## Goodwill 

Goodwill recorded is the result of the purchase of DaimlerChrysler Rail Systems GmbH (Adtranz). Goodwill is tested for impairment annually, or more frequently if events or cir- cumstances indicate that the asset might be impaired. The Corporation selected its fourth quarter as its annual testing period for its good- will. A goodwill impairment charge is recorded when the discounted value of the expected future cash flows of the entire reporting unit is less than its carrying value. Future cash flows are forecasted based on the Corporation’s best estimate of revenues, production costs, manufacturing overhead and other costs. These estimates are made by reviewing exist- ing contracts, expected future orders, current cost structure, anticipated cost variations, labour agreements and general market condi- tions, and are subject to review and approval by senior management. The future cash flows are discounted using a weighted average cost of capital rate. 

## Product warranties 

Products sold in the aerospace and the transportation segments are accompanied by warranties for systems, accessories, equip- ment, parts and software developed by the Corporation. 

Warranty obligations are recognized at the time of sale based on the estimated warranty costs expected to be incurred. These estimates are based on a number of factors, including the historical warranty claims and cost expe- rience, the type and duration of the warranty coverage, the products sold and warranty coverage available from the Corporation’s sup- pliers. Warranty expense is recorded as a component of cost of sales. 

## Employee future benefits 

Pension and other employee benefit costs and obligations are dependant on assumptions 

used in calculating such amounts. Two critical assumptions, the discount rate and the expected long-term rate of return on plan assets are important elements of cost and/or obligation measurement. Other assumptions include the rate of compensation increase and the health-care cost trend rate, as well as demographic factors such as retirement ages of employees, mortality rates and turnover. Assumptions are reviewed and updated at least annually. 

The discount rate allows the Corporation to reflect estimated future benefit payments at present value on the measurement date. Management has little discretion in selecting the discount rate as it must represent the market rates for high quality fixed income investments available for the period to maturity of the benefits. A lower discount rate increases the benefit obligation and benefit costs. A 50-basis-point change in the weighted-average discount rates would increase or decrease expected benefit cost in fiscal year 2005 by approximately $75 million. 

The expected long-term rate of return on pension plan assets assumption is determined considering historical returns, future estimates of long-term investment returns and asset allocations. A lower return assumption increases pension cost. A 50-basis-point change in the return assumption would increase or decrease expected pension cost in fiscal year 2005 by approximately $20 million. 

## Income taxes 

The Corporation recognizes deferred income tax assets, resulting mainly from losses carried forward and deductible temporary differences. Management assesses the realization of these deferred tax assets regularly to determine whether a valuation allowance is required. Based on evidence, both positive and nega- tive, the Corporation determines whether it is more likely than not that all or a portion of the 

deferred income tax assets will be realized. The factors considered include estimated future earnings based on internal forecasts, cumulative losses in recent years, history of losses carried forward and other tax assets expiring unused as well as prudent and feasi- ble tax planning strategies. 

## Accounting and reporting developments 

## Variable interest entities 

In June 2003, the Accounting Standards Board (AcSB) issued Accounting Guideline (AcG) 15 “Consolidation of Variable Interest Entities” (VIEs). AcG-15 establishes the consolidation criteria for VIEs based on a risks-and-rewards model rather than on a control-based model. The AcSB is expected to issue proposed revisions to AcG-15. These proposed recom- mendations are expected to be effective as of the Corporation’s fourth quarter of fiscal year 2005. The Corporation has begun analyzing the impact of this guideline, but due to the com- plexity of the guideline and the proposed revision of this standard, has not yet deter- mined the impact, if any, that the new recommendation will have on its Consolidated Financial Statements. However, the impact could be material since it is anticipated that unless certain existing agreements are modified prior to the application of this standard, the Corporation will be required to consolidate certain assets previously sold to special- purpose entities and the related liabilities and non-controlling interest. The consolidation of the VIEs would not alter the Corporation’s finan- cial exposure to the assets and liabilities of the VIEs. 

## Revenue recognition 

In December 2003, the Emerging Issues Committee (EIC) of the Canadian Institute of Chartered Accountants issued EIC 141 “Revenue Recognition,” summarizing the prin- ciples set forth in Staff Accounting Bulletin 101 

