Standard for financial applications specifying maximum number of decimal places?

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John Bentley

John Bentley writes at this level:
If we think about our savings accounts then division never comes in (as far as
I can see). We deposit and withdraw exact amounts most of the time. Occasionaly
we get an interest payment. Unless the bank is cruel to its developers the
interest figure will be able to be exactly represented by a computer, something
like 4.1% as opposed to 4 1/3 %

125.78 * ' Initial Balance
04.1%
-------
5.15698 +
125.78
--------
130.93698 ' Final Balance

(If you then apply an interest payment to this then the number of decimal places
will grow.)

What, exactly is your entitlement? 130.93, 130.94, 130.9367, 130.93698?

I speculate that there is some IEEE standard for financial transactions which
says that currency amounts shall be stored to 4 decimal places, rounded
according to "banker's rounding" (which is toward the even number). So, for
example, if an interest payment yields an intermediate balance of 157.34865 this
gets *stored* in your account as 157.3486. The 0.0086 is kept there for future
rounding operations. However if you closed your account with 157.3486 in it you
will be actually handed 157.35. If you closed your account on a day with
157.3428 in it, you will get back 157.34.

Is there a standard for financial transactions which specifies a maximum number
of decimal places to which you should store currency amounts?

--
 
I am sure was someone who once said 'never trust a bank'.

Firstly 'bankers rounding' is not used for financial transactions. It is
used for statistical analysis.

Secondly, although Im sure that each bank has it's own policy but all the
banks in this country round to cents based on half a cent or better is
rounded up and less than half a cent is rounded down.

In the example then amount of interest credited will be 5.16 and the
resulting balance will be 130.94.

The actual interest 'payment' is a standalone transcation and therfore is
rounded in it's own right before it is applied to your acount and therefore
you account will never have a portion of a cent in it's balance.

The will not be an IEEE standard because each country has it's own
accounting standards, and given the Enron and WorldCom fiascos it would
appear that the USA has none at all.

If, however, the calculation of the interet payment was a complex equation
then 'bankers rounnding' might be used on some of the intermediate steps
before arriving at the final anmount for the transaction.
 
John Bentley Wrote at this level
John Bentley wrote at this level

Many thanks for your post Stephany. Note I have joined a thread "Banker's
rounding" in alt.accounting where this issue should be best dealt with. You may
like to join in there instead of replying here. That's up to you.
Firstly 'bankers rounding' is not used for financial transactions. It
is used for statistical analysis.
Click to expand...

I'd be happy to stand corrected but would you have some source material to back
that claim up? It could be that the term "banker's rounding" has spread amongst
programmer's like an urban myth. However, this rounding direction would make
particular sense when dealing with financial transactions.
Secondly, although Im sure that each bank has it's own policy but all
the banks in this country round to cents based on half a cent or
better is rounded up and less than half a cent is rounded down.
Click to expand...

Are you saying there is a policy for the whole of New Zealand or Just that they
happen to follow the same rule? Is the rounding direction toward positive
infinity or away from zero?
In the example then amount of interest credited will be 5.16 and the
resulting balance will be 130.94.

The actual interest 'payment' is a standalone transcation and
therfore is rounded in it's own right before it is applied to your
acount and therefore you account will never have a portion of a cent
in it's balance.
Click to expand...

So no partial amounts are stored. That certainly could be a standard to adopt.
(I'm agreeing, not being sarcastic)
The will not be an IEEE standard because each country has it's own
accounting standards, and given the Enron and WorldCom fiascos it
would appear that the USA has none at all.
Click to expand...

I don't care to debate why Enron and WorldCom actually failed but if they failed
because they didn't follow a standard it doesn't follow that there is none. You
joke, I know. But I'm not clear if you are claiming that standards do exist but
only at a national level or that standards don't even exist at a national level.
If, however, the calculation of the interet payment was a complex
equation then 'bankers rounnding' might be used on some of the
intermediate steps before arriving at the final anmount for the
transaction.
Click to expand...

It doesn't need to be complex:
12585 * ' Initial Balance
04.3% ' Interest Rate
 
How about 25+ years experience as an Accountant along with Bachelors and
Masters Degrees with Accounting majors. Is that enough of a source?

In New Zealand, all the trading banks operate through a single clearing
point and therefore have the same rounding policies on financial
transactions.

As I said, 'bankers rounding' is not used for stand-alone finacial
transactions. Your new example is a stand-alone financial transaction and
the interest amount will be 541.16 (half cent or better goes up) and the
resulting balance 13126.16.

If the interest calclated to 541.154 then it would be rounded to 541.15 and
the balance would be 13126.16.

Now if the interest had to be pro-rata'd over a non-annual period and then
accrued to an annual amount then 'bankers rounding' might be used on the
interim steps according to the policy of the individual institution.

There is no international standard because every country has different
accounting standards.
 
John Bentley Wrote at this level
A BANKER'S ROUNDING STANDARD
In New Zealand, all the trading banks operate through a single
clearing point and therefore have the same rounding policies on
financial transactions.

As I said, 'bankers rounding' is not used for stand-alone finacial
transactions. Your new example is a stand-alone financial transaction
and the interest amount will be 541.16 (half cent or better goes up)
and the resulting balance 13126.16.

If the interest calclated to 541.154 then it would be rounded to
541.15 and the balance would be 13126.16.
Click to expand...

It take it you mean 13126.15.

I still have: Is the rounding direction toward positive infinity or away from
zero? That is, what do you mean, or what is meant by, "up"?


ANY STANDARDS

I take your word for it that it's done in the way you describe. This is useful
to learn. However, my the enquiry, at base, is about why. Further, I only wish
to know "why" to the point of seeing where the convention, the standard, exists.

For example, in New Zealand driving is on the left. Why do people drive on the
Left, rather than the right, in New Zealand? The next level of explaination is
that there is a Law that says so (Perhaps called the "Motor Act"). I am only
after this level of explaination, for the moment, rather than: Why does the
Motor act specify that people should drive on the left?
How about 25+ years experience as an Accountant along with Bachelors
and Masters Degrees with Accounting majors. Is that enough of a
source?
Click to expand...

And in that 25+ years experience and study did you ever come across the reason
why things where done (here rounding) the way you describe? Did you discover
that in New Zealand, for example, the reason you round in a certain way is
because there is a standard for that country? Is the standard defacto (just a
common practice) or formal (specified in a commonly known document)? If formal,
what would be the name of that standard (Some Law, or professional industry
policy)? In more recent years have you come accross the URL that points to this
standard?

I have, for example, have since discovered a Standard for the Rounding the Euro
after a currency conversion. The standard's name could be "EC law on Euro
currency conversions", the standard applies at an European level (we could write
subinternational), it is a formal standard, I don't know how closely it is
observed in practice.

The specific part of this standard that applies to rounding is found in "Council
Regulation (EC) No 1103/97 of 17 June 1997 on certain provisions relating to the
introduction of the euro (*)" and it's url is:

http://europa.eu.int/comm/economy_finance/euro/essentials/reference_texts/compen
dium/pdf/en_087_090_en.pdf
This standard states:

"Article 5
If the application of the conversion rate gives a result
which is exactly half-way, the sum shall be
rounded up."

Which, by the way, matches with your practice in New Zealand for rounding in
general.
Now if the interest had to be pro-rata'd over a non-annual period and
then accrued to an annual amount then 'bankers rounding' might be
used on the interim steps according to the policy of the individual
institution.

There is no international standard because every country has different
accounting standards.
Click to expand...


Again, These last two sentences require a further explaination. The last
sentence claims there is a standard at the national level. The second to last
sentence claims, that for some type of transactions, there is only an
organisation level standard applies.

Let us take the country which you may know best. Are you writing that there is a
New Zealand accounting standard but it is limited to a subset of accounting
practices (or transaction types)?
A BANKER'S ROUNDING STANDARD REVISITED

What is it about a transaction that makes it suseptible to banker's rounding? I
can't see the relevant difference between my example and yours (beginning "Now
if the interest ..."). Yes, yours is more complex. Does not my interest payment
example involve interim steps? Eg the interest payment.
 
I don't really know how I make this any more simple for you.

Let's take a principal of $12345.00 with interest paid annually at the rate
of 4.3%pa and assume that the interest is added to the principal.

At the end of year 1.

Principal 12345.00
Interest 530.84
New Principal 12875.84

The actual interest calculation results in 530.835 and the fraction of a
cent (being half or better) is rounded UP to the next whole cent. (Net loss
to the interest payer of $0.005)

At the end of year 2.

Principal 12875.84
Interest 553.66
New Principal 13429.50

The actual interest calculation results in 553.66122 and the fraction of a
cent (being less than half) is rounded DOWN to the previous whole cent. (Net
gain to the interest payer of $0.00122)

Over the 2 years there is a net loss to the interest payer of $0.00378.

There is no specific historical explanation as to why it is done this way
but a widely accepted explanation is that it is to err on the side of
generosity in favour of the customer. It is also widely accepted that the
accumulated losses and gains over a period of time will be negligible.

In this country there are number of 'standards'. Some standards are imposed
by the Commerce Commission by way of legislation and/or regulation and some
standards are imposed by the Inlnad Revenue Department by way of legislation
and/or regulation. Other standards are 'imposed' by the New Zealand Society
of Accountants (professional body) as best or preferred practices. I have no
interest in trawling the bookshelves to find specific references for you.

Your reference about the conversions regarding the Euro, (I assume it is
quoted correctly), appears to apply where the result of the conversion is
exacly half a cent however it implies that if the result is more than half a
cent then it is rounded UP to the next whole cent.

This is exactly what happens with stand-alone financial transctions in this
country.
 
-------------------------------------------------
Stephany Young wrote (at this indent level):
Click to expand...

ROUNDING DIRECTION

I do know how to make it more simple for you.

I was not asking about whether, when you and your accountancy profession say
"UP", whether 0.835 goes to 0.84 or 0.83. I was asking you to remove the
ambiguity that UP has. I was asking whether this is toward postive infinity or
away from zero.

Here comes the simple part:

If you round -0.835 up, to two decimal places, which number do you get?

There is no specific historical explanation as to why it is done this
way
but a widely accepted explanation is that it is to err on the side of
generosity in favour of the customer.
Click to expand...

Rounding up when invoicing a customer who has purchased a service would be to
err against the customer.
It is also widely accepted that
the accumulated losses and gains over a period of time will be
negligible.
Click to expand...

If an international bank, conducting millions of transactions per day, has a
rounding scheme that errs on thier own side, then the gains will be significant.
In this country there are number of 'standards'. Some standards are
imposed
by the Commerce Commission by way of legislation and/or regulation
and some standards are imposed by the Inlnad Revenue Department by
way of legislation and/or regulation. Other standards are 'imposed'
by the New Zealand Society
of Accountants (professional body) as best or preferred practices.
Click to expand...

Commerce Commission, Inlnad Revenue Department, New Zealand Society of
Accountants. Well at least now I have the bodies where one set of standards are
kept.
I
have no interest in trawling the bookshelves to find specific
references for you.
Click to expand...

I am suprised that to get to the standards you would have to go to a bookstore.
I suprised that a professional account would not have the standards to which
they operate close to hand. As a non accountant I was able to get at the euro
conversion standard with only a little bit of effort.

Maybe the standards to which your profession might be so fundamental that there
is little practical need to constantly refer to them. That's fine. Surely,
though, it's clearly understood what they are, what your profession is
ultimately based on. Surely naming and accessing them is easily done. You seem
to have only a vague notion of them.

For example, as a licenced driver in Australia I don't have the driving
standards close to hand. But at one point, namely when studying for my driving
test, I did have to read and refer to them. I don't need to refer to the
standard on a daily basis in order to drive. I do, though, have in mind that my
driving behaviour and others is done according to a standard.

Here is a specification of the standard
Standard's name is: "The Australian Road Rules"
Standard's Scope (or "Level"): The Nation of Australia
Standard's Authority: "The ARRs were developed by the National Road Transport
Commission, State and Territory transport agencies, police, other organisations
and approved by a majority vote of State Transport Ministers in February 1999."
The Standard's URL:

http://www.rta.nsw.gov.au/rulesregulations/downloads/roadraustr_dl1.html

See how easy it is!

I have brought us squarely into the arena of flame. I don asbestos and await
your reply :)
 
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