(i) Convertible Debentures The Company presents its convertible debentures in their debt and equity component parts where applicable, as follows: (i) The debt component represents the value of the semi-annual interest obligations to be satisfied by cash, discounted at the rate of interest that would have been applicable to a debt-only instrument of comparable term and risk at the date of issue. As a result, a portion of the semi-annual interest payments has been treated as a reduction of the debt component and the remainder as interest expense. (ii) The equity component of the convertible debentures is presented under “Shareholders’ Equity” in the consolidated balance sheets. A value is ascribed to the equity component as a result of the Company’s ability upon maturity to convert the debentures into common shares, and is increased over its term to the full face value of the debentures by an annual charge to the deficit. In addition, debentures that provide the Company with the ability to satisfy the interest payments through the issuance of common shares are also included in the equity component of convertible debentures. A value is also ascribed to the conversion right granted to the holder, which remains a fixed amount over the term of the debentures. (iii) Debenture issue costs are proportionately allocated to their respective debt and equity components. The debt component of the issue costs is classified as deferred financing costs, and is amortized on a straight-line basis over the term of the debentures. The equity component of the issue costs reduces the carrying value of the equity component of the convertible debentures. (j) Income Taxes Income taxes are accounted for using the liability method. Under this method, future income taxes are recognized for the expected future tax consequences of differences between the carrying amount of balance sheet items and their corresponding tax values. Future income taxes are computed using substantively enacted corporate income tax rates for the years in which the differences are expected to reverse. (k) Stock-Based Compensation Plan The Company has a stock-based compensation plan, which is described in note 12(d). Any consideration paid on the exercise of stock options is credited to share capital.  The Company accounts for stock-based compensation using the fair value method. Under the fair value method, compensation expense for stock-based compensation is measured at fair value at the grant date using an option pricing model and is recognized over the vesting period. (l) Use of Estimates The preparation of the Company’s financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenue and expenses during the reporting year. Actual results could differ from such estimates. 54 First Capital Realty Annual Report 2003 Notes to the Consolidated Financial Statements  continued 1 Significant  Accounting Policies continued