Implication Of A Restriction Imposed On The Use Of The Asset – FAQ | IFRS

Implication of a Restriction Imposed on the Use of the Asset

A donor contributes land in an otherwise developed residential area to a not-for-profit neighborhood association. The land is currently used as a playground. The donor specifies that the land must continue to be used by the association as a playground in perpetuity.

Upon review of relevant documentation (e.g., legal and other), the association determines that the fiduciary responsibility to meet the donor’s restriction would not be transferred to market participants if the association sold the asset, i.e., that the donor restriction on the use of the land is specific to the association. Furthermore, the association is not restricted from selling the land.

Without the restriction on the use of the land by the association, the land could be used as a site for residential development. In addition, the land is subject to an easement (i.e., a legal right that enables a utility to run power lines across the land).

Implication of a Restriction Imposed on the Use of the Asset

Following is an analysis of the effect on the fair value measurement of the land arising from the restriction and the easement:

  1. Donor restriction on use of land. Because in this situation the donor restriction on the use of the land is specific to the association, the restriction would not be transferred to market participants. Therefore, the fair value of the land would be the higher of its fair value used as a playground (i.e., the fair value of the asset would be maximized through its use by market participants in combination with other assets or with other assets and liabilities) or its fair value as a site for residential development (i.e., the fair value of the asset would be maximized through its use by market participants on a stand-alone basis), regardless of the restriction on the use of the land by the association.
  2. Easement for utility lines. Because the easement for utility lines is specific to (i.e., a characteristic of) the land, it would be transferred to market participants with the land.

Therefore, the fair value measurement of the land would take into account the effect of the easement, regardless of whether the highest and best use is as a playground or as a site for residential development.

Implication of a Restriction Imposed on the Use of the Asset Implication of a Restriction Imposed on the Use of the Asset Implication of a Restriction Imposed on the Use of the Asset

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