Why should heritage assets be reported in the financial statements?

Government has a responsibility to manage South Africa’s resources

One of government’s key responsibilities is to provide services to its citizens. It is however also responsible for managing the country’s resources which include mineral, natural and cultural resources. While it is obvious that the revenue, costs, assets and liabilities related to service delivery should be reported in the financial statements, it is often challenged whether, or why, the same should apply to certain resources. Many of the debates on these issues relate to: (a) the difference between management versus control of resources; and (b) whether a reliable value can be determined for financial reporting purposes.

Management versus control of resources

The financial statements aim to reflect those resources that an entity controls. Control means that the entity has the ability to direct how the economic benefits or service potential of an asset will be used for the entity’s benefit. This is contrasted with being tasked with the broad management of resources, which could include, for example, keeping a database of resources, issuing licences for their use, giving approval for alterations etc. These actions do not mean that the entity can use those resources to either generate cash or other economic benefits for the entity, nor are they able to use those assets in delivering services. The responsibility of an entity to manage resources without control being present will not result in recording in the financial statements. The existence of control (along with other factors), is the difference between a “resource” being managed and the existence of an “asset” for financial statement purposes.  

Determining a reliable value

Resources are reported in the financial statements as assets when control exists, and a reliable value can be determined. This value is based on either what was paid, or an alternative value such as fair value where the asset was acquired without giving anything (or only a minimal amount) in return.
If amounts are paid, the value is usually easy to determine. Where there is no exchange of value and fair value or an alternative measurement basis needs to be used, the value may be difficult to determine. The value may be difficult to determine for a number of reasons, including that: (a) the benefits associated with an asset may not be known or quantifiable, and (b) the resources may be unique, meaning there is no active market, similar assets may not exist, and proxies may not best represent the value of the asset.
For accounting purposes, a reliable measure usually does not exist where either there is significant variability in the range of estimated values, or the probabilities of the various estimates cannot be reasonably assessed. Where there is variability in the values being determined, the asset is not recognised in the financial statements because this would not give users of the financial statements a fair representation of the value of the asset. Some other action, such as disclosure, may be appropriate.
 
 
What gets measured gets managed

The ASB has issued a number of Standards dealing with the accounting for resources. Notably, the ASB issued GRAP 103 on Heritage Assets in 2008 which explains when, or in what circumstances, certain of the resources listed above should be reported in the financial statements. Heritage assets are those assets that have “cultural, environmental, historical, natural, scientific, technological or artistic significance and are held indefinitely for the benefit of present and future generations”.
Prior to GRAP 103 being issued, entities would not necessarily have reported heritage assets at all in the financial statements. Entities were permitted to reflect heritage assets in the financial statements where they were used for administrative tasks or service delivery. By applying GRAP 103, entities are required to:

1. Identify heritage assets, i.e. those that are held for the reasons outlined above, and are preserved and maintained so that they can be held indefinitely for future generations. These resources should otherwise meet the definition of an asset, including that they are controlled.
2. A value should be determined for the initial recording of the asset, either using cost or fair value (depending on how the asset was acquired, and what information was available on the initial adoption of the Standard). Where a reliable value cannot be determined, there is disclosure in the financial statements.
3. Where a reliable value can be determined, the asset is measured at each reporting date either at cost or using the revaluation method. In both instances, the assets are not depreciated but assessed for impairment.

By including heritage assets in the financial statements, one inherent result is that entities should have a complete asset register of all heritage assets to support the amounts reported in the financial statements. What has emerged during the implementation of GRAP 103 is that entities – often those whose primary responsibility it is to hold, manage and direct how heritage assets are used – did not have complete registers of these assets. It is a basic management principle that asset registers should be kept so that assets can be managed and appropriately safeguarded. Entities may in fact need two asset registers – one for those assets that are heritage assets for financial statement purposes, and one for those assets/resources that it is required to manage in terms of a legal mandate.
Many argue that assigning a value to heritage assets is inappropriate because they generally cannot be sold. Because government has a broader responsibility related to the country’s resources, the focus cannot merely be on cash generation. Assets in the public sector have service potential because they can be used to deliver services, which includes preserving the country’s heritage. Value for accounting purposes, should reflect both cash and similar benefits that can be derived as well as service potential.
There are many benefits assigning a value to a heritage asset, which include the following:

• Users can make decisions about the quantum of resources needed to manage, maintain, and preserve these assets.
• Decisions can be taken about how best to safeguard assets, including whether insuring them is viable given their nature and value.
• Values provide an indication of how important an asset may be to the country’s heritage and holding officials accountable for their preservation – although appreciating that the value of many assets that are irreplaceable may not be determinable.
   

Differing views on the value of accounting for heritage assets

The accounting for heritage assets – as outlined in GRAP 103 – has elicited divergent views from both preparers and users of the financial statements. Given the issues raised during the implementation of the Standard, the ASB agreed to undertake a post-implementation review of the Standard. The public consultation process with preparers, users and auditors is currently underway and will end on 15 September 2020. Affected parties are urged to participate in the review either by attending sessions hosted by the Secretariat of the ASB or other organisations, or by completing the applicable questionnaire.
More information on the review is available on the ASB’s website: http://www.asb.co.za/ed-180/