Additional legal documents and agreements, such as a shareholders agreement, may have to be amended or drafted, increasing complexity and legal fees. For these companies, phantom stock and stock appreciation rights may be very attractive. However, there is one key difference between the two plans. 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. ERISA (the Employee Retirement Income and Security Act of 1974) is the federal law that governs retirement plans. Each plan sponsor should make a determination after consulting with its accounting advisors. Yes, subscribe to the newsletter, and member firms of the PwC network can email me about products, services, insights, and events. PwC. CFI is the official provider of the Capital Markets & Securities Analyst (CMSA) certification program, designed to transform anyone into a world-class financial analyst. As the phantom stock units become vested, the value of the phantom stock units is includible as wages subject to FICA taxes. As with phantom stock, this is normally paid out in cash, but it could be paid in shares. Shares are not actually issued or transferred to the option-. Report phantom stock if the value of the phantom stock was more than $1,000 at the end of the reporting period or if you received more than $200 in income during the reporting period. 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. At redemption, the companys common share price was $30. 594 0 obj <> endobj 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. Figure FSP 1-1 depicts the reporting periods required by the SEC for financial statements of public companies. It is for your own use only - do not redistribute. These financial statements must include consolidated balance sheets and statements of . Phantom Stock Plan. This content is copyright protected. 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. 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. If they do, they could be subject to ERISA rules (see below). If SARs or phantom stock awards are settled in shares, however, their accounting is somewhat different. Other equity or allocation formulas could be used as well. To receive more complimentary information about Phantom Stock from our expert advisors, please provide us with your contact information below. Unusual or innovative applications of GAAP. Phantom stock can also be changed at the leadership's discretion. 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. There are two main types ofphantom stock plans. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. 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. The offers that appear in this table are from partnerships from which Investopedia receives compensation. All other aspects of the plan would be the same. We also reference original research from other reputable publishers where appropriate. ", Investopedia requires writers to use primary sources to support their work. ERISA (the Employee Retirement Income and Security Act of 1974) is the federal law that governs retirement plans. endobj Unlike accounting for variable award stock options, where a charge is amortized only over a vesting period, with phantom stock and SARs, the charge builds up during the vesting period, then after vesting all additional stock price increases are taken as they occur. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. The cash payment per phantom stock would be $30. Description: Provide the name of the employer, write phantom stock, and indicate whether the phantom stock is vested. 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. 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. Who will be allowed to participate? In addition, for a privately held business, describe the line of business, unless you have already provided this information in another entry. Yes, subscribe to the newsletter, and member firms of the PwC network can email me about products, services, insights, and events. One of the great advantages of these plans is their flexibility. 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. For example, if the company has a bad year and the value of its stock decreases, the value of the phantom stock also decreases. 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. Other reporting entities choose to include this information in a "Significant Accounting Policies" footnote, as described in. Should forfeiture provisions apply if the employee enters into competition with the company or is terminated for cause? A type of deferred employee compensation plan where plan participants benefit from the upside of a companys share price without actually receiving company shares. This can apply to a limited liability corporation (LLC), a sole proprietor or S-companies restricted by the 100-owner rule. A phantom stock plan and stock option plan both award employees from the share appreciation of the companys stock price. Write cash payment for cash income over $200. 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. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. that do not have publicly traded shares. Unlike SARs, phantom stock may reflect dividends and stock splits. In most cases, a valuation is required upon the employees termination, death, or disability. We use cookies to personalize content and to provide you with an improved user experience. The vesting and forfeiture provisions contained in the phantom stock plan or individual grant agreement determine whether and when the executives rights are vested. As a result, a phantom stock plan allows the participant to reap the benefits of an increasing share price without shareholder dilution. About the Financial statement presentation guide& Full guide PDF. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. % Phantom stock, also known as synthetic equity, has no inherent requirements or restrictions regarding its use, allowing the organization to use it however it chooses. All rights reserved. Contact Us Todaydocument.write(checkCookie()), 2019 - PhantomStockOnline.comPowered by VisionLinkAll Rights Reserved. EBPAQC Alert No. Similarly, a major event like thecoronavirus pandemic affects market valuesfor many companies. 1 0 obj Select a section below and enter your search term, or to search all click For example, assume the issuing price of the phantom stock is $10. The calendar year-end audited financial statements of the Company will serve as the basis for the adjusted balance sheet for the valuation period ending December . A closer look at phantom stock Considered restricted stock units (RSUs), phantom stock units are tied to the value of your company's stock and generally vest over a set period. A phantom stock plan is a costly form of long-term incentive requiring a charge against the company's income statement. As of the end of each of the two most recent fiscal years, Statement of changes in stockholders' equity, Present in a separate statement or in the footnotes for each period a statement of comprehensive income is presented. A pension plan is an employee benefit that commits the employer to make regular payments to the employee in retirement. hbbd```b``v+A$X{lG#d_b+gHFV #CiDO ` 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. |$8:4; b ,` Q$;G3fU | 32023VngYv#T)WONF1pX20_RD m|aVikx:20@T1& O By simulating stock ownership, without actually providing it, management ensures that equity does not become diluted for other shareholders. Will special vesting rules apply in the case of death, disability, or attainment of specified normal retirement age? Second, the equity of the company must be valued in a defensible, careful way. If the employees base pay (before adding in the phantom stock unit payment) exceeds the Social Security wage base, no additional Social Security tax would be assessed on the phantom stock payments. With that said, the value of the phantom stock at redemption is tied to the companys stock price. Phantom stock may behypothetical, however, it stillcan pay out dividends and it experiences price changes just like its real counterpart. Additionally. 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.