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. Phantom stock plans that require the attainment of predetermined metrics (i.e., performance vesting) are expensed as the performance conditions become ascertainable, instead of over the requisite service period. Are you still working? Phantom Stock Plans Variation: Elective Phantom Stock Plan Executives can defer salary and/or bonuses Deferrals used to purchase phantom stock - Either fullvalue or appreciation only Earnings on deferrals based on growth in the phantom stock vs a credited interest rate or other notional investment Provide the exact amount of cash income over $200 during the reporting period. This compensation may impact how and where listings appear. A phantom stock program must meet the requirements set forth by the Internal Revenue Service (IRS) code 409(a). A foreign parent may wish to award phantom stock units to executive employees of a U.S. subsidiary to avoid the complications of selling stock on a foreign exchange. This site uses cookies to enhance site navigation and personalize your experience. 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). In most cases, a valuation is required upon the employees termination, death, or disability. 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. financial benefit or property as compensation for services, the value of the benefit or . Does the phantom stock plan comply with section 409A? Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. 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. If phantom stock units are awarded annually, will each new grant be subject to a fresh vesting schedule? Gordon Scott has been an active investor and technical analyst or 20+ years. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. It is for your own use only - do not redistribute. Unusual or innovative applications of GAAP. Phantom shares are a contractual agreement between the phantom stock plan participant and the employer. 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. As such, the sponsoring company must recognize the plan expense ratably over the vesting period. 616 0 obj <>stream Once you have viewed this piece of content, to ensure you can access the content most relevant to you, please confirm your territory. On redemption, in a phantom stock plan, the plan participant receives a cash payment. Stock-based compensation. 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. Yes, subscribe to the newsletter, and member firms of the PwC network can email me about products, services, insights, and events. 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. ERISA (the Employee Retirement Income and Security Act of 1974) is the federal law that governs retirement plans. Publicly traded companies will want to be certain their phantom stock structure qualifies as performance-based compensation. 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. <> Even though it's not real, the phantom stock follows the price movement of the company's actual stock, paying out any resulting profits. The offers that appear in this table are from partnerships from which Investopedia receives compensation. 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. With that said, the company typically follows a valuation policy for the issuing price of phantom shares. Will any funding mechanism be used to help the company meet fund its future obligations to pay the amount owed to recipients? The number of phantom stock units, vesting schedule, form of payment (i.e., lump sum or installments over a period of years), and triggering payment events are typically set forth in individual grant agreements. Figure FSP 1-1 depicts the reporting periods required by the SEC for financial statements of public companies. Because they can be designed in so many ways, many decisions need to be made about such issues as who gets how much, vesting rules, liquidity concerns, restrictions on selling shares (when awards are settled in shares), eligibility, rights to interim distributions of earnings, and rights to participate in corporate governance (if any). However, there is one key difference between the two plans. 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. A phantom stock option is a bonus tax treatment plan where the amount of the bonus is determined by reference to the. Value: Report the value of the phantom stock by selecting the appropriate category. Her expertise is in personal finance and investing, and real estate. There are a number of situations that might call for one or more of these plans: This article provides a brief overview of the design, implementation, accounting, valuation, tax, and legal issues for the four kinds of plans it covers. These materials were downloaded from PwC's Viewpoint (viewpoint.pwc.com) under license. Each offering period of the ESPP lasts [ ]. 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. 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? Stock option plans produce a more favorable fixed accounting result. The company's leadership has considered other plans but found their rules too restrictive or implementation costs too high. Enter phantom stock and cash-settled stock appreciation rights (CSARs). He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. Typically, the valuation will follow an event that triggers phantom stock unit payouts so that the amount of such payouts can be determined. Do Not Sell or Share My Personal Information (California). The company already has a conventional ownership plan, such as an ESOP, but wants to provide additional equity incentives, perhaps without providing stock itself, to selected employees. Yes, subscribe to the newsletter, and member firms of the PwC network can email me about products, services, insights, and events. A company may wish that former employees do not own company stock after they separate from service. 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. For example, assume the issuing price of the phantom stock is $10. Otherwise, select the None (or less than $201) category. Report your phantomstock and income from phantom stock in Part 2. For example, assume the issuing price of the phantom stock is $10. 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. The plan must be designed and documented to conform to section 409A. Lastly, GAAP accounting also permits C-corporations to book a deferred tax asset (DTA) for future distributions, helping offset the overall accrual. Any subsequent gain on the shares is taxable as capital gain. Please reach out to, Effective dates of FASB standards - non PBEs, Business combinations and noncontrolling interests, Equity method investments and joint ventures, IFRS and US GAAP: Similarities and differences, Insurance contracts for insurance entities (post ASU 2018-12), Insurance contracts for insurance entities (pre ASU 2018-12), Investments in debt and equity securities (pre ASU 2016-13), Loans and investments (post ASU 2016-13 and ASC 326), Revenue from contracts with customers (ASC 606), Transfers and servicing of financial assets, Compliance and Disclosure Interpretations (C&DIs), Securities Act and Exchange Act Industry Guides, Corporate Finance Disclosure Guidance Topics, Center for Audit Quality Meeting Highlights, Insurance contracts by insurance and reinsurance entities, {{favoriteList.country}} {{favoriteList.content}}. Employees pay no taxes until they receive income from the plan. By continuing to browse this site, you consent to the use of cookies. ;?|U`7D"gm8DHXR~J5h!Sv(Pm%1hmd4]@xa]/|BPBq~C8[ ^[ 2ts=Q`K.'ozH6oR>UThrIOL S=um0RXlkN4|f^4H_P4zTQGpTbP4o3)%XyF. endstream endobj startxref The accounting treatment is more complicated if the vesting occurs gradually. In addition, for a privately held business, describe the line of business, unless you have already provided this information in another entry. Similarly, if there is an explicit or implied reduction in compensation to get the phantom stock, there could be securities issues involved, most likely anti-fraud disclosure requirements. The two main types of phantom stock plans are: In an appreciation only phantom stock plan, the plan participant receives a cash payment equal to the difference between the companys stock price at redemption and the issuing price of the phantom stock. The limit does not apply, however, to performance-based compensation. As with phantom stock, this is normally paid out in cash, but it could be paid in shares. As of the end of each of the two most recent fiscal years, Statement of changes in stockholders' equity, Present in a separate statement or in the footnotes for each period a statement of comprehensive income is presented. Select a section below and enter your search term, or to search all click For both phantom stock and SARs, employees are taxed when the right to the benefit is exercised. Despite their name, phantom stock plans are NQDC arrangements, not stock arrangements. 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. You can set the default content filter to expand search across territories. A phantom stock plan is a contractual agreement wherein a company promises to make cash payments to employees upon the achievement of certain conditions. Phantom stock can help in getting an executive team to think and act like equity partners. The purpose of the Chaparral Energy Phantom Stock Plan (the "Plan") is to provide deferred compensation to certain key employees (the "Participants") of Chaparral Energy. Description: Provide the name of the employer, write phantom stock, and indicate whether the phantom stock is vested. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. % Employee benefit plan financial statement auditors will need to consider whether disclosures related to the COVID-19 pandemic, CARES Act, SECURE Act and other matters should be included in the plan's . During the installment payout period, should earnings be credited on the balance at a specified interest rate? Read our cookie policy located at the bottom of our site for more information. Each member firm is a separate legal entity. Phantom stock plans are considered liability awards for accounting purposes (assuming they will be settled in cash rather than stock). The idea of phantom stock is to provide the benefit of stock appreciation without transferring actual stock to the employee. Your go-to resource for timely and relevant accounting, auditing, reporting and business insights. hbbd```b``v+A$X{lG#d_b+gHFV #CiDO ` In general, if at redemption, the companys stock price is below the issuing price of the companys phantom stock, the plan participant is not entitled to a cash payment. Income Amount: Provide the exact amount of cash income over $200 during the reporting period. Phantom shares provide benefits similar to stock ownership but without actually issuing company shares. The value of the Phantom Units will be based on the Fair Market Value ("FMV") of Chaparral, L.L.C. 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. Stock appreciation rights (SARs) are similar to a phantom stock-based program. 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. Discover what makes RSM the first choice advisor to middle market leaders, globally. Each member firm is a separate legal entity. Investments by and distributions to owners during the period. hb```,, A+dTr]BBTse Phantom Stock Plan. Although partnerships do not have common stock, as noted above, entities taxed as partnerships, including LLCs, can implement plans very similar to phantom stock plans. Our in-depth guide to the accounting, presentation and disclosures of investments in debt and equity securities. Varying accrual schedules can be found in the market. endstream endobj 595 0 obj <. When should the value of the phantom stock units be paid out in cash (e.g., periodically every three to five years, upon termination of employment, only upon a future change in control, or, perhaps, other events)? It should be noted that the value of the phantom stock units fluctuates from year to year as the value of the company changes. The plan must be properly vetted by an attorney, with all of the pertinent details specified in writing. At redemption, the companys common share price was $30. It does not allow non-qualified plans to operate like qualified plans, so the plan could be ruled illegal. stream Report any stock that you acquired as a separate lineentry, using the standard instructions for, 3 - Your Employment Agreements & Arrangements. "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. 607 0 obj <>/Filter/FlateDecode/ID[<48C1A16090314945BC51EFB7EBB391C8><6C0F7AA95DE6A2458300B480FF3472C5>]/Index[594 23]/Info 593 0 R/Length 82/Prev 262895/Root 595 0 R/Size 617/Type/XRef/W[1 3 1]>>stream holder when an option is exercised, but rather the right to receive an award based on the value of the company . Stock appreciation rights (SARs) are a type of employee compensation linked to the company's stock price during a predetermined period. Please see www.pwc.com/structure for further details. As a result, a phantom stock plan allows the participant to reap the benefits of an increasing share price without shareholder dilution. Because the phantom stock units are not actual equity in the partnership, such a plan should not raise any concerns over partners being considered employees. For the Federal Insurance Contributions Act (FICA), deferred compensation is includible as wages in the later of either the year in which the related services are performed, or the year in which the deferred compensation becomes vested. "Publication 5528 (6-2021): Nonqualified Deferred Compensation Audit Technique Guide. The company will customarily consider the phantom stock plan a benefit that requires disclosure in an S-8 filing with the SEC. Report any stock that you acquired as a separate lineentry, using the standard instructions for stock. But for others, these plans, because of cost, regulatory requirements, corporate considerations, or other issues will not be the best fit. PwC. Chapter 1:Stock-based compensation overview and scope. 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. 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. - 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 . A closer look at phantom stock Considered restricted stock units (RSUs), phantom stock units are tied to the value of your company's stock and generally vest over a set period. Ready to Speak with a Phantom Stock Expert Now?Call (888) 703-0080 or complete our contact form. Management might consider materiality of the related account, as well as the requirements of users, such as investors, analysts, financial institutions, and other constituents. Get reusable documents specific to your state in the most extensive online forms library, with 24/7 access to your acquired samples. Less expensive than offering employees an employee stock ownership plan (ESOP). Public companies should consider this potentially higher cost for phantom stock when designing their plans. 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. These materials were downloaded from PwC's Viewpoint (viewpoint.pwc.com) under license. The company will customarily consider the phantom stock plan a benefit that requires disclosure in an S-8 filing with the SEC. What Are Stock Appreciation Rights (SARs), and How Do They Work? Should the payment be made in a lump sum or in installments over a period of years? That assumption applies throughout the guide and will not be restated in every instance. This chapter introduces the general concepts of financial statement presentation and disclosure that underlie the detailed guidance that is covered in the remaining chapters of this guide. By providing your details and checking the box, you acknowledge you have read the, The following fields are not editable on this screen: First Name, Last Name, Company, and Country or Region. . Handbook: Investments September 30, 2022. For these companies, phantom stock and stock appreciation rights may be very attractive. The cash payment per phantom stock would be $30. As described in theAccounting section, phantom stock plans require variable accounting. 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. Shares are not actually issued or transferred to the option-. A phantom stock plan and stock option plan both award employees from the share appreciation of the companys stock price. You can learn more about the standards we follow in producing accurate, unbiased content in our. The company is not a company - it is a nonprofit or government entity that nonetheless can create some kind of measurement that mimics equity growth that it would like to use as a basis to create an employee bonus. %PDF-1.6 % All rights reserved. Large cash payments to employees, however, must be taxed as ordinary income rather than capital gains to the recipient and may disrupt the firm's cash flow in some cases. Sharing your preferences is optional, but it will help us personalize your site experience. There are also shareholder approval rules related to the deduction limitation under IRC 162 (m). Please see www.pwc.com/structure for further details. About the Financial statement presentation guide& Full guide PDF. Phantom stock plans are considered "liability awards" for accounting purposes (assuming they will be settled in cash rather than stock). 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. Phantom stock payments are usually made at a fixed, predetermined date. Unlike SARs, phantom stock may reflect dividends and stock splits. Stock compensation refers to the practice of rewarding employees with stock options that will vest, or become available for purchase, at a later date. 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. How frequently will phantom stock units be granted (e.g., a single upfront grant or annual grants)? 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. One of the great advantages of these plans is their flexibility. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. Here are answers to nine frequently asked questions about phantom stock plans and what they could mean for your company. Otherwise, select the None (or less than $201) category. At redemption, the companys common share price was $30. Internal Revenue Service. SARs are a form of bonus compensation given to employees that is equal to the appreciation of company stock over an established time period. To receive more complimentary information about Phantom Stock from our expert advisors, please provide us with your contact information below. To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below: A free, comprehensive best practices guide to advance your financial modeling skills, Financial Modeling & Valuation Analyst (FMVA), Commercial Banking & Credit Analyst (CBCA), Capital Markets & Securities Analyst (CMSA), Certified Business Intelligence & Data Analyst (BIDA), Financial Planning & Wealth Management (FPWM). Sufficient versatility for private and public companies to use. CFI is the official provider of the Capital Markets & Securities Analyst (CMSA) certification program, designed to transform anyone into a world-class financial analyst. It is potentially an "uncapped liability" to the company. If they do, they could be subject to ERISA rules (see below). How broadly or narrowly should the plan define what qualifies as cause for termination? A pension plan is an employee benefit that commits the employer to make regular payments to the employee in retirement. This content is copyright protected. Phantom stock plans have financial implications for employees and companies that cut both ways: Pros. In other words, no actual stock is ever awarded to the employee under a phantom stock plan. 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. 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. <>>> 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). He is a Chartered Market Technician (CMT). 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. ERISA (the Employee Retirement Income and Security Act of 1974) is the federal law that governs retirement plans. Choose from timely legislation and compliance alerts to monthly perspectives on the tax topics important to you. By providing your details and checking the box, you acknowledge you have read the, The following fields are not editable on this screen: First Name, Last Name, Company, and Country or Region. Pros and Cons of Phantom Stock Plans. When designing these provisions, the company should take into accountpossible phantom stock valuations and company cash flow. Varying accrual schedules can be found in the market. The concept is better understood below, where we contrast phantom shares (from a phantom stock plan) with stock options (from a stock option plan). 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. 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. Third, tax and regulatory problems may make phantom stock more dangerous than it seems. The agreement gives the participant the right to cash payments at (1) specified times or (2) specified conditions based on the market value of equivalent shares of the company. Finally, if the plan is intended to benefit more than key employees and defers some or all payment until after termination or retirement, it may be considered a de facto "ERISA plan." Statutory Stock Option Plans require shareholder approval within 12 months before or after adoption by the board of directors. Report the value of the phantom stock by selecting the appropriate category. A phantom stock plan is a deferred compensation plan that awards the employee a unit measured by the value of a share of a companys common stock, or, in the case of a limited liability company, by the value of an LLC unit. 594 0 obj <> endobj Excel shortcuts[citation CFIs free Financial Modeling Guidelines is a thorough and complete resource covering model design, model building blocks, and common tips, tricks, and What are SQL Data Types? Description : Provide the name of the employer, write "phantom stock," and indicate whether the phantom stock is vested. For example, capping the cash payment to a company share price limit of $50. Ready to Speak with a Phantom Stock Expert Now?Call (888) 703-0080 or complete our contact form. This alert contains information about EBP financial statement disclosures related to COVID-19, CARES Act, and SECURE Act. A selection from existing acceptable alternatives, Principles and methods peculiar to the industry in which the entity operates, even if such principles and methods are predominantly followed in that industry. There are several issues unique to public company use of phantom stock. 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)? To learn why sharing value with those who drive growth is so critical to your pay strategy, download and read our report today! Follow along as we demonstrate how to use the site. Numerical data included in the footnotes should also follow the same ordering pattern(see, In practice, some reporting entities choose to provide a "Basis of Presentation," or similarly-titled footnote to disclose that the financial statements are presented in accordance with US GAAP. Should forfeiture provisions apply if the employee enters into competition with the company or is terminated for cause? (Consider current and future positions). At the time the payment becomes taxable, the company is entitled to a deduction in a corresponding amount (subject to general limitations under section 162 with respect to the amount being reasonable and not excessive). The phantom stock plan should specify what events should trigger, or give rise to, a valuation (i.e., what events should entitle the employee to receive benefits under the plan) and at what precise point the value of the phantom stock units should be determined. This guide details the required presentation and disclosures for each topical area. These financial statements must include consolidated balance sheets and statements of . IRC Section 162(m) limits the deduction a publicly traded company may take with respect to remuneration in excess of $1 million paid to its top officers.