Dedication across the board
Annual Report 2012

Consolidated Financial Statements

24. Employee share option plan

Employees (including senior executives and executive directors) of members of the Group receive remuneration in the form of equity-based payment transactions, whereby employees render services as consideration for share appreciation rights, which can only be settled in cash ("cash-settled transactions").

The cost of cash-settled equity-based employee compensation is measured initially at fair value at the grant date using a binomial model. This fair value is expensed over the period until vesting with the recognition of a corresponding liability. The liability is remeasured at each reporting date up to and including the settlement date with changes in fair value recognised in the statement of comprehensive income.

The equity-based payment plan is described below.

During 2008-2012, 3,182,958 equity appreciation rights (SARs) were granted to senior employees and executive directors of members of the Group, which can only be settled in cash. These generally vest over a five year period from the date of grant, so that one fifth of granted SARs vests on each of the five anniversaries from the date of grant. The contractual life of the SARs is ten years. The fair value of the SARs is measured at the grant date using a binomial option pricing model taking into account the terms and conditions upon which the instruments were granted. SARs are exercisable at any time after vesting till the end of the contractual life and give its holder a right to a difference between the market value of the Group's GDRs at the date of exercise and a stated base value. The services received and a liability to pay for those services are recognised over the expected vesting period. Until the liability is settled it is remeasured at each reporting date with changes in fair value recognised in profit or loss as part of the employee benefit expenses arising from cash-settled share-based payment transactions.

The carrying value of the liability relating to 2,131,723 of SARs at December 31, 2012 is US$ 9,788 thousand (2011: 2,867,617 SARs with carrying value of US$ 11,734 thousand). During the year ended December 31, 2012, 426,345 were fully vested (2011: 474,455).

The following table illustrates the number (No.) and exercise prices (EP) of, and movements in, SARs during the year:

  December 31, 2012 December 31, 2011
  No. EP, US$ No. EP, US$
Outstanding at the beginning of the year (with EP of US$ 4) 2,667,617 4 2,982,958 4
Outstanding at the beginning of the year (with EP of US$ 10) 200,000 10 - -
Total outstanding at the beginning of the year 2,867,617   2,982,958  
Granted - - 200,000 10
Exercised (735,894) 4 (315,341) 4
Outstanding at the end of year 2,131,723   2,867,617  
Exercisable at the end of year 1,311,170   1,394,434  

The following table lists the inputs to the models used for the plan for the year ended December 31, 2012:

In thousands of US dollars 2012 2011
Dividend yield (%) 1.5 -
Expected volatility (%) 86 86
Risk-free interest rate (%) 2.0 3.2
Expected life (years) 3.5 3.5
Option turnover (%) 10 10
Price trigger 2 2

The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns that may occur. The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may also not necessarily be the actual outcome.