Demerger of company - how to record?

[John Ralls]

> On Oct 19, 2014, at 2:30 PM, David Carlson <david.carlson.417 at gmail.com> wrote:
> 
> On 10/19/2014 12:03 PM, John Ralls wrote:
>>> 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
>>>> 
>>>> 
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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,
>> 
>> 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
>> 
>> 
>> 
> 
> John,
> 
> I had to interrupt my question to run an errand, so here in the second
> part. 
> 
> If it is even possible to transfer shares directly from one security
> account to another account denominated as a different security when the
> securities have different per-share values, will this balance out so
> that the gain or loss that is needed to make the trial balance is correct? 
> 
> I think that Divakar Ramachandran 's original question was about the
> detailed structure of the transaction(s).
> 
> If I understand your example, you are saying to create a two line
> transaction with one line adding the actual number of shares of BSTOCK
> resulting from the de-merger at a price derived from the ratio of the
> de-merger times the original cost basis of the ASTOCK, not the current
> value. 
> 
> Then another line having a negative number of shares of ASTOCK equal to
> the positive number of shares of BSTOCK  at a price equal to the
> original cost basis amount of the ASTOCK minus the just-entered amount
> for the BSTOCK divided by the remaining number of shares of ASTOCK,
> giving a total amount equal to the original cost basis amount minus the
> just-entered amount for the BSTOCK in the line for the removal of ASTOCK
> shares.  If the numbers do not work out exactly, let GnuCash adjust the
> prices rather than the amounts or numbers of shares.
> 
> Then you continue to say to go to the price editor and verify (or add it
> if necessary) a price for ASTOCK equal to the price that appears in that
> transaction for the date of the de-merger.
> 
> It is important to note that these prices are not the same as the prices
> that are reported in the company literature or the newspapers for the
> de-merger date.
> 
> I expect that this should keep the trial balance report correct and
> obviate the need for any further adjustment transaction lines.
> 
> Then, I assume, it would also be important to be sure that the price
> editor also shows prices for the following day that do match the prices
> reported by the companies or newspapers for both stocks to make
> subsequent GnuCash reports accurate.
> 
> Is all of that correct?

David,

Not quite. The price and debit/credit value in the transaction must be the same, and it's the price and value of the new calculated basis of the "B" stock; anything else will make the transaction unbalanced. 

With the splits closed it looks like this:


This makes it obvious that your basis in A is 20000 - 7800, or 12200.

And with them open:


Gnucash can't figure out that the price entered for the B stock isn't the one that applies to the A stock, so you have to go in and correct it in the price DB. Yes, your point that the prices we're dealing with here are derived from the original purchase price of the A stock and not the current price of either is important. Except in rare circumstances at large financial institutions current prices have nothing to do with book value, even when splits or spin-offs affect the number of shares you hold.

As always with reports you need to be careful with the Price Source. You'll get weird results if you select anything but "Nearest in time".