Cohen & Co Inc. Revenue Disclosure

N. Revenue Recognition

 

Net trading 

 

Net trading includes: (i) all gains, losses, interest income, dividend income, and interest expense from securities classified as investments-trading and trading securities sold, not yet purchased; (ii) interest income and expense from collateralized securities transactions; and (iii) commissions and riskless trading profits. Net trading is reduced by margin interest, which is recorded on an accrual basis.  Riskless trades are transacted through the Company’s proprietary account with a customer order in hand, resulting in little or no market risk to the Company. Transactions that settle in the regular way are recognized on a trade date basis. Extended settlement transactions are recognized on a settlement date basis (although in cases of extended settlement trades, the unsettled trade is accounted for as a derivative between trade and settlement date).  See note 10.  The investments classified as trading (both investments-trading and trading securities sold, not yet purchased) are carried at fair value. The determination of fair value is based on quoted market prices of an active exchange, independent broker market quotations, market price quotations from third-party pricing services or, when independent broker quotations or market price quotations from third-party pricing services are unavailable, valuation models prepared by the Company’s management. The models include estimates, and the valuations derived from them could differ materially from amounts realizable in an open market exchange.

 

Asset management 

 

Asset management revenue consists of management fees earned from Investment Vehicles.  In the case of CDOs, the fees earned by the Company generally consist of senior, subordinated, and incentive fees.  The senior asset management fee is generally senior to all the securities in the CDO capital structure and is recognized on a monthly basis as services are performed. The senior asset management fee is generally paid on a quarterly basis.  The subordinated asset management fee is an additional payment for the same services but has a lower priority in the CDO cash flows. If the CDO experiences a certain level of asset defaults and deferrals, these fees may not be paid. There is no recovery by the CDO of previously paid subordinated asset management fees. It is the Company’s policy to recognize these fees on a monthly basis as services are performed. The subordinated asset management fee is generally paid on a quarterly basis. However, if the Company determines that the subordinated asset management fee will not be paid (which generally occurs on the quarterly payment date), the Company will stop recognizing additional subordinated asset management fees on that particular CDO and will reverse any subordinated asset management fees that are accrued and unpaid. The Company will begin accruing the subordinated asset management fee again if payment resumes and, in management’s estimate, continued payment is reasonably assured. If payment were to resume but the Company was unsure of continued payment, it would recognize the subordinated asset management fee as payments were received and would not accrue such fees on a monthly basis.  The incentive management fee is an additional payment, made typically after five to seven years of the life of a CDO, which is based on the clearance of an accumulated cash return on investment (“Hurdle Return”) received by the most junior CDO securities holders. It is an incentive for the Company to perform in its role as asset manager by minimizing defaults and maximizing recoveries. The incentive management fee is not ultimately determined or payable until the achievement of the Hurdle Return by the most junior CDO securities holders. The Company recognizes incentive fee revenue when it is probable and there is not a significant chance of reversal in the future.  In the case of Investment Vehicles other than CDOs, generally the Company earns a base fee and, in some cases, also earns an incentive fee.  Base fees will generally be recognized on a monthly basis as services are performed and will be paid monthly or quarterly.  The contractual terms of each arrangement will determine the Company’s revenue recognition policy for incentive fees in each case.  However, in all cases the Company recognizes the incentive fees when they are probable and there is not a significant chance of reversal in the future.

 

New issue and advisory 

 

New issue and advisory revenue is comprised of (a) origination fees for newly created financial instruments originated by the Company, (b) revenue from advisory services, (c) revenue from underwriting, and (d) revenue associated with arranging and placing the issuance of newly created financial instruments.  New issue and advisory revenue is recognized when the Company’s performance obligations have been satisfied and collectability is reasonably assured. 

 

Principal transactions and other income 

 

Principal transactions include all gains, losses, and income from financial instruments classified as other investments, at fair value and other investments sold, not yet purchased in the consolidated balance sheets.

 

Investments classified as other investments, at fair value and other investments sold, not yet purchased are carried at fair value. The determination of fair value is based on quoted market prices of an active exchange, independent broker market quotations, market price quotations or models from third-party pricing services, or, when independent broker quotations or market price quotations or models from third-party pricing services are unavailable, valuation models prepared by the Company’s management. These models include estimates, and the valuations derived from them could differ materially from amounts realizable in an open market exchange. Dividend income is recorded on the ex-dividend date.  

 

Other income/(loss) includes foreign currency gains and losses, interest earned on cash and cash equivalents, interest earned and losses incurred on notes receivable, and other miscellaneous income including transaction break up fees and revenue from revenue sharing arrangements.