Scenario 1: Derivation Bhd owns a building that is used as a factory. The building, however, is
Question:
Scenario 1:
Derivation Bhd owns a building that is used as a factory. The building, however, is located in a newly residential area. Other industrial and commercial buildings have been converted into residential use in the area. Based on expected future cash flows from use as a factory, Derivation Bhd. estimates a value of RM20m. However, the building could be sold for conversion to residential property for RM21m, incurring transaction costs of RM1.5m (surveys, fees etc). Prior to sale, the building would require repairs costing RM500k to return site to safe for human dwelling.
Scenario 2 :
Boohoo Inc. conducts a business that makes women’s apparels. It operates a factory in an inner suburb of Kuala Nerus, Malaysia. The factory contains a large amount of equipment that is used in the manufacture of apparel. The company owns both the factory and land on which the factory stands. The land was acquired in 2005 for RM200,000 and the factory was built in that year at a cost of RM520,000. Both assets are recorded at cost, with the factory having a carrying amount at 30 June 2014 of RM260,000.
In recent years, there has been a property boom in Kuala Nerus with residential house prices doubling such that the average price of a house is approximately RM500,000. A recent valuation of the land on which the factory stands as performed by a property valuation group and based on recent sales of land in the area has the land at a value of RM1,000,000. The land is now considered prime residential property given its closeness to the city and, with it superb river view, its suitability for building executive apartments. It would cost RM100,000 to demolish the factory to make way for the apartments to be built. It is estimated that to build a new factory on the current site would cost around RM780,000.
By applying the four steps of fair value measurement as prescribed by MFRS 13, discuss the process in determining the fair value of the assets in the following questions. You can use the following guidelines in drafting your answer:
Step 1: Discuss about characteristics of the asset being measured
Step 2: Determine the:
i. Highest and Best Use ii. Valuation Premise
Step 3: Determine the most advantageous market.
Step 4: Determine the valuation technique (Cost, market, income) and the related input (Level 1, 2, 3)
Vector Mechanics for Engineers Statics and Dynamics
ISBN: 978-0073212227
8th Edition
Authors: Ferdinand Beer, E. Russell Johnston, Jr., Elliot Eisenberg, William Clausen, David Mazurek, Phillip Cornwell