Form 10-K/A

Potash Corporation of Saskatchewan (POT)

Documents found in this filing:

Annual Reports

Quarterly Reports

8-K

Other

Documents found in this filing:

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Send us Feedback

Potash Corporation of Saskatchewan (POT)

	SUMMARY

	BULLS

	BEARS

	DATA CENTRAL

	STOCK CHART

	SEC FILINGS

	BALANCE

	INCOME

	CASH FLOW

POTASH CORP OF SASKATCHEWAN INC 10-K 2012

Form 10-K/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K/A

Amendment No. 1

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

Commission file number 1-10351

Potash Corporation of Saskatchewan Inc.

(Exact name of the registrant as specified in its charter)

Canada

N/A

(State or other jurisdiction of

incorporation or organization)

(I.R.S. employer

identification no.)

Suite 500, 122 – 1^st Avenue South

Saskatoon, Saskatchewan, Canada S7K 7G3

306-933-8500

(Address and telephone number of the registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class		Name of exchange on which registered
Common Shares, No Par Value		New York Stock Exchange

The Common Shares are also listed on the Toronto Stock Exchange in Canada

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

At June 30, 2011, the aggregate market value of the 851,961,075 Common Shares held by non-affiliates of the registrant was approximately $48,553,261,671.44. At February 21, 2012, the registrant had 858,745,947 Common Shares outstanding.

EXPLANATORY NOTE

Potash Corporation of Saskatchewan Inc. (the “Corporation”) is filing this Amendment No. 1 on Form 10-K/A (this “Amendment”) to amend the Corporation’s Annual Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission on February 27, 2012 (the “Form 10-K”). This Amendment is being filed solely to revise the report of the Company’s independent registered chartered accountants contained in Item 8 of the Form 10-K, which inadvertently omitted the reference to the International Accounting Standards Board as the issuer of the International Financial Reporting Standards. No other changes have been made to the Form 10-K. This Amendment speaks as of the original filing date of the Form 10-K, does not reflect events that may have occurred subsequent to the original filing date, and does not modify or update in any way the other disclosures made in the Form 10-K.

Part II

Item 8. Financial Statements and Supplementary Data

Management’s Responsibility

Management’s Report on Financial Statements

The accompanying consolidated financial statements and related financial information are the responsibility of PotashCorp management. They have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board and include amounts based on estimates and judgments. Financial information included elsewhere in this report is consistent with the consolidated financial statements.

Our independent registered chartered accountants, Deloitte & Touche LLP, provide an audit of the consolidated financial statements, as reflected in their report for 2011.

The consolidated financial statements are approved by the Board of Directors on the recommendation of the audit committee.

The audit committee of the Board of Directors is composed entirely of independent directors. PotashCorp’s interim condensed consolidated financial statements and Management’s Discussion and Analysis (“MD&A”) are discussed and analyzed by the audit committee with management and the independent registered chartered accountants before such information is approved by the committee and submitted to securities commissions or other regulatory authorities. The annual consolidated financial statements and MD&A are also analyzed by the audit committee together with management and the independent registered chartered accountants and are approved by the Board of Directors.

In addition, the audit committee has the duty to review critical accounting policies and significant estimates and judgments underlying the consolidated financial statements as presented by management, and to approve the fees of the independent registered chartered accountants.

Deloitte & Touche LLP, the independent registered chartered accountants, have full and independent access to the audit committee to discuss their audit and related matters.

Management’s report on internal control over financial reporting

Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting. During the past year, we have directed efforts to improve our internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Management has assessed the effectiveness of the company’s internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and concluded that the company’s internal control over financial reporting was effective as of December 31, 2011. The effectiveness of the company’s internal control over financial reporting as of December 31, 2011 has been audited by Deloitte & Touche LLP , as reflected in their report for 2011.

LOGO

W. Doyle

President and

Chief Executive Officer

February 21, 2012

LOGO

W. Brownlee

Executive Vice President and

Chief Financial Officer

II-1

Report of Independent Registered Chartered Accountants

To the Board of Directors and Shareholders of Potash Corporation of Saskatchewan Inc.

We have audited the internal control over financial reporting of Potash Corporation of Saskatchewan Inc. and subsidiaries (the “Company”) as of December 31, 2011, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2011 of the Company and our report dated February 21, 2012 expressed an unqualified opinion on those consolidated financial statements.

LOGO

Independent Registered Chartered Accountants

Saskatoon, Canada

February 21, 2012

II-2

Report of Independent Registered Chartered Accountants

To The Board of Directors and Shareholders of Potash Corporation of Saskatchewan Inc.

We have audited the accompanying consolidated statements of financial position of Potash Corporation of Saskatchewan Inc. and subsidiaries (the “Company”) as of December 31, 2011, December 31, 2010 and January 1, 2010, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flow for each of the two years in the period ended December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Potash Corporation of Saskatchewan Inc. and subsidiaries as of December 31, 2011, December 31, 2010 and January 1, 2010, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2011, in conformity with International Financial Reporting Standards, as issued by the International Accounting Standards Board.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 21, 2012 expressed an unqualified opinion on the Company’s internal control over financial reporting.

LOGO

Independent Registered Chartered Accountants

Saskatoon, Canada

February 21, 2012

II-3

Consolidated Financial Statements

Consolidated Statements of Financial Position


As at		In millions of US dollars
Notes		December 31, 2011		December 31, 2010		January 1, 2010
	Assets
	Current assets
	Cash and cash equivalents	$	430	$	412	$	385
Note 3	Receivables		1,195		1,059		1,214
Note 4	Inventories		731		570		624
	Prepaid expenses and other current assets		52		54		69
			2,408		2,095		2,292
	Non-current assets
Note 5	Property, plant and equipment		9,922		8,141		6,444
Note 6	Investments in equity-accounted investees		1,187		1,051		955
Note 6	Available-for-sale investments		2,265		3,842		2,760
Note 7	Other assets		360		303		274
Note 8	Intangible assets		115		115		117
	Total Assets	$	16,257	$	15,547	$	12,842
	Liabilities
	Current liabilities
Note 9, 12	Short-term debt and current portion of long-term debt	$	832	$	1,871	$	729
Note 10	Payables and accrued charges		1,295		1,198		817
Note 11	Current portion of derivative instrument liabilities		67		75		52
			2,194		3,144		1,598
	Non-current liabilities
Note 12	Long-term debt		3,705		3,707		3,319
Note 11	Derivative instrument liabilities		204		204		123
Note 21	Deferred income tax liabilities		1,052		737		643
Note 13	Pension and other post-retirement benefit liabilities		552		468		455
Note 14	Asset retirement obligations and accrued environmental costs		615		455		300
	Other non-current liabilities and deferred credits		88		147		99
	Total Liabilities		8,410		8,862		6,537
	Shareholders’ Equity
Note 15	Share capital		1,483		1,431		1,430
	Contributed surplus		291		308		273
	Accumulated other comprehensive income		816		2,394		1,798
	Retained earnings		5,257		2,552		2,804
	Total Shareholders’ Equity		7,847		6,685		6,305
	Total Liabilities and Shareholders’ Equity	$	16,257	$	15,547	$	12,842
Note 26	Commitments
Note 27	Contingencies and Other Matters
Note 28	Guarantees

(See Notes to the Consolidated Financial Statements)

Approved by the Board of Directors,

LOGO

Director

II-4

Consolidated Statements of Income


For the years ended December 31		In millions of US dollars except per-share amounts
Notes			2011			2010
Note 16	Sales		$	8,715		$	6,539
	Freight, transportation and distribution			(496	)		(488	)
Note 17	Cost of goods sold			(3,933	)		(3,361	)
	Gross Margin			4,286			2,690

Note 17	Selling and administrative expenses			(217	)		(228	)
Note 18	Provincial mining and other taxes			(147	)		(77	)
	Share of earnings of equity-accounted investees			261			174
	Dividend income			136			163
Note 19	Other expenses			(13	)		(125	)

	Operating Income			4,306			2,597

Note 20	Finance Costs			(159	)		(121	)

	Income Before Income Taxes			4,147			2,476

Note 21	Income Taxes			(1,066	)		(701	)

	Net Income		$	3,081		$	1,775

Note 22	Net Income per Share – Basic		$	3.60		$	2.00

Note 22	Net Income per Share – Diluted		$	3.51		$	1.95

	Dividends Declared per Share		$	0.28		$	0.13

(See Notes to the Consolidated Financial Statements)

II-5

Consolidated Statements of Comprehensive Income


For the years ended December 31	In millions of US dollars
(Net of related income taxes)	2011			2010
Net Income	$	3,081		$	1,775
Other comprehensive (loss) income
Net (decrease) increase in net unrealized gains on available-for-sale investments ¹		(1,581	)		663
Net actuarial losses on defined benefit plans ²		(136	)		(25	)
Net losses on derivatives designated as cash flow hedges ³		(38	)		(119	)
Reclassification to income of net losses on cash flow hedges ⁴		47			53
Other		(6	)		(1	)
Other Comprehensive (Loss) Income	$	(1,714	)	$	571
Comprehensive Income	$	1,367		$	2,346

¹	Available-for-sale investments are comprised of shares in Israel Chemicals Ltd. and Sinofert Holdings Limited.

²	Net of income taxes of $75 (2010 – $11).

³	Cash flow hedges are comprised of natural gas derivative instruments and are net of income taxes of $24 (2010 – $72).

⁴	Net of income taxes of $(29) (2010 – $(32)).

(See Notes to the Consolidated Financial Statements)

II-6

Consolidated Statements of Cash Flow


For the years ended December 31	In millions of US dollars
				2011					2010
Operating Activities
Net income				$	3,081				$	1,775
Adjustments to reconcile net income to cash provided by operating activities
Depreciation and amortization		489					449
Share-based compensation		24					24
Realized excess tax benefit related to share-based compensation		29					45
Provision for deferred income tax		337					177
Undistributed earnings of equity-accounted investees		(133	)				(96	)
Pension and other post-retirement benefits		(122	)				(24	)
Asset retirement obligations and accrued environmental costs		39					77
Other long-term liabilities and miscellaneous		(40	)				82

Subtotal of adjustments					623					734
Changes in non-cash operating working capital
Receivables		(155	)				256
Inventories		(146	)				66
Prepaid expenses and other current assets		(1	)				(6	)
Payables and accrued charges		83					306

Subtotal of changes in non-cash operating working capital					(219	)				622
Cash provided by operating activities					3,485					3,131
Investing Activities
Additions to property, plant and equipment					(2,176	)				(2,079	)
Purchase of long-term investments					(3	)				(422	)
Other assets and intangible assets					(72	)				(71	)
Cash used in investing activities					(2,251	)				(2,572	)
Cash before financing activities					1,234					559
Financing Activities
Proceeds from long-term debt obligations					–					1,794
Repayment of and finance costs on long-term debt obligations					(607	)				(810	)
(Repayments of) proceeds from short-term debt obligations					(445	)				547
Dividends					(208	)				(119	)
Repurchase of common shares					–					(2,000	)
Issuance of common shares					44					56
Cash used in financing activities					(1,216	)				(532	)
Increase in Cash and Cash Equivalents					18					27
Cash and Cash Equivalents, Beginning of Year					412					385
Cash and Cash Equivalents, End of Year				$	430				$	412
Cash and cash equivalents comprised of:
Cash				$	46				$	115
Short-term investments					384					297
				$	430				$	412
Supplemental cash flow disclosure
Interest paid				$	233				$	212
Income taxes paid (recovered)				$	623				$	(45	)

(See Notes to the Consolidated Financial Statements)

II-7

Consolidated Statements of Changes in Equity


In millions of US dollars

	Equity Attributable to Common Shareholders¹
						Accumulated Other Comprehensive Income
	Share Capital		Contributed Surplus			Net unrealized gains on available-for- sale investments			Net unrealized losses on derivatives designated as cash flow hedges			Net actuarial losses on defined benefit plans			Other			Total Accumulated Other Comprehensive Income			Retained Earnings			Total Equity
Balance – December 31, 2010	$	1,431	$	308		$	2,563		$	(177	)	$	–	²	$	8		$	2,394		$	2,552		$	6,685
Net income		–		–			–			–			–			–			–			3,081			3,081
Other comprehensive (loss) income		–		–			(1,581	)		9			(136	)		(6	)		(1,714	)		–			(1,714	)
Effect of share-based compensation		–		(9	)		–			–			–			–			–			–			(9	)
Dividends declared		–		–			–			–			–			–			–			(240	)		(240	)
Issuance of common shares		52		(8	)		–			–			–			–			–			–			44
Transfer of actuarial losses on defined benefit plans		–		–			–			–			136			–			136			(136	)		–
Balance – December 31, 2011	$	1,483	$	291		$	982		$	(168	)	$	–	²	$	2		$	816		$	5,257		$	7,847

¹	All equity transactions are attributable to common shareholders.

²	Any amounts incurred during a period are closed out to retained earnings at each period-end. Therefore, no balance exists in the reserve at beginning or end of period.


	Equity Attributable to Common Shareholders¹
							Accumulated Other Comprehensive Income
	Share Capital			Contributed Surplus			Unrealized gains on available-for- sale investments		Net unrealized losses on derivatives designated as cash flow hedges			Net actuarial losses on defined benefit plans			Other			Total Accumulated Other Comprehensive Income		Retained Earnings			Total Equity
Balance – January 1, 2010	$	1,430		$	273		$	1,900	$	(111	)	$	–	²	$	9		$	1,798	$	2,804		$	6,305
Net income		–			–			–		–			–			–			–		1,775			1,775
Other comprehensive income (loss)		–			–			663		(66	)		(25	)		(1	)		571		–			571
Share repurchase		(69	)		(47	)		–		–			–			–			–		(1,884	)		(2,000	)
Effect of share-based compensation		–			96			–		–			–			–			–		–			96
Dividends declared		–			–			–		–			–			–			–		(118	)		(118	)
Issuance of common shares		70			(14	)		–		–			–			–			–		–			56
Transfer of actuarial losses on defined benefit plans		–			–			–		–			25			–			25		(25	)		–
Balance – December 31, 2010	$	1,431		$	308		$	2,563	$	(177	)	$	–	²	$	8		$	2,394	$	2,552		$	6,685

¹	All equity transactions are attributable to common shareholders.

²	Any amounts incurred during a period are closed out to retained earnings at each period-end. Therefore, no balance exists in the reserve at beginning or end of period.

(See Notes to the Consolidated Financial Statements)

II-8

In millions of US dollars except as otherwise noted


NOTE 1				DESCRIPTION OF BUSINESS

With its subsidiaries, Potash Corporation of Saskatchewan Inc. (“PCS”) – together known as “PotashCorp” or “the company” except to the extent the context otherwise requires – forms an integrated fertilizer and related industrial and feed products company. The company has producing assets in the following locations:

•

Potash

–

five mines and mills and mining rights to potash reserves at a sixth location (expires December 31, 2012), all in the province of Saskatchewan

–

one mine and mill in the province of New Brunswick

•

Phosphate

–

a mine and processing plants in the state of North Carolina

–

a mine and two processing plants in the state of Florida

–

a processing plant in the state of Louisiana

–

phosphate feed plants in the states of Nebraska, Illinois, Missouri, North Carolina and Florida

–

an industrial phosphoric acid plant in the state of Ohio

•

Nitrogen

–

three plants, one located in each of the states of Georgia, Louisiana and Ohio

–

large-scale operations in Trinidad

In North America, the company leases or owns 207 terminal and warehouse facilities, some of which have multi-product capability, for a total of 270 distribution points, and services customers with a fleet of approximately 9,950 railcars. In the offshore market, it leases one warehouse in China and one in Malaysia and has ownership in a joint venture which leases a dry bulk fertilizer port terminal in Brazil. PotashCorp sells potash from its Saskatchewan mines for use outside North America exclusively to Canpotex Limited (“Canpotex”). A potash export, sales and marketing company owned in equal shares by the three producers in Saskatchewan (including the company), Canpotex resells potash to offshore customers. PCS Sales (Canada) Inc. and PCS Sales (USA), Inc., wholly owned subsidiaries of PCS, execute marketing and sales for the company’s potash, phosphate and nitrogen products in North America and offshore marketing and sales for the company’s New Brunswick potash. Phosphate Chemicals Export Association, Inc. (“PhosChem”), a phosphate export association established under United States law, is the principal vehicle through which the company executes offshore marketing and sales for its phosphate fertilizers. PCS Sales (USA), Inc. generally handles offshore marketing and sales for the company’s nitrogen products.


NOTE 2				BASIS OF PRESENTATION

The company previously prepared its financial statements in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”) as set out in the Handbook of the Canadian Institute of Chartered Accountants (“CICA Handbook”). In 2010, the CICA Handbook was revised to incorporate International Financial Reporting Standards (“IFRS”), and required publicly accountable enterprises to apply these standards effective for years beginning on or after January 1, 2011, with early adoption permitted. Accordingly, these consolidated financial statements are in accordance with IFRS, as issued by the International Accounting Standards Board (“IASB”). In these consolidated financial statements, the term “Canadian GAAP” refers to Canadian GAAP before the company’s adoption of IFRS.

These consolidated financial statements have been prepared in accordance with IFRS and First-Time Adoption of International Financial Reporting Standards (“IFRS 1”). Subject to certain transition elections disclosed in Note 30, the company has consistently applied the same accounting policies in its opening IFRS statement of financial position as at January 1, 2010 and throughout all periods presented, as if these policies had always been in effect. Note 30 describes the impact of the transition to IFRS on the company’s

reported financial position and financial performance, including the nature and effect of significant changes in accounting policies from those used in its Canadian GAAP consolidated financial statements as at January 1, 2010 and December 31, 2010, and for the year ended December 31, 2010.

The company is a foreign private issuer in the US that voluntarily files its consolidated financial statements with the Securities and Exchange Commission (the “SEC”) on US domestic filer forms. In connection with the company’s transition to IFRS, it is permitted to file two years of financial statements presented in accordance with IFRS, instead of three, in the company’s audited consolidated financial statements. In addition, the company is permitted to file with the SEC its audited consolidated financial statements under IFRS without a reconciliation to US generally accepted accounting principles (“US GAAP”). As a result, the company no longer prepares a reconciliation of its results to US GAAP. It is possible that certain of the company’s accounting policies could be different from US GAAP.

These consolidated financial statements were authorized by the Board of Directors for issue on February 21, 2012.

II-9

In millions of US dollars except as otherwise noted

NOTE 2 Basis of Presentation continued

These consolidated financial statements were prepared under the historical cost convention, except for certain items not carried at historical cost as discussed in the applicable accounting policies.

Significant Accounting Policies

Principles of consolidation

Subsidiaries are all entities (including special purpose entities) over which the company has the power to govern the financial and operating policies so as to obtain benefits from its activities that generally accompany an equity interest controlling more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the company controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the company. They are deconsolidated from the date that control ceases. Principal (wholly owned) operating subsidiaries are:

PCS Sales (Canada) Inc.

–

PCS Joint Venture, Ltd. (“PCS Joint Venture”)

PCS Sales (USA), Inc.

PCS Phosphate Company, Inc. (“PCS Phosphate”)

–

PCS Purified Phosphates

White Springs Agricultural Chemicals, Inc. (“White Springs”)

PCS Nitrogen Fertilizer, L.P.

PCS Nitrogen Ohio, L.P.

PCS Nitrogen Trinidad Limited

PCS Cassidy Lake Company

All significant intercompany balances and transactions are eliminated.

Foreign currency transactions

Items included in the consolidated financial statements of the company and each of its subsidiaries are measured using the currency of the primary economic environment in which the individual entity operates (“the functional currency”). The consolidated financial statements are presented in United States dollars (“US dollars”), which is the functional currency of the company and the majority of its subsidiaries.

Foreign currency transactions, including Canadian, Trinidadian and Chilean currency operating transactions, are generally translated to US dollars at the average exchange rate for the previous month. Monetary assets and liabilities are translated at period-end exchange rates. Foreign exchange gains and losses resulting from the settlement of such transactions, and from the translation at period-end exchange rates of monetary assets and liabilities denominated in foreign currencies, are recognized in net income in the period in which they arise. Foreign exchange gains and losses are presented in the statements of income within other income or other expenses as applicable.

Translation differences on non-monetary assets and liabilities carried at fair value are recognized as part of changes in fair value. Translation differences on non-monetary financial assets such as investments in equity securities classified as available-for-sale are included in other comprehensive income (“OCI”).

Cash equivalents

Highly liquid investments with a maturity of three months or less from the date of purchase are considered to be cash equivalents.

Prepaid expenses

The company has classified freight and other transportation and distribution costs incurred relating to product inventory stored at warehouse and terminal facilities as prepaid expenses.

Long-lived asset impairment

Assets that have an indefinite useful life (i.e., goodwill) are not subject to amortization and are tested at least annually for impairment (typically in April), or more frequently if events or circumstances indicate there may be an impairment. At the end of each reporting period, the company reviews the carrying amounts of both its long-lived assets to be held and used and its identifiable intangible assets with finite lives to determine whether there is any indication that they have suffered an impairment loss. For assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (this can be at the asset or cash-generating unit level). A cash-generating unit is the smallest identifiable group of assets that generates cash inflows which are largely independent of the cash inflows from other assets or groups of assets. If an indication of impairment exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). An impairment loss is recognized as the amount by which the asset’s carrying amount exceeds its recoverable amount. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the unit. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. Non-financial assets, other than goodwill, that previously suffered an impairment loss are reviewed for possible reversal of the impairment at each reporting date.

II-10

In millions of US dollars except as otherwise noted

NOTE 2 Basis of Presentation continued

Additional accounting policies

To facilitate a better understanding of our consolidated financial statements, we have disclosed our significant accounting policies (with the exception of those identified above) throughout the following notes, with the related financial disclosures by major caption:


Note		Topic	Page
	3	Receivables		II-19
	4	Inventories		II-19
	5	Property, Plant and Equipment		II-20
	6	Investments		II-22
	7	Other Assets		II-24
	8	Intangible Assets		II-25
	11	Derivative Instruments		II-27
	12	Long-Term Debt		II-29
	13	Pension and Other Post-Retirement Benefits		II-30
	14	Provisions for Asset Retirement, Environmental and Other Obligations		II-35
	16	Revenue Recognition		117
	17	Cost of Goods Sold		II-40
	17	Selling and Administrative Expenses		119
	21	Income Taxes		II-42
	23	Share-Based Compensation		II-45
	24	Fair Value of Financial Instruments		II-49
	26	Commitments		II-56

Accounting Estimates and Judgments

Certain of the company’s policies involve accounting estimates and judgments because they require the company to make subjective or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts could be reported under different conditions or using different assumptions.

The following section discusses the accounting estimates, judgments and assumptions that the company has made and how they affect the amounts reported in the consolidated financial statements.

Special purpose entities

In the normal course of business, the company may enter into arrangements that are created to accomplish a narrow and well-defined objective. Any such

special purpose entities (“SPE”) must be consolidated when the substance of the relationship between the company and the SPE indicates that the SPE is controlled by the company. Assessing the substance of such a relationship involves considerable judgment. In addition to the general indicators of control, such as the company’s proportion of voting rights, power to govern the financial and operating policies of the entity and power to appoint or remove the majority of the board of directors, the company considers several additional factors to determine whether in substance it controls the SPE, even in cases where it controls less than half of the voting rights or owns little or none of the SPE’s equity.

Long-lived asset impairment

The impairment process begins with the identification of the appropriate asset or cash-generating unit for purposes of impairment testing. Identification and measurement of any impairment are based on the asset’s recoverable amount, which is the higher of its fair value less costs to sell and its value in use. Value in use is generally based on an estimate of discounted future cash flows. Judgment is required in determining the appropriate discount rate. Assumptions must also be made about future sales, margins and market conditions over the long-term life of the assets or cash-generating units.

The company cannot predict if an event that triggers impairment will occur, when it will occur or how it will affect reported asset amounts. Although estimates are reasonable and consistent with current conditions, internal planning and expected future operations, such estimates are subject to significant uncertainties and judgments. As a result, it is reasonably possible that the amounts reported for asset impairments could be different if different assumptions were used or if market and other conditions were to change. The changes could result in non-cash charges that could materially affect the company’s consolidated financial statements.

Restructuring charges

Plant shutdowns, sales of business units or other corporate restructurings trigger incremental costs to the company (i.e., expenses for employee termination, contract termination and other exit costs). Because such activities are complex processes that can take several months to complete, they involve making and reassessing estimates.

II-11

In millions of US dollars except as otherwise noted

NOTE 2 Basis of Presentation continued

Additional accounting estimates and judgments

To facilitate a better understanding of the company’s consolidated financial statements, it has disclosed its significant accounting estimates and judgments (with the exception of those identified above) throughout the following notes with the related financial disclosures by major caption:


Note		Topic	Page
	5	Property, Plant and Equipment		II-20
	6	Investments		II-22
	8	Intangible Assets		II-25
	11	Derivative Instruments		II-27
	13	Pension and Other Post-Retirement Benefits		II-30
	14	Provisions for Asset Retirement, Environmental and Other Obligations		II-35
	21	Income Taxes		II-42
	23	Share-Based Compensation		II-45
	24	Financial Instruments		II-49
	26	Commitments		II-56
	27	Contingencies		II-57

Recent Accounting Pronouncements

The following new standards and amendments or interpretations to existing standards have been published and are mandatory for periods beginning on or after January 1, 2011, or later:

IFRS 9, Financial Instruments

In November 2009, the IASB issued guidance on the classification and measurement of financial assets. Under IFRS 9, financial assets will generally be measured initially at fair value plus particular transaction costs, and subsequently at either amortized cost or fair value. In October 2010, the IASB issued additions to IFRS 9 relating to accounting for financial liabilities. Under the new requirements, an entity choosing to measure a financial liability at fair value will present the portion of any change in its fair value due to changes in the entity’s own credit risk in OCI, rather than within net income. In December 2011, the IASB issued amendments which modify the requirements for transition from International Accounting Standard (“IAS”) 39 to IFRS 9. The modifications introduce new disclosure requirements and eliminate the requirement to restate prior periods. The standard is to be applied prospectively and will be effective for periods commencing on or after January 1, 2015, with earlier application permitted. The company is reviewing the standard to determine the potential impact, if any, on its consolidated financial statements.

Amendments to IFRIC 14, Prepayments of a Minimum Funding Requirement

In November 2009, the International Financial Reporting Interpretations Committee (“IFRIC”) issued amendments to IFRIC 14 relating to the prepayments

of a minimum funding requirement for an employee defined benefit plan. The amendments apply when an entity is subject to minimum funding requirements and makes early contributions to cover those requirements. The amendments permit treating the benefit of such an early payment as an asset. The amendment must be applied from the beginning of the first comparative period presented in the first financial statements in which it is applied. The amendments became effective for periods commencing on or after January 1, 2011. The company has applied these amendments, which had no effect on these consolidated financial statements.

Amendments to IFRS 7, Financial Instruments: Disclosures

In May 2010, the IASB issued amendments to IFRS 7 as part of its annual improvements process. The amendments addressed various requirements relating to the disclosure of financial instruments and became effective for annual periods commencing on or after January 1, 2011. The company has applied these amendments by providing the appropriate disclosures in Note 24 to these consolidated financial statements.

Amendments to IFRS 7, Financial Instruments: Disclosures – Transfers of Financial Assets

In October 2010, the IASB issued amendments to IFRS 7. The amendments require additional disclosures to assist users of financial statements in evaluating the risk exposures relating to transfers of financial assets that are not derecognized or for which the entity has a continuing involvement. The amendments became effective for annual periods beginning on or after July 1, 2011. The company does not typically retain any continuing involvement in financial assets once transferred and the application of these amendments had no effect on these consolidated financial statements.

IFRS 10, Consolidated Financial Statements

In May 2011, the IASB issued guidance establishing principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. IFRS 10 (which supersedes IAS 27 and Standing Interpretations Committee (“SIC”) 12) builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance to help determine control where this is difficult to assess. It is to be applied retrospectively, in most circumstances, and will be effective for annual periods commencing on or after January 1, 2013, with earlier application permitted. The company is reviewing the standard to determine the potential impact, if any, on its consolidated financial statements.

II-12

In millions of US dollars except as otherwise noted

NOTE 2 Basis of Presentation continued

IFRS 11, Joint Arrangements

In May 2011, the IASB issued guidance establishing principles for financial reporting by parties to a joint arrangement. IFRS 11 (which supersedes IAS 31 and SIC 13) requires a party to a joint arrangement to determine the type of arrangement, either a joint operation or a joint venture, by assessing its rights and obligations arising from the arrangement. The existing policy choice of proportionate consolidation for jointly controlled entities has been eliminated and under IFRS 11, equity accounting is mandatory for participants in joint ventures. The standard is to be applied prospectively and will be effective for annual periods commencing on or after January 1, 2013, with earlier application permitted. The company is reviewing the standard to determine the potential impact, if any, on its consolidated financial statements.

IFRS 12, Disclosure of Interests in Other Entities

In May 2011, the IASB issued guidance relating to the disclosure requirements of interests in other entities. IFRS 12 is a new and comprehensive standard on disclosure requirements for all forms of interest in other entities, including subsidiaries, joint arrangements, associates and unconsolidated structured entities. The standard is to be applied prospectively and will be effective for annual periods commencing on or after January 1, 2013, with earlier application permitted. The company is reviewing the standard to determine the potential impact, if any, on its consolidated financial statements.

IFRS 13, Fair Value Measurement

In May 2011, the IASB issued guidance establishing a single source for fair value measurement. IFRS 13 defines fair value, sets out a framework for measuring it and introduces consistent requirements for disclosures on fair value measurements. It does not determine when an asset, a liability or an entity’s own equity instrument is measured at fair value. Rather, the measurement and disclosure requirements of IFRS 13 apply when another standard requires or permits the item to be measured at fair value, with limited exceptions. The standard is to be applied prospectively and will be effective for annual periods commencing on or after January 1, 2013, with earlier application permitted. The company is reviewing the standard to determine the potential impact, if any, on its consolidated financial statements.

Amendments to IAS 1, Presentation of Financial Statements

In June 2011, the IASB issued amendments to IAS 1 requiring items within OCI that may be reclassified to the profit or loss section of the income statement to be grouped together. The amendments are to be applied retrospectively and will be effective for annual periods commencing on or after July 1, 2012, with earlier application permitted. The company is reviewing these amendments to determine the potential impact, if any, on its consolidated financial statements.

Amendments to IAS 19, Employee Benefits

In June 2011, the IASB issued amendments to IAS 19 relating to the recognition and measurement of post-employment defined benefit expense and termination benefits, and to the disclosures for all employee benefits. The amendments will require remeasurements (actuarial gains and losses and the actual return on plan assets) to be recognized immediately in other comprehensive income and all service cost and interest income (expense) to be recognized immediately in net income. Interest income (expense) will be calculated by applying the discount rate to the net defined benefit asset (liability). The amendments are to be applied retrospectively, except for changes to the carrying value of assets that include capitalized employee benefit costs, which are to be applied prospectively. The amendments will be effective for annual periods commencing on or after January 1, 2013, with earlier application permitted. The company is reviewing these amendments to determine the potential impact, if any, on its consolidated financial statements.

Amendments to IAS 32, Offsetting Financial Assets and Financial Liabilities and IFRS 7, Disclosures

In December 2011, the IASB issued amendments to IAS 32 and IFRS 7 as part of its offsetting project. The amendments clarify certain items regarding offsetting financial assets and financial liabilities and also address common disclosure requirements. The amendments are to be applied retrospectively and will be effective for annual periods commencing on or after January 1, 2013 for IFRS 7 and January 1, 2014 for IAS 32, with earlier application permitted. If IAS 32 is early adopted, the disclosures required by the amendments to IFRS 7 must be provided. The company is reviewing these amendments to determine the potential impact, if any, on its consolidated financial statements.

IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine

In October 2011, the IFRIC issued IFRIC 20 clarifying the requirements for accounting for stripping costs in the production phase of a surface mine. This interpretation clarifies when production stripping should lead to the recognition of an asset and how that asset should be measured, both initially and in subsequent periods. The interpretation will be effective for annual periods commencing on or after January 1, 2013, with earlier application permitted. The company is reviewing this interpretation to determine the potential impact, if any, on its consolidated financial statements.

II-13

In millions of US dollars except as otherwise noted


NOTE 3				RECEIVABLES

Accounting Policies

Trade receivables are recognized initially at fair value and subsequently measured at amortized cost less provision for impairment of trade accounts receivable. Such a provision is established when there is reasonable expectation that the company will not be able to collect all amounts due. The carrying amount of the trade receivables is reduced through the use of the provision for impairment account, and the amount of any increase in the provision for impairment is recognized in the consolidated statements of income. When a trade receivable is uncollectible, it is written off against the provision for impairment account for trade accounts receivable. Subsequent recoveries of amounts previously written off are credited to the consolidated statements of income.

Supporting Information


	December 31,			December 31,			January 1,
	2011			2010			2010
Trade accounts – Canpotex (Note 29)	$	291		$	298		$	164
– Other		609			448			264
Less provision for impairment of trade accounts receivable		(8	)		(8	)		(8	)
		892			738			420
Margin deposits on derivative instruments		189			198			109
Income taxes receivable (Note 21)		21			46			363
Provincial mining and other taxes receivable		44			–			235
Other non-trade accounts		49			77			87
	$	1,195		$	1,059		$	1,214


NOTE 4				INVENTORIES

Accounting Policies

Inventories of finished products, intermediate products, raw materials, and materials and supplies are valued at the lower of cost and net realizable value. Costs, allocated to inventory using the weighted average cost method, include direct acquisition costs, direct costs related to the units of production and a systematic allocation of fixed and variable production overhead, as applicable. Net realizable value for finished products, intermediate products and raw materials is generally considered to be the selling price of the finished product in the ordinary course of business less the estimated costs of completion and estimated costs to make the sale. In certain circumstances, particularly pertaining to the company’s materials and supplies inventories, replacement cost is considered to be the best available measure of net realizable value. Inventory is reviewed monthly to ensure the carrying value does not exceed net realizable value. If so, a writedown is recognized. The writedown may be reversed if the circumstances which caused it no longer exist.

LOGO

II-14

In millions of US dollars except as otherwise noted

NOTE 4 Inventories continued

Supporting Information


	December 31,		December 31,		January 1,
	2011		2010		2010
Finished products	$	395	$	255	$	303
Intermediate products		98		127		159
Raw materials		91		65		51
Materials and supplies		147		123		111
	$	731	$	570	$	624
Items affecting cost of goods sold				2011		2010
Expensed inventories			$	3,653	$	3,087
Reserves, reversals and writedowns of inventories				8		5
			$	3,661	$	3,092


NOTE 5				PROPERTY, PLANT AND EQUIPMENT

Accounting Policies

Property, plant and equipment (which include certain mine development costs, pre-stripping costs and assets under construction) are carried at cost (which includes all expenditures directly attributable to bringing the asset to the location and installing it in working condition for its intended use) less accumulated depreciation less any recognized impairment loss. The cost of property, plant and equipment is reduced by the amount of related investment tax credits to which the company is entitled. Costs of additions, betterments, renewals and borrowings during construction are capitalized. Borrowing costs directly attributable to the acquisition, construction or production of assets that necessarily take a substantial period of time to ready for their intended use are added to the cost of those assets, until such time as the assets are substantially ready for their intended use. The capitalization rate is based on the weighted average interest rate on all of the company’s outstanding third-party debt. All other borrowing costs are charged through finance costs in the period in which they are incurred. Each part of an item of property, plant and equipment with a cost that is significant in relation to the item’s total cost is depreciated separately. When the cost of replacing part of an item of property, plant and equipment is capitalized, the carrying amount of the replaced part is derecognized. The cost of major inspections and overhauls is capitalized and depreciated over the period until the next major inspection or overhaul. Maintenance and repair expenditures that do not improve or extend productive life are expensed in the period incurred.

Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sale proceeds and the carrying amount of the asset, and is recognized in operating income.

Accounting Estimates and Judgments

Determination of which costs are directly attributable (e.g., labor, overhead) is a matter of judgment. Capitalization of costs ceases when an item is substantially complete and in the location and condition necessary for it to be capable of operating in the manner intended by management. Determining when an asset, or a portion thereof, meets these criteria requires consideration of the circumstances and the industry in which it is to be operated, normally predetermined by management with reference to such factors as productive capacity. This determination is a matter of judgment that can be complex and subject to differing interpretations and views, particularly when significant capital projects contain multiple phases over an extended period of time.

Certain mining and milling assets are depreciated using the units-of-production method based on the shorter of estimates of reserves or service lives. Pre-stripping costs are depreciated on a units-of-production basis over the ore mined from the mineable acreage stripped. Land is not depreciated. Other asset classes are depreciated on a straight-line basis as follows: land improvements 5 to 40 years, buildings and improvements 4 to 40 years and machinery and equipment (comprised primarily of plant equipment) 20 to 40 years.

Depreciation of assets under construction commences when the assets are ready for their intended use and is subject to management judgment. Their residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the depreciation period or method, as appropriate, and are treated as changes in accounting estimates.

II-15

In millions of US dollars except as otherwise noted

NOTE 5 Property, Plant and Equipment continued

The company assesses its existing assets and depreciable lives in connection with the review of mine and plant operating plans at the end of each reporting period. When it is determined that assigned asset lives do not reflect the expected remaining period of benefit, prospective changes are made to their depreciable lives. Uncertainties are inherent in estimating reserve quantities, particularly as they relate to assumptions regarding future prices, the geology of the company’s mines, the mining methods used and the related costs incurred to develop and mine the company’s reserves. Changes in these assumptions could result in material adjustments to reserve estimates, which could result in changes to units-of-production depreciation expense in future periods, particularly if reserve estimates are reduced.

Supporting Information


	Land and Improvements			Buildings and Improvements			Machinery and Equipment			Mine Development Costs			Assets Under Construction			Total
Carrying amount – December 31, 2010	$	332		$	1,248		$	4,331		$	260		$	1,970		$	8,141
Investment tax credits		–			–			(31	)		–			(41	)		(72	)
Additions		–			2			40			141			2,202			2,385
Disposals		–			(10	)		(1	)		(1	)		–			(12	)
Transfers		82			842			824			136			(1,884	)		–
Depreciation		(12	)		(43	)		(384	)		(81	)		–			(520	)
Carrying amount – December 31, 2011	$	402		$	2,039		$	4,779		$	455		$	2,247		$	9,922
Balance at December 31, 2011 comprised of:
Cost	$	499		$	2,345		$	7,657		$	827		$	2,247		$	13,575
Accumulated depreciation		(97	)		(306	)		(2,878	)		(372	)		–			(3,653	)
Carrying amount	$	402		$	2,039		$	4,779		$	455		$	2,247		$	9,922
Carrying amount – January 1, 2010	$	280		$	676		$	3,233		$	168		$	2,087		$	6,444
Investment tax credits		–			–			–			–			(36	)		(36	)
Impairment losses		–			–			(2	)		–			–			(2	)
Additions		2			12			156			82			1,962			2,214
Disposals		–			(3	)		(22	)		–			–			(25	)
Transfers		59			595			1,322			67			(2,043	)		–
Depreciation		(9	)		(32	)		(356	)		(57	)		–			(454	)
Carrying amount – December 31, 2010	$	332		$	1,248		$	4,331		$	260		$	1,970		$	8,141
Balance at December 31, 2010 comprised of:
Cost	$	417		$	1,513		$	6,864		$	548		$	1,970		$	11,312
Accumulated depreciation		(85	)		(265	)		(2,533	)		(288	)		–			(3,171	)
Carrying amount	$	332		$	1,248		$	4,331		$	260		$	1,970		$	8,141
Balance at January 1, 2010 comprised of:
Cost	$	356		$	911		$	5,540		$	400		$	2,087		$	9,294
Accumulated depreciation		(76	)		(235	)		(2,307	)		(232	)		–			(2,850	)
Carrying amount	$	280		$	676		$	3,233		$	168		$	2,087		$	6,444

II-16

In millions of US dollars except as otherwise noted

NOTE 5 Property, Plant and Equipment continued

Depreciation of property, plant and equipment included in cost of goods sold and in selling and administrative expenses was $478 in 2011 (2010 – $441). Depreciation of property, plant and equipment included in the cost of property, plant and equipment and inventory was $42 in 2011 (2010 – $13).

Acquiring or constructing property, plant and equipment by incurring a liability does not result in a cash outflow for the company until the liability is paid. In the period the related liability is incurred, the change in operating accounts payable on the consolidated statements of cash flow is typically reduced by such amount. In the period the liability is paid, the amount is reflected as a cash outflow for investing activities. The applicable net change in accounts payable that was reclassified (to) from investing activities to (from) operating activities on the consolidated statements of cash flow in 2011 was $(3) (2010 – $14).

LOGO


NOTE 6				INVESTMENTS

LOGO

Investments in Equity-Accounted Investees

Accounting Policies

Investments in which the company exercises significant influence (but does not control) are accounted for using the equity method. Such investees that are not jointly controlled entities are referred to as associates. The company’s interests in jointly controlled entities are also accounted for using the equity method.

These associates and jointly controlled entities follow similar accounting principles and policies to PotashCorp. The proportionate share of any net income or losses from investments accounted for using the equity method, and any gain or loss on disposal, are recorded in net income. The company’s share of its associates’ post-acquisition movements in OCI is recognized in the company’s OCI. The cumulative post-acquisition movements in net income and in OCI are adjusted against the carrying amount of the investment. Dividends received from associates reduce the value of the company’s investment. An impairment test is performed when there is objective evidence of impairment, such as significant adverse changes in the environment in which the equity-accounted investee operates or a significant or prolonged decline in the fair value of the investment below its cost. An impairment loss is recorded when the recoverable amount becomes lower than the carrying amount, recoverable amount being the higher of value in use and fair value less costs to sell. Impairment losses are reversed if the recoverable amount subsequently exceeds the carrying amount.

Accounting Estimates and Judgments

Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. Judgment is necessary in determining when significant influence exists.

The company’s 22 percent ownership of Sinofert Holdings Limited (“Sinofert”) does not constitute significant influence and its investment is therefore accounted for as an available-for-sale investment.

II-17

In millions of US dollars except as otherwise noted

NOTE 6 Investments continued

Supporting Information


	December 31, 2011		December 31, 2010		January 1, 2010
Sociedad Quimica y Minera de Chile S.A. (“SQM”) – 32 percent ownership; quoted market value of $4,429	$	728	$	649	$	587
Arab Potash Company Ltd. (“APC”) – 28 percent ownership; quoted market value of $1,383		433		382		349
Other		26		20		19
	$	1,187	$	1,051	$	955

Summarized financial information of the company’s associates (SQM, APC, Canpotex and others) is as follows:


	December 31, 2011		December 31, 2010		January 1, 2010
Current assets	$	3,661	$	3,067	$	2,629
Non-current assets		2,799		2,464		2,265
Current liabilities		1,663		1,355		1,174
Non-current liabilities		1,453		1,305		1,210
Non-controlling interest		52		48		46

			2011		2010
Sales			$	7,609	$	5,642
Gross profit				1,458		1,029
Income from continuing operations and net income				989		625

Dividends received from these investments in 2011 were $128 (2010 – $79).

Available-for-Sale Investments

Accounting Policies

The fair value of investments designated as available-for-sale is recorded in the consolidated statements of financial position, with unrealized gains and losses, net of related income taxes, recorded in accumulated other comprehensive income (“AOCI”). The cost of investments sold is based on the weighted average method. Realized gains and losses on these investments are removed from AOCI and recorded in net income. The company assesses at the end of each reporting period whether there is objective evidence of impairment. A significant or prolonged decline in the fair value of the investment below its cost would be evidence that the assets are impaired. If objective evidence of impairment were to exist, the impaired amount (i.e., the unrealized loss) would be recognized in net income; any subsequent reversals would be recognized in OCI and would not flow back into net income. See Note 24 for a description of how the company determines fair value for its investments.

Accounting Estimates and Judgments

The determination of when an investment is impaired requires significant judgment. In making this judgment, the company evaluates, among other factors, the duration and extent to which the fair value of the investment is less than its cost.

At December 31, 2011, the company assessed whether there was objective evidence that its investment in Sinofert was impaired. The fair value of this investment, recorded in the consolidated statements of financial position, was $439 compared to the cost of $579. Factors considered in assessing impairment included the length of time and extent to which fair value had been below cost, and current financial and market conditions specific to Sinofert. The company concluded that objective evidence of impairment did not exist as at December 31, 2011 and, as a result, the unrealized holding loss of $140 was included in AOCI. Impairment will be assessed again in future reporting periods if the fair value of the company’s investment in Sinofert is below cost.

II-18

In millions of US dollars except as otherwise noted

NOTE 6 Investments continued

Supporting Information


	December 31, 2011		December 31, 2010		January 1, 2010
Israel Chemicals Ltd. (“ICL”) – 14 percent ownership	$	1,826	$	3,046	$	1,896
Sinofert – 22 percent ownership		439		796		864
	$	2,265	$	3,842	$	2,760

In 2011, the company purchased additional shares in Sinofert for cash consideration of $4, of which $3 was settled during the year. The company’s ownership percentage remained at approximately 22 percent.


NOTE 7				OTHER ASSETS

Accounting Estimates and Judgments

The costs of certain ammonia catalysts are capitalized to other assets and are amortized, net of residual value, on a straight-line basis over their estimated useful lives of 3 to 10 years.

Upfront lease costs are capitalized to other assets and amortized over the life of the leases on a straight-line basis, the latest of which extends through 2038.

Supporting Information


	December 31, 2011		December 31, 2010		January 1, 2010
Long-term income taxes receivable (Note 21)	$	117	$	122	$	78
Investment tax credits receivable		111		41		46
Ammonia catalysts – net of accumulated amortization of $27 (December 31, 2010 – $17; January 1, 2010 – $9)		37		37		44
Accrued pension benefit asset (Note 13)		20		26		29
Upfront lease costs – net of accumulated amortization of $7 (December 31, 2010 – $6; January 1, 2010 – $4)		20		21		23
Deferred income tax assets (Note 21)		19		38		31
Derivative instrument assets (Note 11)		6		–		3
Other – net of accumulated amortization of $15 (December 31, 2010 – $11; January 1, 2010 – $6)		30		18		20
	$	360	$	303	$	274

Amortization of other assets included in cost of goods sold and in selling and administrative expenses was $9 (2010 – $5).

II-19

In millions of US dollars except as otherwise noted


NOTE 8				INTANGIBLE ASSETS

Accounting Policies

Intangible assets are recorded initially at cost and relate primarily to production and technology rights, contractual customer relationships, computer software and goodwill. Internally generated intangible assets relate to computer software and other developed projects. An intangible asset is recognized when it is probable that the expected future economic benefits attributable to the asset will flow to the company and the cost of the asset can be measured reliably.

Costs associated with maintaining computer software programs are recognized as an expense as incurred. Development costs that are directly attributable to the design and testing of identifiable and unique software products controlled by the company are recognized as intangible assets when the following criteria are met:

It is technically feasible to complete the software product so that it will be available for use;

Management intends to complete the software product and use or sell it;

The software product can be used or sold;

It can be demonstrated how the software product will generate probable future economic benefits;

Adequate technical, financial and other resources to complete the development and to use or sell the software product are available; and

The expenditure attributable to the software product during its development can be reliably measured.

Directly attributable costs that are capitalized as part of the software product include applicable employee costs. Development costs previously recognized as an expense are not recognized as an asset in a subsequent period.

Amortization expense is recognized in net income in the expense category consistent with the function of the intangible asset. The assets’ useful lives are

reviewed, and adjusted if appropriate, at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortization period or method, as appropriate, and are treated as changes in accounting estimates.

All business combinations are accounted for using the purchase method. Identifiable intangible assets are recognized separately from goodwill. Goodwill is carried at cost, is no longer amortized and represents the excess of the cost of an acquisition over the fair value of the company’s share of the net identifiable assets of the acquired subsidiary or equity method investee at the date of acquisition. Separately recognized goodwill is carried at cost less accumulated amortization and impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

Accounting Estimates and Judgments

An intangible asset is defined as being identifiable, able to bring future economic benefits to the company and controlled by it. An asset meets the identifiability criterion when it is separable or arises from contractual rights. Judgment is necessary to determine whether expenditures made by the company on non-tangible items represent intangible assets eligible for capitalization. Finite-lived intangible assets are accounted for at cost and are amortized on a straight-line basis over their estimated useful lives.

Goodwill is allocated to cash-generating units or groups of cash-generating units for the purpose of impairment testing based on the level at which it is monitored by management, and not at a level higher than an operating segment. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose.

II-20

In millions of US dollars except as otherwise noted

NOTE 8 Intangible Assets continued

Supporting Information

Goodwill is the only intangible asset with an indefinite useful life recognized by the company. All other intangible assets have finite useful lives.


	Goodwill ¹			Other			Total
Carrying amount – December 31, 2010	$	97		$	18		$	115
Additions		–			2			2
Amortization		–			(2	)		(2	)
Carrying amount – December 31, 2011	$	97		$	18		$	115
Balance at December 31, 2011 comprised of:
Cost	$	104		$	55		$	159
Accumulated amortization		(7	)		(37	)		(44	)
Carrying amount	$	97		$	18		$	115
Carrying amount – January 1, 2010	$	97		$	20		$	117
Additions		–			1			1
Amortization		–			(3	)		(3	)
Carrying amount – December 31, 2010	$	97		$	18		$	115
Balance at December 31, 2010 comprised of:
Cost	$	104		$	53		$	157
Accumulated amortization		(7	)		(35	)		(42	)
Carrying amount	$	97		$	18		$	115
Balance at January 1, 2010 comprised of:
Cost	$	104		$	51		$	155
Accumulated amortization		(7	)		(31	)		(38	)
Carrying amount	$	97		$	20		$	117

The company’s aggregate carrying amount of goodwill is $97 (December 31, 2010 – $97; January 1, 2010 – $97), representing 1.2 percent of shareholders’ equity at December 31, 2011 (December 31, 2010 – 1.5 percent; January 1, 2010 – 1.5 percent). Substantially all of the company’s recorded goodwill relates to the nitrogen segment.


NOTE 9				SHORT-TERM DEBT


	December 31, 2011		December 31, 2010		January 1, 2010
Commercial paper	$	829	$	1,274	$	727

The amount available under the commercial paper program is limited to the availability of backup funds under the credit facilities.

The company has a $75 unsecured line of credit available for short-term financing. Net of letters of credit of $23 and direct borrowings of $NIL, $52 was available at December 31, 2011 (December 31, 2010 – $66; January 1, 2010 – $42). The line of credit is available through August 2012.

The line of credit is subject to financial tests and other covenants. The principal covenants require a debt-to-capital ratio of less than or equal to 0.60:1, a long-term-debt-to-EBITDA (as defined in the agreement to be earnings before interest, income taxes, provincial mining and other taxes, depreciation, amortization and other non-cash expenses, and unrealized gains and losses in respect of hedging instruments) ratio of less than or equal to 3.5:1 and debt of subsidiaries not to exceed $650. The line of credit is subject to other customary covenants and events of default, including an event of default for non-payment of other debt in excess of CDN $40. Non-compliance with such covenants could result in accelerated payment of amounts due under the line of credit, and its termination. The company was in compliance with the above-mentioned covenants at December 31, 2011.

II-21

In millions of US dollars except as otherwise noted


NOTE 10				PAYABLES AND ACCRUED CHARGES


	December 31, 2011		December 31, 2010		January 1, 2010
Trade accounts	$	578	$	592	$	509
Income taxes (Note 21)		271		167		17
Accrued compensation		111		120		45
Deferred revenue		67		53		34
Dividends		60		28		30
Accrued interest		42		49		48
Other taxes		34		47		9
Current portion of asset retirement obligations and accrued environmental costs (Note 14)		26		26		40
Accrued deferred share units		25		30		20
Current portion of pension and other post-retirement benefits (Note 13)		8		9		8
Other payables and other accrued charges		73		77		57
	$	1,295	$	1,198	$	817


NOTE 11				DERIVATIVE INSTRUMENTS

Accounting Policies

Derivative financial instruments are used by the company to manage its exposure to commodity price, exchange rate and interest rate fluctuations. The company recognizes its derivative instruments at fair value on the consolidated statements of financial position where appropriate. Contracts to buy or sell a non-financial item that can be settled net in cash or another financial instrument, or by exchanging financial instruments, as if the contracts were financial instruments (except contracts that were entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance with expected purchase, sale or usage requirements), are accounted for as derivative financial instruments.

The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship. For instruments designated as fair value hedges, the effective portion of the change in the fair value of the derivative is offset in net income against the change in fair value, attributed to the risk being hedged, of the underlying hedged asset, liability or firm commitment. For cash flow hedges, the effective portion of the change in the fair value of the derivative is accumulated in OCI until the variability in cash flows being hedged is recognized in net income in future accounting periods. Ineffective portions of hedges are recorded in net income in the current period. The change in fair value of derivative instruments not designated as hedges is recorded in net income in the current period.

The company’s policy is not to use derivative instruments for trading or speculative purposes, although it may choose not to designate an economic hedging relationship as an accounting hedge. The company formally documents all relationships between hedging instruments and hedged items,

as well as its risk management objective and strategy for undertaking the hedge transaction. This process includes linking derivatives to specific assets and liabilities or to specific firm commitments or forecast transactions. The company also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are expected to be or were, as appropriate, highly effective in offsetting changes in fair values of hedged items. Hedge effectiveness related to the company’s natural gas hedges is assessed on a prospective and retrospective basis using regression analyses.

A hedging relationship may be terminated because the hedge ceases to be effective, the underlying asset or liability being hedged is derecognized, or the derivative instrument is no longer designated as a hedging instrument. In such instances, the difference between the fair value and the accrued value of the hedging derivatives upon termination is deferred and recognized in net income on the same basis that gains, losses, revenue and expenses of the previously hedged item are recognized. If a cash flow hedging relationship is terminated because it is no longer probable that the anticipated transaction will occur, then the net gain or loss accumulated in OCI is recognized in current period net income.

Accounting Estimates and Judgments

Most derivative instruments are recorded on the statements of financial position at fair value and must be remeasured at each reporting date; changes in the fair value are recorded in either net income or OCI. Uncertainties, estimates and use of judgment inherent in applying the standards include the assessment of contracts as derivative instruments and for embedded derivatives, application of hedge accounting and valuation of derivatives at fair value (discussed further in Note 24).

II-22

In millions of US dollars except as otherwise noted

NOTE 11 Derivative Instruments continued

In determining whether a contract represents a derivative or contains an embedded derivative, the most significant area where judgment has been applied pertains to the determination as to whether the contract can be settled net, one of the criteria in determining whether a contract for a non-financial asset is considered a derivative and accounted for as such. Judgment is also applied in determining whether an embedded derivative is closely related to the host contract, in which case bifurcation and separate accounting are not necessary.

To obtain and maintain hedge accounting for its natural gas derivative instruments, the company must be able to establish that the hedging instrument is effective at offsetting the risk of the hedged item both retrospectively and prospectively, and ensure documentation meets stringent requirements. The process to test effectiveness requires the application of judgment and estimation, including determining the number of data points to test to ensure adequate and appropriate measurement to confirm or dispel hedge effectiveness and valuation of data within effectiveness tests where external existing data available do not perfectly match the company’s circumstances. Judgment and estimation are also used to assess credit risk separately in the company’s hedge effectiveness testing.

Supporting Information

Significant recent derivatives included the following:

Natural gas futures, swaps and option agreements to manage the cost of natural gas, generally designated as cash flow hedges of anticipated transactions. The portion of gain or loss on derivative instruments designated as cash flow hedges that is deferred in AOCI is reclassified into cost of goods sold when the product containing the hedged item impacts earnings. Any hedge ineffectiveness is recorded in cost of goods sold in the current period.

Foreign currency forward contracts for the primary purpose of limiting exposure to exchange rate fluctuations relating to expenditures denominated in currencies other than the US dollar and foreign currency swap contracts to limit exposure to exchange rate fluctuations relating to Canadian dollar-denominated commercial paper. These contracts are not designated as hedging instruments for accounting purposes. Accordingly, they are recorded at fair value with changes in fair value recognized through other income or other expenses, as applicable, in net income.


	December 31, 2011
	Assets			Liabilities			Net
Natural gas hedging derivatives	$	6		$	271		$	(265	)
Foreign currency derivatives		4			–			4
Total		10			271			(261	)
Less current portion		(4	)		(67	)		63
Long-term portion	$	6		$	204		$	(198	)


	December 31, 2010
	Assets			Liabilities			Net
Natural gas hedging derivatives	$	–		$	279		$	(279	)
Foreign currency derivatives		5			–			5
Total		5			279			(274	)
Less current portion		(5	)		(75	)		70
Long-term portion	$	–		$	204		$	(204	)


	January 1, 2010
	Assets		Liabilities		Net
Natural gas hedging derivatives	$	4	$	175	$	(171)
Foreign currency derivatives		5		–		5
Total		9		175		(166)
Less current portion		(6)		(52)		46
Long-term portion	$	3	$	123	$	(120)

As at December 31, 2011, the company had natural gas derivatives qualifying for hedge accounting in the form of swaps, which represented a notional amount of 40 million MMBtu with maturities in 2012 through 2019. At December 31, 2010, the notional amount of swaps was 103 million MMBtu with maturities in 2011 through 2019. At January 1, 2010, the notional amount of swaps was 123 million MMBtu with maturities in 2010 through 2019.

As at December 31, 2011, the company had entered into foreign currency forward contracts to sell US dollars and receive Canadian dollars in the notional amount of $160 (December 31, 2010 – $170, January 1, 2010 – $140) at an average exchange rate of 1.0437 (December 31, 2010 – 1.0170, January 1, 2010 – 1.0681) per US dollar with maturities in 2012. At December 31, 2011, the company had no foreign currency swaps to sell US dollars and receive Canadian dollars (notional amount at December 31, 2010 – $69, January 1, 2010 – $263; average exchange rate at December 31, 2010 – 1.0174, January 1, 2010 – 1.0551 per US dollar).

For the year ended December 31, 2011, losses before taxes of $62 were recognized in OCI (2010 – $191). For the year ended December 31, 2011, losses before taxes of $76 (2010 – $85) were reclassified from AOCI and recognized in cost of goods sold excluding ineffectiveness, which changed these losses by $NIL in both years. Of the losses before taxes at December 31, 2011, approximately $68 (2010 – $76) will be reclassified to cost of goods sold within the next 12 months. See Note 24 for a description of how the company determined fair value for its derivative instruments.

II-23

In millions of US dollars except as otherwise noted


NOTE 12				LONG-TERM DEBT

Accounting Policy

Issue costs of long-term debt obligations and gains and losses on interest rate swaps qualifying for hedge accounting are capitalized to long-term obligations and are amortized to expense over the term of the related liability using the effective interest method.

Supporting Information


	December 31, 2011			December 31, 2010			January 1, 2010
Senior notes ¹
7.750% notes due May 31, 2011	$	–		$	600		$	600
4.875% notes due March 1, 2013		250			250			250
5.250% notes due May 15, 2014		500			500			500
3.750% notes due September 30, 2015		500			500			500
3.250% notes due December 1, 2017		500			500			–
6.500% notes due May 15, 2019		500			500			500
4.875% notes due March 30, 2020		500			500			500
5.875% notes due December 1, 2036		500			500			500
5.625% notes due December 1, 2040		500			500			–
Other		7			7			8
		3,757			4,357			3,358
Less net unamortized debt costs		(49	)		(54	)		(42	)
Add unamortized interest rate swap gains		–			1			2
		3,708			4,304			3,318
Less current maturities		(7	)		(602	)		(2	)
Add current portion of amortization		4			5			3
	$	3,705		$	3,707		$	3,319

Each series of senior notes is unsecured and has no sinking fund requirements prior to maturity. Each series is redeemable, in whole or in part, at the company’s option, at any time prior to maturity for a price not less than the principal amount of the notes to be redeemed, plus accrued and unpaid interest. Under certain conditions related to a change in control, the company is required to make an offer to purchase all, or any part, of the senior notes other than those maturing in 2013 at 101 percent of the principal amount of the notes repurchased, plus accrued and unpaid interest.

The company has two long-term revolving credit facilities that provide for unsecured borrowings: a $750 credit facility that matures on May 31, 2013 and a $2,750 credit facility that matures on December 11, 2016. No borrowings were outstanding under these credit facilities at December 31, 2011, December 31, 2010 or January 1, 2010. These credit facilities also backstop the company’s commercial paper program and the availability of borrowings is reduced by the amount of commercial paper outstanding (December 31, 2011 – $829; December 31, 2010 – $1,272; January 1, 2010 – $725). During the year ended December 31, 2011, the company borrowed and repaid $NIL (2010 – $810) under its long-term credit facilities. Interest rates on borrowings under its credit facilities in 2010 ranged from 0.60 percent to 3.75 percent.

Other long-term debt in the above table includes a net financial liability of $6 (December 31, 2010 – $6; January 1, 2010 – $6) pursuant to back-to-back loan arrangements involving certain financial assets and financial liabilities.

The company has presented financial assets of $505 and financial liabilities of $511 on a net basis related to these arrangements because a legal right to set-off exists, and it intends to settle with the same party on a net basis.

The senior notes are not subject to any financial test covenants but are subject to certain customary covenants (including limitations on liens and on sale and leaseback transactions) and events of default, including an event of default for acceleration of other debt in excess of $50. Principal covenants and events of default under the $750 credit facility are the same as those under the line of credit described in Note 9 with the addition of a minimum tangible net worth covenant in an amount greater than or equal to $1,250.

Principal covenants and events of default under the $2,750 credit facility are as follows: a debt-to-capital ratio of less than or equal to 0.60:1, a long-term-debt-to-EBITDA (as defined in the agreement to be earnings before interest, income taxes, provincial mining and other taxes, depreciation, amortization

II-24

In millions of US dollars except as otherwise noted

NOTE 12 Long-Term Debt continued

and other non-cash expenses, and unrealized gains and losses in respect of hedging instruments) ratio of less than or equal to 3.5:1, debt of subsidiaries not to exceed $1,000 and a $300 permitted lien basket. The credit facility is subject to other customary covenants and events of default, including an event of default for non-payment of other debt in excess of CDN $100. Non-compliance with such covenants could result in accelerated payment of amounts due under the credit facility, and its termination. The back-to-back loan arrangements are not subject to any financial test covenants but are subject to certain customary covenants and events of default, including, for other long-term debt, an event of default for non-payment of other debt in excess of $25. Non-compliance with such covenants could result in accelerated

payment of the related debt. The company was in compliance with the above-mentioned covenants at December 31, 2011.

Long-term debt obligations at December 31, 2011 will mature as follows:


2012	$	7
2013		250
2014		500
2015		500
2016		–
Subsequent years		2,500
	$	3,757


NOTE 13				PENSION AND OTHER POST-RETIREMENT BENEFITS

Accounting Policies

The company offers a number of benefit plans that provide pension and other post-retirement benefits to qualified employees: defined benefit pension plans, supplemental pension plans, defined contribution plans and health, disability, dental and life insurance plans.

Defined benefit plans

The company accrues its obligations under employee benefit plans and the related costs, net of plan assets and unvested prior service costs. The cost of pensions and other retirement benefits earned by employees generally is actuarially determined using the projected unit credit method and management’s best estimate of expected plan investment performance, salary escalation, retirement ages of employees and expected health-care costs. Actuaries perform valuations on a regular basis to determine the actuarial present value of the accrued pension and other post-employment benefits. For the purpose of calculating the expected return on plan assets, such assets are valued at fair value. Prior service costs from plan amendments are deferred and amortized on a straight-line basis over the average period until the benefits become vested. However, to the extent that benefits are already vested, such prior service costs are recognized immediately.

Actuarial gains (losses) arise from the difference between the actual rate of return on plan assets for a period and the expected long-term rate of return on plan assets for that period, or from changes in actuarial assumptions used to determine the defined benefit obligation. The company’s policy is to recognize in OCI all actuarial gains (losses) for defined benefit plans immediately in the period in which they arise.

When the restructuring of a benefit plan simultaneously gives rise to both a curtailment and a settlement of obligation, the curtailment is accounted for prior to the settlement.

Pension and other post-employment benefit expense includes, as applicable, the net of management’s best estimate of the cost of benefits provided, interest cost of projected benefits, expected return on plan assets, prior service costs and the effect of any curtailments or settlements.

Defined contribution plans

Defined contribution plan costs are recognized in net income for services rendered by employees during the period.

Accounting Estimates and Judgments

The company sponsors plans that provide pension and other post-retirement benefits for most of its employees. The calculation of employee benefit plan expenses and obligations depends on assumptions such as discount rates, expected rates of return on assets, health-care cost trend rates, projected salary increases, retirement age, mortality and termination rates. These assumptions are determined by management and are reviewed annually by the company’s independent actuaries.

The company’s discount rate assumption reflects the weighted average interest rate at which the pension and other post-retirement liabilities could be effectively settled at the measurement date. The rate varies by country. The company determines the discount rate using a yield curve approach. Based on the respective plans’ demographics, expected future pension benefits and medical claims payments are measured and discounted to determine the present value of the expected future cash flows. The cash flows are discounted using yields on high-quality AA-rated non-callable bonds with cash flows of similar timing where there is a deep market for such bonds. Where the company does not believe there is a deep market for such bonds (such as for terms in excess of 10 years in Canada), the cash flows are discounted using a yield curve derived from yields on provincial bonds rated AA or better to which a spread adjustment is added to reflect the additional risk of corporate bonds.

II-25

In millions of US dollars except as otherwise noted

NOTE 13 Pension and Other Post-Retirement Benefits continued

The resulting rates are used by the company to determine the final discount rate. The rate selected for the December 31, 2011 measurement date will be used to determine expense for fiscal 2012 unless significant market fluctuations require an update during 2012, at which time a new rate will be selected.

The expected long-term rate of return on assets is determined using a building block approach. The expected real rate of return for each individual asset class is determined based on expected future performance. These rates are weighted based on the current asset portfolio. A separate determination is made of the underlying impact of expenses, inflation, rebalancing, diversification and the actively managed portfolio premium. The resulting total expected asset return is compared to the historical returns achieved by the portfolio. Based on these input items, the company selects a final rate.

The assumptions used to determine the benefit obligation and expense for the company’s significant plans were as follows (weighted average as of December 31):


	Pension					Other
	2011			2010		2011			2010
Discount rate – obligation, %		4.60			5.45		4.60			5.45
Discount rate – expense, %		5.45	¹		5.85		5.45	¹		5.85
Long-term rate of return on assets, %		7.00			7.00		n/a			n/a
Rate of increase in compensation levels, %		4.00			4.00		n/a			n/a

¹	Discount rate changed from 5.45 percent to 4.75 percent, effective October 1, 2011, as a result of significant market fluctuations that had occurred since the prior year-end.

n/a	= not applicable

Assumptions regarding future mortality experience are set based on actuarial advice in accordance with published statistics and experience in each country.

The average remaining service period of the active employees covered by the company’s pension plans is 12.4 years (2010 – 11.6 years). The average remaining service period of the active employees covered by the company’s other benefit plans is 12.9 years (2010 – 12.1 years).

The assumed health-care cost trend rate for the company’s significant retiree medical plan is 6 percent. Effective January 1, 2004, the largest retiree medical plan limits the company’s share of annual medical cost increases to 75 percent of the first 6 percent of total medical inflation for recent and future non-union retirees. Any cost increases in excess of this amount are funded by retiree contributions.

Sensitivity of Assumptions

Sensitivity to changes in key assumptions for the company’s pension and other post-retirement benefit plans would have been as follows:


	2011						2010
	Benefit Obligation			Expense in Income Before Income Taxes			Benefit Obligation			Expense in Income Before Income Taxes
As reported	$	1,417					$	1,191
Discount rate
Impact of 1.0 percentage point decrease		232		$	8			179		$	1
Impact of 1.0 percentage point increase		(183	)		(7	)		(149	)		(4	)
Expected long-term rate of return
Impact of 1.0 percentage point decrease		n/a			7			n/a			7
Impact of 1.0 percentage point increase		n/a			(7	)		n/a			(5	)
Rate of compensation increase
Impact of 1.0 percentage point decrease		(24	)		(3	)		(19	)		(1	)
Impact of 1.0 percentage point increase		27			3			21			1
Medical cost trend rate
Impact of 1.0 percentage point decrease		(32	)		(3	)		(38	)		(4	)
Impact of 1.0 percentage point increase		14			4			17			5

n/a	= not applicable

II-26

In millions of US dollars except as otherwise noted

NOTE 13 Pension and Other Post-Retirement Benefits continued

The above sensitivities are hypothetical and should be used with caution. Changes in amounts based on a 1.0 percentage point variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in amounts may not be linear. The sensitivities have been calculated independently of changes in other key variables. Changes in one factor may result in changes in another, which could amplify or reduce certain sensitivities.

Supporting Information

Pension plans

Canada

The company has established a supplemental defined benefit retirement income plan for senior management that is unfunded, non-contributory and provides a supplementary pension benefit. It is provided for by charges to earnings sufficient to meet the projected benefit obligation.

United States

Substantially all employees of the company are participants in either a defined contribution or a defined benefit pension plan. Benefits are based on a combination of years of service and compensation levels, depending on the plan. Contributions to the US plans are made to meet or exceed minimum funding requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”) and associated Internal Revenue Service regulations and procedures.

Trinidad

Substantially all employees of the company are participants in both a defined contribution and a defined benefit pension plan. Benefits are based on a combination of years of service and compensation levels, depending on the plan.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company