|
An important facet of
accrual accounting is the allocation of benefits and expenses over the
period that the organisation derives benefits from them. Libraries
should adopt a detailed and serious approach to valuing library
collections as an asset, as a matter of practicality. In a book written
in 1915, Nicolle suggests that practicality is 'the sense of seeing
things as they are and doing things as they ought to be done'. He
defines it as 'the science of being skilled in the application of means
to attain particular ends'.(1)
Valuation of a library’s
collection(s) delivers a number of practical benefits if undertaken as
an essential part of the library’s performance measurement. In public
sector organisations the obvious benefit is that the library is seen to
be contributing to the organisation’s compliance with public sector
financial management and reporting standards and with Treasury policy;
and to be providing information relating to the stewardship of public
assets and the value of the organisation's investment in library
collections. This in turn facilitates the measurement of change in the
net worth of public sector entities. Current and realistic collection
valuations allow library managers to calculate the rate of return to
the organisation of the assets, represented by the collection, employed
in providing the library service. These are all accountability
benefits. Management benefits include information for use in developing
library budgets, and information that enables adequate management of
library collections and informs decision making on utilisation and
future allocation of resources. Current and realistic collection
valuations facilitate the measurement of financial performance and
assist library managers to adequately price library services.
Despite these multiple
benefits, valuation of libraries appears not to be an issue that is
being addressed in depth by library managers, nor is there a generally
accepted methodology for valuing libraries as an asset. It is somewhat
surprising that anecdotal evidence suggests library managers in
Australia have not seen the practical use of implementing this
particular aspect of accrual accounting. Rather, it would appear that
what little effort has been spent on considering the issue, has been
directed towards attempts to convince auditors either that an extremely
simplistic methodology should be adopted, or that libraries should be
exempt.
Arguments for exemption
tend to revolve around:
- the value threshold for
disclosure, the conclusion being that as the value of no individual
book exceeds the threshold the collection is not required to be valued;
- the fact that the
collection represents less than 5% of the agency's total asset base and
therefore the management decision making and accuracy of the agency's
financial reports would not be seriously compromised by exclusion of
the collection;
- the difficulty of
valuing the collection by reference to purchase records, including
historical practice of recording the value of donations as $NIL;
- the absence of formal
write-off action when items are weeded or otherwise removed from the
collection.
Definition of Type of
Asset
Accurate definition of asset type is central to deciding whether or not
those assets should be valued. General assets (physical non-current
assets other than land and heritage assets) are either specialised and
non-specialised assets.
- Specialised general
assets are general assets, which because of their special design or
location would not normally be purchased on a secondary market. A
library collection that has been built up over a number of years in
accordance with a collection development plan tailored to a client
population with particular needs and purposes in a particular
geographic area, could not be replaced as an entity by purchase on a
secondary market. As there is no trading market for such assets, the
appropriate value for such assets is the lower of the current
replacement cost and current reproduction cost of that service
potential.(2)
- Non-specialised general
assets are general assets that are normally traded on a secondary
market. The appropriate value of such assets is the current market
buying price of the gross service potential or future economic benefits
of the existing asset. It is rare for libraries to buy more than a
minute proportion of books and other library materials on the second
hand market.
While certain individual
items within a library might be considered to be ephemera (such as
newspapers and popular magazines) consumed within twelve months of
acquisition, and would therefore be current assets, library collections
could be deemed to be non-current assets because
- They meet the criterion
of service potential or future economic benefits controlled by a
reporting entity as a result of past transactions or other past
events.(3)
- Library collections
possess a cost or other value which can be measured reliably
- Service potential
embodied in the Library collection will eventuate
- The service potential
will be consumed over greater than 12 months
Libraries should be
regarded to be specialised general assets, and therefore the
appropriate value should be current replacement cost of the service
potential - the materials within the collection.
While the library
collection may be defined as a non- current asset, the majority of most
library collections is current use. A current use collection is a
collection that is used in the day-to-day operation of the library.
Individual items within such a collection show a pattern of declining
use, obsolescence and/or of physically wearing out over time. It
follows that depreciation is appropriate.
A permanently retained
collection is a collection for which there is verifiable evidence that
the collection has heritage, cultural, aesthetic or historic value
which is worth preserving in perpetuity and to which sufficient
resources are committed to preserve and protect the collection and its
service potential. Such permanently retained collections will generally
only be found in archives or cultural collections, although many
libraries will have a small number of items which fit into this
category.
Item or Collection?
Arguing that libraries should be exempt is to suggest, in accrual
accounting terms, that library collections are an inexhaustible
resource. Where, because of diminishing funding over a number of years,
library collections are aging, such a stance could have a negative
impact on future funding. Of particular concern to this writer is the
"book by book" approach to library collections inherent in the value
threshold argument. In the interest of survival, a shared understanding
that a library collection is a unique resource built up over years in
which every item is enhanced by others in the collection, and that all
have been selected to meet the particular goals and needs of the parent
organisation and of the library's clientele.
While the value of
individual items in the library collection will fall below the asset
threshold, the total collection will not. In Queensland, this has been
recognised in guidelines issued to agencies:
Where an
agency controls sets, networks or collections of like assets, which
individually may be valued below the asset valuation threshold, but,
when combined, are above the threshold, it will need to determine
whether the total vale of that set or collection is material. Where it
is, the set, network or collection is to be recorded and valued as a
whole. (4)
Valuation for insurance
It must be stressed that the methods used to value library collections
for insurance purposes do not meet the requirements of accrual
accounting, though the converse is not necessarily true. In valuing a
circulating library collection for insurance purposes it is normal to
assess the percentage of the collection which is on loan at any
particular time, and to reduce the coverage accordingly. The basis for
this practice is the assumption that the sort of catastrophic
occurrence which would not only destroy that part of the collection
housed in the library at the time, but also that part of the collection
in the possession of library users, and therefore scattered over a wide
geographic area, would be unlikely to be covered by the insurance
policy. It is also normal to insure for full replacement and
restitution.
Deprival value
In valuing a library collection as part of financial reporting for
performance monitoring, the major consideration, or test of value, is:
What is the value of this collection to the organisation? What does it
contribute to the organisation? What would it cost to replace the
services the organisation obtains from the collection? This is known as
the deprival value of the collection.
Under the deprival value
methodology the useful life of the asset is calculated, and the asset
is depreciated annually to ensure that the residual value reflects that
useful life. Deprival value is neither the product of any particular
valuation technique nor a valuation methodology in its own right.
Deprival value is based on the legal notion of compensation for loss.
Inherent in this legal
notion are two principles which mitigate against either over-valuation
or under-valuation of the collection:
- the loss resulting from
deprivation of the collection cannot be greater than the cost to the
library or parent body to replace the collection or its services. (The
intrinsic, educational, social, cultural or knowledge value of the
collection is not taken into account.)
- the collection cannot
be worth less than the library could sell it for.
Prerequisites for
implementation
Once it has been decided to value a collection, a number of decisions
are a prerequisite for implementation. These are selection of a
depreciation methodology; categorisation of the collection; and
definition of initial cost
Depreciation
Depreciation is the method by which the value of an asset is allocated
over the period in which it provides service potential, that is, the
rate at which an asset is depreciated is dependent on how long its
useful life is in the context of the organisation which owns it. Such
assessments are estimates of the future life of assets based on current
experience. In other words, the useful life of library materials is
reflected only by the experience of the particular library which owns
them because the purposes for which the library’s clients use the
library materials and the type of use to those materials are put, in
combination determine the useful life of those materials.
There are two aspects to
useful life in relation to library materials:
Physical life
Physical life is simply
how long an item lasts. Hardcover books, softcover books, videos, and
other library materials each have a finite average physical life which
is not necessarily consistent across all user populations, climatic
conditions or subject matter.
Relevance life
The period during which
content or subject matter is relevant to a library’s user population is
that period between publication and/or acquisition and obsolescence.
Library materials remain relevant to the user population for differing
periods, depending on a number of factors. Information can be extracted
from circulation records. It is unlikely to be practical to include
in-library and photocopying use of circulating materials, though these
forms of use may be sampled for reference materials).
The same item may have
differing physical life and relevance in different libraries because
these depend on the physical format of the item, the purpose for which
the item is used and the physical treatment is receives, for example
how often it is borrowed and how rough its treatment. The Story of
Ping, for example, appears to have infinite relevance, but will
have be regularly replaced in collections used directly by small
children. In an exemplar collection used by academics, however, it will
fare much better. On the other hand, libraries regularly throw out
pristine looking reference books that are hopelessly out of date.
Developing a profile of useful life of a library collection is a
complex combination of the physical and relevance lives of various
categories of materials, which, for accuracy, must be based on
empirical data collected on a class by class basis in that particular
library. An acceptable approximation may, however, be developed from
data from other libraries where the user population and materials are
similar, as, for example, in school libraries in a particular education
system or geographical area. Professional expertise and observation
should not be discounted. Library staff are a good source of
observational data.
In most libraries usage of
library materials falls off rapidly with increasing age. One of the
criteria for allocating costs is that the method chosen should
generally model the loss of service potential. In order that the rate
of depreciation of reflects the decline in service potential of library
materials, items should be depreciated more rapidly in the early part
of the life-expectancy period.
The recognised methods for
calculating depreciation do not include half-life which is generally
deemed to be too complex a method. However, in relation to library
collections it is a method which should not be discarded out of hand,
though it is unlikely to be practical to implement in its pure form.
Of the recognised methods,
the sum-of-the-years'- digits method allows more of the cost of
assets to be charged to the earlier years, and therefore models the
half- life usage pattern more closely than does the straight line
method. It also provides for a complete write-off at a predictable
time. Unfortunately it may also be inordinately complex and
time-consuming to implement.
Given that a cornerstone
principle is that the benefits of valuation should exceed the costs of
the exercise, thus collecting the information should not be
time-consuming and expensive, it would appear that the reducing
balance method would be the optimal choice of method for
depreciating library collections.
Because the straight line
method of depreciation least approximates the half-life usage pattern,
it is not appropriate in depreciating library collections, even though
it is the most commonly adopted method of asset depreciation.
Categorisation of library
collections
Traditionally, while others may regard the library as one collection,
librarians have managed libraries as a series of collections. Such
collections can have either a subject or a client focus. In addition,
differentiation between formats is normal.
There are a number of
possibilities for identification of individual collections for the
purposes of valuation
- By broad subject
The average cost of published items is not uniform across all subjects.
For example Medicine, Law, Business and Science are all subjects which
tend to group at the higher end of the individual average cost
continuum, for books, for journals, and now for the newer media.
- By client
Collections can be defined by their target clientele, or by their
target clientele in addition to broad subject categorisations, for
example preschool, lower primary, upper primary school collections by
curriculum resources or fiction.
- By format
Collections can be defined by format, for example videos, books,
serials, bound serials, software, CD-ROMs. Each format tends to have a
different average value profile. Because of their very limited useful
life, newspapers and ephemeral popular magazines must be excluded from
the collection for the purposes of valuing it.
- By access provisions
Reference collections, traditionally only available for in- library
use, may be categorised separately from the loan collections. Sets of
encyclopaedia, for example, are devalued markedly where one or more
volumes is missing. Libraries usually hold detailed records to
facilitate access to individual items, but may lack aggregated data.
Defining "initial cost"
Library materials do not reach the shelves of the library without a
number of value-added processes being carried out. These processes
include cataloguing and physical processing. Whether the costs of the
materials applied to the item in physically processing it (plastic
jackets, barcodes and the like) should be added to the purchase cost of
the item is a moot point. As the items stand on the shelves, the
covers, barcodes and so on have become part of the item, however the
materials themselves can be considered to be consumables and would
therefore not be added to the cost of the item for valuation purposes.
The cataloguing record is part of a separate in-house produced
database, and is therefore clearly excluded.
It is not normal practice
to add the cost of acquiring smaller physical assets to the cost of the
item, therefore the administrative costs of raising an order, paying an
invoice and so on, are not added to the value of the item, though they
do, strictly speaking, increase the cost of that item.
Two classes of materials
can cause particular problems because of lack of, or inaccuracy of
historical information. These are materials which have been donated to
the library, or materials acquired as part of an exchange program.
Gifts and donations
There is no single universally applied practice in dealing with gifts
and donations. Some libraries enter a $0.00 value, others apply a
notional average value, and yet others the actual value of the
individual item.
Normal practice should
be to apply to the donated item, the value of that item if purchased.
It is relatively easy, when the donation is a new item, to apply the
recommended retail price. However, many donations to libraries are of
second hand items published some time previously. In such a case, the
depreciated value should be applied. In establishing the initial value
if the library has adopted the practice of applying actual value to
donations, the value of these items must be established and added to
the annual expenditure. Where the library has applied a notional
average value it would not be cost-effective to undertake the work
required to revalue them. A pragmatic approach would be to accept the
notional value, establish the value of the donations and add to the
expenditure. Where, however, the library has treated donations as if
they are of no value a pragmatic approach would be to establish the
average value of purchased items and the number of donations apply to
those donations the average value of purchased items to arrive at the
value of the total collection.
Exchanges
Normal budget practice would require that where materials are acquired
by exchange, the cost of the items provided by the library would be
included in the expenditure records of the library. In relation to
valuation, however, the value of the item received must be included.
Implementation
The implementation of valuing of current Library collections as part of
the implementation of accrual accounting has four parts: Initial
valuation; Asset acquisition; Asset disposal; Revaluation (the base
value for the following year).
Establishing initial value
There are two broad approaches which may be adopted to determine the
initial value of library collections
- Individual actual
cost method requires authoritative information concerning the
actual cost of every item in the collection, establishing the date of
acquisition and depreciating on an item by item basis.
- Broad based roll-up
capitalisation method requires determining the funds expended on
library material acquisition in the current financial period and over
the prior periods for which it is deemed necessary to account. This
estimation would be based on the assumed average life of the materials
in the collection. This approach does not provide a fair impression of
the reality depreciation accounting attempts to capture.
In practice, however,
it may be necessary to adopt a pragmatic approach to establishing an
initial value in the full knowledge that this figure will be
inaccurate. The process of establishing the base line figure will
inevitably reveal inconsistencies in data collection and recording in
relation to cost of library materials, and highlight practices which,
while logical at the time they were made, will compromise the accuracy
of any valuation. However, these should not be used as justification
for seeking exemption.
Revaluations
Asset revaluation on a regular basis is required in an accrual
accounting environment. After the initial valuation there are two
options for revaluation methodology: revaluing from scratch; treating
depreciated replacement cost as the initial valuation and adding
historic cost in subsequent years.
Accountants tend to
recommend against the latter methodology. Permanently retained items
will need to be treated separately, and may well appreciate in value.
The Queensland
Department of Education experience
When planning commenced for the implementation of accrual accounting
the valuation of library collections was originally not on the agenda.
Strategically, given that the value of the Department’s asset held in
library collections was unknown, the benefits of successful advocacy
for inclusion far outweighed the imposte of establishing a methodology
and practice of collecting and collating valuation data
A variety of systems
had been used to account for expenditure on library materials, and
complete records are lacking in a many of the Department’s libraries.
These differing levels of data collections in the past, combined with
differing rates of implementation of automated library systems mean
that Departmental libraries have differing capacities to collect and
collate the data required to value their collections accurately. While
this had to be accepted for the past, it was decided that every
endeavour would be required to ensure that all libraries can comply
with minimum requirements in order to ensure that the Departmental
asset represented by library collections can be accurately valued in
future. The challenge has been to develop a method by which an initial
value of a library collection can be arrived at, without access to full
records, and without a significant imposte on the staff of the library.
Due to the varied information available on each collection, it was
accepted that the initial valuation would result only in an
approximation of the value, which will become more accurate each year
as actual data on acquisitions and withdrawals are included in the
total value.
A number of pragmatic
decisions were made. Given the spectrum of quality of historical
records and the multiplicity of collections it was accepted that it
would be impossible to apply either the individual actual cost method
or the broad based roll-up capitalisation method to current collections
in order to arrive at an initial valuation, and therefore it was
necessary to adopt a more practical though less accurate method. It
seemed that the most practical method of revaluing would be to revalue
annually using depreciated replacement cost as a basis.
The valuation would
progressively become more accurate as information about the actual cost
of purchases, donations and exchanges, during each subsequent year is
used as a basis to arrive at the depreciated replacement cost. Two
options for identifying depreciated replacement cost as a base-line
initial valuation: Using the historical cost of the collection (the
option of choice if the data is available); Using the average
replacement cost of the current collection (to be used where the
historical information is not available or is not reliable).
Those libraries which
have the information and resources to develop and use their own
collection categorisations and depreciation schedules are encouraged to
do so. To accommodate the rare case where full records are available,
historical cost was considered. Historical cost is the purchase price
of the items in the collection at the time of original purchase and all
items in the collection should be included regardless of age. Donations
to the collection should also be included using the recommended retail
price at the time the donation was received. However, though the
calculations were done to establish the percentage by which the total
should be discounted to account for depreciation which had not
previously been calculated (40%), it was decided to use the average
replacement cost method.
The average
replacement cost refers to the average of the current purchase price of
all the items in the collection. It should be assumed that the average
purchase price of materials bought in the current year is equivalent.
Thus the amount spent in the current year is divided by the number of
items it purchased. This average cost is then multiplied by the number
of items in the collection to arrive at the total current cost.
A series of
calculations were used to develop and test the Average Replacement Cost
method these libraries are encouraged to use. Assuming no major changes
in the direction of the collections being valued, dividing the dollars
spent during the year during which the initial valuation is carried out
by the number of items, delivers the average replacement cost per item.
The total number of items in the collection as at the end of the
financial year, regardless of the category of then multiplied by this
average cost to arrive at the total current cost. This current cost is
adjusted to recognise depreciation which has not been previously
calculated. Depreciating that cost to reflect selected useful life
periods resulted in a consistent 57% devaluation. This was rounded up
to 60% so that the initial current cost adjustment is 60% of the total
current cost. The higher percentage reduction also allows for the fact
that current purchase price was used rather than the purchase price at
the time of acquisition, thus roughly factoring in CPI increases in the
cost of library materials. The written down value of the collection is
thus 40% of the total current cost.
In order to ensure
that the imposte on any particular library, particularly those being
managed by part-time staff or library aides, was minimal, libraries are
given the option to use a generic approach to determining average item
price and period over which the collection is depreciated, though it is
stressed that while the generic approach meets the requirement for
compliance, it destroys any usefulness of the information for internal
library budgeting and collection planning and development purposes.
Components of the generic method are omission of categorisation of the
collection, thus the collection is treated as a single collection, a
rule-of- thumb useful life (established as 7 years from the results of
a survey of a cross-section of libraries) is applied and use of the
average price for Primary ($19.49 in 1996) and Secondary ($23.50 in
1996) developed by the Department’s Finance Directorate.
Conclusion
While the process of valuation is relatively simple, the process of
developing procedures and collecting data within a particular library
environment can be complicated by previous practice and
decision-making, and by inadequacy of procedures and library automation
systems. Nonetheless, these difficulties are not insurmountable if an
open and pragmatic approach is adopted. The process can also facilitate
communication of the purposes of the library to those who make
financial decisions affecting the library. Because the data collected
is contributed to the financial records of the whole organisation, it
is necessary to reach shared understanding of the purpose and nature of
the process and data, and the purpose and nature of library
collections, with all parties involved. The experience provides
possibly one of the most confronting opportunities to plumb the
misconceptions of librarians about financial management and accountants
about libraries and library collections. In a time of increasing
workloads it may be tempting to accept accountants assumptions that
library collections either should not or can not be included in the
assets valued as part of accrual accounting. The benefits, however, far
outweigh the detriments.
References
1. Nicolle, R. Practicality:
How to acquire it. New York: Funk & Wagnells, 1915. p iii
2. Steering Committee
on National Performance Monitoring of Government Trading Enterprises, Overview:
guidelines on accounting policy for valuation of assets of Government
trading enterprises. Using current valuation methods. Melbourne,
Commonwealth of Australia, State and Territory Governments, 1994, p 16
3. Australian
Accounting Research Foundation, Definition and Recognition of the
Elements of Financial Statements. Statement of Accounting Concepts
SAC 4 , issued 3.92, revised 3.95 p 57 in Australian Society of
Certified Practicing Accountants Members Handbook. Vol 1, Society
Section. Butterworths, Sydney, 1995
4. Recording &
valuation of non-current physical assets in the Queensland Public
Sector.[Brisbane, Queensland Government, 1997] p 9
|
