IFRS vs. HGB in the real estate industry: How the choice of accounting approach affects your property value
Did you know that the carrying value of your property can fluctuate by over 30% depending on the accounting standard? The strategic choice between IFRS and HGB has a massive impact on your financial metrics. This article highlights the crucial differences and how you can leverage them to your advantage.
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The topic briefly and concisely
The German Commercial Code (HGB) prioritises creditor protection through the historical cost principle, which leads to stable values and hidden reserves.
IFRS targets investor information and uses the fair value model, which reflects current market values but can lead to volatile results.
The choice of standards has a direct impact on equity ratio, profit, tax burden, and financing conditions and is a strategic decision.
For property owners and investors, engaging with the accounting approaches of the real estate industry is more than just an accounting obligation. The choice between the German Commercial Code (HGB) and the International Financial Reporting Standards (IFRS) directly affects the reported value of your assets, the amount of profits, and the tax burden. A property valued at 800,000 euros under HGB may show a market value of 1.2 million euros under IFRS. This 50% discrepancy impacts financing negotiations and sales decisions. We break down the fundamental differences between the two systems and explain their strategic significance for your real estate.
Two Philosophies: Creditor Protection versus Investor Information
The fundamental accounting approaches for the real estate industry according to IFRS vs. HGB are based on two completely different objectives. The German HGB, which in its basic features is over 120 years old, follows the principle of caution, whose primary goal is creditor protection. Profits are only recognised when they are realised, leading to the formation of hidden reserves and accepting an undervaluation of assets. In contrast, IFRS accounting aims to provide decision-useful information for international investors. Its goal is to offer the most realistic insight possible into the asset, financial, and earnings situation („True and Fair View“). These opposing principles result in significantly divergent valuations of real estate assets.
Key difference in valuation: acquisition cost or market value?
The key difference in practice lies in the subsequent valuation of real estate. According to the HGB, the acquisition cost model applies strictly, where a property is valued at no more than its original acquisition or production costs, reduced by scheduled depreciation. A property purchased for 1 million euros can only be accounted for at 800,000 euros in the balance sheet after 10 years with 2% depreciation per annum, even if its market value has risen to 1.5 million euros. In contrast, the IFRS allows for the application of the fair value model (fair value) for investment properties held as financial investments. Here, the property is revalued at each balance sheet date to its current market value, which can reveal increases in value of over 50%. The IFRS fair value property valuation thus provides a more dynamic picture. This revaluation has direct implications for the company's profit and loss account.
Impact on Profit and Equity: Stability vs Volatility
Under HGB accounting, adherence to the historical cost principle results in very stable and predictable outcomes. Value increases remain invisible until a sale occurs, smoothing out key figures. The IFRS fair value valuation reflects market fluctuations directly in the profit and loss account (P&L). A 5% increase in the real estate market value directly boosts the period profit and equity. This can significantly improve the equity ratio and enable better financing conditions. However, in market downturns, it also leads to immediate impairments and profit downturns. Choosing the cost model in real estate valuation according to HGB thus provides a more conservative representation. The consequences of IFRS valuation are varied:
Direct impact of market fluctuations on the P&L.
Higher volatility of key figures such as the annual surplus.
Potentially higher reported equity.
Increased need for explanations to investors in case of value changes.
This difference becomes even more apparent with real estate held purely for rental or capital appreciation.
Special Case Investment Properties: The Strategic Choice according to IAS 40
The IFRS recognises a distinct category with 'investment properties held for financial investment' (Investment Properties according to IAS 40). This includes properties held to earn rental income or for long-term capital appreciation, rather than for own use. For these properties, IAS 40 explicitly provides a choice between the cost model and the fair value model. In practice, over 90% of publicly traded European real estate companies opt for the fair value model to provide transparency for investors. This decision is strategic, as it ensures comparability with competitors. The valuation of Investment Properties according to IFRS is therefore a crucial factor for capital market communication. The different valuation approaches also lead to different tax treatments.
Deferred taxes: An often overlooked item in IFRS financial statements
The revaluation of a property to Fair Value according to IFRS results in a difference between the higher IFRS valuation and the lower value in the tax balance sheet, which often follows the HGB value. This temporary difference must lead to the recognition of deferred tax assets in the IFRS financial statements. A revaluation of 500,000 euros can result in the recognition of a deferred tax liability of 150,000 euros at an assumed tax rate of 30%. In the HGB financial statements, due to the strict acquisition cost principle, usually, no or only very minor deferred taxes on property occur. This item can significantly affect the net result and equity according to IFRS. In addition to pure valuation, the two standards also differ significantly in the required additional information.
Transparency Requirements: What Investors Really See
An IFRS financial statement requires far more detailed disclosures than an HGB financial statement. If a company applies the fair value model, IFRS 13 demands extensive information on the valuation methodology. This transparency is intended to enable investors to understand the quality of the valuation. The HGB requirements are significantly less extensive in this regard. The key IFRS disclosure obligations include:
The valuation techniques applied (e.g., comparative value method, income value method).
The significant input factors for the valuation, particularly in the case of factors not observable in the market (Level 3 inputs).
A sensitivity analysis showing how the result would change with a variation in the most critical assumptions.
A reconciliation showing the change in fair value over the period.
These IFRS disclosure requirements for real estate valuation create a high degree of traceability. For you as an owner, the question arises of which standard is relevant for your purposes.
ifrs-vs-hgb-accounting-approaches-real-estate-industry
For most non-listed companies in Germany, the individual financial statement according to the HGB is legally mandatory and crucial for tax measurement and dividend determination. The IFRS vs. HGB accounting approaches in the real estate sector become relevant once international investors, a stock market launch, or a sale to an IFRS-reporting company come into play. A buyer reporting under IFRS will use the fair value as a basis for their pricing decision. Understanding IFRS logic can improve your negotiating position by up to 15%. Are you uncertain how an AI-driven analysis would determine the fair value of your property? The Auctoa ImmoGPT Chat provides you with an initial data-driven assessment in under 60 seconds. Choosing the accounting approach is thus a strategic decision with far-reaching consequences.
Conclusion: Strategic decision between stability and market proximity
Which standard is mandatory for my company in Germany?
For the individual financial statements of every German company, the HGB is decisive. Capital market-oriented groups must additionally prepare their consolidated financial statements according to IFRS. Non-capital market-oriented companies can voluntarily prepare an IFRS statement, often for banks or international partners.
How does choosing between HGB and IFRS affect my taxes?
The tax base in Germany is based on the tax balance sheet, derived from the HGB balance sheet (principle of relevance). A purely IFRS valuation has no direct tax consequences, but it may require deferred taxes in the IFRS financial statements to represent future tax burdens or reliefs.
What exactly does “Fair Value” mean in real estate?
Fair Value (fair market value) is the price that would be achieved in an orderly transaction between independent market participants on the valuation date for the property. Essentially, it corresponds to the current market value.
Can I switch from HGB to IFRS?
Yes, it is possible to change accounting standards, but it is a complex project. It requires a complete re-evaluation of many balance sheet items according to IFRS rules and the preparation of an opening balance sheet. This step is usually taken in the course of international expansion or in preparation for a stock market flotation.
What is an impairment test under IFRS?
An impairment test (recoverability test) is an extraordinary examination to determine whether the carrying amount of an asset is still covered by its future benefits. If there are signs of impairment (e.g., significantly fallen market prices), an impairment write-down to the lower recoverable amount must be made according to IFRS.
How can Auctoa assist with valuation for IFRS or HGB?
Auctoa offers data-driven, AI-supported real estate valuations that can provide an objective basis for both accounting standards. Our analyses can determine the Fair Value for an IFRS financial statement or reveal hidden reserves by showing the market value in an HGB balance sheet, thereby supporting your strategic decisions.
Additional useful links
Wikipedia offers a comprehensive overview of the International Financial Reporting Standards (IFRS).
Die Deutsche Bundesbank provides the current financial stability report, containing important information on the stability of the German financial system.
Gesetze im Internet enables direct access to the Commercial Code (HGB), the legal foundation for accounting in Germany.
FAQ
Which standard is mandatory for my company in Germany?
For the individual financial statements of each German company, the HGB is authoritative. Capital market-oriented groups must also prepare their consolidated financial statements according to IFRS. Non-capital market-oriented companies can voluntarily prepare an IFRS statement, usually for banks or international partners.
How does the choice between HGB and IFRS affect my taxes?
The tax base in Germany is based on the tax balance sheet, which is derived from the HGB balance sheet (principle of authority). A pure IFRS valuation has no direct tax implications, but may require deferred taxes in the IFRS accounts to reflect future tax burdens or reliefs.
What exactly does "Fair Value" mean in real estate?
The fair value (current value) is the price that would be achieved for the property in an orderly transaction between independent market participants on the valuation date. It essentially corresponds to the current market value.
Can I switch from HGB to IFRS?
Yes, a change of accounting standards is possible, but it is a complex project. It requires a complete reassessment of many balance sheet items according to IFRS rules and the preparation of an opening balance sheet. Such a step is usually taken in the course of international expansion or in preparation for an initial public offering.
What is an impairment test according to IFRS?
An impairment test is an unscheduled assessment to determine whether the carrying amount of an asset is still covered by its future benefits. If there are indications of impairment (e.g., significantly fallen market prices), an impairment loss must be recognized to the lower recoverable amount according to IFRS.
How can Auctoa assist with assessments for IFRS or HGB?
Auctoa offers data-driven, AI-supported real estate valuations that can provide an objective foundation for both accounting standards. Our analyses can determine the fair value for an IFRS financial statement or reveal hidden reserves by showing the market value in a HGB balance sheet, thus supporting your strategic decisions.
