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Summary of Significant Accounting Policies | 9 Months Ended
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Sep. 30, 2018
Accounting Policies [Abstract] |
Summary of Significant Accounting Policies | Summary of Significant Accounting Policies Nature of Operations SEI Investments Company (the Company), a Pennsylvania corporation, provides investment processing, investment management, and investment operations platforms to financial institutions, financial advisors, institutional investors, investment managers and ultra-high-net-worth families in the United States, Canada, the United Kingdom, continental Europe and various other locations throughout the world. Investment processing platforms consist of application and business process outsourcing services, professional services and transaction-based services. Revenues from investment processing platforms are recognized in Information processing and software servicing fees on the accompanying Consolidated Statements of Operations. Investment management programs consist of mutual funds, alternative investments and separate accounts. These include a series of money market, equity, fixed-income and alternative investment portfolios, primarily in the form of registered investment companies. The Company serves as the administrator and investment advisor for many of these products. Revenues from investment management programs are recognized in Asset management, administration and distribution fees on the accompanying Consolidated Statements of Operations. Investment operations platforms consist of outsourcing services including fund and investment accounting, administration, reconciliation, investor servicing and client reporting. Revenues from investment operations platforms are recognized in Asset management, administration and distribution fees on the accompanying Consolidated Statements of Operations. Basis of Presentation The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Certain financial information and accompanying note disclosure normally included in the Company’s Annual Report on Form 10-K have been condensed or omitted. The interim financial information is unaudited but reflects all adjustments (consisting of only normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of financial position of the Company as of September 30, 2018, the results of operations for the three and nine months ended September 30, 2018 and 2017, and cash flows for the nine-month periods ended September 30, 2018 and 2017. These interim Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. The Company adopted the requirements of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (Accounting Standards Codification (ASC) 606 (ASC 606)) using the modified retrospective method during the nine months ended September 30, 2018. As a result of the adoption of ASC 606, the Company recorded a cumulative effect adjustment of $14,402 to retained earnings as of January 1, 2018. Prior period information has not been restated (see following caption "Revenue Recognition"). The Company also adopted ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (see Note 6) and ASU No. 2016-18, Statement of Cash Flows, Restricted Cash (Topic 230) (see following caption "Statements of Cash Flows"). All amounts and disclosures set forth in this Form 10-Q have been updated to comply with the new standards. Revenue Recognition Revenue is recognized when the transfer of control of promised goods or services under the terms of a contract with customers are satisfied in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those promised goods or services. Certain portions of the Company’s revenues involve a third party in providing goods or services to its customers. In such circumstances, the Company must determine whether the nature of its promise to the customer is to provide the underlying goods or services (the Company is the principal in the transaction and reports the transaction gross) or to arrange for a third party to provide the underlying goods or services (the entity is the agent in the transaction and reports the transaction net). ASC 606 did not change the accounting for the majority of the Company’s revenue arrangements and did not have a material impact to the Company’s consolidated financial statements. The following is a summary of the impact from the adoption of ASC 606: •The majority of the Company’s services are bundled together, and provided and completed for the client on a monthly basis. For these revenue arrangements, the Company continues to recognize revenue on a monthly basis as the client consumes the benefits continuously over time. The timing and recognition of revenues from these arrangements did not change. •Contracts with new clients or with existing clients for new services generally include implementation fees. These fees are recognized in Information processing and software servicing fees when in connection with investment processing platforms and are recognized in Asset management, administration and distribution fees when in connection with investment operations platforms. The Company concluded that most of the current arrangements for implementation services are a distinct and separate performance obligation from the monthly recurring services. The timing and recognition of fees for most of these arrangements have not changed. However, each new revenue arrangement for implementation fees is analyzed to determine whether or not it is a distinct performance obligation. Implementation fees determined not to be a distinct performance obligation would be required to be recognized over the expected life of the client relationship along with the costs relating directly to satisfying such performance obligation. The Company will evaluate each contract in accordance with the requirements of ASC 606. •Research services provided by SIDCO, the Company’s broker-dealer subsidiary, to customers in soft-dollar arrangements were determined to be a separate performance obligation. Research services provided by a broker-dealer may be internally generated or provided by a third party and paid directly by the broker-dealer on the customer’s behalf. It was determined that SIDCO is considered an agent since it does not control the research services before they are transferred to the customer. Therefore, fees received for research services should be recorded in revenues net of amounts paid for the soft-dollar arrangement. These amounts paid by the Company were previously recorded gross as an expense and, beginning January 1, 2018, are recorded net of any revenue recognized. The amounts related to soft-dollar arrangements during the three months ended September 30, 2018 and 2017 were $3,265 and $3,297, respectively. The amounts related to soft-dollar arrangements during the nine months ended September 30, 2018 and 2017 were $10,497 and $10,799, respectively. •Incremental contract acquisition costs related to information processing contracts in the Private Banks segment and investment operations contracts in the Investment Managers segment will be deferred and recognized over the expected client life. These costs primarily consist of sales compensation payments to the Company's sales personnel. As a result, incremental contract acquisition costs are capitalized and subsequently amortized. The Company recorded a cumulative effect adjustment to retained earnings associated with the capitalization of contract costs. For the Company's other sales compensation payments, the Company either applies the practical expedient permitting the expensing of costs to obtain a contract when the expected amortization period is one year or less or there are no contract acquisition costs required to be deferred under the requirements of ASC 606. The Company amortizes deferred contract acquisition costs using the straight-line method. Cash and Cash Equivalents Cash and cash equivalents includes $286,824 and $401,292 at September 30, 2018 and December 31, 2017, respectively, primarily invested in SEI-sponsored open-ended money market mutual funds. The SEI-sponsored mutual funds are Level 1 assets. Restricted Cash Restricted cash includes $3,000 at September 30, 2018 and December 31, 2017 segregated for regulatory purposes related to trade-execution services conducted by SEI Investments (Europe) Limited. Restricted cash also includes $511 and $505 at September 30, 2018 and December 31, 2017, respectively, segregated in special reserve accounts for the benefit of customers of the Company’s broker-dealer subsidiary, SEI Investments Distribution Co. (SIDCO), in accordance with certain rules established by the Securities and Exchange Commission (SEC) for broker-dealers. Capitalized Software The Company capitalized $33,371 and $48,573 of software development costs during the nine months ended September 30, 2018 and 2017, respectively. The Company's software development costs primarily relate to the continued development of the SEI Wealth Platform SM (the Platform). The Company capitalized $32,526 and $40,604 of software development costs for significant enhancements to the Platform during the nine months ended September 30, 2018 and 2017, respectively. As of September 30, 2018, the net book value of the Platform was $288,010. The net book value includes $38,552 of capitalized software development costs in-progress associated with future releases. The Platform has a weighted average remaining life of 8.4 years. Amortization expense for the Platform was $29,723 and $37,324 during the nine months ended September 30, 2018 and 2017, respectively. The Company also capitalized $845 and $7,969 of software development costs during the nine months ended September 30, 2018 and 2017, respectively, related to an application for the Investment Managers segment. The application was placed into service during the first quarter 2018 with an estimated useful life of 5 years. The net book value of the application at September 30, 2018 was $22,136. Amortization expense for the application was $3,907 during the nine months ended September 30, 2018. Earnings per Share The calculations of basic and diluted earnings per share for the three and nine months ended September 30, 2018 and 2017 are:
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
Net income | $ | 128,319 |  |  | $ | 101,739 |  |  | $ | 389,834 |  |  | $ | 282,245 |
Shares used to compute basic earnings per common share | 156,283,000 |  |  | 157,902,000 |  |  | 157,086,000 |  |  | 158,439,000 |
Dilutive effect of stock options | 4,228,000 |  |  | 3,246,000 |  |  | 4,967,000 |  |  | 3,427,000 |
Shares used to compute diluted earnings per common share | 160,511,000 |  |  | 161,148,000 |  |  | 162,053,000 |  |  | 161,866,000 |
Basic earnings per common share | $ | 0.82 |  |  | $ | 0.64 |  |  | $ | 2.48 |  |  | $ | 1.78 |
Diluted earnings per common share | $ | 0.80 |  |  | $ | 0.63 |  |  | $ | 2.41 |  |  | $ | 1.74 |
During the three months ended September 30, 2018 and 2017, employee stock options to purchase 6,183,000 and 11,324,000 shares of common stock with an average exercise price of $53.38 and $37.81, respectively, were outstanding but not included in the computation of diluted earnings per common share. During the nine months ended September 30, 2018 and 2017, employee stock options to purchase 6,153,000 and 11,286,000 shares of common stock with an average exercise price of $53.15 and $37.73, respectively, were outstanding but not included in the computation of diluted earnings per common share. These options for the three and nine month periods were not included in the computation of diluted earnings per common share because either the performance conditions have not been satisfied or would have been satisfied if the reporting date was the end of the contingency period or the option’s exercise price was greater than the average market price of the Company’s common stock and the effect on diluted earnings per common share would have been anti-dilutive. Reclassifications Certain prior year amounts have been reclassified to conform to current year presentation. New Accounting Pronouncements In February 2016, the FASB issued ASU No. 2016-02, Leases (ASU 2016-02), as amended, requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases with the exception of short-term leases. For lessees, leases will be classified as either operating or finance leases, with the classification affecting the pattern and classification of expense recognition in the income statement. The updated standard is effective for the Company beginning in the first quarter of 2019. Early adoption is permitted. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (i) its effective date or (ii) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. The Company expects to adopt the new standard on January 1, 2019 and use the effective date as the date of initial application. As a result, financial information will not be updated and the disclosures required under the new standard will not be provided for periods prior to January 1, 2019. The new standard provides a number of optional practical expedients in transition. The Company expects to elect the package of practical expedients which permits the Company to not reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. As part of its project plan’s preliminary assessment and design implementation phases for the adoption of ASU 2016-02, the Company has adopted implementation controls that allow it to properly and timely adopt ASU 2016-02 on the effective date. While the Company continues to assess all of the effects of adoption, the Company believes the most significant effects relate to the recognition of right-of-use assets and lease liabilities on the balance sheet for office space and certain office equipment and providing significant new disclosures about leasing arrangements. The Company owns its corporate headquarters and leases office space in other locations. The Company has completed the process of cataloging existing lease agreements and is currently calculating the right-of-use asset and lease liability. The Company will make updates to the year-end disclosures, with a focus on both status and internal controls over financial reporting. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13) which requires that expected credit losses relating to financial assets measured on an amortized cost basis and available-for-sale debt securities be recorded through an allowance for credit losses. ASU 2016-13 limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and also requires the reversal of previously recognized credit losses if fair value increases. ASU 2016-13 becomes effective for the Company during the first quarter of 2020. Early adoption is permitted. The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures. In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (ASU 2017-04). The objective of ASU 2017-04 is to simplify the subsequent measurement of goodwill by entities performing their annual goodwill impairment tests by comparing the fair value of a reporting unit, including income tax effects from any tax-deductible goodwill, with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds fair value. ASU 2017-04 is effective for the Company beginning in the first quarter of 2020. Early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2017-04 on its consolidated financial statements and related disclosures. In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07) which simplifies the accounting for nonemployee share-based payment transactions. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. ASU 2018-07 is effective for the Company beginning in the first quarter of 2019. The Company does not believe the adoption of ASU 2018-07 will have a material impact on its consolidated financial statements and related disclosures. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13) which modifies the disclosure requirements on fair value measurements. ASU 2018-13 is effective for the Company beginning in the first quarter of 2020. The Company is currently evaluating the impact of adopting ASU 2018-13 on its consolidated financial statements and related disclosures. Statements of Cash Flows For purposes of the Consolidated Statements of Cash Flows, the Company considers investment instruments purchased with an original maturity of three months or less to be cash equivalents. The Company adopted ASU No. 2016-18, Statement of Cash Flows, Restricted Cash (Topic 230) (ASU 2016-18) on January 1, 2018 which requires that a statement of cash flows explain the change during the period for the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The prior period was retrospectively adjusted to conform to the current period’s presentation. There was no material impact to net cash flows for the nine months ended September 30, 2017 as a result of including restricted cash with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts presented on the accompanying Consolidated Condensed Statement of Cash Flows in accordance with ASU 2016-18. The following table provides the details of the adjustments to reconcile net income to net cash provided by operating activities for the nine months ended September 30:
| 2018 |  | 2017
Net income | $ | 389,834 |  |  | $ | 282,245 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |
Depreciation | 21,515 |  |  | 20,347 |
Amortization | 36,420 |  |  | 38,332 |
Equity in earnings of unconsolidated affiliate | (123,406 | ) |  | (109,213 | )
Distributions received from unconsolidated affiliate | 138,216 |  |  | 117,447 |
Stock-based compensation | 16,396 |  |  | 19,527 |
Provision for losses on receivables | (29 | ) |  | 176 |
Deferred income tax expense | 8,378 |  |  | 1,143 |
Net loss (gain) from investments | 460 |  |  | (1,036 | )
Change in long-term income taxes payable | (9,859 | ) |  | — |
Change in other long-term liabilities | 1,930 |  |  | 106 |
Change in other assets | (4,214 | ) |  | 79 |
Contract costs capitalized, net of amortization | (3,463 | ) |  | — |
Other | (99 | ) |  | 1,070 |
Change in current assets and liabilities |  |  |
Decrease (increase) in |  |  |
Receivables from investment products | 2,263 |  |  | 10,800 |
Receivables | (44,878 | ) |  | (43,661 | )
Other current assets | (5,955 | ) |  | (2,962 | )
Increase (decrease) in |  |  |
Accounts payable | 3,893 |  |  | (1,748 | )
Accrued liabilities | (9,717 | ) |  | (15,856 | )
Deferred revenue | 213 |  |  | (409 | )
Total adjustments | 28,064 |  |  | 34,142 |
Net cash provided by operating activities | $ | 417,898 |  |  | $ | 316,387 |

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