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Die Another Day - The Future of Notional Pooling Notional pooling is a popular cash management instrument but over the past few months the debate about its future has intensified. Some believe it will disappear in the next two years, others are convinced that it will survive.

Die Another Day - The Future of Notional Pooling

by Bas Rebel, Senior Director of Corporate Treasury Solutions, PwC The Netherlands and Philippe Förster, Director, PwC Luxembourg

Notional pooling is a popular cash management instrument. But over the past few months the debate about its future has intensified. Some believe it will disappear in the next two years, others are convinced that it will survive. No doubt some convictions are founded in business opportunism. Many corporate beneficiaries are sitting on the fence wondering what will happen and how and when they should prepare for alternatives. Treasury professionals know that implementation of any alternative implies a fundamental change in cash management which will require substantial effort and lead time. In the interest of undisturbed and stress-free cash management, clarity on this issue is needed sooner rather than later.

It would not be the first time notional pooling has been declared dead prematurely. Without a good understanding of the issues that triggered the debate and turmoil this time, it is difficult to assess the right moment to jump trains if/when necessary. This article examines the underlying issues.

What are we talking about?

Notional pooling comes in many different shapes and forms, ranging from simple interest recalculation to contractual supported balance sharing. It can be implemented across legal entities as well as within a single legal entity. The currencies of the participating accounts is another dimension to the range of notional pooling products. A special kind of notional pooling is the so-called reference account structure also known as ‘Nordic’ pooling, in which the owner of the account can be different from the operator. A key characteristic of all notional pooling products is that account balances are not transferred between participating accounts.

Notional pooling appeals to corporate treasurers for different reasons, including operational ease of managing liquidity across the group, wide acceptance by income revenues across the globe and low impact on corporate accounting and business operation. The effectiveness and efficiency of multi-entity notional pooling solutions, however, is dependent on the contractual obligations between participating entities required by the bank (i.e., the cross guarantee or act of joint and several liability). These cross guarantees and other enhancing multilateral contractual obligations are typically hurdles for groups of companies wishing to implement notional pooling.

Under fire

The current debate around notional pooling has some parallels with similar discussions a decade ago, but there are also some notable differences. In 2004, corporate beneficiaries were concerned about the implications of the adoption of IAS32. Although this international accounting standard did not discuss notional pooling explicitly, it did define bank accounts as financial instruments and stipulated the conditions for net representation of financial instruments on the balance sheet as:

1. Contractual agreement to settle outstanding liabilities that can be enforced under all legal circumstances; and

2. A regular demonstration of the intent to settle outstanding liabilities that are represented on a net basis.

At that time, banks, corporate clients and accountants had a vested interest in finding alternative ways of working within the boundaries of this international accounting standard. Corporate treasurers feared that gross representation of pool balances would negatively impact balance sheet ratios and possibly breach bank covenants for no material economic reason. Transaction bankers felt caught in a prisoner’s dilemma, fearing loss of substantial business if they did not offer an acceptable solution. For them, any product development cost was immaterial compared to the revenue and client retention at stake.

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