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Calian Reports First Quarter Results: Strong Start to a New Fiscal Year

(All amounts in this release are in Canadian Dollars) (February 08, 2012)

OTTAWA, ONTARIO -- (Marketwire) -- 02/08/12 -- Calian Technologies Ltd. (TSX:CTY) today released unaudited results for the first quarter ended December 31, 2011. Revenues for the quarter were $56.8 million, a 7% increase from the $53.3 million reported in the same quarter of the previous year. Net earnings were $3.6 million or $0.47 per share basic and diluted, compared to $3.1 million or $0.41 per share basic and diluted in the same quarter of the previous year.

"Today, we reported the highest level of first quarter revenues and earnings in the Company's history and we are very pleased to start the fiscal year on such a strong note. Both divisions showed healthy increases in revenues relative to the prior year. Our SED division had a strong quarter, bolstered by heightened activity levels in the manufacturing group due to a significant short-term requirement from one of our US military customers. Likewise, our BTS division continued its positive momentum, producing growing revenues from increased activity in all major sectors" stated Ray Basler, President and CEO.

"Gross margins remained strong for the quarter and were consistent with the prior year. SED realized excellent margins as a result of economies of scale in the manufacturing area coupled with better than expected margins on the close-out of certain projects. Our BTS division continued to experience margin contraction due to the effects of significant competitive pressures for new work. Fortunately our strong backlog of long-term work affords us the ability to cope with the market competitiveness created by current economic conditions" continued Basler.

During the quarter, the company repurchased 65,200 shares under its Normal Course Issuer Bid at an average price of $17.71 representing an excellent use of surplus cash to enhance overall shareholder value.


While growth has been strong this quarter, we are cognizant of the fact that increased activity levels in certain areas may not be recurring. We continue to believe that our key markets will remain relatively strong, although we are aware of the potential impact of government cost cutting initiatives and increased competitive pressures. While recent contract signings have bolstered our confidence in meeting our financial targets, revenues ultimately realized will be dependent on the extent and timing of future contract awards as well as customer utilization of existing contracting vehicles. Based on available information and our prudent assessment of the marketplace during these unsettled economic times, we expect revenues for 2012 to be in the range of $230 million to $250 million and net earnings in the range of $1.70 to $1.95 per share.

About Calian

Calian employs over 2300 people with offices and projects that span Canada, U.S. and international markets. The company's capabilities include the provision of business and technology services to industry and government in the health, operations and maintenance, IT services and training domains as well as the design, manufacturing and maintenance of complex systems to the communications and defence sectors. Our goal is to be the best company to work for, buy from and invest in. The Business and Technology Services (BTS) Division is headquartered in Ottawa. This division augments customer workforces with flexible short and long-term placements of individuals and teams, provides access to critical recruiting capabilities and delivers outsourcing services for a variety of technical and professional functions. Our strength lies in understanding clients' needs, recruiting highly qualified personnel who understand and meet those needs, and then effectively managing those personnel within our customers' framework. Calian's Systems Engineering Division (SED) plans, designs and implements complex communication systems for many of the world's space agencies and leading satellite manufacturers and operators. SED also provides contract manufacturing services for both private sector and military customers in North America.

DISCLAIMER

Certain information included in this press release is forward-looking and is subject to important risks and uncertainties. The results or events predicted in these statements may differ materially from actual results or events. Such statements are generally accompanied by words such as "intend", "anticipate", "believe", "estimate", "expect" or similar statements. Factors which could cause results or events to differ from current expectations include, among other things: the impact of price competition; scarce number of qualified professionals; the impact of rapid technological and market change; loss of business or credit risk with major customers; technical risks on fixed price projects; general industry and market conditions and growth rates; international growth and global economic conditions, and including currency exchange rate fluctuations; and the impact of consolidations in the business services industry. For additional information with respect to certain of these and other factors, please see the Company's most recent annual report and other reports filed by Calian with the Ontario Securities Commission. Calian disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. No assurance can be given that actual results, performance or achievement expressed in, or implied by, forward-looking statements within this disclosure will occur, or if they do, that any benefits may be derived from them.

CALIAN TECHNOLOGIES LTD. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION As at December 31, 2011, September 30, 2011 and October 1, 2010 (Canadian dollars in thousands) December 31, September 30, October 1, NOTES 2011 2011 2010 -------------- -------------- -------------- ASSETS CURRENT ASSETS Cash $ 28,579 $ 30,742 $ 29,055 Accounts receivable 37,347 35,181 33,954 Work in process 6,187 6,960 3,576 Prepaid expenses 6 3,036 2,751 6,329 Derivative assets 350 451 158 Investment - - 953 -------------- -------------- -------------- Total current assets 75,499 76,085 74,025 Deferred tax assets 113 480 696 Investment - - 2,464 Equipment 4,067 4,069 4,611 Application software 583 440 543 Goodwill 9,518 9,518 9,518 -------------- -------------- -------------- Total non-current assets 14,281 14,507 17,832 -------------- -------------- -------------- TOTAL ASSETS $ 89,780 $ 90,592 $ 91,857 -------------- -------------- -------------- -------------- -------------- -------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued liabilities $ 13,932 $ 18,594 $ 17,024 Unearned contract revenue 11,438 8,026 16,002 Share repurchase obligation 7 532 562 1,315 Derivative liabilities 123 1,054 48 -------------- -------------- -------------- TOTAL LIABILITIES 26,025 28,236 34,389 -------------- -------------- -------------- -------------- -------------- -------------- SHAREHOLDERS' EQUITY Issued capital 7 19,038 19,018 18,511 Contributed surplus 207 219 171 Retained earnings 43,983 43,345 38,275 Accumulated other comprehensive income (loss) 527 (226) 511 -------------- -------------- -------------- TOTAL SHAREHOLDERS' EQUITY 63,755 62,356 57,468 -------------- -------------- -------------- $ 89,780 $ 90,592 $ 91,857 -------------- -------------- -------------- -------------- -------------- -------------- CALIAN TECHNOLOGIES LTD. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the three months ended December 31, 2011 and 2010 (Canadian dollars in thousands, except per share data) December 31, December 31, NOTES 2011 2010 -------------- -------------- Revenues $ 56,813 $ 53,260 Cost of revenues 45,902 43,017 -------------- -------------- Gross profit 10,911 10,243 Selling and marketing 1,098 1,097 General and administration 4,208 4,264 Facilities 811 833 -------------- -------------- Earnings before interest income and income tax expense 4,794 4,049 Interest income 8 79 231 -------------- -------------- Earnings before income tax expense 4,873 4,280 Income tax expense - current 1,206 1,032 Income tax expense - deferred 76 110 -------------- -------------- Total income tax expense 1,282 1,142 -------------- -------------- NET EARNINGS 3,591 3,138 -------------- -------------- Other comprehensive income, net of tax Unrealized (loss) on translating financial statements of an investment in a foreign operations, net of tax of nil (2011 - nil) (29) (29) Change in deferred gain on derivatives designated as cash flow hedges, net of tax of $289 (2011 - $199) 782 487 -------------- -------------- Other comprehensive income, net of tax 753 458 -------------- -------------- COMPREHENSIVE INCOME $ 4,344 $ 3,596 -------------- -------------- -------------- -------------- NET EARNINGS PER SHARE: Basic 9 $ 0.47 $ 0.41 -------------- -------------- -------------- -------------- Diluted 9 $ 0.47 $ 0.41 -------------- -------------- -------------- --------------

CALIAN TECHNOLOGIES LTD. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY For the three months ended December 31, 2011 and 2010 (Canadian dollars in thousands, except per share data) Issued Contributed Retained Notes capital surplus Earnings Balance October 1, 2011 $ 19,018 $ 219 $ 43,345 Comprehensive income - - 3,591 Dividends ($0.26 per share) - - (1,992) Issue of shares under stock option plan 7 183 (31) - Share repurchase 7 (163) - (992) Stock option compensation - 19 - Share purchase agreement - reclassification 7 - - 31 --------------------------------------------- Balance December 31, 2011 $ 19,038 $ 207 $ 43,983 --------------------------------------------- --------------------------------------------- CALIAN TECHNOLOGIES LTD. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY For the three months ended December 31, 2011 and 2010 (Canadian dollars in thousands, except per share data) Foreign Cash currency flow translation Hedging reserve reserve Total Balance October 1, 2011 $ 22 $ (248) $ 62,356 Comprehensive income (29) 782 4,344 Dividends ($0.26 per share) - - (1,992) Issue of shares under stock option plan - - 152 Share repurchase - - (1,155) Stock option compensation - - 19 Share purchase agreement - reclassification - - 31 --------------------------------------------- Balance December 31, 2011 $ (7) $ 534 $ 63,755 --------------------------------------------- --------------------------------------------- Issued Contributed Retained Notes capital surplus Earnings Balance October 1, 2010 $ 18,511 $ 171 $ 38,275 Comprehensive income - - 3,138 Dividends ($0.22 per share) - - (1,698) Issue of shares under stock option plan 7 153 (15) - Share repurchase 7 (43) - (283) Share purchase agreement - reclassification 7 107 - 660 --------------------------------------------- Balance December 31, 2010 $ 18,728 $ 156 $ 40,092 --------------------------------------------- --------------------------------------------- Foreign Cash currency flow translation Hedging reserve reserve Total Balance October 1, 2010 $ - $ 511 $ 57,468 Comprehensive income (29) 487 3,596 Dividends ($0.22 per share) - - (1,698) Issue of shares under stock option plan - - 138 Share repurchase - - (326) Share purchase agreement - reclassification - - 767 --------------------------------------------- Balance December 31, 2010 $ (29) $ 998 $ 59,945 --------------------------------------------- --------------------------------------------- CALIAN TECHNOLOGIES LTD. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the three months ended December 31, 2011 and 2010 (Canadian dollars in thousands) -------------------------------------- December 31, December 31, NOTES 2011 2010 ------------------------------ CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES Net earnings $ 3,591 $ 3,138 Items not affecting cash: Interest income 8 (79) (231) Income tax expense 1,282 1,142 Employee stock purchase plan and option plan compensation expense 36 15 Amortization 276 286 ------------------------------ 5,106 4,350 Change in non-cash working capital Accounts receivable (2,346) 82 Work in process 773 1,300 Prepaid expenses (285) 2,449 Accounts payable and accrued liabilities (4,337) (4,475) Unearned contract revenue 3,412 (3,093) ------------------------------ 2,323 613 Interest received 79 71 Income tax paid (1,124) (1,258) ------------------------------ 1,278 (574) ------------------------------ CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES Issuance of common shares 7 152 138 Dividends (1,992) (1,698) Repurchase of shares 7 (1,155) (326) ------------------------------ (2,995) (1,886) ------------------------------ CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES Equipment and application software expenditures (417) (124) ------------------------------ (417) (124) ------------------------------ FOREIGN CURRENCY ADJUSTMENT (29) (29) NET CASH OUTFLOW (2,163) (2,613) CASH, BEGINNING OF PERIOD 30,742 29,055 ------------------------------ CASH, END OF PERIOD $ 28,579 $ 26,442 ------------------------------ ------------------------------ CALIAN TECHNOLOGIES LTD. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the periods ended December 31, 2011 and 2010 (Canadian dollars in thousands, except per share amounts) (Unaudited)

1. BASIS OF PREPARATION

Calian Technologies Ltd. ("the Company"), incorporated under the Canada Business Corporations Act, and its wholly-owned subsidiaries provide technology services to industry and government. The address of its registered office and principal place of business is 340 Legget Drive, Ottawa, Ontario K2K 1Y6.

These interim condensed consolidated financial statements are expressed in Canadian dollar and have been prepared in accordance with International Accounting Standard (IAS) IAS34 - Interim financial reporting and IFRS 1 - First-time adoption of International Financial Reporting Standards (IFRS), as issued by the International Accounting Standard Board (IASB). These interim consolidated financial statements have been prepared in accordance with the accounting policies the Company expects to adopt in its annual consolidated financial statements for the year ending September 30, 2012 which are described in Note 2 - Summary of significant accounting policies.

The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto prepared under previous Canadian generally accepted accounting principles included in the Company's Annual Report for the year ended September 30, 2011. Note 13 - Transition to IFRS explains how the transition from previous Canadian GAAP to IFRS affected the Company's reported financial position as at October 1, 2010 and September 30, 2011, as well as the financial performance and cash flows for the year ended September 30, 2011 and the three-month period ended December 31, 2010.

These interim condensed consolidated financial statements for the three-month period ended December 31, 2011 were authorized for issuance by the Board on February 8, 2012.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting policies below have been applied consistently to all periods presented in these interim condensed consolidated financial statements unless otherwise stated.

Basis of consolidation

The interim condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries Calian Ltd. located in Ottawa, Ontario and Calian Technology (U.S.) Ltd, located in Manassas, Virginia. All transactions and balances between these companies have been eliminated on consolidation.

Basis of presentation

The interim condensed consolidated financial statements are presented at historical cost unless otherwise noted. Historical cost is generally based on the fair value of the consideration given in exchange for the asset.

Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable. Revenue from a contract to provide services is recognized by reference to the stage of completion of the contract. The stage of completion of the contract is determined as follows:

Fixed price contracts

Where the outcome of fixed-price construction contracts can be estimated reliably, revenue is recognized by reference to the completed activity of the contract as at each reporting period, measured based on the proportion of the costs incurred for work performed to date relative to the estimated total contract costs including warranty costs where applicable, except where this would not be representative of the stage of completion. As some contracts extend over more than one year, any revision in cost and profit estimates made during the course of the work is reflected in the accounting period in which the facts indicating a need for the revision become known. Variations in contract work, claims and incentive payments if any, are included to the extent that the amount can be measured reliably and its receipt is considered probable.

Where the outcome of fixed-price construction contracts cannot be estimated reliably, contract revenue is recognized to the extent of contract costs incurred that it is probable will be recoverable. Contract costs are recognized as expenses in the period they are incurred.

When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognized as an expense immediately.

Where contract costs incurred to date plus recognized profits less recognized losses exceed progress billings, the surplus is shown as work in process. For contracts where progress billings exceed contract costs incurred to date plus recognized profits less recognized losses, the surplus is shown as unearned contract revenue. Amounts received before the related work is performed are included in the consolidated statement of financial position, as a liability, as unearned contract revenue. Amounts billed for work performed but not yet paid by the customer are included in the consolidated statement of financial position under accounts receivable.

Time and material contracts

Revenue derived from time and material contracts is recognized at the contractual rates as labour hours are delivered and direct expenses are incurred. Variations in incentive payments if any, are included to the extent that the amount can be measured reliably and its receipt is considered probable.

Share-based compensation

The Company has a stock option plan for executives and other key employees. The Company measures and recognizes compensation expense based on the grant date fair-value of the stock options issued using the Black-Scholes pricing model. The offsetting credit is recorded against contributed surplus. Compensation expense is recorded on a straight-line basis over the vesting period, based on the Company's estimate of stock options that will ultimately vest. At each reporting period, the Company revises its estimate of the stock options expected to vest. The impact on the change in estimate, if any, is recognized over the remaining vesting period with an offsetting credit to contributed surplus. Consideration paid by employees on the exercise of options and related amounts of contributed surplus is recorded as issued capital when the shares are issued. This policy is applied to all stock options that vested after October 1, 2010, date of the transition to IFRS.

The Company has an employee stock purchase plan available to all employees of the Company. The plan provides for a 20% discount of the fair market value at the date the shares are issued. Compensation expense representing the 20% discount is recorded as general and administration costs with an offsetting credit to issued capital.

Operating leases

Leases entered into are classified as either finance or operating leases. Leases that transfer substantially all of the risks and rewards of ownership of property to the company are accounted for as finance leases. For leases which are classified as operating leases, lease payments are recognized as an expense on a straight-line basis over the lease term. In the event that lease incentives are received to enter into operating leases, such incentives are recognized as a liability. The aggregate benefit of incentives is recognized as a reduction of rental expense on a straight-line basis. The Company does not have any financing leases.

Current monetary assets and liabilities

Cash is measured at fair value with changes in fair value recorded in net earnings. Trade receivables and trade payables and accrued liabilities are measured at amortized costs with interest accretion recorded in net earnings. Due to the short-term nature of these assets and liabilities, the carrying amounts approximate fair value.

Income taxes

Income tax expense comprises current and deferred tax. Income tax expense is recognized in net earnings, except when it relates to items that are recognized in other comprehensive income or directly in equity, in which case, the current and deferred tax are also recognized in other comprehensive income or directly in equity respectively. Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination.

Current tax

The tax currently payable is based on taxable income for the period using tax rates enacted or substantively enacted as at each reporting period and any adjustments to tax payable related to previous years. Taxable profit differs from profit as reported in the consolidated statement of comprehensive income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible.

Deferred tax

Deferred tax is recognized using the balance sheet method, providing for differences between the carrying amounts of assets and liabilities for financial reporting purposes and the corresponding tax bases used for taxation purposes.

Deferred tax liabilities are generally recognized for all taxable temporary differences, and deferred tax assets are generally recognized for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized. Such assets and liabilities are not recognized if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

Deferred tax liabilities are recognized for taxable temporary differences associated with investments in subsidiaries, except where the Company is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments are only recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at each reporting period and reduced to the extent that it is no longer probable that sufficient taxable income will be available to allow all or part of the asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized, based on tax rates that have been enacted or substantively enacted at each reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Company expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities.

Equipment

Equipment, comprising leasehold improvements, furniture and computer equipment is stated at cost less accumulated depreciation and impairment losses, if any. The carrying value is net of related government assistance and investment tax credits. The cost of equipment at October 1, 2010, the date of transition to IFRS, was determined by reference to its amortized cost at that date.

Amortization is recognized in net earnings on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis over the term of the leases. The estimated useful lives for the current and comparative period are as follows:

-- Leasehold improvements: over the term of each lease. -- Furniture: 10 years -- Computer equipment: 5 years

The estimated useful lives, residual values and depreciation methods are reviewed at each reporting period, with the effect of any changes in estimate accounted for on a prospective basis.

Application software

Application software is measured at cost less accumulated amortization and is amortized on a straight-line basis over its estimated useful life not exceeding five years. The amortization method and estimate of useful life is reviewed annually.

Impairment of equipment and application software

At each reporting period, management reviews the carrying amounts of its equipment and application software to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. Where it is not possible to estimate the recoverable amount of an individual asset, management estimates the recoverable amount of the cash-generating unit to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units.

Recoverable amount is the higher of 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.

If the recoverable amount of an asset or cash-generating unit is estimated to be less than its carrying amount, the carrying amount of the asset or cash-generating unit is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss.

Impairment of goodwill

Goodwill arising on the acquisition of a business represents the excess of the purchase price over the net fair value of identifiable assets, liabilities and contingent liabilities of the acquired businesses recognized at the date of the acquisition. Goodwill is initially recognized as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill is allocated to the cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually or more frequently if events or changes in circumstances indicate that the unit might be impaired.

When the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, 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. An impairment loss recognized for goodwill is not reversed in a subsequent period. The Company performs its annual review of goodwill on September 30th each year.

Foreign currency translation

Transactions in currencies other than the Company's functional currency (foreign currencies) are recorded at the rates of exchange prevailing at the dates of the transactions. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuated significantly during that period, in which case the exchange rates at the dates of the transactions are used. At each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at each reporting period. Non-monetary items which are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences are recognized in net earnings in the period in which they arise except for exchange differences on transactions entered into in order to hedge certain foreign currencies (see note below for hedging policy).

The functional currency of the parent company and Calian Ltd., a subsidiary, is the Canadian dollar. The functional currency of Calian Technology (US) Ltd., is the US dollar. For the purpose of presenting consolidated financial statements, the assets and liabilities of the Company's wholly-owned foreign operation are expressed in Canadian dollars using US dollar exchange rates prevailing at each reporting period. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuated significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising are classified in other comprehensive income and accumulated in equity in the Company's foreign currency translation adjustment reserve. Such exchange differences are recognized in net earnings in the period in which the foreign operation is disposed.

Financial instruments

Financial assets and financial liabilities are recognized when the Company becomes a party to the contractual provisions of the instrument.

Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss.

Financial assets

The classification of financial assets depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. The Company's financial assets are classified as follows:

Cash Fair value through profit or loss (FVTPL) Accounts receivable Loans and receivables Derivative assets FVTPL

Financial assets at fair value through profit or loss (FVTPL)

Financial assets are classified as at FVTPL if they are held for trading or are designated as such upon initial recognition. Financial assets at FVTPL are measured at fair value with changes in fair value recognized in net earnings.

Loans and receivables

Accounts receivable are classified as loans and receivables. Loans and receivables are measured at amortized cost using the effective interest method, less any impairment. Interest income is recognized by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial.

Impairment of financial assets

Financial assets, other than those at FVTPL, are assessed for indicators of impairment at each reporting period. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted. Objective evidence of impairment could include significant financial difficulty of the issuer or counterparty, default or delinquency in interest or principal payments or it becoming probable that the borrower will enter bankruptcy or financial re-organization.

Accounts receivable are assessed for impairment individually. Objective evidence of impairment could include the Company's past experience of collecting payments and an increase in the number of delayed payments past the average credit period.

For financial assets carried at amortized cost, the amount of the impairment is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the financial asset's original effective interest rate.

Impairment losses, if any, are recognized in net earnings. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognized in net earnings, if any. If in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through net earnings to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized.

Financial liabilities

Financial liabilities are classified as either financial liabilities at FVTPL or other financial liabilities. The Company's trade payables are classified as other financial liabilities and are initially measured at fair value and are subsequently measured at amortized cost using the effective interest method, with interest expense recognized on an effective yield basis. Derivative liabilities are classified as FVTPL.

Effective interest method

The effective interest method is a method of calculating the amortized cost of a financial asset (or financial liability) and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (cash disbursements), including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts, through the expected life of the financial asset or financial liability, or, where appropriate, a shorter period.

Fair value hierarchy

The Company's fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The three levels of the fair value hierarchy are:

Level 1 values are based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.

Level 2 values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability.

Level 3 values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.

When the inputs used to measure fair value fall within more than one level of the hierarchy, the level within which the fair value measurement is categorized is based on the Company's assessment of the lowest level input that is the most significant to the fair value measurement.

Derivative financial instruments and risk management

The Company enters into derivative financial instruments, mainly forward exchange forward contracts to manage its foreign exchange rate risk. The Company's policy does not allow management to enter into derivative financial instruments for trading or speculative purposes. Foreign exchange forward contracts are entered into to manage the foreign exchange rate risk on foreign denominated financial assets and liabilities and foreign denominated forecasted transactions.

Derivatives are initially recognized at fair value at the date a derivative contract is entered into with transaction costs recognized in profit and loss. Derivatives are subsequently re-measured to their fair value at each reporting period. The resulting gain or loss is recognized in net earnings immediately unless the derivative is designated and effective as a hedging instrument, in which event the effective portion of changes in the fair value of the derivative is recorded in other comprehensive income and is recognized in net earnings when the hedged item affects net earnings. The Company expenses transaction costs related to its foreign exchange contracts. Fair value of the forward exchange contracts reflects the cash flows due to or from the Company if settlement had taken place at the end of the period. A derivative is presented as a non-current asset or a non-current liability if the remaining maturity of the instrument is more than 12 months and it is not expected to be realized or settled within 12 months.

Hedge accounting

Management designates its foreign exchange forward contracts as either hedges of the fair value of recognized assets or liabilities (fair value hedges) or hedges of highly probable forecast transactions and firm commitments (cash flow hedges).

At the inception of the hedge relationship, the Company documents the relationship between the hedging instruments and the hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. Furthermore, both at the hedge's inception and on an ongoing basis, the Company also assesses whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.

Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in net earnings immediately, together with any changes in the fair value of the hedged item that are attributable to the hedged risk. The change in the fair value of the hedging instrument and the change in the hedged item attributable to the hedged risk are recognized in the line of the income statement relating to the hedged item.

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are deferred in other comprehensive income and accumulated under the heading of cash flow hedging reserve. The gain or loss relating to the ineffective portion is recognized immediately in net earnings, and is included in other gains and losses, if any. Amounts deferred in other comprehensive income are recycled in net earnings in the periods when the hedged item is recognized in net earnings, in the same line of the income statement as the recognized hedged item. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously deferred in other comprehensive income are transferred from other comprehensive income and included in the initial measurement of the cost of the asset or liability.

Hedge accounting is discontinued when management revokes the hedging relationship, the hedging instrument is terminated or no longer qualifies for hedge accounting. For fair value hedges, the adjustment to the carrying amount of the hedged item arising from the hedged risk is amortized to net earnings from that date. For cash flow hedges, any cumulative gain or loss deferred in other comprehensive income at that time remains in other comprehensive income and is recognized when the forecast transaction is ultimately recognized in net earnings. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was deferred in other comprehensive income is recognized immediately in net earnings.

Note 11 sets out details of the fair values of the derivative instruments used for hedging purposes. Movements in the hedging reserve in equity are also detailed in the statement of changes in equity.

3. FUTURE CHANGES IN ACCOUNTING POLICIES

IFRS 9 Financial instruments

IFRS 9 was issued in November 2009 introducing new requirements for the classification and measurement of financial assets.

IFRS9 was further amended in October 2010 to include the requirements for the classification and measurement of financial liabilities and derecognition.

IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. The new standard also requires a single impairment method to be used, replacing the multiple impairment methods in IAS 39. IFRS 9 is effective for annual periods beginning on or after January 1, 2015. The Company is currently evaluating the impact of this standard on its consolidated financial statements.

IFRS 10 Consolidated financial statements

IFRS 10 establishes principles for the presentation of consolidated financial statements when an entity controls one or more other entities. IFRS 10 replaces IAS 27 - Consolidated and Separate Financial Statements and is effective for annual periods beginning on or after January 1, 2013. Earlier application is permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements.

IFRS 12 Disclosure of interests in other entities

IFRS 12 is a new and comprehensive standard on disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off-balance sheet vehicles. The standard requires an entity to disclose information regarding the nature and risks associated with its interests in other entities and the effects of those interests on its financial position, financial performance and cash flows. IFRS 12 will be effective for the Company's fiscal years beginning on or after January 1, 2013, with earlier application permitted. The Company has not yet assessed the impact of the adoption of this standard on its consolidated financial statements.

IFRS 13 Fair value measurement

IFRS 13 is intended to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRS. The standard will be effective for the Company's fiscal years beginning on or after January 1, 2013, with earlier application permitted. The Company has not yet assessed the impact of the adoption of this standard on its consolidated financial statements.

IAS 1 Presentation of financial statements

In June 2011, the IASB amended IAS 1 - Presentation of financial statements. The principal change resulting from the amendments to IAS 1 is a requirement to group together items within other comprehensive income that may be reclassified to the statement of income. The amendments also reaffirm existing requirements that items in other comprehensive income and net earnings should be presented as either a single statement or two consecutive statements. The amendment to IAS 1 will be effective for the Company's fiscal years beginning on or after January 1, 2013, with earlier application permitted. The Company does not expect any changes to its consolidated financial statement presentation from this amendment as the items within other comprehensive income that may be reclassified to the statement of comprehensive income are already grouped together.

IAS 28 Investments in associates and joint ventures

IAS 28 was re-issued by the IASB in May 2011 in order to conform to changes as a result of the issuance of IFRS 10, IFRS11, and IFRS 12. IAS 28 continues to prescribe the accounting for investments in associates, but is now the only source of guidance describing the application of the equity method. The amended IAS 28 will be applied by all entities that are investors with joint control of, or significant influence over, an investee. The amended version of IAS 28 is effective for financial years beginning on or after January 1, 2013, with earlier application permitted. The Company is evaluating the impact of the amendments to IAS 28 on its consolidated financial statements.

IAS 34 Interim financial reporting

In May 2010, the IASB issued amendments to IAS 34 as part of its annual improvements process. The amendments provided clarification of the disclosures required by IAS 34 when considered against the disclosure requirements of other IFRS and are effective for periods commencing on or after January 1, 2011, with earlier application permitted. The Company has applied these amendments in these unaudited interim condensed consolidated financial statements.

4. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

Estimates:

The preparation of financial statements in conformity with IFRS requires the Company's management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods presented. Actual results could differ from those estimates.

Percentage completion on revenue

A significant portion of the Systems Engineering Division's revenue is derived from fixed-price contracts. Revenue from these fixed-price projects is recognized using the percentage of completion method using management's best estimate of the costs and related risks associated with completing the projects. The greatest risk on fixed-price contracts is the possibility of cost overruns. Management's approach to revenue recognition is tightly linked to detailed project management processes and controls. The information provided by the project management system combined with a knowledgeable assessment of technical complexities and risks are used in estimating the percentage completion.

Impairment of goodwill

Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The value in use calculation requires management to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value.

Income taxes

The Company records deferred income tax assets and liabilities related to deductible or taxable temporary differences. The Company assesses the value of these assets and liabilities based on their realizability given management assessments of future taxable income.

Contingent liabilities

From time to time the Company is involved in claims in the normal course of business. Management assesses such claims and where considered likely to result in a material exposure and, where the amount of the claim can be measured reliably, provisions for loss are made based on management's assessment of the likely outcome.

Allowance for doubtful accounts receivable

The Company has extensive commercial history upon which to base its provision for doubtful accounts receivable. Due to the nature of the industry in which the Company operates, the Company does not create a general provision for bad debts but rather determines bad debts on a specific account basis.

For the periods ended December 31, 2011 and December 31, 2010, no material changes in estimates have been made.

Judgments:

Financial instruments

The Company's accounting policy with regards to financial instruments is described in note 2. In applying this policy, judgments are made in applying the criteria set out in IAS39 - Financial instruments: recognition and measurement, to record financial instruments at fair value through profit and loss, and the assessments of the classification of financial instruments and effectiveness of hedging relationships.

Accounting policy for equipment

Management makes judgements in determining the most appropriate methodology for amortizing assets over their useful lives. The method chosen is intended to mirror, to the best extent possible, the consumption of the asset.

Deferred income taxes

The Company's accounting policy with regards to income taxes is described in note 2. In applying this policy, judgments are made in determining the probability of whether deductions or tax credits can be utilized and related timing of such items.

Determination of functional currency

To enable translation of foreign currency transactions of foreign operations, IFRS require an assessment of the basis or unit of measure, or what is termed the "functional currency" under IFRS. IAS 21 - The Effects of Changes in Foreign Exchange Rates sets out factors to be considered in determining whether the functional currency of a foreign operation is the same as that of the reporting entity of which it is a subsidi
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