Quarterly Financial Report (QFR) for the Quarter Ended December 31, 2017

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 and Supplementary Estimates (A) and (B). This report has not been subject to an external audit or review.

Strong, Secure, Engaged is the new defence policy presenting a new vision and approach to defence by the Government of Canada. Strong, Secure, Engaged presents a new strategic vision in which Canada is:

• strong at home, its sovereignty well defended by a Canadian Armed Forces ready to assist in times of natural disaster, other emergencies and search and rescue
• secure in North America, active in a renewed defence partnership in the North American Aerospace Defense Command and with the United States
• engaged in the world, with the Canadian Armed Forces doing its part in Canada’s contributions to a more stable, peaceful world, including through peace support operations and peacekeeping

The Defence mission is delivered through 6 program activities. A summary description of these program activities can be found in the Departmental Plan (previously known as the 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 used by the department consistent with the Main Estimates and Supplementary Estimates (A) and (B) for the fiscal year 2017–2018. 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 money 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.

The department uses the full accrual method of accounting to prepare and present its annual Consolidated Departmental Financial Statements, which are part of the departmental results reporting process. However, the spending authorities voted by Parliament remain on an expenditure basis. The main difference between the Quarterly Financial Reports and the Consolidated Departmental Financial Statements is the timing of when revenues and expenses are recognized. The Quarterly Financial Reports report revenues only when the money is received and expenses only when the money is paid out. The Consolidated Departmental Financial Statements reports revenues when they are earned and expenses when they are incurred. In the latter case, revenues are recorded even if cash has not been received and expenses are incurred even if cash has not yet been paid out.

2. Highlights of fiscal-quarter and fiscal-year-to-date results

In the following section on financial highlights, the department provides explanations for differences between the fiscal-quarter and fiscal-year-to-date results at December 31, 2017 and the results of the same period last year.

2.1 Statement of authorities

When compared to those of the same quarter of the previous year, year-to-date the department’s budgetary authorities available for use increased by $946.3 million (from $19,281.8 million in authorities in 2016–2017 to $20,228.1 million in authorities in 2017–2018), as reflected in Table 1: Statement of authorities. Major reasons for the increase are outlined below.

Year-to-date variances in authorities available for use

(in millions of dollars)

Year-to-date net increase of $946.3 million over the third quarter in 2016–2017 can be explained by variances in funding for a number of initiatives, as detailed below.

• Operation and sustainment (fleet maintenance) of military capabilities and operating requirements (increase of $354.1 million)

In order to provide ongoing support for operating and capital requirements, the department received additional funding to offset sustainment growth and the inflationary impact on the Defence budget.

• Pay increase for the Canadian Armed Forces (increase of $333.1 million)

The increase is due to adjustments made to the rates of pay and allowances found in the Compensation and Benefits Instructions for the Canadian Forces.

• Interim auxiliary oiler replenishment capability for the Canadian Armed Forces (increase of $99.0 million)

The increase is due to a services contract establishing an organic fleet replenishment capability, provided by a contracted civilian vessel being converted for military use and engaged as an interim auxiliary oiler replenishment vessel.

• Pay increase for the federal public administration (increase of $87.8 million)

The increase is due to adjustments made to terms and conditions of service or employment of the federal public administration.

• Federal Contaminated Sites Action Plan (increase of $25.2 million)

The increase is mainly due to additional funding announced in Budget 2016 for the Federal Contaminated Sites Action Plan, a government-wide initiative to reduce environmental and human health risks from known federal contaminated sites and associated federal financial liabilities.

• Major capital equipment and infrastructure projects (increase of $396.2 million)

The increase in funding is due to net adjustments to the spending profile of major capital equipment and infrastructure projects to align financial resources with project acquisition timelines. This increase in cash requirements is mainly due to the Fixed Wing Search and Rescue Aircraft Replacement Project and the Light Armoured Vehicle III Upgrade Project.

• Canada's response to the Middle East crisis (decrease of $142.1 million)

The decrease is due to the timing requirement for funding for operations abroad.

• Projects at Canadian Armed Forces bases and other Defence properties (decrease of $117.1 million)

The decrease is due to the completion of projects related to the Federal Infrastructure Investment Plan. The intent of this initiative is to repair and upgrade Canadian Armed Forces facilities in order for the department to deliver a large number of infrastructure projects and upgrades across Canada.

• Travel, advertising and professional services (decrease of $58.3 million)

In Budget 2016, the Government of Canada committed to reduce spending on travel, advertising and professional services. The department contributed to that commitment with a reduction of $58.3 million in funding for operating expenditures in 2017–2018 and with plans for further reductions in the future.

• Miscellaneous departmental requirements (decrease of $31.6 million)

The net decrease is the result of miscellaneous funding variances. It is mainly related to the decrease in the employee benefit plans rate from 17.2% in 2016–2017 to 15.7% in 2017–2018, as directed by the Treasury Board Secretariat.

2.2 Departmental budgetary expenditures by standard object

As presented in Table 2: Departmental budgetary expenditures by standard object, year-to-date total net budgetary expenditures have increased by $1,433.0 million compared to those of the same quarter in the previous year (from $12,685.8 million in expenditures in 2016–2017 to $14,118.8 million in expenditures in 2017–2018).

Overall, total spending at the end of the quarter represents 69.8% of annual planned expenditures for 2017–2018, compared with 65.8% at the end of the third quarter of 2016–2017.

Year-to-date variances in net budgetary expenditures (presented by standard object)

(in millions of dollars)

The year-to-date net increase of $1,433.0 million is attributable mainly to the variances detailed below.

• Personnel (increase of $1,018.0 million)

The increase in personnel costs year-to-date at the end of the third quarter, compared to those of the same time in the previous fiscal year, relates to the lump sum retroactive pay increases for military and civilian personnel for the periods of 2014–2015, 2015–2016, 2016–2017 and the first 3 quarters of 2017–2018.

• Acquisition of machinery and equipment (increase of $282.1 million)

The increase in spending on the acquisition of machinery and equipment is mainly due to the cash requirements attributed to the acquisition of aircraft and of related systems and equipment, ammunition, field engineering and support parts for small vessels, the delivery of armoured vehicles and of associated parts and accessories, and communication equipment.

• Professional and special services (increase of $208.5 million)

The increase in spending on professional services is primarily due to the implementation of several major capital projects and maintenance work on naval vessels.

• Utilities, materials and supplies (increase of $38.0 million)

The increase in spending on utilities, materials and supplies is due to an increase in spending for military clothing and protective equipment as well as to increased costs for deployed operations.

• Transportation and communications (decrease of $67.6 million)

The decrease in spending on transportation and communications is due to the final payment made in the first quarter of 2016–2017 for the Wideband Global Satellite Communication System.

• Acquisition of land, buildings and works (decrease of $50.5 million)

The decrease in spending on the acquisition of land, buildings and works is due to the completion of and lower spending on infrastructure projects.

• Repair and maintenance (decrease of $21.7 million)

The decrease in spending on repair and maintenance is largely due to decreased repair and maintenance of real property, as a result of the completion of projects under the infrastructure program.

• Revenues netted against expenditures (decrease of $21.4 million)

The decrease in total revenues netted against expenditures is due to the transfer of the military pension administration function from the department to Public Services and Procurement Canada in July 2017.

3. Risks and uncertainties

To fulfill its mission, the department 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.

The department’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 surpluses or shortages. For example, an appreciation of the Canadian dollar or a deterioration of commodity prices (oil in particular) could result in lower spending. Conversely, a depreciation of the Canadian dollar or an increase in commodity prices could result in increased spending.

The department’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 budgetary surpluses.

While the department 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 the department.

Additionally, significant unforecasted operational demands can occur at any time, requiring the department 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 incremental funding from Government.

4. Significant changes in relation to programs, operations and personnel

On June 7, 2017, the government announced Strong, Secure, Engaged (SSE), the new defence strategy for Canada. The policy prepares for the future and represents the most extensive consultation ever undertaken by the department. It focuses on ensuring that the men and women in uniform are prepared to succeed on operations, that they are provided with the equipment they need, and that they are fully supported from recruitment to retirement. SSE is the most rigorously costed Canadian defence policy ever developed. It is transparent and fully funded. Initial implementation of various SSE initiatives will be a priority for the department during 2017–2018.

Canadian Armed Forces deployments on international operations in Ukraine (Operation UNIFIER), Central and Eastern Europe (Operation REASSURANCE) and the Republic of Iraq (Operation IMPACT) continue to be a major focus of activity in 2017–2018. Furthermore, during 2017–2018, the department will remain concentrated on the process of renewing our major equipment fleets. Canada’s existing fleets of CF-18 fighter aircraft and maritime warships are among our primary considerations.

The department continues with the implementation of its Defence Renewal initiative, aiming at finding efficiencies and generating savings for reinvestment in military capabilities and readiness, including the internal reinvestment of personnel to higher priority tasks. By the end of 2017–2018, it will transition to enabling continuous improvement within the department. This will include supporting the establishment of a comprehensive regime of performance metrics and targets, the development of business analytic tools, and the utilization of business intelligence to identify opportunities for improvement.

Approved by:

Dated: February 21, 2018

Ottawa, Canada

5. Financial tables

• Table 1: Statement of Authorities
• Table 2: Departmental budgetary expenditures by standard object