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Museums and Historical Societies: FASB updates definition of ‘collections’ for nonprofits

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.

For Full FASB Update: Click Here

Question: Why are audit fees so expensive for Nonprofits?

Question: Why are audit fees so expensive for Nonprofits?

Generally, audit fees are expensive for any entity. Complicating this is the fact that many small organizations don’t have a full understanding of the audit process and how it differs from a preparation engagement. On the surface, the output is seemingly the same. There is not much extra “paper” you receive from an audit compared to less expensive services. All the extra work for the CPA firm goes into their documentation and remains in the audit files of the firm. Those files will be “audited” during that firm’s Peer Review. The extra piece of paper you do get, the audit opinion report, which proceeds the financial statements, has to be backed up by serious amounts of documentation . That is why it is the gold standard in the world of accounting and also why the Audit Report is relied on by your organization (i.e. your board), your donors, your grantors, your service recipients and state charity regulators. If you have not worked as an auditor for a peer reviewed CPA firm, it would be hard to understand the full audit process. For edification, I will point you to the popular blog of Charles Hall. You can read the blog here, Each entry is an education of what goes into the audit process “behind the scenes”. If you want to know more about the differences between Audit, Review and Compilation services, I will point you to this AICPA publication .

So, why are audit fees so expensive for Nonprofits?

Audits (and reviews) are subject to peer review. This means the CPA’s files and workpapers are reviewed by an AICPA approved peer reviewer. Peer review requirements have been becoming increasingly stringent for a variety of reasons. Remember, there is only one audit standard. The same rules and documentation requirements apply to auditing a small nonprofit organization as to a public entity (e.g. Microsoft). Specialized personnel are needed to work on audit documentation and are in demand. Additionally, NY has now joined every other state in the nation in requiring peer reviews for every CPA doing Audits or Reviews. Many smaller firms and sole practitioners dropped audits/reviews instead of being subject to peer review. Price is also affected by supply and demand. This is very specialized service (audits) and few people are doing it. Also, Nonprofits are a specialized industry which many accountants don't serve.

Outside of the Nonprofit world, few small entities (i.e. small businesses) ever have a CPA financial statement audit. Because of the public nature of 501(c)(3) charitable organizations, there are immense benefits for these organizations to have an audit. There are good reasons why states require audits as a tool to protect the public’s interest as they regulate charities and charitable assets in their state. Unfortunately, lack of funds , lack of experience in staff and governance and the limited amounts of CPAs actually doing Nonprofit audits, makes this a dilemma for many small organizations.