ASC 940
Active
ASC 940 – Financial Services–Brokers and Dealers
Governs trade date accounting, customer protection through asset segregation, and fail-to-deliver positions for brokers and dealers.
1
Conceptual Framework Linkage
A trading-first business model, reflected in trading-first accounting
Broker-dealers exist to TRADE securities – buying and selling on their own account and on behalf of customers, often within the SAME trading day. ASC 940 reflects this by recognising transactions at TRADE DATE (not settlement date) and by measuring virtually ALL trading securities at FAIR VALUE through earnings, rather than applying the tiered AFS/HTM/amortised-cost classification scheme used by most other entities holding financial instruments.
2
Scope
Registered broker-dealers in securities
ASC 940 applies to entities registered as BROKER-DEALERS under securities laws, engaging in the purchase and sale of securities for their own account and as agent for customers.
3
Trade Date vs Settlement Date Accounting
Recognition at the moment of the trade, not settlement
Broker-dealers record securities transactions on a TRADE DATE basis – recognising the purchase/sale (and any resulting gain/loss) on the date the TRANSACTION is EXECUTED, rather than waiting for the later SETTLEMENT date (typically 1-2 business days later) when cash and securities actually change hands. This reflects that economic exposure to price movements begins at the moment of the trade itself.
4
Trading Securities – Universal Fair Value Through Earnings
No AFS/HTM tiering – trading securities are simply marked to market
Broker-dealers' securities held for TRADING purposes are measured at FAIR VALUE, with changes recognised DIRECTLY in EARNINGS – WITHOUT the tiered available-for-sale/held-to-maturity classification framework other entities apply under ASC 320/321. This reflects the fundamentally TRADING-oriented nature of a broker-dealer's securities inventory, which exists to be actively bought and sold rather than held for yield or long-term investment purposes.
5
Receivables From and Payables To Customers and Broker-Dealers
Reflecting the mechanics of clearing and settlement
Receivables from and payables to CUSTOMERS (e.g. margin balances) and other BROKER-DEALERS (amounts arising from unsettled trades, clearing organization deposits) are separately presented, reflecting the distinctive counterparty structure of the securities clearing and settlement process.
6
Fails to Deliver / Fails to Receive
Unsettled trades where the counterparty hasn't yet performed
A "FAIL TO DELIVER" arises when a broker-dealer has SOLD securities but has not yet DELIVERED them to the buyer by the expected settlement date; a "FAIL TO RECEIVE" arises when it has BOUGHT securities but not yet RECEIVED them. These are presented as RECEIVABLES/PAYABLES reflecting the unsettled trade position, requiring ongoing monitoring given regulatory settlement requirements.
7
Customer Protection – Segregation of Assets
Regulatory-driven asset segregation, reflected in presentation
Broker-dealers are subject to regulatory requirements (e.g. SEC Rule 15c3-3) to SEGREGATE customer cash and securities from the firm's OWN proprietary assets, to protect customers in the event of the broker-dealer's insolvency – this segregation is reflected in the presentation and disclosure of customer-related assets and liabilities.
8
Worked Example – Trade Date Recognition
Recognising the trade before settlement occurs
Example: A securities purchase executed near period-end
A broker-dealer executes a $5,000,000 securities purchase on December 30 (trade date), with settlement not occurring until January 2 (settlement date) of the following year.
The broker-dealer recognises the $5,000,000 securities purchase and corresponding payable on December 30 (trade date) – INCLUDED in the CURRENT year's balance sheet – even though cash and securities won't actually change hands until January 2 of the following year.
9
Worked Example – a Fail-to-Deliver Position
An unsettled sale
Example: Securities sold but not yet delivered
A broker-dealer sells $2,000,000 of securities to a counterparty, but due to a settlement delay, has not yet delivered the securities by the expected settlement date.
The broker-dealer records a $2,000,000 receivable representing the "FAIL TO DELIVER" position – reflecting that it has sold the securities (and is owed payment) but has not yet completed physical/electronic delivery, requiring ongoing monitoring until the fail is resolved.
10
Disclosure Requirements
What ASC 940 requires
Nature and amounts of receivables from and payables to customers and broker-dealersFails to deliver and fails to receive positionsRegulatory net capital requirements and compliance status
11
Critical Judgments & Estimates
Where judgement matters most
SIGNIFICANT JUDGEMENTS
Classification of receivables/payables between customer and broker-dealer counterparties
SIGNIFICANT ESTIMATES
Fair value of trading securities, particularly less liquid positions
12
No Dedicated IFRS Broker-Dealer Standard – Discussion
General IFRS 9 FVTPL classification achieves a similar outcome
IFRS has NO dedicated broker-dealer industry standard. A broker-dealer reporting under IFRS would classify trading securities as measured at FAIR VALUE THROUGH PROFIT OR LOSS (FVTPL) under GENERAL IFRS 9 classification principles (since they are held for trading, they fail the "hold to collect" business model tests) – arriving at a BROADLY similar practical outcome to ASC 940's universal fair-value-through-earnings treatment, without a dedicated industry standard on either side. Trade date vs settlement date accounting is ALSO addressed under general IFRS 9 principles, which explicitly permit EITHER trade date or settlement date accounting as an accounting POLICY choice – broadly converged, though IFRS 9 offers this as an explicit choice rather than the closer-to-mandatory trade date convention common in US broker-dealer practice.
13
Statement Mapping
Where every ASC 940 event lands
EventStatement(s) affectedNotes
Trade date recognitionBSRecognised at execution, not settlement
Trading securities fair value changeISRecognised directly in earnings
14
Related Topics
Cross-reference map
TopicConnection
ASC 820Supplies the fair value measurement framework for trading securities
ASC 860Governs derecognition principles relevant to securities lending and repo arrangements common in broker-dealer operations
15
Quick-Reference Glossary
Trade date accounting
Recognition of a securities transaction on the date the trade is executed, rather than the later settlement date.
Fail to deliver / fail to receive
An unsettled securities trade where the broker-dealer has not yet delivered securities sold, or received securities purchased, by the expected settlement date.
Financial statement key
BS Balance sheet
IS Income statement
SE Statement of changes in equity
OCI Other comprehensive income
SCF Statement of cash flows