More thoughts on recording reinvested earnings

[Bruce]

I've re-read a number of question+replies on the proper recording of reinvested earnings, and I have a couple of ideas I'd like validated or corrected.

The issue seems to be that FM (and perhaps some users) don't understand all the steps that happen behind the scene at the brokerage when we reinvest earnings in an asset held in street-name. The key part here is if we (and several thousand other clients of that brokerage) get a distribution (dividend, interest, cap-gain) on one day, the brokerage has to execute a buy order for the correct number of shares for all clients, and then allocate the shares and price to our individual accounts. That all takes several business days. For us as individuals, certain things fall out from that.

1. We are tax-liable for those earnings the day they are paid.
2. That we've entered a "reinvested dividend" order with our brokers, we might better think of it as a GTC-Buy order. While technically not correct, it models the time delay in familiar terms.
3. The earnings-destined-for-reinvestment don't show up in our brokerage cash accounts; they are in a transitory ledger because the company is off buying shares for us and will use that cash on our behalf.

Given what we have in FM, I've come up with three options. The buggaboos appear at the end of the month and end of the year. Say, a stock pays a dividend on 6/29/18, but the reinvestment isn't completed until 7/3/18. Or the same scenario at the end of December.

1. Enter the transactions separately as they occur.
+ The asset register reflects reality.
- The cash register is "over" for a few days for every reinvestment transaction (because FM records distributions directly to the cash account.) and won't reconcile if a reinvestment transaction spans the reconcile date.
+ End of year earnings reports (for taxes) are correct.

2. Enter the earnings and asset purchase on the day the earnings are received.
+ Simplifies transaction entry.
- Solves the cash register / reconcile issue, but FM won't reconcile share-counts for any asset whose reinvestment transaction spans the reconcile date.
+ End of year earnings reports are correct.

3. Enter the earnings and asset purchase on the day the asset was purchased. (what I currently do)
+ Simplifies transaction entry.
+ Solves all end-of-month reconcile issues.
- FM end of year earnings reports are incorrect (the reports understate earnings).

The really cool software fix, seems to me, is the dialog for reinvested earnings has space for two transactions on different dates. First transaction records the earnings received. It does not go to the cash register but instead holds it in a transitory register which may or may not show up in the portfolio window (I can see pros and cons to both). Second transaction record is filled out a few days later when the asset has been purchased.

Seems like FM would accurately create all reports by knowing the two transactions are separated by a couple of days, and by not linking distributions-destined-for-reinvestment to the cash account.

And that's where the warning light goes off in my head. Street-name (and the accounting overhead) has been dominate for several decades. The only assets I hold where the earnings are paid and reinvested the same day are the few assets I still hold in direct-registration. And I'm an old freak, so that's got to be pretty rare.

What do you think? Where am I going wrong?

[Mark]

Hi Bruce,

I think you are talking about the case of reinvesting in stocks, and not mutual funds, correct?

I would point out that you do not have to deposit money from a distribution into cash. If you have a default cash account assigned, FM will automatically record this deposit for you, but you can delete the cash side of this transaction, or not use a default cash account if that is your desire.

We could consider having an option to have 2 dates in the reinvestment dialog, but I lean against adding this as an option. The majority of the cases where this dialog is used is for mutual funds, where it does all happen on the same date. We could have a separate dialog for stocks, but this starts adding complexity to the program, and to the user interface. I'm not sure the severity of this issue warrants adding this complexity. You can achieve the same results with the available dialogs as they exist today.