Orbit Garant 2012 annual rep O rt 43 Financial instruments Financial assets and fnancial liabilities are initially recognized at fair value and their subsequent measurement is dependent on their classifcation as described below. Their classifcation depends on the purpose for which the fnancial instruments were acqui red or issued, their characteristics and the Company’s designation of such instruments. Settlement date accounting is used. Asset/Liability Classifcation Measurement Cash Loans and receivables Amortized cost Accounts receivable Loans and receivables Amortized cost Bank overdraft Other liabilities Amortized cost Accounts payable and accrued liabilities Other liabilities Amortized cost Contingent consideration — Fair value Long-term debt Other l iabilities Amortized cost Amortized cost and effective interest method The effective interest method is a method of calculating the amortized cost of a fnancial instrument and of allocating interes t income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash fows (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts ) through the expected life of the debt instrument, or, where appropriate, a shorter period, to the net carrying amount on initial recogniti on. Trade receivables Trade receivables are initially stated at their fair value, less an allowance for doubtful accounts and an allowance for sales returns. The Company establishes an allowance for doubtful accounts based on the specifc credit risk of its customers and historical trends . Individual trade receivables are written off when management deems them not collectible. The carrying amounts for accounts receivabl e are net of allowances for doubtful accounts, which are estimated based on aging analysis of receivables, past experience, specifc risks as sociated with the customer and other relevant information. Cash and cash equivalents Cash and cash equivalents include cash and bank overdraft of which the balance often fuctuates between the available cas h amount and the indebtedness. Inventories The Company maintains an inventory of operating supplies, drill rods and drill bits. Inventories are valued at the lower of cos t and net realizable value. Net realizable value is the estimated selling price less the estimated cost necessary to make the sale. Cost is determined on the frst-in, frst-out basis. Used and revised inventories are valued at 50% and 75% of cost respectively. The amount of the depreciation of inventories can be reversed when the circumstances that led to the impairment charge in the past no longer exists. Investments in associates Investments in associates are accounted for using the equity method. Under this method, the Company’s share in net earnings of these companies is presented in the statement of earnings. Property, plant and equipment Property, plant and equipment are stated at cost. Cost represents the acquisition costs, net of government grants and inves tment tax credits, or manufacturing costs, including preparation, installation and tes ting costs. The manufacturing costs for drilling equipment include the material, direct labour and indirect specifc costs. Borrowing costs are also included in the cost of self-constructed property , plant and equipment. Future expenditures, such as maintenance and repairs, are expensed as incurred. Cost of repairs and maintenance are charged to operations as incurred. Signifcant improvements are capitalized and amorti zed over the useful life of the asset. Property, plant and equipment are recorded at cost and amortization is calculated using the straight-line method based on thei r estimated useful life using the following periods: Buildings and components 5 to 40 years Drilling equipment 5 to 10 years Vehicles 5 years Other 3 to 10 years The amortization begins when the property, plant and equipment are ready for their intended use.