(Consider current and future positions). An employee stock ownership plan (ESOP) enables employees to gain an ownership interest in their employer in the form of shares of company stock. 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. For example, if the issuing price of the phantom shares is $50 and the companys share price at redemption is $20, the plan participant would not reap any benefits. Should the payment be made in a lump sum or in installments over a period of years? This type of plan is sometimes referred to as shadow stock. In addition, report your participation in a phantom stock plan in Part 3 (see Part 3 of this guide for details). 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." It creates a sense of ownership in the success of the business. For income tax purposes, if the plan is compliant with section 409A, the deferred compensation attributable to the phantom stock will not be subject to income taxation to the employee until it is actually paid to and received by, the employee. The offers that appear in this table are from partnerships from which Investopedia receives compensation. A phantom stock plan constitutes a deferred compensation plan. Follow along as we demonstrate how to use the site. 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. One of the great advantages of these plans is their flexibility. Investopedia does not include all offers available in the marketplace. On redemption, in a phantom stock plan, the plan participant receives a cash payment. For many companies, the route to employee ownership is through a formal employee ownership plan such as an ESOP, 401(k) plan, stock option, or employee stock purchase plan (ESPPsa regulated stock purchase plan with specific tax benefits). Stock-based compensation. Care must be taken to avoid giving out too much to early participants and not leaving enough for later employees. Phantom shares are a contractual agreement between the phantom stock plan participant and the employer. Fi4X\c_Txa/BCCB[SU& w!l C** Phantom stock plans have financial implications for employees and companies that cut both ways: Pros. For example, legislative increases or decreases in corporate tax rates may result in companies having more or less cash flow, accordingly (with all else being equal). endstream endobj startxref 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. 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. The accounting treatment is more complicated if the vesting occurs gradually. 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. Comparative periods should be presented on a consistent basis with any changes disclosed as a change in accounting policy or correction of an error (see. Internal Revenue Service. 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 is a division of another company, but can create a measurement of its equity value and wants employees to have a share in that even though there is no actual stock. Should forfeiture provisions apply if the employee enters into competition with the company or is terminated for cause? At redemption, the companys common share price was $30. 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. By continuing to browse this site, you consent to the use of cookies. During the installment payout period, should earnings be credited on the balance at a specified interest rate? All rights reserved. Phantom stock is a compensation plan that bestows upon the holder the right to receive a cash payment at a specified future point in time usually in conjunction with a specified future event or milestone. Stock option plans produce a more favorable fixed accounting result. This may restrict some of the flexibility of the plan design. A U.S. parent may wish to incentivize executive employees of a subsidiary without awarding shares of parent stock to tie their incentive to the subsidiary level value rather than the parent level. Qualifying Emerging Growth Companies, as defined in the Jumpstart Our Business Startups (JOBS) Act, and Smaller Reporting Companies, as defined in S-K 10(f),are permitted to omit the earliest year income statement and statements of comprehensive income, cash flows, and changes in stockholders equityin an initial public offering. There are several issues unique to public company use of phantom stock. 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). Phantom equity shares do not carry voting rights or similar rights associated with stock ownership. This compensation may impact how and where listings appear. 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. 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. 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. Once you have viewed this piece of content, to ensure you can access the content most relevant to you, please confirm your territory. Gordon Scott has been an active investor and technical analyst or 20+ years. 2019 - 2023 PwC. In other cases, valuation may be required periodically, such as annually, or on a specific future date. 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. endobj 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. Even though it's not real, the phantom stock follows the price movement of the company's actual stock, paying out any resulting profits. 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. 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. How should a change in control be defined? 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. Who will be allowed to participate? 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. A phantom stock option is a bonus tax treatment plan where the amount of the bonus is determined by reference to the. Typically, the valuation will follow an event that triggers phantom stock unit payouts so that the amount of such payouts can be determined. We use cookies to personalize content and to provide you with an improved user experience. 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 Less expensive than offering employees an employee stock ownership plan (ESOP). Please seewww.pwc.com/structurefor further details. As the phantom stock units become vested, the value of the phantom stock units is includible as wages subject to FICA taxes. 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. that do not have publicly traded shares. It does not allow non-qualified plans to operate like qualified plans, so the plan could be ruled illegal. Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. Select a section below and enter your search term, or to search all click Are you still working? These include white papers, government data, original reporting, and interviews with industry experts. 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. 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. 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). For example, if the company has a bad year and the value of its stock decreases, the value of the phantom stock also decreases. 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. How frequently will phantom stock units be granted (e.g., a single upfront grant or annual grants)? In addition, companies should be aware that events outside the companys control also affect its value if a third-party appraisal is used. 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. Other equity or allocation formulas could be used as well. The value of the Phantom Units will be based on the Fair Market Value ("FMV") of Chaparral, L.L.C. Our in-depth guide to the accounting, presentation and disclosures of investments in debt and equity securities. Will special vesting rules apply in the case of death, disability, or attainment of specified normal retirement age? Publicly traded companies will want to be certain their phantom stock structure qualifies as performance-based compensation. In most cases, a valuation is required upon the employees termination, death, or disability. All rights reserved. As with phantom stock, this is normally paid out in cash, but it could be paid in shares. For example, vesting may be cliff or graded, time-based, or based on the achievement of specified financial performance goals. Just as with stock awards, the purpose of a phantom stock plan is to generate an ownership mentality and reward key employees for helping to grow the business value. When designing these provisions, the company should take into accountpossible phantom stock valuations and company cash flow. This is the case even though the amounts are not subject to income tax until actually paid to the employee. Each member firm is a separate legal entity. Second, the equity of the company must be valued in a defensible, careful way. IRC Section 162(m) limits the deduction a publicly traded company may take with respect to remuneration in excess of $1 million paid to its top officers. The company will customarily consider the phantom stock plan a benefit that requires disclosure in an S-8 filing with the SEC. It is for your own use only - do not redistribute. The limit does not apply, however, to performance-based compensation. Additionally. Instead, the employee is granted a number of phantom stock units, and the plan provides that each phantom stock unit is equal in value to one share of common stock. Figure FSP 1-1 depicts the reporting periods required by the SEC for financial statements of public companies. financial benefit or property as compensation for services, the value of the benefit or . Companies should address the following when formulating aspects of the written plan: Various equity compensation methods, including phantom stock units, can provide great incentive to the employees receiving them and the employer providing them by cultivating increased engagement that can boost company performance. hbbd```b``v+A$X{lG#d_b+gHFV #CiDO ` Financial statement presentation. For example, capping the cash payment to a company share price limit of $50. - 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 . when the vesting is triggered by a performance event, such as a profit target. Income Amount: Provide the exact amount of cash income over $200 during the reporting period. Your go-to resource for timely and relevant accounting, auditing, reporting and business insights. Parameters and Trading, With Examples, Employee Stock Options (ESOs): A Complete Guide, What Is a Pension? Pros and Cons of Phantom Stock Plans. Statutory options include Incentive Stock Options (ISO's) and options granted under an Employee Stock Purchase Plan (ESPP). Each member firm is responsible only for its own acts and omissions, and not those of any other party. ;?|U`7D"gm8DHXR~J5h!Sv(Pm%1hmd4]@xa]/|BPBq~C8[ ^[ 2ts=Q`K.'ozH6oR>UThrIOL S=um0RXlkN4|f^4H_P4zTQGpTbP4o3)%XyF. Determining which accounting policies are considered significant is a matter of management judgment. In this case, the company must estimate the expected amount earned based on progress towards the target. It provides a level of reassurance to employees since phantom stock programs are generally backed in cash. 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)? Reporting entities are required to describe all significant accounting policies in the financial statements. Click here to extend your session to continue reading our licensed content, if not, you will be automatically logged off. <> As a result, a phantom stock plan allows the participant to reap the benefits of an increasing share price without shareholder dilution. An employee stock option (ESO) is a grant to an employee giving the right to buy a certain number of shares in the company's stock for a set 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. Sufficient versatility for private and public companies to use. For more information, see Section 409A Fundamentals. <>>> Phantom stock ties a financial gain directly to a company performance metric. 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. This content is copyright protected. SARs often can be exercised any time after they vest. The amount of the cash payment is linked to the market value of a predetermined number of shares of the company's stock. 1.1 Financial statement presentation and disclosure requirements. In March, the common share price of Company A is $70. Discover what makes RSM the first choice advisor to middle market leaders, globally. 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. Phantom shares provide benefits similar to stock ownership but without actually issuing company shares. To ensure these tax results occur, companies should ensure that the terms of the phantom stock plan are in compliance with section 409A prior to the plan becoming effective. Accounting topics or transactions that are not material or not applicable to a reporting entity generally do not require separate presentation or disclosure, unless otherwise indicated. These materials were downloaded from PwC's Viewpoint (viewpoint.pwc.com) under license. 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. About the Financial statement presentation guide& Full guide PDF. Lastly, GAAP accounting also permits C-corporations to book a deferred tax asset (DTA) for future distributions, helping offset the overall accrual. Follow along as we demonstrate how to use the site. 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. 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. 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). In-depth guide on presentation and disclosure requirements under US GAAP, plus considerations under SEC regulations. %PDF-1.6 % 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? 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. Unlike SARs, phantom stock may reflect dividends and stock splits. So from the time the grant is made until the award is paid out, the company records the value of the percentage of the promised shares or increase in the value of the shares, pro-rated over the term of the award. Consider removing one of your current favorites in order to to add a new one. The idea of phantom stock is to provide the benefit of stock appreciation without transferring actual stock to the employee. Equity grants may give rise to voting rights or unforeseen minority rights under state law. For example, assume the issuing price of the phantom stock is $10. Each offering period of the ESPP lasts [ ]. Please see www.pwc.com/structure for further details. Your go-to resource for timely and relevant accounting, auditing, reporting and business insights. 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. . Whether granted up front or over a period of years, the phantom stock units may either be immediately vested or subject to any vesting schedule determined by the company. However, unlike actual stock, the award does not confer equity ownership in the company. Unusual or innovative applications of GAAP. "Full value" plans pay both the value of the underlying stock as well as any appreciation. For these companies, phantom stock and stock appreciation rights may be very attractive. A phantom stock program must meet the requirements set forth by the Internal Revenue Service (IRS) code 409(a). Contact Us Todaydocument.write(checkCookie()), 2019 - PhantomStockOnline.comPowered by VisionLinkAll Rights Reserved. Her expertise is in personal finance and investing, and real estate. If payments are to be made in installments, the phantom stock unit plan or grant agreement should also specify whether interest will accrue on the unpaid installments. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Varying accrual schedules can be found in the market. Disclosure of accounting policies shall identify and describe the accounting principles followed by the entity and the methods of applying those principles that materially affect the determination of financial position, cash flows, or results of operations. Should the phantom stock units pending payment continue to participate in the growth in value of the company? 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.