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9/14/17 9:41 AM

Escheat Compliance: Don't Forget About Account Receivable Credits

by Joshua Moldrup

Accounting Records - Yellow Ring Binder on Office Desktop with Office Supplies and Modern Laptop. Accounting Records Business Concept on Blurred Background. 3D Render..jpegAccounts receivables (A/R) is an important component to most companies and often overlooked when it comes to unclaimed property compliance. This is unfortunate because A/R can create a substantial amount of unclaimed property and be a key focus in unclaimed property audits. Consequently, any effective escheat program should include policies and procedures for reviewing and including accounts receivables in the reporting process.

How Does A/R Become Unclaimed Property?

Accounts receivables become an unclaimed property issue when credit balances occur that go unresolved and age beyond the respective dormancy period (typically 3 to 5 years). These unclaimed credit balances typically can be found on a company’s books and records in three forms.

  1. On Account Customer Credit Balances
  2. Unidentified Receipts
  3. Write-offs
On Account Customer Credit Balances

On account customer credit balances can become unclaimed property when activity with the customer ceases and the credit balance ages beyond the statutory dormancy period which can vary across jurisdictions.  Customer credit balances can result from a variety of reasons including but not limited to returned product, overpayments and invoice adjustments.  It’s important that an organization understand their specific causes for credit balances, and has standard procedures in place to regularly review and resolve them before they age and become unclaimed property.

With any unclaimed property type, including A/R, it’s vital to maintain documentation sufficient to substantiate the resolution of any credit balance. Procedures should include standardized documentation requirements for resolved credit balances to ensure the outcome can be proven under the scrutiny of an unclaimed property audit.

Unidentified or Unapplied Receipts

Unidentified or unapplied receipts typically occur when a payment is received that cannot be applied to an invoice or a customer account. These payments would fall under the same process as identifiable customer credit balances. If a payment cannot be identified or applied to a customer within the dormancy period it becomes unclaimed property and should be reported to the respective state or jurisdiction.  

Often times these payments sit in generic “clearing” or “suspense” accounts while research is conducted to apply the payment. All general ledger or sub-ledger accounts used to hold unidentified or unapplied payments should be reviewed and reconciled on a regular basis. Payments that cannot be applied or otherwise resolved should be returned to the payor or included in further analysis for unclaimed property reporting requirements.

Write-Offs

Write-offs can be a complicated area when it comes to unclaimed property, and should not be overlooked. Often times this is the area that gets companies in the most trouble in an audit. Credit amounts that are written-off over periods of time, even in small amounts, can accumulate into relatively large amounts. To make matters worse, due to the passage of time and bad record keeping, it can be very difficult to differentiate between credit write-offs that represent actual amounts that are due and owing, and basic accounting adjustments. By the time you factor in extrapolations and penalty and/or interest assessments, something as simple as a write-off policy can put even relatively compliant companies at risk under audit.

Most unclaimed property audits will include a review of common general ledger accounts where accounts receivable credits and debits are typically written-off to. Auditors will review activity in these accounts looking to identify any credit amounts that have the potential to be unclaimed property. Most states do not have a minimum threshold for unclaimed property reporting, so even a small credit write-off policy can result in fairly large amounts of past due unclaimed property liability especially for companies with high transaction volumes or a large customer base.

Once an amount is written-off the balance sheet the information necessary to research the credits may no longer be retained or linked within the accounting system. This can put even a relatively compliant company at risk under audit as items that may not truly be due and owing can be deemed as unclaimed property by the auditors simply because the information to research the credit balance is not available, or the supporting documentation was not retained.

Recommendations to manage A/R Credits

Every organization should review their accounts receivable write-off policy to ensure it is compliant with escheat statutes and include the retention of documentation to support any credit write-offs that are not due and owing, such as a bad debt recoveries, volume discount accruals, or invoice adjustments.  

Accounts receivables is not a property type that can be ignored. Use the points above to start a discussion and review of your current policies. Engage with an outside advisor who has expertise and can assist you with creating best practices and procedures to ensure compliance and keep A/R from becoming an issue and keep surprises from arising in the event of an audit.

Topics: Compliance, Recordkeeping, Best Practices