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Valuation Guidance for Cultural and Heritage Assets (2002)

4 Carrying out a Valuation for Collection Assets

4.1 Planning a Valuation

Having regard to the budgetary constraints and other competing priorities, it is necessary for an entity to plan the valuation process to ensure that it:

  • meets the strategic objectives and priorities of the agency in terms of the management of the collection assets;
  • places a minimal demand on the finances and other resources of the agency; and
  • is acceptable to the auditor for financial reporting purposes.

A collaborative approach involving collection managers, curatorial staff, valuers, finance officers and auditors is the most effective way of planning a valuation. Issues for consideration in the planning process include determining the categories of collections (e.g. European Art), the types of collections (e.g. cultural collections, research material, etc) and the locations of collections as well as identifying collections that cannot be replaced (e.g. extinct flora and fauna) and determining items of known high value. The other key valuation judgments described in the previous section also need to be agreed at the planning stage.

Having regard to the extent and diversity of most entities collections, valuation of appropriate samples and extrapolation of the values obtained to the overall collection is considered to be the most cost effective means of providing the valuations necessary for financial reporting purposes.

Information regarding the categories, types and locations of collection assets and the high value items is required in developing the sampling methodology.

4.2 Independent Valuers

FRS 3 requires that valuation should be conducted either:

  • by an independent valuer; or
  • where an entity has in its employ a person sufficiently experienced to conduct a valuation, by that person, so long as the basis of valuation has been subject to review by an independent valuer.

Independent valuers are to hold a relevant professional qualification and have experience in the category of collections being valued (FRS 3 paragraph 7.6). Employees sufficiently experienced to conduct valuations are those who possess expert knowledge and experience in the category of collections being valued. The basis, methodology and assumptions underpinning valuations conducted by such experienced employees are to be reviewed by independent valuers to ensure the appropriateness of the valuation approach (FRS 3 paragraph 7.7).

The requirement of using external valuers may prove to be difficult in the case of valuing cultural and heritage collections, as there are few independent valuers for such collections. The expertise might reside within the entities themselves. If an in-house valuation is conducted, the basis, methodology and assumptions underpinning the valuation should be checked by independent valuers.

4.3 Sampling Methodology

The objective of the valuation exercise is to obtain a valuation which is materially accurate but at a reasonable cost. This may be achieved by selecting the high value items for individual valuation, with the remainder of the collection assets being subject to a sampling methodology. Threshold values will need to be developed for this purpose. Assets above the thresholds would be valued individually, whilst assets below the thresholds would be sampled on a random or other basis for valuation.

The sampling exercise requires technical expertise and involves a number of steps including determining the sample size, selecting the sample, drawing the sample, valuing the sample and calculating the total extrapolated asset value. Sampling will have regard to location and manner of storage, the homogeneity of the items within the collection and the expected range of values within the population to be sampled.

To ensure a high level of statistical accuracy, the sample needs to be representative of the whole population. Therefore, if the collection is not completely homogenous, it will be necessary to stratify the population for sampling purposes to ensure that the sample chosen is truly representative of the whole population. This is commonly known as ‘stratified sampling’. It normally requires the subdivision of the collection assets into a number of groups and sub-groups. A separate sample is then taken from each sub-group. Within each sub-group, items should be approximately similar in nature, value and the way they are stored. There should be as little variation in characteristics as possible within each sub-group.

Once the samples have been valued, it will be possible to extrapolate the values applied to the samples to the whole population and calculate the degree of accuracy that has been achieved. The degree of accuracy will need to be considered carefully as it is important to ensure that the valuation is acceptable for financial reporting purposes. If doubt exists over the acceptability of the valuation because of the degree of accuracy, the entity should consult its auditor. In these circumstances, entities would need to weigh up the cost of increasing the sample size against the extra degree of accuracy obtained. Detailed information should be kept of the selection and valuation of samples.

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