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Fair value
How your property valuations can
be fully compliant with HKFRS 13
Property valuations are commonly required for financial reporting
purposes. Gary Stevenson explains how they need to meet the
upcoming standard on fair value measurement
HKFRS 13 Fair Value
Measurement provides
a single comprehensive
source of guidance on
how fair value is measured for financial
reporting purposes. The standard is applied
prospectively for annual periods beginning
on or after 1 January 2013 and earlier
application is permitted.
Property valuations are commonly
required for financial reporting purposes, for
example, for investment property, property
acquired through a business combination
or property being tested for impairment.
Entities often use external valuers to value
their property interests. Nonetheless,
management is still responsible for the
fair value measurements included in the
financial statements. They therefore need
to assess whether the valuation techniques
and assumptions used by external valuers
comply with HKFRS 13. This will require an
understanding of the main requirements of
the standard relevant to property valuations.
Definition of fair value under HKFRS 13 and
International Valuation Standards
Fair value under HKFRS 13 is a different
concept to fair value as defined in
International Valuation Standards.
Rather, the concept of market value as
defined in IVS will generally meet the
fair value measurement requirement
under HKFRS 13 subject to certain specific
assumptions which are required by the
standard. Management should be aware
of this difference in concepts when
communicating with external valuers in
46 December 2012
order to ensure that property valuations are
suitable for financial reporting purposes.
Which characteristics of the property
should be taken into account?
Fair value should reflect those characteristics
of an asset that would influence the pricing
decisions of market participants. These
may include the condition and location of a
property and any restrictions on its use or
sale. Only restrictions that are specific to the
property and that would be transferred to
market participants with the property are
incorporated in fair value, for example legal
rights of use. The characteristics taken into
account reflect the property as it currently
exists, even if they are not associated with its
highest and best use.
Highest and best use
Fair value takes into account the highest
and best use of a nonfinancial asset such
as property. That is the way a market
participant would use the property to
maximize its value or the value of the group
of assets and liabilities, for example a
business within which it would be used.
HKFRS 13 presumes that an entity’s
current use of a nonfinancial asset is its
highest and best use unless market or other
factors suggest otherwise. Management does
not need to consider all possible alternative
uses of the property if there is no evidence
to suggest that the current use is not its
highest and best use. The highest and best
use may differ, for example where land held
for industrial purposes has potential for
redevelopment for commercial use.
The highest and best use of the property
should be physically possible, legally
permissible and financially feasible. The use
of a property does not need to be legal at the
measurement date but should not be legally
prohibited. The illustrative examples to
HKFRS 13 show how land can be zoned for a
particular use at the measurement date but
how a fair value measurement could assume
a different zoning if market participants
would do so. Fair value should incorporate
the costs of obtaining any necessary
approvals for changing the use of the
property, including the risk that they might
not be granted and the costs of converting
the property to the alternative use.
The valuation premise
The highest and best use of a nonfinancial
asset determines how its fair value should
be measured. This will either be on a stand
alone basis or in combination with other
assets and liabilities, for example a business.
HKFRS 13 sets out principles for
determining the assets and liabilities to be
included in the group. Where the highest and
best use of the property is in combination
with other assets or with other assets and
liabilities, the fair value measurement
assumes that the buyer already holds (or is
able to obtain) the complementary assets and
associated liabilities and will use the property
in a similar way.
The property’s use in an asset group may
be reflected in fair value by adjusting the
stand alone value or adjusting the valuation
assumptions used. In limited situations, an
entity might measure the property at an