Hi, In section 1.4 there is a question on the difference between bid basis and offer basis to provisioning for unrealised gains in unit pricing. Solution mentioned “The company may even allow for no discounting of the liability, if the assets are being sold specifically in order to redeem the units.” What does this mean? Thank you.
Hi: we need to be a little bit careful here - we aren't 'provisioning for unrealised gains', we are setting a provision up for the tax liability in relation to those gains. This is because BLAGAB fund gains on equities and properties are not taxable until they are realised - ie when the assets are sold. So the company would make an assumption about the expected time period between now and when the existing unrealised gains would actually be realised (and the tax then becomes payable at that future point in time). The liability to pay tax on the gain can then be discounted for that expected period (ie the time between now and when the tax actually has to be paid). If the company is pricing on a bid basis, that means that the fund is contracting in size, with more money going out than coming in. So the expected time period before the gains are going to be realised might be very short. If it is having to sell its equities/property now in order to generate liquidity to pay the net cash outflows, then the gains are being realised almost immediately. Hence the assumed period can be taken to be zero, meaning that the tax liability isn't discounted. In other words, because the company expects to realise those gains very soon, it just takes the tax liability at face value - no need to bother discounting over such a short period.
