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 categories 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).

Dr Equity (amount received from Trust)
Cr Cash (amount received from Trust)

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 effectively eliminated on ‘consolidation’.

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

Dr Cash (amount received from employees)
Cr Equity (amount received from employees)

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 (Helpsheet: Share Options under FRS 102).

Example

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

Dr Equity (eg EBT 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 ‘EBT 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 the option exercise price of £30 each.

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

This results in the effective gain on the reissue of shares (the difference between the £25 at which the shares were repurchased and the option exercise price of £30) being recognised in equity. The company could choose to move the share option reserve 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 and the shares are not accounted for by the entity as if they are holding their own shares.

An example of such an arrangement is given in FRS 102 9.33A of a co-operative owned by its employees, and all of the shares are held in a trust for the benefit of the employees, but the shares never vest in individual employees.  This is similar to the John Lewis Partnership model.

Example

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

The existing shareholders of Trade Co sell their shares to EOT Trust. A trust does not have a separate legal personality and therefore Trustee Co (in its capacity as a trustee) will hold the shares on behalf of EOT Trust.

In other words, a common situation is that Trustee Co only holds legal title to the shares in Trade Co “for and on behalf of” EOT Trust. As a result, even though Trustee Co has legal title, EOT Trust holds beneficial ownership of those shares.

Control (of an entity) is defined in the glossary of FRS 102 as “the power to govern the financial and operating policies of an entity so as to obtain benefit from its activities”.
As such Trustee Co never controls the shares of Trade Co as it is only ever acting on behalf of EOT Trust.

FRS 102 defines an asset as “a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity”. This means the definition of an asset is not met by Trustee Co as Trustee Co does not control the shares of Trade Co and as such Trustee Co will not recognise the shares in Trade Co as an investment on the balance sheet of Trustee Co.

As EOT Trust holds the beneficial interest in the shares of Trade Co it would recognise the shares as an investment in the EOT Trust accounts. In this example the shares were not acquired for cash, instead there is a corresponding liability owed to the former shareholders.

There will be no accounting transactions in Trade Co arising from the sale of shares in Trade Co to EOT Trust as they were not a party to this arrangement. This was a transaction that occurred between the original shareholders and the EOT, ie a transaction between the Trade Co’s shareholders. Trade Co then makes distributions to EOT Trust 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

EOT Trust would need to consider any requirements arising from law or their governing documents, including the Trust Deed and Rules, to inform how this transaction is reflected in any financial statements prepared by EOT Trust.

Trustee Co will not recognise any income as a result of the transaction as they do not have control of the shares and are therefore not entitled to distributions in respect of those shares. The result in Trustee Co’s individual accounts is that it will have largely no assets or liabilities and potentially minimal income and expenses in P&L. Consideration will need to be made as to whether this entity will qualify as a dormant company under Companies Act 2006, guidance on which can be found in Is a company dormant?

EOTs are unique arrangements that are often carefully tailored to the specific requirements of the interested party. This example may not be applicable in all situations and the specifics of each EOT, governed by the Trust deed, will need to be carefully considered to determine the appropriate accounting treatment.

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.