Orbit Garant 2012 annual rep O rt 45 Financing fees Financing fees related to long-term debt are capitalized in reduction of long-term debt and amortized using the effective i nterest rate. Leases Assets under leasing agreements are classifed at the inception of the lease as (i) fnance leases whenever the terms of the leas e transfer substantially all the risks and rewards of ownership of the asset to the lessee, or as (ii) operating leases for all other leas es. All of the Company’s current leases are classifed as operating leases. Operating lease rentals are recognized in the consolidated statement of earnings on a straight-line basis over the peri od of the lease. Any lessee incentives are deferred and then recognized evenly over the lease term. Revenue recognition Revenue from drilling contracts is recognized on the basis of actual meters drilled for each contact. Revenue from ancillary s ervices is recorded when the service is rendered and revenue from the sale of drilling rigs is recorded at shipping. The Company recogni zes revenue when persuasive evidence of an arrangement exists, service has been rendered, merchandise has been shipped, the pric e to the buyer is fxed or determinable and collection is reasonably assured. Earnings per share Earnings per share are calculated using the weighted daily average number of shares outstanding during the year. Diluted earnings per share are determined as net earnings, divided by the weighted average number of diluted common shares for the period. Diluted common shares refect the potential dilutive effect of exercising the stock options based on the treasury stock method. Stock options The Company uses the fair value method to account for stock options. In accordance with this method, compensation cost is meas ured at the fair value of the option at the grant date using the Black-Scholes option pricing model and is amortized to earnings over the vesting period. The fair value is recognized as an expense with a corresponding increase in equity settled reserve. The amount recogni zed as an expense is adjusted to refect the number of stock options expected to vest. When unexercised stock options are forfeited or ex pired, the amounts are transferred to retained earnings. 4. CRITICAL ACCOUNTING ESTIMATES, ASSUMPTIONS AND J UDGMENTS Estimates, assumptions and judgments are continually evaluated by the Company and are based on historical experienc e and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Company makes estimates, assumptions and judgments concerning the future. Actual results could differ from these estimates . The estimates, assumptions and judgments that have a risk of causing a material adjustment to the carrying amounts of assets and li abilities within the next fnancial year, are addressed below. Inventories Inventory is measured at the lower of cost and net realizable value. In estimating net realizable values, management takes i nto account the most reliable evidence available at the time the estimates are made. Net realizable value is the estimated selling price less the estimated cost necessary to make the sale. 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 exis ts. Useful lives of depreciable assets Amortization methods, residual values and useful lives of property, plant and equipment are reviewed at each reporting date by the management. Any changes is accounted for prospectively as a change in accounting estimate. As at June 30, 2012, management assesses that the useful lives represent the expected utility of the assets to the Company. Business combinations On initial recognition, the assets and liabilities of the acquired business are included in the consolidated balance s heet of the Company at their fair values. In measuring fair value, management uses estimates about future cash fows and discount rates , however, the actual results may vary. Any measurement changes upon initial recognition would affect the measurement of Goodwill.