FASB News

Use of Employee Stock Ownership Plans Growing but Disclosures Inadequate

An increasing number of private companies are using employee stock ownership plans (ESOP), but risk managers are not getting enough information to do proper financial statement analyses, according to recent discussions at FASB. Information is not being fully disclosed about the loans plan sponsors offer to ESOPs, members of the Private Company Council (PCC) recently told FASB. Items like the terms, conditions, and interest rates on the loans being made, for example, are not clearly documented, and monetary shortages are coming to light too late. “I did have that thought as I was auditing a plan this year ‘where are they going to get this money to pay these people that have left already?’” Candace Wright, partner, EisnerAmper’s Audit & Assurance Services Group, said. “And they owe it,” she said. “The fair value is set at that point and so it’s a real actual liability.” The discussions come as the use of ESOPs are projected to increase in the next 10 years. There are about 6,500 ESOPs in the United States as of 2022, according to the National Center for Employee Ownership. Of that number, 5,887 are related to privately held companies, and 580 are related to public companies. For privately held companies, ESOPs are popular because they can be used as a business strategy to provide the company with liquidity as well as pass a portion of ownership to employees, the PCC said at a December 14, 2023, meeting. “But I think when you have that it really creates risk to the capital and cash part of the balance sheet because in essence it’s a ‘put’ from the employee back to the company and you really need to be monitoring that and be aware of that,” Robert Messer, chief financial officer-chief risk officer at American National Bank of Texas, said. “So I think it’s something that does merit more attention.”

Decision Not to Consider Eliminating Held-to-Maturity for Debt Securities Disappoints Investor Advocates

Some investor protection advocates expressed disappointment following FASB’s decision not to add a standards-setting project to its technical agenda to consider eliminating held-to-maturity (HTM) classification for debt securities. This accounting approach was highlighted by high-profile bank failures earlier in the year, including Silicon Valley Bank (SVB) in March. While respecting the board’s decision, Council of Institutional Investors (CII) General Counsel Jeffrey Mahoney said he is “disappointed that the board failed to have any public discussion about the recent empirical evidence by Professor Stephen G. Ryan supporting our proposal to consider eliminating the held-to maturity classification.” This research showed that banks classify fixed-rate debt investment securities as HTM rather than available for sale (AFS) when HTM classification provides “preferred financial accounting and regulatory capital treatments, not because they have a distinct economically motivated intent and ability to hold the securities to maturity.” FASB’s decision comes as investor groups, such as the CII and the CFA Institute, urged the accounting board to require companies to account debt securities at fair value on the balance sheet because it provides more useful information to analysts than other accounting methods, including amortized accounting that accompanies HTM classification for debt securities.

PCAOB News

New Chief Information Officer Named

The PCAOB announced that Pamela Dyson, who has more than 30 years of IT experience, was named as the boards’ chief information officer (CIO), effective immediately. Previously, Dyson was executive vice president and CIO at the Federal Reserve Bank of New York. The appointment comes after then-CIO and Data Officer Eric Hagopian left the PCAOB in July. Evan Lee, who was named acting CIO in July, resumed his role as deputy director for architecture and engineering. As CIO, Dyson serves as the director of the PCAOB’s Office of Data, Security, and Technology (ODST) and reports to the PCAOB’s chief operating officer—currently James McNamara. “The deployment of secure, best-in-class information technology is critical to the PCAOB’s work to protect investors and drive improvements in audit quality. Pamela joins the PCAOB with outstanding experience as a technology leader and will be a tremendous asset to our team,” said PCAOB Chair Erica Williams in a statement. “Before her tenure at the Federal Reserve, Dyson was CIO and director of the Office of Information Technology at the SEC.