Accounting Guide

The American Institute of CPAs (AICPA) is the world's largest member association representing the CPA profession, with more than 429,000 members in the United States and worldwide, and a history of serving the public interest since 1887. AICPA members represent many areas of practice, including business and industry, public practice, government, education, and consulting. The AICPA sets ethical standards for its members and U.S. auditing standards for private companies, nonprofit organizations, federal, state and local governments. It develops and grades the Uniform CPA examination, offers specialized credentials, builds the pipeline of future talent and drives professional competency development to advance the vitality, relevance and quality of the procession.

1 The Securities Industry .01-.144

Broker-Dealers .04-.25

Discount Brokers .08

Investment Bankers .09-.14

Government Securities Dealers .15

Designated Market Maker .16

Clearing Brokers .17

Carrying Brokers .18

Prime Brokers .19

Swap Dealers .20-.21

Introducing Brokers .22

Brokers’ Brokers .23

Bank-Owned Brokers (Section 4k4(e) and Section 20 Brokers) .24

Independent Broker-Dealers .25

The Financial Markets .26-.48

Exchange Market .29-.34

OTC Market .35-.39

Third Market .40

Alternative Trading Venues .41-.48

Clearing Organizations and Depositories .49-.55

Transfer Agents .56-.59

Regulatory Overview .60-.63

Business Activities .64-.144

Brokerage .64-.72

Firm Trading .73-.109

Investment Banking .110-.117

Financing .118-.130

Other Activities .131-.144

2 Broker-Dealer Functions, Books, and Records .01-.176

Introduction .01-.18

Overview .01-.03

Original Entry Journals .04-.06

General Ledger .07

Stock Record .08-.12

Regulatory Recordkeeping Requirements .13-.15

Trade Date and Settlement Date .16-.18

Trade Execution .19-.60

Customer Trades .19-.48

Proprietary Trades .49-.60

Clearance and Settlement .61-.90

Overview .61-.65

Comparison .66-.70

Settlement .71-.87

Bookkeeping .88-.90

Specialized Clearance Activities .91-.118

Mortgage-Backed Securities .91-.95

Government Securities .96-.98

Repos and Reverse Repos .99-.100

Derivative Securities .101-.103

Commodity Futures and Options on Futures .104-.108

Forward Transactions .109

Municipal Securities .110-.111

International Securities .112

Options on Securities .113-.118

Reconciliation and Balancing .119-.122

Custody .123-.134

Possession or Control .124-.128

Securities Transfer .129-.134

Dividends, Interest, and Reorganization .135-.148

Dividends and Interest .135-.143

Reorganization .144-.148

Collateralized Financing .149-.163

Stock Loan and Stock Borrow .149-.153

Bank Loan Financing .154-.157

Reverse Repos and Repos .158-.163

Regulatory Considerations .164-.171

Tax Information Reporting for Certain Customer Transactions .172-.175

Illustrative Stock Record Entries .176

3 Regulatory Considerations .01-.188

Applicable Rules .05-.10

Interpretations of Rules .09-.10

Explanation of Significant SEC Financial Responsibility Rules .11-.125

SEC Rule 15c3-3, "Customer Protection—Reserves and Custody of Securities" .11-.40

SEC Rule 15c3-1, "Net Capital Requirements for Brokers or Dealers" .41-.60

SEC Rule 15c3-1(e), "Notice Provisions Relating to the Limitations on the Withdrawal of Equity Capital" .61-.65

SEC Rule 17a-13, "Quarterly Security Counts to Be Made by Certain Exchange Members, Brokers, and Dealers" .66-.70

SEC Rule 17a-3, "Records to Be Made by Certain Exchange Members, Brokers, and Dealers" .71

SEC Rule 17a-4, "Records to Be Preserved by Certain Exchange Members, Brokers, and Dealers" .72

Regulation T and Maintenance Margin .73-.79

Account Statement Rule(s) .80-.81

SEC Rules and CFTC Regulations Governing Customer Margin for Transactions in Security Futures .82

SEC Rules 17h-1T and 17h-2T .83-.86

SEC Rule 17Ad-17, "Lost Securityholders and Unresponsive Payees" .87-.92

SEC Rule 17Ad-22, "Clearing Agency Standards" .93-.94

SEC Rule 17-248—Subpart C, "Regulation S-ID: Identity Theft Red Flags" .95

SEC Rule 506 of Regulation D and SEC Rule 144A .96-.97

SEC Rule 15c3-5, "Risk Management Controls for Brokers or Dealers with Market Access" .98-.101

SEC Rule 17a-5, "Reports to Be Made by Certain Brokers and Dealers" .102-.122

Anti-money Laundering Regulations .123-.125

Reporting Requirements .126-.151

Consolidation of Subsidiaries .132-.134

Form Custody .135

Other Periodic Reporting .136

The Annual Audited Financial Report .137-.151

Filings Concurrent With the Annual Audited Financial Report .152-.161

Compliance or Exemption Report Required by SEC Rule 17a-5 .152-.154

Report to State Regulatory Agencies .155

Financial Statements to Be Furnished to Customers of Securities Broker-Dealers .156-.161

Other Reports .162-.171

Reports on Securities Investor Protection Corporation Assessment .162-.164

Reports on Agreed-Upon Procedures for Distributions .165

PCAOB Accounting Support Fee .166-.171

Additional Requirements for Registered Investment Advisers .172-.180

Rules Applicable to Broker-Dealers in Commodities and U.S. Government Securities .181-.183

Commodities Brokers .182

Government Securities Broker-Dealers .183

OTC Derivatives Dealers .184-.185

Swap Dealers and Swaps Marketplace Participants .186

Annual Compliance Certification .187-.188

4 Internal Control .01-.69

Introduction .01-.06

The Control Environment .07-.09

Risk Assessment .10-.18

Control Activities .19-.22

Information and Communication .23-.29

Information and Communication Control Activities .26-.29

Monitoring Activities .30-.35

Broker-Dealer Control and Monitoring Activities .36-.61

Sales and Compliance .40-.43

Clearance .44-.45

Securities Settlement .46-.47

Custody .48-.49

Dividends, Interest, and Reorganization .50-.51

To-Be-Announced Securities .52

Principal Transactions .53-.55

OTC Derivative Transactions .56

Commissions .57

Collateralized Financings .58-.60

Period End Financial Reporting .61

SEC Requirements for Management’s Report on Internal Control Over Financial Reporting for Issuers .62-.69

Annual Reporting Requirements for Issuers .66

Quarterly Reporting Requirements for Issuers .67-.69

5 Accounting Standards .01-.127

Accounting Model .02-.40

Definition of Fair Value .06-.08

Application of Fair Value Measurement to Liabilities and Instruments Classified in a Reporting Entity’s Shareholders’ Equity .09-.11

Valuation Techniques .12-.14

Inputs to Valuation Techniques .15-.16

Application to Financial Assets and Financial Liabilities With Offsetting Positions in Market Risks or Counterparty Credit Risk .17-.19

Inputs Based on Bid and Ask Prices .20

Present Value Techniques .21-.24

The Fair Value Hierarchy .25-.28

Fair Value Measurements of Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) .29-.32

Fair Value Determination When the Volume or Level of Activity Has Significantly Decreased .33-.37

Fair Value Option .38-.40

Additional Fair Value Considerations .41-.54

Financial Instruments Listed on a Recognized Exchange .41-.45

Financial Instruments Not Listed on a Recognized Exchange but Having a Readily Available Market Price .46-.48

Financial Instruments Not Having a Readily Available Market Price .49-.54

Trade-Date Versus Settlement-Date Accounting .55-.68

Proprietary and Principal Transactions .58-.65

Agency Transactions .66-.68

Statement of Financial Condition Considerations .69-.112

Due From, and Due to, Other Broker-Dealers and Clearing Entities .69-.70

Transfers of Financial Assets .71-.85

Exchange Memberships Owned or Contributed .86

Suspense Accounts .87

Derivatives .88-.97

Conditional Transactions .98

Leveraged Buyouts and Bridge Loans .99

Asset Securitizations .100-.103

Variable Interest Entities .104

Soft-Dollar Arrangements .105-.109

Mandatorily Redeemable Instruments .110-.112

Statement of Income or Loss Considerations .113-.124

Underwriting Revenues and Expenses .113-.117

Distribution Costs .118-.119

Interest, Dividends, and Rebates .120-.123

Costs Associated With Exit or Disposal Activities .124

Revenue Recognition: Application of FASB ASC 606 .125-.127

Brokers, Dealers, and Futures Commission Merchants and the Definition of a Public Business Entity .125-.127

6 Financial Statement Presentation and Classification .01-.169

Introduction .01-.12

Financial Statements .13-.31

Statement of Financial Condition .13-.15

Statements of Income, Comprehensive Income or Operations .16-.20

Statement of Cash Flows .21-.22

Statement of Changes in Ownership Equity .23-.24

Statement of Changes in Subordinated Borrowings .25

Consolidation of Subsidiaries .26-.28

Going Concern .29-.31

Supplementary Schedules .32-.39

Computation of Net Capital Pursuant to SEC Rule 15c3-1 .34

Computations for Determination of Reserve Requirements Pursuant to SEC Rule 15c3-3 .35-.36

Information Relating to Possession or Control Requirements Under SEC Rule 15c3-3 .37-.38

Schedules of Segregation Requirements and Funds in Segregation for Customers’ Trading Pursuant to the Commodity Exchange Act .39

Statement of Financial Condition Account Descriptions .40-.97

Cash and Securities Segregated Under Federal and Other Regulations .41

Memberships in Exchanges .42-.46

Securities Sold Under Agreements to Repurchase and Securities Purchased Under Agreements to Resell .47-.53

Securities Borrowed and Securities Loaned .54-.60

Securities Received as Collateral and Obligation to Return Securities Received as Collateral .61-.63

Receivables From and Payables to Broker-Dealers, Clearing Organizations, and Others .64-.72

Receivables From and Payables to Customers .73-.76

Deferred Dealer Concessions .77

Securities Owned and Securities Sold, Not Yet Purchased .78-.85

Other Borrowed Funds .86-.88

Subordinated Borrowings .89-.93

Commitments and Guarantees .94-.96

Equity .97

Statement of Income or Operations Account Descriptions .98-.126

Commission Income and Related Expense .99-.103

Interest Income and Interest Expense .104-.105

Dividend Income and Dividend Expense .106

Principal Transactions (Trading Gains and Losses) .107

Investment Banking Fees and Expenses .108-.113

Asset Management and Investment Advisory Income .114-.115

Distribution Fees .116-.117

Floor Brokerage, Exchange Fee, and Clearance Expenses .118-.120

Occupancy and Equipment Expenses .121

Employee Compensation and Benefits Expenses .122-.124

Technology and Communications Expense .125

Management and Allocated Corporate Overhead Expense .126

Disclosures .127-.165

Fair Value Disclosures .127-.130

Disclosures Related to Transfers of Financial Assets Accounted for as Sales .131-.132

Disclosures Related to Transfers of Financial Assets Accounted for as Secured Borrowings .133

Disclosures of Certain Significant Risks and Uncertainties and Contingencies .134-.144

Derivative Instruments Disclosures .145-.148

Guarantee Disclosures .149-.150

Related Party Disclosures .151-.156

Subsequent Events Disclosures .157-.159

Balance Sheet Offsetting Disclosures .160-.165

Financial Statements and Schedules .166-.169

Appendix

A Information Sources

B Illustrative Example of Compliance Report Required by SEC Rule 17a-5

C Illustrative Example of Exemption Report Required by SEC Rule 17a-5

D The New Leases Standard: FASB ASC 842

E Accounting for Financial Instruments

F Schedule of Changes Made to the Text From the Previous Edition

Glossary

Index of Pronouncements and Other Technical Guidance

Subject Index