News & Views

ESOPs and Fair Value Disclosures

GAAP is requiring new disclosures with respect to fair value determination for non-traded securities that is impacting ESOP companies. In May 2011, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU), Fair Value Measurement (Topic 820) that caused an uproar in the ESOP community as the ramifications for ESOPs has become more widely known and understood. The ASU is effective for nonpublic entities beginning after December 15, 2011, and will impact the ESOP community (those with December 31, 2012 plan year ends) in the upcoming year.

The ASU would require companies to disclose "significant" assumptions and methodologies used in the valuation of company securities that are not publicly traded. This disclosure would be in a footnote (fair value disclosure) of the ESOP audit report (not the Company's audit report) which is filed with the 5500 form, a form that is available publicly on the Department of Labor's website (and many other websites). The information disclosed in the footnote would be required to enable users of the statement to assess the valuation techniques and inputs used to develop those measurements. In all, the footnote is required to provide enough information to reconcile the fair value measurement disclosed. What level of detail this would require is still unclear, but may include what types of approaches were used (income, market, asset), as well as other details that could potentially enable those with access to this footnote disclosure a large amount of information on how the fair market value of the ESOP's stock was determined and the fair market value determined for the sponsoring Company.

This is not welcome news to private ESOP companies. In February, the National Center for Employee Ownership (NCEO), the ESOP Association and The Employee-Owned S Corporations of America (ESCA) submitted a letter to the Technical Director at FASB voicing concern over the disclosure and ramifications of this requirement to employee-owned companies. Here is an excerpt from the letter:

"These disclosures would provide the public with information regarding private ESOP companies that otherwise would not be available. Collectively, these disclosures could allow readers to recreate a financial picture of the company. As you can imagine, in the hands of competitors, customers and suppliers, this information could be damaging to the company and ultimately its employee-owners. Even more threatening may be the ability of corporate raiders to precisely ascertain the financial condition of otherwise private companies, enabling them to launch takeovers which ultimately work to the detriment of employee-owners who could lose the opportunity to own their companies. We are also concerned about other unforeseen negative consequences as a result of making such information publicly available. Ultimately, we believe it is important to keep this type of information as it relates to private ESOP companies just that—private."

FASB has yet to respond. In the meantime, get ready for questions from your ESOP clients about this disclosure requirement.

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