Question 2 AASB 13 Fair Value

A generous donor recently donated a forestry business to the State Government. Included in the business is a large piece of land which is used to grow pine trees. Once the trees reach a certain height, they are harvested and treated before being sold for construction purposes. New trees are then planted.

The land is also used for recreational purposes and people from across the State come and visit the land to go for walks and forest bathing.

The donor stipulated that the forestry and land cannot be sold, once the government has accepted the donation. However, use of the land for recreational and educational purposes is permitted.

If the land could be sold, it would sell for approximately $50 million. The government made calculations based on the accounting records of the previous owner and estimates that by continuing to use the site as a forestry, it can make a good income in the future. The net present value was calculated to be approximately $25 million over the next 20 years.

However, as there is a shortage on recreational land, the government recently decided that it would change the use of the site and turn it into a conservation park, used for recreational and educational purposes only. This change was made and approved by legislation and is going to be implemented with immediate effect.

There is no income expected from using the land for recreational purposes only.

If something were to happen to the land and the government needed to replace it (withland for recreational purposes of a similar size), it would cost approximately $15 million. The valuation was undertaken by a professional valuer, taking into account the restrictions of the land.

Required:

Explain how the State Government should value the land of the forestry in accordance with the four steps outlined in AASB 13 Fair Value.In addition, explain what information would need to be included in the notes to the financial statements. Focus on the value of the land only.