A few weeks ago I visited our dentist together with my little 4-year old girl just to check up everything’s OK with her little teeth.
While we were sitting in the waiting room, my little one playing with the small teeth replicas (OMG!), I looked around myself noting that there were beautiful wall paintings around, evoking soothing feelings before other scary things at dentist’s chair.
There’s always an accountant inside me and that little voice asked: How would you treat these paintings in your accounts under IFRS? I know, I suffer from a “job-related impact” or a “deformation by profession”
The truth is that I received fair amount of questions from my readers about this issue, because many professional offices contain at least some decorations.
IFRS do not contain any specific guidance applicable to “artwork” and therefore, we must stick with what’s in place.
In my opinion, the first thing to do before any attempts to account for your artwork, is to answer the following question:
What kind of artwork do you have?
Artwork itself is a very broad category and we just can’t lump everything together. You should consider a few aspects of your artwork, such as:
- Does your artwork have a determinable useful life?
- Is your artwork exposed to wear and tear?
- Does your artwork have some residual value? Can you sell it when you want to?
- Is your piece of art separable? Or is it attached to the other piece of property, for example – artistic painting on the wall?
- Does the value of your piece of art tend to increase with time rather than decrease? Does it have some historical or cultural value?
- Is the value of your artwork material for your financial statements?
After answering all the above questions, we can come up with 4 basic classes of artwork (I named them up for easier reference):
Class 1: First-class artwork
First-class artwork represents pieces that are held for capital appreciation purposes, although decoration is not excluded.
All kinds of art collections or individual pieces may fall into this class, including various paintings, statues and sculptures, probably (but not solely) acquired in artistic auctions and held primarily as a store of wealth. These pieces usually do have some cultural or historical value.
Usually, the primary goal for acquiring artwork is exactly making an investment and many people acquire a piece of art rather than some financial instrument for the purpose of storing value.
Unfortunately, IFRS do not contain any guidance in relation to this type artwork. We can’t really apply IAS 16 Property, plant and equipment (PPE), because first-class artwork does not meet the definition of PPE (due to its purpose of capital appreciation). Neither can we apply IAS 40 Investment property, because IAS 40 limits its scope to land and buildings.
Therefore, I’d like to bring IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors to your attention. Indeed, this is what we should do:
Develop your own accounting policy
IAS 8 specifically says in paragraph 10 that in the absence of an IFRS that specifically applies to a transaction, other event or condition, management shall use its judgment in developing and applying an accounting policy that results in information that is both relevant and reliable.
Acquiring a piece of art with historical value for the purpose of storing the wealth is exactly the transaction not specifically addressed by IFRS, therefore you should develop your own accounting policy.
You can’t simply develop accounting policy out of thin air, because there’s IAS 8 hierarchy you should follow.
IAS 8 says that when you develop your accounting policy, you should refer to and consider the following resources in descending order (hence the name “IAS 8 hierarchy”):
- The requirements in IFRSs dealing with similar and related issues;
- The definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework; and finally,
- The most recent pronouncements of other standard-setting bodies that use a similar conceptual framework to develop accounting standards, other accounting literature and accepted industries if they do not conflict with the sources in points 1 and 2.
For example, you can refer to IAS 40 Investment property dealing with property acquired for capital appreciation or rental income, because the purpose of your first-class artwork is very similar.
In fact, fair value model appears to be the most appropriate for these assets, as they often have indefinite useful life, their fair value tends to increase over time (although not always) and they are held as a wealth store.
I also recommend looking to guidance in other accounting principles, for example, to UK GAAP and their FRS 30 Heritage Assets that deals with the similar items. When you look there you’ll also find out that FRS 30 prescribes something like IAS 40 fair value model for these assets.
Fair value model under IAS 40
Under fair value model, the property is measured initially at cost including the transaction cost. Subsequently, the property is remeasured at fair value determined in accordance with the standard IFRS 13 Fair Value Measurement.
Gains or losses arising from changes in the fair value of investment property must be included in net profit or loss for the period in which it arises. That’s it. There’s no depreciation.
I think applying the fair value model to really valuable artwork that appreciates with the time is wise and appropriate selection of an accounting policy.
Class 2: Office artwork
Office artwork represents separate pieces, i.e. not attached to other items like walls that are held primarily for their use in business, while they might be resold time-to-time.
What can we include here: all kinds of paintings, sculptures, replicas and other items held primarily for decorating your office or workplace in general.
These items may have non-negligible acquisition cost, they might be produced specifically for you by the artist or purchased in galleries. In other words, these are not small items – I write about these in class 4.
These pieces of art really make your workplace or office a pleasant and comfortable place and they create an atmosphere that you want and need in your business. Thus we can say that they meet the PPE in line with IAS 16, as they are used either in a production of goods or services (e.g. decorations in Thai wellness center creating calming place for massages) or for administrative purposes (e.g. paintings in CEO office).
How to account for office artwork
As we may classify office artwork as an item of PPE in line with IAS 16, you have 2 models to choose from:
- Cost model, under which you hold your assets at cost less depreciation less impairment loss; or
- Revaluation model, under which you hold your assets at fair value at the date of revaluation less subsequent depreciation less subsequent impairment loss.
Which model to select?
If there’s a market for these items and fair value can be obtained, then you can opt for revaluation model and revalue these items regularly. Otherwise, just stick with cost model.
What about depreciation?
I can hear you saying: but we can’t book depreciation on our artwork as we can’t determine its useful life and it will always have some value!
OK, I got you.
Some items have a useful life as businesses know in advance when they are going to replace interiors. Also, some items simply wear and tear by inconsiderate treatment or just because. In this case, it should not be a problem to make an estimate of asset’s useful life and residual value.
For items with indefinite useful life that you can sell whenever you want, it’s OK not to depreciate when the residual value is the same or even higher than the acquisition cost (you should prove that).
So when you acquired some high value paintings from a famous artist and display them in your CFO’s office, you don’t depreciate them as long as you can support the residual value of that painting equal or higher than the cost or fair value (depending on the model you apply).
Class 3: Inseparable artwork
Sometimes, businesses hire artists to decorate their walls. For example, municipal swimming pool in my hometown hired Spanish street artist Aryz to decorate the external wall and the result is right here on the right.
Personally I like this smoking monster because it’s a kind of mad and terrific at the same time, but you would not believe how much excitement and debates it raised among honorable men sitting in the municipal board!!!
Back to the point: In this case, treat the artwork as a subsequent expenditure related to an item of PPE in line with IAS 16. If the artwork brings some future economic benefits and its cost is reliably measurable, then you should capitalize it (not as a separate asset, but to the cost of the related PPE).
For example, above mentioned municipal swimming pool argued that this crazy painting raised much more interest among people and the number of pool’s visitors rapidly increased. As a result, pool’s turnover increased, too.
You definitely need to depreciate this artwork over its useful life. If you plan to remove or replace the artwork after few years, then depreciate it over these few years (artwork’s useful life is not necessarily the same as the useful life of the related building). If you plan to leave it there until the building is destroyed or until the end of your lease, then depreciate it over the remaining useful life of the property. You get the idea.
However, if the painting does not bring future economic benefit and is seen just as some servicing or maintenance, then you should expense it in profit or loss. Although, you would rarely hire an artist for maintenance works, would you?
Class 4: “IKEA” artwork
IKEA artwork represents all decoration pieces with relatively small acquisition cost, used solely for administrative purposes (not for capital appreciation), with no or very small residual value, often subject to wear and tear.
Here, I would classify all kinds of posters, framed and unframed replicas, little statues, vases and other small things that can be acquired easily anywhere, including the famous furniture chain IKEA (hence the name “IKEA”).
This is an artwork, too and it should be treated in line with IAS 16 exactly as the class n. 2. However, these items are rarely material and although they will be used mostly for more than 1 year and IAS 16 says nothing about the value threshold of PPE, it’s OK to expense them right to profit or loss as some office supplies.
Just be careful, because in some circumstances, these items can be material, if acquired in high amounts.
For example, one local company running a building with about 100 apartments for rentals acquired about 100 pieces of framed posters from IKEA. Sure, they were going to use it for decoration purposes in the apartments. One poster cost about 100 EUR, but total cost climbed to about 10 000 EUR which was quite material for that particular company.
What to do in this case?
Well, IAS 16 does not describe the unit of account, or what constitutes an item of PPE. Therefore, you may need to apply judgment. Maybe it would be appropriate to aggregate individually insignificant items and apply the criteria to the aggregate value. Or maybe not – I leave it to you and your decision.
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