BIM44205 - Specific deductions - employee share schemes: Accounting for ESOP trusts, a/c periods starting before 1 Jan 2003 - group schemes - example 3

A ‘group scheme’ is one in which the parent company in a group sets up an ESOP trust for the benefit of employees of any company in the group.

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 see BIM44200.

Example 3 (Trust buys new shares at exercise)

Facts

• 1/1/2000: subsidiary grants options over 5m £1 parent company shares, which can be exercised between 2003-2005.
• Market value at date of award is £2 per share.
• Exercise price £1.40 per share.
• Performance targets to be met by 31/12/2002.
• Trust will subscribe for shares in the parent at market value at date of exercise.
• Subsidiary contracts to pay the shortfall between issue price (MV at date of exercise) and exercise price.
• All options are expected to be exercised.
• June 2003 - all options exercised when market value is £3.10 per share.
• June 2003 - subsidiary contributes to trust 5m x £1.70 (£3.10 - £1.40) = £8.5m.

In subsidiary company’s accounts

• Subsidiary has an obligation to pay shortfall [will pay cash] based on market value at exercise.
• Provision made (applying principles of UITF25, see BIM44235) using reliable estimate.
• Market values at 31/12/2000 = £2.20 per share; 31/12/2001 = £2.50 per share; 31/12/2002 = £3.00 per share.
• Each year:

In parent company’s accounts

• No accounting entries are needed until exercise.
• If all options are exercised on 30/6/2003 when the market value of a share is £3.10:

In group accounts