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Fair value measurement can be required for nonfinancial assets and liabilities outside a business combination. Valuation approaches for some of these nonfinancial assets and liabilities are included below.

7.5.1 Asset retirement obligations

ASC 410, Asset Retirement and Environmental Obligations, applies to legal obligations associated with the retirement of tangible long-lived assets. Assuming fair value can be reasonably estimated, ASC 410-20-25-4 requires that a reporting entity recognize the fair value of a liability for an asset retirement obligation (ARO) in the period in which it is incurred. ASC 410 provides a practicability exception, which requires disclosure if a reasonable estimate of fair value cannot be made. The ASC 820 framework is also applicable to AROs. Refer to PPE 3 for the initial and subsequent accounting for asset retirement obligations, as well as considerations for applying ASC 820 to these obligations.
The provisions of ASC 410-20 do not apply to obligations that result from improper operation of an asset, including environmental remediation liabilities, which are subject to ASC 410-30, Asset Retirement and Environmental Obligations – Environmental Obligations. Refer to PPE 9 for more information on accounting for environmental obligations under ASC 410-30.

7.5.2 Investment property

Under US GAAP, investment property is generally measured at the lower of fair value less costs to sell or carrying value. In some instances, the reporting entity may be subject to specialized accounting that requires investment property to be measured at fair value. The fair value used in these measurements is subject to the requirements in ASC 820.

7.5.2.1 How to fair value investment property

An investment property’s fair value is typically based either on the market approach by reference to sales in the market of comparable properties, or the income approach by reference to rentals obtained from the subject property or similar properties. The replacement cost approach may not be appropriate for the fair value model under ASC 820 because the value of an investment property lies in its ability to generate income or to appreciate in value by reference to market prices, not in the cost to rebuild it.
Fair value excludes any estimated price that is inflated or deflated by special terms such as unusual financing, sale and leaseback arrangements, or special considerations or concessions granted by anyone associated with the sale. Fair value is determined without deduction for transaction costs that might be incurred on sale or other disposal.
When a reporting entity has prepaid or accrued operating lease income on its balance sheet, it does not include the value of that income in the fair value of the related investment property, as the prepaid or accrued operating lease income is a separate asset.
The market approach – investment property
The best evidence of fair value is usually provided by current prices in an active market for similar property in a similar location and condition and subject to similar lease terms and other conditions. Such similar properties may not always be present and thus an entity should take into account, and make allowances for, differences from the comparable properties in location, nature, and condition or in contractual terms of leases and other contracts relating to the property. For example, if the property is leased by the entity through a finance lease that contains restrictions on the use of the property by present and future lessees that could significantly affect the property’s fair value because it might restrict the entity’s ability to obtain the optimum market rentals, an adjustment to comparable property values would likely be necessary.
Fair value of an investment property does not reflect the following factors if they would not be generally available to market participants:
  • Additional value created by bringing together a number of properties in different locations and combining them into a portfolio of properties
  • Synergies between investment properties and other assets
  • Legal rights and restrictions specific to the present owner
  • Tax benefits or disadvantages specific to the present owner
Where current prices in an active market are not available, entities should consider evidence from alternative sources, such as:
  • Current prices in an active market for properties of a different nature, condition, or location or that are subject to different lease or other contractual terms, adjusted to reflect the differences
  • Recent prices from transactions in less active markets, adjusted to reflect changes in economic conditions since the date of those transactions
Using the market approach to measure the fair value of investment property is likely to be a Level 2 measurement as long as any multiple used is observable and the reporting entity does not make any significant adjustments using unobservable data.
The income approach – investment property
The fair value of an investment property may be measured using discounted cash flow projections based on reliable estimates of future rental income and expenditures, supported by the terms of the existing lease and other contracts. When practicable, external evidence should also be used, such as current market rents for properties of a similar nature, condition, and location. Discount rates that reflect current market participant assessments of uncertainty regarding the amount and timing of cash flows should be used to discount the projected future cash flows.
Using the income approach to measure the fair value of investment property is likely to result in a Level 3 measurement as the most significant input will be the projected cash flows.
Question FV 7-4 discusses classification of real estate assets within the fair value hierarchy.
Question FV 7-4
Where are fair value measurements of real estate assets classified within the fair value hierarchy?
PwC response
The fair value hierarchy level chosen for real estate assets will vary by the inputs used. For example, a multi-unit condominium development in which each unit has similar floor plans, features, and few differentiating characteristics, may be measured using an appraisal based on a market approach that incorporates a dollar-per-square-foot multiple. As long as the multiple is observable and the reporting entity does not make any significant adjustments using unobservable data, the valuation would represent a Level 2 fair value measurement.
However, the valuation of many real estate assets—such as office buildings, shopping centers, hospitals, manufacturing facilities, and similar build-to-suit facilities—may require adjustments to market-based valuation inputs to reflect the different characteristics between the assets being measured and the assets upon which the observable inputs are based. These adjustments could result in classification as a Level 3 fair value measurement for the real estate asset. Real estate assets may also be measured using an income approach based on unobservable cash flows to be received from expected rents and expenses, which would likely also yield a Level 3 fair value measurement.
In considering the results from appraisals of real estate assets, it is the reporting entity’s responsibility to ensure the third-party valuation specialist appropriately evaluates and documents the assumptions and inputs used in their assessment of the highest and best use of the asset.
Refer to FV 4.4 and FV 4.5 for further discussion of available valuation approaches, techniques and the evaluation of related inputs.

7.5.3 Commodity broker-trader inventory — IFRS only

Broker-traders are those who trade in commodities on their own behalf or for others. Their inventories are normally traded in an active market and are purchased with the intent to resell in the near future, generating a profit from fluctuations in price or the broker-traders’ margin. Industry practice is often to carry such inventories at fair value less costs of disposal. Measurement of these inventories is within IFRS 13’s scope.
If such inventories do not meet the definition of Level 1, we would not expect them to qualify as commodity broker-trader inventory. Entities with commodity broker-trader inventory generally measure fair value by reference to the market price for the item in the principal market.

7.5.4 Biological assets

US GAAP
There is no specific US GAAP for biological assets. These assets are measured at fair value less frequently under US GAAP than under IFRS. However, many of the concepts discussed in the IFRS section that follows could be helpful in situations when, under US GAAP, a reporting entity elects or is required to measure a biological asset at fair value in accordance with specialized accounting or other US GAAP applicable to nonfinancial assets (e.g., if acquired in a business combination).
IFRS
Biological assets are generally categorized as bearer or consumable and plants or animals. All biological assets, except bearer plants, are required by IAS 41 to be measured at fair value less costs to sell at both initial recognition and at each subsequent reporting date, and are therefore within the scope of IFRS 13 for both measurement and disclosure.
Bearer plants
Bearer plants are used solely to grow produce. The term is defined in IAS 41.5.

Excerpt from IAS 41.5

A bearer plant is a living plant that:
  1. is used in the production or supply of agricultural produce;
  2. is expected to bear produce for more than one period; and
  3. has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.

Examples include apple trees and palm oil plants.
IAS 41.5A denotes what is not a bearer plant.

IAS 41.5A

The following are not bearer plants:
  1. plants cultivated to be harvested as agricultural produce (for example, trees grown for use as lumber);
  2. plants cultivated to produce agricultural produce when there is more than a remote likelihood that the entity will also harvest and sell the plant as agricultural produce, other than as incidental scrap sales (for example, trees that are cultivated both for their fruit and their lumber); and
  3. annual crops (for example, maize and wheat).

Bearer plants are in the scope of IAS 16 and should be accounted for in the same way as property, plant, and equipment.
The produce growing on the bearer plant is within the scope of IAS 41 and should be measured at fair value less cost to sell.

7.5.4.1 Fair value of biological assets using the market approach

Many biological assets have relevant market-determined prices or values available, as they are often basic commodities that are traded actively. For example, there are usually market prices for calves and piglets, as there is an active market for these. When there is an active market for a biological asset or agricultural produce, the quoted price in that market is the appropriate basis for determining the fair value of that asset.
If an active market does not exist, one or more of the following methods should be used to estimate fair value, if such data is available:
  • The most recent market transaction price, provided that there has not been a significant change in economic circumstances between the date of that transaction and the balance sheet date
  • Market prices for similar assets with adjustment to reflect differences
  • Sector benchmarks, such as the value of an orchard expressed per export tray, bushel, or hectare and the value of cattle expressed per kilogram of meat

Biological assets are often physically attached to land (for example, trees and vines). There may be no separate market for biological assets that are attached to the land, but an active market may exist for the combined assets, that is, for the biological assets, raw land, and land improvements, as a group. An entity may use information regarding the combined assets to determine the fair value of the biological assets. For example, the fair value of raw land and land improvements may be deducted from the fair value of the combined assets to arrive at the biological assets’ fair value (IAS 41.25).

7.5.4.2 Fair value of biological assets using the income approach

When market-based prices or values are not available for a biological asset in its present location and condition, fair value should be measured on the basis of a valuation approach/technique that is appropriate in the circumstances and for which sufficient data is available. As per IFRS 13.61, the use of relevant observable inputs should be maximized while minimizing the use of unobservable inputs. The income approach would be an appropriate valuation approach. For example, the present value of expected net cash flows from the asset could be discounted at a current market-based rate.
The cash flow model should include all directly attributable cash inflows and outflows. The inflows will be the price in the market of the harvested produce/consumable asset for each harvest over the asset’s life. The outflows will be those incurred to raise or grow the asset and get it to market, for example, direct labor, feed, fertilizer, and transport costs. The market is where the asset will be sold. For some assets, this will be an actual market; for others, it may be the “factory gate,” i.e., the assets are sold excluding any retail profit or additional transport and delivery costs.
A contributory asset charge should be included when measuring fair value if there are otherwise no existing charges for the use of assets essential to the agricultural activity. One example is when the land on which the biological asset is growing is owned by the entity. The cash flows used to measure the fair value of the biological asset should include a cash outflow for rent of the land to be comparable with the asset of an entity that rents its land from a third party.
Fair value of produce
Agricultural produce are measured at fair value under the bearer plants amendment of IAS 41. A cash flow model is the most likely valuation method for bearer produce. The cash flow model should include all directly attributable cash inflows and outflows. The inflows will be the price in the market of the harvested produce. The outflows will be those incurred in growing the asset and getting it to market (for example, direct labor, fertilizer and transport to market). Contributory asset charges will be included for both the land and bearer plant if they are owned by the entity. This economic rent removes cash flows attributable to those assets so the remaining value relates solely to the produce. As such, on day one after the previous harvest, the next harvest is likely to have a fair value close to zero.

7.5.4.3 Location of the asset — biological assets

A biological asset’s physical location is often one of the asset’s critical characteristics. Transport costs are regularly incurred in an agricultural context as entities need to ensure that their biological assets and agricultural produce are transported to the principal or most advantageous market. In such cases, IFRS 13.26 requires the fair value of those assets to be adjusted for transport costs.
Under IFRS 13.28, fair value takes into account an asset’s location and condition. Thus, transport costs impact the measurement of fair value. For example, the fair value of cattle at a farm is the price for the cattle in the principal market less the transport and other costs of getting the cattle from the farm to that market.
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