In plain words
Wallet and payment companies hold customer money, often in a segregated account the regulator requires. Whether that cash and the matching obligation sit on its balance sheet depends on control and legal analysis, not the label. If the company directs the funds and bears the bank's default risk, it shows both gross. Funds in an insolvency-remote trust it cannot direct are custodial and only disclosed. Receiving funds creates no revenue.
Why it matters
Regulators typically require e-money and payment institutions to legally segregate client funds from company funds, but whether those segregated cash balances and the matching obligation appear on the entity's own balance sheet depends on control and legal analysis, not on regulatory labeling alone; getting this wrong can materially overstate or understate total assets and liabilities and mislead readers about the entity's true balance-sheet risk.
Diagnostic questions
Under the license/trust documentation, who bears the risk if the safeguarding bank defaults, the entity or the customer? Can the entity direct the use of the segregated cash (e.g., move it between banks) even though it is restricted? Is there a bare trust or insolvency-remote arrangement that removes the funds from the entity's estate?
Recognition
1) Obtain the legal opinion / trust documentation governing the safeguarding arrangement for each license/jurisdiction. 2) Determine who bears the risk of the bank holding the segregated cash defaulting (the entity or the customer), this is a strong control indicator. 3) Determine whether the entity can direct the use of the segregated cash (even subject to restrictions) or whether it is held in a bare trust with no residual control. 4) If the entity retains control and owes a matching obligation, recognize both the cash and the customer liability gross on the balance sheet. 5) If funds are demonstrably held off the entity's balance sheet under an insolvency-remote trust, treat as custodial and disclose only. 6) Re-perform this assessment separately for each group entity/license, as trust law and regulatory form can differ by jurisdiction.
Measurement
Where the funds are on balance sheet, measure segregated cash at its bank balance (subject to any impairment/ECL assessment on the holding bank as a counterparty) and the client liability at the amount owed; interest income or costs on float require a separate policy decision on entitlement (see the related float-interest issue); reassess measurement if the safeguarding bank's own credit standing deteriorates. Where the funds are held off balance sheet under an insolvency-remote trust, neither the cash nor the obligation is measured in the entity's statements; disclose the amount held in trust, and recognize only the entity's own fees and any amounts it is entitled to.
Presentation & disclosure
Disclose: description of the safeguarding/segregation arrangement and applicable regulation; the legal basis for on-balance-sheet versus off-balance-sheet treatment; any restrictions on use of segregated cash; the amount presented as restricted cash and the matching customer liability; concentration risk with safeguarding banks; and any escheatment/unclaimed-funds obligations.
Common mistakes
- Netting client liabilities against segregated cash without a legal right of set-off
- treating regulatory segregation as automatically meaning the funds are off-balance-sheet
- inconsistent treatment across group entities with different local licenses
- failing to update the legal analysis when the safeguarding bank or trust structure changes
- presenting segregated cash within unrestricted '
- cash and cash equivalents'
- without separate disclosure of restrictions.
Simple example
Case 1 (on balance sheet): a digital wallet provider holds SAR 40,000,000 of customer top-up balances in a segregated bank account, as its licence is assumed to require; it retains operational control (can move funds between safeguarding banks) and bears the counterparty risk of bank default, so both sides are presented gross. Journal entry on receiving top-ups: Dr Restricted cash, safeguarding account 40,000,000 / Cr Customer wallet liability 40,000,000. No revenue is recognized on receipt; the wallet liability is derecognized only as customers spend or withdraw their balances. Case 2 (off balance sheet): a payment institution in another group jurisdiction receives SAR 25,000,000 of client funds directly into an account held under a trust deed that, on legal advice, is insolvency-remote; customers bear the bank default risk and the entity can move the funds only on customers' instructions. The funds and the matching obligation are custodial: no journal entry is made for the SAR 25,000,000, the entity records only its own fees as earned, and the note discloses the amount held in trust and the arrangement.
Professional judgment
This is a genuinely unsettled area without a single dedicated IFRS standard; conclusions vary by legal form of segregation, trust law, and insolvency remoteness, and should be documented with legal input. Key grey areas: whether a statutory trust created purely by regulation (without a bespoke trust deed) is sufficient to achieve insolvency remoteness; how to treat partial commingling where the entity has occasionally used safeguarding accounts for short-term liquidity; and whether investment of float in short-term instruments changes the control conclusion. Entities should revisit the analysis whenever safeguarding arrangements or banking relationships change.
Source basis
Professional Judgment · Financial Instruments / Presentation (no single standard directly on point)
Paragraph references
Verified against the official standard texts used in the IFRS Expert skill.
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.