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10.3 Works of art, historical treasures and similar assets
Publication date: 27 May 2020
us NFP guide
ASC 958-360 provides guidance on the accounting for works of art, historical treasures, and similar assets which have aesthetic, cultural, or historical significance and are employed in an NFP’s day-to-day operations. Such assets include landmarks, monuments, cathedrals, historical treasures, and collections (a special class of long-lived assets used in carrying out the operations of museums and similar entities), as described in ASC 958-360-35-5.
Excerpt from ASC 958-360-35-5
The future economic benefits or service potentials of individual items comprising collections (as that term is commonly used, not necessarily as defined within this Subtopic) and of buildings and other structures—including those designated as landmarks, monuments, cathedrals, or historical treasures—are used up not only by wear and tear in intended uses but also by the continuous destructive effects of pollutants, vibrations, and so forth. The cultural, aesthetic, or historical values of those assets can be preserved, if at all, only by periodic major efforts to protect, clean, and restore them, usually at significant cost.
The value of these long-lived assets, like other PP&E, is derived from using them in carrying out the NFP’s mission, rather than from holding them for capital appreciation or resale. Similar assets that are acquired and held for investment purposes (for example, a work of art held as an investment) would be accounted for using the investment accounting guidance discussed in NP 9.
The principles of accounting for PP&E discussed in NP 10.2 generally apply to these assets; that is, they should be capitalized and depreciated over their estimated useful lives, regardless of whether they were acquired by purchase, by contribution, or discovery. However, there are two exceptions:
- An individual work of art or historical treasure that has been capitalized does not have to be depreciated if it has an extraordinarily long estimated useful life (see NP 10.3.1).
- If collections meet certain criteria established under ASC 958-360 (see NP 10.3.2), some or all of the items may be exempt from capitalization based on an accounting policy election (see NP 10.3.2.2).
Figure NP 10-1 depicts the categories of works of art, historical treasures, and similar items that do and do not require capitalization and depreciation.
Figure NP 10-1
Accounting for works of art, historical treasures, and similar assets
Accounting for works of art, historical treasures, and similar assets
Presentation and disclosure considerations for collections that meet the requirements for policy elections on capitalization are discussed beginning at NP 10.3.2.3.
Regardless of the category into which they fall, effort is generally required to protect, clean, and restore these assets in order to preserve their value. ASC 958-360-35-6 requires that costs of major preservation and restoration efforts that provide future economic benefit or service potential be capitalized and depreciated, regardless of whether depreciation is recognized on the underlying asset being protected or restored. The depreciable life of those improvements would be based on the time expected to elapse until the next expected preservation or restoration.
See AAG-NFP 7.17 through AAG-NFP 7.29 for additional commentary on accounting for works of art, historical treasures, and similar assets.
10.3.1 Depreciation exception – extraordinarily long-lived items
For some rare works of art or historical treasures that have been capitalized, the economic benefit or service potential is used up so slowly that the amount related to any particular accounting period is inconsequential. Due to their extraordinarily long estimated useful lives, ASC 958-360-35-3 indicates that depreciation does not need to be recognized (similar to non-depreciation of land). To qualify for this exception, there must be verifiable evidence that the asset has cultural, aesthetic, or historical value worth preserving perpetually, and that the owner has the technological and financial ability to preserve and protect the asset's service potential and is doing so.
Consistent with the accepted practice for land used as a building site, depreciation need not be recognized on an individual work of art or historical treasure whose economic benefit or service potential is used up so slowly that its estimated useful life is extraordinarily long. A work of art or historical treasure shall be deemed to have that characteristic only if verifiable evidence exists demonstrating both of the following characteristics:
- The asset individually has cultural, aesthetic, or historical value that is worth preserving perpetually.
- The holder has the technological and financial ability to protect and preserve essentially undiminished the service potential of the asset and is doing that.
While having an extraordinarily long useful life is not limited solely to assets that have already been in existence for a long period, an asset that has come into existence relatively recently cannot be assumed to possess an extraordinarily long life in the absence of verifiable evidence that its value is worth preserving perpetually and that the holder has the intent and ability to protect and preserve it essentially undiminished. As used in ASC 958-360-35-3, “verifiable” embodies the concepts of FASB Concepts Statement No. 8, paragraph QC26 that different knowledgeable and independent observers could reach consensus that a particular depiction or assertion faithfully represents what it purports to represent.
10.3.2 Accounting and reporting guidance for collections
Some NFPs, like museums, collect, preserve, interpret, and display collections of artifacts and other objects of artistic, cultural, historical, or scientific significance for the education of the public. As described in the ASC Master Glossary, the nature of collections held vary widely, ranging from art and historical objects to living zoological or botanical specimens.
Excerpt from ASC Master Glossary
Collections: Collections generally are held by museums; botanical gardens; libraries; aquariums; arboretums; historic sites; planetariums; zoos; art galleries; nature, science, and technology centers; and similar educational, research, and public service 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.
Some collections are the cornerstone of standalone organizations established for that specific purpose. Other collections are held and managed as a discrete operation within a larger entity, such as a museum within a university.
In essence, collections that are held and managed by an NFP belong to the general public. As stewards of these resources, NFPs manage the collection for the benefit of the public and must preserve and protect the collection items for the benefit of future generations. The commitment to preserve and protect collections for the benefit of future generations requires that careful consideration be given to the acceptance of items for the collection (referred to as “accessioning”) and for making decisions in the public interest about disposing, selling, or trading items in the collection (“deaccessioning”). NFP collections differ from privately-owned collections in these respects. Although private collections are sometimes made available to the public for viewing or study, decisions related to acquiring or disposing of items in the collection can be carried out according to the owners’ wishes, rather than as fiduciaries acting in the public interest.
The foregoing background information provides context regarding collections generically, as the term is commonly used. As used in GAAP, however, the term collection has a special purpose and significance. The GAAP definition of collection is shown in Figure NP 10-2.
Figure NP 10-2
ASC Master Glossary definition of “collections”
ASC Master Glossary definition of “collections”
Original definition
|
As amended by ASU 2019-03
|
Collections: Works of art, historical treasures, or similar assets that meet all of the following criteria:
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Collections: Works of art, historical treasures, or similar assets that meet all of the following criteria:
|
Items held within a collection that meets the GAAP definition are eligible for special accounting treatment, described in NP 10.3.2.1. To be eligible, the collections must be held in trust for the public and made accessible for the public benefit (as opposed to private collecting), must be appropriately cared for to preserve them for future generations, and must be subject to an organizational policy requiring that proceeds from items sold be reinvested in the collection. This last criterion typically distinguishes the collections that qualify for special treatment from those that do not.
Recent standard-setting
As noted in Figure NP 10-2, ASU 2019-03, Updating the Definition of Collections, amended the criterion regarding use of deaccessioning proceeds to clarify that use of proceeds for direct care of the collection is also permissible. This conforms the FASB’s criteria to align with a change made by the American Alliance of Museums in its guidelines for management of collections, on which the FASB’s criteria are based. For accounting purposes, holders of collections can choose whether or not to utilize the broader spending policy.
The ASU also requires all entities that hold collections to disclose their policy regarding the use of deaccession proceeds. If that policy allows proceeds to be used for the direct care of collections, the entity must also disclose how it defines “direct care” for operational purposes (see NP 10.3.2.6).
ASU 2019-03’s amendments are effective for annual financial statements issued for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. The amendments are to be applied on a prospective basis, with early application permitted.
10.3.2.1 Capitalized collections
If a collection does not meet all of the criteria in the definition in Figure NP 10-2, the collection items must be capitalized and depreciated as discussed in NP 10.3. If the collection contains individual items that are extremely long-lived, those items would be exempt from depreciation as discussed in NP 10.3.1.
Figure NP 10-3 provides an example of an accounting policy disclosure for a capitalized collection that is derived from an example in AAG-NFP 7.29.
Figure NP 10-3
Illustrative policy note disclosure for capitalized collection
Illustrative policy note disclosure for capitalized collection
Derived from Example 1 in AAG-NFP 7.29
Collections
If purchased, items accessioned into the collection are capitalized at cost, and if donated, they are capitalized at their fair value on the accession date (the date on which the item is accepted by the Acquisitions Committee of the Board of Trustees). Gains or losses on the deaccession of collection items are classified on the statement of activities as support without donor restrictions or donor-restricted support depending on donor restrictions, if any, placed on the item at the time of accession. Collection items are depreciated over their estimated useful lives unless they have cultural, aesthetic, or historical value that is worth preserving perpetually, and the organization is protecting and preserving essentially undiminished the service potential of the collection item.
10.3.2.2 Accounting policy elections for collections that meet the criteria
According to ASC 958-360-25-3, NFPs with collections that meet all of the criteria in Figure NP 10-2 can choose from among three accounting policy alternatives regarding the capitalization of collection items.
An NFP that holds works of art, historical treasures, and similar items that meet the definition of a collection has the following three alternative policies for reporting that collection:
- Capitalization of all collection items
- Capitalization of all collection items on a prospective basis (that is, all items acquired after a stated date)
- No capitalization
Prior to issuance of the standard underlying these requirements, which dates back to 1993, most NFP collection-holding entities did not report collections on their balance sheets. Many had acquired a significant portion of their collection items (or in some cases, entire collections) through gifts or bequests rather than by purchase. The FASB concluded that because valuation information necessary to recognize collections may not have been compiled in the past or may not have been retained, and was likely to be too costly to obtain, the incremental benefits of the information gained by requiring retroactive capitalization would not justify the cost that entities would incur. Accordingly, the FASB concluded that entities who wished to do so could make an accounting policy election to not capitalize them (or to capitalize only items acquired from a certain date forward).
The policy selected must be disclosed (ASC 958-360-50-1(d)) and is applied on an “all or nothing” basis. An entity is not permitted to selectively capitalize only certain items within a particular collection and not capitalize other items within that collection. Similarly, if an entity has several different qualifying collections, the same capitalization or non-capitalization election applies to all of them.
10.3.2.3 Policy to capitalize all collection items
If an NFP with collections that meet the definition in Figure NP 10-2 nonetheless has elected to capitalize them, the accounting and reporting considerations would be similar to those discussed in NP 10.3.2.1 for collections that are required to be capitalized. ASC 958-360 provides minimal additional presentation and disclosure requirements. The balance sheet must display the total amount capitalized in a separate line item titled “collections” or “collection items” (ASC 958-360-45-3). If the NFP has other works of art, historical treasures, or similar assets that do not meet the definition in Figure NP 10-2, the amounts capitalized for those items must be disclosed separately, either on the face of the balance sheet or in the notes (ASC 958-360-45-4).
The NFP must also disclose its accounting policy choice as required by ASC 958-360-50-1(d). This might be accomplished, for example, by adding a statement such as “The organization has capitalized its collections since its inception” to the policy disclosure illustrated in Figure NP 10-3.
10.3.2.4 Policy not to capitalize collection items
If an NFP with collections that meet the definition in Figure NP 10-2 has elected an accounting policy not to capitalize, ASC 958-360-45-3 requires that the face of its balance sheet display a separate line item with no corresponding amount that refers the reader to a note describing that accounting policy.
Excerpt from ASC 958-360-45-3
If an NFP does not recognize and capitalize its collections or capitalizes its collections prospectively, a line item shall be shown on the face of the statement of financial position that refers to the disclosures about collections required by paragraph 958-360-50-6. That line item shall be dated if collections are capitalized prospectively, for example, collections acquired since January 1, 20X1 (Note X).
This presentation is illustrated in Figure NP 10-4.
Figure NP 10-4
Example financial statement line item when collections are not capitalized
Example financial statement line item when collections are not capitalized
20X1
|
||
Collections (Note X)
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$ —
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In the statement of activities, the accounting anomaly that results from the noncapitalization policy requires special presentation, as discussed in ASC 958-360-45-5.
An NFP that does not recognize and capitalize its collections shall report all of the following on the face of its statement of activities, separately from revenues, expenses, gains, and losses:
- Costs of collection items purchased as a decrease in the appropriate class of net assets
- Proceeds from sale of collection items as an increase in the appropriate class of net assets
- Proceeds from insurance recoveries of lost or destroyed collection items as an increase in the appropriate class of net assets.
Normally, purchases of capital assets would not be reported in the statement of activities, and dispositions would only give rise to recognition of a gain or loss. When collection items are not capitalized, however, any purchases, sales, and insurance recoveries will be reported as increases or decreases in net assets. Because these do not represent revenue, expense, gains, or losses under GAAP, they must be reported in a special section of the statement of activities as follows.
- Collection items purchased are reported as decreases in net assets without donor restrictions, unless they were purchased with contributions restricted for that purpose. If the collection items were purchased with donor-restricted contributions, the transaction is reported as a decrease in net assets with donor restrictions. Because these decreases in net assets do not represent expenses, they are not included in the analysis of expenses by nature and function (see NP 3.5).
- Proceeds from sales of collection items (or from insurance recoveries for lost or damaged items) are reported as increases in the appropriate net asset categories, depending on the existence and type of donor-imposed restrictions, if any.
- Collection items received or disposed of by gift are not reported in in the statement of activities but instead, are disclosed in the notes.
Figure NP 10-5 illustrates the required display of these transactions in the statement of activities.
Figure NP 10-5
Statement of activities –non-capitalized collection items
Statement of activities –non-capitalized collection items
Without donor restrictions |
With donor restrictions |
Total |
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Revenues and other support |
$ 100 |
$1,000 |
$1,100 |
|
Net assets released from restrictions |
600 |
(600) |
-- |
|
Expenses |
(750) |
-- |
(750) |
|
Change in net assets before changes related to collection items not capitalized |
50 |
400 |
450 |
|
Change in net assets related to collection items not capitalized: |
||||
Proceeds from sales of collection items |
25 |
60 |
85 |
|
Proceeds from insurance recoveries |
10 |
45 |
55 |
|
Collection items purchased |
(40) |
(150) |
(190) |
|
(5) |
(45) |
(50) |
||
Change in net assets |
$ 45 |
$ 355 |
$400 |
|
The presentation of activity in the statement of cash flows is consistent with when collections are capitalized. Cash inflows and outflows associated with purchases and sales of collection items and from insurance recoveries related to such items are classified as investing activities, and collection items received by donation are disclosed as noncash investing activities.
As required by ASC 958-360-50-1(d), the NFP must disclose its accounting policy of noncapitalization, AAG-NFP 7.29 provides an example.
In order for financial statement users to understand the size and significance of the unrecognized collections, certain disclosures are required by ASC 958-360-50-6. AAG-NFP 7.29 Example 3 illustrates this disclosure.
An NFP that does not recognize and capitalize its collections or that capitalizes collections prospectively shall describe its collections, including their relative significance, and its stewardship policies for collections. If collection items not capitalized are deaccessed during the period, it also shall describe the items given away, damaged, destroyed, lost, or otherwise deaccessed during the period or disclose their fair value.
Excerpt from AAG-NFP 7.29
Example 3
Note X: Summary of Significant Accounting Policies
The collections, which were acquired through purchases and contributions since the organization's inception, are not recognized as assets on the statement of financial position. Purchases of collection items are recorded as decreases in net assets without donor restrictions in the year in which the items are acquired, or as decreases in net assets with donor restrictions if the assets used to purchase the items were restricted by donors. Contributed collection items are not reflected on the financial statements. Proceeds from deaccessions or insurance recoveries are reflected as increases in the appropriate net asset classes.
10.3.2.5 Policy to capitalize collection items acquired after a certain date
If an NFP with collections that meet the definition in Figure NP 10-2 has elected to only capitalize collection items acquired after a specified date (prospective capitalization), the presentation and disclosure requirements prescribed by ASC 958-360-45-3 are a hybrid of the requirements described in NP 10.3.2.3 (for capitalized collections) and NP 10.3.2.4 (for noncapitalized collections).
Excerpt from ASC 958-360-45-3
If an NFP does not recognize and capitalize its collections or capitalizes its collections prospectively, a line item shall be shown on the face of the statement of financial position that refers to the disclosures about collections required by paragraph 958-360-50-6. That line item shall be dated if collections are capitalized prospectively, for example, collections acquired since January 1, 20X1 (Note X).
As illustrated in Figure NP 10-6, the balance sheet will display the total amount capitalized in a separate line item captioned "collections" or "collection items,” identifying when collections began to be capitalized and referring to the policy note disclosure required for non-capitalized collections (per ASC 958-360-45-3). If the NFP has other works of art, historical treasures, or similar assets that do not meet the definition of a collection, the amount capitalized for those items must be disclosed separately, either on the face of the balance sheet or in the notes (per ASC 958-360-45-4).
Figure NP 10-6
Example financial statement line item when collections are capitalized after a certain date
Example financial statement line item when collections are capitalized after a certain date
20X1
|
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Collections acquired since January 1, 1995 (Note X)
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$ XX,XXX,XXX
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AAG-NFP 7.29 provides an example of the policy note disclosure.
Excerpt from AAG-NFP 7.29
Example 2
Note X: Summary of Significant Accounting Policies
Collection items acquired on or after July 1, 19X0: Accessions of these collection items are capitalized at cost, if the items were purchased, or at their fair value on the accession date (the date on which the item is accepted by the Acquisitions Committee of the Board of Trustees), if the items were contributed. Gains or losses from deaccessions of these items are reflected on the statement of activities as changes in the appropriate net asset classes, depending on the existence and type of donor-imposed restrictions. Collection items are depreciated over their estimated useful lives unless they have cultural, aesthetic, or historical value that is worth preserving perpetually, and the organization is protecting and preserving essentially undiminished the service potential of the collection item.
Collection items acquired prior to July 1, 19X0: Collection items purchased prior to July 1, 19X0, were recorded as decreases in net assets without donor restrictions. No financial statement recognition was made for contributed collection items. Proceeds from insurance recoveries or deaccessions of these items are reflected on the statements of activities as changes in the appropriate net asset classes, depending on the existence and type of donor-imposed restrictions.
Any proceeds from sales or insurance recoveries of items acquired prior to the capitalization date must be reported in the statement of activities as increases in the appropriate category of net assets, using the presentation illustrated in Figure NP 10-5. Disclosures required by ASC 958-360-50-6 (discussed in NP 10.3.2.4) must be provided for the portion of the collection that is not capitalized.
10.3.2.6 Direct care of collections
As discussed in NP 10.3.2, ASU 2019-03 changed the definition of “collection” to acknowledge that an entity’s policy for the use of deaccession proceeds could be expended for direct care of existing collection items as well as for reinvestment in new items for the collection. Once an entity adopts ASU 2019-03, the pending content in ASC 958-360-50-7 requires disclosure of the entity’s policy regarding the use of deaccession proceeds. If that policy allows proceeds to be used for the direct care of collections, the entity must also disclose how it defines “direct care” for operational purposes.
ASC 958-360-50-7 (as amended by ASU 2019-03)
A collection-holding NFP shall disclose its organizational policy for the use of proceeds from deaccessioned collection items, including whether those proceeds could be used for acquisitions of new collection items, the direct care of existing collections, or both. If the collection-holding entity allows proceeds from deaccessioned collection items to be used for direct care, the entity shall disclose its definition of direct care.
“Direct care of collections” is not defined in the codification. The American Alliance of Museums defines direct care as “an investment that enhances the life, usefulness or quality of a museum’s collection.” For GAAP purposes, it may be appropriate to think of direct care in a manner similar to the assessment required under GAAP for whether repair and maintenance expenditures on PP&E should be capitalized or expensed. Repairs and maintenance that simply maintain a fixed asset in its current operating condition are expensed, whereas outlays that increase the economic life or functionality of the asset are capitalized. Applying this principle by analogy to a restoration of an exhibit, artifacts, or a painting, expenditures that enhance the life, usefulness, or quality of individual items held within a collection could reasonably be considered “direct care” expenditures. AICPA TQA 6140.27, Definition of Direct Care of Collection Items, also discusses characteristics to consider when determining which costs are considered direct care of collection items.
10.3.3 Collections acquired in a business combination
If an NFP that does not capitalize its collections (as discussed in NP 10.3.2.4) acquires another NFP that has collections, ASC 958-805-25-23 provides an exception to the general rule that all assets acquired in a combination must be recognized and measured. That exception applies only to items from the acquiree’s collections that will continue to be included within the consolidated collections subsequent to the acquisition. Acquired collection items that will not be incorporated into the consolidated collections would be recognized as long-lived assets acquired and measured at fair value in acquisition accounting, as illustrated in ASC 958-805-55-49.
Excerpt from ASC 958-805-25-23
An NFP acquirer that has an organizational policy of not capitalizing collections in accordance with paragraph 958-360-25-3 shall not recognize as an asset those items (works of art, historical treasures, or similar assets) that it acquires as part of an acquisition and adds to its collection. Rather, the acquirer shall do both of the following:
- Recognize the cost of the collection items purchased (either by the transfer of consideration or the assumption of liabilities in excess of assets acquired) as a decrease in the appropriate class of net assets in the statement of activities and as a cash outflow for investing activities
- Not recognize the fair value of collection items contributed – either as an asset or as contribution revenue.
The illustrations in ASC 958-805-55-49 through ASC 958-805-55-54 provide guidance on determining whether collection items acquired in a business combination have been purchased or contributed and, if purchased, the appropriate amount of cost to attribute to the purchased items. The distinction is important because the portion of the collection item that is contributed will have no impact on the acquisition accounting, while the outflows associated with the purchased portion will need to be reported as a decrease in the appropriate class of net assets in the acquisition accounting (see NP 10.3.2.4 for more information).
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