Highest and best use: Application of a 'change of use option'

The Board noted that it had taken a tentative decision that when an entity measures an asset at fair value and currently uses the asset together with another asset in a use that differs from their highest and best use, the entity may need to split the fair value into two components: (a) the fair value of the asset assuming its current use and (b) a 'change of use option' reflecting the entity's ability to switch the asset to its highest and best use. The issue could arise in either of the following situations:

• when the assets are being measured at fair value in a business combination, or
• when the assets are being re-measured at fair value under the revaluation model in IAS 16 or IAS 40.

The staff proposed that the forthcoming exposure draft should provide explicit guidance for these situations, and noted several approaches that it had seen (either in major accounting firms' IFRS accounting manuals or elsewhere), some of which it could support others that it did not.

At least one Board Member disagreed with the staff recommendation, being fearful of creating 'a monster'. The Board Member noted that any occasion when an entity purchases a bundle of assets, it had to make arbitrary allocations. If the Board was going to provide guidance in the ED for every circumstance in which this was difficult, it would introduce lots of rules affecting relatively marginal, specialised situations that would be understood by relatively few experts.

However, a majority of the Board agreed that the forthcoming ED should provide guidance. A majority of the Board would accept the two approaches, which will be included in the ED for constituents' comments: The approaches used the following example:

Entity A acquired land and a factory building in a business combination. The land is currently zoned for industrial use. Nearby parcels of land are being rezoned to residential use and developers have begun building high-rise condominiums in the area. Entity A determines that the highest and best use of the land is residential use for high-rise condominiums. Therefore, the fair value of the land assumes that the factory is demolished and the land will be made available to build the condominiums. On this basis, the fair value of the site as a whole is CU300,000, net of costs to demolish the factory. The value of the factory, assuming its current use, is CU100,000. The value of the land, assuming its current use, is CU30,000.

The approaches to be included in the ED are:

Approach A: value the land as the difference between the total site in its highest and best use (in this case CU300,000) and the value of the factory in its current use (CU100,000), or CU200,000.

Approach B: This approach would result in Entity A recognising the following: Factory value in current use 100,000; Land value in current use 30,000; and a 'Change of Use Option' that reflects the option to convert land to an alternative use 170,000 (300,000 - 30,000 - 100,000).