BKAR3033 (A231)
MINI CASE 2: FAIR VALUE MEASUREMENT
SUBMISSION DATE 19 NOVEMBER 2023
QUESTION 1
A.
Alif Dairy Bhd (ADB) is principally involved in dairy farming, processing, and
distributing fresh dairy produce. The company operates in Kulim, Kedah since 2010
and now has more than 20 dairy farms in Malaysia. In 2015, ADB acquired 200 acres
of land in Kuala Ketil, Kedah by issuing 100,000 units of ordinary shares. The land is a
vacant land and recently was appraised at RM1.5 million. In 2019, Kedah State
Government announced to develop Kuala Ketil as industrial area. Many factories from
big companies were built and the area is named Kuala Ketil Industrial Park. The vacant
land of ADB is located near to the industrial park. ADB estimates that the land could be
developed as a site for industrial purpose with a fair value of RM2 million and the cost
to convert the land is estimated to be RM150,000.
ADB also owns milk processing equipment in each branch. The equipment were
purchased from a company selling various milk processing facilities in New Zealand.
Recent survey carried out by the company indicates that similar equipment are traded in
Retail, Wholesale and Dealer market in Malaysia. ADB has access in all markets. In
determining the fair value of the equipment, the accountant provides the following data:
Volume (annual)
Trade per month
Price (per unit)
Transportation costs (per unit)
Sales commission (per unit)
Retail
3,750
22
RM22,000
RM1,500
RM800
Wholesale
1,500
12
RM19,000
RM1,500
RM700
Dealer
2,000
15
RM23,000
RM1,400
RM850
The company is in the process to prepare its financial statements for the year ended 31
December 2021.
REQUIRED:
(a)
Determine the fair value of the land of ADB as at 31 December 2021 as per
MFRS 13 Fair Value Measurement.
(b)
Determine the fair value of the equipment of ADB as at 31 December 2021 as
per MFRS 13 Fair Value Measurement.
(c)
Explain TWO (2) approaches of valuation techniques and provide ONE (1)
example of common usage for each approach.
B.
UCB Bhd is a manufacturing company, incorporated in Malaysia since year 2014. Mr
Haziq, the managing director of the company is negotiating for the purchase of Sepakat
Sdn Bhd. The following is the statement of financial position of Sepakat Sdn Bhd.
Sepakat Sdn Bhd
Statement of Financial Position
As at 31 December 2021
Assets
Buildings (net)
Equipment (net)
Land
Inventory
Accounts receivable
Cash
Equity and Liabilities
Share capital-ordinary, 500,000 units
Retained earnings
Long-term notes payable
Accounts payable
RM
230,000
175,000
100,000
90,000
95,600
63,000
753,600
300,000
180,000
200,000
73,600
753,600
Additional information:
1. The buildings and land are undervalued by RM40,000 and RM20,000, respectively
and the equipment is overvalued by RM25,000.
2. The current return to shareholders for a company in the same industry is 8% although
it is expected that an additional risk premium of 2% will be applicable to Sepakat
Sdn Bhd, being a smaller and unlisted company. The dividend payments for years
2017, 2018, 2019, 2020 were RM20,000, RM22,300, RM24,700 and RM25,000,
respectively. In 2021, the dividend payment is 10% lesser than year 2020.
REQUIRED:
Calculate the fair value of Sepakat Sdn Bhd based on the following valuation models.
(i)
(ii)
Net assets valuation
Dividend valuation model
Round up the growth rate to two decimal points and fair value to the nearest RM. Show
all the workings.
QUESTION 2
Sihat Selalu Bhd (SSB) is a manufacturer and supplier of cat food which operates in one district
in Kedah, Malaysia. Among the property, plant and equipment (PPE) of the company is a vacant
land in Sungai Petani. The land was acquired in year 2010 with a cost of RM400,000. Sungai
Petani area is currently known for the booming of residential houses, and the location of the
land is nearby the development area and suitable for residential property. Statement of Financial
Position of the company as at 31 December 2020 shows the carrying value of the land of RM1
million. A recent sale of similar vacant land in the area was at RM1.8 million. It is estimated
that the fair value of the residential property would be RM6 million with the cost to convert the
land to residential property of RM3.5 million.
The SSB’s Chief Executive Officer (CEO), Mr. Rahman, is planning to acquire Mesra Sdn Bhd
(MSB), a potential cat food manufacturing firm located in Kuala Kedah. The current return to
shareholders for a company in the same industry as MSB is 7% and it is expected that an
additional risks premium of 2% will be applicable to MSB, being a smaller and unlisted
company.
The CEO estimates that the expected cash flows before tax for MSB for years 2021, 2022, 2023
and 2024 are RM1.5 million, RM2.0 million, RM2.5 million and RM3.0 million, respectively.
MSB is expected to sustain its 2024 after tax cash flows in the future indefinitely. The growth
rate of the estimated cash flow in year 2025 and beyond is at historical rate. The probability for
the attainment of the estimated cash flow is expected to be 90% for the first two years and
remain constant at 80% on year 3 and beyond. The corporate tax rate remains at 24% for all
years.
Checking on the previous performance of MSB shows the following amount of profit after tax
and dividend payment for the last 4 years:
Year
2017
2018
2019
2020
Profit after Tax (RM)
150,000
153,000
160,000
175,000
Dividend (RM)
75,000
83,000
83,500
85,000
A similar listed company to MSB has recently floated on the stock market. The company has
earnings per share of RM0.80 and a share price of RM5. The following table presents the
present value table for single sum and annuity.
Period
1
2
3
4
5
1%
0.990
0.980
0.971
0.961
0.951
Present Value Table
Single sum
7%
9%
0.935
0.917
0.873
0.842
0.816
0.772
0.763
0.708
0.713
0.650
Ordinary annuity
7%
9%
0.935
0.917
1.808
1.759
2.524
2.531
3.387
3.240
4.100
3.890
REQUIRED:
(a)
Explain the application of highest and best use as per MFRS 13 Fair Value
Measurement in determining the fair value of the land of SSB as at 31 December 2021.
(b)
Explain the differences between Level 1 and Level 3 inputs of fair value hierarchy and
indicate the appropriate valuation technique for each level of inputs.
(c)
Calculate the fair value of MSB based on the following valuation models. Round up the
growth rate to two decimal points and fair value of the company to the nearest RM. Show
all the workings.
i. Dividend valuation model
ii. P/E or earnings valuation
iii. Discounted cash flow
QUESTION 3
A.
Rizki Bhd, is a plants and flowers nursery, operates the business in Pokok Sena, a district
in Kedah. Rizki Bhd owns a land and an office on which the nursery is operating. The
land was acquired in 2015 for RM500,000 and the office was built in the same year at a
cost of RM300,000. Both assets are recorded at costs, with the office having a carrying
amount of RM100,000 on 31 December 2022.
In recent year, the Kedah government has planned to develop a new city in Pokok
Sena which is expected the price of land around the place would increase and develop
residential houses around the area. The location of the nursery is about 1 km from the
proposed city and the land would be considered as a target for residential property. A
recent valuation of the land on which the nursery stands as performed by a property
valuation group and based on recent sales of land in the area has indicated the value of
RM1.5 million for the land. It would cost RM150,000 to demolish the office and clean
the land. It is estimated that the replacement cost for the new office on the current site
would cost around RM200,000.
REQUIRED:
(a)
Determine the fair value of the land and the office of Rizki Bhd. Explain your
answer based on the procedures to measure the fair value as per MFRS 13 Fair
Value Measurement.
(b)
Explain the difference between Level 2 Inputs and Level 3 Inputs in the Fair Value
Hierarchy and provide ONE (1) example of each as discussed in MFRS 13 Fair
Value Measurement.
B.
KMI Bhd is a manufacturing company, incorporated in Malaysia since year 2016. Mr
Nabil, the managing director of the company is negotiating to purchase NDA Sdn Bhd.
The following is the Statement of Financial Position of NDA Sdn Bhd as at 31 December
2022.
NDA Sdn Bhd
Statement of Financial Position
As at 31 December 2022
Assets
RM
Buildings (net)
250,000
Equipment (net)
156,000
Land
160,000
Inventory
80,000
Accounts receivable
85,500
Cas
70,000
Cash
801,500
Equity and Liabilities
Share capital-ordinary, 300,000 units
300,000
Retained earnings
200,000
Long-term notes payable
193,000
Accounts payable
108,500
801,500
Additional information:
1.
The buildings and land are undervalued by RM30,000 and RM50,000, respectively
and the account payable, equipment and inventory are overvalued by RM30,000,
RM40,000, and RM20,000 respectively.
2.
The current return to shareholders for a company in the same industry is 7% although
it is expected that an additional risk premium of 2% will be applicable to NDA Sdn
Bhd, being a smaller and unlisted company. The dividend payments for both
companies are as follows:
Year
KMI Bhd (RM)
NDA Sdn Bhd (RM)
2018
300,000
20,000
2019
350,000
22,300
2020
250,000
23,700
2021
230,000
24,000
2022
250,000
24,500
3.
A similar listed company with NDA Sdn Bhd had recently floated on the Bursa
Malaysia. The earnings per share of that particular company is RM0.50 and the
current share price is RM3.
4.
NDA Sdn Bhd earns profits after tax of RM180,000 in year 2022.
REQUIRED:
(Round up the growth rate to three decimal points and fair value to the nearest RM)
Calculate the fair value of NDA Sdn Bhd based on the following valuation models.
(i)
Net assets valuation model
(ii)
Dividend valuation model
(iii)
P/E or earnings valuation model