an entity acquires land in a business combination the land is currently developed fo 612321

Highest and best use vs. current use [IFRS 13.IE7-8]

An entity acquires land in a business combination. The land is currently developed for industrial use as a site for a factory. The current use of the land is presumed to be its highest and best use unless market or other factors suggest a different use. Nearby sites have recently been developed for residential use as sites for high-rise apartment buildings. On the basis of that development and recent zoning and other changes to facilitate that development, the entity determines that the land currently used as a site for a factory could be developed as a site for residential use (i.e. for high-rise apartment buildings) because market participants would take into account the potential to develop the site for residential use when pricing the land.

The highest and best use of the land would be determined by comparing both of the following:

(a) the value of the land as currently developed for industrial use (i.e. the land would be used in combination with other assets, such as the factory, or with other assets and liabilities).

(b) the value of the land as a vacant site for residential use, taking into account the costs of demolishing the factory and other costs (including the uncertainty about whether the entity would be able to convert the asset to the alternative use) necessary to convert the land to a vacant site (i.e. the land is to 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 those values. In situations involving real estate appraisal, the determination of highest and best use might take into account factors relating to the factory operations, including its assets and liabilities.

Assume that the fair value of the land in-use as a manufacturing operation is determined to be CU4,000,000 and that the fair value for the land as a vacant site that can be used for residential purposes is CU5,000,000. In order to convert the land from a manufacturing operation to a vacant site for residential use, the manufacturing facility must be removed. Assuming demolition and other costs of CU500,000, the fair value of the land as a vacant lot for residential use would be CU4,500,000*. In order to determine the fair value of the land, the price of the land as a residential development site (CU5,000,000) would need to be adjusted for the transformation costs (CU500,000) necessary to prepare the land for residential use. Therefore, the amount of CU4,500,00 must be used as the fair value of the land.

*For simplicity purposes, this example does not specifically discuss other types of costs that may need to be considered in determining the fair value of the land for residential use (such as the effect of intangible or other assets related to the manufacturing facility).