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It’s Clear Now: Broker-Dealer Financial Instrument Contracts Would Be Excluded From New Revenue Recognition Guidance

AICPA release of revenue recognition implementation issue draft for securities broker-dealers and investment companies
 

July 12, 2016

Revenue Recognition On July 1, 2016, the Financial Reporting Executive Committee (FinREC) of the American Institute of CPAs (AICPA) released, for informal and confidential comment, a draft revenue recognition implementation issue. Titled “Issue #3-7: Revenue From Financial Instruments (Out of Scope),” the working draft addresses revenue recognition implementation issues for brokers and dealers and investment companies in the securities industry. Comments are due Sept. 1, 2016.

The publication stems from the work of the Brokers and Dealers in Securities Revenue Recognition Task Force, one of 16 industry task forces the AICPA established to study industries’ implementation issues related to Accounting Standards Update (ASU) No. 2014-09, “Revenue From Contracts With Customers (Topic 606),” issued in May 2014 by the Financial Accounting Standards Board (FASB). The tasks forces are, according to the AICPA, “charged with developing revenue recognition implementation issues that will provide helpful hints and illustrative examples for how to apply the new Revenue Recognition Standard” in their respective industries.

Final revenue recognition implementation issues will be included in a new revenue recognition guide that the AICPA is developing. Prior to publishing implementation issues, the AICPA submits the issues to the FASB/International Accounting Standards Board Joint Transition Resource Group for Revenue Recognition to verify that the guide is consistent with how the board intends the standard to be interpreted.

The Task Force’s Conclusions

As the document’s title indicates, the task force has concluded that financial instrument contracts (as defined in the Master Glossary of the FASB Accounting Standards Codification (ASC)) held by brokers and dealers in securities and investment companies would be excluded from the scope of FASB ASC Topic 606, “Revenue From Contracts With Customers.”

The original standard, ASU 2014-09, excluded from Topic 606 the financial instruments and other contractual rights or obligations that are within the scope of Topic 310 (“Receivables”) and Topic 320 (“Investments – Debt and Equity Securities”).

However, financial instrument contracts held by broker-dealers and investment companies are out of the scope of Topics 310 and 320, because the contracts are subject to the industry-specific guidance of FASB ASC 940 (“Financial Services – Brokers and Dealers”) and 946 (“Financial Services – Investment Companies”). The draft implementation issue guidance clarifies that FASB ASC 606-10-15-2 excludes financial instrument contracts held by broker-dealers and investment companies.

Upon Implementation ...

Brokers and dealers would continue to follow the existing accounting guidance for the recognition of the following income streams, as spelled out in the AICPA draft:

  • “Recognition of interest and dividend income and expense from financial instruments owned or sold short (including amortization of premiums and discounts)
  • “Interest (rebate) from reverse repurchase agreements, repurchase agreements, securities borrowed and securities loaned transactions and similar arrangements
  • “Interest from debit balances in customer margin accounts and margin deposits
  • “Dividends from equity instruments owned or sold short, and
  • “Payment-in-kind (PIK) dividends and interest from investments in debt and equity securities”

Implementation of the new revenue recognition standard will have a far-reaching effect on many industries, including securities broker-dealers and investment companies. This implementation issue has little impact on the industry’s accounting. However, stay tuned for guidance releases on issues such as commission income, selling and distribution fee income, costs associated with underwriting and investment banking advisory services, advisory fee income, and soft-dollar revenues.

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