- 10 Marks
CR – Nov 2016 – L3 – Q4c – Fair Value Measurement (IFRS 13)
Discuss IFRS 13’s principles in computing fair value for land with alternative uses in Abuja.
Question
Megida Plc, a public limited liability company, has acquired hectares of land in Abuja designated for economic empowerment programs, intended for commercial use. The fair value of the land for commercial purposes is estimated at N100 million. Utilizing the land for commercial purposes would contribute to reducing unemployment and attract an annual tax credit, which is based on the lower of 15% of the fair market value or N10,000,000, at a 20% tax rate.
Megida Plc has also considered an alternative use of the land for residential purposes, a choice market participants may support. The fair value of the land for residential purposes is estimated to be N148 million, excluding certain associated costs such as:
- Legal costs: N4,000,000
- Project viability analysis: N6,000,000
- Demolition of commercial structures: N2,000,000
Due to uncertainty in obtaining residential use permission from the Abuja Municipal Authority, market participants would discount the fair value by 20%.
Required: Discuss the way in which Megida Plc should compute the fair value of the Abuja land with reference to the principles of IFRS 13 Fair Value Measurement. (10 Marks)
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- Tags: Fair Value, Highest and Best Use, IFRS 13, Market Participants, Risk Adjustment
- Level: Level 3