How Do Victorian City Councils and Museums Accountable for Land under Roads and Heritage Assets - Coursework Example

How do Victorian City Councils and Museums Account for Land under Roads and Heritage Assets Introduction The main aim of this paper is to analyze accounting standards for Land under Roads and Heritage Assets as put forth by the Australian Accounting Standards Board and the way in which Victorian City Councils and Museums account for Land under Roads and Heritage Assets. An accounting standard is defined as, “A technical pronouncement that sets out the required accounting for particular types of transactions and events. The accounting requirements affect the preparation and presentation of an entity’s financial statements.”1 Accounting standards in Australia was first developed by the professional accounting bodies and were enforced under the code of ethics. In the beginning of the year 1984, the Accounting Standards Review Board (ASRB) was established by the Ministerial Council for companies and securities to review the standards created by the profession. This operated under the Companied Act 1981 and corresponding to the state or territory codes. The ASRB was then re-established under the Australian Security Commission Act 1989. In the year 1991 it was renamed as the Australian Accounting Standards Board (AASB). The AASB is an agency of the Australian Government under the Australian Securities and Investments Commission Act of 2001. As per that act the main functions of the AASB includes, development of a conceptual framework for evaluating proposed standards, formulation accounting standards under section 334 of the Corporations Act 2001, formulation accounting standards for other purposes, participation in and contribution towards developing a single set of accounting standards for use worldwide and the advancement and promotion of Part 12 of the ASIC Act including reducing cost of capital and enabling Australian entities to compete overseas and maintain investor confidence in the Australian economy.2 The primary missions of the AASB are to develop and sustain high-quality financial reporting standards for all the sectors of the economy of Australia and contribute to the development of global financial reporting standards through leadership and talent. Its mission is also to be recognized as a body that assists the inclusion of the Australian community in global standard setting. The AASB has put forth standards for Land Under Roads and standards for Heritage Assets. The AASB expects local governments, government departments, general government sectors and whole governments to follow these standards when recognizing, valuing and reporting both land under roads and heritage assets. Importance of Accounting for Land Under Roads and Heritage Assets In this context there are some important points to be addressed regarding whether it is important to account land under roads and heritage assets and the reasons why, the issues that arise when accounting for the above two, how city councils and museums overcome these issues and how they are accountable for land under roads and heritage assets as per the AASB’s accounting standards. Many governments are increasingly making legislative commitments to be fiscally responsible. Encouraged by the New Public Management and pushed forward by international bodies that set standards, these governments are moving away from traditional cameralistic or cash accounting and adopting accrual accounting systems.3 Cameralistic accounting, also called budgetary accounting or cash accounting was chiefly designed to contribute towards increased control of public money.4 The primary reasons for the transition of governments from cash accounting to accrual accounting are increased levels of transparency, greater cost awareness and a better idea on the revenues and expenses. Debt and changes in debt were the main indicators of the government’s fiscal responsibility under the cash accounting system. Cash surpluses and deficits demonstrated the fiscal responsibility of governments. One of the biggest disadvantages of cash accounting is that it ignores significant costs such as asset depreciation and accruing employee entitlements unless equivalent amount of money ahs been set aside in a fund. Cash accounting also gives a distorted picture of whether a government is acting monetarily responsible or not, because the asset sale earnings are recorded as either revenue or reductions in expenditure. This inadequacy in the quality of financial information provided to the government can result in the making of poor decisions with respect to investment or disinvestment in public sector assets and with respect to cost-effectiveness of alternate service providers of certain public services. Furthermore the use of cash accounting for government financial reporting has been seen as a considerable obstruction to holding governments accountable for the quality of fiscal management on a year to year basis.5 Accrual accounting system provides a more transparent and valid measurement of the annual cost of government operations and of the annual changes in the value of the government’s net worth, which is the difference between the value of its assets and liabilities. “Modern approaches to fiscal responsibility provide for reporting of audited information on net worth, and of changes in net worth, to provide a more transparent view of a government’s fiscal management.”6 A significantly large portion of the assets of the Australian Government is in the form of property, plant and equipment. Different valuation approaches are used for different assets and liabilities. However, this use of different valuation procedures is justified because of the better subjectivity and elevated costs in maintaining current values when compared to historical values. This is because most financial assets with the inclusion of investments are readily valued at current value. For example Queensland Government securities are increased primarily because the Queensland Treasury Corporation, as a financial institution adopts a market to market accounting procedure in accordance with the standards set by the AASB. Financial reporting of Land Under Roads and Heritage sites are important and valid for three chief reasons. The foremost and crucial reason is accountability. Financial reporting of land under roads and heritage sites provides information by means of which officers and the governing body can be held responsible for their stewardship of public assets. It also provides information that will aid in the measurement of changes in the net worth of public sector bodies over time. The second important reason is facilitation of management decision making. Financial reporting land under roads and heritage sites also provides the management with information that is required to help them manage the assets under their control efficiently. It also aids the management in making decisions regarding the utilization of current resources and allocation of future resources to land and heritage assets. The final reason for financial reporting of land under roads and heritage sites is insurance. The valuations of land under roads and heritage assets that are calculated and obtained for financial reporting purposes has relevance to the decisions that have to be made with regards to insurance and risk management purposes.7 Apart from this the valuation of heritage assets and financial reporting also provides information to the management and the public, which allows them to gain a complete picture of the financial value of the asset at that particular time, compare and contrast the changes in financial value of assets over time, allocate funds between different kinds of assets, re-allocate resources to assets with higher priority through the sale of existing assets with low priority and develop suitable internal management practices and procedures. It is important to note here that to achieve the purposes of financial reporting of land and heritage assets effectively, the financial information that is provided must be current. If a historical approach is utilized no account can of specific or general price movements since purchase can be taken and comparability between financial statements is encumbered. Furthermore, distortions with respect to the value of components of the collection assets may arise. Hence in order to avoid the many disadvantages of cash accounting and the many benefits that arise out of financial reporting, accountability of land under roads and heritage assets is very important. Issues When Accounting for Land Under Roads and Heritage Assets There are several problems and issues involved in the implementation and adoption of accounting and financial reporting of land under roads and heritage assets. One of the basic issues in implementation of accounting procedures is that many agencies were not prepared for the introduction and implementation of accrual accounting. Despite the fact that the Commonwealth adopted an incremental approach to implementation, comprehensive surveys of agencies and staff displayed lack of preparation for implementation.8 Another implementation issue is concerned with maintaining the government’s net worth in real terms, i.e., using current value accounting model. In order to maintain the government’s net worth in real terms, agencies must account for the effect of changes in prices in a different way from how they presently do it. Instead of recording the changes to asset values directly in the balance sheet, the changes arising from price level movements would be accounted for in the balance sheet. Changes in the proportional value of certain types of assets such as land are recorded as revenues or expenses before they are recorded in the account as changes in net worth. This approach needs a considerable learning process by those who prepare financial reports. The next issue involved in accountability of land under roads and heritage assets is the implementation costs of accrual accounting procedures. The applying of relative current value accounting procedures involves additional costs and in certain situations increased subjectivity. However, it was found that only the overall costs of implementation was available as opposed to specific costs with reference to education, training etc. This failure to keep accurate records to facilitate the calculation of the total implementation costs of accounting not only negates the main reason why the method was adopted, i.e., to enable full disclosure of cost services; it also creates two further problems. Firstly, the unavailability of data regarding accurate costs makes it difficult to establish whether benefits exceed the costs involved. Secondly, since no budget has been set aside for the implementation process and hence there is no way of measuring performance by striking a comparison between the actual costs and budget costs. The absence of data on accurate costs and lack of a proper budget for the implementation of the process contribute to higher implementation costs through poor management. The third most significant issue in accounting for land under roads and heritage assets is contentious nature of valuation methods used and the inconsistency of valuation methods. It was noted that there were discrepancies between the valuation methods and procedures adopted by different government entities. For instance, the Roads and Traffic Authority (RTS), valued assets by calculating a Provision for Asset Restoration, which is amount of money necessary to bring the road network to an acceptable standard and a Provision for Asset Renewal, which is the amount of money required to transform the road network from an acceptable standard to an almost new condition. The Maritime Services Board however, valued land assets at a nominal value of $1 per site.9 The Commonwealth’s Joint Committee of Public Accounts noted that although the RTA recognized the value for land under roads in its financial statements, the whole-of-government reports did not take into account the valuation for land under roads as the land did not have any alternative use. Another point of debate at this juncture is the valuation of community and heritage assets. While these heritage assets are revealed in the balance sheet, of relevant departments and governments with positive values, these heritage and community asset values do not provide utility for those reporting the entities. This lack of consistency in valuation methods and procedures in the public sector implies that significant comparisons between public sector reporting entities and other public sector entities and private sector entities are not possible. The above mentioned issues thus make it very difficult for Victoria City Councils and Museums to account for land under roads and heritage assets. Overcoming the Issues There are several ways in which City Councils and Museums overcome the above issues. As mentioned previously a large portion of the Australian government’s assets are in the form of property, plant and equipment. And in the previous section we have already seen that there are differing valuation methods that are used across Australia when recording land under road and heritage assets. For instance current value is used for physical assets with a value that exceeds agency thresholds and with an estimated useful life of three years, while historical value is used for other physical assets. Some government agencies, use varying valuation methods and procedures despite the discrepancies involved by justifying it using two main reasons. These agencies justify the use of variable valuation procedures due to the larger subjectivity and elevated costs in maintaining current value. They ignore the issue of discrepancies in valuation methods and procedures as they feel it is justified due to increased subjectivity and higher costs. With regards to land under roads, many state and territory governments in Australia do not include the value of land under roads due to the doubts regarding the reliability of such information. However, in 1996.97, the Auditor-General of New South Wales qualified the financial report of that government due to the exclusion of land under roads. These assets had an estimated value of $15 billion. The Government of Western Australia on the other hand, has found a solution around the issue of lack of reliability of information regarding the value of land under roads and has included it in its financial report. It included an amount of 4$ billion as value of land under roads in its 1996-97 financial reports. The Western Australian Government uses average ratable value of the surrounding land to estimate value of land under roads in the Perth Metropolitan area. It utilizes unimproved broad acre value to estimate the value of land under roads outside the Perth Metropolitan area. While this method of calculating value of land under roads may bring about the issue of circularity, that is, the value of land under roads is heavily dependent on the value of land surrounding it, which in turn depends on the existence of a road network, this procedure is a reasonable solution to combat the doubts regarding the reliability of information regarding value of land under roads and is a better alternative to the total exclusion of the value of land under roads from the financial statements and report. Many Australian Public sector entities have adopted deprival value method for the purpose of valuation of non-current assets.10 Several authors are of the opinion that in public sector, where historical cost is not the method adopted to value assets, deprival value represents better value of non-current physical assets.11Deprival value which is usually described as Value to the Business asks the question, ‘what would the owner of the asset lose if he were deprived of the asset?’ In simple terms it is the measurement of the additional value that a business accumulates as a consequence of owning a particular asset. “Deprival value is usually interpreted as implying measurement at replacement cost for an asset whose recoverable amount (the highest value obtainable from use or disposal) exceeds replacement cost.”12 The primary reason for restricting the value of the asset to its replacement cost is because the loss resulting from losing the asset must not be greater than the cost of replacing the asset. Similarly, the value of owning the asset must not exceed the cost of obtaining a comparable asset in the market. One of the primary advantages of adopting this method is that when assessing replacement cost all necessary costs of acquiring the asset are included as opposed to merely the price. It includes transactions, transportation and installation costs. However deprival value of asset provides a better value for non-current physical assets. Another very important valuation method that is being widely used today throughout the state of Victoria is the Fair Value method. “The fair value of an asset is the best estimate of the price reasonably obtainable in the market at the reporting date.” 13 Fair value is based on the assumption that a public sector entity is a ongoing concern without any need to liquidate or curtail its scale of operations or undertake transactions based on adverse terms. It also assumes that the asset is exchanged after a sufficient time of marketing to acquire an advantageous price. “The fair value of an asset is determined by reference to its highest and best use, i.e. the use of the asset that is physically possible, legally permissible, financially feasible, and which results in the highest value.”14 At this juncture opportunities that are unavailable to the entity are not considered. The chief test that is undertaken to determine the fair value of an asset is to determine whether there is an active and liquid market available for that particular asset. This method is one of the most accurate methods to determine the value of land and heritage assets. Methods of Accountability Victoria City Councils and Museums are accountable for land under roads and heritage assets as per the Accounting Standards AASB 1051 and AASB 116 respectively. Under AASB 1051 Land Under Roads, city councils and museums are required to disclose their accounting policies for land under roads acquired by the end of the first reporting period ending on or after 31st December 2007 in each reporting period to which this standard applies. The nature and net amount of each adjustment made must also be disclosed. However, according to this standard, a public sector entity may choose to recognize as an asset depending on the asset recognition criteria, or it may choose not to recognize as an asset, land under roads that have been acquired before the end of the first reporting period ending on or after 31st December 2007. When an entity chooses to recognize land under roads in accordance with this standard, after the entity’s first time adoption of the Australian equivalent to IFRS the entity is allowed to choose fair value in relation to land under roads. Those lands under roads acquired after the end of the first reporting period ending 31st December 2007, are accounted for as per AASB 116. According to AASB 116, property, plant and equipment can be recognized as asset only it will bring about future economic benefits to the entity and if the cost can be measured reliably. Initial measurement of asset is done ay cost for property plant and machine and for non-profit entities cost is measured as fair value at the date of acquisition. The standard requires entities to value plant, property and equipment based on the cost model or revaluation model. For each plant, property and equipment entities must disclose the measurement basis used for deciding gross carrying amounts, depreciation methods, rates and useful life, gross carrying amount and depreciation accumulated at the start and end periods and a settlement of the carrying amount at the start and end of period. Information about pledged items as security for liabilities and information on revaluations obtained must also be disclosed. Levels of Consistency in Accounting Standards The following sections of this paper will analyze two city councils and one museum in Victoria, their accounting procedures for land under use and heritage assets, whether they are complying with relevant accounting standards and whether they meet the needs of public accountability. The Banyule City Council in Victoria recognizes items of infrastructure, plant, property and equipment and these items are measures at recognition at cost and then are depreciated. Infrastructure assets include roads, drainage, footpaths and parks improvements. Infrastructure and property assets are recorded in the Balance Sheet of the Council, at cost in the year of acquisition or construction and are subject to depreciation on a straight line basis over their useful lives following acquisition. The valuation of property, plant and equipment is done based on the revaluation model as per the measurement models set forth in AASB 116. Infrastructure and property are revalued on 30th June in the year of each general biennial revaluation of property. Revaluation of assets is done very year to ensure their values do not vary from their current value. Revaluation increase is credited to asset revaluation reserve and revaluation decrease is recorded as an expense. However, The Banyule City Council has chosen not to recognize land under roads as an asset ass on 30th June 2008 as per AASB 1051. 15 Casey City Council follows a similar procedure as that of Banyule City Council for the recognition and valuation of property, plat, equipment and infrastructure. The Casey City Council recognizes plant, property and equipment at cost less accumulated depreciation. Infrastructure assets include road pavements, bridges, footpaths and bicycle paths, kerb and channels drains and pits etc. The buildings in this Council are valued according to the standards set forth by AASB 116, using the fair value method. The fair value of building assets in the Council are measured with consideration for the highest and best use of the property. Where it was found that there was no active or liquid market for an asset, fair value was determined and recorded as written down value of the building asset. The Casey City Council uses revaluation method to measure its assets as per AASB 116. The revaluation establishes fair value of the assets based on unit rates resulting from subdivisions and contracts constructed during 2007-2008 exclusive of demolition and preparation costs, straight line depreciation determined for each asset and expected lives of assets assessed from the condition of the asset. Unlike Banyule City Council, Casey City Council has chosen to recognize all land under roads acquired before the end of 30th June 2008 based on the satisfaction of recognition criteria given in the accounting standards given by AASB. Land under roads acquired before 30th June is measured at fair value as on the date of election. Land under roads obtained post 1st July 2008 will be recognized based on the recognition criteria and measured at fair value as on the date of acquisition based on AASB 116. 16 Museum Victoria recognizes land and buildings initially at cost and subsequently measures them at fair value less accumulated depreciation and impairment losses. Museum Victoria utilized cost method to calculate the value of plant, property and equipments. Cultural assets, collections and heritage assets are recognized and measured at the cost of replacing the assets less accumulated depreciation calculated based on cost, to reflect already expired economic benefits if the asset. Revaluation method is used for those for assets other than those that are measured at cost. This is done regularly to ensure that there are no variations in the value of the asset and carrying amount. Revaluation increments are credited to the revaluation reserve and revaluation decrements are recognized as expenses. The collections in Museum Victoria were valued according to the principles of the AASB 116, using the fair value method. It also arranged for revaluation of its library collection on the fair value basis. Revaluation of collections and library collections are done every five years to ensure that the carrying amount of the asset does not differ from its fair value.17 All of the above three public sector entities, i.e. the two city councils of Victoria and Museum Victoria are reasonably consistent with each other accounting procedures for land under roads and heritage assets. They all follow the same recognition and valuation methods, except for the variation in the recognition of land under roads as an asset, with Banyule City council choosing not to recognize land under roads as an asset and Casey City Council and Museum Victoria choosing to recognize and measure land under roads as per the AASB accounting standards. Compliance with Relevant Accounting Standards The Banyule City Council, Casey City Council as well as Museum Victoria are complying with the relevant accounting standards set forth by the Australian Accounting Standards Board when recognizing and measuring land under roads and heritage and cultural assets. All three public sector entities act in accordance with the principles set out in AASB 1051 Land Under Roads and AASB 116 Property, Plant and Equipment. The primary objective of AASB 1051 Land Under Roads, is to specify requirements for the financial reporting of land under roads by local governments, government departments, General Government sectors and whole of governments. This standard applies to annual reporting periods beginning on or after 1st July 2008. According to this standard an entity may choose to recognize as per recognition criteria, or choose not to recognize land under roads as an asset before the first reporting period ending on or after 31st December 2007. A final election is to be made based on recognition and any adjustments during this election is made against the opening balance of accumulated surplus. All entities are required to disclose their accounting policy for land under roads before the end of the first reporting period on or after 31st December 2007. The nature and net amount of adjustments made during election must also be disclosed. When an entity chooses to recognize land under roads it can measure the asset at fair value or can revalue the asset based on fair value or revaluation as deemed cost.18 While the Banyule City Council has chosen not to recognize land under roads as an asset as per AASB 1051, Casey City Council and Museum Victoria recognize land under roads as assets and measures them at fair value as on the date of acquisition. The primary objective of AASB 116, Property, Plant and Equipment is to set down accounting treatment for property, plant and equipment of an entity so that users of financial statements can gather information regarding the entity’s investment in i8ts property, plant and equipment and the changes in investment. The main factors to consider when accounting for property, plant and equipment include recognition of assets, determination of carrying amounts, depreciation charges and impairment losses to be recognized. This standard applies to all entities that are required to prepare financial reports in accordance with Corporations Act. As per this act property, plant and equipment must be recognized as assets only when the asset brings about future economic benefit to the entity and the cost of the item can be measured in a reliable way. Initial recognition of assets is done at cost and non-profit entities recognize assets at fair value. This standards call for all entities to choose either the cost model or revaluation model for the subsequent measurement of property, plant and equipment. As per the cost model, the carrying amount of each asset is determined as cost less depreciation and impairment loss. As per the revaluation model the carrying amount of assets must be determined at its revalued amount, which is fair value at revaluation date less accumulated depreciation and impairment loss. This standard requires all entities to disclose all information regarding measurement basis used for assessing gross carrying amount, depreciation methods and rates and useful life of asset, gross carrying amount and accumulated depreciation at the start and end of accounting period and a resolution of the carrying amount at the beginning and end of the period.19 Both Banyule City Council and Casey City council have initially recognized assets at cost less depreciation and used the revaluation method for the subsequent measurement of the assets. Any revaluation increase is credited to asset revaluation reserve and revaluation decrease is recorded as an expense by both City Councils. The revaluation is done on a regular basis to ensure that variations between carrying amount and value of the asset do not exist. Museum Victoria uses a combination of cost method as well as revaluation method as stated by AASB 116. It uses cost method to recognize land and buildings and subsequently measures them at fair value less depreciation and impairment loss. Heritage assets are recognized and measured at the cost of replacing the assets less accumulated depreciation calculated based on cost and other assets are recognized and measured using the revaluation method. Thus all three public entities are complying with the relevant accounting standards as set forth by the AASB for land under roads and heritage assets. Levels of Public Accountability Public accountability is one of the most important aspects with reference to public sector entities handling public assets. Those who exercise the power of the government have to be publicly accountable for their dealings and actions.20 Public accountability has been defined as, “Obligations of public enterprises and agencies (who are entrusted with public resources) to be answerable for fiscal and social responsibilities, to those who have assigned such responsibilities to them.”21 Hence when recognizing and measuring and valuing land under roads and heritage assets, the City Councils and Museums of Victoria are answerable to the people of Victoria, regarding the investment and other decisions that they take. The Banyule city Council, Casey City Council as well as Museum Victoria meet the needs of public accountability. Annual reports of the City Council and the museum are available on their websites and they can be obtained directly from the council and museum. The annual reports provide the standard statements of financial performance of the public sector entities. The financial report gives specific information on the whether entities elect to recognize land under roads, the method they use for measuring and valuing those lands under roads that are recognized. It gives the standard based on which the above actions are taken. The financial report also gives specifics with reference to the actions taken by entities on cultural assets. Here again information regarding the method used for recognition of assets and the valuation method used to determine the value of the heritage asset. The standard used is also specified. This information gives the public an understanding of actions taken by entities regarding investments on public property. By making annual reports and other important documents containing information on investment and other decisions, easily available to the public, these public entities meet the needs of public accountability. 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