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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 exceptions 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.

9.2

Heritage assets are more likely to have restrictions on their use and disposal and they are
more likely to generate expenses that are in excess of any revenues that are generated. They
are not typically acquired or held with the expectation of generating positive net cash flows
either through continued use, or disposal. Unlike assets that are typically held by private
sector entities, those entities that hold heritage assets will typically be unable to deny access
by others to the resource. Being commonly unique in nature, heritage assets typically pose
difficult valuation issues, relative to other assets.

9.3

This is an issue on which students may have different views. Issues which should be
considered include whether the requisite degree of control exists in relation to heritage assets
and whether heritage assets are expected to generate future economic benefits that are
probable and measurable. The text describe a number of factors which may indicate that
heritage assets are not clearly assets as defined in the AASB Framework. These 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.

At a broader level, another issue is whether there is actually a demand for financial
information pertaining to heritage assets. Is such information useful for assessing the
performance of those responsible for managing or maintaining the heritage assets? Should
those in charge of looking after heritage assets be accountable for the financial performance
of such assets, or should they be accountable for other non-financial aspects associated with
the heritage assets use? Valuation of heritage assets can be a costly exercise and, as such, the
activity should only be undertaken if there are some associated benefits. To date, demand for
financial information about heritage assets has not been clearly established.
9.4

The Framework for the Preparation and Presentation of Financial Statements defines
liabilities as:
a present obligation of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic
benefits.

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There are three key 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.

At issue here is whether there is a present obligation to transfer funds in the future. Arguably,
there is no such obligation, and although the asset may be likely to generate negative net
cash flows in the future this in itself would not be sufficient to say that it is a liability.
9.5

As your textbook indicates, paragraph 7.4.8 of AAS 29 provides that:


Written-down current cost is determined by reference to current market buying prices
of the remaining future economic benefits embodied in the asset, or where such prices
are not available, an estimation thereof. Statement of Accounting Practice SAP 1
Current Cost Accounting and the Working Guide for Statement of Accounting
Practice SAP 1 may be of assistance in determining the written-down current cost of
an asset where market buying prices are not available.

9.6

9.7

Again, as with a number of the questions in this chapter, there is no correct answer. Rather,
students should be encouraged to consider various arguments for and against the proposal
that not-for-profit entities need different asset definitions to for-profit entities. Reference can
be made to the Statements of Accounting Concepts formerly developed within Australia.
SAC 2 states that an objective of general-purpose financial reporting is to provide relevant
and reliable information (paragraph 11) to assist report users to make and evaluate decisions
about the allocation of scarce resources (paragraph 26), and to enable management and
governing bodies to discharge their accountability (paragraph 14). Issues are:
(i)

In relation to assessing the performance of managers/custodians of heritage assets, do


the readers of financial reports require information to inform decisions about the
allocation of scarce resources?

(ii)

Are the definitions of the elements of accounting provided in the AASB Framework
appropriate for managers to be able to discharge their accountability, or is their
accountability not primarily related to financial performance data?

There would be many costs and benefits. Assigning reliable measurements to many of these
costs and benefits would be a particularly difficult exercise. Costs would include those costs
associated with developing the new requirements as well as the costs involved in producing
and disseminating the information. Whenever new Accounting Standards are issued there are
costs for report users in terms of being able to read and understand the requirements. When
new accounting requirements are released which restrict the available portfolio of accounting
methods there may also be costs imposed on both users and preparers as methods which
were considered to be most efficient in conveying the performance of a particular entity may
no longer be allowable under the new rules. Paragraphs 42 to 45 of SAC 4 (no longer
applicable within Australia) provided some discussion on various costs and benefits
associated with the release of new accounting requirements. Paragraph 44 stated:
Standard setters and regulators of financial information need to employ processes for
gathering information about the merits of requirements they are proposing. These

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processes can give insight into the perceptions of the various categories of users
about the costs and benefits of the requirements being considered. However, it is
unlikely that these processes will significantly reduce the need for judgement in
relation to costs and benefits.
Paragraph 45 stated:
Assessments of the costs and benefits of reporting particular items of financial
information may vary between individual preparers, auditors and other interested
parties. Therefore, if assessments of costs and benefits were to be made only by those
individuals, the assessments would be likely to be specific to the entity and unable to
have regard to the general benefits of financial reporting. Consequently, they may fail
to optimise the cost/benefit function of financial reporting generally and may
disregard the benefits likely to flow from the inter-entity comparability of financial
reports. In the process of setting Accounting Standards, Standard setters seek to
consider all costs and benefits in relation to financial reporting generally, and not just
as they pertain to individual reporting entities.
Considering the above quote, is it possible to consider all costs and benefits?
9.8

Again, there is no right or wrong answer to this question. Alternative arguments are provided
in the chapter. If it was considered that the accountability of managers of heritage assets is
best demonstrated by numbers generated by conventional financial accounting procedures
(for example, profits) then valuations of the heritage assets would be appropriate. Such
valuations would enable the generation of such performance indicators as return on assets.
Increases or decreases in the valuations of the assets would also be included in reported
profits.
If we consider that the accountability of such managers is not well demonstrated by financial
numbers then we may question the necessity of requiring periodic valuations.

9.9

9.10

AASB141 Agriculture defines a biological asset as a living animal or plant. Biological


assets would include:

trees held as part of a forestry operation;

animals held as part of a livestock operation;

orchards and vineyards;

aquaculture and fishery holdings.

As noted in the text, some of the unique characteristics include:

Unlike most assets, biological assets have a natural capacity to grow and/or procreate
which directly impacts the value of the asset.

A 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.

Frequently, a great deal of the costs are incurred earlier in the life of the asset (for
example, the establishment of a forest), yet the economic benefits are not derived until
many years later.

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The production (growing cycle) of the assets may be particularly long (for example,
some forests may take in excess of 30 years to generate millable timber), with
resultant issues as to when the revenue should be recognised. In relation to a forest,
should we wait until the ultimate harvest before we recognise revenue?

There is not necessarily any relationship between expenditure on the asset and the
ultimate returns, perhaps due to such things as droughts, flooding, variations in
qualities of soils, and so on.

9.11

Carnegie and Wolnizer would probably argue that valuing national parks held as heritage
assets in financial terms is an accounting fiction. Roberts, Staunton and Hagen however
would suggest that forests held for the purposes of milling should be valued on the basis of
their net market value.

9.12

The basis of their argument is that profits or losses should only take into account real changes
in the value of resources, that is, changes which adjust for price changes in the underlying
assets. For example, 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 market conditions then this change in
value should not, according to the approach discussed by Roberts, Staunton and Hagen, be
treated as part of the periods profit or loss. Rather, the change should be credited to a
reserve which forms part of shareholders funds. This view is consistent with Roberts (1988),
an extract of which is provided in the text. There does seem to be merit to their argument.
However, this view is not consistent with the contents of a number of recently released
Accounting Standards (such as those that relate to general insurers, life insurers and
superannuation plans). Such Standards require the change in the value of an asset to be fully
treated as part of the periods profit or loss. AASB 141 also does not incorporate the views
of Roberts, Staunton and Hagenit includes both the volume change and price change in
income (although paragraph 51 of AASB 141 recommends disclosures that separately
identify the physical changes and price changes).

9.13

Lack of consistency in how particular items are accounted for across different reporting
entities is frequently cited as a reason to justify the development of an Accounting Standard.
Clearly, the development of an Accounting Standard should only be instigated when it is
considered that the benefits of reducing diversity (and thereby improving such information
attributes as comparability) exceeds the associated costs. If this cannot be established, then
the development of an Accounting Standard may be difficult to justify.

9.14

The 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. They
argue that heritage assets are not really assets consistent with the definition provided in SAC
4 (which has subsequently been replaced by the AASB Framework) and that the information
produced by valuing heritage assets in a financial accounting sense is of very limited use.
They argue that the accountability of managers of heritage assets would be better assessed by
using measures of a non-financial nature; measures which amongst other things might
indicate how the existing use of the heritage assets provides social, cultural or environmental
benefits to the community. There is also an argument that if heritage assets are to be
accounted for in financial terms, then the managers of the heritage assets might be persuaded
into utilising the assets in a way that maximises the financial results associated with the
assets, rather than perhaps using them in ways which benefit the community. Encourage
students to indicate whether they agree or disagree with Carnegie and Wolnizer.

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9.15

This question is intended to highlight the difficulties in undertaking such a valuation. Students
should be encouraged to provide and discuss alternative valuation approaches. There is not a
clear right or wrong answer but a crucial issue is whether students believe that heritage
assets, such as an artefact collection, should actually be valued in financial terms. Is it an
accounting fiction, as Carnegie and Wolnizer would probably suggest? If it is an asset, what
are the future economic benefits the asset generates, and what is the best basis to measure
the value of these benefits? If a value of, say, $50 000 is attributed to the unique artefact
collection does this really mean it is worth less than, say, an ancient butterfly collection that
has been valued at $60 000? From whose perspective? This question should stimulate much
debate.

9.16

The argument being provided here is consistent with the traditional realisation principle.
The argument is that revenue should not be recognised until such time that an actual
transaction occurs. We can consider particular parts of the quote from Charter:
it does not reflect actual events. This could be challenged. An increase in the market
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 same
commodity. A central point here is whether historical cost data is relevant, or whether
reference to the current market prices of similar assets is more relevant.
Its accounting for whats going to happen in the future, not whats already happened.
Part of this is true, as the actual market price is used as a guide to what the entity would
receive if it made a salewhich it will do at a future time. However, the increase in
market price has already happened as at reporting date, and perhaps should not be
ignored. Remember, it is estimated market price at reporting date.
An unrealised gain on lambs might not be worth a penny if they fall over and die before
sale time. This 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. Indeed, 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. There is always a trade-off between
relevancy and reliability. To many users of financial reports, market values are more
relevant, even though they might not be as reliable as historical costs. However, historical
cost information might not be too relevant for many current decisions. With the release of
many recent Australian accounting standards it is clear that there is an increasing
preference by standard-setters for valuations based on current market values. Hence,
there is a clear movement away from the traditional realisation principle. Clearly,
recording assets at market values has direct implications for a reporting entitys profits
and it is the possible volatility in profits which many managers have objected to. Where
there have been criticisms of AASB 1037 and its replacement standard AASB 141, the
criticism appears to relate more to assets that will not be sold for many years (which
might have many fluctuations in market values and will not generate actual cash flows for
many years), as opposed to assets which are near to sale.

9.17

The Council provides three reasons for not recognising its library collections as an asset: fair
value on acquisition is much less than cost; individual books are below a minimum for
capitalisation; and depreciation is difficult due to the variability of useful lives of individual
books. None of these criteria addresses the definition and recognition criteria of assets.
There are alternative views on the validity of recognising the assets for balance sheet
purposes. It could be argued that it is reasonable to assume that the books have future
economic benefits for the Council, being resources that contribute to the facilities and
services provided to members of the community. The control over the future economic

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benefits is established by the acquisition. The books are acquired at a cost that is not difficult
to measure. There does not appear to be any cause for concern about the probability of the
future economic benefits of books acquired. However, contrast these points with the position
embraced by Carnegie and Wolnizer, as discussed within the text. They would possibly
question whether the books generate any economic benefits to the party that controls the
books.
Returning to the matters raised by the Council, the gap between cost and fair value, once the
books are acquired, is not relevant, because the Council could adopt the cost model.
The minimum amount adopted for the Councils capitalisation is an attempt to quantify
materiality. This raises an interesting question about the level of aggregation. For instance,
should the purchase of a set of encyclopaedia be considered as one set, or, say, 24 books?
Individual items may be immaterial but become material in aggregate. The library collection
consists of many books. Although the cost of each book might be immaterial, it does not
follow that the cost of the entire library collection is immaterial. Students may be quite
divided on the choice of an appropriate level of aggregation for judgements about materiality.
Lastly, the question of depreciation raises some measurement difficulties after initial
recognition. However, this problem is not unique to the Council. Many companies have a
variety of items comprising plant and machinery, with varied useful lives.
A practical solution may be for the library to estimate useful lives by categories, such as
paperbacks, hardcover books and reference material.
Arguably, the difficulty of depreciation may pose measurement problems. Students may vary
in their views as to whether it would be better to leave the books of the balance sheet because
they are too difficult to depreciate.
For various reasons (materiality issues, measurement problems or perhaps rejection of the
notion that the books, as cultural assets, have any place on a balance sheet) alternative means
of reporting this asset or cultural resource may be appropriate. One alternative is to disclose
one or more measures of value of the books in the notes to the accounts. Suggestions include
the contingent-valuation method, the travel-cost method, estimated depreciated cost,
replacement value or net realisable value. Alternatively, the information provided might be
non-financial.

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9.18
Dr
Cr
Dr

Fertiliser expenses
Cash
Fertiliser expenses
Inventory
Cash

10 000
10 000
76 000
12 000

Cr
Revenuegrape harvest

64 000

Cr
Dr
Cr

Harvesting grapes
Grapevines
Gain on increase in net
market value of grapevines
Change in net market value of
grapevines

5 000

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