Recognizing Revenue in Soft-Dollar Arrangements


Sept. 15, 2017

By Christopher G. Johnson, CPA, and Mark C. Shannon, CPA

On Sept. 1, 2017, the Financial Reporting Executive Committee (FinREC) of the American Institute of CPAs (AICPA) released, for informal and confidential comment, a draft revenue recognition implementation paper titled “Soft-Dollar Revenue” (the implementation issue). The implementation issue addresses how a broker-dealer determines whether a contract includes a performance obligation to perform research services in return for a certain volume of trades from the customer or for an increased commission rate. Such an arrangement commonly is referred to as a soft-dollar arrangement. The implementation issue further addresses how a broker-dealer in a soft-dollar arrangement should determine and allocate the transaction price to the various performance obligations, including research services. The implementation issue also addresses how to determine when the revenue allocated to the research services should be recognized. Comments on the implementation issue are due Nov. 1, 2017.

The implementation issue stems from the efforts of the Brokers and Dealers in Securities Revenue Recognition Task Force, one of 16 industry task forces the AICPA established to study industry 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). According to the AICPA, the task forces are “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 are included in a new revenue recognition guide that the AICPA developed and continues to update as new implementation issues are finalized. 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.

Soft-Dollar Arrangements

In a soft-dollar arrangement, as noted in Accounting Standards Codification (ASC) Topic 940, a broker-dealer typically agrees to provide research to a customer in return for a certain volume of trades. The trades generate commission income for the broker-dealer. Research can take many forms, including traditional reports or documents, answering questions, or providing the customer access to research equipment (for example, the Bloomberg Terminal).

Soft-dollar arrangements might be oral or documented in a formal contract. The value of the research in a soft-dollar arrangement typically is based on a percentage of commission income. A broker-dealer might produce its own research, or it might purchase research from a third party.

Given the variability of the nature and substance of soft-dollar arrangements, each individual arrangement must be evaluated using the criteria in Topic 606.

FinREC’s Conclusions

Identifying the Contract With the Customer

Soft-dollar arrangements, whether written or oral, might be in a stand-alone agreement or included in an agreement with clearing, custody, or trade execution services. In accordance with the criteria in Topic 606, broker-dealers must determine if contracts should be combined into a single contract for analysis.

FinREC believes stand-alone soft-dollar arrangements entered into at or near the same time as a separate agreement that includes clearing or execution services generally will be combined and accounted for as a single contract when the amount of research the broker-dealer provides to the customer is based on the volume of trades with the customer (combined contract). In a combined contract, broker-dealers should consider the guidance on commission income in the AICPA’s Revenue Recognition – Audit and Accounting Guide1 regarding whether the purchase of research is an optional purchase and provides the customer a material right.

Identifying Separate Performance Obligations

FinREC typically views research services as a separate performance obligation, even in a combined contract, because the customer can benefit from the service on its own and the promise to deliver the service is separately identifiable from other promises in the contract (that is, the service is distinct). According to FinREC, if determined to be distinct, research services should be accounted for separately from the other promises in the contract.

A broker-dealer might have different methods to provide research (that is, the performance obligation) to a customer. The broker-dealer might actually perform the research, it might purchase research from a third party and subsequently transfer the research to a customer, or it might pay a third party to provide research directly to its customer.

A customer’s ability to choose between receiving research reports to be provided in the future or access to a research system provides the customer a material right to future research, and therefore would be a separate performance obligation.

This implementation issue deals solely with the research performance obligation, and broker-dealers should consider the commission income section of the AICPA guide for revenue recognition guidance on trade execution, clearing service, and custody service performance obligations.

Determining the Transaction Price

For a combined contract, the transaction price typically will be the commission fee specified in the contract. A broker-dealer should determine the transaction price based on the term of the contract. Many brokerage contracts are terminable at will by either party, which might indicate the duration of the contract is a single day, unless the customer has a material right that extends beyond the contract term. Additional judgment and analysis might be required if the customer has a material right, the brokerage contract has a specified term, or if the amounts collected under the contract are refundable upon contract termination.

A broker-dealer also must consider whether it is a principal or an agent when it pays a third party for research services on behalf of its customer. Topic 606 provides various indicators to consider to determine if the broker-dealer controls the research before it is transferred to the customer and is acting as a principal. A broker-dealer is acting as an agent if it does not control the research before it is transferred to the customer. Agents report revenue net of expenses paid to third parties, and principals report both revenue and expense on a gross basis.

Topic 606 also provides factors a broker-dealer should consider when determining whether the timing of the payment for the research services provides a significant financing benefit to the customer. FinREC believes the transaction price in a soft-dollar arrangement typically will not include a significant financing benefit because either:

  • The customer provides a significant upfront payment, and the timing of the transfer of the research services is at the discretion of the customer
  • The period between the transfer of the research services and customer payment is one year or less (that is, the broker-dealer may apply the practical expedient in Topic 606 related to a significant financing benefit)

Allocating the Transaction Price to Performance Obligations

When research services are included in a combined contract, Topic 606 indicates the broker-dealer should allocate the transaction price among the various performance obligations (for example, research, trade execution, or clearing) in proportion to the stand-alone selling prices of the performance obligations.

Recognizing Revenue

A broker-dealer must determine whether each performance obligation is satisfied over time or at a point in time. For research, a broker-dealer must consider the nature of the services provided. For example, providing a customer ongoing access to research services might indicate the performance obligation is satisfied over time. In contrast, a broker-dealer that provides a single report or a fixed number of reports might conclude its performance obligation is satisfied when each report is provided.

Looking Ahead

The views expressed in the implementation issue are not expected to have a significant impact on how a broker-dealer recognizes revenues for soft-dollar arrangements. However, the facts and circumstances of each arrangement should be separately considered. Interested parties should submit any comments, along with the implementation issue number in the subject, to Ivory Bare at prior to Nov. 1, 2017.


1 Revenue Recognition – Audit and Accounting Guide, 2016, American Institute of CPAs, Chapter 5.