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ESOP accounting and share release


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ESOP acquires shares w proceeds from a 10-year loan. Note and pledge agreement specify P&I release. Accountant for plan sponsor insists on using a Principal only release for financial statements. Says he called AICPA last week and confirmed his understanding that SOP 93-6 requires the use of the principal only release. Where do I find guidance that says otherwise? I have examples from seminars which he says are not authoritative guidance.

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DPL,

Feel free to call me if you like, or have your CPA call me.

First question - what does the share release have to do with SOP 93-6, now codified as FASB ASC 718-40? Two things come to mind:

1) Measuring compensation expense on the company's P&L;

2) Measuring Unearned ESOP Shares on the company's balance sheet.

For the first issue, see FASB ASC 718-40-30-2: "the employer shall recognize compensation cost equal to the fair value of shares committed to be released." The actual release of shares is controlled by the pledge agreement, so if the pledge agreement clearly specifies a principal-and-interest share release method, and if that is the way the shares are, in actuality, being released and allocated to participants, then it is clear that that same number of shares should be used for expense recognition. To use a different number of shares to measure compensation expense simply makes no sense.

For the second issue, see FASB ASC 718-40-30-3: "Unearned employee stock ownership plan shares shall be credited as shares are committed to be released based on the cost of shares to the employee stock ownership plan." In other words, Unearned ESOP Shares should be reduced by the cost of the actual number of released shares, not some alternate calculation of released shares that is not what is actually happening within the trust.

The two different share release methodologies (i.e., principal-only or principal-and-interest) aren't even described in SOP 93-6, so SOP 93-6 clearly doesn't control the use of either approach for anything related to the financial statements. That is controlled, again, by the pledge agreement on a loan-by-loan basis. SOP 93-6 should reflect the reality of what is happening within the trust, not some alternate universe.

Thanks,
Marcus

Marcus R. Piquet, CPA

American ESOP Advisors LLC
5995 Brockton Ave Fl 2, Riverside, CA 92506-1833
(951) 779-1124 (v) (951) 346-0896 (fax)

mpiquet@AmericanESOP.com

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The NCEO had within the last few weeks a one hour webanair about GAAP accounting and ESOPs. If you are an NCEO member you can get the handouts for free. The handouts give examples of the journal entries one would make on the company's side. I think members can listen to the recorded version for free also. They might have publications on GAAP accounting for ESOP companies also. This might give you a starting place but I doubt all your answers. A one hour seminar on a topic this complex is by definition a pretty high overview.

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