FRED 42, Heritage Assets
Comments from ACCA
October 2008
ACCA is pleased to have this opportunity to comment on the issues raised in the above exposure draft (ED). This was considered by ACCA's Public Sector Technical Committee and its Charities Panel and I am writing to give you their views.
General observations
We commented on FRED40 when that was published and on the preceding discussion paper on the subject. Though we had a number of criticisms of FRED40, we prefer its approach of valuation of heritage assets when practicable, relevant and reliable, and of non-capitalisation when not. By reverting to mandatory capitalisation in FRED42 the ASB have
- Left the inconsistent accounting position that was highlighted in FRED40 of entities capitalising only recent and future acquisitions but not showing any value for assets acquired before FRS15 came into force.
- Resurrected the question of whether these are assets and whether treating them as such provides useful information
FRED42 should make clear where it fits in the context of the Board's stated objective of convergence in the near future with international standards. If and when ASB replace FRS15 with an international version this is unlikely to contain any reference to heritage assets. Will any standard developed from FRED42 remain an extra special UK addition or will its guidance be included in the charities or local authority SORP? Perhaps the convergence with international standards will require a separate regime to develop in areas which relate only to not-for-profit entities such as heritage assets.
ACCA's responses to specific questions raised in the ED
Q1 Do you agree with the proposed disclosures and are there any additional disclosures that you consider would provide useful information?
We agree that FRED42 will provide for enhanced disclosure which will help to improve financial reporting. We are not convinced that the 5 year record is now required if the accounting reverts to an FRS15 basis of capitalisation of expenditure on heritage assets. The 5 year record was important where there would have been non-capitalisation in order to put the write-off of expenditure in the current year into the context of the recent past.
Q2 Do you agree that it is difficult to improve upon the current FRS15 based accounting and that heritage assets should be reported in the balance sheet where information on cost or valuation is available?
No. As noted in our general comments above we would prefer the non-capitalisation approach in FRED40 to be that generally applied.
Above all we still find there is no convincing identification (let alone quantification) of the benefits of this accounting treatment. Paragraph 8 of the section on the development of the standard contends that elements of financial performance are assessed in the context of the value of the heritage assets. It is not clear to us what those elements are and they are left unspecified in the ED.
On a similar theme we agreed with FRED40 when it referred to the relevance of the information in deciding whether to adopt the non-capitalisation approach. This seems to have been dropped in FRED42 and the rationale for the approach has now become that which capitalises as many assets as possible.
We are concerned that encouraging internal valuations risks including some unreliable financial information in accounts, and will also undermine their comparability.
FRED42 states (paragraph 19 of Appendix 1) that by reverting to the FRS15 model all new acquisitions will be included as assets because valuations of donations will be available. This seems unlikely to us and an assumption which might be difficult to support.
Q3 Do you agree that impairment reviews should be required only where there is evidence that the value of an asset may have declined due to physical deterioration or damage?
Yes. These assets most often are not generating significant cash flows and therefore any impairment on those grounds would be irrelevant. Any assessment of the deterioration in the cultural historical or artistic value for example would be very difficult or impossible to carry out.
Q4 The Board believes that the costs of implementing the proposals should not be disproportionate. Do you agree?
There will be a restricted number of entities affected by these proposals, and so the costs will bear disproportionately on some sectors. Certainly that will include large public sector entities (museums, heritage agencies, local authorities) for which this may pose little problem. On the other hand some charities and perhaps landowning entities might be affected as well and these could include some quite small entities with limited accounting resources.
The principal new compulsory ongoing cost will be that of providing extra disclosures. We have noted above that we would reduce these by not making a 5 year record mandatory. There is also (evident from the examples) considerable new narrative disclosure of the assets expected.
Beyond disclosures, any compulsion or encouragement to revalue heritage assets for example would be expensive and disproportionate.
Any impact assessment should also consider benefits, and as noted above we have found no evidence of the existence of any benefits.
Other comments
Paragraph 14 is potentially confusing in asking for the separate disclosures of movements in assets recognised in the balance sheet from those assets not. Presumably this could only apply to 14(c) (disposal proceeds) as for assets not in the balance sheet there would by definition be no cost, valuation or impairment for them.
We find the final paragraph on page 23 illustrates the problem of the approach and should be reworded. Heritage assets are held for their qualities artistic, historical or others. The ephemera in the example might be highly ‘valued' as such by the museum. The market value for such items is completely different and might indeed be negligible.