What does highest and best use mean for fair value of non-financial assets?

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AcadiFi · Accepted Answer

Highest and best use (HBU) is a concept that applies only to non-financial assets under IFRS 13 and ASC 820. Fair value must reflect the use that is physically possible, legally permissible, and financially feasible, and that maximizes the value of the asset to market participants, even if the reporting entity intends to use it differently.

For Torrington's warehouse parcel, if comparable mixed-use developments in the area sell at $140 per square foot while warehouse use comparables trade at $85, HBU analysis likely supports the mixed-use valuation provided zoning entitlements are in place and development is financially feasible net of demolition and rezoning costs. The current use is irrelevant if another use yields higher market-participant value.

Three screens apply. Physically possible: can the site support the alternative use given size, topography, access? Legally permissible: is zoning, title, or regulatory approval attainable without undue cost? Financially feasible: does the alternative generate positive return after conversion costs? If all three pass and value exceeds current-use value, HBU drives fair value.

IFRS 13 presumes current use is HBU unless market or other factors suggest otherwise. Entities must disclose when HBU differs from current use. Note that HBU does not apply to financial assets or liabilities, which are measured based on their contractual cash flows and market pricing.

What does highest and best use mean for fair value of non-financial assets?

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