Week 1 - Financial Reporting in Australia and Fair Value Measurement
Tutorial Questions
1.
Asset JPY is sold in three different active markets.
• In Market I, the price that would be received is $54; transaction costs are $4 and the
transport costs are $6.
• In Market II, the price that would be received is $52; transaction costs are $4 and the
transport costs are $2.
• In Market III, the price that would be received is $58; transaction costs are $8 and the
transport costs are $2.
Required
a) What is the most advantageous market for Asset JPY and what is its fair value?
b) If the principal market for Asset JPY were Market I, then what would be the fair
value of Asset JPY?
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2. Notoro Ltd makes women’s handbags. It operates a factory in an inner suburb of Perth.
The factory contains a large amount of equipment that is used in the manufacture of
handbags. Notoro Ltd owns both the factory and the land on which the factory stands.
The land was acquired in 2014 for $400 000 and the factory was built in that year at a
cost of $1 040 000. Both assets are recorded at cost, with the factory having a carrying
amount at 30 June 2024 of $520 000.
A property boom in Perth has seen residential house prices double. The average price of
a house is now approximately $1 000 000. A property valuation group recently valued the
land on which the factory stands at $2 000 000. The land is considered prime residential
property given its closeness to the coast and, with its superb ocean views, its suitability
for building executive apartments. It would cost $200 000 to demolish the factory to make
way for these apartments to be built. It is estimated that to build a new factory on the
current site would cost around $1 560 000.
Required:
The directors of Notoro Ltd want to measure both the factory and the land at fair value as
at 30 June 2024. Discuss how you would measure these fair values.
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3. An entity acquired a machine in a business combination that is held and used in its
operations. The machine was initially acquired from a supplier and was then customised
by the entity for use in its own operations. The highest and best use of the machine is its
use in combination with other assets as a group. The valuation premise is then ‘in-
combination’.
Required:
1. What two valuation techniques could be used to determine the fair value of the machine?
2. What would be the level of the inputs to the two valuation techniques?
