NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Deferred income tax assets are recognized to the extent that it is probable that the asset can be recovered. Deferred income tax assets and liabilities are presented as non-current. Basic and Diluted Earnings per Share Comprehensive Income Basic earnings per share is calculated by dividing the net income attributable to the shareholders' of Capstone, less dividends declared to preferred shareholders by the weighted average number of common shares and Class B exchangeable units of MPT LTC Holding LP.  Diluted earnings per share is computed in a similar manner as the basic earnings per share but reflects any dilutive effect from the conversion of  debentures into shares and the exercise of stock options and warrants. Debenture conversions and the exercise of stock options and warrants are  excluded from the computation of diluted net income per share if their effect is anti-dilutive. Other comprehensive income (“OCI”) represents changes in shareholders' equity during a period arising from transactions and other events, including unrealized gains and losses on translation of net assets of foreign operations, the equity share of OCI of equity accounted investments and  actuarial gains recognized in respect of retirement benefit obligations. OCI also includes the effective portion of the change in fair value of  designated cash flow hedges of Bristol Water less any amounts reclassified to interest and other expenses, net, in the period the underlying hedged item is also recorded in interest expense, net. Accumulated other comprehensive income (“AOCI”) is included as a component in the consolidated  statement of shareholders' equity. Financial assets and financial liabilities are recognized on the consolidated statement of financial position when the Corporation becomes a party to  the contractual provisions of the financial instrument. Financial instruments are required to be measured at fair value on initial recognition. Measurement in subsequent periods depends on the classification of the financial instrument. The Corporation has designated each of its significant categories of financial instruments outstanding as follows: Financial Instruments Classification Significant Categories Measurement Financial assets and liabilities at fair value through profit and loss • Cash and cash equivalents Restricted cash • Short-term deposits Derivative contract assets • Derivative contract liabilities • At fair value with changes in fair value recognized in the consolidated statement of income Loans and receivables • Accounts receivable  Loans receivable • At amortized cost using the effective interest method Other liabilities • Accounts payable and other liabilities Loans payable  • Finance lease obligations Long-term debt • At amortized cost using the effective interest method Transaction costs relating to financial instruments classified as loans and receivables and other liabilities are deferred and amortized over the  expected life of the instrument using the effective interest method. Transaction costs that are directly attributable to the acquisition or issue of  financial instruments classified as held-for-trading are expensed as incurred. The Corporation determines the fair value of its financial instruments based on the following hierarchy: •  Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities; •  Level 2 – Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly; and •  Level 3 – Inputs that are not based on observable market data. Offsetting of Financial Instruments Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position if there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the assets and settle the  liabilities simultaneously. Capstone has recorded no material offsetting arrangements. Derivative Financial Instruments The Corporation's derivatives are carried at fair value and are reported as assets when they have a positive fair value and as liabilities when they have a negative fair value. For the years ended December 31, 2013 and 2012, the Corporation's derivatives include interest rate swaps and foreign currency contracts. Changes in the fair values of derivative financial instruments are reported in the consolidated statement of income, except for cash flow hedges that meet the conditions for hedge accounting. The portion of the gain or loss on the hedging instruments which are determined to be an effective hedge  are recognized directly in other comprehensive income, and the ineffective portion in the consolidated statement of income. Gains or losses 64 CAPSTONE INFRASTRUCTURE CORPORATION