Financial Statements

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• Statement of Management Responsibility Including Internal Control over Financial Reporting
• Consolidated Statement of Financial Position (Unaudited)
• Consolidated Statement of Operations and Departmental Net Financial Position (Unaudited)
• Consolidated Statement of Change in Departmental Net Debt (Unaudited)
• Consolidated Statement of Cash Flows (Unaudited)
• Notes to the Consolidated Financial Statements (Unaudited)
  1. Authority and objectives
  2. Summary of significant accounting policies
  3. Parliamentary authorities
  4. Accounts payable and accrued liabilities
  5. Environmental liabilities and asset retirement obligations
  6. Revenues
  7. Deposits and trust accounts
  8. Deferred revenue
  9. Canadian Forces pension and insurance accounts
  10. Lease obligations for tangible capital assets
  11. Employee future benefits
  12. Accounts receivable
  13. Loans and advances
  14. Risk management
  15. Prepaid expenses
  16. Inventory
  17. Tangible capital assets
  18. Contingent liabilities
  19. Contractual obligations and contractual rights
  20. Related party transactions
  21. Segmented information
  22. Subsequent events
• 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, 2024
• Index

Statement of Management Responsibility Including Internal Control over Financial Reporting

Responsibility for the integrity and objectivity of the accompanying financial statements for the year ended March 31, 2024, 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).

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 key risks, to assess effectiveness of associated key controls, and to make any necessary adjustments, including remediating deficiencies.

A risk-based assessment of the system of ICFR for the year ended March 31, 2024 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.

The financial statements of the Department have not been audited.

Ottawa, Canada
October 28, 2024

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Consolidated Statement of Financial Position (Unaudited)

As at March 31

Contingent liabilities (note 18)

Contractual obligations and contractual rights (note 19)

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

Ottawa, Canada
October 28, 2024

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Consolidated Statement of Operations and Departmental Net Financial Position (Unaudited)

For the year ended March 31

Segmented information (note 21)

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

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

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Consolidated Statement of Cash Flows (Unaudited)

For the year ended March 31

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

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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.

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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 2023–24 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 2023–24 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 and deferred revenues

Revenues are comprised of revenues earned from non-tax sources. They include exchange transactions where goods or services are provided for consideration where a performance obligation exists, and non-exchange transactions where no performance obligations exist to provide a good or service. These transactions can be recurring or non-recurring in nature. Recurring transactions are viewed as ongoing, routine activities that form part of the normal course of operations and can be used to indicate if they can be reasonably expected to be earned again in future years.

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. Other revenues are recognized in the period the event giving rise to the revenue occurred.

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.
• 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.

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(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, recognizes the plans assets and the actuarial estimate of the liabilities in the Consolidated financial statements of the Government of Canada (for details, see Note 11(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 11(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.

See Note 14 Risk Management for risks related to the Department's financial instruments.

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)), 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 16).

(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 17. 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:

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 17).

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

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(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 18).

(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.

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 legally required 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 Consolidated 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. 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:

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

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

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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:

4. Accounts payable and accrued liabilities

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5. Environmental liabilities and asset retirement obligations

(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 allocate limited resources to those sites which pose the highest risk to human health and the environment.

The Department has identified approximately 748 sites (852 sites in 2022–23) where contamination may exist and assessment, remediation and monitoring may be required. Of these, the Department has identified 241 sites (279 sites in 2022–23) where action is required and for which a gross liability of $700.5 million ($580.2 million in 2022–23) has been recorded. This liability estimate has been determined based on site assessments performed by environmental experts.

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 (145 in 2022–23) where a liability estimate of $35.9 million ($34.7 million in 2022–23) has been recorded using this model.

These two estimates combined totaling $736.4 million ($614.8 million in 2022–23), 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 372 sites (428 sites in 2022–23), 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, 2024, and March 31, 2023. 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 2022–23). 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 2024 rates range from 4.59% (4.50% in 2023) for a 1 year term to 3.43% (3.01% in 2023) for a 30 or greater year term.

(1) Contamination associated with the operations of military and former military sites where activities such as fuel handling and storage activities, waste sites, metals/PCB-based paint used on buildings resulted in former or accidental contamination, e.g. petroleum hydrocarbons, PCBs, heavy metals. Sites often have multiple sources of contamination.

(2) Contamination primarily associated with fuel storage and handling, e.g. accidental spills related to fuel storage tanks or former fuel handling practices, e.g. petroleum hydrocarbons, polyaromatic hydrocarbons and BTEX (benzene, toluene, ethylbenzene, and xylenes).

(3) Contamination associated with former landfill/waste site or leaching from materials deposited in the landfill/waste site, e.g. metals, petroleum hydrocarbons, polyaromatic hydrocarbons, BTEX, other organic contaminants, etc.

(4) Contamination associated with the operations of engineered assets such as airports, railways and roads where activities such as fuel storage/handling, waste sites, firefighting training facilities and chemical storage areas resulted in former or accidental contamination, e.g. metals, petroleum hydrocarbons, polyaromatic hydrocarbons, BTEX and other organic contaminants. Sites often have multiple sources of contamination.

(5) Contamination associated with the operations of marine assets, e.g. port facilities, harbours, navigation systems, light stations, hydrometric stations, where activities such as fuel storage/handling, use of metal-based paint (e.g. on light stations) resulted in former or accidental contamination, e.g. metals, petroleum hydrocarbons, polyaromatic hydrocarbons and other organic contaminants. Sites often have multiple sources of contamination.

(6) Contamination associated with the operations of office/commercial/industrial facilities where activities such as fuel storage/ handling, waste sites and use of metal-based paint resulted in former or accidental contamination, e.g. metals, petroleum hydrocarbons, polyaromatic hydrocarbons, BTEX, etc. Sites often have multiple sources of contamination.

(7) Contamination from other sources, e.g. use of pesticides, herbicides, fertilizers at agricultural sites; use of PCBs, firefighting training areas, firing ranges and training facilities, etc.

Also during the year, 121 sites (72 sites in 2022–23) 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.

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(b) Other environmental liabilities

The Department has identified approximately 512 unexploded explosive ordnance (UXO) suspected sites (522 sites in 2022–23) for which clearance action may be necessary. Of these sites, 37 sites (34 sites in 2022–23) are confirmed UXO affected sites. Based on the Department's best estimates, a liability of $119.5 million ($135.6 million in 2022–23) has been recorded for clearance action on 8 sites of the confirmed UXO sites (7 sites in 2022–23). Following a risk assessment and review, 35 suspected sites (22 sites in 2022–23) were closed. The remaining 469 suspected sites (493 sites in 2022–23) are currently either still in the assessment phase or assessment has been completed, but a decision has not yet been made regarding risk mitigation or site closure. Of these sites, the obligation for clearance action is indeterminable for 51 sites and unlikely for 418 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.

(1) Accretion expense is the increase in the carrying amount of an asset retirement obligation due to the passage of time.

The undiscounted future expenditures, adjusted for inflation, for the planned projects comprising the liability are $4,581,682 thousand ($4,424,213 thousand as at March 31, 2023).

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

6. Revenues

The Department has the following major types of revenues: Sale of goods and services, gains on disposals of assets, miscellaneous revenues, interest and gains on foreign exchange, and revenues earned on behalf of the Government. Sale of goods and services, as well as gains on disposals of assets are recorded as performance obligations are satisfied. Miscellaneous revenues, as well as interest and gains on foreign exchange are recorded when they are earned.

(a) Disaggregated revenues

*Total non-recurring revenues of $23,683 thousand were incurred for the sale of the former Kapyong Barracks site in Winnipeg, Manitoba ($20,432 thousand total for sale and associated gain) and for the collection of legal costs ($3,251 thousand) from co-defendants in the Spieser Class Action Settlement.

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7. Deposits and trust accounts

* The trust account, estates – Armed Services was established to record the service estates of deceased members of the Canadian Forces pursuant to section 42 of the National Defence Act. Net assets of estates are distributed to legal heirs under the administration of the Judge Advocate General, in their capacity as Director of Estates.

8. Deferred revenue

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.

9. 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 please visit PSPIB.

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, 2024, the total refundable tax transferred amounts to $530.1 million ($509.9 million as at March 31, 2023).

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9a. 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.

10. 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 $238 million and accumulated amortization of $182 million as at March 31, 2024 ($220 million and $174 million respectively as at March 31, 2023). The obligations for the upcoming years include the following:

The Department has also entered into agreements for buildings under capital leases (refer to note 17).

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11. 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 2023–24 expense amounts to $225.1 million ($208.0 million in 2022–23). For Group 1 members, the expense represents approximately 1.02 times (1.02 times in 2022–23) the contributions by employees and, for Group 2 members, approximately 1.00 times (1.00 times in 2022–23) 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.

CAF members and the Department each contribute to the cost of the plans. The 2023–24 expense amounts to $4,465.1 million ($1,014.7 million in 2022–23) which represents approximately 6.38 times (1.73 times in 2022–23) the contributions by employees and includes a one-time actuarial adjustment of $3,298 million to eliminate the actuarial shortfall.

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 $4.1 million ($17.4 million in 2022–23) 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 an employee's eligibility, years of service and salary at termination of employment. However, since 2011, the accumulation of severance benefits for voluntary departures progressively ceased for substantially all employees. Employees subject to these changes were given the option to be paid the full or partial value of benefits earned to date or collect the full or remaining value of benefits upon departure from the public service. By March 31, 2024, 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:

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12. Accounts receivable

13. Loans and advances

14. 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, 2024 and March 31, 2023 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 12.

15. Prepaid expenses

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16. Inventory

The cost of consumed inventory recognized as an expense in the Consolidated Statement of Operations and Departmental Net Financial Position is $440.9 million in 2023–24 ($765.1 million in 2022–23).

17. Tangible capital assets

(1) Adjustments represent adjustments to asset pooled items (API), assets under construction put into use, transfer from/to the Department, reclassifications and adjustments from prior years.

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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 Department has $8 million ($5 million in 2022–23) in net book value of capital assets with an original acquisition cost of $1,280 million ($1,290 million in 2022–23) that have been declared surplus. These assets have been written down to their net realizable value in the Consolidated Statement of Financial Position.

18. 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 regarding 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 $22.7 million ($11.1 million in 2022–23) at March 31, 2024.

19. 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:

(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 future years and that can be reasonably estimated are summarized as follows:

*The disclosed contractual rights pertain to an In-Service Support Contract for helicopters that gives rise to royalties as well as consideration. In accordance with the contract, consideration will be provided in the form of a credit of $31 million that cannot be activated prior to 2023–24 and must be used by end of 2028–29. Also, the Department could earn royalties for future helicopter sales. As there are no anticipated sales as at March 31, 2024, this amount is currently reported as nil.

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20. 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(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.

(1) For the Consolidated Departmental Financial Statements, key management personnel (KMP) are defined as the Associate Deputy Ministers, Assistant Deputy Ministers (ADM) and other executives at the EX-4 and EX-5 level, including military equivalents.

(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:

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

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

21. 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:

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22. Subsequent events

On April 2, 2024, the Federal Court approved the notice of a proposed settlement of a class action for current and former members of the CAF who experienced racial discrimination and/or racial harassment in connection with their military service. A hearing to determine if the proposed settlement is fair, reasonable, and in the best interest of the Class Members was held on July 16, 2024 and the Federal Court will render its decision subsequent to the hearing. The financial impact of the notice of proposed settlement on the Department's consolidated financial statements was assessed and the Department's best estimate of the contingent liability (Note 18) recognized within the consolidated financial statements reflects the information available as of August 2024.

On April 8, 2024, the Government of Canada released a new defence policy for Canada – Our North, Strong and Free: A Renewed Vision for Canada, announcing investments of $8.1 billion over five years and $73 billion over 20 years. The impact of this new defence policy is expected to have a significant effect on the future operations of the Department that will be reflected in future years' financial statements.

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, 2024

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
• The DAC is an independent advisory committee to the deputy head. It is responsible to provide advice to the deputy head 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 Service 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.

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3. Departmental assessment results for 2023–24 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. 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 continues 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.

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

Some minor amendments were made to existing controls, to implement remediation action items, or to improve efficiency. Furthermore, the scope of some assessments was expanded, resulting in new key controls being assessed. These controls were all assessed for design and operating effectiveness. There were no significantly amended key controls in existing processes that required a reassessment.

3.2 Ongoing monitoring program

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

The Department completed its assessments of financial reporting and close, procure to payment, and real property. No new control gaps were identified as a result of the monitoring. However, three common themes emerged: (a) automated controls were found to be more effective than manual controls, (b) lack of consistent documentation being available and retained to demonstrate the performance of the controls, and (c) controls are generally designed effectively, but increased training and monitoring is required to ensure consistent application 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.

Index

• Accounts payable and accrued liabilities (note 4)
• Accounts receivable (note 12)
• Authority and objectives (note 1)
• Canadian Forces pension and insurance accounts (note 9)
• Contingent liabilities (note 18)
• Contractual obligations and contractual rights (note 19)
• Deferred revenue (note 8)
• Deposits and trust accounts (note 7)
• Employee future benefits (note 11)
• Environmental liabilities and asset retirement obligations (note 5)
• Inventory (note 16)
• Lease obligations for tangible capital assets (note 10)
• Loans and advances (note 13)
• Parliamentary authorities (note 3)
• Prepaid expenses (note 15)
• Related party transactions (note 20)
• Revenues (note 6)
• Risk management (note 14)
• Segmented information (note 21)
• Subsequent events (note 22)
• Summary of significant accounting policies (note 2)
• Tangible capital assets (note 17)

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