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.

Natural Resources Canada

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

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

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

Natural Resources Canada

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

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 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 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

b) Authorities provided and used

4. Accounts payable and accrued liabilities

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:

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.

7. Other Liabilities

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

9.  Loan receivable

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

11. Inventory

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

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. 

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:

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 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:

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:

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:

View larger segmented information table