NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 20 – SIGNIFICANT DIFFERENCES BETWEEN CANADIAN AND U.S. GAAP NET INCOME RECONCILIATION Year ended December 31  (millions of dollars except per share amounts) 2001 2000 1999 Net income from continuing operations as reported in accordance  with Canadian GAAP 737 729 552 U.S. GAAP adjustments Preferred securities charges 1 (77) (78) (82) Tax impact of preferred securities charges 32 34 36 Unrealized loss on derivatives 2 (14) – – Tax impact of loss on derivatives 6 – – Gain on early retirement of long-term debt 3 – (15) – Tax impact on gain on early retirement of long-term debt – 2 – Income taxes from substantively enacted tax rates 4 28 (28) – Income taxes 5 – – (15) Income from continuing operations in accordance with U.S. GAAP 712 644 491 Net (loss)/income from discontinued operations in accordance  with U.S. GAAP 6 (67) 61 (486) Income before cumulative effect of the application SFAS No. 133  in accordance with U.S. GAAP 2 645 705 5 Cumulative effect of the application of SFAS No. 133, net of tax (2) – – Extraordinary item:  Gain on early retirement of long-term debt, net of tax – 13 – Net income in accordance with U.S. GAAP 643 718 5 Basic and diluted net income/(loss) per share in accordance with U.S. GAAP Continuing operations $ 1.45 $ 1.28 $ 0.91 Discontinued operations (0.14) 0.13 (1.03) Extraordinary item – 0.03 – $ 1.31 $ 1.44 $ (0.12) 1 Under U.S. GAAP, the financial charges related to Preferred Securities are recognized as an expense, rather than dividends. 2 Effective January 1, 2001, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivatives and Hedging Activities". SFAS No. 133 requires that all derivatives be recognized as assets and liabilities on the balance sheet and measured at fair value. 3 Under U.S. GAAP, gain on early retirement of long-term debt is recognized as an extraordinary item, rather than ordinary income from operations. 4 Under U.S. GAAP, only enacted rates can be used in measuring deferred tax assets and liabilities; use of substantively enacted rates is not permitted. The February 2000 and October 2000 Federal budgets would not be considered enacted until the proposals were completely enacted into law in June 2001 and, accordingly, the related tax recoveries are recognized in 2001. 5 Under U.S. GAAP, the liability method is used to calculate deferred income taxes and deferred income tax expense is calculated as the net change in the deferred tax asset or liability in the year. Prior to 2000, the deferral method was used under Canadian GAAP. 6 In 1999, the loss from discontinued operations was $48 million lower than the amount recorded under Canadian GAAP as a result of differences in previously recorded asset impairment provisions. For derivatives designated as fair value hedges, changes in the fair value are recognized in earnings together with an equal or lesser amount of changes in the fair value of the hedged item attributable to the hedged risk. For derivatives designated as cash flow hedges, changes in the fair value of the derivative that are effective in offsetting the hedged risk are recognized in other comprehensive income until the hedged item is recognized in earnings. Any ineffective portion of the change in fair value is recognized in earnings each period. On initial adoption of SFAS No. 133 on January 1, 2001, additional assets of $93 million and liabilities of $99 million were recorded for U.S. GAAP purposes to reflect the fair value of derivatives designated as hedges and the corresponding change in the fair value of items designated as hedges. A charge of $2 million, after tax, relating to the fair value of hedges was recognized in income and $4 million, after tax, relating to the fair value of derivatives designated as cash flow hedges was recognized in other comprehensive income as the cumulative effect of application of SFAS No. 133. During 2001, net gains of $36 million from the hedges of changes in the fair value of long-term debt, and offsetting net losses of $44 million in the fair value of the hedged item were included in earnings as an adjustment to interest expense and foreign exchange losses. The difference of the change in the fair value of the derivative as compared to the change in the fair value of the hedged item of $(8) million, after tax, is included in earnings for U.S. GAAP purposes. During 2001, no amounts of the derivatives' gains or losses were excluded from the assessment of hedge effectiveness in fair value hedging relationships. No amounts were included in income in 2001 with respect to cash flow hedges. For amounts included in other comprehensive income as at December 31, 2001,  $3 million relates to the hedge of interest rate risk and $2 million relates to the hedge of foreign exchange rate risk. Of these amounts, none are expected to be recorded in earnings during 2002. As at December 31, 2001, additional assets of $162 million and liabilities of $187 million were recorded for U.S. GAAP purposes to reflect the fair value of derivatives designated as hedges and the corresponding change in the fair value of items designated as hedges. 2001 ANNUAL REPORT  63