Revision of IDW S 1: "Principles for the Performance of Business Valuations" – An Overview of the Most Important Changes

IDW S 1 is the authoritative standard for business valuations in Germany and enjoys high recognition, particularly in legal valuation contexts. In jurisprudence, the standard serves as an objectified benchmark for appropriate business valuations. This practically proven standard has remained virtually unchanged since 2008. However, academia and case law have evolved significantly since then. Furthermore, economic transformation has brought changing trends (such as digitalisation and ESG) into focus, and altered valuation contexts – driven, among other things, by international influences – must be taken into account. With this revision, the Business Valuation and Economics Committee (FAUB) of the IDW aims to adapt the central business valuation standard to modern economic and legal frameworks. The new standard is designed to function as a modular toolkit capable of mapping various valuation contexts, while more clearly defining the auditor's responsibility as well as individual work steps within the valuation process.

The FAUB officially approved the revised standard on 11 February 2026. IDW S 1 as amended in 2026 was first published in issue 04/2026 of the journal IDW Life. The following section classifies and summarizes the key changes relevant to valuation practice.

Overview of the Most Important Changes and their Impact on Valuation Practice

Impact of the Auditor’s Function

The new IDW S 1 firmly links the auditor’s function agreed upon in the valuation engagement with the requirements for the plausibility assessment of corporate planning. In this regard, the functions of the public auditor are categorized as follows (cf. IDW S 1 as amended in 2026, Section 2.3):

• Neutral Expert (Neutraler Gutachter): Acting as a neutral expert, the public auditor conducts a comprehensive plausibility assessment of the key assumptions and the planning model. This means that they evaluate the essential assumptions, the forecasting model, and the resulting overall enterprise value by applying the established plausibility standards (mathematical and formal plausibility, material internal plausibility, and material external plausibility; Section 5.5).

• Neutral Appraiser (Neutraler Sachverständiger): In this function, which was newly introduced in the revised version of the standard, the public auditor conducts a sufficient plausibility assessment. Depending on the valuation trigger and the engagement, certain analytical procedures within the material internal and external plausibility assessment may be omitted or a lower level of detail may be applied, provided that—based on the analytical procedures performed—an overall enterprise value can be derived that is sufficiently plausible for the specific valuation purpose.

• Advisor (Berater): In an advisory function, the public auditor is not strictly required to perform a sufficient plausibility assessment. However, they must notify the client of any obvious errors in the provided valuation-relevant documents that come to their attention during the execution of the engagement.

• Arbitrator or Mediator (Schiedsgutachter oder Vermittler): Acting as an arbitrator or mediator under IDW S 1, the auditor acts as a neutral authority to resolve conflicts between two parties. In this role, they determine a settlement value (Einigungswert) that balances the differing interests and subjective expectations of the parties involved.

In practice, these various functions do not imply a fundamental change in valuation methodology, but rather a clearer presentation of the procedural logic. The valuation trigger and the specific engagement determine the required plausibility assessment and thus the depth of detail of the valuation. This enhances legal certainty and efficiency, allowing for an appropriate, less intensive scope of plausibility testing in suitable cases. Furthermore, the new standard requires engagement letters to be drafted with significantly greater precision in practice. Since liability and the scope of work are directly tied to the selected function, a clear demarcation within the engagement letter is critical.

Differentiating Management Forecasts from the Projection of Future Financial Surpluses

Under the revised version of IDW S 1 (2026), the valuer's responsibility regarding the distinction between internal management forecasts and valuation-relevant projections of future financial surpluses has been significantly sharpened. The new standard explicitly requires the public auditor—in their role as a neutral expert or neutral appraiser—to no longer merely accept management forecasts as a given. Instead, they must test them for consistency and realism in order to derive the "expectable" sustainable earnings power. If a management forecast is only partially or limitedly usable, it must be adjusted or supplemented by the public auditor.

Additionally, the revised version introduces the concept of a transition phase (also known as "Phase II"). This phase bridges the gap between the detailed forecasting period (Phase I) and the perpetual annuity (Phase III). In valuation practice, this leads to a more precise modeling of the transition from above-average growth or return rates toward a long-term stable equilibrium (steady state). If the company is already in a steady state at the end of the detailed forecasting period, a direct transition to Phase III is permitted. This must be justified in the valuation report. 

Further Development of Value Concepts

The value concept is determined by the valuation perspective. If the valuation is conducted from the perspective of an atomistic shareholder, the valuer continues to determine an objectified enterprise value (objektivierter Unternehmenswert). The concept of the objectified enterprise value has been refined in the revised edition and adapted to modern market requirements. For instance, the focus has shifted toward expectable rather than existing sustainable earnings power. Furthermore, the previously legally driven distinction between genuine and non-genuine synergies has been abandoned in favor of an economic, business-oriented interpretation.

In addition, the new standard replaces the previous subjective decision value (subjektiver Entscheidungswert) with the plausibilised decision value (plausibilisierter Entscheidungswert). Under this value concept, the opportunities and expectations of specific decision-makers are subjected to internal and external plausibility assessments to ensure they are verifiable and consistent. In practice, the valuer must actively challenge the client's assumptions when determining a plausibilised decision value. This means assumptions must not clearly contradict market realities or historical performance. Furthermore, the public auditor must document the plausibility process and assumes personal responsibility for the logical consistency and realism of the forecast. This mandatory plausibility assessment is intended to increase the level of responsibility and, consequently, the credibility of the valuation result.

Other aspects of the revision include a stronger emphasis on stock market prices. These are now increasingly utilized as a tool to cross-check and plausibilise the derived capitalized earnings value. Generally, the significance of market-oriented valuation approaches (including valuation methods using multiples) has been elevated in the new standard. Comprehensive guidance on the calculation of multiples has been added. Another new passage dictates that plausibility cross-checks of the valuation result using multiples must be disclosed in the reporting (cf. IDW S 1, 182).

Moreover, the valuation of SMEs (small and medium-sized enterprises) is now treated as an independent topic. Relevant practical guidance on valuing smaller entities as well as planning in crisis scenarios has been directly integrated into the standard. The standard also regulates the procedure for legally induced deviations: if individual provisions of IDW S 1 must be disregarded due to statutory or judicial requirements, all other principles of the standard remain fully valid. Deviations must be documented and transparently justified with reference to the legal requirements. Additionally, the revised version contains further clarifications, particularly regarding personal income taxes, as well as supplementary explanations on determining the market risk premium.

Conclusion

The revised version of IDW S 1 (2026) fundamentally continues the well-established framework of the 2008 standard. However, the new standard establishes a more application-oriented valuation framework that better accommodates different valuation triggers. The refined, trigger- and engagement-specific plausibility assessment strengthens the transparency and consistency of the methodology, while simultaneously increasing the valuer's responsibility. Terminology has been sharpened, providing the reader with a clearer upfront view of the informative value of the business valuation and the specific depth of the plausibility assessment performed.

In practice, this may result in significantly higher preparation efforts for companies and require valuers to scrutinize the robustness of corporate forecasts more intensely. On the other hand, it allows for an appropriate, less intensive scope of plausibility testing in suitable cases. In this context, the engagement letter gains massive importance compared to the 2008 standard, as it must now strictly and precisely define the exact role of the auditor and the specific value concept—particularly to differentiate between the objectified value and the plausibilised decision value.

The new standard applies to valuation dates after the publication of Issue 04/2026 of IDW Life on April 9, 2026. Applying the standard to valuation dates prior to its publication is only permitted if explicitly agreed upon in the engagement. Accordingly, IDW S 1 (2008 version) will also continue to be applied in the coming years.

Authors: Holger Redle (Associate Manager, Advisory), Klaus Wenzel (Partner)