XML 21 R9.htm IDEA: XBRL DOCUMENT
v3.20.2

Significant Accounting Policies | 3 Months Ended
--- | ---
Sep. 30, 2020
Accounting Policies [Abstract] |
Significant Accounting Policies | Significant Accounting Policies Basis of Presentation The accompanying unaudited condensed consolidated financial statements as of September 30, 2020 and December 31, 2019, and for the three- and nine-month periods ended September 30, 2020 and 2019, for Diamond Hill Investment Group, Inc. and its subsidiaries (referred to in these notes to the condensed consolidated financial statements as "the Company," "management," "we," "us," and "our"), have been prepared in accordance with United States generally accepted accounting principles ("GAAP") and with the instructions to Form 10-Q and Article 10 of Securities and Exchange Commission (the "SEC") Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair statement of the financial condition and results of operations at the dates and for the interim periods presented have been included. These unaudited condensed consolidated financial statements and footnotes should be read in conjunction with the audited consolidated financial statements of the Company included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the "2019 Form 10-K"), as filed with the SEC. Operating results for the three- and nine-month periods ended September 30, 2020 are not necessarily indicative of the results the Company may expect for the full fiscal year ending December 31, 2020 (“fiscal 2020”), particularly in light of the novel coronavirus pandemic (“COVID-19”) and its effects on the U.S. and global economies. To limit the spread of COVID-19, governments have continued to take various actions including extending travel bans and social distancing guidelines, which has caused some businesses to have prolonged suspensions of their operations, disrupted the global supply chain, and created a reduction in demand for many products. This has affected global financial markets and has caused significant financial market volatility, which could impact our assets under management ("AUM"), the revenue derived from our AUM, and the returns on corporate investments, our liquidity, our capital resources, and our results of operations. The pandemic and the related responses to COVID-19 could continue to affect our results of operations, cash flows and financial position. However, at this time we cannot reasonably estimate the full impact, given the uncertainty surrounding the duration and severity of the pandemic and its related economic impacts. For further information regarding the risks to our business, refer to the consolidated financial statements and notes thereto included in the 2019 Form 10-K and in “Part II – Item 1A. – Risk Factors” of this Quarterly Report on Form 10-Q. Use of Estimates The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions related to the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expense during the period. Actual results could differ from those estimates. Reclassification Certain prior period amounts and disclosures may have been reclassified to conform to the current period's financial presentation. Principles of Consolidation The accompanying consolidated financial statements include the operations of the Company and its controlled subsidiaries. All inter-company transactions and balances have been eliminated in consolidation. The Company holds certain investments in the Funds for general corporate investment purposes, to provide seed capital for newly formed strategies or to add capital to existing strategies. The Funds are organized in a series fund structure in which there are multiple mutual funds within one trust (the "Trust"). The Trust is an open-end investment company registered under the Investment Company Act of 1940, as amended (the"1940 Act"). The Company performs its analysis at the individual mutual fund level and has concluded the mutual funds are voting rights entities ("VREs") because the structure of the investment product is such that the shareholders are deemed to have the power through voting rights to direct the activities that most significantly impact the entity's economic performance. To the extent material, these investment products are consolidated if Company ownership, directly or indirectly, represents a majority interest (greater than 50%). The Company records redeemable noncontrolling interests in consolidated investments for which the Company's ownership is less than 100%. The Company has consolidated the Diamond Hill International Fund and the Diamond Hill Global Fund (collectively, the "Consolidated Funds") as of September 30, 2020. Redeemable Noncontrolling Interest Redeemable noncontrolling interest represents third-party interests in the Consolidated Funds. This interest is redeemable at the option of the investors, and therefore, is not treated as permanent equity. Redeemable noncontrolling interest is recorded at redemption value, which approximates the fair value each reporting period. Segment Information Management has determined that the Company operates in one business segment, which is providing investment management and administration services to mutual funds, separately managed accounts, and a private investment fund. Therefore, the Company does not present disclosures relating to operating segments in annual or interim financial statements. Cash and Cash Equivalents Cash and cash equivalents include demand deposits and money market mutual funds held by DHCM. Accounts Receivable The Company records accounts receivable when they are due and presents them 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 the individual or entity that owes the receivable. No allowance for doubtful accounts was deemed necessary at September 30, 2020, or December 31, 2019. Accounts receivable from the Funds were $8.9 million as of September 30, 2020, and $10.7 million as of December 31, 2019. Investments Management determines the appropriate classification of its investments at the time of purchase and re-evaluates its determination at each reporting period. Investments in the Funds that DHCM advises where the Company has neither control nor the ability to exercise significant influence, as well as securities held in the Consolidated Funds, are measured at fair value based on quoted market prices. Unrealized gains and losses are recorded as investment income (loss) in the Company's consolidated statements of income. Investments classified as equity method investments represent investments in which the Company owns between 20-50% of the outstanding voting interests in the entity or when it is determined that the Company is able to exercise significant influence but not control over the investments. When using the equity method, the Company recognizes its respective share of the investee's net income or loss for the period, which is recorded as investment income in the Company's consolidated statements of income. Property and Equipment Property and equipment, consisting of leasehold improvements, right-of use lease assets, computer equipment, capitalized software, furniture, and fixtures, are carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated lives of the assets. Revenue Recognition – General The Company recognizes revenue when it satisfies performance obligations under the terms of a contract with a client. The Company earns substantially all of its revenue from investment advisory and fund administration contracts. Investment advisory and administration fees, generally calculated as a percentage of AUM, are recorded as revenue as services are performed. In addition to fixed fees based on a percentage of AUM, certain client accounts also provide periodic variable rate fees. Revenue earned during the three months ended September 30, 2020, and 2019, under contracts with clients include:
| Three Months Ended September 30, 2020 |  |  |  |
| Investment advisory |  | Mutual fund administration, net |  | Total revenue
Proprietary funds | $ | 21,435,758 |  |  | $ | 1,813,103 |  |  | $ | 23,248,861 |
Sub-advised funds and separately managed accounts | 7,926,894 |  |  | — |  |  | 7,926,894 |
| $ | 29,362,652 |  |  | $ | 1,813,103 |  |  | $ | 31,175,755 |
| Three Months Ended September 30, 2019 |  |  |  |
| Investment advisory |  | Mutual fund administration, net |  | Total revenue
Proprietary funds | $ | 24,178,440 |  |  | $ | 2,094,271 |  |  | $ | 26,272,711 |
Sub-advised funds and separately managed accounts | 8,319,661 |  |  | — |  |  | 8,319,661 |
| $ | 32,498,101 |  |  | $ | 2,094,271 |  |  | $ | 34,592,372 |
Revenue earned during the nine months ended September 30, 2020, and 2019, under contracts with clients include:
| Nine Months Ended September 30, 2020 |  |  |  |
| Investment advisory |  | Mutual fund administration, net |  | Total revenue
Proprietary funds | $ | 64,613,063 |  |  | $ | 5,131,104 |  |  | $ | 69,744,167 |
Sub-advised funds and separately managed accounts | 21,606,262 |  |  | — |  |  | 21,606,262 |
| $ | 86,219,325 |  |  | $ | 5,131,104 |  |  | $ | 91,350,429 |
| Nine Months Ended September 30, 2019 |  |  |  |
| Investment advisory |  | Mutual fund administration, net |  | Total revenue
Proprietary funds | $ | 72,093,686 |  |  | $ | 6,195,272 |  |  | $ | 78,288,958 |
Sub-advised funds and separately managed accounts | 22,427,805 |  |  | — |  |  | 22,427,805 |
| $ | 94,521,491 |  |  | $ | 6,195,272 |  |  | $ | 100,716,763 |
Revenue Recognition – Investment Advisory Fees The Company's investment advisory contracts have a single performance obligation (the investment advisory services provided to the client) as the promised services are not separately identifiable from other promises in the contracts and, therefore, are not distinct. All performance obligations to provide advisory services are satisfied over time, and the Company recognizes revenue as time passes. The fees we receive for our services under our investment advisory contracts are based on AUM, which changes based on the value of securities held under each advisory contract. These fees are thereby constrained and represent variable consideration, and they are excluded from revenue until the AUM on which our client is billed is no longer subject to market fluctuations. The Company also provides services to Unified Managed Account ("UMA") programs in which the Company provides its strategy model portfolio to the sponsor of the UMA. The Company is paid a portion of the UMA fee for its services by the program sponsor at a pre-determined rate based on assets in the program. UMA program revenue was $0.7 million and $0.5 million, for the three months ended September 30, 2020 and 2019, respectively, and $1.9 million and $1.3 million, for the nine months ended September 30, 2020 and 2019, respectively. UMA program revenue is included in investment advisory fees in the consolidated statements of income. Revenue Recognition – Variable Rate Fees The Company manages certain client accounts that provide for variable rate fees. These fees are calculated based on client investment results over rolling five-year periods. The Company records variable rate fees at the end of the contract measurement period because the variable fees earned are constrained based on movements in the financial markets. The Company did not record any variable rate fees during any of the three- or nine-month periods ended September 30, 2020 or September 30, 2019. The table below shows AUM subject to variable rate fees and the amount of variable rate fees that would be recognized based upon investment results as of September 30, 2020:
| As of September 30, 2020 |  |
| AUM subject to variable rate fees |  | Unearned variable rate fees
Contractual Period Ending: |  |  |
Quarter Ending December 31, 2020 | $ | 61,439,470 |  |  | $ | 470,319 |
Quarter Ending September 30, 2021 | 294,745,586 |  |  | 8,583,508 |
Total | $ | 356,185,056 |  |  | $ | 9,053,827 |
The contractual end dates highlight the time remaining until the variable rate fees are scheduled to be earned. The amount of variable rate fees that would be recognized based upon investment results as of September 30, 2020, will increase or decrease based on future client investment results through the end of the contractual period. The Company cannot assure that it will earn the unearned amounts set forth above. 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 performance obligations such as mutual fund administration, fund accounting, transfer agency, and other related functions. These services are performed concurrently under DHCM's agreement with the Funds, all performance obligations to provide these administrative services are satisfied over time, and the Company recognizes the related revenue as time progresses. Each Fund pays DHCM a fee for performing these services , which is calculated using an annual rate times the average daily net assets of each respective Fund share class. These fees are thereby constrained and represent variable consideration, and they are excluded from revenue until the AUM on which DHCM bills the Funds is no longer subject to market fluctuations. 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 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 and pays for these services on behalf of the Funds. Each vendor is independently responsible for fulfillment of the services it has been engaged to provide and negotiates its fees and terms directly with the management and board of trustees of the Funds. Each year, the Funds' board of trustees reviews the fee that each Fund pays to DHCM, 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 addition, DHCM advances the upfront commissions that are paid to brokers who sell Class C shares of the Funds. 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. Mutual fund administration gross and net revenue are summarized below:
| Three Months Ended September 30, |  |  |  | Nine Months Ended September 30, |  |
| 2020 |  | 2019 |  | 2020 |  | 2019
Mutual fund administration: |  |  |  |  |  |  |
Administration revenue, gross | $ | 5,571,022 |  |  | $ | 5,677,414 |  |  | $ | 16,144,295 |  |  | $ | 16,599,581 |
Fund related expense | (3,766,667) |  |  | (3,589,273) |  |  | (11,028,882) |  |  | (10,430,419) |
Revenue, net of related expenses | 1,804,355 |  |  | 2,088,141 |  |  | 5,115,413 |  |  | 6,169,162 |
C-Share financing: |  |  |  |  |  |  |
Broker commission advance repayments | 60,634 |  |  | 57,908 |  |  | 190,993 |  |  | 176,901 |
Broker commission amortization | (51,886) |  |  | (51,778) |  |  | (175,302) |  |  | (150,791) |
Financing activity, net | 8,748 |  |  | 6,130 |  |  | 15,691 |  |  | 26,110 |
Mutual fund administration revenue, net | $ | 1,813,103 |  |  | $ | 2,094,271 |  |  | $ | 5,131,104 |  |  | $ | 6,195,272 |
Income Taxes The Company accounts for current and deferred income taxes through an asset and liability approach. Deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The Company is subject to examination by federal and applicable state and local jurisdictions for various tax periods. The Company’s income tax positions are based on research and interpretations of the income tax laws and rulings in each of the jurisdictions in which it does business. Due to the subjectivity of interpretations of laws and rulings in each jurisdiction, the differences and interplay in tax laws among those jurisdictions, and the inherent uncertainty in estimating the final resolution of complex tax audit matters, the Company’s estimates of income tax liabilities may differ from actual payments or assessments. The Company regularly assesses its positions with regard to tax exposures and records liabilities for these uncertain tax positions and related interest and penalties, if any, according to the principles of Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 740, Income Taxes. The Company records interest and penalties within income tax expense on the income statement. See Note 8. On March 27, 2020, H.R. 748, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act”) was signed into legislation, which includes various tax provisions. The CARES Act did not have an impact on the Company's consolidated financial statements. Earnings Per Share Basic earnings per share (“EPS”) excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period, which includes unvested restricted shares. Diluted EPS reflects the dilutive effect of outstanding and unvested restricted stock units, if any. See Note 9. Recently Adopted Accounting Guidance In August 2018, FASB issued Accounting Standards Update ("ASU") No. 2018-13, “Fair Value Measurements.” This update makes certain revisions to existing disclosure requirements for fair value measurement. ASU No. 2018-13 does not change fair value measurements already required or permitted by existing standards. ASU No. 2018-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company adopted this guidance on January 1, 2020 without any impact on the Company’s consolidated financial statements.

X
- References No definition available. + Details
Name: | us-gaap_AccountingPoliciesAbstract
Namespace Prefix: | us-gaap_
Data Type: | xbrli:stringItemType
Balance Type: | na
Period Type: | duration

X
- Definition The entire disclosure for all significant accounting policies of the reporting entity. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -URI http://asc.fasb.org/topic&trid=2122369 + Details
Name: | us-gaap_SignificantAccountingPoliciesTextBlock
Namespace Prefix: | us-gaap_
Data Type: | nonnum:textBlockItemType
Balance Type: | na
Period Type: | duration