Did you know that choosing an accounting standard can influence the value of your property by over 20%? Accounting under IFRS or HGB has direct effects on deferred taxes and your financial planning. This article highlights the key differences and how to avoid pitfalls.
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The topic briefly and concisely
The main difference lies in valuation: HGB uses the prudent historical cost principle, whereas IFRS relies on transparent fair value, which leads to higher valuations and deferred taxes.
Deferred taxes according to IFRS must be recognised on temporary differences and represent a future tax liability that directly affects equity and financial ratios.
The choice of accounting standard is a strategic decision that significantly influences creditworthiness, attractiveness to investors, and the net return in the event of a sale.
Valuing real estate is not merely a formality; it's a strategic tool. Whether you report according to the German Commercial Code (HGB) or the International Financial Reporting Standards (IFRS) has significant consequences. This decision not only affects the reported value of your portfolio but also leads to the creation of deferred taxes – an often underestimated item with substantial financial impact. A wrong approach can distort your key figures and result in unexpected tax burdens of 30% or more upon sale. We explain the differences so that you can draw the right conclusions for your real estate assets.
Basics: Why Deferred Taxes are Crucial in Real Estate
Deferred taxes arise from the difference between the valuation of a property in the commercial balance sheet (according to HGB or IFRS) and the tax balance sheet. While the tax balance sheet forms the basis for the actual tax payment, the commercial balance sheet serves to inform investors and creditors. These valuation differences are not uncommon; they affect thousands of companies in Germany. Correct allocation is crucial for an accurate period-based representation of tax expenses. Incorrectly assessed deferred taxes can distort equity by up to 15%, thus influencing creditworthiness. Therefore, the choice of accounting standard is the first strategic lever you need to adjust.
HGB Valuation: Security through the Acquisition Cost Model
The German HGB follows the strict principle of prudence, primarily aimed at creditor protection. Properties are thus assessed according to the acquisition cost principle, meaning at the original purchase price minus regular depreciation. Increases in value beyond the acquisition costs can only be realised upon sale. This approach leads to the formation of hidden reserves, which can often constitute 30-50% of the market value. This method results in fewer temporary differences, which is why HGB financial statements often report little or no deferred taxes. For a detailed analysis of your hidden reserves, an assessment according to the acquisition cost model is essential. This conservative perspective provides stability but obscures the true potential value of your property assets.
IFRS Assessment: Transparency through the Fair Value Method
In contrast to the HGB, the IFRS aim to provide investors with a realistic basis for decision-making. For investment properties (IAS 40), the fair value measurement, i.e., valuation at fair value, is the common method. This means: Increases in market value are recognised directly in profit or loss, often annually. A property purchased for €2 million can already be listed at €2.5 million on the balance sheet after 2 years according to IFRS. This increase in value of €500,000 leads to a temporary difference compared to tax law and necessitates the creation of a deferred tax liability. An accurate fair value property valuation is therefore key to international comparability. However, this increased transparency comes at a price in the form of potentially high future tax burdens.
Direct Comparison: An Example Calculation of Deferred Taxes
Imagine you're purchasing a property for €1,000,000. After five years, the market value is €1,500,000. The tax depreciation has reduced the book value for tax purposes to €900,000. Here you can see the consequences of the different accounting standards. The differences between IFRS and HGB are significant.
According to HGB: The balance sheet value remains at the carried acquisition cost (e.g., €950,000). There is no deferred tax on the increase in market value.
According to IFRS: The property is valued at the fair value of €1,500,000. The difference to the tax value is €600,000 (€1,500,000 - €900,000).
Deferred tax according to IFRS: A deferred tax liability is created on this difference. Assuming a tax rate of 30%, this amounts to €180,000.
Impact: While equity is €500,000 higher according to IFRS, it is simultaneously burdened by a future tax liability of €180,000.
This comparison shows how IFRS makes the potential visible but also transparently discloses the associated obligations.
Strategic implications for investors and owners
The choice between HGB and IFRS has significant implications for your corporate strategy. Higher equity disclosure under IFRS can improve loan terms with banks, as the creditworthiness seems to increase by 10-20%. At the same time, the high latent tax burden signals to potential buyers the tax impact they will face in an asset deal. International investors prefer IFRS financial statements because they enable better comparability with global markets. For heirs or when considering a sale, understanding the latent taxes is crucial for accurately calculating the net proceeds. A precise, AI-supported Auctoa valuation helps you accurately quantify these hidden reserves or future burdens. The balance sheet impact of a revaluation should not be underestimated. Knowledge of these figures is the foundation for any well-informed sale or financing decision.
Practical tips for actively managing deferred tax liabilities
Deferred taxes are not fate, but a manageable balance sheet item. A proactive approach can optimize your tax rate and reduce financial risks by up to 25%. Use the following steps to stay in control:
Regular portfolio assessment: Conduct a reassessment of your property portfolio at least every 12 months to identify changes in value early on.
Structuring transactions: Consider whether a share deal is more tax advantageous than an asset deal to avoid realizing deferred taxes.
Long-term tax planning: Simulate the impact of future tax law changes on your deferred taxes. Rates may change over a 10-year investment horizon.
Seek expert advice: Use digital tools like Auctoa ImmoGPT for an initial assessment or consult a tax advisor about complex deferred tax strategies.
Active management turns a passive balance sheet item into an active control tool for your business success.
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FAQ
Which standard is better for my real estate company – HGB or IFRS?
That depends on your goals. HGB is conservative, stable, and protects creditors. IFRS is transparent, market-oriented, and appeals to international investors, but increases complexity due to the accounting of deferred taxes. An Auctoa analysis can help you simulate the financial impacts of both standards on your portfolio.
How do deferred taxes affect the sale price of a property?
Deferred taxes reduce the net sales proceeds. In an asset deal, the buyer must pay tax on hidden reserves. An informed buyer will want to deduct this future tax liability (which is reported as a deferred tax in the IFRS balance sheet) from the purchase price. Therefore, a precise understanding of this position is crucial for price negotiation.
What happens to deferred taxes when the property market falls?
When the market value of a property assessed according to IFRS decreases, the difference to the tax value is reduced. This leads to the reversal of deferred tax liabilities, which can have a positive impact on the result. Under the German Commercial Code (HGB), if there is an impairment below the acquisition cost, there is an extraordinary depreciation, which can also lead to deferred taxes.
Is an assessment by Auctoa compatible with HGB and IFRS standards?
Yes, absolutely. Our AI-powered evaluation platform determines the precise market value (Fair Value), which forms the basis for IFRS accounting. At the same time, we can model the development based on acquisition costs according to HGB. This provides you with a clear decision-making foundation, regardless of the standard you apply.
What is the average tax rate for calculating deferred taxes?
The tax rate used for calculation is the company-specific tax rate that is expected to apply at the time the differences are realized. In Germany, this combined rate of corporate and trade tax is often around 30%.
