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Cash Pooling

The term “Cash Pooling” refers to the operation of transferring the bank balance entered on a subsidiary entity to the parent entity (holding company or sub-holding company) which will register a variation in its own current bank account and a variation of the intragroup financial payables/receivables. Cash pooling encompasses not only transfers of banking positions but also transfers of the commercial component of intragroup financial expenses and income (again from the subsidiary to the parent company).

Therefore, Cash Pooling refers to two types of transfer:

  • the transfer of the subsidiary entity’s bank balance to the parent company
  • the transfer of the subsidiary entity’s interest receivable or payable to the parent company

The journal entries that the system makes on the parent entity based, for example, on an intercompany bank balance of the subsidiary entity equal to a +10 and interest receivable (intragroup financial income) equal to -2, are

The intercompany bank account (IC Banks receivable/payable) fed on the subsidiary entity is not a real bank account, but in fact represents an intercompany credit and debit account which actually behaves like a completely standard current account on which interest is calculated. Therefore, this account can be considered as both an intercompany bank account and an intercompany financial debit/credit account which, for the subsidiary, behaves like an intercompany bank account.

The following need to be defined in order to set up cash pooling:

Cash pooling is incompatible with the financial policy by counterparty entity. In fact, in cases of cash pooling, when the system performs section shifts and generates interest, it always enters the counterparty entity as the parent entity regardless of the counterparty defined.

Accounts sensitive to cash pooling

As stated previously, the concept of Cash Pooling involves the transfer of intercompany bank balances and the relative interest from one entity to another; therefore, it is necessary for these accounts at least to be “intercompany option” accounts.

The following accounts must allow intercompany transfers:

  • Intragroup financial income
  • Intragroup financial expenses
  • IC bank assets
  • IC bank liabilities
  • Intragroup financial receivables

  • Intragroup financial payables

  • Receivables for IC interest

  • Payables for IC interest

An account is defined as “intercompany option ” if, in the chart of accounts list (accessible from the administrator-user’s web interface by following the path: Setup & Admin > Dimensions > Account > List) Navigation panel> Dimensions > Account > List) , it has the IC Management option active

If that option has not been enabled, the system will display a blocking error during data processing

Lines of credit / deposits sensitive to cash pooling

The transfer of the intercompany bank balance to the holding entity is defined within the Cash management rule for the subsidiary entities.

Groups which have entities that do cash pooling normally have two different cash management rules:

  • one to manage the holding entity
  • one to manage the subsidiary entities in which the credit lines and deposits sensitive to cash pooling, i.e. the credit lines and deposits that will be transferred to the parent entity and, for each of them, the specific accounts involved in the transfer operation

The management of the aforementioned information can be accessed from the administrator-user’s web interface by following the path Setup & Admin > Data processing > Cash Flow Planning > Cash management rule > Actions () > Lines of credit and deposits> Navigation panel> > Data processing > Cash Flow Planning > Cash management rule > Actions () > Lines of credit and deposits>located on the Cash pooling tab.

To tell the system that a line of credit / deposit is sensitive to cash pooling it is necessary to activate the Cash pooling option. Then, for every credit line or deposit defined as sensitive to cash pooling, it is necessary to specify the accounts on which the entries on the holding entity will take place, particularly:

    • the IC financial credit account or the financial credit account of the variation type that is defined in the Holding entity as the counterparty of the cashflow received from the subsidiary entity
  • the IC bank variation - Credit/Debit account i.e. the bank account of the variation type, usually that of third parties, on to which the cash flows are “transferred” to the holding entity, with the same sign; these cash flows (increases or decreases) are entered at the subsidiary in its intercompany bank account
  • the IC Financial debit account i.e. the financial debit of the variation type that is fed at the holding entity as the counterparty of the cashflow received from the subsidiary entity

  • the IC interest account or the intragroup financial expenses or income account (depending on the line of credit or deposit being defined) to which the intercompany interest receivable or payable, calculated on the subsidiary entity, is transferred to the holding entity. For example, if the line of credit or deposit being defined is active, then the defined IC interest account is that of the intragroup financial expenses since the income entered at the subsidiary entity is transferred to the holding entity, reversed in sign

  • the IC accrual variation - debit/credit account, i.e. the accrual (receivable or payable) account of the variation type that is entered at the holding entity as the balance sheet contra-entry of the IC interest account

  • the IC bank account i.e. the bank account of the variation type used for the settlement of capitalised intercompany interest transferred to the holding entity. In practice, it is the variation type bank account in which the parent entity receives the payment of financial expenses and income from the subsidiary
  • the IC bank for withholding tax account, or the IC bank account of the variation type used for the transfer of the write off of the capitalisation of interest when billing the withholding tax.
  • the debits / credits for IC interest - debit/credit account, or the credit / debit account of the variation type that is defined in the holding entity as the balance sheet contra-entry in cases of deferred collection / payment.

This typically coincides with the “capitalisation variation bank account” defined for the main line by the same cash management rule.

The cash pooling setup logic is that of the parent entity; therefore, the accounts that will be subject to entries deriving from cash pooling are indicated.

Entities which fall within the cash pooling scope

Once the accounts subject to intercompany transfers and the behaviour of the lines of credit/deposit that fall within the cash pooling scope for the subsidiary entities’ interest calculation rule have been defined, it is necessary to define:

  • the pooler entity, i.e. the entity to which the bank balances and interest are transferred; typically the Holding or Sub-Holding entity
  • the subsidiary entities, i.e. the entities that are transferring the bank balances and interest to the pooler entity, specifying the parent entity to which they are transferring their own short-term financial position

Pooler entity setup

In order for an entity to be defined as a pooler”, it is necessary, in the area dedicated to managing the execution plan’s Cash Management, to set the Group calculation to “Yes”.

If the pooler entity is represented by a sub-holding entity it is necessary to set the “Group calculation” to “On other entity” and enter the Reference Holding field, indicating the company code of the parent entity. In fact, the sub-holding entity is the group’s parent company and a subsidiary at the same time; it receives the bank balance of the subsidiaries and, in turn, transfers this to the holding entity.

Subsidiary entities setup

Subsequently, to place a subsidiary entity within the cash pooling scope it is necessary, in the area dedicated to managing the execution plan’s Financial policy, to set:

  • the Entity Calculation to “Yes”
  • the Group calculation to “On other entity”, specifying the parent entity to which to transfer the bank balance and interest in the Reference Holding field

Tagetik allows the user to customise the parent entity to which to transfer the bank balance and interest by section. For more details, see Execution plan.