Museums, zoos, and historical sites got broader authority from U.S. rulemakers March 21 on how to account for priceless artwork and dinosaur bones.

The Financial Accounting Standards Board published an update to the Accounting Standards Codification Master Glossary to allow proceeds from the sale of paintings or fossils to be used for the direct care of existing exhibits, as opposed to only being allowed to purchase new items. The update aligns the accounting literature’s definition of “collection” with the definition used by the major U.S. museum accrediting organization.

On its face, updating a definition may not sound like an accounting issue, but the definition has implications for how assets get measured. Existing accounting guidance allows museums, historical sites, and zoos to skip recognizing the value of artwork and artifacts—an onerous to impossible task for priceless treasures—if they are held as part of a “collection.”

That was the problem—the generally accepted accounting principles’ definition of “collection” was narrower than the one used by the American Alliance of Museums. Under the outgoing GAAP’s definition, a collection is something that is held for public exhibition or education, and is protected and preserved. Perhaps most importantly, the old rule qualified that funds from the sale of an item in a collection should be used only to acquire new collection items.

The American Alliance of Museums, on the other hand, said that sales of items in a collection also can be used to pay for direct care—the preservation and upkeep of existing items, which museums also consider a crucial piece of their mission.

Now, FASB’s literature is the same as the museum alliance’s.

“Expanding the definition of collections to support the concept of direct care is valuable and it’s important for many institutions,” said Kathy Kelsey Foley, director of the Leigh Yawkey Woodson Art Museum in Wasau, Wisc.

Kelsey Foley gave the example of a museum fortunate enough to receive gifts of two classic Ansel Adams photographs. One may be in pristine shape while the other may have been hanging on wall in a donor’s home, slightly faded by direct sunlight. The faded photograph may have value in the marketplace but the museum’s curator would prefer to display the pristine version. The proceeds from the sale of the faded photograph could now be used to pay for things like matting and framing existing museum photographs without running afoul of accounting rules.

Determining Value

FASB published its main not-for-profit accounting rules in June 1993, acknowledging that artwork and artifacts that museums and other institutions hold as part of collections are indeed assets. But the board also admitted that pinning down the value of these items could be tricky, so it allowed a measurement exception for assets held in a collection.

“How do you go back and do the math and say what is the value of your collection that you’ve accumulated over 100 years? What’s the value of the dinosaur bones?” said Cathy Clarke, chief assurance officer at CliftonLarsonAllen LLP, on the reasoning behind the exception. “Who knows?”

That said, museums and other institutions rarely sell pieces of their collections and do so only after careful consultation, Clarke said.

But when they do, they want to make sure they are in compliance not just with their ethical standards, but with GAAP. Without FASB’s update, an auditor could, potentially, make an institution hold the proceeds of a sale of a piece of artwork or historical treasure in reserve until the organization earmarked the proceeds for purchasing other items to add to existing collections, she said.

“It’s not a common everyday occurrence, but if it does happen, this just allows them flexibility,” she said of FASB’s update.

No Definition of ‘Direct Care’

When FASB proposed the new definition, several groups asked FASB to define “direct care” or at least offer examples.

“What does direct care mean? Does direct care mean replacing the roof if its leaking into your storage facility and its galleries?” Kelsey Foley said. “Those are among the murky issues.”

Reasoning that it wasn’t a panel of experts on museums or art galleries, FASB decided to remain silent on what “direct care” means. Organizations can look to the guidance of their accrediting bodies to determine what qualifies as care of a collection. The AAM recently issued a white paper offering guidance to determine what’s in bounds for “direct care” and what’s not.

For organizations that don’t have accreditation bodies, the American Institute of CPAs is stepping in. A panel at AICPA is considering issuing nonauthoritative guidelines on making the “direct care” call, said Clarke, who also is a member of AICPA’s Financial Reporting Executive Committee.

“There was a fear that some of those organizations who aren’t following guidelines because they aren’t accredited by museums, may say, ‘I have to keep this building otherwise my collection will go bad so I could use that money to heat the building because it is direct care of my collection,’ and ‘I need a security guard to walk around to make sure nobody steals anything or touches anything,’” she said. “We’re just trying to provide some of that guidance.”

Update Applies to For-Profit Businesses, Too

The update is effective for annual periods beginning after December 15, 2019, and for quarterly reports one year later. FASB will allow organizations to adopt the amendments early.

Under the update, an organization must disclose its policy for the use of proceeds from when collection items are sold, or “deaccessioned,” in museum parlance. If an organization has a policy that allows proceeds from deaccessioned collection items to be used for direct care, it should disclose its definition of direct care, FASB said.

The update primarily applies to not-for-profit organizations like museums and art galleries, but FASB said it applies to for-profit outfits, too. Some large corporations and banks, for example, have artwork or collector items at corporate headquarters. They likely aren’t material to their balance sheets, however, said CLA’s Clarke.