CONSOLIDATED FINANCIAL STATEMENTS





December 31, 2010





February 28, 2011





(Date Issued)










IMRIS Inc.100-1370 Sony Place
TF.
1.888.304.0114Winnipeg, Manitoba
T.
204.480.7070Canada R3T 1N5
F.
204.480.7071
www.imris.com







Deloitte & Touche LLP360 Main StreetSuite 2300Winnipeg MB R3C 3Z3CanadaTel: 204-942-0051Fax: 204-947-9390www.deloitte.ca


INDEPENDENT AUDITOR’S REPORT




To the Shareholders of IMRIS Inc.





We have audited the accompanying consolidated financial statements of IMRIS Inc., which comprise the consolidated balance sheets as at December 31, 2010 and 2009, and the consolidated statements of loss and comprehensive loss and deficit and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information.





Management's responsibility for the consolidated financial statements





Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.





Auditor's responsibility




Our responsibility is to express an opinion on these consolidated financial statements based on our audits.  We conducted our audits in accordance with Canadian generally accepted auditing standards.  Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.





An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements.  The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control.  An
audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.





We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.





Opinion





In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of IMRIS Inc. as at December 31, 2010 and 2009, and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.






Independent Chartered AccountantsFebruary 28, 2011Winnipeg, Canada









IMRIS INC.
 Consolidated Balance Sheets
 As at December 31,
 (Thousands of CDN dollars, except per share amounts)
  2010


2009AssetsCurrent assetsCash and cash equivalents (note 5)

$
60,447


$
25,981Restricted cash (note 6)


-



293Accounts receivable (note 7)


15,789



13,717Unbilled receivables


7,114



5,202Inventory (note 8)


5,255



3,101Prepaid expenses


2,002



2,16890,607



50,462Property, plant, and equipment, net (note 9)


6,389



7,922Goodwill


6,463



6,463Intangibles, net (note 10)


11,540



73818,003



7,201Total assets

$
114,999


$
65,585Liabilities and Shareholders' equityCurrent liabilitiesAccounts payable and accrued liabilities

$
15,020


$
12,673Customer deposits


6,851



21,05121,871



33,724Shareholders' equityShare capital (note 11b)


147,138



85,337Contributed surplus (note 11d)


2,858



1,946Deficit


(56,868
)


(55,422
)93,128



31,861Commitments (note 14)Total liabilities and shareholders' equity

$
114,999


$
65,585
 
 Approved on behalf of the Board of Directors
 
 /s/ H. David GravesH. David Graves  Chairman/s/ David A. LeslieDavid A. Leslie, F.C.A.  Director
 
 See accompanying notes










IMRIS INC.Consolidated Statements of Loss and Comprehensive Loss and DeficitFor the years ended December 31,(Thousands of CDN dollars, except per share amounts)





2010


2009Sales

$
71,755


$
44,418Cost of sales


40,715



24,749Gross profit


31,040



19,669Operating expensesAdministrative


7,672



6,706Sales and marketing


9,114



8,040Customer support and operations


5,841



4,950Research and development


5,602



4,924Amortization


3,536



2,162Total operating expenses


31,765



26,782Operating loss before the following


(725
)


(7,113
)Other income (expense)Foreign exchange loss


(814
)


(2,025
)Interest income (expense)


93



(27
)Total other income (expense)


(721
)


(2,052
)Loss before taxes


(1,446
)


(9,165
)Income taxes (note 12a)


-



-Loss and comprehensive loss for the year


(1,446
)


(9,165
)Deficit, beginning of year


(55,422
)


(46,257
)Deficit, end of year

$
(56,868
)

$
(55,422
)Weighted average number of common shares


33,990,295



27,956,272Basic and diluted loss per share

$
(0.04
)

$
(0.33
)










IMRIS INC.Consolidated Statements of Cash FlowsFor the years ended December 31,(Thousands of CDN dollars, except per share amounts)





2010


2009OPERATING ACTIVITIESLoss for the year:

$
(1,446
)

$
(9,165
)Items not affecting cashAmortization


3,536



2,162Stock based compensation


982



726Loss on disposal of assets


-



2Unrealized foreign exchange loss


912



8213,984



(5,454
)Changes in non-cash working capital itemsAccounts receivable


(2,072
)


(12,509
)Unbilled receivables


(1,912
)


(2,150
)Inventory


(2,154
)


(915
)Prepaid expenses


166



(1,034
)Accounts payable and accrued liabilities


2,014



6,445Customer deposits


(14,200
)


8,403(18,158
)


(1,760
)(14,174
)


(7,214
)FINANCING ACTIVITIESProceeds from issuance of share capital (net)


51,328



19,336Repayment of obligation under capital lease


-



(9
)51,328



19,327INVESTING ACTIVITIESRestricted cash


293



(293
)Acquisition of property, plant and equipment


(1,117
)


(3,615
)Acquisition of intangibles


(800
)


-Acquisition costs for net assets of NeuroArm Surgical (note 13b)


(181
)


-Cash acquired in asset acquisition (note 13c)


29



-(1,776
)


(3,908
)Foreign exchange translation adjusment on cash


(912
)


(821
)Increase in cash and cash equivalents


34,466



7,384Cash and cash equivalents, beginning of year


25,981



18,597Cash and cash equivalents, end of year

$
60,447


$
25,981Supplemental disclosure of cash flow informationCash paid during the year for:Interest

$
1


$
37Income taxes


-



-







IMRIS INC.


Notes to the Consolidated Financial Statements


December 31, 2010 and 2009


1.
DESCRIPTION OF BUSINESS





IMRIS provides image guided therapy solutions that deliver timely information to clinicians during surgical or interventional procedures.  IMRIS systems incorporate multiple imaging modalities including magnetic resonance imaging (“MRI”) and fluoroscopy into fully integrated imaging suites.  The systems use a variety of patented technologies, including the capability of moving an MRI scanner to the patient, rather than having to move the patient to the scanner, while the surgery or interventional procedure is in progress.  The Company’s products include IMRISneuro for the neurosurgical market, IMRIScardio for the interventional cardiovascular market and
IMRISNV for the neurovascular market.





2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





These consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles. The significant accounting policies of the Company include the following:





a)
Basis of consolidation





The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries: IMRIS, Inc (United States), IMRIS (Europe) SPRL (Belgium), IMRIS India Private Limited (India), IMRIS KK (Japan), NeuroArm Surgical Limited (Canada) and IMRIS Germany GmbH (Germany).  All intercompany transactions and balances are eliminated on consolidation.





b)
Use of estimates





The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the year.  Significant estimates include the percentage completion for the systems being installed, the valuation allowance relating to the future income tax assets, the useful lives of capital assets, the amortization of intangible assets, the calculation of investment tax credits receivable, the assumptions used in the determination of
stock-based compensation costs and the fair value information used for purposes of performing the annual goodwill impairment test.  Actual results could differ significantly from those estimates.  Changes in estimates are recorded in the accounting period in which these changes are determined.





c)
Revenue recognition





The Company generates revenues from three principal activities: system sales, sales of ancillary products and services, and extended maintenance services.





Revenues for system sales are recognized on a percentage of completion basis as systems are installed.  The degree of completion is generally determined by the ratio of actual costs incurred to date to estimated total costs.  Any projected losses are recognized immediately.  Funds received from customers in advance of meeting the criteria for revenue recognition are recorded as customer deposits until such time as the revenue is recognized.  Revenues recognized in advance of the criteria for invoicing to the customer are recorded as unbilled receivables where the collection of the receivable is probable.





Revenues from ancillary products and services are recognized where there is persuasive evidence of an arrangement and upon delivery or as the services are rendered, respectively.  Revenues from extended maintenance service agreements are recognized ratably over the life of the service agreement.  Revenues from both ancillary products and services and extended maintenance service agreements are based on pre-determined or determinable sales prices and are only recognized when the collection of the receivable is probable.







IMRIS INC.


Notes to the Consolidated Financial Statements


December 31, 2010 and 2009


2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





d)
Cash and cash equivalents





Cash consists of bank deposits.  Cash equivalents are short-term highly liquid investments that are readily convertible to known amounts of cash with maturities of three months or less from the date of acquisition, and which are subject to an insignificant risk in change in value.





e)
Inventory





Materials are valued at the lower of cost, which is determined on an average cost basis, and net realizable value.  Cost of materials is determined on the basis of the invoiced value of goods.  Work in progress inventories are valued at the lower of cost and net realizable value.





f)
Property, plant, and equipment





The Company records all property, plant and equipment acquisitions at their original cost and they are amortized over their estimated useful life using the straight line method at the following rates:





Computer equipment
3 yearsOffice furnishings and equipment
5 yearsAssembly & test equipment
5 yearsDemonstration suite & tradeshow equipment
3-5 yearsLeasehold improvements
Lesser of their useful life and the

term of leaseAssets under capital lease
Policy consistent with

respective asset class





Management evaluates the carrying value of its long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable.  To the extent the estimated undiscounted future net cash inflows attributable to the asset are less than the carrying amount, an impairment loss is recognized.  The amount of impairment loss to be recorded is the difference between the assets’s carrying value and the net discounted estimated future cash flows.





As at December 31, 2010, there are no indicators of impairment of long-lived assets.





g)
Intangibles





Goodwill





Goodwill represents the excess of the purchase price over fair value of the identifiable net tangible assets and intangible assets purchased at the date of acquisition.  Goodwill is not amortized, but rather it is tested for impairment annually or more frequently when an event or circumstance occurs that indicates that goodwill might be impaired.  When the carrying amount exceeds the fair value, an impairment loss is recognized in the statement of operations in an amount equal to the excess.





Patents





Patents are accounted for at cost.  Amortization is based on the estimated useful life which is generally the life of the patent, using the straight line method.  The average remaining life of the patents at the time of acquisition in May 2005 was 11 years.  The patents acquired in the NeuroArm Surgical Limited acquisition (note 13) in February, 2010 are amortized over the estimated useful lives which range between 13-18 years.





Computer software





Computer software is accounted for at cost.  Amortization is based on the estimated useful life which is generally three years, using the straight line method.









IMRIS INC.


Notes to the Consolidated Financial Statements


December 31, 2010 and 2009




2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





h)
Research and development





Research costs are expensed as incurred.  Development costs that meet specific criteria related to technical, market and financial feasibility are capitalized and amortized over the useful life of the technology.





i)
Investment tax credits





The Company is entitled to Canadian federal and provincial investment tax credits, which are earned as a percentage of eligible current and capital research and development expenditures incurred in each taxation year.  Investment tax credits are recognized when realization of the tax credits is reasonably certain either as an item on the statement of loss or a reduction in deferred development costs or capital assets depending on where the original costs which gave rise to the tax credits are recorded.





j)
Stock-based compensation





The Company uses the fair value method to measure compensation expense at the date of granting of stock options to employees.  The fair value of options is determined using the Black-Scholes option pricing model and is amortized to earnings over the vesting period with the related credit recorded as contributed surplus.  Upon exercise of these stock options, amounts previously credited to contributed surplus are reversed and credited to share capital.  Forfeitures are accounted for as they occur.





k)
Income taxes





The Company follows the liability method of accounting for income taxes.  Under this method, future income taxes are recognized based on the expected future tax consequences of differences between the carrying amount of balance sheet items and their corresponding tax basis, using the enacted and substantively enacted income tax rates for the years in which the differences are expected to be realized or settled.  A valuation allowance is provided to the extent that it is not more likely than not that the future income tax assets will be realized.





l)
Foreign currency translation





Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the year-end exchange rates and non-monetary assets are translated at the exchange rates prevailing when the asset was acquired.





Revenue and expenses are translated into Canadian dollars at average exchange rates for the year.  Exchange gains or losses on translation of foreign currencies are included in the determination of net loss.





m)
Financial instruments





The following is a summary of the Company’s financial instruments, their classifications and measurement basis:





·
Cash and cash equivalents are classified as held-for-trading and are measured at fair value with changes in fair value recognized in net income.


·
Accounts receivable and unbilled receivables are classified as loans and receivables and are measured at amortized cost.


·
Accounts payable and accrued liabilities are classified as other liabilities and are measured at amortized cost.









IMRIS INC.


Notes to the Consolidated Financial Statements


December 31, 2010 and 2009


3.
CHANGES IN ACCOUNTING POLICIES





The Company’s critical accounting policies are unchanged from the year ended December 31, 2009 and there were no new accounting standards issued by the Canadian Institute of Chartered Accountants, which the Company would have been required to adopt in 2010.





4.
FUTURE ACCOUNTING STANDARDS





Transition to US GAAP vs International Financial Reporting Standards (IFRS)





IMRIS has carefully considered the implications of conversion to IFRS compared to US GAAP and has determined that it is in the best interests of the Company and the readers of our financial information to begin to provide US GAAP, rather than IFRS compliant financial statements.  As such, the Company has decided not to report under IFRS by 2011 and will report under US GAAP as of January 1, 2011.





A current reconciliation between US and Canadian GAAP is provided in note 22.





5.
CASH AND CASH EQUIVALENTS





2010


2009Cash

$
52,953


$
7,973Short term investments


7,494



18,008$
60,447


$
25,981





Short term investments consist of investments in short term bank deposits.





6.
RESTRICTED CASH





Restricted cash consists of short-term deposits totalling $Nil (2009 - $293) that have been pledged as security to our bank for letters of credit required for bid bonds on certain system installations and purchase of certain system components.





7.
ACCOUNTS RECEIVABLE





2010


2009Accounts receivable, trade

$
15,782


$
13,526Commodity taxes receivable


-



183Interest receivable


7



8$
15,789


$
13,717





The carrying value of the Company’s trade accounts receivable is as noted above.  The Company has not provided an allowance for doubtful accounts.





As at December 31, 2010, trade accounts receivable of $2,052 were past due but not impaired.  The aging of these trade accounts receivable are as follows:





Current


1 to 30 days

past due


31 to 60 days

past due


61 to 90 days

past due


> 90 days

pastdueAccounts receivable, trade

$
13,730


$
411


$
582


$
1,003


$
56





There are no impairments or amounts past due other than those relating to trade accounts receivable.







IMRIS INC.


Notes to the Consolidated Financial Statements


December 31, 2010 and 2009




8.
INVENTORY





2010


2009Materials

$
4,818


$
2,688Work in progress


437



413$
5,255


$
3,101





Cost of sales for the year ended December 31, 2010 was $40,715 (2009 – $24,749), which included $31,495 (2009 – $18,118) of costs associated with inventory.





During the year ended December 31, 2010, the Company recorded inventory write-downs for slow moving or obsolete inventory of $237 (2009 - $125).





9.
PROPERTY, PLANT, AND EQUIPMENT





2010


2009Cost


Accumulated

Amortization


Net book

value


Cost


Accumulated

Amortization


Net book

valueComputer equipment

$
1,074


$
720


$
354


$
736


$
540


$
196Office furnishings & equipment


681



447



234



538



332



206Assembly & test equipment


10,152



5,167



4,985



9,768



3,263



6,505Demonstration suite & tradeshow equipment


1,550



876



674



1,356



502



854Leasehold improvements


421



279



142



362



201



161$
13,878


$
7,489


$
6,389


$
12,760


$
4,838


$
7,922





During the year ended December 31, 2010, the Company received investment tax credits of $112 (2009 - $Nil).  These credits have been netted against assembly and test equipment.





10.
INTANGIBLES





2010


2009Cost


Accumulated

Amortization


Net book

value


Cost


Accumulated

Amortization


Net book valuePatents

$
11,370


$
885


$
10,485


$
484


$
206


$
278Software


837



445



392



699



239



460Deferred development costs


663



-



663



-



-



-$
12,870


$
1,330


$
11,540


$
1,183


$
445


$
738





During the year ended December 31, 2010, amortization of $885 (2009 - $46) relating to the patents and software was charged to operations.







IMRIS INC.


Notes to the Consolidated Financial Statements


December 31, 2010 and 2009




11.
SHARE CAPITAL





a)
Authorized





The Company’s share capital consists of an unlimited number of common shares and an unlimited number of preferred shares.





b)
Issued and outstanding





The issued share capital of the Company is as follows:





Common Shares

Number of Shares


ConsiderationIssued and outstanding as at December 31, 2008


27,352,513


$
65,993Stock options exercised (i)


32,614



56Shares issued on November 2, 2009 for cash (ii)


3,697,250



20,704Costs relating to offering


(1,416
)Issued and outstanding as at December 31, 2009


31,082,377


$
85,337Stock options exercised (iii)


331,406



533Issued for acquisition of NeuroArm Surgical Limited (note 13)


1,600,000



10,384Shares issued on November 19, 2010 for cash (iv)


10,500,000



53,067Shares issued on November 30, 2010 for cash (iv)


600,000



3,079Costs relating to offering


(5,262
)Issued and outstanding as at December 31, 2010


44,113,783


$
147,138




i)
Pursuant to option exercises, during 2009, the Company issued 32,614 common shares to employees for cash consideration of $48.  In addition to the cash consideration, $8 was transferred from contributed surplus to share capital.





ii)
The Company closed on November 2, 2009 a bought deal financing with a syndicate of underwriters to issue 3,215,000 common shares of IMRIS at $5.60 per common share for gross proceeds of $18,004.  In addition, IMRIS granted the underwriters an option, exercisable in whole or in part for a period of up to 30 days following the offering closing date, to increase the offering by up to 482,250 common shares at a price of $5.60 per common share.  This option was exercised on November 2, 2009, increasing the aggregate size of the offering to $20,704.





Costs relating to the November 2, 2009 offering include underwriter fees (5% of the gross proceeds or $0.28 per share) plus various legal and professional fees.





iii)
Pursuant to option exercises, during 2010, the Company issued 331,406 common shares to employees for cash consideration of $463.  In addition to the cash consideration, $70 was transferred from contributed surplus to share capital.





iv)
The Company closed on November 19, 2010 a public offering with a syndicate of underwriters to issue 10,500,000 common shares of IMRIS at US $5.00 per common share for gross proceeds of $53,067.  In addition, IMRIS granted the underwriters an option, exercisable in whole or in part for a period of up to 30 days following the offering closing date, to increase the offering by up to 1,650,000 common shares at a price of US $5.00 per common share.  This option was partially exercised on November 30, 2010, increasing the aggregate size of the offering to $56,146.





Costs relating to the November 19, 2010 offering include underwriter fees (6% of the gross proceeds or US $0.30 per share) plus various legal and professional fees.





There are no preferred shares outstanding.







IMRIS INC.


Notes to the Consolidated Financial Statements


December 31, 2010 and 2009




11.
SHARE CAPITAL (continued)





c)
Stock-based compensation plan





On May 20, 2005 the Company established a stock option plan (the “Plan”) for the employees, directors, officers and consultants of the Company and any of its subsidiaries which govern all options granted under the Plan.  Under the Plan, options to purchase common shares of the Company may be granted by the Board of Directors.  The exercise price of the options granted is established by the Board of Directors based on the fair market value of the common shares as at the date of the grant.  The maximum number of common shares which may be issued pursuant to options granted under the Plan is equal to 15% of the common shares of the Company outstanding at any
time.





Options granted under the Plan generally vest over a four year period and may be exercised in whole or in part as to any vested options prior to the expiry time as follows:  25% on or after the first anniversary of the grant date increasing 6.25% per quarter thereafter until fully vested after four years.  Options expire six years after the date of the grant.  The vesting of options granted under the plan ceases upon the death or the termination of employment of the participant or the participant ceases to be a director, and the participant thereafter has 90 days to exercise any vested and unexpired options, failing which any unexercised options shall lapse.  The Board
of Directors, at their discretion, may accelerate the vesting period of individual grants as deemed appropriate.





The Board of Directors may accelerate the vesting of all unvested options in the event of certain change of control transactions, including without limitation a take over bid, merger or other structured acquisition; and may further force the exercise of any and all vested options, and/or may cancel or replace any unvested options in any manner as the Board deems reasonable in its unfettered discretion.





The outstanding options and the activity relating to these options are as follows:





2010


2009Number of

options


Weighted

averageexercise

price


Number of

options


Weighted

averageexercise

priceOutstanding, beginning of year


4,007,915


$
3.07



3,697,226


$
2.90Granted


672,145



6.07



413,234



4.50Exercised


(331,406
)


1.40



(32,614
)


1.47Forfeited


(348,005
)


5.63



(69,931
)


2.80Outstanding, end of year


4,000,649


$
3.50



4,007,915


$
3.08





The following table summarizes the options outstanding at December 31, 2010:





Year

granted

Number of

options

outstanding


Exercise price

range


Weighted

average

exercise

price


Number of options

exercisable


Weighted

average

exercise price


Expiry

date2005


700,562


$0.97 to $1.71


$
0.97



700,562


$
0.97



20112006


1,026,500


1.71 to 2.25



2.19



1,026,500



2.19



20122007


1,030,500


2.25 to 6.00



4.39



880,286



4.24



20132008


354,353


2.40 to 5.00



4.54



241,999



4.61



20142009


292,423


2.01 to 5.60



4.53



92,573



4.04



20152010


596,311


5.52 to 6.45



6.03



-



-



20164,000,649


$0.97 to $6.45


$
3.50



2,941,920


$
2.77







IMRIS INC.


Notes to the Consolidated Financial Statements


December 31, 2010 and 2009




11.       SHARE CAPITAL (continued)





c)
Stock-based compensation plan (continued)





The company recorded an expense of $982 related to stock options during the year ended December 31, 2010 (2009 - $726) with a corresponding credit to contributed surplus.  The fair value of option grants issued was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions:





2010


2009Risk-free interest rate


2.40
%


2.25
%Dividend yield


0
%


0
%Expected life of the options

4.2 years


4.2 yearsExpected volatility of the underlying stock


62.41
%


63.20
%





The estimated fair value of the options is expensed on a straight-line basis over the option’s vesting period.





The weighted average fair value of stock options granted during the year ended December 31, 2010, under the Black-Scholes option pricing model, and using the above assumptions was $3.05 (December 31, 2009 – $2.28).





d)
Contributed Surplus





2010


2009Balance, beginning of year

$
1,946


$
1,228Stock based compensation expense for the year


982



726Amount credited to share capital related to options exercised during the year


(70
)


(8
)Balance, end of year

$
2,858


$
1,946





e)
Diluted loss per share





There were no adjustments to the weighted number of shares outstanding for the purposes of calculating diluted loss per share because to do so would be anti-dilutive.  Employee stock options totaling 4,000,649 (December 31, 2009 – 4,007,915) could dilute the loss per share.





12.
INCOME TAXES





a)
Income tax expense





Income tax expense differs from the amount that would be computed by applying the statutory income tax rates to loss before income taxes.  A reconciliation of income taxes calculated at the statutory rates to the actual tax provision is as follows:





2010


2009Statutory federal and provincial tax rates


30.00
%


31.50
%Expected tax recovery at statutory rate

$
(434
)

$
(2,877
)Permanent differences and other


214



266Non taxable foreign exchange


112



82Expiry of non-capital losses


-



191Benefit of future tax assets not recognized


108



2,338Income tax expense

$
-


$
-







IMRIS INC.


Notes to the Consolidated Financial Statements


December 31, 2010 and 2009


12.
INCOME TAXES (continued)





b)
Future income taxes





The Company has not recorded any future income tax assets in these financial statements because a valuation allowance has been provided against the full amount of the future income tax assets.  The balances of future income taxes as at December 31, 2010 and December 31, 2009 represent the future benefit of unused tax losses and temporary differences between the tax and accounting bases of assets and liabilities.  The major items giving rise to future income tax assets and liabilities are presented below:





2010


2009Non-capital losses carried forward

$
9,910


$
10,304Capital assets


109



16Intangible assets


(2,822
)


(51
)Research and development expenditures


5,708



4,469Reserves not taken for tax purposes


3,475



2,332Total future income assets


16,380



17,070Valuation allowance


(16,380
)


(17,070
)Net future income tax asset

$
-


$
-





c)
Non-capital losses





As at December 31, 2010, Company had non-capital loss carry forwards of approximately $33,210 available to reduce the taxable income of future years which expire in 2026 and beyond.





d)
Scientific Research and Experimental Development





The company has deductible Scientific Research and Experimental Development expenditures applicable to future years in the amount of approximately $21,140.  These expenditures have been included in the calculation of future income taxes in note 12 (b) and have no expiry date.




The Company also has unutilized federal and provincial scientific research and experimental development investment tax credits of approximately $5,300 and $6,100 respectively.  The tax benefit of these investment tax credits has not been recognized in the financial statements.  These credits expire in the following years:





2014

$
2002015


5002016


5002017


8002018


1,9002019


1,0002020


1,1002022


4002023


3002024


1002025 and beyond


4,500





IMRIS INC.


Notes to the Consolidated Financial Statements


December 31, 2010 and 2009


13.
ACQUISITION OF NEUROARM SURGICAL LIMITED





(a)
Overview





On February 4, 2010, the Company announced that it entered into a definitive agreement to acquire 100% issued and outstanding common shares of NeuroArm Surgical Limited (“NASL”), a privately held company based in Calgary, Alberta, and its magnetic resonance-compatible neurosurgical robotics system.  The Company also entered into a memorandum of understanding with MacDonald Dettwiler and Associates Limited (“MDA”) to create the next generation of the technology.





The transaction was accomplished through the issuance of 1.6 million common shares from treasury and included the technology, patents and associated intellectual property.  The value of the common shares was determined based on the closing trading price of the common shares of the Company on The Toronto Stock Exchange as of the closing of the transaction on February 5, 2010.  The Company has issued 20% of the common shares, being 320,000 common shares placed into escrow for a period of 24 months for any claims that could be made against NASL.





(b)
Consideration and Transaction Costs





Consideration offered to complete the acquisition was 1.6 million common shares of the Company with a value of $10,400 or $6.50 per share.  Transaction costs to complete the acquisition included legal and accounting costs of $181 which brought the total purchase price to $10,581.





(c)
Net Assets Acquired





The following estimated fair values were assigned to the net assets of NASL as at February 5, 2010:





Cash and cash equivalents

$
29Intangibles


10,885Total Assets


10,914Accounts payable and accrued liabilities


333Total Liabilities


333Total purchase price

$
10,581





Intangibles include the valuation of the patents tied to the intellectual property acquired.  The intangibles are amortized over their estimated useful lives which range between 13-18 years.





The carrying amount of the intangibles is $10,250 as at December 31, 2010.  The associated amortization at December 31, 2010 was $635.





14.
COMMITMENTS





(a)
Operating leases





As at December 31, 2010 the Company had commitments under operating leases requiring future minimum annual lease payments as follows:





2011

$
3182012


1212013


642014


642015


32$
599










IMRIS INC.


Notes to the Consolidated Financial Statements


December 31, 2010 and 2009


14.
COMMITMENTS (continued)





(b)
Guarantee





During the year the Company entered into an agreement, which meets the definition of a guarantee according to AcG-14 in the CICA Handbook.  Under the terms of this agreement, the Company has agreed to be legally bound to pay the obligation.  The Company’s maximum obligation under this agreement is $597 and the obligation expires once the Company satisfies the conditions of the original agreement.





To offset this arrangement the Company has entered into a reciprocal arrangement with a financial institution to cover the full amount of the obligation, should the need arise.  The financial institution, involved in the reciprocal arrangement did not require any of the Company’s assets to be pledged as collateral; as a result, the Company has not recorded a liability in their year end statements related to the original agreement.





15.
SEGMENTED INFORMATION





The Company operates as one business segment that develops, assembles and installs surgical imaging systems used in medical applications as well as providing ancillary products and services and extended maintenance services.





Revenue attributable to geographic locations, based on the location of the customer, is as follows:





2010


2009Canada

$
16,027


$
4,475United States


40,534



38,824Europe and Middle East


4,308



2Asia Pacific


10,886



1,117$
71,755


$
44,418





During the year ended December 31, 2010, revenues from four individual customers totalled $30,642 which represents 43% of the total revenue (2009 – five individual customers accounted for $30,620 or 69% of revenues).  The revenues from each of those customers, individually accounted for more than 10% of the total revenue for the years ended December 31, 2010 and 2009.





Substantially all of the capital assets and the entire goodwill and intangibles balances are attributable to the Company’s operations located in Canada.





16.
RELATED PARTY TRANSACTIONS





The Company leases air travel time from a company which is wholly owned by the Chairman of IMRIS Inc.  The amount charged to travel included in Administrative expenses during the year ended December 31, 2010 totaled $144 (2009 – $741) and $154 was charged to share issuance costs (2009 - $Nil).  The transactions were priced using an estimated third party comparable cost and were recorded at the exchange amount.  The payable balance owing as at December 31, 2010 was $Nil (December 31, 2009 - $Nil).





17.
DEFINED CONTRIBUTION EMPLOYEE PENSION PLAN





The Company contributes to a defined contribution Employee Pension Plan for all its employees.  Contributions to this Plan are expensed as incurred.  The Company makes a matching contribution equal to 50% of the employee’s contribution, to a maximum of 3% of the employee’s annual remuneration (subject to regulatory maximums).  These Employer contributions vest immediately with the employee.  The expense for the defined contribution plan during the year ended December 31, 2010 totaled $239 (December 31, 2009 - $231).








IMRIS INC.


Notes to the Consolidated Financial Statements


December 31, 2010 and 2009





18.
FINANCIAL RISK MANAGEMENT





The Company is exposed to a variety of financial risks by virtue of its activities: market risk (including currency risk; fair value interest rate risk; cash flow interest rate risk); credit risk and liquidity risk.  The overall risk management efforts focus on the unpredictability of financial markets and seek to minimize potential adverse effects on financial performance.  Management identifies and evaluates financial risks in close cooperation and direction from the Board of Directors.  Management is charged with the responsibility of establishing controls and procedures to ensure that financial risks are mitigated.





(a)
Market Risk





i.  Foreign exchange risk





The Company operates internationally and is exposed to foreign exchange risk from various currencies, primarily US dollars.  Foreign exchange risk arises from future sales and purchase transactions as well as recognized financial assets and liabilities denominated in foreign currencies.  The Company’s main objective in managing its foreign exchange risk is to preserve gross margins and reduce variations in performance.  While the Company sells in most foreign markets in US dollars, the Company also sources a significant portion of the components it delivers in US dollars.  In addition, the Company incurs nearly all of its sales expenses in US dollars.  As a
result of this natural hedge, the Company’s foreign exchange risk is significantly reduced.  The Company does not currently enter into any foreign exchange contracts, but may consider doing so in the future.





The balances in foreign currencies at December 31, 2010 are as follows:





US Dollars


EurosCash and cash equivalents

$
52,316


€
635Accounts receivables


7,886



1,989Unbilled receivables


4,821



379Accounts payable and accrued liabilities


(4,197
)


(1,362
)$
60,826


€
1,641





Based on the above net exposures as at December 31, 2010, and assuming that all other variables remain constant a 10% depreciation of the Canadian dollar or a 10% appreciation of the Canadian dollar against the various currencies would result in increases/(decreases) in net loss and comprehensive loss as follows:





US Dollars


EurosCanadian dollar depreciates 10%

$
(6,050
)

$
(218
)Canadian dollar appreciates 10%


6,050



218





ii.  Cash flow and fair value interest rate risk





Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates.  Financial assets and financial liabilities with variable interest rates expose the Company to cash flow interest rate risk.  The Company’s cash and cash equivalents includes short-term highly liquid investments that earn interest at market rates.  Financial assets and financial liabilities that bear interest at fixed rates are subject to fair value interest rate risk.  The Company’s short-term investments are the only financial assets bearing fixed interest rates.  The Company manages its
interest rate risk by minimizing financing costs on its borrowings and maximizing the interest income earned on excess funds while maintaining the liquidity necessary to conduct operations on a day-to-day basis.  The Company’s investment policy limits the investing of excess funds to Bankers Acceptances, Canadian Chartered bank term deposits, and short term highly liquid money market mutual funds sponsored by Canadian Chartered banks.








IMRIS INC.


Notes to the Consolidated Financial Statements


December 31, 2010 and 2009





18.
FINANCIAL RISK MANAGEMENT (continued)





(b)
Credit Risk





Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligation.  The maximum exposure to credit risk of the Company at year end is the carrying value of its financial assets.  The Company manages its credit risk on cash and cash equivalents by dealing solely with reputable banks and financial institutions.  The Company’s North American customers are large credit worthy medical hospitals and thus there is very little exposure to credit risk.  When selling internationally, the Company uses irrevocable letters of credit to reduce its exposure to credit risk.  The Company
reviews the collectability of its accounts receivable and would record an allowance for doubtful accounts receivable if accounts were determined to be uncollectible.  The loss would be recognized in the income statement within ‘Administrative expense’.  Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments are considered indicators that the account receivable is uncollectible.  For the year ended December 31, 2010, revenues from four individual customers totalled $30,642 which represents 43% of the total revenue.  (December 31, 2009; five customers represented 69% of the total revenue).  The Company’s December 31, 2010 receivables include balances owing from four individual customers who respectively account
for 22%, 16%, 13% and 11% of the combined accounts receivable and unbilled receivables balances.





(c)
Liquidity Risk





Liquidity risk is the risk that the Company will not be able to meet its obligations as they fall due.  The Company manages its liquidity risk by forecasting cash flows from operations and anticipated investing and financing activities.  The Board of Directors reviews and approves the Company’s operating and capital budgets as well as any material transactions that are not in the ordinary course of business.  The following are the contractual maturities of the undiscounted cash flows of financial liabilities as at December 31, 2010:





Less than 3

months


3 to 6

months


6 to 9

months


9 months

to 1 year


Over 1

yearAccounts payable and accrued liabilities

$
13,871


$
173


$
283


$
247


$
446





19.
FINANCIAL INSTRUMENTS





Fair values





Financial instruments measured at fair value should be classified into one of three levels that distinguish fair value measurements by the significance of the inputs used for valuation.  Fair value is determined based on the price that would be received for an asset or paid to transfer a liability in the most advantageous market, utilizing a hierarchy of three different valuation techniques, based on the lowest level input that is significant to the fair value measurement in its entirety.





Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities;





Level 2 - Observable inputs other than Level 1 quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable or corroborated by observable market data; and





Level 3 - Unobservable inputs that are supported by little or no market activity.  Valuation techniques are primarily model-based.





Financial assets and liabilities measured at fair value as at December 31, 2010 in the consolidated financial statements on a recurring basis are summarized below:





Level 1


Level 2


Level 3Cash and cash equivalents

$
60,447


$
-


$
-$
60,447


$
-


$
-










IMRIS INC.


Notes to the Consolidated Financial Statements


December 31, 2010 and 2009




19.
FINANCIAL INSTRUMENTS (continued)





Financial assets and liabilities measured at fair value as at December 31, 2009 in the consolidated financial statements on a recurring basis are summarized below:





Level 1


Level 2


Level 3Cash and cash equivalents

$
26,274


$
-


$
-$
26,274


$
-


$
-





The effective rate of return on short-term investments is approximately 1.20% (December 2009 – 0.47%).





20.
CAPITAL RISK MANAGEMENT





The Company’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the overall cost of capital.





In the management of capital, the Company includes shareholders’ equity, debt and customer deposits in the definition of capital.





In managing capital, the Company estimates its future cash requirements by preparing a budget annually for review and approval by the Board of Directors.  The Company also prepares pro-forma financial statement forecasts and a rolling revenue forecast to monitor potential changes to plan.  The budget establishes the approved activities for the upcoming year and estimates costs of these activities.  Budget to actual variances are prepared quarterly and reviewed by the Company’s management and the Board of Directors.  Historically, funding for the Company’s plan has been through a combination of customer deposits and the issuance of common shares.  The
Company manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets.





To maintain or adjust the capital structure, the Company may attempt to issue new shares, issue new debt, acquire or dispose of assets and adjust the amount of cash and short-term investment balances.





Pursuant to its Capital Risk management strategy, The Company closed on November 19, 2010 a public offering with a syndicate of underwriters to issue 10,500,000 common shares of IMRIS at US $5.00 per common share for gross proceeds of $53,067.  In addition, IMRIS granted the underwriters an option, exercisable in whole or in part for a period of up to 30 days following the offering closing date, to increase the offering by up to 1,650,000 common shares at a price of US $5.00 per common share.  This option was partially exercised on November 30, 2010, increasing the aggregate size of the offering to $56,146.





Proceeds of the offering will be used for working capital and general corporate purposes.





21.
COMPARATIVE FIGURES





The Company reclassified $293 from cash and cash equivalents to restricted cash and $460 from property, plant, and equipment to conform to the current period’s presentation.  The Company also reclassified $821 unrealized foreign exchange loss on cash balances on the consolidated cash flow statement.







IMRIS INC.
 Notes to the Consolidated Financial Statements
 December 31, 2010 and 2009
  22.
RECONCILIATION WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
 
 The Company follows Canadian GAAP which is different in some respects from the accounting principles applicable in the United States [‘‘US GAAP’’] and from practices prescribed by the United States Securities and Exchange Commission.  The significant differences between Canadian and US GAAP, and their effects on the consolidated financial statements, are described below:
 
 This reconciliation of Canadian GAAP to US GAAP should be read in conjunction with our annual consolidated financial statements for the year-ended December 31, 2010.  We believe this reconciliation reflects all adjustments (consisting of normal recurring adjustments) necessary to present fairly the results for the periods shown.  Material differences between Canadian GAAP and US GAAP are described below.
 
 Statement of Changes in Shareholders’ Equity
 
 Common Shares


Additional

Paid-inNumber


Amount


Capital


Deficit


TotalBalance, December 31, 2008, in accordance with Canadian GAAP


27,352,513


$
65,993


$
1,228


$
(46,257
)

$
20,964Adjustment to opening shareholders’ equity – Stock-based compensationiand embedded derivatives ii


-



-



219



6



225Issuance of stock on exercise of employee stock options


32,614



56



-



-



56Stock issued for cash


3,697,250



19,288



-



-



19,288Stock based compensation expense for the year


-



-



937



-



937Amount credited to share capital related to options issued


-



-



(8
)


-



(8
)Loss and comprehensive loss


-



-



-



(9,999
)


(9,999
)Balance, December 31, 2009, in accordance with US GAAP


31,082,377


$
85,337


$
2,376


$
(56,250
)

$
31,463Issuance of stock on exercise of employee stock options


331,406



533



-



-



533Stock issued on acquisition of NASL


1,600,000



10,384



-



-



10,384Stock issued for cash


11,100,000



50,884



-



-



50,884Stock based compensation expense for the year


-



-



1,119



-



1,119Amount credited to share capital related to options issued


-



-



(70
)


-



(70
)Loss and comprehensive loss


-



-



-



(1,848
)


(1,848
)Balance, December 31, 2010, in accordance with US GAAP


44,113,783


$
147,138


$
3,425


$
(58,098
)

$
92,465
  
  IMRIS INC.
 Notes to the Consolidated Financial Statements
 December 31, 2010 and 2009
  22.
RECONCILIATION WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)
 
 Statement of Loss and Comprehensive Loss
 
 2010


2009Loss and comprehensive loss in accordance with Canadian GAAP

$
(1,446
)

$
(9,165
)Stock-based compensation i


(137
)


(211
)Fair value adjustment to embedded derivatives ii


398



(623
)Deferred development costs expensediii


(663
)


-Loss and comprehensive loss in accordance with US GAAP

$
(1,848
)

$
(9,999
)
 
 The following table details the computation of US GAAP basic and diluted loss per share:
 
 2010


2009Loss attributed to common shareholders - basic and diluted

$
(1,848
)

$
(9,999
)Weighted average number of shares


33,990,295



27,956,272Basic loss per share

$
(0.05
)

$
(0.36
)Weighted average number of shares


33,990,295



27,956,272Diluted loss per share*

$
(0.05
)

$
(0.36
)
 * Excludes the effect of all options that are anti-dilutive.
 
 i.
Stock-based compensation
  The Company grants stock options to employees in accordance with an employee stock option plan established on May 20, 2005.  Under Canadian GAAP, effective March 1, 2004, public companies must account for stock-based compensation granted to employees, officers and directors at fair value.  The fair value of stock options is to be measured using an option pricing model such as the Black-Scholes option pricing model which the Company has elected to use for its fair value calculations.  Prior to the initial public offering of its shares on November 2, 2007, the Company was privately held and used the minimum value methodology to value compensation related to stock options granted to
employees, also allowable under Canadian GAAP.
 
 Under US GAAP, effective January 1, 2006, the Company adopted Financial Accounting Standards Board, Accounting Standards Codification 718 - Stock Compensation (“ASC 718”) to account for employee stock-based compensation.  This standard requires companies to expense the fair value of stock-based compensation awards through operations.  The fair value of stock options granted is to be calculated using an option pricing model and must take into consideration estimated forfeitures at the time of grant to determine the number of awards that will ultimately vest.
  
  IMRIS INC.
 Notes to the Consolidated Financial Statements
 December 31, 2010 and 2009
  22.
RECONCILIATION WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)
 
 i.
Stock-based compensation (continued)
  The Company has elected to use the modified prospective application transition method to implement the accounting for employee stock options outstanding at January 1, 2006 under ASC 718.  Under the modified prospective method, ASC 718 is generally applied only to share-based awards granted, modified, repurchased or cancelled on or after January 1, 2006.  ASC-718 was applied prospectively to new awards and to awards modified, repurchased, or cancelled after the required effective date of January 1, 2006.  The Company has adopted the straight-line attribution method for determining the compensation cost to be recorded during each accounting period.
 
 As a result of adopting ASC 718, which does not permit use of the minimum value method and requires forfeitures to be estimated at the grant date, additional compensation expense has been recorded under US GAAP for the years ended December 31, 2009 and December 31, 2010.
 
 Other disclosure related to share-based compensation is as follows;
 
 a)
The total number of options vested and exercisable as at December 31, 2010 was 2,941,920 (December 31, 2009 – 2,681,438) with a weighted average exercise price of $2.77 (December 31, 2009 – $2.51), a weighted average remaining term of 1.9 years (December 31, 2009 – 2.6 years) and a total intrinsic value of $8,710 (December 31, 2009 - $7,929).
 
 b)
The total number of options vested and expected to vest amounted to 3,819,477 as at December 31, 2010 (December 31, 2009 - 3,754,341) and had a weighted average exercise price of $3.41 (December 31, 2009 - $2.95), a weighted average remaining term of 2.5 years (December 31, 2009 – 3.0 years) and a total intrinsic value of $9,092 (December 31, 2009 - $9,345).
 
 c)
The total fair value of options that vested during the year ended December 31, 2010 was $955 (December 31, 2009 – $1,014).
 
 d)
The total intrinsic value of options exercised during the year ended December 31, 2010 was $1,479 (December 31, 2009 – $106).
 
 e)
As at December 31, 2010, compensation costs not yet recognized relating to stock option awards outstanding was $2,018 (December 31, 2009 - $1,640).  As at December 31, 2010, compensation cost will be recognized on a straight line basis over the remaining weighted-average period of approximately 2.9 for the time vesting awards.  Compensation will be adjusted for subsequent changes in estimated forfeitures.
 
 f)
Expected volatilities are based on similar publicly traded companies in the industry as this represents the most appropriate basis to determine the actual expected volatility of IMRIS’ shares in future periods.
 
 g)
Upon exercise of stock options the Company can satisfy its obligations by either issuing treasury shares or repurchasing shares on the market.  To date the Company has chosen to issue treasury shares and does not expect to repurchase shares from the market to satisfy expected exercises of stock options.
  
 
 IMRIS INC.
 Notes to the Consolidated Financial Statements
 December 31, 2010 and 2009
  22.
RECONCILIATION WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)
 
 ii.
Embedded derivative
  In some instances the Company sells products to customers located in foreign countries and denominates the contract in United States dollars which is the functional currency of neither of the contracting parties.  Under ASC 815, Derivatives and Hedging, these types of contracts give rise to an embedded derivative.  The embedded derivative is the change in the relative values of the US dollar (the contracting currency) and the customer’s functional currency.  Under Canadian GAAP there are specific exceptions for contracts of this nature which results in no embedded derivative being recognized.
 
 ASC 815 requires the Company to record an asset or liability for the embedded derivative based on its fair value.  The embedded derivative arises on initial execution of the contract and is active until the contract is closed with its fair value being recalculated throughout the life of the contract.  Changes in the fair value of the embedded derivative are recognized in income during the period in which the changes occur.  As these contracts can be active for two or more years the fair value of the embedded derivatives is calculated using a credit adjusted discount rate.  As at December 31, 2010, there is no embedded derivative asset or liability.  As at December
31, 2009 there was an embedded derivative liability of $398.
 
 The valuation of the embedded derivatives was derived using observable forward currency rates combined with estimated timing and magnitudes of contractual cash flows pertaining to specific sales contracts.
  iii.
Deferred development costs
  Under Canadian GAAP, development costs that meet specific criteria related to technical, market and financial feasibility are capitalized and amortized over the useful life of the technology.  FASB Accounting Standards Codification 730 Research and Development requires all development costs to be expensed as incurred.
  Other Disclosures Required Under US GAAP
  1.
Income Statement
 
 a)
During each of the periods presented revenue is comprised of:
 
 2010


2009System sales

$
69,646


$
42,366Extended maintenance services


2,109



1,763$
71,755


$
44,129
 
 System sales under US GAAP are adjusted for the effects of the foreign currency embedded derivatives described above.  The net reduction to sales for the year ended December 31, 2010 was $470 (December 31, 2009 - $289).
  
  IMRIS INC.
 Notes to the Consolidated Financial Statements
 December 31, 2010 and 2009
  22.
RECONCILIATION WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)
 
 1.
Income Statement (continued)
 
 b)
Stock-based compensation:
 
 Non-cash stock-based compensation of $1,119 was recorded for the year ended December 31, 2010 (December 31, 2009 – $937) and was included in Administrative, Sales and Marketing, Customer Support and Operations and Research and Development as follows:
 
 2010


2009Administrative

$
704


$
546Sales and marketing


93



163Customer support and operations


118



80Research and development


204



148$
1,119


$
937
 
 c)
Related party transactions included in income statement captions are as follows:
 
 2010


2009Administration

$
144


$
741$
144


$
741
 
 d)
Bad debt expense included in administrative expenses is nil for the year ended December 31, 2010 (December 31, 2009 - $Nil).
 
 e)
Rental expense related to premise included in administrative expense is $815 for the year ended December 31, 2010 (December 31, 2009 - $605).
 
 f)
Depreciation expense related to capital assets included in administrative expense is $Nil for the year ended December 31, 2010 (December 31, 2009 - $Nil).
 
 g)
The Company receives investment tax credits for eligible research and development expenditures and accounts for the credits received using the flow-through method.
  2.
Balance Sheet
 
 a)
Details of accounts payable and accrued liabilities are as follows:
  2010


2009Trades payable

$
10,907


$
8,952Accruals


2,273



1,962Payroll related accruals


1,243



1,242Warranty


597



517$
15,020


$
12,673
  
  IMRIS INC.
 Notes to the Consolidated Financial Statements
 December 31, 2010 and 2009
  22.
RECONCILIATION WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)
 
 2.
Balance Sheet (continued)
 
 b)
Warranty liability
 
 The Company records a liability for future warranty costs based on management’s best estimate of probable claims under Company warranties.  The accrual is based on the terms of the warranty and historical experience.  The Company regularly evaluates the appropriateness of the remaining accrual.
 
 The following table details the changes in the warranty accrual.
 
 2010


2009Balance at beginning of the year

$
517


$
660Accruals


284



193Utilization


(204
)


(336
)Balance at end of the year

$
597


$
517
 
 c)
Patents
 
 The aggregated amortization expense related to patents for the next five years is as follows:
  20102011

$
7392012


7392013


7392014


7392015


739$
3,695
 
 d)
Deferred taxes
 
 The net reduction in the valuation allowance during the year ended December 31, 2010 was $690 (December 31, 2009 - $1,417).
 
 3.
Income taxes
 
 a)
Adoption of FASB Interpretation 48
 
 In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (“FIN 48”) an interpretation of FAS 109, effective for fiscal years beginning on or after December 15, 2006 (now ASC 740).  ASC 740 provides specific guidance on the recognition, de-recognition and measurement of income tax positions in financial statements, including the accrual of related interest and penalties recorded in interest expense.  An income tax position is recognized when it is more likely than not that it will be sustained upon examination based on its technical merits, and is measured as the largest amount that is
greater than 50% likely of being realized upon ultimate settlement.  Under Canadian GAAP, the Company recognizes and measures income tax positions based on the best estimate of the amount that is more likely than not of being realized.  The adoption of this standard did not have any impact on the Company’s US GAAP results.
 
 b)
Substantively enacted tax rates
 
 Under Canadian GAAP, income taxes are measured using substantively enacted tax rates, while under US GAAP, measurement is based upon enacted tax rates.  There is a difference between the enacted and substantively enacted rates for the periods presented, however; this difference does not result in a difference in the consolidated financial statements as the Company’s tax asset is nil under either rate assumption due to valuation allowances.  There is a difference in the effective tax rate applied to the individual temporary differences comprising the deferred tax balance in Note 12 b however, as the net tax asset would be zero under either rate assumption, the table detailing the
composition of deferred taxes has not been reproduced to reflect enacted rates.
  
  IMRIS INC.
 Notes to the Consolidated Financial Statements
 December 31, 2010 and 2009
  22.
RECONCILIATION WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)
 
 3.
Income taxes (continued)
 
 c)
Deferred tax asset
 
 Under US GAAP, investment tax credits are included in the determination of deferred tax assets whereas under Canadian GAAP, investment tax credits are not considered in the determination of future tax assets.  Including the investment tax credits as a deferred tax asset under US GAAP would have the impact of increasing deferred tax assets with a corresponding increase in the Company’s valuation allowance of $11,400 as at December 31, 2010  (December 31, 2009 - $9,000).
 
 d)
Fiscal periods subject to examination
 
 The Company files tax returns in Australia, Belgium, Canada, India, Japan, Germany and the United States.  Generally, the years 2006 to 2009 remain subject to examination by tax authorities.
 e)
Income (loss) by jurisdiction
 
 The components of the Company’s income (loss) from operations before income taxes, by taxing jurisdiction, were as follows:
 
 2010


2009Canada

$
145


$
(9,890
)United States


(2,371
)


784Other


378



(893
)$
(1,848
)

$
(9,999
)
 
 f)
Future tax liabilities by jurisdiction
 
 The Company’s future tax liability for each tax jurisdiction is $Nil for all periods noted above.
 
 4.
Fair Value Measurements
 
 Effective January 1, 2008, the Company adopted FASB standard SFAS No. 157, “Fair Value Measurements,” (now ASC 820) which defines fair value, establishes a framework and prescribes methods for measuring fair value and outlines the additional disclosure requirement on the use of fair value measurements.  Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date).  ASC 820 establishes a three-level hierarchy that prioritizes the inputs used to measure fair
value.  The three levels of fair value hierarchy based on the reliability of inputs are as follows:
 
 Level 1- Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities;
 
 Level 2 - Inputs are significant observable inputs other than quoted prices included in level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data; and
 
 Level 3 - Inputs are significant unobservable inputs that reflect the reporting entity’s own assumptions and are supported by little or no market activity.
  
  IMRIS INC.
 Notes to the Consolidated Financial Statements
 December 31, 2010 and 2009
  22.
RECONCILIATION WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)
 
 4.
Fair Value Measurements (continued)
 
 The Company’s financial assets and liabilities that are measured at fair value on a recurring basis have been segregated into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the table below.  ASC 820 delayed the effective date for non-financial assets and liabilities until January 1, 2009, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis.
 
 Financial assets and liabilities measured at fair value as at December 31, 2010 in the consolidated financial statements on a recurring basis are summarized below:
 
 Level 1


Level 2


Level 3Cash and cash equivalents

$
60,447


$
-


$
-$
60,447


$
-


$
-
 
 Financial assets and liabilities measured at fair value as at December 31, 2009 in the consolidated financial statements on a recurring basis are summarized below:
 
 Level 1


Level 2


Level 3Cash and cash equivalents

$
26,274


$
-


$
-Embedded derivatives


-



-



(398
)$
26,274


$
-


$
(398
)
 
 5.
Collaborative Arrangement
 
 During the year, IMRIS entered into a collaborative arrangement with a third party to encourage research, education and patient care activities of mutual benefit in the areas of developing diagnostic and functional assessment capabilities of magnetic resonance imaging for mainstream interventional cardiology and neuroscience.
 
 As part of the agreement, IMRIS had agreed to provide the necessary equipment, maintenance and support staff to achieve the purpose intended by the agreement.  The third party will provide the appropriate clinical validation.
 
 Included in the current years consolidated statement of income is revenue of $138 arising from sales to our partner of products manufactured by the Company.  All future costs or revenue generated from third parties will be recognized in these income statements on a gross basis.  Any future payments between the participants of this agreement will be recognized in accordance with the Company’s current expenditure policies.  The classification of these, or any future payments between participants pursuant to this collaborative arrangement, will be based on the nature of the arrangement.