Guidelines

+ NAV-T01 —

+ NAV-T02 —

Local GAAP to INREV NAV templates

+ NAV-T03 —

Fair value of debt Q&A - Appendices

+ NAV-T04 —

https://www.inrev.org/training/introduction-inrev-nav

 

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Vehicle details:

Multi-sector;
Single-country vehicle: Euroland;
Reporting under IFRS.

Note: the example does not include all required disclosures.

Assets	Notes	Amount	Liabilities and Equity	Notes	Amount
Investment property	1	4,500	Vehicle capital (NAV)	7	1,000
Investment property under construction	2	350	Deferred tax liability	8	100
Inventory property	3	250	Fixed rated debt	9	3,000
Finance lease	4	100	Shareholder Loans	10	2,245
Deferred tax asset	5	25	Derivative financial instruments		100
Investment property held for sale	6	1,275	Other liabilities	11	55
Total		6,500	Total		6,500

Summary of accounting principles and notes

1) Investment property

The investment property is valued at fair value under the fair value option of IAS 40. The current fair value of the property based on an independent valuation report is 4,500. The vehicle is structured as far as possible as a tax neutral structure. All investment properties are held by special purpose vehicles (SPVs). Management’s strategy is to sell all properties through the sale of the shares in the relevant SPVs. It is estimated that this method will save the potential purchaser approximately 200 of transfer taxes.

2) Investment property under construction

Investment property under construction is composed of a self-constructed or developed investment property valued at cost until construction or development is complete. The current fair value of the property under construction based on an independent valuation report is 400.

3) Inventory

Property classified as inventory is measured at the lower of cost or net realisable value. Currently, such inventory is carried at cost in the balance sheet. The current fair value of the property held for sale based on an independent valuation report and including a provision for disposal costs is 300.

4) Finance lease

Property that is leased to tenants under a finance lease is initially measured at the initial net investment and subsequently re-measured based on an amortisation pattern reflecting a constant rate of return. Key assumptions include: Lease contract rent: 6%. Current rent: 7%. The current fair value of the finance lease based on current market interest rate conditions is 125.

5) Deferred tax asset

The deferred tax asset is measured in the financial statements at the nominal statutory tax rate. The nominal tax rate is 25%. This deferred tax asset relates to the revaluation of the derivative financial instruments. Management’s opinion is that a tax rate of 12.5% should be used to reflect the fair value of the deferred tax position concerning the derivative financial instruments.

6) Investment property held for sale

The vehicle is in the process of selling a property located in Euroland. The property has been reclassified as investment property held for sale and is measured at fair value in accordance with IAS 40 which does not include disposal costs of 30.

7) Vehicle equity (NAV)

The vehicle capital structure does not include any options, convertibles and other equity interests other than shareholder loans (see below).

Details of the equity structure of the vehicle are as follows:

In addition to the performance fee arrangement included as a contractual liability, the manager of the vehicle, shareholder A, has a preferred right to an additional 10% of the profit of the year when an IRR hurdle rate is reached. The hurdle rate was reached for the first time in 2013. The profit for 2013 amounts to 100.

The vehicle shareholders are as follows:

	Units	%
Shareholder A	1	0.1
Shareholder B	333	33.3
Shareholder C	333	33.3
Shareholder D	333	33.3
Total units issued	1,000	100

8) Deferred tax liability

The deferred tax liability is measured in the financial statements at the nominal statutory tax rate. The nominal tax rate is 25%. This deferred tax liability relates to the revaluation of the investment property. The vehicle is structured as a tax neutral structure. All investment properties are held by special purpose vehicles (SPVs). Management’s strategy is to sell all properties through the sale of the shares in the relevant SPVs. It is currently estimated that the sale will not lead to any payments to tax authorities but the deferred tax liability will be settled between the seller and the purchaser. Current market practice for this settlement is estimated to be 50% of the nominal rate.

9) Fixed rate debt

Debt is initially recognised at fair value net of transaction costs and subsequently measured at amortised cost using the effective interest rate method. Key assumptions include: Debt interest 5%. Current interest 5.25%. The current fair value of the fixed rate debt is estimated to be 2,850.

10) Shareholder loans

The financial statements under IFRS show shareholder loans of 2,275. The shareholder loans are judged to form part of the long term interest of the vehicle’s shareholders.

11) Other liabilities

Under the vehicle’s constitution, a component of income in a period is contractually required to be paid out to shareholders. Consequently, other liabilities include undistributed dividends of 30.

12) Set-up costs

Set-up costs are expensed immediately at the inception of the vehicle. The total amount of set-up costs is 100. The vehicle was incorporated in 2010. It is assumed that set-up costs are not deductible.

13) Acquisition expenses

Under the fair value model, acquisition expenses of an investment property are charged to income as a component of fair value changes at the first subsequent measurement date after acquisition.

	Building	Amount	Year of acquisition
1	Building A	50	2010
2	Building B	70	2011
3	Building C	30	2012
4	Building D	60	2013

We have assumed that the acquisition costs are incurred on 1 January each year.

14) Contractual fees

Under the other liabilities an obligation is recorded in relation to the fair value of potential performance fees for an amount of 10.

15) Subsidiaries with negative net equity

The vehicle holds a 100% interest in a subsidiary which is in a position of negative equity. The vehicle currently has no intention or constructive obligation to fund the losses. The current accumulated negative equity (including shareholder loans) included in the consolidated accounts relating to this subsidiary is 100.

INREV NAV Calculation

	Total	Notes
NAV as per the IFRS financial statements	1,000
Reclassification of certain IFRS liabilities as components of equity
Effect of reclassifying shareholder loans and hybrid capital instruments	2,245
Effect of dividends recorded as a liability which have not been distributed	30
NAV after reclassification of equity-like interests and dividends yet distributed	3,275
Fair value assets and liabilities
Revaluation to fair value of investment properties
Revaluation to fair value of self-constructed or developed investment property	50	1
Revaluation to fair value of investment property held for sale	(30)
Revaluation to fair value of property that is leased to tenants under a finance lease	25	2
Revaluation to fair value of real estate asset held as inventory	50	3
Revaluation to fair value of other investments in real assets
Revaluation to fair value of indirect investments not consolidated
Revaluation to fair value of financial assets and financial liabilities	150	4
Revaluation to fair value of construction contracts for third parties
Set-up costs	20	5
Acquisition expenses	104	6
Contractual fees
Effects of the expected manner of settlement of sales/ vehicle unwinding
Revaluation to fair value of savings of purchaser’s costs such as transfer taxes	200
Revaluation to fair value of deferred taxes and tax effect of INREV NAV adjustments	(16.1)	7
Effect of subsidiaries having a negative equity (non-recourse)	100	8
Other
Goodwill
Non-controlling interest effects of INREV adjustments
INREV NAV	3,927.9

Notes to the INREV NAV

1. Revaluation to fair value of self-constructed or developed investment property

Value per IFRS financial statements	350
Value per INREV Guidelines	400
INREV NAV adjustment	50

The adjustment represents the impact on the NAV of the measurement of the self-constructed or developed investment properties to fair value.

2. Revaluation to fair value of property that is leased to tenants under a finance lease

Value per IFRS financial statements	100
Value per INREV Guidelines	125
INREV NAV adjustment	25

In the financial statements, properties that are leased to tenants under a finance lease are initially measured at the net investment and subsequently based on a pattern reflecting a constant rate of return. The adjustment represents the impact on the NAV of the measurement of such finance leases to fair value.

3. Revaluation to fair value of inventory property

Value per IFRS financial statements	250
Value per INREV Guidelines	300
INREV NAV adjustment	50

The adjustment represents the impact on the NAV of the measurement of the properties intended for sale recorded using the lower of cost or net realisable value model to fair value less disposal costs.

4. Revaluation to fair value of financial assets and financial liabilities

Value per IFRS financial statements	3,000
Value per INREV Guidelines	2,850
INREV NAV adjustment	150

In the financial statements, debt is initially measured at fair value net of transaction costs and, generally, subsequently measured at amortised cost using the effective interest method. The adjustment represents the impact on NAV of the measurement of all debt and related derivatives to their fair values.

5. Set-up costs

In 2010, an amount of 100 of vehicle set-up costs was expensed immediately to the income statement prepared under IFRS. In accordance with INREV Guidelines, these vehicle set-up costs have been capitalised and amortised over the first five years of the life of the vehicle. During the year 2013, the vehicle amortised an amount of 20, resulting in a cumulative amortisation of 80. The manager assesses that no impairment should be recorded as it is not to be expected that the capitalised set-up costs can be recovered through the sale of the units of the vehicle.

6. Acquisition expenses

From 2010 to 2013, acquisition expenses amounting to 210 were expensed immediately to the income statement prepared under IFRS. In accordance with INREV Guidelines, these acquisition expenses have been capitalised and amortised over the first five years after the acquisition of the buildings. During the year 2013, the vehicle amortised an amount of 42, resulting in a cumulative amortisation of 106. The unamortised amount at 2013 is 104.

The manager assesses that no impairment should be recorded as it is not to be expected that the acquisition expenses can be recovered through the sale of the units of the vehicle.

7. Deferred tax

The deferred tax assets and liabilities are measured in the financial statements at the nominal statutory tax rate. The manner in which the vehicle expects to settle deferred tax is not taken into consideration. The adjustment represents the impact on the NAV of the deferred tax for the assets and liabilities of the vehicle (in this case properties and derivative financial instruments) based on the expected manner of settlement (i.e., when tax structures have been applied to reduce tax on capital gains or allowances, this should be taken into consideration).

Based on the example, the following adjustment would be made:

Deferred tax	Exit assumption	Temporary taxable difference	Effective tax rate	NAV adjustment
Revaluation to fair value of self-constructed or developed investment property	Share sale	50	12.5%	(6.3)
Revaluation to fair value of inventory	Asset sale	50	25%	(12.5)
Revaluation to fair value of property that is leased to tenants under a finance lease	Share sale	25	12.5%	(3.1)
Revaluation to fair value of financial assets and financial liabilities	N/A	150	12.5%	(18.8)
Acquisition expenses	Share sale	104	12.5%	(13)
Existing deferred tax measured at fair value				37.5
Total Effect on NAV				(16.1)

Key assumptions that support the computation are as follows:

• Management’s opinion is that a tax rate of 12.5% should be used to reflect the fair value of the deferred tax position concerning debts and related derivative financial instruments. For the adjusted NAV calculation all potential other deferred taxes are valued at 50% of the nominal rate.
• Property assets accounted for as inventory are expected to be sold in asset deals and therefore the full statutory rate has been applied to the temporary taxable difference;
• Under IFRS reporting the deferred tax liability for investment property is based on a nominal rate of 25%. All investment properties are held by SPVs. Management’s strategy is to sell properties only through the sale of the shares in the SPVs. The sale will not lead to any tax payments. The deferred tax liability will be settled between the seller and the purchaser. Market practice for this settlement is 50% of nominal rate;
• The difference between the fair value of properties leased to tenants under a finance lease and the corresponding tax book value is expected to reverse as an effective rate of 12.5%, taking into account the vehicle tax structure and likely exit scenario.
• The existing deferred tax measured at fair value is calculated by multiplying the difference between the deferred tax asset and deferred tax liability by 50%.

8. Effect of subsidiaries having a negative equity (non-recourse)

The vehicle holds a 100% interest in a subsidiary which is in a position of negative equity. The vehicle currently holds no intention or constructive obligation to fund the losses. The current accumulated negative equity (including shareholder loans) position is 100. An adjustment of 100 is therefore made to the INREV NAV.

9. NAV per share

		Computation	NAV/share
Shareholder A	10% of profit + 0.1% of the remaining NAV	(10%*100 + 0.1% x (3,927.9-10))/1	13.9179
Shareholder B	33% of NAV minus performance allocation to shareholder A	(33.3% x (3,927.9-10))/333	3.9179
Shareholder C	33% of NAV minus performance allocation to shareholder A	(33.3% x (3,927.9-10))/333	3.9179
Shareholder D	33% of NAV minus performance allocation to shareholder A	(33.3% x (3,927.9-10))/333	3.9179

The NAV per share is calculated based on the INREV NAV adjusted for any preferences due to shareholders based on the current equity structure. Initially, profit allocation to preferred shareholders is calculated, and then the remaining INREV NAV is allocated according to the current equity structure.