Phantom stock plans are considered “liability awards” for accounting purposes (assuming they will be settled in cash rather than stock). As such, the sponsoring company must recognize the plan expense ratably over the vesting period.

Varying accrual schedules can be found in the market. Each plan sponsor should make a determination after consulting with its accounting advisors.

Most companies follow the guidance offered under ASC 718-10-35-8 which reads as follows:

"An entity shall make a policy decision about whether to recognize compensation cost for an award with only service conditions that has a graded vesting schedule in either of the following ways:

a. On a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in-substance, multiple awards

b. On a straight-line basis over the requisite service period for the entire award (that is, over the requisite service period of the last separately vesting portion of the award).”

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.

Separate Method

Entire Method

Phantom stock plans that require the attainment of predetermined metrics (i.e., performance vesting) are expensed as the performance conditions become “ascertainable,” instead of over the requisite service period. Lastly, GAAP accounting also permits C-corporations to book a deferred tax asset (DTA) for future distributions, helping offset the overall accrual.