FASB Issues Exposure Draft on ESOP Disclosures; Comment Period Open

FASB Accounting Standard Update (ASU) 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs , requires transparency about how value is determined for investments that are not traded in an active public market. For 2012 Form 5500 filings, this disclosure must include a description of the valuation process for the fair value of the sponsor company stock held by the employee stock option plan (ESOP) and a table that discloses the valuation methodology, the critical assumptions in that methodology and a quantification of each unobservable input. 

Because the financial statement of an employee benefit plan that covers 100 or more participants is subject to audit under the Employee Retirement Income Security Act, and those audited financial statements are uploaded to the Department of Labor’s (DoL) EFAST2database, this disclosure requirement has caused some consternation. It means that competitors of a private company, potential acquirers for a company, attorneys looking for potential litigation on the share price, or other potentially adverse parties have unrestricted access to this potentially confidential information. 

This confidentiality issue has prompted FASB to propose an indefinite deferral of the effective date of the quantitative disclosure described above for employer securities. The indefinite deferral recognizes that FASB is able to move on this quickly and is intended to allow time for discussions between the employee benefit plan community and DOL to resolve this issue. Those parties charged with preparing the financial statements and footnotes for the ESOP must still consider the required elements of the disclosures – valuation methodologies, unobservable inputs and the description of the process used by the ESOP fiduciary in arriving at fair value. The only required item that is proposed to be omitted is the quantification of the unobservable inputs.

The proposed deferral would be effective upon issuance of the final ASU, which is expected in June. This means that companies that are concerned with this disclosure should not file their Form 5500 until after the ASU is finalized.

The FASB’s proposed ASU, Fair Value Measurement (Topic 820): Deferral of the Effective Date of Certain Disclosures for Nonpublic Employee Benefit Plans in Update No. 2011-04,  is available for comment until May 31. To review comment letters filed to date, see: Private Company Securities Comment Letters. To facilitate the comment process, FASB has created an Electronic Feedback Form that includes specific questions regarding the proposed changes. If you wish to submit individually crafted comments, such comments may be emailed to: director@fasb.org. The subject line on the email should include “File Reference No. 2013-260.” Alternatively, written comments may be delivered to:

Technical Director, File Reference No. 2013-260
401 Merritt 7
PO Box 5116
Norwalk, CT 06856-5116