Notional Cash pooling: what to do now? 16 June 2016 - PwC · PDF fileNotional Cash pooling:...

Discover and unlockyour potential…

Hot topics treasury seminarNotional Cash pooling: what to do now?

16 June 2016

PwCPwC

Discussion abundant

Regulatory changes

Accounting rules

Pressure on BanksNP will

disappear!

What do I need to do?!?

Possibly, but it will be no longer viable!

Nothing will change!

No, no, it will survive…

… somehow!?

216 June 2016Hot topics treasury seminar

PwCPwC

Program

Under siege Implications? Alternatives?


PwC

Under siege

Cash pooling: what to do now?

PwCPwC

Basel

III

Notional

Pooling

• Capital Adequacy

• Liquidity Coverage Ratio

Both to be calculated over the

gross balances in the notional pool

Impact on:

• availability

• Terms & conditions

• Cost of Product

IFR

IC

Notional

Pooling

Decision Paper

March 2016 on

IAS32

Ability to settle a balance that

cannot be defined in advance

No discrimination between pooling

within a single entity or across

multiple entities

Notional Pools including accounts with

fluctuating balances may no longer be

included in financial statements as a net

balance.

Debt coverage and other key financial

ratio’s may be effected negatively.

Secti

on

385

Zero

Balancing US legislation

REG-108060-15

on section 385

effective 4 April

2015

(4 April 2016 first

day of 90 days

discussion

period)

Mandatory reclassification of

related party funding within three

years before or after the following

transaction:

• Dividend distribution

• Acquisition of equity in related

party

• Distribution of boot

• Failing to document and

substantiate commercial terms

within 30 days of lending

“Principal purpose” and “Per se”

rule

If the proposal as it currently reads will be

approved, debt Instruments issued on or

after 4 April 2016 are subject to section

385.

US Tax payers but effecting inbound and

outbound international structures

Knock on effects make it potentially an oil

spill.

• Consequences resulting from

restatements

• Domino effect to related parties

• Foreign tax treatment

• Hedging on reclassified debt

“Besieger” Pooling affected Levers of impact Implications

Pooling under siege from multiple directions


PwC

Implications

PwCPwC

Why have we been so happy about pooling?

Liquidity management technique whereby funds are physically concentrated or notionally consolidated into a single cash position

One Definition

Interest savingBalance sheet improvementEfficient liquidity managementAutomation of intra-group funding

Multiple Objectives

Notional pooling (no movement)Cash concentration (ZBA - Sweeping)Hybrid structure (target balance, Nordic pooling)

Few Techniques

Fiscal & legal implications: Arms length pricing Thin capitalisation VAT and services provided Other fiscal and legal considerations

Accounting Systems Cash forecasting Internal limits / (budget) control Guarantees / Joint & several liability ICCA and/or (loan) documentation


PwCPwC

• Notional Cash Pooling is based on offsetting positions within the group and/or entity

• It is based on the ‘promise’ of all cash pool members to cover any deficit of any cash pool member

• Previously banks would be allowed to offset their position against the cash pool members, regulatory liquidity ratios were calculated on the offset balance

• Now they will have to cover all of the positions separately, leading to balance extension, and more required regulatory capital

• The banks respond differently. Banks not required to comply with Basel III offer the product with no changes, others vary their response;

Basel III & notional cash pooling

Bank Position: --Offset--

HOLDING OPCO NL OPCO BE Holding CurrXX

500 600 400 300

CASH POOL NET Balance: 0.00

Discontinuation of the productTriggering physical settlement

Passing through of additional costs

LiabilitiesAssets

Liquidity Coverage Ratio (LCR) Increase in high quality assets

Solvency ratio (Risk weighted assets) Increase in capital

HOLDING OPCO NL OPCO BE Holding CurrXX

CASH POOL GROSS Balance: 1800

500 600 400 300

Bank Position: DT: 900CT: 900


PwCPwC

IFRIC on notional pooling (1 / 2)

IAS 32.42A financial asset and a financial liability shall be offset and the net amount presented in the statement of financial position when, and only when, an entity:

(a) currently has a legally enforceable right to set-off the recognised amounts; and

(b) intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. In accounting for a transfer of a financial asset that does not qualify for derecognition, the entity shall not offset the transferred asset and the associated liability (see IAS 39, paragraph 36).

Master netting agreement in case of default or at maturity is not enough:

- partially fixed by banks - enforceability in all countries

Intention criteria is more difficult to meet!IAS 32.46: the right to do so is not sufficient!


PwCPwC

IFRIC on notional pooling (2 / 2)

IAS 32.43This Standard requires the presentation of financial assets and financial liabilities on a net basis when doing so reflects an entity’s expected future cash flows from settling two or more separate financial instruments. When an entity has the right to receive or pay a single net amount and intends to do so, it has, in effect, only a single financial asset or financial liability.

Offsetting if and only if individual cash flows are expected and netting is intended

IAS 32.47An entity's intention with respect to settlement of particular assets and liabilities may be influenced by its normal business practices, the requirements of the financial markets and other circumstances that may limit the ability to settle net or to settle simultaneously. When an entity has a right of set off, but does not intend to settle net or to realisethe asset and settle the liability simultaneously, the effect of the right on the entity's credit risk exposure is disclosed in accordance with paragraph 36 of IFRS 7.

Movements in & out are a barrier to prove the intention to net settle

The original beneficial ownership structure of balances is maintained

IFRIC March 2016


PwCPwC

Section 385; basic implication

Reclassification of debt within three years either before of after one of the following transactions at least to the amount of prohibited transaction defined as:

• Distribution;

• Acquisition of equity in related party;

• Distribution of boot.

Some exemptions apply:

• Intra-group funding < USD 50Mio

• Distributions less than the current earnings and profit

Still under review, but force of law since 4 April, 2016.

• Intense debate about (unintended) effect

• No finality on text (yet)


PwCPwC

Section 385’s (unintended?) domino effect

FS1Non US

S2US

FS3Foreign

(US) Parent

USS entity (Pool Master)

FS4Foreign

ZBA Cash Pool

• Zero Balancing result typically registered as IC lending and depositing

• Prohibited transaction could involve many of:

• Dividend upstreaming

• Asset reorganisation

• Poor documentation

• Employee stock option plans

• ….

• Funding overdraft ZBA then automatically reclassified as equity

• Since US Treasury now “acquired” a stake in FS4 the “deposits taken” from FS1-3 will also trigger reclassification under this rule;

• Any cashflow the following day in the opposite direction will be classified and tax as distribution

• And so on, …

• and so on…

1. Reclassified as equity

3. Reclassified as equity

2. Borrowed to acquire

equity


PwC

Alternatives?

Cash pooling: what to do now?

PwCPwC

Future of NP after IFRIC March 2016

Timing of Sweep Off-set at B/S

1 Never X

2 Sweep & Reverse Sweep X

3 Sweep at B/S V

4 Sweep at any other date X

NB: #3 and #4 do:

• Create intercompany loans and deposits (in case of multi entity Pool);

• Unwind positions in case of multi-currency pooling;


PwCPwC

Viable Alternatives?

Alternative? Attention points

Zero Balance Pool • IC (loan) documentation

• System set-up

• Fiscal implication

• Section 385

±Nordic Pooling • Often better known as reference account structure

• Single entity variant of NP that is XVirtual Accounts • Limited availability

• Pioneering stage

• How different from Nordic Pooling?


PwCPwC

Pooling, a hot topic not cooling down …

… thank you for your attention


PwC

More information

Trainer:Bas Rebel

Phone number: +31 (0)88 792 3824Mobile: +31 (0)6 45 874 974E-mail: [email protected]


17

mailto:[email protected]

Notional Cash pooling: what to do now? 16 June 2016 - PwC · PDF fileNotional Cash pooling:...

Documents

Transcript of Notional Cash pooling: what to do now? 16 June 2016 - PwC · PDF fileNotional Cash pooling:...