Revenue Recognition of Research Revenue for Broker-Dealers
Some broker-dealers are providing research services to their clients where the client ultimately decides if and when to pay, and how much they should pay. Because of this structure, the recording of the revenue for the broker-dealer can be a little tricky. Should the revenue just be recorded when it is paid? If the client requests an invoice, should it be recorded when that occurs? What if it is paid in January, but it is noted that the payment was for Q4 services from the prior year? It may be easy to get wrapped up in the details, but one ultimately has to go back to the revenue recognition rules per ASC 605. It states that the four criteria for revenue recognition are as follows:
1. Persuasive evidence of an arrangement exists.
2. The arrangement fee is fixed or determinable.
3. Delivery or performance has occurred.
4. Collectability is reasonably assured.
Therefore, revenue should be recorded when all four criteria have been met, and it should not be recorded if even one of these things has not occurred. To further clarify, here are some examples:
1. Broker-dealer receives a cash payment on 1/3/15, and upon inquiring with its client, it is informed that the payment was for Q4 2014 research services.
When should the revenue be recorded?
In this case, the revenue should be recorded in 2015. The reason for this is because the four criteria had not been met as of December 31, 2014. Although the performance has occurred, there is no evidence at December 31, 2014 that the arrangement exists.
2. Broker-dealer receives a notification on 1/5/15 requesting an invoice for Q4 research services, which it then pays in January 2015.
When should the revenue be recorded?
The revenue should be recorded in 2015 even though it appears that the service relates to 2014. The reason for this is because the four criteria had not been met as of December 31, 2014. Like the example above, the performance has occurred, but there is no evidence at December 31, 2014 that the arrangement exists.
3. Broker-dealer gets an email from a client request to be billed $5,000 for Q4 research services on December 28, 2015, and the broker-dealer has been providing such services for the client in the past and has no historical issues with collectability. The broker-dealer invoices client in the first week in January and receives payment quickly thereafter.
When should the revenue be recorded?
The revenue should be recorded in 2014 because that is when the four criteria had been met. The timing of the invoice and payment are irrelevant in this case. The arrangement existed, the fee was determinable based on the email, and the service was performed in Q4. Also, collectability is reasonably assured based on the broker-dealer’s history with the client.
The overarching theme is that when considering what period research revenue should be recorded, one has to look at the four criteria for revenue recognition and determine the period in which the four criteria have been met. Taking this high-level approach when looking at each transaction will allow broker-dealers to avoid incorrectly recording revenue when only focusing on one or two of the criteria and ignoring the others.
