Question

PART A

GanJee Pty Limited (GanJee) owns and develops properties in the Gosford CBD on the Central Coast of NSW. Upon completion of construction the company leases the apartments and retail space and provides tennants services including waste removal, maintenance and shared facilities like airconditioning. All leases are signed for a period of less than 5 years and are then reviewed before renewal or extension. You wish to establish the fair value of one of GanJee’s Gosford properties using AASB 13/IFRS 13. GanJee purchased the property in 2001 when the Gosford CBD was in decline. At the time, GanJee was able to snap up the property for $0.5 million. In 2015, existing property was demolished and GanJee constructed two impressive tower block buildings with retail space below. The property also includes a hotel, office space and apartments. Construction was expensive, costing $400 million. You have ascertained the following information for your assessment: • The company commissioned the expert opinion of two reputable independent expert appraisers. These appraisers delivered valuation A and valuation B. Valuation A contained the appraiser’s opinion that the property value for GanJee’s Gosford holding had a fair value of $1.3 billion based upon earnings before interest and tax multiplied by a conservative earnings multiple of 6 which is more likely to be considered fair by a potential buyer for the properties. The second valuer in providing valuation B expressed the opinion that the properties had a fair value of $2.75 billion based upon earnings before interest and tax multiplied by an earnings multiple of 8 which is more likely to be considered fair by a potential seller of the property. Both appraisers acknowledged that valuing the property in the current economic climate was difficult as generally there are very few sales of comparable properties. The appraisers communicated that they used their experience in observing valuations of residential rather than commercial and residential properties.  The directors estimate that the current cost of replacing the property would be $1.8 billion based on the current design with today’s construction costs, including labour, materials and overheads. Property prices in the Gosford CBD have increased substantially since 2001. The CBD went through a rapid growth phase in 2017 but there is currently a lull as the City Council does not wish to have new development. The GanJee property is surrounded by fairly derelict buildings which makes valuation difficult. • Present value of future cash flows: The directors have calculated net cash inflows over the next 20 years estimated to be $300 million per year, based on projected cash flows from rental income, tax savings and expenditures. The directors expect that the building will need substantial renovation in 20 years’ time. The directors based their valuation on the following factors: ✓ discount rate of 11.5% to 14.5%; ✓ average subsequent tenure period of ten years for retail units (ILU) and four years for serviced apartments (SA).

Required

Discuss each of the above four values as a basis for establishing a fair value for the property. In accordance with AASB 13/IFRS 13 which methodology do you believe is most appropriate? What additional information if any would you wish to obtain to make a better estimate?

PART B

Walkabout Park wants to determine fair value of the animals in their zoo. They hold the animals primarily for breeding and preservation of native species but also for the benefit of the local population and school group visits.

Required

Provide your recommendation for how the entity should go about measuring the biological assets’ fair value. In your response provide an explanation of possible alternatives and justify your recommendation.

Answer 1

partA

The highest and best use of a non-financial asset takes into account the use of the asset that is physically possible, legally permissible and financially feasible, as follows: (a) A use that is physically possible takes into account the physical characteristics of the asset that market participants would take into account when pricing the asset (eg the location or size of a property). (b) A use that is legally permissible takes into account any legal restrictions on the use of the asset that market participants would take into account when pricing the asset (eg the zoning regulations applicable to a property). (c) A use that is financially feasible takes into account whether a use of the asset that is physically possible and legally permissible generates adequate income or cash flows (taking into account the costs of converting the asset to that use) to produce an investment return that market participants would require from an investment in that asset put to that use.

part B

IAS 41 establishes the accounting treatment for biological assets during their growth, degeneration, production and procreation, and for the initial measurement of agricultural produce at the point of harvest. It does not deal with processing of agricultural produce after harvest (for example, processing grapes into wine, or wool into yarn). IAS 41 contains the following accounting requirements:

• bearer plants are accounted for using IAS 16;
• other biological assets are measured at fair value less costs to sell;
• agricultural produce at the point of harvest is also measured at fair value less costs to sell;

• changes in the fair value of biological assets are included in profit or loss; and
• biological assets attached to land (for example, trees in a plantation forest) are measured separately from the land.

The fair value of a biological asset or agricultural produce is its market price less any costs to sell the produce. Costs to sell include commissions, levies, and transfer taxes and duties.