Demerger of company - how to record?

David Carlson david.carlson.417 at gmail.com
Sun Oct 19 12:43:26 EDT 2014


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
>
>
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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 C


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