Financial Statements 2012-2013

Table of Contents

Statement of Management Responsibility Including Internal Control Over Financial Reporting

Responsibility for the integrity and objectivity of the accompanying consolidated financial statements for the year ended March 31, 2013, and all information contained in these statements rests with the management of the Department. These consolidated financial statements have been prepared by management using the Government's accounting policies, which are based on Canadian public sector accounting standards.

Management is responsible for the integrity and objectivity of the information in these consolidated financial statements. Some of the information in the consolidated financial statements is based on management's best estimates and judgment, and gives due consideration to materiality. To fulfill its accounting and reporting responsibilities, management maintains a set of accounts that provides a centralized record of the Department's financial transactions. Financial information submitted in the preparation of the Public Accounts of Canada, and included in the Department's Departmental Performance Report, is consistent with these consolidated financial statements.

Management is also responsible for maintaining an effective system of internal control over financial reporting (ICFR) designed to provide reasonable assurance that consolidated financial information is reliable, that assets are safeguarded and that transactions are properly authorized and recorded in accordance with the Financial Administration Act and other applicable legislation, regulations, authorities and policies.

Management seeks to ensure the objectivity and integrity of data in its financial statements through careful selection, training and development of qualified staff; through organizational arrangements that provide appropriate divisions of responsibility; through communication programs aimed at ensuring that regulations, policies, standards, and managerial authorities are understood throughout the Department and through conducting an annual risk-based assessment of the effectiveness of the system of ICFR.

The system of ICFR is designed to mitigate risks to a reasonable level based on an ongoing process to identify key risks, to assess effectiveness of associated key controls, and to make any necessary adjustments.

A risk-based assessment of the system of ICFR for the year ended March 31, 2013 was completed in accordance with the Treasury Board Policy on Internal Control and the results and action plans are summarized in the annex.

The effectiveness and adequacy of the Department's system of internal control is reviewed by the Office of the Chief Audit Executive, which conducts audits of various areas of the Department's operations, as well as audit work specific to annual financial reporting. Management is also supported by a Departmental Audit Committee (DAC). The fundamental role of the DAC is to provide objective advice and recommendations to the Deputy Ministers on the adequacy of the Department's risk management, control and governance processes. The DAC recommends the consolidated financial statements to the Deputy Head.

The Consolidated Financial Statements of the Department have not been audited.

Original signed by:

Simon Kennedy
Deputy Minister of International Trade

Morris Rosenberg
Deputy Minister of Foreign Affairs

Nadir Patel
Assistant Deputy Minister and Chief Financial Officer
Corporate Planning, Finance and Human Resources

Ottawa, Canada
August 30, 2013

Consolidated Statement of Financial Position (Unaudited)

Table 1: Consolidated Statement of Financial Position
As at March 31 (in thousands of dollars)20132012
Liabilities
Accounts payable and accrued liabilities (Note 4)242,263330,438
Vacation pay and compensatory leave37,97340,288
Deferred revenue130130
Employee future benefits (Note 5)132,258162,655
Total liabilities412,624533,511
Financial Assets
Due from the Consolidated Revenue Fund156,369240,598
Accounts receivable and advances (Note 6)95,668102,724
Inventory held for re-sale (Note 7)12,9205,351
Total Financial Assets264,957348,673
Departmental Net Debt147,667184,838
Non-Financial Assets
Prepaid expenses19,84714,183
Consumable inventory (Note 7)4,0423,040
Tangible capital assets (Note 8)1,381,0511,233,510
Total non-financial assets1,404,9401,250,733
Departmental Net Debt1,257,2731,065,895

Contractual obligations (Note 9)
Contingent liabilities (Note 10)

The accompanying notes form an integral part of the Consolidated Financial Statements.

Consolidated Statement of Operations and Departmental Net Financial Position (Unaudited)

Table 2: Consolidated Statement of Operations and Departmental Net Financial Position
For the year ended March 31 (in thousands of dollars)Planned Results 201320132012
Expenses
Diplomacy and Advocacy1,217,257953,5021,083,378
Governance, Strategic Direction and Common Service Delivery731,924609,508666,786
Passport Canada346,589315,799331,469
Government of Canada Benefits197,743219,730210,610
Internal Services200,649182,500193,435
International Commerce175,953162,483173,735
International Policy Advice and Integration107,40292,861101,484
Consular Services and Emergency Management73,91258,32272,528
Total Expenses3,051,4292,594,7052,833,425
Revenues
Sale of goods and services476,184485,855461,912
Gain on disposal of tangible capital assets (net)21,184-44,003
Foreign exchange net gain--3,772
Other non-tax revenue-9,9191,158
Interest on non-tax revenue-269256
Revenues earned on behalf of Government-(140,803)(184,862)
Total Revenues498,072355,240326,239
Net cost from continuing operations2,533,3572,239,0652,507,186
Transferred operations
Expenses (Note 12)--41,804
Net cost of transferred operations--41,804
Net cost of operations before government funding and transfers2,553,3572,239,4652,548,990
Government funding and transfers
Net cash provided by Government2,439,8562,475,899
Change in due from Consolidated Revenue Fund(84,229)25,458
Services provided without charge by other government departments (Note 11)79,79379,709
Transfer of assets and liabilities from (to) other government departments(4,577)(6,808)
Net cost of operations after government funding and transfers(191,378)(25,268)
Departmental net financial position - Beginning of Year1,065,8951,040,627
Departmental net financial position - End of Year1,257,2731,065,895

Segmented Information Note 13.

The accompanying notes form an integral part of the Consolidated Financial Statements

Consolidated Statement of Change in Departmental Net Debt (Unaudited)

Table 3: Consolidated Statement of Change in Departmental Net Debt
For the year ended March 31 (in thousands of dollars)20132012
Net cost of operations after government funding and transfers(191,378)(25,268)
Change due to tangible capital assets
Acquisition of tangible capital assets251,216132,478
Amortization of tangible capital assets(89,891)(91,511)
Proceeds from disposal of tangible capital assets(12,296)(56,138)
Net (loss) gain on disposal of tangible capital assets - net(1,141)44,003
Transfers to other government departments(347)(8,906)
Total change due to tangible capital assets147,54119,926
Change due to prepaid expenses5,664(17,618)
Change due to consumable inventory1,002(3,047)
Net increase (decrease) in departmental net debt(37,171)(26,007)
Departmental Net Financial Position - Beginning of Year184,838210,845
Departmental Net Financial Position - End of Year147,667184,838

The accompanying notes form an integral part of the Consolidated Financial Statements.

Consolidated Statement of Cash Flow (Unaudited)

Table 4: Consolidated Statement of Change in Departmental Net Debt
For the year ended March 31 (in thousands of dollars)20132012
Operating activities
Net cost of operations before government funding and transfers2,239,4652,548,990
Non-cash items:
Amortization of tangible capital assets (Note 8)(89,891)(91,511)
Services provided without charge by other government departments (Note 11)(79,793)(79,709)
Gain (loss) on disposal of tangible capital assets - net(1,141)44,003
Variations in Statement of Financial Position:
Increase in accounts receivable and advances(7,056)6,737
Increase (decrease) in inventory held for re-sale7,569(1,779)
Decrease in prepaid expenses5,664(17,618)
Increase (decrease) in consumable inventory1,002(3,047)
Increase in accounts payable and accrued liabilities88,175(23,995)
Decrease in vacation pay and compensatory leave2,3153,396
Decrease (increase) in deferred revenue-309
Decrease (increase) in accrued employee future benefits30,39715,881
Transfer of liabilities to other government departments4,230(2,098)
Cash used in operating activities2,200,9362,399,559
Capital investing activities
Acquisitions of tangible capital assets (Note 8)251,216132,478
Proceeds from disposal of tangible capital assets(12,296)(56,138)
Cash used in capital investing activities238,92076,340
Net cash provided by Government of Canada2,439,8562,475,899

The accompanying notes form an integral part of the Consolidated Financial Statements.

Notes to the Consolidated Financial Statements (Unaudited)

As at March 31, 2013

1. Authority and objectives

The Department of Foreign Affairs and International Trade (hereinafter called "the Department") operates under the legislation set out in the Department of Foreign Affairs and International Trade Act, RSC 1985, c. E-22.

The 2012-2013 Report on Plans and Priorities (RPP) was based on the Department's Program Alignment Architecture (PAA), as approved by Treasury Board (TB). Financial information in the 2012-2013 Departmental Performance Report (DPR) is reported on this basis. The PAA presents the Department's three strategic outcomes. Strategic outcomes are supported by a cascading matrix of programs, sub-activities and sub-sub-activities, each of which has associated expected results and performance indicators.

  • Strategic Outcome #1:Canada's International Agenda - The international agenda is shaped to Canada's benefit and advantage in accordance with Canadian interests and values.
    • Program #1: International Policy Advice and Integration - DFAIT draws upon its expertise at missions and Headquarters to establish integrated and coherent foreign policy and international trade priorities, and to provide information, intelligence and advice to ministers, senior officials and key partners to support informed decisions that advance Canadian values and interests internationally.
    • Program #2: Diplomacy and Advocacy - DFAIT uses diplomacy, advocacy, and program delivery, informed by consultations with domestic stakeholders, to engage and influence international players in order to advance Canadian interests and values.
  • Strategic Outcome #2:International Services for Canadians - Canadians are satisfied with commercial, consular and passport services.
    • Program #3: International Commerce - This program activity delivers commercial services and advice to Canadian business and supports their pursuit of international business opportunities.
    • Program #4: Consular Services and Emergency Management - This program activity manages and delivers consular services and advice to Canadians and provides a coordinated Government of Canada response to emergencies abroad affecting Canadians.
    • Program #5: Passport Canada - This program activity is responsible for the issuing, refusing, revoking, withholding, recovering and use of Canadian passports. The program enables the issuance of secure travel documents to Canadians, which facilitates their travel and contributes to international and domestic security. This program activity manages and delivers passport services through the Passport Canada Revolving Fund.
  • Strategic Outcome #3:Canada's International Platform - The Department maintains a mission network of infrastructure and services to enable the Government of Canada to achieve its international priorities.
    • Program #6: Governance, Strategic Direction and Common Service Delivery - This program activity governs, provides strategic direction and leadership, manages change, delivers services and provides infrastructure to the mission platform.
    • Program #7: Government of Canada Benefits - This program activity is the vehicle through which the department and central agencies manage statutory payments to Government of Canada employees abroad (Canada-based staff and locally engaged staff).

The internal services program activity provides the essential support functions that enable DFAIT to carry out its mandate, including governance and management support; resource management services and asset management services.

Note 13 Segmented Information presents the expenses incurred and revenues generated from continuing operations, by strategic outcome and program, as well as by major object of expenses and by major type of revenues.

2. Summary of significant accounting policies

These consolidated financial statements have been prepared using the Government's accounting policies stated below, which are based on Canadian public sector accounting standards. The presentation and results using Treasury Board accounting policies do not result in any significant differences from Canadian public sector accounting standards (CICA).

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 Consolidated Statement of Operations and Departmental Net Financial Position and in the Consolidated Statement of Financial Position are not necessarily the same as those provided through authorities from Parliament. Note 3 provides a reconciliation between the bases of reporting. The planned results amounts in the Consolidated Statement of Operations and Departmental Net Financial Position are the amounts reported in the future-oriented financial statements included in the 2012-13 Report on Plans and Priorities.

(b) Consolidation:These consolidated financial statements include the accounts of the Passport Canada Revolving Fund for which deputy head (DH) is accountable. All inter-organizational balances and transactions have been eliminated.

Export Development Canada (EDC), a federal Crown corporation named in Part I of Schedule III to the Financial Administration Act, is accountable for its affairs to Parliament through the Minister of International Trade. The Minister of International Trade, via a trust in the name of Her Majesty, is the sole shareholder of EDC. As the Department does not own the shares of EDC, this investment is not included within the Department's Consolidated Financial Statements. In accordance with Government Accounting Policies, transactions between EDC and the Government of Canada are not recorded in the Department's consolidated financial statements.

The Department also makes payments on behalf of the Government of Canada to three Crown Corporations: the Canadian Commercial Corporation (CCC), the National Capital Commission (NCC), and the International Development and Research Centre (IDRC). As per the Treasury Board Accounting Standards (TBAS), these payments are not recorded in the Department's financial statements as the Department's deputy head is not accountable for the Crown corporations and these funds do not relate to the Department's activities. The Department is simply acting as a flow-through mechanism for administrative purposes so that the Crown Corporation can receive its Parliamentary authorities.

(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 received by the Department is deposited to the CRF, and all cash disbursements made by the Department are paid from the CRF. The net cash provided by Government is the difference between all cash receipts and all cash disbursements, including transactions between departments of the Government.

(d) Amounts due from or to the CRF:Amounts due from or 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 authorities to discharge its liabilities.

(e) Revenues:

  1. Revenues from regulatory fees are recognized in the accounts based on the services provided in the year.
  2. Funds received from external parties for specified purposes are recorded upon receipt as deferred revenue. These revenues are recognized in the period in which the related expenses are incurred.
  3. Funds that have been received are recorded as deferred revenue, provided the Department has an obligation to other parties for the provision of goods, services or the use of assets in the future.
  4. Other revenues are accounted for in the period in which the underlying transaction or event that gave rise to the revenue takes place.
  5. Revenues that are non-respendable (revenues earned on behalf of Government) are not available to discharge the Department's liabilities. While the Deputy Head is expected to maintain accounting control, he or she has no authority regarding the disposition of non-respendable revenues. As a result, non-respendable revenues are considered to be earned on behalf of the Government of Canada and are therefore presented in reduction of the entity's gross revenues.
  6. Passport Canada recognizes revenue from passport fees upon receipt of payment and verification of the passport appplication for completeness.

(f) Expenses: Expenses are recorded on the accrual basis:

  1. Transfer payments are recorded as expenses when authorization for the payment exists and the recipient has met the eligibility criteria or the entitlements established for the transfer payment program. In situations where payments do not form part of an existing program, transfer payments are recorded as expenses 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 financial statements. Transfer payments that become repayable as a result of conditions specified in the contribution agreement that have come into being are recorded as a reduction to transfer payment expense and as a receivable.
  2. Vacation pay and compensatory leave are accrued as the benefits are earned by employees under their respective terms of employment.
  3. Services provided without charge by other government departments for accommodation, employer contributions to the health and dental insurance plans, legal services and workers' compensation are recorded as operating expenses at their estimated cost.

(g) Employee future benefits:

  1. Pension benefits:Eligible Canada based staff (CBS) participate in the Public Service Pension Plan, a multiemployer pension 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. The Department's responsibility with regard to the 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. Eligible locally engaged staff (LES), who are employees hired at Missions abroad, participate in a combination of plans developed and administered based on local laws and practice, or in a worldwide pension scheme, which is administered by the Department. As the Government of Canada is the sponsor of LES pension plans, the funds for the contributions have been provided to the Department (Vote 15).
  2. Severance benefits: Employees (both CBS and LES) who are entitled to severance benefits under labour contracts or conditions of employment earn these benefits as services necessary to earn them are rendered. The obligation relating to the benefits earned by CBS employees is calculated using information derived from the results of the actuarially determined liability for employee severance benefits for the Government as a whole. The LES obligation is established on the basis of operational requirements of the specific Mission, local laws or practice, and is calculated based on the number of eligible employees multiplied by the estimated value of the severance payment based on historical experience.

(h) Accounts receivable and advances:Accounts receivable and advances are stated at the lower of cost and net recoverable value. An allowance for doubtful accounts is recorded for accounts receivable where recovery is considered uncertain.

(i) Contingent liabilities:Contingent liabilities are potential liabilities that 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 if an amount cannot be reasonably estimated, the contingency is disclosed in the notes to the consolidated financial statements.

(j) Prepaid expenses: Prepaid expenses for the Department consist primarily of rent payments. Prepaid expenses are accounted for as non-financial assets until the related services are rendered, goods are consumed, or terms of the contractual agreement are fulfilled.

(k) Inventories:Inventories consist of parts, materiels and supplies held for future program delivery and not intended for resale, as well as inventory for sale. Inventories are valued at the lower of cost (using the average cost method) or net realizable value.

(l) 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 and losses resulting from foreign currency transactions are included in either Expenses or Revenues in the Consolidated Statement of Operations and Departmental Net Financial Position (and in Note 13), depending on if the net result is a loss or gain, respectively. The Department has negotiated an agreement with the Treasury Board Secretariat (TBS) and the Department of Finance whereby the Department is held harmless to foreign exchange gains and losses on Vote 1 Operating Expenditures abroad.

(m) Tangible capital assets: All tangible capital assets and leasehold improvements having an initial cost per unit of $10,000 or more are recorded at their acquisition cost. The Department does not capitalize intangibles, works of art and historical treasures that have cultural, aesthetic or historical value

Amortization of tangible capital assets is done on a straight-line basis over the estimated useful life of the asset as follows:

Table 5: Amortization of tangible capital assets
Asset CategoriesAmortization Period
Buildings20 to 25 years
Works and infrastructure30 years
Machinery and equipment5 to 25 years
Informatics hardware3 to 15 years
Informatics software3 to 10 years
Vehicles5 to 10 years
Leasehold improvementsTerm of the lease or 25 years

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.

(n) Measurement uncertainty:The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in the financial statements. At the time of preparation of these statements, management believes the estimates and assumptions to be reasonable. The most significant items where estimates are used are contingent liabilities, the liability for employee future benefits, allowance for doubtful accounts and the useful life of tangible capital assets. Actual results could significantly differ from those estimated. Management’s estimates are reviewed periodically and, as adjustments become necessary, they are recorded in the financial statements in the year they become known.

3. Parliamentary authorities

The Department receives most of its funding through annual parliamentary authorities. Note 3 provides three separate reconciliations of the current year authorities used. Section 3 b) displays how much of the authorities provided were actually used, section 3 c) shows of those Authorities used, how much required the use of cash, while 3 a) shows the reconciliation between Authorities used (cash-basis) to net cost of operations (accrual-basis, from the Statement of Operations). Items recognized in the Consolidated Statement of Operations and Departmental Net Financial Position and the consolidated 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:

Table 6: Parliamentary Authorities - Reconciliation of net cost of operations to current year authorities used
Reconciliation of net cost of operations to current year authorities used (in thousands of dollars)20132012
Net cost of operations before government funding and transfers2,239,4652,548,990
Adjustments for items affecting net cost of operations but not affecting authorities:
Services provided without charge by other government departments(79,793)(79,709)
Amortization of tangible capital assets(89,891)(91,511)
Refund of prior years' expenditures9,94120,759
Termination benefits - Workforce Adjustment costs13,900(37,600)
Gain on disposal of tangible capital assets - net(1,141)44,003
Gain on sale of Real property-(52,729)
Bad debt expense(1,120)(330)
Decrease in vacation pay and compensatory leave2,3153,239
Decrease in accrued employee future benefits30,39715,881
Other adjustments457230
 2,124,5302,371,223
Adjustments for items not affecting net cost of operations but affecting authorities:
Acquisition of tangible capital assets251,216132,478
Spending of proceeds from the disposal of surplus assets-1,209
Interdepartmental transactions4,898-
Increase (decrease) in prepaid expenses5,664(17,618)
Increase (decrease) in inventory held for re-sale7,569(1,779)
Increase (decrease) in consumable inventory1,002(3,047)
Current year authorities used2,394,8792,482,466

Authorities are provided on a cash basis while the net cost of operations is reported on an accrual accounting basis. As a result, the two will always be different. The difference is mainly explained by accruals and non cash expenditures such as amortization and services provided without charge as they do not affect authorities, but are included in the net cost of operations. The variance is also explained by various elements classified as Assets in the Consolidated Statement of Financial Position (i.e. inventory, prepaid expenses and capital assets) that affect authorities used, but are not included in the net cost of operations.

Table 7: Parliamentary Authorities - Authorities provided and used
Authorities provided and used (in thousands of dollars)20132012
Authorities provided:
Vote 1 - Operating Expenditures1,393,6311,455,482
Vote 5 - Capital Expenditures341,230227,740
Vote 10 - Grants and Contributions822,927899,459
Vote 15 - Payments, in respect of pension, insurance and social security programs or other arrangements for LES72,66870,140
Statutory - Passport Canada138,820158,349
Other Statutory91,63195,675
 2,860,9072,906,845
Less:
Authorities available for future years116,442138,982
Lapsed authorities: Operating123,37197,031
Lapsed authorities: Capital73,14360,458
Lapsed authorities: Grants and Contributions150,490117,609
Lapsed authorities: Payments, in respect of pension, insurance and social security programs or other arrangements for LES2,58210,299
 466,028424,379
Current year authorities used2,394,8792,482,466

Parliamentary authorities provided are reconciled to Parliamentary authorities used in the current year and agree with amounts shown as "Available for Use and Authorities Used" as reflected in the "Summary of Source and Disposition of Authorities" in Volume II of the Public Accounts.

Table 8: Parliamentary Authorities - Reconciliation of net cash provided by Government to current year authorities used
Reconciliation of net cash provided by Government to current year authorities used (in thousands of dollars)20132012
Net cash provided by Government2,439,8562,475,899
Refund of prior years' expenditures9,94120,759
Proceeds from disposal of tangible capital assets12,29656,138
Gain on sale of Real Property-(52,729)
Increase in accounts receivable and advances7,056(6,737)
Increase in accounts payable and accrued liabilities(88,175)23,995
Liabilities transferred to other government departments(4,230)2,098
Accrued termination benefits included in the accounts payable and accrued liabilities13,900(37,600)
Increase (decrease) in deferred revenue-(309)
Interdepartmental transactions(4,327)-
Other adjustments(92)952
Current year authorities used2,394,8792,482,466

The Net cash provided by Government is reconciled to the Current year authorities used by including: refund of prior years’ expenditures, proceeds and related gains on capital assets, and the changes that have occurred within the Statement of Financial Position. Only items within the Statement of Financial Position for which the amounts affect either Net Cash Provided by Government or Current Year Authorities Used are included. Accrued liabilities, such as contingent liabilities and employees severance benefits, are not included as they do not affect net cash nor authorities.

4. Accounts payable and accrued liabilities

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

Table 9: Accounts payable and accrued liabilities
Accounts payable and accrued liabilities (in thousands of dollars)20132012
Accounts payable to external parties129,058199,305
Accounts payable to other government departments and agencies33,72232,299
Total accounts payable162,780231,604
Accrued liabilities79,48398,834
Total accounts payable and accrued liabilities242,263330,438

In Canada’s Economic Action Plan 2012 (Budget 2012), the Government announced savings measures to be implemented by departments over the next three fiscal years starting in 2012-2013. As a result, the Department has recorded at March 31, 2013, an obligation for termination benefits for an amount of $23,700,000 ($37,600,000 in 2011-12) as part of accrued liabilities to reflect the estimated workforce adjustment costs.

5. Employee future benefits

(a) Pension benefits: The Department's Canada based staff (CBS) participate in the Public Service Pension Plan, which is sponsored and administered by the Government. Pension benefits accrue up to a maximum period 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 Plans benefits and they are indexed to inflation.

Both the employees and the Department contribute to the cost of the Plan. The 2012-13 expense amounts to $79,214,900 ($81,889,950 in 2011-12), which represents approximately 1.7 times (1.8 times in 2011-12) thecontributions by employees.

The Department's responsibility with regard to the 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.

For locally-engaged staff (LES), the Government of Canada participates in local social security programs where possible. Where Canada does not participate in a local social security system providing pension benefits, or Canada participates in the local system and in addition, employer-sponsored supplemental pension plans are typically provided in the country, the Government of Canada provides supplemental pension benefits through acombination of local separate pension plans developed and administered based on local law and practice, or through the Pension Scheme for Employees of the Government of Canada, Locally Engaged which is administered by the Department. Local separate pension plans are pre-funded and are provided on defined benefit or defined contribution basis. The Pension Scheme is a defined benefit plan provided on a pay-as-you go basis. The Department is responsible for the expenses related to LES social security and pension via Vote 15 (contributions to social security and separate pension plans and benefits from the Pension Scheme). The 2012-13 employer contributions were $58,270,000 ($47,870,000 in 2011-12). The Department's responsibility with regard to the Plan is limited to its contributions. The Government of Canada, the Plan's sponsor, is responsible for surpluses or deficiencies.

(b) Severance benefits: The Department provides severance benefits to its employees based on eligibility, years of service and salary at termination of employment. The severance benefit liability for Canada Based Staff is based on a percentage provided by TBS, applied to the eligible payroll as at March 31. Treasury Board determines the percentages based on an actuarial evaluation of the future liability for the government's eligible employees. As part of collective agreement negotiations with certain employee groups, and changes to conditions of employment for executives and certain non-represented employees, the accumulation of severance benefits under the employee severance pay program has ceased for these employees. Employees subject to these changes were given the option to be immediately paid the full or partial value of benefits earned to date or collect the full or remaining value of benefits on termination from the public service. These changes have been reflected in the calculation of the outstanding severance benefit obligation.

For locally-engaged staff, the estimated future cash flow for severance benefits is based on an average severance payment determined from experience. This average severance payment is multiplied by a percentage to reflect the notion that not all locally-engaged staff receive a severance at end-of-service. Finally, this amount is multiplied by the total number of locally engaged staff. These future severance benefits are not pre-funded so benefits will be paid from future authorities.

Information about the severance benefits, measured as at March 31, is as follows:

Table 10: Employee future benefits - Severance benefits
Employee future benefits (in thousands of dollars)20132012
Accrued benefit obligation, beginning of year162,655178,536
Transferred to other government department (Note 12)-(1,941)
 162,655176,595
Expense for the year6,95440,456
Benefits paid during the year(37,351)(54,396)
Accrued benefit obligation, end of year132,258162,655

CBS severance benefit liability amounts to $61.6 million, whereas the LES liability is $70.6 million.

(c) Locally-engaged staff insurance benefits: The Department is responsible for the expenses (premiums to local insured plans and benefits from local self-insured plans) related to locally-engaged staff insurance benefits, which include medical, dental, disability and life insurance (via Vote 15). The 2012-13 expense was $11,817,000 ($11,971,000 in 2011-12).

6. Accounts receivable and advances

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

Table 11: Accounts receivable and advances
Accounts receivable and advances (in thousands of dollars)20132012
Advances to Missions abroad37,85940,574
Employee advances
Posting advances21,93922,095
Other609771
Total employee advances22,54822,866
Receivables from other government departments and agencies17,97618,182
Receivables from external parties18,94421,330
Cash in transit7,1177,459
Other advances6,5866,586
Gross accounts receivable and advances111,030116,997
Allowance for doubtful accounts on external receivables and advances(15,362)(14,273)
Net accounts receivable95,668102,724

7. Inventory

The following table presents details of Passport Canada's inventory measured at the average cost method:

Table 12: Inventory
Inventory (in thousands of dollars)20132012
Passport materials - Consumable inventory4,0423,040
Passport material - held for re-sale12,9205,351
Total inventory16,9628,391

The cost of consumed inventory recognized as an expense in the Consolidated Statement of Operations and Departmental Net Financial Position is $27,173,408 ($24,160,360 in 2011-12)

8. Tangible capital assets

Table 13: Tangible capital assets
Tangible capital assets (in thousands of dollars)Opening BalanceAcquisitionsAdjustments*Disposals & Write-offsClosing Balance
* Adjustments include assets under construction of $42,419 that were transferred to other asset categories upon completion of the assets and assets transferred to other government departments.
Cost
Land231,4845033,658(1,578)234,067
Buildings1,237,9994,53518,302(11,158)1,249,678
Works and infrastructure1,4521,077978-3,507
Machinery and equipment50,1082,248(492)(568)51,296
Informatic hardware19,9671,525--21,492
Informatic software56,2555,2135,189(2,919)63,738
Vehicles49,7518,407(27)(5,465)52,666
Leasehold Improvements228,9931,67414,317-244,984
Assets under construction339,878226,034(42,419)(2,830)520,663
Total2,215,887251,216(494)(24,518)2,442,091
Accumulated amortization
Buildings736,55949,942-(4,455)782,046
Works and infrastructure23031-64325
Machinery and equipment36,6372,486(15)(749)38,359
Informatic hardware17,4741,720--19,194
Informatic software34,42012,514(126)(2,722)44,086
Vehicles27,7265,246(6)(4,517)28,449
Leasehold Improvements129,33117,952-1,298145,581
Total982,37789,891(147)(11,081)1, 061,040
Table 14: Tangible capital assets - Net book value
Net Book Value (in thousands of dollars)20122013
Land231,484234,067
Buildings501,440467,632
Works and infrastructure1,2223,182
Machinery and equipment13,47112,937
Informatic hardware2,4932,298
Informatic software21,83519,652
Vehicles22,02524,217
Leasehold improvements99,66296,403
Assets under construction339,878520,663
Total1,233,5101,381,051

9. 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 in order to carry out its transfer payment programs or when the services/goods are received. There are a significant number of small dollar value leases for residential and office building rentals abroad. Significant contractual obligations that can be reasonably estimated are summarized as follows:

Table 15: Contractual obligations
Contractual Obligations (in thousands of dollars)20142015201620172018 and thereafterTotal
Chancery lease in Moscow4,4004,6004,7004,800154,000172,500
Purchase of passport materials29,52636,81734,950--101,293
Leases of office space for Passport Canada32,9679,8927,9876,9626,25264,060
Chancery lease in Hong Kong9,60010,9751,9751,97512,72537,250
Chancery lease in Madrid2,0002,1002,2002,30018,90027,500
Chancery annex lease in Hong Kong2,1702,1702,1702,17012,48021,160
Chancery lease in Dublin55055055055013,05015,250
Consulate lease in New York3,1003,1003,1003,1001,52013,920
Chancery lease in Sao Paulo3,0003,2003,5002,600-12,300
Total87,31373,40461,13224,457218,927465,233

10. Contingent liabilities

The Department is involved in various legal actions in the ordinary course of business and also as a result of our role in administering the North American Free Trade Agreement (NAFTA) treaty. These claims include items where the amount of damages is specified, and others for which no amount is specified. While the total amount claimed in these actions is significant, their outcomes are not determinable. Pending claims and legal proceedings for which the outcome is not determinable totalled approximately $6,800,000,000 ($6,500,000,000 in 2011-12). The $6,800,000,000 arises from nine cases, one of which is in the amount of $5,080,000,000.

Contingent loss accruals are established when it becomes likely that the Department will incur an expense and the amount can be reasonably estimated. No accrual has been recorded in 2012-13 ($0 in 2011-12) in the Consolidated Statement of Financial Position. In management's opinion, the ultimate disposition of these actions, individually or in the aggregate, will not have a material adverse affect on the financial condition of the Department.

11. Related party transactions

The Department is related as a result of common ownership to all government departments, agencies, and Crown corporations. The Department enters into transactions with these entities in the normal course of business and on normal trade terms. During the year, the Department received common services that were obtained without charge from other government departments as disclosed below.

(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 accommodation, 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 Consolidated Statement of Operations and Departmental Net Financial Position as follows:

Table 16: Related party transactions - Common services provided without charge by other government departments
Common services provided without charge by other government departments (in thousands of dollars)20132012
Employer's contribution to the health and dental insurance plans48,80648,007
Accommodation29,43029,445
Legal services1,2421,952
Workers' compensation charges315305
Total79,79379,709

The Government has centralized some of its administrative activities to enhance the efficiency and cost-effectiveness 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 the 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 the Department's consolidated Statement of Operations and Departmental Net Financial Position.

b) Management and administration of Common Services:In accordance with the Treasury Board Common Service Policy (February 1997), and the Department of Foreign Affairs and International Trade Act (1985), the Department has the mandate to manage the procurement of goods, services and real property at missions abroad. These common services are mandatory for departments to use when required to support Canada's diplomatic and consular missions abroad.

Memorandums of Understanding (MOUs) are in force to cover the roles and responsibilities of the Department, partner departments, Crown corporations and non-federal organizations. These MOUs outline the principles and operational guidelines for the management and administration of the common services regime, specifications with respect to services and service delivery standards, the funding of common services, the responsibilities of parties, and dispute resolution.

i. Common Services provided to other government departments:To facilitate the efficient and cost-effective delivery of common services in support of the international programs of all federal departments and agencies of the Government of Canada, the Interdepartmental Memorandum of Understanding on Operations and Support at Missions Abroad (the Generic MOU) was standardized and signed in February 2009.

In the fiscal year ended March 31, 2013, expenses related to changes made to partner departments' representation abroad are reflected in the Consolidated Financial Statements of the Department. Authorities for the Department are adjusted via the Annual Reference Level Updates (ARLU) and Supplementary Estimates.

ii. Common Services provided to co-locators:To facilitate the efficient and cost-effective delivery of common services in support of the international programs of co-locators, individual MOUs are signed with each co-locator. Co-locators comprise all non-departmental entities, and include Crown corporations, provincial or territorial governments, foreign governments, and non-governmental organizations co-located at the Department's missions abroad.

In the fiscal year ended March 31, 2013, this activity amounted to approximately $23,615,187 ($21,208,600 in 2011-12) of in-year funds received via the Specified Purpose Accounts and Net-Voted Revenues.

(c) Administration of programs on behalf of other government departments:The Department has a number of memorandums of understanding (MOUs) with partner departments for the administration of unique, in-year programs delivered abroad. The Department issued approximately $89,000,000 ($162,000,000 in 2011-12) in payments for operational and program activities on behalf of several partner departments (mainly the Canadian International Development Agency and Shared Service Canada). The Department also collected approximately $185,000,000 ($301,000,000 in 2011-12) in revenues on behalf of Citizenship and Immigration Canada. These expenses and the revenues are not reflected in these Consolidated Financial Statements, but rather in the Financial Statements of the respective government departments.

(d) Other transactions with related parties:

Table 17: Related party transactions - Other transactions with related parties
Other Transactions with Related Parties (in thousands of dollars)20132012
Revenues - other government departments and agencies20,31919,492
Expenses - other government departments and agencies275,348281,330

Expenses and revenues disclosed in (d) exclude common services provided without charge, which are already disclosed in (a).

12. Transfers to other government departments

Effective November 15, 2011, the Department transferred some responsibility for Informatic Hardware and Software to Shared Services Canada (SSC) in accordance with Order-in-Council 2011-1297, including the stewardship responsibility for the assets and liabilities related to the program.

The Department transferred the following assets and liabilities to other government departments:

Table 18: Transfers to other government departments
Transfers to other government departments (in thousands of dollars)2012
Assets
Tangible capital assets (net book value) (Note 8)8,906
Total assets transferred8,906
Liabilities
Vacation pay and compensatory leave157
Employee future benefits (Note 5)1,941
Total liabilities transferred2,098
Adjustment to the departmental net financial position6,819
Transferred Expenses
April 1st to November 14th, 201141,804
November 15th, 2011 to March 31st, 201231,989
Total expenses transferred to SSC73,793

During the 2011-12, the Department continued to administer the transferred activities on behalf of Shared Services Canada. The administered expenses amounted to $32 million for the remainder of the year. These expenses are not recorded in these financial statements. No revenues were administered on behalf of Shared Services Canada.

13. Segmented information

Presentation by segment is based on the Department's Strategic Outcomes and Programs as presented in Note 1. The presentation by segment is based on the same accounting policies as in Note 2. The following table presents the expenses incurred and revenues generated for the main programs, by major object of expenses and by major type of revenues. The segmented results for the period are as follows:

Table 19: Segmented information
Segmented information (in thousands of dollars)Canada's International AgendaInternational Services for CanadiansCanada's International PlatformInternal Services (PA #8)Total 2013Total 2012
International Policy Advice and Integration (PA #1)Diplomacy and Advocacy (PA #2)International Commerce (PA #3)Consular Services and Emergency Management (PA #4)Passport Canada (PA #5)Governance, Strategic Direction and Common Service Delivery (PA #6)Government of Canada Benefits (PA #7)
Transfer payments
Other countries and international organizations3,634400,184------403,818462,412
Non-profit organizations9,059229,5196,038-----244,616297,957
Other transfers to any other sector---------21,321
Other levels of government in Canada-12,789------12,78913,379
International Development Assistance-5,283------5,2833,780
Individuals-3,915----79-3,99488
Industry-3731,643-----2,0151,699
Refund of prior years' transfer payments(72)(3,714)(44)-----(3,831)(9,135)
Total transfer payments12,621648,3477,637---79-668,685791,501
Operating expenses
Salaries and employee benefits56,654180,800118,76147,148182,241223,313176,168127,0751,112,1611,193,490
Professional and special services7,59042,90912,1983,71434,207111,5534,27512,074228,521229,513
Rentals8,75946,15913,3974,15018,999105,01688220,177217,539212,306
Transportation2,91115,3434,4531,37933,37235,57037,9466,708137,683151,312
Amortization352861809411,57973,473-4,12789,89190,309
Acquisition of machinery and equipment, including parts and consumables7092,82489929628,03816,686533,36152,86764,306
Utilities, materials and supplies1,7509,2362,6798301,29321,2711774,00541,24141,239
Repair and maintenance9765,0021,4644562,68514,587952,51927,78534,429
Information4232,2396492012,9755,0524395112,53116,252
Other7840511837721,52582172,4592,203
Bad debt-----5-1,1151,120330
Telecommunications3214244142669231261,0786,235
Loss on disposal of tangible capital assets (net)4121329762-431,141-
Foreign exchange loss (net)2821(16)4-44-
Total operating expenses80,240305,155154,84658,322315,799609,508219,651182,5001,926,0212,041,924
Total expenses92,861953,502162,48358,322315,799609,508219,730182,5002,594,7052,833,425
Revenues
Sale of goods and services910,4702,578107,919311,54753,313118485,855461,912
Gain on disposal of tangible capital assets (net)---------44,003
Foreign exchange gain (net)---------3,772
Other non-tax revenue341712649,600-309,9191,158
Interest on non-tax revenue1263186-141127269256
Revenues earned on behalf of Government(117)(487)(2,532)(96,627)-(40,521)(9)(510)(140,803)(184,862)
Total revenues(92)10,0508211,298311,81122,534(7)(435)355,240326,239
Net cost from continuing operations92,953943,452162,40147,0243,988586,974219,737182,9362,239,4652,507,186

14. Subsequent events

(a) Merger of the Canadian International Development Agency and the Department of Foreign Affairs and International Trade:In Canada’s Economic Action Plan 2013, the government announced its intention to amalgamate the Department of Foreign Affairs and International Trade (DFAIT) and the Canadian International Development Agency (CIDA). The new department, the Department of Foreign Affairs, Trade and Development (DFATD), will continue to serve the same functions as those of previously served by DFAIT and CIDA.

Economic Action Plan 2013 Act, No. 1., the act that implemented the amalgamation, received Royal Assent on June 26, 2013. As a result of this amalgamation, the assets (estimated at $238,155,000) and liabilities (estimated at $244,451,000) of CIDA will be transferred to DFATD as of this date.

(b) Transfer of Passport Canada from the Department of Foreign Affairs and International Trade to Citizenship and Immigration Canada: Effective July 2, 2013, and in accordance with Canadian Passport Order SI/81-86, primary responsibility for Passport Canada will move from the Department of Foreign Affairs and International Trade to Citizenship and Immigration Canada (CIC). At March 31, 2013 Passport Canada reported assets of $74.6 million and liabilities of $42.4 million.

Annex to the Statement of Management Responsibility Including Internal Control over Financial Reporting Fiscal Year 2012-13

1. Introduction

This document is the fourth annual annex to the Department of Foreign Affairs and International Trade’s (DFAIT) Statement of Management Responsibility Including Internal Control Over Financial Reporting. As required by the Treasury Board Policy on Internal Control (PIC), this annex provides summary information on the measures taken by DFAIT to maintain an effective system of internal control over financial reporting (ICFR) including information on internal control management and assessment results and related action plans.

In particular, it provides summary information on the assessments conducted by DFAIT as at March 31, 2013, including progress, results and related action plans along with some elements pertinent to understanding the departmental Internal Control Management Environment and Framework.

Detailed information on DFAIT’s authority, mandate, and program activities can be found in Departmental Performance Report and Report on Plans and Priorities.

Disclaimer

On June 26, 2013, Royal Assent was given to Bill C-60, amalgamating the former Department of Foreign Affairs and International Trade (DFAIT) and Canadian International Development Agency (CIDA), creating the Department of Foreign Affairs, Trade and Development (DFATD). This annex presents DFAIT’s control environment, assessment results and future year commitments notwithstanding the amalgamation. The former CIDA’s Internal Control assessment results are reported in the CIDA’s 2012-13 Annex to the Statement of Management Responsibility. The action plan as presented in Section 4.2 of this Annex reflects commitments made by the former DFAIT to reach the state of controls audit readiness by 2014-15 and which are deemed to be not impacted by the amalgamation. Future year commitments will be reassessed in 2013-14 in light of the combined DFATD processes, control environment and risks.

2. DFAIT's Control Environment relative to ICFR

DFAIT recognizes the importance of setting the tone from the top to help ensure that staff at all levels understand their roles in maintaining effective systems of ICFR and is well equipped to exercise these responsibilities effectively. DFAIT’s focus is to ensure risks are managed well through a responsive and risk-based control environment that enables continuous improvement and innovation.

2.1 Key Positions, Roles and Responsibilities

DFAIT is one of the most complex departments in the Government of Canada, responsible for the conduct of Canada’s international affairs, including global trade and commerce. The scope of its mandate and the complexity of its activities require two deputy ministers and an associate deputy minister.

Deputy Minister of Foreign Affairs – Is the Accounting Officer for DFAIT and assumes overall responsibility and leadership for the stewardship, management and oversight of departmental resources, as well as for the measures taken to maintain an effective system of internal control. The Deputy Minister of Foreign Affairs co-chairs the Executive Council.

Deputy Minister of International Trade - In accordance with sections 8.1 and 8.2 of the Department of Foreign Affairs and International Trade Act the Deputy Minister of International Trade shall have the rank and status of a deputy head and shall, under the Deputy Minister of Foreign Affairs exercise and perform such powers, duties and functions as deputies of the Minister and otherwise as the Minister may specify. The Deputy Minister of International Trade co-chairs the Executive Council.

Associate Deputy Minister of Foreign Affairs In accordance with section 8.1 of the Department of Foreign Affairs and International Trade Act the Associate Deputy Minister of Foreign Affairs has the rank and status of a deputy head of a department and, under the Deputy Minister of Foreign Affairs, exercises and perform such powers, duties and functions as deputies of the Minister and otherwise as the Minister may specify. The Associate Deputy Minister of Foreign Affairs chairs the Executive Council in the absence of the co-chairs.

Chief Financial Officer (CFO) - DFAIT’s CFO provides direct support to the Deputies and provides leadership for the coordination, coherence and focus on the design and maintenance of an effective and integrated system of ICFR, including its annual assessment. The CFO is part of the Executive Council, providing functional leadership and a focus on financial management and chairs the Resource Management Committee which reports to the Executive Council.

Senior Departmental Managers – DFAIT’s senior departmental managers in charge of program delivery are responsible for maintaining and reviewing the effectiveness of the system of ICFR falling within their mandate.

Heads of Mission (HOMs)- DFAIT’s Heads of Mission are responsible for the management and direction of their missions’ activities including maintaining and reviewing the effectiveness of the system of ICFR falling within their area of responsibility.

Chief Audit Executive (CAE)- DFAIT’s CAE reports directly to the Deputy Minister of Foreign Affairs and provides assurance through periodic internal audits that are instrumental to the maintenance of an effective system of ICFR.

Executive Council – The Executive Council is the senior decision-making committee of DFAIT. It provides strategic direction and oversight to support the achievement of the Department’s three strategic outcomes.

Departmental Audit Committee (DAC) - The DAC is an advisory committee that provides objective views on the Department’s risk management, control and accountability processes. It comprises four external members, including the Chair.

Departmental Evaluation Committee (DEC) - The DEC is chaired by the deputy head and serves as an advisory body to the deputy ministers related to the departmental evaluation plan, resourcing and final evaluation reports.

Resource Management Committee (RMC) - The RMC is responsible for addressing financial management and resource allocation matters. It also oversees capacity building on financial management and implementation of the CFO Model; and provides advice and guidance to the Executive Council and other departmental committees on financial issues and matters.

2.2 Key Measures taken by DFAIT

DFAIT’s control environment also includes a series of measures to equip its staff to manage risks through raising awareness, providing appropriate knowledge and tools as well as developing skills.

Key elements include:

  • A new departmental Values and Ethics code was released by DFAIT on October 31, 2012;
  • A Values and Ethics Division led by the Chief Audit Executive who reports directly to the Deputy Minister of Foreign Affairs;
  • The DFAIT Conduct, Integrity and Ethical Practices Review Board - This new Board has been established to support and foster a workplace that demonstrates the values and expected behaviors outlined in the Values and Ethics Code for the Public Sector, the new DFAIT Values and Ethics Code, as well as the Code of Conduct for Canadian Representatives Abroad;
  • DFAIT's Code of Conduct for Canadian Representatives Abroad – This code provides guidance on the Government of Canada expectations of its representatives abroad;
  • The Executive Council which is supported by three sub-committees: the Resource Management Committee; the Policy and Programs Committee; and the Operations Committee;
  • Regularly updated delegated authorities instrument to reflect new requirements of TB policies and directives as well as departmental policy requirements;
  • The Corporate Risk Profile which helps the Department establish direction for managing corporate risks;
  • Regular reporting of financial performance including the preparation and publishing of quarterly financial reports;
  • Performance Management Agreements, which include strengthened financial management as a departmental priority;
  • Training and communications in core areas of financial management, including mandatory financial training before signing authorities can be granted;
  • Departmental policies, directives and procedures tailored to DFAIT's specific risks, control activities and environment;
  • IT processing systems to achieve greater security, integrity, efficiency and effectiveness;
  • A risk-based internal audit plan, with annual coverage of governance and risk management; and
  • Mission inspections performed annually by the Office of the Chief Audit Executive.

In addition, the Departmental Audit Committee’s mandate is to review and provide advice to the Deputy Ministers on key financial management reports and disclosures of the Department, such as the Annual Financial Statements. The Departmental Audit Committee has substantially contributed to the strengthening of departmental financial management and reporting, and the development of internal controls and risk management frameworks.

2.3 Service Arrangements relevant to Financial Statements

Common Arrangements:

DFAIT relies on other government departments for the processing of many of the transactions that are recorded in its financial statements:

  • Public Works and Government Services Canada (PWGSC) centrally administers the payment of Canada based salaries and the procurement of goods and services, as well as the provision of accommodations in Canada;
  • Treasury Board Secretariat provides the Department with information used to calculate various accruals and allowances related to salary expenses, such as the accrued severance liability for Canada based staff;
  • The Department of Justice provides domestic legal services to DFAIT; and
  • Shared Services Canada manages IT general controls in the areas of email, data centre and network services.

Specific Arrangements:

In accordance with the Treasury Board Common Services Policy and with the Department of Foreign Affairs and International Trade Act, DFAIT is mandated to manage the procurement of goods, services and real property when required for diplomatic and consular purposes. Partner departments provide DFAIT with agreed levels of funding for the delivery of common services using appropriate financial instruments; supplementary estimates and reference level funding through the Annual Reference Level Update. The costs associated with delivering these common services are included in DFAIT's expenses.

DFAIT is also responsible for managing the payment of program-specific expenditures and the collection of program-specific revenues on behalf of partner departments. These revenues and expenses flow back to the other departments through the use of Interdepartmental Settlements and will appear on the financial statements of the associated partner department.

3. DFAIT's Assessment Results during Fiscal Year 2012-13

In support of the Policy on Internal Control, an effective system of ICFR has the objective to provide reasonable assurance that:

  • Transactions are appropriately authorized;
  • Financial records are properly maintained;
  • Assets are safeguarded; and
  • Applicable laws, regulations and policies are followed.

A fully assessed system of ICFR requires DFAIT to document the processes that are significant to the compilation of the financial statements, identify the key controls and then test those controls for design and operating effectiveness. Once the key controls are operating effectively and as designed, the Department will implement an on-going monitoring program to sustain and continuously improve the system of ICFR.

Documentation refers to the development of flowcharts and narrative descriptions, including the identification of key control points by using control matrices.

Design effectiveness is to ensure that key control points are aligned with the risks they aim to mitigate and that any remediation of design deficiencies is addressed. A walk-through will be performed in order to analyze the design effectiveness of key controls and identify any design gaps, or areas for improvement.

Operating effectivenessmeans that key controls have been tested over a defined period and that any remediation is addressed.

The following section will summarize the significant findings of the internal control activities undertaken during Fiscal year 2012-13.

3.1 Design Effectiveness Testing of Key Controls

During 2012-13, DFAIT followed-up on or tested the design effectiveness of six business processes: Entity Level Controls (ELCs); Canada-Based Staff Payroll; Year-end and close process; Revenue; HQ Payments; and Grants andContributions.

Entity Level Controls (ELCs)

Entity level controls (ELCs) refer to those controls and practices in place that permeate across the department and may have a direct or indirect impact or influence on the integrity of the department’s financial reporting. Two ELC design effectiveness recommendations are still outstanding. The priority of the department was on the development and the official release of the new DFAIT Values and Ethics Code which occurred in 2012-13. The Framework recommended by the Office of the Comptroller General of Canada for the assessment of internal controls identifies sound and ethical values as a key entity level control. The revised Values and Ethics Code is an important element of this. Its implementation will include the two outstanding recommendations, namely the recertification of all DFAIT employees for their compliance to the Values and Ethics Code and improved communication of the reporting of ethical issues.

Canada-Based Staff (CBS) Payroll

A follow-up was performed on the Management Action Plan (MAP) for the CBS Payroll process design effectiveness assessment. All the recommendations from the MAP were implemented by the process owners with the exception of one deficiency regarding the sub-process on secondments in and out. Human Resources is working on a solution to remediate this control weakness.

Year-End and Close Process

The design effectiveness testing of the Year-end and Close Process was completed. We observed that efforts could be made to further strengthen the design of the controls in this process. We noted that instructions for staff for the Public Accounts and Financial Statement (FS) compilation process were not updated and there was a need for better indexing of adjusting entries to the Financial Statements and evidence for approval on the audit binder. Remediation by the process owners will be effective during the 2012-13 year-end and close process.

Revenue

The design effectiveness testing of the revenue process was completed. We observed that the design testing of the revenue controls raised the following exceptions:

  • There is a need for a periodic review of the recording of the DFAIT consular fee on Passport purchases at HQ;
  • The financial system access rights for posting by Passport Canada personnel of consular Revenue; and
  • The absence of management review of invoices to co-locators and the set-up of account receivables when these invoices are issued.

Recommendations were issued in a Management Action Plan (MAP) and process owners have committed to correcting these deficiencies.

HQ Payments

A follow-up was done on the MAP for the prior year HQ Payment process design effectiveness assessment. All recommendations from the MAP were implemented by the process owners as at the end of 2012-13.

Grants and Contributions

The design effectiveness testing was substantially advanced for the six material in-scope G&C processes. A report, including a management action plan, has been issued as of the publication date of this Annex.

3.2 Operating Effectiveness Testing of Key Controls

Responsibility for testing the operating effectiveness of key controls resides with the CFO Branch.

During 2012-13, the CFO Branch completed operating effectiveness testing of two processes: Information Technology General Controls (ITGCs) and Canada Based Staff (CBS) Payroll.

Information Technology General Controls (ITGCs)

The operating effectiveness testing for IMS-BASIS was completed in 2012-13 and showed a significant improvement from the previous one performed in 2010-11. Only three high risk control weaknesses were noted in regards to the SAP BASIS controls tested. These findings relate to SAP Change Management Privileges and System Parameters. According to the Management Action plan, the process owner committed to remediating these weaknesses through restricting user access, by the end of March 2013. As part of the on-going monitoring strategy, the internal control group will follow-up to ensure the weaknesses have been remediated.

A trend was observed related to users from Passport Canada having access that was not commensurate with their roles and responsibilities. Those users were noted to have abilities in SAP that would allow access to sensitive functionality within DFAIT's IMS client. This access presents a risk of accidental or deliberate modification to system settings.

CBS Payroll

The operating effectiveness testing of the CBS Payroll process was completed in 2012-13. The assessment included both manual and automated controls.

We noted deficiencies related to the lack of back-up documentation for time sheets and struck-off-strength employees, and inappropriate certification of FAA section 34. The calculation of retroactive pay performed by PWGSC was found to be an issue, as DFAIT needs to rely on assurance to be provided by PWGSC. Controls around secondments could not be tested due to an un-remediated design deficiency. Errors detected in the methodology of calculating payroll estimates were also noted and corrections were made.

The automated controls assessment was also completed and included application controls over the HR system (HRMS). Application controls over the financial system (SAP) will be tested as part of the HQ payment applications assessment to be performed in 2013-14. Three low risk control deficiencies related to existing system access rights were noted. Mitigating controls were in place to compensate for these deficiencies.

Year-End and Close Process

The operating effectiveness testing of the year-end and close process was completed. The process was found to be generally operating effectively. Evidence of sign-offs of reviews performed by the process owner and the managers of areas providing information to the departmental corporate accounting section, were not always evident. The process owners committed to implementing the recommendations.

3.3 On-going Monitoring of Key Controls by the Chief Audit Executive (CAE) Branch

In addition to the work performed by the CFO branch, the Office of the Chief Audit Executive carries out comprehensive audits of particular subjects, examining areas of the overall management control framework assessed as higher risk. In some cases, these audits include a review of the internal controls over financial reporting. The CAE carried out a number of audits that confirmed the operating effectiveness of these controls. The following highlights the internal controls over financial reporting reviewed during 2012-2013:

  • Specified procedures on Note 3 of the Departmental Financial Statements are undertaken on an annual basis. Each year, the auditors have noted that all amounts had been reconciled and were disclosed in accordance with the disclosure requirements of Treasury Board Accounting Standard (TBAS) 1.2
  • Specified procedures related to the 2011-2012 Departmental Financial Statements were carried out to assess the accuracy and completeness of Locally Engaged Staff: Payroll Expenses ($227,461,987); Severance Payments ($6,897,626); Severance Liabilities ($91,723,000); and, Pension Payments ($47,870,993). With very few and minor exceptions, the auditors were satisfied that payment transactions were appropriately recorded in DFAIT’s financial records. In the auditors’ opinion, those minor exceptions had no material impact on the overall financial statements. The audit did note that the processes and control activities over financial reporting of LES payroll expenditures have not been documented. This creates a challenge for the Department in meeting the Treasury Board Policy on Internal Control requirement for documentation and could lead to inconsistent practices. The auditors noted significant differences in the handling of LES pay by the different missions abroad. Implementation of a global payroll solution, which will standardize the processing of LES pay abroad, will begin in January 2014.

3.4 Concurrent Activities to strengthen DFAIT’s ICFR

In addition to the assessment activities identified in the previous section, DFAIT is also working on a variety of initiatives designed to strengthen financial processes and associated controls through standardized solutions. These initiatives include:

  • Regionalization of common services delivery, including Finance, at missions:DFAIT developed a new Model for Common Services Delivery abroad in 2011, referred to as the Common Service Delivery Model (CSDM). The CSDM changes the way in which Common Services, including Finance, are delivered at missions. On the financial operations side, the model provides for accounting operations (accounts payable, accounts receivable, and bank reconciliation) to be delivered by a Common Service Delivery Point (CSDP) to several client missions. The goal of the model is to standardize, enhance internal controls, leverage technology, consolidate transactions and gain efficiencies. This leads, among other things, to a better segregation of duties within finance and sound financial risk management. This model will also bring consistency to the Finance function at missions. In 2012-13, DFAIT continued implementing this new model in accordance with the implementation plan.
  • Enabling Technology enhancements in the departmental financial management system:The introduction of automated Workflow capabilities within the departmental system and an electronic Departmental Financial Signing Authority solution will support the two major departmental projects which are the Procure to Pay (P2P) and the LES Payroll, Pensions and Benefits projects.
  • Procure to Pay (P2P) Automation project:The P2P will allow DFAIT to carry out its business processes and related payments in a more efficient and standard manner. It will allow the department to implement electronic authorization and approval (EAA), and will, through the imaging function, embed some of the key controls in the application. The London and New-Delhi mission have piloted the application.
  • Locally Engaged Staff (LES) Payroll, Pension and Benefits project.The objective of this project is to introduce a standard global payroll solution at over 170 missions abroad. Implementation will begin in January 2014 with a planned completion date in fiscal year 2015-16.
  • Standard Payment System (SPS) – Mission Conversion project.The objective of this project is to create a standard International Payments Platform using the Government of Canada SPS system. This project will be finalized in 2013-14.
  • Implementation of the Financial Management Advisor (FMA) model. The FMAs have an independent role in the oversight on internal controls. They act as the liaison between financial centers of expertise and client branches and provide valuable insight into the development of internal controls, participate in their implementation and assist in monitoring compliance. FMAs review and assess financial processes and report on their findings. The FMA model has been implemented and the CFO Branch will continue to introduce refinements to the model.
  • Mission Online Payments Service (MOPS):The MOPS is a centralized application that allows missions to accept credit card payments for revenue. It is an online payment platform currently used for DFAIT's two main revenue streams, Consular and Passport Services as well as the International Experience Canada Program, an initiative that allows young Canadians to work abroad and non-Canadians to work in Canada, for up to one year. Clients abroad can now conveniently pay for these services using a major credit card. It has been implemented at all missions as of April 1, 2013. The MOPS reduces the fraud risk associated with cash collected at mission and improves financial controls over revenue.

4. DFAIT's Progress and Action Plan

4.1 Progress during Fiscal year 2012-13

During 2012-13, DFAIT continued to make progress in assessing and improving its key controls. Below is a summary of the main progress made by the Department based on the plans identified in the previous fiscal year’s Annex.

Table 20: Commitments from the previous year’s Annex
Commitments from previous year's AnnexStatusComments
Remediate the identified design gaps in ELC procesSubstantially advancedA new DFAIT Values and Ethics code was issued. As part of the implementation of this code, the department will revisit the two outstanding recommendations that required management action.
Information Technology General Controls (ITGC) Process: Complete the Operating Effectiveness testing for IMS BASIS.Commitment MetSignificant improvements from the 2010-11 review were noted. Three high risk deficiencies are still outstanding and will be monitored in 2013-14.
Revenues Process: Perform the Design Effectiveness testing.Commitment MetThe design effectiveness testing of the revenue process was completed. We observed that the design of the controls raised a few exceptions that process owners have committed to correct.
Foreign Service Directives Process: Complete the scoping exercise and process documentation.Commitment MetScoping and planning documents for material FSD sub-processes was completed. In-scope sub-processes were documented except those which are impactedby system changes to be implemented in 2013-14.
Grants and Contributions Process: Complete documentationCommitment MetIn scope G&C sub-processes were documented.
Grants and Contributions Process: Complete Design effectiveness TestingSubstantially advancedTesting through walkthroughs of in-scope G&C processes were completed and the report has been issued as of the date of this Annex
CBS Payroll Process: Follow-up on the status of Design Effectiveness remediationCommitment MetFollow-up showed that only one recommendation, requiring a system change, is still outstanding.
CBS Payroll Process: Perform Operating Effectiveness Testing of manual controlsCommitment MetManual key controls were tested for their operating effectiveness. Retroactive pay performed by PWGSC could not be tested as this department is the owner of this sub-process. Secondments could not be tested due to an un-remediated design deficiency.
CBS Payroll Process: Perform application controls reviewCommitment MetThree low risk control deficiencies related to existing system access rights, were noted. Risks are mitigated by other existing controls.
HQ Payments Process: Work with responsible areas to develop remediation plans and begin Operating Effectiveness testing if possible.Commitment MetFollow-up on the Management action plan was done. All recommendations were implemented in 2012-13.
Year-End and Close Process: Perform both Design and Operating Effectiveness testing.Commitment MetDesign and Operating effectiveness report including gaps identification, observations and recommendations has been prepared and issued. Process owners have provided their management action plan for remediation.
Budgeting and Forecasting Process: Planning and ScopingCompletedThe scoping and planning document was completed, approved and shared with the process owners.
Mission Specific Processes: As identified in the PIC Methodology for Missions Abroad -Create inventory of risks and controls.Commitment MetAn inventory of risks specific to missions abroad and related key controls has been created and will be validated in 2013-14.

4.2 Action Plan

Effective June 26, 2013, the Government amalgamated the Department of Foreign Affairs and International Trade (DFAIT) and the Canadian International Development Agency (CIDA) to create the new Department of Foreign Affairs, Trade and Development (DFATD). This amalgamation will have an impact on the new Department’s implementation of the Policy on Internal Control (PIC) and more particularly on future year commitments, as reported in this annex. The potential impact will be assessed in 2013-14.

The status and action plan for the completion of the identified control areas for the next fiscal year (2013-14) and subsequent years, are as follows:

4.2.1 Headquarters (HQ) Specific Action Plan

By the end of 2013-14, DFATD plans to:

  1. Develop a departmental Internal Control Management Framework to be approved by the Deputy Head.
  2. Reassess DFAIT and CIDA’s future year commitments and develop a new departmental PIC approach reflecting the combined departments (DFATD).
  3. Develop an internal control monitoring strategy for DFATD.
  4. HQ Payments Process: Perform Operating Effectiveness testing of both manual and automated controls.
  5. Capital Asset Management Process: Update documentation, perform the design effectiveness testing of the capital asset processes and begin the testing of the operating effectiveness of capital assets at Headquarters.
  6. Foreign Service Directives Process: Complete the documentation and perform the design effectiveness testing of the FSD sub-processes.
  7. Budgeting and Forecasting Process: Document the budgeting and forecasting process (including the role of the FMA).
  8. Revenues Process: Perform the operating effectiveness testing of revenue controls.
  9. Mission Specific Processes: As identified in the PIC Methodology for Missions Abroad, the inventory of risks and related key controls will be validated and rolled out to all missions (see page 14 for the mission specific action plan).
Table 21: DFATD's overall assessment plan* for 2013-2014, and subsequent years
Business ProcessPlanning and ScopingDocumentDesign EffectivenessOperating Effectiveness (OT) Testing & Monitoring of Controls
OE TestingMonitoring
* This plan is based on current resources and within the context of DFAIT’s control environment and risks, prior to the amalgamation with CIDA. The plan will be updated in 2013-14, to account for the amalgamation.
DFATD Internal Control Management Framework2013-14
Reassessment of Future Year Commitments for DFATD2013-14
Develop an IC monitoring strategy for DFATD2013-14
Entity-level controls (ELCs)CompleteCompleteComplete2014-152015-16
Information technology general controls (ITGCs)CompleteCompleteCompleteComplete2014-15
Payroll - CBSCompleteCompleteCompleteComplete2014-15
Payroll - LESSee Commitments related to Mission Specific Processes
Payments - at HQCompleteCompleteComplete2013-142014-15
Payments - at MissionsSee Commitments related to Mission Specific Processes
Capital assets at HQCompleteComplete2013-142014-152015-16
Grants and ContributionsCompleteCompleteComplete2014-152015-16
Foreign Service DirectivesCompleteComplete2013-142014-152015-16
Year End ProceduresCompleteCompleteCompleteComplete2014-15
Budgeting & ForecastingComplete2013-142014-152014-152015-16
RevenueCompleteCompleteComplete2013-142014-15

4.2.2 Missions Specific Action Plan

A strategy has been developed and approved to ensure that DFATD's assessment of internal controls over Financial Reporting (ICFR) adequately addresses the network of missions abroad and their specific risks.

Based on this strategy, the following table provides the action plan as it relates to the implementation of the PIC at DFATD's missions abroad.

Table 22: Missions Specific Action Plan
KeyAction2012-132013-142014-15 and On-going
* to be performed during that specific fiscal year.
Mission Risk AssessmentCompleteUpdate 
Development of the PIC Methodology for Missions AbroadComplete  
Inventory of Risks and Key ControlsComplete  
Validation of Key Internal Controls over Financial Reporting (all business processes at missions) * 
Development of a roll out and Communication strategy * 
Roll out of key controls to all missions (excluding LES Pay, Pension and Benefits) * 
Design/Validation and Roll out of Key Application Controls (LES Pay Pension and Benefits and other applications)  *
Operating Effectiveness Testing of Key Controls  *
Risk-based Monitoring of Key Controls  *