Atlas Copco 2008 – tough ending to a record year Annual Report ...

Financial statements, atlas copco group23. ContinuedAssumed healthcare cost trend rates have a significant effect on theamounts recognized in profit and loss. A one percentage point change inassumed healthcare cost trend rates would have the following effects:Medical cost trend rateOne percentagepointincreaseOne percentagepointdecreaseEffect on aggregate service cost 9.7% –8.5%Effect on defined benefit obligation 8.7% –7.7%Historical information2008 2007 2006 2005 2004Present value of definedbenefit obligations 6 741 6 288 6 416 6 656 6 201Fair value of plan assets 4 863 4 936 4 739 4 445 3 234Present value of netobligations 1 878 1 352 1 677 2 211 2 967Experience adjustments relating to:2008 2007 2006 2005 2004Plan assets –293 –66 11 244 86Plan liabilities –33 16 –51 –142 16The Group expects to pay 341 in contributions to defined benefit plans in2009.Share value based incentive programsIn 2000, the Board of Directors resolved to implement a worldwide personnelstock option program for the years 2000–2003 for key employees inthe Group. The implementation of this program was to be decided upon bythe Board on a yearly basis. No personnel stock option programs weredecided upon in 2004 and 2005. In 2006 and 2007, the Annual GeneralMeeting decided on performance based personnel stock option programsfor 2006 and 2007 based on a proposal from the Board reflecting an optionprogram for 2006–2008. In 2008, the Annual General Meeting decided ona performance based personnel stock option program for 2008 similar tothe 2006 and 2007 programs.Option program 2000–2003The 2000–2003 program provided for the grant of stock options, whichentitled the holders to acquire Atlas Copco AB series A shares at an exerciseprice which was calculated as 110% of the average trading price duringa ten-day period before the grant.In some countries, Share Appreciation Rights (SARs) were grantedinstead of options due to legal and tax reasons. A SAR does not entitle theholder to acquire shares, but only to receive the difference between theprice of the series A share at exercise and a fixed price, corresponding tothe exercise price of the stock options.The main terms of the personnel stock options/SARs program2000–2003 are the following: they are issued by Atlas Copco AB; have aterm of six years from grant date and vest at a rate of one third per year asfrom the date of grant. They are not transferable. The personnel optionswere granted free of charge and had no performance conditions.Option program 2006–2008At the Annual General Meeting 2006, 2007 and 2008 respectively, it wasdecided to implement performance related personnel stock option programs.The decision to grant options was made in May each year and theoptions were issued in March the following year. The number of optionsissued depended on the development of the value growth within theGroup, expressed as Economic Value Added (EVA), during the respectiveprogram year.In connection to the issuance, the exercise price was calculated as110% of the average trading price for series A shares during a ten-dayperiod before the issuance date. The options were issued without compensationpaid by the employee and they remain the property of the employeealso if the employment is terminated. The options have a term of five yearsfrom the issuance date and are not transferable. The options become exercisableat a rate of one third per year, starting one year after the date ofissue.The Board had the right to decide to implement an alternative incentivesolution (SARs) for key persons in such countries where the grant ofpersonnel options was not feasible.In the program 2008 the option may, on request by an Optionee inSweden, be settled by the Company paying cash equal to the excess of theclosing price of the shares over the exercise price on the exercise day lessany administrative fees. Due to this choice of settlement by the Swedishemployees, these options in the program 2008 are for accounting purposesclassified as cash-settled in accordance with IFRS 2.The Black-Scholes model was used to calculate the fair value of theoptions/SARs in the programs at grant date (May each year) where theexercise price was a simulation of what it may be established at in Marchthe following year. For the program in 2008, the fair value of the options/SARs was based on the following assumptions:Program 2008Expected exercise price SEK 127.50Expected volatility 30%Expected option life3.84–5.84 yearsExpected/estimated share price SEK 112.50Expected dividend (growth) SEK 3.00 (10%)Risk free interest rate 4.05%–4.07%Average grant value SEK 23.36Maximum number of options 4 200 000– of which forfeited 219 792For stock options, the fair value is recognized as an expense over the periodMay through March the following year, while the value of the SARs andthe options classified as cash-settled are remeasured at each reporting dateuntil exercise or expiration.In accordance with IFRS 2, the expense in 2008 for all share-basedincentive programs amounted to 50 (93) excluding social costs whereof52 (89) refers to equity-settled options. The related costs for social securitycontributions are accounted for in accordance with the statement fromthe Swedish Financial Reporting Board (UFR 7) and are classified aspersonnel expenses.In the Balance sheet, the provision for share appreciation rights andstock options classified as cash-settled as per December 31 amounted to28 (51). Atlas Copco shares are held by the Group in order to covercommitments under the programs 2006–2008. See also note 20.68 Atlas Copco 2008