Collections only seem to work when online. They do not recognize downloaded files. In my case they try and reach the SMB share even when offline. I thought I could work around this by creating another collection from the locally downloaded files, but this creates a weird second set of local collections (you cant add to existing collections), which can be added to the home screen when expanding the collections option (this shows both the normal and local collections) but do not show in the general parent collections home screen row (I assume this is because they are not part of the normal collections but a strange local version)
Downloaded (local) files in collections are kept separate from collections of remote files and these local collections will not sync through iCloud.
The reason for this is simply that local items are not playable on other devices, so it would be confusing to have these collections appear on other devices.
The same also applies to playlists which are created with local files.
Thanks for the great response. It would be nice if when playing offline it could check for a local version, but i get it. It can also be difficult to create collections with local downloaded files since they are all just at the same level (non tv and movie) and it gets messy with hundreds or more files.
Version 8.1.5233 in the app store is actually 8.1.9 (5233)