Museums, botanical gardens, art galleries and other holders of collections are now obtaining consistency in their industry code and financial accounting standards. On Thursday, March 21, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2019-03 to update and modify the definition of the term “collections” as it relates to not-for-profit entities, which now parallels with the definition used in the American Alliance of Museums’ (AAM) Code of Ethics (the Code). In addition, ASU No. 2019-03 provides a technical correction to clarify the accounting and disclosure guidance for collections as it applies to business entities and nonprofits.
Background and Provisions
The definition of “collections” as used by the Code served as the basis for FASB Statement No. 116, Accounting for Contributions Received and Made, which was released in 1993. Since then, the Code has revised its definition; the FASB became aware of the discrepancy and, therefore, revised the definition so that it aligns with the Code, as well as require that a collection-holding entity disclose its policy for the use of proceeds in the event of deaccessioning any items from the collection. The new definition defines “collections” as works of art, historical treasures or similar assets that meet all of the following conditions:
- They are held for public exhibition, education or research in furtherance of public service rather than financial gain.
- They are protected, kept unencumbered, cared for and preserved.
- They are subject to an organization policy that requires the use of proceeds from items that are sold to be for the acquisitions of new collection items, the direct care of existing collections, or both.
The definition of a “collection” is the key criterion in the FASB literature as an entity has an option to not recognize contributions of works of art, historical treasures and similar items as assets in the financial statement if the donated items meet the above definition of a collection. According to the AAM, while some museums elect to record collections as donated assets, most do not view their collections as financial assets and prefer not to record them in their financial statements.
The newly aligned definition to the Code now allows proceeds from the sale of items to be used for the direct care of items, whereas the previous definition only allowed for proceeds to go toward the acquiring of other items for a collection. According to the FASB, allowing proceeds from deaccessioned collection items to be used for direct care better enables such entities to maintain their existing collections, thus maintaining consistency with the conclusions of Statement 116, which uses care and preservation of collections as part of the basis for permitting entities to not recognize contributed collections. The technical requirement to clarify the accounting and disclosure guidance for collections will also improve how financial statement users are informed regarding how an entity defines collections for purposes of noncapitalization.
ASU No. 2019-03 also adds a technical correction to Topic 360, Property, Plant and Equipment, to specify that accounting and disclosure guidance found in Subtopic 958-360, Not-for-Profit Entities – Property, Plant, and Equipment, applies to nonprofits and business entities. This correction is also consistent with Statement 116.
ASU No. 2019-03 is effective for financial statements issued for fiscal years beginning after December 15, 2019, with early application permitted.
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