ASC

ASC 940-20

Broker-Dealer Activities

940 Financial Services—Brokers and Dealers

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In brief

AdvancedIndustry-specificRecognitionPresentationRevenue

ASC 940-20 governs specific broker-dealer activities, organized into General (commissions, soft-dollar arrangements, mutual fund distribution fees, agency transactions, financial presentation), Clearing (fails, due bills, suspense accounts, trading errors), and Underwriting Subsections. Its core rules are that agency transactions stay off the broker-dealer's statement of financial condition unless they fail to settle on the contracted settlement date, commission income is recognized under Topic 606 while related expenses accrue on trade date, and fails-to-deliver/fails-to-receive are recorded at selling/purchase price including accrued interest.

Key points (7)
  • Agency transactions executed for customers are not reflected in the broker-dealer's statement of financial condition unless the transaction fails to settle on the contracted settlement date, in which case it is recorded (e.g., fail-to-receive from customer, payable to customer, or stock borrowed or loaned) (940-20-25-1).
  • Commissions are recorded as a receivable from customers on purchases and as reductions of payable to customers on sales; commission income is recognized when (or as) performance obligations are satisfied under Topic 606, while related expenses are accrued on trade date (940-20-25-2).
  • At the statement of financial condition date, the broker-dealer must analyze soft-dollar commission income and research provided to determine whether a liability for research due to customers should be accrued or prepaid soft-dollar expenses deferred (940-20-25-3).
  • A fail-to-deliver is recorded as a receivable from broker-dealers measured initially at the selling price including accrued interest; a fail-to-receive is recorded as a liability measured at the purchase price including accrued interest, with such liabilities recorded at contract amounts or the fair value of collateral to be returned (940-20-25-4; 25-5; 30-1; 30-2).
  • Conditional transactions (e.g., when-issued securities) whose completion is assured beyond a reasonable doubt are recognized like unconditional transactions; if completion is not so assured, only fair value losses are recognized and fair value gains are deferred until the uncertainty is eliminated (940-20-25-7; 35-1).
  • Trading errors go to an error suspense account and unreconciled differences are recognized at the transaction amount with an appropriate valuation account until resolved; securities underlying suspense accounts are subsequently measured at fair value with gain or loss in income (940-20-25-6; 35-2).
  • Current/noncurrent classification is ordinarily not presented, the broker-dealer's noncontingent share in underwriting or joint accounts is included with trading accounts, unsettled regular-way payables and receivables may be presented net, firm-commitment unsubscribed underwriting shares are measured at fair value, and underwriting and when-issued contractual commitments must be disclosed (940-20-45-1 through 45-3; 35-3; 50-1).

For students. This is the operational heart of broker-dealer accounting: remember that agency trades are off-balance-sheet until they fail to settle, and that commission revenue follows Topic 606 while the related expense is accrued on trade date—an asymmetry students often miss. Also note the one-sided treatment of unassured conditional (when-issued) transactions: losses recognized, gains deferred.

agency transactionscommission incomesoft-dollar arrangementsfail-to-deliver and fail-to-receivesuspense accounts and trading errorswhen-issued securitiesunderwriting commitmentsmutual fund distribution fees

Machine-generated study aid for ASC 940-20. Check the source paragraphs below.

940-20-00Status

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940-20-05Overview and Background

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940-20-05-1
This Subtopic addresses certain activities engaged in by brokers and dealers in securities (broker-dealers). The guidance in this Subtopic is presented in the following three Subsections:
  1. a
    General
  2. b
    Clearing
  3. c
    Underwriting.
940-20-05-2
The General Subsections provide guidance on matters such as commissions, soft-dollar arrangements, mutual fund distribution fees, agency transactions, and broker-dealer financial presentation.

Commissions

940-20-05-3
Acting as an agent, a broker-dealer may buy and sell securities on behalf of its customers. In return for such services, the broker-dealer charges a commission.

Soft-Dollar Arrangements

940-20-05-4
Soft-dollar arrangements generate commission income for the broker-dealer. Many of these soft-dollar arrangements are oral, and the value of the research to be provided is typically based on a percentage of commission income. Soft-dollar customers are typically institutional investors or money managers. Soft-dollar research may be generated either internally by the broker-dealer or purchased by the broker-dealer from a third party.

Mutual Fund Distribution

940-20-05-5
Broker-dealers may contract with one or more mutual funds to act as the registered distributor of the mutual fund's shares, assisting the fund in selling and distributing its shares. If a broker-dealer undertakes the responsibility for selling and distributing fund shares, it will incur different types of costs, the most common of which are commissions paid to those of its representatives who arrange fund sales. To compensate a broker-dealer for those selling efforts, mutual funds may establish some form of a fund-charge and shareholder-commission structure that provides fees to the broker-dealer either at the time of sale or over a specified period of time. Two common forms of compensation are the following:
  1. a
    A front-end commission paid to the broker-dealer by the fund shareholder at the time of sale
  2. b
    A 12b-1 distribution fee, which is paid by the fund over a period of time based on a percentage of the fund's daily net asset levels, together with a deferred sales charge, which is a commission paid to the broker-dealer by the shareholder at the time the shareholder exits the fund. Deferred sales charges are often charged to the shareholder in decreasing amounts over time.

Clearing

940-20-05-6
The Clearing Subsections provide guidance for a broker-dealer's clearing operations.

Dividend Department

940-20-05-7
The dividend department maintains a record of securities that the broker-dealer fails to receive or deliver on the record date. Securities received or delivered against fails that were open on the record date and that are in the name of the delivering broker should be accompanied by due bills. A due bill is an official authorization allowing the purchasing broker-dealer to make a legal claim on the selling broker-dealer for a future distribution to which it is entitled. For cash dividends or interest payments, this typically takes the form of a postdated check. It is usually the responsibility of the dividend department to collect or authorize payments for transactions of this nature.

Suspense Accounts

940-20-05-8
Because of the number of transactions that take place when trades are cleared for the broker-dealer or its customers, unreconciled differences and trading errors occur. A broker-dealer often has several suspense accounts to facilitate the resolution and identification of differences.

Underwriting

940-20-05-9
The Underwriting Subsections provide guidance for a broker-dealer's underwriting activities.
940-20-05-10
There are several different ways in which a broker-dealer may participate in the underwriting of a new issue of securities. The broker-dealer may be the managing or lead underwriter, a member of the syndicate, or a member of the selling group. Such participation may be on any of the following bases:
  1. a
    Firm commitment
  2. b
    Standby
  3. c
    Best efforts
  4. d
    All or none.

940-20-15Scope and Scope Exceptions

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Overall Guidance

940-20-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 940-10-15.

Instruments

940-20-15-2
For the scope application of Subtopic 815-10 to contracts for the purchase or sale of when-issued securities or other securities that do not yet exist, see paragraph 815-10-15-17.

Clearing

Overall Guidance

940-20-15-3
The Clearing Subsections follow the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 940-10-15.

Underwriting

940-20-15-4
The Underwriting Subsections follow the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 940-10-15.

940-20-25Recognition

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Agency Transactions

940-20-25-1
Transactions executed by broker-dealers as agents for customers shall not be reflected in the statement of financial condition of the broker-dealer unless the transaction fails to settle on the contracted settlement date. Because the broker-dealer typically delivers cash or financial instruments on behalf of the customer, if the customer fails on the settlement date, the broker-dealer shall record the transaction (for example, as a fail-to-receive from customer, payable to customer, or stock borrowed or loaned on behalf of customer).

Commissions

940-20-25-2
For securities purchased, the commission shall be recorded as a receivable from customers; for securities sold, commission shall be recorded as reductions in the payable to customers. The commission income shall be recognized in revenue by the broker-dealer when (or as) it satisfies its performance obligations under the contract in accordance with Topic 606 on revenue from contracts with customers. Related expenses shall be accrued by the broker-dealer on the trade date, because substantially all the efforts in generating the commissions have been completed.
940-20-25-3
At the date of the statement of financial condition, the broker-dealer should analyze both the commission income generated from soft-dollar customers and the research provided to the soft-dollar customers to determine whether a liability should be accrued for research due to customers based on the commission income generated or whether any soft-dollar expenses have been prepaid and need to be deferred.

Clearing

Fail-to-Deliver

940-20-25-4
A broker-dealer that sells securities, either for its own account or for a customer's account, but does not deliver the securities on the settlement date shall record the fail-to-deliver as an asset in the receivable account due from broker-dealers.

Fail-to-Receive

940-20-25-5
A broker-dealer that purchases securities, either for its own account or for a customer's account, but does not receive the securities on the settlement date shall record the fail-to-receive as a liability to the selling broker-dealer.

Suspense Accounts

940-20-25-6
Trading errors shall be recorded in the broker-dealer's error suspense account until they are resolved. Unreconciled differences shall be recognized at the amount of the transaction with an appropriate valuation account until a determination of the cause of the differences is made and the differences are resolved.

Conditional Transactions

940-20-25-7
Certain transactions (for example, those for when-issued securities) are, by their nature, conditional; that is, their completion is dependent on the occurrence of a future event or events. For those conditional transactions in which completion is assured beyond a reasonable doubt, the recognition of the transactions and related profit and loss shall be the same as for unconditional transactions. For those conditional transactions in which completion is not assured beyond a reasonable doubt, only fair value losses shall be recognized, while fair value gains shall be deferred.

Floor Broker

940-20-25-8
If the floor broker is employed by the broker-dealer, any costs associated with the floor broker's employment are generally reported as employee compensation. Costs paid to independent floor brokers or floor brokers of other entities for trades on behalf of the broker-dealer are generally reported as floor brokerage expense.

940-20-30Initial Measurement

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Clearing

Fail-to-Deliver

940-20-30-1
A fail-to-deliver asset shall be measured initially at the selling price, including any accrued interest.

Fail-to-Receive

940-20-30-2
A fail-to-receive liability shall be measured initially at the amount of money representing the purchase price of the securities, including any accrued interest. That is, liabilities related to broker-dealer operations, such as fails-to-receive and securities sold under agreements to repurchase (known as repurchase agreements or repos), shall be recorded at contract amounts or the fair value of collateral to be returned.

940-20-35Subsequent Measurement

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Clearing

Conditional Transactions

940-20-35-1
Fair value gains deferred under paragraph 940-20-25-7 shall be recognized when the uncertainty is eliminated.

Suspense Accounts

940-20-35-2
Securities underlying amounts in suspense accounts shall be subsequently measured at fair value, and the gain or loss shall be recognized in income.

Underwriting

940-20-35-3
With respect to the underwriting of issues that trade before the settlement date, the broker-dealer shall subsequently measure at fair value any shares that it is firmly committed to purchase but that have not yet been subscribed to by customers.

940-20-45Other Presentation Matters

Source downloaded: .Record version 0378777d5316. Effective date must be checked in the source.

Statement of Financial Condition Classification

940-20-45-1
Current and noncurrent classifications (see Subtopic 210-10) are ordinarily not presented in the statement of financial condition because such a distinction normally has little meaning for brokers and dealers.
940-20-45-2
The broker-dealer's share (assuming such share is not merely contingent) in underwriting or joint accounts with other broker-dealers for issued securities shall be included with its trading accounts.
940-20-45-3
Payables and receivables arising from unsettled regular-way transactions may be recorded net in an account titled net receivable (or payable) for unsettled regular-way trades.

940-20-50Disclosure

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Contractual Commitments

940-20-50-1
Broker-dealers acting as principals in underwriting and when-issued contracts have contractual commitments. Disclosure shall be made of such commitments.

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