Guidelines

+ NAV-Q11 —

For INREV NAV calculation purposes, capitalised debt arrangement fees and costs should not be considered when the fair value of the loan is compared with the carrying amount at balance sheet date. This is because the debt arrangement fees and costs are netted with the related financial instrument.

The fair value of the financial liability should be compared with the long- and short-term part of the principal amount still open at balance sheet date, also referred to as the nominal value of the financial instrument.

Rationale

Based on various technical questions and debates from within the INREV community on this topic, INREV notes that practitioners use different approaches regarding the treatment of debt arrangement fees and costs for the following INREV NAV adjustment j) Revaluation to fair value of financial assets and financial liabilities.

Background

Under IFRS, financial liabilities within the scope of IFRS 9 are measured at:

• Financial liabilities at fair value through profit or loss
• Financial liabilities at amortised cost.

Financial liabilities are generally classified and measured at amortised cost, unless they meet the criteria for classification at fair value through profit or loss.

In this Q&A, we initially focus on financial liabilities measured at amortised cost and then on financial liabilities at fair value through profit or loss.

Initial measurement at initial recognition: an entity shall measure a financial liability at its fair value plus or minus, in the case of a financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the issue of the financial liability.

Debt arrangement expenses includes fees and commission paid to agents (including employees acting as selling agents), advisers, brokers and dealers, levies by regulatory agencies and security exchanges, and transfer taxes and duties. Debt arrangement expenses do not include debt premiums or discounts, or internal administrative or holding costs.

Reference is made to the INREV Global Definitions Database (GDD) in respect to debt arrangement costs and debt arrangement fees.

In the amortised cost approach after initial recognition, the amount at which the financial asset or financial liability is measured at initial recognition minus the principal repayments, plus or minus the cumulative amortisation, using the effective interest method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any loss allowance.

The effective interest method that is used in the calculation of the amortised cost of a financial asset or a financial liability and in the allocation and recognition of the interest revenue or interest expense in profit or loss over the relevant period.

When applying the effective interest method, an entity generally amortises any fees, points paid or received, transaction costs and other premiums or discounts that are included in the calculation of the effective interest rate over the expected life of the financial instrument.

Treatment of capitalised debt arrangement expenses

Based on these assumptions, when the debt position is accounted for at amortised cost, the debt arrangement expenses remaining to be amortised should be considered.

INREV NAV should be adjusted for the spreading of costs that will benefit different generations of investors. The assessment on how to consider the capitalised debt arrangement expenses in the INREV NAV should be based on this principle.

Under IFRS, when applying the effective interest method, an entity generally amortises any fees and transaction costs that are included in the calculation of the effective interest rate over the expected life of the financial instrument. Therefore, the treatment for the capitalised debt arrangement expenses under IFRS is already in line with the INREV NAV principle of spreading one-off costs over time to benefit different generations of investors.

Example

Debt accounted for at amortised cost
Original principal amount	€ 100 million
Fixed interest	8%
Current market fixed interest	6%
Remaining term	5 years
Capitalised debt arrangement cost at balance sheet date	€3 million
Remaining principal amount at balance sheet date (after previous repayments)	€ 80 million
Carrying amount at balance sheet date	€ 77 million
Fair value of the debt at balance sheet date	€ 90 million

Calculation of the adjustment:

As previously indicated, the capitalised debt arrangement cost should not be taken into account when the fair value of the loan is compared with the carrying amount at balance sheet date.

Items	Amount (€ M)
Fair value of the loan	90
Remaining principle amount	80
To be adjusted amount	(10)

As the current market fixed interest is lower than the actual fixed rate, the fair value is more than the remaining principal amount. As a result, the INREV NAV adjustment is a negative adjustment of € 10 million.

Accounting of financial liability at fair value

Under IFRS 9, debt instruments under certain circumstances can be measured at fair value through Profit and Loss. However, the accounting of debt instruments at fair value is not a common approach.

All financial instruments are initially measured at fair value plus or minus transaction costs. As a result, for financial liability at fair value through profit or loss, the debt arrangement fees and costs are not capitalised and directly expensed in Profit and Loss.

In this model, the debt arrangement fees and costs are directly expensed and a reversal is expected to bring the accounting of the debt arrangement cost in line with the effective interest method.

Therefore, a calculation should be made to determine the amount of unamortised debt arrangement fees and costs and if an effective interest method be used. This unamortised part should be positively corrected in the NAV to bring it in line with the accounting principles.

As the debt is already accounted for at fair value, no adjustment to bring the debt to fair value is expected for this debt category, except for the unamortised debt arrangement fees and costs.

Local GAAP

If local GAAP prescribe other accounting treatments on the debt arrangement costs, an assessment should be made how the debt arrangement cost should have been accounted for under the effective interest method. An adjustment should be made to bring the position of these debt arrangement cost in line.

Depending on the accounting treatment (expensed, booked through equity or capitalised with different amortisation methodology), the adjustment should include the proper accounting of the spreading of the debt arrangement cost.

Straight-lined instead of effective interest

If a financial statement preparer from a materiality perspective did not properly account for the amortisation of debt arrangement expenses in line with the effective interest method (e.g. straight-lined over the term of the debt), it is expected from a materiality perspective when preparing the INREV NAV that the same reasoning/approach would be acceptable.

For debt arrangement cost that are expensed and expected to be reversed for INREV NAV, this practical expedient could be used. The debt arrangement cost could be amortised on a straight-lined basis if it is to be expected that the effective interest method would not lead to a material difference in the INREV NAV.