EXCHANGE: Haliburton (HAL) and Kellogg Brown and Root (KBR)

Issue:

Halliburton Company [HAL] made an exchange offer to their shareholders where a share of HAL could be exchanged for 1.5905 shares of KBR, Inc. [KBR]. The offer expired at midnight on 4/2/07.

Cause:

This is a tax-free exchange. The new shares of KBR will have, in total, the same cost basis as the HAL shares surrendered, and the holding period will include the holding period of the HAL shares.

This exchange offer is known as a "split-off" (not a "spin-off"), and, as such, requires some creative, work-around accounting in our Club Accounting software. It differs from a spin-off, in that shares of HAL were actually exchanged for the KBR shares. In a spin-off, shares of the originating company remain constant. We will account for the transaction first by effecting a spin-off to record the KBR shares received, then recording a reverse stock split to reduce the HAL shares to the actual number of shares retained after the exchange.

Resolution:

Let's assume a case where we owned 200 shares of HAL at a total cost of $6,314.98, and we elected to exchange 50 of those shares for stock in KBR . Since the exchange ratio is 1.5905 shares of KBR for each share of HAL, we would receive 79.5250 shares of KBR.

First, we will record a spin-off of 79.525 shares of KBR. We will need to know the percentage of HAL shares retained after the exchange. In our example, we had 200 shares, and exchanged 50 of them. Therefore, we had 150 left after the exchange. [150 divided by 200 = 75%, which we will call the Rem Basis]

Figure your Rem Basis:
A. Shares before exchange _______________________ [200 in our example]
B. Shares exchanged _______ [50 in our example]
C. Shares after exchange ___________ [150 in our example]
D. Rem Basis ______ (C) divided by (A) [75% in our example]

We will now go through the steps for entering this transaction in both CA3 and CAO.

CA3:

Go to Enter New Transaction.
* Enter 4/02/07 as the date.
* Enter Spin off as the transaction type
* Select HAL as the parent security.
* Click on the Remaining Basis Percentage button, and enter the figure in (D) above [75 in our example]
* If KBR does not appear as one of the Spinoff Securities, click on NEW SECURITY, and enter the data for KBR.
* When KBR appears in the Spinoff Securities window, enter the shares received, including the fractional portion [79.525 in our example] and 20.69 for the price per share.
* Enter any cash received in lieu of fractional shares in the Cash Received window. Note- if you have not yet received this information from the broker, you can leave this amount blank, and later sell your fractional shares when you know the amount.
* Click on OK to complete the "spin-off"

Now, we must reduce the number of our HAL shares to the amount retained after the exchange, 150 in our example. To do this:

CAO:

Go to Accounting>Securities>Spin Off

Now, we must reduce the number of our HAL shares to the amount retained after the exchange, 150 in our example. To do this:
* Go to Accounting>Securities>Stock Split.
* Enter 4/2/07 for the date.
* Select HAL for the symbol.
* Click Continue.
* Enter the amount in (C) above, for the Shares after split [150 in our example].
* Accept the ratio displayed on the screen, and click on Submit. [No need to enter Cash in Lieu or select bank account].
* Click on 'here' to continue.

Some very astute readers of this article might notice that the above method might not yield absolutely accurate results when more than one purchase was made for HAL. In that case, in our example, the correct basis to be transferred to the 79.525 shares of KBR would be the amount paid for the first 50 shares of HAL purchased. It can't be helped. No club accounting software on the market has the ability to allocate specific lot amounts in a spin-off where multiple lots are involved. In the opinion of this writer, the chances of this treatment ever being challenged are nil.