Heritage Assets - Can Accounting Do Better?
Accounting Standards Board, Discussion Paper
Comments from ACCA
May 2006
Executive Summary
The Association of Chartered Certified Accountants (ACCA) is pleased to have this opportunity to comment on the discussion paper issued by the Accounting Standards Board (ASB), Heritage Assets: can accounting do better? These comments have been prepared in consultation with members of ACCA's Public Sector Network Panel, Financial Reporting Committee and our Charities Panel, groups of experienced accountants working for public benefit entities.
ACCA considers that the usual model should be that heritage assets are not capitalised in an entity’s balance sheet. This is because we do not believe that information on the current value of heritage assets has significant value for the users of financial statements of public benefit entities. We believe that the definition of heritage assets proposed by the ASB should be amended so that their accounting treatment is not dependant on the objectives of the reporting entity.
Initial Comments
Introduction
ACCA believes that the core problem is that there is a class of assets, held and managed by entities in the public and charities sectors, which do not have readily obtainable market values and which will not be a source of future net income. In addition, we recognise that the current approach is inconsistent as museums and galleries, for example, are currently only required to include the values of recently acquired items in their balance sheets.
We believe, however, in contrast to the approach proposed by ASB, that the default position should be that such assets are expensed in the year of acquisition and so are not capitalised in the entity’s balance sheet. The only exceptions should be if it is likely that the asset is to be subject to disposal and if the entity believes that current values would convey useful information and reliable values might be readily available .
We agree with the ASB’s proposal that if such heritage assets are used for operational reasons (for example, as a building) then they should be capitalised at depreciated replacement cost, although the option of the use of historic cost should be retained, at least for charities.
Definition
The ASB proposal is that heritage assets should be defined very closely as “assets with historic, artistic, scientific, technological, geophysical or environmental qualities that are held and maintained principally for their contribution to knowledge and culture and this purpose is central to the objectives of the entity holding them”.
ACCA believes that this definition is problematic particularly for entities such as educational institutions and churches. Some of these entities have significant holding of what are generally considered to be heritage assets, however, such assets would be excluded by the ASB definition, as the holding and maintenance of such assets is not necessarily central to the objectives of such entities.
We believe that heritage assets should be accounted for in a comparable manner, irrespective of the nature of the objectives of the reporting entity. As a result we believe that the phrase “and this purpose is central to the objectives of the entity holding them” should be deleted from the proposed definition of heritage assets.
Useful and Relevant Information
The ASB discussion paper suggests that regular valuations would provide “useful and relevant information” (page 9) on heritage assets which are held by public benefit entities. The paper does not however, explain the uses for which such information may be required. There are a range of possible uses for such information, including:
- for insurance purposes
- to indicate the opportunity cost of capital
- to indicate that the entity is a going concern
- security for a loan.
In each case ACCA believes that the information would have limited value for users of general purpose financial statements. Thus many public sector organisations self insure and, in addition, as many heritage assets are irreplaceable, insurance has limited value for such assets. As there is most often no prospect of converting heritage assets into cash they do not have an opportunity cost. Heritage assets generally cannot be disposed of to repay a loan and so it is misleading to include an estimate of their value in the balance sheet and they cannot be used as security for a loan.
We do not consider that the inclusion of the value of heritage assets in the balance sheet of a public benefit entity will be of significant use in assessing the management’s stewardship of the heritage assets. The stewardship would be mainly measured in terms of their standard of preservation and this would be covered more by the disclosures in Section 5.
The ASB discussion paper argues that the current cost valuation of heritage assets could be a proxy for the quality of their preservation. However, the inclusion of council houses in the balance sheets of local authorities did not avoid the problem of their lack of adequate maintenance in the 1990s. The resulting loss in value was more than masked by the overall increase in their value due to general house price inflation. The total figure of back-log maintenance of an estimated £19 billion was not available from the financial statements of local authorities, but had to be estimated separately.
Decision to adopt non-capitalisation approach
The ASB discussion paper proposes the option of non-capitalisation, relieving entities of the requirement to value their heritage assets, but only in the limited circumstances where the entity “can demonstrate that it cannot obtain reliable values at reasonable cost for the majority, by value, of its heritage assets” (page 10). As a result, it is expected that all national museums and galleries, at least, will make use of this option. We believe that the in the vast majority of cases valuation of the bulk of heritage assets will not be practical. The example of the motor museum given in the Discussion Paper would be very much an exceptional case.
There are concerns among charities in particular that the inclusion of heritage assets at current values could:
- portray an inflated picture of the resources available to the charity and thereby discourage donations
- raise security concerns over their collections by encouraging theft of specific items with apparently high realisable values.
ACCA believes that it would be more appropriate for public benefit entities to adopt the non-capitalisation approach to heritage assets. This would ensure that such assets were treated in a comparable manner across the sector and that such entities would not suffer the potential burden of having to value their holdings of heritage assets on a regular basis.
Public trust assets
ACCA believes that, in the public and not-for-profit sectors at least, there is a class of assets which are non-market goods which the Australian academic Allan Barton has argued are public goods held in trust for the nation which “should be accounted for and reported on separately from normal commercial assets”. This, he argues, is because it is “legally wrong to mix together normal operating assets and trust assets because they are not legally accessible by creditors. The mixed information is grossly misleading and lacks representational faithfulness of the financial position of the entity”.
We agree with this argument and so consider that public benefit entities should be allowed to designate appropriate assets as trust or public goods and so exclude their value from their balance sheets. This would be efficient as it would save the considerable expense currently incurred in valuing many such assets every five years when such an estimate has little or no practical value.
Specific Questions for Respondents Raised in the Discussion Paper
In this section we provide brief comments on each of the ASB’s proposals on which it asked for specific comment.
a. Do you agree with the definition of heritage assets proposed for financial reporting purposes? If not, what definition would you propose? (paragraph 1.16)
ACCA supports the definition proposed by the ASB with the exclusion of the final phrase (“and this purpose is central to the objectives of the entity holding it”). See above. We also consider that there is a wider class of trust or public goods which does not have an objective easily obtainable open market value. These assets cannot usually be disposed of for practical or operational reasons and so there is no opportunity cost for holding them which should be considered. Such items may include, for example, infrastructural assets (roads and other public infrastructure) and community assets (parks and other recreational assets). We believe that such assets should be accounted for in a comparable manner to heritage assets.
b. The Discussion Paper proposes that where heritage assets are reported in the balance sheet this should be at a current value rather than at historical cost as this provides more useful and relevant information. Do you agree? If not, please give reasons. (paragraph 3.16)
ACCA accepts that the current hybrid approach of capitalising all heritage assets acquired since 2001 is not sustainable. We consider, however, that heritage assets and other assets with similar attributes (trust or public goods) should not generally be capitalised in the balance sheet of the reporting entity. We do not consider that the current value of such assets is useful or relevant as such figures may not be accurate and for political or practical reasons such assets do not have an opportunity cost.
c. The objective of the proposals is to improve the quality of financial reporting of heritage assets. Do you agree that, to meet this objective, it is impractical to require all entities to adopt a capitalisation approach for the financial reporting of heritage assets? (paragraph 3.18)
ACCA agrees with this proposal and would go further to suggest that this approach, non-capitalisation, should be adopted as the usual model. Those entities which believe that estimates of the current value of their heritage assets provide useful information to the users of their financial statements and that the cost of providing such information are reasonable, should however, be allowed to provide such information.
d. Do you consider the proposals in paragraphs 4.8 and 4.9 will encourage the adoption of a capitalisation approach in appropriate cases? If not, what modifications to existing reporting requirements would you propose?
ACCA does not agree with the proposals in paragraphs 4.8 and 4.9. We consider that they may encourage the capitalisation approach when this would not be appropriate and that the information provided in the balance sheet of the entity concerned would not be useful or relevant and may not be sufficiently objective to be comparable with other information provided by other public benefit entities. The Discussion Paper underestimates the problems with the capitalisation approach. The question of impairment of these assets would not be avoided by the revaluation model proposed and it is widely accepted as difficult to apply to non-income generating assets.
e. Where it is clear that practical considerations prevent an entity adopting a policy of recognising heritage assets a non-capitalisation approach should be adopted. Do you agree that, in reaching this decision, an entity should have regard to whether it can obtain—at a reasonable cost—reliable valuations on an ongoing basis for the majority, by value, of heritage assets held and that this should be explained clearly in the notes to the accounts? If you do not agree, how should an entity support its decision to adopt a non-capitalisation approach? (paragraphs 4.12-13)
ACCA believes that the non-capitalisation approach should be adopted as the usual model. Thus we consider that all assets which are considered to be heritage (and trust or public goods) should not be capitalised within the balance sheet of the relevant public benefit entity. Those entities which believe that estimates of the current value of their heritage assets provide useful information to the users of their financial statements and that the cost of providing such information are reasonable (compared to the value of the information provided), should however, be allowed to provide such information.
f. Under a non-capitalisation approach, it is proposed that acquisitions and disposals of heritage assets should be presented outside of the income and expenditure account in a statement of change in recognised net assets. Do you support this proposal? If not, how should these transactions be reported? (paragraphs 4.15-4.16)
ACCA supports this position and considers that the proposed statement of change in recognised net assets will provide useful information about the acquisition and disposal of heritage assets during the current reporting period.
g. Do you consider that it is appropriate to report other transactions related specifically to heritage assets—such as donations, grants for their acquisition and restoration costs—in a statement of change in recognised net assets? If not, how should these transactions be reported? (paragraph 4.18 and Appendix 3)
ACCA supports this proposal. ASB will be aware, for charities at least, of the need for reporting of restricted funds which would deal with most of the presentation issues raised here in this context.
There is a significant problem in practice in distinguishing different types of subsequent expenditure which for a heritage asset will include expenditure on:
a) Restoration
b) Preservation
c) Maintenance
Expenditure under any of these headings could significantly extend the life of the asset, but whereas restoration works could be regarded as capital expenditure, maintenance would not. For example, the cost of clearing gutters on a stately home will significantly reduce the need for future repair. However, this is generally regarded as a maintenance cost. It is also difficult at times to draw a clear distinction between what is restoration and what is maintenance. The exterior repainting of a stately home is one situation where the distinction can be blurred. We suggest that restoration costs should be treated in the same way as an acquisition only when it is restoration associated with the acquisition or after an event such as a fire.
h. Do you agree with the proposed disclosure requirements for heritage assets? Are there other disclosures that are practicable and would provide useful information? (paragraphs 5.6-5.17)
ACCA supports these proposals as providing useful information at a reasonable cost.
i. It is proposed that, for financial reporting purposes, historic assets used by the entity itself and corporate art are not heritage assets. Is it appropriate at this stage to clarify the accounting treatment of these assets? If so, do you agree with the proposals in Sections 6 and 7 of the Discussion Paper?
ACCA supports the proposal for the separate treatment of historic/cultural assets which are either used as operational assets or as corporate art. We consider, however, that for operational assets for charities depreciated historical cost should remain as an alternative valuation base.