Quarterly Financial Report for the quarter ended September 30, 2017

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). This report has not been subject to an external audit or review.

Strong, Secure, Engaged is the new defence policy presenting a new vision and approach to defence by the Government of Canada. Strong, Secure, Engaged presents a new strategic vision in which Canada is:

  • strong at home, its sovereignty well defended by a Canadian Armed Forces ready to assist in times of natural disaster, other emergencies and search and rescue
  • secure in North America, active in a renewed defence partnership in North American Aerospace Defense Command (NORAD) and with the United States
  • engaged in the world, with the Canadian Armed Forces doing its part in Canada’s contributions to a more stable, peaceful world, including through peace support operations and peacekeeping

The Defence mission is delivered through 6 program activities. A summary description of these program activities can be found in the Departmental Plan (previously known as the 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) for the fiscal year 2017-2018. 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 money 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 consolidated departmental financial statements that are part of the departmental results reporting process. However, the spending authorities voted by Parliament remain on an expenditure basis. The main difference between the Quarterly Financial Report and the Consolidated Departmental Financial Statements is the timing of when revenues and expenses are recognized. The Quarterly Financial Report reports revenues only when the money is received and expenses only when the money is paid out. The Consolidated Departmental Financial Statements reports revenues when they are earned and expenses when they are incurred. In the latter case, revenues are recorded even if cash has not been received and expenses are incurred even if cash has not yet been paid out.

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 year to date, at September 30, 2017, as compared to the same period last year.

2.1 Statement of authorities

When compared to the same quarter of the previous year, year-to-date, the department’s budgetary authorities available for use increased by $40.2 million ($19,037.0 million in authorities in 2016-2017 when compared to $19,077.2 million in authorities in 2017-2018), as reflected in Table 1: Statement of Authorities. Major reasons for the increase are outlined below.

Year-to-date variances in authorities available for use

(in millions of dollars)

InitiativeOperatingCapital

 Grants and contributions

Budgetary statutory authoritiesTotal variances
Operation and sustainment (fleet maintenance) of military capabilities and operating requirements 354.1 n/a n/a n/a 354.1

Interim Auxiliary Oiler Replenishment Capability for the Canadian Armed Forces

121.0 n/a n/a n/a 121.0
Federal Contaminated Sites Action Plan 53.7 n/a n/a n/a 53.7
Major capital equipment and infrastructure projects n/a (271.9) n/a n/a (271.9)
Projects at Canadian Armed Forces bases and other defence properties (70.5) (14.3) n/a n/a (84.8)

Travel, advertising and professional services

(58.3) n/a n/a n/a (58.3)
Other miscellaneous departmental requirements 62.4 (27.0) 0.1 (109.1) (73.6)
Cumulative variance in authorities available for use 462.4 (313.2) 0.1 (109.1) 40.2

Year-to-date net increase of $40.2 million over the second quarter in 2016-2017 can be explained by:

  • operation and sustainment (fleet maintenance) of military capabilities and operating requirements (increase of $354.1 million)

In order to provide ongoing support for operating and capital requirements, the department received additional funding to offset sustainment growth and the inflationary impact on the Defence budget.

  • interim auxiliary oiler replenishment capability for the Canadian Armed Forces (increase of $121.0 million)

The increase is due to a services contract establishing an organic fleet replenishment capability, provided by a contracted civilian vessel being converted for military use and engaged as an interim auxiliary oiler replenishment vessel.

  • Federal Contaminated Sites Action Plan (increase of $53.7 million)

The increase is mainly due to additional funding for projects announced in Budget 2016 for the Federal Contaminated Sites Action Plan program, which is a government-wide initiative to reduce environmental and human health risks from known federal contaminated sites and associated federal financial liabilities.

  • major capital equipment and infrastructure projects (decrease of $271.9 million)

The decrease in funding is due to net adjustments to the spending profile of major capital equipment and infrastructure projects to align financial resources with project acquisition timelines. This decrease in cash requirements is mainly due to the Arctic Offshore Patrol Ship Project, and the Halifax Class Modernization and Frigate Life Extension Project.

  • projects at Canadian Armed Forces bases and other defence properties (decrease of $84.8 million)

The decrease is due to the completion of projects related to the Federal Infrastructure Investment Plan. The intent of this initiative is to repair and upgrade Canadian Armed Forces facilities in order for the department to deliver a large number of infrastructure projects and upgrades across Canada.

  • travel, advertising and professional services (decrease of $58.3 million)

In Budget 2016, the Government of Canada committed to reduce spending on professional services, travel and advertising. The department contributed to that commitment with a reduction of $58.3 million in funding in operating expenditures starting in 2017-2018 and ongoing.

  • other miscellaneous departmental requirements (decrease of $73.6 million)

This net decrease is the result of miscellaneous funding variances, which is mainly related to the decrease in the employee benefit plans rate from 17.2% in 2016-2017 to 15.7% in 2017-2018, as directed by the Treasury Board Secretariat.

2.2 Departmental budgetary expenditures by standard object

As presented in Table 2: Departmental budgetary expenditures by standard object, year-to-date total net budgetary expenditures have increased by $1,139.3 million compared to the same quarter of the previous year ($7,868.2 million in expenditures in 2016-2017 when compared to $9,007.5 million in expenditures in 2017-2018).

Overall, total spending at the end of the quarter represents 47.2% of annual planned expenditures for 2017-2018, compared with 41.3% at the end of the second quarter of 2016-2017.

Year-to-date variances in net budgetary expenditures (presented by standard object)

(in millions of dollars)

Standard object

2017-2018

Year-to-date used at quarter end

2016-2017

Year-to-date used at quarter end

Year-to-date variance
Personnel 5,196.0 4,341.9 854.1
Acquisition of machinery and equipment 971.4 726.2 245.2
Professional and special services 1,430.8 1,293.0 137.8
Utilities, materials and supplies 367.5 343.2 24.3
Transportation and communications 374.8 469.9 (95.1)
Repair and maintenance 378.6 444.9 (66.3)
Rentals 148.9 153.7 (4.8)
Other expenditures 300.7 289.5 11.2
Revenues netted against expenditures (161.2) (194.1) 32.9
Total net budgetary expenditures 9,007.5 7,868.2 1,139.3

Year-to-date net increase of $1,139.3 million is attributable mainly to:

  • personnel (increase of $854.1 million)

The increase in personnel costs year-to-date at the end of the second quarter, compared to the same time the previous fiscal year, relates to the lump sum retroactive pay increases for military and civilian personnel for the periods of 2014-2015, 2015-2016, 2016-2017 and the first 2 quarters of 2017-2018.

  • acquisition of machinery and equipment (increase of $245.2 million)

The increase in acquisition of machinery and equipment is mainly due to the cash requirements attributed to the acquisition of aircraft and related systems and equipment, ammunition, field engineering and support parts for small vessels, and the delivery of armoured vehicles and associated parts, accessories and communication equipment.

  • professional and special services (increase of $137.8 million)

The increase in professional services requirements is primarily due to the implementation of several major capital projects, and maintenance work on naval vessels.

  • utilities, materials and supplies (increase of $24.3 million)

The increase in utilities, materials and supplies is due to an increase in spending for military clothing and protective equipment as well as increased costs for deployed operations.

  • transportation and communications (decrease of $95.1 million)

The decrease in transportation and communications is due to a final payment made in the first quarter of 2016-2017 for the Wideband Global Satellite Communication System.

  • repair and maintenance (decrease of $66.3 million)

The decrease is due to the timing difference of payments for the repair and maintenance of real property, and various aircraft fleets as compared to the prior year.

  • revenues netted against expenditures (decrease of $32.9 million)

The decrease is due to a timing difference related to revenue received for the sale of aviation fuel to foreign countries.

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.

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

To prepare for the future, on June 7, 2017, the department announced Strong, Secure, Engaged (SSE), the new defence strategy for Canada. The policy represents the most extensive consultation ever undertaken by the department, to ensure the men and women in uniform are prepared and equipped to succeed on operations, and that they are fully supported from recruitment through retirement. It is also to give them the equipment they need. SSE is the most rigorously costed Canadian defence policy ever developed. It is transparent and fully funded. Initial implementation of various SSE initiatives will be a priority for the department during 2017-2018.

Canadian Armed Forces deployments on international operations in Ukraine (Op UNIFIER), central and Eastern Europe (Op REASSURANCE) and the Republic of Iraq (Op IMPACT) continue to be a major focus of activity in 2017-2018. Furthermore, during 2017-2018, the department will remain concentrated on the process of renewing our major equipment fleets. Canada’s existing fleets of CF-18 fighter aircraft and maritime warships will be among our primary considerations.

The department continues with the implementation of its Defence Renewal initiative, aiming at finding efficiencies and generating savings for reinvestment in military capabilities and readiness, including the internal reinvestment of personnel to higher priority tasks. By the end of 2017-2018, it will transition to enabling continuous improvement within the department. This will include supporting the establishment of a comprehensive regime of performance metrics and targets, development of business analytic tools, and utilizing business intelligence to identify opportunities for improvement.

Subsequent to the end of the quarter, September 30, 2017, following the retirement of Mr. John Forster, effective October 23, 2017, the Prime Minister announced changes to the senior ranks of the department as follows:

  • Ms. Jody Thomas, previously Senior Associate Deputy Minister, becomes Deputy Minister
  • Mr. Bill Matthews, previously Comptroller General of Canada, becomes Senior Associate Deputy Minister
  • Mr. Gordon Venner, previously Assistant Deputy Minister (Policy), becomes Associate Deputy Minister

Approved by:

// Signed by //

Jody Thomas

Deputy Minister

// Signed by //

C. Rochette, CPA, CMA

Chief Financial Officer

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