Statement of Management Responsibility Including Internal Control Over Financial Reporting

Responsibility for the integrity and objectivity of the accompanying financial statements for the year ended March 31, 2012, and all information contained in these statements rests with the management of Natural Resources Canada.  These 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 financial statements. Some of the information in the 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 financial statements.

Management is also responsible for maintaining an effective system of internal control over financial reporting (ICFR) 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 Actand 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, 2012 was completed in accordance with the Treasury Board Policy on Internal Controland 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 work of internal audit staff, who conduct periodic audits of different areas of the department’s operations, and by the Departmental Audit Committee, which oversees management’s responsibilities for maintaining adequate control systems and quality of financial reporting, and which recommends the financial statements to the Deputy Minister of Natural Resources Canada.

The financial statements of Natural Resources Canada have not been audited.

Serge P. Dupont Deputy Minister Date signed Ottawa, Canada

Thérèse Roy, CPA, CA A/ Chief Financial Officer Date signed Ottawa, Canada

Natural Resources Canada

Statement of Financial Position (Unaudited)
As at March 31
(in thousands of dollars)

The statement below reports the assets and liabilities of Natural Resources of Canada for fiscal year 2010-2011 and 2011-2012.

	2012	2011 Restated (note 20)
Liabilities
Accounts payable and accrued liabilities (note 4)	1,090,651	839,832
Vacation pay and compensatory leave	23,934	25,917
Lease obligation for tangible capital assets (note 5)	76,137	78,190
Employee future benefits (note 6)	67,319	78,558
Other liabilities (note 7)	18,150	15,725
Environmental liabilities (note  15a)	1,085,010	1,106,361
Total net liabilities	2,361,201	2,144,583
Financial assets
Due from Consolidated Revenue Fund	925,187	803,966
Accounts receivable and advances (note 8)	206,749	159,598
Loan receivable (note 9)	40,667	41,333
Total gross financial assets	1,172,603	1,004,897
Financial assets held on behalf of Government
Accounts receivable and advances (note 8)	(203,487)	(157,579)
Loan receivable (note 9)	(40,667)	(41,333)
Total financial assets held on behalf of Government	(244,154)	(198,912)
Total net financial assets	928,449	805,985
Departmental net debt	1,432,752	1,338,598
Non-financial assets
Prepayments (note 10)	90,361	114,136
Inventory (note 11)	1,818	1,914
Tangible capital assets (note 12)	221,392	213,456
Total non-financial assets	313,571	329,506
Departmental net financial position (note 13)	$ (1,119,181)	$ (1,009,092)

Contractual obligations (Note 14)
Contingent liabilities (Note 15)
Contingent recoveries (Note 16)

The accompanying notes form an integral part of these financial statements.

Serge P. Dupont Deputy Minister Date signed Ottawa, Canada

Thérèse Roy, CPA, CA A/ Chief Financial Officer Date signed Ottawa, Canada

Natural Resources Canada

Statement of Operations and Departmental Net Financial Position (Unaudited)
For the year ended March 31
(in thousands of dollars)

The statement below reports the revenues, expenses and the net cost of operations by the departmental major programs for fiscal year 2010-2011 and 2011-2012. The major programs are determined by the department’s Program Activity Architecture.

	2012 Planned Results (note 3)	2012	2011 Restated (note 20)
Expenses
Economic Opportunities for natural resources	1,794,625	1,485,600	2,323,344
Clean energy	1,316,978	1,354,727	1,319,033
Internal services	249,984	254,462	1,039,337
Ecosystem risk management	86,176	220,085	202,585
Natural resources and landmass knowledge and systems	81,048	80,401	103,403
Adapting to a changing climate and hazard risk management	61,203	61,829	65,488
Natural resource-based communities	190	25	11,975
Geomatics Canada Revolving Fund	1,726	3,235	4,535
Total expenses	3,591,930	3,460,364	5,069,700
Revenues
Rights and privileges	1,640,316	1,150,865	1,187,544
Miscellaneous revenue	185,602	589,520	459,813
Revenue from services of a non-regulatory nature	1,708	20,514	20,759
Proceeds from sales of goods and information products	730	2,773	2,751
Revenue from services of a regulatory nature	-	1,370	1,242
Revenues earned on behalf of Government	(1,801,705)	(1,739,978)	(1,636,581)
Total revenues	26,651	25,064	35,528
Net cost from continuing operations	3,565,279	3,435,300	5,034,172
Transferred operations (note 18)
Expenses	28,772	14,831	25,910
Net cost of transferred operations	28,772	14,831	25,910
Net cost of operations before government funding and transfers	3,594,051	3,450,131	5,060,082
Government funding and transfers
Net cash provided by Government		3,164,716	4,204,103
Change in due from Consolidated Revenue Fund		121,221	183,318
Services provided without charge by other government departments (note 17a)		59,361	52,994
Transfer of assets and liabilities from (to) other government departments (note 18)		(5,256)	7
Net cost of operations after government funding and transfers		110,089	619,660
Departmental net financial position - Beginning of year		(1,009,092)	(389,432)
Departmental net financial position - End of year		$ (1,119,181)	$ (1,009,092)

Segmented information (note 19)

The accompanying notes form an integral part of these financial statements.

Natural Resources Canada

Statement of Change in Departmental Net Debt (Unaudited)
For the year ended March 31
(in thousands of dollars)

The statement below presents the reconciliation of the opening balance of the Net Debt of Canada to the closing balance as at March 31 for fiscal year 2010-2011 and 2011-2012 for Natural Resources Canada.

	2012	2011
Net cost of operations after government funding and transfers	110,089	619,660
Change due to tangible capital assets
Acquisition of tangible capital assets	34,679	133,189
Amortization of tangible capital assets	(18,371)	(24,250)
Proceeds from disposal of tangible capital assets	(444)	(394)
Net (loss) or gain on disposal of tangible capital assets including adjustments	640	8,408
Transfer to other government departments	(8,568)	7
Total change due to tangible capital assets	7,936	116,960
Change due to inventories	(96)	(6,100)
Change due to prepayment	(23,775)	48,327
Net increase (decrease) in departmental net debt	94,154	778,847
Departmental net debt - Beginning of year	1,338,598	559,751
Departmental net debt - End of year	$ 1,432,752	$ 1,338,598

The accompanying notes form an integral part of these financial statements

Natural Resources Canada

Statement of Cash Flows (Unaudited)
For the year ended March 31
(in thousands of dollars)

The statement below presents financial data on how Natural Resources Canada generated and used cash in fiscal year 2010-2011 and 2011-2012.

	2012	2011 Restated (note 20)
Operating activities
Net cost of operations before government funding and transfers:	3,450,131	5,060,082
Non-cash items:
Amortization of tangible capital assets	(18,371)	(24,250)
Gain on disposal and write-offs of tangible capital assets	640	8,408
Services provided without charge by other government departments (note 17a)	(59,361)	(52,994)
Variations in Statement of financial position:
Increase (decrease) in accounts receivable and advances	1,243	(1,026)
Increase (decrease) in prepayments	(23,775)	48,327
Decrease in inventory	(96)	(6,100)
Increase in accounts payable and accrued liabilities	(250,819)	(138,115)
Decrease in vacation pay and compensatory leave	1,983	1,218
Decrease in future employee benefits	11,239	9,551
(Increase) decrease in environmental liabilities	21,351	(756,413)
(Increase) decrease in other liabilities	(2,425)	810
Transfer of net liabilities to other government departments     (note 18)	(3,312)	-
Cash used in operating activities	3,128,428	4,149,498
Capital investing activities
Acquisitions of tangible capital assets	34,679	133,189
Proceeds from disposal of tangible capital assets	(444)	(394)
Cash used in capital investing activities	34,235	132,795
Financing activities
Lease obligation for tangible capital assets	(2,665)	(80,005)
Lease payments for tangible capital assets	4,718	1,815
Cash used in financing activities	2,053	(78,190)
Net cash provided by Government of Canada	$ 3,164,716	$ 4,204,103

The accompanying notes form an integral part of these financial statements.

Natural Resources Canada

Notes to the Financial Statements (Unaudited)
For the year ended March 31, 2012

1. Authority and Objectives

The Department of Natural Resources Canada (NRCan) was created on June 25, 1993 by the merger of the Department of Energy, Mines and Resources and the Department of Forestry. This organizational change was effected by Order in Council, pending the passage of legislation which occurred in 1994. The Department’s mandate is primarily based on the Department of Natural Resources Act, the Resources and Technical Surveys Actand the Forestry Act.     

Natural Resources Canada (NRCan) seeks to enhance the responsible development and use of Canada’s natural resources and the competitiveness of Canada’s natural resources sectors.  The department is an established leader in science and technology in the fields of energy,  forests, and minerals and metals and applies its expertise in earth sciences to build and maintain an up-to-date knowledge base of Canada’s landmass. NRCan develops policies and programs that enhance the contribution of the natural resources sector to the economy and improve the quality of life of Canadians. NRCan fulfills its mandate through eight main program activities:

• Economic Opportunities for natural resources contains programs designed to promote innovation, investment, and the enhancement of the competitiveness of Canada’s natural resources and related products to industries through the provision of know-how and tools, along with trade promotion and market acceptance, at home and abroad.
• Clean energy includes the development and delivery of energy science and technology, policies, programs, legislation and regulations to mitigate air emissions and to reduce other environmental impacts associated with energy production and use. 
• Ecosystem risk management includes programs that help to understand the risks to Canada’s environment and the protection of critical resources such as groundwater. 
• Natural resources and landmass knowledge and systems carries out the Minister’s obligation to provide a property rights infrastructure on all lands for which the Department has this responsibility, along with the provision and access to accurate and precise geographic information on the Canadian landmass. 
• Adapting to a changing climate and hazard risk management provides geoscience and geospatial information that contributes to the reduction of risks from natural hazards, such as earthquakes, tsunamis and floods, as well as hazards arising from human activities, and works with front-line responders to provide geographical information in the event of an emergency. 
• Natural resource-based communities is targeted to increasing Canada’s knowledge of the impacts of natural resource sector evolution on communities that have a substantial reliance on resource-based industries and to improve the capacity and knowledge for increasing the number of opportunities through value-added products and services. 
• The Geomatics Canada Revolving Fund allows Geomatics Canada to shift the costs from taxpayers at large to specific users who benefit directly from the goods and services provided.  These goods and services include aeronautical charts and publications which contribute to the safety and security of the traveling public and Canadians.
• Internal services are groups of related activities and resources that are administered to support the needs of programs and other corporate obligations of an organization.

2. Summary of Significant Accounting Policies

These financial statements have been prepared in accordance with the Treasury Board 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:

1. Parliamentary authorities – The Department is financed by the Government of Canada through Parliamentary authorities. Financial reporting of authorities provided to the Department do not parallel financial reporting according to generally accepted accounting principles since authorities are primarily based on cash flow requirements. Consequently, items recognized in the Statement of Operations and the Statement of Financial Position are not necessarily the same as those provided through authorities from Parliament. Note 3 provides a reconciliation between the bases of reporting.  The planned results amounts in the Statement of Operations and Departmental Net Financial Position are the amounts reported in the future-oriented financial statements included in the 2011-12 Report on Plans and Priorities. The future-oriented financial statements for 2011-2012 have been restated to reflect the revenue net of non-respendable amounts. This restatement resulted in a $1,801,705 increase in net costs of operations before government funding and transfers. In addition, the future-oriented financial statements have also been reclassified to conform to the current year presentation.
2. Consolidation – These consolidated financial statements include the accounts of the sub-entities that are under the control of the Department.  The accounts of the Geomatics Canada Revolving Fund have been consolidated with those of the Department and all inter-organizational balances and transactions have been eliminated.
3. 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.
4. 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 appropriations to discharge its liabilities. 
5. Revenues:
   • Revenues from regulatory fees are recognized in the accounts based on the services provided in the year.
   • 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.
   • Other revenues are accounted for in the period in which the underlying transaction or event that gave rise to the revenue takes place.
   • Revenues that are non-respendable 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. Expenses – Expenses are recorded on the accrual basis
   • 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.
   • Vacation pay and compensatory leave are accrued as the benefits are earned by employees under their respective terms of employment.
   • 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.
7. Employee future benefits
   1. Pension benefits:  Eligible employees participate in the Public Service Pension Plan, a multi employer plan administered by the Government.  The Department’s contributions to the Plan are charged to expenses in the year incurred and represent the total departmental obligation to the Plan.  Current legislation does not require the department to make contributions for any actuarial deficiencies to the Plan.
   2. Severance benefits:  Employees entitled to severance benefits under labour contracts or conditions of employment earn those benefits as services necessary to earn them are rendered.  The obligation relating to the benefits earned by employees is calculated using information derived from the results of the actuarially determined liability employee severance benefits for the Government as a whole.  
8. Accounts and loans receivable are stated at the lower of cost and net recoverable value. However, when the terms of the loans are concessionary, such as those provided with a low or no interest clause, they are recorded at their estimated present value. A portion of the unamortized discount is recorded as revenue each year to reflect the change in the present value of the loans outstanding. Transfer payments that are unconditionally repayable are recognized as loans receivable. A valuation allowance is recorded for accounts and loans receivable where recovery is considered uncertain.
9. 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. 
10. Environmental liabilities – Environmental liabilities reflect the estimated costs related to the management and remediation of environmentally contaminated sites.  Based on management’s best estimates, a liability is accrued and an expense recorded when the contamination occurs or when the department becomes aware of the contamination and is obligated, or likely to be obligated to incur such costs.  If the likelihood of NRCan’s obligation to incur these costs is not determinable, or if an amount cannot be reasonably estimated, the costs are disclosed as contingent liabilities in the notes of the financial statements. 
11. Inventories – Inventories consist of parts, material and supplies held for future program delivery.  Inventory is valued at cost using the average cost method.  If there is no longer any service potential, inventory is valued at the lower of cost or net realizable value.
12. 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 the Statement of Operations and Departmental Net Financial Position and note 19 in the operating expenses – other.
13. Tangible capital assets – All tangible capital assets and leasehold improvements having an initial cost of $10,000 or more ($1,000 or more for the Geomatics Canada Revolving Fund) 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, assets located on Indian Reserves and museum collections.

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

    The table below provides the information of the amortization period for each asset class used in Natural Resources Canada.

    Asset Class	Amortization period
    Buildings	15 to 40 years
    Machinery and equipment	5 to 15 years
    Vehicles	3 to 10 years
    Leasehold improvements	Lesser of the remaining term of lease or useful life of the improvement
    Leased tangible capital assets	Over term of lease/useful life
    Assets under construction	Once in service, in accordance with asset class

    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.

14. 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, the useful life of tangible capital assets, and the allowance for doubtful accounts.  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 Statement of Operations and Departmental Net Financial Position and the Statement of Financial Position in one year may be funded through Parliamentary authorities in prior, current or future years.  Accordingly, the Department has different net results of operations for the year on a government funding basis than on an accrual accounting basis.  The differences are reconciled in the following tables.

Planned results are derived from the amounts presented in the 2011-12 future-oriented financial statement of operations and included in the 2011-12 Departmental Report on Plans and Priorities. To compare to 2012 results, expenses have been reclassified to reflect the transfer of activities to Shared Services Canada and revenues earned on behalf of Government have been presented.

a) Reconciliation of net cost of operations to current year authorities used

The table below reconciles the differences between the net results of operations for fiscal year 2010-2011 and 2011-2012 based on accrual accounting and government funding.

				2012	2011 Restated (note 20)
				(in thousands of dollars)
Net cost of operations before government funding and transfers				$ 3,450,131	$ 5,060,082
Adjustments for items affecting net cost of operations but not affecting authorities:
Add (Less):
NRCan's authorities
Refunds of prior years expenditures				10,969	15,913
Services provided without charge by other government departments				(59,361)	(52,994)
Adjustment for prepaid expenses				27,653	12,707
Allowance for environmental liabilities				21,351	(756,413)
Amortization of tangible capital assets				(18,371)	(24,250)
Employee severance benefits				9,762	9,551
Adjustments of prior year accounts payable				10,972	8,832
Increase in accrued liabilities not charged to authorities				(66,455)	-
Adjustments from prepayments				(169,127)	(56,529)
Amortization of unamortized discount loans				3,333	3,333
Adjustments of previous years inventory				(96)	(6,100)
Vacation pay and compensatory leave				1,602	1,218
Adjustment for expenses related to claims				-	(2,850)
Other adjustments				(47,631)	(9,677)
Total items not affecting net cost of operations but not affecting authorities				(275,399)	(857,259)
Adjustments for items not affecting net cost of operations but affecting authorities:
Add (Less):
Receivables, Advances, and Prepayments				140,097	99,207
Acquisitions of tangible capital assets				34,679	133,189
Decrease (Increase) in lease obligations for tangible capital assets				2,665	(78,190)
Total items not affecting net cost of operations but affecting authorities				177,441	154,206
Current year authorities used				$ 3,352,173	$ 4,357,029

b) Authorities provided and used

The table below reports authorities used by Natural Resources Canada for fiscal year 2010-2011 and 2011-2012, which is the difference between the authorities provided by Parliament in prior and current years and the authorities available for future years.

	2012	2011
	(in thousands of dollars)
Authorities Provided:
Vote 1 - Operating expenditures	$ 844,593	$ 860,176
Vote 5 - Capital expenditures	23,758	26,476
Vote 10 - Transfer payments	1,716,488	1,898,728
Statutory amounts	1,297,037	2,177,541
Less:
Authorities available for future years	(7,553)	(7,862)
Lapsed - Operating	(89,175)	(40,576)
Lapsed - Capital	(2,396)	(5,256)
Lapsed - Transfer payment	(430,579)	(552,178)
Lapsed – Statutory amounts	-	(20)
Current year authorities used	$ 3,352,173	$ 4,357,029

4. Accounts payable and accrued liabilities

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

	2012	2011
	(in thousands of dollars)
Accounts payable to other government departments and agencies	$ 12,575	$ 22,921
Accounts payable to external parties	983,278	815,546
Total accounts payable	995,853	838,467
Accrued liabilities	94,798	1,365
Total	$ 1,090,651	$ 839,832

As part of its accrued liabilities, the Department has recorded at March 31, 2012 an obligation for termination benefits for an estimated amount of $20,387,229. This amount reflects the estimated workforce adjustment costs related to an internal restructuring and to the Canada’s Economic Plan 2012 in which the Government announced savings measures to be implemented by departments over the next three fiscal years starting in 2012-13.

5.  Lease obligation for tangible capital assets

The Department has entered into agreements to lease a building under a capital lease with a cost of $90,953,000 and accumulated amortization of $5,038,000 as at March 31, 2012 ($1,400,000 as at March 31, 2011). The obligations related to the upcoming years include the following:

The below table shows the amount of the loan and unamortized discounts to Nordion International Inc from Natural Resources Canada.

	2012		2011
	(in thousands of dollars)
2012	-		$ 4,718
2013	4,718		4,718
2014	4,718		4,718
2015	4,718		4,718
2016	4,718		4,718
2017 and thereafter	92,549		92,791
Total future minimum lease payments	111,421		116,381
Less: imputed interest (3.45%)	35,284		38,191
Balance of obligations under leased tangible capital assets	$ 76,137		$ 78,190

6.  Employee future benefits

(a) Pension benefits:  The Department’s employees 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 2011-12 expense amounts to $64,135,000 ($66,220,000 in 2010-11), which represents approximately 1.8 times (1.9 in 2010-11) 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. 

(b) Severance benefits: The Department provides severance benefits to its employees based on eligibility, years of service and final salary.  These severance benefits are not pre-funded. Benefits will be paid from future authorities.  Information about the severance benefits, measured as at March 31, is as follows:

As part of the 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 ceased for these employees commencing in 2012.  Employees subject to these changes have been 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.

This table presents the reconciliation of the opening balance of accrued severance benefit obligation to the closing balance for fiscal year 2010-2011 and 2011-2012 for Natural Resources Canada.

	2012	2011
	(in thousands of dollars)
Accrued benefit obligation - Beginning of year	$ 78,558	$ 88,109
Transferred to other government department, effective November 15, 2011 (note 18)	(1,477)	-
Subtotal	77,081	88,109
Expense for the year	(16,771)	(9,574)
Benefits paid during the year	7,009	23
Accrued benefit obligation - End of year	$ 67,319	$ 78,558

7. Other Liabilities

The below table presents the reconciliation of the opening balance of the other liabilities by programs to the closing balance for fiscal year 2010-2011 and 2011-2012 for Natural Resources Canada.

	April 1,    2011	Receipts and other credits	Payments and other charges	March 31, 2012
	(in thousands of dollars)
Guarantee deposits - Oil and gas	$ 4,429	$334,699	$ (334,518)	$ 4,610
Shared costs projects	2,246	4,988	(2,712)	4,522
Market development and incentive payments - Alberta	4,651	-	(66)	4,585
Shared costs agreements  - Research	4,399	1,538	(1,504)	4,433
Total	$ 15,725	$341,225	$ (338,800)	$ 18,150

Guarantee deposits – Oil and gas: This account was established to record securities in the form of cash, promissory notes, and bonds which are required to be issued to, and held by the Government of Canada pursuant to an Exploration License in accordance with section 24 of the Canada Petroleum Resources Act.  These securities are a performance guarantee that the agreed exploration will be performed in the manner and time frame specified.  Interest is not paid on these deposits.

Shared-cost projects - This account was established to facilitate the retention and disbursement of moneys received from private organizations and other governments for cost-sharing scientific projects.

Market development incentive payments – Alberta: This account records money received from the Government of Alberta, to encourage the expansion of natural gas market in Alberta and provinces to the East, in accordance with an agreement between the Government of Canada and the Government of Alberta dated September 1, 1981 and pursuant to section 39 of the Energy Administration Act.  The original term of the agreement was from November 1, 1981 to January 31, 1987.  As a result of the Western Accord of March 25, 1985, payments from the Government of Alberta terminated as at April 30, 1986, however, payments are being made from the account for selected programs which encourage the use of natural gas for vehicles.

Shared-cost agreements – Research: This account was established to facilitate the retention and disbursement of moneys received from private industries and other governments for joint projects or shared-cost research agreements.

8.  Accounts receivable and advances

The following presents details of the Department’s accounts receivable and advances balances:

	2012	2011 Restated (note 20)
	(in thousands of dollars)
Receivables - Other government departments and agencies	$ 9,933	$ 11,344
Receivables - External parties	197,594	149,205
Employee advances	77	102
Subtotal	207,604	160,651
Allowance for doubtful accounts on receivables from external parties	(855)	(1,053)
Gross accounts receivable	206,749	159,598
Accounts receivable held on behalf of Government	(203,487)	(157,579)
Net accounts receivable	$ 3,262	$ 2,019

9.  Loan receivable

The following table presents details of the Department’s loan balance:

	2012	2011
	(in thousands of dollars)
Loan to Nordion International Inc.	$ 54,000	$ 58,000
Unamortized discounts	(13,333)	(16,667)
Gross Loan balance - Nordion	40,667	41,333
Loans receivable held on behalf of government	(40,667)	(41,333)
Loan balance - Nordion	-	-

Nordion International Inc. (loan)

Interest Free Loan Agreement; to be repaid over 30 semi-annual payments commencing October 1, 2000; fully secured by a financial instrument in Canada’s name which guarantees that the loan will be repaid.  Balance remaining as of March 31, 2012 is $54,000,000.  Due to the concessionary terms of this loan, the estimated present value is $40,667,000 as at March 31, 2012.

10.  Prepayments

The following presents details of the Department’s prepayments:

	2012	2011
	(in thousands of dollars)
Prepaid expenses	$ 5,269	$ 12,707
Prepaid transfer payments	85,092	101,429
Total	$ 90,361	$ 114,136

11. Inventory

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

	2012	2011
	(in thousands of dollars)
Inventories held for consumption	$ 1,793	$ 1,875
Inventories for re-sale	25	39
Total	$ 1,818	$ 1,914

The cost of consumed inventory recognized as an expense in the Statement of Operations and Departmental Net Financial Position is $175,605 in 2011-12 ($6,038,999 in 2010-11).

12. Tangible capital assets

The following table reports the tangible capital assets owned by Natural Resources Canada in fiscal year 2010-2011 and 2011-2012. The assets are classified as land, buildings, machinery and equipment, vehicles, leased tangible capital asset, and assets under construction.

(in thousands of dollars)

Capital asset class	Cost					Accumulated amortization					2012	2011
	Opening balance	Acqui- sitions	Adjust- ments	Disposals, write-offs and other	Closing balance	Opening balance	Amortiz -ation	Adjust ments	Disposals, write-offs and other	Closing balance
											Net book value	Net book value
Land	7,923	3,204	-	-	11,127	-	-	-	-	-	11,127	7,923
Buildings	193,915	1,528	(718)	336	194,389	132,982	3,611	(19)	3	136,571	57,818	60,933
Machinery and equipment	260,526	9,050	(33,437)	881	235,258	209,867	10,062	(29,783)	1,523	188,623	46,635	50,659
Vehicles	11,345	552	(80)	746	11,071	6,957	1,060	(46)	633	7,338	3,733	4,388
Leasehold improvements	-	-	371	-	371	-	-	-	-	-	371	-
Leased tangible capital assets	90,953	-	-	-	90,953	1,400	3,638	-	-	5,038	85,915	89,553
Assets under construction	-	20,345	(4,552)	-	15,793	-				-	15,793	-
Total	564,662	34,679	(38,416)	1,963	558,962	351,206	18,371	(29,848)	2,159	337,570	221,392	213,456

View larger tangible capital assets table

Adjustments include assets under construction of $4,552,000 that were transferred to other categories upon completion of the assets.

Effective November 15, 2011, the Department transferred tangible capital assets with a net book value of $8,509,000 to Shared Service Canada ( refer to Note 18 for more information on the transfer).

During the year, the Department transferred tangible capital assets with Other Government Departments with a net effect of $59,000 on the departmental net financial position.

13. Departmental net financial position

A portion of the Department’s net financial position is used for a specific purpose.  Related revenues and expenses are included in the Statement of Operations and Departmental Net Financial Position. 

The Environmental Studies Research Fund account was established pursuant to subsection 76(1) of the Canada Petroleum Resources Act.  The purpose of the fund is to finance environmental and social studies pertaining to the manner in which, and the terms and conditions under which, exploration development and production activities on frontier land, authorized under this Act or any other Act of Parliament, should be conducted.  Legislation required that the revenues of these accounts to be earmarked and that related payments and expenses be charged against such revenues.  The transactions do not represent liabilities to third parties but are internally restricted for specified purposes. 

The below table reports the equity of Canada for Natural Resources Canada in fiscal year 2010-2011 and fiscal year 2011-2012, which is the total of restricted and unrestricted equity of Canada. 

	2012	2011 Restated (note 20)
	(in thousands of dollars)
Environmental Studies Research Fund – Restricted Departmental net financial position
Balance, beginning of year – Restricted	$ 3,381	$ 3,979
Revenues	92	177
Expenses	(669)	(775)
Balance, end of year – Restricted	2,804	3,381
Unrestricted Departmental net financial position	(1,121,985)	(1,012,473)
Departmental net financial position – End of year	$ (1,119,181)	$ (1,009,092)

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 in order to carry out its transfer payment programs or when the services/goods are received.  Significant contractual obligations that can be reasonably estimated are summarized as follows:

The below table provides the estimated total amount of the contractual obligations for upcoming years for Natural Resources of Canada.

(in thousands of dollars)	2013	2014	2015	2016	2017 and thereafter	TOTAL
Transfer payments	$323,280	298,401	257,274	165,210	453,687	$1,497,852

Contractual obligations totaling $721,654 were transferred to Shared Services Canada and are not included in the above table.  

15. Contingent liabilities

Contingent liabilities arise in the normal course of operations and their ultimate disposition is unknown.  They are grouped into two categories as follows:

(a) Contaminated sites

Liabilities are accrued to record the estimated costs related to the management and remediation of contaminated sites where the department is obligated or likely to be obligated to incur such costs.  The Department has identified approximately 6 sites (6 sites in 2011) where such action is possible and for which a liability of $1,085,010,000 ($1,106,361,000 in 2011) has been recorded. The Department has identified additional costs related to the contaminated sites of $3,077,000 ($27,673,000 in 2010-2011) that are not accrued, as these are not considered likely to be incurred at this time. The Department’s ongoing efforts to assess contaminated sites may result in additional environmental liabilities related to newly identified sites, or changes in the assessments or intended use of existing sites.  These liabilities will be accrued by the department in the year in which they become likely and are reasonably estimable. 

(b) Claims and litigation

Claims have been made against the Department in the normal course of operations.  These claims include items with pleading amounts and others for which no amount is specified. While the total amount claimed in these actions is significant, their outcomes are not determinable. The Department has recorded an allowance for claims and litigations where it is likely that there will be a future payment and a reasonable estimate of the loss can be made. Based on the Department’s assessment, legal proceedings for claims estimated at $17,425,000 ($17,350,000 in 2011) were pending at March 31, 2012.  Some of these potential liabilities may become actual liabilities when one or more future events occur or fail to occur.  To the extent that the future event is likely to occur or fail to occur, and a reasonable estimate of the loss can be made, an estimated liability is accrued and an expense recorded in the financial statements. 

16. Contingent recoveries

NRCan issues conditionally repayable contributions that become repayable if conditions specified in the contribution agreement come into effect. 

Lloydminster Bi-Provincial Upgrader - Canada sold its interests in the Lloydminster Bi-Provincial Upgrader to Husky Oil in 1995.  The terms of sale included an upside interest provision whereby Canada would be eligible to receive additional payments for a period of up to 20 years if the differential between light and heavy crude oil reached a certain threshold.  As a result of the increase in oil prices since the date of sale, the upside interest provision was triggered and eligible payments to Canada have increased. Canada's eligibility for upside interest payments ends in 2015.

Vancouver Island Pipeline Contribution - Canada provided $50 million in support of the construction of Vancouver Island Pipeline in the early 1990's.  This support was provided in the form of a repayable contribution.  Repayment was contingent upon the proponent meeting certain financial conditions.  Full repayment is expected to be received by 2014.

The Ethanol Expansion Program (EEP) was launched in August 2003 with a budget of $100 million, as part of the Budget 2003 Climate Change measures. The purpose of the EEP was to contribute to the expansion of ethanol production and use in Canada and the reduction of transportation greenhouse gas emissions.  Incentives were provided to enable the construction of new ethanol facilities or the expansion of existing ones. The support was provided in the form of repayable contributions. Repayments are to be made over a seven year period or until Canada has received repayments totalling an amount equal to the contribution, whichever comes first. Repayment is contingent upon the proponents meeting certain financial conditions. The final repayment reports will be received in 2017.

Other contingent recoveries relate to agreements entered into with proponents for early stage research and development (R&D) activities.  Recoveries are contingent upon the successful commercialization of products generated by the R&D activities.

The Department has estimated the contingent recoverable amounts as $60,950,000 ($98,713,000 in 2011).  Contingent recoveries are not recorded in the financial statements. 

17. 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 common services which were obtained without charge from other Government departments as presented in part (a).

(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 received without charge have been recorded in the Department’s Statement of Operations and Departmental Net Financial Position as follows:

The table below reports the total of services provided without charge by other government departments and agencies to Natural Resources Canada in fiscal year 2010-2011 and 2011-2012.

	2012	2011
	(in thousands of dollars)
Employer's contribution to the health and dental insurance plans	$ 39,723	$ 33,594
Accommodation	17,483	17,469
Legal services	1,898	1,672
Workers' compensation	257	259
Total	$ 59,361	$ 52,994

The Government has centralized some of its administrative activities for efficiency and 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, which include 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 as an expense in the Department’s Statement of Operations and Departmental Net Financial Position.

(b)    Other transactions with related parties:

The below table provides the total expenses and revenues from other government departments and agencies in fiscal year 2010-2011 and 2011-2012 for Natural Resources Canada.

	2012	2011
	(in thousands of dollars)
Accounts receivable - Other government departments and agencies	$ 1,812	$ 2,015
Accounts payable - Other government departments and agencies	11,645	22,622
Expenses - Other government departments and agencies	129,556	180,774
Revenues - Other government departments and agencies	2,566	3,426

Expenses and revenues disclosed in (b) exclude common services provided without charge, which is already disclosed in (a). The expenses and revenues in 2011 have been modified to correct the errors in the fiscal year 2011 financial statements.

18. Transfers from/to other government departments

Effective November 15, 2011, pursuant to an Order-in-Council (P.C.2011-1297), the Department transferred to Shared Services Canada the responsibility for providing email, data centre and network services including the stewardship responsibility for the assets and liabilities related to these services.  Accordingly, the Department transferred the following assets and liabilities related to email, data centre and network services to Shared Services Canada on November 15, 2011 and also transferred tangible capital assets to other Departments:

The below table provides the assets and liabilities transferred to other government departments and agencies in fiscal year 2011-2012 for Natural Resources Canada.

(in thousands of dollars)

Assets:
Accounts receivable Tangible capital assets transfer to other government departments (net book value)  (Note 12)	$ 296
Shared Services Canada	8,509
Other Government Departments	59
Tangible capital assets transferred	8,568
Total assets transferred	8,864
Liabilities:
Accounts payable and accrued liabilities	1,739
Vacation pay and compensatory leave	392
Employee future benefits (note 6)	1,477
Total liabilities transferred	3,608
Adjustment to the departmental net financial position	$ 5,256

In addition, the 2011 comparative figures have been reclassified on the Statement of Operations and Departmental Net Financial Position to present the expenses of the transferred operations related to Shared Services Canada.

During the transition period, the Department continued to administer the transferred activities on behalf of Shared Services Canada.  The administered expenses amounted $13,940,725 for the period from November 15, 2011 to March 31, 2012.  These expenses are not recorded in these financial statements.

19. Segmented information

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

The below table reports the expenses and revenues by major programs in fiscal year 2010-2011 and 2011-2012 for Natural Resources Canada.

(in thousands of dollars)
	Economic Opportunities for natural resources	Clean energy	Internal Services	Ecosystem risk management	Natural resources and landmass knowledge and systems	Adapting to a changing climate and hazard risk manag- ement	Natural resource- based commu- nities	Geomatics Canada Revolving Fund	2012 Total	2011 Total Restated (Note 20)
Transfer payments
Industry	5,948	979,082	(1,104)	1,334	86	608	-	-	985,954	803,021
International	326	683	(243)	2,114	-	3	-	-	2,883	2,154
Non-profit organization	63,686	24,029	(1,595)	621	131	9,870	-	-	96,742	122,606
Other levels of government	1,283,806	2,520	(74)	-	-	2,607	-	-	1,288,859	2,103,822
Individuals	(6)	196,773	(12)	-	-		-	-	196,755	352,655
Total transfer payments	1,353,760	1,203,087	(3,028)	4,069	217	13,088	-	-	2,571,193	3,384,258
Operating expenses
Salaries and employee benefits	92,466	94,540	202,617	42,882	52,625	38,378	1	940	524,449	487,490
Environmental expenses	-	-	(21,351)	-	-	-	-	-	(21,351)	756,413
Information	547	1,186	8,475	222	114	193	-	17	10,754	6,256
Professional and special services	24,723	27,271	41,648	156,988	19,469	4,049	-	1,623	275,771	305,185
Rentals	3,586	5,426	5,600	4,738	10,724	1,476	1	113	31,664	45,936
Transportation	6,494	4,057	563	1,907	3,056	2,568	21	54	18,720	25,465
Utilities, material and supplies	3,834	4,262	4,480	1,379	2,639	2,293	-	44	18,931	22,983
Purchased repairs and upkeep	1,250	1,171	2,424	363	779	296	-	18	6,301	7,784
Acquisitions	4,036	4,863	1,582	630	11,114	874	2	23	23,124	7,613
Amortization	-	-	18,370	-	-	-	-	-	18,370	24,250
Other	(5,096)	8,864	(6,918)	6,907	(20,336)	(1,386)	-	403	(17,562)	(3,934)
Expenses incurred on behalf of   Government	-	-	-	-	-	-	-	-	-	-
Total operating expenses	131,840	151,640	257,490	216,016	80,184	48,741	25	3,235	889,171	1,685,442
Total Expenses	1,485,600	1,354,727	254,462	220,085	80,401	61,829	25	3,235	3,460,364	5,069,700
Revenues
Rights and privileges	1,148,950	-	-	-	2	1,913	-	-	1,150,865	1,187,544
Miscellaneous revenue	588,339	138	1,004	(1)	33	7	-	-	589,520	459,813
Revenue from services of a non- regulatory nature	1,716	9,393	(4)	4,153	38	3,070	-	2,148	20,514	20,759
Proceeds from sales of goods and information products	1,408	-	(40)	18	114	752	-	521	2,773	2,751
Revenue from services of a regulatory nature	-	-	-	-	-	1,370	-	-	1,370	1,242
Revenue earned on behalf of Government	(1,737,347)	(692)	(898)	(972)	(54)	66	-	(81)	(1,739,978)	(1,636,581)
Total Revenues	3,066	8,839	62	3,198	133	7,178	-	2,588	25,064	35,528
Net cost from continuing operations	(1,482,534)	(1,345,888)	(254,400)	(216,887)	(80,268)	(54,651)	(25)	(647)	(3,435,300)	(5,034,172)

View larger segmented information table

20. Accounting changes

During 2011, amendments were made to Treasury Board Accounting Standard 1.2 – Departmental and Agency Financial Statements to improve financial reporting by government departments and agencies.  The amendments are effective for financial reporting of fiscal years ending March 31, 2012, and later.  The significant changes to the Department’s financial statements are described below.  These changes have been applied retroactively, and comparative information for 2010-11 has been restated.

Net debt (calculated as liabilities less financial assets) is now presented in the Statement of Financial Position.  Accompanying this change, the Department now presents a Statement of Change in Net Debt and no longer presents a Statement of Equity.

Revenue and related accounts receivable are now presented net of non-respendable amounts in Statement of Operations and Departmental Net Financial Position and Statement of Financial Position.  The effect of this change was to increase the net cost of operations before government funding and transfers by $1,739,978,000 for 2012 ($1,636,581,000 for 2011), and decrease total financial assets by $244,154,000 for 2012 ($198,912,000 for 2011). 

Government funding and transfers, as well as the credit related to services provided without charge by other government Departments, are now recognized in the Statement of Operations and Departmental Net Financial Position below “Net cost of operations before government funding and transfers.”  In previous years, the Department recognized these transactions directly in the Statement of Equity of Canada.  The effect of this change was to decrease the net cost of operations after government funding and transfers by $3,340,042,000 for 2012 ($4,440,423,000 for 2011).

The below table restates assets, revenue, government funding and transfer of Canada on the departmental statements of financial positions for fiscal year 2010-2011 due to the change from the Statement of Equity to Statement of Change in Net Debt.

	2011 As previously stated	Effect of change	2011 Restated
	(in thousands of dollars)
Statement of Financial Position
Assets held on behalf of government	$ -	$ (198,912)	$ (198,912)
Departmental financial position	(810,180)	(198,912)	(1,009,092)
Statement of Operations and Departmental Net Financial Position
Revenues	1,672,109	(1,636,581)	35,528
Governement funding and transfers
Net Cash provided by Government	-	4,204,104	4,204,104
Changes in due from Consolidated Revenue Fund	-	183,318	183,318
Services provided without charge by other government departments	-	52,994	52,994
Transfer of assets and liabilities to other government departments	-	7	7

21. Comparative information

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

Annex to the Statement of Management Responsibility  Including Internal Control over Financial Reporting of Natural Resources Canada for fiscal year 2011-2012 (unaudited)

Summary of the assessment of effectiveness of the system of internal control over financial reporting and the action plan

Note to the reader

With the Treasury Board Policy on Internal Control, effective April 1, 2009, departments are required to demonstrate the measures they are taking to maintain an effective system of Internal Control over Financial Reporting (ICFR).

As part of this policy, departments are expected to conduct annual assessments of their system of ICFR, establish action plans to address any necessary adjustments, and to attach to their Statements of Management Responsibility a summary of their assessment results and action plan.

Effective systems of ICFR aim to achieve reliable financial statements and to provide assurances that:

• Transactions are appropriately authorized;
• Financial records are properly maintained;
• Assets are safeguarded from risks such as waste, abuse, loss, fraud and mismanagement; and
• Applicable laws, regulations and policies are followed.

It is important to note that the system of ICFR is not designed to eliminate all risks, rather to mitigate risk to a reasonable level with controls that are balanced with and proportionate to the risks they aim to mitigate.

The system of ICFR is designed to mitigate risks to a reasonable level based on an ongoing process to identify key risks, to assess the effectiveness of associated key controls and adjust as required, as well as to monitor the system 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.      Introduction

This document is attached to the Natural Resources Canada (NRCan) Statement of Management Responsibility Including Internal Control over Financial Reporting for the fiscal-year 2011-2012. This document provides summary information on the measures taken by NRCan to maintain an effective system of internal control over financial reporting (ICFR). In particular, it provides summary information on the assessments conducted by NRCan during the 2011-2012 fiscal year, the third year for which such information has been published by the Department. This document includes progress, results and related action plans along with some financial highlights pertinent to understanding the control environment unique to the Department.

1.1  Authority, Mandate and Program Activities

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

1.2  Financial Highlights

The financial statements (unaudited) of NRCan for fiscal-year 2011-2012 can be found at http://www.nrcan.gc.ca/performance-reports/2011-2012/financial-statements. Information can also be found in the Public Accounts of Canada.

• Total expenses are $3.46 B.
• Transfer payments comprise the majority (74%) of the expenses for a value of $2.57 B.
• Salary and employee benefits expenses are $524 M.
• Gross revenues earned are $1.77 B, of which $1.74 B is earned on behalf of Government (not re-spendable by the Department).
• Gross financial assets are $1.17 B, of which $244 M are financial assets held on behalf of Government.
• Total non-financial assets are $313 M.
• NRCan has total net liabilities of $2.36 B which include an accrual of $1.09 B to record the estimated costs related to the management and remediation of contaminated sites.
• NRCan has one revolving fund whose financial statements are audited annually.  The financial results are consolidated into the departmental financial statements.
• NRCan has used the SAP financial system, supported by Agriculture and Agri-food Canada (AAFC), starting in fiscal year 2011-2012. This system interfaces with other departmental systems such as the Application for Modules and Interfaces (AMI) (formerly known as the GFS User Friendly Interface (GUFI)), and the ecoENERGY Retrofit – Homes grant program database.

1.3     Service arrangements relevant to the financial statements

NRCan relies on other organizations and their internal controls for the processing of transactions that are recorded in its financial statements:

• The department of Agriculture and Agri-Food Canada provides Integrated Financial and Material System services to NRCan (SAP). 
• The department of Public Works and Government Services Canada centrally administers the payment of salaries.
• The Treasury Board Secretariat provides the Department with information to calculate various accruals and allowances, such as the accrued severance liability.
• Since November 15, 2011, Shared Services Canada has been providing the Department with email, data centre and network services.
• The Department of Justice provides legal services to NRCan.

1.4  Material changes in fiscal-year 2011-2012

Significant changes that have occurred within NRCan during the fiscal year 2011-2012 are as follows:

• NRCan implemented the SAP financial system, in partnership with Agriculture and Agri-Food Canada (AAFC), replacing the previous financial system Government Financial System (GFS).  NRCan’s SAP instance runs on AAFC’s informatics servers; AAFC provides SAP support services to NRCan in the form of system acquisition, development and maintenance.
• The Honourable Joe Oliver was appointed Minister of Natural Resources on May 18, 2011.
• Christian Asselin was appointed Chief Audit Executive on March 5, 2012.
• The ecoENERGY Retrofit – Homes program has not been renewed past 2011-2012.
• On November 15, 2011, the responsibility for providing email, data centre and network services was transferred to Shared Services Canada (SSC) from NRCan, as was the case for a number of organizations across the Government of Canada.

2. NRCan's control environment relevant to ICFR

NRCan 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 are well equipped to exercise these responsibilities effectively. NRCan’s focus is to ensure risks are managed well through a responsive and risk-based control environment that enables continuous improvement and innovation, guided by the Values and Ethics Code for the Public Sector and an NRCan specific Values and Ethics Code.

2.1 Key positions, roles and responsibilities

Following are NRCan’s key positions and committees with responsibilities for maintaining and reviewing the effectiveness of its system of ICFR:

Deputy Minister (DM) – NRCan's DM, as accounting officer, assumes overall responsibility and leadership for the measures taken to maintain an effective system of internal control.  In this role, the DM chairs the Executive Committee.

Associate Deputy Minister (Associate DM) – The Associate DM supports the Deputy Minister with respect to the stewardship of NRCan, including financial management.  In this role, the Associated Deputy Minister chairs the Business Transformation Committee.

Chief Financial Officer (CFO) – NRCan's CFO reports directly to the DM and provides leadership for the design and maintenance of an effective and integrated system of ICFR, including its annual assessment.  The CFO provides leadership to the financial management of NRCan and is a member of the Business Transformation Committee and the Transfer Payment Review Committee.

Assistant Deputy Ministers (ADM's) – ADM’s are NRCan’s senior departmental managers in charge of program delivery. ADM’s are responsible to establish and maintain a system of internal control for their areas of responsibility and within the departmental system of internal control, designed to provide reasonable assurance that financial information is reliable, assets are safeguarded, transactions are in accordance with the Financial Administration Act (FAA) and executed in accordance with prescribed regulations and policy instruments, within parliamentary authorities and are properly recorded to maintain accountability of Government funds.

Chief Audit Executive (CAE) – NRCan’s CAE reports directly to the DM and provides independent assurance on the maintenance of effective systems of ICFR through both periodic and continuous internal audits, as identified in the Risk-Based Audit Plan; this plan includes audit works that will provide assurances and that will support continuous improvement.   

Departmental Audit Committee (DAC) – The DAC is an advisory committee to the DM; it is comprised of three external members. It provides objective advice and recommendations to the DM in the area of risk management, control and governance frameworks and processes.

Executive Committee (EC) – The EC is the most senior decision-making committee of the Department, ensuring policy, science, program and corporate integration. The EC also approves corporate plans and strategies and oversees resource allocation and corporate risk management.

Business Transformation Committee (BTC) – The BTC leads and manages the Department’s programs and business processes with a view to enhance the utilization of human, financial, information management and technology, and real property resources; and to improve the capacity and responsiveness of NRCan to meet its strategic outcomes.

Transfer Payment Review Committee (TPRC) – The TPRC provides strategic advice and oversight in the management of grants and contributions (G’s & C’s).

2.2 Key measures taken by NRCan

NRCan’s control environment includes a series of measures to help the Department manage risks through the establishment of an appropriate control environment and risk management processes.

Entity level Controls are the overarching controls of the organization:

• Control environment (e.g. values and ethics code, hiring standards, staff training, Departmental Audit Committee);
• Risk Management;
• Information systems and Communications; and
• Monitoring (e.g. assessment of the systems of Internal Control over Financial Reporting, quality assurance of account verification, financial policy compliance reviews).

The business processes identified as key processes in relation to the system of Internal Control over Financial Reporting (ICFR) are the following:

• Grants and Contributions (standard);
• Repayable Contributions;
• ecoENERGY Retrofit – Homes grant program;
• Capital Assets;
• Environmental Liabilities;
• Financial Close and Reporting;
• Payroll and Benefits;
• Revenues and Accounts Receivable;
• Offshore Royalty Revenues and corresponding statutory transfers; 
• Loans;
• Operating Expenditures.

The General Computer Controls (GCC’s) (also known as Information Technology (IT) General Controls) are the controls over the infrastructure and systems that support the following key applications:

• Application for Modules and Interfaces (AMI) (formerly known as GUFI): used for the    management of Grants and Contributions (standard) and Repayable Contributions. 
• ecoENERGY Retrofit – Homes grant program applications and database (used for analyzing and recording energy evaluation electronic files, and to perform calculations to determine the grant amount awarded).
• SAP logical security: SAP access procedures under the responsibility of NRCan.

3. Assessment of NRCan's system of ICFR

3.1 Assessment approach

In support of the Treasury Board Policy on Internal Control, an effective system of ICFR has the objectives 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.

Over time, this includes assessment of design and operating effectiveness of the system of ICFR leading to ensuring the ongoing monitoring and continuous improvement of 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 (i.e. controls are balanced with and proportionate to 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 departmental financial statements accounts, by location as applicable.

Operating effectiveness means that the application of key controls has been tested over a defined period and that any required remediation is addressed. 

Ongoing monitoring is a systematic, integrated approach in support of continuous improvement of ICFR, which includes periodic risk-based assessments and timely remediation.

Testing covers all departmental control levels: entity, General Computer Controls and business processes.

3.2 Scope of NRCan’s assessment during fiscal year 2011-2012

During the Fiscal Year 2011-2012, the Department has undertaken assessments as follows: 

Business Processes

Design effectiveness

• Operating Expenditures (assessment started in 2010-2011)

A large portion of the control activities for the Operating Expenditures business process are only carried out in Headquarters, or at the supplier Invoice Payment Centre in Sherbrooke, Quebec, which reports directly to the Shared Services Office in Headquarters. The design effectiveness work took into account both locations. Where control activities occur in other regional offices, they are performed on the basis of departmental wide financial policies and procedures.

Operating Effectiveness

• ecoENERGY Retrofit – Homes grant program (assessment started in 2010-2011)
• Offshore Royalty Revenues and corresponding statutory transfers
• Loans
• Payroll and Benefits

The first three processes are centralized at NRCan’s Headquarters. 

For Payroll and Benefits, samples used for operating effectiveness testing were selected from the full departmental transactions database, including transactions processed in regional offices.

Some year-end control activities under the new SAP environment were out-of-scope as they did not occur in the time period covered by the 2011-2012 assessments.  

General Computer Controls (GCC’s)

Design effectiveness

• SAP logical security: SAP access procedures under the responsibility of NRCan.

Design and Operating effectiveness

• GCC’s over the infrastructure and systems that support AMI and the ecoENERGY Retrofit - Homes grant program applications and database (assessment started in 2010-2011). 
  The following GCC areas were assessed:
  • Information systems operations
  • Information security
  • Business continuity planning
  • Application systems implementation and maintenance (change management)
  • Database implementation and support (change management)
  • Network support (change management)
  • Systems software support (change management)

Ongoing monitoring

• Updates to all business processes internal control documentation to replace GFS related controls with SAP related controls, except the Financial Close and Reporting business process, which will be updated in 2012-2013. 
• Design and operating effectiveness testing of the SAP automated controls, except those of the Financial Close and Reporting business process.
• Survey of remaining legacy systems under the SAP environment.
• Updates to the multi-year plan for on-going monitoring.

4.  NRCan’s assessment results during fiscal year 2011-2012

The following summarizes key results from the assessments completed by NRCan in 2011-2012.

4.1 Design effectiveness of key controls

The design for key controls was appropriate such that most controls were in place and aligned with the risks. The following key remediation requirements were identified in 2011-12:

Business Processes

Operating Expenditures

• Complete post-payment quality assurance and reporting in a timelier manner.

General Computer Controls

SAP access control processes which are under NRCan’s responsibility

• Document additional procedures to support all SAP logical security duties to be carried out by NRCan and monitor compliance with procedures.

GCC’s over the infrastructure and systems that support AMI and the ecoENERGY

Retrofit - Homes grant program applications and database

• See section 4.2 Operating effectiveness of key controls

4.2 Operating effectiveness of key controls

Results indicate that most controls were found to be in place and operating effectively and that NRCan has effectively remediated its controls in many of the areas previously identified for improvement. The following key remediation requirements were identified in 2011-12:

Business Processes

ecoENERGY Retrofit – Homes grant program

• No remediation required (opportunities for automating some controls were not pursued due to the fact that the program has not been renewed past 2011-2012).

Offshore Royalty Revenues and corresponding statutory transfers

• Retain evidence of the review of the details in wire transfer notifications.

Loans

• No remediation required.

Payroll and Benefits

• Develop a departmental wide approach for keeping evidence of the conduct of periodic budget variance analysis by responsibility centre managers.
• Ensure that evidence of verification of pay actions is always retained.
• Review user access in the Regional Pay System (RPS).

General Computer Controls (GCC’s)

GCC’s over the infrastructure and systems that support AMI and the ecoENERGY

Retrofit - Homes grant program applications and database

• Formalize and review some change management processes.
• Establish adequate segregation of duties.
• Disable generic user accounts.
• Retain evidence of the review of high risk activities.
• Retain proper evidence of user acceptance testing
• Formalize the procedures for testing the on-going readability of database backup tapes and retain evidence of the tests.
• Remove, on a timelier basis, system access to employees and contractors who have left the Department.

4.3 Ongoing Monitoring

With the exception of the Financial Close and Reporting business process, all business process internal control documentation was updated to reflect SAP related control activities (replacing GFS control activities).  As well, design and operating effectiveness testing was performed for the SAP automated control activities, including user access.   

The following key remediation requirements were identified in 2011-12: 

• Implement controls to ensure the completeness of data transferred between the Application for Modules and Interfaces (AMI) and SAP. 
• Review all SAP user access and restrict access to those users who require such access to perform their functions.
• Monitor the use of one-time vendor codes to ensure their use remains appropriate.   

5.    NRCan's action plan

5.1 Progress during fiscal year 2011-2012

Since initiating efforts on its ICFR program, NRCan has made significant progress in assessing and improving its controls. 

During the fiscal year 2011-2012, NRCan has conducted the following work, as planned and identified in the Summary of the assessment of the effectiveness of the system of internal control over financial reporting and the action plan of Natural Resources Canada for fiscal year 2010-2011:

Business Processes

Design effectiveness

• Completed the documentation and design effectiveness testing for the Operating Expenditures business process.

Operating Effectiveness

• Completed operating effectiveness testing for the following business processes:
  • ecoENERGY Retrofit – Homes grant program;
  • Offshore Royalty Revenues and corresponding statutory transfers;
  • Loans: and,
  • Payroll and Benefits.

General Computer Controls (GCC’s)

• Completed the documentation and design effectiveness testing of the SAP access control processes which are under NRCan’s responsibility.
• Completed the documentation, including revisions and updates, and design and operating effectiveness testing of the GCC’s over the infrastructure and systems that support AMI (formerly GUFI) and the ecoEnergy Retrofit – Homes grant applications and database.  

Ongoing Monitoring

• Completed the update to internal control documentation to reflect the key SAP related control activities for all business processes (except for the Financial Close and Reporting business process which will be updated in 2012-2013). 
• Completed the design effectiveness and operating effectiveness testing of the key SAP automated control activities, including user access, except for the Financial Close and Reporting business process.
• Completed a survey of remaining legacy systems under the SAP environment.
• Completed the addition of details to the multi-year plan for on-going monitoring.

Remediation actions

• Completed most remediation actions identified (e.g. departmental policy instrument on Repayable Contributions, strengthening of segregation of duties, retaining evidence of control activities).
• Remaining remediation actions required are planned or in progress.

5.2 Action plan for the next fiscal year and subsequent years

The Department will continue its work to implement outstanding remediation actions, as well as to maintain an effective system of ICFR through the following action plan:

During the fiscal year 2012-2013, NRCan plans to:

• Determine, based on their use under the new SAP environment, which legacy systems should be subject to on-going monitoring of internal controls.
• Update internal control documentation in the context of the new financial system (SAP) for the Financial Close and Reporting process. 
• Conduct operating effectiveness testing for the following processes:
  • Operating Expenditures;
  • Capital Assets;
  • Revenues and Accounts Receivable;
  • SAP access control processes which are under NRCan’s responsibility.
• Address any additional remediation actions identified.
• Update the multi-year plan for on-going monitoring, as may be required.

During the fiscal year 2013-2014, NRCan plans to:

• Conduct monitoring activities as per the multi-year plan for on-going monitoring. The following  processes are currently on the plan for 2013-2014, however timing could change based on risks identified at that time:
  • Grants and Contribution (Standard);
  • Repayable Contributions;
  • Financial Close and Reporting; and
  • Entity level controls.
• Address any additional remediation actions identified.
• Update the multi-year plan for on-going monitoring, as may be required.

During the fiscal year 2014-2015, NRCan plans to:

• Conduct monitoring activities as per the multi-year plan for on-going monitoring. The following processes are currently on the plan for 2014-2015, however timing could change based on risks identified at that time:
  • Operating Expenditures;
  • Payroll and Benefits;
  • General Computer Controls;
  • Environmental Liabilities.
• Address any additional remediation actions identified.
• Update the multi-year monitoring plan, as may be required.