Consolidated Financial Statements and Notes - Brookfield Asset ...

Market value adjustments for trading securities and derivative contracts carried at fair value for U.S. GAAP are as follows:MILLIONS 2005 2004Securities designated as Trading for U.S. GAAP $ 1 $ 7Derivative contracts recognized at fair value for U.S. GAAP 17 (6)$ 18 $ 1The effects of accounting for derivatives in accordance with U.S. GAAP for the year ended December 31, 2005 resulted in adecrease in assets of $98 million (2004 – increase of $112 million), an increase in liabilities of $59 million (2004 – $72 million), adecrease in other comprehensive income of $156 million (2004 – $30 million) and a decrease in net income of $1 million (2004 –$8 million) as outlined in the table above. In 2004, there was a $2 million decrease in net income associated with the company’sequity accounted investments, which was included as a reduction of equity accounted income in note 24(a)(i). During theyear ended December 31, 2005, there were no net derivative gains reclassifi ed from other comprehensive income to income(2004 – $22 million).(vi) Commercial property incomePrior to January 1, 2004, Canadian GAAP permitted the recognition of rental revenue over the term of the lease as it became duewhere increases in rent were intended to offset the estimated effects of infl ation, whereas U.S. GAAP required that rental revenuebe recognized on a straight-line basis over the term of the lease. The company adopted straight-line recognition of rental revenuefor all its properties from January 1, 2004 onward, thereby harmonizing this policy with U.S. GAAP. In 2005, the company recordeda decrease to commercial property income of $15 million (2004 – $18 million) to refl ect the adjustment required if straight-linerental revenue had been recognized from the outset of the lease as opposed to January 1, 2004 onward. The recognition of leasetermination income can differ between U.S. GAAP and Canadian GAAP, and and resulted in a decrease to commercial propertyincome in 2005 of $2 million (2004 – increase of $42 million).(vii) Commercial depreciationStraight-line depreciation was adopted by the company from January 1, 2004 onward which effectively harmonized Canadian GAAPwith U.S. GAAP. In 2005, the company recorded an increase to U.S. GAAP net income of $8 million (2004 – $5 million) to refl ect theadjustment required if straight-line depreciation had been recognized from the outset as opposed to January 1, 2004 onward.(viii) Residential development incomeThe company’s revenue recognition policy for land sales requires, in part, that the signifi cant risks and rewards of ownershiphave passed to the purchaser prior to the recognition of revenue by the vendor. Primarily in the province of Alberta, land salestransactions substantially transfer the risks and rewards of ownership to the purchaser when both parties are bound to the terms ofthe sale agreement and possession passes to the purchaser. In certain instances, title may not have transferred. Under FAS No. 66,“Sales of Real Estate,” transfer of title is a requirement for recognizing revenue under U.S. GAAP, whereas this is not necessarilyrequired under Canadian GAAP. Accordingly, residential development income decreases by $26 million for U.S. GAAP purposes.(ix) FalconbridgeDuring 2005, the company sold substantially all of its interest in Falconbridge for proceeds of $2.7 billion. Under U.S. GAAP, thecompany’s carrying value of its investment in Falconbridge was $157 million lower than under Canadian GAAP due to U.S. GAAPadjustments in prior years. As a result, the gain on the disposition of the company’s interest in Falconbridge was increased by$41 million under U.S. GAAP.(x) Foreign exchange and dividends on convertible preferred sharesEffective January 1, 2005, the company adopted the amendment to CICA Handbook Section 3860. The amendment requirescertain of the company’s preferred share obligations that could be settled with a variable number of the company’s common equityto be classifi ed as liabilities and corresponding distributions as interest expense for Canadian GAAP, whereas under U.S. GAAP,they continue to be treated as equity and corresponding distributions as dividends. Under Canadian GAAP, these preferred shareliabilities are converted into the company’s functional currency at current rates. Under U.S. GAAP, these preferred shares are treated90Brookfield Asset Management | 2005 Annual Report