NOTE 12 VARIABLE INTEREST ENTITIES

VIEs for which the Company is the primary beneficiary

Non-owned restaurants

The Company has consolidated 345 Non-owned restaurants as at March 31, 2013 (fiscal 2012: 365 restaurants), or approximately 8.0% of the Company’s total systemwide restaurants (fiscal 2012: 8.6%). On average, a total of 358 Non-owned restaurants were consolidated during the first quarter of fiscal 2013 (first quarter fiscal 2012: average of 306 restaurants).

Advertising Funds

The Ad Fund has rolled out a program to acquire and install LCD screens, media engines, drive-thru menu boards and ancillary equipment for our restaurants (“Expanded Menu Board Program”). The advertising levies, depreciation, interest costs, capital expenditures and financing associated with the Expanded Menu Board Program are presented on a gross basis on the Condensed Consolidated Statement of Operations and Cash Flows. The Ad Fund has purchased $2.8 million of equipment for the Expanded Menu Board Program in the first quarter of fiscal 2013 and $56.2 million cumulatively since fiscal 2011.

In February 2013, the Tim Hortons Advertising and Promotion Fund (Canada) Inc. (“Ad Fund”) entered into an amortizing interest rate swap to fix a portion of the interest expense on its term debt.

The advertising funds spent approximately $69.5 million in the first quarter of fiscal 2013 (first quarter fiscal 2012: $73.7 million). Company contributions to the Canadian and U.S. advertising funds consisted of the following:


	First quarter ended
	March 31, 2013		April 1, 2012
Company contributions	$	2,704	$	2,603
Contributions from consolidated Non-owned restaurants		3,237		2,897

Total Company contributions	$	5,941	$	5,500

The revenues and expenses associated with the Company’s consolidated Non-owned restaurants and advertising funds presented on a gross basis, prior to consolidation adjustments, are as follows:


	First quarter ended
	March 31, 2013						April 1, 2012
	Restaurant VIEs		Advertising fund VIEs		Total VIEs		Restaurant VIEs		Advertising fund VIEs		Total VIEs
Sales	$	86,760	$	0	$	86,760	$	78,014	$	0	$	78,014
Advertising levies⁽¹⁾		0		2,531		2,531		0		487		487

Total revenues		86,760		2,531		89,291		78,014		487		78,501
Cost of sales⁽²⁾		85,866		0		85,866		76,588		0		76,588
Operating expenses⁽¹⁾		0		2,099		2,099		0		385		385

Operating income		894		432		1,326		1,426		102		1,528
Interest expense		0		432		432		0		102		102

Income before taxes		894		0		894		1,426		0		1,426
Income taxes		142		0		142		226		0		226

Net income attributable to noncontrolling interests	$	752	$	0	$	752	$	1,200	$	0	$	1,200

⁽¹⁾

Generally, the advertising levies that are not related to the Expanded Menu Board Program are netted with advertising and marketing expenses incurred by the advertising funds in operating expenses, as these contributions are designated for specific purposes. The Company acts as an agent with regard to these contributions.

⁽²⁾	Includes rents, royalties, advertising expenses and product purchases from the Company which are eliminated upon the consolidation of these VIEs.

The assets and liabilities associated with the Company’s consolidated Non-owned restaurants and advertising funds presented on a gross basis, prior to consolidation adjustments, are as follows:


	As at
	March 31, 2013				December 30, 2012
	Restaurant VIEs		Advertising fund VIEs		Restaurant VIEs		Advertising fund VIEs
Cash and cash equivalents	$	9,044	$	0	$	10,851	$	0
Advertising fund restricted assets – current		0		43,543		0		45,337
Other current assets		6,350		0		6,770		0
Property and equipment, net		18,463		56,995		19,536		57,925
Other long-term assets⁽¹⁾		440		2,341		572		2,095

Total assets	$	34,297	$	102,879	$	37,729	$	105,357

Notes payable to Tim Hortons Inc. – current⁽¹⁾	$	13,646	$	0	$	13,637	$	0
Advertising fund liabilities – current		0		44,542		0		44,893
Other current liabilities⁽¹⁾		12,652		8,830		14,548		9,919
Notes payable to Tim Hortons Inc. – long-term⁽¹⁾		1,272		0		804		0
Long-term debt⁽²⁾		0		46,411		0		46,849
Other long-term liabilities		5,174		3,096		5,887		3,696

Total liabilities		32,744		102,879		34,876		105,357

Equity of VIEs		1,553		0		2,853		0

Total liabilities and equity	$	34,297	$	102,879	$	37,729	$	105,357

⁽¹⁾	Various assets and liabilities are eliminated upon the consolidation of these VIEs, the most significant of which are the FIP Notes payable to the Company, which reduces the Notes receivable, net reported on the Condensed Consolidated Balance Sheet.

⁽²⁾	Balance as at March 31, 2013 includes $54.5 million of debt relating to the Expanded Menu Board Program (fiscal 2012: $56.5 million), of which $8.1 million is recognized in Other current liabilities (fiscal 2012: $9.7 million) with the remainder recognized as Long-term debt.

The liabilities recognized as a result of consolidating these VIEs do not necessarily represent additional claims on the Company’s general assets; rather, they represent claims against the specific assets of the consolidated VIEs. Conversely, assets recognized as a result of consolidating these VIEs do not represent additional assets that could be used to satisfy claims by the Company’s creditors as they are not legally included within the Company’s general assets.

Trust

In connection with RSUs granted to certain employees, the Company established the Trust, which purchases and retains common shares of the Company to satisfy the Company’s contractual obligation to deliver shares to settle the awards for most Canadian employees. The cost of the shares held by the Trust of $13.2 million as at March 31, 2013 (fiscal 2012: $13.4 million), is presented as a reduction in outstanding common shares on the Condensed Consolidated Balance Sheet.

VIEs for which the Company is not the primary beneficiary

These VIEs are primarily real estate ventures, the most significant being the TIMWEN Partnership. The Company does not consolidate these entities as control is considered to be shared by both the Company and the other joint owner(s).