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Although the accounting for employee and nonemployee awards has been largely aligned under ASC 718 upon adoption of ASU 2018-07, some differences remain. In particular, the attribution of cost and measurement of instruments awarded to employees differs from instruments awarded to nonemployees. Therefore, it is important to determine whether the recipient of an award is an “employee” under ASC 718. Refer to SC 7 for further discussion of nonemployee awards. Throughout this guide, we generally refer to awards as employee awards; however, unless indicated otherwise, most of the guidance would be equally applicable to both employee and nonemployee awards given that ASU 2018-07 eliminated many of the differences.
ASC 718-10-20 defines an employee as someone over whom the grantor of a stock-based compensation award exercises or has the right to exercise sufficient control to establish an employer-employee relationship based on common law. All other individuals (aside from the exceptions described below) who receive stock-based compensation should be considered nonemployees.

1.5.1 Awards to members of a board of directors

A nonemployee who sits on the board of directors and is compensated by the company solely for the individual's role as a director will be treated as an employee under ASC 718 if the individual has been:
  • Elected by the company's shareholders, or
  • Appointed to a board position that will be filled by another person whom the shareholders will elect when the current term expires.
Accordingly, an award granted to a nonemployee director should be accounted for as an award granted to an employee, so long as the award to the nonemployee director is in return for services provided solely in the person's capacity as a director. However, an award granted to such a director for non-board services should be accounted for as a nonemployee transaction.
The exception for nonemployee directors does not extend to independent contractors or advisory board members (e.g., board members that function in a consulting capacity, provide legal services, or give scientific advice) because, typically, such individuals are not elected by a company's shareholders. Any instruments granted in exchange for nondirector services should be accounted for as a nonemployee transaction and disclosed as a related-party transaction in the company's financial statements, in MD&A, and in the proxy statement.
Subsidiary entities in a consolidated group may have separate boards of directors. In general, only those outside directors on the board of the parent company are considered employees. However, to the extent that nonemployee directors on the board of a consolidated subsidiary are elected by shareholders of the subsidiary that are not controlled, directly or indirectly, by the parent or another member of the consolidated group, then those directors would also be considered employees under ASC 718 (e.g., when a subsidiary of a public company is a public company itself). In the separate financial statements of the subsidiary, members of the subsidiary's board of directors elected by the subsidiary's shareholders, regardless of whether they are independent shareholders or the parent shareholder, would be considered employees.

1.5.2 Awards to leased and part-time employees

Under the ASC 718 definition of an employee, the primary consideration is whether or not the individual is considered an employee under common law. A leased individual must also be a common law employee, but the definition of an employee in ASC 718-10-20 includes additional criteria that need to be met for a leased individual to be considered an employee, including that the leased individual be eligible to participate in the lessee's employee benefit plans, the lessee has the exclusive right to determine the economic value of the services performed by the lessee, and the lessee has the right to hire, fire, and control the activities of the individual. If an individual does not meet those criteria, the individual would be considered a nonemployee.
Part-time employees generally meet ASC 718's definition of an employee because they are considered employees under common law.

1.5.3 Awards to employees of a pass-through entity

We believe that the share-based payments awards of a pass-through entity should generally be considered employee awards if the grantee qualifies as a common law employee. The fact that the pass-through entity does not classify the grantee as an employee for payroll tax purposes is generally not relevant given the combined service and ownership relationship of owners in a pass-through entity (e.g., a partnership or a limited liability company). For guidance on the determination of whether an award granted by a pass-through entity is akin to equity and therefore a share-based payment award in the scope of ASC 718, see SC 6.7.
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