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. 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. 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Investments by and distributions to owners during the period. 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. Will any funding mechanism be used to help the company meet fund its future obligations to pay the amount owed to recipients? 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. Additional legal documents and agreements, such as a shareholders agreement, may have to be amended or drafted, increasing complexity and legal fees. 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. Other reporting entities choose to include this information in a "Significant Accounting Policies" footnote, as described in. Otherwise, select the None (or less than $201) category. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. 2019 - 2023 PwC. 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. 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. This content is copyright protected. 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). 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. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. Stock appreciation rights (SARs) are similar to a phantom stock-based program. 0 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. It can also be used selectively as a reward or a bonus to employees who meet certain criteria. Discover what makes RSM the first choice advisor to middle market leaders, globally. 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. This type of plan is sometimes referred to as shadow stock. What percentage of the companys value should be dedicated or reserved for this plan? 1.1.3 Basis of presentation. |$8:4; b ,` Q$;G3fU | 32023VngYv#T)WONF1pX20_RD m|aVikx:20@T1& O 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 first issue is figuring out how much phantom stock to give out. 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. 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. We use cookies to personalize content and to provide you with an improved user experience. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Parameters and Trading, With Examples, Employee Stock Options (ESOs): A Complete Guide, What Is a Pension? 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. Get reusable documents specific to your state in the most extensive online forms library, with 24/7 access to your acquired samples. Click here to extend your session to continue reading our licensed content, if not, you will be automatically logged off. ", Investopedia requires writers to use primary sources to support their work. In this case, the company must estimate the expected amount earned based on progress towards the target. The concept is better understood below, where we contrast phantom shares (from a phantom stock plan) with stock options (from a stock option plan). Handbook: Investments September 30, 2022. 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. 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. Stock option plans produce a more favorable fixed accounting result. The accounting treatment is more complicated if the vesting occurs gradually. This can apply to a limited liability corporation (LLC), a sole proprietor or S-companies restricted by the 100-owner rule. Once you have viewed this piece of content, to ensure you can access the content most relevant to you, please confirm your territory. The attributes of phantom stock units should be carefully considered to determine whether it is theright incentive planto meet a companys needs. In addition, report your participation in a phantom stock plan in Part 3 (see Part 3 of this guide for details). 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. At that point, the value of the award, minus any consideration paid for it (there usually is none) is taxed as ordinary income to the employee and is deductible by the employer. Should forfeiture provisions apply if the employee enters into competition with the company or is terminated for cause? 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 . 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? For example, if the company has a bad year and the value of its stock decreases, the value of the phantom stock also decreases. Provide the exact amount of cash income over $200 during the reporting period. All rights reserved. This can, in turn, result in higher selling prices for a business if a prospective buyerperceives the upper management team as being stable. 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. The plan must be designed and documented to conform to section 409A. The vesting and forfeiture provisions contained in the phantom stock plan or individual grant agreement determine whether and when the executives rights are vested. Because they can be designed in so many ways, many decisions need to be made about such issues as who gets how much, vesting rules, liquidity concerns, restrictions on selling shares (when awards are settled in shares), eligibility, rights to interim distributions of earnings, and rights to participate in corporate governance (if any). We use cookies to personalize content and to provide you with an improved user experience. Phantom Stock Plan. Visit rsmus.com/about for more information regarding RSM US LLP and RSM International. 594 0 obj <> endobj Phantom stock qualifies as a deferred compensation 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. Description : Provide the name of the employer, write "phantom stock," and indicate whether the phantom stock is vested. None of these plans should be set up without the detailed advice of qualified legal and financial counsel. 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). 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. Equity Alternatives: Restricted Stock, Performance Awards, Phantom Stock, SARs, and More. Ready to Speak with a Phantom Stock Expert Now?Call (888) 703-0080 or complete our contact form. Other equity or allocation formulas could be used as well. Varying accrual schedules can be found in the market. 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, 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. Chapter 1:Stock-based compensation overview and scope. To learn why sharing value with those who drive growth is so critical to your pay strategy, download and read our report today! 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. 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. Publicly traded companies will want to be certain their phantom stock structure qualifies as performance-based compensation. EBPAQC Alert No. The method used for valuation should take into account adjustments that the parties agree are appropriate. Care must be taken to avoid giving out too much to early participants and not leaving enough for later employees. 4 0 obj If the issuing phantom stock price is $30, and the companys share price at redemption is $100, the cash payment per phantom stock would be capped at $50 $30 = $20. 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. 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. Her expertise is in personal finance and investing, and real estate. Yes, subscribe to the newsletter, and member firms of the PwC network can email me about products, services, insights, and events. It does not allow non-qualified plans to operate like qualified plans, so the plan could be ruled illegal. Employee Stock Ownership Plan (ESOP): What It Is, How It Works, Advantages, What Are Stock Options? When will phantom stock units vest? (Consider current and future positions). 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. Should the payment be made in a lump sum or in installments over a period of years? Are you still working? For example, capping the cash payment to a company share price limit of $50. 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 We also reference original research from other reputable publishers where appropriate. 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.
