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James, audit partner with accounting firm Ernest &Young, says one of the main problems with fair value is that too much judgment is involved in its use

Accounting

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James, audit partner with accounting firm Ernest &Young, says one of the main problems with fair value is that too much judgment is involved in its use. 'Lots of judgment goes into determining fair value. The volatile global economy causes fair value to continually move. So it's very confusing to report against,' says James.
The way fair value requires unrealized gains and losses to be treated does not necessarily reflect what an asset means to a business. 'Financial institutions use fair value to value financial instruments as part of everyday business. But when it comes to valuing property, plant and equipment, you get swings and roundabouts and changing valuations. On top of this there are inconsistencies in the way individual businesses use fair value to account for plant and equipment, which is a problem, 'she adds. James explains that Ernest & Young directs financial account prepares to use the market price of an asset, taking into account the highest and best use of an asset to determine fair value. But this poses problems for not-for-profit groups "If you take the example of an aged care home, if you knocked it down to build a block of flats, which might be the highest and best use, you are going to get an inflated figure because no-one's going to knock it down because it's being used for altruistic purposes. So you might carry a value of N$10 million for the asset in the accounts, but this value isn't realistic to the entity or the users of the financial statements because there is no intention by the organization to realize the value of the financial statements because there is no intention by the organization to realize the value of the asset determined under highest and best use scenario. 'The problem is this inflation of asset valuations, especially for not-for-profits, makes valuations more complex and requires accountants to use too much judgment when applying fair value.

Required
Discuss the highest and best principle and the relevance of the information provided by its application to the aged care home.