# ASC 718-40-25: Compensation—Stock Compensation — Employee Stock Ownership Plans — 25 Recognition Source: FASB Accounting Standards Codification, Basic View [Read online](https://asc.understandingaccounting.org/asc/718/40/#25-recognition) 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): 2026-09-10T01:05:29.309Z to 2026-09-10T01:05:29.309Z Record version: sha256:31777c6f290bd9d58d3a291a816c78cc127065a4b1d92265083616be95150f90 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 718-40-25: 25 Recognition [Read section](https://asc.understandingaccounting.org/asc/718/40/#25-recognition) SEC content: no ##### [718-40-25-1](https://asc.understandingaccounting.org/asc/718/40/#718-40-25-1) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:29.309Z to 2026-09-10T01:05:29.309Z Record version: sha256:1653c1a8bdedb140b2a1b3dc3040d1e39c65c08f7ba3f83800578d7ca59d682b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Subsection provides guidance on recognition issues applicable to both leveraged and nonleveraged [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 covers the following issues: 1. a Stock with a put option or a guaranteed redemption price (treasury stock recognition) 2. b Pension reversion employee stock ownership plans (recognition of assets transferred from the pension plan). #### Stock with a Put Option or a Guaranteed Redemption Price ##### [718-40-25-2](https://asc.understandingaccounting.org/asc/718/40/#718-40-25-2) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:29.309Z to 2026-09-10T01:05:29.309Z Record version: sha256:40ff3e587c19023f3a15829a9b740e20149bc7268dbfb1aa9ed04ee66bc57cf0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Regardless of whether an employee stock ownership plan is leveraged or nonleveraged, employers are required to give a put option to participants holding employee stock ownership plan shares that are not readily tradable, which on exercise requires the employer to repurchase the shares at [fair value](https://asc.understandingaccounting.org/glossary/f/#fair-value "The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date."). [Public entity](https://asc.understandingaccounting.org/glossary/p/#public-entity "An entity that meets any of the following criteria: Has equity securities that trade in a public market, either on a stock exchange (domestic or foreign) or in an over-the-counter market, including securities quoted only locally or regionally Makes a filing with a regulatory agency in preparation for the sale of any class of equity securities in a public market Is controlled by an entity covered by the preceding criteria. That is, a subsidiary of a public entity is itself a public entity. An entity that has only debt securities trading in a public market (or that has made a filing with a regulatory agency in preparation to trade only debt securities) is not a public entity.") sponsors sometimes offer cash redemption options to participants who are eligible to withdraw traded shares from their accounts, which on exercise requires the employer to repurchase the shares at fair value. Employers shall report the satisfaction of such option exercises as purchases of treasury stock. #### Pension Reversion Employee Stock Ownership Plans ##### [718-40-25-3](https://asc.understandingaccounting.org/asc/718/40/#718-40-25-3) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:29.309Z to 2026-09-10T01:05:29.309Z Record version: sha256:25c10886f1426cba59d23af3d72f9daa85a4fb20c4e3a7e5741d0d2a9a65362e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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. ##### [718-40-25-4](https://asc.understandingaccounting.org/asc/718/40/#718-40-25-4) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:29.309Z to 2026-09-10T01:05:29.309Z Record version: sha256:57f503b47b37cbf28adc20a1faf9a58c6be5876b88077f2216aeb5963d33bc92 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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.) ##### [718-40-25-5](https://asc.understandingaccounting.org/asc/718/40/#718-40-25-5) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:29.309Z to 2026-09-10T01:05:29.309Z Record version: sha256:90b2e9603da04f17a2b360c5ff26826eca5750bd80d0c999df739dfc96b67b1a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Because the number of shares the employee stock ownership plan acquires in a pension plan reversion is usually more than the Internal Revenue Service (IRS) permits to be allocated to participant accounts in a single year, some of the shares are held in a suspense account until they are [committed to be released](https://asc.understandingaccounting.org/glossary/c/#committed-to-be-released-shares "Committed-to-be-released shares are shares that, although not legally released, will be released by a future scheduled and committed debt service payment and will be allocated to employees for service rendered in the current accounting period. The period of employee service to which shares relate is generally defined in the employee stock ownership plan documents. Shares are legally released from suspense and from serving as collateral for employee stock ownership plan debt as a result of payment of debt service. Those shares are required to be allocated to participant accounts as of the end of the employee stock ownership plan's fiscal year. Formulas used to determine the number of shares released can be based on either of the following: The ratio of the current principal amount to the total original principal amount (in which case unearned employee stock ownership plan shares and debt balance will move in tandem) The ratio of the current principal plus interest amount to the total original principal plus interest to be paid. Shares are released more rapidly under the second method than under the first. Tax law permits the first method only if the employee stock ownership plan debt meets certain criteria.") in future years for allocation to participant accounts. The guidance in this Subtopic, for shares held by leveraged employee stock ownership plans, shall be applied to suspense account shares. ##### [718-40-25-6](https://asc.understandingaccounting.org/asc/718/40/#718-40-25-6) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:29.309Z to 2026-09-10T01:05:29.309Z Record version: sha256:2d7a96b73a7394d8cde00b60afe4a826997224ec36be7127a28dab86d5ce9e90 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If the assets from the pension plan reversion are used to repay the debt of an existing employee stock ownership plan, employee stock ownership plan shares are committed to be released from suspense. In such situations, the guidance for leveraged employee stock ownership plans in this Subtopic shall be followed. The employer shall reduce the debt as it is repaid and reduce unearned employee stock ownership plan shares as shares are committed to be released. How the committed-to-be-released shares are used determines what accounts are charged upon release of shares (see paragraphs [718-40-25-11 through 25-15](https://asc.understandingaccounting.org/asc/718/40/#718-40-25-11) ). ### Leveraged Employee Stock Ownership Plans ##### [718-40-25-7](https://asc.understandingaccounting.org/asc/718/40/#718-40-25-7) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:29.309Z to 2026-09-10T01:05:29.309Z Record version: sha256:e9520eadaaa67befb3727876c0ccad7af2ff8752250c1248ba0417a91e67dfa8 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Subsection provides recognition guidance for leveraged [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 is organized as follows: 1. a Debt financing 2. b Purchase of shares by a leveraged employee stock ownership plan 3. c Release of leveraged employee stock ownership plan shares 4. d Dividends on employee stock ownership plan shares #### Debt Financing ##### [718-40-25-8](https://asc.understandingaccounting.org/asc/718/40/#718-40-25-8) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:29.309Z to 2026-09-10T01:05:29.309Z Record version: sha256:5544e4e584c39ee45cf28bc238e75bfbf02fbe256c01cfbe1ab3d5e314c833e6 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Paragraph [718-40-05-3](https://asc.understandingaccounting.org/asc/718/40/#718-40-05-3) provides background on debt financing by an employee stock ownership plan. ##### [718-40-25-9](https://asc.understandingaccounting.org/asc/718/40/#718-40-25-9) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:29.309Z to 2026-09-10T01:05:29.309Z Record version: sha256:62cd4b271da9f828d418a024887c797694c263783af6ad7548c6cb67e68994de Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. For purposes of applying this Subtopic, employee stock ownership plan debt is characterized as follows: 1. a Employers that sponsor an employee stock ownership plan with a [direct loan](https://asc.understandingaccounting.org/glossary/d/#direct-loan "A direct loan is a loan made by a lender other than the employer to the employee stock ownership plan. Such loans often include some formal guarantee or commitment by the employer.") shall report the obligations of the employee stock ownership plan to the outside lender as debt. Furthermore, employers shall accrue interest cost on the debt and shall report cash payments to the employee stock ownership plan that are used by the employee stock ownership plan to service debt, regardless of whether the source of cash is employer contributions or dividends, as reductions of the debt and accrued interest payable when the employee stock ownership plan makes the payments to the outside lender. 2. b Employers that sponsor an employee stock ownership plan with an [indirect loan](https://asc.understandingaccounting.org/glossary/i/#indirect-loan "An indirect loan is a loan made by the employer to the employee stock ownership plan, with a related outside loan to the employer.") shall report outside loans as debt. Employers shall not report a loan receivable from the employee stock ownership plan as an asset and shall, therefore, not recognize interest income on such receivable. Employers shall accrue interest cost on the outside loan and shall report loan payments as reductions of the principal and accrued interest payable. Contributions to the employee stock ownership plan and the concurrent payments from the employee stock ownership to the employer for debt service would not be recognized in the employer's financial statements. 3. c Employee stock ownership plans with indirect loans and employer loans are often referred to as internally leveraged. 4. d Employers that sponsor an employee stock ownership plan with an [employer loan](https://asc.understandingaccounting.org/glossary/e/#employer-loan "An employer loan is a loan made by the employer to the employee stock ownership plan, with no related outside loan.") shall not report the employee stock ownership plan's note payable and the employer's note receivable in the employer's balance sheet. Accordingly, employers shall not recognize interest cost or interest income on an employer loan. #### Purchase of Shares by a Leveraged Employee Stock Ownership Plan ##### [718-40-25-10](https://asc.understandingaccounting.org/asc/718/40/#718-40-25-10) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:29.309Z to 2026-09-10T01:05:29.309Z Record version: sha256:f3337870c0a649fba5e04f73d791c98c591d02086919e20a5069f4b62c1798f0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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). #### Release of Leveraged Employee Stock Ownership Plan Shares ##### [718-40-25-11](https://asc.understandingaccounting.org/asc/718/40/#718-40-25-11) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:29.309Z to 2026-09-10T01:05:29.309Z Record version: sha256:cca58e4aa18f4379429a8c11067038229931cf41343e07d4d855b4762ca05991 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Employee stock ownership plan shares are released for different purposes: 1. a To compensate [employees](https://asc.understandingaccounting.org/glossary/e/#employee "An individual over whom the grantor of a share-based compensation award exercises or has the right to exercise sufficient control to establish an employer-employee relationship based on common law as illustrated in case law and currently under U.S. Internal Revenue Service (IRS) Revenue Ruling 87-41. A reporting entity based in a foreign jurisdiction would determine whether an employee-employer relationship exists based on the pertinent laws of that jurisdiction. Accordingly, a grantee meets the definition of an employee if the grantor consistently represents that individual to be an employee under common law. The definition of an employee for payroll tax purposes under the U.S. Internal Revenue Code includes common law employees. Accordingly, a grantor that classifies a grantee potentially subject to U.S. payroll taxes as an employee also must represent that individual as an employee for payroll tax purposes (unless the grantee is a leased employee as described below). A grantee does not meet the definition of an employee solely because the grantor represents that individual as an employee for some, but not all, purposes. For example, a requirement or decision to classify a grantee as an employee for U.S. payroll tax purposes does not, by itself, indicate that the grantee is an employee because the grantee also must be an employee of the grantor under common law. A leased individual is deemed to be an employee of the lessee if all of the following requirements are met: The leased individual qualifies as a common law employee of the lessee, and the lessor is contractually required to remit payroll taxes on the compensation paid to the leased individual for the services provided to the lessee. The lessor and lessee agree in writing to all of the following conditions related to the leased individual: The lessee has the exclusive right to grant stock compensation to the individual for the employee service to the lessee. The lessee has a right to hire, fire, and control the activities of the individual. (The lessor also may have that right.) The lessee has the exclusive right to determine the economic value of the services performed by the individual (including wages and the number of units and value of stock compensation granted). The individual has the ability to participate in the lessee's employee benefit plans, if any, on the same basis as other comparable employees of the lessee. The lessee agrees to and remits to the lessor funds sufficient to cover the complete compensation, including all payroll taxes, of the individual on or before a contractually agreed upon date or dates. A nonemployee director does not satisfy this definition of employee. Nevertheless, nonemployee directors acting in their role as members of a board of directors are treated as employees if those directors were elected by the employer's shareholders or appointed to a board position that will be filled by shareholder election when the existing term expires. However, that requirement applies only to awards granted to nonemployee directors for their services as directors. Awards granted to those individuals for other services shall be accounted for as awards to nonemployees. (P) December 16, 2026; (N) December 16, 2026220-40-65-1An individual over whom a reporting entity exercises or has the right to exercise sufficient control to establish an employer-employee relationship based on common law as illustrated in case law and currently under U.S. Internal Revenue Service (IRS) Revenue Ruling 87-41. A reporting entity based in a foreign jurisdiction would determine whether an employee-employer relationship exists based on the pertinent laws of that jurisdiction. Accordingly, an individual meets the definition of an employee if the reporting entity consistently represents that individual to be an employee under common law. The definition of an employee for payroll tax purposes under the U.S. Internal Revenue Code includes common law employees. Accordingly, a reporting entity that classifies an individual potentially subject to U.S. payroll taxes as an employee also must represent that individual as an employee for payroll tax purposes (unless the individual is a leased employee as described below). An individual that meets the definition of an employee includes, but is not limited to, a full-time, part-time, temporary, or seasonal employee. An individual does not meet the definition of an employee solely because the reporting entity represents that individual as an employee for some, but not all, purposes. For example, a requirement or decision to classify an individual as an employee for U.S. payroll tax purposes does not, by itself, indicate that the individual is an employee because the individual also must be an employee of the reporting entity under common law. A leased individual is deemed to be an employee of the lessee if all of the following requirements are met: The leased individual qualifies as a common law employee of the lessee, and the lessor is contractually required to remit payroll taxes on the compensation paid to the leased individual for the services provided to the lessee. The lessor and lessee agree in writing to all of the following conditions related to the leased individual: The lessee has the exclusive right to grant compensation to the individual for the employee service to the lessee. The lessee has a right to hire, fire, and control the activities of the individual. (The lessor also may have that right.) The lessee has the exclusive right to determine the economic value of the services performed by the individual (including wages and the number of units and value of stock compensation granted). The individual has the ability to participate in the lessee's employee benefit plans, if any, on the same basis as other comparable employees of the lessee. The lessee agrees to and remits to the lessor funds sufficient to cover the complete compensation, including all payroll taxes, of the individual on or before a contractually agreed upon date or dates. A nonemployee director does not satisfy this definition of employee. Nevertheless, nonemployee directors acting in their role as members of a board of directors are treated as employees if those directors were elected by the employer's shareholders or appointed to a board position that will be filled by shareholder election when the existing term expires. However, that requirement applies only to awards and other compensation granted to nonemployee directors for their services as directors. Awards granted and compensation paid to those individuals for other services shall be accounted for as awards and compensation to nonemployees.") directly 2. b To settle employer liabilities for other employee benefits 3. c To replace dividends on [allocated shares](https://asc.understandingaccounting.org/glossary/a/#allocated-shares "Allocated shares are shares in an employee stock ownership plan trust that have been assigned to individual participant accounts based on a known formula. Internal Revenue Service (IRS) rules require allocations to be nondiscriminatory generally based on compensation, length of service, or a combination of both. For any particular participant such shares may be vested, unvested, or partially vested.") that are used for debt service. ##### [718-40-25-12](https://asc.understandingaccounting.org/asc/718/40/#718-40-25-12) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:29.309Z to 2026-09-10T01:05:29.309Z Record version: sha256:fe2572391fa73fd93aa1752e9b9372cb6038f51c7fd1e3272572a990285a4125 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. As employee stock ownership plan shares are [committed to be released](https://asc.understandingaccounting.org/glossary/c/#committed-to-be-released-shares "Committed-to-be-released shares are shares that, although not legally released, will be released by a future scheduled and committed debt service payment and will be allocated to employees for service rendered in the current accounting period. The period of employee service to which shares relate is generally defined in the employee stock ownership plan documents. Shares are legally released from suspense and from serving as collateral for employee stock ownership plan debt as a result of payment of debt service. Those shares are required to be allocated to participant accounts as of the end of the employee stock ownership plan's fiscal year. Formulas used to determine the number of shares released can be based on either of the following: The ratio of the current principal amount to the total original principal amount (in which case unearned employee stock ownership plan shares and debt balance will move in tandem) The ratio of the current principal plus interest amount to the total original principal plus interest to be paid. Shares are released more rapidly under the second method than under the first. Tax law permits the first method only if the employee stock ownership plan debt meets certain criteria."), unearned employee stock ownership plan shares should be credited and, depending on the purpose for which the shares are released shall be charged to one of the following accounts: 1. a Compensation cost 2. b Dividends payable 3. c Compensation liabilities. ##### [718-40-25-13](https://asc.understandingaccounting.org/asc/718/40/#718-40-25-13) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:29.309Z to 2026-09-10T01:05:29.309Z Record version: sha256:17e3bd5210b793554ede1fbad480aca08dd809bba9affc3c865485292e925f9c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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. ##### [718-40-25-14](https://asc.understandingaccounting.org/asc/718/40/#718-40-25-14) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:29.309Z to 2026-09-10T01:05:29.309Z Record version: sha256:83e0c9fa79ceb5e8fc54273b8ad050dfd82ba9efc7756448f1236f19fc6b5163 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Some employers agree to provide a specified or determinable benefit, such as a contribution to a 401(k) plan or to a formula profit-sharing plan, to employees and use the employee stock ownership plan to partially or fully fund the benefit. Employers shall recognize compensation cost and liabilities associated with providing such benefits to employees in the same manner they would had an employee stock ownership plan not been used to fund the benefit. For employee stock ownership plan shares committed to be released to [settle](https://asc.understandingaccounting.org/glossary/s/#settlement-of-an-award "An action or event that irrevocably extinguishes the issuing entity's obligation under a share-based payment award. Transactions and events that constitute settlements include the following: Exercise of a share option or lapse of an option at the end of its contractual term Vesting of shares Forfeiture of shares or share options due to failure to satisfy a vesting condition An entity's repurchase of instruments in exchange for assets or for fully vested and transferable equity instruments. The vesting of a share option is not a settlement because the entity remains obligated to issue shares upon exercise of the option.") liabilities for such benefits, employers shall report satisfaction of the liabilities when the shares are committed to be released to settle the liability. The number of shares released to settle the liability shall be based on the [fair value](https://asc.understandingaccounting.org/glossary/f/#fair-value "The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.") of shares as of dates specified by the employers, which are usually specified in the employee stock ownership plan documents. #### Dividends on Employee Stock Ownership Plan Shares ##### [718-40-25-15](https://asc.understandingaccounting.org/asc/718/40/#718-40-25-15) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:29.309Z to 2026-09-10T01:05:29.309Z Record version: sha256:8c9e36caab88ed5d102139e51079587a5ce53ab5d3e6fb5dcb55b6255973140f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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. ##### [718-40-25-16](https://asc.understandingaccounting.org/asc/718/40/#718-40-25-16) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:29.309Z to 2026-09-10T01:05:29.309Z Record version: sha256:9fc79b1e257cf542598f07e9fc92911e01f32256ca37ad9412e67cfeb2e1f3ff Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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. ##### [718-40-25-17](https://asc.understandingaccounting.org/asc/718/40/#718-40-25-17) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:29.309Z to 2026-09-10T01:05:29.309Z Record version: sha256:a50aaf4ca409da011b90a272c941ed924d44a4b384ac90baa2bbe02479337efa Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Dividends on allocated shares shall be charged to retained earnings. The dividends payable may be satisfied either by contributing cash to the participant accounts, by contributing additional shares to participant accounts, or by releasing shares from the employee stock ownership plans suspense account to participant accounts (see paragraph [718-40-25-15](https://asc.understandingaccounting.org/asc/718/40/#718-40-25-15)). ### Nonleveraged Employee Stock Ownership Plans ##### [718-40-25-18](https://asc.understandingaccounting.org/asc/718/40/#718-40-25-18) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:29.309Z to 2026-09-10T01:05:29.309Z Record version: sha256:970df70a7d8e525be176aa80cf984a7bb76f51eae28147ec319f804008a575db Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Subsection provides recognition guidance for nonleveraged [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 is organized as follows: 1. a Contribution of shares to the employee stock ownership plan 2. b Dividends on employee stock ownership plan shares 3. c Shares allocated by year-end #### Contribution of Shares to the Employee Stock Ownership Plan ##### [718-40-25-19](https://asc.understandingaccounting.org/asc/718/40/#718-40-25-19) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:29.309Z to 2026-09-10T01:05:29.309Z Record version: sha256:a65a3d20a6b7ad4430af0d320cec9f1a36d4c75f59cf6a504ebb5a93b2dcdac4 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Employers with nonleveraged employee stock ownership plans shall report compensation cost equal to the contribution called for in the period under the plan. #### Dividends on Employee Stock Ownership Plan Shares ##### [718-40-25-20](https://asc.understandingaccounting.org/asc/718/40/#718-40-25-20) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:29.309Z to 2026-09-10T01:05:29.309Z Record version: sha256:3f624a489bea44d9146bbef2f28164407c2589a1ff64880c5dfbc92b1a5fab2d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Employers with nonleveraged employee stock ownership plans shall charge dividends on shares held by the employee stock ownership plans to retained earnings, except that dividends on suspense account shares of a pension reversion employee stock ownership plan shall be accounted for the same way as dividends on suspense account shares of leveraged employee stock ownership plans (see paragraph [718-40-25-15 through 25-17](https://asc.understandingaccounting.org/asc/718/40/#718-40-25-15) ). #### Shares Allocated by Year-End ##### [718-40-25-21](https://asc.understandingaccounting.org/asc/718/40/#718-40-25-21) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:29.309Z to 2026-09-10T01:05:29.309Z Record version: sha256:039055ef58d508f6dcfbe42bf69e697e5eceed2ae292d0dc2e23b445daa15b19 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/glossary/e/#employee "An individual over whom the grantor of a share-based compensation award exercises or has the right to exercise sufficient control to establish an employer-employee relationship based on common law as illustrated in case law and currently under U.S. Internal Revenue Service (IRS) Revenue Ruling 87-41. A reporting entity based in a foreign jurisdiction would determine whether an employee-employer relationship exists based on the pertinent laws of that jurisdiction. Accordingly, a grantee meets the definition of an employee if the grantor consistently represents that individual to be an employee under common law. The definition of an employee for payroll tax purposes under the U.S. Internal Revenue Code includes common law employees. Accordingly, a grantor that classifies a grantee potentially subject to U.S. payroll taxes as an employee also must represent that individual as an employee for payroll tax purposes (unless the grantee is a leased employee as described below). A grantee does not meet the definition of an employee solely because the grantor represents that individual as an employee for some, but not all, purposes. For example, a requirement or decision to classify a grantee as an employee for U.S. payroll tax purposes does not, by itself, indicate that the grantee is an employee because the grantee also must be an employee of the grantor under common law. A leased individual is deemed to be an employee of the lessee if all of the following requirements are met: The leased individual qualifies as a common law employee of the lessee, and the lessor is contractually required to remit payroll taxes on the compensation paid to the leased individual for the services provided to the lessee. The lessor and lessee agree in writing to all of the following conditions related to the leased individual: The lessee has the exclusive right to grant stock compensation to the individual for the employee service to the lessee. The lessee has a right to hire, fire, and control the activities of the individual. (The lessor also may have that right.) The lessee has the exclusive right to determine the economic value of the services performed by the individual (including wages and the number of units and value of stock compensation granted). The individual has the ability to participate in the lessee's employee benefit plans, if any, on the same basis as other comparable employees of the lessee. The lessee agrees to and remits to the lessor funds sufficient to cover the complete compensation, including all payroll taxes, of the individual on or before a contractually agreed upon date or dates. A nonemployee director does not satisfy this definition of employee. Nevertheless, nonemployee directors acting in their role as members of a board of directors are treated as employees if those directors were elected by the employer's shareholders or appointed to a board position that will be filled by shareholder election when the existing term expires. However, that requirement applies only to awards granted to nonemployee directors for their services as directors. Awards granted to those individuals for other services shall be accounted for as awards to nonemployees. (P) December 16, 2026; (N) December 16, 2026220-40-65-1An individual over whom a reporting entity exercises or has the right to exercise sufficient control to establish an employer-employee relationship based on common law as illustrated in case law and currently under U.S. Internal Revenue Service (IRS) Revenue Ruling 87-41. A reporting entity based in a foreign jurisdiction would determine whether an employee-employer relationship exists based on the pertinent laws of that jurisdiction. Accordingly, an individual meets the definition of an employee if the reporting entity consistently represents that individual to be an employee under common law. The definition of an employee for payroll tax purposes under the U.S. Internal Revenue Code includes common law employees. Accordingly, a reporting entity that classifies an individual potentially subject to U.S. payroll taxes as an employee also must represent that individual as an employee for payroll tax purposes (unless the individual is a leased employee as described below). An individual that meets the definition of an employee includes, but is not limited to, a full-time, part-time, temporary, or seasonal employee. An individual does not meet the definition of an employee solely because the reporting entity represents that individual as an employee for some, but not all, purposes. For example, a requirement or decision to classify an individual as an employee for U.S. payroll tax purposes does not, by itself, indicate that the individual is an employee because the individual also must be an employee of the reporting entity under common law. A leased individual is deemed to be an employee of the lessee if all of the following requirements are met: The leased individual qualifies as a common law employee of the lessee, and the lessor is contractually required to remit payroll taxes on the compensation paid to the leased individual for the services provided to the lessee. The lessor and lessee agree in writing to all of the following conditions related to the leased individual: The lessee has the exclusive right to grant compensation to the individual for the employee service to the lessee. The lessee has a right to hire, fire, and control the activities of the individual. (The lessor also may have that right.) The lessee has the exclusive right to determine the economic value of the services performed by the individual (including wages and the number of units and value of stock compensation granted). The individual has the ability to participate in the lessee's employee benefit plans, if any, on the same basis as other comparable employees of the lessee. The lessee agrees to and remits to the lessor funds sufficient to cover the complete compensation, including all payroll taxes, of the individual on or before a contractually agreed upon date or dates. A nonemployee director does not satisfy this definition of employee. Nevertheless, nonemployee directors acting in their role as members of a board of directors are treated as employees if those directors were elected by the employer's shareholders or appointed to a board position that will be filled by shareholder election when the existing term expires. However, that requirement applies only to awards and other compensation granted to nonemployee directors for their services as directors. Awards granted and compensation paid to those individuals for other services shall be accounted for as awards and compensation to nonemployees."). 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.