What is the highest and best use concept under IFRS 13?

Under IFRS 13 Highest and Best Use, the fair value of a non-financial asset must be measured based on how market participants would use it to maximise value — not necessarily how the reporting entity currently uses it. - Applies only to non-financial assets. The highest and best use (HBU) concept is explicitly scoped to non-financial assets (IFRS 13.27). For financial instruments, fair value is determined independently of the holder's intended use. - Market participant perspective is paramount. HBU is determined from the viewpoint of market participants at the measurement date, not management's own intentions (IFRS 13.22). The entity's actual use is largely irrelevant unless it coincides with the market participant view. - Three-pronged feasibility test. To qualify as the highest and best use, the use must be (a) physically possible — considering the physical characteristics of the asset; (b) legally permissible — reflecting any legal restrictions such as zoning laws or environmental regulations; and (c) financially feasible — generating adequate return to justify the use (IFRS 13.28). - Two valuation premises: in-use vs. in-exchange. If HBU is in-use (the asset maximises value when used in combination with other assets and liabilities), fair value reflects the price received in a transaction assuming the complementary assets are available to market participants (IFRS 13.31). If HBU is in-exchange (standalone use maximises value), fair value reflects the standalone selling price (IFRS 13.30).

How does the in-use valuation premise under IFRS 13.31 affect the unit of account when measuring a group of complementary assets?

- Current use presumption — rebuttable. IFRS 13.29 creates a practical presumption that current use equals HBU, but this is rebuttable when market or other factors suggest an alternative use would produce greater value. The entity must disclose if it holds the asset for a use that differs from its HBU (IFRS 13.93(i)). - Interaction with IAS 36 and IFRS 5. HBU fair value feeds directly into IAS 36 impairment testing (fair value less costs of disposal) and IFRS 5 measurement of assets held for sale. A different HBU assumption can materially shift impairment conclusions. Scenario: A manufacturing company owns an industrial building carried at €8 million. Current use is as a production facility. An independent valuer determines that market participants would redevelop the site as commercial office space, generating a higher fair value of €12 million. The HBU is therefore the redevelopment use (in-exchange premise). For an IAS 36 impairment test, fair value less costs of disposal (FVLCD) is calculated: | Item | € million | |---|---| | HBU fair value (office redevelopment) | 12.0 | | Less: estimated disposal costs (2%) | (0.24) | | FVLCD | 11.76 |

When must an entity rebut the current-use presumption under IFRS 13.29, and what documentation is required to support an alternative HBU?

Since carrying amount (€8m) is below FVLCD (€11.76m), no impairment arises. However, if the valuer had incorrectly anchored to current industrial use (fair value €7.5m), management might have incorrectly recognised an impairment of €0.5m. Journal entry if impairment were incorrectly recognised: | Account | Dr (€m) | Cr (€m) | |---|---|---| | Impairment loss (P&L) | 0.50 | | | Accumulated impairment — Property | | 0.50 | Using the correct HBU, this entry would not be made, illustrating the material impact of the HBU determination. - Anchoring to management intent. A frequent audit trap is using the entity's planned use rather than market participant assumptions. If the business intends to demolish an asset but market participants would retain it for rental income, the rental income scenario drives fair value under IFRS 13.22.

How does the highest and best use determination under IFRS 13 interact with the recoverable amount calculation under IAS 36.53A for impairment testing?

- Ignoring the in-use vs. in-exchange distinction. Failing to assess whether the asset generates maximum value on a standalone basis or in combination with complementary assets leads to an incorrect valuation premise. A machine that only has value as part of a production line must be valued in-use — applying an in-exchange standalone price would artificially deflate fair value. - Treating the current-use presumption as conclusive. IFRS 13.29 is a rebuttable presumption, not a rule. When market evidence (comparable transactions, rezoning activity, development feasibility studies) suggests an alternative use is superior, practitioners must rebut the presumption and document why. Auditors increasingly challenge this in property-heavy industries. - IFRS 13.22 — Fair value measurement requires market participant assumptions, not entity-specific assumptions. - IFRS 13.27 — HBU concept applies only to non-financial assets. - IFRS 13.28 — The three-part test: physically possible, legally permissible, financially feasible. - IFRS 13.29 — Rebuttable presumption that current use equals highest and best use. - IFRS 13.30–31 — In-exchange versus in-use valuation premises and their fair value implications. - IFRS 13.93(i) — Disclosure requirement when the reporting entity uses a non-financial asset in a manner that differs from its HBU.

IFRS 13 Highest and Best Use

IFRS 13 Highest and Best Use — Core Rule

Under IFRS 13 Highest and Best Use, the fair value of a non-financial asset must be measured based on how market participants would use it to maximise value — not necessarily how the reporting entity currently uses it.

How IFRS 13 Highest and Best Use Works

Applies only to non-financial assets. The highest and best use (HBU) concept is explicitly scoped to non-financial assets (IFRS 13.27). For financial instruments, fair value is determined independently of the holder's intended use.

Market participant perspective is paramount. HBU is determined from the viewpoint of market participants at the measurement date, not management's own intentions (IFRS 13.22). The entity's actual use is largely irrelevant unless it coincides with the market participant view.

Three-pronged feasibility test. To qualify as the highest and best use, the use must be (a) physically possible — considering the physical characteristics of the asset; (b) legally permissible — reflecting any legal restrictions such as zoning laws or environmental regulations; and (c) financially feasible — generating adequate return to justify the use (IFRS 13.28).

Two valuation premises: in-use vs. in-exchange. If HBU is in-use (the asset maximises value when used in combination with other assets and liabilities), fair value reflects the price received in a transaction assuming the complementary assets are available to market participants (IFRS 13.31). If HBU is in-exchange (standalone use maximises value), fair value reflects the standalone selling price (IFRS 13.30).

Current use presumption — rebuttable. IFRS 13.29 creates a practical presumption that current use equals HBU, but this is rebuttable when market or other factors suggest an alternative use would produce greater value. The entity must disclose if it holds the asset for a use that differs from its HBU (IFRS 13.93(i)).

Interaction with IAS 36 and IFRS 5. HBU fair value feeds directly into IAS 36 impairment testing (fair value less costs of disposal) and IFRS 5 measurement of assets held for sale. A different HBU assumption can materially shift impairment conclusions.

IFRS 13 Highest and Best Use — Practical Example

Scenario: A manufacturing company owns an industrial building carried at €8 million. Current use is as a production facility. An independent valuer determines that market participants would redevelop the site as commercial office space, generating a higher fair value of €12 million. The HBU is therefore the redevelopment use (in-exchange premise).

For an IAS 36 impairment test, fair value less costs of disposal (FVLCD) is calculated:

Item	€ million
HBU fair value (office redevelopment)	12.0
Less: estimated disposal costs (2%)	(0.24)
FVLCD	11.76

Since carrying amount (€8m) is below FVLCD (€11.76m), no impairment arises. However, if the valuer had incorrectly anchored to current industrial use (fair value €7.5m), management might have incorrectly recognised an impairment of €0.5m.

Journal entry if impairment were incorrectly recognised

Account	Dr (€m)	Cr (€m)
Impairment loss (P&L)	0.50
Accumulated impairment — Property		0.50

Using the correct HBU, this entry would not be made, illustrating the material impact of the HBU determination.

IFRS 13 Highest and Best Use — Common Pitfalls

Anchoring to management intent. A frequent audit trap is using the entity's planned use rather than market participant assumptions. If the business intends to demolish an asset but market participants would retain it for rental income, the rental income scenario drives fair value under IFRS 13.22.

Ignoring the in-use vs. in-exchange distinction. Failing to assess whether the asset generates maximum value on a standalone basis or in combination with complementary assets leads to an incorrect valuation premise. A machine that only has value as part of a production line must be valued in-use — applying an in-exchange standalone price would artificially deflate fair value.

Treating the current-use presumption as conclusive. IFRS 13.29 is a rebuttable presumption, not a rule. When market evidence (comparable transactions, rezoning activity, development feasibility studies) suggests an alternative use is superior, practitioners must rebut the presumption and document why. Auditors increasingly challenge this in property-heavy industries.

IFRS 13 Highest and Best Use — Key Paragraphs

IFRS 13.22 — Fair value measurement requires market participant assumptions, not entity-specific assumptions.
IFRS 13.27 — HBU concept applies only to non-financial assets.
IFRS 13.28 — The three-part test: physically possible, legally permissible, financially feasible.
IFRS 13.29 — Rebuttable presumption that current use equals highest and best use.
IFRS 13.30–31 — In-exchange versus in-use valuation premises and their fair value implications.
IFRS 13.93(i) — Disclosure requirement when the reporting entity uses a non-financial asset in a manner that differs from its HBU.