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Significant Accounting Policies | 3 Months Ended
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Sep. 30, 2021
Accounting Policies [Abstract] |
Significant Accounting Policies | Significant Accounting Policies Basis of Presentation The accompanying unaudited, condensed, consolidated financial statements as of September 30, 2021 and December 31, 2020, and for the three- and nine-month periods ended September 30, 2021 and 2020, 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"), with the instructions to Form 10-Q, and with 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 as of 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, 2020 (the "2020 Form 10-K"), as filed with the SEC. Operating results for the three- and nine-month periods ended September 30, 2021 are not necessarily indicative of the results the Company may expect for the full fiscal year ending December 31, 2021. For further information regarding the risks to the Company's business, refer to the consolidated financial statements and notes thereto included in the 2020 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 as of 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 consolidation analysis at the individual Fund level and has concluded that the Funds are voting rights entities ("VREs") because the structure of the Funds is such that the shareholders are deemed to have the power through voting rights to direct the activities that most significantly impact each Fund's economic performance. To the extent material, the Funds are consolidated if Company ownership, directly or indirectly, represents a majority interest (greater than 50%). The Company records redeemable noncontrolling interest in consolidated investments for which the Company's ownership is less than 100%. The Company has consolidated the Diamond Hill Large Cap Concentrated Fund, the Diamond Hill International Fund, and the Diamond Hill Global Fund (collectively, the "Consolidated Funds") as of September 30, 2021. DHCM is the investment manager of Diamond Hill Micro Cap Fund, LP (“DHMF”), a Delaware limited partnership, and is the managing member of Diamond Hill Fund GP, LLC (the “General Partner”), which is the general partner of DHMF. DHCM is wholly owned by, and consolidated with, the Company. Further, DHCM, through its control of the General Partner, has the power to direct DHMF’s economic activities and the right to receive investment advisory fees that may be significant from DHMF. DHMF commenced operations on June 1, 2021 and its underlying assets consist primarily of marketable securities. The Company concluded DHMF was a variable interest entity (“VIE”) given that: (i) DHCM has disproportionately less voting interest than economic interest, and (ii) DHMF's limited partners have full power to remove the General Partner (which is controlled by the Company) due to the existence of substantive kick-out rights. In addition, substantially all of DHMF's activities are conducted on behalf of the General Partner, which has disproportionately few voting rights. The Company concluded it is not the primary beneficiary of DHMF as it lacks the power to control DHMF, since DHMF's limited partners have single-party kick-out rights and can unilaterally remove the General Partner without cause. DHCM’s investments in DHMF are reported as a component of the Company’s investment portfolio and valued at DHCM’s respective share of DHMF's net income or loss. Gains and losses attributable to changes in the value of DHCM’s interests in DHMF are included in the Company’s reported investment income. The Company’s exposure to loss as a result of its involvement with DHMF is limited to the amount of its investment. DHCM is not obligated to provide, and has not provided, financial or other support to DHMF, except for its investments to date and its contractually provided investment advisory responsibilities. The Company has not provided liquidity arrangements, guarantees, or other commitments to support DHMF’s operations, and DHMF’s creditors and interest holders have no recourse to the general credit of the Company. 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, sub-advised funds, and a private 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 either September 30, 2021, or December 31, 2020. Accounts receivable from the Funds were $11.2 million as of September 30, 2021, and $10.5 million as of December 31, 2020. Investments Management determines the appropriate classification of its investments at the time of purchase and re-evaluates its determination for 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 where 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 DHCM investment advisory and fund administration contracts. Investment advisory and administration fees, generally calculated as a percentage of assets under management ("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 performance-based fees.
Revenue earned during the three months ended September 30, 2021 and 2020 under contracts with clients include:
| Three Months Ended September 30, 2021
| Investment advisory |  | Mutual fund administration, net |  | Total revenue
Proprietary funds | $ | 28,605,297 |  |  | $ | 3,206,175 |  |  | $ | 31,811,472 |
Sub-advised funds and separately managed accounts (including $11.9 million of performance-based fees) | 23,243,082 |  |  | — |  |  | 23,243,082 |
| $ | 51,848,379 |  |  | $ | 3,206,175 |  |  | $ | 55,054,554 |
| 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 |
Revenue earned during the nine months ended September 30, 2021 and 2020 under contracts with clients include:
| Nine Months Ended September 30, 2021
| Investment advisory |  | Mutual fund administration, net |  | Total revenue
Proprietary funds | $ | 85,568,472 |  |  | $ | 9,004,731 |  |  | $ | 94,573,203 |
Sub-advised funds and separately managed accounts (including $11.9 million of performance-based fees) | 44,565,437 |  |  | — |  |  | 44,565,437 |
| $ | 130,133,909 |  |  | $ | 9,004,731 |  |  | $ | 139,138,640 |
| 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 |
Revenue Recognition – Investment Advisory Fees DHCM's investment advisory contracts with clients have a single performance obligation because the contracted services are not separately identifiable from other obligations in the contracts and therefore, are not distinct. All performance obligations to provide investment advisory services are satisfied over time by DHCM and the Company recognizes revenue through DHCM as time passes. The fees DHCM receives for its services under its investment advisory contracts are based on AUM, which changes based on the value of securities held under each investment advisory contract. These fees are thereby constrained and represent variable consideration, and they are excluded from revenue until the AUM on which DHCM's client is billed is no longer subject to market fluctuations. DHCM also provides its strategy model portfolio and related services to sponsors of model delivery programs. DHCM is paid a model delivery fee for its services by the program sponsor at a pre-determined rate based on the amount of assets in the program. Model delivery program revenues were $1.4 million and $0.7 million for the three months ended September 30, 2021 and 2020, respectively, and $3.5 million and $1.9 million for the nine months ended September 30, 2021 and 2020, respectively. Model delivery program revenue is included in investment advisory fees in the consolidated statements of income. Revenue Recognition – Performance-Based Fees DHCM manages certain client accounts that pay performance-based fees. These fees are calculated based on client investment results over rolling five-year periods. The Company records performance-based fees when it is probable that a significant reversal of the revenue will not occur. The Company recorded $11.9 million of performance-based fees during the three- and nine-month periods ended September 30, 2021 as a significant performance-based agreement reached its first five-year measurement term on September 30, 2021. The Company did not record any performance-based fees during either of the three- and nine-month periods ended September 30, 2020. The table below shows AUM subject to performance-based fees and the amount of unearned performance-based fees that would be recognized based upon investment results as of September 30, 2021:
| As of September 30, 2021
| AUM subject to performance-based fees |  | Unearned performance-based fees
Contractual Measurement Period Ending: |  |  |
Quarter Ending September 30, 2022 | $ | 390,974,947 |  |  | $ | — |
Total | $ | 390,974,947 |  |  | $ | — |
The contractual end dates highlight the time remaining until the performance-based fees are scheduled to be earned. The amount of performance-based fees that would be recognized based upon investments results as of September 30, 2021, will increase or decrease based on future client investment results through the end of the contractual period. 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 multiplied by 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. In fulfilling a portion of its role under the administration agreement with the Funds, DHCM 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 considers 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, prior to Funds' elimination of Class C Shares, DHCM advanced the upfront commissions that were paid to brokers who sold those Class C shares. These advances were capitalized and amortized over 12 months to correspond with the repayments DHCM received from the principal underwriter to recoup this commission advancement. During the first quarter of 2021, Class C shares were liquidated with the proceeds transferring to Investor Class shares. As a result, no financing activity will be recognized in future periods. Mutual fund administration gross and net revenue are summarized below:
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
Mutual fund administration: |  |  |  |  |  |  |
Administration revenue, gross | $ | 7,436,287 |  |  | $ | 5,571,022 |  |  | $ | 22,466,306 |  |  | $ | 16,144,295 |
Fund related expense | (4,230,112) |  |  | (3,766,667) |  |  | (13,446,649) |  |  | (11,028,882) |
Revenue, net of related expenses | 3,206,175 |  |  | 1,804,355 |  |  | 9,019,657 |  |  | 5,115,413 |
C-Share financing: |  |  |  |  |  |  |
Broker commission advance repayments | — |  |  | 60,634 |  |  | 33,595 |  |  | 190,993 |
Broker commission amortization | — |  |  | (51,886) |  |  | (48,521) |  |  | (175,302) |
Financing activity, net | — |  |  | 8,748 |  |  | (14,926) |  |  | 15,691 |
Mutual fund administration revenue, net | $ | 3,206,175 |  |  | $ | 1,813,103 |  |  | $ | 9,004,731 |  |  | $ | 5,131,104 |
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. 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. See Note 9.

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- Definition The entire disclosure for all significant accounting policies of the reporting entity. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=123372394&loc=d3e18726-107790 Reference 2: 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
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