The following is the second part of our two part piece about unclaimed property audits and the Oil & Gas Industry. View the first part here
Oil & Gas Industry Factors
In addition to the common red flags listed in the previous article, there are some risk factors specific to the oil and gas industry — specifically with mineral proceeds, suspense accounts and credit balances.
The payment of mineral proceeds provides very unique challenges related to unclaimed property. For example, the large volume and small dollar amounts for some royalty payments can make them hard to track and more likely to go unclaimed. Additionally, many states have special rules around reporting unclaimed royalties. For example, in excess of 20 states have some form of a current pay rule, which generally requires payment of certain mineral proceeds before the expiration of a complete dormancy period. Once the abandonment period for the first such payment has run, all subsequent payments due, held, or owing for that owner become reportable as unclaimed property – despite the fact that the dormancy period for all payments in the series has not been satisfied.
In addition, some states, such as Oklahoma, require different types of mineral proceeds to be reported on different forms. Oklahoma also requires mineral proceeds that emanate from “forced pooled” situations to be reported to the Oklahoma Corporation Commission instead of the Oklahoma State Treasurer’s office.
When mineral proceeds are held in suspense, unclaimed property reporting gets even more complex. Items can be put into suspense for many reasons (i.e. deceased owner, litigation, bad address, no signed division order, etc.). The challenge is to make sure that items do not fall into a “black hole” when they are put into suspense. Legal counsel should be consulted to determine which suspense codes are subject to escheat and which suspense codes could potentially require the company to hold the items in excess of the state statutory holding periods.
Credit balances can also create unique challenges for the oil and gas industry. Buying and/or selling oil and gas can result in accounting adjustments or “true-ups” when invoices that were created based on estimates are adjusted to actuals. If these adjustments are not made in a timely manner, it can create the appearance that the company is simply writing off aged outstanding credit balances, which is a huge audit red flag.
In order to determine if a credit balance on a customer account is unclaimed property, you first need to determine how it was created. A customer overpayment or duplicate payment would result in a liability that is clearly due to the customer. On the other hand, a promotional credit or accounting error could appear to be a potential liability but may not represent a fixed and certain obligation.
The dormancy period for credit balances in most states ranges from three to five years. This does not mean that a credit balance must remain on the company’s books and records for that time period to be a potential liability. If a company is going through an unclaimed property audit, for example, it is possible that the states will determine the ultimate disposition of aged credit balances in order to identify credit balances that may have been written off to an income or other account.
Unclaimed property compliance reporting can be complex for companies across a wide variety of industries – but especially for those operating in the oil and gas space. The significant new activity, mixed with the very nature of the unique payment systems, can provide headaches and challenges when it comes to properly tracking dormancy periods and completing the escheatment process. Companies must keep a vigilant eye out for the red flags auditors are looking for and should adopt policies and procedures to help mitigate potential risk and liabilities.