ODYSSEY RE HOLDINGS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued Deferred federal income taxes are provided for temporary differ ences between the financial statement and tax bases of assets and liabilities. Such differences relate principally to deferred acquisition costs, unearned premiums, unpaid losses and loss adjustment expenses and investments. (h) All derivative instruments are recognized as either assets or liabilities on the balance sheet and measured at their fair value. Gains or losses from changes in the derivative values ar accounted for based on how the derivative is used and whether it qualifies for hedge accounting. (i) The Company has identified its operating segments to reflect the manner in which management monitors and evaluates the Company’s financial performance. The Company’s operations ar e comprised of four segments: Americas, EuroAsia, London Market and U.S. Insurance. (j) The Company translates the financial statements of its foreign subsidiaries to United States dollars by translating balance sheet accounts at the balance sheet date exchange rate and income statement accounts at the average exchange rate for the year. Translation gains or losses are recorded, net of deferred income taxes, as a component of comprehensive income. Foreign currency transaction gains or losses are reflected in the statement of operations in the period they are realized. (k) Basic earnings per share ar calculated by dividing net income by the weighted average number of common shares outstanding, excluding those non-vested shares granted under the OdysseyRe Restricted Share Plan. Diluted earnings per share ar calculated by dividing net income by the weighted average number of common shares outstanding, inclusive of: vested and non-vested shares, as determined using the treasury stock method, granted under the OdysseyRe Restricted Share Plan; stock options that would be assumed to be exercised on the balance sheet date; and the effect of the conversion of OdysseyRe’s convertible debt to equity securities (see note 8). Restricted shar es, stock options or the effect of the conversion of the convertible debt would not be included in the calculation of diluted earnings per share, if the effect would be anti-dilutive. The Emerging Issues Task Force (“EITF”) Issue 4-08 “The Effect of Contingently Convertible Instruments on Diluted Earnings Per Share,” which is effective for periods ending after December 15, 2004, requires that the dilutive effect of contingently convertible debt securities, with a market price threshold, should be included in diluted earnings per share. The terms of OdysseyRe’s convertible senior debentures (see note 17) meet the criteria defined in EITF Issue 4-08, and accordingly, the effect of conversion of OdysseyRe’s senior debentures to common stock has been assumed when calculating its diluted earnings per share. The diluted earnings per shar for the years ended December 31, 2003 and 2002 have been restated to conform to the requirements of EITF Issue 4-08. (l) In April 2002, the Company’s stockholders approved the Odyssey Re Holdings Corp. 2002 Stock Incentive Plan (the “2002 Plan”). Effective January 1, 2003, the Company adopted the expense recognition provisions of Statement of Financial Accounting Standards (“SFAS”) 123, “Accounting for Stock-Based Compensation,” on a prospective basis, in accordance with SFAS 148, “Accounting for Stock-Based Compensation-Transaction and Disclosure” with respect to the 2002 Plan. The prospective method requires the application of the fair value based method to compensation awards granted, modified, or settled on or after the date of adoption. Accordingly net income for the years ended December 31, 2004 and 2003 reflects stock-based compensation expense related to stock options granted in 2003 and subsequently . For stock options granted during 2002, the Company accounted for stock-based compensation based on the intrinsic-value method prescribed in Accounting Principles Board Opinion (“APB”) 25, “Accounting for Stock Issued to Employees” and re lated interpretations, as permitted under SFAS 123. Had compensation cost been charged to earnings in accordance with the fair value based method as prescribed in SFAS 123 for all outstanding stock-based compensation awards (occurring both before and after adoption of the recognition provisions of SFAS 123), the Company’s net income and net income per share (on a pr o forma basis) would have been as follows (in thousands, except per share amounts): 50