Are you facing the choice between IFRS and HGB for valuing your real estate? This decision can affect the reported value of your assets by more than 20% and has direct implications for key figures and financing conditions. Understand the fundamental differences to strategically make the right choice for your portfolio.
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The topic briefly and concisely
The HGB protects creditors through a conservative assessment at acquisition cost, whereas the IFRS informs investors with a market-based fair value assessment.
The fair value assessment according to IFRS can significantly increase equity but also leads to higher volatility in the profit and loss account.
The choice of standards directly impacts impairment rules, the creation of deferred taxes, and the costs of preparing financial statements.
The valuation of real estate is not merely a technical process, but a strategic decision with far-reaching consequences. Whether you are acting as an heir, investor, or company, the choice between international IFRS standards and German HGB determines the financial picture you present. While the HGB prioritises prudence and creditor protection, the IFRS aim for a market-oriented representation for investors. This article analyses the key differences between IFRS and HGB valuation methods for real estate, highlights the effects on impairments and taxes, and provides you with a clear basis for decision-making.
Basic Principles: Creditor Protection versus Investor Information
The choice between HGB and IFRS begins with the fundamental objective. The German Commercial Code (HGB) is historically oriented towards creditor protection and follows the principle of prudence. Valuations are conservative to avoid over-indebtedness and to protect creditors' claims with a safety margin of at least 10-15%. In contrast, the primary function of IFRS financial statements is to provide decision-useful information for investors in the capital market. Here, the principle of 'Fair Presentation' applies, aiming to depict as realistic a picture as possible of the asset, financial, and earnings situation. These opposing philosophies shape each valuation rule and lead to significantly different results in the balance sheet. Understanding these fundamentals is the first step towards strategically using the different accounting approaches. It becomes clear that the system choice is not merely a formality but sets the course for the entire financial communication.
Key difference in valuation: acquisition cost or market value?
The Acquisition Cost Model according to HGB
In accordance with the HGB, properties are strictly valued based on the acquisition cost principle (§ 255 HGB). The value in the balance sheet is based on the original purchase price plus ancillary costs such as property transfer tax or notary fees, reduced by scheduled depreciation over the useful life. A property purchased for 1 million euros remains recorded at this value (less depreciation) even if its market value rises to 1.5 million euros. The HGB prohibits an upward revaluation beyond the original acquisition costs. This method ensures stable but often hidden reserve-containing balance sheet values. More on this conservative method can be found at Acquisition Cost Model according to HGB.
The Fair Value Model according to IFRS
The IFRS offer for real estate held as financial investments (Investment Properties according to IAS 40) an option between the cost model and the Fair Value Model. If a company opts for the Fair Value Model, the property is regularly valued at its current market value. Value increases are recognised directly in profit or loss in the income statement. Our example property would thus be reported at 1.5 million euros, increasing equity by 500,000 euros. This method provides maximum transparency about the actual value but also leads to greater volatility in results. Determining the Fair Value often requires external appraisers who apply recognised methods such as the DCF method. Details on Fair Value Valuation according to IFRS are crucial for understanding. Handling value fluctuations is therefore a key difference between the two systems.
Response to Market Crises: Comparison of Impairments
The handling of impairments clearly reflects the risk philosophy of the two standards. The HGB requires an extraordinary depreciation only in the case of a likely permanent impairment (§ 253 HGB). The threshold for this is high; a temporary market price drop of, for example, 10% is often insufficient. This smooths results in volatile market phases. The IFRS are significantly more sensitive in this regard. According to IAS 36, an annual impairment test must be conducted as soon as there are indications (triggering events) of an impairment. A significant decline in market prices or a negative development in rental income of over 5% can immediately trigger a write-down to the recoverable amount. This regulation ensures that IFRS balance sheets reflect market downturns more quickly and directly. A deeper insight into the impairment test for real estate reveals the complexity of the procedure. This difference in the speed of write-downs has direct consequences for the stability of balance sheet ratios.
Tax Pitfalls: How Valuation Methods Affect the Tax Burden
The different valuation approaches in the commercial balance sheet (HGB/IFRS) and the tax balance sheet lead to the formation of deferred taxes. Since the tax balance sheet in Germany generally follows the (lower) HGB values, temporary differences arise in fair value assessments under IFRS. An increase in the value of a property by 500,000 euros in the IFRS balance sheet results in the formation of a deferred tax liability, as this increase in value only becomes taxable upon sale. These deferred taxes can increase the total balance sheet by up to 5-8% and correspondingly reduce equity. According to HGB, the formation of deferred taxes is less common due to the principle of relevance, but has been expanded by the BilMoG. The complexity of deferred taxes in real estate is an often underestimated factor. The choice of valuation method thus has direct effects on the reported tax rate and the net profit margin.
Strategic Decision: Which Standard Suits Your Goals?
The choice between HGB and IFRS is not purely technical, but strategic. Your decision should be based on your company's goals and the expectations of your stakeholders. Here are the key decision criteria:
Stability vs. Market Proximity: HGB provides very stable and predictable balance sheet values through the historical cost principle. This is often appreciated by conservative creditors such as banks. IFRS reflect the current market value with fair value measurement, which international investors prefer, but it can lead to profit volatility of over 20% per year.
Capital Raising: A higher equity disclosure through fair value measurement under IFRS can enhance creditworthiness and the ability to raise new capital.
Comparability: For internationally active companies or those planning a public listing, an IFRS financial statement is practically indispensable as it ensures global comparability.
Complexity and Costs: Applying IFRS, particularly the regular determination of fair value, involves greater effort and costs for appraisers and advisers, which can amount to up to 0.1% of the portfolio value.
Uncertain which valuation method is optimal for your portfolio? The ImmoGPT chat by Auctoa analyses your situation and provides a data-driven initial assessment in under 60 seconds. This analysis forms the basis for the right strategic alignment of your real estate values.
Conclusion: Using the evaluation method as a strategic tool
The comparison of IFRS vs. HGB valuation methods for real estate clearly shows: There is no single right way. While the HGB, with its focus on acquisition costs and creditor protection, stands for stability and caution, the IFRS offers a dynamic and investor-oriented perspective through fair-value measurement. The decision significantly impacts balance sheet figures, tax burden, and your company's market perception. A deliberate choice of accounting standard is therefore a crucial lever for achieving your financial and strategic objectives. Make your decision informed to optimally manage the value of your real estate assets.
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Additional useful links
KPMG offers a brochure on real estate audits according to IFRS and HGB.
IAS Plus provides detailed information on the IAS 40 standard for investment properties.
DRSC informs about a project on changes concerning the transfer of investment properties.
Haufe offers decision support on the topic of IFRS or HGB and the differences in their implementation.
Gesetze im Internet provides the full text of § 253 HGB concerning the valuation of assets.
Gesetze im Internet provides the full text of § 255 HGB regarding the production costs.
IDW offers the announcement ERS IFA 3 on accounting for properties.
Bundesfinanzministerium provides information and an application for purchase price allocation for properties.
FAQ
What properties fall under IAS 40 (Investment Properties)?
Under IAS 40, properties (land, buildings or parts thereof) held to generate rental income and/or increases in value are covered. Owner-occupied properties (IAS 16) or properties held for sale (IAS 2) are not included.
Do I need to apply IFRS as a capital market-oriented company?
Yes, parent companies in the EU that are oriented towards the capital market have been legally required to prepare their consolidated financial statements in accordance with IFRS since 2005. This is intended to ensure comparability for investors on international capital markets.
What is the principle of lower of cost or market in the German Commercial Code?
The strict principle of the lower of cost or market in the German Commercial Code (HGB) states that, between two possible values (e.g., acquisition cost and lower market price), the lower one must always be used. This reflects the principle of prudence and serves to protect creditors.
How is the fair value of a property determined?
The fair value is usually determined by independent, certified appraisers. Common methods include the comparative value method (Market Approach), the income value method (Income Approach, e.g., DCF method), and in exceptional cases, the cost value method (Cost Approach).
Does IFRS valuation always lead to a higher tax burden?
Not directly. The current tax liability is based on the tax balance, which often follows the HGB rules. However, IFRS valuation leads to the recognition of deferred (future) tax liabilities on hidden reserves, which impacts the balance sheet but only triggers actual tax payment upon realization (e.g., sale).
Can I switch between the cost and fair value models under IFRS?
A change is only permitted under IAS 40 if it leads to a more accurate presentation. Switching from the fair value model back to the cost model is considered highly unlikely to achieve such an improvement.
