Fees and Administrative Expenses
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Fees and Administrative Expenses Few accounting topics cause more
confusion than the use of fees and administrative expenses. This is an attempt
to clear up a few common misconceptions.
When a member makes a contribution to the club, it can be
classified as either a payment
or a fee. Payments are awarded units at the then
prevailing unit value
for the club. Therefore, total assets increase, the member's units and value
increase and the unit value
remains the same.
No units are awarded to a member whose contribution is
classified as a fee. Therefore, total assets increase, but the number of units
outstanding does not increase. Since unit value
is computed by dividing the total value of the club by the
units outstanding, the receipt of a fee contribution will increase the
unit value.
There are two main reasons for classifying contributions as
fees - 1. to attempt to spread the burden for certain administrative
expenses equally among the partners, and 2. to assess a penalty against one of
the partners.
Let's take the matter of administrative expenses. There
is absolutely nothing wrong with spreading all these expenses in accordance with
ownership, and thus eliminate the use of fees entirely. However, a club may well
decide that certain expenses should be spread equally among members rather
than in accordance with ownership. This is a matter of club preference, and
should be decided by each club. If a club decides that it wants to
spread the burden of certain expenses equally, it is very important that
the amount of fees assessed and the expenses to which these fees will be
applied be roughly equal. Otherwise, a real distortion in members' values
occurs. See my article on Payment vs.
Fees at http://bivio.com/pub/trez_talk/msg?t=518700003.
Some clubs go to great lengths to keep funds for
administrative expenses separate from funds for investment. In my mind, this is
completely unnecessary. Having said that, however, there is nothing inherently
wrong with using a bank account for administrative expenses and the broker's
account for investments. If, as a matter of course, the club designates all
funds going into the Administrative Checking Account as fees, it is very
important to keep this account roughly equal to the expenses it will cover
in one year.
I will take up the matter of the use of fees to assess
penalties against certain members in a separate article.
I should also add that bivio plans to implement a feature that
will allow certain expenses to be allocated equally among members, both for tax
and financial purposes. When this is done, the need for fees will diminish greatly.
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