Question

Matthew owns a piece of land with a toy factory on it in a small town near Melbourne city. The factory is a family business that started a century ago and is currently used to produce handmade wooden toys. However, for market participants, they would redevelop the land to build a retail shopping centre. Matthew recently received an attractive offer from property redevelopers, but he rejected the offer because he has no intention to stop the family business.

Which of the following statements is correct regarding the fair value of land?

Group of answer choices

The fair value of the land cannot be determined because we do not know the highest and best use of the asset.

The fair value of the land should be based on its current use as Matthew has no intention to sell the land and stop the family business.

The fair value of the land should be based on stand-alone valuation premise.

The fair value of the land should be based on in-combination valuation premise.

Answer 1

The fair value of the land should be based on in-combination valuation premise

The highest and best use of the land is determined by comparing the following:–

the value of the land as currently developed for produce handmade wooden toys (i.e. an assumption that the land would be used in combination with other assets, such as the factory, or with other assets and liabilities); and–

the value of the land to build a retail shopping centre, taking into account the costs of demolishing the factory and other costs necessary to convert land to build a retail shopping centre. The value under this use would take into account risks and uncertainties about whether the entity would be able to convert the asset to the alternative use (i.e. an assumption that the land would be used by market participants on a stand-alone basis).

The highest and best use of the land would be determined on the basis of the higher of these values.