Unclaimed Property: What

You Need to Know

~ Part 2 ~

Heela Popal & Troy Wangen

June 15, 2016

3:30p – 4:30p

25094

Legal Disclaimer

This presentation does not constitute legal, financial, accounting or any other type of advice. It is provided solely for educational and informational purposes for the attendees of this webinar which is

sponsored by UPPO. Attendees are urged to consult with their own attorneys and other advisors about their particular facts and circumstances. The analysis and opinions expressed herein are those of the

presenters and do not necessarily represent the views of their employers, the Unclaimed Property Professionals Organization, or its officers, directors or members.

Anti-Trust Statement UPPO members and/or meeting attendees cannot come to understandings, make agreements, or

otherwise concur on positions or activities that in any way tend to raise, lower or stabilize prices or fees. Members and/or attendees can discuss pricing models, methods, systems, and applications, as well as

certain cost matters that do not lead to an agreement or consensus on prices or fees to be charged. However, there can be no discussion as to what constitutes a reasonable, fair or appropriate price or fee

to charge for any service or product. Information may be presented with regard to historical pricing activities so long as such information is general in nature and does not include data on current prices or fees being charged in any trade area. Any discussion of current or future prices, fees, discounting, and

other terms and conditions of sale, which may lead to an agreement or consensus on prices or fees to be charged, is strictly prohibited. Any questions about UPPO’s antitrust policy should be directed to UPPO’s

Executive Director.

• Unclaimed Property in the Credit Department

• How to identify potential unclaimed property

• Internal Due Diligence

• Proper Documentation

• Effective Policies and Procedures

• Audits of Accounts Receivable

Today’s Agenda

Unclaimed Property in the Credit Department

• A customer’s account is a moving target with fluid balances

• Credits often appear as an obligation to the customer, but there may be more to a customer’s account balance than initially meets the eye

• Potential AR exposure may be hidden in several GL accounts: • Trade AR

• Cash Application/Tolerance Write-Offs

• Bad Debt Offsets

• Unapplied Cash/Suspense Accounts

Unclaimed Property in the Credit Department

• Prompt Pay Discounts (e.g., 2/10 net 30)

• Volume Discounts

• Fluctuations in Pricing

• Customer pays based on purchase order price regardless of invoice amount

• Product Returns

• Overpayments

• Pre-Payments

Trade AR

• Accounting Errors

• Credit should have never been issued to the customer

• Payment applied to wrong account

• Payment applied to related account

• Transposing of invoice amounts or payments applied

• Rebate/Discount requirements not fulfilled

Trade AR

• Generally no deminimus exemptions; even $0.01 can be unclaimed property and reportable

• Automatic process at cash application to remove small balances doesn’t allow for credits to be tracked and resolved

• Thresholds can be established for internal administration and review

• Certain states have low due diligence thresholds that may be less than your tolerance level • CT requires due diligence letters for all amounts

Cash Application/ Tolerance Write Offs

• Credit balances included in monthly entry to write-off bad debt

• Payments received after a balance has been written off to bad debt

• Unknown payments used to offset bad debt

Bad Debt Offsets

• Customer payments collected via lockbox • Payment is received without reference to account

number, customer number, purchase order, invoice number, etc.

• Payment moved to specific Trade AR customer account or separate suspense account until it can be researched and property matched

• But what if the payment can never be matched? • Zeroed out periodically (e.g., taken into income)

• Refunded

• Remains unreconciled credit balance

Unapplied Cash/ Suspense Accounts

• Tracking of date of last activity

• Must be customer generated such as a payment or purchase

• Related Customers

• Parent / Child relationships

• Netting

• Overall net customer balance, including related customers, if allowed

• Bad Debt

• Cash Application/Tolerance Write-Offs

• Yearly audit of customer balances

Internal Due Diligence

• Settlement Agreements • Written contract between two parties resolving any

outstanding credits and debits between them for a specific period of time

• Signed by both parties

• Language often includes: – Summary of facts, including disputed amounts;

– Agreement as to resolving amount owed, if any, and acknowledgement of payment or discharge;

– Mutual releases, waivers, discharges, and covenants not to sue; and

– Specific periods covered by the release agreement.

Internal Due Diligence

• Contractual Terms / Anti-Limitation Provisions

• States often claim that contractual terms limiting an owner’s right to claim unclaimed property (e.g., “Not Valid After 90 Days”) may be disregarded by the state as a form of “private escheat”

• The settlement agreement is not triggered by a specific period of time, although it may address specific periods, and the terms are mutually negotiated and agreed to

Internal Due Diligence

• It is important to maintain documentation on credits that have been resolved in the unlikely event of an audit

Proper Documentation

Effective Policies and Procedures

• Determine whether there are any procedures currently in place.

• Identify other departments (i.e., AP, PR) to be included in the process

• Identify entities to be included in the process

• Clearly define roles within each department

• Appoint one Escheat Coordinator to communicate with all departments that have escheatable property

• Separation of duties

• Document the process flow in a flow chart with general ledger coding for entries

Developing Unclaimed Property Process

• Gathering data

• Unclaimed property liability account

• Develop a compliance timeline/calendar

• Due diligence letter process

• State report preparation

• Tracking of reporting changes

Unclaimed Property Reporting Steps

• Trade A/R

• Quarterly / semi-annual review of credit balances

• How are liabilities going to be researched? – Courtesy letter or phone call campaign

• Tolerance Write Offs

• Move balances directly to a clearing account for netting purposes or credits directly to UP liability account

• Unapplied Cash

• Unresolved amounts moved to UP liability account

Gathering Data: A/R

Audits of Accounts Receivable

• AR tends to be the most labor intensive portion of any general ledger unclaimed property audit

• Audit methodologies for computing AR liability can vary largely from self-review

• “Guilty until proven innocent” stance makes proper documentation imperative

• Review is typically not limited to AR aging reports

Audits on the Rise

• Identification of “Tracer” Accounts • Auditors will review AR aging reports to identify

customer credit balances that “drop off” between periods

• Tracer credits (and debits) will be scheduled to uncover general ledger accounts believed to hold unclaimed property

• Request will be made to: – Identify account to which the credit was posted;

– Disposition (e.g., refunded, written off) of the balance; and

– Provide copies of journal entries that link that balance to the specific general ledger account.

Audit Methodology

• Testing of “Tracer” Accounts

• Provide every journal entry, including the individual transactions for any batch postings, for the identified “tracer” accounts, which may include: – Bad Debt Expense

– Miscellaneous Income/Expense

– Accrual or Suspense Accounts

• Provide offsetting general ledger account to exclude non-customer related postings

• “Netting” of customer debits and credits to facilitate testing of net-credit balance customers

Audit Methodology

Questions and

Answers

Contacts

Heela Popal

2016-17 UPPO President

Director, State and Local Tax

PricewaterhouseCoopers LLP

Phone: 678.419.1462

Heela.Popal@pwc.com

Troy Wangen

2016-17 UPPO Midwest Region Vice President

Senior Manager

True Partners Consulting LLC

Phone: 312.588.3430

Troy.Wangen@tpctax.com