Quarterly Financial Report—Quarter ended June 30, 2013

1. Introduction
2. Highlights of fiscal quarter and fiscal year-to-date (YTD) results
3. Risks and uncertainties
4. Budget 2012 Implementation

• Statement of Authorities (unaudited)
• Table 1: Departmental budgetary expenditures by Standard Object (unaudited)

Statement Outlining Results, Risks and Significant Changes in Operations, Personnel and Programs

1. Introduction

This Quarterly Financial Report (QFR) has been prepared by management as required by section 65.1 of the Financial Administration Act, in the form and manner prescribed by the Treasury Board. This QFR should be read in conjunction with the Main Estimates and Supplementary Estimates for fiscal year 2013–14 as well as with the measures found in Budget 2012.

It excludes new funding from Budget 2013, which will only be reflected in subsequent 2013–14 QFRs.

A summary description of Industry Canada's program activities can be found in Part II of the Estimates.

Basis of presentation

The authority of Parliament is required before moneys can be spent by the Government. Approvals are given in the form of annually approved limits through appropriation acts or through legislation in the form of statutory spending authority for specific purposes. This QFR has been prepared using a special purpose financial reporting framework designed to meet financial information needs with respect to the use of spending authorities.

As part of the departmental performance reporting process, Industry Canada prepares its annual departmental financial statements on a full accrual basis in accordance with Treasury Board accounting policies, which are based on Canadian generally accepted accounting principles for the public sector. However, the spending authorities voted by Parliament remain on an expenditure basis. This QFR has therefore been prepared by management using an expenditure basis of accounting.

The accompanying Statement of Authorities includes Industry Canada's spending authorities granted by Parliament and those used by Industry Canada, consistent with the Main Estimates and Supplementary Estimates for the 2013–14 fiscal year.

As part of the Parliamentary business of supply, the Main Estimates must be tabled in Parliament on or before March 1 preceding the new fiscal year. Budget 2012 was tabled in Parliament on March 29 after the tabling of the Main Estimates on February 28, 2012. As a result, the measures announced in Budget 2012 could not be reflected in the 2012–13 Main Estimates.

In fiscal year 2012–13, frozen allotments were established by Treasury Board authority in departmental votes to prohibit the spending of funds already identified as savings measures in Budget 2012. In 2013–14, the changes to departmental authorities were reflected in the 2013–14 Main Estimates tabled in Parliament.

This QFR has not been subject to an external audit. However, it has been reviewed by the Departmental Audit Committee.

2. Highlights of fiscal quarter and fiscal year-to-date (YTD) results

The variances in authorities available for use and actual expenditures in 2013–14 largely relate to several significant changes over the past year: the completion of the Knowledge Infrastructure Program (KIP) in March of 2013; a one-time payment for a legal settlement in 2012–13; an increase in severance payouts between 2012–13 and 2013–14; the postponement of funding requests from quarter one to quarter three in the 2013–14 supplementary estimates; and overall decreases in funding profiles of grants and contributions programs in both years attributable to varying payment requirements.

2.1 Authorities available for use and planned expenditures

Graph 1: Comparison of Total Net Budgetary Authorities Available for Use as of June 30, 2013 and June 30, 2012

Industry Canada's total authorities available for use of $1.2 billion in 2013–14 represent a $280.7 million decrease, compared with the same quarter ended in 2012–13, as shown in the Statement of Authorities and in Table 1: Departmental Budgetary Expenditures by Standard Object. This decrease is primarily related to the following:

• Vote 10 Grants and Contributions — $122.9 million decrease
• Statutory Grants and Contributions — $97.0 million decrease
• Vote 1 Operating Expenditures — $78.8 million decrease
• Vote 5 Capital Expenditures — $11.7 million increase
• CIPO Revolving Fund — $6.7 million increase

Variances for each appropriation are explained in greater detail throughout this document.

2.1.1 Vote 10 — Grants and Contributions ($122.9 million decrease) and Statutory Grants and Contributions ($97.0 million decrease)

Graph 2: Comparison of Net Budgetary Authorities Available for Use for Vote 10 and Statutory Grants and Contributions as of June 30, 2013 and June 30, 2012

The authority for Vote 10 — Grants and Contributions decreased by a total of $122.9 million, compared to the same quarter last fiscal year mainly as result of the following factors:

• Fluctuating funding profiles of programs to match expected requirements of recipients mainly for the Canada Foundation for Innovation ($82.0 million decrease), the Automotive Innovation Fund ($67.9 million decrease), the Structured Financing Facility ($10.3 million decrease), Bombardier C-Series ($10.5 million decrease), and Broadband Canada ($4.7 million increase);
• New funding approved through Budget 2012, such as Canada's Advanced Research and Innovation Network (CANARIE) ($20.0 million), the Canadian Institute for Advanced Research (CIFAR) ($5.0 million), Genome Canada ($21.2 million) and the Industrial Research and Development Internship Program (Mitacs) ($7.0 million). This funding had not yet been accessed in Q1 of the 2012–13 fiscal year;
• Postponement of a 2013–14 funding request for the Community Access Program (CAP) Youth Internships ($9.5 million) to Supplementary Estimates B in the fall.

Statutory authorities for grants and contributions decreased by $97.0 million, primarily as a result of the completion of KIP ($52.5 million). In addition, when compared to the first quarter-end of 2012–13, funding for Genome Canada has decreased by $17.5 million and projected liabilities under the Canada Small Business Financing Program have decreased by $17.1 million. The $10 million funding for the Canadian Youth Business Foundation in 2012–13 has expired; its renewal will only be reflected in a subsequent report.

2.1.2 Vote 1 — Net Operating Expenditures ($78.8 million decrease)

Graph 3: Comparison of Net Budgetary Authorities Available for Use for Vote 1 — Net Operating Expenditures as of June 30, 2013 and June 30, 2012

Authorities available for use in Vote 1—Net Operating Expenditures decreased by a total of $78.8 million, compared with the same quarter-end of the previous year. The most significant elements contributing to this change include the postponement of access to royalties and receipts from repayable contributions ($33.3 million) from the first to the third quarter of 2013–14 and the one-time funding received in 2012–13 ($29.0 million) for the payment of a legal settlement agreement. In addition, the transfer of operating funds ($11.7 million) to the capital expenditures vote to establish capital project funding, as explained below, occurred earlier in 2013–14 than they had in 2012–13.

2.1.3 Vote 5 — Capital Expenditures ($11.7 million increase)

Authorities available for use in Vote 5—Capital Expenditures increased by a total of $11.7 million compared with the first quarter of the previous year. This increase is mainly related to the National Accommodation Strategy initiative ($3.1 million) and the Spectrum Application Modernization (SAM) project ($8.7 million).

2.1.4 CIPO Revolving Fund ($6.7 million increase)

This is largely due to an increase in capital expenditure funding as part of a strategy to upgrade the organization's IT infrastructure.

2.1.5 Table 1: Departmental Budgetary Expenditures by Standard Object

The Departmental Budgetary Expenditures by Standard Object, as per Table 1 at the end of this report, show initial expenditure plans. These plans are subject to change during the fiscal year, and in particular when the department's access to royalties and receipts from repayable contributions is included later in the fall.

The details provided in the previous paragraphs also explain the major variances in standard objects between the two years. For example, the variance in "transfer payments" is related to the changes in grants and contributions programs. The variance in "other subsidies and payments" pertains to the previous year's one-time payment for the legal settlement and the current postponement of access to royalties and receipts from repayable contributions. A large portion of "acquisition of machinery and equipment" relates to Vote 5, explained in Section 2.1.3.

2.2 Authorities used and actual expenditures

Graph 4: Comparison of expenditures as of June 30, 2013 and June 30, 2012

Expenditures in the first quarter of 2013–14 decreased by $236.9 million, compared with the same quarter last year, primarily in Grants and Contributions (Vote 10 and Statutory).

2.2.1 Vote 10—Grants and Contributions and Statutory Grants and Contributions ($213.8 million decrease)

Graph 5: Comparison of expenditures for Vote 10 and Statutory Grants and Contributions as of June 30, 2013 and June 30, 2012

In the first quarter of 2013–14, there was a $213.8 million net decrease in Grants and Contributions expenditures, compared with the same quarter in 2012–13. Details of the significant variances that occurred in two program activities are as follows:

• Science, Technology and Innovation Capacity
  The variance between the two fiscal years for the following programs can be attributable to the timing of payments:
  • $23.0 million increase for CANARIE: The payment was made in the first quarter of 2013–14, but in the third quarter of 2012–13;
  • $21.2 million increase for Genome Canada: The payment was made in the first quarter of 2013–14, but in the fourth quarter of 2012–13;
  • $249.0 million decrease for the Canada Foundation for Innovation: The payment for fiscal year 2012–13 was made at the end of the first quarter while no claims were yet received for payment in the first quarter of 2013–14.
• Industrial Research and Development Financing
  
  • $15.6 million increase in the Bombardier CSeries program, as a result of the timing and number of claims submitted compared with the first quarter of 2012–13.

In 2013–14, Statutory Grants and Contributions expenditures decreased by $24.2 million, compared to last year. This variance is mostly attributable to timing differences for statutory payments made to Genome Canada ($22.7 million decrease).

2.2.2 Vote 1—Net Operating Expenditures ($17.0 million decrease)

In the first quarter of 2013–14, there was a $17.0 million net decrease in authorities used for Vote 1—Net Operating Expenditures. As shown in Table 1: Departmental Budgetary Expenditures by Standard Object, this variance is primarily due to the following factors:

• A $17.2 million increase in severance payouts made in 2013–14 and a decrease of $3.1 million due to a reduction in headcount;
• A $29.0 million decrease in expenditures in the "other subsidies and payments" standard object due to the payment of a legal settlement in the first quarter of 2012–13.

2.2.3 Canadian Intellectual Property Office (CIPO) Revolving Fund ($9.9 million decrease)

The CIPO had cash receipts of $30.7 million in the first quarter of 2013–14. As pointed out in the 2012–13 QFR for the first quarter, due to a system issue in that quarter, cash receipts were understated at $19.1 million and should have been $35.7 million. This resulted in an overstatement in net revolving fund expenditures for Q1 of 2012–13.

2.2.4 Vote 5—Capital Expenditures ($3.9 million increase)

There was a $3.9 million increase in Vote 5—Capital Expenditures compared with fiscal year 2012–13 for the following projects:

• $3.3 million for the ongoing Spectrum Applications Modernization Project;
• $561,000 for maintenance of the Communications Research Centre Canada (CRC) campus and equipment.

2.2.5 Table 1: Departmental Budgetary Expenditures by Standard Object: Personnel ($15.2 million increase)

The "personnel" standard object in Table 1: Departmental Budgetary Expenditures by Standard Object includes personnel expenditures from all of the votes included in the Statement of Authorities, primarily from Vote 1—Net Operating Expenditures, Employee Benefit Plans and CIPO's Revolving Fund. In 2013–14, there was a $15.2 million increase in this standard object mainly because of $17.2 million in severance payouts made in 2013–14 and a $3.1 million decrease due to a reduction in headcount.

2.2.6 Table 1: Departmental Budgetary Expenditures by Standard Object: Acquisition of machinery and equipment ($2.6 million increase)

The increase in "acquisition of machinery and equipment" standard object is mainly attributable to the ongoing Spectrum Applications Modernization Project.

2.2.7 Table 1: Departmental Budgetary Expenditures by Standard Object: Other Subsidies and Payments ($29.0 million decrease)

See section 2.2.2.

3. Risks and uncertainties

In 2012–13, a number of government-wide restraint measures stemming from Budget 2010 and Budget 2011 created significant pressures for the Department. At the end of 2012–13, as was reported in the QFR for the quarter ended December 31, 2012, appropriate mitigation measures had been taken for these risks and no additional measures were planned.

The Department continues to refine and strengthen its existing stewardship and oversight practices to monitor program funding and expenditures. This includes Industry Canada's system of internal controls over financial transactions and reporting, and monthly senior management review of plans and forecasts. Ongoing controls and accurate monitoring are particularly important to Industry Canada because of the Department's funding model, whereby a portion of the operating budget comes from royalty repayments from legacy contribution programs. Because these royalties fluctuate with the sales of aging product lines of individual companies and the overall health of the economy, the Department must be prepared to mitigate the impact of unpredictable changes to its funding level.

4. Budget 2012 Implementation

This section provides an overview of the savings measures announced in Budget 2012, which sets out the government's plan to reduce the federal deficit and return to fiscal balance over the medium term. Details of Industry Canada's reductions are available online and focus on three main areas, not in direct services to Canadians:

• reducing administrative expenditures by improving efficiencies;
• reducing expenditures by consolidating program and office functions; and
• achieving efficiencies in research and analysis functions while maintaining adequate capacity for targeted policy development.

Industry Canada's prudent financial management is central to the Department's approach to achieving its Budget 2012 reduction targets. Long-term financial affordability and a commitment to ensuring the Department's continued ability to deliver its mandate and its core activities have been a key focus of all financial decisions.

As a result of the Department's proactive and targeted approach to managing the size of its workforce in advance of Budget 2012, as of the end of the third quarter of 2012–13, Industry Canada had achieved its headcount targets for both 2012–13 and 2013–14. Additional information can be found in last year's second quarter Quarterly Financial Report as well as in the Supplementary Data on Budget 2012 Implementation.

This led to savings of $49.2 million in 2012–13. In 2013–14, the Department's savings will increase to $65.2 million with ongoing savings amounting to $79.5 million by 2014–15.

For 2013–14, a $6.1 million decrease can be seen in the Main Estimates, in Industry Canada's grants and contributions authorities. The remaining decrease of $59.1 million will come from reductions in repayable contributions that the Department is allowed to access through the Supplementary Estimates.

Industry Canada will continue to monitor the implementation of its Budget 2012 reductions in order to ensure that delivery of the Department's core mandate is not impacted, both in the short-term and looking ahead to future years. To date, although Budget 2012 has had an impact on the Department's overall financial and human resource levels, implementation of the reduction measures has been unfolding in compliance with the required targets.

The printed version is signed by:

Industry Canada
For the quarter ended June 30, 2013

Statement of Authorities (unaudited)

Industry Canada
For the quarter ended June 30, 2013

Table 1: Departmental budgetary expenditures by Standard Object (unaudited)