ESOP issues and sale-leaseback accounting.

ESOP ISSUES AND SALE-LEASEBACK ACCOUNTING

This month's column discusses an ESOP-related consensus reached at a recent meeting of the Financial Accounting Standards Board Emerging Issues Task Force (EITF or task force). FASB staff responses to some sale-leaseback questions also are discussed.

EITF Abstracts, copyrighted by the FASB, is available in softcover and loose-leaf versions and may be obtained by contacting the FASB order department at 401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut 06856-5116. Phone: [phone].

ISSUE NO. 90-4

This EITF issue, Earnings-per-Share Treatment of Tax Benefits for Dividends on Stock Held by an Employee Stock Ownership Plan, deals with this problem: A sponsor establishes an employee stock ownership plan (ESOP). The cash dividends on the stock held by the ESOP are tax deductible by the sponsor because they are either used by the ESOP to service its debt or paid to participants. The sponsor credits retained earnings for the tax benefit from dividends paid to the ESOP in accordance with Accounting Principles Board Opinion no. 11, Accounting for Income Taxes.

Accounting issues. The two issues considered by the task force were:

1. When primary earnings per share (EPS) are being computed, should the dividends on preferred stock held by an ESOP be deducted from net income (net of any applicable income tax benefit)?

2. When computing EPS, should tax benefits related to common dividends paid to the ESOP be considered in net income?

Consensus. On the first issue the task force decided dividends on preferred stock held by an ESOP should be deducted from net income (net any applicable income tax benefit) if that stock is not a common stock equivalent.

The task force couldn't reach a consensus on the second issue. It did, however, note the same issue applies to sponsors with preferred stock ESOPs when computing earnings per share under the if-converted method.

The task force also reached a consensus on a disclosure matter. It decided the amount and treatment in the earnings-per-share computation of the tax benefit related to dividends paid to any ESOP should be disclosed, if material.

SALE-LEASEBACK

ACCOUNTING

Briefly, under sale-leaseback accounting, a sale is recorded, the property and related liabilities are removed from the balance sheet, gain or loss is recorded and the lease-back is classified according to the FASB lease accounting rules (FASB Statement no. 13, Accounting for Leases, as amended). FASB Statement no. 98, Accounting for Leases, et al., precludes using sale-leaseback accounting if the transaction includes any form of continuing involvement other than a normal leaseback.

PARTIAL SALE-LEASEBACK

A utility owns a 30% undivided interest in an electric generating facility. It is considering the sale-leaseback of a 7% undivided interest. That would leave the utility a 23% ownership interest and a 7% leasehold interest in the facility.

Would the retention of a partial interest of a property in that sale-leaseback transaction violate the conditions of FASB Statement no. 98 that are concerned with continuing involvement?

FASB staff reply. Yes. The FASB staff believes partial sale transactions preclude use of sale-leaseback accounting because of the continuing involvement of the seller-lessee. The FASB staff thinks the board intended the continuing involvement conditions of Statement no. 98 to be interpreted restrictively, as indicated by the broad prohibitions of paragraphs 11 to 13 of that Statement.

LESSEE PARTICIPATION

IN LESSOR'S INTEREST

SAVINGS

Would sale-leaseback accounting be precluded if the agreement allowed the seller-lessee to require the buyer-lessor to refinance debt related to the property and pass through the interest savings to the seller-lessor?

FASB staff reply. Yes. Such a provision would preclude sale-leaseback accounting. The FASB staff acknowledges, however, changes in leaseback payments indexed to an interest rate are contingent rental payments and won't preclude sale-leaseback accounting, although the economic effect of the two provisions might be very similar.

By JOHN GRAVES, CPA, director - technical services, and MOSHE S. LEVITIN, CPA, senior technical manager, of the American Institute of CPAs technical information division.