The accounting treatment is more complicated if the vesting occurs gradually. That assumption applies throughout the guide and will not be restated in every instance. 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. PDF Executive Compensation: 409A Tips and Current Plan Design Issues . Report the value of the phantom stock by selecting the appropriate category. Company name must be at least two characters long. As a result, a phantom stock plan allows the participant to reap the benefits of an increasing share price without shareholder dilution. Other equity or allocation formulas could be used as well. SARs are a form of bonus compensation given to employees that is equal to the appreciation of company stock over an established time period. A phantom stock plan and stock option plan both award employees from the share appreciation of the companys stock price. financial benefit or property as compensation for services, the value of the benefit or . Chapter 1:Stock-based compensation overview and scope. 2019 - 2023 PwC. One of the great advantages of these plans is their flexibility. This alert contains information about EBP financial statement disclosures related to COVID-19, CARES Act, and SECURE Act. Phantom stock plans designed just for a limited number of employees, or as a bonus for a broader group of employees that pays out annually based on a measure of equity, would most likely avoid these problems. Unlike SARs, phantom stock may reflect dividends and stock splits. 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. endobj Thus, regardless of any vesting schedule, there is no locked-in value inherent in the phantom stock. 451. The concept is better understood below, where we contrast phantom shares (from a phantom stock plan) with stock options (from a stock option plan). 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. 594 0 obj <> endobj However, unlike actual stock, the award does not confer equity ownership in the company. 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. The specifics regarding vesting and payment are covered in Section 5. of this phantom plan and Section 1 of the form Phantom equity shares do not carry voting rights or similar rights associated with stock ownership. The cash payment per phantom stock would be $20. 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. 9 frequently asked questions about phantom stock plans - RSM US 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. Lastly, GAAP accounting also permits C-corporations to book a deferred tax asset (DTA) for future distributions, helping offset the overall accrual. Despite their name, phantom stock plans are NQDC arrangements, not stock arrangements. Once you have viewed this piece of content, to ensure you can access the content most relevant to you, please confirm your territory. It provides a level of reassurance to employees since phantom stock programs are generally backed in cash. Equity Stock Based Compensation Audit Techniques Guide | Internal 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. Should the phantom stock units pending payment continue to participate in the growth in value of the company? 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. This article was originally published on Oct. 12, 2020 and has been updated. 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. Each offering period of the ESPP lasts [ ]. Phantom shares provide benefits similar to stock ownership but without actually issuing company shares. hbbd```b``v+A$X{lG#d_b+gHFV #CiDO ` Read our cookie policy located at the bottom of our site for more information. 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 . It should be noted that the value of the phantom stock units fluctuates from year to year as the value of the company changes. Figure FSP 1-1 depicts the reporting periods required by the SEC for financial statements of public companies. Welcome to Viewpoint, the new platform that replaces Inform. If they do, they could be subject to ERISA rules (see below). At redemption, the companys common share price was $30. 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. 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. 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}}. 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 site uses cookies to enhance site navigation and personalize your experience. Determining which accounting policies are considered significant is a matter of management judgment. For example, capping the cash payment to a company share price limit of $50. 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 value of the Phantom Units will be based on the Fair Market Value ("FMV") of Chaparral, L.L.C. 3 0 obj For example, assume the issuing price of the phantom stock is $10. %PDF-1.6 % In other words, no actual stock is ever awarded to the employee under a phantom stock plan. 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. Phantom stock can be provided to every employee, either across the board or distributed variably depending on performance, seniority, or other factors. Phantom stock plans are considered "liability awards" for accounting purposes (assuming they will be settled in cash rather than stock). Her expertise is in personal finance and investing, and real estate. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Contact Us Todaydocument.write(checkCookie()), 2019 - PhantomStockOnline.comPowered by VisionLinkAll Rights Reserved. It should be noted that even if payments are made after the grantee terminates service, the nature of the payment is generally still treated as compensation for tax purposes and reported on Form W-2. Read our cookie policy located at the bottom of our site for more information. endobj <>/ExtGState<>/XObject<>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/MediaBox[ 0 0 612 792] /Contents 4 0 R/Group<>/Tabs/S/StructParents 0>> A phantom stock program must meet the requirements set forth by the Internal Revenue Service (IRS) code 409(a). The method used for valuation should take into account adjustments that the parties agree are appropriate. But for others, these plans, because of cost, regulatory requirements, corporate considerations, or other issues will not be the best fit. Sufficient versatility for private and public companies to use. 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. Such plans must conform to IRS Section 409A and be vetted by an attorney with plan details specified in writing. The first issue is figuring out how much phantom stock to give out. Less expensive than offering employees an employee stock ownership plan (ESOP). Unusual or innovative applications of GAAP. Other companies may have one or more of these plans but want to supplement them for certain employees with another kind of plan. 1.1 Financial statement presentation and disclosure requirements - PwC PwC. But that flexibility is also their greatest challenge. He is a Chartered Market Technician (CMT). After a period of time, the cash value of the phantom stock is distributed to the participating employees. 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. Companies should consider the possibility of such unexpected fluctuations in value, regardless of whether it relies on a third-party valuation. 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. 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. endstream endobj 595 0 obj <. Equity Alternatives: Restricted Stock, Performance Awards, Phantom Stock, SARs, and More. 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. For example, vesting may be cliff or graded, time-based, or based on the achievement of specified financial performance goals. Phantom stock can also be changed at the leadership's discretion. Handbook: Financial statement presentation September 30, 2022. Situations in which a company may not want to issueactual equityinclude: A company can grant an employee a designated number of phantom stock units or a percentage interest in the companys value pursuant to a prescribed valuation method; this can be done once or multiple times. When designing these provisions, the company should take into accountpossible phantom stock valuations and company cash flow. How broadly or narrowly should the plan define what qualifies as cause for termination? 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. We use cookies to personalize content and to provide you with an improved user experience. Report any stock that you acquired as a separate lineentry, using the standard instructions for stock. Should the payment be made in a lump sum or in installments over a period of years? 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. (If based only on the appreciation, this is commonly referred to as a stock appreciation right.) Any subsequent gain on the shares is taxable as capital gain. 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). A cash payment from Company A equal to the current common share price: $50 x 500 = $25,000. Unlike SARs, phantom stock may reflect dividends and stock splits. For example, if the company has a bad year and the value of its stock decreases, the value of the phantom stock also decreases. Third, tax and regulatory problems may make phantom stock more dangerous than it seems. Handbook: Investments September 30, 2022. 2 0 obj The plan must be designed and documented to conform to section 409A. Phantom StockIt's Alive! - SHRM He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. 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. To receive more complimentary information about Phantom Stock from our expert advisors, please provide us with your contact information below. Phantom stock payments are usually made at a fixed, predetermined date. Phantom stock qualifies as a deferred compensation plan. This compensation may impact how and where listings appear. Stock option plans produce a more favorable fixed accounting result. Stock-based compensation. What Are Stock Appreciation Rights (SARs), and How Do They Work? In addition, for a privately held business, describe the line of business, unless you have already provided this information in another entry. 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}}, Financial position at the end of the period, Earnings (net income) for the period, (which may be presented as a separate statement or within a continuous statement of comprehensive income [see paragraph, Comprehensive income (total nonowner changes in equity) for the period in one statement or two separate but consecutive statements (if the reporting entity is required to report comprehensive income, see paragraph. 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. 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. Equity grants may give rise to voting rights or unforeseen minority rights under state law. 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. and its subsidiary entities (collectively the "Company"). Income Type: Write cash payment for cash income over $200. What Is a Phantom Stock Plan for Employees? - SmartAsset A company may wish that former employees do not own company stock after they separate from service. 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.
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