Original Cost and Adjusted Book Cost

BY IRWIN A. MICHAEL – JANUARY 10, 2020

We have noted that there exists considerable confusion with regard to the difference between a client’s original investment cost and a client’s adjusted book cost. In a number of instances, clients have mistakenly assumed that their elevated adjusted investment cost, which includes reinvested dividends (distributions), was their original cash outlay, and by extension, that their fund performance was less favourable than they expected. This is incorrect.

We addressed this misconception a couple of years ago via an ABC client email. Today we offer an updated explanation. Naturally, if there are any further questions or comments on this topic, please feel free to contact me at imichael@abcfunds.com.

Original Cost and Adjusted Book Cost

A simple explanation to understand the difference between original cost and adjusted book cost of an investor’s holding in an investment fund.

Assume an investor buys $100,000 worth of a $10.00 investment fund to purchase 10,000 units. The investor’s cost is obviously $100,000.

Next, assume the fund declares a 50¢ dividend per unit. Consequently, the investor receives $5,000 in dividends (10,000 units @ 50¢ = $5,000). If the investor decides to take $5,000 in dividends as a cash disbursement, the investor’s original cost base remains $100,000 as does his adjusted book cost.

However, if the investor decides to reinvest the $5,000 at say $10.00 (assuming an unchanged price for simplicity) this results in an additional 500 units. The investor now holds a total of 10,500 units at $10.00 for a value of $105,000.

Unfortunately, this is where some investors become confused:

  • The investor’s original cash cost outlay remains $100,000
  • However, the new adjusted book cost of the investor who reinvested the dividend becomes $105,000.

This difference will lead some investors to confuse how much capital they originally invested. The fact is that the original cash cost or actual historical invested sum remains $100,000. On the other hand, for those who reinvested the $5,000 dividend to purchase more units results in a new “adjusted book cost” of $105,000.

In summary, this explanation should clarify the difference between an investor’s original cash investment outlay and the adjusted book cost that appears on one’s quarterly ABC Funds’ account statements.

Sincerely,

Irwin A. Michael Signature

Irwin A. Michael, President
I.A. Michael Investment Counsel Ltd.

© 2020 I.A. Michael Investment Counsel Ltd. All right reserved. Design by New Design Group.

ABC founds logo

Wrong email!