Home > Import > Tax Lot Data Discrepancies and Reconciliation Options
There are a number of reasons why your custodian’s open lot and cost file may not match to Morningstar’s calculated open lots. Here are some common reasons:
When you first started importing into Morningstar Office, you most likely went through the initialization process, which creates a single Deliver-In transaction for each holding in your accounts using the holding file provided by your custodian. This initial lot will most likely not reconcile with your custodian lot file because your holding is made up of multiple lots. This requires the Split Initialized Lots option (see Split Initialized Lots section).
Many custodians do not provide the lot matching method on their closing transactions (FIFO, LIFO, Specified, etc.). For this case, Morningstar Office relies on the default matching method setting for the holding. If the closing transactions’ matching method does not match the Morningstar method, the Morningstar open lots may not match the custodian open lots. This requires the View/Edit Transaction update to edit the closing transaction.
There may be a security that was delivered into the account with missing cost basis information. This requires the Update Cost to Custodian option.
Many custodian trading platforms have sophisticated tax lot optimizer algorithms that specify which lots to close. This requires the Specify Lot option.
The security may have incurred a corporate action and the cost calculation methodology may be slightly different. For example, there may be a difference in the fair market value calculation. This requires the Update Cost to Custodian option.
There may be a wash sale cost adjustment that Morningstar Office has not considered. This requires the Update Cost to Custodian option.
There may be a Return of Principal cost adjustment that Morningstar Office has not considered. This requires the Update Cost to Custodian option.
There are three functions that help you reconcile the latter two outcomes: Splitting Initialized Lots, Re-Initializing Lots, and manually editing tax lots.
Split Initialized Lots
Splitting Initialized Lots is a process by which users can simply override open tax lot data (that is either price, number of shares or acquisition date) in Morningstar Office with the data the custodian provides. This detailed and precise process results in Office data most accurately mirroring the custodian data.
Users most likely to use this method want to account for historical transactions that affect tax lots or who want to produce accurate realized gain/loss reports.
Partially closed lots cannot be split, however you can manually update the transactions related to those lots.
Here’s a simple and straightforward example of why you might consider splitting open lots. After you initialize or import your client and account data, your client owns 100 share of ABC fund which, in office, is accounted for with one Deliver-In transaction of 100 shares. But, after importing your tax lots, you find out that the 100 shares was really the result of two buys, we’ll say 75 shares on a certain day and 25 shares on a different day. With Splitting lots, Office provides functionality to break that single Deliver-in of 100 shares into 2 deliver-ins with the correct acquisition date, price, and number of shares.
Click here for step-by-step instructions to Split Initialized Lots.
Re-Initialize Lots
The Re-Initialized Lots option is the easiest way to create a new baseline using the open lot and cost data from your custodian. However, you should carefully consider whether or not to use this option.
The Re-Initialized Lots option will generate a single Debit transaction for the entire open holding(s) you have selected in Morningstar's system. Additionally, the option will generate multiple Credit transactions corresponding to each open lot record from your custodian. Each Credit transaction will be created with the original cost that your custodian is providing. The end result of the holding amount(s) will be the same, but now your open lot and cost data will be in sync with your custodian.
Users most likely to use this method might want to create a new beginning point with custodian provided tax data; produce unrealized gain/loss reports; have a position with months or years of complicated transactions which can’t be easily tracked, audited, or deciphered; or the user doesn’t want to manually edit transactions for positions containing partially closed lots.
There are some items you should consider before using this Re-Initialize Lots option.
Creating Debit and Credit transactions as of your import lot file will only ensure that your lot and cost data is correct moving forward. This option will not correct any historical transactions that have occurred prior to this new baseline you are establishing.
Therefore, if you run a Gain/Loss report for a date range that spans across this new baseline, the result could be inaccurate. Only a date range after this new baseline should be considered.
There are some items you should consider before using this Re-Initialize Lots option.
If you want to correct your entire transaction history for the un-reconciled lots, you can start with the Split Initialized Lots option to split your initial Deliver-In transaction into multiple lots with correct cost. You can also verify your existing, closing transaction to ensure the tax lot accounting method is correct and Morningstar has closed the correct lot(s). This is a more time-consuming approach.
Both of the two reconciliation methods are precise in that the custodian’s data is brought into Office, however the more intricate process of splitting initialized lots results in more accurate reporting.
Manually Editing Lots
Manually editing lots is an appropriate option to reconcile lots as long as the user can provide the data and enter it in Office. In this method, a user can view an un-reconciled position and edit the transactions manually with the correct number of shares, share price, or acquisition date.
Manual editing is generally used in conjunction with the Splitting Initialized Lots reconciliation method because it is not uncommon to have partially closed lots as part of the import file. And, as stated previously, the primary reason for using the splitting lots reconciliation method is to generate accurate realized gain loss reports.
For additional frequently asked questions regarding the importing and reconciliation of tax lots, access the FAQ here.