Archived: Unaudited Financial Statements for the period ending March 31, 2015, Environment Canada chapter 6

Notes to the Financial Statements (Unaudited)

1. Authority and objectives
2. Summary of significant accounting policies
3. Parliamentary authorities
4. Accounts payable and accrued liabilities
5. Deferred revenue
6. Lease obligation for tangible capital assets
7. Employee future benefits
8. Environmental liabilities
9. Accounts receivable and advances
10. Inventory
11. Tangible capital assets
12. Contractual obligations
13. Contingent liabilities
14. Related party transactions
15. Transfer of the transition payments for implementing salary payments in arrears
16. Transfers to/from other government departments
17. Segmented information
18. Comparative information

1. Authority and objectives

Environment Canada was established under legislation by Environment Canada of the Environment Act. Under this Act, the powers, duties and functions of the Minister of the Environment extend to and include matters relating to:

• The preservation and enhancement of the quality of the natural environment (including water, air and soil quality);
• Renewable resources, including migratory birds and other non-domestic flora and fauna;
• Water;
• Meteorology;
• Enforcement of any rules or regulations made by the International Joint Commission relating to boundary waters; and
• Coordination of the policies and programs of the Government of Canada respecting the preservation and enhancement of the quality of the natural environment.

Environment Canada delivers its mandate by promoting the three (3) following Strategic Outcomes:

• Conservation of Canada's Natural Environment
  Canada's natural environment is conserved and restored for present and future generations.
• Weather Information
  Canadians are equipped to make informed decisions on changing weather, water and climate conditions.
• Threats from Pollution Minimized
  Threats to Canadians and their environment from pollution are minimized.

The Internal Services Program includes groups of related activities and resources that are administered to support the Department's Strategic Outcomes and Programs. It is the basis for a common government-wide approach to planning, designing, budgeting, reporting and communicating all Government of Canada internal services.

In addition, Environment Canada has authority under numerous pieces of legislation which affect how Environment Canada operates. The most significant Acts are as follows:

• Antarctic Environmental Protection Act
• Canada Water Act
• Canada Wildlife Act
• Canadian Environment Week Act
• Canadian Environmental Assessment Act, 2012
• Canadian Environmental Protection Act, 1999
• Department of the Environment Act
• Environmental Enforcement Act
• Environmental Violations Administrative Monetary Penalties Act
• Federal Sustainable Development Act
• Fisheries Act (Sections 36-42)
• International River Improvements Act
• Lac Seul Conservation Act, 1928
• Lake of the Woods Control Board Act, 1921
• Manganese-Based Fuel Additives Act
• Migratory Birds Convention Act, 1994
• National Wildlife Week Act
• Perfluorooctane Sulfonate Virtual Elimination Act
• Species at Risk Act
• Weather Modification Information Act
• Wild Animal and Plant Protection and Regulation of International and Interprovincial Trade Act

2. Summary of significant accounting policies

These financial statements have been prepared using the Government's accounting policies stated below, which are based on Canadian public sector accounting standards. The presentation and results using the stated accounting policies do not result in any significant differences from Canadian public sector accounting standards.

Significant accounting policies are as follows:

(a) Parliamentary authorities
Environment Canada is financed by the Government of Canada through Parliamentary authorities. Financial reporting of authorities provided to Environment Canada 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 Statement of Operations and Departmental Net Financial Position and in the Statement of Financial Position are not necessarily the same as those provided through authorities from Parliament. Note 3provides a reconciliation  between the bases of reporting. The planned results amounts in the “Expenses” and “Revenues” sections of the Statement of Operations and Departmental  Net Financial Position are the amounts reported in the Future-Oriented  Statement of Operations included in the 2014-2015 Report on Plans and Priorities.  Planned results are not presented in the “Government  funding and transfers” section of the Statement of Operations and Departmental  Net Financial Position and in the Statement of Change in Departmental  Net Debt because these amounts were not included in the 2014-15 Report on Plans and Priorities.

(b) Net Cash Provided by Government
Environment Canada operates within the Consolidated Revenue Fund (CRF), which is administered by the Receiver General for Canada. All cash received by Environment Canada is deposited to the CRF, and all cash disbursements made by Environment Canada 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.

(c) Amount Due from the Consolidated Revenue Fund (CRF)
Amount due from or to the CRF 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 from the CRF represent the net amount of cash that Environment Canada is entitled to draw from the CRF without further authorities to discharge its liabilities.

(d) Revenues

• Revenues from regulatory fees are recognized in the accounts based on the services provided in the year.
• Funds received from external parties for specified purposes are recorded upon receipt as deferred revenue. These revenues are recognized in the period in which the related expenses are incurred.
• Funds that have been received are recorded as deferred revenue, provided the Department has an obligation to other parties for the provision of goods, services or the use of assets in the future.
• Other revenues are accounted for in the period in which the underlying transaction or event that gave rise to the revenue takes place.
• Revenues that are non-respendable are not available to discharge Environment Canada's liabilities. While the Deputy Head is expected to maintain accounting control, he has no authority regarding the disposition of non-respendable revenues. As a result, non-respendable revenues are considered to be earned on behalf of the Government of Canada and are therefore presented in reduction of the entity's gross revenues.

(e) 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 accommodation, employer's contributions to the health and dental insurance plans, legal services and workers' compensation are recorded as operating expenses at their estimated cost.

(f) Employee future benefits

• Pension benefits: Eligible employees participate in the Public Service Pension Plan, a multiemployer pension plan administered by the Government. Environment Canada's contributions to the Plan are charged to expenses in the year incurred and represent the total departmental obligation to the Plan. Environment Canada'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: Employees entitled to severance benefits under labour contracts or conditions of employment earn these benefits as services necessary to earn them are rendered. The obligation relating to the benefits earned by employees is calculated using information derived from the results of the actuarially determined liability for employee severance benefits for the Government as a whole.

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

(h) 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 financial statements.

(i) Environmental liabilities

Environmental  liabilities consist of estimated costs related to the remediation of contaminated sites as well as estimated costs related to obligations associated with the retirement of tangible capital assets and other environmental  liabilities.

Contaminated Sites:

A liability for remediation of contaminated sites is recognized when all of the following criteria are satisfied: an environmental standard exists, contamination exceeds the environmental  standard, the government is directly responsible or accepts responsibility, it is expected that future economic benefits will be given up and a reasonable estimate of the amount can be made. The liability reflects the Government’s  best estimate of the amount required to remediate the sites to the current minimum standard for its use prior to contamination. When the cash flows required to settle or otherwise extinguish a liability are expected to occur over extended future periods, a present value technique is used. The discount rate applied is taken from the government’s consolidated revenue fund monthly lending rates for periods of one year and over.  The discount rates used are based on the term rate associated with the estimated number of years to complete remediation.

The recorded environmental  liabilities are adjusted each year, as required, for present value adjustments, inflation, new obligations, changes in management estimates and actual costs incurred.

(j) Inventory

Inventory  held for future program  delivery consists  of meteorological  supplies,  electric  lighting,  compressed  gases and acetylene, chemicals and related products, scientific and technical equipment and test vehicles. It is valued using the moving average price.

Inventory held for resale consists of printed material, books, maps and forms, stationery and office paper supplies which will be sold in the future. It is valued using the moving average price.

(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. Environment Canada 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 calculated on a straight-line basis over the estimated useful life of the asset as follows:

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  financial  statements  requires  management  to make  estimates  and  assumptions  that  affect  the reported amounts  of  assets,  liabilities,  revenues  and  expenses  reported  in  the  financial  statements.  At  the  time  of  preparation  of  these statements,  management  believed  the estimates  and assumptions  to be reasonable.  The most significant  items where estimates  are used are contingent liabilities, environmental  liabilities, liabilities for employee future benefits and the useful life of tangible capital assets.   Actual  results  could  significantly  differ  from those estimated.  Management’s  estimates  are reviewed  periodically  and,as adjustments become necessary, they are recorded in the financial statements in the year they become known.

3. Parliamentary authorities

Environment Canada receives most of its funding through annual parliamentary authorities. Items recognized in the Statement of Operations and Departmental Net Financial Position and the Statement of Financial Position in one year may be funded through parliamentary authorities in prior, current or future years. Accordingly, Environment Canada has different net results of operations for the year on a government funding basis than on an accrual accounting basis. The differences are reconciled in the following tables:

(a) Reconciliation of net cost of operations to current year authorities used:

(b) Authorities provided and used:

4. Accounts payable and accrued liabilities

The following table presents details of Environment Canada's accounts payable and accrued liabilities:

In Canada’s Economic Action Plan 2012, the Government  announced savings measures to be implemented  by departments  over the next  three  fiscal  years  starting  in  2012-2013.   As  a  result,  the  Department  has  recorded  at  March  31,  2015  an  obligation  for termination  benefits  for an estimated  amount  of $1,870,000  ($1,800,000  in 2013-2014)  as part of accrued  liabilities  to reflect the estimated workforce adjustment costs. The actual cost may be different from the estimate.

5. Deferred revenue

Deferred revenue represents the balance at year-end of unearned revenues stemming from amounts received from external parties that are restricted in order to fund the expenditures related to specific projects. Revenue is recognized in the period in which these expenditures are incurred or in which the service is performed. Details of the transactions related to this account are as follows:

6. Lease obligation for tangible capital assets

Environment Canada has entered into agreements to lease certain equipment under capital leases with a cost of $18,198,560 and accumulated amortization of $9,462,848 as at March 31, 2015 ($18,198,560 of cost and $8,734,872 in accumulated amortization respectively as at March 31, 2014) as reflected in note 10. The obligations related to the upcoming years include Carleton University for which,  on October  13, 2000,  Environment  Canada  entered  into an agreement  to rent office laboratory  space for the National Wildlife Research Centre (NWRC), at an annual cost of $1,300,000 under a capital lease which expires in 2028.

7. Employee future benefits

(a) Pension benefits
Environment Canada'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 percent per year of pensionable service, times the average of the best five consecutive years of earnings. The benefits are integrated with Canada/Québec Pension Plan benefits and they are indexed to inflation.

Both the employees and the Department contribute to the cost of the Plan. Due to the amendment of the Public Service Superannuation Act following the implementation of provisions related to Economic Action Plan 2012, employee contributors have been divided into two 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  2014-2015  expense  amounts  to  $61,199,436  ($65,844,996  in  2013-2014).   For  Group  1  members,  the  expense  represents approximately  1.41 times (1.6 times in 2013-2014)  the employee contributions  and, for Group 2 members, approximately  1.39 times (1.5 times in 2013-2014) the employee contributions.

Environment Canada'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.

(b) Severance benefits
Environment Canada provides severance benefits to its employees based on eligibility, years of service and salary at termination of employment. These severance benefits are not pre-funded. Benefits will be paid from future authorities.

As part of collective agreement negotiations with certain employee groups, and changes to conditions of employment for executives and certain non-represented employees, the accumulation of severance benefits under the employee severance pay program ceased for these employees commencing in 2012. Employees subject to these changes have been given the option to be immediately paid the full or partial value of benefits earned to date or collect the full or remaining value of benefits on termination from the public service. These changes have been reflected in the calculation of the outstanding severance benefit obligation.

Information about the severance benefits, measured as at March 31, is as follows:

8. Environmental liabilities

The  government  has  developed  a “Federal  Approach  to Contaminated  Sites”,  which  incorporates  a  risk-based  approach  to the management of contaminated  sites. Under this approach the Government has inventoried the contaminated sites on federal lands that have been identified, allowing them to be classified, managed and recorded in a consistent manner. This systematic approach aides in the identification  of the high risk sites in order  to allocate  limited  resources  to those sites which  pose the highest  risk to the environment and human health.

Environment   Canada  has  identified   approximately   182  sites  (187  sites  in  2013-2014)   where  contamination   may  exist  and assessment,  remediation  and monitoring  may be required.  Of these, the Department  has identified  23 sites (22 sites in 2013-2014) where action is possible and for which a net liability of $122,609,100 ($110,916,041  in 2013-2014) has been recorded. This liability represents  management’s  best estimate  of the amount  required  to complete  the remediation  of the sites to the current  minimum standard  for its use prior  to contamination,  based  on information  available  at the financial  statement  date.  A net  present  value technique has been used for sites where the cash flows are expected to occur over extended future periods.

The following table presents the total estimated amounts of these liabilities by nature and source, the associated expected recoveries and the total undiscounted  future expenditures  as at March 31, 2015, and March 31, 2014. When the liability estimate is based on a future cash requirement,  the Government  of Canada lending rate applicable to loans with similar terms to maturity has been used to discount  the estimated  future expenditures.  The March 2015 rates range from 0.61% for 2 year term to 2.12% for a 25 or greater year term. No recoveries are estimated.

Of the remaining 159 sites, 49 sites were closed, as they were either remediated or assessed and found not to be contaminated,  and there are 110 sites for which  an estimated  liability  hasnot been determined,  primarily  due to the fact the sites are not yet fully assessed and contamination  hasnot yet been determined  or they have not developed  a detailed  remediation  plan. As the sites are assessed, if contamination  is found, and it exceeds the environmental  standard, a liability will be recognized as soon as a reasonable estimate can be made.

Of the 110 sites that do not have liabilities, 6 require action and are high in priority for future assessment. 61 sites are considered a medium to low priority based on the low level of risk to human health or the environment.  Assessment and remediation will be done on these sites as resources become available. 28 sites are not yet classified because they are only at theinitial testing stages and contamination  has not yet been determined.  15 sites are not considered  a priority for action because information  indicates there is likely no significant  environmental  impact or human health threats and there is likely no need for action unless  new information becomes available indicating greater concerns, in which case, the sitewill be re-examined.  Zero site currently have insufficient information in order to classify. Additional information is required to classify the sites but is not available at this time. As additional information becomes available the sites will be re-examined.

The Government’s  ongoing  efforts  to assess  contaminated  sites may result  in additional  environmental  liabilities.  Any additional liabilities will be accrued in the year in which they become known and can be reasonably estimated.

9. Accounts receivable and advances

The following table presents details of Environment Canada's accounts receivable and advances balances:

10. Inventory

The following table presents details of the inventory.

Inventory  is valued  using  the  moving  average  price.  The  accounting  valuation  method  has  been  revised  in 2014-2015  but  with minimal impact on 2013-2014 therefore,these figures have not been restated.

11. Tangible capital assets

12. Contractual obligations

The nature of Environment  Canada's  activities  can result in some large multi-year  contracts  and obligations  whereby Environment Canada 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:

13. Contingent liabilities

Claims have been made against Environment  Canada in the normal course of operations.   These claims include items with pleading amounts and others for which no amount is specified.  While the total amount claimed in these actions is significant, their outcomes are not determinable.  Environment Canada has recorded an allowance for claims and litigations where it is likely that there will be a future payment and a reasonable estimate of the loss can be made.  Claims and litigations for which the outcome is not determinable and a reasonable estimate can be made by management amount to approximately $8,725,000 at March 31, 2015 ($8,550,000 in 2013-2014).

14. Related party transactions

Environment Canada is related as a result of common ownership to all Government departments, agencies, and Crown corporations. Environment Canada enters into transactions with these entities in the normal course of business and on normal trade terms. During the year, Environment Canada received common services which were obtained without charge from other Government departments as disclosed below.

(a) Common services provided without charge by other government departments :
During the year, Environment Canada received services without charge from certain common service organizations, related to accommodation, the employer’s contribution to the health and dental insurance plans, legal services and workers' compensation coverage. These services provided without charge have been recorded in Environment Canada’s 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 Works and Government Services Canada, the informatic services provided by Shared Services Canada and the audit services provided by the Office of the Auditor General are not included in Environment Canada's Statement of Operations and Departmental Net Financial Position.

(b) Other transactions with related parties :

Expenses and revenues disclosed in (b) exclude common services provided without charge, which are already disclosed in (a).

15. Transfer of the transition payments for implementing salary payments in arrears

The Government  of Canada implemented  salary payments  in arrears in 2014-2015.  As a result, a one-time payment was issued to employees  and  will  be  recovered  from  them  in  the  future.  The  transition  to  salary  payments  in  arrears  forms  part of the transformation  initiative that replaces the pay system and also streamlines and modernizes the pay processes. This change to the pay system had no impact on the expenses of Environment  Canada. However,  it did result in the use of additional  spending authorities by the Department.  Prior to year end, the transition  payments  for implementing  salary payments  in arrears  were transferred  to a central account administered by Public Works and Government Services Canada, who is responsible for the administration of the Government pay system.

16. Transfers to/from other government departments

During the year, Environment  Canada transferred  tangible capital assets with Fisheries  and Oceans Canada and National Defence with  a net  effect  of $6,050  ($20,329  in 2014-2015)  on the departmental  net  financial  position  affecting  categories  under  land, machinery and equipment and vehicles.

17. Segmented information

Presentation by segment is based on Environment Canada's program alignment architecture. The presentation by segment is based on the same accounting policies as described in the Summary of significant accounting policies in Note 2. The following table presents the expenses incurred and revenues generated by strategic outcomes, by major object of expense and by major type of revenue. The segment results for the period are as follows:

18. Comparative information

Comparative figures have been reclassified to conform to the current year's presentation.