EX-99.2 5 ex99_2.htm CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED MARCH 31, 2011.

Exhibit 99.2
Precision Drilling Corporation
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)

|  |  | March 31, |  | December 31, |  |  | January 1, |
(Stated in thousands of Canadian dollars) |  |  | 2011 |  | 2010 |  |  | 2010 |
ASSETS |  |  |  |  |  |  |  |  |  |
Current assets: |  |  |  |  |  |  |  |  |  |
Cash |  |  | $ | 129,688 |  |  | $ | 256,831 |  |  | $ | 130,799 |
Accounts receivabe |  |  |  | 507,885 |  |  |  | 414,901 |  |  |  | 283,899 |
Income tax recoverable |  |  |  | – |  |  |  | – |  |  |  | 25,753 |
Inventory |  |  |  | 10,610 |  |  |  | 4,933 |  |  |  | 9,008 |
Total current assets |  |  |  | 648,183 |  |  |  | 676,665 |  |  |  | 449,459 |
Non-current assets: |  |  |  |  |  |  |  |  |  |  |  |  |
Income tax recoverable |  |  |  | 172,755 |  |  |  | 64,579 |  |  |  | 64,579 |
Property, plant and equipment |  |  |  | 2,505,118 |  |  |  | 2,532,398 |  |  |  | 2,653,204 |
Intangibles |  |  |  | 7,068 |  |  |  | 6,366 |  |  |  | 3,156 |
Goodwill |  |  |  | 309,726 |  |  |  | 284,532 |  |  |  | 284,537 |
Total non-current assets |  |  |  | 2,994,667 |  |  |  | 2,887,875 |  |  |  | 3,005,476 |
Total assets |  |  | $ | 3,642,850 |  |  | $ | 3,564,540 |  |  | $ | 3,454,935 |
LIABILITIES AND SHAREHOLDERS’ EQUITY |  |  |  |  |  |  |  |  |  |  |  |  |
Current liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |
Accounts payable and accrued liabilities |  |  | $ | 237,569 |  |  | $ | 217,799 |  |  | $ | 134,974 |
Income tax payable |  |  |  | 807 |  |  |  | 863 |  |  |  | – |
Long-term debt |  |  |  | – |  |  |  | – |  |  |  | 223 |
Total current liabilities |  |  |  | 238,376 |  |  |  | 218,662 |  |  |  | 135,197 |
Non-current liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |
Share based compensation | (Note 10) |  |  | 6,627 |  |  |  | 12,268 |  |  |  | 6,602 |
Provisions and other |  |  |  | 17,824 |  |  |  | 18,051 |  |  |  | 21,000 |
Long-term debt | (Note 6) |  |  | 811,408 |  |  |  | 804,494 |  |  |  | 748,725 |
Deferred tax liabilities |  |  |  | 581,464 |  |  |  | 578,239 |  |  |  | 620,459 |
Total non-current liabilities |  |  |  | 1,417,323 |  |  |  | 1,413,052 |  |  |  | 1,396,786 |
Contingencies and commitments | (Note 16) |  |  |  |  |  |  |  |  |  |  |  |
Shareholders’ equity: |  |  |  |  |  |  |  |  |  |  |  |  |
Shareholders’ capital | (Note 8(b)) |  |  | 2,200,698 |  |  |  | 2,200,031 |  |  |  | – |
Unitholders’ capital | (Note 8(b)) |  |  | – |  |  |  | – |  |  |  | 2,198,738 |
Contributed surplus |  |  |  | 13,228 |  |  |  | 11,266 |  |  |  | – |
Deficit |  |  |  | (166,691 | ) |  |  | (232,251 | ) |  |  | (275,786 | )
Accumulated other comprehensive loss | (Note 9) |  |  | (60,084 | ) |  |  | (46,220 | ) |  |  | – |
Total equity |  |  |  | 1,987,151 |  |  |  | 1,932,826 |  |  |  | 1,922,952 |
Total liabilities and shareholders’ equity |  |  | $ | 3,642,850 |  |  | $ | 3,564,540 |  |  | $ | 3,454,935 |
See accompanying notes to consolidated financial statements. |  |  |  |  |  |  |  |  |  |  |  |

P r e c i s i o n D r i l l i n g C o r p o r a t i o n
C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s 14

Precision Drilling Corporation
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)

Three months ended March 31, |  |  |  |  |
(Stated in thousands of Canadian dollars, except per share amounts) |  | 2011 |  | 2010 |
Revenue |  | $ | 525,350 |  |  | $ | 373,136 |
Expenses: |  |  |  |  |  |  |  |
Operating |  |  | 304,325 |  |  |  | 229,672 |
General and administrative |  |  | 34,614 |  |  |  | 25,806 |
Earnings before income taxes, depreciation and amortization, and other items |  |  | 186,411 |  |  |  | 117,658 |
Depreciation and amortization |  |  | 63,319 |  |  |  | 52,307 |
Operating earnings |  |  | 123,092 |  |  |  | 65,351 |

Other items: |  |  |  |  |  |  |
Foreign exchange |  |  |  | 3,332 |  |  |  | (19,752 | )
Finance charges | (Note 11) |  |  | 42,528 |  |  |  | 28,729 |
Earnings before tax |  |  |  | 77,232 |  |  |  | 56,374 |
Income taxes: |  |  |  |  |  |  |  |  |
Current | (Note 7) |  |  | 1,140 |  |  |  | 1,797 |
Deferred |  |  |  | 10,532 |  |  |  | (2,340 | )

|  |  |  | 11,672 |  |  |  | (543 | )
Net earnings |  |  | $ | 65,560 |  |  | $ | 56,917 |
Earnings per share: | (Note 12) |  |  |  |  |  |  |  |
Basic |  |  | $ | 0.24 |  |  | $ | 0.21 |
Diluted |  |  | $ | 0.23 |  |  | $ | 0.20 |
See accompanying notes to consolidated financial statements. |  |  |  |  |  |  |  |

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) |
Three months ended March 31, |  |  |  |  |
(Stated in thousands of Canadian dollars) |  | 2011 |  | 2010 |
Net earnings |  | $ | 65,560 |  |  | $ | 56,917 |
Unrealized loss on translation of assets |  |  |  |  |  |  |  |

and liabilities of self-sustaining operations |  |  |  |  |  |
denominated in foreign currency |  |  | (26,808 | ) |  |  | (36,251 | )
Foreign exchange gain on net investment hedge |  |  |  |  |  |  |  |
with U.S. denominated debt, net of tax of $ 1,876 |  |  | 12,944 |  |  |  | – |
Comprehensive income |  | $ | 51,696 |  |  | $ | 20,666 |
See accompanying notes to consolidated financial statements. |  |  |  |  |  |  |

C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s 15

Precision Drilling Corporation
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)

|  |  |  |  |  |  |  | Accumulated |  |  |  |  |  |  |
| Shareholders’/ |  |  |  |  |  | other |  |  |  |  |  |  |
|  | unitholders |  |  | Contributed |  |  | comprehensive |  |  |  |  |  | Total |
(Stated in thousands of Canadian dollars) |  | capital |  |  | surplus |  |  | loss (Note 9) |  |  | Deficit |  |  | equity |
Balance at January 1, 2010 |  | $ | 2,198,738 |  |  | $ | – |  |  | $ | – |  |  | $ | (275,786 | ) |  | $ | 1,922,952 |
Net earnings for the period |  |  | – |  |  |  | – |  |  |  | – |  |  |  | 56,917 |  |  |  | 56,917 |
Other comprehensive income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
for the period |  |  | – |  |  |  | – |  |  |  | (36,251 | ) |  |  | – |  |  |  | (36,251 | )
Balance at March 31, 2010 |  | $ | 2,198,738 |  |  | $ | – |  |  | $ | (36,251 | ) |  | $ | (218,869 | ) |  | $ | 1,943,618 |
|  |  |  |  |  |  |  |  |  | Accumulated |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  | other |  |  |  |  |  |  |  |  |
| Shareholders’ |  |  | Contributed |  |  | comprehensive |  |  |  |  |  |  | Total |
(Stated in thousands of Canadian dollars) |  | capital |  |  | loss surplus |  |  | (Note 9) |  |  | Deficit |  |  | equity |
Balance at January 1, 2011 |  | $ | 2,200,031 |  |  | $ | 11,266 |  |  | $ | (46,220 | ) |  | $ | (232,251 | ) |  | $ | 1,932,826 |
Net earnings for the period |  |  | – |  |  |  | – |  |  |  | – |  |  |  | 65,560 |  |  |  | 65,560 |
Other comprehensive income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
for the period |  |  | – |  |  |  | – |  |  |  | (13,864 | ) |  |  | – |  |  |  | (13,864 | )
Share options exercised (Note 8) |  |  | 667 |  |  |  | (231 | ) |  |  | – |  |  |  | – |  |  |  | 436 |
Share based |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
compensation expense (Note 10) |  |  | – |  |  |  | 2,193 |  |  |  | – |  |  |  | – |  |  |  | 2,193 |
Balance at March 31, 2011 |  | $ | 2,200,698 |  |  | $ | 13,228 |  |  | $ | (60,084 | ) |  | $ | (166,691 | ) |  | $ | 1,987,151 |
See accompanying notes to consolidated financial statements. |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

16 P r e c i s i o n D r i l l i n g C o r p o r a t i o n

Precision Drilling Corporation
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)

Three months ended March 31, |  |  |  |  |  |
(Stated in thousands of Canadian dollars) |  |  | 2011 |  | 2010 |
Cash provided by (used in): |  |  |  |  |  |  |
Operations: |  |  |  |  |  |  |
Net earnings |  |  | $ | 65,560 |  |  | $ | 56,917 |
Adjustments for: |  |  |  |  |  |  |  |  |
Long-term compensation plans |  |  |  | 8,845 |  |  |  | 3,176 |
Depreciation and amortization |  |  |  | 63,319 |  |  |  | 52,307 |
Foreign exchange |  |  |  | 3,344 |  |  |  | (18,346 | )
Finance charges |  |  |  | 42,528 |  |  |  | 28,729 |
Income taxes |  |  |  | 11,672 |  |  |  | (543 | )
Other |  |  |  | 199 |  |  |  | (1,617 | )
Income taxes paid |  |  |  | (565 | ) |  |  | (219 | )
Income taxes recovered |  |  |  | 246 |  |  |  | 1,005 |
Interest paid |  |  |  | (3,052 | ) |  |  | (18,713 | )
Interest received |  |  | 241 |  |  |  | 63 |
|  |  |  | 192,337 |  |  |  | 102,759 |
Changes in non-cash working capital balances | (Note 15) |  |  | (75,015 | ) |  |  | (82,135 | )
|  |  |  | 117,322 |  |  |  | 20,624 |
Investments: |  |  |  |  |  |  |  |  |
Business acquisitions, net of cash acquired | (Note 13) |  |  | (33,143 | ) |  |  | – |
Purchase of property, plant and equipment |  |  |  | (64,800 | ) |  |  | (7,483 | )
Proceeds on sale of property, plant and equipment |  |  |  | 735 |  |  |  | 1,153 |
Changes in income tax recoverable |  |  |  | (108,176 | ) |  |  | – |
Changes in non-cash working capital balances | (Note 15) |  |  | (29,340 | ) |  |  | 556 |
|  |  |  | (234,724 | ) |  |  | (5,774 | )
Financing: |  |  |  |  |  |  |  |  |
Repayment of long-term debt |  |  |  | (175,000 | ) |  |  | (12,188 | )
Premium paid on settlement of unsecured senior notes | (Note 6) |  |  | (26,688 | ) |  |  | – |
Debt issue costs |  |  |  | (3,839 | ) |  |  | – |
Increase in long-term debt |  |  |  | 200,000 |  |  |  | – |
Issuance of common shares on exercise of options |  |  |  | 436 |  |  |  | – |
Changes in non-cash working capital balances | (Note 15) |  |  | (746 | ) |  |  | – |
|  |  | (5,837 | ) |  |  | (12,188 | )
Effect of exchange rate changes on cash and |  |  |  |  |  |  |  |  |
cash equivalents |  |  | (3,904 | ) |  |  | (1,443 | )
Increase in cash and cash equivalents |  |  |  | (127,143 | ) |  |  | 1,219 |
Cash and cash equivalents, beginning of period |  |  | 256,831 |  |  |  | 130,799 |
Cash and cash equivalents, end of period |  | $ | 129,688 |  |  | $ | 132,018 |
See accompanying notes to consolidated financial statements. |  |  |  |  |  |  |  |

C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s 17

Precision Drilling Corporation
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
(Tabular amounts are stated in thousands of Canadian dollars except share numbers and per share amounts)
NOTE 1. DESCRIPTION OF BUSINESS
Precision Drilling Corporation, (“Precision” or the “Corporation”) incorporated under the laws of the Province of Alberta, Canada, is a provider of contract drilling and completion and production services primarily to oil and natural gas exploration and production companies in Canada and the United States. The address of the registered office is 4200, 150 - 6th Avenue S.W., Calgary, Alberta, Canada, T2P 3Y7.
On June 1, 2010 Precision Drilling Trust (the “Trust”) completed its conversion (the “Conversion”) from an income trust to a corporation pursuant to a Plan of Arrangement (the “Arrangement”). Pursuant to the Arrangement, Trust unitholders and Exchangeable LP unitholders exchanged their Trust units and Exchangeable LP units for common shares of the Corporation on a one-for-one basis.
The Conversion has been accounted for on a continuity of interest basis and accordingly these consolidated financial statements reflect the financial position, results of operations and cash flows as if Precision had always carried on the business formerly carried on by the Trust. All references to shares and shareholders in these financial statements pertain to common shares and common shareholders subsequent to the Conversion and units and unitholders prior to the Conversion.
NOTE 2. BASIS OF PRESENTATION
(a) Statement of compliance
These condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting using accounting policies consistent with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board and interpretations of the International Financial Reporting Interpretations Committee. These are the Corporation’s first IFRS condensed consolidated interim financial statements for part of the period covered by the first IFRS annual financial statements and IFRS 1 First-time Adoption of International Financial Reporting Standards has been applied. The condensed consolidated interim financial statements do not include all of the information required for full annual financial statements and should be read in conjunction with the consolidated financial statements of the Corporation as at and for the year ended December 31, 2010 as prepared under previous Canadian Generally Accepted Accounting Principles (“Canadian GAAP”).
An explanation of how the transition to IFRS has affected the reported financial position, financial performance and cash flows of the Corporation is provided in Note 4. This note includes reconciliations of equity and total comprehensive income for comparative periods and of equity at the date of transition reported under previous Canadian GAAP to those reported under IFRS.
The policies applied in these condensed consolidated interim financial statements are based on IFRS issued and outstanding as of June 13, 2011, the date the Board of Directors approved the statements. Any subsequent changes to IFRS that are given effect in the Corporation’s annual consolidated financial statements for the year ending December 31, 2011 could result in restatement of these interim consolidated financial statements, including the adjustments recognized upon transition to IFRS.
(b) Basis of measurement
The consolidated financial statements have been prepared using the historical cost basis except as detailed in the Corporation’s accounting policies in Note 3 and are presented in thousands of Canadian dollars.
18 P r e c i s i o n D r i l l i n g C o r p o r a t i o n

(c) Use of estimates and judgments
The preparation of the consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingencies. These estimates and judgments are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The estimation of anticipated future events involves uncertainty and, consequently, the estimates used in preparation of the consolidated financial statements may change as future events unfold, more experience is acquired or the Corporation’s operating environment changes. Significant estimates and judgments used in the preparation of the financial statements are described in Note 3.
(d) Seasonality
Precision has operations that are carried on in Canada which represent approximately 47% (2010 - 45%) of consolidated total assets as at March 31, 2011 and 63% (2010 - 62%) of consolidated revenue for the three months ended March 31, 2011. The ability to move heavy equipment in Canadian oil and natural gas fields is dependent on weather conditions. As warm weather returns in the spring, the winter's frost comes out of the ground rendering many secondary roads incapable of supporting the weight of heavy equipment until they have thoroughly dried out. The duration of this “spring break-up” has a direct impact on Precision’s activity levels. In addition, many exploration and production areas in northern Canada are accessible only in winter months when the ground is frozen hard enough to support equipment. The timing of freeze up and spring break-up affects the ability to move equipment in and out of these areas. As a result, late March through May is traditionally Precision’s slowest time in this region.
NOTE 3. SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of consolidation
These condensed consolidated interim financial statements include the accounts of the Corporation and all of its subsidiaries and partnerships substantially all of which are wholly-owned. The financial statements of the subsidiaries are prepared for the same period as the parent entity, using consistent accounting policies. All significant intercompany balances, transactions and any unrealized gains and losses arising from intercompany transactions, have been eliminated.
Subsidiaries are entities (including special-purpose entities) controlled by the Corporation. Control exists when Precision has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that currently are exercisable are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.
Precision does not hold investments in any companies where it exerts significant influence and does not hold interests in any special-purpose entities.
The acquisition method is used to account for acquisitions of subsidiaries and assets that meet the definition of a business under IFRS. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The excess of the cost of acquisition over the fair value of the identifiable assets, liabilities and contingent liabilities acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized immediately in the income statement. Transaction costs, other than those associated with the issuance of debt or equity securities, that the Corporation incurs in connection with a business combination are expensed as incurred.
(b) Cash and cash equivalents
Cash and cash equivalents consist of cash and short-term investments with original maturities of three months or less.
(c) Inventory
Inventory is primarily comprised of operating supplies and is carried at the lower of average cost, being the cost to acquire the inventory, and net realizable value. Inventory is charged to operating expenses as items are sold or consumed at the amount of the average cost of the item.
N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s 19

(d) Property, plant and equipment
Property, plant and equipment are carried at cost, less accumulated depreciation and any accumulated impairment losses.
Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition for their intended use and borrowing costs on qualifying assets.
The cost of replacing a part of an item of property, plant and equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Corporation, and its cost can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-day servicing of property, plant and equipment (repair and maintenance) are recognized in profit or loss as incurred.

Property, plant, and equipment are depreciated as follows: |  |  |
| Expected life | Salvage value | Basis of depreciation
Drilling rig equipment: |  |  |  |
Power & Tubulars | 1,700 utilization days | – |  | unit-of-production
Dynamic | 3,400 utilization days | – |  | unit-of-production
Structural | 5,000 utilization days | 20 | % | unit-of-production
Service rig equipment | 24,000 service hours | 20 | % | unit-of-production
Drilling rig spare equipment | up to 15 years | – |  | straight-line
Service rig spare equipment | up to 15 years | – |  | straight-line
Rental equipment | 10 to 15 years | 0 to 25 | % | straight-line
Other equipment | 3 to 10 years | – |  | straight-line
Light duty vehicles | 4 years | – |  | straight-line
Heavy duty vehicles | 7 to 10 years | – |  | straight-line
Buildings | 10 to 20 years | – |  | straight-line

Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment, and recognized in the statement of earnings.
The estimated useful lives, residual values and methods or depreciation are reviewed annually, and adjusted prospectively if appropriate.
(e) Intangibles
Intangible assets that are acquired by the Corporation with finite lives are initially recorded at estimated fair value and subsequently measured at cost less accumulated amortization and any accumulated impairment losses.
Subsequent expenditures are capitalized only when it increases the future economic benefits of the specific asset to which it relates.
Amortization is recognized in profit and loss using the straight-line method based over the estimated useful lives of the respective assets as follows:

Customer relationships | 1 to 5 years
Patents | 10 years
Brand | 1 to 5 years

The estimated useful lives and methods of amortization are reviewed annually, and adjusted prospectively if appropriate.
(f) Goodwill
Goodwill is the amount that results when the purchase price of an acquired business exceeds the sum of the amounts allocated to the assets acquired, less liabilities assumed, based on their fair values.
If the fair value of the identifiable net assets acquired exceeds the fair value of the consideration, Precision reassesses whether it has correctly identified and measured the assets acquired and liabilities assumed. If that excess remains after reassessment, Precision recognizes the resulting gain in profit or loss on the acquisition date.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, attributed to each of the Corporation’s cash generating units that are expected to benefit and as identified in the combination.
20 P r e c i s i o n D r i l l i n g C o r p o r a t i o n

(g) | Impairment:

i) | Financial assets

| A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is tested for impairment if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate.

| Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics.

| All impairment losses are recognized in profit or loss.

| An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognized. For financial assets measured at amortized cost the reversal is recognized in profit or loss.

ii) | Non-financial assets

| The carrying amounts of the Corporation’s non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill and other intangible assets that have indefinite lives or that are not yet available for use an impairment test is completed at the same time each year.

| For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit” or “CGU”). The recoverable amount of an asset or a CGU is the greater of its value in use and its fair value less costs to sell.

| In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Value in use is generally computed by reference to the present value of the future cash flows expected to be derived from the cash generating unit.

| An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of CGU’s are allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to reduce the carrying amounts of the other assets in the unit on a pro rata basis.

| An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognized in prior years are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depletion and depreciation or amortization, if no impairment loss had been recognized.

(h) | Borrowing costs

Interest and borrowing costs that are directly attributable to the acquisition, construction or production of assets that take a substantial period of time to prepare for their intended use are capitalized as part of the cost of those assets. Capitalization ceases during any extended period of suspension of construction or when substantially all activities necessary to prepare the asset for its intended use are complete.
All other interest and borrowing costs are recognized in earnings in the period in which they are incurred.
N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s 21

(i) Income taxes
Income tax expense is recognized in net earnings except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity.
Current tax is the expected tax payable or receivable on the taxable earnings or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Deferred tax is recognized using the liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized on the initial recognition of assets or liabilities in a transaction that is not a business combination. In addition, deferred tax is not recognized for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in net earnings in the period that includes the date of enactment or substantive enactment.
A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.
(j) Revenue recognition
The Corporation’s services are generally sold based upon service orders or contracts with a customer that include fixed or determinable prices based upon daily, hourly or job rates. Customer contract terms do not include provisions for significant post-service delivery obligations. Revenue is recognized when services and equipment rentals are rendered and only when collectability is reasonably assured. The Corporation also provides services under turnkey contracts whereby it drills a well to an agreed upon depth under specified conditions for a fixed price, regardless of the time required or the problems encountered in drilling the well. Revenue from turnkey drilling contracts is recognized using the percentage-of-completion method based upon costs incurred to date and estimated total contract costs. Anticipated losses, if any, on uncompleted contracts are recorded at the time the estimated costs exceed the contract revenue.
(k) Employee benefit plans
Precision sponsors various defined contribution retirement plan for its employees. The Corporation’s contributions to defined contribution plans are expensed as employees earn the entitlement.
(l) Provisions
Provisions are recognized when the Corporation has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.
The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.
(m) Share based incentive compensation plans
The Corporation has established several cash settled share based incentive compensation plans for officers and other eligible employees. The fair values of the amounts payable to eligible participants under these plans are recognized as an expense with a corresponding increase in liabilities over the period that the participants become unconditionally entitled to payment. The recorded liability is re-measured at the end of each reporting period until settlement with the resultant change to the fair value of the liability recognized in net earnings for the period. When the plans are settled, the cash paid reduces the outstanding liability.
22 P r e c i s i o n D r i l l i n g C o r p o r a t i o n

An equity settled deferred share unit plan has been established whereby non-management directors of Precision can elect to receive all or a portion of their compensation in fully-vested deferred share units. Compensation expense is recognized based on the fair value price of the Corporation’s shares at the date of grant with a corresponding increase to contributed surplus. Upon redemption of the deferred share units into common shares, the amount previously recognized in contributed surplus is recorded as an increase to shareholders' capital. Prior to the conversion from an income trust to a corporation, Trust units issued upon settlement of this plan were redeemable and therefore were accounted for as a liability based award. The liability was re-measured, until settlement, at the end of each reporting period with the resultant change being charged or credited to the statement of earnings as compensation expense. Upon conversion to a corporation the liability for the plan was reclassified to contributed surplus.
A share option plan has been established for certain eligible employees. Under this plan the fair value of share purchase options is calculated at the date of grant using the Black-Scholes option pricing model and that value is recorded as compensation expense over the grant's vesting period with an offsetting credit to contributed surplus. Upon exercise of the equity purchase option, the associated amount is reclassified from contributed surplus to shareholders' capital. Consideration paid by employees upon exercise of the equity purchase options is credited to shareholders' capital. Prior to the conversion from an income trust to a corporation, Trust units issued upon settlement of this plan were redeemable and therefore were accounted for as a liability based award. The liability was re-measured, until settlement, at the end of each reporting period with the resultant change being charged or credited to the statement of earnings as compensation expense. Upon conversion to a corporation the liability for this plan was reclassified from liabilities to contributed surplus with the remaining unamortized grant date fair value charged to earnings as compensation expense over the remaining service period of the awards.
(n) Foreign currency translation
Transactions of the Corporation’s individual entities are recorded in the currency of the primary economic environment in which it operates (its functional currency). Transactions in currencies other than the entities functional currency are translated at rates in effect at the time of the transaction. At each period end monetary assets and liabilities are translated at the prevailing period end rates. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Gains and losses are included in net earnings except for gains and losses on translation of long-term debt designated as a hedge of foreign operations which are deferred and included in accumulated other comprehensive income.
For the purpose of preparing the Corporation’s consolidated financial statements, the financial statements of each foreign operation that does not have a Canadian dollar functional currency are translated into Canadian dollars. Assets and liabilities are translated at exchange rates in effect at the balance sheet date. Revenues and expenses are translated using average exchange rates for the month of the respective transaction. Gains or losses resulting from these translation adjustments are recognized initially in other comprehensive income and reclassified from equity to net earnings on disposal or partial disposal of the foreign operation.
(o) Exchangeable LP units
Prior to Precision’s conversion to a corporation, the issued and outstanding exchangeable LP units were treated as long-term financial liability. This financial liability was revalued at the end of each reporting period based on the period end trading price of Precision’s Trust units with the resulting gains or losses included in earnings. Upon the exchange of LP units for Trust units, the LP units were revalued to the trading price of Precision’s Trust unit on the date of exchange with the associated amount transferred from long-term liabilities to Shareholders’ equity. Upon conversion to a corporation, the remaining exchangeable LP units were revalued and transferred to Shareholders’ equity.
N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s 23

(p) Per share amounts
Basic per share amounts are calculated using the weighted average number of shares outstanding during the year. Diluted per share amounts are calculated by using the treasury stock method for equity based compensation arrangements. The treasury stock method assumes that any proceeds obtained on exercise of equity based compensation arrangements would be used to purchase common shares at the average market price during the period. The weighted average number of shares outstanding is then adjusted by the difference between the number of shares issued from the exercise of equity based compensation arrangements and shares repurchased from the related proceeds.

(q) | Financial instruments

(i) | Non-derivative financial assets:

| Financial assets are classified as either fair value through profit and loss, loans and receivables, held to maturity or available for sale. Financial liabilities are classified as either fair value through profit and loss or other financial liabilities. Non-derivative financial instruments are recognized initially at fair value plus, for instruments not at fair value through profit or loss, any directly attributable transaction costs. Transaction costs attributable to fair value through profit or loss items are expensed as incurred. Subsequent to initial recognition non-derivative financial instruments are measured based on their classification. Cash and cash equivalents are classified as “fair value through profit and loss” and any change in fair value is recorded through net income.

| Accounts receivable are classified as “loans and receivables”. After their initial fair value measurement, they are measured at amortized cost using the effective interest rate method. For the Corporation, the measured amount generally corresponds to historical cost.

| Accounts payable and accrued liabilities and long-term debt are classified as “other financial liabilities”. After their initial fair value measurement, they are measured at amortized cost using the effective interest rate method. For the Corporation, the measured amount generally corresponds to historical cost.

(ii) | Derivative financial instruments:

| The Corporation may enter into certain financial derivative contracts in order to manage the exposure to market risks from fluctuations in interest rates or exchange rates. These instruments are not used for trading or speculative purposes. Precision has not designated its financial derivative contracts as effective accounting hedges, and thus not applied hedge accounting, even though it considers certain financial contracts to be economic hedges. As a result, financial derivative contracts are classified as fair value through profit or loss and are recorded on the balance sheet at estimated fair value. Transaction costs are recognized in profit or loss when incurred.

| Derivatives embedded in other instruments or host contracts are separated from the host contract and accounted for separately when their economic characteristics and risks are not closely related to the host contract. Embedded derivatives are recorded on the balance sheet at estimated fair value and changes in the fair value are recognized in earnings.

(r) | Hedge accounting

The Corporation utilizes foreign currency long-term debt to hedge its exposure to changes in the carrying values of the Corporation’s net investment in certain foreign operations as a result of changes in foreign exchange rates.
To be accounted for as a hedge, the foreign currency long-term debt must be designated and documented as a hedge, and must be effective at inception and on an ongoing basis. The documentation defines the relationship between the foreign currency long-term debt and the net investment in the foreign operations, as well as the Corporation’s risk management objective and strategy for undertaking the hedging transaction. The Corporation formally assesses, both at inception and on an ongoing basis whether the changes in fair value of the foreign currency long-term debt is highly effective in offsetting changes in fair value of the net investment in the foreign operations. The portion of gains or losses on the hedging item that is determined to be an effective hedge is recognized in other comprehensive income, net of tax and is limited to the translation gain or loss on the net investment, while the ineffective portion is recorded in earnings. If the hedging relationship is terminated or ceases to be effective, hedge accounting is not applied to subsequent gains or losses. The amounts recognized in other comprehensive income are reclassified to net earnings when corresponding exchange gains or losses arising from the translation of the foreign operation are recorded in net earnings
24 P r e c i s i o n D r i l l i n g C o r p o r a t i o n

(s) | Critical accounting estimates and judgments

(i) | Allowance for doubtful accounts receivable

| Precision performs ongoing credit evaluations of its customers and grants credit based upon past payment history, financial condition and anticipated industry conditions. Customer payments are regularly monitored and a provision for doubtful accounts is established based upon specific situations and overall industry conditions.

(ii) | Depreciation and amortization

| Precision’s property, plant and equipment and its intangible assets are depreciated and amortized based upon estimates of useful lives and salvage values. These estimates are based on data and information from various sources including vendors, industry practice and Precision’s own historical experience and may change as more experience is gained, market conditions shift or new technological advancements are made.

(iii) | Impairment of long-lived assets

| Long-lived assets, which include property, plant and equipment, intangibles and goodwill, comprise the majority of Precision’s assets. The carrying value of these assets is periodically reviewed for impairment or whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. For property, plant and equipment this requires Precision to forecast future cash flows to be derived from the utilization of these assets based upon assumptions about future business conditions and technological developments. Significant, unanticipated changes to these assumptions could require a provision for impairment in the future.

| The recoverability of goodwill requires a calculation of the recoverable amount of the CGU or groups of CGUs to which goodwill has been allocated. This calculation requires an estimation of the future cash flows from the CGU or group of CGUs and the appropriate discount rate to be applied. Significant, unanticipated changes to these assumptions could require a provision for impairment in the future.

(iv) | Income taxes

| Deferred tax assets and liabilities arise from temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and contain estimates regarding the nature and timing of reversal for the temporary differences as well as the future tax rates that will apply to those reversals. Deferred tax assets also reflect the benefit of unutilized tax losses that can be carried forward to reduce income taxes in future years. Judgment is required to assess the recoverability of these unutilized tax losses and requires Precision to make significant estimates related to expectations of future taxable income. To the extent that future cash flows and taxable income differ significantly from estimates, or changes in tax laws in jurisdictions in which Precision operates occurs, the amount recorded as deferred taxes on the balance sheet could be impacted

(v) | Share based compensation

| Precision uses an option pricing model to determine the fair value of certain share based compensation awards. Inputs to the model requires estimates be made of interest rates, expected lives and forfeiture rates of the awards, and the price volatility of the Corporation’s shares.

N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s 25

NOTE 4. FIRST TIME ADOPTION OF IFRS
As discussed in Note 2(a), these are the Corporation’s first consolidated financial statements prepared in accordance with IFRS. The accounting policies as described in Note 3 have been applied in preparing the financial statements for the three months ended March 31, 2011 and 2010, for the year ended December 31, 2010 and in preparation of the Corporation’s opening statement of financial position at January 1, 2010 (the transition date).
In previous years, the Corporation prepared its consolidated financial statements in accordance with previous Canadian GAAP. An explanation of how the transition from previous Canadian GAAP to IFRS has affected Precision’s financial statements is set out in the following tables and accompanying notes.
Reconciliation of Consolidated Statement of Financial Position at January 1, 2010 (Transition Date)

|  |  | Previous |  |  | Effect of |  |  |  |
(Stated in thousands of Canadian dollars) |  |  | Canadian GAAP |  |  | transition to IFRS |  |  | IFRS |
Assets |  |  |  |  |  |  |  |  |  |
Current assets: |  |  |  |  |  |  |  |  |  |
Cash |  |  | $ | 130,799 |  |  | $ | – |  |  | $ | 130,799 |
Accounts receivable |  |  |  | 283,899 |  |  |  | – |  |  |  | 283,899 |
Income tax recoverable |  |  |  | 25,753 |  |  |  | – |  |  |  | 25,753 |
Inventory |  |  | 9,008 |  |  |  | – |  |  |  | 9,008 |
|  |  |  | 449,459 |  |  |  | – |  |  |  | 449,459 |
Income tax recoverable |  |  |  | 64,579 |  |  |  | – |  |  |  | 64,579 |
Property, plant and equipment | (b) |  |  | 2,913,966 |  |  |  | (260,762 | ) |  |  | 2,653,204 |
Intangibles | (a) |  |  | 3,156 |  |  |  | – |  |  |  | 3,156 |
Goodwill | (a) |  |  | 760,553 |  |  |  | (476,016 | ) |  |  | 284,537 |
|  |  | $ | 4,191,713 |  |  | $ | (736,778 | ) |  | $ | 3,454,935 |
Liabilities and Shareholder’s Equity |  |  |  |  |  |  |  |  |  |  |  |  |
Current liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |
Accounts payable and accrued liabilities | (c) |  | $ | 128,376 |  |  | $ | 6,598 |  |  | $ | 134,974 |
Current portion of long-term debt |  |  | 223 |  |  |  | – |  |  |  | 223 |
|  |  |  | 128,599 |  |  |  | 6,598 |  |  |  | 135,197 |
Long-term liabilities | (e) |  |  | 26,693 |  |  |  | 909 |  |  |  | 27,602 |
Long-term debt |  |  |  | 748,725 |  |  |  | – |  |  |  | 748,725 |
Deferred income taxes | (b),(c) |  |  | 703,195 |  |  |  | (82,736 | ) |  |  | 620,459 |
|  |  |  | 1,607,212 |  |  |  | (75,229 | ) |  |  | 1,531,983 |
Shareholder’s equity: |  |  |  |  |  |  |  |  |  |  |  |  |
Shareholders’ capital | (a),(e) |  |  | 2,770,708 |  |  |  | (571,970 | ) |  |  | 2,198,738 |
Contributed surplus | (c) |  |  | 4,063 |  |  |  | (4,063 | ) |  |  | – |
Retained earnings (deficit) | (a),(b),(c),(e),(f) |  |  | 107,227 |  |  |  | (383,013 | ) |  |  | (275,786 | )
Accumulated other comprehensive income (loss) | (f) |  |  | (297,497 | ) |  |  | 297,497 |  |  |  | – |
|  |  |  | 2,584,501 |  |  |  | (661,549 | ) |  |  | 1,922,952 |
|  |  | $ | 4,191,713 |  |  | $ | (736,778 | ) |  | $ | 3,454,935 |

26 P r e c i s i o n D r i l l i n g C o r p o r a t i o n

Reconciliation of Consolidated Statement of Financial Position at March 31, 2010 |  |  |  |  |  |  |
|  |  | Previous |  |  | Effect of |  |  |  |
(Stated in thousands of Canadian dollars) |  |  | Canadian GAAP |  |  | transition to IFRS |  |  | IFRS |
Assets |  |  |  |  |  |  |  |  |  |
Current assets: |  |  |  |  |  |  |  |  |  |
Cash |  |  | $ | 132,018 |  |  | $ | – |  |  | $ | 132,018 |
Accounts receivable |  |  |  | 367,759 |  |  |  | – |  |  |  | 367,759 |
Income tax recoverable |  |  |  | 23,530 |  |  |  | – |  |  |  | 23,530 |
Inventory |  |  | 9,149 |  |  |  | – |  |  |  | 9,149 |
|  |  |  | 532,456 |  |  |  | – |  |  |  | 532,456 |
Income tax recoverable |  |  |  | 64,579 |  |  |  | – |  |  |  | 64,579 |
Property, plant and equipment | (b) |  |  | 2,824,633 |  |  |  | (262,744 | ) |  |  | 2,561,889 |
Intangibles |  |  |  | 2,739 |  |  |  | – |  |  |  | 2,739 |
Goodwill | (a) |  |  | 746,451 |  |  |  | (461,917 | ) |  |  | 284,534 |
|  |  | $ | 4,170,858 |  |  | $ | (724,661 | ) |  | $ | 3,446,197 |
Liabilities and Shareholder’s Equity |  |  |  |  |  |  |  |  |  |  |  |  |
Current liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |
Accounts payable and accrued liabilities | (c) |  | $ | 138,107 |  |  | $ | 8,719 |  |  | $ | 146,826 |
Current portion of long-term debt |  |  | 444 |  |  |  | – |  |  |  | 444 |
|  |  |  | 138,551 |  |  |  | 8,719 |  |  |  | 147,270 |
Long-term liabilities | (e) |  |  | 22,776 |  |  |  | 929 |  |  |  | 23,705 |
Long-term debt |  |  |  | 725,721 |  |  |  | – |  |  |  | 725,721 |
Deferred income taxes | (b),(c) |  |  | 689,304 |  |  |  | (83,421 | ) |  |  | 605,883 |
|  |  |  | 1,576,352 |  |  |  | (73,773 | ) |  |  | 1,502,579 |
Shareholder’s equity: |  |  |  |  |  |  |  |  |  |  |  |  |
Shareholders’ capital | (a),(e) |  |  | 2,770,708 |  |  |  | (571,970 | ) |  |  | 2,198,738 |
Contributed surplus | (c) |  |  | 5,459 |  |  |  | (5,459 | ) |  |  | – |
Retained earnings (deficit) | (a),(b),(c),(e),(f) |  |  | 169,244 |  |  |  | (388,113 | ) |  |  | (218,869 | )
Accumulated other comprehensive income (loss) | (f) |  |  | (350,905 | ) |  |  | 314,654 |  |  |  | (36,251 | )
|  |  |  | 2,594,506 |  |  |  | (650,888 | ) |  |  | 1,943,618 |
|  |  | $ | 4,170,858 |  |  | $ | (724,661 | ) |  | $ | 3,446,197 |

N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s 27

Reconciliation of Consolidated Statement of Financial Position at December 31, 2010 |  |  |  |  |  |  |
|  |  | Previous |  |  | Effect of |  |  |  |
(Stated in thousands of Canadian dollars) |  |  | Canadian GAAP |  |  | transition to IFRS |  |  | IFRS |
Assets |  |  |  |  |  |  |  |  |  |
Current assets: |  |  |  |  |  |  |  |  |  |
Cash |  |  | $ | 256,831 |  |  | $ | – |  |  | $ | 256,831 |
Accounts receivable |  |  |  | 414,901 |  |  |  | – |  |  |  | 414,901 |
Income tax recoverable |  |  |  | – |  |  |  | – |  |  |  | – |
Inventory |  |  | 4,933 |  |  |  | – |  |  |  | 4,933 |
|  |  |  | 676,665 |  |  |  | – |  |  |  | 676,665 |
Income tax recoverable |  |  |  | 64,579 |  |  |  | – |  |  |  | 64,579 |
Property, plant and equipment | (b) |  |  | 2,812,281 |  |  |  | (279,883 | ) |  |  | 2,532,398 |
Intangibles |  |  |  | 6,366 |  |  |  | – |  |  |  | 6,366 |
Goodwill | (a) |  |  | 736,897 |  |  |  | (452,365 | ) |  |  | 284,532 |
|  | $ | 4,296,788 |  |  | $ | (732,248 | ) |  | $ | 3,564,540 |
Liabilities and Shareholder’s Equity |  |  |  |  |  |  |  |  |  |  |  |  |
Current liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |
Accounts payable and accrued liabilities | (c) |  | $ | 215,653 |  |  | $ | 2,146 |  |  | $ | 217,799 |
Income tax payable |  |  | 863 |  |  |  | – |  |  |  | 863 |
|  |  |  | 216,516 |  |  |  | 2,146 |  |  |  | 218,662 |
Long-term liabilities | (e) |  |  | 30,319 |  |  |  | – |  |  |  | 30,319 |
Long–term debt |  |  |  | 804,494 |  |  |  | – |  |  |  | 804,494 |
Deferred income taxes | (b),(c) |  |  | 667,540 |  |  |  | (89,301 | ) |  |  | 578,239 |
|  |  |  | 1,718,869 |  |  |  | (87,155 | ) |  |  | 1,631,714 |
Shareholder’s equity: |  |  |  |  |  |  |  |  |  |  |  |  |
Shareholders’ capital | (a),(e) |  |  | 2,771,023 |  |  |  | (570,992 | ) |  |  | 2,200,031 |
Contributed surplus | (c) |  |  | 10,471 |  |  |  | 795 |  |  |  | 11,266 |
Retained earnings (deficit) | (a),(b),(c),(e),(f) |  |  | 169,318 |  |  |  | (401,569 | ) |  |  | (232,251 | )
Accumulated other comprehensive income (loss) | (f) |  |  | (372,893 | ) |  |  | 326,673 |  |  |  | (46,220 | )
|  |  |  | 2,577,919 |  |  |  | (645,093 | ) |  |  | 1,932,826 |
|  |  | $ | 4,296,788 |  |  | $ | (732,248 | ) |  | $ | 3,564,540 |

Reconciliation of Consolidated Statement of Earnings (Deficit) for the three months ended March 31, 2010

|  |  | Previous |  |  | Effect of |  |  |  |
(Stated in thousands of Canadian dollars) |  |  | Canadian GAAP |  |  | transition to IFRS |  |  | IFRS |
Revenue |  |  | $ | 373,136 |  |  | $ | – |  |  | $ | 373,136 |
Expenses: |  |  |  |  |  |  |  |  |  |  |  |  |
Operating | (c) |  |  | 229,495 |  |  |  | 177 |  |  |  | 229,672 |
General and administrative | (c),(e) |  |  | 25,238 |  |  |  | 568 |  |  |  | 25,806 |
Depreciation and amortization | (b) |  |  | 45,634 |  |  |  | 6,673 |  |  |  | 52,307 |
Foreign exchange |  |  |  | (19,752 | ) |  |  | – |  |  |  | (19,752 | )
Finance charges |  |  | 28,729 |  |  |  | – |  |  |  | 28,729 |
Earnings before income taxes |  |  |  | 63,792 |  |  |  | (7,418 | ) |  |  | 56,374 |
Income taxes: |  |  |  |  |  |  |  |  |  |  |  |  |
Current |  |  |  | 1,797 |  |  |  | – |  |  |  | 1,797 |
Deferred | (b),(c) |  |  | (22 | ) |  |  | (2,318 | ) |  |  | (2,340 | )
|  |  |  | 1,775 |  |  |  | (2,318 | ) |  |  | (543 | )
Net earnings |  |  |  | 62,017 |  |  |  | (5,100 | ) |  |  | 56,917 |
Retained earnings (deficit), beginning of period | (a),(b),(c),(e),(f) |  |  | 107,227 |  |  |  | (383,013 | ) |  |  | (275,786 | )
Retained earnings (deficit), end of period |  |  | $ | 169,244 |  |  | $ | (388,113 | ) |  | $ | (218,869 | )
Earnings per share: |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  |  | $ | 0.23 |  |  |  |  |  |  | $ | 0.21 |
Diluted |  |  | $ | 0.22 |  |  |  |  |  |  | $ | 0.20 |

28 P r e c i s i o n D r i l l i n g C o r p o r a t i o n

Reconciliation of Consolidated Statement of Earnings (Deficit) for the year ended December 31, 2010

|  |  | Previous |  |  | Effect of |  |  |  |
(Stated in thousands of Canadian dollars) |  |  | Canadian GAAP |  |  | transition to IFRS |  |  | IFRS |
Revenue |  |  | $ | 1,429,653 |  |  | $ | – |  |  | $ | 1,429,653 |
Expenses: |  |  |  |  |  |  |  |  |  |  |  |  |
Operating | (c) |  |  | 886,748 |  |  |  | 3 |  |  |  | 886,751 |
General and administrative | (c),(e) |  |  | 107,522 |  |  |  | 472 |  |  |  | 107,994 |
Depreciation and amortization | (b) |  |  | 182,719 |  |  |  | 27,384 |  |  |  | 210,103 |
Foreign exchange |  |  |  | (12,712 | ) |  |  | – |  |  |  | (12,712 | )
Finance charges |  |  | 211,327 |  |  |  | – |  |  |  | 211,327 |
Earnings before income taxes |  |  |  | 54,049 |  |  |  | (27,859 | ) |  |  | 26,190 |
Income taxes: |  |  |  |  |  |  |  |  |  |  |  |  |
Current |  |  |  | 7,634 |  |  |  | – |  |  |  | 7,634 |
Deferred | (b),(c) |  |  | (15,676 | ) |  |  | (9,303 | ) |  |  | (24,979 | )
|  |  |  | (8,042 | ) |  |  | (9,303 | ) |  |  | (17,345 | )
Net earnings |  |  |  | 62,091 |  |  |  | (18,556 | ) |  |  | 43,535 |
Retained earnings (deficit), beginning of period | (a),(b),(c),(e),(f) |  |  | 107,227 |  |  |  | (383,013 | ) |  |  | (275,786 | )
Retained earnings (deficit), end of period |  |  | $ | 169,318 |  |  | $ | (401,569 | ) |  | $ | (232,251 | )
Earnings per share: |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  |  | $ | 0.23 |  |  |  |  |  |  | $ | 0.16 |
Diluted |  |  | $ | 0.22 |  |  |  |  |  |  | $ | 0.25 |

Reconciliation of Consolidated Statement of Comprehensive Income for the three months ended March 31, 2010

|  |  | Previous |  |  | Effect of |  |  |  |
(Stated in thousands of Canadian dollars) |  |  | Canadian GAAP |  |  | transition to IFRS |  |  | IFRS |
Net earnings |  | $ | 62,017 |  |  | $ | (5,100 | ) |  | $ | 56,917 |
Unrealized gain (loss) on translation of |  |  |  |  |  |  |  |  |  |  |  |  |
assets and liabilities of self-sustaining |  |  |  |  |  |  |  |  |  |  |  |  |
operations denominated in foreign currency | (a),(b) |  |  | (53,408 | ) |  |  | 17,157 |  |  |  | (36,251 | )
Comprehensive income |  |  | $ | 8,609 |  |  | $ | 12,057 |  |  | $ | 20,666 |

Reconciliation of Consolidated Statement of Comprehensive Income (Loss) for the year ended December 31, 2010

|  |  | Previous |  |  | Effect of |  |  |  |
(Stated in thousands of Canadian dollars) |  |  | Canadian GAAP |  |  | transition to IFRS |  |  | IFRS |
Net earnings |  |  | $ | 62,091 |  |  | $ | (18,556 | ) |  | $ | 43,535 |
Unrealized gain (loss) on translation of |  |  |  |  |  |  |  |  |  |  |  |  |
assets and liabilities of self-sustaining operations |  |  |  |  |  |  |  |  |  |  |  |  |
denominated in foreign currency | (a),(b) |  |  | (90,213 | ) |  |  | 29,176 |  |  |  | (61,037 | )
Foreign exchange gain on net investment hedge with |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. denominated debt, net of tax of $2,148 |  |  | 14,817 |  |  |  | – |  |  |  | 14,817 |
Comprehensive income (loss) |  |  | $ | (13,305 | ) |  | $ | 10,620 |  |  | $ | (2,685 | )

N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s 29

(a) Business Combinations
As permitted under IFRS 1 Precision has elected to apply IFRS 3 “Business Combinations” retrospectively to acquisitions occurring on or after December 23, 2008. The only acquisition to be restated upon making this election was the acquisition of Grey Wolf Inc. (“Grey Wolf”) which was completed on December 23, 2008. The application of IFRS 3 would cause the acquisition to be restated as follows:

|  | Canadian GAAP |  |  | IFRS |
Net assets at assigned values: |  |  |  |  |  |
Working capital |  | $ | 470,586 |  |  | $ | 470,586 |
Property, plant and equipment |  |  | 1,869,875 |  |  |  | 1,869,875 |
Intangible assets |  |  | 4,428 |  |  |  | 77,643 |
Goodwill (no tax basis) |  |  | 553,335 |  |  |  | (103,109 | )
Long-term liabilities |  |  | (23,308 | ) |  |  | (23,308 | )
Long-term debt |  |  | (319,115 | ) |  |  | (319,115 | )
Deferred income taxes |  |  | (553,682 | ) |  |  | (581,504 | )
|  | $ | 2,002,119 |  |  | $ | 1,391,068 |
Consideration: |  |  |  |  |  |  |  |
Cash |  | $ | 1,113,034 |  |  | $ | 1,091,522 |
Trust units |  |  | 889,085 |  |  |  | 299,546 |
|  | $ | 2,002,119 |  |  | $ | 1,391,068 |

The principal changes from applying IFRS 3 were that:

• | purchase consideration was valued based on the share price at the date the acquisition closed rather than on the date the acquisition was announced;

• | acquisition costs of $22 million were expensed in the period incurred;

• | an additional intangible asset relating to the purchased name was recognized and, given Precision’s intent not to use the name long-term, was fully amortized in 2009; and

• | the negative goodwill created from the acquisition was immediately recognized in earnings.

The impacts on the financial statements were as follows: |  |  |  |  |  |  |  |  |
|  | As at and for the |  |  | As at and for the |  |  |  |
|  | year ended |  |  | three months ended |  |  | As at |
(Stated in thousands of Canadian dollars) |  | December 31, 2010 |  |  | March 31, 2010 |  |  | January 1, 2010 |
Goodwill |  | $ | (452,365 | ) |  | $ | (461,917 | ) |  | $ | (476,016 | )
Shareholders’ capital |  |  | (589,539 | ) |  |  | (589,539 | ) |  |  | (589,539 | )
Retained earnings |  |  | 113,523 |  |  |  | 113,523 |  |  |  | 113,523 |
Accumulated other comprehensive income (loss) |  |  | 23,651 |  |  |  | 14,099 |  |  |  | – |
Other comprehensive income (loss) |  |  | 23,651 |  |  |  | 14,099 |  |  |  | – |

30 P r e c i s i o n D r i l l i n g C o r p o r a t i o n

(b) Property, Plant and Equipment
In accordance with IFRS 1, Precision has elected to fair value selected drilling rigs located in the United States and Canada. The fair value election for certain rigs has resulted in an adjustment to the carrying value of $146 million at January 1, 2010. For the remaining property, plant and equipment, historical records were built from inception of Precision using principles of IAS 16 Property Plant and Equipment. This has resulted in a decrease in the carrying value of Property, Plant and Equipment of $115 million at January 1, 2010. The adjustment to the carrying values resulted in a decrease to deferred income tax liability of $82 million at the transition date.

The impacts on the financial statements were as follows: |  |  |  |  |  |  |  |  |
|  | As at and for the |  |  | As at and for the |  |  |  |
|  | year ended |  |  | three months ended |  |  | As at |
(Stated in thousands of Canadian dollars) |  | December 31, 2010 |  |  | March 31, 2010 |  |  | January 1, 2010 |
Property, plant and equipment |  | $ | (279,883 | ) |  | $ | (262,744 | ) |  | $ | (260,762 | )
Deferred income taxes |  |  | (88,013 | ) |  |  | (82,457 | ) |  |  | (81,979 | )
Retained earnings |  |  | (178,783 | ) |  |  | (178,783 | ) |  |  | (178,783 | )
Accumulated other comprehensive income (loss) |  |  | 5,525 |  |  |  | 3,058 |  |  |  | – |
Depreciation and amortization |  |  | 27,384 |  |  |  | 6,673 |  |  |  | – |
Deferred income tax expense |  |  | (8,772 | ) |  |  | (2,111 | ) |  |  | – |
Other comprehensive income (loss) |  |  | 5,525 |  |  |  | 3,058 |  |  |  | – |

(c) Share based compensation
Prior to Precision’s conversion to a corporation, the capital structure consisted of Trust units and exchangeable LP units which contained features that allowed the units to be redeemed for cash at any time and on demand by the unitholder. Under IFRS as a result of this redemption feature, Precision’s equity settled share based compensation plan for non-management directors and share option plan for employees were required to be accounted for as liability based awards and be re-measured until settlement at the end of each reporting period. Under previous Canadian GAAP the share-based compensation plan for non-management directors was accounted for by reference to the trading value of the Corporation’s shares at the date of grant while the share option plan was treated as an equity settled award and valued based on the fair value of the option at the date of grant using the Black-Scholes option pricing model. The net effect of these differences is to decrease retained earnings by $1 million for additional compensation expense (net of tax), remove $4 million from contributed surplus and record $5 million in current liabilities at the date of transition.
Precision has a cash settled share appreciation rights plan (“SAR”) which under previous Canadian GAAP were recorded based on the intrinsic value method which uses the balance sheet date share price to value the associated liability. IFRS requires the use of an option pricing model to fair value the SAR. The differences in methodology resulted in a decrease to retained earnings of $1 million for additional compensation expense (net of tax) and a $2 million increase to current liabilities at the date of transition.

The impacts on the financial statements were as follows: |  |  |  |  |  |  |  |  |
|  | As at and for the |  |  | As at and for the |  |  |  |
|  | year ended |  |  | three months ended |  |  | As at |
(Stated in thousands of Canadian dollars) |  | December 31, 2010 |  |  | March 31, 2010 |  |  | January 1, 2010 |
Accounts payable and accrued liabilities |  | $ | 2,146 |  |  | $ | 8,719 |  |  | $ | 6,598 |
Deferred income taxes |  |  | (1,288 | ) |  |  | (964 | ) |  |  | (757 | )
Shareholders’ capital |  |  | 87 |  |  |  | – |  |  |  | – |
Contributed surplus |  |  | 795 |  |  |  | (5,459 | ) |  |  | (4,063 | )
Retained earnings |  |  | (1,778 | ) |  |  | (1,778 | ) |  |  | (1,778 | )
Operating expense |  |  | 3 |  |  |  | 177 |  |  |  | – |
General and administrative expense |  |  | 490 |  |  |  | 548 |  |  |  | – |
Deferred income tax expense |  |  | (531 | ) |  |  | (207 | ) |  |  | – |

N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s 31

(d) Borrowing costs
Under previous Canadian GAAP, Precision expensed borrowing costs as incurred. At the date of transition, Precision elected to capitalize borrowing costs only in respect of qualifying assets for which the commencement date for capitalization was on or after the date of transition.
(e) Exchangeable LP units
Prior to Precision’s conversion to a corporation, it had issued and outstanding exchangeable LP units which under IFRS would be considered a financial liability. This financial liability would be revalued at the end of each reporting period based on the period end trading price of Precision’s Trust units with the resulting gains or losses included in earnings. Upon the exchange of LP units for Trust units, the LP unit would be revalued to the trading price of Precision’s Trust unit on the date of exchange with the associated amount transferred from long-term liabilities to Shareholders equity.

The impacts on the financial statements were as follows: |  |  |  |  |  |  |  |  |
|  | As at and for the |  |  | As at and for the |  |  |  |
|  | year ended |  |  | three months ended |  |  | As at |
(Stated in thousands of Canadian dollars) |  | December 31, 2010 |  |  | March 31, 2010 |  |  | January 1, 2010 |
Long-term liabilities |  | $ | – |  |  | $ | 929 |  |  | $ | 909 |
Shareholders’ capital |  |  | 18,460 |  |  |  | 17,569 |  |  |  | 17,569 |
Retained earnings |  |  | (18,478 | ) |  |  | (18,478 | ) |  |  | (18,478 | )
General and administrative expense |  |  | (18 | ) |  |  | 20 |  |  |  | – |

(f) Cumulative translation differences
In accordance with IFRS 1, Precision has elected to reset the cumulative translation adjustments included in accumulated other comprehensive loss prior to the date of transition to be nil.

The impacts on the financial statements were as follows: |  |  |  |  |  |  |  |  |
|  | As at and for the |  |  | As at and for the |  |  |  |
|  | year ended |  |  | three months ended |  |  | As at |
(Stated in thousands of Canadian dollars) |  | December 31, 2010 |  |  | March 31, 2010 |  |  | January 1, 2010 |
Retained earnings |  | $ | (297,497 | ) |  | $ | (297,497 | ) |  | $ | (297,497 | )
Accumulated other comprehensive income (loss) |  |  | 297,497 |  |  |  | 297,497 |  |  |  | 297,497 |
(g) Retained earnings |  |  |  |  |  |  |  |  |  |  |  |
The impact of IFRS on Precision’s retained earnings as at the transition date is as follows: |  |  |  |  |
|  |  |  |  |  |  |  |  |  | As at |
(Stated in thousands of Canadian dollars) |  |  |  |  |  | Note |  |  | January 1, 2010 |
Business combination: |  |  |  |  |  | (a) |  |  |  |  |
Acquisition costs |  |  |  |  |  |  |  |  |  | $ | (21,512 | )
Amortization of intangibles |  |  |  |  |  |  |  |  |  |  | (68,677 | )
Negative goodwill |  |  |  |  |  |  |  |  |  |  | 103,109 |
Foreign exchange |  |  |  |  |  |  |  |  |  |  | 74,506 |
Deferred income tax |  |  |  |  |  |  |  |  |  |  | 26,097 |
|  |  |  |  |  |  |  |  |  |  | 113,523 |
Fair value of selected rigs net of depreciation |  |  |  |  |  | (b) |  |  |  | (145,868 | )
Calculation of historical property, plant and equipment |  |  |  |  |  |  |  |  |  |  |  |
cost net of depreciation |  |  |  |  |  | (b) |  |  |  | (114,894 | )
Deferred tax on property, plant and equipment adjustments |  |  |  |  |  | (b) |  |  |  | 81,979 |
Share based compensation |  |  |  |  |  | (c) |  |  |  | (1,778 | )
Foreign currency translation adjustment |  |  |  |  |  | (f) |  |  |  | (297,497 | )
Exchangeable LP units |  |  |  |  |  | (e) |  |  |  | (18,478 | )
Decrease in retained earnings |  |  |  |  |  |  |  |  |  | $ | (383,013 | )

32 P r e c i s i o n D r i l l i n g C o r p o r a t i o n

NOTE 5. RECENTLY ANNOUNCED ACCOUNTING PRONOUNCEMENTS NOT YET APPLIED
In November 2009 the International Accounting Standards Board issued IFRS 9 Financial Instruments which introduced new requirements for the classification and measurement of financial assets. This standard was revised in October 2010 to include requirements concerning the classification and measurement of financial liabilities. This new standard is applicable for periods beginning on or after January 1, 2013, with earlier adoption permitted. The Corporation is currently evaluating the impact of adopting this standard on its financial statements.

NOTE 6. LONG-TERM DEBT |  |  |  |  |
|  | March 31, |  | December 31, |
|  | 2011 |  | 2010 |
Revolving credit facility |  | $ | – |  |  | $ | – |
Unsecured senior notes: |  |  |  |  |  |  |  |
6.625% senior notes |  |  | 631,670 |  |  |  | 646,490 |
6.5% senior notes |  |  | 200,000 |  |  |  | – |
10% senior notes |  |  | – |  |  |  | 175,000 |
|  |  | 831,670 |  |  |  | 821,490 |
Less net unamortized debt issue costs |  |  | (20,262 | ) |  |  | (16,996 | )
|  | $ | 811,408 |  |  | $ | 804,494 |

During March 2011, Precision issued $200 million aggregate principal amount of 6.5% senior unsecured notes (“6.5% Senior Notes”) due 2019 in a private placement. The net proceeds and cash on hand were in effect used to repay the $175 million 10% senior unsecured notes. The total repayment of approximately $204 million included the $175 million in principal, accrued interest and a make-whole premium. The make-whole premium of $27 million was recorded in financing charges in the first quarter of 2011.
The 6.5% Senior Notes are unsecured, ranking equally with existing and future senior unsecured indebtedness, and have been guaranteed by current and future U.S. and Canadian subsidiaries that guaranteed the revolving credit facility. These notes contain certain covenants that limit Precision’s ability and the ability of certain subsidiaries to, incur additional indebtedness and issue preferred stock; create liens; make restricted payments; create or permit to exist restrictions on the ability of Precision or certain subsidiaries to make certain payments and distributions; engage in amalgamations, mergers or consolidations; make certain dispositions and transfers of assets; and engage in transactions with affiliates. If the notes receive an investment grade rating by Standard & Poor’s and Moody’s Investors Service and Precision and its subsidiaries are not in default under the indenture governing the notes, then Precision will not be required to comply with particular covenants contained in the indenture.
Precision may redeem, prior to March 15, 2014, up to 35% of the 6.5% Senior Notes with the net proceeds of certain equity offerings at a redemption price equal to 106.5% of the principal amount plus accrued interest. Prior to March 15, 2015, Precision may redeem the notes in whole or in part at 100.0% of their principal amount, plus accrued interest. and the greater of 1.0% of the principal amount of the note to be redeemed and the excess, if any, of the present value of the March 15, 2015 redemption price plus required interest payments through March 15, 2015 (calculated using the Government of Canada rate plus 100 basis points) over the principal amount of the note. As well, Precision may redeem the notes in whole or in part at any time on or after March 15, 2015 and before March 15, 2017, at redemption prices ranging between 103.250% and 101.6254% of their principal amount plus accrued interest. Anytime on or after March 15, 2017 the notes can be redeemed for their principal amount plus accrued interest. Upon specified change of control events, each holder of a note will have the right to sell to Precision all or a portion of its notes at a purchase price in cash equal to 101% of the principal amount, plus accrued interest to the date of purchase.
At March 31, 2011 no mandatory principal repayments are required in the next five years.
N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s 33

NOTE 7. INCOME TAXES
The provision for income taxes differs from that which would be expected by applying statutory Canadian income tax rates. A reconciliation of the difference at March 31 is as follows:

|  | Three months ended March 31, |
|  | 2011 |  | 2010 |
Earnings before income taxes |  | $ | 77,232 |  |  | $ | 56,374 |
Federal and provincial statutory rates |  |  | 27 | % |  |  | 28 | %
Tax at statutory rates |  | $ | 20,853 |  |  | $ | 15,785 |
Adjusted for the effect of: |  |  |  |  |  |  |  |
Non-deductible expenses |  |  | 1,324 |  |  |  | 2,865 |
Non-taxable capital gains |  |  | (16 | ) |  |  | (1,248 | )
Income taxed at lower rates |  |  | (10,943 | ) |  |  | (20,773 | )
Other |  |  | 454 |  |  |  | 2,828 |
Income tax expense (reduction) |  | $ | 11,672 |  |  | $ | (543 | )
Effective income tax rate |  |  | 15 | % |  |  | (1 | )%

NOTE 8. SHAREHOLDERS’ CAPITAL |  |  |  |  |  |  |  |
(a) Authorized – unlimited number of voting common shares |  |  |  |  |  |  |  |
– unlimited number of preferred shares, issuable in series |  |  |  |  |  |  |  |
(b) Issued |  |  |  |  |  |  |  |
Common shares |  | Number |  |  | Amount |
Balance, May 31, 2010 |  |  | – |  |  | $ | – |
Issued for Trust units |  |  | 275,544,524 |  |  |  | 2,198,933 |
Issued for LP units |  |  | 118,820 |  |  |  | 891 |
Options exercised – cash consideration |  |  | 23,332 |  |  |  | 122 |
– reclassification from contributed surplus |  |  | – |  |  |  | 85 |
Balance, December 31, 2010 |  |  | 275,686,676 |  |  | $ | 2,200,03 |
Options exercised – cash consideration |  |  | 66,250 |  |  |  | 436 |
– reclassification from contributed surplus |  |  | – |  |  |  | 231 |
Balance, December 31, 2010 |  |  | 275,752,926 |  |  | $ | 2,200,698 |
The following provides a continuity of Trust units up to the Conversion on June 1, 2010. |  |  |  |  |
Trust units |  | Number |  |  | Amount |
Balance, January 1, 2010 |  |  | 275,516,778 |  |  | $ | 2,198,738 |
Issued on redemption of non-management directors DSU’s |  |  | 28,586 |  |  |  | 204 |
Cancellation of units owned by dissenting shareholders |  |  | (840 | ) |  |  | (9 | )
Balance, May 31, 2010 |  |  | 275,544,524 |  |  | $ | 2,198,933 |

(c) Warrants
On April 22, 2009 the Corporation issued 15,000,000 purchase warrants pursuant to a private placement. Each warrant is exercisable into common shares of the Corporation at a price of $3.22 per share for a period of five years from the date of issue. No warrants have been exercised as at March 31, 2011.
34 P r e c i s i o n D r i l l i n g C o r p o r a t i o n

NOTE 9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |  |  |  |  |  |  |
|  |  | Unrealized |  | Foreign exchange |  |  | Accumulated |
|  | foreign currency |  |  | gain on net |  |  | other |
|  | translation |  |  | investment |  |  | comprehensive |
|  | losses |  |  | hedge |  |  | income (loss) |
Balance, January 1, 2010 |  | $ | – |  |  | $ | – |  |  | $ | – |
Other comprehensive income |  |  | (36,251 | ) |  |  | – |  |  |  | (36,251 | )
Balance, March 31, 2010 |  |  | (36,251 | ) |  |  | – |  |  |  | (36,251 | )
Other comprehensive income |  |  | (24,786 | ) |  |  | 14,817 |  |  |  | (9,969 | )
Balance, December 31, 2010 |  |  | (61,037 | ) |  |  | 14,817 |  |  |  | (46,220 | )
Other comprehensive income |  |  | (26,808 | ) |  |  | 12,944 |  |  |  | (13,864 | )
Balance March 31, 2011 |  | $ | (87,845 | ) |  | $ | 27,761 |  |  | $ | (60,084 | )

NOTE 10. SHARE BASED COMPENSATION PLANS
(a) Officers and employees
Precision has two cash settled share based incentive plans for officers and other eligible employees. Under the Restricted Share Unit incentive plan shares granted to eligible employees vest annually over a three year term. Vested shares are normally paid out in cash in the first quarter of the year following vesting at a value determined by the fair market value of the shares as at December 31 of the vesting year. Under the Performance Share Unit incentive plan shares granted to eligible employees vest at the end of a three-year term. Vested shares are automatically paid out in cash in the first quarter following the vested term at a value determined by the fair market value of the shares at December 31 of the vesting year and based on the number of performance shares held multiplied by a performance factor that ranges from zero to two times. The performance factor is based on Precision achieving a predetermined return on capital employed and share price performance compared to a peer group over the three-year period. As at March 31, 2011 $14.8 million is included in accounts payable and accrued liabilities and $6.6 million in long-term liabilities for the plans. Included in net earnings for the three months ended March 31, 2011 is an expense of $8.8 million (2010 - $2.8 million).
Prior to the implementation of the incentive plans mentioned above, Precision had a Performance Savings Plan. Certain liabilities under this plan continue to exist as eligible participants were able to elect to receive a portion of their annual performance bonus in the form of deferred share units ("DSUs"). These notional share units are redeemable in cash and must be redeemed within 60 days of ceasing to be an employee of Precision or by the end of the second full calendar year after receipt of the DSUs. A summary of the DSUs outstanding under this share based incentive plan is presented below:

Deferred Share Units |  | Outstanding |
Balance, December 31, 2010 |  |  | 167,442 |
Redeemed on employee resignations and withdrawals |  |  | (51,983 | )
Balance, March 31, 2011 |  |  | 115,459 |

As at March 31, 2011 $1.5 million is included in accounts payable and accrued liabilities for outstanding DSUs. Included in net earnings for the three months ended March 31, 2011 is an expense of $0.4 million (2010 - $0.1 million expense recovery).
N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s 35

The Corporation has a U.S. dollar denominated Share Appreciation Rights ("SAR") plan under which eligible participants were granted SAR's that entitle the rights holder to receive cash payments calculated as the excess of the market price over the exercise price per share on the exercise date. The SAR's vest over a period of 5 years and expire 10 years from the date of grant.

|  |  |  |  |  |  |  | Weighted |  |  |  |
|  |  |  |  | Range of |  |  | average |  |  |  |
|  |  |  |  | exercise price |  |  | exercise price |  |  |  |
Share Appreciation Rights |  | Outstanding |  |  | (US$) |  |  | (US$) |  |  | Exercisable |
Outstanding at December 31, 2010 |  |  | 745,615 |  |  |  | 9.26 – 17.92 |  |  |  | 14.79 |  |  |  | 707,327 |
Exercised |  |  | (8,620 | ) |  |  | 9.26 – 9.26 |  |  |  | 9.26 |  |  |  |  |
Outstanding at March 31, 2011 |  |  | 736,995 |  |  | $ | 9.26 – 17.92 |  |  | $ | 14.86 |  |  |  | 736,995 |
|  | Total SAR’s Outstanding |  |  | Exercisable SAR’s |

|  |  |  |  |  |  |  |  | Weighted |  |  |  |  |  |  |
|  |  |  |  |  | Weighted |  |  | average |  |  |  |  |  | Weighted |
|  |  |  |  |  | average |  |  | remaining |  |  |  |  |  | average |
|  |  |  |  |  | exercise price |  |  | contractual |  |  |  |  |  | exercise price |
Range of Exercise Prices (US$): |  |  |  | Number |  |  |  | price (US$) |  |  |  | life (Years) |  |  |  | Number |  |  |  | price (US$) |
$ | 9.26 – 11.99 |  |  |  | 62,760 |  |  | $ | 9.27 |  |  |  | 2.99 |  |  |  | 62,760 |  |  | $ | 9.27 |
| 12.00 – 14.99 |  |  |  | 115,478 |  |  |  | 13.26 |  |  |  | 3.85 |  |  |  | 115,478 |  |  |  | 13.26 |
| 15.00 – 17.92 |  |  |  | 558,757 |  |  |  | 15.81 |  |  |  | 6.18 |  |  |  | 558,757 |  |  |  | 15.81 |
$ | 9.26 – 17.92 |  |  |  | 736,995 |  |  | $ | 14.86 |  |  |  | 5.54 |  |  |  | 736,995 |  |  | $ | 14.86 |

As at March 31, 2011 $3.6 million is included in accounts payable and accrued liabilities for outstanding SARs. Included in net earnings for the three months ended March 31, 2011 is an expense of $1.5 million (2010 - $0.2 million).
(b) Non-management directors
Precision has a deferred share unit plan for non-management directors. Under the plan fully vested deferred share units are granted quarterly based upon an election by the non-management director to receive all or a portion of their compensation in deferred share units. These deferred share units are redeemable into an equal number of common shares any time after the director's retirement. A summary of this share based incentive plan is presented below:

Deferred Shares Units |  | Outstanding |
Balance, December 31, 2010 |  |  | 393,717 |
Granted |  |  | 18,197 |
Balance, March 31, 2011 |  |  | 411,914 |

For the three months ended March 31, 2011 the Corporation expensed $0.2 million as share based compensation, with a corresponding increase in contributed surplus. As discussed in Note 4(b), prior to the conversion to a corporation, this plan was treated as a cash settled award and for the three months ended March 31, 2010 Precision expensed $0.3 million as share based compensation with a corresponding increase to accounts payable and accrued liabilities.
(c) Option plan
The Corporation has a share option plan under which a combined total of 10,303,253 options to purchase shares are reserved to be granted to employees. Of the amount reserved 5,984,655 options have been granted. Under this plan, the exercise price of each option equals the fair market of the option at the date of grant determined by the weighted average trading price for the five days preceding the grant. The options are denominated in either Canadian or U.S. dollars and vest over a period of three years from the date of grant as employees render continuous service to the Corporation and have a term of seven years.
36 P r e c i s i o n D r i l l i n g C o r p o r a t i o n

A summary of the status of the equity incentive plan is presented below: |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  | Weighted |  |  |  |
|  | Options |  |  | Range of |  |  | average |  |  | Options |
Canadian share options |  | Outstanding |  |  | exercise price |  |  | exercise price |  |  | exercisable |
Outstanding as at December 31, 2010 |  |  | 2,341,769 |  |  | $ | 5.22 – 8.59 |  |  | $ | 7.24 |  |  |  | 386,013 |
Granted |  |  | 1,160,500 |  |  | $ | 10.44 – 10.44 |  |  | $ | 10.44 |  |  |  |  |
Exercised |  |  | (27,254 | ) |  | $ | 5.85 – 8.59 |  |  | $ | 7.17 |  |  |  |  |
Forfeitures |  |  | (31,876 | ) |  | $ | 5.85 – 10.44 |  |  | $ | 8.95 |  |  |  |  |
Outstanding as at March 31, 2011 |  |  | 3,443,139 |  |  | $ | 5.22 – 10.44 |  |  | $ | 8.30 |  |  |  | 743,897 |
|  |  |  |  |  |  |  |  |  | Weighted |  |  |  |  |
|  |  | Options |  |  |  | Range of |  |  | average exercise |  |  |  | Options |
U.S. share options |  |  | Outstanding |  |  | exercise price (US$) |  |  | price (US$) |  |  | exercisable |
Outstanding as at December 31, 2010 |  |  | 1,381,354 |  |  | $ | 4.95 – 8.06 |  |  | $ | 6.77 |  |  |  | 158,177 |
Granted |  |  | 776,200 |  |  | $ | 10.55 – 10.55 |  |  | $ | 10.55 |  |  |  |  |
Exercised |  |  | (38,996 | ) |  | $ | 4.95 – 8.06 |  |  | $ | 6.43 |  |  |  |  |
Forfeitures |  |  | (5,500 | ) |  | $ | 4.95 – 4.95 |  |  | $ | 4.95 |  |  |  |  |
Outstanding as at March 31, 2011 |  |  | 2,113,058 |  |  | $ | 4.95 – 10.55 |  |  | $ | 8.17 |  |  |  | 329,163 |

The range of exercise prices for options outstanding at March 31, 2011 are as follows: |  |  |
Canadian share options |  |  |  | Total Options Outstanding |  |  | Exercisable Options |
|  |  |  |  |  |  |  |  | Weighted |  |  |  |  |  |  |
|  |  |  |  |  | Weighted |  |  | Average |  |  |  |  |  | Weighted |
|  |  |  |  |  | Average |  |  | Remaining |  |  |  |  |  | Average |
|  |  |  |  |  | Exercise |  |  | Contractual |  |  |  |  |  | Exercise |
Range of Exercise Prices: Number |  |  | Price |  |  | Life (Years) |  |  | Number |  |  | Price |
$ | 5.22 – 6.99 |  |  |  | 1,120,702 |  |  | $ | 5.85 |  |  |  | 5.10 |  |  |  | 364,874 |  |  | $ | 5.85 |
| 7.00 – 8.99 |  |  |  | 1,177,537 |  |  |  | 8.56 |  |  |  | 5.88 |  |  |  | 379,023 |  |  |  | 8.59 |
| 9.00 – 10.44 |  | 1,144,900 |  |  |  | 10.44 |  |  |  | 6.86 |  |  |  | – |  |  |  | – |
$ | 5.22 – 10.44 |  |  |  | 3,443,139 |  |  | $ | 8.30 |  |  |  | 5.95 |  |  |  | 743,897 |  |  | $ | 7.24 |

U.S. share options |  |  |  |  |  | Total Options Outstanding |  |  | Exercisable Options |
|  |  |  |  |  |  |  |  | Weighted |  |  |  |  |  |  |
|  |  |  |  |  | Weighted |  |  | Average |  |  |  |  |  | Weighted |
|  |  |  |  |  | Average |  |  | Remaining |  |  |  |  |  | Average |
|  |  |  |  |  | Exercise |  |  | Contractual |  |  |  |  |  | Exercise |
Range of Exercise Prices (US$): | Number |  |  | Price (US$) |  |  | Life (Years) |  |  | Number |  |  | Price (US$) |
$ | 4.95 – 5.99 |  |  |  | 478,836 |  |  | $ | 4.95 |  |  |  | 5.05 |  |  |  | 134,155 |  |  | $ | 4.95 |
| 6.00 – 8.99 |  |  |  | 858,022 |  |  |  | 7.81 |  |  |  | 5.99 |  |  |  | 195,008 |  |  |  | 8.05 |
| 9.00 – 10.55 |  |  |  | 776,200 |  |  |  | 10.55 |  |  |  | 6.86 |  |  |  | – |  |  |  | – |
$ | 4.95 – 10.55 |  |  |  | 2,113,058 |  |  | $ | 8.17 |  |  |  | 6.10 |  |  |  | 329,163 |  |  | $ | 6.79 |

The per option weighted average fair value of the share options granted during 2011 was $4.84 estimated on the grant date using the Black-Scholes option pricing model with the following assumption: average risk-free interest rate 2%, average expected life of four years, expected forfeiture rate of 5% and expected volatility of 59%. Included in net earnings for the three months ended March 31, 2011 is an expense $2.0 million (2010 - $1.6 million).
N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s 37

NOTE 11. FINANCE CHARGES |  |  |  |  |
Three months ended March 31, |  | 2011 |  | 2010 |
Interest: |  |  |  |  |  |
Long-term debt |  |  | 15,021 |  |  | $ | 18,718 |
Other |  |  | 31 |  |  |  | 19 |
Income |  |  | (187 | ) |  |  | (63 | )
Amortization of debt issue costs |  |  | 721 |  |  |  | 9,069 |
Accelerated amortization of debt issue costs from voluntary debt repayments |  |  | – |  |  |  | 986 |
Loss on settlement of debt facilities |  |  | 26,942 |  |  |  | – |
Finance charges |  | $ | 42,528 |  |  | $ | 28,729 |

NOTE 12. PER SHARE AMOUNTS
The following tables reconcile the net earnings and weighted average shares outstanding used in computing basic and diluted earnings per share:

Three months ended March 31, |  | 2011 |  | 2010 |
Net earnings - basic and diluted |  | $ | 65,560 |  |  | $ | 56,917 |
(Stated in thousands) |  |  | 2011 |  |  |  | 2010 |
Weighted average shares outstanding – basic |  |  | 275,711 |  |  |  | 275,517 |
Effect of share warrants |  |  | 10,704 |  |  |  | 9,359 |
Effect of exchangeable LP units |  |  | – |  |  |  | 119 |
Effect of stock options and other equity compensation plans |  |  | 1,440 |  |  |  | 674 |
Weighted average shares outstanding – diluted |  |  | 287,855 |  |  |  | 285,669 |

NOTE 13. BUSINESS ACQUISITIONS
On March 28, 2011 Precision acquired all the issued and outstanding shares of Drake Directional Drilling, LLC and Drake MWD Services, LLC. These companies provide directional drilling services in Texas, Louisiana, Oklahoma and Colorado and have been included in the Contract Drilling Services segment.

The details of this acquisition are as follows: |  |  |
Net assets at assigned values: |  |  |
Working capital |  | $ | 3,748(1) |
Property, plant and equipment |  |  | 5,513 |
Intangible assets |  |  | 1,460 |
Goodwill |  |  | 25,301 |
|  | $ | 35,752 |
Consideration: |  |  |  |
Cash |  | $ | 35,752 |
(1) Working capital includes cash of $ 2,609 |  |  |  |

38 P r e c i s i o n D r i l l i n g C o r p o r a t i o n

NOTE 14. SEGMENTED INFORMATION
To align with the management of the operating divisions, Precision now considers the camp and catering division to be within the Completion and Production Services segment. In addition, Precision views its corporate segment as a support function that provides assistance to more than one segment and commencing in 2011 has included United States based corporate costs, previously included in Contract Drilling Services, in the Corporate and Other segment. Prior period amounts have been restated to reflect these changes. The Corporation operates primarily in Canada and the United States, in two industry segments; Contract Drilling Services and Completion and Production Services. Contract Drilling Services includes drilling rigs, directional drilling, procurement and distribution of oilfield supplies, and manufacture, sale and repair of drilling equipment. Completion and Production Services includes service rigs, snubbing units, oilfield equipment rental, camp and catering services, and wastewater treatment units.

|  | Contract |  |  | Completion and |  |  |  |  |  |  |  |  |  |
|  | Drilling |  |  | Production |  |  | Corporate |  |  | Inter-segment |  |  |  |
Three months ended March 31, 2011 |  | Services |  |  | Services |  |  | and Other |  |  | Eliminations |  |  | Total |
Revenue |  | $ | 426,027 |  |  | $ | 104,229 |  |  | $ | – |  |  | $ | (4,906 | ) |  | $ | 525,350 |
Operating earnings |  |  | 118,023 |  |  |  | 27,380 |  |  |  | (22,311 | ) |  |  | – |  |  |  | 123,092 |
Depreciation and amortization |  |  | 54,527 |  |  |  | 7,071 |  |  |  | 1,721 |  |  |  | – |  |  |  | 63,319 |
Total assets |  |  | 2,920,266 |  |  |  | 446,506 |  |  |  | 276,078 |  |  |  | – |  |  |  | 3,642,850 |
Goodwill |  |  | 197,587 |  |  |  | 112,139 |  |  |  | – |  |  |  | – |  |  |  | 309,726 |
Capital expenditures* |  |  | 55,649 |  |  |  | 8,927 |  |  |  | 224 |  |  |  | – |  |  |  | 64,800 |
* Excludes business acquisitions |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Contract |  |  | Completion and |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Drilling |  |  | Production |  |  | Corporate |  |  | Inter-segment |  |  |  |  |
Three months ended March 31, 2010 |  | Services |  |  | Services |  |  | and Other |  |  | Eliminations |  |  | Total |
Revenue |  | $ | 304,820 |  |  | $ | 73,152 |  |  | $ | – |  |  | $ | (4,836 | ) |  | $ | 373,136 |
Operating earnings |  |  | 69,251 |  |  |  | 12,768 |  |  |  | (16,668 | ) |  |  | – |  |  |  | 65,351 |
Depreciation and amortization |  |  | 43,605 |  |  |  | 6,677 |  |  |  | 2,025 |  |  |  | – |  |  |  | 52,307 |
Total assets |  |  | 2,854,115 |  |  |  | 388,761 |  |  |  | 203,321 |  |  |  | – |  |  |  | 3,446,197 |
Goodwill |  |  | 172,395 |  |  |  | 112,139 |  |  |  | – |  |  |  | – |  |  |  | 284,534 |
Capital expenditures |  |  | 5,385 |  |  |  | 1,043 |  |  |  | 1,055 |  |  |  | – |  |  |  | 7,483 |
The Corporation’s operations are carried on in the following geographic locations: |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  | Inter-segment |  |  |  |  |
Three months ended March 31, 2011 |  | Canada |  |  | United States |  |  | International |  |  | Eliminations |  |  | Total |
Revenue |  | $ | 332,619 |  |  | $ | 187,055 |  |  | $ | 6,035 |  |  | $ | (359 | ) |  | $ | 525,350 |
Total assets |  |  | 1,709,726 |  |  |  | 1,881,997 |  |  |  | 51,127 |  |  |  | – |  |  |  | 3,642,850 |
|  |  |  |  |  |  |  |  |  |  |  |  |  | Inter-segment |  |  |  |  |
Three months ended March 31, 2010 |  | Canada |  |  | United States |  |  | International |  |  | Eliminations |  |  | Total |
Revenue |  | $ | 231,660 |  |  | $ | 136,094 |  |  | $ | 6,234 |  |  | $ | (852 | ) |  | $ | 373,136 |
Total assets |  |  | 1,554,528 |  |  |  | 1,838,230 |  |  |  | 53,439 |  |  |  | – |  |  |  | 3,446,197 |

N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s 39

NOTE 15. SUPPLEMENTAL INFORMATION |  |  |  |  |
Components of change in non-cash working capital balances: |  |  |  |  |
Three months ended March 31, |  | 2011 |  | 2010 |
Accounts receivable |  | $ | (92,118 | ) |  | $ | (88,632 | )
Inventory |  |  | (5,655 | ) |  |  | (162 | )
Accounts payable and accrued liabilities |  |  | (7,328 | ) |  |  | 5,819 |
|  | $ | (105,101 | ) |  | $ | (82,975 | )
Pertaining to: |  |  |  |  |  |  |  |
Operations |  | $ | (75,015 | ) |  | $ | (83,531 | )
Investments |  | $ | (29,340 | ) |  | $ | 556 |
Financing |  | $ | (746 | ) |  | $ | – |

NOTE 16. CONTINGENCIES, COMMITMENTS AND GUARANTEES
The business and operations of the Corporation are complex and the Corporation has executed a number of significant financings, business combinations, acquisitions and dispositions over the course of its history. The computation of income taxes payable as a result of these transactions involves many complex factors as well as the Corporation’s interpretation of relevant tax legislation and regulations. The Corporation’s management believes that the provision for income tax is adequate and in accordance with IFRS and applicable legislation and regulations. However, there are tax filing positions that have been and can still be the subject of review by taxation authorities who may successfully challenge the Corporation’s interpretation of the applicable tax legislation and regulations, with the result that additional taxes could be payable by the Corporation and the amount owed, with estimated interest but without penalties, could be up to $350 million, including the estimated amount pertaining to the long-term income tax recoverable on the balance sheet for $166 million. On February 9, 2011 the Corporation received a notice of reassessment from Canada Revenue Agency for $216 million relating to a transaction that occurred in the 2005 tax year which amount is included in the $350 million noted above. The Corporation has appealed this reassessment as it vigorously defends what it believes to be a correct filing position related to this transaction. The appeal process required the Corporation to pay security of approximately $108 million which was recorded in long-term income tax recoverable.
The Corporation, through the performance of its services, product sales and business arrangements, is sometimes named as a defendant in litigation. The outcome of such claims against the Corporation is not determinable at this time, however, their ultimate resolution is not expected to have a material adverse effect on the Corporation.
The Corporation has entered into agreements indemnifying certain parties primarily with respect to tax and specific third party claims associated with businesses sold by the Corporation. Due to the nature of the indemnifications, the maximum exposure under these agreements cannot be estimated. No amounts have been recorded for the indemnities as the Corporation’s obligations under them are not probable or estimable.
NOTE 17. SUBSEQUENT EVENT
On June 13, 2011, the Corporation entered into an amendment to its existing revolving credit facility which; (i) reduced the margins and rates applicable to interest rates and fees payable under the revolving credit facility, (ii) extended the maturity date of the revolving credit facility to November 17, 2015, (iii) increased the amount of unsecured indebtedness permitted to be incurred under the revolving credit facility, (iv) increased the permitted limit ratio of consolidated senior debt to EBITDA from 2.5:1 to 3:1 and (v) increased the permitted limit ratio of consolidated total debt to EBITDA from 3.5:1 to 4:1.
40 P r e c i s i o n D r i l l i n g C o r p o r a t i o n

C o r p o r a t e I n f o r m a t i o n 41

42 P r e c i s i o n D r i l l i n g C o r p o r a t i o n

Precision Drilling Corporation
4200, 150 – 6th Avenue SW
Calgary, Alberta, Canada T2P 3Y7
Telephone: 403-716-4500
www.precisiondrilling.com