EX-99.3 9 pds-ex993_12.htm EX-99.3

Exhibit 99.3

Management’s Report to the Shareholders

The accompanying Consolidated Financial Statements and all information in this Annual Report are the responsibility of management. The Consolidated Financial Statements have been prepared by management in accordance with the accounting policies in the Notes to the Consolidated Financial Statements. When necessary, management has made informed judgments and estimates in accounting for transactions that were not complete at the balance sheet date. In the opinion of management, the Consolidated Financial Statements have been prepared within acceptable limits of materiality and are in accordance with International Financial Reporting Standards (IFRS) appropriate in the circumstances. The financial information elsewhere in this Annual Report has been reviewed to ensure consistency with that in the Consolidated Financial Statements.

Management has prepared Management’s Discussion and Analysis (MD&A). The MD&A is based on the financial results of Precision Drilling Corporation (the Corporation) prepared in accordance with IFRS. The MD&A compares the audited financial results for the years ended December 31, 2018 and December 31, 2017.

Management is responsible for establishing and maintaining adequate internal control over the Corporation’s financial reporting and is supported by an internal audit function that conducts periodic testing of these controls. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of Consolidated Financial Statements for external reporting purposes in accordance with IFRS. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision of, and with direction from, our principal executive officer and principal financial and accounting officer, management conducted an evaluation of the effectiveness of the Corporation’s internal control over financial reporting. Management’s evaluation of internal control over financial reporting was based on the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO 2013). Based on this evaluation, management concluded that the Corporation’s internal control over financial reporting was effective as of December 31, 2018. Also, management determined that there were no material weaknesses in the Corporation’s internal control over financial reporting as of December 31, 2018.

KPMG LLP (KPMG), an independent firm of Chartered Professional Accountants, was engaged, as approved by a vote of shareholders at the Corporation’s most recent annual meeting, to audit the Consolidated Financial Statements and provide an independent professional opinion.

KPMG also completed an audit of the design and effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2018, as stated in its report included in this Annual Report and expressed an unqualified opinion on the design and effectiveness of internal control over financial reporting as of December 31, 2018.

The Audit Committee of the Board of Directors, which is comprised of six independent directors who are not employees of the Corporation, provides oversight to the financial reporting process. Integral to this process is the Audit Committee’s review and discussion with management and KPMG of the quarterly and annual financial statements and reports prior to their respective release. The Audit Committee is also responsible for reviewing and discussing with management and KPMG major issues as to the adequacy of the Corporation’s internal controls. KPMG has unrestricted access to the Audit Committee to discuss its audit and related matters. The Consolidated Financial Statements have been approved by the Board of Directors and its Audit Committee.

/s/ Kevin A. Neveu |  | /s/ Carey T. Ford
Kevin A. Neveu |  | Carey T. Ford
President and Chief Executive Officer |  | Senior Vice President and Chief Financial Officer
Precision Drilling Corporation |  | Precision Drilling Corporation
March 1, 2019 |  | March 1, 2019

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of Precision Drilling Corporation

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated statements of financial position of Precision Drilling Corporation (the Corporation) as of December 31, 2018 and 2017, the related consolidated statements of loss, comprehensive loss, changes in equity, and cash flow for the years then ended, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Corporation as of December 31, 2018 and 2017, and the results of its financial performance and its cash flows for the years then ended, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Corporation’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 1, 2019 expressed an unqualified opinion on the effectiveness of the Corporation’s internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/KPMG LLP

We have served as the Corporation’s auditor since 1987.

Chartered Professional Accountants

Calgary, Canada

March 1, 2019

Precision Drilling Corporation 2018 Annual Report | 2

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of Precision Drilling Corporation

Opinion on Internal Control over Financial Reporting

We have audited Precision Drilling Corporation’s (the “Corporation”) internal control over financial reporting as of December 31, 2018, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated statements of financial position of the Corporation as of December 31, 2018 and December 31, 2017, the related consolidated statements of loss, comprehensive loss, changes in equity and cash flows for the years then ended, and the related notes (collectively the “consolidated financial statements”) and our report dated March 1, 2019 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report to the Shareholders. Our responsibility is to express an opinion on the Corporation’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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

Definition and Limitations of Internal Control over Financial Reporting

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

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

/s/KPMG LLP

Chartered Professional Accountants

Calgary, Canada

March 1, 2019

Precision Drilling Corporation 2018 Annual Report | 3

Consolidated Statements of Financial Position

(Stated in thousands of Canadian dollars) |  |  |  | December 31, 2018 |  |  | December 31, 2017 |
ASSETS |  |  |  |  |  |  |  |  |  |
Current assets: |  |  |  |  |  |  |  |  |  |
Cash |  |  |  | $ | 96,626 |  |  | $ | 65,081 |
Accounts receivable |  | (Note 25) |  |  | 372,336 |  |  |  | 322,585 |
Income tax recoverable |  |  |  |  | — |  |  |  | 29,449 |
Inventory |  |  |  |  | 34,081 |  |  |  | 24,631 |
|  |  |  |  | 503,043 |  |  |  | 441,746 |
Assets held for sale |  | (Note 6) |  |  | 19,658 |  |  |  | — |
Total current assets |  |  |  |  | 522,701 |  |  |  | 441,746 |
Non-current assets: |  |  |  |  |  |  |  |  |  |
Income taxes recoverable |  |  |  |  | 2,449 |  |  |  | 2,256 |
Deferred tax assets |  | (Note 14) |  |  | 36,880 |  |  |  | 41,822 |
Property, plant and equipment |  | (Note 7) |  |  | 3,038,612 |  |  |  | 3,173,824 |
Intangibles |  | (Note 8) |  |  | 35,401 |  |  |  | 28,116 |
Goodwill |  | (Note 9) |  |  | — |  |  |  | 205,167 |
Total non-current assets |  |  |  |  | 3,113,342 |  |  |  | 3,451,185 |
Total assets |  |  |  | $ | 3,636,043 |  |  | $ | 3,892,931 |
LIABILITIES AND EQUITY |  |  |  |  |  |  |  |  |  |
Current liabilities: |  |  |  |  |  |  |  |  |  |
Accounts payable and accrued liabilities |  | (Note 25) |  | $ | 274,489 |  |  | $ | 209,625 |
Income tax payable |  |  |  |  | 7,673 |  |  |  | — |
Total current liabilities |  |  |  |  | 282,162 |  |  |  | 209,625 |
Non-current liabilities: |  |  |  |  |  |  |  |  |  |
Share based compensation |  | (Note 13) |  |  | 6,520 |  |  |  | 13,536 |
Provisions and other |  | (Note 16) |  |  | 10,577 |  |  |  | 10,086 |
Long-term debt |  | (Note 10) |  |  | 1,706,253 |  |  |  | 1,730,437 |
Deferred tax liabilities |  | (Note 14) |  |  | 72,779 |  |  |  | 118,911 |
Total non-current liabilities |  |  |  |  | 1,796,129 |  |  |  | 1,872,970 |
Shareholders’ equity: |  |  |  |  |  |  |  |  |  |
Shareholders’ capital |  | (Note 17) |  |  | 2,322,280 |  |  |  | 2,319,293 |
Contributed surplus |  |  |  |  | 52,332 |  |  |  | 44,037 |
Deficit |  |  |  |  | (978,874 | ) |  |  | (684,604 | )
Accumulated other comprehensive income |  | (Note 19) |  |  | 162,014 |  |  |  | 131,610 |
Total shareholders’ equity |  |  |  |  | 1,557,752 |  |  |  | 1,810,336 |
Total liabilities and shareholders’ equity |  |  |  | $ | 3,636,043 |  |  | $ | 3,892,931 |

See accompanying notes to consolidated financial statements.

Approved by the Board of Directors:

/s/ Allen R. Hagerman |  | /s/ Steven W. Krablin
Allen R. Hagerman Director |  | Steven W. Krablin Director

Precision Drilling Corporation 2018 Annual Report | 4

Consolidated Statements of Loss

Years ended December 31, (Stated in thousands of Canadian dollars, except per share amounts) |  |  |  | 2018 |  |  | 2017 |
Revenue |  | (Note 4) |  | $ | 1,541,189 |  |  | $ | 1,321,224 |
Expenses: |  |  |  |  |  |  |  |  |  |
Operating |  | (Note 25) |  |  | 1,067,871 |  |  |  | 926,171 |
General and administrative |  | (Note 25) |  |  | 112,387 |  |  |  | 90,072 |
Other recoveries |  | (Note 11) |  |  | (14,200 | ) |  |  | — |
Earnings before income taxes, loss (gain) on redemption and repurchase of unsecured senior notes, finance charges, foreign exchange, impairment of property, plant, and equipment, impairment of goodwill and depreciation and amortization |  |  |  |  | 375,131 |  |  |  | 304,981 |
Depreciation and amortization |  |  |  |  | 365,660 |  |  |  | 377,746 |
Impairment of goodwill |  | (Note 9) |  |  | 207,544 |  |  |  | — |
Impairment of property, plant and equipment |  | (Note 7) |  |  | — |  |  |  | 15,313 |
Foreign exchange |  |  |  |  | 4,017 |  |  |  | (2,970 | )
Finance charges |  | (Note 12) |  |  | 127,178 |  |  |  | 137,928 |
Loss (gain) on redemption and repurchase of unsecured senior notes |  |  |  |  | (5,672 | ) |  |  | 9,021 |
Loss before income taxes |  |  |  |  | (323,596 | ) |  |  | (232,057 | )
Income taxes: |  | (Note 14) |  |  |  |  |  |  |  |
Current |  |  |  |  | 8,573 |  |  |  | (1,331 | )
Deferred |  |  |  |  | (37,899 | ) |  |  | (98,690 | )
|  |  |  |  | (29,326 | ) |  |  | (100,021 | )
Net loss |  |  |  | $ | (294,270 | ) |  | $ | (132,036 | )
Loss per share: |  | (Note 18) |  |  |  |  |  |  |  |
Basic |  |  |  | $ | (1.00 | ) |  | $ | (0.45 | )
Diluted |  |  |  | $ | (1.00 | ) |  | $ | (0.45 | )

See accompanying notes to consolidated financial statements.

Consolidated Statements of Comprehensive Loss

Years ended December 31, (Stated in thousands of Canadian dollars) |  |  |  | 2018 |  |  | 2017 |
Net loss |  |  |  | $ | (294,270 | ) |  | $ | (132,036 | )
Unrealized gain (loss) on translation of assets and liabilities of operations denominated in foreign currency |  |  |  |  | 175,630 |  |  |  | (146,545 | )
Foreign exchange gain (loss) on net investment hedge with U.S. denominated debt, net of tax |  |  |  |  | (145,226 | ) |  |  | 121,699 |
Comprehensive loss |  |  |  | $ | (263,866 | ) |  | $ | (156,882 | )

See accompanying notes to consolidated financial statements.

Precision Drilling Corporation 2018 Annual Report | 5

Consolidated State ments of Cash Flow

Years ended December 31, (Stated in thousands of Canadian dollars) |  |  | 2018 |  |  | 2017 |
Cash provided by (used in): |  |  |  |  |  |  |  |  |
Operations: |  |  |  |  |  |  |  |  |
Net loss |  |  | $ | (294,270 | ) |  | $ | (132,036 | )
Adjustments for: |  |  |  |  |  |  |  |  |
Long-term compensation plans |  |  |  | 17,401 |  |  |  | 6,795 |
Depreciation and amortization |  |  |  | 365,660 |  |  |  | 377,746 |
Impairment of property, plant and equipment |  |  |  | — |  |  |  | 15,313 |
Impairment of goodwill |  |  |  | 207,544 |  |  |  | — |
Foreign exchange |  |  |  | 2,341 |  |  |  | (2,873 | )
Finance charges |  |  |  | 127,178 |  |  |  | 137,928 |
Loss (gain) on redemption and repurchase of unsecured senior notes |  |  |  | (5,672 | ) |  |  | 9,021 |
Income taxes |  |  |  | (29,326 | ) |  |  | (100,021 | )
Other |  |  |  | (1,269 | ) |  |  | (2,025 | )
Income taxes paid |  |  |  | (4,446 | ) |  |  | (3,645 | )
Income taxes recovered |  |  |  | 33,283 |  |  |  | 11,932 |
Interest paid |  |  |  | (108,622 | ) |  |  | (136,065 | )
Interest received |  |  |  | 1,412 |  |  |  | 1,865 |
Funds provided by operations |  |  |  | 311,214 |  |  |  | 183,935 |
Changes in non-cash working capital balances | (Note 25) |  |  | (17,880 | ) |  |  | (67,380 | )
Cash provided by operations |  |  |  | 293,334 |  |  |  | 116,555 |
Investments: |  |  |  |  |  |  |  |  |
Purchase of property, plant and equipment | (Note 7) |  |  | (114,576 | ) |  |  | (74,823 | )
Purchase of intangibles | (Note 8) |  |  | (11,567 | ) |  |  | (23,179 | )
Proceeds on sale of property, plant and equipment | (Note 7) |  |  | 24,457 |  |  |  | 14,841 |
Changes in non-cash working capital balances | (Note 25) |  |  | 892 |  |  |  | (7,989 | )
Cash used in investing activities |  |  |  | (100,794 | ) |  |  | (91,150 | )
Financing: |  |  |  |  |  |  |  |  |
Redemption and repurchase of unsecured senior notes | (Note 10) |  |  | (168,722 | ) |  |  | (571,975 | )
Debt issuance costs | (Note 10) |  |  | — |  |  |  | (9,196 | )
Debt amendment fees | (Note 8) |  |  | (638 | ) |  |  | (1,793 | )
Proceeds from issuance of long-term debt | (Note 10) |  |  | — |  |  |  | 509,180 |
Issuance of common shares on the exercise of options |  |  |  | 275 |  |  |  | — |
Cash used in financing activities |  |  |  | (169,085 | ) |  |  | (73,784 | )
Effect of exchange rate changes on cash and cash equivalents |  |  |  | 8,090 |  |  |  | (2,245 | )
Increase (decrease) in cash and cash equivalents |  |  |  | 31,545 |  |  |  | (50,624 | )
Cash and cash equivalents, beginning of year |  |  |  | 65,081 |  |  |  | 115,705 |
Cash and cash equivalents, end of year |  |  | $ | 96,626 |  |  | $ | 65,081 |

See accompanying notes to consolidated financial statements.

Precision Drilling Corporation 2018 Annual Report | 6

Consolidated Statement s of Changes in Equity

(Stated in thousands of Canadian dollars) |  |  |  | Shareholders’ Capital (Note 17) |  |  | Contributed Surplus |  |  | Accumulated other Comprehensive Income (Note 19) |  |  | Deficit |  |  | Total Equity |
Balance at January 1, 2018 |  |  |  | $ | 2,319,293 |  |  | $ | 44,037 |  |  | $ | 131,610 |  |  | $ | (684,604 | ) |  | $ | 1,810,336 |
Net loss for the period |  |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (294,270 | ) |  |  | (294,270 | )
Other comprehensive income for the period |  |  |  |  | — |  |  |  | — |  |  |  | 30,404 |  |  |  | — |  |  |  | 30,404 |
Redemption of non-management directors DSUs |  | (Note 13) |  |  | 2,609 |  |  |  | (809 | ) |  |  | — |  |  |  | — |  |  |  | 1,800 |
Share options exercised |  | (Note 13) |  |  | 378 |  |  |  | (103 | ) |  |  | — |  |  |  | — |  |  |  | 275 |
Share based compensation expense |  | (Note 13) |  |  | — |  |  |  | 9,207 |  |  |  | — |  |  |  | — |  |  |  | 9,207 |
Balance at December 31, 2018 |  |  |  | $ | 2,322,280 |  |  | $ | 52,332 |  |  | $ | 162,014 |  |  | $ | (978,874 | ) |  | $ | 1,557,752 |

(Stated in thousands of Canadian dollars) |  |  |  | Shareholders’ Capital (Note 17) |  |  | Contributed Surplus |  |  | Accumulated other Comprehensive Income (Note 19) |  |  | Deficit |  |  | Total Equity |
Balance at January 1, 2017 |  |  |  | $ | 2,319,293 |  |  | $ | 38,937 |  |  | $ | 156,456 |  |  | $ | (552,568 | ) |  | $ | 1,962,118 |
Net loss for the period |  |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (132,036 | ) |  |  | (132,036 | )
Other comprehensive loss for the period |  |  |  |  | — |  |  |  | — |  |  |  | (24,846 | ) |  |  | — |  |  |  | (24,846 | )
Share based compensation expense |  | (Note 13) |  |  | — |  |  |  | 5,100 |  |  |  | — |  |  |  | — |  |  |  | 5,100 |
Balance at December 31, 2017 |  |  |  | $ | 2,319,293 |  |  | $ | 44,037 |  |  | $ | 131,610 |  |  | $ | (684,604 | ) |  | $ | 1,810,336 |

See accompanying notes to consolidated financial statements.

Precision Drilling Corporation 2018 Annual Report | 7

Notes to Consolidated Financial Statements

(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) is incorporated under the laws of the Province of Alberta, Canada and is a provider of contract drilling and completion and production services primarily to oil and natural gas exploration and production companies in Canada, the United States and certain international locations. The address of the registered office is 800, 525 – 8th Avenue S.W., Calgary, Alberta, Canada, T2P 1G1.

NOTE 2. BASIS OF PREPARATION

(a) Statement of Compliance

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).

These consolidated financial statements were authorized for issue by the Board of Directors on March 1, 2019.

(b) Basis of Measurement

The consolidated financial statements have been prepared using the historical cost basis and are presented in thousands of Canadian dollars.

(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. The Corporation reviews its estimates and assumptions on an ongoing basis. Adjustments that result from a change in estimate are recorded in the period in which they become known. Significant estimates and judgments used in the preparation of the financial statements are described in Note 3(d), (g), (i), (j) and (s).

NOTE 3. SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Consolidation

These consolidated 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 and transactions and any unrealized gains and losses arising from intercompany transactions, have been eliminated.

Subsidiaries are 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 considered. 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 statement of earnings. 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 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.

Precision Drilling Corporation 2018 Annual Report | 8

(d) Property, Plant and Equipment

Property, plant and equipment are carried at cost, less accumulated depreciation and any accumulated impairment losses.

Cost includes an expenditure that is 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 |  | 5 years |  | – |  |  | straight-line
– Dynamic |  | 10 years |  | – |  |  | straight-line
– Structural |  | 20 years |  | 10% |  |  | straight-line
Service rig equipment |  | 20 years |  | 10% |  |  | straight-line
Drilling rig spare equipment |  | up to 15 years |  | – |  |  | straight-line
Service rig spare equipment |  | up to 15 years |  | – |  |  | straight-line
Rental equipment |  | up 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

Property, plant and equipment are depreciated based on estimates of useful lives and salvage values. These estimates consider 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 technological advancements are made.

Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal to the carrying amount of property, plant and equipment, and are recognized in the consolidated statements of loss.

Determination of which parts of the drilling rig equipment represent significant cost relative to the entire rig and identifying the consumption patterns along with the useful lives of these significant parts, are matters of judgment. This determination can be complex and subject to differing interpretations and views, particularly when rig equipment comprises individual components for which different depreciation methods or rates are appropriate.

The estimated useful lives, residual values and methods of 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 they increase the future economic benefits of the specific asset to which they relate.

Intangible assets are amortized based on estimates of useful lives. These estimates consider data and information from various sources including vendors and Precision’s own historical experience and may change as more experience is gained or technological advancements are made.

Amortization is recognized in profit and loss using the straight-line method over the estimated useful lives of the respective assets. Precision’s loan commitment fees are amortized over the term of the respective facility. Software is amortized over its expected useful life of up to 10 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.

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 the cash-generating unit (CGU) or groups of cash-generating units that are expected to benefit and as identified in the business combination.

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(g) Impairment of 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. 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). Judgment is required in the aggregation of assets into CGUs.

If any such indication exists, then the asset or CGU’s recoverable amount is estimated. Judgement is required when evaluating whether a CGU has indications of impairment. For CGUs that contain goodwill and other intangible assets that have indefinite lives or that are not yet available for use, an impairment test is, at a minimum, completed annually as of December 31.

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 an after-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 a CGU exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to reduce the carrying amounts of the other assets in the CGU 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 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.

(i) Income Taxes

Income tax expense is recognized in profit or loss 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 at the reporting date. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in profit or loss in the period that includes the date of enactment or substantive enactment. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset and they relate to taxes levied by the same tax authority on the same taxable entity, or on different tax entities that are expected to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.

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.

The Corporation is subject to taxation in numerous jurisdictions. Uncertainties exist with respect to the interpretation of complex tax regulations and requires significant judgement. Differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to taxable income and expense already recorded. The Corporation establishes provisions, based on reasonable estimates, for possible consequences of audits by the tax authorities of the respective countries in which it operates. The amount of such provisions is based on various factors, such as experience of previous tax audits and differing interpretations of tax regulations by the taxable entity and the responsible tax authority.

(j) Revenue from Contracts with Customers

The Corporation initially applied IFRS 15 on January 1, 2018, as described in Note 3(t). Precision recognizes revenue from a variety of sources. In general, customer invoices are issued upon rendering all performance obligations for an individual well-

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site job. Under the Corporation’s standard contract terms, customer payments are to be received within 30 days of the customer’s receipt of an invoice.

Contract Drilling Services

The Corporation contracts individual drilling rig packages, including crews and support equipment, to its customers. Depending on the customer’s drilling program, contracts may be for a single well, multiple wells or a fixed term. Revenue from contract drilling services is recognized over time from spud to rig release on a daily basis. Operating days are measured through industry standard tour sheets that document the daily activity of the rig. Revenue is recognized at the applicable day rate for each well, based on rates specified in the drilling contract.

The Corporation provides services under turnkey contracts, whereby Precision is required to drill a well to an agreed upon depth under specified conditions for a fixed price, regardless of the time required or problems encountered in drilling the well. Revenue from turnkey drilling contracts is recognized over time using the input method based on costs incurred to date in relation to estimated total contract costs, as that most accurately depicts the Corporation’s performance.

The Corporation also provides directional drilling services, which include the provision of directional drilling equipment, tools and personnel to the wellsite, and performance of daily directional drilling services. Directional drilling revenue is recognized over time, upon the daily completion of operating activities. Operating days are measured through daily tour sheets. Revenue is recognized at the applicable day rate, as stipulated in the directional drilling contract.

Completion and Production Services

The Corporation provides a variety of well completion and production services including well servicing and snubbing. In general, service rigs do not involve long-term contracts or penalties for termination. Revenue is recognized daily upon completion of services. Operating days are measured through daily tour sheets and field tickets. Revenue is recognized at the applicable daily or hourly rate, as stipulated in the contract.

The Corporation offers a variety of oilfield equipment for rental to its customers. Rental revenue is recognized daily at the applicable rate stated in the rental contract. Rental days are measured through field tickets.

The Corporation provides accommodation and catering services to customers in remote locations. Customers contract these services either as a package or individually for a fixed term. For accommodation services, the Corporation supplies camp equipment and revenue is recognized over time on a daily basis, once the equipment is on-site and available for use, at the applicable rate stated in the contract. For catering services, the Corporation recognizes revenue daily according to meals served. Accommodation and catering services provided are measured through field tickets.

(k) Employee Benefit Plans

Precision sponsors various defined contribution retirement plans 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 as a result of a past event, when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and when 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 non-management directors, officers, and other eligible employees. As estimated by management, 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 profit or loss for the period. When the plans are settled, the cash paid reduces the outstanding liability.

The Corporation has implemented an employee share purchase plan that allows eligible employees to purchase common shares through payroll deductions. Under this plan, contributions made by employees are matched to a specific percentage by the Corporation. The contributions made by the Corporation are expensed as incurred.

Prior to January 1, 2012, the Corporation had an equity-settled deferred share unit plan whereby non-management directors of Precision could elect to receive all or a portion of their compensation in fully-vested deferred share units. Compensation expense was 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. The Corporation continues to have obligations under this plan.

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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. A forfeiture rate is estimated on the grant date and is adjusted to reflect the actual number of options that vest. 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.

(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 profit or loss except for gains and losses on translation of long-term debt designated as a hedge of foreign operations, which are deferred and included in 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 period end 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 profit or loss on disposal or partial disposal of the foreign operation.

(o) Per Share Amounts

Basic per share amounts are calculated using the weighted average number of shares outstanding during the period. 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.

(p) Financial Instruments

i) Non-Derivative Financial Instruments:

The Corporation initially applied IFRS 9, Financial Instruments, on January 1, 2018 as described in Note 3(s). Financial assets and liabilities are classified and measured at amortized cost, fair value through other comprehensive income or fair value through profit and loss. The classification of financial assets and liabilities is generally based on the business model in which the asset or liability is managed and its contractual cash flow characteristics. Financial assets held within a business model whose objective is to collect contractual cash flows and whose contractual terms give rise to cash flows on specified dates that are solely payments of principal and interest on the principal amount outstanding are measured at amortized cost. After their initial fair value measurement, accounts receivable, accounts payable and accrued liabilities and long-term debt are classified and measured at amortized cost using the effective interest rate method.

Upon initial recognition of a non-derivative financial asset a loss allowance is recorded for expected credit losses (ECL). Loss allowances for trade receivables are measured based on lifetime ECL that incorporates historical loss information and is adjusted for current economic and credit conditions.

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 has 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 statement of financial position at estimated fair value. Transaction costs are recognized in profit or loss when incurred.

Derivatives embedded in financial assets are never separated. Rather, the financial instrument as a whole is assessed for classification. Derivatives embedded in financial liabilities 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 in financial liabilities are recorded on the statement of financial position at estimated fair value and changes in the fair value are recognized in earnings.

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(q) 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 from fluctuations 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 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 ineffective portions are recorded through profit or loss.

A reduction in the fair value of the net investment in the foreign operations or increase in the foreign currency long-term debt balance may result in a portion of the hedge becoming ineffective. If the hedging relationship ceases to be effective or is terminated, hedge accounting is not applied to subsequent gains or losses. The amounts recognized in other comprehensive income are reclassified to profit and loss and the corresponding exchange gains or losses arising from the translation of the foreign operation are recorded through profit and loss upon dissolution or substantial dissolution of the foreign operation.

(r) Assets Held For Sale

Non-current assets, or disposal groups, are classified as held-for sale if it is highly probable that their carrying amount will be recovered primarily through a sale transaction rather than through continued use. Such assets, or disposal groups, are measured at the lower of their carrying amount and fair value less costs to sell. Impairment losses on initial classification as held-for-sale and subsequent gains or losses on remeasurement are recognized in profit or loss.

(s) Critical Accounting Assumptions and Estimates

i) Impairment of Long-Lived Assets

When indications of impairment exist within a CGU, a recoverable amount is determined and requires assumptions to estimate future discounted cash flows. These estimates and assumptions include future drilling activity, margins and market conditions over the long-term life of the CGU. In selecting a discount rate, we use observable market data inputs to develop a rate that we believe approximates the discount rate of market participants.

Although we believe the estimates are reasonable and consistent with current conditions, internal planning, and expected future operations, such estimations are subject to significant uncertainty and judgment.

ii) Income Taxes

Significant estimation and assumptions are required in determining the provision for income taxes. The recognition of deferred tax assets in respect of deductible temporary differences and unused tax losses and credits is based on the Corporation’s estimation of future taxable profit against which these differences, losses and credits may be used. The assessment is based upon existing tax laws and estimates of the Corporation’s future taxable income. These estimates may be materially different from the actual final tax return in future periods.

(t) Accounting Standards Adopted January 1, 2018

The following standards were adopted by the Corporation on January 1, 2018 using the cumulative-effect method of adoption. The adoption of these standards had no material impact on the amounts recorded in these financial statements.

i) IFRS 9, Financial Instruments

Effective January 1, 2018, IFRS 9 replaced IAS 39 Financial Instruments, Recognition and Measurement. IFRS 9 contains three principal classification categories for financial assets: measured at amortized cost, fair value through other comprehensive income and fair value through profit or loss. The classification of financial assets under IFRS 9 is generally based on the business model in which a financial asset is managed and the characteristics of its contractual cash flows. IFRS 9 eliminates the previous IAS 39 categories of held to maturity, loans and receivables and available for sale. Under IFRS 9, derivatives embedded in contracts where the host is a financial asset under the standard are never separated. Instead the hybrid financial instrument as a whole is assessed for classification.

Under the new standard, Precision’s accounts receivable, accounts payable and accrued liabilities and long-term debt have been classified and measured at amortized cost.

The following table shows the original measurement categories and carrying amounts for each financial asset and liability under IAS 39 and the subsequent measurement and carrying amount upon adoption of IFRS 9 as at January 1, 2018.

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| Measurement Category | Carrying Amount |
(Stated in thousands of Canadian dollars) | IAS 39 |  | IFRS 9 | IAS 39 |  |  | IFRS 9 |
Financial Assets |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents | Loans and receivables |  | Amortized cost | $ | 65,081 |  |  | $ | 65,081 |
Accounts receivable | Loans and receivables |  | Amortized cost |  | 322,585 |  |  |  | 322,585 |
|  |  |  | $ | 387,666 |  |  | $ | 387,666 |
Financial Liabilities |  |  |  |  |  |  |  |  |  |
Accounts payable and accrued liabilities | Other financial liabilities |  | Amortized cost | $ | 209,625 |  |  | $ | 209,625 |
Long-term debt | Other financial liabilities |  | Amortized cost |  | 1,730,437 |  |  |  | 1,730,437 |
|  |  |  | $ | 1,940,062 |  |  | $ | 1,940,062 |

IFRS 9 replaced the incurred loss model of IAS 39 with an expected credit loss model. The loss allowance to be recorded against trade receivables is measured as the lifetime expected credit losses. Due to low historical default rates, there was no material adjustment to the credit loss allowance.

ii) IFRS 15, Revenue from Contracts with Customers

IFRS 15 established a single comprehensive model to address how and when to recognize revenue as well as requiring entities to provide users of financial statements with more informative, relevant disclosures in order to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. It replaced existing revenue recognition guidance including IAS 18 Revenue and IAS 11 Construction Contracts.

The standard provides a principle based five-step model to be applied to all contracts with customers. This five-step model involves identifying the contract(s) with a customer; identifying the performance obligations in the contract; determining the transaction price; allocating the transaction price to the performance obligations in the contract; and recognizing revenue when (or as) the entity satisfies performance obligations.

During its initial application of IFRS 15, the Corporation did not apply any of the available practical expedients. The application of IFRS 15 did not result in a material impact to the Corporation’s consolidated financial statements. For additional information about the Corporation’s accounting policies with respect to revenue recognition, see Note 3(j).

(u) Accounting Standards, Interpretations and Amendments to Existing Standards not yet Effective

i) IFRS 16, Leases

On January 1, 2019, Precision will adopt IFRS 16 - Leases. This standard introduces a single, on-balance sheet lease accounting model for lessees and requires a lessee to recognize a right-of-use asset representing its right to direct the use of the underlying asset as well as a lease liability representing its obligation to make future lease payments. IFRS 16 will also cause expenses to be higher at the beginning and lower towards the end of a lease, even when payments are consistent throughout the term. The standard includes recognition exemptions for short-term leases and leases of low-value items. Lessor accounting remains similar to the current standard in which lessors continue to classify leases as either finance or operating leases.

IFRS 16 will replace existing lease guidance, including IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases – Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease.

Precision has completed its review of the existing contracts that are currently classified as leases under the existing standard, or that could be classified as leases under IFRS 16, in order to identify the contracts that will be impacted by the new standard from the perspective of both a lessor and a lessee. Management has also estimated the impact that the initial application of IFRS 16 will have on its consolidated financial statements, as described below. The actual impact of adopting the standard on January 1, 2019 may differ from what is described below as Precision’s accounting policies, including the election to apply certain practical expedients, are subject to change until presented in its first published financial statements after the date of initial application.

Leases in which Precision is a lessee

Precision will recognize right-of-use assets and lease liabilities for its real estate, vehicle, office equipment and other contracts that are currently classified as operating leases. The nature of expenses related to those leases will change as Precision will depreciate the right-of-use assets and recognize interest expense on its lease liabilities. Under the existing standard, Precision recognizes operating lease expenses on a straight-line basis over the term of the lease in either operating or general and administrative expense and recognizes assets and liabilities only to the extent there was a timing difference between the payment date and the recognition of the expense.

Based on the information currently available, Precision estimates that it will recognize lease liabilities and corresponding right-of-use assets of approximately $60 million - $70 million on January 1, 2019 related to contracts where it is the lessee. Precision does not expect a material adjustment to the opening balance of retained earnings on January 1, 2019 upon the initial application of IFRS 16. The actual impact of adopting the standard on January 1, 2019 may differ from

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these estimates as the Corporation continues to review its calculations and may refine certain inputs therein, such as the discount rate and lease term.

Leases in which Precision is a lessor

Precision evaluated its drilling rigs under term contracts longer than one year and determined that these meet the definition of a lease under IFRS 16. Precision expects to classify these as operating leases, and accordingly, will recognize lease income over the term of the respective drilling contract. This is not expected to give rise to differences in the recognition or measurement of revenues from these contracts as compared to Precision’s existing accounting policies.

Precision reassessed the classification of its real estate sub-leases in which it is a lessor. These are classified as an operating lease under the existing lease standard and management does not expect to reclassify these as finance leases.

Transition

There are two methods by which the new standard may be adopted: (1) a full retrospective approach with a restatement of all prior periods presented, or (2) a modified retrospective approach with a cumulative-effect adjustment recognized in opening retained earnings as of the date of adoption, with no restatement of comparative information. Precision will apply IFRS 16 initially on January 1, 2019, using the modified retrospective approach.

When applying a modified retrospective approach to leases previously classified as operating leases under IAS 17, the lessee can elect, on a lease-by-lease basis, whether to apply a number of practical expedients on transition. On initial adoption of the new standard, the Corporation intends to use the following practical expedients, where applicable:

•not applying the requirements of the standard to short-term leases;

•treat existing operating leases with a remaining term of less than 12 months at January 1, 2019 as short-term leases;

•not applying the requirements of the standard to low-value leases; and

•applying a single discount rate to a portfolio of leases with reasonably similar characteristics.

As a result of the adoption of the new standard, Precision will be required to include significant disclosures in the consolidated financial statements based on the prescribed requirements. These new disclosures will include information regarding the judgments used in determining discount rates and terms of leases including optional renewal periods. The Corporation will include the required disclosures in its 2019 first quarter condensed consolidated interim financial statements.

ii) IFRIC 23, Uncertainty over Income Tax Treatments

IFRIC 23 clarifies the accounting for uncertainties in income taxes. The interpretation requires the entity to use the most likely amount or the expected value of the tax treatment if it concludes that it is not probable that a particular tax treatment will be accepted. It requires an entity to assume that a taxation authority with the right to examine any amounts reported to it will examine those amounts and will have full knowledge of all relevant information when doing so.

IFRIC 23 is effective for annual reporting periods beginning on or after January 1, 2019. The requirements are applied by recognizing the cumulative effect of initially applying them in retained earnings, or in other appropriate components of equity, at the start of the reporting period in which an entity first applies them, without adjusting comparative information. Full retrospective application is permitted, if an entity can do so without using hindsight.

Precision has reviewed its initial application of IFRIC 23 and determined it will not have a material impact on the consolidated financial statements. The actual impact of adopting the standard on January 1, 2019 may differ as Precision’s accounting policies are subject to change until presented in its first published financial statements after the date of initial application.

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NOTE 4. REVENUE

The following table includes a reconciliation of disaggregated revenue by reportable segment (Note 5). Revenue has been disaggregated by primary geographical market and type of service provided.

Twelve months ended December 31, 2018 |  | Contract Drilling Services |  |  | Completion and Production Services |  |  | Corporate and Other |  |  | Inter- Segment Eliminations |  |  | Total |
Canada |  | $ | 426,475 |  |  | $ | 138,030 |  |  | $ | — |  |  | $ | (5,759 | ) |  | $ | 558,746 |
United States |  |  | 778,886 |  |  |  | 12,730 |  |  |  | — |  |  |  | (304 | ) |  |  | 791,312 |
International |  |  | 191,131 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 191,131 |
|  | $ | 1,396,492 |  |  | $ | 150,760 |  |  | $ | — |  |  | $ | (6,063 | ) |  | $ | 1,541,189 |
Day rate/hourly services |  | $ | 1,302,575 |  |  | $ | 150,760 |  |  | $ | — |  |  | $ | (1,009 | ) |  | $ | 1,452,326 |
Shortfall payments/idle but contracted |  |  | 12,520 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 12,520 |
Turnkey drilling services |  |  | 37,811 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 37,811 |
Directional services |  |  | 31,943 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 31,943 |
Other |  |  | 11,643 |  |  |  | — |  |  |  | — |  |  |  | (5,054 | ) |  |  | 6,589 |
|  | $ | 1,396,492 |  |  | $ | 150,760 |  |  | $ | — |  |  | $ | (6,063 | ) |  | $ | 1,541,189 |

Twelve months ended December 31, 2017 (1) |  | Contract Drilling Services |  |  | Completion and Production Services |  |  | Corporate and Other |  |  | Inter- Segment Eliminations |  |  | Total |
Canada |  | $ | 429,119 |  |  | $ | 139,113 |  |  | $ | — |  |  | $ | (5,982 | ) |  | $ | 562,250 |
United States |  |  | 554,410 |  |  |  | 15,033 |  |  |  | — |  |  |  | (870 | ) |  |  | 568,573 |
International |  |  | 190,401 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 190,401 |
|  | $ | 1,173,930 |  |  | $ | 154,146 |  |  | $ | — |  |  | $ | (6,852 | ) |  | $ | 1,321,224 |
Day rate/hourly services |  | $ | 1,076,018 |  |  | $ | 154,146 |  |  | $ | — |  |  | $ | (1,614 | ) |  | $ | 1,228,550 |
Shortfall payments/idle but contracted |  |  | 39,468 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 39,468 |
Turnkey drilling services |  |  | 12,306 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 12,306 |
Directional services |  |  | 34,481 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 34,481 |
Other |  |  | 11,657 |  |  |  | — |  |  |  | — |  |  |  | (5,238 | ) |  |  | 6,419 |
|  | $ | 1,173,930 |  |  | $ | 154,146 |  |  | $ | — |  |  | $ | (6,852 | ) |  | $ | 1,321,224 |
(1) IFRS 15 initially applied at January 1, 2018; under the transition method chosen, comparative information is not restated. |

NOTE 5. SEGMENTED INFORMATION

The Corporation operates primarily in Canada, the United States and certain international locations, 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 the 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.

2018 |  | Contract Drilling Services |  |  | Completion and Production Services |  |  | Corporate and Other |  |  | Inter- Segment Eliminations |  |  | Total |
Revenue |  | $ | 1,396,492 |  |  | $ | 150,760 |  |  | $ | — |  |  | $ | (6,063 | ) |  | $ | 1,541,189 |
Operating loss |  |  | (129,965 | ) |  |  | (8,998 | ) |  |  | (59,110 | ) |  |  | — |  |  |  | (198,073 | )
Depreciation and amortization |  |  | 334,555 |  |  |  | 23,879 |  |  |  | 7,226 |  |  |  | — |  |  |  | 365,660 |
Impairment of goodwill |  |  | 207,544 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 207,544 |
Total assets |  |  | 3,301,457 |  |  |  | 170,113 |  |  |  | 164,473 |  |  |  | — |  |  |  | 3,636,043 |
Goodwill |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Capital expenditures |  |  | 108,610 |  |  |  | 5,004 |  |  |  | 12,529 |  |  |  | — |  |  |  | 126,143 |

Precision Drilling Corporation 2018 Annual Report | 16

2017 |  | Contract Drilling Services |  |  | Completion and Production Services |  |  | Corporate and Other |  |  | Inter- Segment Eliminations |  |  | Total |
Revenue |  | $ | 1,173,930 |  |  | $ | 154,146 |  |  | $ | — |  |  | $ | (6,852 | ) |  | $ | 1,321,224 |
Operating loss |  |  | (6,930 | ) |  |  | (17,750 | ) |  |  | (63,398 | ) |  |  | — |  |  |  | (88,078 | )
Depreciation and amortization |  |  | 334,587 |  |  |  | 29,638 |  |  |  | 13,521 |  |  |  | — |  |  |  | 377,746 |
Impairment of property, plant and equipment |  |  | 15,313 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 15,313 |
Total assets |  |  | 3,491,393 |  |  |  | 209,353 |  |  |  | 192,185 |  |  |  | — |  |  |  | 3,892,931 |
Goodwill |  |  | 205,167 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 205,167 |
Capital expenditures |  |  | 69,076 |  |  |  | 4,509 |  |  |  | 24,417 |  |  |  | — |  |  |  | 98,002 |

A reconciliation of operating loss to loss before income taxes is as follows:

|  |  |  |  |  |  |  | 2018 |  |  | 2017 |
Total segment operating loss |  |  |  |  |  |  |  | $ | (198,073 | ) |  | $ | (88,078 | )
Add (deduct): |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange |  |  |  |  |  |  |  |  | 4,017 |  |  |  | (2,970 | )
Finance charges |  |  |  |  |  |  |  |  | 127,178 |  |  |  | 137,928 |
Loss (gain) on redemption and repurchase of unsecured senior notes |  |  |  |  |  |  |  |  | (5,672 | ) |  |  | 9,021 |
Loss before income taxes |  |  |  |  |  |  |  | $ | (323,596 | ) |  | $ | (232,057 | )

The Corporation’s operations are carried on in the following geographic locations:

2018 |  | Canada |  |  | United States |  |  | International |  |  | Eliminations |  |  | Total |
Revenue |  | $ | 571,640 |  |  | $ | 797,217 |  |  | $ | 191,131 |  |  | $ | (18,799 | ) |  | $ | 1,541,189 |
Total assets |  |  | 1,269,542 |  |  |  | 1,772,850 |  |  |  | 593,651 |  |  |  | — |  |  |  | 3,636,043 |

2017 |  | Canada |  |  | United States |  |  | International |  |  | Eliminations |  |  | Total |
Revenue |  | $ | 578,817 |  |  | $ | 568,573 |  |  | $ | 190,401 |  |  | $ | (16,567 | ) |  | $ | 1,321,224 |
Total assets |  |  | 1,631,838 |  |  |  | 1,666,368 |  |  |  | 594,725 |  |  |  | — |  |  |  | 3,892,931 |

NOTE 6. ASSETS HELD FOR SALE

In December 2018, Precision committed to a plan to sell drilling rigs that no longer met the Corporation’s High-Performance technology standards. The disposal group, contained within its Contract Drilling Services segment, has been classified as held for sale and measured at the lower of its carrying value and fair value less costs to sell. At December 31, 2018, the disposal group was stated at its carrying value of $19.7 million, which is less than its estimated fair value. Efforts to sell the disposal group have started and are expected to be completed prior to December 31, 2019.

NOTE 7. PROPERTY, PLANT AND EQUIPMENT

|  | 2018 |  |  | 2017 |
Cost |  | $ | 6,937,062 |  |  | $ | 6,733,634 |
Accumulated depreciation |  |  | (3,898,450 | ) |  |  | (3,559,810 | )
|  | $ | 3,038,612 |  |  | $ | 3,173,824 |
Rig equipment |  |  | 2,745,172 |  |  |  | 2,823,782 |
Rental equipment |  |  | 43,992 |  |  |  | 60,179 |
Other equipment |  |  | 52,195 |  |  |  | 66,560 |
Vehicles |  |  | 12,702 |  |  |  | 16,280 |
Buildings |  |  | 65,561 |  |  |  | 71,102 |
Assets under construction |  |  | 84,561 |  |  |  | 102,035 |
Land |  |  | 34,429 |  |  |  | 33,886 |
|  | $ | 3,038,612 |  |  | $ | 3,173,824 |

Precision Drilling Corporation 2018 Annual Report | 17

Cost

|  | Rig Equipment |  |  | Rental Equipment |  |  | Other Equipment |  |  | Vehicles |  |  | Buildings |  |  | Assets Under Construction |  |  | Land |  |  | Total |
Balance, December 31, 2016 |  | $ | 6,266,991 |  |  | $ | 159,144 |  |  | $ | 247,073 |  |  | $ | 45,147 |  |  | $ | 131,361 |  |  | $ | 126,430 |  |  | $ | 35,032 |  |  | $ | 7,011,178 |
Additions |  |  | 21,268 |  |  |  | 71 |  |  |  | 49 |  |  |  | 42 |  |  |  | 235 |  |  |  | 53,158 |  |  |  | — |  |  |  | 74,823 |
Disposals |  |  | (71,014 | ) |  |  | (9,758 | ) |  |  | (785 | ) |  |  | (339 | ) |  |  | (930 | ) |  |  | — |  |  |  | — |  |  |  | (82,826 | )
Reclassifications |  |  | 67,779 |  |  |  | 84 |  |  |  | 216 |  |  |  | 113 |  |  |  | — |  |  |  | (68,566 | ) |  |  | — |  |  |  | (374 | )
Effect of foreign currency exchange differences |  |  | (250,858 | ) |  |  | (1,530 | ) |  |  | (1,603 | ) |  |  | (1,762 | ) |  |  | (3,281 | ) |  |  | (8,987 | ) |  |  | (1,146 | ) |  |  | (269,167 | )
Balance, December 31, 2017 |  |  | 6,034,166 |  |  |  | 148,011 |  |  |  | 244,950 |  |  |  | 43,201 |  |  |  | 127,385 |  |  |  | 102,035 |  |  |  | 33,886 |  |  |  | 6,733,634 |
Additions |  |  | 7,013 |  |  |  | — |  |  |  | 347 |  |  |  | — |  |  |  | 569 |  |  |  | 106,647 |  |  |  | — |  |  |  | 114,576 |
Disposals |  |  | (32,153 | ) |  |  | (18,227 | ) |  |  | (59,865 | ) |  |  | (228 | ) |  |  | (3,663 | ) |  |  | — |  |  |  | (893 | ) |  |  | (115,029 | )
Reclassifications |  |  | 127,668 |  |  |  | — |  |  |  | 507 |  |  |  | — |  |  |  | — |  |  |  | (128,175 | ) |  |  | — |  |  |  | — |
Reclassification to assets held for sale |  |  | (135,398 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (135,398 | )
Effect of foreign currency exchange differences |  |  | 321,240 |  |  |  | 679 |  |  |  | 5,351 |  |  |  | 2,483 |  |  |  | 4,036 |  |  |  | 4,054 |  |  |  | 1,436 |  |  |  | 339,279 |
Balance, December 31, 2018 |  | $ | 6,322,536 |  |  | $ | 130,463 |  |  | $ | 191,290 |  |  | $ | 45,456 |  |  | $ | 128,327 |  |  | $ | 84,561 |  |  | $ | 34,429 |  |  | $ | 6,937,062 |

Accumulated Depreciation

|  | Rig Equipment |  |  | Rental Equipment |  |  | Other Equipment |  |  | Vehicles |  |  | Buildings |  |  | Assets Under Construction |  |  | Land |  |  | Total |
Balance, December 31, 2016 |  | $ | 3,056,058 |  |  | $ | 79,746 |  |  | $ | 161,342 |  |  | $ | 23,117 |  |  | $ | 49,026 |  |  | $ | — |  |  | $ | — |  |  | $ | 3,369,289 |
Depreciation expense |  |  | 334,896 |  |  |  | 15,159 |  |  |  | 19,914 |  |  |  | 5,064 |  |  |  | 8,488 |  |  |  | — |  |  |  | — |  |  |  | 383,521 |
Disposals |  |  | (67,304 | ) |  |  | (6,331 | ) |  |  | (592 | ) |  |  | (320 | ) |  |  | (208 | ) |  |  | — |  |  |  | — |  |  |  | (74,755 | )
Impairment |  |  | 15,313 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 15,313 |
Effect of foreign currency exchange differences |  |  | (128,579 | ) |  |  | (742 | ) |  |  | (2,274 | ) |  |  | (940 | ) |  |  | (1,023 | ) |  |  | — |  |  |  | — |  |  |  | (133,558 | )
Balance, December 31, 2017 |  |  | 3,210,384 |  |  |  | 87,832 |  |  |  | 178,390 |  |  |  | 26,921 |  |  |  | 56,283 |  |  |  | — |  |  |  | — |  |  |  | 3,559,810 |
Depreciation expense |  |  | 335,215 |  |  |  | 9,418 |  |  |  | 15,993 |  |  |  | 4,820 |  |  |  | 8,126 |  |  |  | — |  |  |  | — |  |  |  | 373,572 |
Disposals |  |  | (28,399 | ) |  |  | (11,249 | ) |  |  | (59,857 | ) |  |  | (220 | ) |  |  | (3,161 | ) |  |  | — |  |  |  | — |  |  |  | (102,886 | )
Reclassification to assets held for sale |  |  | (115,740 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (115,740 | )
Effect of foreign currency exchange differences |  |  | 175,904 |  |  |  | 470 |  |  |  | 4,569 |  |  |  | 1,233 |  |  |  | 1,518 |  |  |  | — |  |  |  | — |  |  |  | 183,694 |
Balance, December 31, 2018 |  | $ | 3,577,364 |  |  | $ | 86,471 |  |  | $ | 139,095 |  |  | $ | 32,754 |  |  | $ | 62,766 |  |  | $ | — |  |  | $ | — |  |  | $ | 3,898,450 |

a) | Impairment Test

Precision reviews the carrying value of its long-lived assets at each reporting period for indications of impairment. Precision completed its review as at December 31, 2018 and impairment charges of $207.5 million were recorded against goodwill. Refer to Note 9 for additional discussion of impairment testing performed in the current year.

As at December 31, 2017, the Corporation determined that the uncertainty around future activity levels within Mexico was an indication of impairment and a comprehensive assessment of the carrying values of property, plant and equipment of the Mexico drilling CGU within the Contract Drilling Services segment was performed.

The recoverable amount of the Mexico drilling CGU was determined using a value in use calculation. Projected cash flows covered a five-year period and were based on future expected outcomes taking into account existing contracts, past experience and management’s expectation of future market conditions. The primary source of cash flow information was the strategic plan approved by executives of the Corporation. The strategic plan was developed based on benchmark commodity prices and industry supply-demand fundamentals.

Cash flows used in the calculation were discounted using a discount rate specific to the Mexico drilling CGU. The after-tax discount rate derived from Precision’s weighted average cost of capital, adjusted for risk factors specific to the CGU and used in determining the recoverable amount for the Mexico drilling CGU was 17.1%. The test resulted in an impairment charge of $15.3 million as the carrying value of the CGU’s assets exceeded its value in use of $26.3 million.

Precision Drilling Corporation 2018 Annual Report | 18

NOTE 8. INTANGIBLES

|  | 2018 |  |  | 2017 |
Cost |  | $ | 51,912 |  |  | $ | 39,707 |
Accumulated amortization |  |  | (16,511 | ) |  |  | (11,591 | )
|  | $ | 35,401 |  |  | $ | 28,116 |
Loan commitment fees related to Senior Credit Facility |  | $ | 2,307 |  |  | $ | 3,120 |
Software |  |  | 33,094 |  |  |  | 24,996 |
|  | $ | 35,401 |  |  | $ | 28,116 |

Cost

|  | Loan Commitment Fees |  |  | Software |  |  | Total |
Balance, December 31, 2016 |  | $ | 12,345 |  |  | $ | — |  |  | $ | 12,345 |
Additions |  |  | 1,793 |  |  |  | 23,179 |  |  |  | 24,972 |
Reclassifications |  |  | — |  |  |  | 2,390 |  |  |  | 2,390 |
Balance, December 31, 2017 |  |  | 14,138 |  |  |  | 25,569 |  |  |  | 39,707 |
Additions |  |  | 638 |  |  |  | 11,567 |  |  |  | 12,205 |
Balance, December 31, 2018 |  | $ | 14,776 |  |  | $ | 37,136 |  |  | $ | 51,912 |

Accumulated Amortization

|  | Loan Commitment Fees |  |  | Software |  |  | Total |
Balance, December 31, 2016 |  | $ | 9,029 |  |  | $ | — |  |  | $ | 9,029 |
Amortization expense |  |  | 1,989 |  |  |  | 573 |  |  |  | 2,562 |
Balance, December 31, 2017 |  |  | 11,018 |  |  |  | 573 |  |  |  | 11,591 |
Amortization expense |  |  | 1,451 |  |  |  | 3,469 |  |  |  | 4,920 |
Balance, December 31, 2018 |  | $ | 12,469 |  |  | $ | 4,042 |  |  | $ | 16,511 |

NOTE 9. GOODWILL

Balance, December 31, 2016 |  | $ | 207,399 |
Exchange adjustment |  |  | (2,232 | )
Balance, December 31, 2017 |  |  | 205,167 |
Exchange adjustment |  |  | 2,377 |
Impairment charge |  |  | (207,544 | )
Balance, December 31, 2018 |  | $ | — |

Management performed its annual impairment test for those CGUs containing goodwill and determined the goodwill associated with the Canada contract drilling CGU of $172.2 million and U.S. directional drilling CGU of $35.3 million were not recoverable at December 31, 2018. Accordingly, an impairment charge of $207.5 million was recorded in the statement of loss for the period ended December 31, 2018. Both CGUs are contained within the Contract Drilling Services segment.

In performing its annual goodwill impairment tests, the Corporation used a value in use approach. Projected cash flows covered a five-year period and were based on future expected outcomes taking into account existing term contracts, past experience and management’s expectation of future market conditions. The primary source of cash flow information was the strategic plans approved by the Corporation’s Board of Directors. These strategic plans were developed based on benchmark commodity prices and industry supply-demand fundamentals.

Canada Contract Drilling

Cash flows used in the impairment calculation were discounted using a discount rate specific to the Canada contract drilling CGU. The after-tax discount rate derived from Precision’s weighted average cost of capital, adjusted for risk factors specific to the CGU and used in determining the recoverable amount for the Canada contract drilling CGU was 11.66% (2017 – 9.72%). The test resulted in a goodwill impairment charge of $172.2 million as the carrying value of the CGU’s assets exceeded its value in use of $941.6 million.

Precision Drilling Corporation 2018 Annual Report | 19

The key assumptions used in the calculation of the CGU’s value in use included the discount rate and terminal value growth rates of nil. An increase of 0.5% to the discount rate would result in approximately $37.3 million of additional impairment charges to the remaining assets within the CGU.

US Directional Drilling

Cash flows used in the impairment calculation were discounted using a discount rate specific to the U.S. directional drilling CGU. The after-tax discount rate derived from Precision’s weighted average cost of capital, adjusted for risk factors specific to the CGU and used in determining the recoverable amount for the U.S. directional drilling CGU was 12.16% (2017 – 11.72%). The test resulted in a goodwill impairment charge of $35.3 million as the carrying value of the CGU’s assets exceeded its value in use of $38.8 million.

The key assumptions used in the calculation of the CGU’s value in use included the discount rate and terminal value growth rates of nil. An increase of 0.5% to the discount rate would result in approximately $2.4 million of additional impairment charges to the remaining assets within the CGU.

NOTE 10. LONG-TERM DEBT

|  | 2018 |  |  | 2017 |  |  | 2018 |  |  | 2017 |
Senior Credit Facility | US | $ | — |  | US | $ | — |  |  | $ | — |  |  | $ | — |
Unsecured senior notes: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
6.5% senior notes due 2021 |  |  | 165,625 |  |  |  | 248,625 |  |  |  | 226,113 |  |  |  | 312,601 |
7.75% senior notes due 2023 |  |  | 350,000 |  |  |  | 350,000 |  |  |  | 477,823 |  |  |  | 440,062 |
5.25% senior notes due 2024 |  |  | 351,104 |  |  |  | 400,000 |  |  |  | 479,331 |  |  |  | 502,928 |
7.125% senior notes due 2026 |  |  | 400,000 |  |  |  | 400,000 |  |  |  | 546,084 |  |  |  | 502,928 |
| US | $ | 1,266,729 |  | US | $ | 1,398,625 |  |  |  | 1,729,351 |  |  |  | 1,758,519 |
Less net unamortized debt issue costs |  |  |  |  |  |  |  |  |  |  | (23,098 | ) |  |  | (28,082 | )
|  |  |  |  |  |  |  |  |  | $ | 1,706,253 |  |  | $ | 1,730,437 |

|  | Senior Credit Facility |  |  | Unsecured senior notes |  |  | Debt issue costs |  |  | Total |
Balance December 31, 2016 |  | $ | — |  |  | $ | 1,933,993 |  |  | $ | (27,059 | ) |  | $ | 1,906,934 |
Changes from financing cash flows: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Proceeds from issue of senior notes |  |  | — |  |  |  | 509,180 |  |  |  | — |  |  |  | 509,180 |
Redemption of senior notes |  |  | — |  |  |  | (571,975 | ) |  |  | — |  |  |  | (571,975 | )
Payment of debt issue costs |  |  | — |  |  |  | — |  |  |  | (9,196 | ) |  |  | (9,196 | )
|  |  | — |  |  |  | (62,795 | ) |  |  | (9,196 | ) |  |  | (71,991 | )
Non-cash changes: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loss on redemption of unsecured senior notes |  |  | — |  |  |  | 9,021 |  |  |  | — |  |  |  | 9,021 |
Amortization of debt issue costs |  |  | — |  |  |  | — |  |  |  | 8,173 |  |  |  | 8,173 |
Foreign exchange adjustment |  |  | — |  |  |  | (121,700 | ) |  |  | — |  |  |  | (121,700 | )
Balance December 31, 2017 |  |  | — |  |  |  | 1,758,519 |  |  |  | (28,082 | ) |  |  | 1,730,437 |
Changes from financing cash flows: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Redemption of senior notes |  |  | — |  |  |  | (168,722 | ) |  |  | — |  |  |  | (168,722 | )
Non-cash changes: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Gain on redemption of unsecured senior notes |  |  | — |  |  |  | (5,672 | ) |  |  | — |  |  |  | (5,672 | )
Amortization of debt issue costs |  |  | — |  |  |  | — |  |  |  | 4,984 |  |  |  | 4,984 |
Foreign exchange adjustment |  |  | — |  |  |  | 145,226 |  |  |  | — |  |  |  | 145,226 |
Balance December 31, 2018 |  | $ | — |  |  | $ | 1,729,351 |  |  | $ | (23,098 | ) |  | $ | 1,706,253 |

(a) Senior Credit Facility:

The senior secured revolving credit facility (as amended, the Senior Credit Facility) provides Precision with senior secured financing for general corporate purposes, including for acquisitions, of up to US$500.0 million with a provision for an increase in the facility of up to an additional US$250.0 million (US$300.0 million after March 31, 2019). The Senior Credit Facility is secured by charges on substantially all of the present and future assets of Precision, its material U.S. and Canadian subsidiaries and, if necessary, to adhere to covenants under the Senior Credit Facility, certain subsidiaries organized in jurisdictions outside of Canada and the U.S.

The Senior Credit Facility requires that Precision comply with certain financial covenants including a leverage ratio of consolidated senior debt to consolidated Covenant EBITDA (as defined in the debt agreement) of less than 2.5:1. For purposes of calculating the leverage ratio consolidated senior debt only includes secured indebtedness. It also requires the Corporation to maintain a ratio of consolidated Covenant EBITDA to consolidated interest expense for the most recent four consecutive quarters, of greater than 2.0:1 for the periods ending December 31, 2018 and March 31, 2019. For periods ending after March 31, 2019 the ratio reverts to 2.5:1.

Precision Drilling Corporation 2018 Annual Report | 20

The Senior Credit Facility prevents us from making distributions prior to April 1, 2019, after which, distributions are subject to a pro-forma senior net leverage covenant of less than or equal to 1.75:1. The Senior Credit Facility also limits the redemption and repurchase of junior debt subject to a pro-forma senior net leverage covenant test of less than or equal to 1.75:1.

In addition, the Senior Credit Facility contains certain restrictive covenants that limit Precision’s ability to incur additional indebtedness; dispose of assets; make or pay dividends, share redemptions or other distributions; change its primary business; incur liens on assets; engage in transactions with affiliates; enter into mergers, consolidations or amalgamations; and enter into speculative swap agreements. At December 31, 2018, Precision was in compliance with the covenants of the Senior Credit Facility.

The Senior Credit Facility has a term of four years, with an annual option on Precision’s part to request that the lenders extend, at their discretion, the facility to a new maturity date not to exceed five years from the date of the extension request. The current maturity date of the Senior Credit Facility is November 21, 2022.

Under the Senior Credit Facility, amounts can be drawn in U.S. dollars and/or Canadian dollars and, as at December 31, 2018 and 2017 no amounts were drawn under this facility. Up to US$200.0 million of the Senior Credit Facility is available for letters of credit denominated in U.S and/or Canadian dollars and other currencies acceptable to the fronting lender. As at December 31, 2018 outstanding letters of credit amounted to US$28.2 million (2017 – US$20.9 million).

The interest rate on loans that are denominated in U.S. dollars is, at the option of Precision, either a margin over a U.S. base rate or a margin over LIBOR. The interest rate on loans denominated in Canadian dollars is, at the option of Precision, either a margin over the Canadian prime rate or a margin over the bankers’ acceptance rate; such margins will be based on the then applicable ratio of consolidated total debt to EBITDA.

(b) Unsecured Senior Notes:

Precision has outstanding the following unsecured senior notes:

6.5% US$ senior notes due 2021

These notes bear interest at a fixed rate of 6.5% per annum and mature on December 15, 2021. Interest is payable semi-annually on June 15 and December 15 of each year.

Precision may redeem these notes in whole or in part before December 15, 2019, at a redemption price of 101.083% of their principal amount plus accrued interest. Any time on or after December 15, 2019, these 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.

During 2018, Precision redeemed US$80.0 million and repurchased and cancelled US$3.0 million of these notes for an aggregate purchase price of US$84.5 million. The difference was recognized as a loss on redemption of unsecured senior notes within the consolidated statement of loss.

7.75% US$ senior notes due 2023

These notes bear interest at a fixed rate of 7.75% per annum and mature on December 15, 2023. Interest is payable semi-annually on June 15 and December 15 of each year.

Prior to December 15, 2019, Precision may redeem up to 35% of the 7.75% senior notes due 2023 with the net proceeds of certain equity offerings at a redemption price equal to 107.75% of the principal amount plus accrued interest. Prior to December 15, 2019, Precision may redeem these 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 December 15, 2019 redemption price plus required interest payments through December 15, 2019 (calculated using the U.S. Treasury rate plus 50 basis points) over the principal amount of the note. As well, Precision may redeem these notes in whole or in part at any time on or after December 15, 2019 and before December 15, 2021, at redemption prices ranging between 103.875% and 101.938% of their principal amount plus accrued interest. Any time on or after December 15, 2021, these 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.

5.25% US$ senior notes due 2024

These notes bear interest at a fixed rate of 5.25% per annum and mature on November 15, 2024. Interest is payable semi-annually on May 15 and November 15 of each year.

Precision Drilling Corporation 2018 Annual Report | 21

Prior to May 15, 2019, Precision may redeem these 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 May 15, 2019 redemption price plus required interest payments through May 15, 2019 (calculated using the U.S. Treasury rate plus 50 basis points) over the principal amount of the note. As well, Precision may redeem these notes in whole or in part at any time on or after May 15, 2019 and before May 15, 2022, at redemption prices ranging between 102.625% and 100.875% of their principal amount plus accrued interest. Any time on or after May 15, 2022, these 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.

During 2018, Precision repurchased and cancelled US$48.9 million of these notes for an aggregate purchase price of US$43.2 million. The difference was recognized as a gain on repurchase of unsecured senior notes within the consolidated statement of loss.

7.125% US$ senior notes due 2026

These notes, issued in 2017, bear interest at a fixed rate of 7.125% per annum and mature on January 15, 2026. Interest is payable semi-annually on January 15 and July 15 of each year, commencing July 15, 2018.

Prior to November 15, 2020, Precision may redeem up to 35% of the 7.125% senior notes due 2026 with the net proceeds of certain equity offerings at a redemption price equal to 107.125% of the principal amount plus accrued interest. Prior to November 15, 2020, Precision may redeem these 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 November 15, 2020 redemption price plus required interest payments through November 15, 2020 (calculated using the U.S. Treasury rate plus 50 basis points) over the principal amount of the note. As well, Precision may redeem these notes in whole or in part at any time on or after November 15, 2020 and before November 15, 2022, at redemption prices ranging between 105.344% and 101.781% of their principal amount plus accrued interest. Any time on or after November 15, 2023, these 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.

The senior notes require that we comply with certain financial covenants including an incurrence based test of Consolidated Interest Coverage Ratio, as defined in the senior note agreements, of greater than or equal to 2.0:1 for the most recent four consecutive fiscal quarters. In the event that our Consolidated Interest Coverage Ratio is less than 2.0:1 for the most recent four consecutive fiscal quarters the senior notes restrict our ability to incur additional indebtedness. As at December 31, 2018, our senior notes Consolidated Interest Coverage Ratio was 2.80:1.

The senior notes also contain a restricted payments covenant that limits our ability to make payments in the nature of dividends, distributions and repurchases from shareholders. This restricted payment basket grows by, among other things, 50% of cumulative consolidated net earnings, and decreases by 100% of cumulative consolidated net losses as defined in the note agreements, and cumulative payments made to shareholders. As at December 31, 2018, the governing restricted payments basket was negative $496 million (2017 – negative $213 million), therefore prohibiting us from making any further dividend payments until the governing restricted payments basket once again becomes positive. No dividends have been declared or paid subsequent to December 31, 2018.

Our unsecured senior notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all U.S. and Canadian subsidiaries that guaranteed the Senior Credit Facility (Guarantor Subsidiaries). These Guarantor Subsidiaries are directly or indirectly 100% owned by the parent company. Separate financial statements for each of the Guarantor Subsidiaries have not been provided; instead we have included in Note 27 condensed consolidating financial statements based on Rule 3-10 of the U.S. Securities and Exchange Commission’s Regulation S-X.

Long-term debt obligations at December 31, 2018 will mature as follows:

2021 |  | $ | 226,113 |
2023 |  |  | 477,823 |
Thereafter |  |  | 1,025,415 |
|  | $ | 1,729,351 |

Precision Drilling Corporation 2018 Annual Report | 22

NOTE 11. OTHER RECOVERIES

For the period ended December 31, 2018, the Corporation had other recoveries of $14.2 million (2017 – nil) relating to the recovery of Corporate transactions costs resulting from the termination of an arrangement agreement to acquire an oil and gas drilling contractor.

NOTE 12. FINANCE CHARGES

|  | 2018 |  |  | 2017 |
Interest: |  |  |  |  |  |  |  |
Long-term debt |  | $ | 121,810 |  |  | $ | 128,381 |
Other |  |  | 378 |  |  |  | 1,083 |
Income |  |  | (1,444 | ) |  |  | (1,858 | )
Amortization of debt issue costs |  |  | 6,434 |  |  |  | 10,162 |
Other |  |  | — |  |  |  | 160 |
Finance charges |  | $ | 127,178 |  |  | $ | 137,928 |

NOTE 13. SHARE BASED COMPENSATION PLANS

In May 2017 shareholders approved an omnibus equity incentive plan (Omnibus Plan) that allows the Corporation to settle short-term incentive awards (annual bonus) and long-term incentive awards (options, performance share units and restricted share units) issued on or after February 8, 2017 in voting shares of Precision (either issued from treasury or purchased in the open market), cash, or a combination of both. Precision intends to settle all short-term incentive, restricted share unit and non-executive performance share unit awards issued under the Omnibus Plan in cash and to settle performance share awards issued to senior executives and all options in voting shares. No further grants will be made under the legacy stock option plan, performance share unit plan or restricted share unit plan. Vesting conditions for incentive awards issued under the Omnibus Plan are unchanged from what existed under the legacy plans.

Liability Classified Plans

|  | Restricted Share Units |  | Performance Share Units |  | Share Appreciation Rights |  | Non- Management Directors’ DSUs |  | Total |
Balance, December 31, 2016 |  | $ | 15,592 |  | $ | 29,045 |  | $ | 3 |  | $ | 4,602 |  | $ | 49,242 |
Expensed (recovered) during the period |  |  | 2,115 |  |  | (4,188 | ) |  | (3 | ) |  | (1,090 | ) |  | (3,166 | )
Payments |  |  | (10,757 | ) |  | (13,450 | ) |  | — |  |  | — |  |  | (24,207 | )
Balance, December 31, 2017 |  |  | 6,950 |  |  | 11,407 |  |  | — |  |  | 3,512 |  |  | 21,869 |
Expensed during the period |  |  | 5,223 |  |  | 398 |  |  | — |  |  | 769 |  |  | 6,390 |
Payments |  |  | (6,764 | ) |  | (7,284 | ) |  | — |  |  | (1,800 | ) |  | (15,848 | )
Balance, December 31, 2018 |  | $ | 5,409 |  | $ | 4,521 |  | $ | — |  | $ | 2,481 |  | $ | 12,411 |
Current |  | $ | 3,112 |  | $ | 2,779 |  | $ | — |  | $ | — |  | $ | 5,891 |
Long-term |  |  | 2,297 |  |  | 1,742 |  |  | — |  |  | 2,481 |  |  | 6,520 |
|  | $ | 5,409 |  | $ | 4,521 |  | $ | — |  | $ | 2,481 |  | $ | 12,411 |

(a) Restricted Share Units and Performance Share Units

Precision has two cash-settled share based incentive plans for officers and other eligible employees. Under the Restricted Share Unit (RSU) incentive plan, shares granted to eligible employees vest annually over a three-year term. Vested shares are automatically paid out in cash at a value determined by the fair market value of the shares at the vesting date. Under the Performance Share Unit (PSU) 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 the vesting date 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’s share price performance compared to a peer group over the three-year period.

A summary of the RSUs and PSUs outstanding under these share based incentive plans is presented below:

Precision Drilling Corporation 2018 Annual Report | 23

|  | RSUs Outstanding |  |  | PSUs Outstanding |
December 31, 2016 |  |  | 3,129,039 |  |  |  | 6,493,798 |
Granted |  |  | 1,343,669 |  |  |  | 828,400 |
Redeemed |  |  | (1,404,271 | ) |  |  | (1,325,692 | )
Forfeited |  |  | (271,579 | ) |  |  | (270,247 | )
December 31, 2017 |  |  | 2,796,858 |  |  |  | 5,726,259 |
Granted |  |  | 2,918,912 |  |  |  | 1,292,550 |
Redeemed |  |  | (1,404,284 | ) |  |  | (2,137,163 | )
Forfeited |  |  | (255,572 | ) |  |  | (338,656 | )
December 31, 2018 |  |  | 4,055,914 |  |  |  | 4,542,990 |

(b) Share Appreciation Rights

The Corporation had a U.S. dollar denominated Share Appreciation Rights (SAR) plan under which eligible participants were granted SARs 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. There were no SARs outstanding at December 31, 2018. The SARs vested over a period of five years and expired 10 years from the date of grant. At December 31, 2018 and 2017 the intrinsic value of these awards was $nil.

Share Appreciation Rights |  | Outstanding |  |  | Range of Exercise Price (US$) |  |  | Weighted Average Exercise Price (US$) |  |  | Exercisable |
December 31, 2016 |  |  | 253,376 |  |  | $ 15.22 – 15.79 |  |  | $ | 15.47 |  |  |  | 253,376 |
Forfeited |  |  | (117,207 | ) |  | 15.22 – 17.38 |  |  |  | 15.75 |  |  |  |  |
December 31, 2017 |  |  | 136,169 |  |  | 15.22 – 15.22 |  |  |  | 15.22 |  |  |  | 136,169 |
Forfeited |  |  | (136,169 | ) |  | 15.22 – 15.22 |  |  |  | — |  |  |  |  |
December 31, 2018 |  |  | — |  |  | $ | — |  |  | $ | — |  |  |  | — |

(c) Non-Management Directors

Effective January 1, 2012, Precision instituted a deferred share unit (DSU) plan for non-management directors whereby fully vested DSUs are granted quarterly based on an election by the non-management director to receive all or a portion of his or her compensation in DSUs. These DSUs are redeemable in cash or for an equal number of common shares upon the director’s retirement. The redemption of DSUs in cash or common shares is solely at Precision’s discretion. Non-management directors can receive a lump sum payment or two separate payments any time up until December 15 of the year following retirement. If the non-management director does not specify a redemption date, the DSUs will be redeemed on a single date six months after retirement. The cash settlement amount is based on the weighted average trading price for Precision’s shares on the Toronto Stock Exchange for the five days immediately prior to payout. A summary of the DSUs outstanding under this share based incentive plan is presented below:

Deferred Share Units |  | Outstanding |
Balance December 31, 2016 |  |  | 621,821 |
Granted |  |  | 331,456 |
Balance December 31, 2017 |  |  | 953,277 |
Granted |  |  | 474,766 |
Redeemed |  |  | (374,408 | )
Balance December 31, 2018 |  |  | 1,053,635 |

Equity Settled Plans

(d) Non-Management Directors

Prior to January 1, 2012, Precision had a deferred share unit plan for non-management directors. Under the plan, fully vested deferred share units were granted quarterly based on an election by the non-management director to receive all or a portion of his or her 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 Share Units |  | Outstanding |
December 31, 2016 and 2017 |  |  | 195,743 |
Redeemed |  |  | (102,570 | )
December 31, 2018 |  |  | 93,173 |

Precision Drilling Corporation 2018 Annual Report | 24

(e) Option Plan

Under this plan, the exercise price of each option equals the fair market value 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.

A summary of the status of the equity incentive plan is presented below:

Canadian Share Options |  | Options Outstanding |  |  | Range of Exercise Prices |  | Weighted Average Exercise Price |  |  | Options Exercisable |
December 31, 2016 |  |  | 6,188,672 |  |  | $ 4.46 – 14.50 |  | $ | 8.70 |  |  |  | 4,369,155 |
Granted |  |  | 377,100 |  |  | 7.30 – 7.30 |  |  | 7.30 |  |  |  |  |
Forfeited |  |  | (1,665,412 | ) |  | 7.32 – 14.50 |  |  | 8.98 |  |  |  |  |
December 31, 2017 |  |  | 4,900,360 |  |  | 4.46 – 14.50 |  |  | 8.50 |  |  |  | 3,734,019 |
Granted |  |  | 490,200 |  |  | 4.35 – 4.35 |  |  | 4.35 |  |  |  |  |
Forfeited |  |  | (657,404 | ) |  | 10.44 – 14.50 |  |  | 10.58 |  |  |  |  |
December 31, 2018 |  |  | 4,733,156 |  |  | $ 4.35 – 14.31 |  | $ | 7.78 |  |  |  | 3,786,473 |

U.S. Share Options |  | Options Outstanding |  |  | Range of Exercise Prices (US$) |  | Weighted Average Exercise Price (US$) |  |  | Options Exercisable |
December 31, 2016 |  |  | 5,337,070 |  |  | $ 3.21 – 15.21 |  | $ | 6.69 |  |  |  | 2,626,326 |
Granted |  |  | 1,165,900 |  |  | 3.99 – 5.57 |  |  | 5.56 |  |  |  |  |
Forfeited |  |  | (944,349 | ) |  | 5.79 – 10.96 |  |  | 8.42 |  |  |  |  |
December 31, 2017 |  |  | 5,558,621 |  |  | 3.21 – 15.21 |  |  | 6.16 |  |  |  | 2,891,808 |
Granted |  |  | 1,569,250 |  |  | 3.44 – 3.62 |  |  | 3.45 |  |  |  |  |
Exercised |  |  | (66,000 | ) |  | 3.21 – 3.21 |  |  | 3.21 |  |  |  |  |
Forfeited |  |  | (996,021 | ) |  | 3.21 – 15.21 |  |  | 8.08 |  |  |  |  |
December 31, 2018 |  |  | 6,065,850 |  |  | $ 3.21 – 10.74 |  | $ | 5.17 |  |  |  | 3,224,078 |

The weighted average share price at the date of exercise for the U.S. share options exercised in 2018 was US$4.02.

Canadian Share Options |  | Total Options Outstanding |  |  | Options Exercisable |
Range of Exercise Prices: |  | Number |  |  | Weighted Average Exercise Price |  |  | Weighted Average Remaining Contractual Life (Years) |  |  | Number |  |  | Weighted Average Exercise Price |
$ 4.34 – 6.99 |  |  | 1,105,400 |  |  | $ | 4.41 |  |  |  | 5.04 |  |  |  | 410,122 |  |  | $ | 4.46 |
7.00 – 8.99 |  |  | 1,539,001 |  |  |  | 7.32 |  |  |  | 3.58 |  |  |  | 1,287,596 |  |  |  | 7.33 |
9.00 – 14.31 |  |  | 2,088,755 |  |  |  | 9.90 |  |  |  | 1.12 |  |  |  | 2,088,755 |  |  |  | 9.90 |
$ 4.34 – 14.31 |  |  | 4,733,156 |  |  | $ | 7.78 |  |  |  | 2.83 |  |  |  | 3,786,473 |  |  | $ | 8.43 |

U.S. Share Options |  | Total Options Outstanding |  |  | Options Exercisable |
Range of Exercise Prices (US$): |  | Number |  |  | Weighted Average Exercise Price (US$) |  |  | Weighted Average Remaining Contractual Life (Years) |  |  | Number |  |  | Weighted Average Exercise Price (US$) |
$ 3.21 – 3.99 |  |  | 3,046,950 |  |  | $ | 3.33 |  |  |  | 5.18 |  |  |  | 995,888 |  |  | $ | 3.21 |
4.00 – 6.99 |  |  | 1,924,500 |  |  |  | 5.61 |  |  |  | 4.37 |  |  |  | 1,133,790 |  |  |  | 5.66 |
7.00 – 10.74 |  |  | 1,094,400 |  |  |  | 9.52 |  |  |  | 1.19 |  |  |  | 1,094,400 |  |  |  | 9.52 |
$ 3.21 – 10.74 |  |  | 6,065,850 |  |  | $ | 5.17 |  |  |  | 4.20 |  |  |  | 3,224,078 |  |  | $ | 6.22 |

The per option weighted average fair value of the share options granted during 2018 was $1.96 (2017 – $1.59) estimated on the grant date using the Black-Scholes option pricing model with the following assumptions: average risk-free interest rate of 2% (2017 – 1%), average expected life of four years (2017 – four years), expected forfeiture rate of 5% (2017 – 5%) and expected volatility of 56% (2017 – 54%). Included in net loss for the year ended December 31, 2018 is an expense of $3.3 million (2017 – $3.2 million).

(f) Executive Performance Share Units

During 2018 Precision granted PSUs to certain senior executives with the intention of settling them in voting shares of the Corporation either issued from treasury or purchased in the open market. These PSUs vest over a three year period and

Precision Drilling Corporation 2018 Annual Report | 25

incorporate performance criteria established at the date of grant that can adjust the number of performance share units available for settlement from zero to two times the amount originally granted. A summary of the activity under this share based incentive plan is presented below:

|  | Outstanding |  |  | Weighted Fair Value |
December 31, 2016 |  |  | — |  |  | $ | — |
Granted |  |  | 1,159,000 |  |  |  | 6.00 |
December 31, 2017 |  |  | 1,159,000 |  |  |  | 6.00 |
Granted |  |  | 2,082,800 |  |  |  | 6.22 |
Forfeited |  |  | (50,733 | ) |  |  | 6.12 |
December 31, 2018 |  |  | 3,191,067 |  |  | $ | 6.14 |

The per unit weighted average fair value of the performance share units granted during 2018 was $6.22 (2017 – $6.00) estimated on the grant date using a Monte Carlo simulation with the following assumptions: share price of $4.29 (2017 – $5.08), average risk-free interest rate of 2.3% (2017 – 1.2%), average expected life of three years (2017 – three years), expected volatility of 59% (2017 – 60%), and an expected dividend yield of nil (2017 – nil). Included in net loss for year ended December 31, 2018 is an expense of $5.9 million (2017 - $1.9 million).

Employee Share Purchase Plan

The Corporation has an employee share purchase plan to encourage employees to become Precision shareholders and to attract and retain people. Under the plan, eligible employees can contribute up to 10% of their regular base salary through payroll deduction with Precision matching 20% of the employee’s contribution. These contributions are used to purchase the Corporation’s shares in the open market. No vesting conditions apply. During 2018, the Corporation recorded compensation expense of $0.7 million (2017 – $0.8 million) related to this plan.

NOTE 14. 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 for the years ended December 31, is as follows:

|  | 2018 |  |  | 2017 |
Loss before income taxes | $ |  | (323,596 | ) | $ |  | (232,057 | )
Federal and provincial statutory rates |  |  | 27 | % |  |  | 27 | %
Tax at statutory rates | $ |  | (87,371 | ) | $ |  | (62,655 | )
Adjusted for the effect of: |  |  |  |  |  |  |  |
Non-deductible expenses |  |  | 49,455 |  |  |  | 2,672 |
Non-taxable capital gains |  |  | (845 | ) |  |  | (175 | )
Income taxed at lower rates |  |  | — |  |  |  | (42,334 | )
Impact of foreign tax rates |  |  | 4,861 |  |  |  | (2,814 | )
Withholding taxes |  |  | 1,061 |  |  |  | 1,165 |
Taxes related to prior years |  |  | 3,803 |  |  |  | (618 | )
Other |  |  | (290 | ) |  |  | 4,738 |
Income tax recovery | $ |  | (29,326 | ) | $ |  | (100,021 | )

Precision Drilling Corporation 2018 Annual Report | 26

On December 22, 2017, the United States government enacted new tax legislation which affects the taxation of Precision’s U.S. subsidiaries. In additional to changing certain U.S. federal income tax laws, this new tax legislation reduced the U.S. federal income tax rate from 35% to 21% effective January 1, 2018. For the period ending December 31, 2017 Precision recorded a $15.8 million deferred income tax expense on the revaluation of its U.S. subsidiaries net deferred income tax assets which incorporates the reduction in the U.S. federal income tax rate and the expected impact of other applicable provisions within the new U.S tax legislation. The Corporation has also recognized a $2.4 million long-term receivable for the recovery of its U.S. subsidiaries alternative minimum tax carryforward balance.

The net deferred tax liability is comprised of the tax effect of the following temporary differences:

|  | 2018 |  |  | 2017 |
Deferred income tax liability: |  |  |  |  |  |  |  |
Property, plant and equipment and intangibles | $ |  | 467,109 |  | $ |  | 454,613 |
Debt issue costs |  |  | 3,534 |  |  |  | 3,352 |
Partnership deferrals |  |  | 1,730 |  |  |  | — |
Other |  |  | 5,722 |  |  |  | 6,709 |
|  |  | 478,095 |  |  |  | 464,674 |
Offsetting of assets and liabilities |  |  | (405,316 | ) |  |  | (345,763 | )
|  |  | 72,779 |  |  |  | 118,911 |
Deferred income tax assets: |  |  |  |  |  |  |  |
Losses (expire from time to time up to 2037) |  |  | 423,595 |  |  |  | 368,133 |
Partnership deferrals |  |  | — |  |  |  | 335 |
Long-term incentive plan |  |  | 6,849 |  |  |  | 7,935 |
Other |  |  | 11,752 |  |  |  | 11,182 |
|  |  | 442,196 |  |  |  | 387,585 |
Offsetting of assets and liabilities |  |  | (405,316 | ) |  |  | (345,763 | )
|  |  | 36,880 |  |  |  | 41,822 |
Net deferred income tax liability | $ |  | 35,899 |  | $ |  | 77,089 |

Included in the deferred income tax assets is $33.2 million (2017 – $38.8 million) of tax-effected temporary differences related to the Corporation’s U.S. operations.

The Corporation has certain loss carryforwards in U.S. and international locations for which it is unlikely that sufficient future taxable income will be available. Accordingly, the Corporation has not recognized a deferred income tax asset on these losses totaling $37.1 million.

The movement in temporary differences is as follows:

|  | Property, Plant and Equipment and Intangibles |  |  | Partnership Deferrals |  |  | Other Deferred Income Tax Liabilities |  |  | Losses |  |  | Debt Issue Costs |  |  | Long-Term Incentive Plan |  |  | Other Deferred Income Tax Assets |  |  | Net Deferred Income Tax Liability |
Balance, December 31, 2016 | $ |  | 629,967 |  | $ |  | (16,447 | ) | $ |  | 6,159 |  | $ |  | (418,253 | ) | $ |  | 4,215 |  | $ |  | (18,270 | ) | $ |  | (12,753 | ) | $ |  | 174,618 |
Recognized in net loss |  |  | (149,489 | ) |  |  | 16,112 |  |  |  | 545 |  |  |  | 24,124 |  |  |  | (863 | ) |  |  | 9,651 |  |  |  | 1,230 |  |  |  | (98,690 | )
Effect of foreign currency exchange differences |  |  | (25,865 | ) |  |  | — |  |  |  | 5 |  |  |  | 25,996 |  |  |  | — |  |  |  | 684 |  |  |  | 341 |  |  |  | 1,161 |
Balance, December 31, 2017 | $ |  | 454,613 |  | $ |  | (335 | ) | $ |  | 6,709 |  | $ |  | (368,133 | ) | $ |  | 3,352 |  | $ |  | (7,935 | ) | $ |  | (11,182 | ) | $ |  | 77,089 |
Recognized in net loss |  |  | (9,667 | ) |  |  | 2,065 |  |  |  | (1,005 | ) |  |  | (30,660 | ) |  |  | 182 |  |  |  | 1,325 |  |  |  | (139 | ) |  |  | (37,899 | )
Effect of foreign currency exchange differences |  |  | 22,163 |  |  |  | — |  |  |  | 18 |  |  |  | (24,802 | ) |  |  | — |  |  |  | (239 | ) |  |  | (431 | ) |  |  | (3,291 | )
Balance, December 31, 2018 | $ |  | 467,109 |  | $ |  | 1,730 |  | $ |  | 5,722 |  | $ |  | (423,595 | ) | $ |  | 3,534 |  | $ |  | (6,849 | ) | $ |  | (11,752 | ) | $ |  | 35,899 |

On December 31, 2018, Precision had $2.0 million (2017 – $2.0 million) of unrecognized tax benefits that, if recognized, would have a favourable impact on Precision’s effective income tax rate in future periods. Precision classifies interest accrued on unrecognized tax benefits and income tax penalties as income tax expense. Included in the unrecognized tax benefit, as at December 31, 2018 was interest and penalties of $0.5 million (2017 – $0.5 million).

Precision Drilling Corporation 2018 Annual Report | 27

Reconciliation of Uncertain Tax Positions

|  | 2018 |  |  | 2017 |
Unrecognized tax benefits, beginning of year | $ |  | 1,980 |  | $ |  | 1,923 |
Additions: |  |  |  |  |  |  |  |
Prior year’s tax positions |  |  | 60 |  |  |  | 57 |
Reductions: |  |  |  |  |  |  |  |
Prior year’s tax positions |  |  | — |  |  |  | — |
Unrecognized tax benefits, end of year | $ |  | 2,040 |  | $ |  | 1,980 |

It is anticipated that approximately $2.0 million (2017 – $nil) of unrecognized tax positions that relate to prior year activities will be realized during the next 12 months. Subject to the results of audit examinations by taxing authorities and/or legislative changes by taxing jurisdictions, Precision does not anticipate further adjustments of unrecognized tax positions during the next 12 months that would have a material impact on the financial statements.

NOTE 15. BANK INDEBTEDNESS

At December 31, 2018, Precision had available $40.0 million (2017 – $40.0 million) and US$15.0 million (2017 – US$15.0 million) under secured operating facilities, and a secured US$30.0 million (2017 – US$30.0 million) facility for the issuance of letters of credit and performance and bid bonds to support international operations. As at December 31, 2018 and 2017, no amounts had been drawn on any of the facilities. Availability of the $40.0 million and US$30.0 million facility were reduced by outstanding letters of credit in the amount of $27.8 million (2017 – $20.8 million) and US$2.1 million (2017 – US$13.3 million), respectively. The facilities are primarily secured by charges on substantially all present and future property of Precision and its material subsidiaries. Advances under the $40.0 million facility are available at the bank’s prime lending rate, U.S. base rate, U.S. LIBOR rate plus 80% of applicable margin, or Banker’s Acceptance plus 80% of applicable margin, or in combination, and under the US$15.0 million facility at the bank’s prime lending rate.

NOTE 16. PROVISIONS AND OTHER

|  | Workers’ Compensation |
Balance December 31, 2016 |  | $ | 15,461 |
Expensed during the year |  |  | 2,613 |
Payment of deductibles and uninsured claims |  |  | (3,929 | )
Effects of foreign currency exchange differences |  |  | (913 | )
Balance December 31, 2017 |  |  | 13,232 |
Expensed during the year |  |  | 3,359 |
Payment of deductibles and uninsured claims |  |  | (4,271 | )
Effects of foreign currency exchange differences |  |  | 1,053 |
Balance December 31, 2018 |  | $ | 13,373 |

|  | 2018 |  |  | 2017 |
Current |  | $ | 2,796 |  |  | $ | 3,146 |
Long-term |  |  | 10,577 |  |  |  | 10,086 |
|  | $ | 13,373 |  |  | $ | 13,232 |

Precision maintains a provision for the deductible and uninsured portions of workers’ compensation and general liability claims. The amount accrued for the provision for losses incurred varies depending on the number and nature of the claims outstanding at the balance sheet dates. In addition, the accrual includes management’s estimate of the future cost to settle each claim such as future changes in the severity of the claim and increases in medical costs. Precision uses third parties to assist in developing the estimate of the ultimate costs to settle each claim, which is based on historical experience associated with the type of each claim and specific information related to each claim. The specific circumstances of each claim may change over time prior to settlement and, as a result, the estimates made as of the balance sheet dates may change.

Precision Drilling Corporation 2018 Annual Report | 28

NOTE 17. SHAREHOLDERS’ CAPITAL

(a) Authorized | – |  | unlimited number of voting common shares
| – |  | unlimited number of preferred shares, issuable in series, limited to an amount equal to one half of the issued and outstanding common shares
(b) Issued |  |  |

Common shares |  | Number |  |  | Amount |
Balance, December 31, 2016 and 2017 |  |  | 293,238,858 |  |  | $ | 2,319,293 |
Issued on redemption of non-management directors' DSUs |  |  | 476,978 |  |  | $ | 2,609 |
Options exercised – cash consideration |  |  | 66,000 |  |  |  | 275 |
– reclassification from contributed surplus |  |  | — |  |  |  | 103 |
Balance, December 31, 2018 |  |  | 293,781,836 |  |  | $ | 2,322,280 |

NOTE 18. PER SHARE AMOUNTS

The following tables reconcile the net loss and weighted average shares outstanding used in computing basic and diluted loss per share:

|  | 2018 |  |  | 2017 |
Net loss – basic and diluted |  | $ | (294,270 | ) |  | $ | (132,036 | )
(Stated in thousands) |  | 2018 |  |  | 2017 |
Weighted average shares outstanding – basic |  |  | 293,560 |  |  |  | 293,239 |
Effect of stock options and other equity compensation plans |  |  | — |  |  |  | — |
Weighted average shares outstanding – diluted |  |  | 293,560 |  |  |  | 293,239 |

NOTE 19. ACCUMULATED OTHER COMPREHENSIVE INCOME

|  | Unrealized Foreign Currency Translation Gains (Losses) |  |  | Foreign Exchange Gain (Loss) on Net Investment Hedge |  |  | Accumulated Other Comprehensive Income |
December 31, 2016 |  | $ | 587,278 |  |  | $ | (430,822 | ) |  | $ | 156,456 |
Other comprehensive loss |  |  | (146,545 | ) |  |  | 121,699 |  |  |  | (24,846 | )
December 31, 2017 |  |  | 440,733 |  |  |  | (309,123 | ) |  |  | 131,610 |
Other comprehensive income |  |  | 175,630 |  |  |  | (145,226 | ) |  |  | 30,404 |
December 31, 2018 |  | $ | 616,363 |  |  | $ | (454,349 | ) |  | $ | 162,014 |

NOTE 20. EMPLOYEE BENEFIT PLANS

The Corporation has a defined contribution pension plan covering a significant number of its employees. Under this plan, the Corporation matches individual contributions up to 5% of the employee’s eligible compensation. Total expense under the defined contribution plan in 2018 was $12.0 million (2017 – $10.4 million).

NOTE 21. RELATED PARTY TRANSACTIONS

Compensation of Key Management Personnel

The remuneration of key management personnel is as follows:

|  | 2018 |  |  | 2017 |
Salaries and other benefits |  | $ | 6,732 |  |  | $ | 6,078 |
Equity settled share based compensation |  |  | 5,562 |  |  |  | 3,036 |
Cash settled share based compensation |  |  | 722 |  |  |  | (3,945 | )
|  | $ | 13,016 |  |  | $ | 5,169 |

Key management personnel are comprised of the directors and executive officers of the Corporation. Certain executive officers have entered into employment agreements with Precision that provide termination benefits of up to 24 months base salary plus up to two times targeted incentive compensation upon dismissal without cause.

Precision Drilling Corporation 2018 Annual Report | 29

NOTE 22. COMMITMENTS

Operating Lease Commitments

The Corporation has commitments under various operating lease agreements, primarily for vehicles and office space. Terms of the office leases run for a period of one to 10 years while the vehicle leases are typically for terms of between three and four years. Expected non-cancellable operating lease payments are as follows:

|  | 2018 |  |  | 2017 |
Less than one year |  | $ | 13,496 |  |  | $ | 12,248 |
Between one and five years |  |  | 36,639 |  |  |  | 27,445 |
Later than five years |  |  | 17,797 |  |  |  | 21,909 |
|  | $ | 67,932 |  |  | $ | 61,602 |

Certain leased properties were sublet by the Corporation.

The following amounts were recognized as expenses in respect of operating leases in the consolidated statements of loss:

|  | 2018 |  |  | 2017 |
Operating leases |  | $ | 17,187 |  |  | $ | 16,311 |
Sub-lease recoveries |  |  | (540 | ) |  |  | (441 | )
|  | $ | 16,647 |  |  | $ | 15,870 |

Capital Commitments

At December 31, 2018, the Corporation had commitments to purchase property, plant and equipment totaling $179.8 million (2017 – $132.9 million). Payments of $88.0 million for these commitments are expected to be made in 2019, $73.6 million in 2020 and $18.2 million in 2021.

NOTE 23. FINANCIAL INSTRUMENTS

Financial Risk Management

The Board of Directors is responsible for identifying the principal risks of Precision’s business and for ensuring the implementation of systems to manage these risks. With the assistance of senior management, who report to the Board of Directors on the risks of Precision’s business, the Board of Directors considers such risks and discusses the management of such risks on a regular basis.

Precision has exposure to the following risks from its use of financial instruments:

(a) Credit Risk

Accounts receivable includes balances from a large number of customers primarily operating in the oil and gas industry. The Corporation manages credit risk by assessing the creditworthiness of its customers before providing services and on an ongoing basis, and by monitoring the amount and age of balances outstanding. In some instances, the Corporation will take additional measures to reduce credit risk including obtaining letters of credit and prepayments from customers. When indicators of credit problems appear, the Corporation takes appropriate steps to reduce its exposure including negotiating with the customer, filing liens and entering into litigation. Precision’s most significant customer accounted for $18.1 million of the trade receivables amount at December 31, 2018 (2017 – $11.7 million).

The movement in the expected credit loss allowance during the year was as follows:

|  | 2018 |  |  | 2017 |
Balance at January 1 |  | $ | 2,596 |  |  | $ | 6,072 |
Impairment loss recognized |  |  | 483 |  |  |  | 56 |
Amounts written-off as uncollectible |  |  | (416 | ) |  |  | (3,296 | )
Impairment loss reversed |  |  | (1,247 | ) |  |  | (30 | )
Effect of movement in exchange rates |  |  | 54 |  |  |  | (206 | )
Balance at December 31 |  | $ | 1,470 |  |  | $ | 2,596 |

Precision Drilling Corporation 2018 Annual Report | 30

The ageing of trade receivables at December 31 was as follows:

|  | 2018 |  |  | 2017 |
|  | Gross |  |  | Provision for Impairment |  |  | Gross |  |  | Provision for Impairment |
Not past due |  | $ | 175,277 |  |  | $ | — |  |  | $ | 92,880 |  |  | $ | — |
Past due 0 – 30 days |  |  | 64,351 |  |  |  | — |  |  |  | 66,723 |  |  |  | — |
Past due 31 – 120 days |  |  | 25,032 |  |  |  | 71 |  |  |  | 19,410 |  |  |  | 580 |
Past due more than 120 days |  |  | 1,399 |  |  |  | 1,399 |  |  |  | 2,016 |  |  |  | 2,016 |
|  | $ | 266,059 |  |  | $ | 1,470 |  |  | $ | 181,029 |  |  | $ | 2,596 |

(b) Interest Rate Risk

As at December 31, 2018 and 2017, all of Precision’s outstanding long-term debt bears fixed interest rates. As a result, Precision is not exposed to significant fluctuations in interest expense as a result of changes in interest rates. The Corporation would have exposure to interest rates if it were to draw upon its Senior Credit Facility.

(c) Foreign Currency Risk

The Corporation is primarily exposed to foreign currency fluctuations in relation to the working capital of its foreign operations and certain long-term debt facilities of its Canadian operations. The Corporation has no significant exposures to foreign currencies other than the U.S. dollar. The Corporation monitors its foreign currency exposure and attempts to minimize the impact by aligning appropriate levels of U.S. denominated debt with cash flows from U.S. based operations.

The following financial instruments were denominated in U.S. dollars:

|  | 2018 |  |  | 2017 |
|  | Canadian Operations (1) |  |  | Foreign Operations |  |  | Canadian Operations (1) |  |  | Foreign. Operations |
Cash |  | $ | 957 |  |  | $ | 49,302 |  |  | $ | 1,720 |  |  | $ | 39,636 |
Accounts receivable |  |  | 482 |  |  |  | 181,609 |  |  |  | — |  |  |  | 152,216 |
Accounts payable and accrued liabilities |  |  | (20,655 | ) |  |  | (122,417 | ) |  |  | (13,221 | ) |  |  | (98,008 | )
Long-term liabilities, excluding long-term incentive plans |  |  | — |  |  |  | (7,747 | ) |  |  | — |  |  |  | (8,023 | )
Net foreign currency exposure |  | $ | (19,216 | ) |  | $ | 100,747 |  |  | $ | (11,501 | ) |  | $ | 85,821 |
Impact of $0.01 change in the U.S. dollar to Canadian dollar exchange rate on net loss |  | $ | (192 | ) |  | $ | — |  |  | $ | (115 | ) |  | $ | — |
Impact of $0.01 change in the U.S. dollar to Canadian dollar exchange rate on comprehensive loss |  | $ | — |  |  | $ | 1,007 |  |  | $ | — |  |  | $ | 858 |

(1) Excludes U.S. dollar long-term debt that has been designated as a hedge of the Corporation’s net investment in certain self-sustaining foreign operations.

(d) Liquidity Risk

Liquidity risk is the exposure of the Corporation to the risk of not being able to meet its financial obligations as they become due. The Corporation manages liquidity risk by monitoring and reviewing actual and forecasted cash flows to ensure there are available cash resources to meet these needs. The following are the contractual maturities of the Corporation’s financial liabilities and other contractual commitments as at December 31, 2018:

|  | 2019 |  |  | 2020 |  |  | 2021 |  |  | 2022 |  |  | 2023 |  |  | Thereafter |  |  | Total |
Accounts payable and accrued liabilities |  | $ | 274,489 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 274,489 |
Share based compensation |  |  | 6,221 |  |  |  | 4,357 |  |  |  | 6,082 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 16,660 |
Long-term debt |  |  | — |  |  |  | — |  |  |  | 226,113 |  |  |  | — |  |  |  | 477,823 |  |  |  | 1,025,415 |  |  |  | 1,729,351 |
Interest on long-term debt (1) |  |  | 115,802 |  |  |  | 115,802 |  |  |  | 115,190 |  |  |  | 101,105 |  |  |  | 99,562 |  |  |  | 101,457 |  |  |  | 648,918 |
Commitments |  |  | 101,542 |  |  |  | 84,404 |  |  |  | 27,811 |  |  |  | 8,604 |  |  |  | 7,617 |  |  |  | 17,797 |  |  |  | 247,775 |
Total |  | $ | 498,054 |  |  | $ | 204,563 |  |  | $ | 375,196 |  |  | $ | 109,709 |  |  | $ | 585,002 |  |  | $ | 1,144,669 |  |  | $ | 2,917,193 |

(1) Interest has been calculated based on debt balances, interest rates, and foreign exchange rates in effect as at December 31, 2018 and excludes amortization of long-term debt issue costs.

Fair Values

The carrying value of cash, accounts receivable, and accounts payable and accrued liabilities approximates their fair value due to the relatively short period to maturity of the instruments. The fair value of the unsecured senior notes at December 31, 2018 was approximately $1,548 million (2017 – $1,765 million).

Financial assets and liabilities recorded or disclosed at fair value in the consolidated statements of financial position are categorized based on the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels are based on the amount of subjectivity associated with the inputs in the fair determination and are as follows:

Level I—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Precision Drilling Corporation 2018 Annual Report | 31

Level II—Inputs (other than quoted prices included in Level I) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

Level III—Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

The estimated fair value of unsecured senior notes is based on level II inputs. The fair value is estimated considering the risk free interest rates on government debt instruments of similar maturities, adjusted for estimated credit risk, industry risk and market risk premiums.

NOTE 24. CAPITAL MANAGEMENT

The Corporation’s strategy is to carry a capital base to maintain investor, creditor and market confidence and to sustain future development of the business. The Corporation seeks to maintain a balance between the level of long-term debt and shareholders’ equity to ensure access to capital markets to fund growth and working capital given the cyclical nature of the oilfield services sector. The Corporation strives to maintain a conservative ratio of long-term debt to long-term debt plus equity. As at December 31, 2018 and 2017, these ratios were as follows:

|  | 2018 |  |  | 2017 |
Long-term debt |  | $ | 1,706,253 |  |  | $ | 1,730,437 |
Shareholders’ equity |  |  | 1,557,752 |  |  |  | 1,810,336 |
Total capitalization |  | $ | 3,264,005 |  |  | $ | 3,540,773 |
Long-term debt to long-term debt plus equity ratio |  |  | 0.52 |  |  |  | 0.49 |

As at December 31, 2018, liquidity remained sufficient as Precision had $96.6 million (2017 – $65.1 million) in cash and access to the US$500.0 million Senior Credit Facility (2017 – US$500.0 million) and $101.4 million (2017 – $96.6 million) secured operating facilities. As at December 31, 2018, no amounts (2017 – US$ nil) were drawn on the Senior Credit Facility with availability reduced by US$28.2 million (2017 – US$20.9 million) in outstanding letters of credit. Availability of the $40.0 million secured operating facility and US$30.0 million secured facility for the issuance of letters of credit and performance and bid bonds were reduced by outstanding letters of credit of $27.8 million (2017 – $20.8 million) and US$2.1 million (2017 – US$ 13.3 million), respectively. There was no amount drawn on the US$15.0 million secured operating facility.

NOTE 25. SUPPLEMENTAL INFORMATION

Components of changes in non-cash working capital balances are as follows:

|  | 2018 |  |  | 2017 |
Accounts receivable |  | $ | (32,709 | ) |  | $ | (41,309 | )
Inventory |  |  | (7,504 | ) |  |  | (3,902 | )
Accounts payable and accrued liabilities |  |  | 23,225 |  |  |  | (30,158 | )
|  | $ | (16,988 | ) |  | $ | (75,369 | )
Pertaining to: |  |  |  |  |  |  |  |
Operations |  | $ | (17,880 | ) |  | $ | (67,380 | )
Investments |  | $ | 892 |  |  | $ | (7,989 | )

The components of accounts receivable are as follows:

|  | 2018 |  |  | 2017 |
Trade |  | $ | 264,589 |  |  | $ | 178,433 |
Accrued trade |  |  | 47,426 |  |  |  | 91,708 |
Prepaids and other |  |  | 60,321 |  |  |  | 52,444 |
|  | $ | 372,336 |  |  | $ | 322,585 |

The components of accounts payable and accrued liabilities are as follows:

|  | 2018 |  |  | 2017 |
Accounts payable |  | $ | 129,493 |  |  | $ | 87,436 |
Accrued liabilities: |  |  |  |  |  |  |  |
Payroll |  |  | 73,682 |  |  |  | 58,550 |
Other |  |  | 71,314 |  |  |  | 63,639 |
|  | $ | 274,489 |  |  | $ | 209,625 |

Precision Drilling Corporation 2018 Annual Report | 32

Precision presents expenses in the consolidated statements of earnings by function with the exception of depreciation and amortization and impairment of property, plant and equipment, which are presented by nature. Operating expense and general and administrative expense would include $358.4 million and $7.2 million (2017 – $364.2 million and $13.5 million), respectively, of depreciation and amortization and impairment of property, plant and equipment if the statements of earnings were presented purely by function. The following table presents operating and general and administrative expenses by nature:

|  | 2018 |  |  | 2017 |
Wages, salaries and benefits |  | $ | 728,101 |  |  | $ | 580,482 |
Purchased materials, supplies and services |  |  | 422,359 |  |  |  | 433,827 |
Share based compensation |  |  | 15,598 |  |  |  | 1,934 |
|  | $ | 1,166,058 |  |  | $ | 1,016,243 |
Allocated to: |  |  |  |  |  |  |  |
Operating expense |  | $ | 1,067,871 |  |  | $ | 926,171 |
General and administrative |  |  | 112,387 |  |  |  | 90,072 |
Other recoveries |  |  | (14,200 | ) |  |  | — |
|  | $ | 1,166,058 |  |  | $ | 1,016,243 |

NOTE 26. CONTINGENCIES 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.

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 27. LONG-TERM DEBT GUARANTOR DISCLOSURE

Condensed Consolidating Statement of Financial Position as at December 31, 2018

|  | Parent |  |  | Guarantor Subsidiaries |  |  | Non-Guarantor Subsidiaries |  |  | Consolidating Adjustments |  |  | Total |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash |  | $ | 28,626 |  |  | $ | 37,138 |  |  | $ | 30,862 |  |  | $ | — |  |  | $ | 96,626 |
Other current assets |  |  | 4,798 |  |  |  | 308,450 |  |  |  | 93,166 |  |  |  | 3 |  |  |  | 406,417 |
Intercompany receivables |  |  | 51,616 |  |  |  | 1,887,405 |  |  |  | 80,735 |  |  |  | (2,019,756 | ) |  |  | — |
Investments in subsidiaries |  |  | 4,522,964 |  |  |  | 68 |  |  |  | — |  |  |  | (4,523,032 | ) |  |  | — |
Assets held for sale |  |  | — |  |  |  | 19,658 |  |  |  | — |  |  |  | — |  |  |  | 19,658 |
Property, plant and equipment |  |  | 55,430 |  |  |  | 2,541,060 |  |  |  | 441,509 |  |  |  | 613 |  |  |  | 3,038,612 |
Intangibles |  |  | 33,548 |  |  |  | 1,853 |  |  |  | — |  |  |  | — |  |  |  | 35,401 |
Goodwill |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Other long-term assets |  |  | — |  |  |  | 46,620 |  |  |  | 5,479 |  |  |  | (12,770 | ) |  |  | 39,329 |
Total assets |  | $ | 4,696,982 |  |  | $ | 4,842,252 |  |  | $ | 651,751 |  |  | $ | (6,554,942 | ) |  | $ | 3,636,043 |
Liabilities and shareholders’ equity |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Current liabilities |  | $ | 42,211 |  |  | $ | 190,239 |  |  | $ | 49,712 |  |  | $ | — |  |  | $ | 282,162 |
Intercompany payables and debt |  |  | 1,918,306 |  |  |  | 60,101 |  |  |  | 41,349 |  |  |  | (2,019,756 | ) |  |  | — |
Long-term debt |  |  | 1,706,253 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,706,253 |
Other long-term liabilities |  |  | 88,983 |  |  |  | 13,160 |  |  |  | 503 |  |  |  | (12,770 | ) |  |  | 89,876 |
Total liabilities |  |  | 3,755,753 |  |  |  | 263,500 |  |  |  | 91,564 |  |  |  | (2,032,526 | ) |  |  | 2,078,291 |
Shareholders’ equity |  |  | 941,229 |  |  |  | 4,578,752 |  |  |  | 560,187 |  |  |  | (4,522,416 | ) |  |  | 1,557,752 |
Total liabilities and shareholders’ equity |  | $ | 4,696,982 |  |  | $ | 4,842,252 |  |  | $ | 651,751 |  |  | $ | (6,554,942 | ) |  | $ | 3,636,043 |

Precision Drilling Corporation 2018 Annual Report | 33

Condensed Consolidating Statement of Financial Position as at December 31, 2017

|  | Parent |  |  | Guarantor Subsidiaries |  |  | Non-Guarantor Subsidiaries |  |  | Consolidating Adjustments |  |  | Total |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash |  | $ | 20,843 |  |  | $ | 5,422 |  |  | $ | 38,816 |  |  | $ | — |  |  | $ | 65,081 |
Other current assets |  |  | 38,558 |  |  |  | 261,883 |  |  |  | 76,221 |  |  |  | 3 |  |  |  | 376,665 |
Intercompany receivables |  |  | 93,662 |  |  |  | 2,669,280 |  |  |  | 84,861 |  |  |  | (2,847,803 | ) |  |  | — |
Investments in subsidiaries |  |  | 4,822,876 |  |  |  | 61 |  |  |  | — |  |  |  | (4,822,937 | ) |  |  | — |
Property, plant and equipment |  |  | 64,605 |  |  |  | 2,659,831 |  |  |  | 449,917 |  |  |  | (529 | ) |  |  | 3,173,824 |
Intangibles |  |  | 25,644 |  |  |  | 2,472 |  |  |  | — |  |  |  | — |  |  |  | 28,116 |
Goodwill |  |  | — |  |  |  | 205,167 |  |  |  | — |  |  |  | — |  |  |  | 205,167 |
Other long-term assets |  |  | — |  |  |  | 53,908 |  |  |  | 3,051 |  |  |  | (12,881 | ) |  |  | 44,078 |
Total assets |  | $ | 5,066,188 |  |  | $ | 5,858,024 |  |  | $ | 652,866 |  |  | $ | (7,684,147 | ) |  | $ | 3,892,931 |
Liabilities and shareholders’ equity |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Current liabilities |  | $ | 36,331 |  |  | $ | 124,482 |  |  | $ | 48,812 |  |  | $ | — |  |  | $ | 209,625 |
Intercompany payables and debt |  |  | 1,795,141 |  |  |  | 1,000,167 |  |  |  | 52,495 |  |  |  | (2,847,803 | ) |  |  | — |
Long-term debt |  |  | 1,730,437 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,730,437 |
Other long-term liabilities |  |  | 135,053 |  |  |  | 17,978 |  |  |  | 2,383 |  |  |  | (12,881 | ) |  |  | 142,533 |
Total liabilities |  |  | 3,696,962 |  |  |  | 1,142,627 |  |  |  | 103,690 |  |  |  | (2,860,684 | ) |  |  | 2,082,595 |
Shareholders’ equity |  |  | 1,369,226 |  |  |  | 4,715,397 |  |  |  | 549,176 |  |  |  | (4,823,463 | ) |  |  | 1,810,336 |
Total liabilities and shareholders’ equity |  | $ | 5,066,188 |  |  | $ | 5,858,024 |  |  | $ | 652,866 |  |  | $ | (7,684,147 | ) |  | $ | 3,892,931 |

Condensed Consolidating Statement of Loss for the Year ended December 31, 2018

|  | Parent |  |  | Guarantor Subsidiaries |  |  | Non-Guarantor Subsidiaries |  |  | Consolidating Adjustments |  |  | Total |
Revenue |  | $ | 104 |  |  | $ | 1,356,913 |  |  | $ | 191,131 |  |  | $ | (6,959 | ) |  | $ | 1,541,189 |
Operating expense |  |  | 83 |  |  |  | 950,058 |  |  |  | 124,689 |  |  |  | (6,959 | ) |  |  | 1,067,871 |
General and administrative expense |  |  | 52,638 |  |  |  | 49,305 |  |  |  | 10,444 |  |  |  | — |  |  |  | 112,387 |
Other recoveries |  |  | (14,200 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (14,200 | )
Earnings (loss) before income taxes, equity in loss of subsidiaries, gain on redemption and repurchase of unsecured senior notes, finance charges, foreign exchange, impairment of goodwill and depreciation and amortization |  |  | (38,417 | ) |  |  | 357,550 |  |  |  | 55,998 |  |  |  | — |  |  |  | 375,131 |
Depreciation and amortization |  |  | 6,882 |  |  |  | 298,019 |  |  |  | 60,542 |  |  |  | 217 |  |  |  | 365,660 |
Impairment of goodwill |  |  | — |  |  |  | 207,544 |  |  |  | — |  |  |  | — |  |  |  | 207,544 |
Foreign exchange |  |  | 4,819 |  |  |  | (443 | ) |  |  | (359 | ) |  |  | — |  |  |  | 4,017 |
Finance charges |  |  | 126,758 |  |  |  | (233 | ) |  |  | 653 |  |  |  | — |  |  |  | 127,178 |
Gain on redemption and repurchase of unsecured senior notes |  |  | (5,672 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (5,672 | )
Equity in loss of subsidiaries |  |  | 168,975 |  |  |  | — |  |  |  | — |  |  |  | (168,975 | ) |  |  | — |
Loss before income taxes |  |  | (340,179 | ) |  |  | (147,337 | ) |  |  | (4,838 | ) |  |  | 168,758 |  |  |  | (323,596 | )
Income taxes |  |  | (46,125 | ) |  |  | 13,863 |  |  |  | 2,936 |  |  |  | — |  |  |  | (29,326 | )
Net loss |  | $ | (294,054 | ) |  | $ | (161,200 | ) |  | $ | (7,774 | ) |  | $ | 168,758 |  |  | $ | (294,270 | )

Precision Drilling Corporation 2018 Annual Report | 34

Condensed Consolidating Statement of Earnings (Loss) for the Year ended December 31, 2017

|  | Parent |  |  | Guarantor Subsidiaries |  |  | Non-Guarantor Subsidiaries |  |  | Consolidating Adjustments |  |  | Total |
Revenue |  | $ | 89 |  |  | $ | 1,138,049 |  |  | $ | 190,401 |  |  | $ | (7,315 | ) |  | $ | 1,321,224 |
Operating expense |  |  | 138 |  |  |  | 809,233 |  |  |  | 124,115 |  |  |  | (7,315 | ) |  |  | 926,171 |
General and administrative expense |  |  | 35,605 |  |  |  | 44,932 |  |  |  | 9,535 |  |  |  | — |  |  |  | 90,072 |
Earnings (loss) before income taxes, equity in loss of subsidiaries, loss on redemption and repurchase of unsecured senior notes, finance charges, foreign exchange, impairment of property, plant and equipment and depreciation and amortization |  |  | (35,654 | ) |  |  | 283,884 |  |  |  | 56,751 |  |  |  | — |  |  |  | 304,981 |
Depreciation and amortization |  |  | 13,118 |  |  |  | 302,958 |  |  |  | 61,450 |  |  |  | 220 |  |  |  | 377,746 |
Impairment of property, plant and equipment |  |  | — |  |  |  | 15,313 |  |  |  | — |  |  |  | — |  |  |  | 15,313 |
Foreign exchange |  |  | (2,375 | ) |  |  | (889 | ) |  |  | 294 |  |  |  | — |  |  |  | (2,970 | )
Finance charges |  |  | 138,027 |  |  |  | (68 | ) |  |  | (31 | ) |  |  | — |  |  |  | 137,928 |
Loss on redemption and repurchase of unsecured senior notes |  |  | 9,021 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 9,021 |
Equity in loss of subsidiaries |  |  | (12,383 | ) |  |  | — |  |  |  | — |  |  |  | 12,383 |  |  |  | — |
Loss before income taxes |  |  | (181,062 | ) |  |  | (33,430 | ) |  |  | (4,962 | ) |  |  | (12,603 | ) |  |  | (232,057 | )
Income taxes |  |  | (47,567 | ) |  |  | (59,120 | ) |  |  | 6,666 |  |  |  | — |  |  |  | (100,021 | )
Net income (loss) |  | $ | (133,495 | ) |  | $ | 25,690 |  |  | $ | (11,628 | ) |  | $ | (12,603 | ) |  | $ | (132,036 | )

Condensed Consolidating Statement of Comprehensive Income (Loss) for the Year ended December 31, 2018

|  | Parent |  |  | Guarantor Subsidiaries |  |  | Non-Guarantor Subsidiaries |  |  | Consolidating Adjustments |  |  | Total |
Net loss |  |  | (294,054 | ) |  |  | (161,200 | ) |  |  | (7,774 | ) |  |  | 168,758 |  |  | $ | (294,270 | )
Other comprehensive income (loss) |  |  | (145,226 | ) |  |  | 129,804 |  |  |  | 45,190 |  |  |  | 636 |  |  |  | 30,404 |
Comprehensive Income (loss) |  | $ | (439,280 | ) |  | $ | (31,396 | ) |  | $ | 37,416 |  |  | $ | 169,394 |  |  | $ | (263,866 | )

Condensed Consolidating Statement of Comprehensive Loss for the Year ended December 31, 2017

|  | Parent |  |  | Guarantor Subsidiaries |  |  | Non-Guarantor Subsidiaries |  |  | Consolidating Adjustments |  |  | Total |
Net income (loss) |  | $ | (133,495 | ) |  | $ | 25,690 |  |  | $ | (11,628 | ) |  | $ | (12,603 | ) |  | $ | (132,036 | )
Other comprehensive income (loss) |  |  | 121,699 |  |  |  | (110,717 | ) |  |  | (35,661 | ) |  |  | (167 | ) |  |  | (24,846 | )
Comprehensive loss |  | $ | (11,796 | ) |  | $ | (85,027 | ) |  | $ | (47,289 | ) |  | $ | (12,770 | ) |  | $ | (156,882 | )

Condensed Consolidating Statement of Cash Flow for the Year ended December 31, 2018

|  | Parent |  |  | Guarantor Subsidiaries |  |  | Non-Guarantor Subsidiaries |  |  | Consolidating Adjustments |  |  | Total |
Cash provided by (used in): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Operations |  | $ | (102,901 | ) |  | $ | 351,782 |  |  | $ | 44,453 |  |  | $ | — |  |  | $ | 293,334 |
Investments |  |  | 277,501 |  |  |  | (75,740 | ) |  |  | (16,253 | ) |  |  | (286,302 | ) |  |  | (100,794 | )
Financing |  |  | (169,085 | ) |  |  | (247,017 | ) |  |  | (39,285 | ) |  |  | 286,302 |  |  |  | (169,085 | )
Effects of exchange rate changes on cash and cash equivalents |  |  | 2,268 |  |  |  | 2,691 |  |  |  | 3,131 |  |  |  | — |  |  |  | 8,090 |
Increase (decrease) in cash and cash equivalents |  |  | 7,783 |  |  |  | 31,716 |  |  |  | (7,954 | ) |  |  | — |  |  |  | 31,545 |
Cash and cash equivalents, beginning of year |  |  | 20,843 |  |  |  | 5,422 |  |  |  | 38,816 |  |  |  | — |  |  |  | 65,081 |
Cash and cash equivalents, end of year |  | $ | 28,626 |  |  | $ | 37,138 |  |  | $ | 30,862 |  |  | $ | — |  |  | $ | 96,626 |

Precision Drilling Corporation 2018 Annual Report | 35

Condensed Consolidating Statement of Cash Flow for the Year ended December 31, 2017

|  | Parent |  |  | Guarantor Subsidiaries |  |  | Non-Guarantor Subsidiaries |  |  | Consolidating Adjustments |  |  | Total |
Cash provided by (used in): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Operations |  | $ | (160,698 | ) |  | $ | 243,364 |  |  | $ | 33,889 |  |  | $ | — |  |  | $ | 116,555 |
Investments |  |  | 191,638 |  |  |  | (58,942 | ) |  |  | (11,152 | ) |  |  | (212,694 | ) |  |  | (91,150 | )
Financing |  |  | (73,784 | ) |  |  | (190,360 | ) |  |  | (22,334 | ) |  |  | 212,694 |  |  |  | (73,784 | )
Effects of exchange rate changes on cash and cash equivalents |  |  | 1,893 |  |  |  | (1,778 | ) |  |  | (2,360 | ) |  |  | — |  |  |  | (2,245 | )
Decrease in cash and cash equivalents |  |  | (40,951 | ) |  |  | (7,716 | ) |  |  | (1,957 | ) |  |  | — |  |  |  | (50,624 | )
Cash and cash equivalents, beginning of year |  |  | 61,794 |  |  |  | 13,138 |  |  |  | 40,773 |  |  |  | — |  |  |  | 115,705 |
Cash and cash equivalents, end of year |  | $ | 20,843 |  |  | $ | 5,422 |  |  | $ | 38,816 |  |  | $ | — |  |  | $ | 65,081 |

NOTE 28. SUBSIDIARIES

Significant Subsidiaries

|  |  |  | Ownership Interest |
|  | Country of Incorporation |  | 2018 |  |  | 2017 |
Precision Limited Partnership |  | Canada |  |  | 100 |  |  |  | 100 |
Precision Drilling Canada Limited Partnership |  | Canada |  |  | 100 |  |  |  | 100 |
Precision Diversified Oilfield Services Corp. |  | Canada |  |  | 100 |  |  |  | 100 |
Precision Directional Services Ltd. |  | Canada |  |  | 100 |  |  |  | 100 |
Precision Drilling (US) Corporation |  | United States |  |  | 100 |  |  |  | 100 |
Precision Drilling Company LP |  | United States |  |  | 100 |  |  |  | 100 |
Precision Completion & Production Services Ltd. |  | United States |  |  | 100 |  |  |  | 100 |
Precision Directional Services, Inc. |  | United States |  |  | 100 |  |  |  | 100 |
Grey Wolf Drilling Limited |  | Barbados |  |  | 100 |  |  |  | 100 |
Grey Wolf Drilling (Barbados) Ltd. |  | Barbados |  |  | 100 |  |  |  | 100 |

Precision Drilling Corporation 2018 Annual Report | 36