Does the book value of your properties reflect their actual market value? Many balance sheets conceal untapped value potential. Switching to the Revaluation Model under IFRS can more accurately depict the financial reality of your company and improve your equity ratio by up to 20%.
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The topic briefly and concisely
The Revaluation Model (IAS 16) adjusts the carrying amount of properties to the current market value, with increases in value being recorded in the revaluation surplus in equity without affecting profit or loss.
In contrast, under the Fair Value Model for Investment Properties (IAS 40), all changes in value are directly recorded in the income statement (P&L).
The valuation is based on the fair value according to IFRS 13, a market-based 'exit price' that must be determined through regular, often external appraisals.
The valuation of real estate according to IFRS presents companies with an important choice: the cost model or the revaluation model. While the cost model adheres to historical values, the revaluation method allows adjustment to the current market value (Fair Value). This article explains the mechanisms of real estate valuation under IFRS, highlights the differences between IAS 16 and IAS 40, and offers a clear guide on how revaluation can be used not only to create transparency for investors but also to actively manage your balance sheet figures. Discover how to use revaluation as a strategic tool for your real estate portfolio.
Fundamentals of IFRS Revaluation: Cost vs. Revaluation Model
The International Financial Reporting Standards (IFRS) offer two primary methods for the subsequent measurement of property, plant and equipment: the cost model and the revaluation model. Under the cost model, a property is listed at its original purchase cost minus depreciation, which often doesn't reflect the real value after a few years. The revaluation model, on the other hand, allows for regular adjustments of the carrying amount to the fair value, which can represent the actual economic situation with up to 30% more accuracy. This method ensures more up-to-date and relevant financial reporting, crucial for investors and lenders. The choice of the correct model directly influences the presentation of assets and equity. Opting for the revaluation model is thus a strategic step towards optimising the balance sheet structure. The next section sheds light on the key concept of this method: the fair value.
Fair Value according to IFRS 13 as a cornerstone of valuation
The success of the revaluation method depends on an accurate determination of the fair value, as defined in IFRS 13. The fair value is the price that would be achieved in an orderly transaction between market participants at the valuation date upon the sale of an asset – a so-called 'exit price'. This market-based viewpoint is not company-specific and must consider the assumptions of market participants, including risk premiums. A three-level hierarchy exists for valuation, classifying the quality of data used. Level-1 inputs are market prices for identical assets, whereas Level-3 inputs are based on unobservable data and often require complex valuation models, as might occur in project developments. An accurate fair value determination is essential for compliance with IFRS 13. The correct application of these principles ensures that the revaluation stands on a solid and comprehensible basis, leading us to the accounting treatment of changes in value.
Booking of value changes: Revaluation reserve and P&L
The accounting treatment of value increases is a key difference of IFRS standards. When applying the Revaluation Model for owner-occupied properties under IAS 16, an increase in value beyond historical cost is accounted for outside of profit or loss. The excess amount is recorded directly in equity in a separate position, the revaluation surplus. If the value of a previously revalued property decreases, the surplus is first reversed before an impact on the profit and loss account (P&L) occurs. A simple example: A plot of land with a book value of €1.0 million is revalued to a fair value of €1.2 million. The difference of €200,000 increases the revaluation surplus without affecting profit or loss. This neutral treatment significantly stabilises the P&L during market fluctuations. This contrasts with the treatment of investment property, as the following section shows.
IAS 16 vs. IAS 40: The Key Difference for Your Portfolio
The correct classification of your property determines the applicable standard and accounting. IAS 16 governs owner-occupied properties (Property, Plant, and Equipment), while IAS 40 applies to investment properties held for rental income or capital appreciation. The main difference lies in subsequent measurement at fair value: while changes in value under IAS 16 primarily affect equity neutral, they are fully recognised in profit or loss under IAS 40's fair value model. An increase in the fair value of an investment property by 5% directly leads to higher periodic results. This direct impact on results makes portfolios under IAS 40 more volatile but also offers the opportunity to immediately highlight increases in value. The correct delineation between the standards is therefore essential for financial reporting. But how does one practically implement such an evaluation?
Practical Implementation: Steps for IFRS-compliant Revaluation
Implementing a revaluation strategy requires a structured process to ensure compliance and accuracy. A regular and reliable assessment is key. The following steps are central:
Engagement of a qualified appraiser: IFRS strongly recommends that the fair value assessment be carried out by an independent, certified expert to ensure objectivity.
Selection of the valuation method: According to IFRS 13, three methods are possible: the market approach, the income approach, and the cost approach. For investment properties, the income approach is often the most relevant method.
Regularity of the valuation: The revaluation must be carried out regularly so that the carrying amount does not significantly deviate from the fair value. An annual cycle is common in volatile markets such as commercial real estate.
Documentation and disclosure: All assumptions, methods, and key inputs (e.g., discount rates, market data) must be disclosed in detail in the notes to the financial statements.
Inadequate documentation can lead to audit objections. Do you have questions about the methodology? Our ImmoGPT chat can provide initial assessments of valuation approaches. With these steps, the valuation becomes transparent and robust, leading to the advantages of the model.
Benefits of Reassessment for Owners and Investors
The application of the Revaluation Model offers tangible strategic advantages that go beyond mere compliance. A key advantage is the improved transparency, as the balance sheet provides a more realistic picture of the company's assets. This can enhance creditworthiness with banks and optimize loan conditions by up to 15 basis points. Additionally, uncovering hidden reserves leads to a higher equity ratio, which underscores the company's financial stability. For publicly listed companies, a higher, market-appropriate book value per share can strengthen investor confidence and positively influence the share price. A higher intrinsic value serves as a strong argument in financing and M&A negotiations. An analysis of the balance sheet impacts often reveals untapped potential. However, where there is light, there is also shadow.
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Despite the advantages, the Revaluation Model also presents challenges that companies need to be aware of. The biggest downside is the cost and effort of regular external appraisals, which can reach five-figure amounts annually depending on portfolio size. Additionally, valuing assets at fair value leads to increased volatility in equity (IAS 16) or even in the income statement (IAS 40). A market downturn can quickly erode equity and negatively impact metrics such as the debt ratio. Another issue is the subjectivity in valuations based on Level 3 inputs. There is a risk of misjudgments if the underlying assumptions are not robust. Without a solid data basis, revaluation can result in undesirable volatility. Data-driven valuation by Auctoa minimises this risk through AI-based market analyses. Weighing these factors is crucial for the final decision.
Conclusion: When a re-evaluation is worthwhile for you
Does the application of the Revaluation Model always lead to a higher balance sheet total?
Not necessarily. In rising markets, revaluation leads to higher assets and a higher balance sheet total. However, in declining markets, it can also lead to devaluations that reduce equity and the balance sheet total.
Can I switch from the Cost Model to the Revaluation Model?
Yes, a switch from the Cost Model to the Revaluation Model is permitted as a change in accounting method. The reverse, i.e., switching back to the Cost Model, is generally not envisaged under IFRS.
What costs are incurred for property valuation under the Revaluation Model?
Primarily costs for external, independent appraisers are incurred. The amount depends on the number, type, and complexity of the properties to be valued and can range from several thousand to high five-digit amounts per year.
Do I need to revalue all my properties if I choose the model?
Yes, the option must be exercised uniformly for an entire group of assets (e.g., all land and buildings). Selective revaluation of individual properties (so-called "cherry-picking") is not permitted.
How does Auctoa assist with IFRS property valuation?
Auctoa offers AI-powered, data-driven valuations that can serve as a solid foundation for an IFRS-compliant fair value assessment. Our analyses provide quick and objective market values, helping you to validate appraiser costs and make informed decisions. Initiate a request or chat with our ImmoGPT to understand the process.
What happens to the revaluation reserve upon the sale of the property?
Upon the sale of a revalued property, the revaluation reserve can be directly reclassified into retained earnings. This reclassification is neutral with regard to profit and does not affect the periodic result.
Additional useful links
The IFRS Foundation provides detailed information on IFRS 13, which governs fair value measurement.
The Federal Statistical Office (Destatis) offers comprehensive data on construction prices and the real estate price index in Germany.
The German Bundesbank presents a detailed indicator system for the German residential property market.
The Institute of Public Auditors in Germany (IDW) publishes letters on the Property Valuation Regulation (ImmoWertA) in cooperation with the BMWSB.
KPMG offers a brochure on real estate auditing (Audit Real Estate) considering IFRS and HGB.
The German Accounting Standards Committee (DRSC) provides feedback on IFRS evaluation.
WTS offers an article on IAS 40, which deals with investment properties held as financial investments.
FAQ
Does the application of the Revaluation Model always lead to a higher balance sheet total?
Not necessarily. In rising markets, revaluation leads to higher asset values and a larger balance sheet total. However, in falling markets, it can also lead to devaluations, which reduce equity and the balance sheet total.
Can I switch from the cost model to the revaluation model?
Yes, a switch from the Cost Model to the Revaluation Model is permissible as a change in accounting method. However, under IFRS, the reverse, i.e., a switch back to the Cost Model, is generally not envisaged.
What costs are incurred in property valuation under the Revaluation Model?
The primary expenses incurred are for external, independent appraisers. The amount depends on the number, type, and complexity of the properties to be assessed and can range from several thousand to high five-figure amounts per year.
Do I need to reevaluate all my properties if I choose the model?
Yes, the option must be exercised consistently for an entire group of assets (e.g. all land and buildings). It is not permitted to selectively revalue individual properties (known as 'cherry-picking').
How does Auctoa help me with IFRS real estate valuation?
Auctoa offers AI-driven, data-driven assessments that can serve as a well-founded basis for determining fair value in compliance with IFRS. Our analyses provide quick and objective market values that help you validate appraiser costs and make informed decisions. Initiate a request or chat with our ImmoGPT to understand the process.
What happens to the revaluation reserve when the property is sold?
When selling a revalued property, the revaluation reserve can be transferred directly to retained earnings. This transfer is profit-neutral and does not affect the result for the period.
