The draft of the highly anticipated regulations regarding Delaware unclaimed property estimation practices has been issued. As mandated with the passage of Senate Bill 13, Delaware issued a draft of its proposed “Unclaimed Property Reporting & Examination Manual” which included guidance on estimation, sampling, and extrapolation in addition to regulations pertaining to audits and examinations.
There is a public comment period on the entire draft proposal, which expires on May 3rd, 2017. Comments, suggestions, briefs and other written materials should be submitted in writing to David M. Gregor via email to firstname.lastname@example.org.
Delaware Unclaimed Property Estimation Practices
- Section 1145 authorizes the State Escheator to estimate the amount of property due using a reasonable period of estimation based on all information available to the State Escheator
- The Base Period is defined as the period of time for which the Holder possesses complete and researchable records. Consistent with the majority of the states, Delaware requires a 10 year record retention period plus dormancy. It is expected that the Holder possess several years of dormant records, even if it does not possess records for the entire 10 year period.
- In order to draw a representative error rate, the base periods shall consist of at least 3 years from the universe of complete and researchable records.
- The State may utilize any dormant record to estimate liability for the period where the Holder does not possess complete and researchable records
- If the Holder fails to retain sufficient dormant years of records, the Audit Manager and the Holder shall discuss which records will be used for the base period. In the absence of agreement, the State Escheator has the sole authority to make a reasonable determination
- At the conclusion of the records production, the CFO or other officer shall provide in a form amenable to the State Escheator, the records available by property types and year. The Holder is bound by this representation, absent good cause in the determination of the State Escheator.
- Items to be excluded from estimation calculation include items payable to an owner that is a US federal department or agency and funds returned in the normal course of business prior to the issuance of the examination notice
- Funds returned outside of the normal course of business (such as a change in process) after reissuance of the notice will be included
- When it is determined through a documented discussion between the auditor and the Holder that a population is too large to be reasonably tested on an actual basis, a statistical sampling methodology shall be employed, though the Holder is permitted to search an entire population if it can perform the research in a reasonable time
- Generally, the population will be divided into strata (“stratified sampling”) from which samples will be drawn. For each strata, a sample size will be determined using generally accepted statistical principles such that the sample mean will be within 10% of the population mean for that strata at a 90% confidence interval. However, in the instance of a lower valued stratum where the results are generally immaterial to the overall liability, a relaxed confidence and precision level intervals may be considered for purposes of efficiency, if accuracy is not sacrificed on a material level.
- In some circumstances where the Holder has not maintained records for the entire examination period, the State may elect to sample a number of entities in lieu of testing all Delaware entities. The auditors will identify an appropriate sampling of entities based upon factors such as, but not limited to, the following: revenue, line of business, commercial activity, and property types being held. The results will be extrapolated, if applicable, to the other appropriate Delaware entities that have not been selected for detailed review to determine the liability due to the State. The Holder will be given the option to use this sampling methodology or to test all entities that fall within the scope of the examination.
- Delaware’s approved sampling process for estimating a Holder’s unclaimed property liability includes these steps:
- Define the population
- Base period
- Sampling unit (aged checks/customer net credit balances, etc.)
- Remove potential anomalies (duplicate records, errors)
- Determine appropriate stratification (if necessary)
- Number of strata
- Stratum boundaries
- Calculate sample size
- Desired confidence and precision
- Perform random computerized sample selection
- Verified achieved precision goals
- Evaluate results
- Define the population
Aging Criteria for Outstanding and Voided Checks
- Checks that remain outstanding less than 90 days after issue, as well as checks voided within 30 days of issuance will be excluded unless the State, in the sole discretion of the State Escheator, determines that a redefined outstanding period is necessary.
- Projection techniques may be used to determine reportable amounts that cannot be ascertained from the books and records of the Holder.
- Where records exist, they will be examined to establish a “base period” of data from which statistical inferences can be made for periods that are incomplete or do not exist. To the extent permitted by law, names and addresses identified in the base period shall not be used to determine which State has the priority claim to the abandoned property estimated to be due over periods where records of owners’ addresses do not exist.
All sampling, projection and estimation techniques used by the auditor to determine unclaimed property due to Delaware shall be a method approved by Delaware prior to use.
- The auditor may suggest or the State may request guidance as to which estimation technique would be most appropriate. The Holder may comment on or suggest an alternative technique, but the ultimate decision to employ a particular technique is at the sole discretion of the State. The Holder may challenge this decision at the close of the examination.
The sole purpose of determining an estimated liability in a time period where records exist is for calculating an unclaimed property liability in years where records do not exist. The use of statistical sampling for estimation shall be used, therefore, where (a) prior approval is received by the State; and (b) records are not available and the names and address of rightful owners cannot be identified.
Complete and Researchable Records
- The expectation is that a Holder, at a minimum, may have complete and researchable records for a period that would cover 7-8 years from the date of the examination notice. If there are unique circumstances where a Holder does not have such records, the State and the Holder may discuss and use an alternative data set with fewer years.
- Complete records shall reconcile to the general ledger with the understanding that immaterial differences may occur. Researchable records are records to which the Holder may research the resolution of an item. At a minimum, researchable records shall include those items that contain a last known address of the owners of property.
Keane will continue to track and monitor the activities pertaining to the Delaware unclaimed property reporting and audit manual, including the estimation practices, here on our unclaimed property blog. Check back for regular updates.