ASC

ASC 320-940

Financial Services—Brokers and Dealers

320 Investments—Debt Securities

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In brief

IntermediateIndustry-specificFair valuePresentationFinancial instruments

This subtopic governs how broker-dealers account for investments in debt and equity securities, covering both clearance/settlement activities (General) and proprietary trading (Proprietary Trading Securities). The core rules are that all regular-way trades are reflected on a trade-date basis (320-940-25-1), and proprietary security positions — both inventory and obligations for short inventory positions — are measured initially and subsequently at fair value with unrealized gains and losses included in profit or loss (320-940-30-2, 35-1, 35-2).

Key points (7)
  • The statement of financial condition shall reflect all regular-way trades on an accrual or trade-date basis, because risk, benefits, and economic potentials are conveyed at the trade date (320-940-25-1).
  • A purchase for the broker-dealer's own account is recorded in inventory with a corresponding credit to net receivable or payable for unsettled regular-way trades; if exchange does not occur on the contracted settlement date, the transaction is reported as a fail-to-receive or fail-to-deliver (320-940-25-2).
  • Accrued interest on fixed-income securities is computed from the last coupon payment date to the settlement date and is paid by the purchaser to the seller (320-940-30-1).
  • Security positions from proprietary trading — inventory and obligations for short inventory positions — are measured initially and subsequently at fair value, with unrealized gains or losses included in profit or loss measured as the difference between acquisition cost and fair value (320-940-30-2, 35-1 through 35-3).
  • Proprietary securities transactions for trading or investment purposes are included in securities owned and securities sold, not yet purchased; payables and receivables from unsettled regular-way trades may be recorded net (320-940-45-2, 45-3).
  • Trading gains and losses (realized and unrealized) are generally presented net, and income and expense from complex trading strategies may be reflected net on the income statement (320-940-45-5, 45-6).
  • Trading securities activities are reported in the operating section of the statement of cash flows, and gross components of complex trading strategies not shown on the face of the income statement must be disclosed in the notes (320-940-45-7, 50-1).

For students. This is the broker-dealer industry rule that carries trading inventory at fair value through earnings, bypassing the trading/AFS/HTM classification scheme; common mistakes are using settlement-date rather than trade-date accounting and forgetting that short positions ("securities sold, not yet purchased") are also carried at fair value.

broker-dealerregular-way tradestrade-date accountingproprietary tradingsecurities sold, not yet purchasedfair value measurementfails-to-deliver and fails-to-receivecomplex trading strategies

Machine-generated study aid for ASC 320-940. Check the source paragraphs below.

320-940-00Status

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320-940-00-1
The following table identifies the changes made to this Subtopic.
Paragraph Action Accounting Standards Update Date
Financial Asset (2nd def.) Amended Accounting Standards Update No. 2016-19 12/14/2016
Repurchase Agreement Amended Accounting Standards Update No. 2014-11 06/12/2014
Repurchase Agreement (1st def.) Added Accounting Standards Update No. 2014-06 03/14/2014
Repurchase Agreement (2nd def.) Superseded Accounting Standards Update No. 2014-06 03/14/2014
Reverse Repurchase Agreement Superseded Accounting Standards Update No. 2014-06 03/14/2014
940-320-05-3 Amended Accounting Standards Update No. 2014-06 03/14/2014
940-320-30-2 Amended Accounting Standards Update No. 2012-04 10/01/2012
940-320-35-1 through 35-3
 Amended Accounting Standards Update No. 2012-04 10/01/2012
940-320-45-4 Amended Accounting Standards Update No. 2012-04 10/01/2012

320-940-05Overview and Background

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320-940-05-1
This Subtopic addresses investments in debt and equity securities by brokers and dealers in securities (broker-dealers). The guidance in this Subtopic is presented in the following two Subsections:
  1. a
    General
  2. b
    Proprietary Trading Securities.
320-940-05-2
The General Subsections provide guidance relating to clearance and settlement activities.

Proprietary Trading Securities

320-940-05-3
The Proprietary Trading Securities Subsections provide guidance on accounting for proprietary transactions. A broker-dealer may buy and sell securities for its own account. Broker-dealers frequently enter into matched-stock borrow and loan transactions as a finder or conduit, or enter into repurchase and reverse repurchase transaction agreements as part of a matched-book trading strategy. Further, complex trading strategies often involve numerous long and short positions in different products, so that those positions reflect a trading position that is different from its individual components (for example, box spreads, conversions, and reversals).

Regular-Way Trades

320-940-05-4
The risk of nonperformance of regular-way trades is minimal given all of the following:
  1. a
    They are fully collateralized on the trade date.
  2. b
    The period of time between trade date and settlement date is reasonably short.
  3. c
    Most equity, U.S. government, and mortgage-backed agency securities are affirmed by both parties to the trade and settle net through a clearing entity.

320-940-15Scope and Scope Exceptions

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Overall Guidance

320-940-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 940-10-15, with specific qualifications noted below.

Other Considerations

320-940-15-2
For guidance on investments in debt and equity securities that are part of a financial-restructuring transaction (as described in paragraphs 940-325-05-1, 940-325-30-1, and 940-325-35-1), see Subtopic 940-325.

Proprietary Trading Securities

Overall Guidance

320-940-15-3
The Proprietary Trading Securities Subsections follow the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 940-10-15, and apply to all broker-dealers involved in proprietary trading of securities.

320-940-25Recognition

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Proprietary Trading Securities

320-940-25-1
The statement of financial condition shall reflect all regular-way trades on an accrual or trade-date basis. Risk, benefits, and economic potentials are created and conveyed at the trade date (that is, the inception of the contract), which is when the major terms have been agreed to by the parties. To properly reflect the economic effects of purchase and sale transactions for financial instruments (that is, to reflect the assumption of the risks and rewards resulting from changes in the value of financial instruments), broker-dealers shall account for the changes in value relating to all proprietary or principal transactions on a trade-date basis.
320-940-25-2
For example, if the broker-dealer purchased financial instruments for its own account on the date of the statement of financial condition, the transaction shall be reflected in the broker-dealer's inventory with a corresponding credit to net receivable or payable for unsettled regular-way trades. If the exchange does not occur on the contracted settlement date (referred to as a fail-to-deliver or fail-to-receive), these transactions shall be recognized on the statement of financial condition as fails-to-receive or fails-to-deliver.

320-940-30Initial Measurement

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Clearance and Settlement

320-940-30-1
Accrued interest earned on fixed-income securities shall be computed from the last coupon payment date up to the settlement date. This amount shall be paid to the seller of the instrument by the purchaser, who then receives the full periodic interest amount on the next coupon payment date.

Proprietary Trading Securities

320-940-30-2
A broker-dealer may buy and sell securities for its own account. Security positions resulting from proprietary trading shall be measured initially at fair value, including both of the following:
  1. a
    Inventory
  2. b
    Obligations for short inventory positions.

320-940-35Subsequent Measurement

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Proprietary Trading Securities

320-940-35-1
Security positions resulting from proprietary trading shall be measured subsequently at fair value, including both of the following:
  1. a
    Inventory
  2. b
    Obligations for short inventory positions.
320-940-35-2
Any unrealized gains or losses resulting from subsequent measurements of these to fair value shall be included in profit or loss.

Trading Gains and Losses

320-940-35-3
The profit or loss shall be measured by the difference between the acquisition cost and the fair value.

320-940-45Other Presentation Matters

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Proprietary Trading Securities

Consolidation

320-940-45-1
For guidance on consolidation of majority-owned investee entities, see paragraph 940-810-45-1.

Balance Sheet

320-940-45-2
Proprietary securities transactions entered into by a broker-dealer for trading or investment purposes shall be included in securities owned and securities sold, not yet purchased.
320-940-45-3
Payables and receivables arising from unsettled regular-way trades may be recorded net in an account titled net receivable (or payable) for unsettled regular-way trades.

Income Statement

320-940-45-4
The changes in the fair value of fixed-income securities owned that were purchased at a discount or premium is composed of accreted interest income or changes in the fair value of the securities or both. Consideration should be given to reporting these components separately as interest income and trading gains and losses, respectively.
320-940-45-5
Trading gains and losses, which are composed of both realized and unrealized gains and losses, shall generally be presented net.
320-940-45-6
The income and expense resulting from complex trading strategies as described in paragraph 940-320-05-3 may be reflected net in the income statement, with disclosure of the gross components either on the face of the income statement or in the notes to financial statements.

Statement of Cash Flows

320-940-45-7
Broker-dealers shall report their trading securities activities in the operating section of the statement of cash flows.

320-940-50Disclosure

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320-940-50-1
If the gross income and expense components resulting from complex trading strategies are not disclosed on the face of the income statement in accordance with paragraph 940-320-45-6, they shall be disclosed in the notes to financial statements.

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