Branson Restaurants Limited is currently reviewing its financial operations for the past year. Specifically, it is looking to determine what is happening with one of its restaurants (which it owns – including the land). The following summary gives data about the restaurant in question.
Restaurant Orro:
• In business for five years.
• Serves Italian cuisine.
• Initially catered to a young set of patrons but over time this has changed such that the restaurant is attracting mainly tourists.
• Initially very successful and generated significant cash flows.
• In the past year, business has slowed down (cash flows have declined as a result).
• Feedback about the quality of the service has not been as positive lately although there is no consistent thing that the company can readily put its finger on in the comments.
• Other similar restaurants in the area are doing quite well although they do not serve Italian cuisine.
• The surrounding area is doing quite well economically and real estate prices have been rising.
• Many condominiums are being built around the restaurant (there have been numerous condominium developers purchasing land in the past year).
• Rezoning is not an issue (any purchaser will be able to get the land rezoned for condo development).
Branson has decided to sell the restaurant in question and is looking to determine a fair value. The company follows IFRS. It would likely remeasure the investment in the restaurant to fair value less costs to sell in the year-end (assuming the value is less than carrying value). This is acceptable treatment under IFRS as long as the asset is being held to sell (which it is). Branson is owned by several large investors who are deciding whether to dispose of their holdings in the company.
Instructions
You are the external auditor of the company. Discuss how fair value would be measured for purposes of revaluing the restaurant.
