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15.7 Employee stock ownership plans (ESOPs)
Publication date: 31 Mar 2024
us Financial statement presentation guide
An ESOP is a stock bonus plan that is designed to facilitate employee investment in the reporting entity’s stock. ESOP plans can be non-leveraged or leveraged:
- Non-leveraged ESOP
A reporting entity (sponsor) with a non-leveraged ESOP contributes cash to the ESOP to purchase the sponsor’s stock, or contributes its stock directly to the ESOP.
- Leveraged ESOP
A leveraged ESOP borrows funds from a lender to purchase the sponsor’s shares. The sponsor generally guarantees the loan or otherwise commits, directly or indirectly, to make contributions and/or pay dividends to the ESOP. As an alternative to borrowing funds from a lender, the sponsor may directly loan funds to the ESOP. Sponsor contributions and, in most instances, dividends on the stock held by the ESOP, are used by the ESOP to service the debt.
15.7.1 Presentation
For non-leveraged ESOPs, when contributions are made and shares are purchased in the ESOP, common stock or additional paid-in capital are credited to the sponsor’s equity accounts.
For leveraged ESOPs, sponsors should report the issuance of new shares or the sale of treasury shares to the ESOP, or external purchase of shares by the ESOP, when the issuance, sale, or purchase occurs, and should report a corresponding charge to “unearned ESOP shares,” a contra-equity account. Sponsors should credit “unearned ESOP shares” as the shares are committed to be released, based on the cost of the shares to the ESOP.
A sponsor should report loans from outside lenders to its leveraged ESOPs as liabilities on its balance sheet and should report the related interest cost on the debt in its income statement. A sponsor with internally leveraged ESOPs (employer loans) should not report the loan receivable from the ESOP as an asset and should not report the ESOP’s debt as a liability, or recognize interest income or cost on the sponsor loan.
Question FSP 15-4 addresses the classification of stock with a put option or a mandatory cash redemption feature held by an ESOP.
Question FSP 15-4
Under what circumstances should all or a portion of stock with a put option or a mandatory cash redemption feature held by an ESOP be classified outside of permanent equity in the sponsor’s balance sheet?
Under what circumstances should all or a portion of stock with a put option or a mandatory cash redemption feature held by an ESOP be classified outside of permanent equity in the sponsor’s balance sheet?
PwC response
If there are conditions (regardless of their probability of occurrence) when holders of equity securities (i.e., ESOP participants) may demand cash in exchange for their securities, SEC registrants and private company financial statements filed with the SEC must reflect the maximum possible cash obligation related to those securities outside of permanent equity, in accordance with ASR 268. This is true regardless of whether the underlying shares have been allocated to participants.
Where the cash obligation relates only to a market value guarantee feature (i.e., a cash feature equivalent to the amount by which the “floor” exceeds the common stock market price as of the reporting date), reporting entities are permitted to classify only that portion of the obligation outside of permanent equity.
Alternatively, a reporting entity could classify the entire guaranteed value amount outside of permanent equity (e.g., in situations where there is uncertainty as to the ultimate cash obligation due to a possible market value decline in the underlying security).
15.7.2 Disclosure
Reporting entities that sponsor ESOPs should provide the disclosures described in ASC 718-40, Employer Stock Ownership Plans, as applicable. These include:
Excerpt from ASC 718-40-50-1
a. A description of the plan, the basis for determining contributions, including the employee groups covered, and the nature and effect of significant matters affecting comparability of information for all periods presented. For leveraged employee stock ownership plans and pension reversion employee stock ownership plans, the description shall include the basis for releasing shares and how dividends on allocated and unallocated shares are used.
b. A description of the accounting policies followed for employee stock ownership plan transactions, including the method of measuring compensation, the classification of dividends on employee stock ownership plan shares, and the treatment of employee stock ownership plan shares for earnings per share (EPS) computations. If the employer has both old employee stock ownership plan shares for which it does not adopt the guidance in this Subtopic and new employee stock ownership plan shares for which the guidance in this Subtopic is required, the accounting policies for both blocks of shares shall be described.
c. The amount of compensation cost recognized during the period.
d. The number of allocated shares, committed-to-be-released shares, and suspense shares held by the employee stock ownership plan at the balance-sheet date. This disclosure shall be made separately for shares accounted for under this Subtopic and for grandfathered employee stock ownership plan shares.
e. The fair value of unearned employee stock ownership plan shares at the balance-sheet date for shares accounted for under this Subtopic. (Future tax deductions will be allowed only for the employee stock ownership plan's cost of unearned employee stock ownership plan shares.) This disclosure need not be made for old employee stock ownership plan shares for which the employer does not apply the guidance in this Subtopic.
f. The existence and nature of any repurchase obligation, including disclosure of the fair value (see paragraph 718-40-30-4) of the shares allocated as of the balance sheet date, which are subject to a repurchase obligation.
g. The amount and treatment in the EPS computation of the tax benefit related to dividends paid to any employee stock ownership plan, if material.
ASC 718-40-55-9 and ASC 718-40-55-20 provide illustrative examples of ASC 718-40-50-1’s disclosure requirements.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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