Annual Report 2007 - Komatsu

Notes to Consolidated Financial Statements
Komatsu Ltd. and Consolidated Subsidiaries
APB opinion No. 25. Effective April 1, 2006, Komatsu adopted
SFAS No. 123R for the year ended March 31, 2007 using the
modified prospective method. In accordance with SFAS
No. 123R, Komatsu recognizes compensation expense of ¥663
million ($5,619 thousand). As a result, income from continuing
operations before income taxes, minority interests and equity in
earnings of affiliated companies, and net income are decreased
by ¥663 million ($5,619 thousand) and ¥394 million ($3,339
thousand) respectively for the year ended March 31, 2007. The
impact on the net income per share is immaterial.
For the years ended March 31, 2006 and 2005, no compensation
expense was recognized using the intrinsic value method
as the exercise price was at least equal to the market price on
the date of grant.
The Company transfers treasury stock without issuance of
new stock when the share acquisition rights are exercised.
The following table summarizes information about stock option activity for the years ended March 31, 2007, 2006 and 2005:
Number of
shares
2007 2006 2005
Weighted average
Number of
Weighted average
Number of
Weighted average
exercise price
shares
exercise price
shares
exercise price
Yen U.S. dollars Yen Yen
Outstanding at beginning of year 3,665,000 ¥ 848 $ 7.19 6,409,000 ¥ 665 6,460,000 ¥659
Granted 833,000 2,325 19.70 1,610,000 1,126 1,430,000 673
Exercised (845,000) 855 7.25 (4,254,000) 678 (491,000) 542
Cancelled or Expired (5,000) 2,325 19.70 (100,000) 820 (990,000) 700
Outstanding at end of year 3,648,000 1,182 10.02 3,665,000 848 6,409,000 665
Exercisable at end of year 2,820,000 846 7.17 2,055,000 630 4,979,000 662
The intrinsic values were ¥1,180 million ($10,000 thousand), ¥2,093 million and ¥83 million for the years ended March 31,
2007, 2006 and 2005, respectively.
The information for options outstanding and options exercisable at March 31, 2007 is as follows.
Outstanding
Options Exercisable
Weighted average
Weighted average
Weighted average remaining Weighted average remaining
Number of exercise price Intrinsic value contractual life Number of exercise price Intrinsic value contractual life
shares
shares
Millions of Thousands of Millions of Thousands of
Exercise Prices Yen U.S. dollars yen U.S. dollars years Yen U.S. dollars yen U.S. dollars years
¥ 445 - 650 750,000 ¥ 556 $ 4.71 ¥1,443 $12,229 1.8 750,000 ¥ 556 $4.71 ¥1,443 $12,229 1.8
¥ 651 - 900 800,000 673 5.70 1,446 12,254 5.3 800,000 673 5.70 1,446 12,254 5.3
¥ 901 - 1,350 1,270,000 1,126 9.54 1,719 14,568 6.3 1,270,000 1,126 9.54 1,719 14,568 6.3
¥1,351 - 2,325 828,000 2,325 19.70 129 1,093 7.3 — — — — — —
¥ 445 - 2,325 3,648,000 1,182 10.02 4,737 40,144 5.4 2,820,000 846 7.17 4,608 39,051 4.8
The fair value of each share option award is estimated on
the date of grant using a discrete-time model (a binomial
model) for the year ended March 31, 2007 and the Black-
Sholes option pricing model for the years ended March 31,
2006 and 2005 based on the assumptions noted in the following
table. Because a discrete-time model incorporates ranges
of assumptions for inputs, those ranges are disclosed.
Expected volatilities are based on implied volatilities from
historical volatility of the Company’s shares.
The Company uses historical data to estimate share option
exercise and employee departure behavior used in the dicretetime
model. The expected term of share options granted is
derived from the output of the option pricing model and represents
the period of time that share options granted are
expected to be outstanding. The risk-free rate for periods
within the contractual term of the share option is based on
the Japanese government bond yield curve in effect at the
time of grant.
74 Annual Report 2007