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SPLIT-OFF: Kraft Foods, Ralcorp Holdings

Issue:

Kraft Foods, Inc. [KFT] made an exchange offer to their shareholders where a share of KFT could be exchanged for 0.6606 shares of Ralcorp Holdings, Inc. [RAH]. The offer expired at 8:00AM on 8/4/08.

Cause:

This is a tax-free exchange. The new shares of RAH will have, in total, the same cost basis as the KFT shares surrendered, and the holding period will include the holding period of the KFT shares. This information can be verified by going to the company's website at http://www.kraft.com/Investor/stock/Post_split_off/

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 KFT were actually exchanged for the RAH 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 RAH shares received, then recording a reverse stock split to reduce the KFT shares to the actual number of shares retained after the exchange.

Resolution:

Let's assume a case where we owned 200 shares of KFT at a total cost of $6,000, and we elected to exchange 100 of those shares for stock in RAH . The offer was over-subscribed, and we would have only been able to exchange 8.2055% of our tendered KFT holdings, or 8 shares [8.2055% of 100, rounded to whole shares]. Since the exchange ratio is 0.6606 shares of RAH for each share of KFT, we would receive 5.2848 shares of RAH. Actually, the company would issue cash in lieu of fractional shares, but we should use the figure including fractional shares for our spin-off entry. The program will then sell the fractional portion [0.2848] for the cash received in lieu of fractional shares.

First, we will record a spin-off of 5.2848 shares of RAH. We will need to know the percentage of KFT shares retained after the exchange. In our example, we had 200 shares, and exchanged 8 of them. Therefore, we had 192 shares left after the exchange. [192 divided by 200 = 96%, which we will call the Rem Basis]

Figure your Rem Basis:
A. KFT Shares before exchange _______________________ [200 in our example]
B. KFT shares exchanged _______ [8 in our example]
C. KFT shares after exchange ___________ [192 in our example]
D. Rem Basis ______ (C) divided by (A) [96% 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 8/04/08 as the date.
* Enter Spin off as the transaction type
* Select KFT as the parent security.
* Click on the Remaining Basis Percentage button, and enter the figure in (D) above [96 in our example]
* If RAH does not appear as one of the Spinoff Securities, click on NEW SECURITY, and enter the data for RAH.
* When RAH appears in the Spinoff Securities window, enter the shares received, including the fractional portion [5.2848 in our example] and 56.35 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 KFT shares to the amount retained after the exchange, 192 in our example. To do this:


* Go to Enter New Transaction
* Enter 8/4/08 for the date.
* Enter Stock Split for Transaction Type.
* On the next screen, select KFT for the security.
* For the Split Ration, enter (C) above in the first box, and (A), above in the second box [192 and 200,in our example].
* Do not enter anything for Cash Payment for Fractional Shares, and click OK.

CAO:

Go to Accounting>Securities>Spin Off


* Enter 8/04/08 for the date.
* Select KFT for the Parent Company
* Enter 1 for the number of daughter companies.
* Click on Continue.
* Click on the button for Remaining Basis Percentage.
* In the remaining basis box, enter the figure in (D) above [96 in our example]
* Enter RAH for the symbol of the new company.
* Enter the shares of RAH received, including fractional shares [5.2848 in our example].
* Enter 56.35 as the Price per share.
* Enter any cash received for fractional shares in the cash received box.
* Select the appropriate Account.
* Click on Submit

Now, we must reduce the number of our KFT shares to the amount retained after the exchange, 192 in our example. To do this:
* Go to Accounting>Securities>Stock Split.
* Enter 8/4/08 for the date.
* Select KFT for the symbol.
* Click Continue.
* Enter the amount in (C) above, for the Shares after split [192 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 KFT. In that case, in our example, the correct basis to be transferred to the 5.2848 shares of RAH would be the amount paid for the first 8 shares of KFT 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.



 
  
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