Consolidated Financial Statements for Real Estate Companies: IFRS vs. HGB – A Crucial Comparison
Are you facing the choice between IFRS and HGB for your real estate company’s consolidated financial statements? This decision impacts everything – from the valuation of your assets to the perception by international investors. We will show you the critical differences that every property owner and investor needs to know.
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The topic briefly and concisely
The main differences between IFRS and HGB lie in their objectives: IFRS focuses on providing information to investors (Fair Value), while HGB focuses on creditor protection (principle of prudence).
The real estate valuation according to IFRS (fair value model) often results in higher but more volatile assets and profits than the HGB (acquisition cost model).
The fair value assessment according to IFRS requires the recognition of significant deferred tax liabilities, which play a much smaller role in the HGB financial statements.
Choosing the accounting standard for the consolidated financial statement of a real estate company is far more than a formal bookkeeping decision. It is a strategic decision that shapes the financial presentation of your business. While the German Commercial Code (HGB) focuses on creditor protection and prudent valuation, the International Financial Reporting Standards (IFRS) aim for maximum transparency for investors. This article analyses the fundamental differences between the two approaches, from property valuation to the impact on equity and profit. Discover why an identical portfolio can be valued up to 30% differently depending on the standard and the implications this has for financing discussions and strategic decisions.
Basic philosophies: Creditor protection (HGB) vs. Investor information (IFRS)
The most fundamental difference in the consolidated financial statements for real estate companies according to IFRS vs. HGB lies in the objective. The HGB is characterised by the principle of prudence and primarily serves to protect creditors. Assets are generally valued conservatively to prevent excessive profit distribution. The IFRS, on the other hand, adhere to the principle of providing a true and fair view. Their goal is to provide capital market participants with decision-relevant information, which often leads to a more market-oriented valuation. Since 1 January 2005, capital market-oriented parent companies in the EU are required to prepare their consolidated financial statements according to IFRS.
These opposing approaches lead to significant differences in the presentation of the asset, financial, and earnings position. While an HGB financial statement aims at stability and the cautious determination of distributable profits, an IFRS financial statement reflects current market values and, therefore, their volatility. The accounting approaches of the real estate industry differ significantly depending on the standard applied, which makes comparability difficult. These philosophical differences are the starting point for all specific valuation differences.
Property Valuation: The Acquisition Cost Model of the HGB
Under the German Commercial Code (HGB), real estate in fixed assets is strictly accounted for according to the acquisition cost principle (§ 253 para. 1 HGB). This means that a property is valued at no more than its original purchase or production cost minus regular depreciation. Increases in value beyond this historical worth are not recorded, even if the market value of the property has increased by 50%. This leads to the formation of significant hidden reserves which remain invisible in the balance sheet. Extraordinary depreciation is only mandatory in the event of a likely permanent impairment.
This approach ensures stable and well-forecastable book values but conceals the actual, current value of the portfolio. For an investor, this means that the true value of a company often only becomes apparent through a separate analysis of individual assets. The acquisition cost model under HGB thus prioritizes accounting continuity over economic reality. The strict limitation to historical costs is a central criticism from international investors.
Fair Value Assessment under IFRS: Opportunities and Risks of Market Proximity
In contrast to the HGB, IFRS allows for investment properties (Investment Properties under IAS 40) to use the Fair Value model. This means that the property is revalued at each balance sheet date to its fair value, or the current market value. Changes in value – both gains and losses – are recorded directly in the income statement. A property purchased for €10 million can appear in the balance sheet at €11.5 million in the following year if there is a market value increase of 15%, resulting in an unrealized gain of €1.5 million.
This method provides high transparency regarding the current value of real estate assets but also leads to greater volatility in results. A fluctuating real estate market directly impacts the balance sheet and the income statement. The determination of Fair Value follows the detailed guidelines of IFRS 13 and often requires external appraisals. The Fair-Value valuation of properties is thus a double-edged sword: it creates transparency but also increases the risk of fluctuating results. The key differences in the valuation methods for properties are crucial for analysis.
Impact on balance sheet metrics: equity, profit, and debt
The different valuation approaches have a significant impact on the key figures in the consolidated financial statements of real estate companies. Through IFRS fair value measurement, companies often report substantially higher equity than comparable companies reporting under HGB. An uplift in real estate assets by €100 million directly increases equity by the same amount (before taxes). This results in an improved apparent equity ratio and can enhance creditworthiness.
The effects on the profit and loss account are also significant:
IFRS profit: This is influenced by non-cash value changes and is therefore more volatile. A strong market year can boost profits by over 40% without any additional rental income received.
HGB profit: It is based on actual rental income minus depreciation and interest, making it more stable and predictable.
Furthermore, the debt level (Loan-to-Value, LTV) is directly affected. A higher real estate value under IFRS results in a lower LTV with the same level of debt financing, which is a positive signal for banks and investors. The IFRS valuation in the consolidated financial statements thus has direct strategic implications.
Deferred Taxes: A Key Difference with Impact on Results
Another crucial difference in the consolidated financial statements of real estate companies according to IFRS vs. HGB is the treatment of deferred taxes. Due to the revaluation of real estate to fair value under IFRS, a difference arises between the higher IFRS book value and the lower tax book value (which remains based on the acquisition costs). This temporary difference necessarily leads to the creation of a deferred tax liability according to IAS 12. This represents the future tax burden that would be incurred in the event of a theoretical sale of the property at fair value.
Assuming a property is revalued by €20 million. With an assumed tax rate of 30%, the company must report a deferred tax liability of €6 million on the balance sheet. This position can significantly reduce equity and increase total assets. In the HGB, deferred taxes play a much lesser role for real estate, as recoveries beyond acquisition costs are prohibited and therefore such differences do not arise to this extent. The correct representation of deferred taxes in real estate is a complex yet important task.
Practical implications for owners and investors
For you as an owner, heir, or investor, the choice of accounting standard has direct practical implications. An IFRS financial statement offers better comparability on an international level and provides a more transparent representation of assets, which can give you over a 25% advantage in appeal when seeking foreign investors. However, it can lead to volatile results due to market fluctuations, which are difficult to explain. On the other hand, an HGB financial statement offers stability and predictability, which is often valued by conservative, long-term oriented investors and German banks. However, it conceals the true value potential of your portfolio.
Your decision should therefore depend on your strategy:
Capital Market Orientation: If you are aiming for an IPO or want to attract international funds, an IFRS financial statement is essential.
Traditional Financing: For classic bank financing in Germany, an HGB financial statement is often sufficient and sometimes even preferred.
Intention to Sell: If you are planning to sell the company, an IFRS financial statement can help to present the value more transparently and speed up the sales process.
Regardless of the standard, an accurate, data-driven valuation of your real estate is essential. A neutral valuation from Auctoa can help you understand the true value of your properties – an important foundation for any strategic decision. Try our ImmoGPT chat now to get initial data-based assessments.
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The comparison Consolidated Financial Statements Real Estate Company IFRS vs. HGB shows that there is no universally better solution. The choice is a strategic decision that depends on the target audience of your accounts, your financing plans, and your corporate strategy. While IFRS speaks the language of the international capital market and highlights current values, the HGB offers a conservative and stable anchor. It is important to understand the implications of both standards to draw the right conclusions for your real estate assets. A thorough understanding of the differences enables you to interpret financial reports correctly and recognise the true value of your company. Ultimately, the right accounting is the foundation for sustainable success in the real estate market.
Additional useful links
KPMG offers a brochure on the audit of real estate in accordance with IFRS and HGB.
Haufe provides a decision aid for applying IFRS or HGB, focusing on differences and transition.
IAS Plus features a news article on IDW ERS IFA 3.
Federal Statistical Office (Destatis) delivers information on construction prices and the property price index.
Haufe explains the accounting of land according to HGB, EstG, and IFRS, with a focus on international accounting.
Rödl & Partner explores real estate leasing, financing, and the impact of IFRS 16.
Gesetze im Internet offers the legal text of § 253 HGB (Valuation).
KPMG provides an overview of accounting and financial reporting according to IFRS and HGB.
BDO offers advice on accounting according to IFRS or HGB in the real estate sector.
FAQ
Which standard is better for my real estate company, IFRS or HGB?
That depends on your strategy. If you are targeting international investors or planning an IPO, IFRS is the better choice. For traditional financing and a stable, conservative presentation, HGB is often sufficient and established in Germany.
How does the choice between IFRS and HGB affect my bank covenants?
The choice has significant impacts. An IFRS statement can result in a lower Loan-to-Value (LTV) due to higher property values, which is a positive aspect. However, the higher volatility of profit may negatively affect other metrics such as the interest coverage ratio. Discuss this proactively with your bank.
Do I always have to hire an external appraiser for a fair value assessment under IFRS?
Although not explicitly required for each reporting date, it is common practice and strongly recommended for audit and legal certainty to regularly engage external, independent valuers for determining the Fair Value, especially for significant properties.
What are 'hidden reserves' in the HGB financial statement?
Hidden reserves are the difference between the actual, higher market value of a property and its lower book value according to the German Commercial Code (cost of acquisition minus depreciation). They are not visible on the balance sheet but represent a real, unrealised value.
Can I switch from HGB to IFRS?
Yes, a switch from HGB to IFRS is possible and is referred to as an 'IFRS transition'. This process is complex, requires a reassessment of many balance sheet items, and must be carefully planned. A return from IFRS to HGB is generally not envisaged.
Does the accounting standard affect the actual rent I can charge?
No, the accounting standard is a method of financial reporting and does not directly impact the contractually agreed rents or cash flow. However, it does influence how these revenues and the values of your properties are presented in the financial reports, which in turn shapes the perception by investors and banks.
