Current Status, as of August 31, 2012:
Interactive Brokers Group, Inc. (the "Company") is current with all of its SEC reporting obligations and is in compliance with NASDAQ Listing Rules.
In summary, as of June 2012, the Company has reported its total equity ($4.997 billion at June 30, 2012) to include all noncontrolling interests as permanent equity, consistent with its historical reporting.
Due to the accounting issue outlined below, the Company restated its historical total equity for periods prior to June 6, 2012 to exclude certain noncontrolling interests, which were required to be reported as "redeemable" noncontrolling interests, or "temporary" equity, for such periods. Temporary equity accounting also required the Company to restate its historically reported earnings per share, as described below.
Total net income reported by the Company was not affected by the accounting issue.
Timeline and Key Points Related to the Accounting Issue:
- In May 2012, in connection with its review of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, Deloitte & Touche LLP ("Deloitte"), the Company's independent registered public accounting firm, questioned whether noncontrolling interests in the Company's subsidiary, IBG LLC ("LLC") held by LLC's largest shareholder, IBG Holdings LLC ("Holdings"), should be classified as permanent or temporary equity in the Company's consolidated statement of financial condition (balance sheet). Because Deloitte was unable to complete its review of that Form 10-Q and the necessary management certifications could not be included in the filing, the filing was deemed to be deficient. The deficiency triggered a violation of Nasdaq Listing Rules and the Company issued a press release to that effect on May 22, 2012. Nasdaq rules provide a cure period of up to 180 days and Nasdaq accepted the Company's plan to regain compliance.
- Noncontrolling interests represent the ownership of Holdings in LLC (the "Noncontrolling Interests"). The accounting issue arose from a contractual provision of the Exchange Agreement among the Company, Holdings and LLC. The Exchange Agreement, in its original form, permitted Holdings to request redemption of its membership interests in LLC and allowed for two methods of funding such redemptions: under the so called "Public Offering Funding Method", the Company would purchase LLC interests from Holdings using funds raised through a public offering of an equivalent number of shares of its Class A common stock; and under the so called "Alternative Funding Method", upon mutual agreement of the Company, Holdings and LLC, the redemption of Holdings membership interests could be effected using cash on hand at LLC. Deloitte questioned whether Holdings' control of the Company would have allowed Holdings to control the decisions of the Company and LLC to redeem for cash under the Alternative Funding Method. Under U.S. GAAP, if the cash redemption decision was not solely within the control of the Company, Holdings would have a claim on LLC's cash or other assets, requiring the Noncontrolling Interests to be accounted for as temporary equity and marked to redemption value (i.e., the public share price of the Company's common stock). While it was not the original intention of the parties to the agreement that Holdings control redemption decisions under the Alternative Funding Method, there was enough uncertainty as to the proper accounting that we determined to seek guidance from the SEC's Office of the Chief Accountant.
- For the avoidance of doubt, on June 6, 2012, the parties to the Exchange Agreement executed an amendment to the Exchange Agreement (the "Amendment") that eliminated the Alternative Funding Method as an option for funding redemptions. As amended, the Public Offering Funding Method is the only method prescribed in the Exchange Agreement for funding a redemption of membership interests in LLC.
- In June 2012, we requested an interpretation from the SEC as to the proper accounting for the Noncontrolling Interests. Following several discussions with SEC staff and further analyses, in August 2012 the SEC provided its view that, for periods prior to the Amendment, the Noncontrolling Interests should have been accounted for as redeemable noncontrolling interests, or temporary equity. However, the SEC agreed with the Company that for periods subsequent to the Amendment, the Company could revert to its historical accounting for the Noncontrolling Interests as permanent equity. As a result, the Company concluded that, for periods prior to the Amendment, there had been an error in its consolidated financial statements. This error had no effect on reported net income attributable to common stockholders or cash flows, but did affect the classification of the Noncontrolling Interests and earnings per share during the period from the Company's May 3, 2007 initial public offering through June 6, 2012. As shown in the restated financial statements and supplementary data, this reclassification to redeemable noncontrolling interests, together with the valuation at the public share price, resulted in large increases to temporary equity and corresponding decreases to stockholders' equity. While combined permanent and temporary equity remained unchanged, under this accounting convention reported (permanent) equity at the restatement dates was negative.
- The treatment of the Noncontrolling Interests as temporary equity was based on the contingency that the Company might have been required to redeem all Noncontrolling Interests for cash. Except for previously reported cash redemptions, aggregating $114 million, that occurred in 2008, 2009 and 2010, Noncontrolling Interests have not been redeemed for cash historically.
- For periods after the June 6, 2012 Amendment, the Company concluded (consistent with the SEC's interpretation) that the Noncontrolling Interests should be reported as permanent equity. Hence, as reported in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, the classification of the Noncontrolling Interests as permanent equity in our balance sheet subsequent to June 6, 2012 is the same as it was in historical periods before the amended 2011 Annual and March 31, 2012 Quarterly Reports were filed.
- As a result of the change in the classification of the Noncontrolling Interests as temporary equity, the calculation of earnings per share ("EPS") was also affected. (The EPS effects are detailed in the Company's amended Form 10-K/A for the year ended December 31, 2011.) As redeemable equity, the Noncontrolling Interests were revalued at the public share price of the Company's common stock, i.e., at above the "fair value" of the LLC interests subject to redemption. This difference between the fair value of LLC and the fair value of the Company represents the Company's share of the tax benefits arising from the sale of stock in May 2007 at the Company's initial public offering and in connection with the August 2011 member interest redemption transaction, or $57.6 million, that has been retained by the Company. The recognition of the cash redemption feature does not affect net income attributable to common stockholders, but, specifically for the calculation of EPS, allocates a portion of earnings to this other-than-fair-value redemption right that would otherwise have been available to common stockholders.
- On August 13, 2012, the Audit Committee of the Board of Directors of the Company concluded, with the concurrence of management, that the previously issued consolidated financial statements for the three years ended December 31, 2011 should no longer be relied upon and should be restated. This conclusion was reported in the Form 8-K filed with the SEC on August 15, 2012.
- On August 31, 2012, after completing the necessary restatements, the Company filed the following reports with the SEC:
- Amended Annual Report on Form 10-K/A for the year ended December 31, 2011;
- Amended Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2012; and
- Quarterly Report on Form 10-Q for the quarter ended June 30, 2012.
- The amended reports contain detailed disclosures of the issues described in this summary. In addition to the change in classification relating to the reporting of the Noncontrolling Interests, the amended reports also disclose two other errors, which had been disclosed in prior filings: an error in recording share issuances under stock compensation award plans, which was corrected in connection with the preparation of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2012; and an adjustment to record the timely recognition of the effect of equity award plan forfeiture provisions, which was corrected in the original filing of the 2011 Annual Report. These errors were disclosed as immaterial restatements in the respective original filings.
- The amended reports also contain disclosures about internal control considerations. A significant restatement of financial information - in this case, associated with the review and interpretation of complex accounting issues, specifically, redeemable noncontrolling interests in LLC attributable to Holdings and stock based compensation - requires the Company to conclude that a material weakness existed in its internal controls over financial reporting which, together with a remediation plan, is explained in detail in Item 9A. (Controls and Procedures) in the Form 10-K/A for the year ended December 31, 2011.
- On September 5, 2012, the Company received a letter from Nasdaq confirming that it has regained compliance with Nasdaq Listing Rules.
Public Documents Related to this Issue:
Relevant documents, including Forms 8-K, press releases and Forms 10-K/A and 10-Q/A, filed or published between May 15, 2012 and August 31, 2012, can be found on the Investor Relations page of IB's website.