Understandings are guidance notes issued by the Employee Share Ownership Centre following discussions with governmental and regulatory bodies.
Share Valuations Worked Examples Group
The Centre is the secretary to the Share Valuations Worked Examples Group (WEG). Worked examples agreed with HMRC appear here as Understandings, may be disseminated by WEG members and will be published by HMRC in due course.
Share Valuation Worked Example 1
Public Service Mutual Healthcare CIC (“Healthcare CIC”)
Healthcare CIC is an employee-owned community interest company.
Healthcare CIC’s share capital comprises redeemable ordinary shares of £1 each (each a Partnership Share) and one ordinary (non-redeemable) share of £1.
Shares may only be held by employees. Each permanent employee may subscribe for one Partnership Share for £1.
Each share carries one vote. In practice no dividends are paid and if they were they would be subject to the dividend restrictions in the Community Interest Company Regulations 2005.
If a holder of a Partnership Share ceases to be an employee of Healthcare CIC then their share is redeemed for £1.
The ordinary (non-redeemable) share is the same as a Partnership Share except that it is non-redeemable and must be held only by an executive director.
There are numerous issued shares and each shareholder has a very small insignificant minority shareholding.
The Actual Market Value of each share in Healthcare CIC is £1.
It is unusual in private company share valuations for the Actual Market Value and the Unrestricted Market Value to be the same but, in the particular circumstances of this example, the Unrestricted Market Value may also be taken as £1.
Example submitted by Graeme Nuttall OBE of Fieldfisher.
Experts may submit worked examples to email@example.com.
Issued by the Esop Centre on January 12 2017
There has been increasing interest in the employee ownership business model in recent years, in particular since 2014 when the government introduced significant new tax reliefs to encourage companies to become majority or wholly owned by Employee Ownership Trusts (EOTs).
However, leading members of the Esop Centre have been concerned that accountants might not immediately appreciate the fundamental difference between an EOT and the type of Employee Share Ownership Plan trust (ESOP trust) which has been traditionally used to warehouse shares for direct employee equity participation.
Under UITF38, ESOP trusts were treated in the accounts as an extension of the company, in what was sometimes called the “extended equity” method of accounting. UITF38 has now been replaced by new rules for intermediate payment arrangements in FRS102; this contains a rebuttal presumption that the extended equity method applies to ESOPs (and other similar intermediary payment arrangements).
In conjunction with William Franklin of Pett, Franklin & Co. LLP and Graeme Nuttall OBE of Fieldfisher LLP, the Esop Centre discussed the issue with staff at the Financial Reporting Council (FRC). Following those discussions, it is our understanding that, when an EOT owns shares in a company, the presumption that extended equity accounting applies can be rebutted because, unlike an ESOP trust, an EOT is part of the company’s ownership and governance structure and is designed to operate alongside or independently of the board of the sponsoring company.
New section 9.33A in FRS 102:
It is possible for an entity to be owned by a trust established for the beneﬁt of employees without the entity controlling the trust. An example is when the entity is a co-operative, owned by its employees, and all of the shares are held in a trust for the beneﬁt of the employees but the shares never vest in individual employees, with dividends from the company being distributed to employees solely in accordance with the provisions of the trust deed
Revision not mandatory till 2019 but can be referred to – FRC.