Question

(v) GHL purchased a factory site in Malaysia on 1 April 2019 with intention for industrial use. Land prices in the area had increased significantly in the years immediately prior to 31 March 2020. Nearby sites had been acquired and converted into residential use. It is felt that, should the GHL’s

site also be converted into residential use, the factory site would have a market value of $27 mil- lion. $1.5 million of costs are estimated to be required to demolish the factory and to obtain plan- ning permission for the conversion. GHL was not intending to convert the site at 1 April 2019 and had not sought planning permission at that date. The current replacement cost and carrying amount of the factory site are correctly calculated as $25.1 million and $28 million respectively as at 31 March 2020 before revaluation. Fanny did not reflect the change in fair value of the factory site even the factory site is measured using the revaluation model under HKAS 16.

Discuss the approach described in HKFRS 13 ‘Fair Value Measurement’ to measure the non- financial asset.

Answer 1

The approach described in HKFRS 13 "Fair Value Measure" to measure the non-financial asset is as follows:

• For a Non Financial Asset, HKFRS 13 determines the highest and best use of the asset whether it is on a stand alone basis or whether it is used in combination with other assets.
• Fair Value Measurement of a non financial asset considers the economic benefits the market participant is able to derive by using the asset in its highest and best use or by selling it to another market participant who would use the asset in its highest and best use.
• The highest and best use of the asset considers the use of the asset that is physically possible, legally permissible and financially feasible.
• The physical possibility of the asset considers the physical characteristics of the asset that would be considered by the market participants while price it.
• Legally permissible use of the asset considers the legal restrictions on the use of the asset that would be considered by the market participants while price it.
• Financial feasibility considers whether the use of the asset is physically possible and legally permissible to generate sufficient income or cash flows to produce an investment return that the market participants would expect from it.
• Even if the entity intends to make use of the non financial asset in a different manner, highest and best use would be considered from the perspective of the market participants.
• However the entity;s present use of the asset is present to be the highest and best use unless the market or other factors suggest that a different use by market participants would maximise the value of the non financial asset.