Heritage Assets: Can Accounting do Better?
Author:
Pat Barker
Introduction
Accountants are accustomed to dealing with assets of commercial organisations and of public entity bodies such as charities and government bodies. We define assets as rights or other access to future economic benefits controlled by an entity as a result of past transactions or events. The future economic benefit is usually cash flow in some form. However, there is an issue in dealing with heritage assets. The ASB proposes a definition for us to consider of heritage assets as:
“assets with historic, artistic, scientific, technological, geophysical or environmental qualities that are held and maintained principally for their contribution to knowledge and culture when this purpose is central to the objectives of the reporting entity”
Such assets might include assets held by the National Museum of Ireland or supervised by An Taisce. When one visualises heritage assets, one can think of New Grange, The Book of Kells, The Francis Bacon studio, the Cliffs of Moher, The Bog of Allen, the Casement diaries, the Ceide Fields, Malahide Castle, the Jack Yeats paintings, the stuffed animal collection and so on. However, the above definition tries to confine the definition, for accounting purposes, to only those heritage assets that are held and maintained by an entity whose sole or main purpose is the preservation and display of the assets. The definition excludes, for example, the holding of a priceless painting by a commercial organisation in its board room. It also excludes the occupation for business purposes of a listed building.
There is a problem in accounting for assets that are virtually priceless, held by museums, charities and public bodies. A practice has developed of putting a fair value on these assets where they were acquired in 2001 and later years, after the introduction of FRS 15. Since most heritage assets do not move through the market place with any level of frequency, there is a problem in valuing assets acquired pre-2001 and in subsequently assessing the fair value of post-2001 heritage assets. It would be enormously problematic to put valuations on assets that have been owned for hundreds and hundreds of years by the same owner for the benefit of the cultural edification of the nation.
Proposal
It is proposed that heritage assets should be capitalised where it is practicable to obtain valuations which, when supplemented with appropriate disclosures, provide useful and relevant information sufficient to assist in an assessment of the value of heritage assets held by an entity. Where it is clear that valuation is not practicable, there should be sufficient disclosure – including reasons why valuation is not practicable – and there should be a consistently applied policy of reporting transactions in a way that does not distort the reported financial performance.
Are we wading into alien waters?
In considering this ruling for accounting for heritage assets, some fundamental questions come to mind. For example, is this an area in which we have expertise at all?
Is the definition above robust?
A heritage asset is a difficult element to define. However, heritage assets are different from other assets because of the value they derive from being incapable of reproduction and replacement and highly unlikely ever to be traded. For example an asset like a Caravaggio in the Municipal Gallery, is probably not a heritage asset since, although it cannot be reproduced, it could be replaced. It would be possible to ascertain a willing buyer’s price and because a gallery could conceivably sell it to buy new exhibits of equal value to its purposes and of equal delight to the populace. However, it would be impossible to reproduce or replace the Book of Kells. There would be no relevant market price for an asset like the Book of Kells and it is highly unlikely ever to be sold. The Book of Kells is, therefore, a heritage asset. It may also be useful to consider this question through the lens of the ‘organisation’ rather than through a definition of the asset. If an entity is continually trading in particular assets, then fair financial value is appropriate. However, if it is not continually trading, but merely acting as a guardian, the cost should be written off with relevant disclosure from experts as suggested below.
Should the asset be embedded in the financial statements of the guardian?
In preparing financial statements for organisations such as for-profit entities or not-for-profit entities set up for the alleviation of poverty, illness etc or for government organisations, the objectives of the organisation can be identified, users can be identified and their financial information needs may be determined and accounting standard setters can attempt to address those needs. In recent times this flow of logic from:
objective ? user ? needs ? appropriate valuation technique
has led us inexorably towards the use of fair financial values. However, there is a fundamental break in this chain of logic when trying to apply it to heritage assets. It is more difficult to be clear about the objectives of the entity in which the heritage asset is situated. With for-profit organisations, the entity chronologically comes first and then it acquires assets in order to achieve its objectives. In the case of heritage assets, the asset comes first and the entity is usually created in order to protect and perpetuate the asset in its current form. One is, thus, not part of the other. There is therefore a fundamental difficulty in trying to integrate the valuation of the asset into the financial statements of the entity which has been created with an objective of the perpetuation of the asset. The entity should be held accountable for its success or failure in this endeavour and in its use of assets and liabilities to achieve this end. The actual heritage asset itself is separate and should not be integrated into the statement of stewardship of the guardian. Any ‘increase’ in the value of the heritage asset does not belong to the guardian. Indeed, financial value of the heritage asset is probably meaningless.
Has the user been correctly identified?
The second break in the chain of logic is in identifying the user. The ASB identifies the users of the financial statements as funders and ‘friends’. This, of course, provides an elegant linkage with the Statement of Principles and, indeed, with the proposed Statement of Principles for public entity bodies.
IF one can assume that these are the users, it is probably true to say that these users are interested in seeing how their money was used by the guardian in protecting, enhancing and displaying the heritage asset. However they are probably not interested in the financial value of the heritage asset or in seeing if that financial value has gone up or down in an accounting reference period. These decision makers will not base their decisions about whether to continue funding or not on whether the asset has gone up in financial value during the year. They are unlikely to look at an increase in value and say either ‘This lot don’t need any more of my money’ or ‘They have done a good job in increasing its value, so I will give more’. Therefore, if the funders and friends are the users, it seems unlikely that a fair financial value on the heritage asset will satisfy their information needs.
IF, on the other hand, the actual ‘users’ are ‘mankind’, since it is for the current and future inhabitants of the earth that this asset is being protected, then their information needs are even less likely to be met by giving them the fair financial value of the heritage asset. Indeed, many of them are likely to be unaware of its existence, unimpressed by its importance or indeed, even irritated by its delineation as a protected asset when they want to tear it down and build a mall or take it off the wall and replace it with a flat screen television. It is, in fact, a fairly small section of ‘mankind’ that decides that this heritage asset has value. It is probably true to say that in many cases the general agreement that this asset must be preserved for current and future generations of mankind is limited to a middle class intelligentsia. However, IF it can be assumed that all mankind are the users of the information concerning the heritage asset, then probably a range of alternative use valuations would be more appropriate than one single value. This might include that value which derives from its current definition as having heritage, protected value only and not resale value (which is probably nil if expressed in financial terms) i.e. its ‘value in display’ rather than its ‘value in use’. It might also, conceivably include a development or resale value if there were any possibility that its use were to be changed and it were to give rise to a future flow of significant income.
Is financial value the most appropriate way of reporting heritage assets?
The ASB assumes that a fair financial value is the appropriate method for placing a value on a heritage asset. For accountants, something has value if it gives rise to a future flow of financial resources over and above that flow necessary to keep it in productive order. This is fairly easy to conceptualise for assets of commercial enterprises, both private and public, and even for assets utilised by not for profit organisations. However, heritage assets derive their value from the capacity of a group of people (often quite an elite group) to persuade lawmakers that the assets have an importance and value that must be maintained for future generations. This may be demonstrable, such as the preservation of certain living species in order to preserve food stocks or water quality or hiking terrain for generations to come. It may not be quite so clear to many, such as in the cases of the destruction of Wood Quay or the Bamiyan Great Buddas. Thus, there is not always agreement as to the cultural or ephemeral value. How much less could there be agreement as to the translation of that value into financial terms. Indeed how much value could one place on such a valuation? This feels like one of those situations where we accountants must recognise that something can have value which is more appropriately expressed in a non-financial way; and that accounting for stewardship is not always accounting for financial stewardship.
It is also worth noting that there may be economic consequences associated with placing market values on priceless assets. For example, the interest of art thieves may grow proportionately with the increase in value of the asset. The heritage asset may become uninsurable as the accountants increase the fair value of heritage assets by reference to some notional or expert market valuation.
Is there another way?
It may be that we need to think more laterally in our accountability responsibility in relation to heritage assets. Why are we fixated with translating value into financial terms or into an OFR disclosure?
Assets that have any likelihood of being traded are probably not heritage assets and should be valued regularly as with other assets. However, heritage assets – i.e. those which are held for future generations for cultural, historic, aesthetic or ecological reasons, and are highly unlikely to be traded at any time in the future – should not be valued. If there is a cost associated with them, the costs should be expensed as incurred and non financial information should be given to account for the stewardship of the guardian entity. In relation to the kind of non-financial information, this is an example of the opportunities for cross-disciplinary deliberation to determine the most appropriate accountability in non-traditional elements of annual reports Would it not be more appropriate for the guardian to account for its endeavours by publishing photographs, diagrams, engineering reports, soil analyses, art historian reports and so on? These reports could be on interactive CDs or could be updated on a website regularly. A virtual tour of the asset would be a better mechanism for accountability with the possibility of interrogation of the guardians on line than trying to force a number value on them. This kind of analysis, reporting and accountability is mostly in the sphere of experts other than accountants.
On balance, the ASB’s suggestions are pragmatic, but do not really come to grips with the appropriateness of our traditional response to accountability in this situation. As always, the Institute’s Accounting Committee welcomes the views of interested members and any observations or suggestions can be sent to Pat Barker at Dublin City University, Dublin 9 or at pat.barker@dcu.ie.