Unaudited Financial Statements for the period ending March 31, 2017, Environment and Climate Change 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. Environmental liabilities
6. Deferred revenue
7. Lease obligation for tangible capital assets
8. Employee future benefits
9. Accounts receivable and advances
10. Inventory
11. Tangible capital assets
12. Contractual obligations
13. Contingent liabilities
14. Related party transactions
15. Transfers to/from other government departments
16. Segmented information
17. Comparative information

1. Authority and objectives

Environment and Climate Change Canada was established under Department of the Environment Act . Under this Act, the powers, duties and functions of the Minister of the Environment and Climate Change Canada 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 and Climate Change 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 and Climate Change Canada has authority under numerous pieces of legislation which affect how Environment and Climate Change Canada operates. The most significant Acts are as follows:

• Antarctic Environmental Protection Act
• Canada Emission Reduction Incentives Agency 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 and Climate Change Canada is financed by the Government of Canada through Parliamentary authorities. Financial reporting of authorities provided to Environment and Climate Change 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 3 provides 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 2016-17 Departmental Plan. 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 2016-17 Departmental Plan.

(b) Net Cash Provided by Government

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

Amounts 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 and Climate Change 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 Environment and Climate Change Canada 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 and Climate Change 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 contribution 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 and Climate Change Canada’s contributions to the Plan are charged to expenses in the year incurred and represent the total departmental obligation to the Plan. Environment and Climate Change 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.

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 department 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 Department’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 which is based on the Government’s cost of borrowing.  The discount rates used are based on the term rate associated with the estimated number of years to complete remediation. For remediation costs with estimated future cash flows spanning more than 25 years, the Government of Canada’s 25 year Consolidated Revenue Fund lending rate is used as the discount rate.

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.

If the likelihood of the Department’s responsibility is not determinable, a contingent liability is disclosed in the notes to the financial statements. If measurement uncertainty exists, it is also disclosed in the notes to the financial statements.

(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 and Climate Change 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 and Climate Change 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 and Climate Change 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:

4. Accounts payable and accrued liabilities

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

In Canada’s Economic Action Plan 2012 , the Government announced savings measures to be implemented by departments starting in 2012-2013 and extending over the three subsequent fiscal years. To this effect, the Department has recorded an obligation for termination benefits as part of accrued liabilities to reflect the estimated workforce adjustment costs. The remaining balance of these measures as of March 31, 2017 is $211,500 ($730,000 as of March 31, 2016).

5. 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 and Climate Change Canada has identified approximately 111 sites (163 sites in 2015-2016) where contamination may exist and assessment, remediation and monitoring may be required. Of these, the Department has identified 17 sites (23 sites in 2015-2016) where action is possible and for which a liability of $183,005,866 ($126,025,708 in 2015-2016) has been recorded. This liability estimate has been determined after the sites are assessed and is based on environmental experts reviewing the results of site assessments, and proposing possible remediation solutions.

In addition, a statistical model based upon a projection of the number of sites that will proceed to remediation and upon which current and historical costs are applied is used to estimate the liability for a group of unassessed sites. As a result, there are 14 unassessed sites ‎(43 sites in 2015-2016) where a liability estimate of $12,596,796 ($15,392,016 in 2015-2016) has been recorded using this model.

These two estimates combined, totaling $195,602,662 ($141,417,724 in 2016), represents management’s best estimate of the costs required to remediate the sites to the current minimum standard for its use prior to contamination, based on information available at the financial statement date.

Of the remaining 80 sites (97 sites in 2015-2016), no liability for remediation has been recognized. Some of these sites are at various stages of testing and evaluation and if remediation is required, liabilities will be reported as soon as a reasonable estimate can be determined. For other sites, the Department does not expect to give up any future economic benefits (there is likely no significant environmental impact or human health threats). These sites will be re-examined and a liability for remediation will be recognized if future economic benefits will be given up.

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, 2017, and March 31, 2016. When the liability estimate is based on a future cash requirement, the amount is adjusted for inflation using a forecast CPI rate of 2%. Inflation is included in the undiscounted amount. 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 2017 rates range from 0.89% for 2 year term to 2.55% for a 25 or greater year term.

⁽¹⁾ Contamination primarily associated with fuel storage and handling, e.g. accidental spills related to fuel storage tanks or former fuel handling practices, e.g. petroleum, hydrocarbons, polyaromatic hydrocarbons and BTEX.

⁽²⁾ Contamination associated with the operations of marine assets, e.g., port facilities, harbours, navigation systems, light stations, hydrometric stations, where activities such as fuel storage/handing, use of metal bases paint (e.g., on light stations) resulted in former or accidental contamination, e.g. metals, petroleum hydrocarbons, polyaromatic hydrocabons and other organic contaminents. Sites often have multiple sources of contamination.

⁽³⁾ Contamination associated with the operations and maintenance of parks and protected areas where activities such as fuel storage/handing, waste sites and use of metal based paint resulted in former or accidental contamination, e.g. metals, petroleum hydrocarbons, polyaromatic hydrocarbons, PCBs and other organic contaminants. Sites often have multiple sources of contamination

⁽⁴⁾ Contamination aasociated with the operations of the office/commercial/industrial facilities where activities such as fuel storage/handling, waste sites and use of metal-based paint resulted in former or accidental contamination, e.g. metals, petroleum hydrocarbons, polyaromatic hydrocarbons, BTEX, etc. Sites often have multiple sources of contamination.

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.

6. 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:

7. Lease obligation for tangible capital assets

Environment and Climate Change Canada has entered into agreements to lease certain equipment under capital leases with a cost of $18,198,560 and accumulated amortization of $10,918,733 as at March 31, 2017 ($18,198,560 of cost and $10,190,791 in accumulated amortization respectively as at March 31, 2016) as reflected in note 11. The obligations related to the upcoming years include Carleton University for which, on October 13, 2000, Environment and Climate Change 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.

8. Employee future benefits

(a) Pension benefits

Environment and Climate Change 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 2016-2017 expense amounts to $55,858,162 ($58,090,226 in 2015-2016). For Group 1 members, the expense represents approximately 1.12 times (1.25 times in 2015-2016) the employee contributions and, for Group 2 members, approximately 1.08 times (1.24 times in 2015-2016) the employee contributions.

Environment and Climate Change 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

Severance benefits provided to the Environment and Climate Change Canada'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, 2017, substantially all settlements for immediate cash out were completed. Severance benefits are unfunded and, consequently, the outstanding obligation will be paid from future authorities.

The changes in the obligations during the year were as follows:

9. Accounts receivable and advances

The following table presents details of Environment and Climate Change 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.

11. Tangible capital assets

⁽¹⁾ Assets under construction include: buildings, engineering works, software and other construction.

⁽²⁾ Vehicles include: road motor vehicles, off road vehicles, aircraft, mobile laboratories, ships and boats.

⁽³⁾ Adjustments include assets under constructions of $27,166,679 that were transferred to the other categories upon completion of the assets, post- capitalization and write-offs for a net book value of $767,627 reduced by transfers of tangible capital assets between departments with a net effect of $198,199 on the departmental net financial position.

12. Contractual obligations

The nature of Environment and Climate Change Canada's activities can result in some large multi-year contracts and obligations whereby Environment and Climate Change 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 and Climate Change 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 and Climate Change 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 $35,275,000 at March 31, 2017 ($8,775,000 in 2015-2016).

14. Related party transactions

Environment and Climate Change Canada is related as a result of common ownership to all Government departments, agencies, and Crown corporations. Environment and Climate Change Canada enters into transactions with these entities in the normal course of business and on normal trade terms. During the year, Environment and Climate Change 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 and Climate Change 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 and Climate Change 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 Services and Procurement 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 and Climate Change Canada's Statement of Operations and Departmental Net Financial Position.

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

15. Transfers to/from other government departments

During the year, Environment and Climate Change Canada transferred tangible capital assets with Fisheries and Oceans Canada and National Defense with a net effect of $198,199 ($168,112 in 2015-2016) on the departmental net financial position affecting categories under land, machinery and equipment and vehicles.

16. Segmented information

Presentation by segment is based on Environment and Climate Change 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:

17. Comparative information

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