1. Chapter 8 Accounting for heritage and biological assets

2. Copyright  2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 8-2 Objectives Understand what items constitute heritage assets and be familiar with the attributes of heritage assets which differentiate them from other assets. Understand what items constitute heritage assets and be familiar with the attributes of heritage assets which differentiate them from other assets. Explain the arguments for and against placing a valuation on heritage assets. Explain the arguments for and against placing a valuation on heritage assets. Be aware of the alternative approaches to valuing heritage assets. Be aware of the alternative approaches to valuing heritage assets.

3. Copyright  2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 8-3 Objectives (cont.) Understand what types of assets can be classified as biological assets, and appreciate the unique attributes of such assets. Understand what types of assets can be classified as biological assets, and appreciate the unique attributes of such assets. Be able to explain why net market value has been suggested by some researchers as the appropriate basis of valuation for biological assets. Be able to explain why net market value has been suggested by some researchers as the appropriate basis of valuation for biological assets.

4. Copyright  2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 8-4 Objectives (cont.) Understand the various issues associated with changes in the fair value of biological assets, and explain when such changes in value should be recognised as income for accounting purposes. Understand the various issues associated with changes in the fair value of biological assets, and explain when such changes in value should be recognised as income for accounting purposes.

5. Copyright  2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 8-5 Objectives (cont.) Be aware of some of the current and ongoing accounting debates on heritage assets and biological assets and be able to evaluate the logic of the various arguments presented for and against particular valuation and disclosure approaches. Be aware of some of the current and ongoing accounting debates on heritage assets and biological assets and be able to evaluate the logic of the various arguments presented for and against particular valuation and disclosure approaches.

6. Copyright  2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 8-6 Definition of heritage assets No single accepted definition. No single accepted definition. Rowles suggests ‘physical assets that a community intends preserving because of cultural, historic or environmental associations’. Rowles suggests ‘physical assets that a community intends preserving because of cultural, historic or environmental associations’. Includes national parks, national monuments, museum and library collections, historic buildings etc. Includes national parks, national monuments, museum and library collections, historic buildings etc. Unique and have no alternative use. Unique and have no alternative use. Generally cannot be replaced. Generally cannot be replaced.

7. Copyright  2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 8-7 Considerations in accounting for heritage assets Should heritage assets be treated in the same manner as other assets? Should heritage assets be treated in the same manner as other assets? Would heritage assets be considered assets in accordance with the Statement of Concepts definition? Would heritage assets be considered assets in accordance with the Statement of Concepts definition? Are the Statement of Concepts definition and recognition criteria appropriate for public sector assets? Are the Statement of Concepts definition and recognition criteria appropriate for public sector assets? How are heritage assets financially measured? How are heritage assets financially measured? Should heritage assets be financially measured? Should heritage assets be financially measured? No consensus on these issues. No consensus on these issues. Answers will depend on personal views. Answers will depend on personal views.

8. Copyright  2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 8-8 Do heritage assets provide future economic benefits? Heritage assets typically lead to net cash outflows rather than net inflows. Heritage assets typically lead to net cash outflows rather than net inflows. Heritage assets provide needed or desired services to beneficiaries, but do they generate probable service potential or economic benefits to the entity that controls them? Heritage assets provide needed or desired services to beneficiaries, but do they generate probable service potential or economic benefits to the entity that controls them? Can benefits from heritage assets be considered economic? Can benefits from heritage assets be considered economic?

9. Copyright  2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 8-9 State sector bodies and local authorities In New Zealand, state sector bodies and local authorities are required to prepare financial statements using approved financial reporting standards. In New Zealand, state sector bodies and local authorities are required to prepare financial statements using approved financial reporting standards. Heritage and community assets must be reported if they meet the definition of property, plant and equipment contained in FS-3. Heritage and community assets must be reported if they meet the definition of property, plant and equipment contained in FS-3. These are required to be revalued to net market value. These are required to be revalued to net market value.

10. Copyright  2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 8-10 Who controls the heritage assets? Which government department ultimately controls the asset? Which government department ultimately controls the asset? Is the asset controlled at the National or Local Government level? Is the asset controlled at the National or Local Government level? It is difficult to exclude access to public heritage assets. It is difficult to exclude access to public heritage assets. There may be restrictions on what can be done with the asset. There may be restrictions on what can be done with the asset.

11. Copyright  2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 8-11 Are the benefits measurable with reasonable accuracy? Heritage assets are unique, so access to net market value or depreciated replacement cost is problematic. Heritage assets are unique, so access to net market value or depreciated replacement cost is problematic. Values for similar assets generally not available. Values for similar assets generally not available. Raises questions about how an external auditor might determine the reasonableness of a particular valuation. Raises questions about how an external auditor might determine the reasonableness of a particular valuation.

12. Copyright  2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 8-12 Demand for financial information about heritage assets If there is limited demand for information, are resources being wasted to provide the data? If there is limited demand for information, are resources being wasted to provide the data? Need to ensure benefits from increased disclosures exceed costs incurred in generating disclosures. Need to ensure benefits from increased disclosures exceed costs incurred in generating disclosures.

13. Copyright  2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 8-13 Measuring heritage assets in financial terms Major purpose of financial reporting is for management to demonstrate accountability for resources entrusted to them Major purpose of financial reporting is for management to demonstrate accountability for resources entrusted to them –should only be accountable for things under their control. Should those in charge of looking after heritage assets be assessed in terms of financial criteria? Should those in charge of looking after heritage assets be assessed in terms of financial criteria? Must accountability be assessed in terms of financial indicators alone? Must accountability be assessed in terms of financial indicators alone?

14. Copyright  2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 8-14 Summary—arguments against financial disclosure Often do not provide economic benefits. Often do not provide economic benefits. Determination of ‘control’ is problematic. Determination of ‘control’ is problematic. Benefits are difficult to quantify in monetary terms. Benefits are difficult to quantify in monetary terms. Demand for financial information not established. Demand for financial information not established. Accountability of those charged with managing heritage assets not well assessed in financial terms. Accountability of those charged with managing heritage assets not well assessed in financial terms.

15. Copyright  2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 8-15 Approaches to valuation of heritage assets Absence of a ‘market’ for heritage assets. Absence of a ‘market’ for heritage assets. Alternative methods include: Alternative methods include: –contingent valuation method (CVM) –travel-cost method (TCM) –valuation based on market values of surrounding private properties –past practice of using a notional value of $1.

16. Copyright  2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 8-16 Biological assets ED-90 issued for comment in April 2002. ED-90 issued for comment in April 2002. Exposure draft considered necessary because unique nature of agricultural activity had made coverage under existing financial reporting standards problematic. Exposure draft considered necessary because unique nature of agricultural activity had made coverage under existing financial reporting standards problematic.

17. Copyright  2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 8-17 Definition of biological assets Living animal or plant. Living animal or plant. Includes: Includes: –trees held as part of a forestry operation –animals held as part of a livestock operation –orchards and vineyards –annual or perennial cropping –aquaculture and fishery holdings –embryos stored on ice that have been created through biotechnology. Accounting issues arise as a result of the unique attributes of biological assets. Accounting issues arise as a result of the unique attributes of biological assets.

18. Copyright  2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 8-18 Unique nature of biological assets Natural capacity to grow and/or procreate directly impacts on value. Natural capacity to grow and/or procreate directly impacts on value. Great deal of increase in value may be due to input of free goods. Great deal of increase in value may be due to input of free goods. Great deal of cost incurred early in the asset’s life but economic benefits derived much later. Great deal of cost incurred early in the asset’s life but economic benefits derived much later. Production cycle may be very long. Production cycle may be very long. Not necessarily any relationship between expenditure on asset and ultimate return. Not necessarily any relationship between expenditure on asset and ultimate return.

19. Copyright  2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 8-19 Classification and reporting in financial reports Prior to standard, various classification systems used. Prior to standard, various classification systems used. Forestry was classified as: Forestry was classified as: –fixed assets or property, plant and equipment; separate class under non-current assets. Livestock was classified as: Livestock was classified as: –inventory, current (intended for meat) and non- current inventory (intended for breeding).

20. Copyright  2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 8-20 ED-90 classification requirements Biological assets required to be presented separately in the statement of financial position. Biological assets required to be presented separately in the statement of financial position. Does not require classification into current and non-current portions Does not require classification into current and non-current portions –classification as current and non-current will depend on management’s intentions. Requires a description of each group of biological assets. Requires a description of each group of biological assets.

21. Copyright  2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 8-21 How should biological assets be measured? Prior to ED-90, great variation in valuation methods. Prior to ED-90, great variation in valuation methods. Limitations in using historical cost in relation to biological assets include: Limitations in using historical cost in relation to biological assets include: –ignores accretion in value through natural events –ignores price changes –does not reflect relative values of comparable forests –provides irrelevant and unreliable information.

22. Copyright  2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 8-22 How should biological assets be measured? (cont.) ED-90 requires fair value based on an active market value to be used to value biological assets. ED-90 requires fair value based on an active market value to be used to value biological assets. Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction If an active market exists, the quoted price in that market is used to determine fair value. If an active market exists, the quoted price in that market is used to determine fair value.

23. Copyright  2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 8-23 Recognition of revenue associated with biological assets Change in fair value has two components: Change in fair value has two components: –result of biological factors (e.g. growth, quality, ageing and changes in composition); and –price level changes. ED-90 requires all increments or decrements in the fair values of biological assets to be recognised in the statement of financial performance for the period in which it arises. ED-90 requires all increments or decrements in the fair values of biological assets to be recognised in the statement of financial performance for the period in which it arises.

24. Copyright  2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 8-24 Accounting for non-living produce of biological assets Includes fruit pulled from tree, wool shorn from sheep, felled log, slaughtered livestock. Includes fruit pulled from tree, wool shorn from sheep, felled log, slaughtered livestock. ED-90 no longer classes these as biological assets and they fall within the scope of FRS-4 ‘Accounting for Inventories’. ED-90 no longer classes these as biological assets and they fall within the scope of FRS-4 ‘Accounting for Inventories’. Inventories are recorded at lower of cost and net realisable value. Inventories are recorded at lower of cost and net realisable value. Fair value immediately after produce becomes non-living is deemed to be the cost. Fair value immediately after produce becomes non-living is deemed to be the cost.

25. Copyright  2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 8-25 Opposition to ED-90 Since release, ED-90 (and its Australian equivalent AASB 1037) has been subject to criticism. Since release, ED-90 (and its Australian equivalent AASB 1037) has been subject to criticism. Criticisms include: Criticisms include: –too academic –provides ‘nothing positive’ for local companies –makes payout ratio look unfavourable –alienates US investors.

26. Copyright  2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 8-26 Disclosure requirements Contained in ED-90. Contained in ED-90. Extremely detailed. Extremely detailed. Cost versus benefit considerations must be considered, especially in the New Zealand context. Cost versus benefit considerations must be considered, especially in the New Zealand context.