Cost Write-down
There are three types of cost write-down:
|
Movement code |
CGT/Accounting rule |
Description |
|
COW |
A4/Adjustment to Cost |
Cost write-down (apportioned) |
|
CWD |
A1/Adjustment to Cost |
Cost write-down (single date) |
|
CRD |
D6/Adjustment to Cost |
Cost reduced (partial transfer out) |
The D6 entry is used in demergers and in transferring out a proportion of the cost of a holding to a beneficiary. This is described under Demergers. Here, we look at the difference between an A1 write-down and an A4 write-down.
There are three differences between an A1 write-down and an A4 write-down.
- Firstly, an A1 write-down must be manually allocated back for CGT purposes to the acquisitions which are being written down, whereas an A4 write-down is automatically allocated back. (See the A2 rule for details of allocation).
NB: There is one, rather technical, exception to this: an A4 is allocated if there is a subsequent disposal within 10 days. In this case, the allocation must be done manually using multiple A1 entries. To allocate an A1 entry to a specific acquisition, the transaction date, or the CGT Override Date if present, must be the same as that of the original entry.
- The second difference is that A4 entries do not affect the current holding whereas A1 write-downs do. A1 write-down movement codes usually have the Nil Quantity attribute set. However, this only means that a zero quantity is allowed. You are still requested to enter it and if a value is entered the holding is affected.
- The third difference relates to indexation. On an A1 entry the indexation runs from the date of the entry, or from the CGT override date if present. However, this must match the date of the acquisition. So, in effect the indexation runs from the date of the acquisition. The indexation on an A4 cost write-down also runs from the date of the transaction. However, in this case, the date is the date that the cost write-down occurred. The A1 write-down therefore reduces indexation from the date of the acquisition, whereas the A4 write-down only reduces it from the date of the write-down (like negative ‘enhancement expenditure’).
In general, an A1 write-down should only be used to make an adjustment to the cost, or possibly the units, of a specific original acquisition. For other write-downs, it is usually better to enter an A4 entry. For either type of write-down, if the client has a nominal ledger, remember to set the Negative Addition attribute on the movement code to allow positive amounts to be entered.
A4 cost write-downs often occur as part of a capital reorganisation, e.g. a demerger when new shares are issued which reduce the cost of the original shares. Another example would be a company which issues ‘free’ warrants. These reduce the cost of the original holding.
An example of an A1 cost write-down might be an adjustment to the cost of a specific purchase or sale. It is usually easier to handle these by editing the entry in question.