15
COLLECTIONS
PERSPECTIVE AND ISSUES
One area of financial accounting that is somewhat unique to not-for-profit organizations is the accounting for collections. Accounting for collections was an area that was extensively deliberated by the FASB prior to the issuance of its accounting guidance for collections. These deliberations and the divergent viewpoints of the interested parties have resulted in accounting guidance for collections that allows several options. Once an option is adopted, however, it becomes the not-for-profit organization's accounting policy for collections and must be followed consistently.
Collections are works of art, historical treasures, and similar assets that are defined in the FASB ASC Master Glossary:
- Held for public exhibition, education, or research in furtherance of public service rather than financial gain;
- Protected, kept unencumbered, cared for, and preserved;
- Subject to an organizational policy that requires the proceeds from sales of collection items to be used to acquire other items for collections.
In 2019, FASB issued ASU 2019-03, which allows proceeds from sale of collection items to also be used for direct care of existing collections. FASB did not define what constitutes ‘direct care,’ but left it to each organization to define this for itself. Disclosure of this definition is required.
Not-for-profit organizations may establish a policy to either capitalize all collections, capitalize only collection items after adopting SFAS 116, which originally promulgated the accounting guidance for collections, or not capitalize collections. Organizations cannot elect to capitalize only selected collections or collection items. Once a policy is adopted, it must be applied consistently. GAAP requirements for collections are contained at FASB 958-360-25, 45, and 50.
Capitalized collections should be recorded as assets on the books of the not-for-profit entity and reported in the statement of financial position. If the collection was acquired in an exchange transaction (i.e., purchased and not donated), the collection should be recorded in the financial statements at cost. If, however, the collection was acquired by contribution to the not-for-profit organization, then the items should be measured at fair value on the date of donation. As discussed later in this chapter, fair value may be difficult to obtain for collections because of the nature of the assets.
For collections that are not capitalized, no assets should be recorded when the items are acquired. The organization would still display the collection on the statement of activities. The collection would be presented separate from revenue, expenses, gains, and losses without an amount. The financial statement caption would simply inform the reader that a collection was contributed without specifying a dollar amount.
If only collections acquired after SFAS 116 was adopted are capitalized, the not-for-profit organizations should treat capitalized collection items in the same manner as capitalized collections, and collection activities related to items not previously capitalized in the same manner as collections not capitalized.
Not-for-profit organizations are required to disclose additional information about collections and whether they are capitalized or not capitalized.
CONCEPTS, RULES, AND EXAMPLES
The accounting for collections depends on the policies adopted by the entity. GAAP does not require that organizations capitalize assets included in collections. When initially adopting the provisions of SFAS 116, the not-for-profit organization had the following three options, as stated in the section above:
- Capitalizing their collections, including all items that have been acquired in prior periods that have not been capitalized before and all items acquired in future periods.
- Capitalizing only those items acquired after the adoption of SFAS 116.
- Not capitalizing any of the collection items.
Obviously, the accounting for the collection items is dependent on the option chosen by the organization. While the not-for-profit organization has latitude in selecting an accounting policy for collections, once a policy is adopted, it must be followed consistently.
All Collection Items Are Capitalized
Organizations that elect to capitalize all collection items must follow a consistent accounting policy for these items. Collection items that are acquired in exchange transactions should be recognized as assets in the period acquired and should be measured at cost. This treatment is consistent with any other type of capital asset purchase. (AICPA Guide, paragraph 7.24)
Donated collection items should be recognized at their fair value in the period received. These items should be recorded as assets and as contribution revenue. Fair value, in concept, is generally based on quoted market prices. However, many collection items are unique and are unlikely to have quoted market prices. This uniqueness is what makes them collection items in the first place. If market prices are not available, fair value may be based on quoted market prices of similar items, appraisals, or other valuation techniques. For collections, appraisals are a likely source of information. Remember, the donor is also likely to be interested in determining fair value for tax considerations.
Major uncertainties about the future service potential or economic benefit of contributed collection items may indicate that they should not be recognized. (AICPA Guide, paragraph 7.18) In cases where the collection items were not capitalized prior to the adoption of SFAS 116, the not-for-profit organization may find it difficult, if not impossible, to obtain the original cost or fair value of the collection at the time of contribution. If this is the case, the organization may value the collection as follows:
- At the cost or fair values of the items at the time they were acquired; or
- At the cost or current market values of the items at the date SFAS 116 was adopted, whichever is more practical.
According to the FASB ASC 958-360-40-2, if an organization donates a capitalized collection item to another not-for-profit organization, the organization should:
- Decrease its assets by the carrying amount of the donated asset.
- Record contribution expense equal to the asset's fair value.
- Recognize a gain or loss for the difference.
The amount capitalized should be presented on the statement of financial position on a separate line item, “Collections” or “Collection Items.”
Collection Items Not Capitalized
Some organizations elect a policy of not capitalizing collections, which is acceptable if the criteria on the first page of this chapter are met. In these cases, collection items should not be recognized either as an asset or as contribution revenue. This accounting treatment is allowable even if an item is purchased rather than received from a donor.
The following describes how the organization should report information in the financial statements in cases where the collection items are not capitalized.
The statement of activities should report the following:
- 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.
Collections should be shown on the face of the statement, separately from revenues, expenses, gains, and losses. The statement of financial position should present a separate line item which has no dollar amounts for the collection items. According to the FASB ASC 958-230-55-5A, cash flows from purchases, sales, and insurance recoveries of items that have not been capitalized should be reported as investing activities on the statement of cash flows.
If an organization donates a noncapitalized collection item to another not-for-profit entity, the contribution made should not be shown on the face of the financial statements but should be disclosed in the notes.
Collections Capitalized after SFAS 116 Was Adopted
If the not-for-profit organization's policy is to only capitalize collection items after the adoption of SFAS 116, then accounting would be the same as for capitalized collections as described above.
In some cases, works of art that do not meet the criteria as stated in the first section of this chapter require special treatment. These items should be recorded as assets at cost if acquired in an exchange transaction, or fair value if received as a contribution. Works of art should be presented separately on the statement of financial position and recognized in a statement of activities as support that increases the appropriate net asset classes. Alternatively, these items may be disclosed in the notes to the financial statements.
DISCLOSURE REQUIREMENTS
A not-for-profit organization should describe in the notes to the financial statements its accounting policy for recognizing contributions of collection items and its definition of direct care.
Additional disclosures are required when collections are not capitalized or are capitalized prospectively after the adoption of SFAS 116. In these circumstances the following additional disclosures should be provided: (FASB ASC 958-360-50-5, 6)
- Description of the collections, including their relative significance to the organization, and the organization's accounting and stewardship policies for collections.
- If collection items not capitalized have become no longer accessible during the period:
- Description of the items given away, damaged, destroyed, lost, or otherwise deaccessed during the period; or
- The fair value of such items.