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Financial Statements 2010-2011

Table of Contents

• Statement of Management Responsibility Including Internal Control Over Financial Reporting
• Consolidated Statement of Financial Position (Unaudited)
  • Assets
• Consolidated Statement of Operations (Unaudited)
• Consolidated Statement of Equity of Canada (Unaudited)
• Consolidated Statement of Cash Flow (Unaudited)
• Notes to the Consolidated Financial Statements (Unaudited)
  • 1. Authority and Objectives
  • 2. Summary of Significant Accounting Policies
  • 3. Parliamentary Authorities
  • 4. Accounts Receivable and Advances
  • 5. Inventory
  • 6. Tangible Capital Assets
  • 7. Accounts Payable and Accrued Liabilities
  • 8. Deferred Revenue
  • 9. Employee Future Benefits
  • 10. Contingent Liabilities
  • 11. Contractual Obligations
  • 12. Related Party Transactions
  • 13. Segmented Information
  • 14. Transfer from Other Government Department
  • 15. Correction of an Error
• Annex to the Statement of Management Responsibility Including Internal Control Over Financial Reporting Fiscal Year 2010-11
  • 1. Introduction
    • 1.1 Authority, Mandate and Program Activities
    • 1.2 Financial Highlights
    • 1.3 Service Arrangements Relevant to Financial Statements
    • 1.4 Material Changes in Fiscal-Year 2010-2011
  • 2. DFAIT's Control Environment Relative to ICFR
    • 2.1 Key Positions, Roles and Responsibilities
    • 2.2 Key Measures Taken by DFAIT
  • 3. Assessment of DFAIT's System of ICFR
    • 3.1 Assessment Approach
    • 3.2 DFAIT's Assessment Scope
  • 4. DFAIT's Assessment Results
    • 4.1 Design Effectiveness of Key Controls
    • 4.2 Operating Effectiveness of Key Controls
  • 5. DFAIT's Action Plan
    • 5.1 Progress as of March 2011
    • 5.2 Action Plan

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, 2011, and all information contained in these statements rests with the management of the Department. These Consolidated Financial Statements have been prepared by management in accordance with Treasury Board accounting policies, which are based on Canadian generally accepted accounting principles for the public sector.

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 designed to provide reasonable assurance that 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 Consolidated 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 assessment of the effectiveness of the system of internal control over financial reporting.

An assessment for the year ended March 31, 2011 was completed in accordance with the Policy on Internal Control and the results and action plans are summarized in the annex.

The system of internal control over financial reporting is designed to mitigate risks to a reasonable level based on an on-going process to identify key risks, to assess effectiveness of associated key controls, and to make any necessary adjustments.

The effectiveness and adequacy of the Department's system of internal control is reviewed by the Office of the Chief Audit Executive, who conduct periodic 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 ensure that the Deputy Ministers have objective advice and recommendations on the adequacy of the department's risk management, control and governance processes. The DAC reviews core areas of departmental management, control and accountability, including the department's Consolidated Financial Statements and all significant accounting estimates and judgements therein with management and advises the Deputy Ministers on any apparent material concerns. Additionally, the Chief Audit Executive has full and unrestricted access to, and meets regularly with the DAC.

The Consolidated Financial Statements of the Department are not audited.

Original signed by:

Louis Lévesque, Deputy Minister of International Trade

Morris Rosenberg, Deputy Minister of Foreign Affairs

Rob Dufresne, A/Chief Financial Officer and Assistant Deputy Minister

Ottawa, Ontario
August 19, 2011

Consolidated Statement of Financial Position (Unaudited)

Assets

Financial Assets

Non-Financial Assets

Total Assets

Liabilities

Liabilities and Equity of Canada

Contingent liabilities (Note 10)
Contractual obligations (Note 11)

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

Consolidated Statement of Operations (Unaudited)

Expenses

Revenues

Net Results of Operations

The basis of presentation for the Consolidated Statement of Operations can be found in Note 1.
Further details of this statement can be found in Note 13, Segmented Information.

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

Consolidated Statement of Equity of Canada (Unaudited)

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

Consolidated Statement of Cash Flow (Unaudited)

Operating Activities

Non-Cash Items

Variations in Statement of Financial Position

Capital Investing Activities

Net Cash Provided by Government of Canada

Further details of this statement can be found in Note 3, Parliamentary Authorities.

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

Notes to the Consolidated 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 2010-2011 Report on Plans and Priorities (RPP) was based on the Department's Program Activity Architecture (PAA), as approved by Treasury Board (TB). Financial information in the 2010-2011 Departmental Performance Report (DPR) is reported on this basis. The PAA presents the Department's three strategic outcomes stated as end results. Strategic outcomes are supported by a cascading matrix of program activities, sub-activities and sub-sub-activities.

• 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 Activity #1: International Policy Advice and Integration - providing strategic direction, intelligence and advice, including integration and coordination of Canada's foreign and international economic policies.
  • Program Activity #2: Diplomacy and Advocacy - engaging and influencing international players and delivering international programs and diplomacy.
• Strategic Outcome #2:International Services for Canadians: Canadians are satisfied with commercial, consular and passport services.
  • Program Activity #3: International Commerce - managing and delivering commerce services and advice to Canadian business.
  • Program Activity #4: Consular Affairs - managing and delivering consular services and advice to Canadians.
  • Program Activity #5: Passport Canada - managing and delivering passport services to Canadians through the use of 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 Activity #6: Canada's International Platform: Support at Headquarters - managing and delivering services and infrastructure at headquarters to enable Canada's representation abroad.
  • Program Activity #7: Canada's International Platform: Support at Missions Abroad - managing and delivering services and infrastructure at missions to enable Canada's representation abroad.

Internal Services are the combination of process- and service-related activities that make possible all of the Department's operations. Overall, Internal Services enable the Department to carry out its mandated functions toward the achievement of its strategic outcomes.

2. Summary of Significant Accounting Policies

These Consolidated Financial Statements have been prepared in accordance with the Treasury Board (TB) accounting policies stated below, which are based on Canadian generally accepted accounting principles for the public sector. The presentation and results using the stated accounting policies do not result in any significant differences from Canadian generally accepted accounting principles.

Significant accounting policies are as follows:

a) Parliamentary Authorities: The Department is financed by the Government of Canada through Parliamentary authorities. Financial reporting of authorities provided to the Department do not parallel financial reporting according to generally accepted accounting principles since authorities are primarily based on cash flow requirements. Consequently, items recognized in the Consolidated Statement of Operations and 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.

b) Consolidation: These Consolidated Financial Statements include the accounts of Passport Canada Revolving Fund. Revenue and expense transactions and asset and liability accounts between Passport Canada Revolving Fund and the Department have been eliminated.

Export Development Canada (EDC) is a federal Crown corporation named in Part I of Schedule III to the Financial Administration Act and 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 Financial Statements. In accordance with Treasury Board Accounting Standards (TBAS) , transactions between EDC and the Government of Canada are not recorded in the Department's financial statements.

The Department also makes payments on behalf of the Government of Canada to two Crown Corporations; Canadian Commercial Corporation (CCC) and International Development and Research Center (IDRC). As per the Treasury Board Accounting Standards (TBAS), these payments are not recorded in the Department's financial statements.

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) Due from the CRF: Amounts due from 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 appropriations to discharge its liabilities.

e) Revenues: Revenues from regulatory fees are recognized in the accounts based on the services provided in the year.

1. 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;
2. 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;
3. Other revenues are accounted for in the period in which the underlying transaction or event that gave rise to the revenue takes place.

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

1. Grants are recognized in the year in which the conditions for payment are met;
2. Contributions are recognized in the year in which the recipient has met the eligibility criteria or fulfilled the terms of a contractual transfer agreement, provided that the transfer is authorized and a reasonable estimate can be made. Advance payments can be made to recipients in cases where the advance criteria have been met; and when all of the terms of the contractual agreement have not yet been fulfilled;
3. Vacation pay and compensatory leave are expensed as the benefits accrue to employees under their respective terms of employment;
4. Services provided without charge by other government departments for accommodation, employer's contribution 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), employees hired under the Public Service Employment Act, 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. Actuarial surpluses or deficiencies are recognized in the Financial Statements of the Government of Canada, as the Plan's sponsor. Current legislation does not require the Department to make contributions for any actuarial deficiencies. Eligible locally engaged staff (LES), employees hired at Missions abroad, participate in a combination of plans developed and administered based on local law 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, Treasury Board Secretariat (TBS) provides the funds for the contributions.
2. 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 in Transit: 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 of exchange in effect on March 31.

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

j) Contingent Liabilities: Contingent liabilities are potential liabilitieswhich may become actual liabilitieswhen 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 Consolidated Financial Statements.

k) Prepaid Expenses: Prepaid expenses for the Department consist primarily of rent payments and transfer payments when a recipient requires payment in advance and some of the terms and conditions will be fulfilled in a future fiscal year. Prepaid expenses are be accounted for as non-financial assets until the related services are rendered, goods are consumed, or terms of the contractual agreement are fulfilled.

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. Inventories of materials and supplies are valued at the lower of cost (using the average 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. Foreign exchange gains and losses have been netted together and the net result is presented in either Expenses or Revenues in the Consolidated Statement of Operations (and in Note 13), depending on if the net result is a loss or gain, respectively.

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. Amortization of tangible capital assets is done on a straight-line basis over the estimated useful life of the assets. The amortization ranges for the asset categories are as follows, however classes within the asset category have a specific period:

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.

o) 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, environmental liabilities, the liability for employee severance benefits, allowance for doubtful accounts, and the useful life of tangible capital assets (list as applicable). 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. Items recognized in the Consolidated Statement of Operations 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 purpose of Note 3 is to reconcile the differences from the two basis of reporting. The differences are reconciled in the following tables:

Adjustments for Items Affecting Net Cost of Operations But Not Affecting Authorities

Adjustments for Items Not Affecting Net Cost of Operations But Affecting Authorities

Current Year Authorities Used

Authorities are provided on 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 variance is mainly explained by accruals and revenue not available for spending 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.

Authorities Provided

Less

Current Year Authorities Used

Parliamentary authorities provided (i.e. authorities available from prior years for Passport Canada, proceeds from the disposal of surplus Crown assets, and funds provided through the Main Estimates and Supplementary Estimates in the current year) 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. The difference between Authorities provided Vote 5 - Capital expenditures, less lasped authorities capital and the acquisitions of tangible capital assets is due to capital authorities used on expenditures that were not capitalized, in accordance with the Department's capital asset policy.

The net cash provided by the Government as per the Consolidated Statment of Cash Flow is reconciled to the current year authorities used by including the revenue not available for spending and the changes that have occurred within the Statement of Financial Position. Only items within the Statement of Financial Position for which the amounts affects either net cash provided by Government or authorities used are included. Most of the accrued liabilities, such as contingent liabilities and employees severance benefits, are not included as they do not affect net cash nor authorities.

4. Accounts Receivable and Advances

The following tables present details of the Department's accounts receivable and advances:

Employees Advances

5. Inventory

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

The cost of consumed inventory recognized as an expense in the Consolidated Statement of Operations is $21,991,544 in 2010-2011 ($23,313,519 in 2009-2010).

6. Tangible Capital Assets

Amortization expense for the year ended March 31, 2011 is $91,844,808 (2010 - $89,478,773).

Reductions of assets under construction represent assets that were put into use in the year and have been transferred to the other capital asset classes as applicable.

During the fiscal year, a misclassification of an opening balance by category was discovered. The acquisition amount of $21.507 has been adjusted in-year, affecting Machinery and equipment (decreased) and Informatic hardware (increased). The associated amortization expense had been properly recorded and was not impacted by this asset category misclassification, however the related accumulated amortization of $17.316 was transfered to follow the correct asset category. Overall net book value remains unchanged. There is no impact on the Statement of Financial Position.

7. Accounts Payable and Accrued Liabilities

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

8. Deferred Revenue

Deferred revenue is comprised of monies received as prepayment for services to be performed by the Department on behalf of third parties, deposits and unclaimed cheques for passport fees. Revenue is recognized in the period that these expenditures are incurred or the service is performed. Details of the transactions related to this account are as follows:

9. 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 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/Quebec Pension Plans benefits and are indexed to inflation.

Both the employees and the Department contribute to the cost of the Plan. The 2010-11 Departmental expense amounts to $81.498.595 ($86.945.252 in 2009-10), which represents approximately 1.9 times (1.9 times in 2009-10) the contributions by employees.

The Department's responsibilitywith 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.

Locally-engaged staff (LES) participate in a combination of pension plans developed and administered based on local law and practice, or in the worldwide pension scheme which is administered by the Department. The Government of Canada is the sponsor of all plans which may be defined contribution, defined benefit and either prefunded or pay-as-you go. The 2010-2011 employer contributions amount to $22.392.158 ($19.412.613 in 2009-2010) which was funded by TBS.

b) Severance Benefits: The Department provides severance benefits to its employees based on eligibility, years of service and final salary. The severance benefit liability for CBS is based on a percentage provided by TBS, applied to the total payroll as at March 31. TBS determines the percentage based on an actuarial evaluation of the future liability for the entire government's eligible employees. The rate to be applied to total salary expense as at March 31, 2011 was 23.79% (23.27% as at March 31, 2010). For LES, the liability is based on historical data whereby an average severance payment per LES is calculated. This cost is multiplied by the total number of eligible LES as at March 31, 2011 and a factor that takes into consideration how an employee leaves the Department.

These severance benefits are not pre-funded. Benefits will be paid from future appropriations. Information about the severance benefits, measured as at March 31, is as follows:

The CBS severance benefits liability amounts to $93 million, whereas the LES liability is $86 million.

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 NAFTA treaty. These claims include items with pleading amounts and others for which no amount is specified. Based on the Department's assessment, legal proceedings for claims estimated at $17,000,000,000 ($18,000,000,000 as at March 31, 2010) were pending at March 31, 2011. Of this amount, three specific cases account for $15,000,000,000, with one case representing $10,000,000,000 inactive since 1999. Twenty-three cases make up the remaining $2,000,000,000. Some of these claims are at a very early stage, and although all claims are reviewed quarterly by legal counsel, pending claims and legal proceedings in which the outcome is not determinable totalled approximately $5,300,000,000 ($5,500,000,000 as at March 31, 2010). Of this amount, $165,000,000 ($166,000,000 as at March 31, 2010) relates to litigation where another Government department has been named as a co-defendant.

Some of these potential liabilities may translate into actual liabilities as a result of court decisions or out-of-court settlements. Contingent loss accruals are established when it becomes likely that the Department will incur an expense and the amount can be reasonably estimated. An accrual of $3,055,000 ($3,000,000 as at March 31, 2010) has been recorded in the Consolidated Statement of Financial Position under Accrued Liabilities. In management's opinion, the ultimate disposition of these actions, individually or in the aggregate, will not have a material adverse effect on the financial condition of the Department.

11. 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 goods or services 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:

12. 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 government departments (accommodation, legal fees, the employer's contribution to the health and dental insurance plans and workers' compensation coverage). These services without charge have been estimated and recorded the Department's Consolidated Statement of Operations as follows:

The Government has centralized some of its administrative activities for efficiency, cost-effectiveness purposes and economic delivery of programs to the public. As a result, the Government uses central agencies and common service organizations so that one department performs services for all other departments and agencies without charge. The costs of these services, such as 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 Statement of Operations.

b) Other Transactions 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. The Department issued approximately $181,000,000 ($179,000,000 in 2009-2010) in payments for operational and program activities on behalf of our partner departments. The Department also collected approximately $264.000.000 ($227,000,000 in 2009-2010) in revenues on behalf of our partner departments. 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) 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.

1. 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 updated and signed in February 2009.

   In the fiscal year ended March 31, 2011, 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 the fiscal year's Supplementary Estimates.

   This activity amounted to approximately $15,320,000 ($8,570,000 in 2009-2010) of permanent funding handled through the ARLU and $50,626,900 ($17,193,000 in 2009-2010) of in-year funding received via Supplementary Estimates.

2. 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, 2011, this activity amounted to approximately $17,386,200 ($15,565,000 in 2009-2010) of in-year funds received in Net-Voted Revenues.

   This activity represents the recovery of costs incurred, where a portion can be re-spent under the TB Decision Letter on Net-Voting.

13. Segmented Information

Presentation by segment is based on the Department's Strategic Outcomes and program activity architecture. The presentation by segment is based on the same accounting policies as described in the Summary of significant accounting policies in Note 2. The following table presents the expenses incurred and revenues generated for the main program activities, by major object of expenses and by major type of revenues. The segment results for the period are as:

Transfer Payments - Part 1

Transfer Payments - Part 2

Operating Expenses - Part 1

Operating Expenses - Part 2

Revenues - Part 1

Revenues - Part 2

14. Transfer from Other Government Department

The Budget Implementation Act, introduced in Parliament on March 4, 2010, approved the integration of the NAFTA Secretariat, Canadian Section into the Department of Foreign Affairs and International Trade including its staff. The Budget bill was ratified by Parliament in July 2010, and the order in council necessary to give effect to the transfer as specified in the Budget legislation was signed integrating the Secretariat into the Department effective August 27, 2010. The transfer of the Secretariat funding from the prior legal entity to the Department of $2,483,000 was done through the government's Supplementary Estimates B. Assets and liabilities transferred to the Department were insignificant. These Consolidated Financial Statements reflect the activities of the former Secretariat from August 27, 2010, onwards.

15. Correction of an Error

During the fiscal year, an error in the calculation of the Canada Based Staff (CBS) Severance benefit was discovered. The Department had been using the eligible salary base (those with ten or more years of service) when calculating the severance liability, instead of the total annual salary for all permanent employees. In addition, the government-wide actuarial percentage provided by the Office of the Comptroller General used to calculate the severance liability for 2009-10 was revised in June 2010. The effect of these two errors is reflected below:

The following adjustments show the cumulative effect of the change in rate and the change in salary base.

Expenses

The following adjustments show the in-year effect of the change in rate and the change in salary base.

Annex to the Statement of Management Responsibility Including Internal Control Over Financial Reporting Fiscal Year 2010-11

1. Introduction

This document is the second 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). In particular, it provides summary information on the assessments conducted by DFAIT as at March 31, 2011, including progress, results and related action plans along with some financial highlights pertinent to understanding the control environment unique to the Department.

The system of ICFR is not designed to eliminate every possible financial reporting risk, rather to mitigate risk to a reasonable level with controls that are balanced with, and proportionate to, the risks they aim to mitigate. The maintenance of an effective system of ICFR is an on-going process designed to identify, assess effectiveness and adjust as required, key risks and associated key controls as well as to monitor its performance in support of continuous improvement. As a result, the scope, pace and status of those departmental assessments of the effectiveness of their system of ICFR will vary from one organization to another based on risks and taking into account their unique circumstances.

1.1 Authority, Mandate and Program Activities

The strategic direction given to the Department's mandate and role comes from the three strategic outcomes as identified in the Department's Program Activity Architecture:

• Canada's International Agenda: The international agenda is shaped to Canada's benefit and advantage in accordance with Canadian interests and values;
• International Services for Canadians: Canadians are satisfied with commercial, consular and passport services; and
• Canada's International Platform: The Department of Foreign Affairs and International Trade maintains a mission network of infrastructure and services to enable the Government of Canada to achieve its international priorities.

In accordance with the Department of Foreign Affairs and International Trade Act, the Department has the mandate to manage and direct Canada's diplomatic and consular missions. This includes the supervision of the official activities of the various departments and agencies of the Government of Canada represented abroad.

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

1.2 Financial Highlights

Below is key financial information for fiscal year 2010-11. More information can be found in DFAIT's financial statements (unaudited) for the fiscal year ended March 31, 2011. Information can also be found in the Public Accounts of Canada.

• DFAIT received Parliamentary authority to spend $3.1B and stayed within this budget.
• Total expenses were $3.0B. Salaries and wages comprise the majority (36% or $1.1B) followed by transfer payments (28% or $865M).
• Total revenues were $429M. Passport Canada's revenue represents 63% or $269M of total revenues.
• Tangible capital assets represent 77% of departmental total assets ($1.6B). Accounts payable and accrued liabilities comprise 58% of total liabilities ($529M).
• DFAIT's operations are conducted at Headquarters in the National Capital Region, in 18 offices across Canada and in 175 missions abroad.
• Support at missions abroad represents 24% of the Department's operating expenses.
• DFAIT utilizes IMS, a SAP-based software, as its primary financial system, with feeder systems providing source information to IMS.
• DFAIT's financial statements include the accounts of Passport Canada. Passport Canada is a separate operating agency and is responsible for its own assessment of internal control over financial reporting.

1.3 Service Arrangements Relevant to Financial Statements

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

• 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, such as the accrued severance liability for Canada based staff; and
• The Department of Justice provides legal services to DFAIT.

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 in support of diplomatic and consular missions. 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 common service expenses appear on DFAIT's financial statements.

Other departments may also use an Interdepartmental Settlement when DFAIT is incurring program-specific expenditures or collecting program-specific revenues. Program-specific expenses and revenues appear on the financial statements of the associated partner department.

1.4 Material Changes in Fiscal-Year 2010-2011

As part of the accrual budgeting initiative, DFAIT prepared its Future Oriented Statement of Operations and the corresponding Notes to be included in the 2011-12 Report on Plans and Priorities.

The Budget Implementation Act, introduced in Parliament on March 4th, 2010, approved the integration of the NAFTA Secretariat, Canadian Section into the Department of Foreign Affairs and International Trade including its staff.

In April 2010, Mr. Gordon White replaced Mr. Bruce Hirst as the Department's Chief Financial Officer (CFO). In July 2011, Mr. Nadir Patel replaced Mr. Gordon White as the Department's CFO. Mr. Rob Dufresne was acting CFO from May 2011 to July 2011 and, in this capacity, has signed the 2010-11 financial statements.

In June 2010, Mr. Morris Rosenberg replaced Mr. Len Edwards as the Deputy Minister of Foreign Affairs.

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 internal control and are well equipped to exercise these responsibilities effectively. The objective of DFAIT's control environment is to help ensure risks are managed appropriately and to enable continuous improvement at a manageable cost.

2.1 Key Positions, Roles and Responsibilities

DFAIT is among 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 section 8.1 of the Department of Foreign Affairs and International Trade Act "shall have the rank and status of a deputy head of a department 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 cochairs 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 "shall have the rank and status of a deputy head of a department 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 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.

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 his/her mission's 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 which are instrumental to the maintenance of an effective system of ICFR.

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 is comprised of 4 external members, including the Chair. As stated in the Policy on Internal Control, the DAC will be engaged, as applicable, on the Department's risk-based assessment plans and associated results related to the effectiveness of the departmental 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.

2.2 Key Measures Taken by DFAIT

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

Key elements include:

• The Executive Council is supported by three sub-committees; the Resource Management Committee, the Policy and Programs Committee and the Operations Committee;
• A Values and Ethics Division led by the Inspector General, and reporting directly to the Deputy Minister of Foreign Affairs;
• DFAIT's Conduct Abroad Code and the Public Service Values and Ethics Code;
• Regularly updated delegated authorities matrix;
• Preparation of a Corporate Risk Profile which helps the Department establish direction for managing corporate risks by presenting a snapshot of DFAIT's risk status;
• Training and communications in core areas of financial management;
• Departmental policies tailored to DFAIT's control environment;
• A dedicated Quality Assurance function for the Department's financial reporting section;
• 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 Inspector General.

3. Assessment of DFAIT's System of ICFR

3.1 Assessment Approach

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.

Going forward, DFAIT will assess the design and operating effectiveness of its system of ICFR and will implement an on-going monitoring program to sustain and continuously improve the departmental system of ICFR.

Design effectiveness means to ensure that key control points are identified, documented, in place and that they are aligned with the risks they aim to mitigate and that any remediation is addressed. This includes the mapping of key processes and IT systems to the main accounts by location, as applicable.

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

On-going monitoring program means that a systematic integrated approach to monitoring is in place, including periodic risk-based assessments and timely remediation.

3.2 DFAIT's Assessment Scope

DFAIT performed a risk assessment using the financial statements at March 31, 2010 to determine significant accounts. Significance was assessed relative to qualitative and quantitative measures of materiality specified by departmental management.

Once the significant accounts were identified they were then linked to the related financial processes. The results of this assessment confirmed the following key priority areas of DFAIT's system of ICFR that need to be addressed in the implementation of the Policy on Internal Control:

Foundational elements:

• Entity-level controls (ELCs)
• Information technology general controls (ITGCs)

Business process elements (directly related to DFAIT's ICFR)

• Financial reporting
• Year end procedures including contractual obligations and contingent liabilities
• Capital asset management
• Payroll - Canada Based Staff
• Payroll - Locally Engaged Staff
• Purchasing and payments - at HQ
• Purchasing and payments - at Missions
• Revenues
• Grants and contributions
• Foreign service directives

Business process elements (not directly related to DFAIT's ICFR)

• Management of Parliamentary appropriations
• Other Government Departments

DFAIT has also developed an Internal Control over Financial Reporting Framework (the FRAMEWORK) through which each process will be assessed.

The FRAMEWORK is designed to accomplish the following:

• Provide DFAIT with a methodology to present, test, and monitor internal control over financial reporting in a consistent and standardized format. The methodology should be able to meet the threshold of a controls-based audit.
• Provide a standard approach to documenting financial processes and related internal controls.
• Provide support for DFAIT's financial statements, particularly in meeting the financial statement objectives.
• Define and provide assurance on the system of internal control over financial reporting in support of the accountabilities under the Financial Administration Act and Federal Accountability Act.

Entity level controls were documented by the Department using a COSO-based questionnaire during the 2009-10 fiscal year. During 2010-11, DFAIT assessed the design effectiveness of entity level controls.

During the 2009-10 fiscal year, DFAIT documented and then tested the design effectiveness of IT general controls for the Department's key information systems. In 2010-11, DFAIT developed a comprehensive management action plan to remediate the identified gaps.

Business processes were prioritized by DFAIT during 2010-11 for documentation based upon the following factors: impact upon MAF assessment; related OAG and Internal Audit recommendations; coordination with other departmental initiatives; linkage to the Office of the Comptroller General's Common Financial Management Business Process Initiative. Based upon this prioritization exercise, DFAIT documented key risk and control points related to the following processes:

• the main payroll process for Canadian-based staff as well as the material subprocesses; severance, overtime, estimates, retroactive pay, and secondments
• the main HQ payment process as well as the material sub-processes; travel, hospitality, relocation, grants and contributions, vendor master file creation

4. DFAIT's Assessment Results

This year, as a result of the assessment approach described above, DFAIT developed an inventory of all entity-level controls, as well as process-level controls for both the Canadian-based staff payroll process and the HQ payment process.

As at year end 2010-11, DFAIT completed all testing of design effectiveness related to the entity level controls, as well as remediation of a number of weaknesses in the design effectiveness of information technology general controls identified in the previous fiscal year.

4.1 Design Effectiveness of Key Controls

DFAIT's key business processes have been developed to help ensure appropriate internal controls are in place. These controls provide assurance that the financial information is complete, reliable, relevant, timely, and that all authorities and regulations are respected. DFAIT developed a comprehensive, COSO based questionnaire to aide in the documentation of Entity Level Controls. The internal control section worked with the responsible divisions to compile a list of narrative and documentary evidence to support the identified controls. Design effectiveness also included ensuring appropriate alignment of each key control with risks. Based upon this, opportunities for enhancements to the documentation of entity level controls were identified, as well as recommendations to improve the design effectiveness of certain entity level controls. Findings included:

• Staffing of IT and systems management is at less than optimal levels and could eventually impact the quality of information provided to management as well as the maintenance of internal controls throughout the organization. The department should ensure its IT complement is adequately staffed.
• The Department should consider implementing a process that would have all DFAIT employees sign-off electronically that they are in compliance with the terms of the Values and Ethics code.

Based on the assessment of design effectiveness of key information technology general controls performed during 2009-10, areas requiring improvements were identified. During 2010-11, remediation activities were developed in a comprehensive management action plan document with respect to the design of controls related to program change management, system and database access, SAP and PeopleSoft security, computer operations and program development.

A review of the design effectiveness of the payment process revealed a number of inefficiencies. As a result, a new account verification methodology (statistical sampling) is being introduced. Design effectiveness testing of key controls will be based on this new methodology.

4.2 Operating Effectiveness of Key Controls

DFAIT has not yet commenced testing of the operating effectiveness of key controls, however there are compensating controls in place which provide a level of assurance that the system of internal control is effective. These compensating controls include:

• During 2010-11, Internal Audit reviewed the Department's progress relative to key recommendations from the 2007 audit readiness assessment and assessed controls related to real property and materiel management.
• The application approval process for Grants and Contributions is established in each program's accountability risk framework. The programs are subject to evaluations and internal audits. In addition, there are also recipient audits conducted by the Office of the Inspector General.
• Ongoing quality assurance on financial accounts monitors the appropriateness of financial data related to the financial reporting process.
• A robust account verification process, currently at 100% review will transition to a risk based statistical sampling methodology during 2011-12.
• The Financial Operations, International section monitors the financial management practices of Missions. Their work is complimented by The Office of the Inspector General which carried out inspections (both program and financial related) at 17 missions during 2010-11.

5. DFAIT's Action Plan

5.1 Progress as of March 2011

5.2 Action Plan

By end of 2011-12, DFAIT plans to:

• ELC process: Remediate the identified design gaps.
• ITGC process: Continue the remediation of the design effectiveness by determining the status of all management action plan items. Begin testing operating effectiveness once a majority of action plan items are complete.
• CBS Payroll process: Complete design effectiveness including gap identification, recommendations and management action plan for remediation. Commence the operating effectiveness testing phase.
• HQ Payments process: Complete design effectiveness testing and prepare recommendations and management action plan for remediation. Commence the operating effectiveness testing phase.
• Year End Procedures process including contractual obligations and contingent liabilities: Document the in-scope year-end procedures.
• Capital Asset Management process: Begin scoping and documentation, in conjunction with the Capital Asset Review which is scheduled to commence in June 2011.
• Revenue process: Document all in-scope DFAIT revenue sub-processes.
• Grants and Contributions process: Begin scoping and documentation of the process.
• Complete a mission-specific financial statement risk assessment to determine significant locations. This assessment will also assist in the elaboration of a mission strategy with respect to PIC implementation.
• Develop a methodology for consistent reporting and follow-up on gaps or other corrections needed in design and operating effectiveness.

DFAIT's overall assessment plan¹ for 2011-2012 and subsequent years, steps to be completed by:

¹ This plan is based on current resources and within the context of the department's current control environment. Major changes to departmental structure will impact timelines. The plan will be updated on an annual basis.

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Date Modified:

2012-09-05