H&R REAL ESTATE INVESTMENT TRUST  H&R FINANCE TRUST  Years ended December 31, 2010 and 2009  1.  Significant accounting policies (continued): Notes to Combined Financial Statements   (In thousands of dollars, except unit and per unit amounts)  The REIT has a unit option plan available for officers, employees and certain trustees as disclosed in note 11(a). Any  consideration paid by optionholders on exercise of unit options is credited to unitholders’ equity. All options granted  under the option plan are fair valued and expensed over the vesting period of three years. The Trusts consider deposits in banks, certificates of deposit and short-term investments with original maturities of three  months or less from the acquisition date as cash and cash equivalents. Restricted cash includes tenant rent deposits and amounts held in reserve by lenders to fund repairs and capital  expenditures or to cover property tax payments as required by either a mortgage or under the terms of a purchase and  sale agreement.  The REIT accounts for its investments in the United States (“foreign operations”) as self-sustaining operations. Assets  and liabilities of foreign operations are translated into Canadian dollars at the exchange rates in effect at the balance  sheet dates and revenue and expenses are translated at the average exchange rates for the years. The foreign  currency translation adjustment is recorded as a separate component in accumulated other comprehensive income until  there is a reduction in the REIT’s net investment in the foreign operations.  The U.S. dollar denominated bank indebtedness is designated as a hedge of the REIT’s investment in self-sustaining  operations. Accordingly, the accumulated unrealized gains or losses arising from the translation of this obligation are  recorded as a foreign currency translation adjustment in accumulated other comprehensive income.  Finance Trust’s U.S. dollar denominated assets and liabilities are translated into Canadian dollars at the exchange rates  in effect at the balance sheet dates and revenue and expenses are translated at the actual exchange rates incurred,  resulting in any gains/losses recorded in earnings. Derivative financial instruments are utilized by the REIT in its management of its foreign currency, interest rate and utility  price exposures. The REIT formally documents all relationships between hedging instruments and hedged items, as  well as its risk management objective and strategy for undertaking various hedge transactions. The REIT also formally  assesses, both at the hedge’s inception and on an ongoing basis, whether hedging relationships will be highly effective. The fair value of the hedging instrument is recorded on the combined balance sheets. The effective portion of the hedge  is recorded in other comprehensive income and the ineffective portion is recognized in net earnings. (g) Unit option plan:  (h) Cash and cash equivalents:  (i) Restricted cash:  (j) Foreign currency translation:  (k) Derivative financial instruments:  9 