Do you know what valuation risks are lurking in your balance sheet? Incorrect disclosures in real estate valuation under IFRS can undermine investor trust and lead to significant adjustments. This guide shows you how to confidently navigate the complex requirements.
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The topic briefly and concisely
The IFRS disclosure requirements demand a transparent presentation of real estate valuation, with IAS 40 and IFRS 13 being the central standards.
The three-level fair value hierarchy according to IFRS 13 is crucial for the classification of valuation and must be disclosed in the notes.
For Level-3 assessments, the disclosure of significant assumptions and the performance of sensitivity analyses are mandatory.
The International Financial Reporting Standards (IFRS) place high demands on the transparency and comparability of corporate financial statements. In particular, the IFRS disclosure requirements for real estate valuation are a challenge for asset holders and investors. Unlike the German Commercial Code (HGB), IFRS requires a realistic representation of assets, which often means valuation at fair value. The correct application of standards such as IAS 40 and IFRS 13 is not just a compliance topic; it is the foundation for the trust of capital providers and solid financial communication. This article provides you with clear guidance to avoid pitfalls and optimise your disclosure processes.
Mastering IFRS Fundamentals for Real Estate Valuation
The transition to IFRS accounting affects all publicly traded companies in the EU and fundamentally changes the rules for real estate valuation. While the HGB is characterised by the principle of prudence, IFRS aims to provide decision-useful information for investors. For investment properties, the standard IAS 40 is of central importance. It allows a choice between the cost model and the fair value model, with the latter requiring regular revaluation at market value. Fair value valuation provides more up-to-date and relevant information for stakeholders. The specific requirements for determining and disclosing this fair value are regulated in IFRS 13, ensuring comparability across more than 140 countries. These regulations form the basis for transparent and internationally recognised accounting of your real estate assets.
Correctly applying the fair value hierarchy according to IFRS 13
IFRS 13 introduces transparency through a three-tier hierarchy regarding how a fair value has been determined. This classification depends on the observability of the valuation inputs used. Over 90% of all real estate valuations fall into Levels 2 and 3, highlighting the importance of robust models. Correct classification is a key disclosure requirement.
The hierarchy is structured as follows:
Level 1: This uses quoted prices for identical assets in active markets. Due to the uniqueness of real estate, this is only applicable in rare exceptional cases.
Level 2: Valuation is based on observable inputs that are not quoted prices for the identical property. This includes comparable prices for similar properties in a comparable location or market rents.
Level 3: Valuation relies on unobservable market inputs. Complex valuation models like DCF methods are used here, based on internal assumptions about cash flows or discount rates.
A detailed description of the fair value determination is crucial and directly leads to the specific disclosures in the appendices.
Implement detailed disclosure requirements in accordance with IAS 40 precisely
The disclosure obligations in the notes to the financial statements are central to transparency in real estate valuation. IAS 40 requires a range of specific disclosures to ensure the traceability of valuations. Erroneous or incomplete disclosures can quickly lead to objections by auditors. The reconciliation of carrying amounts is one of the most important required disclosures.
The key disclosure requirements include, among others:
Indicating whether the fair value model or the cost model is utilised.
A reconciliation showing the changes in carrying amounts from the beginning to the end of the reporting period.
When applying the fair value model: the methods and key assumptions for valuation according to IFRS 13.
The extent to which the fair value was determined by an independent, qualified expert.
Any restrictions on the sale of the property or the disposal of proceeds.
These disclosures require careful documentation, particularly with regard to the underlying assumptions, which will be examined in more detail in the next step.
Quantifying risks through sensitivity analyses and key assumptions
Especially with Level 3 valuations, the disclosure of significant assumptions and their impact on the fair value is essential. IFRS 13.93(h) explicitly requires a sensitivity analysis that shows how the value would change with a variation in the key unobservable input factors. A change in the discount rate of just 0.25 percentage points can already affect the property value by 5-10%. The disclosure of these sensitivities makes the valuation uncertainty tangible for investors. Critical assumptions typically include the property interest rate, the expected rental development, and the vacancy rate. An inadequate analysis of these factors is a common point of criticism during audits. With Auctoa's ImmoGPT-Chat, you can quickly and data-supportedly validate initial assumptions for your valuation. The analysis of these value drivers is also an important precursor for the potential impairment test.
Identify impairments with the impairment test according to IAS 36
Even when real estate is recorded at Fair Value, impairment needs play a role, particularly for properties evaluated under the historical cost model. According to IAS 36, a company must assess at each balance sheet date whether there are any indicators of impairment of an asset. Such an indicator may be a significant drop in market prices by more than 15%. If there is an indicator, the recoverable amount must be determined. The recoverable amount is the higher of fair value less costs of disposal and the value in use. If the carrying amount exceeds this recoverable amount, an impairment loss must be recognized for the difference. Specific rules apply to real estate accounted for under the revaluation model. A clear separation of valuation occasions is crucial for accurate accounting.
Secure assessment quality through external evaluations
The complexity of IFRS regulations often makes the involvement of external experts indispensable. Although it is not always mandatory, IAS 40 requires disclosure of the extent to which an independent appraiser with recognised qualifications has conducted the valuation. Engaging an external expert like Auctoa significantly enhances the objectivity and credibility of the valuation. Companies with independent appraisals consistently demonstrate higher valuation stability. A professional appraisal not only documents the value but also makes the methodology and assumptions comprehensible, significantly increasing audit assurance. An AI-supported valuation from Auctoa provides you with a neutral basis for your IFRS-compliant accounting within 48 hours.
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Additional useful links
DRSC offers a document on the application of IFRS in the context of financial reporting.
IDW provides information on changes to its accounting standards, particularly IDW RS HFA 9, as well as the withdrawal of IDW RS HFA 25 and 26.
Destatis, the Federal Statistical Office, offers comprehensive information on construction prices and the property price index.
Destatis provides detailed tables with data on house and land prices.
BBSR, the Federal Institute for Research on Building, Urban Affairs and Spatial Development, offers the latest analysis of the 2023 Germany Property Market Report.
FAQ
How often does a property valuation need to be updated according to IFRS?
When applying the fair value model under IAS 40, valuations must be performed often enough so that the reported carrying amount at the balance sheet date does not substantially deviate from the fair value. In practice, this usually means an annual valuation.
What role does IAS 36 play in investment properties held as financial investments?
IAS 36 (Impairment of Assets) applies to real estate accounted for using the cost model. If there are indications of impairment, it must be assessed whether the carrying amount exceeds the recoverable amount.
What is the difference between real estate valuation according to IFRS and HGB?
The main difference lies in the valuation objective. The German Commercial Code (HGB) adheres to the strict lower of cost or market principle and acquisition cost, which results in hidden reserves. IFRS aims for a current, market-oriented value (Fair Value) to provide investors with decision-relevant information.
Can I apply different valuation models (fair value/cost) for different properties?
No, according to IAS 40.30, the chosen model – either the fair value model or the cost model – must be applied to all investment properties of a company.
What happens to the profits or losses from the fair value adjustment?
Gains or losses arising from a change in the fair value of an investment property are recognised in profit or loss in the period in which they arise, in accordance with IAS 40.35.
How can Auctoa assist with IFRS disclosures?
Auctoa provides fast, data-driven, and independent property valuations that serve as an objective basis for determining your fair value. Our reports transparently document the methodology and assumptions, thereby enhancing the audit reliability for your IFRS accounting.
