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.