Demerger of company - how to record?

[John Ralls]

> On Oct 19, 2014, at 9:43 AM, David Carlson <david.carlson.417 at gmail.com> wrote:
> 
> On 10/19/2014 10:43 AM, John Ralls wrote:
>>> 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
>> 
>> 
>> _______________________________________________
>> gnucash-user mailing list
>> gnucash-user at gnucash.org
>> https://lists.gnucash.org/mailman/listinfo/gnucash-user
>> -----
>> Please remember to CC this list on all your replies.
>> You can do this by using Reply-To-List or Reply-All.
>> 
> 
> John,
> 
> Could you elaborate on the details?  For starters, this is not a split
> because both Security A and Security B shares will continue to exist
> after the demerger.  Security A is in an account denominated in Security
> A shares.  It would be incorrect to denominate the Security B in the
> same shares.  So where, exactly do the shares get converted?  Is there a
> need to have a sale and purchase to complete the documentation?

David,

It's not a split in this case because the total number of shares remains the same. In cases where the number of shares changes then you split the source stock to get the right total number of shares before doing the transfer. The transfer between accounts accomplishes the change in commodity from A to B; remember that commodities are associated with accounts.

Whether you need a sale and purchase depends on whether the spin-off results in a taxable event: If it is, do it as a sale and purchase instead of a direct transfer. The letter from the company explaining the transaction will tell you whether it's taxable or not, though if it's a foreign company and you're invested directly in the foreign market rather than via a local derivative (e.g. an ADR), you should consult an accountant with experience in foreign investments on the tax treatment. If it's a local derivative you'll get your letter from the institution backing the derivative instead of from the company, and the structure of the deal is likely to be different from the one that actual shareholders get.

Regards,
John Ralls