Demerger of company - how to record?

[John Ralls]

> On Oct 19, 2014, at 5:56 AM, Divakar Ramachandran <divakar07 at dataone.in> wrote:
> 
> I need help recording the following event in a company whose shares I own:
> 
> I had 'x' shares in company 'A' each of which had a value 'rA' on date
> 21/06/2014
> I received notice from 'A' that there was a demerger of 'A' into
> companies 'A' and 'B', each individually listed on stock exchanges. The
> terms of the demerger were such that I had as a result, 'x/2' shares of
> 'A' and 'x/2' shares of 'B'.
> The letter from the company 'A' had the statement that "shareholders are
> advised to apportion their pre-demerger cost of acqquisition of company
> 'A' shares as: 69% for 'A' and 31% for 'B'".
> 
> I used the stock split dialog for this, entering '-x/2' for company 'A'
> shares, and '0.69 * (rA * x) / (x/2)' for price; the next window for
> cash disbursement was left blank, since I received 'x/2' shares of
> company 'B'. This results in a single transaction reducing stock in 'A'
> by 'x/2' and a record of the price in the price editor. I could record
> the shares of 'B' that have resulted as a separate transaction at the
> price '0.31 * (rA * x) / (x/2)'.
> 
> Alternatively, if I record the entire transaction as a split transaction
> with '-x/2' shares of 'A' at price '0.69 * (rA * x) / (x/2)' and '+x/2'
> shares of 'B' at price '0.31 * (rA * x) / (x/2)' I am left with an
> obvious imbalance that GC propmts me to correct either number, or price
> or value.
> 
> What is the correct way to record such a de-merger?

Record a transfer of x/2 shares from A to B at a price of .31 * rA * 2, then in the price editor correct the price of A on the transfer date to .69 * rA * 2. ( (.69 * rA * x )/( x / 2) = (.69 * rA * x * 2) / x = .69 * rA * 2)  

For example, suppose you had bought 200 shares of A at 100, so your basis (book value, not the same as price) is 20000. You transfer 100 shares to B at a price of 62, so your basis in B is 6200 and your basis in A is now 20000 - 6200, or 13800.

Now go to the price editor. If you're using 2.6.x there will be a price on the "demerger" (in the US we call this a spin-off) date; if you're using 2.4.x or earlier you'll have to create one. Make that price 138 and your CoA page will show the correct values for everything, at least on 2.6.x.

Regards,
John Ralls