Question: How do you value a church or a museum collection?
New Zealand’s new financial reporting requirements have added clarity to the treatment of heritage assets for financial reporting purposes. Any general purpose financial statements required by law now need to appropriately record such assets, including recording the value of any assets that can have their value reliably measured.
New Zealand’s new financial reporting framework has placed the spotlight on heritage assets as this is one area in which New Zealand’s standard setters have diverged from the requirements of international standards. While international public sector accounting standards do not mandate the recognition and measurement of heritage assets in financial statements, our new suite of Public Benefit Entity accounting standards require this where such assets are able to be reliably measured. It is therefore important that entities with heritage assets, not only have a complete record of what assets they have, but also have processes in place to value and recognise these in their financial statements.
What are Heritage Assets?
While there is no set definition in the accounting standards of what a heritage asset is, such assets generally have cultural, environmental or historical significance. Examples include historical buildings and monuments, conservation areas and artefacts. They are not limited to assets of a particular type or age. Because of this, there may be some judgement required in what assets fall within the definition of heritage assets and what are recorded as property, plant and equipment. While the characteristics of these assets will vary, they will generally include some or all of the following:
- Their value in cultural, educational and historical terms is not likely to be fully reflected in a financial value based purely on a market price;
- Legal and/or statutory obligations may restrict the ability to dispose of the asset;
- They are often irreplaceable and their value may increase over time, even if their physical condition deteriorates; and
- It may be difficult to estimate their useful lives, which in some cases could be several hundred years.
These assets are rarely held for their ability to generate cash inflows. In fact, in many instances there will be a real cost to the entity of holding the assets. Some would argue this makes them a liability! The primary purpose for retaining such assets is non-financial factors that are often intangible. Say for example an entity owned a church that had been consistently used for 150 years. Such an asset is likely to hold significant cultural significance, however due to its age, possible restrictions on the ability of the church to sell it, and its income generating potential as a church, it may have little or no actual value to the market.
Why recognise Heritage Assets in our financial statements?
For entities required to prepare general purpose financial statements, the disclosure of these assets is required. The policy rationale behind this is that heritage assets usually form an important part of the assets under the organisation’s control. Hence to omit them completely from the organisation’s financial statements renders these an incomplete picture of the organisation. There are other benefits of appropriately recognising collections of heritage assets in your financial statements.
Readers of your financial statements are likely to be interested in the scope and scale of the assets controlled by your organisation, whether they be historic buildings, cultural artefact collections or similar. Using the financial statements to clearly and fully communicate this to your stakeholders can result in improved stakeholder support due to enhanced visibility of the significance of the assets under your control.
Often we find the focus on financial reporting requirements also engenders improved focus on record keeping of collection detail. This can be useful for other purposes, such as ensuring that appropriate insurance cover is in place and potentially uncover assets that are of value.
We are also seeing a move towards entities having greater focus on valuing of their assets. Appropriate reporting of your heritage assets will therefore ensure you are in line with the sector trend towards inclusion of such assets. We have seen some instances where entities have applied for and received grants for the cataloguing and recording of heritage assets, or assisting with their preservation and/or restoration. Doing so is a useful way to offset the potential costs of recording and caring for your collection of heritage assets.
How do we account for them?
Often, heritage assets will be acquired over many years and by various means, including donation or bequest. Their value may therefore be very difficult to determine.
Some heritage assets have future economic benefits or service potential other than their heritage value. For example, an historic building may be able to be used as offices and therefore have a value to the market. For other heritage assets, their future economic benefit or service potential is limited to their heritage characteristics, for example, a historic building that is of such a state that it may not be able to be used.
If value is able to be reliably measured…
If heritage assets meet the recognition criteria and an entity is able to reliably measure those assets, they must be recorded in the financial statements. They are covered by the same standard as other items of property, plant and equipment and therefore have the same measurement and disclosure requirements.
The value of such assets will usually be recorded with reference to an active market. While there may only be a very small local market for many heritage assets, there will often be an international market that can be used to derive a value. Purchased assets will be recorded at the value paid. If the assets are donated, the value of these should be assessed at the time of the donation which will usually require a specialist valuer to be used. Where possible this should be an independent person, however in certain circumstances the only, or by far the best qualified specialists may be within the organisation.
Subsequently, revaluations can be performed with the same requirements as for other categories of property, plant and equipment, or the assets can continue to be recorded at cost. Usually heritage assets won’t depreciate, or the useful life will be very long and difficult to assess making a reliable depreciation calculation impossible. Most commonly, heritage assets will not be depreciated and held in the financial statements at cost, but tested annually for impairment.
Appropriate disclosure of the treatment used by way of note will be important to assist the readers’ understanding of the method used.
If value is unable to be reliably measured…
There may be some circumstances where heritage assets cannot be reliably measured. If this is the case, the assets need not be recorded in the balance sheet. The standards do however require disclosure of:
- A description of the heritage assets held that have not been recognised in the financial statements, including the significance and nature of such assets; and
- Where current information is available, an estimate of the value of those unrecognised assets, such as a recent insurance value.
- The expectation in this regard is that disclosure would be of a reasonably detailed level of asset type, quantities involved and the reason why a value is not readily obtainable.
- The recording of information about assets that cannot be reliably measured when read in conjunction with information about recognised assets provides useful and relevant information about the entity’s overall holding of heritage assets.
Heritage assets are, by their very nature, an important part of what makes up a modern society and our cultural identity. They represent an important historical record of our past, and protecting those assets enhances our society. It is therefore appropriate that the accounting for these assets has now received enhanced clarity in New Zealand.
Used properly to tell the story of your organisation and the assets held by it, there are significant advantages of appropriate recording of heritage assets. While the initial recording and accounting for these may seem onerous, in our experience this is a one-off time impost in that initial year. In subsequent years, the additional requirements are generally not onerous.
These are important assets to us as all – and hence deserve their place in our financial statements.