ASC

ASC 340-940

Financial Services—Brokers and Dealers

340 Other Assets and Deferred Costs

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In brief

IntermediateRecognitionInitial measurementSubsequent measurementIndustry-specific

ASC 340-940 governs two broker-dealer asset/deferred-cost items: exchange memberships and deferred underwriting expenses. Memberships are classified based on the rights conveyed — as an intangible asset (trading right only), an ownership interest in the exchange (cost less impairment), or a contributed interest (fair value with an equal, offsetting subordinated liability). Underwriting expenses incurred before securities are issued are deferred and recognized when the related underwriting revenues are recorded, or written off if the deal does not close.

Key points (7)
  • An exchange membership that conveys only the right to conduct business on an exchange is accounted for as an intangible asset under Subtopic 350-10, with a finite or indefinite life depending on the arrangement terms (340-940-25-1(a)).
  • A membership is accounted for as an ownership interest in the exchange if it conveys both ownership and trading rights held for operating purposes, or if ownership must be held to conduct business on the exchange (340-940-25-1(b)).
  • A membership whose use is contributed to the broker-dealer under a formal or informal subordination agreement and subordinated to general creditors is recorded as a contributed interest with a corresponding subordinated liability (340-940-25-1(c)).
  • A membership registered in an individual's name is an asset of the broker-dealer if an agreement requires the departing member to fund a replacement membership, remit sale proceeds, or transfer the membership for nominal consideration to the entity's designee (340-940-25-2).
  • Ownership-interest memberships are initially measured at cost (340-940-30-1) and subsequently at cost less impairment measured under paragraphs 321-10-35-3 through 35-4 (340-940-35-1).
  • Contributed-interest memberships are measured initially and subsequently at fair value, with the related subordinated liability measured at an equal and offsetting amount (340-940-30-2; 340-940-35-2).
  • Underwriting expenses incurred before issuance of the securities are deferred (340-940-25-3) and recognized when the related revenues are recorded; if the transaction is not completed, participating entities write the costs off to expense (340-940-35-3).

For students. The exam trap is assuming all exchange memberships get the same treatment — classification turns entirely on whether the membership conveys ownership, only trading rights, or is contributed under a subordination agreement, and each bucket has a different measurement basis (350-10 intangible, cost less 321-10 impairment, or fair value with an offsetting liability). Also remember deferred underwriting costs follow the revenue: recognized when underwriting revenue is recorded, expensed immediately if the deal dies.

exchange membershiptrading privilegesownership interest in an exchangecontributed interestliability subordinated to claims of general creditorsdeferred underwriting expensessyndicate cost allocationcost less impairment

Machine-generated study aid for ASC 340-940. Check the source paragraphs below.

340-940-00Status

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340-940-00-1
The following table identifies the changes made to this Subtopic.
ParagraphActionAccounting Standards UpdateDate
ABC AgreementSupersededAccounting Standards Update No. 2016-1912/14/2016
940-340-25-2AmendedAccounting Standards Update No. 2016-1912/14/2016
940-340-35-1AmendedAccounting Standards Update No. 2016-0101/05/2016

340-940-05Overview and Background

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340-940-05-1
This Subtopic addresses other assets and deferred costs for brokers and dealers in securities (broker-dealers), including those associated with both of the following:
  1. a
    Exchange memberships. Exchange memberships provide the broker-dealer with the right to do business on the exchanges of which the broker-dealer is a member. Some exchange memberships also represent an ownership interest in the exchange. Due to the demutualization of some exchanges, membership may not be aligned with ownership in the exchange as trading privileges are disaggregated from ownership. Many broker-dealers have memberships in several exchanges and have more than one membership in any particular exchange. Memberships are usually registered in the names of individuals who are affiliated with the broker-dealer.
  2. b
    Underwriting. In connection with its participation in an underwriting of securities, a broker-dealer may receive various types of revenues as well as incur various related expenses. Such revenues include management fees (in the case of the lead or comanaging underwriter), underwriting fees (in the case of the lead underwriter and other members of the syndicate), and selling concession fees (in the case of all selling group members). The related expenses include but are not limited to marketing and advertising fees, legal fees, stabilization costs, and the other costs associated with setting up the syndicate group. These expenses are accumulated by the lead underwriter and are allocated to the other members of the syndicate on a pro-rata basis.

340-940-15Scope and Scope Exceptions

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Overall Guidance

340-940-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 940-10-15.

340-940-25Recognition

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Exchange Memberships

340-940-25-1
The accounting for exchange memberships depends on the rights they convey and the reasons they are held as assets, as follows:
  1. a
    Intangible asset. If an exchange membership represents only the right to conduct business on an exchange, the entity shall account for the exchange membership as an intangible asset according to the guidance in Subtopic 350-10. Such memberships may have finite or indefinite lives based on the terms of the arrangement and the estimated life of the membership.
  2. b
    Ownership interest in the exchange. An exchange membership shall be accounted for as an ownership interest in the exchange if either of the following conditions is met:
    1. 1
      The exchange membership represents both an ownership interest and the right to conduct business on the exchange, which are owned by a broker-dealer and held for operating purposes.
    2. 2
      The exchange membership represents an ownership interest, which must be held by a broker-dealer to conduct business on the exchange.
  3. c
    Contributed interest. A membership may be considered to be an asset of the broker-dealer if its use has been contributed to the broker-dealer under a formal or informal subordination agreement. An exchange membership contributed for the use of the broker-dealer and subordinated to claims of general creditors shall be accounted for as a contributed interest and a liability subordinated to claims of general creditors.
340-940-25-2
A membership held in the name of an individual is considered to be an asset of the broker-dealer if it is held by the broker-dealer under an agreement that would require the member, upon leaving the broker-dealer, to do any of the following:
  1. a
    Pay the member entity the amount necessary to purchase another membership (if the named individual wishes to retain the membership)
  2. b
    Sell the membership and pay the proceeds over to the member entity
  3. c
    Transfer the membership for a nominal consideration to a person designated by the member entity and satisfactory to the exchange.

Underwriting Expenses

340-940-25-3
Underwriting expenses incurred before the actual issuance of the securities shall be deferred.

340-940-30Initial Measurement

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Exchange Memberships

340-940-30-1
An exchange membership recognized under paragraph 940-340-25-1 as an ownership interest in the exchange shall be measured initially at cost.
340-940-30-2
An exchange membership recognized under paragraph 940-340-25-1 as a contributed interest shall be measured initially at fair value with the related subordinated liability measured initially at an equal and offsetting amount.

340-940-35Subsequent Measurement

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Exchange Memberships

340-940-35-1
An exchange membership recognized under paragraph 940-340-25-1 as an ownership interest in the exchange shall be measured subsequently at cost less impairment. Impairment shall be measured in accordance with paragraphs
321-10-35-3 through 35-4
.
340-940-35-2
An exchange membership recognized under paragraph 940-340-25-1 as a contributed interest shall be measured subsequently at fair value with the related subordinated liability measured subsequently at an equal and offsetting amount.

Underwriting Expenses

340-940-35-3
Underwriting expenses deferred under the guidance in paragraph 940-340-25-3 shall be recognized at the time the related revenues are recorded. In the event that the transaction is not completed and the securities are not issued, the entities that have agreed to participate in the costs associated with the underwriting shall write those costs off to expense.

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