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Intermediate Financial Reporting
ACCT20002 Practice Exam
Solutions of Online Practice Test for the End-of-Semester Exam
- Fair Value Measurement
Philip owns land with a wool factory on it in a small town near Melbourne city. The factory
is a family business that started a century ago. The factory is currently used to produce wool
scarfs and clothes, but could be redeveloped as a retail shopping centre. Philip recently
received an attractive offer from property redevelopers, but he rejected the offer because he
has no intention to stop the family business.
Required:
Discuss how Philip should apply AASB 13 Fair Value Measurement to measure fair
value of the land and factory.
Fair value is to be measured by considering the‘highest and best use’of the asset.
AASB 13 para.28 has the following requirements for determining the highest and best use:
it must be physically possible to use the asset for the entity’spurposes.
it must be legally permissible, that is, not subject to any legal restrictions (e.g. heritage-
listed, zoning regulations).
it must be financially feasible and capable of generating sufficient income or cash flows
to produce the required investment return.
Fair value is not based on the current use of the asset; instead, it is based on how the market
participants would use the asset. As a result, Philip’s intention to continue the current use of the
asset is irrelevant.
Once the asset’s highest and best use has been established, the next step in determining its fair
value is to select one of two valuation premises: in-combination; and stand-alone
In this example, there are two possible uses for the site:
- Continue to use the site for its current production purposes. In this instance the valuation
premise would be the in-combination valuation premise. [Background: Both the land and
the production facilities would be sold together so that the market participant could
continue to use the site for the same production purposes. The fair value of the land would
be based on its suitability to continue being used for production. The fair value of any
production facilities would be based on their ability to maintain existingproduction.] - Redevelop the site for retail purposes. In this instance, the valuation premise is the stand-
alone valuation premise. [Background: The land on which the production takes place
would be sold as a stand-alone asset, separate to the production facilities, which, in turn,
would be expected to be demolished to make way for the redevelopment. The production
facilities would therefore have a zero fair value and the fair value of the land would be
based on the amount that would be received on sale to theredevelopers.]