I first met Jenn Landry, now Director of Museums at City of Irving (TX), when she attended Developing History Leaders @SHA, a program that I managed for the American Association for State and Local History from 2007–2016.
Like Ruth Taylor, whose commentary I posted here, Jenn has a keen mind for museums and their value. She is also a collections professional with a wide range of experiences that, frankly, I do not have.
In response to my original post, The Deaccessioning Dilemma, Jenn reached out and shared another concern with the use of proceeds from the deaccessioning and sale of collections: that of the Financial Accounting Standards Board (FASB).
Her comments are thorough in addressing an angle I haven’t often heard mentioned in the overall discussions on this topic. While acknowledging how challenging deaccessioning decisions are, Jenn urges us to gain better understanding of the accounting/auditing/tax ramifications of our decisions.
In the early 1990s, FASB issued an Exposure Draft called Accounting for Contributions Received and Contributions Made and Capitalization of Works of Art, Historical Treasures, and Similar Assets that recommended museums should capitalize their collections. All incoming donations and acquisitions would be capitalized and within three years all preceding collections would need to be capitalized (there were apparently some exceptions to this but I did not track those down). Under the proposed draft, if a museum did not have its collection appraised and listed as an asset on the museum’s balance sheet it would not be able to receive an unqualified audit (a qualified audit is frowned upon and would jeopardize grant applications and impact credit rating).
The museum community responded with strong opposition to collections becoming financial assets and AAM led the charge and won. The arguments included the fact that collections were held in the public trust and should not be treated as financial assets but also cited the exorbitant cost for museums to appraise and assign value. In the end, FASB determined that the costs associated with capitalization for many museums outweighed the benefit.
In the 1993 publication of FASB 116, FASB encouraged the capitalization of collections but did not require it. However, if museums chose NOT to capitalize collections there were some requirements that FASB put into place.
From Page 7: 11. An entity need not recognize contributions of works of art, historical treasures, and similar assets if the donated items are added to collections that meet all of the following conditions:
a. Are held for public exhibition, education, or research in furtherance of public service rather than financial gain
b. Are protected, kept unencumbered, cared for, and preserved
c. Are subject to an organizational policy that requires the proceeds from sales of collection items to be used to acquire other items for collections.
During the same time period, AAM issued a revised Code of Ethics that included language along these same lines (which FASB looked to for guidance in writing the revised 116). And of course, some of the museum community pushed back on the “deaccession proceeds for acquisition only” statement and AAM eventually amended the Code of Ethics to include Direct Care (although by not defining direct care set in motion a need for a Direct Care of Collections Task Force, to define it; which brings us up to recent history). FASB has not been updated to reflect direct care as an additional use of disposal funds but the sense from the museum community is that this still aligns with the intent of the policy.
Paragraph 144 in FASB 116 is also relevant and could be interpreted to imply direct care:
144. Most museums and other respondents to the 1992 Exposure Draft that commented on the provisions for recognition of and disclosures about collections supported the provisions in this Statement. Some museums that endorse the provisions of paragraph 11(a) and (b) but are not committed to reinvesting proceeds from sales of collection items to acquire other items for collections (paragraph 11(c)) asked the Board to allow nonrecognition of their collection items. Having an organizational policy and demonstrated commitment to reinvest in collection items is particularly relevant to the Board’s conclusions about collection assets.
My concerns with the recent news of the Berkshire Museum and La Salle University and the ensuing debate within our community about deaccessioning policies is that if we move towards an acceptance of using disposal proceeds for purposes outside of acquisitions and direct care, FASB could decide to revisit 116 and possibly determine that museums cannot have their cake and eat it too (we cannot hide under the umbrella of our collections not being financial assets and then turn around and use our collections as financial assets).
If FASB 116 was revisited and it was determined that all museums had to capitalize their collections this would have an enormous impact on our field and place a significant burden on history and science museums, in particular, to try and determine value for their collections.
In my own experience, I came to realize that as long as a donor agreement (restriction) is not being violated there is really nothing illegal about museums or parent organizations selling collections for non-acquisition or direct care purposes. Yes, it is unethical (per AAM, AASLH, AAMD) but not illegal. There are some IRS rules that have to be followed if the sale happens within three years of the donation but that is about it.
Other questions/issues also come to mind:
1. Would the IRS step in and begin questioning whether in-kind donations were being used for related use or unrelated use if they were being sold to shore up the general operating budget or endowment? This would have implications for donors and how we process donations. (IRS Publication 526)
2. If museums began selling collections to shore-up basic operating expenses, would our nonprofit status be called into question?
3. If the standard uses of disposal proceeds where abandoned for a larger definition (special projects, general operating, endowment building) would the proceeds be subject to Unrelated Business Tax?
So my concern is that this “leg” of the deaccession beast isn’t lost in the discussion — most of us are not real familiar with accounting standards and processes but their impact could be large. It seems that as the museum field begins to assess whether our approach to deaccessioning needs reevaluated (and I think we should have the discussion) we need to invite accounting and finance to the table as well so that we understand the full scope and impact of any change.
It is also important that it is not just art museums driving the discussion, the impacts for history and science collections would in many ways be bigger since it is often much more difficult to determine value of our collections.
In case you missed the links within the body of Jenn’s commentary, here they are:
I am grateful to Jenn or introducing a new wrinkle into my understanding of the Deaccessioning Dilemma. In my view, this particular point one is worthy of much additional exploration. Please share your thoughts.
A twenty-year veteran of the nonprofit world, Bob Beatty is founder of The Lyndhurst Group, a history, museum, and nonprofit consulting firm providing community-focused engagement strategies for institutional planning, organizational assessments, and interpretive direction.