Or How Much Collateral Is in that Caravaggio?

By William G. Tompkins

This article was published in Museum News January/February 2004.

Q:At a mid-sized art museum in the Southeast, the board of trustees is alarmed about a growing deficit. Some trustees strongly advocate capitalizing a portion of the museum’s collection and using it as collateral to secure a loan to cover the deficit. The museum’s accountant agrees, insisting that capitalization is a generally accepted accounting practice and necessary for a clean audit. The director, though, is nervous. Is it ethical to use collections as financial assets? 

A: The director, standing on top of that proverbial slippery slope, is right to be nervous. The capitalization of collections—assigning a monetary value to collection items and including them as assets on a museum’s financial statement—is not a new issue, but it is a thorny one. In 1986, FASB (Financial Accounting Standards Board, the accounting standards-setters for nonprofit and for-profit organizations) declared that museums needed to get consistent. There were too many variations in accounting and reporting practices regarding collections and contributions. In 1990, FASB issued an “exposure draft” (sounds like standing in a cold wind with no clothes on, doesn’t it?). It proposed a mandatory requirement that museums recognize collections as revenue in the period they were donated and retroactively capitalize their collections within three years. ¹

An outcry arose from museums. The field, led by AAM, questioned the appropriateness, practicality, and usefulness of assigning cash values to collection items. Do collections meet the same definition as other tangible assets? Could monetary values be established and measured reliably, and at what cost to the museum? Would the costs outweigh the benefits of the information that capitalization would provide? How could disclosing dollar-value information about collections help assess a museum’s financial health? Many in the field called for the withdrawal of FASB’s mandatory capitalization requirement.

In 1993, after further deliberations, FASB established its standard,² which was basically: you have a choice. Nonprofit collecting organizations now have the option of capitalizing their collections. Institutions that choose not to capitalize must certify that their collections:

These conditions describe the unique nature of collections. That Caravaggio on the gallery wall is not an asset like cash, investments, accounts receivable, pledges of monetary gifts, merchandise, land, buildings, and equipment. If a museum meets the FASB conditions and chooses not to capitalize its collections, it must report specific disclosures on its financial statement separate from revenues, expenses, gains, and losses.³

In June 1999, yet another powerful acronym, GASB (Governmental Accounting Standards Board, which sets standards for state and local government entities), issued a standard that almost mirrors the FASB statement.⁴ Both standards encourage, but don’t require, museums to treat collections as financial assets. Interestingly, FASAB (yes, another one—the Federal Accounting Standards Advisory Board, standards-setters for the federal government) takes a different view, determining that collections do not meet the criteria for assets that must be reported on federal agency financial statements. Under FASAB standards, federal entities must remain accountable for “stewardship” property (collections) by disclosing specific descriptive information about collections, but do not have to show dollar amounts on their balance sheets.⁵

To Capitalize or Not to Capitalize?

What does this mean for our nervous director? First, the museum’s accountant cannot require the museum to capitalize the collections to ensure an unqualified (“clean”) audit. The accountant serves as an advisor and has no authority to dictate the museum’s decisions, particularly when the institution has an option under GAAP (I knew you’d ask: Generally Accepted Accounting Principles). It is the museum management’s prerogative and responsibility to develop its own policy to capitalize (or not) its collections. Second, capitalization of selected collections is precluded under FASB and GASB. If a museum decides to capitalize its collections, it must include the entire collection or all collection items acquired after it adopted a capitalization policy. It cannot capitalize a portion or a specific type of its collections.

Third, the ethical standards established by the professional associations of the museum community—including the Association of Art Museum Directors, International Council of Museums, American Association for State and Local History (AASLH), and AAM—discourage the practice of capitalizing collections. The AASLH Council recently issued “The Capitalization of Collections,” practical guidelines that reflect the association’s position on the ethics of capitalizing collections.⁶ This paper conveys the seriousness of the issue as state and local governments face record deficits.

Our museum director must consider whether the collections should be treated as financial assets that may be pledged as collateral for a loan. The museum community persuaded FASB that collections need not be capitalized because they are acquired and retained “for public exhibition, education, or research in furtherance of public service rather than financial gain.” It is true that collections may indirectly produce future economic benefits through admissions, royalties, or licensing fees. But they are acquired solely to fulfill the museum’s public service mission as a public trust, rather than to bolster the institution’s financial wealth, even in the worst economic times. Current professional standards, such as AAM’s Code of Ethics for Museums, preclude the use of collections as collateral, whether or not the museum chooses to capitalize its collections on its financial statement.

A museum’s financial statement should present quantifiable information about its economic resources and obligations, as well as the non-monetary disclosures that describe its operations, activities, and services. To evaluate a museum’s financial stability, lenders and donors will assess equally information about the organization’s performance and how well its managers have discharged their stewardship responsibility. Putting collections in the dollars-and-cents column will mislead others about a museum’s operating activities and financial stability, violate professional standards, and undermine the integrity of the entire field.

For our art museum, capitalizing collections so they can be used as collateral looks to the board and the accountant like a financial quick fix. In truth, it is simply a bad idea.

The Alphabet Soup of Accounting Standards

The generally accepted accounting principles (GAAP) are the “rules of the road”for preparing and reporting an organization’s financial statement. There are three GAAP standard-setting entities:

• Financial Accounting Standards Board (FASB) establishes accounting standards for the private sector (nonprofit and for-profit organizations).
• Governmental Accounting Standards Board (GASB) sets GAAP for state and local governments.
• Federal Accounting Standards Advisory Board (FASAB) promulgates standards for the federal government.

The American Institute of Certified Public Accountants (AICPA) provides guidance on producing and auditing financial statements in accordance with GAAP. An audited financial statement must include a letter from the auditor indicating that the information is presented in conformance with GAAP and has been reviewed according to generally accepted auditing standards (GAAS).

References

1. Accounting for Contributions Received and Contributions Made and Capitalization of Works of Art, Historical Treasures, and Similar Assets. FASB Exposure Draft, October 1990.

2. Statement of Financial Accounting Standards (SFAS) No. 116, Accounting for Contributions Received and Contributions Made, June 1993.

3. Required disclosures include: costs of collection items purchased; proceeds from the sale of collection items; proceeds from insurance recoveries of lost or destroyed collection items; description of collection items disposed by other methods than sale or disclose their fair value; and a description of the museum’s collections, including relative significance, and its accounting and stewardship policies for collections.

4. Statement No. 34 of the Governmental Accounting Standards Board: Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, June 1999.

5. In June 1996, the Federal Accounting Standards Advisory Board (FASAB) issued standards for reporting on the federal government’s stewardship of heritage assets such as museum collections held by federal entities: Statement of Federal Financial Accounting Standard (SFFAS) 8: Supplementary Stewardship Reporting. At press time, FASAB had issued a proposed standard reclassifying heritage assets as basic information, except for condition information, which would be classified as required supplementary information.

6. AASLH Technical Leaflet #224, “The Capitalization of Collections,” History News 58, no. 4, Autumn 2003.

 Resources

Accounting for Museum Collections and Contributions of Collections Items by Henry R. Jaenicke and Alan Glaser. Washington, D.C.: American Association of Museums, Professional Practice Series, 1991. This study—commissioned by the American Museum of Natural History, the Art Institute of Chicago, the Metropolitan Museum of Art, and the Museum of Modern Art in response to FASB’s initial proposal—presents a full discussion of the issues surrounding the treatment of collections as financial assets.

AASLH Technical Leaflet #224, “The Capitalization of Collections,” History News 58, no. 4, Autumn 2003.

“Capitalizing Collections” can be found on the members-only section of the AAM Web site; click on Information Center > Collections Stewardship > Ethical & Legal Collections Issues. www.aam-us.org.

“Considerations for AAM Accredited Museums Facing Retrenchment or Downsizing” can be found on the AAM Web site; click on “Newsroom.” www.aam-us.org.

FASB Statement of Financial Accounting Standards (SFAS) No. 116, Accounting for Contributions Received and Contributions Made, and SFAS No. 117, Financial Statements for Not-for-Profit Organizations, June 1993. www.fasb.org. FASAB Statement of Federal Financial Accounting Standards (SFFAS) 8, Supplementary Stewardship Reporting (June 1996) and Heritage Assets and Stewardship Land: Reclassification from Required Supplementary Stewardship Information (Exposure Draft, August 2003). www.fasab.gov.

GASB Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, June 1999. www.gasb.org.

William G. Tompkins is national collections coordinator, National Collections Program, Smithsonian Institution, Washington, D.C.