Many nonprofit organizations, especially those in the arts and culture space, have extremely diverse collections of assets. These range from historic artifacts to revered artworks worth millions of dollars. Correctly accounting, and caring, for these collections is crucial, both from a financial and an operational perspective.
In accounting terms, nonprofits face a fundamental choice: whether or not to capitalize their collections and present them on their Statement of Financial Position. Beyond this, there are various other accounting and fiduciary considerations that nonprofit leaders must keep in mind.
In this overview, we will outline the accounting techniques applicable to nonprofit organizations with collections of diverse assets. We will also explore additional considerations regarding operational best practices and internal controls that nonprofit leaders should embrace. In doing so, leaders can ensure their collections continue to have a significant cultural impact for generations to come.
Diverse assets are assets of which the value is difficult to quantify. For nonprofits in the arts and culture space, the term is typically used to refer to collections. The definition of collections for nonprofit entities was updated in 2019 by the Financial Accounting Standards Board (FASB).
Today, ASU 2019-03 defines collections as:
“Works of art, historical treasures, or similar assets that meet all of the following criteria:
In practice, an organization’s collections typically consist of a wide variety of diverse assets. At Smith + Howard, we have worked with nonprofit organizations with collections including assets such as artwork, artifacts, buildings, and even a fully-functioning historic whiskey still.
Maintaining a comprehensive inventory of these assets, their condition, and the ongoing efforts to conserve them must be a key focus for all organizations that actively manage collections. To do so correctly, nonprofit organizations must adopt correct accounting policies and internal governance practices.
A clearly defined accounting policy consistently applied across all of a nonprofit’s collections is central to successfully accounting for diverse assets. In general, nonprofit organizations have two choices when it comes to accounting for their diverse assets: capitalizing or not capitalizing the assets.
In the majority of instances, nonprofit organizations choose not to record the value of their collections on their annual Statement of Financial Position.
Diverse assets can be purchased or donated. Determining the value of donated assets can be extremely challenging. Expert appraisals are required and it is not uncommon for different appraisers to offer inconsistent valuations. If a nonprofit capitalizes its diverse assets, depreciation would be required as all assets have wear or tear. Additionally, if capitalized a nonprofit would need to consider impairment if there are changes in circumstances if the carrying amount may not be recoverable.
If a nonprofit chooses to follow the accounting policy of not capitalizing collections, it is still required to maintain a comprehensive inventory of its collections. Additionally, the nonprofit should describe its diverse assets, including their significance in the audited financial statement. They must also specify the internal governance policies related to these assets. If the nonprofit has chosen to adopt a policy under which proceeds from sales of collections can be used for direct care, the nonprofit’s definition of what is included as direct care must be disclosed.
No matter which accounting policy your nonprofit has chosen to adopt, it’s vital the policy is applied consistently. It’s not permissible for nonprofit organizations to attach tangible valuations to some collections and not to others: leaders must select an accounting policy and uniformly abide by it.
Regardless of the accounting policies a nonprofit adopts, the presence of robust internal controls is perhaps almost as important in correctly accounting for diverse assets. These controls are particularly relevant when it comes to selling items of a collection or soliciting donations to expand a collection.
ASU 2019-03 didn’t just redefine what collections are, it also changed the accounting standards that define how nonprofits can allocate revenue from the sale of their collections. Previously, these proceeds could only be used to acquire new items. Today, proceeds from the sale of collection items can also be used for the direct care and maintenance of existing collections.
The maintenance of collections, particularly collections of historic art and artifacts, often represents a significant expense for many nonprofit organizations. Historic and valuable collections may require temperature-controlled storage facilities, extensive security measures, and more. Effectively tracking the funds used to pay for these expenses requires nonprofit organizations to have sophisticated financial systems that expense these costs against restricted funds earmarked for this purpose.
This also holds true for certain types of donations that nonprofits receive. Nonprofits frequently receive restricted contributions. These are donor funds that are granted subject to conditional requirements that the funds be spent on certain items: such as a collection of artwork that is scheduled to be auctioned soon. Nonprofit organizations must carefully track these contributions and correctly expense qualified acquisitions against these.
Investing in building the financial infrastructure and internal controls to ensure appropriate tracking and attribution of expenses is an important step for all nonprofits in the arts and culture industries. A reliance on manual processes leaves significant room for error. Embracing automated tracking and expensing solutions and creating clearly detailed written policies is crucial in ensuring funds are appropriated correctly.
With so many intricacies to consider, leaders of organizations with diverse assets need to have a trusted accounting firm they can rely on. At Smith + Howard, our nonprofit accounting professionals have extensive experience supporting the needs of a range of arts and cultural organizations.
Our experience with large, nationally recognized institutions allows us to share industry-leading best practices with all of our clients. It’s our goal to provide guidance and advisory services that go beyond the scope of a typical accounting engagement, and to help the organizations we work with upgrade their internal policies and controls to be in line with industry leaders.
To learn more about how Smith + Howard’s nonprofit accounting team can support your arts and culture nonprofit, contact an advisor today.
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