Item III.11: Employee Stock Options (ESOs) Training on general introduction to ESA 2010 Luxembourg, 9 - 10 December 2013 Eurostat, JMO M4

Employee Stock Options(ESOs) In ESA 1995 no clear guidelines were given on ESOs, thus possibly not included within Compensation of Employees. With the introduction of IFRS by IASB, the companies accounts should property capture ESOs, thus included in the returns to tax authorise and in the business surveys. ESA 2010 give guidance on recording entries in national accounts framework.

ESA 2010 on ESOs ESOs (AF.72) are agreements made on a given date (grant date) under which employees may purchase a given number of employer’s shares (stocks) at a stated price (strike price) either at a stated time (vesting date) or within a given period of time (exercise period) The exercise period can start on a vesting date and no later than the end of the exercise period (lapse date)

ESA 2010 on ESOs ESOs are similar to other financial derivatives options, where the employee may choose not to exercise the option, if the share price is now lower than the price at which he can exercise the option (strike price); ESOs may be subject to certain conditions, e.g. that the employee is still in the enterprise’s employ, or conditional on the performance of the enterprise.

ESA 2010 on ESOs According IASB, the enterprise derives a fair value for the options at grant date by taking the strike price of the shares at that time multiplied by the number of options expected to be exercisable at vesting date divided by the number of service years expected to be provided until the vesting date.(e.g. see also IFRS 2.2)

ESA 2010 on ESOs ESOs are valued: at grant date; as part of compensation of employees (D.1) spread over the period between the grant date and vesting date, if possible. If this is not possible, the value of the option has to be recorded at vesting date. In the financial account, the acquisition of ESOs by households matches the corresponding part of compensation of employees (D.1) with a matching liability (F.89) of the employer.

ESA 2010 on ESOs When an ESO is exercised, the entry in the balance sheet (AF.72) disappears to be replaced by the value of the stocks (shares – AF.51) acquired. The corresponding changes are recorded as financial transactions. Any change in value between grant date and vesting date is to be treated as part of compensation of employees (D.1) While any change in value between vesting date and exercise date is but as a holding gain/loss.

ESOs: Simplified example A company (S.11) gives 1 ESO to each of its 10 employees (S.14) at grant date (at T). All 10 employees fulfil ESO conditions and exercise their ESOs at the end of exercise date/lapse date (at T+5); The fair value of ESO at T is 40, thus accrued value in service periods between T and T+2 is: 40€(ESO fair value) x 10(employees) / 2 = 200€ T grant date T + 2 Vesting date T+5 Exercise/lapse data

ESOs: Simplified example Hence, 200€ is recoded as D.1 with matching F.89/AF.89 at T+1 and T+2 (until vesting date); From T+2 the ESOs can be exercised, thus at T+2 F.89/AF.89 are replaced with F.72/AF.72 ESOs are all exercised at T+5, in other words employees (S.14) buy company's stocks (F.51) in exchange for their ESOs. T grant date T + 2 Vesting date T+5 Exercise/lapse data

ESOs: Simplified Example: period T+1 S.11 S.14 Uses/ Assets Res/ Liab. D.1t+1 200 F.89t+1 +200 AF.89t+1 T+1 is the first period when accrued value corresponding to ESO is recorded, as follows: 40€(ESO fair value) x 10(employees) / 2 = 200€ T grant date T + 2 Vesting date T+5 Exercise/lapse data

ESOs: Simplified Example: period T+2 S.11 S.14 Uses/ Assets Res/ Liab. D.1t+2 200 F.89t+2 +200 AF.89t+2 400 T+2 is the second and last period when accrued value corresponding to ESO is recorded, as follows: 40€(ESO fair value) x 10(employees) / 2 = 200€ T grant date T + 2 Vesting date T+5 Exercise/lapse data

ESOs: Simplified Example: period T+3 S.11 S.14 Uses/ Assets Res/ Liab. F.72t+3 +400 AF.72t+3 400 F.89t+3 -400 AF.89t+3 At T+3 (after vesting date) the ESOs can be exercised, thus F.89/AF.89 are replaced with F.72/AF.72 T grant date T + 2 Vesting date T+5 Exercise/lapse data

ESOs: Simplified Example: period T+4 S.11 S.14 Uses/ Assets Res/ Liab. F.72t+4 AF.72t+4 400 F.89t+4 AF.89t+4 At T+4 the ESOs is not exercised yet T grant date T + 2 Vesting date T+5 Exercise/lapse data

ESOs: Simplified Example: period T+5 S.11 S.14 Uses/ Assets Res/ Liab. F.21t+5 +600 -600 F.51t+5 +1000 AF.51t+5 1000 F.72t+5 -400 AF.72t+5 At T+5, the employees decide to exercise their ESOs and to buy the company's stocks (AF.51), as the exercise price of 100€ is above strike price of 60€ , thus we get: 100€ x 10 employees =1000€ 60€ x 10 = 600€ T grant date T + 2 Vesting date T+5 Exercise/lapse data

ESOs: The simplified example did not consider: ESOs conditions, like: employee(s) leaving the company, company's performance, etc.; Any change in value between grant date and vesting date that should be treated as part of compensation of employees; While any change in value between vesting date and exercise date is but as a holding gain/loss. T grant date T + 2 Vesting date T+5 Exercise/lapse data