FAS Statement 150 Raises Appears to Require Booking of Repurchase Obligations for Stock Plans

In May of 2003, the Financial Accounting Standards Board (FASB) issued FAS 150, a new accounting guideline that appears to require companies with "mandatorily redeemable shares, which the issuing company is obligated to buy back in exchange for cash or other assets" to book the liability this obligation represents. The effective date of the proposal for new contracts is May 31, 2003; for existing obligations, it is for interim accounting periods starting after June 15, 2003. However, for closely held companies, the effective date for all obligations is December 15, 2003. While the guidelines are written for all kinds of financial instruments that require repurchase, it appears that they will affect ESOPs as well as any individual equity programs, such as restricted stock, phantom stock, SARs, or stock options having a mandatory repurchase feature that occurs on a determinable event (termination, death, retirement, etc.).

The proposal has received little public attention. A Google search yielded only one article about it. There is still a great deal of confusion about the proposal in the accounting community. For instance, paragraph 17 of the statement explicitly states that ESOPs subject to AICPA Statement of Position 96-3 accounting rules will not be covered by the guidelines. Becky Miller of McGladrey & Pullen, an expert on ESOPs and a prominent member of the accounting community, tells us that FASB staff nonetheless say the statement does apply to ESOPs. Its application to individual equity arrangements seems less controversial, but the specific method by which the obligations should be recorded and valued for different instruments with different conditions attached to them is still murky.

We will continue to follow this issue in the hopes of providing some clarity in the future.