Cash flow presentation of collections and remittances, fees deducted at source and offsetting · IAS 7 / IAS 32

In plain words

Borrower payments flowing through a servicer's accounts can dwarf its own revenue. Because the money belongs to the financier, these collections and remittances may be shown net, so the cash flow statement reflects the servicer's own business. The servicer's fees, even when deducted from collections, are its own operating cash inflow. Amounts owed both ways are offset only with a legal right and net settlement.

Why it matters

When collections pass through a servicer's own accounts, gross receipts and remittances can be many times its revenue. Presenting them gross as operating cash flows makes the servicer look like a much larger business and hides its true operating cash generation; presenting collection cash alongside the servicer's own cash, without separation and disclosure, can make liquidity appear far stronger than it is. Fees deducted from collections before remittance also raise questions: they are a real cash inflow of the servicer's own revenue, but the related receivable and payable may only be offset in the balance sheet when the strict offsetting conditions are met.

Diagnostic questions

Are collections recognised on the servicer's balance sheet at all (see the collections-on-behalf issue)? If so, do the receipts and payments reflect the activities of the financiers rather than of the servicer, so that net reporting is permitted? Is the collection account a demand deposit that the servicer can draw on (even if only to remit to the financier), or can it not be withdrawn on demand, for example because every withdrawal needs the financier's countersignature or the funds are placed for a fixed term? Does the mandate give the servicer a legally enforceable right to deduct its fees from collections, and does it intend to settle on that net basis? Are amounts receivable from and payable to the same financier presented net at the reporting date, and are both offsetting conditions met?

Recognition

In the statement of financial position, present collection cash held for financiers as a separate line item, never within the servicer's own cash, and keep it out of liquidity measures and commentary on the servicer's own funds.
Decide, on the definition and not on presentation preference, whether that balance forms part of cash and cash equivalents in the statement of cash flows: a demand deposit recognised by the servicer generally remains cash even though the mandate restricts its use (the IFRS Interpretations Committee has taken this view for contractual restrictions agreed with a third party), whereas a balance the servicer cannot withdraw on demand falls outside; document the conclusion and disclose the restriction. If it is included, the servicer may (but need not) present collections and remittances on behalf of financiers net within operating activities as receipts and payments on behalf of customers that reflect the customers' activities, and disclose the policy; if it is excluded, these flows do not appear in the statement of cash flows.
Present the servicer's own fee receipts, including fees settled by deduction from collections and transferred to its own account, as cash receipts from customers within operating activities.
Where fees are deducted from collections held off balance sheet and paid to the servicer, present the transfer received as an operating receipt.
In the statement of financial position, offset a fee receivable and a liability to the same financier only if the servicer currently has a legally enforceable right to set off and intends to settle net or simultaneously.
Disclose significant restricted cash balances and the reasons they are not available for the servicer's general use.
Reconcile the cash flow categories to the movement in restricted collection cash and liabilities to financiers.

Measurement

Cash flows are presented at the amounts received and paid. Net reporting does not change any balance; it only affects how flows on behalf of financiers are shown. Offsetting in the statement of financial position presents the net amount of the fee receivable and the liability only where both conditions are met; otherwise both are shown gross at their carrying amounts.

Presentation & disclosure

Disclose: (1) the policy on whether collection cash forms part of cash and cash equivalents, and the basis for it; (2) the use of net reporting for collections and remittances on behalf of financiers; (3) the amount of restricted cash held for financiers and the restrictions; (4) offsetting policies and the gross and net amounts where receivables and liabilities to the same financier are offset; (5) a reconciliation of cash and cash equivalents to the statement of financial position.

Common mistakes

Presenting collections as operating receipts and remittances as operating payments on a gross basis, inflating reported operating cash flows
presenting collection cash within the servicer'
s own cash line, or including it in cash and cash equivalents without disclosure, so that liquidity appears overstated
excluding a recognised demand deposit from cash and cash equivalents merely because its use is restricted
omitting fees deducted from collections from operating cash receipts because no invoice was paid in cash
offsetting fee receivables against liabilities to financiers merely because the same counterparty is involved, without an enforceable right and intention to settle net
treating changes in restricted collection cash as investing or financing flows without a basis.

Simple example

During the year a servicer that holds collections on balance sheet in a demand deposit account it can draw on to remit (so the balance is included in cash and cash equivalents, presented as a separate line and disclosed as restricted) receives SAR 300,000,000 of borrower collections, deducts its invoiced fees of SAR 6,000,000 from collections as the mandate permits, remits SAR 291,000,000 to the financier, and ends the year holding SAR 3,000,000 more collection cash than at the start (300,000,000 - 6,000,000 - 291,000,000 = 3,000,000).
Journal entries:
Dr Restricted cash - collection accounts 300,000,000
Cr Amounts payable to financiers 300,000,000
Dr Amounts payable to financiers 291,000,000
Cr Restricted cash - collection accounts 291,000,000
Dr Amounts payable to financiers 6,000,000
Cr Fees receivable 6,000,000
Dr Cash at bank - operating 6,000,000
Cr Restricted cash - collection accounts 6,000,000
Cash flow statement (operating activities): cash receipts from customers for fees SAR 6,000,000; collections on behalf of financiers, net of remittances, SAR 3,000,000 (presented net). At year end the servicer also has SAR 1,000,000 of fees receivable from, and SAR 3,000,000 payable to, the same financier; as the mandate gives an enforceable right of deduction and the servicer settles net, it presents a net liability of SAR 2,000,000 and discloses the gross amounts. Had every withdrawal from the collection account required the financier's countersignature, so that the balance was excluded from cash and cash equivalents, the statement of cash flows would show only the SAR 6,000,000 fee transfer as an operating receipt, and the SAR 3,000,000 increase in collection cash would not appear as a cash flow.

Professional judgment

The decisive judgments are whether collection cash is part of the servicer's cash and cash equivalents and how flows on behalf of financiers are shown. A restriction on use agreed with the financier does not by itself stop a recognised demand deposit from being cash; exclusion needs a basis in the definition, such as funds that cannot be withdrawn on demand. Whatever the cash flow answer, the conservative presentation is a separate line in the statement of financial position, clear disclosure of the restriction and the matching liability, and no use of these balances in the servicer's own liquidity measures. Net reporting of flows on behalf of financiers is permitted, not required. Offsetting requires both an enforceable right in all circumstances (including insolvency of either party) and an intention to settle net; a mandate clause allowing deduction of fees is often enough for the fee balance, but not for unrelated claims between the parties.

Source basis

IAS 7 / IAS 32 · Statement of Cash Flows / Financial Instruments: Presentation

Paragraph references

IAS 7.22–24IAS 7.6IAS 7.48IAS 32.42

Verified against the official standard texts used in the IFRS Expert skill.

IAS 7 Statement of Cash Flows

Issued: 1992 · Effective: 1 January 1994

IAS 32 Financial Instruments: Presentation

Issued: December 2003 (revised) · Effective: 1 January 2005

Related issues

Educational and navigation content only. Not professional advice. Does not reproduce official IFRS/IAS text. Consult the authoritative standards and qualified professionals; professional judgment may still be required.