Trial Balance does not include amount of Return of Capital Investment splits

[John Ralls]

> On May 21, 2017, at 2:24 AM, Chris Good <chris.good at ozemail.com.au> wrote:
> 
> From: John Ralls [mailto:jralls at ceridwen.us] 
> Sent: Friday, 19 May 2017 1:33 AM
> To: Chris Good <chris.good at ozemail.com.au>
> Cc: GnuCash User Mailing List <gnucash-user at gnucash.org>
> Subject: Re: Trial Balance does not include amount of Return of Capital Investment splits
>  
>  
>> On May 18, 2017, at 1:18 AM, Chris Good <chris.good at ozemail.com.au <mailto:chris.good at ozemail.com.au>> wrote:
>> 
>> 
>> Hi John,
>> 
>> (Sorry about wrong abbreviation RoT I used previously when I meant RoC)
>> 
>> Thanks very much for your input. Interesting to hear about US tax law.
>> Australian tax law seems similar, at least as far as recording in GnuCash is
>> concerned, but not as complicated thankfully.
>> 
>> My RoC transactions are actually to do with a stock split where the value of
>> one stock is reduced, but not the no of shares, and a no of a different
>> stock are created for the same value. In my very limited, inexpert
>> investment experience, the Aust Tax Office has made a ruling shortly after
>> the split, detailing what the cost of the shares involved should be.
>> 
>> Using the RoC transaction to reduce the original shares works fine with the
>> Advanced Portfolio Rpt, but not with the Trial Balance, which makes using
>> the TB to validate the correct capital gain/loss value of other sales more
>> complicated than it should be.
>> 
>> I tried everything I could think of to add another pair of splits that
>> adjusts Equity as you suggested, but could not find anything that ends up
>> with the right figures in all accounts and a balancing Trial Balance. Could
>> you please give more detail?
>> 
>> As the RoC transaction seems to be a problem, I thought that instead of
>> doing a ROC, I would sell all the stock at cost (so there is zero gain/loss)
>> and then buy all for the new cost but this comes up with a TB I don't
>> understand at all. E.g.
>> 
>> (Trading Accounts not on, and only 1 currency used, GnuCash 2.6.16, Windows
>> 10)
>> 
>> Tx 1 01/07/2016 Opening Balance
>> $1000 DR Assets:Current Assets:Bank1
>> $1000 CR Equity:Opening Balances
>> 
>> Tx 2 01/08/2016 Tfr Bank to Brokerage
>> $500 DR Assets:Investments:Brokerage1
>> $500 CR Assets:Current Assets:Bank1
>> 
>> Tx 3 02/08/2016 Buy 500 Stock1 for $1 Ea
>> $500 DR Assets:Investments:Brokerage1:Stock1 (Shares 500,  Price $1)
>> $500 CR Assets:Investments:Brokerage1
>> 
>> Tx 4 03/08/2016 Dummy Return of Capital - Sell all at Cost
>> $500 DR Assets:Current Assets:Bank1
>> $500 CR Assets:Investments:Brokerage1:Stock1 (Shares -500,  Price $1)
>> 
>> Tx 5 03/08/2016 Dummy Buy all shares at reduced cost
>> $400 DR Assets:Investments:Brokerage1:Stock1 (Shares 500, Price $0.80)
>> $400 DR Assets:Current Assets:Bank1
>> 
>> The Trial Balance as at 3/8/2016 (Commodities Price Source: Nearest in Time)
>> shows:
>> 
>> $600 DR Assets:Current Assets:Bank1
>> $500 DR Assets:Investments:Brokerage1:Stock1      Expected $400
>> $1000 CR Equity:Opening Balances
>> $50 CR Unrealized Gains                           Expected $0
>> 
>> DR Total $1,100
>> CR Total $1,050
>> 
>> 
>> 
>> Am I misunderstanding?
> 
>  
>  
> Chris,
>  
> Selling and buying back is selling and buying back, it's not an RoC. Remember that GnuCash can handle only one price per day, so the pricedb replaced the price of your sale on 3/8 with the price of the buy, resulting in the Trial Balance report seeing a capital loss on the sale when using the "Nearest in Time" price source. Try doing the sale and buy-back on different days.
>  
> To represent an actual Return of Capital you'd do something like
> $400 DR Assets:Current Assets:Bank1
> $400 CR Assets:Investments:Brokerage1:Stock1 Memo: Return of Capital
> $400 CR Assets:Investments:Brokerage1:Stock1 Memo: Reduction in basis 0 shares, 0 price
> $400 DR Income:Deferred Income:Reduction in basis of investments
>  
> Spin-offs and mergers are not returns of capital: The only money you get back is "cash in lieu" of fractional shares, and that's immediate income just as if you'd sold the stock. Depending on how they're structured spin-offs and mergers can either be immediately taxable (IIRC Baxter's spin off of Baxalta was) or not (IIRC Abbot labs spin off of AbbVie was not). The shareholder letter will tell you. In the former case it's correct to book that as a sale of the original stock and buy of the two new stocks. The letter to shareholders should tell you what prices to use. In the latter I generally create the new stock account and commodity, use the split assistant to create the new shares then edit the resulting transaction so that the new shares are in the new stock's account. I wouldn't expect either the lots facility, the trial balance report, or the APR to understand how to handle the transaction, but I don't use any of those much. The trial balance report can be brought back into balance with the same sort of shadow split pair that one uses for capital gains, just book it to a deferred income account so that you know not to pay taxes on it that year. I doubt that the lots facility has any hope of being able to deal with that situation, and I have no idea about whether the APR would be able to figure it out.
>  
> Regards,
> John Ralls
>  
>  
> Hi John,
>  
> Sticking with my attempt to record a return of capital by selling all the stock at cost and buying it again at the effective new cost (as this is the best way I can see to do this at the moment...)
>  
> I tried putting TX 5 on a separate day (04/08/2016) so that there was a separate price in the Price DB (verified) and this time the TB as at 4/8/2016 correctly records the value of the stock as $400, but now
> Equity: Unrealized Gains $50 CR
> has changed to
> Equity:Unrealized Losses $50 DR
> so TB is still out by $50. It seems to be using Average Costing when calculating gains/losses, but Nearest in Time as per report option for the account balances.
>  
> I do not understand why the TB has any options for Commodity Price Source.
> Shouldn’t it always use the transaction values, converted to Report Currency using tx exchange rate if needed?
> I guess it’s because much of the code is shared with the Balance Sheet and it wants to ensure Assets - Liabilites = Equity and it needs to account for capital gains/losses from stock sales if they haven’t been recorded properly because that affects stock asset value.
> I guess if it didn’t do that, it wouldn’t be any use for finding incorrect capital gains, although maybe the Balance Sheet should be used exclusively for that. No doubt there are other reasons too…
>  
> As an aside, how is the Start of Adjusting/Closing option on the General tab, and the Adjusting/Closing Entries on the Entries tab in the report options supposed to be used? I haven’t seen any documentation or discussion on that. Also the Merchandising tab is a complete mystery to me.
>  
> Sorry for all these questions. I will try to make it worthwhile by documenting new found knowledge.
>  
> Your suggestion for a Return of Capital transaction has 2 splits for the stock account:
>  
> $400 CR Assets:Investments:Brokerage1:Stock1 Memo: Return of Capital
> $400 CR Assets:Investments:Brokerage1:Stock1 Memo: Reduction in basis 0 shares, 0 price
>  
> Isn’t this doubling up on the value? Should they both have 0 Shares, 0 Price?
>  
> Regards, Chris Good

Chris,

Sorry, I can't speak to why the TB report is the way it is. Like most of the reports it was written a long time ago and it's quite possible that things it depends on have changed underneath it.

Yes,  both Stock1 splits will be 0 shares, 0 price.

Regards,
John Ralls