Valuation Guidance for Cultural and Heritage Assets

Review of report prepared by the Treasury Accounting Policy Team, for The Treasury (November 2002) prepared for Archefacts.

Keywords: Governance; Literature and Culture;

In 1974, with the construction industry, straining under the demand to catchup on the backlog of housing, was running out of building sites, the government instructed its agencies to identify suitable land they had available, and release them onto the market. The policy failed because it transpired that most had no idea of what land they possessed (or, probably, any other of their government assets).

Such concerns were not a main focus of the public accounting reforms of the 1980s. But a byproduct of requiring every agency to value all its assets (and liabilities) was to create such registers, albeit in a system of decentralised ones. In a way, the valuation requirement was a shrewd resolution of the problem. A physical register could get overwhelmed in minutia, but a valuation one could aggregate not very important items together. Even so, the agency is required to identify these items and keep some sort of record of them and , hopefully because they are now in the administrative vision, care for them a little better than, say, was the experience of the Tiriti o Waitangi over the first part of last century.

However the accountant’s requirement that every asset should be valued leads to difficulties with many artefacts and resources. Valuation principles arose from the treatment of land (as does much property law). But even the valuation of some land seems deeply problematic. There is a sum of just under $16m in the Department of Conservation’s accounts for the Tongariro National Park. It is itemised in a registry, and represents a land valuer’s assessment based on rateable value (excluding improvements) after allowing for limitations on use. but what are we to make of that value? Suppose a developer were to offer double that sum. Would the government flog it off? Certainly not. (It would probably increase the value in the accounts, though.) Suppose the developer doubled the initial offer … We could go on, but it is hard to think of a price at which the government would privatise Tongariro National Park.

(There is another peculiarity of the valuation. Suppose the government were to change the law to make it harder to develop within the Park. Presumably the valuation in the account would go down, even though the judgement of the public’s parliamentary representatives was that the Park was now more valuable.)

The response of a thoughtful accountant is that such questions miss the point. The system may be logical for commercial assets, which can be bought and sold. However it has to be comprehensive, so that non-commercial assets are included in the scope as best they may. Less thoughtful accountants might argue that the law says all government assets must be valued, and it is up to each agency to do the best they can. Exceptions cannot be made.

Whatever, the fact of the matter is that statute and practice requires that cultural and heritage assets must be valued and include in agencies’ balance sheets (statement of financial position). Inevitably, the Treasury, which has overall responsibility for the assets and their valuation, needs to set national standards. The 16 page document under review, Valuation Guidance for Cultural and Heritage Assets, is the outcome. It covers libraries, museums art galleries, historical documents, historical monuments and heritage assets, and applies to holdings of central and local governments.

Its rationale for such valuation are
– accountability;
– management decision making;
– insurance;
adding that ‘Members of Parliament, Councillors, the public or ratepayers are entitled to know the extent of the resources … allocated …. to the cultural institutions’.

Implicit in the document is the notion that there has to be some commonality of valuation, so that there are some sense in a comparison the asset valuations for the National Library and the Museum of New Zealand., or between them and the Auckland City Library, Museum and Art Gallery. (However these are only guidelines, so an agency may choose different valuation rules. This would have to be explained in the accounts, and those to whom the agency is accountable are entitled to demand a closely argued justification.)

So the document sets down rules for the ‘fair’ valuation which is summarises as
‘- If an active market exists for the same asset or a similar asset, the market prices are deemed to be the fair value; or
– If there is no active market, fair value should be determined by using other market-based evidence; or
– If there is no market-based evidence, … Depreciated Replacement Cost [should be used]. For practical purposes, where an assets has an indefinite or sufficiently long life, no depreciation charge should be made.’

What does this mean for your favourite or most cherished asset? Basically find a similar asset, and see what the market prices it, or if it doesnt how much it costs to replace. What to do if the asset is unique and irreplaceable? Well there are valuers and accountants who can determine angels on the head of a pin, so leave it to them. That is what National Archives had to do with Te Tiriti. Southebys said that the going price for such documents was $26m (higher one supposes if there were not the water stains and rat chewings). The procedure is perfectly logical. But what sense does it make?

Sitting behind this is the notion of ‘fair valuation’. Economists long ago learned to distinguish between ‘value’ and ‘price’, untangling a confusion which dogged the nineteenth century, as they puzzled why market prices suggest diamonds are so much more ‘valuable’ than water. And yet practically water is obviously more valuable than diamonds. Economists concluded that price is what the market transacts at, but (for a repeated transaction) the price only reflects the marginal value, the value to the last purchaser. The value of your most marginal use of water is trivial, and that is reflected in the price of water. But the total value of water far exceeds the quantity time the marginal value. Thus the diamond-water paradox is resolved. Diamonds are expensive and we only use them for very valuable things; water is cheap so we use it for activities we dont value very much, as well as for activities which are far more valuable than diamonds. To the remark that ‘economists know the price of everything and the value of nothing’, economists can retort ‘we do understand the difference’. (The original version of the first quote, about a cynic, appears in Oscar Wilde’s Lady Windermere’s Fan in 1892.)

The point of this incursion into ‘value theory’ (for economist’s still call price theory by its nineteenth century) is to recognise that the ‘fair valuation’ used by the accountants is not a ‘value’ but a price. Their terminology is slightly different from that of economists, but economists could claim their language in this (perhaps very rare) case is more aligned with terminology of everyday people, while acknowledging that many other professions – such as land valuers – use ‘value’ to mean ‘price’.

So the guidelines document is about is putting a price on the assets, as required by the Public Finance Act and Generally Accepted Accounting Practices (GAAP). It is certainly not putting on a value, for the market really cannot. The very point of the government holding heritage assets, is it is a means by which the public express their value. There is no more efficient mechanism to do this. Individual bids in the market do not reflect social value, and the cost of organising a collective bid would be prohibitive, were there no government to do it for us.

I draw a practical conclusion. While the heritage assets may be priced in the government accounts, they need to be clearly delineated from the potentially commercial assets. That is why I advocate introducing a class of publicly owned assets called ‘Crown Heritage Assets’ which are those which would not, in normal circumstances, be alienated from public ownership. A logical consequence would be there would be no capital charge on such CHAs – a number are already treated that way – because capital charging is a management device to encourage government agencies to rationalise assets by, ultimately, sale. That does not apply to CHAs because the intention is to maintain, preserve and (hopefully) accumulate, rather than dispose of, them.

Regrettably the Treasury valuation guidelines do not make this distinction. Instead they will disappear into the accounting section of the relevant government agencies and, no doubt be applied rigorously and obsessively – even thoughtfully. With luck they will result in a better management and protection of the heritage assets, and perhaps more accountability. Take some comfort from this, but remember they are only pricing the unique, irreplaceable and precious: they are not giving them any national value.*

* I am grateful to Don Gilling helping me with some of the intricacies of public accounting practices.

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