| THE COMPANY AND BASIS OF PREPARATION | THE COMPANY AND BASIS OF PREPARATION. T. Rowe Price Group (Price Group) derives its consolidated revenues and net income primarily from investment advisory services that its subsidiaries provide to individual and institutional investors in the T. Rowe Price U.S. mutual funds ( U.S. mutual funds ) and other investment products , including separately managed accounts, subadvised funds, and other T. Rowe Price investment products . We also provide our investment advisory clients with related administrative services, including distribution, mutual fund transfer agent, accounting, and shareholder services; participant recordkeeping and transfer agent services for defined contribution retirement plans; brokerage; and trust services. Investment advisory revenues depend largely on the total value and composition of assets under our management. Accordingly, fluctuations in financial markets and in the composition of assets under management impact our revenues and results of operations. These unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require the use of estimates and reflect all adjustments that are, in the opinion of management, necessary to a fair statement of our results for the interim periods presented. All such adjustments are of a normal recurring nature. Actual results may vary from our estimates. In order to increase transparency of operating expenses and better align expenses that have similar cost drivers, we have changed the presentation of certain line items of our income statement. In doing so, we have reclassified certain prior year amounts to conform to the 2018 presentation. These reclassifications are shown along with the impact of the new revenue recognition accounting standard adopted on January 1, 2018, in the New Accounting Guidance section below. The unaudited interim financial information contained in these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements contained in our 2017 Annual Report. NEW ACCOUNTING GUIDANCE. We adopted Accounting Standards Codification Topic 606: Revenue from Contracts with Customers (ASC 606), on January 1, 2018, using the retrospective method which required adjustments to be reflected as of January 1, 2016. In connection with the adoption of this guidance, we reevaluated all of our revenue contracts and determined that the new guidance does not change the timing of when we recognize revenue. However, we did conclude that certain fees earned from the U.S. mutual funds associated with our mutual fund transfer agent, accounting, shareholder servicing, and participant recordkeeping activities could no longer be reported net of the expenses paid to third parties that perform such services as we are deemed, under the guidance, to have control over the services before they are transferred to the U.S. mutual funds. No transition-related practical expedients were applied. Certain immaterial balance sheet reclassifications were made to conform to the 2018 presentation and all related note disclosures have been recast. Updates to our revenue recognition disclosures are included in Note 2 - Information about Receivables, Revenues, and Services and our updated revenue recognition accounting policy is included in the Summary of Significant Accounting Policies section below. The impact of ASC 606 and other income statement reclassifications, as described above, on the condensed consolidated statements of income for each quarter of 2017 follows: Three months ended 3/31/2017 Three months ended 6/30/2017 (in millions) As previously reported Change in Presentation Impact of ASC 606 As reported herein As previously reported Change in Presentation Impact of ASC 606 Recast Revenues Investment advisory fees $ 991.1 $ — $ 1.6 $ 992.7 $ 1,043.9 $ — $ 2.1 $ 1,046.0 Administrative, distribution, and servicing fees (1) 122.5 — — — 17.4 — 139.9 127.7 — — 12.3 — 140.0 Net revenues 1,113.6 — 19.0 1,132.6 1,171.6 — 14.4 1,186.0 Operating expenses Compensation and related costs 397.4 — — 397.4 403.8 — — 403.8 Distribution and servicing 35.2 22.9 1.7 59.8 36.4 26.4 2.0 64.8 Advertising and promotion 25.6 — .1 25.7 18.6 — .1 18.7 Product-related costs — 21.4 17.2 38.6 — 22.4 12.0 34.4 Technology, occupancy, and facility costs (2) 81.0 — 1.8 — — 82.8 83.1 — 2.5 — — 85.6 General, administrative, and other 102.7 (46.1 ) — 56.6 122.1 (51.3 ) .3 71.1 Nonrecurring insurance recoveries related to Dell appraisal rights matter (50.0 ) — — (50.0 ) — — — — Total operating expenses 591.9 — 19.0 610.9 664.0 — 14.4 678.4 Net operating income $ 521.7 $ — $ — $ 521.7 $ 507.6 $ — $ — $ 507.6 Three months ended 9/30/2017 Three months ended 12/31/2017 (in millions) As previously reported Change in Presentation Impact of ASC 606 Recast As previously reported Change in Presentation Impact of ASC 606 Recast Revenues Investment advisory fees $ 1,096.7 $ — $ 2.2 $ 1,098.9 $ 1,156.0 $ — $ 2.2 $ 1,158.2 Administrative, distribution, and servicing fees (1) 125.0 — — 14.8 — 139.8 130.1 — — 9.3 — 139.4 Net revenues 1,221.7 — 17.0 1,238.7 1,286.1 — 11.5 1,297.6 Operating expenses Compensation and related costs 417.4 — — 417.4 446.3 — — 446.3 Distribution and servicing 37.4 27.9 2.1 67.4 38.0 30.2 2.4 70.6 Advertising and promotion 14.0 — — 14.0 33.8 — .2 34.0 Product-related costs — 23.4 14.5 37.9 — 26.0 9.1 35.1 Technology, occupancy, and facility costs (2) 84.0 — 2.2 .1 — 86.3 90.4 — 5.5 (.1 ) — 95.8 General, administrative, and other 120.4 (53.5 ) .3 67.2 146.6 (61.7 ) (.1 ) 84.8 Total operating expenses 673.2 — 17.0 690.2 755.1 — 11.5 766.6 Net operating income $ 548.5 $ — $ — $ 548.5 $ 531.0 $ — $ — $ 531.0 (1) The previously reported column aggregates the administrative fees and distribution and servicing fees lines presented in the income statement in prior year. (2) The previously reported column aggregates the depreciation and amortization of property and equipment and occupancy and facility costs lines presented in the income statement in prior year. We adopted Accounting Standards Update No. 2016-01 — Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities on January 1, 2018. This standard update addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. After January 1, 2018, the guidance requires substantially all equity investments in non-consolidated entities to be measured at fair value with changes recognized in earnings, except for those accounted for using the equity method of accounting. As such, the guidance eliminated the available-for-sale investment category for equity securities, which required unrealized holding gains to be recognized in accumulated other comprehensive income. Upon adoption, we reclassified net unrealized holding gain of $7.9 million , net of taxes, related to our $597.1 million available-for-sale investment portfolio from accumulated other comprehensive income to retained earnings. Additionally, certain investments that do not have readily available market prices or quotations will be measured at fair value, under the new guidance, as we elected to use their calculated and reported net asset value (NAV) per share as a practical expedient for measuring their fair value in accordance with ASC 946. As such, we recognized a cumulative adjustment to retained earnings of $14.5 million to adjust investments previously accounted for as cost method investments to fair value on January 1, 2018. The corresponding increase in the investments’ carrying value and related deferred taxes was of $19.5 million and $5.0 million , respectively. Our updated investments policy is included in the Summary of Significant Accounting Policies section below. We adopted Accounting Standards Update No. 2018-02 — Reclassification of certain tax effects from accumulated other comprehensive income on January 1, 2018. This guidance permits tax effects stranded in accumulated other comprehensive income primarily resulting from the enactment of the U.S. tax reform bill originally known as the Tax Cuts and Jobs Act of 2017 to be reclassified to retained earnings either on January 1, 2018 or retrospectively. We elected to adopt the guidance on January 1, 2018 and reclassified $2.3 million of stranded tax benefits related to currency translation adjustments to retained earnings. The stranded income taxes related to our available-for-sale investment portfolio at December 31, 2017, were reclassified to retained earnings with the adoption of Accounting Standards Update No. 2016-01 on January 1, 2018. Our updated comprehensive income policy is included in the Summary of Significant Accounting Policies section below. NEWLY ISSUED BUT NOT YET ADOPTED ACCOUNTING GUIDANCE. In February 2016, the FASB issued Accounting Standards Update No. 2016-02 — Leases (Topic 842). The standard update seeks to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The standards update is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted and certain practical expedients are available. While we continue evaluating the full impact this standard will have on our financial position and results of operations, we currently expect the most significant impact will be the recognition of a right of use asset and lease liability on our consolidated balance sheets for each real-estate operating lease. We plan to adopt the standard on its effective date, January 1, 2019. We have considered all other newly issued accounting guidance that is applicable to our operations and the preparation of our condensed consolidated statements, including those we have not yet adopted. We do not believe that any such guidance has or will have a material effect on our financial position or results of operations. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. REVENUE RECOGNITION. Our revenue is earned from investment advisory, administrative, and distribution services we provide to our clients. Each distinct service we promise in our agreements is considered a performance obligation and is the basis for determining when we recognize revenue. The fees are allocated to each distinct performance obligation and we recognize revenue when, or as, we satisfy our promises. The timing of when we bill our clients varies in accordance with agreed-upon contractual terms. For the majority of our agreements, billing occurs after we have recognized revenue which results in accounts receivable and accrued revenue. For an insignificant portion of our contracts, billing occurs in advance of providing services which results in deferred revenue within the accounts payable and accrued expenses line of our condensed consolidated balance sheets. Taxes billed to our clients based on our fees for services rendered are not included in revenues. Investment advisory fees The majority of our investment advisory agreements, including those with the U.S. mutual funds, have a single performance obligation as the promised services are not separately identifiable from other promises in the agreements and, therefore, are not distinct. Substantially all performance obligations for providing advisory services are satisfied over time and revenue is recognized as time passes. Investment advisory agreements with T. Rowe Price investment products regulated outside the U.S. generally have two performance obligations; one for investment management and one for distribution. For these agreements, we allocate the management fee to each performance obligation using our best estimate of the standalone fee of each of these services. The performance obligation for providing investment management services, like our other advisory contracts, is satisfied over time and revenue is recognized as time passes. The performance obligation for distribution is satisfied at the point in time when an investor makes an investment into the product. Accordingly, a portion of the investment advisory fees earned from these products relate to distribution performance obligations that were satisfied during prior periods. These distribution fees are reported within the investment advisory fees line of our condensed consolidated statements of income. The management fee for our investment advisory agreements are based on our assets under management, which change based on fluctuations in financial markets, and represent variable consideration. Therefore, investment advisory fees are generally constrained, and excluded from revenue, until the asset values on which our client is billed are no longer subject to financial market volatility. Our assets under management are valued in accordance with valuation and pricing processes for each major type of investment. Fair values used in our processes are primarily determined from quoted market prices; prices furnished by dealers who make markets in such securities; or from data provided by an independent pricing service that considers yield or price of investments of comparable quality, coupon, maturity, and type. Investments for which market prices are not readily available are not a material portion of our total assets under management. We provide all services to the U.S. mutual funds under contracts that are subject to periodic review and approval by the funds’ Boards. Regulations require that the funds’ shareholders also approve material changes to investment advisory contracts. Administrative, distribution, and servicing fees Administrative fees The administrative services we provide include distribution, mutual fund transfer agent, accounting and shareholder services; participant recordkeeping and transfer agent services for defined contribution retirement plans; brokerage, and trust services. The administrative service agreements with the U.S. mutual funds for accounting oversight, transfer agency and recordkeeping services generally have one performance obligation as the promised services in each agreement are not separately identifiable from other promises in the agreement and, therefore, are not distinct. The fees for performing these services are generally equal to the costs incurred and represent variable consideration. The fees are generally constrained, and are recognized as revenue when costs are incurred to perform the services. These fees are generally offset by the costs incurred to provide such services. Other administrative service agreements for participant recordkeeping and transfer agent services for defined contribution retirement plans; brokerage services, and trust services generally have one performance obligation as the promised services in each agreement are not separately identifiable from other performance obligations in the contract and, therefore, are not distinct. Our performance obligation in each agreement is satisfied over time and revenue is recognized as time passes. The fees for these services vary by contract and are both fixed and variable. Distribution and servicing fees The agreements for distribution and servicing fees earned from 12b-1 plans of the Advisor Class, R Class, and Variable Annuity II Class shares of the U.S. mutual funds have one performance obligation, as distribution services are not separately identifiable from shareholder servicing promises in the agreements and, therefore, are not distinct. Our performance obligation is satisfied at the point in time when an investor makes an investment into these share classes of the U.S. mutual funds . The fees for these distribution and servicing agreements are based on the assets under management in these shares classes, which change based on fluctuations in financial markets, and represent variable consideration. These fees are generally constrained, and excluded from revenue, until the asset values on which our client is billed are not subject to financial market volatility. Accordingly, the majority of the distribution and servicing revenue disclosed in Note 2 - information about receivables, revenues and services relates to distribution and servicing obligations that were satisfied during prior periods. These fees are offset entirely by the distribution and servicing costs paid to third-party financial intermediaries that source the assets of these share classes. INVESTMENTS. Investments held at fair value Investments in T. Rowe Price investment products have been made for both general corporate investment purposes and to provide seed capital for newly formed product s. Those investments that we do not consolidate are carried at fair value using the quoted closing NAV per share of each fund as of the balance sheet date. The underlying investments held by our consolidated T. Rowe Price investment products are considered trading securities and are valued in accordance with the valuation and pricing policy used to value our assets under management which is further described in the Revenue Recognition policy above. We elected to value our interest in investment partnerships for which market prices or quotations are not readily available, at fair value using the NAV per share as a practical expedient for measuring fair value. Changes in the fair values of all these investments are reflected in non-operating income in our condensed consolidated statements of income. Equity method investments Equity method investments consist of investments in entities, including T. Rowe Price investment products , for which we have the ability to exercise significant influence over the operating and financial policies of the investee. The carrying values of these investments are adjusted to reflect our proportionate share of the investee's net income or loss, any unrealized gain or loss resulting from the translation of foreign-denominated financial statements into U.S. dollars, and dividends received. Our proportionate share of income or loss is included in non-operating income in our consolidated statements of income. As permitted under existing accounting guidance, we adopted a policy by which we recognize our share of UTI Asset Management Company Limited’s (UTI) earnings on a quarter lag as current financial information is not available in a timely manner. The basis difference between our carrying value and our proportionate share of UTI’s book value is primarily related to consideration paid in excess of the stepped-up basis of assets and liabilities on the date of purchase. COMPREHENSIVE INCOME. The components of comprehensive income are presented in a separate statement following our consolidated statements of income and include net income, the change in our currency translation adjustments, and prior to 2018, the change in net unrealized security holding gains (losses) on investments classified as available-for-sale. The currency translation adjustments result from translating our proportionate share of the financial statements of UTI, our equity method investment, and certain consolidated T. Rowe Price investment products into U.S. dollars. Assets and liabilities are translated into U.S. dollars using year-end exchange rates, and revenues and expenses are translated using weighted-average exchange rates for the period. The changes in accumulated balances of each component of other comprehensive income, the deferred tax impacts of each component, and information about significant items reclassified out of accumulated other comprehensive income are presented in the notes to the financial statements. The notes also indicate the line item of our consolidated statements of income to which the significant reclassifications were recognized. We reclassify income tax effects relating to currency translation adjustments to tax expense when there is a reduction in our ownership interest in the related investment. The amount of the reclassification depends on the investment’s accounting treatment before and after the change in ownership percentage. Prior to 2018, tax effects relating to each available-for-sale investment’s unrealized holding gain or loss, were reclassified upon the sale of the investment. |
