Archived - Financial statements (Unaudited) Department of Finance Canada: 2019

For the year ended
March 31, 2019

Statement of Management Responsibility including Internal Control over Financial Reporting

Responsibility for the integrity and objectivity of the accompanying financial statements for the year ended March 31, 2019, and all information contained in these statements rests with the management of the Department of Finance Canada (the Department). These financial statements have been prepared by management using the Government's accounting policies, which are based on Canadian public sector accounting standards.

Management is responsible for the integrity and objectivity of the information in these financial statements. Some of the information in the financial statements is based on management's best estimates and judgment, and gives due consideration to materiality. To fulfil its accounting and reporting responsibilities, management maintains a set of accounts that provides a centralized record of the Department's financial transactions.  Financial information submitted in the preparation of the Public Accounts of Canada, and included in the Department's Departmental Results Report, is consistent with these financial statements.

Management is also responsible for maintaining an effective system of internal control over financial reporting (ICFR) designed to provide reasonable assurance that financial information is reliable, that assets are safeguarded and that transactions are properly authorized and recorded in accordance with the Financial Administration Act and other applicable legislation, regulations, authorities and policies.

Management seeks to ensure the objectivity and integrity of data in its financial statements through careful selection, training, and development of qualified staff; through organizational arrangements that provide appropriate divisions of responsibility; through communication programs aimed at ensuring that regulations, policies, standards, and managerial authorities are understood throughout the Department and through conducting an annual risk-based assessment of the effectiveness of the system of ICFR.

The system of ICFR is designed to mitigate risks to a reasonable level based on an ongoing process to identify key risks, to assess effectiveness of associated key controls, and to make any necessary adjustments.

A risk-based assessment of the system of ICFR for the year ended March 31, 2019 was completed in accordance with the Treasury Board Policy on Financial Management and the results and action plans are summarized in the Annex.

The effectiveness and adequacy of the Department's system of internal control is reviewed by the work of internal audit staff, who conduct periodic audits of different areas of the Department's operations, and by the Departmental Audit Committee, which oversees management's responsibilities for maintaining adequate control systems and the quality of financial reporting, and which recommends the financial statements to the Deputy Minister.

The financial statements of the Department have not been audited.

 

Contractual obligations (note 23)

Contingent liabilities (note 24)

The accompanying notes form an integral part of these financial statements.

 

Segmented information (note 26)

The accompanying notes form an integral part of these financial statements.

The accompanying notes form an integral part of these financial statements.

The accompanying notes form an integral part of these financial statements.

Notes to the Financial Statements (Unaudited)

1. Authority and objectives

The Department is established under the Financial Administration Act as a Department of the Government of Canada.

The Department contributes to a strong economy and sound public finances for Canadians. It does so by monitoring developments in Canada and around the world to provide first-rate analysis and advice to the Government of Canada and by developing and implementing fiscal and economic policies that support the economic and social goals of Canada and its people. The Department also plays a central role in ensuring that government spending is focused on results and delivers value for taxpayer dollars. The Department interacts extensively with other federal organizations and acts as an effective conduit for the views of participants in the economy from all parts of Canada.

To achieve its strategic outcome the Department articulates its plans and priorities based on the programs below.

Economic and Fiscal Policy: Develop the federal budget and Fall Economic Statement, as well as provide analysis and advice to the Government of Canada on economic, fiscal and social policy; federal-provincial relations, including the transfer and taxation payments; the financial sector; tax policy; and international trade and finance.

Internal Services: Internal Services are those groups of related activities and resources that the federal government considers to be services in support of programs and/or required to meet corporate obligations of an organization. Internal Services refers to the activities and resources of the 10 distinct service categories that support Program delivery in the organization, regardless of the Internal Services delivery model in a department. The 10 service categories are: Management and Oversight Services; Communications Services; Legal Services; Human Resources Management Services; Financial Management Services; Information Management Services; Information Technology Services; Real Property Services; Materiel Services; and Acquisition Services.

2. Summary of significant accounting policies

These financial statements have been prepared using the Government's accounting policies stated below, which are based on Canadian public sector accounting standards. The presentation and results using the stated accounting policies do not result in any significant differences from Canadian public sector accounting standards.

Significant accounting policies are as follows:

a) Parliamentary authorities

The Department is financed by the Government of Canada through Parliamentary authorities. Financial reporting of authorities provided to the Department do not parallel financial reporting according to generally accepted accounting principles since authorities are primarily based on cash flow requirements. Consequently, items recognized in the Statement of Operations and Departmental Net Financial Position and in the Statement of Financial Position are not necessarily the same as those provided through authorities from Parliament. Note 3 provides a reconciliation between the bases of reporting.

Planned results in the Expenses and Revenues sections of the Statement of Operations and Departmental Net Financial Position are the amounts reported in the Future-oriented Statement of Operations included in the 2018-19 Departmental Plan. Planned results are not presented in the Government funding and transfers section of the Statement of Operations and Departmental Net Financial Position and in the Statement of Change in Departmental Net Debt because these amounts were not included in the 2018-19 Departmental Plan.

b) Net cash provided by Government

The Department operates within the Consolidated Revenue Fund (CRF), which is administered by the Receiver General for Canada. All cash received by the Department is deposited to the CRF, and all cash disbursements made by the Department are paid from the CRF. The net cash provided by Government is the difference between all cash receipts and all cash disbursements including transactions between departments of the Government.

c) Amounts due from the CRF

Amounts due from the CRF are the result of timing differences at year-end between when a transaction affects authorities and when it is processed through the CRF. Amounts due from the CRF represent the net amount of cash that the Department is entitled to draw from the CRF without further authorities to discharge its liabilities.

d) Revenues

• The Department reports revenues on an accrual basis.
• Investment income is recognized as revenue in accordance with the terms and conditions of underlying agreements or relevant legislation as applicable.
• Sale of domestic coinage is recognized in the period that the sale took place.
• Interest on bank deposits is recognized as revenue when earned.
• Net foreign currency gains are determined by reference to prevailing exchange rates at the time of the transaction and at the year-end date as applicable on foreign currency denominated items.
• Guarantee fees are recognized when earned and are determined by reference to the terms of the guarantee program or underlying contract.
• Uncashed Receiver General cheques, warrants and bank account cheques for all departments and agencies are recognized as revenue of the Department if they remain outstanding for 10 years after the date of issue.
• Unclaimed matured bonds are recognized as revenue if they remain unredeemed for 15 years after the date of call or maturity, whichever is earlier.
• Unclaimed bank balances are recognized as revenue when there has been no owner activity in relation to the balance for a period of 40 years for amounts under one thousand, and for 100 years for amounts over one thousand.
• Other revenues are accounted for in the period in which the underlying transaction or event that gave rise to the revenue takes place.
• Revenues earned on behalf of the Government are non-respendable revenues which are not available to discharge the Department's liabilities. While the Deputy Minister is expected to maintain accounting control, he has no authority regarding the disposition of non-respendable revenues. As a result, non-respendable revenues are presented as a reduction of the department's gross revenues.

e) Expenses

• The Department reports expenses on an accrual basis.
• Transfer payments are recorded as expenses when authorization for the payment exists and the recipient has met the eligibility criteria or the entitlements established for the transfer payment program. In situations where payments do not form part of an existing program, transfer payments are recorded as expenses when enabling legislation or authorization for payment receives parliamentary approval prior to the completion of the financial statements.
• Interest and other costs are recognized when incurred and include interest, amortization of debt discounts, premiums and commissions, and servicing and issue costs. Amortization of discounts and premiums is performed on a straight line basis.
• Operating expenses are recognized as incurred.
• The cost of domestic coinage sold is recognized in the period in which the related sale took place.
• Net foreign currency losses are determined by reference to prevailing exchange rates at the time of the transaction and at the year-end date as applicable on foreign currency denominated items.
• Vacation pay and compensatory leave are accrued as the benefits are earned by employees under their respective terms of employment.
• Services provided without charge by other government departments for accommodation, employer contributions to the health and dental insurance plans and legal services are recorded as operating expenses at their estimated cost.
• Expenses also include amortization of tangible capital assets, which are capitalized at their acquisition cost. Tangible capital assets used in operations are amortized on a straight line basis over the estimated useful life of the asset.

f) Employee future benefits

Pension benefits: Eligible employees participate in the Public Service Pension Plan, a multi-employer pension plan administered by the Government. The Department's contributions to the Plan are charged to expenses in the year incurred and represent the total departmental obligation to the Plan. The Department's responsibility with regard to the Plan is limited to its contributions. Actuarial surpluses or deficiencies are recognized in the financial statements of the Government of Canada, as the Plan's sponsor.

Severance benefits: The accumulation of severance benefits for voluntary departures ceased for applicable employee groups. The remaining obligation for employees who did not withdraw benefits is calculated using information derived from the results of the actuarially determined liability for employee severance benefits for the Government as a whole.

g) Coin inventory

Coin inventory is valued at the lower of cost and net realizable value. Cost is determined using the average cost method.

h) Accounts receivable

Accounts receivable are stated at the lower of cost and net recoverable value. A valuation allowance is recorded for accounts receivable where recovery is considered uncertain.

i) Foreign exchange accounts

Short-term deposits, marketable securities, and special drawing rights held in the Foreign exchange accounts are recorded at cost. Marketable securities are adjusted for amortization of purchase discounts and premiums. Purchases and sales of securities are recorded at the settlement date. Write-downs to reflect other than temporary impairment in the fair value of securities, if any, are included in Net foreign currency gain or loss in the Statement of Operations and Departmental Net Financial Position.

Canada's subscriptions, allocation of special drawing rights, notes payable to and loans receivable from the International Monetary Fund are recorded at cost.

j) Foreign currency transactions

Transactions involving foreign currencies are translated into Canadian dollar equivalents using rates of exchange in effect at the time of those transactions. Monetary assets and liabilities denominated in a foreign currency are translated into Canadian dollars using the rate of exchange in effect at year-end. Gains and losses resulting from foreign currency transactions are included in revenues or expenses in the Statement of Operations and Departmental Net Financial Position.

k) Loans receivable

Loans receivable are initially recorded at cost and are adjusted to reflect the concessionary terms of those loans made on a long-term, low interest, or interest-free basis. An allowance for valuation is further used to reduce the carrying value of loans receivable to amounts that approximate their net realizable value. The allowance is determined based on estimated probable losses that exist on the remaining portfolio.

When the terms of a loan are concessionary, such as those provided with a low or no interest clause, they are recorded at their estimated net present value. A portion of the unamortized discount is recorded as revenue each year to reflect the change in the present value of loans outstanding.

l) Investments and capital share subscriptions

Investments and capital share subscriptions are recorded at cost net of allowances. Allowances are determined based on a combination of expected return and likelihood of capital recovery. Given their nature, investments in certain international financial institutions are not expected to generate direct financial returns, and hence cannot be recovered. In those cases, investments are provisioned.

m) Derivative financial instruments

Derivative financial instruments are financial contracts that derive their value from underlying changes in interest rates, foreign exchange rates or other financial measures specified in the underlying contracts. Derivative financial instruments that the Department is currently party to include cross-currency swap agreements and foreign exchange forward contracts.

Cross-currency swap agreements and foreign exchange forward contracts are initially recorded at cost and are translated into Canadian dollars at the exchange rate in effect at the reporting date. The translated values of cross-currency swap agreements are included as part of Unmatured debt reflecting their longer term nature. The translated values of foreign exchange forward contracts are included as part of Accounts payable and accrued liabilities as these have maturities that are short term in nature.

For cross-currency swap agreements where domestic debt has been converted into foreign debt, any exchange gains or losses are offset by the exchange gains or losses on foreign currency investments held by the Exchange Fund Account.

For foreign exchange forward contracts, any exchange gains or losses are offset by the exchange gains or losses on loan balances with the International Monetary Fund.

Interest paid and payable, and interest received and receivable on cross-currency swap agreements are included in Interest on unmatured debt.

n) Tangible capital assets

All tangible capital assets and leasehold improvements having an initial cost of $10,000 or more are recorded at their acquisition cost. The Department does not capitalize intangibles, works of art and historical treasures that have cultural, aesthetic or historical value, assets located on Indian Reserves and museum collections.

Amortization of tangible capital assets is performed on a straight-line basis over the estimated useful life of the asset as follows:

o) Unmatured debt

When a marketable bond is exchanged or repurchased, and the transaction results in an extinguishment of the debt, the difference between the carrying amount of the debt instrument and the net consideration paid is recognized in the Statement of Operations and Departmental Net Financial Position.

An extinguishment occurs on the repurchase of bonds, or when there is an exchange of bonds with an existing bond holder and the terms of the original debt and the replacement debt are substantially different. Exchanged bonds are considered to have substantially different terms when the discounted present value of the cash flows under the new terms, including any amounts paid on the exchange, and discounted using the average effective interest rate of the original debt, is at least 10 percent different from the discounted present value of the remaining cash flows of the original debt.

If an exchange of bonds with an existing bond holder does not result in an extinguishment, the carrying amount of the debt is adjusted for any amounts paid on the exchange, and the unamortized premiums or discounts relating to the original debt and arising on the exchange transaction are amortized over the remaining term to maturity of the replacement debt on a straight line basis.

p) Cash held as collateral

The Department participates in a two-way collateral program in accordance with Credit Support Annex (CSA) agreements for cross-currency swap agreements. This program is administered by the Bank of Canada, and requires the Department and counterparties to provide collateral, either in the form of securities or cash (CAD or USD), based on the terms and conditions of the agreements, or when the fair value of a contract exceeds a minimum threshold.

Collateral provided by the Government of Canada, in the form of cash, is recorded as an asset on the Statement of Financial Position. Collateral posted by the Government of Canada in the form of securities, if any, are not derecognized.

q) Deposit liabilities

Deposits that are repayable on demand are recorded as liabilities.

Deposit liabilities can also include collateral received in the form of cash in accordance with CSA agreements for cross-currency swap agreements. In the event of a credit default of a counterparty, deposit liabilities related to the collateral received in the form of cash is derecognized. Securities pledged to the Government of Canada, if any, are not recognized as assets.

r) Contingent liabilities

Contingent liabilities are potential liabilities that may become actual liabilities when one or more future events occur or fail to occur. To the extent that the future event is likely to occur or fail to occur, and a reasonable estimate of the loss can be made, an estimated liability is accrued and an expense recorded.  If the likelihood is not determinable or an amount cannot be reasonably estimated, the contingency is disclosed in the notes to the financial statements.

Provisions for liabilities arising under the terms of a loan guarantee program are made when it is likely that a payment will be made and an amount can be estimated.

s) Contingent assets

Contingent assets are possible assets which may become actual assets when one or more future events occur or fail to occur. If the future event is likely to occur or fail to occur, the contingent asset is disclosed in the notes to the financial statements.

t) Measurement uncertainty

The preparation of these financial statements requires management to make estimates and assumptions that affect the reported and disclosed amounts of assets, liabilities, revenues and expenses reported in the financial statements. At the time of preparation of these statements, management believes the estimates and assumptions to be reasonable. The most significant items where estimates are used are contingent liabilities, valuation allowances for loans receivable, valuation allowances for investments and capital share subscriptions, discounts on loans receivable, accruals of taxes receivable and taxes payable under tax collection agreements, the liability for employee future benefits and the useful life of tangible capital assets. Actual results could significantly differ from those estimated. Management's estimates are reviewed periodically and, as adjustments become necessary, they are recorded in the financial statements in the year they become known.

u) Liabilities and financial assets held on behalf of Government

Liabilities and financial assets held on behalf of Government are presented in these financial statements as the Deputy Minister must maintain accounting control for these elements.

The classification of financial assets as held on behalf of Government is determined based on the ability to discharge that financial asset or financial assets against the Department's liabilities or to increase the value of those financial assets without further authority from Parliament. The classification of liabilities as held on behalf of Government is determined based on the ability to increase the value of those liabilities without further authorities or within prescribed limits or ceilings.

v) Related party transactions

Related party transactions, other than inter-entity transactions, are recorded at the exchange amount.

Inter-entity transactions are transactions between commonly controlled entities. Inter-entity transactions, other than restructuring transactions, are recorded on a gross basis and are measured at the carrying amount, except for the following:

i) Services provided on a recovery basis are recognized as revenues and expenses on a gross basis and measured at the exchange amount.

ii) Certain services received on a without charge basis are recorded for department financial statement purposes at the carrying amount.

3. Parliamentary authorities

The Department receives most of its funding through annual parliamentary authorities. Items recognized in the Statement of Operations and the Departmental Net Financial Position and the Statement of Financial Position in one year may be funded through parliamentary authorities in prior, current or future years. Accordingly, the Department has different net results of operations for the year on a government funding basis than on an accrual accounting basis. The differences are reconciled in the following tables:

a) Reconciliation of net cost of operations to current year authorities used

b) Authorities provided and used

4. Deposit liabilities

The following table presents details of deposit liabilities:

a) Canada Hibernia Holding Corporation (CHHC)—Abandonment reserve fund

This is a demand deposit established to record funds deposited to the CRF by CHHC to defray future decommissioning and abandonment costs that will be incurred at the closure of the Hibernia oil field. The expected timing of abandonment is the year 2056 and is based on the useful lives of the assets.

The interest payable is calculated at a rate equivalent to 90 percent of the bi-weekly three-month Treasury bill tender rate.

b) Canada Eldor Inc. (CEI)—Holdback—Privatization—CDEV

This represents funds deposited in the CRF pursuant to subsection 129(1) of the Financial Administration Act. The funds will be used by CEI to pay for costs relating to the decommissioning of former mine site properties in Saskatchewan and for retiree benefits of certain former employees.

The interest payable is calculated at a rate equivalent to 90 percent of the bi-weekly three-month Treasury bill tender rate.

c) Collateral deposits

This was established to record cash received as credit support under collateral agreements with financial institutions for cross-currency swap agreements.

5. Accounts payable and accrued liabilities

The following table presents details of the Department's accounts payable and accrued liabilities:

a) Accounts payable - external parties

The majority of the account is composed of $250 million payable relating to transfer payments ($0 in 2018).

b) Provision for redemption of Canadian pennies

Canadian pennies are no longer being produced and since February 4, 2013 they are being eliminated from circulation. As part of the effort to remove pennies from circulation, Canadians have the option of redeeming their pennies at their face value.

This provision reflects the estimated remaining net cost to the Government of this initiative as of March 31, 2019.

c) Foreign exchange forward contracts

This represents the net translated notional values of foreign exchange forward contracts outstanding at March 31, 2019. These contracts were settled on May 21, 2019 and are discussed in more detail in note 11.

6. Taxes payable under tax collection agreements

Pursuant to various tax collection agreements, the Canada Revenue Agency (CRA) collects and administers personal income taxes, corporate taxes, harmonized sales tax, sales tax, goods and services tax, and cannabis excise duties on behalf of certain provinces, territories and Aboriginal governments.

The Department ultimately transfers the taxes collected directly to the participating provinces, territories and Aboriginal governments in accordance with established payment schedules.

Given that the Government of Canada reports information on a fiscal year basis while tax information is calculated on a calendar year basis, there can be transactions related to several tax years during any given fiscal year. Taxes payable therefore include amounts assessed, estimates of assessments based upon cash received, adjustments from reassessments, and adjustments relating to previous tax years payable to provincial, territorial and Aboriginal governments.

Beginning October 17, 2018, cannabis excise duties came into effect under the Excise Act, 2001,  and applies to cultivators, producers and packagers of cannabis products.

The majority of the provinces and the three territories entered into Coordinated Cannabis Taxation Agreements (CCTAs), with the federal government. The Minister of Finance and the Provincial/Territorial Ministers agreed that excise duties on cannabis products will be shared (75% provincial / 25% federal) and the federal portion is capped at $100 million annually for the first two years. Cannabis excise duties will be distributed to provinces and territories based on monthly assessments by the Canada Revenue Agency. The Department is responsible for reviewing and authorizing cannabis excise duties payments in accordance with the CCTAs.

At March 31, the balance in the accounts pertaining to taxes collectible and payable to provinces, territories and Aboriginal governments under tax collection agreements is as follows:

Amounts collectible by the CRA, but not yet remitted to the Department, are described at note 17.

7. Interest payable

The following table presents details of interest payable:

8. Notes payable to international organizations

Non-interest bearing demand notes are issued in lieu of cash in respect of subscriptions and contributions to international organizations. The notes are presented for encashment according to their terms of agreement.

At March 31, the amount outstanding is as follows:

9. Matured debt

Matured debt consists of debt that has matured but has not yet been redeemed.

At March 31, the amount outstanding is as follows:

10. Unmatured debt

The Department borrows in both domestic and international markets on behalf of the Government of Canada.

Domestic debt consists of treasury bills, marketable bonds and retail debt.

The treasury bills balance at March 31, 2019, includes $5.5 billion ($2.3 billion in 2018) in odd issue bills, $41.9 billion ($30.8 billion in 2018) in three month bills, $27.3 billion ($21.9 billion in 2018) in six month bills, and $59.6 billion ($55.7 billion in 2018) in 364 day bills.

Marketable bonds consist of outstanding domestic Government of Canada bonds with remaining terms to maturity ranging from 1 to 46 years.

Retail debt includes Canada Savings Bonds which are redeemable on demand by the holder, with accrued interest calculated to the end of the previous month; no interest is paid if redeemed during the first three months following the date of issue.

Foreign debt is issued by the Government of Canada under the government's foreign currency borrowing program. It consists of marketable bonds, Canada bills and medium term notes. Marketable bonds include bonds assumed by Finance Canada on February 5, 2001, on the dissolution of Petro Canada Limited.

Marketable bonds are either issued in US dollars or Euros. They are issued to provide long term foreign funds and have remaining terms to maturity ranging from 1 to 4 years.

Canada bills are short-term certificates of indebtedness issued in the US money market.

Cross-currency revaluation refers to the net notional value of cross-currency swap agreements in place at March 31, 2019 translated into Canadian dollar equivalents using year-end market rates. Cross-currency swap agreements are entered into to effectively convert portions of domestic debt into foreign debt in order to meet foreign funding requirements. Remaining terms to maturity range from 1 to 10 years.

The Government has entered into individual cross-currency swap agreements with various counterparties. Terms and conditions associated with these outstanding agreements are established using International Swaps and Derivatives Association (ISDA) master agreements, which are in place with each counterparty. Cross-currency swap agreements are used primarily to fund foreign-denominated asset levels in the Foreign exchange accounts.

Included in Cross-currency revaluation is $988.8 million ($947.2 million in 2018) related to individual cross-currency swap agreements that have a net foreign-exchange asset value to the Government upon revaluation and $8,262.3 million ($8,782.2 million in 2018) relating to individual cross-currency swap agreements that have a net foreign-exchange liability value, resulting in an overall cross-currency swap net liability revaluation of $7,273.5 million ($7,835 million in 2018).

Further details are discussed in note 11.

At March 31, unmatured debt is composed of the following:

Contractual maturities of unmatured debt by currency, at face value, are as follows:

The effective average annual interest rates are as follows:

11. Derivative and fair values of financial instruments

a) Derivative financial instruments

i) Swap agreements

Government debt is issued at both fixed and variable interest rates and is denominated in Canadian dollars, US dollars and Euros. The Government has entered into cross-currency swap agreements to facilitate the management of its debt structure. Using cross-currency swap agreements, Canadian dollar and other foreign currency debt has been converted into US dollars or other foreign currencies with either fixed interest rates or variable interest rates. As a normal practice, the Government's swap positions are held to maturity.

The interest paid or payable and the interest received or receivable on all swap transactions are recorded as part of Interest and other costs. Unrealized gains or losses due to fluctuations in the foreign exchange value of the swaps are presented in the Cross-currency revaluation account and are recognized as part of Net foreign currency gain or loss in the Statement of Operations and Departmental Net Financial Position.

Cross-currency swaps with contractual or notional principal amounts outstanding at March 31, stated in Canadian dollars, are as follows:

ii) Foreign exchange forward contracts

The Government funds loans with the International Monetary Fund (IMF) as part of the Foreign exchange accounts, which are denominated in special drawing rights (SDRs), with US dollars. Since the currency value of the SDR is based upon a basket of key international currencies (the US dollar, Euro, Japanese yen, British pound sterling and Chinese Renminbi), a foreign exchange mismatch results, whereby fluctuations in the value of the loan asset are not equally offset by fluctuations in the value of the related funding liability. Therefore, the Government enters into forward contracts to hedge this foreign exchange risk.

Unrealized gains and losses due to fluctuations in the foreign exchange value of these contracts are recorded in Accounts payable and accrued liabilities and are recognized as part of the Net foreign currency gain or loss in the Statement of Operations and Departmental Net Financial Position.

Foreign exchange forward contracts with contractual or notional principal amounts outstanding total  $2.1 billion ($1.3 billion in 2018), maturing in 2019-20.

b) Fair value of financial instruments

The following tables present the carrying value and the fair value of certain financial instruments. 

Fair values are managements estimates and are generally calculated using market conditions at a specific point in time where a market exists. Fair values of instruments with a short life span or of a non-negotiable nature are assumed to approximate carrying values. Fair values may not reflect future market conditions nor the actual values obtainable should the instrument be exchanged on the market. The calculations are subjective in nature and involve inherent uncertainties due to unpredictability of future events.

Fair values of the Cross-currency revaluation and Foreign exchange forward contracts are the estimated amount that the Government would receive or pay, based on market factors, if the contracts were terminated on March 31, 2019.

They are established by discounting the expected cash flows of the Cross-currency revaluation and Foreign exchange forward contracts, calculated from the contractual or notional principal amounts, using year-end market interest and exchange rates. A positive (negative) fair value indicates that the Government would receive (make) a payment if the agreements were terminated on March 31, 2019.

12. Financial risk

a) Credit risk related to swap and foreign exchange forward contracts

The Department manages its exposure to credit risk by dealing principally with financial institutions having acceptable credit ratings. Credit risk is also managed through collateral provisions in swap and foreign exchange forward contracts. Counterparties must pledge collateral to the Government, which, in the event of default, could be liquidated to mitigate credit losses.

The Government of Canada participates in a two-way collateral program in accordance with Credit Support Annex (CSA) agreements for its cross-currency swap portfolio.

At March 31, collateral pledged and held under two-way CSA agreements is as follows:

The Department does not have a significant concentration of credit risk with any individual institution and does not anticipate any counterparty credit loss with respect to its swap and foreign exchange forward contracts.

The following table presents the contractual or notional principal amounts of the swap and foreign exchange forward contracts organized by credit ratings based on published Standard & Poor's credit ratings and stand-alone credit profiles at year-end:

b) Managing foreign currency and interest rate risk and sensitivity analysis to foreign currency exposures

Foreign currency and interest rate risks are managed using a strategy of matching the duration and the currency of the Exchange Fund Account assets and the related foreign currency borrowings of the Government. As at March 31, 2019, the impact of price changes affecting the Exchange Fund Account assets and the liabilities funding these assets naturally offset each other, resulting in no significant impacts to the Government's net debt. Assets related to the IMF are only partially matched by related foreign currency borrowings, as they are denominated in SDR; however, foreign exchange risks relating to loans to the IMF have been managed through entering into various foreign exchange forward contracts.

The majority of the Exchange Fund Account foreign currency assets and liabilities are held in four currency portfolios: the US dollar, the Euro, British pound sterling and the Japanese yen. At March 31, 2019, a one percent appreciation in the Canadian dollar as compared to the US dollar, the Euro, British pound sterling and the Japanese yen would result in a foreign exchange loss of $1.7 million ($1 million in 2018) due to the exposure of the Euro portfolio. There is no significant exposure related to the US Dollar ($2.6 million in 2018), British pound sterling and Japanese yen portfolio.

13. Employee future benefits

a) Pension benefits

The Department's employees participate in the public service pension plan (the "Plan"), which is sponsored and administered by the Government of Canada. Pension benefits accrue up to a maximum period of 35 years at a rate of 2 percent per year of pensionable service, times the average of the best five consecutive years of earnings. The benefits are integrated with Canada/Québec Pension Plan benefits and they are indexed to inflation.

Both the employees and the Department contribute to the cost of the Plan. Due to the amendment of the Public Service Superannuation Act following the implementation of provisions related to the Economic Action Plan 2012, employee contributors have been divided into two groups - Group 1 relates to existing plan members as of December 31, 2012 and Group 2 relates to members joining the Plan on or after  January 1, 2013. Each group has a distinct contribution rate.

The expense amounts to $8.1 million ($7.4 million in 2018). For Group 1 members, the expense represents approximately 1.01 times (1.01 times in 2018) the employee contributions and, for Group 2 members, approximately 1.00 times (1.00 times in 2018) the employee contributions.

The Department's responsibility with regard to the Plan is limited to its contributions. Actuarial surpluses or deficiencies are recognized in the financial statements of the Government of Canada, as the Plan's sponsor.

b) Severance benefits

Severance benefits provided to the Department's employees were previously based on an employee's eligibility, years of service and salary at termination of employment. However, since 2011 the accumulation of severance benefits for voluntary departures progressively ceased for substantially all employees. Employees subject to these changes were given the option to be paid the full or partial value of benefits earned to date or collect the full or remaining value of benefits upon departure from the public service. All settlements for immediate cash out are complete. Severance benefits are unfunded and, consequently, the outstanding obligation will be paid from future authorities.

The changes in the obligations during the year were as follows:

14. Liabilities and financial assets held on behalf of Government

a) Liabilities held on behalf of Government

Notes payable to international organizations are related to investments made in those entities. Since the Department must obtain separate authorities to make these investments these items are considered liabilities held on behalf of Government.

b) Financial assets held on behalf of Government

A distinction is made between financial assets that are available to discharge the Department's liabilities and those that are not. Financial assets that are not available to discharge the Department's liabilities are considered to be held on behalf of Government and are therefore presented as a reduction of the Department's gross financial assets.

Financial assets held on behalf of Government include amounts related to non-respendable revenues as well as loans receivable and investments and capital share subscriptions which if repaid could not be used to discharge other liabilities.

The following table presents details of the liabilities and financial assets held on behalf of Government:

15. Cash held as collateral

This represents cash deposited by the Government as credit support under collateral agreements with financial institutions. Interest is received on the balance.

The Department participates in a two-way collateral program in accordance with Credit Support Annex (CSA) agreements for cross-currency swaps. This program is administered by the Bank of Canada, and requires the Department and counterparties to provide collateral, either in the form of securities or cash (CAD or USD), based on the terms and conditions of agreements, or when the fair value of a contract exceeds a minimum threshold.

As at March 31, 2019 the total pledged as collateral is $7.2 billion ($8.7 billion in 2018).

16. Accounts receivable

The following table presents details of the Department accounts receivable:

17. Taxes receivable under tax collection agreements

Taxes receivable include taxes collected or collectible by the CRA on behalf of provincial, territorial or Aboriginal governments that have not yet been remitted to the Department.

The following table presents details of taxes receivable under tax collection agreements:

The Department ultimately transfers these amounts directly to the participating provincial, territorial or Aboriginal governments in accordance with established payment schedules. Amounts payable are described in note 6.

Provincial benefit programs include benefit amounts paid by CRA directly to recipients on behalf of provincial governments. Transfers to the provincial governments are ultimately reduced by these amounts.

18. Foreign exchange accounts

The foreign exchange accounts represent the largest component of the official international reserves of the Government of Canada and consist of the following:

a) Investments held in Exchange Fund Account

This relates to cash advanced from the Government to the Exchange Fund Account, in Canadian and other currencies, foreign currencies and securities, and SDRs.

The Exchange Fund Account is operated pursuant to Section 17 of the Currency Act. Total advances are limited to US$150 billion.

The following table details international reserves held in and advances to the Exchange Fund Account:

b) Subscriptions to the International Monetary Fund

This account records the value of Canada's subscription ("quota") to the capital of the IMF. The IMF is an international organization of 189 member countries that operates in accordance with its Articles of Agreement.

The amount by which the sum of Canada's subscriptions plus loans to the IMF under special facilities exceeds the IMF's holdings of Canadian dollars represents the amount of foreign exchange which Canada is entitled to draw from the IMF on demand for balance of payments purposes. The subscription is expressed in terms of SDR, a unit of account defined in terms of a "basket" of five major currencies, the US dollar, Euro, Japanese yen, British pound sterling and Chinese Renminbi.

Canada has accumulated its subscriptions through settlements to the IMF in Canadian dollars, gold and SDRs. Annual maintenance of value payments are made to, or received from, the IMF when the Canadian dollar depreciates or appreciates against the SDR, in order to maintain the SDR-value of the IMF's holdings of Canadian dollars.

In 2019, receipts and other credits consisted of valuation adjustment of $197.3 million.

c) Loans receivable from the International Monetary Fund

This account records the value of interest-bearing loans made under Canada's multilateral and bilateral lending arrangements with the IMF. The purpose of these arrangements are to provide temporary resources to the IMF which works to promote economic growth and safeguard the stability of the international monetary system.

There are two outstanding lending arrangements with the IMF outside of the quota system: the New Arrangements to Borrow (NAB) and the temporary bilateral borrowing agreement.

Canada's current participation in the NAB is governed by the November 2012 NAB Decision which incorporated technical amendments made as a result of the IMF's 14th General Review of Quotas. The maximum lending by Canada to the IMF under this arrangement is SDR 3,873.7 million. As at March 31, 2019, SDR 294.2 million or $545.7 million (SDR 414 million or $775.4 million in 2018) in lending has been provided by Canada to the IMF under the NAB. Canada's participation in the NAB was renewed through November 2022.

In December 2018, Canada's participation in the General Agreements to Borrow (GAB) was not renewed since GAB participants agreed that the GAB should be allowed to lapse upon expiration of the current commitment period.

In early 2017, Canada extended a temporary bilateral credit line to the IMF in the amount of SDR 8,200 million for a maximum period of four years, as part of a collective effort with 34 other nations to foster global economic and financial stability. As at March 31, 2019, no lending had been provided to the IMF under the bilateral credit line.

Collectively, the outstanding loans under multilateral and bilateral arrangements with the IMF cannot exceed SDR 12,074 million at any given time. This reflects the maximum commitment under the NAB and bilateral borrowing agreement.

At March 31, 2019, a total of SDR 294.2 million or $545.7 million was outstanding under these arrangements (SDR 414 million or $775.4 million in 2018). Amounts advanced under these arrangements are considered part of the Official International Reserves of Canada.

d) Notes payable to the International Monetary Fund

This account records non-marketable, non-interest bearing notes issued by the Government to the IMF. These notes are payable on demand and are subject to redemption or re-issue, depending on the needs of the IMF for Canadian currency.

Canadian dollar holdings of the IMF include these notes and a small working balance (initially equal to one-quarter of one percent of Canada's subscription) held on deposit at the Bank of Canada.

In 2019, notes payable to the IMF decreased by $1,300.8 million.

e) Special drawing rights allocations

This account records the value of SDRs allocated to Canada by the IMF. The SDR is an international currency created by the IMF, and allocated to countries participating in its Special Drawing Rights Department. It represents a liability of Canada, as circumstances could arise whereby Canada could be called upon to repay these allocations, in part or in total.

As an asset, SDRs represent rights to purchase currencies of other countries participating in the IMF's Special Drawing Rights Department, as well as to make payments to the IMF itself. All SDRs allocated to Canada by the IMF have either been used to settle subscriptions in the IMF, or have been advanced to the Exchange Fund Account.

There was no allocation of SDRs by the IMF to Canada during the year. In 2019, payments and other charges consisted of valuation adjustment of $107.2 million.

19. Crown borrowings

 The following table presents details of Crown borrowings issued as at March 31:

Contractual maturities of outstanding loans with Crown corporations, at face value, are as follows:

The effective average annual interest rates are as follows:

20. Loans receivable

The following table presents the various components of loans receivable due to the Department.

The breakdown of loans receivable by organizational body is outlined as follows:

The amount of loans receivable outstanding in foreign currencies, the Canadian dollar equivalent and the basis of translation is outlined in the table below.

Government business enterprises

Canada Lands Company Limited (CLCL) is an arm's length, self-financing federal Crown corporation incorporated under the Canada Business Corporations Act. CLCL's objective is to ensure the commercially oriented, orderly disposition of selected surplus federal real properties with optimal value to the Canadian taxpayer and the holding of certain properties. CLCL optimizes the financial and community value of strategic properties no longer required for program purposes by the Government. The Canada Lands Company CLC Limited (CLC) and Downsview Park Inc. are two of their wholly-owned active subsidiaries.

a) Canada Lands Company CLC Ltd. (CLC)

Through CLC, the CLCL works to purchase properties from the federal government at fair market value, then holds and manages or improves and sells them, in order to produce the best possible benefit for both local communities and the Government.

CLC has acquired an interest in a number of real properties from the Government in consideration for the issuance of promissory notes, which bear no interest and are repayable from the proceeds of the sale of the properties in respect of which they were issued. The notes are discounted using the Government's cost of borrowing at the time of issuance and recorded at their discounted value.

During the year, no new promissory notes were issued ($12 million in 2018). $13.5 million was repaid during the year (nil in 2018). An amount of $5 million ($5.5 million in 2018) was amortized to income. The balance in the account represents the balance of the notes receivable net of the corresponding unamortized discount.

b) Downsview Park Inc.

Located in Toronto, Downsview Park is a unique urban recreational green space, a safe and peaceful place developed according to the principles of environmental, economic and social sustainability, for Canadians to enjoy in all seasons.

Downsview Park Inc. issued a promissory note which is non-interest bearing and is repayable in full on July 31, 2050. No amounts were repaid during the year (nil in 2018). An amount of $0.2 million ($0.3 million in 2018) was amortized to income.

The promissory notes are discounted using the Government's cost of borrowing at the time of issuance and are recorded at their discounted value at March 31, 2019.

Provincial and territorial governments

c) Federal-Provincial fiscal arrangements

These amounts represent net overpayments in respect of transfer payments to provinces under the Constitutions Acts 1867 to 1982, the Federal-Provincial Arrangements Act, and other statutory authorities.

The overpayments are non-interest bearing and will be repaid by reducing transfer payments in subsequent years.

d) Municipal Development and Loan Board

Loans have been made to provinces and municipalities to augment or accelerate municipal capital works programs.

The loans bear interest at rates from 5.25 to 5.375 percent per annum and are repayable in annual or semi-annual installments over 15 to 50 years.

e) Winter Capital Projects Fund

Loans have been made to provinces, provincial agencies and municipalities to assist in the creation of employment.

The loans bear interest at rates from 7.4 to 9.5 percent per annum and are repayable either in annual installments over 5 to 20 years, or at maturity.

International and other organizations

f) International Monetary Fund - Poverty Reduction and Growth Trust

This account records the loan to the International Monetary Fund's Poverty Reduction and Growth Trust in order to provide assistance to qualifying low-income countries as authorized by the Bretton Woods and Related Agreements Act, and various appropriation acts.

The total loan authority pursuant to the Bretton Woods and Related Agreements Act was set at $550 million or such greater amount as may be fixed by the Governor in Council. The Governor in Council has set the limit to SDR 1.7 billion.

As at March 31, 2019, Canada has lent a total of SDR 864.6 million or $1,603.7 million (SDR 851.5 million or $1,594.8 million in 2018) to the Poverty Reduction and Growth Trust. Of this amount, SDR 720 million or $1,335.5 million (SDR 714.3 million or $1,337.8 million in 2018) has been repaid.

The outstanding balance of SDR 144.6 million or $268.2 million (SDR 137.3 million or $257 million in 2018) was translated into Canadian dollars at the year-end closing rate of exchange of $1.855 ($1.8729 in 2018) per SDR. During the year, transactions included repayments and an exchange valuation adjustment.

Separately, Canada has also made budgetary contributions towards an interest subsidy amounting to $399.1 million ($403 million in 2018).

g) Global Environment Facility (GEF)

This account records the funding of a facility for environmental funding in developing countries in the areas of ozone, climate change biodiversity and international waters as authorized by the Bretton Woods and Related Agreements Act, and various appropriation acts.

Advances to the GEF are made in non-negotiable, non-interest bearing demand notes that are later encashed.

As at March 31, 2019, advances to the GEF amounted to $10 million ($10 million in 2018).

h) Canadian Commercial Bank

Advances have been made to the Canadian Commercial Bank representing the Government's participation in the support group as authorized by the Canadian Commercial Bank Financial Assistance Act. These funds represent the Government's participation in the loan portfolio that was acquired from the Bank and the purchase of outstanding debentures from existing holders.

National governments

i) Ukraine

Pursuant to section 8.3(1) of the Bretton Woods and Related Agreements Act, the Minister of Finance, by order of the Governor in Council, is authorized to extend certain forms of financial assistance to a foreign state. The provision of such financial assistance is contingent upon that state having an arrangement with the International Monetary Fund and upon the satisfactory participation of other countries with Canada in the provision of financial assistance.

Funding for such transactions is provided by the Minister of Finance out of the CRF. The maximum amount of financial assistance that can be provided under legislation is US$2.5 billion in respect of any particular foreign state and US$5 billion in respect of all foreign states.

As at March 31, 2019, the outstanding loan balance to the Ukraine was $400 million ($400 million for 2018). There were no other balances or transactions in respect to Ukraine or other foreign states during the year.

These loans bear interest at rates ranging between 1.4 and 2.1 percent and have repayment term of 5 years.

21. Investments and capital share subscriptions

The following table presents details of investments and capital share subscriptions that the Department participates in:

a) International Development Association (IDA)

This represents Canada's contributions and subscriptions to the IDA, as authorized by the Bretton Woods and Related Agreements Act, and various appropriation acts. The contributions and subscriptions to the IDA, which is part of the World Bank Group, are used to lend funds to the poorest developing countries for development purposes, on highly favourable terms (no interest, with a 35 to 40 year maturity and 10 years of grace).

As at March 31, 2019, Canada's total participation in IDA amounted to $12.5 billion ($12.1 billion in 2018).

b) European Bank for Reconstruction and Development

This represents Canada's subscriptions to the capital of the European Bank for Reconstruction and Development (EBRD), as authorized by the European Bank for Reconstruction and Development Agreement Act, and various appropriation acts.

At year-end, Canada has subscribed to 102,049 shares (102,049 shares in 2018) of the EBRD's authorized capital with a face value at EUR 1 billion (EUR 1 billion in 2018).

Only EUR 212.9 million (EUR 212.9 million in 2018) or about 21 percent (21 percent in 2018) of Canada's share subscription is considered paid-in. The balance is callable meaning the institution can request the resources in the unlikely event that it requires them to meet its financial obligations to bondholders. Payments for the share subscription are authorized by the Act. Each payment to the EBRD is comprised of cash and a promissory note.

Canada's contingent liability for the callable portion of its shares is EUR $807.6 million (EUR 807.6 million in 2018).

Up to and including March 31, 2019 Canada's total cash contributions into the paid-in capital of the EBRD total US$216.2 million (US$216.2 million in 2018).

c) International Bank for Reconstruction and Development

This represents Canada's subscriptions to the capital of the International Bank for Reconstruction and Development (part of the World Bank Group), as authorized by the Bretton Woods and Related Agreements Act, and various appropriation acts.

As at March 31, 2019, Canada has subscribed to 70,455 shares (58,354 shares in 2018). The total face value of these shares is US$8.5 billion (US$7 billion in 2018), of which US$604.2 million (US$417.8 million in 2018) plus $16.4 million ($16.4 million in 2018) has been paid-in. The remaining portion is callable.

The callable portion is subject to call by the World Bank under certain circumstances. Canada's contingent liability for the callable portion of its shares is US$7.9 billion (US$6.6 billion in 2018).

d) International Finance Corporation

This represents Canada's subscription to the capital of the International Finance Corporation (part of the World Bank Group), as authorized by the Bretton Woods and Related Agreements Act, and various appropriation acts.

As at March 31, 2019, Canada has subscribed to 81,342 shares (81,342 shares in 2018). These shares have a total face value of US$81.3 million (US$81.3 million in 2018), all of which has been paid-in.

e) International Finance Corporation (IFC) - Catalyst Fund

The IFC - Catalyst Fund invests in companies focused on providing capital to renewable energy projects. As at March 31, 2019, the investment has a net book value of $75 million.

f) Multilateral Investment Guarantee Agency

This represents Canada's subscriptions to the capital of the Multilateral Investment Guarantee Agency, as authorized by the Bretton Woods and Related Agreements Act, and various appropriation acts.

As at March 31, 2019, Canada has subscribed to 5,225 shares (5,225 shares in 2018). The total value of these shares is US$56.5 million (US$56.5 million in 2018), of which US$10.7 million (US$10.7 million in 2018) is paid-in and the remaining portion is callable.

The callable portion is subject to call by the Multilateral Investment Guarantee Agency under certain circumstances. Canada's contingent liability for the callable portion of its shares is US$45.8 million (US$45.8 million in 2018).

g) Asian Infrastructure Investment Bank (AIIB)

Canada is a member to the AIIB pursuant to the Asian Infrastructure Investment Bank Agreement Act. The AIIB commenced operations in January 2016.

As at March 31, 2019, Canada has subscribed to 9,954 shares (9,954 in 2018). The total value of these shares is US$995.4 million (US$995.4 million in 2018), of which US$199.1 million (US$199.1 million in 2018) is paid-in and the remaining portion is callable. The paid-in capital will be paid in five equal installments over five years.

Canada's contingent liability for the callable portion of its shares is US$796.3 million (US$796.3 million in 2018).

h) Other Investments

Following the dissolution of PPP Canada Inc., in 2018, pursuant to Order in Council P.C. 2017-1329, the Department assumed investments held by PPP Canada Inc.

These investments include guaranteed investment certificates with maturities ranging from 1 to 2 years.

The investments earned interest at rates from 1.65% per cent to 2.15% per cent per annum.

22. Tangible capital assets

23. Contractual obligations

The nature of the Department's activities can result in some large multi-year contracts and obligations whereby the Department will be obligated to make future payments in order to carry out its transfer payments programs or when the services/goods are received.

Significant contractual obligations that can be reasonably estimated are summarized as follows:

24. Contingent liabilities

Contingent liabilities arise in the normal course of operations and their ultimate disposition is unknown. They are grouped into two categories as follows:

a) Callable share capital

The Department has callable share capital in certain international organizations that could require payments to those organizations; however the likelihood is low.

The following table presents details of callable share capital as at March 31:

b) Loan guarantees

Mortgage or Hypothecary Protection Insurance

The Protection of Residential Mortgage or Hypothecary Insurance Act (PRMHIA) received Royal Assent on June 26, 2011 and came into force on January 1, 2013.

The PRMHIA authorizes the Minister of Finance to provide protection in respect of certain mortgage or hypothecary insurance contracts written by approved mortgage insurers. Under the PRMHIA, a payment in respect of this guarantee would only be made if a winding-up order were made in respect of an approved mortgage insurer that had written an insurance contract guaranteed under the PRMHIA. In that case, the Minister would honour lender claims for insured mortgages in default, subject to: (a) any proceeds the beneficiary has received from the underlying property or the insurer's liquidation, and (b) a deductible of 10 percent of the original principal amount of the insured mortgage.

As at March 31, 2019, the aggregate outstanding principal amount of loans that are guaranteed under the PRMHIA is estimated at $273.7 billion ($281.9 billion in 2018). Any payment made by the Minister is subject to a deductible equal to 10 percent of the original principal amount of these loans, or $32.1 billion ($32.3 billion in 2018). The principal amount outstanding does not refer to anticipated losses or payments in respect of the guarantee. No provision has been made in these accounts for payments under the guarantee.

As at March 31, 2019, there are two approved mortgage insurers under the PRMHIA: Genworth Financial Mortgage Insurance Company Canada, and Canada Guaranty Mortgage Insurance Company.

International Bank for Reconstruction and Development

In 2017, pursuant to section 8.3(1) of the Bretton Woods and Related Agreements Act, the Minister of Finance, by order of the Governor in Council, authorized a partial loan guarantee in the amount of US$118 million to the International Bank for Reconstruction and Development (IBRD) in respect to a US$1,443.8 million loan entered into between the IBRD and the Republic of Iraq.

Under this guarantee, the Department would make payment to the IBRD in the event that the Republic of Iraq is more than six months late in meeting a scheduled interest or principal payment to the IBRD. The Department would only be required to pay a pro-rata share of the loan repayment that is past due, up to a fixed aggregate amount of US$118 million.

In the event that any portion of the guarantee is called, Canada would receive a claim from the IBRD against the Republic of Iraq, and would have the option to pursue recovery. As at March 31, 2019, no losses are anticipated with respect to this guarantee and no provision has been made.

Coast Capital Savings Federal Credit Union

Pursuant to section 39.02 of the Bank Act, the Minister of Finance has authorized a loan guarantee in the amount of $1.5 billion for a line of credit extended by federal financial institutions to Coast Capital Savings Federal Credit Union (CCS). The eligibility of each drawdown under this line of credit for the guarantee must be approved by the Minister of Finance. The loan guarantee agreement expires on October 31, 2021.

Under this guarantee, the government would pay eligible outstanding principal, interest and other expenses, if CCS defaults. Following default, the government has the option to pursue recovery under the Indemnity Agreement between CCS and the government.

As at March 31, 2019, there were no approved drawdowns on the line of credit giving rise to a loan guarantee exposure. Therefore, no provision and associated losses have been recognized.

25. Related party transactions

The Department is related as a result of common ownership to all government departments, agencies, and Crown corporations. Related parties also include individuals who are members of key management personnel or close family members of those individuals, and entities controlled by, or under shared control of, a member of key management personnel or a close family member of that individual.

The Department enters into transactions with these entities in the normal course of business and on normal trade terms. During the year, the Department received common services which were obtained without charge from other government departments as disclosed below.

a) Common services received without charge from other government departments

During the year, the Department received services without charge from certain common service organizations, related to accommodation, legal services, and the employer's contribution to the health and dental insurance plans. These services received without charge have been recorded in the Department's Statement of Operations and Departmental Net Financial Position as follows:

The Government has centralized some of its administrative activities for efficiency, cost-effectiveness purposes and economic delivery of programs to the public. As a result, the Government uses central agencies and common service organizations so that one department performs services for all other departments and agencies without charge.

b) Other transactions with related parties

Expenses disclosed exclude common services provided without charge, which are disclosed in note 25a. These amounts include expenses and revenues pertaining to Assets and liabilities held on behalf of Government as well as Interest on superannuation and other accounts.

26. Segmented Information

Presentation by segment is based on the Department's Core Responsibilities. The presentation by segment is based on the same accounting policies as described in the Summary of significant accounting policies in note 2. The following table presents the expenses incurred and revenues generated for the core responsibilities, by major object of expenses and by major type of revenues.

The Treasury Board Policy on Results which took effect July 1, 2016 resulted in changes to the structure of the Department's segments. Starting in fiscal year 2018-19, the Department has two core responsiblities (formerly known as Program Activities), namely Economic and Fiscal Policy and Internal Services. The 2017-18 results reported in the table below, as well as in the Statement of Operations and Departmental Net Financial Position have been reclassified by core responsibility (see Note 1).

 The segment results for the period are as follows:

a) Transfer payments to provinces and territories

Transfer payments to provinces and territories are paid pursuant to the Federal-Provincial Fiscal Relations Act, Budget Implementation Acts, and other statutory authorities.

For the period ending March 31, transfer payments to provinces and territories include the following:

b) Interest on unmatured debt

Interest on unmatured debt includes interest incurred, amortization of debt discounts/premiums, net interest on cross-currency and interest rate swaps.

For the period ending March 31, interest on unmatured debt includes the following:

c) Interest on superannuation and other accounts

For the period ending March 31, interest on superannuation and other accounts includes the following:

The Department funds interest on interest-bearing specified purpose accounts established by all departments and agencies, including superannuation accounts and retirement compensation arrangement accounts established for the benefit of public service employees and members of the Royal Canadian Mounted Police and the Canadian Forces, the Canada Pension Plan Account, and other accounts.

d) Operating expenses

The following table presents details of operating expenses by category:

27. Revenues earned on behalf of Government

The following table presents details of the revenues earned on behalf of Government:

Revenues earned on behalf of Government represent revenue which the Department cannot re-spend to fund other departmental activities.

28. Comparative information

Comparative figures have been reclassified where necessary to conform to the current year's presentation. Specifically, the 2017-18 results reported in the Statement of Operations and Departmental Net Financial Position and Note 26 - Segmented Information have been reclassified to conform to the Department's new Departmental Results Framework. The new framework is in accordance with the Treasury Board's Policy on Results which took effect July 1, 2016.

Department of Finance Canada

Annex to the Statement of Management Responsibility Including Internal Control over Financial Reporting of the Department of Finance Canada for Fiscal Year 2018-19 (unaudited)

1. Introduction

This document provides summary information on the measures taken by the Department of Finance Canada (the Department) to maintain an effective system of internal control over financial reporting (ICFR) as well as information on internal control management, assessment results and related action plans.

Detailed information on the Department's authority, mandate and program activities are available in the 2018-19 Departmental Results Report and the 2018-19 Departmental Plan.

2. Departmental System of Internal Control Over Financial Reporting

2.1 Internal control management

The Department has a well-established governance and accountability structure to support departmental assessment efforts and oversight of its system of internal control.

A departmental internal control framework approved by the Deputy Minister and the Chief Financial Officer (CFO) is in place, which includes:

• Accountability structures relating to internal control management to support sound financial management, including clear roles and responsibilities for employees in their areas of responsibility for control management;
• On-going communication and training on statutory requirements, policies and procedures for sound financial management and control;
• A group dedicated to ICFR under the direction of the CFO with a primary focus on maintaining documentation in support of business processes and associated key risks and control points;
• A risk based internal audit plan which includes audits and reviews related to business processes assessed under the Policy on Financial Management;
• An Office of Values and Ethics to provide service and guidance on values and ethics issues, discuss ethical dilemmas in accordance with the Values and Ethics Code for the Public Sector, Policy on Conflict of Interest and Post Employment and the Department of Finance Code of Conduct to underline the need for employees to avoid, and if necessary, resolve conflicts of interest between their official duties and their personal interests. Mandatory annual reporting is an important feature of the code;
• A Disclosure Protection Officer, housed within the Office of Values and Ethics, to facilitate protected disclosures of wrongdoing in accordance with the Public Servants Disclosure Protection Act;
• Monitoring and regular updates on internal control management plus assessment results and action plans presented to the Departmental Audit Committee (DAC) and senior management; and
• Advice provided by the DAC to the Deputy Minister on the adequacy and functioning of the Department's risk management, control and governance frameworks and processes.

2.2 Service arrangements relevant to the financial statements

The Department relies on other organizations for the processing of certain transactions recorded in its financial statements.

Common-to-government arrangements:

• Public Services and Procurement Canada (PSPC) centrally administers banking arrangements and related processes, the payment and processing of salaries and the procurement of goods and services consistent with the Department's delegation of authority;
• Treasury Board of Canada Secretariat (TBS) provides the Department with information on public service insurance and centrally administers payment of the employer's share of contributions toward statutory employee benefit plans;
• The Department of Justice provides legal services to the Department; and
• Shared Services Canada (SSC) provides information technology (IT) infrastructure services.

Specific departmental arrangements:

• The Bank of Canada has shared responsibility with the Department for maintaining the financial records and accounts for the domestic debt of Canada and the Exchange Fund Account of Canada, for which the Bank acts as fiscal agent. These responsibilities include ensuring all related financial systems and processes are effectively designed and operating;
• Canada Revenue Agency (CRA) provides the financial information used by the Department to determine taxes receivable from CRA under tax collection agreements, including accrual-based methodologies to determine amounts receivable at year-end;
• TBS provides financial management and accounting services for operating expenses, managed through a shared-services arrangement; and
• TBS provides the Department and other departments with its SAP financial system platform through which its captures and reports on financial transactions. As the service provider, TBS is responsible for ensuring that IT-general controls over the SAP environment are designed and operating effectively. The Department retains responsibility of certain IT-general controls within the SAP environment, such as user access controls and segregation of duties.

3. Departmental Assessment Results During Fiscal Year 2018-19

The key findings and significant adjustments required from the current year's assessment activities are summarized below.

New or significantly amended key controls: In the current year, a new business process related to Transfer Payments was documented and assessed.

• Transfer Payments: All provinces (except Manitoba) and the three territories have each entered into its own Coordinated Cannabis Taxation Agreements (CCTAs) with the federal government.  The Minister of Finance and the Provincial/Territorial Ministers have agreed that excise duties on cannabis products will be shared (75% provincial / 25% federal) and the federal portion is capped at $100 million annually for the first two years.  Revenues will be distributed to provinces and territories based on monthly assessments by the Canada Revenue Agency. The Department is responsible for reviewing and authorizing payments in accordance with the CCTAs.

On-going monitoring of key controls:

The Department assesses the design and operational effectiveness ^{Footnote [1]} of its high-risk business processes on an annual basis as part of its rotational on-going monitoring of key controls.

The Department conducts walkthroughs throughout the fiscal year and selects transaction samples for testing. The testing validates that the controls in place are effective and operating as designed prior to the OAG pre-audit review. The extent of testing is determined by the frequency of the control being performed as well as the characteristics of the population. It also includes the expected size and frequency of misstatements for the population to be tested, and is based on the assessment of inherent risk, control risk and the detection risk related to the analytical procedures. The Department follows industry standards in determining the quantity of tests performed.

This year, the Department completed its reassessment of entity-level controls, IT-general controls under departmental management and the following business processes:

Based on the testing, the key controls that were tested have performed as intended.

Payroll & Benefits: The resolution of pay-related issues, including stabilizing pay operations and processing of pay transactions, will require multiple years of effort and significant resources. In this context, and considering the adverse impact on Finance employees, the risk rating has changed to high. The review and assessment of the payroll and benefits process is ongoing. We have initiated the testing on a number of operational activities relating to staffing, leave without pay and extra duty pay to validate the current level of maturity and assess the design effectiveness of the controls under the Department's responsibilities.

Operating expenses:  The Department implemented a data analytics program in January 2016. This program analyzes accounting and other financial data for anomalies from a compliance and/or process efficiency standpoint using industry-standard data analytics software. The objective of the analysis is to detect operational, and compliance risk. The monitoring report produced quarterly supports management in overseeing these activities:

• Travel
• Travel card purchases
• Accounts payable
• Acquisitions cards
• Financial monitoring
• Material management contracts and amendments

Service arrangements relevant to the financial statements 

SAP environment: Initiated in 2016, the service-provider (TBS) provides an annual CSAE 3416 ^{Footnote [2]} report prepared by an external auditor on the state of internal controls in the shared SAP environment. The results for this year identified eight control deficiencies, four of which are recurring from the previous year. The Office of the Auditor General (OAG) reviewed the results and determined that five of the eight control deficiencies are deemed significant enough to prevent the OAG from relying on SAP ITGC in a year where reliance is sought.  There were no issue identified by the OAG relating to complementary controls under the Department of Finance responsibilities.

IT Infrastructure: Shared Services Canada manages the IT infrastructure, which supports the SAP application. The OAG followed up on the 2018 management letter observations and concluded that one of the observations remain outstanding related to access controls.

The Department will follow up on a quarterly basis to monitor the progress of action plans to address these deficiencies.

4. Departmental Monitoring Plan of Key Controls

4.1 Monitoring plan for the next fiscal year and subsequent years

The Department's rotational on-going monitoring plan of key controls over the next three years is based on an annual validation of high-risk processes and controls as is shown in the following table:

Entity-level and IT-general controls will be validated on an annual basis. Operating expenses are monitored on an on-going basis under the data analytic program. 

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^{Footnote [1]} Design effectiveness refers to whether or not controls are in place and aligned and balanced with the risks they aim to mitigate. Operating effectiveness refers to testing undertaken to determine whether key controls have been functioning over a period of time. The testing is performed on a sample basis, using widely recognized sampling techniques and methodologies. In certain instances, judgmentally targeted testing is employed in areas that have certain risk profiles.

^{Footnote [2]} The Canadian Standard on Assurance Engagements 3416 (CSAE 3416), Reporting on Controls at a Service Organization, provides the department with the assurance that the service provider is maintaining effective and efficient internal controls related to financial, informational, or security reporting. This examination formerly designated as CICA 5970, is the Canadian equivalent of the American Institute of CPAs (AICPA) SSAE 16 audit compliance standards.