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 – Risk Management
  • Note 14 – Prepaid expenses
  • Note 15 – Inventory
  • Note 16 – Tangible capital assets
  • Note 17 – Contingent liabilities
  • Note 18 – Contractual obligations and contractual rights
  • Note 19 – Related party transactions
  • Note 20 – Segmented information
  • Note 21 – Subsequent events
  • Note 22 – Adjustments to prior year's results
  • Note 23 – 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, 2023

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, 2023, 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), 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, 2023 was completed in accordance with the Treasury Board Policy on Financial Management and the results and action plans 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 also 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: 12 September 2023

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

(in thousands of dollars)	2023	2022 Restated (note 22)
Liabilities
Accounts payable and accrued liabilities (note 4)	5,196,920	4,280,150
Vacation pay and compensatory leave	258,285	245,126
Environmental liabilities (note 5)	3,361,301	3,572,529
Deposits and trust accounts (note 6)	4,324	3,580
Deferred revenue (note 7)	3,755	3,913
Canadian Forces pension and insurance accounts (note 8)	595,971	525,185
Lease obligations for tangible capital assets (note 9)	34,145	67,609
Employee future benefits (note 10)	743,519	771,306
Total liabilities	10,198,220	9,469,398
Financial assets
Due from Consolidated Revenue Fund	4,301,383	2,767,164
Accounts receivable (note 11)	397,666	394,240
Loans and advances (note 12)	45,526	46,774
Total gross financial assets	4,744,575	3,208,178
Financial assets held on behalf of government
Accounts receivable (note 11)	(13,215)	(24,707)
Total financial assets held on behalf of government	(13,215)	(24,707)
Total net financial assets	4,731,360	3,183,471
Departmental net debt	5,466,860	6,285,927
Non-financial assets
Prepaid expenses (note 14)	1,926,069	1,518,641
Inventory (note 15)	4,840,983	4,965,752
Tangible capital assets (note 16)	41,576,418	39,662,014
Total non-financial assets	48,343,470	46,146,407
Departmental net financial position	42,876,610	39,860,480

Contingent liabilities (note 17)

Contractual obligations and contractual rights (note 18)

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

Date: 12 September 2023

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

(in thousands of dollars)	2023 Planned ResultsFootnote *	2023 Actual	2022 Actual Restated (note 22)
Expenses
Operations	793,658	2,040,832	951,409
Ready Forces	10,602,883	10,838,567	10,312,503
Defence Team	3,978,086	4,150,214	3,857,623
Future Force Design	632,513	798,324	753,110
Procurement of Capabilities	4,269,288	2,205,620	1,807,017
Sustainable Bases, Information Technology Systems and Infrastructure	4,113,784	3,754,522	3,817,961
Internal services	1,000,785	1,173,878	1,420,427
Total expenses	25,390,997	24,961,957	22,920,050
Revenues
Sale of goods and services	371,134	355,205	338,801
Gains on disposals of assets	19,350	21,642	21,044
Other	23,835	14,245	26,465
Interest and gains on foreign exchange	14,594	13,432	18,402
Revenues earned on behalf of government	(20,923)	(17,529)	(36,201)
Total revenues	407,990	386,995	368,511
Net cost of operations before government funding and transfers	24,983,007	24,574,962	22,551,539
Government funding and transfers
Net cash provided by government	0	25,157,381	24,467,050
Change in due from Consolidated Revenue Fund	0	1,534,220	(484,375)
Services provided without charge by other government departments (note19)	0	899,539	897,986
Transfer of Accounts receivable to Public Services and Procurement Canada	0	0	(10)
Transfer of assets and liabilities from (to) other government departments (note16)	0	(119)	21
Transfer of salary overpayments (to) from other government departments	0	71	93
Net cost of operations after government funding and transfers		(3,016,130)	(2,329,226)
Departmental net financial position — beginning of year		39,860,480	37,531,254
Departmental net financial position — end of year		42,876,610	39,860,480

Segmented information (note 20)

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)	2023 Actuals	2022 Actuals Restated (note 22)
Net cost of operations after government funding and transfers	(3,016,130)	(2,329,226)
Change due to tangible capital assets
Acquisition of tangible capital assets (note 16)	4,163,227	3,896,744
Amortization of tangible capital assets (note 16)	(2,012,941)	(1,858,402)
Proceeds from disposal of tangible capital assets	(16,205)	(19,230)
Loss on disposals of tangible capital assets	(2,571)	(74,454)
Adjustments of tangible capital assets	(216,987)	333,454
Transfer (to) from other government departments (note 16)	(119)	21
Total change due to tangible capital assets	1,914,404	2,278,133
Change due to inventory	(124,769)	(216,623)
Change due to prepaid expenses	407,428	246,518
Net increase in departmental net debt	(819,067)	(21,198)
Departmental net debt — beginning of year	6,285,927	6,307,125
Departmental net debt — end of year	5,466,860	6,285,927

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)	2023	2022 Restated (note 22)
Operating activities
Net cost of operations before government funding and transfers	24,574,962	22,551,539
Non-cash items included in net cost of operations:
Amortization of tangible capital assets (note 16)	(2,012,941)	(1,858,402)
Loss on disposals of tangible capital assets	(2,571)	(74,454)
Adjustments of tangible capital assets	(216,987)	333,454
Services provided without charge by other government departments (note 19)	(899,539)	(897,986)
Transition payments for implementing salary payments in arrears	0	10
Variations in Statement of Financial Position:
Increase in accounts receivables	14,918	4,566
(Decrease) in loans and advances	(1,248)	(1,248)
Increase in prepaid expenses	407,428	246,518
Decrease in inventory	(124,769)	(216,623)
(Increase) decrease in accounts payable and accrued liabilities	(916,770)	388,178
(Increase) decrease in vacation pay and compensatory leave	(13,159)	32,538
(Increase) decrease in environmental liabilities and asset retirement obligations	211,228	(133,154)
(Increase) decrease in deposits and trust accounts	(744)	621
Decrease in deferred revenue	158	2,714
(Increase) decrease in Canadian Forces pension and insurance accounts	(70,786)	202,308
Decrease in employee future benefits	27,787	36,243
Transfer of salary overpayments to (from) other government departments	(71)	(93)
Cash used by operating activities	20,976,896	20,616,729
Capital investing activities
Acquisitions of tangible capital assets (note 16)	4,163,227	3,896,744
Proceeds from disposal of tangible capital assets	(16,205)	(19,230)
Cash used in capital investing activities	4,147,022	3,877,514
Financing activities
Lease payments for tangible capital assets	33,464	(27,193)
Cash used by financing activities	33,464	(27,193)
Net cash provided by Government of Canada	25,157,381	24,467,050

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), the presentation and result using the stated accounting policies do not result in any significant differences from PSAS.

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 2022–23 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 2022–23 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 and the Communications Security Establishment 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, he 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

1. (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)).
2. (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) Financial Instruments

A contract establishing a financial instrument creates, at its inception, rights, and obligations to receive or deliver economic benefits. The financial assets and financial liabilities portray these rights and obligations in the financial statements. The Department recognizes a financial instrument when it becomes a party to a financial instrument contract.

Financial instruments consist of accounts and loans receivable, and accounts payable and accrued liabilities.
All financial assets and liabilities are recorded at cost or amortized cost. Any associated transaction costs are added to the carrying value upon initial recognition.

For financial instruments measured at amortized cost, the effective interest method is used to determine interest revenue or expense.

Accounts and loans receivable are stated at the lower of cost and net recoverable value. When necessary, an allowance for valuation is recorded to reduce the carrying value of accounts and loans receivable to amounts that approximate their net recoverable value.

(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 15).

(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 16. 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	10–50 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 16).

Tangible capital assets do not include immovable assets located on reserves as defined in the Indian Act, works of art, museum collection and Crown land to which no acquisition cost is attributable, and intangible assets.

(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 17).

(l) Environmental liabilities and asset retirement obligations

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. If the likelihood of the government’s responsibility is not determinable, a contingent liability is disclosed in the notes to the consolidated statements.

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.

An asset retirement obligation is recognized when all of the following criteria are satisfied: there is a legal obligation to incur retirement costs in relation to a tangible capital asset, the past event or transaction giving rise to the retirement liability has occurred, it is expected that future economic benefits will be given up and a reasonable estimate of the amount can be made. The costs to retire an asset are normally capitalized and amortized over the asset’s estimated remaining useful life. An asset retirement obligation may arise in connection with a tangible capital asset that is not recognized or no longer in productive use. In this case, the asset retirement cost would be expensed. The measurement of the liability is the government’s best estimate of the amount required to retire a tangible capital asset.

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.

The recorded liabilities are adjusted each year, for present value adjustments, inflation, new obligations, changes in management estimates and actual costs incurred.

(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. The Government has elected to recognize gains and losses resulting from foreign currency translation, including those arising prior to settlement or derecognition of the financial instrument, directly on the Statement of Operations and Departmental Net Financial Position according to the activities to which they relate. 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. The estimates are based on facts and circumstances, historical experience, general economic conditions and reflect the Government’s best estimate of the related amount at the end of reporting period. The most significant items where estimates are used are contingent liabilities, environmental liabilities and asset retirement obligations, 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 estimated. 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.

Asset retirement obligations (ARO) are recognized and measured in accordance with applicable accounting standards.  As this is the first year of implementation, there are inherent uncertainties related to identifying and quantifying obligations, assessing the timing and magnitude of future cash flows, and determining appropriate discount rates. The recorded asset retirement obligations disclosed in note 5 of these financial statements may be subject to revisions in subsequent periods as additional information becomes available and as the estimation process is refined. Management will continue to evaluate and update measurements as necessary based on new developments and changing circumstances.

(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	2023	2022
Net cost of operations before government funding and transfers	24,574,962	22,551,539
Adjustments for items affecting net cost of operations but not affecting authorities:
Amortization of tangible capital assets (note 16)	(2,012,941)	(1,858,402)
Services provided without charge by other government departments (note 19)	(899,539)	(897,986)
Decrease in employee future benefits	27,787	36,243
Refund of previous years' expenses	70,219	96,608
(Increase) / decrease in vacation pay and compensatory leave	(13,159)	32,538
Loss on disposals of capital assets	(2,571)	(74,454)
Adjustments to tangible capital assets	(216,987)	333,454
Refund of program expenditures	22,229	18,185
Decrease in deferred revenue	158	2,714
Decrease in accrued liabilities not charged to authorities	671,849	109,188
Bad debt expense	796	(1,920)
Decrease / (increase) in environmental liabilities and asset retirement obligations (note 5)	211,228	(133,154)
Proceeds from sale of assets	(16,205)	(19,230)
Miscellaneous	35,199	30,520
Total items affecting net cost of operations but not affecting authorities	(2,121,937)	(2,325,696)
Adjustments for items not affecting net cost of operations but affecting authorities:
Acquisition of tangible capital assets (note 16)	4,163,227	3,896,744
Decrease / (increase) in lease obligations for tangible capital assets	33,464	(27,193)
Decrease in inventory purchases net of usage and adjustments	(124,769)	(216,623)
Increase in prepaid expenses	407,428	246,518
Transition payments for implementing salary payments in arrears	0	10
Revenues collected from prior year receivables	(2,215)	846
Total items not affecting net cost of operations but affecting authorities	4,477,135	3,900,302
Current year authorities used	26,930,160	24,126,145

(b) Authorities provided and used

(in thousands of dollars)	2023	2022
Vote 1 – Operating expenditures	19,020,028	18,315,760
Vote 5 – Capital expenditures	5,944,136	5,797,368
Vote 10 – Grants & contributions	1,326,255	344,013
Vote 15 – Long-term disability and life insurance plan for members of the Canadian Forces	446,728	532,282
Vote 20 – Debt write-off	0	0
Vote 25 – Debt forgiveness	0	0
Statutory amounts	1,763,886	1,645,786
Less:
Authorities available for future years	(1,461,811)	(2,282,184)
Frozen allotments and other lapses	(109,062)	(226,880)
Current year authorities used	26,930,160	24,126,145

4. Accounts payable and accrued liabilities

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

(in thousands of dollars)	2023	2022
Accounts payable - other government departments and agencies	106,525	110,674
Accounts payable - external parties	2,939,969	2,541,551
Total accounts payable	3,046,494	2,652,225
Accrued liabilities	2,150,426	1,627,925
Total accounts payable and accrued liabilities	5,196,920	4,280,150

5. Environmental liabilities and asset retirement obligations

Environmental liabilities and asset retirement obligations include the following:

(in thousands of dollars)	2023	2022
Total liabilities for contaminated sites	614,815	589,636
Other environmental liabilities (UXO sites)	135,625	139,962
Asset retirement obligations	2,610,861	2,842,931
Total environmental liabilities and asset retirement obligations	3,361,301	3,572,529

(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 identified on federal lands, allowing them to be classified, managed and recorded in a consistent manner. This systematic approach aids in identification of the high risk sites in order to prioritize allocation of limited resources to those sites which pose the highest risk to the environment and human health."

The department has identified approximately 852 sites (861 sites in 2021–22) where contamination may exist and assessment, remediation and monitoring may be required. Of these, the department has identified 279 sites (301 sites in 2021–22) where action is required and for which a gross liability of $580.2 million ($561.7 million in 2021–22) has been recorded. This liability estimate has been determined based on site assessments performed by 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 145 unassessed sites (127 in 2021–22) where a liability estimate of $34.7 million ($28.0 million in 2021–22) has been recorded using this model.

These two estimates combined totaling $614.8 million ($589.6 in 2021–22), represents 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 428 sites (433 sites in 2021–22), 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 likely 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, and the total undiscounted future expenditures as at March 31, 2023, and March 31, 2022.  When the liability estimate is based on a future cash requirement, the amount is adjusted for inflation using an expected CPI rate of 2.0% (2.0% in 2021–22). 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 2023 rates range from 4.50% (1.88% in 2022) for a 1 year term to 3.01% (2.35% in 2022) for a 30 or greater year term.

2023

Nature and source (in thousands of dollars)	Total number of sites	Number of sites with a liability	Estimated liability	Estimated undiscounted expenditure
Military and Former Military SitesFootnote 1	394	188	430,620	497,931
Fuel Related PracticesFootnote 2	229	107	50,387	55,685
Landfill / Waste SitesFootnote 3	100	48	22,226	25,233
Engineering Assets / Air and Land TransportationFootnote 4	8	2	451	493
Marine Facilities / Aquatic SitesFootnote 5	15	5	6,696	7,601
Office / Commercial / Industrial OperationsFootnote 6	45	16	12,086	14,065
OtherFootnote 7	61	58	92,348	101,230
Totals	852	424	614,814	702,238

2022

Nature and source (in thousands of dollars)	Total number of sites	Number of sites with a liability	Estimated liability	Estimated undiscounted expenditure
Military and Former Military SitesFootnote 1	360	178	420,145	468,436
Fuel Related PracticesFootnote 2	249	110	40,479	44,629
Landfill / Waste SitesFootnote 3	114	59	27,966	30,625
Engineering Assets / Air and Land TransportationFootnote 4	8	2	454	478
Marine Facilities / Aquatic SitesFootnote 5	16	4	1,577	1,690
Office / Commercial / Industrial OperationsFootnote 6	48	18	12,009	13,138
OtherFootnote 7	66	57	87,006	91,848
Totals	861	428	589,636	650,844

Also during the year 72 sites (51 sites in 2021–22) 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 522 unexploded explosive ordnance (UXO) suspected sites (528 sites in 2021–22) for which clearance action may be necessary. Of these sites, 34 sites (29 sites in 2021–22) are confirmed UXO affected sites. Based on the department’s best estimates, a liability of $135.6 million ($140.0 million in 2021–22) has been recorded for clearance action on 7 sites of the confirmed UXO sites (5 sites in 2021–22). Remediation has been done on 22 of the sites (11 of the sites in 2021–22). The remaining 493 suspected sites (512 sites in 2021–22) 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 16 sites, indeterminable for 36 sites and unlikely for 441 sites.

(c) Asset retirement obligations

The Department has recorded asset retirement obligations for the removal of asbestos and other hazardous materials in buildings and activities related to demilitarization and disarmament.

The changes in asset retirement obligations during the year are as follows: 

(in thousands of dollars)	2023			2022
	Asbestos and other hazardous material in buildings	Activities related to demilitarization and disarmament	Total	Restated (note 22)
Opening balance	1,999,234	843,697	2,842,931	2,763,348
Liabilities incurred	0	14,507	14,507	15,764
Liabilities settled	(1,415)	(656)	(2,071)	0
Revisions in estimates	(215,332)	(98,075)	(313,407)	0
Accretion expenseFootnote 1	48,555	20,346	68,901	63,819
Closing balance	1,831,042	779,819	2,610,861	2,842,931

The undiscounted future expenditures, adjusted for inflation, for the planned projects comprising the liability are $4,424,213 thousand ($4,429,276 thousand as at March 31, 2022).

Key assumptions used in determining the provision are as follows:

	2023	2022
Discount rate	2.84 - 4.50%	1.55 - 2.47%
Discount period and timing of settlement	1 to 48 years	2 to 49 years
Long-term rate of inflation	2.00%	2.00%

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

6. Deposits and trust accounts

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

(in thousands of dollars)	2023	2022
Contractor security deposits
Deposits, beginning of year	3,056	3,304
Deposits received	3,965	3,535
Refunds	(3,258)	(3,783)
Contractor security deposits, end of year	3,763	3,056
Trust account, estates — Armed ServicesFootnote *
Trust account, beginning of year	524	897
Funds received	1,812	2,014
Payments	(1,775)	(2,387)
Trust account, estates — Armed Services, end of year	561	524
Closing balance	4,324	3,580

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)	2023	2022
Foreign governments
Beginning of year	0	2,214
Revenue recognized	0	(2,214)
Foreign governments, end of year	0	0
Other specified purposes
Beginning of year	3,913	4,413
Funds received	(167)	1,247
Revenue recognized	9	(1,747)
Other specified purposes, end of year	3,755	3,913
Closing balance	3,755	3,913

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 www.pspib.ca.

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, 2023, the total refundable tax transferred amounts to $509.9 million ($492.7 million as at March 31, 2022).

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)	2023	2022
Canadian Forces Pension Fund Account
Beginning of year	(44,283)	202,664
Funds received and other credits	1,542,199	1,523,051
Payments and other charges	(1,337,888)	(1,284,534)
Transfers to the Public Sector Pension Investment Board	(135,000)	(485,464)
Canadian Forces Pension Fund Account, end of year	25,028	(44,283)
Reserve Force Pension Fund Account
Beginning of year	(98,755)	(132,884)
Funds received and other credits	97,052	102,757
Payments and other charges	(108,795)	(68,628)
Reserve Force Pension Fund Account, end of year	(110,498)	(98,755)
Retirement Compensation Arrangements Account
Beginning of year	498,612	486,815
Funds received and other credits	48,648	50,111
Payments and other charges	(32,460)	(38,314)
Retirement Compensation Arrangements Account, end of year	514,800	498,612
Regular Force Death Benefit Account
Beginning of year	169,611	170,898
Funds received and other credits	28,185	28,273
Payments and other charges	(31,155)	(29,560)
Regular Force Death Benefit Account, end of year	166,641	169,611
Closing balance	595,971	525,185

8a. Canadian Forces Superannuation Account

The Superannuation Account was created in order to record notional transactions for service prior to April 1, 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)	2023	2022
Canadian Forces Superannuation Account
Beginning of year	45,302,622	46,321,978
Funds received and other credits	1,409,099	1,516,893
Payments and other charges	(2,553,898)	(2,536,249)
Canadian Forces Superannuation Account, end of year	44,157,823	45,302,622

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 $220 million and accumulated amortization of $174 million as at March 31, 2023 ($220 million and $166 million respectively as at March 31, 2022). The obligations for the upcoming years include the following:

(in thousands of dollars)	Total future minimum lease payments	Imputed interest (0.86% to 11.89%)	Balance of obligations 2023	Balance of obligations 2022
Buildings	42,472	(8,327)	34,145	67,609
Total	42,472	(8,327)	34,145	67,609

Future minimum lease payments

(in thousands of dollars)	2023–24	2024–25	2025–26	2026–27	2027–28	2028–29 and thereafter	Total
Buildings	11,267	9,197	7,592	4,023	4,023	6,370	42,472
Total	11,267	9,197	7,592	4,023	4,023	6,370	42,472

The department has also entered into agreements for buildings under capital leases (refer to note 16). 

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 2022–23 expense amounts to $208.0 million ($208.0 million in 2021–22). For Group 1 members, the expense represents approximately 1.02 times (1.01 times in 2021–22) the contributions by employees and, for Group 2 members, approximately 1.00 times (1.00 times in 2021–22) 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 2022–23 expense amounts to $1,014.7 million ($1,031.3 million in 2021–22) which represents approximately 1.73 times (1.73 times in 2021–22) the contributions by employees.

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 $17.4 million ($17.4 million in 2021–22) to fund the deficit in the Reserve Force Pension Fund Account until the deficit is funded as per the triennial funding valuation.

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. By March 31, 2023, substantially all settlements for immediate cash out were completed. 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)	2023	2022
Public Service Employees
Accrued benefit obligation, beginning of year	66,145	76,068
Expenses for the year	(2,068)	153
Benefits paid during the year	(6,995)	(10,076)
Accrued benefit obligation, end of year	57,082	66,145
Canadian Armed Forces Members
Accrued benefit obligation, beginning of year	705,161	731,481
Expenses for the year	62,156	35,725
Benefits paid during the year	(80,880)	(62,045)
Accrued benefit obligation, end of year	686,437	705,161
Total accrued benefit obligation, end of year	743,519	771,306

11. Accounts receivable

The following table presents details of accounts receivable:

(in thousands of dollars)	2023	2022
Receivables - External parties	304,973	276,213
Receivables - Other government departments and agencies	141,328	167,511
Subtotal	446,301	443,724
Less: allowance for doubtful accounts on receivables from external parties	48,635	49,484
Gross accounts receivable	397,666	394,240
Accounts receivable held on behalf of Government	(13,215)	(24,707)
Net accounts receivable	384,451	369,533

The following table provides an aging analysis of accounts receivable from external parties and the associated valuation allowances used to reflect their net recoverable value.

(in thousands of dollars)	2023	2022
Accounts receivable from external parties
Not past due	59,155	46,614
Number of days past due
1 to 30	2,051	1,826
31 to 60	1,453	789
61 to 90	746	1,377
91 to 365	22,097	23,138
Over 365	219,471	202,469
Subtotal	304,973	276,213
Less: Valuation allowance	48,635	49,484
Total	256,338	226,729

12. Loans and advances

The following table presents details of loans and advances:

(in thousands of dollars)	2023	2022
Imprest accounts, standing advances and authorized loans to CAF members	45,526	46,774
Total loans and advances	45,526	46,774

13. Risk Management

The Department has exposure to the following risk from its use of financial instruments:

Credit Risk

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss.

The Department’s maximum exposure to credit risk at March 31, 2023 and March 31, 2022 is the carrying amount of its financial assets.

The Department has determined that there is no significant concentration of credit risk related to accounts receivable from external parties. An analysis of the age of these financial assets and the associated valuation allowances used to reflect these accounts at their net recoverable value is disclosed in note 11.

14. Prepaid expenses

The following table presents details of prepaid expenses:

(in thousands of dollars)	2023	2022Footnote *
Foreign Military Purchases	1,095,155	725,197
Sea Sparrow Missiles	509,146	528,412
Mercury Global Military Wideband Satellite Communications Project	131,602	147,084
Other purchases	71,777	23,317
NATO Flying Training Canada (NFTC)	70,366	73,009
Joint Support Ship (JSS)	37,000	10,000
Building rentals	11,023	11,622
Total prepaid expenses	1,926,069	1,518,641

15. 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)	2023	2022
Ammunition, bombs and missiles	2,595,627	2,649,704
Contractor held inventory	488,050	482,219
Uniforms and clothing	417,198	433,588
Ship spares	295,032	288,656
Communication, electrical parts/accessories and informatics equipment	210,375	206,695
Medical equipment	192,734	174,964
Engineering, test and technical equipment and machine tools	173,134	199,407
Metal	169,458	161,393
Land equipment spares	78,046	83,527
Fuel, petroleum and oil	57,943	52,625
Miscellaneous	45,826	88,544
Sonobuoys, parts and accessories	35,370	33,099
Lighting, distribution, control equipment and parts	26,281	21,826
Electric generators and air conditioning units	19,930	17,480
Training equipment and supplies	18,175	56,759
Packaging, preserving and storing material	17,804	15,266
Total inventories	4,840,983	4,965,752

The cost of consumed inventory recognized as an expense in the Consolidated Statement of Operations and Departmental Net Financial Position is $765.1 million in 2022–23 ($783.3 million in 2021–22).

16. 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	87,341	745	0	0	88,086
Buildings	12,340,602	483,830	0	(21,828)	12,802,604
Works and infrastructure	2,964,789	213,736	0	(8,147)	3,170,378
Subtotal	15,392,732	698,311	0	(29,975)	16,061,068
Machinery and equipment
Machinery and equipment	7,228,145	54,390	130,346	(9,896)	7,402,985
Informatics hardware	5,886,623	34,029	310,097	(3,550)	6,227,199
Informatics software	1,149,299	(8,348)	1,887	0	1,142,838
Arms and weapons	7,163,720	114,576	66,352	(20,676)	7,323,972
Other equipment	108,699	899	7,470	(1,499)	115,569
Subtotal	21,536,486	195,546	516,152	(35,621)	22,212,563
Ships, aircraft and vehicles
Ships and boats	14,350,831	512,736	15,224	(3,168)	14,875,623
Aircraft	22,299,001	848,383	20,712	(8,362)	23,159,734
Non-military motor vehicles	1,217,972	2,826	46,657	(24,618)	1,242,837
Military vehicles	2,160,269	(18,503)	11,618	(52,499)	2,100,885
Other vehicles	426,857	(6,850)	12,494	(3,008)	429,493
Subtotal	40,454,930	1,338,592	106,705	(91,655)	41,808,572
Leasehold improvements
Leasehold improvements	239,920	3,061	0	0	242,981
Subtotal	239,920	3,061	0	0	242,981
Leased tangible capital assets
Buildings	129,736	0	0	0	129,736
Other equipment	48	0	0	0	48
Aircraft	90,229	0	0	0	90,229
Subtotal	220,013	0	0	0	220,013
Assets under construction
Buildings	2,141,936	(760,164)	697,413	0	2,079,185
Engineering works	526,355	(145,378)	125,664	0	506,641
Informatics software	200,283	(128,185)	6,313	0	78,411
Equipment	9,455,998	(1,500,181)	2,710,980	0	10,666,797
Subtotal	12,324,572	(2,533,908)	3,540,370	0	13,331,034
Gross tangible capital assets	90,168,653	(298,398)	4,163,227	(157,251)	93,876,231

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

The department has $5 million ($81 million in 2021–22) in net book value of capital assets with an original acquisition cost of $1,290 million ($1,239 million in 2021–22) that have been declared surplus. These assets have been written down to their net realizable value in the Consolidated Statement of Financial Position.

17. 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 $11.1 million ($1.1 million in 2021–22) at March 31, 2023.

18. 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)	2023–24	2024–25	2025–26	2026–27	2027–28 and thereafter	Total
Tangible Capital Assets	4,668,073	2,465,989	1,589,180	1,124,744	1,807,119	11,655,105
Purchases	3,951,885	3,442,649	2,452,658	1,929,694	5,903,854	17,680,740
Total	8,619,958	5,908,638	4,041,838	3,054,438	7,710,973	29,335,845

(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. 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)	2023–24	2024–25	2025–26	2026–27	2027–28	2028–29 and thereafter	Total Footnote 1
Support services	0	0	0	0	0	31,053	31,053
TotalFootnote 1	0	0	0	0	0	31,053	31,053

19. 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)	2023	2022
Employer's contributions to the health and dental plans paid by Treasury Board of Canada Secretariat	819,842	819,575
Accommodation provided by Public  Services and Procurement Canada	71,522	69,746
Worker's compensation coverage provided by Employment and Social Development Canada	4,650	5,226
Legal services provided by Department of Justice Canada	3,525	3,439
Total	899,539	897,986

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)	2023	2022
Expenses - other government departments and agencies	1,592,752	1,430,927
Revenues - other government departments and agencies	12,674	12,110

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

20. Segmented information

Presentation by segment is based on the Department’s core responsibility. 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 to the main core responsibilities, 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	410,151	5,887,839	2,925,102	276,988
Amortization	1,078	8,503	2,573	23,883
Professional and special services	54,447	1,292,074	382,643	211,899
Repair and maintenance	9,858	1,491,836	14,034	9,707
Expenses related to tangible assets	58,752	693,539	15,381	151,304
Materials and supplies	60,328	692,244	104,681	8,050
Transportation and communications	70,955	237,171	367,381	16,785
Other services	23,629	225,356	241,212	65,461
Accommodation	35,925	65,813	58,450	1,974
Equipment and other rentals	38,088	183,795	14,886	742
Utilities	1,252	1,801	586	288
Loss on disposals and write-offs and write-downs of assets	2,571	0	0	0
Bad debts	0	0	0	0
Interest on capital lease payments	0	0	110	0
Advertising, printing and related services	1,171	10,023	12,561	1,299
Other expenses	9,815	48,497	5,801	7,151
Total operating expenses	778,020	10,838,491	4,145,401	775,531
Transfer payments
Transfers to other countries and international organizations	1,259,712	21	0	14,198
Transfers to other levels of government	0	0	0	0
Transfers to non-profit organizations	3,100	10	4,166	8,595
Transfers to individuals	0	45	647	0
Total transfer payments	1,262,812	76	4,813	22,793
Total expenses	2,040,832	10,838,567	4,150,214	798,324
Revenues
Sale of goods and services	1,504	103,754	61,381	424
Gains on disposals of assets	43	1,420	0	3,188
Interest and gains on foreign exchange	733	4,637	197	344
Revenues earned on behalf of government	(1,333)	(596)	(1,007)	(252)
Other	0	57	1,013	0
Total revenues	947	109,272	61,584	3,704
Net cost from continuing operations	2,039,885	10,729,295	4,088,630	794,620

(in thousands of dollars)	Procurement of Capabilities	Sustainable Bases, Information Technology Systems and Infrastructure	Internal services	2023 Total	2022 Total Restated (note 22)
Operating expenses
Salary and employee benefits	243,786	1,786,737	586,191	12,116,794	11,664,824
Amortization	1,562,301	421,000	(6,397)	2,012,941	1,858,402
Professional and special services	126,112	642,388	117,268	2,826,831	2,669,302
Repair and maintenance	77,046	249,607	91,104	1,943,192	1,855,658
Expenses related to tangible assets	47,544	104,649	1,255	1,072,424	654,485
Materials and supplies	8,684	(9,674)	(7,852)	856,461	696,822
Transportation and communications	59,481	30,367	1,797	783,937	604,521
Other services	21,156	109,647	40,125	726,586	751,929
Accommodation	10,580	29,985	89,032	291,759	268,246
Equipment and other rentals	1,402	32,753	(36)	271,630	243,109
Utilities	38	218,795	(2,437)	220,323	191,896
Loss on disposals and write-offs and write-downs of assets	0	0	0	2,571	74,454
Bad debts	0	0	(796)	(796)	1,920
Interest on capital lease payments	0	2,626	0	2,736	2,817
Advertising, printing and related services	16	859	1,321	27,250	25,923
Other expenses	40,059	100,551	263,303	475,177	1,041,686
Total operating expenses	2,198,205	3,720,290	1,173,878	23,629,816	22,605,994
Transfer payments
Transfers to other countries and international organizations	7,415	0	0	1,281,346	264,426
Transfers to other levels of government	0	34,232	0	34,232	31,400
Transfers to non-profit organizations	0	0	0	15,871	17,317
Transfers to individuals	0	0	0	692	913
Total transfer payments	7,415	34,232	0	1,332,141	314,056
Total expenses	2,205,620	3,754,522	1,173,878	24,961,957	22,920,050
Revenues
Sale of goods and services	0	173,080	15,062	355,205	338,801
Gains on disposals of assets	645	8,234	8,112	21,642	21,044
Interest and gains on foreign exchange	2,218	112	5,191	13,432	18,402
Revenues earned on behalf of government	(254)	(329)	(13,758)	(17,529)	(36,201)
Other	0	1,049	12,126	14,245	26,465
Total revenues	2,609	182,146	26,733	386,995	368,511
Net cost from continuing operations	2,203,011	3,572,376	1,147,145	24,574,962	22,551,539

21. Subsequent events

On April 24, 2023, the Federal Court issued its decision to approve the settlement of the Logan Class Action regarding the calculation of CAF long term disability insurance benefits for disabled CAF veterans. As such, the administration of the settlement agreement will proceed resulting in the payment of retroactive long term disability benefits. The financial impact of this event on the department’s consolidated financial statements was assessed and the department’s best estimate of the contingent liability (Note 17) recognized within the consolidated financial statements reflects the information available as of August 2023.

On June 20, 2023, a National Defence CH-147F Chinook helicopter, carrying four CAF members on a training flight crashed into the Ottawa River near Garrison Petawawa. Two CAF members were killed and two others sustained minor injuries from the crash. The Royal Canadian Air Force's Directorate of Flight Safety is investigating the cause of the crash.

22. Adjustments to prior year’s results

As of April 1, 2022, the Public Sector Accounting Board (PSAB) approved recommendations for the adoption of an accounting standard specific to Asset Retirement Obligations that requires all public sector entities following Public Sector Accounting Standards (PSAS) to account for any Asset Retirement Costs at the time of construction or acquisition of the asset and to add those costs to the value of the asset.

This change has been applied retroactively and comparative information for 2021–22 has been restated. The effect of this adjustment is presented in the table below.

(in thousands of dollars)	2022 As previously stated	Effect of the adjustment	2022 Restated
Consolidated Statement of Financial Position
Environmental liabilities and asset retirement obligations	729,598	2,842,931	3,572,529
Total liabilities	6,626,467	2,842,931	9,469,398
Departmental net debt	3,442,996	2,842,931	6,285,927
Tangible capital assets	39,150,245	511,769	39,662,014
Total non-financial assets	45,634,638	511,769	46,146,407
Departmental net financial position	42,191,642	(2,331,162)	39,860,480
Consolidated Statement of Operations and Departmental Net Financial Position
Total expenses	22,856,231	63,819	22,920,050
Net cost from continuing operations	22,487,720	63,819	22,551,539
Net cost of operations after government funding and transfers	(2,393,045)	63,819	(2,329,226)
Departmental net financial position - beginning of year	39,798,597	(2,267,343)	37,531,254
Departmental net financial position - end of year	42,191,642	(2,331,162)	39,860,480
Consolidated Statement of Change in Departmental Net Debt
Net cost of operations after government funding and transfers	(2,393,045)	63,819	(2,329,226)
Acquisition of tangible capital assets	3,896,744	0	3,896,744
Amortization of tangible capital assets	1,858,402	0	1,858,402
Total change due to tangible capital assets	2,262,369	15,764	2,278,133
Departmental net debt — beginning of year	3,543,777	2,763,348	6,307,125
Departmental net debt - end of year	3,442,996	2,842,931	6,285,927
Consolidated Statement of Cash Flows
Net cost of operations before government funding and transfers	22,487,720	63,819	22,551,539
Amortization of tangible capital assets	(1,858,402)	0	(1,858,402)
Increase in environmental liabilities and asset retirement obligations	(53,571)	(79,583)	(133,154)
Cash used by operating activities	20,616,729	0	20,616,729
Acquisitions of tangible capital assets	3,896,744	0	3,896,744
Cash used by capital investing activities	3,877,514	0	3,877,514
Net cash provided by Government of Canada	24,467,050	0	24,467,050

23. Comparative information

Certain comparative figures have been reclassified to conform to the current’s year 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, 2023

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 core responsibilities can be found in the Departmental Plan for the 2023-24 fiscal year and the Departmental Results Report for the 2022–23 fiscal year.

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 Framework for Internal Control over Financial Management (ICFM), 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;
• • A directorate under the Chief Financial Officer (CFO) responsible for monitoring the effectiveness of ICFR and ICFM across the department, including reporting on deficiencies; and making recommendations for those deficiencies.

Governance and accountability structure that support the system of internal control:

• 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 ICFR 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 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 ICFR related to these specific services.

(ii) Specific Arrangements:

An external service provider, under contract with the Government of Canada, administers certain activities, on behalf of the department. The external service provider has the authority and responsibility to ensure that specific transactions and information are made in accordance with the terms and conditions set out by the department’s program and properly recorded in the financial statements. As a result, the control procedures of the external service provider are relied upon. The external service providers are 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 2022–23 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); both of which will also be undergoing major upgrades and 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 2022–23

Previous year’s rotational ongoing monitoring plan for current year	Status
IT General Controls (ITGCs)	DRMIS Design Effectiveness assessment completed; six remediation action plans under development
Capital Assets	Completed as planned; eight remediation action plans under development
Civilian Payroll & Civilian Payroll QA Program	Completed as planned; four remediation action plans under development
Inventory	Completed as planned; six remediation action plans under development
Project Management	Completed as planned; seven remediation action plans under development

This year’s assessment results support that the department’s internal controls continue to be designed and operating effectively. 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 2022–23 as per the department’s rotational ongoing monitoring plan. Remediation action plans are currently being developed.

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).

As part of the ITGC work, the department finalized its design effectiveness testing of the Defence Resource Management Information System (DRMIS). Most of the IT general controls for change management and end user access have been found to be designed effectively. Management action plans are being developed to address the control gaps identified.

The department completed its assessments of civilian payroll, inventory and stocktaking, and capital assets. 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.

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	2023–24	2024–25	2025–26
Entity Level Controls	No	No	No
IT General Controls	Yes	Yes	Yes
Financial Reporting and Close	Yes	No	No
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	No	Yes	No
Military Reserve Force Payroll	No	No	No