The Financial Accounting Standards Board (FASB) recently approved the decision to apply ASC 718 — the accounting treatment that applies to equity awards granted to employees (and non-employee directors) — to equity awards granted to consultants and other individuals who are not employees.

Applying ASC 718 to Non-Employees

Previously, ASC 505-50 applied to equity awards that were granted to non employees.  Under ASC 505-50, the vesting date — rather than the grant date — is generally the measurement date, which effectively requires the re-measurement of the award expense on a periodic basis until the award vests (i.e.,  less favorable accounting treatment than under ASC 718).

In addition, the FASB approved including in the final standard a rebuttable presumption that options granted to nonemployees should be valued based on the contractual term. This means companies are not foreclosed from using the expected value if it can be demonstrated that the awards are not transferable (or transferable only in limited circumstances) and the estimated expected life is supported by data from historical option grant activity.


The FASB is expected to issue the final Accounting Standard Update later this quarter, becoming effective for public companies for fiscal years beginning after December 15, 2018, and for nonpublic entities for fiscal years beginning after December 15, 2019.  Early adoption is expected to be permitted.


As a result of the change in accounting treatment, companies may be more inclined to grant equity awards to consultants and other advisors.  The change to the accounting rule also means that companies will not need to contend with a change in accounting treatment for an award held by an employee who changes status to a consultant or other form of non-employee advisor in connection with a termination of the employee’s employment.


Victor Flores is a partner in Baker McKenzie’s Employment & Compensation Practice, with a focus on Executive Compensation and Employee Benefits. Victor advises global US and non-US companies – both public and private – on all aspects of executive compensation and benefits matters, including the corporate, securities and tax law, and ERISA issues arising in the implementation and administration of compensation programs. He regularly helps clients with the design and implementation of equity and non-equity based incentive compensation programs and nonqualified deferred compensation programs. Victor also has extensive experience advising on compensations and benefits issues in mergers and acquisitions, corporate reorganizations, private equity and other corporate transactions.


Sinead Kelly is a partner in Baker McKenzie’s Compensation practice in San Francisco. She advises on U.S. executive compensation and global equity and has practiced in the compensation field since 2005. In her practice, Sinead counsels U.S. and non-U.S. public and private companies on all aspects of equity and executive compensation plans and arrangements, including plan design, drafting, administration and governance. In this regard, Sinead advises on and assists companies with compliance with U.S. federal and state securities and tax laws relating to compensation arrangements, as well as with preparing SEC disclosures, complying with stock exchange rules and addressing non-U.S. tax and regulatory requirements. She has been repeatedly recognized by Legal 500 as a leading lawyer for Executive Compensation and Employee Benefits.