Daily Dividend Points Accumulation Standard
33-41 Lower Mount Street
DUBLIN 2
Standard for Daily Accumulation
of Dividend Points for Dividend
Calculation
Requirements Specification
Issued:
May 2007
Updated: February 2008
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Contents
Contents ............................................................................................................................. 2
Introduction ........................................................................................................................ 3
Dividend Points Accumulation & Dividend Calculation ................................................. 4
Processing Requirements ................................................................................................. 5
FURTHER INFORMATION ................................................................................ 13
APPENDIX 1 - WORKED EXAMPLE .................................................................. 14
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Introduction
Historically, going back to the days of manual dividend calculations by staff and
directors, a simple monthly dividend points calculation and accumulation was
adopted to minimise lengthy and complex manual written calculations.
Despite significant improvements in systems and technology over the past two
decades, these same calculations are still used in many credit unions today.
The monthly dividend points calculation and accumulation commonly used in
credit unions today to calculate share dividend does not conform to current
financial industry norms and is less desirable from a consumer point of view.
Current best practice in deposit taking suggests that deposit interest and share
dividend is calculated on a daily basis which is generally considered to be the
fairest practical calculation basis.
Certain deposit accounts, such as Minor Deposit Accounts for under 16’s
offered by credit unions in Northern Ireland, utilize a dividend calculation basis
for the calculation of deposit interest. The processes and calculations for
dividend points accumulation presented in this document equally applies to
those used for deposit interest calculation for Minor Deposit Accounts and other
similar non-share accounts.
Many credit unions offer deposit accounts to members where the deposit
interest calculation basis is the same as that used to calculate share dividend ie
accumulation of deposit points. The processes and calculations for dividend
points accumulation presented in this document equally applies to those used
for deposit interest calculation for such Deposit Accounts.
The purpose of this specification is to provide IT personnel with the
necessary information and business rules to undertake development of
the new standard.
The Irish League of Credit Unions proposed a motion to BDM 2007 to require
all credit unions to adopt and implement these new standards by 1/10/2007 and
bring credit unions more in line with industry norms. This motion was passed
overwhelmingly by the movement in April 2007.
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Dividend Points Accumulation & Dividend Calculation
The proposed standard suggests that the members “start of day” share balance
(including cent/pence) is accumulated each day over the 365 or 366 days of the
financial year. At dividend calculation and posting time this accumulated total
figure is divided by the number of days in the financial year to get the average
daily balance. This average daily balance is multiplied by the dividend
percentage rate and the result is rounded using normal rounding rules.
Annual Div=(Sum Daily Share Bals. for Fin. Yr/No. days in Fin. Yr) x Div. %
For example, if the daily accumulated dividend points total is £/€1,234,567.00
and the dividend rate to be paid is 3% then the annual dividend is calculated as
follows:(1,234,567.00/365)x(3/100)=101.471260273.
After normal rounding the Annual Dividend due is €/£101.47.
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Processing Requirements
Dividend points is a notional value which has no monitory value until converted
into dividend following the determination of dividend payment rate by credit
union representatives at AGM.
Req 1.0 Dividend Points Definition
The system must ensure that the dividend points on a share
account in respect of any day is equal to the opening share balance
(including cents/pence) on that account on that day.
Req 1.1 Dividend Points Accumulation
The system must accumulate Dividend points for all open share
accounts on a daily basis for each day in the current financial year.
The number of days in the financial year is 365 unless the financial
year contains a 29th February date in which case the number of
days is 366.
Req 1.2 Daily Dividend Points Calculation
The system must calculate the annual dividend using the following
formula for share accounts:
[Div=(Sum of Accum’d Div Pts for Fin Yr./No Days in F Yr) x Div. Rate %]
Req 1.3 Dividend Calculation Rounding
The system must round the dividend calculation result as follows:
If the dividend is greater than or equal to 0.xx5 round up to the
nearest cent/pence. If the dividend is less than 0.xx5 round down to
the nearest cent/pence.
Req 1.4 Year End Processing
The system must transfer the dividend points accumulated for each
share account over the full year (ie year-to-date values) into
another field:‘Dividend Points Last Year’, to be used in the
calculation of dividend. The year-to-date value must then zeroised
to be used for accumulation of dividend points in the new financial
year.
Req 1.5 Dividend Posting Process
The system must ensure that the dividend posting process creates
dividend transactions for each member and adds these individual
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dividend amounts to their respective member share balances. The
system must update the 'Dividend Paid Last Year' field accordingly.
The system must make historic dividend payments available to
members as necessary and for inclusion, as appropriate in Member
Certificates of Interest and Dividend.
Credit unions normally process necessary member deductions during the
dividend process. These deductions include affiliation fees, DIRT and in some
cases Death Benefit Insurance premiums.
Req 1.6 Member Deductions
Each “member pay” fee and insurance premium deductions made
by the credit union, from the member dividend paid, must cause a
separate transaction to be created by the system, for the amount of
the deduction. The system must ensure individual deductions
made must be itemised on member accounts receipts and
statements.
.
Loan Interest Rebate
Many credit unions refund a portion of loan interest collected from borrowing
members annually. This processing takes place at the same time as the
dividend posting following financial year end. The rate of loan interest rebate
must be ratified by the members at credit union AGM. A percentage of loan
interest paid by the member is paid in the form of an interest rebate if
applicable.
Req 2.0 Accumulated Loan Interest Paid by Members
The system must ensure that the loan interest paid by each
member is accumulated separately for the credit union financial
year ending 30th September and the tax year 31st December. The
system must also ensure that loan interest paid in the credit union
financial year is used as the basis for the calculation loan interest
rebate for the last year ended
Req 2.1 The system shall calculate the Interest Rebate using the
following calculation:
[Loan Int. Rebate = (Total Loan Interest Paid in Fin. Yr) x Rebate % ]
Eg. Total loan interest paid in the last financial year is €352.22 with 20%
interest rebate payable. The interest rebate calculated is €70.44. Normal
rounding rules apply here also
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Req 2.2 Borrowing Members
The system must ensure that if the credit union pays an interest
rebate to members, then all members loans, where interest was
paid during the last financial year, will qualify for a rebate including members with loans that were fully repaid during the last
financial year but who also paid loan interest during that financial
year
Req 2.3 Recording Loan Interest and Loan Interest Rebate
The system must commencing from 1st October 2007, calculate and
store the total loan interest paid for each loan account for each
financial year (commencing 1st October) and separately for each tax
year (commencing 1st January). Loan interest rebates paid to
members for each loan account within each tax year must also be
recorded by the system.
Certificates of Interest and Dividend
Credit unions provide Certicficates of Interest and Dividend to members on
demand for members requiring to make tax claims or returns.
Req 3.0 Certificate of Interest and Dividend
Credit union IT systems must provide Certificates of Interest and
Dividend on demand for members requiring to make tax claims or
returns. Credit union IT systems must record and be able to
retrieve annually per member -gross dividend paid, loan interest
collected, loan interest rebate refunded and DIRT paid. Member
Certificates for the previous seven tax years must be available to
members on request.
Req 3.1 Members with Multiple Accounts
The system must ensure that if a credit union provides multiple
Certificates of Interest and Dividend for members with multiple
credit union accounts, that no payment values are included in more
than one Certificate and that each Certificate contains a unique
Member Account Reference Number.
Req 3.2 Net Interest Paid in Tax Year
The system must calculate the Net Interest Paid in a Tax Year using
the following formulae:
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[Net Int Paid in Tax Yr= (Int. Paid in Tax Yr–Interest Rebate in Tax Yr)]
Req 3.3 Exclusions from Certificates of Interest and Dividend
As DIRT tax is already deducted at source on special share
accounts, the system must ensure that only dividend amounts for
those account types to which DIRT has not been deducted will be
included in members Certificates of Interest and Dividend ie.
Regular Share Accounts.
Also, the system must ensure that Certificates of Interest and
Dividend do not include interest paid or interest rebates in respect
of qualifying loan accounts for tax years where tax relief at source
(TRS) was already allowed by the credit union eg. mortgages.
Clearing of Funds
Systems and processing must be in place to manage uncleared as well as
cleared funds in accordance with each individual credit union policy.
Consider the situation where a member cheque is received as a share
lodgement and subsequently posted against the members share account. The
funds associated with cheque received by the credit union may not be cleared
by the banking system for up to 5 days. During the cheque clearing period the
credit union may not be earning deposit interest from their bank in respect of
these funds. The credit union may or may not want to effect the lodgement to
the members share balance until the funds have been cleared by the banking
system. Immediate posting of uncleared funds at the credit union will lead to
member dividend entitlement for the clearing period before the credit union
receives value for the lodgement made.
Heretofore from a dividend calculation point of view, most credit unions did not
distinguish between cleared and uncleared funds as dividend was calculated
based on a average monthly balance. This calculation frequency and basis
allowed sufficient time for cheques and other funds to be cleared.
With daily dividend points accumulation, credit unions must decide whether or
not they are willing to pay the additional dividend cost to members in respect of
members lodging uncleared funds to their accounts.
It is recognised that some credit unions will process cleared and uncleared
funds in the same manner though others may not. If the policy of a credit union
is to treat uncleared funds differently to cleared funds then the credit union IT
processing system must be capable of managing uncleared funds in
accordance with policy.
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Req 4.0 Cleared and Uncleared Funds Tracking
The system must be able to identify, track and manage cleared and
uncleared fund transactions.
Credit unions typically offer a standing order loan repayment or lodgement
option to their members in respect of lodgement of funds. In this case funds are
transferred electronically from the members bank account to the credit unions
bank account. Credit unions receive notice of these lodgements(cleared funds)
through their Internet Business Banking package supplied by their bank or
through bank statements received.
Req 4.1 Standing Orders and Exceptions Posting
The system must ensure that cleared funds lodged in respect of
member payments to credit union bank accounts, are posted to the
destination member accounts no later than next day following
value received by the credit union to their bank account. The
system must also ensure that queries, in respect of unapplied
credits, must be reported on for follow up the same day the query
arises.
Req 4.2 Funds Clearing Periods
The credit union IT system must record the number of days
required to clear funds in respect of the transaction types to be
processed. These “number of days” values will be used by the IT
system in automatically clearing member funds. Once the clearing
period for funds has elapsed, uncleared funds will be processed as
cleared funds
Req 4.3 If Same Treatment for Cleared and Uncleard Funds Applies
If credit union policy suggests that there is no special treatment for
transactions containing uncleared funds, then the system must
ensure that uncleared fund transactions are processed as if they
funds were cleared funds
Req 4.4 No Funds Value for Clearing Period
If credit union policy suggest that members will not receive value
for their funds lodged for the clearing period, the system must
ensure that uncleared funds transactions will only be posted and
effected to member account balances next day following the
completion of the specified clearing period for that transaction
type. This applies to funds received by cheque and electronically
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Bounced Cheque and Unpaid Direct Debit Treatment
Systems must be capable of efficiently processing the cancellation of bounced
cheques or unpaid direct debit lodgements in accordance with credit union
policy. Systems must provide for controlled and automated processing of
dividend points adjustments where applicable in respect of lodgements of
uncleared funds.
Req 4.5 Reversal of Bounced Cheques and Treatment of Unpaids
If credit union policy suggest that funds value will be given to
members except for the clearing period in respect of bounced
cheques or unpaid direct debits, the system must automatically readjust the dividend points accumulated in respect of necessary
transaction reversals as a result of such bounced cheques or
electronic unpaid direct debits. Dividend points accumulated must
be calculated in accordance with this standard as follows: [ Div. Pts. Adj. = (Cancelled Lodge Amt x No. Days Elapsed) ]
[ Corrected Div. Pts. = (Start of Day Share Balance – Div. Pts. Adj.) ]
A worked example is shown in Appendix 1. In this example a lodgement of
£/€100 is made on 17/9/06 by cheque. Dividend points commenced to be
accumulated for this lodgement from 18/9/06. Subsequently the cheque
bounced and a transaction reversal was effected on 20/9/06. This reversal had
the effect of reducing the share balance to £/€1,140 to be applied
retrospectively back to 17/9/06 when the cheque lodgement was made. In this
example the dividend points adjustment for the three days is calculated as
follows: Div. Pts Adj. = (100 *3) =300
The corrected dividend points is calculated by subtracting the Div. Pts Adj. from
the Start of Day Share balance ie 1140-300 = 840.
Dividend Compounding
Compounding of dividend has the effect of providing dividend on dividend in
respect of dividend payments made for the portion of the new fincancial year
elapsed until dividend is posted to members accounts.
The material effect of compounding is that it gives members the financial
benefit of receiving their dividend payment into their accounts at 30 th
September in respect of the year ended (and not 60 or 90 days later following
the credit union AGM). Where compounding applies, this occurs as part of the
dividend posting process where the dividend points in respect of the dividend
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payment is added for each day elapsed in the new financial year until the
dividend posting to members accounts is made. The effect of dividend
compounding in a particular year is not realised to members account balances
until the following years dividend payment is posted. YTD means year to date.
Req 5.0 Compounding of Dividend
The system must have the capability to compound member
dividend thereby giving members the financial benefit of receiving
dividend payment into their accounts at 30th September in respect
of the financial year ended.
Req 5.1 Compounding Calculations
The system shall calculate the Compounding Calculations using
the following formulae:
[“n” Days Comp’g Div. Pts Adj = (Gross Div. Paid x “n” days)]
[Div. Pts. YTD Adj for Comp’g = (Div. Pts. YTD + Comp’g Div. Pts Adj)]
In the example shown in Appendix 1, the closing balance for 30th September
2006 is £/€1140.00. Assume that no further lodgements are made since this
date. Also assume that the £/€2.64 of dividend is posted to the members
account on 1st December 2006, 61 days into the new financial year.
61 days Compounding Div. Pts Adj = ( 2.64 x 61)= 161.04
The effect of this compounding on the Dividend Points YTD for 2007(the
following financial year) is calculated as follows: Div Pts. YTD Adj for Comp’g= {( 61 x 1140) + 161.04} = 69,701.04
Req 5.2 Compounding of Interest Rebate and Other Payments
The system must have the capability to compound all the
components of Net Dividend including Loan Interest Rebate, Bonus
shares, Affilliation Fees etc using the same calculation basis as
used for Dividend Compounding.
Req 6.0 Dividend Posting of Bonus Shares
The system must ensure that where the posting of Bonus Shares is
allowed and applies, the Bonus Shares amount is calculated using
the same dividend points total accumulated for the financial year
ended and the same dividend calculation formula is used for the
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calculation of member dividend though the Bonus Share Rate may
differ from the Dividend Rate used.
Req 7.0 Auditing of Adjustments
The system must ensure that all transaction cancellations and
adjustments, including dividend points adjustments, are controlled
and fully traceable through electronic and paper audit trails.
Req 7.1 Recording of Rates of Return and Fees Charged
The system must ensure that the Share Dividend Rate, or other rate
of return paid to members, or fees charged to members, currently
or historically must be readily available to authorised credit union
personnel and audit staff through the system without the need for
making special arrangements with IT providers.
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Further Information
Should you have any queries or require further information in relation to
implementing the new standard interest calculation basis contact the League
Name:
Joe Timmons
Email:
jtimmons@creditunion.ie
Telephone:
+353 1 6146968
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Appendix 1 - Worked Example
Lodgeme
nts(+)/Wit
Date
Share
hdrawals Dividend
(Sept)
Balance (-)
Pts
1
0.00 1,000.00
0
2 1,000.00
1000
3 1,000.00
1000
4 1,000.00
1000
5 1,000.00
100.00
1000
6 1,100.00
1100
7 1,100.00
-10.00
1100
8 1,090.00
1090
9 1,090.00
1090
10 1,090.00
-50.00
1090
11 1,040.00
1040
12 1,040.00
100.00
1040
13 1,140.00
1140
14 1,140.00
1140
15 1,140.00
1140
16 1,140.00
1140
17 1,140.00
100.00
1140
18 1,240.00
1240
19 1,240.00
1240
20 1,240.00
-100.00
1240
20
-300
21 1,140.00
1140
22 1,140.00
1140
23 1,140.00
1140
24 1,140.00
1140
25 1,140.00
1140
26 1,140.00
1140
27 1,140.00
1140
28 1,140.00
1140
29 1,140.00
1140
30 1,140.00
1140
32070
Withdrawal
Bounced Cheque
Reversed
Div pts adjustment
Div Points at 30th Sept
Dividend Payable
2.64
Dividend Rate used is 3%, No of days in financial year is 365
[ Annual Dividend =(Sum of Div Points for Yr / No. days in Fin Yr) x Div Rate % ]
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