The Accounting treatment of Employee Ownership Trusts

Before undertaking an EOT it’s important to be aware of the impact the transaction will have on the company’s statutory accounts.

This can be split into two time periods:

• What is the impact at completion.
• What is the future impact.

Impact at Completion

The company or group will normally make a significant cash contribution to the EOT at completion to allow the trust to pay part of the purchase price to the selling shareholders. From an accounts perspective this is treated as a profit distribution in a similar way in which dividends are accounted. The impact is therefore to reduce the net assets of the company by the amount of the contribution.

Depending on the timing of completion in relation to the company’s financial year end there will be a time lag before the first set of accounts showing the net asset reduction will need to be filed at Companies House and therefore this information becoming publicly available. It is possible that the company will have retained profits in the period from completion to the date of the accounts which will already mitigate some of the reduction in net assets.

From a commercial perspective it is good practice to consider the impact that these accounts will have on customers and suppliers and what steps can be undertaken to reassure them of the financial strength of the business to avoid any undesirable consequences. However, in our experience as long as owners are proactive in communicating the change with their key stakeholders, there is very rarely any negative response and in fact the strengthened employee focus by the Company is often seen as a positive.

It is also likely that a significant part of the purchase price will be owed to the shareholders, and this will be paid in future on deferred terms. It is important to note that this is a creditor of the EOT rather than the company. The good news is that from a company accounts perspective this creditor will therefore not need to be included in it’s accounts and does not impact net assets.

Future Impact

As noted above, it is likely that the company will be make further cash contributions to the EOT to enable it to pay the selling shareholders the sums due on deferred terms. From an accounts perspective any future cash contributions will also be treated as profit distribution and reduce the net assets of the company.

It is important to note that in all cases the company will only be able to make contributions to the EOT up to the level of its distributable reserves. This is similar to the payment of dividends.