You can learn more about the standards we follow in producing accurate, unbiased content in our. Who will be allowed to participate? As the phantom stock units become vested, the value of the phantom stock units is includible as wages subject to FICA taxes. Phantom stock may behypothetical, however, it stillcan pay out dividends and it experiences price changes just like its real counterpart. 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. Please see www.pwc.com/structure for further details. The issuing price of phantom shares in a phantom stock plan is set by the company and not necessarily tied to the value of the companys stock at that time. If phantom stock units are awarded annually, will each new grant be subject to a fresh vesting schedule? 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. Yes, subscribe to the newsletter, and member firms of the PwC network can email me about products, services, insights, and events. 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. Other companies may have one or more of these plans but want to supplement them for certain employees with another kind of plan. Management might consider materiality of the related account, as well as the requirements of users, such as investors, analysts, financial institutions, and other constituents. To learn why sharing value with those who drive growth is so critical to your pay strategy, download and read our report today! As described in theAccounting section, phantom stock plans require variable accounting. She has worked in multiple cities covering breaking news, politics, education, and more. Each plan sponsor should make a determination after consulting with its accounting advisors. 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 appreciation rights (SARs) are similar to a phantom stock-based program. At redemption, the companys common share price was $30. Yes, there is. Contact Us Todaydocument.write(checkCookie()), 2019 - PhantomStockOnline.comPowered by VisionLinkAll Rights Reserved. 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 amount of the cash payment is linked to the market value of a predetermined number of shares of the company's stock. Sufficient versatility for private and public companies to use. Stock appreciation rights (SARs) are a type of employee compensation linked to the company's stock price during a predetermined period. The plan must be designed and documented to conform to section 409A. Value: Report the value of the phantom stock by selecting the appropriate category. 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 specifics regarding vesting and payment are covered in Section 5. of this phantom plan and Section 1 of the form A company may wish that former employees do not own company stock after they separate from service. endstream endobj startxref When will phantom stock units vest? Similarly, a major event like thecoronavirus pandemic affects market valuesfor many companies. 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. Consider removing one of your current favorites in order to to add a new one. This can also help ensure employee retention, especially in times of internal volatility, such as an ownership change or a personal emergency. Phantom stock can help in getting an executive team to think and act like equity partners. Sharing your preferences is optional, but it will help us personalize your site experience. The plan must be properly vetted by an attorney, with all of the pertinent details specified in writing. 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. The vesting and forfeiture provisions contained in the phantom stock plan or individual grant agreement determine whether and when the executives rights are vested. If they do, they could be subject to ERISA rules (see below). The method used for valuation should take into account adjustments that the parties agree are appropriate. One of the great advantages of these plans is their flexibility. 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. 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. Learn more about how they work. Stock option plans produce a more favorable fixed accounting result. Her expertise is in personal finance and investing, and real estate. The phantom stock plan should indicate the number of phantom stock units or the participation percentage interest to be granted to the employee. What's the purpose? 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. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. A cash payment from Company A equal to the current common share price: $50 x 500 = $25,000. stream Publicly traded companies will want to be certain their phantom stock structure qualifies as performance-based compensation. Do Not Sell or Share My Personal Information (California). A phantom stock plan is a deferred compensation plan that awards the employee a unit measured by the value of a share of a company's common stock, or, in the case of a limited liability company, by the value of an LLC unit. Additional legal documents and agreements, such as a shareholders agreement, may have to be amended or drafted, increasing complexity and legal fees. 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. ;?|U`7D"gm8DHXR~J5h!Sv(Pm%1hmd4]@xa]/|BPBq~C8[ ^[ 2ts=Q`K.'ozH6oR>UThrIOL S=um0RXlkN4|f^4H_P4zTQGpTbP4o3)%XyF. It provides a level of reassurance to employees since phantom stock programs are generally backed in cash. 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. Equity grants may give rise to voting rights or unforeseen minority rights under state law. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Should the phantom stock units pending payment continue to participate in the growth in value of the company? This site uses cookies to enhance site navigation and personalize your experience. With that said, the value of the phantom stock at redemption is tied to the companys stock price. All rights reserved. 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. How will the phantom stock units be valued (i.e., based on a formula or an appraisal)? Appreciation is allocated to each award pro-rata to time over which it is earned. Employees pay no taxes until they receive income from the plan. This can, in turn, result in higher selling prices for a business if a prospective buyerperceives the upper management team as being stable. Now each tranche of vested awards is treated as a separate award. 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. In most cases, a valuation is required upon the employees termination, death, or disability. In other cases, valuation may be required periodically, such as annually, or on a specific future date. A violation of the section 409A rules could cause immediate taxation, plus an additional 20% tax, as well as the assessment of penalties all prior to any actual receipt by the employee. 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. By simulating stock ownership, without actually providing it, management ensures that equity does not become diluted for other shareholders. 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. Each member firm is a separate legal entity. 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. This article was originally published on Oct. 12, 2020 and has been updated. If so, at what rate? PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. These financial statements must include consolidated balance sheets and statements of . If John redeems the 500 phantom shares in March, he will receive: The choice between the two options depends on whether the phantom stock plan is appreciation only or full value, as discussed below. The purpose of the Chaparral Energy Phantom Unit Plan (the "Plan") is to provide deferred compensation to certain key employees (the "Participants") of Chaparral Energy. Some organizations may use phantom stock as an incentive to upper management. Report your phantomstock and income from phantom stock in Part 2. SARs are often granted in tandem with stock options (either ISOs or NSOs) to help finance the purchase of the options and/or pay tax if any is due upon exercise of the options; these SARs sometimes are called "tandem SARs." For example, the company could grant the employee a 5% interest initially and increase the interest to 10% after the employee completes five years of service. 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)? Chapter 1:Stock-based compensation overview and scope. The cash payment per phantom stock would be $30. 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. Description : Provide the name of the employer, write "phantom stock," and indicate whether the phantom stock is vested. Phantom stock plans have a lot in common with traditional nonqualified stock plans. 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). Parameters and Trading, With Examples, Employee Stock Options (ESOs): A Complete Guide, What Is a Pension? 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). 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. 616 0 obj <>stream Should forfeiture provisions apply if the employee enters into competition with the company or is terminated for cause? 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 plan is a contractual agreement wherein a company promises to make cash payments to employees upon the achievement of certain conditions. Otherwise, select the None (or less than $201) category. An employee stock option (ESO) is a grant to an employee giving the right to buy a certain number of shares in the company's stock for a set price. Unlike SARs, phantom stock may reflect dividends and stock splits. It does not allow non-qualified plans to operate like qualified plans, so the plan could be ruled illegal. You can set the default content filter to expand search across territories. In addition, Comparative financial statements provide historical context for a reporting entity's financial performance and enable users to identify trends or other relationships. This may restrict some of the flexibility of the plan design. Care must be taken to avoid giving out too much to early participants and not leaving enough for later employees. hbbd```b``v+A$X{lG#d_b+gHFV #CiDO ` How broadly or narrowly should the plan define what qualifies as cause for termination? 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. All rights reserved. For these companies, phantom stock and stock appreciation rights may be very attractive. None of these plans should be set up without the detailed advice of qualified legal and financial counsel. 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. If you have any questions pertaining to any of the cookies, please contact us us_viewpoint.support@pwc.com. 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. 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." The cash payment per phantom stock would be $20. Phantom equity does not have some of the drawbacks associated with providing actual equity. Provide the exact amount of cash income over $200 during the reporting period. The company will customarily consider the phantom stock plan a benefit that requires disclosure in an S-8 filing with the SEC. 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). How will the phantom stock units be valued in the event of a merger, consolidation, or a change in control of the company? During the installment payout period, should earnings be credited on the balance at a specified interest rate? "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. Does the phantom stock plan comply with section 409A? 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). Fi4X\c_Txa/BCCB[SU& w!l C** The value of the Phantom Units will be based on the Fair Market Value ("FMV") of Chaparral, L.L.C. 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. Phantom equity shares do not carry voting rights or similar rights associated with stock ownership. The phantom stock plan must specify when the phantom stock unit payments should commence and at what point a valuation of the units is generally required, as described above. Investments by and distributions to owners during the period. The attributes of phantom stock units should be carefully considered to determine whether it is theright incentive planto meet a companys needs. 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. 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. endobj Income Amount: Provide the exact amount of cash income over $200 during the reporting period. This can apply to a limited liability corporation (LLC), a sole proprietor or S-companies restricted by the 100-owner rule. We use cookies to personalize content and to provide you with an improved user experience. Depending on the terms and conditions, restricted stock units may . PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. 3 0 obj Phantom stock qualifies as a deferred compensation plan. Phantom shares are a contractual agreement between the phantom stock plan participant and the employer. 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? 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. Equity Alternatives: Restricted Stock, Performance Awards, Phantom Stock, SARs, and More. <>/ExtGState<>/XObject<>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/MediaBox[ 0 0 612 792] /Contents 4 0 R/Group<>/Tabs/S/StructParents 0>> If the plan is intended to benefit most or all employees in ways similar to qualified plans like ESOPs or 401(k) plans, and it defers some or all payment until after termination, it may be considered a de facto "ERISA plan." hb```,, A+dTr]BBTse After a period of time, the cash value of the phantom stock is distributed to the participating employees. A type of deferred employee compensation plan where plan participants benefit from the upside of a companys share price without actually receiving company shares. Despite their name, phantom stock plans are NQDC arrangements, not stock arrangements. About the Financial statement presentation guide& Full guide PDF. Are you still working? Typically, the valuation will follow an event that triggers phantom stock unit payouts so that the amount of such payouts can be determined. 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. 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? 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. 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. Accounting As described in the Accounting section, phantom stock plans require variable accounting. On redemption, in a phantom stock plan, the plan participant receives a cash payment. This alert contains information about EBP financial statement disclosures related to COVID-19, CARES Act, and SECURE Act. Other reporting entities choose to include this information in a "Significant Accounting Policies" footnote, as described in. - 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 . The first issue is figuring out how much phantom stock to give out. 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. Otherwise, select the None (or less than $201) category. Follow along as we demonstrate how to use the site. 451. Generally, Rule 701 requires that companies that are required to provide financial and other disclosure provide financial statements for the two most recently completed fiscal years or the period during which they have been in existence if it is shorter. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Welcome to Viewpoint, the new platform that replaces Inform. It is for your own use only - do not redistribute. ERISA (the Employee Retirement Income and Security Act of 1974) is the federal law that governs retirement plans. Refer to the following PwC guide sections for guidance on those matters: Company name must be at least two characters long. Report any stock that you acquired as a separate lineentry, using the standard instructions for, 3 - Your Employment Agreements & Arrangements. 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. Select a section below and enter your search term, or to search all click "Full value" plans pay both the value of the underlying stock as well as any appreciation. 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. Thus, regardless of any vesting schedule, there is no locked-in value inherent in the phantom stock. CFI is the official provider of the Capital Markets & Securities Analyst (CMSA) certification program, designed to transform anyone into a world-class financial analyst. 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. In-depth guide on presentation and disclosure requirements under US GAAP, plus considerations under SEC regulations. 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. If payments should be made in installments, over how many years? This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. Statutory options include Incentive Stock Options (ISO's) and options granted under an Employee Stock Purchase Plan (ESPP). 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. 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. and its subsidiary entities (collectively the "Company"). Handbook: Investments September 30, 2022. Other equity or allocation formulas could be used as well. 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 . financial benefit or property as compensation for services, the value of the benefit or . 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. Write cash payment for cash income over $200. For example, a company could exclude gain or loss attributable to operations or sales of certain divisions of the company. Even though it's not real, the phantom stock follows the price movement of the company's actual stock, paying out any resulting profits. 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. 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. For example, assume the issuing price of the phantom stock is $10. By continuing to browse this site, you consent to the use of cookies. (If based only on the appreciation, this is commonly referred to as a stock appreciation right.) 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. 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. Figure FSP 1-1 depicts the reporting periods required by the SEC for financial statements of public companies. 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. Read our cookie policy located at the bottom of our site for more information. 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. Third, tax and regulatory problems may make phantom stock more dangerous than it seems. In addition, for a privately held business, describe the line of business, unless you have already provided this information in another entry. Internal Revenue Service. In addition, companies should be aware that events outside the companys control also affect its value if a third-party appraisal is used. 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.