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. Click here to extend your session to continue reading our licensed content, if not, you will be automatically logged off. Statutory options include Incentive Stock Options (ISO's) and options granted under an Employee Stock Purchase Plan (ESPP). 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Chapter 1:Stock-based compensation overview and scope. endobj This alert contains information about EBP financial statement disclosures related to COVID-19, CARES Act, and SECURE Act. Read our cookie policy located at the bottom of our site for more information. 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. 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. 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 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. If you have any questions pertaining to any of the cookies, please contact us us_viewpoint.support@pwc.com. Shares are not actually issued or transferred to the option-. Management might consider materiality of the related account, as well as the requirements of users, such as investors, analysts, financial institutions, and other constituents. It provides a level of reassurance to employees since phantom stock programs are generally backed in cash. This is in comparison to a stock option plan, where the plan participant receives common stock. Report phantom stock if the value of the phantom stock was more than $1,000 at the end of the reportingperiod or ifyou received more than $200 in income during the reporting period. Equity grants may give rise to voting rights or unforeseen minority rights under state law. Handbook: Financial statement presentation September 30, 2022. If SARs or phantom stock awards are settled in shares, however, their accounting is somewhat different. 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. 1.1 Financial statement presentation and disclosure requirements. 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. 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. 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. There are also shareholder approval rules related to the deduction limitation under IRC 162 (m). However, unlike actual stock, the award does not confer equity ownership in the company. The vesting and forfeiture provisions contained in the phantom stock plan or individual grant agreement determine whether and when the executives rights are vested. Please see www.pwc.com/structure for further details. 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. 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. that do not have publicly traded shares. 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. 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. 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. 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. These include white papers, government data, original reporting, and interviews with industry experts. Any subsequent gain on the shares is taxable as capital gain. Phantom shares are a contractual agreement between the phantom stock plan participant and the employer. Stock appreciation rights (SARs) are similar to a phantom stock-based program. A company may wish that former employees do not own company stock after they separate from service. 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). There are several issues unique to public company use of phantom stock. This may restrict some of the flexibility of the plan design. A phantom stock option is a bonus tax treatment plan where the amount of the bonus is determined by reference to the. 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. Each offering period of the ESPP lasts [ ]. This can apply to a limited liability corporation (LLC), a sole proprietor or S-companies restricted by the 100-owner rule. For example, capping the cash payment to a company share price limit of $50. . 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. Pros and Cons of Phantom Stock Plans. If so, at what rate? 616 0 obj <>stream Other equity or allocation formulas could be used as well. It does not allow non-qualified plans to operate like qualified plans, so the plan could be ruled illegal. 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. If phantom stock units are awarded annually, will each new grant be subject to a fresh vesting schedule? By continuing to browse this site, you consent to the use of cookies. Our in-depth guide to the accounting, presentation and disclosures of investments in debt and equity securities. 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. The company will customarily consider the phantom stock plan a benefit that requires disclosure in an S-8 filing with the SEC. Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 718, Stock Compensation (formerly, FASB Statement 123R), requires generally that all equity awards granted to employees be accounted for at "fair value." This fair value is measured at grant for stock-settled awards, and at subsequent Description : Provide the name of the employer, write "phantom stock," and indicate whether the phantom stock is vested. For example, a company could exclude gain or loss attributable to operations or sales of certain divisions of the company. In other words, no actual stock is ever awarded to the employee under a phantom stock plan. Phantom stock can also be changed at the leadership's discretion. 92-64 includes model provisions for a rabbi trust, including a statement that any . - 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 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. "Publication 5528 (6-2021): Nonqualified Deferred Compensation Audit Technique Guide. Lastly, GAAP accounting also permits C-corporations to book a deferred tax asset (DTA) for future distributions, helping offset the overall accrual. 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)? Report any stock that you acquired as a separate lineentry, using the standard instructions for stock. An employee stock ownership plan (ESOP) enables employees to gain an ownership interest in their employer in the form of shares of company stock. Second, the equity of the company must be valued in a defensible, careful way. and its subsidiary entities (collectively the "Company"). hb```,, A+dTr]BBTse 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. In a phantom stock plan, upon redemption of phantom stock, the plan participant receives cash compensation. A phantom stock plan is a costly form of long-term incentive requiring a charge against the company's income statement. In addition, report your participation in a phantom stock plan in Part 3 (see Part 3 of this guide for details). %%EOF Are you still working? Thus, regardless of any vesting schedule, there is no locked-in value inherent in the phantom stock. Public companies should consider this potentially higher cost for phantom stock when designing their plans. Each plan sponsor should make a determination after consulting with its accounting advisors. Ready to Speak with a Phantom Stock Expert Now?Call (888) 703-0080 or complete our contact form. The phantom stock plan should indicate the number of phantom stock units or the participation percentage interest to be granted to the employee. Write cash payment for cash income over $200. 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. The concept is better understood below, where we contrast phantom shares (from a phantom stock plan) with stock options (from a stock option plan). (Consider current and future positions). 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). Choose from timely legislation and compliance alerts to monthly perspectives on the tax topics important to you. 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. If they do, they could be subject to ERISA rules (see below). Investopedia does not include all offers available in the marketplace. All rights reserved. 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. Phantom Stock Plan. 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. 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. It can also be used selectively as a reward or a bonus to employees who meet certain criteria. This guide details the required presentation and disclosures for each topical area. At redemption, the companys common share price was $30. 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. Actual payouts of the phantom stock units are usually deferred until a predetermined future date or until the employment relationship is terminated due to retirement, death, or disability. Phantom equity shares do not carry voting rights or similar rights associated with stock ownership. 1 0 obj stream Phantom stock payments are usually made at a fixed, predetermined date. Each offering period of the ESPP lasts [ ]. Sharing equity is a major step that should be considered thoroughly and carefully. Once you have viewed this piece of content, to ensure you can access the content most relevant to you, please confirm your territory. Additionally. 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. It is for your own use only - do not redistribute. If payments should be made in installments, over how many years? Determining which accounting policies are considered significant is a matter of management judgment. Should forfeiture provisions apply if the employee enters into competition with the company or is terminated for cause? Financial statement presentation. There are two main types ofphantom stock plans. ERISA (the Employee Retirement Income and Security Act of 1974) is the federal law that governs retirement plans. Yes, there is. When will phantom stock units vest? Now each tranche of vested awards is treated as a separate award. Report the value of the phantom stock by selecting the appropriate category. 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. The value may be a specified value, determined by an express written formula or determined by a third-party appraisal. 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. Employee Stock Ownership Plan (ESOP): What It Is, How It Works, Advantages, What Are Stock Options? 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 plans have financial implications for employees and companies that cut both ways: Pros. Publicly traded companies will want to be certain their phantom stock structure qualifies as performance-based compensation. By continuing to browse this site, you consent to the use of cookies. Such plans must conform to IRS Section 409A and be vetted by an attorney with plan details specified in writing. 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)? This content is copyright protected. How will the phantom stock units be valued in the event of a merger, consolidation, or a change in control of the company? Phantom stock qualifies as a deferred compensation plan. Stock-based compensation. In addition, Comparative financial statements provide historical context for a reporting entity's financial performance and enable users to identify trends or other relationships. A phantom stock program must meet the requirements set forth by the Internal Revenue Service (IRS) code 409(a). As with phantom stock, this is normally paid out in cash, but it could be paid in shares. Stock option plans produce a more favorable fixed accounting result. The company's owners want to share the economic value of equity, but not equity itself. Unusual or innovative applications of GAAP. Third, tax and regulatory problems may make phantom stock more dangerous than it seems. This compensation may impact how and where listings appear. A phantom stock plan and stock option plan both award employees from the share appreciation of the companys stock price. The calendar year-end audited financial statements of the Company will serve as the basis for the adjusted balance sheet for the valuation period ending December . Value: Report the value of the phantom stock by selecting the appropriate category. 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. Follow along as we demonstrate how to use the site. She has worked in multiple cities covering breaking news, politics, education, and more. 4 0 obj increase in value of the shares subject to the option. 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. You can learn more about the standards we follow in producing accurate, unbiased content in our. At redemption, the companys common share price was $30. The accounting treatment is more complicated if the vesting occurs gradually. Should the phantom stock units pending payment continue to participate in the growth in value of the company? 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. But that flexibility is also their greatest challenge. The method used for valuation should take into account adjustments that the parties agree are appropriate. 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.