H&R REIT AND H&R FINANCE TRUST - MD&A - December 31, 2010  SECTION IV  CRITICAL ACCOUNTING ESTIMATES  The preparation of the Trusts’ combined financial statements requires management to make estimates and judgements that affect  the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements  and reported amounts of revenue and expenses during the reporting period. The Trusts’ combined financial statements have been  prepared in accordance with Canadian GAAP.  Management believes the policies which are most subject to estimation and judgements are outlined below. For a detailed  description of these and other accounting policies refer to note 1 of the December 31, 2010 audited combined financial statements of  the Trusts. The REIT is required to write down to fair value any of its income properties that were determined to have been impaired. The  analysis required is dependent upon a review of estimated undiscounted future cash flows from operations over the anticipated  holding period. This review involves subjective assumptions of, among other things, estimated occupancy and rental rates, all of  which can affect the ultimate value of the property. In the event these factors result in a carrying value that exceeds the sum of  future undiscounted cash flows expected to result from the ongoing use and ultimate residual value of the properties, an impairment  would be recognized. During 2010, the REIT recorded an impairment loss of $14.9 million relating to two properties formerly  tenanted by A&P. During 2009, the REIT recorded an impairment loss of $14.8 million relating to four properties formerly tenanted  by Circuit City and Bruno’s Supermarkets LLC. The REIT also evaluates the fair value of mortgages receivable to determine whether any impairment provisions are required. Impairment is recognized when the carrying value of the mortgage receivable will not be recovered as determined by the economic  value of the underlying security and/or the financial covenant of the issuer of the security. No impairments of mortgages receivable  were recorded during 2010 or 2009.  Upon the acquisition of a property, a significant portion of the cost is allocated per management’s determination to the building  component of the property. In addition, the REIT is required to assess the useful lives of its income properties in order to determine  the amount of building depreciation to record on a quarterly and annual basis.  The REIT depreciates its income properties and building improvements on a straight-line basis over their estimated useful lives. In  the event the allocation to either the building or paving and equipment component is inappropriate or the estimated useful life of the  properties are not correct, the amount of depreciation expensed quarterly and annually, which affects the REIT’s future net earnings  might not be appropriate.  For acquisitions of properties initiated on or after September 12, 2003, the CICA has issued guidance for accounting for operating  leases assumed in connection with these acquisitions. Through management’s judgment and estimates, the purchase price must be  allocated to land site improvements, building, the above- and below-market value of in-place operating leases, the fair value of  tenant improvements, in-place leasing costs and the value of the relationship with the existing tenants.  These estimates will impact rentals from income properties, depreciation expense and amortization expense recorded on both a  quarterly and annual basis.  During the second quarter of 2010, the REIT completed necessary restructuring to qualify for the REIT Exemption commencing  January 1, 2011. The REIT will not be subject to the SIFT Rules provided that the REIT qualifies for the REIT Exemption at all times  after 2010. See the “Tax Risk” section for further discussion. Accordingly, the net future income tax liability of $125.3 million  recorded as at March 31, 2010, was reversed into net earnings as at June 30, 2010. Page 33 of 45  Income Tax  Property Acquisitions  Depreciation of Income Properties  Impairment of Assets