ACCOUNTING POLICIES AND ESTIMATES
This MD&A is based on the Company's annual consolidated financial statements that have been prepared in accordance with IFRS. Management is required to make assumptions, judgments and estimates in the application of IFRS. The Company's summary of significant accounting policies are described in Note 2 of the December 31, 2012 audited consolidated financial statements. The preparation of the consolidated financial statements requires that certain estimates and judgments be made concerning the reported amount of revenue and expenses and the carrying values of assets and liabilities. These estimates are based on historical experience and management's judgment. Anticipating future events involves uncertainty and, consequently, the estimates used by management in the preparation of the consolidated financial statements may change as future events unfold, additional experience is acquired or the environment in which the Company operates changes.
Apart from the key source of estimation uncertainty disclosed below, all key assumptions concerning the future, and other key sources of estimation uncertainty made at the end of the last full reporting period were applied consistently for the twelve months ended December 31, 2012.
Valuation of debenture holders' conversion option
In order to value the debenture holders' conversion option, management had to determine what interest rate a similar debt instrument will carry if it had no conversion privilege. Management reviewed similar issues within the Canadian debt market of unrated entities and concluded that such a similar debt instrument without conversion privilege will carry a 10% coupon interest rate.
Also, the Company's option to redeem the debentures before maturity is considered closely related to the host debt instrument and thus not separately valued.
Useful lives of plant and equipment
The Company reviews the estimated useful lives of plant and equipment at the end of each reporting period. These estimates may change as more experience is obtained or as general market conditions change, thereby impacting the operation of the Company's property and equipment. Amortization of the finite intangible assets also incorporates estimates of useful lives and residual values. During the current year, no changes were made to the economic useful life plant and equipment.
Recognition of deferred tax assets
The Company only recognizes a deferred tax asset when it is probable that taxable benefits would be received in the future. The probability of future taxable benefits is based upon the earnings history of the Company, management's best estimate of future earnings and expectations of future tax rates based on legislation in place in the relevant jurisdiction.
Share based compensation estimates
The Company calculates the fair value of its options using the Black-Scholes option pricing model. Based on available information the Company estimates the fair value using the following weighted average assumptions to determine the fair value of the options at the date of grant. All share options are granted at the market value of the shares on grant date.
Performance share unit grants are linked to corporate performance and grants vest from one to three years from date of grant. The Company periodically assesses expectations as to the performance achieved as an input variable to the calculation of its liability pursuant to performance share units.
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