How to value member's holdings

For members to see the club’s financial position at a glance, you need a method for valuing each member’s holdings.

Informal accounting system

There is a range of approaches you can take, some clubs prefer to keep things as simple as possible at the outset and avoid using a formal accounting system in the short term.

  • This approach is only possible if all members contribute the same amount each month. For these clubs, it may be as simple as making monthly contributions into the club’s bank account, and valuing each member’s holding by summing the club’s assets (shares plus funds in the club’s bank account) and dividing this figure by the number of members.
  • This approach has the advantage of simplicity, but cannot offer the more detailed information of a formal accounting system.

Formal accounting system

Other clubs prefer to adopt an accounting system from the start.

  • This involves a certain amount of record keeping, but does not need to be a complex system. A proper accounting system will provide valuable information on the current financial position of the club, and its performance over time.  
  • Many clubs take the more informal approach at the start, and adopt a proper accounting system later. At that point, the partnership agreement may need to be modified to allow for the change in procedure. There are several accounting systems that can be used.

Unit valuation system

Many clubs use the Unit Valuation System (UVS), as it is relatively simple, and should be easily understood by all members. It also caters for different size holdings, and enables new members to join the club at any time without benefiting (or suffering) from the past profits (or losses) of the club.

This system operates on a simple formula:

 C   =   A
            B

Where:
A is the value of the club’s net assets i.e. the current value of the club’s investments and cash in the bank, less any liabilities
B is the total number of units bought by all the members
C is the current value of each unit

At the outset the value of a unit is $1. As the value of the club’s investments changes, so will the value of the unit.

Example
Your club has ten members and you decide on an initial lump sum subscription of $50 and then $20 per month.

Month 1
The club’s assets are $700 in the bank. Each member owns 70 units valued @ $1. The club decides there is as yet insufficient money to make an investment.

Month 2
All members make their $20 contribution and a new member, Fred, joins. He pays his initial $50 and the $20 monthly sub. Fred now has 70 units and the initial members have 90 units. The club has $970 in the bank, and units are valued @ $1.

Month 3
11 members pay their $20 and there is $1,190 in the bank. The founders have 110 units each and Fred has 90.

The club buys 500 shares in ABC Ltd @ $2.00. With brokerage, the total cost is $1,030, leaving $160 in the bank.

A week later, ABC shares have risen to $2.50. The 500 shares are now worth $1,250, so with $160 in the bank, the club’s assets are now $1,410.

Dividing $1,410 by the 1,190 units gives a unit value of $1.18. To get the value of their holding, each member multiplies the number of units they hold by the unit value of $1.18.

Founding members’ holding = 110 x $1.18 = $129.80
Fred’s holding          =   90 x $1.18  = $106.20

Month 4
Each member pays in $20. However, because the unit value has risen, the $20 contribution no longer buys 20 units. With a unit value of $1.18, $20 buys each member 16.95 units.

A new member also joins in Month 4. His initial subscription of $50 and monthly contribution of $20 buys him 59.32 units ($70 divided by the unit value of $1.18).

Operating the Unit Valuation system and downloads

For a detailed description of how to operate the Unit Valuation System, please refer to Keeping account. 

ASX also provides sample accounting forms for your club which provide the framework for operating the Unit Valuation System. View downloadable forms and instructions.

Next topic: Keeping account