# ASC 718-40-05: Compensation—Stock Compensation — Employee Stock Ownership Plans — 05 Overview and Background Source: FASB Accounting Standards Codification, Basic View [Read online](https://asc.understandingaccounting.org/asc/718/40/#05-overview-and-background) Study and research edition. Verify current requirements with the official source. Summaries, enrichment, and tags are machine-generated study aids. Paragraph html preserves source markup; snippet is abbreviated. Pending content is not necessarily effective. Tables and mathematical or amendment markup are retained as HTML where Markdown would lose structure. Source downloaded (UTC): 2026-09-10T01:05:21.414Z to 2026-09-10T01:05:21.414Z Record version: sha256:ccb32bddff79a249bf28095118fced87a66dc3f21a0db30a20ff27856cc47953 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 718-40-05: 05 Overview and Background [Read section](https://asc.understandingaccounting.org/asc/718/40/#05-overview-and-background) SEC content: no ##### [718-40-05-1](https://asc.understandingaccounting.org/asc/718/40/#718-40-05-1) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:21.414Z to 2026-09-10T01:05:21.414Z Record version: sha256:a3f0e4df9a95522ca701d9accb8d655579024fd084fccf940cf42ec491f03d90 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Subtopic provides guidance to entities that utilize [employee stock ownership plans](https://asc.understandingaccounting.org/glossary/e/#employee-stock-ownership-plan "An employee stock ownership plan is an employee benefit plan that is described by the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986 as a stock bonus plan, or combination stock bonus and money purchase pension plan, designed to invest primarily in employer stock. Also called an employee share ownership plan."). It includes the following Subsections: 1. a General 2. b Leveraged employee stock ownership plans 3. c Nonleveraged employee stock ownership plans. ##### [718-40-05-2](https://asc.understandingaccounting.org/asc/718/40/#718-40-05-2) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:21.414Z to 2026-09-10T01:05:21.414Z Record version: sha256:dc94565098e9d0c3821fe465a5c26686f2dada5d7efc794af87969bdec704785 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Employee stock ownership plans are used for many purposes in addition to furthering employee ownership. These include the following: 1. a To fund a matching program for a sponsor's 401(k) saving plan, formula-based profit-sharing plan, and other employee benefits 2. b To raise new capital or to create a marketplace for the existing stock 3. c To replace lost benefits from the termination of other retirement plans or provide benefits under postretirement benefit plans, particularly medical benefits 4. d To be part of the financing package in leveraged buy-outs 5. e To provide a tax-advantaged means for owners to terminate their ownership 6. f To be part of a long-term program to restructure the equity section of a plan sponsor's balance sheet 7. g To defend the entity against hostile takeovers. ### Leveraged Employee Stock Ownership Plans ##### [718-40-05-3](https://asc.understandingaccounting.org/asc/718/40/#718-40-05-3) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:21.414Z to 2026-09-10T01:05:21.414Z Record version: sha256:8cedf0601c1ca824ba2fc7ed20fc8edf19f7cdd8bbda1bd6cdf7780561ab2407 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A leveraged [employee stock ownership plan](https://asc.understandingaccounting.org/glossary/e/#employee-stock-ownership-plan "An employee stock ownership plan is an employee benefit plan that is described by the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986 as a stock bonus plan, or combination stock bonus and money purchase pension plan, designed to invest primarily in employer stock. Also called an employee share ownership plan.") borrows money to acquire shares of the employer stock. The money can be borrowed by the employee stock ownership plan from the sponsor, with or without a related outside loan, or directly from an outside lender. Outside loans to the employee stock ownership plan are generally guaranteed by the sponsor. Unlike other kinds of employee benefit plans, an employee stock ownership plan is permitted by Employee Retirement Income Security Act of 1974 to borrow from a related party or with the assistance of a related party. The debt usually is collateralized by the employer's shares. ### Nonleveraged Employee Stock Ownership Plans ##### [718-40-05-4](https://asc.understandingaccounting.org/asc/718/40/#718-40-05-4) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:21.414Z to 2026-09-10T01:05:21.414Z Record version: sha256:3932202031ca2c319746def3a0f0bdfcf3188782867cffd670c2c96abe5c6264 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. As indicated in paragraph [718-40-25-21](https://asc.understandingaccounting.org/asc/718/40/#718-40-25-21), an employer with a nonleveraged [employee stock ownership plan](https://asc.understandingaccounting.org/glossary/e/#employee-stock-ownership-plan "An employee stock ownership plan is an employee benefit plan that is described by the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986 as a stock bonus plan, or combination stock bonus and money purchase pension plan, designed to invest primarily in employer stock. Also called an employee share ownership plan.") periodically contributes its shares or cash to its employee stock ownership plan on behalf of employees. In the case of cash contributions the entity acquires shares. The shares are allocated to participant accounts and held by the employee stock ownership plan until distributed to the employees at a future date, such as on the date of termination or retirement. The shares of employer stock obtained by the nonleveraged employee stock ownership plan shall be allocated to individual participant accounts as of the end of the employee stock ownership plan's fiscal year. Allocating shares by year end is mandated by the tax code in 2008. The Codification does not keep up with changes in the tax code.