Unclaimed Monies Treatment

Nidhi , Last updated: 22 August 2016
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Executive Summary: The below article gives an overview on treatment and accounting of unclaimed monies by a Company as per the laws and regulations of the jurisdiction in which the company operates. At a high level the accounting treatment as per IFRS and USGAAP are also outlined. Also, covers the different possible treatment of unclaimed monies and some specific rules around it in India

Unclaimed monies is the obligations of any Company to its customers, vendors, employees, business partner or shareholders or any other party, that remain unclaimed and outstanding for a specific period of time and for which the Company has been unable to locate the rightful owner through the efforts made.

While above definition may sound to be very simple but in real world ensuring right accounting and regulatory treatment of such monies can be nightmare especially for multi-national organizations operating in multiple jurisdictions following local GAAPs and then for parent entity consolidated results either as per USGAAP or IFRS. It’s a tight rope to walk upon as companies have to abide to laws and regulations around unclaimed monies in each country of operation. The local laws may prescribe specific due diligence (to substantiate efforts made) procedures for locate right owner, treatment for unclaimed monies after specified period which can be either treating it as revenue, escheatment to government or may have to hold it for indefinite period.

Organizations spend huge dollars to ensure such compliance by maintaining proper records (as in some countries the specific period can be even more than a decade), governance and proper audit trail as non compliance would lead to regulatory breach and impact the company’s reputation. Even the banking regulations across the globe have stringent rules around unclaimed monies because at the end of the day it’s someone’s hard earned money.

The risk of non compliance & improper accounting of unclaimed monies can give sleepless nights to many top officials of any company including CFO and CEO and for this reason the multinational companies have specific teams/ officials responsible for compliance around it and may also create centre of excellence at one location for such process with local compliance teams, accounting team, operations team, reporting team, internal audit team and Risk governance team working together to ensure proper hand offs, audit trail and proper recording, accounting and reporting for each transaction under this ambit.

Ideally there would be group accounting policy approved by board of directors & audit committee, which will clearly specify the accounting events and treatment along with local legal entity accounting policy as per local GAAP and laws. The process maps with clearly defined roles and responsibilities, risk assessments, control assertions and risk reporting would ensure compliance procedures. Also, it needs to be ensured that any single change in accounting GAAP or local laws is appropriately understood and complied on timely basis.

Different treatment of unclaimed monies after a specified period based on local laws:

a) Escheatment

As per Investopedia, Escheatment is defined as the transfer of title of property or an estate to the state when an individual dies without a will and legal heirs. Escheatment ensures that property always has a recognized owner, which would be the state or government if no other claimants to ownership exist. Most jurisdictions have their own laws and regulations defining escheat and the circumstances under which it can be invoked. Escheatment is usually done on a revocable basis, which means that ownership of the estate or property would revert to a rightful heir should one turn up.

Some jurisdictions may warrant the unclaimed money to be kept in bank with restrictions on use and such amounts would to be disclosed in the notes to the financial statements. Where IFRS entities hold cash in segregated / safeguarded accounts and must maintain a minimum balance in these accounts, this cash balance should be disclosed as restricted cash and excluded from the cash flow statement.

If funds are required to be escheated, they cannot be taken to the P&L and remain on the balance sheet until escheated as per the time specified in local laws.

b) De-recognition

The accounting treatment for unclaimed monies if that need to de-recognized to revenue differs as per rules specified in applicable accounting GAAP. Usually, the amount taken to Profit & Loss account is booked and disclosed under “Other Revenue” reporting line.

IFRS explicitly prohibits the de-recognition of financial liabilities (obligated to pay cash or forgive a financial debt) even where performance is assessed as being remote. A financial liability (IFRS definition) is a contractual obligation to deliver cash or another financial asset to another entity, or to exchange financial assets or Hence, financial liabilities and cannot be de-recognized in IFRS books until the statute of limitations (a law or regulation which sets out the maximum time that rightful owner have to claim their funds. It generally starts from the date of the transaction. The precise form of a statute of limitations differs from one jurisdiction to the next) is reached.

Where a liability is non-financial in nature, IFRS is silent on when to de-recognize and therefore one can follow the US GAAP approach. A non-financial liability refers to an obligation on an entity to deliver goods or services to a third party that does not include a contractual obligation to deliver cash or another financial asset, or to exchange financial assets or liabilities under conditions that are potentially unfavorable to that reporting entity.

IAS 39 Financial Instruments: Recognition and Measurement states that an entity shall derecognize a financial liability ‘when, and only when, it is extinguished – i.e. when the obligation specified in the contract is discharged or cancelled or expires.’

In addition, IFRS 13 Fair Value Measurement states that financial liabilities with a demand feature may not be measured at less than the amount payable on demand, discounted from the first date that the amount could be required to be paid.

The stipulation in IFRS 13 means that it is not permissible to recognize breakage on financial liabilities even where fulfillment of the liability is assessed as remote, prior to the obligations being discharged or the reporting entity receiving legal release from the obligation, even where this is allowable under US GAAP.

Therefore IFRS-reporting entities that make a release of a liability under US GAAP applying the remote concept must assess whether the liability is financial or non-financial for IFRS purposes. Where it is a financial liability then the release cannot be recognized within its IFRS financial statements due to the restrictions of IFRS 13. Instead, the entity will derecognize the financial liability only when it is extinguished (for example, upon reaching the statute of limitations) under IFRS.

The distinction between financial or non-financial of a liability is critical under IFRS for accounting treatment.

As per US GAAP, ASC 405-20-40-1 on “Extinguishment of Liabilities” specifies that a liability shall only be de-recognized if and only if it has been extinguished. A liability has been extinguished if either of the following conditions is met:

The debtor pays the creditor and is relieved of its obligation for the liability; or
The debtor is legally released from being the primary obligor under the liability, either judicially or by the creditor.

In addition to ASC 405, there was an SEC Speech given regarding this topic. That speech indicated that entities should apply the de-recognition guidance found in ASC 405, but that de-recognition may also be acceptable in certain circumstances if the vendor can demonstrate that it is remote that the customer will require performance.

In India any entity unless otherwise regulated any other law, may as per the approval for board create policy to recognizing non regulated unclaimed amounts to revenue after a specified period usually after three years.

c) Infinite hold

Some jurisdictions where the claimants have rights for unclaimed monies to be claimed indefinitely even by legal heirs then the companies will have to infinitely hold the money and may warrant the unclaimed money to be kept in bank with restrictions on use and such amounts would to be disclosed in the notes to the financial statements. Such cash in segregated / safeguarded accounts and must maintain a minimum balance in these accounts; this cash balance should be disclosed as restricted cash and excluded from the cash flow statement. United Kingdom is one of the countries where for specified categories of unclaimed money are required to be safeguarded for infinite period.

Some specific rules around unclaimed monies in India

For any Banking company:

There are guidelines issued by RBI (Depositor Education and Awareness Fund Scheme,2014) which require the Bank to transfer to the designated fund the proceeds of inoperative accounts and unclaimed balances for ten years or more which include:

(a) savings bank deposit accounts;

(b) fixed or term deposit accounts;

(d) current deposit accounts;

(e) other deposit accounts in any form or with any name;

(f) cash credit accounts;

(g) loan accounts after due appropriation by the banks;

(h) margin money against issue of Letter of Credit/Guarantee etc., or any security deposit;

(i) outstanding telegraphic transfers, mail transfers, demand drafts, pay orders, bankers cheques, sundry deposit accounts, vostro accounts, inter-bank clearing adjustments, unadjusted National Electronic Funds Transfer (NEFT) credit balances and other such transitory accounts, unreconciled credit balances on account of Automated Teller Machine (ATM) transactions, etc.;

(j) undrawn balance amounts remaining in any prepaid card issued by banks but not amounts outstanding against travellers cheques or other similar instruments, which have no maturity period;

(k) rupee proceeds of foreign currency deposits held by banks after conversion of foreign currency to rupees in accordance with extant foreign exchange regulations; and

(l) such other amounts as may be specified by the Reserve Bank from time to time.

(iv) Any amount payable in foreign currency under an instrument or a transaction, that has remained unclaimed for ten years or more, shall at the time of transfer to the Fund be converted into Indian Rupees at the exchange rate prevailing on that date and in the event of a claim, the Fund shall be liable to refund only the Indian Rupees received by the Fund with respect to such instrument or transaction.

(v) A bank shall transfer to the Fund the entire amount as specified in sub-paragraph (iii), including the accrued interest that the bank would have been required to pay to the customer/ depositor as on the date of transfer to the Fund.

(vi) A bank shall calculate the cumulative balances in all such accounts as specified in sub-paragraphs (iii) and (iv), as on the day prior to the effective date and transfer the amount to the Fund on the last working day of subsequent month along with the interest accrued as specified in sub-paragraph (v).

(vii) From the effective date, banks are required to transfer to the Fund the amounts becoming due in each calendar month (i.e. balances remaining unclaimed for ten years or more) as specified in sub-paragraphs (iii) and (iv) and the interest accrued thereon as specified in sub-paragraph (v), on the last working day of the subsequent month.

(viii) Notwithstanding anything contained in the Banking Companies (Period of Preservation of Records) Rules, 1985, or Co-operative Banks (Period of Preservation of Records) Rules, 1985, banks shall preserve records/documents containing details of all accounts and transactions, including deposit accounts in respect of which amounts are required to be credited to the Fund permanently; and where refund has been claimed from the Fund, banks shall preserve records/documents in respect of such accounts and transactions, for a period of at least five years from the date of refund from the Fund.

(ix) Reserve Bank may call for all relevant information in respect of an account or deposit or transaction for which a claim for refund has been submitted by a bank.

The accounts of the Fund shall be audited by the statutory auditor of the Reserve Bank or any other auditors as directed by the Reserve Bank.

Unclaimed Dividends:

Companies Act specifies the treatment for unclaimed dividend as per the Section 124 Provisions related to Transfer of Unpaid Dividends. As per new Companies Act, 2013, any unpaid or unclaimed dividends remaining after 30 day expiry have to be transferred to a special account called “unpaid dividend account” within 7 days of expiry of 30 days from the date of declaration. As per Sec 124(2), the Company, within a period of 90 days of transfer to special account, shall prepare a statement of unpaid dividend and display it in the web site of the company and also on the website of the central government as per the form and manner specified.

As per Sec 124 (5), new Companies Act, 2013, If no claim is made till 7 years from date of transfer to the special account, the amount along with interest accrued, if any, shall be transferred to Investor Education and Protection Fund (IEPF) established u/s 125 (1). As per Sec 124 (6), new Companies Act, 2013, All shares in respect of which unpaid or unclaimed dividend has been transferred under sub-section (5) shall also be transferred by the company in the name of Investor Education and Protection Fund along with a statement containing such details as may be prescribed.

If a company fails to comply with any of the requirements of this section, the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

Rule no 8.4 under IEPF Rules issued in year 2012 prescribes the manner in which unclaimed dividend has to be transferred to IEPF. A prescribed Form no. 8.2 with duly certified details of unclaimed dividend by a company sectary in practice/ Chartered accountant/ cost accountant along with receipted challan has to be filed by the company with IEPF. Company has to maintain the particulars of unpaid dividend transferred to IEPF for a period of 8 years from the date of such transfer.

Employee related unclaimed amount:

As per the provisions of the State Labour Welfare Fund Acts, typically all "unclaimed accumulations" in respect of the establishment’s employees are deemed as unclaimed monies. Under the State Labour Welfare Fund Acts, an employer is required to transfer all unclaimed accumulations with respect to its employees to the relevant Labour Welfare Board constituted under the relevant Labour Welfare Fund Act. Upon such transfer, the employer is discharged of its liability to make any payments to its employees to the extent of the amount paid to the Labour Welfare Board. Different states in India have different requirements which need to be considered.

Un-presented Cheques:

An issued cheque has a validity of 3 months as per the latest update of RBI circular# (RBI/2011-12/251 DBOD.AML BC.No.47/14.01.001/2011-12), hence the cheque should move to Stale account after 3 months from the date of issuance.

It needs to be noted that as per the provisions of Limitation Act, the person will be entitled to bring a suit to recover the amounts due to him from Indian legal entity within a period of three years from the date the amounts accrued to such person.

For any entity unless otherwise regulated any other law, may as per the approval for board create policy to recognizing non regulated unclaimed amounts to revenue after a specified period usually after three years.

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