Variable Interest Entities and Consolidated Sponsored Investment Products

12 Months Ended

Sep. 30, 2013

Variable Interest Entities and Consolidated Sponsored Investment Products [Abstract]

Variable Interest Entities and Consolidated Sponsored Investment Products

Variable Interest Entities and Consolidated Sponsored Investment Products

The Company sponsors and manages various types of investment products, which consist of both VIEs and non-VIEs. The Company consolidates the VIE products for which it is the primary beneficiary and the non-VIE products which it controls. The Company has no right to the consolidated products' assets, other than its direct equity investment in them, and/or investment management fees earned from them. The debt holders of these consolidated entities have no recourse to the Company's assets beyond the level of its direct investment, therefore the Company bears no other risks associated with the entities' liabilities.

The balances of consolidated VIEs and consolidated SIPs included in the Company's consolidated balance sheets were as follows:

	2013						2012
(in millions)	Consolidated						Consolidated
as of September 30,	VIEs		SIPs		Total		VIEs		SIPs		Total
Assets
Cash and cash equivalents	$	44.0	$	93.1	$	137.1	$	224.3	$	42.8	$	267.1
Receivables	37.7		19.1		56.8		2.7		23.7		26.4
Investments, at fair value	941.1		1,203.2		2,144.3		984.1		1,046.6		2,030.7
Other assets	—		0.7		0.7		—		0.7		0.7
Total Assets	$	1,022.8	$	1,316.1	$	2,338.9	$	1,211.1	$	1,113.8	$	2,324.9
Liabilities
Accounts payable and accrued expenses	$	—	$	25.2	$	25.2	$	—	$	21.8	$	21.8
Debt, at fair value	988.5		—		988.5		1,100.9		—		1,100.9
Debt	—		108.9		108.9		—		110.2		110.2
Other liabilities	10.9		8.5		19.4		61.9		8.5		70.4
Total liabilities	999.4		142.6		1,142.0		1,162.8		140.5		1,303.3
Redeemable Noncontrolling Interests	—		121.8		121.8		—		26.7		26.7
Stockholders' Equity
Franklin Resources Inc.'s interests	23.4		454.8		478.2		48.3		389.8		438.1
Nonredeemable noncontrolling interests	—		596.9		596.9		—		556.8		556.8
Total stockholders' equity	23.4		1,051.7		1,075.1		48.3		946.6		994.9
Total Liabilities, Redeemable Noncontrolling Interests and Stockholders' Equity	$	1,022.8	$	1,316.1	$	2,338.9	$	1,211.1	$	1,113.8	$	2,324.9

The redeemable noncontrolling interests balance as of September 30, 2013 included $57.0 million that was reclassified from nonredeemable noncontrolling interests during fiscal year 2013 and relates to a consolidated SIP which is redeemable on a monthly basis without restriction.

The consolidated VIEs and consolidated SIPs did not have a significant impact on net income attributable to the Company in fiscal years 2013, 2012 and 2011.

Consolidated VIEs

Consolidated VIEs consist of sponsored CLOs, which are asset-backed financing entities collateralized by a pool of corporate debt securities. The Company generally earns senior and subordinated management fees from the CLOs based on the par value of outstanding investments and, in certain instances, may also receive performance-based fees. In addition, the Company holds equity interests in certain of these entities. The debt holders of the CLOs have recourse only to the corresponding collateralized assets, which cannot be used by the Company for any other purpose. Scheduled debt payments are based on the performance of the CLOs collateral pool and may be prepaid prior to the contractual maturity dates. The Company is the primary beneficiary of the CLOs as it has the power to direct the activities that most significantly impact the CLOs' economic performance in its role as collateral manager and has the right to receive benefits that could potentially be significant to the CLOs.

The assets and liabilities of the CLOs are carried at fair value. Changes in the fair values were as follows:

(in millions)	2013			2012
for the fiscal years ended September 30,
Net gains from changes in fair value of assets	$	64.8		$	90.9
Net losses from changes in fair value of liabilities	(80.8		)	(65.3		)
Total Net Gains (Losses)	$	(16.0	)	$	25.6

The following tables present the unpaid principal balance and fair value of investments, including investments 90 days or more past due, and debt of the CLOs:

(in millions)	Total  Investments			Investments 90 Days or More Past Due			Debt
as of September 30, 2013
Unpaid principal balance	$	943.6		$	7.9		$	1,017.8
Difference between unpaid principal balance and fair value	(2.5		)	(7.7		)	(29.3		)
Fair Value	$	941.1		$	0.2		$	988.5

(in millions)	Total  Investments			Investments 90 Days or More Past Due			Debt
as of September 30, 2012
Unpaid principal balance	$	996.1		$	7.2		$	1,186.5
Difference between unpaid principal balance and fair value	(12.0		)	(6.7		)	(85.6		)
Fair Value	$	984.1		$	0.5		$	1,100.9

Consolidated SIPs

Consolidated SIPs consist of non-VIE limited partnerships and similar structures that the Company controls and other fund products in which the Company has a controlling financial interest. The Company consolidated 36 SIPs as of September 30, 2013. SIPs are typically consolidated when the Company makes an initial investment in a newly launched fund or limited partnership entity. They are deconsolidated when the Company redeems its investment in the SIP or its voting interests decrease to a minority percentage. The Company's investments in SIPs subsequent to deconsolidation are accounted for as trading or available-for-sale investment securities, or equity method or cost method investments depending on the nature of the SIP and the Company's level of ownership.

Investments

Investments of consolidated VIEs and consolidated SIPs consisted of the following:

	2013						2012
(in millions)	Consolidated						Consolidated
as of September 30,	VIEs		SIPs		Total		VIEs		SIPs		Total
Investment securities, trading	$	—	$	244.1	$	244.1	$	—	$	194.4	$	194.4
Other debt securities	941.1		272.3		1,213.4		984.1		317.5		1,301.6
Other equity securities	—		686.8		686.8		—		534.7		534.7
Total Investments	$	941.1	$	1,203.2	$	2,144.3	$	984.1	$	1,046.6	$	2,030.7

Investments of consolidated VIEs consist of corporate debt securities. Other debt and equity securities of consolidated SIPs primarily consist of direct investments in secured and unsecured debt securities and equity securities of entities in emerging markets, which are generally not traded in active markets. Other equity securities also include investments in funds that are not traded in active markets.

Debt

Debt of consolidated VIEs and consolidated SIPs consisted of the following:

(dollars in millions)	2013		Effective Interest Rate		2012		Effective Interest Rate
as of September 30,
Debt of CLOs, at fair value, due fiscal years 2018-2024	$	988.5	1.32	%	$	1,100.9	1.48	%
Debt of consolidated SIPs due fiscal years 2014-2019	108.9		4.08	%	110.2		4.20	%
Total Debt	$	1,097.4			$	1,211.1

The debt of CLOs had floating interest rates ranging from 0.50% to 9.77% at September 30, 2013, and from 0.67% to 9.98% at September 30, 2012.

The debt of consolidated SIPs had both fixed and floating interest rates ranging from 2.45% to 5.83% at September 30, 2013, and from 1.98% to 7.03% at September 30, 2012. The repayment of amounts outstanding under the debt agreements is secured by the assets of the consolidated SIPs or a pledge of the right to call capital.

At September 30, 2013, contractual maturities for debt of consolidated VIEs and consolidated SIPs were as follows:

(in millions)	Amount
for the fiscal years ending September 30,
2014	$	55.0
2015	—
2016	—
2017	15.5
2018	366.4
Thereafter	660.5
Total	$	1,097.4

Fair Value Measurements

The tables below present the balances of assets and liabilities of consolidated VIEs and consolidated SIPs measured at fair value on a recurring basis. 

(in millions)	Level 1		Level 2		Level 3		Total
as of September 30, 2013
Assets
Cash and cash equivalents of consolidated VIEs	$	44.0	$	—	$	—	$	44.0
Receivables of consolidated VIEs	—		37.7		—		37.7
Investments of consolidated VIEs	—		940.6		0.5		941.1
Investments of consolidated SIPs
Debt securities	4.5		83.8		272.3		360.6
Equity securities	158.1		213.6		470.9		842.6
Total Assets Measured at Fair Value	$	206.6	$	1,275.7	$	743.7	$	2,226.0
Liabilities
Debt of consolidated VIEs	$	—	$	928.8	$	59.7	$	988.5
Other liabilities of consolidated VIEs	—		10.9		—		10.9
Total Liabilities Measured at Fair Value	$	—	$	939.7	$	59.7	$	999.4

(in millions)	Level 1		Level 2		Level 3		Total
as of September 30, 2012
Assets
Cash and cash equivalents of consolidated VIEs	$	—	$	224.3	$	—	$	224.3
Receivables of consolidated VIEs	—		2.7		—		2.7
Investments of consolidated VIEs	—		984.1		—		984.1
Investments of consolidated SIPs
Debt securities	6.3		49.3		317.5		373.1
Equity securities	145.9		0.6		527.0		673.5
Total Assets Measured at Fair Value	$	152.2	$	1,261.0	$	844.5	$	2,257.7
Liabilities
Debt of consolidated VIEs	$	—	$	1,033.0	$	67.9	$	1,100.9
Other liabilities of consolidated VIEs	—		61.9		—		61.9
Total Liabilities Measured at Fair Value	$	—	$	1,094.9	$	67.9	$	1,162.8

The investments in fund products for which fair value was estimated using NAV as a practical expedient consisted of the following:

		September 30, 2013			September 30, 2012
(in millions)	Redemption Frequency	Fair Value Level	Balance		Fair Value Level	Balance
Hedge funds	Monthly or quarterly	2	$	6.6	N/A	$	—
Global fixed-income fund	Monthly	2	191.8		3	172.7
Hedge funds	Annually or triennially	3	1.5		N/A	—
Real estate and private equity funds	Nonredeemable	3	242.1		3	141.5
Total			$	442.0		$	314.2

The investments in real estate and private equity funds are expected to be returned through distributions as a result of liquidations of the funds' underlying assets over a weighted-average period of 4.7 years and 5.9 years at September 30, 2013 and 2012. The consolidated SIPs' unfunded commitments to these funds totaled $135.5 million and $123.0 million at September 30, 2013 and 2012, of which the Company was contractually obligated to fund $2.8 million and $2.9 million based on its ownership percentage in the SIPs.

Transfers into Level 2 from Level 1 were $47.4 million and $1.0 million, and transfers into Level 1 from Level 2 were $53.9 million and $26.8 million, during fiscal year 2013 and 2012. The transfers into Level 2 from Level 1 during the current year include $47.0 million of securities for which the quoted market prices were adjusted as of December 31, 2012 due to significant price changes in U.S.-traded market proxies resulting from the resolution of U.S. fiscal cliff negotiations. The impacted securities trade in 16 different countries in Europe, Asia and Latin America. The adjustments were made after the close of the foreign markets and were based on third-party factors derived from model-based valuation techniques for which the significant assumptions were observable in the market. All transfers into Level 1 from Level 2 were securities that were valued using unadjusted quoted market prices. There were no significant transfers between Level 1 and Level 2 during fiscal year 2011.

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for fiscal years 2013, 2012 and 2011 were as follows:

(in millions)	Investments of Consolidated VIEs		Investments of Consolidated SIPs						Total Level 3 Assets			Debt of Consolidated VIEs
for the fiscal year ended September 30, 2013			Debt			Equity
Balance at October 1, 2012	$	—	$	317.5		$	527.0		$	844.5		$	(67.9	)
Realized and unrealized gains included in investment and other income, net	—		4.5			43.2			47.7			5.5
Purchases	—		73.3			156.2			229.5			—
Sales	—		(130.9		)	(53.4		)	(184.3		)	—
Settlements	—		—			—			—			2.7
Acquisition	—		—			0.8			0.8			—
Reclassification to Level 2	—		—			(205.4		)	(205.4		)	—
Transfers into Level 3	0.5		—			—			0.5			—
Effect of exchange rate changes	—		7.9			2.5			10.4			—
Balance at September 30, 2013	$	0.5	$	272.3		$	470.9		$	743.7		$	(59.7	)
Change in unrealized gains included in net income relating to assets and liabilities held at September 30, 2013	$	—	$	0.1		$	4.7		$	4.8		$	7.3

(in millions)	Investments of Consolidated VIEs			Investments of Consolidated SIPs						Total Level 3 Assets			Debt of Consolidated VIEs
for the fiscal year ended September 30, 2012				Debt			Equity
Balance at October 1, 2011	$	1.9		$	324.9		$	283.7		$	610.5		$	(83.9	)
Realized and unrealized gains (losses) included in investment and other income, net	(1.2		)	(31.2		)	13.1			(19.3		)	(5.0		)
Purchases	—			63.0			312.0			375.0			—
Sales	(1.4		)	(33.1		)	(78.8		)	(113.3		)	—
Settlements	—			—			—			—			23.8
Consolidation of variable interest entity	—			—			—			—			(4.6		)
Transfers into Level 3	1.6			—			—			1.6			—
Transfers out of Level 3	(0.9		)	—			—			(0.9		)	—
Effect of exchange rate changes	—			(6.1		)	(3.0		)	(9.1		)	1.8
Balance at September 30, 2012	$	—		$	317.5		$	527.0		$	844.5		$	(67.9	)
Change in unrealized gains (losses) included in net income relating to assets and liabilities held at September 30, 2012	$	—		$	2.9		$	3.8		$	6.7		$	(4.0	)

(in millions)	Investments of Consolidated VIEs		Investments of Consolidated SIPs			Total Level 3 Assets			Debt of Consolidated VIEs
for the fiscal year ended September 30, 2011
Balance at October 1, 2010	$	—	$	3.3		$	3.3		$	—
Adjustment for adoption of new consolidation guidance	1.8		—			1.8			(71.4		)
Realized and unrealized gains (losses) included in investment and other income, net	0.1		(1.3		)	(1.2		)	(45.6		)
Purchases, sales and settlements, net	—		14.1			14.1			36.7
Consolidation adjustment	—		593.1			593.1			—
Transfers out of Level 3, net	—		(0.6		)	(0.6		)	—
Effect of exchange rate changes	—		—			—			(3.6		)
Balance at September 30, 2011	$	1.9	$	608.6		$	610.5		$	(83.9	)
Change in unrealized gains (losses) included in net income relating to assets and liabilities held at September 30, 2011	$	0.1	$	0.3		$	0.4		$	(45.6	)

There were no transfers out of Level 3 during fiscal year 2013. The reclassification out of Level 3 to Level 2 during fiscal year 2013 relates to an investment in a global fixed-income fund which is redeemable on a monthly basis without restriction and was originally misclassified as Level 3. Investments of consolidated SIPs during fiscal year 2011 consisted primarily of equity securities.

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets were as follows:

(in millions)
as of September 30, 2013	Fair Value		Valuation Technique	Significant Unobservable Inputs	Range (Weighted Average)
Debt securities	$	272.3	Discounted cash flow	Discount rate	5.7%–25.6% (8.3%)
				Risk premium	0.0%–19.3% (2.2%)
Equity securities	137.4		Market comparable companies	EBITDA multiple	5.0–10.2 (8.0)
				Discount for lack of marketability	20.0%–30.0% (19.0%)
	70.8		Discounted cash flow	Discount rate	12.0%–18.0% (16.2%)
				Discount for lack of marketability	0.0%–50.0% (20.6%)
	19.1		Market pricing	Price to book value ratio	1.7

(in millions)
as of September 30, 2012	Fair Value		Valuation Technique	Significant Unobservable Inputs	Range (Weighted Average)
Debt securities	$	317.5	Discounted cash flow	Discount rate	4.9%–25.6% (11.8%)
				Risk premium	0.0%–7.3% (2.1%)
Equity securities	144.4		Market comparable companies	EBITDA multiple	5.5–8.6 (7.3)
				Discount for lack of marketability	15.0%–30.0% (22.1%)
	47.4		Discounted cash flow	Discount rate	12.0%–15.0% (14.8%)
				Discount for lack of marketability	0.0%–50.0% (27.8%)
	21.0		Market pricing	Price to book value ratio	1.7

Level 3 debt securities held by consolidated SIPs consisted of mezzanine loans, convertible debentures and corporate loans and notes, and equity securities consisted primarily of common and preferred shares at September 30, 2013 and 2012.

The fair values of Level 3 assets and liabilities that were determined based on third-party pricing information or NAV are excluded from the above two tables. At September 30, 2013 and 2012, the exclusions consisted of $59.7 million and $67.9 million of debt of consolidated VIEs that was valued using third-party broker or dealer price quotes and $243.6 million and $314.2 million of investments in various funds held by consolidated SIPs for which fair value was estimated using NAV as a practical expedient.

Following are descriptions of the sensitivity of the Level 3 recurring fair value measurements to changes in the significant unobservable inputs presented in the above tables.

For securities utilizing the discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, risk premium or discount for lack of marketability in isolation would result in a significantly lower (higher) fair value measurement. The discount for lack of marketability used to determine fair value may include other factors such as liquidity or credit risk. Generally, a change in the discount rate is accompanied by a directionally similar change in the risk premium and discount for lack of marketability.

For securities utilizing the market comparable companies valuation technique, a significant increase (decrease) in the EBITDA multiple in isolation would result in a significantly higher (lower) fair value measurement. A significant increase (decrease) in the discount for lack of marketability in isolation would result in a significantly lower (higher) fair value measurement. The discount for lack of marketability used to determine fair value may include other factors such as liquidity or credit risk.

For securities utilizing a market pricing valuation technique, a significant increase (decrease) in the price to book value ratio would result in a significantly higher (lower) fair value measurement.

Financial instruments of consolidated SIPs that were not measured at fair value were as follows:

(in millions)		September 30, 2013				September 30, 2012
	Fair Value Level	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial Assets
Cash and cash equivalents of consolidated SIPs	1	$	93.1	$	93.1	$	42.8	$	42.8
Financial Liabilities
Debt of consolidated SIPs	3	108.9		110.4		110.2		113.0

Non-consolidated VIEs

VIEs for which the Company is not the primary beneficiary consist of sponsored and other investment products from which the Company earns investment management fees and/or in which it has an equity ownership interest.

The carrying values of the investment management fees receivable from and the equity ownership interests in these VIEs included in the Company's consolidated balance sheets are set forth below. These amounts represent the Company's maximum exposure to loss from these investment products.

(in millions)
as of September 30,	2013		2012
Receivables	$	46.3	$	43.8
Investments	198.5		199.7
Total	$	244.8	$	243.5

The Company's total AUM of non-consolidated VIEs was $37.3 billion at September 30, 2013 and $35.3 billion at September 30, 2012.

While the Company has no contractual obligation to do so, it routinely makes cash investments in the course of launching SIPs. The Company also may voluntarily elect to provide its SIPs with additional direct or indirect financial support based on its business objectives. The Company did not provide financial or other support to its SIPs during the fiscal years ended September 30, 2013 and 2012.