In a leveraged employee stock ownership plan (ESOP), an ESOP borrows funds from a bank or other lender. The company (sponsor) may guarantee the loan or otherwise commit, directly or indirectly, to make contributions, pay dividends, or both to the ESOP. Alternatively, the sponsor may borrow funds and then make a loan to the ESOP. Sponsor contributions and dividends are used by the ESOP to service the debt. Some leveraged ESOP borrowings require level repayment of the debt over a period of years. Alternatively, the repayment schedule for the ESOP loan may be nonlevel and may depend on the sponsor's expected cash flow or expected compensation costs. Loans may be structured to require only interest payments for a number of years or may permit negative amortization. Debt agreements also may require prepayments of debt if the sponsor's cash flow exceeds certain thresholds or may permit voluntary prepayments by the sponsor. Shares acquired by the ESOP are allocated to participants based on principal payments or principal and interest payments. SOP 76-3 states that the amount contributed or committed to be contributed by the sponsor to the ESOP with respect to a given year should be the measure of the amount to be charged to expense by the Copyright © 1990, Financial Accounting Standards Boar
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