NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The vesting provisions and exercise period (which cannot exceed 10 years) are determined at the time of the  grant. Each tranche is considered a separate award with its own vesting period and grant date fair value. The  fair value of each tranche is measured at the date of grant using either the Binomial or the Black Scholes  option pricing model. The number of awards expected to vest is reviewed at least annually, with any impact  being recognized immediately. In addition to stock options, SARs may be granted to directors, officers and key employees of the Company. The vesting provisions (which range from three to eight years) and exercise period (which cannot exceed 10  years) are determined at the time of grant. The holder is entitled on exercise to receive a cash payment from  the Company equal to any increase in the market price of the Class A Non-Voting shares over the base value  of the SAR exercised. The base value is equal to the closing price of the Class A Non-Voting shares on the day  before the grant. The fair value of the services received is recognized as selling and administrative expense. In the case of  equity settled share-based payment plans, the selling and administrative expense results in a corresponding  increase in contributed surplus over the vesting period of the respective plan. When stock options are  exercised, shares are issued and the amount of the proceeds, together with the amount recorded in contributed  surplus, is recognized in share capital. For cash settled share-based payment plans, a corresponding liability  is recognized. The fair value of the cash settled share-based payment plan is remeasured at each Statement  of Financial Position date through the Statement of Net Income and Comprehensive Income until settlement. Funds flow from operations is not a Generally Accepted Accounting Principle (“GAAP”) measure under IFRS,  however it is an additional GAAP measure. AKITA’s method of determining funds flow from operations may  differ from methods used by other companies and involves including cash flow from operating activities before  working capital changes. Management and certain investors may find funds flow from operations to be a  useful measurement to evaluate the Company’s operating results at year-end and within each year since the  seasonal nature of the business affects the comparability of non-cash working capital changes both between  and within periods. The preparation of these consolidated financial statements requires management to make estimates and  assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities  as at the date of the financial statements as well as the reported amounts for revenue and expenses during  the period. Estimates and judgments are continually evaluated and are based upon historical experience and  other factors, including expectations of future events that are believed to be reasonable in the circumstances. Actual outcomes could differ materially from these estimates. The Company makes assumptions relating to transactions that were incomplete at the Statement of Financial  Position date. Depending on the actual transaction, total assets and liabilities of the Company as well as  results of operations including net income could be either understated or overstated as a result of differences  between amounts accrued for incomplete transactions and the subsequent actual balances. The preparation of AKITA’s financial statements requires management to make significant estimates relating  to the useful lives of drilling rigs. Depreciation is calculated using a detailed approach based on major  components, and results in an average useful life of 3,600 operating days per rig. Drilling rigs are depreciated  Additional GAAP Measure  Significant accounting estimates and judgments 45 AKITA DRILLING LTD.  ANNUAL REPORT