MANAGEMENT’S DISCUSSION AND ANALYSIS Accounting Estimates The preparation of AKITA’s consolidated financial statements requires management to make estimates and  assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities  as at the date of the consolidated financial statements as well as reported amounts for revenue and expenses  for the year. Estimates and judgments are continually evaluated and are based upon historical experience and  other factors including expectations of future events that are believed to be reasonable in the circumstances. Actual outcomes could differ materially from these estimates. The Company makes assumptions relating to transactions that were incomplete at the Statement of Financial  Position date. Depending on the actual transaction, total assets and liabilities of the Company as well as  results of operations including net income could be either understated or overstated as a result of differences  between amounts accrued for incomplete transactions and the subsequent actual balances. The preparation of AKITA’s consolidated financial statements requires management to make significant  estimates relating to the useful lives of drilling rigs. Drilling rigs are depreciated using the unit of production  method. Depreciation is calculated using a detailed approach based on major components, and typically  results in an average useful life of 3,600 operating days per rig, subject to annual minimum imputed activity  levels. Additionally, commencing in the fourth quarter of 2013, in certain instances in which rigs are inactive  for extended periods, the depreciation rate is accelerated.  AKITA’s depreciation estimates do not have any effect on the changes to financial condition for the Company,  as depreciation is a non-cash item. However, total assets and results of operations, including net income,  could be either understated or overstated as a result of excessively high or low depreciation estimates.  At each reporting date, the Company assesses whether there is objective evidence that a financial asset is  impaired. If such evidence exists, the Company recognizes an impairment loss calculated as the difference  between the amortized cost of the asset and the present value of the estimated future cash flows, discounted  using the instrument’s original effective interest rate. The carrying amount of the asset is reduced by this  amount. AKITA’s asset impairment estimates do not have any effect on the changes to financial condition for the  Company, as any asset write-down would be a non-cash item. However, total assets and results of operations  including net income could be overstated as a result of projections of discounted future cash flows that are  too high.  A significant estimate used in the preparation of AKITA’s consolidated financial statements relates to the  defined benefit pension liability for certain employees that was recorded as $2,556,000 at December 31,  2013 (2012 - $2,348,000). AKITA’s pension liability estimates do not have any effect on the changes to the  financial condition for the Company, since the defined benefit pension is an unfunded non-cash item. However,  total liabilities and results of operations including net income could be either understated or overstated as a  result of pension estimates that are either too high or too low. AKITA utilizes the services of a third party to  assist in the actuarial estimate of the Company’s pension expense and liability. For 2013, a key assumption  relates to the use of a 4.7% discount rate (2012 – 4.0%). Except for the impact on the discount rate used  in the pension assumptions, recent changes in the global economy and related markets have not otherwise  affected the recording of the Company’s defined benefit pension liability. This pension is an unfunded liability  of the Company. The Company makes assumptions relating to deferred income taxes, including future tax rates, timing of  22 AKITA DRILLING LTD.  ANNUAL REPORT