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The Interpretations Committee tentatively decided not to add the issue to its agenda

 10 November 2015


The Interpretations Committee received a request to address an issue related to IAS 32 Financial Instruments: Presentation.

The issue relates to whether certain cash pooling arrangements would meet the requirements for offsetting under IAS 32—specifically, whether the regular physical transfers of balances (but not at the reporting date) into a netting account would be sufficient to demonstrate an intention to settle the entire period-end account balances on a net basis in accordance with paragraph 42(b) of IAS 32.

For the purposes of the analysis, the Interpretations Committee considered a cash pooling arrangement involving a number of subsidiaries within a group, each of which have legally separate bank accounts. Both the bank and the group have the necessary legally enforceable right to set off balances in these bank accounts in accordance with paragraph 42(a) of IAS 32. Interest is calculated on a notional basis using the net balance of all the separate bank accounts. In addition, the group instigates regular physical transfers of balances into a single netting account. However, such transfers are not required under the terms of the arrangement and are not performed at the reporting date. Furthermore, based on expected activity, the period end balances may change prior to the next net settlement date as group entities place further cash on deposit or withdraw cash to settle other obligations.

In considering whether the group could demonstrate an intention to settle on a net basis in accordance with paragraph 42(b) of IAS 32, the Interpretations Committee observed that:

  1. as highlighted in paragraph 46 of IAS 32, net presentation more appropriately reflects the amounts and timings of the expected future cash flows only when there is an intention to exercise a legally enforceable right to set off; and
  2. in accordance with paragraph 47 of IAS 32, when assessing whether there is an intention to net settle, an entity should consider normal business practices, the requirements of the financial markets and other circumstances that may limit the ability to settle net.

Consequently, within the context of the particular cash pooling arrangement described by the submitter, the Interpretations Committee noted that the entity should consider the guidance above in order to assess whether, at the reporting date, there is an intention to settle individual account balances on a net basis or whether the intention is for various entities within the group to use those individual account balances for other purposes prior to the next net settlement date. In this regard, the Interpretations Committee observed that in the example presented, it is stated that prior to the next net settlement date the period end balances may change as group entities place further cash on deposit or withdraw cash to settle other obligations. Because the entity does not expect to settle the period end balances on a net basis due to the expected future activity prior to the next net settlement date, the Interpretations Committee noted that it would not be appropriate for the entity to assert that it had the intention to settle the entire period-end balances on a net basis. This is because presenting these balances net would not appropriately reflect the amounts and timings of the expected future cash flows, taking into account the entity’s normal business practice. However, the Interpretations Committee also observed that in other cash pooling arrangements, an entity may not expect the period end balances to change prior to the next net settlement date and consequently it was noted that an entity would be required to apply its judgement in determining whether there was an intention to settle on a net basis in those circumstances.

The Interpretations Committee also observed that the results of the outreach did not suggest that the particular type of cash pooling arrangement described by the submitter was widespread. Furthermore, it was noted that many different variations of cash pooling arrangements existed in practice and consequently the determination of what constitutes an intention to settle on a net basis would depend on the individual facts and circumstances of each case. In the light of this and given the existing IFRS requirements, the Interpretations Committee considered that neither an amendment to IAS 32 nor an interpretation was necessary and consequently [decided] not to add the issue to its agenda.


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