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Do Spinoffs Have Your Head Spinning? No Problem
Become a Master of Mergers With myICLUB.com
In my December article I covered the choices for the program setting for Include Earlier Ownership. In this article I’ll discuss the choices and consequences for the program setting Merger/Spinoff Return Basis. This setting is found only in the online myICLUB.com accounting platform and not in the desktop version, Club Accounting 3.
The two choices for this setting are Market Value and Tax Basis. The post merger/spinoff holding period and cost basis for tax purposes of the securities affected won’t differ between these choices. The options change how the return figures are calculated for stocks involved in a merger or spinoff.
The market value choice begins the return calculations with a cash flow into the new post-merger/spinoff security for the market value of the security on the day used to record the transaction into the software. This is equivalent to a purchase of the security at market value on the merger/spinoff date. The return figures seen on the Valuation Statement for the affected security then reflect how well the security has performed since the merger/spinoff date.
The tax basis option uses the tax basis of the new security as the starting cash flow for the return calculations of the affected security. This is equivalent to allocating your original investment into the post-merger/spinoff securities. Going this route lends a better picture of how the original investment has performed or will perform in the future. As with the Include Earlier Ownership choice discussed in the last article, this selection also has a drawback. The performance of the original security will be included in the return figures for the post-transaction securities.
A company that performed well before the merger/spinoff will have a smaller tax basis amount as the starting point for its post-transaction return calculations. The return figures would then be higher than reported using the market value choice to calculate returns. The opposite would be true for companies that performed poorly before the merger/spinoff, especially those with an unrealized loss at the time of the merger/spinoff. The tax-basis choice would provide lower return figures for these securities than the market-value choice.
Which option to choose depends on your club and its feelings on whether the post-transaction companies are different enough to keep their return calculations separated as much as possible. The default choice is market value and offers the most separation of return calculations. To change the setting at myICLUB.com, go to Accounting > Utilities > Update Club Settings. On the settings page, click in the button next to your choice for the Merger/Spinoff Return Based On selection.
Russell Malley is the Club Accounting Adviser for ICLUBcentral.