Are you still evaluating your properties based on traditional acquisition costs? By doing so, you might be leaving up to 40% of the actual market value dormant in your balance sheet. The difference between IFRS and HGB in real estate valuations is the key to unlocking hidden reserves.
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The topic briefly and concisely
The German Commercial Code protects creditors through the acquisition cost principle, which leads to lower, conservative property values on the balance sheet.
IFRS informs investors through the fair value method, which reflects the current market value and can reveal hidden reserves.
The choice of standard has a direct impact on the equity ratio, creditworthiness, and company valuation, with value differences of over 30% being possible.
The choice between the German Commercial Code (HGB) and the International Financial Reporting Standards (IFRS) often seems like a purely technical question for accounting. However, especially in real estate, it holds significant strategic implications. While the HGB relies on the cautious principle of acquisition costs, the IFRS allows for valuation at the current market value (Fair Value). This difference directly impacts your financial ratios, creditworthiness, and potential sales proceeds by hundreds of thousands of euros. For owners and investors, understanding these differences is crucial to unveil the true value of their portfolio and make informed decisions.
HGB vs. IFRS: Two philosophies of company valuation
The fundamental difference between HGB and IFRS lies in their objectives. The HGB primarily serves creditor protection and follows the prudence principle, which often leads to lower, more conservative valuations. In contrast, the Anglo-American influenced 'True and Fair View' of IFRS aims to provide potential investors with as realistic a picture as possible of the assets, financial, and income situation. For real estate, this specifically means: HGB looks to the past (acquisition costs), while IFRS reflects the present (market value). These differing perspectives lead to significant discrepancies in the balance sheet, which can amount to 30% or more depending on market developments. Choosing the standard is therefore a crucial decision for the financial representation of your company.
The cost principle according to HGB: Stability with limits
According to § 253 of the German Commercial Code (HGB), real estate held as fixed assets is recorded at the acquisition or construction costs, reduced by regular depreciation. Market value increases are completely disregarded in this process. If the value is expected to fall permanently, the mitigated lower of cost or market principle applies, and an extraordinary depreciation becomes mandatory. In a property market that has been rising for 10 years, this method often results in book values being 20–40% below the actual market values. This difference is known as a hidden reserve – capital that remains invisible on the balance sheet. A solid, yet often unrealistic valuation method. More details can be found in our guide to the Acquisition Cost Model according to HGB.
Fair Value according to IFRS: Reflect market values directly in the balance sheet
The IFRS provides an option for investment properties under IAS 40: the fair value measurement. The fair value is the price that would be achieved for the property if sold on the valuation date. Changes in value – both gains and losses – are recorded directly and affect profit or loss in the income statement. This increases volatility, but also creates maximum transparency regarding current value development. Even a positive revaluation of 5% on a portfolio worth 10 million euros increases equity by 500,000 euros. This improves key figures like the equity ratio and can positively influence financing conditions with banks. Learn more about the fair value measurement under IFRS.
The fair value hierarchy according to IFRS 13: Ensuring objectivity
To avoid arbitrariness in fair value determination, IFRS 13 prescribes a three-level hierarchy for the valuation inputs used. These levels are intended to make the objectivity of the valuation transparent:
Level 1: Quoted prices on active markets for identical assets. This is not applicable to most real estate, as each property is unique.
Level 2: Observable market data for similar properties. This includes comparable prices per square metre in the same location or derived capitalization factors.
Level 3: Non-observable, company-internal data. This includes cash flow forecasts from leases, which often require external appraisals. Over 80% of real estate valuations fall into this category.
This hierarchy places high demands on the traceability and the disclosure requirements in the appendix.
Practical example: A difference of 1.4 million euros
Imagine you purchased a commercial property for 2 million euros 10 years ago. The annual depreciation is 2% (40,000 euros). Today, the market value is 3 million euros. The difference in the balance sheet is significant. According to HGB, the book value is now only 1.6 million euros (2 million euros - 10 * 40,000 euros). According to IFRS (Fair Value Model), the property would be valued at 3 million euros. This means that the IFRS balance sheet shows equity 1.4 million euros higher. With a total balance of 5 million euros, the equity ratio would increase from 32% to 58%. Such a leap can be crucial for obtaining loans or finding investors.
Deferred Taxes: The Silent Companion of IFRS Revaluation
The revaluation of a property according to IFRS leads to a temporary difference between the higher IFRS valuation and the lower tax valuation. This difference triggers the creation of deferred tax liabilities. In the example above, the increase in value of 1.4 million euros would result in a deferred tax liability. Assuming a tax rate of 30%, this would amount to 420,000 euros, which must be recognised as a liability in the balance sheet. This tax deferral ensures that future tax burdens resulting from the increase in value are taken into account today. The correct treatment of deferred taxes in real estate is a critical aspect of IFRS accounting.
unterschied-ifrs-und-hgb-bei-immobilienbewertungen
The difference between IFRS and HGB in property valuations is far more than a technical formality. The HGB offers conservative stability, which, however, can conceal significant hidden reserves. IFRS, on the other hand, provides transparency regarding the true market value, improves balance sheet ratios, and strengthens the position with international investors and banks. The choice of a standard depends on your business strategy. Do you need a strong equity base for expansions or a stable, cautious balance? A data-driven, neutral evaluation is the foundation for both paths. Use the ImmoGPT chat from Auctoa to get an initial assessment of the fair value of your property and understand the potential of an IFRS valuation.
Additional useful links
The German Accounting Standards Committee (DRSC) offers a document for evaluation and feedback regarding the IFRS.
A joint letter from the Institute of Public Auditors in Germany (IDW) and the Federal Ministry for Housing, Urban Development and Building (BMWSB) explains the Property Valuation Ordinance (ImmoWertA).
KPMG provides practical insights into the application of IFRS and HGB on its hub.
EY (Ernst & Young) presents a survey on IFRS financial statements in the real estate sector for the year 2024.
IAS Plus (Deloitte) offers e-learning material on IAS 40, which deals with investment properties.
FAQ
Which standard is better for my company, HGB or IFRS?
That depends on your target audience. For traditional, non-capital market-oriented German companies focusing on creditor protection, the HGB is often sufficient. For internationally operating companies aiming to attract investors or report a higher equity base, IFRS is the better choice.
How is the fair value of a property specifically determined?
The assessment is usually carried out by certified experts using recognised methods such as the comparative value, income value, or intrinsic value methods. The methodology and underlying assumptions must be disclosed in detail in the notes to the financial statements according to IFRS 13.
Does an assessment according to IFRS always lead to higher values?
In phases of rising property prices, yes. However, in a declining market, the fair value method can also lead to write-downs that directly affect profits. The German Commercial Code (HGB) is more conservative in this respect due to the principle of lower of cost or market value and only responds to likely permanent impairments.
What are the consequences of deferred taxes?
Deferred latent taxes represent a future tax liability. They reduce the equity increase resulting from an appreciation and ensure that the future tax burden from the realization of hidden reserves is already reflected in the balance sheet.
