Consolidated Financial Statements and Notes - Brookfield Asset ...

The changes in the number of options during 2005 and 2004 were as follows:2005 2004WeightedWeightedNumber of Average Number of AverageOptions Exercise Options Exercise(000’S) Price (000’S) PriceOutstanding at beginning of year 12,181 C$ 18.70 11,363 C$ 16.94Granted 2,694 46.25 1,527 30.07Exercised (1,543) 15.28 (382) 15.13Cancelled (236) 26.84 (327) 14.95Converted (483) 13.33 — —Outstanding at end of year 12,613 C$ 25.05 12,181 C$ 18.70Exercisable at end of year 6,793 7,069At December 31, 2005, the following options to purchase Class A common shares were outstanding:WeightedNumberNumber Outstanding Average Exercisable(000’S) Exercise Price Remaining Life (000’S)1,285 C$8.80 – C$12.80 3.8 yrs. 1,2852,710 C$12.87 – C$19.27 4.4 yrs. 2,1354,512 C$19.60 – C$27.64 4.9 yrs. 3,0851,462 C$30.07 – C$37.42 8.1 yrs. 2882,644 C$45.94 – C$54.68 9.2 yrs. —12,613 6,793A Restricted Share Unit Plan is offered to executive offi cers and non-employee directors of the company. Under this plan, qualifyingoffi cers and directors may choose to receive all or a percentage of their annual incentive bonus or directors fees in the form ofDeferred Share Units (“DSUs”) and Restricted Share Appreciation Units (“RSAUs”). The DSUs and RSAUs vest over periods of upto fi ve years, and DSUs accumulate additional DSUs at the same rate as dividends on common shares. Offi cers and directorsare not allowed to convert DSUs and RSAUs into cash until retirement or cessation of employment. The value of the DSUs, whenconverted to cash, will be equivalent to the market value of the common shares at the time the conversion takes place. The valueof the RSAUs when converted into cash will be equivalent to the difference between the market price of equivalent numbers ofcommon shares at the time the conversion takes place, and the market price on the date the RSAUs are granted. The company usesequity derivative contracts to match its exposure to the change in share prices in respect of vested DSUs and RSAUs, although itsoperating subsidiaries do not. The value of the vested and unvested DSUs and RSAUs as at December 31, 2005 was $189 million(2004 – $87 million), which is partially offset by the receivable in respect of hedging arrangements.Employee compensation expense for these plans is charged against income over the vesting period of the DSUs and RSAUs. Theamount payable by the company in respect of vested DSUs and RSAUs changes as a result of dividends and share price movements.All of the amounts attributable to changes in the amounts payable by the company are recorded as employee compensationexpense in the period of the change, and for the year ended December 31, 2005, including those of operating subsidiaries, totalled$66 million (2004 – $39 million), net of the impact of hedging arrangements.15. RISK MANAGEMENT AND DERIVATIVE FINANCIAL INSTRUMENTSThe company and its subsidiaries use selectively derivative fi nancial instruments principally to manage risk.Management evaluates and monitors the credit risk of its derivative fi nancial instruments and endeavours to minimize counterpartycredit risk through collateral and other credit risk mitigation techniques. The credit risk of derivative fi nancial instrumentsis limited to the replacement value of the instrument, and takes into account any replacement cost and future credit exposure.The replacement value or cost of interest rate swap contracts which form part of fi nancing arrangements is calculated by way ofdiscounted cash fl ows using market rates adjusted for credit spreads.82Brookfield Asset Management | 2005 Annual Report