Fair Value of Investment Property

[Jammic]

Hi,
A company recognized a granted land as investment property on fair value 3 years ago, using an income based approach, on the premise that the company intends to develop the land by constructing buildings to be leased out.
The company has been facing challenges in securing the required financing to fund the project for developing the land. However, the intention for land development remains.
In the current year, for impairment testing and disclosure requirements, the company is considering whether to continue using an income based approach for estimating the fair value of the land, or if it is more appropriate to shift to a market based approach in estimating the land's fair value, in light of the fact that the company is unable to secure the required financing for the project to be developed on the land to generate the expected income.
Suppose that the market value of the land is higher than the valuation on an income based approach.
Which valuation approach is more appropriate in this case, in line with the premise of "highest and best use"?
Thanks,

[Marek Muc]

Fair value only reflects market conditions, meaning your company's financial issues shouldn't affect land valuation. Unless these issues stem directly from the land, like challenges in securing building permits etc. In such cases, these challenges should be reflected in both income and market valuation methods. So, the question is, why is the company facing difficulties in securing financing?

[Jammic]

Hi Marek,
Many thanks for your reply.
The company is trying to finance the land development by partnering with property master developers who has the capacity to develop the land. The main issue putting off developers from agreeing a deal with the company is that the land is a huge bare land lacking necessary infrastructure (roads, electricity, water and sewerage connections) and it would require huge investment by developers in infrastructure. However, other adjacent plots are developed and other bare plots are traded in the market.

[Marek Muc]

In principle, the valuation technique you select should yield the same fair value. If the income approach yields much higher fair value compared to the market approach, it means that the necessary infrastructure investments and related risks might not have been adequately accounted for in the income approach.

[Jammic]

In fact market approach is yielding higher fair value compared to the income approach used in prior years. So, in this case is it more appropriate to consider the market approach valuation more representative of the highest and best use for the land in line with IFRS 13?
The implication for using the market approach valuation in the current year, is to reverse huge amounts of impairment losses recognized in prior years. On the other hand, if the income approach is used this year (yielding lower fair value) the impairment loss reversals in the current year would be lower.

[Marek Muc]

Always consider the 'highest and best use' regardless of the valuation method. Also, remember that for assets valued at fair value, there are no impairment losses, only changes in fair value. If two valuation techniques yield significantly different results, you need to recalibrate one of them. Since the land is vacant, the market approach's inputs are likely to be more reliable.

[Jammic]

Many thanks for your replies, it really help.