spin off accounting - how to calc Cost Basis (edit)

questionsforever

I was wondering for stock spin or split-offs, how do you achieve the Canadian dollar cost base for the spin-co and parent-co?

Do you calculate the % of the cost basis attributed to each of parent and spin-co, or do you calculate the market value of the parent and spin-co using the Quicken spin-off register because in the register entry it asks for the fair market value of parent and co on the date of the spin , plus the ratio of shares received. It doesn't say anything about the 'cost basis'

Tom Young

Stock spin offs and split offs are two distinct corporate actions and each requires its own approach.

In the US, and maybe in Canada too, for a spin off you split the original basis for the parent company stock between the parent company and the child company based on the fair market value of your two holdings immediately after the spin off. So

(Parent Co # of shares x per share FMV after spin) + (Child Co # of shares x per share FMV after spin) = $XX,XXX

(Parent Co # of shares x per share FMV after spin) / $XX,XXX x (Parent Co original basis) = New basis of Parent Co

(Child Co # of shares x per share FMV after spin) / $XX,XXX x (Parent Co original basis) = New basis of Child Co

The Spin off Wizard has always been somewhat confusing from the beginning and continues to be confusing to this day, though it's better that it was. Basically it's asking for those per share FMVs after the spin.

questionsforever

Thank you. I have tried to figure out what a split-off is but it seems the treatment is the same in the end for the end-share owner?

Also for a merger where you receive shares, the cost basis of the parent that you get shares in, the treatment is different than above?

Tom Young

With a split off you typically end up with fewer shares of the Parent Co than you originally owned as you exchanged some (or all) of your Parent Co shares for some number of Child Co shares. The allocation is similar to a spin off in that the value of your stock holdings after the split off dictates the allocation process, but Quicken has no "wizard' for these sort of actions, meaning you have to make your calculations outside of Quicken and then make manual entries to get things set up properly.

There's no "one size fits all" approach to mergers since mergers can be structured in a variety of ways each requiring their own accounting approach. The simplest and easiest merger is a tax-free stock-for-stock merger where your basis and holding period(s) is preserved, except for the sale of fractional shares for a gain or loss. Quicken does have a wizard for these mergers (you have to do the sale of the fraction manually using the cash in lieu as the proceeds of the sale), but not for any of the more complex mergers.

In the spin off discussion I should have also mention that holding period(s) are also preserved.

questionsforever

Thank you. So it seems if you do the calculation in this way the exchange ratio between parent:spin shares is not relevant as its just the % ratio of the total sums.

Also how do you deal with fractional shares that are immediately sold. Say you receive 25.48 shares of which .48 are sold. Do you just calculate the spin-co cost basis on 25.48 and then make a sale transaction for the .48?

Tom Young

"Thank you. So it seems if you do the calculation in this way the exchange ratio between parent:spin shares is not relevant as its just
the % ratio of the total sums."

If you're referring to a spin off here then the exchange ratio is very relevant since it creates the # of shares of the Child Co, and that # is multiplied by the per share FMV in the calculation.

"Also how do you deal with fractional shares that are immediately sold. Say you receive 25.48 shares of which .48 are sold. Do you just
calculate the spin-co cost basis on 25.48 and then make a sale transaction for the .48?"

Yes. The spin off wizard will leave you with 25.48 shares, .48 of which you never see. So you have to enter a sale transaction for the .48 fraction to get you holdings correctly stated. The cash in lieu is the proceeds you use for the sale, which gets your actual cash balance correctly stated.

questionsforever

Thank you.

I have done this transaction in Quicken and after many lots asking me for the foreign exchange rate, the values don't seem right at all for the parent-co. For example, the average cost basis per share that shows in the investment portfolio screen for the parent stock has gone UP by a few dollars from 25/share to 28/share, which makes no sense as it should go DOWN by a small amount given the formula above. I am debating to use an alternative method to adjust the cost basis of the parent and enter an add transaction for the spin shares based on my Excel calculations…

Also for the merger stock for stock consideration, is there a thread here or do you know how to enter it if there is both a cash and stock for stock component since the quicken entry is simply 'stock for stock' merger and there is no field for cash received and % in cash vs stock.

Thanks.

Tom Young

"and after many lots asking me for the foreign exchange rate"

So you're also translating currencies here? In that case I don't know how you can make any judgements along the lines you've made - which make sense in a single currency situation - because currency appreciation or depreciation is also changing things. You might try doing the exercise in Excel to see if that's the case.

"is there a thread here or do you know how to enter it if there is both a cash and stock for stock component"

There are lots of threads about these types of mergers but, again, there's no "one size fits all" cookbook for the proper accounting. You really need to read the section of the proxy or offering circular or what ever you received for a section that discusses the tax consequences to shareholders of the merger.

Name the companies involved and you'll get the best answer.

questionsforever

Ok got it.

Based on the formula above, the parent cost basis is supposed to decrease by the spin-shares. Therefore when you sell the parent stock, your gain is now higher than before due to the lowered cost basis. Likewise, when you go to sell the spin shares, you will usually have a capital gain as well since the spin cost basis is related to the parent cost basis. The sum total of the two are equal to the FMV on the date of the spin. Is the idea that the parent gain on sale is purely market driven since in theory the FMV of the parent should drop in the market by the amount of the spin (like a dividend)? In practice, it often goes up as the parent co is now more focused or traders sell the spin and buy the parent. So far I have seen no drop in the parent price from the spin at all and have two extra gains - the extra gain on the parent from the lowered cost basis and the extra gain on the spin shares which, when accounting for the spin ratio, still trades quite a bit higher than the spin-co cost basis.

Tom Young

"Based on the formula above, the parent cost basis is supposed to decrease by the spin-shares."

Yes, in a single currency situation, but currency conversion aspects might affect the actual outcome.

"Therefore when you sell the parent stock, your gain is now higher than before due to the lowered cost basis."

Well, maybe. "Gain" is a function of cost vs. selling price so the date of "when" and the selling price at that time will dictate gain or loss. But your parent co basis is reduced in a spin off.

"Likewise, when you go to sell the spin shares, you will usually have a capital gain as well since the spin cost basis is related to the parent cost basis."

Again, that's an over generalization because gain/loss always is affected by the selling price at the time sold. But you'd expect that if you went into the spin off with a gain in the parent co you'd come out of the spin off with gains in both stocks.

"Is the idea that the parent gain on sale is purely market driven since in theory the FMV of the parent should drop in the market by the amount of the spin (like a dividend)?"

Something like that. If a company with, let's say two operating divisions, Division A and Division B, is priced at $X, then the efficient market theory suggests that the "market" perfectly understands the value of Division A and Division B and adds those two numbers together to get "$X." So it sorta logically follows that your cost basis should be allocated between Division A and Division B immediately after Division B's spin off based on the new $X for parent co and the $Y for Division B the market has determined right after the spin off.