Departmental Financial Statements from the 2010–11 DPR: Notes

1. Authorities and Objectives

Authorities

The Department of National Defence (DND) was established by the National Defence Act (NDA). Under section 3 of the NDA, the Minister of National Defence presides over the Department. Under section 4 of the NDA, the Minister has the management and direction of the Canadian Forces (CF) and of all matters relating to National Defence.

Objectives

The Defence mission is to defend Canada and Canadian interests and values, while contributing to international peace and security. On behalf of the people of Canada, Defence stands ready to perform three key roles:

• Defend Canada - by delivering excellence at home;
• Defend North America - by being a strong and reliable partner with the United States in the defence of the continent; and
• Contribute to International Peace and Security - by projecting leadership abroad.

The Defence mission is delivered through seventeen program activities, which are as follows:

(a) Defence Science and Technology (S&T)

This program provides the Government of Canada with critical scientific knowledge and innovation to address defence and security challenges and needs. The S&T Program includes direction setting, program planning, program management, and capability management, execution and assessment. The program comprises multi-year projects with activities in research, technology development, analysis and experimentation applied to inform, enable and respond to Canada’s defence and security priorities over multiple time horizons extending up to a 20-year outlook. The scientific knowledge and innovation generated from these activities informs decisions on Defence capability acquisitions, readiness preparation and the conduct of operations in response to Government priorities. Activities under this program draw on internal capability and make extensive use of partnerships with Canadian industry and academia as well as international organizations.

(b) Recruiting of Personnel and Initial Training

This program promotes National Defence as a preferred workplace with the general public and to recruit new hires for a broad range of trades and other general, professional and scientific occupations. This involves deepening Defence's connections to the various educational and ethnic communities to attract the right number and mix of people who have the skills needed to contribute in meeting the Defence Mission. Engaging in effective leadership, strategic planning, and targeted outreach activities will ensure proactive measures are taken to address the challenges arising from current labour market pressures for specific skill sets within certain geographic locations. The program attracts, selects and enrols personnel and conducts initial training (basic recruit and occupational training) to military members to the Operational Functional Point. This ensures that sufficient personnel are recruited and trained with the needed skills in the appropriate occupation, now and into the future, to meet Defence requirements. This is accomplished through the provision of recruitment centres, recruitment campaigns, advertising and other outreach activities as well as the necessary training staff, facilities and associated supports.

(c) Equipment Acquisition and Disposal

This program acquires equipment required for Canadian Forces operations. This includes the acquisition of new and replacement capabilities or capital improvements to in-service equipment and disposes of them at the end of their service life. Equipment Acquisition occurs primarily through collaboration with Public Works and Government Services (PWGSC), Industry Canada (IC) and the vendors. Equipment Acquisition activities include defining requirements, engineering design, sourcing, validation of requirements, developing procurement strategy, contracting, contract negotiation and award, contract administration and management and project management of equipment acquisitions.

(d) Real Property and Informatics Infrastructure Acquisition and Disposal

An extensive portfolio of land, works, and buildings and informatics required to support the delivery of defence operations. The Real Property Acquisition and Informatics Infrastructure Acquisition Disposal program ensures that the right real property and informatics is acquired and disposed of, and is available where and when needed, while providing value for money, advancing objectives for the greening of government land and buildings, and adhering to best practices for asset life-cycle management. Program activities include working with stakeholders to define requirements; updating the real property and informatics development and management plans; managing projects for new and replacement construction; and identifying and eliminating excess facilities. Real property and informatics are acquired through construction and recapitalization, purchase or capital leases, and disposed of through deconstruction, sale or transfer. The activity includes the Capital Assistance Program (CAP)which is a capital contribution program under which National Defence makes financial contributions to support the transfer of infrastructure facilities to provinces, territories, municipalities and/or their agencies. CAP projects support real property goals and objectives by encouraging cost-effective solutions for the provision of infrastructure on bases and wings across Canada.

(e)Maritime Readiness

This program provides Canada with a combat-capable, multi-purpose Navy. The program generates and sustains relevant, responsive, combat capable maritime forces that are able to respond to a spectrum of tasks, as may be directed by the Government, within the required response time. This is accomplished by bringing maritime forces to a state of readiness for operations, by assembling, and organizing maritime personnel, supplies, and materiel. This includes the training and equipping of forces and the provision of their means of deployment, sustainment and recovery to defend Canadian interests domestically, continentally and internationally.

(f) Land Readiness

This program provides Canada with a combat-capable, multi-purpose Army. The program generates and sustains relevant, responsive, combat capable land forces that are effective across the spectrum of conflict, from peacekeeping and nation building to war fighting. This is accomplished by bringing land forces to a state of readiness for operations, assembling and organizing Land personnel, supplies, and materiel as well as the provision of individual and collective training to prepare land forces to defend Canadian interests domestically, continentally and internationally.

(g) Aerospace Readiness

This program provides Canada with a combat-capable, multi-purpose Air Force. The program generates and sustains relevant, responsive, combat capable aerospace forces that are able to respond to the spectrum of tasks, as may be directed by the Government, within the required response time. This is accomplished by bringing aerospace forces to a state of readiness for operations, by assembling, and organizing aerospace personnel, supplies, and materiel. This includes the training and equipping of aerospace forces and the provision of their means of deployment, sustainment and recovery to defend Canadian interests domestically, continentally and internationally.

(h) Joint and Common Readiness

This program ensures Defence is ready to operate in a joint capacity, as directed by Government, to respond to domestic, continental and international requirements within the required response time. The program generates and sustains forces for activities, operations and organizations in which elements of at least two services (e.g Navy, Army, Air Force) participate. This is accomplished through the provision of training of a joint and common nature, the equipping of forces and the provision of their means to deploy in a joint capacity.

(i) Situational Awareness

The Government of Canada and Defence require an accurate and timely security picture and comprehensive situational awareness and threat knowledge for Canada and abroad. This program provides credible, reliable and sustained intelligence services to Defence in support of decision making and military operations, as well as, support to other government departments in the defence and security of Canada. Work activities include geospatial intelligence, imagery intelligence, signals intelligence, and counter intelligence. The program also ensures the acquisition and use of information from the global information infrastructure to provide foreign intelligence to support Government of Canada intelligence priorities. This is accomplished through the collection, dissemination and analysis of electronic information. The program ensures the provision of advice, guidance and services to help protect electronic information and information infrastructures of importance to the Government of Canada as well as technical and operational assistance to federal law enforcement and security agencies in the performance of their lawful duties.

(j) Canadian Peace, Stability and Security

This program employs the Canadian Forces in the conduct of operations to ensure the safety and security of Canadians and the defence of Canada. These operations include protecting Canada’s sovereignty, responding to domestic disasters or humanitarian crisis, supporting domestic security requirements, and conducting search and rescue activities. This is accomplished through the mobilization and deployment of forces within Canada. Canada Command is responsible for the conduct of all Canadian forces domestic operations – routine and contingency - and is the national operational authority for the defence of Canada.

(k) Continental Peace, Stability and Security

This program employs the Canadian forces in the conduct of operations, both independently and in conjunction with allies, for the defence of North America and its approaches. Activities under this program include continental operations, as required in accordance with Government of Canada policy. This is accomplished through the mobilization and deployment of forces for the defence of North America and its approaches. Canada Command is responsible for the conduct of all continental operations – routine and contingency - and is the national operational authority for the defence of North America and its approaches.

(l) International Peace, Stability and Security

This program contributes to global peace and security by conducting global CF operations, across the spectrum from humanitarian assistance to combat, in concert with national and international partners, to achieve timely and decisive results in support of Canada’s national interests. This is accomplished through the mobilization and deployment of forces internationally. Canadian Expeditionary Force Command is the operational command responsible for all Canadian Forces (CF) international operations, with the exception of operations conducted solely by Special Operations Forces elements.

(m) Defence Team Personnel Support

The Defence Team Personnel Support program provides a broad spectrum of support services such as financial support for education and housing and facilities services, as well as, benefits to military personnel and their families. This program also provides learning support to Defence civilians. This program is necessary as the provision of fair and equitable support is a key element of the Social Contract between the nation and its military personnel that is essential to enhance personnel readiness and deployability, and establish the Canadian Forces as an employer of choice and learning institution.

(n) Canadian Identity

This program preserves and promotes Canadian identity by providing youth programs, ceremonial activities and the preservation of military history. The program is necessary to demonstrate the military heritage and proficiency of the Canadian Forces (CF) to Canadians and inform them of the military profession and practice in Canada. This is realized through initiatives such as ceremonial and band performances, CF museums, CF history and heritage books, web content and the Cadets.

(o) Environment Protection and Stewardship

This program promotes public health and safety and supports sustainable development on Defence lands and wherever Defence operates. It delivers multi-faceted real property/infrastructure environmental protection and stewardship compliant with applicable legislation and federal policy that extends through every level of departmental decision-making.

(p) Non-Security Support

Defence is strongly committed to contribution to Canadian society in non-operational roles. The program provides support to develop national competency in defence issues and to the whole of government approach by sharing information with other government departments and non-governmental organizations. This may include the provision of grants to researchers to generate knowledge related to defence issues or provide meteorological or mapping information to other government departments in the interest of information sharing on horizontal initiatives.

(q) Internal Services

Internal Services are groups of related activities and resources that are administered to support the needs of programs and other corporate obligations of an organization. These groups 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; Acquisition Services; and Travel and Other Administrative Services. Internal Services include only those activities and resources that apply across an organization and not to those provided specifically to a program.

2. Summary of Significant Accounting Policies

These financial statements have been prepared in accordance with the Treasury Board accounting policies stated below, which are based on Canadian generally accepted accounting principles for the public sector. The presentation and results using the stated accounting policies do not result in any significant differences from Canadian generally accepted accounting principles.

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 the Statement of Financial Position are not necessarily the same as those provided through authorities from Parliament. Note 3 provides a high-level reconciliation between the bases of reporting.

(b) Consolidation

These consolidated financial statements include the accounts of the sub-entities that are under the control of the Department. The accounts of these sub-entities have been consolidated with those of the Department and all inter- organizational balances and transactions have been eliminated. The Department is comprised of DND, the CF and several related organizations and agencies in the Defence Portfolio, which carry out the Defence mission and are part of the Defence Services Program.

Organizations and agencies that are part of these consolidated financial statements include the following:

• Canadian Cadet Program and the Junior Canadian Rangers;
• Communications Security Establishment;
• Canadian Forces Housing Agency;
• Defence Research and Development Canada;
• Office of the Department of National Defence and Canadian Forces Ombudsman;
• Office of the Judge Advocate General; and
• National Search and Rescue Secretariat.

The Canadian Forces Grievance Board, the Military Police Complaints Commission and the Office of the Communications Security Establishment Commissioner are excluded from the consolidation because these organizations are not part of the Defence Services Program, although they fall under the responsibility of the Minister of National Defence.

Non-Public Property (NPP) as defined in section 2 of the NDA, and administered by the Canadian Forces Personnel and Family Support Services is also excluded from the reporting entity. NPP includes all money and property contributed to or by CF members for their collective benefit and welfare. NPP is not subject to the Financial Administration Act, and is administered outside the framework of public funds. NPP is not part of the Defence Services Program. For 2010-11, NPP had estimated annual revenues of $386 million ($405 million in 2009-10), estimated annual expenses of $349 million ($362 million in 2009-10) and as of March 31, 2011 had an estimated net equity (assets minus liabilities) of $597 million ($571 million in 2009-10).

(c) 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 receipts are deposited to the CRF and all cash disbursements made by the Department are paid from the CRF. Net cash provided by the Government is the difference between all cash receipts and cash disbursements including transactions between departments of the Government.

(d) Amounts Due From/To the Consolidated Revenue Fund

Amounts due from/to 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.

(e) Revenues

Revenues are accounted for in the period in which the underlying transaction or event occurred that gave rise to the revenues.

Funds received from external parties for specified purposes are recorded upon receipt as deferred revenues. These revenues are recognized in the period in which the related expenses are incurred and revenues that have been received but not yet earned are recorded as deferred revenues.

(f) Expenses

Expenses are recorded on an accrual basis:

Grants are recognized in the year in which the conditions for payment are met. In the case of grants which do not form part of an existing program, the expense is recognized when the Government announces a decision to make a non-recurring transfer, provided the enabling legislation or authorization for payment receives parliamentary approval prior to the completion of the financial statements;

Contributions are recognized in the year in which the recipient has met the eligibility criteria or fulfilled the terms of a contractual transfer agreement, provided that the transfer is authorized and a reasonable estimate can be made;

Vacation pay and compensatory leave are accrued as the benefits are earned by employees under their respective terms of employment; and

Services provided without charge by other government departments for accommodation, employer contributions to the health and dental insurance plans, worker’s compensation coverage and legal services are recorded as operating expenses at their estimated cost.

(g) Employee Future Benefits –

(i) Pension Benefits

Eligible civilian employees participate in the Public Service Pension Plan, a multi-employer 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. Current legislation does not require the Department to make contributions for any actuarial deficiencies of the Plan.

The Government sponsors a variety of employee future benefits such as pension plans and disability benefits, which cover members of the Canadian Forces. National Defence administers the pension benefits for members of the Canadian Forces. The actuarial liability and related disclosures for these future benefits are presented in the financial statements of the Government of Canada and reported annually to Parliament as required by the Canadian Forces Superannuation Act. This differs from the accounting and disclosures of future benefits for military members presented in these financial statements whereby pension expense corresponds to the Department’s annual contributions toward the cost of current and prior service, which is based on actual contributions made by members of the Plans during the period. In addition to its regular contributions, current legislation also requires the Department to make contributions for actuarial deficiencies in the Canadian Forces Pension Plan and in the Reserve Force Pension Plan, which came into force on March 1, 2007. These contributions are expensed in the year they are credited to the Plans. This accounting treatment corresponds to the funding provided to departments through Parliamentary authorities.

(ii) Severance Benefits

Employees and military members are entitled to severance benefits under labour contracts or conditions of employment. These benefits are accrued as employees and military members render the services necessary to earn them. The obligation relating to the benefits earned by civilian employees and Canadian Forces members is calculated using information derived from the results of the actuarially determined liability for employee severance benefits for the Government as a whole. Nevertheless civilian collective agreements are the reference for paying entitlement on severance pay. The process of severance pay for civilian members will then be processed instructively by their respective collective agreements.

(h) Accounts and Loans Receivables

Accounts and loans receivables are stated at the lower of cost and net recoverable value; a valuation allowance is recorded for receivables where recovery is considered uncertain.

(i) Inventories

Inventory consists of consumables (such as non-repairables, uniforms and clothing, medical and other equipment and machine tools) and ammunition (including bombs and missiles). Consumable inventories are valued using a moving weighted average price methodology. Some items classified as repairable ammunition (e.g. missiles and torpedoes) are valued using a standard price. Inventory managed by contractors and not held in the Canadian Forces Supply System or Defence Resource Management Information System (DRMIS) is valued based on contractor-supplied records. DND is currently conducting a multi-year conversion of legacy systems into DRMIS. During the conversion process both periodic and perpetual inventory methods are being utilized. Items identified for disposal are excluded from the value of inventory as no value is expected to be recovered.

(j) Tangible Capital Assets

All tangible capital assets, having an initial cost of $30,000 or more, including capital leases, betterments and leasehold improvements, are recorded at their acquisition cost. Capitalization threshold values lower than $30,000 may apply to certain assets such as vehicles and asset pooled items (API), formerly known as repairables.

Capital assets do not include intangible assets, works of art and historical treasures that have cultural, aesthetic or historical value, assets located on First Nations Reserves and in museum collections.

(k) Amortization of Tangible Capital Assets

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

API are amortized in accordance with the sum of the accumulated amortization of the equipment platform that they support.

Assets under construction are recorded in the applicable capital asset class in the year that they become available for use and are not amortized until they become available for use.

(l) Contingent Liabilities - Claims and Litigations

Contingent liabilities are potential liabilities, which 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 (refer to Note 15(a) of these financial statements).

(m) Remediation Liabilities

Remediation liabilities reflect the estimated costs related to the management and remediation of environmentally contaminated sites. A liability, based on a reasonable estimate, is accrued when a site becomes contaminated or the Department becomes aware that a site has become contaminated and is obligated, or likely to be obligated to incur costs related to implementing a site-specific management plan. If the likelihood of the Department's obligation to incur these costs is not determinable, or cannot be reasonably estimated, the costs are disclosed as a contingent liability in the notes to the financial statements (refer to Note 15 (b) of these financial statements).

(n)Future Asset Restoration Liabilities

Future asset restoration liabilities represent the estimated costs related to the risk management of unexploded explosive ordnance (UXO) affected legacy sites. A liability, based on a reasonable estimate, is accrued when the Department becomes aware that a site is affected by UXO and is obligated, or is likely to be obligated, to incur costs related to a site-specific management plan. If the likelihood of the Department’s obligation to incur these costs is not determinable, or if an amount cannot be reasonably estimated, the costs are disclosed as a contingent liability in the notes to the financial statements (refer to Note 15 (c) of these financial statements).

(o) 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 resulting from foreign currency transactions are included as revenues in Interest and Gains on Foreign Exchange in Note 21 and losses from foreign currency transactions are included in Other Expenses in Note 21.

(p) Measurement Uncertainty

The preparation of these financial statements requires management to make estimates and assumptions that affect the reported 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 gains and liabilities, remediation liabilities, the liability for employee future benefits, allowance for doubtful accounts and the useful life of tangible capital assets. Actual results could significantly differ from those estimates. Management’s estimates are reviewed periodically and, as adjustments become necessary, they are recorded in the financial statements in the year they become known.

3. Parliamentary Authorities

National Defence receives most of its funding through annual Parliamentary authorities. Items recognized in the Statement of Operations 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

* 2010-11 Lapsed Authorities include a $443.5 million Operating Budget Carry Forward and approximately $1,051.5 million in frozen allotments, consisting mainly of funds that will be returned to the Department for use in future years.

4. Receivables

The following table presents details of accounts receivable:

(in thousands of dollars)

5. Loans and Advances

6. Prepaid Expenses

The following is a breakdown of prepaid expenses

7. Inventories

The following table presents the details of inventory, measured at cost using the moving weighted average method.

* 2010 comparative figures have been restated to reflect the addition of the Metal and Fuel, Petroleum and Oil categories previously included in Miscellaneous.

** Contractor Held Inventory is valued at historical cost.

The cost of consumed inventory recognized as an expense in the Statement of Operations is $196.1 million in 2010-11 ($167.0 million in 2009-10).

8. Tangible Capital Assets and Accumulated Amortization

(1) Current Year Adjustments represent adjustments to API, assets under construction (AUC) put into use, reclassifications and adjustments of tangible capital assets

(2)

Accumulated Amortization

The Department is presently reviewing its process for recording and valuation of tangible capital assets. This work will be conducted over a number of years. In 2010-11, DND identified and recorded $102.6 million ($164.4 million in 2009-10) in post-capitalization of tangible capital assets as current year transactions.

In 2010-11, the Department had capital asset holdings that were damaged but that have yet to be approved for write-down or write-off. The net book value of these holdings has been estimated as follows:

Further evaluation of these capital asset holdings will be conducted in fiscal year 2011-12 and, once the review is completed and the net book value of these holdings is confirmed, the applicable write-down or write-off accounting entries will be recorded.

9. Accounts Payable and Accrued Liabilities

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

16. Contingent Gain

The Department entered into a contract to obtain military flying training over a 20-year term as part of the NATO Flying Training in Canada (NFTC) program. Among other services, the prime contractor provides aircraft by leasing them for the life of the program from a non-profit company (Milit-Air Inc.), which was set up to finance the acquisition of aircraft. The asset purchase period was completed 21 December 2010 for the acquisition of aircraft and excess funds have been declared surplus. Milit-Air Inc. reported a total of $33.1 million in cash and short-term deposits as Current Assets in its financial statements as at March 31, 2011. It is estimated that $26.7 million of this total will be declared surplus in fiscal year 2011-12.

17. 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 when the services/goods are received. Contractual obligations over $10 million that can be reasonably estimated are as follows:

18. Related Party Transactions

The Department is related as a result of common ownership to all Government departments, agencies and Crown Corporations. 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 Provided Without Charge by Other Government Departments

During the year, the Department received services without charge from certain common service organizations, related to accomodation, legal services, the employer's contribution to the health and dental insurance plans and workers' compensation coverage. These services provided without charge have been recorded in the Department's Statement of Operations 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. The costs of these services, such as the payroll and cheque issuance services provided by Public Works and Government Services of Canada and audit services provided by the Office of the Auditor General are not included in the Department's Statement of Operations.

(b) Other transactions with related parties

19. Adoption of new accounting policies

During the year, the Department adopted the revised Treasury Board accounting policy TBAS 1.2: Departmental and Agency Financial Statements which is effective for the Department for the 2010-11 fiscal year. The major change in the accounting policies of the Department required by the adoption of the revised TBAS 1.2 is the recording of amounts due from the Consolidated Revenue Fund as an asset on the Statement of Financial Position.

The adoption of the new Treasury Board accounting policies have been accounted for retroactively with the following impact on the comparatives for 2009-10:

20. Comparative Information

Comparative figures have been reclassified to conform to the current year's presentation.

21. Segmented information

Presentation by segment is based on the Department's program activity architecture. 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 main program activities, by major object of expenses and by major type of revenues. The segment results for the period are as follows:

The following table is available in PDF format for viewing or downloading purpose.

Notes-to-Future-oriented-Financial-Statements-2011-2012-table-21-eng.pdf (PDF Format) 29Kb