Demerger of company - how to record?

John Ralls jralls at ceridwen.us
Sun Oct 19 20:40:40 EDT 2014


On Oct 19, 2014, at 4:55 PM, David Carlson <david.carlson.417 at gmail.com> wrote:

> 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:
>>> 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,

Right.

Regards,
John Ralls





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