Quarterly Financial Report for the Quarter Ended September 30, 2013

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 (TB). This report should be read in conjunction with the Main Estimates. 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 seventeen 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 for fiscal year (FY) 2013-2014. 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.

As part of the Parliamentary business of supply, the Main Estimates must be tabled in Parliament on or before March 1 preceding the new FY.  Budget 2012 was tabled in Parliament on March 29, 2012 after the tabling of the Main Estimates on February 28, 2012.  As a result the measures announced in Budget 2012 could not be reflected in the 2012-2013 Main Estimates.

In FY 2012-2013, frozen allotments were established by Treasury Board authority in departmental votes to prohibit the spending of funds already identified as savings measures in Budget 2012. In 2013-2014, the changes to departmental authorities were reflected in the 2013-2014 Main Estimates tabled in Parliament.

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 September 30, 2013 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 decreased in FY 2013-2014 from that of FY 2012-2013 by $2,096M (10%). This net decrease is the result of decreases in Vote 1 spending authority of $1,464M, in Vote 5 spending authority of $510M, in Vote 10 spending authority of $81M, and, a decrease of spending authority for Statutory Payments of $42M.

The change in spending authority is summarized below:

 

VoteExplanation of Change (thousands of dollars)Change ($)
1 Reduction of funding under the 2010 Strategic Review and savings identified as part of the Budget 2012 Spending Review (961,656)
1 Sunsetting of incremental funding associated with the Canada First Defence Strategy (CFDS) (831,952)
1 Operating budget carry forward (246,587)
1 Annual escalator on defence spending as announced in Budget 2008 to provide long-term and predictable funding 340,227
1 Compensation adjustments to pay and allowances 136,962
1 Requirements to support Canada’s international security operations in Afghanistan 78,392
1 Other Miscellaneous Departmental Requirements 20,745
1 Total Operating Expenditures (1,463,869)
5 Net adjustments to the spending profile of major capital equipment and infrastructure projects (364,022)
5 Reduction of funding under the 2010 Strategic Review and savings identified as part of the Budget 2012 Spending Review (107,559)
5 Capital budget carry forward (39,514)
5 Other Miscellaneous Departmental Requirements 1,217
5 Total Capital Expenditures (509,878)
10 Total Grants and Contributions (80,677)
(S) Total Statutory Expenditures (41,963)
  Total National Defence (2,096,386)

 

The $832M decrease for the CFDS is the result of the expired budgetary spending authorities, which were approved for a three year period between 2010-2011 and 2012-2013. For 2013-2014 and onwards, the department will seek renewed budgetary spending authorities for the CFDS through the supplementary estimates process.

The $246M decrease for the operating budget carry forward is a result in the timing of the approval. The prior year budget carry forward was approved in Q2 while the current year approval is expected in Q3.

The change in Vote 10 spending authority was due to a net decrease in transfer payments. The decrease in Statutory Payments was largely due to a reduction in employee benefit plan contributions as a result of the 2010 Strategic Review and Budget 2012 Spending Review.

Statement of Departmental Budgetary Expenditures by Standard Object

YTD "net budgetary expenditures" increased $252.9M (3.1%) compared to last year, primarily due to payments related to the Manuge v. her Majesty the Queen class-action lawsuit.

In Q2, "net budgetary expenditures" increased $7.7M (0.2%) as compared to the same quarter last year. This increase is a result of the combined effect of an overall net decrease ($29.1M) in “gross budgetary expenditures” negated by an offsetting decrease ($36.8M) in vote-netted revenues.

The standard objects with the most significant increases in Q2, as compared to the same quarter last year were:

  • Professional, Special and Other Services ($75.1M) - primarily due to an increase in engineering support for several major projects; and
  • Other Subsidies and Payments ($99.2M) - primarily due to a payment related to the Manuge case settlement.

The standard objects with the most significant decreases were:

  • Transportation and Communications ($46.0M) - primarily due to changes in the benefits provided under military cost moves and a general reduction in service travel;
  • Repair and Maintenance ($52.8M) – primarily due to a reduction in expenditures against the Department's capital construction program;
  • Acquisition of Buildings and Works ($22.9M) - primarily due to differences in the schedules of project payment milestones for Chinook helicopter facilities at CFB Petawawa; and
  • Acquisition of Machinery and Equipment ($80.8M) - primarily due to differences in the schedules of project payment milestones for several major projects.

Revenues, which offset "gross budgetary expenditures" decreased by $36.8M primarily due to differences in the payment schedule for the provision of services to British Army units training in Canada and a reduction in the sales of various goods and services . 

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 Government.

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

Impacts related to change initiatives such as the 2010 Strategic Review and the savings initiatives related to Budget 2012 will continue to shape DND/CAF operations, personnel and programs throughout 2013-2014. 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. Details related to Budget 2012 initiatives are provided in the next section.

5. 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:

  • $692.4M in 2013-2014; and
  • $1,106.1M in 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 the DND/CAF to ensure the right people with the right experience were in place to realize the important missions for which they are responsible on behalf of all Canadians.

Savings for FY 2013-2014 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, rationalization of corporate accounts 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 2012-13.

As of September 30, 2013, DND/CAF has achieved actual savings of $531.8M, or (77%) of the $692.4M in proposed savings for FY 2013-2014.  Deferring CAF growth has resulted in savings of approximately $251M in previously planned expenditures and a further savings of $0.4M has been achieved through reductions in grants and contributions.  After considering expenditure reductions associated with Strategic Review and the transfers for Communications Security Establishment Canada and Shared Services Canada, the net savings for contracting is $226.3M. A further $21.8M in actual savings were achieved through the rationalization of corporate accounts.  Finally, a reduction in personnel costs for full-time Reservists and the civilian workforce related to Budget 2012 initiatives of $21.7M and $10.6M respectively has also been achieved. 

Approved By:

// SIGNED BY //

Richard B. Fadden

Deputy Minister

// SIGNED BY //

J.K. Lindsey, CMA, ICD.D

Chief Financial Officer

Dated: 26 November 2013

Ottawa, Canada

6. Financial Tables

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