Case 11-7:
Food for Thought

The Audit Committee of the Board of Directors of Allfoods Corporation:
Allfoods Corp. acquired 80% of the outstanding common stock of Baked Beans Corp in a business combination on February 1, 2009. Allfoods paid $40 million in cash and issued two million shares of Allfoods common stock to the selling shareholders of Baked Beans. Allfoods stock options will replace all outstanding stock options granted to Baked Beans employees as required by the merger agreement. This transaction has been accounted for in accordance with ASC 805, Business Combinations.
We have determined that consideration transferred amounts to $135 million, land and buildings should be recorded using the “in-use” valuation …show more content…

Highest and best use is determined based on the use of the asset by market participants, even if the intended use of the asset by the reporting entity is different.” This means that recognized fair value should be based on the highest amount of value that a market participant could derive from the asset.
In this case, Allfoods Corporation acquired a manufacturing facility owned by Baked Beans. This facility consisted of land, two buildings and machinery. In determining the fair value of the assets acquired and liabilities assumed, the highest and best possible use from a market participant’s standpoint must be evaluated. A market participant could either (1) sale the manufacturing facility as acquired for $36 million, (2) turn the manufacturing facility into a residential subdivision and sell it for a net profit of $32 million or (3) sale the land, buildings and machinery individually for a total of $28 million. Based off these estimates, a market participant would derive the greatest value by selling the manufacturing facility as acquired for $36 million.
Valuation Premise
According to ASC 820-10-35-10 the highest and best use of an asset is the basis for the valuation premise used to measure the fair value of an