Quarterly Financial Report (QFR) for the Quarter Ended December 31, 2011

1. Introduction

This quarterly report has been prepared by management as required by section 65.1 of the Financial Administration Act and in the form and manner prescribed by the Treasury Board. This report should be read in conjunction with the Main Estimates, Supplementary Estimates A and B and previous interim reports for the current year. This report has not been subject to an external audit or review.

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

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

The Defence mission is delivered through seventeen program activities. A summary description of these program activities can be found in Part III- Report on Plans and Priorities.

Basis of Presentation

This quarterly report has been prepared by management using an expenditure basis of accounting. The accompanying Statement of Authorities includes the department's spending authorities granted by Parliament and those used by the department consistent with the Main Estimates and Supplementary Estimates B for the 2011-12 fiscal year. This quarterly report has been prepared using a special purpose financial reporting framework designed to meet financial information needs with respect to the use of spending authorities.

The authority of Parliament is required before moneys can be spent by the Government. Approvals are given in the form of annually approved limits through appropriation acts or through legislation in the form of statutory spending authority for specific purposes.

When Parliament is dissolved for the purposes of a general election, section 30 of the Financial Administration Act authorizes the Governor General, under certain conditions, to issue a special warrant authorizing the Government to withdraw funds from the Consolidated Revenue Fund. A special warrant is deemed to be an appropriation for the fiscal year in which it is issued.

The Department uses the full accrual method of accounting to prepare and present its annual departmental financial statements that are part of the departmental performance reporting process. However, the spending authorities voted by Parliament remain on an expenditure basis.

2. Highlights of fiscal quarter and fiscal year to date (YTD) results

Statement of Authorities

Total budgetary authorities available for use in the third quarter of FY 2011-12 decreased from that of the third quarter of FY 2010-11 by $851M (4%). This net decrease was the result of decreases in Vote 1 spending authority of $172M, in Vote 5 spending authority of $701M, in Vote 10 spending authority of $30M and an increase of spending authority for Statutory Payments of $52M.

The change in Vote 1 spending authority was mainly due to lower funding requested as part of Supplementary Estimates (B) 2011-12 when compared to the Supplementary Estimates (B) 2010-11 which included amounts for the Canada First Defence Strategy and Canada’s Domestic and International Security Operations. The decrease was partially offset the calculation of the automatic annual increase for defence spending.

The decrease in Vote 5 spending authority was largely due to changes in the spending profile for major vehicle, ship and aircraft acquisitions. The decrease in Vote 10 spending authority was mainly due to a net decrease in transfer payment programs, while the increase in spending authority for Statutory Payments was largely due to higher employee benefit contributions.

Statement of Departmental Budgetary Expenditures by Standard Object

Although overall expenditures for the third quarter were similar to the previous year, there were some significant variances due to operations changing or ending as well as capital project activity.

Personnel Expenditures increased 3% ($73.1M) over the previous year due largely to payouts resulting from the termination of severance benefits for public service employees and a 9% increase in individual military cost moves in FY 2011/12 when compared to FY 2010/11. Additionally, a small portion of the variance is the result of other small increases in Maternity/Paternity Leave, Workers Compensation and normal Severance Pay.

Transportation and communications decreased 25% ($57.6M) primarily due to the attribution of expenditures for individual military cost moves being reflected in the personnel expenditures.

Information expenditures decreased 33% ($1.3M) over the previous year reflecting the higher level of activity associated with the Navy’s centennial celebrations in FY 2010/11 as well as a lower level of recruiting campaign production in FY 2011/12.

Professional, special and other services expenditures increased 32% ($216.6M) over the previous year. A large portion of this increase is due to deployed operations expenditures in the Mediterranean and south-east Asia. Additional factors contributing to the increase include higher engineering support costs related to major capital projects for the mid-life refit of the HALIFAX class vessels and a change in the contract payment schedule for the NATO Flying Training in Canada program.

Rentals increased 24% ($33.7M) over the previous year. The largest part of the increase was due to support to deployed operations with a smaller portion of the increase attributable to a Canadian Army reserve collective training exercise being conducted in FY 2011/12 for the first time in several years.

Repair and maintenance increased 28% ($80.5M) over the previous year due to a combination of real property maintenance and infrastructure repairs/upgrades at various bases, wings and naval units, as well as an increase in spending onequipment repair.

Acquisition of land, buildings and work increased 28% ($25.2M) due to an increase in the number of approved construction projects.

A decrease of 19% ($163.8M) in acquisition of machinery and equipment from the previous year is primarily due to delays in large capital projects as well as a significant decrease in ammunition acquisition in FY 2011/12 compared to the previous year.

Although the quarter to quarter variance in transfer payments is a small decrease of 11% ($8.8M), the year-to-date decrease is 42% ($61.1M). This year-to-date decrease is attributed to the reduction in planned NATO infrastructure spending in 2011, as well as a slowdown in the NATO infrastructure program resulting from financial pressures on the program in 2009 and 2010. The decrease also reflects a timing difference compared to last fiscal year. The NATO fiscal year is from January to December while the Canadian Federal Government fiscal year is from April to March. DND receives requests for payments from NATO between February and April each year. In 2011, these payments were made in March, and thus were not reflected in this fiscal years expenditures.

The remaining quarter to quarter decrease in expenditures of $4.3M is due to small decreases in utilities, materials and supplies and other subsidies and payments as a result of a variety of factors.

3.Risks and Uncertainties

To fulfil its mission National Defence purchases the goods and services necessary to train military forces, conduct operations at the request of the Government of Canada and acquire related infrastructure and equipment both domestically and internationally.

As such, National Defence’s financial transactions are exposed to a broad range of external financial and economic risks such as inflation, foreign exchange and commodity price fluctuations. Depending on how these risks unfold, they could lead to funding lapses or shortages. For example, an appreciation of the Canadian dollar or deterioration of commodity prices, oil in particular, could result in a funding lapse. Conversely, a depreciation of the Canadian dollar or increase in commodity prices could result in budget pressures.

National Defence’s capital acquisition program includes a number of large multi-year acquisition projects. Delays in contracting and procurement activities, or delays in deliveries by suppliers for individual projects, can lead to reduced expenditures or funding lapses.

While National Defence considers key economic and financial risk factors including defence specific inflation and foreign exchange in developing expenditure strategies, these risks are outside of the control of National Defence.

Additionally, significant unforecasted operational demands can occur at any time requiring National Defence to respond anywhere on the globe. Depending on the extent of the operational demand, the cost of unforecasted operations would be mitigated either through internal reallocations or by requesting a budget adjustment from Parliament.

Budget 2010 announced that the operating budgets of departments would be frozen at their 2010-11 levels for the fiscal years 2011-12 and 2012-13. Management has reprioritized and reallocated budgets to address the impacts of Budget 2010 on departmental activities.

This Departmental Quarterly Financial Report (QFR) reflects the results of the current fiscal period in relation to the 2011-12 Main Estimates and Supplementary Estimates B.

4. Significant Changes in Relation to Operations, Personnel and Programs

The Canadian Forces (CF) training role in Afghanistan, in support of the Government of Canada’s commitment to the NATO Training Mission Afghanistan (NTM – A), continues to be a major focus of activities this quarter, with the repatriation and reconstitution of theresources previously employed in Afghanistan and in support of Libya having an effect on expenditures. The continuing investment in the mid-life refit of the HALIFAX class ships shall continue to influence expenditures.

The Order-in-Council 2011-1297 15 November 2011 for Shared Services Canada (SSC) transferred the identified in-scope funds and personnel from DND to SSC. This has had little effect on service delivery in DND in the near term and with close coordination with SSC the transition will not have any significant disruption on DND.

The Order-in-Council 2011-1305 15 November 2011 for Communications Security Establishment Canada (CSEC) transferred the personnel and resources from DND to CSEC with little disruption to either organization. DND continues to work closely with CSEC to support the establishment of their organization.

Approved by:

Dated: MAR 01 2012

Ottawa, Canada

Robert Fonberg
Deputy Minister

MGen R. Bertrand
for J.K Lindsey, CMA, ICD.D
Chief Financial Officer

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