DIVERSIFIED ROYALTY CORP .  Notes toConsolidatedFinancial Statements  (Unaudited)  (Expressed in Canadian dollars)  Year ended December 31, 2014  3. Significant accounting policies(continued):  (k) Income tax (continued):  (l) Financial instruments:   Loans and receivables: Loans and receivable are non -derivative financial asset s with fixed  or determinable payments that are not quoted in an active market. Cash and cash  equivalents, royalties receivableand amounts receivable, are included in this category. Deferred tax is recognized in respect of temporary differences between the carrying amounts  of assets and liabilities for financial reporting purposes and the amounts used for taxa tion  purposes. Deferred tax is not recognized for the following temporary differences: the initial  recognition of assets or liabilities in a transaction that is not a business combination and that  affects neither accounting nor taxable profit or loss, and  differences relating to investments in  subsidiaries and jointly controlled entities to the extent that it is probable that they will not  reverse in the foreseeable future. Deferred tax is measured at the tax rates that are expected  to be applied to temporary differences when they reverse, based on the laws that have been  enactedor substantivelyenacted by the reporting date. Deferred tax assets and liabilities are  offset if there is a legallyenforceableright to offset current tax liabilities and assets, and they  relate to income taxes levied bysame tax authority on the same taxable entity, or on different  tax entities, but they intend to settle current tax liabilities and assets on a net basis or their  tax  assets and liabilities will be realized simultaneously. A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary  differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviews at each reporting date and are  reduced to the extent that it is no longer probable that the related tax benefit will be realized. Financial assets and liabilities are offset and the net amount is reported in the  statement of  financial positionwhen there is a legally enforceable right to offset the recognized amounts and  there is an intention to settle on a net basis or realized the asset and settle the liability  simultaneously.  At initial recognition, the Company classifies its financial instruments in the following categories  depending on the purposes for which the instruments were acquired: Loans and receivables are initially recognized at the amount expected to  be received less,  when material, a discount to reduce the loans and receivables to fair value.  Subsequently, loans and receivables are measured at amortized cost using the effective  interest method.  11 