Companies that are obliged to draw up and publish a trade balance sheet prepare it in accordance with the requirements of the Commercial Code (HGB). Certain principles apply. One of these principles requires that only actual realised profits are included in the balance sheet. If you wanted to set the potential increase in the value of a property in the balance sheet, then this is excluded according to the specifications of the HGB. However, if a company wants to take out a loan, then the increase in profit of the property in the meantime is quite important. In such a situation, one can use the commercial balance sheet according to internationally recognized IFRS standards. There, the increase in value can actually be represented. In addition, a company can also avoid the previous depreciation on the property as a loss. Although the obligation to draw up the commercial balance sheet according to the HGB remains, it can be published according to the rules of the IFRS.

Measuring real estate according to IFRS: Maximizing equity & profit on the balance sheet

1st IFRS as an accounting standard

In Germany as in other countries, companies of a certain size and above have obligations to establish a trade balance. Such an annual financial statement usually fulfils several functions. On the one hand, any business partners and creditors of a company should have the opportunity to inquire about the economic status of the company. Thus, this also requires a publication obligation. It is also logically understandable that the data presented in the balance sheet is determined on the basis of objective criteria. After all, the values should also correspond to the economic facts. Furthermore, the trade balance also serves to determine profits. Therefore, it is also relevant for the shareholders involved in a company, since the share of the profit due to them also depends on this. Finally, the balance sheet also has the function of taxing the company or its shareholders as a basis for determining the taxable profit.

This is why Germany has introduced fixed rules for establishing a trade balance. These are legally fixed in the Commercial Code (HGB). In addition, general principles are applied here, which originate in particular from the protection of creditors. According to these rules, companies in Germany prepare their financial statements.

But if you are interested in working with a German company as a foreign business partner or investor, then you have to first study the HGB to understand the German balance sheet. At a time when the world is growing together, especially economically, this is hardly justifiable. This is why internationally recognized accounting standards have been created in the past, the IFRS. IFRS simply means “International Financial Reporting Standards”.

2. development and structure of IFRS

2.1 Background on the development of IFRS

IFRS is the result of the efforts of the International Accounting Standards Board (IASB), a U.S.-based organization dedicated to international accounting harmonization. It is not so much a question of transposing national rules as of harmonisation, recognised in international trade, in the accounting of both annual accounts and consolidated accounts.

Nevertheless, since the publication of IFRS by the IASB, more than 140 countries and other jurisdictions have already recognized these as legal standards, at least in part. The EU has now also introduced IFRS as accounting standards for certain cases. In addition, it was ensured that the IFRS also receives a corresponding translation in all official languages distributed within the EU. Consequently, the IFRS can also be read in German. On the other hand, IFRSs have not yet become universally applicable in the United States, for example. In Germany, too, IFRS are only partially decisive. In contrast, in addition to Austria, Belgium and the Netherlands, the Scandinavian countries Norway, Sweden and Finland have also fully recognised IFRS.

The latest versions of IFRS are now available via the OECD, the World Bank or the International Federation of Accountants (IFAC).

2.2 Principles in the Development of IFRS

As far as the structure of IFRS is concerned, it follows a predetermined structure. However, this structure only serves as an indication for the preparation of IFRSs by the IASB. For example, IFRSs are intended to inform potential investors in particular. Other key aspects of the development of IFRSs relate to the qualitative nature of the information contained in financial statements prepared in accordance with IFRSs. Therefore, in particular the relevance and the presentation of the actual economic conditions are in the foreground of the purpose of IFRS. This is accompanied by other aspects, such as the comparability or verifiability of the information in the financial statements prepared in accordance with IFRSs.

Another characteristic of the application of IFRSs is the presentation of fixed and working assets. In both cases, IFRS accounting is based on the principle that assets should be measured by actual value. This underlines the importance of the assets’ values in terms of their fundamental function, namely contributing to the future value of the company. Therefore, it is also understandable that the assets are valued with their actual market value at the balance sheet date.

On the other hand, the HGB provides for the precautionary principle as a guideline that is decisive for the preparation of the balance sheet. This is accompanied by the presentation of the profit taking into account all potential reductions. According to the principle of realisation, only actual profits may appear on the balance sheet. Future profits are therefore excluded in the accounting under the HGB. The maximum value principle also applies here restrictively. Because an economic good can be valued at most with the acquisition or production costs. Particularly for investment properties that are expected to show positive performance in the future, a realistic presentation of their current value according to these accounting principles is excluded. Therefore, in a balance sheet according to the HGB, one cannot obtain comprehensive information about the realistic value of a company or its assets.

4th IFRS – Application in Germany

For most companies in Germany that have an interest in applying IFRS when preparing their financial statements, the question is whether this can replace the trade balance according to HGB. However, this is only currently possible for larger companies. The link to HGB as a legal basis for the preparation of the balance sheet therefore remains. However, in addition to the trade balance regularly prepared according to the HGB, one can also publish a financial statement that follows the rules of IFRS. Therefore, one has to factor in additional costs in the preparation of this alternative trade balance. The principle of balance sheet continuity is also important here. Thus, once valuations and voting rights have been made, companies must also retain them in subsequent financial statements. This is the only way to make a comparison over several accounting periods.

Apart from these obvious limitations, a replacement of the balance sheets prepared according to the HGB by those according to IFRS is out of the question, if only because the tax balance sheet is based on the data of the balance sheet prepared according to the HGB. A further reason why the balance sheet drawn up according to the HGB continues to play a decisive role lies in its importance in relation to company law. The profit distribution of a commercially active company is also based on the calculations, which are included in the annual accounts according to the specifications of the HGB.

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Design through IFRS – Advantages with real estate

Of course, IFRS may primarily serve to provide information about the economic situation of a company. In particular, international investors may be interested in this because it makes it easier for them to analyze the economic situation and compare it. However, IFRSs also provide opportunities for companies that account for these requirements.

5.1 Valuation of real estate according to IFRS

In particular, the presentation of real estate in corporate assets can be interesting from the methods according to IFRS. For example, if the purchase of such a property has already taken place some time ago and thus a significant loss of value due to the annual depreciation, the IFRS allow a different view of the economic situation. At the same time, properties in general can boast an ongoing increase in value. However, no information can be taken from a balance sheet according to HGB about this.

With financial statements prepared according to the rules of IFRS, this can be changed. This is because the directive states that the value is as objective as possible. So when drawing up the balance sheet, you can use the current market value of a property in the company's assets.

5.2 Benefits of valuing real estate according to IFRS

But what advantage does this offer? Well, if a company holds real estate in its assets and seeks financing through a loan from a lender, then the identification of the assets according to IFRS is of course much cheaper than the very conservative presentation according to the HGB. Finally, on the one hand, the influence exerted by depreciation on the property value diminishes. At the same time, IFRSs also enable a value measure that is above the acquisition or production costs. In this way, one can map the increase in value that the property has experienced over time. The effect is that potential lenders tend to lend in such a positive light. Under certain circumstances, another bonus may be waved. Because in a skilful negotiation you can also use the positive assets in the balance sheet to get better conditions for a loan.