When a company decides to establish an ESOP, the company and its stakeholders should consider and understand the significant financial statement implications. A company may form two different types of ESOPs: a leveraged ESOP and a nonleveraged ESOP. Leveraged ESOP transactions are the most common transaction type in the formation of an employee-owned structure. After a 100% leveraged ESOP transaction, the formation greatly affects the company's equity and debt, often decreasing the equity. All current and future financial statement users should understand the impact of these transactions to the financial statements, which allows the company to continue its operations successfully. During ESOP formation and afterward, the board of directors, management, lenders, bonding agencies, and customers all use the financial statements and often need to understand and assess the impact. The purpose of this publication is to describe the basics of accounting for leveraged ESOP transactions so that all potential financial statement users can anticipate the accounting presentation and structure the transaction where possible to minimize any complications created by the accounting.
