1. 8-1 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd Accounting for heritage and biological assets Chapter 9

2. Learning objectives Identify items that are heritage assets, and be familiar with the attributes that differentiate them from other assets Explain the arguments for and against valuing heritage assets Differentiate alternative approaches to valuing heritage assets State what types of assets can be classified as biological assets and describe the unique attributes of them 9-2 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

3. Learning objectives Explain why fair value has been suggested by some researchers as the appropriate basis for valuation of biological assets Discuss various issues associated with changes in the fair value of biological assets, and state when such changes in value should be recognised as income List the necessary disclosures for biological assets. 9-3 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

4. Accounting for heritage assets Definition of heritage assets No single accepted definition Purpose for holding the asset central to qualifying an asset as a ‘heritage asset’: –“An asset with historic, artistic, scientific, technological, geophysical or environmental qualities that is held and maintained principally for its contribution to knowledge and culture and this purpose is central to the objectives of the entity holding it”. –Accounting Standards Board (UK). Assets held for ‘ambience’ purposes or to present individual company history should not be considered ‘heritage assets’. 9-4 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

5. Accounting for heritage assets ‘Heritage assets’ Should have no alternate uses and generally cannot be replaced: –e.g. national parks, national monuments, museum and library collections, historic buildings, which are unique and have no alternative use. 9-5 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

6. Accounting for heritage assets Key issues Should heritage assets be treated the same as other assets? Are heritage assets, assets according to the NZ Framework? Are definitions and recognition criteria provided in conceptual frameworks appropriate for public sector assets? How are heritage assets financially measured? Should heritage assets be financially measured? No consensus on these issues—answers depend on personal views 9-6 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

7. Accounting for heritage assets Three essential characteristics required of an asset: 1. Provide future economic benefits 2. Control (as opposed to legal ownership) 3. The transaction giving rise to control must have occurred Do heritage assets provide future economic benefits? Heritage assets typically lead to net cash outflows rather than inflows. Heritage assets provide needed or desired services to beneficiaries: –but do they generate probable economic benefits to the entity that controls them? Can benefits from heritage assets be considered economic? 9-7 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

8. Accounting for heritage assets In NZ, reporting entities, state sector bodies and local authorities required by: –Financial Reporting Act 1993 –Public Finance Act 1989 –Local Government Amendment Act 1996 –to prepare financial statements using approved financial reporting standards. They are required to adopt definitions and recognition criteria that are consistent with those provided in NZ Framework. 9-8 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

9. Accounting for heritage assets Specifically, FRS-3 ‘Accounting for Property, Plant and Equipment’, paragraph 4.38 states: –Some assets are described as ‘heritage assets’ because of their cultural or historical significance. Heritage assets that meet the definition of property, plant and equipment are to be accounted for in accordance with this standard. And yet: –Longevity of heritage assets means historical cost and initial carrying value unlikely to remain relevant for economic decision-making –NZ IAS 16 requires ‘Fair value’ estimates in the absence of market-based evidence to be made using an income or depreciated replacement cost approach. 9-9 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

10. Accounting for heritage assets FRS-3 leaves unanswered whether depreciated replacement cost approach is appropriate where fair value is not able to be reliably determined. 9-10 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

11. Accounting for heritage assets Key questions to consider: Is it appropriate to consider a market value when, for some heritage assets no market exists? Is the NZ Framework, as currently developed, appropriate for issues associated with financial recognition of heritage assets? 9-11 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

12. Accounting for heritage assets (Continued from previous slide) Should ‘all’ assets be defined in terms of their probability of generating future economic benefits? –Many heritage assets held by entities do not provide cash flows –Yet, they:  are central to the purposes of public bodies such as museums and galleries  may be realisable for cash, generate income indirectly through admission charges/ reproduction rights  have utility through provision of educational/cultural experience and academic/scientific research. –Future economic benefits primarily in the form of ‘service potential’ than cash flows –Accounting Standards Board (UK). 9-12 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

13. Accounting for heritage assets Who controls heritage assets? Which government department ultimately controls the asset? At which government level is the asset controlled? It is difficult to prevent access to public heritage assets, e.g. parks. There might be restrictions about what can be done with the asset, e.g. museum collections. 9-13 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

14. Accounting for heritage assets Are the benefits measurable with reasonable accuracy? Heritage assets are unique so access to a written- down current cost is problematic. Values for similar assets are generally not available. How would an external auditor determine the reasonableness of a valuation? 9-14 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

15. Accounting for heritage assets Demand for financial information about heritage assets: 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. Evidence suggests that, for example, arts institutions in the English-speaking world do not report their collections as assets for financial reporting purposes. Questionable whether financial information about various forms of heritage assets is really necessary. 9-15 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

16. Accounting for heritage assets Measuring heritage assets in financial terms 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? 9-16 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

17. Accounting for heritage assets (Continued from previous slide) Must accountability be assessed in terms of financial indicators alone? –Views held on this issue will directly affect an individual’s perception of whether heritage assets should be measured in financial terms. Accountability itself does not have to be addressed in financial terms alone –arguments for a broader scope of accountability taking into account a combination of several qualitative and quantitative performance indicators. 9-17 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

18. Accounting for heritage assets Summary—arguments against financial disclosure Often do not provide economic benefits. Determination of ‘control’ is problematic. Benefits are difficult to quantify in monetary terms. Demand for financial information not established. Accountability of those charged with managing heritage assets not well assessed in financial terms. 9-18 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

19. Accounting for heritage assets Approaches to the valuation of heritage assets Absence of a ‘market’ for heritage assets—number of alternative approaches have been developed to place a value on them. Alternative methods include: –Contingent valuation method (CVM)  which relies upon a survey administered to a sample of individuals who are asked how much they would be willing to pay to retain a particular resource 9-19 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

20. Accounting for heritage assets Alternative methods include (continued): –Travel-cost method (TCM) –collecting data about costs incurred by individuals who visit a particular location to determine what individuals are paying to use that resource –Valuation based on market values of surrounding private properties –Past practice of using a notional value of $1,  i.e. on basis that asset would never become available for sale or alternative development (e.g. art gallery or museum). 9-20 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

21. Accounting for biological assets Relevant standard is NZ IAS 41 ‘Agriculture’ ‘Agriculture’ defined as: ‘management by an entity of the biological transformation of biological assets for sale, into agricultural produce, or into additional biological assets’ Biological assets defined as ‘a living animal or plant’. 9-21 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

22. Accounting for biological assets Definition of self-generating and regenerating assets (SGARAs). Non-human-related living assets. Include: –Trees held as part of a forestry operation –Animals held as part of a livestock operation –Orchards and vineyards –Aquaculture and fishery holdings. Accounting issues arise as a result of the unique attributes of SGARAs/biological assets. 9-22 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

23. Accounting for biological assets NZ IAS 41 does not apply to: An investment in a forest as a carbon sink: –which gives rise to carbon credits that can either be sold or used to offset pollution caused by the entity. Greyhounds, horses, pigeons, and whippets used for racing. Performing animals held by theme parks. Non-human living assets other than animals and plants, such as viruses and blood cells. 9-23 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

24. Accounting for biological assets NZ IAS 41 adopts directly the definition of assets provided by NZ Framework (NZ IAS 41, par. 10): –An entity shall recognise a biological asset or agricultural produce when, and only when: a) The entity controls the asset as a result of past events b) It is probable that future economic benefits associated with the asset will flow to the entity; and c) The fair value or cost of the asset can be measured reliably. 9-24 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

25. Accounting for biological assets Key issues associated with SGARAs/biological assets Since they are unique, do they need a dedicated accounting standard? How should SGARAs/biological assets be classified and presented in financial reports? How should SGARAs/biological assets be measured? When and how should revenue associated with SGARAs/biological assets be recognised? 9-25 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

26. Accounting for biological assets Unique nature of SGARAs/biological assets Natural capacity to grow and/or procreate directly impacts on value. Great deal of increase in value owing to input of free goods. Great deal of cost incurred early in the asset’s life but economic benefits derived much later. Production cycle might be very long. Not necessarily any relationship between expenditure on asset and ultimate return. 9-26 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

27. Accounting for biological assets Classification and reporting in financial reports Prior to standard, various classification systems used: –Forestry was classified as:  PPE separate class of ‘regenerative’ assets –Livestock was classified as:  inventory, current (intended for meat)  non-current inventory (intended for breeding) –Comparability an important attribute of general-purpose financial reports. 9-27 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

28. Accounting for biological assets SGARAs required to be presented separately in the balance sheet. Does not prohibit classification into current and non- current elements: –Classification as current and non-current will depend on management’s intentions. How should SGARAs be measured? Prior to the issue of NZ IAS 41 there was great variation. EG forests in New Zealand was valued on a: –historical cost basis –replacement-cost basis and/or –a market value basis. 9-28 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

29. Accounting for biological assets Limitations in using historical cost method for SGARAs/biological assets include: Ignores accretion in value through natural events. Ignores price changes. It provides irrelevant information. Does not reflect relative values of comparable forests. It does not satisfy management’s accountability obligations and provides irrelevant information on performance. It ignores the value of native forests. 9-29 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

30. Accounting for biological assets Alternative measurement models problematic: NPV requires decisions and estimates. Current market values are difficult to assess. However: While the market can be volatile: –market value reflects actual economic value of assets at a particular time and is considered appropriate. There is an active market for livestock at all stages of development so this approach is easy and more reliable. 9-30 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

31. Accounting for biological assets NZ IAS 41 (par. 12): “A biological asset shall be recognised on initial recognition and at each reporting date at its fair value less estimated point-of-sale costs, except for the case where the fair value cannot be measured reliably”. ‘Fair value’ less estimated point-of-sale costs is essentially the same as ‘net market value’. ‘Fair value’ is defined by NZ IAS 41 as: –‘the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction’. 9-31 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

32. Accounting for biological assets Gains and losses associated with holding biological assets (NZ IAS 41, par. 26): –‘A gain or loss arising on initial recognition of a biological asset at fair value less estimated point-of-sale costs and from a change in fair value less estimated point-of-sale costs of a biological asset shall be included in profit or loss for the period in which it arises’. 9-32 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

33. Accounting for biological assets Point-of-sale costs (NZ IAS 41, par. 14): Includes commissions to brokers and dealers, levies by regulatory agencies and commodity exchanges, and transfer taxes and duties. Does not include transport and other costs necessary to get assets to a market. Assessing fair value NZ IAS 41 requires that quoted prices from ‘active markets’ be used: –Deductions made for transaction costs such as costs associated with transportation to point of sale or sale yard commissions. 9-33 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

34. Accounting for biological assets Active market defined in NZ IAS 41 as a market where all of the following conditions exist: –The items traded within the market are homogeneous –Willing buyers and sellers can normally be found at any time –Prices are made available to the public. 9-34 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

35. Accounting for biological assets Where no active market for particular biological assets, an entity can choose between the following to determine fair value: The most recent market transaction price –If there has not been a significant change in economic circumstances between the date of that transaction and the reporting date. Market prices for similar assets –with adjustment to reflect differences. Sector benchmarks –such as the value of an orchard expressed per export tray, bushel, or hectare, and the value of cattle expressed per kilogram of meat. 9-35 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

36. Accounting for biological assets Where market-determined prices or values are not available an entity can use the PV of NCF from the asset. Where biological asset is not separate from other assets NZ IAS 41 (par. 25) states: –Biological assets are often physically attached to land (e.g. trees in a plantation forest). –There might be no separate market for biological assets that are attached to the land but an active market might exist for the combined assets, that is the value of the raw land and land improvements may be deducted from the fair value of the combined assets to arrive at a fair value of biological asset. 9-36 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

37. Accounting for biological assets If still not possible to measure fair value reliably biological assets are measured at cost: less any accumulated depreciation and any accumulated impairment losses Once the fair value of the biological asset can be measured reliably, the biological asset is measured at the fair value: less point-of-sale costs. When and how should revenue associated with biological assets be recognised? NZ IAS 41 (par. 26): “A gain or loss arising from initial recognition of a biological asset at fair value less estimated point-of-sale costs and from a change in fair values less estimated point-of-sale costs of a biological asset shall be included in profit and loss for the period in which it arises”. 9-37 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

38. Accounting for biological assets NZ IAS 41 also ‘encourages’ disclosures that differentiate between changes in fair values (based upon price changes and physical changes): The fair value less estimated point-of-sale costs can change: –due to both physical changes and price changes in the market. Separate disclosure of physical and price changes is useful in appraising current period performance and future prospects: –particularly when there is a production cycle of more than one year. 9-38 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

39. Accounting for biological assets (Continued from previous slide) In such cases, an entity is encouraged to disclose: –the amount of the change in fair value less estimated point-of- sale costs included in profit or loss owing to physical changes and owing to price changes. This information is generally less useful when the production cycle is less than one year: –for example, when raising chickens or growing cereal crops. 9-39 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

40. Accounting for biological assets Accounting for agricultural produce Agricultural produce of a biological asset is defined as: –‘the harvested product of the entity’s biological assets’ –Includes fruit pulled from trees –wool shorn from sheep –felled logs –slaughtered livestock. NZ IAS 2 requires inventory to be valued at the lower of cost and net realisable value—what is the cost of agricultural produce? –par. 13 states that agricultural produce harvested from an entity’s biological assets is to be measured at its fair value less point-of-sale costs at the point of harvest. 9-40 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

41. Accounting for biological assets Opposition to NZ IAS 41 Exposure Draft leading to the standard subjected to sustained criticism by members of industries affected: –Cost to financial statement preparers from complying –Unrealised gains and losses would result in misleading and meaningless information. Other criticisms of parallel overseas standards include: –Too academic –Provide ‘nothing positive’ for local companies –Make payout ratio look unfavourable –Alienate US investors. 9-41 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd

42. Summary Accounting for heritage and biological assets is only recently controlled by standards. There are a variety of methods used to account for heritage assets. Biological assets change in value in different ways to any other asset. Fair value based on an active market is the usual valuation method for agriculture. Changes in fair value are reflected in profit and loss. 9-42 PowerPoint slides to accompany New Zealand Financial Accounting 5e by Samkin Slides adapted by Bob Miller, © 2011 McGraw-Hill Australia Pty Ltd