BEGINNING TREASURER WORKSHOP

September 27, 2003

Presented by
NAIC
Minneapolis/St. Paul Chapter

Instructor:
Bruce Reed

Agenda

Welcome and Introductions
General Club Accounting Concepts
NAIC Club Accounting Concepts
Club Accounting Procedures
Club Accounting Tips
Resources

Welcome and Introductions

Beginning Treasurer’s Workshop

Instructor: Bruce Reed

How many of you are club treasurers now?
How many of you plan on being a club treasurer?

Buddy system - pair up with someone else in the class to share information

This presentation is available at www.brucereed.com/Presentations/index.htm

Welcome and Introductions - Expectations

What do you expect to get out of this class?

Welcome and Introductions - Disclaimer

Statements made in this workshop are not official statements from either NAIC or the IRS.
We believe that our statements are accurate information but they are not intended to replace professional tax or accounting advisors.
When in doubt follow the advice of your tax advisor or accountant who is familiar with your particular circumstances.

Certain portions of this presentation are subject to NAIC and ICLUBcentral, Inc. copyright, but the presentation itself is copyrighted by Bruce Reed.

Feel free to use all or part of this presentation for any Investment Club Treasurer activities
Feel free to reuse all or part of this presentation in other presentations
Do not feel free to laugh at or ridicule this presentation - we all have our limitations

Welcome and Introductions - Other Workshops

General Treasurer Workshop (October)
Non-Treasurers Self-Service Club Accounting (January)
Treasurer's Year-End/Tax Workshop (February)

General Club Accounting Concepts

Club Organization

Cost Basis

General Club Accounting Concepts - Club Organization

The IRS considers most Investment Clubs to be partnerships.

Generally speaking, Investment Clubs ARE partnerships. They should be operated like a partnership business.

Members each own a percentage of the club. They should each receive a portion of the income and expenses according to their percentage in the club.

General Club Accounting Concepts - Cost Basis

Everything in investing has a cost basis. Cost basis is the money you put into something. When you buy a stock for $1000, your cost basis is $1000.

When you sell the investment, you are taxed on the difference between the sale amount and your cost basis. If you sold that stock for $1200, you have taxable gains of $200.

The same applies to your investment in the club.

When you make a regular monthly payment to the club, that adds to your cost basis.
When you pay a late fee to the club, that adds to your cost basis.
When you chip in for a party, that does not add to your cost basis.

NAIC Club Accounting Concepts

This class is based on NAIC club accounting software and methods.

Other software and methods should have similar concepts.

Current NAIC software is NAIC Club Accounting for Windows (NCA) version 2.3.5, and NAIC Online Club Accounting (NOCA). NCA 1.04 is no longer supported.

The terminology in this presentation is from NOCA. NCA is generally the same, but does have some differences. For example, NCA has an Audit function for making corrections to units and unit values on existing transactions; NOCA handles this automatically.

Club Accounting concepts

Custom Designed
Transaction Specific
Account Selection
Petty Cash Account
Record Deletion
Allocation of Expenses
Unit Value Method

NAIC Club Accounting Concepts - Custom Designed

designed for the specific accounting needs of investment clubs
for best results use the software as intended

NAIC Club Accounting Concepts - Transaction Specific

Transactions that change a member's stake in the club should be entered as Member Transactions
Transactions that change the number of shares of a security (stock) or have a tax impact on a specific security should be entered as a Security Transaction
Cash Account Transactions should only be used for transactions that don't fall under one of the above guidelines, such as Money Market dividends, club expenses for software

NAIC Club Accounting Concepts - Account Selection

The source and/or destination of the transaction determines the Account to enter transactions.

You can create new Accounts to tailor the accounting to your club specifics, in addition to or in place of the provided accounts - Bank, Broker, Suspense. Examples are shown later in this presentation.

NAIC Club Accounting Concepts - Petty Cash Account

DO NOT USE PETTY CASH ACCOUNTS!

Any activity through the club checking account should be entered in the "Bank" account, or a cash account created for this purpose.  For example, you can create an account called "TCF Checking".

For non-investment monies, for example, club shirts:
   - Create a new Cash Account to work as an "accrual" account.
   - Enter deposited money as a Cash Transfer, from the Accrual account to Bank
   - Enter spent money as a Cash Transfer, from Bank to the Accrual account

Some clubs hold a little money as cash for small expenses, such as stamps, copy charges, etc.  In this case a new Cash Account should be created.   Avoid using the title "Petty Cash" to prevent confusion; use a specific title, such as "Cash in Box" or "Cash in Joe's pocket".

NAIC Club Accounting Concepts - Record Deletion

Every entry represents the history of your investment club. Records of withdrawn partners and securities no longer held are permanent records and should not be deleted.

Club Accounting provides a means of marking inactive records.

Records should only be deleted if they are entered in error, for example a deposit entered twice.

NAIC Club Accounting Concepts - Allocation of Expenses

Allocation of Expenses can be "By ownership share" or "By member".   If no special collection is made from members to pay for an expense, then the choice of which method to use is subjective.

However, if a separate collection is made for an expense, and each member is chipping in equally, then Allocation of Expenses should be "By member".   Note that such a collection should be entered as Member Deposits and should buy units for each member (see the example later in the presentation).

Allocation of Expenses may be set by checking or not checking the "equal allocation" box.

Note that if your membership agreement dictates a method of expense allocation, that method should be followed.   Otherwise, the IRS takes the position that all expenses shall be allocated in proportion to ownership (see Publication 541).   To allocate any or all expenses "By member", your partnership agreement must spell it out.

Remember that an Investment Club is a business; all income and expenses arising from the Club's activities apply to the Club, not directly to each member.   At the end of the year, each member is allocated their share of income/expenses based on their share of ownership, just like a business.

NAIC Club Accounting Concepts - Unit Value Method

Club accounting is based on the Unit Value Method.

Units are NOT shares.
Requiring equal values is not recommended.
Unit Value of the Club is Total Club Value divided by Total Club Units.

Things that may affect Units and or Unit Value

Member Deposits
Member Fees
Security Income, such as dividends
Non-security Income, such as bank interest
Expenses, such as software
Sale of securities
Current stock prices
Non-Club transactions

NAIC Club Accounting Concepts - Unit Value Method - Member Deposit transactions

Member Deposits buy units and add directly to the member's value in the club.

Member Deposits includes regular member investments as well as special assessments for expenses, if your club has any.

Some clubs try to keep expense money separate from investment money. There is no need to do this. If your club insists on collecting separate money for expenses, enter it the same way as regular member payments, and when entering the Expense, be sure to mark the Allocation as "By member".

Effect on Units and Unit Value

Member Deposit and Member Withdrawals are the only transactions that affect Total Units, all other transactions affect the Unit Value.
Year-end Distributions also affect Units and Unit Value. Refer to the section on Year-End Processing.

NAIC Club Accounting Concepts - Unit Value Method - Member Deposit transactions, cont.

When a Member Deposit is entered, units are calculated for the member by taking the payment amount and dividing by the Unit Value.

Member Deposits add to the member's cost basis in the club.

NAIC Club Accounting Concepts - Unit Value Method - Member Fee transactions

Member Fees don't buy units.

Member Fees do add to the club's total value, and increase the per unit value of the Club.

Member Fees do add to the member's cost basis in the club.

Member Fees can include things like late fees, and bank fees that apply to a specific member (such as a bounced check).

Member Fees should be treated like penalties. They should not be used for something that applies to all members.

NAIC Club Accounting Concepts - Unit Value Method - Security Income

Security Income includes Cash Dividends and Reinvested Dividends. Security Income can also include Return of Capital and awards from shareholder lawsuits.

Security Income should always be entered on the Securities menu.

Note that Reinvested Dividends are actually two transactions - Cash Dividend and Stock Purchase. Broker statements usually show both transactions separately, sometimes on different days. You can use the Securities, Reinvest entry to enter Reinvested Dividends, but do NOT also enter them as Cash Dividends. Entering them using Reinvest from the menu handles both transactions in one entry.

NAIC Club Accounting Concepts - Unit Value Method - Non-security Income

Non-security income includes Interest, Money Market Dividend, and "Other".

Interest also includes credit union dividends.  Most credit unions use the term "dividend", but the IRS classifies credit union dividends as normal Interest.

"Other" income is entered using the Cash Accounts, Income menu item.   "Other" includes any other kind of income not listed anywhere else on the NOCA or NCA menus.   For example, a shareholder lawsuit settlement received a year after a stock is sold might be entered as Income (follow the advice of your tax advisor or accountant).

NAIC Club Accounting Concepts - Unit Value Method - Expenses

Expenses includes all expenditures of the club, whether tax deductible or not. Software is tax deductible. IRS rules say Investment-related seminars are not deductible. Most clubs consider Treasurer workshops to not be Investment-related, but rather are related to running the business aspects of the investment club, and therefore are deductible.

Sorry, Holiday parties are not deductible.

NAIC Club Accounting Concepts - Unit Value Method - Sale of securities

The sale of a stock or other security does not result in ordinary Income or Expense, but instead results in Capital Gain or Capital Loss.

Sometimes a Merger, Spinoff, or Stock Split results in fractional shares. Usually these fractional shares are not issued as shares, but are issued as "cash-in-lieu-of" - money that gets deposited in your broker Money Market account. It's important to know that this money is a sale, not a dividend. If your broker reports this as dividend, contact them for a correction.

These fractional shares are a sale of securities, and result in a Capital Gain or a Capital Loss.

The software provides for "cash-in-lieu-of" for fractional shares on the entry screen for the Merge, Spinoff, or Stock Split.

NAIC Club Accounting Concepts - Unit Value Method - Current stock prices

Your club by-laws should have a provision for official Club Valuations, which are usually monthly. An official Club Valuation is entered using the Securities, Create New Valuation menu item. A 'Valuation' is just a record of the current stock price of all current holdings.

The value of a Club is the total of all cash accounts plus the current value (price) of all securities owned.

NAIC Club Accounting Concepts - Unit Value Method - Non-club transactions

Non-club transactions are payments that don't directly relate to the club or club activities. For example, a club has a holiday party, and collects money from each member. This money is not related to the member's investment in the club, and does not add to the member's cost basis.

Non-club transactions should never affect the units or unit value of a club.

When entering non-club transactions, they should not be directly associated with a member. They should be entered as Cash transfers between a special "suspense" account and the "Bank" account. The member's name can be entered in the comment area. These are considered "pass-thru" transactions.

NAIC Club Accounting Concepts - Unit Value Method - Non-club transactions, cont.

"Pass-Thru" transactions:

a special account should be set up, for example "SSG Seminar - Member costs"
all "pass-thru" money paid in should also be paid out, for example Club covers member's seminar fee, member reimburses Club.
when "pass-thru" money is spent, it is entered as a Transfer, not an Expense
when all transactions are entered for this activity, the net balance in the special account should be zero

NAIC Club Accounting Concepts - Unit Value Method - Summary

In relation to Units, there are three kinds of transactions:

Deposits/Withdrawals, which add/subtract Units for Members, but do not affect Unit Value
Income/Expenses, which don't change the total units, but do affect the Unit Value of the Club
Cash Transfer, which have no effect on units or Unit Value

Unit Value, sometimes called per unit value, is simply total club value divided by total club units of all members.

Club Accounting Procedures

Monthly Processes
Monthly Reports
Withdrawals
Year-End

Club Accounting Procedures - Monthly Processes

Enter monthly transactions
Reconcile balances
Backup data
Send notices
Print Reports

Club Accounting Procedures - Monthly Processes - Enter monthly transactions

Member Deposits - Members, Deposit
Member Fees, if any - Members, Member fee
Stock purchases and sales - Securities, Buy (or Sell)
Dividends - Securities, Cash Dividends (or Reinvest)
Bank and Broker interest/dividends, Cash Accounts, Interest or (Bank/Money market dividend)
Valuation - Securities, Create new valuation
Other transactions

Club Accounting Procedures - Monthly Processes - Reconcile balances

Print a Valuation Statement for the end of the month. If your club's monthly valuations are not done at the end of the month, you can still use a 'custom' date. If you do use a 'custom' date, remember that this is not an official valuation, used only for reconciling cash balances and number of shares. Do not use the 'Current Unit Value' or the 'Total value of portfolio' from this report.

For each cash account, compare the bank or broker statement balance against the balance on the valuation statement. If there's a difference, print a Cash Journal for the month. The starting balance, transactions, and ending balance should all match the bank or broker statement.

For each security held, match the number of shares on the broker statement with the number of shares shown on the Valuation Statement.

Club Accounting Procedures - Monthly Processes - Backup data

This is done from the Accounting, Utilities menu.

You can use the Backup Manager, or you can Export a backup file to your computer. Or you can do both. I do.

Club Accounting Procedures - Monthly Processes - Send notices

Some clubs have each member print their own reports. If your club does this, notices should be sent to the members when the information is ready for printing.

Club Accounting Procedures - Monthly Reports

It's up to each club and the treasurer to determine which reports to print. When deciding which reports to print, keep in mind what kind of information the members need to see and also keep in mind what information would be needed for the annual audit.

Here are the reports I print for my club:

Valuation Statement
Member Status Report
Cash Contributions Report
Cash Journal
Transaction Summary
Member Listing

Club Accounting Procedures - Monthly Reports, cont.

If your members print their own reports, they can select any reports they like. The most common member reports are:

Valuation Statement
Individual Valuation Unit Ledger (remember to print your own)

If you print statements for the members, you'll need to print a copy of the Valuation for each member. Also, you might want to print each member's Unit Ledger one at a time. If you print them all at once, it won't put them on separate pages.

Club Accounting Procedures - Withdrawals

Entering member withdrawals is straight-forward. The software will step you through it. Use the Members, Withdrawal menu item.

Club Accounting Procedures - Year-End

This workshop does not cover Year End steps in detail, but here is a short list of year-end steps:

Enter all data for the year
Distribute Earnings
Print federal and state tax forms

Club Accounting Tips

Entering Dividends
Dates on Transactions
Problems with Journals not matching
Total Return and Compound Annual Return

Club Accounting Tips - Entering Dividends

Dividends from stocks

dividend check - enter under Securities, Cash Dividends
reinvested - enter under Securities, Reinvest

Dividends from broker/bank

enter under Cash Accounts, 'Bank/Money Market Dividend' or Cash Accounts, Interest, depending on how the broker labels it. Note that dividends from credit unions are actually ordinary Interest.

Club Accounting Tips - Dates on Transactions

For transactions that rely on unit value (Member Deposits, Withdrawals), if possible, avoid using the same date as any transactions that change the unit value. This will reduce doubt about which transactions will affect the unit value for transactions which have units.

Especially avoid entering withdrawals on the same day as a valuation. There have been reports of problems related to this.

Club Accounting Tips - Problems with Journals not matching

If your Cash Journal does not reconcile with other journals, first check that all journals are run for the same date (or range of dates).

The next thing to check for is withdrawals entered on the same date as a valuation. There is a known bug in entering withdrawals on the same date as a valuation. This only applies to official valuations that are created when you enter stock prices, not 'custom' dates used to print non-official valuation statements.

Club Accounting Tips - Total Return and Compound Annual Return

Ignore these columns (better yet don't print them).

Total Return is not a straight-forward calculation of current value vs. cost. It is a complicated calculation based on Compound Annual Return.

Compund Annual Return is a complicated calculation based on the time of ownership of each "block" of shares of a stock. Reinvested dividends and additional purchases are factored in, based on the date of purchase/reinvest.

Resources

NAIC

ICLUB

Yahoo

IRS

Your broker

Resources - NAIC

Local

Minneapolis/St. Paul Chapter NAIC
P.O. Box 18264
West St. Paul, MN 55118
Voice Mailbox: 952-932-9686

National

www.better-investing.org
Toll Free: 877-275-6242

Email Discussion Lists

lists.better-investing.org - click on Club Treasurers

Hint - Digest mode sends only one email per day, rather than one email for each posting

Club Treasurer's Duties

old.better-investing.org/clubs/treasurer-duties.html

Other information

old.better-investing.org/clubs/clubs.html#corner

Resources - ICLUBcentral

Web Site

www.iclub.com

NCA

NAIC Club Accounting for Windows V2.3.5

NOCA

NAIC Online Club Accounting
www.naic-club.com

Resources - NAIC Software

Available from ICLUBcentral

NCA $169
NCA Annual Support $49/year - includes NOCA

NOCA with Support $49/year

NAIC Club Tax Printer $49 (each year) - for NOCA or NCA

Resources - Yahoo Stock Information

Stock Quotes

finance.yahoo.com

Historical Stock Quotes

chart.yahoo.com/t

Resources - IRS

Web site

www.irs.gov ( NOT www.irs.com !)

Publication 541 - Partnerships www.irs.gov/pub/irs-pdf/p541.pdf

Resources - Your broker

Most brokers have information available online. Statements are usually available much faster than receiving them in the mail.

For example, TD Waterhouse has a web site - www.waterhouse.com - and provides full account access online.

Questions?

eMail me

This presentation can be found at www.brucereed.com
Click on Investment Club & Treasurer Presentations.