This Subsection provides guidance on recognition issues applicable to both leveraged and nonleveraged
employee stock ownership plans. It covers the following issues:
- a
Stock with a put option or a guaranteed redemption price (treasury stock recognition)
- b
Pension reversion employee stock ownership plans (recognition of assets transferred from the pension plan).
An employer that terminates a defined benefit pension plan may avoid part of the excise tax on an asset reversion by transferring the assets to an existing or newly created employee stock ownership plan, which could be either leveraged or nonleveraged. The reverted assets may be used either to purchase shares of the employer stock or to retire existing employee stock ownership plan debt.
If the assets from the pension plan are used by the employee stock ownership plan to purchase employer shares, the employer shall report the share issuance the same way as other share issuances to an employee stock ownership plan. The issuance of shares or the sale of treasury shares to the employee stock ownership plan shall be recognized when it occurs, and a corresponding charge to unearned employee stock ownership plan shares, a contra-equity account, shall be reported. If the shares are purchased on the market, the employer shall similarly charge unearned employee stock ownership plan shares. (The credit would be to cash.)
This Subsection provides recognition guidance for leveraged
employee stock ownership plans. It is organized as follows:
- a
Debt financing
- b
Purchase of shares by a leveraged employee stock ownership plan
- c
Release of leveraged employee stock ownership plan shares
- d
Dividends on employee stock ownership plan shares
Paragraph
718-40-05-3 provides background on debt financing by an employee stock ownership plan.
An employer shall report the issuance of shares or the sale of treasury shares to an employee stock ownership plan when they occur and shall report a corresponding charge to unearned employee stock ownership plan shares, a contra-equity account. Furthermore, even if a leveraged employee stock ownership plan buys outstanding shares of employer stock on the market rather than from the employer, the employer shall charge unearned employee stock ownership plan shares and credit either cash or debt, depending on whether the employee stock ownership plan is internally or externally leveraged (see the preceding paragraph).
Under this Subtopic, when shares are committed to be released, rather than when shares are legally released, is significant for accounting purposes. Employee stock ownership plan shares are legally released from an employee stock ownership plan's suspense account (and from serving as collateral for employee stock ownership plan debt) when debt payments are made, but the employee service to which the shares released relates is continuous. For purposes of reporting compensation cost and satisfaction of liabilities under this Subtopic, accounting recognition shall occur when shares are committed to be released, which may occur before the shares are legally released. Shares that have not been legally released, but that relate to employee services rendered during an accounting period (interim or annual) ending before the related debt service payment is made, shall be considered committed to be released. The periods of employee service to which shares relate are generally specified in the employee stock ownership plan documents.
The Internal Revenue Code allows employers to use dividends on employee stock ownership plan shares that have been allocated to participants for debt service if participants are allocated shares of employer stock with a fair value no less than the amount of the dividends used for debt service. If shares released will include shares designated to replace dividends on previously allocated shares used for debt service, employers shall report the settlement of the dividend payable when the shares are committed to be released to replace the dividends on shares used for debt service. (See the following two paragraphs; only dividends on allocated shares shall be charged to retained earnings.) The number of shares committed to be released to replace the dividends on allocated shares used for debt service shall be based on the fair value of shares as of dates specified by the employer, which are usually specified in the employee stock ownership plan documents based on the employer's interpretation of current Internal Revenue Service regulations.
Because employers control the use of dividends on unallocated shares, dividends on unallocated shares shall not be considered dividends for financial reporting purposes. Dividends on unallocated shares used to pay debt service shall be reported as a reduction of debt or of accrued interest payable. Dividends on unallocated shares paid to participants or added to participant accounts shall be reported as compensation cost.
This Subsection provides recognition guidance for nonleveraged
employee stock ownership plans. It is organized as follows:
- a
Contribution of shares to the employee stock ownership plan
- b
Dividends on employee stock ownership plan shares
- c
Shares allocated by year-end
Employers with nonleveraged employee stock ownership plans shall report compensation cost equal to the contribution called for in the period under the plan.
An employer with a nonleveraged employee stock ownership plan periodically contributes its shares or cash to its employee stock ownership plan on behalf of employees. The shares contributed or acquired with the cash contributed, which may be outstanding shares, treasury shares, or newly issued shares, shall be 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. While this is the accounting treatment of employee stock ownership plan shares, it is mandated by tax law. The Codification does not keep up with changes in the tax law.