Morningstar Office stores information for many spin-offs and mergers in the Corporate Action Warehouse, which is accessed via the Import window. This information can be used to create the necessary transactions to help adjust the cost basis and value for securities involved in these processes.
Once you open the Corporate Action Warehouse window, you can select whether to use the Spin-off, Merger or Split wizard. This document explains how to handle spin-offs for securities your clients hold in their accounts.
Note: The images used in this document should be considered only as examples. Morningstar does not guarantee the accuracy or completeness of these examples. This document and the information provided within it is not intended to provide tax or legal advice about the transactions described. Users are urged to consult their tax advisors and legal counsel about the tax consequences of all transactions.
Since your custodian may already generate transactions for spin-offs, a logical question is: Why should I bother using the Spin-off Wizard for something that already exists? The Spin-off Wizard is recommended for three reasons:
The transactions from your custodian will not adjust the cost basis for the original security, but the Spin-off Wizard will.
You can control the Cash in Lieu amount recorded for each transaction, and ensure your clients’ Cash account is updated correctly.
For a transactional account you imported via the Microsoft Excel - Transactions interface, the Spin-off Wizard will help keep these accounts updated.
To the extent the data is available, the Spin-off Wizard will be pre-populated with several key data points. The table below describes the data the Spin-off Wizard is pre-populated with:
Item |
Description |
Security Name |
The name of the original security and the new security (or securities, depending on how many entities are being spun off of the original) |
Symbol/CUSIP |
The ticker symbol or CUSIP of both the original and new security |
# of New Securities |
Seen on the Original Security page of the wizard, this number indicates how many new securities are being spun off of the original security |
Effective Date |
The effective date of the spin off; this date can be edited |
Fair market Value Per Share |
This is the previous day closing price |
New Cost Allocation (%) |
This is seen for both the original and new securities; it represents how much of the original security’s value is either being retained by the original security, or allocated to the new security |
Share Distribution Ratio |
This is seen only on the new security page in the wizard; this determines the number of shares of the new security the client receives via the spin-off The original number of shares is multiplied by the share distribution ratio to determine the number of shares for the new holding |
Note: One item not shown in the Spin-off Wizard is the price of the new security. This is shown in the Corporate Action blotter once you complete the wizard. The calculation for this value is explained below.
The Spin-off Wizard performs the following calculations:
the new value of the original security after the spin-off
the updated cost basis of the original security
number of shares of the new security (or securities) an account should receive as a result of the spin-off, and
the value of the new security (or securities).
The table below explains how each of these items is calculated:
Item |
Calculation |
New value of the original security |
$Value of Original Security x New Cost Allocation%* = $New Value of Original Security $New Value of Original Security / Number of Original Shares = $New Price for Original Security |
Updated cost basis for the original security |
Number of Original Shares x $Original Per Share Cost Basis = $Total Original Cost Basis $Total Original Cost Basis x New Cost Allocation%* = $Total Updated Cost Basis $Total Updated Cost Basis / Original Shares = $Updated Per Share Cost Basis for Original Security |
Number of shares of the new security |
Number of Original Shares x Share Distribution Ratio = Number of New Security Shares |
Value of the New Security |
$Value of Original Security x New Cost Allocation%** = $Value of New Security $Value of New Security / Number of New Security Shares = $Price of New Security |
Note: * = New Cost Allocation% for Original Security ** = New Cost Allocation% for New Security
See Also