Financial Reporting Exposure Draft 40, Accounting for Heritage Assets

Accouting Standards Board, April 2007
1.0 Introduction

1.1 The Museums Association (MA) is an independent membership organisation representing museums and galleries in the UK and people who work for them. The Association has over 5,000 individual members and 600 institutional members.

These institutional members encompass around 1500 museums in the UK ranging from the largest government-funded national museums to small volunteer-run charitable trust museums. Formed in 1889, it is a charity, receiving no regular government funding, which seeks to inform, represent and develop museums and people who work for them in order that they may provide a better service to society.

1.2 In its response to last year's discussion paper, the MA broadly welcomed the ASB's proposals. It remains our view that the present system is unsatisfactory and potentially misleading to donors and other stakeholders and that a new approach is needed. We welcome the overall approach suggested in the exposure draft, but have some concerns about points of detail. These are outline in response to the questions in the invitation to comment, below.

2.0 Do you agree that rather than the current arrangements, under which entities generally capitalise only recently acquired heritage assets at cost, the requirement should be that an entity should, where practicable, adopt a valuation approach for its heritage assets?

Yes, with the caveat that very few museums are likely to find it practicable.

This [draft] FRS requires a valuation approach where practicable but, where this is not practicable, prescribes a non-recognition approach. Do you agree this proposal will lead to an improvement in the quality of the financial reporting of heritage assets?

Yes, this will be an improvement over the hybrid approach currently in place, which is arbitrary (in that only recent purchases are capitalised and other, much more valuable assets may not be) and potentially misleading.

4.0 This [draft] FRS proposes the assessment of practicability should be applied to individual collections rather than for the entity's total holding of heritage assets (see paragraphs 22 and 23 of Appendix 1). Do you agree?

No. We would favour the all or nothing approach proposed in the consultation paper.

Allowing museums to make an assessment of practicability at the level of individual collections will lead to a new kind of hybrid approach. This seems somewhat perverse, given that one of the motivations behind the change in practice is to get away from the current hybrid approach.

5.0 Moreover, on a practical level, it is not always entirely straightforward to define what constitutes a discrete "collection" and there are problems with the definition proposed in the exposure draft. Museums might define as a collection a group of material that is managed by a particular department.

But museological practice changes and individual objects might be transferred between departments, and whole departments might be merged or split up.

To use the terms suggested in the proposed definition, museums might move from separating collections by "age" or "nature" to a classification based on "origin", according to what intellectual approach is favoured at any one time.

To give one example, at the Victoria and Albert Museum, most collections used to be managed by departments dealing with particular materials (ceramics, metalwork, textiles, etc).

In the 1970s, because of a growing academic interest in the cultures of Japan, China and Korea, a Far Eastern Department was established, and material from those cultures was transferred from the materials based departments to the new department. But now the departments have been reorganised again, and the Far Eastern Department has been subsumed within a larger Asian Department.

No doubt there will be further changes in future as museological practice and academic thinking develops. It would be very confusing and unhelpful if an object that was capitalised in the accounts one year was not capitalised the next because it had moved into a collection for which it was impracticable to obtain valuations overall.

For the same reasons, different museums classify similar objects in different ways. For example, an early Apple Mac computer might belong to a technology collection in one museum, a design history collection in another, and a social history collection in a third museum. It seems unhelpful to promote an approach that could lead to inconsistent treatment of very similar heritage assets held by different museums.

7.0 Museums sometimes acquire a group of objects which might seem to constitute a discrete collection (e.g. a bequest from a private collector) but decisions are often taken at a later stage to split such collections up and to manage component parts separately.

Again, this could lead to confusing accounts with objects moving between non-capitalised and capitalised groups. We urge the ASB not to adopt this approach, but to insist that museums make a decision about whether it is practicable to obtain valuations on the basis of their whole collection.

8.0 If the approach is to be determined at the level of an individual collection, it is necessary to define the term "collection". Do you consider the definition proposed in paragraph 4 of the [draft] FRS is appropriate? If not, what alternative would you propose and why?

As outlined above, we do not think the current definition is workable but cannot propose a better alternative because no approach to classification or management of collections is ever going to be set in stone and there is always a possibility that any boundaries that are established will change.

9.0 This [draft] FRS proposes the approach should be determined for individual collections following an assessment of whether it is practicable to obtain valuations that provide useful and relevant information. This assessment, will include consideration of the relevance of valuations as well as their reliability and the costs and benefits of obtaining them.

Do you support this approach or would you prefer that the approach emphasises that valuation is required only where the valuation is reliable? If you believe that a reliability approach, or some other approach, should be adopted, what guidance would you see as being necessary to assess the reliability of valuations?

It seems sensible to include consideration of relevance, since this will be a factor for museums in deciding whether the benefits of obtaining valuations justify the costs.

10.0 Do you consider that the proposals will cause auditors significant difficulties when assessing an entity's approach, particularly in terms of applying the assessment of practicability at the level of an individual collection? Where a valuation approach is adopted, do you think auditors will face further difficulties in evaluating the valuations being reported?

For reasons outlined above, we think auditors are likely to find it very difficult to assess the appropriateness of decisions about practicability taken at collection level: an auditor is very unlikely to have the specialist expertise needed for a proper understanding of whether even the definition of the scope of a collection is appropriate, let alone to assess the decision about practicability itself. This is a further argument against adopting the sub-collection based approach.

Evaluating the valuations being reported may also present some difficulties.

12.0 The[draft] FRS requires that where an entity adopts a non-recognition approach for some or all of its collections, acquisitions and disposals of heritage assets should not be reported in the profit and loss account or equivalent statement, or in any manner that implies they are gains and losses (see paragraphs 29 to 31 of Appendix 1). Do you agree?

Yes, we agree that it would be confusing to report acquisitions and disposals in a manner that implied that they were gains or losses.

The proposals require enhanced disclosures of heritage assets (see paragraphs 18 to 23 and paragraph 25 of the [draft] FRS). Do you consider the nature and extent of the required disclosures are appropriate? Do you consider any of the disclosure requirements are unduly onerous?

The proposals seem appropriate and not unduly onerous. All Registered/Accredited museums should have the kind of statement required by paragraph 19 in place as part of standard good practice.

14.0 The definition of a heritage asset is set out in paragraph 4 of the [draft] FRS and the scope of the proposed new standard is set out in paragraph 5. The rationale for these is discussed in paragraphs 7 to 12 of Appendix 1. Do you agree with the proposed definition and scope?

We agree with the proposed definition. We are less certain about the scope, for reasons set out in our response to the discussion document. The proposed scope is that "Entities that hold heritage assets to contribute to a principal objective of the entity of promoting knowledge and culture should account for their heritage assets in accordance with this standard".

As stated in our response to the discussion document, local authority museums and university museums (as well as some independent museums) are part of larger bodies which do not necessarily have the promotion of knowledge and culture as a principal objective. Some museums in this position will prepare their own accounts; others' accounts will be prepared as part of the accounts of the larger body.

There is then a danger that collections held by such museums could fall outside the proposed definition of heritage assets. We believe that the scope needs to be amended slightly to reflect the fact that some museums are part of larger organisations.

The scope could perhaps be amended to read: "Entities that hold heritage assets to contribute to a principal objective of the entity (or of a discrete part of the entity) of promoting knowledge and culture should account for their heritage assets in accordance with this standard".

15.0 As explained in paragraphs 8 to 12 of the Preface, the Board believes the costs of implementing the proposals should not be disproportionate. Do you agree?

It would be particularly helpful if any significant costs that would arise on implementation of the proposals (including any not identified above) could be identified and quantified. We agree that this should be the case, provided that non-capitalisation remains an option for museums where the costs of obtaining valuations are disproportionately high.

For more information or comment, please contact:

Helen Wilkinson
Policy Officer
Museums Association
24 Calvin Street
E1 6NW
020 7426 6954