8.11 Fair Value
Fair value should be regarded as the maximum value that an entity would be prepared to pay, if it did not currently hold the asset, after consideration of (Queensland Treasury 2014):
- quoted market price in an active and liquid market, e.g. listed shares
- the current market price of the same or similar asset, e.g. land
- the cost of replacing or reproducing the asset, if management intend to replace the asset
- the remaining useful life and condition of the asset
- cash flows from future use and disposal.
Where assets have a market price for their current type and condition, the market price is the fair value.
Where no market price exists, fair value may be determined from the cost to replace the future economic benefits embodied in the asset.
Future economic benefits from an asset can be any or all of the following (Queensland Treasury 2014):
- cash flows from future use
- cash flows from disposal
- future service potential to the entity
- cost savings
- other benefits arising from use of the asset by the entity.
Where a not-for-profit entity acquires an asset at no cost, or for a nominal cost, for which there is no market value, the asset’s fair value is its depreciated replacement cost (DRC) at the date of acquisition.
DRC may be determined by one of two methods:
- the cost per unit of future economic benefits of the most appropriate modern replacement facility, adjusted for any differences in production capacity, utility and useful life
- the cost of reproducing or replicating the future economic benefits of the asset.
A not-for-profit entity may hold an asset to generate cash flows. This may be where an agency constructs a food kiosk in a rural truck stop to encourage drivers to rest, leases the kiosk to a private operator and uses the rental revenue to fund part of the operating and maintenance cost of the truck stop. Where there is no market price of an asset, its fair value will be the lower of the:
- net present value of the cash flows associated with the asset, or
- the current depreciated replacement or reproduction cost.
A for-profit agency within the public sector should operate on a commercial basis, with its primary objective to generate profits, compared to a not-for-profit agency whose primary objective is to deliver essential goods and services to meet the agency’s community service obligations.
For assets held for this purpose and where there is no market price of an asset, its fair value will be the lower of the:
- net present value of the cash flows from the asset.
A Fair Value Decision Tree has been developed for IPWEA (2015b) based on the application of AASB 13 (2015g) Fair Value Measurement to AASB 166 Property, Plant and Equipment. The decision tree recognises the estimation of fair value of the asset based market valuation, or an alternative valuation where no market exists for the asset, together with the use of a DRC, taking into account asset impairment.