ACCA SBR ^INT Syllabus C. Reporting The Financial Performance Of A Range Of Entities - Highest & Best Use, Most Advantageous & Principal Market - Notes ^{3 / 3}

Highest and Best Use

The use of a non-financial asset by market participants that would maximise the value of the business using it

Most Advantageous Market

The market that maximises the amount received (after transaction costs and transport costs)

Principal Market

The market with the greatest volume and level of activity

Guidance On Measurement

1. Take into account the condition, location & any restrictions placed on the asset

2. Fair value assumes a transaction taking place in the principal market for the asset 

   (In the absence of a principal market, the most advantageous market is used)

3. Fair value of a non-financial asset uses its highest and best use

4. The fair value of a liability reflects non-performance risk and own credit risk

Valuation Techniques

Valuation techniques should maximise the use of observable and minimise unobservable inputs

Three widely used valuation techniques are shown below. Sometimes, just one technique is appropriate, other times multiple techniques:

1. Market Approach 

   Uses prices generated by market transactions involving identical or comparable (similar) assets

2. Cost Approach

   The amount needed to replace the service capacity of an asset (current replacement cost)

3. Income Approach 

   Converts future cash flows to a single current (discounted) amount (reflecting current market expectations about those future amounts)