Generally speaking, collections are a set of works or artifacts that are held for public exhibition, education, or research. We usually associate the care of a collection with a nonprofit organization such as a museum, library, or historical site, but for-profit business entities may also maintain collections.
Generally accepted accounting principles (GAAP) provides three different options for the accounting of collections. 1. the capitalization of the collection 2. the capitalization of the collection on a prospective basis (items acquired after a certain date) or 3. no capitalization of the collection. To forgo the capitalization of a collection is typically the standard practice among most American Alliance of Museums (AAM) members.
As collection items are not capitalized, there needs to be clear controls and practices for deaccessioning (removal) of items from the collection.
Until the adoption of ASU No. 2019-03 in March of 2019, Financial Accounting Standards Board (FASB) and AAM were not quite in alignment with their guidance on deaccessioning. According to AAM’s Code of Ethics for Museums, when disposing of a collection item, proceeds are to be used for further acquisitions or direct care of the collection.
Previously, accounting guidance centered around the reinvestment of sale proceeds towards the acquisition of other collection items, and did not address the use of funds toward the maintenance of the collection- a rather significant inconsistency with AMM practices.
ASU No. 2019-03 Not-for-Profit Entities (Topic 958): Updating the Definition of Collections attends to the importance of investing in the care and preservation of the collection by modifying GAAP’s definition of collections. The new definition now includes language to address the use of proceeds for the maintenance of the collection.
The full definition of collections now reads:
Works of art, historical treasures, or similar assets that meet the following criteria:
a. They are held for public exhibition, education or research in furtherance of public services rather than financial gain.
b. They are protected, kept unencumbered, cared for and preserved.
c. They are subject to an organizational policy that requires the use of proceeds from items that are sold to be for the acquisition of new collection items, the direct care of existing collections or both.
Collections generally are held by museums; botanical gardens; libraries; aquariums; arboretums; historical sites; planetariums; zoos; art galleries; nature, science, and technology centers; and similar educational, research, and public services organizations that have those divisions; however, the definition is not limited to those entities nor does it apply to all items held by those entities.
ASU No. 2019-03 also addresses an additional disclosure in the financial statements regarding deaccessioning practices. Organizations are now required to disclose organizational policy for the use of proceeds from deaccessioned collection items, including whether those proceeds can be used for new acquisitions, the direct care of existing collections or both. If proceeds can be used for the direct care of the collection, the organization’s definition of direct care must also be defined.
The standard took effect for annual financial statements issued for fiscal years beginning after December 15, 2019. Amendments should be applied on a prospective basis.