## H&R REAL ESTATE INVESTMENT TRUST H&R FINANCE TRUST 

Notes to Combined Financial Statements  (In thousands of dollars, except unit and per unit amounts) 

Years ended December 31, 2010 and 2009 

## 1. Significant accounting policies: 

These combined financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”) and reflect the following policies: 

(a) Principles of combination 

The principles used to prepare combined financial statements are similar to those used to prepare consolidated financial statements. The combined financial statements include the assets, liabilities, unitholders' equity, comprehensive income and operating results of the Trusts, after elimination of the following: 

(i) the REIT's notes payable to Finance Trust; and 

(ii) the REIT's interest expense and Finance Trust's interest income from the notes payable to Finance Trust. 

The foreign exchange gain or loss recorded in net earnings as a result of exchanging Finance Trust's U.S. dollar note receivable from U.S. Holdco is not eliminated on combination as U.S. Holdco is a self-sustaining operation of the REIT, which results in the foreign exchange on the note payable being reported in accumulated other comprehensive income. 

The combination of the Trusts does not result in the elimination of the equity of Finance Trust as neither of the Trusts hold any interest in the other. The equity of the Trusts will be presented by way of combining the two together. As a result, the creation of Finance Trust will result in an increase to equity for the issuance of such Finance Trust units, similar to the reporting of the distribution of Finance Trust units to unitholders by the REIT. 

(b) Principles of consolidation 

The combined financial statements include the accounts of all entities in which the REIT holds a controlling interest. Finance Trust does not hold a controlling interest in any entity. 

The REIT carries out a portion of its activities through co-ownership agreements and records its proportionate share of assets, liabilities, revenue, expenses and cash flows of all co-ownerships in which it participates. 

(c) Income properties: 

All material intercompany transactions and balances have been eliminated upon consolidation. 

Income properties are recorded at cost less accumulated depreciation. The REIT reviews whether the income properties are impaired whenever events or changes in circumstances affect the ultimate value of the income property and indicate that the carrying amount may not be recoverable. An impairment is recognized if the sum of the estimated undiscounted future cash flows from operations and expected residual value is less than the carrying value of a particular asset. The impairment recognized is measured at the amount by which the carrying amount of the asset exceeds its fair value. 

