Accounting for ESOP transactions
WHITE PAPER |
This article was originally published in Leveraged ESOPs and Employee Buyouts and has been updated, revised and reprinted here with permission.
Too frequently, the accountant is brought in after a leveraged employee stock ownership plan (ESOP) transaction has been implemented and the financing obtained. At that point, it’s likely too late to start educating the plan sponsor on the accounting treatment of leveraged ESOPs. By that time, the transaction may be too far down the road to be able to avoid or minimize any potentially adverse accounting treatment. Many people simply do not recognize the dramatic impact that a leveraged ESOP will have on the financial statements of the plan sponsor.
This article describes the basics of accounting for leveraged ESOP transactions so that potential plan sponsors and their advisors can anticipate the accounting presentation and structure the transaction where possible to minimize any complications created by the accounting. This is only a primer on the rules covering the accounting for leveraged ESOPs and will not cover all of the intricacies of very sophisticated ESOP applications. Nor will it go into much detail on the accounting for nonleveraged ESOPs. ESOP sponsors or potential sponsors should involve their accounting firms in the early stages of planning, as the sophisticated equity structures of many ESOP transactions will create equally sophisticated financial reporting consequences beyond what is covered in this brief overview.