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 . In-depth guide on presentation and disclosure requirements under US GAAP, plus considerations under SEC regulations. As such, the sponsoring company must recognize the plan expense ratably over the vesting period. If SARs or phantom stock awards are settled in shares, however, their accounting is somewhat different. For many companies, the route to employee ownership is through a formal employee ownership plan such as an ESOP, 401(k) plan, stock option, or employee stock purchase plan (ESPPsa regulated stock purchase plan with specific tax benefits). She has worked in multiple cities covering breaking news, politics, education, and more. Ready to Speak with a Phantom Stock Expert Now?Call (888) 703-0080 or complete our contact form. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. What behavior or performance levels is the company trying to incentivize? 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." Description: Provide the name of the employer, write phantom stock, and indicate whether the phantom stock is vested. 1.1 Financial statement presentation and disclosure requirements. However, unlike actual stock, the award does not confer equity ownership in the company. When will phantom stock units vest? This can also help ensure employee retention, especially in times of internal volatility, such as an ownership change or a personal emergency. As the phantom stock units become vested, the value of the phantom stock units is includible as wages subject to FICA taxes. All other aspects of the plan would be the same. You can set the default content filter to expand search across territories. 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 . when the vesting is triggered by a performance event, such as a profit target. A phantom stock option is a bonus tax treatment plan where the amount of the bonus is determined by reference to the. Depending on the terms and conditions, restricted stock units may . 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. endobj The company's owners want to share the economic value of equity, but not equity itself. PwC. Reporting Stock Acquired through a Phantom Stock Plan. If payments should be made in installments, over how many years? The company already has a conventional ownership plan, such as an ESOP, but wants to provide additional equity incentives, perhaps without providing stock itself, to selected employees. 1 0 obj endstream endobj startxref 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. Shares are not actually issued or transferred to the option-. |$8:4; b ,` Q$;G3fU | 32023VngYv#T)WONF1pX20_RD m|aVikx:20@T1& O The company will customarily consider the phantom stock plan a benefit that requires disclosure in an S-8 filing with the SEC. There are several issues unique to public company use of phantom stock. SARs are a form of bonus compensation given to employees that is equal to the appreciation of company stock over an established time period. It is for your own use only - do not redistribute. This can apply to a limited liability corporation (LLC), a sole proprietor or S-companies restricted by the 100-owner rule. Please seewww.pwc.com/structurefor further details. Xylophone Technologies Corporation, unvested phantom stock. 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. 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. For example, vesting may be cliff or graded, time-based, or based on the achievement of specified financial performance goals. The cash payment per phantom stock would be $30. 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. Report your phantomstock and income from phantom stock in Part 2. 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. In other words, no actual stock is ever awarded to the employee under a phantom stock plan. These include white papers, government data, original reporting, and interviews with industry experts. 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). Are you still working? After a period of time, the cash value of the phantom stock is distributed to the participating employees. If you have any questions pertaining to any of the cookies, please contact us us_viewpoint.support@pwc.com. What percentage of the companys value should be dedicated or reserved for this plan? 1.1.3 Basis of presentation. 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. Phantom Stock for Long-Term Incentive Awards. 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. 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. 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. Her expertise is in personal finance and investing, and real estate. This may restrict some of the flexibility of the plan design. Third, tax and regulatory problems may make phantom stock more dangerous than it seems. SARs often can be exercised any time after they vest. Should the payment be made in a lump sum or in installments over a period of years? Value: Report the value of the phantom stock by selecting the appropriate category. For example, a company could exclude gain or loss attributable to operations or sales of certain divisions of the company. 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. How will the phantom stock units be valued (i.e., based on a formula or an appraisal)? A type of deferred employee compensation plan where plan participants benefit from the upside of a companys share price without actually receiving company shares. PwC. 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. But that flexibility is also their greatest challenge. A pension plan is an employee benefit that commits the employer to make regular payments to the employee in retirement. As a result, a phantom stock plan allows the participant to reap the benefits of an increasing share price without shareholder dilution. %%EOF 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. Provide the exact amount of cash income over $200 during the reporting period. Refer to the following PwC guide sections for guidance on those matters: Company name must be at least two characters long. (If based only on the appreciation, this is commonly referred to as a stock appreciation right.) Phantom equity shares do not carry voting rights or similar rights associated with stock ownership. 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. 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. This content is copyright protected. The value may be a specified value, determined by an express written formula or determined by a third-party appraisal. Companies should consider the possibility of such unexpected fluctuations in value, regardless of whether it relies on a third-party valuation. stream Similarly, if there is an explicit or implied reduction in compensation to get the phantom stock, there could be securities issues involved, most likely anti-fraud disclosure requirements. 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. The vesting and forfeiture provisions contained in the phantom stock plan or individual grant agreement determine whether and when the executives rights are vested. 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. 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. Stock appreciation rights (SARs) are similar to a phantom stock-based program. How should a change in control be defined? For example, assume the issuing price of the phantom stock is $10. If so, at what rate? 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. 451. There are two main types ofphantom stock plans. To learn why sharing value with those who drive growth is so critical to your pay strategy, download and read our report today! Management might consider materiality of the related account, as well as the requirements of users, such as investors, analysts, financial institutions, and other constituents. 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. Should the phantom stock units pending payment continue to participate in the growth in value of the company? This is the case even though the amounts are not subject to income tax until actually paid to the employee. 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. 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