Please join us starting Monday for our next workshop, Club Accounting For Everyone. Gene Rooks will be presenting this workshop that is not just for club treasurers! If you are in an investment club, you owe it to yourself and the rest of the club to understand what goes into the bookkeeping. Gene intends to cover what every member should know as well as some of the most frequent questions asked by treasurers.
Gene Rooks learned club accounting via the sink or swim method -- either do it herself, or watch her investment club disband. This experience made her empathetic with new or floundering treasurers who need help over the bumps in the road. She has been a frequent contributor to the BetterInvesting Club-Treasurers email discussion list. Gene retired after twenty-eight years with General Motors Acceptance Corp. in Orlando. She lives nearby in Gotha with her husband. She is a BetterInvesting Space Coast Chapter Director and club accounting instructor.
Bob Mann
There is nothing - absolutely nothing - half so much worth doing as simply messing around in boats
Bob asked me to share accounting concepts that every club member needs to know. Quite an honor following workshops by Gary Simms and Ralph Seger, but here goes:
Don’t say you don’t need to know anything about Club Accounting, what you don’t know can hurt you, and after all, as Herb Barnett wrote in the June issue of BITS, It’s Your Money! Pay Attention!
Why should you be concerned? While you may never be treasurer, it is still a personal responsibility for yourself and your club to be comfortable that the accounting is being handled in an orderly, accurate, fashion. You can know this by understanding and reviewing the reports you as a member are entitled to receive. Very few treasurers would deliberately be dishonest. However, my own experiences in answering queries to the Club Treasurers list ( http://lists.betterinvesting.net/read/?forum=club-treasurers ) has shown that some treasurers don’t learn all they should soon enough, and mistakes, some of them serious, can be made – with YOUR money. (One outstanding example – a treasurer found a way to credit member deposits to their club account all right, so they had it to invest, but it was NOT posted to the individuals contributing, for a whole year, and no one noticed.)
Most treasurers are quick to reach out for the help that is available to them within their chapter or the Club Treasurers list, but some are reluctant to admit to problems, and may try to bluff their way through. The club has a responsibility collectively and individually to be sure accurate records are being kept, which is why YOU need to know what to expect. If you don’t recognize, or ignore, problem areas, you may find you or others will be shortchanged in the allocation of their investment in the club.
What should you expect from your club’s treasurer?
1. Accurate, orderly posting of payments made, sales transactions, income and expense items.
2. Regular monthly reports on Member Status, Valuation, and on occasion, a Transaction Summary which covers everything. This is the only way you can see that all of the club’s business has been recorded. More to follow.
3. Meeting IRS tax filing requirements at year end. Club partnerships do not pay IRS taxes directly. The tax liabilities they incur are passed through to the members at the end of each year. Since club members are required to include their allocation of the club’s gains or losses in their personal tax filing, you need to receive a K-1 when all the club’s statements have been reconciled at year-end. Failure of the club to file IRS Form 1065 and issue K-1’s can result in steep fines.
Just a note, clubs are NOT required to furnish the K-1 on January 31st, in fact, they should not, because they usually don’t receive 1099s from their financial institutions until shortly after that. Legally, partnership clubs have until April 15th to issue K-1’s. Practically speaking, this could get a treasurer killed, but late February or March is a more reasonable time to expect them.
Monday-Pt. 1 of 3
Gene Rooks, Director
Space Coast Chapter
Accounting Instructor
Pt. 2 of 3
What should your club’s treasurer expect from you?
1. Prompt monthly contributions. Your treasurer should receive all the club’s contributions at or immediately after the meeting, as they should only be expected to make one deposit a month. Don’t ‘forget’ and mail them a week or so later, and expect inclusion in that month’s deposit. She or he has a life.
2. KISS club policies. Help your treasurer by not complicating the job with convoluted and unnecessary handling of fees and petty cash. More on this later. Don’t make purchase decisions for REIT, Partnership, or Trust stocks. Their accounting requirements are a nightmare for your treasurer, and will cause delays in K-1 issuance, even if they are good investment choices.
3. Timely, but not hasty, withdrawal policies. Don’t ask for immediate payout checks when a member withdraws, this leads to errors. At the same time, don’t delay authorizing these payouts longer than the end of the next valuation period. It is their money!
4. A co-treasurer. Always have an elected and active backup to work with your treasurer. It is never fair, or good business, to have only one person familiar with the bookkeeping. What if they become ill, have an accident, take an extended vacation, or quit in a snit? It has happened.
5. Annual audits. A treasurer expects to have their work audited annually, right after year-end books are closed. The club should appoint a committee to review the books against your financial institution statements. Never have a new treasurer take over until the tax reports are done for the past year. They can begin learning, but have the current treasurer handle the tax reporting, and submit the 1065.
6. Training. Club accounting is not rocket science, if you can balance a checkbook and have common sense, you can do it. If someone volunteers or is elected who has no prior experience, put them in touch with the chapter to get some basic training. Pay their registration for the Treasurer Workshops usually offered at least once a year, and there are other resources like the above mentioned Club Treasurers List. Any member can go there to post questions. Once up and going, the job shouldn’t take more than an hour or so a month, a little more with the reconciling and tax reporting at year end.
7. Thanks! It is an important responsibility, and a little appreciation goes a long way!
At the same time, don’t delay authorizing these payouts longer than the end of the next valuation period. It is their money!
Pt. 3 of 3
Primary reports members should receive monthly are the Members Status Report, and the Valuation Statement. Don’t just glance at them and toss them when you get home. For your own protection, save them in a folder during the year, and keep the year-end ones permanently. What do these figures represent?
l Col. 1, Paid in since (date of choice) - What YOU have paid in since that date
l Col. 2, Total paid in – What YOU have paid in during your time in the club
l Col. 3, Total paid in plus earnings (PIPE) = Your Tax Basis
l Col. 4 - Units since (date of choice) Number of units your contributions bought since that date
l Col. 5 – Total units you own in the club as of your last contribution.
l Col. 6 – Market Value – What your value is as of the last valuation date, including stocks and cash on hand.
l Col. 7 – Percent ownership. The percent of the club you own as of the valuation date of the report
l Col. 8 – CAR since (date of choice) – The Compound Annual Return your contributions have earned since the date chosen. See http://www.betterinvesting.org/articles/web/5078 if you are interested in a really comprehensive explanation on this.
Most of the above columns are self-explanatory. However, column three on the Paid in Plus Earnings (PIPE) creates more member questions than any other. How can that figure be higher for one person and lower for another than their actual amount paid in? Why is it different at all?
Balance of pt. 3
Your PIPE changes each month only by the amount of your contributions. It also changes at the end of the year when the club’s gain/loss and expenses are allocated. If yours does NOT change by this varying amount over year end, it is an indication the allocation, and perhaps tax reporting, hasn’t been done. It can go up or down, depending on whether your club’s sales and expenses for the year resulted in an overall gain or a loss. The December 31st Member Status report reflecting this may not be available until February, but if not, ask about it.
Note: It used to be that units were also adjusted corresponding to the loss or gain each year-end, even though market value remained unchanged, but this was an unnecessary and confusing step, and is no longer the suggested option. Only the PIPE should change.
Since clubs don’t pay taxes, the tax liabilities they incur are passed through to the members at the end of each year through IRS form K-1, which you are to use in completing your personal tax return. Whatever earnings gain or loss reported is then added to or deducted from your actual contributions to the club, which the PIPE column represents. This is your Tax Basis, which will be subtracted from your total market value when you leave the club. You are only liable for reporting any gain or loss more or less than your Tax Basis. Clear as mud now?
Tomorrow we will move on to the Valuation Statement, and unit values.
In my original club, our treasurer was a corporate lawyer who worked evenings at H&R Block. He had been treasurer for many years by the time I was elected President. I was attempting to calculate our club's return over many years so I was reviewing transaction statements going back many years. Within the 18 months prior to my becoming President, I found two voted-for transactions that never happened and one not-voted-for buy then sell. He ultimately quit the club (and had no good explanation for his activities). I don't know that he was deliberately being dishonest, but it was as much our own fault for not verifying what he was doing.
When I started a new club a couple years later, I made sure that everyone knew there would be an annual audit by two non-officers.
As I've heard described elsewhere: trust, but verify!
Nancy and Rip, withdrawal policies could be a whole 'nuther workshop! As for timing, sooner the better, following the valuation that sets the member's value.
Methods:
1. For tax advantages, transfer shares of appreciated stock. No, this does not dump all the liability on the last person in the club, everyone gets their fair share of allocation sooner or later. This just makes it later.
2. Pay cash out of available funds. If not enough funds available, suggest other members can contribute more at this time, which will buy themselves new units, to provide cash for the payout. No, they are not buying the withdrawing member's units.
3. Sell losers or poor performers, after doing appropriate portfolio review and SSGs on your holdings. Get rid of part of too large holdings, or stocks with little growth value forecast.
Do not do anything off the books and then try to get creative with the software to make things balance. Use the proper withdrawal procedure.
Gene,
Great start! I can't wait for the rest.
Ira Smilovitz
We left off with the Member Status Report. Now take a good look at your latest Valuation Statement.
l Col. 1 and 2 – Name, stock symbol, and first date purchased of your current holdings. Self-explanatory.
l Col. 3 and 4 – Number of shares owned and their average cost per share
l Col. 5 – Total cost of that stock
l Col. 6 and 7 – Price per share as of that valuation date, and total market value of your holding as of that date
l Col. 8 – The percent of your whole portfolio that stock represents
l Col. 9 – Compound Annual Return of that stock for the time you have owned it.
Column 3, Shares Owned, represents the total shares owned under that stock symbol, even if purchased in several lots, and also includes reinvested dividends. This figure should agree exactly with your broker’s monthly statements. Your treasurer should make a copy of those statements available at each meeting.
Column 4, cost per share is the average per share cost of all purchases of the stock and any reinvested dividends. It does not include cash dividends.
Column 5 is the total cost including all broker fees of that holding.
The upper part of the valuation statement is pretty easily understood. But, some members have a bit of a problem following the lower totals.
The first column for Total Cost includes the total invested in your current holdings, and cash on hand as of the valuation date.
The second column for Market Value includes the prices as of closing on the valuation date, plus cash on hand on that date.
The grand total, under the line Total Value of portfolio, will equal the total of Market Value on the Member Status Report. Percent of totals is simply the percent each item is of your entire value.
The bottom section of the Valuation Statement shows the total number of units owned in the club as of that valuation date. It should agree with the total number of units on the Member Status report.
Cash balance check – If there is a minus figure under one of your cash accounts, and a plus under the other, an entry correction, or a cash transfer entry may need to be made. This type of error can occur if one or more items are posted as coming out of the broker account when it actually was the bank checking account, or vice-versa. The total cash should agree with the total cash in your bank and broker statements. Question any unclear totals.
If your total cash balance when compared to broker statements is off pennies, it may mean a mis-entry on a dividend, or omission of SEC fees on a sale. The cash should balance to the penny.
pt. 2
Now let’s look at unit values. This is the method used to properly credit the monthly contributions of each member for what they have invested at the time they invested it. It is similar to the NAV used by mutual funds to determine share value from one month to the next.
Most clubs start out with $10 buying one unit. Just as soon as they have an expense, or buy a stock, this initial unit value changes on each valuation date. For instance, 10 members put in an initial $100 each and own 10 units each at the end of the first month, total $1000. Next month they spend $100 on software and contribute another $100 each still at $10 unit value. Club is now worth $1900. $1900 divided by 200 units owned equals a unit value now of $9.50. $10 divided by $9.50 = 1.0562. So, their $100 invested the third month will buy them 10.562 units. Luckily, no one has to do that math, the software does it all.
When the value of your club goes up due to price gains on stocks, unit values go up, and each contribution buys fewer units. If your value lowers due to price dropping or heavy expenses, unit values go down, and each contribution buys more units. Just like a stock that you invest $100 a month on. When it is priced at $10, you get ten shares. If the price goes up to $20, you only get five shares with your $100. If it drops to $5, your $100 buys 20 shares.
This brings up another common club question, about keeping all members equal. Monthly changes in unit values makes keeping members equal an impossibility in the long run. As soon as a new member joins, or an original member doubles up, skips a month, whatever, no longer are all members buying the same units at the same time, even if they put in the same dollar amount overall. Equal membership is of no particular value anyhow. Trying to maintain it by requiring newer members to pay up doesn’t work, because their contributions buy in at different unit values than yours did. Requiring a large buy in also inhibits recruiting new members. Instead, set a reasonable minimum for a new member buy in, who can buy more if they wish. The unit value system is handled readily by the software and makes it possible for clubs to have members joining at different times with different percentages in the club, all handled fairly.
Pt. 3 OF 3
Tomorrow we will look at the Transaction Summary report, and discuss fees and petty cash.
Nancy, Yes, the unit value, if you are talking about what your contribution will buy in units at a particular time, is the same for everyone each month. The creating of a Valuation Statement computes the unit value for the coming month. It will not change until the next valuation is run. There should only be one valuation run and saved each month, just so everyone's contributions will buy the same during that period.
The only way two people would own the exact amount of units would be if they started at the same time and never varied from contributing the same amount as each other each time they paid. This seldom holds up for long, as people have a way of missing a month for illness or something, or paying ahead for a vacation period, etc. Thanks for the question,
<...at any given time is the unit value the same for everyone?>
Usually only at the beginning of life of the Club, providing each member pays the same amount. The unit value of each member will remain the same until there is a unique event on the part of one, or more, member(s). That unique event can be a difference in the amount paid in, a missed payment, a partial withdrawal, etc.
Al,
I think you've confused "unit value" for "units owned". The value of a unit must always be identical for everyone within the club. Class A and Class B units aren't allowed, that I'm aware. The number of units owned can vary by member, although I understand that some clubs would like everyone to own exactly the same number of shares.
If I'm confused about what you wrote, please help me to understand.
I won't debate what you wrote, for it is spot on.
For some reason, when I read Nancy's question, I interpreted it to mean the total value of each member's units in the Club. It will always be the same until there is an event on the part of one, or more, member(s) to alter a contribution in some way or to take a partial withdrawal. Otherwise, I would have had a very difficult time trying to understand the basis for the question.
Surely, the value of a unit is as it is stated by the software - for each and everyone to behold.
