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Significant Accounting Policies
 9 Months Ended
Sep. 30, 2012
Significant Accounting Policies [Abstract]  
Significant Accounting Policies
Note 2 Significant Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses for the periods. Actual results could differ from those estimates. Certain prior period amounts and disclosures have been reclassified to conform to the current period financial presentation. Book value per share is computed by dividing total shareholders’ equity by the number of shares issued and outstanding at the end of the measurement period. The following is a summary of the Company’s significant accounting policies:

Principles of Consolidation

The accompanying consolidated financial statements include the operations of the Company and its subsidiaries. All material inter-company transactions and balances have been eliminated in consolidation.

Segment Information

Management has determined that the Company operates in one business segment, namely providing investment management and administration services to mutual funds, separate accounts, and private investment funds. Therefore, no disclosures relating to operating segments are required in annual or interim financial statements.

Cash and Cash Equivalents

Cash and cash equivalents include demand deposits and money market mutual funds.

Accounts Receivable

Accounts receivable are recorded when they are due and are presented on the balance sheet, net of any allowance for doubtful accounts. Accounts receivable are written off when they are determined to be uncollectible. Any allowance for doubtful accounts is estimated based on the Company’s historical losses, existing conditions in the industry, and the financial stability of those individuals or entities that owe the receivable. No allowance for doubtful accounts was deemed necessary at September 30, 2012 or December 31, 2011.

Valuation of Investment Portfolio

Investments held by the Company are valued based upon the definition of Level 1 inputs and Level 2 inputs. Level 1 inputs are defined as fair values which use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are defined as quoted prices in markets that are not considered to be active for identical assets or liabilities, quoted prices in active markets for similar assets or liabilities, and inputs other than quoted prices that are directly observable or indirectly through corroboration with observable market data. The following table summarizes the values of the Company’s investments based upon Level 1 and Level 2 inputs as of September 30, 2012 and December 31, 2011:

 

                 
    September 30, 2012     December 31, 2011  

Level 1 Inputs

   $ 32,589,375     $ 10,480,353  

Level 2 Inputs

     3,644,102       6,977,929  

Level 1 investments are all registered investment companies (mutual funds) and include $20.6 million and $9.2 million, respectively, of money market mutual funds that the Company classifies as cash equivalents.

Level 2 investments are all limited partnerships. There were no transfers in or out of the levels.

The changes in market values on the investments are recorded in the Consolidated Statements of Income as investment return.

Limited Partnership Interests

DHCM is the managing member of Diamond Hill General Partner, LLC (the “General Partner”), the general partner of Diamond Hill Investment Partners, L.P. (“DHIP”), Diamond Hill Investment Partners II, L.P. (“DHIP II”), Diamond Hill Research Partners, L.P. (“DHRP”), Diamond Hill Research Partners – International, L.P. (“DHRPI”), and Diamond Hill Valuation-Based Index, L.P. (“DHVBI”) collectively (the “Partnerships”), each a limited partnership whose underlying assets consist of marketable securities. Effective January 3, 2012, Diamond Hill Research Partners, L.P. converted to Diamond Hill Research Opportunities Fund, a series of the Diamond Hill Funds. On July 18, 2012, DHIP II was liquidated.

DHCM, in its role as managing member of the General Partner, has the power to direct the Partnerships’ economic activities and the right to receive investment advisory and performance incentive fees that may be significant to the Partnerships. The Company evaluated these Partnerships to determine whether or not to consolidate the entities. Certain of these Partnerships are considered to be variable interest entities (“VIEs”) while others are considered to be voting rights entities (“VREs”) both of which are subject to consolidation consideration. The Company would consolidate VIEs where the Company is considered the primary beneficiary or VREs where the General Partner is considered to control the Partnership. For the Partnerships that were considered VIEs, the Company was not deemed to be the primary beneficiary. For the Partnerships that were considered VREs, it was determined that the DHCM in its role of managing member of the General Partner did not control the Partnerships. Therefore, the investments are accounted for under the equity method rather than being consolidated in the accompanying financial statements. DHCM’s investments in these Partnerships are reported as a component of the Company’s investment portfolio, valued at DHCM’s proportionate interest in the net asset value of the marketable securities held by the Partnerships. Gains and losses attributable to changes in the value of DHCM’s interests in the Partnerships are included in the Company’s reported investment return.

 

The Company’s exposure to loss as a result of its involvement with the Partnerships is limited to the amount of its investments. DHCM is not obligated to provide financial or other support to the Partnerships, other than its investments to date and its contractually provided investment advisory responsibilities, and has not provided such support. The Company has not provided liquidity arrangements, guarantees or other commitments to support the Partnerships’ operations, and the Partnerships’ creditors and interest holders have no recourse to the general credit of the Company.

Certain board members, officers and employees of the Company invest in DHIP. These individuals receive no remuneration as a result of their personal investment in the Partnership. The capital of the General Partner is not subject to a management fee or an incentive fee.

Furniture and Equipment

Furniture and equipment, consisting of computer equipment, furniture, and fixtures, are carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over estimated lives of three to seven years.

Revenue Recognition - General

The Company earns substantially all of its revenue from investment advisory and fund administration services. Mutual fund investment advisory and administration fees, generally calculated as a percentage of assets under management, are recorded as revenue as services are performed. Managed account and private investment fund clients provide for monthly or quarterly management fees, in addition to periodic variable incentive fees.

Revenue Recognition – Incentive Revenue

The Company manages certain client accounts that provide for variable incentive fees. These fees are based on investment results over rolling five year periods. For variable management fees based on a formula, there are two methods by which incentive revenue may be recorded. Under “Method 1”, incentive fees are recorded at the end of the contract measurement period; under “Method 2”, the incentive fees are recorded periodically and calculated as the amount that would be due under the formula at any point in time as if the contract was terminated at that date. Management has chosen Method 1, in which incentive fees are recorded at the end of the contract measurement period for the specific client in which the incentive fee applies. The table below shows assets under management (“AUM”) subject to incentive fees and the incentive fees, as calculated under each of the above methods:

 

                 
    As Of September 30,  
    2012     2011  

AUM Contractual Period Ends:

                

Calendar Quarter-End

   $ —       $ 82,972,698  

Calendar Year-End

     —         83,941,115  

May 31, 2017

     273,834,389       —    
   

 

 

    

 

 

  

Total AUM Subject to Incentive Fees

   $ 273,834,389     $ 166,913,813  
   

 

 

    

 

 

  

 

                                 
    For The Three Months
Ending September 30,		     For The Nine Months
Ending September 30,		  
    2012     2011     2012     2011  

Incentive Fees Under Method 1 - Contractual Period Ends:

                                

Calendar Quarter-End

   $ —       $ —       $ —       $ 507  

Calendar Year-End

     —         —         —         738  

May 31, 2017

     —         —         —         —    
   

 

 

    

 

 

    

 

 

    

 

 

  

Total Incentive Fees Under Method 1

   $ —       $ —       $ —       $ 1,245  
   

 

 

    

 

 

    

 

 

    

 

 

  

Incentive Fees Under Method 2 - Contractual Period Ends:

                                

Calendar Quarter-End

   $ —       $ —       $ —       $ 507  

Calendar Year-End

     —         —         —         738  

May 31, 2017

     53,600       —         53,600       —    
   

 

 

    

 

 

    

 

 

    

 

 

  

Total Incentive Fees Under Method 2

   $ 53,600     $ —       $ 53,600     $ 1,245  
   

 

 

    

 

 

    

 

 

    

 

 

  

Revenue Recognition – Mutual Fund Administration

DHCM has an administrative and transfer agency services agreement with the Funds, under which DHCM performs certain services for each fund. These services include mutual fund administration, transfer agency and other related functions. For performing these services, each fund compensates DHCM a fee, which is calculated using the following annual rates times the average daily net assets of each respective series and share class:

 

                 
    Prior to February 29,
2012		     After February 29,
2012		  

Class A and Class C

     0.26 %      0.25 % 

Class I

     0.24 %      0.25 % 

Class Y  (a)

     0.10 %      0.10 % 

 

(a) Class Y commenced operations on January 3, 2012.

The Funds have selected and contractually engaged certain vendors to fulfill various services to benefit the Funds’ shareholders or to satisfy regulatory requirements of the Funds. These services include, among others, required fund shareholder mailings, federal and state registrations, and legal and audit services. DHCM, in fulfilling a portion of its role under the administration agreement with the Funds, acts as agent to pay these obligations of the Funds. Each vendor is independently responsible for fulfillment of the services it has been engaged to provide and negotiates fees and terms with the management and board of trustees of the Funds. The fee that the Funds pay to DHCM is reviewed annually by the Funds’ board of trustees and specifically takes into account the contractual expenses that DHCM pays on behalf of the Funds. As a result, DHCM is not involved in the delivery or pricing of these services and bears no risk related to these services. Revenue has been recorded net of these Fund related expenses, in accordance with the

appropriate accounting treatment for this agency relationship. In addition, DHCM finances the upfront commissions which are paid by the Fund’s principal underwriter to brokers who sell Class C shares of the Funds. As financer, DHCM advances to the underwriter the commission amount to be paid to the selling broker at the time of sale. These advances are capitalized and amortized over 12 months to correspond with the repayments DHCM receives from the principal underwriter to recoup this commission advancement.

Beacon Hill has underwriting and administrative service agreements with certain clients, including registered mutual funds. The fee arrangements vary from client to client based upon services provided and are recorded as revenue under Mutual Fund Administration on the Consolidated Statements of Income. Part of Beacon Hill’s role as underwriter is to act as an agent on behalf of its mutual fund clients to receive 12b-1/service fees and commission revenue and facilitate the payment of those fees and commissions to third parties who provide services to the funds and their shareholders. The amount of 12b-1/service fees and commissions are determined by each mutual fund client and Beacon Hill bears no financial risk related to these services. As a result, 12b-1/service fees and commission revenue has been recorded net of the expense payments to third parties, in accordance with the appropriate accounting treatment for this agency relationship.

Mutual fund administration gross and net revenue are summarized below:

 

                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2012     2011     2012     2011  

Mutual fund administration:

                                

Administration revenue, gross

   $ 3,349,027     $ 2,829,944     $ 9,675,532     $ 8,802,865  
         

12b-1/service fees and commission revenue received from fund clients

     1,734,552       1,663,549       5,168,905       5,437,354  
         

12b-1/service fees and commission expense payments to third parties

     (1,734,552 )      (1,663,549 )      (5,168,905 )      (5,437,354 ) 

Fund related expense

     (1,102,340 )      (934,701 )      (3,135,709 )      (2,892,596 ) 
   

 

 

    

 

 

    

 

 

    

 

 

  

Revenue, net of fund related expenses

     2,246,687       1,895,243       6,539,823       5,910,269  
         

DHCM C-Share financing:

                                

Broker commission advance repayments

     46,077       79,780       166,746       286,890  

Broker commission amortization

     (52,378 )      (70,290 )      (167,255 )      (254,479 ) 
   

 

 

    

 

 

    

 

 

    

 

 

  

Financing activity, net

     (6,301 )      9,490       (509 )      32,411  
   

 

 

    

 

 

    

 

 

    

 

 

  

Mutual fund administration revenue, net

   $ 2,240,386     $ 1,904,733     $ 6,539,314     $ 5,942,680  
   

 

 

    

 

 

    

 

 

    

 

 

  

Third Party Distribution Expense

Third party distribution expenses are earned by various third party financial services firms based on sales and/or assets of the Company’s investment products generated by the respective firms. Expenses recognized represent actual payments made to the third party firms and are recorded in the period earned based on the terms of the various contracts.

Income Taxes

The Company accounts for income taxes through an asset and liability approach. A net deferred tax asset or liability is determined based on the tax effects of the various temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.

The Company has analyzed its tax positions taken on federal income tax returns for all open tax years (tax years ended December 31, 2009 through 2011) to determine any uncertainty in income taxes and has recognized no adjustment in the net asset or liability.

Earnings Per Share

Earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding for the period. For the periods presented, the Company does not have dilutive securities outstanding.