Why Is the FASB Issuing This Accounting Standards Update?
The FASB became aware of a concern that the definition of the term collections in the Master Glossary of the FASB Accounting Standards Codification® is not fully aligned with the definition used in the American Alliance of Museums’ (AAM) Code of Ethics for Museums (the Code). The definition used in the Code, which served as the basis for the guidance on collections in FASB Statement No. 116, Accounting for Contributions Received and Contributions Made, was revised by the AAM after the issuance of Statement 116.1 The FASB is issuing this Update to improve the definition of collections in the Master Glossary by realigning it with the definition in the Code. The FASB also is making a technical correction in Topic 360, Property, Plant, and Equipment, to clarify that the accounting and disclosure guidance for collections in Subtopic 958-360, Not-for-Profit Entities—Property, Plant, and Equipment, applies to business entities as well as not-for-profit entities, consistent with what was indicated in Statement 116. Who Is Affected by the Amendments in This Update? The amendments in this Update apply to all entities, including business entities that maintain collections. However, accounting for collections is primarily an issue for certain not-for-profit (NFP) entities because collections often 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.
What Are the Main Provisions?
The amendments in this Update modify the definition of the term collections and require that a collection-holding entity disclose its policy for the use of proceeds from when collection items are deaccessioned (that is, removed from a collection). If a collection-holding entity has a policy that allows proceeds from deaccessioned collection items to be used for direct care, it should disclose its definition of direct care. Current generally accepted accounting principles (GAAP) state that an entity need not recognize contributions of works of art, historical treasures, and similar assets if the donated items are added to collections and meet three conditions. One condition states that an entity must be subject to an organizational policy that requires that the proceeds from sales of collection items be used to acquire other items for collections. The amendments in this Update modify that condition so that the proceeds to be used to support the direct care of existing collections in addition to the current requirement that proceeds from sales of collection items be used to acquire other items for collections. Current GAAP also states that 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, capitalization of all collection items on a prospective basis (that is, all items acquired after a stated date), and no capitalization. The amendments in this Update improve GAAP because they eliminate the diversity in practice that exists today between the application of the Master Glossary’s definition compared with the definition that many entities use for accreditation purposes. In addition, using proceeds from deaccessioned collection items toward direct care better aligns with many entities’ missions to specifically maintain their collections. Furthermore, aligning the definition and permitting proceeds to be utilized for the care of existing collections are consistent with the basis for conclusions in Statement 116 about the care and preservation of collections. The care and preservation of collections was a foundational element of the basis for permitting entities to not recognize contributed collections. The requirement for a collection-holding entity to disclose its policy for the use of proceeds from deaccessioned collection items is an improvement because that information will inform financial statement users of how the entity defines collections for purposes of non-capitalization, specifically whether the entity applies a narrower definition than the Master Glossary’s definition. If an entity allows deaccession proceeds to be used for direct care, the requirement for the entity to disclose its definition of direct care will allow financial statement users to understand the specific nature of expenditures considered to be direct care for that particular entity. If entities define direct care differently, users will be able to understand the differences in how entities apply proceeds from deaccessioned collection items to collections-related expenditures.
When Will the Amendments Be Effective?
The amendments in this Update 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. Early application of the amendments is permitted. The amendments in this Update should be applied on a prospective basis.
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