1

HERITAGE AND

CULTURAL ASSETS:

ACCOUNTING AND REPORTING

A DIFFERENT PERSPECTIVE

A Discussion Paper presented by the Department of Finance and Administration for

the CPA Australia Public Sector Centre of

Excellence

December 2005

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Table of Contents

Chapter Topic Page

Executive Summary 3

Introduction 4

The Nature and Management of Heritage and Cultural

Assets

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The Conceptual Accounting Frameworks 8

Does an asset exist 8

Can the asset be reliably measured 9

Can useful life be reliably established 10

Is there a depreciable amount 11

Is the asset being consumed or determined 12

Conclusion 13

Definitions 14

Attachment A: Current and Proposed Guidance 15

GAAP 15

Other Jurisdictional Guidance 19

Guidance provided by International jurisdictions 19

Other Australian jurisdictions 19

Attachment B: Conceptual Decision Flowchart 21

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Executive Summary

Entities within Australia’s public sector jurisdictions hold collections of items of

heritage and cultural significance. These collections are developed and maintained in

order to meet community expectations as to the public accessibility to items of

cultural importance.

Presently, Australian accounting standards make cursory mention of these community

assets, which effectively results in the application of a commercial based framework

to assets held for the cultural benefit of a community.

Interpretation and application of the Australian accounting standards has led to

differing policies relating to heritage and cultural assets. Internationally there is

support for applying an indefinite useful life to items other than land.

It is against the inconsistency of interpretation within Australian public sector

jurisdictions and the international experience that this Discussion Paper attempts to

discuss the application of a commercial accounting approach in the management of

heritage and cultural assets.

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Introduction

The approach adopted by the paper is:

• firstly, to discuss the nature and management of heritage and cultural assets;

• secondly, to analyse these assets in terms of the conceptual accounting

frameworks;

• thirdly, to propose a decision framework, based on GAAP and AEIFRS, to

support a decision to recognise or not to recognise the valuation and

depreciation of these assets in an entity’s financial statements;

• fourthly, outline the areas of contention requiring clarification and

interpretation in determining a ‘one size fits all’ commercial approach to the

provision of a public service; and

• lastly, recommendations relating to the accounting and management of

heritage and cultural assets.

Many Australian Government agencies hold collections of items of heritage and

cultural significance, resulting from human endeavour or the natural world. The

difficulty for custodians is selecting the most appropriate accounting treatment for

these assets in the absence of specific authority from Generally Accepted Accounting

Principles (GAAP) and Australian Equivalents to International Financial Reporting

Standards (AEIFRS).

Alternate opinion views the accounting standards as “strongly suggest(ing) that apart

from land, all assets have a limited economic life, no matter that that life might be

extremely long or difficult to estimate, and that as a result they should be

depreciated.” This opinion does provide an exception to this view in that not

depreciating these assets may not attract an adverse audit opinion if the depreciation

charge is not material in the context of that entity’s financial statements. The

foundation to this view is that it is implicit in the accounting standards that indefinite

useful life only applies to land, and seems to ignore reliable estimation requirements.

The Australasian Council of Auditors-General (ACAG) appears to be split on the

treatment of heritage and cultural assets, as audit acceptance varies across the public

sector jurisdictions.

This paper accepts that a fair value may, in some circumstances, be determinable for

heritage and cultural assets, or components of them, and therefore only discusses

depreciation of these assets.

Evidence is available of applying an indefinite useful life to items other than land in

the Australian accounting standards, while the US Financial Accounting Standards

Board has been specific in recommending applying an indefinite useful life for certain

Heritage and Cultural assets.

The view that unlimited life only applies to land is refuted internationally by reference

to FAS93 and nationally by reference to AAS 29 Financial Reporting by Government

Departments, and AEIFRS, in particular AASB 136 Impairment of Assets, AASB 138

Intangible Assets, and AASB 140 Investment Property, and the road earthworks

interpretation UIG 1055. These references, contained at Attachment A, emphasise the

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fact that such assets have cultural aesthetic or historical value that is worth preserving

perpetually and the service potential is consumed slowly or not at all.

The framework at Attachment B can be applied to determine if heritage and cultural

items should be valued and depreciated in an entity’s financial statements or if

disclosure in the notes is more appropriate. The latter enables users of financial

statements to understand the nature and extent of any significant movements during

the year, e.g. the acquisition or disposal of such assets. This is preferable to the

inclusion of an unreliable value and useful life in the financial statements.

The purpose of this paper therefore, is to explore the ability and appropriateness of a

commercially based accounting framework to provide for the existence and usage of

heritage and cultural assets for public sector entities. That is, to explore the issues

surrounding applying a “one size fits all” approach to the depreciation of heritage and

cultural assets in the financial statements of Australia’s public sectors.

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The Nature and Management of Heritage and Cultural Assets

Nature of Heritage and Cultural assets:

Taxpayers and the broader community have, over generations, indicated the need and

want of assets portraying the community’s heritage and culture, and that these assets

need to be preserved (managed by curators). Taxpayers therefore expect Governments

to, from taxation receipts, fund these assets and their preservation.

Heritage and cultural items provide information to present day society on past events.

As societies mature they become more appreciative of their ancestors resourcefulness

in surviving and adapting to their environments, and previous generations’ influence

on society. This appreciation assists in forming the foundation or identity of a

society, with heritage and cultural legacy reinforcing this “identity”. This is the

intrinsic value or benefit within such assets.

The more common examples of heritage and cultural items include buildings,

components of buildings, other structures, works of art, artefacts, collectables, natural

formations, historical treasures, or similar items.

Less common examples include:

• unique items that have iconic status e.g. Uluru;

• historic and irreplaceable museum and library collections e.g. Captain Cook’s

journal; and

• items that are sacred to particular communities eg Aboriginal sacred sites.

They are used for a variety of purposes: research and scholarship, permanent and

temporary exhibitions, educational and public programs, tourism and the

dissemination of knowledge. They form part of the Nations intellectual property.

Some heritage and cultural assets by their nature cannot be reproduced if they are

destroyed or lost. Therefore their significance resides in both their medium (materials)

and content (intrinsic value). If destroyed, the medium is lost because it cannot be

reproduced: where reproduction reinstates the assets intrinsic value.

Benefits derived from items such as paintings, artefacts, library and museum

collections and sacred sites illustrate the history and the intellectual progress of a

culture. Geographical items such as Uluru, Kakadu and the Great Barrier Reef,

provide benefits in terms of a history of the development of the natural environment

in the past and an insight into the way the future environment may change. Other

items such as Cook’s journal have iconic status and are identified with cultures and

their way of life. All these benefits are intangible and essential to the development and

identity of a society.

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Management of Heritage and Cultural assets

Cultural Assets

A Government’s collection institutions exist to make educational and aesthetic use of

collections and other intellectual resources that they hold. Their primary function is

to acquire, preserve, research and interpret cultural material and documentary

resources and to communicate knowledge to the public and other users for their

education and enjoyment.

These institutions have an ongoing obligation to ensure the proper care, restoration

and preservation of their collections. This includes preventative conservation methods

and techniques, and the provision of suitable environmental protection against known

natural and artificial causes of deterioration.

Heritage Assets

Generally, use of heritage assets is regulated by legislation. This legislation

determines what modifications to the asset are allowable and the state of repair of

these assets. Therefore they are, in a sense, restricted assets.

As for cultural assets, owners and custodians of heritage assets have an ongoing

obligation to ensure the proper maintenance, preservation and presentation of these

assets. These assets include natural heritage assets such as State forests, and National

Parks, including Kakadu and the Great Barrier Reef Marine Park.

The multigenerational approach required for maintenance of heritage and cultural

assets places an obligation on owners and custodians to continually ensure that there

is minimal degradation of these assets.

It can be seen, therefore, that maintenance requirements of heritage and cultural assets

extends beyond reasonable commercial expectations for asset maintenance.

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The Conceptual Accounting Frameworks

Reliability of measurement of a cost or value of an asset is an important requirement

to address in the disclosure of assets on an entity’s balance sheet. Reliable estimates,

as it relates to depreciation, are based on management’s intention for the use of that

asset and the length of anticipated use or ownership of that asset.

Government entities don’t hold onto or maintain heritage and cultural assets for a

specific time. Rather these assets are maintained indefinitely according to

management’s intentions. The accounting Framework acknowledges “these assets

benefit the entities by enabling them to meet their objectives of providing needed

services to beneficiaries.”1

To challenge managements intention would be to seriously cast doubt over the

approach to asset management required by the accounting Framework, as it is

management who ultimately estimates the length of time an asset will provide service

potential to the community.

Attachment B to this paper outlines the ‘Conceptual Decision Flowchart’ adopted by

this paper. The following analyses Heritage and Cultural assets referencing this

flowchart.

Does an asset exist?

The new AASB Framework for the Preparation and Presentation of Financial

Statements defines an asset as:

“a resource controlled by the entity as a result of past events and from which

future economic benefits are expected to flow to the entity.”2

Hence the characteristics of an asset are:

• a controlled resource;

• expectation of future economic benefits; and

• the fact that control has arisen from a past event.

In order to satisfy the asset recognition criteria, the Framework requires that it must be

demonstrated:

• that it is probable that any future economic benefit associated with the item

will flow to or from the entity; and

• that the item has a cost or value that can be reliably measured.

The control and transaction characteristics are not in dispute, nor the probability that

benefit from holding and using these assets will eventuate. However the benefits to

the community need clarification.

Most Government agencies are not cash generating units. Cash derived by institutions

charging fees for exhibitions cannot generally be assigned to individual assets.

Additionally, these assets may not be held for sale. Hence their assets deliver future

1 AASB Framework para Aus 54.2

2 AASB Framework para 49 (a)

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benefits in terms of non-commercial services to meet the needs and expectations of

the community.

The service potential provided by heritage and cultural assets to society is intrinsic in

the form of a heritage, cultural, aesthetic or historic value, preserved for use by future

generations. Service potential is delivered in the form of exhibitions, research and

tourism to provide knowledge, education and enjoyment by the public and other users.

Heritage and cultural assets provide a service potential, which is maintained

indefinitely, while commercial assets provide economic benefits over a predetermined

useful life.

Can the asset be reliably measured?

The valuation of assets is undertaken for a number of reasons including:

• accountability in measuring the net worth of public and private sector entities

over time;

• management decision-making for asset management and utilisation, including

replacement; and

• insurance and risk management purposes.

Heritage and cultural assets can have two components of value: a market-related value

and an intrinsic (aesthetic or social) value that does not tend to be reflected in the

asset's current market value.

Reliable measurement may be difficult and/or impossible for groups of items falling

into the following categories:

• natural heritage assets that have iconic status e.g. Uluru, Great Barrier Reef

Marine Park, or National and State Parks and Forests.

• historic and irreplaceable library and museum collections e.g. Captain James

Cook’s journal and Blue Poles.

• items that are sacred to particular communities eg Aboriginal sacred sites.

Reliable measurement can only be achieved for items in the above categories if:

• a comparable item exists in a restricted market, which can be used as a basis

for valuation;

• there is an associated and identifiable cashflow; eg via admission fees which

can be linked to specific assets or leasing agreements; or

• the items are insured or insurable.

Determining a market-related value is consistent with an intention to sell or purchase

an asset. In relation to assets held for the benefit of the community, trade is not

necessarily management’s intention for the holding of these assets. Therefore

assigning a value representative of the benefits provided to the community becomes

difficult when management’s intention is not to sell and their objectives require these

assets to be held on an ongoing or in-perpetuity basis.

Many heritage and cultural assets can be reliably valued where the asset is merely one

of a type that is traded through the existence of an active market of independent

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buyers and sellers eg this would be applicable to works of art. Other assets will

instead be representative. That is, some heritage and cultural assets will be unique, as

they cannot be reproduced. Additionally, management’s intentions may not be to sell

thereby reducing or removing market evidence to support a value. These latter assets

would be held solely on behalf of the community.

As previously stated, a fundamental concept is that an asset must not be recognised

unless it can be reliably measured. When an asset cannot be referenced to a market or

to an equivalent measurement benchmark, it must be questioned as to how reliable the

valuation is for financial statement users who are making decisions based on the net

worth of the Australian Government. e.g. for international credit rating purposes.

Reliability of measurement impacts assets with indigenous significance (eg rock

carvings), and natural assets such as the Great Barrier Reef.

The intrinsic value of heritage and cultural assets can be viewed as representing an

intangible asset. This intangible component is not always reflected in the value

assigned to the asset. For example, in the absence of an active market, depreciated

replacement cost (DRC) is used. However assets such as Cook’s Journal cannot be

reproduced, as it is held as much for who wrote the journal and under what

circumstances, as for what is written in the journal. Therefore the DRC can only

represent costs of replicating or restoring the original Journal using current

technologies etc. It cannot reproduce the unique intrinsic value embodied in the

original. This value will only exist as long as the original asset exists.

If a market is seen to exist, the valuation of the service potential may not represent the

full value of the asset ie include the intangible intrinsic value. For example, the

service potential in a building used for administrative purposes is the floor space etc

available for use. It would be this potential that would be valued, as opposed to the

full value when its heritage value or the requirements of the relevant legislation is

taken into account. Therefore the intrinsic value is not included.

Componentisation of heritage and functional assets

Some assets have heritage value but are also used by agencies in delivering services to

the public eg heritage-listed buildings. Where assets have both functional (eg the

office accommodation) and heritage value (e.g. the facade of a building), and when

separation is practical and material in relation to the value of the building as a whole,

these should be separated and the functional value depreciated. For example, a

heritage-listed building used as office space in a major city will normally be valued as

office space, taking into account the restrictions imposed by the heritage listing.

The valuation of the heritage component becomes more difficult as in these situations

the intention is usually not to sell the asset and the market is limited due to heritage

restrictions. As with some other heritage and cultural assets these assets are

maintained to last indefinitely and are not being consumed in the normal course of

business.

Can a Useful Life be Reliably Established?

At this point it is useful to compare assets that are classified as property, plant and

equipment (PPE) to heritage and cultural assets.

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PPE acquired for use include assets that:

• can be replicated and hence easily replaced;

• have a history which supports the application of a limited economic life; and

• have a systematic consumption pattern, which supports the useful life

methodology.

Resources are required to optimise the economic benefits of all assets in the asset base

over their useful lives, often established by a manufacturer’s specifications. These

assets are not maintained to last indefinitely. Heritage and cultural assets are

distinguishable from PPE, in that they have an intrinsic value in the form of a

heritage, cultural, aesthetic or historic value, and are intended to be available for a

considerable, if not indefinite, time. In many cases, resources are required to be

committed to preserve and protect the asset and its service potential for considerable

or indefinite time.

Useful life’s reflect the expected pattern of consumption and are determined by

management. If management intention or community expectations is not to determine

a limit to the time over which the asset is to provide service potential, it doesn’t

appear logical to establish a useful life. Assessing the asset for impairment would be a

better indicator of consumption.

Reliable estimation of a useful life is also questionable for a long lived asset. When

combined with materiality and management’s intention to maintain an asset

indefinitely, the anticipated end date of the asset will be constantly changing, casting

doubt over the applicability of the useful life. Therefore the length of time the asset is

held determines a greater variation to the useful life selected, thereby reducing

reliability. This highlights the difference in approach to holding assets for the benefit

of the community and an asset held for commercial reasons.

Is there a depreciable amount?

Once an item is recognised, a depreciable amount needs to be established. In most

cases a reliable depreciable amount may exist. The exception being, those assets that

cannot be replaced but are insured in case of loss or destruction. For example Cook’s

Journal that has intrinsic value in both the content and the medium in which the

content is retained. Its’ uniqueness is not embedded in the nature of the content as

this can be reproduced. It is attributed to the historical significance of being written

by the recognised discoverer of Australia; its intangible value. If the journal was

destroyed or lost, the intrinsic value could not be reproduced.

If the intention of the Australian Government is not to sell the item then a buyer’s

market does not exist. In the absence of a separately identifiable external cashflow,

the valuation must then refer to the insured amount. That is, the amount the

institution requires to replace the asset with a different asset providing new service

potential. The assets’ residual value could be seen as the insured amount in the event

the asset is lost or destroyed. In this case the depreciable amount of the asset is zero.

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Is the asset being consumed or deteriorating?

For depreciation to apply there must be a measurable loss of service. The

underpinning rationale for depreciation is that the service potential embodied in an

asset is consumed by the entity, therefore the carrying amount of the item should be

reduced to reflect consumption. Many heritage and cultural assets are subject to

physical wear and tear eg historical library books that are regularly handled by

sections of the public. Setting useful lives in these cases can be based on experience.

However, many heritage and cultural assets, including some paintings and artefacts

are stored, managed, displayed, repaired, restored, at a cost beyond reasonable

economic expectations, to maintain them indefinitely, as an asset for future

generations. Where conservation, preservation and restoration activities demonstrate

that an asset's service potential is not being consumed or consumed at a minimal rate

over time the application of a useful life and depreciation expense is contradictory e.g.

in the case of the public viewing an original book in a library displayed in a glass

cabinet under regulated temperatures it could be argued that consumption will not

occur.

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Conclusion

The accounting standards necessitate recording heritage and cultural items as assets in

an entity’s balance sheet when the definitional and recognition criteria are met.

Furthermore the standards require depreciation of the asset if it can be established

that:

• a depreciable amount can be determined; and

• a useful life can be reliably determined.

It is supported that assets with the above characteristics should be recognised in the

financial statements and are subject to revaluation and review for impairment on the

same basis as PPE.

However, the view that reliability of measurement can be ascertained in all

circumstances – whether for value, useful life and depreciation, is not supported.

Values should not be arbitrarily applied in the absence of robust criteria resulting in

misleading information for users of financial statements.

As established previously, issues of reliable valuation arise when assets fall into the

following categories:

• the asset is unique, possibly having an iconic status with no active market.

• the asset is historic and can’t be replicated.

• assets that are sacred to particular cultures.

Issues relating to depreciation and reliable consumption patterns arise for those

heritage and cultural assets that have been recognised as existing in perpetuity, and

accordingly require more resources for preservation purposes with the intention of

providing service potential indefinitely. Typically these assets:

• appreciate in value due to their uniqueness and inability to be replaced;

• are maintained for an indefinite life and do not deteriorate because of the

preservation care applied; and

• are not consumed through the process of achieving entity objectives

The accounting frameworks do recognise that indefinite useful lives are applicable for

assets other than land. Accordingly, we believe it is more prudent to apply an annual

impairment test to those heritage and cultural assets that can be reliably valued but do

not evidence a loss of service potential, rather than assign a depreciation expense

based on less than reliable information. This would provide more robust information

for financial statement users in assessing the net worth and/or performance of an

Australian Government entity.

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Definitions

The following table provides the definitions for the purposes of this discussion paper.

Term Definition

Service Potential The provision of benefits to users in accordance with the objectives of

the entity.

Reproduce To re-present an item in or to its original form

Replace To take the place of or be substituted for

Replicate To make a replica of the original

Iconic Having the nature of an image.

Intrinsic Something essential to the character of a Heritage or Cultural item

Residual Value The net amount expected to be recovered on disposal of the asset

Heritage Assets a country’s’ or areas’ history and historical buildings, sites and

artefacts that are considered to be of interest and value to present

generations, and something, such as a way of life or traditional

culture, that passes from one generation to the next.

Cultural Assets relates to a particular culture or civilization or to the arts (art, music,

literature, and related intellectual activity) and intellectual activity of a

culture.3

Depreciable

Asset

a non-current asset having a limited useful life.4

Depreciable

Amount

The cost of an asset, or other amount substituted for cost, less its

residual value.5

Long-Lived

Asset

An asset with an indeterminate or indefinite useful life, where that

asset is subject to maintenance aimed at continuing to provide benefits

beyond normal commercial terms.

An asset for which management intends to continually maintain and

the limit of benefit is not foreseeable.

3 Encarta UK

4 AAS 4 Depreciation. There is no equivalent definition in AASB 116 Property, Plant and Equipment.

5 AASB 116 Property, Plant and Equipment

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Current and Proposed Guidance

AAS29 Financial Reporting by Government Departments

GAAP has been relatively silent on the application of an indefinite useful life to assets

other than land with the exception of the illustrative example in the appendix of

AAS29. The following disclosure is at its Note 2: “Heritage assets controlled by the

Department are works of art. They are anticipated to have very long and indeterminate

useful lives. Their future economic benefits have not, in any material sense, been

consumed during the reporting period. As such, no amount for depreciation has been

recognised in respect of them.”

Opinions may contradict the intention in Note 2 to AAS 29. In relation to all assets

other than land, it may be argued that while a useful life might be extremely long or

difficult to estimate, an estimate nonetheless must be made.

AAS 29 para 7.4.5 to 7.4.7 goes on to discuss the “practical problems related to their

identification and measurement.”

“All non-current assets having a limited useful life are systematically depreciated over

their useful lives in a manner which reflects the consumption of their future economic

benefits”. This limitation is based on management’s intention at the time. Therefore it

is not logical, if management has the intention to maintain consumption indefinitely,

that a limitation of that consumption must be estimated. There is no reason to expect

that a useful life cannot be assumed in the future when a more reliable end point can

be determined.

AASB 116 Property, Plant and Equipment

The following points are contained in AASB 116 refer to determining the useful life

of an asset:

• ‘useful life’ is “the period over which an asset is expected to be available for

use by an entity…” – para 6.

• “The estimation of the useful life of the asset is a matter of judgement based

on the experience of the entity with similar assets: - para 57.

• “The entity selects the method that most closely reflects the expected pattern

of consumption of the future economic benefits embodied in the asset. That

method is applied consistently from period to period unless there is a change

in the expected pattern of consumption of those future economic benefits.” –

para 62.

Clearly, if the entity has no intention to dispose or relinquish control over the asset,

the useful life is indeterminate. Therefore requiring that a useful life must exist due to

the inevitability that some day in the future, well beyond commercial expectations, an

asset will cease to provide benefit, contradicts this definition when management

cannot reliably predict the expected period of benefit.

AASB 116 also states that expected usage, wear and tear, technical or commercial

obsolescence, and legal or similar limits are determining factors in setting useful

Attachment A

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lifes.6 In the case of heritage and cultural assets, wear and tear are the relevant factors.

However where it can be shown that conservation and preservation programs exist,

and/or impairment assessments indicate, it is questionable whether reliable

estimations of useful life or depreciation are possible.

AASB136 Impairment of Assets

Irrespective of whether there is an impairment indicator present, AASB 136 requires

that the recoverable amount of an intangible asset with an indefinite useful life or an

intangible asset not yet available for use be determined annually at the same time each

year and compared with the intangible asset’s carrying amount.

This requirement of AASB 136 will cause conflict with AASB 116 where, upon

testing the assets for impairment, no deterioration of benefits is identified. The logical

extension from this would be the revaluation of the asset to reverse the depreciation

applied to the asset during the period, especially when the asset is subject to a strict

conservation and preservation regime.

AASB138 Intangible Assets

AASB 138.88 states: “An entity shall assess whether the useful life of an intangible

asset is finite or indefinite. An intangible asset shall be regarded by the entity as

having an indefinite useful life when, based on an analysis of all of the relevant

factors, there is no foreseeable limit to the period over which the asset is expected to

generate net cash inflows for the entity.” As stated previously, service potential is

substituted for economic benefit.

The approach taken in AASB 138 is that “it is possible for management to have the

intention and the ability to maintain an intangible asset in such a way that there is no

foreseeable limit to the period over which that particular asset is expected to…”

provide benefit.7

Therefore the conceptual thinking is that it is possible to maintain an asset

‘indefinitely’, albeit an intangible asset. This thinking would be based around the non-

physical nature of the asset. Heritage and cultural assets are subject to conservation

and preservation regimes that may actually see them still in existence well after an

intangible ceases to provide benefit.

AASB140 Investment Property

AEIFRS also specifies where depreciation is not to be applied to assets. Investment

properties valued at fair value are not depreciated; increments and decrements are

instead recorded in the income statement.

Investment property characteristics are comparable to heritage and cultural assets in

that they are not held for short-term sale in the ordinary course of business and they

tend to appreciate in value.

6 AASB 116 para 56

7 IAS 38 Intangible Assets Basis for Conclusions

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While investment property is held with the intent of future benefit in the form of cash

inflows, heritage and cultural assets are held with the intent of future benefit in the

form of societal and cultural identity.

AASB 140 recognises that investment properties are not necessarily held for short-

term turnover with commercial intent. So it is for heritage and cultural assets. The

standard also recognises that there is no consumption of benefits during the period the

asset is held. Changes in the future benefits will be represented by revaluations.

However a change in the estimated future economic benefits is not the same as the

consumption of those benefits. Value is estimated by market, management estimates

consumption. Therefore by utilising the fair value methodology for investment

property, the standard recognises that there is no regular consumption of benefits.

In relation to heritage and cultural assets measured at fair value, AASB 140

conceptually supports no depreciation. However by requiring changes in the fair value

to be booked in the period it occurs, still recognises the commercial intent of

ownership. This approach is not transferable to heritage and cultural as management’s

intent is not necessarily commercially orientated.

AASB 1031 Materiality

It can be argued that the financial impact of depreciation on the custodians financial

performance in relation to heritage and cultural assets is material, given the value

depreciated, and the relatively small budget required to enable the custodian to use

these assets in carrying out its objectives.

However the qualitative impact, ie the omission has the potential to influence

economic decisions of users, or affect the discharge of accountability, is questionable,

and may in fact present a confusing and misleading position.

Take the example of a heritage and cultural asset measured at fair value, subject to

impairment, held for the benefit of society indefinitely and having a useful life well in

excess of normal commercial expectations.

Due to the large value of the item, the amount of depreciation could be material in

terms of its final impact on the entity’s financial performance. This asset is subject to

impairment testing aimed at identifying reductions in the carrying value of the asset.

The results of the impairment test may indicate that the recoverable amount could be

in excess of the carrying amount due, in part, to the absence of deterioration of

benefits. This in turn may trigger a revaluation under AASB 116 para 31, which

would reinstate depreciation charged. Whether there is any change to the useful life is

not relevant.

Therefore it is questionable as to whether not depreciating the asset will impact the

decision-making process or discharge accountability. In this circumstance the effect

may be to impede or mislead by requiring depreciation to be determined.

UIG Interpretation 1030 Depreciation of Long-Lived Physical Assets: Condition –

Based Depreciation and Related Methods.

UIG 1030 discusses the concept of condition-based depreciation. This paper is not

suggesting a departure from this interpretation. However a principle of the

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Interpretation is that “condition assessments are used as a mechanism to determine

whether, and the extent to which, the future economic benefits of an…other long lived

asset have been consumed during the reporting period, and to confirm the pattern of

consumption of those future economic benefits.”8

This principle supports the ability of an asset to have an indeterminate or indefinite

useful life at reporting date, given managements intentions.

UIG Interpretation 1055 Accounting for Road Earthworks

The UIG Interpretation 1055 Accounting for Road Earthworks identifies the following

issues:

• whether particular road earthworks may be assessed as not having a limited

useful life, and therefore not subject to depreciation; and

• whether it is possible to reliably estimate a useful life over which particular

road earthworks with a limited useful life should be depreciated.

Paragraph 7 states: “Road earthwork assets that are assessed as not having a limited

useful life shall not be depreciated.” This assessment requires engineering reviews of

the expected physical wear and tear and technical obsolescence of the particular

earthworks and any limits on the use of the earthworks.

This Interpretation adopts the view that road earthworks represent, in some

circumstances, another exception to the expectation that all tangible assets have

limited useful lives. This view is based on the similarity between land and road

earthworks when the service potential of the earthworks is expected to be retained due

to the absence of any events that cause physical deterioration, such as excessive

usage, re-growth of vegetation, flooding or land movement, and the earthworks are

not expected to become obsolete in the foreseeable future. The similarity between

land and earthworks can also be extended to those heritage and cultural assets where

the service potential is being retained into the foreseeable future.

UIG 1055 recognises that some earthwork assets “may have limited useful lives

because of their connection with an operation or activity that has a limited useful

life.”9 Therefore it is logical that an asset connected with an activity that does not

have a limited useful life could also possess a life that is not limited. This would be

the case where management can demonstrate an intention to utilise an asset for the

purposes of its own objectives and there is no intention to limit the timeframe of those

objectives.

8 UIG 1030 para 17

9 UIG 1030 para 16

19

Other Jurisdictional Guidance

Guidance provided by International jurisdictions

Australia and New Zealand require valuation of heritage and cultural assets. The, US,

UK and Canada do not require compulsory valuation. 10

The use of indefinite useful life is supported by the US standards setter the Financial

Accounting Standards Board. The Board issued a standard addressing the issue of

indefinite life, ‘The Recognition of Depreciation by Not-For-Profit Organizations’

(FAS93)11

in August 1987. It states: “This statement requires all not-for-profit

organisations to recognize the cost of using up long lived tangible assets-depreciation-

in general-purpose external financial statements. However, depreciation need not be

recognized for certain works of art and certain historical treasures.”

The standard elaborates by referring to using up the service potential so slowly that

their estimated useful lives are extraordinarily long and specifies when this is to be

applied:

..only if verifiable evidence exists demonstrating that:

a) The asset individually has cultural aesthetic or historical value that is worth

preserving perpetually and

b) The holder has the technological and financial ability to protect and preserve

essentially undiminished the service potential of the asset and is doing that.

Other Australian jurisdictions

The Australian Government and State Governments currently apply similar

accounting treatments for valuing and recording heritage and cultural assets. The

JCPAA of Victoria found that for some collections it was not only difficult but also

pointless to ascribe commercial values to such assets. But it is also difficult to provide

a definitional boundary to isolate such assets. Like the Australian National Audit

Office, the Victorian Auditor-General has qualified financial statements of cultural

institutions that did not include an ascribed value to assets held.12

The following outlines various State jurisdictional views of indefinite lives in relation

to heritage and cultural assets:

• The ACT Government recognises that assets have indeterminate useful lives.

• The Victorian 2002-03 Consolidated Financial Statements state “core cultural

assets which are considered to have an indefinite useful life are not

depreciated. Depreciation is not recognised in respect of these assets as their

service potential has not, in any material sense, being consumed during the

reporting period.”

10

Victorian JCPAA report on the valuation ands reporting of Cultural, Heritage and Infrastructure

assets 11

Statement of Financial Accounting Standards No.93 12

Victorian JCPAA report on the valuation ands reporting of Cultural, Heritage and Infrastructure

assets

20

• NSW policy is not to recognise depreciation of assets with an indeterminate or

indefinite useful life, and limits this policy to heritage and cultural type assets.

• In Tasmania only the Education and Economic Development Departments

have heritage and cultural assets, mainly antique furniture. They do not

depreciate these assets.

• New Zealand guidance provides that some assets have very long useful lives,

and therefore no depreciation be charged, as for practical purposes

deterioration may be reduced through proper conservation and care.

21

Conceptual Decision Flowchart

This flowchart has been developed to assist in the process of determining whether

heritage and cultural asset should be recognised and depreciated in an entity’s

financial statements or disclosed in the notes.

The main features of this flowchart are outlined below:

• If the item satisfies the definition and recognition criteria for an asset; it can be

reliably measured with reference to an active market; a depreciable amount

can be calculated; there is evidence the asset is losing service potential over a

period of time; and a useful life can be reliably determined, then the asset

should be valued and depreciated in the entity’s financial statements.

• If the asset cannot be reliably measured with reference to an active market,

reference must then be made to:

- comparable items in a restricted market; or

- an identifiable cashflow linked to the asset; or

- an insurable amount. In this case the insurance value equates to the fair

value and residual value.

• If the asset can be practically separated into parts, the asset should be

componentised and valued with reference to the above valuation benchmarks.

Restrictions related to the heritage and cultural components should be

identified and taken into account in determining the fair value of the asset.

Restrictions may decrease the value of an asset if its’ usefulness to the entity is

diminished.

• Once a reliable value is determined, it must be established if a depreciable

amount exists. The latter would exist in most cases however, if the value is

based on the insured amount of the asset, the value and residual value would

be equal resulting in a nil depreciable amount. In this case the asset should not

be depreciated. In all other cases if the heritage and cultural component of the

asset is being consumed or is deteriorating, a consumption pattern must be

determined to calculate a reliable useful life. If the asset is being preserved to

last indefinitely, a useful life is not applicable and the asset should not be

depreciated.

Attachment B

22

Decision Flowchart

N Derecognise

Y

N

Y

N Don’t depreciate

Y

N Don’t depreciate

Y

N Don’t depreciate

Y

Does an asset exist?

Can the asset be reliably measured? If yes

value at fair value

Is there a depreciable amount?

Is the asset being consumed or

deteriorating?

Can a useful life be reliably determined?

Depreciate the asset and record in the

financial statements

A

23

N

N

Y

N Derecognise

Y

A

Determine management’s intention

Identify components

Identify restrictions

Is there market? (restricted, identifiable

cashflow, insurable amount) B

Determine fair value

Is the asset insured?

Determine the nature of restrictions

Fair value equals insurance value

B

Depreciate the asset and record in the

financial statements