Another example of cost containment is our streamlining of production capacity in Europe. We closed smaller, obsolete capacity and consolidated production on our newer, more efficient lines at our South Molton, England, and Cowie mills. We’ve already seen significant gains in production from the consolidated lines and expect these actions will result in higher overall margin contribution from our European business.

We continue to believe OSB is the industry’s best growth opportunity and that successful execution of our strategy will maximize value for our shareholders. Our strategy is simple and straightforward, and delivers results.

During 2006, we made excellent progress against our objectives:

2.     Own high-quality, well-located assets with industry-leading cost positions – We installed a biomass heat energy system at our Cowie mill, approved similar projects at Genk and Nacogdoches, and streamlined existing European production capacity by closing two older, less efficient lines.

Norbord is an international producer of wood-based panels, with 16 plant locations in the United States, Europe and Canada. It is one of the world's largest producers of oriented strand board (OSB) with annual capacity of 5.0 billion square feet (³/8-inch basis). The core of Norbord's OSB business is located in the US South. The Company is a significant producer of wood-based panels in Europe. Norbord does not own any timberlands. It purchases wood fibre from third parties that include private landowners and government-owned timberlands. Norbord employed approximately 2,800 people at December 31, 2006.

Operations include 11 OSB mills, 3 particleboard plants, 2 medium density fibreboard (MDF) plants, 1 hardwood plywood mill, 1 I-joist mill, 2 laminating operations, and a furniture plant. The Company reports all operations as a single operating segment.

Norbord's OSB and particleboard panels are used primarily in the construction sector and its MDF and hardwood plywood panels serve the furniture and fixtures markets.

Norbord's business strategy is focused entirely on the wood panels sector – in particular OSB – in North America and Europe.

The Company's overall business strategy focuses on five key areas:

1. Pursuing growth in OSB through optimization or expansion of existing assets and opportunistic acquisitions.
2. Owning high-quality, well-located assets with industry-leading cost positions.
3. Maintaining a margin-focused operating culture.
4. Focusing customer service strategy on customers who are growing their own market share.
5. Maintaining a disciplined approach to capital allocation.

• Started up $135 million expansion project at Cordele, Georgia OSB mill on time and on budget
• Achieved record annual OSB production – a 4% increase over 2005
• Streamlined European production capacity by decommissioning older, less efficient particleboard and MDF lines
• Started up a new biomass heat energy system in Cowie, Scotland
• Commenced installation of new biomass energy systems at Genk, Belgium and Nacogdoches, Texas
• Improved European earnings trend
• Generated $56 million in margin improvements
• Expanded North American OSB sales volume with key big box customers
• Secured new panelboard business with leading UK home builders
• Paid third CAD $1.00 special dividend, in addition to the regular CAD $0.10 quarterly dividend
• Completed the repurchase of 2.7 million common shares
• Completed small shareholder buyback program

Norbord's financial goal is to achieve top quartile return on equity (ROE) and cash return on capital employed (ROCE) among North American forest products companies. Norbord believes that it has met this target in each of the past four years.

Maintaining investment grade debt ratings is an important element of Norbord's financing strategy. With investment grade debt ratings, Norbord believes that it should have the benefit of long-term access to public and private capital markets on attractive terms. Ratings on Norbord debt have been consistently investment grade since 1992.

Norbord manages its business to provide for a sustainable dividend to be paid quarterly to common shareholders throughout the business cycle, subject to Board approval. At December 31, 2006, the Board of Directors had declared 65 consecutive quarterly common dividends of CAD $0.10 per share. In addition, Norbord paid three special dividends of CAD $1.00 per share to common shareholders in each of the past three years. The special dividends were declared to preserve an efficient capital structure through the peak of the OSB price cycle.

Throughout the cycle, Norbord took steps to prepare itself for this inevitable downturn by focusing on cost containment and by focusing product mix on higher margin products. The Margin Improvement Program (MIP) has helped Norbord to concentrate on improving its competitive position, generating over $185 million of savings in the past five years, including $56 million in 2006. These gains have helped to offset the impact of industry-wide rising input costs and management believes its relative competitive position has improved over this time. The benefit of the discipline exercised through the top of the cycle is that all Norbord mills generated positive EBITDA in the second half of the year when North American OSB prices traded well below the historical average.

In contrast to North America, markets in Europe showed steady improvement during 2006 as the economy expanded, particularly in Germany where construction activity and investment are growing for the first time this decade. Norbord's European business is exposed to different market dynamics than the North American business. The Company believes this provides meaningful earnings diversification, while capitalizing on Norbord's strength as a panel producer.

Return on equity (ROE) was 20% in 2006 compared to 46% in 2005. ROE is a measure for shareholders to determine how effectively their money is being employed. Capital initiatives, including the three CAD $1.00 special dividends paid in each of the past three years and the share repurchase program, have maintained the efficiency of Norbord's capital structure and contributed to the high ROE levels. The 2004 and prior ROE includes Fraser Papers, which was distributed to common shareholders in the third quarter of 2004. Pre-tax return on capital employed (ROCE) averaged 25% for the year compared to 53% in 2005. ROCE is a measurement of financial performance, focusing on cash generation and the efficient use of capital.

Norbord achieved record annual OSB production in 2006, increasing volume 4% over 2005 levels. OSB volume has more than doubled over the past five years, growing at a compound annual rate of 19%. Producing more volume from existing assets has contributed to Norbord's cost containment efforts. Norbord's OSB production is expected to increase by more than 10% in 2007, as a result of the ramp-up of the second line at Cordele and productivity improvements at existing mills.

Cash provided by operating activities totalled $191 million or $1.33 per share in 2006. In the past five years, over $1.4 billion in cash has been generated from operating activities. This cash has been used to reshape the Company from a traditional Canadian forest products company to a focused internationally-recognized leader in the structural panels sector. During this time, Norbord has:

• Invested $610 million in growing the business
• Reduced net debt and preferred shares outstanding by $160 million
• Paid out $550 million in cash dividends
• Invested $100 million to repurchase 10.2 million common shares
• Distributed paper and timberlands business (Fraser Papers) to shareholders

This transformation has contributed to strong returns for shareholders. A CAD $100 investment in Norbord shares at the end of 2001 would have grown to CAD $234 by the end of 2006, assuming reinvestment of dividends and other distributions, representing a compound annual return of 19% per year.

North American OSB accounts for two-thirds of Norbord's panel shipments by volume, therefore results of operations are most affected by volatility in the price of North American OSB. Comprising almost 30% of shipments by volume, the relative strength of European panel markets also affects results, although to a much lesser degree. North America is the principal market destination for Norbord's products.

(1)    Excludes particleboard consumed internally (2006 – 178 MMsf – ³/8"; 2005 – 183 MMsf – ³/8").

Interest rates and inflation in North America remained relatively low while GDP growth and consumer confidence remained relatively strong. Thirty-year US mortgage rates averaged 6.4% in 2006 compared to 5.9% in 2005. Most indicators suggest that the underlying demographics, driven by immigration, will continue to support a high level of housing demand throughout the coming decade. Canadian housing starts increased 1% over 2005 and remain robust at 0.2 million units.

The North American structural panel industry produced 42 billion square feet (³/8-inch basis) of panels in 2006. OSB production reached 26 billion square feet in 2006 and now represents approximately 62% of total North American structural panel production. Industry-wide OSB production was up 1% over 2005 while plywood production decreased 6%.

The North Central benchmark OSB price averaged $217 per Msf (⁷/16-inch basis) in 2006 compared to an average price of $320 per Msf in the prior year. Regional pricing variations, particularly in the US South, make the North Central benchmark price a useful, albeit imperfect, proxy for over-all North American OSB pricing. Further, the pricing lag effect of maintaining an order file, premiums obtained on value-added products, and volume and trade discounts cause realized prices to differ from the benchmark. Norbord's realized OSB prices or mill nets (net sales divided by shipments) were 102% of the benchmark in 2006 and 97% in 2005.

European markets showed steady improvement during 2006 as European construction market confidence improved, particularly in Germany. As a result, European OSB prices increased 5% over 2005 and averaged 8% above the five-year average.

The Company believes that improvement in the European economy in 2006 led to higher demand and prices for particleboard and MDF. Furthermore, Norbord successfully expanded particleboard sales to the construction sector, a focus selected to maximize synergies with its OSB sales strategy. While European results benefited from the higher price levels, these gains were tempered by continued high energy, resin and other input costs.

(1)    Includes European net sales of $127 million (2005 – $114 million).
(2)    Excludes particleboard consumed internally (2006 – 178 MMsf – ³/8"; 2005 – 183 MMsf – ³/8").
(3)    Other sales include I-joist, laminated products, furniture components and ready-to-assemble furniture units.

Eight of Norbord's 11 OSB mills established annual production records in 2006. Improvements delivered as a result of implementing best practices resulted in a 4% production increase. This follows a 9% increase in OSB production in 2005. Particleboard production increased 2% as compared to 2005 despite decommissioning the older and less efficient particleboard line at South Molton, England in the third quarter of 2006. The decrease in MDF production as compared to 2005 is the result of decommissioning the older MDF line at Cowie in the second quarter of 2006. Norbord's total European MDF production is expected to return to about 90% of its pre-closure volume by the end of 2007 as production at the remaining MDF facility is optimized.

In 2006, EBITDA was $247 million as compared with $495 million in 2005. The primary driver of the change in EBITDA was the lower North American OSB price. Benchmark OSB prices in 2006 averaged 32% below the highs seen in 2005 and 20% below the five-year average. The components of the EBITDA change are summarized in the following variance table. EBITDA margin was 20% compared to 34% for the prior year.

(1)    The mill net variance represents the change in realized pricing across all products. Mill net is calculated as net sales divided by shipment volume.

(2)    Key inputs include fibre, resin and energy.

(3)    The volume variance represents the impact of shipment volume changes across all products.

(4)    Other category comprises all remaining variances including labour and benefits, supplies and maintenance, the impact of foreign exchange, and the $7 million refund of softwood lumber duty received in the fourth quarter of 2006.

North American OSB generated EBITDA of $215 million (2005 – $478 million). Other products contributed $41 million (2005 – $35 million) to EBITDA. These figures exclude unallocated corporate overhead relating to all product lines totalling $16 million (2005 – $18 million) and softwood lumber duty refunds of $7 million.

The global forest products industry continued to be challenged with significantly higher key input prices in 2006. The prices of energy, resin and fibre, which account for approximately 70% of production costs, have each increased more than 70% in the past five years. In 2006, while the rate of increase diminished, all of these input prices increased over 2005. Gains from the Margin Improvement Program (MIP) of $56 million in 2006, measured relative to 2005 at constant prices and exchange rates, limited the impact these higher input prices had on earnings. Mix, volume and key input usage initiatives were the largest contributors to MIP in 2006. Globally, Norbord expects to deliver MIP of $45 million for the full year 2007.

Despite these continued input price pressures, Norbord's North American per unit OSB production costs, before employee profit share, were in line with the prior year – the result of increased productivity and improved raw material usages.

EBITDA margins for non-OSB products averaged 6% in 2006 compared to 7% in 2005. MDF and particleboard costs were impacted by energy and resin price pressures. MDF and particleboard are more energy- and resin-intensive products than OSB.

Depreciation expense increased $5 million in 2006 to $94 million, due to the impact of recent capital investments.

Interest expense of $29 million in 2006 was down from $30 million in 2005. Interest of $7 million was capitalized in 2006 relating to the Cordele expansion completed in December. This offset the impact that higher average debt levels and increased short-term interest rates had on interest expense. Long-term debt ended the year at $480 million, up from $440 million at December 31, 2005.

The effective interest rate on Norbord's debt-related obligations, including the impact of interest rate swaps, was 7.7% at December 31, 2006, compared to 7.2% at year-end 2005. Approximately 80% of Norbord's net debt was subject to floating interest rates during the year. The increased average rate was the result of higher US money market rates in 2006.

From time to time the Company recoupons its portfolio of interest rate swaps to more efficiently manage cash flow and credit exposure. Any gains realized are deferred and amortized over the remaining term of the debt against which the swaps were designated as hedges. At December 31, 2006, $19 million of gains were deferred and included in accounts payable and accrued liabilities and other liabilities in the consolidated balance sheet. The amortization of $8 million in 2006 and $8 million in 2005 was included in interest expense. Interest income in 2006 amounted to $3 million compared to $5 million in 2005. Interest earned on cash and cash equivalents accounts for the majority of interest income. A tax expense of $17 million was recorded in 2006 on pre-tax earnings of $114 million. The effective tax rate of 15% is less than the statutory rate of 34% principally due to rate differences on foreign activities.

At December 31, 2006, the Company had tax operating loss carryforwards of approximately £36 million from UK operations that can be carried forward indefinitely. The Company has capital losses in Canada of CAD $66 million that can also be carried forward indefinitely. The Company also has approximately CAD $34 million of investment tax credits (ITCs) available to reduce future Canadian tax liabilities. The ITCs expire between 2007 and 2014. The loss carryforwards and the credits may be utilized over the next several years to eliminate cash taxes otherwise payable, and will enhance future cash flows. The future tax benefits of these temporary differences have been included in future income taxes in the consolidated financial statements.

Cash provided by operating activities was $191 million, or $1.33 per share, compared to $314 million, or $2.14 per share, in 2005. Changes in earnings is the principal driver of changes in cash provided by operating activities. Higher cash taxes in 2006 and 2005 following the utilization of the majority of the benefit of the North American tax operating loss carryforwards in 2004 also contributed to the lower level of cash provided by operating activities in these years.

Operating working capital, consisting of accounts receivable and inventory less accounts payable and accrued liabilities was $33 million at December 31,2006, compared to $19 million at December 31,2005. A higher accounts receivable balance due to an increase in non-trade receivables is the primary driver of the change in the operating working capital balance. Collections of trade receivables are in line with prior periods. The Company aims to minimize the amount of capital held as operating working capital. Total working capital at December 31,2006 was $53 million including $20 million in cash and cash equivalents. Total working capital is down significantly over 2005 principally due to the lower cash balance in 2006.

In addition to cash on hand and cash generated from operations, the Company has $200 million of committed unsecured revolving bank lines available to support short-term liquidity requirements, of which $44 million were utilized at December 31, 2006 – $40 million drawn as cash and $4 million drawn for letters of credit. These committed bank lines mature in 2010, bear interest at money market rates plus a margin that varies with the Company's credit rating, and contain certain financial covenants which the Company must comply with on a quarterly basis.

Cash dividends of $167 million or CAD $1.40 per share were paid in the year including the payment of a CAD $1.00 special dividend on July 14, 2006, the third special dividend in the past three years. Dividends were funded with cash from operations. Other uses of the cash from operations in the year include $160 million for capital investments and $29 million for common share repurchases. These initiatives are discussed in further detail in the Investments and Divestitures and Capitalization sections. In addition, $40 million of cash was received through the drawdown of the committed bank lines, which is reflected as an increase in long-term debt.

Norbord's net debt stood at $460 million at year-end, representing 27% of capitalization on a market basis and 51% of capitalization on a book basis. Net debt includes long-term debt of $480 million less cash and cash equivalents of $20 million.

At December 31, 2006, the Company had $365 million (2005 – $365 million) of interest rate swaps outstanding, and 84% (2005 – 74%) of Norbord's net debt was at floating interest rates.

The following table summarizes the aggregate amount of future cash outflows for contractual obligations:

Note: The above table does not include pension and post-retirement benefits plan obligations which are discussed in the Significant Accounting Policies and Estimates – Defined Benefit Pension Plans section.

In December 2006, the second OSB line at Cordele was completed, on time and on budget, creating one of the largest and most efficient OSB manufacturing facilities in the world. The expansion added approximately 550 million square feet (³/8-inch basis) of production capacity at a capital cost of $135 million and increased Norbord's North American OSB production capacity by 15%. Once fully ramped up, this expansion will further strengthen Norbord's position as one of the largest OSB producers in the US South. In addition to the capital cost of $135 million, $8 million of interest and $5 million of start-up costs have been capitalized since construction began in the second quarter of 2005.

Capital investments in 2006, excluding the new Cordele OSB line, were $56 million, representing 60% of depreciation (2005 – 87%). Approximately 55% of the $56 million was invested in projects designed to enhance profitability. In addition, $97 million was invested in the Cordele mill expansion project and $7 million of interest was capitalized bringing the total capital investment in 2006 to $160 million.

At year-end 2006, commitments to projects in progress totalled $16 million. Norbord's 2007 capital investments are expected to be $30 million, representing committed capital and essential maintenance only. Should market conditions warrant, this could be increased to $40 million, or approximately 40% of depreciation. The 2007 capital investments will be funded with cash on hand, cash generated from operations and, if necessary, drawdowns under the Company's committed bank lines.

The following table summarizes Norbord's capital investments:

In December 2006, the Company recorded a provision relating to the indefinite closure of the I-joist mill in Juniper, New Brunswick, following notification from the mill's major customer that its contract would not be renewed. The provision of $13 million ($0.06 per share) consisted of asset writedowns of $12 million and severances and other costs of $1 million. Earnings and balance sheet information relating to these assets follows:

Notwithstanding the writedown taken, efforts to find replacement customers for the mill's product continue.

Dividends to common shareholders totalled $178 million in 2006 and $166 million in 2005 including the payment of a CAD $1.00 per share special dividend in each of the third quarter of 2006 and the second quarter of 2005. In addition to the special dividends, the Company paid a regular dividend of CAD $0.40 in both 2006 and 2005.

Preferred share dividends totalled $1 million in 2005. All of the outstanding preferred shares were redeemed in the second quarter of 2005 (see Capitalization – Preferred Share Redemption).

In 2006, the Company purchased and cancelled 2.7 million common shares at a cost of $29 million under a share repurchase program that expired on November 1, 2006. The share repurchase program was not renewed. In 2005, 5.7 million shares were purchased and cancelled at a cost of $54 million.

During the second quarter of 2005, the Company redeemed all of the outstanding Class A Series I preferred shares at par (CAD $60 million). On redemption, a foreign exchange loss of $9 million was recorded as a charge to equity. This one-time charge did not impact earnings. However, the charge reduced earnings per share by $0.06 as it was included in the determination of earnings available to common shareholders, the numerator in the earnings per share calculation. Following the redemption, the Company's issued equity is comprised solely of common shares. The redemption eliminated the Company's financial obligation with the highest after-tax cost.

The price of North American OSB is the primary factor affecting the comparability of Norbord's results over the past eight quarters. Fluctuations in earnings during that time mirror fluctuations in the price of OSB in North America. The Company estimates the annualized impact of a $10 per Msf (⁷/16-inch basis) change in the North American OSB price on EBITDA in 2006 was approximately $30 million or approximately $0.14 per share. Regional pricing variations, particularly in the US South, make the North Central benchmark price a useful, albeit imperfect, proxy for overall North American OSB pricing. Further, the pricing lag effect of maintaining an order file, premiums obtained on value added products, and volume and trade discounts cause realized prices to differ from the benchmark.

Norbord has a relatively low exposure to the Canadian dollar due to a comparatively small manufacturing base in Canada, comprising 13% of its panel production capacity. The Company estimates the unfavourable impact of a US one-cent increase in the Canadian dollar to negatively impact annual earnings by approximately $1 million or less than $0.01 per share.

One-time items that had a significant impact on fourth quarter 2006 results include pre-tax income of $7 million ($0.03 per share) due to softwood lumber duty refunds, the $13 million provision ($0.06 per share) for non-core operation and tax recovery of $4 million ($0.03 per share) due to the resolution of several income tax audit items relating to prior taxation years. Foreign exchange on the redemption of preferred shares had a $0.06 per share negative impact in the second quarter of 2005.

In the fourth quarter of 2006, results were driven by North American OSB prices which continued their downward trend in the quarter. Average North American OSB benchmark pricing for the fourth quarter was $166 per Msf (⁷/16-inch basis), 50% below the fourth quarter of 2005. Return on capital employed (ROCE) was 8% on an annualized basis for the quarter, compared to 15% and 45% for the third quarter of 2006 and the fourth quarter of 2005, respectively. ROCE is a measure of financial performance, focusing on cash generation and the efficient use of capital.

A loss of $1 million was generated in the fourth quarter as compared to income of $7 million in the previous quarter and income of $52 million in the fourth quarter of 2005. EBITDA of $22 million was generated in the fourth quarter of 2006, versus $35 million in the previous quarter and $110 million in the fourth quarter of 2005. The primary driver of the change in earnings and EBITDA is the change in North American OSB price. EBITDA changes are summarized in the variance table below. EBITDA margins were 8% in the quarter, compared to 12% for the previous quarter and 31% in the fourth quarter of 2005.

(1)    The mill net variance represents the change in realized pricing across all products. Mill net is calculated as net sales divided by shipment volume.

(2)    The volume variance represents the of shipment volume changes across all products.

(3)    Key inputs include fibre, resin and energy.

(4)    Other category covers all remaining variances including labour and benefits, supplies and maintenance, the impact of foreign exchange, and the $7 million refund of softwood lumber duty received in the fourth quarter of 2006.

At January 31,2007, there were 143.8 million common shares outstanding.

The weighted average number of common shares outstanding in the year has decreased 2% over the prior year. This decrease is principally due to share repurchases and has resulted in an improvement to earnings per share of approximately $0.02 per share.

Under the Dividend Reinvestment Plan, 1.4 million common shares were issued in 2006 compared to 0.5 million in 2005. The share repurchase program under which the Company purchased and cancelled 2.7 million common shares during the year expired November 1,2006 and was not renewed.

Shares issued under the Company's stock option plan totalled 0.3 million in 2006, generating proceeds of $1 million. Options on 0.7 million shares were exercised during 2005. Options on 1.8 million shares were outstanding at year-end 2006, with 38% vested. During the year, the exercise price on all outstanding options was decreased by CAD $1.00 to reflect the payment of a special dividend (CAD $1.00). The exercise price for these options ranges from CAD $0.01 to CAD $11.13, with expiry at various dates to 2015.

The following table summarizes common share information for each of the past five years.

(1)    Calculated based on year-end closing share price and annual dividend excluding the special dividends of CAD $1.00 per share paid in each of the past three years.

Norbord's total shareholder return during 2006 was a loss of 16% as the CAD $1.40 in regular and special dividend payments were offset by a decline in share price. The average daily volume traded during 2006 was 0.5 million shares as compared to 0.4 million shares in 2005.

The Company's major shareholder has various interests over which it has control or otherwise has significant influence (a "related company" or, collectively, "related companies").

In 2006 and 2005, the Company provided certain administrative services to a related company which were charged on a cost recovery basis. In addition, the Company periodically engages the services of related companies for various financial, real estate and other business advisory services. In 2006, the fees for these services were less than $1 million and were charged at market rates.

In 2006, the Company received a $3 million payment from a related company as final consideration pursuant to a 1999 Asset Purchase Agreement. The payment was contingent on the completion of an expansion project. In addition, Norbord paid $1 million to this related company for certain costs for which Norbord provided an indemnity under the same 1999 Asset Purchase Agreement. Total estimated future costs related to this indemnification total $1 million and are included in other liabilities in the consolidated balance sheet.

Norbord considers effective capital allocation to be critical to its success. Capital is invested only when Norbord expects returns to exceed pre-determined thresholds, taking into consideration both the degree and magnitude of the relative risks and rewards and, if appropriate, strategic considerations in the establishment of new business activities or maintenance of existing business activities. Post-investment reviews are conducted on capital investment decisions to assess the results against planned project returns.

Norbord strives to maintain sufficient financial liquidity at all times in order to participate in attractive investment opportunities as they arise, as well as to withstand sudden adverse changes in economic circumstances.

At year-end, Norbord had $156 million of unutilized committed unsecured revolving credit facilities with six international financial institutions available to support short-term liquidity requirements.

Debt ratings within investment grade categories are a key objective of Norbord's financing strategy and provide for long-term access to public and private capital markets on attractive terms. Current ratings on Norbord's senior unsecured debentures are:

Ratings on the debentures have been investment grade since 1992.

Norbord uses derivative financial instruments solely for the purpose of managing its interest rate, foreign exchange and commodity price exposures, as further detailed in the Risks and Uncertainties section. These activities are governed by Board-approved financial policies that cover risk identification, tolerance, measurement and reporting. Derivative transactions are executed only with approved highly rated counterparties under master netting agreements. Derivative contracts that are deemed to be highly effective in offsetting changes in the fair value, net investment or cash flows of hedged items are designated as hedges of specific exposures and, accordingly, all gains and losses on these instruments are recognized in the same manner as the item being hedged.

Net sales are recognized when the risks and rewards of ownership pass to the purchaser. This is generally when goods are shipped. Sales are recorded net of third-party transportation and discounts.

Sales are governed by contract or by standard industry terms. Revenue is not recognized prior to the completion of those terms. The majority of product is shipped via third-party transport on a freight-on-board shipping basis. In all cases, product is subject to quality testing by the Company to ensure it meets applicable standards prior to shipment.

Property, plant and equipment are recorded at cost, including capitalized interest. Government capital grants and investment tax credits received reduce the cost of related assets. Property, plant and equipment acquired in a business acquisition are recorded at fair value. Property, plant and equipment are depreciated on a straight-line basis. The rates of depreciation are intended to fully depreciate manufacturing and non-manufacturing assets over the following periods, which approximate their useful lives.

Buildings 20 to 40 years
Production equipment 10 to 15 years

These periods are assessed from time to time to ensure that they continue to approximate the useful lives of the related assets. Property, plant and equipment is tested for recoverability whenever events or changes in circumstances indicate the carrying amount may not be recoverable.

Future income tax assets and liabilities are determined based on temporary differences between the carrying amount and tax basis of assets and liabilities as well as certain carryforward items.

Future income tax assets are recognized only to the extent that, in the Company's opinion, it is more likely than not that the future income tax assets will be realized. This opinion is based on certain estimates and assumptions. If these estimates or assumptions change in the future, the Company could be required to reduce or increase the value of the future income tax assets resulting in income tax expense or recovery. The Company evaluates its future income tax assets periodically.

Norbord's defined benefit pension plans are funded in accordance with all applicable regulatory requirements. Norbord's obligations under its defined benefit pension plans are determined periodically through actuarial valuations, which are the basis for calculating pension expense. The weighted average assumed return on assets is 7.8%, which is based on management's best estimate of the long-term expected rate of return on plan assets, including consideration of asset mix, equity risk premium and active investment management premium. The weighted average discount rate used to value year-end 2006 accrued benefit obligations is 5.0%, which is based on the market yield of high-quality corporate bonds of similar duration to the pension plan liabilities.