37 Caribbean Utilities Company, Ltd.  2011  Annual Report Notes to Financial Statements method, the compensation expense is amortised over the four-year vesting period of the options. Upon exercise, the proceeds of the option are credited to capital stock at CI$0.05 and the difference from the exercise price to share premium.  Therefore an exercise of options below the current market price has a dilutive effect on capital stock and shareholders equity. Forfeitures are accounted for as they occur. The pension costs of the defined benefit plan are actuarially determined using the projected benefits method prorated on service and best estimate assumptions. Past service costs from plan initiation are amortised on a straight-line basis over the remaining service period of the employee active at the date of initiation. The excess of any cumulative net actuarial gain (loss) over 10% of the greater of the benefit obligation and the fair value of plan assets at the beginning of the year,  are deferred and amortized over the remaining service period of the employee. The balance of any such actuarial gain (loss) is also deferred. The Company’s defined benefit pension plan is subject to judgments utilised in the actuarial determination of the expense and related obligation. The Company designates its financial instruments into one of the following three categories: (i) held for trading, (ii) loans and receivable, (iii) Other financial liabilities. All financial instruments are initially measured at fair value.  Subsequent adjustment of held for trading instruments are taken to the Statement of Earnings, whereas loans and receivables and other financial liabilities are subsequently measured at cost using the effective interest rate method. The Company’s policy is to recognise transaction costs associated with financial assets and liabilities as an adjustment to the cost of those financial assets and liabilities recorded on the balance sheet. These transaction costs are amortized into earnings using the effective interest rate method over the life of the related financial instrument. The Company uses derivatives to reduce the impact of volatility in the Fuel Cost Charge paid by the Company’s customers for the fuel that the Company must purchase in order to provide electricity service. The programme utilises call options to promote transparency in pricing. The use of call options creates a ceiling price for fuel costs at pre-determined contract premiums. The derivatives entered into by the Company relate to regulated operations and all contracts are recognised as either regulatory assets or liabilities and are measured at fair value. Any resulting gains or losses and changes to fair value are recorded in the regulatory asset/regulatory liability accounts, subject to regulatory approval.  Cash inflows and outflows associated with the settlement of all derivative instruments are included in operating cash flows on the Company’s statements of cash flows. Financial Instruments Derivatives (Expressed in thousands of United States dollars) The Company maintains defined contribution pension plans for its employees and defined benefit pension plan for the retired Chairman of the Company’s Board of Directors as well as the retired President and Chief Executive Officer. The pension costs of the defined contribution plan are recorded as incurred.  Employee Future Benefits