Cash pooling is a treasury arrangement in which a corporate group manages the balances of many bank accounts as one position, so that surpluses in some entities offset deficits in others. In physical pooling the balances are actually transferred to a master account held by the pool leader; in notional pooling they stay where they are and interest is calculated on the combined balance.
Why It Matters
Pooling lets a group use its own cash before borrowing externally and see its liquidity in one place. It also creates obligations that are easy to miss. In physical pooling every sweep is an intercompany loan or deposit, priced under transfer pricing rules; the OECD's guidance on financial transactions makes the pool leader's reward depend on the functions it performs, the assets it uses and the risks it assumes. Notional pooling raises an accounting question instead: under IAS 32, balances may be presented net only where there is both a legally enforceable right of set-off and an intention to settle net.
How It Works in Practice
- 1Physical pooling: at an agreed time the bank sweeps each participant's account to zero or to a target balance, moving the difference to or from the pool leader's master account.
- 2Record each physical sweep as an intercompany loan or deposit between the participant and the pool leader, at a rate set under the group's transfer pricing policy.
- 3Notional pooling: the accounts stay separate, the bank calculates interest on the net position, and the pooling agreement documents the right of set-off between the accounts.
- 4At each reporting date, present balances gross or net according to the IAS 32 offsetting test, not according to how the bank calculates interest.
Common Pitfalls
Presenting a notional pool net on the strength of the interest calculation. The IFRS Interpretations Committee observed in 2016 that where subsidiaries are expected to keep using their accounts before the next net settlement date, it would not be appropriate to assert an intention to settle the entire period-end balances net.
Leaving intercompany pricing to the bank's rates. The leader and participants are related parties, so both the rates and how the benefit of pooling is shared among members need to be supportable under transfer pricing rules.
Adding entities in new jurisdictions without a local review. Currency controls and the tax treatment of intercompany interest are set country by country, so participation has to be checked entity by entity.
Confusing a corporate cash pool with a pooled client account. The latter holds several clients' money in one account and raises client-asset questions, not intercompany ones.
Sources
- Offsetting and cash-pooling arrangements (IAS 32), agenda decision, March 2016 — IFRS Interpretations Committee
- IAS 32 Financial Instruments: Presentation — IFRS Foundation
- OECD on Cash Pooling (summary of the OECD's Transfer Pricing Guidance on Financial Transactions) — Mayer Brown
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