Critical Accounting Estimates and Judgments The Corporation makes estimates and assumptions concerning the future that will, by definition, seldom equal actual results. The following are the  estimates and judgments applied by management that most significantly affect the Corporation's financial statements. These estimates and judgments have a risk of causing a material adjustment to the carrying values of financial assets and financial liabilities within the next financial year. 2013 ANNUAL REPORT  67 Areaof Significance Critical Estimate Critical Judgment Capital assets, projects under development and intangible assets – carrying values Fair value estimates are required in the  determination of the net assets acquired  in a business combination and in the  impairment assessment for our capital  assets and the assignment of amounts to  the asset retirement obligations, as well  as assessing capitalization criteria for  project development costs. • Estimates are based on assumptions that are sensitive to change, which  may have a significant impact on the valuations performed. • Impairment reviews of the carrying value of capital and other long-lived assets along with the asset retirement obligations require management to  estimate fair value based on future cash flows, discount rates and business  performance. • Initial fair value of net  assets • Estimated useful lives and  residual value • Estimated future cash  flows • Expected settlement date and amount • Discount rate • Decision criteria for  capitalization of  development costs Retirement benefits The present value of defined benefit  pension obligations is dependent on actuarial calculations, which include a  number of assumptions. • Assumptions include the discount rate, which is used to calculate the present value of the estimated future cash outflows that will be required to meet the pension obligations. In determining the discount rate to use, the Corporation considers market yields of high quality corporate bonds, denominated in UK pounds sterling, that have times to maturity approximating the terms of the pension liability. • Future cash flows and discount rate Deferred income taxes Estimates in the determination of  deferred income taxes affect asset and  liability balances. • The determination of the deferred income tax balances of the Corporation requires management to make estimates of the reversal of existing temporary differences between the accounting and tax bases of assets and liabilities in future periods. • Timing of reversal of  temporary differences • Tax rates • Current and future taxable  income Financial instrument fair value  measurements When observable prices are not available, fair values are determined by using  valuation techniques that refer to  observable market data. This is  specifically related to Capstone's  financial instruments. • Management's valuation techniques include comparisons with similar  instruments where market observable prices exist, discounted cash flow analysis, option pricing models and other valuation techniques commonly  used by market participants.  • For embedded derivatives, fair values are determined from valuation  techniques using non-observable market data or transaction processes.  A number of factors such as bid-offer spread, credit profile and model  uncertainty are taken into account, as appropriate. • Interest rate • Natural gas rate • Direct customer rate Accounts receivable The allowance for doubtful accounts for  Bristol Water is calculated based on an  assessment of expected cash flows.  Collective impairment losses on  receivables with similar credit risk are  calculated using a statistical model. • The probability of failing to recover accounts receivable is determined by considering past experience, adjusted for changes in external factors. The accuracy of the impairment calculation would therefore be affected by unexpected changes to the economic situation, and to changes in customer behavior. To the extent that the failure to recover debts in arrears alters by 5%, the provision for impairment would increase or decrease by $528. • Probability of a failure to recover accounts receivable when they fall into arrears Accounting for investments in non- wholly owned subsidiaries When Capstone owns a partial interest in  an entity, significant judgment is required  to determine the proper accounting  treatment. Capstone consolidates upon  evaluating its ability to control a  subsidiary. • No critical estimates are involved in determining control. • Determine how relevant activities are directed  (either through voting  rights or contracts) • Determine if Capstone has  substantive or protective rights • Determine Capstone's  ability to influence returns