Quarterly Financial Report (QFR) for the Quarter Ended June 30, 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). 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, the Canadian Armed Forces and National Defence (hereafter “department”) stand ready to perform three key roles:

The Defence mission is delivered through six 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 those used by the department consistent with the Main Estimates and Supplementary Estimates (A) for 2017-18. 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 Departmental Financial Statements that 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 Report and the Departmental Financial Statements is the timing of when revenues and expenses are recognized. The Quarterly Financial Report reports revenues only when the money is received and expenses only when the money is paid out. The Departmental Financial Statements report 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 (YTD) results

In the following section on financial highlights the department is providing explanations for differences, for the fiscal quarter and fiscal YTD, at June 30, 2017 as compared to the same period last year.

2.1 Statement of Authorities

When compared to the same quarter of the previous year, year-to-date the department’s budgetary authorities available for use increased by $36.2 million ($18,649.9 million in 2016-17; $18,686.1 million in 2017-18), 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)

Initiative Operating Capital

Grants and contributions

Budgetary statutory Authorities Total variances
Operation and sustainment (fleet maintenance) of military capabilities and operating requirements 354.1 - - - 354.1

Interim Auxiliary Oiler Replenishment Capability for the Canadian Armed Forces

121.0 - - - 121.0
Federal Contaminated Sites Action Plan 53.7 - - - 53.7
Major capital equipment and infrastructure projects - (271.9) - - (271.9)
Projects at Canadian Armed Forces bases and other Defence properties (70.5) (14.3) - - (84.8)

Travel, advertising and professional services

(58.3) - - - (58.3)
Other miscellaneous departmental requirements 36.4 (7.0) 0.1 (107.1) (77.6)
Cumulative variance in authorities available for use 436.4 (293.2) 0.1 (107.1) 36.2

The year-to-date net increase of $36.2 million can be explained by:

In order to provide ongoing support for operating and capital requirements, the department receives additional funding to offset sustainment growth and the inflationary impact on the Defence budget. This increase is offset by planned decreases relating to previous funding to support operating, sustainment, and fleet maintenance of military equipment.

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.

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

The decrease 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 decrease in cash requirements is mainly due to the Arctic Offshore Patrol Ship Project and the Halifax Class Modernization and Frigate Life Extension Project, which are lower in 2017-18 than in 2016-17.

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 for the department to deliver a large number of infrastructure projects and upgrades across Canada.

In Budget 2016, the Government of Canada committed to reduce spending on professional services, travel and advertising. The department contributed to that commitment with a reduction of $58.3 million in funding in Operating expenditures starting in 2017-18 and ongoing.

This net decrease is the result of miscellaneous funding variances, which is mainly related to the decrease of the Employee Benefit Plans rate from 17.2% in 2016-17 to 15.7% in 2017-18, 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 $593.9 million compared to the same quarter of the previous year ($3,567.8 million in 2016-17; $4,161.7 million in 2017-18).

Overall, total spending at the end of the quarter represents 22% of annual planned expenditures for 2017-18, compared with 19% at the end of the first quarter of 2016-17.

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

(in millions of dollars)

Standard object

2017-18 Year-to-date used at quarter end

2016-17 Year-to-date used at quarter end Year-to-date variance
Personnel 2,653.5 2,133.6 519.9
Acquisition of machinery and equipment 398.7 295.6 103.1
Professional and special services 563.3 508.6 54.7
Other subsidies and payments 75.3 47.2 28.1
Utilities, materials and supplies 174.8 151.3 23.5
Transportation and communication 149.7 228.5 (78.8)
Repair and maintenance 108.2 148.6 (40.4)
Other expenditures 112.3 110.3 2.0
Revenues netted against expenditures (74.1) (55.9) (18.2)
Total net budgetary expenditures 4,161.7 3,567.8 593.9

Year-to-date net increase of $593.9 million is attributable mainly to:

The increase in personnel costs between the first quarter of 2016-17 and the first quarter of 2017-18 relates to the lump sum retroactive pay increases for military personnel for the periods of 2014-15, 2015-16, 2016-17 and the first quarter of 2017-18.

The increase in acquisition of machinery and equipment is mainly due to the cash requirements attributed to the shipbuilding contract, and increased cost for ammunition.

The increase in professional services requirements is primarily due to several major capital projects, and maintenance work on naval vessels.

The increase in subsidies and payments is due to the timing difference of payment in lieu of taxes.

The increase in utilities, materials and supplies is due to the costs for military clothing and protective equipment for deployed operations.

The decrease in transportation and communication is due to a final payment made in the first quarter of 2016-17 for the Wideband Global Satellite Communication System.

The decrease is due to the timing difference of repair and maintenance of real property, and various aircraft fleets.

3. Risks and uncertainties

To fulfill its mission, the department purchases 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, 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 deterioration of commodity prices, oil in particular, could result in lower spending. Conversely, a depreciation of the Canadian dollar or 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 operations, personnel and programs

Effective March 13, 2017, the Prime Minister appointed Ms. Jody Thomas as Senior Associate Deputy Minister of the department.

In the past few years, the department has faced a changing fiscal environment. In response, the department has launched a number of initiatives, including Defence Renewal, aimed at improving business processes and practices. The implementation of these initiatives continues to be a priority for 2017-18. Defence Renewal is focused on re-evaluating requirements, finding efficiencies and generating savings for reinvestment in military capabilities and readiness, including the internal reinvestment of personnel to higher priority tasks.

To prepare for the future, the department conducted an open and transparent review to create a new defence strategy for Canada. The policy represents a remarkable achievement, culminating a year of analysis, hard work and the most extensive consultation ever undertaken by the department. Strong, Secure, Engaged is the most rigorously costed Canadian defence policy ever developed. The Defence Policy Review was announced on June 7, 2017 and initial implementation of various Strong, Secure, Engaged initiatives will be a priority for the department during 2017-18.

Canadian Armed Forces deployments on international operations in Ukraine (Op UNIFIER), central and Eastern Europe (Op REASSURANCE) and the Republic of Iraq (Op IMPACT) continue to be a major focus of activity in 2017-18. Furthermore, during 2017-18, 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 will be among our primary considerations.

Approved by:

// Signed by //

John Forster

Deputy Minister

// Signed by //

C. Rochette, CPA, CMA

Chief Financial Officer

Dated: August 24, 2017

Ottawa, Canada

5. Financial tables

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