SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements reflect the Company's accounts and the accounts of the Company's majority-owned and/or controlled subsidiaries. The Company follows the provisions of Accounting Standards Codification (“ASC”) Topic 810, “Consolidation,” and accordingly consolidates entities that are variable interest entities (“VIEs”) where it has determined that it is the primary beneficiary of such entities. Once it is determined that the Company holds a variable interest in a VIE, management must perform a qualitative analysis to determine (i) if the Company has the power to direct the matters that most significantly impact the VIE's financial performance; and (ii) if the Company has the obligation to absorb the losses of the VIE that could potentially be significant to the VIE or the right to receive the benefits of the VIE that could potentially be significant to the VIE. If the Company's interest possesses both of these characteristics, the Company is deemed to be the primary beneficiary and would be required to consolidate the VIE. The Company will continually assess its involvement with VIEs and reevaluate the requirement to consolidate them. The portions of these entities that the Company does not own are presented as noncontrolling interests as of the dates and for the periods presented in the consolidated financial statements.

All intercompany transactions and balances have been eliminated in the Company's consolidated financial statements.

The financial statements for 2013, 2012 and 2011 reflect the consolidation of RSO. Variable interests in the Company's real estate segment have historically related to subordinated financings in the form of mezzanine loans or unconsolidated real estate interests. See Note 23 for additional disclosures pertaining to VIEs.

Reclassifications and Revisions

The Company has reclassified short-term insurance notes from debt for 2012 into accrued expenses due to the short-term nature of the loans.

Use of Estimates

Preparation of the Company's consolidated financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and costs and expenses during the reporting period. The Company makes estimates of its allowance for credit losses, the valuation allowance against its deferred tax assets, discounts and collectability of management fees, the valuation of stock-based compensation, and in determining whether a decrease in the fair value of an investment is an other-than-temporary impairment. The financial fund management segment makes assumptions in determining the fair value of its investments in investment securities. Actual results could differ from these estimates.

Prior to the deconsolidation of LEAF, significant estimates specifically for the commercial finance segment included the unguaranteed residual values of leased equipment, servicing liabilities and repurchase obligations, allowance for lease and loan losses, impairment of long-lived assets and goodwill, and the fair values and effectiveness of interest rate swaps.

Investments in Unconsolidated Loan Manager

The Company's interest in CVC Credit Partners and the Company's preferred equity interest in Apidos-CVC is included in Investments in Unconsolidated Loan Manager on the consolidated balance sheets. The Company accounts for its investment in CVC Credit Partners on the equity method since the Company has the ability to exercise significant influence over the partnership.

The Company accounts for its preferred equity interest in Apidos-CVC on the cost method. As the incentive fees underlying the preferred equity are received, 75% will be distributed to the Company which will initially be recorded as income, net of any contractual amounts due to third-parties. On a quarterly basis, the Company will evaluate the investment for impairment by estimating the fair value of the expected future cash flows from the incentive management fees. If the estimated fair value is less than the cost basis of the preferred shares, the preferred equity interest will be deemed to be impaired. If the Company determines that the shortfall is other-than-temporary, the impairment will be recorded as a reduction of the preferred equity interest by reducing the revenues previously recorded on these preferred shares. To the extent that the investment in preferred equity has been reduced to zero, all subsequent distributions will be recorded as income.

Investments in Unconsolidated Entities

The Company accounts for the investments it has in the real estate, financial fund management and commercial finance investment entities it has sponsored and manages primarily under the equity method of accounting since the Company has the ability to exercise significant influence over the operating and financial decisions of these entities. To the extent that there is a negative balance in the investment for any of these entities, these balances are reclassified to reduce any receivable from such entities. The Company accounts for its investment in RRE Opportunity REIT I on the cost method since the Company owns less than 1% of the shares outstanding. The Company will evaluate these investments for impairment on a quarterly basis. There were no identified events that had a significant adverse effect on these investments and, as such, no impairment was recorded.

Real estate. The Company has sponsored and manages eight real estate limited partnerships, two limited liability companies, one public non-traded REIT, and six TIC programs that invest in multifamily residential properties.

Financial fund management. In the Financial Fund Management operations, the Company holds the following interests in unconsolidated entities:


•	general and limited partnership interests in seven company-sponsored and managed partnerships that invest in regional banks, and a limited partnership interest in an affiliated partnership organized as a credit opportunities fund that invests in bank loans and high yield bonds; and


•	equity interests in two unconsolidated management companies which manage trust preferred securities held by 13 separate CDOs.

Commercial finance. The Company has general and limited partnership interests in four company-sponsored commercial finance investment partnerships.

Concentration of Credit Risk

The Company’s receivables from managed entities are comprised of unsecured amounts due from its investment entities and other affiliated entities, which the Company has sponsored and manages. The Company evaluates the collectability of these receivables and records an allowance to the extent any portion of that receivable is determined to be uncollectible. Additionally, the Company records a discount where it determines that any of the entities will be unable to repay the Company in the near term. In the event that any of these entities fail, the corresponding receivable balance would be at risk.

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of periodic temporary investments of cash and restricted cash. The Company places its temporary cash investments and restricted cash in high quality short-term money market instruments with high-quality financial institutions and brokerage firms. At December 31, 2013, the Company had $16.8 million (excluding restricted cash) in deposits at various banks, which was over the insurance limit of the Federal Deposit Insurance Corporation of $250,000, or in deposit in foreign banks or in brokerage accounts where no insurance coverage is available. No losses have been experienced on such investments.

Restricted Cash

The Company's restricted cash balance at December 31, 2013 includes $317,000 of escrow deposits for a real estate mortgage and a $250,000 clearing deposit with a third-party broker dealer who serves as a clearing agent for the Company's broker dealer.

Foreign Currency Translation

Foreign currency transaction gains and losses of the Company’s foreign operations are recognized in the determination of net income. Foreign currency translation adjustments related to our Australian foreign operations are included in accumulated other comprehensive loss, a separate component of shareholders’ equity. Foreign currency translation adjustments related to its European operations are included in net income.

Revenue Recognition – Fee Income

RSO management fees. The Company earns base management and incentive management fees for managing RSO. In addition, the Company is reimbursed for its expenses incurred on behalf of RSO and its operations and for property management fees. Management fees, property management fees and reimbursed expenses are recognized monthly when earned. In addition, in February 2011, the Company entered into a services agreement with RSO to provide sub-advisory collateral management and administrative services for five CLOs holding approximately $1.7 billion in bank loans. In connection with the sub-advisory services provided, RSO pays CVC Credit Partners 10% of all senior and additional collateral management fees and 50% of all incentive collateral management fees it collects. As of December 31, 2013, CVC Credit Partners continues to provide subadvisory services to three of these CLOs holding approximately $1.1 billion in bank loans.

The quarterly incentive compensation to the Company is payable seventy-five percent (75%) in cash and twenty-five percent (25%) in restricted shares of RSO common stock. The Company may elect to receive more than 25% of its incentive compensation in RSO restricted stock. However, the Company’s ownership percentage in RSO, direct and indirect, cannot exceed 15%. All shares are fully vested upon issuance, provided that the Company may not sell such shares for one year after the incentive compensation becomes due and payable. The restricted stock is valued at the average of the closing price of RSO's common stock over the thirty-day period ending three days prior to the issuance of such shares.

Under a fee agreement, in connection with the April 2012 sale of Apidos to CVC, the Company must remit a portion of the senior management fee and incentive compensation it receives from RSO to Apidos-CVC for advisory services in managing the portfolio of CLOs. The percentage paid to Apidos-CVC is determined by dividing the equity RSO holds in three Apidos CLOs by the calculated equity used to determine the senior management fee. Any incentive compensation paid to Apidos-CVC excludes non-recurring items unrelated to Apidos-CVC.

Fees from RSO have been allocated and, accordingly, were reported as revenues by each of the Company’s operating segments. The Company reports these fees as an adjustment to the consolidated revenues of RSO in consolidation to reflect the compensation arrangement between the Company and RSO that would have otherwise been eliminated in consolidation.

Real estate fees. The Company records acquisition fees of 1% to 2% of the net purchase price of properties acquired by real estate investment entities it sponsors and financing fees equal to 0.5% to 1.75% of the debt obtained or assumed related to the properties acquired. In addition, the Company receives debt origination fees which range from 0.5% to 5.0% on the purchase price of real estate debt investments acquired on behalf of its real estate investment entities. The Company recognizes these fees when its sponsored entities acquire the properties and obtain the related financing.

The Company records a monthly property management fee equal to 4.5% to 5% of the gross operating revenues from the underlying properties and a monthly debt management fee equal to 0.167% (2% per year) of the gross offering proceeds deployed in debt investments. The Company recognizes these fees monthly when earned.

Additionally, the Company records an annual investment management fee from its limited partnership investment entities equal to 1% of the gross offering proceeds of each partnership. The Company records an annual asset management fee from its TIC programs equal to 1% to 2% of the gross revenues from the properties. These investment management fees and asset management fees are recognized monthly when earned and are discounted to the extent that these fees are not expected to be paid timely.

The Company records quarterly asset management fees from its joint ventures with an institutional partner, which range from 0.833% to 1% per annum of the gross funds invested in distressed real estate loans and assets. The Company recognizes these fees monthly.

Financial fund management fees. The Company earns monthly investment and management fees on assets held in CDOs on behalf of institutional and individual investors. These investment management fees and asset management fees are recognized monthly when earned and are discounted to the extent that these fees are deferred. Additionally, the Company records fees for managing the assets held by the partnerships or funds it has sponsored and for managing their general operations.

The Company also enters into management or advisory agreements for managing the assets held by third-parties. These fees, which vary by agreement, are recognized monthly when earned.

Introductory agent fees. The Company earns fees for acting as an introducing agent for transactions involving sales of securities of financial services companies, REITs and insurance companies. The Company recognizes these fees monthly when earned.

Commercial finance fees. Prior to the November 2011 deconsolidation of LEAF, the Company recorded acquisition fees from its leasing investment entities (based on a percentage of the cost of the leased equipment acquired) as compensation for expenses incurred by the Company for those acquisitions. The fees, which ranged from 1% to 2%, were earned at the time of the sale of the related leased equipment to the investment entities.

The Company also had recorded management fees from its investment entities for managing and servicing the leased assets acquired when the service was performed. The payment of these fees to the Company by each entity was contingent upon the partners receiving specified annual distributions from each of the respective entities. During 2013, 2012 and 2011, the Company permanently waived $1.8 million, $3.9 million and $7.2 million, respectively, of management fees from its four investment entities since the distributions to the limited partners were less than the annual specified amounts. The management fees that were waived are not deferrals and, accordingly, will not be paid. Prior to the deconsolidation of LEAF, the Company was paid for the operating and administrative expenses it incurred to manage these entities.

Revenue Recognition – Rental income

Rental revenue is primarily derived from an 86-room boutique hotel located in Savannah, Georgia, which is 80% owned by the Company. The Company recognizes the room rental revenue on a daily basis. The Company also derives rental revenue on retail space in the hotel as well as from office space in the office building that the Company owns located in Philadelphia, Pennsylvania. The income from these leases is recognized over the term of the lease as earned. Rent abatements and scheduled rent increases over the lease terms are accounted for on a straight-line basis. Tenant reimbursements are recognized in the period that the related costs are incurred. Percentage rent is recognized when the tenant's reported sales have reached certain levels as specified in the lease.

Stock-Based Compensation

The Company values the restricted stock it issues based on the closing price of its stock on the date of grant. For stock option awards, the Company determines the fair value by applying the Black-Scholes pricing model. These equity awards are amortized to compensation expense over the respective vesting period, net of an estimate for forfeitures.

Earnings (Loss) Per Share

Basic earnings (loss) per share (“Basic EPS”) is determined by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period, including participating securities. Diluted earnings (loss) per share (“Diluted EPS”) is computed by dividing net income (loss) by the sum of the weighted average number of shares of common stock outstanding including participating securities, as well as after giving effect to the potential dilution from the exercise of securities, such as stock options and warrants, into shares of common stock as if those securities were exercised.

Financing Receivables - Receivables from Managed Entities

The Company performs a review of the collectability of its receivables from managed entities on a quarterly basis. If upon review there is an indication of impairment, the Company will analyze the future cash flows of the managed entity. With respect to the receivables from its commercial finance investment partnerships, this takes into consideration several assumptions by management, primarily concerning estimations of future bad debts and recoveries. For the receivables from the real estate investment entities for which there are indications of impairment, the Company estimates the cash flows through the sale of the underlying properties based on projected net operating income as a multiple of published capitalization rates, as reduced by the underlying mortgage balances and priority distributions due to the investors.

Loans

Real estate loans. Real estate loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are stated at the amount of unpaid principal, reduced by unearned income and an allowance for credit losses, if necessary. These loans are included in Investments in Real Estate in the consolidated balance sheets. Interest on the loans is calculated based upon the principal amount outstanding. Accrual of interest ceases on a loan when management believes, after considering economic factors, business conditions and collection efforts, that the borrower’s financial condition is such that collection of interest is doubtful.

An impaired real estate loan may remain on accrual status during the period in which the Company is pursuing repayment of the loan; however, the loan is placed on non-accrual status at such time as (i) management believes that contractual debt service payments will not be met; or (ii) the loan becomes 90 days delinquent; and (iii) management determines the borrower is incapable of, or has ceased efforts toward, curing the cause of the impairment. While on non-accrual status, the Company recognizes interest income only when an actual payment is received. Loans are charged off after being on non-accrual for a period of one year.

The Company maintains an allowance for credit losses for real estate loans at a level deemed sufficient to absorb probable losses. The Company considers general and local economic conditions, neighborhood values, competitive overbuilding, casualty losses and other factors that may affect the value of real estate loans. The value of loans and real estate may also be affected by factors such as the cost of compliance with regulations and liability under applicable environmental laws, changes in interest rates and the availability of financing. Income from a property will be reduced if a significant number of tenants are unable to pay rent or if available space cannot be rented on favorable terms. In addition, the Company reviews all credits on a quarterly basis and continually monitors collections and payments from its borrowers and maintains an allowance for credit losses based upon its historical experience and its knowledge of specific borrower collection issues. Investments in real estate loans and real estate are reflected on the consolidated balance sheet net of the allowance for credit losses.

Investment Securities

The Company’s investment securities available-for-sale, including investments in the CLO issuers it sponsored, are carried at fair value. The fair value of the CLO investments is based primarily on internally-generated expected cash flow models that require significant management judgment and estimates due to the lack of market activity and the use of unobservable pricing inputs. The investments in the common stock of The Bancorp, Inc. (“TBBK”) (NASDAQ: TBBK) and in Resource Real Estate Diversified Income Fund ("RREDX") (NASDAQ: RREDX), affiliated entities, are valued at the closing prices of the respective publicly-traded stocks. The cumulative net unrealized gains (and losses) on these investment securities, net of tax, is reported through accumulated other comprehensive income (loss). Realized gains (and losses) on the sale of investments are determined on the trade date on the basis of specific identification and are included in net operating results.

Periodically, the Company reviews the carrying value of its available-for-sale securities. If it is probable there has been an adverse change in a security and the Company deems this to be other-than-temporary, it will record an impairment charge. The Company’s process for identifying other-than-temporary declines in the fair value of its investments involves consideration of (i) the duration of a significant decline in value, (ii) the liquidity, business prospects and overall financial condition of the issuer, (iii) the magnitude of the decline, often measured by change in the estimated cash flows of the security holder (iv) the collateral structure and other credit support, as applicable, and (v) the more-than-likely intention of the Company to hold the investment until the value recovers. When the analysis of the above factors results in a conclusion that a decline in fair value is other-than-temporary, an impairment charge is recorded and the cost of the investment is written down to its fair value. The cost basis adjustment for an other-than-temporary impairment would be recoverable only upon the sale or maturity of the security.

Trading securities are recorded at fair value with unrealized holding gains and losses reported in revenues by operating segment. The Company utilizes trade date accounting to record the purchases and sales of trading securities. The cost of a security is determined using the specific identification method. Earnings from trading securities, primarily reported net, include realized and unrealized gains and losses from the sale of trading securities, mark to market adjustments to fair value, gains and losses related to foreign currency, and commissions from riskless principal trades. The Company utilizes the services of a third-party valuation expert to provide an estimate of the fair value of its trading securities. In 2011, the Company held shares of TBBK common stock in a benefit plan for a former executive (see Note 17). The shares, which were also classified as trading, were valued at the closing price of the stock with unrealized gains and losses included in Other Income in the consolidated statements of operations.

The Company recognizes dividend income on its investment securities classified as available-for-sale on the ex-dividend date.

Property and Equipment

Property and equipment, which includes amounts recorded under capital leases, are stated at cost. Depreciation and amortization are based on cost, less estimated salvage value, using the straight-line method over the asset’s estimated useful life. Maintenance and repairs are expensed as incurred. Major renewals and improvements that extend the useful lives of property and equipment are capitalized. The amortization of assets classified under capital leases is included in depreciation and amortization expense.

Accounting for Income Taxes

The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and to recognize deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns.

The Company adjusts the balance of its deferred taxes to reflect the tax rates at which future taxable amounts will likely be settled or realized. The effects of tax rate changes on deferred tax liabilities and deferred tax assets, as well as other changes in income tax laws, are recognized in net earnings in the period during which such changes are enacted. Valuation allowances are established and adjusted, when necessary, to reduce deferred tax assets to the amounts expected to be realized. The Company assesses its ability to realize deferred tax assets primarily based on tax planning strategies.

A tax position should only be recognized if it is more likely than not that the position will be sustained upon examination by the appropriate taxing authority. A tax position that meets this threshold is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The Company classifies any tax penalties as general and administrative expenses and any interest as interest expense. The Company does not have any unrecognized tax benefits that would affect the effective tax rate.

Recent Accounting Standards

Newly-Adopted Accounting Principles

The Company’s adoption of the following standard during 2013 did not have a material impact on its consolidated financial position, results of operations or cash flows:

In February 2013, the FASB issued guidance that requires an entity to disclose information showing the effect of items reclassified from accumulated other comprehensive income on the line items of net income. The Company adopted this guidance beginning January 1, 2013 and has presented the required disclosures.

Accounting Standards Issued But Not Yet Effective

The FASB issued the following accounting standard which was not yet effective for the Company as of December 31, 2013:

In July 2013, the FASB issued guidance that addresses the diversity in practice regarding financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance requires an unrecognized tax benefit, or a portion of, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. To the extent the deferred tax asset is not available at the reporting date to settle any additional income taxes that would result from the disallowance of a tax position, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with the deferred tax asset. The amendments in this standard are effective for the Company beginning January 1, 2014. The Company does not anticipate that the adoption of this guidance will have a material impact on its consolidated financial statements.