Regardless of the valuation premise used to measure the equipment, market participant
assumptions regarding the cost of redeployment, such as costs for disassembling, transporting
and reinstalling the equipment should be considered in the fair value measurement.
10.2.2
Valuation premise – in combination with other assets and/or liabilities
If the highest and best use of a non-financial asset is in combination with other assets as a
group or in combination with other assets and liabilities, the fair value of the asset is the
price that would be received in a current transaction to sell the asset and would assume that:
(i) market participants would use the asset together with other assets or with other
assets and liabilities; and
(ii) those assets and liabilities (i.e. its complementary assets and the associated
liabilities) would be available to market participants. [IFRS 13.31(a)(i)]. That is, the fair
value of the asset would be measured from the perspective of market participants
who are presumed to hold the complementary assets and liabilities (see 10.2.3
below for further discussion regarding associated liabilities).
Once an entity determines that the valuation premise for a non-financial asset is its use
in combination with a set of assets (or assets and liabilities), all of the complementary
non-financial assets in that group should be valued using the same valuation premise
(i.e. assuming the same highest and best use), regardless of whether any individual asset
within the group would have a higher value under another premise. [IFRS 13.31(a)(iii)].
Example 14.13 illustrates this further.
Example 14.13: Consistent assumptions about highest and best use in an asset group
A wine producer owns and manages a vineyard and produces its own wine onsite. The vines are measured at
fair value less costs to sell in accordance with IAS 41 at the end of each reporting period. The grapes are
measured at the point of harvest at fair value less costs to sell in accordance with IAS 41 (being its ‘cost’
when transferred to IAS 2). Before harvest, the grapes are considered part of the vines. The wine producer
elects to measure its land using IAS 16’s revaluation model (fair value less any subsequent accumulated
depreciation and accumulated impairment). All other non-financial assets are measured at cost.
At the end of the reporting period, the entity assesses the highest and best use of the vines and the land from
the perspective of market participants. The vines and land could continue to be used, in combination with the
entity’s other assets and liabilities, to produce and sell its wine (i.e. its current use). Alternatively, the land
could be converted into residential property. Conversion would include removing the vines and plant and
equipment from the land.
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Scenario A
The entity determines that the highest and best use of these assets in combination as a vineyard (i.e. its current use).
The entity must make consistent assumptions for assets in the group (for which highest and best use is relevant, i.e.
non-financial assets). Therefore, the highest and best use of all non-financial assets in the group is to produce and
sell wine, even if conversion into residential property might yield a higher value for the land on its own.
Scenario B
The entity determines that the highest and best use of these assets is to convert the land into residential
property, even if the current use might yield a higher value for the vines on their own. The entity would need
to consider what a market participant would do to convert the land, which could include the cost of rezoning,
selling cuttings from the vines or simply removing the vines, and the sale of the buildings and equipment
either individually or as an asset group.
Since the highest and best use of these assets is not their current use in this scenario, the entity would disclose that
fact, as well as the reason why those assets are being used in a manner that differs from their highest and best use.
When the asset’s highest and best use is in combination with other items, the effect of
the valuation premise on the measurement of fair value will depend on the specific
circumstances. IFRS 13 gives the following examples.
(a) The fair value of the asset might be the same whether it’s on a stand-alone basis or
in an asset group.
This may occur if the asset is a business that market participants would continue to
operate, for example, when a business is measured at fair value at initial recognition
in accordance with IFRS 3. The transaction would involve valuing the business in its
entirety. The use of the assets as a group in an ongoing business would generate
synergies that would be available to market participants (i.e. market participant
synergies that, therefore, should affect the fair value of the asset on either a stand-
alone basis or in combination with other assets or with other assets and liabilities).
(b) An asset’s use in an asset group might be incorporated into the fair value measurement
through adjustments to the value of the asset used on a stand-alone basis.
For example, assume the asset to be measured at fair value is a machine that is
installed and configured for use. If the fair value measurement is determined using
an observed price for a similar machine that is not installed or otherwise configured
for use, it would need to be adjusted for transport and installation costs so that the
fair value measurement reflects the current condition and location of the machine.
(c) An asset’s use in an asset group might be incorporated into the fair value measurement
through the market participant assumptions used to measure the fair value of the asset.
For example, the asset might be work in progress inventory that is unique and
market participants would convert the inventory into finished goods. In that
situation, the fair value of the inventory would assume that market participants
have acquired or would acquire any specialised machinery necessary to convert
the inventory into finished goods.
(d) An asset’s use in combination with other assets or with other assets and liabilities might
be incorporated into the valuation technique used to measure the fair value of the asset.
That might be the case when using the multi-period excess earnings method to
measure the fair value of an intangible asset because that valuation technique
specifically takes into account the contribution of any complementary assets and the
associated liabilities in the group in which such an intangible asset would be used.
Fair value measurement 995
(e) In more limited situations, when an entity uses an asset within a group of assets, the
entity might measure the asset at an amount that approximates its fair value when
allocating the fair value of the asset group to the individual assets of the group.
For example, this might be the case if the valuation involves real property and the
fair value of improved property (i.e. an asset group) is allocated to its component
assets (such as land and improvements). [IFRS 13.B3].
Although the approach used to incorporate the valuation premise into a fair value
measurement may differ based on the facts and circumstances, the determination of a
non-financial asset’s val
uation premise (based on its highest and best use) and the inputs
applied in the valuation technique used to estimate fair value should always be
considered from the perspective of market participants, not the reporting entity.
10.2.3
How should associated liabilities be considered when measuring the
fair value of a non-financial asset?
As discussed at 10.2.2 above, an asset’s highest and best use might be in combination
with associated liabilities and complementary assets in an asset group. IFRS 13.B3(d), for
example, notes that an asset’s use in combination with other assets and liabilities might
be incorporated when using the multi-period excess earnings method to measure the
fair value of an intangible asset that has been acquired in a business acquisition.
[IFRS 13.B3]. The multi-period excess earnings method specifically takes into account the
contribution of any complementary assets and the associated liabilities in the group in
which such an intangible asset would be used.
‘Associated liabilities’ is not defined and IFRS 13 provides limited guidance on the types
of liabilities that could be considered associated to a non-financial asset. IFRS 13
provides some guidance, stating that associated liabilities can include those that fund
working capital, but must exclude liabilities used to fund assets other than those within
the group of assets. [IFRS 13.31(a)(ii)].
Management will need to exercise judgement in determining which liabilities to include
or exclude from the group, based on the specific facts and circumstances. This assessment
must reflect what market participants would consider when determining the non-financial
asset’s highest and best use. Entities will need to be careful to exclude entity-specific
assumptions when valuing liabilities, particularly if valuation techniques are used that are
based on their own data (valuation techniques are discussed further at 14 below).
The clarification on considering associated liabilities when measuring the fair value of
non-financial assets was generally intended to align the guidance in IFRS 13 with current
practice for measuring the fair value of certain non-financial assets (e.g. intangible
assets). We generally would not expect this clarification to result in significant changes
to the valuation of most non-financial assets. For example, real estate should generally
be valued independently from any debt used to finance the property.
10.2.4
Unit of account versus the valuation premise
Fair value measurement of a non-financial asset assumes the asset is sold
consistently with its unit of account (as specified in other IFRSs), irrespective of its
valuation premise. This assumption applies even if the highest and best use of the
asset is in combination with other assets and/or liabilities. This is because the fair
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14
value measurement contemplates the sale of the individual asset to market
participants that already hold, or are able to obtain, the complementary assets and
liabilities. [IFRS 13.32]. Only when the unit of account of the item being measured at
fair value is an asset group (which may be the case when measuring non-financial
assets for impairment as part of a cash-generating unit), can one consider the sale of
an asset group. That is, the valuation premise for a non-financial asset does not
override the unit of account as defined by the applicable IFRS. However, this can
be confusing in practice as both concepts deal with determining the appropriate
level of aggregation or disaggregation for assets and liabilities.
Unit of account is an accounting concept. It identifies what is being measured for
financial reporting purposes. When applying IFRS 13, this drives the level of aggregation
(or disaggregation) for presentation and disclosure purposes, for example, whether the
information presented and disclosed in the financial statements is for an individual asset
or for a group of assets.
The valuation premise is a valuation concept (sometimes referred to as the ‘unit of
valuation’). It determines how the asset or liability is measured, i.e. based on the
value it derives on a stand-alone basis or the value it derives in conjunction with
other assets and liabilities. As discussed above, the unit of account established by an
IFRS may be an individual item. However, that item may need to be grouped with
others for the purpose of measuring fair value, i.e. the valuation premise may differ
from the unit of account.
For example, an entity may own an investment property that is attached to land and
contains other assets, such as fixtures and fittings. The unit of account for the investment
property would likely be the stand-alone asset in accordance with IAS 40. However,
the value of this asset on a stand-alone basis may have little meaning since it is physically
attached to the land and derives its benefit in combination with the fixtures and fittings
in the building. Therefore, when determining fair value, the valuation premise would
likely reflect its use in combination with other assets.
It is important to note that when the valuation premise for measuring the fair value of a
non-financial asset (or group of assets and corresponding liabilities) differs from its unit
of account, categorisation within IFRS 13’s fair value hierarchy (for disclosure purposes)
must be determined at a level consistent with the unit of account for the asset or liability
(see 16.2 below).
11 APPLICATION
TO
LIABILITIES AND AN ENTITY’S OWN
EQUITY
IFRS 13 applies to liabilities, both financial and non-financial, and an entity’s own equity
whenever an IFRS requires those instruments to be measured at fair value. For example, in
accordance with IFRS 3, in a business combination management might need to determine
the fair value of liabilities assumed, when completing the purchase price allocation, and the
fair value of its own equity instruments to measure the consideration given.
For financial liabilities and an entity’s own equity that are within the scope of IAS 32 or
IFRS 9, it is important to note that IFRS 13 would apply to any initial and subsequent fair
value measurements that are recognised in the Statement of Financial Position. In addition,
Fair value measurement 997
if those instruments are not subsequently measured at fair value in the Statement of
Financial Position, for example financial liabilities may be subsequently measured at
amortised cost, an entity may still need to disclose their fair value in the notes to the
financial statements. At a minimum, this would be a requirement for financial liabilities. In
these situations, IFRS 13 would also need to be applied to measure the instruments’ fair
value for disclosure.
The classification of an instrument as either a liability or equity instrument by other IFRSs
may depend on the specific facts and circumstances, such as the characteristics of the
transaction and the characteristics of the instrument. Examples of these instruments
include contingent consideration issued in a business combination in accordance with
IFRS 3 or equity warrants issued by an entity in accordance with IFRS 9. In developing the
requi
rements in IFRS 13 for measuring the fair value of liabilities and an entity’s own equity,
the Boards concluded the requirements should generally be consistent between these
instruments. That is, the accounting classification of an instrument, as either a liability or
own equity, should not affect that instrument’s fair value measurement. [IFRS 13.BC106].
Prior to the issuance of IFRS 13, IFRS did not provide guidance on how to measure the
fair value of an entity’s own equity instruments. While IFRS 13 may be consistent with
how many entities valued their own equity prior to adoption of IFRS 13, it changed
practice for entities that concluded the principal market for their own equity (and
therefore the assumption of market participants in that market) would be different when
valuing the instrument as an asset. For example, this might have been the case if an entity
measuring the fair value of a warrant previously assumed a volatility that differs from the
volatility assumptions market participants would use in pricing the warrant as an asset.
11.1 General
principles
Under IFRS 13, a fair value measurement assumes that a liability or an entity’s own equity
instrument is transferred to a market participant at the measurement date and that:
• for liabilities – the liability continues and the market participant transferee would
be required to fulfil the obligation. That is, the liability is not settled with the
counterparty or otherwise extinguished; and
• for an entity’s own equity – the equity instrument would remain outstanding and
the market participant transferee would take on the rights and responsibilities
associated with the instrument. The instrument would not be cancelled or
otherwise extinguished on the measurement date. [IFRS 13.34].
11.1.1
Fair value of a liability
IFRS 13 states that the fair value measurement of a liability contemplates the transfer of
the liability to a market participant at the measurement date. The liability is assumed to
continue (i.e. it is not settled or extinguished), and the market participant to whom the
liability is transferred would be required to fulfil the obligation.
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 196
