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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. 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. Gordon Scott has been an active investor and technical analyst or 20+ years. Unusual or innovative applications of GAAP. The concept is better understood below, where we contrast phantom shares (from a phantom stock plan) with stock options (from a stock option plan). 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. Care must be taken to avoid giving out too much to early participants and not leaving enough for later employees. 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). 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. 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. 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. The vesting and forfeiture provisions contained in the phantom stock plan or individual grant agreement determine whether and when the executives rights are vested. %PDF-1.5 Under ASC 718, companies recognize the fair value of those awards in their financial statements, generally beginning on the date the awards are granted. Learn more about how they work. 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. Does the phantom stock plan comply with section 409A? 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 are considered "liability awards" for accounting purposes (assuming they will be settled in cash rather than stock). Phantom Stock Plan. For example, capping the cash payment to a company share price limit of $50. In general, if at redemption, the companys stock price is below the issuing price of the companys phantom stock, the plan participant is not entitled to a cash payment. However, the company and the employee would each be subject to Medicare payroll tax since the Medicare tax is imposed on total wages, without any wage cap. when the vesting is triggered by a performance event, such as a profit target. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. hbbd```b``v+A$X{lG#d_b+gHFV #CiDO ` Phantom stock can help in getting an executive team to think and act like equity partners. than $200 in income during the reporting period. Handbook: Financial statement presentation September 30, 2022. Determining which accounting policies are considered significant is a matter of management judgment. 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. In addition, Comparative financial statements provide historical context for a reporting entity's financial performance and enable users to identify trends or other relationships. Phantom stock qualifies as a deferred compensation plan. 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 1.1 Financial statement presentation and disclosure requirements. Similarly, a major event like thecoronavirus pandemic affects market valuesfor many companies. 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. For both phantom stock and SARs, employees are taxed when the right to the benefit is exercised. Provide the exact amount of cash income over $200 during the reporting period. The company cannot offer conventional kinds of ownership plans because of corporate restrictions, as would be the case, for instance, with a Limited Liability Corporation, partnership, a sole proprietorship, or an S corporation concerned about the 100-owner rule. 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. Income Type: Write cash payment for cash income over $200. 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. As such, the sponsoring company must recognize the plan expense ratably over the vesting period. Reporting entities are required to describe all significant accounting policies in the financial statements. Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. 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 Phantom stock can be provided to every employee, either across the board or distributed variably depending on performance, seniority, or other factors. This article was originally published on Oct. 12, 2020 and has been updated. 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. Pros and Cons of Phantom Stock Plans. 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. 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. As with phantom stock, this is normally paid out in cash, but it could be paid in shares. If you have any questions pertaining to any of the cookies, please contact us us_viewpoint.support@pwc.com. Stock appreciation rights (SARs) are similar to a phantom stock-based program. 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. With that said, the value of the phantom stock at redemption is tied to the companys stock price. T8g_vwZ4Yj},_A?+:8eg^I_nLzJ.?!(siS&M=pd3+GsQWr3We+$j?8[H+&aF,MhW{N?SJ\[5UQ6#l0E2CpaF}L58\;.F^T cS^yU_JL\FlO9'2H S+?g&Rg(dD I?0xNi-quw4jIq,(h%+JfR=XX82Gc3dv}H-t?+Rz*_o}56*{p4Cj/(%e(ZT^RCdOE >>Lx8tfjRAX&jPu[HlC}.^U0JJ@Ec'Ku& "cXZ RH 4S+TeC= X5Ehnp+j' C,-Jy}htnO%-rcwpb~4wX=4/wp{>B>n;5Z Z?=#-o` ;5N_Lxy'XX9HR9$+ AV@KIDQ9"#a.60DF&? 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 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. How frequently will phantom stock units be granted (e.g., a single upfront grant or annual grants)? Typically, the valuation will follow an event that triggers phantom stock unit payouts so that the amount of such payouts can be determined. 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. Click here to extend your session to continue reading our licensed content, if not, you will be automatically logged off. 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. Despite their name, phantom stock plans are NQDC arrangements, not stock arrangements. 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. For example, a company could exclude gain or loss attributable to operations or sales of certain divisions of the company. He is a Chartered Market Technician (CMT). Please seewww.pwc.com/structurefor further details. The company's owners want to share the economic value of equity, but not equity itself. Value: Report the value of the phantom stock by selecting the appropriate category. Phantom stock also provides organizations with certain restrictions in place to provide incentives tied to stock value. 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. For these companies, phantom stock and stock appreciation rights may be very attractive. % 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. This can, in turn, result in higher selling prices for a business if a prospective buyerperceives the upper management team as being stable. 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. |$8:4; b ,` Q$;G3fU | 32023VngYv#T)WONF1pX20_RD m|aVikx:20@T1& O Each member firm is a separate legal entity. These include white papers, government data, original reporting, and interviews with industry experts. 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. Stock-based compensation. Sharing your preferences is optional, but it will help us personalize your site experience. This is the case even though the amounts are not subject to income tax until actually paid to the employee. Each offering period of the ESPP lasts [ ]. Once you have viewed this piece of content, to ensure you can access the content most relevant to you, please confirm your territory. Phantom stock plans have financial implications for employees and companies that cut both ways: Pros. Varying accrual schedules can be found in the market. Select a section below and enter your search term, or to search all click Each member firm is a separate legal entity. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. SARs often can be exercised any time after they vest. 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. Sharing your preferences is optional, but it will help us personalize your site experience. When will phantom stock units vest? In other cases, valuation may be required periodically, such as annually, or on a specific future date. A phantom stock plan is a costly form of long-term incentive requiring a charge against the company's income statement. You can learn more about the standards we follow in producing accurate, unbiased content in our. Investing for Teens: What They Should Know, Rolling Over Company Stock from a 401(k): When It Doesand Doesn'tMake Sense, Taxation on Non-Qualified Deferred Compensation Plans, Using Phantom Stock as an Organizational Benefit. 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. 2 0 obj Management might consider materiality of the related account, as well as the requirements of users, such as investors, analysts, financial institutions, and other constituents. All other aspects of the plan would be the same. It is potentially an "uncapped liability" to the company. 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. Thus, regardless of any vesting schedule, there is no locked-in value inherent in the phantom stock. The company will customarily consider the phantom stock plan a benefit that requires disclosure in an S-8 filing with the SEC. For example, if the company has a bad year and the value of its stock decreases, the value of the phantom stock also decreases. 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. 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 This content is copyright protected.