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Corporate Spinoff in R29.9 and later editions

q_lurker

With the R29.9 release of the subscription program, Quicken changed the way they were treating Corporate Spinoff transactions. (I am currently using R29.22.)

Improvement: Changed the Corporate Securities Spin-Off investment action to use a Return of Capital transaction instead of a Removed transaction to provide more accurate IRR reports.

As noted, a change was necessary because Investment Performance Reports (IPR) and related calculations for Average Annual Return or Internal Rate of Return were wrong as presented in prior releases. As currently implemented, there are two glitches: one a minor (easily corrected) glitch; the second with no perfect solution. Whether the target of correcting the IPRs has been achieved depends on the second glitch.

I offer this discussion for interested users to comment on this new approach -- plusses and minuses perhaps leading to an 'idea' to further improve the action. If anyone wants more description or self-generated documentation, I can offer more. I am trying to start this off shorter rather than longer.

The basics of the change are that the former Remove Shares and Add Shares for the parent company have been replaced by a Return Cap and Misc Income transactions for the parent company. Those two values constitute the "return" from the parent company. In combination with the still used Add Shares for the spinoff company, the Returns and Investments on the IPR are supposed to match and, when applicable, cancel each other out.

THE MINOR GLITCH: The RtrnCapX transaction does not properly flow to all later transactions and reports, specifically capital Gains reports when the parent company shares are sold. But in the portfolio view before the sale, the proper cost basis will be shown. The glitch also shows in the Investment Transactions Report negative Amount Invested (after the parent shares are sold) when it should be $0.

CORRECTING THE MINOR GLITCH: Turns out to be easy. Click the Edit button for the RtrnCapX transaction; then click the Done button. No real editing is necessary. That should take care of the problem as far as I have seen. The Capital Gains and Investment Transactions reports should be correct. I am confident the programmers can quickly resolve this glitch.

A POTENTIALLY MORE CHALLENGING ISSUE: For the Investment side of the IPR, the program is accessing the ending share price for the date of the transaction. During the spinoff action, the user provides "Cost of old shares" and "Cost of new shares" along with a share ratio all three of which determine how the cost basis of the parent shares is allocated between the old parent and the new spinoff. (We have asked for years to have "Cost" replaced by "Fair Market Value" but that clarification has never taken place. However, other language is in place to clarify the intended values.) Those two 'cost' values are plugged into the price history records for the two securities.

The problem arises because the 'fair market values' applicable for getting the return and investment sides of the IPR correct are not generally closing price quotes for the respective securities. Before closing prices are entered or downloaded, the IPR will be correct; the return and investment values will match and offset each other. But if and when the price history of the spinoff is updated with true closing values for that date, the investment value will no longer match the return side value.

My summary arrives at saying, you can have the IPR or the Net Worth correct, but not both. You can have the spinoff-based fair market value in the price history or the correct closing value, but not both.

OTHER CONSIDERATIONS: I have reservations about the use of the Return of Capital transaction based on past program behavior with that transaction. Problems have historically existed with multi-lot holdings when RtrnCap transactions are used. I have tried multi-lot (2 lot) parent with this current implementation and not found an issue, but I am still cautious about its use.

I do not care for the MiscInc transaction as used. The RtrnCap transaction does include a field for "Market Value" associated with the Return of Capital value. Rather than use the MiscInc transaction used (which I believes raises questions), I would rather the process use that Market Value as the "Return" portion of the calculation. (At which point I am hoping the RtrnCap approach proves suitably robust for all cases putting aside my above noted reservations.)

All in all, I think this approach may well be an improvement, though the minor glitch and challenging issue do need addressing, IMO. Thoughts from other interested users are welcome.

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Comments

q_lurker

More robust testing reported here:
https://community.quicken.com/discussion/comment/20135189/#Comment_20135189

q_lurker

In that same linked discussion, I recently added an extended presentation about working around the shortcomings of the current (post-R29.9) Corporate Spinoff actions.

The gist of that methodology is to
a) use the generated Add Shares for the Spinoff security
b) generate a new Remove Shares for the Parent
c) generate new Add Shares for the Parent with reduced basis, and
d) use a MiscIncX to account for the 'error' in the way the Remove Shares omits the applicable value of the spinoff.

In that other discussion which is specific to a Pfizer - Viatris spinoff, I am inviting more broad based issues to be discussed here.

q_lurker

In that other discussion, @Q_comm_red asked:

Is there an underlying issue with the IRR calculation?

I am not clear on the question. In all the variations I have seen, the transactions generated by the Corporate Spinoff action have never fully and properly meshed with the IRR calculations, meaning Investment Performance Report (IPR) and portfolio views with Average Annual Return presented.

The companion question become -- What Quicken version(s)? Behavior before QW2017, in early subscription versions, and since R29.9 have all differed and have unique shortcomings (IMO). Your citation of Remove/Add suggests you are dealing with QW2017 to QW-S R28.28 releases.

It seems to me that the remove/add shares is not being recognized by IRR, given that the date range for the IRR includes the remove/add shares.

How are you seeing them "not being recognized"? I see the transactions included in IPR presentations. The issue for me has been that the data being presented for those transactions is incomplete or inaccurate for the purpose.

I would think IRR should 1.) offset the original cost basis on the original date. (remove shares) 2.) insert the new cost basis and date. (add shares).

Re 1) Are you asking that the removal of the original basis be backdated to the original date? I hope not. Further, that original basis may also (conceptually) have been impacted by prior RtrnCap transactions or other spinoff or similar events. "Original" basis may not be from the lots origin.

A further consideration in the thought (and calculation) process needs to be that while the overall picture through the spinoff should be dollar-neutral (same value added as removed),users may not always be looking at the whole picture. For example, I may want to look at Pfizer's IRR across that spinoff date. On 11/16/20, PFE had 5% of it's value removed PFE. That non-neutral effect needs to be included in the IRR calculation. Doesn't really matter that it went to VTRS specifically, but the calculation does need to reflect the the investor did get that as a return.

Q_comm_red

@q_lurker
[edit 12-8-20, 2300, cst. please see my next post, https://bit.ly/36WaxWA , on the more general topic of which IRRs are valid.]

using subscription version r29.9+

corporate spin off: firm b is a spin off of firm a.

manually entering transactions to record spin off:
-- 1 remove shares (all shares of firm a)
-- 2 add shares, with appropriate number of shares and cost basis for firms a and b.
-- result: all reports and portfolio is correct for all dates, except IRR calculation. (I am asserting this. I have not checked all reports. If not true, please describe.)

IRR of firm A:

dates before spin-off -- IRR calc OK.
dates after spin-off -- IRR calc not OK. IRR used original cost basis, not the revised CB (Cost Basis).

I think that if the IRR calculator replaced the original CB with the revised CB for dates that included spin-off date, the IRR calc would work.

One way to this is to have IRR add a cash flow "return" equal to original CB at the date of the original CB getting this hint from the remove shares transaction. Then adding a cash flow "investment" equal to the revised CB on the originals CB date, getting this hint from the add shares transaction.

When I refer to IRR calculation, I am not making any changes to accounts but simple describing how IRR could get to the correct answer by how it constructs the IRR cash flow as seen in detailed report from IRR.

[eom]

Q_comm_red

more thoughts on IRR calculation of a spin-off

The IRR for any of the firms after the spin-off, where the dates of calculation include the spin-off date, is actually undefined and unknowable in an investment sense. The cost basis assignments done thru manual 'add shares' or other means is done in accordance with IRS guidance and has no relation to the business entities as they existed months or years prior to the spin-off. The financial contribution by spin-off months or years prior the spin-off is not known or even if the spun-off entity even existed in its spun-off form. The means the cash flow that the IRR calculator uses is not related to what the companies would have cost or proportions of distributed dividends, both of which are used in IRR cash flow.

conclusions:

1. valid IRRs that span spin-off date:
- the combination of all companies included in spin-off. one IRR result.

2. valid IRRs after spin-off date:
- any individual company or any combination. many IRR results.

3. valid IRRs prior to spin-off date:
- the one original company. one IRR result.

4. Any other IRR is invalid, from a investment sense

q_lurker

@Q_comm_red
-- QW-Subscription R30.14 for a manually entered Removed Share transactions
For the Investment Performance Report (IPR), the transaction shows as a "Return" on the date of removal for a dollar amount equal to number of shares times most recent prior price per share. If the price history has a price on that date it uses that price. If not, it uses the preceding price it does have. If you later change the price history, the 'Returns' column updates accordingly.

In prior versions (not sure when the change was made), there was a "MktValue" field in the transaction list (not on the Enter Transactions form) for a Removed Shares transaction that might have been applicable to the IPR and that defaulted to the cost basis of the shares removed.

For the Add Shares component in the current program, I see the parallel behavior. The entry in the IPR uses the latest available price on or prior to the date of the entry to determine the value of the shares added. This line item is also dynamic, meaning if the price history changes, the IPR line item changes.

Because both transactions use the same price history records, if you use the method I have used manually for many years

Remove (all) Shares Parent Co
Add (all by lot) Shares Parent Co
Add (xxx by lot) Shares Spinoff Co

Then the parent company Removes and Adds will balance each other in the IPR and the IPR calculation for the IRR (Average Annual Return) will reflect a net addition in the 'Investments' column for the added value of the spinoff company.

IRR of firm A:

dates before spin-off -- IRR calc OK.
dates after spin-off -- IRR calc not OK. IRR used original cost basis, not the revised CB (Cost Basis).

I assume when you cite cost basis as being used, you mean a line item entry in the IPR. As currently configured for a spinoff manually entered as Removed Shares / Add Shares I don't see cost basis used anywhere. The only place I would expect 'cost basis' to show in an IPR would be a buying shares and then only under selected subtotals (by Security).

Your other thoughts

The IRR for any of the firms after the spin-off, where the dates of calculation include the spin-off date, is actually undefined and unknowable in an investment sense. ...

I disagree. In an investment sense, the spinoff of a company from a parent is no different than a 'dividend' from that company. It is just 'paid' not in dollars but in shares with a value/share of the spinoff. That the share value of the parent drops upon execution of the spinoff is no different (except in magnitude) from when the share value drops as the shares go ex-div prior to the dividend payout.

I have found (when properly programmed!) the IRR (aka Avg Annual Return) to be reliable and meaningful with respect to the parent by itself, the spinoff by itself, or as combined. (The 'neutral' effect of the spinoff only apples when both parts are included in the calculation.) The characteristic that the IRR does handle spinoff type events (when properly programmed!) is one thing that makes it more valuable to me as an investment metric.

Q_comm_red

@q_lurker

1. thanks for the details on the remove/add shares transactions and the price history.

2. I also use the remove/add method you described for spin-offs. Actually, I do a spreadsheet first and then quicken and cross check. (I need to re-think this after doing some experiments. (see below). I am back in learning mode.)

3. [file under pet peeve] IRR is short for Internal Rate of Return. Ref: https://bit.ly/2VZ00DU "Average Annual Return" is often used to mean IRR but not always. "IRR" is more specific being defined as NPV=0 for cash flow.

> I assume when you cite cost basis as being used, you mean a line item entry in the IPR. As currently configured for a spinoff manually entered as Removed Shares / Add Shares I don't see cost basis used anywhere. The only place I would expect 'cost basis' to show in an IPR would be a buying shares and then only under selected subtotals (by Security).

4. I created a new quicken data file and did some experiments. In reference to the IRR cash flow, I could not see any offset of original cost basis on original purchase date. (this is different than my memory. I am back in learning mode...)

So to get the portfolio table to be correct, e.g. cost basis and mkt value AND get the IPR correct, I ended up using the return of capital transaction and then zeroing out the cash with a misc expense. so the sequence is:

date months/years in the past:
1. buy shares firm A. (This is original purchase)
date of spin-off:
2. rtn of cap firm A, equal to amount to mkt value of spin-off.
3. add shares of firm B. (value equal to rtn of cap, and set the 'acquired date')
4. misc expense to zero out cash created by rtn of cap. (maybe a 'withdrawal' back to account would be better?)

I did not have to do a 'remove shares' or "add shares" of Firm A, since the rtn of cap adjusted the basis in the 'portfolio view' and 'portfolio value' report. (comments welcome)

I did not do the built-in 'corporate spin-off' yet. I wanted to understand the details first.

>
> Your other thoughts
>
> I disagree. In an investment sense, the spinoff of a company from a parent is no different than a 'dividend' from that company. It is just 'paid' not in dollars but in shares with a value/share of the spinoff. That the share value of the parent drops upon execution of the spinoff is no different (except in magnitude) from when the share value drops as the shares go ex-div prior to the dividend payout.

5. I mostly agree, expect that in order to get a correct IRR for the parent, the spin-off value (aka, "dividend", or RoC) would be included in the IRR calc. I am thinking the best way to do this is to have a rtn of cap for the parent on the day of the spin-off so that any IRR calc that includes that date will included that 'return'.

> I have found (when properly programmed!) the IRR (aka Avg Annual Return) to be reliable and meaningful with respect to the parent by itself, the spinoff by itself, or as combined. (The 'neutral' effect of the spinoff only apples when both parts are included in the calculation.) The characteristic that the IRR does handle spinoff type events (when properly programmed!) is one thing that makes it more valuable to me as an investment metric.

6. I mostly agree, given the discussion above.

Thanks for your detailed answers. I too, use the IRR and NPV in many situations, almost always in spreadsheets.

ps. sorry about the ugly formating. I could not figure out how to get the prettier gray quote highlighter to work.

q_lurker

re #3: No problem with your pet peeve. I am just trying to use Quicken language and terminology when discussing Quicken. The program uses Average Annual Return which they cite as "(often called Internal Rate of Return, or IRR)". On that basis and for our purposes, I can and do accept them as synonyms, even if that is not totally accurate. But also try to be clear about the Quicken terminology for things to minimize confusion.

re #4: Going back even further in time and version, originally for spinoffs, Quicken generated a back-dated RtrnCap and Buy Spinoff shares. Perhaps that was what you recalled. It created an offset of the parent basis to the spinoff basis on the original buy date of the lot. That was (IMO) a real mistake on several different fronts and gave way for me to the Remove/Add pairings manually entered.

[Sidebar: Gray box quoting may be a editing feature based on 'points earned' as a member in this forum]

... so the sequence is:

date months/years in the past:
1. buy shares firm A. (This is original purchase)
date of spin-off:
2. rtn of cap firm A, equal to amount to mkt value of spin-off.
3. add shares of firm B. (value equal to rtn of cap, and set the 'acquired date')
4. misc expense to zero out cash created by rtn of cap. (maybe a 'withdrawal' back to account would be better?)

That parallels part of the 'new' approach (post R29.9). The existing identified problem with that sequence is that RtrnCap gets applied to original parent lots based on shares rather than on relative basis value of the lot. While I am hopeful of a resolution of that impropriety, I also see it perhaps creating two variations of RtrnCap transactions both of which should be available to the user for manual entry.

The new approach uses RtrnCapX with the specified transfer account as the originating account. That is a standard technique within the program to make cash appear from or disappear into thin air, otherwise unaccounted for. (See Opening Balance transactions). That aspect avoids the MiscExp transaction you cite and forms the "withdrawal back to account" you mention.

As you note (3), the Add Shares of the spinoff company gets the basis to the right spot. But the current configuration of the Add Shares entry in the IPR is that it is an "investment" of shares x closing price (market value) on spinoff date.

--------------------- Investment --------------------- Return ------------
Spinoff Date --------------------------------------- RtrnCap value from Parent
Spinoff Date --- Mkt Value of Spinoff ---------------------------------

In simple terms within the IPR you have the above 2 line items which do NOT balance to a neutral impact on the IRR calculation.

The new configuration adds one more line (5. in your sequence)
Spinoff Date ---------------------------------------- Gain/Loss Income from Parent

At that point you have the full market value being taken from the Parent (RtrnCap as Basis + the gain/loss over the applicable time of that portion of the basis) and the same total market value being shown as an additional investment. The two balance. As with the RtrnCapX, they use a MiscIncX for that gain/loss term so no real cash shows up in the account along the way.

re #5

I am thinking the best way to do this is to have a rtn of cap for the parent on the day of the spin-off so that any IRR calc that includes that date will included that 'return'.

That is the way things are now (QW2017 and later) being done -- all on date of spinoff.

q_lurker

The minor glitch I cited in my opening post still applies in R30.14 (if anyone cares).

THE MINOR GLITCH: The RtrnCapX transaction does not properly flow to all later transactions and reports, specifically capital Gains reports when the parent company shares are sold. But in the portfolio view before the sale, the proper cost basis will be shown. The glitch also shows in the Investment Transactions Report negative Amount Invested (after the parent shares are sold) when it should be $0.

CORRECTING THE MINOR GLITCH: Turns out to be easy. Click the Edit button for the RtrnCapX transaction; then click the Done button. No real editing is necessary. That should take care of the problem as far as I have seen. The Capital Gains and Investment Transactions reports should be correct. I am confident the programmers can quickly resolve this glitch.

Q_comm_red

@q_lurker

I do remember that rtn of cap did not work well with multiple lots. On q2017 I ended up splitting a stock into different names but the same market symbol just so I could get the cost basis correct. But that approach creates mismatches with broker statement and warnings after online updates.

Well, I am off to do more experiments, but thanks much for the time to post all the details and tolerate the new member.

q_lurker

UPDATE - 06/05/21
In processing the recent Merck / Organon spinoff, I find some changes have been made between the R29.9 release initially reviewed above and the R32.12 release I am now using. I don't know when these changes were implemented.
1) The MINOR GLITCH I cited initially appears to be fixed. That glitch applied to the RtrnCapX transaction. It now appears that the subsequent "Edit" of that transaction is not required.
2) The language of the "Cost" of the shares has been edited. The pop up window is now prompting for the cost of the old and new shares with the further on-screen explanation that these should be "Closing price per share on the day of the spinoff".

#1 was (I hope) an easy fix. Thanks for getting it done.
#2 appears to be a response to my observation about how the value entered for "Cost" was used in both the spinoff computation and in the price history which then could led to Investment Performance discrepancies. If the chosen "Cost" matches the closing price for that date, no discrepancy develops. But as used in the online help for that screen, the cost to be entered in those two fields is really the "Fair Market Value" of the two securities on the day of (or immediately following) the spinoff. That fair market value could be Closing Price, or it could be:

Opening Price,
Average of Open and Close
Average of Hi and Lo prices
A weighted average of pre-spinoff prices (if when-issued trades are in play)
Any variety of other calculations used by the company, the brokers, or the users.

As such, I see that "Closing Price" suggestion to be a weak solution.

At this point I expect to continue to try the RtrnCapX / Add shares pairings (eliminating the MiscIncX transaction) with the Mkt Value entry in the RtrnCapX transaction line. I will watch carefully for behavior with multi-lot holdings spinning off a security. The other path still in play for me is the Remove Shares / Add Shares / Add Shares.