Foreign Affairs and International Trade Canada

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5. Accountability

Financial Statements 2007-2008

Notes to the Financial Statements (Unaudited)

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 2007-2008 Report on Plans and Priorities (RPP) used the Interim Program Activity Architecture (PAA). Financial information in the 2007-2008 Departmental Performance Report (DPR) is reported on this basis. Under the Interim PAA the four strategic outcomes for the department were as follows: Canada's Interest Are Advanced Internationally, Canada’s Commercial Interests Are Advanced Internationally, Government of Canada Is Served Abroad, and Canadians Are Served Abroad. The Interim PAA had 14 program activities as follows:

• Strategic Policy and Planning - Leading the formulation of Canada's overall foreign policy and commercial strategy and the inter-departmental development of whole-of-government strategies, including public diplomacy.
• International Security -Integrating, advocating, and advancing Canadian international security interest, bilaterally and multilaterally, as well as managing and implementing the department’s policy and programming responsibilities with respect to security and intelligence.
• Global Issues -Advocating a stronger and more effective multilateral system, capable of addressing Canada's interests in global issues, in particular international economic relations and development, environment and sustainable development, human rights and human security.
• Bilateral Relations - Conducting and promoting Canada’s bilateral diplomatic relations in Canada and abroad.
• Protocol - Managing and facilitating the presence of foreign diplomats in Canada as well as planning and leading official travel by the Governor General, the Prime Minister, Ministers of the Portfolio and all official diplomatic events.
• Trade Policy and Negotiations - Analyzing, negotiating, advocating and representing Canada's international economic and commercial interests in Canada and abroad, in consultation with stakeholders.
• World Markets/Commercial Relations - Integrating Canada's economic, trade, investment, and science and technology interests at the regional and bilateral level and managing commercial relations.
• International Business Development - Managing and delivering international business services to Canadians.
• Promotion of Foreign Direct Investment and Science and Technology Cooperation - Attracting, retaining and expanding foreign direct investment in Canada.
• Common Services and Infrastructure (Support from HQ) - Managing and delivering Headquarters-provided common services to government programs and partners operating abroad.
• Common Services and Infrastructure (Missions Abroad) - Managing and delivering mission-provided common services to government programs and partners operating in Canada’s missions.
• Consular Affairs - Managing and delivering consular services to Canadians.
• Passport Canada Special Operating Agency (Revolving Fund) - Managing and delivering passport services to Canadians through the use of the Passport Revolving Fund.
• Passport Canada Special Operating Agency (Appropriated Funds) - Managing and delivering passport services to Canadians through initiatives complementing funding from the Appropriated Funds.

On June 7, 2007, Treasury Board Secretariat approved the new DFAIT PAA. The new PAA has the following three strategic outcomes: Canada’s International Agenda, International Services for Canadians and Canada’s International Platform.

The department is also responsible for the Canada Account, which is administered by Export Development Canada (EDC) pursuant to section 23 of the Export Development Act. The Canada Account supports export transactions which, though within the scope of EDC’s authority, are considered to be outside of the organization’s risk tolerance. Such transactions may be conducted under the Canada Account if they are deemed to be in Canada’s national interest by the Minister of International Trade and the Minister of Finance.

2. Summary of significant accounting policies

The financial statements have been prepared in accordance with Treasury Board accounting policies which are consistent with Canadian generally accepted accounting principles for the public sector.

Significant accounting policies are as follows:

(a) Parliamentary appropriations: The department is financed by the Government of Canada through Parliamentary appropriations. Appropriations provided to the department do not parallel financial reporting according to Canadian generally accepted accounting principles since appropriations 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 appropriations from Parliament. Note 3 provides a high-level reconciliation between the bases of reporting.

(b) Consolidation: These financial statements include the accounts of Passport Canada. Revenue and expense transactions and asset and liability accounts between Passport Canada and the department have been eliminated. The department has recorded investments in the three Crown corporations: Canadian Commercial Corporation, Export Development Canada and the International Development Research Centre. These investments are recorded at cost. The results of the Crown corporations are not consolidated in these financial statements due to the fact that the department is deemed not to control these entities.

(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 federal government.

(d) Change in net position in the Consolidated Revenue Fund: The change in the net position of the CRF is the difference between the net cash provided by Government and appropriations used in a year, excluding the amount of non-respendable revenue recorded by the department. It results from timing differences between when a transaction affects appropriations and when it is processed through the CRF.

(e) Revenues: Revenues are accounted for in the period in which the underlying transaction or event that gave rise to the revenues occurred. The department also receives revenues from regulatory fees that are recognized in the period in which the service is provided. Revenues that have been received but not yet earned for specified purposes are recorded as deferred revenues.

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

i. 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 financial statements;

ii. Contributions are recognized in the year in which the recipient has met the eligibility criteria or fulfilled the terms of a contractual transfer agreement;

iii. Vacation pay and compensatory leave are expensed as the benefits accrue to employees under their respective terms of employment;

iv. Services provided without charge by other government departments for accommodation, the employer’s contribution to the health and dental insurance plans and legal services are recorded as operating expenses at their estimated cost.

(g) Employee future benefits:

i. Pension benefits: Eligible Canada-based staff (CBS) participate in the Public Service Pension Plan, a multi-employer plan administered by the Government of Canada. 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. Eligible locally engaged staff (LES) participate in locally administered pension plans. These contributions are charged to expense in the year incurred.

ii. Severance benefits: Employees (CBS and LES) are entitled to severance benefits under labour contracts or conditions of employment. These benefits are accrued as employees render the services necessary to earn them. The CBS obligation relating to the benefits earned by 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 mission, local laws or practice and is calculated based on the number of eligible employees multiplied by the estimated severance payment based on historical experience.

(h) Cash: Cash for the department consists of the funds in transit from missions and funds received and not yet deposited, partially offset by credits in imprest accounts. This cash is for the facilitation of operations. All foreign currency accounts are valued at the rate as of March 31.

(i) Accounts and loans receivable: Accounts and loans receivable are stated at amounts expected to be ultimately realized; a provision is made for receivables where recovery is considered uncertain. An allowance for loans, resulting in a provision, is applied against the loans receivable balance. An allowance for doubtful accounts, resulting in a charge to bad debt, is applied to the accounts receivable balance.

Loans are initially recorded at cost and are adjusted to reflect the concessionary terms of those loans made on a long-term, low-interest or interest-free basis (unamortized discount). An allowance for valuation is further used to reduce the carrying value of the loans to amounts that approximate their net realizable value. Interest on loans receivables is applied in accordance with the policy that governs the account or the loan. Interest revenue is recognized at the time it is applied to the account.

(j) Investments in Crown corporations: Investments in Crown corporations are recorded at cost. If there is a permanent impairment in value, an allowance is recorded to reduce the carrying value of the investment to a nominal amount.

(k) Repayable contributions: Repayable contributions are contributions where the recipient is expected to repay the amount advanced. The contributions of the department include conditionally repayable contributions, which become either all or partly repayable, if conditions specified in the contribution agreement come into effect. Accordingly, they are not recorded on the Statement of Financial Position until such time as the conditions specified in the agreement are satisfied, at which time they are then recorded as a receivable and a reduction in transfer payment expenses. An estimated allowance for un-collectibility is recorded where appropriate.

(l) Inventories: Inventories consist of parts, material and supplies held for future program delivery and not intended for resale, as well as inventory for sale. All inventories are valued at cost. If they no longer have service potential, they are valued at the lower of cost or net realizable value.

(m) 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 on March 31. Losses on foreign exchange are presented in Note 4 – Expenses, while gains on foreign exchange are presented on Note 5 - Revenue.

(n) Tangible capital assets: All tangible capital assets and leasehold improvements having an initial cost 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, and assets located in museum collections.

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

(o) Contingent liabilities: 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 financial statements.

(p) Measurement uncertainty: The preparation of these financial statements in accordance with Treasury Board accounting policies which are consistent with Canadian generally accepted accounting principles for the public sector 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 severance benefits 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 Appropriations

The department receives most of its funding through annual parliamentary appropriations. Items recognized in the Statement of Operations and the Statement of Financial Position in one year may be funded through parliamentary appropriations 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:

4. Expenses

The following table presents details of expenses (in thousands of dollars) by category:

The presentation in the current year has changed to include expenses related to the Canada Account.

5. Revenues

The following table presents details of revenues (in thousands of dollars) by category:

The presentation in the current year has changed to include revenues related to the Canada Account.

6. Accounts Receivable and Advances

The following table presents details of accounts receivable and advances:

7. Investments in Crown Corporations

Export Development Canada

Export Development Canada (EDC) is a Canadian Crown corporation that provides financing and risk-management services to Canadian exporters and investors in up to 200 markets worldwide. EDC is financially self-sufficient and operates on commercial principles. It is wholly owned by the Government of Canada, and is listed in Schedule III to the Financial Administration Act, Part 1. EDC reports to Parliament through the Minister of International Trade. Included in this account are 9.8 million EDC shares issued to the Government of Canada at a value of $100 per share. Total authorized capital of EDC is $1,500,000,000, 15 million shares at a par value of $100 each.

During the year, the department recorded dividend revenue from EDC of $250,000,000 ($350,000,000 in 2007).

Canadian Commercial Corporation

The Canadian Commercial Corporation (CCC) is an agent Crown corporation listed in Part 1 of Schedule III of the Financial Administration Act. Included within the Corporation’s contributed surplus is paid up capital by the department of $8,000,000.

International Development Research Centre

The International Development Research Centre (IDRC) is a Crown corporation that was created by the Parliament of Canada in 1970. IDRC reports to Parliament through the Minister of Foreign Affairs. IDRC is principally funded by parliamentary appropriations. IDRC was incorporated with no share capital.

8. Canada Account Loans

This category consists of: loans made to national governments and loans to commercial entities. Loans to national governments and commercial entities are administered by EDC through the Canada Account.

Pursuant to section 23 of the Export Development Act, the Minister of International Trade, with concurrence of the Minister of Finance, may authorize EDC to enter into certain transactions or class of transactions where the Minister is of the opinion it is in the national interest and where EDC has advised the Minister that it will not enter into such transactions. Such transactions could not be supported by EDC for various reasons, one of which would be on the basis of EDC’s risk management practices. Funding for such transactions is provided by the Minister of Finance out of the CRF and the transactions are administered by EDC on behalf of the Government of Canada. The department is authorized to issue a maximum of $13,000,000,000 for Canada Account loans and guarantees.

Loan transactions with long repayment terms and/or low or zero interest rates are recorded in part as expenses (amortized discount) when the economic value is reduced due to such concessionary terms.

The following table presents the balances for loans made to national governments and commercial entities:

9. Tangible Capital Assets

Amortization expense for the year ended March 31, 2008 is $81,552,683 (2007 - $74,344,486).

* Aircrafts consists of planes that were returned to the Canada Account due to the restructuring of loan agreements. While the department does not in the ordinary course of business act as lessor, it has engaged in leasing activities to maximize recoveries on these returned assets and minimize potential losses. Operating lease revenue is recognized on a straight-line basis over the terms of the underlying leases.

10. Softwood Lumber Agreement

The Softwood Lumber Agreement (the “Agreement”) between the governments of the United States of America and Canada entered into force on October 12, 2006. Under the authority of the Minister of International Trade, EDC was designated by the Government of Canada to administer the return of duties and interest owed to Canadian companies by the U.S. government. Under this arrangement, EDC purchased the rights to the duties and interest owed to Canadian softwood producers opting to participate in the deposit refund mechanism, with funds advanced by the department from the CRF.

As at March 31, 2007, the department accrued a liability of $502,919,703, representing the net amount due to members of the Coalition for Fair Lumber Imports, the binational industry council, and meritorious initiatives of the United States of America under the terms of the Agreement. Amounts receivable by the department from EDC as at March 31, 2007 totalled $11,191,307. All outstanding matters in relation to the agreement were settled during 2007-2008 and there are no amounts remaining due or receivable as at March 31, 2008.

11. Deferred Revenue

Deferred revenue is comprised of monies received as prepayment for services to be performed by the department on behalf of third parties and deposits and unclaimed cheques for passport fees. Details of the transactions related to this account are as follows:

12. Employee Benefits

(a) Pension benefits:

The department's CBS participate in the Public Service Pension Plan, which is sponsored and administered by the Government of Canada. 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 are indexed to inflation.

Both the employees and the department contribute to the cost of the Plan. The 2007-2008 departmental expense amounts to $69,837,802 ($66,634,100 in 2006-2007), which represents approximately 2.1 times (2.2 times in 2006-2007) the contributions 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.

Eligible LES participate in locally administered pension plans. These plans are linked to local practises. The departmental contributions are charged to expense in the year incurred. The 2007-2008 departmental expense amounts to $15,165,678 ($17,392,141 in 2006-2007).

(b) Severance benefits:

The department provides severance benefits to its employees based on eligibility, years of service and final salary. These severance benefits for CBS and LES are not prefunded. Benefits will be paid from future appropriations. Information about the severance benefits, measured as at March 31, is as follows:

A revision to a management assumption regarding LES severance liability resulted in a $27,530,420 reduction in the estimate of the current year liability. This reduction has been reflected as a reduction to the expense in the current year.

13. Contingent Liabilities

(a) Claims and litigation:

Legal proceedings totalling approximately $12,974,089,247 ($13,263,859,304 in 2006-2007) were still pending at March 31, 2008. Some of these potential liabilities may translate into actual liabilities as a result of court decisions or out-of-court settlements. To the extent to which future legal decisions are assessed as unfavourable, and a reasonable estimate of the loss can be made, estimated liabilities are accrued and an expense is recorded in the financial statements.

(b) Loan guarantees:

Loan guarantees relate to guarantees rendered on loans made to national governments and loans to commercial entities which are administered by EDC through the Canada Account.

Loan guarantees by the department at March 31, 2008 amount to $467,964,715 ($532,352,766 at March 31, 2007), for which an allowance of $33,504,028 ($72,420,309 at March 31, 2007) has been recorded. These loan guarantees are subject to payment in the event of the default of the debtor. An allowance for valuation is used to reduce the carrying value of the loans to amounts that approximate their net realizable value. The allowance is determined based on the Government's identification and evaluation of countries that have formally applied for debt relief, estimated probable losses that exist on the remaining portfolio, and changes in the economic conditions of sovereign and non-sovereign debtors.

14. 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. These obligations include long-term rental agreements for chancery offices, transfer payments, and loan commitments under the Canada Accounts. Significant contractual obligations that can be reasonably estimated are summarized as follows:

15. Related party transactions

The department is related as a result of common ownership to all Government of Canada departments, agencies, and Crown corporations. The department enters into transactions with these entities in the normal course of business and on normal trade terms. Also, during the year, the department received services which were obtained without charge from other Government departments as presented in part (a).

(a) Services provided without charge by other government departments:

During the year, the department received services without charge from other departments (accommodation, legal fees and the employer's contribution to the health and dental insurance plans). These services without charge have been recognized in the department's Statement of Operations as follows:

(b) Payables and receivables outstanding at year end with related parties:

(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. These expenses are reflected in the financial statements of our partner departments and not those of DFAIT. The department administered approximately $261,000,000 ($282,000,000 in 2006-2007) for operational and program activities on behalf of partner departments. DFAIT also collected approximately $276,000,000 ($310,000,000 in 2006-2007) in revenues on behalf of our partner departments. These revenues were remitted to the partner departments and are reflected in the financial statements of our partners departments and not those of DFAIT.

(d) 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, DFAIT 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.

MOUs are in force between DFAIT and other federal government departments, and between DFAIT and co-locators (Crown corporations, non-federal organizations, and may include other federal government departments) to cover the roles and responsibilities of all parties at missions. 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

In the fiscal year ended March 31, 2008, expenses related to changes made to partner departments’ representation abroad are reflected in the financial statements of the department. Appropriations for the department are adjusted via the Annual Reference Level Updates (ARLU) and the fiscal year’s supplementary estimates.

This activity amounted to approximately $20,552,000 ($22,800,000 in 2006-2007) of in-year funding received via Supplementary Estimates and $17,776,000 ($8,942,000 in 2006-2007) of permanent funding handled through the ARLU.

ii. Common Services provided to co-locators

In the fiscal year ended March 31, 2008, this activity amounted to approximately $7,920,000 ($7,238,000 in 2006-2007) of in-year funds.

16. Comparative information

Comparative figures have been reclassified to conform to the current year's presentation.

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Date Modified:

2012-12-04