Artwork collection In September 20X2 Amalgam begins collecting artworks for the

Question

Artwork collection

In September 20X2 Amalgam begins collecting artworks for the first time. It acquires 10 paintings at auctions in London, Hong Kong and New York at a total cost of $1,000 million.

Amalgam neither trades in artworks nor does it intend to do so in the future. However, in managing the art collection, it is believed that some artworks might need to be sold to fund the acquisition of other, more desirable pieces.

The artwork collection is stored in a purpose-built underground vault at Amalgam’s

head office building. On occasion, Amalgam might invite its most important customers and other special guests to view the collection at no charge.

Amalgam’s risk management team expect to hold the art indefinitely and the cash used to pay for the collection is surplus to the entity’s foreseeable cash flow needs.

How would you advise Mr J when he is developing an accounting policy for Amalgam to account for the artworks held as a store of wealth?

Hint: What are the economics of Amalgam holding artworks as a store of wealth?

Main discussion questions:

1.     Are artworks held as a store of wealth similar and related to investment property?

2.     Could Mr J use his judgement and when developing and applying an accounting policy for the artworks held it in accordance with the IAS 8 hierarchy, and analogize to IAS 40 Investment Property.

3.     When/If MrJ decides to develop an accounting policy for the unique artworks by analogy to IAS 40, does the nature of the market for unique artworks—absence of a deep and liquid market—affect the judgement about which measurement basis Mr J should specify in Amalgam’s accounting policy for those artworks?

Explanation / Answer

1- As per IAS 40 Investment Property is property held by owner to earn Rental or for Capital Appreciation or both. Investment properties are initially recognized at cost with some exception where FMV method is used. In given case Amalgam neither trades in artworks nor does it intend to do so in the future. However, in managing the art collection, it is believed that some artworks might need to be sold to fund the acquisition of other, more desirable pieces. The artwork collection is stored in a purpose-built underground vault at Amalgam’s head office building. On occasion, Amalgam might invite its most important customers and other special guests to view the collection at no charge. Amalgam’s risk management team expect to hold the art indefinitely, Hence it is clear that Artwork will be held as Investment Property for Capital Appreciation. It should be recognized as Investment property at Cost of acquisition as per IAS 40.

2- IAS 8 Accounting Policies,Change in Accounting Estimates and errors requires compliance with any specific IFRS applying to transaction or event and provides guidence on developing accounting policies that result in reliable and relevant information. Mr J should use his judgement and when developing and applying an accounting policy for the artworks held it in accordance with the IAS 8 hierarchy and should recognize it as per intention of business existing at that time and situation.

3- If Mr J decides to develop an accounting policy for the unique artworks by analogy to IAS 40, then the nature of the market for unique artworks may affect the judgement about which measurement basis Mr J should specify in Amalgam’s accounting policy for those artworks.

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