(e) Amortization The Company follows the sinking-fund method of amortizing its buildings and improvements. Under this method, amortization is charged to income in increasing annual amounts consisting of fixed annual sums, together with interest compounded at the rate of 5% per annum, so as to fully amortize the properties over their estimated useful lives, which vary but do not exceed 40 years. Leasing fees and tenant inducements incurred on securing leases, other than initial leases, are amortized over the term of such leases on a straight-line basis. The values of the above and below-market leases are amortized and recorded as either an increase (in the case of below-market leases) or a decrease (in the case of above-market leases) to property rental revenue over the remaining term of the associated leases. The value of in-place leases and tenant relationships is amortized over the expected term of the relationship. Tenant improvements are amortized over the remaining life of the associated leases. The Company amortizes commitment fees and other costs incurred in connection with debt financing over the term of such financing on a straight-line basis. Cash and cash equivalents are comprised of cash and short-term market investments with original maturities of three months or less. The Company carries on business in the United States through operationally and financially self- sustaining entities. Assets and liabilities denominated in United States dollars are translated into Canadian dollars at year-end exchange rates. The resulting net gains or losses are accumulated as a separate component of shareholders’ equity. Revenues and expenses denominated in United States dollars are translated at the weighted average daily exchange rate for the year. (f) Cash and Cash Equivalents (g) Foreign Currency (h) Derivative Financial Instruments Derivative financial instruments are utilized by the Company in the management of its foreign currency and interest rate exposures. The Company does not utilize derivative financial instruments for trading or speculative purposes. The Company uses forward exchange contracts to manage its foreign exchange risk exposures. The resulting gains or losses on forward exchange contracts, which represent designated hedges of foreign currency-denominated cash flows, are recorded in the cumulative translation account in shareholders’ equity as an offset to the above gains or losses. Any excess gains or losses arising from differences between the notional amount of the forward exchange contracts and the actual cash flows are recorded in the consolidated statements of operations. From time to time, the Company may enter into interest rate swap contracts to modify the interest rate profile of its outstanding debt without an exchange of the underlying principal amount. The initial cost of entering into such transactions is recorded as interest expense over the term of the debt. Any ongoing difference payable or receivable on such transactions is recorded as an adjustment to interest expense. 53 First Capital Realty Annual Report 2003