Question

Analyze equity-based employee benefit plans including ESOP and the effect of Fin-46R on employer’s accounting for ESOPs. What are the main differences between ESOPs and ESPP (employee stock purchase plans), financial accounting and Federal tax considerations. For this assignment, you need to review ESOP Facts published by National Center for Employee Ownership (NCEO.org).

Your paper should include:

• Equity-based employee benefit plans including ESOP.
• The effect of Fin-46R on employer’s accounting for ESOPs.
• The main differences between ESOPs and ESPP (employee stock purchase plans).
• Financial accounting and Federal tax considerations for ESOPs.

Answer 1

Equity compensation is a non cash pay that is offered to employees.Equity compensation may include options ,restricted stock,and performance shares ;all of these investment vehicles represent ownership in the firm for a company's employees.Equity compensation allows the employees of the firm to share in the profita via appreciation and can encourage retention ,particularly if there are vesting requirements .At times ,equity compensation may accompany a below market salary.

TYPES OF EQUITY COMPENSATION

1)STOCK OPTION:Company's  that offer equity compensation can give employees stock option that offer the right to purchase shares of the company stock at a predetermined price ,also refered to as exercise price .

2)NON QUALIFIED STOCK OPTION AND INCENTIVE STOCK OPTION

These options include special tax advantages .IOS are only available to employees.

3)RESTRICTED STOCK

Restricted stock requires the completion of a vesting period .Vesting may be done all at once or over a set period of years.

4)Performance shares

Performance shares are awarded only if certain measures are met.These could include metrices,such as an earnings per share target, return on equity,or the total return of the company's stock in relation to an index.

THE FIN-46R​​​​​​​

The intent of teh FASB in FIN 46R was to scope out ESOP in general because of their unique structures and not only in relationship to their employer entities.The ESOP is not a variable interest equity subject to cosolidation by business enterprice under FIN 46 5.We beleive in determining the equity at risk ,it would be necessary to consider the transactions that give rise to this equity, despite the fact that such transaction transpired prior to the adoption of FIN 46R.

DIFFERENCE BETWEEN ESOP AND ESPP

ESOP:Employee stock option is a plan under which yhe company grants option to employees .

ESPP:Employee stock purchase plan under which a company offers share to employees as a part of a public issue or otherwise .

1)Tax implications :THe mony in an ESOP account is not taxed untill the employee retires .On the other hand ,in an ESPP ,employees puchase the stock with their own after tax dollars and have to pay capital gains taxes when they sell their shares .

2)Access to stock balances :ESPP participents can excecise their options when their company vesting schedule permit them to do so,which is normally after one or two years of service .The participents of an ESOP do not have access to their balances untill they retire or leave the company just like 401(k) plans.

3)Employer costs:ESOPs cost a lot more to start and administer as compared to ESPPs .It is required by law for private companies to purchase RSOP shares from departing employees,which can be a huge expence for the company.

In short ,ESOP vs ESPP is very different from each other.