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## notes to the Consolidated Financial Statements (cont’d) 

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## foreign currency riSk 

As a result of significant investment in operations in the United States through a self-sustaining subsidiary, the Company’s balance sheet can be affected significantly by movements in the US$/C$ exchange rate. The Company seeks to mitigate some of the effect of its structural currency exposure by borrowing in U.S. dollars. Between 10% and 40% of the Company’s net investment in non-Canadian operations is hedged in this manner. 

In addition, the Company’s equity will change as a result of foreign exchange fluctuations as it has a net investment in U.S. subsidiaries. On December 31, 2011, the Company had $52.9 million designated as a hedge protecting approximately 34% of the exposure (January 1, 2011: $5 million protecting approximately 16% of the exposure). Based on the net investment as of December 31, 2011, a 1-cent increase/(decrease) in the U.S. exchange rate will increase/(decrease) equity by approximately $1.0 million (January 1, 2011: $0.3 million; January 3, 2010: $0.5 million). 

The Company also has transactional currency exposures. Such exposure arises from sales or purchases by the Company in currencies other than its functional currency. 83% (January 1, 2011: 78%; January 3, 2010: 75%) of the Canadian operation’s cost of sales is denominated in currencies other than the Company’s functional currency, 37% of the total Company’s cost of sales (January 1, 2011: 38%; January 3, 2010: 35%), while 92% of the Canadian operation’s sales are denominated in the Company’s functional currency (January 1, 2011: 97%; January 3, 2010: 96%). 

The Company hedges forecasted cash flows for purchases of products where the purchase price is substantially known in advance. The policy dictates that cash flows out 15 months are hedged between a minimum and maximum percent that declines by quarter the further in the future the cash flows. The Company does not hedge cash flows on certain seafood purchases in which the ultimate selling prices charged to the Company’s customers move with changes in exchange rates. It is the Company’s policy to set the terms of the hedge derivatives to match the terms of the hedged item to maximize hedge effectiveness. The Company also has foreign exchange risk related to the input costs of commodities related to freight surcharges on transportation costs, paper products in packaging, grain products in its breading and batters, and cooking oils. The Company does not actively hedge these inputs, relying where possible on fixed price contracts, from three to 12 months with suppliers. 

At December 31, 2011, the Company had hedged 55% (January 1, 2011: 60%; January 3, 2010: 50%) of its targeted foreign currency purchases for its Canadian operations, extending to December, 2013. The Company does not include certain commodity products in its hedging program due to the commodity nature of the marketplace. Excluding the impact of the Company’s hedges, the sensitivity to a change in the U.S. dollar exchange rate, with all other variables held constant, of the Company’s profit before tax is approximately $1.9 million (January 1, 2011: $1.7 million; January 3, 2010: $1.7 million) for a 1-cent increase/(decrease) in the U.S. dollar rate, based on estimated annual foreign exchange exposure. 

The Company’s equity can fluctuate due to changes in the value of the U.S. dollar, forward exchange contracts and its net investment in its U.S. subsidiaries. The Company’s forward exchange contracts are summarized in note 22 , and changes in the U.S. dollar exchange rate will result in changes to the fair value of these contracts, which flow through comprehensive income. 

