UITF Abstract 38.qxd

38 UITF abstract 38 Accounting for ESOP trusts (Issued 15 December 2003) Introduction This Abstract supersedes UITF Abstract 13 ‘Accounting for ESOP trusts’ (issued on 8 June 1995). Abstract 13 addressed: (a) the nature and extent of the sponsoring company’s assets and liabilities that should be recognised under employee share ownership plans (ESOPs); and (b) the timing of expense recognition under such arrangements. This Abstract addresses issue (a) above. The principal change from Abstract 13 concerns the treatment of an interest in an entity’s own shares arising through an ESOP trust. Abstract 13 required that such shares should be recognised as assets of the sponsoring entity. This Abstract reflects the principle in UITF Abstract 37 ‘Purchases and sales of own shares’, which is consistent with International Financial Reporting Standards (IFRSs), that an entity that reacquires its own equity instruments should present them as a deduction in arriving at shareholders’ funds rather than as assets. This Abstract does not include any requirements concerning the recognition of the cost of awards to employees that take the form of shares or rights to shares. Those accounting requirements are dealt with in UITF Abstract 17 ‘Employee share schemes’, which is amended by this Abstract. The issue ESOPs are designed to facilitate employee shareholdings and are often used as vehicles for distributing shares to employees under remuneration schemes. The detailed structures of individual ESOPs are many and varied, as are the reasons for establishing them. However, the main features are often as follows: (a) The ESOP trust provides a warehouse for the sponsoring company’s shares, for example by acquiring and holding shares that are to be sold or transferred to employees in the future. The trustees may purchase the shares with finance provided by the sponsoring company (by way of cash contributions or loans), or by a third-party bank loan, or by a combination of the two. Loans from the company are usually interest-free. In other cases, the ESOP trust may subscribe directly for shares issued by the sponsoring company or acquire shares held as treasury shares.