Heritage in Financial Reporting

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1 Italy EPSAS Working Group Fabrizio Mocavini Italian MEF RGS Study and Research Directorate

2 We started from Heritage Team Ministry of Economic and Finance General Accounting Department and Ministry of Cultural Heritage and Tourism In cooperation with: National Institute of Statistics Italy s Court of Auditors Ministry of the Environment, Land and Sea State Property Office Academics 2

3 Index What is a Heritage Item? UNESCO view IPSASB view Italian view Heritage Item as asset Main characteristics From heritage Item to heritage Asset Evaluation criterion Fixed points and open issues Pilot Project 3

What is a Heritage Item? In order to be included in the World Heritage List, sites must be of outstanding universal value and meet at least one out of ten selection criteria (e.g. iii, iv, vi, viii).

4 What is a Heritage Item? In order to be included in the World Heritage List, sites must be of outstanding universal value and meet at least one out of ten selection criteria (e.g. iii, iv, vi, viii) sites; Classification: Cultural; Natural (e.g. mountains, lakes, waterfalls). UNESCO ITALY Characteristics of Heritage Items* often irreplaceable; often ethical, legal and/or statutory restrictions or prohibitions that restrict or prevent sale, transfer or destruction by the holder or owner; and a long, possibly indefinite, useful life due to increasing rarity and/or significance. *IPSASB CP April 2017 Par. 1.7, p.10 Definition of cultural heritage (Cultural Heritage and Landscape Code, L.D. n.42/04) Classification: Cultural (ONLY tangible); Natural. Movable and immovable properties Evaluation criteria Committee 4

5 What is a Heritage Item? SITES UNESCO ITALY ITEMS Caserta Royal Palace Cultural (tangible) items Cultural heritage Caserta Royal Palace Uffizi gallery (Florence) Historical centres of Florence Dolomiti Mountains Natural items Landscape heritage Piazza Duomo of Florence Dolomiti Mountains + Mediterranean diet Cultural (intangible) items 5

6 Heritage Item as Asset 6

7 Heritage Item as Asset Definition of Asset by IPSASB Conceptual Framework* «A resource presently controlled by an entity as a result of a past event» *IPSASB CF Par. 5.6, p.51 Special characteristics of Heritage Item by IPSASB Consultation Paper* Heritage items are items that are intended to be held indefinitely and preserved for the benefit of present and future generations because of their rarity and/or significance in relation, but not limited, to their archeological, architectural, agricultural, artistic, cultural, environmental, historical, natural, scientific or technological features * *IPSASB CP April 2017, par. 2.11, Preliminary View Chapter 2.1 7

Presently controlled by an entity Legal ownership Other enforceable rights given to an entity that give it the

8 Heritage Item as Asset Italy agrees on the fact that these special characteristics do not prevent heritage items being: 1. Resources EPSAS 2. Presently controlled by an entity Legal ownership Other enforceable rights given to an entity that give it the ability to access or deny or restrict access Direct the use of heritage resources to achieve the entity s objectives 3. as a result of past event Purchase Non exchange transaction (nationalization) 8

Heritage Asset in Financial Reporting Nevertheless, given the legal limits weighing on cultural heritage (such as its

10 Item #2 5 Item #3 10 Item #4 5 Non -Current Liabilities X NET ASSETS/EQUITY Not available Reserve 30 Financial Position KEY

9 Heritage Asset in Financial Reporting Nevertheless, given the legal limits weighing on cultural heritage (such as its nontransferability), an unavailable reserve should be recognized in the net equity, equal to the amount of the unavailable Heritage Items recorded in the assets. ASSETS Current Assets X LIABILITIES Current Liabilities X Principle of prudence Non -Current Assets X Heritage Asset 30 Item #1 10 Item #2 5 Item #3 10 Item #4 5 Non -Current Liabilities X NET ASSETS/EQUITY Not available Reserve 30 Financial Position KEY ELEMENTS «Inalienability» as legal concept; Link between Financial Position and Financial Performance: HI give rise to revenues and costs; Debt sustainability: it should be consider the «inalienable» assets (eventually another index). 9

10 Approach to evaluation Nominal cost of one currency unit criterion* is inadequate because: it is equivalent to not attributing any value to the asset; it would cause severe distortions in the accounting of the State property. *IPSASB CP April 2017, Specific Matters for Comment Chapter 4.1 Other criteria such as historical cost, market value and replacement cost are not completely adequate because: difficult to apply to the entire cultural heritage; do not properly consider the use of the asset; non-monetary values are not taken into account. [Market value can be used only for some contemporary works of art] 10

Italian view: value of Heritage Assets A Heritage Asset represents an investment made in the public interest and its value is given by: the VALUE OF USE: the value that the asset has because it is

11 Italian view: value of Heritage Assets A Heritage Asset represents an investment made in the public interest and its value is given by: the VALUE OF USE: the value that the asset has because it is seen, visited, enjoyed. Measured based on the financial flows generated by its use. and by a NON-USE VALUE: the value that people attribute to the cultural asset even without using it. Measured with ad hoc techniques (e.g. contingency evaluation). HAV = usev + non-usev 11

12 Value of use and non-use usev The financial flows related to the use of the asset is given by: revenue related to the use of the asset; revenue connected to the economy generated thanks to the heritage asset. Ff t = Ffdir t + Ffind t Ffdir t : direct financial flows Ffind t : indirect financial flows t : is the time when the evaluation takes place non-usev The non-use values of heritage assets can be: option value (conservation, use in the future); existence value (availability for the community); inheritance value (future generations). non-usev is completely independent from the individual use of the cultural asset or service and it doesn t depend on revenue financial flows. non-use value can be measured with the public contribution allocated to the type of cultural asset or services (proxy of the option value)*. *The whole of the direct and indirect expenses the Entity incurs in order to safeguard and enhance its assets. 12

13 Heritage Asset Value. so, Heritage Asset Value is the flow discounting of the following sum: usev (A) Direct revenue (B) Expenses for use + (C) Tax revenue from tourism economy (A) Revenues from ticket sales; (B) Expenses for cleaning, personnel, fees, etc. (C) Duties, direct and indirect taxes (e.g. tourist tax) non-usev (D) Costs for protection and enhancement (D) Costs for renovation, extraordinary maintenance, etc. This method focus on the expectations entertained concerning the values that the asset may generate in its future; Nevertheless, this method completely overlooks the "past", the "history" of the asset, with the limit of potentially placing an ancient heritage asset and a more recent one on the same level. 13

14 «Mixed solution» What therefore seems most appropriate for our purposes is a mixed solution, which - in a balanced way should consider Heritage Asset value based on both historical method and financial future flows. Mixed solution HAV based on historical method* Use value HAV based on financial flow Non-use value Past t 0 Future HAV = (HAV s q) + (HAV f p) [ q + p = 1 ] * a kind of "financial value, able to appreciate the investments made on Heritage Assets during the course of history 14

Fixed points and open issues Heritage Items have to be considered as

be evaluated recognising an unavailable reserve in the net equity; The

assets; Landscape property; Subsequent measurement: amortization,

15 Fixed points and open issues Heritage Items have to be considered as assets for the purposes of financial reporting; Heritage Items have to be evaluated recognising an unavailable reserve in the net equity; The «nominal cost of one currency» criterion cannot be applied; Intangible assets; Landscape property; Subsequent measurement: amortization, capitalisation, etc. The criteria set out in the IPSASB CP are not always applicable. 15

16 Pilot Project Purpose: to test the actual applicability of criterium on different assets; How: selecting at least five different heritage assets, identifying relevant data and information; Items: Colosseum, Trevi Fountain, Galleria Borghese, Caravaggio s Paint (inside Galleria Borghese), Pantheon, Villa Pamphili. Timeline: from Nov to Feb Working Team Ministry of Economy and Finance Ministry of Cultural Heritage and Tourism Municipality of Rome University of Roma Tre 16

17 Contacts Fabrizio Mocavini Pierpaolo Italia - pierpaolo.italia@mef.gov.it Paolo Angiolillo paolo.angiolillo@mef.gov.it Ministry of Economic and Finance Via XX Settembre, 97 Rome - Italy 17

Financial Reporting for Heritage in the Public Sector

Consultation Paper April 2017 Comments due: September 30, 2017 Proposed International Public Sector Accounting Standard Financial Reporting for Heritage in the Public Sector This document was developed