You can use same lot selection to relieve the same lots across multiple accounting bases within an entity to keep lots in sync across bases.

Why Lot Structures Get Out of Sync

In Eagle Accounting, a position on one accounting basis works independently from the same position in a different basis. Differences in accounting standards for different accounting bases can result in differences in lot structure and position cost. Such differences can include wash sale loss deferrals, amortization, or the result of using different lot relief methods.

A typical cause for these differences is wash sale processing. Wash sale guidelines allow the disallowance of losses from the disposition of securities for tax purposes. The disallowed loss amounts result in the adjustment of the cost basis of open lots that remain in a position after a close transaction is processed. There are scenarios that can also result in the fracturing of open lots if the close quantity is less than the open lot quantity of the lot that receives the disallowed loss. The fracture can result in multiple open lots in a USTAX basis with a total quantity that equates to the quantity of a single lot in a GAAP basis. Disallowed losses are not considered for GAAP accounting. Therefore book cost is not adjusted and fractures do not occur from wash sale processing.

Due to potential differences in lot cost and structure, lot selection logic that occurs during close processing can potentially result in the selection of different lots between bases than if the selection logic was applied to each basis independently.

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About Same Lot Selection Processing

When you use same lot selection, despite the difference in cost and lot structure, the system relieves the “same” lots across all bases on an entity. The end result is that the remaining lots in each basis originate from the same lots even though the structure (due to wash sales) and cost may differ. The system can link fractured lots caused by wash sales in a tax basis back to a single lot in another basis and considered it the same lot for lot selection and reconciliation.

To use same lot selection, you identify an accounting basis within an entity as the controlling basis to use for lot selection. During processing for a close transaction, when the system executes a trade on both bases, it first creates close transactions for the controlling basis. Then, when it is replicating the transactions for the non-controlling bases, it uses the lot selection results of the controlling basis to perform lot selection for the non-controlling basis or bases. It closes out the same lots in the non-controlling bases that were closed in the controlling basis.

Same lot selection uses the Original Event ID (tag 457) as a common lot identifier on transactions and as the common link across lots for multiple accounting bases. This identifier indicates that a lot in a position on one basis is the same lot on another basis. Due to fractured lots caused by wash sales, multiple lots on one basis can correspond to a single lot on another basis. This Original Event ID tag has the same value on the fractured lot and its sub-lots in the case of wash sales. During same lot selection processing, the system considers whether each controlling and non-controlling basis uses wash sales processing in order to keep the lot structures in sync.

Same lot selection also applies to other types of close transactions. The system references the Orig Event ID (tag 457) from the open lot on close lots for all transaction types that affect a cost position. This allows the system to maintain the same lot structure across bases for these transactions.

When the system performs rollback and replay for entities that use same lot selection, if the system backdates any activity, the controlling basis position rolls back the cost, and propagates the replay information of any sells to loopbacks for the non-controlling basis. If there are changes to a security or amortization rule, for example, the system may need to roll back and replay sell transactions for multiple bases, and needs to create sell transactions in a manner that maintains lots structures consistent with same lot selection processing.

About Global Processes and Same Lot Selection

If you use same lot selection, certain global processes related to fixed income securities use the controlling basis during processing to keep lots in sync across bases. Global processes such as the accruals process and variation margin identify the controlling basis in order to replicate events from the controlling basis. The system does this when you run the global process panel manually or automatically, and when the system triggers the global events in rollback/replay when it is processing an event on an As Of basis.

About Reconciliation and Same Lot Selection

If you use same lot selection and also use Eagle solutions for reconciliation, STAR to PACE Direct sends the Original Event ID to the Eagle data warehouse tables for use in reconciliation when comparing lots. You can set up the reconciliation process to identify expected accounting differences and to assign reason codes that inform you why lots are out of sync. For example, if you have known amortization methods differences between bases that would cause a break each day, you can set up rules to evaluate the difference to see if it met certain conditions. If conditions are met, the system can flag the amortization difference as an expected or known difference and assign it a specific reason code.

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About Standard Reports and Same Lot Selection

Same lot selection does not require any special setup for reports in Eagle Accounting's standard report package.

However, if you use same lot selection and you run the Hypothetical Sell Query report, be sure to run the report only for the entity's controlling basis.