Note 1. Summary of Significant Accounting Policies

The consolidated financial statements of the Plan reflect the financial position and the changes in its net assets available for benefits. These consolidated statements are prepared in accordance with Canadian generally accepted accounting principles (GAAP) and comply with the requirements of CICA Handbook Section 4100 (Pension Plans). Certain comparative amounts have been reclassified to conform to the current year’s presentation.  The significant accounting policies followed in the preparation of these consolidated financial statements are summarized below.

a) Principles of Consolidation

The consolidated financial statements include the assets, liabilities and the changes in net assets of HOOPP and its wholly owned investment subsidiaries, as well as its proportionate share of the fair value of assets, liabilities, and other operations resulting from real estate joint ventures, after elimination of all inter-company transactions and balances.

b) Valuation of Investments

Investments are stated at fair value. Fair value represents the amount of consideration that would be agreed upon in an arm’s length transaction between knowledgeable and willing parties who are under no compulsion to act.

Fair values of investments are determined as follows:

i. Short-term money market securities are recorded at cost or amortized cost, which together with accrued interest or discount earned, approximates fair value.

ii. Bonds are valued based on market quotes using the average of the bid and ask prices. Where quoted year-end prices are not available, estimated values are calculated using discounted cash flows based on current market yields and comparable securities, as appropriate.

iii. Equities owned and sold short are valued at year-end quoted market prices.

iv. Securities sold under agreements to repurchase, all of which mature within 90 days, are treated as collateralized borrowing transactions and are recorded at cost.  Accrued interest on repurchase agreements is included in interest expense as part of net investment income.

v. Private equities are valued based on estimated fair values determined using appropriate valuation techniques, and management’s best estimates.

vi. Real estate, consisting primarily of income-producing properties, is generally valued based on latest appraisal values determined at least once every two years by accredited external appraisers. Investments are typically carried at cost in the year of acquisition, as an approximation of fair value, unless specific and conclusive reasons exist to change the value.

vii. Exchange-traded derivatives are based on quoted market prices. For non exchange traded derivatives where quoted market values are not readily available, appropriate valuation techniques are used to determine fair value.

c) Investment Transactions and Income

Investment transactions, including gains and losses realized upon dispositions, are recognized on a trade-date basis. Investment income, comprising interest income and expense, and real estate operating income net of expenses, is recorded on an accrual basis; dividend income is recognized on the ex-dividend date.  Unrealized gains and losses on investments represent the change in the difference between the cost-based values and the fair values of investments at the beginning and end of each year. 

On October 1, 2007, the Emerging Issues Committee (EIC) approved EIC-168 “Accounting by Pension Plans for Transactions Costs”, requiring Pension Plans to expense transaction costs, i.e. acquisition costs, in the period in which they are incurred.  HOOPP adopted this new requirement in 2007 but no adjustments have been made to the financial statements as the amounts are immaterial for financial reporting purposes.

d) Foreign Currency Translation

Assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the rate of exchange prevailing at the year-end date.  Income and expenses are translated into Canadian dollars at the rate of exchange prevailing on the dates of the transactions.  The realized gains and losses arising from these transactions are included in realized gains and losses on the sale of investments. Unrealized gains and losses on translation are included in the change in unrealized gains and losses on investments.

e) Accrued Pension Benefits

Accrued pension benefits are determined based on an actuarial valuation prepared by an independent actuarial consulting firm.  The year-end valuation of accrued pension benefits is based on data extrapolated to the current valuation date of December 31, 2007. The valuation uses the projected accrued benefit actuarial cost method pro-rated on service and management’s estimate of certain future events.

f) Actuarial Asset Value Adjustment

The actuarial value of net assets available for benefits has been determined in a manner that reflects long-term market trends consistent with assumptions underlying the actuarial present value of accrued pension benefits.

This value has been determined by taking an average of the current market value of net assets and the market values for the four preceding years brought forward with interest at the asset valuation rate and adjusted for contributions, benefit payments, and administrative expenses.

The impact of this adjustment is to decrease the net assets available for benefits by $1,650 million (2006: decrease $2,709 million).  This is a common actuarial practice and has the effect of stabilizing the contribution rates of the Plan during periods of short-term market volatility.

g) Contributions

Contributions from members and employers are recorded on an accrual basis.  Contributions for past service purchases and transfers are recorded when received. 

h) Benefits

Benefit payments to members and pensioners are recorded in the period in which they are paid.  Any benefit payment accruals not paid are reflected in the accrued pension benefits.

i) Use of Estimates

In the preparation of these consolidated financial statements, management uses estimates and assumptions based on current available information.  Such estimates and assumptions may affect the reported amounts of assets and liabilities, revenue and expenses, accrued pension benefits and related disclosures.  Actual results could differ from those estimates.