FORM 10-K IMPERIAL OIL LIMITED

Notes to consolidated financial statements (continued)
Under the restricted stock unit plan, each unit entitles the recipient to the conditional right to receive from the company, upon exercise, an
amount equal to the closing price of the company’s common shares on the To ronto Stock Exchange on the exercise dates. Fifty percent of
the units are exercised three years following the grant date, and the remainder are exercised seven years following the grant date. The
units may be exercised early in the event of death or disability.
All units require settlement by cash payments with one exception. The restricted stock unit plan was amended for units granted in 2003
and future years by providing that the recipient may receive one common share of the company per unit or elect to receive the cash
payment for the units to be exercised on the seventh anniversary of the grant date. The maximum number of common shares that may
be issued under the restricted stock unit plan is 3.5 million.
For deferred share units, a charge is made to expense in the year of grant equal to the cash performance bonus payment and directors’
fees foregone. The company records expense for incentive share, deferred share and restricted stock units based on changes in the price
of common shares in the year. Expense for earnings bonus units is recorded based on the cumulative net earnings per outstanding
common share from issue date, up to the maximum settlement value for the units.
Incentive stock options
In April 2002, incentive stock options were granted for the purchase of the company’s common shares at an exercise price of $46.50 per
share. Up to 50 percent of the options may be exercised on or after January 1, 2003, a further 25 percent may be exercised on or after
January 1, 2004, and the remaining 25 percent may be exercised on or after January 1, 2005. Any unexercised options expire after
April 29, 2012. The company has not issued incentive stock options since 2002 and has no plans to issue incentive stock options in the future .
The company does not recognize compensation expense on the issuance of stock options because the exercise price is equal to the market
value at the date of grant. If the fair-value-based method of accounting had been adopted, the impact on net income and earnings per share
would be as shown in the summary of significant accounting policies on page F-9. The average fair value of each option granted during
2002 was $12.70. The fair value was estimated at the grant date using an option-pricing model with the following weighted average
assumptions: risk-free interest rate of 5.7 percent, expected life of five years, volatility of 25 percent and a dividend yield of 1.9 perc e n t .
The company has purchased shares on the market to fully offset the dilutive effects from the exercise of stock options. This practice is
expected to continue.
A summary of the incentive compensation programs is as follows:
Obligations
Number of units Expensed in outstanding at
Cancelled Outstanding at period December 31
Granted Exercised or adjusted December 31 (millions of dollars) (millions of dollars)
Incentive share units
2004 – (1 619 907) (3 000) 5 266 423 94 245
2003 – (1 142 145) 19 225 6 889 330 109 216
2002 7 000 (812 550) (5 325) 8 012 250 39 142
Deferred share units
2004 4 899 – – 48 810 1 4
2003 8 253 (49 486) (379) 43 911 1 3
2002 7 479 (9 853) – 85 523 – 4
Earnings bonus units
2004 1 889 740 (1 139 160) – 3 984 830 7 6
2003 2 221 580 (1 156 370) – 3 234 250 3 3
2002 1 036 500 – – 2 169 040 3 3
Incentive stock options
2004 – (274 250) (7 400) 2 854 500 – –
2003 – (49 050) (11 500) 3 136 150 – –
2002 3 210 200 – (13 500) 3 196 700 – –
Restricted stock units
2004 987 480 – (5 710) 2 642 325 31 41
2003 872 085 (3 300) (120) 1 660 555 11 11
2002 791 890 – – 791 890 – –
F-17