Real Estate Valuation for the Balance Sheet: Fair Value under IFRS, Carrying Value under German GAAP (HGB), and the Role of the Auditor

Valuing real estate for the balance sheet is different from determining its market value for a sale or inheritance. Corporations, funds, and groups must record their real estate in the financial statements according to accounting standards – and these rules differ significantly depending on the accounting framework. If the financial statements are subject to an auditing the valuation must meet the auditor's requirements for traceability and independence.

HGB: Acquisition Costs and the Lower of Cost or Market Principle

The commercial financial statement follows the prudence and acquisition cost principle. Immobilien des Anlagevermögens werden zu Anschaffungs- oder Herstellungskosten angesetzt und – bei abnutzbaren Gebäuden – planmäßig abgeschrieben. Eine Aufwertung über die Anschaffungskosten hinaus ist nicht zulässig.

Conversely, in the event of a permanent impairment, the lower of cost or market principleapplies: If the carrying amount at the balance sheet date is expected to be permanently below the book value, an extraordinary depreciation to this lower value must be made (§ 253 HGB). For this "carrying amount," an expert market or market value assessment is regularly required – as an objective basis for the depreciation requirement.

IFRS: Fair Value under IAS 40 and IFRS 13

International accounting takes a different approach. Under IAS 40 real estate held as a financial investment (Investment Property) can be valued at fair value – changes in value then flow through the income statement. This means the property is recorded at current market value at each reporting date, not at historical cost.

How this fair value is to be determined is regulated by IFRS 13. Zentrale Konzepte:

• Highest and best use – the highest and best use that is legally permissible and economically viable is decisive.
• The Valuation hierarchy (Level 1–3) distinguishes based on the observability of input data; due to their uniqueness, real estate usually falls into Level 3.
• The priority of market-based inputs over purely model-based assumptions.

In practice, this means: The result of a market value determined according to ImmoWertV and an IFRS 13 fair value are conceptually close – both aim at market value – but the derivation, documentation, and assumptions used must meet IFRS requirements.

What the audit expects from the valuation report

If a real estate valuation is included in a financial statement subject to audit, it becomes part of the auditor's audit procedures. The auditor does not rely on a number alone but examines its derivation. In particular, the following are expected:

• independence independence of the valuer from the company being valued,
• a traceable, documented methodology with reliable market data,
• plausible and disclosed assumptions (rent, interest rate, remaining useful life, vacancy rate),
• a Sensitivity analysis sensitivity analysis of the key value drivers, and
• a recognized valuation basis – internationally often the RICS Red Book or the International Valuation Standards (IVS).

An appraisal report that meets these criteria can be verified by the auditor and incorporated into the audit documentation – this accelerates the audit process and reduces queries.

Conclusion

Real estate valuation for financial statements is more than just a market value estimate: it must comply with the rules of the respective accounting framework – acquisition costs and lower of cost or market under HGB, fair value under IAS 40 / IFRS 13 – and meet the audit requirements of statutory auditors. Key factors are independence, a verifiable methodology, and documented assumptions. Those who combine both deliver a valuation that stands up in the financial statements and during the audit.

The Real Estate Valuer office STRECKEL prepares valuation reports for financial statement purposes in accordance with HGB and IFRS – for corporations, funds, and institutional investors, aligned with audit requirements. Book a non-binding consultation now.