EX-99.2 3 a13-4360_1ex99d2.htm EX-99.2

Exhibit 99.2

Consolidated Financial Statements

(Expressed in thousands of United States dollars)

WESTPORT INNOVATIONS INC.

For the year ended December 31, 2012, nine months

ended December 31, 2011 and year ended March 31, 2011

KPMG LLP	Telephone	(604) 691-3000
Chartered Accountants	Fax	(604) 691-3031
PO Box 10426 777 Dunsmuir Street	Internet	www.kpmg.ca
Vancouver BC V7Y 1K3
Canada

INDEPENDENT AUDITORS’ REPORT OF
REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of Westport Innovations Inc.

We have audited the accompanying consolidated financial statements of Westport Innovations Inc., which comprise the consolidated balance sheets as at December 31, 2012 and December 31, 2011, the consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for the year ended December 31, 2012, nine-month period ended December 31, 2011 and year ended March 31, 2011, and notes, comprising a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Consolidated Financial Statements

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

Auditors’ Responsibility

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

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as, evaluating the overall presentation of the consolidated financial statements.

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

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

Westport Innovations Inc.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Westport Innovations Inc. as at December 31, 2012 and December 31, 2011 and its consolidated results of operations and its consolidated cash flows for the year ended December 31, 2012, nine-month period ended December 31, 2011 and year ended March 31, 2011 in accordance with US generally accepted accounting principles.

Other Matter

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Westport Innovation Inc.’s internal control over financial reporting as of December 31, 2012 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 March 6, 2013 expressed an unmodified (unqualified) opinion on the effectiveness of Westport Innovation Inc.’s internal control over financial reporting.

Restatement of Consolidated Financial Statements

Without modifying our opinion, we draw attention to note 2(a) to the consolidated financial statements which indicates the consolidated financial statements as at December 31, 2011 and for the nine month period ended December 31, 2011 and the year ended March 31, 2011 have been restated from those on which we originally reported on February 28, 2012 and more extensively describes the reason for the restatement.

//s// KPMG LLP

Chartered Accountants

March 6, 2013

Vancouver, Canada

KPMG LLP	Telephone	(604) 691-3000
Chartered Accountants	Fax	(604) 691-3031
PO Box 10426 777 Dunsmuir Street	Internet	www.kpmg.ca
Vancouver BC V7Y 1K3
Canada

REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of Westport Innovations Inc.

We have audited Westport Innovations Inc.’s, (the “Company”) internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal 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 accompanying Management’s Report on Financial Statements and Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, 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.

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

Westport Innovations Inc.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012 based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

We also have conducted our audit on the consolidated financial statements in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Our report dated March 6, 2013 expressed an unmodified (unqualified) opinion on those consolidated financial statements.

//s// KPMG LLP

Chartered Accountants

March 6, 2013

Vancouver, Canada

WESTPORT INNOVATIONS INC.

Consolidated Balance Sheets

(Expressed in thousands of United States dollars, except share amounts)

December 31, 2012, with comparative information for 2011

	2012			2011
				(Restated – note 2(a))
Assets
Current assets:
Cash and cash equivalents	$	188,958		$	63,285
Short-term investments	26,902			4,274
Accounts receivable (note 5)	44,189			50,922
Inventories (note 6)	44,946			37,026
Prepaid expenses	6,641			6,462
Current portion of deferred income tax assets (note 20(b))	7,183			15
Other current assets (note 8)	—			2,034
	318,819			164,018
Long-term investments (note 7)	19,118			26,307
Other assets (note 8)	1,852			1,994
Property, plant and equipment (note 9)	58,194			35,408
Intangible assets (note 10)	35,215			36,582
Deferred income tax assets (note 20(b))	—			933
Goodwill (note 11)	56,879			55,814
	$	490,077		$	321,056

Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities (note 12)	$	48,509		$	49,251
Deferred revenue	1,254			478
Current portion of deferred income tax liabilities (note 20(b))	65			—
Loan payable (note 21)	—			19,409
Current portion of long-term debt (note 13)	28,566			20,568
Current portion of warranty liability (note 14)	2,072			1,187
	80,466			90,893
Warranty liability (note 14)	4,308			3,214
Long-term debt (note 13)	52,156			65,577
Deferred revenue	5,215			2,876
Deferred income tax liabilities (note 20(b))	9,245			3,446
Other long-term liabilities (note 15)	2,606			2,460
	153,996			168,466
Shareholders’ equity:
Share capital (note 17):
Authorized:
Unlimited common shares, no par value
Unlimited preferred shares in series, no par value
Issued:
55,294,091 (2011 - 48,455,601) common shares	733,385			459,866
Other equity instruments	9,228			6,112
Additional paid in capital	6,384			4,499
Accumulated deficit	(429,932		)	(331,158		)
Accumulated other comprehensive income	17,016			13,271
	336,081			152,590
Commitments and contingencies (notes 16 and 23)
	$	490,077		$	321,056

See accompanying notes to consolidated financial statements.

Approved on behalf of the Board:

/s/ Douglas R. King

Director

/s/ John A. Beaulieu

Director

WESTPORT INNOVATIONS INC.

Consolidated Statements of Operations

(Expressed in thousands of United States dollars, except share and per share amounts)

	Year ended December 31,			Nine months ended December 31,			Year ended March 31,
	2012			2011			2011
				(Restated – note 2(a))			(Restated – note 2(a))

Product revenue	$	128,914		$	75,164		$	25,863
Parts revenue	3,468			2,351			2,784
Service and other revenue (note 22)	23,244			10,181			8,128
	155,626			87,696			36,775

Cost of revenue and expenses:
Cost of product and parts revenue	102,486			67,093			23,993
Research and development (notes 18(d) and 19)	73,198			36,574			24,620
General and administrative (note 18(d))	44,811			22,738			15,030
Sales and marketing (note 18(d))	30,112			15,302			13,985
Foreign exchange loss (gain)	1,185			(13		)	2,247
Depreciation and amortization	11,395			6,200			3,375
Bank charges, interest and other	737			917			446
	263,924			148,811			83,696

Loss before undernoted	(108,298		)	(61,115		)	(46,921		)

Income from investment accounted for by the equity method (note 7)	16,190			16,498			7,585
Interest on long-term debt and amortization of discount	(5,354		)	(2,998		)	(3,323		)
Interest and other income	426			661			938

Loss before income taxes	(97,036		)	(46,954		)	(41,721		)

Income tax recovery (expense) (note 20):
Current	(2,147		)	(1,028		)	68
Deferred	409			2,188			(489		)
	(1,738		)	1,160			(421		)
Net loss for the period	$	(98,774	)	$	(45,794	)	$	(42,142	)

Loss per share:
Basic and diluted	$	(1.83	)	$	(0.96	)	$	(1.00	)

Weighted average common shares outstanding:
Basic and diluted	54,072,513			47,933,348			42,305,889

See accompanying notes to consolidated financial statements.

WESTPORT INNOVATIONS INC.

Consolidated Statements of Comprehensive Income (Loss)

(Expressed in thousands of United States dollars)

	Year ended December 31,			Nine months ended December 31,			Year ended March 31,
	2012			2011			2011
				(Restated – note 2(a))			(Restated – note 2(a))

Loss for the period	$	(98,774	)	$	(45,794	)	$	(42,142	)
Other comprehensive income (loss):
Cumulative translation adjustment	3,745			(12,370		)	7,414

Comprehensive loss	$	(95,029	)	$	(58,164	)	$	(34,728	)

See accompanying notes to consolidated financial statements.

WESTPORT INNOVATIONS INC.

Consolidated Statements of Shareholders’ Equity

(Expressed in thousands of United States dollars, except share amounts)

	Common shares outstanding		Share capital			Other equity instruments			Additional paid in capital			Accumulated deficit			Accumulated other comprehensive income			Total shareholders’ equity

Balance, March 31, 2010 (Restated - note 2(a))	38,494,475		$	293,609		$	9,825		$	3,998		$	(242,367	)	$	18,227		$	83,292

Issue of common shares on exercise of stock options	472,414		5,115			—			(1,817		)	—			—			3,298
Issue of common shares on exercise of performance share units	241,825		3,239			(3,239		)	—			—			—			—
Issue of common shares on exercise of warrants	858,221		13,853			(4,344		)	—			—			—			9,509
Cancellation of common shares	(52,131	)	(895		)	—			—			—			—			(895		)
Reclassification of fair value of expired warrants	—		—			(2,413		)	2,413			—			—			—
Stock-based compensation	—		—			4,376			547			—			—			4,923
Issue of common shares on public offering	6,957,500		121,756			—			—			—			—			121,756
Share issuance costs	—		(6,069		)	—			—			—			—			(6,069		)
Net loss for the year	—		—			—			—			(42,142		)	—			(42,142		)
Other comprehensive income	—		—			—			—			—			7,414			7,414

Balance, March 31, 2011 (Restated - note 2(a))	46,972,304			430,608			4,205			5,141			(284,509	)		25,641			181,086

Issue of common shares on exercise of stock options	225,845		2,810			—			(994		)	—			—			1,816
Issue of common shares on exercise of performance share units	391,612		3,799			(3,799		)	—			—			—			—
Issue of common shares in connection with acquisitions	915,021		23,052			—			—			—			—			23,052
Cancellation of common shares	(49,181	)	(403		)	—			—			(855		)	—			(1,258		)
Stock-based compensation	—		—			5,706			352			—			—			6,058
Net loss for the period	—		—			—			—			(45,794		)	—			(45,794		)
Other comprehensive loss	—		—			—			—			—			(12,370		)	(12,370		)

Balance, December 31, 2011 (Restated - note 2(a))	48,455,601			459,866			6,112			4,499			(331,158	)		13,271			152,590

Issue of common shares on exercise of stock options	93,044		1,492			—			(523		)	—			—			969
Issue of common shares on exercise of performance share units	420,446		6,597			(6,597		)	—			—			—			—
Issue of common shares on public offering	6,325,000		273,556			—			—			—			—			273,556
Share issue costs	—		(8,126		)	—			—			—			—			(8,126		)
Stock-based compensation	—		—			9,713			2,408			—			—			12,121
Net loss for the year	—		—			—			—			(98,774		)	—			(98,774		)
Other comprehensive income	—		—			—			—			—			3,745			3,745

Balance, December 31, 2012	55,294,091		$	733,385		$	9,228		$	6,384		$	(429,932	)	$	17,016		$	336,081

See accompanying notes to consolidated financial statements.

WESTPORT INNOVATIONS INC.

Consolidated Statements of Cash Flows

(Expressed in thousands of United States dollars)

	Year ended December 31,			Nine months ended December 31,			Year ended March 31,
	2012			2011			2011
				(Restated – note 2(a))			(Restated – note 2(a))
Cash flows from operating activities:
Loss for the period	$	(98,774	)	$	(45,794	)	$	(42,142	)
Items not involving cash:
Depreciation and amortization	11,395			6,200			3,375
Stock-based compensation expense	12,468			6,179			4,923
Deferred income tax expense (recovery)	(409		)	(2,188		)	489
Change in deferred lease inducements	(52		)	(47		)	(58		)
Income from investment accounted for by the equity method	(16,190		)	(16,498		)	(7,585		)
Accretion of long-term debt	2,094			1,016			1,992
Other	392			654			165
Changes in non-cash operating working capital:
Accounts receivable	6,733			(14,598		)	3,919
Inventories	(7,920		)	(2,051		)	(1,927		)
Prepaid expenses	179			(4,649		)	(457		)
Accounts payable and accrued liabilities	(742		)	(857		)	127
Deferred revenue	3,115			1,561			162
Warranty liability	1,979			2,751			(384		)
	(85,732		)	(68,321		)	(37,401		)
Cash flows from investing activities:
Purchase of property, plant and equipment	(30,363		)	(13,123		)	(3,171		)
Purchase of intangible assets	(989		)	(123		)	—
(Purchase) sale of short-term investments, net	(22,520		)	26,621			3,376
Repayment of loan receivable	2,494			—			—
Increase in loan payable	2,450			29,080			18,961
Repayment of loan payable	(21,840		)	(23,840		)	(21,207		)
Acquisitions, net of acquired cash (note 4)	(1,125		)	(9,084		)	(13,016		)
Investment in equity interest (note 7)	—			(955		)	(4,316		)
Dividends received from joint venture	22,600			10,000			6,000
	(49,293		)	18,576			(13,373		)
Cash flows from financing activities:
Repayment of demand installment loan	—			—			(3,206		)
Increase in operating lines of credit	4,245			—			—
Repayment on operating lines of credit	(3,118		)	(3,240		)	—
Repayment of short-term debt	—			(221		)	—
Repayment of long-term debt	(6,725		)	(53,057		)	(117		)
Issuance of subordinated debenture notes	—			34,345			—
Finance costs incurred	—			(1,392		)	—
Proceeds from stock options exercised	969			1,816			3,298
Shares issued for cash	273,556			—			131,265
Share issuance costs	(8,126		)	—			(6,069		)
	260,801			(21,749		)	125,171
Effect of foreign exchange on cash and cash equivalents	(103		)	3,246			3,116

Increase (decrease) in cash and cash equivalents	125,673			(68,248		)	77,513

Cash and cash equivalents, beginning of period	63,285			131,533			54,020

Cash and cash equivalents, end of period	$	188,958		$	63,285		$	131,533

WESTPORT INNOVATIONS INC.

Consolidated Statements of Cash Flows (Continued)

(Expressed in thousands of United States dollars)

	Year ended December 31,		Nine months ended December 31,		Year ended March 31,
	2012		2011		2011
			(Restated – note 2(a))		(Restated – note 2(a))
Supplementary information:
Interest paid	$	3,532	$	1,349	$	1,729
Taxes paid, net of refunds	1,982		1,472		842
Non-cash transactions:
Purchase of property, plant and equipment by assumption of capital lease obligation	—		34		—
Shares issued on exercise of performance share units	6,597		3,799		3,239
Cancellation of performance share units	—		1,258		895
Common shares issued in connection with acquisitions (note 4)	—		23,052		—
Contingent consideration payable in common shares in connection with acquisitions (note 4)	—		428		—

See accompanying notes to consolidated financial statements.

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011

and year ended March 31, 2011

1. Company organization and operations:

Westport Innovations Inc. (the “Company”) was incorporated under the Business Corporations Act (Alberta) on March 20, 1995.

The Company is a provider of high-performance, low-emission engine and fuel system technologies utilizing gaseous fuels. Its technology and products enable light (<5.9-litre), medium (5.9- to 8.9-litre), heavy-duty (11- to 16-litre) and high horsepower (>16-litre) petroleum-based fuel engines to use primarily natural gas, giving users a cleaner, more plentiful and generally less expensive alternative fuel.

The Company is focused on developing technology to enable more environmentally sustainable engines without compromising the performance, fuel economy, durability and reliability of diesel engines. The substitution of natural gas for petroleum-based fuel drives a significant reduction in harmful combustion emissions, such as nitrogen oxides, particulate matter and greenhouse gas, in addition to providing an abundant, relatively inexpensive alternative fuel. The Company’s systems can be used to enable combustion engines to use gaseous fuels, such as natural gas, propane or hydrogen. The Company’s research and development effort and investment have resulted in a substantial patent portfolio that serves as the foundation for its differentiated technology offerings and competitive advantage.

2. Significant accounting policies:

(a) Basis of presentation:

The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and variable interest entities (“VIEs”) for which the Company is considered the primary beneficiary. All Intercompany balances and transactions have been eliminated on consolidation.

Interests in variable interest entities are consolidated by the Company if the Company is the primary beneficiary thereof.

In its’ previously filed annual and the interim financial statements in fiscal 2012 and 2011, the Company had identified Cummins Westport Inc. (“CWI”) as a variable interest entity and the Company’s interest as being that of the primary beneficiary upon adoption of ASU 2009-17 effective April 1, 2010. As a result, the Company consolidated CWI on a line by line basis in its consolidated financial statements reflecting its financial position, results of operations and cash flows.

Based on the Company’s ongoing review and adoption of the applicable accounting guidance in ASU 2009-17 and related interpretations, the Company concluded that the presentation of CWI under the equity method is more appropriate as CWI continues to be a VIE but there is no primary beneficiary. Accordingly, commencing with the annual report for the year ended December 31, 2012, the Company is recording the results of CWI using the equity method and has restated its consolidated financial statements for the nine month period ended December 31, 2011 and the year ended March 31, 2011 on a similar basis. This restatement did not affect the reported amounts of net loss, loss per share or shareholders’ equity but has impacted certain amounts disclosed. The Company’s interest in the net assets of CWI is now presented net on a single line in other long term investments on the balance sheet and the Company’s share of net earnings of CWI is reflected in income from investments accounted for by the equity method on statement of operations. The assets, liabilities, revenues and expenses of CWI previously included on the balance sheet and statement of operations on a line by line basis are summarized in note 7(b). There was no cumulative effect from adoption of ASU 2009-17 at April 1, 2010.

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011

and year ended March 31, 2011

2. Significant accounting policies (continued):

(a) Basis of presentation (continued):

These consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).

(b) Foreign currency translation:

The Company’s reporting currency for its consolidated financial statement presentation is the United States dollar. The functional currency of the Company’s operations is the Canadian dollar except for OMVL and Emer which use the Euro and AFV which uses the Swedish Krona. The Company translates financial statements denominated in a foreign currency into the reporting currency using the current rate method. All assets and liabilities are translated using the period end exchange rates. Shareholders’ equity balances are translated using a weighted average of historical exchange rates. Revenues and expenses are translated using the monthly average rate for the period. All resulting exchange differences are recognized in other comprehensive income.

Transactions that are denominated in currencies other than the functional currency of the Company or its subsidiaries are translated at the rate in effect on the date of the transaction. Foreign currency denominated monetary assets and liabilities are translated at the exchange rate in effect on the balance sheet date. Non-monetary assets and liabilities are translated at the historical exchange rate. All foreign exchange gains and losses are recognized in the statement of operations, except for the translation gains and losses arising from available-for-sale instruments, which are recorded through other comprehensive income until realized through disposal or impairment.

Except as otherwise noted, all amounts in these financial statements are presented in U.S. dollars. The year-end exchange rate of the Canadian dollar as at December 31, 2012 was $0.99 (December 31, 2011 - $1.02), and the average exchange rate for the year ended December 31, 2012 was $1.00 (nine month period ended December 31, 2011 - $1.01; year ended March 31, 2011 - $0.98). The year-end exchange rate of the Euro as at December 31, 2012 was 1.32 (December 31, 2011 - 1.30), and the average exchange rate for the year ended December 31, 2012 was 1.29 (nine month period ended December 31, 2011 – 1.40; July 2, 2010 to March 31, 2011 - 1.34). The year-end exchange rate of the Swedish Krona as at December 31, 2012 was 0.15 (December 31, 2011 - 0.15) and the average exchange rate for the year ended December 31, 2012 was 0.15 (October 12, 2011 to December 31, 2011 – 0.15).

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011

and year ended March 31, 2011

2. Significant accounting policies (continued):

Cash and cash equivalents includes cash, term deposits, bankers acceptances and guaranteed investment certificates with maturities of ninety days or less when acquired. Cash equivalents are considered as held for trading and recorded at fair value with changes in fair value recognized in the consolidated statements of operations.

(d) Short-term investments:

Short-term investments, consisting of investment grade commercial paper, banker acceptances, bearer deposit notes, guaranteed investment certificates and other term deposits, are considered available for sale and recorded at fair value with changes in fair value recognized in accumulated other comprehensive income until realized. A decline in value that is considered other than temporary is recognized in net loss for the period.

(e) Accounts and loans receivable:

Accounts receivable and loans receivable are measured at amortized cost. An allowance for doubtful accounts is recorded based on a review of specific accounts deemed uncollectible. Account balances are charged against the allowance in the period in which it is considered probable that the receivable will not be recovered.

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011

and year ended March 31, 2011

2. Significant accounting policies (continued):

(f) Inventories:

The Company’s inventories consist of the Company’s fuel system products (finished goods), work-in-progress, purchased parts and assembled parts. Inventories are recorded at the lower of cost and net realizable value. Cost is determined based on the lower of weighted average cost and net realizable value. The cost of fuel system product inventories, assembled parts and work-in-progress includes materials, labour and production overhead including depreciation. An inventory obsolescence provision is provided to the extent cost of inventory exceeds net realizable value. In establishing the amount of the inventory obsolescence provision, management estimates the likelihood that inventory carrying values will be affected by changes in market demand and technology, which would make inventory on hand obsolete.

(g) Property, plant and equipment:

Property, plant and equipment are stated at cost. Depreciation is provided as follows:

Assets	Basis	Rate

Buildings	Straight-line	10 years
Computer equipment and software	Straight-line	3 years
Furniture and fixtures	Straight-line	5 years
Machinery and equipment	Straight-line	8 – 10 years
Leasehold improvements	Straight-line	Lease term

(h) Long-term investments:

The Company accounts for investments in which it has significant influence, including VIE’s for which the Company is not the primary beneficiary, using the equity basis of accounting. Under the equity method, the Company recognizes its share of income from equity accounted for investees in the statement of operations with a corresponding increase in long-term investments. Any dividends paid or payable are credited against long-term investments.

(i) Financial liabilities:

Accounts payable and accrued liabilities, short-term debt and long-term debt are measured at amortized cost. Transaction costs relating to long-term debt are deferred in other assets on initial recognition and are amortized using the effective interest rate method.

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011

and year ended March 31, 2011

2. Significant accounting policies (continued):

(j) Research and development costs:

Research and development costs are expensed as incurred and are recorded net of government funding received or receivable.

(k) Government assistance:

The Company periodically applies for financial assistance under available government incentive programs, which is recorded in the period it is received or receivable. Government assistance relating to the purchase of property, plant and equipment is reflected as a reduction of the cost of such assets. Government assistance related to research and development activities is recorded as a reduction of the related expenditures.

(l) Intangible assets:

Intangible assets consist primarily of the cost of intellectual property, trademarks, technology, customer contracts and non-compete agreements. Intangible assets are amortized over their estimated useful lives, which range from 5 to 20 years.

(m) Impairment of long-lived assets:

The Company reviews its long-lived assets for impairment, including property, plant and equipment and intellectual property, to be held and used whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If such conditions exist, assets are considered impaired if the sum of the undiscounted expected future cash flows expected to result from the use and eventual disposition of an asset is less than its carrying amount. An impairment loss is measured at the amount by which the carrying amount of the asset exceeds its fair value. When quoted market prices are not available, the Company uses the expected future cash flows discounted at a rate commensurate with the risks associated with the recovery of the asset as an estimate of fair value.

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011

and year ended March 31, 2011

2. Significant accounting policies (continued):

(n) Goodwill impairment:

Goodwill is not amortized and instead is tested at least annually for impairment, or more frequently when events or changes in circumstances indicate that goodwill might be impaired. This impairment test is performed annually at November 30.

A two-step test is used to identify a potential impairment and to measure the amount of impairment, if any. The first step is to compare the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is considered not impaired; otherwise, goodwill is impaired and the loss is measured by performing step two. Under step two, the impairment loss is measured by comparing the implied fair value of the reporting unit goodwill with the carrying amount of goodwill.

Fair value is determined using widely accepted valuation techniques, including discounted cash flows and market multiple analyses. These types of analyses contain uncertainties because they require management to make assumptions and to apply judgment to estimate industry economic factors and the profitability of future business strategies. It is the Company’s policy to conduct impairment testing based on its current business strategy in light of present industry and economic conditions, as well as its future expectations.

Goodwill is recorded at the time of purchase for the excess of the amount of the purchase price over the fair values of the assets acquired and liabilities assumed. Future adverse changes in market conditions or poor operating results of underlying assets could result in losses or an inability to recover the carrying value of the goodwill, thereby possibly requiring an impairment charge.

(o) Warranty liability:

Estimated warranty costs are recognized at the time the Company sells its products and are included in cost of revenue. The Company provides warranty coverage on products sold for a period of two years from the date the products are put into service by customers. Warranty liability represents the Company’s best estimate of warranty costs expected to be incurred during the warranty period. Furthermore, the current portion of warranty liability represents the Company’s best estimate of the costs to be incurred in the next twelve-month period. The Company uses historical failure rates and cost to repair defective products together with known information to estimate the warranty liability. New product launches require a greater use of judgment in developing estimates until claims experience becomes available. Product specific experience is typically available four or five quarters after product launch, with a clear experience trend not evident until eight to twelve quarters after launch. The Company records warranty expense for new products upon shipment using a factor based upon historical experience from previous engine generations in the first year, a blend of actual product and historical experience in the second year and product specific experience thereafter. The amount payable by the Company and the timing will depend on actual failure rates and cost to repair failures of its products. Since a number of the Company’s products are new in the market, historical data may not necessarily reflect actual costs to be incurred and may result in significant fluctuations in the warranty liability.

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011

and year ended March 31, 2011

2. Significant accounting policies (continued):

(p) Extended warranty:

The Company sells extended warranty contracts that provide coverage in addition to the basic two-year coverage. Proceeds from the sale of these contracts are deferred and amortized over the extended warranty period commencing at the end of the basic warranty period. On a periodic basis, management reviews the estimated warranty costs expected to be incurred related to these contracts and recognizes a loss to the extent such costs exceed the related deferred revenue.

(q) Revenue recognition:

Product and parts revenue is recognized when the products are shipped and title passes to the customer. Revenue also includes fees earned from performing research and development activities for third parties, as well as technology license fees from third parties. Revenue from research and development activities is recognized as the services are performed. Revenue from technology license fees is recognized over the duration of the licensing agreement. Amounts received in advance of the revenue recognition criteria being met are recorded as deferred revenue.

The Company also earns service revenue from certain research and development arrangements under which the Company provides contract services relating to developing natural gas engines or biogas engines for use in customer products. Service revenue is recognized using the milestone method upon completion of project milestones as defined and agreed to by the Company and its customers. The Company recognizes consideration earned from the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. The payment associated with each milestone relates solely to past performance and is deemed reasonable upon consideration of deliverables and the payment terms within the contract.

When an arrangement includes multiple deliverables, the Company allocates the consideration to each separate deliverable (unit of accounting) based on relative selling prices. A separate unit of accounting is identified if the delivered item(s) have standalone value and the delivery or performance of undelivered items is considered probable and within the control of the Company. Revenue for each unit of account is recognized in accordance with the above revenue recognition principles.

(r) Income taxes:

The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are determined based on temporary differences between the accounting and tax basis of the assets and liabilities and for loss carry forwards and are measured using the tax rates expected to apply when these tax assets and liabilities are recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes income tax laws that have been enacted at the balance sheet date. A valuation allowance is provided to reduce the deferred income tax assets if, based upon available evidence, it is more-likely-than-not that some or all of the deferred income tax assets will not be realized.

Tax credits, including investment tax credits and research and development credits, are recognized in income tax expense in the same year in which the related expenditures are charged to earnings or loss, provided there is reasonable assurance the benefits will be realized.

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011

and year ended March 31, 2011

3. Accounting changes:

(a) Adoption of new accounting standards:

Fair value measurements:

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updated (“ASU”) No. 2011-04, Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, (“ASU 2011-04”). ASU 2011-04 changes the language used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is to be applied prospectively. This update was effective for the Company on January 1, 2012. The adoption of this update did not have a material impact on the Company’s consolidated financial statement note disclosures.

Comprehensive income:

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, (“ASU 2011-05”). ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in equity. ASU 2011-05 requires that all non-owner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. In December 2011, the FASB issued ASU No. 2011-12 (“ASU 2011-12”), which defers certain requirements within ASU 2011-05. These amendments are being made to allow the FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income in all periods presented. This new guidance is to be applied retrospectively. This update was effective for the Company on January 1, 2012. The adoption of this update did not have a material impact on the Company’s consolidated financial statements.

Intangibles – goodwill and other:

In September 2011, the FASB issued ASU No. 2011-08, Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment (“ASU 2011-08”), which allows an entity to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. This update was effective for the Company on January 1, 2012. The adoption of this update did not have a material impact on the Company’s goodwill impairment test and the Company’s consolidated financial statement note disclosures.

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011

and year ended March 31, 2011

3. Accounting changes (continued):

(b) New accounting pronouncements:

Balance sheet:

In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). ASU 2011-11 enhances disclosures regarding financial instruments and derivative instruments. Entities are required to provide both net information and gross information for these assets and liabilities in order to enhance comparability between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of IFRS. This new guidance is to be applied retrospectively and is effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods. The Company anticipates that the adoption of this standard will expand its consolidated financial statement note disclosures.

4. Business combinations:

(a) Acquisition of Emer:

On July 1, 2011, the Company acquired, through its wholly owned subsidiary, Juniper Engines Italy S.r.l., 100% of the outstanding shares of Emer from the seller. The fair value of the consideration for the acquisition was $39,706. Westport paid cash of $17,607 on closing and issued 881,860 common shares with a value of $22,099 based on the NASDAQ closing price of the Company’s shares on July 1, 2011 of $25.06. The Company also assumed approximately $77,000 in existing net debt of Emer. Post-closing, Westport repaid approximately $36,300 of the debt, leaving approximately $40,700 in debt on the consolidated balance sheet as of July 1, 2011.

The acquisition was accounted for as a business combination using the purchase method. The results of Emer have been included in the consolidated financial statements of the Company from July 1, 2011.

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011

and year ended March 31, 2011

4. Business combinations (continued):

(a) Acquisition of Emer (continued):

The Company obtained an independent third-party valuation of inventories, property and equipment, and intangible assets. The fair value of the assets acquired and liabilities assumed are as follows:

Consideration allocated to:
Property, plant and equipment	$	17,644
Other tangible assets, including cash of $11,073	60,532
Intangible assets subject to amortization over 5 to 20 years	32,954
Goodwill	50,774

Total assets acquired	161,904
Less:
Long-term debt	(83,272		)
Other liabilities	(38,926		)

Total net assets acquired	$	39,706

Consideration:
Cash	$	17,607
Common shares	22,099

	$	39,706

The foreign exchange rate used to translate Euro denominated net assets acquired, liabilities assumed and purchase consideration into U.S. dollars was 1.45 based on the July 1, 2011 closing rate.

The Company recognized goodwill associated with the transaction of $50,774. Goodwill includes the value of the assembled work force and expected synergies including access to markets and supply chain integration. Goodwill is not deductible for tax purposes.

The consolidated financial statements reflect consolidated revenue and net loss for Emer of $31,831 and $1,924, respectively, from July 1, 2011 to December 31, 2011. Had the Company acquired Emer on April 1, 2011, consolidated pro forma revenue and net loss for the nine-month period ended December 31, 2011 would have been $247,216 (year ended March 31, 2011 - $219,609) and $54,927 (year ended March 31, 2011 - $31,322), respectively, not including the financial results of AFV (note 4(b)).

The Company incurred acquisition related expenses of $1,683 during the nine months ended December 31, 2011, which have been recorded in general and administrative expenses in the consolidated statements of operations.

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011

and year ended March 31, 2011

4. Business combinations (continued):

(b) Acquisition of AFV:

On October 11, 2011, the Company acquired, through its wholly owned subsidiary Westport Light Duty Canada Inc., 100% of the outstanding shares of AFV. The fair value of the consideration for the acquisition was $3,939. Westport paid cash of $2,558 on closing and issued 33,161 common shares with a value of $953 based on the TSX closing price of the Company’s shares on October 11, 2011 of $28.74 (CDN$29.56). There is also a contingent earn-out, which will be settled in Westport shares if AFV achieves certain performance targets by December 31, 2014.

The Company also assumed approximately $1,087 in existing debt of AFV. Upon closing, Westport settled $420 of the debt, leaving approximately $667 in debt on the consolidated balance sheet as of October 11, 2011.

The acquisition was accounted for as a business combination using the purchase method. The results of AFV have been included in the consolidated financial statements of the Company from October 11, 2011.

The fair value of the assets acquired and liabilities assumed are as follows:

Consideration allocated to:
Total tangible assets, including cash of $8	$	2,161
Intangible assets subject to amortization over 8 years	2,638
Goodwill	2,701

Total assets acquired	7,500
Less: total liabilities	(3,561		)

Total net assets acquired	$	3,939

Consideration:
Cash	$	2,558
Common shares	953
Contingent consideration payable	428

	$	3,939

The foreign exchange rate used to translate net assets acquired, liabilities assumed and purchase consideration from Swedish Krona into U.S. dollars was 6.6712 based on the October 11, 2011 closing rate.

The Company recognized goodwill associated with the transaction of $2,701. Goodwill includes the value of the assembled work force and expected synergies including access to markets and product know-how. Goodwill is not deductible for tax purposes.

The consolidated financial statements reflect consolidated revenue and net loss for AFV of $2,566 and $191, respectively, from October 11, 2011 to December 31, 2011. Had the Company acquired AFV on April 1, 2011, consolidated pro forma revenue and net loss for the nine months ended December 31, 2011 would have been $201,707 (year ended March 31, 2011 - $148,062) and $43,064 (year ended March 31, 2011 - $42,724), respectively, not including the financial results of Emer (note 4(a)).

The Company incurred acquisition related expenses of $93 during the nine months ended December 31, 2011, which have been recorded in general and administrative expenses in the consolidated statements of operations.

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011

and year ended March 31, 2011

4. Business combinations (continued):

On March 20, 2012, the Company acquired, through its wholly owned subsidiary, Westport Innovations (Australia) Pty Ltd., certain assets of AEC. Based in Perth, Australia, AEC specializes in research, development and production of patented electronic fuel injection and engine management technologies that enable vehicle engines to operate on natural gas.

The fair value of the assets acquired and liabilities assumed are as follows:

Consideration allocated to:
Total tangible assets	$	685
Intangible assets subject to amortization over 8 years	832

Total assets acquired	1,517
Less: total liabilities	(392		)

Total net assets acquired	$	1,125

The Company paid cash totaling $1,125 (AUD$1,082) for the acquisition. The Company also assumed AEC’s Australian leased facility and approximately ten of AEC’s employees. The acquisition was accounted for as a business combination using the purchase method.

The foreign exchange rate used to translate Australian dollar denominated assets acquired, liabilities assumed and purchase consideration into U.S. dollars was 1.04 based on the March 20, 2012 closing rate.

The Company incurred acquisition related expenses of $280 during the year ended December 31, 2012, which have been recorded in general and administrative expenses in the consolidated statement of operations.

The Company has determined that the acquisition of AEC was a non-material business combination. As such, pro forma disclosures are not required.

5. Accounts receivable:

	December 31, 2012			December 31, 2011

Customer trade receivable	$	39,754		$	43,181
Government funding receivable	541			582
Due from joint venture (note 21)	2,127			416
Other receivables	1,916			7,528
Income taxes receivable	172			—
Allowance for doubtful accounts	(321		)	(785		)

	$	44,189		$	50,922

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011

and year ended March 31, 2011

6. Inventories:

	December 31, 2012			December 31, 2011

Purchased parts	$	25,454		$	19,989
Assembled parts	4,870			4,198
Work-in-process	7,516			6,994
Finished goods	7,385			6,360
Obsolescence provision	(279		)	(515		)

	$	44,946		$	37,026

During the year ended December 31, 2012, the Company recorded a write-down to net realizable value of approximately $233 (nine months ended December 31, 2011 - $430; year ended March 31, 2011 - nil) for obsolescence and scrap. Cost of revenue related to product and parts revenue for the year ended December 31, 2012 was $102,486 (nine months ended December 31, 2011 - $67,093; year ended March 31, 2011 - $23,993).

7. Long-term investments:

	December 31, 2012		December 31, 2011

Weichai Westport Inc. (a)	$	11,275	$	7,732
Cummins Westport Inc. (b)	7,138		17,792
Other equity accounted for investees	705		783

	$	19,118	$	26,307

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011

and year ended March 31, 2011

7. Long-term investments (continued):

(a) Weichai Westport Inc.:

On July 3, 2010, the Company invested $4,316 under an agreement with Weichai Power Co. Ltd. and Hong Kong Peterson (CNG) Equipment Ltd. to form Weichai Westport Inc. (“WWI”). On October 11, 2011, the Company invested an additional $955 in WWI. The Company has a 35% equity interest in WWI.

For the year ended December 31, 2012, the Company recognized its share of WWI’s income of $2,881 (nine months ended December 31, 2011 - $1,438; year ended March 31, 2011 - $997), as income from investment accounted for by the equity method.

Assets, liabilities, revenue and expenses of WWI as of and for the periods presented are as follows:

	December 31, 2012		December 31, 2011

Current assets:
Cash and short-term investments	$	1,145	$	3,073
Accounts receivable	21,512		10,005
Inventory	55,109		23,903
Other current assets	1,053		751
Long-term assets	8,178		4,179

	$	86,997	$	41,911

	December 31, 2012		December 31, 2011

Current liabilities:
Accounts payable and accrued liabilities	$	49,125	$	20,567
Other current liabilities	12,055		4,248

Total liabilities	$	61,180	$	24,815

	Year ended December 31, 2012		Nine months ended December 31, 2011		Year ended March 31, 2011

Product revenue	$	272,086	$	84,917	$	53,127

Cost of revenue and expenses:
Cost of product revenue	234,266		70,345		43,130
Operating expenses	28,055		9,693		6,624
	262,321		80,038		49,754

Income before income taxes	9,765		4,879		3,373

Income tax expense:
Current	1,536		1,364		528

Income for the period	$	8,229	$	3,515	$	2,845

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011

and year ended March 31, 2011

7. Long-term investments (continued):

(b) Cummins Westport Inc.:

The Company entered into a joint venture with Cummins on March 7, 2001. On December 16, 2003, the Company and Cummins amended the joint venture agreement (“JVA”) focusing CWI on developing markets for alternative fuel engines. In addition, the two companies signed a Technology Partnership Agreement that creates a flexible arrangement for future technology development between Cummins and the Company.

The Company has determined that CWI is a variable interest entity. Cummins and Westport each own 50% of the common shares of CWI and have equal representation on the Board of Directors. No one shareholder has the unilateral power to govern CWI. The Board of Directors has power over the operating decisions and to direct other activities of CWI that most significantly impact CWI’s economic performance as set forth in the governing documents. As decision-making at the Board of Directors’ level requires unanimous approval, this power is shared. Accordingly neither party is the primary beneficiary.

On February 20, 2012, the JVA was amended and restated to provide for, among other things, clarification concerning the scope of products within CWI. In addition, the parties have revised certain economic terms of the JVA.

Under the prior JVA, CWI had a global exclusive right to design, engineer, and market mid-range on-road spark-ignited natural gas engines based on Cummins diesel engines manufactured in Cummins facilities. The Company and Cummins have agreed in the amended and restated JVA to focus CWI’s future product development on North American markets including engines for on-road applications between the displacement range of 5.9 litres through 12 litres and to have these engines manufactured in Cummins North American plants.

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011

and year ended March 31, 2011

7. Long-term investments (continued):

(b) Cummins Westport Inc. (continued):

The joint venture will now have a term of ten years and can be terminated under certain circumstances before the end of the term, including in the event of a material breach of the agreement by, or in the event of a change of control of, one of the parties.

Prior to February 20, 2012, the Company and Cummins shared equally in the profits and losses of CWI. Under the new JVA, profits and losses are shared equally up to an established revenue baseline, then any excess profit will be allocated 75% to the Company and 25% to Cummins.

The Company has not historically provided and does not intend to provide financial or other support to CWI that the Company is not previously contractually required to provide.

For the year ended December 31, 2012, the Company recognized its share of CWI’s income of $13,232 (nine months ended December 31, 2011 - $12,958; year ended March 31, 2011 - $7,785), as income from investment accounted for by the equity method.

Assets, liabilities, revenue and expenses of CWI as of and for the periods presented are as follows (amounts as at December 31, 2011 and for the nine months ended December 31, 2011 and the year ended March 31, 2011 had previously been consolidated and in 2012 have been retrospectively deconsolidated as described in note 2(a)):

	December 31, 2012		December 31, 2011

Current assets:
Cash and short-term investments	$	44,371	$	17,403
Accounts receivable	6,995		4,717
Loan receivable	—		38,818
Current portion of deferred income tax assets	7,304		6,432
Other current assets	225		89
Long-term assets
Property, plant and equipment	896		835
Deferred income tax assets	9,786		4,142

Total assets	$	69,577	$	72,436

	December 31, 2012		December 31, 2011

Current liabilities:
Current portion of warranty liability	$	13,317	$	11,791
Current portion of deferred revenue	3,862		2,668
Accounts payable and accrued liabilities	7,274		5,878
	24,453		20,337

Long-term liabilities:
Warranty liability	17,501		8,039
Deferred revenue	9,968		7,451
Other long-term liabilities	1,312		644
	28,781		16,134

Total liabilities	$	53,234	$	36,471

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011

and year ended March 31, 2011

7. Long-term investments (continued):

(b) Cummins Westport Inc. (continued):

	Year ended December 31, 2012			Nine months ended December 31, 2011			Year ended March 31, 2011

Product revenue	$	161,741		$	114,518		$	84,612
Parts revenue	36,274			24,326			26,675
	198,015			138,844			111,287

Cost of revenue and expenses:
Cost of product and parts revenue	136,575			78,837			66,989
Research and development	12,114			6,720			10,043
General and administrative	1,417			796			1,181
Sales and marketing	12,541			9,659			7,675
Foreign exchange loss (gain)	(18		)	(2,023		)	160
Bank charges, interest and other	472			369			299
	163,101			94,358			86,347

Income before undernoted	34,914			44,486			24,940

Interest and investment income	530			297			284

Income before income taxes	35,444			44,783			25,224

Income tax recovery (expense):
Current	(16,362		)	(18,602		)	(8,954		)
Deferred	6,517			1,775			(272		)
	(9,845		)	(16,827		)	(9,226		)

Income for the period	25,599			27,956			15,998

Income attributable to Joint Venture Partner	(12,367		)	(13,978		)	(7,999		)

Income attributable to the Company	$	13,232		$	13,978		$	7,999

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011

and year ended March 31, 2011

8. Other assets:

	December 31, 2012		December 31, 2011

Note receivable (a)	$	—	$	2,446
Deferred financing charges (b)	902		1,323
Other	950		259
	1,852		4,028
Current portion	—		(2,034		)
	$	1,852	$	1,994

(a) On October 15, 2010, the Company entered into a Note and Warrant Purchase Agreement (the “Agreement”) with a private energy company based in the United States to fund operating and capital expenditures related to infrastructure development activities.

Under the Agreement, the Company loaned $2,200 and received 1,427,179 warrants representing 20% of the current outstanding shares to purchase common shares at $0.10 per share for a period of five years. The loan bore interest at 12.5%, and was payable on maturity dates ranging from October 15, 2012 to October 20, 2013. The value of the warrants was nominal at the time of issue.

On February 29, 2012, the total loan principal and accrued interest of $2,494 was repaid in full by the counterparty, and the warrants were terminated.

(b) Financing charges incurred on the issuance of subordinated debentures (note 13(a)) have been deferred and are being amortized into income over the term of the debentures using the effective interest rate method.

9. Property, plant and equipment:

December 31, 2012	Cost		Accumulated amortization		Net book value

Land and buildings	$	575	$	64	$	511
Computer equipment and software	11,529		8,140		3,389
Furniture and fixtures	4,032		1,913		2,119
Machinery and equipment	80,667		34,219		46,448
Leasehold improvements	15,602		9,875		5,727

	$	112,405	$	54,211	$	58,194

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011

and year ended March 31, 2011

9. Property, plant and equipment (continued):

December 31, 2011	Cost		Accumulated amortization		Net book value

Land and buildings	$	668	$	124	$	544
Computer equipment and software	8,903		7,246		1,657
Furniture and fixtures	2,072		1,602		470
Machinery and equipment	54,156		27,288		26,868
Leasehold improvements	14,930		9,061		5,869

	$	80,729	$	45,321	$	35,408

As at December 31, 2012, equipment with a cost of $16,532 (December 31, 2011 - $15,448) and a net book value of $2,587 (December 31, 2011 - $3,662) is held under capital lease.

Depreciation expense for the year ended December 31, 2012 was $8,131 (nine months ended December 31, 2011 - $4,394; year ended March 31, 2011 - $2,783).

10. Intangible assets:

December 31, 2012	Cost		Accumulated amortization		Net book value

Patents and trademarks	$	20,192	$	1,758	$	18,434
Technology	6,961		1,901		5,060
Customer contracts	14,404		2,709		11,695
Non-compete agreement	44		18		26

	$	41,601	$	6,386	$	35,215

December 31, 2011	Cost		Accumulated amortization		Net book value

Patents and trademarks	$	19,508	$	727	$	18,781
Technology	6,380		1,122		5,258
Customer contracts	13,334		815		12,519
Non-compete agreement	37		13		24

	$	39,259	$	2,677	$	36,582

During the year ended December 31, 2012, nine months ended December 31, 2011 and the year ended March 31, 2011, amortization of $3,264, $1,806 and $592, respectively, was recognized in the statement of operations.

The expected amortization of intangible assets for fiscal 2013 to 2017 is $3,500 per year.

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011

and year ended March 31, 2011

11. Goodwill:

A continuity of goodwill is as follows:

	December 31, 2012		December 31, 2011

Balance, beginning of period	$	55,814	$	8,202
Acquisition of Emer (note 4(a))	—		50,774
Acquisition of AFV (note 4(b))	—		2,701
Impact of foreign exchange	1,065		(5,863		)

Balance, end of period	$	56,879	$	55,814

12. Accounts payable and accrued liabilities:

	December 31, 2012		December 31, 2011

Trade accounts payable	$	37,956	$	37,651
Accrued payroll	8,539		8,157
Accrued interest	961		1,233
Income taxes payable	876		1,311
Due to joint venture and other payables	177		899

	$	48,509	$	49,251

13. Long-term debt:

	December 31, 2012			December 31, 2011

Subordinated debenture notes (a)	$	36,185		$	35,398
Long-term payable (b)	9,836			9,330
Senior financing (c)	18,812			24,871
Senior revolving financing (c)	13,185			11,360
Other bank financing (d)	1,171			2,557
Capital lease obligations (e)	1,533			2,629
	80,722			86,145

Current portion	(28,566		)	(20,568		)

	$	52,156		$	65,577

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011

and year ended March 31, 2011

13. Long-term debt (continued):

(a) On September 23, 2011, the Company raised $36,185 (CDN$36,000) through the issuance of debentures to Macquarie Private Wealth Inc. (“Macquarie”) on a private placement basis.

The debentures are unsecured and subordinated to senior indebtedness, mature on September 22, 2014, and bear interest at 9% per annum, payable in cash semi-annually in arrears on March 15 and September 15 of each year during the term, which commenced on March 15, 2012.

The debentures are redeemable at the option of the Company at a price equal to $1,150 per $1,000 principal amount of the debentures on or before March 22, 2013. After March 22, 2013 and before maturity, the debentures can be redeemed at a price equal to $1,100 per $1,000 principal amount.

The Company paid to Macquarie a cash commission equal to 3.85% of the gross proceeds of the offering totaling $1,460, which is included in other assets (note 8) and amortized over the term of the debentures.

(b) On July 2, 2010, the Company acquired OMVL for $25,711. A portion of the purchase price amounting to $10,021 (€7,600) is payable on the third anniversary of the closing date. This amount is non-interest bearing and was discounted at market rates of interest on the acquisition date. The difference between the carrying value of this liability and the principal amount is accreted to the principal amount using the effective interest rate of 3.72% over the term to maturity. The amount outstanding is denominated in Euros, exposing the Company to foreign exchange changes. The amount is guaranteed to the sellers of OMVL by Banca Intesa S.p.A with a cross guarantee from the Bank of Montreal with a letter of credit for $10,618 (CDN$10,564).

(c) The senior financing agreement bears interest at the 6-month Euribor plus 1.7% or a rate of 2.0% as at December 31, 2012 and its carrying value is recorded at amortized cost using the effective interest rate method. The principal repayment schedule of the remaining senior financing is as follows for the years ended December 31:

2013	$	3,718
2014	4,090
2015	4,461
2016	4,647
2017	2,324
	$	19,240

The senior revolving financing facility bears interest at the 6-month Euribor plus 2.2% or a rate of 2.5% as at December 31, 2012 and will be repaid through one principal payment of $13,185 (€10,000) on September 30, 2017.

The Company has pledged its interest in Emer as a general guarantee for its senior financing and senior revolving financing.

Throughout the entire term of these financing arrangements, the Company is required to meet certain financial and non-financial covenants. As of December 31, 2012, the Company is in compliance with all covenants under the financing arrangements.

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011

and year ended March 31, 2011

13. Long-term debt (continued):

(d) Other bank financing consists of various unsecured bank financing arrangements that carry rates of interest ranging from 1.01% to 8.00% and are payable on maturity dates ranging from June 23, 2013 to June 23, 2017.

(e) The Company has capital lease obligations that have initial terms of three to five years at interest rates ranging from 3.07% to 7.32%. The capital lease obligations require the following minimum annual payments during the respective fiscal years:

2013	$	836
2014	418
2015	276
2016	34
2017	2
	1,566
Amount representing interest	(33		)
	$	1,533

(f) The Company has a credit facility for maximum borrowings of CDN$30,000. The credit facility is governed by a margin requirement limiting such borrowings to a calculated amount based on cash and investments held with the creditor. Borrowings may be drawn in the form of direct borrowings, letters of credit, foreign exchange forward contracts and overdraft loans. Outstanding amounts on direct borrowings and overdraft loans drawn under this credit facility bear interest at the prime rate, and letters of credit bear interest at 0.75% per annum. As at December 31, 2012 and 2011, no amounts of this credit facility were drawn.

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011

and year ended March 31, 2011

14. Warranty liability:

A continuity of the warranty liability is as follows:

	December 31, 2012			December 31, 2011			March 31, 2011

Balance, beginning of period	$	4,401		$	1,314		$	1,769
Warranty claims	(3,099		)	(1,395		)	(2,124		)
Warranty accruals	5,303			4,530			1,740
Impact of foreign exchange	(225		)	(48		)	(71		)
Balance, end of period	$	6,380		$	4,401		$	1,314
Current portion	(2,072		)	(1,187		)	(154		)

Long-term portion	4,308			3,214			1,160

15. Other long-term liabilities:

	December 31, 2012		December 31, 2011

Severance indemnity (a)	$	1,681	$	1,914
Contingent consideration payable related to AFV acquisition (b)	856		428
Deferred lease inducements	69		118

	$	2,606	$	2,460

(a) Italian law requires companies to make a mandatory termination payment to employees. It is paid, as a lump sum, when the employment ends for any reason such as retirement, resignation or layoff. The severance indemnity liability is calculated in accordance with local civil and labour laws based on each employee’s length of service, employment category and remuneration. There is no vesting period or funding requirement associated with the liability. The liability recorded in the consolidated balance sheet is the amount that the employee would be entitled to if the employee terminates immediately. This liability for severance indemnities relates primarily to the Company’s employees in Italy.

(b) The total purchase price to acquire AFV also includes earn-out payments payable in the Company’s shares and tied to revenue and production milestones to be achieved no later than December 31, 2014. This contingent consideration is estimated to have a fair value of $442 as at December 31, 2012 (December 31, 2011 - $428).

The Company also records compensation expense relating to two employees of AFV who receive earn-out payments in the Company’s shares that are tied to revenue and production milestones to be achieved no later than December 31, 2014 and contingent upon continuing employments. This contingent consideration is estimated to have a fair value of $414 as at December 31, 2012 (December 31, 2011 - nil).

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011

and year ended March 31, 2011

16. Government assistance:

From time to time, the Company enters into agreements for financial assistance with government agencies. During the year ended December 31, 2012, nine months ended December 31, 2011 and the year ended March 31, 2011, government assistance of $842, $604 and $982, respectively, was received or receivable by the Company, which has been recorded as a reduction of the related research and development expenditures (note 19).

Under the terms of an agreement with the Industry Canada’s Industrial Technologies Office (“ITO”), from April 1, 2008 to March 31, 2015, inclusive, the Company is obligated to pay annual royalties equal to the greater of $1,357 (CDN$1,350) or 0.33% of the Company’s annual revenue provided that gross revenue exceeds $13,569 (CDN$13,500) in any of the aforementioned fiscal years. The royalty payment period may be extended until the earlier of March 31, 2018 or until cumulative royalties total $28,345 (CDN$28,200). For the year ended December 31, 2012, $1,350 (nine months ended December 31, 2011 - $1,327; year ended March 31, 2011 - $1,392) in royalties have been paid or are payable of which $1,350 (December 31, 2011 - $996) remains accrued in accounts payable and accrued liabilities as at December 31, 2012. As at December 31, 2012, cumulative royalties of CDN$5,400 have been paid.

The Company is also obligated to pay royalties to the Government of Canada’s Department of Natural Resources equal to 1% of future revenue from engines for power generators until the earlier of ten years from the project completion date (August 30, 2004) or when cumulative royalties total $1,005 (CDN$1,000). As at December 31, 2012, there has been no revenue from the sales of engines for power generators; therefore, no royalty payments have been paid or are payable.

17. Share capital:

On November 15, 2010, the Company issued 6,957,500 common shares at a price of $17.50 per share. Gross proceeds totaled $121,756 and the Company incurred share issue costs of $6,069.

On July 1, 2011, the Company issued 881,860 common shares at a price of $25.06 per share as part of the consideration paid to acquire Emer (note 4(a)).

On October 11, 2011, the Company issued 33,161 common shares at a price of $28.74 per share as part of the consideration paid to acquire AFV (note 4(b)).

On February 27, 2012, the Company issued 6,325,000 common shares at a price of $43.25 per share. Gross proceeds totaled $273,556 and the Company incurred share issuance costs of $8,126.

During the twelve months ended December 31, 2012, the Company issued 513,490 common shares, net of cancellations, upon exercises of stock options and share units (nine months ended December 31, 2011 — 568,276 common shares; twelve months ended March 31, 2011 — 662,108 common shares). The Company issues new shares to satisfy stock option and share unit exercises.

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011

and year ended March 31, 2011

18. Stock options and other stock-based plans:

At the Company’s 2011 annual general meeting, the Company’s shareholders ratified and approved the Westport Omnibus Plan and reserved 3,026,645 common shares under this plan. Under the Westport Omnibus plan, stock options, RSUs and PSUs may be granted and are exercisable into common shares of the Company for no additional consideration. Any employee, contractor, director or executive officer of the Company is eligible to participate in the Westport Omnibus Plan.

The Executive and Senior Management Compensation Program sets out provisions where the RSUs and PSUs (together the “Units”) will be granted to the Company’s executive management if performance milestones are achieved as determined at the discretion of the Human Resources and Compensation Committee of the Company’s Board of Directors. These performance milestones are focused on achievement of key cash management, profitability and revenue growth objectives. Vesting periods and conditions for each Unit granted pursuant to the Westport Omnibus Plan are at the discretion of the Board of Directors and may include time based, share price or other performance targets.

(a) Stock options:

The Company grants incentive stock options to employees, directors, officers and consultants. Stock options are granted with an exercise price of not less than the market price of the Company’s common shares on the date immediately prior to the date of grant. The exercise period of the options may not exceed eight years from the date of grant. Vesting periods of the options are at the discretion of the Board of Directors and may be based on fixed terms, achieving performance milestones or reaching specified share price targets.

A summary of the status of the Company’s stock option plan as of December 31, 2012, December 31, 2011 and March 31, 2011 and changes during the periods then ended are presented as follows:

	December 31, 2012				December 31, 2011				March 31, 2011
	Number of shares		Weighted average exercise price (CDN $)		Number of shares		Weighted average exercise price (CDN $)		Number of shares		Weighted average exercise price (CDN $)

Outstanding, beginning of period	328,027		$	8.96	562,014		$	8.46	1,051,589		$	8.13

Granted	770,727		33.77		—		—		—		—
Exercised	(93,044	)	10.49		(225,845	)	7.87		(472,414	)	7.19
Cancelled/expired	(9,663	)	33.36		(8,142	)	4.84		(17,161	)	23.24

Outstanding, end of period	996,047		$	27.78	328,027		$	8.96	562,014		$	8.46

Options exercisable, end of period	226,487		$	8.06	311,360		$	8.55	455,206		$	7.75

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011

and year ended March 31, 2011

18. Stock options and other stock-based plans (continued):

(a) Stock options (continued):

During the year ended December 31, 2012, the Company recognized $2,705 (nine months ended December 31, 2011 - $352; years ended March 31, 2011 - $547) in stock-based compensation related to stock options. The fair value of the options granted during the year ended December 31, 2012 was determined using the Black-Scholes option pricing formula simulation with the following weighted average assumptions: expected dividend yield - nil%, expected stock price volatility — 47.79%, risk free interest rate — 0.38%; expected life of options — 3 years. The weighted average grant date fair value was $10.97 for options granted for the fiscal year ended December 31, 2012. No stock options were granted during the nine month period ended December 31, 2011 or the year ended March 31, 2011.

As at December 31, 2012, $5,642 of compensation cost related to stock option awards has yet to be recognized in results from operations and will be recognized over a weighted average period of 2.00 years.

(a) Stock options (continued):

Range of exercise prices (CDN $)		Number outstanding, December 31, 2012	Weighted average remaining contractual life	Weighted average exercise price (CDN $)		Number exercisable, December 31, 2012	Weighted average exercise price (CDN $)

$ 3.22 to	$ 3.47	7,218	1.5	$	3.31	7,218	$	3.31
4.24 to	4.87	37,458	1.3	4.48		37,458	4.48
5.29 to	9.10	90,301	0.6	6.34		90,301	6.34
10.50 to	11.11	78,655	2.0	11.04		78,655	11.04
14.90 to	16.50	21,188	3.1	15.53		12,855	14.90
29.76 to	33.83	761,227	4.0	33.77		—	—

$ 3.22 to	$33.83	996,047	3.42	$	27.78	226,487	$	8.06

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011

and year ended March 31, 2011

18. Stock options and other stock-based plans (continued):

(b) Share units:

The value assigned to issued Units and the amounts accrued are recorded as other equity instruments. As Units are exercised or vest and the underlying shares are issued from treasury of the Company, the value is reclassified to share capital.

During the year ended December 31, 2012, the Company recognized $9,763 (nine months ended December 31, 2011 - $5,827; year ended March 31, 2011 - $4,376) of stock-based compensation associated with the Westport Omnibus Plan and the former Amended and Restated Unit Plan.

A continuity of the Units issued under the Westport Omnibus Plan and the former Amended and Restated Unit Plan as of December 31, 2012, December 31, 2011 and March 31, 2011 are as follows:

	December 31, 2012				December 31, 2011				March 31, 2011
	Number of units		Weighted average grant date fair value (CDN $)		Number of units		Weighted average grant date fair value (CDN $)		Number of units		Weighted average grant date fair value (CDN $)

Outstanding, beginning of period	1,250,917		$	18.04	1,377,237		$	12.19	1,194,913		$	8.56

Granted	185,705		$	35.99	269,292		$	35.70	424,149		$	22.78
Exercised	(337,228	)	$	19.34	(391,612	)	$	9.61	(241,825	)	$	12.81
Cancelled/expired	(4,300	)	$	19.67	(4,000	)	$	18.61	—		—

Outstanding, end of period	1,095,094		$	20.68	1,250,917		$	18.04	1,377,237		$	12.19

Units outstanding and exercisable, end of period	262,615		$	8.86	276,931		$	7.97	541,534		$	6.91

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011

and year ended March 31, 2011

18. Stock options and other stock-based plans (continued):

(b) Share units (continued):

	December 31, 2012				December 31, 2011				March 31, 2011
	Number of units		Weighted average grant date fair value (CDN $)		Number of units		Weighted average grant date fair value (CDN $)		Number of units		Weighted average grant date fair value (CDN $)

Unvested, beginning of period	973,986		$	20.90	835,703		$	15.62	1,012,418		$	8.16

Granted	185,705		$	35.99	269,292		$	35.70	424,149		$	22.78
Vested	(322,912	)	$	21.64	(127,009	)	$	17.55	(548,733	)	$	7.58
Cancelled/expired	(4,300	)	$	18.61	(4,000	)	$	18.61	(52,131	)	$	13.64

Unvested, end of period	832,479		$	24.41	973,986		$	20.90	835,703		$	15.62

As at December 31, 2012, $11,127 of compensation cost related to Units awards has yet to be recognized in results from operations and will be recognized over a weighted average period of 1.02 years.

Of the Units granted during the year ended December 31, 2012, 66,428 Units were subject to market and service conditions. The fair value of these Units was determined using a Monte-Carlo simulation using the following weighted average assumptions: expected dividend yield - nil%; expected stock price volatility – 55.95%; and risk free interest rate – 0.93%. The valuation model determined the grant date fair value based on assumptions about the likelihood of the Company achieving different payout factors as driven by the market conditions. The weighted average grant date fair value was $35.99 for Units granted for the year ended December 31, 2012. For the Units granted after January 1, 2012, payout factors are determined based upon the absolute stock price at the end of two years, equal to the closing price on the last trading day of December 31, 2013. One-half of these Units vest after two years and the remainder after three years from the date of the grant. The impact of market conditions, if any, on compensation expense for these units is determined at the time of the grant with no adjustment to the compensation expense for the actual results of the market condition. The fair value of all other Units was determined based on the market price of the underlying shares on the date of grant.

For the Units granted prior to January 1, 2012, payout factors are determined based upon the absolute stock price at the end of two years and the stock price relative to a Synthetic Clean Tech index of comparative companies two years after the grant date. One-half of these Units vest after two years and the remainder after three years from the date of the grant. The impact of market conditions, if any, on compensation expense for these units is determined at the time of the grant with no adjustment to the compensation expense for the actual results of the market condition.

During the year ended December 31, 2012, 83,218 PSUs vested with a payout factor of 200% (2011 – nil).

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011

and year ended March 31, 2011

18. Stock options and other stock-based plans (continued):

The aggregate intrinsic value of the Company’s stock option awards and share units at December 31, 2012 are as follows:

	December 31, 2012 CDN$		December 31, 2011 CDN$

Stock options:
Outstanding	$	4,219	$	8,138
Exercisable	4,137		7,851
Exercised	2,398		5,849
Share units:
Outstanding	$	28,823	$	42,234
Exercisable	6,912		9,352
Exercised	15,135		7,688

(d) Stock-based compensation:

Stock-based compensation associated with the Unit plans and the stock option plan is included in operating expenses as follows:

	Year ended December 31, 2012		Nine months ended December 31, 2011		Year ended March 31, 2011

Research and development	$	2,251	$	825	$	627
General and administrative	6,752		3,302		2,958
Sales and marketing	3,465		2,052		1,338

	$	12,468	$	6,179	$	4,923

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011

and year ended March 31, 2011

19. Research and development expenses:

Research and development expenses are recorded net of program funding received or receivable. The research and development expenses had been incurred and program funding had been received or are receivable as follows:

	Year ended December 31, 2012			Nine months ended December 31, 2011			Year ended March 31, 2011

Research and development expenses	$	74,040		$	37,178		$	25,602
Program funding (note 16)	(842		)	(604		)	(982		)

Research and development	$	73,198		$	36,574		$	24,620

20. Income taxes:

(a) The Company’s income tax provision differs from that calculated by applying the combined enacted Canadian federal and provincial statutory income tax rate of 25.0% for the twelve months ended December 31, 2012 (nine months ended December 31, 2011 — 26.5%; year ended March 31, 2011 - 28.0%) as follows:

	Year ended December 31, 2012			Nine months ended December 31, 2011			Year ended March 31, 2011

Loss before income taxes	$	(97,036	)	$	(46,954	)	$	(41,721	)

Expected income tax recovery	$	24,259		$	12,443		$	11,682

Reduction (increase) in income taxes resulting from:
Non-deductible stock-based compensation	(3,019		)	(1,642		)	(1,379		)
Other permanent differences	2,158			(87		)	(600		)
Withholding taxes	(1,187		)	(500		)	(303		)
Change in enacted rates	(62		)	(189		)	24
Foreign tax rate differences, foreign exchange and other adjustments	382			552			(710		)
Non-taxable income from equity investment	3,308			3,974			1,888
Change in valuation allowance	(27,577		)	(13,391		)	(11,023		)

Income tax recovery (expense)	$	(1,738	)	$	1,160		$	(421	)

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011

and year ended March 31, 2011

20. Income taxes (continued):

(b) The significant components of the deferred income tax assets and liabilities are as follows:

	December 31, 2012			December 31, 2011

Deferred income tax assets:
Net operating loss carry forwards	$	76,496		$	51,240
Intangible assets	1,557			873
Property, plant and equipment	5,703			3,109
Financing and share issuance costs	3,248			5,212
Warranty liability	2,013			1,073
Deferred revenue	1,601			861
Inventory	2,300			1,972
Unrealized foreign exchange	595			1,324
Research and development	2,132			2,086
Other	3,917			1,782

Total gross deferred income tax assets	99,562			69,532
Valuation allowance	(89,033		)	(61,456		)

Total deferred income tax assets	10,529			8,076

Deferred income tax liabilities:
Intangible assets	8,784			6,696
Property, plant and equipment	3,297			3,878
Other	575			—
Total deferred income tax liabilities	12,656			10,574

Total net deferred income tax liabilities	$	2,127		$	2,498

Allocated as follows:
Current deferred income tax assets	$	7,183		$	15
Current deferred income tax liabilities	(65		)	—
Long-term deferred income tax assets	—			933
Long-term deferred income tax liabilities	(9,245		)	(3,446		)
Total net deferred income tax liabilities	$	(2,127	)	$	(2,498	)

The valuation allowance is reviewed on a quarterly basis to determine if, based on all available evidence, it is more-likely-than-not that some or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent on the generation of income during the future periods in which those temporary differences are expected to reverse. If the evidence does not exist that all the deferred income tax assets will be fully realized, a valuation allowance has been recorded.

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011
and year ended March 31, 2011

20. Income taxes (continued):

(b) (continued):

The following is a summary of the changes in the deferred income tax asset valuation allowance:

				Nine months
	Year ended			ended
	December 31,			December 31,
	2012			2011

Beginning balance	$	61,456		$	48,065
Additions	27,639			13,391
Reductions	(62		)	—
Ending valuation allowance	$	89,033		$	61,456

	Net income (loss) before income			Income tax recovery (expense)
	taxes			Current			Deferred			Total

Year ended December 31, 2012:
Canada	$	(93,688	)	$	(1,339	)	$	(53	)	$	(1,392	)
United States	(1,589		)	62			—			62
Italy	(318		)	(775		)	(25		)	(800		)
Other	(1,441		)	(95		)	487			392

	$	(97,036	)	$	(2,147	)	$	409		$	(1,738	)

Nine months ended December 31, 2011:
Canada	$	(45,899	)	$	(500	)	$	—		$	(500	)
United States	(1,862		)	(95		)	—			(95		)
Italy	(1,342		)	(388		)	2,205			1,817
Other	2,149			(45		)	(17		)	(62		)

	$	(46,954	)	$	(1,028	)	$	2,188		$	1,160

Year ended March 31, 2011:
Canada	$	(39,219	)	$	(304	)	$	(32	)	$	(336	)
United States	(2,121		)	—			—			—
Italy	1,015			372			(457		)	(85		)
Other	(1,396		)	—			—			—

	$	(41,721	)	$	68		$	(489	)	$	(421	)

(d) As at December 31, 2012, there were no uncertain tax positions that require recognition in the consolidated financial statements. The Company files income tax returns in Canada, the U.S., Italy, and various other foreign jurisdictions. All taxation years remain open to examination by the Canada Revenue Agency, the 2008 to 2012 taxation years remain open to examination by the Internal Revenue Service and the Italian Revenue Agency, and various years remain open in the other foreign jurisdictions.

(e) The Company has loss carry forwards in the various jurisdictions available to offset future taxableincome as follows:

Expiring in:	2013		2014		2015		2016		2017		2025 and later		Total

Canada	$	2,717	$	2,521	$	—	$	—	$	—	$	283,624	$	288,862
Italy	—		—		—		—		—		4,247		4,247
United States	—		—		—		—		—		3,433		3,433
Sweden	—		—		—		—		—		4,752		4,752
Other	63		522		215		303		1,821		44		2,968

Total	$	2,780	$	3,043	215		$	303	1,821		$	296,100	$	304,262

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011
and year ended March 31, 2011

21. Related party transactions:

Pursuant to the amended and restated JVA, Westport engages in transactions with CWI.

As at December 31, 2012, net amounts due from CWI total $2,127 (2011 - $416). Amounts receivable relate to costs incurred by Westport on behalf of CWI. The amounts are generally reimbursed by CWI to Westport in the month following the month in which the payable is incurred. During the twelve month ended December 31, 2012, nine months ended December 31, 3011 and twelve months ended March 31, 2011 cost reimbursements from CWI consisted of the following:

	Year ended December 31, 2012		Nine months ended December 31, 2011		Year ended March 31, 2011

Research and development	$	223	$	148	$	314
General and administrative	1,007		338		1,164
Sales and marketing	2,830		2,598		3,501

	$	4,060	$	3,084	$	4,979

CWI also provided a loan to the Company under a demand loan agreement. The loan receivable bore interest monthly at a rate equal to the Bank of Canada prime corporate paper one-month rate in effect on the last day of each month. All outstanding interest was payable in United States dollars on or before December 15, 2012. Interest began accruing on the date in which monies were advanced under the loan agreement. The loan principal and accrued interest was repaid during the year ended December 31, 2012. Loan payable of $19,409 owing to CWI as at December 31, 2011. During the year ended December 31, 2012, interest of $114 (nine months ended December 31, 2011 - $116; year ended March 31, 2011 - $19) was paid to CWI.

All material transactions between the Company and CWI have been eliminated on application of equity accounting.

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011
and year ended March 31, 2011

22. Service and other revenue:

Service and other revenue for the year ended December 31, 2012 consisted of a one-time license revenue of $7,923 for the transfer of proprietary know-how, other fee payments of $1,414, and service revenue of $13,907 under existing development agreements.

During the year ended December 31, 2012, the Company entered into an agreement with an original equipment manufacturer (“OEM”) to co-develop natural gas technology for off-road equipment, including mining trucks and locomotives. Under the agreement, the Company provided its proprietary know-how related to the high pressure direct injection (“HPDI”) technology by granting a non-exclusive license to the OEM. The Company will also provide ongoing development services to the OEM to assist with the development and commercialization of products. These are considered to be multiple deliverables arrangements and the Company has determined that the license and the development services are separate units of accounting.

Service revenue of $13,907 was recognized as the Company achieved and delivered certain milestones during the year ended December 31, 2012 under certain development agreements. All costs associated with the development agreements were recorded as research and development expenses in the period incurred.

23. Commitments and contingencies:

The Company has obligations under operating lease arrangements that require the following minimum annual payments during the respective fiscal years:

2013	$	4,785
2014	4,264
2015	3,700
2016	3,372
2017	2,118
Thereafter	1,119
	$	19,358

For the year ended December 31, 2012, the Company incurred operating lease expense of $4,492 (nine months ended December 31, 2011 - $2,070; year ended March 31, 2011 - $1,599).

As at December 31, 2012, the Company’s wholly owned subsidiary Emer has provided a total amount of guarantees to third parties of $489 (€371) (December 31, 2011 - $771 (€594)), which include guarantees to its customers for the completion of specific supplies.

The Company is a party to a variety of agreements in the ordinary course of business under which it is obligated to indemnify a third party with respect to certain matters. Typically, these obligations arise as a result of contracts for sale of the Company’s product to customers where the Company provides indemnification against losses arising from matters such as product liabilities. The potential impact on the Company’s financial results is not subject to reasonable estimation because considerable uncertainty exists as to whether claims will be made and the final outcome of potential claims. To date, the Company has not incurred significant costs related to these types of indemnifications.

The Company is engaged in certain legal actions in the ordinary course or business and believes that the ultimate outcome of these actions will not have a material adverse effect on our operating results, liquidity or financial position.

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011
and year ended March 31, 2011

24. Segmented information:

In December 2012, the Company realigned its business units to focus on product commercialization and global partnerships development. To accommodate the variety in product, system and service solutions, Westport has created three new reportable operating segments. The financial information for the Company’s business segments evaluated by the Company’s chief operating decision maker (“CODM”) includes the results of the CWI and WWI as if it were consolidated, which is consistent with the way Westport manages its business segments. As CWI and WWI is accounted for under the equity method of accounting, an adjustment is reflected in the tables below to reconcile the segment measures to the Company’s consolidated measures.

The Company’s business operates in six reportable operating segments:

· Westport Applied Technologies, designs, produces, and sells compressed natural gas (CNG), liquefied petroleum gas (LPG), and liquefied natural gas (LNG) components and subsystems for natural gas vehicles of all types;

· Westport On-Road Systems, engineers, designs, and markets complete vehicle systems from automotive to trucking applications and industrial systems to Westport’s existing OEM customers;

· Westport New Markets and Off-Road Systems, engineers, designs, and markets Westport proprietary natural gas technologies, including the WestportTM high pressure direct injection (HPDI) technology, and fuel systems for the off-road, large-engine applications such as mine trucks, locomotives, workboats, and petroleum exploration equipment;

· Corporate and Technology Investments, which includes corporate costs such as research and development, general and administrative, marketing, interest and other charges, foreign exchange and depreciation that cannot be attributed to a particular segment and are incurred by all segments.

· CWI which serves the medium- to heavy-duty engine markets. The fuel for CWI engines is typically carried on vehicles as compressed natural gas or liquefied natural gas;

· WWI develops, manufactures, and sells advanced, alternative fuel engines and parts that are widely used in city bus, coach, and heavy-duty truck applications in China or exported to other regions globally; and

These reporting segments offer different products and services and are managed separately as each business requires different technology and marketing strategies.

Comparative periods have been recast to conform to current segment presentation.

The accounting policies for the reportable segments are consistent with those described in note 2. The CODM evaluates segment performance based on the net operating income (loss), which is before income taxes and does not include depreciation and amortization, foreign exchange gains and losses, bank charges, interest and other expenses, interest and other income, and gain on sale of long-term investments. The Company did not record any intersegment sales or transfers for the year ended December 31, 2012, nine months ended December 31, 2011 and the year ended March 31, 2011.

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011
and year ended March 31, 2011

24. Segmented information (continued):

	Year ended December 31, 2012			Nine months ended December 31, 2011			Year ended March 31, 2011

Revenue:
Applied Technologies	$	91,675		$	55,064		$	22,053
On-Road Systems	40,706			22,451			6,594
Corporate and Technology Investments	23,245			10,181			8,128
CWI	198,015			138,844			111,287
WWI	272,086			84,917			53,127
Total segment revenues		625,727			311,457			201,189
Less: equity investees revenues	470,101			223,761			164,414
Total consolidated revenues	$	155,626		$	87,696		$	36,775

Net operating income (loss) excluding depreciation and amortization:
Applied Technologies	$	10,868		$	1,051		$	(5,170	)
On-Road Systems	(43,503		)	(32,625		)	(19,985		)
New Markets and Off-Road Systems	(12,324		)	(2,670		)	—
Corporate and Technology Investments	(50,022		)	(19,767		)	(15,698		)
CWI	35,368			42,832			25,399
WWI	9,765			4,879			3,373
Net segment operating income (loss)	(49,848		)	(6,300		)	(12,081		)
Less: equity investees operating income	45,133			47,711			28,772
Net consolidated operating income (loss) excluding depreciation and amortization:	$	(94,981	)	$	(54,011	)	$	(40,853	)
Depreciation and amortization:
Applied Technologies	$	(7,905	)	$	(5,048	)	$	(1,305	)
On-Road Systems and Corporate	(3,490		)	(1,152		)	(2,070		)
	(11,395		)	(6,200		)	(3,375		)

Net consolidated operating loss before foreign exchange loss (gain), bank changes, interest and other:	(106,376		)	(60,211		)	(44,228		)

Foreign exchange loss (gain), bank changes, interest and other	1,922			904			2,693

Loss before undernoted	(108,298		)	(61,115		)	(46,921		)

Interest on long-term debt and other income (expense), net	(4,928		)	(2,337		)	(2,385		)
Income from investment accounted for by the equity method (note 7)	16,190			16,498			7,585

Loss before income taxes	$	(97,036	)	$	(46,954	)	$	(41,721	)

Total additions to long-lived assets excluding business combinations:	$	31,566		$	13,392		$	3,613

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011
and year ended March 31, 2011

24. Segmented information (continued):

It is impracticable for the Company to allocate additions to long lived assets to the new reporting segment.

It is impracticable for the Company to provide geographical revenue information by individual countries; however, it is practicable to provide it by geographical regions. Product and service and other revenues are attributable to geographical regions based on location of the Company’s customers. For the year ended December 31, 2012, 38% (nine months ended December 31, 2011 — 28%; year ended March 31, 2011 - 11%) of the Company’s product and service revenues were from sales in the Americas (including the United Sates), 9% (nine months ended December 31, 2011 — 15%; year ended March 31, 2011 - 12%) from sales in Asia (including China), and 53% (nine months ended December 31, 2011 — 57%; year ended March 31, 2011 - 77%) from sales elsewhere (including Italy). The Company’s revenue earned from Canadian customers is not significant and has been included in revenue from sales in the Americas.

Total goodwill of $51,711 was allocated to Applied Technologies and $5,168 On-Road Systems reporting segments.

As at December 31, 2012, total long-term investments of $18,544 (December 31, 2011 - $25,670) was allocated to the Corporate segment and $574 (December 31, 2011 - $637) was allocated to the On-Road Systems. Total assets are allocated as follows:

	December 31, 2012		December 31, 2011

Applied Technologies	$	161,206	$	165,192
On-Road Systems	85,401		49,347
Corporate and unallocated assets	243,470		106,517
CWI	69,577		72,436
WWI	86,997		41,911
	$	646,651	$	435,403
Less: equity investees total assets	156,574		114,347

Total consolidated assets	$	490,077	$	321,056

The Company’s long-lived assets consist of property, plant and equipment, intangible assets and goodwill.

Long-lived assets information by geographic area:

	December 31, 2012		December 31, 2011

Italy	$	90,474	$	94,889
Canada	40,799		27,006
United States	12,463		1,312
Sweden	5,253		5,378
China	6,524		3,087
Australia	601		32
	$	156,114	$	131,704
Less: equity investees long-lived assets	5,826		3,900

Total consolidated long-lived assets	$	150,288	$	127,804

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011
and year ended March 31, 2011

25. Financial instruments:

(a) Financial risk management:

The Company has exposure to liquidity risk, credit risk, foreign currency risk and interest rate risk.

(b) Liquidity risk:

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they are due. The Company has sustained losses and negative cash flows from operations since inception. At December 31, 2012, the Company has $215,860 of cash, cash equivalents and short-term investments.

The following are the contractual maturities of financial obligations as at December 31, 2012:

	Carrying amount		Contractual cash flows		< 1 year		1-3 years		4-5 years		> 5 years

Accounts payable and accrued liabilities	$	48,509	$	48,509	$	48,509	$	—	$	—	$	—
Unsecured subordinated debentures (1)	36,185		40,929		2,302		38,627		—		—
Long-term payable (2)	9,386		10,021		10,021		—		—		—
Senior financing (3)	18,812		19,240		3,718		8,551		6,971		—
Senior revolving financing (4)	13,185		13,185		13,185		—		—		—
Other bank financing	1,171		1,176		392		300		342		142
Other long-term debt	1,533		1,533		836		661		36		—
Operating lease commitments	—		19,358		4,785		7,964		5,490		1,119
Royalty payments(5)	—		22,906		1,357		21,549		—		—

	$	129,605	$	176,857	$	85,105	$	77,652	$	12,839	$	1,261

(1) Includes interest at 9%.

(2) Includes interest at 3.72%.

(3) Includes interest at 2.0%, the rate in effect at December 31, 2012.

(4) Includes interest at 2.3%, the rate in effect at December 31, 2012.

(5) From fiscal 2011 to 2015, inclusive, the Company is obligated to pay annual royalties equal to the greater of $1,357 (CDN$1,350) or 0.33% of the Company’s gross annual revenue from all sources, provided that gross revenue exceeds CDN$13,500 in any aforementioned fiscal year, up to a maximum of $28,333 (CDN$28,189). The Company has assumed the minimum required payments.

The Company expects to be able to meet its future financial obligations with its current source of funds. However, there are uncertainties related to the timing of the Company’s cash inflows and outflows, specifically around the sale of inventories and amounts required for market and product development costs. These uncertainties include the volume of commercial sales related to its natural gas engines and fuel system products and the development of markets for, and customer acceptance of, these products. As a result, the Company may need to seek additional equity or arrange debt financing, which could include additional lines of credit, in order to meet its financial obligations.

Credit risk arises from the potential that a counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Company’s cash and cash equivalents, short-term investments and accounts receivable. The Company manages credit risk associated with cash and cash equivalents and short-term investments by regularly consulting with its current bank and investment advisors and investing primarily in liquid short-term paper issued by Schedule 1 Canadian banks, R1 rated companies and governments. The Company monitors its portfolio, and its policy is to diversify its investments to manage this potential risk.

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011
and year ended March 31, 2011

The Company is also exposed to credit risk with respect to uncertainties as to timing and amount of collectability of accounts receivable and loans receivable. As at December 31, 2012, 83% (December 31, 2011 - 83%) of accounts receivable relates to customer receivables, 1% (December 31, 2011 - 1%) relates to government grants receivable and 16% (December 31, 2010 - 16%) relates to amounts due from joint venture and indirect, income tax and value added taxes receivable. In order to minimize the risk of loss for customer receivables, the Company’s extension of credit to customers involves review and approval by senior management as well as progress payments as contracts are executed. Most sales are invoiced with payment terms in the range of 30 days to 90 days. The Company reviews its customer receivable accounts and regularly recognizes an allowance for doubtful receivables as soon as the account is determined not to be fully collectible. Estimates for allowance for doubtful debts are determined by a customer-by-customer evaluation of collectability at each balance sheet reporting date, taking into consideration past due amounts and any available relevant information on the customers’ liquidity and financial position.

The carrying amount of cash and cash equivalents, short-term investments and accounts receivable of $260,049 at December 31, 2012 represents the Company’s maximum credit exposure.

(d) Foreign currency risk:

Foreign currency risk is the risk that the fair value of future cash flows of financial instruments will fluctuate because of changes in foreign currency exchange rates. The Company conducts a significant portion of its business activities in foreign currencies, primarily the United States dollar (“U.S.”) and the Euro (“Euro”). Cash and cash equivalents, short-term investments, accounts receivable, accounts payable, and long-term debt that are denominated in foreign currencies will be affected by changes in the exchange rate between the Canadian dollar and these foreign currencies.

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011
and year ended March 31, 2011

25. Financial instruments (continued):

(d) Foreign currency risk (continued):

The Company’s functional currency is the Canadian dollar. The U.S. dollar and the Euro carrying amount of financial instruments subject to exposure to foreign currency risk in the consolidated balance sheet at December 31, 2012 is as follows:

	U.S. dollars

Cash and cash equivalents	$	169,369
Short-term investments	24,442
Accounts receivable	7,864
Accounts payable	3,673

	Euros

Cash and cash equivalents	€	387
Current portion of long-term debt	7,459

If foreign exchange rates on December 31, 2012 had changed by 25 basis points, with all other variables held constant, net loss for the year ended December 31, 2012 would have changed by $495 and $18 for US dollar denominated and Euro denominated financial instruments, respectively. The Company’s exposure to currencies other than U.S. dollars and Euros is not material.

(e) Interest rate risk:

Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is subject to interest rate risk on its loan receivable and certain long-term debt with variable rates of interest. The Company 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.

If interest rates for the year ended December 31, 2012 had changed by 50 basis points, with all other variables held constant, net loss for the year ended December 31, 2012 would have changed by $57.

(f) Fair value of financial instruments:

The carrying amounts reported in the balance sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities and loan payable approximate their fair values due to the short-term period to maturity of these instruments.

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

Year ended December 31, 2012, nine months ended December 31, 2011
and year ended March 31, 2011

25. Financial instruments (continued):

(f) Fair value of financial instruments (continued):

The Company’s short-term investments are recorded at fair value. The long-term investment represents our interests in the CWI, WWI and other equity accounted for investees, which are accounted for using the equity method.

The carrying value reported in the balance sheets for obligations under capital lease, which is based upon discounted cash flows, approximates its fair value.

The carrying value reported in the balance sheet for the unsecured subordinated debenture notes (note 13(a)) approximates its fair value, based on market rates of interest for similar indebtedness. Additionally, the interest rate on the notes approximates the interest rate being demanded in the market for debt with similar terms and conditions.

The carrying value reported in the balance sheet for other long-term payable (note 13(b)) is recorded at amortized cost using the effective interest rate method. It is being accreted to the gross proceeds of €7,600 that is payable to OMVL on July 2, 2013 at the effective interest rate of 3.65%. As at December 31, 2012, the fair value of the long-term debt is higher than its carrying value by $70 based on a market interest rate of 2.35%.

The carrying value reported in the balance sheet for senior financing agreements (note 13(c)) approximates its fair value as at December 31, 2012, as the interest rate on the debt is floating and therefore approximates the market rate of interest. The Company’s credit spread also has not substantially changed from the 2.2% premium currently paid.

The Company categorizes its fair value measurements for items measured at fair value on a recurring basis into three categories as follows:

Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Inputs for the asset or liability that are not based on observable market data (unobservable inputs).

When available, the Company uses quoted market prices to determine fair value and classify such items in Level 1. When necessary, Level 2 valuations are performed based on quoted market prices for similar instruments in active markets and/or model-derived valuations with inputs that are observable in active markets. Level 3 valuations are undertaken in the absence of reliable Level 1 or Level 2 information.

As at December 31, 2012, cash and cash equivalents and short-term investments are measured at fair value on a recurring basis and are included in Level 1.