| Significant Accounting Policies | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation These consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States ( “ GAAP ” ), which require the Company to make estimates and assumptions regarding the valuation of certain financial instruments, goodwill and other intangibles, allowance for credit losses on receivables, share-based compensation, accruals for liabilities, income taxes, revenue and expense accruals, and other matters that affect the consolidated financial statements and related disclosures. Actual results could differ from those estimates under different assumptions or conditions and the differences may be material to the consolidated financial statements. Consolidated Financial Statement Presentation Changes Certain financial statement line items in the consolidated statements of income and the consolidated statements of financial condition have been reclassified to more closely align with industry practice and the Company’s business, and to better serve financial statement users. Prior period amounts have been reclassified to conform to the current presentation as follows: • The consolidated statements of income have been reclassified as follows: ◦ The Company has disaggregated the activity previously reported in the Transaction and fee line item in Total revenue into its Service and fee and Transaction components; ◦ The Company has included Interest expense on borrowings and Loss on extinguishment of debt in Total expense. Previously, these amounts were presented after Total operating expense. • The consolidated statements of financial condition have been reclassified as follows: ◦ Receivables from product sponsors have been reclassified to Other receivables, net. These were previously included in Receivables from product sponsors, broker-dealers and clearing organizations; ◦ Advisor accounts receivable and institutional loans, net of related allowance have been reclassified to Advisor loans, net. These were previously included in Other receivables, net and Other assets, respectively; ◦ Trading and held-to-maturity securities, which were previously reported as discrete line items, were reclassified to Investment securities; ◦ Certain other financial statement line items which were previously reported as discrete line items, including securities borrowed, operating lease assets, and deferred income taxes, net have been reclassified to Other assets; ◦ Drafts payable and Payables to clients, which were previously reported as discrete line items, were reclassified to Client payables; ◦ Liabilities related to the Company’s deferred compensation plans have been reclassified to Other liabilities. These were previously included in Accounts payable and accrued liabilities; ◦ Certain other financial statement line items which were previously reported as discrete line items, including income taxes payable, unearned revenue, securities sold, but not yet purchased, and lease liabilities have been reclassified to Other liabilities. These changes did not impact total assets, total liabilities, or total net income; however, the consolidated statements of cash flows have been updated to conform to the current presentation on the statements of financial condition. In addition, during the year ended December 31, 2021, the Company concluded that it is acting in a principal capacity for fractional shares held in customer brokerage accounts resulting from the dividend reinvestment program (“DRIP”) that the Company offers. The Company concluded that it should account for these shares as a secured borrowing with underlying financial assets pledged as collateral, and as a result has corrected its consolidated statement of financial condition to include an asset and related liability of $72.6 million at December 31, 2020 to reflect the investments in fractional shares and the corresponding repurchase obligation in other assets and other liabilities, respectively. The Company also corrected its consolidated statements of cash flows for the years ended December 31, 2020 and December 31, 2019, respectively, to reflect the changes in the consolidated statements of financial condition related to this activity in prior years. As a result, the Company corrected the consolidated statements of cash flows to reflect an increase in the other assets line items and an offsetting increase in the other liabilities line items of $13.8 million and $20.6 million for the years ended December 31, 2020 and December 31, 2019, respectively. This adjustment did not have an impact on earnings, earnings per share, retained earnings, or net cash provided by operating activities in prior periods. The Company has evaluated the impact of the error on previously issued consolidated financial statements and determined, based on consideration of quantitative and qualitative factors, that the impact of the error is immaterial. Consolidation These consolidated financial statements include the accounts of LPLFH and its subsidiaries. Intercompany transactions and balances have been eliminated. Related Party Transactions In the ordinary course of business, the Company enters into related party transactions with beneficial owners of more than five percent of the Company’s outstanding common stock. Additionally, through its subsidiary LPL Financial, the Company provides services and charitable contributions to the LPL Financial Foundation, a tax-exempt charitable organization that provides volunteer and financial support within the Company’s local communities. The Company recognized revenue for services provided to these related parties of $6.1 million, $4.8 million and $4.1 million during the years ended December 31, 2021, 2020 and 2019, respectively. The Company incurred expense for services provided by these related parties of $2.2 million, $3.8 million and $3.2 million during the years ended December 31, 2021, 2020 and 2019, respectively. As of December 31, 2021 and 2020, receivables from and payables to related parties were not material. Reportable Segment Management has determined that the Company operates in one segment, given the similarities in economic characteristics between its operations and the common nature of its products and services, production and distribution process and regulatory environment. Revenue Recognition Revenue is recognized when control of the promised service is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. For additional information, see Note 3 - Revenue . Compensation and Benefits The Company records compensation and benefits expense for all cash and deferred compensation, benefits and related taxes as earned by its employees. Compensation and benefits expense also includes fees earned by temporary employees and contractors who perform similar services to those performed by the Company’s employees. Share-Based Compensation Certain employees, officers, directors, advisors and financial institutions participate in the Company’s various long-term incentive plans that provide for granting stock options, warrants, restricted stock awards, restricted stock units, deferred stock units and performance stock units. Stock options, warrants and restricted stock units generally vest in equal increments over a three-year period and expire on the tenth anniversary following the date of grant. Restricted stock awards and deferred stock units generally vest over a one-year period, and performance stock units generally vest in full at the end of a three-year performance period. The Company recognizes share-based compensation for equity awards granted to employees, officers and directors as compensation and benefits expense on the consolidated statements of income. The fair value of stock options is estimated using a Black-Scholes valuation model on the date of grant. The fair value of restricted stock awards, restricted stock units and deferred stock units is equal to the closing price of the Company’s stock on the date of grant. The fair value of performance stock units is estimated using a Monte-Carlo simulation model on the date of grant. Share-based compensation is recognized over the requisite service period of the individual awards, which generally equals the vesting period. The Company recognizes share-based compensation for equity awards granted to advisors and financial institutions as advisory and commission expense on the consolidated statements of income. The fair value of restricted stock units is equal to the closing price of the Company’s stock on the date of grant. Share-based compensation is recognized over the requisite service period of the individual awards, which generally equals the vesting period. The Company makes assumptions regarding the number of stock options, warrants, restricted stock awards, restricted stock units, deferred stock units and performance stock units that will be forfeited. The forfeiture assumption is ultimately adjusted to the actual forfeiture rate. As a result, changes in the forfeiture assumptions do not impact the total amount of expense ultimately recognized over the service period. Rather, different forfeiture assumptions would only impact the timing of expense recognition over the service period. See Note 16 - Share-Based Compensation, Employee Incentives and Benefit Plans , for additional information regarding share-based compensation for equity awards granted. Earnings Per Share Basic earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that the denominator is increased to include the number of additional shares of common stock that would have been outstanding if dilutive potential shares of common stock had been issued. Income Taxes In preparing the consolidated financial statements, the Company estimates income tax expense based on various jurisdictions where it conducts business. The Company needs to estimate current tax obligations and to assess temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities. These temporary differences result in deferred tax assets and liabilities. The Company then must assess the likelihood that the deferred tax assets will be realized. A valuation allowance is established to the extent that it is more likely than not that such deferred tax assets will not be realized. When the Company establishes a valuation allowance or modifies the existing allowance in a certain reporting period, it generally records a corresponding increase or decrease to tax expense in the consolidated statements of income. Management makes significant judgments in determining its provision for income taxes, deferred tax assets and liabilities and any valuation allowances recorded against the deferred tax assets. Changes in the estimate of these taxes occur periodically due to changes in the tax rates, changes in the business operations, implementation of tax planning strategies, resolution with taxing authorities of issues where the Company had previously taken certain tax positions, and newly enacted statutory, judicial and regulatory guidance. These changes could have a material effect on the Company’s consolidated statements of income, financial condition or cash flows in the period or periods in which they occur. Income tax credits are accounted for using the flow-through method as a reduction of income tax expense in the period they are generated. The Company recognizes the tax effects of a position in the consolidated financial statements only if it is more likely than not to be sustained based solely on its technical merits; otherwise no benefits of the position are to be recognized. The more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit. Moreover, each tax position meeting the recognition threshold is required to be measured as the largest amount that is greater than 50 percent likely to be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. Cash and Equivalents Cash equivalents are highly liquid investments with an original maturity of 90 days or less that are not required to be segregated under federal or other regulations. The Company’s cash and equivalents are composed of interest and noninterest-bearing deposits, money market funds and U.S. government obligations. Cash Segregated Under Federal or Other Regulations The Company’s broker-dealer subsidiary, LPL Financial, is required to maintain cash or qualified securities in a segregated reserve account for the exclusive benefit of its customers in accordance with Rule 15c3-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and other regulations. At December 31, 2021, this line item included approximately $100,000 of cash for the proprietary accounts of broker-dealers. Restricted Cash Restricted cash primarily represents cash held and for use by the Captive Insurance Subsidiary. Receivables from Clients, Net and Client Payables Receivables from clients include amounts due on cash and margin transactions. The Company extends credit to clients of its advisors to finance their purchases of securities on margin and receives income from interest charged on such extensions of credit. Client payables represent credit balances in client accounts arising from deposits of funds, proceeds from sales of securities and dividend and interest payments received on securities held in client accounts at LPL Financial. The Company pays interest on certain client payable balances. Receivables from clients are generally fully secured by securities held in the clients’ accounts. To the extent that margin loans and other receivables from clients are not fully collateralized by client securities, the Company establishes an allowance that it believes is sufficient to cover any probable losses. When establishing this allowance, the Company considers a number of factors, including its ability to collect from the client or the client’s advisor and its historical experience in collecting on such transactions. The following table reflects a roll-forward of the allowance for credit losses on receivables from clients (in thousands): December 31, 2021 2020 2019 Beginning balance — January 1 $ 520 $ 115 $ 640 Impact of ASU 2016-13 adoption — — — Provision for credit losses 424 432 130 Charge-offs, net of recoveries 43 (27) (655) Ending balance — December 31 $ 987 $ 520 $ 115 Advisor Loans, Net Advisor loans, net includes loans made to advisors and financial institutions and other advisor fee receivables. The Company periodically extends credit to its advisors in the form of recruiting loans, commission advances and other loans. The decision to extend credit to an advisor is generally based on the advisor’s credit history and their ability to generate future revenue. Loans made in connection with recruiting can be either repayable or forgivable over terms generally up to ten years provided that the advisor remains licensed through LPL Financial. Forgivable loans are not repaid in cash and are amortized over the term of the loan. If an advisor terminates their arrangement with the Company prior to the loan maturity date, the remaining balance becomes repayable immediately. An allowance for credit losses is recorded at the inception of a repayable loan or upon advisor termination for forgivable loans using estimates and assumptions based on historical lifetime loss experience and expectations of future loss rates based on current facts. Advisor repayable loans, net totaled $191.2 million and $127.4 million as of December 31, 2021 and 2020. The following table reflects a roll-forward of the allowance for credit losses on advisor loans (in thousands): December 31, 2021 2020 2019 Beginning balance — January 1 $ 8,797 $ 13,461 $ 12,313 Impact of ASU 2016-13 adoption — 8,748 — Provision for credit losses 7,074 3,642 4,806 Charge-offs, net of recoveries (4,296) (17,054) (3,658) Ending balance — December 31 $ 11,575 $ 8,797 $ 13,461 Other Receivables, Net Other receivables, net primarily consist of receivables due from product sponsors and others, miscellaneous receivables and short-term secured loans to clients. An allowance for credit losses is recorded at inception using estimates and assumptions based on historical experience, current facts and other factors. Management monitors the adequacy of these estimates through periodic evaluations against actual trends experienced. The following table reflects a roll-forward of the allowance for credit losses on other receivables (in thousands): December 31, 2021 2020 2019 Beginning balance — January 1 $ 1,068 $ 805 $ 866 Impact of ASU 2016-13 adoption — 1,097 — Provision for credit losses 1,670 1,610 365 Charge-offs, net of recoveries (1,655) (2,444) (426) Ending balance — December 31 $ 1,083 $ 1,068 $ 805 Investment Securities Investment securities include trading and held-to-maturity securities. The Company also has securities which have been sold, but not yet purchased, which are reflected in other liabilities on the consolidated statements of financial condition. The Company generally classifies its investments in debt and equity instruments as trading securities, except for U.S. government notes held by its wholly owned subsidiary PTC, which are held to satisfy minimum capital requirements of the OCC and classified as held-to-maturity securities because the Company has both the intent and the ability to hold these investments to maturity. The Company has not classified any investments as available-for-sale. Securities classified as trading are carried at fair value, while securities classified as held-to-maturity are carried at amortized cost. The Company uses prices obtained from independent third-party pricing services to measure the fair value of its trading securities. Prices received from the pricing services are validated using various methods including comparison to prices received from additional pricing services, comparison to available quoted market prices and review of other relevant market data including implied yields of major categories of securities. In general, these quoted prices are derived from active markets for identical assets or liabilities. When quoted prices in active markets for identical assets and liabilities are not available, the quoted prices are based on similar assets and liabilities or inputs other than the quoted prices that are observable, either directly or indirectly. For certificates of deposit and treasury securities, the Company utilizes market-based inputs, including observable market interest rates that correspond to the remaining maturities or the next interest reset dates. Interest income is accrued as earned. Premiums and discounts are amortized using a method that approximates the effective yield method over the term of the security and are recorded as an adjustment to the investment yield. The Company makes estimates about the fair value of investments and the timing for recognizing losses based on market conditions and other factors. If these estimates change, the Company may recognize additional losses. Realized and unrealized gains and losses on trading securities are recognized in other revenue on a net basis in the consolidated statements of income. Property and Equipment, Net Internally developed software, leasehold improvements, computers and software and furniture and equipment are recorded at historical cost, net of accumulated depreciation and amortization. Depreciation is recognized using the straight-line method over the estimated useful lives of the assets. The Company expenses software development costs as incurred during the preliminary project stage, while capitalizing costs at the point at which the conceptual formulation, design and testing of possible software project alternatives are complete and management authorizes and commits to funding the project. The costs of internally developed software that qualify for capitalization are included in property and equipment and subsequently amortized over the estimated useful life of the software, which is generally 5 years. The Company does not capitalize pilot projects or projects for which it believes that the future economic benefits are less than probable. Leasehold improvements are amortized over the lesser of their useful lives or the terms of the underlying leases. Computers and software are depreciated over a period of 3 to 5 years. Furniture and equipment are depreciated over a period of 3 to 7 years. Land is not depreciated. Management reviews property and equipment for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. No i mpairment occurred for the years ended December 31, 2021, 2020 or 2019. Acquisitions Accounting for business combinations requires the Company to make significant estimates and assumptions with respect to intangible assets, liabilities assumed and pre-acquisition contingencies. These assumptions include, but are not limited to, future expected cash flows and discount rates, and are based in part on historical experience, market data and information obtained from the management of the acquired companies. When acquiring companies, the Company recognizes separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill is recognized for business combinations as of the acquisition date and is measured as the excess of consideration transferred and the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions as a part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, these estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of income. The Company also enters into asset acquisitions for single identifiable assets. Accounting for asset acquisitions requires the Company to make significant estimates and assumptions with respect to the useful life of the asset purchased. These assumptions are based in part on historical experience and market data. Goodwill and Other Intangibles, Net Goodwill and other indefinite-lived intangibles are tested annually for impairment in the fourth fiscal quarter and between annual tests if certain events occur indicating that the carrying amounts may be impaired. If a qualitative assessment is used and the Company determines that the fair value of a reporting unit or indefinite-lived intangible is more likely than not (i.e., a likelihood of more than 50%) less than its carrying amount, a quantitative impairment test will be performed. An impairment loss will be recognized if a reporting unit’s carrying amount exceeds its fair value, to the extent that it does not exceed the total carrying amount of goodwill. No impairment of goodwill or other indefinite-lived intangibles was recognized for the years ended December 31, 2021, 2020 or 2019. Intangibles that are deemed to have definite lives are amortized over their useful lives, generally ranging from 5 to 20 years. They are reviewed for impairment when there is evidence that events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount to the estimated undiscounted future cash flows expected to be generated. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the estimated fair value. There was no impairment of definite-lived intangibles recognized for the years ended December 31, 2021, 2020 or 2019. See Note 9 - Goodwill and Other Intangibles, Net , for additional information regarding the Company’s goodwill and other intangibles. Securities Borrowed The Company borrows securities from other broker-dealers to make deliveries or to facilitate customer short sales. Securities borrowed, which are included in other assets in the consolidated statements of financial condition, are accounted for as collateralized borrowings and are recorded at the contract value, which represents the amount of cash provided for securities borrowed transactions (generally in excess of market values). The adequacy of the collateral deposited, which is determined by comparing the market value of the securities borrowed to the cash loaned , is continuously monitored and is adjusted when considered necessary to minimize the risk associated with this activity. As of December 31, 2021, the contract and collateral market values of borrowed securities were $10.0 million and $9.7 million, respectively. As of December 31, 2020, the contract and collateral market values of borrowed securities were $30.1 million and $29.1 million, respectively. Fractional Shares The Company acts in a principal capacity in respect of fractional shares resulting from the DRIP that is offered to clients by aggregating dividends received by clients, executing purchases of whole shares, and allocating the whole shares to clients on a fractional basis based on the dividend amounts that are reinvested. Shares remaining after this process and fractional shares purchased by the Company in client liquidations are included in the Company’s inventory and reflected as investment securities on the Company’s consolidated statements of financial condition. Fractional shares that have been allocated to clients do not meet the criteria for sale accounting in ASC 860, Transfers and Servicing , and are accounted for as a secured borrowing (repurchase obligation related to shares held by clients) with a corresponding investment in fractional shares. These are reflected in other assets and other liabilities, respectively, on the Company’s consolidated statements of financial condition. The Company has elected the fair value option to measure these financial assets and the corresponding repurchase obligation and determines fair value based on quoted prices in active markets. Debt Issuance Costs Debt issuance and amendment costs are capitalized and amortized as additional interest expense over the expected term of the related debt agreement. Debt issuance costs are presented as a direct deduction from the carrying amount of the related debt liability. Costs incurred while obtaining the revolving credit facility are included in other assets in the consolidated statements of financial condition and subsequently amortized ratably over the term of the revolving credit facility, regardless of whether there are any outstanding borrowings on the revolving credit facility. Leases Lease assets and lease liabilities are recognized based on the present value of the future lease payments over the lease term at the lease commencement date and reflected in other assets and other liabilities, respectively, on the consolidated statements of financial condition. The Company estimates its incremental borrowing rate based on information available at the commencement date in determining the present value of future payments. For additional information, see Note 12 - Leases . Commitments and Contingencies The Company recognizes a liability for loss contingencies when it believes it is probable a liability has occurred and the amount can be reasonably estimated. If some amount within a range of loss appears at the time to be a better estimate than any other amount within the range, the Company accrues that amount. When no amount within the range is a better estimate than any other amount, however, the Company accrues the minimum amount in the range. The Company has established an accrual for those legal proceedings and regulatory matters for which a loss is both probable and the amount can be reasonably estimated. The Company also accrues for losses at its Captive Insurance Subsidiary for those matters covered by self-insurance. The Captive Insurance Subsidiary records losses and loss reserve liabilities based on actuarially determined estimates of losses incurred, but not yet reported to the Company as well as specific reserves for proceedings and matters that are probable and estimable. The Captive Insurance Subsidiary is funded by payments from the Company’s broker-dealer subsidiary and has cash reserves to cover losses, including $77.4 million in restricted cash at the Captive Insurance Subsidiary. Assessing the probability of a loss occurring and the timing and amount of any loss related to a legal proceeding or regulatory matter is inherently difficult and requires management to make significant judgments. For additional information, see Note 14 - Commitments and Contingencies - “Legal & Regulatory Matters.” Recently Issued or Adopted Accounting Pronouncements There are no recently issued accounting pronouncements that would materially impact the Company’s consolidated financial statements and related disclosures. There are no new accounting pronouncements adopted during the year ended December 31, 2021 that materially impacted the Company’s consolidated financial statements and related disclosures. |
