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ACCA Strategic Professional · Strategic Business Reporting (International) · Fair value measurement

Ardent Group acquires a subsidiary whose land is currently used as a car park. Market participants would pay $12m if the land were used for residential development, which needs planning consent that has a reasonable prospect of approval, and the development costs would make the net value to participants $9m. Its value as a car park is $7m. The finance director proposes $7m because Ardent plans to keep it as a car park, and says a lower fair value reduces future depreciation and impairment risk. Which response is correct under IFRS 13 and ethical reporting?

The land should be fair valued at $9m, being the net value to market participants under its highest and best use after development costs. Management's intention to keep it as a car park is irrelevant, and choosing a lower figure to flatter future results would breach ethical reporting principles.

  1. AUse $7m, as management's intended use governs fair value
  2. BUse $12m, ignoring development costs, as it is the highest market price
  3. CUse $9m, reflecting highest and best use by market participants including the costs to achieve it, and challenge the proposal as management biasCorrect
  4. DUse the average of $7m and $12m as a compromise

Explanation

Highest and best use must be physically possible, legally permissible and financially feasible, and the valuation reflects the value to participants after the costs of conversion, giving $9m. Management intent cannot override this, and choosing a figure to influence later earnings raises an objectivity and integrity concern. Using $12m ignores the costs, and averaging is not a permitted technique.

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