Quarterly Financial Report (QFR) for the Quarter Ended September 30, 2012

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 (TB). 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 Forces (CF) and the Department of National Defence (DND) stand ready to perform three key roles:

The Defence mission is delivered through seventeen program activities. A summary description of these program activities can be found in Section II- 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 fiscal year (FY) 2012-13. 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.

As part of the Parliamentary business of supply, the Main Estimates must be tabled in Parliament on or before March 1 preceding the new fiscal year. Budget 2012 was tabled in Parliament on March 29, after the tabling of the Main Estimates on February 28, 2012. As a result the measures announced in Budget 2012 could not be reflected in the 2012-2013 Main Estimates.

In FY 2012-13, frozen allotments were established by TB authority in departmental votes to prohibit the spending of funds already identified as savings measures in Budget 2012. In future years, the changes to departmental authorities will be implemented through the Annual Reference Level Update, as approved by TB, and reflected in the subsequent Main Estimates tabled in Parliament.

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

In the following section on financial highlights the Department is providing explanations for differences exceeding a materiality threshold of $20M or for those items with an unusual percentage increase/decrease.

Statement of Authorities

Total budgetary authorities available for use decreased in FY 2012-13 from that of FY 2011-12 by $1,222M (6%). This net decrease is the result of decreases in Vote 1 spending authority of $662M, a decrease in Vote 5 spending authority of $530M, an increase in Vote 10 spending authority of $24M, and a decrease in spending authority for Statutory Payments of $53M.

The change in budgetary spending authority is summarized below:

Vote Explanation of Change Change
(thousands of dollars)
Annual funding increase to offset defence specific inflation 333,555
The Budget Carry Forward of funding from the previous FY 246,587
Reduction in departmental funding under Strategic Review -303,754
Transfer of funding for the establishment of the Communication Security Establishment (CSE) as a stand-alone agency -286,684
Canada First Defence Strategy -255,729
Transfer of funding for the establishment of Shared Services Canada (SSC) as part of the Public Works and Government Services Canada (PWGSC) portfolio -255,309
Reduction in funding required to support Canada’s international security operations in Afghanistan -121,000
Other Miscellaneous Departmental Requirements -19,543
1 Total Operating Expenditures -661,887
The Budget Carry Forward of funding from the previous fiscal 39,514
Reduction in spending authority for major capital equipment and infrastructure projects to realign funding with project acquisition timelines -232,066
Reduction in departmental funding under Strategic Review -156,350
Transfer of funding for the establishment of the CSE as a stand-alone agency -70,951
Transfer of funding for the establishment of SSC as part of the PWGSC portfolio -26,188
Other Miscellaneous Departmental Requirements -84,330
5 Total Capital Expenditure -530,372
10 Total Grants and Contributions 23,690
(S) Total Statutory Expenditures -53,427
Total Budgetary – National Defence -1,221,985

The $246.6M increase in Vote 1 and the $39.5M increase in Vote 5 are the results of the Budget Carry Forward of funding from the previous fiscal year. This routine Budget Carry Forward is subject to TB policy and approval that provides departments and agencies with additional financial flexibility and encourages good financial management and planning. The Budget Carry Forward in FY 2011-12 was not requested until after the second quarter and therefore the timing difference accounts for the increase for this quarter.

The $255.7M decrease for the Canada First Defence Strategy relates to the portion of funding that was received for the past several FYs, but has not yet been received for FY 2012-13. Additional authorities for FY 2012-13 will be sought through Supplementary Estimates C.

The change in Vote 10 spending authority is due to a net increase in transfer payment programs and the decrease in Statutory Payments is due to lower employee benefit contributions resulting from the establishment of CSE and SSC as stand-alone agencies.

Statement of Departmental Budgetary Expenditures by Standard Object

Compared to last year, overall expenditures decreased $405.6M (8.4%) in the second quarter of FY 2012-13. This decrease brings YTD expenditures to $266.0M (3.2%) lower than last year, eliminating the net YTD increase reported in Q1.

The standard objects with the most significant decreases in Q2, as compared to the same quarter last year, were:

These decreases in the quarter were offset by increases in expenditures related to Repair and Maintenance ($28.2M) and Acquisition of Land, Buildings and Works ($34.8M) primarily due to increased spending for infrastructure renewal projects.

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 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 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 budgetary surpluses.

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.

Financial risk and uncertainty exist with the implementation of various change initiatives including the 2010 Strategic Review, the savings measures announced in Budget 2012 and the stand up of SSC and CSE as stand-alone agencies.

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 incremental funding from Government.

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

Current change initiatives that affect DND’s Budget include the 2010 Strategic Review, the savings measures announced in Budget 2012, the stand up of SSC and CSE as stand-alone agencies, along with other restraint and efficiency initiatives. A Defence Renewal Team has been stood up to serve as a central coordinating body to ensure that there is coherence and completeness in the implementation of these and further change initiatives.

5. Budget 2012 Implementation

This section provides an overview of the savings measures announced in Budget 2012 that will be implemented in order to refocus government and programs; make it easier for Canadians and business to deal with their government; and modernize and reduce the back office.

Budget 2012 presents the results of the review of departmental spending, with reductions for DND as follows:

DND/CF reviewed spending and programs to ensure they are effective and efficient, as well as responding to the priorities of Canadians. This allowed the DND/CF to ensure the right people with the right experience are in place to realize the important missions for which they are responsible on behalf of all Canadians.

Most of the savings for FY 2012-13 will be achieved by maintaining the Regular and Reserve force strength of the CF at 68,000 and 27,000 respectively, deferring anticipated growth over the medium term, and reducing total contracted services. The majority of savings in current FY expenditures will accrue in the final two quarters as they are associated with deferring additional investments to grow the Canadian Forces Regular and Reserve force and reduce contracted services. However, a reduction in personnel costs for full-time Reservists and the civilian workforce related to Budget 2012 initiatives of $20M and $10M respectively has been achieved.

The mitigation strategy has been to phase-in the reductions and to balance the savings across the Department, with a focus on increased efficiencies.

Approved by:

Robert Fonberg
Deputy Minister

Major General R. Bertrand
Acting Chief Financial Officer

Dated: 29 NOVEMBER 2012

Ottawa, Canada

6. Financial Tables

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