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Historically the financial reporting requirements for ESOP companies have been have been limited to the requirements of SOP 93-6.  FASB adopted ASU 2011-04 to develop common fair market value requirements in accordance with GAAP and IFRSs


An unintended consequence of the new valuation rules may require an additional disclosure of information in the ESOP audit report, including the methodologies and assumptions used in determining the ESOP independent third party appraisal of company stock for employer securities that are not publicly traded. Disclosing this financial information would be harmful for ESOP companies, as it would become public knowledge for competitors and increase the possibility of unsolicited offers.  The additional ESOP disclosure requirements under ASU 2011-04 take effect for periods beginning on or after December 15, 2011, including 2012 calendar year plans.  If your ESOP requires a plan audit it is important that you have worked with your ESOP consultant to develop a plan of action.

In response to the ESOP disclosure requirement, the NCEO, ESOP Association, and ESCA prepared a joint letter to FASB to express their concerns.

During an April 10, 2013 FASB Board Meeting the FASB Board discussed deferring the requirement that a nonpublic employee benefit plan disclose the quantitative fair value information required for investments in private company stock the impact of the proposal:

Agenda decision: fair value measurement disclosures of private company employer securities held by employee benefit plans.

The Board discussed whether to add a project to the FASB agenda to exempt or indefinitely defer for nonpublic employee benefits plans (plans other than those subject to the Form 11-K filing requirements of the Securities and Exchange Commission) the requirement to provide certain disclosures about the fair value of investments in private company equity securities of the plan sponsor. The Board made the following decisions:

    1. To add the project to the agenda.

    2. To expose for public comment a proposal to indefinitely defer the requirement that a nonpublic employee benefit plan disclose the quantitative fair value information required by paragraph 820-10-50-2(bbb) for investments in private company equity securities of the plan sponsor, regardless of what other private company equity securities are held by the nonpublic employee benefit plan.

    3. To provide a comment period extending through May 31, 2013.

The Board directed the staff to draft a proposed Accounting Standards Update for vote by written ballot.

The April 15, 2013 Employee Ownership Update discusses FASB’s decision to defer in more detail:

FASB's decision was based on concern that the disclosures would have exposed privately held companies' confidential information to the general public on the Department of Labor's Web site. If approved, the deferral will be in effect until the employee benefits community and the DOL resolve the issue. Such indefinite deferrals may last multiple years.

The original disclosure requirements, described in FASB's Accounting Standard Update 2011-4 on fair value, applied to plan years starting after December 15, 2011, and would have required a description of the specific valuation methods used and the specific rates applied. In other words, an ESOP company may have had to report, among other things, fair value, the EBITDA multiple used, and the size of discounts, such as the discount for the lack of marketability. The proposal is to retain the descriptions of the methods and the inputs, but to eliminate the requirement to quantify the inputs.

The disclosures would have been available to the public because employee benefit plans with 100 or more participants are subject to audit under the Employee Retirement Income Security Act (ERISA), and the audited financial statements are available on the DOL's Web site.

The Pension and Benefits Blog explores the Implications of ASU 2011-4 for sponsors of ESOPs in more detail and shares some disclosure tips:

The issue was viewed as sufficiently important that it was addressed at the April 10, 2013 meeting of the FASB.  At that meeting, they approved the issuance of an Exposure Draft to indefinitely defer the reporting of the quantifiable aspects of the inputs.  The ED will be subject to a 30 day comment period.  If approved, the last column of the table in the above illustration would be omitted.  The suggestion of an indefinite delay was to allow the accounting community to work with the Department of Labor to see if some method could be achieved to mask this potentially confidential information from the general public.  In arriving at this position, the FASB members strove to balance the objective of providing sufficient information to the intended users of the financial statements with the conflict created by publicly exposing such information to unintended and possibly adverse parties.

In the interim, plan fiduciaries are facing the looming deadline for the 2012 Form 5500 filing.  The possible reporting relief does not eliminate this disclosure.  It will merely omit the most controversial element.  Thus, parties responsible for the financial reports of benefit plans holding employer securities must choose a course of action. 

When complying with the ESOP disclosure requirements you will also have to remain aware of your Procedures for Releasing an ESOP Valuation Report to Auditors.  This is important because conflicts can occur when auditors review the stock valuation report, including the auditor's potential conflicts with ESOP sponsors, ESOP trustees or other fiduciaries, and valuation firms.

The additional ESOP disclosure requirements under ASU 2011-04 take effect for periods beginning on or after December 15, 2011, including 2012 calendar year plans. If your ESOP requires a plan audit on or after this time period, you should work with your ESOP consultant to make sure you have a plan to comply with the requirements.


aaron juckett 


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