As part of its continuing efforts to examine the accounting principles used by not-for-profit organizations, the FASB issued an SFAS exposure draft (ED) that would dramatically change how many museums account for works of art, historical treasures, and similar items held for present or future display or study (referred to as "collection items" or "collections"). Although action on the ED has been postponed while other related issues are being debated, eventually the FASB will issue final guidance on the appropriate accounting. An article by the authors in the July 1991 issue of The CPA Journal describes present practice and the FASB proposals in detail.

Some museums capitalize all acquisitions, some capitalize only purchased collection items, and some do not capitalize any collection items. In addition, some museums recognize revenue from contributed collection items; others do not. The FASB proposed a new set of accounting standards for collection items. In its October 1990 ED, the Board concluded that, with certain exceptions based on cost-benefit considerations, organizations must capitalize both currentperiod acquisitions of collection items and, within three years of the effective date of the final statement, prior-period acquisitions not previously capitalized. With similar exceptions, contributions of collection items would have to be recognized as unrestricted, temporarily restricted, or permanently restricted revenues or gains. Purchased collection items would be recognized at acquisition cost and contributed items at fair value.

Criticisms of the Recognition Requirements

To provide all interested parties with an opportunity to respond formally to the proposals and as part of its due process before adopting a new SFAS, the FASB solicited written responses and conducted public hearings this past summer. Many members of the museum community expressed concern that a requirement to capitalize museum collections could be extremely costly to implement, especially, for contributed collection items acquired in previous periods, and would not provide any significant benefits. The interviews we conducted in the course of our research indicated that users of financial statements are not concerned about the value of a museum's collections or about comparing the value of one museum's collection with those of others. Rather than being relevant, information provided by capitalizing collection items could mislead users of financial statements into believing that collection items could be readily sold and the proceeds used to meet a museum's operating or other financial needs.

Some respondents and commentators based their criticism of the FASB proposal on the difficulty of obtaining reliable estimates of the fair value of many contributed collection items. Although sources of information about such values exist, the absence of an organized market or other sources of market prices for many collection items results in estimates that may not be sufficiently verifiable to be recognized for financial reporting purposes. For example, estimates by professional appraisers of the potential market prices of collection items can fluctuate widely and unpredictably. Appraisals made to support donor's tax deductions have been required only since 1984 and, even when available, may not be sufficiently reliable to be used for recognition purposes.

FASB Alternatives

The Board has decided to postpone issuing a final statement on accounting for contributions, including collection items, until it has made further progress on a related project dealing with the display of information in the financial statements of not-for-profit organizations. The Board believes that these two topics are closely related, and more work needs to be done on display before it can adopt a final statement on accounting for contributions.

When it returns to the contributions project, the FASB will have several alternative courses of action. One, of course, is to issue a final standard with the same recognition requirements proposed in the ED. Despite the opposition of many in the museum community, the FASB clearly believes that collection items meet the definition of assets contained in Statement of Financial Accounting Concepts No. 6 and, therefore, should be recognized. The cost of most purchased collection items is available in museum records and is easy to verify. A reliable measure of the fair value for items acquired by contributions and by other means can often be obtained from appraisals and from other sources, and the failure to recognize collection items because some cannot be reliably measured is inappropriate. The Board may conclude that collection items should be recognized to ensure that the total economic resources of the museum and changes in those resources are included in the financial statements.

Alternatively, the Board could decide that present GAAP for collection items is adequate despite the diversity in practice. Although collection items may meet the FASB's definition of an asset, the Board could conclude that mandatory recognition is inappropriate based on reliability and cost/benefit considerations. In our opinion, there appears to be little evidence that dollar-value information about collection items is useful in measuring a museum's financial position or performance or assessing management's stewardship over the collection. In addition, the costs of obtaining reliable estimates of the fair value of many collection items, especially those contributed long ago, may be significant and, to some museums, prohibitive.

Another Approach

A third alternative would require museums to segment their collections into groups of related items, or "classes" (for example, curatorial departments). Collection items in each class would not have to be capitalized if substantially all of the items in the class do not have attributes that could be reliably measured at reasonable cost, and the museum has adopted a policy restricting the use of the proceeds from the sale of collection items to the acquisition of other collection items. Current-period acquisitions would be either capitalized or expensed, depending on how the collection class as a whole is accounted for.

Under this alternative, current-period contributions of collection items would be recognized as revenue unless their fair value could not be reliably measured. This would ensure that, regardless of which policy a museum adopts for recognizing collection items, the receipt of a contribution of a collection item whose value can be reliably measured would be recognized in the same manner as the receipt of a contribution of cash restricted by a donor solely for the purchase of a collection item and the subsequent purchase of that item by the museum. Users might find that information more useful, or at least less harmful, than collection values on the balance sheet. Our interviews indicated that financial statement users are interested in a museum's reputation and its ability to generate future cash flows, including cash contributions, and current contributions of collection items are a valid indicator of a museum's current reputation and, possibly, of its viability as well. For most the cost of obtaining reliable measures of fair value for current- period contributions should not pose a significant implementation problem.

While narrowing the range of acceptable accounting practices, this alternative would permit collections in different museums (and different classes of collection items within the same museum) to be accounted for by different methods. Although accounting practice for collection items would not be standardized, either policy that a museum adopts should, together with the disclosures recommended later, provide additional information to readers of financial statements beyond that presently reported by museums that do not recognize either their collections or current contributions of collection items in their financial statements.

We do not believe that the loss of comparability resulting from the existence of two acceptable accounting methods is critical in this situation. The users we interviewed do not want to compare the value of museums' collections, nor would they be able to do so easily under the FASB proposal because of the mixture of measurement attributes that it permits.

Museum Alternatives

The museum community also has a range of alternatives that it could follow if the FASB requires capitalization of collection items. One response would obviously be simply to adhere to the requirement. We believe that, in order to get an unqualified audit opinion, many museums would have to obtain estimates of the fair value of many of their collection items from qualified, independent appraisers. Some museums will undoubtedly follow this strategy, primarily newer and smaller museums and those that adopted a capitalization policy prior to the FASB requirement. Other museums, however, will have more problems adopting a capitalization requirement, largely because of the difficulty and cost of obtaining reliable fair value estimates for larger and older collections. Because of the unique nature of collection items, we have not been able to develop any type of sampling plan that could be used to systematically reduce the costs of obtaining large numbers of such estimates. We also believe that inhouse appraisals and other methods for obtaining fair value estimates of the collection that are not prepared by qualified independent appraisers may not be sufficiently objective for auditing purposes.

Museums that chose not to recognize their collections, even in the presence of a capitalization requirement, could issue a full set of financial statements that omits the collection. In that situation, the independent auditors would issue either an adverse opinion or a qualified opinion because of the failure to follow GAAP. The users we interviewed in the course of our research did not seem to care about either opinion if the sole cause was a museum's failure to capitalize its collections.

Another option a museum might elect in the face of a capitalization requirement is to prepare financial statements on a comprehensive basis of accounting other than GAAP (OCBOA) that is acceptable to its bankers and to state officials.

Redefining and Resolving the Problem

The major goal of the FASB proposal presumably is to provide relevant, reliable information about collection items to users of financial statements. We believe, however, that many museums will have significant problems implementing a capitalization requirement. One workable alternative is to require museums to present a schedule of changes in the number of items in the collection that would reconcile the beginning and ending figures, including the number of collection items purchased, contributed, and sold during a period. Those disclosures, together with dollar figures for total current-period purchases, contributions, and sales of collection items, would provide the financial statement user with relevant and reliable information about the nature and sources of changes in the collection. (An example of such a note is presented in Figure 1. )

The FASB proposal is also presumably directed at providing information to users about managements' stewardship over collection items. Recognizing collection items as required by the ED does bring them under accounting control and forces the independent auditor to determine whether they in fact exist and to evaluate whether they have been maintained, at least to the extent that their current realizable value exceeds their carrying value. Recognizing collection items also imposes a discipline on management to design and operate internal control procedures to ensure that the items are safeguarded from harm, for if a loss should occur, it too would have to be recognized.

Users also need information about stewardship and custodial controls, but, in our opinion, those needs can best be met by means other than accounting recognition, especially in light of the reliability and cost considerations that a mandatory recognition requirement would entail. In the course of our research, we found that museums that do not recognize collection items often have well-developed custodial controls. For example, some museums undertake physical inventories of their collections on a regular (though not necessarily annual) basis.

Information about a museum's controls over its collections, together with auditor attestation of that information, could be provided directly to interested parties or included in a museum's annual report outside the financial statements. For example, the management of a museum could issue a "Statement of Management Responsibility" indicating that the museum follows specified museum accreditation standards related to collections, conducts an evaluation of its compliance with those standards, and submits that evaluation to an examination by its independent auditors. The Statement of Management Responsibility could also be accompanied by assertions by the museum about its responses to a questionnaire on compliance with collection standards (with those standards and the questionnaire attached to the assertions) and an attestation engagement report by its independent auditors.

Initiatives from the Museum

Community

A requirement for a Statement of Management Responsibility and related assertions falls outside the FASB scope of authority. Such a requirement would have to be developed by the museum community acting in concert to: 1) adopt a set of collection standards; 2) agree to abide by them; 3) create a questionnaire on the standards to be completed by museum management; and 4) require signatory museums to engage their independent auditors to report on the responses to the questionnaire. The Auditing Standards Division of the AICPA could then issue an interpretation of "Statements on Standards for Attestation Engagements" to provide guidance to CPAs engaged to perform that service.

Through this'approach, which was used by certain defense contractors in the mid-1980s who made a commitment to adopt and implement six principles of business ethics and conduct, museums could provide assurance to the public that they are meeting their fiduciary responsibilities with respect to their collections, without incurring the cost and other potentially adverse consequences associated with mandatory financial statement recognition of collection values.

Two Sides to the Story

The FASB has proposed that museums recognize, with some exceptions, collection items as assets and current-period contributions of those items as revenue or gain. Many members of the museum community oppose mandatory recognition, arguing that the information is unreliable and irrelevant to users' needs and that the costs of providing the information exceed the benefits. We suggest that alternatives to these positions exist and that compromises are possible. We recommend an alternative method of disclosing relevant information about collection items and custodial controls, thereby achieving the goals of those who seek more information than is generally presented currently by many museums, but at a cost that would be significantly lower than if full financial statement recognition were mandated.

This article is based on a research report commissioned by the American Museum of Natural History, the Art Institute of Chicago, the Metropolitan Museum of Art, and the Museum of Modern Art. The full report is available from the American Association of Museums, 1225 Eye St., N.W., Washington, D.C. 20005. The views expressed in this article are solely those of the authors.