Edgar Filing: Jefferies Group LLC

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 31, 2017



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-14947

JEFFERIES GROUP LLC

(Exact name of registrant as specified in its charter)



Delaware	95-4719745
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

520 Madison Avenue, New York, New York	10022
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (212) 284-2550

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☐
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The Registrant is a wholly-owned subsidiary of Leucadia National Corporation and meets the conditions set forth in General Instructions H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with a reduced disclosure format as permitted by Instruction H(2).

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JEFFERIES GROUP LLC

INDEX TO QUARTERLY REPORT ON FORM 10-Q

August 31, 2017



PART I. FINANCIAL INFORMATION
	Page
Item 1. Financial Statements	2
Consolidated Statements of Financial Condition (Unaudited)	2
Consolidated Statements of Earnings (Unaudited)	3
Consolidated Statements of Comprehensive Income (Unaudited)	4
Consolidated Statements of Changes in Equity (Unaudited)	5
Consolidated Statements of Cash Flows (Unaudited)	6
Notes to Consolidated Financial Statements (Unaudited)	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	57
Item 3. Quantitative and Qualitative Disclosures About Market Risk	87
Item 4. Controls and Procedures	87

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	88
Item 1A. Risk Factors	88
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	88
Item 6. Exhibits	88

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

JEFFERIES GROUP LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)

(In thousands)



	August 31, 2017			November 30, 2016
ASSETS
Cash and cash equivalents ($6,242 and $16,805 at August 31, 2017 and November 30, 2016, respectively, related to consolidated VIEs)	$	4,806,724		$	3,529,069
Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations	903,744			857,337
Financial instruments owned, at fair value, (including securities pledged of $10,257,188 and $9,706,881 at August 31, 2017 and November 30, 2016, respectively; and $44,862 and $87,153 at August 31, 2017 and November 30, 2016, respectively, related to consolidated VIEs)	14,036,679			13,809,512
Investments in managed funds	169,926			186,508
Loans to and investments in related parties	897,604			653,872
Securities borrowed	7,758,532			7,743,562
Securities purchased under agreements to resell	3,371,435			3,862,488
Receivables:
Brokers, dealers and clearing organizations	2,565,581			2,009,163
Customers	1,291,537			843,114
Fees, interest and other ($245 and $1,547 at August 31, 2017 and November 30, 2016, respectively, related to consolidated VIEs)	344,190			310,894
Premises and equipment	290,871			265,553
Goodwill	1,643,398			1,640,653
Other assets ($3 and $0 at August 31, 2017 and November 30, 2016, respectively, related to consolidated VIEs)	1,278,200			1,229,551
Total assets	$	39,358,421		$	36,941,276
LIABILITIES AND EQUITY
Short-term borrowings (includes $4,281 and $0 at fair value at August 31, 2017 and November 30, 2016, respectively)	$	417,122		$	525,842
Financial instruments sold, not yet purchased, at fair value	8,460,500			8,359,202
Collateralized financings:
Securities loaned	2,763,253			2,819,132
Securities sold under agreements to repurchase	8,473,419			6,791,676
Other secured financings (includes $0 and $41,768 at fair value at August 31, 2017 and November 30, 2016, respectively; and $541,500 and $755,544 at August 31, 2017 and November 30, 2016, respectively, related to consolidated VIEs)	552,540			755,576
Payables:
Brokers, dealers and clearing organizations	2,647,970			3,290,404
Customers	2,459,686			2,297,292
Accrued expenses and other liabilities ($800 and $735 at August 31, 2017 and November 30, 2016, respectively, related to consolidated VIEs)	1,479,287			1,248,200
Long-term debt (includes $553,870 and $248,856 at fair value at August 31, 2017 and November 30, 2016, respectively)	6,449,685			5,483,355
Total liabilities	33,703,462			31,570,679
EQUITY
Member’s paid-in capital	5,805,688			5,538,103
Accumulated other comprehensive loss:
Currency translation adjustments	(125,383		)	(152,305		)
Changes in instrument specific credit risk	(15,364		)	(6,494		)
Cash flow hedges	(1,585		)	—
Additional minimum pension liability	(9,098		)	(9,358		)
Total accumulated other comprehensive loss	(151,430		)	(168,157		)
Total Jefferies Group LLC member’s equity	5,654,258			5,369,946
Noncontrolling interests	701			651
Total equity	5,654,959			5,370,597
Total liabilities and equity	$	39,358,421		$	36,941,276

See accompanying notes to consolidated financial statements.

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JEFFERIES GROUP LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)

(In thousands)



	Three Months Ended August 31,					Nine Months Ended August 31,
	2017		2016			2017		2016
Revenues:
Commissions and other fees	$	139,082	$	152,044		$	437,547	$	454,025
Principal transactions	185,215		167,483			693,242		382,290
Investment banking	475,702		294,930			1,235,586		778,906
Asset management fees and investment income from managed funds	5,465		15,877			11,694		29,743
Interest	230,496		213,716			660,323		655,836
Other	12,371		19,791			58,691		(6,937		)
Total revenues	1,048,331		863,841			3,097,083		2,293,863
Interest expense	247,639		209,391			721,584		621,018
Net revenues	800,692		654,450			2,375,499		1,672,845
Non-interest expenses:
Compensation and benefits	462,933		376,438			1,373,627		1,141,497
Non-compensation expenses:
Floor brokerage and clearing fees	44,869		40,189			138,221		124,259
Technology and communications	72,440		64,512			205,425		196,000
Occupancy and equipment rental	27,736		24,987			77,145		74,498
Business development	23,125		20,259			72,223		67,700
Professional services	25,007		29,761			83,544		82,799
Other	22,318		17,582			62,670		52,649
Total non-compensation expenses	215,495		197,290			639,228		597,905
Total non-interest expenses	678,428		573,728			2,012,855		1,739,402
Earnings (loss) before income taxes	122,264		80,722			362,644		(66,557		)
Income tax expense	38,439		39,564			95,009		5,112
Net earnings (loss)	83,825		41,158			267,635		(71,669		)
Net earnings (loss) attributable to noncontrolling interests	10		(11		)	50		77
Net earnings (loss) attributable to Jefferies Group LLC	$	83,815	$	41,169		$	267,585	$	(71,746	)

See accompanying notes to consolidated financial statements.

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JEFFERIES GROUP LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(In thousands)



	Three Months Ended August 31,						Nine Months Ended August 31,
	2017			2016			2017			2016
Net earnings (loss)	$	83,825		$	41,158		$	267,635		$	(71,669	)
Other comprehensive income (loss), net of tax:
Currency translation and other adjustments	3,830			(55,945		)	27,182			(79,804		)
Changes in instrument specific credit risk (1)	3,508			(2,466		)	(8,870		)	(4,771		)
Cash flow hedges	(1,585		)	—			(1,585		)	—
Total other comprehensive income (loss), net of tax (2)	5,753			(58,411		)	16,727			(84,575		)
Comprehensive income (loss)	89,578			(17,253		)	284,362			(156,244		)
Net earnings (loss) attributable to noncontrolling interests	10			(11		)	50			77
Comprehensive income (loss) attributable to Jefferies Group LLC	$	89,568		$	(17,242	)	$	284,312		$	(156,321	)


(1)	Includes income tax expense of approximately $2.1 million and income tax benefit of approximately $5.3 million for the three and nine months ended August 31, 2017, respectively, and income tax benefit of approximately $1.6 million and $3.1 million for the three and nine months ended August 31, 2016, respectively.


(2)	None of the components of other comprehensive income (loss) are attributable to noncontrolling interests.

See accompanying notes to consolidated financial statements.

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JEFFERIES GROUP LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)

(In thousands)



	Nine Months Ended August 31, 2017			Year Ended November 30, 2016
Member’s paid-in capital:
Balance, beginning of period	$	5,538,103		$	5,526,855
Net earnings attributable to Jefferies Group LLC	267,585			15,434
Tax detriment for issuance of share-based awards	—			(4,186		)
Balance, end of period	$	5,805,688		$	5,538,103
Accumulated other comprehensive income (loss) (1) (2):
Balance, beginning of period	$	(168,157	)	$	(44,946	)
Currency adjustments	26,922			(115,494		)
Changes in instrument specific credit risk, net of tax	(8,870		)	(6,494		)
Cash flow hedges	(1,585		)	—
Pension adjustments, net of tax	260			(1,223		)
Balance, end of period	(151,430		)	(168,157		)
Total Jefferies Group LLC member’s equity	$	5,654,258		$	5,369,946
Noncontrolling interests:
Balance, beginning of period	$	651		$	27,468
Net earnings (loss) attributable to noncontrolling interests	50			(28		)
Contributions	—			9,390
Distributions	—			(563		)
Deconsolidation of asset management company	—			(35,616		)
Balance, end of period	$	701		$	651
Total equity	$	5,654,959		$	5,370,597


(1)	The components of other comprehensive income (loss) are attributable to Jefferies Group LLC. None of the components of other comprehensive income (loss) are attributable to noncontrolling interests.


(2)	There were no material reclassifications out of Accumulated other comprehensive income (loss) during the nine months ended August 31, 2017 and the year ended November 30, 2016.

See accompanying notes to consolidated financial statements.

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JEFFERIES GROUP LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)



	Nine Months Ended August 31,
	2017			2016
Cash flows from operating activities:
Net earnings (loss)	$	267,635		$	(71,669	)
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	1,820			(2,888		)
(Income) loss on loans to and investments in related parties	(65,323		)	15,862
Distributions received on investments in related parties	8,021			11,187
Other adjustments	91,313			13,359
Net change in assets and liabilities:
Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations	(45,746		)	(277,019		)
Receivables:
Brokers, dealers and clearing organizations	(546,424		)	(392,632		)
Customers	(448,494		)	341,930
Fees, interest and other	(31,877		)	(35,514		)
Securities borrowed	—			(1,510,588		)
Financial instruments owned	(176,662		)	2,079,134
Investments in managed funds	16,582			(132,941		)
Securities purchased under agreements to resell	524,937			(248,931		)
Other assets	(50,147		)	(236,907		)
Payables:
Brokers, dealers and clearing organizations	(652,668		)	781,782
Customers	162,387			(31,159		)
Securities loaned	(68,310		)	(22,326		)
Financial instruments sold, not yet purchased	50,267			1,269,261
Securities sold under agreements to repurchase	1,668,725			(1,824,027		)
Accrued expenses and other liabilities	209,756			68,024
Net cash provided by (used in) operating activities	915,792			(206,062		)
Cash flows from investing activities:
Contributions to loans to and investments in related parties	(2,916,204		)	(343,835		)
Distributions from loans to and investments in related parties	2,729,276			485,620
Net payments on premises and equipment	(53,595		)	(51,001		)
Payment on purchase of aircraft	—			(27,500		)
Proceeds from sale of aircraft	—			29,450
Deconsolidation of asset management entity	—			(39		)
Cash received from contingent consideration	1,342			1,211
Net cash provided by (used in) investing activities	(239,181		)	93,906

Continued on next page.

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JEFFERIES GROUP LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS – CONTINUED (UNAUDITED)

(In thousands)



	Nine Months Ended August 31,
	2017			2016
Cash flows from financing activities:
Proceeds from short-term borrowings	25,784,561			8,350,534
Payments on short-term borrowings	(25,887,517		)	(8,229,669		)
Net payments on other secured financings	(203,036		)	(156,602		)
Proceeds from issuance of long-term debt, net of issuance costs	1,030,027			239,779
Repayment of long-term debt	(121,957		)	(373,246		)
Net change in bank overdrafts	(5,764		)	(56,126		)
Net proceeds from noncontrolling interests	—			3,937
Net cash provided by (used in) financing activities	596,314			(221,393		)
Effect of exchange rate changes on cash and cash equivalents	4,730			(17,471		)
Net increase (decrease) in cash and cash equivalents	1,277,655			(351,020		)
Cash and cash equivalents at beginning of period	3,529,069			3,510,163
Cash and cash equivalents at end of period	$	4,806,724		$	3,159,143

Supplemental disclosures of cash flow information:
Cash paid (received) during the period for
Interest	$	777,969		$	675,896
Income taxes, net	3,329			(8,011		)

See accompanying notes to consolidated financial statements.

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JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Index



Note	Page
Note 1. Organization and Basis of Presentation	9
Note 2. Summary of Significant Accounting Policies	10
Note 3. Accounting Developments	10
Note 4. Fair Value Disclosures	12
Note 5. Derivative Financial Instruments	28
Note 6. Collateralized Transactions	33
Note 7. Securitization Activities	36
Note 8. Variable Interest Entities	37
Note 9. Investments	40
Note 10. Goodwill and Other Intangible Assets	44
Note 11. Short-Term Borrowings	46
Note 12. Long-Term Debt	47
Note 13. Compensation Plans	48
Note 14. Income Taxes	49
Note 15. Commitments, Contingencies and Guarantees	50
Note 16. Net Capital Requirements	52
Note 17. Segment Reporting	52
Note 18. Related Party Transactions	54
Note 19. Exit Costs	55

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JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Note 1. Organization and Basis of Presentation

Organization

Jefferies Group LLC and its subsidiaries operate as a global full service, integrated securities and investment banking firm. The accompanying Consolidated Financial Statements represent the accounts of Jefferies Group LLC and all our subsidiaries (together “we” or “us”). The subsidiaries of Jefferies Group LLC include Jefferies LLC (“Jefferies”), Jefferies Execution Services, Inc. (“Jefferies Execution”), Jefferies International Limited, Jefferies Hong Kong Limited, Jefferies Financial Services, Inc., Jefferies Funding LLC, Jefferies Leveraged Credit Products, LLC and all other entities in which we have a controlling financial interest or are the primary beneficiary. On April 9, 2015, we entered into an agreement to transfer certain of the client activities of our Futures business to Société Générale S.A. and initiated a plan to substantially exit the remaining aspects of our Futures business. During the second quarter of 2016, we completed the exit of the Futures business. For further information on the exit of the Futures business, refer to Note 19, Exit Costs.

Jefferies Group LLC is an indirect wholly owned subsidiary of Leucadia National Corporation (“Leucadia”). Leucadia does not guarantee any of our outstanding debt securities. Our 3.875% Convertible Senior Debentures due 2029 are convertible into Leucadia common shares (see Note 12, Long-Term Debt, for further details). Jefferies Group LLC is a Securities and Exchange Commission (“SEC”) reporting company, filing annual, quarterly and periodic financial reports. Richard Handler, our Chief Executive Officer and Chairman, is the Chief Executive Officer of Leucadia, as well as a Director of Leucadia. Brian P. Friedman, our Chairman of the Executive Committee, is Leucadia’s President and a Director of Leucadia.

We operate in two reportable business segments, Capital Markets and Asset Management. For further information on our reportable business segments, refer to Note 17, Segment Reporting.

Basis of Presentation

The accompanying Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and should be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended November 30, 2016. Certain footnote disclosures included in our Annual Report on Form 10-K for the year ended November 30, 2016 have been condensed or omitted from the consolidated financial statements as they are not required for interim reporting under U.S. GAAP. The Consolidated Financial Statements reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for the fair presentation of the results for the interim period. The results presented in the Consolidated Financial Statements for interim periods are not necessarily indicative of the results for the entire year.

We have made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting period to prepare these consolidated financial statements in conformity with U.S. GAAP. The most important of these estimates and assumptions relate to fair value measurements, compensation and benefits, goodwill and intangible assets, the ability to realize certain deferred tax assets and the recognition and measurement of uncertain tax positions. Although these and other estimates and assumptions are based on the best available information, actual results could be materially different from these estimates.

Consolidation

Our policy is to consolidate all entities that we control by ownership of a majority of the outstanding voting stock. In addition, we consolidate entities that meet the definition of a variable interest entity (“VIE”) for which we are the primary beneficiary. The primary beneficiary is the party who has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and who has an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the entity. For consolidated entities that are less than wholly owned, the third-party’s holding of equity interest is presented as Noncontrolling interests in our Consolidated Statements of Financial Condition and Consolidated Statements of Changes in Equity. The portion of net earnings attributable to the noncontrolling interests is presented as Net earnings to noncontrolling interests in our Consolidated Statements of Earnings.

In situations in which we have significant influence, but not control, of an entity that does not qualify as a VIE, we apply either the equity method of accounting or fair value accounting pursuant to the fair value option election under U.S. GAAP, with our portion of net earnings or gains and losses recorded within Other revenues or Principal transaction revenues, respectively. We also have formed nonconsolidated investment vehicles with third-party investors that are typically organized as partnerships or limited liability companies and are carried at fair value. We act as general partner or managing member for these investment vehicles and have generally provided the third-party investors with termination or “kick-out” rights.

Intercompany accounts and transactions are eliminated in consolidation.

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JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Note 2. Summary of Significant Accounting Policies

For a detailed discussion about the Company’s significant accounting policies, see Note 2, Summary of Significant Accounting Policies, in our consolidated financial statements included in Part II, Item 8 of our Annual Report on Form 10-K for the year ended November 30, 2016. During the nine months ended August 31, 2017, other than the following, there were no significant updates made to the Company’s significant accounting policies. The accounting policy updates are attributable to the implementation of hedge accounting in connection with an interest rate swap entered into during the nine months ended August 31, 2017 and the adoption of the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”) on December 1, 2016.

Principal Transactions Revenues

Financial instruments owned and Financial instruments sold, but not yet purchased (all of which are recorded on a trade-date basis) are carried at fair value with gains and losses reflected in Principal transaction revenues in our Consolidated Statements of Earnings, except for derivatives accounted for as hedges (see “Hedge Accounting” section herein and Note 5, Derivative Financial Instruments). Fees received on loans carried at fair value are also recorded within Principal transaction revenues.

Hedge Accounting

Hedge accounting is applied using interest rate swaps designated as fair value hedges of changes in the benchmark interest rate of fixed rate senior long-term debt. The interest rate swaps are included as derivative contracts in Financial instruments owned and Financial instruments sold, not yet purchased in our Consolidated Statements of Financial Position. We use regression analysis to perform ongoing prospective and retrospective assessments of the effectiveness of these hedging relationships. A hedging relationship is deemed effective if the change in fair value of the interest rate swap and the change in the fair value of the long-term debt due to changes in the benchmark interest rate offset within a range of 80% - 125%. The impact of valuation adjustments related to our own credit spreads and counterparty credit spreads are included in the assessment of effectiveness.

For qualifying fair value hedges of benchmark interest rates, the change in the fair value of the derivative and the change in fair value of the long-term debt provide offset of one another, and together with any resulting ineffectiveness, are recorded in Interest expense.

Refer to Note 5, Derivative Financial Instruments, for further information.

Share-based Compensation

Share-based awards are measured based on the grant-date fair value of the award and recognized over the period from the service inception date through the date the employee is no longer required to provide service to earn the award. Effective upon our adoption of ASU 2016-09, we account for forfeitures as they occur. Prior to the adoption of ASU 2016-09, expected forfeitures were included in determining share-based compensation expense. See Note 3, Accounting Developments, for further information on the adoption of ASU 2016-09.

Note 3. Accounting Developments

Accounting Standards to be Adopted in Future Periods

Derivatives and Hedging. In July 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. The objective of the guidance is to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The guidance is effective in the first quarter of fiscal 2019. We are currently evaluating the impact of the new guidance on our consolidated financial statements.

Stock Compensation. In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation: Scope of Modification Accounting. The guidance provides clarity and reduces diversity in practice and cost and complexity when accounting for a change to the terms or conditions of a share-based payment award. The guidance is effective in the first quarter of fiscal 2019 and early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements.

Retirement Benefits. In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The guidance impacts the presentation of net periodic pension costs in the statement of income. The update also allows the service cost to be eligible for capitalization, when applicable. The guidance is effective in the first quarter of fiscal 2019 and early adoption is permitted. We plan to adopt this guidance in the first quarter of fiscal 2018. We are currently evaluating the impact of the new guidance on our Consolidated Statements of Earnings.

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JEFFERIES GROUP LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Goodwill. In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies goodwill impairment testing. The guidance is effective in the first quarter of fiscal 2021 and early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements.

Statement of Cash Flows. In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. The guidance adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. We plan to adopt this guidance in the first quarter of fiscal 2018. In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash. The guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. We plan to adopt this guidance in the first quarter of fiscal 2018. We are currently evaluating the impact of these new ASUs on our Consolidated Statements of Cash Flows.

Financial Instruments-Credit Losses. In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. The guidance provides for estimating credit losses on certain types of financial instruments by introducing an approach based on expected losses. The guidance is effective in the first quarter of fiscal 2021 and early adoption is permitted in the first quarter of fiscal 2020. We are currently evaluating the impact of the new guidance on our consolidated financial statements.

Leases. In February 2016, the FASB issued ASU No. 2016-02, Leases. The guidance affects the accounting for leases and provides for a lessee model that brings substantially all leases onto the balance sheet. The guidance is effective in the first quarter of fiscal 2019 and early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements.

Financial Instruments. In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The guidance affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. The guidance is effective in the first quarter of fiscal 2019. We are currently evaluating the impact of the new guidance related to equity investments and the presentation and disclosure requirements of financial instruments on our consolidated financial statements. Early adoption is permitted for the accounting guidance on financial liabilities under the fair value option and we adopted this guidance in the first quarter of fiscal 2016. The adoption of this accounting guidance did not have a material effect on our consolidated financial statements.

Revenue Recognition. In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The accounting guidance defines how companies report revenues from contracts with customers, and also requires enhanced disclosures. We intend to adopt the new guidance on December 1, 2017 with a cumulative-effect adjustment to opening member’s equity. Because the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other U.S. GAAP, we do not expect the guidance to have a material impact on the elements of our Consolidated Statements of Earnings most closely associated with financial instruments, including Principal transaction revenues, Interest income and Interest expense. Our implementation efforts include the identification of revenue streams within the scope of the guidance, the evaluation of certain revenue contracts, education and discussions with our control functions, and periodic discussions with our Audit Committee. Our evaluation of the impact of the new guidance on our consolidated financial statements is ongoing. We continue to evaluate the timing of recognition for each revenue stream within scope, which includes investment banking and asset management fees which may be accelerated or deferred depending on the features of the client arrangements, and the timing and presentation of certain related investment banking expenses (whether presented gross or offset against revenues).

Adopted Accounting Standards

Employee Share-Based Payments. In March 2016, the FASB issued ASU No. 2016-09, which simplifies various aspects related to how share-based payments are accounted for and presented in the consolidated financial statements. The amendments include the recognition of all excess tax benefits and tax deficiencies as income tax expense or benefit in our Consolidated Statement of Earnings and changes to the timing of recognition of excess tax benefits, the accounting for forfeitures, classification of awards as either equity or liabilities and classification on the Cons