Summary of Significant Accounting Policies

12 Months Ended

Oct. 31, 2019

Summary of Significant Accounting Policies [Abstract]

Summary of Significant Accounting Policies

1.Summary of Significant Accounting Policies

Business and organization

Eaton Vance Corp. and its subsidiaries (Company) manage investment funds and provide investment management and advisory services to high-net-worth individuals and institutions in the United States, Europe, the Asia Pacific region and certain other international markets. The Company distributes its funds and individual managed accounts principally through financial intermediaries. The Company also commits significant resources to serving institutional and high-net-worth clients who access investment management services on a direct basis and through investment consultants.

Revenue is largely dependent on the total value and composition of assets under management, which include sponsored funds and separate accounts. Accordingly, fluctuations in financial markets and changes in the composition of assets under management affect revenue and the results of operations.

Basis of presentation

The preparation of the Company’s Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make judgments, estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and related notes to the Consolidated Financial Statements. However, due to the inherent uncertainties in making estimates, actual results could differ from those estimates.

Adoption of new accounting standards

The Company adopted the following accounting standards as of November 1, 2018:

Revenue recognition – Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers

Financial instruments – ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities

Statement of cash flows – ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments

Statement of cash flows – ASU 2016-18, Restricted Cash

Revenue recognition

This guidance seeks to improve comparability by providing a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The guidance also changes the accounting for certain contract costs and revises the criteria for determining if an entity is acting as a principal or agent in certain arrangements. The Company adopted the new revenue recognition guidance using a full retrospective approach.

The adoption of this guidance did not result in any significant changes to the timing of recognition and measurement of revenue or recognition of costs incurred to obtain and fulfill revenue contracts; however, the presentation of certain revenue and expense balances was affected. Notably, fund subsidies of $26.9 million and $13.9 million previously included as a component of fund-related expenses in the Consolidated Statements of Income for the years ended October 31, 2018 and 2017, respectively, are now presented as a contra-revenue component of management fees. Separately, in applying the revised

principal-versus-agent guidance to the Company’s various distribution contracts for certain classes of shares in sponsored funds with a front-end load commission pricing structure, the entire front-end load commission (including both the underwriting commission retained by the Company and the sales charge paid to the selling broker-dealer) is now presented on a gross basis (i.e., included within distribution and underwriting fee revenue) and the sales charge paid to the selling broker-dealer is now presented within distribution expense in the Consolidated Statements of Income. Prior to the adoption of ASU 2014-09, only the underwriting commission retained by the Company was presented within distribution and underwriting fee revenue as the sales charge paid to the selling broker-dealer was recorded net. As a result of adopting ASU 2014-09, distribution and underwriter fees and distribution expense each increased by approximately $17.1 million and $17.0 million for the years ended October 31, 2018 and 2017, respectively. Lastly, contingent deferred sales charges received, which were previously recorded as a reduction of deferred sales commission assets, are now recorded as revenue within the distribution and underwriting fees line item in the Consolidated Statements of Income.

The following tables present the effect of the changes in presentation made to prior periods which are attributable to the retrospective adoption of ASU 2014-09:

	October 31, 2018
(in thousands)		As Previously Reported		Reclassification		As Restated
Revenue:
Management fees	$	1,481,896	$	(22,710)	$	1,459,186
Distribution and underwriter fees		80,478		16,893		97,371
Service fees		123,500		(1,269)		122,231
Other revenue		16,375		(2,741)		13,634
Total revenue		1,702,249		(9,827)		1,692,422
Expenses:
Compensation and related costs		604,631		-		604,631
Distribution expense		141,418		23,615		165,033
Service fee expense		113,337		(6,506)		106,831
Amortization of deferred sales
commissions		18,394		-		18,394
Fund-related expenses		64,538		(26,936)		37,602
Other expenses		204,729		-		204,729
Total expenses		1,147,047		(9,827)		1,137,220
Operating income	$	555,202	$	-	$	555,202

	October 31, 2017
(in thousands)		As Previously Reported		Reclassification		As Restated
Revenue:
Management fees	$	1,318,141	$	(9,121)	$	1,309,020
Distribution and underwriter fees		78,776		16,777		95,553
Service fees		119,962		(2,442)		117,520
Other revenue		12,131		(2,113)		10,018
Total revenue		1,529,010		3,101		1,532,111
Expenses:
Compensation and related costs		553,952		-		553,952
Distribution expense		132,873		24,039		156,912
Service fee expense		112,519		(7,071)		105,448
Amortization of deferred sales
commissions		16,239		-		16,239
Fund-related expenses		48,995		(13,867)		35,128
Other expenses		181,674		-		181,674
Total expenses		1,046,252		3,101		1,049,353
Operating income	$	482,758	$	-	$	482,758

Financial instruments – recognition and measurement

This guidance requires substantially all equity investments in unconsolidated entities (other than those accounted for under the equity method of accounting) with a readily determinable fair value to be measured at fair value, with changes in fair value recognized in net income. The guidance effectively eliminates the ability, at acquisition, to classify an equity investment as available-for-sale with holding gains and losses presented in other comprehensive income until realized. The Company adopted this provision of the new ASU using a modified retrospective approach.

The Company held $10.3 million of available-for-sale equity investments in unconsolidated sponsored funds at October 31, 2018. Upon adoption, the Company recognized a $3.7 million cumulative effect adjustment (increase), net of related income tax effects, to reclassify unrealized holding gains attributable to these investments previously recognized in accumulated other comprehensive income (loss) to retained earnings. Prior period investments in unconsolidated sponsored mutual funds and private funds previously classified as trading and available-for-sale are now referred to as “equity securities” within the notes to the financial statements; the prior-period treatment of gains or losses arising from changes in the fair value of these investments did not change.

The guidance also provides for an election to measure certain investments without a readily determinable fair value at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the same or similar instrument of the same issuer (cost method). The Company adopted this provision of the ASU using a prospective approach.

Statement of cash flows – classification

This standard clarifies how certain cash receipts and cash payments are classified and presented on the Consolidated Statement of Cash Flows. The Company adopted ASU 2016-15 using a retrospective

approach. The adoption of this standard did not result in any changes to the classification of prior period activity on the Company’s Consolidated Statements of Cash Flows.

Statement of cash flows – restricted cash

This standard requires the inclusion of restricted cash and restricted cash equivalents (restricted cash) with cash and cash equivalents when reconciling the beginning and ending amounts on the Consolidated Statement of Cash Flows. The Company adopted this new guidance using a retrospective approach. Accordingly, previously reported net changes in restricted cash balances, which totaled $174.8 million and $16.2 million for the years ended October 31, 2018 and 2017, respectively, are no longer presented as a component of the Company’s net cash provided by operating activities for those periods. Conversely, an increase in cash due to initial consolidation was added as a separate component of net cash provided by operating activities for the years ended October 31, 2018 and 2017 to reflect the restricted cash balance of a CLO entity initially consolidated during that period. A reconciliation of cash, cash equivalents and restricted cash for all balance sheet periods presented is included in Note 3.

In addition to the standards described above, the Company also early-adopted the portion of ASU 2018-13, Fair Value Measurement: Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, related to the removal of certain fair value disclosure requirements. The fair value disclosures required to be added under this new guidance will be effective for the fiscal year that begins on November 1, 2020.Where applicable, the Company’s significant accounting policies provided below have been updated to reflect the adoption of these new accounting standards as of November 1, 2018.

Principles of consolidation

The Consolidated Financial Statements include the accounts of the Company and its controlled affiliates. All legal entities are evaluated for consolidation under two primary consolidation models; namely, the voting interest entity model and the variable interest entity (VIE) model. Both consolidation models require the Company to consolidate a legal entity when it has a controlling financial interest in that entity. The Company recognizes non-controlling interests (held by third parties) in consolidated entities in which the Company’s ownership is less than 100 percent. All intercompany accounts and transactions have been eliminated in consolidation.

Under the voting interest entity model, the Company consolidates any voting interest entity in which the Company is considered to have a controlling financial interest, which is typically when the Company’s voting ownership exceeds 50 percent or where the Company otherwise has the power to govern the financial and operating policies of the entity. Voting interest entities primarily include wholly- and majority-owned affiliates through which the Company conducts its business.

The Company evaluates any VIEs in which the Company has a variable interest for consolidation. A VIE is an entity in which either: (a) the equity investment at risk is not sufficient to permit the entity to finance its own activities without additional financial support; or (b) where, as a group, the holders of the equity investment at risk do not possess: (1) the power through voting or similar rights to direct the activities that most significantly affect the entity’s economic performance, (2) the obligation to absorb expected losses or the right to receive expected residual returns of the entity or (3) proportionate voting and economic interests (in instances in which substantially all of the entity’s activities either involve or are conducted on

behalf of one or more investors with disproportionately fewer voting rights). If an entity has any of these characteristics, it is considered a VIE and is required to be consolidated by its primary beneficiary.

The Company is deemed to be the primary beneficiary of a VIE when it has a variable interest that provides it with both (1) the power to direct the activities that most significantly affect the VIE’s economic performance and (2) the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE. VIEs consolidated by the Company primarily include certain open‐end registered investment companies that it sponsors (sponsored funds) and collateralized loan obligation (CLO) entities. Additional considerations relevant to the application of the VIE model to sponsored funds and CLO entities are discussed below.

The Company may consolidate one or more sponsored funds or CLO entities during a given reporting period. Due to the similarity of risks related to the Company’s involvement with each of these entities, and disclosures required under the VIE model, certain disclosures regarding these entities are aggregated.

Consolidation of sponsored funds

With limited exceptions, each of the Company’s sponsored funds is organized as a separately managed series of a series trust. Each series trust contains multiple funds that issue equity interests to shareholders. All assets of a fund within a series trust irrevocably belong to the shareholders of that fund and are subject to the liabilities of that fund; under no circumstances are the liabilities of one fund payable by another fund in the series trusts. The Company’s series trusts have no equity investment at risk; rather, all equity is issued at the individual fund level. However, decisions regarding the trustees of the series trust and certain key activities of funds within the series trust, such as appointment of each fund’s investment adviser, typically reside at the series trust level. As a result, shareholders of funds organized as series of a series trust lack the ability to control the key decision-making processes that most significantly affect the economic performance of the fund. Accordingly, the Company believes that each series trust is a VIE and each component fund within the series trust is a silo that should be evaluated for consolidation as a separate VIE. Having concluded that each silo is a VIE for accounting purposes, the primary beneficiary evaluation is focused on an analysis of economic interests in each silo.

The Company regularly seeds new sponsored funds and may hold a significant interest in the shares of a sponsored fund during the seed investment stage when the sponsored fund’s investment track record is being established. The Company has concluded that, to the extent that the Company’s interest in a sponsored fund is limited to: (1) market-based fees earned from the fund that are commensurate with the level of effort to provide the service; and (2) other interests that, in aggregate, would absorb an insignificant amount of variability in the fund, the Company’s asset management agreements would not be considered a variable interest that provides the Company with the power to direct the activities of the fund and therefore the Company would not be required to consolidate the fund. The Company has concluded that its fees earned from advisory agreements with sponsored funds in which the Company holds a significant (at least 10 percent) ownership interest in the fund do represent variable interests that, in combination with the ownership interest, convey both power and significant economic exposure (both characteristics of a controlling financial interest) to the Company, and therefore the Company would be deemed to be the primary beneficiary and required to consolidate the funds.

Upon consolidation, management fee revenue earned on, as well as the Company’s investments in, consolidated sponsored funds are eliminated. The Company retains the specialized accounting treatment of sponsored funds in consolidation whereby the underlying investments are carried at fair value, with corresponding changes in fair value reflected in gains (losses) and other investment income, net, in the

Company’s Consolidated Statements of Income. When the Company is no longer deemed to hold a controlling financial interest in a sponsored fund, the Company deconsolidates the sponsored fund and removes the related assets, liabilities and non-controlling interests from its balance sheet and the Company’s remaining equity investment is held at fair value. Because consolidated sponsored funds carry their assets and liabilities at fair value, there is no incremental gain or loss recognized upon deconsolidation.

Consolidation of CLO entities

In the normal course of business, the Company provides collateral management services to, and in certain cases invests in, sponsored CLO entities. The Company evaluates such CLO entities under the VIE model as the equity investment at risk is not sufficient to finance the activities of these entities, which are primarily financed through the issuance of senior debt obligations. The fees paid to the Company as collateral manager are not considered to be variable interests in sponsored CLO entities in cases where each of the following conditions are met: (1) the fees paid to the Company are commensurate with the level of effort required to provide the collateral management services, (2) the Company does not hold other interests in the CLO entity that individually, or in the aggregate, would absorb more than an insignificant amount (less than 10 percent) of the CLO entity’s expected losses or residual returns, and (3) the terms of the collateral management agreement between the Company and the CLO entity are consistent with the terms for similar services negotiated at arm’s length. Unless each of these criteria is met, the Company is deemed to have a variable interest in the sponsored CLO entity and would be required to consolidate the VIE if the Company is the primary beneficiary.

In assessing whether the Company is the primary beneficiary of a sponsored CLO entity, the Company considers its role as collateral manager and the significance of other interests in the CLO entity that are held by the Company. As collateral manager, the Company has the power to direct the activities that most significantly affect the economic performance of these entities. In cases where the Company holds at least 10 percent of the subordinated interests of a sponsored CLO entity, the Company is deemed to have the obligation to absorb losses of, or the right to receive benefits from, the CLO entity that could potentially be significant to the CLO entity. Accordingly, the Company deems itself to be the primary beneficiary of a CLO entity, and thus consolidates the entity, in cases where the Company both: (1) provides collateral management services to the CLO entity and (2) holds at least 10 percent of the subordinated interests of the CLO entity.

Upon consolidation, management fee revenue earned on, as well as the Company’s subordinated interests in, consolidated CLO entities are eliminated. The Company applies the measurement alternative to Accounting Standard Codification (ASC) 820 related to fair value measurement for collateralized financing entities upon initial consolidation and for the subsequent measurement of financial assets and liabilities of these entities. The measurement alternative requires reporting entities to use the more observable of the fair value of the financial assets or the fair value of the financial liabilities to measure both the financial assets and the financial liabilities of a collateralized financing entity. Any gain or loss resulting from the initial application of the measurement alternative is reflected in earnings attributable to the reporting entity. Subsequent to initial consolidation, the application of the measurement alternative requires the Company to recognize in earnings amounts that reflect the equivalent of its own economic interests in the CLO entity, which generally include both changes in fair value of any retained investment and management fees received as compensation for collateral management services. When the Company is no longer deemed to be the primary beneficiary of a CLO entity, the Company deconsolidates the CLO entity and removes the related assets and liabilities from its balance sheet. Because assets and liabilities of consolidated CLO entities in the securitization phase are carried at fair value pursuant to the measurement

alternative to ASC 820 previously described, there is no incremental gain or loss recognized upon deconsolidation.

Segment information

Management has determined that the Company operates in one segment, namely as an investment adviser managing funds and separate accounts. The Company’s determination that it operates in one business segment is based primarily on the fact that the Company’s Chief Executive Officer reviews the Company’s financial performance at an aggregate level. All of the business services provided by the Company relate to investment management and are subject to similar regulatory frameworks. Investment management teams at the Company are generally not aligned with specific business lines or distribution channels; in many instances, the investment professionals who manage the Company’s sponsored funds are the same investment professionals who manage the Company’s separately managed accounts.

Cash and cash equivalents

Cash and cash equivalents consists principally of cash held in banks as well as cash equivalents that may consist of short-term, highly liquid investments in money market mutual funds, commercial paper, certificates of deposit and holdings of Treasury and government agency securities that are readily convertible to cash. Cash equivalents have remaining maturities of less than three months, as determined upon purchase by the Company, and are stated at fair value or amortized cost, which approximates fair value due to the short-term maturities of these investments. Cash deposits maintained at a financial institution may exceed the federally insured limit.

Restricted cash

Restricted cash includes cash collateral required for margin accounts established to support derivative positions and other segregated cash held to comply with certain regulatory requirements. Such derivatives are used to hedge certain of the Company’s investments in consolidated sponsored funds and separately managed accounts seeded for business development purposes (consolidated seed investments). Restricted cash also includes cash and cash equivalents held by consolidated sponsored funds and consolidated CLO entities, which are not available to the Company for its general operations.

Investments

Debt securities held at fair value

Debt securities held at fair value consist of certificates of deposit, commercial paper and corporate debt obligations with remaining maturities of three months to 12 months upon purchase by the Company, as well as investments in debt securities held in consolidated sponsored funds and separately managed accounts. Debt securities are measured at fair value with net realized and unrealized holding gains or losses, and interest and dividend income reflected as a component of gains (losses) and other investment income, net, on the Company’s Consolidated Statements of Income. The specific identified cost method is used to determine the realized gains or losses on all debt securities sold.

Equity securities held at fair value

Equity securities consist primarily of domestic and foreign equity securities held in consolidated sponsored funds and separately managed accounts and the Company’s investments in non-consolidated funds. Equity securities and investments in non-consolidated funds with readily determinable fair values are measured

at fair value based on quoted market prices and published net asset values per share, respectively. Investments in non-consolidated funds without readily determinable fair values are measured at fair value based on the net asset value (or equivalent) of the fund shares held.

Equity investments without readily determinable fair values are measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the same or similar instruments of the same issuer (cost method). Investments held at cost are qualitatively evaluated for impairment each reporting period. If that qualitative assessment indicates that an investment held at cost is impaired, the fair value of the investment is estimated and an impairment loss is recognized equal to the difference between the estimated fair value of the investment and its carrying amount. If an equity security valued under the cost method subsequently has a readily determinable fair value or if the Company irrevocably elects to measure the equity security at fair value, the cost method is no longer applied to such security.

Net realized and unrealized holding gains or losses on equity securities, any observable price changes and/or impairment losses attributable to investments held at cost, and dividend income are all reflected within gains (losses) and other investment income, net, on the Company’s Consolidated Statements of Income. The specific identified cost method is used to determine the realized gains or losses on all equity securities sold.

Investments in non-consolidated CLO entities

Investments in non-consolidated CLO entities are carried at amortized cost unless impaired. The excess of actual and anticipated future cash flows over the initial investment at the date of purchase is recognized in gains (losses) and other investment income, net, over the life of the investment using the effective yield method. The Company reviews cash flow estimates throughout the life of each non-consolidated CLO entity. If the updated estimate of future cash flows (taking into account both timing and amounts) is less than the last estimate, an impairment loss is recognized to the extent the carrying amount of the investment exceeds its fair value.

Investments in equity method investees

Investments in non-controlled affiliates in which the Company’s ownership ranges from 20 to 50 percent, or in which the Company is able to exercise significant influence, but not control, are accounted for under the equity method of accounting. Under the equity method of accounting, the Company’s share of the investee’s underlying net income or loss is recorded as equity in net income of affiliates, net of tax. Distributions received from investees reduce the Company’s investment balance and are classified as cash flows either from operating activities or investing activities in the Company’s Consolidated Statements of Cash Flows as determined using the cumulative earnings method. Investments in equity method investees are evaluated for impairment as events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the carrying amounts of the assets exceed their respective fair values, additional impairment tests are performed to measure the amounts of the impairment losses, if any.

Fair value measurements

The accounting standards for fair value measurement provide a framework for measuring fair value and require disclosures of how fair value is determined. Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date.

The accounting standards establish a fair value measurement hierarchy, which requires an entity to maximize the use of observable inputs where available. This fair value measurement hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

The Company utilizes third-party pricing services to value investments in various asset classes, including interests in senior floating-rate loans and other debt obligations, derivatives and certain foreign equity securities, as further discussed below. Valuations provided by the pricing services are subject to exception reporting that identifies securities with significant movements in valuation, as well as investments with no movements in valuation. These exceptions are reviewed by the Company on a daily basis. The Company compares the price of trades executed by the Company to the valuations provided by the third-party pricing services to identify and research significant variances. The Company periodically compares the pricing service valuations to valuations provided by a secondary independent source when available. Market data provided by the pricing services and other market participants, such as the Loan Syndication and Trading Association (LSTA) trade study, is reviewed by the Company to assess the reliability of the provided data. The Company’s Valuation Committee reviews the general assumptions underlying the methodologies used by the pricing services to value various asset classes at least annually. Throughout the year, members of the Company’s Valuation Committee or its designees meet with pricing service providers to discuss any significant changes to the service providers’ valuation methodologies or operational processes.

Assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories based on the nature of the inputs that are significant to the fair value measurements in their entirety. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value measurement hierarchy. In such cases, an investment’s classification within the fair value measurement hierarchy is based on the lowest level of input that is significant to the fair value measurement.

Level 1Unadjusted quoted market prices in active markets for identical assets or liabilities at the reporting date.

Level 2Observable inputs other than Level 1 unadjusted quoted market prices, such as quoted market prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities that are not active, and inputs other than quoted prices that are observable or corroborated by observable market data.

Level 3Unobservable inputs that are supported by little or no market activity.

Derivative financial instruments

The Company may utilize derivative financial instruments to hedge market, interest rate, commodity and currency risks associated with its investments in separate accounts and certain consolidated sponsored funds seeded for business development purposes, exposures to fluctuations in foreign currency exchange rates associated with investments denominated in foreign currencies and interest rate risk inherent in debt offerings. In addition, certain consolidated funds may enter into derivative financial instruments within their portfolios to achieve stated investment objectives. The Company does not use derivative financial instruments for speculative purposes.

The Company records all derivative financial instruments as either assets or liabilities on its Consolidated Balance Sheets and measures these instruments at fair value. Derivative transactions are presented on a gross basis in the Company’s Consolidated Balance Sheets. Changes in the fair value of derivative financial instruments that are not designated in a hedge relationship are recognized in earnings in the current period.

Deferred sales commissions

Sales commissions paid to broker‐dealers in connection with the sale of certain classes of shares of sponsored open-end and private funds are deferred and amortized over their expected useful life, which does not exceed five years from purchase. The useful life reflects the period during which the Company expects to recover such sales commissions, taking into consideration the period during which redemptions by the purchasing shareholder are subject to a contingent deferred sales charge or distribution fees apply to the purchased fund shares.

The Company evaluates the carrying value of its deferred sales commission assets for impairment on a quarterly basis. In its impairment analysis, the Company compares the carrying value of a deferred sales commission asset to the undiscounted cash flows expected to be generated by the asset in the form of distribution fees over its remaining useful life to determine whether impairment has occurred. If the carrying value of the asset exceeds the undiscounted cash flows, the asset is written down to fair value based on discounted cash flows. Impairment adjustments are recognized in operating income as a component of amortization of deferred sales commissions.

Income taxes

Deferred income taxes reflect the expected future tax consequences of temporary differences between the carrying amounts and tax bases of the Company’s assets and liabilities measured using rates expected to be in effect when such differences reverse. To the extent that deferred tax assets are considered more likely than not to be unrealizable, valuation allowances are provided. Adjustments to deferred taxes resulting from changes in tax law are recorded as an expense or benefit in the period enacted.

The Company’s effective tax rate reflects the statutory tax rates of the many jurisdictions in which it operates. Significant judgment is required in evaluating its tax positions. In the ordinary course of business, many transactions occur for which the ultimate tax outcome is uncertain. Accounting standards governing the accounting for uncertainty in income taxes for a tax position taken or expected to be taken in a tax return require that the tax effects of a position be recognized only if it is more likely than not to be sustained based solely on its technical merits as of the reporting date. The more-likely-than-not threshold must be met in each reporting period to support continued recognition of the benefit. The difference between the tax benefit recognized in the financial statements for a tax position and the tax benefit claimed in the income tax return is referred to as an unrecognized tax benefit. Unrecognized tax benefits, as well as the related interest and penalties, are adjusted regularly to reflect changing facts and circumstances. The Company classifies any interest or penalties incurred as a component of income tax expense.

Equipment and leasehold improvements

Equipment and other fixed assets are recorded at cost and depreciated on a straight-line basis over their estimated useful lives, which range from three to five years. Leasehold improvements are amortized on a

straight-line basis over the shorter of their estimated useful lives or the terms of the leases. Expenditures for repairs and maintenance are charged to expense when incurred. Equipment and leasehold improvements are tested for impairment whenever changes in facts or circumstances indicate that the carrying amount of an asset may not be recoverable.

Certain internal and external costs incurred in connection with developing or obtaining software for internal use are capitalized and amortized on a straight-line basis over the shorter of the estimated useful life of the software or three years, beginning when the software project is complete and the application is put into production. These costs are included in equipment and leasehold improvements on the Company’s Consolidated Balance Sheets.

Goodwill

Goodwill represents the excess of the cost of the Company’s investment in the net assets of acquired companies over the fair value of the underlying identifiable net assets at the dates of acquisition. The Company attributes all goodwill associated with its acquisitions of Atlanta Capital Management Company, LLC (Atlanta Capital), Parametric Portfolio Associates LLC (Parametric) and The Clifton Group Investment Management Company (Clifton), which share similar economic characteristics, to one reporting unit. The Company attributes all goodwill associated with its acquisition of the Tax Advantaged Bond Strategies (TABS) business of M.D. Sass Investor Services and other acquisitions to a second reporting unit.

Goodwill is not amortized, but is tested annually for impairment in the fourth quarter of each fiscal year by comparing the fair values of identified reporting units to their respective carrying amounts, including goodwill. The Company establishes fair value for the purpose of impairment testing for each reporting unit by using an income approach and a market approach.

The income approach employs a discounted cash flow model that takes into account (1) assumptions that market participants would use in their estimates of fair value, (2) current period actual results and (3) budget projections for future periods that have been vetted by senior management. The discounted cash flow model incorporates the same fundamental pricing concepts used to calculate fair value in the acquisition due diligence process and a discount rate that takes into consideration the Company’s estimated cost of capital adjusted for the uncertainty inherent in the forecasted information.

The market approach employs market multiples based on comparable publicly traded companies in the financial services industry, calculated with data from industry sources. Estimates of fair value are established using current and forward multiples of both revenue and earnings before interest, taxes, depreciation and amortization (EBITDA), adjusted for size and performance of the reporting unit relative to peer companies.

If the carrying amount of the reporting unit exceeds its calculated fair value, the second step of the goodwill impairment test will be performed to measure the amount of the impairment loss, if any.

Intangible assets

Amortizing identifiable intangible assets generally represent the cost of client relationships, intellectual property, trademarks and research systems. In valuing these assets, the Company makes assumptions regarding useful lives and projected growth rates, and significant judgment is required. The Company periodically reviews its amortizing identifiable intangible assets for impairment as events or changes in

circumstances indicate that the carrying amount of such assets may not be recoverable. If the carrying amounts of those assets exceed their respective fair values, an impairment loss is recognized equal to that excess.

Non-amortizing intangible assets generally represent the cost of mutual fund management contracts acquired. Non-amortizing intangible assets are tested for impairment in the fourth quarter of each fiscal year by comparing the fair values of the management contracts acquired to their carrying values. The Company establishes fair value for purposes of impairment testing using the income approach. If the carrying value of a management contract acquired exceeds its fair value, an impairment loss is recognized equal to that excess.

Debt issuance costs

Debt issuance costs related to the Company’s term debt are included in debt in the Company’s Consolidated Balance Sheets. Deferred debt issuance costs are amortized using the effective interest method over the related debt term. The amortization of deferred debt issuance costs is included in interest expense on the Company’s Consolidated Statements of Income.

Revenue recognition

The Company earns revenue primarily by providing asset management services, distribution and underwriter services, and shareholder services to funds and separately managed accounts. Revenue is recognized for each distinct performance obligation identified in contracts with customers when the performance obligation has been satisfied by providing services to the customer either over time or at a point in time (which is when the customer obtains control of the service). Revenue recognized is the amount of variable or fixed consideration allocated to the satisfied performance obligation that the Company expects to be entitled to for providing such services to the customer (transaction price). Variable consideration is included in the transaction price only when it is probable that a significant reversal of such revenue will not occur or when the uncertainty associated with the variable consideration (constraint) is subsequently resolved. The majority of the fees earned by providing asset management, distribution and shareholder services represent variable consideration, as the fee is largely dependent on the value and composition of the associated assets under management. The value of assets under management-fluctuates with changes in the market prices of securities held.

The timing of when the Company bills its customers and related payment terms vary in accordance with the agreed-upon contractual terms. Certain of the Company’s customers are billed after the service is performed, which results in the recording of accounts receivable and accrued revenue. Deferred revenue is recorded in instances where a client is billed in advance.

Management fees

The Company is entitled to receive management fees in exchange for asset management services provided to funds that it sponsors and separate accounts managed for individual and institutional clients. Management fees from funds sponsored by the Company are calculated principally as a percentage of average daily net assets, are earned daily upon completion of investment advisory and administrative service performance obligations, and are typically paid monthly from the assets of the fund. Management fees from separate accounts are calculated as a percentage of either beginning, average or ending monthly or quarterly net assets, are earned daily and are typically paid either monthly or quarterly from account

assets. Performance fees received under certain fund and separate account management contracts are recognized into revenue when specified performance hurdles are met during the performance period.

The Company may contractually waive certain fees that it is otherwise entitled to receive for asset management services provided to funds that it sponsors. Separately, the Company may subsidize certain share classes of funds that it sponsors to ensure that operating expenses attributable to such share classes do not exceed a specified percentage. Fee waivers and fund subsidies are recognized as a reduction to management fee revenue.

Distribution and underwriter fees

The Company is entitled to receive distribution fees and underwriter commissions in exchange for distribution services provided to certain classes of shares of funds that it sponsors. Distribution services consist of distinct sales and marketing activities that are earned upon the sale of fund shares. Distribution fees for all share classes subject to these fees are calculated as a percentage of average daily net assets, and are typically paid monthly from the assets of the fund.

Underwriting commissions for all share classes subject to these fees are calculated as a percentage of the amount invested and are deducted from the amount invested by the purchasing fund shareholder. These commissions represent fixed consideration and are recognized as revenue when the fund shares are sold to the shareholder. Underwriter commissions are waived or reduced on purchases of shares that exceed specified minimum amounts.

Service fees

The Company is entitled to receive service fees in exchange for shareholder services provided to funds that it sponsors. Shareholder services consist of shareholder transaction processing and/or shareholder account maintenance services provided on a daily basis. Service fees are calculated as a percentage of average daily net assets under management, are earned daily upon completion of shareholder services and are typically paid monthly from the assets of the fund.

Principal versus agent

The Company has contractual arrangements with third parties involved in providing various services to funds that the Company sponsors, including sub-advisory, distribution and shareholder services. In instances where the Company has discretion to hire third-party service providers, the Company is generally deemed to control the services before transferring them to the fund, and accordingly presents associated revenues gross of the related third-party costs. Alternatively, where the Company does not control the service, revenue is recorded net of payments to third-party service providers.

The Company controls the right to asset management services performed by third-party sub-advisers; therefore management fee revenue of sub-advised funds is recorded on a gross basis. Fees paid to sub-advisers are recognized as an expense when incurred and are included in fund-related expenses in the Company’s Consolidated Statements of Income. The Company also controls the right to distribution and shareholder services performed by third-party financial intermediaries; therefore distribution and underwriter fees and service fees are also recorded on a gross basis. Fees paid to third parties for distribution and shareholder services are recognized as an expense when incurred and are included in distribution expense and service fee expense, respectively, in the Company’s Consolidated Statements of Income.

Leases

The Company leases office space under various leasing arrangements. As leases expire, they are normally renewed or replaced in the ordinary course of business. Most lease agreements contain renewal options, rent escalation clauses and/or other inducements provided by the landlord. Rent expense, including escalations and inducements, is recognized on a straight-line basis over the non-cancellable term of each lease, plus any periods the Company has access to and control over the leased space prior to the beginning of the non-cancellable lease term to construct leasehold improvements and any extension periods that appear to be reasonably assured at the inception of the lease. Deferred rent represents the difference between straight-line rent expense and scheduled rent payments and inducements.

Earnings per share

Basic earnings per share is calculated by dividing net income attributable to Eaton Vance Corp. shareholders by the weighted-average number of shares outstanding during the reporting period. Diluted earnings per share is calculated by dividing net income attributable to Eaton Vance Corp. shareholders by the weighted-average number of common shares outstanding during the period plus the dilutive effect of any potential common shares outstanding during the period as determined using the treasury stock method.

Stock-based compensation

The Company accounts for stock‐based compensation expense at fair value. Under the fair value method, stock‐based compensation expense for equity awards, which reflects the fair value of stock‐based awards measured at grant date, is recognized on a straight‐line basis over the relevant service period (generally five years) and is adjusted each period for forfeitures as they occur.

The tax effect of the difference, if any, between the cumulative compensation expense recognized for a stock-based award for financial reporting purposes and the deduction for such award for tax purposes is recognized as income tax expense (for tax deficiencies) or benefit (for excess tax benefits) in the Company’s Consolidated Statements of Income in the period in which the tax deduction arises (generally in the period of vesting or settlement of a stock-based award, as applicable) and are reflected as an operating activity on the Company’s Consolidated Statements of Cash Flows. Shares of Non-Voting Common Stock withheld for tax withholding purposes upon the vesting of restricted share awards are reflected as a financing activity in the Company’s Consolidated Statements of Cash Flows.

Foreign currency translation

Substantially all of the Company’s foreign subsidiaries have a functional currency that is something other than the U.S. dollar. Assets and liabilities of these subsidiaries are translated into U.S. dollars at current exchange rates as of the end of each accounting period. Related revenue and expenses are translated at average exchange rates in effect during the accounting period. Net translation exchange gains and losses are excluded from income and recorded in accumulated other comprehensive income (loss). Foreign currency transaction gains and losses are reflected in gains (losses) and other investment income, net, as they occur.

Comprehensive income

The Company reports all changes in comprehensive income in its Consolidated Statements of Comprehensive Income. Comprehensive income includes net income, unrealized gains and losses on certain derivatives designated as cash flow hedges, and related reclassification adjustments attributable to the amortization of net gains and losses on these derivatives and foreign currency translation adjustments, in each case net of tax. When the Company has established an indefinite reinvestment assertion for a foreign subsidiary, deferred income taxes are not provided on the related foreign currency translation.

Non-controlling interests

Non-redeemable non-controlling interests consist entirely of unvested interests granted to employees of the Company’s majority-owned subsidiaries. These grants become subject to holder put rights upon vesting and are reclassified to temporary equity as vesting occurs.

Redeemable non-controlling interests include vested interests held by employees of the Company’s majority-owned subsidiaries and are recorded in temporary equity at estimated redemption value. Future payments to purchase these interests reduce temporary equity. Future changes in the redemption value of these interests are recognized as increases or decreases to additional paid-in capital. Redeemable non-controlling interests also include interests in the Company’s consolidated sponsored funds given that investors in those funds may request withdrawals at any time.

Loss contingencies

The Company continuously reviews any investor, employee or vendor complaints and pending or threatened litigation. The Company evaluates the likelihood that a loss contingency exists under the criteria of applicable accounting standards through consultation with legal counsel and records a loss contingency, inclusive of legal costs, if the contingency is probable and reasonably estimable at the date of the financial statements. There are no losses of this nature that are currently deemed probable and reasonably estimable, and, thus, none have been recorded in the accompanying Consolidated Financial Statements.