"ESPPs", or Discounted Stock Purchase Plans ("DSPPs")

• Enable employees to purchase company stock at a discount
• Can be qualified per IRC § 423 ("423 plans")

Typical terms

• Up to 15% discount from fair market value
• "Look-back" feature:
  Apply the discount to the price of the stock at either the beginning or end of an investment period, whichever is lower
• Avoids most of the downside risk of stock options

Widely used

• Cover over 15 million employees
• At some 4,000 public companies
• 183 of Fortune 500
• According to news accounts

FAQS on Qualified Plans (Fairmark.com)

National Center for Employee Ownership (NCEO)

FASB 123(R)  Dec 2004

• For GAAP purposes, ESPPs are now deemed to be "compensatory"
• Gives rise to compensation expense, unless ESPP features are limited
• Reverses APB 25 treatment, which didn't require imbedded discounts and options to be expensed
• Doesn't apply if discount is no more than 5%
• See Equity Compensation Accounting

Rule 15d-21

• Rule text
• Reports for employee stock purchase, savings and similar plans

Internal Revenue Code §423

• Government website (GPO)
• Cornell Law website

IRS FAQs

IRS Notice 2004-55

SEC filings

Fisher Scientific 2006

Symantec 2005

Schlumberger 2005

Sample Plans

• Dow Chemical

Company Informational Websites

• Alaska Air Group
• Allianz AG
• Home Depot

Support Services

• Deutsche Bank
• Mellon Investor Services

Equity Compensation Accounting