Broker Dealer Accounting: A Guide to Commission Income and Fees

Commission income is a significant source of revenue for broker-dealers. It's calculated as a percentage of the total sales or trades made by the firm.

To accurately record commission income, broker-dealers must track each transaction and calculate the corresponding commission. This includes commissions earned from buying and selling securities, as well as other related fees.

Broker-dealers can use the accrual method to account for commission income, which involves recognizing revenue when it's earned, not when it's received. This ensures that the firm's financial statements accurately reflect its current revenue and expenses.

Commission income is typically recorded as a credit to revenue and a debit to the commission expense account. This helps to accurately reflect the firm's profitability and cash flow.

Commission income is a crucial aspect of broker dealer accounting, and it's essential to understand the transfer of control as it relates to trade dates. The transfer of control occurs on the trade date, as stated by FinREC, meaning revenue should be recognized on this date.

A payment failure during a trade execution may require a liability or expense to be recognized by the broker-dealer, but it doesn't affect the transfer of control. The customer's risk and rewards of ownership aren't altered by payment failures.

Variable consideration should be estimated for refunds on failed trades that aren't expected to be settled. This estimate should be calculated using historical data on trades that were never settled, and it should only include consideration for contractual trade executions, minus the estimated refund.

Commission Income is a crucial aspect of trade execution, and understanding when revenue should be recognized is essential.

The transfer of control in a trade execution performance obligation occurs on the trade date, according to FinREC, and revenue should be recognized on this date.

A payment failure during a trade execution may require a broker-dealer to recognize a liability or expense for their obligation to remedy the failure.

Trade failures that result from payment failures do not affect the transfer of control, as the customer's risk and rewards of ownership are not altered by failures to perform.

Failed trades that are not expected to be settled may require a refund, which should be estimated by the broker-dealer and treated as a reduction of revenue.

The estimated variable consideration for a refund should only include consideration for contractual trade executions, minus the estimated refund.

This estimate of refundable consideration should be calculated using historical data on trades that were never settled.

Advisory fee income can be a significant source of revenue for broker-dealers, but it requires careful consideration of the terms and conditions of each contract.

Services offered in an advisory arrangement can vary contract by contract, so professional judgment is required to identify separate performance obligations.

Broker-dealers will likely need to reassess each reporting period whether the occurrence of a significant revenue reversal is probable, especially when advisory fees are contingent upon the successful completion of a transaction.

Revenue for services that are identified as separate performance obligations and consumed at the same time the entity performs the service will likely qualify to be recognized over time.

Determining the transfer of control, series of distinct goods or services, variable consideration, and allocating variable consideration are all important factors to consider when evaluating advisory fee income.

Here are some key considerations for broker-dealers:

Broker-dealers need to be aware of the fees associated with their services. The fee for filing a broker-dealer application is $300.

In some cases, fees may be paid directly to the CRD if the applicant is filing with them, while in other cases, the fee is paid directly to the Commissioner. Fees are not refundable except as provided in Government Code Sections 13140-13144.

Broker-dealers should also be aware that advisory fee income can vary contract by contract, requiring professional judgment to identify separate performance obligations.

Underwriting and Related Fees can be a complex topic, but let's break it down. Underwriting arrangements typically involve the sale of securities, which is a straightforward performance obligation that's fulfilled on the trade date.

However, there's an option called the "greenshoe" option that can make things more complicated. This option allows underwriters to sell more shares than originally agreed upon if demand exceeds expectations.

The accounting for underwriting arrangements can be tricky, especially when exercising the greenshoe option. This would qualify as a modification of the contract and would be accounted for as a separate contract.

Broker-dealers often incur costs to obtain a contract, such as marketing, submitting a bid and proposal, and legal fees. These costs can be tricky to recognize as assets, and the recoverability criteria in ASC 340-40-25 come into play.

FinREC believes that costs that are recoverable only upon the occurrence of an event outside the underwriter's control should not be recognized as deferred assets. These might include marketing and advertising costs, salaries of sales support, and similar expenses.

On the other hand, costs that are non-refundable and expected to be recovered by the underwriter do meet the recoverability criteria for capitalization. These might include commissions, bonuses, or portions of bonuses related to new sales or bookings.

Broker-dealers have a voluntary election option to recognize incremental costs of obtaining a contract as an expense when incurred. This is allowed if the expected benefit period is less than a year.

Here are the key issues related to contract costs:

Soft dollar arrangements are a common practice where a broker-dealer provides research to customers in exchange for a specified number of trades. This creates trade commission revenues for brokers upon the execution of the agreed upon trades.

The complexity of accounting for soft dollar revenues arises from the way the agreement is negotiated, the distinct nature of the broker's obligation to provide research, and the possibility of a principal-agent relationship between the broker, the customer, and a third-party research provider.

In certain cases, the performance obligation may be fulfilled before enough trades have been completed to provide sufficient consideration for the research, resulting in the need for a contract asset to be created, recognized, and then reduced by the trade commission allocated to the performance obligation.

The opposite can happen when payment is received before the performance of the obligation has been fulfilled, necessitating the creation of a contract liability, which would then be reduced in a similar manner.

Here are the relevant steps in the new framework that apply to accounting for soft dollar arrangements:

Financial instruments are a crucial part of broker-dealer accounting, and understanding how they work is essential for accurate financial reporting.

Broker-dealers can hold financial instruments, such as cash and securities, which are reported at fair value on the balance sheet.

Financial instruments are also used to facilitate trades, with broker-dealers acting as intermediaries between buyers and sellers.

The value of these instruments is determined by market forces, and broker-dealers must accurately record and report their fair value to comply with accounting standards.

Commission income from asset transactions can be recognized on the trade date, as the transfer of control occurs at this point. The customer's risk and rewards of ownership are not altered by failures to perform.

FinREC believes that the revenue allocated to the performance obligation should be recognized on the trade date, not affected by trade failures. This means that the customer's rights and obligations remain unchanged.

Trade failures due to payment failures can result in a liability or expense for the broker-dealer to remedy the situation. A payment failure does not affect the transfer of control, as the customer's risk and rewards of ownership are not altered.

The consideration for a failed trade that is not expected to be settled should be treated as variable consideration. This refund should be estimated by the broker-dealer and calculated using historical data on trades that were never settled.

The estimated refundable consideration should include only contractual trade executions, minus the estimated refund.

ASC 606 specifically clarifies that financial instrument contracts held by broker-dealers are not within its scope.

Revenues from financial instruments are subject to different guidance, found in ASC 310-940, ASC 320-940, and ASC 845.

This means that certain revenue streams are not subject to ASC 606.

The following list of revenue streams is not subject to ASC 606, according to the AICPA Industry Guide for ASC 606: