FINRA Issues Guidance on Calculating Net Capital

FINRA reminded firms that SEC rules govern how a firm's net worth must be calculated, recorded and reported. In a Regulatory Notice, FINRA offered guidance on applying financial accounting standards to revenue recognition from contracts with customers.

In the Notice, FINRA said that it observed non-compliance with Exchange Act Rule 15c3-1 ("Net capital requirements for brokers or dealers"), Rule 17a-3 ("

Records to be made by certain exchange members, brokers and dealers

") and Rule 17a-5 ("Reports") which resulted from a firm's misapplication of the Financial Accounting Standards Board's ("FASB's") "revenue recognition practices" (i.e. Revenue from Contracts with Customers, Codification ASC 606"). FINRA reminded firms that ASC 606 requires that "revenue recognition by a firm should occur when the related performance obligation has been satisfied, either at a point in time or over time, depending on the contract terms."

FINRA stated that firms should "ensure that they are able to demonstrate, through a documented policy and analysis that is applied consistently, the basis for their revenue recognition practices, in order to substantiate their compliance with ASC 606." FINRA said that firms should "analyze each contract with their customers for the performance obligation(s) thereunder and the revenue associated with each such obligation, and document when and how such performance obligation(s) has been satisfied."

Further, FINRA stated that firms should ensure that their annual reports include appropriate footnote disclosures required by ASC 606, and that their FOCUS reports and Supplemental Statement of Income be consistent with the revenue recognition disclosures made in the firm's annual report.