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Guidelines
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Fund documentation for INREV NAV framework
The fund documentation should include details of valuation rules and procedures, pricing methodology including the methods used in valuing hard-to-value assets, and the frequency of valuation for all material assets and liabilities of the vehicle.
The fund documentation should disclose the frequency of the NAV calculation.
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INREV NAV Adjustments
The INREV NAV best practice requirements for the calculation of an adjusted NAV should be used for both open end and closed end vehicles. In this section 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, further adjustments may be required to align with IFRS as the basis for determining an INREV NAV. References to further guidance by INREV on the interpretation of fair value and provision accounting will also be included.
A vehicle NAV calculated in accordance with IFRS should be adjusted for the following items to calculate an INREV NAV:
| Total | |
|---|---|
| NAV per the IFRS financial statements | x |
| Reclassification of certain IFRS liabilities as components of equity | |
| a) Effect of reclassifying shareholder loans and hybrid capital instruments (including convertible bonds) that represent shareholders long term interests in a vehicle | x |
| b) Effect of dividends recorded as a liability which have not been distributed | x |
| NAV after reclassification of equity-like interests and dividends not yet distributed | x |
| Fair value of assets and liabilities | |
| c) Revaluation to fair value of investment properties | x/(x) |
| d) Revaluation to fair value of self-constructed or developed investment property | x/(x) |
| e) Revaluation to fair value of investment property held for sale | x/(x) |
| f) Revaluation to fair value of property that is leased to tenants under a finance lease | x/(x) |
| g) Revaluation to fair value of real estate held as inventory | x/(x) |
| h) Revaluation to fair value of other investments in real assets | x/(x |
| i) Revaluation to fair value of indirect investments not consolidated | x/(x) |
| j) Revaluation to fair value of financial assets and financial liabilities | x/(x |
| k) Revaluation to fair value of construction contracts for third parties | x/(x |
| l) Set-up costs | x/(x) |
| m) Acquisition expenses | x/(x |
| n) Contractual fees | x/(x) |
| Effects of the expected manner of settlement of sales/vehicle unwinding | |
| o) Revaluation to fair value of savings of purchaser’s costs such as transfer taxes | x/(x) |
| p) Revaluation to fair value of deferred taxes and tax effect of INREV NAV adjustments | x/(x |
| q) Effect of subsidiaries having a negative equity (non-recourse | x/(x) |
| Other adjustments | |
| r) Goodwill | (x) |
| s) Non-controlling interest effects of INREV adjustments | x/(x) |
| INREV NAV | x |
Reclassification of certain IFRS liabilities as a component of the INREV NAV:
a) Effect of reclassifying shareholder loans and hybrid capital instruments (including convertible bonds) that represent shareholders’ long term interest in a vehicle
Investors’ capital can take various forms aside from equity – examples include shareholder loans and hybrid capital instruments such as convertible bonds. Some vehicles are structured via a combination of equity participations and shareholder loans.
Shareholder loans and hybrid capital instruments are generally seen as part of the investors’ overall interest in the vehicle. They should be included as a component of equity in the INREV NAV and reclassified as such if they have been classified as liabilities in the financial statements of the vehicle under IFRS. The amount to be reclassified should reflect the corresponding carrying value of the liabilities in the IFRS accounts.
The existence of such instruments as part of the capital structure of a vehicle at its origination, or investor loans that are pari-passu to their equity stake and at off-market loan terms, are indicators, among others, that these items should be reclassified as part of the INREV NAV.
The reclassification should also take account of accrued interest, which is treated in a similar fashion to dividends.
b) Effect of dividends recorded as a liability which have not been distributed
Under certain circumstances dividends are recorded as a liability but have not yet been legally distributed. For the determination of INREV NAV, these accrued dividends should be reversed to the NAV.
Fair value of assets and liabilities
c) 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 NAV 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 NAV.
d) 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 NAV of the revaluation of the self-constructed or developed investment property to fair value under the fair value option of IAS 40.
e) 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 NAV of the revaluation of the investment property intended for sale, measured at fair value or cost, to the net realisable value (fair value less disposal costs).
f) 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 NAV of the revaluation of the finance lease receivable to fair value.
g) 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 NAV of the revaluation of such properties to net realisable value (fair value less disposal costs). This adjustment should be included under the caption ‘revaluation to fair value of real estate held as inventory’.
Where the likely disposal date is more than one year from the date of the NAV computation, disposal costs should not be deducted from fair value in calculating this adjustment.
h) 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 NAV of the revaluation of other investments in real assets to fair value in accordance with the fair value assumptions under IFRS 13.
i) Revaluation to fair value of indirect investments not consolidated
Indirect investments in real estate, such as investments in associations and 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 NAV of the revaluation of indirect investments to fair value if not yet accounted for at fair value.
j) Revaluation to fair value of financial assets and liabilities (including revaluation to fair value of debt obligations)
Financial assets and liabilities such as hedging instruments or debt obligations are generally measured at amortised cost, taking into account any impairment when applicable. The adjustment represents the impact on NAV of the revaluation of financial assets and financial liabilities to fair value as determined in accordance with IFRS, if not yet accounted for at fair value.
In addition, vehicles may incur costs for redemption of bank debts as a result of sales of properties. As with disposal costs, these costs are generally not accrued in IFRS. Where the property is classified as held for sale, any bank debt early redemption costs should be accrued in the NAV.
k) 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 NAV 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 smooth the effect of the write-off 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.
In practice, there are many other ways in which vehicles address such issues for pricing, valuation, or other purposes including using bid-ask spreads for issue premium or redemption discounts on the NAV calculated on the basis of set percentages, the capitalisation and amortisation of such costs over different time periods or, indeed, not taking into account such costs at all in the calculation of the vehicle NAV. Since the INREV NAV is primarily intended to facilitate comparability between different vehicles, the INREV approach is a simple but fixed methodology. Please note that these capitalised costs are subject to an impairment test each time the NAV is calculated and therefore should always be recoverable over time. As the adjustments with respect to set-up costs are separately disclosed in the calculation of a vehicle’s INREV NAV, investors can choose how these are taken into account when valuing their holding.
l) 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.
When capitalising and amortising set-up costs, a possible impairment test should be taken into account every time the adjusted NAV 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 down.
m) 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.
When capitalising and amortising acquisition costs, a possible impairment test should be taken into account every time the adjusted NAV 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.
n) Contractual fees
A liability represents a present obligation as a result of past events. A fee payable at the end of the life of a vehicle or at any other time during the life of a vehicle may not meet the criteria for recognition as a provision or liability in accordance with IFRS at reporting date.
Examples of such fees include performance fees, disposal fees, or liquidation fees, representing a present obligation from contractual arrangements.
Most of these fees are normally accrued under IFRS accounting rules. The adjustment represents the impact on the NAV of the amount of the estimated contractual fees payable based on the current NAV of the vehicle in the rare circumstances in which these fees are not already recognised in financial statements produced under IFRS and it is probable that they will be incurred. In order to determine the amount of the adjustment, reference should be made to IFRS standards for the measurement (but not necessarily the recognition) of provisions or deferred liabilities.
A description of the calculation methodology and the terms of the underlying agreement should be disclosed (or reference could be made to the related party disclosures in which such agreements and terms are explained).
Effects of the expected manner of settlement of sales/vehicle unwinding
o) 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 NAV 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 disposal strategies has been made. Reference should be made to both the current structure and prevailing market conditions.
p) Revaluation to fair value of deferred taxes and tax effect of INREV NAV adjustments
Under IFRS, deferred tax assets and liabilities are measured at the nominal statutory tax rate. The manner in which the vehicle expects to realise deferred tax (for example, for investment properties through share sales rather than direct property sales) is generally not taken into consideration.
The adjustment represents the impact on the NAV of the difference between the amount determined in accordance with IFRS and the estimate of deferred tax which takes into account the expected manner of settlement (i.e., when tax structures and the intended method of disposals or settlement of assets and liabilities have been applied to reduce the actual tax liability).
Disclosures should include an overview of the tax structure including, for instance, details of the property ownership structure, key assumptions and broad parameters used for estimating deferred taxes for each country, the maximum deferred tax amount estimated assuming only asset sales (i.e., without taking into account the intended method of disposal) and the approximate tax rates used.
It is possible that the estimate of the amount of the adjustment required to bring the deferred tax liability related to property disposals to fair value could have a large impact on the INREV NAV. Since tax structures may differ from vehicle to vehicle, significant judgement is required and the mechanics of the calculation methodology for this adjustment may vary from vehicle to vehicle. Other components of the overall deferred tax adjustment require less judgement and are more mechanical in nature.
This adjustment should include a full assessment of the tax impact on NAV of INREV NAV adjustments.
As with IFRS, deferred tax balances are not discounted to take into account time value of money.
q) Effect of subsidiaries having a negative equity (non-recourse)
The NAV of a consolidated group under IFRS may include the net liability position of subsidiary undertakings. In practice, however, the group may have neither a legal nor a constructive obligation to fund the accumulated losses in situations where the financing of the subsidiaries is non-recourse to the vehicle.
In this scenario it is appropriate to make an adjustment when calculating the INREV NAV in order to recognise the group’s interest in such subsidiaries at nil or an adjusted negative amount rather than at a full net liability position, to the extent there is no intention or obligation on the vehicle to make good those losses.
The adjustment represents the positive impact on the NAV of the partial or full reversal of the negative equity of the specific subsidiary. If the vehicle has granted shareholder loans to the subsidiary, these should be taken into account.
Other adjustments
r) 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 NAV as determined under IFRS, they should be written off in the INREV NAV.
s) Non-controlling interest effects on the above adjustments
This adjustment represents the impact on the NAV of the recognition of non-controlling interests on all of the above adjustments.
Computation of INREV NAV per share and effect of exercise of options, convertibles and other equity interests
The INREV NAV represents the economic value of the total investment by the investors as a group. To derive the NAV per unit, managers should take into consideration any rights (such as carried interest, performance fees, manager remuneration schemes, terms or different classes of units, NAV waterfall calculation, option shares etc.) held by equity shareholders, or prospective equity stakeholders (in the case of options) of the vehicle in allocating the overall INREV NAV of the vehicle to individual classes of equity shareholders and in determining the individual value of units or shares.
In some circumstances, where the vehicle has raised and called capital, some investors may not have fully paid in their contributions. The INREV NAV per share should take into account the impact of called but unpaid capital.
INREV NAV disclosure requirements
Managers should make following disclosures related to the NAV computation:
- the reconciliation between GAAP NAV and INREV NAV should be presented in line with guideline NAV03
Managers should explain material estimates and computation methodologies to enable investors to understand the components of the reconciliation between GAAP NAV and INREV NAV. Explanatory notes to the reconciliation should describe key assumptions, methods used, and in particular:
- the basis for reclassifying certain shareholder loans or hybrid capital instruments as a component of equity;
- the basis for the determination of fair value of investment property, self-constructed or developed investment property, property that is leased to tenants under finance lease, investment property held for sale and real estate held as inventory;
- the basis of the estimate of other investments in real estate assets;
- the basis for the determination of the fair value of indirect investments not consolidated;
- details of the methodology used to calculate the fair value of financial assets and liabilities;
- the basis of the estimate of the fair value of construction contracts with third parties;
- the basis of the estimate of the fair value of contractual fees;
- details of the assumptions used to estimate the fair value of deferred tax and the tax effect of INREV NAV adjustments. Such disclosure gives an overview of the tax structure including, for instance, details of the property ownership structure, key assumptions and broad parameters used for estimating deferred taxes for each country, the maximum deferred tax amount estimated assuming only asset sales (i.e., without taking into account the intended method of disposal) and the approximate tax rates used;
- reasons for making adjustments to the carrying value of subsidiaries having negative equity (non-recourse);
- under IFRS, the fair value of investment properties does not take into account the expenses incurred by the seller when selling a property. As with IFRS, no adjustment is required to include a provision for such costs in the INREV Guidelines, unless they are held for sale. The manager should, however, estimate and disclose the amount of disposal costs likely to be incurred on the sale of properties, taking account of the intended method of exit, assuming an exit without duress and in the current market environment;
- set-up costs - Description of impairment and reasons for booking if applicable;
- set-up costs - Description of the reasons for departure from the five year amortisation period if applicable;
- acquisition expenses - Description of impairment and reasons for booking if applicable;
- acquisition expenses - Description of the reasons for departure from the five year amortisation period if applicable.