Cash pooling arrangements arise where one group entity (which may be the ultimate group parent, or a fellow subsidiary) acts as the treasury function for the rest of the group. Under these arrangements, one entity within a group holds and maintains all cash balances with an external financial institution(s) and advances funds to group entities.
Often, a group treasury function is used in order to make the most efficient use of cash resources within a group, and to enable hedge accounting transactions to be entered into at group-level at the lowest overall cost. Typically, the group entities that act as a treasury function are not financial institutions. In some cases, subsidiaries do not have bank accounts at all, and instead amounts due are settled directly from centrally controlled funds.
Questions then arise as to whether the cash flow statement should be prepared at all.
A statement of cash flows which reflects the actual cash flows of an entity during the period is required to be prepared in all cases, regardless of the balance of cash and cash equivalents held at each period end. This is consistent with the requirements of IAS 7, which contain no exemption from the preparation of a statement of cash flows. This is regardless of whether an entity has a cash and cash equivalents balance at its reporting date, or merely a balance with a treasury function entity. In circumstances in which an entity makes net deposits or withdrawals of funds, these will give rise to inter-company balances. These deposits or withdrawals will be shown as investing or financing activities, respectively.
The question which then arises is whether it is appropriate in the separate financial statements of an entity that has deposited cash and cash equivalents with a group treasury function, to present those amounts as cash and cash equivalents in its statement of cash flows.
Many consider that the classification of such amounts as cash and cash equivalents to be inappropriate, on the basis that:
- The concept of cash is restricted to amounts that are held by independent financial institutions and are subject to protection by the regulatory requirements that are imposed on those financial institutions
- Deposits with group entities are subject to inherent risks that are not usually associated with cash deposits
- All group entities are controlled by a parent entity, meaning that it is difficult to conclude that a group entity could demand repayment of deposits independently of whether the parent entity would agree to the repayment
- In many cases funds are transferred to the treasury entity for unspecified and indeterminate periods.
It is very unlikely that it would be appropriate for cash and cash equivalents deposited by entities within a group treasury function to be classified as cash and cash equivalents. However it is possible that this would be appropriate, but only in very rare cases − limited to those cases which involve a combination of at least the following factors:
- The treasury entity itself operates in accordance with strict and well defined controls,
- The intra group balances behave in a manner similar to cash balances. That is, they are highly liquid, available on demand or in the short term and have terms that are similar to those which would be expected if the deposits had been made with an independent third party financial institution,
- The group maintains collective cash balances (or has access to cash via lines of credit) to meet demand notices served by subsidiaries that have deposited excess funds with the treasury entity.
Even if these characteristics existed, it is not clear how an entity could claim that it, individually, has control over whether it can require the repayment of cash and cash equivalents from a central treasury company. It would appear difficult to overcome the presumption that the ultimate parent company will control the repayment of funds, and in any event the purpose of a treasury function is to centralise the pooling and use of funds; the ability of a group entity to require repayment would appear contrary to the group policy.
If they were presented as cash and cash equivalents, it is considered it would be appropriate for these balances to be identified on the face of the statement of financial position and/or in the notes to the financial statements (depending on their significance) as being amounts deposited with another group entity. It might also be appropriate to include additional information about the group cash pooling arrangements that are relevant to the users of financial statements in their understanding of the financial position and liquidity of the entity, as required by IAS 7.50.