Distinguishing between financial assets, non-financial assets and liabilities

BC63 The exposure draft stated that the concepts of highest and best use and valuation premise would not apply to financial assets or to liabilities.

The IASB reached that conclusion for the following reasons:

(a) Financial assets do not have alternative uses because a financial asset has specific contractual terms and can have a different use only if the characteristics of the financial asset (ie the contractual terms) are changed. However, a change in characteristics causes that particular asset to become a different asset. The objective of a fair value measurement is to measure the asset that exists at the measurement date.

(b) Even though an entity may be able to change the cash flows associated with a liability by relieving itself of the obligation in different ways, the different ways of doing so are not alternative uses. Moreover, although an entity might have entity‑specific advantages or disadvantages that enable it to fulfil a liability more or less efficiently than other market participants, those entity‑specific factors do not affect fair value.

(c) Those concepts were originally developed within the valuation profession to value non‑financial assets, such as land.

BC64 Before the amendments to Topic 820, US GAAP specified that the concepts of highest and best use and valuation premise applied when measuring the fair value of assets, but it did not distinguish between financial assets and non‑financial assets.