Alan O’Connor, a Project Director at the Accounting Standards Board, explains how the Board is seeking to improve the financial reporting of heritage assets.

How does your Museum account for its heritage assets?

 Almost all museums and galleries will be affected by a new Financial Reporting Standard that will provide greater insights into their total holding of heritage assets and the way in which these assets are managed from April this year.  

The new Financial Reporting Standard (FRS) marks the culmination of the Accounting Standards Board’s (ASB) project on heritage assets, which was launched in January 2006 with publication of the Discussion Paper ‘Heritage Assets: Can Accounting Do Better’.

The new FRS, which was published in June 2009 and will be applicable for accounting periods beginning on or after 1st April 2010, introduces significant new disclosure requirements.  The accounting requirements are not in most respects different to that currently required, although the standard does clarify some recognition and measurement issues.  It will apply to heritage assets that are held and maintained by an entity principally for their contribution to knowledge and culture.

The need for a new standard

There can be little doubt that a museum’s collections and exhibits are its greatest assets.  Yet, under the current accounting practice, which results in heritage assets acquired in 2001 and later being reported in the balance sheet at cost, many museums and galleries publish accounts that do not reflect the collections that they exist to safeguard and preserve.  Without information on these assets, the accounts are not as useful as they should be and it is difficult to see how they can provide users with a full understanding of the entity’s financial position.  

Any debate on accounting for heritage assets will inevitably generate a wide range of views.  The ASB has listened carefully to these views over the course of its project and acknowledges that accounting for heritage assets presents some very difficult and challenging issues.

The best accounting

Throughout the project, the ASB has retained the view that, conceptually, heritage assets are assets.  They are central to the purpose of an entity such as a museum or gallery: without them the entity could not function.  The ASB therefore consider the best accounting is achieved when heritage assets are reported as tangible fixed assets in the balance sheet.  The ASB also considers that a current valuation will provide more useful and relevant information than historical cost, although it is acknowledged there can be difficulties in obtaining current valuations for heritage assets.

Improved disclosures

The ASB considers the main benefit of the new standard, in terms of improved financial reporting, will be secured through improved disclosures.  These will require the accounts to include:

•    an indication of the nature and scale of heritage assets held by the entity;
•    information on the entity’s policy for the acquisition, preservation, management and disposal of heritage assets;
•    a description of the records maintained by the entity of its collection of heritage assets and information on the extent to which access to the collections is permitted; and
•    a five-year summary of transactions relating to heritage assets, including details of purchases, donations and disposals.

The ASB is aware that some heritage bodies maintain comprehensive and up-to-date catalogues of their collections - information that it considers will be useful to users of the accounts in assessing the entity’s stewardship of its collections.  It also considers that information on the extent to which public access is permitted is helpful, including arrangements for providing access to items that are not on public display.

The disclosures should also include a clear explanation of the accounting policies adopted by the entity for its collections of heritage assets, including an analysis of those assets that are being reported in the balance sheet at cost and those that are being reported at valuation.  Where heritage assets are not reported in the balance sheet, the reasons why should be explained and the accounts should include explain the significance and nature of these assets.

The new standard includes illustrative disclosures that might be made to comply with the new requirements.  It is hoped these examples will help clarify the ASB’s intentions in framing the disclosure requirements.  They might also provide the seed for best practice to develop.  To help entities find the right balance between good financial reporting and providing too much information, the new standard also allows the accounts to cross-refer to other documents that provide this important information.

The accounting requirements

Despite the more radical approaches proposed in earlier consultations, the ASB has not been persuaded there is a better accounting solution for heritage assets than current practice.  The new FRS therefore results in the continued reporting of at least some of an entity’s heritage assets in the balance sheet, although, to encourage a valuation approach, and get more assets onto the balance sheet, the standard allows entities to use internal valuations without the need for a full valuation every five years.  It is likely that internal valuations will be provided by the museum’s curators.

In the ASB’s view, this approach is preferable to not reporting any assets in the balance sheet, even where, as under the current practice, it results in the reporting of recently acquired assets at cost.  The Board recognises this provides an imperfect reflection of the value of an entity’s holding of heritage assets but it is hoped that improved disclosures will mitigate the disadvantages of an entity reporting only part of their total holding of heritage assets in the balance sheet.

Further information

The new standard includes an Appendix ‘The Development of the FRS’ which provides more detail on the Board’s project, including the alternative approaches that were exposed for comment in the Discussion Paper and two Exposure Drafts.  The Appendix also explains the Board’s conclusions on specific issues such as the scope of the FRS, the need for impairment reviews and the reporting of donations.

www.frc.org.uk/asb/

 Note
This article was first published in Museums & Heritage 2/2009