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Valuation Guidance for Cultural and Heritage Assets (2002)

2  Accounting Framework

2.1 The New Standard: FRS-3

FRS-3 Accounting for Property, Plant and Equipment covers all property, plant and equipment (PPE) and applies to periods ending on or after 31 March 2002. It replaces SSAP-3 Accounting for Depreciation and SSAP-28 Accounting for Fixed Assets, although SSAP-3 remains on issue to cover the amortisation of intangible assets.

Major changes introduced by FRS-3 are the prohibition of capitalising feasibility costs, the introduction of component accounting for items of PPE and the use of fair value when revaluing.

2.2 How Does FRS-3 Apply?

The Statement of Concepts defines an asset as having three essential characteristics:

  • there must be service potential or future economic benefits;
  • the entity must have control over the service potential to the extent that the entity is able to enjoy the benefits, and deny or regulate the access of others to the benefits; and
  • the transaction or other event that gives rise to the entity’s control must have occurred.

Furthermore, under FRS-3, Property, Plant and Equipment are tangible assets that:

  • are held by an entity for use in the production or supply of goods and services, for rental to others or for administrative purposes, and may include items held for the maintenance or repair of such assets; and
  • have been acquired or constructed with the intention of being used on a continuing basis.

As cultural and heritage assets are for the continuing use of the library, museum, art galleries and other entities in the provision of services to the community, they are within the definition of PPE. It would be inappropriate to write off investments in cultural assets as a current expense, when the economic benefits will mainly emerge in the future.

FRS-3 requires all cultural and heritage assets (including collection assets) that meet the definition of PPE and can be reliably measured, to be recognised in the entity’s financial statements.

2.3 Fair Value

Cultural and heritage assets are to be valued on the same basis as other physical non-current assets of an entity. FRS-3 permits subsequent revaluations of these assets, provided that fair value is used.

‘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. Other terms commonly used to describe ‘Fair Value’ include ‘Market Value’, ‘Open Market Value’ and ‘Current Market Value’ (FRS-3 paragraphs 4.23 and 4.24).

Fair value is considered to be the most appropriate basis of valuation because it represents the exchange value of the future economic benefits embodied in the asset regardless of the manner in which the entity has chosen to utilise the asset (FRS-3 paragraph 7.3).

Where the fair value of an asset can be determined by reference to the price in an active market for the same asset or a similar asset, the fair value of the asset is determined using this information. Where the fair value of an asset is not able to be determined in this manner, it should be determined using other market-based evidence (FRS-3 paragraph 4.26).

Where the fair value of an asset is not able to be reliably determined using market-based evidence, Depreciated Replacement Cost (or DRC) is an acceptable estimate of the fair value of an asset (adapted from FRS-3 paragraph 4.11). DRC is based on the reproduction cost of a specific asset. In principle, it reflects the service potential embodied in the asset.

One concern that has been expressed with this approach is that where the majority of the collection is either purchased from overseas, or the New Zealand prices vary with foreign exchange rates, the foreign exchange rate fluctuations could adversely impact the valuation. It is recommended that where the exchange rates are an important factor in the valuation, disclosure be made of the exchange rate assumptions used in the notes to the accounts.

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