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How should the INREV GAV be calculated for the Total Global Expense Ratio (TGER) and the Real Estate Expense ratio (REER)?
For the disclosure of the INREV TGER and REER a calculation based on INREV GAV is required.
In using/preparing the INREV TGER and REER the question might arise about which components should be included in calculating the (INREV GAV) denominator of these ratios.
The fund manager should be transparent in its reporting to investors and explain the methodology and assumptions used for the calculation of the GAV, as required by both INREV NAV and Fee and Expense Metrics modules.
The Total Assets derived from Generally Accepted Accounting Principles (GAAP), including IFRS, could be used as a starting point in the calculation of the denominator of the ratios presented in the Fee and Expense Metrics module.
INREV suggests to start from the same accounting framework as it was used in calculating the INREV NAV, i.e., IFRS, local GAAP or other vehicle specific GAAP.
From there, the various adjustments should be included, or excluded, to come to an INREV GAV that can be used in the calculation of the INREV TGER and REER.
In preparing this Q&A the guidance provided to the users should be read in light of the requirements included in the Fee and Expense Metrics module.
It should be noted that the INREV GAV used for the INREV TGER and REER calculation might be different than an adjusted GAV used for performance measurement or other disclosure requirements. Additional adjustments could be included, or excluded, to come to an adjusted GAV to better suit a particular purpose.
The INREV GAV guidance overrides the accounting principles by making adjustments to the results arrived at by following the chosen GAAP.
INREV GAV adjustments require some material judgment by the manager. Consequently, it is important to include sufficient disclosures to allow investors to understand positions taken by the manager.
In this Q&A, direct links will be made to IFRS as a basis for calculating the required adjustments, and if needed, to other fair value concepts. If another basis of GAAP is used as a starting point, further adjustments may be required to align with IFRS for determining the INREV GAV. References to further guidance by INREV on the interpretation of fair value and provision accounting are also included.
For the use of calculating the INREV TGER and REER, a vehicle GAV calculated in accordance with IFRS should be adjusted for the following items:
INREV GAV adjustment table:
| Total | |
| GAV per the IFRS financial statements (Total Assets) | x |
| Fair value of assets | |
| a) Revaluation to fair value of investment properties | x/(x) |
| b) Revaluation to fair value of self-constructed or developed investment property | x/(x) |
| c) Revaluation to fair value of investment property held for sale | x/(x) |
| d) Revaluation to fair value of property that is leased to tenants under a finance lease | x/(x) |
| e) Revaluation to fair value of real estate held as inventory | x/(x) |
| f) Revaluation to fair value of other investments in real assets | x/(x) |
| g) Recognition to fair value of indirect investments not consolidated | x/(x) |
| h) Revaluation to fair value of financial assets | x/(x) |
| i) Revaluation to fair value of construction contracts for third parties | x/(x) |
| j) Set-up costs | x/(x) |
| k) Acquisition expenses | x/(x) |
| Effects of the expected manner of settlement of sales/vehicle unwinding | |
| l) Revaluation to fair value of savings of purchaser’s costs such as transfer taxes | x/(x) |
| Other adjustments | |
| m) Goodwill | x(x) |
| n) Derecognition of financial derivatives | x/(x) |
| o) Derecognition of deferred tax assets | x/(x) |
| INREV GAV | x |
Fair value of assets
a) Revaluation to fair value of investment properties
If a real estate vehicle uses the option to account for investment properties under the cost model, this adjustment represents the impact on GAV of the revaluation of the investment property to fair value under the fair value option of IAS 40.
The effect of straight-lining of lease incentives, rent guarantees, insurance claims (for damages, lost rent, etc.) should be taken into account when valuing the property at fair value in accordance with IAS 40 and SIC 15 to ensure that any asset is not double counted in the GAV.
b) Revaluation to fair value of self-constructed or developed investment property
If a real estate vehicle uses the option to account for self-constructed or developed investment property under the cost model, the adjustment represents the impact on GAV of the revaluation of the self-constructed or developed investment property to fair value under the fair value option of IAS 40.
c) Revaluation to fair value of investment property held for sale
Some investment properties may be classified as assets held for sale or as a group of assets held for sale. The carrying value of such investment properties depends on the chosen accounting treatment under IAS 40 (either fair value or cost).
The adjustment represents the impact on GAV of the revaluation of the investment property intended for sale, measured at fair value or cost, to the net realisable value (fair value less disposition costs).
d) Revaluation to fair value of property that is leased to tenants under a finance lease
Property that is leased to tenants under a finance lease is initially measured on a net investment basis and subsequently re-measured based on an amortisation pattern reflecting a constant rate of return.
The adjustment represents the impact on GAV of the revaluation of the finance lease receivable to fair value.
e) Revaluation to fair value of real estate held as inventory
Properties intended for sale and accounted for under IAS 2 (Inventory) are measured at the lower of cost or net realisable value in the financial statements. This adjustment represents the impact on the GAV of the revaluation of such properties to net realizable value (fair value less disposition costs). This adjustment should be included under the caption ‘revaluation to fair value of real estate held as inventory’.
Where the likely disposition date is more than one year from the date of the GAV computation, disposition costs should not be deducted from fair value in calculating this adjustment..
f) Revaluation to fair value of other investments in real assets
Under IAS16 other investments in real assets are normally accounted for at cost.
The adjustment represents the impact on GAV of the revaluation of other investments in real assets to fair value in accordance with the fair value assumptions under IFRS 13.
g) Recognition to fair value of indirect investments not consolidated
Indirect investments in real estate, such as investments in associations and Joint Venture ">joint ventures, have different accounting treatments and carrying values under IFRS. Such investments can be valued at cost, fair value or NAV.
The adjustment represents the impact on GAV of the recognition of indirect investments not consolidated and depending on the type of investment at fair value.
Under this adjustment, two situations can be identified:
1. Investments for which fees and costs are proportionally taken into consideration in the calculation of the fee and expense metrics
The adjustment represents the impact on GAV when including the proportional GAV of the associations and joint ventures based on the share that the vehicle holds.
In this case, all assets should be included proportionally for the share that the vehicle holds in the assets of the associations or joint venture. These assets should be valued in accordance with the guidance provided herein. All corrections should be taken into consideration and should be reflected, as applicable, when calculating the INREV GAV for the purpose of preparing the INREV TGER and REER.
2. Investments for which fees and costs are not taken into consideration in the calculation of the fee and expense metrics
The adjustment represents the impact on GAV of the revaluation of indirect investments to fair value, if not yet accounted for at fair value. Reference is made to the INREV NAV guidelines, and more specifically to Q&A-4 of the INREV NAV module.
h) Revaluation to fair value of financial assets
Financial assets are generally measured at amortised cost, taking into account any impairments (when applicable). The adjustment represents the impact on GAV of the revaluation of financial assets to fair value, as determined in accordance with IFRS, if not yet accounted for at fair value.
i) Revaluation to fair value of construction contracts for third parties
Under IAS11, construction contracts for third parties are normally accounted for based on the stage of completion.
The adjustment represents the impact on GAV of the revaluation of construction contracts for third parties to fair value in accordance with the fair value principles of IFRS 13.
Adjustments to reflect the spreading of one-off costs
As described in further detail below, set-up costs and acquisition expenses should be capitalised and amortised. The rationale for these adjustments is to spread these costs over a defined period of time to smoothen the immediate impact of costs on the vehicle’s performance. Furthermore, it is a simple mechanism to spread costs between different investor groups entering or leaving the vehicle’s equity at different times. Such adjustments are taken into account in the calculation of the ratio numerator included in the Fee and Expense Metrics module.
Since the INREV GAV is primarily intended to facilitate comparability between different vehicles, the INREV approach is a simple but stable methodology where these capitalised costs are subject to an impairment test each time the GAV is calculated and therefore should always be recoverable over time.
j) Set-up costs
Under IFRS, vehicle set-up costs are charged immediately to income after the inception of a vehicle. Such costs should be capitalised and amortised over the first five years of the term of the vehicle.
The rationale for capitalising and amortising set-up costs is to better reflect the duration of the economic benefits to the vehicle. Furthermore these costs are taken into account in the calculation of the ratio numerator included in the Fee and Expense Metrics module.
When capitalising and amortising set-up costs, a possible impairment test should be taken into account every time the adjusted GAV is calculated when market circumstances change and it is not expected that the capitalised set-up costs can be recovered through the sale of units of a vehicle. For instance, when a decision is made to liquidate the vehicle or stakeholders no longer expect to recover the economic benefit of such capitalised expenses, they should be written off.
k) Acquisition expenses
Under the fair value model, acquisition expenses of an investment property are effectively charged to income when fair value is calculated at the first subsequent measurement date after acquisition. This results in the fair value of a property on subsequent fair value measurement being lower than the total purchase price of the property, all other things being equal.
Property acquisition expenses should be capitalised and amortised over the first five years after acquisition of the property.
The rationale for capitalising and amortising acquisition expenses is to better reflect the duration of the economic benefits to the vehicle of these costs. Furthermore these cost are taken into account in the calculation of the ratio numerator included in the Fee and Expense Metrics module. When capitalising and amortising acquisition costs, a possible impairment test should be taken into account each time the adjusted GAV is calculated when market circumstances change and it is not expected that the capitalised acquisition costs can be recovered through the sale of units of a vehicle. When a property is sold during the amortisation period, or is classified as held for sale, the balance of capitalised acquisition expenses of that property should be expensed.
Effects of the expected manner of settlement of sales/vehicle unwinding
l) Revaluation to fair value of savings of purchaser’s costs such as transfer taxes
Transfer taxes and purchaser’s costs which would be incurred by the purchaser when acquiring a property are generally deducted when determining the fair value of investment properties under IAS 40.
The effect of an intended sale of shares in a property-owning vehicle, rather than the property itself, should be taken into account when determining the amount of the deduction of transfer taxes and purchaser’s costs, to the extent this saving is expected to accrue to the seller when the property is sold.
The adjustment therefore represents the positive impact on the GAV of the possible reduction of the transfer taxes and purchaser’s costs for the benefit of the seller based on the expected sale of shares in the property-owning vehicle.
Disclosure should be made on how the estimate of the amount the manager expects to benefit from intended disposition strategies has been made. Reference should be made to both the current structure and prevailing market conditions.
Other adjustments
m) Goodwill
At acquisition of an entity which is determined to be a business combination, goodwill may arise as a result of a purchase price allocation exercise. Often a major component of such goodwill in property vehicles reflects the difference between the full recognition of deferred tax, purchaser’s costs or similar items in the IFRS accounts (which does not generally take account of the likely or intended method of subsequent exit), and the economic value attributed to such items in the actual purchase price.
Except where such components of goodwill have already been written off in the GAV as determined under IFRS, they should be written off in the INREV GAV.
n) Financial derivatives
This adjustment relates to the derecognition of any financial derivatives which are reported on the asset side of the balance sheet.
This relates to all financial derivatives as interest instruments, cash flow instruments and or currency exchange instruments. The rationale is that all the expenses/charges in respect to these instruments are linked to a liability or exempted for the calculation of the ratio numerator included in the Fee and Expense Metrics module.
o) Deferred tax assets
This adjustment relates to the derecognition of any deferred tax assets which are reported on the asset side of the balance sheet. The rationale is that all the expenses/charges in respect to taxes are linked to a liability or exempted for the calculation of the ratio numerator included in the Fee and Expense Metrics module.