FINANCIAL STATEMENTS (Full Version) - Sembcorp

Notes to the
Financial Statements
Year Ended December 31, 2008
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)
q. Employee Benefits (cont’d)
ii. Defined Benefit Plans (cont’d)
Actuarial gains and losses arise mainly from changes in actuarial assumptions and differences between
actuarial assumptions and what has actually occurred. They are recognised in the income statement, over the
expected average remaining working lives of the employees participating in the plan, only to the extent that
their cumulative amount exceeds 10% of the greater of the present value of the obligation and of the fair
value of plan assets. Unrecognised actuarial gains and losses are reflected in the balance sheet.
For defined benefit plans, the actuarial cost charged to the income statement consists of current service cost,
interest cost, expected return on plan assets and past service cost as well as actuarial gains or losses to the
extent that they are recognised. The past service cost for the enhancement of pension benefits is accounted
for when such benefit vests or becomes a constructive obligation.
Where the calculation results in a benefit to the Group, the recognised asset is limited to the net total of any
unrecognised actuarial losses and past service costs and the present value of any future refunds from the plan
or reductions in future contributions to the plan.
iii. Short-Term Employee Benefits
Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the
related employment service is provided.
The amount expected to be paid are accrued when the Group has a present legal or constructive obligation
to pay this amount as a result of past service provided by the employee and the obligation can be estimated
reliably.
iv. Staff Retirement Benefits
Retirement benefits payable to certain categories of employees upon their retirement are provided for in
the financial statements based on their entitlement under the staff retirement benefit plan or, in respect of
unionised employees of a subsidiary who joined on or before December 31, 1988, based on an agreement with
the union.
The Group’s net obligation in respect of retirement benefits is the amount of future benefit that employees
have earned in return for their service in the current and prior periods. The obligation is calculated using the
projected future salary increase and is discounted to its present value and the fair value of any related assets
is deducted.
v. Equity and Equity-Related Compensation Benefits
Share Option Plan
The share option programme allows the Group’s employees to acquire shares of the Group companies.
The fair value is measured at grant date and spread over the period during which the employees become
unconditionally entitled to the options. The fair value of options granted is recognised as an employee
expense with a corresponding increase in equity. At each balance sheet date, the Company revises its estimates
of the number of options that are expected to become exercisable. It recognises the impact of the revision
of original estimates in employee expense and in a corresponding adjustment to equity over the remaining
vesting period.
The proceeds received net of any directly attributable transaction costs are credited to share capital when the
options are exercised.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)
q. Employee Benefits (cont’d)
v. Equity and Equity-Related Compensation Benefits (cont’d)
Performance Share Plan
The fair value of equity-related compensation is measured using the Monte Carlo simulation method as at
the date of the grant. The method involves projecting future outcomes using statistical distributions of key
random variables including share prices and volatility of returns.
In estimating the fair value of the compensation cost, market-based performance conditions are taken
into account. Therefore, for performance share grants with market-based performance conditions, the
compensation cost is charged to the income statement with a corresponding increase in equity on a basis that
fairly reflects the manner in which the benefits will accrue to the employee under the plan over the service
period to which the performance period relates, irrespective of whether this performance condition is satisfied.
Restricted Stock Plan
Similar to the Performance Share Plan, the fair value of equity related compensation is measured using the
Monte Carlo simulation method as at the date of the grant. The method involves projecting future outcomes
using statistical distributions of key random variables including share prices and volatility of returns. This
model takes into the account the probability of achieving the performance conditions in the future.
The fair value of the compensation cost is measured at grant date and spread over the service period to which
the performance criteria relates and the period during which the employees become unconditionally entitled
to the shares. The compensation cost is charged to the income statement with a corresponding increase in
equity on a basis that fairly reflects the manner in which the benefits will accrue irrespective of whether this
performance condition is satisfied.
At the balance sheet date, the Company revises its estimates of the number of performance-based restricted
stocks that the employees are expected to receive based on the achievement of non-market performance
conditions and the number of shares ultimately given. It recognises the impact of the revision of the original
estimates in employee expense and in a corresponding adjustment to equity over the remaining vesting period.
In the Company’s separate financial statements, the fair value of options, performance shares and restricted
stocks granted to employees of its subsidiaries is recognised as an increase in the cost of the Company’s
investment in subsidiaries, with a corresponding increase in equity over the vesting period.
vi. Cash-Related Compensation Benefits
Sembcorp Challenge Bonus
The Group recognises a liability and an expense for bonuses and profit-sharing, based on a formula that
takes into consideration the share price of the Company. The Group recognises a provision when contractually
obliged to pay or where there is a past practice that has created a constructive obligation to pay.
The compensation cost is measured at the fair value of the liability at each balance sheet date and spread
over the service period to which the performance criteria relates and the period during which the employees
become unconditionally entitled to the bonus. The liability takes into account the probability of achieving the
performance conditions in the future.
Until the liability is settled, the Group will re-measure the fair value of the liability at each balance sheet date
and at the date of settlement, with any changes in fair value recognised in the income statement for the period.
132 Delivering Essential Solutions Sembcorp Industries Annual Report 2008 133