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The New Revenue Recognition Standard: What this Means for Broker Dealers


As you may have heard, the Financial Accounting Standards Board (FASB) issued a new revenue recognition standard for all public filing entities—broker dealers meet this definition—for years beginning after December 15, 2017. This means that effective January 1, 2018, for calendar year-end companies, revenue must be recorded under this standard. In this article, we will focus on the main provisions of the standard, and how we see it will effect broker dealers (BDs) in the investment banking world.

Under previous accounting standards you had to meet four general principles in order to recognize revenue:

  1. Persuasive evidence of an arrangement exists
  2. Delivery has occurred or services have been rendered
  3. Price is fixed or determinable
  4. Collectability is reasonably assured

Under the new standard (ASC 606) revenue is recognized under a five-step process:

  1. Identify the contract with a customer
  2. Identify the performance obligations in the contract
  3. Determine the transaction price
  4. Allocate the transaction price
  5. Recognize revenue when or as the entity satisfies a performance obligation

While there are complexities to each step of the process, and each contract should be looked at individually for any subtleties that may impact your assessment of revenue recognition, below are some of the key concepts from each step and how we believe they may impact you.

Step 1 - Identify the Contract with a Customer

Because most investment banking or private placement deals are generally consummated with a signed agreement by both parties, we believe this step should be fairly straightforward. 

Step 2 - Identify the Performance Obligations in the Contract

It is important to note that this step is open to some interpretation. The main performance obligation for a placement is the successful transaction of the customer you are working with. However, as you know, the successful transaction is not the only value that you are providing to your customers throughout this process. There are also obligations for you to market the company, produce marketing materials, provide advice, and more. We believe that this will generally result in at least one additional performance obligation under this type of contract. In most cases we see there being at least two performance obligations. This is important when it comes to Steps 4 and 5, as you’ll see below.

Step 3 - Determine the Transaction Price

This can be virtually impossible at the time the contract is signed, as there is typically a fixed portion (the retainer fee) and a variable portion (success fee/commission). It is imperative to identify these facts now, because they will come into play in Steps 4 and 5.

Step 4 - Allocate the Transaction Price

If you determine there is more than one performance obligation in Step 2, you now must allocate the price determined in Step 3. As we discussed in Step 3, there is a fixed portion and a variable portion to most of these contracts. Most contracts would indicate that the variable portion of the success fee is related exclusively to a successful transaction. Therefore, the variable success fee will be allocated entirely to the successful transaction event. Next, you must consider what portion of the fixed price is allocable to subsequent performance obligations. You must evaluate each contract to determine if the retainer fees represent the marketing and selling activities being performed throughout the process, and therefore, whether they would be allocated to these performance obligations.

Step 5 - Recognize Revenue When or as the Entity Satisfies a Performance Obligation

This step deals with the timing of recognition. Again, the success fee portion of the contract is fairly straightforward. The performance obligation related to the successful transaction is not satisfied until the transaction closes, and therefore the revenue is not recognized until that time.  Fees related to the performance obligation(s) surrounding the marketing and other activities require a little more interpretation. Most of the time, these activities are performed over time from the beginning of the contract through the transaction date. As these obligations are satisfied, a method of recognition should reflect that revenue being recognized over time. At Step 2, if you were to determine that the only performance obligation is the successful transaction, which would mean that the total price (retainer and success fees) of the contract, would be deferred and recognized upon the closing of the deal.

Costs of Obtaining the Contract

Another area that is affected by the standard is how to account for the costs associated with investment banking services. The new standard, and existing standards (mostly within FASB ASC 340-40-25), provide for the deferral and capitalization of out-of-pocket expenses provided that the costs are related to revenues to be realized in the future and they are explicitly reimbursable or expected to be recovered regardless of the success of the engagement. Costs related to compensation generally do not meet the qualifications for capitalization due to the fact that they are generally not explicitly reimbursable. However, if the individual contract includes up-front, non-refundable fees or a termination fee that would be paid regardless of the success of the engagement, those factors could indicate that these costs can be recovered up to those amounts and therefore would meet the capitalization standards. Each contract must be evaluated individually for such costs. Conversely, the broker dealer may elect a practical expedient for which they can expense all of these costs in the period they were incurred, as long as the period of the contract is initially expected to be less than one year.


This new standard added many new concepts and complexities that require each contract to be reviewed individually for any differences that may affect these revenue recognition steps. We recommend that you review a sample of your current contracts and go through this required process as soon as possible. This could allow you an opportunity to revise contract wording to clarify terms and better support your revenue recognition determinations.

For help with this process or to discuss further, contact Matthew Vaughn at or (617) 933-3352.