BIM44175 - Specific deductions - employee share schemes: Accounting for ESOP trusts, a/c periods starting before 1 Jan 2003 - UITF13

UITF13 is effective from 22 June 1995. It explains how the ‘substance over form’ principles of FRS5 should be applied when accounting for employee share ownership trusts used as part of remuneration schemes.

Key features

The key features of the accounting treatment under UITF13 are that:

• UITF13 treats the ESOP trust (also called an ESOT) as a branch of the sponsoring company,
• the company’s contributions to the trust are not reflected as charges against profits in the company’s profit and loss account,
• cash paid to the trust is treated as if it is still part of the company’s own cash,
• external loans made to the trust are treated as if a company liability,
• shares purchased by the trust are shown as an asset of ‘own shares’ held on the company’s balance sheet,
• these ‘own shares’ remain as assets on the company’s balance sheet until they vest unconditionally in employees,
• the book value of the ‘own shares’ held on the company’s balance sheet is initially equal to the cost of the shares to the ESOT,
• the shortfall between book value and residual value (option exercise price, or nil if a gift awarded) is recognised as a deduction in the company’s profit and loss account over the period from the date of option grant or share award to the earlier of:

• • the end of the service period to which the gift or option relates, or
  • the date the gift or option first becomes unconditional.

This basis for recognising the cost of the shares to the ESOT is consistent with the accounting requirements of UITF17, which applies to those employee share schemes that do not involve the use of a trust.