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Table 11:
National Defence
Departmental Financial Statements

ADM (PA) DMCS CS07-0622

Statement of Management Responsibility

Responsibility for the integrity and objectivity of the accompanying financial statements for the year ended March 31, 2008 and all information contained in these statements rests with the management of National Defence. These financial statements have been prepared by management in accordance with Treasury Board accounting policies which are consistent with Canadian generally accepted accounting principles for the public sector.

Management is responsible for the integrity and objectivity of the information in these financial statements. Some of the information in the financial statements is based on management’s best estimates and judgment and gives due consideration to materiality. To fulfil its accounting and reporting responsibilities, management maintains a set of accounts that provides a centralized record of the Department’s financial transactions. Financial information submitted to the Public Accounts of Canada and included in the Department’s Departmental Performance Report is consistent with these financial statements.

Management maintains a system of financial management and internal control designed to provide reasonable assurance that financial information is reliable, assets are safeguarded, transactions are in accordance with the Financial Administration Act and are executed in accordance with prescribed regulations, within Parliamentary authorities, and are properly recorded to maintain accountability of Government funds. Management also seeks to ensure the objectivity and integrity of data in its financial statements by careful selection, training and development of qualified staff, by organizational arrangements that provide appropriate divisions of responsibility and by communication programs aimed at ensuring that regulations, policies, standards and managerial authorities are understood throughout National Defence.

The financial statements of the Department have not been audited. There is no current requirement for National Defence to have these statements audited.

Date: August 25, 2008

Statement of Operations (Unaudited)

For the year ended March 31

Statement of Financial Position (Unaudited)

As at March 31

The accompanying notes form an integral part of these financial statements.

Statement of Equity of Canada (Unaudited)

For the year ended March 31

Statement of Cash Flow (Unaudited)

For the year ended March 31

Notes to the Financial Statements (Unaudited)

1. Authorities and Objectives

Authorities

The Department of National Defence (DND) was established by the National Defence Act (NDA). Under section 3 of the Act, the Minister of National Defence presides over the Department. Under section 4 of the NDA, the Minister has the management and direction of the Canadian Forces (CF) and of all matters relating to National Defence.

Objectives

The Defence mission is to defend Canada and Canadian interests and values while contributing to international peace and security. Under Canadian defence policy, the CF is called upon to fill three major roles: protecting Canada, defending North America in co-operation with the United States, and contributing to international peace and security. The Defence mission is delivered through three Program Activities, which are as follows:

(a) Generate and Sustain Relevant, Responsive and Effective Combat-Capable Integrated Forces:

This Program Activity consists of all the activities necessary to design and develop force structure, create the capability components, generate the forces, and sustain and maintain the forces over time at the appropriate readiness levels. It is designed to generate and sustain forces capable of: Maritime Effects; Land Effects; Aerospace Effects; and Joint, National, Unified and Special Operations Forces. This activity is required to:

• Maintain operational units;
• Maintain deployable support;
• Recruit and train personnel;
• Provide nationally based fixed support including infrastructure, supply, fixed command, force development, and research and development; and
• Acquire Capital Equipment.

(b) Conduct operations:

This Program Activity represents the main use of the program output from generate and sustain forces, that is the employment of forces in operations, whether on a constant basis, selectively ongoing operations, or as required for named domestic or international operations. It consists of all the activities necessary to conduct: Constant Situational Awareness; Domestic and Continental Operations; and International Operations. This activity is required to:

• Maintain and conduct Intelligence, Surveillance and Reconnaissance (ISR) operations;
• Maintain ISR support;
• Employ forces to conduct contingency operations in response to domestic or continental requirements;
• Employ High–Readiness forces to conduct operations in response to domestic and continental requirements;
• Provide ongoing specified services in accordance with Government of Canada and other government department agreements and demand from other levels of government;
• Employ forces to conduct contingency operations in response to international requirements; and
• Employ High–Readiness forces to conduct operations in response to international requirements.

(c)   Contribute to Canadian government, society and international community in accordance with Canadian interests and values:

This Program Activity consists of Defence advice to the Government of Canada, contributions to Canadian Government; and contributions to the International Community, all in accordance with Canadian interests and values. This activity is required to:

• Provide defence and security policy advice to the Government of Canada;
• Provide military advice to the Government of Canada;
• Provide support to Government of Canada programs;
• Contribute to Canadian economy and innovation;
• Contribute to Canadian identity;
• Contribute to youth and education;
• Meet commitments to international organizations and exchange programs; and
• Provide advisory and training support to other nations.

2. Summary of Significant Accounting Policies

The financial statements have been prepared in accordance with Treasury Board accounting policies, which are consistent with Canadian generally accepted accounting principles for the public sector.

(a) Parliamentary Appropriations

The Department is financed by the Government of Canada through Parliamentary appropriations. Appropriations provided to the Department do not parallel financial reporting according to generally accepted accounting principles since appropriations are primarily based on cash flow requirements. Consequently, items recognized in the statement of operations and the statement of financial position are not necessarily the same as those provided through appropriations from Parliament. Note 3 provides a high-level reconciliation between the bases of reporting.

(b) Reporting Entity

The reporting entity hereafter referred to, as the Department, is comprised of DND, the CF and several related organizations and agencies in the Defence Portfolio, which carry out the Defence mission and are part of the Defence Services Program. The Canadian Forces Grievance Board and the Military Police Complaints Commission are excluded from the reporting entity because these organizations are not part of the Defence Services Program, although they fall under the responsibility of the Minister of National Defence.

Non-Public Property (NPP) as defined in section 2 of the NDA, and administered by the Canadian Forces Personnel Support Agency is also excluded from the reporting entity. NPP includes all money and property contributed to or by CF members for their collective benefit and welfare. NPP is not subject to the Financial Administration Act, and is administered outside the framework of public funds. NPP is not part of the Defence Services Program. For 2007-2008, NPP had estimated annual revenues of $305 million ($330 million in 2006-2007), estimated annual expenses of $300 million ($295 million in 2006-2007) and as of March 31, 2008 had an estimated net equity (assets minus liabilities) of $560 million ($540 million in 2006-2007).

Organizations and agencies that are part of the reporting entity include the following:

• Canadian Cadet Program and the Junior Canadian Rangers;
• Communications Security Establishment;
• Canadian Forces Housing Agency;
• Defence Research and Development Canada;
• Office of the Communications Security Establishment Commissioner;
• Office of the Department of National Defence and Canadian Forces Ombudsman;
• Office of the Judge Advocate General; and
• National Search and Rescue Secretariat.

All revenue and expense transactions and any related asset and liability accounts between organizations within the Defence Services Program have been eliminated.

(c) Net Cash Provided by the Government of Canada

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

(d) Change in Net Position in the Consolidated Revenue Fund

Change in net position in the CRF is the difference between the net cash provided by Government and appropriations used in a year, excluding the amount of non-respendable revenue recorded by the Department. It results from timing differences between when a transaction affects appropriations and when it is processed through the CRF.

(e) Revenues

• Revenues are accounted for in the period in which the underlying transaction or event occurred that gave rise to the revenues;
• Funds received from external parties for specified purposes are recorded upon receipt as deferred revenues. These revenues are recognized in the period in which the related expenses are incurred; and
• Revenues that have been received but not yet earned are recorded as deferred revenues.

(f) Expenses

Expenses are recorded on an accrual basis:

• Grants are recognized in the year in which the conditions for payment are met. For grants, which do not form part of an existing program, the expense is recognized 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;
• Contributions are recognized in the year in which the recipient has met the eligibility criteria and fulfilled the terms and conditions of the funding agreement;
• Vacation pay and compensatory leave are expensed as the benefits accrue to employees under their respective terms of employment; and
• Services provided without charge by other government departments for accommodation, the employer’s contribution to the health and dental insurance plans, Worker’s Compensation coverage and legal services are recorded as operating expenses at their estimated cost.

(g) Employee Future Benefits

(i) Pension Benefits

Eligible civilian employees participate in the Public Service Pension Plan, a multi-employer plan administered by the Government of Canada. Contributions to the Plan are charged to expenses in the year incurred and represent the total departmental obligation to the Plan. Current legislation does not require the Department to make contributions for any actuarial deficiencies of the Plan.

The Government of Canada sponsors a variety of employee future benefits such as pension plans and disability benefits, which cover members of the Canadian Forces. National Defence administers the pension benefits for members of the Canadian Forces. The actuarial liability and related disclosures for these future benefits are presented in the financial statements of the Government of Canada. This differs from the accounting and disclosures of future benefits for military members presented in these financial statements whereby pension expense corresponds to the Department’s annual contributions toward the cost of current service. In addition to its regular contributions, current legislation also requires the Department to make contributions for actuarial deficiencies in the Canadian Forces Pension Plan and in the Reserve Force Pension Plan, which came into force on March 1, 2007. These contributions are expensed in the year they are credited to the Plans. This accounting treatment corresponds to the funding provided to departments through Parliamentary appropriations.

(ii) Severance Benefits

Employees and military members are entitled to severance benefits, under labour contracts or conditions of employment. These benefits are accrued as employees and military members render the services necessary to earn them. The obligation relating to the benefits earned by civilian employees and Canadian Forces members is calculated using information derived from the results of the actuarially determined liability for employee severance benefits for the Government as a whole.

(h) Receivables

Receivables are stated at amounts expected to be ultimately realized. An allowance for doubtful accounts is made for external receivables where recovery is considered uncertain.

(i) Loans and Advances

Loans and advances are initially recorded at cost, but are stated at amounts expected to be ultimately realized; a provision is made where recovery is considered uncertain.

(j) Inventories

Inventory consists of consumables (such as non-repairable spares, uniforms and clothing, medical and other equipment and machine tools) and ammunition (including bombs and missiles). Consumable inventories are valued using a moving weighted average price methodology. Some items classified as repairable ammunition (e.g. missiles and torpedoes) are valued using a standard price. Inventory managed by contractors and not held in the Canadian Forces Supply System is valued based on contractor-supplied records. DND reviews its inventory on a periodic basis. Items identified for disposal are excluded from the value of inventory.

(k) Tangible Capital Assets

All tangible capital assets, having an initial cost of $30,000 or more, including capital leases, betterments and leasehold improvements, are recorded at their acquisition cost. Capitalization threshold values lower than $30,000 may apply to certain assets such as vehicles and repairable spares.

Capital assets do not include intangible assets, works of art and historical treasures that have cultural, aesthetic or historical value, assets located on First Nations Reserves and in museum collections.

The Department is presently reviewing its process for recording and valuation of tangible capital assets. This work will be conducted over a number of years. In 2007-2008, DND identified and recorded $45 million ($146 million in 2006-2007) in post-capitalization of tangible capital assets as current year transactions.

In anticipation of revised policies regarding the recording of repairable assets in fiscal year 2008-2009, an estimated adjustment of $687M to the net book value of repairable assets has been made this fiscal year resulting in a total net book value of $750M. A thorough valuation of repairable assets will follow the issuance of the revised policies and further adjustments may be required.

(l) Amortization of Tangible Capital Assets

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

(m)  Contingent Liabilities – Claims and Litigations

Contingent liabilities are potential liabilities, which 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 an amount cannot be reasonably estimated, the contingency is disclosed in the notes to the financial statements. (refer to Note 16(a) of these financial statements)

(n)   Environmental Liabilities

Environmental liabilities reflect the estimated costs related to the management and remediation of environmentally contaminated sites and unexploded explosive ordnance (UXO) affected sites. Based on management’s best estimates, a liability is accrued and an expense recorded associated with the site assessment activity, when a site becomes contaminated or affected or when the Department becomes aware that the site has become contaminated or affected and is obligated, or is likely to be obligated, to incur such costs. If the likelihood of the Department’s obligation to incur these costs is not determinable, or if an amount cannot be reasonably estimated, the costs are disclosed as contingent liabilities in the notes to the financial statements. (refer to Note 16(b) of these financial statements)

(o)   Foreign Currency Transactions

Transactions involving foreign currencies are translated into Canadian dollar equivalents using rates of exchange in effect at the time of those transactions. Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars using the rate of exchange in effect on March 31, 2008. Gains resulting from foreign currency transactions are included as revenues in Interest and Gains on Foreign Exchange in Note 5 and losses from foreign currency transactions are included in Other Expenses in Note 4.

(p)   Measurement Uncertainty

The preparation of these financial statements, in accordance with Treasury Board accounting policies, which are consistent with Canadian generally accepted accounting principles for the public sector, requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses in the 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 contingent liabilities, environmental liabilities, the liability for employee severance benefits and the useful life of tangible capital assets. Actual results could significantly differ from those estimates. 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 Appropriations

National Defence receives most of its funding through annual Parliamentary appropriations. Items recognized in the Statement of Operations and the Statement of Financial Position in one year may be funded through Parliamentary appropriations in prior, current and future years. Accordingly, the Department 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 Appropriations Used

(b) Appropriations Provided and Used

(c) Reconciliation of Net Cash Provided by Government to Current Year Appropriations Used

4. Expenses

The following table presents details of expenses by category:

* The Expenses Related to Tangible Assets include those assets (machinery, equipment, buildings and works) that were not capitalized because they were lower than the capitalization threshold established by the Department. The decrease in Expenses Related to Tangible Assets is the result of an estimated adjustment to the reporting of repairable assets. (refer to note 2(k) of these financial statements).

** The increase in Bad Debts is due to an increase in allowance for doubtful accounts.

*** The increase in Other Expenses is mainly due to an increase of $195 million in estimated costs related to unexploded explosive ordnance (UXO) affected sites.

5. Revenues

The following table presents details of revenues by category:

6. Receivables

The following table presents details of accounts receivable:

7. Loans and Advances

8. Prepaid Expenses

The following is a breakdown of prepaid expenses recorded by National Defence as of March 31, 2008:

9. Inventories

10. Tangible Capital Assets and Accumulated Amortization

Tangible Capital Assets

Accumulated Amortization

11. Deposits and Trust Accounts

The following table presents details of deposits and trust accounts:

12. Deferred Revenue

Deferred revenue represents the balance at year-end of unearned revenue stemming from funds received from foreign governments, to cover expenditures to be made on their behalf in accordance with agreements with the Government of Canada, and from funds received for other specified purposes. Details of the transactions related to this account are as follows:

13. Canadian Forces Pension and Insurance Accounts

Modernization of the Canadian Forces Superannuation Act came into force on March 1, 2007, providing pension entitlements for eligible reserve members of the Canadian Forces as part of the new Reserve Force Pension Plan and modernizing existing pension entitlements that are part of the Canadian Forces Pension Plan. The two plans together are referred to as the Canadian Forces Pension Plans.

The Department maintains accounts to record the transactions pertaining to the Canadian Forces Pension Plans, which comprise the Canadian Forces Superannuation Account, the Canadian Forces Pension Fund Account, the Retirement Compensation Arrangement Account, and, commencing March 1, 2007, the Reserve Force Pension Fund Account. These accounts record transactions such as contributions, benefit payments, interest credits, refundable taxes and actuarial debit and credit funding adjustments resulting from triennial reviews and transfers to the Public Sector Pension Investment Board (PSP Investments).

The value of the liabilities reported in these financial statements for the Canadian Forces Pension Plans do not reflect the actuarial value of these liabilities determined by the Chief Actuary of the Office of the Superintendent of Financial Institutions nor the investments that are held by PSP Investments. Additional information on the Canadian Forces Pension Plans, including audited financial statements, is published in the Annual Report of the Canadian Forces Pension Plans, which is available through the Department of National Defence Website.

The Department also maintains the Regular Forces Death Benefit Account, which provides life insurance to contributing members and former members of the Canadian Forces. This account records contributions, premiums, interest, and benefit payments.

The following table provides details of the Canadian Forces Pension and Insurance Accounts:

14. Lease Obligations for Tangible Capital Assets

The Department has entered into agreements for buildings, aircraft, ships and boats and informatics hardware under capital lease (refer to Note 10 of these financial statements). The obligations for the upcoming years include the following:

Future Minimum Lease Payments

15. Employee Benefits

(a)   Pension Benefits:

i) The Department’s Public Service employees participate in the Public Service Pension Plan, which is sponsored by the Government of Canada. Pension benefits accrue up to a maximum 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/Qu�bec Pension Plan benefits and they are indexed to inflation.

Both the employees and the Department contribute to the cost of the Plan. The 2007-2008 expense amounts to $196.6 million ($187.2 million in 2006-2007), which represents approximately 2.1 times (2.2 times in 2006-2007) the contributions by employees.

The Department’s responsibility with regard to the pension 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.

ii) The members of the Canadian Forces (Regular Force), and eligible members of the Reserve Force participate in the Canadian Forces Pension Plans, which are sponsored by the Government of Canada and administered by the Department. Pension benefits accrue up to a maximum 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/Qu�bec Pension Plan benefits and are indexed to inflation.

Both the members and the Department contribute to the cost of the Plans. The 2007-2008 expense amounts to $831.3 million ($693 million in 2006-2007), which represents approximately 2.99 times (3.1 times in 2006-2007) the contributions by employees.

The Department is responsible for providing program management and the day-to-day administration of the Plans. The actuarial liability and actuarial surpluses or deficiencies are recognized in the financial statements of the Government of Canada, as the Plans’ sponsor.

(b)   Severance Benefits:

The Department provides severance benefits to its public service employees and Canadian Forces members based on eligibility, years of service and final salary. These severance benefits are not pre-funded. Benefits will be paid from future appropriations. Information about the severance benefits, measured as at March 31, is as follows:

16. Contingent Liabilities

Contingent liabilities arise in the normal course of the operations of the Department and their ultimate disposition is unknown. The Department is involved in two categories of contingent liabilities, claims and litigations, and environmental liabilities.

(a)   Claims and Litigations

Claims have been made against the Department in the normal course of operations. Legal proceedings for claims totalling approximately $14,008 million ($12,324 million in 2006-2007) were still pending at March 31, 2008. Some of these potential liabilities 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, and a reasonable estimate of the loss can be made, an estimated liability is accrued and an expense recorded in the financial statements.

The Public Sector Pension Investment Board Act that received Royal Assent in September 1999 amended the Canadian Forces Superannuation Act to enable the federal government to deal with the excess amounts in the Canadian Forces Superannuation Account and the Canadian Forces Pension Fund. The legal validity of these provisions has been challenged in the courts. The plaintiffs lost at trial, but have appealed.

(b)   Environmental Liabilities – Contaminated and UXO Sites

Liabilities are accrued to record the estimated costs related to the management and remediation of environmentally contaminated sites and unexploded explosive ordnance (UXO) affected sites, where the Department is obligated or likely to be obligated to incur such costs. The Department has confirmed approximately 359 sites (270 sites in 2006-2007) where such action is possible and for which a liability of $759 million ($497 million in 2006-2007) has been recorded. A further breakdown of the liability reported in 2007-2008 is as follows (2006-2007 figures in brackets):

• 59 (28) Confirmed UXO Affected Areas                                            $328     ($119) million

• 300 (242) Confirmed Environmentally Contaminated Sites                   $431     ($378) million

The Department has estimated contingent liabilities of $479 million ($1,616 million in 2006-2007) for mitigation costs that are not accrued, as these are not considered likely to be incurred at this time. The current year decrease of $1,137 million in these estimated potential liabilities is the result of new information and of an improved understanding of accounting policies related to contaminated sites. The details of the estimated contingent liabilities for 2007-2008 are as follows (2006-2007 figures in brackets):

• UXO Affected Areas                                                                           $114   ($359) million

• Environmentally Contaminated Sites                                                     $365   ($1,257) million

The Department’s ongoing effort to assess contaminated and UXO sites may result in additional environmental liabilities related to confirmed sites, newly identified sites, changes in assessments, or changes in intended use of existing sites. These liabilities will be accrued by the Department in the year in which they become known.

17. Contingent Gain

DND entered into a contract to obtain military flying training over a 20-year term as part of the NATO Flying Training in Canada (NFTC) program. Among other services, the prime contractor provides aircraft by leasing them for the life of the program from a non-profit company, which was set up to finance the acquisition of aircraft. Surplus funds remaining in the accounts of the non-profit company will eventually accrue to the Government of Canada, once the asset purchase period has been completed for the acquisition of aircraft and excess funds have been declared surplus. At present, it is estimated that $24.6 million ($23.6 million in 2006-2007) of the excess funds will be eventually declared surplus.

18. Contractual Obligations

The nature of the Department’s activities can result in some large multi-year contracts and obligations whereby the Department will be obligated to make future payments when the services/goods are received. Contractual obligations over $10 million that can be reasonably estimated are as follows:

19. Related Party Transactions

The Department is related as a result of common ownership to all Government of Canada departments, agencies and Crown Corporations. The Department enters into transactions with these entities in the normal course of business and on normal trade terms. Also during the year, the Department received services which were obtained without charge from other Government departments as presented in part (a).

(a)   Services Provided Without Charge by Other Government Departments

Throughout the year, the Department received without charge from other departments, employer’s contribution to the health and dental plans, accommodations, Worker’s Compensation coverage and legal fees. These services listed below have been recognized in the Department’s Statement of Operations as follows:

The Government has structured some of its administrative activities for efficiency and cost-effectiveness purposes so one department performs these on behalf of all departments and agencies without charge. The costs of these services, which include payroll and cheque issuance services provided by Public Works and Government Services Canada, are not included as expenses in the Department’s Statement of Operations.

(b)   Payables Outstanding at Year-End with Related Parties

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