Interest earned where there is no asset

[IFRS_Questions]

Hi,

i work for a professional services firm where we hold client money on account (this is not an asset that belongs to us, there is no asset in our balance sheet. it belongs to our clients).

However, we earn net interest income on these monies we hold. Net because we earn x% from the bank and pay interest to the client at a lower rate.

My question is, is there scope within the standards to classify this income above EBITDA as "other income" or something along the lines as the standards all refer to interest being earned on an asset you own, but we do not own an asset associated with this income. I've found another professional services firm who include it within other income but need to reference standards for an audit memo.

thanks

[DJP]

Hello,

If your clients' money is comingled in the same account, then the account is your asset (you control the account and have economic benefits). You will have at the same time a liability towards your clients.

The only way for you not to recognise clients' money as your asset is if you have dedicated accounts for each one of your clients.

[IFRS_Questions]

We have separate "client account" bank accounts and business accounts for our business - there is no asset on our balance sheet in relation to these client bank accounts. Whilst we hold the funds, the money does not belong to us.

[DJP]

Ok, in that case, the interest received on those accounts belongs in full to your clients. If you agree to charge them part of the interest earned on those accounts, that will either be recognised as your revenue, or other income (not interest income). The way you operationalise this is a different story (either by holding part of the interest earned, or charging them a fee separately). But from an acounting point of view, you should not recognise interest income on these accounts.

Hope this helps.

[JRSB]

Are you 100% sure the client isn't entitled (in law or regulation) to the full interest earned?

[IFRS_Questions]

SRA regulations set out that we must pay clients a minimum rate based on the market, but anything earned over and above that we are entitled to retain.

[JRSB]

It's significant enough that the auditors want a memo? in any case it sounds in effect like a fee the client is paying ie their money is earning interest and you're holding on to a portion of it. presumably that is then other income as it's not your principle activity.

[JakobLavrod]

This is not my particular area of expertise, but in substance, this sounds alot like you are running a form of shadow banking: The customers get one rate on their money, and you have borrowed it out at a higher rate, hence pocketing the difference. In such a case, one could argue why you should not have an asset (the money you borrow out) and a liability (the customers right to the money) on your balance sheet.

[Marek Muc]

This publication aims to answer the question of whether the client's funds should be recognised in the statement of financial position:

https://www.grantthornton.global/global ... oint-1.pdf

Assuming these funds aren't your assets, does that mean you don't carry any matching liabilities in your balance sheet and don't pay interest to your clients?

[JakobLavrod]

Great reference Marek, thank you!