Reporting: weighted average price source

[Charles Day]

On Fri, Jul 4, 2008 at 12:48 PM, Christian Stimming <stimming at tuhh.de>
wrote:

> Am Freitag, 4. Juli 2008 20:30 schrieb Charles Day:
> > On Fri, Jul 4, 2008 at 2:58 AM, Christian Stimming <stimming at tuhh.de>
> wrote:
> > > Am Freitag, 4. Juli 2008 04:31 schrieb Charles Day:
> > > > For reports, does anyone know why the calculation for price source
> > > > "weighted average" uses the absolute value in its calculations? It
> > > > seems to me that this gives incorrect results.
> > >
> > > If I recall correctly, this code comes from the old days when I added
> > > this to
> > > track "my personal exchange rate" between USD and EUR. Without this
> code,
> > > I think if I bought x USD for y EUR and later sold x USD for y EUR, the
> > > resulting rate turned out zero instead of the expected value (which is
> x
> > > divided by y). Using absolute values here gave the intended results.
> >
> > Ah, I see... so is the "weighted average" price source defined as
> "weighted
> > average price experienced during buys and sells, not including
> transaction
> > fees such as commission"? Because if so, then do you think that exchanges
> > with a zero "amount", such as capital gains and losses, should be
> excluded?
>
> Indeed I introduced this option only with contexts in mind where there were
> no
> capital loss transactions are included. I have no idea how this has been
> used
> since then, or how other people have used it.
>
> > Example: Buy 5 USD for 4 EUR (exchange rate = 0.8), then sell 5 USD for 3
> > EUR (exchange rate = 0.6), giving a 1 EUR capital loss. I am guessing
> from
> > your response that would expect to see the weighted average price of the
> > buy and the sell alone, which is (4 + 3) / (5 + 5) = 0.7.
>
> Exactly. That was what I intended when I introduced that option back in
> 2001.
> I didn't actually record any capital loss transactions.
>
> > However, the
> > current formula includes the capital loss in the calculation: (4 + 3 + 1)
> /
> > (5 + 5 + 0) = 0.8.  Of course, this assumes that you actually record the
> > capital loss. (GnuCash doesn't require you to, but failing to record the
> > loss puts the books out of balance.)
> >
> > Now on the other hand, what I am proposing is to get rid of the absolute
> > value but keep the zero "amount" exchanges. That would change the
> > definition to "weighted average cost for shares currently held, not
> > including transaction fees such as commission".  A few users have been
> > asking for this option, which I maybe could add.
>
> This option seems to make a lot of sense, too, but it will show different
> numbers. Hence I'm not sure whether a complete replacement of the existing
> option is the best idea, and maybe a new option is the better way to go.
> (Although adding yet another option is always the sub-optimum result of a
> discussion...)
>

I think the version I am proposing would be useful, particularly for the
balance sheet, since it could show assets at cost (no unrealized gains). A
couple of users have said that this is the standard way of preparing
financials in India. One described it as not counting chickens before they
are hatched. I believe adding this option would close bugs 460721, 521403
and 538800.

As far as what to do with the current "weighted value" option, what do you
think? Replace it, or leave it in but modify it to leave out zero "amount"
splits? Do you want to make this decision?

It is interesting to know your own personal exchange rate sometimes, but I
don't think it is a very useful way of valuing current holdings. For me it
would be more useful to revalue by "nearest in time" (comes from the price
DB) or "nearest exchange" (i.e. taking the exchange rate from the nearest
recorded trade - another option that doesn't exist at this point).

-Charles


> Christian
>