Why Is a Valuation Report Required in the Independent Audit Process?
Real estate often accounts for a significant share of the balance sheet in asset-intensive companies. Reporting these properties at the correct amount in the financial statements is not merely an accounting matter; it is an audit issue that directly affects the extent to which the financial statements reflect the company’s true economic position.
The purpose of an independent audit is to provide reasonable assurance that the financial statements are free from material misstatement. To this end, the auditor must obtain sufficient and appropriate audit evidence in accordance with Turkish Standards on Auditing (TSA) 500, “Audit Evidence.” Determining the value of a piece of real estate, however, often falls outside the auditor’s area of expertise: it requires distinct technical knowledge, such as market analysis, comparable transactions, the income and cost approaches, and the property’s legal and physical condition. This is precisely where TSA 620, “Using the Work of an Auditor’s Expert,” comes into play, allowing the auditor to rely on the work of an expert in areas beyond their own competence.
The separation of roles here is important: the valuation expert determines the market-based value of the property, while the auditor assesses whether that work constitutes sufficient and appropriate evidence for the audit of the financial statements. A valuation report prepared for independent audit purposes supports the property’s value in the financial statements with market data and transparently sets out the method used, the assumptions made, and how the conclusion was reached. This allows the auditor to understand the critical assumptions and uncertainties in the valuation process, test management’s assertions, and obtain the evidence needed for the relevant financial statement items.
Where a property is measured at fair value, or where its amount is material to users of the financial statements, it becomes particularly important that the valuation work be independent, consistent, and supportable with market data. Such work demonstrates that the values in the financial statements rest on an objective, justifiable basis and reduces the risk inherent in the financial statements.
As Vizyon Taşınmaz Değerleme ve Danışmanlık A.Ş., we provide our valuation services to fulfil the needs of independent audit processes: we evaluate the property’s legal and physical characteristics, current market data, appropriate valuation methods, and the key assumptions we use, as a whole. We conduct our work within the framework of the International Valuation Standards (IVS) and the standards of the Royal Institution of Chartered Surveyors (RICS), and we take care to ensure that our reports are transparent, traceable, consistent, and auditable. Our aim is for the reports we prepare not only to establish the value of the property, but also to provide the reliable technical basis needed in independent audit and financial reporting processes.
What Are The Key Considerations in Real Estate Valuation Under Different Financial Reporting Frameworks in Türkiye?
How real estate is measured and reported in the financial statements in Türkiye is not simply a matter of establishing a market value. The purpose for which the entity holds the property, the classification it falls under, the measurement model applied, and market conditions at the valuation date all directly determine the amount recognized in the financial statements and its effect on profit or loss, or on equity.
For this reason, a real estate valuation should not be treated as a purely technical market-value exercise, but should be considered together with the financial reporting framework the entity is subject to. In Türkiye, depending on their size and whether they are subject to independent audit, entities apply one of the following frameworks: Turkish Financial Reporting Standards (TFRS) and their international counterpart, the International Financial Reporting Standards (IFRS); the Financial Reporting Standard for Large and Medium-Sized Entities (BOBİ FRS); the Financial Reporting Standard for Small and Micro-Sized Entities (KÜMİ FRS); or the General Communiqué on the Accounting System Implementation / Turkish Generally Accepted Accounting Principles (MSUGT), based on the Tax Procedure Law (VUK). The valuation outcome for the same property can therefore be reflected differently in the financial statements depending on which framework applies.
How are Real Estate Assets Classified and Measured under IFRS/TAS?
Under TFRS, how a property is accounted for depends first on the purpose for which the entity holds it.
Turkish Accounting Standards (TAS) 16, “Property, Plant and Equipment (PP&E),” covers buildings and other tangible fixed assets that an entity uses for production, the supply of goods or services, or administrative purposes. Under this standard, an entity may apply either the cost model or the revaluation model. When the revaluation model is chosen, increases arising on revaluation are, under certain conditions, recognized in equity through other comprehensive income (OCI); impairment losses and amounts related to previous revaluation differences, however, may affect profit or loss. Depreciation continues to be charged on revalued assets.
TAS 40, “Investment Property,” covers properties held to earn rental income, for capital appreciation, or both. Investment property is a distinct category from PP&E under TFRS — it is not part of TAS 16. Here, the entity may elect either the cost model or the fair value model as its accounting policy. If the fair value model is applied, changes in the property’s fair value are recognized directly in profit or loss for the period, and no depreciation is charged on these assets.
Consequently, for the same property, answering the question “what is the market value?” on its own is not enough: whether the property falls under TAS 16 (as PP&E) or TAS 40 (as investment property), and which measurement model applies accordingly, are the key factors that determine how the valuation outcome will be reflected in the financial statements.
TFRS 13 – Fair Value Measurement
Where fair value measurement applies, the valuation work must be consistent with the principles set out in TFRS 13. Under TFRS 13, fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. In this context, the quality of the market data used, the selection of comparables, the valuation method, key assumptions, and the observability of the inputs all become important. The property’s “highest and best use” must also be assessed from the perspective of market participants, and any difference between the existing use and an alternative use may need to be analyzed and supported from a legal, physical, and financial standpoint. This analysis can materially affect the valuation outcome, particularly for land with development potential, project development sites, and properties for which a use other than the existing one would be economically more advantageous.
Real Estate Valuation for Public Interest Entities (PIEs)
Because Public Interest Entities (PIEs) are subject to TFRS, valuation work performed for these entities must consider TAS 16, TAS 40, and — where fair value measurement is involved — TFRS 13 together. In valuation work underlying a PIE’s financial statements, determining market value on its own is not sufficient; the valuation date, the classification of the property, the method selected, the market data used, and the measurement basis to be reflected in the financial statements must all be consistent with one another.
Real Estate Valuation Under BOBİ FRS
The principles governing the measurement and reporting of real estate under BOBİ FRS may differ from TFRS. The two frameworks must be distinguished in terms of how property, plant and equipment and investment property are classified and subsequently measured. Where fair value measurement is used for investment property under BOBİ FRS, the valuation work must objectively reflect market conditions and the property’s characteristics. Where the cost basis is applied, however, the valuation report should not be assumed to be used directly as fair value in the financial statements. It is therefore critical to clarify the entity’s applicable reporting framework and accounting policy before the valuation work begins.
Real Estate Valuation Under KÜMİ FRS
Entities that are not subject to independent audit and do not voluntarily apply TFRS or BOBİ FRS have applied the Financial Reporting Standard for Small and Micro-Sized Entities (KÜMİ FRS) since 1 January 2023. Compared to TFRS and BOBİ FRS, KÜMİ FRS is a simplified framework tailored to the needs of smaller entities, and this simplicity carries over into how real estate is measured: the standard adopts a predominantly cost-based approach and, unlike TAS 40, does not provide a separate fair value model for investment property. As a result, a valuation prepared for an entity subject to KÜMİ FRS is generally not intended to be recognized directly as fair value in the financial statements; rather, its purpose is to present the property’s current market-based value to the entity’s management, its shareholders, or third parties in processes such as lending, collateral, or mergers and acquisitions. It is important to clarify how the report will be used under this framework before the work begins.
Real Estate Valuation for Ordinary Entities Under the Tax Procedure Law (VUK/MSUGT)
The position is different for entities that are not subject to TFRS, BOBİ FRS, or KÜMİ FRS — that is, entities that keep their books under the Tax Procedure Law (VUK) and the General Communiqué on the Accounting System Implementation (MSUGT) without applying any financial reporting standard. Under the VUK, real estate is measured at cost and depreciated on that basis; there is no concept of fair value measurement. The revaluation mechanisms provided under the VUK (such as the arrangements under Repeated Article 298 or Provisional Article 31) are also indexation exercises based on the Domestic Producer Price Index (D-PPI) and should not be confused with the revaluation or fair value models under TFRS, since their purpose is to update the recorded value for tax purposes rather than to reflect the property’s current market value. These two mechanisms differ from one another: Repeated Article 298 has, since 1 January 2022, provided a permanent revaluation option that can be applied every year in periods when the conditions for inflation adjustment are not met, whereas Provisional Article 31 was a one-off measure available for a limited period in 2018 and 2021. Real estate valuation reports prepared in this context generally do not feed directly into the financial statements; instead, they are used for the entity’s needs relating to lending, collateral, capital increases, sales, insurance, or ownership structuring. Where an entity is subject to VUK/MSUGT, it is important for the valuation expert to clearly set out the intended use of the report and the limits of its relationship to the financial statements.
This distinction means that valuation work carried out for the same property under different financial reporting frameworks can be reflected differently in the financial statements. Clear communication should therefore be established between the valuation expert and the entity’s financial reporting and independent audit teams, with the purpose of the report and the measurement basis to be used clarified at the outset of the engagement.
What Are the Key Technical Considerations in Real Estate Valuation Work
In real estate valuations performed for financial reporting purposes, the most critical point is that the valuation method selected is appropriate to the nature of the property and prevailing market conditions. In the sales comparison approach, the comparables selected are expected to be comparable in terms of location, characteristics, size, zoning status, intended use, and transaction date; in the income approach, key assumptions such as rental income, occupancy rates, growth expectations, and capitalization rates must be supported by market data. In projects that use the discounted cash flow (DCF) method, the effect on the valuation outcome of assumptions such as future income and expense projections, the discount rate, the growth rate, and the exit value must also be assessed. Because even small changes in these assumptions can lead to material differences in the financial statements, particularly for high-value properties, the assumptions must be justifiable and traceable.
For industrial facilities and special-purpose real estate, correctly separating components such as buildings, land, and machinery and equipment is also important; otherwise, risks such as double-counting the same economic value across more than one asset line, or misclassifying assets, may arise.
In conclusion, it is not enough for a valuation report prepared for financial reporting purposes to present a market value alone. The report must set out, as a consistent whole, the financial reporting framework the entity is subject to, the property’s classification in the financial statements, the applicable measurement basis, the valuation method, the market data used, and the key assumptions.
As an independent valuation firm licensed by the Capital Markets Board of Türkiye (CMB), Vizyon Taşınmaz Değerleme ve Danışmanlık A.Ş. carries out its valuation work with regard to the requirements of both the independent audit process and the various financial reporting frameworks in Türkiye — TFRS/IFRS, BOBİ FRS, KÜMİ FRS, and VUK/MSUGT. In doing so, we evaluate, as a whole, the property’s legal and physical characteristics, current market data, appropriate valuation methods, and the key assumptions we apply. Conducting our work in line with the International Valuation Standards (IVS) and the standards of the Royal Institution of Chartered Surveyors (RICS), we aim for our valuation reports to be transparent, traceable, consistent, well-reasoned, and fit for use within the relevant frameworks in Türkiye.
