COLYSON SD19
(a)(i) Fair value of factory site
Under IFRS 3, on 1 July 20X4, all the assets and liabilities of Colyson should be measured at
fair value for the calculation of goodwill.
In accordance to IFRS 13, the fair value of the factory site should be measured by taking into
consideration its highest and best use, which appears to be for residential purpose in this
case.
The intention whether Colyson wants to convert the site into residential areas or not is
irrelevant because fair value is not an entity specific measure but rather market-focused.
However, it is necessary that the factory site is physically possible, legally permissible, and
financially feasible to be converted into a residential property. Given that several nearby sites
had already been converted, the criteria appear to be met.
The fair value of the factory site should therefore be measured as if it is converted into a
residential site. The $1 million demolition costs is the cost associated with the conversion of
the site, thus should be deducted from the market value of the residential site.
The fair value of the factory site should therefore be at $23 million ($24m - $1m).
Depreciated replacement cost
Depreciated replacement cost is an unobservable input, according to IFRS 13, this should be
minimized. This input is only used when other inputs are unavailable which is usually for highly
specialized assets.
This is unlikely to be the case for a factory site, where observable inputs are likely to be
available by looking at other factories in nearby areas.
The use of the depreciated replacement cost of $17.4 million will understate the fair value of
the assets and overstate goodwill.
GENOVATE MOCK20
Fair value of property