Fair Value Measurement of Non-Financial Assets (IFRS 13)

Highest and best use for non-financial assets

Fair value of a non-financial asset should be determined with reference to its highest and best use, i.e. the use that would maximise the value of the asset. Highest and best use is determined from a perspective of market participants, even if the entity intends a different use or no use at all. If the highest and best use of an asset is to use the asset in combination with other assets (and liabilities) as a group, the fair value is determined assuming that the other assets (and liabilities) are available to market participants. See paragraphs IFRS 13.27-30; IFRS 3.B43 for more discussion. See also Examples 1-3 accompanying IFRS 13.

The reasons for developing additional valuation premise for non-financial assets (as compared to financial assets) are given in paragraph IFRS 13.BC63.

Valuation on a stand-alone basis or with other assets as a group

Depending on the determination of the highest and best use, the fair value of a non-financial asset can be measured (IFRS 13.31; B3):

  • on a stand-alone basis, or
  • in combination with other assets as a group or with other assets and liabilities.

An asset’s use in combination with other assets can be incorporated into the fair value measurement through:

  • Adjustments to the value of the asset used on a stand-alone basis. For example, the determination of fair value of installed and configured machinery starts with a fair value of an uninstalled and not configured items, and is then increased by the installation and configuration costs.
  • The assumptions made by market participants that have acquired or would acquire other necessary assets. For example, work in progress inventory can be measured with the assumption that market participants would convert the work in progress into finished goods.
  • Valuation technique used to measure the fair value of the asset. Multi-period excess earnings method is a typical example of this approach.
  • Allocation of a fair value of the whole group of assets to individual assets of the group using reasonable allocation methods.

Liabilities associated with the asset and with the complementary assets include liabilities that fund working capital, but do not include liabilities used to fund assets other than those within the group of assets. Financing liabilities are entity-specific and should be excluded from calculation of fair value of assets.

Assumptions about the highest and best use of a non-financial asset should be consistent for all the assets (for which highest and best use is relevant) of the group of assets or the group of assets and liabilities within which the asset would be used (IFRS 13.31).

Example 1 accompanying IFRS 13 illustrates application of the valuation premise described above.

More about fair value

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