page 41 Bombardier Inc. Annual Report 2003-04 Basis of presentation Transactions in foreign currencies Future currency exposure Translation of self-sustaining  foreign operations In the aerospace segment, the Corporation uses forward foreign exchange contracts to manage its currency exposure arising from anticipated foreign currency cash flows, mainly the U.S. dollar. The forward foreign exchange contracts typically extend from one- to 24-month  periods. Therefore, a significant portion of the currency fluctuations will impact the results of operations with a similar time lag.The forward Effective the first quarter of fiscal year 2005, the Corporation will also change its reporting currency to the U.S. dollar.  Effective February 1, 2004, the Corporation changed its functional currencies from the Canadian dollar and the sterling pound  to the U.S. dollar for the Canadian and U.K. operations in the aerospace segment, and from the Canadian dollar and the Mexican  peso to the U.S. dollar for the Canadian and  Mexican operations in the transportation  segment. The European operations of the transportation segment continue to mainly  use western European currencies as their  functional currencies. The main impact of the year-end exchange rate fluctuations on the financial position of the Corporation as at January 31, 2004 was a reduction of the U.S. dollar- and sterling pound- denominated consolidated balance sheet items. The effect of these translation adjust- ments is included in the deferred translation adjustment account in the consolidated  statements of shareholders’ equity and has no impact on net income. The Corporation is subject to currency fluc- tuations from the translation of statement of income items and of assets and liabilities  of self-sustaining foreign operations using a functional currency other than the Canadian dollar, mainly the U.S. dollar, the euro and  the sterling pound and from transactions in foreign currencies, mainly the U.S. dollar.  Effect of currency fluctuations Fiscal year ended January 31, 2004 As a result of the fluctuation in the average exchange rates shown above, revenues and earnings before taxes (EBT) of the euro- denominated foreign operations translated  in Canadian dollars, mainly in the transpor- tation segment, were positively impacted. Revenues and EBT of the U.S. dollar- and sterling-pound-denominated foreign operations were negatively impacted. foreign exchange hedge contracts, in the  aerospace segment, mitigated the negative impact of the weakening of the U.S. dollar compared to the Canadian dollar by approxi- mately $250 million during fiscal year 2004. The transportation segment primarily uses western European and U.S. currencies as its functional currencies. Under the Corporation’s foreign exchange policy, foreign currency denominated risks are hedged on a contract- by-contract basis at the inception of the respective contracts. Accordingly, contract  margins are not expected to be significantly affected by currency fluctuations, assuming hedge effectiveness. The Summary of significant accounting poli- cies accompanying the Consolidated Financial Statements describes the significant account- ing principles followed by the Corporation. BC’s operations and financial position are fundamentally different from those of the manufacturing segments. As such, the capital markets use different performance indicators from those used for the manufacturing oper- ations to analyze and measure these two distinct businesses. The following discussion and analysis segregates these two types of businesses to better highlight their respective characteristics. The consolidated balance sheets are unclassified. The consolidated operations of the Corporation are referred to hereafter as the Corporation  or Bombardier Inc., the manufacturing opera- tions are referred to as Bombardier and the  financial and real estate services as BC. This  presentation has no impact on net income and shareholders’ equity. AVERAGE EXCHANGE RATES INCREASE  2004 2003 (DECREASE) U.S. dollar 1.3812 1.5655 (12%) Euro 1.5817 1.5018 5% Sterling pound 2.2760 2.3751 (4%) The average exchange rates used for the years ended January 31 to translate statement of income items were as follows: YEAR-END RATES INCREASE  2004 2003 (DECREASE) U.S. dollar 1.3264 1.5290 (13%) Euro 1.6520 1.6421 1% Sterling pound 2.4156 2.5151 (4%) The year-end exchange rates used to translate assets and liabilities were as follows as  at January 31: