Fair value not reliably determinable

Learning objectives

• Apply the rare exception in which fair value cannot be reliably determined (cost until disposal).L2, L3
• Calculate, from the case data, the amount relating to fair value that cannot be reliably determined and justify the basis of calculation.L2, L3
• Record the entry relating to fair value that cannot be reliably determined and state its effect on the financial statements.L2, L3

Normative references

• IAS 40 §53Rebuttable presumption that fair value can be measured reliably on a continuing basis; the exception, identified on acquisition or on the first change in use, applies only if the market for comparable properties is inactive and no other reliable measure is available: the IAS 16 cost model (IFRS 16 for a right-of-use asset) until disposal, with a residual value assumed to be zero; investment property under construction: at cost until fair value becomes reliably measurable or construction is completed.
• IAS 40 §54In the exceptional cases in which the entity is compelled, for the reason in para. 53, to apply the cost model (IAS 16 or IFRS 16) to one investment property, it continues to measure all its other investment property at fair value, including investment property under construction.
• IAS 40 §55An investment property previously measured at fair value continues to be measured at fair value until disposal (or until it becomes owner-occupied or the entity begins to develop it for sale in the ordinary course of business), even if comparable market transactions become less frequent or market prices less readily available.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

3 questions

• An entity may abandon the fair value model for a property as soon as measuring its fair value becomes difficult or costly.L2
• On acquiring a property, Brevane establishes that its fair value cannot be determined reliably on a continuing basis (exceptional case, documented evidence). It therefore applies the cost model until the property is disposed of. Cost: {cost}; useful life: {useful_life}; straight-line depreciation (case assumption). Calculate the annual depreciation charge.L3
• On acquiring a property, there is no comparable market and the entity demonstrates, with supporting evidence, that its fair value cannot be determined reliably on a continuing basis. In three to five sentences, explain the accounting treatment applicable to this property.L3