2.3 Nonemployee Directors

ASC 718-10

Example 2: Definition of Employee

55-89 This Example illustrates the evaluation as to whether an individual meets conditions to be considered an employee under the definition of that term used in this Topic.

55-90 This Topic defines employee as an individual over whom the grantor of a share-based compensation award exercises or has the right to exercise sufficient control to establish an employer-employee relationship based on common law as illustrated in case law and currently under U.S. Internal Revenue Service (IRS) Revenue Ruling 87-41. An example of whether that condition exists follows. Entity A issues options to members of its Advisory Board, which is separate and distinct from Entity A’s board of directors. Members of the Advisory Board are knowledgeable about Entity A’s industry and advise Entity A on matters such as policy development, strategic planning, and product development. The Advisory Board members are appointed for two-year terms and meet four times a year for one day, receiving a fixed number of options for services rendered at each meeting. Based on an evaluation of the relationship between Entity A and the Advisory Board members, Entity A concludes that the Advisory Board members do not meet the common law definition of employee. Accordingly, the awards to the Advisory Board members are accounted for as awards to nonemployees under the provisions of this Topic.

55-91 Nonemployee directors acting in their role as members of an entity’s board of directors shall be treated as employees if those directors were elected by the entity’s shareholders or appointed to a board position that will be filled by shareholder election when the existing term expires. However, that requirement applies only to awards granted to them for their services as directors. Awards granted to those individuals for other services shall be accounted for as awards to nonemployees in accordance with Section 505-50-25. Additionally, consolidated groups may have multiple boards of directors; this guidance applies only to either of the following:

The nonemployee directors acting in their role as members of a parent entity’s board of directors
Nonemployee members of a consolidated subsidiary’s board of directors to the extent that those members are elected by shareholders that are not controlled directly or indirectly by the parent or another member of the consolidated group.

Under an exception in ASC 718, a member of an entity’s board of directors who may not meet the common law definition of an employee may be treated as an employee if certain conditions are met.

2.3.1 Parent-Entity Directors

A nonemployee member of a parent entity’s board of directors is treated as an employee if (1) the director was elected by the entity’s shareholders or (2) the board position will be subject to shareholder election upon expiration of the director’s term. (However, see ASC 718-10-55-90 for guidance on awards issued to members of an advisory board.)

2.3.2 Subsidiary Directors

A nonemployee member of a subsidiary’s board of directors who is granted awards is treated as an employee in the parent’s consolidated financial statements if the individual is granted awards for services as a member of the parent company’s board of directors (and meets one of the conditions described in ASC 718-10-55-91 [see the previous section]).

Further, nonemployee members of a consolidated subsidiary’s board of directors that are granted awards for their director services to the subsidiary are considered employees under ASC 718 if they were elected by minority shareholders who are not directly or indirectly controlled by the parent or another member of the consolidated group. Such awards are accounted for under ASC 718 in the parent company’s consolidated financial statements and in the separate financial statements of the subsidiary. If the directors were not elected by minority shareholders of the subsidiary (i.e., they were elected by the controlling shareholders or another member of the consolidated group), the awards should be accounted for as nonemployee awards under ASC 718 in the parent company’s consolidated financial statements. However, if they were elected by the subsidiary’s shareholders, including controlling shareholders of the consolidated group, the awards granted for director services should be accounted for as awards granted to employees under ASC 718 in the separate financial statements of the subsidiary.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.