Quarterly Financial Report (QFR) for the Quarter Ended September 30, 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 and Supplementary Estimates and 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 II of the Main Estimates.

Basis of Presentation

This quarterly report has been prepared by management using an expenditure basis of accounting using a special purpose financial reporting framework designed to meet financial information needs with respect to the use of spending authorities. 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 (as applicable) for the 2011-12 fiscal year.

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 decreased in the second quarter of FY 2011-12 from that of the second quarter of FY 2010-11 by $627M (2.9%). This net decrease is the result of decreases in Vote 1 spending authority of $95M, in Vote 5 spending authority of $580M, in Vote 10 spending authority of $4M and an increase of spending authority for Statutory Payments of $52M.

The change in Vote 1 spending authority was largely due to changes in the calculation of the automatic annual increase for defence spending, net of the Operating Budget Carry Forward (OBCF). The OBCF had not been requested before the end of the second quarter in FY 2011-12 whereas it had been requested prior to the end of the second quarter in the previous fiscal year.

The decrease in Vote 5 spending authority was largely due to changes in the spending profile for major vehicle, ship and aircraft acquisitions. The minor reduction 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

While overall expenditures year-to-date (YTD) are similar to the same period last year, fluctuations have occurred in some standard object categories.

Personnel expenditures increased 2% ($94M) over the previous year largely due to the payouts required in lieu of severance payments as a result of the latest Government negotiations with some of the department’s civilian public servants. In addition, a small portion of the variance resulted from revisions to some of the collective agreements.

Professional, Special and Other Services increased 20% ($174M) over the previous year due to deployed operations expenditures in the Mediterranean and south-east Asia due to new and changing military roles. Additionally, the department increased its infrastructure services spending on construction, betterments and renovations largely due to the short notice set up in Libya as well as closure and redeployment in Afghanistan requiring short-term service contracts to support these missions.

Rentals increased 42% ($80M) over the previous year due to support to deployed operations and in particular support costs related to the change in focus of the mission in Afghanistan. Increased rental costs related to the end of the combat mission will diminish by the end of this year but increases related to the training mission will continue until early 2014.

Repair and Maintenance increased 16% ($69M) over the previous year due to a combination of Real Property maintenance and infrastructure repairs, upgrades and updates at various bases, wings and naval units.

Utilities, Materials and Supplies increased 11% ($43M) over the previous year due to deployed operations expenditures largely associated with Libya, south-east Asia and support to an Arctic exercise and subsequent search and rescue operations.

The increases noted above were offset by a decrease of 33% ($417M) in Acquisition of Machinery and Equipment from the previous year. This decrease is primarily due to delays in large capital projects.

Transfer payments also decreased 77% ($52M) over the same YTD period last year mainly attributable to a delay in a planned transfer payment to NATO for an infrastructure project which has been stalled due to the ongoing financial crisis in the European Union.

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 A.

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

Implementing the transition of the Canadian Forces (CF) from a combat to a training role in Afghanistan, in support of the Government of Canada’s commitment to the NATO Training Mission Afghanistan (NTM – A), continued to be a major focus of activities this quarter.

Operation MOBILE, the CF participation in the NATO-led effort in Libya which began in late March 2011, continued to have an impact on operations, personnel and programs in the second quarter. With the success and recently announced end of the mission, this impact will diminish throughout the next quarter.

Approved by:

Dated: NOV 24 2011

Ottawa, Canada

Robert Fonberg
Deputy Minister

J.K Lindsey, CMA, ICD.D
Chief Financial Officer

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