Quarterly Financial Report for the Quarter Ended December 31, 2014

1. Introduction

This quarterly report has been prepared by management as required by section 65.1 of the Financial Administration Act (FAA) and in the form and manner prescribed by the Treasury Board (TB). This report should be read in conjunction with the Main Estimates and Supplementary Estimates B. This report has not been subject to an external audit or review.

The Defence mission is to defend Canada and Canadian interests and values, while contributing to international peace and security. On behalf of the people of Canada, the Canadian Armed Forces (CAF) and the Department of National Defence (DND) stand ready to perform three key roles:

  • Defend Canada - by delivering excellence at home;
  • Defend North America - by being a strong and reliable partner with the United States in the defence of the continent; and
  • Contribute to International Peace and Security - by projecting leadership abroad.

The Defence mission is delivered through six programs. A summary description of these programs can be found in Section II - Report on Plans and Priorities.

Basis of Presentation

This quarterly report has been prepared by management using an expenditure basis of accounting. The accompanying Statement of Authorities includes the Department's spending authorities granted by Parliament and those used by the Department consistent with the Main Estimates for fiscal year (FY) 2014-2015. This quarterly report has been prepared using a special purpose financial reporting framework designed to meet financial information needs with respect to the use of spending authorities.

The authority of Parliament is required before moneys can be spent by the Government. Approvals are given in the form of annually approved limits through appropriation acts or through legislation in the form of statutory spending authority for specific purposes.

The Department uses the full accrual method of accounting to prepare and present its annual departmental financial statements that are part of the departmental performance reporting process. However, the spending authorities voted by Parliament remain on an expenditure basis.

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

In the following section on financial highlights the Department is providing explanations for differences, for the fiscal quarter and fiscal YTD, at December 31, 2014 as compared to the same period last year, exceeding a materiality threshold of $20M or for those items with an unusual percentage increase/decrease.

Statement of Authorities

Total budgetary authorities available for use increased in 2014-2015 from those of 2013-2014 by $718.0 million (4%). This net increase is the result of decreases in Vote 1 spending authority of $447.1 million, increases in Vote 5 spending authority of $1,272.8 million, decreases in Vote 10 spending authority of $5.9 million, and a decrease of spending authority for Statutory Payments of $101.8 million.

The change in spending authority is summarized below:

VoteExplanation of Change (thousands of dollars)Change($)
1 Annual escalator on defence spending as announced in Budget 2008 to provide long-term and predictable funding 347,031
1 Funding associated with the Canada First Defence Strategy 252,124
1 Canadian Forces Service Income Security Insurance Plan – Long Term Disability Policy (324,300)
1 Savings identified as part of the Budget 2012 Spending Review (317,015)
1 Funding authorized to be carried forward between fiscal years (188,611)
1 Decrease in requirements to support Canada’s international security operations in Afghanistan (130,964)
1 Transferred to Shared Services Canada (44,569)
1 Compensation Adjustments to pay and allowances (24,300)
1 Other miscellaneous departmental requirements (16,496)
1 Total Operating Expenditures (447,100)
5 Net adjustments to the spending profile of major capital equipment and infrastructure projects to align financial resources with project acquisition timelines 1,232,954
5 Funding authorized to be carried forward between fiscal years 95,501
5 Transferred to Shared Services Canada (28,490)
5 Other miscellaneous departmental requirements (27,135)
5 Total Capital Expenditures 1,272,830
10 Total Grants and Contributions (5,927)
(S) Total Statutory Expenditures (101,773)
Total National Defence 718,030

The change in Vote 1 spending authority is primarily due to a decrease in funding related to the Canadian Forces Service Income Security Insurance Plan; the Budget 2012 Spending Review; funding authorized to be carried forward between fiscal years; and Canada’s Mission in Afghanistan. The transfer of funding to Shared Services Canada related to its responsibility for the acquisition and provision of hardware and software; and the compensation adjustments to pay and allowances, also contributed to the decrease. These Vote 1 decreases were offset by an increase in the annual escalator on defence spending as announced in Budget 2008 and an increase in the funding associated with the Canada First Defence Strategy.

The change in Vote 5 spending authority is due to an increase in the net adjustments to the spending profile of major capital equipment and infrastructure projects to align financial resources with current project acquisition timelines and funding authorized to be carried forward between fiscal years. The adjustments to the spending profile of major capital equipment relate specifically to funding authorities for the Family of Land Combat Vehicles, the Maritime Helicopter Project and the Arctic/Offshore Patrol Ships which are higher in  2014-15 than 2013-14. Vote 5 spending authority also decreased as a result of a transfer of funding to Shared Services Canada for the Carling Campus Project and for information technology infrastructure services in support of the Military Personnel Management Capability Transformation Project.

The change in Vote 10 spending authority is due to a decrease in transfer payments. The decrease in Statutory Payments is largely due to a reduction in employee benefit plan contributions as a result of the Budget 2012 Spending Review.

Statement of Departmental Budgetary Expenditures by Standard Object

YTD "net budgetary expenditures" decreased $959.9M (7.4%) compared to the third quarter last year.

In Q3, “net budgetary expenditures” decreased $261.6M (5.7%) as compared to the same quarter last year.

The standard objects with the most significant decreases in Q3 were:

  • Acquisition of Machinery and Equipment ($164.5M) – primarily due to differences in the cash requirements attributed to the capital acquisition program;
  • Professional and Special Services ($58.1M) – primarily due to reduced professional services requirements for the C-130J Hercules Aircraft and LAV III Armored Vehicle projects;
  • Personnel ($53.4M) – decreases primarily due to the impact of higher attrition rates upon  Regular and Reserve Force pay and allowances payments, as well as the changes in entitlements associated with cost moves for Regular and Reserve Force members resulting in decreased payments;
  • Transfer Payments ($28.2M) – primarily due to reductions in payments related to Canada’s contribution to the North Atlantic Treaty Organization (NATO);

The standard objects with a significant increase in Q3, as compared to the same quarter last year, were:

  • Transportation and Telecommunications ($24.4M) – primarily due to delays which resulted in Military Cost Move claims being processed in Q3 FY 2014-15 as compared to Q2;
  • Acquisition of Land, Buildings and Works ($21.4M) – primarily due to the realignment of some of the Construction/Betterment general ledger accounts from the standard object Repair and Maintenance to the standard object Acquisition of Land, Buildings and Works;
  • Other Subsidies and Payments ($20.3M) – primarily due to timing differences in the processing of transfer payments to other government departments.

3. Risks and Uncertainties:

To fulfill its mission, National Defence purchases the goods and services necessary to train military forces, conduct operations at the request of the Government of Canada and acquire related infrastructure and equipment both domestically and internationally.

As such, National Defence’s financial transactions are exposed to a broad range of external financial and economic risks such as inflation, foreign exchange and commodity price fluctuations. Depending on how these risks unfold, they could lead to surpluses or shortages.  For example, an appreciation of the Canadian dollar or deterioration of commodity prices, oil in particular, could result in lower spending. Conversely, a depreciation of the Canadian dollar or increase in commodity prices could result in budget pressures.  

National Defence’s capital acquisition program includes a number of large multi-year acquisition projects. Delays in contracting and procurement activities, or delays in deliveries by suppliers for individual projects, can lead to reduced expenditures or budgetary surpluses.

While National Defence considers key economic and financial risk factors including defence specific inflation and foreign exchange in developing expenditure strategies, these risks are outside of the control of National Defence.

Additionally, significant unforecasted operational demands can occur at any time, requiring National Defence to respond anywhere on the globe. Depending on the extent of the operational demand, the cost of unforecasted operations would be mitigated either through internal reallocations or by requesting incremental funding from the Government.

4. Significant Changes in Relation to Operations, Personnel and Programs

Impacts related to change initiatives such as Budget 2012 will continue to shape DND/CAF operations, personnel and programs throughout FY 2014-2015. Activities to find better, more effective and efficient ways for DND/CAF to do its work, and move into a new era of renewal will be ongoing. Despite the challenging economic times, DND/CAF will continue to deliver a combat-effective, multi-role military for Canada and Canadians by enhancing operational capabilities and reducing corporate and institutional overhead.

Budget 2012 Implementation

This section provides an overview of the savings measures announced in Budget 2012 that are being implemented in order to refocus government and programs; make it easier for Canadians and business to deal with their government; and modernize and reduce the back office.  

The departmental reductions as a result of Budget 2012 are $1,106.1M in FY 2014-2015 and ongoing.

DND/CAF reviewed spending and programs to ensure they are effective and efficient, as well as responding to the priorities of Canadians. DND/CAF Budget 2012 initiatives focus on process reform, administrative efficiencies, reducing reliance on contracted services, and rebalancing the workforce. This allowed DND/CAF to ensure the right people with the right experience were in place to accomplish the important missions for which they are responsible on behalf of all Canadians.

Savings for FY 2014-2015 will be achieved by maintaining the Regular and Reserve force strength of the CAF at 68,000 and 27,000 respectively, deferring anticipated growth over the medium term, rationalizing corporate accounts, centralizing service delivery for real property and civilian human resources (HR) management and reducing total contracted services and grants and contributions.

The implementation strategy has been to phase in the reductions and to balance the savings across the Department, with a focus on increased efficiencies. Budget 2012 cost savings measures started in FY 2012-2013.

As of December 31, 2014, DND/CAF has achieved $1,002.6M (90.6%) of the $1,106.1M in proposed savings for FY 2014-2015, which are related to:

  • Contracting initiatives – resulted in a reduction of $398.1M in previously planned expenditures;
  • Deferring CAF growth – resulted in savings of approximately $291.5M in previously planned expenditures;
  • Rationalization of corporate accounts and reducing National Procurement expenditures – $146.3M;
  • Civilian workforce reduction initiatives – $104.5M;
  • Reductions in personnel costs for full-time Reservists – $39.9M;
  • Centralized service delivery for real property and civilian HR – $21.9M; and
  • Reductions in grants and contributions – $0.4M.

 

Approved by:

// SIGNED BY //

John Forster

Deputy Minister

// SIGNED BY //

C. Rochette, CPA, CMA

Chief Financial Officer

 

Dated: 23 February 2015

Ottawa, Canada

5. Financial Tables

Date modified: