22 ANNUAL REPORT 2012 MANAGEMENTS DISCUSSION AND ANAL YSIS OF OPERA TING RESUL TS AND FINANCIAL CONDITION DECEMBER 31 2012 actuarial valuation process This measurement uncertainty may lead to potential fuctuations in fnancial results attributable to the selection of actuarial assumptions and other accounting estimates involved in the determination of pension expense and obligations A signifcant actuarial and accounting assumption impacting the reporting of pension plans is the discount rate assumption As at December 31 2012 Aecon used a discount rate of 375 in its pension plan calculations for fnancial statement purposes The impact of a 05 decrease in the discount rate assumption would have resulted in an increase in the Pension Beneft Obligation of approximately 24 million at December 31 2012 and an increase in the estimated 2013 pension expense of approximately 01 million Further details of contingencies and guarantees are included in the Companys 2012 consolidated fnancial statements RELATED PARTY TRANSACTIONS Included in trade and other receivables at December 31 2012 is a 06 million noninterest bearing relocation loan due from an offcer of the Company The loan is expected to be repaid in 2013 CRITICAL ACCOUNTING ESTIMATES By its nature accounting for construction contracts requires the use of estimates Revenue and income from fxed price construction contracts including contracts in which Aecon participates through joint ventures are determined on the percentage of completion method based on the ratio of costs incurred to date over estimated total costs Aecon has a process whereby progress on jobs is reviewed by management on a regular basis and estimated costs to complete are updated However due to unforeseen changes in the nature or cost of the work to be completed or performance issues contract proft can differ signifcantly from earlier estimates Unpriced change orders are change orders that have been approved as to scope but unapproved as to price For such change orders contract revenues are recognized to the extent of costs incurred or if lower to the extent to which recovery is probable Therefore to the extent that actual costs recovered are different from expected cost recoveries signifcant swings in revenue and proftability can occur from one reporting period to another Claims are amounts in excess of the agreed contract price or amounts not included in the original contract price that Aecon seeks to collect from clients or others for clientcaused delays errors in specifcations and designs contract terminations change orders in dispute or unapproved as to both scope and price or other causes of unanticipated additional costs In accordance with Aecons accounting policy claims are recognized in revenue only when resolution is probable Therefore it is possible for Aecon to have substantial contract costs recognized in one accounting period with associated revenue recognized only in a later period In the preparation of the consolidated fnancial statements various other estimates are required which are either subjective could be materially different under different conditions or using different assumptions or which require complex judgments The more signifcant estimates are related to the accounting for income taxes employee beneft plans and the accounting for pension expense the allocation of the purchase price to the fair value of assets acquired and liabilities assumed on acquisitions budgetrelated estimates used in testing goodwill and other assets for impairment and estimates relating to the valuation of derivatives and fair valuing of fnancial instruments The Companys accounting for income taxes is described in Note 21 to the 2012 consolidated fnancial statements and under Tax Accrual Risks in the following section of the MDA entitled Risk Factors The signifcant actuarial assumptions used in accounting for pension expense are set out in Note 22 to the 2012 consolidated fnancial statements and are discussed above in the OffBalance Sheet Arrangements section of the MDA RISK FACTORS The following risk factors and the information incorporated by reference herein should be considered carefully These risk factors could materially and adversely affect the Companys future operating results and could cause actual events to differ materially from those described in forwardlooking statements relating to the Company LARGE PROJECT RISK A substantial portion of Aecons revenues is derived from large projects some of which are conducted through joint ventures These projects provide opportunities for signifcant revenue and proft contributions but by their nature carry signifcant risk and as such can and have occasionally resulted in signifcant losses As a result of the existing infrastructure defcit throughout Canada a signifcant number of large projects are expected to be tendered over the next several years In addition to a growing involvement in large projects in response to changing market conditions Aecon is also active in the Public Private Partnership P3 market in Canada The P3 procurement model typically involves a transfer of certain risks to a contractor beyond those contained in a conventional fxed price contract As such a failure to properly execute and complete a P3 project may subject Aecon to signifcant losses In addition previously announced or anticipated projects in the Alberta oil sands and commodities mining sector continue to grow in size scope and complexity The risks associated with such large scale infrastructure and industrial projects are often proportionate to their size and complexity thereby placing a premium on risk assessment and project execution Joint ventures are often formed to undertake a specifc project jointly controlled by the partners and are dissolved upon completion of the project Aecon selects its joint venture partners based on a variety of criteria including relevant expertise past working relationships as well as analysis of prospective partners fnancial and construction capabilities Joint venture agreements spread risk between the partners and they generally state that companies supply their proportionate share of operating funds and that they share profts and losses in accordance with specifed percentages Nevertheless each participant in a joint venture is usually liable to the client for completion of the entire project in the event of a default by any of its partners Therefore in the event that a joint venture partner fails to perform its obligations due to fnancial or other diffculties Aecon may be required to make additional investments or provide additional services which may reduce or eliminate proft or even subject Aecon to signifcant losses with respect to the joint venture As a result of the complexity and size of such projects that Aecon has pursued in recent years or is likely to pursue going forward the failure of a joint venture partner on a larger more complex project could have a more signifcant impact on Aecons results The contract price on large projects is based on cost estimates using a number of assumptions Given the size of these projects