SPLIT-OFF: Procter & Gamble (PG) & The J. M. Smucker Co. (SJM)

Issue:

The Procter & Gamble Company [PG] made an exchange offer to their shareholders where a share of PG could be exchanged for 1.6342 shares of The J. M. Smucker Company [SJM]. The offer expired at midnight on 11/5/2008.

Cause:

This is a tax-free exchange. The new shares of SJM will have, in total, the same cost basis as the PG shares surrendered, and the holding period will include the holding period of the PG shares. You can find more information on this at the company's website at http://phx.corporate-ir.net/phoenix.zhtml?c=77952&p=folgers

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

Resolution:

Let's assume a case where we owned 200 shares of PG at a total cost of $6,314.98, and we elected to exchange 50 of those shares for stock in SJM . Since the exchange ratio is 1.6342 shares of SJM for each share of PG, we would receive 81.7100 shares of SJM.

First, we will record a spin-off of 81.7100 shares of SJM. We will need to know the percentage of PG 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 11/6/2008 as the date.
* Enter Spin off as the transaction type
* Select PG as the parent security.
* Click on the Remaining Basis Percentage button, and enter the figure in (D) above [75 in our example]
* If SJM does not appear as one of the Spinoff Securities, click on NEW SECURITY, and enter the data for SJM.
* When SJM appears in the Spinoff Securities window, enter the shares received, including the fractional portion [81.7100 in our example] and 39.75 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 PG 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 PG shares to the amount retained after the exchange, 150 in our example. To do this:
* Go to Accounting>Securities>Stock Split.
* Enter |date| for the date.
* Select PG 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 PG. In that case, in our example, the correct basis to be transferred to the shares of SJM would be the amount paid for the first 50 shares of PG 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.