NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of business

Tim Hortons Inc. is a corporation governed by the Canada Business Corporations Act. References herein to “Tim Hortons,” or the “Company” refer to Tim Hortons Inc. and its subsidiaries. The Company’s principal business is the development and franchising of quick service restaurants primarily in Canada and the U.S., that serve premium coffee, espresso-based hot and cold specialty drinks, including lattes, cappuccinos, espresso shots, specialty teas and fruit smoothies, fresh baked goods, grilled Panini and classic sandwiches, wraps, soups, prepared foods and other food products. As the franchisor, we collect royalty revenue from franchised restaurant sales. The Company also controls the real estate underlying a substantial majority of the system restaurants, which generates another source of revenue. In addition, the Company has vertically integrated manufacturing, warehouse and distribution operations which supply a significant portion of our system restaurants with coffee and other beverages, non-perishable food, supplies, packaging and equipment.

The following table outlines the Company’s systemwide restaurant counts and activity:


	First quarter ended
	March 31, 2013			April 1, 2012
Systemwide Restaurant Count
Franchised restaurants in operation—beginning of period		4,242			3,996
Restaurants opened		33			30
Restaurants closed		(10	)		(2	)
Net transfers within the franchised system		6			(5	)

Franchised restaurants in operation—end of period		4,271			4,019
Company-operated restaurants		17			23

Total systemwide restaurants—end of period⁽¹⁾		4,288			4,042

% of restaurants franchised—end of period		99.6	%		99.4	%

⁽¹⁾

Includes various types of standard and non-standard restaurant formats in Canada, the U.S. and the Gulf Cooperation Council (“GCC”) with differing restaurant sizes and menu offerings as well as self-serve kiosks, which serve primarily coffee products and a limited product selection. Collectively, the Company refers to all of these restaurants and kiosks as “systemwide restaurants.”

Excluded from the above table are 246 primarily licensed locations in the Republic of Ireland and the United Kingdom as at March 31, 2013 (first quarter fiscal 2012: 253 restaurants).

Basis of presentation and principles of consolidation

The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In the opinion of management, the accompanying Condensed Consolidated Financial Statements contain all adjustments (all of which are normal and recurring in nature) necessary to state fairly the Company’s financial position as at March 31, 2013, and the results of operations, comprehensive income and cash flows for the first quarters ended March 31, 2013 and April 1, 2012. These Condensed Consolidated Financial Statements should be read in conjunction with the 2012 Consolidated Financial Statements which are contained in the Company’s Annual Report on Form 10-K filed with the SEC and the CSA on February 21, 2013. The December 30, 2012 Condensed Consolidated Balance Sheet was derived from the audited 2012 Consolidated Financial Statements, but does not include all of the year-end disclosures required by U.S. GAAP.

The Condensed Consolidated Financial Statements include the results and balances of Tim Hortons Inc., its wholly-owned subsidiaries and certain entities and joint-ventures which the Company consolidates as variable interest entities (“VIEs”) (see note 12). Intercompany accounts and transactions among consolidated entities have been eliminated upon consolidation. Investments in non-consolidated affiliates over which the Company exercises significant influence, but for which the Company is not the primary beneficiary and does not have control, are accounted for using the equity method. The Company’s share of the earnings or losses of these non-consolidated affiliates is included in equity income, which is included as part of operating income since these investments are operating ventures closely integrated into the Company’s business operations.

Accounting changes – new accounting standards

In the first quarter of fiscal 2013, we prospectively adopted Accounting Standards Update (“ASU”) No. 2013-02-Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires additional disclosure of significant reclassifications out of comprehensive income into net income, if the amount is required to be reclassified in its entirety (see Condensed Consolidated Statement of Equity and note 8).