page 92 Bombardier Inc. Annual Report 2003-04 Allowance for credit losses Derivative financial instruments Environmental obligations Stock-based compensation and other stock-based payments Bombardier – Significant accounting policies  Revenue recognition  The Corporation uses forward foreign exchange contracts to hedge forecasted foreign currency cash flows. Forecasted foreign currency cash flows can only be hedged when significant characteristics and the expected terms of the forecasted foreign currency cash flows are identified and it is probable that these cash flows will occur. There is no recognition in the Consolidated Financial Statements of unrealized gains or losses on forward foreign exchange contracts designated as hedges of forecasted foreign currency cash flows until the anticipated transactions occur. The Corporation enters into interest-rate swap agreements in order to modify the interest rate characteristics and to reduce the impact of fluctuating interest rates, mainly on its long-term debts and certain financial commitments. These swaps are accounted for using the accrual method. Under this method, net payments made or received on the derivative financial instruments are accrued as an adjustment to interest expense in the consolidated statements of income. The Corporation does not use derivative financial instruments for trading or speculative purposes. Gains and losses related to derivative financial instruments are recorded in the same category as the hedged item. When the hedged item is a forecasted foreign currency sale, gains and losses are included in revenues. When the underlying is a forecasted foreign currency cost, gains and losses are generally included in cost of sales.  Gains and losses associated with derivative financial instruments, which have been settled prior to maturity, are deferred and included in other assets or liabilities on the consolidated balance sheets and recognized to income in the period in which the related hedged transaction is recognized to income, if the underlying forecasted foreign currency cash flows are still probable of occurring. Otherwise, these gains and losses are recognized immediately to income. In the event that a hedged item is settled prior to the termination of the corresponding derivative financial instrument or is no longer probable of occurring, any unrealized gain or loss on such derivative financial instrument is recognized to income immediately. Environmental liabilities are recorded when environmental claims or remedial efforts are probable, and the costs can be reasonably estimated. Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to future revenue generation, are expensed. The Corporation expenses stock-based compensation provided to its employees and directors, and stock based payments to non-employees, using the fair value-based method for all awards granted or modified after January 31, 2003. The fair value of stock options at the grant date is determined using an option pricing model. Compensation expense is recognized over the vesting period of the stock options. Prior to February 1, 2003, the Corporation accounted for stock-based compensation provided to its employees and directors as capital transactions. However, pro forma net income and earnings per share for awards granted in fiscal year 2003 are disclosed using the fair value- based method. No compensation expense is recorded in the consolidated statements of income for these awards. The Corporation’s contributions to the employee share purchase plan are accounted for in the same manner as the related employee payroll costs. Revenues from the sale of commercial aircraft and narrow-body business aircraft (Bombardier Learjet), fractional interests in business aircraft and other products and services are recognized upon delivery of products or when the services are rendered. Wide-body business aircraft (Bombardier Challenger 300, Bombardier Challenger 604 and Bombardier Global Express) contracts are segmented between green aircraft (i.e. before interiors and optional avionics are installed) and completion of interiors. Revenues are recognized based on green aircraft deliveries when certain conditions are met, and upon final acceptance of interiors and optional avionics by customers. Finance receivables, trade receivables and loans are classified as impaired when, in the opinion of Management, there is reasonable doubt as to the ultimate collectibility of a portion of principal and interest. Accrual of interest income on finance receivables is suspended when the account becomes 90 days delinquent or may be suspended earlier if collection of an account becomes doubtful. The Corporation maintains an allowance for credit losses in an amount sufficient to provide adequate protection against losses. The level of allowance is based on Management’s assessment of the risks associated with each of the Corporation’s portfolios, including loss and recovery experience, industry performance and the impact of current and projected economic conditions.