FAS 150 Has Minor Impact on Entities that Sponsor ESOPs
On May 15, 2003 the Financial Accounting Standards Board (FASB) issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.
Statement 150 affects the issuer’s accounting for types of freestanding financial instruments that have mandatory redemption, some put options and forward purchase contracts that obligate the issuers to buy back the shares in exchange for cash or other assets.
How does the statement impact a private company’s accounting for ESOPs?
Paragraph 17 of the statement provides a scope of limitation that should exclude most shares issued to and held by ESOPs. That paragraph indicates that this Statement does not apply to obligations under stock-based compensation arrangements if those obligations are accounted for under AICPA Statement of Position 93-6 Employers’ Accounting for Employee Stock Ownership Plans or related guidance. As a result, most ESOP companies should not be required to recognize the repurchase liability of their ESOP on their financial statement. However, Statement 150 may apply to a freestanding financial instrument issued under a stock arrangement but is no longer subject to SOP 93-6 or related guidance. (Example – stock previously distributed by an ESOP and held by former ESOP participants that is subject to a put option.)
Important Note:
FAS No. 150 did not resolve all issues. FASB plans to complete a second phase to this project in which they intend to address the accounting for stock compensation programs with characteristics of both liabilities and equity that are not currently covered by FAS 150. Stay tuned!