Quarterly Financial Report for the Quarter Ended December 31, 2016

1. Introduction

This quarterly report has been prepared by management as required by section 65.1 of the Financial Administration Act and in the form and manner prescribed by the Treasury Board. This report should be read in conjunction with the Main Estimates and Supplementary Estimates (A) and (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 (hereafter “Department”) 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 renewing Canada’s proud tradition of international leadership.

The Defence mission is delivered through six program activities. A summary description of these program activities 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 and Supplementary Estimates (A) and (B) for 2016-17. 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, 2016 as compared to the same period last year, exceeding a materiality threshold of $20.0M or for those items with an unusual percentage increase/decrease.

Statement of Authorities

Total budgetary authorities available for use decreased in 2016-17 from those of 2015-16 by $263.3M (1.3%). This net decrease is the result of increases in Vote 1 spending authority of $273.5M, decreases in Vote 5 spending authority of $586.9M, increases in Vote 10 spending authority of $8.5M, and an increase in spending authority for Statutory Payments of $41.5M.

 The change in budgetary authority is summarized below:

 Vote Explanation of Change (in thousands of dollars)Change ($)
1 Annual escalator on defence spending 361,051
Funding associated with Canada's response to the Middle East crises 122,278
Funding for projects at Canadian Armed Forces bases and other defence properties (Federal Infrastructure Investment Plan) 27,680
Funding associated with the Federal Contaminated Sites Action Plan 26,112
Funding associated with the Interim Auxiliary Oiler Replenishment Capability for the Canadian Armed Forces 22,000
Funding in support of the ongoing implementation of National Defence Priorities (165,000)
Funding authorized to be carried forward between fiscal years (76,173)
Other miscellaneous departmental requirements (44,431)
Total Operating Expenditures 273,517
5 Funding authorized to be carried forward between fiscal years 100,000
Funding for projects at Canadian Armed Forces bases and other defence properties (Federal Infrastructure Investment Plan) 56,188
Net adjustments to the spending profile of major capital equipment and infrastructure projects to align financial resources with project acquisition timelines (761,604)
Other miscellaneous departmental requirements 18,476
Total Capital Expenditures (586,940)
10 Total Grants and Contributions 8,541
(S) Total Statutory Expenditures 41,548
Total Authorities (263,334)

The change in Vote 1 budgetary authority is primarily due to an increase in the annual escalator on defence spending, the funding associated with Canada’s response to the Middle East crises, the funding related to the Federal Infrastructure Investment Plan, the funding related to the Federal Contaminated Sites Action Plan, and the funding related to the Interim Auxiliary Oiler Replenishment Capability for the Canadian Armed Forces. The increase in Vote 1 is partially offset by a $165M planned decrease in funding for fleet maintenance on equipment such as Light Armoured Vehicles and the Aurora Aircraft, and by decreases to the funding authorized to be carried forward between fiscal years, and other miscellaneous departmental requirements.

The change in Vote 5 budgetary authority is primarily due to a decrease in the net adjustments to the spending profile of major capital equipment and infrastructure projects to align financial resources with project acquisition timelines. Specifically, cash requirements for the Family of Land Combat Vehicles and the Maritime Helicopter Project are lower in 2016-17 than in 2015-16. The decrease in Vote 5 is partially offset by an increase to the funding authorized to be carried forward between fiscal years, and the funding related to the Federal Infrastructure Investment Plan, and other miscellaneous departmental requirements. The fleet maintenance is dependent on the National Procurement budget which is sufficient to meet the Departments’ demands for 2016-17.

The change in Vote 10 budgetary authority is primarily due to an increase relating to the funding for Canada’s response to the Middle East crises.

The increase in statutory budgetary authority is primarily due to a higher rate in the employer’s portion of the Employee Benefit Plan contributions.

Statement of Departmental Budgetary Expenditures by Standard Object

YTD "net budgetary expenditures" increased by $449.4M (3.7%) compared to last year.

In Q3, “net budgetary expenditures” increased by $291.8M (6.4%) compared to the same quarter last year.

The standard objects with the most significant increases in the third quarter, as compared to the same quarter last year, were:

  • Acquisition of Machinery and Equipment ($143.7M) – primarily due to increased procurement for the Family of Land Combat Vehicles and several smaller capital equipment projects;
  • Acquisition of Land, Buildings, and Works ($42.6M) – primarily due to implementation of the Federal Infrastructure Investment Program; and
  • Professional, Special and Other Services ($40.4M) – primarily due to increased professional services requirements for real property and Canadian Forces Health Services.

Revenue decreased by $82.9M primarily due to a timing difference in payments received from the United Kingdom related to the provision of service to the British Army units training in Canada.

3. Risks and Uncertainties

To fulfill its mission, the Department 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, the Department’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 increased spending.  

The Department’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 the Department 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 the Department.

Additionally, significant unforecasted operational demands can occur at any time, requiring the Department 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 Government.

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

In the past few years, the Department has faced a changing fiscal environment. In response, the Department has launched a number of initiatives, including Defence Renewal, aimed at improving business processes and practices. The implementation of these initiatives continues to be a priority for 2016-17. Defence Renewal is focused on re-evaluating requirements, finding efficiencies and generating savings for reinvestment in military capabilities and readiness, including the internal reinvestment of personnel to higher priority tasks. 

Despite the challenging economic times, the Department will continue to deliver a combat-effective, multi-role military for Canada and Canadians by enhancing operational capabilities and reducing corporate and institutional overhead.

 
Approved by:

// SIGNED BY //

John Forster

Deputy Minister

// SIGNED BY //

C. Rochette, CPA, CMA

Chief Financial Officer

 

Dated: 28 February 2017

Ottawa, Canada

5. Financial Tables

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