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Accounting for EOTs

William Franklin has been featured in the following guidance note concerning Employee-Ownership Trusts (“EOTs”) published by the Employee Share Ownership (Esop) Centre, a non-profit membership organisation promoting broad-based employee share ownership:

“There has been increasing interest in the employee-ownership business model in recent years, in particular since 2014 when the government introduced significant new tax reliefs to encourage companies to become majority or wholly owned by Employee Ownership Trusts (EOTs).

However, leading members of the Esop Centre have been concerned that accountants might not immediately appreciate the fundamental difference between an EOT and the type of Employee Share Ownership Plan trust (ESOP trust) which has been traditionally used to warehouse shares for direct employee equity participation.

Under UITF38, ESOP trusts were treated in the accounts as an extension of the company, in what was sometimes called the “extended equity” method of accounting. UITF38 has now been replaced by new rules for intermediate payment arrangements in FRS102; this contains a rebuttal presumption that the extended equity method applies to ESOPs (and other similar intermediary payment arrangements).

In conjunction with William Franklin of Pett, Franklin & Co. LLP and Graeme Nuttall OBE of Fieldfisher LLP, the Esop Centre discussed the issue with staff at the Financial Reporting Council (FRC). Following those discussions, it is our understanding that, when an EOT owns shares in a company, the presumption that extended equity accounting applies can be rebutted because, unlike an ESOP trust, an EOT is part of the company’s ownership and governance structure and is designed to operate alongside or independently of the board of the sponsoring company.”

Pett, Franklin & Co. LLP are experts in employee share schemesshare valuations and executive incentives.