Unit Cancellation

From Wikipedia, the free encyclopedia

Unit Cancellation is part of the Unit Valuation System and typically used by Investment Clubs.

[edit] Purpose

Unit Cancellation is typically used for withdrawals and when you want to exclude none tax deductible expenses from Unit Value calculations.

The exclusion of none tax deductible expenses ensure that the Unit Value calculations are only based on investment performance. Unit Value is determined by the total assets divided by the number of units allocated. If you deduct a none trading expense from the total assets, without changing the number of allocated units, then the unit value will be reduced. This would have the side effect of making the investment performance appear to have decreased - whereas you may have simply elected to use funds for some common purpose, such as an annual meal.

To ensure that unit value remains consistent after a withdrawal or after the payment of an expenses, a commonly used solution to this problem is to cancel a number of allocated units, such that the number of allocated units is reduced in line with the reduced value of the club assets. The net effect being that the Unit Value remains constant.

If you do not want to include income or expenditures transactions in the calculation of the unit value you can either:

• set up a separate Ledger that is not included in the UVS calculations, such as a Petty Cash Ledger
• or you can exclude specific income or expenditure transactions from a Ledger that is included in the Unit Value calculations

Given the complexity of these calcuations most investment clubs use investment club accounting software.

[edit] How it works

When using unit cancellation on a transaction, the transaction is ignored for the purposes of calculating the Unit Value, but still considered when calculating the club's total assets. As the assets and Unit Value remain unchanged after a transaction is exclude through the process of unit cancellation, the number of units can therefore be derived. This has the effect of removing (or cancelling) a number of units from the club's accounts. Each member's units are therefore decreased by an equal amount during unit cancellation.