exv4w8





Exhibit 4.8

RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (UNAUDITED)

As at September 30, 2008 and for the nine months ended September 30, 2008 and 2007




In millions of Canadian dollars, except per share data




This information should be read in conjunction with the unaudited interim consolidated financial
statements of Canadian Pacific Railway Limited (“CP” or “the Company”) as at September 30, 2008 and
for the nine month periods ended September 30, 2008 and 2007. The unaudited interim consolidated
financial statements of the Company were prepared in accordance with generally accepted accounting
principles (“GAAP”) in Canada. The material differences between Canadian and U.S. GAAP are
explained and quantified below, along with their effect on the Company’s Statement of Consolidated
Income and Consolidated Balance Sheet. For a complete discussion of U.S. and Canadian GAAP
differences, as they relate to the Company, see Note 24 to the consolidated financial statements
for the year ended December 31, 2007 in the Company’s 2007 Annual Report and the Supplemental
United States Generally Accepted Accounting Principles Differences and Disclosures. In
management’s opinion, the unaudited interim consolidated financial statements and this
reconciliation include all adjustments (consisting solely of normal recurring adjustments)
necessary to present fairly such information.




	 	(a)	 	Accounting for derivative instruments and hedging: The measurement and recognition
rules for derivative instruments and hedging under Canadian GAAP, as described in CICA
accounting standards Section 3855 “Financial Instruments, Recognition and Measurement”,
Section 3861 “Financial Instruments, Presentation and Disclosure”, Section 3865 “Hedging”,
Section 1530 “Comprehensive Income” and Section 3251 “Equity”, are largely harmonized with
U.S. GAAP, as stated in Financial Accounting Standards Board (“FASB”) Statement No. 133
“Accounting for Derivative Instruments and Hedging Activities” (“FASB 133”). However,
under Canadian GAAP, only the ineffective portion of a net investment hedge that represents
an over hedge is recognized in income, whereas under U.S. GAAP, any ineffective portion is
recognized in income immediately. As well, transaction costs have been added to the fair
value of the “Long-term debt” under Canadian GAAP whereas under U.S. GAAP such costs are
recorded separately with “Other assets and deferred charges”.
	 
	 	(b)	 	Pensions and post-retirement benefits: On December 31, 2006, CP adopted FASB Statement
No. 158 “Employers’ Accounting for Defined Benefit Pension and other Postretirement Plans”
(“FASB 158”). Under U.S. GAAP, the Company is required to recognize the over or under
funded status of defined benefit pension and other post-retirement plans on the balance
sheet. The over or under funded status is measured as the difference between the fair
value of the plan assets and the benefit obligation, being the projected obligation for
pension plans and the accumulated benefit obligation for other post-retirement plans. In
addition, any previously unrecognized actuarial gains and losses and prior service costs
and credits that arise during the period will be recognized as a component of other
comprehensive income (“OCI”), net of tax. No similar requirement currently exists under
Canadian GAAP.
	 
	 	(c)	 	Post-employment benefits: Post-employment benefits are covered by the CICA
recommendations for accounting for employee future benefits. Consistent with accounting
for post-retirement benefits, the policy permits amortization of actuarial gains and losses
only if they fall outside of the corridor. Under FASB Statement No. 112 “Employers’
Accounting for Post-employment Benefits” (“FASB 112”), such gains and losses on
post-employment benefits that do not vest or accumulate are included immediately in income.
	 
	 	(d)	 	Termination and severance benefits: Termination and severance benefits are covered by
the CICA Section 3461 and the CICA Emerging Issues Committee Abstract 134 “Accounting for
Severance and Termination Benefits” (“EIC 134”). Upon transition to the CICA Section 3461
effective January 1, 2000, a net transitional asset was created and is being amortized to
income over approximately 13 years. Under U.S. GAAP, the expected benefits were not
accrued and are expensed when paid.
	 
	 	(e)	 	Stock-based compensation: U.S. GAAP requires the use of an option-pricing model to
fair value, at the grant date, share-based awards issued to employees, including stock
options, stock appreciation rights (“SARs”) and deferred share units (“DSUs”). SARs and
DSUs are subsequently re-measured at fair value at each reporting period. Under Canadian
GAAP, liability awards, such as SARs and DSUs, are accounted for using the intrinsic
method. U.S. GAAP also requires that CP accounts for forfeitures on an estimated basis.
Under Canadian GAAP, CP has elected to account for forfeitures on an actual basis as they
occur.





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	 	 	 	In addition, on adoption of FASB Statement No. 123 Revised 2004 — “Share Based Payment”
(“FASB 123R”), CP has recognized compensation cost attributable to stock-based awards over
the period from the grant date to the date the employee becomes eligible to retire when this
is shorter than the vesting period (the “non-substantive vesting period approach”).
Previously CP recognized the compensation cost over the vesting period (the “nominal vesting
period approach”). Canadian GAAP has similar provisions for the recognition of the
compensation cost attributable to stock-based awards over the shorter of the period from
grant date to vesting or eligibility for retirement. However, Canadian GAAP introduced
these provisions with effect for the year ended December 31, 2006 and the Company adopted
them with retroactive restatement of prior periods.
	 
	 	 	 	Under FASB Interpretation No. 44 “Accounting for Certain Transactions Involving Stock
Compensation” (“FIN 44”), compensation expense must be recorded if the intrinsic value of
stock options is not exactly the same immediately before and after an equity restructuring.
As a result of the Canadian Pacific Limited (“CPL”) corporate reorganization in 2001, CPL
underwent an equity restructuring, which resulted in replacement options in CP stock having
a different intrinsic value after the restructuring than prior to it. Canadian GAAP did not
require the revaluation of these options. The Company adopted on a prospective basis
effective January 2003 the CICA Section 3870 “Stock-based Compensation and Other Stock-based
Payments”, which requires companies to account for stock options at their fair value.
Concurrently, the Company elected to also account for stock options at their fair value
under FASB Statement No. 123 “Accounting for Stock-based Compensation” (“FASB 123”).
	 
	 	(f)	 	Internal use software: Under the American Institute of Certified Public Accountants
Statement of Position No. 98-1 “Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use” (“SOP 98-1”), certain costs, including preliminary project phase
costs, are to be expensed as incurred. These costs are capitalized under Canadian GAAP.
	 
	 	(g)	 	Capitalization of interest: The Company expenses interest related to capital projects
undertaken during the year unless specific debt is attributed to a capital program. FASB
Statement No. 34 “Capitalization of Interest Cost” (“FASB 34”) requires interest costs to
be capitalized for all capital programs. Differences in GAAP result in additional
capitalization of interest under U.S. GAAP and subsequent related depreciation.
	 
	 	(h)	 	Comprehensive income: Under U.S. GAAP, all derivative instruments are recognized on
the balance sheet as either an asset or a liability measured at fair value. Changes in the
fair value of derivatives are either recognized in earnings or in other comprehensive
income depending on whether specific hedge criteria are met.
	 
	 	 	 	FASB Statement No. 130 “Reporting Comprehensive Income” requires disclosure of the change in
equity from transactions and other events related to non-owner sources during the period.
In 2008 and the comparative period presented, the differences in other comprehensive income
under U.S. GAAP arose from foreign currency translation related to long-term debt designated
as a hedge of the net investment in foreign subsidiaries and unfunded pension liability.
	 
	 	(i)	 	Joint venture: The CICA Section 3055 “Interest in Joint Ventures” requires the
proportionate consolidation method to be applied to the recognition of interests in joint
ventures in consolidated financial statements. The Company has a joint-venture interest in
the Detroit River Tunnel Partnership (“DRTP”). FASB Accounting Principles Board Opinion
No. 18 “The Equity Method of Accounting for Investments in Common Stock” (“APB 18”)
requires the equity method of accounting to be applied to interests in joint ventures.
This has no effect on net income as it represents a classification difference within the
Statement of Consolidated Income and Consolidated Balance Sheet. Equity income from DRTP
in the nine months ended September 30, 2008 was $7.3 million (nine months ended September
30, 2007 — $8.2 million).
	 
	 	(j)	 	Offsetting contracts: FASB Financial Interpretation No. 39 “Offsetting of Amounts
Relating to Certain Contracts” (“FIN 39”) does not allow netting of assets and liabilities
among three parties. In 2003, the Company and one of its subsidiaries entered into a
contract with a financial institution. Under Canadian GAAP, offsetting amounts with the
same party and with a legal right to offset are netted against each other.
	 
	 	(k)	 	Start-up costs: Under EIC 27 “Revenues and Expenditures during the Pre-Operating
Period”, costs incurred for projects under development may be deferred until the projects
are substantially complete. Upon completion, these costs are amortized based on the
expected period and pattern of benefit of the expenditures. Under U.S. GAAP, these costs
are expensed as incurred.





2









 






	 	(l)	 	Capital leases: Under FASB Statement No. 13 “Accounting for Leases”, which prescribes
certain recognition criteria for a capital lease, certain leases, which the Company has
recorded as capital leases under Canadian GAAP, do not meet the criteria for capital leases
and are recorded as operating leases. These relate to equipment leases, previously
recorded as operating leases under Canadian and U.S. GAAP, which were renewed within the
last 25 percent of the equipment’s useful life. Under U.S. GAAP, these continue to be
operating leases.
	 
	 	(m)	 	Statement of cash flows: There are no material differences in the Statement of
Consolidated Cash Flows under U.S. GAAP. However, U.S. GAAP requires the disclosure of
income taxes paid. Canadian GAAP requires the disclosure of income tax cash flows, which
would include any income taxes recovered during the year. For the nine months ended
September 30, 2008, income taxes paid were $14.8 million (nine months ended September 30,
2007 — $62.7 million).
	 
	 	(n)	 	Dividends declared per share: Dividends declared per share in the nine months ended
September 30, 2008 were $0.7425 (nine months ended September 30, 2007 — $0.6750).





The application of U.S. GAAP, as described above, would have had the following effects on net
income, and comprehensive income.



	 	 	 	 	 	 	 	 	 
	 	 	For the nine months	 
	 	 	ended September 30	 
	In millions of Canadian dollars except per share amounts	 	2008	 	 	2007	 
	 
	 
	 	 	 	 	 	 	 	 
	Net Income — Canadian GAAP
	 	$	418.4	 	 	$	603.9	 
	 
	 	 	 	 	 	 	 	 
	Increased (decreased) by:
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Pension costs
	 	 	2.0	 	 	 	6.3	 
	 
	 	 	 	 	 	 	 	 
	Post-retirement benefits costs
	 	 	7.2	 	 	 	7.6	 
	 
	 	 	 	 	 	 	 	 
	Post-employment benefits costs
	 	 	0.9	 	 	 	0.9	 
	 
	 	 	 	 	 	 	 	 
	Termination and severance benefits
	 	 	(6.6	)	 	 	(6.7	)
	 
	 	 	 	 	 	 	 	 
	Internal use software — additions
	 	 	(14.9	)	 	 	(8.8	)
	 
	 	 	 	 	 	 	 	 
	Internal use software — depreciation
	 	 	9.2	 	 	 	8.0	 
	 
	 	 	 	 	 	 	 	 
	Stock-based compensation
	 	 	7.4	 	 	 	(3.6	)
	 
	 	 	 	 	 	 	 	 
	Gain (loss) on ineffective portion of hedges
	 	 	2.1	 	 	 	(4.1	)
	 
	 	 	 	 	 	 	 	 
	Capitalized interest — additions
	 	 	20.3	 	 	 	14.3	 
	 
	 	 	 	 	 	 	 	 
	Capitalized interest — depreciation
	 	 	(5.2	)	 	 	(4.3	)
	 
	 	 	 	 	 	 	 	 
	Start-up costs
	 	 	(0.7	)	 	 	(0.8	)
	 
	 	 	 	 	 	 	 	 
	Future/deferred income tax expense related to net income
	 	 	(11.5	)	 	 	(12.8	)
	 
	Net Income — U.S. GAAP
	 	$	428.6	 	 	$	599.9	 
	 






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	 	 	For the nine months	 
	 	 	ended September 30	 
	In millions of Canadian dollars except per share amounts	 	2008	 	 	2007	 
	 
	 
	 	 	 	 	 	 	 	 
	Other comprehensive income (loss) — Canadian GAAP
	 	$	13.9	 	 	$	(26.6	)
	 
	 	 	 	 	 	 	 	 
	Increased (decreased) by:
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Unrealized foreign exchange (gain) loss on designated
net investment hedge
	 	 	(2.1	)	 	 	4.1	 
	 
	 	 	 	 	 	 	 	 
	Unfunded pension and post-retirement liability adjustment
	 	 	64.1	 	 	 	75.0	 
	 
	 	 	 	 	 	 	 	 
	Future/deferred income tax expense related to other
comprehensive income
	 	 	(18.5	)	 	 	(25.0	)
	 
	Other comprehensive income — U.S. GAAP
	 	$	57.4	 	 	$	27.5	 
	 
	 
	 	 	 	 	 	 	 	 
	Earnings per share — U.S. GAAP
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Basic earnings per share
	 	$	2.79	 	 	$	3.89	 
	 
	 	 	 	 	 	 	 	 
	Diluted earnings per share
	 	$	2.76	 	 	$	3.85	 
	 






A summary of comprehensive income resulting from Canadian and U.S. GAAP differences is as follows:



	 	 	 	 	 	 	 	 	 
	 	 	For the nine months	 
	 	 	ended September 30	 
	In millions of Canadian dollars	 	2008	 	 	2007	 
	 
	 
	 	 	 	 	 	 	 	 
	Comprehensive income
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Canadian GAAP
	 	$	432.3	 	 	$	577.3	 
	 
	 	 	 	 	 	 	 	 
	U.S. GAAP
	 	$	486.0	 	 	$	627.4	 
	 






A summary of operating income resulting from Canadian and U.S. GAAP differences is as follows:



	 	 	 	 	 	 	 	 	 
	 	 	For the nine months	 
	 	 	ended September 30	 
	In millions of Canadian dollars	 	2008	 	 	2007	 
	 
	 
	 	 	 	 	 	 	 	 
	Operating income
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Canadian GAAP
	 	$	752.5	 	 	$	858.7	 
	 
	 	 	 	 	 	 	 	 
	U.S. GAAP
	 	$	746.8	 	 	$	851.1	 
	 






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Consolidated Balance Sheet




Had the Consolidated Balance Sheet been prepared under U.S. GAAP, the differences would have been
as follows (higher/(lower)):



	 	 	 	 	 	 	 	 	 
	In millions of Canadian dollars	 	Sept. 30, 2008	 	 	Dec. 31, 2007	 
	 
	 
	 	 	 	 	 	 	 	 
	Assets
	 	 	 	 	 	 	 	 
	Current assets
	 	 	 	 	 	 	 	 
	Cash
	 	 	 	 	 	 	 	 
	Investment in joint ventures
	 	$	(0.1	)	 	$	(0.2	)
	Accounts receivable and other current assets
	 	 	 	 	 	 	 	 
	Investment in joint ventures
	 	 	—	 	 	 	1.4	 
	Long-term assets
	 	 	 	 	 	 	 	 
	Investments
	 	 	 	 	 	 	 	 
	Investment in joint ventures
	 	 	50.3	 	 	 	48.9	 
	Start-up costs
	 	 	(12.3	)	 	 	(11.6	)
	Properties
	 	 	 	 	 	 	 	 
	Capitalized interest
	 	 	175.1	 	 	 	160.0	 
	Internal use software
	 	 	(60.9	)	 	 	(55.2	)
	Investment in joint ventures
	 	 	(35.9	)	 	 	(36.1	)
	Capital leases
	 	 	(9.8	)	 	 	(10.4	)
	Other assets and deferred charges
	 	 	 	 	 	 	 	 
	Pension
	 	 	(1,147.4	)	 	 	(1,103.1	)
	Long-term receivable
	 	 	198.9	 	 	 	190.3	 
	Transaction costs on long-term debt
	 	 	45.3	 	 	 	36.0	 
	Investment in joint ventures
	 	 	(15.5	)	 	 	(14.8	)
	 
	Total assets
	 	$	(812.3	)	 	$	$(794.8	)
	 






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	In millions of Canadian dollars	 	Sept. 30, 2008	 	 	Dec. 31, 2007	 
	 
	 
	 	 	 	 	 	 	 	 
	Liabilities and shareholders’ equity
	 	 	 	 	 	 	 	 
	Current liabilities
	 	 	 	 	 	 	 	 
	Accounts payable and accrued liabilities
	 	 	 	 	 	 	 	 
	Investment in joint ventures
	 	$	(0.7	)	 	$	(0.4	)
	Income and other taxes payable
	 	 	 	 	 	 	 	 
	Investment in joint ventures
	 	 	—	 	 	 	(0.1	)
	Long-term debt maturing within one year
	 	 	 	 	 	 	 	 
	Capital leases
	 	 	(0.8	)	 	 	(0.7	)
	 
	 	 	 	 	 	 	 	 
	Long-term liabilities
	 	 	 	 	 	 	 	 
	Deferred liabilities
	 	 	 	 	 	 	 	 
	Termination and severance benefits
	 	 	(3.6	)	 	 	(10.2	)
	Post-employment benefit liability
	 	 	4.3	 	 	 	5.2	 
	Under funded status of defined benefit pension and other post — retirement plans
	 	 	455.4	 	 	 	573.0	 
	Investment in joint ventures
	 	 	(0.5	)	 	 	(0.5	)
	Stock-based compensation
	 	 	(5.6	)	 	 	0.2	 
	Long-term debt
	 	 	 	 	 	 	 	 
	Bank loan
	 	 	198.9	 	 	 	190.3	 
	Capital leases
	 	 	(9.0	)	 	 	(9.7	)
	Transaction costs on long-term debt
	 	 	45.3	 	 	 	36.0	 
	Future/deferred income tax liability
	 	 	(411.5	)	 	 	(441.2	)
	 
	Total liabilities
	 	$	272.2	 	 	$	341.9	 
	 
	 
	 	 	 	 	 	 	 	 
	Shareholders’ equity
	 	 	 	 	 	 	 	 
	Share capital
	 	 	 	 	 	 	 	 
	Stock-based compensation
	 	 	21.0	 	 	$	20.9	 
	Contributed surplus
	 	 	 	 	 	 	 	 
	Stock-based compensation
	 	 	3.5	 	 	 	5.2	 
	Retained income
	 	 	(146.6	)	 	 	(156.8	)
	Accumulated other comprehensive income
	 	 	 	 	 	 	 	 
	Funding status of defined benefit pension
and other post-retirement plans
	 	 	(964.8	)	 	 	(1,010.2	)
	Unrealized foreign exchange loss on designated
net investment hedge
	 	 	2.4	 	 	 	4.2	 
	 
	Total liabilities and shareholders’ equity
	 	$	(812.3	)	 	$	(794.8	)
	 






Supplemental U.S. GAAP Disclosures




Business combination




Dakota, Minnesota and Eastern Railroad Corporation (“DM&E”) was acquired in October 2007 and is
wholly owned. The purchase was subject to review and approval by the U.S. Surface Transportation
Board (“STB”), during which time the shares of DM&E were placed in a voting trust. The STB
approved the purchase on October 30, 2008, at which time the Company assumed control of the DM&E.



U.S. GAAP requires supplemental unaudited pro forma income statement information for the period in
which a material business combination occurs. Material business combinations must be presented, on
a pro forma basis as



6









 







if the acquisition had taken place at the beginning of the fiscal period. Pro forma results are
not indicative of actual results or future performance. The pro forma information presented below
assumes this acquisition took place on January 1, 2008 and January 1, 2007, respectively. There
were no acquisitions in 2008.



	 	 	 	 	 	 	 	 	 
	 	 	For the nine months	 
	 	 	ended September 30	 
	In millions of Canadian dollars, except per share data	 	2008	 	 	2007	 
	 
	Pro forma revenue
	 	$	3,893.3	 	 	$	3,758.9	 
	Pro forma net income
	 	$	418.4	 	 	$	633.9	 
	Pro forma basic earnings per share
	 	$	2.72	 	 	$	4.11	 
	Pro forma diluted earnings per share
	 	$	2.70	 	 	$	4.07	 
	 






Pensions and other benefits




For the nine months ended September 30, 2008 and 2007, the components of net periodic benefit cost
under U.S. GAAP for defined benefit pensions and other benefits were as follows:



	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	For the nine months ended September 30	 
	 	 	2008	 	 	2007	 
	In millions of Canadian dollars	 	Pensions	 	 	Other Benefits	 	 	Pensions	 	 	Other Benefits	 
	 
	Current service cost
	 	$	73.0	 	 	$	12.3	 	 	$	73.1	 	 	$	12.7	 
	Interest cost
	 	 	333.3	 	 	 	20.5	 	 	 	314.8	 	 	 	20.0	 
	Expected return on plan assets
	 	 	(436.9	)	 	 	(0.5	)	 	 	(415.7	)	 	 	(0.5	)
	Amortization of prior service cost
	 	 	23.4	 	 	 	(1.3	)	 	 	20.5	 	 	 	(1.3	)
	Recognized net actuarial loss
	 	 	35.9	 	 	 	6.1	 	 	 	49.2	 	 	 	6.6	 
	Settlement gain
	 	 	—	 	 	 	(4.3	)	 	 	—	 	 	 	(10.7	)
	 
	Net periodic benefit cost
	 	$	28.7	 	 	$	32.8	 	 	$	41.9	 	 	$	26.8	 
	 






Pension contributions




In 2008, the Company expects to make total contributions of approximately $95 million for all its
defined benefit pension plans, of which $73.2 million was disbursed as at September 30, 2008.



Recent accounting pronouncements




Framework for Fair Value Measurement 




The Company adopted the provisions of FASB Statement No. 157 “Fair Value Measurements”, effective
January 1, 2008 and all related FASB Staff Positions published to the date of this report. The
standard establishes a framework for measuring fair value and expands the disclosures about fair
value measurements. The implementation of this standard did not have a material impact on the
consolidated financial statements as the Company’s current policy on accounting for fair value
measurements is consistent with this guidance.



The fair value of financial instruments reflects the Company’s best estimates of market value based
on generally accepted valuation techniques or models and supported by observable market prices and
rates. When such prices are not available, CP incorporates probability weighted discounted cash
flows considering the best available public information regarding market conditions and other
factors that a market participant would consider for such investments. The fair value of financial
instruments, other than derivatives, represents the amounts that would have been received from or
paid to counterparties to settle these instruments at the reporting date.



7









 





Fair Value of Financial Instruments




The Company categorizes its financial assets and liabilities measured at fair value into one of
three different levels depending on the observability of the inputs employed in the measurement.
Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2
inputs are directly or indirectly observable inputs other than quoted prices. Level 3 inputs are
unobservable inputs for the asset or liability reflecting our assumptions about pricing by market
participants.




	 	•	 	Level 1: This category includes assets and liabilities measured at fair value based on
unadjusted quoted prices for identical assets and liabilities in active markets that are
accessible at the measurement date. An active market for an asset or liability is
considered to be a market where transactions occur with sufficient frequency and volume to
provide pricing information on an ongoing basis.
	 
	 	•	 	Level 2: This category includes valuations determined using directly or indirectly
observable inputs other than quoted prices included within Level 1. Derivative instruments
in this category are valued using models or other industry standard valuation techniques
derived from observable market data. Such valuation techniques include inputs such as
quoted forward prices, time value, volatility factors and broker quotes that can be
observed or corroborated in the market. Instruments valued using inputs in this category
include non exchange traded derivatives such as over the counter financial forward
contracts, as well as swaps for which observable inputs can be obtained for the entire
duration of the derivative instrument.
	 
	 	•	 	Level 3: This category includes valuations based on inputs which are less observable,
unavailable or where the observable data does not support a significant portion of the
instruments’ fair value. Generally, Level 3 valuations are longer dated transactions,
occur in less active markets, occur at locations where pricing information is not
available, or have no binding broker quote to support Level 2 classifications.





When possible the estimated fair value is based on quoted market prices, and, if not available,
estimates from third party brokers. For non exchange traded derivatives classified in Levels 2 and
3, the Company uses standard valuation techniques to calculate fair value. These methods include
discounted mark to market for forwards, futures and swaps. Primary inputs to these techniques
include observable market prices (interest, foreign exchange and commodity) and volatility,
depending on the type of derivative and nature of the underlying risk. The Company uses inputs and
data used by willing market participants when valuing derivatives and considers its own credit
default swap spread as well as those of its counterparties in its determination of fair value.
Wherever possible the Company uses observable inputs. Note 10 of the Company’s third quarter
unaudited interim consolidated financial statements provides a detailed analysis of the techniques
used to value third party asset-backed commercial paper (“ABCP”).



The following table presents the Company’s fair value hierarchy for those assets and liabilities
measured at fair value on a recurring basis as at September 30, 2008.



	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	In millions of Canadian dollars	 	Level 1	 	 	Level 2	 	 	Level 3	 	 	Total	 
	 
	Financial Assets:
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Current financial assets
	 	$	—	 	 	$	15.5	 	 	$	—	 	 	$	15.5	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Long-term financial assets
	 	 	—	 	 	 	11.0	 	 	 	72.7	 	 	 	83.7	 
	 
	Financial Liabilities:
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Current financial liabilities
	 	 	—	 	 	 	26.8	 	 	 	—	 	 	 	26.8	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Long-term financial liabilities
	 	 	—	 	 	 	0.3	 	 	 	—	 	 	 	0.3	 
	 






Fair value measurements using significant unobservable inputs (Level 3)




Below is a roll-forward of assets and liabilities measured at fair value using Level 3 inputs for
the nine months ended September 30, 2008. These instruments, related to ABCP, were valued using
pricing models that, in management’s judgment, reflect the assumptions a market place participant
would use.



8









 





	 	 	 	 	 
	In millions of Canadian dollars	 	Financial Assets	 
	 
	Beginning Balance, January 1, 2008
	 	$	122.1	 
	Total losses, realized and unrealized, included in earnings
	 	 	(49.4	)
	 
	Closing Balance, September 30, 2008
	 	$	72.7	 
	 






Unrealized losses are reported within the caption “Change in estimated fair value of Canadian third
party asset-backed commercial paper” on the face of the Statement of Consolidated Income.



Credit Risk




Entering into derivative financial instruments can result in exposure to credit risk. Credit risk
arises from the possibility that a counterparty will default on its contractual obligations and is
limited to those contracts where the Company would incur a loss in replacing the instrument. The
Company enters into risk management transactions only with institutions that possess investment
grade credit ratings. Credit risk relating to derivative counterparties is mitigated by credit
exposure limits, contractual and collateral requirements, frequent assessment of counterparty
credit ratings and netting arrangements.



Counterparty credit valuation adjustments may be necessary when the market price of an instrument
is not indicative of the fair value due to the credit quality of the counterparty. Generally,
market quotes assume that all counterparties have near zero, or low, default rates and have equal
credit quality. Therefore, an adjustment may be necessary to reflect the credit quality of a
specific counterparty to determine the fair value of the instrument. CP monitors the
counterparties’ credit ratings and could unwind positions if their ratings deteriorate. As of
September 30, 2008, with the exception of the ABCP, the only outstanding derivatives were crude oil
swaps, interest rate swaps, currency forwards, foreign exchange contracts on fuel, and a total
return swap that are all made with major banks.



Fair value option for financial assets and financial liabilities




FASB Statement No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities”
(“FASB 159”), which became effective January 1, 2008, permits an entity to irrevocably elect fair
value on a contract by contract basis as the initial and subsequent measurement attribute for many
financial instruments and certain other items. An entity electing the fair value option would be
required to recognize changes in fair value in earnings. At this time the Company has not elected
to account for any instruments at fair value under the fair value option of FASB 159.



Future accounting changes




FASB Statement No. 141 (revised 2007) — Business Combinations




In December 2007, FASB issued FASB Statement No. 141 (revised 2007) “Business Combinations” (“FASB
141 (revised)”) which replaces FASB Statement No. 141 “Business Combinations”. The new standard
requires the acquiring entity in a business combination, to recognize all the assets acquired and
liabilities assumed in the transaction; and recognize and measure the goodwill acquired in the
business combination or a gain from a bargain purchase. FASB 141 (revised) will be applied
prospectively to business combinations for which the acquisition date is on or after January 1,
2009. The adoption of this accounting standard will not impact the current financial statements of
the Company.



Measurement date of defined benefit pension 




FASB Statement No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of FASB Statements No. 87, 88, 106 and 123R” (“FASB 158”) requires that pension
and other post-retirement benefit plans be measured as of the balance sheet date. The Company’s
Canadian plans are already measured as of the balance sheet date; however, the U.S. pension plans
had a November 30 measurement date. FASB 158 provides two approaches to transition to a fiscal
year-end measurement date, both of which are applied prospectively. Under the first approach, the
plan assets are measured on November 30, 2007, and then re-measured on January 1, 2008. Under the
alternative approach, the plan assets are measured on November 30, 2007 and the next re-measurement
is not until December 31, 2008. CP has elected to adopt this change in measurement date using the
latter approach. The impact of adopting a plan measurement date at the balance sheet date for the



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Company’s U.S. plans is not expected to be material to the financial position and results of
operations for the Company.



FSP 157-2 — Nonfinancial Assets and Nonfinancial Liabilities




In February 2008, the FASB issued FASB Staff Position on Statement No. 157 “Effective
Date of FASB Statement No. 157” (FSP 157-2). FSP 157-2 delays the effective date of
FASB Statement No. 157 for nonfinancial assets and nonfinancial liabilities, except
those that are recognized or disclosed on a recurring basis, to fiscal years beginning
after November 15, 2008. Our significant nonfinancial assets and liabilities that
could be impacted by this deferral include assets and liabilities initially measured at
fair value in a business combination and goodwill tested annually for impairment. The
adoption of FSP 157-2 is not expected to have a significant impact on the financial
position and the results of operations of the Company.



FASB Statement No. 160 — Non-controlling Interests in Consolidated Financial Statements




In December 2007, FASB issued FASB Statement No. 160 “Non-controlling Interests in
Consolidated Financial Statements” (“FASB 160”) which requires the Company to report
non-controlling interests in subsidiaries as equity in the consolidated financial
statements; and all transactions between an entity and non-controlling interests as
equity transactions. FASB 160 is effective for the Company commencing on January 1,
2009 and is unlikely to impact the financial statements of the Company at that time.



FASB Statement No. 161 — Disclosures about Derivative Instruments and Hedging Activities 




In March 2008, the FASB issued FASB Statement No. 161 “Disclosures about Derivative Instruments and
Hedging Activities”. The standard requires enhanced disclosures about an entity’s derivative and
hedging activities. Entities are required to provide enhanced disclosures about (i) how and why an
entity uses derivative instruments, (ii) how derivative instruments and related hedged items are
accounted for, and (iii) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows. The standard increases convergence with
International Financial Reporting Standards, as it relates to disclosures of derivative
instruments. The Company is currently reviewing the guidance, which is effective for fiscal years
beginning after November 15, 2008, to determine the potential impact on its consolidated financial
statements.



FASB Statement No. 162 — The Hierarchy of Generally Accepted Accounting Principles 




In May 2008, the FASB issued FASB Statement No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”. This standard identifies the sources of accounting principles and the
framework for selecting the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with U.S. GAAP. The FASB does not expect
that this standard will result in a change in current practice. FASB Statement No. 162 will become
effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411 “The Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles”. The Company is currently reviewing the guidance to determine the potential
impact, if any, on its consolidated financial statements.




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