Demerger of company - how to record?

[David Carlson]

On 10/19/2014 5:09 PM, John Ralls wrote:
>
>> On Oct 19, 2014, at 2:30 PM, David Carlson
>> <david.carlson.417 at gmail.com <mailto: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 <mailto: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 <mailto: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".

John,

Thank you for the clarification.

So in a real world data file in the register view of security account A
the first transaction would have been entered sometime in the past when
A was purchased or it might actually be the net of several purchases and
sales, which would match the balance amount of shares before the
spin-off.  The new transaction might be separated from it by several
unrelated transactions such as dividends which could be there to make
the advanced portfolio reports more accurate.

David C