FASB Modifies Proposed Accounting Treatment of Employee Stock Purchase Plans
 
August 27, 2004
 
Mark A. von Bergen- Portland
David Wang - Portland

This is an update to the Public Companies Alert published by Holland & Knight on August 24, 2004.

At an August 25, 2004 board meeting, the Financial Accounting Standards Board (FASB), by a split vote, tentatively adopted a different accounting treatment for Employee Stock Purchase Plans (ESPPs) than that originally contained in its March 2004 exposure draft proposal.  FASB’s change has the potential of lessening the expense to be recorded by companies in connection with stock sold pursuant to ESPPs.

Employee Stock Purchase Plans

Using an ESPP, a company allows its employees to use after-tax payroll deductions to purchase company stock at a discount.  ESPPs generally are designed to promote employee ownership and to generate incentives for workers.

In its March 2004 proposal, titled “Share-Based Payment: an amendment of FASB Statements No. 123 and 95,” FASB suggested that any discount or benefit offered to employees through an ESPP that is unavailable to all stockholders represents compensation to employees, and therefore should be recorded as a compensation expense.  Some critics of the proposal voiced concerns that companies would begin to discontinue or scale back ESPPs if they were forced to record such an expense.

Alternative Treatments Considered by FASB

At its August 25, 2004 meeting, FASB considered four alternative accounting treatments for ESPPs and related compensation expenses:

Alternative No. 1

The first alternative would retain the “guidance” of the original proposal and would record as an expense any discount given to employees under an ESPP.

 

Alternative No. 2

The second alternative is based on the concept that ESPPs enable companies to issue stock and raise capital without incurring the significant costs otherwise associated with public offerings.  Viewed from this perspective, and according to the written materials handed out at the FASB meeting, a company should be permitted to treat a purchase discount as non-compensatory so long as the discount does not exceed the greater of: (i) the “per-share discount that would be reasonable in a recurring offer of stock to stockholders or others;” and (ii) the “per-share amount of stock issuance costs avoided by not having to raise a significant amount of capital by a public offering.”

 

Alternative No. 3

The third alternative would effectively avoid any recorded expense by treating ESPPs as vehicles for encouraging employee loyalty and generating shareholder value, rather than for compensating employees.

 

Alternative No. 4

The final alternative, and the one tentatively adopted by FASB by a split vote, retains the general principles underlying the original proposal, but allows an ESPP purchase discount to be treated as non-compensatory if the proceeds the company receives are at least as much as the proceeds it would have received if it had issued the shares through an underwriter.

By adopting the last alternative listed above, FASB would permit companies to record less of an expense for shares acquired by employees through an ESPP than that originally required in the March 2004 proposal.  FASB’s decision is, of course, only tentative, and it continues to deliberate matters associated with its March 2004 proposal.  Holland & Knight will issue additional alerts on this topic as events unfold.

For more information, e-mail David Wang or Mark von Bergen at david.wang@hklaw.com or mark.vonbergen@hklaw.com, respectively, or call toll free, 1-888-688-8500.