How broadly or narrowly should the plan define what qualifies as cause for termination? Phantom stock plans are considered "liability awards" for accounting purposes (assuming they will be settled in cash rather than stock). Varying accrual schedules can be found in the market. Phantom stock can be provided to every employee, either across the board or distributed variably depending on performance, seniority, or other factors. 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. Your go-to resource for timely and relevant accounting, auditing, reporting and business insights. 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. Phantom equity does not have some of the drawbacks associated with providing actual equity. Companies can choose what the triggers areexamples include a separation from service, a change in control, or a specified future date or fixed payment schedule. 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. 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. We use cookies to personalize content and to provide you with an improved user experience. The company's owners want to share the economic value of equity, but not equity itself. There are also shareholder approval rules related to the deduction limitation under IRC 162 (m). Private Companies Need to Update Rule 701 | Fenwick & West LLP <> If John redeems the 500 phantom shares in March, he will receive: The choice between the two options depends on whether the phantom stock plan is appreciation only or full value, as discussed below. Investments by and distributions to owners during the period. Appreciation is allocated to each award pro-rata to time over which it is earned. Other equity or allocation formulas could be used as well. 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. For example, assume the issuing price of the phantom stock is $10. 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. CFI is the official provider of the Capital Markets & Securities Analyst (CMSA) certification program, designed to transform anyone into a world-class financial analyst. Phantom stock plans have a lot in common with traditional nonqualified stock plans. 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. Phantom stock plans designed just for a limited number of employees, or as a bonus for a broader group of employees that pays out annually based on a measure of equity, would most likely avoid these problems. For example, assume the issuing price of the phantom stock is $10. As the phantom stock units become vested, the value of the phantom stock units is includible as wages subject to FICA taxes. endobj Phantom equity shares do not carry voting rights or similar rights associated with stock ownership. This may restrict some of the flexibility of the plan design. %PDF-1.6 % In other words, no actual stock is ever awarded to the employee under a phantom stock plan. Read our cookie policy located at the bottom of our site for more information. Select a section below and enter your search term, or to search all click However, there is one key difference between the two plans. This compensation may impact how and where listings appear. PDF SBP Footnote Disclosure Template - FinTools Statutory options include Incentive Stock Options (ISO's) and options granted under an Employee Stock Purchase Plan (ESPP). Financial statement presentation. 1.1 Stock-based compensation background - PwC Report your phantomstock and income from phantom stock in Part 2. 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. Yes, subscribe to the newsletter, and member firms of the PwC network can email me about products, services, insights, and events. The idea of phantom stock is to provide the benefit of stock appreciation without transferring actual stock to the employee. In addition, companies should be aware that events outside the companys control also affect its value if a third-party appraisal is used. Phantom stock qualifies as a deferred compensation plan. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Rather than getting physical stock, the employee receives mock stock. 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). Now each tranche of vested awards is treated as a separate award. Are you still working? 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. All rights reserved. The amount of the cash payment is linked to the market value of a predetermined number of shares of the company's stock. Once you have viewed this piece of content, to ensure you can access the content most relevant to you, please confirm your territory. A phantom stock plan and stock option plan both award employees from the share appreciation of the companys stock price. 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. 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. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Should participants receive the base value of the phantom stock units, or only participate in growth over and above the base value? But that flexibility is also their greatest challenge. The specifics regarding vesting and payment are covered in Section 5. of this phantom plan and Section 1 of the form In addition, for a privately held business, describe the line of business, unless you have already provided this information in another entry. To learn why sharing value with those who drive growth is so critical to your pay strategy, download and read our report today! What percentage of the companys value should be dedicated or reserved for this plan? Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. Figure FSP 1-1 depicts the reporting periods required by the SEC for financial statements of public companies. 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. Phantom shares are a contractual agreement between the phantom stock plan participant and the employer. Select a section below and enter your search term, or to search all click There are several issues unique to public company use of phantom stock. Please see www.pwc.com/structure for further details. 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. Ready to Speak with a Phantom Stock Expert Now?Call (888) 703-0080 or complete our contact form. A cash payment from Company A equal to the current common share price: $50 x 500 = $25,000. None of these plans should be set up without the detailed advice of qualified legal and financial counsel. To learn why sharing value with those who drive growth is so critical to your pay strategy, download and read our report today! 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 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. endstream endobj 595 0 obj <. Even though it's not real, the phantom stock follows the price movement of the company's actual stock, paying out any resulting profits. Phantom stock plans are deferred compensation plans and, as such, must be designed and documented to conform to the requirements of section 409A. Phantom Stock Plan: What It Is, How It Works, 2 Types - Investopedia Statutory Stock Option Plans require shareholder approval within 12 months before or after adoption by the board of directors. 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. Reporting Stock Acquired through a Phantom Stock Plan. A phantom stock plan is a costly form of long-term incentive requiring a charge against the company's income statement. 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). This alert contains information about EBP financial statement disclosures related to COVID-19, CARES Act, and SECURE Act. To receive more complimentary information about Phantom Stock from our expert advisors, please provide us with your contact information below. 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. 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. At redemption, the companys common share price was $30. Please see www.pwc.com/structure for further details. 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 Unit Plan (the "Plan") is to provide deferred compensation to certain key employees (the "Participants") of Chaparral Energy. What is a Phantom Stock Plan? | Shareworks by Morgan Stanley 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. It represents a bonus payable at a future date if certain objectives are met or if a specific event occurs, like the sale of the company. Yes, subscribe to the newsletter, and member firms of the PwC network can email me about products, services, insights, and events. 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. About the Financial statement presentation guide& Full guide PDF. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. This article was originally published on Oct. 12, 2020 and has been updated.