If they do, they could be subject to ERISA rules (see below). 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. 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. If phantom stock units are awarded annually, will each new grant be subject to a fresh vesting schedule? Statutory options include Incentive Stock Options (ISO's) and options granted under an Employee Stock Purchase Plan (ESPP). But for others, these plans, because of cost, regulatory requirements, corporate considerations, or other issues will not be the best fit. Otherwise, select the None (or less than $201) category. 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. Report your phantomstock and income from phantom stock in Part 2. We also reference original research from other reputable publishers where appropriate. Companies should consider the possibility of such unexpected fluctuations in value, regardless of whether it relies on a third-party valuation. PwC. What Are Stock Appreciation Rights (SARs), and How Do They Work? It does not allow non-qualified plans to operate like qualified plans, so the plan could be ruled illegal. What behavior or performance levels is the company trying to incentivize? Third, tax and regulatory problems may make phantom stock more dangerous than it seems. 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). It provides a level of reassurance to employees since phantom stock programs are generally backed in cash. Stock appreciation rights (SARs) are similar to a phantom stock-based program. The taxation of the bonus would be much like any other cash bonus--it is taxed as ordinary income at the time it is received. Reporting Stock Acquired through a Phantom Stock Plan. 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). 2 0 obj 616 0 obj <>stream Each offering period of the ESPP lasts [ ]. However, there is one key difference between the two plans. stream 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. Here are answers to nine frequently asked questions about phantom stock plans and what they could mean for your company. 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. Each offering period of the ESPP lasts [ ]. 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. endobj 1.1.3 Basis of presentation. This can, in turn, result in higher selling prices for a business if a prospective buyerperceives the upper management team as being stable. The value may be a specified value, determined by an express written formula or determined by a third-party appraisal. As a result, a phantom stock plan allows the participant to reap the benefits of an increasing share price without shareholder dilution. 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. endstream endobj startxref 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. The idea of phantom stock is to provide the benefit of stock appreciation without transferring actual stock to the employee. ", Investopedia requires writers to use primary sources to support their work. The presentation and disclosure requirements discussed in this guide presume that the related accounting topics are considered to be material and applicable to the reporting entity. As such, the sponsoring company must recognize the plan expense ratably over the vesting period. Employee Stock Ownership Plan (ESOP): What It Is, How It Works, Advantages, What Are Stock Options? 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. At redemption, the companys common share price was $30. Internal Revenue Service. 0 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. 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. There are several issues unique to public company use of phantom stock. At that point, the value of the award, minus any consideration paid for it (there usually is none) is taxed as ordinary income to the employee and is deductible by the employer. Should the payment be made in a lump sum or in installments over a period of years? 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. With that said, the company typically follows a valuation policy for the issuing price of phantom shares. Appreciation is allocated to each award pro-rata to time over which it is earned. 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. that do not have publicly traded shares. Consider removing one of your current favorites in order to to add a new one. Phantom stock plans are considered "liability awards" for accounting purposes (assuming they will be settled in cash rather than stock). 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. 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. The plan must be properly vetted by an attorney, with all of the pertinent details specified in writing. Report any stock that you acquired as a separate lineentry, using the standard instructions for, 3 - Your Employment Agreements & Arrangements. Care must be taken to avoid giving out too much to early participants and not leaving enough for later employees. This type of plan is sometimes referred to as shadow stock. Company name must be at least two characters long. Does the phantom stock plan comply with section 409A? Such plans must conform to IRS Section 409A and be vetted by an attorney with plan details specified in writing. Phantom stock can be provided to every employee, either across the board or distributed variably depending on performance, seniority, or other factors. Phantom stock ties a financial gain directly to a company performance metric. . However, unlike actual stock, the award does not confer equity ownership in the company. 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. 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. The offers that appear in this table are from partnerships from which Investopedia receives compensation. 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. You can set the default content filter to expand search across territories. 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. About the Financial statement presentation guide& Full guide PDF. 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. 4 0 obj If funds are set aside, they may need to be segregated into a "rabbi trust" or "secular trust" to help avoid causing employees to pay tax on the benefit when it is promised rather than paid. Phantom stock plans are deferred compensation plans and, as such, must be designed and documented to conform to the requirements of section 409A. This content is copyright protected. Do Not Sell or Share My Personal Information (California). |$8:4; b ,` Q$;G3fU | 32023VngYv#T)WONF1pX20_RD m|aVikx:20@T1& O These financial statements must include consolidated balance sheets and statements of . There are also shareholder approval rules related to the deduction limitation under IRC 162 (m). 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. <>>> Similarly, a major event like thecoronavirus pandemic affects market valuesfor many companies. 92-64 includes model provisions for a rabbi trust, including a statement that any . 2019 - 2023 PwC. 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. Phantom Stock Plan. 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. The value of the Phantom Units will be based on the Fair Market Value ("FMV") of Chaparral, L.L.C. 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. Are you still working? During the installment payout period, should earnings be credited on the balance at a specified interest rate? endobj 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. What percentage of the companys value should be dedicated or reserved for this plan? endobj Reporting entities are required to describe all significant accounting policies in the financial statements. Who will be allowed to participate? 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 equity does not have some of the drawbacks associated with providing actual equity. 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&? Will special vesting rules apply in the case of death, disability, or attainment of specified normal retirement age? Shares are not actually issued or transferred to the option-. In other cases, valuation may be required periodically, such as annually, or on a specific future date. 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. 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. 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. This is the case even though the amounts are not subject to income tax until actually paid to the employee. and its subsidiary entities (collectively the "Company"). Rather than getting physical stock, the employee receives mock stock. The company must record a compensation charge on its income statement as the employee's interest in the award increases. The phantom stock plan should indicate the number of phantom stock units or the participation percentage interest to be granted to the employee. 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. A company may wish that former employees do not own company stock after they separate from service. Some organizations may use phantom stock as an incentive to upper management. Income Type: Write cash payment for cash income over $200. Should the phantom stock units pending payment continue to participate in the growth in value of the company? To learn why sharing value with those who drive growth is so critical to your pay strategy, download and read our report today! Your go-to resource for timely and relevant accounting, auditing, reporting and business insights. However, unlike actual stock for which the increase in value on a disposition may be eligible for favorable capital gains tax rates, phantom stock unit payouts are taxable to the employee at ordinary income tax rates. 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). Unusual or innovative applications of GAAP. Management might consider materiality of the related account, as well as the requirements of users, such as investors, analysts, financial institutions, and other constituents.