Stock Price / Exchange Rates Used while Closing Book

[John Ralls]

On Apr 17, 2011, at 2:30 PM, Mike or Penny Novack wrote:

> 
>> I don't think that's correct. "Accrual" vs. "Cash" accounting refers to when you book income and expense: Accrual if you book it when you issue the invoice or receive the bill, cash if you book it when you're paid or when you pay.
>> 
>> I think that you're thinking of "Trading Securities"[1], and I doubt that anyone using Gnucash would be subject to those rules -- but I'm not an accountant. Doubtless one will come along and set us straight on the matter.
>> 
>> 
> Hmmmm ... well although not an accountant I have some knowledge of the rules (applying to other sorts of businesses besides trading securities -- which I DON'T know very well). For example, I have just 87 acres of woods and for me "stumpage" would be considered casual income so if/when I chose to have the land logged would be income at that time. But if I had 8700 acres of woods, in the business of raising timber, I would be required to account for that on the accrual basis taking as income NOW the estimated change in asset value annual growth of the trees) and later getting a deduction for "wastage of asset" when cut. In other words, an example of a business not allowed to use "cash" basis, not allowed to defer booking income till actually received.
> 
> I am sure there are other examples besides growing timber where accrual must be used (and change in asset value a current income or loss)
> 
> The following aren't about "cash" vs "accrual" but that even when on a cash basis might need to report income you don't physically receive (even us "peons")
> 
> If you work for a large corporation you might have as one of your benefits term life insurance. If this applies to you (it did for me**) only the first $50,000 (the cost of it) isn't income to you. Let's say you are given as this benefit whatever matches your salary and you are paid more than $50,000 and you opt for the full amount. Then you would be familiar with receiving each year a statement indicating the amount of "imputed income" for the excess even though you didn't receive anything in cash.
> 
> Other examples?  With securities, how about coupon bonds bought at a discount from their face value (current interest rates for this sort of bond are higher than the coupon rate). Of course the interest payments you receive for the coupons are current income but so is the calculated rise in value as the bonds approach maturity -- it's considered current interest income, not capital gains. Income though you haven't received anything in your pocket (and if rates change, might "evaporate").
> 
> Michael
> 
> (NOTE --- I'm not sure this is the CURRENT tax law but was back some decades ago the last time  I was paid for "stumpage" I had to look it up. This land is kept as wildlife habitat, wasn't intending any logging even back then. But a neighboring property was being logged and the logger asked to be able to cut enough trees on our property to allow logs to be hauled out across a "neck" of our land to avoid a dangerous (and environmentally destructive) side hill haul. Initially was only going to be a few trees (to allow the haul) but in the course of cutting the true boundary marker was uncovered, not the mistaken one we had been shown when buying the property and the one I had showed this logger when walking the bounds with him. So he paid us for an acre or two of trees that had been cut thinking they were on the adjacent property. Honest fellow)
> 
> ** I am simplifying because these arrangements can be complicated. In my case the first $50,000 was free (paid by the company) and then they would split the cost with you for up to three times your salary. So even back when I wasn't paid all that much 3x salary was over $50,000. Note that this is NOT what a "split dollar" benefit is! I had that too. In that case the company buys, pays for, and owns the policy but allows you to name the beneficiary and allows you to buy the policy out when you leave if you want to keep it (this is permanent, cash value type insurance). In this case the "split" is the calculated cost of it as if it were term insurance coverage and it would be taxable income for you if they paid for it but in this case you pay that portion of it. Maybe some places you don't, but if the company pays it then again "income" you don't actually receive.

With the life insurance, I (and the IRS) would argue that you do receive the income... it's just like the other pay deductions that your employer makes on your behalf... including tax withholding. That's still not 
accrual. The income is considered payed to you when the employer makes the payment on your behalf. 

An everyday example of how accrual accounting might apply to a wage slave is vacation. Suppose that your salary (or wage, it doesn't really matter) amounts to 1000/wk. and you get 26 days of vacation a year (one 
day per pay period, to make it easy). Under cash accounting, your employer pays you your 2000/wk less the
various deductions (tax withholding, FICA tax, your share of health insurance, your share of that life insurance policy, etc.). You also accrue 1 day of vacation, worth $200 (1 day's pay). You don't pay tax on that $200 until you take the corresponding vacation day (because then you get paid even though you didn't
work). Under accrual accounting *you'd pay tax on that vacation day when you earned it, not when you took it.*

Another example: You sell your house, accepting a contract on 15 December, closing on 15 January the following year. Under accrual accounting, you pay the tax on the gain this year; under cash accounting, you pay next year. 

Actually, OID bonds and your stumpage value over time, are similar situations if I understand correctly your description of the stumpage. In each case, the underlying "book" value of the asset increases at a fixed rate each year, and you have to pay tax on that increase. It's basically the reverse of depreciation, where you get to deductably expense the amount that some fixed asset's value falls over time. That's different from mark-to-market, where you'd have to add to or deduct from the value of your stumpage depending on how much the loggers are paying per tree or acre or whatever they price it on, or I'd have to value and book the market value of that house periodically, or account for the change in market value of the OID bond as interest rates fluctuate. NB that if you buy an ordinary bond at below par on the market you don't have to book the change in face value as it matures, at least in the US.

From the accounting view, I have a depreciation account (balanced by depreciation expense) on the books for a rental house that I own, and if I had any OID bonds (I don't at the moment), I'd have an appreciation account on them, balanced by an appreciation income account. You'd do the same for your trees. I don't book the swings in value of stocks, bonds, or the house due to market fluctuations, and you wouldn't have for your trees, either.

Regards,
John Ralls