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Accounting for ESOPs

ESOP accounting is the application of accounting principles generally accepted in the United States of America (U.S. GAAP) to employee stock ownership plans (ESOPs), which are a type of qualified retirement plan that invests in the employer's stock. ESOP accounting differs depending on whether the ESOP is leveraged or while a non-leveraged. A leveraged ESOP is one that borrows money to buy the employer's stock, while a non-leveraged ESOP is one that receives cash or stock contributions from the employer. In ESOP accounting, transactions between the employer and the ESOP are usually eliminated, and only external transactions are accounted for. The employer records a liability for the ESOP debt only if it guarantees or commits to make contributions to the ESOP to repay the debt. The employer also records compensation expense for the cash or stock contributions to the ESOP, based on the fair market value of the shares or the amount of cash contributed to the ESOP, and increased only as the debt is reduced.

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