The status of a recipient of an award may change to or from an employee while he or she continues to provide service. For example, an employee may terminate employment with a company and continue to provide service as a nonemployee consultant. As discussed above, there are differences in the accounting for awards granted to employees as compared to nonemployees.

1.8.1 Status change—awards with ongoing service

ASC 718 does not provide specific guidance on accounting for a change in employment status when the recipient continues to provide substantive services. When the recipient of an award changes employment status and continues to provide service and vest in an award, the company should assess whether the award was modified in connection with the change in status. The company should also make an assessment as to whether the future services to be provided by the individual are substantive (see SC 1.8.2).
If the award was modified to allow the recipient to continue vesting in the award after the change in status and the future service was deemed substantive, the modification should be treated as a cancellation of the old award and issuance of a new award. In this scenario, the compensation cost previously recognized related to the old award would be reversed when it is no longer probable of vesting. The full amount of compensation cost related to the new (modified) award would be measured as a nonemployee award under ASC 718 (see SC 7.1.3) and recognized prospectively over the new vesting period. This is a Type III modification under ASC 718 (as discussed in SC 4.3.1) because at the modification date, the service condition of the original award is not expected to be satisfied.
After adoption of ASU 2018-07, if the award was not modified in connection with the change in status (i.e., the original terms of the award provided for continued vesting for service provided as a nonemployee consultant, such that the individual was contractually entitled to retain the award), but future substantive service is still necessary to earn the award, then the original grant date fair value of the award would continue to be recognized. Attribution of the remaining cost would follow the nonemployee guidance prospectively from the date of the change in status (see SC 7.1.5).

1.8.2 Changes in status and awards with no future services

As described in SC 1.8.1, when an employee becomes a nonemployee and is allowed to continue to vest in existing awards, an assessment should be made as to whether future services to be provided by the individual are substantive.
If the services are not substantive, the compensation cost would be accounted for as a severance arrangement with no future service requirement (i.e., recognized immediately). All of the relevant facts and circumstances should be considered to determine whether an individual is providing substantive services, including whether the individual’s compensation is reasonable in relation to the services to be provided and whether there is a clear understanding of the individual’s role and responsibilities, supervision of the individual’s performance, and monitoring of hours worked.
Example SC 1-2 illustrates the accounting for an award that is modified to allow continued vesting upon a separation when no substantive future service is required.
Change in status – no substantive future service
An executive was previously granted stock options that vest on June 30, 20X3 based on continuous service as an employee of SC Corporation. On December 31, 20X1, SC Corporation enters into a separation agreement and consulting arrangement with the executive. In accordance with the agreements:
  • The executive will no longer be an employee, but will be "on call" for one hour per month through June 30, 20X3 as a consultant to SC Corporation, and
  • The executive's outstanding unvested options on the date of the agreement (which would otherwise have been forfeited under their original terms upon termination of employment) are modified so that they will continue to vest through June 30, 20X3 based on satisfaction of the terms of the consulting arrangement, at which time the executive will have 90 days to exercise the options.
How should SC Corporation account for the stock options?
The accounting should be based on the substance of the separation agreement and not the form. The substance of the agreement is that the executive does not have to provide future services to SC Corporation (except for a non-substantive amount of “on call” time) in order to continue vesting in the unvested options. The unvested options should therefore be viewed as immediately vested with a delayed exercise date. The modification is a Type III modification (as discussed in SC 4.3.1) and incremental compensation cost should be recognized immediately.
We believe a similar conclusion would be reached in scenarios where an existing employment or stock award agreement was not amended, but an employee is discretionarily allowed to retain benefits and the rights to continue vesting in the award, even though the nature of the employment relationship changes so that any future services as an employee are not substantive (e.g., the employee is no longer required to be present in the workplace and has no ongoing responsibilities, but remains on the payroll through the scheduled vesting date of the stock award).
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