FASB OKs partial relief from ESOP fair value disclosures

BVWireIssue #127-3
April 17, 2013

ESOP companies will get an indefinite deferral on the requirement to disclose quantitative information on how they value nontraded securities, including securities of the sponsoring company. However, the qualitative information—the valuation method and key inputs—will still have to be disclosed. This was decided at the April 10 Financial Accounting Standards Board meeting.

While the FASB recognized the importance of disclosing all information on the valuation of private company securities held by employee benefit plans, it understood that some of this information is proprietary. The disclosures are made public by the DOL on Form 5500, which posts the information online.

The disclosure requirement is contained in Accounting Standards Update Fair Value Measurement (Topic 820, formerly FAS 157), which became effective for nonpublic entities beginning in December 2011 and thus will impact those ESOPs with December 2012 year-end plans this year. The DOL reporting deadline is July 31 (October 15 with an extension).

What to do: The key point now is to disclose the valuation method and main inputs in such a way as to prevent “reverse engineering,” that is, to prevent competitors from taking the disclosure and backing into a valuation figure. But what has to be disclosed does not have to be the valuation formula—just the generic method and a basic description of the inputs. The FASB believes that the required qualitative disclosure can be generic enough to quell the fears of ESOP companies and still comply with the rules.

FASB will issue a limited exposure draft by May 1 with a 30-day comment period. It expects to have a final version out before the July 31 reporting deadline for ESOPs.

Please let us know if you have any comments about this article or enhancements you would like to see.