4.3 Centralized Cash Management Arrangements (“Cash Pools”)
A parent company and its subsidiaries may have centralized cash management arrangements in which excess cash is invested in a cash pool. Subsidiary cash requirements are met through withdrawals or borrowings from the pool. The pool is invested in assets (e.g., deposits at banks) that are in the parent company’s name. Under this type of arrangement, the parent company and its subsidiaries have sweep arrangements with their respective banks in which cash is transferred between the parent’s and subsidiaries’ bank accounts daily. This arrangement reduces lending costs and yields higher rates of return on investments (by allowing an entity to invest larger “blocks” of cash).
Generally, funds deposited by a subsidiary in its parent company’s cash account under a centralized cash management arrangement should not be classified as cash or a cash equivalent in the subsidiary’s separate financial statements if the subsidiary does not have legal title to the cash on deposit. For a subsidiary to classify funds on deposit with its parent as cash and cash equivalents in the balance sheet, the deposit in the cash pool would need to meet the definition of cash or a cash equivalent.
Because the deposit in the cash pool is not a demand deposit in a bank or other financial institution, it would not meet the definition of cash. Generally, legal title in a cash account is demonstrated by the deposit of the cash or cash equivalent in a demand deposit account at a bank or other financial institution in the subsidiary’s name.
A deposit in the cash pool would also not be considered a cash equivalent under ASC 230. As defined in
ASC 230-10-20, cash equivalents are “short-term, highly liquid investments.” Such investments are made available to a broad group of independent investors and are commonly recognized in markets as vehicles for investing funds for future benefit. Accordingly, the deposit in the affiliate cash management pool is generally a receivable from an affiliate and not an investment as contemplated in ASC 230.
Receivables from an affiliate resulting from a cash pooling arrangement are
generally considered loans and, correspondingly, changes resulting from such
deposits should be presented as investing activities in the statement of cash flows.
ASC 230-10-45-12 and 45-13 state that cash flows from investing activities include
payments and receipts related to making and collecting loans. Payables due to an
affiliate in these situations are considered borrowings and, correspondingly,
changes should be presented as financing activities in the statement of cash flows.
ASC 230-10-45-14 and 45-15 state that cash flows from financing activities include
proceeds and payments related to borrowings and repayments of amounts borrowed.
Example 4-4
Parent A maintains a centralized cash management program in which Subsidiary B participates. Subsidiary B issues stand-alone financial statements that reflect a $100 receivable from A as of December 31, 20X6, in connection with cash deposited by B into the centralized cash management program. During 20X7, B withdraws $200 from A as part of the centralized cash management program, resulting in a $100 payable to A as of December 31, 20X7. The statement of cash flows in the stand-alone financial statements of B for the 12 months ended 20X7 would report a $100 investing cash inflow and a $100 financing cash inflow related to the activity associated with the centralized cash management program.
ASC 230-10-45-8 and 45-9 indicate that payments and receipts in these situations
should be presented in the statement of cash flows on a gross basis, except when
“the turnover is quick, the amounts are large, and the maturities are short.” In
addition, if the receivable from or payable to affiliates is due on demand, net
presentation of payments and receipts is acceptable. In most centralized cash
management arrangements in which funds are due on demand, the parent acts as a bank
to the subsidiary in that it holds and disburses cash on the subsidiary’s behalf;
correspondingly, such related transactions may be presented net in the statement of
cash flows. See Section
3.2 for further discussion of reporting cash flows on a gross or net
basis.
The principles above also apply to condensed consolidating information for guarantor subsidiaries under SEC Regulation S-X, Rule 3-10. In a manner consistent with cash pooling arrangements, intercompany transactions settled on a net basis between entities with cash flow information reported in different columns in the condensed consolidating information in a guarantor footnote should be recorded separately in each entity’s column as if the columns were reported on a stand-alone basis. Therefore, the classification of intercompany funding activity between entities whose cash flow information is separately reported in each column should reflect cash payments and receipts in investing and financing activities.