phantom stock plan financial statement disclosure phantom stock plan financial statement disclosure

To learn why sharing value with those who drive growth is so critical to your pay strategy, download and read our report today! How should a change in control be defined? As such, the sponsoring company must recognize the plan expense ratably over the vesting period. Additional legal documents and agreements, such as a shareholders agreement, may have to be amended or drafted, increasing complexity and legal fees. What Are Stock Appreciation Rights (SARs), and How Do They Work? A phantom stock plan is a contractual agreement wherein a company promises to make cash payments to employees upon the achievement of certain conditions. than $200 in income during the reporting period. 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 stock payments are usually made at a fixed, predetermined date. Stock appreciation rights (SARs) are a type of employee compensation linked to the company's stock price during a predetermined period. 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. Phantom stock plans have financial implications for employees and companies that cut both ways: Pros. We use cookies to personalize content and to provide you with an improved user experience. 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. The plan must be designed and documented to conform to section 409A. By simulating stock ownership, without actually providing it, management ensures that equity does not become diluted for other shareholders. 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. Handbook: Financial statement presentation September 30, 2022. PwC. Phantom Stock Plans Variation: Elective Phantom Stock Plan Executives can defer salary and/or bonuses Deferrals used to purchase phantom stock - Either fullvalue or appreciation only Earnings on deferrals based on growth in the phantom stock vs a credited interest rate or other notional investment The company must use a formula to estimate the present value of the award at grant, making adjustments for expectd forfeitures. Report the value of the phantom stock by selecting the appropriate category. It provides increased incentives as the value of the company increases. Report your phantomstock and income from phantom stock in Part 2. 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. Financial statement presentation. By continuing to browse this site, you consent to the use of cookies. This guide details the required presentation and disclosures for each topical area. Discover what makes RSM the first choice advisor to middle market leaders, globally. 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. increase in value of the shares subject to the option. Sharing equity is a major step that should be considered thoroughly and carefully. 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. 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. All rights reserved. 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. 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. Phantom stock can also be changed at the leadership's discretion. Gordon Scott has been an active investor and technical analyst or 20+ years. %%EOF 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. Depending on the terms and conditions, restricted stock units may . Phantom stock plans have a lot in common with traditional nonqualified stock plans. Each member firm is responsible only for its own acts and omissions, and not those of any other party. 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)? 1 0 obj 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. 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. ", Investopedia requires writers to use primary sources to support their work. A phantom stock option is a bonus tax treatment plan where the amount of the bonus is determined by reference to the. For example, if the company has a bad year and the value of its stock decreases, the value of the phantom stock also decreases. For instance, a company could promise Mary, its new employee, that it would pay her a bonus every five years equal to the increase in the equity value of the firm times some percentage of total payroll at that point. The attributes of phantom stock units should be carefully considered to determine whether it is theright incentive planto meet a companys needs. 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. 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). "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. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. Otherwise, select the None (or less than $201) category. Stock option plans produce a more favorable fixed accounting result. Is the potential payment opportunity under the phantom stock plan in line with the companys compensation and business objectives in three, five, 10, or 15 years given certain performance assumptions? Even though it's not real, the phantom stock follows the price movement of the company's actual stock, paying out any resulting profits. However, unlike actual stock, the award does not confer equity ownership in the company. Will special vesting rules apply in the case of death, disability, or attainment of specified normal retirement age? Should the payment be made in a lump sum or in installments over a period of years? A phantom stock plan, or 'shadow stock' is a form of compensation offered to upper management that confers the benefits of owning company stock without the actual ownership or transfer of any shares. Similar toemployee stock options(ESO), SARs are beneficial to the employee when company stock prices rise; the difference with SARs is that employees do not have to pay theexercise price, but receive the sum of the increase in stock or cash. x\oGn?s4"{}C(jli#\>xqWUP AGuu=]l}v;7N\}Y'?>-fzMig7ttb$DQE#MQvyU9^ivn].6OU#%F6E-FM!h~-hEC.auw8P5mM*DK_mo_^%FK^pv7D6Om]D4_^n7V,"vUsBc&S=.|n[1hzRb@QWBY"kFs4Efzr9BaV+ 3PU%i%l |Q{$kdx`Q=Tim?#ecbz)tQNO}lQw+KTgrA:tH{Q+U++; RVv6oP!NS^|O5!=J#($m#k?ppF.=r Yes, subscribe to the newsletter, and member firms of the PwC network can email me about products, services, insights, and events. How will the phantom stock units be valued in the event of a merger, consolidation, or a change in control of the company? We also reference original research from other reputable publishers where appropriate. Please see www.pwc.com/structure for further details. By continuing to browse this site, you consent to the use of cookies. 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." 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). 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. You can set the default content filter to expand search across territories. A full set of financial statements for a period shall show all of the following: In any one year it is ordinarily desirable that the statement of financial position, the income statement, and the statement of changes in equity be presented for one or more preceding years, as well as for the current year. This type of plan is sometimes referred to as shadow stock. Please see www.pwc.com/structure for further details. She has worked in multiple cities covering breaking news, politics, education, and more. The company will customarily consider the phantom stock plan a benefit that requires disclosure in an S-8 filing with the SEC. However, unlike actual stock, the award does not confer equity ownership in the company. 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. 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. Yes, there is. 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). Select a section below and enter your search term, or to search all click A pension plan is an employee benefit that commits the employer to make regular payments to the employee in retirement. Reporting Stock Acquired through a Phantom Stock Plan. Your go-to resource for timely and relevant accounting, auditing, reporting and business insights. It creates a sense of ownership in the success of the business. An employee stock ownership plan (ESOP) enables employees to gain an ownership interest in their employer in the form of shares of company stock. Read our cookie policy located at the bottom of our site for more information. 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. 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. Unusual or innovative applications of GAAP. Stock compensation refers to the practice of rewarding employees with stock options that will vest, or become available for purchase, at a later date. Welcome to Viewpoint, the new platform that replaces Inform. 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. Does the phantom stock plan comply with section 409A? Other equity or allocation formulas could be used as well. <>>> The idea of phantom stock is to provide the benefit of stock appreciation without transferring actual stock to the employee. It provides a level of reassurance to employees since phantom stock programs are generally backed in cash. The accounting treatment is more complicated if the vesting occurs gradually. Choose from timely legislation and compliance alerts to monthly perspectives on the tax topics important to you. All rights reserved. 0 At redemption, the companys common share price was $30. 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. Phantom equity shares do not carry voting rights or similar rights associated with stock ownership. Our in-depth guide to the accounting, presentation and disclosures of investments in debt and equity securities. 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. It should be noted that the value of the phantom stock units fluctuates from year to year as the value of the company changes. Phantom shares provide benefits similar to stock ownership but without actually issuing company shares. 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. 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). This may restrict some of the flexibility of the plan design. These materials were downloaded from PwC's Viewpoint (viewpoint.pwc.com) under license. 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 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. Phantom stock also provides organizations with certain restrictions in place to provide incentives tied to stock value. endobj If they do, they could be subject to ERISA rules (see below). 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. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. 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. 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. 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. The cash payment per phantom stock would be $20. Equity Alternatives: Restricted Stock, Performance Awards, Phantom Stock, SARs, and More. For example, assume the issuing price of the phantom stock is $10. 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. 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}}. Statutory Stock Option Plans require shareholder approval within 12 months before or after adoption by the board of directors. Should participants receive the base value of the phantom stock units, or only participate in growth over and above the base value? Report any stock that you acquired as a separate lineentry, using the standard instructions for, 3 - Your Employment Agreements & Arrangements. A phantom stock program must meet the requirements set forth by the Internal Revenue Service (IRS) code 409(a). If payments should be made in installments, over how many years? Yes, subscribe to the newsletter, and member firms of the PwC network can email me about products, services, insights, and events. The plan must be properly vetted by an attorney, with all of the pertinent details specified in writing. None of these plans should be set up without the detailed advice of qualified legal and financial counsel. Each offering period of the ESPP lasts [ ]. In March, the common share price of Company A is $70. Phantom stock ties a financial gain directly to a company performance metric. 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. The method used for valuation should take into account adjustments that the parties agree are appropriate. Additionally. |$8:4; b ,` Q$;G3fU | 32023VngYv#T)WONF1pX20_RD m|aVikx:20@T1& O Phantom stock qualifies as a deferred compensation plan. In other words, no actual stock is ever awarded to the employee under a phantom stock plan. In addition, companies should be aware that events outside the companys control also affect its value if a third-party appraisal is used. If SARs or phantom stock awards are settled in shares, however, their accounting is somewhat different. 3 0 obj Click here to extend your session to continue reading our licensed content, if not, you will be automatically logged off. 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). 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. Unlike SARs, phantom stock may reflect dividends and stock splits. The value of the Phantom Units will be based on the Fair Market Value ("FMV") of Chaparral, L.L.C. 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. ERISA (the Employee Retirement Income and Security Act of 1974) is the federal law that governs retirement plans. Phantom Stock for Long-Term Incentive Awards. The concept is better understood below, where we contrast phantom shares (from a phantom stock plan) with stock options (from a stock option plan). 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. 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. endobj Internal Revenue Service. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. 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 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. 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. 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. 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. 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 . Contact Us Todaydocument.write(checkCookie()), 2019 - PhantomStockOnline.comPowered by VisionLinkAll Rights Reserved. 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. 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. These materials were downloaded from PwC's Viewpoint (viewpoint.pwc.com) under license. 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. 92-64 includes model provisions for a rabbi trust, including a statement that any . This site uses cookies to enhance site navigation and personalize your experience. 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. 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. 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. One of the great advantages of these plans is their flexibility. Stock-based compensation. 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. Phantom stock plans are considered liability awards for accounting purposes (assuming they will be settled in cash rather than stock). Despite their name, phantom stock plans are NQDC arrangements, not stock arrangements. 451. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. It is for your own use only - do not redistribute. 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. 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. How broadly or narrowly should the plan define what qualifies as cause for termination? <> 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. As a result, a phantom stock plan allows the participant to reap the benefits of an increasing share price without shareholder dilution. 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. Some organizations may use phantom stock as an incentive to upper management. This can apply to a limited liability corporation (LLC), a sole proprietor or S-companies restricted by the 100-owner rule. How frequently will phantom stock units be granted (e.g., a single upfront grant or annual grants)? He is a Chartered Market Technician (CMT). Companies should consider the possibility of such unexpected fluctuations in value, regardless of whether it relies on a third-party valuation. A cash payment from Company A equal to the current common share price: $50 x 500 = $25,000. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. 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. Other reporting entities choose to include this information in a "Significant Accounting Policies" footnote, as described in. Our book Equity Alternatives: Restricted Stock, Performance Awards, Phantom Stock, SARs, and More includes a detailed chapter on phantom stock and SARs. 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. Thus, regardless of any vesting schedule, there is no locked-in value inherent in the phantom stock. The company's leadership has considered other plans but found their rules too restrictive or implementation costs too high. Care must be taken to avoid giving out too much to early participants and not leaving enough for later employees. 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 Phantom stock may behypothetical, however, it stillcan pay out dividends and it experiences price changes just like its real counterpart. In a phantom stock plan, upon redemption of phantom stock, the plan participant receives cash compensation.