Nearly two years ago, the Financial Accounting Standards Board issued Accounting Standards Update Fair Value Measurement (Topic 820, formerly FAS 157), requiring new disclosures with respect to the fair value determination for nontraded securities. The ASU became effective for nonpublic entities beginning in December 2011 and thus will impact ESOPs (those with December 2012 year-end plans) in the coming year.

As its ramifications became more widely understood, the ASU “has caused an uproar in the ESOP community,” according to the ASA’s weekly E-Letter to members. As editor Arlene Ashcraft explains, the new ASU requires companies to disclose any “significant” assumptions and methodologies used in the valuation of non-publicly traded company securities. The disclosure would appear in a footnote to the ESOP audit report, filed with Form 5500 at the DOL website (and many others) and would enable readers to assess the valuation techniques and inputs. “What level of detail this would require is still unclear,” Ashcraft says, “but may include what types of approaches were used (income, market, asset),” as well as other details that could potentially disclose “a large amount of information” on how the fair market value of the ESOP’s stock was determined as well as the fair market value of the sponsoring company. 

“This is not welcome news to private ESOP companies,” Ashcraft says. Last month, several stakeholders in the ESOP community—including the National Center for Employee Ownership (NCEO), the ESOP Association, and the Employee-Owned S Corporations of America (ESCA)—submitted a letter to the FASB’s technical director voicing concern over the ASU requirements and their consequences on employee-owned companies:

These disclosures would provide the public with information regarding private ESOP companies that otherwise would not be available. Collectively, these disclosures could allow readers to recreate a financial picture of the company. As you can imagine, in the hands of competitors, customers, and suppliers, this information could be damaging to the company and ultimately its employee-owners. Even more threatening may be the ability of corporate raiders to precisely ascertain the financial condition of otherwise private companies, enabling them to launch takeovers which ultimately work to the detriment of employee-owners who could lose the opportunity to own their companies. We are also concerned about other unforeseen negative consequences as a result of making such information publicly available. Ultimately, we believe it is important to keep this type of information as it relates to private ESOP companies just that—private.

“FASB has yet to respond,” Ashcraft says. “In the meantime, get ready for questions from your ESOP clients about this disclosure requirement.”