IAS 16 Property, Plant and Equipment

Canadian SerieS

Guide to International Financial Reporting Standards in Canada IAS 16 Property, Plant and Equipment

Irene Wiecek, FCPA, FCA Martha Dunlop, FCPA, FCA Jane Bowen, FCPA, FCA primary editor: Alex Fisher, CPA, CA

June 2013

FINANCIAL REPORTING

Canadian Series

Guide to International Financial Reporting Standards in Canada IAS 16 Property, Plant and Equipment

Irene Wiecek, FCPA, FCA Martha Dunlop, FCPA, FCA Jane Bowen, FCPA, FCA primary editor: Alex Fisher, CPA, CA

June 2013

IAS 16 Property, Plant and Equipment iii

Table of Contents

Preface 1 Research Resources 4 Notice to Readers 4

Introduction to IAS 16 5

Standards Update 6 IASB 6 Methods of Depreciation and Amortization 6 Bearer Biological Assets 6 Annual Improvements 7 IFRIC 7

Key Standards Referred to in This Publication 8

IAS 16 Definitions 9

Overview of Key Requirements 10

Analysis of Relevant Issues 12 Scope 12 Recognition of Initial and Subsequent Costs 14 Items Acquired for Safety or Environmental Reasons 14 Spare Parts, Standby Equipment and Servicing Equipment 15 Subsequent Costs 15 Measurement at Recognition 17 Costs of a Self-Constructed Asset 18 Borrowing Costs 19 Cessation of Cost Recognition 20 Income and Related Expenses of Incidental Operations 20 Assets Acquired Using Government Grants 21 Assets Held under a Finance Lease 21 Non-Monetary Transactions 21 Transfers of Assets from Customers [IFRIC 18] 22 Subsequent Measurement 24 Cost Model 24 Revaluation Model 24

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Costs of Dismantling, Removal and Site Restoration (Decommissioning Costs) and Changes to These Costs 31 Depreciation 33 Component Accounting 34 Residual Value 36 Useful Life 36 Depreciation Start Date 39 Depreciation End Date 40 Depreciation Method 40 Impairment and Compensation for Impairment 43 Compensation for Impairment 44 Derecognition of PP&E 44

Disclosure 46

Accounting Policy Choices 50

Significant Judgments and Estimates 53

Appendix A — Acronyms Used 55

List of Extracts

Extract 1 — Excerpt from The Brick Ltd. 2012 Financial Statements Note 3 — Significant Accounting Policies 13

Extract 2 — Excerpt from Sherritt International Corporation 2012 Financial Statements Note 2 — Summary of Significant Accounting Policies 15

Extract 3 — Excerpt from Air Canada 2012 Financial Statements Note 2 — Basis of Presentation and Summary of Significant Accounting Policies 16

Extract 4 — Excerpt from Saskatchewan Transportation Company 2012 Financial Statements Note 4 — Significant Accounting Policies 16

Extract 5 — Excerpt from Bombardier Inc. 2012 Financial Statements Note 2 — Summary of Significant Accounting Policies 17 Table of Contents v

Extract 6 — Excerpt from Rogers Communications Inc. 2012 Financial Statements Note 2 — Significant Accounting Policies 19

Extract 7 — Excerpt from Potash Corporation of Saskatchewan Inc. 2012 Financial Statements Note 5 — Property, Plant and Equipment 20

Extract 8 — Excerpt from Cenovus Energy Inc. 2012 Financial Statements Note 3 — Summary of Significant Accounting Policies 21

Extract 9 — Excerpt from the Great Canadian Gaming Corporation 2012 Financial Statements Note 3 — Critical Accounting Estimates and Judgments 22

Extract 10 — Excerpt from The Brick Ltd. 2012 Financial Statements Note 3 — Significant Accounting Policies 24

Extract 11 — Excerpt from Husky Energy Inc. 2012 Financial Statements Note 3 — Significant Accounting Policies 33

Extract 12 — Excerpt from Air Canada 2012 Financial Statements Note 2 — Basis of Presentation and Summary of Significant Accounting Policies 35

Extract 13 — Excerpt from Westjet Airlines Ltd. 2012 Financial Statements Note 1 — Statement of Significant Accounting Policies 36

Extract 14 — Excerpt from Newalta Corporation 2012 Financial Statements Note 2 — Significant Accounting Policies 37

Extract 15 — Excerpt from Sears Canada Inc. 2012 Financial Statements Note 2 — Significant Accounting Policies 43

Extract 16 — Excerpt from Royal Bank of Canada 2012 Financial Statements Note 2 — Summary of Significant Accounting Policies, Estimates and Judgments 43

Extract 17 — Excerpt from Shoppers Drug Mart Corporation 2012 Financial Statements Note 3 — Significant Accounting Policies 45

Extract 18 — Excerpt from Telus Corporation 2012 Financial Statements Note 15 — Property, Plant and Equipment 50

Extract 19 — Excerpt from Enerflex Ltd. 2012 Financial Statements Note 4 — Significant Accounting Estimates and Judgments 54

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List of Illustrations

Illustration 1 — Included and Excluded Costs of PP&E 17

Illustration 2 — Application of the Revaluation Model 25

Illustration 3 — Recognition of Revaluation Changes 28

Illustration 4 — IFRIC 1 — Changes in Existing Decommissioning, Restoration and Similar Liabilities 32

Illustration 5 — Determining the Expected Useful Life of an Item of PP&E 37

Illustration 6 — Summary of Some IAS 16 Disclosure Requirements 46

Illustration 7 — Some Significant Judgments and Sources of Estimation Uncer- tainty Under IAS 16 53 1

IAS 16 Property, Plant and Equipment

Preface This publication is part of the Guide to International Financial Reporting Stan- dards in Canada series published by the Chartered Professional Accountants of Canada (CPA Canada) to support its members.

The objective of this publication, IAS 16 Property, Plant and Equipment, is to help you understand IAS 16 and the IASB material that accompanies it. The publication begins with an introduction and standards update and then includes definitions, an overview chart, an analysis section, a section on accounting policies and one on significant judgments and estimates.

Every attempt has been made to use plain language and to avoid mere restatement of the IFRS standards although, where deemed necessary, specific wording from the standards is referred to.

This publication has been carefully prepared, but it necessarily contains information in summarized form and is, therefore, intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment.

The overview section takes a high-level look at the key requirements of the standard in a chart format (the Overview chart). Specific “touchstone” references to IAS 16 are included in the Overview chart to help you navigate the standard. These are not meant to be comprehensive references, rather a

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starting point for your research. The Analysis section analyzes the more complex areas of the standard in more depth. Note that, where parts of the standard are more straightforward, they are included in the Overview chart only as it is felt that this coverage is at a sufficient level.

Illustrations, examples and extracts have been used to explain a particular concept and/or provide insight into how the standard is applied. Financial statement note extracts have been selected to illustrate a particular point but do not necessarily represent best practices.

Several features have been included to enhance understanding as follows:

1. Illustrations, including the following: • charts • decision trees • summaries

These illustrations add value by summarizing, grouping, highlighting simi- larities/differences and working through decision processes in applying the standard.

2. Examples • IASB Illustrative Examples excerpts • IASB examples excerpted from the standard • other examples

These examples add value by showing how a particular part of the standard might be applied in a specific situation. Note that IAS 16 does not include any illustrative examples and therefore the examples included in this publication are not authoritative.

3. Extracts from the IASB standards, including the following: • definitions • select quotes

Even though every attempt has been made to use plain language, in some cases, it has been important to use the specific wording in the standard to get a point across.

4. Extracts from financial statements — financial statements of prominent Canadian companies have been selected, including those that were recipi- ents of the CPA Canada Corporate Reporting Awards. The report on the Corporate Reporting Awards, including a list of winners, may be found at www.cpacanada.ca.

The extracts included illustrate a particular aspect. It may be useful to review the complete note, which may be found at www.sedar.com. IAS 16 Property, Plant and Equipment 3

5. Non-IFRS Interpretations Committee insights — Items discussed but not taken to the IASB agenda, referred to as NIFRICs (Non-IFRICs), have been included because, in some cases, they provide insights into the standard setting decision processes.

6. IFRS Discussion Group (IDG) insights — references to IDG discussions. The IDG was established by the Canadian Accounting Standards Board (AcSB) in 2009. Its aim is to provide a public forum for the discussion of issues relating to IFRSs and to collect the views of Canadians experiencing issues in implementing IFRSs. These discussions are not meant to provide authoritative guidance; however, they do help clarify issues and allow interested parties to learn how others are working through their financial reporting issues and applying judgment in the application of IFRSs. These have been drawn from the publically available reports of the IDG meetings. The IDG’s meetings are recorded and audio webcasts are archived on the AcSB website (www.frascanada.ca). Discussants include preparers, practitioners, regulators and users of financial statements.

7. References to other relevant CPA Canada material.

8. This publication is part of a series with various publication dates. The dates have been noted on each publication.

Where necessary, icons have been used throughout the publication to refer to many of these features so the reader can easily distinguish the sources of the information.

Application insights explain, discuss and/or debate a particular IFRS application issue. Insight Application insights include: • NIFRICs (Non-IFRICs) • IFRS Discussion Group reports

Viewpoints refer to the Viewpoints: Applying IFRSs in the Min- ing Industry or the Viewpoints: Applying IFRSs in the Oil and Viewpoints Gas Industry — a series of papers that addresses specific IFRS application issues.

Examples illustrate how a particular part of an IFRS might be E xa mple applied in a specific situation.

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Statistics Statistics on particular IFRS application practices highlight common practices and/or application approaches.

Resources Resources include references to other relevant CPA Canada material.

Research Resources CPA Canada has compiled various IFRS technical summaries, practical application guides and frequently-asked-question documents aimed at supporting the understanding and application of IFRSs. For more information on IFRSs visit our website.

Notice to Readers The Research, Guidance and Support Group of the Chartered Professional Accountants of Canada (CPA Canada) commissioned this publication as part of its continuing research program. The views and conclusions expressed in this publication are those of the authors. They have not been adopted, endorsed, approved or otherwise acted upon by a Board or Committee of CPA Canada or any Provincial Institute / Ordre. CPA Canada and the authors do not accept any responsibility or liability that might occur directly or indirectly as a conse- quence of the use, application or reliance on this material. IAS 16 Property, Plant and Equipment 5

Introduction to IAS 16 IAS 16 prescribes the accounting treatment for property, plant and equipment (PP&E) held for use in the production or supply of goods or services, for rental to others or for administrative purposes, that are expected to be used for more than one period. IAS 16 allows an accounting policy choice for PP&E: items may be carried at cost or at a revalued amount.

IAS 16 provides guidance on what may, and what may not, be considered PP&E, the recognition and measurement of initial and subsequent costs and the derecognition of an item of PP&E.

IAS 16 includes a Basis for Conclusions document that summarizes the Inter- national Accounting Standards Board’s (IASB) considerations and conclusions in the development of this standard. IAS 16 does not include any illustrative examples.

The costs to dismantle, remove and restore items of PP&E are included in the carrying amount of the asset. IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities, provides guidance on accounting for the effect of changes in the measurement of existing decommissioning liabilities and discusses the related impact on PP&E.

IFRIC 18 Transfers of Assets from Customers, applies to the accounting for transfers of items of PP&E by entities that receive such transfers from their customers. This IFRIC provides guidance on the recognition and measurement of such asset transfers.

This publication is based on the requirements of IFRS standards and interpretations for annual periods beginning January 1, 2013. Where appropriate, for illustration purposes, certain note-disclosure examples are presented from financial statements with annual periods ending before January 1, 2013.

This publication has not been updated since the publication date of June 2013. Readers are cautioned that certain aspects of IFRSs may have changed since the publication date.

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Standards Update

IASB

Methods of Depreciation and Amortization In December 2012, the IASB issued an Exposure Draft (ED), Clarification of Acceptable Methods of Depreciation and Amortization (Proposed Amendments to IAS 16 and IAS 38), based on a submission from the IFRS Interpretations Committee. IAS 16.60 requires the depreciation method to reflect the pattern in which an asset’s future economic benefits are expected to be consumed. The proposed revisions are intended to clarify that revenue-based methods are not acceptable methods of depreciating or amortizing an item of PP&E or an intangible asset. This is because a revenue-based method reflects the economic benefits being generated from an asset rather than the expected pattern of consumption of the asset.

The proposed amendment also provides further guidance on the application of the diminishing balance method of depreciation. This proposed guidance clarifies that information about technical or commercial obsolescence of the output of the asset (product or service) is relevant for estimating the pattern of consumption of future economic benefits and the useful life of the asset. As an example, the ED notes that an expected future reduction in the unit selling price of the output, as a result of technical or commercial obsolescence, could be an indication of the diminution of the future economic benefits of the asset.

The comment period on this ED closed April 2, 2013, and the expected completion date is the fourth quarter of 2013.

Bearer Biological Assets The IASB has a limited-scope project to amend IAS 41 to address bearer biological assets (e.g., grapevines, dairy cows, etc.). These assets are accounted for under IAS 41 at fair value less costs to sell based on the principle that the transformation of bearer biological assets is best reflected by fair value measurement. The counter argument is that mature bearer biological assets are not going through biological transformation and, as such, are similar to manufacturing assets and should be accounted for under IAS 16.

This project will focus on measurement of bearer biological assets that are plants. This ED was issued on June 26, 2013, and was available for comment until October 28, 2013. IAS 16 Property, Plant and Equipment 7

Annual Improvements

2010 — 2012 cycle (ED issued May 2012) The IASB proposes an amendment to IAS 16 to address concerns about the computation of accumulated depreciation at the date of a revaluation of PP&E for entities that apply the revaluation method to account for PP&E. The con- cern stems from differing practices in computing accumulated depreciation for a revalued item where the residual value, the useful life or the depreciation method is re-estimated before a revaluation.

When an item of PP&E is revalued, IAS 16 currently allows entities a choice to (1) restate accumulated depreciation proportionately with the change in the gross carrying amount of the asset, or (2) eliminate accumulated depreciation against the gross carrying amount of the asset. A problem arises with the use of method (1) if the residual value, useful life or depreciation method is re- estimated before a revaluation adjustment. In these situations, the restatement of accumulated depreciation proportionately would not result in the carrying amount of the asset being equal to the revalued asset amount less the revalued accumulated depreciation. The proposed amendment to IAS 16 (and IAS 38) would state that the accumulated depreciation is computed as the difference between the gross and net carrying amounts. The proposed amendment would also clarify that the determination of accumulated depreciation does not depend on the selection of the valuation technique.

A similar amendment is proposed in IAS 38 for intangible assets measured using the revaluation model.

It is expected that this amendment will be approved and issued in the fourth quarter of 2013 and will be effective for annual periods beginning on or after January 1, 2014, with early adoption permitted.

IFRIC The Interpretations Committee received a request to address an issue related to contractual arrangements within the scope of IFRIC 12, Service Concession Arrangements. This request is to clarify in what circumstances contractual payments made by an operator under a service concession arrangement should: 1. be included in the measurement of an asset and liability at the start of the concession; or 2. be accounted for as executory in nature (i.e., be recognized as expenses as incurred over the term of the concession arrangement).

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At the January 2013 meeting, the Interpretations Committee tentatively decided to recommend that the IASB amend IAS 16 to require the adjustments of the carrying amount of a financial liability, other than those adjustments for finance costs not eligible for capitalization in accordance with IAS 23, be recognized as corresponding adjustments to the cost of the asset to the extent that IAS 16 or IAS 38 requires them. The Interpretations Committee also decided to propose amendments to IFRIC 12.

Key Standards Referred to in This Publication The following is a list of standards mentioned in this publication. Names of the standards have been included for the sake of clarity. The standards have been separated into two groups for purposes of this list — primary and secondary. The primary standards are the main standards that deal with the topic under discussion (in this publication — property, plant and equipment). The secondary standards are those referred to in this publication but not discussed in depth.

Primary standards:

IAS 16 Property, Plant and Equipment IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities IFRIC 18 Transfers of Assets from Customers

Secondary standards:

IFRS 2 Share-based Payments IFRS 5 Non-current Assets Held for Sale and Discontinued Operations IFRS 6 Exploration for and Evaluation of Mineral Resources IFRS 13 Fair Value Measurement IAS 1 Presentation of Financial Statements IAS 2 Inventories IAS 8 Accounting Policies, Changes in Estimates and Errors IAS 12 Income Taxes IAS 17 Leases IAS 18 Revenue IAS 20 Accounting for Government Grants and Disclosure of Government Assistance IAS 23 Borrowing Costs IAS 36 Impairment of Assets IAS 37 Provisions, Contingent Liabilities and Contingent Assets IAS 38 Intangible Assets IAS 40 Investment Property IAS 41 Agriculture IFRIC 12 Service Concession Arrangements IAS 16 Property, Plant and Equipment 9

Subsequently, only the standard number will be referenced, not the name (e.g., IAS 36).

IAS 16 Definitions [IAS 16.6]

These definitions were taken directly from IAS 16.

Carrying amount Carrying amount is the amount at which an asset is recognized after deducting any accumulated depreciation and accumulated impairment losses.

Cost Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction or, where applicable, the amount attributed to that asset when initially recognized in accordance with the specific requirements of other IFRSs (e.g., IFRS 2 Share-based Payment).

Depreciable amount Depreciable amount is the cost of an asset or other amount substi- tuted for cost less its residual value.

Depreciation Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.

Entity-specific value Entity-specific value is the present value of the cash flows an entity expects to arise from the continuing use of an asset and from its disposal at the end of its useful life or expects to incur when settling a liability.

Fair value Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. (See IFRS 13 Fair Value Measurement.)

Impairment loss An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount.

Property, plant and Property, plant and equipment are tangible items that: equipment 1. are held for use in the production or supply of goods or services, for rental to others or for administrative purposes; and 2. are expected to be used during more than one period.

Recoverable amount Recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use (VIU).

Residual amount The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.

Useful life Useful life is: 1. the period over which an asset is expected to be available for use by an entity; or 2. the number of production or similar units expected to be obtained from the asset by an entity.

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Overview of Key Requirements The following chart provides a high-level overview of the key requirements of IAS 16 and accompanying IASB support materials. The intent is not to repeat the standard but to walk the reader through the main requirements in the standard and identify the areas where detailed guidance is given and where complexity in application exists. Areas of greater complexity will be covered in more detail under the Analysis section of this publication.

As mentioned in the Preface, specific “touchstone” references to IAS 16 have been inserted to help the reader navigate the standard. The referencing is not meant to be all-inclusive but rather to give a starting point for further research in the standard itself.

KEY REQUIREMENTS OF IAS 16

Scope — IAS 16.2 – .5

Assets Included within the Scope of IAS 16 Assets Excluded from the Scope of IAS 16 • PP&E, including assets that are carried • PP&E, classified as held for sale (IFRS 5) at revalued amounts • PP&E where another standard requires or • PP&E used to develop or maintain the permits a different accounting treatment assets shown as excluded from the scope (e.g., investment property (IAS 40)) of IAS 16 • intangible assets (IAS 38) • measurement of investment property • biological assets related to agricultural (IAS 40) accounted for using the cost activity (e.g., vines used to grow grapes model (IAS 41)) • finance leases from the lessee perspective • recognition and measurement of explora- (other than the recognition criteria, which tion and evaluation assets (IFRS 6) are included in IAS 17) • mineral rights and mineral reserves (e.g., oil and natural gas)

Recognition — IAS 16.7 – .14

General recognition criteria: 1. must be probable that an item of PP&E’s future economic benefits will flow to the entity; and 2. the item of PP&E’s cost can be measured reliably. Items acquired for safety and environmental reasons, certain spare parts, standby equipment, servicing equipment and major inspection costs are recognized as they enable an entity to obtain future economic benefits from other assets.

Measurement at recognition — IAS 16.15 – .28

An entity considers the IAS 16 recognition criteria for all PP&E costs at the time they are incurred. These costs include costs incurred initially to acquire or construct an item of PP&E and costs incurred subsequently to add to or replace part of PP&E. An item of PP&E should be recognized at cost, which is the amount of cash or cash equivalents paid, or the fair value of other consideration given, to acquire an asset at the time of its acquisition or construction. There are specific elements to consider when assessing what contributes to the cost of an item of PP&E, particularly when such an item is self-constructed rather than acquired. IAS 16 provides guidance as to what cost elements should be included and those that should be excluded from the cost determination. IAS 16 Property, Plant and Equipment 11

KEY REQUIREMENTS OF IAS 16

Measurement at recognition — IAS 16.15 – .28 (continued)

IAS 16 provides specific guidance for revenue from incidental operations, self-constructed assets, non-monetary asset exchanges and costs of dismantling, removal and site restoration. Other cost consideration issues included in the analysis section of this publication include: • borrowing costs; • assets acquired using government grants; and • assets transferred from customers. A subsequent expenditure on an asset is not capitalized if it is not probable that it will create future economic benefit. The costs of day-to-day servicing of an item (i.e., repairs and maintenance) are recognized in profit and loss as incurred.

Measurement after recognition — IAS 16.29 – .66

Choice of two accounting policies by class of PP&E: • cost model; or • revaluation model. Significant guidance is provided for the application of the revaluation model, including: • when it can be used; • determining asset classes; • frequency of revaluations; and • recognition of revaluation increases and decreases. Each part of PP&E that is significant to the overall cost of an item should be separately depreciated, regardless of the accounting policy choice to measure PP&E using the cost model or the revaluation model after recognition. Depreciation is determined using the cost of an asset less its residual value over the estimated useful life of the asset. Entities need to review, at least at each annual reporting date, the residual values of their PP&E assets, their estimated useful lives and the depreciation method used. IAS 16 provides guidance on: • when depreciation of an asset begins; • how to determine an asset’s useful life; • depreciation methods; and • where depreciation is recognized. An entity applies IAS 36 to determine whether an item of PP&E is impaired.

Derecognition — IAS 16.67 – .72

The carrying amount of a PP&E item should be derecognized: 1. on disposal; or 2. when no future economic benefits are expected from its use or disposal. The carrying amount of a replaced part should be derecognized upon replacement.

Disclosure — IAS 16.73 – .79

Extensive disclosure requirements exist for each class of PP&E, including: 1. a reconciliation of the carrying amount at the beginning and end of the period (including additions, write-downs and depreciation); 2. the measurement basis for each class of PP&E (cost or revaluation); 3. the depreciation methods used; 4. the useful lives or depreciation rate used; and 5. specific information when the revaluation method is used.

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Analysis of Relevant Issues This section expands on certain areas of greater complexity and/or areas requiring significant judgment.

Scope [IAS 16.2 – .5]

Several other standards may be used in conjunction with, or in lieu of, IAS 16 to recognize and measure PP&E.

IAS 16 does not apply to investment property such as land and buildings used to earn rental income or held for capital appreciation purposes. Instead, the provisions of IAS 40 apply. The IAS 16 cost model is relevant in circumstances where this policy is chosen for subsequent measurement of investment properties.

The following examples look at the relationship between IAS 16 and IAS 40.

Application ExampleS Relationship between IAS 16 and IAS 40

Company ABC is in the manufacturing business and owns several plants (buildings and related machinery) across the country. Company ABC uses E xa mple each of these plants to make products that will ultimately be sold to gener- ate revenue. These plants are not considered investment property as they are used in the production or supply of goods or services sold in the ordinary course of business. As such, they are recognized under IAS 16 using the requirements in this publication.

Company DEF is in the real estate business and has invested in several buildings in many cities across the country. Company DEF derives its revenue E xa mple from rental income and would recognize a capital gain or loss from the sale of these buildings. These buildings are considered investment property because they are held to earn rentals and for capital appreciation purposes. As such, they are recognized under IAS 40. Under this standard, Company DEF may choose to measure the buildings after recognition by using either the fair value model or the cost model. Should it choose the cost model, the requirements of IAS 16 would apply. The Brick Ltd. Notes to the Consolidated Financial Statements December 31, 2012 and December 31, 2011 (thousands of Canadian dollars except for share and per share amounts)

it is probable that there will be sufficient taxable profits against which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Company expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off income tax assets against income tax liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle its income tax assets and liabilities on a net basis.

3.9 Property, plant and equipment 3.9.1 Recognition and measurement Items of property, plant and equipment are carried at cost less accumulated depreciation and accumulated impairment losses.

Cost includes expenditures directly attributable to the acquisition of the asset and required to establish the asset in working condition given its intended use. Cost also includes expenditures for dismantling and removing items and restoring the site on which they were located, and borrowing costs on qualifying assets. Purchased software and costs directly related to the purchase and installation of such software are capitalized as IASa component 16 Property, of related Plant equipment and Equipment 13 when the software is integral to its functionality. Software that is not considered integral to the functionality of equipment is classified as an intangible asset.

When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment.

Gains and losses on disposal of an item of property, plant and equipment are determined by Extractcomparing 1 — Ex ctheerp proceedst from from The disposal Bri ckwith Lt thed. carry 2012ing Finanamount cofial property, Stat eplantmen andts equipment and are recognized within other income (expense) on the consolidated statements of Note 3 — Scomprehensiveignificant income. Accounting Policies 3.9 Property, plant and equipment (in part) 3.9.2 Reclassification to investment property Property, plant and equipment are used in the ordinary course of business in the production or supply of goods or services or for administrative purposes. Investment property is property held to earn rental revenue or for capital appreciation or both. When the use of a property changes from use in the business to investment property, the property’s cost and accumulated depreciation is reclassified from property, plant and equipment to investment property.

24 The following insight looks at accounting for the right to use land as to whether IAS 16, IAS 17 or IAS 38 applies.

Application Insights Purchase of right to use land

Source NIFRIC

Meeting Date September 2012

The following insights were obtained from “IFRIC — items not taken onto the agenda” report.

Insight Reason for not adding to Issue the IFRIC agenda

In January 2012, the Interpreta- The Interpretations Committee iden- tions Committee received a request tified characteristics of a lease in the to clarify whether the purchase fact pattern considered, in accor- of a right to use land should be dance with the definition of a lease accounted for as a: as defined in IAS 17. The Interpreta- • purchase of property, plant and tions Committee noted that a lease equipment; could be indefinite via extensions or • purchase of an intangible asset; renewals and, therefore, the exis- or tence of an indefinite period does • lease of land. not prevent the ‘right to use’ from qualifying as a lease in accordance In the fact pattern submitted, the with IAS 17. The Interpretations Com- laws and regulations in the juris- mittee also noted that the lessee has diction concerned do not permit the option to renew the right and entities to own freehold title to land. that the useful life for depreciation Instead, entities can purchase the purposes might include renewal right to exploit or build on land. periods. Judgement will need to be According to the submitter, there is applied in making the assessment of diversity in practice in the jurisdic- the appropriate length of the depre- tion on how to account for a land ciation period. right. The Interpretations Committee, not- withstanding the preceding observations, noted that the particular fact pattern is specific to one jurisdiction. Consequently, the Interpretations Committee decided not to take this issue onto its agenda.

Details of the issues that have been considered by the IFRIC but not added to its agenda are available online at www.ifrs.org/.

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Recognition of Initial and Subsequent Costs [IAS 16.7 – .14]

IAS 16 does not specifically address what items constitute PP&E but provides general recognition guidance. The costs of an item of PP&E are capitalized only if: 1. it is probable that future economic benefits from the item will flow to the entity; and 2. the cost can be reliably measured.

The recognition criteria are based on the IASB’s Conceptual Framework for Financial Reporting.

Judgment may be required to determine whether particular costs qualify for recognition as PP&E in certain circumstances, some of which are outlined in the following sub-sections.

Items Acquired for Safety or Environmental Reasons [IAS 16.11]

IAS 16 provides specific guidance for PP&E acquired for safety or environmental reasons. A distinction is made for such PP&E because these assets generally do not have a direct impact on increasing the future economic benefits of any existing piece of PP&E. They may, however, allow an entity to obtain future economic benefits from its other assets in excess of what it might have derived had it not acquired the safety or environmental PP&E.

Application Example Items acquired for safety or environmental reasons

Company ABC operates in the pharmaceutical industry. To run its plants it must abide by several environmental and chemical safety standards. To do E xa mple so the company has hired several engineers to develop specific processes that will ensure compliance. It has also acquired specified quality control and monitoring equipment. This equipment is not necessary for the production of goods and services, yet it is important for ensuring compliance with the environmental and chemical safety standards. The process development costs, as well as the equipment, are capitalized under IAS 16. IAS 16 Property, Plant and Equipment 15

Spare Parts, Standby Equipment and Servicing Equipment [IAS 16.8]

Items such as spare parts, standby equipment and servicing equipment are recognized as PP&E when they meet the definition of PP&E. Otherwise, such items are classified as inventory. 2.8 Property, plant and equipment Property, plant and equipment include capitalized development and pre-production expenditures that are recorded at cost less Extaccumulatedract 2 — depreciationExcerp and accumulatedt from impairmentSherri losses.tt I Costnt includeserna expenditurestional that Co arerp directlyora attributabletion 2012 to the Finanacquisitioncial of theSt asset.ate Alsomen includedts in the cost of property, plant and equipment are borrowing costs on qualifying capital projects. These are incurred while construction is in progress and before the commencement of commercial production. Once Noteconstruction 2 — Summar of an asset isy substantially of Significant complete and the A assetccountingis ready for its intended Policies use, the costs are depreciated. 2.8 Plant,Property, equipment plantand and land equipment (in part) Plant, equipment and land includes assets under construction, equipment and processing, refining, power generation and other Plant,manufacturing equipment facilities. and land (in part)

The Corporation recognizes major long-term spare parts and standby equipment as plant, equipment and land when the parts and equipment are significant and are expected to be used over a period greater than a year, or when the parts and equipment can be used only in connection with an item of plant, equipment and land. Major inspections and overhauls required at regular intervals over the useful life of an item of plant, equipment and land are recognized in the carrying amount of the related item if Subsequentthe inspection or Costs overhaul provides benefit exceeding one year. Plant and equipment are depreciated using the straight-line method based on estimated useful lives, once the assets are available Repairsfor use. Plantandand Maintenanceequipment may have components with different useful lives. Depreciation is calculated based on each individual component’s useful life. New components are capitalized to the extent that they meet the recognition criteria of an [IASasset. 16.12] The carrying amount of the replaced component is derecognized, and any gain/loss is included in net earnings (loss). If the carrying amount of the replaced component is not known, it is estimated based on the cost of the new component less estimated depreciation. The useful lives of the Corporation’s plant and equipment are as follows: IAS 16 applies the general recognition criteria to subsequent costs incurred to Buildings and refineries 5 to 40 years addMa tochinery or andservice equipment a previously recognized5 to 50 years PP&E item. A subsequent expendi- Office equipment 3 to 35 years tureFixtures on an and fittingsasset is capitalized only3 when to 35 years it is probable that it will create future economicAssets under benefit. construction The costs of day-to-daynot depreciated duringservicing development of periodan item are described Mining properties as beingMining properties required include acquisitionfor the costs repair and development and maintenance costs related to mines of in production, an item properties of PP&E under development and these costsand propertiesare recognized held for future development. in profit Ongoing and pre loss-development as incurred. costs relating to properties held for future development are expensed as incurred, including property carrying costs, drilling and other exploration costs. Once a project is determined to be commercially viable, development costs are capitalized. Development costs incurred to access reserves at producing Replacementproperties and properties Parts under development are capitalized and are depreciated on a unit-of-production basis over the life of such reserves. Reserves are measured based on proven and probable reserves. [IAS 16.13] Oil and gas properties Oil and gas properties include acquisition costs and development costs related to properties in production, under development Costsand heldincurred for future development. subsequently Ongoing pre in-development order coststo relatingadd to, to properties replace held forpart future developmentof, or service are an itemcapitalized are capitalized as incurred, including if explorationthey meet costs. Developmentthe recognition costs incurred tocriteria. access reserves In atsuch producing cases, properties the and properties under development are capitalized and are depreciated on a unit-of-production basis over the life of such reserves. standardReserves are requires measured based an on entity proven and to probable derecognize reserves. the carrying amount of the part thatDerecognition has been replaced. This applies whether or not the replaced item has been An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected to separatelyarise from the identified continued use of theand asset. depreciated Any gain or loss arising since on derecognition acquisition. of the asset If (calculated the carrying as the differen ceamount of thebetwee replacedn the net disposal part proceeds cannot and the carryingbe identified, amount of the item) the is included cost in netof earningsthe replacement, (loss) in the period the itemsuitably is derecognized. depreciated, can be used to estimate the carrying amount of the part being Capitalization of borrowing costs replacedBorrowing costsand on derecognized. funds directly attributable to finance the acquisition, construction or production of a qualifying asset are capitalized until such time as substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. A qualifying asset is one that takes a substantial period of time to prepare the asset for its intended use. Where money borrowed specifically to finance a project is invested to earn interest income, the income generated is also capitalized to reduce the total capitalized borrowing costs.

Sherritt International Corporation 13

June 2013

2012 Consolidated Financial Statements and Notes 2012 Consolidated Financial Statements and Notes

at the average market price for the period and the difference between the number of shares and the number of shares assumedH) EMPLOYEE to be purchased PROFIT areSHARING included PLANS in the calculation. The number of shares included with respect to performance- based employee share options and PSUs are treated as contingently issuable shares because their issue is contingent uponThe Corporation satisfying specifiedhas employee conditions profit insharing addition plans. to thePayments passage are of calcul time.ated If the based specified on full conditions calendar year are met,results then and thean expensenumber of recorded shares included throughout is also the computed year as ausing charge the treasury to Wages, stock salaries method and unless benefits they based are anti-dilutive. on the estimated annual payment under the plan. P) CASH AND CASH EQUIVALENTS I) SHARE-BASED COMPENSATION PLANS Cash and cash equivalents include $218 pertaining to investments with original maturities of three months or less at DecemberCertain employees 31, 2012 of ($356 the Corporation as at December participate 31, 2011). in Air Investments Canada’s Long-Term include bankers’ Incentive acceptances Plan, which andprovides bankers’ for thediscount grant notes,of stock which options may and be liquidatedperformance promptly share andunits have (“PSUs”), original as maturities further described of three inmonths Note or14. less. PSUs are notional share units which are exchangeable, on a one-to-one basis, as determined by the Board of Directors based on factors such as the remainingQ) SHORT-TERM number of INVESTMENTSshares authorized for issuance under the Long-Term Incentive Plan as described in Note 14, for Air Canada shares, or the cash equivalent. The options and PSUs granted contain both time and performance based vesting Short-term investments, comprised of bankers’ acceptances and bankers’ discount notes, have original maturities over features as those further described in Note 14. three months, but not more than one year. The fair value of stock options with a graded vesting schedule is determined based on different expected lives for the R) RESTRICTED CASH options that vest each year, as it would be if the award were viewed as several separate awards, each with a different Thevesting Corporation date, and it has is accounted recorded Restrictedfor over the cash respective under Currentvesting period assets taking representing into consideration funds held forfeiture in trust byestimates. Air Canada For Vacationsa stock option in accordance award attributable with regulatory to an employee requirements who governingis eligible toadvance retire atticket the sales,grant date,as well the as fair funds value held of inthe escrow stock accountsoption award relating is expensed to Air Canada on the Vacations grant date. credit For ca ard stock booking option transactions, award attributable recorded underto an Currentemployee liabilities, who will for become certain traveleligible related to retire activities. during the vesting period, the fair value of the stock option award is recognized over the period from the grant date to the date the employee becomes eligible to retire. The Corporation recognizes compensation expense and a Restrictedcorresponding cash adjustment with maturities to Contributed greater than surplus one yearequal from to the the fair ba lancevalue sheetof the date equity is recorded instruments in Deposits granted andusing other the 16 Guideassets.Black-Scholes to International This restricted option pricingcash Financial relates model to taking fundsReporting into on depositconsideration in with Canada various forfeiture financial estimates. institutions Compensation as collateral expense for letters is adjusted of credi fort andsubsequent other items. changes in management’s estimate of the number of options that are expected to vest.

GrantsS) AIRCRAFT of PSUs are FUEL accounted INVENTORY for as AND cash SPARE settled PARTS instruments AND asSUPPLIES described INVENTORY in Note 14. Accordingly, the Corporation recognizes compensation expense at fair value on a straight line basis over the applicable vesting period, taking into Inventories of aircraft fuel and spare parts, other than rotables, and supplies are measured at the lower of cost and net consideration forfeiture estimates. Compensation expense is adjusted for subsequent changes in the fair value of the realizable value, with cost being determined using a weighted average formula. PSU and management’s current estimate of the number of PSUs that are expected to vest. The liability related to cash Thesettled Corporation PSUs is recorded did not inrecognize Other long-term any write-downs liabilities. on Refer inventories to Note or 17 reversals for a description of any previous of derivative write-downs instruments during used the by the Corporation to hedge the cash flow exposure to PSUs. Extraperiodsct presented. 3 — Ex Includedcerp tin Aircraftfrom maintenance Air Canada is $43 related 2012 to spare Finan parts andcial supplies St aconsumedtemen duringts the year (2011 – $39). Air Canada also maintains an employee share purchase plan. Under this plan, contributions by the Corporation’s Note 2 — Basis of Presentation and Summary of Significant Accounting employeesT) PROPERTY are matched AND EQUIPMENTto a specific percentage by the Corporation. Employees must remain with the Corporation until PoliciesMarch 31 of the subsequent year for vesting of the Corporation’s contributions. These contributions are expensed in PropertyWages, salaries, and equipment and benefits is recognized expense over using the the vesting cost model. period. Property under finance leases and the related obligation for J) Maintenancefuture lease payments and arerepairs initially recorded(in part) at an amount equal to the lesser of fair value of the property or equipment andJ) the MAINTENANCE present value of AND those REPAIRS lease payments.

TheMaintenance Corporation and allocatesrepair costs the for amount both leased initially and recognized owned aircra in ft respect are charged of an to item Aircraft of property maintenance and equipmentas incurred, to with its thesignificant exception components of maintenance and depreciatesand repair costs separately related eachto return component. conditions Property on aircraft and under equipment operating are lease, depreciated which are to accrued over the term of the lease, and major maintenance expenditures on owned and finance leased aircraft, whichSaskatchewan are Transportation Company 2012 Annual Report 55 estimated residual values based on the straight-line method over their estimated service lives. Aircraft and flight equipmentcapitalized as are described componentized below in intoNote airframe, 2T. engine, and cabin interior equipment and modifications. Airframe and engines are depreciated over 20 to 25 years, with 10% to 20% estimated residual values. Cabin interior equipment and Maintenance and repair costs related to return conditions on aircraft leases are recorded over the term of the lease for modifications are depreciated over the lesser of 5 years or the remaining useful life of the aircraft. Spare engines and T) Propertythe end of leaseand maintenance equipment return (in condition part) obligations within the Corporation’s operating leases, offset by a prepaid related parts (“rotables”) are depreciated over the average remaining useful life of the fleet to which they relate with maintenance asset to the extent of any related power-by-the-hour maintenance service agreements or any recoveries 10% to 20% estimated residual values. Cabin interior equipment and modifications to aircraft on operating leases are under aircraft subleasing arrangements. The provision is recorded within Maintenance provisions using a discount rate amortized over the term of the lease. Major maintenance of airframes and engines, including replacement spares and taking into account the specific risks of the liability over the remaining term of the lease. Interest accretion on the parts, labour costs and/or third party maintenance service costs, are capitalized and amortized over the average provision is recorded in Other non-operating expense. For aircraft under operating leases which are subleased to third expected life between major maintenance events. Major maintenance events typically consist of more complex parties, the expense relating to the provision is presented net on the income statement of the amount recognized for inspections and servicing of the aircraft. All maintenance of fleet assets provided under power-by-the-hour contracts are any reimbursement of maintenance cost which is the contractual obligation of the sublessee. The reimbursement is charged to operating expenses in the income statement as incurred, respectively. Buildings are depreciated on a recognized when it is virtually certain that reimbursement will be received when the Corporation settles the obligation. straight-line basis over their useful lives not exceeding(continued) 50 years or the term of any related lease, whichever is less. Notes Anyto Financial changes in the maintenance Statements cost estimate, discount rates, timing of settlement or difference in the actual Leasehold improvements are amortized over the lesser of the lease term or 5 years. Ground and other equipment is maintenance cost incurred and the amount of the provision is recorded in Aircraft maintenance in the period. depreciated over 3 to 25 years. c.ExPropertytract 4 — and Eequipmentxcerpt from Saskatchewan Transportation CCompanyompan recognizesy 2012 a portion of the capital grant as revenue each Property and equipment are recorded at cost less accumulated year equivalent to the amount of depreciation recognized on the Financial Statements depreciation and any provisions for impairment. Cost includes assets acquired13 with the grant funds. Noteexpenditure 4 — Significant that is directly A ccountingattributable to Ptheolicies acquisition of the 10 Capital grants related to the acquisition of land and related costs are c. Propertyasset. The andcost ofequipment self-constructed (in part) assets includes materials, recognized as a direct increase in retained earnings. services, direct labour and directly attributable overheads. The costs of maintenance, repairs, renewals or replacements which do g. Depreciation of property and equipment not extend productive life are charged to operations as incurred. The Depreciation is recorded on buildings, vehicles, and equipment, on costs of replacements and improvements which extend productive life the straight-line basis over the estimated productive life of each are capitalized. The cost of replacing part of an item of property and asset. Depreciation commences when the property and equipment is equipment is recognized in the carrying amount of the item if it is ready for its intended use. The estimated useful life of property and probable that the future economic benefits embodied within the part equipment is based on manufacturer’s guidance, past experience and will flow to the Company and its cost can be measured reliably. The future expectations regarding the potential for technical carrying amount of the replaced part is derecognized. The costs of obsolescence. The estimated useful lives are reviewed annually and the day-to-day servicing of property and equipment are recognized in any changes are applied prospectively. total comprehensive loss as incurred. The estimated useful lives of the major classes of property and When property and equipment are disposed of or retired, the equipment are as follows: related costs and accumulated depreciation are eliminated from the Buildings 10 - 50 years Majoraccounts. Inspections Any resulting gains or losses are reflected in the Vehicles 5 -15 years [IASstatement 16.14] of comprehensive loss for the period. Other equipment 3 - 10 years d. Non-financial assets held for sale h. Impairment of non-financial assets ToNon-financial continue operating, assets are classified certain as itemsheld for of sale PP&E if their may carrying require major inspectionsAt each reporting date, the Company reviews the carrying amount of (foramount example: will be aircrafts,recovered principally ships, etc.). through When a sale such transaction major inspections itstake non-financial place, assets to determine whether there is any indication therather costs than are through recognized continuing as use. a separate This condition component, is regarded ifas the recognitionthat those criteria assets have suffered an impairment loss. If any such met only when the sale is highly probable and the asset is available indication exists, the recoverable amount of the asset is estimated in are satisfied and amortized over the period between scheduled inspections. for immediate sale in its present condition. Management must be order to determine the extent, if any, of the impairment loss. Oncecommitted a scheduled to the sale, inspection which should has be expectedtaken place, to qualify any for remaining carrying amount The recoverable amount is the higher of fair value less costs to sell of recognitionthe cost ofas athe completed previous sale inspectionwithin one year (i.e., from the the unamortizeddate of portion) must be classification. and value in use. In assessing value in use, the estimated future cash derecognized and the new inspection cost capitalized. flows are discounted to their present value using a discount rate that Non-financial assets classified as held for sale are measured at the reflects current market assessments of the time value of money and lower of their previous carrying amount and fair value less costs to the risks specific to the asset for which the estimates of future cash sell. flows have not been adjusted. e. Operating grant revenue If the recoverable amount of an asset is estimated to be less than its Operating grants from CIC are recognized as revenue when received. carrying amount, the carrying amount of the asset is reduced to its f. Capital grant revenue recoverable amount. An impairment loss is recognized immediately in Capital grants related to depreciable property are deferred as received the statement of comprehensive loss. and are recognized as revenue over the life of the asset. The unfunded benefit plans, the benefit obligation, after adjusting for the effects of unrecognized past service costs (credits), is included in retirement benefit liability.

Other long-term employee benefits – The accounting method is similar to the method used for defined benefit plans, except that all actuarial gains and losses and past service costs are recognized immediately in income. Other long-term employee benefits are included in other liabilities.

Property, plant and equipment PP&E are carried at cost less accumulated amortization and impairmentIAS losses. 16 Property, The cost of anPlant item andof PP&E Equipment 17 includes its purchase price or manufacturing cost, borrowing costs as well as other costs incurred in bringing the asset to its present location and condition. If the cost of certain components of an item of PP&E is significant in relation to the total cost of the item, the total cost is allocated between the various components, which are then separately depreciated over the estimated useful lives of each respective component. The amortization of PP&E is computed on a straight-line basis over the following useful lives:

Buildings 5 to 75 years Equipment 2 to 15 years ExtOtherract 5 — Excerpt from Bombardier Inc. 2012 Financial Stat3e tom 20en yearsts

NoteThe 2 — S amortizationummar methody of and usefulSignificant lives are reviewed Accounting on a regular basis, Policies at least annually, and changes are accounted for prospectively. The amortization expense and impairments are recorded in cost of sales, SG&A or Property,R&D expenses plant basedand onequipment the function of(in the part) underlying asset. Amortization of assets under construction begins when the asset is ready for its intended use.

When a significant part is replaced or a major inspection or overhaul is performed, its cost is recognized in the carrying amount of the PP&E if the recognition criteria are satisfied, and the carrying amount of the replaced part or previous inspection or overhaul is derecognized. All other repair and maintenance costs are charged to income when incurred.

Intangible assets Internally generated intangible assets include development costs (mostly aircraft prototype design and testing costs) and internally developed or modified application software. These costs are capitalized when certain criteria Measurementfor deferral such as provenat Recognition technical feasibility are met. The costs of internally generated intangible assets include the cost of materials, direct labour, manufacturing overheads and borrowing costs. [IAS 16.15 – .28] Acquired intangible assets include the cost of development activities carried out by vendors for which the Corporation controls the underlying output of the usage of the technology, as well as the cost related to externally PP&Eacquired is initially licences, patentsrecognized and trademarks. at cost. Cost is the cash price equivalent or fair value of other consideration given at the recognition date. If payment is deferred Intangible assets are recorded at cost less accumulated amortization and impairment losses and include goodwill, beyondaerospace normal program credit tooling, as terms, well as other the intangible difference assets such between as licenses, the patents cash and trademarks.price equivalent Other intangible assets are included in other assets. and the total payment is recognized as interest over the period of credit unless such interest is capitalized in accordance with IAS 23. Cost includes all expenditures directly attributed to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.

IAS 16 provides guidance on the elements of the cost of an item of PP&E. The following illustration summarizes some elements of the cost of PP&E and some costs that are excluded. Note that this is not meant to be a comprehensive list.

Illustration 1 — Included and Excluded Costs of PP&E

142 Included costs Excluded costs

• purchase price, including import duties • costs of opening a new facility and non-refundable purchase taxes, after • costs of introducing a new product or deducting trade discounts and rebates service (including costs of advertising and • costs of site preparation (e.g., surveying, promotional activities) clearing, leveling, grading, and other civil • costs of conducting business in a new engineering tasks involved in preparing location or with a new class of customer, the site for construction) including costs of staff training • initial delivery and handling costs • administrative and general overhead costs • installation and assembly costs • training costs, including those incurred for • costs of testing whether the asset is func- employees who must learn how to oper- tioning properly, after deducting the net ate a new piece of equipment proceeds from selling any items produced • costs incurred while an item capable while bringing the asset to that location of operating in the manner intended and condition (such as samples produced by management has yet to be brought when testing equipment) into use or is operated at less than full • costs of employee benefits (including capacity share-based payments) arising directly • initial operating losses, such as those from the acquisition or construction of incurred while demand for the item’s the PP&E output builds up • professional fees (e.g., legal, architectural, • costs of relocating or reorganizing part engineering) or all of an entity’s operations • initial estimate of the costs of dismantling and removing the item and restoring the site where it is located to its original condition when an obligation to do so exists

June 2013 18 Guide to International Financial Reporting in Canada

The following insight looks at costs of testing whether an asset is functioning properly and the treatment of any proceeds before the asset is ready for commercial production.

Application Insights Costs of testing

Source NIFRIC

Meeting Date July 2011

The following insights were obtained from “IFRIC — items not taken onto the agenda” report.

Insight Reason for not adding to Issue the IFRIC agenda

The Interpretations Committee The Committee noted that para- received a request to clarify the graph 17(e) of IAS 16 applies sepa- accounting for sales proceeds from rately to each item of property, plant testing an asset before it is ready and equipment. It also observed that for commercial production. The the ‘commercial production date’ submitted fact pattern is that of referred to in the submission for an industrial group with several the whole complex was a different autonomous plants being available concept from the ‘available for use’ for use at different times. This group assessment in paragraph 16(b) of is subject to regulation that requires IAS 16. The Committee thinks that it to identify a ‘commercial produc- the guidance in IAS 16 is sufficient tion date’ for the whole industrial to identify the date at which an item complex. The question asked of the of property, plant and equipment Committee is whether the proceeds is ‘available for use’ and, therefore, from those plants already in opera- is sufficient to distinguish proceeds tion can be offset against the costs that reduce costs of testing an asset of testing those plants that are not from revenue from commercial yet available for use. production. As a result, the Committee does not expect diversity to arise in practice and therefore decided not to add this issue to its agenda.

Details of the issues that have been considered by the IFRIC but not added to its agenda are available online at www.ifrs.org/.

Costs of a Self-Constructed Asset [IAS 16.22]

The costs of a self-constructed asset are determined using the same principles as for an acquired asset. They normally include the direct costs of constructing the asset (e.g., the purchase price of raw materials including transportation, handling and other direct costs, and direct labour costs). IAS 16 Property, Plant and Equipment 19

If an entity makes similar assets for sale in the normal course of business, the costs of the asset are usually the same as the costs of constructing an asset for sale. Therefore, any internal profits are excluded.

IAS 16 specifically excludes the cost of abnormal amounts of wasted material, NOTE S obligation. Actuarial gains and losses are determined at the end labour(ii) Terminationor other resources benefits: incurred in self-constructing an asset. of the year in connection with the valuation of the plans and are Termination benefits are recognized as an expense when the TO CON S recognized in OCI and retained earnings. ExtCompanyract 6 — isEx committedcerpt from without Roger realistics Commu possibilitynicati ofons Inc. 2012 Financial withdrawal, to a formal detailed plan to terminate employment The Company uses the following methods and assumptions for Statements before the normal retirement date. pension accounting associated with its defined benefit plans:

Note 2 — Significant Accounting Policies OLIDATED FINANCIAL S (r) Property, plant and equipment: (a) the cost of pensions is actuarially determined and takes (r) Property, plant and equipment: (in part) (i) Recognition and measurement: into account the expected rates of salary increases, for (i) ItemsRecognition of PP&E and are measurement: measured at (in costpart) less accumulated instance, as the basis for future benefit increases; depreciation and accumulated impairment losses. (b) for the purpose of calculating the expected return on Cost includes expenditures that are directly attributable to the plan assets, those assets are valued at fair value; and acquisition of the asset. The cost of self-constructed assets (c) past service costs from plan amendments are expensed includes the cost of materials and direct labour, any other costs immediately in the consolidated statements of income directly attributable to bringing the assets to a working

TATEMENT S to the extent that they are already vested. Unvested condition for their intended use, the costs of dismantling and past service costs are deferred and amortized on a removing the items and restoring the site on which they are straight-line basis over the average remaining vesting located, and borrowing costs on qualifying assets. The period. Contributions to defined contribution plans are determination of directly attributable costs involves significant recognized as an employee benefit expense in the management estimates. These estimates include certain direct statement of income in the periods during which labour and direct costs associated with the acquisition, related services are rendered by employees. construction, development or betterment of the Company’s network are capitalized to PP&E, and interest costs which are Contributions to defined contribution plans are recognized as an capitalized during construction and development of certain employee benefit expense in the consolidated statements of PP&E. income in the periods during which related services are rendered by employees. The cost of new cable subscriber installation costs are capitalized to cable and wireless network and is depreciated over the useful Borrowinglives of the Costs related assets. Costs of other cable connections and [IASdisconnections 23.1 and .5] are expensed, except for direct incremental installation costs related to reconnect Cable customers, which are deferred to the extent of reconnect installation revenues. IAS 23 establishes criteria for the recognition of borrowing costs as an element of Gainsthe carrying and losses amount on disposal of of a an qualifying item of PP&E asset. are determined A qualifying asset is defined in by comparing the proceeds from disposal with the carrying IASamount 23 as of “an PP&E, asset and arethat recognized necessarily within takes other incomea substantial in the period of time to get readyconsolidated for its intended statements ofuse income. or sale”. IAS 23 does not provide guidance on what (ii) Depreciation: constitutes a substantial period of time. This is a matter of judgment. Depreciation is charged to the consolidated statements of income over the estimated useful lives of the PP&E as follows: Asset Basis Estimated useful life An entity must capitalize borrowing costs for qualifying assets that are directly Buildings Diminishing balance 5 to 25 years Cable and wireless network Straight-lineattributable to the acquisition, construction 3or to production 30 years of the qualifying asset. Computer equipment and software Straight-line 4 to 10 years Customer premise equipment Straight-line 3 to 5 years Leasehold improvements Straight-line Over shorter of estimated useful life and lease term Equipment and vehicles Diminishing balance 3 to 20 years

Components of an item of PP&E may have different useful lives. are recorded on the consolidated statements of financial position The selection of depreciation methods, rates, and useful lives when the licence period begins and the program is available for use requires significant estimates that take into account industry and is amortized to other external purchases in the consolidated trends and company-specific factors. Depreciation methods, rates statements of income over the expected exhibition period, which and residual values are reviewed at least annually or when there ranges from one to five years. If programs are not scheduled, the are changes in circumstances, and revised if the current method, related program rights are considered impaired and written off. June 2013 estimated useful life or residual value is different from that Otherwise, they are subject to non-financial asset impairment testing estimated previously. The effect of such changes is recognized in as intangible assets with finite useful lives. Program rights for multi- the consolidated statements of income prospectively. year sports programming arrangements are expensed as incurred, when the games are aired. Development expenditures are capitalized if they meet the criteria for recognition as an asset. The assets are amortized over (t) Goodwill and intangible assets: their expected useful lives once they are available for use. (i) Goodwill: Research expenditures, as well as maintenance and training Goodwill is measured if the fair value of consideration costs, are expensed as incurred. transferred, including the recognized amount of any non- controlling interest of the acquiree, is greater than the fair value (s) Acquired program rights: of the identifiable net assets acquired. If the excess is negative, Program rights represent contractual rights acquired from third the difference is recognized immediately in the consolidated parties to broadcast television programs and are carried at cost less statements of income. accumulated amortization. Program rights and the related liabilities

2012 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 91 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS In millions of US dollars except as otherwise noted

Note 4 Inventories continued

SUPPORTING INFORMATION Inventories at December 31 were comprised of: 2012 2011 Finished products $ 417 $ 395 Intermediate products 82 98 Raw materials 91 91 Materials and supplies 172 147 $ 762 $ 731

The following items affected cost of goods sold during the year: 2012 2011 2010 Expensed inventories $ 3,659 $ 3,653 $ 3,087 Reserves, reversals and writedowns of inventories 8 85 $ 3,667 $ 3,661 $ 3,092

The carrying amount of inventory recorded at net realizable value was $23 at December 31, 2012 (2011 – $7), with the remaining inventory recorded at cost.

NOTE 5 PROPERTY, PLANT AND EQUIPMENT

20 Guide to International Financial Reporting in Canada ACCOUNTING POLICIES Any gain or loss arising on the disposal or retirement of an item of property, Property, plant and equipment (which include certain mine development costs, plant and equipment is determined as the difference between the sale pre-stripping costs and assets under construction) are carried at cost (which proceeds and the carrying amount of the asset, and is recognized in includes all expenditures directly attributable to bringing the asset to the operating income. location and installing it in working condition for its intended use) less ACCOUNTING ESTIMATES AND JUDGMENTS accumulated depreciation and any recognized impairment loss. Income or Extract 7 — Excerpt from Potash Corporation of SaDeterminationskatchewanof which costsIncare. directly attributable (e.g., labor, overhead) expenses derived from the necessity to bring an asset under construction to 2012 Financial Statements and when income or expenses derived from an asset under construction is the location and condition necessary to be capable of operating in the manner Note 5 — Property, Plant and Equipment recognized as part of the cost of the asset, are matters of judgment. intended is recognized as part of the cost of the asset. The cost of property, Capitalization of costs ceases when an item is substantially complete and in Accountingplant and equipment Policies is reduced (in part) by the amount of related investment tax the location and condition necessary for it to be capable of operating in the credits to which the company is entitled. Costs of additions, betterments, manner intended by management. Determining when an asset, or a portion renewals and borrowings during construction are capitalized. Borrowing costs thereof, meets these criteria requires consideration of the circumstances and directly attributable to the acquisition, construction or production of assets the industry in which it is to be operated, normally predetermined by that necessarily take a substantial period of time to ready for their intended management with reference to such factors as productive capacity. This use are added to the cost of those assets, until such time as the assets are determination is a matter of judgment that can be complex and subject to substantially ready for their intended use. The capitalization rate is based on differing interpretations and views, particularly when significant capital the weighted average interest rate on all of the company’s outstanding third- projects contain multiple phases over an extended period of time. When an party debt. All other borrowing costs are charged through finance costs in the item of property, plant and equipment comprises individual components for period in which they are incurred. Each component of an item of property, which different depreciation methods or rates are appropriate, judgment is plant and equipment with a cost that is significant in relation to the item’s used in determining the appropriate level of componentization. Distinguishing total cost is depreciated separately. When the cost of replacing part of an item major inspections and overhauls from repairs and maintenance, and Cessationof property, plantof Costand equipment Recognition is capitalized, the carrying amount of the determining the appropriate life over which such costs should be amortized is [IASreplaced 16.20] part is derecognized. The cost of major inspections and overhauls is capitalized and depreciated over the period until the next major inspection or a matter of judgment. It overhaul.should Maintenance be noted and that repair costs expenditures are thatno do longer not improve capitalized or extend onceCertain the mining item and millingis in assetsthe are depreciated using the units-of- locationproductive and life are condition expensed in the necessary period incurred. for it to be capable of operatingproduction method in the based man on the- shorter of estimates of reserves or service ner intended by management. This means that IAS 16 prohibitslives. Pre-stripping the recognition costs are depreciated on a units-of-production basis over the ore mined from the mineable acreage stripped. Land is not depreciated. of relocation and reorganization costs, costs incurred after the asset is capable of being used and initial operating losses.

Income114 POTASHCORP and Related 2012 ANNUAL Expenses INTEGRATED of REPORT Incidental Operations [IAS 16.21]

Incidental income derived from operating PP&E prior to its substantial completion and readiness for use is recognized as part of the cost of the asset provided it is necessary to bring the asset to its intended use.

Income and related expenses of incidental operations that are not necessary to bring an asset to the condition and location for its intended use, or that are incurred after the asset is already in the location and condition necessary for operating as intended, are recognized in profit or loss.

Application Example Incidental income

Company ABC is about to construct a condominium project near a golf course. Before construction begins, the land on which the project will be E xa mple situated is being used as a place where golfers may practice prior to beginning their games. The golf company must pay a rental fee to Company ABC for the use of this land. Revenues derived by ABC from the golf company are recognized in the period when earned as they are not required to bring the asset to the condition and location for its intended use. IAS 16 Property, Plant and Equipment 21

Assets Acquired Using Government Grants [IAS 16.28 and IAS 20.24]

For many industries, the acquisition of certain assets is made possible by government grants. Government grants may take the form of subsidies, forgivable loans or other similar mechanisms. IAS 20 prescribes the following treatment for government grants related to PP&E:

• recognizeNOTES TO CONSOLIDATED the grant FINANCIALas deferred STATEMENTS income to be recognized in profit or loss All amounts in $ millions, unless otherwise indicated onFor thea yearsystematic ended December basis 31, 2012over the useful life of the asset; or • deduct the grant in calculating the carrying amount of the asset. The

grantAn impairment is recognized loss on a financial in profit asset carried or lossat amor overtized costthe islife calculated of a asdepreciable the difference betweenasset the amortized cost and the present value of the future cash flows discounted at the asset’s original effective interest asrate. a The reduced carrying amount depreciation of the asset is expense.reduced through the use of an allowance account. Impairment losses on financial assets carried at amortized cost are reversed through net earnings in subsequent periods if the amount of the loss decreases.

ExtQ)ra Borrowingct 8 — ECostsxcerp t from Cenovus Energy Inc. 2012 Financial

StaBorrowingtemen coststs are recognized as an expense in the period in which they are incurred unless there is a qualifying asset. Borrowing costs directly associated with the acquisition, construction or production of a qualifying asset are Notecapitalized 3 — S ummarwhen a substantialy of periodSignificant of time is required Accounting to make the asset P oliciesready for its intended use. Capitalization of borrowing costs ceases when the asset is in the location and condition necessary for its intended use.

R) Government Grants

Government grants are recognized at fair value when there is reasonable assurance that the grants will be received and the Company will comply with the conditions of the grant. Grants related to assets are recorded as a reduction of the asset’s carrying value and are depreciated over the useful life of the asset. Grants related to income are treated as a reduction of the related expense in the Consolidated Statements of Earnings and Comprehensive Income.

S) Leases

Leases in which substantially all of the risks and rewards of ownership are retained by the lessor are classified as Assetsoperating Held leases. under Operating a Financelease payments Lease are recognized as an expense on a straight-line basis over the lease term.

[IASLeases 16.4 where and the .27] Company assumes substantially all the risks and rewards of ownership are classified as finance leases within property, plant and equipment.

TheT) initial Business measurement Combinations and ofGoodwill cost for PP&E acquired under the form of a finance

leaseBusiness is determined combinations are underaccounted the for using provisions the acquisition of method IAS 17.of accounting Once ain whichleased the identifiableasset held assets acquired, liabilities assumed and any non-controlling interest are recognized and measured at their fair value at the underdate ofa acquisition.finance Any lease excess ofhas the pubeenrchase recognized, price plus any non-controlling its subsequent interest over measurementthe fair value of the net assets acquired is recognized as goodwill. Any deficiency of the purchase price over the fair value of the net assets acquired is credited to net earnings. follows the requirements in IAS 16 (e.g., use of the cost model or revaluation At acquisition, goodwill is allocated to each of the CGUs to which it relates. Subsequent measurement of goodwill is modelat cost and less anydepreciation). accumulated impairment losses.

U) Provisions

Non-MonetaryGeneral Transactions

[IASA provision16.24 – .26] is recognized if, as a result of a past event, the Company has a present obligation, legal or constructive, that can be estimated reliably, and it is more likely than not that an outflow of economic benefits will be required to settle the obligation. Where applicable, provisions are determined by discounting the expected Wherefuture ancash entityflows at aacquires pre-tax credit-a andjusted item rate of thatPP&E reflects in the exchange current market for assessments a non-monetary of the time value of money and the risks specific to the liability. The increase in the provision due to the passage of time is assetrecognized or assets, as a finance or costa combination in the Consolidated ofStatements monetary of Earnings and and non-monetary Comprehensive Income. assets,

measurementDecommissioning at Liabilities fair value is prescribed unless the exchange transaction lacks

Decommissioning liabilities include those legal or constructive obligations where the Company will be required to commercialretire tangible substance long-lived assets or such the as fairproducing value well ofsites, neither crude oil theand naturalasset gas received processing facilitiesnor the and refining facilities. The amount recognized is the present value of estimated future expenditures required to settle assetthe givenobligation up using is areliably credit-adjusted measurable. risk-free rate. IfA cotherresponding acquired asset itemequal tois the not initial measured estimate of theat liability is capitalized as part of the cost of the related long-lived asset. Changes in the estimated liability resulting fairfrom value, revisions its costto expected is measured timing or futureat the decommissioning carrying amountcosts are recognizedof the asset as a changegiven in up. the decommissioning liability and the related long-lived asset. The amount capitalized in property, plant and equipment is depreciated over the useful life of the related asset. Increases in the decommissioning liabilities resulting from the passage of time are recognized as a finance cost in the Consolidated Statements of Earnings and Comprehensive Income.

Actual expenditures incurred are charged against the accumulated liability.

Cenovus Energy Inc. 18 Consolidated Financial Statements June 2013

22 Guide to International Financial Reporting in Canada

An entity determines whether an exchange transaction has commercial substance by considering the extent to which its future cash flows are expected to change as a result of the transaction. An exchange transaction has commercial substance if: • the configuration (i.e., risk, timing and amount) of the cash flows of the asset received differs from the configuration of the cash flows of the asset transferred; or • the entity-specific value of the portion of the entity’s operations affected by the transaction changes as a result of the exchange; and GREAT• the CANADIAN difference GAMING in the CORPORATION points above is significant relative to the fair value of Notes to the Consolidated Financial Statements For the theYears assets Ended December exchanged. 31, 2012 and 2011 (Expressed in millions of Canadian dollars, except for per share information) Recall that entity-specific value is the present value of the cash flows an entity 3. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (Continued) expects to arise from the continuing use of an asset and from its disposal at  Fair value of net assets acquired in business combinations the end of its useful life or expects to incur when settling a liability. The cost of an acquired business (“purchase price”) is assigned to the identifiable tangible and For theintangible purpose assets of purchased determining and liabilities commercial assumed on substance,the basis of their the fair entity-specific values at the date ofvalue acquisition. The identification of assets purchased and liabilities assumed and the valuation thereof is of thespe portioncialized and of judgmental.the entity’s Where operations appropriate, the affected Company engages by the business transaction valuators toshould assist in the valuation of tangible and intangible assets acquired. Any excess of purchase price over the fair reflectvalue post-tax of the identifiable cash tangibleflows. and intangible assets purchased and liabilities assumed is allocated to goodwill.

Ext raWhenct 9 — a businessExcerp combinationt from involves the Gcontingentreat Canadianconsideration, anG aamountming equal Co rpto theora fairt valueion of2012 Finanthecial contingent Stat considerationements is recorded as a liability at the time of acquisition. The key assumptions utilized in determining fair value may include probabilities associated with the occurrence of specified Note future3 — C events,ritical financial Accounting projections of theEstimates acquired business, and theJudgments timing of future cash flows, and the appropriate discount rate.

 Fair value of assets acquired in business transactions with non-monetary consideration

The Company measures the fair value of assets acquired in business transactions with non-monetary consideration at the fair value of the asset given up or the fair value of the asset received, whichever is more reliably measurable. Measurement of fair value is based on an analysis of pertinent information that may include third-party asset appraisals, market values evidenced from similar transactions, and discounted cash flows.

 Equity-settled share-based compensation

TransfersThe Company of Assets estimates from the Customerscost of equity-settled [IFRIC share 18]-based compensation using the Black-Scholes option pricing model. The model takes into account an estimate of the expected life of the option, the In somecurren industries,t price of the underlyingsuppliers common of goods share, the or expected services volatility, require an estimate (or ofallow) future dividends their cus on - the underlying common share, the risk-free rate of return expected for an instrument with a term equal tomersto theto expectedcontribute life of the PP&E option, items and the (orexpected cash forfeiture to construct rate. or acquire PP&E items) to support the customers’ ongoing access to a supply of goods or services.  Income taxes Examples include PP&E to connect to utilities such as gas, electricity or water Deferred tax assets and liabilities are due to temporary differences between the carrying amount for and PP&Eaccounting provided purposes toand an the information tax basis of certain outsourcing assets and liabilities, provider. as well The as IFRSundeducted Inter tax- pretationslosses. Committee Estimation is required clarified for the timingthe accountingof the reversal of treatment these temporary for differences how the and entitythe tax rate applied. The carrying amounts of assets and liabilities are based on amounts recorded in the receivingfinancial the statements PP&E recognizesand are subject tothe the receipt accounting of estimates the assets inheren t(or in those cash balances. specifically The tax basis of assets and liabilities and the amount of undeducted tax losses are based on the applicable designatedincome taxfor legislation, the acquisition regulations andor constructioninterpretations. The of timing PP&E of theitems) reversal from of the its temporary custom - differences and the timing of deduction of tax losses are based on estimations of the Company’s future ers (IFRICfinancial 18). results.

Essentially, Changes that in the transfer expected isoperating treated results, as aenacted non-monetary tax rates, legislation transaction. or regulations, Therefore, and the if Company’s interpretations of income tax legislation will result in adjustments to the expectations of a PP&Efuture item timing received difference reversalsfrom a and customer may require meetsmaterial deferred the definition tax adjustments. of an asset (i.e., the

item is a resource the entity controls as a result of past events and from which

Notes to the Consolidated Financial Statements Page 18 IAS 16 Property, Plant and Equipment 23

future economic benefits are expected to flow), that item should be measured at fair value as a non-monetary transaction as described above. If, however, the customer continues to exercise control after ownership of the item is transferred, the item cannot be recognized as an asset.

It is important to note that government grants in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the entity’s operating activities are excluded from IFRIC 18 and should be accounted for under IAS 20. In addition, IFRIC 18 does not apply to agreements covering the transfer of infrastructure used in public-to-private service concession arrangements and falling within the scope of IFRIC 12.

The following insight looks at the issue of how IFRIC 18 applies to customer transfer of assets within the scope of IFRIC 18. Note the date of the NIFRIC. Even though some NIFRICs are older, they still provide some insight into how the standards are interpreted by the standard setters.

Application Insights Applicability of IFRIC 18 to the customer

Source NIFRIC

Meeting Date July 2009

The following insights were obtained from “IFRIC — items not taken onto the agenda” report.

Insight Reason for not adding Issue to the IFRIC agenda

The IFRIC received a request to pro- Therefore, the IFRIC concluded vide guidance on how the customer that the agenda criteria were not should account for a transfer of met mainly because IFRSs already assets that is in the scope of IFRIC provide relevant guidance, and it did 18 for the recipient. The IFRIC noted not expect divergent interpretations that IFRIC 18 addresses only the in practice. Therefore, the IFRIC accounting by the recipient of the decided not to add this issue to transferred assets. its agenda. The IFRIC also noted that the accounting by customers transferring assets should be consistent with the principles in IFRIC 18 that, in a normal trading transaction, transfers of assets include exchanges of other goods, services or both. The IFRIC noted that other IFRSs provide relevant guidance for accounting for the goods or services received or given up in the exchange transaction.

Details of the issues that have been considered by the IFRIC but not added to its agenda are available online at www.ifrs.org/.

June 2013 24 Guide to International Financial Reporting in Canada

Subsequent Measurement [IASThe 16.29 – .66]Brick Ltd. Notes to the Consolidated Financial Statements December 31, 2012 and December 31, 2011 IAS(thousands 16 permits of Canadian entities dollars except to choose for share and between per share amounts) two accounting policy models for subsequent measurement of PP&E: it is probable that there will be sufficient taxable profits against which to utilize the benefits of • the costthe temporary model; differences or and they are expected to reverse in the foreseeable future. • the revaluation model. The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available Cost Modelto allow all or part of the asset to be recovered. [IAS 16.30] Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized, based on tax rates (and tax laws) Under thethat costhave beenmodel, enacted once or substantively an item ofenacted PP&E by isthe recognizedend of the reporting as an period. asset, The it is measurement of deferred tax liabilities and assets reflects the tax consequences that would carried atfollow its fromcost the less manner any in whichaccumulated the Company depreciation expects, at the end and of the any reporting accumulated period, to impairmentrecover losses. or settle Thisthe carrying is the amount traditional of its assets methodand liabilities. of accounting for PP&E.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off Extractincome 10 — taxEx assetscerp againstt fr incomeom The tax liabilitiesBrick anLtd d.when 2012 they Finanrelate to cincomeial Staxestat leviedemen byts Note 3 — Sthe ignificantsame taxation authorityAccounting and the Company Policies intends to settle its income tax assets and liabilities on a net basis.

3.9 Property, plant and equipment 3.9.1 Recognition and measurement Items of property, plant and equipment are carried at cost less accumulated depreciation and accumulated impairment losses.

Cost includes expenditures directly attributable to the acquisition of the asset and required to establish the asset in working condition given its intended use. Cost also includes expenditures for dismantling and removing items and restoring the site on which they were located, and borrowing costs on qualifying assets. Purchased software and costs directly related to the purchase and installation of such software are capitalized as a component of related equipment when the software is integral to its functionality. Software that is not considered integral to the functionality of equipment is classified as an intangible asset.

When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. Revaluation Model [IAS 16.31 – .42]Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment and are recognized within other income (expense) on the consolidated statements of Once a modelcomprehensive is selected, income. it applies to an entire class of PP&E. Thus, if an item of PP&E is revalued, the entire class of PP&E to which that asset belongs has 3.9.2 Reclassification to investment property to be revaluedProperty, plantto prevent and equipment selective are used inrevaluation. the ordinary course A classof business of PP&Ein the production is defined or as a groupingsupply of of assets goods or of services a similar or for administrativenature and purposes. use in Investmentan entity’s property operations. is property The held to earn rental revenue or for capital appreciation or both. When the use of a property followingchanges illustration from use inincludes the business examples to investment of prop separateerty, the property’s asset costclasses and accumulated identified in IAS 16. depreciation is reclassified from property, plant and equipment to investment property.

24 IAS 16 Property, Plant and Equipment 25

Illustration 2 — Application of the Revaluation Model

Examples of separate asset classes

Land

Land and buildings

Machinery

Ships

Aircraft

Motor vehicles

Furniture and fixtures

Office equipment

Judgment must be applied in the determination of PP&E asset classes. Each entity should analyze its specific operations to determine those classes. Asset classes may be narrower than those identified above. As an example, in the airline industry, engines or flight equipment may be considered specific asset classes rather than the more all-encompassing notion of “aircraft.”

The revaluation model is available to classes of PP&E whose fair value can be reliably measured. If the fair value cannot be reliably measured, the cost model must be selected.

Under the revaluation model, a class of PP&E is carried at its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is determined from a market perspective by applying the requirements of IFRS 13.

The revaluation model is generally used by companies having assets that tend to appreciate in value, such as buildings and land not accounted for under IAS 40. In particular, this model is informative for land assets since land is not depreciated and revaluation would reflect appreciation in value over time — although recent economic trends have shown that asset appreciation is not a guarantee.

As a matter of interest, few companies in Europe, Australia, Canada and other areas use the revaluation model and those that do limit its use to a few selected classes.

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Selecting and Deselecting the Revaluation Model Policy [IAS 8.14, .17, .19, .22 – .25 and .29]

The change in accounting policy from the cost model to the revaluation model should be treated as a change in accounting policy in accordance with IAS 16 rather than IAS 8. The change is treated as a revaluation during the period the revaluation model is first applied and, therefore, prior periods are not adjusted. This means it is not necessary to restate prior periods for the carrying value and depreciation and impairment charges for the revalued items. This is an exception from the IAS 8 requirement to account for voluntary changes in accounting policies retrospectively.

Deselecting the revaluation model is more problematic. IAS 8 permits a voluntary change in accounting policy only if the change results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity’s financial position, financial performance or cash flows. The revaluation model is thought to provide information more relevant and reliable than that obtained under the cost model; therefore, it may be difficult to assert that the change results in more relevant information. However, circumstances such as a new limitation in determining a reliable fair value could force such a reversion. This could mean that the revaluation does not result in reliable information.

Thus, an entity choosing to revert back to the cost model would have to justify that choice under IAS 8 and apply the change retrospectively (i.e., as if it had always been applied), unless it is impracticable to do so. This means the entity would have to restate the carrying values, including accumulated depreciation and accumulated impairments and the effects on profit or loss and equity, as if the revaluation model had not been adopted as an accounting policy choice. The entity would also apply the IAS 8 disclosure requirements for a voluntary change in accounting policy.

Frequency of Revaluations [IAS 16.31 and .34]

Companies should revalue their PP&E with sufficient regularity to ensure the carrying amount does not differ materially from what they would determine using fair value at the end of the reporting period. IAS 16 Property, Plant and Equipment 27

The frequency of revaluations depends on the changes in the fair values of the PP&E items. If there is a material difference between the fair value of an asset and its carrying amount, it needs to be revalued. There is no requirement to conduct an annual revaluation of assets; if, however, the value of an asset fluctuates a great deal, it should be revalued annually. For example, where asset values change very little, they can possibly be revalued every three-to- five years.

The items within a class of PP&E are revalued simultaneously to avoid selective revaluation of assets and the reporting of amounts in the financial statements that are a mixture of costs and fair value.

Accounting for a Revaluation [IAS 16.35 and .39 – .40]

When a PP&E item is revalued, any accumulated depreciation at the date of the revaluation is treated in one of two ways: 1. It is restated proportionately with the change in the gross carrying amount of the asset so that the carrying amount of the asset after revaluation equals its revalued amount. This method is often used when an asset is revalued by applying an index to determine its replacement cost (see IFRS 13). 2. It is eliminated against the gross carrying amount of the asset and the net amount is restated to the asset’s revalued amount. This method is often used for buildings.

Note: Refer to the Standards Update section in this publication. A proposed amendment to IAS 16 would change the guidance in (1) above and state that accumulated depreciation is computed as the difference between the gross and net carrying amounts. The amendment will also clarify that the determination of accumulated depreciation does not depend on the selection of the valuation technique.

These two methods will result in the same net balance sheet amount for PP&E although the gross amounts reported (i.e., cost and accumulated depreciation) will differ. The effect on the income statement and the other comprehensive income will be the same.

June 2013 28 Guide to International Financial Reporting in Canada

The following illustration indicates the recognition of a change from a revaluation.

Illustration 3 — Recognition of Revaluation Changes

Initial revaluation increase • included in other comprehensive income (OCI) and accumulated in equity under the heading “revaluation surplus”.

Initial revaluation decrease • included in profit or loss.

Subsequent revaluation • included in OCI and increases revaluation surplus unless increase it reverses a revaluation decrease of the same asset previously recognized in profit or loss. • recognition in profit or loss is limited to the previously recognized decreases in that asset. • no net gain should be recognized in income over the useful life of a revalued asset.

Subsequent revaluation • included in profit or loss unless any credit balance exists decrease in the revaluation surplus for that asset. In this case, the decrease is recognized in OCI and the revaluation surplus to the extent that any credit balance exists for that asset. • carrying a negative revaluation reserve for any asset is not permitted.

The following three examples illustrate the calculation of a revaluation. Note that in the first two examples, the impact of depreciation has been ignored to simplify the calculations. The impact of depreciation is demonstrated in the third example. The following abbreviations are used in these examples:

CA = carrying amount FV = fair value OCI = other comprehensive income

Application Example Initial revaluation is an increase in carrying amount

This is a simplified example, excluding depreciation, to demonstrate recognition of revaluation adjustments. E xa mple ABC Ltd. has elected to use the revaluation model to account for its building. There is only one building in the asset class. The building cost is $500,000.

Difference between Recognized Recognized Revaluation FV FV and CA in OCI in profit or loss

#1 $600,000 +$100,000 +$100,000 0

#2 $400,000 -$200,000 -$100,000 -$100,000

#3 $750,000 +$350,000 +$250,000 +$100,000 IAS 16 Property, Plant and Equipment 29

Application Example Initial revaluation is an increase in carrying amount

At the first revaluation, a $100,000 increase in the carrying amount of the building and a corresponding increase in OCI is recognized. A revaluation surplus of $100,000 is included as a separate line item in equity. At the second revaluation, the carrying amount of the building is decreased by $200,000, which represents the difference between the carrying amount of the building before revaluation ($600,000) and the revalued amount (fair value of $400,000). Because the second revaluation decreases the carrying amount, the decrease is applied first to the revaluation surplus balance. A reversal of $100,000 will be recognized in OCI and a loss of $100,000 will be recognized in profit or loss. For the third revaluation, the carrying amount of the building has increased $350,000, which represents the difference between the carrying amount of the building before the revaluation ($400,000) and the revalued amount (fair value of $750,000). An amount of $100,000 is recognized in profit or loss to reverse the loss recognized in the previous revaluation. The remaining $250,000 is recognized in OCI. A revaluation surplus of $250,000 is included as a separate line item in equity.

Application Example Initial revaluation is a decrease in carrying amount

This is a simplified example, excluding depreciation, to demonstrate recognition of revaluation adjustments. E xa mple ABC Ltd. has elected the revaluation model to account for its building. There is only one building in the asset class. The building cost is $500,000.

Difference between Recognized Recognized Revaluation FV FV and CA in OCI in profit or loss

#1 $400,000 -$100,000 0 -$100,000

#2 $700,000 +$300,000 +$200,000 +$100,000

#3 $350,000 -$350,000 -$200,000 -$150,000

At the first revaluation, a $100,000 decrease in the carrying amount of the building and a corresponding charge to profit or loss is recognized (there is no revaluation surplus related this asset). At the second revaluation, the carrying amount of the building is increased by $300,000, which represents the difference between the carrying amount of the building before revaluation ($400,000) and the revalued amount (fair value of $700,000). The $100,000 loss recognized for the previous revaluation is reversed, with the difference of $200,000 recognized in OCI. A revaluation surplus of $200,000 is included as a separate line item in equity. For the third revaluation, the carrying amount of the building has decreased to $350,000, which represents the difference between the carrying amount of the building before the revaluation ($700,000) and the revalued amount (fair value of $350,000). The decrease is applied first to the revaluation surplus balance. A reversal of $200,000 will be recognized in OCI and a loss of $150,000 will be recognized in profit or loss.

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Application Example Initial revaluation is a decrease in carrying amount

This example includes the impact of revaluation adjustments and the effect on depreciation. E xa mple ABC Ltd. has elected the revaluation model to account for its building. There is only one building in the asset class. The building cost is $1 million and is being depreciated on a straight-line basis over its estimated useful life of 20 years.

FV at Depreciation Revaluation CA at the end for the year Revaluation recognized the end of of the Difference (in profit recognized in profit Year the year year CA — FA or loss) in OCI or loss

1 $950,000 $950,000 0 $50,000 0 0

2 $900,000 $900,000 0 $50,000 0 0

3 $850,000 $850,000 0 $50,000 0 0

4 $800,000 $600,000 -$200,000 $50,000 0 -$200,000

5 $562,500 $562,500 0 $37,500 0 0 ($600,000 ($600,000 – $37,500) /16)

6 $525,000 $525,000 0 $37,500 0 0

7 $487,500 $700,000 +$212,500 $37,500 $50,000 $162,500

In years one through three the carrying amount approximates fair value. Depreciation is $50,000 yearly ($1,000,000 / 20 years). At the end of the fourth year, when the carrying amount is $800,000, a revaluation results in a revaluation adjustment of -$200,000 recognized in profit or loss. Depreciation is $50,000 for year four but decreases to $37,500 for year five based on the carrying amount of $600,000 at the beginning of the year and an estimated remaining useful life of 16 years. At the end of the seventh year, when the carrying amount is $487,500, the fair value is $700,000. This results in a revaluation adjustment of $212,500. To determine the amount to recognize in profit or loss, the loss previously recognized in profit or loss and the reduction in depreciation as a result of the revaluation adjustment need to be considered. The portion of the revaluation adjustment recognized in profit or loss is equal to $200,000 (the reversal of the previous revaluation loss) less an adjustment for the extra depreciation that would have been recognized in profit or loss without the revaluation adjustment (($50,000 – $37,500) × 3 years = $37,500). Thus $162,500 is a credit to profit or loss and the remainder is recognized in OCI ($212,5000 – $162,500 = $50,000). A revaluation surplus of $50,000 is included as a separate line item in equity. This represents the excess of the carrying amount using the revaluation method ($700,000) over what it would have been using the cost method, with no revaluations recognized (($1,000,000 – ($50,000 × 7 years) = $750,000). IAS 16 Property, Plant and Equipment 31

Transferring the Revaluation Surplus to Retained Earnings [IAS 16.41]

A portion of the revaluation surplus related to the depreciated asset may be realized during the useful life of the asset by transferring an amount equivalent to the difference between the depreciation calculated on the asset’s revalued carrying amount and the depreciation calculated on its original cost from the revaluation surplus to retained earnings. These transfers do not go through profit or loss. Alternatively, the whole of the surplus can be transferred to retained earnings when the asset is retired or disposed of.

Costs of Dismantling, Removal and Site Restoration (Decommissioning Costs) and Changes to These Costs [IAS 16.16 and .18, IAS 37.10, .14 and .36 and IFRIC 1]

Many entities have obligations to dismantle, remove and restore items of PP&E. Under IAS 16, the cost of an item of PP&E includes the costs an entity incurs for dismantling, removing the item and restoring the site on which it is located, either at acquisition or after having used the asset during a particular period for purposes other than to produce inventories during that period.

IAS 37 provides guidance on when these costs are recognized and how the amount is determined. A provision for decommissioning, site restoration and similar liabilities is recognized when: 1. the entity has a present obligation (legal or constructive1) as a result of a past event; 2. an outflow of resources to settle the obligation is probable; and 3. a reliable estimate of the obligation can be made.

Obligations for dismantling, removal or site restoration are measured at management’s best estimate of the expenditure required to settle the obligation at the end of the reporting period. A corresponding cost is added to the carrying amount of the PP&E item.

IFRIC 1 was developed to provide guidance on changes in the measurement of an existing decommissioning or restoration obligation triggered by a change in the estimated timing or amount of the outflow of resources required to settle the obligation, or in the discount rate.

1 A constructive obligation is an obligation derived from an entity’s actions where an established pattern of past practice, published policy or a sufficiently specific current statement indicating to other parties that it will accept certain responsibilities have created a valid expectation on the part of other parties that the entity will discharge those responsibilities.

June 2013 32 Guide to International Financial Reporting in Canada

The following illustration summarizes the guidance in IFRIC 1.

Illustration 4 — IFRIC 1 — Changes in Existing Decommissioning, Restora- tion and Similar Liabilities

Cost model used for PP&E Revaluation model used for PP&E

The change is added to, or deducted from, The change is recognized either in the revalu- the costs of the related asset. ation surplus or deficit previously recognized. • The amount deducted should not exceed • A decrease in the obligation is recognized the carrying amount of the asset. Any in OCI and increases the revaluation sur- excess should be recognized in profit plus in equity unless it reverses a revalua- or loss. tion deficit recognized previously in profit • An increase in the carrying amount of the or loss. If, so, this portion is recognized in asset as a result of an increase in the obli- profit or loss. gation may trigger an asset impairment • If the liability decrease exceeds the carry- test. If indicators of impairment exist, the ing amount that would have been recog- asset should be tested in accordance with nized had the asset been measured using IAS 36 by comparing the carrying amount the cost model, the excess is recognized of the asset to its recoverable amount in profit or loss. (i.e., higher of fair value less costs of • An increase in the obligation is recog- disposal and VIU. nized in profit or loss unless there is a credit balance in the revaluation surplus related to the asset. If so, the increase is recognized in OCI to the extent of the credit balance in the revaluation surplus in equity. • The change in the obligation may be an indication that the asset has to be revalued. If a revaluation is necessary, the entire class has to be revalued.

Once the related asset has reached the end of its useful life, all subsequent changes in the liability must be recognized in profit or loss as they occur. Moreover, the unwinding of the discount should be recognized in profit or loss as a finance cost. Under IAS 23, capitalization is not permitted. IAS 16 Property, Plant and Equipment 33

An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses recognized with respect to CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amounts of the other assets in the CGU or group of CGUs on a pro rata basis. Impairment losses are recognized in depletion, depreciation, amortization and impairment in the consolidated statements of income.

ExtImpairmentract 11 — lossesE recognizedxcerp fort otherfrom assets Husky in prior years E nergare assessedy Iatn thec. end2012 of each Finan reportingc ialperiod Sfort aanyt eindicatiomennsts that the impairment condition has decreased or no longer exists. An impairment loss is reversed only to the extent that the Notecarrying 3 — S amountignificant of the asset or CGUAccounting does not exceed the P carryingolicies amount that would have been determined, net of depletion, depreciation and amortization, if no impairment loss had been recognized.

i) Asset Retirement Obligations (“ARO”)

A liability is recognized for future legal or constructive retirement obligations associated with the Company's assets. The Company has significant obligations to remove tangible assets and restore land after operations cease and the Company retires or relinquishes the asset. The retirement of Upstream and Downstream assets consists primarily of plugging and abandoning wells, removing and disposing of surface and subsea plant and equipment and facilities, and restoring land to a state required by regulation or contract. The amount recognized is the net present value of the estimated future expenditures determined in accordance with local conditions, current technology and current regulatory requirements. The obligation is calculated using the current estimated costs to retire the asset inflated to the estimated retirement date and then discounted using a credit-adjusted risk free discount rate. The liability is recorded in the period in which an obligation arises with a corresponding increase to the carrying value of the related asset. The liability is progressively accreted over time as the effect of discounting unwinds, creating an expense recognized in finance expenses. The costs capitalized to the related assets are amortized in a manner consistent with the depletion, depreciation and amortization of the underlying assets. Actual retirement expenditures are charged against the accumulated liability as incurred.

Liabilities for ARO are adjusted every reporting period for changes in estimates. These adjustments are accounted for as a change in the corresponding capitalized cost, except where a reduction in the provision is greater than the undepreciated capitalized cost of the related assets, in which case the capitalized cost is reduced to nil and the remaining adjustment is recognized in net earnings. In the case of closed sites, changes to estimated costs are recognized immediately in net earnings. Changes to the amount of capitalized costs will result in an adjustment to future depletion, depreciation and amortization, and finance expenses.

Estimating the ARO requires significant judgment as restoration technologies and costs are constantly changing, as are regulatory, political, environmental and safety considerations. Inherent in the calculation of the ARO are numerous assumptions including the ultimate settlement amounts, future third-party pricing, inflation factors, risk free discount rates, credit risk, timing of settlement Depreciationand changes in the legal, regulatory, environmental and political environments. Future revisions to these assumptions may result in material changes to the ARO liability. Adjustments to the estimated amounts and timing of future ARO cash flows are a regular [IASoccurrence 16.6 andin light of.43 – .62] the significant judgments and estimates involved.

IASj) 16 Legal requires and Other an annualContingent charge Matters to income for depreciation based on an

allocationProvisions and of liabilities the costfor legal of and an other asset, contingent less matters its are residual recognized invalue, the period over when theits circumstance useful life, becomes probable that a future cash outflow resulting from past operations or events will occur and the amount of the cash outflow can be includingreasonably estimated.any idle The period timing of recognitionor period and measurementin which of the the provision asset requires is retired the application from of activejudgment touse. Depreciationexisting facts and maycircumstances, be nil, which however, can be subject if toa change,usage and method the carrying amountsis applied of provisions and and there liabilities is are no reviewed regularly and adjusted accordingly. The Company is required to both determine whether a loss is probable based on productionjudgment and frominterpretation the of asset. laws and regulations, and determine that the loss can be reasonably estimated. When a loss is recognized, it is charged to net earnings. The Company continually monitors known and potential contingent matters and makes appropriate provisions when warranted by the circumstances present. The mechanics of depreciation are the same for the cost and revaluation model in thatk) Share “cost” Capital or “revalued amount,” less any residual value, is amortized over thePreferred useful shares life are of classified an asasset. equity since Although, they are cancellable as we and redeemablehave seen only at thein Company'sthe application option and dividends exam are - discretionary and payable only if declared by the Board of Directors. Incremental costs directly attributable to the issuance of plesshares in andthe stock section options are on recognized the asapplication a deduction from equity,of the net ofrevaluation tax. Common share model, dividends arethe paid mechanics out in common shares or in cash, and preferred share dividends are paid in cash. Both common and preferred share dividends are recognized as of calculatingdistributions within theequity. depreciation expense under the revaluation model may pose some difficulties, the determination of depreciation remains fundamentally the same under both models.

Consolidated Financial Statements A depreciation charge for each period is17 recognized in profit or loss unless an asset’s future economic benefits are absorbed in producing other assets, in which80 Husky Energycase Inc. the2012 Annual depreciation Report charge is included in the carrying amount of those assets. For example, the depreciation of a manufacturing plant and equipment is included in the costs of conversion of inventories.

June 2013 34 Guide to International Financial Reporting in Canada

Component Accounting [IAS 16.43 – .47]

IAS 16 requires the application of component accounting. The main objective of component accounting is to ensure the costs of an asset’s significant components are depreciated over their appropriate useful lives, rather than the useful life of the asset taken as a whole. Note that a separate component can be either physical (e.g., a motor on an aircraft) or nonphysical (e.g., a major overhaul or inspection).

The allocation of cost to components requires judgment and careful analysis of facts and circumstances. There is no prescribed methodology for determining significant components.

One could, however, consider the use of a valuator to determine values of assets and components. Alternatively, insurance appraisal reports may have components listed for significant assets, which could be useful in determining the value of significant components. Where an entity has several locations (e.g., a company with relatively homogeneous manufacturing plants around the world) it might consider using a pilot-project approach. Under a pilot project, the company would pick one plant for evaluation by valuators, engineers or other appropriate personnel. Their findings would then be applied to the other plants in the organization and produce results not materially different from what might have been obtained had all individual plants been evaluated on their own. One must recall that the components must be significant to the overall asset. Therefore, the asset should not have a significant number of components.

Each component part of a PP&E item costing a significant amount in relation to the item’s total cost is depreciated separately. When, however, significant parts of a PP&E item have the same useful lives and depreciation method, they may be grouped together for depreciation purposes.

As an example, a building may have several components (e.g., the roof, door frames, walls, floors, elevators, escalators, etc.), but only some of these components may be considered significant. In addition, the walls, doorframes and floors may all have the same useful lives and can be grouped together. IAS 16 Property, Plant and Equipment 35

2012 Consolidated Financial Statements and Notes 2012 Consolidated Financial Statements and Notes

at the average market price for the period and the difference between the number of shares and the number of shares Appliat theca averagetion marketExam priceple for the period and the difference between the number of shares and the number of shares assumed to be purchased are included in the calculation. The number of shares included with respect to performance- assumed to be purchased are included in the calculation. The number of shares included with respect to performance- based employee share options and PSUs are treated as contingently issuable shares because their issue is contingent Allocationbased employee of cost share to options components and PSUs are treated as contingently issuable shares because their issue is contingent upon satisfying specified conditions in addition to the passage of time. If the specified conditions are met, then the upon satisfying specified conditions in addition to the passage of time. If the specified conditions are met, then the number of shares included is also computed using the treasury stock method unless they are anti-dilutive. number of shares includedABC Ltd.is also acquires computed usinga building. the treasury An stock insurance method unless valuator they are proposes anti-dilutive. that the building has two significant components (i.e., the roof and the elevators) repre- P) CASH AND CASH EQUIVALENTS E xP)a CASHmpl eAND CASHsenting EQUIVALENTS 15% and 18% respectively of the relative fair value of the building. Cash and cash equivalents include $218 pertaining to investments with original maturities of three months or less at Cash and cash equivalentsThe building include $218 was pertaining acquired to investmentsfor $750,000 with original and itsmaturities useful of life three was months determined or less at to December 31, 2012 ($356 as at December 31, 2011). Investments include bankers’ acceptances and bankers’ discount December 31, 2012be ($356 50 as years. at December The roof31, 2011). and Investmentselevators include have bankers’an estimated acceptances useful and bankers’ life of discount15 years notes, which may be liquidated promptly and have original maturities of three months or less. notes, which may beand liquidated 25 years promptly respectively. and have original The maturities building of three is measured months or less. using the cost model. Q) SHORT-TERMFor INVESTMENTS simplicity, residual value is deemed to be nil. Q) SHORT-TERM INVESTMENTS Short-term investments, comprised of bankers’ acceptances and bankers’ discount notes, have original maturities over TheShort-term components investments, are depreciated comprised of bankers’ as follows: acceptances and bankers’ discount notes, have original maturities over three months, but not more than one year. three months, but not more than one year. R) RESTRICTED CASH ComponentR) RESTRICTED CASH Carrying amount Useful life Depreciation The Corporation has recorded Restricted cash under Current assets representing funds held in trust by Air Canada The Corporation has recorded Restricted cash under Current assets representing funds held in trust by Air Canada RoofVacations (15%) in accordance with$112,500 regulatory requirements governing15 years advance ticket sales, as well$7,500 as funds held in escrow Vacations in accordance with regulatory requirements governing advance ticket sales, as well as funds held in escrow accounts relating to Air Canada Vacations credit card booking transactions, recorded under Current liabilities, for certain accounts relating to Air Canada Vacations credit card booking transactions, recorded under Current liabilities, for certain Elevatortravel related (18%) activities. $135,000 25 years $5,400 travel related activities. Restricted cash with maturities greater than one year from the balance sheet date is recorded in Deposits and other BuildingRestricted (67%) cash with maturities$502,500 greater than one year from the50 bayearslance sheet date is recorded$10,050 in Deposits and other assets. This restricted cash relates to funds on deposit with various financial institutions as collateral for letters of credit assets. This restricted cash relates to funds on deposit with various financial institutions as collateral for letters of credit and other items. Totaland other items. $750,000 $22,950 S) AIRCRAFT FUEL INVENTORY AND SPARE PARTS AND SUPPLIES INVENTORY S) AIRCRAFT FUEL INVENTORY AND SPARE PARTS AND SUPPLIES INVENTORY If theInventories building of aircraftis depreciated fuel and spare as parts, a single other thanunit rotables, rather and than supplies as component are measured atparts, the lower depreciation of cost and net Inventories of aircraft fuel and spare parts, other than rotables, and supplies are measured at the lower of cost and net wouldrealizable be $15,000 value, with ($750,000 cost being determined / 50 years), using a weighted which averageis relatively formula. lower than $22,950 above. realizable value, with cost being determined using a weighted average formula. The Corporation did not recognize any write-downs on inventories or reversals of any previous write-downs during the The Corporation did not recognize any write-downs on inventories or reversals of any previous write-downs during the periods presented. Included in Aircraft maintenance is $43 related to spare parts and supplies consumed during the year periods presented. Included in Aircraft maintenance is $43 related to spare parts and supplies consumed during the year (2011 – $39). Extra(2011ct – $39). 12 — Excerpt from Air Canada 2012 Financial Statements NoteT) 2 — B PROPERTYasis ANDof EQUIPMENTPresentation and Summary of Significant Accounting T) PROPERTY AND EQUIPMENT Property and equipment is recognized using the cost model. Property under finance leases and the related obligation for PoliciesProperty and equipment is recognized using the cost model. Property under finance leases and the related obligation for future lease payments are initially recorded at an amount equal to the lesser of fair value of the property or equipment future lease payments are initially recorded at an amount equal to the lesser of fair value of the property or equipment T) Propertyand the present and value equipment of those lease (inpayments. part) and the present value of those lease payments. The Corporation allocates the amount initially recognized in respect of an item of property and equipment to its The Corporation allocates the amount initially recognized in respect of an item of property and equipment to its significant components and depreciates separately each component. Property and equipment are depreciated to significant components and depreciates separately each component. Property and equipment are depreciated to estimated residual values based on the straight-line method over their estimated service lives. Aircraft and flight estimated residual values based on the straight-line method over their estimated service lives. Aircraft and flight equipment are componentized into airframe, engine, and cabin interior equipment and modifications. Airframe and equipment are componentized into airframe, engine, and cabin interior equipment and modifications. Airframe and engines are depreciated over 20 to 25 years, with 10% to 20% estimated residual values. Cabin interior equipment and engines are depreciated over 20 to 25 years, with 10% to 20% estimated residual values. Cabin interior equipment and modifications are depreciated over the lesser of 5 years or the remaining useful life of the aircraft. Spare engines and modifications are depreciated over the lesser of 5 years or the remaining useful life of the aircraft. Spare engines and related parts (“rotables”) are depreciated over the average remaining useful life of the fleet to which they relate with related parts (“rotables”) are depreciated over the average remaining useful life of the fleet to which they relate with 10% to 20% estimated residual values. Cabin interior equipment and modifications to aircraft on operating leases are 10% to 20% estimated residual values. Cabin interior equipment and modifications to aircraft on operating leases are amortized over the term of the lease. Major maintenance of airframes and engines, including replacement spares and amortized over the term of the lease. Major maintenance of airframes and engines, including replacement spares and parts, labour costs and/or third party maintenance service costs, are capitalized and amortized over the average parts, labour costs and/or third party maintenance service costs, are capitalized and amortized over the average expected life between major maintenance events. Major maintenance events typically consist of more complex expected life between major maintenance events. Major maintenance events typically consist of more complex inspections and servicing of the aircraft. All maintenance of fleet assets provided under power-by-the-hour contracts are inspections and servicing of the aircraft. All maintenance of fleet assets provided under power-by-the-hour contracts are charged to operating expenses in the income statement as incurred, respectively. Buildings are depreciated on a charged to operating expenses in the income statement as incurred, respectively. Buildings are depreciated on a straight-line basis over their useful lives not exceeding 50 years or the term of any related lease, whichever is less. straight-line basis over their useful lives not exceeding 50 years or the term of any related lease, whichever is less. Leasehold improvements are amortized over the lesser of the lease term or 5 years. Ground and other equipment is Leasehold improvements are amortized over the lesser of the lease term or 5 years. Ground and other equipment is depreciated over 3 to 25 years. depreciated over 3 to 25 years.

13 13

June 2013 36 Guide to International Financial Reporting in Canada

Residual Value

[IAS 16.6 and .51 – .54]

Notes to Consolidated Financial Statements IASFor 16.6the years provides ended December a detailed31, 2012 and 2011definition of the residual value of an asset. Resid- (Stated in thousands of Canadian dollars, except share and per share amounts) ual value should reflect the amount an entity would currently receive from 1. Statement of significant accounting policies (continued) the disposal of an asset after deducting estimated costs of disposal if it were (i) Inventory alreadyInventories of the are valued age at and the lower in of the cost andcondition net realizable value,expected with cost being at determinedthe end on aof first its-in, firstuseful-out basis life. and a specific item basis depending on the nature of the inventory. The Corporation’s inventory balance consists of aircraft fuel, de- icing fluid, retail merchandise and aircraft expendables. IAS 16 requires an annual review of the residual value of an asset. If a change (j) Property and equipment is required,Property and it equipment should is stated be ataccounted cost and depreciated for to asits estimated a change residual value.in an Assets accounting under finance leases estimate are initially recorded at the present value of minimum lease payments at the inception of the lease. Expected useful lives and depreciation (unlessmethods the are change reviewed annually. reflects a correction of an error).

Asset class Basis Rate ExtraAircraft,ct 13 — net ofE estimatedxcerp residualt fr valueom Westjet Airlines LtStraightd. 2012-line Finan20c yearsial Engine, airframe and landing gear overhaul Straight-line 8 to 15 years StateLivemen satellitets television equipment Straight-line 10 years/Term of lease Ground property and equipment Straight-line 5 to 25 years Note Spare1 — S enginestatement and rotables of, net Sofignificant estimated residual value Accounting Straight Policies-line 20 years Buildings Straight-line 40 years (j) PropertyLeasehold and improvements equipment (in part) Straight-line 5 years/Term of lease Assets under finance leases Straight-line Term of lease

Estimated residual values of the Corporation’s aircraft range between $4,000 and $6,000 per aircraft. Spare engines have a residual value equal to 10% of the original purchase price. Residual values, where applicable, are reviewed annually against prevailing market rates at the consolidated statement of financial position date. Major overhaul expenditures are capitalized and depreciated over the expected life between overhauls. All other costs relating to the maintenance of fleet assets are charged to the consolidated statement of earnings on consumption or as incurred. DepreciationRotable assets isare recognizedpurchased, depreciated as andlong disposed as ofthe on a asset’spooled basis. carrying When parts are amount purchased, theexceeds cost is added its to the pool and depreciated over its useful life of 20 years. The cost to repair rotable parts is recognized in maintenance expense as residualincurr ed.value. In circumstances where the residual value of an asset increases to (k)an Intangible amount assets greater than its carrying amount, the depreciation charge is zero Included in intangible assets are costs related to software, landing rights and other. Software and landing rights are carried at until thecost less residual accumulated value amortization falls and beloware amortized the on aasset’s straight-line carrying basis over their amount. respective useful lives of five and 20 years. Expected useful lives and amortization methods are reviewed annually. Useful(l) Impairment Life Property and equipment and intangible assets are grouped into cash generating units (CGUs) and reviewed for impairment when [IAS 16.6,events or .50 – .51 changes in andcircumstances .56 – .59] indicate that the carrying value of the CGU may not be recoverable. When events or circumstances indicate that the carrying amount of the CGU may not be recoverable, the long-lived assets are tested for recoverability by comparing the recoverable amounts, defined as the greater of the CGU’s fair value less cost to sell or value-in- The usefuluse, with thelife carrying of an amount asset of the is: CGU. Fair value is defined as the amount for which an asset could be exchanged, or a liability settled, between knowledgeable willing parties, in an arm’s length transaction. Value-in-use is defined as the present • thevalue period of the cash over flows expectedwhich from an the asset future use is orexpected eventual sale of to the beasset availableat the end of its for useful use life. Ifby the ancarrying value of the CGU exceeds the greater of the fair value less cost to sell and value-in-use, an impairment loss is recognized in net entity;earnings orfor the difference. Impairment losses may subsequently be reversed and recognized in earnings due to changes in events and circumstances, but only to the extent of the original carrying amount of the asset, net of depreciation or • theamortization, number had theof originalproduction impairment not or been similar recognized. units an entity expects to obtain from the asset.

The useful life of an asset is defined in terms of the asset’s expected utility to the entity and may sometimes be shorter than its economic life.

The estimation of the useful life of an asset is a matter of judgment based on the experience of the entity with similar assets. The illustration below lists fac- WestJet Year End 2012 │ 11 tors included in IAS 16 that should be considered in determining the expected useful life. IAS 16 Property, Plant and Equipment 37

Illustration 5 — Determining the Expected Useful Life of an Item of PP&E

Examples of factors to consider in determining an asset’s expected useful life include:

• expected usage assessed by reference to the asset’s expected capacity or physical output.

• expected physical wear and tear, which depends on operational factors such as the number of shifts for which the asset is to be used, the repair and maintenance program and the care and maintenance of the asset while idle.

• technical or commercial obsolescence arising from changes or improvements in production, or from a change in the market demand for the product or service output of the asset.

• legal or similar limits on the use of the asset, such as the expiry dates of related leases.

Land and building are separate assets and accounted for separately. With some exceptions (e.g., quarries and landfill sites) land has an unlimited useful life and is not depreciated. In cases where land has a limited useful life, it is depreciated in a manner that reflects the benefits to be derived from it. If the cost of the land includes costs of site dismantlement, removal and restoration costs, these costs are depreciated over the period of benefits obtained by incurring those costs. C) PROPERTY, PLANT AND EQUIPMENT IASProperty, 16 requires plant and equipment the useful are stated life at cost,of anless accumulatedasset be amortization reviewed and impairment.on an annual Amortization basis; rates are calculated to amortize the costs, net of residual value, over the assets’ estimated useful lives. Significant parts of anyproperty, changes plant and are equipment accounted that have different for as depreciable a change lives are in amortized an accounting separately. estimate.

Plant and equipment is principally depreciated at rates of 5-10% of the declining balance (buildings, site improvements, Exttanksra andct mobile 14 — equipment)Excerp ort from fr 5-14om years Newal straightt linea C(vehicles,orpo computerratio hardwaren 2012 and Finan softwarec andial leasehold Staimprovements),tements depending on the expected life of the asset. Some equipment is depreciated based on utilization rates. The utilization rate is determined by dividing the cost of the asset by the estimated future hours of service. Residual Notevalues, 2 — S up toignificant 20% of original cost, A ccountingmay be established forPolicies buildings, site improvements, and tanks. These residual values C) Property,are not depreciated. plant The and estimated equipment useful lives, (in residual part) values and amortization methods are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis.

Landfill assets represent the costs of landfill available space, including original acquisition cost, incurred landfill construction and development costs, including gas collection systems installed during the operating life of the site, and capitalized landfill closure and post-closure costs. The cost of landfill assets, together with projected landfill construction and development costs for permitted capacity, is amortized on a per-unit basis as landfill space is consumed. Management annually updates landfill capacity estimates, based on survey information provided by independent engineers, and projected landfill construction and development costs. The impact on annual amortization expense of changes in estimated capacity and construction costs is accounted for prospectively.

D) PERMITS AND OTHER INTANGIBLE ASSETS Permits and other intangible assets are stated at cost, less accumulated amortization and impairment, and consist of certain production processes, trademarks, permits and agreements which are amortized over the period of the contractual benefit of 8 to 20 years on a straight line basis. Certain permits are deemed to have indefinite lives and therefore are not amortized. There are nominal fees to renew these permits provided that Newalta remains in good standing with regulatory authorities.

E) LEASES

Lessee All of the Corporation’s leases are classified as operating leases and the leased assets are not recognized in the Corporation’s consolidated balance sheets. Payments made under operating leases are recognized in profit or loss on a straight-line basis over the term of the lease unless another systematic basis is representative of the time pattern of the user’s benefit, including any rent-free periods. Lease incentives are recognized as an integral part of the total lease expense, over the term of the lease. June 2013 Leases where the Corporation assumes substantially all the risks and rewards of ownership would be classified as finance leases and the corresponding asset would be classified as property, plant and equipment and the liability as obligations under finance lease.

Leases may include additional payments for real estate taxes, maintenance and insurance. These amounts are expensed in the period to which they relate.

Lessor Assets subject to operating leases are recognized and classified according to the nature of the asset. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and expensed over the lease term on the same basis as the lease income. The depreciation policy for leased assets is consistent with the depreciation policy for similar owned assets.

NEWALTA | AR 12 61 38 Guide to International Financial Reporting in Canada

The following viewpoint is industry specific and is included to illustrate some of the judgment involved in the determination of the useful life of an asset.

Application Viewpoints Depletion of a Mine in the Production Phase: Useful Life of the Mine

The Mining Industry Force on IFRSs has issued a Viewpoint discussing some of the accounting considerations for determining the useful life of a mine. Viewpoints The Viewpoint Series is available online at www.cpacanada.ca/ifrs

Application Insights Useful life of leasehold improvements

Source IFRS Discussion group

The following insights were obtained from a publicly available IFRS Discus- sion Group report. Insight

Meeting Date April 19, 2012

Topic IAS 16: Useful Life of Leasehold Improvements

Insights IAS 16 Property, Plant and Equipment requires the depreciable amount of an asset to be allocated on a systematic basis over its useful life. In determining a “lease term”, IAS 17 Leases requires that a renewal option not be reflected unless it is “reasonably certain” that the option will be exercised. The issue considered by the Group was whether the lease term represents the useful life for leasehold improvements under IAS 16 when the lessee is not reasonably certain it will exercise an option to extend a lease. Fact Pattern: • A lessee enters into an operating lease for an office property that has: oo an initial term of five years; and oo an option for the lessee to extend the lease for a further five years at market rates. • Upon commencement of the lease term, the lessee: oo spends $2 million on an immovable leasehold improvement specific to the property, that has an economic life of seven years; and oo expects to exercise the extension option, but is not reasonably certain it will do so. Should the useful life of the leasehold improvements be the shorter of the lease term and the asset’s economic life (i.e., five years) View( A) or the asset’s expected economic life (i.e., seven years) (View B)? Proponents of View A refer to paragraph 56(d) of IAS 16 and the definition of lease term under IAS 17, arguing that a consistent approach to amortization should be used. Proponents of View B give more weight to paragraphs 56(a) and 57 of IAS 16, focussing on the expected use of the asset. IAS 16 Property, Plant and Equipment 39

Application Insights Useful life of leasehold improvements

The Group’s Discussion Group members noted that it is difficult to understand how the lessee in this fact pattern can expect to exercise the extension option but not be reasonably certain it will do so. As a result, Group members questioned how often the fact pattern would occur in practice. Several Group members observed that there is a relatively unclear distinction between expected and reasonably certain. They expressed the view that expected and reasonably certain do not represent different thresholds. Group members also noted that, from a practical perspective, management would align the lease term with the economic life of significant leasehold improvements and, in most cases, a financial statement preparer would arrive at compatible approaches. Group members made several other observations, including that there may be an economic incentive to renew the lease and that only IAS 16 applies to the amortization of the asset (i.e., IAS 17 does not apply). The Group agreed that this issue should not be brought to the attention of the IFRS Interpretations Committee because the issue is not expected to arise in practice frequently.

Written reports and audio webcasts of the Group’s discussion for each agenda topic are available online at www.frascanada.ca.

Depreciation Start Date [IAS 16.55]

Depreciation of an asset begins when the asset is available for use. This means that it should be in the location and condition necessary for it to be capable of operating in the manner intended by management.

The starting date for depreciating a major spare part or standby equipment classified as PP&E is generally the date it is available for use.

Application Example Depreciation of standby equipment

ABC Ltd. owns a specialized piece of equipment powered by a generator 24 hours a day, all year round. ABC also has another generator installed E xa mple and ready for use should the operating generator break down. The standby generator is classified as PP&E when it meets the definition of PP&E (i.e., held for use in the production or supply of goods and services, for rental to others, or for administrative purposes, and expected to be used during more than one period (IAS 16.8)). Since amortization should begin when the standby generator is “available for use,” it should be amortized as soon as it begins serving as a backup for the operating generator. The method of amortization will depend on what is considered a systematic basis over its useful life. If the generator’s useful life is based on the passage of time, it will be amortized along with the one being used; if it is based on usage, there may be no measured amount of amortization until it is actually put into use.

June 2013 40 Guide to International Financial Reporting in Canada

Depreciation End Date [IAS 16.55]

IAS 16 indicates depreciation of an asset ceases at the earlier of the date the asset is classified as held for sale (or included in a disposal group classified as held for sale), in accordance with IFRS 5, and the date the asset is derecognized.

Depreciation Method [IAS 16.60 – .61]

IAS 16 specifies that the depreciation method must closely reflect the way an entity consumes an asset’s future economic benefits over the asset’s estimated useful life.

An annual review of the depreciation method applied to an item of PP&E is required.

Acceptable Depreciation Methods [IAS 16.62]

IAS 16 provides a variety of depreciation methods for allocating the depreciable amount of an asset on a systematic basis over its useful life, such as: • the straight-line method (constant charge over the asset’s useful life); • the diminishing balance method (decreasing charge over the asset’s useful life); and • the units of production method (charge based on the expected use or output of the asset).

The standard is not prescriptive. Entities should choose the method that most closely reflects their expected pattern of consumption of the asset’s future economic benefits. That method should be applied consistently from period to period unless there is a change in the expected pattern of consumption of those future economic benefits.

As noted in the Standards Update section of this publication, in December 2012 the IASB issued an ED proposing a narrow-scope amendment to IAS 16. The objective of the proposed amendment is to ensure preparers do not use revenue-based methods to calculate charges for the depreciation or amortization of items of PP&E or intangible assets. The proposed amendment also provides further guidance in the application of the diminishing balance method. IAS 16 Property, Plant and Equipment 41

Application statistics CICA Survey of Selected Accounting Policies of Junior Oil and Gas Entities — January 2013

In practice, oil and gas properties are depleted by analogy to IAS 16 and Statistics IAS 38. The unit of production method is most commonly used to deplete such assets. In a survey of select junior oil and gas company financial statements, 90% disclosed the use of proved and probable reserves for application of this method and 7% disclosed the use of proved reserves.

The publication is available online at www.cpacanada.ca/ifrs

The following two insights look at methods of depreciation. Note the date of the NIFRICs. Even though some NIFRICs are older, they still provide some insight into how the standards are interpreted by the standard setters.

Application Insights Depreciation of fixed assets

Source NIFRIC

Meeting Date May 2004

The following insights were obtained from “IFRIC — items not taken onto the agenda” report.

Insight Reason for not adding Issue to the IFRIC agenda

The Committee considered a poten- The IFRIC agreed that this was fore- tial issue as to whether the produc- most a conceptual area and decided tion method of depreciation could not to add it to the IFRIC agenda. be used under IAS 16 Property, However, the IFRIC recommended Plant and Equipment if an asset is that this topic be considered by not consumed (worn down) directly the Board as part of the Concepts in relation to the level of use. For project. example, if a road with a greater capacity than current demands is built, should depreciation in the initial period be lower than in later periods, if usage is expected to increase over the life of the asset?

Details of the issues that have been considered by the IFRIC but not added to its agenda are available online at www.ifrs.org/.

June 2013 42 Guide to International Financial Reporting in Canada

Application Insights IAS 16 and IAS 17: Depreciation of assets leased under operating leases

Source NIFRIC

Meeting Date November 2004

The following insights were obtained from “IFRIC — items not taken onto the agenda” report.

Insight Reason for not adding Issue to the IFRIC agenda

The IFRIC considered whether inter- The IFRIC noted that, while deliber- est methods of depreciation were ating certain issues related to service permissible under IFRSs. Use of such concessions, it had considered methods would permit an entity whether it would be appropriate to to depreciate an asset that is not a use an interest method of deprecia- receivable in much the same way as tion. In that discussion, it concluded if it were a receivable, with the result that using an interest method of that the depreciated amount of the depreciation was not appropriate. asset reflects the present value of The IFRIC concluded that there was future net cash flow expected from it. nothing unique about assets leased under operating leases in service concessions that would cause it to reach a different conclusion about the use of interest methods of depreciation. It noted that the Basis for Conclusions in the future Interpretations on service concessions would include a discussion of its conclusions on interest methods of depreciation.

Details of the issues that have been considered by the IFRIC but not added to its agenda are available online at www.ifrs.org/.

Changes in Depreciation Method [IAS 16.61]

If there is a significant change in the expected pattern of consumption of an asset’s future economic benefits, the depreciation method should be adjusted to reflect the changed pattern. This change would be recognized as a change in accounting estimate (unless the change is to correct an error), in line with IAS 8. All intercompany balances and transactions, income and expenses arising from intercompany transactions are eliminated in the preparation of the consolidated financial statements.

2.5 Cash and cash equivalents Cash and cash equivalents include highly liquid investments with maturities of 90 days or less at the date of purchase. Cash and cash equivalents are considered to be restricted when they are subject to contingent rights of a third party customer, vendor, government agency or financial institution.

2.6 Short-term investments Short-term investments include investments with maturities between 91 to 364 days from the date of purchase.

2.7 Inventories Inventories are measured at the lower of cost and net realizable value. Cost is determinedIAS 16 using Property, the weighted Plant average and cost Equipment method, 43 based on individual items. The cost is comprised of the purchase price, plus the costs incurred in bringing the inventory to its present location and condition. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs to sell. Rebates and allowances received from vendors are recognized as a reduction to the cost of inventory, unless the rebates clearly relate to the reimbursement of specific expenses. A provision for shrinkage and obsolescence is calculated based on historical experience. All inventories consist of finished goods.

2.8 Property, plant and equipment ExtProperty,ract plant 15 — andE equipmentxcerp aret measuredfrom atSear cost or sdeemed Canada cost less accumulatedInc. 2012 depreciation Finan andc ialaccumulated Stat impairmentements losses. Costs include expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets Noteincludes 2 — S site ignificantpreparation costs, design Accounting and engineering fees, Policies freight (only on initial freight costs incurred between the vendor and the Company), installation expenses and provincial sales tax (Saskatchewan, Manitoba and Prince Edward Island), and is net of 2.8 anyProperty, vendor subsidies plant or reimbursements. and equipment An allocation (in ofpart) general and specific incremental interest charges for major construction projects is also included in the cost of related assets.

GoodwillWhen the significant parts of an item of property, plant and equipment have varying useful lives, they are accounted for as separate Goodwillcomponents is allocated of property, to cash-generating plant and equipment. units or groups Depreciation of cash-generating is calculated units based (CGU) foron the purposedepreciable of impairment amount of testing, the asset which or signifi is cant undertakencomponent at thereof, the lowest if levelapplicable, at which which goodwill is isthe monitored cost of forthe internalasset or management significant purposes.component Impairment less its testingresidual is value. performed Depreciation annually as is at Augustrecognized 1, or more using frequently the straight-line if there are method indications for that each impairment significant may component have occurred, of byancomparing item of property, the recoverable plant amountand equipment of a CGU withand its is carrying amount. The recoverable amount of a CGU is the higher of its value in use and its fair value less costs to sell. Value in use is the present valuerecorded of the in expected “Selling, future administrative cash flows from and aother CGU. expenses” in the Consolidated Statements of Net Earnings (Loss) and Comprehensive IncomeSignificant (Loss) judgment . The estimated is involved useful in estimating lives are the2 to model 13 years inputs for used equipment to determine and fixtures the recoverable and 10 to amount 50 years of our for CGU, buildings in particular and bu futureilding cashimprovements. flows, discount The rates estimated and terminal useful growth lives, rates,residual due values to the uncertaintyand depreciation in the timing methods and for amount property, of cash plant flows and and equipment the forward-looking are reviewed natureannually of these and inputs.adjusted, Future if appropriate, cash flows are with based the on effect financial of any plans changes agreed byin managementestimates accounted which are for estimated on a prospective based on forecast basis. results, business initiatives, planned capital investments and returns to shareholders. Discount rates are based on the bank-wide cost of capital, adjustedAssets held for CGU-specific under finance risks andleases currency are depreciated exposure as over reflected their by expected differences useful in historical lives on and the expected same inflation.basis as CGU-specificowned assets risks or, include where country risk, business/operational risk, geographic risk (including political risk, devaluation risk, and government regulation), currency risk, and priceshorter, risk (includingthe term of product the relevant pricing risk lease, and unless inflation). it is Terminal reasonably growth certain rates reflect that the grossCompany domestic will product obtain andownership inflation by for thethe countriesend of the withinlease whichterm. the CGU operates. Changes in these assumptions may impact the amount of impairment loss recognized in Non-interest expense. ImpairmentThe carrying amount and of a CGU Compensation includes the carrying amount of assetsfor and Impairment goodwill allocated to the CGU. If the recoverable amount is less thanThe thegain carrying or loss value, arising the impairmenton the disposal loss isor allocated retirement first of to an reduce item the of carryingproperty, amount plant of and any equipment goodwill allocated is determined to the CGU as andthe thendiffere tonce the [IASotherbetween 16.63 – .66] non-financial the proceeds assets from of the sale CGU or proportionately the cost of retirement based on and the the carrying carrying amount amount of each of asset.the asset, Any impairmentand is recognized loss is charged in the Consoli to incomedated in theStatements period in whichof Net the Earnings impairment (Loss) is identified. and Comprehensive Goodwill is stated Income at cost (Loss). less accumulated impairment losses. Subsequent reversals of goodwill impairment are prohibited. For Upona discussion disposal on of athe portion impairment of a CGU, of the tangible carrying assets amount refer of goodwill to Note relating 2.11. Property, to the portion plant of and the CGUequipment sold is includedare reviewed in the determinationat the end of Anof impairment gains or losses on disposal. loss The is carrying the amount amount is determined by based which on the relativethe faircarrying value of the disposed amount portion toof the an total CGU.asset each reporting period to determine whether there is an indicator of impairment. exceedsOther intangibles its recoverable amount. Recoverable amount is defined in IAS 16 as Intangible2.9 Investment assets areproperty recognized separately from goodwill when they are separable or arise from contractual or other legal rights, and their fair thevalue higher can be measured of an reliably. asset’s Intangible fair assets value with a finite less life are costs amortized onto a straight-linesell or basisits overVIU. their estimated useful lives, generallyThe Company’s from 10 to investment 20 years, and property are assessed consists for indicatorsof vacant of land impairment which is at not each currently reporting used period. in its operations. Investment property is measuredIf there at is anits indicationdeemed cost that less a finite-life accumulated intangible impairment asset may belosses. impaired, an impairment test is performed by comparing the carrying To amountdetermine of the intangible whether asset to its recoverable a PP&E amount. item Where is it is impaired, not possible to estimate an theentity recoverable applies amount of anIAS individual 36. asset, This we estimateThe fair the values recoverable of the amountinvestment of the property CGU to which is estimated the asset using belongs. observable If the recoverable data based amount on the of the current asset (orcost CGU) of acquiring is less than comparable its carrying standardamount,properties the within carryingprovides the amount market of guidance the area intangible and the assetcapitalization as is writtento when downof the to property’s its to recoverable assess anticipated amount impairment, asrevenue. an impairment The Company loss. how engages to independentdeter- An impairment loss recognized previously is reversed if there is a change in the estimates used to determine the recoverable amount of the assetqualified (or CGU) third since parties the last to conduct impairment appraisals loss was recognized.of its investment If an impairment property. loss is subsequently reversed, the carrying amount of the asset mine(or CGU) the is revised recoverable to the lower of its recoverableamount amount and and thewhen carrying to amount recognize that would have beenan determinedimpairment (net of amortization) loss. had there been no prior impairment. Due to the subjective nature of these estimates, significant judgment is required in determining the useful lives It alsoand recoverable provides amounts ofguidance our intangible assets, on andreversal assessing whether of impairment certain events or circumstances losses. constitute When objective there evidence is of impairment. To make these estimates, management relies on sales projections, allocated costs and risk-adjusted discount rates that take into a subsequentconsideration the market increase environment andin ourthe business recoverable objectives. Changes56 amount in these assumptions of an may impaired impact the amount asset, of impairment the loss recognized in Non-interest expense. We do not have any intangible assets with indefinite lives. previously recognized impairment loss is reversed. For PP&E assets carried at Other cost,Translation the ofamount foreign currencies of the recovery is limited to the carrying value of the asset Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at rates prevailing at the balance sheet thatdate. would Foreign exchange have gains been and losses determined resulting from the translation (net andof settlementdepreciation) of these items are had recognized no in impairment Non-interest income in loss the Consolidated Statements of Income. been Non-monetaryrecognized assets and for liabilities the that asset are measured in prior at historical years. cost are translated This intorequirement Canadian dollars at historicalmeans rates. that an Non-monetary financial assets classified as AFS securities, such as equity instruments, that are measured at fair value are translated into entityCanadian must dollars atbe rates able prevailing to at thereconstruct balance sheet date, andthe the pre-impairment resulting foreign exchange gains carrying and losses are recordedamount in Other of components of equity until the asset is sold or becomes impaired. the asset.Assets and liabilities of our foreign operations with functional currencies other than Canadian dollars are translated into Canadian dollars at rates prevailing at the balance sheet date, and income and expenses of these foreign operations are translated at average rates of exchange for the reporting period. Unrealized gains or losses arising as a result of the translation of our foreign operations along with the effective portion of related hedges Exaretra reportedct in16 — Other componentsExcerp oft equity fr onom an after-tax Roy basis.al UponBan disposalk of or partial Canada disposal of a2012 foreign operation,Finan anc appropriateial portion of the accumulated net translation gains or losses is included in Non-interest income. Statements Premises and equipment NotePremises 2 — S and equipmentummar includesy of land, S buildings,ignificant leasehold improvements, Accounting computer equipment, Policies furniture,, fixturesEstimates and other equipment, and are stated at cost less accumulated depreciation and accumulated impairment losses. Cost comprises the purchase price, any costs directly andattributable Judgments to bringing the asset to the location and condition necessary for its intended use, and the initial estimate of any disposal costs. Depreciation is recorded principally on a straight-line basis over the estimated useful lives of the assets, which are 25 to 50 years for buildings, 3 Premisesto 10 years forand computer equipment equipment, and (in 7 to part)10 years for furniture, fixtures and other equipment. The amortization period for leasehold improvements is the lesser of the useful life of the leasehold improvements or the lease term plus the first renewal period, if reasonably assured of renewal, up to a maximum of 10 years. Land is not depreciated. Gains and losses on disposal are recorded in Non-interest income. Premises and equipment are assessed for indicators of impairment at each reporting period. If there is an indication that an asset may be impaired, an impairment test is performed by comparing the asset’s carrying amount to its recoverable amount. Where it is not possible to estimate the recoverable amount of an individual asset, we estimate the recoverable amount of the CGU to which the asset belongs and test for impairment at the CGU level. An impairment charge is recorded to the extent the recoverable amount of an asset (or CGU), which is the higher of fair value less costs to sell and value in use, is less than its carrying amount. Value in use is the present value of the future cash flows expected to be derived from the asset (or CGU). After the recognition of impairment, the depreciation charge is adjusted in future periods to reflect the asset’s revised carrying amount. If an impairment is later reversed, the carrying amount of the asset is revised to the lower of the asset’s recoverable amount and the carrying amount that would have been determined (net of depreciation) had there been no prior impairment loss. The depreciation charge in future periods is adjusted to reflect the revised carrying amount.

Consolidated Financial Statements Royal Bank of Canada: Annual Report 2012 105

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Compensation for Impairment [IAS 16.65]

If an entity receives third-party compensation for PP&E items that were impaired, lost or given up, the compensation is recognized in profit or loss when receivable.

Derecognition of PP&E [IAS 16.67 – .72]

The carrying amount of an item of PP&E is derecognized: • on disposal; or • when no future economic benefits are expected from its use or disposal.

The disposal date is the date at which the criteria for recognizing revenue from the sale of goods in IAS 18 are met. IAS 17 applies to disposal by a sale and leaseback.

An entity is required to derecognize the carrying amount of a part of a PP&E item if that part has been replaced and the entity has included the cost of the replacement part in the carrying amount of the item. This is required even if the part was not a significant component and was, therefore, not depreciated separately.

When a PP&E item is disposed of, the gain or loss on disposal is included in profit or loss unless IAS 17 requires otherwise on the sale and leaseback of an asset. The gain or loss is determined as the difference between the net disposal proceeds, if any, and the carrying amount of the asset.

Consideration receivable is recognized at fair value and, if payment is deferred, the compensation is recognized at the cash price equivalent; any difference between the recognized amount and the nominal amount is recognized as interest revenue reflecting the effective yield on the receivable. The gain or loss arising from derecognition of a PP&E item is not classified as revenue.

The following insight looks at the issue of classification of revenue from the sale of assets held for rental. Note the date of the NIFRIC. Even though some NIFRICs are older, they still provide some insight into how the standards are interpreted by the standard setters. IAS 16 Property, Plant and Equipment 45

Application Insights IAS 16 Property, Plant and Equipment — Sale of assets held for rental

Source NIFRIC

Meeting Date May 2007

The following insights were obtained from “IFRIC — items not taken onto the agenda” report.

Insight Reason for not adding to Issue the IFRIC agenda

The IFRIC was asked to provide The IFRIC noted that IAS 16 para- guidance on the accounting for graph 68 states that gains arising sales of assets held for rental. Some from derecognition of an item of entities sell assets after renting property, plant and equipment shall them out to third parties. In such not be classified as revenue. Also, circumstances, it appears that the when the asset is classified as held (j) Business Combinationsasset is manufactured or acquired for sale under IFRS 5 Non-current the Company applieswith the acquisition a dual intention, method in accounting to rent forit businessout combinations.Assets Held for Sale and Discon- on acquisition, the assets,and toincluding sell it. intangible The issue assets, is and whether any liabilities assumedtinued are Operations,measured at their IFRS fair value. 5 para purchase- the sale of such an asset should be graph 24 refers to the derecognition price allocations may be preliminary when initially recognized and may change pending finalization of the valuation of the assets presented gross (revenue and costs requirements of paragraphs 67 – 72 acquired. purchase price allocations are finalized within one year of the acquisition and prior periods are restated to reflect any of sales) or net (gain or loss) in the of IAS 16, thereby confirming that adjustments to the purchase price allocation made subsequent to the initial recognition. income statement. gains should not be classified as the determination of fair values, particularly for intangible assets, is based on management’srevenue. However, estimates and some includes believed assumptions on the timing and amount of future cash flows. the Company recognizes asthat, goodwill in thesome excess limited of the purchase circumstances, price of an acquired business over the fair value of the underlying net assets, includingreporting intangible grossassets, atrevenue the date inof acquisition.the transaction costs are expensed as incurred. the date of acquisition is the dateincome on which statement the Company would obtains be control con over- the acquired business. sistent with the Framework paragraph 72, with IAS 18 Revenue, IAS 2 (k) Inventory Inventories, and IAS 40 Investment inventory is comprised of merchandise inventory, which includes prescriptionProperties inventory, and and is valued with at the lower prohibition of cost and estimated net realizable value. Cost is determined on the first-in, first-out basis.on offsetsCost includes in allIAS direct 1 Presentation expenditures and of other appropriate costs incurred in bringing inventory to its present location and condition.Financial the Company Statements classifies. rebates and other consideration received from a vendor as a reduction to the cost of inventory unlessFor this the rebate reason, relates the to theIFRIC reimbursement decided of a selling cost or a payment for services. to draw the issue to the attention of the Board and not to take the item net realizable value is the estimated selling price in the ordinary course of business, less the estimated selling expenses. onto to its own agenda. (l) Property and Equipment and Investment Property Details of the issues that have been considered by the IFRIC but not added to its agenda are (i) Recognition and Measurement available online at www.ifrs.org/. items of property and equipment are carried at cost less accumulated depreciation and any recognized impairment losses (see (p) impairment). ExtCostra ctincludes 17 — expendituresExcerp thatt arefr directlyom Sh attributableopper to sthe D acquisitionrug Mar of thet asset.Corp theo costra oft self-constructedion 2012 assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition Financial Statements for their intended use, and, where applicable, the costs of dismantling and removing the items and restoring the site on which Notethey 3 — Sare located.ignificant Borrowing costs A ccountingare recognized as part P oliciesof the cost of an asset, where appropriate. (l) Propertypurchased software and Equipmentthat is integral to andthe functionality Investment of the related Property equipment (in is capitalizedpart) as part of that equipment. (i) RecognitionWhen components and of property Measurement and equipment (inhave part)different useful lives, they are accounted for as separate items of property and equipment. gains and losses on disposal of an item of property and equipment are determined by comparing the proceeds from disposal with the carrying amount of property and equipment and are recognized net, within operating and administrative expenses, in net earnings. Fully depreciated items of property and equipment that are still in use continue to be recognized in cost and accumulated depreciation.

(ii) Subsequent Costs the cost of replacing part of an item of property and equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Company and its cost can be measured reliably. the carrying amount of the replaced part is de-recognized. the costs of repairs and maintenance of property and equipment June 2013 are recognized in earnings as incurred.

ShopperS Drug Mart Corporation annual report 2012 79 46 Guide to International Financial Reporting in Canada

An entity that, in the course of its ordinary activities, routinely sells PP&E items held for rental to others, should transfer such assets to inventory at their carrying amount when they cease to be rented and are held for sale. The proceeds from the sale of such assets should be recognized as revenue in accordance with IAS 18. In such cases, IFRS 5 does not apply.

Disclosure [IAS 16.73 – .79]

For many entities, PP&E is a major part of the statement of financial position. The depreciation of these assets can have a material impact on profit or loss. Thus, it is not surprising that IAS 16 includes significant disclosure requirements. The following chart summarizes some of the disclosures relating to PP&E.

Illustration 6 — Summary of Some IAS 16 Disclosure Requirements

Type Disclosure

Disclosures for each class of • measurement bases (e.g., cost model) used in determining PP&E gross carrying amount • depreciation methods used (e.g., straight line) • useful lives or depreciation rates • gross carrying amounts and accumulated depreciation, including impairment losses at the beginning and end of the period

Reconciliation of the carrying • additions amount at beginning and end • depreciation of the period • impairment losses recognized or reversed in profit or loss • increases or decreases resulting from revaluations and from impairment losses recognized or reversed in other comprehensive income • net exchange differences arising on the translation of the financial statements from the functional currency into a different presentation currency, including the translation of a foreign operation into the presentation currency of the reporting entity • assets classified as held for sale or included in a disposal group classified as held for sale in accordance with IFRS 5 • acquisitions through business combinations • other changes

Depreciation • depreciation, whether recognized in profit or loss or as a part of the cost of other assets, during a period, as well as accumulated depreciation at the end of the period IAS 16 Property, Plant and Equipment 47

Type Disclosure

Estimate changes • nature and effect of any change in a PP&E accounting estimate that has an effect in the current period or is expected to have an effect in subsequent periods • changes in estimate could relate to: oo residual values oo estimated costs of dismantling, removing and restoring items of PP&E oo useful lives oo depreciation methods

Revaluation model • effective date of revaluation • whether an independent valuer was involved • for each revalued PP&E class, the carrying amount that would have been recognized had the assets been carried under the cost model • the revaluation surplus, indicating the change for the period and any restrictions on the distribution of the balance to shareholders • additional disclosures required by IFRS 13 • a change in the revaluation surplus arising from a change in the liability for an existing decommissioning, restoration or similar liability (IAS 1 requires disclosure in the statement of comprehensive income of each component of other comprehensive income or expense IFRIC 1 6(d))

Constructed assets • the amount of expenditures recognized in the carrying amount of a PP&E item in the course of its construction

Impaired assets • the amount of compensation from third parties for items of PP&E that were impaired, lost or given up, included in profit or loss (if not separately presented in the statement of comprehensive income) • disclosures required by IAS 36

Restrictions and • the existence and amounts of restrictions on title and commitments PP&E pledged as security for liabilities • the amount of contractual commitments for the acquisition of PP&E

Disclosures encouraged but • temporarily idle PP&E not required • fully depreciated PP&E still in use • PP&E retired from active use but not classified as held for sale • fair value of PP&E recognized under the cost model when materially different from the carrying amount

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IAS 16 suggests but does not require disclosure of the gross carrying amount of fully depreciated PP&E still in use. As IAS 16 requires a review of the useful life, residual value and depreciation method at least at each financial year-end, the existence of such assets is likely to be rare.

More general disclosure requirements under IAS 1 must also be met as they relate to PP&E. These include accounting policies, significant judgments made in applying accounting policies and sources of estimation uncertainty. Exam- ples include: • IAS 1.117 requires that the entity disclose a summary of significant accounting policies. This is especially important where there are accounting policy choices. • IAS 1.122 requires disclosure of judgments made in the process of applying the entity’s accounting policies that have the most significant effect on the amounts recognized in the financial statements. • IAS 1.125 requires disclosure of information about the future and other major sources of estimation uncertainty at the end of the reporting period that have a significant risk of resulting in material adjustment to the carrying amounts of assets and liabilities within the next financial year.

Application Resources Disclosure checklist

To ensure compliance with IAS 16, the use of a disclosure checklist is Resources recommended. CPA Canada has compiled numerous IFRS presentation and disclosure checklists available for download at www.cpacanada.ca/ifrs.

The following insight looks at the disclosure of temporarily idle assets or assets under construction when further construction has been postponed. Note the date of the NIFRIC. Even though some NIFRICs are older, they still provide some insight into how the standards are interpreted by the standard setters. IAS 16 Property, Plant and Equipment 49

Application Insights Disclosure of idle assets and construction in progress

Source NIFRIC

Meeting Date May 2009

The following insights were obtained from “IFRIC — items not taken onto the agenda” report.

Insight Reason for not adding Issue to the IFRIC agenda

The IFRIC received a request for Given the requirements of IAS 16 more guidance on the extent of and IAS 1, the IFRIC did not expect required disclosures relating to prop- significant diversity in practice and erty, plant and equipment temporar- decided not to add this issue to its ily idle or assets under construction agenda. However, the IFRIC rec- when additional construction has ommended that the Board should been postponed. In accordance with undertake a review of all disclosures paragraph 74(b) of IAS 16, an entity encouraged (but not required) by is required to disclose the amount of IFRSs with the objective of either expenditures recognised in the car- confirming that they are required rying amount of an item of property, or eliminating them. plant and equipment in the course of its construction. Paragraph 79(a) encourages an entity to disclose the amount of property, plant and equipment that is temporarily idle. The IFRIC also noted that paragraph 112(c) of IAS 1 requires an entity to provide in the notes information that is not presented elsewhere in the financial statements that is relevant to their understanding. The IFRIC noted that disclosure regarding idle assets might be particularly relevant in the current economic environment. Consequently, the IFRIC expected that entities would provide information in addition to that specifically required by IAS 16 whenever idle assets or postponed construction projects become significant.

Details of the issues that have been considered by the IFRIC but not added to its agenda are available online at www.ifrs.org/.

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The following extract provides an example of a reconciliation of the carrying amounts of assets at the beginning and end of the period.

Extract 18 — Excerpt from Telus Corporation 2012 Financial Statements Note 15 — Property, Plant and Equipment FINANCIAL STATEMENTS & NOTES: 15

15 Property, plant and equipment

Buildings and leasehold Assets under Assets under (millions) Network assets improvements finance lease Other Land construction Total

At cost As at January 1, 2011 $ß22,691 $ß2,351 $ß21 $ß1,550 $ß49 $ß438 $ß27,100 Additions(1) 516 20 1 41 7 887 1,472 Additions arising from business acquisitions (Note 16(e)) – 11 – 7 – – 18 Dispositions, retirements and other (220) (8) 1 (51) (1) – (279) Reclassifications 779 99 – 75 – (953) – As at December 31, 2011 23,766 2,473 23 1,622 55 372 28,311 Additions(1) 569 21 – 42 – 980 1,612 Additions arising from business acquisitions (Note 16(e)) – – – 2 – – 2 Dispositions, retirements and other (1,126) (16) (17) (80) – – (1,239) Reclassifications 795 142 – 38 – (975) – As at December 31, 2012 $ß24,004 $ß2,620 $ß 6 $ß1,624 $ß55 $ß377 $ß28,686 Accumulated depreciation As at January 1, 2011 $ß16,555 $ß1,443 $ß10 $ß1,261 $ßß – $ßß – $ß19,269 Depreciation 1,091 121 2 117 – – 1,331 Dispositions, retirements and other (218) (4) 8 (39) – – (253) As at December 31, 2011 17,428 1,560 20 1,339 – – 20,347 Depreciation 1,192 126 3 101 – – 1,422 Dispositions, retirements and other (1,127) (12) (17) (92) – – (1,248) As at December 31, 2012 $ß17,493 $ß1,674 $ß 6 $ß1,348 $ßß – $ßß – $ß20,521 Net book value As at December 31, 2011 $ß 6,338 $ß 913 $ß 3 $ß 283 $ß55 $ß372 $ß 7,964

As at December 31, 2012 $ß 6,511 $ß 946 $ßß – $ß 276 $ß55 $ß377 $ß 8,165

(1) For the year ended December 31, 2012, additions include $49 (2011 – $15) in respect of asset retirement obligations (see Note 19(a)).

The gross carrying amount of fully depreciated property, plant and As at December 31, 2012, our contractual commitments for the equipment that was still in use as at December 31, 2012, was $2.9 billion acquisition of property, plant and equipment were $187 million over (2011 – $3.0 billion). a period through to 2014 (2011 – $188 million over a period through to 2013).

Accounting Policy Choices The following chart summarizes some significant accounting policy choices in IAS 16.

Reference Policy choice Alternatives Insights

IAS 16.29 Measurement of PP&E 1. Cost model The policy choice is after recognition 2. Revaluation model made for each class of PP&E and must apply to the entire class. A class of PP&E is a TELUSgrouping 2012 ANNUAL of REPORT assets . 147of a similar nature and use in an entity’s operations. IAS 16 Property, Plant and Equipment 51

Reference Policy choice Alternatives Insights

IAS 16.35 Revaluation of depre- When an item of PP&E Alternative 1 is often ciable assets is revalued, any accu- used when an asset is mulated depreciation at revalued by means of the date of revaluation applying an index to is treated in one of two determine its replace- ways:2 ment cost (see IFRS 13). 1. Restate propor- Alternative 2 is often tionately with the used for buildings. change in the gross carrying amount of the asset so that the carrying amount of the asset after revaluation equals its revalued amount 2. Eliminate against the gross carrying amount of the asset and the net amount restated to the revalued amount of the asset

IAS 16.41 Transferring revaluation 1. Transfer revaluation Alternative 1 may surplus surplus to retained involve transferring the earnings on asset whole of the surplus derecognition when the asset is 2. Transfer a relevant retired or disposed of. portion of the For alternative 2, the revaluation surplus amount of the surplus to retained earn- transferred would be ings as the asset the difference between is depreciated, depreciation based on with the balance the revalued carrying remaining (if any) amount of the asset transferred on asset and depreciation based derecognition on the asset’s original 3. No transfer of cost. revaluation surplus to retained earnings

2 Note: Refer to the Standards Update section in this publication. A proposed amendment to IAS 16 would change the guidance in (1) below and state that accumulated depreciation is computed as the difference between the gross and net carrying amounts. The amendment will also clarify that the determination of accumulated depreciation does not depend on the selection of the valuation technique.

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Reference Policy choice Alternatives Insights

IAS 16.41 The revaluation surplus transfers referred to in (continued) IAS 16.41 are implied to be at the option of the reporting entity, rather than being mandated by the Standard. There would, therefore, appear to be another alternative — to make no reserve transfer (alternative 3). That option would, however, result in the permanent reten- tion of the portion of the revaluation reserve relating to assets that have been fully depreciated or disposed of. Transfers from revaluation surplus to retained earnings are not made through profit or loss. IAS 16 Property, Plant and Equipment 53

Significant Judgments and Estimates The following chart summarizes some possible significant judgments and sources of estimation uncertainty required by IAS 16. This is not meant to be an exhaustive list and other judgments and/or estimates most certainly exist within IAS 16.

Illustration 7 — Some Significant Judgments and Sources of Estimation Uncertainty Under IAS 16

Judgments Sources of estimation uncertainty

Policy choice Both cost model and revaluation model • whether to measure PP&E using the cost • determination of the residual value of model or the revaluation model value a depreciable item of PP&E (IAS 16.29) • determination of the useful life of a depreciable item of PP&E Both cost model and revaluation model • timing and amount of costs of disman- • unit of measure for recognition of an item tling, removal and site restoration and of PP&E (i.e., the amount of aggregation) changes to these costs • determination of which costs (initial and • discount rate to be used for the above subsequent) meet the recognition criteria • recoverability of tangible capital assets of IAS 16, including which costs are • estimate of the recoverable amount for directly attributable (e.g., safety equip- impairment testing ment, spare parts, replacement parts, inspection costs and costs for self-con- Revaluation model structed assets) • determination of fair value of revalued • significant components of assets and the items of PP&E allocation of costs to components (for depreciation) • selection of depreciation methods and depreciation start date • how much detail to provide in note disclosures • assessment of impairment under IAS 36 • when an item of PP&E should be derecognized. Revaluation model • frequency of revaluations • how to treat accumulated depreciation on revaluation of an item of PP&E (IAS 16.35) • when to transfer a revaluation surplus to retained earnings (IAS 16.41)

June 2013 NOTES TO ThE CONSOLIDATED fINANCIAL STATEMENTS

54 Guide NOTEto International 4. SIGNIFICANT Financial ACCOUNTING Reporting ESTIMATES in AND Canada JUDGMENTS The preparation of the Company’s consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the end of the reporting period. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods. In the process of applying the Company’s accounting policies, management has made the following judgments, estimates and assumptions which have the most significant effect on ExtraNtheOTESct amounts 19 — recognizedTOEx Tcherp Ein theCONSOLIDATEDt consolidated from financialEner statements:flex fINANCIAL Ltd. 2012 STATEMENTS Financial S tatements Note 4 — S> Revenueignificant Recognition – Long-TAccountingerm Contracts Estimates and Judgments The Company reflects revenues generated from the assembly and manufacture of projects using the percentage-of- NOTE 4. SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGMENTS completion approach of accounting for performance of production-type contracts. This approach to revenue recognition The preparation of the Company’s consolidated financial statements requires management to make judgments, estimates and requires management to make a number of estimates and assumptions surrounding the expected profitability of the assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent contract, the estimated degree of completion based on cost progression and other detailed factors. Although these liabilities, at the end of the reporting period. Estimates and judgments are continually evaluated and are based on historical factors are routinely reviewed as part of the project management process, changes in these estimates or assumptions experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. could lead to changes in the revenues recognized in a given period. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to > Provisions for Warranty the carrying amount of the asset or liability affected in future periods. In the process of applying the Company’s accounting Provisions set aside for warranty exposures either relate to amounts provided systematically based on historical policies, management has made the following judgments, estimates and assumptions which have the most significant effect on experience under contractual warranty obligations or specific provisions created in respect of individual customer issues the amounts recognized in the consolidated financial statements: undergoing commercial resolution and negotiation. Amounts set aside represent management’s best estimate of the > likelyRevenue settlement Recognition and the – Long-T timingerm of anyContracts resolution with the relevant customer. The Company reflects revenues generated from the assembly and manufacture of projects using the percentage-of- > Property, Plant and Equipment completion approach of accounting for performance of production-type contracts. This approach to revenue recognition Property, plant and equipment are stated at cost less accumulated depreciation, including any asset impairment losses. requires management to make a number of estimates and assumptions surrounding the expected profitability of the Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The estimated contract, the estimated degree of completion based on cost progression and other detailed factors. Although these useful lives of property, plant and equipment are reviewed on an annual basis. Assessing the reasonableness of factors are routinely reviewed as part of the project management process, changes in these estimates or assumptions the estimated useful lives of property, plant and equipment requires judgment and is based on currently available could lead to changes in the revenues recognized in a given period. information. Property, plant and equipment are also reviewed for potential impairment on a regular basis or whenever > Preventsovisions or changes for Warranty in circumstances indicate that the carrying amount may not be recoverable. Provisions set aside for warranty exposures either relate to amounts provided systematically based on historical Changes in circumstances, such as technological advances and changes to business strategy can result in actual experience under contractual warranty obligations or specific provisions created in respect of individual customer issues useful lives and future cash flows differing significantly from estimates. The assumptions used, including rates and undergoing commercial resolution and negotiation. Amounts set aside represent management’s best estimate of the methodologies, are reviewed on an ongoing basis to ensure they continue to be appropriate. Revisions to the estimated likely settlement and the timing of any resolution with the relevant customer. useful lives of property, plant and equipment or future cash flows constitute a change in accounting estimate and are > Prappliedoperty, prospectively. Plant and Equipment Property, plant and equipment are stated at cost less accumulated depreciation, including any asset impairment losses. > Allowance for Doubtful Accounts Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The estimated An allowance for doubtful accounts is made when there is objective evidence that the collection of the full amount useful lives of property, plant and equipment are reviewed on an annual basis. Assessing the reasonableness of is no longer probable under the terms of the original invoice. Impaired receivables are derecognized when they are the estimated useful lives of property, plant and equipment requires judgment and is based on currently available assessed as uncollectible. Amounts estimated represent management’s best estimate of probability of collection of information. Property, plant and equipment are also reviewed for potential impairment on a regular basis or whenever amounts from customers. events or changes in circumstances indicate that the carrying amount may not be recoverable. > Impairment of Inventory Changes in circumstances, such as technological advances and changes to business strategy can result in actual The Company regularly reviews the nature and quantities of inventory on hand and evaluates the net realizable value of useful lives and future cash flows differing significantly from estimates. The assumptions used, including rates and inventory items based on historical usage patterns, known changes to equipment or processes and customer demand methodologies, are reviewed on an ongoing basis to ensure they continue to be appropriate. Revisions to the estimated for specific products. Significant or unanticipated changes in business conditions could impact the magnitude and useful lives of property, plant and equipment or future cash flows constitute a change in accounting estimate and are timing of inventory impairment. applied prospectively.

> Allowance for Doubtful Accounts 82 An allowanceEnErfl Eforx ldoubtfultd. accounts is made when there is objective evidence that the collection of the full amount is no longer probable under the terms of the original invoice. Impaired receivables are derecognized when they are assessed as uncollectible. Amounts estimated represent management’s best estimate of probability of collection of amounts from customers.

> Impairment of Inventory The Company regularly reviews the nature and quantities of inventory on hand and evaluates the net realizable value of inventory items based on historical usage patterns, known changes to equipment or processes and customer demand for specific products. Significant or unanticipated changes in business conditions could impact the magnitude and timing of inventory impairment.

82 EnErflEx ltd. IAS 16 Property, Plant and Equipment 55

Appendix A — Acronyms Used

AcSB Accounting Standards Board CPA Canada Chartered Professional Accountants of Canada ED Exposure Draft IAS International Accounting Standard IASB International Accounting Standards Board IDG IFRS Discussion Group IFRIC IFRS Interpretations Committee IFRS International Financial Reporting Standard NIFRIC Non-IFRS Interpretations Committee abstract OCI Other comprehensive income PP&E Property, plant and equipment VIU Value in use

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