Consolidated Financial Statements(Expressed in U.S.
      dollars)BALLARD POWER SYSTEMS
    INC.Years ended December 31,
      2011, and 2010




---



MANAGEMENTS REPORT

Managements Responsibility for the Financial Statements
andReport on Internal Control over Financial
Reporting

The
consolidated financial statements contained in this Annual Report have been
prepared by management in accordance with International Financial Reporting
Standards (IFRS) as issued by the International Accounting Standards Board.
The integrity and objectivity of the data in these consolidated financial
statements are managements responsibility. Management is also responsible for
all other information in the Annual Report and for ensuring that this
information is consistent, where appropriate, with the information and data
contained in the consolidated financial statements.

Management is responsible for establishing and maintaining adequate
internal control over financial reporting. Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of consolidated financial
statements for external reporting purposes in accordance with IFRS. Internal
control over financial reporting may not prevent or detect fraud or
misstatements because of limitations inherent in any system of internal control.
Management has assessed the effectiveness of the Corporations internal control
over financial reporting based on the framework in Internal Control  Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and concluded that the Corporations internal control over financial
reporting was effective as of December 31, 2011. In addition, management
maintains disclosure controls and procedures to provide reasonable assurance
that material information is communicated to management and appropriately
disclosed. Some of the assets and liabilities include amounts, which are based
on estimates and judgments, as their final determination is dependent on future
events.

The
Board of Directors oversees managements responsibilities for financial
reporting through the Audit Committee, which consists of four directors who are
independent and not involved in the daily operations of the Corporation. The
Audit Committee meets on a regular basis with management and the external and
internal auditors to discuss internal controls over the financial reporting
process, auditing matters and financial reporting issues. The Audit Committee is
responsible for appointing the external auditors (subject to shareholder
approval), and reviewing and approving all financial disclosure contained in our
public documents and related party transactions.

---



The
external auditors, KPMG LLP, have audited the financial statements and expressed
an unqualified opinion thereon. KPMG has also expressed an unqualified opinion
on the effective operation of the internal controls over financial reporting as
of December 31, 2011. The external auditors have full access to management and
the Audit Committee with respect to their findings concerning the fairness of
financial reporting and the adequacy of internal controls.

JOHN SHERIDAN
    TONY GUGLIELMINJOHN SHERIDAN
    TONY GUGLIELMINPresident and
    Vice President andChief Executive
Officer
    Chief Financial
  OfficerFebruary 22, 2012
    February 22,
  2012


---



| |                                        |          
| | -------------------------------------- | ---------
| | **KPMG
    LLP**                       | Telephone
| | **Chartered
      Accountants**        | Fax      
| | PO Box 10426 777 Dunsmuir
      Street | Internet 
| | Vancouver BC V7Y 1K3                   |          
| | Canada                                 |          



REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of
Directors of Ballard Power Systems Inc.

We have audited the accompanying
consolidated statements of financial position of Ballard Power Systems Inc. as
at December 31, 2011, December 31, 2010 and January 1, 2010 and the related
consolidated statements of comprehensive loss, changes in equity and cash flows
for the years ended December 31, 2011 and December 31, 2010. These consolidated
financial statements are the responsibility of the Companys management. 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 and the standards
of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of the Company as at December 31, 2011,
December 31, 2010 and January 1, 2010, and its consolidated financial
performance and its consolidated cash flows for the years ended December 31,
2011 and December 31, 2010 in conformity with International Financial Reporting
Standardsas issued by the International
Accounting Standards Board.

We also have audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the Companys internal control over financial reporting as of
December 31, 2011, based on the criteria established in Internal Control 
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated February 22, 2012 expressed an
unqualified opinion on the effectiveness of the Companys internal control over
financial reporting.

Chartered AccountantsVancouver, CanadaFebruary 22,
2012







KPMG LLP is a Canadian limited
      liability partnership and a member firm of the KPMGnetwork of
      independent member firms affiliated with KPMG International
      Cooperative(KPMG International), a Swiss entity.KPMG Canada provides services to KPMG
      LLP.


---



| |                                        |          
| | -------------------------------------- | ---------
| | **KPMG
    LLP**                       | Telephone
| | **Chartered
      Accountants**        | Fax      
| | PO Box 10426 777 Dunsmuir
      Street | Internet 
| | Vancouver BC V7Y 1K3                   |          
| | Canada                                 |          



REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of
Directors of Ballard Power Systems Inc.

We have audited Ballard Power
Systems Incs (the Company) internal control over financial reporting as of
December 31, 2011, based on the criteria established inInternal Control
 Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). The Companys management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the section entitled Managements Report on Disclosure Controls and
Procedures and Internal Controls over Financial Reporting under the heading
Internal control over financial reporting included in Management Discussion
and Analysis. Our responsibility is to express an opinion on the Companys
internal control over financial reporting based on our audit.

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

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

Because of its inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

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







KPMG LLP is a Canadian limited
      liability partnership and a member firm of the KPMGnetwork of
      independent member firms affiliated with KPMG International
      Cooperative(KPMG International), a Swiss entity.KPMG Canada provides services to KPMG
      LLP.


---





| |                          
| | -------------------------
| | *February 22,
      2012*

We also have audited, in
accordance with the Canadian generally accepted auditing standards and the
standards of the Public Company Accounting Oversight Board (United States), the
consolidated statements of financial position of the Company as of December 31,
2011, December 31, 2010 and January 1, 2010, and the related consolidated
statements of comprehensive loss, changes in equity and cash flows for the years
ended December 31, 2011 and December 31, 2010, and our report dated February 22,
2012 expressed an unqualified opinion on those consolidated financial
statements.

Chartered AccountantsVancouver, CanadaFebruary 22,
2012

---



BALLARD POWER SYSTEMS
INC.Consolidated Statement of
Financial Position(Expressed in
thousands of U.S. dollars)

|                                                   |  |         |  | December 31, |            | December 31, |   | January 1, |  
|-------------------------------------------------- |  | ------- |  | ------------ | ---------- | ------------ | - | ---------- | -
|                                                   |  | Note    |  | 2011         |            | 2010         |   | 2010       |  
|Assets                                             |  |         |  |              |            |              |   |            |  
|                                                  
|Current assets:                                    |  |         |  |              |            |              |   |            |  
|Cash and cash equivalents                          |  |         |  | $            | 20,316     |              | $ | 51,937     |  
|Short-term investments                             |  |         |  |              | 25,878     |              |   | 22,508     |  
|Trade and other receivables                        |  | 6       |  |              | 17,164     |              |   | 11,614     |  
|Inventories                                        |  | 7       |  |              | 13,614     |              |   | 12,382     |  
|Prepaid expenses and other current assets          |  |         |  |              | 934        |              |   | 957        |  
|Total current assets                               |  |         |  |              | 77,906     |              |   | 99,398     |  
|                                                  
|Property, plant and equipment                      |  | 8       |  |              | 35,085     |              |   | 36,945     |  
|Intangible assets                                  |  | 9       |  |              | 2,249      |              |   | 2,975      |  
|Goodwill                                           |  | 10      |  |              | 48,106     |              |   | 48,106     |  
|Investments                                        |  | 11      |  |              | 635        |              |   | 673        |  
|Long-term trade receivables                        |  | 6       |  |              | 1,126      |              |   | 1,596      |  
|Other long-term assets                             |  |         |  |              | 183        |              |   | 334        |  
|Total assets                                       |  |         |  | $            | 165,290    |              | $ | 190,027    |  
|                                                  
|Liabilities                                        |  |         |  |              |            |              |   |            |  
|                                                  
|Current liabilities:                               |  |         |  |              |            |              |   |            |  
|Bank operating line                                |  | 12      |  | $            | 4,587      |              | $ | -          |  
|Trade and other payables                           |  | 13      |  |              | 22,834     |              |   | 21,885     |  
|Deferred revenue                                   |  |         |  |              | 3,560      |              |   | 2,506      |  
|Provisions                                         |  | 14      |  |              | 9,573      |              |   | 10,019     |  
|Finance lease liability                            |  | 12 &15  |  |              | 978        |              |   | 681        |  
|Total current liabilities                          |  |         |  |              | 41,532     |              |   | 35,091     |  
|                                                  
|Finance lease liability                            |  | 12 & 15 |  |              | 13,749     |              |   | 13,354     |  
|Deferred gain                                      |  |         |  |              | 5,653      |              |   | 5,947      |  
|Provisions                                         |  | 14      |  |              | 4,733      |              |   | 3,102      |  
|Convertible debenture                              |  | 16      |  |              | 1,592      |              |   | -          |  
|Employee future benefits                           |  | 17      |  |              | 5,686      |              |   | 2,950      |  
|Total liabilities                                  |  |         |  |              | 72,945     |              |   | 60,444     |  
|                                                  
|Equity:                                            |  |         |  |              |            |              |   |            |  
|Share capital                                      |  | 18      |  |              | 837,686    |              |   | 836,245    |  
|Treasury
    shares                                |  | 18      |  |              | (515       | )            |   | (670       | )
|Contributed surplus                                |  | 18      |  |              | 289,219    |              |   | 289,444    |  
|Accumulated
      deficit                          |  |         |  |              | (1,031,279 | )            |   | (995,023   | )
|Foreign currency reserve                           |  |         |  |              | 209        |              |   | -          |  
|Total equity attributable to equity
    holders    |  |         |  |              | 95,320     |              |   | 129,996    |  
|Dantherm Power A/S non-controlling
      interests |  |         |  |              | (2,975     | )            |   | (413       | )
|Total equity                                       |  |         |  |              | 92,345     |              |   | 129,583    |  
|Total liabilities and equity                       |  |         |  | $            | 165,290    |              | $ | 190,027    |  

See accompanying notes to
consolidated financial statements.

Approved on behalf of the
Board:

"Ed Kilroy"
    "Ian Bourne"Director
    Director




BALLARD POWER SYSTEMS
INC.Consolidated Statement of
Comprehensive LossFor the year ended December 31(Expressed in
thousands of U.S. dollars, except per share amounts and number of
shares)

|                                                           |  | Note |  |   | 2011       |   |   | 2010       |  
|---------------------------------------------------------- |  | ---- |  | - | ---------- | - | - | ---------- | -
|Revenues:                                                  |  |      |  |   |            |   |   |            |  
|Product and service revenues                               |  |      |  | $ | 76,009     |   | $ | 65,019     |  
|Cost of product and service revenues                       |  |      |  |   | 62,124     |   |   | 54,887     |  
|Gross margin                                               |  |      |  |   | 13,885     |   |   | 10,132     |  
|                                                          
|Operating expenses:                                        |  |      |  |   |            |   |   |            |  
|Research and product development                           |  |      |  |   | 25,480     |   |   | 28,749     |  
|General and administrative                                 |  |      |  |   | 12,500     |   |   | 14,777     |  
|Sales and marketing                                        |  |      |  |   | 9,488      |   |   | 9,113      |  
|Total operating expenses                                   |  |      |  |   | 47,468     |   |   | 52,639     |  
|                                                          
|Results from operating activities                          |  |      |  |   | (33,583    | ) |   | (42,507    | )
|Finance income (loss)
      and other                      |  | 26   |  |   | 195        |   |   | (104       | )
|Finance
    expense                                        |  | 26   |  |   | (1,392     | ) |   | (861       | )
|Net finance expense                                        |  |      |  |   | (1,197     | ) |   | (965       | )
|Gain on sale of property, plant and
    equipment          |  | 8    |  |   | 734        |   |   | 4          |  
|Gain on sale of assets                                     |  |      |  |   | -          |   |   | 8,032      |  
|Impairment loss on property, plant and
      equipment     |  | 8    |  |   | (1,727     | ) |   | -          |  
|Loss before income taxes                                   |  |      |  |   | (35,773    | ) |   | (35,436    | )
|Income tax expense                                         |  | 22   |  |   | (383       | ) |   | (3         | )
|Net loss                                                   |  |      |  |   | (36,156    | ) |   | (35,439    | )
|Foreign currency
      translation differences             |  |      |  |   | 363        |   |   | -          |  
|Defined benefit plan
      actuarial gains (losses)        |  | 17   |  |   | (2,905     | ) |   | 112        |  
|Net gain on hedge of forward contracts                     |  |      |  |   | 20         |   |   | -          |  
|Comprehensive loss                                         |  |      |  | $ | (38,678    | ) | $ | (35,327    | )
|Net loss attributable to:                                  |  |      |  |   |            |   |   |            |  
|Ballard Power Systems
      Inc.                           |  |      |  | $ | (33,420    | ) | $ | (31,532    | )
|Dantherm Power A/S
      non-controlling interest          |  |      |  |   | (2,736     | ) |   | (3,907     | )
|Net loss                                                   |  |      |  | $ | (36,156    | ) | $ | (35,439    | )
|Comprehensive loss attributable
to:                        |  |      |  |   |            |   |   |            |  
|Ballard Power Systems
      Inc.                           |  |      |  | $ | (36,116    | ) | $ | (31,420    | )
|Dantherm Power A/S
      non-controlling interest          |  |      |  |   | (2,562     | ) |   | (3,907     | )
|Comprehensive loss                                         |  |      |  | $ | (38,678    | ) | $ | (35,327    | )
|                                                           |  |      |  |   |            |   |   |            |  
|Basic and diluted loss per share attributable
      to     |  |      |  | $ | (0.40      | ) | $ | (0.37      | )
|**Ballard Power
      Systems Inc.**                       |  |      |  |   |            |   |   |            |  
|Weighted average number of common shares
      outstanding |  |      |  |   | 84,440,970 |   |   | 84,102,315 |  

See
accompanying notes to consolidated financial statements.

---



BALLARD POWER SYSTEMS
INC.Consolidated Statement of
Changes in Equity(Expressed in thousands
of U.S. dollars except per share amounts and number of shares)

|                                          |  |                                         |  |   |           |  |          |      |             |   |             |   |          |            |   |             |     |  |        | Dantherm |        |       |  |       |        
|----------------------------------------- |  | --------------------------------------- |  | - | --------- |  | -------- | ---- | ----------- | - | ----------- | - | -------- | ---------- | - | ----------- | --- |  | ------ | -------- | ------ | ----- |  | ----- | -------
|                                          |  | Ballard Power Systems Inc.
      Equity |  |   | Power A/S |  |          |      |             |  
|                                          |  |                                         |  |   |           |  |          |      |             |   |             |   |          |            |   | Foreign     |     |  | Non-   |          |        |       |  |      
|                                          |  | Number
    of                           |  |   | Share     |  | Treasury |      | Contributed |   | Accumulated |   | currency |            |   | controlling |     |  | Total  |         
|                                          |  | shares                                  |  |   | capital   |  | shares   |      | surplus     |   | deficit     |   | reserve  |            |   | interests   |     |  | equity |         
|Balance, January 1, 2010                  |  | 83,973,988                              |  | $ | 835,565   |  | $        | (207 | )           | $ | 285,814     |   | $        | (963,582   | ) | $****       | -   |  |        | $        | -      |       |  | $**** | 157,590
|Acquisition of
      Dantherm Power A/S   |  | -                                       |  |   | -         |  |          | -    |             |   | -           |   |          | -          |   |             | -   |  |        |          | 3,543  |       |  |       | 3,543  
|Power A/S                                 |  |                                         |  |   |           |  |          |      |             |   |             |   |          |            |   |             |     |  |        |          |        |       |  |       |        
|Additional investment in Dantherm         |  | -                                       |  |   | -         |  |          | -    |             |   | 915         |   |          | -          |   |             | -   |  |        |          | (49    | )     |  |       | 866    
|Power A/S                                 |  |                                         |  |   |           |  |          |      |             |   |             |   |          |            |   |             |     |  |        |          |        |       |  |       |        
|Net
    loss                              |  | -                                       |  |   | -         |  |          | -    |             |   | -           |   |          | (31,532    | ) |             | -   |  |        |          | (3,907 | )     |  |       | (35,439
|Defined benefit plan actuarial gain       |  | -                                       |  |   | -         |  |          | -    |             |   | -           |   |          | 112        |   |             | -   |  |        |          | -      |       |  |       | 112    
|Non-dilutive
      financing              |  | -                                       |  |   | -         |  |          | -    |             |   | (22         | ) |          | -          |   |             | -   |  |        |          | -      |       |  |       | (22    
|Purchase of treasury shares               |  | -                                       |  |   | -         |  |          | (559 | )           |   | -           |   |          | -          |   |             | -   |  |        |          | -      |       |  |       | (559   
|RSUs and DSUs
      redeemed              |  | 101,986                                 |  |   | 542       |  |          | 96   |             |   | (800        | ) |          | (21        | ) |             | -   |  |        |          | -      |       |  |       | (183   
|Options exercised                         |  | 72,491                                  |  |   | 138       |  |          | -    |             |   | (47         | ) |          | -          |   |             | -   |  |        |          | -      |       |  |       | 91     
|Share distribution plan                   |  | -                                       |  |   | -         |  |          | -    |             |   | 3,584       |   |          | -          |   |             | -   |  |        |          | -      |       |  |       | 3,584  
|Balance, December 31, 2010                |  | 84,148,465                              |  |   | 836,245   |  |          | (670 | )           |   | 289,444     |   |          | (995,023   | ) |             | -   |  |        |          | (413   | )     |  |       | 129,583
|Net
      loss                            |  | -                                       |  |   | -         |  |          | -    |             |   | -           |   |          | (33,420    | ) |             | -   |  |        |          | (2,736 | )     |  |       | (36,156
|Foreign currency translation for          |  | -                                       |  |   | -         |  |          | -    |             |   | -           |   |          | -          |   |             | 189 |  |        |          | 174    |       |  |       | 363    
|**foreign
      operations**              |  |                                         |  |   |           |  |          |      |             |   |             |   |          |            |   |             |     |  |        |          |        |       |  |       |        
|Defined
      benefit plan actuarial loss |  | -                                       |  |   | -         |  |          | -    |             |   | -           |   |          | (2,905     | ) |             | -   |  |        |          | -      |       |  |       | (2,905 
|Net gain on hedge of forward contracts    |  | -                                       |  |   | -         |  |          | -    |             |   | -           |   |          | -          |   |             | 20  |  |        |          | -      |       |  |       | 20     
|Non-dilutive
      financing              |  | -                                       |  |   | -         |  |          | -    |             |   | (60         | ) |          | -          |   |             | -   |  |        |          | -      |       |  |       | (60    
|Purchase of treasury shares               |  | -                                       |  |   | -         |  |          | (327 | )           |   | -           |   |          | -          |   |             | -   |  |        |          | -      |       |  |       | (327   
|RSUs
      redeemed                       |  | 376,225                                 |  |   | 1,393     |  |          | 482  |             |   | (2,769      | ) |          | 69         |   |             | -   |  |        |          | -      |       |  |       | (825   
|Options exercised                         |  | 25,834                                  |  |   | 48        |  |          | -    |             |   | (8          | ) |          | -          |   |             | -   |  |        |          | -      |       |  |       | 40     
|Share distribution
    plan               |  | -                                       |  |   | -         |  |          | -    |             |   | 2,612       |   |          | -          |   |             | -   |  |        |          | -      |       |  |       | 2,612  
|Balance, December 31,
      2011          |  | 84,550,524                              |  | $ | 837,686   |  | $        | (515 | **)**       | $ | 289,219     |   | $        | (1,031,279 | ) | $           | 209 |  |        | $        | (2,975 | **)** |  | $     | 92,345 

See accompanying
notes to consolidated financial statements.

---



BALLARD POWER SYSTEMS
INC.Consolidated Statement of Cash
FlowsFor the year ended December 31(Expressed in thousands of U.S. dollars)

|                                                                             |  | Note |  | 2011 |         | 2010 |      
|---------------------------------------------------------------------------- |  | ---- |  | ---- | ------- | ---- | -----
|Cash provided by (used
    for):                                             |  |      |  |      |         |      |      
|Operating activities:                                                        |  |      |  |      |         |      |      
|Net loss for the
      year                                                  |  |      |  | $    | (36,156 | )    | $****
|Adjustments for:                                                             |  |      |  |      |         |      |      
|Compensatory
      shares                                                    |  |      |  |      | 2,646   |      |      
|Employee future
      benefits                                               |  |      |  |      | (172    | )    |      
|Depreciation
      and amortization                                          |  |      |  |      | 5,906   |      |      
|Gain (loss) on
      sale of property, plant and equipment                   |  | 8    |  |      | (734    | )    |      
|Gain on sale of
      assets                                                 |  |      |  |      | -       |      |      
|Impairment loss
      on property, plant and equipment                       |  |      |  |      | 1,727   |      |      
|Unrealized
      loss/(gain) on forward contracts                            |  |      |  |      | 285     |      |      
|                                                                             |  |      |  |      | (26,498 | )    |      
|Changes in
      non-cash working capital:                                   |  |      |  |      |         |      |      
|Trade and other
      receivables                                            |  |      |  |      | (4,317  | )    |      
|Inventories                                                                  |  |      |  |      | (1,293  | )    |      
|Prepaid expenses and other
      current assets                              |  |      |  |      | 42      |      |      
|Trade and other
      payables                                               |  |      |  |      | (1,691  | )    |      
|Deferred revenue                                                             |  |      |  |      | 1,052   |      |      
|Accrued warranty
      liabilities                                           |  |      |  |      | (516    | )    |      
|                                                                             |  |      |  |      | (6,723  | )    |      
|Cash used by
      operating activities                                      |  |      |  |      | (33,221 | )    |      
|                                                                            
|Investing activities:                                                        |  |      |  |      |         |      |      
|                                                                            
|Net decrease
      (increase) in short-term investments                      |  |      |  |      | (3,370  | )    |      
|Additions to property, plant and
      equipment                             |  |      |  |      | (4,107  | )    |      
|Net proceeds on
      sale of property, plant and equipment and other        |  |      |  |      | 3,666   |      |      
|Net proceeds on monetization of
      other long-term assets                 |  |      |  |      | -       |      |      
|Net investments
      in associated companies                                |  | 11   |  |      | 36      |      |      
|Other investment
      activities                                            |  |      |  |      | -       |      |      
|Business
      acquisition including cash acquired                           |  |      |  |      | -       |      |      
|                                                                             |  |      |  |      | (3,775  | )    |      
|Financing activities:                                                        |  |      |  |      |         |      |      
|Non-dilutive financing                                                       |  |      |  |      | (60     | )    |      
|Purchase of
      treasury shares                                            |  |      |  |      | (327    | )    |      
|Payment of finance lease
      liabilities                                   |  |      |  |      | (830    | )    |      
|Net proceeds
      from bank operating line                                  |  | 12   |  |      | 4,587   |      |      
|Net proceeds on issuance of
      share capital                              |  |      |  |      | 40      |      |      
|Proceeds on
      issuance of convertible debenture from                     |  | 16   |  |      | 1,718   |      |      
|Dantherm Power
      A/S non-controlling interests                           |  |      |  |      |         |      |      
|Contribution from Dantherm Power
      A/S non-controlling interests         |  |      |  |      | -       |      |      
|                                                                             |  |      |  |      | 5,128   |      |      
|                                                                            
|Effect of
      exchange rate fluctuations on cash and cash equivalents held |  |      |  |      | 247     |      |      
|                                                                            
|Increase (decrease) in cash and cash
      equivalents                       |  |      |  |      | (31,621 | )    |      
|Cash and cash equivalents, beginning of period                               |  |      |  |      | 51,937  |      |      
|Cash and cash equivalents, end of
      period                               |  |      |  | $    | 20,316  |      | $    

Supplemental disclosure of cash
flow information (note 24).See accompanying notes to consolidated financial
statements.

---



BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)


1.Reporting
entity:

The
principal business of Ballard Power Systems Inc. (the Corporation) is the
design, development, manufacture, sale and service of fuel cell products for a
variety of applications, focusing on motive power (material handling and buses)
and stationary power (back-up power and distributed generation) markets; and
engineering services for a variety of fuel cell applications. A fuel cell is an
environmentally clean electrochemical device that combines hydrogen fuel with
oxygen (from the air) to produce electricity. The Corporations technology is
based on proton exchange membrane (PEM) fuel cells.

The
Corporation is a company domiciled in Canada and its registered office is
located at 9000 Glenlyon Parkway, Burnaby, British Columbia, Canada, V5J 5J8.
The consolidated financial statements of the Corporation as at and for the year
ended December 31, 2011 comprise the Corporation and its subsidiaries (note
3(a)).

2.Basis of
preparation:

(a)Statement of compliance:

These
consolidated financial statements of the Corporation have been prepared in
accordance with International Financial Reporting Standards (IFRS) as issued
by the International Accounting Standards Board (IASB). These are the
Corporations first consolidated annual financial statements prepared in
accordance with IFRS, and IFRS 1First-Time Adoption of International Financial Reporting
Standards, has been applied.

An
explanation of how the transition to IFRS has affected the reported financial
position, financial performance and cash flows of the Corporation is provided in
note 27.

The
consolidated financial statements were authorized for issue by the Board of
Directors on February 22, 2012.

(b)Basis of measurement:

The
consolidated financial statements have been prepared on the historical cost
basis except for the following material items in the statement of financial
position:

- Financial instruments classified as fair
  value through profit or loss and available-for-sale are measured at fair
  value;
- Derivative financial instruments are measured
  at fair value; and
- Employee future benefit plan assets are
  measured at fair value, determined directly by reference to quoted market
  prices.

11

---



BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)


2. Basis of preparation
(contd):

(c)Functional and presentation
currency:

These consolidated financial
statements are presented in U.S. dollars, which is the Corporations functional
currency.

(d) Use of estimates and
judgments:

The preparation of the
consolidated financial statements in conformity with IFRS requires the
Corporations management to make judgments, estimates and assumptions that
affect the amounts reported in these consolidated financial statements and
notes. Actual results could differ from those estimates.

Estimates and underlying
assumptions are reviewed on an ongoing basis. Revisions to accounting estimates
are recognized in the period in which the estimates are revised and in any
future periods affected.

Significant areas requiring
management to make estimates include revenue recognition, product warranty
provision, the net realizable value of inventory, recoverability of intangibles
and goodwill, and employee future benefits. These estimates and judgments are
further discussed in note 4.

3.Significant
accounting policies:

The accounting policies set out
below have been applied consistently to all periods presented in these
consolidated financial statements and in preparing the opening IFRS statement of
financial position at January 1, 2010 for the purposes of the transition to
IFRS, unless otherwise indicated.

(a) Basis of consolidation:

The consolidated financial
statements include the accounts of the Corporation and its principal
subsidiaries as follows:

Percentage
      ownershipJanuary 1,2011
    
    2010
    
    2010Ballard Material
      Products Inc.
    
    100%
    
    100%
    
    100%Ballard Power
    Corporation
    
    100%
    
    100%
    
    100%Dantherm Power A/S
    
    52%
    
    45% - 52%
    
    -


12

---



BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)


3. Significant accounting
policies (contd):

(a) Basis of consolidation
(contd):

Subsidiaries are entities over which the Corporation exercises control,
where control is defined as the power to govern financial and operating
policies, generally owning greater than 50% of the voting rights. The financial
statements of subsidiaries are included in the consolidated financial statements
from the date that control commences until the date that control ceases.
Intercompany balances and transactions are eliminated in the consolidated
financial statements.

The
Corporation acquired a 45% interest in Dantherm Power A/S on January 18, 2010.
In August 2010, the Corporation acquired an additional 7% interest in Dantherm
Power A/S. As the Corporation obtained control over Dantherm Power A/S as of the
date of acquisition of the 45% interest, Dantherm Power A/S has been
consolidated since January 18, 2010.

Acquisitions of non-controlling interest are accounted as transactions
with equity holders in their capacity as equity holders; therefore no goodwill
is recognized as a result of such transactions.

(b) Foreign currency:

(i) Foreign currency transactions

Transactions in foreign currencies are translated to the respective
functional currencies of the Corporation and its subsidiaries at the exchange
rate in effect at the transaction date. Monetary assets and liabilities
denominated in other than the functional currency are translated at the exchange
rates in effect at the balance sheet date. The resulting exchange gains and
losses are recognized in earnings. Non-monetary assets and liabilities
denominated in other than the functional currency that are measured at fair
value are translated to the functional currency at the exchange rate at the date
that the fair value was determined. Non-monetary items that are measured in
terms of historical cost in other than the functional currency are translated
using the exchange rate at the date of the transaction.

(ii)
Foreign operations

The
assets and liabilities of foreign operations are translated to presentation
currency at exchange rates at the reporting date. The income and expenses of
foreign operations are translated to presentation currency at exchange rates at
the dates of the transactions. Foreign currency differences are recognized in
other comprehensive income.

13

---



BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)


3. Significant accounting
policies (contd):

(c) Financial instruments:

(i) Financial assets

The Corporation initially
recognizes loans and receivables and deposits on the date that they are
originated and all other financial assets on the trade date at which the
Corporation becomes a party to the contractual provisions of the instrument. The
Corporation derecognizes a financial asset when the contractual rights to the
cash flows from the asset expire, or when it transfers substantially all the
risks and rewards of ownership of the financial asset.

Financial assets at fair
value through profit or loss

Financial assets are classified
at fair value through profit or loss if they are held for trading or if the
Corporation manages such investments and makes purchase and sale decisions based
on their fair value in accordance with the Corporations documented risk
management or investment strategy. Financial assets at fair value through profit
or loss are measured at fair value, and changes therein are recognized in net
loss.

The Corporations short-term
investments, consisting of highly liquid interest bearing securities with
maturities at the date of purchase between three months and three years, are
classified as held for trading.

The Corporation also
periodically enters into platinum futures and foreign exchange forward contracts
to limit its exposure to platinum price and foreign currency rate fluctuations.
These derivatives are recognized initially at fair value and are recorded as
either assets or liabilities based on their fair value. Subsequent to initial
recognition, these derivatives are measured at fair value and changes to their
value are recorded through net loss, unless these financial instruments are
designated as hedges (note 3 (c)(iv)).

Loans and receivables

Loans and receivables are
financial assets with fixed or determinable payments that are not quoted in an
active market. Such assets are recognized initially at fair value and
subsequently at amortized cost using the effective interest method, less any
impairment losses. Loans and receivables are comprised of the Corporations
trade and other receivables.

14

---



BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)


3. Significant accounting
policies (contd):

(c) Financial instruments
(contd):

(i) Financial assets (contd)

Cash and cash equivalents

Cash
and cash equivalents consist of cash on deposit and highly liquid short-term
interest-bearing securities with maturities at the date of purchase of three
months or less.

Available-for-sale financial assets

Available-for-sale financial assets are non-derivative financial
assets that are designated as available-for-sale and that are not classified in
any of the previous categories. The Corporations investment in Chrysalix Energy
Limited Partnership (Chrysalix) is classified as available-for-sale financial
assets. Subsequent to initial recognition, they are measured at fair value and
changes therein, other than impairment losses and foreign currency differences,
are recognized in other comprehensive income. When an investment is
derecognized, the cumulative gain or loss in other comprehensive income is
transferred to profit or loss.

Determination of fair value

The
fair value of financial assets at fair value through profit or loss and
available-for-sale are determined by reference to their quoted closing bid price
at the reporting date if they are traded in an active market. For derivative
instruments (foreign exchange forward contracts, platinum futures contracts),
fair value is estimated by Management based on their listed market price or
broker quotes that include adjustments to take account of the credit risk of the
Corporation and the counterparty when appropriate. The fair value of loans and
receivables is estimated as the present value of future cash flows, discounted
at the market rate of interest at the reporting date.

(ii)
Financial liabilities

Financial liabilities comprise the Corporations trade and other
payables. The financial liabilities are initially recognized on the date they
are originated and are derecognized when the contractual obligations are
discharged or cancelled or expire. These financial liabilities are recognized
initially at fair value and subsequently are measured at amortized costs using
the effective interest method, when materially different from the initial
amount. Fair value is determined based on the present value of future cash
flows, discounted at the market rate of interest.

15

---



BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)


3. Significant accounting
policies (contd):

(c) Financial instruments
(contd):

(iii)
Share capital

Share
capital is classified as equity. Incremental costs directly attributable to the
issue of shares and share options are recognized as a deduction from equity.
When share capital is repurchased, the amount of the consideration paid,
including directly attributable costs, is recognized as a deduction from equity.
Repurchased shares are classified as treasury shares and are presented as a
deduction from equity. When treasury shares are subsequently reissued, the
amount received is recognized as an increase in equity, and the resulting
surplus or deficit on the transaction is transferred to or from retained
earnings.

(iv)
Derivative financial instruments, including hedge accounting

The
Corporation holds derivative financial instruments to hedge its foreign currency
risk exposures that are designated as the hedging instrument in a hedge
relationship.

On
initial designation of the hedge, the Corporation formally documents the
relationship between the hedging instrument and hedged item, including the risk
management objectives and strategy in undertaking the hedge transaction,
together with the methods that will be used to assess the effectiveness of the
hedging relationship.

The
Corporation makes an assessment, both at the inception of the hedge relationship
as well as on an ongoing basis, whether the hedging instruments are expected to
be highly effective in offsetting the changes in the fair value or cash flows
of the respective hedged items during the period for which the hedge is
designated, and whether the actual results of each hedge are within a range of
80-125 percent. For a cash flow hedge of a forecast transaction, the transaction
should be highly probable to occur and should present an exposure to variations
in cash flows that could ultimately affect reported net income.

Derivatives are recognized initially at fair value; attributable
transaction costs are recognized in profit or loss as incurred. Subsequent to
initial recognition, derivatives are measured at fair value, and changes therein
are accounted for as described below.

16

---



BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)


3. Significant accounting
policies (contd):

(c) Financial instruments
(contd):

(iv) Derivative financial
instruments, including hedge accounting (contd)

Cash flow hedges

When a derivative is designated
as the hedging instrument in a hedge of the variability in cash flows
attributable to a particular risk associated with a recognized asset or
liability or a highly probable forecast transaction that could affect profit or
loss, the effective portion of changes in the fair value of the derivative is
recognized in other comprehensive income and presented in unrealized
gains/losses on cash flow hedges in equity. The amount recognized in other
comprehensive income is removed and included in profit or loss in the same
period as the hedged cash flows affect profit or loss under the same line item
in the statement of comprehensive income as the hedged item. Any ineffective
portion of changes in the fair value of the derivative is recognized immediately
in profit or loss.

If the hedging instrument no
longer meets the criteria for hedge accounting, expires or is sold, terminated,
exercised, or the designation is revoked, then hedge accounting is discontinued
prospectively. The cumulative gain or loss previously recognized in other
comprehensive income and presented in unrealized gains/losses on cash flow
hedges in equity remains there until the forecast transaction affects profit or
loss.

If the forecast transaction is
no longer expected to occur, then the balance in other comprehensive income is
recognized immediately in profit or loss. In other cases the amount recognized
in other comprehensive income is transferred to profit or loss in the same
period that the hedged item affects profit or loss.

Other non-trading
derivatives

When a derivative financial
instrument is not held for trading, and is not designated in a qualifying hedge
relationship, all changes in its fair value are recognized immediately in profit
or loss.

17

---



BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)


3. Significant accounting
policies (contd):

(d) Inventories:

Inventories are recorded at the
lower of cost and net realizable value. The cost of inventories is based on the
first-in first-out principle, and includes expenditures incurred in acquiring
the inventories, production or conversion costs and other costs incurred in
bringing them to their existing location and condition. In the case of
manufactured inventories and work in progress, cost includes materials, labor
and appropriate share of production overhead based on normal operating capacity.
Costs of materials are determined on an average per unit basis.

Net realizable value is the
estimated selling price in the ordinary course of business, less the estimated
costs of completion and selling expenses. In establishing any impairment of
inventory, management estimates the likelihood that inventory carrying values
will be affected by changes in market demand, technology and design, which would
impair the value of inventory on hand.

(e) Property, plant and equipment:

Property, plant and equipment
are measured at cost less accumulated depreciation and accumulated impairment
losses. Cost includes expenditure that is directly attributable to the
acquisition of the asset. The cost of self-constructed assets includes the cost
of materials, costs directly attributable to bringing the assets to a working
condition for their intended use, and the costs of dismantling and removing
items and restoring the site on which they are located.

When parts of an item of
property, plant and equipment have different useful lives, they are accounted
for as separate items (major components).

Property, plant and equipment
are depreciated from the date of acquisition or, in respect of internally
constructed assets, from the time an asset is completed and ready for use, using
the straight-line method less its residual value over the estimated useful lives
of the assets as follows:

Building
    
    20 yearsBuilding under finance
      lease
    
    15 yearsComputer
      equipment
    
    3 to 7
      yearsFurniture and fixtures
    
    5 to 14 yearsFurniture and
      fixtures under finance lease
    
    5
  yearsLeasehold improvements
    
    The shorter of initial term of
      the respective lease andestimated useful
  lifeProduction and
      test equipment
    
    4 to 15
      yearsProduction and test equipment under finance
      lease
    
    5 years


18

---



BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)


3. Significant accounting
policies (contd):

(e) Property, plant and equipment
(contd):

Depreciation methods, useful
lives and residual values are reviewed at each financial year-end and adjusted
if appropriate.

Gains and losses on disposal of
property, plant and equipment are determined by comparing the proceeds from
disposal with the carrying amount of property, plant and equipment, and are
recognized net within other income in profit or loss.

(f) Leases:

Leases where the Corporation
assumes substantially all the risks and rewards of ownership are classified as
finance leases. Upon initial recognition the leased asset is measured at an
amount equal to the lower of its fair value and the present value of the minimum
lease payments. Subsequent to initial recognition, the asset is accounted for in
accordance with the accounting policy applicable to that asset. Other leases are
operating leases and not recognized in the statement of financial
position.

Minimum lease payments made
under finance leases are apportioned between the finance expense and the
reduction of the outstanding liability. The finance expense is allocated to each
period during the lease term so as to produce a constant periodic rate of
interest on the remaining balance of the liability.

Payments made under operating
leases are recognized in income on a straight-line basis over the term of the
lease. Lease incentives received are recognized as a reduction to the lease
expense over the term of the lease.

(g) Goodwill and intangible
assets:

Goodwill is recognized as the
fair value of the consideration transferred including the recognized amount of
any non-controlling interest in the acquiree, less the fair value of the net
identifiable assets acquired and liabilities assumed, as of the acquisition
date. Subsequent to initial recognition, goodwill is measured at cost less
accumulated impairment losses.

Goodwill acquired in a business
combination is allocated to groups of cash generating units that are expected to
benefit from the synergies of the combination.

Intangible assets consist of
fuel cell technology acquired from third parties and are recorded at cost less
accumulated amortization and impairment losses. Intangible assets less their
residual values are amortized over their estimated useful lives of 5 years using
the straight-line method from the date that they are available for use.
Amortization methods, useful lives and residual values are reviewed annually and
adjusted if appropriate.

19

---



BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in
      thousands of U.S. dollars, except per share amounts and number of
      shares)


3. Significant accounting
policies (contd):

(g) Goodwill and intangible assets
(contd):

Costs
incurred in establishing and maintaining patents and license agreements are
expensed in the period incurred.

Research costs are expensed as they are incurred. Product development
costs are expensed as incurred except when they meet specific criteria for
capitalization. Development activities involve a plan or design for the
production of new or substantially improved products and processes. Development
costs are capitalized only if costs can be measured reliably, the product or
process is technically and commercially feasible, future economic benefits are
probable and the Corporation intends to and has sufficient resources to complete
development to use or sell the asset. Capitalized development costs are measured
at cost less accumulated amortization and accumulated impairment losses.
Capitalized development costs, if any, are amortized when commercial production
begins, using the straight-line method over a period of 5 years.

(h) Impairment:

(i)
Financial assets

Financial assets not carried at fair value through profit or loss are
assessed for impairment at each reporting date by determining whether there is
objective evidence that indicates that a loss event has occurred after the
initial recognition of the asset, and that the loss event had a negative effect
on the estimated future cash flows of that asset that can be estimated
reliably.

Impairment losses on available-for-sale investment securities are
recognized by transferring the cumulative loss that has been recognized in other
comprehensive income, and presented in accumulated other comprehensive loss in
equity, to net loss. The cumulative loss that is removed from other
comprehensive income and recognized in net loss is the difference between the
acquisition cost, net of any principal repayment and amortization, and the
current fair value less any impairment loss previously recognized in net loss.
If subsequently the fair value of an impaired available-for-sale security
increases, then the impairment loss is reversed, with the amount of the reversal
recognized in net loss. However, any subsequent recovery in the fair value of an
impaired available for sale equity security is recognized in other comprehensive
income.

20

---



BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in
      thousands of U.S. dollars, except per share amounts and number of
      shares) 3. Significant accounting
policies (contd): (h) Impairment (contd): (ii)
Non-financial assets The
carrying amounts of the Corporations non-financial assets other than
inventories are reviewed at each reporting date to determine whether there is
any indication of impairment. If any such indication exists, then the assets
recoverable amount is estimated. For goodwill and intangible assets that have
indefinite useful lives, the recoverable amount is estimated
annually. The
recoverable amount of an asset or cash-generating unit is the greater of its
value in use and its fair value less costs to sell. 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. Fair value less costs to sell is
defined as the estimated price that would be received on the sale of the asset
in an orderly transaction between market participants at the measurement date.
For the purposes of impairment testing, assets that cannot be tested
individually are grouped together into the smallest group of assets that
generates cash inflows from continuing use that are largely independent of the
cash inflows of other groups of assets. Cash-generating units to which goodwill
has been allocated reflects the lowest level at which goodwill is monitored for
internal reporting purposes. An
impairment loss is recognized if the carrying amount of an asset or its
cash-generating unit exceeds its estimated recoverable amount. Impairment losses
are recognized in net loss. Impairment losses recognized in respect of the
cash-generating units are allocated first to reduce the carrying amount of any
goodwill allocated to the units, and then to reduce the carrying amounts of the
other assets in the unit on a pro-rata basis. An
impairment loss in respect of goodwill is not reversed. In respect of other
assets, impairment losses recognized in prior periods are assessed at each
reporting date for any indications that the loss has decreased or no longer
exists. An impairment loss is reversed only to the extent that the assets
carrying amount does not exceed the carrying amount that would have been
determined, net of depreciation or amortization, if no impairment loss had been
recognized. (i) Provisions: A
provision is recognized if, as a result of a past event, the Corporation has a
present legal or constructive obligation that can be estimated reliably, and it
is probable that an outflow of economic benefits will be required to settle the
obligation. Provisions are determined by discounting the expected future cash
flows at a pre-tax rate that reflects current market assessments of the time
value of money and the risk specific to the liability. The unwinding of the
discount is recognized as a finance cost. 21




BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in
      thousands of U.S. dollars, except per share amounts and number of
      shares)


3. Significant accounting
policies (contd):

(i) Provisions (contd):

Warranty provision

A
provision for warranty costs is recorded on product sales at the time the sale
is recognized. In establishing the warranty provision, management estimates the
likelihood that products sold will experience warranty claims and the estimated
cost to resolve claims received, taking into account the nature of the contract
and past and projected experience with the products.

Decommissioning liabilities

Legal
obligations to retire tangible long-lived assets are recorded at fair value at
acquisition with a corresponding increase in asset value. These include assets
leased under operating leases. The liability is accreted over the life of the
asset to fair value and the increase in asset value is depreciated over the
remaining useful life of the asset.

(j) Revenue recognition:

The
Corporation generates revenues primarily from product sales and services.
Product revenues are derived primarily from standard equipment and material
sales contracts and from long-term fixed price contracts. Service revenues are
derived primarily from cost-plus reimbursable contracts.

On
standard equipment and material sales contracts, revenues are recognized when
(i) significant risks and rewards of ownership of the goods has been transferred
to the buyer; (ii) the Corporation retains neither continuing managerial
involvement to the degree usually associated with ownership nor effective
control over the goods sold; (iii) the amount of revenue can be measured
reliably; (iv) it is probable that the economic benefits associated with the
sale will accrue to the Corporation; and (v) the costs incurred, or to be
incurred, in respect of the transaction can be measured reliably. Provisions are
made at the time of sale for warranties.

On
cost-plus reimbursable contracts, revenues are recognized as costs are incurred,
and include applicable fees earned as services are provided.

On
long-term fixed price service contracts, revenues are recognized on the
percentage-of-completion basis over the duration of the contract, which consists
of recognizing revenue on a given contract proportionately with its percentage
of completion at any given time. The percentage of completion is determined by
dividing the cumulative costs incurred as at the balance sheet date by the sum
of incurred and anticipated costs for completing a contract.

22

---



BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in
      thousands of U.S. dollars, except per share amounts and number of
      shares)


3. Significant accounting
policies (contd):

(j) Revenue recognition (contd):

The
cumulative effect of changes to anticipated revenues and anticipated costs for
completing a contract are recognized in the period in which the revisions are
identified. In the event that the anticipated costs exceed the anticipated
revenues on a contract, such loss is recognized in its entirety in the period it
becomes known.

Deferred revenue represents cash received from customers in excess of
revenue recognized on uncompleted contracts.

(k) Finance income and costs:

Finance
income comprises of interest income on funds invested, gains on the disposal of
available-for-sale financial assets and changes in the fair value of financial
assets at fair value through profit or loss. Interest income is recognized as it
accrues in income, using the effective interest method.

Finance
costs comprise interest expense on capital leases, unwinding of the discount on
provisions, changes in the fair value of financial assets at fair value through
profit or loss and impairment losses recognized on financial assets.

Foreign
currency gains and losses are reported on a net basis.

(l) Income taxes:

The
Corporation follows the asset and liability method of accounting for income
taxes. Under this method, deferred income taxes are recognized for the deferred
income tax consequences attributable to differences between the financial
statement carrying values of assets and liabilities and their respective income
tax bases (temporary differences) and for loss carry-forwards. The resulting
changes in the net deferred tax asset or liability are included in
income.

Deferred tax assets and liabilities are measured using enacted, or
substantively enacted, tax rates expected to apply to taxable income in the
years in which temporary differences are expected to be recovered or settled.
The effect on deferred income tax assets and liabilities, of a change in tax
rates, is included in income in the period that includes the substantive
enactment date. Deferred income tax assets are reviewed at each reporting date
and are reduced to the extent that it is no longer probable that the related tax
benefit will be realized.

23

---



BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in
      thousands of U.S. dollars, except per share amounts and number of
      shares)


3. Significant accounting
policies (contd):

(m) Employee benefits:

Defined contribution plans

A
defined contribution plan is a post-employment benefit plan under which an
entity pays fixed contributions into a separate entity and will have no legal or
constructive obligation to pay further amounts. Obligations for contributions to
defined contribution pension plans are recognized as an employee benefit expense
in profit or loss in the periods during which services are rendered by
employees. Prepaid contributions are recognized as an asset to the extent that a
cash refund or a reduction in future payments is available. Contributions to a
defined contribution plan that are due more than 12 months after the end of the
period in which the employees render the service are discounted to their present
value.

Defined benefit plans

A
defined benefit plan is a post-employment benefit plan other than a defined
contribution plan. The Corporations net obligation in respect of defined
benefit pension plans is calculated separately for each plan by estimating the
amount of future benefit that employees have earned in return for their service
in the current and prior periods; that benefit is discounted to determine its
present value. Any unrecognized past service costs and the fair value of any
plan assets are deducted. The discount rate is the yield at the reporting date
on AA credit-rated bonds that have maturity dates approximating the terms of the
Corporations obligations and that are denominated in the same currency in which
the benefits are expected to be paid. The calculation is performed annually by a
qualified actuary using the projected unit credit method.

When
the calculation results in a benefit to the Corporation, the recognized asset is
limited to the total of any unrecognized past service costs and the present
value of economic benefits available in the form of any future refunds from the
plan or reductions in future contributions to the plan. In order to calculate
the present value of economic benefits, consideration is given to any minimum
funding requirements that apply to any plan in the Corporation. An economic
benefit is available to the Corporation if it is realizable during the life of
the plan, or on settlement of the plan liabilities.

As a
result of the curtailment of the pension plan in 2009, there is no current
service cost associated with the plan.

The
Corporation recognizes all actuarial gains and losses arising from defined
benefit plans immediately in other comprehensive income, and reports them in
retained earnings.

24

---



BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in
      thousands of U.S. dollars, except per share amounts and number of
      shares)


3. Significant accounting
policies (contd):

(m) Employee benefits (contd):

Other long-term employee benefits

The
Corporations net obligation in respect of long-term employee benefits other
than pension plans is the amount of future benefit that employees have earned in
return for their service in the current and prior periods; that benefit is
discounted to determine its present value, and the fair value of any related
assets is deducted. The discount rate is the yield at the reporting date on AA
credit-rated bonds that have maturity dates approximating the terms of the
Corporations obligations. The calculation is performed using the projected unit
credit method. Any actuarial gains and losses are recognized in other
comprehensive income or loss in the period in which they arise.

Termination benefits

Termination benefits are recognized as an expense when the Corporation is
committed demonstrably, without realistic possibility of withdrawal, to a formal
detailed plan to either terminate employment before the normal retirement date,
or to provide termination benefits as a result of an offer made to encourage
voluntary redundancy. Termination benefits for voluntary redundancies are
recognized as an expense if the Corporation has made an offer of voluntary
redundancy, it is probable that the offer will be accepted, and the number of
acceptances can be estimated reliably. If benefits are payable more than 12
months after the reporting period, then they are discounted to their present
value.

Short-term employee benefits

Short-term employee benefit obligations are measured on an undiscounted
basis and are expensed as the related service is provided.

A
liability is recognized for the amount expected to be paid under short-term cash
bonus or profit sharing plans if the Corporation has a present legal or
constructive obligation to pay this amount as a result of past service provided
by the employee, and the obligation can be estimated reliably.

25

---



BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in
      thousands of U.S. dollars, except per share amounts and number of
      shares)


3. Significant accounting
policies (contd):

(n) Share-based compensation
plans:

The
Corporation uses the fair-value based method of accounting for share-based
compensation for all awards of shares and share options granted. The resulting
compensation expense, based on the fair value of the awards granted, excluding
the impact of any non-market service and performance vesting conditions, is
charged to income over the period that the employees unconditionally become
entitled to the award, with a corresponding increase to contributed surplus.
Fair values of share options are calculated using the Black-Scholes valuation
method as of the grant date and adjusted for estimated forfeitures. For awards
with graded vesting, the fair value of each tranche is calculated separately and
recognized over its respective vesting period. Non-market vesting conditions are
considered in making assumptions about the number of awards that are expected to
vest. At each reporting date, the Corporation reassesses its estimates of the
number of awards that are expected to vest and recognizes the impact of any
revision in the income statement with a corresponding adjustment to contributed
surplus.

The
Corporation issues shares and share options under its share-based compensation
plans as described in note 18. Any consideration paid by employees on exercise
of share options or purchase of shares, together with the amount initially
recorded in contributed surplus, is credited to share capital.

(o) Earnings (loss) per share:

Basic
earnings (loss) per share is computed using the weighted average number of
common shares outstanding during the period, adjusted for treasury shares.
Diluted earnings per share is calculated using the treasury stock
method.

Under
the treasury stock method, the dilution is calculated based upon the number of
common shares issued should deferred share units (DSUs), restricted share
units (RSUs), and in the money options, if any, be exercised. When the
effects of outstanding stock-based compensation arrangements would be
anti-dilutive, diluted loss per share is not calculated.

(p) Government assistance and
investment tax credits:

Government assistance and investment tax credits are recorded as either a
reduction of the cost of the applicable assets, or credited against the related
expense incurred in the statement of comprehensive loss, as determined by the
terms and conditions of the agreements under which the assistance is provided to
the Corporation or the nature of the expenditures which gave rise to the
credits. Government assistance and investment tax credit receivables are
recorded when their receipt is reasonably assured.

26

---



BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in
      thousands of U.S. dollars, except per share amounts and number of
      shares)


3. Significant accounting
policies (contd):

(q) Segment reporting:

An
operating segment is a component of the Corporation that engages in business
activities from which it may earn revenues and incur expenses, including
revenues and expenses that relate to transactions with any of the Corporations
other components. Segment results include items directly attributable to a
segment as well as those that can be allocated on a reasonable basis.
Unallocated items comprise mainly corporate assets, head office expenses, and
income tax assets and liabilities.

4.Critical
accounting estimates and judgments:

The
preparation of the consolidated financial statements requires the Corporations
management to make judgments, estimates and assumptions that affect the amounts
reported in the consolidated financial statements and the accompanying notes.
Actual results may differ from those estimates.

Estimates and judgments are continually evaluated and are based on
historical experience and other factors including expectations of future events
that are believed to be reasonable under the circumstances. The estimates and
assumptions critical to the determination of carrying value of assets and
liabilities are discussed below:

(a) Revenue:

Revenues under certain contracts for product and engineering development
services, provide for receipt of payment based on achieving defined milestones
or on the performance of work under product development programs. Revenues are
recognized under these contracts based on managements estimate of progress
achieved against these milestones or on the proportionate performance method of
accounting. Changes in managements estimated costs to complete a contract may
result in an adjustment to previously recognized revenues.

(b) Warranty Provision:

In
establishing the warranty provision, management estimates the likelihood that
products sold will experience warranty claims and the cost to resolve claims
received. In making such determinations, the Corporation uses estimates based on
the nature of the contract and past and projected experience with the products.
Should these estimates prove to be incorrect, the Corporation may incur costs
different from those provided for in the warranty provision. Management reviews
warranty assumptions and makes adjustments to the provision at each reporting
date based on the latest information available, including the expiry of
contractual obligations. Adjustments to the warranty provision are recorded in
cost of product and service revenues.

27

---



BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in
      thousands of U.S. dollars, except per share amounts and number of
      shares)


4. Critical accounting
estimates and judgments (contd):

(c) Inventory:

In
determining the lower of cost and net realizable value of inventory and in
establishing the appropriate impairment amount for inventory obsolescence,
management estimates the likelihood that inventory carrying values will be
affected by changes in market pricing or demand for the products and by changes
in technology or design which could make inventory on hand obsolete or
recoverable at less than the recorded value. Management performs regular reviews
to assess the impact of changes in technology and design, sales trends and other
changes on the carrying value of inventory. Where it is determined that such
changes have occurred and will have an impact on the value of inventory on hand,
appropriate adjustments are made. If there is a subsequent increase in the value
of inventory on hand, reversals of previous write-downs to net realizable value
are made. Unforeseen changes in these factors could result in additional
inventory provisions, or reversals of previous provisions, being
required.

(d) Goodwill:

The
values associated with goodwill involve significant estimates and assumptions,
including those with respect to future cash inflows and outflows, discount
rates, asset lives and determination of cash generating units. At least
annually, the carrying value of goodwill is reviewed for potential impairment.
Among other things, this review considers the fair value of the cash-generating
units based on discounted estimated future cash flows. These significant
estimates require considerable judgment, which could affect the Corporations
future results if the current estimates of future performance and fair values
change.

(e) Employee future benefits:

The
present value of the defined benefit obligation is determined by discounting the
estimated future cash outflows using interest rates of high-quality corporate
bonds that have terms to maturity approximating the terms of the related pension
liability. Determination of benefit expense requires assumptions such as the
discount rate to measure obligations, expected plan investment performance,
expected healthcare cost trend rate, and retirement ages of employees. Actual
results will differ from the recorded amounts based on these estimates and
assumptions.

28

---



BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in
      thousands of U.S. dollars, except per share amounts and number of
      shares)


5. Recent accounting
pronouncements:

The
following is an overview of accounting standard changes that the Corporation
will be required to adopt in future years. Except as otherwise noted below for
IFRS 9, IAS 32 and amendments to IFRS 7, the standards are effective for the
annual periods beginning on or after January 1, 2013, with earlier application
permitted. The Corporation does not expect to adopt any of these standards
before their effective dates. The Corporation continues to evaluate the impacts
of these standards on its financial statements.

(a) IFRS 9 Financial Instruments:

IFRS 9
introduces new requirements for the classification and measurement of financial
assets. IFRS 9 requires all recognized financial assets that are within the
scope of IAS 39 Financial Instruments: Recognition and Measurement to be subsequently measured at amortized cost or fair
value. Specifically, financial assets that are held within a business model
whose objective is to collect the contractual cash flows, and that have
contractual cash flows that are solely payments of principal and interest on the
principal outstanding are generally measured at amortized cost at the end of
subsequent accounting periods. All other financial assets including equity
investments are measured at their fair values at the end of subsequent
accounting periods.

Requirements for financial liabilities were added in October 2010 and
they largely carried forward existing requirements in IAS 39Financial Instruments  Recognition and
Measurement, except that fair value
changes due to credit risk for liabilities designated at fair value through
profit and loss would generally be recorded in other comprehensive income. IFRS
9 is effective for annual periods beginning on or after January 1, 2015.

(b) IFRS 10 Consolidated Financial Statements:

IFRS 10
requires an entity to consolidate an investee when it is exposed, or has rights,
to variable returns from its involvement with the investee and has the ability
to affect those returns through its power over the investee. Under existing
IFRS, consolidation is required when an entity has the power to govern the
financial and operating policies of an entity so as to obtain benefits from its
activities. IFRS 10 replaces SIC-12Consolidation  Special Purpose Entitiesand parts of IAS 27Consolidated
and Separate Financial Statements.

(c) IFRS 11 Joint Arrangements:

IFRS 11
requires a venturer to classify its interest in a joint arrangement as a joint
venture or joint operation. Joint ventures will be accounted for using the
equity method of accounting whereas for a joint operation the venturer will
recognize its share of the assets, liabilities, revenue and expenses of the
joint operation. Under existing IFRS, entities have the choice to
proportionately consolidate or equity account for interests in joint ventures.
IFRS 11 supersedes IAS 31Interests in
Joint Ventures, and SIC-13Jointly Controlled Entities 
Non-monetary Contributions by Venturers.

29

---



BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)


5. Recent accounting
pronouncements (contd):

(d) IFRS 12 Disclosure of Interests in Other Entities:

IFRS 12
establishes disclosure requirements for interests in other entities, such as
joint arrangements, associates, special purpose vehicles, and off balance sheet
vehicles. The standard carries forward existing disclosures and also introduces
significant additional disclosure requirements that address the nature of, and
risks associated with, an entitys interests in other entities.

(e) IFRS 13 Fair Value Measurement:

Under
existing IFRS, guidance on measuring and disclosing fair value is dispersed
among the specific standards requiring fair value measurements. IFRS 13 is a
more comprehensive standard for fair value measurement and disclosure
requirements for use across all IFRS standards. The new standard clarifies that
fair value is the price that would be received to sell an asset, or paid to
transfer a liability in an orderly transaction between market participants, at
the measurement date. It also establishes disclosures about fair value
measurement.

(f) Amendments to IAS 19 Employee Benefits:

The
amendments to IAS 19 make significant changes to the recognition and measurement
of defined benefit pension expense and termination benefits, and to enhance the
disclosures for all employee benefits. Actuarial gains and losses are renamed
remeasurements and will be recognized immediately in other comprehensive
income (OCI). Remeasurements recognized in OCI will not be recycled through
profit or loss in subsequent periods. The amendments also accelerate the
recognition of past service costs whereby they are recognized in the period of a
plan amendment. The annual expense for a funded benefit plan will be computed
based on the application of the discount rate to the net defined benefit asset
or liability. The amendments to IAS 19 will also impact the presentation of
pension expense as benefit cost will be split between (i) the cost of benefits
accrued in the current period (service cost) and benefit changes (past-service
cost, settlements and curtailments); and (ii) finance expense or income.

A
number of other amendments have been made to recognition, measurement and
classification, including those re-defining short-term and other long-term
benefits guidance on the treatment of taxes related to benefit plans, guidance
on risk/cost sharing factors and expanded disclosures.

The
Corporations current accounting policy for employee benefits for the
presentation of pension expense and the immediate recognition of actuarial gains
and losses in OCI is consistent with the requirements in the new standard,
however, additional disclosures and the computation of annual expense based on
the application of the discount rate to the net defined benefit asset or
liability will be required in relation to the revised standard.

30

---



BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)


5. Recent accounting
pronouncements (contd):

(g) Amendments to IAS 1 Financial Statement Presentation:

The
amendments to IAS 1 require entities to separate items presented in OCI into two
groups based on whether or not they may be recycled to profit or loss in the
future. Items that will not be recycled, such as remeasurements resulting from
the amendments to IAS 19, will be presented separately from items that may be
recycled in the future, such as deferred gains and losses on cash flow hedges.
Entities that choose to present OCI items before tax will be required to show
the amount of tax related to the two groups separately.

(h) Amendments to other
standards:

In
addition, there have been amendments to existing standards, including IFRS 7Financial Instruments:
Disclosure, IAS 27Separate Financial Statements, IAS 28Investments in Associates and Joint Ventures, and IAS 32Financial Instruments: Presentation. IFRS 7 amendments require disclosure about the effects of offsetting
financial assets and financial liabilities and related arrangements on an
entitys financial position. IAS 27 addresses accounting for subsidiaries,
jointly controlled entities and associates in non-consolidated financial
statements. IAS 28 has been amended to include joint ventures in its scope and
to address the changes in IFRS 10 to 13. IAS 32 addresses inconsistencies when
applying the offsetting requirements, and is effective for annual periods
beginning on or after January 1, 2014.

6. Trade and other receivables:

December 31,
    
    December 31,
    
    January 1,2011
    
    2010
    
    2010Trade
      receivables
    
    $
    16,343
    
    $
    12,584
    
    $
    12,847Other
    
    
    1,947
    
    
    626
    
    
    5618,290
    
    
    13,210
    
    
    12,903Less: Non-current trade receivables
    
    
    (1,126
    )
    
    (1,596
    )
    
    -$
    17,164
    
    $
    11,614
    
    $
    12,903


7. Inventories:

December 31,
    
    December 31,
    
    January 1,2011
    
    2010
    
    2010Raw materials
      and consumables
    
    $
    8,353
    
    $
    6,962
    
    $
    5,928Work-in-progress
    
    
    1,820
    
    
    2,951
    
    
    2,018Finished
      goods
    
    
    3,441
    
    
    2,469
    
    
    1,222$
    13,614
    
    $
    12,382
    
    $
    9,168


In
2011, changes in raw materials and consumables, finished goods and
work-in-progress recognized as cost of product and service revenues amounted to
$37,227,000 (2010 - $33,522,000).

31

---



BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)


7. Inventories (contd):

In
2011, the write-down of inventories to net realizable value amounted to $486,000
(2010 - $604,000). There were no reversals of previously recorded write-downs in
2011 or 2010. Write-downs and reversals are included in either cost of product
and service revenues, or research and product development expense, depending on
the nature of inventory.

8. Property, plant and
equipment:

|                                                        |  | Balance at |        |           |   |           |  |          |        | Balance at
|------------------------------------------------------- |  | ---------- | ------ | --------- | - | --------- |  | -------- | ------ | ----------
|                                                        |  | December   |        |           |   |           |  |          |        | December  
|Cost                                                    |  | 31, 2010   |        | Additions |   | Disposals |  | 31, 2011
|Land                                                    |  | $          | 1,220  |           | $ | -         |  | $        | -      |           
|Building                                                |  |            | 3,666  |           |   | -         |  |          | -      |           
|Building under
      finance lease                      |  |            | 12,180 |           |   | -         |  |          | -      |           
|Computer equipment                                      |  |            | 6,339  |           |   | 403       |  |          | (319   | )         
|Furniture and
      fixtures                            |  |            | 741    |           |   | 93        |  |          | -      |           
|Furniture and fixtures under
      finance lease        |  |            | -      |           |   | 317       |  |          | -      |           
|Leasehold
      improvements                            |  |            | 7,518  |           |   | 2,568     |  |          | -      |           
|Production and test
      equipment                     |  |            | 45,382 |           |   | 2,785     |  |          | (3,076 | )         
|Production and test equipment under
      finance lease |  |            | 2,078  |           |   | 1,589     |  |          | -      |           
|                                                       
|Total                                                   |  | $          | 79,124 |           | $ | 7,755     |  | $        | (3,395 | )         



|                                                  |  | Balance at |        |              |   |       |            |           |       |          |   |          | Balance at
|------------------------------------------------- |  | ---------- | ------ | ------------ | - | ----- | ---------- | --------- | ----- | -------- | - | -------- | ----------
|                                                  |  | December   |        |              |   |       | Impairment |           |       |          |   | December
|Depreciation and impairment loss                  |  | 31, 2010   |        | Depreciation |   | loss  |            | Disposals |       | 31, 2011
|Land                                              |  | $          | -      |              | $ | -     |            | $         | -     |          | $ | -        |           
|Building                                          |  |            | 2,044  |              |   | 155   |            |           | -     |          |   | -        |           
|Building under
      finance lease                |  |            | 652    |              |   | 836   |            |           | -     |          |   | -        |           
|Computer equipment                                |  |            | 5,347  |              |   | 345   |            |           | -     |          |   | (16      | )         
|Furniture and
      fixtures                      |  |            | 682    |              |   | 106   |            |           | -     |          |   | -        |           
|Furniture and fixtures under
      finance lease  |  |            | -      |              |   | 37    |            |           | -     |          |   | -        |           
|Leasehold
      improvements                      |  |            | 4,442  |              |   | 521   |            |           | -     |          |   | -        |           
|Production and test
      equipment               |  |            | 28,889 |              |   | 3,292 |            |           | 1,727 |          |   | (1,102   | )         
|Production and
      test equipment under finance |  |            | 123    |              |   | 319   |            |           | -     |          |   | -        |           
|lease                                             |  |            |        |              |   |       |            |           |       |          |   |          |           
|                                                 
|Total                                             |  | $          | 42,179 |              | $ | 5,611 |            | $         | 1,727 |          | $ | (1,118   | )         

32

---



BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)


8. Property, plant and
equipment (contd):

|                                    |  |            |         |             | Acquisitions |           |              |           |           |  |                  |                | Asset    |            |         |  
|----------------------------------- |  | ---------- | ------- | ----------- | ------------ | --------- | ------------ | --------- | --------- |  | ---------------- | -------------- | -------- | ---------- | ------- | -
|                                    |  | Balance at |         | through     |              |           |              |           |           |  |                  | de-recognition |          | Balance at
|                                    |  | January 1, |         | business    |              | Other     |              |           |           |  |                  | and            |          | December  
|Cost                                |  | 2010       |         | combination |              | additions |              | Disposals |           |  | reclassification |                | 31, 2010
|Land                                |  | $          | 4,803   |             | $            | -         |              | $         | -         |  | $                | (3,583         | )        | $          | -       |  
|Building                            |  |            | 13,596  |             |              | -         |              |           | -         |  |                  | (10,357        | )        |            | 427     |  
|Building under finance lease        |  |            | -       |             |              | -         |              |           | 12,180    |  |                  | -              |          |            | -       |  
|Computer
      equipment            |  |            | 11,421  |             |              | 113       |              |           | 366       |  |                  | -              |          |            | (5,561  | )
|Furniture and fixtures              |  |            | 4,692   |             |              | 58        |              |           | 48        |  |                  | (479           | )        |            | (3,578  | )
|Leasehold
      improvements        |  |            | 9,201   |             |              | 376       |              |           | 78        |  |                  | (1,745         | )        |            | (392    | )
|Production and test equipment       |  |            | 67,651  |             |              | 136       |              |           | 3,163     |  |                  | (662           | )        |            | (24,906 | )
|Production and
      test equipment |  |            | 2,078   |             |              | -         |              |           | -         |  |                  | -              |          |            | -       |  
|under finance lease                 |  |            |         |             |              |           |              |           |           |  |                  |                |          |            |         |  
|                                   
|Total                               |  | $          | 113,442 |             | $            | 683       |              | $         | 15,835    |  | $                | (16,826        | )        | $          | (34,010 | )
|                                   
|                                    |  |            |         |             | Acquisitions |           |              |           |           |  |                  |                | Asset    |            |         |  
|                                    |  | Balance at |         | through     |              |           |              |           |           |  |                  | de-recognition |          | Balance at
|Depreciation
      and              |  | January 1, |         | business    |              |           |              |           |           |  |                  | and            |          | December  
|impairment loss                     |  |            | 2010    |             | combination  |           | Depreciation |           | Disposals |  | reclassification |                | 31, 2010
|Land                                |  | $          | -       |             | $            | -         |              | $         | -         |  | $                | -              |          | $          | -       |  
|Building                            |  |            | 5,661   |             |              | -         |              |           | 216       |  |                  | (3,979         | )        |            | 146     |  
|Building under finance lease        |  |            | -       |             |              | -         |              |           | 652       |  |                  | -              |          |            | -       |  
|Computer
      equipment            |  |            | 10,319  |             |              | 47        |              |           | 905       |  |                  | -              |          |            | (5,924  | )
|Furniture and fixtures              |  |            | 4,629   |             |              | 20        |              |           | 30        |  |                  | (378           | )        |            | (3,619  | )
|Leasehold
      improvements        |  |            | 5,824   |             |              | 60        |              |           | 578       |  |                  | (626           | )        |            | (1,394  | )
|Production and test equipment       |  |            | 47,492  |             |              | 20        |              |           | 3,946     |  |                  | (517           | )        |            | (22,052 | )
|Production and
      test equipment |  |            | -       |             |              | -         |              |           | 123       |  |                  | -              |          |            | -       |  
|under finance lease                 |  |            |         |             |              |           |              |           |           |  |                  |                |          |            |         |  
|                                   
|Total                               |  | $          | 73,925  |             | $            | 147       |              | $         | 6,450     |  | $                | (5,500         | )        | $          | (32,843 | )

|                                                        |  | Balance at         |        | Balance at         |   | Balance at    
|------------------------------------------------------- |  | ------------------ | ------ | ------------------ | - | --------------
|                                                        |  | December
      31, |        | December
      31, |   | January
    1,
|Carrying amounts                                        |  | 2011               |        | 2010               |   | 2010          
|Land                                                    |  | $                  | 1,220  |                    | $ | 1,220         
|Building                                                |  |                    | 1,467  |                    |   | 1,622         
|Building under
      finance lease                      |  |                    | 10,692 |                    |   | 11,528        
|Computer equipment                                      |  |                    | 747    |                    |   | 992           
|Furniture and
      fixtures                            |  |                    | 46     |                    |   | 59            
|Furniture and fixtures under
      finance lease        |  |                    | 280    |                    |   | -             
|Leasehold
      improvements                            |  |                    | 5,123  |                    |   | 3,076         
|Production and test
      equipment                     |  |                    | 12,285 |                    |   | 16,493        
|Production and test equipment under finance
      lease |  |                    | 3,225  |                    |   | 1,955         
|                                                       
|Total                                                   |  | $                  | 35,085 |                    | $ | 36,945        

33

---



BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)


8. Property, plant and
equipment (contd):

Leased assets

The
Corporation leases certain assets under finance lease agreements including the
Corporations head office building in Burnaby, British Columbia and certain
production and test equipment.

In June
2011, the Corporation completed a sale and leaseback agreement whereby the
Corporation sold certain property, plant and equipment in return for gross cash
proceeds of $1,922,000. The Corporation then leased the assets back for a term
of 5 years. On the closing of the transaction, the Corporation recorded a
deferred gain of $150,000, which is recognized to income on a straight-line
basis over the term of the 5-year lease. The lease transaction qualifies as a
finance lease (note 15). As a result, on the closing of the transaction, the
Corporation recorded assets under finance lease and a corresponding obligation
under finance lease of $1,906,000.

Disposals

In
March 2011, the Corporation completed a sub-lease agreement with Mercedes-Benz
Canada Inc. (MBC) for the rental of 21,000 square feet of surplus production
space in the Corporations specialized fuel cell manufacturing facility. As part
of the sub-lease agreement, certain production and test equipment with a net
book value of $471,000 were sold to MBC in advance of the sub-lease for cash
proceeds of $1,639,000. At December 31, 2011, selling costs of
$479,000were incurred to-date and estimated additional costs of
$25,000were accrued against the disposition. As a result, a total gain on sale
of assets of $663,000 was recognized from the transaction. The remaining
$71,000gain on sale of property, plant and equipment recognized during the year
relates to other miscellaneous asset dispositions.

Impairment loss

During
the year ended December 31, 2011, impairment losses of $1,727,000 (2010 - $nil)
were recognized with respect to obsolescence of production and test equipment.
No impairment losses were reversed in 2011 or 2010.

34

---



BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)


9. Intangible assets:

Fuel cell technology
    
    
    
    
    Accumulated
    
    Net carryingBalance
    
    Cost
    
    amortization
    
    amountAt January 1,
      2010
    
    $
    40,567
    
    $
    39,743
    
    $
    824Acquisition through business
      combination
    
    
    2,876
    
    
    -
    
    
    2,876Amortization
    
    
    -
    
    
    725
    
    
    (725
    )At December 31, 2010
    
    
    43,443
    
    
    40,468
    
    
    2,975Amortization
    
    
    -
    
    
    726
    
    
    (726
    )At December 31, 2011
    
    $
    43,443
    
    $
    41,194
    
    $
    2,249


During
2010, the Corporation acquired $2,876,000 in fuel cell technology as part of the
acquisition of Dantherm Power A/S.

Amortization and impairment losses of fuel cell technology and
development costs are allocated to research and product development expense.
There were no impairment losses recorded in 2011 and 2010.

10. Goodwill:

For the
purpose of impairment testing, goodwill is allocated to the Corporations
cash-generating units which represent the lowest level within the Corporation at
which the goodwill is monitored for internal management purposes, which is not
higher than the Corporations operating segments (note 25).

The
aggregate carrying amount of goodwill allocated to each cash-generating unit is
as follows:

December 31,
    
    December 31,
    
    January 1,2011
    
    2010
    
    2010Fuel cell
      products
    
    $
    46,291
    
    $
    46,291
    
    $
    46,291Contract automotive
    
    
    -
    
    
    -
    
    
    -Material products
    
    
    1,815
    
    
    1,815
    
    
    1,815$
    48,106
    
    $
    48,106
    
    $
    48,106


The
impairment testing for the above cash-generating units requires a comparison of
the carrying value of the asset to the higher of (i) value in use; and (ii) fair
value less costs to sell. Value in use is defined as the present value of future
cash flows expected to be derived from the asset in its current state.

The
Corporations fair value test is in effect a modified market capitalization
assessment, whereby the fair value of the Fuel Cell Products segment is
calculated by first calculating the value of the Corporation at December 31,
2011 based on the average closing share price in the month of December, adding a
reasonable estimated control premium of 25% to 30% to determine the
Corporations enterprise value on a controlling basis, and deducting the fair
value of the Materials Product and Contract Automotive segments from this
enterprise value, arriving at the fair value of the Fuel Cell Products
segment.

35

---



BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)
 10. Goodwill (contd): Based
on the fair value test, the Corporation has determined that the fair value of
the Fuel Cell Products segment exceeds it carrying value by approximately 15% to
20% as of December 31, 2011. The fair value of the Material Products segment,
determined using an estimated market value as a multiple of revenues, is
substantially in excess of its carrying value of December 31, 2011. In
addition to the fair value test, the Corporation also performed a value in use
test on the Fuel Cell Products segment, comparing the carrying value of the
segment to the present value of future cash flows expected to be derived from
the segment. The principal factors used in the discounted cash flow analysis
requiring judgment are the projected results of operations, the discount rate
based on the weighted average cost of capital (WACC), and terminal value
assumptions for each reporting unit. The Corporations value in use test was
based on a WACC of 17.5% to 20%; an average estimated compound annual growth
rate of approximately 40% from 2011 to 2016; and a terminal year earnings before
interest, taxes, depreciation and amortization (EBITDA) multiplied by a
terminal value multiplier of 4.0. The value in use assessment resulted in a
significantly higher value than as determined under the fair value, less costs
to sell, assessment. As the
recoverable amount of each cash-generating unit was determined to be greater
than its carrying amount, no impairment loss was recorded. 11. Investments: Investments are
comprised of the following:




December 31, 2011
    
    December 31, 2010
    
    January 1, 2010Percentage
    
    
    
    
    Percentage
    
    
    
    
    PercentageAmount
    
    ownership
    
    Amount
    
    ownership
    
    Amount
    
    ownershipChrysalix Energy
      Limited Partnership
    
    $
    627
    
    15.0%
    
    $
    663
    
    15.0%
    
    $
    632
    
    15.0%Other
    
    
    8
    
    
    
    
    10
    
    
    
    
    -$
    635
    
    
    
    $
    673
    
    
    
    $
    632


Chrysalix Energy Limited Partnership (Chrysalix) is accounted for as an
available-for-sale financial asset and recorded at fair value.

During
2011, the Corporation made additional capital contributions of $103,000 (2010 -
$67,000) in Chrysalix, which was offset by cash distributions received from
Chrysalix of $139,000 (2010 - $36,000).

The
Corporation maintains a 19.9% interest in AFCC Automotive Fuel Cell Cooperation
Corp. (AFCC), which is accounted for as an available-for-sale financial asset
and recorded at fair value of $1. The Corporation has no obligation to fund any
of AFCCs operating expenses.

36

---



BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)


12. Bank
facilities:

In June
2011, the Corporation entered into a demand revolving facility (Bank Operating
Line) in which an operating line of credit of up to CDN $10,000,000 was made
available to be drawn upon by the Corporation. The Bank Operating Line is
utilized to assist in financing the day-to-day operating activities and
short-term working capital requirements of the business. Outstanding amounts are
charged interest at the banks prime rate minus 0.50% per annum and are
repayable on demand by the bank. During 2011, the Corporation was advanced
$14,265,000under the bank operating line of which $9,678,000 was
repaid during the year. At December 31, 2011, $4,587,000 was outstanding on the
Bank Operating Line.

The
Corporation also has a CDN $3,323,000 capital leasing facility (Leasing
Facility) which can be utilized to finance the acquisition and lease of
operating equipment (notes 8 & 15). Interest is charged on outstanding
amounts at the banks prime rate per annum and is repayable on demand by the
bank.

Both
the Bank Operating Line and Leasing Facility are secured by a hypothecation of
the Corporations cash, cash equivalents and short-term
investments.

13. Trade and other payables:

December 31,
    
    December 31,
    
    January 1,2011
    
    2010
    
    2010Trade accounts
      payable
    
    $
    10,195
    
    $
    8,453
    
    $
    6,670Compensation payable
    
    
    6,615
    
    
    9,159
    
    
    5,235Other
      liabilities
    
    
    5,568
    
    
    3,919
    
    
    2,861Taxes payable
    
    
    456
    
    
    354
    
    
    302Accrued monetization costs
    
    
    -
    
    
    -
    
    
    1,441$
    22,834
    
    $
    21,885
    
    $
    16,509


37

---



BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)


14. Provisions:

Warranty
    
    DecommissioningBalance
    
    Legal
    
    Restructuring
    
    provision
    
    liabilities
    
    TotalAt January 1,
      2010
    
    $
    1,675
    
    $
    2,137
    
    $
    7,813
    
    $
    2,848
    
    $
    14,473Assumed through
    business
    
    
    -
    
    
    -
    
    
    10
    
    
    -
    
    
    10combinationProvisions made
      during the year
    
    
    52
    
    
    305
    
    
    2,410
    
    
    84
    
    
    2,851Provisions used during the
      year
    
    
    (401
    )
    
    (2,380
    )
    
    (614
    )
    
    -
    
    
    (3,395
    )Provisions
      reversed during the
    
    
    (38
    )
    
    (10
    )
    
    (1,504
    )
    
    -
    
    
    (1,552
    )yearEffect of movements in
    
    
    83
    
    
    26
    
    
    455
    
    
    170
    
    
    734exchange
      ratesAt December 31,
      2010
    
    $
    1,371
    
    $
    78
    
    $
    8,570
    
    $
    3,102
    
    $
    13,121Provisions made during the
      year
    
    
    50
    
    
    1,356
    
    
    2,097
    
    
    1,706
    
    
    5,209Provisions used
      during the year
    
    
    (897
    )
    
    (401
    )
    
    (716
    )
    
    -
    
    
    (2,014
    )Provisions reversed during
      the
    
    
    -
    
    
    -
    
    
    (1,721
    )
    
    -
    
    
    (1,721
    )yearEffect of
      movements in
    
    
    (4
    )
    
    (29
    )
    
    (181
    )
    
    (75
    )
    
    (289
    )exchange
      ratesAt December 31, 2011
    
    $
    520
    
    $
    1,004
    
    $
    8,049
    
    $
    4,733
    
    $
    14,306Current
    
    $
    520
    
    $
    1,004
    
    $
    8,049
    
    $
    -
    
    $
    9,573Non-current
    
    
    -
    
    
    -
    
    
    -
    
    
    4,733
    
    
    4,733$
    520
    
    $
    1,004
    
    $
    8,049
    
    $
    4,733
    
    $
    14,306


Restructuring

The
restructuring provision of $2,137,000 as at January 1, 2010, relates to the
remaining restructuring and related charges from the organizational
restructuring and the elimination of 117 positions in 2009. In 2010, the
Corporation completed an organizational restructuring at Dantherm Power A/S
resulting in restructuring and related charges of $285,000 primarily for
severance expense on elimination of 8 positions. In 2011, a leadership
restructuring, which reduced the number of executive officers at both the
Corporation and at Dantherm Power A/S resulted in the recognition of $1,356,000
of restructuring charges. The estimated restructuring costs primarily include
employee termination benefits and are expected to be finalized and paid in 2012.
Restructuring charges are recognized in general and administrative expenses.

Warranty provision

During
the year the warranty provision decreased by $521,000. A portion of the
provision, $1,721,000, was reversed during the year due primarily to contractual
expirations, reductions in estimated costs to repair, and improved lifetimes,
and reliability of the Corporations fuel cell products. Warranty expenditures
during the year of $716,000 also decreased the warranty provision.

38

---



BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)


14. Provisions (contd):

Decommissioning liabilities

Provisions for decommissioning liabilities have been recorded for the
Corporations two leased locations, the head office building and manufacturing
facility, and are related to site restoration obligations at the end of the
lease terms. Due to the long-term nature of the liability, the most significant
uncertainty in estimating the provision is the costs that will be
incurred.

The
Corporation has determined a range of reasonable possible outcomes of the total
costs for the manufacturing facility. In determining the fair value of the
decommissioning liabilities, the estimated future cash flows have been
discounted at 3% per annum. The total undiscounted amount of the estimated cash
flows required to settle this obligation is $3,912,000. The obligation will be
settled at the end of the term of the operating lease, which extends to 2019.
The provision has increased during the period due to accretion costs.

At
December 31, 2011, the Corporation assessed that a fair value of $1,615,000 of
decommissioning liabilities, discounted at 2% per annum was appropriate to
record for the Corporations head office building. The total undiscounted amount
of the estimated cash flows required to settle this obligation is $2,233,000.
The obligation will be settled at the end of the lease term, which extends to
2025.

15. Finance lease liability

The
Corporation leases certain assets under finance lease agreements (note 8). The
finance leases have imputed interest rates ranging between 2.25% to 7.35% per
annum and expire between December 2014 and February 2025.

The
future minimum lease payments for the Corporations finance leases are as
follows:

Year ending December
312012
    $
    1,8822013
    
    1,8822014
    
    2,2792015
    
    1,6972016
    
    1,872Thereafter
    
    12,266Total minimum
      lease payments
    
    21,878Less imputed interest
    
    (7,151
    )Total finance
      lease liability
    
    14,727Current portion of finance lease liability
    
    978Non-current portion of finance lease
      liability
    $
    13,749


At
December 31, 2011, $3,113,000 was outstanding on the Leasing Facility which is
included in the finance lease liability. The remaining $11,614,000 finance lease
liability relates to the lease of the Corporations head office building.

39

---



|BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16. Convertible
debenture

The convertible debenture relates
to financing to Dantherm Power A/S by the non-controlling partners and is
redeemable at the option of Dantherm Power A/S subject to approval by all
convertible debenture holders on or after January 1, 2013 including interest
which is accrued at 12%. Prior to December 31, 2013 (the Maturity Date), the
convertible debenture holders may elect to convert all or part of the debenture
into shares of Dantherm Power A/S at a conversion price equal to DKK 3.40 per
share. This conversion feature was determined to have a nominal value. The
Maturity Date may be extended to December 31, 2014 with approval of the
subscribers.


17. Employee future
benefits:

2011
    
    2010Pension
    
    Other
    
    Pension
    
    Otherplan
    
    benefit plan
    
    plan
    
    benefit planPlan
      assets
    $
    8,223
    
    $
    -
    
    $
    8,360
    
    $
    -Plan obligations
    
    (13,329
    )
    
    (580
    )
    
    (10,819
    )
    
    (491
    )Employee future benefit plans deficit
    $
    (5,106
    )
    $
    (580
    )
    $
    (2,459
    )
    $
    (491
    )  The Corporation maintains a
defined benefit pension plan covering employees in the United States. The
benefits under the pension plan are based on years of service and salary levels
accrued as of December 31, 2009. In 2009, amendments were made to the defined
benefit pension plan to freeze benefits accruing to employees at their
respective years of service and salary levels obtained as of December 31, 2009.
Certain employees in the United States are also eligible for post-retirement
healthcare, life insurance and other benefits. The Corporation accrues the
present value of its obligations under employee future benefit plans and the
related costs, net of the present value of plan assets. The measurement date used to
determine pension and other post-retirement benefit obligations and expense is
December 31 of each year. The most recent actuarial valuation of the employee
future benefit plans for funding purposes was as of January 1, 2011. The next
actuarial valuation of the employee future benefit plans for funding purposes is
expected to be as of January 1, 2012.


40

---



|BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

17. Employee future benefits
(contd):

The Corporation expects
contributions of approximately $600,000 to be paid to its defined benefit plans
in 2012. Information about the Corporations employee future benefit plans, in
aggregate, is as follows: Movement in the present value of
the defined benefit plan obligations: 2011
    
    2010Pension
    
    Other
    
    Pension
    
    OtherPlan
    
    benefit plan
    
    plan
    
    benefit planDefined benefit
      plan obligations at January 1
    
    $
    10,819
    
    $
    491
    
    $
    9,800
    
    $
    616Current service cost
    
    
    -
    
    
    6
    
    
    -
    
    
    3Interest
      cost
    
    
    587
    
    
    25
    
    
    579
    
    
    35Benefits paid
    
    
    (251
    )
    
    (44
    )
    
    (217
    )
    
    (31
    )Benefits
      payable
    
    
    48
    
    
    -
    
    
    36
    
    
    -Actuarial (gains) losses in other comprehensive
      income
    
    
    2,126
    
    
    102
    
    
    621
    
    
    (132
    )Defined benefit plan obligations at December
      31
    
    $
    13,329
    
    $
    580
    
    $
    10,819
    
    $
    491  Movement in the present value of
plan assets: 2011
    
    2010Pension
    
    Other
    
    Pension
    
    Otherplan
    
    benefit plan
    
    plan
    
    benefit planFair value of
      plan assets at January 1
    
    $
    8,360
    
    $
    -
    
    $
    7,105
    
    $
    -Expected return on plan
      assets
    
    
    582
    
    
    -
    
    
    502
    
    
    -Employers
      contributions
    
    
    210
    
    
    44
    
    
    370
    
    
    28Benefits paid
    
    
    (252
    )
    
    (44
    )
    
    (218
    )
    
    (28
    )Actuarial (losses) gains in other comprehensive
      income
    
    
    (677
    )
    
    -
    
    
    601Fair value of plan assets at December 31
    
    $
    8,223
    
    $
    -
    
    $
    8,360
    
    $
    -  Pension plan assets
comprise: 2011
    
    2010Cash and cash
      equivalents
    
    3
    %
    
    2
    %Equity securities
    
    70
    %
    
    71
    %Debt securities
    
    27
    %
    
    27
    %Total
    
    100
    %
    
    100
    %


41

---



|BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

17. Employee future benefits
(contd):

Expense recognized in net income: 2011
    
    2010Pension
    
    Other
    
    Pension
    
    Otherplan
    
    benefit plan
    
    plan
    
    benefit planCurrent service
      cost
    
    $
    -
    
    $
    6
    
    $
    -
    
    $
    3Interest on
obligations
    
    
    587
    
    
    25
    
    
    579
    
    
    35Expected
      (return) on plan assets
    
    
    (582
    )
    
    -
    
    
    (502
    )
    
    -Benefits payable
    
    
    48
    
    
    -
    
    
    36
    
    
    -Expense recognized in net income
    
    
    53
    
    
    31
    
    
    113
    
    
    38Actuarial (gain) loss on plan assets and plan
      obligations       recognized in
      other comprehensive income
    
    
    2,803
    
    
    102
    
    
    20
    
    
    (132
    )Total expense (income) recognized in
      net income and       other
      comprehensive income
    
    $
    2,856
    
    $
    133
    
    $
    133
    
    $
    (94
    )  The expense recognized in net
income is recorded in Finance expense. Expense (income) recognized in
other comprehensive income: 2011
    
    2010Pension
    
    Other
    
    Pension
    
    Otherplan
    
    benefit plan
    
    plan
    
    benefit planActuarial (gain) loss on defined benefit plan
      obligations
    
    $
    2,126
    
    $
    102
    
    $
    621
    
    $
    (132
    )Expected return
      on plan assets
    
    
    582
    
    
    -
    
    
    502
    
    
    -Actual (return) loss on plan assets
    
    
    68
    
    
    -
    
    
    (1,137
    )
    
    -Plan expenses
    
    
    27
    
    
    -
    
    
    34
    
    
    -Actuarial (gain) loss recognized in
      other
      comprehensive       income
    
    $
    2,803
    
    $
    102
    
    $
    20
    
    $
    (132
    )  Cumulative actuarial gains and
losses recognized in other comprehensive income: 2011
    
    2010Pension
    
    Other
    
    Pension
    
    Otherplan
    
    benefit plan
    
    plan
    
    benefit planCumulative
      amount at January 1
    
    $
    20
    
    $
    (132
    )
    $
    -
    
    $
    -Recognized during the period
    
    
    2,803
    
    
    102
    
    
    20
    
    
    (132
    )Cumulative amount at December 31
    
    $
    2,823
    
    $
    (30
    )
    $
    20
    
    $
    (132
    )


42

---



|BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

17. Employee future benefits
(contd):

The significant actuarial
assumptions adopted in measuring the fair value of benefit obligations at
December 31, 2011 and 2010 were as follows: 2011
    
    2010Pension
    
    Other
    
    Pension
    
    Otherplan
    
    benefit plan
    
    plan
    
    benefit planDiscount
      rate
    
    4.3%
    
    4.3%
    
    5.5%
    
    5.5%Rate of compensation increase
    
    n/a
    
    n/a
    
    n/a
    
    n/a  The significant actuarial
assumptions adopted in determining net expense for the years ended December 31,
2010 and 2009 were as follows: 2011
    
    2010Pension
    
    Other
    
    Pension
    
    Otherplan
    
    benefit plan
    
    plan
    
    benefit planDiscount
      rate
    
    5.5%
    
    5.5%
    
    6.0%
    
    6.0%Expected return on plan
      assets
    
    7.0%
    
    7.0%
    
    7.0%
    
    n/aRate of compensation increase
    
    n/a
    
    n/a
    
    n/a
    
    n/a  The assumed health care cost trend
rates applicable to the other benefit plans at December 31, 2010 and 2009 were
as follows: 2011
    
    2010Initial medical
      health care cost trend rate
    
    8.0%
    
    8.5%Initial dental health care cost
      trend rate
    
    5.0%
    
    5.0%Cost trend rate
      declines to medical and dental
    
    5.0%
    
    5.0%Year that the medical rate
      reaches the rate it is assumed to remain at
    
    2017
    
    2017Year that the dental rate reaches the rate it is
      assumed to remain at
    
    2009
    
    2009  A one-percentage-point change in
assumed health care cost trend rates would not have a material impact on the
Corporations financial statements.


43

---



|BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

18. Equity:

(a)Authorized and issued:

Unlimited number of common shares, voting, without par value.

Unlimited
number of preferred shares, issuable in series.

At
December 31, 2011, 84,550,524 (2010  84,148,465) common shares are issued and
outstanding.

(b)Share option plan:

The
Corporation has options outstanding under a consolidated share option plan. All
directors, officers and employees of the Corporation, and its subsidiaries, are
eligible to participate in the share option plans although as a matter of
policy, options are currently not issued to directors. Option exercise prices
are denominated in both Canadian and U.S. dollars, depending on the residency of
the recipient. Canadian dollar denominated options have been converted to U.S.
dollars using the year-end exchange rate for presentation purposes.

All
options have a term of seven to ten years from the date of grant unless
otherwise determined by the board of directors. One-third of the options vest
and may be exercised, at the beginning of each of the second, third and fourth
years after granting.

As at December 31, 2011, options
outstanding from the consolidated share option plan was as follows: Options for
    
    Weighted averageBalance
    
    common shares
    
    exercise priceAt January 1,
      2010
    
    5,867,851
    
    $
    19.18Options
      granted
    
    1,709,737
    
    
    2.31Options
      exercised
    
    (72,491
    )
    
    1.30Options
      forfeited
    
    (589,408
    )
    
    9.48Options
      expired
    
    (233,100
    )
    
    190.90At December 31, 2010
    
    6,682,589
    
    
    10.84Options
      granted
    
    1,874,369
    
    
    1.99Options
      exercised
    
    (25,834
    )
    
    1.27Options
      forfeited
    
    (260,016
    )
    
    7.62Options
      expired
    
    (655,139
    )
    
    46.52At December 31, 2011
    
    7,615,969
    
    $
    5.54


44

---



|BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

18. Equity (contd):

(b)Share option plan
(contd):

The following table summarizes
information about the Corporations share options outstanding as at December 31,
2011: Options
      outstanding
    
    Options
      exercisableWeightedaverage
    
    Weighted
    
    
    
    Weightedremaining
    
    average
    
    
    
    averageNumber
    
    contractual life
    
    exercise
    
    Number
    
    exerciseRange of exercise price
    
    
    outstanding
    
    (years)
    
    price
    
    exercisable
    
    price$1.01 
      $1.92
    
    
    1,794,152
    
    4.9
    
    $
    1.54
    
    965,601
    
    $
    1.56$2.06  $2.36
    
    
    3,104,218
    
    5.7
    
    
    2.21
    
    540,950
    
    
    2.35$3.05 
      $5.00
    
    
    569,034
    
    3.2
    
    
    4.74
    
    569,034
    
    
    4.74$5.69  $7.82
    
    
    1,405,766
    
    3.3
    
    
    7.19
    
    1,405,766
    
    
    7.19$10.00 
      $14.43
    
    
    292,955
    
    1.5
    
    
    13.57
    
    292,955
    
    
    13.57$17.99  $38.10
    
    
    449,844
    
    0.4
    
    
    35.12
    
    449,844
    
    
    35.127,615,969
    
    4.4
    
    $
    5.54
    
    4,224,150
    
    $
    8.37  The Corporation uses the
fair-value method for recording employee and director share option grants.
During 2011, compensation expense of $1,743,000 (2010 - $1,634,000) was recorded
in net income as a result of fair value accounting for share options granted.
The share options granted during the year had a weighted average fair value of
$1.14 (2010 - $1.23) and vesting periods of three years. The fair values of the options
granted were determined using the Black-Scholes valuation model under the
following weighted average assumptions: 2011
    
    2010Expected
      life
    
    5
years
    
    5
  yearsExpected dividends
    
    Nil
    
    NilExpected
      volatility
    
    63%
    
    65%Risk-free interest rate
    
    3%
    
    3%


(c) Share distribution plan:

The Corporation has a consolidated
share distribution plan that permits the issuance of common shares for no cash
consideration to employees of the Corporation to recognize their past
contribution and to encourage future contribution to the Corporation. At
December 31, 2011, there were 440,268 (2010  1,089,491) shares available to be
issued under this plan. No compensation expense was
recorded against income during the years ended December 31, 2011 and 2010 for
shares distributed, and to be distributed, under the plan.


45

---



|BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

18. Equity (contd):

(d) Deferred Share
Units:

Deferred share units (DSUs) are
granted to the board of directors and executives. Eligible directors may elect
to receive all or part of their annual retainers and executives may elect to
receive all or part of their annual bonuses in DSUs. Each DSU is redeemable for
one common share in the capital of the Corporation after the director or
executive ceases to provide services to the Corporation. Shares will be issued
from the Corporations share distribution plan. Balance
    
    DSUs for common sharesAt January 1,
      2010
    
    316,152DSUs exercised
    
    (25,355
    )At December 31, 2010 and 2011
    
    290,797  No compensation expense was
recorded against income during the years ended December 31, 2011 and
2010.


(e) Restricted Share
Units:

Restricted share units (RSUs)
are granted to employees and executives. Each RSU is convertible into one common
share. The RSUs vest after a specified number of years from the date of
issuance, and under certain circumstances, are contingent on achieving specified
performance criteria. The Corporation has two plans
under which RSUs may be granted, the consolidated share distribution plan and
the market purchase RSU plan. Awards under the consolidated share distribution
plan (note 18 (c)) are satisfied by the issuance of treasury shares on maturity.
Awards granted under the market purchase RSU Plan are satisfied by shares
purchased on the open market by a trust established for that purpose. During
2011, the Corporation repurchased 230,211 (2010  269,877) common shares through
the trust for cash consideration of $327,000 (2010  $559,000) for the purpose
of funding future grants under the Market Purchase RSU Plan. As at December 31,
2011 the Corporation held 309,089 shares as treasury shares.


46

---



|BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

18. Equity (contd):

(e) Restricted Share Units
(contd):

RSUs for common
      sharesShare
    
    MarketBalance
    
    Distribution Plan
    
    Purchase Plan
    
    Total RSUsAt January 1,
      2010
    
    1,241,016
    
    380,733
    
    1,621,749RSUs
    granted
    
    -
    
    893,370
    
    893,370RSUs
      exercised
    
    (154,006
    )
    (38,990
    )
    (192,996
    )RSUs
      forfeited
    
    (235,040
    )
    (176,015
    )
    (411,055
    )At December 31,
      2010
    
    851,970
    
    1,059,098
    
    1,911,068RSUs
    granted
    
    -
    
    1,351,516
    
    1,351,516RSUs
      exercised
    
    (660,522
    )
    (371,626
    )
    (1,032,148
    )RSUs
      forfeited
    
    (4,975
    )
    (52,084
    )
    (57,059
    )At December 31, 2011
    
    186,473
    
    1,986,904
    
    2,173,377  The fair value of RSU grants is
measured based on the stock price of the shares underlying the RSU on the date
of grant. During 2011, compensation expense of $870,000 (2010 - $1,944,000) was
recorded against income.


19. Operating leases:

The Corporation leases a facility
at its Burnaby, Canada location, which has been assessed as an operating lease.
The facility has a lease term expiring in 2019, with renewal options after that
date. At December 31, 2011, the
Corporation is committed to payments under operating leases as follows: Less than 1 year
    $
    2,4651-3 years
    
    4,9874-5
    years
    
    5,379Thereafter
    
    10,739Total minimum lease payments
    $
    23,570


20. Commitments and
contingencies:

The Corporation has agreed to pay
royalties in respect of sales of certain fuel cell-based stationary power
products under two development programs with Canadian government agencies. The
total combined royalty is limited in any year to 4% of revenue from such
products. Under the terms of the Utilities Development Program (Phase 1) with
the Governments of Canada and British Columbia, total royalties are payable to a
maximum equal to the original amount of the government contributions of
CDN$10,702,000. During 2009, a Canadian government agency agreed to terminate
potential royalties payable of CDN $5,351,000 in respect of future sales of fuel
cell based stationary power products under the Utilities Development Program
(Phase 1). As at December 31, 2011, no royalties have been incurred for Phase
1.


47

---



|BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

20. Commitments and
contingencies (contd):

Under the terms of the Utilities
Development Program (Phase 2) with Technology Partnerships Canada (TPC) total
royalties are payable to a maximum of CDN$38,329,000. As at December 31, 2011, a
total of CDN $5,320,000 in royalty repayments have been incurred for Phase 2.
The Corporation has made no Phase 2 royalty repayments in 2011 and 2010. Original maximum payable amount under Phase 1 and
      2
    
    CDN$
    
    49,031Termination
      of potential royalties payable
    
    
    
    (5,350
    )Prior year
      payments applied
    
    
    
    (5,320
    )Maximum payable amount, December 31, 2011
    
    CDN$
    
    38,361Maximum payable amount, December 31, 2011
    
    US$
    
    37,719  At December 31, 2011, the
Corporation has outstanding commitments aggregating up to a maximum of $867,000
(2010 - $1,156,000) relating primarily to purchases of property, plant and
equipment. The Corporation is also committed
to make future investments totaling $98,000 in Chrysalix (note 11). The Corporation has agreed to pay
royalties in respect of sales of Ballard fuel cells or fuel cell systems under a
July 31, 1996 Fuel Cell Bus Program Agreement (FC Bus Agreement), with
Province of British Columbia, BC Transit, and BC Transportation Financing
Authority (BCTFA). Under the terms of FC Bus Agreement, the royalty payable is
at a rate of 2% on deferred sales of such products for commercial transit
application to a maximum of $2,163,000 (CDN$ 2,200,000). No royalties have been
paid to date. On December 31, 2008, the
Corporation completed a restructuring transaction with Superior Plus Income Fund
(Superior Plus), which included an indemnification agreement (the Indemnity
Agreement), which sets out the parties continuing obligations to the other.
The Indemnity Agreement provides for the indemnification by each of the parties
to the other for breaches of representations and warranties or covenants, as
well as, in the Corporations case, any liability relating to the business which
is suffered by Superior Plus. The Corporations indemnity to Superior Plus with
respect to representation relating to the existence of the Corporations tax
pools immediately prior to the completion of the Arrangement is limited to an
aggregate of $7,227,000 (CDN $7,350,000) with a threshold amount of $492,000
(CDN $500,000) before there is an obligation to make a payment. The Indemnity
Agreement also provides for adjustments to be paid by the Corporation, or to the
Corporation, depending on the final determination of the amount of 2008 Canadian
non-capital losses, scientific research and development expenditures and
investment tax credits, to the extent that such amounts are more or less than
the amounts estimated at the time the Arrangement was executed. At December 31, 2011, no amount
payable or receivable has been accrued as a result of the Indemnity Agreement.


48

---



|BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

21. Personnel expenses:

Personnel expenses are included in
cost of product and services revenues, research and product development expense,
general and administrative expense, and sales and marketing expense. December 31,
    
    December 31,2011
    
    2010Salaries and
      employee benefits
    
    $
    55,362
    
    $
    53,014Share-based compensation (note 18)
    
    
    2,646
    
    
    3,579$
    58,008
    
    $
    56,593


22. Income taxes:

(a) Current tax
expense:

The components of income tax
benefit / (expense) included in the determination of the profit (loss) comprise
of: 2011
    
    2010Current tax expenseCurrent period income
    tax
    
    $
    102
    
    $
    3Withholding
      tax
    
    
    135
    
    
    -Adjustment for prior periods
    
    
    146
    
    
    -Total current tax expense
    
    $
    383
    
    $
    3Deferred tax expenseOrigination and reversal of
      temporary differences
    
    $
    8,907
    
    $
    61,850Adjustments for
      prior periods
    
    
    (907
    )
    
    (20,700
    )Change in unrecognized deductible temporary
      differences
    
    
    (8,000
    )
    
    (41,150
    )Total deferred tax expense
    
    $
    -
    
    $
    -Total income tax expense
    
    $
    383
    
    $
    3  The Corporations effective income
tax rate differs from the combined Canadian federal and provincial statutory
income tax rate for companies. The principal factors causing the difference are
as follows: 2011
    
    2010Net loss before income taxes
    
    $
    (36,156
    )
    $
    (35,439
    )Expected tax
      expense (recovery) at 26.5% (201028.5%)
    
    $
    (9,581
    )
    $
    (10,100
    )Increase (reduction) in income taxes resulting
      from:Non-deductible
      portion of capital gain (loss)
    
    
    2,838
    
    
    (1,289
    )Non-deductible
      expenses (non-taxable income)
    
    
    700
    
    
    1,113Investment
      tax credits earned
    
    
    (4,352
    )
    
    (4,559
    )Foreign
      tax rate differences
    
    
    349
    
    
    658Losses and
      other deductions for which no benefit has
      been               recorded
    
    
    10,429
    
    
    14,180Income taxes
    
    $
    383
    
    $
    3


49

---



BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)


22. Income taxes (contd):

(b) Recognized deferred tax:

At December 31, 2011, the
Corporation did not have any deferred tax liabilities resulting from temporary
differences recognized for financial statement and income tax
purposes.

(c) Unrecognized deferred tax:

At December 31, 2011, the
Corporation did not have any deferred tax liabilities resulting from temporary
differences for financial statement and income tax purposes.

2011
    
    2010Deferred tax assetsScientific
      research expenditures
    
    $
    11,647
    
    $
    9,350Investment in
      associated companies
    
    
    2,246
    
    
    2,296Accrued
      warranty liabilities
    
    
    8,454
    
    
    7,965Losses from
      operations carried forward
    
    
    17,373
    
    
    14,695Capital losses
      carried forward
    
    
    30,681
    
    
    30,681US investment
      tax credits
    
    
    827
    
    
    707Investment tax
      credits
    
    
    15,188
    
    
    12,049Property, plant
      and equipment and intangible assets
    
    
    48,465
    
    
    49,139Deferred tax
      assets offset against deferred tax liabilities
    
    
    -
    
    
    -Deferred tax
      asset not recognized
    
    $
    134,881
    
    $
    126,882


Deferred tax assets have not
been recognized in respect of these items because it is not probable that future
taxable profit will be available against which the Corporation can utilize the
benefits.

The Corporation has available
to carry forward the following as at December 31:

2011
    
    2010Canadian scientific research
      expenditures
    
    $
    46,587
    
    $
    37,398Canadian losses from operations
    
    
    23,075
    
    
    19,652Canadian investment tax
      credits
    
    
    17,984
    
    
    13,990German losses from operations for corporate tax
      purposes
    
    
    227
    
    
    220U.S. federal losses from
      operations
    
    
    13,287
    
    
    14,727U.S. state losses from operations
    
    
    1,972
    
    
    1,703U.S. research and development
      and investment tax credits
    
    
    825
    
    
    707U.S. capital losses
    
    
    90,237
    
    
    90,237Denmark losses from operations
    
    
    27,534
    
    
    18,359


The Canadian scientific
research expenditures may be carried forward indefinitely. The Canadian loses
from operations may be used to offset future Canadian taxable income and expire
over the period from 2028 to 2031.

50

---



BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)


22. Income taxes (contd):

(c) Unrecognized deferred tax
(contd):

The German and Denmark losses
from operations may be used to offset future taxable income in Germany and
Denmark for corporate tax and trade tax purposes and may be carried forward
indefinitely.

The U.S. federal losses from
operations may be used to offset future U.S. taxable income and expire over the
period from 2012 to 2030. The U.S. states losses from operations arising in
California may be used to offset future state taxable income and may be carried
forward for ten years. The U.S. federal and state research and development and
investment tax credits are available to reduce future U.S. taxable income and
expire over the period from 2012 to 2030. The U.S. capital losses are available
to reduce U.S. capital gains and expire over the period from 2012 to 2013.

The Canadian investment tax
credits may be used to offset future Canadian income taxes otherwise payable and
expire as follows:

2012
    
    $
    612013
    
    
    1192014
    
    
    1042015
    
    
    -2016
    
    
    932017
    
    
    1032029
    
    
    7,2452030
    
    
    5,0732031
    
    
    5,186$
    17,984


23. Related party transactions:

Related parties include
shareholders with a significant ownership interest in the Corporation, together
with its subsidiaries and affiliates. The revenue and costs recognized from
transactions with such parties reflect the prices and terms of sales and
purchase transactions with related parties, which are in accordance with normal
trade practices. Transactions between the Corporation and its subsidiaries are
eliminated on consolidation.

Balances with related
      parties:
    
    2011
    
    2010Trade
      receivables
    
    $
    -
    
    $
    153Trade payables
    
    $
    260
    
    $
    517Transactions during the year with related
      parties:
    
    
    2011
    
    
    2010Revenues
    
    $
    -
    
    $
    134Purchases
    
    $
    744
    
    $
    1,301


51

---



BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)


23. Related party transactions
(contd):

The Corporation provides key
management personnel, being board directors and executive officers, certain
benefits, in addition to their salaries. Key management personnel also
participate in the Corporations share-based compensation plans (note 18).

In addition to cash and equity
compensation, the Corporation provides the executive officers with certain
personal benefits, including car allowance, medical benefit program, long and
short-term disability coverage, life insurance and an annual medical and
financial planning allowance.

In accordance with the
employment agreements of the executive officers, the Corporation is required to
provide notice of 12 months plus one month for every year of employment
completed with the Corporation, to a maximum of 24 months, or payment in lieu of
such notice, consisting of the salary, bonus and other benefits that would have
been earned during such notice period. If there is a change of control, and if
the executive officers employment is terminated, including a constructive
dismissal, within 2 years following the date of a change of control, the
executive officer is entitled to a payment equivalent to payment in lieu of a 24
month notice period.

Key management personnel
compensation is comprised of:

2011
    
    2010Salaries and
      employee benefits
    
    $
    3,744
    
    $
    4,390Post-employment retirement
      benefits
    
    
    79
    
    
    75Termination
      benefits
    
    
    425
    
    
    -Share-based compensation (note 18)
    
    
    1,136
    
    
    1,638$
    5,384
    
    $
    6,103


24. Supplemental disclosure of
cash flow information:

Non-cash financing and
      investing activities:
    
    2011
    
    2010Compensatory
      shares
    
    $
    2,046
    
    $
    540Assets acquired
      under finance lease (note 8)
    
    $
    1,906
    
    $
    12,180


52

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BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)


25. Operating segments:

The
Corporations business operates in three market segments:

- Fuel Cell Products: fuel cell products and services for motive power
  (material handling and bus markets) and stationary power (backup power and
  distributed generation markets) applications; and engineering services for a
  variety of fuel cell applications;
- Contract Automotive: contract manufacturing services provided primarily
  for Daimler AG;
- Material Products: carbon fiber products primarily for automotive
  transmissions and gas diffusion layers (GDL) for fuel cells.

In
2011, the Corporation completed its manufacturing services contract for the
supply of automotive fuel cell modules to Daimler AG. As a result, the Contract
Automotive segment will cease to be an operating segment as of December 31,
2011. The Corporation has restated its comparative operating segment information
to align to its current composition of operating segments. Revenues relating to
engineering services previously recorded in the Contract Automotive segment of
$1,460,000 for the year ended December 31, 2010, have been reallocated to the
Fuel Cell Products segment.

Segment
revenues and segment income (loss) represent the primary financial measures used
by senior management in assessing performance and allocating resources, and
include the revenues, cost of product and service revenues and expenses for
which management is held accountable. Segment expenses include research and
product development costs directly attributable to individual segments.

Costs
associated with shared services and other shared costs are allocated based on
headcount and square footage. Corporate amounts include expenses for research
and product development that are not attributable to individual segments, sales
and marketing, and general and administrative, which apply generally across all
segments and are reviewed separately by senior management.

A
significant portion of the Corporations production, testing and lab equipment,
and facilities, as well as intellectual property, are common across the
segments. Therefore, management does not classify asset information on a
segmented basis. Instead, performance assessments of these assets and related
resource allocations are done on a company-wide basis.

53

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BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)


25. Operating segments
(contd):

2011
    
    2010Total revenuesFuel Cell Products
    
    $
    46,468
    
    $
    34,244Contract
      Automotive
    
    
    9,305
    
    
    9,811Material Products
    
    
    20,236
    
    
    20,964$
    76,009
    
    $
    65,019Segment income (loss) for the year(1)Fuel Cell
      Products
    
    $
    (1,305
    )
    $
    (8,762
    )Contract Automotive
    
    
    1,803
    
    
    1,755Material Products
    
    
    5,852
    
    
    7,689Total
    
    
    6,350
    
    
    682Corporate
      amountsResearch and
      product development
    
    
    (17,945
    )
    
    (19,299
    )General and
      administrative
    
    
    (12,500
    )
    
    (14,777
    )Sales and
      marketing
    
    
    (9,488
    )
    
    (9,113
    )Net finance
      loss
    
    
    (1,197
    )
    
    (965
    )Gain on sale of property, plant
      and equipment
    
    
    734
    
    
    4Gain on sale of
      assets
    
    
    -
    
    
    8,032Impairment loss on property, plant and
      equipment
    
    
    (1,727
    )
    
    -Loss before income tax
    
    $
    (35,773
    )
    $
    (35,436
    )  (1)
    
    Research and product development costs directly
      related to segments are included in segment income (loss) for the
      year.


In
2011, sales to a single customer of $18,119,000 exceeded 10% of total revenue,
of which $7,264,000 were included in revenues from the Fuel Cell Products
segment and $10,855,000 were included in revenues from the Contract Automotive
segment. In addition, sales to a single customer group of $11,518,000 in the
Material Products segment exceeded 10% of total revenue.

In
2010, sales to a single customer of $16,359,000 exceeded 10% of total revenue,
of which $8,107,000 were included in revenues from the Fuel Cell Products
segment and $8,252,000 were included in revenues from the Contract Automotive
segment. In addition, sales to a single customer group of $13,586,000 in the
Material Products segment exceeded 10% of total revenue.

Revenues by geographic area, which are attributed to countries based on
customer location for the years ended December 31, is as follows:

Revenues
    
    2011
    
    2010Canada
    
    $
    9,320
    
    $
    5,070U.S.
    
    
    27,842
    
    
    31,179Germany
    
    
    19,771
    
    
    17,465United Kingdom
    
    
    3,868
    
    
    5,733Denmark
    
    
    2,631
    
    
    1,048Belgium
    
    
    4,992
    
    
    513Brazil
    
    
    2,810
    
    
    -Other countries
    
    
    4,775
    
    
    4,011$
    76,009
    
    $
    65,019


54

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BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)


25. Operating segments
(contd):

Non-current assets by geographic area is as follows:

December 31,
    
    December 31,
    
    January 1,Non-current assets
    
    2011
    
    2010
    
    2010Canada
    
    $
    76,728
    
    $
    78,180
    
    $
    78,450U.S.
    
    
    8,635
    
    
    9,698
    
    
    10,620Germany
    
    
    59
    
    
    59
    
    
    59Denmark
    
    
    1,962
    
    
    2,692
    
    
    -$
    87,384
    
    $
    90,629
    
    $
    89,129


26. Financial instruments:

(a)Fair value:

The
Corporations financial instruments consist of cash and cash equivalents,
short-term investments, accounts receivables, long-term investments, accounts
payable and accrued liabilities, and obligations under capital lease. The fair
values of cash, accounts receivable, accounts payable and accrued liabilities
approximate carrying value because of the short-term nature of these
instruments. The Corporations long-term investments are not actively traded,
therefore management estimates fair value using valuation techniques that
require inputs that are unobservable, including inputs made available by its
investees (i.e. Level 3 of the fair value hierarchy). The interest rates applied
to the obligations under capital lease are not considered to be materially
different from market rates, thus the carrying value of obligations under
capital lease approximate fair value. The carrying value of cash equivalents and
short-term investments equal their fair values as they are classified as held
for trading.

Fair
value measurements recognized in the balance sheet must be categorized in
accordance with the following levels:

(i)
    Level 1: quoted prices
      (unadjusted) in active markets for identical assets or
    liabilities;(ii)
    Level 2: inputs other than
      quoted prices included in Level 1 that are observable for the asset or
      liability, either directly (i.e. as prices) or indirectly (i.e., derived
      from prices);(iii)
    Level 3: inputs for the asset
      or liability that are not based on observable market data (unobservable
      inputs).


The
Corporation categorized the fair value measurement of its cash, cash equivalents
and short-term investments in Level 1 as they are primarily derived directly
from reference to quoted (unadjusted) prices in active markets.

55

---



BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)


26. Financial instruments
(contd):

(b) Financial risk
management:

The Corporation primarily has exposure to currency
exchange rate risk, interest rate risk and credit risk. These risks arise
primarily from the Corporations holdings of U.S. and Canadian dollar
denominated cash and cash equivalents and short-term investments.

2011
    
    2010Canadian
    
    U.S.
      dollar
    
    Other (1)
    
    Total
    
    Canadian
    
    U.S.
      dollar
    
    Other
      (1)
    
    Totaldollar
    
    portfolio
    
    
    
    
    
    
    
    dollar
    
    portfolioportfolio(1)
    
    
    
    
    
    
    
    
    
    
    portfolio(1)Cash and
      cashequivalents
    
    $
    9,421
    
    $
    10,284
    
    $
    611
    
    $
    20,316
    
    $
    16,759
    
    $
    33,947
    
    $
    1,231
    
    $
    51,937Short-term
    
    
    25,878
    
    
    -
    
    
    -
    
    
    25,878
    
    
    9,492
    
    
    13,016
    
    
    -
    
    
    22,508investmentsTotal cash,
      cashequivalents
andshort-terminvestments
    
    $
    35,299
    
    $
    10,284
    
    $
    611
    
    $
    46,194
    
    $
    26,251
    
    $
    46,963
    
    $
    1,231
    
    $
    74,445  (1)
    
    U.S. dollar equivalent


Changes arising from these
risks could impact the Corporations reported investment and other income
through either changes to investment income or foreign exchange gains or losses.
Reported finance income and expenses and other income are as follows:

2011
    
    2010Investment
      income
    
    $
    303
    
    $
    323Other income
    
    
    -
    
    
    224Pension
      costs
    
    
    (37
    )
    
    (124
    )Foreign exchange loss
    
    
    (71
    )
    
    (527
    )Finance income (loss) and
    other
    
    $
    195
    
    $
    (104
    )Finance expense
    
    $
    (1,392
    )
    $
    (861
    )


The Corporation did not realize
any material gains or losses on its accounts receivable or its financial
liabilities measured at amortized cost.

Foreign currency exchange
rate risk

Foreign currency exchange rate
risk is the risk that the fair value of deferred cash flows of a financial
instrument will fluctuate because of changes in foreign exchange rates. The
Corporation is exposed to currency risks primarily due to its holdings of
Canadian dollar denominated cash equivalents and short-term investments and its
Canadian dollar denominated purchases and accounts payable. Substantially all
receivables are denominated in U.S. dollars.

56

---



BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)


26. Financial instruments
(contd):

(b) Financial risk management
(contd):

Foreign currency exchange
rate risk(contd)

The Corporation limits its
exposure to foreign currency risk by holding Canadian denominated cash, cash
equivalents and short-term investments in amounts up to 100% of forecasted
twelve month Canadian dollar net expenditures and up to 50% of the following
twelve months of forecasted Canadian dollar net expenditures, thereby creating a
natural hedge. Periodically, the Corporation also enters into forward foreign
exchange contracts to further limit its exposure. At December 31, 2011, the
Corporation had Canadian dollar cash, cash equivalents and short-term
investments of CDN $35,899,000, and outstanding forward foreign exchange
contracts outstanding to sell a total of CDN $7,000,000 in 2012 at an average
rate of CDN $1.02 to US $1.00.

The following exchange rates
applied during the year ended December 31, 2011:

$U.S. to $1.00 CDN
    
    $CDN to $1.00 $U.S.January 1, 2011 Opening rate
    
    $
    1.005
    
    $
    0.995December 31,
      2011 Closing rate
    
    
    0.983
    
    
    1.017Fiscal 2011 Average rate
    
    
    1.011
    
    
    0.989


Based on cash, cash equivalents
and short-term investments held at December 31, 2011, a 10% increase in the
Canadian dollar against the U.S. dollar, with all other variables held constant,
would result in an increase in foreign exchange gains of approximately
$3,530,000 recorded against net income.

If the Canadian dollar weakened
10% against the U.S. dollar, there would be an equal, and opposite impact, on
net income. This sensitivity analysis includes foreign currency denominated
monetary items, and adjusts their translation at year-end, for a 10% change in
foreign currency rates.

Interest rate risk

Interest rate risk is the risk
that the fair value of deferred cash flows of a financial instrument will
fluctuate because of changes in market interest rates. The Corporation is
exposed to interest rate risk arising primarily from fluctuations in interest
rates on its cash, cash equivalents and short-term investments. The Corporation
limits its exposure to interest rate risk by continually monitoring and
adjusting portfolio duration to align to forecasted cash requirements and
anticipated changes in interest rates.

Based on cash, cash equivalents
and short-term investments at December 31, 2011, a 0.25% decline in interest
rates, with all other variables held constant, would result in a decrease in
investment income $115,000, arising mainly as a result of an increase in the
fair value of fixed rate financial assets classified as held-for-trading. If
interest rates had been 0.25% higher, there would be an equal and opposite
impact on net income.

57

---



BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)


26. Financial instruments
(contd):

(b) Financial risk management
(contd):

Credit risk

Credit risk is the risk of
financial loss to the Corporation if a counterparty to a financial instrument
fails to meet its contractual obligations and arises principally from the
Corporations cash, cash equivalents, short-term investments and accounts
receivable. The Corporation limits its exposure to credit risk on cash, cash
equivalents and short-term investments by only investing in liquid, investment
grade securities. The Corporation manages its exposure to credit risk on
accounts receivable by assessing the ability of counterparties to fulfill their
obligations under the related contracts prior to entering into such contracts,
and continuously monitors these exposures.

27. Transition to IFRS:

As stated in note 2(a), these
are the Corporations first consolidated financial statements prepared in
accordance with IFRS. The accounting policies set out in note 3 have been
applied in preparing the financial statements for the year ended December 31,
2011, the comparative information presented in these financial statements for
the year ended December 31, 2010 and in the preparation of the opening IFRS
statement of financial position at January 1, 2010 (the Corporations
Transition Date).

In preparing its opening IFRS
statement of financial position, the Corporation has adjusted amounts reported
previously in financial statements prepared in accordance with Canadian
Generally Accepted Accounting Principles (Canadian GAAP). The following is an
explanation of how the transition from Canadian GAAP to IFRS has affected the
Corporations financial position, financial performance and cash flows.

(i) IFRS 1,First-Time Adoption of International Financial Reporting
Standards:

IFRS 1,First-Time Adoption of International Financial Reporting
Standard, permits those companies
adopting IFRS for the first time to take certain exemptions from the full
requirements of IFRS at the time of transition. The following are the initial
IFRS 1 mandatory elections and optional exemptions applied by the Corporation
upon initial adoption of IFRS from Canadian GAAP:

Estimates:

Hindsight is not used to create
or revise estimates. The estimates previously made by the Corporation under
Canadian GAAP were not revised for application of IFRS except where necessary to
reflect any differences in accounting policies.

58

---



BALLARD POWER SYSTEMS
      INC.Notes to Consolidated Financial StatementsYears ended December 31, 2011, and
      2010(Tabular amounts expressed in thousands of U.S. dollars, except
      per share amounts and number of shares)


27. Transition to IFRS
(contd):

(i) IFRS 1,First-Time Adoption of International Financial Reporting
Standards(contd):

Share-based
payments:

The Corporation has elected to
apply IFRS 2,Share-based
Payments, to all equity instruments
granted after November 7, 2002 that had not vested as of the Transition Date and
elected not to apply the standard to any equity instruments issued prior to this
date.

Business
combinations:

The Corporation has elected to
prospectively apply IFRS 3,Business
Combinations, from the Transition Date,
rather than retrospectively restating all business combinations that have
occurred prior to the Transition Date. As such, any goodwill arising from past
business combinations have not been adjusted from the carrying value previously
determined under Canadian GAAP.

Currency translation
differences:

The Corporation has elected to
reset its historical cumulative translation gains and losses to nil at the
Transition Date, rather than to retrospectively apply IAS 21,The Effects of Changes in Foreign Exchange
Rates. Historical cumulative translation
adjustments arose prior to 2001 and totaled $236,000. These were a result of the
consolidation method applied at the time to the Corporations German subsidiary.

Employee
benefits:

The Corporation has elected to
disclose comparative information with regards to the defined benefit pension
plan and other benefit plans for the current and previous period, rather than
the previous four periods as required under IAS 19,Employee Benefits.

In addition, the Corporation
has elected to apply the optional election in IFRS 1 and recognize all
cumulative unrecognized actuarial gains and losses through retained earnings as
at the Transition Date.

Decommissioning liabilities:

The Corporation has elected not
to retrospectively restate its decommissioning liabilities. The Corporation
elected rather to calculate the provision per IFRS 37,Provisions, Contingent Liabilities and Contingent
Assets, at the Transition Date, as if
the obligation arose at that date. The calculated value was then discounted to
the date the obligation first arose and then the provision was accreted up to
the Transition Date.

59

---



**BALLARD POWER
      SYSTEMS INC.**Notes to
      Consolidated Financial StatementsYears ended December 31, 2011, and 2010(Tabular amounts expressed in thousands of U.S.
      dollars, except per share amounts and number of shares)


27. Transition to IFRS
(contd):

(ii) Reconciliations of Canadian
GAAP to IFRS:

Reconciliation of equity from Canadian GAAP to IFRS as
  at:

January
    1,
    
    December
      31,2010
    
    2010Shareholders
      equity under Canadian GAAP
    
    
    $
    158,920
    
    $
    127,875Differences:Decommissioning
      liabilities
    a
    
    
    (1,330
    )
    
    (1,381
    )Sale and leaseback gain on
      operating lease
    d
    
    
    -
    
    
    3,089Total equity under IFRS
    
    
    $
    157,590
    
    $
    129,583Reconciliation of comprehensive loss
      from Canadian GAAP to IFRS for the year ended:December
      31,2010Net loss and
      comprehensive loss under Canadian GAAP
    
    
    
    
    
    $
    (38,843
    )Differences:Decommissioning
      liabilities
    
    
    
    a
    
    
    (51
    )Share-based payments
    
    
    
    b
    
    
    478Sale and leaseback gain on
      operating lease
    
    
    
    d
    
    
    3,089Defined benefit plan actuarial
      gain
    
    
    
    e
    
    
    (112
    )Total net loss
      under IFRS
    
    
    
    
    
    
    (35,439
    )Defined benefit plan actuarial
      gain
    
    
    
    e
    
    
    112Total comprehensive loss under
      IFRS
    
    
    
    
    
    $
    (35,327
    )


60

---



**BALLARD POWER
      SYSTEMS INC.**Notes to
      Consolidated Financial StatementsYears ended December 31, 2011, and 2010(Tabular amounts expressed in thousands of U.S.
      dollars, except per share amounts and number of shares)


27. Transition to IFRS
(contd):

(ii) Reconciliations of Canadian
GAAP to IFRS (contd):

Reconciliation of the Canadian GAAP consolidated statement of financial
position as at January 1, 2010 to IFRS:

Effect
    of
    
    Effect
    oftransition
      to
    
    transition
      toCanadian
    
    IFRS
    
    IFRSNote
    
    GAAP
    
    Adjustments
    
    Reclassifications
    
    IFRSAssetsCurrent
      assets:Cash and cash
    equivalents
    
    
    $
    43,299
    
    $
    -
    
    $
    -
    
    $
    43,299Short-term
      investments
    
    
    
    38,932
    
    
    -
    
    
    -
    
    
    38,932Trade and other
      receivables
    
    
    
    12,903
    
    
    -
    
    
    -
    
    
    12,903Inventories
    
    
    
    9,168
    
    
    -
    
    
    -
    
    
    9,168Prepaid expenses and
    other
    
    
    
    2,114
    
    
    -
    
    
    -
    
    
    2,114current
    assetsTotal current
      assets
    
    
    
    106,416
    
    
    -
    
    
    -
    
    
    106,416Property, plant
      and equipment
    a
    
    
    39,320
    
    
    197
    
    
    -
    
    
    39,517Intangible assets
    
    
    
    824
    
    
    -
    
    
    -
    
    
    824Goodwill
    
    
    
    48,106
    
    
    -
    
    
    -
    
    
    48,106Investments
    
    
    
    632
    
    
    -
    
    
    -
    
    
    632Other long-term
      assets
    
    
    
    50
    
    
    -
    
    
    -
    
    
    50Total assets
    
    
    $
    195,348
    
    $
    197
    
    $
    -
    
    $
    195,545Liabilities and EquityCurrent
      liabilities:Trade and other
    payables
    i
    
    $
    20,321
    
    $
    -
    
    $
    (3,812
    )
    $
    16,509Deferred
      revenue
    
    
    
    1,607
    
    
    -
    
    
    -
    
    
    1,607Current portion of finance
      lease
    
    
    
    316
    
    
    -
    
    
    -
    
    
    316liabilityProvisions
    i
    
    
    7,813
    
    
    -
    
    
    3,812
    
    
    11,625Total current
    liabilities
    
    
    
    30,057
    
    
    -
    
    
    -
    
    
    30,057Finance lease
      liability
    
    
    
    1,739
    
    
    -
    
    
    -
    
    
    1,739Provisions
    a
    
    
    1,321
    
    
    1,527
    
    
    -
    
    
    2,848Employee future
      benefits
    
    
    
    3,311
    
    
    -
    
    
    -
    
    
    3,311Total liabilities
    
    
    
    36,428
    
    
    1,527
    
    
    -
    
    
    37,955Equity:Share capital
    
    
    
    835,565
    
    
    -
    
    
    -
    
    
    835,565Treasury
      shares
    
    
    
    (207
    )
    
    -
    
    
    -
    
    
    (207
    )Contributed surplus
    b
    
    
    284,510
    
    
    1,304
    
    
    -
    
    
    285,814Accumulated
      deficit
    a, b,
c
    
    
    (960,712
    )
    
    (2,870
    )
    
    -
    
    
    (963,582
    )Accumulated other
      comprehensive
    c
    
    
    (236
    )
    
    236
    
    
    -
    
    
    -lossTotal
      equity
    
    
    
    158,920
    
    
    (1,330
    )
    
    -
    
    
    157,590Total liabilities and
      equity
    
    
    $
    195,348
    
    $
    197
    
    $
    -
    
    $
    195,545


61

---



**BALLARD POWER
      SYSTEMS INC.**Notes to
      Consolidated Financial StatementsYears ended December 31, 2011, and 2010(Tabular amounts expressed in thousands of U.S.
      dollars, except per share amounts and number of shares)


27. Transition to IFRS
(contd):

(ii) Reconciliations of Canadian
GAAP to IFRS (contd):

Reconciliation of the Canadian GAAP consolidated statement of financial
position as at December 31, 2010 to IFRS:

Effect
    of
    
    Effect
    oftransition
      to
    
    transition
      toCanadian
    
    IFRS
    
    IFRSNote
    
    
    GAAP
    
    Adjustments
    
    Reclassifications
    
    IFRSAssetsCurrent
      assets:Cash and cash
    equivalents
    
    
    
    $
    51,937
    
    $
    -
    
    $
    -
    
    $
    51,937Short-term
      investments
    
    
    
    
    22,508
    
    
    -
    
    
    -
    
    
    22,508Trade and other
      receivables
    
    
    
    
    11,614
    
    
    -
    
    
    -
    
    
    11,614Inventories
    
    
    
    
    12,382
    
    
    -
    
    
    -
    
    
    12,382Prepaid expenses and
    other
    
    
    
    
    957
    
    
    -
    
    
    -
    
    
    957current
    assetsTotal current
      assets
    
    
    
    
    99,398
    
    
    -
    
    
    -
    
    
    99,398Property, plant
      and equipment
    
    a
    
    
    36,706
    
    
    239
    
    
    -
    
    
    36,945Intangible assets
    
    
    
    
    2,975
    
    
    -
    
    
    -
    
    
    2,975Goodwill
    
    
    
    
    48,106
    
    
    -
    
    
    -
    
    
    48,106Investments
    
    
    
    
    673
    
    
    -
    
    
    -
    
    
    673Long-term trade
      receivables
    
    
    
    
    1,596
    
    
    -
    
    
    -
    
    
    1,596Other long-term assets
    
    
    
    
    334
    
    
    -
    
    
    -
    
    
    334Total
      assets
    
    
    
    $
    189,788
    
    $
    239
    
    $
    -
    
    $
    190,027Liabilities and EquityCurrent
      liabilities:Trade and other
    payables
    
    i
    
    $
    23,334
    
    $
    -
    
    $
    (1,449
    )
    $
    21,885Deferred
      revenue
    
    
    
    
    2,506
    
    
    -
    
    
    -
    
    
    2,506Current portion of finance
      lease
    
    
    
    
    681
    
    
    -
    
    
    -
    
    
    681liabilityProvisions
    
    i
    
    
    8,570
    
    
    -
    
    
    1,449
    
    
    10,019Total current
    liabilities
    
    
    
    
    35,091
    
    
    -
    
    
    -
    
    
    35,091Finance lease
      liability
    
    
    
    
    13,354
    
    
    -
    
    
    -
    
    
    13,354Deferred gain
    
    d
    
    
    9,036
    
    
    (3,089
    )
    
    -
    
    
    5,947Provisions
    
    a
    
    
    1,482
    
    
    1,620
    
    
    -
    
    
    3,102Employee future
    benefits
    
    
    
    
    2,950
    
    
    -
    
    
    -
    
    
    2,950Total
      liabilities
    
    
    
    
    61,913
    
    
    (1,469
    )
    
    -
    
    
    60,444Equity:Share capital
    
    
    
    
    836,245
    
    
    -
    
    
    -
    
    
    836,245Treasury
      shares
    
    
    
    
    (670
    )
    
    -
    
    
    -
    
    
    (670
    )Contributed surplus
    
    b
    
    
    288,618
    
    
    826
    
    
    -
    
    
    289,444Accumulated
      deficit
    
    a, b, c,
    d
    
    
    (995,669
    )
    
    646
    
    
    -
    
    
    (995,023
    )Accumulated other
    
    c
    
    
    (236
    )
    
    236
    
    
    -
    
    
    -comprehensive
      lossTotal equity
      attributable to
    
    
    
    
    128,288
    
    
    1,708
    
    
    -
    
    
    129,996equity
    holdersDantherm Power A/S
      non-
    
    
    
    
    (413
    )
    
    -
    
    
    -
    
    
    (413
    )controlling
      interestsTotal
      equity
    
    
    
    
    127,875
    
    
    1,708
    
    
    -
    
    
    129,583Total liabilities and
      equity
    
    
    
    $
    189,788
    
    $
    239
    
    $
    -
    
    $
    190,027


62

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**BALLARD POWER
      SYSTEMS INC.**Notes to
      Consolidated Financial StatementsYears ended December 31, 2011, and 2010(Tabular amounts expressed in thousands of U.S.
      dollars, except per share amounts and number of shares)


27. Transition to IFRS
(contd):

(ii) Reconciliations of Canadian
GAAP to IFRS (contd):

Reconciliation of the Canadian GAAP consolidated statement of
comprehensive loss for the year-ended December 31, 2010 to IFRS:

Effect of
    
    
    Effect oftransition to
    
    
    transition toCanadian
    
    
    IFRS
    
    
    IFRSNote
    
    
    GAAP
    
    
    Adjustments
    
    
    Reclassifications
    
    
    IFRSRevenues:Product and service
      revenues
    
    
    
    $
    65,019
    
    $
    -
    
    $
    -
    
    $
    65,019Cost of product
      and service
    
    a, b
    
    
    54,808
    
    
    79
    
    
    -
    
    
    54,887revenuesGross margin
    
    
    
    
    10,211
    
    
    (79
    )
    
    -
    
    
    10,132Operating expenses:Research and product
    
    b, d, j
    
    
    23,812
    
    
    (46
    )
    
    4,983
    
    
    28,749developmentGeneral and
      administrative
    
    b, j
    
    
    13,315
    
    
    (271
    )
    
    1,733
    
    
    14,777Sales and marketing
    
    b, j
    
    
    8,861
    
    
    (14
    )
    
    266
    
    
    9,113Restructuring
      and related costs
    
    j
    
    
    285
    
    
    -
    
    
    (285
    )
    
    -Acquisition charges
    
    j
    
    
    243
    
    
    -
    
    
    (243
    )
    
    -Depreciation and
      amortization
    
    j
    
    
    6,454
    
    
    -
    
    
    (6,454
    )
    
    -Total operating
    expenses
    
    
    
    
    52,970
    
    
    (331
    )
    
    -
    
    
    52,639Operating
      loss
    
    
    
    
    (42,759
    )
    
    252
    
    
    -
    
    
    (42,507
    )Finance
    income
    
    a, e
    
    
    128
    
    
    (232
    )
    
    -
    
    
    (104
    )Finance
    expense
    
    a
    
    
    (974
    )
    
    113
    
    
    -
    
    
    (861
    )Net finance income
    (loss)
    
    
    
    
    (846
    )
    
    (119
    )
    
    -
    
    
    (965
    )Gain on sale of
      assets
    
    d
    
    
    4,765
    
    
    3,271
    
    
    -
    
    
    8,036Loss before income
    taxes
    
    
    
    
    (38,840
    )
    
    3,404
    
    
    -
    
    
    (35,436
    )Income tax
      (recovery)
    
    
    
    
    3
    
    
    -
    
    
    -
    
    
    3Net loss
    
    
    
    
    (38,843
    )
    
    3,404
    
    
    -
    
    
    (35,439
    )Defined benefit
      plan actuarial gain
    
    e
    
    
    -
    
    
    112
    
    
    -
    
    
    112Comprehensive loss
    
    
    
    $
    (38,843
    )
    $
    3,516
    
    $
    -
    
    $
    (35,327
    )Net loss attributable to:Ballard Power Systems
      Inc.
    
    
    
    $
    (34,936
    )
    $
    3,404
    
    $
    -
    
    $
    (31,532
    )Dantherm Power A/S
      non-controlling interest
    
    
    (3,907
    )
    
    -
    
    
    -
    
    
    (3,907
    )Net loss
    
    
    
    $
    (38,843
    )
    $
    3,404
    
    $
    -
    
    $
    (35,439
    )Comprehensive loss attributable
      to:Ballard Power Systems
      Inc.
    
    
    
    $
    (34,936
    )
    $
    3,516
    
    $
    -
    
    $
    (31,420
    )Dantherm Power A/S
      non-controlling interest
    
    
    (3,907
    )
    
    -
    
    
    -
    
    
    (3,907
    )Comprehensive loss
    
    
    
    $
    (38,843
    )
    $
    3,516
    
    $
    -
    
    $
    (35,327
    )Basic and diluted loss per
      share
    
    
    
    $
    (0.42
    )
    $
    0.05
    
    $
    -
    
    $
    (0.37
    )**attributable to Ballard
      Power****Systems
      Inc.**Weighted average number of common
    
    
    84,102,315
    
    
    84,102,315
    
    
    84,102,315
    
    
    84,102,315**shares
      outstanding**


63

---



**BALLARD POWER
      SYSTEMS INC.**Notes to
      Consolidated Financial StatementsYears ended December 31, 2011, and 2010(Tabular amounts expressed in thousands of U.S.
      dollars, except per share amounts and number of shares)


27. Transition to IFRS
(contd):

(ii) Reconciliations of Canadian
GAAP to IFRS (contd):

The
following is a summary of the effects of the differences between IFRS and
Canadian GAAP on the Corporations accounting policies, statement of financial
position, and statement of comprehensive income for periods previously reported
under Canadian GAAP subsequent to the Transition Date to IFRS. The adoption of
IFRS did not change the Corporations actual cash flows, but has resulted in
changes to the Corporations statements of financial position and comprehensive
loss.

(a)Decommissioning liabilities

Under
both Canadian GAAP and IFRS, the Corporation is required to determine a best
estimate of asset retirement obligations (termed decommissioning liabilities
under IFRS) for all of the Corporations facilities. Under IFRS, the liability
is measured by applying the risk-free discount rate to the estimated total cost
of decommissioning each reporting period whereas under Canadian GAAP the
liability was measured using a company-specific discount rate. As a result of
the application of a lower discount rate under IFRS, adjustments to increase
provisions and other long-term liabilities and property, plant and equipment
were recorded by the Corporation. The impact arising from the change is
summarized as follows:

January 1,
    
    December 31,Consolidated statement of financial
      position
    
    2010
    
    
    2010Increase to
      property, plant and equipment
    
    $
    197
    
    $
    239Increase to provisions and other long-term
      liabilities
    
    
    (1,527
    )
    
    (1,620
    )Increase to accumulated deficit
    
    $
    (1,330
    )
    $
    (1,381
    )Year
    endedDecember
      31,Consolidated statement of comprehensive
      income
    
    
    
    
    2010Increase to cost
      of product and service revenues
    
    
    
    
    $
    (44
    )Decrease to finance income and
      other
    
    
    
    
    
    (120
    )Decrease to finance expense
    
    
    
    
    
    113Increase to net loss and comprehensive
loss
    
    
    
    
    $
    (51
    )


64

---



**BALLARD POWER
      SYSTEMS INC.**Notes to
      Consolidated Financial StatementsYears ended December 31, 2011, and 2010(Tabular amounts expressed in thousands of U.S.
      dollars, except per share amounts and number of shares)


27. Transition to IFRS
(contd):

(ii) Reconciliations of Canadian
GAAP to IFRS (contd):

(b)
Share-based payments

Under
Canadian GAAP, the Corporation valued stock-based compensation that vests in
tranches as a single grant. IFRS requires that each vesting tranche be valued
individually as a separate grant. Therefore under IFRS, the fair value of each
share-based compensation tranche will be amortized over each tranches vesting
period instead of recognizing the entire award on a straight-line basis over the
term of the grant.

As a
result of this difference, the Corporation has recorded a charge to contributed
surplus for vested stock-based compensation awards. The impact arising from the
change is summarized as follows:

January 1,
    
    December 31,Consolidated statement of financial
      position
    
    
    2010
    
    
    2010Increase to contributed
    surplus
    
    $
    (1,304
    )
    $
    (826
    )Increase to accumulated deficit
    
    $
    (1,304
    )
    $
    (826
    )Year
    endedDecember
      31,Consolidated statement of comprehensive
      income
    
    
    
    
    
    2010Increase to cost
      of product and service revenues
    
    
    
    
    $
    (35
    )Decrease to research and product
      development
    
    
    
    
    
    228Decrease to
      general and administrative
    
    
    
    
    
    271Decrease to sales and marketing
    
    
    
    
    
    14Decrease to net loss and comprehensive
      loss
    
    
    
    
    $
    478


(c)
Accumulated other comprehensive loss

As
stated in note 27(i), the Corporation has elected to reset its historical
cumulative translation loss to nil at the Transition Date and therefore the
Corporation has recorded a charge to accumulated deficit in the IFRS opening
statement of financial position. The impact arising from the change is
summarized as follows:

January 1,
    
    December 31,Consolidated statement of financial
      position
    
    2010
    
    
    2010Decrease to accumulated other
      comprehensive loss
    
    $
    (236
    )
    $
    (236
    )Increase to accumulated deficit
    
    $
    (236
    )
    $
    (236
    )


65

---



**BALLARD POWER
      SYSTEMS INC.**Notes to
      Consolidated Financial StatementsYears ended December 31, 2011, and 2010(Tabular amounts expressed in thousands of U.S.
      dollars, except per share amounts and number of shares)


27. Transition to IFRS
(contd):

(ii) Reconciliations of Canadian
GAAP to IFRS (contd):

(d)
Accelerated recognition of sale and leaseback gains

Under
Canadian GAAP, sale and leaseback gains are deferred and amortized over the term
of the lease when the leaseback is classified as an operating lease. Under IFRS,
such gains may be recognized upfront if the sale and leaseback transaction
results in an operating lease, and is undertaken at fair value.

As a
result of this difference, the land component of the March 2010 sale and
leaseback of the Corporations head office building has been determined to meet
the IFRS criteria to be treated as an operating lease. The unamortized portion
of the deferred gain attributed to the land leaseback has been recognized in
2010 net income and the related deferred gain derecognized in 2010. The impact
arising from the change is summarized as follows:

January 1,
    
    December 31,Consolidated statement of financial
      position
    
    2010
    
    2010Decrease to deferred
gain
    
    $
    -
    
    $
    3,089Decrease to accumulated
    deficit
    
    $
    -
    
    $
    3,089Year
      endedDecember 31,Consolidated statement of
      comprehensive income
    
    
    
    
    2010Increase to research and product development
    
    
    
    
    $
    (182
    )Increase to gain on sale of
      assets
    
    
    
    
    
    3,271Decrease to net loss and
      comprehensive loss
    
    
    
    
    $
    3,089


(e)
Employee future benefits

Under
IFRS, actuarial gains and losses arising from defined benefit plans and
post-retirement benefit plans may be recorded immediately in either net income
or other comprehensive income. Under Canadian GAAP, the Corporations accounting
policy was to recognize actuarial gains and losses in net income. On adoption of
IFRS, the Corporation has elected to recognize actuarial gains and losses in
other comprehensive income. This is an accounting policy change made by the
Corporation subsequent to the release of its first consolidated interim
financial statements under IFRS. The impact arising from the change from prior
Canadian GAAP is summarized as follows:

66

---



**BALLARD POWER
      SYSTEMS INC.**Notes to
      Consolidated Financial StatementsYears ended December 31, 2011, and 2010(Tabular amounts expressed in thousands of U.S.
      dollars, except per share amounts and number of shares)


27. Transition to IFRS
(contd):

(ii) Reconciliations of Canadian
GAAP to IFRS (contd):

(e)
Employee future benefits (contd)

Year endedDecember 31,Consolidated statement of
      comprehensive income
    
    2010Decrease to finance income and
      other
    
    $
    (112
    )Increase to net loss
    
    
    (112
    )Increase to defined benefit plan
      actuarial gain
    
    
    112Comprehensive loss
    
    $
    -


(f)
Foreign currency translation of subsidiary (Dantherm Power A/S)

Under
IFRS, the functional currency of the subsidiary determines the translation
methodology. As Dantherm Powers functional currency has been assessed as the
Danish Kroner under IFRS, Dantherm Power will be consolidated under IFRS using
the current rate method. Under Canadian GAAP, Dantherm Power was translated
using the temporal method. The impact arising from the change is not considered
to be material.

(g)
Property, plant and equipment

Under
IFRS, property, plant and equipment may be accounted for using either a cost or
revaluation model. The Corporation has elected to use the cost model for all
classes of property, plant and equipment. This is consistent with the
Corporations accounting policy under Canadian GAAP and hence has no impact on
the Corporations property, plant and equipment balances.

(h)
Impairment of assets

If
there is an indication that an asset may be impaired, an impairment test must be
performed. Under Canadian GAAP, this is a two-step impairment test in which (i)
undiscounted future cash flows are compared to the carrying value; and (ii) if
those undiscounted cash flows are less than the carrying value, the asset is
written down to fair value.

67

---



**BALLARD POWER
      SYSTEMS INC.**Notes to
      Consolidated Financial StatementsYears ended December 31, 2011, and 2010(Tabular amounts expressed in thousands of U.S.
      dollars, except per share amounts and number of shares)


27. Transition to IFRS
(contd):

(ii) Reconciliations of Canadian
GAAP to IFRS (contd):

(h)
Impairment of assets (contd)

Under
IFRS, an entity is required to assess, at the end of each reporting period,
whether there is any indication that an asset may be impaired. If such a
condition exists, the entity shall estimate the recoverable amount of an asset
by performing a one-step impairment test, which requires a comparison of the
carrying value of an asset to the higher of (1) value in use; and (ii) fair
value less costs to sell. Value in use is defined as the present value of future
cash flows expected to be derived from the asset in its current state. In
addition, IFRS requires property, plant and equipment, goodwill and intangible
assets to be assessed for impairment at the cash-generating unit (CGU) level,
rather than the reporting unit level considered by Canadian GAAP. As a result of
this difference, in principle, impairment write downs may be more likely under
IFRS than under Canadian GAAP.

Also
under IFRS, when circumstances have changed such that impairments have been
reduced, any previous impairment losses on assets other than goodwill and
indefinite-lived intangible assets should be reversed while Canadian GAAP
prohibits the reversal of impairment losses.

The
Corporation has concluded that the adoption of these standards does not result
in a change to the carrying value of the Corporations property, plant and
equipment, goodwill, and intangible assets on transition to IFRS.

(i)Provisions

Under
Canadian GAAP, a provision is required to be recorded in the financial
statements when required payment is considered likely and can be reasonably
estimated. The threshold for recognition of provisions under IFRS is lower than
that under Canadian GAAP as provisions must be recognized if required payment is
probable. Therefore, in principle, it is possible that there may be provisions
which would meet the recognition criteria under IFRS that were not recognized
under Canadian GAAP.

There
are also differences in the measurement of provisions under IFRS and Canadian
GAAP, including the requirement under IFRS for provisions to be discounted where
material and the methodology for determining the best estimate where there is a
range of equally possible outcomes. Under IFRS, the mid-point of the range us
used, whereas Canadian GAAP applies the low end of the range.

68

---



**BALLARD POWER
      SYSTEMS INC.**Notes to
      Consolidated Financial StatementsYears ended December 31, 2011, and 2010(Tabular amounts expressed in thousands of U.S.
      dollars, except per share amounts and number of shares)


27. Transition to IFRS
(contd):

(ii) Reconciliations of Canadian
GAAP to IFRS (contd):

(i)Provisions (contd)

The
Corporation has concluded that there is no adjustment to the Corporations
consolidated financial statements on transition to IFRS for the measurement of
provisions; however, certain reclassifications have been made in the statement
of financial position in classifying provisions.

(j)Functional presentation

Under
IFRS, the income statement must be presented on a basis either by function or by
nature. Under Canadian GAAP, the income statement could be presented using a mix
of both function and nature of expenditure. The Corporation has elected to use
the functional classification basis for the presentation of its income
statement.

As a
result, the operating expenses of depreciation and amortization, restructuring
charges, and acquisition costs, which are individually presented under Canadian
GAAP, have been reallocated to research and product development, general and
administrative, and sales and marketing expense under IFRS.

69

---