Question SC 11-4 addresses the reporting by a parent and its subsidiaries of committing shares to be released in an ESOP.

Question SC 11-5 addresses the reporting by a parent and its subsidiary in their separate financial statements of dividends paid to shares held by an ESOP.

The ESOP would report an increase in cash and dividend income for all of the dividends received by the ESOP. If the dividend payment related to unallocated shares will be used to service the debt, the ESOP would reduce the balance of its loan (and accrued interest) due to the parent.

The parent would charge the dividend payment to the ESOP as a charge to retained earnings (if the dividend payment relates to allocated shares), or as a reduction of the loan payable to the subsidiary (if the dividend relates to unallocated shares) with a corresponding reduction to cash or dividends payable.

The subsidiary would recognize the cash (received from the parent’s dividend payment via the ESOP, which pays its loan to the parent, which then in turn pays its loan to the subsidiary) and reduce the intercompany loan receivable from the parent. If the dividend payment or other payments from the parent to the ESOP are not sufficient for the subsidiary to service its third-party loan, and the substance of the arrangement is that the parent will not owe the subsidiary any more than the subsidiary’s third-party debt, the “additional” debt service funded by the subsidiary should be reflected as a dividend by the subsidiary to the parent. Accordingly, the subsidiary would charge retained earnings and reduce the intercompany note receivable from the parent. The parent, in turn, would reduce the intercompany loan payable to the subsidiary and increase its investment in the subsidiary.

Question SC 11-6 addresses the accounting for a repurchase of shares by the employer or by the ESOP of private company shares at a contractual redemption price that is other than fair value as of that date.

Not in this situation. As noted in ASC 718-40-25-2, employers are required to give a put option to participants holding ESOP shares that are not readily tradable, which on exercise requires the employer to repurchase the shares at fair value. However, ASC 718-40 does not specifically address when this fair value must be determined. In private company ESOPs, a valuation performed by an outside appraiser as of the preceding year end date is typically used to determine fair value (i.e., the repurchase price) for such put options exercised in a given year. The legal terms of this plan require that the repurchase price be set based on the fair value as of the preceding plan year end. The repurchase of ESOP shares by the company in accordance with those terms is therefore not a discretionary decision by the company to further compensate the participant. Furthermore, it is not a provision designed to keep the participants from bearing the normal risks and rewards of share ownership as a participant in the ESOP plan, but an administrative convenience to facilitate efficient operation of the plan. As such, no compensation charge would be recorded for the excess of the repurchase price over the fair value of the stock on the date of repurchase.

Compensation expense for ESOPs is measured at the fair value of the shares when shares are committed to be released (i.e., as the employees perform the services to which the shares relate) under ASC 718-40. ASC 718-40-30-2 further states that "The amount of compensation expense recognized in previous interim periods should not be adjusted for subsequent changes in the fair value of the shares." Therefore, there is generally no compensation expense to be recorded for the company's repurchase of retiring individuals' shares. Likewise, if the repurchase price was less than the fair value of the stock on the date of repurchase, it would also be recorded as a treasury stock repurchase and there would be no reversal of compensation cost recognized.

Note that this accounting treatment should not necessarily be applied by analogy to other types of share-based awards. As ESOP shares are subject to the guidance in ASC 718-40 and not ASC 718-10 or ASC 718-20, they are not, for example, subject to the guidance in ASC 718-10-25-9 regarding the impact of repurchase features on the classification of a share-based payment award as liability or equity. Had the repurchase been related to a share-based payment award to an employee outside of an ESOP, there may be different implications of the repurchase feature at a price other than fair value on the date of repurchase. See SC 4.8. Similarly, if the terms of the plan, by design, always resulted in a repurchase of the ESOP shares at a premium, that could result in the recording of additional compensation cost.

Question SC 11-7 addresses the accounting for the tax benefit of dividends paid on ESOP shares for which the employer receives a tax deduction.

Question SC 11-8 address the income tax accounting for the difference between the fair value and historical cost of shares held by a leveraged ESOP.

ASC 740-20-45-11 indicates that the suggested treatment for employee stock options is analogous to ESOPs. Therefore, if the cost of shares committed to be released differs from the shares' fair value, the employer should record the tax effect of the difference to the income statement. Temporary differences that are created based on the timing of expense recognition for income tax and financial reporting purposes should receive normal deferred tax accounting treatment. ASC 718-40-55 contains examples that illustrate the accounting for deferred tax effects of ESOP transactions.

Question SC 11-9 addresses the EPS implication of preferred stock held by an ESOP.

As with all convertible securities, the number of additional common shares issuable for convertible securities should not be considered for purposes of calculating basic earnings per share.

Question SC 11-10 addresses the EPS implications of dividends paid on convertible preferred stock held by an ESOP.

Under the if-converted method for EPS purposes, conversion of the preferred stock is assumed as of the beginning of the period. Thus, the dividends paid on the preferred stock would be added back to the numerator of the EPS calculation (net income available to common stockholders). However, if the preferred stock had been converted to common stock, a greater number of common shares would need to be committed to be released to participants in order to fund the ESOP’s debt service, since the dividend rate on common stock is lower. That allocation would result in additional compensation expense. Thus, because the allocation of additional shares to participants is a nondiscretionary adjustment as a result of the application of the if-converted method, net income available to common stockholders for purposes of calculating diluted EPS should reflect the additional compensation cost that would arise from the assumed conversion. See ASC 718-40-45-4 and the illustration in ASC 718-40-55-21 through ACS 718-40-55-33.

Question SC 11-11 addresses the application of the treasury stock method to sponsor guarantees of the market value of shares held by an ESOP.

Under ASC 718-40-45-7, if the sponsor guarantees a stated minimum value per share that is redeemable in either cash or common stock, and if the value of the shares of common stock issuable is less than the stated minimum value, in applying the if-converted method the employer should presume that such a shortfall will be made up with additional shares of common stock. However, that presumption may be overcome if past experience or a stated policy provides a reasonable basis to believe that the shortfall will be paid in cash.

Question SC 11-12 addresses the EPS implications of a sponsor guarantee of the market value of the shares held by an ESOP that must be settled in cash.

ASC 718-40 does not address this question. In our view, the liability to satisfy the guaranteed floor feature is conceptually no different from any other liability of the sponsor. Therefore, the effect of funding the assumed payment should not be considered (i.e., net income need not be reduced to reflect a reduction in interest income or an increase in interest expense as a result of the assumed use of cash to satisfy the guaranteed floor feature). Similarly, it should not be assumed that additional shares would be issued to fund the cash payment (i.e., the reverse treasury stock method).