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The REIT has completed its analysis and has elected to use the cost model to account for its investment property. In addition, the REIT will also elect under IFRS 1 to use the fair value as the deemed cost for 13 of its income properties upon the initial implementation of IFRS. At conversion, the adjustment resulting from this election which is expected to be approximately $531 million, net of impairments, will be recorded directly to income properties and unitholders’ equity. 

The REIT will disclose the fair value of its investment properties at January 1, 2010 and December 31, 2010 in the notes to the financial statements as follows: 

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( ¹ )  These amounts include tenant inducements, deferred leasing costs and intangible liabilities. 

For subsequent reporting of the fair value of income properties, the REIT will prepare most of these valuations internally after taking into account any changes to the property status, condition, tenants, leases, net operating income and changes to discount and capitalization rates as well as market rental rates. The REIT will use market data provided by valuation firms. 

This change is not expected to require any major change to the REIT’s information technology (“IT”) systems. The controls and procedures to ensure accurate reporting are almost complete. 

The REIT is required to meet financial covenants included in its Declaration of Trust and in banking and debenture agreements. Within each of the previously mentioned documents, the REIT’s debt cannot exceed 65% of the GBV. 

3) Canadian GAAP generally uses a two-step approach to impairment testing: first comparing asset carrying values with undiscounted future cash flows to determine whether impairment exists, and then measuring impairment by comparing asset carrying values to their fair value (which is calculated using discounted cash flows). IAS 36 Impairment of Assets (IAS 36) uses a one-step approach for testing and measuring impairment, with asset carrying values compared directly with the higher of fair value less costs to sell and value in use (which uses discounted cash flows). This may potentially result in write-downs where the carrying value of assets were previously supported under Canadian GAAP on an undiscounted cash flow basis, but could not be supported on a discounted cash flow basis. Unlike Canadian GAAP, which does not permit reversals, IFRS requires the reversal of an impairment loss when the recoverable amount is higher than the carrying value (to no more than what the depreciated amount of the asset would have been had the impairment not occurred). These differences could lead to earnings statement and earnings volatility in future periods. There is no change expected to the REIT’s current IT systems for this accounting change but the REIT is in the process of designing controls and procedures for this change. The REIT is currently finalizing its assessment of potential impairments. 

4) Under Canadian GAAP, upon the purchase of a property, all transaction costs (i.e. commissions, land transfer tax, appraisals, etc.) associated with the purchase are capitalized to the cost of the property. Under IFRS, these costs must be expensed as part of operations. This may have a material impact on the REIT’s net earnings and could lead to earnings statement and earnings volatility in future periods. 

