The different valuation premises available in IFRS and how they are used are:
Stand-alone valuation premise
A basis used to determine the fair value of an asset that provides maximum value to market participants principally on a stand-alone basis.
In combination value
A basis used to determine the fair value of an asset that provides maximum value to market participants principally through its use in combination with other assets and liabilities as a group (as installed or otherwise configured for the highest and best use valuation premise).
The highest and best use valuation premise establishes the valuation premise used to measure the fair value of that asset.
Difference between the current use of an asset and the highest and best use valuation premise:
The current use is how the reporting entity is currently using an asset and the highest and best use valuation premise is based on how market participants will use the asset.
An example of where the two may differ is where land is currently used as a site for a factory, but the land could be used for residential purposes. The current use is industrial while the highest and best use could be residential.
Valuation premises are in combination value, stand alone value and highest and best use value.
Some general principles need to be applied when selecting the appropriate valuation technique. The valuation technique should be:
- appropriate, depending on the circumstances,
- a technique for which sufficient data is available,
- maximise the use of relevant observable inputs and minimise the use of unobservable inputs,
- consistent with the objective of using a calculation technique according to IFRS 13.
The valuation technique chosen should adhere to the following characteristics:
- it is commonly used by market participants and uses inputs that market participants would normally consider to use,
- it is consistent with accepted economic methodologies and techniques,
- it relies as little as possible on entity-specific factors,
- it is applied consistently, and
- it has to be validated against actual market transactions.