Accounting for Heritage Assets
Comments from
April 2007
The Association of Chartered Certified Accountants (ACCA) is pleased to have this opportunity to comment on the exposure draft FRED40 ‘Accounting for heritage assets'. FRED40 was considered by ACCA's Financial Reporting Committee and I am writing to give you their views.
Overall comments
We responded to the earlier discussion paper (DP) on this subject on which FRED40 is closely based and our main comments on that DP still stand.
We are unclear how FRED40 fits in with the ASB's convergence strategy for UK standards and IFRS. No exemption for heritage assets exists in IAS16 and so this would appear to run counter to ASB's previously stated policy and create a new difference between UK standards and IFRS. We note, however, that t he principal entities affected would be charities or government entities, including the national museums. The text might be better incorporated into the Charities SORP and into the Government's Financial Reporting Manual, rather than issued as a separate UK standard. It does though highlight again the need for ASB's convergence policy to be clarified.
ACCA responses to specific questions raised by ASB
Q1. Do you agree that rather than the current arrangements, under which entities generally capitalise only recently acquired heritage assets at cost, the requirement should be that an entity should, where practicable, adopt a valuation approach for its heritage assets?
We agree that the current accounting requirements for heritage assets are unsatisfactory. We do not agree with the expected treatment in FRED40 for heritage assets to include them at current value and we would prefer to see the non-capitalisation approach as the expected treatment. We expect, however, that the majority of the entities holding heritage assets will consider it impracticable to value their assets and therefore use the non-capitalisation treatment.
This [draft] FRS requires a valuation approach where practicable but, where this is not practicable, prescribes a non-recognition approach. Do you agree this proposal will lead to an improvement in the quality of the financial reporting of heritage assets?
Yes. As noted above we consider the current accounting treatment unsatisfactory and that the majority of entities will use this non-recognition approach. The disclosure requirements concerning the accounting policy adopted, the immediate write-off of the expenditure and of the five year record should provide users with a clear position.
Q2. This [draft] FRS proposes the assessment of practicability should be applied to individual collections rather than for the entity's total holding of heritage assets (see paragraphs 22 and 23 of Appendix 1). Do you agree?
We have some concerns here that having a mixture of treatments within one set of accounts will make them harder to understand. We find this true of Example 2 which is a museum with a mixture of capitalised and non-capitalised assets. A ‘cherry picking' approach to valuations might be possible under these proposals, as we note the definition of a collection could comprise a single item.
Q3. If the approach is to be determined at the level of an individual collection, it is necessary to define the term “collection”. Do you consider the definition proposed in paragraph 4 of the [draft] FRS is appropriate? If not, what alternative would you propose and why?
Yes.
Q4. This [draft] FRS proposes the approach should be determined for individual collections following an assessment of whether it is practicable to obtain valuations that provide useful and relevant information. This assessment, will include consideration of the relevance of valuations as well as their reliability and the costs and benefits of obtaining them.
Do you support this approach or would you prefer that the approach emphasises that valuation is required only where the valuation is reliable? If you believe that a reliability approach, or some other approach, should be adopted, what guidance would you see as being necessary to assess the reliability of valuations?
We support the inclusion in the basis of the practicality considerations of the question of relevance of the valuations. If making disposals from the collection are feasible and reliable current values are obtainable without excessive cost and trouble, then current values may indeed be relevant. In other cases (and we think these will be the large majority) they are likely to be both irrelevant and unreliable and so would not be recognised. We do not find that Paragraph 21 of Appendix 1 has provided an adequate explanation of the relevance of the current values for the majority of heritage assets – we are not clear what are these other elements of performance which should be viewed in the context of a current value for the collection.
Q5. Do you consider that the proposals will cause auditors significant difficulties when assessing an entity's approach, particularly in terms of applying the assessment of practicability at the level of an individual collection? Where a valuation approach is adopted, do you think auditors will face further difficulties in evaluating the valuations being reported?
Auditors' problems seem likely to be where the directors/trustees have not recognised heritage assets when they could have done. This sounds a rather rare circumstance. As already noted valuations will probably be deemed impracticable in most cases. Where valuations have been done we expect auditors to be able to report on them.
Q6. The[draft] FRS requires that where an entity adopts a non-recognition approach for some or all of its collections, acquisitions and disposals of heritage assets should not be reported in the profit and loss account or equivalent statement, or in any manner that implies they are gains and losses (see paragraphs 29 to 31 of Appendix 1). Do you agree ?
No. The proposed treatment does not comply with the definitions of ownership interest and of gains and losses in the Statement of Principles. It is difficult for example to see what are the disposal proceeds from heritage assets if they are not gains. We consider that the write-off of expenditure on the acquisition of unrecognised heritage assets should be separately disclosed as a component part of a statement of gains and losses. The provision of some further separate statement of changes in recognised net assets (as in the example on page 32) is a complication that most users will not understand or appreciate. It would also be inconsistent with the treatment of other ‘assets' whose recognition or measurement is unreliable (such as some intangibles) and which cannot be recognised and so must be expensed immediately.
Q7. The proposals require enhanced disclosures of heritage assets (see paragraphs 18 to 23 and paragraph 25 of the [draft] FRS). Do you consider the nature and extent of the required disclosures are appropriate? Do you consider any of the disclosure requirements are unduly onerous?
We support the proposed disclosure requirements as proper for the discharge of the accountability for the heritage collections and to explain the financial statements.
Q8. The definition of a heritage asset is set out in paragraph 4 of the [draft] FRS and the scope of the proposed new standard is set out in paragraph 5. The rationale for these is discussed in paragraphs 7 to 12 of Appendix 1. Do you agree with the proposed definition and scope?
Yes. We support the changes that ASB has made in this regard to the initial proposals in the DP.
Q9. As explained in paragraphs 8 to 12 of the Preface, the Board believes the costs of implementing the proposals should not be disproportionate. Do you agree? It would be particularly helpful if any significant costs that would arise on implementation of the proposals (including any not identified above) could be identified and quantified
Yes. We expect that the majority of heritage assets will use the non-recognition treatment and therefore agree that the likely costs of these proposals should not be disproportionate.