A phantom stock program must meet the requirements set forth by the Internal Revenue Service (IRS) code 409(a). In the case of a partnership, however, the value of a phantom stock unit is tied to partnership equity value rather than common stock value. A phantom stock plan constitutes a deferred compensation plan. For example, assume the issuing price of the phantom stock is $10. In addition, report your participation in a phantom stock plan in Part 3 (see Part 3 of this guide for details). By continuing to browse this site, you consent to the use of cookies. Typically, the valuation will follow an event that triggers phantom stock unit payouts so that the amount of such payouts can be determined. The limit does not apply, however, to performance-based compensation. Does the phantom stock plan comply with section 409A? This guide does not address the income tax, earnings per share, or cash flow implications of stock-based compensation awards nor other presentation and disclosure matters. With that said, the value of the phantom stock at redemption is tied to the companys stock price. Instead, the employee is granted a number of phantom stock units, and the plan provides that each phantom stock unit is equal in value to one share of common stock. stream 92-64 includes model provisions for a rabbi trust, including a statement that any . During the installment payout period, should earnings be credited on the balance at a specified interest rate? Other adjustments that might be considered include subtractions for capital investments made by the shareholders during the course of the plan, additions for any dividends paid to shareholders during this period, and the amount of accrued deferred compensation attributable to the phantom stock units themselves. A phantom stock plan, also called a shadow stock plan, is a type of deferred employee compensation plan where the type of shares issued to plan participants are phantom shares instead of company shares. Unusual or innovative applications of GAAP. For example, vesting may be cliff or graded, time-based, or based on the achievement of specified financial performance goals. . The companys stock option and stock appreciation right (SAR) plans will need to carefully define performance based pay in order to qualify phantom stock payments for the full tax deduction. Stock option plans produce a more favorable fixed accounting result. A phantom stock plan could be a potential, uncapped liability for the issuing company due to the fact that the payment is tied to the share price at redemption. The plan must be designed and documented to conform to section 409A. Write cash payment for cash income over $200. Second, the equity of the company must be valued in a defensible, careful way. "Full value" plans pay both the value of the underlying stock as well as any appreciation. However, it has stated that data presented in tabular form should read consistently from left to right in the same chronological order throughout the filing. If phantom stock units are awarded annually, will each new grant be subject to a fresh vesting schedule? In this case, the company must estimate the expected amount earned based on progress towards the target. Phantom stock may behypothetical, however, it stillcan pay out dividends and it experiences price changes just like its real counterpart. If they do, they could be subject to ERISA rules (see below). Additional legal documents and agreements, such as a shareholders agreement, may have to be amended or drafted, increasing complexity and legal fees. The member firms of RSM International collaborate to provide services to global clients, but are separate and distinct legal entities that cannot obligate each other. The concept is better understood below, where we contrast phantom shares (from a phantom stock plan) with stock options (from a stock option plan). The vesting and forfeiture provisions contained in the phantom stock plan or individual grant agreement determine whether and when the executives rights are vested. This content is copyright protected. In most cases, a valuation is required upon the employees termination, death, or disability. A phantom stock plan is an employee benefit plan that gives selected employees (senior management) many of the benefits of stock ownership without actually giving them any company stock. All other aspects of the plan would be the same. A phantom stock plan, or 'shadow stock' is a form of compensation offered to upper management that confers the benefits of owning company stock without the actual ownership or transfer of any shares. This type of plan is sometimes referred to as shadow stock. The company cannot offer conventional kinds of ownership plans because of corporate restrictions, as would be the case, for instance, with a Limited Liability Corporation, partnership, a sole proprietorship, or an S corporation concerned about the 100-owner rule. Phantom equity shares do not carry voting rights or similar rights associated with stock ownership. For example, a company can set the issuing price of their phantom shares at $10, $20, or $30 without regard to its share price at the time. To receive more complimentary information about Phantom Stock from our expert advisors, please provide us with your contact information below. Provide the exact amount of cash income over $200 during the reporting period. To the extent possible, any date specified for measuring the value at a triggering event should be based on practicalities consistent with the companys business practices. - Financial statements dated within 180 days Must be prepared in accordance with GAAP - Foreign private issuers must provide reconciliation to GAAP Provide audited financial statements (including footnotes) if available If disclosure is not provided to all investors in the offering prior to sale - the exemption is lost for the entire . If the award is settled in shares (as might occur with an SAR), the amount of the gain is taxable at exercise, even if the shares are not sold. The two types of phantom stock plans are "appreciation only," which doesn't include the value of the underlying shares, just the increase in stock over the amount of time the shares are held; and "full value," which pays the underlying value and the amount the stock increased while it was held. endobj Accounting As described in the Accounting section, phantom stock plans require variable accounting. In-depth guide on presentation and disclosure requirements under US GAAP, plus considerations under SEC regulations. A stock appreciation right (SAR) is much like phantom stock, except it provides the right to the monetary equivalent of the increase in the value of a specified number of shares over a specified period of time. Other equity or allocation formulas could be used as well. Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 718, Stock Compensation (formerly, FASB Statement 123R), requires generally that all equity awards granted to employees be accounted for at "fair value." This fair value is measured at grant for stock-settled awards, and at subsequent financial benefit or property as compensation for services, the value of the benefit or . It does not allow non-qualified plans to operate like qualified plans, so the plan could be ruled illegal. Should forfeiture provisions apply if the employee enters into competition with the company or is terminated for cause? 1.1.3 Basis of presentation. Varying accrual schedules can be found in the market. Both types of plans resemble traditional nonqualified plans in many respects, as they can be discriminatory in nature and are also typically subject to a substantial risk offorfeiturethat ends when the benefit is actually paid to the employee, at which time the employee recognizes income for the amount paid and the employer can take adeduction. Click here to extend your session to continue reading our licensed content, if not, you will be automatically logged off. 2019 - 2023 PwC. Financial statement presentation. You can learn more about the standards we follow in producing accurate, unbiased content in our. 2 0 obj when the vesting is triggered by a performance event, such as a profit target. <> Similarly, a major event like thecoronavirus pandemic affects market valuesfor many companies. Phantom stock plans designed just for a limited number of employees, or as a bonus for a broader group of employees that pays out annually based on a measure of equity, would most likely avoid these problems. It provides increased incentives as the value of the company increases. Any subsequent gain on the shares is taxable as capital gain. The guidance in ASC 718, CompensationStock Compensation, applies to various types of equity-based awards that companies use to compensate their employees (see SC 1.5 regarding terminology used in this guide). If the employees base pay (before adding in the phantom stock unit payment) exceeds the Social Security wage base, no additional Social Security tax would be assessed on the phantom stock payments. The value of a phantom stock unit may be measured by the value of a full share of company stock, or it may be based just on the appreciation in value during a specified time frame. Ready to Speak with a Phantom Stock Expert Now?Call (888) 703-0080 or complete our contact form. It represents a bonus payable at a future date if certain objectives are met or if a specific event occurs, like the sale of the company. A phantom stock plan refers to a type of deferred employee compensation plan where plan participants benefit from the upside of a company's share price without actually receiving company shares. Each plan sponsor should make a determination after consulting with its accounting advisors. Pros and Cons of Phantom Stock Plans. It should be noted that the value of the phantom stock units fluctuates from year to year as the value of the company changes. stock, (2) a 20% tax on the phantom stock (which is in addition to ordinary income tax), and (3) interests on deferred amounts that vested in a prior taxable year. Please seewww.pwc.com/structurefor further details. "Appreciation only" plans do not include the value of the actual underlying shares themselves, and may only pay out the value of any increase in the company stock price over a certain period of time that begins on the date the plan is granted. Cash accumulated to pay for the benefit may be subject to an excess accumulated earnings tax (a tax on putting too much money in reserve and not using it for business). Similar toemployee stock options(ESO), SARs are beneficial to the employee when company stock prices rise; the difference with SARs is that employees do not have to pay theexercise price, but receive the sum of the increase in stock or cash. The plan must be properly vetted by an attorney, with all of the pertinent details specified in writing. For more information, see Section 409A Fundamentals. Are you still working? Depending on the terms and conditions, restricted stock units may . Phantom shares provide benefits similar to stock ownership but without actually issuing company shares. <>/ExtGState<>/XObject<>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/MediaBox[ 0 0 612 792] /Contents 4 0 R/Group<>/Tabs/S/StructParents 0>> In a full value phantom stock plan, the plan participant receives a cash payment equal to the value of the underlying asset (common stock) of the phantom stock at redemption. In a phantom stock plan, upon redemption of phantom stock, the plan participant receives cash compensation. Despite their name, phantom stock plans are NQDC arrangements, not stock arrangements. It provides a level of reassurance to employees since phantom stock programs are generally backed in cash. 594 0 obj <> endobj Is the potential payment opportunity under the phantom stock plan in line with the companys compensation and business objectives in three, five, 10, or 15 years given certain performance assumptions? The specifics regarding vesting and payment are covered in Section 5. of this phantom plan and Section 1 of the form Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. If the issuing phantom stock price is $30, and the companys share price at redemption is $100, the cash payment per phantom stock would be capped at $50 $30 = $20. (Consider current and future positions). Reporting entities are required to describe all significant accounting policies in the financial statements. In general, the disclosure shall encompass important judgments as to appropriateness of principles relating to recognition of revenue and allocation of asset costs to current and future periods; in particular, it shall encompass those accounting principles and methods that involve any of the following: Financial statements shall include an explanation that the preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires the use of management's estimates. In addition, although not required for private companies, The SEC staff has indicated no preference as to the order in which data is presented in the financial statements (e.g., whether the most current fiscal period should be displayed as the first or last column in the income statement). You can set the default content filter to expand search across territories. The method used for valuation should take into account adjustments that the parties agree are appropriate. A phantom stock plan and stock option plan both award employees from the share appreciation of the companys stock price. Because a phantom stock plan is a nonqualified deferred compensation plan, companies have a lot of flexibility in plan design as long as that flexibility is exercised before the plan becomes effective. Employee Stock Purchase Plan The Company's Employ Stock Purchase Plan (the " ESPP ") enables eligible employees to purchase the Company's common stock at a price per share equal to [ ]% of the lower of the fair market value of the common stock at the beginning or end of each offering period. This article was originally published on Oct. 12, 2020 and has been updated. Care must be taken to avoid giving out too much to early participants and not leaving enough for later employees. Consider removing one of your current favorites in order to to add a new one. If payments should be made in installments, over how many years? Statutory options include Incentive Stock Options (ISO's) and options granted under an Employee Stock Purchase Plan (ESPP). Figure FSP 1-1 depicts the reporting periods required by the SEC for financial statements of public companies. Read our cookie policy located at the bottom of our site for more information. Phantom stock payments are usually made at a fixed, predetermined date. Gordon Scott has been an active investor and technical analyst or 20+ years. Follow along as we demonstrate how to use the site. Understandably, a lower issue phantom share value provides greater upside for the plan participant upon redemption: *Assume that the common stock price at redemption is $35. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. We use cookies to personalize content and to provide you with an improved user experience. A stock option gives an investor the right, but not the obligation, to buy or sell a stock at an agreed-upon price and date. Contact Us Todaydocument.write(checkCookie()), 2019 - PhantomStockOnline.comPowered by VisionLinkAll Rights Reserved. Phantom stock plans are not tax-qualified, so they are not subject to the same rules as ESOPs and 401(k) plans, provided they do not cover a broad group of employees. These materials were downloaded from PwC's Viewpoint (viewpoint.pwc.com) under license. Companies can choose what the triggers areexamples include a separation from service, a change in control, or a specified future date or fixed payment schedule. 1.1 Financial statement presentation and disclosure requirements. In other cases, valuation may be required periodically, such as annually, or on a specific future date. To receive more complimentary information about Phantom Stock from our expert advisors, please provide us with your contact information below. How should a change in control be defined? In addition, special forfeiture provisions can be included in the phantom stock plan to eliminate the companys obligation to make payments to an executive upon specified events (e.g., if the employee breaches non-compete restrictions in the plan or the employees employment is terminated for cause). Unlike SARs, phantom stock may reflect dividends and stock splits. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. About the Financial statement presentation guide& Full guide PDF. Choose from timely legislation and compliance alerts to monthly perspectives on the tax topics important to you. Management might consider materiality of the related account, as well as the requirements of users, such as investors, analysts, financial institutions, and other constituents. Phantom stock plans have financial implications for employees and companies that cut both ways: Pros. The cash payment per phantom stock would be $30. Unlike accounting for variable award stock options, where a charge is amortized only over a vesting period, with phantom stock and SARs, the charge builds up during the vesting period, then after vesting all additional stock price increases are taken as they occur. Report any stock that you acquired as a separate lineentry, using the standard instructions for, 3 - Your Employment Agreements & Arrangements. The cash payment per phantom stock would be $20. Structured Query Language (known as SQL) is a programming language used to interact with a database. Excel Fundamentals - Formulas for Finance, Certified Banking & Credit Analyst (CBCA), Business Intelligence & Data Analyst (BIDA), Financial Planning & Wealth Management Professional (FPWM), Commercial Real Estate Finance Specialization, Environmental, Social & Governance Specialization, Business Intelligence & Data Analyst (BIDA), Financial Planning & Wealth Management Professional (FPWM), A cash payment from Company A as the difference between the current common share price and phantom stock issue price: ($70 $50) x 500 = $10,000; or. She has worked in multiple cities covering breaking news, politics, education, and more. Your go-to resource for timely and relevant accounting, auditing, reporting and business insights. Or it could promise to pay her an amount equal to the value of a fixed number of shares set at the time the promise is made. Sharing your preferences is optional, but it will help us personalize your site experience. How frequently will phantom stock units be granted (e.g., a single upfront grant or annual grants)? ERISA (the Employee Retirement Income and Security Act of 1974) is the federal law that governs retirement plans. T8g_vwZ4Yj},_A?+:8eg^I_nLzJ.?!(siS&M=pd3+GsQWr3We+$j?8[H+&aF,MhW{N?SJ\[5UQ6#l0E2CpaF}L58\;.F^T cS^yU_JL\FlO9'2H S+?g&Rg(dD I?0xNi-quw4jIq,(h%+JfR=XX82Gc3dv}H-t?+Rz*_o}56*{p4Cj/(%e(ZT^RCdOE >>Lx8tfjRAX&jPu[HlC}.^U0JJ@Ec'Ku& "cXZ RH 4S+TeC= X5Ehnp+j' C,-Jy}htnO%-rcwpb~4wX=4/wp{>B>n;5Z Z?=#-o` ;5N_Lxy'XX9HR9$+ AV@KIDQ9"#a.60DF&? In March, the common share price of Company A is $70. For example, if the company has a bad year and the value of its stock decreases, the value of the phantom stock also decreases. Phantom stock plans can be a valuable method forcompanies that seek to tie incentive compensation to increases or decreases in company value without awarding actual shares of company stock. Equity Alternatives: Restricted Stock, Performance Awards, Phantom Stock, SARs, and More. However, the company and the employee would each be subject to Medicare payroll tax since the Medicare tax is imposed on total wages, without any wage cap. Statutory Stock Option Plans require shareholder approval within 12 months before or after adoption by the board of directors. Discover what makes RSM the first choice advisor to middle market leaders, globally. How It Works, Taxation, and Types of Plans, Stock Compensation: Definition, How It's Used, and Typical Vesting, Publication 5528 (6-2021): Nonqualified Deferred Compensation Audit Technique Guide. SARs often can be exercised any time after they vest. To learn why sharing value with those who drive growth is so critical to your pay strategy, download and read our report today! %%EOF Report phantom stock if the value of the phantom stock was more than $1,000 at the end of the reporting period or if you received more than $200 in income during the reporting period. ERISA (the Employee Retirement Income and Security Act of 1974) is the federal law that governs retirement plans. 4 0 obj If so, at what rate? Phantom stock also provides organizations with certain restrictions in place to provide incentives tied to stock value. As the phantom stock units become vested, the value of the phantom stock units is includible as wages subject to FICA taxes. Additionally. Unlike SARs, phantom stock may reflect dividends and stock splits. <> Are you still working? The value may be a specified value, determined by an express written formula or determined by a third-party appraisal. But for others, these plans, because of cost, regulatory requirements, corporate considerations, or other issues will not be the best fit. For instance, a company could promise Mary, its new employee, that it would pay her a bonus every five years equal to the increase in the equity value of the firm times some percentage of total payroll at that point. Employee Stock Ownership Plan (ESOP): What It Is, How It Works, Advantages, What Are Stock Options? Most commonly made available to upper management, SARs can function as part of a retirement plan. . S-X 4-01 (a) (1) requires financial statements filed with the SEC to be presented in accordance with US GAAP, unless the SEC has indicated otherwise (e.g., foreign private issuers are permitted to use IFRS as issued by the IASB). The company will customarily consider the phantom stock plan a benefit that requires disclosure in an S-8 filing with the SEC. Phantom Stock for Long-Term Incentive Awards. Chapter 1:Stock-based compensation overview and scope. Phantom stock is simply a promise to pay a bonus in the form of the equivalent of either the value of company shares or the increase in that value over a period of time. Should the payment be made in a lump sum or in installments over a period of years? This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. In addition, Comparative financial statements provide historical context for a reporting entity's financial performance and enable users to identify trends or other relationships. hbbd```b``v+A$X{lG#d_b+gHFV #CiDO ` The company must use a formula to estimate the present value of the award at grant, making adjustments for expectd forfeitures. than $200 in income during the reporting period. RSM US LLP is a limited liability partnership and the U.S. member firm of RSM International, a global network of independent audit, tax and consulting firms. Please see www.pwc.com/structure for further details. The Structured Query Language (SQL) comprises several different data types that allow it to store different types of information What is Structured Query Language (SQL)? For these companies, phantom stock and stock appreciation rights may be very attractive. However, unlike actual stock, the award does not confer equity ownership in the company. A pension plan is an employee benefit that commits the employer to make regular payments to the employee in retirement. Phantom stock plans are deferred compensation plans and, as such, must be designed and documented to conform to the requirements of section 409A. % x\oGn?s4"{}C(jli#\>xqWUP AGuu=]l}v;7N\}Y'?>-fzMig7ttb$DQE#MQvyU9^ivn].6OU#%F6E-FM!h~-hEC.auw8P5mM*DK_mo_^%FK^pv7D6Om]D4_^n7V,"vUsBc&S=.|n[1hzRb@QWBY"kFs4Efzr9BaV+ 3PU%i%l |Q{$kdx`Q=Tim?#ecbz)tQNO}lQw+KTgrA:tH{Q+U++; RVv6oP!NS^|O5!=J#($m#k?ppF.=r Each member firm is a separate legal entity. Handbook: Financial statement presentation September 30, 2022. Companies should consider the possibility of such unexpected fluctuations in value, regardless of whether it relies on a third-party valuation. In each year, the value is adjusted to reflect the additional pro-rata share of the award the employee has earned, plus or minus any adjustments to value arising from the rise of fall in share price. It can also be used selectively as a reward or a bonus to employees who meet certain criteria. This may restrict some of the flexibility of the plan design. The value of the Phantom Units will be based on the Fair Market Value ("FMV") of Chaparral, L.L.C. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Stock compensation refers to the practice of rewarding employees with stock options that will vest, or become available for purchase, at a later date. Your go-to resource for timely and relevant accounting, auditing, reporting and business insights. Most companies follow the guidance offered under ASC 718-10-35-8 which reads as follows: The tables below illustrate these two approaches, referred to here as Separate Method and Entire Method. Each assumes a PSO plan with a 5-year vesting schedule equal of 20% per year. Ready to Speak with a Phantom Stock Expert Now?Call (888) 703-0080 or complete our contact form. We also reference original research from other reputable publishers where appropriate. The issuing company generally remedies the matter through: For example, an issuing phantom stock price of $50 when the companys current share price is $40. Do Not Sell or Share My Personal Information (California). A cash payment from Company A equal to the current common share price: $50 x 500 = $25,000. Save time on drafting legal paperwork with US Legal Forms. hb```,, A+dTr]BBTse Stock appreciation rights (SARs) are a type of employee compensation linked to the company's stock price during a predetermined period. that do not have publicly traded shares. For example, once a triggering event has been identified, the company should consider whether the value should be determined on the exact date of the triggering event; or whether it makes more sense to look forward or back to the nearest quarter or year-end, depending on what financial information may be needed to calculate value.