Each plan sponsor should make a determination after consulting with its accounting advisors. Phantom stock plans can be a valuable method forcompanies that seek to tie incentive compensation to increases or decreases in company value without awarding actual shares of company stock. 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 Third, tax and regulatory problems may make phantom stock more dangerous than it seems. Employees pay no taxes until they receive income from the plan. PwC. The limit does not apply, however, to performance-based compensation. The phantom stock plan should indicate the number of phantom stock units or the participation percentage interest to be granted to the employee. Disclosure of accounting policies shall identify and describe the accounting principles followed by the entity and the methods of applying those principles that materially affect the determination of financial position, cash flows, or results of operations. Other companies may have one or more of these plans but want to supplement them for certain employees with another kind of plan. The plan must be designed and documented to conform to section 409A. %PDF-1.6
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Phantom Stock: The Ideal Plan for Growing Private Companies 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. How broadly or narrowly should the plan define what qualifies as cause for termination? Value: Report the value of the phantom stock by selecting the appropriate category. In March, the common share price of Company A is $70. However, unlike actual stock, the award does not confer equity ownership in the company. As such, the sponsoring company must recognize the plan expense ratably over the vesting period. A phantom stock plan is a costly form of long-term incentive requiring a charge against the company's income statement. 594 0 obj
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There are several issues unique to public company use of phantom stock. The company will customarily consider the phantom stock plan a benefit that requires disclosure in an S-8 filing with the SEC. What Are Stock Appreciation Rights (SARs), and How Do They Work? 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. 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Finally, if the plan is intended to benefit more than key employees and defers some or all payment until after termination or retirement, it may be considered a de facto "ERISA plan." Phantom equity does not have some of the drawbacks associated with providing actual equity. About the Financial statement presentation guide& Full guide PDF. 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. 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). 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 . Some organizations may use phantom stock as an incentive to upper management. 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. Refer to the following PwC guide sections for guidance on those matters: Company name must be at least two characters long. In a phantom stock plan, upon redemption of phantom stock, the plan participant receives cash compensation. Parameters and Trading, With Examples, Employee Stock Options (ESOs): A Complete Guide, What Is a Pension? PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. For both phantom stock and SARs, employees are taxed when the right to the benefit is exercised. For these companies, phantom stock and stock appreciation rights may be very attractive. Phantom stock plans are considered liability awards for accounting purposes (assuming they will be settled in cash rather than stock). Are you still working? If payments should be made in installments, over how many years? Each offering period of the ESPP lasts [ ]. 451. Income Amount: Provide the exact amount of cash income over $200 during the reporting period. Once you have viewed this piece of content, to ensure you can access the content most relevant to you, please confirm your territory. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Our in-depth guide to the accounting, presentation and disclosures of investments in debt and equity securities. A pension plan is an employee benefit that commits the employer to make regular payments to the employee in retirement. Company name must be at least two characters long. 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. 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. For more information, see Section 409A Fundamentals. What behavior or performance levels is the company trying to incentivize? SARs are a form of bonus compensation given to employees that is equal to the appreciation of company stock over an established time period. 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. As the phantom stock units become vested, the value of the phantom stock units is includible as wages subject to FICA taxes. 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. Figure FSP 1-1 depicts the reporting periods required by the SEC for financial statements of public companies. Once you have viewed this piece of content, to ensure you can access the content most relevant to you, please confirm your territory. Other adjustments that might be considered include subtractions for capital investments made by the shareholders during the course of the plan, additions for any dividends paid to shareholders during this period, and the amount of accrued deferred compensation attributable to the phantom stock units themselves. The plan must be properly vetted by an attorney, with all of the pertinent details specified in writing. Get reusable documents specific to your state in the most extensive online forms library, with 24/7 access to your acquired samples. Should participants receive the base value of the phantom stock units, or only participate in growth over and above the base value? Understandably, a lower issue phantom share value provides greater upside for the plan participant upon redemption: *Assume that the common stock price at redemption is $35. 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. Welcome to Viewpoint, the new platform that replaces Inform. The company's owners want to share the economic value of equity, but not equity itself. 1.1.3 Basis of presentation. The specifics regarding vesting and payment are covered in Section 5. of this phantom plan and Section 1 of the form There are two main types ofphantom stock plans. An employee stock ownership plan (ESOP) enables employees to gain an ownership interest in their employer in the form of shares of company stock. Phantom stock plans are considered "liability awards" for accounting purposes (assuming they will be settled in cash rather than stock). RSM US LLP is a limited liability partnership and the U.S. member firm of RSM International, a global network of independent audit, tax and consulting firms. Phantom shares provide benefits similar to stock ownership but without actually issuing company shares. |$8:4; b ,` Q$;G3fU
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PDF SBP Footnote Disclosure Template Even though it's not real, the phantom stock follows the price movement of the company's actual stock, paying out any resulting profits. What percentage of the companys value should be dedicated or reserved for this plan? Management might consider materiality of the related account, as well as the requirements of users, such as investors, analysts, financial institutions, and other constituents. Phantom stock payments are usually made at a fixed, predetermined date. If the plan is intended to benefit most or all employees in ways similar to qualified plans like ESOPs or 401(k) plans, and it defers some or all payment until after termination, it may be considered a de facto "ERISA plan." 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. Phantom stock plans have financial implications for employees and companies that cut both ways: Pros. 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). %%EOF
Should the payment be made in a lump sum or in installments over a period of years? 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). 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. To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below: A free, comprehensive best practices guide to advance your financial modeling skills, Financial Modeling & Valuation Analyst (FMVA), Commercial Banking & Credit Analyst (CBCA), Capital Markets & Securities Analyst (CMSA), Certified Business Intelligence & Data Analyst (BIDA), Financial Planning & Wealth Management (FPWM). Consider removing one of your current favorites in order to to add a new one. 4 0 obj
When will phantom stock units vest? Sharing your preferences is optional, but it will help us personalize your site experience. Reporting entities are required to describe all significant accounting policies in the financial statements. 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. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. 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. These materials were downloaded from PwC's Viewpoint (viewpoint.pwc.com) under license. Equity grants may give rise to voting rights or unforeseen minority rights under state law. ", Investopedia requires writers to use primary sources to support their work. In addition, for a privately held business, describe the line of business, unless you have already provided this information in another entry. If phantom stock units are awarded annually, will each new grant be subject to a fresh vesting schedule? 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 . Thus, regardless of any vesting schedule, there is no locked-in value inherent in the phantom stock. The value of the Phantom Units will be based on the Fair Market Value ("FMV") of Chaparral, L.L.C. 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. 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. 3 0 obj
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 (i.e., based on a formula or an appraisal)? 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. For example, vesting may be cliff or graded, time-based, or based on the achievement of specified financial performance goals. 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. 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. A company may wish that former employees do not own company stock after they separate from service. Appreciation is allocated to each award pro-rata to time over which it is earned. endstream
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<. 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. A phantom stock plan constitutes a deferred compensation plan. This chapter introduces the general concepts of financial statement presentation and disclosure that underlie the detailed guidance that is covered in the remaining chapters of this guide. 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.