BIM44200 - Measuring the profits (specific rules & practices) - receipts & deductions: specific deductions - employee share schemes: providing shares - accounting periods starting before 1 January 2003: accounting for employee share ownership (ESOP) trusts - subsidiary companies in group schemes - contributions to employee share ownership (ESOP) trusts
UITF13 treats the ESOP trust as a branch of the ‘sponsoring employer’. With a ‘group scheme’ the group accounts treat the group as the sponsoring employer and the accounting treatment eliminates intra-group transactions, assets and liabilities.
For accounting purposes a subsidiary company’s obligations to make contributions to a ‘group’ ESOP trust fall into two categories:
- where the parent company will issue new shares to the ESOP trust to be used to satisfy option exercises and vesting of share awards,
- where the ESOP trust will buy existing shares in the market to satisfy option exercises and vesting of share awards).
New shares to be issued
The subsidiary will typically pay to the trust an amount equal to the difference between the market value of the shares on the date of exercise and the exercise price payable by the employees. The trust will subscribe for new shares in the parent company at their market value on the exercise date using the amount received from the subsidiary and the option exercise price paid by the employees. The accounting treatment:
- in the subsidiary company’s accounts - deducts the contribution to ESOP trust, spread over the performance period to which the share options or awards relate, using the principles set out in UITF25 (see BIM44230);
- in the group accounts - credits the market value of the shares to the share capital and share premium accounts, and debits to reserves the amount paid by the subsidiary;
- in the parent company’s accounts - produces no deduction in the profit and loss account as the parent company will receive market value for the new shares it issues.
The accounting entries in this situation are explained in more detail in Example 3 at BIM44205.
Existing shares bought in the market
The subsidiary will typically make both a contribution and a loan to the ESOP trust which the trust will use to buy shares in the market at the time the options are granted to the employees. The amount of the loan will be equal to the exercise price that the trust will recover from the employees when they exercise their share options. The accounting treatment:
- in the subsidiary company’s accounts - may follow UITF13 if the subsidiary is regarded as being a sponsoring company of the ESOP trust;
- in the parent company’s accounts - produces no profit and loss account deduction unless the parent company is itself an employing company;
- in the group accounts - will follow UITF13 as the group is a sponsoring entity of the ESOP trust.
The accounting entries in this situation are explained in more detail in Example 4 at BIM44210.
Advice on accountancy issues
In any case in which the question of what constitutes generally accepted accounting practice (GAAP) is an issue, HMRC staff should consult their local HMRC accountant.