How should this adjustment be calculated? Is it appropriate to compute this as a fixed percentage (e.g., 50%) of the transfer taxes for the vehicle under IFRS/local GAAP?
The calculation of the adjustment to the deduction of transfer tax (and other purchaser’s costs) inherent in the property valuation based on the expected manner of settlement, should be assessed on an asset-by-asset basis.
For each asset, therefore, consideration should be given as to the most likely form of disposal (e.g., asset deal or share deal) based on the intended disposal method and tax structuring of the asset as well as market conditions relevant to that property. If applicable, the history of the entity with regard to disposals and the agreed allocation of the tax burden between the seller and the purchaser should also be considered. This is the same rationale as for the calculation of the deferred tax liability adjustment. Where the assessed disposal method would result in a reduction in the transfer taxes (and purchaser’s costs) in the fair valuation of the property, this adjustment is made in arriving at the INREV NAV. However, the adjustment should only be included to the extent to which it is not already included in the property valuation, in order to avoid double-counting.
For this reason it is important that transfer taxes and other purchaser’s costs are considered as separate components when computing the adjustment. The same reduction may not be appropriate in both cases. For example, a share deal disposal may result in lower transfer taxes but may, in fact, increase the other purchaser’s costs due to the need for additional legal expenditure and diligence required to complete any such deal.
On this basis, therefore, a fixed percentage approach as outlined above will not be appropriate unless it represents a reasonable estimate of the adjustment required for both transfer taxes and other purchaser’s costs for each of the individual properties in the portfolio.
Given the subjective and complex nature of this calculation, therefore, it is recommended that managers document a formal internal policy with regard to the calculation methodology and review the policy on an ongoing basis (for example, with respect to changes in tax law and market conditions) in order to ensure that it remains appropriate. Adequate disclosures should also be provided so that users of the financial information can understand the calculation methodology with regard to the adjustment, as well as the key assumptions that the manager has made in the calculation and how the manager expects to utilise this additional value based on the current structure and market circumstances.