Quarterly Financial Report (QFR) for the Quarter Ended September 30, 2019

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

This section provides financial highlights and explanations for differences between the fiscal-quarter and fiscal-year-to-date results for the quarter ended on September 30, 2019, 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, the department's year-to-date budgetary authorities available for use have increased by $1,514.3 million. As reflected in Table 1: Statement of authorities, the authorities increased from $20,803.9 million in 2018–19 to $22,318.2 million in 2019–20. Major reasons for the increase are outlined below.

Year-to-date variances in authorities available for use

(in millions of dollars)

The year-to-date net increase of $1,514.3 million over the second quarter in 2018–19 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 $586.1 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.

• Service Income Security Insurance Plan (SISIP) (increase of $435.8 million)

The increase is due to the transfer of financial management responsibilities and related funding for SISIP from the Treasury Board Secretariat to the department. The funding is required for payments with respect to the long-term disability and life insurance plan for members of the Canadian Armed Forces, expected incremental operating costs, and other anticipated costs related to the transfer.

• Measures announced in Budget 2019 (increase of $257.9 million)

The increase is due to measures announced in Budget 2019: Protecting Canada's National Security, Renewing Canada’s Middle East Strategy, Supporting Veterans as They Transition to Post-Service Life, and Reinforcing Canada’s Support for Ukraine.

• Miscellaneous departmental requirements (increase of $227.2 million)

The net increase is the result of miscellaneous funding variances. It is mainly related to the increase in the employer's share of the employee benefit plans rates. The Treasury Board Secretariat increased the rate from 15.2% in 2018–19 to 15.3% for public service employees and from 15.2% to 18% for members of the Canadian Armed Forces in 2019–20.

• Implementation of SSE (increase of $191.3 million)

The increase in funding represents the incremental demands required to execute the overall SSE policy commitments and to support minor capital investments including acquisition of equipment such as vehicles, spare parts, lab equipment, information technology and software.

The increase also includes funding for the Mobilizing Insights in Defence and Security (MINDS) program and the Innovation for Defence Excellence and Security (IDEaS) program. The MINDS program, which is the revamped and expanded version of the Defence Engagement Program, and the IDEaS program provide new opportunities to support science, technology and innovation for the defence and security of Canada and facilitate the integration and adoption of new solutions and capabilities for Canada’s defence and security.

• Major capital equipment and infrastructure projects (decrease of $111.4 million)

The net decrease in funding is due to modifications to the multi-year spending profile of major capital equipment and infrastructure projects. These adjustments serve to align financial resources with project acquisition timelines. This decrease in cash requirements is mainly due to adjustments to the Light Armoured Vehicle Upgrade Project, the Light Armoured Vehicle Reconnaissance Surveillance System Upgrade Project, the Halifax-class Modernization Project and the Frigate Life Extension Project.

• Budget 2018 fiscal dividend (decrease of $72.6 million)

The decrease is due to an ongoing reduction to reference levels, as announced in Budget 2018, for the modernization and enhancement of the government’s digital services.

2.2 Departmental budgetary expenditures by standard object

When compared to those of the same quarter of the previous fiscal year, the department’s year-to-date total net budgetary expenditures have increased by $687.2 million. As reflected in Table 2: Departmental budgetary expenditures by standard object, the expenditures increased from $8,984.8 million in 2018–19 to $9,672 million in 2019–20.

Overall, total spending at the end of the quarter represents 43.3% of annual planned expenditures for 2019–20, compared with 43.2% at the end of the second quarter of 2018–19.

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

(in millions of dollars)

The year-to-date net increase of $687.2 million can be explained by the variances detailed below.

• Acquisition of machinery and equipment (increase of $216.6 million)

The increase in spending is mainly due to the production increase for the Medium Support Vehicle System Project and the progression of the Joint Support Ship project.

• Personnel (increase of $186.8 million)

The increase in spending is mainly due to rate changes in various types of compensation for military personnel such as the Post Living Allowance, the Foreign Service Premium, and the Post Differential Allowance bonus.

• Professional and special services (increase of $158.8 million)

The increase in spending is mainly due to progressive payments towards production costs, sustainment, and the development for the Joint Strike Fighter program, the implementation of the Innovation for Defence Excellence and Security (IDEaS) program, and the maintenance on naval vessels.

• Repair and maintenance (increase of $69.3 million)

The increase in spending is mainly related to the timing of payments for major repairs and the overhaul related to various aircraft fleets.

• Utilities, materials and supplies (increase of $35.4 million)

The increase in spending is due to the timing of monthly payments and the progression of the Headquarters Shelter System project.

• Other subsidies and payments (increase of $31.6 million)

The increase in spending is mainly due to the LGBT Purge class action settlement payments.

• Acquisition of land, buildings and works (decrease of $22.9 million)

The decrease in spending is mainly due to the differences in the timing of the payments for various construction projects.

• Revenues netted against expenditures (decrease of $20.4 million)

The decrease in revenues netted against expenditures is mainly due to differences in the timing of payments received from foreign countries.

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 higher or lower-than-anticipated spending. 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 is addressing the financial risks associated with the Phoenix pay issues through the implementation of new controls and strengthening of existing ones. A quality assurance (QA) program has been implemented for post-payment verification over pay transactions to ensure the accuracy of payments and of pre-payment verification of high-risk pay transactions. The QA program is being reviewed to expand the scope of the review and ensure increased focus on high-risk areas. The department is exploring IT solutions to analyze larger samples of financial transactions. Furthermore, the department is strengthening its salary payment verification processes, audit trail requirements and salary forecasting capabilities with the intent of enhancing the department’s Phoenix risk mitigation efforts.

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.

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.

Risks also flow from claims and litigations involving the department’s normal operations. When the department receives a claim or litigation alleging liability in tort or extra contractual responsibility to cover losses, expenditures or damages, it is analyzed and an appropriate position is developed, based on legal advice. Litigation or settlement may be pursued and they are tracked through the department’s reporting.

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 the government.

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

The department continues to focus on the process of renewing its major equipment fleets including fighter aircraft and maritime warships. In addition, the implementation of various SSE initiatives remains a priority for the department during 2019–20.

Approved by:

Dated: November 25, 2019

Ottawa, Canada

5. Financial tables

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