Financial statements

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• Statement of Management Responsibility Including Internal Control over Financial Reporting (Unaudited)
• Consolidated Statement of Financial Position (Unaudited) – As at March 31
• Consolidated Statement of Operations and Departmental Net Financial Position (Unaudited) – As at March 31
• Consolidated Statement of Change in Departmental Net Debt (Unaudited) – For the year ended March 31
• Consolidated Statement of Cash Flow (Unaudited) – For the year ended March 31
• Notes to the Consolidated Financial Statements (Unaudited) – For the year ended March 31
  • Note 1 – Authority and objectives
  • Note 2 – Summary of significant accounting policies
  • Note 3 – Parliamentary authorities
  • Note 4 – Accounts payable and accrued liabilities
  • Note 5 – Environmental liabilities
  • Note 6 – Deposits and trust accounts
  • Note 7 – Deferred revenue
  • Note 8 – Canadian Forces pension and insurance accounts
  • Note 9 – Lease obligations for tangible capital assets
  • Note 10 – Employee future benefits
  • Note 11 – Accounts receivable
  • Note 12 – Loans and advances
  • Note 13 – Prepaid expenses
  • Note 14 – Inventory
  • Note 15 – Tangible capital assets
  • Note 16 – Contingent liabilities
  • Note 17 – Contractual obligations and contractual rights
  • Note 18 – Related party transactions
  • Note 19 – Segmented information
  • Note 20 – Comparative information
• Annex to the Statement of Management Responsibility including – Internal Control over Financial Reporting (ICFR) Assessment of ICFR and the Action Plan for the Fiscal Year Ending March 31, 2021

Statement of Management Responsibility Including Internal Control over Financial Reporting (Unaudited)

Responsibility for the integrity and objectivity of the accompanying financial statements for the year ended March 31, 2021, and all information contained in these statements rests with the management of the Department of National Defence (the department). These financial statements have been prepared by management using the Government of Canada’s accounting policies, which are based on Canadian public sector accounting standards (PSAS), with the exception of the accounting for pension benefits where the presentation and results using the stated accounting policies do not result in any significant differences from PSAS.

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 fulfill 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 assessment of the effectiveness of ICFR.

The system of ICFR is designed to mitigate risks to a reasonable level based on an on-going process to identify, 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, 2021 was completed in accordance with the Treasury Board Policy on Financial Management. The results and action plans, along with the effect of COVID-19 on the system of ICFR are illustrated in the department's Annex to the Statement of Management Responsibility.

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 the 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.

Date: September 3, 2021

Consolidated Statement of Financial Position (Unaudited) – As at March 31

(in thousands of dollars)	2021	2020
Liabilities
Accounts payable and accrued liabilities (note 4)	4,668,328	4,010,237
Vacation pay and compensatory leave	277,664	229,998
Environmental liabilities (note 5)	676,027	651,621
Deposits and trust accounts (note 6)	4,201	4,094
Deferred revenue (note 7)	6,627	9,491
Canadian Forces pension and insurance accounts (note 8)	727,493	622,047
Lease obligations for tangible capital assets (note 9)	40,416	52,038
Employee future benefits (note 10)	807,549	640,132
Total liabilities	7,208,305	6,219,658
Financial assets
Due from Consolidated Revenue Fund	3,251,538	2,857,909
Accounts receivable (note 11)	374,354	376,753
Loans and advances (note 12)	48,022	50,758
Total gross financial assets	3,673,914	3,285,420
Financial assets held on behalf of government
Accounts receivable (note 11)	(9,386)	(21,687)
Total financial assets held on behalf of government	(9,386)	(21,687)
Total net financial assets	3,664,528	3,263,733
Departmental net debt	3,543,777	2,955,925
Non-financial assets
Prepaid expenses (note 13)	1,272,123	968,878
Inventory (note 14)	5,182,375	5,118,921
Tangible capital assets (note 15)	36,887,876	35,416,481
Total non-financial assets	43,342,374	41,504,280
Departmental net financial position	39,798,597	38,548,355

Contingent liabilities (note 16)

Contractual obligations and contractual rights (note 17)

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

Date: September 3, 2021

Consolidated Statement of Operations and Departmental Net Financial Position (Unaudited) – As at March 31

(in thousands of dollars)	2021 Planned ResultsFootnote *	2021	2020
Expenses
Operations	1,232,798	1,055,422	1,088,003
Ready Forces	9,938,978	11,801,141	9,625,858
Defence Team	3,530,954	4,479,351	3,586,801
Future Force Design	674,373	799,109	705,873
Procurement of Capabilities	3,431,059	3,075,486	2,991,856
Sustainable Bases, Information Technology Systems and Infrastructure	3,457,848	4,072,939	3,640,987
Internal services	679,461	1,450,388	1,200,790
Total expenses	22,945,471	26,733,836	22,840,168
Revenues
Sale of goods and services	387,286	338,984	394,160
Gains on disposals of assets	20,294	10,738	16,935
Other	13,197	11,454	36,011
Interest and gains on foreign exchange	15,613	40,969	15,717
Revenues earned on behalf of government	(11,482)	(14,902)	(34,682)
Total revenues	424,908	387,243	428,141
Net cost of operations before government funding and transfers	22,520,563	26,346,593	22,412,027
Government funding and transfers
Net cash provided by government		26,310,151	22,729,313
Change in due from Consolidated Revenue Fund		393,629	73,498
Services provided without charge by other government departments (note 18)		904,192	859,218
Transfer of Accounts receivable to Public Services and Procurement Canada		0	(4)
Transfer of assets and liabilities from (to) other government departments (note 15)		(11,137)	(8,296)
Net cost of operations after government funding and transfers		(1,250,242)	(1,241,702)
Departmental net financial position — beginning of year		38,548,355	37,306,653
Departmental net financial position — end of year		39,798,597	38,548,355

Segmented information (note 19)

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

Consolidated Statement of Change in Departmental Net Debt (Unaudited) – For the year ended March 31

(in thousands of dollars)	2021	2020
Net cost of operations after government funding and transfers	(1,250,242)	(1,241,702)
Change due to tangible capital assets
Acquisition of tangible capital assets (note 15)	4,224,179	3,858,770
Amortization of tangible capital assets (note 15)	(2,571,400)	(2,640,839)
Proceeds from disposal of tangible capital assets	(8,906)	(16,936)
Loss on disposals of tangible capital assets	(1,887)	(36,105)
Adjustments of tangible capital assets	(159,454)	461,915
Transfer (to) from other government departments (note 15)	(11,137)	104
Total change due to tangible capital assets	1,471,395	1,626,909
Change due to inventory	63,454	(485,688)
Change due to prepaid expenses	303,245	348,458
Net increase in departmental net debt	587,852	247,977
Departmental net debt — beginning of year	2,955,925	2,707,948
Departmental net debt — end of year	3,543,777	2,955,925

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

Consolidated Statement of Cash Flow (Unaudited) – For the year ended March 31

(in thousands of dollars)	2021	2020
Operating activities
Net cost of operations before government funding and transfers	26,346,593	22,412,027
Non-cash items included in net cost of operations:
Amortization of tangible capital assets (note 15)	(2,571,400)	(2,640,839)
Loss on disposals of tangible capital assets	(1,887)	(36,105)
Adjustments of tangible capital assets	(159,454)	461,915
Transfer of assets to other government departments	0	8,400
Services provided without charge by other government departments (note 18)	(904,192)	(859,218)
Transition payments for implementing salary payments in arrears	0	4
Variations in Statement of Financial Position:
Increase in accounts receivables	9,902	5,171
(Decrease) in loans and advances	(2,736)	(5,543)
Increase in prepaid expenses	303,245	348,458
Increase (decrease) in inventory	63,454	(485,688)
(Increase) in accounts payable and accrued liabilities	(658,091)	(304,202)
(Increase) in vacation pay and compensatory leave	(47,666)	(27,644)
(Increase) in environmental liabilities	(24,406)	(9,995)
(Increase) decrease in deposits and trust accounts	(107)	189
(Increase) decrease in deferred revenue	2,864	(3,626)
(Increase) in Canadian Forces pension and insurance accounts	(105,446)	(12,741)
(Increase) in employee future benefits	(167,417)	(7,715)
Cash used by operating activities	22,083,256	18,842,848
Capital investing activities
Acquisitions of tangible capital assets (note 15)	4,224,179	3,858,770
Proceeds from disposal of tangible capital assets	(8,906)	(16,936)
Cash used in capital investing activities	4,215,273	3,841,834
Financing activities
Lease payments for tangible capital assets	11,622	44,631
Cash used by financing activities	11,622	44,631
Net cash provided by Government of Canada	26,310,151	22,729,313

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

Notes to the Consolidated Financial Statements (Unaudited) – For the year ended March 31

1. Authority and objectives

Authorities

The Department of National Defence (the department) 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 and of all matters relating to national defence and is responsible for the construction and maintenance of all defence establishments and works for the defence of Canada, and research relating to the defence of Canada and to the development of and improvements in materiel.

Objectives

Strong, Secure, Engaged is the defence policy that presents a vision and approach to defence by the Government of Canada. Strong, Secure, Engaged provides a bold vision to defence that will make Canada:

• Strong at home, with a military ready and able to defend its sovereignty, and to assist in times of natural disaster, support search and rescue, or respond to other emergencies;
• Secure in North America, active in a renewed defence partnership in the North American Aerospace Defense Command (NORAD) and with the United States to monitor and defend continental airspace and ocean areas;
• Engaged in the world, with the Canadian Armed Forces doing its part in Canada's contributions to a more stable, peaceful world, including peace support operations and peacekeeping.

The Departmental Results Framework is structured by the following six core responsibilities and internal services:

(a) Operations

Detect, deter and defend against threats to or attacks on Canada. Assist civil authorities and law enforcement, including counter-terrorism, in support of national security, domestic disasters or major emergencies, and conduct search and rescue operations.

Detect, deter and defend against threats to or attacks on North America in partnership with the United States, including through NORAD.

Lead and/or contribute forces to NATO and coalition efforts to deter and defeat adversaries, including terrorists, to support global stability. Lead and/or contribute to international peace operations and stabilization missions with the United Nations, NATO and other multilateral partners. Engage in capacity building to support the security of other nations and their ability to contribute to security and the security of Canadians abroad. Assist civil authorities and non-governmental partners in responding to international and domestic disasters or major emergencies.

(b) Ready Forces

Field combat ready forces able to succeed in an unpredictable and complex security environment in the conduct of concurrent operations associated with all mandated missions.

(c) Defence Team

Recruit, develop and support an agile and diverse Defence Team, within a healthy workplace free from harmful behaviour; support military families; and meet the needs of all retiring military personnel, including the ill and injured. Strengthen Canadian communities by investing in youth.

(d) Future Force Design

Develop and design the future force through a deep understanding of the future operating environment and security risks to Canada and Canadian interests. Enhance Defence’s ability to identify, prevent, adapt and respond to a wide range of contingencies through collaborative innovation networks and advanced research.

(e) Procurement of Capabilities

Procure advanced capabilities to maintain an advantage over potential adversaries and to keep pace with allies, while fully leveraging defence innovation and technology. Streamlined and flexible procurement arrangements ensure Defence is equipped to conduct missions.

(f) Sustainable Bases, Information Technology Systems and Infrastructure

Develop and manage modern, operational and sustainable bases and infrastructure. Contribute to the achievement of federal environmental targets.

(g) 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 services that support Program delivery in the organization, regardless of the Internal Services delivery model in a department. These services are:

• Management and Oversight Services;
• Communications Services;
• Legal Services;
• Human Resources Management Services;
• Financial Management Services;
• Information Management Services;
• Information Technology Services;
• Real Property Management Services;
• Materiel Management Services; and
• Acquisition Management Service.

2. Summary of significant accounting policies

These Consolidated Departmental Financial Statements have been prepared using the government’s accounting policies stated below, which are based on Canadian public sector accounting standards (PSAS), with the exception of the accounting for pension benefits where the presentation and result using the stated accounting policies do not result in any significant differences from PSAS. The pension benefits for members of the CAF (Canadian Armed Forces) follow accounting requirements as outlined in the Treasury Board Accounting Standards, as described in note 2(g) (i), which require the actuarial surpluses or deficiencies to be recognized in the Consolidated financial statements of the Government of Canada, and not the department. Further disclosure is presented in note 8.

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 Consolidated Statement of Operations and Departmental Net Financial Position and in the Consolidated 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. The planned results amounts in the “Expenses” and “Revenues” sections of the Consolidated Statement of Operations and Departmental Net Financial Position are the amounts reported in the Future-Oriented Condensed Statement of Operations included in the 2020–21 Departmental Plan.

Planned results are not presented in the “Government funding and transfers” section of the Consolidated Statements of Operations and Departmental Net Financial Position and in the Consolidated Statement of Change in Departmental Net Debt because these amounts were not included in the 2020–21 Departmental Plan.

(b) Consolidation

These Consolidated Departmental Financial Statements include the accounts of the sub-entities for which the Deputy Minister (DM) is accountable. 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 the DND, the CAF and several related organizations and agencies in the Defence Portfolio, all of which carry out the Defence mission and are part of the Defence Services Program. Organizations and agencies that are part of these Consolidated Departmental Financial Statements include the following:

• Advisory Panel on Systemic Racism, Discrimination with a focus on anti-Indigenous and anti-Black racism, LGBTQ2+ Prejudice, Gender Bias and White Supremacy
• Canadian Cadet Program and the Junior Canadian Rangers
• Canadian Forces Housing Agency
• Defence Research and Development Canada
• Independent Review Panel for Defence Acquisition
• Office of the Chief Military Judge
• Office of the Judge Advocate General
• Office of the National Defence and the Canadian Forces Ombudsman

The Military Grievances External Review Committee, the Military Police Complaints Commission of Canada, the Communications Security Establishment 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.

(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 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 the government is the difference between all cash receipts and cash disbursements, including transactions between departments of the government.

(d) Amounts due from or to the CRF

Amounts due from or 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 from regulatory fees are recognized in the accounts based on the services provided in the year.
• Deferred revenue consists of amounts received in advance from external parties for the delivery of goods and rendering of services that will be recognized as revenue in a subsequent fiscal year as it is earned. Also, funds received from external parties for a specified purpose are recorded upon receipt as deferred revenue.
• Other revenues are recognized in the period in which the underlying transaction or event that gave rise to the revenue takes place.

Revenues that are non-respendable are not available to discharge the department’s liabilities. While the DM is expected to maintain accounting control, she has no authority regarding the disposition of non-respendable revenues. As a result, non-respendable revenues are considered to be earned on behalf of the Government of Canada and are, therefore, presented as a reduction of the department’s gross revenues.

(f) Expenses

Expenses are recorded on an accrual basis:

• Transfer payments are recorded as expenses when authorization for the payment exists and the recipient has met the eligibility or the entitlements criteria (for grants) or the performance conditions (for contributions) established for the transfer payment program. In situations where transfer payments do not form part of an existing program, payments are recorded as expenses 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.
• 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, 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 of Canada. 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 Consolidated financial statements of the Government of Canada, as the Plan’s sponsor.

The department administers pension benefits for members of the CAF, both Regular and Reserve forces. The department contributes towards current and past service of members, and funds any actuarial shortfalls determined by the Chief Actuary of Canada. In addition to the regular contributions, the legislation also requires the department to make contributions for actuarial deficiencies in the pension plans. These contributions by the department are expensed in the year they are incurred. This accounting treatment corresponds to the funding provided to departments through Parliamentary authorities. All assets and liabilities related to the CAF pension plan are not reflected in the department’s Consolidated Financial Statements. As the Plan’s sponsor, the Government of Canada, recognises the plans assets and the actuarial estimate of the liabilities in the Consolidated financial statements of the Government of Canada (for details, see note 10(a)).

(ii) Severance benefits

The accumulation of severance benefits for voluntary departures ceased for applicable employee groups and CAF members. 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. The obligation related to the severance benefits earned by CAF members is calculated using information derived from the results of the actuarially determined liability for severance benefits for the CAF population (for details, see note 10(b)).

(h) Accounts and loans receivable

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

(i) Inventory

Inventories are valued at cost, using a weighted average formula. They are comprised of ammunition and inventory supplies held for future program delivery and are not primarily intended for resale. Inventory managed by contractors and not held in the Defence Resource Management Information System (DRMIS) is valued according to the cost method used by the contractors (first-in, first-out (FIFO), last-in, first-out (LIFO), historical cost or weighted moving average). Inventory identified for disposal or surplus are excluded from the value of inventory as no value is expected to be recovered (for details, see note 14).

(j) Tangible capital assets

The costs of acquiring land, buildings, equipment and other capital property are capitalized as tangible capital assets and, except for land, are amortized to expense over the estimated useful lives of the assets, as described in note 15. All tangible capital assets and leasehold improvements having an initial cost of $30,000 or more are recorded at their acquisition cost.

Asset pooled items (API) are stand-alone assets, self-contained assets, equipment, and spare parts which meet the characteristics of a tangible capital asset, where items may be below the capitalization threshold individually but are typically purchased or held in large quantities so as to represent significant expenditures overall. These items are grouped in pools, valued at weighted moving average and are treated as capital assets from a financial perspective.

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

Asset Class	Amortization Period
Buildings	10–60 years
Works and infrastructure	10–80 years
Machinery and equipment	3–30 years
Informatics hardware	3–10 years
Informatics software	2–10 years
Arms and weapons	3–30 years
Ships and boats	10–35 years
Aircraft	20–40 years
Non–military motor vehicles	2–35 years
Military vehicles	3–25 years
Leasehold improvements	Lesser of useful life of the improvement or term of lease
Betterments	Initial or extended useful life of the asset to which the improvements were made
Leased tangible capital assets	Economic life or term of lease

API are amortized at the estimated useful life of the pool.

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 (for details, see note 15).

(k) Contingent liabilities

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 fails 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, the contingency is disclosed in the notes to the Consolidated Departmental Financial Statements (for details, see note 16).

(l) Environmental liabilities

An environmental liability for the remediation of contaminated sites is recognized when all of the following criteria are satisfied: an environmental standard exists, contamination exceeds the environmental standard, the government is directly responsible or accepts responsibility, it is expected that future economic benefits will be given up and a reasonable estimate of the amount can be made. The liability reflects the government’s best estimate of the amount required to remediate the sites to the current minimum standard for its use prior to contamination. When the future cash flows required to settle or otherwise extinguish a liability are estimable, predictable and expected to occur over extended future periods, a present value technique is used.

The discount rate used reflects the government’s cost of borrowing, associated with the estimated number of years to complete remediation.

A liability for unexploded explosive ordnance (UXO) affected legacy sites is recognized when there is an appropriate basis for measurement and a reasonable estimate can be made. These liabilities are present obligations arising from past transactions or events, the settlement of which is expected to result in the future sacrifice of economic benefits.

The recorded liabilities are adjusted each year, for present value adjustments, inflation, new obligations, changes in management estimates and actual costs incurred. If the likelihood of the government’s responsibility is not determinable, a contingent liability is disclosed in the notes to the consolidated statements.

(m) Transactions involving foreign currencies

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 March 31st. Gains resulting from foreign currency transactions are included as revenues in Interest and gains on foreign exchange, and losses from foreign currency transactions are included in other expenses in the Consolidated Statement of Operations and Departmental Net Financial Position.

(n) Measurement uncertainty

The preparation of these Consolidated Departmental 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 and accompanying notes at March 31st. 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, remediation liabilities, the liability for employee future benefits, allowance for doubtful accounts, allowances to estimate pricing anomalies and value of obsolete inventory and the useful life of tangible capital assets. Actual results could significantly differ from those estimates.

The World Health Organization declared a global pandemic in March 2020 following the outbreak of a novel coronavirus ("COVID-19"). The department has been since adapting to the resurgence of COVID-19 and specific measures and protocols were put in place to mitigate ongoing risks. There is uncertainty with respect to the full pandemic's impact on management's estimates and assumptions used in the preparation of these Consolidated Departmental Financial Statements.

Management’s estimates are reviewed periodically and, as adjustments become necessary, they are recorded in the Consolidated Departmental Financial Statements in the year they become known.

Environmental liabilities are subject to measurement uncertainty as discussed in note 5 due to the evolving technologies used in the estimation of the costs for remediation of contaminated sites, the use of discounted present value of future estimated costs, and the fact that not all sites have had a complete assessment of the extent and nature of remediation or retirement. Changes to underlying assumptions, the timing of the expenditures, the technology employed, or the revisions to environmental standards or changes in regulatory requirements could result in significant changes to the environmental liabilities recorded.

(o) 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 are recorded on a gross basis and are measured at the carrying amount, except for the following:

1. Services provided on a recovery basis are recognized as revenues and expenses on a gross basis and measured at the exchange amount.
2. Certain services received on a without charge basis are recorded for departmental 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 Consolidated Statement of Operations and Departmental Net Financial Position and the Consolidated 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

(in thousands of dollars)	2021	2020
Net cost of operations before government funding and transfers	26,346,593	22,412,027
Adjustments for items affecting net cost of operations but not affecting authorities:
Amortization of tangible capital assets (note 15)	(2,571,400)	(2,640,839)
Services provided without charge by other government departments (note 18)	(904,192)	(859,218)
(Increase) in employee future benefits	(167,417)	(7,715)
Refund of previous years' expenses	78,260	38,813
(Increase) in vacation pay and compensatory leave	(47,666)	(27,644)
Loss on disposals of capital assets	(1,887)	(36,105)
Adjustments of tangible capital assets	(159,454)	461,915
Refund of program expenditures	6,278	5,530
(Increase) decrease in deferred revenue	2,864	(3,626)
(Increase) in accrued liabilities not charged to authorities	(326,117)	(309,189)
Bad debt expense	(348)	926
(Increase) in environmental liabilities (note 5)	(24,406)	(9,995)
Proceeds from sale of assets	(8,906)	(16,936)
Miscellaneous	(26,856)	99,213
Total items affecting net cost of operations but not affecting authorities	(4,151,247)	(3,304,870)
Adjustments for items not affecting net cost of operations but affecting authorities:
Acquisition of tangible capital assets (note 15)	4,224,179	3,858,770
Decrease in lease obligations for tangible capital assets	11,622	44,631
Increase (decrease) in inventory purchases net of usage and adjustments	63,454	(485,688)
Increase in prepaid expenses	303,245	348,458
Transition payments for implementing salary payments in arrears	0	4
Revenues collected from prior year receivables	29,192	(33,894)
Total items not affecting net cost of operations but affecting authorities	4,631,692	3,732,281
Current year authorities used	26,827,038	22,839,438

(b) Authorities provided and used

(in thousands of dollars)	2021	2020
Vote 1 – Operating expenditures	17,188,161	16,930,206
Vote 5 – Capital expenditures	5,808,835	4,455,248
Vote 10 – Grants & contributions	279,591	222,590
Vote 15 – Long-term disability and life insurance plan for members of the Canadian Forces	423,389	435,458
Vote 20
– Protecting Canada’s National Security	0	311
– Debt write-off	17	0
Vote 25
– Renewing Canada’s Middle East Strategy	0	63,037
– Debt forgiveness	17	0
Vote 30 – Supporting Veteran as They Transition to Post-Service Life	0	4,483
Vote 35 – Reinforcing Canada’s Support for Ukraine	0	9,060
Statutory amounts	4,353,553	1,656,562
Less:
Authorities available for future years	(1,060,791)	(842,364)
Frozen allotments and other lapses	(165,734)	(95,153)
Current year authorities used	26,827,038	22,839,438

4. Accounts payable and accrued liabilities

The following table presents details of the department’s accounts payable and accrued liabilities:

(in thousands of dollars)	2021	2020
Accounts payable - other government departments and agencies	167,654	137,345
Accounts payable - external parties	2,927,908	2,437,762
Total accounts payable	3,095,562	2,575,107
Accrued liabilities	1,572,766	1,435,130
Total accounts payable and accrued liabilities	4,668,328	4,010,237

5. Environmental liabilities

Environmental liabilities include the following:

(in thousands of dollars)	2021	2020
Total liabilities for contaminated sites	581,295	541,308
Other environmental liabilities (UXO sites)	94,732	110,313
Total environmental liabilities	676,027	651,621

(a) Remediation of contaminated sites

The government’s “Federal Approach to Contaminated Sites”, sets out a framework for management of contaminated sites using a risk-based approach. Under this approach the Government has inventoried the contaminated sites on identified federal lands allowing them to be classified, managed and recorded in a consistent manner. This systematic approach aids in the identification of the high risk sites in order to allocate limited resources to those sites which pose the highest risk to the environment and human health.

The department has identified a total of 896 sites (940 sites in 2019–20) where contamination may exist and assessment, remediation and monitoring may be required. Of these, the department has identified 309 sites (290 sites in 2019–20) where action is possible and for which a liability of $553.5 million ($497.4 million in 2019–20) has been recorded. This liability estimate has been determined after the sites are assessed and is based on environmental experts reviewing the results of site assessments, and proposing possible remediation solutions.

In addition, a statistical model based upon a projection of the number of sites that will proceed to remediation and upon which current and historical costs are applied is used to estimate the liability for a group of unassessed sites. As a result, there are 135 unassessed sites (180 in 2019–20) where a liability estimate of $27.8 million ($43.9 million in 2019–20) has been recorded using this model.

These two estimates combined totaling $581.3 million ($541.3 million in 2019–20), represent management’s best estimate of the costs required to remediate the sites to the current minimum standard for its use prior to contamination, based on the information available at the financial statement date.

For the remaining 452 sites (470 sites in 2019–20), no liability for remediation has been recognized. Some of these sites are at various stages of testing and evaluation and if remediation is required, liabilities will be reported as soon as a reasonable estimate can be determined. For other sites, the department does not expect to give up any future economic benefits (there is no significant environmental impact or human health threats). These sites will be re-examined and a liability for remediation will be recognized if future economic benefits will be given up.

The following table presents the total estimated amounts of these liabilities by nature and source, the associated expected recoveries and the total undiscounted future expenditures as at March 31, 2021, and March 31, 2020. When the liability estimate is based on a future cash requirement, the amount is adjusted for inflation using a forecast CPI rate of 2% (2% in 2019–20). Inflation is included in the undiscounted amount. The Government of Canada’s cost of borrowing by reference to the actual zero-coupon yield curve for Government of Canada bonds has been used to discount the estimated future expenditures. The March 2021 rates range from 0.24% (0.45% in March 2020) for a 2 year term to 2.01% (1.37% in March 2020) for a 30 or greater year term.

2021
Nature and source (in dollars)	Number of sites	Estimated liability	Estimated undiscounted expenditure
Military and Former Military SitesFootnote (1)	375	392,563,090	418,594,214
Fuel Related PracticesFootnote (2)	264	43,557,238	44,938,895
Landfill / Waste SitesFootnote (3)	117	28,306,212	29,837,967
Engineering Assets / Air and Land TransportationFootnote (4)	7	536,360	547,933
Marine Facilities / Aquatic SitesFootnote (5)	16	1,412,239	1,442,024
Office / Commercial / Industrial OperationsFootnote (6)	50	13,180,440	13,678,690
OtherFootnote (7)	67	101,739,031	106,467,253
Totals	896	581,294,610	615,506,976

2020
Nature and source (in dollars)	Number of sites	Estimated liability	Estimated undiscounted expenditure
Military and Former Military SitesFootnote (1)	381	319,534,777	329,707,590
Fuel Related PracticesFootnote (2)	281	43,891,739	44,774,889
Landfill / Waste SitesFootnote (3)	132	25,328,601	26,312,046
Engineering Assets / Air and Land TransportationFootnote (4)	8	649,593	662,479
Marine Facilities / Aquatic SitesFootnote (5)	16	5,550,835	5,872,493
Office / Commercial / Industrial OperationsFootnote (6)	51	20,433,777	21,456,043
OtherFootnote (7)	71	125,918,214	127,948,904
Totals	940	541,307,536	556,734,444

Also during the year 64 sites (98 sites in 2019–20) were closed as they were either remediated or assessed to confirm that they no longer meet all the criteria required to record a liability for contaminated sites.

(b) Other environmental liabilities

The department has identified approximately 526 UXO suspected sites (484 sites in 2019–20) for which clearance action may be necessary. Of these sites, 38 sites (43 sites in 2019–20) are confirmed UXO affected sites. Based on the department’s best estimates, a liability of $94.7 million ($110.3 million in 2019–20) has been recorded for clearance action on 8 sites (9 sites in 2019–20) of the confirmed UXO sites. The remediation has been completed for 3 sites in 2020–21 (0 site in 2019–20). The remaining 515 suspected sites (475 sites in 2019–20) are currently in the assessment stage and a reasonable estimate cannot yet be determined. Of these sites, the obligation for clearance action is likely for 21 sites (23 sites in 2019–20), indeterminable for 51 sites (50 sites in 2019–20) and unlikely for 443 sites (402 sites in 2019–20).

The department’s ongoing efforts to assess contaminated sites and UXO affected sites may result in additional environmental liabilities.

6. Deposits and trust accounts

The following table presents details of the department’s deposits and trust accounts:

(in thousands of dollars)	2021	2020
Contractor security deposits
Deposits, beginning of year	2,838	3,303
Deposits received	4,474	4,279
Refunds	(4,008)	(4,744)
Contractor security deposits, end of year	3,304	2,838
Trust account, estates — Armed ServicesFootnote *
Trust account, beginning of year	1,256	980
Funds received	1,427	1,592
Payments	(1,786)	(1,316)
Trust account, estates — Armed Services, end of year	897	1,256
Closing balance	4,201	4,094

7. Deferred revenue

Deferred revenue consists of amount received in advance from external parties for the delivery of goods and rendering of services that will be recognized as revenue in a subsequent fiscal year as it is earned. Also, funds received from external parties for a specified purpose are recorded upon receipt as deferred revenue.

(in thousands of dollars)	2021	2020
Foreign governments
Beginning of year	4,793	1,092
Funds received	2,676	25,829
Revenue recognized	(5,255)	(22,128)
Foreign governments, end of year	2,214	4,793
Other specified purposes
Beginning of year	4,698	4,773
Funds received	930	2,179
Revenue recognized	(1,215)	(2,254)
Other specified purposes, end of year	4,413	4,698
Closing balance	6,627	9,491

8. Canadian Forces pension and insurance accounts

Established in 1901 under the Militia Pension Act, the present Canadian Forces pension plans (the “CF pension plans”) are administered in accordance with the provisions of the Canadian Forces Superannuation Act. The Canadian Forces pension plan (CFPP) covers all members of the Regular Force component of the CAF. Reserve Force members who have sufficient qualifying service and pensionable earnings are members of either the CFPP or the Reserve Force pension plan (RFPP), which came into force on March 1, 2007, depending on their employment status and earnings.

The department maintains accounts to record the transactions pertaining to the CF pension plans, which comprise the Canadian Forces Superannuation Account (the “Superannuation Account”), the Canadian Forces Pension Fund Account (CFPF), the Retirement Compensation Arrangement Account (RCA), and the Reserve Force Pension Fund Account (RFPF). These accounts record transactions such as contributions, benefit payments, interest credits, refundable taxes, actuarial funding adjustments resulting from triennial reviews, and transfers to the Public Sector Pension Investment Board (PSPIB).

The value of the liabilities reported in these Consolidated Departmental Financial Statements does not include the actuarial value of the liabilities determined by the Chief Actuary of the Office of the Superintendent of Financial Institutions nor the details of the investments that are held by PSPIB. Additional information on the CF pension plans, including audited financial statements, is published in the Annual Report of the Canadian Forces Pension Plans, which is available through the department. For further information on PSPIB, please visit their website.

The CFPF and the RFPF do not earn interest. The Pension Fund Accounts are merely flow through accounts. At year-end, the balances in the Pension Fund Accounts represent net contributions transferable to PSPIB.

The department also maintains the Regular Force Death Benefit Account, which provides life insurance to contributing members and former members of the CAF. This account records contribution, premiums, interest, and benefit payments.

The RCA records transactions for pension benefits that are provided in excess of those permitted under the Income Tax Act. The RCA is registered with Canada Revenue Agency (CRA) and a transfer is made annually between the RCA Account and CRA to either remit a 50 percent refundable tax in respect of the net contributions and interest credits or to be credited a reimbursement based on the net benefit payments. As at March 31, 2021, the total refundable tax transferred amounts to $470 million ($456 million as at March 31, 2020).

The following table provides details of the Canadian Forces pension and insurance accounts liability as presented in the Statement of Financial Position:

(in thousands of dollars)	2021	2020
Canadian Forces Pension Fund Account
Beginning of year	126,049	110,786
Funds received and other credits	1,611,546	1,534,366
Payments and other charges	(1,157,278)	(1,056,931)
Transfers to the Public Sector Pension Investment Board	(377,653)	(462,172)
Canadian Forces Pension Fund Account, end of year	202,664	126,049
Reserve Force Pension Fund Account
Beginning of year	(136,663)	(123,565)
Funds received and other credits	101,011	78,653
Payments and other charges	(97,232)	(91,751)
Reserve Force Pension Fund Account, end of year	(132,884)	(136,663)
Retirement Compensation Arrangements Account
Beginning of year	460,438	442,574
Funds received and other credits	52,943	47,490
Payments and other charges	(26,566)	(29,626)
Retirement Compensation Arrangements Account, end of year	486,815	460,438
Regular Force Death Benefit Account
Beginning of year	172,223	179,511
Funds received and other credits	29,358	28,098
Payments and other charges	(30,683)	(35,386)
Regular Force Death Benefit Account, end of year	170,898	172,223
Closing balance	727,493	622,047

8a. Canadian Forces Superannuation Account

The Superannuation Account was created in order to record notional transactions for service prior to April 01, 2000. The Superannuation Account does not hold any investment assets. The amount of interest credited on the account is as though net contributions were invested quarterly in 20-year Government of Canada bonds issued at prescribed rates and held to maturity.

The assets and liabilities related to the Superannuation Account are not reflected in the department’s Consolidated Financial Statements as the Superannuation Account is the responsibility of the Government of Canada.

Details of the Superannuation Account, including actuarial surpluses or deficiencies, can be found in the Annual Report of the Canadian Forces Pension Plans and in the Public Accounts of Canada.

The table below does not include the actuarial value of the liabilities determined by the Chief Actuary of the Office of the Superintendent of Financial Institutions, and is provided for information purposes only to disclose the transactions and account balance.

(in thousands of dollars)	2021	2020
Canadian Forces Superannuation Account
Beginning of year	44,741,718	45,607,472
Funds received and other credits	4,123,437	1,686,631
Payments and other charges	(2,543,177)	(2,552,385)
Canadian Forces Superannuation Account, end of year	46,321,978	44,741,718

9. Lease obligations for tangible capital assets

The department has entered into agreements to lease certain tangible capital assets under capital leases with a cost of $807 million and accumulated amortization of $781 million as at March 31, 2021 ($836 million and $770 million respectively as at March 31, 2020). The obligations for the upcoming years include the following:

(in thousands of dollars)	Total future minimum lease payments	Imputed interest (5.26% to 11.89%)	Balance of obligations 2021	Balance of obligations 2020
Buildings	53,718	(13,302)	40,416	48,541
Aircraft	0	0	0	3,497
Total	53,718	(13,302)	40,416	52,038

Future minimum lease payments

(in thousands of dollars)	2021–22	2022–23	2023–24	2024–25	2025–26	2026–27 and thereafter	Total
Buildings	7,985	7,910	7,907	7,908	7,592	14,416	53,718
Aircraft	0	0	0	0	0	0	0
Total	7,985	7,910	7,907	7,908	7,592	14,416	53,718

The department has also entered into agreements for buildings and aircraft under capital leases (refer to note 15). 

10. Employee future benefits

(a) Pension benefits

The department’s Public Service 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 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 Canada’s 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 as of January 1, 2013. Each group has a distinct contribution rate.

The 2020–21 expense amounts to $219 million ($202 million in 2019–20). For Group 1 members, the expense represents approximately 1.01 times (1.01 times in 2019–20) the contributions by employees and, for Group 2 members, approximately 1.00 times (1.00 times in 2019–20) the contributions by employees.

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

The members of the Canadian Armed Forces Regular Force and eligible members of the Reserve Force participate in the Canadian Forces pension plan, which is sponsored by the Government of Canada and administered by the department. Pension benefits accrue up to a maximum 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 are indexed to inflation.

The members of the Canadian Armed Forces Reserve Force who are not eligible for participation in the Canadian Forces pension plan, may be eligible to participate in the Reserve Force pension plan, which is sponsored by the Government of Canada and administered by the department. Pension benefits accrue at a rate of 1.5 percent of pensionable earnings during the member’s service, plus an additional 0.5 percent times the average of the best five consecutive years of earnings for those members who are not yet eligible for Canada/Québec Pension Plan benefits. The benefits are integrated with Canada/Québec Pension Plan benefits and are indexed to inflation.

Both the members and the department contribute to the cost of the CAF pension plans for both current and prior service. The 2020–21 expense amounts to $3,653 million ($1,028 million in 2019–20) which represents approximately 5.7 times (1.9 times in 2019–20) the contributions by employees, the 2020–21 expense includes a one-time actuarial adjustment of $2,605 million.

Public Services and Procurement Canada is responsible for providing program management and the day-to-day administration of the CAF pension plans. The actuarial liability and actuarial surpluses or deficiencies are recognized in the Consolidated financial statements of the Government of Canada, as the sponsor of the CAF pension plans.

As a result of the actuarial funding report by the Office of the Chief Actuary, the President of Treasury Board has approved:

• Annual actuarial adjustments of $17 million ($5 million in 2019–20) to fund the deficit in the Reserve Force Pension Fund Account until the deficit is funded as per the triennial funding valuation. There was no adjustment in 2020–21 ($145 million in 2019–20) to fund the deficit in the Canadian Forces Pension Fund Account.

For more information on these adjustments, please consult the actuarial reports, available at the Office of the Chief Actuary’s website.

(b) Severance benefits

Severance benefits provided to the department’s employees were previously based on 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. 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:

(in thousands of dollars)	2021	2020
Public Service Employees
Accrued benefit obligation, beginning of year	87,353	84,623
Expenses for the year	(3,225)	10,508
Benefits paid during the year	(8,060)	(7,778)
Accrued benefit obligation, end of year	76,068	87,353
Canadian Armed Forces Members
Accrued benefit obligation, beginning of year	552,779	547,794
Expenses for the year	247,503	73,114
Benefits paid during the year	(68,801)	(68,129)
Accrued benefit obligation, end of year	731,481	552,779
Total accrued benefit obligation, end of year	807,549	640,132

11. Accounts receivable

The following table presents details of accounts receivable:

(in thousands of dollars)	2021	2020
Receivables - External parties	253,280	289,411
Receivables - Other government departments and agencies	169,052	136,130
Total receivables	422,332	425,541
Less: allowance for doubtful accounts on receivables from external parties	47,978	48,788
Gross accounts receivable	374,354	376,753
Accounts receivable held on behalf of government	(9,386)	(21,687)
Net Receivables	364,968	355,066

12. Loans and advances

The following table presents details of loans and advances:

(in thousands of dollars)	2021	2020
Imprest accounts, standing advances and authorized loans to CAF members	48,022	50,758
Total loans and advances	48,022	50,758

13. Prepaid expenses

The following table presents details of prepaid expenses:

(in thousands of dollars)	2021	2020
Foreign Military Purchases	549,160	484,510
Sea Sparrow Missiles	431,379	218,845
Mercury Global Military Wideband Satellite Communications Project	162,567	178,049
NATO Flying Training Canada (NFTC)	59,614	57,665
Building rentals	12,221	12,820
Other purchases	57,182	16,989
Total prepaid expenses	1,272,123	968,878

14. Inventory

The following table presents the details of inventory, measured at cost using the moving weighted average method except for inventory managed by contractors and not held in Defence Resource Management Information System (DRMIS), which is valued according to the cost method used by the contractors:

(in thousands of dollars)	2021	2020Footnote *
Ammunition, bombs and missiles	2,713,964	2,800,916
Uniforms and clothing	413,903	392,333
Contractor held inventory	349,203	340,288
Metal	334,113	322,639
Ship spares	294,091	366,132
Communication, electrical parts/accessories and informatics equipment	202,326	178,210
Engineering, test and technical equipment and machine tools	200,029	188,595
Medical equipment and supplies	153,177	116,897
Land equipment spares	82,073	81,039
Packaging, preserving and storing material	75,831	65,418
Electric generators and air conditioning units	71,408	63,510
Fuel, petroleum and oil	62,223	49,565
Sonobuoys, parts and accessories	56,590	17,431
Training equipment and supplies	42,997	5,785
Lighting, distribution, control equipment and parts	19,316	28,295
Miscellaneous	111,131	101,868
Total inventories	5,182,375	5,118,921

The cost of consumed inventory recognized as an expense in the Consolidated Statement of Operations and Departmental Net Financial Position is $354 million in 2020–21 ($512 million in 2019–20).

15. Tangible capital assets

The following table presents details of the cost of tangible capital assets:

(in thousands of dollars)	Balance beginning of year	AdjustmentsFootnote (1)	Acquisitions	Disposals and write-offs	Balance end of year
Land, buildings and works
Land	86,106	(249)	0	0	85,857
Buildings	10,766,253	281,174	5,420	(19,463)	11,033,384
Works and infrastructure	2,838,837	39,483	954	(7)	2,879,267
Sub-total	13,691,196	320,408	6,374	(19,470)	13,998,508
Machinery and equipment
Machinery and equipment	7,102,733	(217,212)	115,221	(2,124)	6,998,618
Informatics hardware	5,943,903	227,247	61,200	(236,220)	5,996,130
Informatics software	1,100,961	25,511	12,477	0	1,138,949
Arms and weapons	7,034,509	906	69,344	(14,837)	7,089,922
Other equipment	97,539	363	6,928	0	104,830
Sub-total	21,279,645	36,815	265,170	(253,181)	21,328,449
Ships, aircraft and vehicles
Ships and boats	12,844,008	523,653	12,110	(6,633)	13,373,138
Aircraft	20,472,380	616,370	55,476	(164,285)	20,979,941
Non-military motor vehicles	1,133,375	12,250	68,533	(14,268)	1,199,890
Military vehicles	2,196,329	37,100	6,529	(63,532)	2,176,426
Other vehicles	401,481	(2,934)	18,023	(1,999)	414,571
Sub-total	37,047,573	1,186,439	160,671	(250,717)	38,143,966
Leasehold improvements
Leasehold improvements	122,301	109,640	0	(50)	231,891
Sub-total	122,301	109,640	0	(50)	231,891
Leased tangible capital assets
Buildings	144,574	(12,416)	0	(16,881)	115,277
Other equipment	48	0	0	0	48
Aircraft	691,286	0	0	0	691,286
Sub-total	835,908	(12,416)	0	(16,881)	806,611
Assets under construction
Buildings	1,625,516	(371,322)	591,755	0	1,845,949
Engineering works	322,885	(40,029)	175,651	0	458,507
Informatics software	158,405	(2,896)	3,486	0	158,995
Equipment	6,912,296	(1,634,052)	3,021,072	(515)	8,298,801
Sub-total	9,019,102	(2,048,299)	3,791,964	(515)	10,762,252
Gross tangible capital assets	81,995,725	(407,413)	4,224,179	(540,814)	85,271,677

Adjustments of tangible capital assets reported in the Consolidated Statement of Change in Departmental Net Debt and in the Consolidated Statement of Cash Flow represent the total net of adjustments (cost and amortization) less net transfers from/to other government departments.

Net of disposal and write-offs (cost and amortization) equals to loss on disposal of tangible capital asset plus proceeds from disposal of tangible capital assets reported in the Consolidated Statement of Change in Departmental Net Debt and in the Consolidated Statement of Cash Flow.

The following table presents details of the amortization of tangible capital assets and its net book value:

(in thousands of dollars)	Balance beginning of year	Adjust-ments	Amorti-zation	Disposals and write-offs	Balance end of year	Net Book Value
						2021	2020
Land, buildings and works
Land	0	0	0	0	0	85,857	86,106
Buildings	5,233,430	1,778	276,599	(17,402)	5,494,405	5,538,979	5,532,823
Works and infrastructure	1,723,563	883	77,377	0	1,801,823	1,077,444	1,115,274
Sub-total	6,956,993	2,661	353,976	(17,402)	7,296,228	6,702,280	6,734,203
Machinery and equipment
Machinery and equipment	5,164,095	(253,628)	212,303	(2,043)	5,120,727	1,877,891	1,938,638
Informatics hardware	4,880,226	105,601	154,402	(235,614)	4,904,615	1,091,515	1,063,677
Informatics software	766,475	511	34,158	0	801,144	337,805	334,486
Arms and weapons	3,229,170	2,574	217,853	(14,180)	3,435,417	3,654,505	3,805,339
Other equipment	78,074	(4,001)	4,034	0	78,107	26,723	19,465
Sub-total	14,118,040	(148,943)	622,750	(251,837)	14,340,010	6,988,439	7,161,605
Ships, aircraft and vehicles
Ships and boats	9,577,997	(128,182)	798,316	(6,426)	10,241,705	3,131,433	3,266,011
Aircraft	12,742,944	59,269	587,297	(158,439)	13,231,071	7,748,870	7,729,436
Non-military motor vehicles	733,703	(14,096)	75,381	(13,944)	781,044	418,846	399,672
Military vehicles	1,361,041	(4,932)	76,451	(63,323)	1,369,237	807,189	835,288
Other vehicles	263,883	(3,312)	15,352	(1,719)	274,204	140,367	137,598
Sub-total	24,679,568	(91,253)	1,552,797	(243,851)	25,897,261	12,246,705	12,368,005
Leasehold improvements
Leasehold improvements	54,543	2,753	11,572	(50)	68,818	163,073	67,758
Sub-total	54,543	2,753	11,572	(50)	68,818	163,073	67,758
Leased tangible capital assets
Buildings	103,206	(2,040)	5,865	(16,881)	90,150	25,127	41,368
Other equipment	48	0	0	0	48	0	0
Aircraft	666,846	0	24,440	0	691,286	0	24,440
Sub-total	770,100	(2,040)	30,305	(16,881)	781,484	25,127	65,808
Assets under construction
Buildings						1,845,949	1,625,516
Engineering works						458,507	322,885
Informatics software						158,995	158,405
Equipment						8,298,801	6,912,296
Sub-total						10,762,252	9,019,102
Total	46,579,244	(236,822)	2,571,400	(530,021)	48,383,801	36,887,876	35,416,481

During 2020–21, the department transferred in machinery and equipment (net book value of one dollar) from the National Research Council of Canada.

Also during 2020–21, the department transferred out land (net book value of $249 thousand), buildings (net book value of $10,638 thousand) and works and infrastructure (net book value of $250 thousand) to Public Services and Procurement Canada.

These transfers are included in the adjustments column.

The department has $11 million ($11 million in 2019–20) in net book value of capital assets with an original acquisition cost of $963 million ($1,027 million in 2019–20) that have been declared surplus. These assets have been written down to their net realizable value in the Consolidated Statement of Financial Position.

16. Contingent liabilities

Contingent liabilities arise in the normal course of the operations of the department and their ultimate disposition is unknown. The department is involved in contingent liabilities on claims and litigations.

Claims and litigations

Claims have been made against the department in the normal course of operations. These claims include items with pleading amounts and others for which no amount is specified. While the total amount claimed in these actions is significant, their outcomes are not determinable. The department has recorded an allowance for claims and litigations where it is likely that there will be a future payment and a reasonable estimate of the loss can be made. Claims and litigations for which the outcome is not determinable and a reasonable estimate can be made by management amount to approximately $0.4 million ($1 million in 2019–20) at March 31, 2021.

17. Contractual obligations and contractual rights

(a) 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 summarized as follows:

(in thousands of dollars)	2021–22	2022–23	2023–24	2024–25	2025–26 and thereafter	Total
Tangible Capital Assets	2,855,342	1,869,880	1,417,808	752,573	634,766	7,530,369
Purchases	3,257,971	2,629,836	1,888,178	1,598,192	6,695,457	16,069,634
Total	6,113,313	4,499,716	3,305,986	2,350,765	7,330,223	23,600,003

(b) Contractual rights

The activities of the department sometimes involve the negotiation of contracts or agreements with outside parties that result in the department having rights to both assets and revenues in the future. They principally involve leases of property, royalties and sales of goods and services. Major contractual rights that will generate revenue in the future years and that can be reasonably estimated are summarized as follows:

(in thousands of dollars)	2021–22	2022–23	2023–24	2024–25	2025–26	2026–27 and thereafter	TotalFootnote 1
Support services	0	0	0	0	0	31,053	31,053
Total	0	0	0	0	0	31,053	31,053

18. 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^{Footnote 1} 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. The department did not identify any material transactions that occurred at a value different from which would have been arrived at if the parties were unrelated.

(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 accommodation, 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 Consolidated Statement of Operations and Departmental Net Financial Position as follows:

(in thousands of dollars)	2021	2020
Employer's contributions to the health and dental plans paid by Treasury Board of Canada Secretariat	827,552	783,236
Accommodation provided by Public Services and Procurement Canada	68,047	67,121
Worker's compensation coverage provided by Employment and Social Development Canada	5,178	5,712
Legal services provided by Department of Justice Canada	3,415	3,149
Total	904,192	859,218

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 Services and Procurement Canada and audit services provided by the Office of the Auditor General are not included in the department’s Consolidated Statement of Operations and Departmental Net Financial Position.

(b) Other transactions with related parties

(in thousands of dollars)	2021	2020
Expenses - other government departments and agencies	1,518,798	1,339,986
Revenues - other government departments and agencies	10,610	14,706

Expenses and revenues disclosed in (b) exclude common services provided without charge, which are already disclosed in (a).

19. Segmented information

The presentation by segment is based on the Departmental Results Framework (DRF) as stated in note 1 and is based on the 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 result framework, by major object of expense and by major type of revenue. The segment results for the period are as follows:

(in thousands of dollars)	Operation	Ready Forces	Defence Team	Future Force Design
Operating expenses
Salary and employee benefits	542,316	7,818,473	3,477,824	294,928
Amortization	1,012	3,681	1,624	21,131
Professional and special services	50,606	1,098,107	309,297	208,902
Repair and maintenance	9,472	1,385,888	10,267	9,828
Expenses related to tangible assets	54,043	435,531	23,513	104,468
Materials and supplies	56,145	416,669	79,308	19,329
Transportation and communications	31,757	89,532	272,627	2,542
Other services	21,314	186,585	230,148	115,497
Accommodation	46,478	46,821	45,144	1,759
Equipment and other rentals	24,287	159,337	1,745	462
Utilities	952	1,608	281	1,112
Loss on disposals and write-offs and write-downs of assets	1,887	0	0	0
Bad debts	0	0	0	0
Interest on capital lease payments	0	103	144	0
Advertising, printing and related services	556	8,567	11,132	1,454
Other expenses	5,525	149,593	13,335	1,686
Total operating expenses	846,350	11,800,495	4,476,389	783,098
Transfer payments
Transfers to other countries and international organizations	206,772	503	225	5,266
Transfers to other levels of government	0	17	0	0
Transfers to non-profit organizations	2,300	23	1,754	10,745
Transfers to individuals	0	103	983	0
Total transfer payments	209,072	646	2,962	16,011
Total expenses	1,055,422	11,801,141	4,479,351	799,109
Revenues
Sale of goods and services	91	123,420	49,393	1,696
Gains on disposals of assets	172	2,881	13	1,988
Interest and gains on foreign exchange	382	6,027	70	2,137
Revenues earned on behalf of government	0	77	(975)	(2,748)
Other	0	(70)	1,057	0
Total revenues	645	132,335	49,558	3,073
Net cost from continuing operations	1,054,777	11,668,806	4,429,793	796,036

(in thousands of dollars)	Procurement of Capabilities	Sustainable Bases, Information Technology Systems and Infrastructure	Internal services	2021	2020
Operating expenses
Salary and employee benefits	297,848	2,187,296	578,269	15,196,954	11,262,686
Amortization	2,180,240	362,876	836	2,571,400	2,640,839
Professional and special services	242,741	573,306	96,299	2,579,258	2,279,797
Repair and maintenance	33,993	216,384	76,809	1,742,641	1,749,274
Expenses related to tangible assets	236,332	116,523	13,005	983,415	860,129
Materials and supplies	9,456	28,607	(15,703)	593,811	617,055
Transportation and communications	19,986	23,212	13,861	453,517	754,304
Other services	18,866	79,570	32,948	684,928	699,516
Accommodation	7,351	33,957	87,299	268,809	267,019
Equipment and other rentals	418	10,073	688	197,010	249,263
Utilities	76	172,152	(2,134)	174,047	191,750
Loss on disposals and write-offs and write-downs of assets	0	0	0	1,887	36,105
Bad debts	0	0	348	348	(926)
Interest on capital lease payments	0	2,669	(90)	2,826	3,230
Advertising, printing and related services	573	778	1,578	24,638	18,868
Other expenses	27,606	230,091	566,375	994,211	987,567
Total operating expenses	3,075,486	4,037,494	1,450,388	26,469,700	22,616,476
Transfer payments
Transfers to other countries and international organizations	0	0	0	212,766	207,260
Transfers to other levels of government	0	35,445	0	35,462	5,252
Transfers to non-profit organizations	0	0	0	14,822	9,866
Transfers to individuals	0	0	0	1,086	1,314
Total transfer payments	0	35,445	0	264,136	223,692
Total expenses	3,075,486	4,072,939	1,450,388	26,733,836	22,840,168
Revenues
Sale of goods and services	16	151,634	12,734	338,984	394,160
Gains on disposals of assets	369	3,435	1,880	10,738	16,935
Interest and gains on foreign exchange	6,747	207	25,399	40,969	15,717
Revenues earned on behalf of government	(28)	(867)	(10,361)	(14,902)	(34,682)
Other	41	1,408	9,018	11,454	36,011
Total revenues	7,145	155,817	38,670	387,243	428,141
Net cost from continuing operations	3,068,341	3,917,122	1,411,718	26,346,593	22,412,027

20. Comparative information

Certain comparative figures have been reclassified to conform to the current year’s presentation.

Annex to the Statement of Management Responsibility including – Internal Control over Financial Reporting (ICFR) Assessment of ICFR and the Action Plan for the Fiscal Year Ending March 31, 2021

1. Introduction

This document provides summary information on the measures taken by the department to maintain an effective system of Internal Control over Financial Reporting (ICFR), including information on internal control management, assessment of results and related action plans. 

Detailed information on the department’s authority, mandate and program activities can be found in the 2020–21 Departmental Results Report and the 2021–22 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 over Financial Management (ICFM) Framework, approved by the Deputy Minister (DM) is in place and includes:

• Organizational accountability structures as they relate to internal control management to support sound financial management, including the roles and responsibilities of senior managers in their areas of responsibility for control management;
• An internal control over financial management directorate under the Chief Financial Officer (CFO) to monitor the effectiveness of ICFR and ICFM across the department, including reporting on deficiencies and making recommendations to those deficiencies;
• An internal financial attestation process in support of certification by the DM and CFO, whereby senior departmental executives who report to the DM attest that they have maintained an effective system of internal control over financial reporting in their area of responsibility;
• A Defence Ethics Program which is a comprehensive values-based program put in place to meet the needs of the department and the Canadian Armed Forces (CAF), at both the individual and the organizational levels;
• A comprehensive Fraud Risk Management program that is designed to protect the department’s resources from fraud, waste and abuse through a prevention and detection framework;
• Regular monitoring of financial management practices by Internal Audit as well as the provision of related assessments of results and action plans to the DM, the Departmental Audit Committee (DAC) and departmental senior management; and
• A DAC that has oversight on the adequacy and functioning of the department’s risk management, control and governance framework and processes.

2.2 Service arrangements relevant to financial statements

The department relies on other organizations for the processing of certain transactions that are recorded in its Consolidated Departmental Financial Statements as follows:

(i) Common Arrangements:

• Public Services and Procurement Canada (PSPC) centrally administers the payments of civilian salaries, pension services to both civilian and military members, and the procurement of goods and services as per the delegation of authority of other government organizations. PSPC also administers the Receiver General Central Systems used to issue cheques on behalf of the department;
• The Treasury Board of Canada Secretariat provides information used to calculate various accruals and allowances, such as the accrued severance liability;
• Shared Services Canada provides information technology infrastructure services and support to the department, such as but not limited to, email, data centres and network services; and
• The department of Justice provides legal services to the department.

Readers of this annex may refer to the annexes of the above-noted departments for a greater understanding of the systems of internal control over financial reporting related to these specific services.

(ii) Specific Arrangements:

The department relies on other external service providers for the processing of certain transactions or information that are recorded in its financial statements, as follows:

• Defence Construction Canada provides contracting, construction contract management and payment processing services as well as infrastructure support to the department in accordance with the Memorandum of Understanding between the two organizations and as per the department’s Delegation of Authorities instrument; and
• The Office of the Superintendent of Financial Institutions provides the department with the accrued severance liability amount for the CAF.

3. Departmental assessment results for 2020–21 fiscal year

The department is one of the largest and most complex organizations in the Government of Canada and is managed in a highly decentralized operating and financial environment. There are three separate payroll systems, two of which are currently undergoing major transformations, which annually expend more than $10 billion in salaries and benefits to more than 100,000 Regular and Reserve Force military members as well as civilian employees. Furthermore, there are two major Enterprise Resource Planning systems, the Defence Resource Management Information System (DRMIS) and the Human Resource Management System (HRMS), which support the business and extend to every operational area of the department. ICFR ongoing monitoring assessments involve the review and testing of previously identified key controls within business processes to confirm that the design of these controls continue to address key financial risks and that these controls continue to operate effectively.

The following table summarizes the status of the ongoing monitoring activities according to the previous fiscal year’s rotational plan.

Progress during fiscal year 2020–21

Previous year’s rotational ongoing monitoring plan for current year	Status
IT General Controls (ITGCs)	Design effectiveness assessment completed; remediation action plans under development
Entity Level Controls (ELCs)	Design effectiveness assessment completed; remediation action plans under development
Inventory	Completed as planned; remediation action plans under development
Civilian Payroll	Completed as planned; remediation action plans under development
Financial Reporting and Close	Completed as planned; remediation action plans under development
Impact of COVID-19 on key financial controls	Additional assessment completed as required by the Treasury Board of Canada Secretariat, through the 2020 Management Accountability Framework (MAF)

The key findings from the current year’s assessment activities are summarized below:

3.1 New or significant amended key controls

The ongoing challenges presented by the government pay system, Phoenix, continue to require changes to internal pay processes and controls; as a result, the implementation of these controls and associated quality assurance programs continue. A full assessment of the civilian payroll process was conducted in fiscal year 2020–21 as per the department’s rotational ongoing monitoring plan. Remediation action plans are currently being developed.

The COVID-19 global pandemic introduced unique challenges to the department. An assessment of the impact of COVID-19 on key financial controls was conducted fiscal year 2020–21 whereby the most significant impact to the Department of the COVID-19 pandemic was the move towards, or an increased use of, electronic approvals. However, the assessment concluded that the key controls were not significantly or negatively impacted.

3.2 Ongoing monitoring program

Ongoing monitoring assessments are comprised of two components: confirming controls continue to mitigate the intended risks (design effectiveness) and confirming that the controls are operating as intended (operating effectiveness).

In the fiscal year 2019–20 Annex to the Statement of Management Responsibility, the department committed to finalizing the work of ITGCs and ELCs in fiscal year 2020–21. Both have now been finalized.

As part of the ITGC work, the department finalized its initial design effectiveness testing of the Central Computerized Pay System (CCPS) and Guardian, the payroll and resource management systems for military members and the Human Resources Management system (HRMS) for civilians. Most of the IT general controls of those systems have been found to be designed effectively and management action plans are being developed to address the control gaps identified.

The ELCs design effectiveness assessment was also finalized.  It encompassed a review of the department’s controls that support the accuracy and completeness of the departmental financial statements. ELCs include controls that permeate across the department and set the tone from the top, which sets an organization’s culture, guiding values and ethical climate. The assessment concluded that all controls are designed effectively, however one control deficiency was noted related to the governance and oversight of the ICFM program.  Management action plans are being developed to address the control deficiency identified.

The department completed its assessments of financial reporting and close, inventory, and civilian payroll. No new control gaps were identified as a result of the monitoring. However, two common themes emerged: (a) automated controls were found to be more effective than manual controls, and, (b) lack of consistent documentation being available and retained to demonstrate the performance of the controls. Management action plans are being developed to address the control gaps identified.

In addition, the Treasury Board of Canada Secretariat, through the 2020 Management Accountability Framework (MAF), required departments to assess the impact of the COVID-19 pandemic on the key controls within the department’s system of internal controls over financial reporting (ICFR). The global COVID-19 pandemic impacted DND’s workforce when the business continuity plan (BCP) was activated which resulted in the vast majority of the Defence Team working remotely. The overall conclusion, as a result of the COVID-19 assessments, is that ICFR controls were not significantly or negatively impacted by the COVID-19 pandemic.

4. Departmental action plan for the next fiscal year and subsequent years

The department’s rotational ongoing monitoring plan for the next three fiscal years, based on an annual ICFM scoping and risk assessment, is shown in the following table.

Rotational Ongoing Monitoring Plan

Key Control Areas	2021–22	2022–23	2023–24
Entity Level Controls	Yes	No	No
IT General Controls	Yes	Yes	Yes
Financial Reporting and Close	Yes	Yes	Yes
Procure to Payment	Yes	No	Yes
Inventory	No	Yes	No
Capital Assets	No	Yes	No
Real Property	Yes	No	No
Civilian Payroll	No	No	Yes
Military Regular Force Payroll	Yes	No	Yes
Military Reserve Force Payroll	Yes	No	No