While dealing with the accounting, a particular item that caught interest was the old furniture, old structures, and other old assets, all of which were easily over a century old. The office was situated in a structure that was over a century old, and many other objects were as old as or older than the building that shared space under the same roof.
Some organisations, such as museums, house these historical artefacts, while others display them for their beauty, symbolic significance, ornamentation, or even nostalgic or emotional affinity. These are invaluable and priceless. The accountant and the finance analyst in me wondered how we would account for them. We are always on the lookout for things of worth, but what about those that are priceless and valued more than we can measure? And it was out of this curiosity to learn more that we decided to share our perspectives on the issue.
What are the Heritage Assets?
Heritage assets aren’t limited to buildings. It may be a piece of jewellery, a picture, a work of art, a cutlery set used by a famous and legendary king or royal family, a mural, a warrior’s weapon, or anything else we believe has cultural, social, historical, or heritage significance. Well, if allowed by law, some of them might be purchased through auction houses such as Sotheby’s and Christie’s, but some are so valuable that no one would want to part with them and therefore would not sell them.
Various accounting standards-setting agencies, including the IASB, have discussed the value of these assets. Who is going to regard the same thing the same way?
‘Heritage Assets: Can Accounting Do Better?’ was the title of a discussion paper published by the Accounting Standards Board in 2006. A few of the museums and galleries did declare specific valuations on these assets in their balance sheets, but only the cost expended at the time of acquisition, not the inherent worth they had. A heritage asset can be understood as an asset or item of plant, property, or equipment that has prominence due to its historic, technological, artistic, scientific, geophysical, or environmental qualities, and is held and maintained primarily for its contribution to culture and knowledge.
This purpose is central to the objectives of the entity that holds or keeps it, according to Heritage Assets. Paintings loaned to museums, historical sites, and so forth are examples of the same. Assets that appear to fulfill this description but are owned by an organisation for operational say, a historic structure utilized as a head office or decorative purposes are not included in the scope e.g., art in the boardroom.
Natural characteristics, as defined by the United Nations Educational, Scientific and Cultural Organisation, encompass perspectives from history, science, art, aesthetics, anthropology, ethnology, conservation, and natural beauty. Other definitions are provided by the Charity Commission and the Chartered Institute of Public Finance and Accountancy in the United Kingdom, the SFFAS 29 in the United States, the ASB in South Africa, the Public Sector Handbook in Canada, the French Central Government Accounting Standards, the FRSB in New Zealand, and UNESCO, among others.
Do they meet the asset definition?
The term “asset” refers to the rights to future economic advantages that an entity has control over as a result of previous transactions or occurrences. The principal source of money for a museum is the fees it receives from visitors to see the artefacts on exhibit, made of such items; therefore, it passes the test of gaining future economic advantages as well as the test of asset control.
Methodologies for Accounting Capitalisation
If an entity can get credible contemporary values for cultural assets at a reasonable cost, such values can be used to determine the asset’s value. Any additional costs associated with restoring the asset would be capitalised. What would be the proper heading if an entity chose to capitalise, or should it be stated as a separate line item?
Non-capitalization Methodology
If an entity can show that it cannot get accurate values at a reasonable cost, the financial statements should merely contain a disclosure. Any additional expenses incurred to rehabilitate the asset would be written off as well. Since the value of these assets appreciates through time, that is the nature of legacy assets, the question of how much should be depreciated or /amortised or evaluated for impairment is a contentious subject.
Alienable vs. Inalienable (Alienable vs. Inalienable)
It is critical, however, that these assets are conserved rather than discarded carelessly. Most of these assets would be ‘inalienable’, i.e., the entity cannot sell them without prior authorisation or approval from the donor, the government, or any other body that supervises the heritage assets. However, inalienability should not be viewed as a barrier to asset recognition; rather, it is one of the limitations on their utilisation.
Excerpts from a Number of Yearly Reports, 30 June 2019 and 2020, from the American Museum of Natural History
Collections:
The Museum has a vast collection of specimens and artefacts that serve as a record of life on the planet. Since the Museum’s foundation, these rich and often irreplaceable items have been gathered through field expeditions, gifts, and purchases, forming one of the world’s largest natural history collections. The Museum’s frozen tissue collection of DNA and tissue samples, as well as massive scientific databases of genomic and astrophysical data, are among the new collecting areas. The collections are a valuable resource for scientists worldwide, and they continue to grow each year.
The value of the Museum’s collections is not included in the consolidated financial statements of financial condition, as required by museum accounting regulations. The earnings from the sale of collection artefacts must be used to augment the collections, according to the Museum’s collection policy. Proceeds from the sale of collection items are reported as increases in net assets with donor limitations in that fund, pending completion of the acquisition, if the assets used to acquire the collection items are drawn from restricted funds.
Annual Report of the Metropolitan Museum of Art for the Years Ending June 30, 2020 and 2019
Collections:
The value of the Museum’s collections has been omitted from the Statements of Financial Position, and donations of art pieces have been excluded from income in the Statement of Activities, in accordance with accounting procedures often used by art museums. The Museum’s purchases of art artefacts are shown in the Statement of Activities as reductions in net assets. Proceeds from the sale of art and accompanying insurance settlements are recognised as net assets, subject to donor limits for the acquisition of art, in accordance with state law and Museum policy.
Annual Report 2019-20 of the Victoria and Albert Museum
Assets of historical significance, where such a cost or valuation is reasonably achievable, additions to the collection are capitalised and reported on the Balance Sheet at the cost or value of the purchase. Because such things are considered to have endless lifetimes, they are not subject to depreciation. Note 6 summarises the museum’s asset management policy for its heritage holdings. Acquisitions are costed and capitalised. Donated items are capitalised at their current estimated worth at the time of gift. The Keeper of the relevant collection will determine this value. The museum does not hold a policy to revalue items that were capitalised once.
Due to the large number of artefacts in the V&A’s collection and their various character, conducting valuations on a regular enough basis to keep them current would be too expensive for the museum. Only those things for which we have valid cost or value information have been capitalised. For objects given or bought before April 1, 2001, such information is not publicly available and could only be obtained at a disproportionate expense to the advantages that would be created. The capitalised artefacts make up just around 1% of the whole collection, and revaluing the rest would consume so much time and money that the museum’s capacity to fulfil its charity goals would be jeopardised.
The museum’s Loss Review Board will label any object that has been missing for five years or more as Missing, and it will be handled as a disposal in the Financial Statements. Since 2001, no capitalised items have been declared as missing. More information on the museum’s historical assets, the V&A’s holdings include 1,570,817 museum artefacts and works of art, 1,125,925 library items, and 1,046 archive collections. Approximately 1% of them have been included in the museum’s financial statement and the chart above. As of March 31, 2020, 64,140 pieces were on exhibit, with access to additional items available through reading and study rooms or by arrangement. The selected third-party websites, reference materials, and publications, as well as the museum’s website and other electronic media, provide further access to the same.
Accounting and reporting of all assets and items around us are important. However, while accounting for or reporting items of enormous relevance, such as priceless artefacts, along with the curiosity, the difficulty associated with making the right decision is also crucial in an equal manner.
Accounting Standard on Lease
Indian Accounting Standard 17 deals with Leases. It requires that all rental amounts received be charged to the Statement of Profit and Loss, which is prepared by the entity on a straight-line basis, if the lease is an operating lease. But this shall be applicable only if the payment to the lessor is made on a straight-line basis and there is no other more appropriate systematic basis.
According to the AS, any inflation or increase in lease rentals will cause a re-computation of all expected rentals. This should then be charged to the Profit and Loss Statement in an equal manner over the term of the lease. Then the excess or deficit amount shall be transferred to the equalisation account.
IFRS 16 – An Understanding
IFRS 16 is effective for annual reporting periods beginning on or after January 1, 2019; however, it can be used sooner (as long as IFRS 15 is also applied).
The goal of IFRS 16 is to provide information that (a) accurately portrays lease transactions and (b) allows readers of financial statements to evaluate the amount, timing, and uncertainty of lease-related cash flows. A lessee should recognise assets and liabilities emerging from a lease to achieve this goal.
IFRS 16 establishes a unified lessee accounting model, requiring lessees to recognise assets and liabilities for all leases lasting longer than 12 months unless the underlying asset is of low value.
A lessee must account for both a right-of-use asset, which reflects the lessee’s right to use the underlying asset that is leased, and a lease liability, which represents the lessee’s obligation to make lease payments.
