2.4 Nonemployee Awards

While most of the guidance on share-based payments granted to nonemployees is aligned with the requirements for share-based payments granted to employees, there remain some differences, notably those related to the attribution of compensation cost and an entity’s election to measure a nonemployee stock option award by using the contractual term instead of the expected term. See Chapter 9 for additional information about accounting for nonemployee awards.

Connecting the Dots

If a grantee’s employment status changes from employee to nonemployee, an entity must consider whether the share-based payment award was modified as a result of that change. For example, an employee may be granted an equity-classified share-based payment award under which continued vesting in the award is permitted notwithstanding a change in employment status (e.g., the award will vest as long as the grantee continues to provide services to the entity, whether as an employee or as an independent contractor). Such an award would not be modified in connection with the change in employment status provided that the grantee continues to provide substantive services to earn the award. The entity would continue to recognize the original grant-date fair-value-based measure of the award and would recognize the remaining cost in accordance with the nonemployee recognition guidance (see Section 9.3.1).

However, an entity may grant an award whose original terms prohibit the grantee from continuing to vest in the award after a change in employment status. If the entity modifies such an award concurrently with a change in employment status to permit continued vesting, that change to the terms of the award represents a modification. Generally, this would result in a Type III improbable-to-probable modification (see Section 6.3.3) because the employee would not have otherwise provided the required service under the original terms of the award. Accordingly, the modification-date fair-value-based measure of the award would be recognized in accordance with the nonemployee recognition guidance (see Section 9.3.1).

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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.