This helpsheet has been issued by ICAEW’s Technical Advisory Service to help ICAEW members account for various ‘trust’ arrangements in relation to employee benefits under FRS 102.

Members may also wish to refer to the following related helpsheet:

• Purchase of own shares in a private limited company
• Share options under FRS 102

There are two main types of employee share trusts. They are:

• EBTs (Employee Benefit Trusts) and ESOPs (Employee Share Ownership Plans), and
• EOTs (Employee Ownership Trusts)

It is therefore important to establish which kind of arrangement the entity has in place. We would suggest asking for trust documentation such as a deed.

The accounting treatment of the arrangement depends on whether the entity has de facto control of the Trust, as outlined in 9.33 of FRS 102, or whether the entity is owned by the Trust without the entity having control of it(FRS 102 section 9.33A).

The reporting entity will typically make payments to the trust, or guarantee borrowing made by the trust, and the trust will use its assets to pay the entity’s employees for services provided to the entity.

The requirements of paragraphs 9.33 to 9.37 of FRS 102 effectively require an entity to ‘consolidate’ an employee benefit trust (EBT) or employee share option trust (ESOP) into its financial statements. This is because the entity (the sponsor) has effective control over the trust (the intermediary).

Accordingly, the assets and liabilities of the intermediary will be accounted for by the sponsoring entity as an extension of its own business and recognised in its own individual financial statements. Usually this remains unchanged until the assets in question vest unconditionally with the beneficiaries, in this case the employees.

Therefore, if the trust purchases the shares of the sponsoring entity the result is similar to if the entity had simply undertaken a Purchase of Own Shares and held the shares as treasury shares rather than cancelling them.

The consideration paid for the equity instruments of the sponsoring entity shall simply be deducted from equity (shares held in trust).

Cr Cash (amount paid)
Dr Equity (amount paid)

If the trust incurs any expenses these are recognised in the sponsoring entity’s profit and loss. Any finance provided by the sponsoring entity to the trust is ignored as it is effectively eliminated on ‘consolidation’.

When the shares vest with, and are purchased by employees (usually for a different price):

Dr Cash (amount paid)
Cr Equity (amount paid)

These transactions should be recorded separately in the statement of changes in equity (SOCIE).

There may be an interaction between accounting for such arrangements and the requirements of Section 26 FRS 102 (Share based payments).

Example

An EBT of an entity purchases 20,000 of its own shares for £500,000 (£25 each).

Dr Equity (eg ESOP reserve) 500,000
Cr Cash 500,000

FRS 102 does not prescribe any specific treatment of the equity element; however, it is often described as ‘ESOP reserve’ or possibly even just ‘Own shares’.

The entity then grants options over these shares to employees with a vesting period of 1 year. The company values these options at £5 per share. The P&L impact is spread over the vesting period of the options.

Dr Profit or loss 100,000
Cr Equity (usually share option reserve) 100,000

At the end of the vesting period the employees exercise their options and purchase the shares for £30 each.

Dr Cash 600,000
Cr Equity (eg ESOP reserve) 500,000
Cr Retained Earnings 100,000

The effective profit on the reissue of shares is recognised in equity and the share option reserve can now be moved to retained earnings.

Dr Share Option Reserve 100,000
Cr Retained Earnings 100,000

EOTs are designed to facilitate employee ownership of an entity. They differ from EBTs and ESOPs (discussed above) because the entity does not have control or de facto control over the trust. This means that these arrangements are not accounted for as intermediate payment arrangements under FRS 102, i.e. there is no quasi consolidation in the entity’s accounts.

Example

We have an established entity (Trade Co).

A trust is established with a company as a trustee (Trust Co).

The existing shareholders of Trade Co sell their shares to Trust Co. The consideration is unpaid originally and remains as a creditor due to the former shareholders.

Trust Co will account for this as follows:

Dr Investment (amount paid)
Cr Creditor (amount paid)

There will be no accounting transactions in Trade Co as they were not a party to this arrangement.

Trade Co then makes distributions to the EOT from retained earnings. These distributions are often termed “contributions”, however, they follow the usual Company Law requirements in relation to profits available for distribution.

The journal entries in Trade Co (for each such distribution) are therefore:

Dr Retained Earnings
Cr Cash

As discussed above, since Trust Co generally has a creditor owed to the old shareholders it will likely use the distribution receipts to make payments to the former shareholders to clear that balance.

Dr Creditor
Cr Cash

ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm access can discuss their specific situation with the Technical Advisory Service on +44 (0)1908 248 250 or via webchat.