ESOPs: Accounting for the Repurchase Obligation on Your Financial Statements

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What is the employee stock ownership plan (ESOP) repurchase obligation? An ESOP-owned company may make annual contributions to the ESOP consisting of company stock and/or cash. These contributions are then allocated among eligible participants’ accounts within the ESOP trust in accordance with the ESOP plan documents. 

Participants are then entitled to receive cash equal to the fair market value of the stock allocated to their accounts upon a distributable event, i.e., death, disability, retirement, voluntary or involuntary termination or diversification, thus creating the repurchase obligation for the company. 

Under Internal Revenue Code Section 409(h), the company—not the ESOP—is required to provide enough cash to the plan so the ESOP can meet these distribution requirements. The company has a fiduciary responsibility to plan for and manage this repurchase liability. Management may use a repurchase obligation study to help forecast the cash needed for repurchase obligation. 

For private companies, the repurchase liability is not required to be reflected as a liability on the plan sponsor’s balance sheet. Under Accounting Standards Codification (ASC) Subtopic 718-40, the plan sponsor should instead disclose in its financial statement footnotes the existence and nature of any repurchase obligation, including disclosure of the fair value of the shares allocated as of the balance sheet date, which are subject to a repurchase obligation. 

While private companies do not have to record the repurchase obligation, public companies that have an effective put do have to report their ESOP-related shares outside of permanent equity under the guidance of Accounting Series Release 268. 

In addition to the repurchase obligation noted above, ASC 718-40 requires certain additional disclosures within the company’s footnotes for both leveraged and nonleveraged ESOPs. To learn more about the required footnote disclosures under ASC 718-40, ESOP-specific accounting or repurchase obligation studies, contact Kristine or your trusted BKD advisor.

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