The consolidation of ADO Properties S.A. was not permissible. Investees may only be fully consolidated in the financial statements if they are controlled by the parent company. The company that prepares the consolidated financial statements must have rights that allow it to direct the relevant activities of the investee. In light of the agreements entered into by the reporting date of 31 December 2019 concerning the public takeover of ADLER Real Estate AG by ADO Properties S.A., ADLER Real Estate AG’s indirect interest of 33.25% in ADO Properties S.A. was not sufficient to give ADLER Real Estate AG the aforementioned rights.

In the consolidated balance sheet of ADLER Real Estate AG, various balance sheet items were therefore overstated:

• Non-current assets held for sale were overstated by EUR 4.4 billion
• Liabilities held for sale were overstated by EUR 1.7 billion
• Non-controlling interests were overstated by EUR 1.7 billion.

Since only ADLER Real Estate AG’s indirect interest of 33.25% in ADO Properties S.A. – as opposed to all assets and liabilities of ADO Properties S.A. – were to be recognised at fair value alongside the corresponding deferred taxes, consolidated total assets were overstated by EUR 3.9 billion and total comprehensive income was overstated by EUR 543 million.

The combined management report also provided only insufficient information on the risks that may be associated with an incorrect assessment of ADLER Real Estate AG’s control over ADO Properties S.A. In particular, ADLER Real Estate AG did not explain that without full consolidation, a significant increase in the loan-to-value ratio to around 70% would have resulted.

Furthermore, ADLER Real Estate AG did not keep any records on whether and for what reasons contractual partners in corporate and real estate transactions were classified as related parties. The accounting documents were incomplete in this regard.

The examination of the consolidated financial statements and the consolidated management report of ADLER Real Estate AG for the 2019 financial year is still ongoing. The same applies to the examinations for the 2020 and 2021 financial years. The Commission de Surveillance du Secteur Financier (CSSF) is the competent authority for financial reporting enforcement as regards the parent company ADLER Group S.A, which is domiciled in Luxembourg.

Full consolidation, loan-to-value

Full consolidation is an accounting technique whereby subsidiaries are included in the consolidated financial statements of the parent company. Rather than an interest in the investee, the consolidated financial statements include the individual assets and liabilities, income and expenses, and cash flows. Transactions and outstanding balances between group companies are to be eliminated. The purpose of full consolidation is to present the group as a single economic unit. In accordance with the International Financial Reporting Standards (IFRS), investees are to be included in the consolidated financial statements by way of full consolidation if the company that prepares the financial statements controls the investee. This requires the company preparing the financial statements to have rights that give it the current ability to direct the relevant activities of the investee.

Loan-to-value is an indicator commonly used in the real estate industry to indicate the ratio of financial liabilities to asset value. In loan agreements or bond terms, the loan-to-value ratio is often used to restrict the possibilities for taking out further loans. Loan-to-value is typically calculated as the ratio of financial liabilities to the market value of the real estate. The loan-to-value ratio is an alternative performance measure, meaning it is not defined in the IFRS. In calculating loan-to-value, real estate companies normally consider the recommendations of industry associations in addition to the formulas set out in the loan agreements and bond terms. As a result, the specific parameters included in the calculation vary from company to company.