ACCOUNTING FOR INCOME TAXES Future income taxes are recorded to account for the effects of future taxes on transactions occurring in the current period. Management uses judgment and estimates in determining the appropriate rates and amounts to record for future taxes, giving consideration to timing and probability Previously recorded tax assets and liabilities are adjusted if the expected tax rate is revised based on current information. 

The recording of future tax assets also requires an assessment of recoverability A valuation allowance is recorded when Torstar does not believe, based on all available evidence, that it is more likely than not that all of the future tax assets recognized will be realized prior to their expiration. This assessment includes a projection of future year earnings based on historical results and known changes in operations. 

More information on Torstar’s income taxes is provided in Note 10 of the consolidated financial statements. 

## CHANGES IN ACCOUNTING POLICIES 

## HEDGING RELATIONSHIPS 

Torstar adopted Accounting Guideline 13 “Hedging Relationships” effective January 1, 2004. This new guideline establishes conditions for applying or discontinuing hedge accounting as well as addressing new documentation requirements and effectiveness testing requirements. 

Torstar had January 1, 2004: 

1. Interest rate swaps and contracts to hedge interest rate movements on portions of its U.S. and Canadian dollar denominated debt. 

2. Foreign currency contracts to hedge the purchase price on purchases of capital assets in U.S. dollars and Euros. 

3. Foreign currency contracts and options to hedge U .S. dollar operating earnings from integrated U.S. dollar operations. 

4. Foreign currency contracts to hedge Euro operating earnings from self-sustaining Euro operations. 

Torstar determined that the first three categories of derivatives continued to qualify as hedges under the new guideline. The U.S. dollar hedges were designated as hedges against U.S. dollar revenues effective January 1, 2004. The gains or losses on those derivatives were recorded against U.S. dollar revenues in 2004 rather than against operating profits as they had been in prior years. 

The new guideline does not permit hedge accounting for an economic hedge on a foreign self-sustaining operation. As a result, Torstar began to mark-to-market the Euro contracts each quarter during 2004. The realized and unrealized gain or loss on the Euro contracts were reported as part of the Book Publishing Segment’s operating results. 

## CIRCULATION REVENUE 

Torstar has, consistent with industry practice, historically reported home delivery circulation revenues for its newspapers net of certain distribution costs. The Canadian Institute of Chartered Accountants Handbook Section 1100 “Generally Accepted Accounting Principles” became effective for Torstar’s 2004 fiscal year. Under this section, a GAAP hierarchy is established and the ability to use industry practice has been eliminated. With this change, Torstar has begun in 2004 to report its home delivery circulation revenues on a gross basis and to include the distribution costs in operating expenses. The impact of the revision was to increase revenues and operating expenses by $38.1 million for the year ended December 31, 2004. There was no impact on operating profit or net income. 

The accounting rules for the implementation of this new section do not permit for a retroactive restatement of prior years’ results. The impact of the revision, had it been applied retroactively, would have been to increase revenues and operating expenses by $38.3 million for the year ended December 31, 2003. 

