FAC3762 ASSIGNMENT 2

Sent: Friday, 24 July 2020, 04:30PM To: Accountant (House Ltd Group) Subject: Fair value measurement of the solar energy unit Good day. The above matter refers. The following considerations should be taken into account when determining the fair value of the solar energy unit. IFRS 13 Fair Value Measurement defines fair value as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date (IFRS 13.9). The entity should identify the asset or liability that is subject to the measurement and in this case the asset is the second hand solar energy units. An orderly transaction is defined as a transaction that assumes exposure to the market for a period before the measurement date, to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities – it is not a forced transaction (e.g., a forced liquidation or distress sale). Coffee Ltd already transacts in both markets which means exposure before the measurement date and Coffee Ltd could access the prices of both markets at the measurement date. IFR13.16 states that a fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place either a. In the principal market for the asset or liability. The principal market is the market in which the greatest volume and level of activity for the asset or liability. b. In the absence of a principal market, in the most advantageous market for the asset or liability. In this particular case, there is no principal market where second hand solar energy units are sold in South Africa, therefore, the company should use the most advantageous market in measuring fair value. The most advantageous market is the market that maximises the amount that would be received to sell the asset, or that minimises the amount that would be paid to transfer the liability, after taking into account transaction and transport costs. Two markets, namely the Gauteng Alternative Energy Market and the Green Solar Shop, were identified where second hand solar energy units are sold at different prices. The most advantageous market is the Green Solar Shop as it results in a net price (after subtracting both transport and transaction costs) of R112 500 which is higher than the Gauteng Alternative Energy Market`s net price of R112 200.