Nov 2018 Q2 c.
Gonja Ltd is an investment company which holds a portfolio of securities linked to the realestate market in Ghana. The following information is available at 31 July 2018 regarding this portfolio:
i) The portfolio cost GH¢13 million 2 years ago.
ii) Real-estate prices in Ghana are generally accepted to have dropped by 20-30% in the past 2 years.
iii) The portfolio of securities held by Gonja is difficult to value, as there is no active market. However, the company has received an offer of GH¢2.6 million for this portfolio from an investor. It has no intention of accepting this offer although similar companies have accepted offers from this investor due to financial difficulties.
iv) A normal sale in the present climate could be reasonably expected to yield GH¢6 million, based on an analysis of transactions in similar assets.
v) Gonja’s valuation models suggest that the real estate market in Ghana will recover, and it expects that the portfolio will generate GH¢12 million (at present value) over the next three years.
Required:
In accordance with IFRS 13: Fair Value Measurement, advise Gonja Ltd on the amount it should state its investment portfolio in its financial statements to 31 July 2018, assuming it wishes to use fair value as measured. (5 marks)
View Solution
- There are a number of potential values that could be used here. However not all are of equal quality.
- There is an offer for the asset of GH¢2.6 million. However Gonja has no intention of accepting this offer, so it is not an active market price.
- An orderly sale would be expected to yield GH¢6 million. This figure is arrived at after analyzing transactions in similar assets. Therefore this would seem to qualify as a level 2 input, and would seem reasonable to use as the basis of valuation.
- The valuation models which suggest a portfolio value of GH¢12 million are level 3, as they are unobservable. Therefore they are inferior to level 2 inputs. However, the fact that the models seem to be anticipating a recovery would suggest that the valuation determined by them would not be attainable in the current market. Therefore this value would not meet the IFRS 13 definition of fair value.
- Hence, the best estimate of fair value in this situation would be GH¢6 million.