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Accounting Gain on Sale of Shares

Discussion in 'Accounting, Tax & Legal' started by Rau, 18th Jul, 2010.

  1. Rau

    Rau New Member

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    Hello all
    I'm preparing Financial Statements for a self-managed super fund that has a deal of direct share holdings. I'm trying to do most of the data preparation and calculations myself (to keep accounting costs down), and then let the Accountant do checking and final touches.

    I'm a little unclear on how to calculate the "Accounting Gain/Loss on Sale)" of shares. [Note: This is about Accounging, NOT Tax considerations.]

    Generally speaking - the Accounting Gain for the sale of a particular share (let's call it BHP) is the [Consideration on sale] - [Cost].

    Now I'm clear that if no BHP shares were purchased in the current financial year, then the Cost is simply the relevant proportion of the (start of the year) 30 June valuation. (So, if you sold half the BHP shares, the cost would be half the 30 June valuation of the BHP share holdings.

    But - I'm unsure how to handle the situation where some more BHP shares were bought in the current year, prior to selling some. And within this scenario, there are 2 cases: (1) You sold less than the quantity held at 30 June; (2) you sold a quantity greater than the 30 June holding.

    Can anyone tell me the answer, or point me to some on-line information?

    Many Thanks
     
  2. jabba_jones

    jabba_jones Well-Known Member

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    Similar to tax cost you can choose your methodology to calculate the accounting cost base. Easiest will probably be weighted average cost or FiFo (First in First Out).
     
  3. Rau

    Rau New Member

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    Thanks for that. Are these the 2 'options':

    1) Calculate a total cost, which is [30 June holdings value + cost of purchases in current year which pre-date the Sale date], then divide by [total holdings at time of sale], then multiply by #units sold. {Uses an 'average' cost of the units sold, based on all prior holdings.}

    2) An approach where the units sold up to the 30 June holding qty are costed at the 30 june value, and units (if any) beyond that (ie. purchased in current year and prior to date of sale) are costed at their purchase price. These two costs are then added to get the total cost base. {Uses separate cost bases for the holdings at 30 June versus those purchased subsequently.}

    I was planning to use method 1 above (if it's correct?) because it's easier to do in spreadsheet.
     
  4. jrc

    jrc Active Member

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    you should look at which shares are most advantageous from a tax point of view, ie you can determine what shares are sold and should use the cost base based on those shares

    eg purchase 1000 July 08 at $10
    purchase 1000 July 07 at $12
    purchase 1000 July 09 at $20

    sell 1500 at $15, do you want a tax loss or a profit, maybe you sell 700 July 07 $2100 profit, 300 July 09 $1500 loss and have a taxable profit of $600
     
  5. Rau

    Rau New Member

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    Thanks for the reply. Yes, I understand that's relevant when preparing a tax return, but I'm doing Financial Statements (Accounts), for which these tax considerations aren't relevant. [Accounting Gain and Gain for Tax purposes are different things.]
     
  6. jabba_jones

    jabba_jones Well-Known Member

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    You can do it any number of ways as long as its consistent. Since its just for accounting purposes most firms I find use FIFO / Av Cost for simplicity. For tax is when you want to do it effectively and use Min/Max or whatever is most beneficial for your tax situation.

    I don't understand what you mean by your '30 June Holdings value' method. If you stored the sum of all purchase costs at June 30 and then kept track of the additional purchase costs + units you would be doing it on an Average Cost base method.

    Depending on the shares in your portfolio administration of cost bases in this manner might get messy if you have tax deferred or tax free components in your dividends.
     
  7. Rau

    Rau New Member

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    To clarify, the Notes to the Financial Accounts include (among others) this info:
    - Value of Holdings for year ended 30 June [units x closing share price on 30 Jun], current year and last year
    - Realised Gains during the Year
    - Unrealised Gains during the Year

    I'm focussing on the Unrealised Gain at the moment, can calculate it as follows:

    Val at end of year - value at start of yr - cost of adds + consid of sells - Accntg Gain on Sells.

    For the Accntg Gain on sale, I calculate a cost base as described previously, viz: Purchases in prior years are assigned a "cost" of the 30 Jun valuation (ie. start of current period). Purchases during the current year are valued at cost.

    So, for shares sold during the current year, I'm determining a cost base per share = [30 June valuation + costs of new purchases prior to the sale] divided by the [30 June holding Qty + Qty purchased in current year prior to the sale] - which I believe gives a weighted average 'cost'.

    Looking at how the accountant had calculated the Accntg Gain on Sale - he seems to use the 30 June valuation as the cost base when selling 'up to' the number of shares held at 30 June, and the purchase cost when selling further (current year purchases) shares. I guess you could call this FIFO.

    Hope that clarifies the 2 methods as I understand them. Do you believe both as described are valid?
     
  8. sumwise

    sumwise New Member

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    Rau, if you want to use a spreadsheet to automatically calculate your FIFO cost of sale, check out this post.