Wondering which valuation risks are lurking in your balance sheet? The disclosure requirements for real estate valuations under IFRS are complex but crucial for investor confidence. This article shows you how to meet the requirements 100%.
Chat with ImmoGPT for free now.
With access to Google, BORIS, and Deep Research.
The topic briefly and concisely
IFRS 13 and IAS 40 are the key standards for the disclosure of property valuations, aiming for maximum transparency and comparability.
The three-level fair value hierarchy determines the extent of disclosure; real estate is mostly classified as Level 3, which requires the most detailed information.
Both quantitative (input factors, sensitivity analysis) and qualitative (valuation methods, processes) information is essential for an IFRS-compliant financial statement.
The correct accounting of real estate assets is a strategic challenge for 9 out of 10 companies. In particular, the disclosure obligations for real estate valuations according to IFRS pose difficulties for many. Incorrect or incomplete information can significantly disrupt the confidence of investors and banks and lead to incorrect company valuations. Since the introduction of IFRS 13 in 2013, the requirements for transparency and detail depth have increased significantly. In this guide, you will learn how to precisely implement the regulations of IFRS 13 and IAS 40, which qualitative and quantitative information is essential, and how to create a reliable and comprehensible valuation basis for your real estate portfolio.
The Fundamentals of IFRS Transparency: More Than Just Regulations
The IFRS frameworks aim for internationally unified and transparent accounting that enables comparability across national borders. For real estate, two standards are in focus: IAS 40 (Investment Property) and IFRS 13 (Fair Value Measurement). While IAS 40 governs the accounting of income-generating properties, IFRS 13 has provided a binding framework for the determination of Fair Value since 2013. The consistent application of these standards reduces information asymmetry between companies and the capital market by up to 30%. Therefore, precise Fair Value real estate valuation is not merely an act of compliance, but a strategic tool for building trust. The distinction from the German Commercial Code (HGB), which primarily serves creditor protection and allows hidden reserves, is fundamental. In contrast, IFRS rules require a realistic representation of assets, defining the next level of requirements.
IFRS 13 Fair Value Hierarchy: The 3 Levels of Valuation
IFRS 13 structures valuation using a three-tier hierarchy based on the observability of the inputs used. This classification is crucial for the extent of the disclosure requirements. The lower the level, the more extensive the required disclosures in the notes. Over 90% of all real estate valuations fall into the most demanding category.
The hierarchy is structured as follows:
Level 1: This uses unadjusted, quoted prices in active markets for identical assets. For real estate, this is extremely rare in practice, occurring in less than 1% of cases.
Level 2: The valuation is based on directly or indirectly observable inputs not falling under Level 1. Examples include prices for similar properties in less active markets.
Level 3: The valuation relies on unobservable inputs. This is the standard case for real estate portfolios, involving internal assumptions about rental growth or capitalisation rates.
The correct classification is the first step towards compliant disclosure and forms the basis for detailed quantitative information. A clear difference between IFRS and HGB lies in this market-oriented perspective. Next, we will examine the specific requirements for investment properties.
IAS 40: Specific rules for investment properties
IAS 40 applies to real estate held for the purpose of earning rental income or for capital appreciation. The standard offers companies a choice for subsequent measurement, which must be applied consistently across the entire portfolio. This decision directly impacts the income statement as well as disclosure obligations. The choice must be made at the initial recognition of 100% of the properties held as investment properties.
Companies can choose between these two models:
Cost Model: The property is measured at cost less accumulated depreciation, similar to the provisions in IAS 16 for property, plant, and equipment. The fair value must still be disclosed in the notes.
Fair Value Model: The property is accounted for at fair value, with value changes being directly recognized in the income statement. This model is preferred by over 80% of listed real estate companies in Europe.
Adopting the fair value model leads to extensive disclosure requirements under IFRS 13. A detailed valuation of investment properties is essential here. Now to the specific quantitative data you need to disclose.
Quantitative Information: Numbers, Data and Facts for the Appendix
For Level 3 valuations, IFRS 13 requires detailed quantitative disclosures on key unobservable inputs. Transparency is key here; general statements are not sufficient. A 2018 report by PwC showed that 92% of the European real estate companies surveyed classified their valuations as Level 3. Providing a range for each key input is now standard.
The main quantitative disclosure requirements include:
A reconciliation from the beginning to the ending balance of Level 3 assets measured at fair value.
Quantitative information on significant unobservable inputs (e.g. capitalisation rate, vacancy rate, market rent per square metre).
The range of input values used, often segmented by property type or geographic location.
A sensitivity analysis showing the impact of changes in key assumptions on fair value.
A precise revaluation under the Revaluation Model requires a solid data foundation. These figures are supplemented by qualitative explanations.
Qualitative information: Explain the context of the assessment
In addition to hard numbers, the IFRS require qualitative, i.e., descriptive, information to provide users of the financial statements with a complete picture. These explanations provide context for valuation methods and assumptions made. Approximately 75% of investors consider this qualitative information to be as important as the quantitative data. The description of valuation processes and the involvement of external experts are central elements here.
The following qualitative information is required:
The valuation techniques applied for each category of assets (e.g., DCF method, comparative valuation method).
A justification if the valuation technique has been changed (e.g., from a market-based to an income-based method).
Information on the inputs and assumptions, particularly in the case of Level-3 valuations.
The description of the company's valuation process, including the role and independence of external evaluators.
This information helps to better understand the tax implications of the valuation. However, even with utmost care, pitfalls lurk.
Avoid common mistakes and maximize trust
Despite detailed regulations, errors still frequently occur in practice that impair comparability and transparency. A study by the ESMA (European Securities and Markets Authority) finds deficiencies in Fair Value disclosures in about 15% of the audited financial statements. A common mistake is an inadequate sensitivity analysis. It is not sufficient to merely state that a change in the capitalization rate of 0.25% alters the value. The disclosure must quantify the quantitative impact on the result or equity. Another error is the use of overly broad input ranges without further segmentation. Do you need a quick and neutral assessment to avoid these pitfalls? The Auctoa ImmoGPT-Chat can provide you with initial data-driven insights in just 60 seconds. Insufficient documentation of deferred taxes on properties is also a common problem. Attention to these details results in a robust financial statement.
offenlegungspflichten-bei-immobilienbewertungen-ifrs
The disclosure obligations for real estate valuations under IFRS are far more than a regulatory box-ticking exercise. They are a crucial tool for building trust in the capital market and creating a solid foundation for strategic decisions. A transparent presentation of the valuation methodology, the underlying assumptions, and the potential value fluctuations (sensitivities) allows investors to accurately assess the quality of your real estate portfolio and management. Strict compliance with IFRS 13 and IAS 40 requirements with a 100% level of detail is key. In the end, clear and understandable disclosure creates sustainable corporate value.
Additional useful links
The Deutsche Rechnungslegungs Standards Committee (DRSC) offers a document on IFRS evaluation and feedback.
The Statistische Bundesamt (Destatis) provides information on construction prices and real estate price indices.
The Deutsche Bundesbank offers insights into the indicator system for the German commercial real estate market.
PwC (PricewaterhouseCoopers) provides information on real estate valuation.
Deloitte provides a comprehensive guide on accounting in the real estate sector.
KPMG offers an updated report on accounting and reporting in the real estate sector.
EY (Ernst & Young) presents an IFRS survey on the financial reports of real estate companies.
IAS Plus offers e-learning material on IAS 40 (investment property).
FAQ
What information is mandatory for a Level 3 property valuation?
You must disclose the valuation techniques used, quantitative information on the significant unobservable inputs (including ranges), a reconciliation of the valuation performance, as well as a sensitivity analysis quantifying the impact of input changes on the fair value.
What happens when the valuation method is changed?
A change in the valuation technique (e.g., from the comparative method to the income approach) is only permissible if the new method leads to a more reliable valuation. This change must be thoroughly justified and disclosed in the appendix to avoid impairing comparability.
Does IAS 40 apply to all real estate of a company?
No, IAS 40 applies exclusively to 'investment properties', meaning those held to earn rental income or for capital appreciation. Owner-occupied properties fall under IAS 16 (Property, Plant and Equipment), and properties held for sale are covered by IFRS 5.
Do I need to specify the fair value even if I choose the cost model according to IAS 40?
Yes. Even if you account for your investment properties under the cost model, you must disclose the fair value of the properties in the notes. This is a key disclosure requirement under IAS 40.
