GAAP Disclosure - 5-Year Compensation Plan

We review a GAAP financial statement for a client that recently adopted a compensation plan for several key employees. The nature of this plan is to award these employees with a fixed and variable amount each year. The variable amount is based on a % of profits. The term of the plan is for 5 years. The employees are 0% vested during the term and are 100% vested at the end of the 5 years.

This is Year #1. There has been $72K awarded among 5 participants.

I am struggling to figure out if this meets the definition of a nonqualified deferred compensation plan or something else. And what the disclosure requirements are, if any.

I am thinking there is no liability accrual, but there should be a note disclosure. I would appreciate any guidance you can offer.

As you've described, Wiles, this sounds as if its more of an annual compensation structure and not a deferred salaried plan?

It sounds as if the amounts are paid (settled up) annually and not intended to me amortized beyond that. As you mentioned, currently they are not vested during the year but after 5 years they will be vested from Jan 1 of each year and payable to them even if they leave before year-end.

If I have summarized it correctly above, then to me, it would be handled as a Payroll Liability at year-end and not Deferred Compensation Plan.

No matter what, I would expense an accrual during the year if interim financials are provided to owners or financial institutions.

if this meets the definition of a nonqualified deferred compensation plan

It does under 409A.
EDIT: I forgot it was a GAAP question, making me unqualified to answer. Ignore me.

I may have done a poor job describing the plan. There is nothing "settled up annually" because nothing is vested.

The company will make these compensation awards, on paper, annually. None of it vests until the end of year 5. By that time, there may be $400K in total awards that would become fully vested on the 5th anniversary.

After going down a rabbit hole, I believe I have found what I am looking for under FASB ASC 710-10-25-9. The company is required to accrue in a systematic & rational manner over the 5 year period, even though nothing vests until Year 5. It seems that they can accrue the $72K in Year 1 provided that this accrual is not less than the present value of the expected benefits payable in Year 5.