An entity acquires a machine in a business combination. The machine will be held and used in its operations. It was originally purchased by the acquired entity from an outside vendor and, before the business combination, was modified by the acquired entity for use in its operations. However, the modification of the machine was not extensive.
The acquiring entity determines that the asset would provide maximum value to market participants through its use in combination with other assets or with other assets and liabilities (as
installed or otherwise configured for use). There is no evidence to suggest that the current use of the machine is not its highest and best use. Therefore, the highest and best use of the machine is its current use in combination with other assets or with other assets and liabilities.
The entity determines that sufficient data are available to apply the cost approach and, because the customization of the machine was not extensive, the market approach. The income approach is not used because the machine does not have a separately identifiable income stream from which to develop reliable estimates of future cash flows. Furthermore, information about short-term and intermediate-term lease rates for similar used machinery that otherwise could be used to project an income stream (i.e., lease payments over remaining service lives) is not available.
The market and cost approaches are applied as follows:
- The market approach is applied using quoted prices for similar machines adjusted for differences between the machine (as modified) and the similar machines. The measurement reflects the price that would be received for the machine in its current condition (used) and location (installed and configured for use). The fair value indicated by that approach ranges from €40,000 to €48,000.
- The cost approach is applied by estimating the amount that would be required currently to construct a substitute (modified) machine of comparable utility. The estimate takes into account the condition of the machine and the environment in which it operates, including physical wear and tear (i.e., physical deterioration), improvements in technology (i.e., functional obsolescence), conditions external to the condition of the machine such as a decline in the market demand for similar machines (i.e., economic obsolescence) and installation costs. The fair value indicated by that approach ranges from €40,000 to €52,000.
The reporting entity determines that the higher end of the range indicated by the market approach is most representative of fair value and, therefore, ascribes more weight to the results of the market approach.
That determination is made on the basis of the relative subjectivity of the inputs, taking into account the degree of comparability between the machine and the similar machines. In particular:
- The inputs used in the market approach (quoted prices for similar machines) require fewer and less subjective adjustments than the inputs used in the cost approach.
- The range indicated by the market approach overlaps with but is narrower than, the range indicated by the cost approach.
- There are no known unexplained differences (between the machine and the similar machines) within that range.
Accordingly, the entity determines that the fair value of the machine is €48,000.
If modification of the machine had been extensive, or if there were not sufficient data available to apply the market approach (e.g., because market data reflect transactions for machines used on a stand-alone basis, such as a scrap value for specialized assets, rather than machines used in combination with other assets or with other assets and liabilities), the entity would apply the cost approach.
When an asset is used in combination with other assets or with other assets and liabilities, the cost approach assumes the sale of the machine to a market participant buyer with the complementary assets and the associated liabilities. The price received for the sale of the machine (i.e., an exit price) would not be more than either of the following:
- the cost that a market participant buyer would incur to acquire or construct a substitute machine of comparable utility; or
- the economic benefit that a market participant buyer would derive from the use of the machine.
Valuation of a machine to be held and used in the Business Valuation of a machine to be held and used in the Business Valuation of a machine to be held and used in the Business