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CMA Final · Corporate Financial Reporting · Valuation of Shares (including Determination of Goodwill)

Orion Steel owns a plant that works best as part of an integrated line with other machines, and Ind AS 113 requires the fair value of the plant to reflect its highest and best use. The line is financed partly by a working capital loan and partly by a term loan taken to fund an unrelated warehouse. Which approach follows Ind AS 113?

The plant is valued assuming use with its complementary assets and associated liabilities. Liabilities that fund working capital are included, but a term loan funding an unrelated warehouse is excluded, as it funds an asset outside the group. Assumptions must be consistent across the group.

  1. AValue the plant stand-alone, ignoring the complementary machines and all liabilities
  2. BValue the plant assuming use with complementary assets and associated liabilities, including the working capital loan but excluding the warehouse term loanCorrect
  3. CValue the plant assuming use with complementary assets and all liabilities of the entity, including the warehouse term loan
  4. DValue the plant using the complementary machines at a different highest and best use assumption from the plant

Explanation

If the highest and best use is in combination, fair value assumes complementary assets and associated liabilities are available to market participants. Liabilities funding working capital are included, but liabilities funding assets outside the group, like the warehouse, are not. Assumptions must also be consistent across the group.

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