Chapter Two Fair value measurement and Impairment

Illustrations:
Adjusting fair value for condition and location: An entity owns a pine forest. The pine trees take approximately 25 years to mature, after which they can be cut down and sold. The average age of the trees in the forest is 14 years at the end of the reporting period. The current use of the forest is presumed to be its highest and best use. There is no market for the trees in their current form. However, there is a market for the harvested timber from trees aged 25 years or older. To measure the fair value of the forest, the entity uses an income approach and uses the price for 25-year-old harvested timber in the market today as an input. However, since the trees are not yet ready for harvest, the cash flows must be adjusted for the costs a market participant would incur. Therefore, the estimated cash flows include costs to manage the forest (including silviculture activities, such as fertilizing and pruning the trees) until the trees reach maturity; costs to harvest the trees; and costs to transport the harvested logs to the market. The entity estimates these costs using market participant assumptions. The entity also adjusts the value for a normal profit margin because a market participant acquiring the forest today would expect to be compensated for the cost and effort of managing the forest for the period (i.e. 11 years) before the trees will be harvested and the timber is sold (i.e. this would include compensation for costs incurred and a normal profit margin for the effort of managing the forest).
Restrictions on assets: An entity holds an equity instrument for which sale is legally restricted for a specified period. The restriction is a characteristic of the instrument that would transfer to market participants. As such, the fair value of the instrument would be measured based on the quoted price for an otherwise identical unrestricted equity instrument that trades in a public market, adjusted for the effect of the restriction. The adjustment would reflect the discount market participants would demand for the risk relating to the inability to access a public market for the instrument for the specified period. The adjustment would vary depending on:

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  the nature and duration of the restriction;
  
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  the extent to which buyers are limited by the restriction; and
  
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  qualitative and quantitative factors specific to both the instrument and the issuer.