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Junior Member
Group: Forum Members
Last Login: 14/10/2008 4:42:52 PM
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I received deferred income in FY2005/06, which MySF has correctly deducted from the asset cost base. However, when calculating unrealised gains at year end, MySF uses the cost base prior to the deferred income deduction. Also, the balance sheet report seems to calculate the market value of shares as the aggregate of cost plus revaluation (instead of quantity x closing share price). The net effect of all this is that the balance sheet under-reports the market value of shares, by an amount equal to the deferred income, and yet intuitively, the deferred income amount should have no affect on market value.
In FY2006/07, I sold all the units that related to the deferred income amount, but the discrepancy in the market value of shares has carried forward to the new year FY2007/08. From what I can work out, it looks like that at the end of the year in which the asset was sold (FY06/07), MySF reversed the deferred income amount from the unrealised CG account. However, as stated in the first paragraph above, MySF did not include the deferred income amount in the revaluation in the prior year (FY05/06). Which means there is now a permanent under-reporting of unrealised CG, which in turn is causing a permanet under-reporting of shares in the balance sheet, even after the shares have been sold.
The Asset Summary report shows the correct details. However, I have to explain to my auditor why the market value of shares in my balance sheet differs to the market value of shares advised by my broker. Am I missing a trick here?
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MySF Administrator
Group: Administrators
Last Login: Yesterday @ 8:08:32 PM
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Hi,
The balance sheet and the asset reports usually contain different figures for assets.
The balance sheet is an accounting report and therefore it shows the cost base of the assets, not their market value. The cost base of an asset is its purchase price, plus any acquisition costs (such as brokerage), less any recovered amounts (such as tax deferred income or sales). For example, if you purchased 1000 units of XYZ at $9.00 each and paid $40 in brokerage then the balance sheet would show (1000 x 9 + $40 =) $9,040. If you then received $0.50 per unit ($500) of tax deferred income for this asset then the cost base per unit would fall from $9.04 to $8.54 and the balance sheet would show $8,540.00 If you then sell half (500 units) then the balance sheet would show the asset at $4,270.
The per unit cost base of the asset rarely changes. The most common causes of a change in cost base are tax deferred income, splits and consolidations (which also change the number of units owned) and other corporate actions.
Revaluations have no effect on the cost base of the asset. The market value of the asset is the value at which it could be traded (on an open market) at any on point in time. It can fluctuate almost continuously. The market value of an asset, as defined by revaluations, is what is shown in the asset reports. Therefore, if you buy 1000 units in XYZ for $9.00 and then revalue them the next day to $9.10 then the balance sheet will still show $9,000 but the asset reports will show a market value of $9,100.
It is rare that the balance sheet and the asset reports show the same amounts for assets. The only time this can happen is if a) the asset is valued at exactly the same amount for which it was purchased, or, more commonly b) there have been no revaluations recorded for the asset, so the data is not up to date with the latest values.
There are a couple of important things to note about the difference between cost base and market value. Realised capital gains from sale are always calculated from the cost base of the asset. Unrealised capital gains for a given period, for assets that have been owned since before the start of that period, are calculated from the starting market value of the asset for that period. For example, if you bought XYZ on 1/5/2005 for $9, and it was valued at $11 on 30/06/06, then valued at $15 on 30/06/07 then the increase for the year 06-07 is $4 per unit. The cumulative increase is more than that, but it would have been accounted for in previous years and adding it in again would double up the unrealised gains.
The unrealised gains (increase in market value of assets) accumulate year on year, in the "increase in market value of " account. Importantly, these gains are not lumped into the assets' accounts. When an asset is sold, these gains become realised capital gains (income) and are removed from the "increase in market value of " during the year end process.
Please note that it is possible to produce a balance sheet from MySF Manager which shows the assets at their market value, but that is not a standard accounting report.
Please let us know if you would like any additional assistance or information.
Regards,
MySF
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Junior Member
Group: Forum Members
Last Login: 14/10/2008 4:42:52 PM
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Thanks for the quick response. I think we may have our wires crossed so I will try again.
You state that the balance sheet shows only the cost base of shares. True, but it also shows the unrealised capital gain (Account No 1171). And the aggregate of the cost base and the unrelaised gain should equal the market value. But it does not because the unrealised gain appears to be incorrect - it is short by an amount equal to the deferred income. The discreancy seems to be related to the sequence of calculations involving revaluations as seen in the following examples:
Example 1
Purchase 100 of XYZ at $10/share = cost $1000.
Revalue at year end at $15/share = market value $1500
Therefore, unrealised gain = $500 (market - cost)
Assume deferred income of $100 during year
Then, cost base = 1000 - 100 = $900
Plus revaluation of 500
Therefore total assets reported in balance sheet = 1400 (cost 900 + rev 500)
You can see in Example 1 that the total asset value is less than the market value and that the difference is equal to the deferred income.
Example 2 (same as Example 1 but different sequencing)
Purchase 100 of XYZ at $10/share = cost $1000
Less deferred income of $100 = cost base $900
Revaluation at year end at $15/share = market value $1500
Therefore, unrealised gain = 600 (market - cost base)
And, total assets (cost plus rev) = market value
As far as I can tell, the MySF balance sheet uses the method described in Example 1, and the MySF Asset Reports use the method described in Example 2. These methods give rise to different amounts of unrealised capital gain.
The problem I have, is that the MySF balance sheet in the year in which the deferred income was received (FY05/06) does not agree with the market value of assets, nor does it agree at the end of the year in which the asset was sold (FY06/07), and most disturbingly, the discrepancy has carried forward into the FY07/08 balance sheet even though the assets were disposed of last FY and any discrepancy should have come out in the wash at the FY06/07 year end.
Can you please:
1. confirm that the two examples above do indeed reflect the difference between the balance sheet treatment and the Asset Report treatment.
2. confirm that the aggregate of the cost of shares and the unrealised CG (account 1171), both of which are reported in the balance sheet, do not necessarily have to add up to the market value of shares.
3. explain why I still have a discrepancy in the unrealised CG carried over to FY07/08 even though the shares the subject of the deferred income were sold last FY. That is, can you explain why the unrealised CG reported in the balance sheet for the remainder of my share portfolio, is out by the amount of deferred income received on shares disposed of in a previous year.
Thanks and regards
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MySF Administrator
Group: Administrators
Last Login: Yesterday @ 8:08:32 PM
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Hi,
The answers to your questions are as follows:
1) Unfortunately the examples you have written do not reflect the difference in the reports. The example calculations provided are not how either of the two reports calculate the figures they show.
The asset reports (in the columns shown as "market value") calculate market value of an asset simply as: number of units owned x most recent revaluation. The cost base of the asset or any changes to the cost base are not relevant here. The report essentially states how much your assets are worth today, regardless of what they cost at some previous time.
The balance sheet shows the cost base of the asset for the asset in question. You are right that there is another account (1171 Increase in Market Value for Shares) which shows an increase in market value. However, this shows the sum total of increases in market value in past financial years and excludes current year increases in market value until after the year end.
It is only during the end of year process that the current year increase in market value is recognised in the balance sheet, in account 1171, because at that time they become past year gains as you move into the new year.
Using your examples the reports will show:
sjcarlsen (13/08/2007)
Example 1
Purchase 100 of XYZ at $10/share = cost $1000.
Revalue at year end at $15/share = market value $1500
Therefore, unrealised gain = $500 (market - cost)
Assume deferred income of $100 during year
Then, cost base = 1000 - 100 = $900
Plus revaluation of 500
-- If the unrealised gain occurred in this year then it will not be shown in the balance sheet, so account 1171 will have $0.
-- If the unrealised gain is from previous financial year(s) because the asset has been held for a long time then 1171 will show the total that was gained in previous years only, excluding any additional gains in the current financial year.
-- The account representing XYZ in the ledger and the balance sheet will show exactly $900, regardless of any revaluations or unrealised gains at any time. If it shows anything other than $900 then there is a problem with the amounts. This can happen if opening balances are loaded as the market value of the asset, rather than the cost base of the asset. This can be checked by locating the account for XYZ in System Setup > General Ledger and double clicking on it to bring up the list of transactions.
-- The asset reports will show $1500 under the "market value" column. This is simply calculated as $15 x 100. This figure will only ever change if you revalue the asset again. It will not change if you process something that changes the cost base.
Using Example 2:
sjcarlsen (13/08/2007)
Example 2 (same as Example 1 but different sequencing)
Purchase 100 of XYZ at $10/share = cost $1000
Less deferred income of $100 = cost base $900
Revaluation at year end at $15/share = market value $1500
Therefore, unrealised gain = 600 (market - cost base)
And, total assets (cost plus rev) = market value
The results here will be the same as for Example 1.
2)
I can confirm that the aggregate of the cost base of the shares plus the unrealised gains as reported in the balance sheet will not always add to the market value.
The reason for this is that the current year increase in market value is not recognised in the balance sheet until the year end process is run. This is consistent with accounting standards and requirements.
It is very important to note that current year increase for assets that have been owned since some past year is not 'market value today' less 'cost'! It is in fact 'market value today' less 'market value at the end of the last financial year'. If you calculate current year increase from cost every time then you effectively double up some of what is included in past year increases.
3)
I am unable to answer this one accurately. To provide a complete and accurate answer we would need to see the details of what was processed for the fund and these assets in particular. If you would like us to take a look at the fund, please email your fund file through to info@mysf.com.au
Based on the information provided in this post I suspect that there was a problem with some of the opening balances that were processed.
Regards,
MySF
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Junior Member
Group: Forum Members
Last Login: 14/10/2008 4:42:52 PM
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Thanks again for your quick reply.
The problem is that the carried forward amount of unrealised CG (Account 1171) in the balance sheet as at the start of the new FY07/08, is incorrect. And the discrepancy is equal to the amount of deferred income received on shares that were sold in the previous FY. As reqested, I will email you my file to see where I have gone wrong.
Thanks again
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Regular Member
Group: Forum Members
Last Login: 28/02/2008 1:16:58 AM
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| Hi, Not sure if this got resolved, but I am having a similar problem with deferred tax and the increase in market value account. The revaluation journal that is posted on the year end rollover doesn't appear to take into account movement in cost base reductions as a result of deferred tax. Eg: I have an asset with a cost base at 1/7/06 of $3,630.74 and a market value of $5,000. During the FYE 2007 it received deferred tax distributions of $389.96, reducing the cost base to $3,240.78. Market value at 30/06/07 is again $5,000. When I run the year end rollover, my balance in account 1172 Increase in Market Value for Investments Funds is $389.96 less than it should be because the system is not including the tax deferred distributions in calculating the market value movement for the year - it appears to be saying market value was $5,000 last year and $5,000 again this year, so no movement? I know the actual dollar value of the market value hasn't changed ($5,000 both years), but my unrealised gain on this investment has increased by $389.96 because my cost base has been reduced, so this should be recognised as income for the year (through increase in market value revaluation). I believe the balance in a/c 1171 Increase in Market Value for Shares and 1172 Increase in Market Value for Investments Funds, should reflect the same figures as the difference between the market value and the cost of the investments (as per the Asset Movement report). This is not the case and the difference is the tax deferred received during the year. I am thinking of just processing a manual journal for the difference so that it equals the asset movement report. Thanks, Bel 
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MySF Administrator
Group: Administrators
Last Login: Yesterday @ 8:08:32 PM
Posts: 293,
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Hi,
We have received similar feedback recently from another source regarding the calculation of increase in market value for assets where there has been a tax deferred income during the reporting period.
We will update the calculations so that these amounts are included automatically. This change will be distributed as part of a new update.
Regards,
MySF
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Regular Member
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