AICPA guidance for nonprofits prompts questions
The American Institute of CPAs released a piece of nonauthoritative guidance for nonprofits earlier this month to clarify the definition of “direct care of collection items” to help nonprofits implement an accounting standards update from the Financial Accounting Standards Board, but the clarification might lead to problems for some nonprofits.
The guidance came in response to an ASU issued by FASB in March, Updating the Definition of Collections (see AICPA offers guidance on direct care of collections for nonprofits). The ASU requires use of “proceeds from [collection] items that are sold to be for the acquisitions of new collection items, the direct care of existing collections, or both.” In a Q&A, the AICPA weighed in on what type of expenses would be considered “direct care of existing collections,” but noted that while FASB updated the definition of “collections,” the term “direct care” is still undefined. That gives nonprofits some wiggle room.
In the guidance, the AICPA said, “When an entity determines which costs are considered direct care of collection items, important characteristics to consider include, but are not limited to, whether those costs
• enhance the life, usefulness, or quality of an entity’s collection;
• provide a benefit to the collections (and not the entity as a whole or other areas of the entity beyond the collections); and
• exclude expenditures that are regular and ongoing in nature (such as expenditures for routine maintenance of the collection).”
The exclusion on “expenditures that are regular and ongoing in nature” might cause some difficulties for nonprofits. The FASB standard updated the definition of the term “collections” to align it with an updated Code of Ethics for Museums issued by the American Alliance of Museums. The definition used in an earlier version of the AAM ethics code had been the basis for a previous FASB standard, FASB Statement No. 116, Accounting for Contributions Received and Contributions Made, but it was revised by the AAM after the issuance of FASB Statement 116. That prompted FASB to release a new accounting standards update this year to harmonize both definitions of “collections.”
“When they actually did ASU 2019-03, the whole purpose of that standard was to try to align the FASB definition of a collection,” said Lee Klumpp, a national assurance partner at BDO USA’s Nonprofit and Government group. “When you look at that, it’s a clarity standard. It kind of helps organizations understand what they can use the proceeds for. In the past they could only use the proceeds from a sale to actually acquire more assets for the collection, according to FASB’s definition. The [AAM] had a little bit of a different twist on that, so FASB then turned around, trying to give some latitude in what organizations could do with the proceeds. They brought in the concept of direct care. The FASB was pretty specific in its basis for conclusion, which by the way is not GAAP. It had to be used for either the acquisition or the direct care of the collection, so what the AICPA did was based upon some concerns. By the way these concerns were raised by various respondents in the comment letters, and the FASB even had a working group to look into the definition of direct care. They elected not to define direct care in the codification glossary, but said specifically the definition should be addressed by industry. I read that not to be the AICPA, but to be the [AAM]. So now the AICPA has said we’re going to turn around through our Q&A process to kind of define what that is. I think that kind of creates tension between the [AAM] and the AICPA. The AICPA has said it’s to enhance the life, usefulness or quality of the collection. That can be a lot of different things. It opens it up for a lot of things along the lines of what the [AAM] was saying, for the direct benefit of the collection. Those two things didn’t bother me very much, but then it says it excludes expenditures of a regular ongoing nature such as the routine maintenance of the collection.”
He foresees that could lead to a disagreement between the AICPA and the AAM. “I think what’s going to happen is we’re going to end up having a little bit of a turf war here between the [AAM] and the AICPA because the AICPA has decided it’s going to define it. But the AICPA does not have the ability to actually write GAAP. The only organization that can turn around and write GAAP in the U.S. for private companies and specifically nonprofits is the FASB. Now the AICPA has taken the role of defining this. I’m going to be curious whether or not it creates any controversy between the organizations that are charged with maintaining these collections and possibly the auditors because of the AICPA’s interpretation.”
An AICPA officials indicated the Institute was providing the guidance to various types of nonprofits that might have collections, not just museums.
“These are considerations, subject to each entity’s facts and circumstances,” said Christopher Cole, associate director of the AICPA’s Not-for-Profit Section. “Many organizations that have collections are not museums. For those organizations, whether expenses are considered to be direct care may not be as easily determined. The considerations are intended to assist in implementing the new standard.”
The American Alliance said it didn't see itself as being at odds with the AICPA. “The American Alliance of Museums has appreciated that FASB and the AICPA have both engaged in meaningful and productive conversation on the issue of direct care," said Laura Lott, president and CEO of American Alliance of Museums. "We do not believe that we are at odds with AICPA and we look forward to further discussion on how to address expenses such as maintenance for collections. In March, the AAM provided guidance on direct care and we are in the process of examining the AICPA’s most recent guidance, while we continue to work with both the AICPA and FASB.”
Klumpp believes the exclusion on routine maintenance could cause some problems for museums that have to take care of temperature and humidity controls, for example, to preserve the collections they have on exhibit or in storage. He also wonders about other institutions like sports and entertainment halls of fame that need to maintain their collections of memorabilia.
“Routine maintenance isn’t defined,” he said. “To me, I would think that things like painting the exhibit hall, and caring for the maintenance as it relates to janitorial services would be excluded out of it. But what would be included? I would think that if you have work around things like putting new picture frames around an art exhibit, or turning around and taking an exhibit and saying this room is not humidistatic appropriate with temperatures and air quality control — to me, that enhances the life of the collection, but someone might take it to mean that’s something you would do normally.”
He sees value in the first two bullet points in the AICPA guidance and hopes the AAM will offer guidance of its own on the third point. “If the [AAM] were more specific around number 3 with some examples, that might be helpful for nonprofit organizations that have collections,” said Klumpp. “So there may be another piece of this, like a step 3. Step 1 was the clarification by the FASB, and now the AICPA has chimed in to help the auditors, and now if the [AAM] chimes in, which I don’t believe they have at this point in time, that may help some more. There may be a way to get the clarity they need on this, but the FASB has left it to industry to try to develop what the definition of direct care is, in my reading.”