H&R REIT AND H&R FINANCE TRUST - MD&A - December 31, 2010  5) Certain leases call for rental payments that increase over their term. Under Canadian GAAP, rental revenue is recognized  on a straight-line basis over the term of the lease, resulting in accruals for rents that are not billable or due until future years. Under Canadian GAAP, this accounting policy change came into effect on January 1, 2004, as a prospective change. Only  lease information from this time forward was applicable for this standard. Under IFRS, the accrued rent receivable amount is  determined from the latter of inception of each lease or the date the REIT assumed the lease rather than from January 1,  2004.  6) The Trusts will be required under IAS 32, Financial Instruments: Presentation, to present the Class B units of H&R Portfolio  Limited Partnership (“HRLP”) as a liability upon initial adoption of IFRS. This presentation will result in a reduction of non- controlling interest of approximately $77.3 million (based on December 31, 2010 figures) and a corresponding liability being  recorded. Distributions on the Class B units of HRLP will then be reflected as a component of interest expense in earnings. 7) Included in the budget for the Bow is approximately $37 million of rental income expected to be received from EnCana  Corporation prior to substantial completion of the building which is currently recorded in the current budget in the line item  “recoveries and other income”. Under IFRS, income earned during the construction of the property will not reduce the cost to  construct the Bow, but will rather be included in rentals from income properties which will cause a corresponding increase to  the cost of the project. These figures assume all occupancies occur on time.  a) Deemed Fair Value  b) Business Combinations  c) Cumulative Translation Difference  The REIT has already made the necessary changes to its IT system and has completed the testing of these modifications. The December 31, 2009 accrued rent receivable balance of $125.2 million is expected to change to approximately $147  million once IFRS is adopted. There will not be any changes to disclosure or internal controls as the existing controls have  been deemed to be appropriate by the REIT.  Upon adoption of IFRS, the Trusts are required to apply IFRS 1, which provides guidance for the initial adoption of IFRS. Included in  IFRS 1 are certain optional exemptions from full retrospective applications of IFRS. The optional exemptions expected to be applied  are described below:  As discussed under the “Status of Convergence Plan”, under IFRS 1 the REIT will choose to adopt the fair value model for  certain income properties prospectively. At conversion the resulting adjustment of approximately $531 million net of  impairments of this election is recorded directly to income properties and retained earnings. The REIT is required to meet financial covenants included in its Declaration of Trust and in banking and debenture  agreements. Within each of the previously mentioned documents, the REIT’s debt cannot exceed 65% of the GBV. As at  January 1, 2010, the debt to GBV ratio in accordance with the Declaration of Trust is 52.5%. Given the change for the  increase in income properties as mentioned above, the debt to GBV ratio decreases to 49.5%.  The REIT expects to apply the business combination exemption offered in IFRS 1 to not apply IFRS 3 Business  Combinations retrospectively to past business combinations. Accordingly, the REIT will not restate business combinations  that took place prior to the January 1, 2010 transition date. There is no change expected to the REIT’s current IT systems or  controls and procedures for this election.  The REIT expects to elect this exemption to set the previous foreign exchange cumulative translation balance to zero at  January 1, 2010, with the balance reclassified to retained earnings. The only effect of this will be a restatement within the  accounts of the unitholders’ equity. The effect at this time would be to reduce the accumulated other comprehensive loss by  $27.5 million and to reduce retained earnings by a similar amount. There is no change expected to the REIT’s IT systems or  controls and procedures for this election.  Page 37 of 45  First Time Adoption of IFRS 