FOR AGES GAR ANT & FR ` ERES INC. NOTES TO THE FINANCIAL ST A TEMENTS 1. DESCRIPTION OF THE BUSINES S F orage Garant & F r ` eres Inc. (the ‘‘company’’), incorporated under the Canada Business Corporations A ct, operates a diamond drilling business in Canada. On October 1, 2006, 4382463 Canada Inc. acquired all issued and outstanding shares of the company. All operating assets and lia bilities were then transferred to Garant Bros. Drilling, a General P artnership. 4382463 Canada Inc. and the company were then amalgamate d and was renamed F orages Garant & F r ` eres Inc. 2. CHANGE IN ACCOUNTING POLICY Income taxes The company adopted the recommendations of CICA Handbook Section 3465 on accounting for income taxes, which require the use of the liability method of accounting for income taxes. This accounting policy, which was adopted as of July 1, 2004, was applied retroactively with restatement. The cumulative effect of the change is as follows: June 30, September 30, 2006 2006 2005 $$$ Decrease in opening retained earnings ......................... 256,902 175,352 158,177 Increase in future income taxes ............................. 245,856 256,902 175,352 Increase (decrease) in net earnings ........................... (11,046) 81,550 17,175 3. SIGNIFIC ANT ACCOUNTING POLICIES The financial statements have been prepared in accordance with Canadian generally accepted accounting principles and includes t he following significant accounting policies: Inventories The company maintains an inventory of operating supplies, drill rods and drill bits. Inventories are valued at the lower of cos t and replacement cost. Cost is determined on the first-in, first-out basis. Used inventories and inventories on jobs are valued at 5 0% of cost. Capital assets Capital assets are recorded at cost less accumulated amortization and amortization is calculated using the straight-line method based on their respective estimated useful lives as follows: P arking .................................................................... 1 0 years Buildings ................................................................... 5 t o 4 0 years Office equipment .............................................................. 5 years Drilling equipment ............................................................. 5 t o 1 0 years Machinery and equipment ........................................................ 1 5 t o 2 0 years Computer equipment ............................................................ 5 years V ehicles .................................................................... 5 t o 1 0 years Impairment of long-lived assets L ong-lived assets are tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss is recognized when their carrying value exceeds the total undiscounted cash flows expected f rom their use and eventual disposition. The amount of the impairment loss is determined as the excess of the carrying value of the asset over its fair value. R evenue recognition R evenue from drilling contracts is recognized on the basis of actual meterage drilled for each contact. R evenue from ancillary services is recorded when the service is rendered. The company recognizes revenue when persuasive evidence of an arrangement exists, servic e has been rendered, the price to the buyer is fixed or determinable and collection is reasonably assured. F-49