FAS 150 and ESOPs: Still Up in the Air

There is still no firm consensus on just what the Financial Accounting Standards Board (FASB) really means by its new FAS 150, an accounting protocol effective December 15, 2003 for closely held companies and June 15, 2003 for public companies. FAS 150 requires companies to record a liability on their balance sheets for mandatorily redeemable obligations, including "puttable stock." On the one hand, shares held by ESOP participants and put to the company certainly seem to fall within this definition. However, "puttable stock" has a more narrow definition here, including that the put option be transferable (it is not in an ESOP). "Mandatorily redeemable" requires that the employee has no choice but to sell the shares back. More important, the statement explicitly exempts ESOPs following current AICPA standards for ESOP accounting. Unfortunately, this only applies to the stock when it is in the plan, not once it has been issued to participants. The rules thus suggest that plans in which the shares are redeemed prior to an employee leaving (as would be the case in S corporations and companies in which the bylaws state that "all or substantially all" of the stock be owned by employees) and plans in which the employee only owns the shares on a temporary basis (the IRS, in rulings on S corporations, has said that such transient ownership does not constitute ownership for S corporation purposes, for instance) would not be covered. It might also not apply to plans in which the company buys back shares and recontributes them to the ESOP. However, it might apply to plans in which the employee, after termination or distribution, can sell the shares back to the company. In that case, the fair market value of shares outstanding subject to these rights might have to be booked as a balance sheet liability and changes in value marked as an adjustment to income.

Whatever the outcome of this issue, it appears FASB will revisit ESOP repurchase obligation specifically in its second round of rulings pursuant to FAS 150 sometime time next year.