47 TORSTAR 2004 MANAGEMENT’S TORSTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ACCOUNTING POLICIES The company manages its exposure to currency  fluctuations, primarily U.S. dollars, through the use of derivative financial instruments. Foreign exchange contracts and options to sell U.S. dollars have been designated as hedges against future Book P ublishing revenue. Gains and losses on these instruments are accounted for as a component of the related hedged transaction. Foreign exchange contracts which do not qualify for hedge accounting are reported on a mark to market basis in Book Publishing earnings (see note 1(r) with respect to change in accounting policy). Machinery and Equipment: Leasehold Improvements: These assets are recorded at cost and depreciated over their estimated useful lives. The rates and methods used for the major depreciable assets are: Buildings: The fair value of the company’s financial instruments approximates their carrying value unless otherwise stated. (TABULAR AMOUNTS IN THOUSANDS OF DOLLARS) The consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles (“GAAP”). The following is a summary of  significant accounting policies. The consolidated financial statements include the accounts of the company and all its subsidiaries and joint ventures. The major subsidiaries are: Toronto Star Newspapers Limited; Harlequin Enterprises Limited (“Harlequin”); Metroland Printing, Publishing & Distributing Ltd. (“Metroland”), and CityMedia Group Inc. The company proportionately consolidates its joint ventures. Assets and liabilities denominated in foreign  currencies have been translated to Canadian dollars primarily at exchange rates prevailing at the year end. Revenues and expenses are translated at average rates for the year. Translation exchange gains or  losses relating to self-sustaining foreign operations, principally in Europe and Asia, are deferred and included in shareholders’ equity as foreign currency translation adjustments. proportionate amount of these deferred gains or losses are recognized in income when there is a reduction in the company ’s net investment in the foreign operation. Receivables are reduced by provisions for anticipated book returns and estimated bad debts which are determined by reference to past experience and expectations. Inventories are valued at the lower of cost and net realizable value. Cash and cash equivalents consists of cash in bank and short-term investments with maturities on  acquisition of 90 days or less. The fair value of derivative financial instruments reflects the estimated amount that the company would have been required to pay if forced to  settle all unfavourable outstanding contracts or  the amount that would be received if forced to  settle all favourable contracts at year end. The fair value represents a point-in-time estimate that may not be relevant in predicting the company’s future earnings or cash flows. The company does not engage in trading or other speculative activities with respect to derivative  financial instruments. The company uses interest rate swap contracts to manage interest rate risks and has designated all interest rate swap contracts as hedges. Payments and receipts under interest rate swap contracts are  recognized as adjustments to interest expense on an  accrual basis. Any resulting carrying amounts are included in receivables in the case of favourable  contracts and accounts payable in the case of unfavourable contracts. DECEMBER 31, 2004 AND 2003 – straight-line over 10 to 20 years or 20% diminishing balance – straight-line over the life of the lease – straight-line over 25 years or 5% diminishing balance (g) Property, plant and equipment (f) Inventories (c) Financial instruments (b) Foreign currency translation (e) Receivables (d) Cash and cash equivalents (a) Principles of consolidation