Deegan5e Sm Ch09

8/20/2019 Deegan5e Sm Ch09

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Chapter 9

Accounting for heritage assets and biological assets

9.1 Characteristics of heritage assets include:

• they frequently have some unique cultural, historic or environmental attributes;

• they typically have limited alternative uses;

• they are typically controlled by government (however, there are eceptions to this!;

• there is often an inability to deny access to the asset;

• they often generate negative net cash flows;

• there are frequently restrictions on how the asset can be used and if or when it can be

disposed.

9." #eritage assets are more li$ely to have restrictions on their use and disposal and they aremore li$ely to generate epenses that are in ecess of any revenues that are generated. %heyare not typically acquired or held with the epectation of generating positive net cash flowseither through continued use, or disposal. &nli$e assets that are typically held by privatesector entities, those entities that hold heritage assets will typically be unable to deny access

by others to the resource. 'eing commonly unique in nature, heritage assets typically posedifficult valuation issues, relative to other assets.

9. %his is an issue on which students may have different views. )ssues which should be

considered include whether the requisite degree of control eists in relation to heritage assetsand whether heritage assets are epected to generate future economic benefits that are probable and measurable. %he tet describe a number of factors which may indicate thatheritage assets are not clearly assets as defined in the **+' ramewor$. %hese factors are:

• heritage assets often do not provide economic benefits;

• determination of -control is problematic; and

• the benefits are difficult to quantify in monetary terms.

*t a broader level, another issue is whether there is actually a demand for financial

information pertaining to heritage assets. )s such information useful for assessing the performance of those responsible for managing or maintaining the heritage assets/ +houldthose in charge of loo$ing after heritage assets be accountable for the financial performanceof such assets, or should they be accountable for other non0financial aspects associated withthe heritage assets use/ aluation of heritage assets can be a costly eercise and, as such, theactivity should only be underta$en if there are some associated benefits. %o date, demand for financial information about heritage assets has not been clearly established.

9.2 %he ramewor$ for the 3reparation and 3resentation of inancial +tatements definesliabilities as:

a present obligation of the entity arising from past events, the settlement of which isepected to result in an outflow from the entity of resources embodying economic

benefits.

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%here are three $ey components in this liability definition, these being:

(i! there must be a future disposition of economic benefits to other entities;

(ii! there must be a present obligation; and,

(iii! a past transaction or other event must have created the obligation.

*t issue here is whether there is a present obligation to transfer funds in the future. *rguably,there is no such obligation, and although the -asset may be li$ely to generate negative netcash flows in the future this in itself would not be sufficient to say that it is a liability.

9.6 *s your tetboo$ indicates, paragraph .2. of **+ "9 provides that:

ritten0down current cost is determined by reference to current mar$et buying pricesof the remaining future economic benefits embodied in the asset, or where such prices

are not available, an estimation thereof. +tatement of *ccounting 3ractice +*3 1-Current Cost *ccounting and the -or$ing <uide for +tatement of *ccounting3ractice +*3 1 may be of assistance in determining the written0down current cost of an asset where mar$et buying prices are not available.

9.= *gain, as with a number of the questions in this chapter, there is no correct answer. >ather,students should be encouraged to consider various arguments for and against the proposalthat not0for0profit entities need different asset definitions to for0profit entities. >eference can

be made to the +tatements of *ccounting Concepts formerly developed within *ustralia.+*C " states that an ob?ective of -general0purpose financial reporting is to provide relevantand reliable information (paragraph 11! to assist report users to ma$e and evaluate decisionsabout the allocation of scarce resources (paragraph "=!, and to enable management andgoverning bodies to discharge their accountability (paragraph 12!. )ssues are:

(i! )n relation to assessing the performance of managers5custodians of heritage assets, dothe readers of financial reports require information to inform decisions about theallocation of scarce resources/

(ii! *re the definitions of the elements of accounting provided in the **+' ramewor$ appropriate for managers to be able to discharge their accountability, or is their accountability not primarily related to financial performance data/

9. %here would be many costs and benefits. *ssigning reliable measurements to many of these

costs and benefits would be a particularly difficult eercise. Costs would include those costsassociated with developing the new requirements as well as the costs involved in producingand disseminating the information. henever new *ccounting +tandards are issued there arecosts for report users in terms of being able to read and understand the requirements. hennew accounting requirements are released which restrict the available portfolio of accountingmethods there may also be costs imposed on both users and preparers as methods whichwere considered to be most efficient in conveying the performance of a particular entity mayno longer be allowable under the new rules. 3aragraphs 2" to 26 of +*C 2 (no longer applicable within *ustralia! provided some discussion on various costs and benefitsassociated with the release of new accounting requirements. 3aragraph 22 stated:

+tandard setters and regulators of financial information need to employ processes for gathering information about the merits of requirements they are proposing. %hese

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processes can give insight into the perceptions of the various categories of usersabout the costs and benefits of the requirements being considered. #owever, it isunli$ely that these processes will significantly reduce the need for ?udgement inrelation to costs and benefits.

3aragraph 26 stated:

*ssessments of the costs and benefits of reporting particular items of financialinformation may vary between individual preparers, auditors and other interested

parties. %herefore, if assessments of costs and benefits were to be made only by thoseindividuals, the assessments would be li$ely to be specific to the entity and unable tohave regard to the general benefits of financial reporting. Consequently, they may failto optimise the cost5benefit function of financial reporting generally and maydisregard the benefits li$ely to flow from the inter0entity comparability of financialreports. )n the process of setting *ccounting +tandards, +tandard setters see$ toconsider all costs and benefits in relation to financial reporting generally, and not ?ust

as they pertain to individual reporting entities.

Considering the above quote, is it possible to consider -all costs and benefits/

9. *gain, there is no right or wrong answer to this question. *lternative arguments are providedin the chapter. )f it was considered that the accountability of managers of heritage assets is

best demonstrated by numbers generated by conventional financial accounting procedures(for eample, profits! then valuations of the heritage assets would be appropriate. +uchvaluations would enable the generation of such performance indicators as return on assets.)ncreases or decreases in the valuations of the assets would also be included in reported

profits.

)f we consider that the accountability of such managers is not well demonstrated by financialnumbers then we may question the necessity of requiring periodic valuations.

9.9 **+'121 -*griculture defines a biological asset as a -living animal or plant. 'iologicalassets would include:

• trees held as part of a forestry operation;

• animals held as part of a livestoc$ operation;

• orchards and vineyards;

• aquaculture and fishery holdings.

9.1@ *s noted in the tet, some of the unique characteristics include:

• &nli$e most assets, biological assets have a natural capacity to grow and5or procreate

which directly impacts the value of the asset.

• * great deal of the increase in value of the resource may be due to the input of free

goods, such as sun, air and water.

• requently, a great deal of the costs are incurred earlier in the life of the asset (for

eample, the establishment of a forest!, yet the economic benefits are not derived untilmany years later.




• %he production (growing cycle! of the assets may be particularly long (for eample,

some forests may ta$e in ecess of @ years to generate millable timber!, withresultant issues as to when the revenue should be recognised. )n relation to a forest,should we wait until the ultimate harvest before we recognise revenue/

• %here is not necessarily any relationship between ependiture on the asset and the

ultimate returns, perhaps due to such things as droughts, flooding, variations inqualities of soils, and so on.

9.11 Carnegie and olniAer would probably argue that valuing national par$s held as heritageassets in financial terms is an -accounting fiction. >oberts, +taunton and #agen however would suggest that forests held for the purposes of milling should be valued on the basis of their net mar$et value.

9.1" %he basis of their argument is that profits or losses should only ta$e into account real changesin the value of resources, that is, changes which ad?ust for price changes in the underlyingassets. or eample, if an entity had only one asset at the beginning of the year (perhaps a

building! and the value of the asset increased due to mar$et conditions then this change invalue should not, according to the approach discussed by >oberts, +taunton and #agen, betreated as part of the periods profit or loss. >ather, the change should be credited to areserve which forms part of shareholders funds. %his view is consistent with >oberts (19!,an etract of which is provided in the tet. %here does seem to be merit to their argument.#owever, this view is not consistent with the contents of a number of recently released*ccounting +tandards (such as those that relate to general insurers, life insurers andsuperannuation plans!. +uch +tandards require the change in the value of an asset to be fullytreated as part of the periods profit or loss. **+' 121 also does not incorporate the viewsof >oberts, +taunton and #agenBit includes both the volume change and price change inincome (although paragraph 61 of **+' 121 recommends disclosures that separatelyidentify the physical changes and price changes!.

9.1 ac$ of consistency in how particular items are accounted for across different reportingentities is frequently cited as a reason to ?ustify the development of an *ccounting +tandard.Clearly, the development of an *ccounting +tandard should only be instigated when it isconsidered that the benefits of reducing diversity (and thereby improving such informationattributes as comparability! eceeds the associated costs. )f this cannot be established, thenthe development of an *ccounting +tandard may be difficult to ?ustify.

9.12 %he basis of their argument would appear to be that the process of financial accounting is being applied to issues where such application is not suited, or perhaps is illogical. %heyargue that heritage assets are not really assets consistent with the definition provided in +*C2 (which has subsequently been replaced by the **+' ramewor$! and that the information

produced by valuing heritage assets in a financial accounting sense is of very limited use.%hey argue that the accountability of managers of heritage assets would be better assessed byusing measures of a non0financial nature; measures which amongst other things mightindicate how the eisting use of the heritage assets provides social, cultural or environmental

benefits to the community. %here is also an argument that if heritage assets are to beaccounted for in financial terms, then the managers of the heritage assets might be persuadedinto utilising the assets in a way that maimises the financial results associated with theassets, rather than perhaps using them in ways which benefit the community. Dncouragestudents to indicate whether they agree or disagree with Carnegie and olniAer.




9.16 %his question is intended to highlight the difficulties in underta$ing such a valuation. +tudentsshould be encouraged to provide and discuss alternative valuation approaches. %here is not aclear right or wrong answer but a crucial issue is whether students believe that heritageassets, such as an artefact collection, should actually be valued in financial terms. )s it an-accounting fiction, as Carnegie and olniAer would probably suggest/ )f it is an asset, what

are the future economic benefits the asset generates, and what is the -best basis to measurethe value of these benefits/ )f a value of, say, E6@ @@@ is attributed to the unique artefactcollection does this really mean it is -worth less than, say, an ancient butterfly collection thathas been valued at E=@ @@@/ rom whose perspective/ %his question should stimulate muchdebate.

9.1= %he argument being provided here is consistent with the traditional -realisation principle.%he argument is that revenue should not be recognised until such time that an actualtransaction occurs. e can consider particular parts of the quote from Charter :

• -F it does not reflect actual events. %his could be challenged. *n increase in the mar$et

price of an asset could be considered to be an -actual event (although, not a

-transaction! and one which could be verified by reference to recent sales of the samecommodity. * central point here is whether historical cost data is relevant, or whether reference to the current mar$et prices of similar assets is more relevant.

• -)ts accounting for whats going to happen in the future, not whats already happened.

3art of this is true, as the actual mar$et price is used as a guide to what the entity wouldreceive if it made a saleBwhich it will do at a future time. #owever, the increase inmar$et price has -already happened as at reporting date, and perhaps should not beignored. >emember, it is estimated mar$et price at reporting date.

• -*n unrealised gain on lambs might not be worth a penny if they fall over and die before

sale time. %his might be true, but the valuation would be based on probabilities and the probability that they might -fall over and die might be quite low. )ndeed, there is a

possibility that all assets might be destroyed, but we do not record them on this basis because such events are not deemed to be probable. %here is always a trade0off betweenrelevancy and reliability. %o many users of financial reports, mar$et values are morerelevant, even though they might not be as reliable as historical costs. #owever, historicalcost information might not be too relevant for many current decisions. ith the release of many recent *ustralian accounting standards it is clear that there is an increasing

preference by standard0setters for valuations based on current mar$et values. #ence,there is a clear movement away from the traditional -realisation principle. Clearly,recording assets at mar$et values has direct implications for a reporting entitys profitsand it is the possible volatility in profits which many managers have ob?ected to. herethere have been criticisms of **+' 1@ and its replacement standard **+' 121, the

criticism appears to relate more to assets that will not be sold for many years (whichmight have many fluctuations in mar$et values and will not generate actual cash flows for many years!, as opposed to assets which are near to sale.

9.1 %he Council provides three reasons for not recognising its library collections as an asset: fair value on acquisition is much less than cost; individual boo$s are below a minimum for capitalisation; and depreciation is difficult due to the variability of useful lives of individual

boo$s. Gone of these criteria addresses the definition and recognition criteria of assets.

%here are alternative views on the validity of recognising the -assets for balance sheet purposes. )t could be argued that it is reasonable to assume that the boo$s have future

economic benefits for the Council, being resources that contribute to the facilities andservices provided to members of the community. %he control over the future economic




benefits is established by the acquisition. %he boo$s are acquired at a cost that is not difficultto measure. %here does not appear to be any cause for concern about the probability of thefuture economic benefits of boo$s acquired. #owever, contrast these points with the positionembraced by Carnegie and olniAer, as discussed within the tet. %hey would possiblyquestion whether the boo$s generate any economic benefits to the party that controls the

boo$s.

>eturning to the matters raised by the Council, the gap between cost and fair value, once the boo$s are acquired, is not relevant, because the Council could adopt the cost model.

%he minimum amount adopted for the Councils capitalisation is an attempt to quantifymateriality. %his raises an interesting question about the level of aggregation. or instance,should the purchase of a set of encyclopaedia be considered as one set, or, say, "2 boo$s/)ndividual items may be immaterial but become material in aggregate. %he library collectionconsists of many boo$s. *lthough the cost of each boo$ might be immaterial, it does notfollow that the cost of the entire library collection is immaterial. +tudents may be quite

divided on the choice of an appropriate level of aggregation for ?udgements about materiality.

astly, the question of depreciation raises some measurement difficulties after initialrecognition. #owever, this problem is not unique to the Council. 4any companies have avariety of items comprising plant and machinery, with varied useful lives.

* practical solution may be for the library to estimate useful lives by categories, such as paperbac$s, hardcover boo$s and reference material.

*rguably, the difficulty of depreciation may pose measurement problems. +tudents may varyin their views as to whether it would be better to leave the boo$s of the balance sheet because

they are too difficult to depreciate.

or various reasons (materiality issues, measurement problems or perhaps re?ection of thenotion that the boo$s, as cultural assets, have any place on a balance sheet! alternative meansof reporting this asset or cultural resource may be appropriate. Hne alternative is to discloseone or more measures of value of the boo$s in the notes to the accounts. +uggestions includethe contingent0valuation method, the travel0cost method, estimated depreciated cost,replacement value or net realisable value. *lternatively, the information provided might benon0financial.

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9.1

7r ertiliser epenses 1@ @@@ Cr Cash 1@ @@@

Fertiliser expenses

7r )nventory = @@@

Cr

Cash 1" @@@

Cr

>evenueBgrape harvest =2 @@@

Harvesting grapes

7r <rapevines 6 @@@ Cr

<ain on increase in net mar$et value of grapevines

6 @@@

Change in net market value of grapevines


Deegan5e Sm Ch09

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