Phantom stock plans are considered "liability awards" for accounting purposes (assuming they will be settled in cash rather than stock). Stock option plans produce a more favorable fixed accounting result. 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. Companies should consider the possibility of such unexpected fluctuations in value, regardless of whether it relies on a third-party valuation. Do Not Sell or Share My Personal Information (California). 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). 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. In addition, report your participation in a phantom stock plan in Part 3 (see Part 3 of this guide for details). 594 0 obj <> endobj Reporting Stock Acquired through a Phantom Stock Plan. 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. PwC. For more information, see Section 409A Fundamentals. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Handbook: Investments September 30, 2022. Phantom stock may behypothetical, however, it stillcan pay out dividends and it experiences price changes just like its real counterpart. Value: Report the value of the phantom stock by selecting the appropriate category. It is for your own use only - do not redistribute. Rather than getting physical stock, the employee receives mock stock. 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. PDF SBP Footnote Disclosure Template <>>> Despite their name, phantom stock plans are NQDC arrangements, not stock arrangements. Write cash payment for cash income over $200. 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. EBPAQC Alert No. 451 - AICPA Appreciation is allocated to each award pro-rata to time over which it is earned. Handbooks - KPMG that do not have publicly traded shares. Any subsequent gain on the shares is taxable as capital gain. 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. You can learn more about the standards we follow in producing accurate, unbiased content in our. 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 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. An introduction to phantom stock and stock appreciation rights 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. endobj 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. (Consider current and future positions). Please seewww.pwc.com/structurefor further details. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Description : Provide the name of the employer, write "phantom stock," and indicate whether the phantom stock is vested. Income Type: Write cash payment for cash income over $200. 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. 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. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. This is the case even though the amounts are not subject to income tax until actually paid to the employee. Each member firm is a separate legal entity. % To receive more complimentary information about Phantom Stock from our expert advisors, please provide us with your contact information below. 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. %%EOF All rights reserved. For these companies, phantom stock and stock appreciation rights may be very attractive. If phantom stock units are awarded annually, will each new grant be subject to a fresh vesting schedule? He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. Depending on the terms and conditions, restricted stock units may . Statutory Stock Option Plans require shareholder approval within 12 months before or after adoption by the board of directors. This guide does not address the income tax, earnings per share, or cash flow implications of stock-based compensation awards nor other presentation and disclosure matters. Unlike SARs, phantom stock may reflect dividends and stock splits. 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. Her expertise is in personal finance and investing, and real estate. To receive more complimentary information about Phantom Stock from our expert advisors, please provide us with your contact information below. 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). The company must record a compensation charge on its income statement as the employee's interest in the award increases. A pension plan is an employee benefit that commits the employer to make regular payments to the employee in retirement. 616 0 obj <>stream Our book Equity Alternatives: Restricted Stock, Performance Awards, Phantom Stock, SARs, and More includes a detailed chapter on phantom stock and SARs. Are you still working? - 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 . Sharing equity is a major step that should be considered thoroughly and carefully. There are several issues unique to public company use of phantom stock. |$8:4; b ,` Q$;G3fU | 32023VngYv#T)WONF1pX20_RD m|aVikx:20@T1& O 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. Determining which accounting policies are considered significant is a matter of management judgment. Financial statement presentation. 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. SARs are a form of bonus compensation given to employees that is equal to the appreciation of company stock over an established time period. The agreement gives the participant the right to cash payments at (1) specified times or (2) specified conditions based on the market value of equivalent shares of the company. EBPAQC Alert No. 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. Qualifying Emerging Growth Companies, as defined in the Jumpstart Our Business Startups (JOBS) Act, and Smaller Reporting Companies, as defined in S-K 10(f),are permitted to omit the earliest year income statement and statements of comprehensive income, cash flows, and changes in stockholders equityin an initial public offering. The purpose of the Chaparral Energy Phantom Stock Plan (the "Plan") is to provide deferred compensation to certain key employees (the "Participants") of Chaparral Energy. Your go-to resource for timely and relevant accounting, auditing, reporting and business insights. 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. Click here to extend your session to continue reading our licensed content, if not, you will be automatically logged off. 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. The concept is better understood below, where we contrast phantom shares (from a phantom stock plan) with stock options (from a stock option plan). If you have any questions pertaining to any of the cookies, please contact us us_viewpoint.support@pwc.com. How should a change in control be defined? As the phantom stock units become vested, the value of the phantom stock units is includible as wages subject to FICA taxes. 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. Such plans must conform to IRS Section 409A and be vetted by an attorney with plan details specified in writing. Lastly, GAAP accounting also permits C-corporations to book a deferred tax asset (DTA) for future distributions, helping offset the overall accrual. 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. Phantom stock can help in getting an executive team to think and act like equity partners. The company is not a company - it is a nonprofit or government entity that nonetheless can create some kind of measurement that mimics equity growth that it would like to use as a basis to create an employee bonus. It provides increased incentives as the value of the company increases. 2019 - 2023 PwC. For example, a company could exclude gain or loss attributable to operations or sales of certain divisions of the company. It should be noted that the value of the phantom stock units fluctuates from year to year as the value of the company changes. 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. During the installment payout period, should earnings be credited on the balance at a specified interest rate? Phantom stock plans are considered liability awards for accounting purposes (assuming they will be settled in cash rather than stock). What percentage of the companys value should be dedicated or reserved for this plan? The taxation of the bonus would be much like any other cash bonus--it is taxed as ordinary income at the time it is received. 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). A phantom stock plan, also called a shadow stock plan, is a type of deferred employee compensation plan where the type of shares issued to plan participants are phantom shares instead of company shares. How will the phantom stock units be valued in the event of a merger, consolidation, or a change in control of the company? PDF -m|ol|o1h t-m P ub -|;olr-m Q - Shearman & Sterling Phantom Stock: The Ideal Plan for Growing Private Companies Handbook: Financial statement presentation September 30, 2022. 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. than $200 in income during the reporting period. If SARs or phantom stock awards are settled in shares, however, their accounting is somewhat different. Refer to the following PwC guide sections for guidance on those matters: Company name must be at least two characters long.