Highest and best use
An entity acquires land in a business combination. The land is currently developed for industrial use as a site for a factory. The current use of land is presumed to be its highest and best use unless market or other factors suggest evidence for a different use.
Scenario (1): in the particular jurisdiction, it can be difficult to obtain consents to change use from industrial to residential use for the land and there is no evidence that the area is becoming desirable for residential development. The fair value is based on the current industrial use of the land
Scenario (2): Nearby sites have recently been developed for residential use as sites for high-rise apartment buildings. On the basis of that development and recent zoning and other changes that facilitated the residential development, the entity determines that the land currently used as a site for a factory could also be developed as a site for residential use) because market participants would take into account the potential to develop the site for residential use when pricing the land.