RPP 2012-2013 - Notes to Future-oriented Financial Statements (Unaudited)

For the Year Ended March 31

1. Authority 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. On behalf of the people of Canada, Defence stands 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, which are as follows:

  • Defence Science and Technology: This program provides the Government of Canada with critical scientific knowledge and innovation to address defence & security challenges and needs. The S&T Program includes direction setting, program planning, program management, and capability management, execution and assessment. The Program comprises multi-year projects with activities in research, technology development, analysis and experimentation applied to inform, enable and respond to Canada’s defence and security priorities over multiple time horizons extending up to a 20-year outlook. The scientific knowledge and innovation generated from these activities informs decisions on Defence capability acquisitions, readiness preparation and the conduct of operations in response to Government priorities. Activities under this program draw on internal capability and make extensive use of partnerships with Canadian industry and academia as well as international organizations.
  • Recruiting of Personnel and Initial Training: This program will promote National Defence as a preferred workplace with the general public and to recruit new hires for a broad range of trades and other general, professional and scientific occupations. This involves deepening Defence's connections to the various educational and ethnic communities to attract the right number and mix of people who have the skills needed to contribute to meeting the Defence Mission. Engaging in effective leadership, strategic planning, and targeted outreach activities will ensure that proactive measures are taken to address the challenges arising from current labour market pressures for specific skill sets within certain geographic locations. The program will attract, select and enrol personnel and conduct initial training (basic recruit and occupational training) to military members to the Operational Functional Point. This ensures that sufficient personnel are recruited and trained with the needed skills in the appropriate occupation, now and into the future, to meet Defence requirements. This is accomplished through the provision of recruitment centres, recruitment campaigns, advertising and other outreach activities as well as the necessary training staff, facilities and associated supports.
  • Equipment Acquisition and Disposal: This program acquires and disposes of equipment required for CF operations. This includes the acquisition of new & replacement capabilities or capital improvements to in-service equipment and their disposal at the end of their service life. Equipment Acquisition occurs primarily through collaboration with Public Works and Government Services, Industry Canada and the vendors. Equipment Acquisition activities include defining requirements, engineering design, sourcing, validation of requirements, developing procurement strategy, contracting, contract negotiation and award, contract administration and management, project management of equipment acquisitions.
  • Real Property and Informatics Infrastructure Acquisition and Disposal: An extensive portfolio of land, works, buildings and informatics required to support the delivery of defence operations. The Real Property and Informatics Infrastructure Acquisition and Disposal program aims to ensure that the right real property and informatics is acquired and disposed of, and is available where and when needed, while providing value for money, advancing objectives for the greening of government land and buildings, and adhering to best practices for asset life-cycle management. Program activities include working with stakeholders to define requirements; updating the real property and informatics development and management plans; managing projects for new and replacement construction; and identifying and eliminating excess facilities. Real property and informatics are acquired through construction and recapitalization, purchase or capital leases, and disposed of through deconstruction, sale or transfer. The activity includes the Capital Assistance Program (CAP) which is a capital contribution program under which Defence makes financial contributions to support the transfer of infrastructure facilities to provinces, territories, municipalities and/or their agencies. CAP projects support real property goals and objectives by encouraging cost-effective solutions for the provision of infrastructure on bases and wings across Canada.
  • Maritime Readiness: This program provides Canada with a combat-capable, multi-purpose Navy. The program will generate and sustain relevant, responsive, combat capable maritime forces that are able to respond to a spectrum of tasks, as may be directed by the Government, within the required response time. This is accomplished by bringing maritime forces to a state of readiness for operations, by assembling, and organizing maritime personnel, supplies, and materiel. This includes the training and equipping of forces and the provision of their means of deployment, sustainment and recovery to defend Canadian interests domestically, continentally and internationally.
  • Land Readiness: This program provides Canada with a combat-capable, multi-purpose Army. The program will generate and sustain relevant, responsive, combat capable land forces that are effective across the spectrum of conflict, from peacekeeping and nation building to war fighting. This is accomplished by bringing land forces to a state of readiness for operations, assembling and organizing Land personnel, supplies, and materiel as well as the provision of individual and collective training to prepare land forces to defend Canadian interests domestically, continentally and internationally.
  • Aerospace Readiness: This program will provide Canada with a combat-capable, multi-purpose Air Force. The program will generate and sustain relevant, responsive, combat capable aerospace forces that are able to respond to the spectrum of tasks, as may be directed by the Government, within the required response time. This is accomplished by bringing aerospace forces to a state of readiness for operations, by assembling, and organizing aerospace personnel, supplies, and materiel. This includes the training and equipping of aerospace forces and the provision of their means of deployment, sustainment and recovery to defend Canadian interests domestically, continentally and internationally.
  • Joint and Common Readiness: This program will ensure Defence is ready to operate in a joint capacity, as directed by Government, to respond to domestic, continental and international requirements within the required response time. The program will generate and sustain forces for activities, operations and organisations in which elements of at least two services (e.g Navy, Army, Air Force) participate. This is accomplished through the provision of training of a joint and common nature, the equipping of forces and the provision of their means to deploy in a joint capacity.
  • Situational Awareness: The Government of Canada and Defence require an accurate and timely security picture and comprehensive situational awareness and threat knowledge for Canada and abroad. This program will provide credible, reliable and sustained intelligence services to Defence in support of decision making and military operations, as well as, support to other government departments in the defence and security of Canada. Work activities include geospatial intelligence, imagery intelligence, signals intelligence, and counter intelligence. The program also ensures the acquisition and use of information from the global information infrastructure to provide foreign intelligence to support Government of Canada intelligence priorities. This is accomplished through the collection, dissemination and analysis of electronic information. The program will ensure the provision of advice, guidance and services to help protect electronic information and information infrastructures of importance to the Government of Canada as well as technical and operational assistance to federal law enforcement and security agencies in the performance of their lawful duties.
  • Canadian Peace, Stability and Security: This program employs the CF in the conduct of operations to ensure the safety and security of Canadians and the defence of Canada. These operations include protecting Canada’s sovereignty, responding to domestic disasters or humanitarian crisis, supporting domestic security requirements, and conducting search and rescue activities. This is accomplished through the mobilization and deployment of forces within Canada. Canada Command is responsible for the conduct of all Canadian forces domestic operations – routine and contingency - and is the national operational authority for the defence of Canada.
  • Continental Peace, Stability and Security: This program employs the Canadian forces in the conduct of operations, both independently and in conjunction with allies, for the defence ofNorth America and its approaches. Activities under this program include continental operations as required in accordance with Government of Canada policy. This is accomplished through the mobilization and deployment of forces for the defence ofNorth America and its approaches. Canada Command is responsible for the conduct of all continental operations – routine and contingency - and is the national operational authority for the defence ofNorth America and its approaches.
  • International Peace, Stability and Security: This program will contribute to global peace and security by conducting global CF operations, across the spectrum from humanitarian assistance to combat, in concert with national and international partners, to achieve timely and decisive results in support of Canada’s national interests. This is accomplished through the mobilization and deployment of forces internationally. Canadian Expeditionary Force Command is the operational command responsible for all CF international operations, with the exception of operations conducted solely by Special Operations Forces elements.
  • Defence Team Personnel Support: The Defence Team Personnel Support program will provide a broad spectrum of support services such as financial support for education and housing and facilities services, as well as, benefits to military personnel and their families. The program will also provide learning support to Defence civilians. This program is necessary as the provision of fair and equitable support is a key element of the Social Contract between the nation and its military personnel that is essential to enhance personnel readiness and deployability, and establish the CF as an employer of choice and learning institution.
  • Canadian Identity: This program preserves and promotes Canadian identity by providing youth programs, ceremonial activities and the preservation of military history. The program is necessary to demonstrate the military heritage and proficiency of the CF to Canadians and inform them of the military profession and practice in Canada. This is realized through initiatives such as ceremonial and band performances, CF museums, CF history and heritage books, web content and the Cadets.
  • Environment Protection and Stewardship: This program promotes public health and safety and supports sustainable development on Defence lands and wherever Defence operates. It delivers multi-faceted real property/infrastructure environmental protection and stewardship compliant with applicable legislation and federal policy that extends through every level of departmental decision-making.
  • Non-Security Support: Defence is strongly committed to contributing to Canadian society in non-operational roles. The program will provide supports to develop national competency in defence issues and to the whole of government approach by sharing information with other government departments and non-governmental organizations. This may include the provision of grants to researchers to generate knowledge related to defence issues or provide meteorological or mapping information to other government departments in the interest of information sharing on horizontal initiatives.
  • Internal Services: The Internal Services Program Activity supports all strategic outcomes and is common across government. Internal Services are groups of related activities and resources that are administered to support the needs of programs and other corporate obligations of an organization. These groups are: Management and Oversight Services; Communications Services; Legal Services; Human Resources Management Services; Financial Management Services; Information Management Services; Information Technology Services; Real Property Services; Materiel Services; Acquisition Services; and Travel and Other Administrative Services. Internal Services include only those activities and resources that apply across an organization and not to those provided specifically to a program.

2. Methodology and Significant Assumptions

The future-oriented statements have been prepared on the basis of government priorities and the plans of the department as described in the Report on Plans and Priorities (RPP).

The main assumptions are as follows:

  • The department’s activities will remain substantially the same as the previous year.
  • Expenses and revenues, including the determination of amounts internal and external to the government, are mainly based on historical experience. The general historical pattern is expected to continue.
  • Allowances for uncollectibility are mainly based on historical experience and trends. The general historical pattern is expected to continue.
  • Estimated year-end position for 2011-12 is used as the opening position for 2012-13 planned results.

These assumptions are adopted as at December 31, 2011.

3. Variations and Changes to the Forecast Financial Information

While every attempt has been made to accurately forecast final results for fiscal year 2011-12 and estimates for 2012-13, actual results achieved are likely to vary from the forecast information presented, and this variation could be material.

In preparing these future-oriented financial statements the department has made estimates and assumptions concerning the future. These estimates and assumptions may differ from the subsequent actual results. Estimates and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

Factors that could lead to material differences between the future-oriented financial statements and the historical financial statements include:

  • The timing and amounts of acquisition and disposal of capital assets may affect gain/losses, amortization and expenses related to tangible capital assets.
  • Implementation of new collective agreements.
  • Economic conditions may affect the amount of revenue earned and the collectability of loans receivable.
  • Further changes to the operating budget through additional new initiatives or technical adjustments later in the year.

Once the RPP is presented, the Department will not be updating the forecasts for any changes to appropriations or forecast financial information made in ensuing supplementary estimates. Variances will be explained in the Departmental Performance Report. The 2011-12 condensed Statement of Operations values appearing in the financial highlights section of the 2012-13 RPP reflect the values reported in the condensed Statement of Operations contained in the 2011-12 RPP, not the values reported in these statements.

4. Summary of Significant Accounting Policies

The future-oriented financial statements have been prepared in accordance with Treasury Board accounting policies, in effect for the 2011-12 fiscal year. These accounting policies, stated below, are based on Canadian generally accepted accounting principles for the public sector. The presentation and results using the stated accounting policies do not result in any significant differences from Canadian generally accepted accounting principles.

Significant accounting policies are as follows:

a. Parliamentary Authorities

The Department is financed by the Government of Canada through Parliamentary authorities. Financial reporting of authorities provided to the Department do not parallel financial reporting according to generally accepted accounting principles since authorities 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 authorities from Parliament. Note 5 provides a high-level reconciliation between the bases of reporting.

b. Consolidation

These future-oriented financial consolidated statements include the accounts of the sub-entities that are under the control of the Department. The accounts of these sub-entities have been consolidated with those of the Department and all inter-organizational balances and transactions have been eliminated. 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.

Organizations and agencies that are part of these consolidated future oriented financial statements include the following:

  • Canadian Cadet Program and the Junior Canadian Rangers;
  • Canadian Forces Housing Agency;
  • Defence Research and DevelopmentCanada;
  • Office of the Department of National Defence and Canadian Forces Ombudsman;
  • Office of the Judge Advocate General; and
  • National Search and Rescue Secretariat.

The Canadian Forces Grievance Board, the Military Police Complaints Commission and the Office of the Communi­cations Security Establishment Commissioner are excluded from the consolidation 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 and Family Support Services 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.

c. Net Cash Provided by Government

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 Government.

d. Amounts Due From/To the Consolidated Revenue Fund

Amounts due from/to the CRF are the result of timing differences at year-end between when a transaction affects authorities and when it is processed through the CRF. Amounts due from the CRF represent the net amount of cash that the Department is entitled to draw from the CRF without further parliamentary expenditure authorities to discharge its liabilities.

e. Revenues

Revenues are recorded on an accrual basis:

  • 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. In the case of 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 future-oriented financial statements;
  • Contributions are recognized in the year in which the recipient has met the eligibility criteria or fulfilled the terms of a contractual transfer agreement, provided that the transfer is authorized and a reasonable estimate can be made;
  • Vacation pay and compensatory leave are accrued as the benefits are earned by employees under their respective terms of employment; and
  • Services provided without charge by other government departments for accommodation, employer contributions 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

  • Pension Benefits

    Eligible civilian employees participate in the Public Service Superannuation Plan, a multi-employer plan admini­stered by the Government. The Department’s 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 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 and reported annually to Parliament as required by the Canadian Forces Super­annuation Act. 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 and prior service, which is based on actual contributions made by members of the Plans during the period. 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 authorities.

  • 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 CF members is calculated using information derived from the results of the actuarially determined liability for employee severance benefits for the Government as a whole. Nevertheless civilian collective agreements are the reference for paying entitlement on severance pay. The process of severance pay for civilian employees will then be processed instructively by their respective collective agreements.

 

h. Accounts and Loans Receivables

Accounts and loans receivables are stated at the lower of cost and net recoverable value; a valuation allowance is recorded for receivables where recovery is considered uncertain.

i. Inventories

Inventory consists of consumables (such as non-repairables, 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 or Defence Resource Management Information System (DRMIS) is valued based on contractor-supplied records. DND is currently conducting a multi-year conversion of legacy systems into DRMIS. During the con­version process both periodic and perpetual inventory methods are being utilized. Items identified for disposal are excluded from the value of inventory as no value is expected to be recovered.

j. 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 apply to certain assets asset pooled items (API), formerly known as repairables.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.

k. 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:

 

Asset ClassAmortization Period
Buildings 10–40 years
Works 5–40 years
Machinery and Equipment 3–30 years
Informatics Hardware 3–30 years
Informatics Software 2–10 years
Arms and Weapons 3–30 years
Other Equipment 5–30 years
Ships and Boats 10–30 years
Aircraft 20–40 years
Non-military Motor Vehicles 2–30 years
Military Vehicles 3–25 years
Other Vehicles 4–30 years
Leasehold Improvements Lesser of useful life of the improvement or term of lease
Leased Tangible Capital Assets Economic life or term of lease

 

API are amortized in accordance with the sum of the accumulated amortization of the equipment platform that they support.

Assets under construction are recorded in the applic­able capital asset class in the year that they become available for use and are not amortized until they become available

for use.

l. 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 future-oriented financial statements.

m. Remediation Liabilities

Remediation liabilities reflect the estimated costs related to the management and remediation of environmentally contaminated sites. A liability, based on a reasonable estimate, is accrued when a site becomes contaminated or the Department becomes aware that a site has become contaminated and is obligated, or likely to be obligated to incur costs related to implementing a site-specific management plan. If the likelihood of the Department’s obligation to incur these costs is not determinable, or cannot be reasonably estimated, the costs are disclosed as a contingent liability in the notes to the future-oriented financial statements.

n. Future Asset Restoration Liabilities

Future asset restoration liabilities represent the estimated costs related to the risk management of unexploded ex­plosive ordnance (UXO) affected legacy sites. A liability, based on a reasonable estimate, is accrued when the Department becomes aware that a site is affected by UXO and is obligated, or is likely to be obligated, to incur costs related to a site-specific management plan. 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 a contingent liability in the notes to the future-oriented 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 a foreign currency are translated into Canadian dollars using the rate of exchange in effect at year-end.

Gains resulting from foreign currency transactions are included as revenues in Interest and Gains on Foreign Exchange in Note 20 and losses from foreign currency transactions are included in Other Expenses in Note 20.

5. Parliamentary Authorities

National Defence receives most of its funding through expenditure authorities provided by Parliament. Items recognized in the Future-oriented Statement of Operations and the Statement of Financial Position in one year may be funded through Parliamentary authorities in prior, current or 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 requested Authorities

 (in thousands of dollars)

 Estimated 2012Planned 2013
Net Cost of Operations  20,640,791 19,099,521
Adjustments for items affecting Net Cost of Operations but not affecting Authorities 
     Amortization of Tangible Capital Assets (2,458,459) (2,602,238)
     Services Provided Without Charge by Other Government Departments (762,302) (753,799)
     Employee Future Benefits (32,076) (16,258)
     Refund of Previous Year's Expenses 38,383 (5,800)
     Vacation Pay and Compensatory Leave 8,475 (194)
     Loss on Disposals of Capital Assets (190,654) (197,485)
     Adjustments of Tangible Capital Assets (258,356) (354,011)
     Return on Investments 714 596
     Other Revenues 9,122 7,107
     Remediation Liabilities and Other Allowances 36,518 36,518
     Allowance for Bad Debts 9,002 8,437
     Miscellaneous (926) (1,204)
  (3,600,559) (3,878,332)
Adjustments for items not affecting Net Cost of Operations but affecting Authorities 
     Acquisitions of Tangible Capital Assets 4,123,368 4,347,881
     Tangible Capital Assets Acquisitions with no monetary impact (39,156) (41,470)
     Payments Against Capital Lease Obligations 92,346 98,983
     Inventory Purchases Net of Usage and Adjustments (57,958) 161,633
     Net Variation Prepaid Expenses 13,360 17,561
     Revenues Collected from Prior Year Receivables (6,521) (6,648)
  4,125,439 4,577,940
Forecast Authorities Available 21,165,671 19,799,128

(b) Authorities Requested 

 (in thousands of dollars)

 Estimated
2012
Planned
2013
Operating Expenditures - Vote 1 15,492,837 14,060,634
Capital Expenditures - Vote 5 4,610,578 4,103,611
Grants & Contributions - Vote 10 241,678 265,293
Statutory Amounts 1,423,095 1,369,591
Less  
Authorities available for future years  
Capital Expenditures - Vote 5 (602,517) 0
Forecast Authorities Available 21,165,671 19,799,129

 

*2011-12 Authorities available for future years include $602.5 million in frozen allotments that will be returned to the Department for use in future years.

6. Accounts Receivable

The following table presents details of the Department's accounts receivable balances:

 (in thousands of dollars)

 Estimated
Results 2012
Planned
Results 2013
External Parties 154,649 157,966
Other Government Departments and Agencies 89,244 91,158
Gross Receivables 243,893 249,124
Less: Allowance for Doubtful Accounts on External Receivables (83,028) (84,809)
Net Receivables 160,865 164,315

 

7. Loans and Advances

The following table presents details of the Department's loans and advances balances:

 (in thousands of dollars)

 Estimated
Results 2012
Planned
Results 2013
Imprest Accounts, Standing Advances and Authorized Loans to CF Members 48,399 50,924
Advances to NATO Personnel for Recoverable Damage Claims 121 127
Accountable Advances (Temporary Advances 77 81
  48,597 51,132

 

8. Prepaid Expenses

The following table presents the details of prepaid expenses:

 (in thousands of dollars)

 Estimated
Results 2012
Planned
Results 2013
Foreign Military Purchases 438,378 447,073
Sea Sparrow Missiles 233,300 237,928
Joint Strike Fighter Development 57,807 58,954
NATO Flying Training Canada (NFTC) 44,127 45,002
Military Salaries 9,974 10,172
Building Rentals 9,867 10,063
Other Purchases 91,820 93,642
  885,273 902,834

 

9. Inventories

The following table presents the details of inventory, measured at cost using the moving weighted average method:

 (in thousands of dollars)

 Estimated
Results 2012
Planned
Results 2013
Ammunition, Bombs and Missiles 3,250,813 3,338,576
Uniforms and Clothing 417,815 429,094
Contractor Held Inventory* 340,105 349,287
Communication, Electrical Parts/Accessories and Informatics Equipment 282,964 290,603
Engineering, Test and Technical Equipment and Machine Tools 267,550 274,773
Land Equipment Spares 267,225 274,439
Aircraft Spares 200,009 205,409
 Ship Spares 171,270 175,894
Sonobuoys, Parts and Accessories 144,387 148,285
Metal 120,937 124,202
Medical Equipment 94,124 96,665
Fuel, Petroleum and Oil 38,515 39,555
Miscellaneous 391,328 401,893
  5,987,042 6,148,675

*Contractor Held Inventory is valued at historical cost.

The cost of consumed inventory recognized as an expense in the Future-oriented Statement of Operations is $181.6 million in 2012-13.

10. Tangible Capital Assets and Accumulated Amortization

Tangible Capital Assets

 (in thousands of dollars)

 Balance Beginning of YearCurrent Year
Adjustments (1)
Acquisitions (3)Disposals (2)Balance End of Year
Land, Buildings & Works     
     Land 85,900 (2,633) 5,510 (1,093) 87,684
     Buildings 7,513,143 350,259 31,580 7,772 7,902,754
     Works 2,294,333 157,593 4,642 (20,697) 2,435,871
  9,893,376 505,219 41,732 (14,018) 10,426,309
Machinery & Equipment     
     Machinery and Equipment 6,882,034 1,987,366 366,440 (11,578) 9,224,262
     Informatics Hardware 7,613,649 1,526,898 205,539 (290,205) 9,055,881
     Informatics Software 598,107 127,323 7,284 (337) 732,377
     Arms and Weapons 6,816,495 227,308 146,542 (5,943) 7,184,402
     Other Equipment 66,591 (8,553) 6,698 (827) 63,909
  21,976,876 3,860,342 732,503 (308,890) 26,260,831
Ships, Aircraft & Vehicles     
     Ships and Boats 11,573,966 (1,306,382) 64,443 (95,574) 10,236,453
     Aircraft 14,595,302 283,815 93,230 (1,294,471) 13,677,876
     Non-military Motor Vehicles 778,838 50,828 30,641 (29,198) 831,109
     Military Vehicles 1,964,000 177,379 32,628 (11,186) 2,162,821
     Other Vehicles 508,592 89,114 45,033 (984) 641,755
  29,420,698 (705,246) 265,975 (1,431,413) 27,550,014
Leasehold Improvements     
     Leasehold Improvements 41,217 7,800 290 (205) 49,102
  41,217 7,800 290 (205) 49,102
Leased Tangible Capital Assets     
     Buildings 149,066 0 10,208 0 159,274
     Informatics Hardware 9,202 0 1,162 0 10,364
     Other Equipment 48 0 0 0 48
     Aircraft 852,620 4,289 30,100 (22,931) 864,078
  1,010,936 4,289 41,470 (22,931) 1,033,764
Assets Under Construction     
     Buildings 1,379,874 (360,832) 760,995 (77)

1,779,960

     Engineering Works 210,496 (95,830) 100,071 (8) 214,729
     Informatics Software 712,645 (102,718) 82,507 (40) 692,394
     Equipment 6,925,908 (1,970,849) 2,322,338 (8,690) 7,268,707
  9,228,923 (2,530,229) 3,265,911 (8,815) 9,955,790
Gross Tangible Capital Assets  71,572,026 1,142,175 4,347,881 (1,786,272) 75,275,810

(1) Current Year Adjustments represent adjustments to API, assets under construction put into use, reclassifications and adjustments of tangible capital assets.

(2) Disposals of assets under construction represent assets that are put into use in the year and transferred to other capital asset classes as applicable.

(3)

 

Total Acquisitions 4,347,881
Less: Leased Tangible Capital Assets (41,470)
Acquisitions excluding capital leases 4,306,411

 

Accumulated Amortization

 (in thousands of dollars)

  Balance Beginning of YearCurrent Year Adjustments  Current Year Amortization DisposalBalance End of Year  Net Book Value 2012Net Book Value 2013 
Land, Buildings & Works        
   Land            85,900 87,684
   Buildings  3,337644 (54,672) 186,854 (15,000) 3,454,826 4,175,499 4,447,928
   Works 1,263,997 (4,847) 74,155 (14,524) 1,318,781 1,030,336 1,117,090
  4,601,641 (59,519) 261,009 (29,524) 4,773,607  5,291,735 5,652,702
Machinery & Equipment        
   Machinery and Equipment  5,914,697 1,375,140 236,210 (8,404) 7,517,643  967,337 1,706,619
   Informatics Hardware  6,169,002 971,061 544,245 (159,959) 7,524,349 1,444,647 1,531,532
   Informatics Software 344,298 16,865 52,129 (229) 413,063 253,809 319,314
   Arms and Weapons 4,139,360 275,706 269,008 (57,970) 4,626,104 2,677,135 2,558,298
   Other Equipment  53,953 (587) 6,070 (609) 58,827 12,638 5,082
  16,621,310 2,638,185 1,107,662 (227,171) 20,139,986 5,355,566 6,120,845
Ships, Aircraft & Vehicles        
   Ships and Boats  6,856,976 (335,466) 378,677 (94,614) 6,805,573 4,716,990 3,430,880
   Aircraft 7,943,866 (852,777) 576,894 (1,177,969) 6,490,014 6,651,436 7,187,862
   Non-military Motor Vehicles  526,590 41,012 47,092 (21,957) 592,737 252,245 238,372
   Military Vehicles  1,186,822 (4,875) 69,254 (12,991)  1,238,210 777,178 924,611
   Other Vehicles 331,301 69,626 31,100 (1,125) 430,902 177,291 210,853
  16,845,555 (1,082,480) 1,103,017 (1,308,656) 15,557,436 12,575,143 11,992,578
Leasehold Improvements        
   Leasehold Improvements 20,113 0 3,558 (259) 23,412 21,104 25,690
  20,113  0 3,558 (259)  23,412 21,104 25,690
Leased Tangible Capital Assets       
   Buildings 55,546 8,314 63,860 93,520 95,414
   Informatics Hardware  6,722 2,867 (1,713) 7,876  2,480 2,488
   Other Equipment  38 8 46 10 2 
   Aircraft  577,786 115,803 (10,669)  682,920  274,834 181,158
  640,093 0  126,992 (12,382)  754,702 370,844 279,062
Assets Under Construction        
   Buildings            1,379,874 1,779,960
   Engineering Works           210,496 214,729
   Informatics Software            712,645 692,394
   Equipment           6,925,908 7,268,707
            9,228,923 9,955,790
 Total 38,728,712 1,496,186 2,602,238 (1,577,992) 41,249,143 32,843,315 34,026,667

 

11. Accounts Payable and Accrued Liabilities

The following table presents details of the Department's accounts payable and accrued liabilities:

 (in thousands of dollars)

 Estimated
Results 2012
Planned
Results 2013
Accounts payable to other government departments and agencies 101,022 84,219
Accounts payable to external parties 1,431,952 1,193,782
  1,532,974 1,278,001
Accrued Liabilities  1,052,189 877,183
  2,585,163 2,155,184

 

12. Deposits and Trust Accounts

The following table presents details of the Department's deposits and trust accounts:

 (in thousands of dollars)

 Estimated
Results 2012
Planned
Results 2013
Contractor Security Deposits 
     Deposits, beginning of year 2,608 2,945
     Deposits Received 6,033 6,330
     Refunds (5,696) (5,921)
     Contractor Security Deposits, end of year 2,945 3,354
Trust Account, Estates - Armed Services* 
     Trust Account, beginning of year 344 291
     Funds Received 1,990 1,979
     Payments (2,043) (2,059)
     Trust Account, Estates - Armed Services, end of year 291 211
  3,236 3,565

 

* The Trust Account, Estates - Armed Services was established to record the service estates of deceased members of the Canadian Forces pursuant to section 42 of the National Defence Act. Net assets of estates are distributed to legal heirs under the administration of the Judge Advocate General, in his capacity as Director of Estates.

13. Deferred Revenue

Deferred revenue represents the balance at year-end of unearned revenues stemming from amounts received from external parties which are restricted to fund the expenditures related to amounts received for fees prior to services being performed. Revenue is recognized in the period that these expenditures are incurred or the service is performed. Details of the transactions related to this account are as follows:

 (in thousands of dollars)

 Estimated
Results 2012
Planned
Results 2013
Foreign Governments 
     Beginning of Year 14,608 7,769
     Funds Received (53,680) (93,318)
     Revenue Recognized 46,841 87,791
     Foreign Governments, end of year 7,769 2,242
Other Specified Purposes 
     Beginning of Year 8,334 11,643
     Funds Received (9,898) (5,278)
     Revenue Recognized 13,207 11,969
     Other Specified Purposes, end of year 11,643 18,334
  19,412 20,576

14. Canadian Forces Pension and Insurance Accounts

Established in 1901 under the Militia Pension Act, the present Canadian Forces Pension Plans (the “Plans”) are administered in accordance with the provisions of the Act. The Canadian Forces Pension Plan (CFPP) covers all members of the regular force component of the Canadian Forces. Reserve Force members who have sufficient qualifying service and pensionable earnings are members of either the CFPP or Reserve Force Pension Plan (RFPP), which came into force on March 1, 2007, depending on their employment status and earnings.

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, 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 reflect only the balances which are posted in the departmental financial system. These balances do not include the actuarial value of the liabilities determined by the Chief Actuary of the Office of the Superintendent of Financial Institutions nor the details of 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. For further information on PSP Investments, please visit their website www.pspib.ca.

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 contribution, premiums, interest, and benefit payments.

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

 (in thousands of dollars)

 Estimated
Results
2012
Planned
Results
2013
Canadian Forces Superannuation Account  
   Beginning of Year 45,995,263 46,149,489
   Funds Received and Other Credits  2,702,726 2,441,500
   Payments and Other Charges (2,548,500) (2,487,417)
   Canadian Forces Superannuation Account, end of year 46,149,489 46,103,572
Canadian Forces Pension Fund Account  
   Beginning of Year 37,744 37,744
   Funds Received and Other Credits 1,264,000 1,280,000
   Payments and Other Charges (307,038) (328,350)
   Transfers to the Public Sector Pension Investment Board (956,962) (951,650)
   Canadian Forces Pension Fund Account, end of year 37,744 37,744
Reserve Force Pension Fund Account  
   Beginning of Year 5,027 12,051
   Funds Received and Other Credits 58,000 38,000
   Payments and Other Charges (19,921) (40,581)
   Transfers to the Public Sector Pension Investment Board (31,055) 0
   Reserve Force Pension Fund Account, end of year 12,051 9,470
Retirement Compensation Arrangements Account*  
   Beginning of Year 286,772 326,582
   Funds Received and Other Credits  84,332 89,881 
   Payments and Other Charges  (44,521)  (47,273)
   Retirement Compensation Arrangements Account, end of year 326,583  369,190 
Regular Force Death Benefit Account  
   Beginning of Year 191,894 188,394 
   Funds Received and Other Credits 31,200 31,100 
   Payments and Other Charges (34,700) (35,800)
   Regular Force Death Benefit Account, end of year 188,394 183,694 
  46,714,261 46,703,670 

 * The Retirement Compensation Arrangements (RCA) account records transactions for pension benefits that are provided in excess of those permitted under the Income Tax Act. The RCA is registered with Canada Revenue Agency (CRA) and a transfer is made annually between the RCA Account and CRA to either remit a 50-percent refundable tax in respect of the net contributions and interest credits or to be credited a reimbursement based on the net benefit payments.

15. Lease Obligations for Tangible Capital Assets

The Department has entered into agreements to lease certain equipment under capital leases with a estimated cost of $1,034 million and accumulated amortization of $755 million as at the date of these statements. The obligations for the upcoming years include the following:

 (in thousands of dollars)

 Estimated
Results
2012
Planned
Results
2013
2013 93,173  
2014 81,404 76,362
2015 81,348 76,309

2016

81,229 76,251
2017 and Thereafter 438,839 499,007
Total Future Minimum Lease payments 775,993 727,929
Less: imputed interest (2.3%-6.0% 191,086 179,250
Balance of Obligations 584,907 548,679

 * The Department has entered into agreements for buildings, aircraft and informatics hardware under capital leases (refer to Note 10 of these financial statements).

16. Employee Future Benefits

(a) Pension Benefits:

  1. The Department's Public Service employees participate in the Public Service Pension Plan, which is sponsored and administered 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/Québec Pension Plan benefits and they are indexed to inflation.

    Both the employees and the Department contribute to the cost of the Plan. 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.
  2. The members of the Canadian Forces (Regular Force) and eligible members of the Reserve Force participate in the Canadian Forces Pension Plan, which is 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/Québec Pension Plan benefits and are indexed to inflation.
  3. The members of the Canadian Forces (Reserve Force), who are not eligible for participation in the Canadian Forces Pension Plan, may be eligible to participate in the Reserve Force Pension Plan, which is sponsored by the Government of Canada and administered by the Department. Pension benefits accrue at a rate of 1.5 percent of pensionable earnings during the member’s service, plus an additional 0.5 percent times the average of the best five consecutive years of earnings for those members who are not yet eligible for Canada/Québec Pension Plan benefits. The benefits are integrated with Canada/Québec Pension Plan benefits and are indexed to inflation.

    Both the members and the Department contribute to the cost of the Plans for both current and prior service. 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 authorities. Information about the severance benefits estimated as at the date of these statements, is as follows:

 (in thousands of dollars)

 Estimated
Results 2012
Planned
Results 2013
Public Service Employees 
     Accrued Benefit Obligation, beginning of year 398,823 404,369
     Expenses for the year 39,463 34,990
     Benefits Paid During the Year (33,917) (36,532)
     Accrued Benefit Obligation, end of year 404,369 402,827
Canadian Forces Members 
     Accrued Benefit Obligation, beginning of year 1,270,600 1,297,130
     Expenses for the Year 127,062 116,543
     Benefits Paid During the Year (100,532) (98,743)
     Accrued Benefit Obligation, end of year 1,297,130 1,314,930
  1,701,499 1,717,757

17. Contingent Liabilities

Contingent liabilities arise in the normal course of operations and their ultimate disposition is unknown. The department is involved in three categories of contingent liabilities: claims and litigations, remediation liabilities, and future asset restoration liabilities.

(a) Claims and Litigations

Claims have been made against the Department in the normal course of operations. As at the date of the preparation of these future oriented financial statements, legal proceedings for claims totalling approximately $2,050 million were still pending. 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.

(b) Remediation Liabilities - Contaminated Sites

Liabilities are accrued to record the estimated costs related to the management and remediation of environmentally contaminated sites, where the Department is obligated or likely to be obligated to incur such costs. An estimated liability of $149 million has been accrued in these statements.

Liability estimates are based on information known at a given point in time. These estimates are subject to variability due to: professional judgment involved in developing estimates, the possibility that additional volumes of contaminated media may be discovered upon implementation of the remedial action plan, and/or new technologies becoming available during the course of implementing the remedial action plan.

The Department confirms an approximate number of sites where such action is possible and records a liability. The Department also makes estimates for contingent liabilities that are not accrued relating to contaminated sites.

The Dew Line Clean Up project completed maintenance investigation of FOX4 – Cape Hooper and has identified the need for additional remediation work which is expected to be competed by fiscal year 2016-17. The department has produced estimates and accruals for the two projects approved to address the risks associated with the trichlorothylene (TCE) contamination at Valcartier. The potential for these estimates to change is likely given the long duration of these projects (15+ years). The cost estimates will continue to be reviewed at least annually and adjusted as necessary. Other projects at this site are being considered.

A potential obligation exists for environmental mitigation at Camp Ipperwash. Assessments regarding potential obligation at sites Suffield Experimental Proving Ground, CFS Alert and London (Highbury Complex) are planned to continue in 2012-13.

As a result of assessment activities undertaken for suspected or confirmed contaminated sites, additional liabilities may be reported for fiscal year 2012-13.

(c) Future Asset Restoration Liabilities

Liabilities are accrued to record the estimated costs related to the risk management and clearance of unexploded explosive ordinance (UXO) affected legacy sites, where the Department is obligated or likely to be obligated to incur such costs. The liability estimates are based on information known at a given point in time and are subject to variability due to the use of professional judgment in developing the estimate, changes to the size of the site or type of UXO on the site, and/or new technologies becoming available during the implementation of the risk management strategy. An estimated liability of $26 million has been accrued in these statements.

The Department confirms sites where clearance or risk management activities may be necessary and records a liability.

A potential obligation exists for UXO risk mitigation at Camp Ipperwash. The uncertainty will be resolved once UXO investigations have been completed and clearance options have been developed. A contingent liability also exists at Lac St. Pierre. The estimated contingent liability (a rough order magnitude estimate ranging from $180 million to $524 million) relates to potential clearance costs to mitigate UXO risk at Lac St. Pierre and is reviewed annually.

As a result of assessment activities undertaken related to the risk management and clearance of UXO affected legacy sites, additional liabilities may be reported for fiscal year 2012-13.

In addition to liabilities related to UXO affected legacy sites, there are potential obligations related to real property. These obligations may arise from property disposal transactions, termination of lease agreements, oil and gas activities on DND/CF property, and other transactions.

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. Significant contractual obligations over $10 million that can be reasonably estimated are as follows:

 (in thousands of dollars)

  2011-20122012-2013 2013-20142014-20152015-2016
and Thereafter
 Total
Fixed Assets 1,404,577  1,072,499  921,448  893,961  1,479,619  5,772,104 
Purchases 1,722,688  1,438,567  1,156,081  1,054,778  8,098,449  13,470,563 
  3,127,265 2,511,066 2,077,529 1,948,739 9,578,068 19,242,667

 19. Related Party Transactions

(a) Common Services Provided Without Charge by Other Government Departments

During the year, the Department received services without charge from certain common service organizations, related to accomodation, legal services, the employer's contribution to the health and dental insurance plans and workers' compensation coverage. These services provided without charge have been recorded in the Department's Future-oriented Statement of Operations as follows:

 (in thousands of dollars)

 Estimated
Results
2012
Planned
Results
2013
Employer's Contributions to the Health and Dental PlansPaid by Treasury Board of Canada Secretariat 666,757 658,734 
Accommodation Provided by Public Works and Government Services Canada 81,661 81,304
Worker's Compensation Coverage Provided by Human Resources and Skills Development Canada 9,117 8,650

Legal Services Provided by Department of Justice Canada

4,766 5,111
  762,302 753,799

 

The Government has centralized some of its administrative activities for efficiency, cost-effectiveness purposes and economic delivery of programs to the public. As a result, the Government uses central agencies and common service organizations so that one department performs services for all other departments and agencies without charge. The costs of these services, such as payroll and cheque issuance services provided by Public Works and Government Services Canada and audit services provided by the Office of the Auditor General are not included in Department's Future-oriented Statement of Operations.

(b) Other transactions with related parties

 (in thousands of dollars)

 Estimated
Results
2012
Planned
Results
2013
Accounts Payable to Other Government Departments and Agencies 101,022 84,219
Accounts Receivable from Other Government Departments and Agencies 89,244 91,158
  190,266 175,378

 

20. Segmented Information

Presentation by segment is based on the Department's program activity architecture. The presentation by segment is based on the same accounting policies as described in the Summary of significant accounting policies in note 4. The following table presents forecasted expenses incurred and forecasted revenues generated for the main program activities, by major object of expesnes and by major types of revenues. The segment results for the period are as follows:

The following table is available for downloading or viewing:

 Table 20 for notes to future-oriented Financial Statements (PDF Version, 132 KB)

21. Transfer from/to Other Government Department's

Effective November 15, 2011, the Department of National Defence transferred responsibility for the Email, Data Centre and Network Services Units to Shared Services Canada in accordance with Order-in-Council 2011-1297, including the stewardship responsibility for the assets and liabilities related to the program. In addition, effective November 16, 2011, the Department transferred responsibility for Communications Security Establishment to Communications Security Establishment in accordance with Order-in-Council 2011-1305, including the stewardship responsibility for the assets and liabilities related to the program. At the time of the preparation of the Future-oriented Financial Statements insufficient data was available to provide detailed disclosure, so these two transfers have not been reflected in the statements.

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