(i)

First of all, we should explain the definition of fair value: fair value is a market-based
measurement, not one that is entity specific. It is determined by the principal market, and has
nothing to do with individual selling price
Then explain that the fair value is determined by the price of the principal market. If there is no
principal market, the price of the most advantageous market will be used.
Then explain the definition and judgment method of the principal market, and the definition and
judgment method of the most advantageous market. The principal market is the one with the
greatest volume and level of activity for the asset or liability, the most advantageous market is the
one that maximizes the net amount received from selling an asset after transport and transaction
costs.
Then explain how to calculate the price. The FV is the price after deducting the transaction
cost(without the deduction of transaction cost).
The market price of the same asset may be different in different entities, which is caused by
different markets
Then explain which is the main market and how to judge in this case. In this question, Asia is the
principal market, and the FV can also be calculated.

(ii)
First, describe the basis for determining the fair value of non-financial assets: The fair value of a
non-financial asset should be based on its highest and best use
When the company considers changing the use of financial assets, it should consider three aspects:
physically possible, legally permissible, financially feasible.
In this question, we should mainly analyze legally permissible
Then analyze the legally permissible. There is no evidence that the conversion of land use will not
be approved. On the contrary, the attitude of the government towards land use conversion and the
attitude of the regulatory authorities indicate that approval is very likely. (According to: However,
preliminary enquiries with the regulatory authorities seem to indicate that planning permission
may be granted. Additionally, the government has recently indicated that more agricultural land
should be used for residential purposes.)
The last, Analyze whether it is commercial use or residential use. it needs further evaluation by the
company.

19 dec Q1
a (i)
How the fair value of the factory site should be determined at 1 July 20X4 and why the
depreciated replacement cost of $17·4 million is unlikely to be a reasonable estimate of fair value.
(7 marks)

First, describe the definition of fair value (market-based measurement, not one that is entity
specific) and the assumption of the fair value of non-financial assets (The fair value of a non-
financial asset should be based on its highest and best use). It has nothing to do with whether they
intend to change.
Then analyze the fair value measurement in this topic. In this question, the best use should be
residential rather than industrial. Three aspects should be considered: physically possible, legally
permissible, financially feasible. In this question, we should mainly analyze legally permissible.
Nearby sites had been acquired and converted into residential use. It indicates that it is legally
permissible.
Then analyze and calculate the fair value of the asset in this question. (2400-100=2300)
The replacement cost after depreciation is a method that can only be used when other methods
can’t be used or there is no relevant information. It can be analyzed in three aspects. First, the
factory site is not a very special asset, and can obtain relevant data and information. Secondly, the
overall market value is on the rise, and the replacement cost after depreciation may underestimate
the fair value of assets. Finally, the depreciation policy may be not necessarily reasonable.