Employment and Social Development Canada Consolidated Financial Statements (Unaudited) for the year ended March 31, 2019

Social Development

Increase inclusion and opportunities for participation of Canadians in their communities.

Pensions and Benefits

Assist Canadians in maintaining income for retirement, and provide financial benefits to survivors, people with disabilities and their families.

Learning, Skills Development and Employment

Help Canadians access post-secondary education and get the skills and training they need to participate in a changing labour market, as well as provide support to those who are temporarily unemployed.

Working Conditions and Workplace Relations

Promotes safe, healthy, fair and inclusive working conditions and cooperative workplace relations.

Information Delivery and Services for Other Departments

Provides information to the public on the programs of the Government of Canada and the Department, and provides services on behalf of government departments.

Internal Services

Internal Services are those groups of related activities and resources that the federal government considers to be services in support of programs and/or required to meet corporate obligations of an organization. Internal Services refers to the activities and resources of the 10 distinct service categories that support program delivery in the organization, regardless of the Internal Services delivery model in a department. The 10 service categories are: Management and Oversight Services; Communications Services; Legal Services; Human Resources Management Services; Financial Management Services; Information Management Services; Information Technology Services; Real Property Services; Materiel Services; and Acquisition Services.

(a) Parliamentary authorities

ESDC is financed by the Government of Canada through Parliamentary authorities. Financial reporting of authorities provided to ESDC do not parallel financial reporting according to generally accepted accounting principles since authorities are primarily based on cash flow requirements. Consequently, items recognized in the Consolidated Statement of Operations and Departmental Net Financial Position and in the Consolidated Statement of Financial Position are not necessarily the same as those provided through authorities from Parliament. Note 3 provides a reconciliation between the bases of reporting. The planned results amounts in the ''Expenses'' and ''Revenues'' sections of the Consolidated Statement of Operations and Departmental Net Financial Position are the amounts reported in the Consolidated Future-oriented Statement of Operations included in the 2018 to 2019 Departmental Plan. Planned results are not presented in the ''Government funding and transfers'' section of the Consolidated Statement of Operations and Departmental Net Financial Position and in the Consolidated Statement of Change in Departmental Net Financial Asset because these amounts were not included in the 2018 to 2019 Departmental Plan.

(b) Consolidation

These consolidated financial statements include the transactions of the Employment Insurance Operating (EIO) Account, a consolidated specified purpose account which includes revenues credited and expenses charged under the Employment Insurance Act and for which the Deputy Minister as Chairperson of the Canada Employment Insurance Commission is accountable. The accounts of the EIO Account have been consolidated with those of ESDC, and all inter-organizational balances and transactions have been eliminated.

The Canada Pension Plan (CPP) is excluded from ESDC's reporting entity because changes to the CPP require the agreement of two thirds of the provinces and it is therefore not controlled by the Government.

ESDC has received dividends on behalf of the Government of Canada from the Canada Mortgage and Housing Corporation (CMHC). As per the Government of Canada Accounting Handbook, these dividends are not recorded in ESDC's consolidated financial statements as they do not relate to ESDC's activities. ESDC is simply acting as a flow-through mechanism for administrative purposes in order to enable the Government of Canada to receive the dividends.

(c) Net cash provided by Government

ESDC operates within the Consolidated Revenue Fund (CRF), which is administered by the Receiver General for Canada. All cash received by ESDC is deposited to the CRF, and all cash disbursements made by ESDC are paid from the CRF. The net cash provided by Government is the difference between all cash receipts and all cash disbursements, including transactions between departments of the Government.

(d) Amounts due to or due from CRF

These amounts are the result of timing differences at year-end between when a transaction affects authorities and when it is processed through the CRF. Amounts due to the CRF represent the net amount of cash that have been credited to authorities used, but were not collected and deposited to the CRF at year-end.

(e) Revenues

Revenues are recorded on an accrual basis of accounting:

• Employment Insurance (EI) premiums are recognized as revenue in the period in which they are earned, when workers, through their employment, generate these premiums and the related employer's contribution. Premiums earned in the period are measured from amounts assessed by the Canada Revenue Agency (CRA) and from estimates of amounts not assessed. Premium revenue also includes adjustments between actual and estimated premiums of previous years.
• Interest revenues on loans receivable are recognized in the year they are earned. Interest revenues are not recorded on impaired loans.
• Recoveries of CPP administration costs are recognized based on the services provided during the year.
• Other revenues are accounted for in the period in which the underlying transaction or event that gave rise to the revenue takes place.
• Revenues earned on behalf of government are non-respendable and are not available to discharge ESDC's liabilities. While the Deputy Minister is expected to maintain accounting control, he has no authority regarding the disposition of non-respendable revenues. Therefore, those revenues are presented in reduction of the entity's gross revenues.

(f) Expenses

Expenses are recorded on an accrual basis:

• Transfer payments are recorded as expenses when authorization for the payment exists and the recipient has met the eligibility criteria or the entitlements established for the transfer payment program. In situations where payments do not form part of an existing program, transfer payments are recorded as expenses when the Government announces a decision to make a non-recurring transfer, provided the enabling legislation or authorization for payment receives parliamentary approval prior to the completion of the financial statements. Transfer payments that become repayable as a result of conditions specified in the contribution agreement that have come into being are recorded as a reduction to transfer payment expense and as a receivable.
• Vacation pay and compensatory leave are accrued as the benefits are earned by employees under their respective terms of employment.
• Services provided without charge by other government departments for employer contributions to the health and dental insurance plans and legal services are recorded as operating expenses at their estimated cost.
• The expenses incurred on behalf of Government are linked to the assets held on behalf of Government. As a result, these expenses are considered to be incurred on behalf of the Government of Canada and are therefore presented in reduction of the entity's gross expenses.

(g) Employee future benefits

• Pension benefits: Eligible employees participate in the Public Service Pension Plan, a multiemployer pension plan administered by the Government. ESDC's contributions to the Plan are charged to expenses in the year incurred and represent the total departmental obligation to the Plan. ESDC's responsibility with regard to the Plan is limited to its contributions. Actuarial surpluses or deficiencies are recognized in the financial statements of the Government of Canada, as the Plan's sponsor.
• Severance benefits: The accumulation of severance benefits for voluntary departures ceased for applicable employee groups. The remaining obligation for employees who did not withdraw benefits is calculated using information derived from the results of the actuarially determined liability for employee severance benefits for the Government as a whole.

(h) Accounts receivable and advances

Accounts receivable and advances are stated at the lower of cost and net recoverable value. A valuation allowance is recorded for accounts receivable where recovery is considered uncertain.

(i) Loans receivable

Canada Student Loans (CSL) and Canada Apprentice Loans (CAL) are recorded at original cost less reimbursements, forgiveness, write-offs and valuation allowances. The allowances for bad debts and Repayment Assistance Plan (RAP) for direct loans of CSL and for CAL are calculated based on rates determined according to an actuarial estimate and as per historical collection rates for guaranteed and risk-shared loans of CSL.

(j) Contingent liabilities

Contingent liabilities are potential liabilities that may become actual liabilities when one or more future events occur or fail to occur. To the extent that the future event is likely to occur or fail to occur, and a reasonable estimate of the loss can be made, an estimated liability is accrued and an expense recorded. If the likelihood is not determinable or if an amount cannot be reasonably estimated, the contingency is disclosed in the notes to the consolidated financial statements.

(k) Tangible capital assets

All tangible capital assets and leasehold improvements having an initial cost of $10,000 or more are recorded at their acquisition cost. ESDC does not capitalize intangibles, works of art and historical treasures that have cultural, aesthetic or historical value, assets located on Indian reserves and museum collections.

Amortization of tangible capital assets is done on a straight-line basis over the estimated useful life of the asset as follows:

• Tables notes:
  • Assets under construction are recorded in the applicable capital asset class in the year that they become available for use and are not amortized until they become available for use.

(l) Measurement uncertainty

The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in the consolidated financial statements. At the time of preparation of these statements, management believes the estimates and assumptions to be reasonable. The most significant items where estimates are used are the determination of part of the EI premiums, the allowances for doubtful accounts, the OAS and EI benefit repayments, the liability for employee future benefits, the recovery of CPP administration costs, the accrued liabilities, the useful life of tangible capital assets, the liability of the Government Annuities Account, the estimated overpayments and underpayments of benefits disclosed in Note 13 and the contingent liabilities. Actual results could significantly differ from those estimated. Management's estimates are reviewed periodically and, as adjustments become necessary, they are recorded in the consolidated financial statements in the year they become known.

Canada Student Loans

The Canada Student loans consist of 3 different types of loans, Direct Loans, Guaranteed Loans and Risk-Shared Loans. Since August 1, 2000, Canada Student Loans are issued under the Direct Loan Regime. Before this date, the loans were issued under the Guaranteed Loan Regime (1964-1995) or under the Risk-Shared Loan Regime (1995-2000). Direct loans issued on or after August 1, 2000 are administered under the authority of section 6.1 of the Canada Student Financial Assistance Act, which authorizes the Minister of Employment, Workforce Development and Labour to enter into loan agreements directly with any qualifying students. Guaranteed loans provided by financial institutions between 1964 and August 1995, under the Canada Student Loans Act, are fully guaranteed by ESDC to the lenders. Risk-shared loans issued prior to August 1, 2000 and on or after August 1, 1995 are amounts related to student loans subrogated to the Crown under the authority of the Canada Student Financial Assistance Act.

An allowance is recorded to provide for bad debts and Repayment Assistance Plan (RAP) for Canada Student Loans. The allowance for direct loans is determined according to an actuarial estimate provided by the Office of the Superintendent of Financial Institutions (Chief Actuary). Based on projected defaulted loans and recovery rates, the Chief Actuary establishes the allowance rates to be applied to the outstanding balances of the portfolio according to the status of the loans. For the year ended March 31, 2019, the bad debt and RAP allowance rates on direct loans were established as follows:

• Source: Actuarial Report on the Canada Student Loans Program, as at July 31, 2018.

The total amount of direct loans issued under the authority of the Canada Student Financial Assistance Act and outstanding risk-shared loans bought-back by ESDC may not exceed $24 billion. The total amount of direct loans and outstanding risk-shared loans as at March 31, 2019 amounted to $21,097.0 million ($19,862.0 million in 2018).

Canada Apprentice Loans

Canada Apprentice Loans (CAL) are administrated under the authority of section 4 of the Apprentice Loans Act which came into effect on January 2, 2015. The Minister of Employment, Workforce Development and Labour is authorized to enter into a loan agreement directly with any eligible apprentice.

An allowance is recorded to provide for CAL bad debts and Repayment Assistance Plan (RAP). The allowance is determined according to an actuarial estimate provided by the Chief Actuary. Based on projected defaulted loans and recovery rates, the Chief Actuary establishes the allowance rates to be applied to the outstanding balances of the portfolio according to the status of the loans. For the year ended March 31, 2019, the bad debt allowance rate was established at 5.10% (5.94% in 2018) and the RAP allowance rate was established at 3.00% (3.11% in 2018), resulting in an allowance of $19.1 million ($18.0 million in 2018).

The total amount of CAL issued under the authority of Apprentice Loans Act may not exceed $1.5 billion. The total amount of outstanding apprentice loans as at March 31, 2019 amounted to $237.2 million ($197.9 million in 2018).

Interest and repayment terms

Under these 2 programs, no security is received from the borrowers and the loans bear interest at either a variable rate (prime rate + 2.5%) or a fixed rate (prime rate + 5.0%). Borrowers are not required to pay interest on their loans while they are still studying or enrolled in their apprentice program.

Borrowers having difficulty repaying their loans may be eligible for assistance under the Repayment Assistance Plan. The typical repayment period is 10 years, with a maximum period of 15 years for borrowers that are eligible if their affordable payment, which is based on family income and family size, is less than their required monthly payment. Depending on their regime, borrowers may also benefit from another type of loan forgiveness program in the event of severe permanent disability or death.

When ESDC no longer has reasonable assurance of recovering the full amount of a loan at the expected date, the loan becomes impaired. Interest revenue is not recorded on impaired loans. Loans that are considered impaired are eventually subject to the write-off process. Subsequent recoveries on these loans are recorded as a reduction of the expense in the consolidated statement of operations and departmental net financial position. For the year ended March 31, 2019, the total bad debt expense on loans receivable amounted to $236.3 million ($252.5 million in 2018).

(a) Pension benefits

ESDC's employees participate in the Public Service Pension Plan (the"Plan"), which is sponsored and administered by the Government of Canada. Pension benefits accrue up to a maximum period of 35 years at a rate of 2% per year of pensionable service, times the average of the best 5 consecutive years of earnings. The benefits are integrated with Canada/Québec Pension Plans benefits and they are indexed to inflation.

Both the employees and ESDC contribute to the cost of the Plan. Due to the amendment of the Public Service Superannuation Act following the implementation of provisions related to the Economic Action Plan 2012, employee contributors have been divided into 2 groups: Group 1 relates to existing plan members as of December 31, 2012 and Group 2 relates to members joining the Plan as of January 1, 2013. Each group has a distinct contribution rate.

The 2019 expense amounts to $172.7 million ($171.3 million in 2018). For Group 1 members, the expense represents approximately 1.01 times (1.01 times in 2018) the employee contributions and, for Group 2 members, approximately 1.00 times (1.00 times in 2018) the employee contributions.

ESDC's responsibility with regard to the Plan is limited to its contributions. Actuarial surpluses or deficiencies are recognized in the Consolidated Financial Statements of the Government of Canada, as the Plan's sponsor.

(b) Severance benefits

Severance benefits provided to ESDC's employees were previously based on an employee's eligibility, years of service and salary at termination of employment. However, since 2011 the accumulation of severance benefits for voluntary departures progressively ceased for substantially all employees. Employees subject to these changes were given the option to be paid the full or partial value of benefits earned to date or collect the full or remaining value of benefits upon departure from the public service. By March 31, 2019, substantially all settlements for immediate cash out were completed. Severance benefits are unfunded and, consequently, the outstanding obligation will be paid from future authorities.

(a) Contractual obligations

The nature of ESDC's activities can result in some large multi-year contracts and obligations whereby ESDC will be obligated to make future payments in order to carry out its transfer payment programs or when the services/goods are received. Significant contractual obligations that can be reasonably estimated are summarized as follows:

Tables notes:

• Labour Market Development Agreements with 8 of the provinces and 1 territory require a 2 year notice for cancellation of the agreements, other provinces and territories require a 1 year notice. The obligations for 2022 cannot be reasonably estimated.

(a) Common services provided without charge by other government departments

During the year, ESDC received services without charge from certain common service organizations, related to the employer's contribution to the health and dental insurance plans and legal services. These services provided without charge have been recorded in the ESDC's Consolidated Statement of Operations and Departmental Net Financial Position as follows:

The Government has centralized some of its administrative activities for efficiency, cost-effectiveness purposes and economic delivery of programs to the public. As a result, the Government uses central agencies and common service organizations so that one department performs services for all other departments and agencies without charge. The costs of these services, such as the payroll and cheque issuance services provided by Public Services and Procurement Canada, information technology infrastructure services provided by Shared Services Canada and audit services provided by the Office of the Auditor General are not included in the ESDC's Consolidated Statement of Operations and Departmental Net Financial Position.

(b) Common services provided without charge to other government departments

During the year, ESDC provided services without charge to other government departments, related to the provision of workers' compensation services, amounted to $24.5 million in 2019 ($23.7 million in 2018).

(c) Other transactions with related parties

In the normal course of business, ESDC enters into transactions with government departments, agencies and Crown corporations. The assets, liabilities, revenues and expenses related to these transactions are as follows:

Tables notes:

• Expenses and revenues disclosed in this table exclude common services provided without charge, which are already disclosed in section (a).

2.1 Internal Control Management

ESDC recognizes the importance of setting the tone from the top to help ensure that staff at all levels understand their roles in maintaining effective systems of ICFR and is well equipped to exercise these responsibilities effectively. The Department's focus is to ensure risks are managed well through a responsive and risk-based control environment that enables continuous improvement and innovation.

The Department has a well-established governance and accountability structure to support departmental assessment efforts and oversight of its system of internal control. The ESDC Financial Internal Control Framework was revised and approved by the primary departmental assurance providers and the Deputy Minister in November 2017. The Framework was a collaborative effort between the Assistant Deputy Minister and members of the Internal Control and Financial Assurance Senior Working Group (ICFA SWG) to depict the financial control activities within the responsibility of each of its members. The Framework also includes:

• Organizational accountability structures as they relate to internal control management to support sound financial management including roles and responsibilities for senior managers in their areas of responsibility for control management;
• Monitoring and regular updates on internal control management plus assessment results and action plans to the Chief Financial Officer (CFO), Corporate Management Committee (CMC) and Departmental Audit Committee (DAC).

The DAC is an advisory committee which provides objective views on the Department's risk management, control and governance processes as well as general reporting.

Other key committees with responsibilities for maintaining and overseeing the effectiveness of its system of ICFR include:

2.2 Service arrangements relevant to financial statements

ESDC relies on other organizations for the processing of certain transactions that are recorded in its financial statements as follows:

Entity Level Controls - Control Activities, Information & Communication, and Control Monitoring Components

The assessment of the Control Activities, Information & Communication, and Control Monitoring Components was conducted as part of a 3-year cycle to assess all of the 5 ELC components (Risk Assessment, Control Environment, Control Activities, Information & Communication, and Monitoring). As a result of the assessment, some key recommendations included but not limited to:

• Ensure that departmental financial policies are reviewed and updated in a timely manner; and
• Continue to enhance the documentation of the departmental FAA Section 33 Framework

Management responses and action plans (MRAPs) will be prepared by the process owners with a view to strengthen control and progress against these plans will be tracked during 2019 to 2020.

IT General Controls

The year 2 ongoing monitoring of ITGCs was conducted as part of a 3-year cycle, which assesses SAP and 16 feeder systems. As a result of the assessment, some key recommendations are noted in all four main control pillars evaluated: access to programs and data, program changes, computer operations, and program development.

MRAPs will be prepared by the process owners with a view to strengthen control and progress against these plans will be tracked during 2019 to 2020 as part of the year 3 ongoing monitoring of ITGCs.

Canada Student Loans

The assessment of the Canada Student Loans Program process included the following 13 sub-processes: disbursements - direct loans, integrated loans, and Canada Apprenticeship loans, alternative payments and special payments for non-integrated provinces, monthly financial information schedule (MFIS) and Production Edulinx (PEDU) reports, establishment of accounts - return to government (RTG), DARS interest calculation, direct loans bad debts provision (interest portion only), direct loans and CAL bad debts provision (principle portion only), recording monthly DARS transactions in SAP, automated receipt and deposit (ARADS) payments, CRA set-off payments, write-offs, annual external audit on the service provider, and receipt of Canada Student Loan payments. As a result of the assessment, some key recommendations included but were not limited to:

• Ensure access to SAP functionality is restricted and a review of specific roles and access privileges is performed periodically,
• Review access rights within DARS,
• Enforce segregation of duties between entry and approval of journal voucher entries in SAP for the quarterly preparation of Direct Loan Bad Debt Interest provisions and for the monthly process of recording DARS transactions for direct loans in default status into SAP, and
• Ensure access to the Cognos reporting tool for DARS is restricted.

MRAPs will be prepared by the process owners with a view to strengthen control and progress against these plans will be tracked during 2019-2020.

Planning and Budgeting

The assessment of the procure to payment business process included the following 13 sub-processes: Annual Reference Level Update (ARLU), interim and main estimates, interim supply - cash, full supply - cash, Departmental Plan, Treasury Board submissions, supplementary estimates (SUPPS A and B), financial allotment report, base derivation, budget allocation and distribution - operating funds and grants and contributions, forecasting, budget transfers - operating budgets and grants and contributions, and budget carry forwards.

As a result of the assessment, some key recommendations included but were not limited to:

• Ensure access to SAP functionality is restricted and a review of specific roles and access privileges is performed periodically;
• Review the access rights to input forecast information in SAP periodically;
• Strengthen segregation of duties between entry and approval of budget transfer entries in SAP.

MRAPs will be prepared by the process owners with a view to strengthen control and progress against these plans will be tracked during 2019-2020.

4.1 Progress during fiscal year 2018-2019

During 2018-2019, ESDC conducted its ongoing monitoring according to the previous year's rotational plan as shown in the following table:

4.2 Action plan for the next fiscal year and subsequent years

ESDC's rotational ongoing monitoring plan over the next 3 years is shown in the following table. Note that the plan will be adjusted as required subject to an annual revalidation of the high risk control areas, the timing of other relevant audit and monitoring activities and the impact of changes that occurred during the year or that are planned for the coming year(s).

Tables notes:

• ¹A portion of Entity Level Controls will be monitored annually. Over a 3 year cycle, each component will be revisited.
• ²A portion of IT General Controls will be monitored annually, based on risk. Over a 3 year cycle, all in scope IT systems will be revisited.