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Countries' updates - Fabrizio Mocavini, Italy

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This presentation was made by Fabrizio Mocavini, Italy, at the 19th OECD Senior Financial Management and Reporting Officials Symposium held at the OECD Conference Centre, Paris, on 4-5 March 2019

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Countries' updates - Fabrizio Mocavini, Italy

  1. 1. Heritage in Financial Reporting Definition and evaluation method 19th Annual Meeting of OECD Senior Financial Management and Reporting Officials Paris, 4-5 March 2019 Servizio Studi Dipartimentale - Research Division
  2. 2. Research Division Paris, 4-5 March 2019 Heritage assets in Financial Reporting 2 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» • 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. • Purchase • Non-exchange transaction (donation, nationalization) «The ability to create Economic Benefits» *IPSASB CF Par. 5.6, p.51
  3. 3. Research Division Heritage assets in Financial Reporting 3 Requirements for evaluating Heritage as asset The proposal concerning the definition of the criteria for estimating and accounting the asset value of heritage items refers essentially to those artistic and cultural heritage items which: • cannot be sold and, therefore, do not have a market price; • cannot be replaced and, therefore, there is no production/replacement cost; • have a potentially infinite survival period (useful life). The database necessary for the estimate must be sufficiently objective and available in every country. The estimate of an asset value must be independent of the organisational structure of MS public administrations. Paris, 4-5 March 2019
  4. 4. Research Division Heritage assets in Financial Reporting 4 Measurement bases (IPSAS Board) ► Historical cost: the information may be not available, in full or in part; ► Market value: many heritage items are burdened by restrictions on their sale which reduce the availability of the relevant market values; ► Replacement cos: given the typical uniqueness of the heritage items, applying this criterion appears to be very difficult; ► Net sale price: heritage items are very often non-disposable; they are kept and preserved rather than sold; ► Value in use: many heritage items do not generate cash flows and therefore the value in use would be equivalent to the replacement cost. The IPSASB CF indicates, for the purposes of evaluating an asset, the following general criteria: ► Historical cost: ► Market value: ► Replacement cost: ► Net sale price: ► Value in use: Paris, 4-5 March 2019
  5. 5. Research Division Heritage assets in Financial Reporting 5 Measurement basis for Heritage assets CHALLENGE: identifying an ad hoc measurement method which is general and applicable to all MS. «Economic» component It is linked to the concept of USABILITY of the heritage item and based on an economic view: direct and indirect financial returns. «Intangible» component Pleasure linked to the enjoyment of the beauty. New concept of «value in use» SOLUTION: using a concept of “value in use” somewhat different from the IPSASB one. Paris, 4-5 March 2019
  6. 6. Research Division Heritage assets in Financial Reporting 6 «Usability» as key element for evaluating For a heritage item to be considered as an asset it is necessary that the community acknowledges an economic value to its usability. Every heritage asset requires actions aimed at ensuring and improving its usability over time. The evaluation of a heritage item as an asset can only be based on the following two economic dimensions: • The economic value of the usability of the heritage item over an infinite time horizon, in relation to the current state of the item and the related conditions of use. • The resources invested in the past allowing an heritage item to be considered as an asset. Paris, 4-5 March 2019
  7. 7. Research Division Heritage assets in Financial Reporting 7 Alternative approaches t0 FuturePast «value in use» HAV based on financial flow HAV based on historical method Capitalised Investment Costs (CIC) made in order to guarantee the usability and conservation of the heritage asset. Present Value of the net Returns (PVR) deriving from the economic exploitation of an heritage asset (direct + indirect financial flows). Paris, 4-5 March 2019
  8. 8. Research Division Heritage assets in Financial Reporting 8 The estimates of the asset values of an heritage item generated by the two methods could diverge significantly. The general rule for the choice: the higher value. The higher value This general rule is also justified because the “intangible” value of the heritage cannot be assessed in accounting terms. Rationale behind: PVR > CIC: this is due to either:  the costs incurred in the past may be not available in full or in part (data missing, not reliable or properly documented), or  in cases in which low investment costs are not sufficient to ensure relevant economic potential returns from an heritage asset, given its inherent properties (uniqueness, not competitive market). CIC > PVR : the State can invest in conservation and improvement of an heritage item outside the "profitability" logic (investment costs not covered by expectations of returns). Paris, 4-5 March 2019
  9. 9. Research Division Present value of net returns Heritage assets in Financial Reporting 9 Direct financial flows include all revenue related to the use of the asset (e.g. income from entrance tickets, additional services, etc.) net of management expenses (e.g. cleaning costs, security costs, utilities, etc.). FOR THE PUBLIC ENTITY Indirect financial flows include all returns connected to the business generated by the asset (higher tax revenue).  Flows strictly connected to the asset directly attributable to the asset or strictly linked to it. Taxes that generate incoming financial flows such as the sale of goods and the provision of services - mainly tourism-based.  Flows induced by the asset not strictly related to it. Economic spin-offs generated by the presence of the asset in a given area. FOR THE STATE Paris, 4-5 March 2019
  10. 10. Research Division Pilot project Heritage assets in Financial Reporting 10 KEY ELEMENTS  Financial statement of Entities (direct flows)  Usability (indirect flows)  “Entirety of items”, no single items (indirect flows)  Amount of visitors and their origin (indirect flows) POMPEI VILLA ADRIANA AND VILLA D’ESTE GALLERIA BORGHESE Paris, 4-5 March 2019
  11. 11. Research Division Direct financial flows Heritage assets in Financial Reporting 11 Source: financial statements of Entities Values expressed in euro Paris, 4-5 March 2019 VILLA D'ESTE AND VILLA ADRIANA GALLERIA BORGHESE POMPEI Revenues from ticket sales 3.350.822 6.287.566 28.108.775 Other revenues: 361.841 855.137 2.346.165 - concession of item 361.841 541.854 352.985 - services in direct concession 0 124.283 925.184 - sponsor, private investment contributions 0 48.000 0 - other 0 141.000 1.067.995 REVENUES (a) 3.712.663 7.142.703 30.454.940 Personnel Costs (salaries, etc…) 4.687.882 2.170.784 12.371.057 Operating costs: 2.262.421 2.369.981 12.660.621 - goods and services 1.948.066 1.306.666 12.713.262 - other 314.355 1.063.315 -52.641 COSTS (b) 6.950.303 4.540.765 25.031.678 DIRECT NET RETURNS NO TAXES (c)=(a) - (b) -3.237.640 2.601.938 5.423.262 2017
  12. 12. Research Division Number of visitors Heritage assets in Financial Reporting 12 The «usability» is strictly linked to the number of visitors of an heritage item and represents the main information that is helpful in assessing the asset value. It is also important to know the area from which the visitors come. Other essential factors are: • Average duration of stay in the reference area; • Average expenditure for one-day stay in the area; • Average expenditure for food; • Average expenditure for transportation and other (gifts and fancy goods, etc..). Paris, 4-5 March 2019
  13. 13. Research Division Indirect financial flows – Elements* Heritage assets in Financial Reporting 13 Heritage item Visitors of which: out of reference areas Time spent (in days) Expenditure per visitor per day (average) Villa d’Este and Villa Adriana 704.001 542.081 1 191 Galleria Borghese 568.982 438.116 1 181 Pompei 3.382.240 2.874.904 2 164 • Usability • Expenses for stay (accomodation) • It consists of accomodation, food and transportation/other. • It depends on the «reference area».  Data traceability (verifiability) is an indispensable condition for the related value to flow into the accounting information (measurement).  Descriptive and extra-accounting information (disclosure). *Sources: financial disclousure of Entities and trade associations surveys Paris, 4-5 March 2019
  14. 14. Research Division Indirect financial flows Heritage assets in Financial Reporting 14 The indirect financial flows (first level effect): estimates of VAT, city tax, income tax and others (e.g. bus toll). Source: Italian MEF - Fiscal Affairs Department Values expressed in euro Paris, 4-5 March 2019 VILLA D'ESTE AND VILLA ADRIANA GALLERIA BORGHESE POMPEI VAT 10.325.135 7.827.641 92.104.545 Accomodation sector 6.357.129 5.137.907 47.827.948 Catering sector 2.688.004 2.172.477 25.828.015 Other sectors (transportation and others) 1.280.002 517.256 18.448.582 CITY TAX (daily) 2.675.204 2.162.132 25.705.024 INCOME TAX 1.631.686 1.234.626 20.877.876 OTHER (Bus toll, …) 0 0 1.720.000 INDIRECT FINANCIAL FLOWS 14.632.025 11.224.398 140.407.445 2017
  15. 15. Research Division Total net returns and asset values Heritage assets in Financial Reporting 15 Values expressed in euro Paris, 4-5 March 2019 VILLA D'ESTE AND VILLA ADRIANA GALLERIA BORGHESE POMPEI Revenues (+) 3.712.663 7.142.703 30.454.940 Costs (-) 6.950.303 4.540.765 25.031.678 DIRECT NET RETURNS -3.237.640 2.601.938 5.423.262 VAT (+) 10.325.135 7.827.641 92.104.545 City tax (+) 2.675.204 2.162.132 25.705.024 Income tax (+) 1.631.686 1.234.626 20.877.876 Other (+) 0 0 1.720.000 INDIRECT RETURNS 14.632.025 11.224.398 140.407.445 TOTAL RETURNS 11.394.385 13.826.336 145.830.706 DISCOUNT RATE 1,5% 1,5% 1,5% ASSET VALUE 759.625.670 921.755.716 9.722.047.092 2017
  16. 16. Research Division Total net returns and asset values Heritage assets in Financial Reporting 17 Values expressed in euro Paris, 4-5 March 2019 VILLA D'ESTE AND VILLA ADRIANA GALLERIA BORGHESE POMPEI TOTAL RETURNS 11.394.385 13.826.336 145.830.706 DISCOUNT RATE 1,5% 1,5% 1,5% ASSET VALUE 759.625.670 921.755.716 9.722.047.092 2017 ALTERNATIVE SCENARIOS DISCOUNT RATE 1,2% 1,2% 1,2% ASSET VALUE 949.532.087 1.152.194.645 12.152.558.865 DISCOUNT RATE 1,8% 1,8% 1,8% ASSET VALUE 633.021.392 768.129.763 8.101.705.910
  17. 17. Research Division 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; ► The «usability method» can be applied when the IPSASB measurement criteria are not applicable. ► Further pilot project with heritage item with free entrance and libraries; ► Subsequent measurement: amortization, capitalisation, etc. Heritage assets in Financial Reporting 17 Paris, 4-5 March 2019
  18. 18. Research Division Heritage assets in Financial Reporting 18 Contacts Fabrizio Mocavini – fabrizio.mocavini@mef.gov.it Rocco Aprile – rocco.aprile@mef.gov.it Pierpaolo Italia - pierpaolo.italia@mef.gov.it Ministry of Economy and Finance Via XX Settembre, 97 Rome - Italy Paris, 4-5 March 2019
  19. 19. Research Division If Heritage is an Asset, it should be reported in the Financial Position Statement Nevertheless, given the legal limits weighing on cultural heritage (such as its non- transferability), an unavailable reserve should be recognized in the net equity, equal to the amount of the unavailable Heritage Items recorded in the assets. Heritage Asset 30 ― Item #1 10 ― Item #2 5 ― Item #3 10 ― Item #4 5 ASSETS LIABILITIES Current Assets X Non -Current Assets X Current Liabilities X Non -Current Liabilities X NET ASSETS/EQUITY Not available Reserve 30 Financial Position Principle of prudence • «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). KEY ELEMENTS Heritage assets in Financial Reporting 19 Paris, 4-5 March 2019

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