IPSCO 2006 Annual Report

The consolidated financial statements have been prepared in accordance with U.S. GAAP, and include certain estimates based on management’s judgments. These estimates affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results may differ from those estimates.

Assets and liabilities of the Company’s operations having a functional currency other than the U.S. dollar are translated into U.S. dollars using the exchange rate in effect at the year-end and revenues and expenses are translated at the average rate during the year. Exchange gains or losses on translation of the Company’s net equity investment in these operations are deferred as a separate component of shareholders’ equity.

The change in the foreign currency translation adjustment results primarily from fluctuations of the Canadian dollar against the U.S. dollar.

The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany balances and transactions are eliminated on consolidation.

Cash equivalents are securities of the government of Canada and its provinces, the government of the United States, banks, and other corporations, with a maturity of less than three months when purchased. These highly liquid securities are short-term and have fixed interest rates.

The Company follows the liability method of tax allocation in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities, and measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

Capital assets are stated at cost. For major projects under construction, the Company capitalizes interest based on expenditures incurred to a maximum of interest costs on debt. Repair and maintenance costs are expensed as incurred.

Amortization is provided on the straight-line basis at the following annual rates:

Buildings		4%
Machinery and Equipment		5% to 33%

Effective January 1, 2004, the Company changed its estimate of the useful life of certain major machinery and equipment from 25 to 20 years. This change was applied prospectively, and resulted in an increase to 2004 depreciation expense of $15,144 ($0.21 per basic share and $0.19 per diluted share).

Depreciation is provided on all assets acquired as they are placed into production.

Financing costs relating to long-term debt are deferred and amortized into interest expense over the term of the related debt.

The cost of pension benefits earned by the employees covered by defined benefit plans is actuarially determined using the projected benefit method prorated on service and management’s best estimate of expected plan investment performance, salary escalation, terminations, and retirement ages of plan members. Plan assets are valued at fair value for the purpose of determining the expected return on plan assets. Adjustments for plan amendments are charged to operations over the expected average remaining service life of the employee group which is approximately 12 years. Actuarial gains and losses arise from changes in assumptions and differences between assumptions and the actual experience of the pension plans. The excess of accumulated actuarial gains and losses over 10% of the greater of the benefit obligation and the fair value of plan assets is also charged to operations over the expected average service life of the employee group. The costs of pension benefits for defined contribution plans are charged to operations as contributions are earned.

Goodwill represents the excess of acquisition costs over the fair value of the net assets acquired in business combinations. Goodwill will be tested for impairment at least annually by the Company in accordance with SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142). The Company is in the process of finalizing the reporting units and the allocation of goodwill to these units relating to its acquisition of NS Group, Inc. on December 1, 2006. Impairment, if any, is measured based on the estimated fair value of the reporting unit. Impairment occurs when the carrying amount of goodwill exceeds its estimated fair value. The Company will test goodwill for impairment in the fourth quarter of each year unless circumstances indicate an impairment may exist during an intervening period.

The Company accounts for other intangible assets, which includes trade names and trademarks, proprietary technology, customer relationships, and non-compete agreements in accordance with SFAS 142. Definite life intangible assets are amortized on a straight-line basis over the length of the contract or benefit period, which generally ranges from three to fifteen years. Impairment, if any, is determined based upon management reviews whereby, estimated undiscounted future cash flows associated with these assets or operations are compared with their carrying value to determine if a write-down to fair value (normally measured by the expected present value technique) is required.

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

The carrying value of cash and cash equivalents and accounts receivable approximates fair value.

The fair value of mortgages receivable has been estimated based on current rates for similar instruments with similar maturities. At December 31, 2006, the estimated fair value of mortgages receivable is $4,939 (2005—$19,876, 2004—$16,986).

The fair value of the Company’s long-term debt has been estimated based on current market prices. Where no market price is available, an estimate based on current rates for similar instruments with similar maturities and debt ratings has been used to approximate fair value. See Note 11 for fair values.

The Company utilizes fixed price physical delivery contracts and swap contracts to manage the variability of the cost of purchasing natural gas. The Company has designated as cash flow hedge instruments certain swap contracts matched against variable price forecasted natural gas purchases through October 31, 2009. The instruments will reduce or increase costs as the underlying physical transaction occurs. As of December 31, 2006, the fair value of the contracts recognized on the balance sheet was a loss of $4,602, and gains of $11,841 and $1,546, in 2005 and 2004 respectively.