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This article was first published in the July/August 2017 China edition of Accounting and Business magazine.

Assigning a book value to a disintegrating but culturally significant 200-year-old-monument is not an easy feat. With this in mind, in April the International Public Sector Accounting Standards Board (IPSASB) launched a consultation paper, Financial Reporting for Heritage in the Public Sector, to help clarify what a heritage item is and how it can be valued.

‘Many public sector entities have heritage responsibilities and this consultation paper is a first step toward developing financial reporting guidance to support accountability and decision-making in this area,’ says IPSASB chairman Ian Carruthers. 

Guidance on accounting for heritage items has been discussed in different countries, but only now is the IPSASB taking steps towards recognising heritage items and possibly devising their own set of standards.

‘There is currently a variety of financial reporting practices for heritage items, which reduces the comparability of public sector entities’ general purpose financial reports,’ Carruthers says.

The United Nations Educational, Scientific and Cultural Organization (Unesco) defines heritage under a number of categories. A total of 193 countries have ratified Unesco’s 1972 World Heritage Convention on the protection of world heritage sites and therefore the organisation’s definition would appear to be widely accepted.

The IPSASB paper describes heritage items as ‘items that are intended to be held indefinitely and preserved for the benefit of present and future generations because of their rarity and/or significance in relation, but not limited, to their archaeological, architectural, agricultural, artistic, cultural, environmental, historical, natural, scientific or technological features’.

However, defining a heritage item for accounting purposes can be more complicated because of a lack of clarity within the international standards. There are no separate standards; instead, heritage items are covered by several, primarily IPSAS 17, Property, Plant and Equipment, and IPSAS 31, Intangible Assets.

IPSAS 17 – which is followed in Hong Kong (see box) – allows public sector entities to choose their accounting approach, including whether to recognise heritage items as assets in the financial statements; if so, the measurement base is applied. Meanwhile, IPSAS 31 includes paragraphs on accounting for intangible heritage assets, based on those in IPSAS 17.

According to the IPSASB consultation (which closes on 30 September), the current use of several standards gives rise to inconsistent practices in the classification of heritage items. But with a new standard and definition, defining heritage items could be easier for the international community.

Matter of value

But defining a heritage item is only part of the problem. Another issue is determining how much a 500-year-old church may be worth, and this is where things can get tricky for governments to navigate. 

‘Heritage items may or may not be recognised in an entity’s financial statements and different measurement approaches are used. This diverse practice has negative consequences for the public interest because it reduces the comparability of information reported in the financial statements,’ notes the report.

The difficulties could be eased with new and more in-depth financial reporting guidance of heritage items. In the consultation paper, IPSASB first asks for the constituents’ views on the identification of heritage items, such as whether they are assets for financial reporting purposes. Secondly, it looks at heritage asset recognition and measurement, whether heritage-related obligations could be liabilities for financial reporting purposes, and the presentation of information on heritage items and related responsibilities.

The purpose of the consulting report is to develop accounting and disclosure requirements for heritage assets across governments, underlining an approach to recognise heritage items as assets. 

This task has been difficult for both academics and government officials, since heritage assets are declared inalienable or have restrictive covenants. This means that they cannot be sold unless there is a change in legislation. 

Considering these features, there have been differing views on reporting heritage assets since the early 1990s. Some academics argue that they are assets and can be included on the balance sheet; others believe that they should not be reported; while another group suggests that it would be more appropriate to classify them as liabilities. 

That said, the consultation paper proposes that heritage items’ special characteristics should not prevent them from being assets for the purposes of financial reporting; they should be recognised in the statement of financial position if they meet the recognition criteria in the conceptual framework, and possibly assigned a monetary value. 

New Zealand’s approach

Some countries have been faster to recognise why heritage items should be factored in financial statements, instead of being lumped under the property, plant and equipment category. Case in point is New Zealand, which has added clarity in its new financial reporting requirements, issued in 2016. 

‘While international public sector accounting standards do not mandate the recognition and measurement of heritage assets in financial statements, our new suite of Public Benefit Entity accounting standards require this where such assets are able to be reliably measured,’ says Wayne Tukiri, associate director at RSM New Zealand.

‘It is not particularly new here, but it doesn’t mean that it’s being universally accepted or everybody buys into it.’

New Zealand’s rationale is that heritage assets usually form an important part of the assets under the organisation’s control; omitting them completely from the financial statements renders these an incomplete picture of the organisation. New Zealand has diverged from international standards; however, it could be setting a trend.

That said, IPSASB’s paper could shed more light in an area that has been debated for a long time with varying views, helping governments navigate the landscape of heritage items. 

Haky Moon, journalist