Why should heritage assets be reported in the financial statements?

Government has a responsibility to manage South Africa’s resources

One of government’s key responsibilities is to provide services to its citizens. It is however
also responsible for managing the country’s resources which include mineral, natural and
cultural resources. While it is obvious that the revenue, costs, assets and liabilities related to
service delivery should be reported in the financial statements, it is often challenged
whether, or why, the same should apply to certain resources. Many of the debates on these
issues relate to: (a) the difference between management versus control of resources; and (b)
whether a reliable value can be determined for financial reporting purposes.

Management versus control of resources

The financial statements aim to reflect those resources that an entity controls. Control
means that the entity has the ability to direct how the economic benefits or service potential
of an asset will be used for the entity’s benefit. This is contrasted with being tasked with the
broad management of resources, which could include, for example, keeping a database of
resources, issuing licences for their use, giving approval for alterations etc. These actions do
not mean that the entity can use those resources to either generate cash or other economic
benefits for the entity, nor are they able to use those assets in delivering services. The
responsibility of an entity to manage resources without control being present will not result in
recording in the financial statements. The existence of control (along with other factors), is
the difference between a “resource” being managed and the existence of an “asset” for
financial statement purposes.

Determining a reliable value

Resources are reported in the financial statements as assets when control exists, and a
reliable value can be determined. This value is based on either what was paid, or an
alternative value such as fair value where the asset was acquired without giving anything (or
only a minimal amount) in return.
If amounts are paid, the value is usually easy to determine. Where there is no exchange of
value and fair value or an alternative measurement basis needs to be used, the value may
be difficult to determine. The value may be difficult to determine for a number of reasons,
including that: (a) the benefits associated with an asset may not be known or quantifiable,
and (b) the resources may be unique, meaning there is no active market, similar assets may
not exist, and proxies may not best represent the value of the asset.
For accounting purposes, a reliable measure usually does not exist where either there is
significant variability in the range of estimated values, or the probabilities of the various
estimates cannot be reasonably assessed. Where there is variability in the values being
determined, the asset is not recognised in the financial statements because this would not
give users of the financial statements a fair representation of the value of the asset. Some
other action, such as disclosure, may be appropriate.

What gets measured gets managed

The ASB has issued a number of Standards dealing with the accounting for resources.
Notably, the ASB issued GRAP 103 on Heritage Assets in 2008 which explains when, or in
what circumstances, certain of the resources listed above should be reported in the financial
statements. Heritage assets are those assets that have “cultural, environmental, historical,
natural, scientific, technological or artistic significance and are held indefinitely for the benefit
of present and future generations”.

Prior to GRAP 103 being issued, entities would not necessarily have reported heritage
assets at all in the financial statements. Entities were permitted to reflect heritage assets in
the financial statements where they were used for administrative tasks or service delivery.

By applying GRAP 103, entities are required to:

1. Identify heritage assets, i.e. those that are held for the reasons outlined above, and are
preserved and maintained so that they can be held indefinitely for future generations.
These resources should otherwise meet the definition of an asset, including that they
are controlled.

2. A value should be determined for the initial recording of the asset, either using cost or
fair value (depending on how the asset was acquired, and what information was
available on the initial adoption of the Standard). Where a reliable value cannot be
determined, there is disclosure in the financial statements.

3. Where a reliable value can be determined, the asset is measured at each reporting
date either at cost or using the revaluation method. In both instances, the assets are
not depreciated but assessed for impairment.

By including heritage assets in the financial statements, one inherent result is that entities
should have a complete asset register of all heritage assets to support the amounts reported
in the financial statements. What has emerged during the implementation of GRAP 103 is
that entities – often those whose primary responsibility it is to hold, manage and direct how
heritage assets are used – did not have complete registers of these assets. It is a basic
management principle that asset registers should be kept so that assets can be managed
and appropriately safeguarded. Entities may in fact need two asset registers – one for those
assets that are heritage assets for financial statement purposes, and one for those
assets/resources that it is required to manage in terms of a legal mandate.

Many argue that assigning a value to heritage assets is inappropriate because they
generally cannot be sold. Because government has a broader responsibility related to the
country’s resources, the focus cannot merely be on cash generation. Assets in the public
sector have service potential because they can be used to deliver services, which includes
preserving the country’s heritage. Value for accounting purposes, should reflect both cash
and similar benefits that can be derived as well as service potential.

There are many benefits assigning a value to a heritage asset, which include the following:

 Users can make decisions about the quantum of resources needed to manage,
maintain, and preserve these assets.

 Decisions can be taken about how best to safeguard assets, including whether
insuring them is viable given their nature and value.

 Values provide an indication of how important an asset may be to the country’s
heritage and holding officials accountable for their preservation – although
appreciating that the value of many assets that are irreplaceable may not be
determinable.

Differing views on the value of accounting for heritage assets

The accounting for heritage assets – as outlined in GRAP 103 – has elicited divergent views
from both preparers and users of the financial statements. Given the issues raised during the
implementation of the Standard, the ASB agreed to undertake a post-implementation review
of the Standard. The public consultation process with preparers, users and auditors is
currently underway and will end on 15 September 2020. Affected parties are urged to
participate in the review either by attending sessions hosted by the Secretariat of the ASB or
other organisations, or by completing the applicable questionnaire.
More information on the review is available here:  https://www.asb.co.za/ed-
180/