Consolidated financial statements

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• Section 2—Table of contents: Section 2—Consolidated financial statements of the Government of Canada and report of the Auditor General of Canada

Government of Canada
Consolidated Statement of Operations and Accumulated Deficit for the year ended March 31, 2018

Government of Canada
Consolidated Statement of Financial Position as at March 31, 2018

Government of Canada
Consolidated Statement of Change in Net Debt for the year ended March 31, 2018

Government of Canada
Consolidated Statement of Cash Flow for the year ended March 31, 2018

Notes to the consolidated financial statements of the Government of Canada

1. Summary of significant accounting policies

Reporting entity

The reporting entity of the Government of Canada includes all of the government organizations which comprise the legal entity of the Government as well as other government organizations, including Crown corporations, which are separate legal entities but are controlled by the Government. For financial reporting purposes, control is defined as the power to govern the financial and operating policies of an organization with benefits from the organization's activities being expected, or the risk of loss being assumed by the Government. All organizations defined as departments and as Crown corporations in the Financial Administration Act are included in the reporting entity. Other organizations not listed in the Financial Administration Act may also meet the definition of control and are included in the Government's reporting entity if their revenues, expenses, assets or liabilities are significant.

Some Crown corporations and not-for-profit organizations rely on the Government for a portion of their financing. The consolidated Crown corporations that receive significant funding from the Government are Atomic Energy of Canada Limited, Canada Council for the Arts, Canadian Air Transport Security Authority, Canadian Broadcasting Corporation and VIA Rail Canada Inc. The consolidated not-for-profit organizations that receive significant funding are the Canada Foundation for Innovation and the Canada Foundation for Sustainable Development Technology. The financial activities of all of these entities are consolidated in these financial statements on a line-by-line and uniform basis of accounting after eliminating significant inter-governmental balances and transactions. Detailed information on these consolidated entities is included in Section 4 (unaudited) of this volume.

Enterprise Crown corporations are government business enterprises able to raise substantial portions of their revenues through commercial business activity and are therefore considered self-sustaining. The major enterprise Crown corporations include the Bank of Canada, Canada Mortgage and Housing Corporation, Canada Post Corporation and Export Development Canada. In addition, there are a number of self-sustaining government business enterprises that are not Crown corporations but which are controlled by the Government. These are referred to as other government business enterprises and include various Canada Port Authorities. Investments in enterprise Crown corporations and other government business enterprises are recorded under the modified equity method.

The Canada Pension Plan (CPP), which includes the assets of CPP under the administration of the Canada Pension Plan Investment Board, is excluded from the reporting entity because changes to CPP require the agreement of two thirds of participating provinces and it is therefore not controlled by the Government.

Basis of accounting

These consolidated financial statements are prepared using the Government's accounting policies stated below, which are based on Canadian public sector accounting standards. The presentation and results using the stated accounting policies do not result in any significant differences from Canadian public sector accounting standards.

Revenues

Tax revenues are recognized in the period in which the taxable event occurs and when they are authorized by legislation or the ability to assess and collect the tax has been provided through legislative convention.

Tax revenues are measured from amounts assessed/reassessed and from estimates of amounts not yet assessed/reassessed based on cash received that relates to the fiscal year ended March 31. Annual revenues also include adjustments between the estimated revenues of previous years and actual amounts, as well as revenues from reassessments relating to prior years. Revenues do not include estimates of unreported taxes, or the impact of future reassessments that cannot yet be reliably determined.

Tax expenditures that reduce taxes paid or payable are considered tax concessions and are netted against the applicable tax revenue. Tax expenditures that provide a financial benefit through the tax system, and are not related to the relief of taxes paid or payable, are shown as other transfer payments and are not netted against tax revenue.

Tax revenues that were not collected at year end and refunds that were not yet disbursed are reported respectively as taxes receivable and amounts payable related to tax on the Consolidated Statement of Financial Position. These amounts also include other receivables and payables for amounts collected through the tax system such as provincial and territorial taxes, as well as Employment Insurance premiums and Canada Pension Plan contributions receivable from individuals and employers as applicable.

Tax collected on behalf of the provincial/territorial governments is not included in tax revenues. It is recorded as payable to the provincial/territorial governments included within Other Accounts Payable and Accrued Liabilities and distributed by the Department of Finance in accordance with associated agreements.

The following policies are applied for specific revenue streams:

• Income tax revenue is recognized when the taxpayer has earned the income subject to the tax.
• Domestic goods and services tax (GST) revenue is recognized at the time of the sale of goods or the provision of services. These revenues are reported net of input tax credits, GST rebates, and the GST quarterly tax credits. The GST quarterly tax credit for low-income individuals and families is recorded in the period the event giving rise to the GST quarterly credit occurred.
• Customs duties and goods and services tax revenue on imports are recognized when goods are authorized to enter Canada.
• Excise tax revenue is recognized when a taxpayer sells goods taxable under the Excise Tax Act.
• Excise duties revenue is recognized when the taxpayer manufactures goods taxable under the Excise Act and the Excise Act, 2001.
• Employment Insurance premiums are recognized as revenue in the period the insurable earnings are earned.
• Other revenues are mainly comprised of consolidated Crown corporation revenues, other program revenues from returns on investments and proceeds from sales of goods and services, as well as other miscellaneous revenues. These revenues are recognized in the period the transactions or events giving rise to the respective revenues occurred.
• Spectrum licence fees are recognized as revenue on a straight-line basis over the term of the licence. Deferred revenue consists of spectrum licence fees and other amounts received in advance for the delivery of goods and rendering of services that will be recognized as revenue in a subsequent fiscal year as it is earned.

Expenses

The Government has three major types of expenses: transfer payments, other expenses and public debt charges.

Transfer payments are recorded as an expense in the year the transfer is authorized and all eligibility criteria have been met by the recipient.

Other expenses are generally recorded when goods are received or services are rendered and include expenses related to personnel, professional and special services, repair and maintenance, utilities, materials and supplies, as well as amortization of tangible capital assets. Provisions to reflect changes in the value of assets or liabilities, such as provisions for bad debts, loans, investments and advances and inventory obsolescence, as well as utilization of inventories and prepaid expenses, and other are also included in other expenses. Public sector pensions and other employee and veteran future benefits, which comprise a portion of personnel expenses, are recorded as employees render services using the projected benefit method prorated on service, except for: veteran future benefits and workers' compensation where benefits are accrued on an event driven basis; accumulated sick leave entitlements where benefits are recognized using an accrued benefit method; and plan amendments related to past services, curtailments and settlements where costs are recorded when approved or paid.

Public debt charges are recorded when incurred and include interest, servicing costs, costs of issuing new borrowings, amortization of premiums and discounts on market debt including amounts arising on the extinguishment of debt, as well as interest on public sector pensions and other employee and veteran future benefits.

Cash and cash equivalents

Cash consists of public moneys on deposit and cash in transit less outstanding cheques and warrants. Cash equivalents consist mainly of term deposits usually not exceeding 31 days.

Foreign exchange accounts

Short-term deposits, marketable securities and special drawing rights held in the foreign exchange accounts are recorded at cost. Marketable securities are adjusted for amortization of purchase discounts and premiums. Purchases and sales of securities are recorded at the settlement date. Transaction costs are expensed as incurred for all classes of financial instruments.

Investment income earned with respect to foreign exchange accounts as well as write-downs to reflect other than temporary impairment in the fair value of securities are included in net foreign exchange revenues on the Consolidated Statement of Operations and Accumulated Deficit. Canada's subscriptions to the capital of the International Monetary Fund and loans to the International Monetary Fund are recorded at cost.

Loans, investments and advances

Investments in enterprise Crown corporations and other government business enterprises, which include the net assets and liabilities of enterprise Crown corporations and other government business enterprises, are recorded under the modified equity method whereby the cost of the Government's equity is reduced by dividends received and adjusted to include the annual profits and losses of these corporations, after elimination of unrealized inter-organizational gains and losses. All of these corporations follow International Financial Reporting Standards (IFRS). Under the modified equity method, the corporations' accounts are not adjusted to the Government's basis of accounting and other comprehensive income or loss is recorded directly to the Government's accumulated deficit and net debt.

Some enterprise Crown corporations provide loans to borrowers outside the reporting entity of the Government. Some of these loans will be repaid through future appropriations of the Government under various subsidy programs which provide funds directly related to the repayment of the loan. For these loans receivable, a valuation allowance for the amount expected to be repaid from future appropriations is recorded to reduce their carrying value to an amount that approximates the amount to be recovered from sources outside the reporting entity of the Government. The valuation allowance is based upon the amount qualified borrowers are expected to receive under various Government subsidy programs and the percentage of the subsidy expected to be applied to the outstanding loan balance.

Other loans, investments and advances are initially recorded at cost and are discounted to reflect their concessionary terms or their net recoverable value. Concessionary terms include cases where loans are made on a long-term, low interest or interest-free basis.

When necessary, an allowance for valuation is recorded to reduce the carrying value of other loans, investments and advances to amounts that approximate their net recoverable value. The allowance for valuation for other loans, investments and advances, reflects the possibility of losses associated with potential default. The determination of the valuation allowance considers the credit risk of borrowers, collateral provided as well as previous repayment history. When they are determined to be uncollectible, other loans, investments and advances are written off. Subsequent recoveries are recorded as revenue when received.

Non-financial assets

The costs of acquiring land, buildings, equipment and other capital property are capitalized as tangible capital assets and, except for land, are amortized to expense over the estimated useful lives of the assets, as described in Note 16. For certain tangible capital assets where the costs are not readily available, such as older buildings, estimated current costs have been extrapolated retrospectively in a systematic and rational manner to approximate original costs. Assets acquired under capital leases are recorded at the present value of the minimum lease payments using the appropriate discount rate, which is generally the lower of the interest rate implicit in the lease and government’s rate of incremental borrowing at the inception of the lease. These assets are amortized over the lease term or the estimated useful life of the asset in accordance with the asset type when terms allow ownership to pass to the government. The corresponding lease obligations are recorded under unmatured debt on the Consolidated Statement of Financial Position. When conditions indicate that a tangible capital asset no longer contributes to the government’s ability to provide goods and services, or that the value of future economic benefits associated with the tangible capital asset is less than its net book value, the cost of the tangible capital asset is reduced to reflect the decline in the asset’s value.

Tangible capital assets do not include immovable assets located on reserves as defined in the Indian Act; works of art, museum collections and Crown land to which no acquisition cost is attributable; and intangible assets. In addition, acquisitions of works of art and museum collections consisting mainly of paintings, sculptures, drawings, prints, photographs, monuments, films and videos are expensed in the fiscal year in which they are acquired.

Inventories are valued at cost and are comprised of spare parts and supplies held for future program delivery and are not primarily intended for resale. Inventories that no longer have service potential are valued at the lower of cost or net realizable value. Items for which the costs are not readily available are valued using management's best estimate of original cost, based on available information.

Unmatured debt

Unmatured debt consists of market debt, cross currency swap revaluations, capital lease obligations and the obligation under public-private partnerships. Market debt is recorded at face value and is adjusted by discounts and premiums which are amortized on a straight-line basis over the term to maturity of the respective debt instrument. When a marketable bond is exchanged or repurchased, and the transaction results in an extinguishment of the debt, the difference between the carrying amount of the debt instrument and the net consideration paid is recognized as a gain or loss in the Consolidated Statement of Operations and Accumulated Deficit, and the debt instrument is derecognized. An extinguishment occurs on the repurchase of bonds, or when there is an exchange of bonds with an existing bond holder and the terms of the original debt and the replacement debt are substantially different. Exchanged bonds are considered to have substantially different terms when the discounted present value of the cash flows under the new terms, including any amounts paid on the exchange, and discounted using the average effective interest rate of the original debt, is at least 10% different from the discounted present value of the remaining cash flows of the original debt. If an exchange of bonds with an existing bond holder does not result in an extinguishment, the carrying amount of the debt is adjusted for any amounts paid on the exchange, and the unamortized premiums or discounts relating to the original debt and arising on the exchange transaction are amortized over the remaining term to maturity of the replacement debt on a straight-line basis. The Government’s holdings of its own securities, if any, are deducted from market debt to report unmatured debt owed to external parties.

Cross currency swap revaluations consist of unrealized gains or losses due to fluctuations in the foreign exchange value of the cross currency swaps entered into by the Government.

Capital lease obligations are the present value of the remaining minimum lease payments under capital lease agreements.

Obligations under public-private partnerships (P3s) result from the Government’s agreements with private sector partners to design, build, finance and/or operate and maintain certain tangible capital assets. The obligation represents the Government’s liability for these long term financing arrangements. These liabilities are recognized on a percentage-of-completion basis over the period of construction of the P3 asset and reduced by progress payments and capital payments made to the P3 partner.

Public sector pensions and other employee and veteran future benefits

Public sector pensions and other employee and veteran future benefits are measured on an actuarial basis. The actuarial valuations estimate the current value of benefits earned and use various actuarial assumptions in the process. When actual experience of the plans varies from estimates or when actuarial assumptions change, actuarial gains or losses arise. Actuarial gains and losses are not recognized immediately but rather over the expected average remaining service life (EARSL) of the employees, which varies across plans, or the average remaining life expectancy (ARLE) of the benefit recipients under wartime veteran plans. Recognition commences in the year following the determination of the actuarial gains and losses. In addition, an unrecognized net actuarial loss is recognized immediately upon a plan amendment, up to a maximum of the related decrease in the accrued benefit obligation; similarly, an unrecognized net actuarial gain is recognized immediately, up to a maximum of the related increase in the accrued benefit obligation. The unrecognized net actuarial loss or gain, relating to the obligation that is curtailed or settled, is recognized immediately upon a plan curtailment or settlement.

Pension assets include investments held by the Public Sector Pension Investment Board (PSPIB) which are valued at market-related value. Under this valuation methodology, the expected return on investments is recorded immediately while the difference between the expected and the actual return on investments is recorded over a five-year period through actuarial gains and losses. The market-related value of investments is adjusted, if necessary, to ensure that it does not fall outside a limit of plus or minus 10% of the market value of investments at year end; any amount outside this limit is recorded immediately through actuarial gains and losses. Pension assets also include investments held in external trusts by consolidated Crown corporations and other entities.

Contributions receivable from employees for past service buyback elections are discounted to approximate their fair value.

Contingent liabilities

Contingent liabilities, including the allowance for guarantees, are potential liabilities which may become actual liabilities when one or more future events occur or fail to occur. If the future event is likely to occur or fail to occur, and a reasonable estimate of the loss can be made, a provision is accrued and an expense recorded to other expenses. If the likelihood is not determinable or an amount cannot be reasonably estimated, the contingency is disclosed in the notes to the consolidated financial statements.

For guarantees, an allowance is recorded when it is determined that a loss is likely and the amount of the allowance is estimated taking into consideration the nature of the guarantee, loss experience and current conditions. The allowance is reviewed on an ongoing basis and changes in the allowance are recorded as expenses in the year they become known.

Contingent assets

Contingent assets are possible assets arising from existing conditions or situations involving uncertainty. That uncertainty will ultimately be resolved when one or more future events not wholly within the Government’s control occurs or fails to occur. Resolution of the uncertainty will confirm the existence or non-existence of an asset. If the occurrence of the confirming event is likely and the value is significant, the contingent asset is disclosed in the notes to the consolidated financial statements. The contingent asset becomes a recorded asset when the outcome of the future event is known and the asset’s existence is confirmed.

Environmental liabilities and asset retirement obligations

An environmental liability for the remediation of contaminated sites is recognized when all of the following criteria are satisfied: an environmental standard exists, contamination exceeds the environmental standard, the Government is directly responsible or accepts responsibility, it is expected that future economic benefits will be given up and a reasonable estimate of the amount can be made. The liability reflects the management's best estimate of the amount required to remediate the sites to the current minimum standard for its use prior to contamination. When the future cash flows required to settle or otherwise extinguish a liability are estimable, predictable and expected to occur over extended future periods, a present value technique is used. The discount rate used reflects the Government's cost of borrowing, associated with the estimated number of years to complete remediation.

A liability for unexploded explosive ordnance (UXO) affected legacy sites is recognized when there is an appropriate basis for measurement and a reasonable estimate can be made. These liabilities are present obligations arising from past transactions or events, the settlement of which is expected to result in the future sacrifice of economic benefits.

Asset retirement obligations are the management's best estimate of costs related to obligations associated with the retirement of tangible capital assets. A liability for an asset retirement obligation is recognized when all of the following criteria are satisfied: there is an agreement, contract, legislation, or a constructive or equitable obligation that obligates the Government to incur retirement costs in relation to a tangible capital asset, the past event or transaction giving rise to the retirement liability has occurred, it is expected that future economic benefits will be given up and a reasonable estimate of the amount can be made. These costs are normally capitalized and amortized over the asset's estimated useful life. If the related asset is fully amortized, the asset retirement costs are expensed. The liability reflects the present value of estimated future cash flows required to retire the assets where amounts can be reasonably estimated and is expected to be settled as the related sites, facilities or assets are removed from service. The estimated future cash flows are adjusted for inflation using a rate that is derived on the basis of Consensus forecasts and Bank of Canada historical and target inflation rates. The discount rate is a weighted average rate reflecting the Government's cost of borrowing on initial recognition and on subsequent changes to expected cash flows, which is most closely associated with the period to settlement of the obligation.

The recorded liabilities are adjusted each year, as required, for present value adjustments, inflation, new obligations, changes in management estimates and actual costs incurred.

If the likelihood of the Government's responsibility is not determinable, a contingent liability is disclosed in the notes to the consolidated statements.

Foreign currency translation

Transactions involving foreign currencies are translated into Canadian dollar equivalents using rates in effect at the time of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated using rates at March 31. Gains and losses resulting from foreign currency translation are reported on the Consolidated Statement of Operations and Accumulated Deficit according to the activities to which they relate. Net gains and losses relating to the foreign exchange accounts, foreign debt, swap and foreign exchange forward agreement revaluations are presented with investment revenues from foreign exchange accounts under net foreign exchange revenues. Net gains and losses relating to loans, investments and advances are presented with the return on investments from these loans, investments and advances under other revenues. Net foreign exchange gains and losses relating to transfer payments are reported in the transfer payment expenses under other transfer payments. Net foreign exchange gains and losses relating to departmental sale or purchase of goods or services in foreign currency are reported under other expenses.

Measurement uncertainty

The preparation of consolidated financial statements requires the Government to make estimates and assumptions that affect the reported and disclosed amounts of assets, liabilities, revenues and expenses in the consolidated financial statements and accompanying notes at March 31. The estimates are based on facts and circumstances, historical experience, general economic conditions and reflect the management's best estimate of the related amount at the end of the reporting period. Estimates and underlying assumptions are reviewed annually at March 31. Revisions to accounting estimates are recognized in the period in which estimates are revised if revisions affect only that period or in the period of revision and future periods if revisions affect both current and future periods.

A material measurement uncertainty exists when it is reasonably possible that a material variance could occur in the reported or disclosed amount in the near term. Near term is defined as a period of time not to exceed one year from March 31. The Government has determined that a material measurement uncertainty exists with respect to the reported amounts for public sector pensions and other employee and veteran future benefits. Measurement uncertainty due to estimates and assumptions also exists in the provision for contingent liabilities (Note 6); the accrual of tax revenues and the related amounts receivable and payable and the allowance for doubtful accounts; environmental liabilities; and contractual rights. It is reasonably possible that the Government’s reassessments of these estimates and assumptions could require a material change in reported amounts or disclosures in the consolidated financial statements..

Accrued benefit obligations for public sector pensions and other employee and veteran future benefits are actuarially determined and the actual experience may differ significantly from the assumptions used in the calculation of the accrued benefits. At March 31, 2018, pension and other future benefit liabilities of $275,707 million ($265,015 million in 2017, as restated—Note 2a) and public sector pension assets of $2,124 million ($1,900 million in 2017) are recorded in the consolidated financial statements. The actuarial assumptions used in measuring the accrued benefit obligations, as well as a sensitivity analysis showing how the accrued benefit obligations would have been affected by changes in the principal actuarial assumptions are found in Note 9.

Tax revenues, the related amounts receivable and payable and the allowance for doubtful accounts are subject to measurement uncertainty due to the use of estimates of amounts not yet assessed/reassessed based on cash received as well as taxpayer objections to assessed federal tax. Key assumptions used in estimating tax revenues are tax instalments, historical information on refund rates, payments received on filing tax returns, and amounts receivable assessed. These are also good indicators of tax revenue earned to March 31 that has not yet been assessed. The key assumption used to estimate the general allowance for doubtful accounts is historical collection information as described in Note 12. The estimates are subject to back-testing and are refined as required. As of March 31, 2018, $14,065 million of federal taxes was under objection ($16,409 million for 2017). An amount is recognized as a reduction of tax revenues for cases where it has been determined that the government had little or no discretion to avoid settlement. The methodologies used to determine the estimates were applied consistently with those of the previous year.

Environmental liabilities and asset retirement obligations are subject to measurement uncertainty as discussed in Note 7 due to the evolving technologies used in remediation activities of contaminated sites or asset retirements, the use of discounted present value of future estimated costs, and the fact that not all sites have had a complete assessment of the extent and nature of remediation or asset retirement costs. Changes to underlying assumptions, the timing of the expenditures, the technology employed, the revisions to environmental standards or changes in regulatory requirements could result in significant changes to the environmental liabilities recorded.

Contingent liabilities are also subject to measurement uncertainty due to the use of estimates relating to both the outcome of the future event as well as the value of the potential loss. The estimate of the provision for contingent liabilities is continuously reviewed and refined in light of several factors, including ongoing negotiations, recent settlements and decisions made by the courts and administrative tribunals. Rulings by the judiciary that contain elements applicable to other claims filed against Canada could also result in significant changes to the contingent liability recorded. For guarantees, the estimate considers assessments of individual companies, particular fields or markets as well as the broader Canadian and global economies.Contractual rights are subject to measurement uncertainty due to the terms and conditions of certain agreements resulting in contractual rights. Certain rights are dependent on the sales or other future activity of the other party to the agreement, requiring the use of estimates in the disclosure of future revenue.

Comparative information

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

2. Accounting changes and restatement

a. Change in discount rate methodology

The Government has reviewed its methodologies for selecting discount rates used in the measurement of its long-term assets and liabilities in order to promote consistency when using a present value technique. This review considered industry practices and emerging changes in accounting standards. The revised discount rate methodology establishes the Government’s cost of borrowing by reference to the actual zero-coupon yield curve for Government of Canada bonds, and affects liabilities for unfunded public sector pensions and other employee and veteran future benefits, environmental liabilities and asset retirement obligations, provision for contingent liabilities, capital leases and loans receivable.

Except as noted below for unfunded pension benefits, this refinement was accounted for as a change in estimate affecting the period of change and applicable future periods. The change in estimate did not have a material impact on the current year, except for other employee and veteran future benefits, where the weighted average discount rate of 2.2% was lower than the discount rate of 2.4% used under the previous methodology resulting in an increase of $5,226 million in accrued benefit obligations.

Unfunded pension benefits

In the past, unfunded pension benefits were discounted using a streamed weighted average of Government of Canada long-term bond rates, which was calculated based on a 20-year weighted moving average of Government of Canada long-term bond rates projected over time. Unfunded pension benefits are now discounted using actual yields that reflect the timing of the expected future cash flows. This change represents a fundamental adjustment to the methodology used to select the discount rate and, therefore, is considered a change in accounting policy which was applied on a retroactive basis. The accrued benefit obligations for unfunded pension benefits is $198,000 million ($200,950 million in 2017) compared to $164,983 million ($166,482 million in 2017) under the old discount rate methodology.

A reconciliation of the restatement pertaining to unfunded pension benefits for the significant consolidated financial statement line items follows:

The effects of the restatement on Note 9 to the consolidated financial statements, public sector pensions and other employee and veteran future benefits, are as follows:

b. Adoption of new accounting standards

The Government of Canada adopted the new accounting standards issued by the Public Sector Accounting Board (PSAB) that were effective for fiscal years beginning on or after April 1, 2017. Of these pronouncements, PS 2200 Related Party Disclosures, PS 3320 Contingent Assets and PS 3380 Contractual Rights provide guidance on disclosure requirements only. PS 3420 Inter-Entity Transactions establishes the accounting and reporting of inter-entity transactions and PS 3210 Assets provides additional guidance on the definition of assets as well as disclosure requirements. These standards have been applied on a prospective basis, resulting in the disclosure of the Government’s contractual rights in Note 18(b).

3. Spending and borrowing authorities

a. Spending authorities

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. The Government uses the full accrual method of accounting to prepare its Budget and present its current consolidated financial statements. However, the spending authorities voted by Parliament are on an expenditure basis, which uses only a partial accrual method of accounting. During the year, expenditures were made under the authorities indicated in the following table:

The use of budgetary expenditure authorities reported in the preceding table differs from the total expenses reported in the Consolidated Statement of Operations and Accumulated Deficit. The difference is due to various factors. The transactions of consolidated specified purpose accounts and of certain Crown corporations and other controlled entities are consolidated in the financial statements but are not included in the budgetary expenditure authorities available for use. Transfer payments to organizations within the Government reporting entity are recorded against a budgetary expenditure authority in the year they are disbursed to the organization, but they are recorded as a consolidated expense only when the transfer is authorized and all eligibility criteria have been met by the ultimate recipient outside of the Government reporting entity. Provisions for valuation of assets and liabilities are also not included in spending authorities.

In addition to the authorities for budgetary expenditures, non-budgetary spending of $213,557 million ($217,341 million in 2017) was authorized for loans, investments and advances. A net amount of $41,332 million ($51,913 million in 2017) was used, an amount of $1,070 million ($145 million in 2017) lapsed and an amount of $171,155 million ($165,283 million in 2017) is available for use in subsequent years.

Details about the source and disposition of authorities (unaudited) and the details of ministerial expenditures are provided in Volume II of the Public Accounts of Canada.

b. Over-expenditure of spending authorities

There were no over-expenditures of spending authorities in 2018.

c. Borrowing authorities

Consistent with the new Parliamentary borrowing authority framework enacted in November 2017, the Government may only borrow money with the authority of Parliament. This authority is granted through the Borrowing Authority Act (BAA) and Part IV of the Financial Administration Act (FAA).

Under the BAA, the Minister of Finance (the Minister) is empowered to borrow money on behalf of Her Majesty in right of Canada with the authorization of the Governor in Council (GIC). Subject to limited exceptions, these borrowings may not exceed the maximum stock as approved by Parliament and specified in that Act of $1,168,000 million, which also includes amounts borrowed by agent Crown corporations and Canada Mortgage Bonds guaranteed by the Canada Mortgage and Housing Corporation. As of March 31, 2018, $996,625 million of the Parliamentary-approved borrowing authority was used.

Additionally, Part IV of the FAA gives the Minister, with the approval of the GIC, the power to carry out borrowings that have been authorized by Parliament, and empowers the GIC to authorize the Minister to borrow for the specific purposes of refinancing outstanding debt, extinguishing or reducing liabilities, and making payments in extraordinary circumstance, such as natural disasters. The GIC specifies a maximum amount of borrowing for the given fiscal year. In 2018, the GIC specified $335,000 million ($325,000 million in 2017) to be the maximum aggregate amount of principal that may be borrowed by the Minister during that fiscal year. The maximum aggregate amount of principal is the sum of i) the maximum stock of treasury bills anticipated to be outstanding during the year, ii) the total value of refinanced and anticipated new issuances of marketable bonds and retail debt and iii) an amount to facilitate intra-year management of the debt and foreign exchange accounts. During the year, $254,269 million ($276,216 million in 2017) of the GIC-approved borrowing authority was used.

d. Source of budget amounts

The budget amounts included in the Consolidated Statement of Operations and Accumulated Deficit and the Consolidated Statement of Change in Net Debt are derived from the amounts that were budgeted for 2018 in the March 2017 Budget Plan (Budget 2017). To enhance comparability with actual 2018 results, Budget 2017 amounts have been restated to reflect the change in the discount rate methodology used in determining the present value of the Government’s unfunded pension obligations. This restatement has resulted in a $2,795 million increase in projected program expenses, a $2,288 million decrease in projected public debt charges, and a $507 million increase in the projected 2018 annual deficit. In addition, certain Budget 2017 amounts have been reclassified to conform to the current year’s presentation in the consolidated financial statements, with no overall impact on the budgeted 2018 annual deficit.

Since actual opening balances of the accumulated deficit and net debt were not available at the time of preparation of Budget 2017, the corresponding amounts in the budget column have been adjusted to the actual closing balances of the previous year.

4. Expenses

Expenses in the Consolidated Statement of Operations and Accumulated Deficit include:

a. Major transfer payments to other levels of government

Major transfer payments to other levels of government include the Canada health transfer, the Canada social transfer and fiscal arrangements pursuant to the Federal-Provincial Fiscal Arrangements Act. Other major transfers include contributions under the federal Gas Tax Fund program.

b. Employment insurance

Pursuant to the Employment Insurance Act, employment insurance includes income benefits and support measures paid to individuals of $17,666 ($18,644 million in 2017) and payments to provinces and territories related to Labour Market Development Agreements of $2,049 million ($2,067 million in 2017).

c. Other transfer payments

Other transfer payments totalling $47,138 million ($41,580 million in 2017) include various amounts paid through federal programs to stabilize market prices for commodities, to develop new technologies, to conduct research, provide international development assistance, support health care and infrastructure of First Nations and Inuit communities, support social housing and families and to promote educational and cultural activities. Also included are expenses of other consolidated entities and other miscellaneous payments. The various types of transfer payments are being delivered by departments according to their departmental legislative mandates. Details can be found in Table 3.6 of Section 3 (unaudited) of this volume.

d. Public debt charges

e. Total expenses by segment

The Government has defined segments as Ministries which groups the activities of departments, agencies and consolidated Crown corporations and other entities for which a Minister is responsible to Parliament. Additional segmented information is provided in Note 19. The following table presents the total expenses by segment after the elimination of internal transactions:

f. Total expenses by type of resource used in operations

The following table presents the total expenses by main objects of expense:

5. Accumulated deficit

The Government includes in its revenues and expenses certain accounts established for specified purposes. Legislation requires that revenues received for purposes specified in the legislation be credited to these accounts and that related payments be charged to the accounts. Any deficiency of revenues over payments must be met through future revenues or transfers credited to these accounts. The following table shows the balance of these consolidated accounts and accumulated other comprehensive income included in the accumulated deficit:

Accumulated other comprehensive income

For enterprise Crown corporations and other government business enterprises recorded under the modified equity method, certain unrealized gains and losses on financial instruments and certain actuarial gains and losses related to pensions and other employee future benefits are recorded in other comprehensive loss or income in accordance with International Financial Reporting Standards (IFRS). The unrealized gains and losses on financial instruments reflect changes in the fair value of financial assets classified as available-for-sale or derivative instruments used in hedging activities and are excluded from the calculation of profit or loss until realized. Actuarial gains and losses related to pensions and other employee future benefits reflect differences between the actual and expected returns on plan assets as well as the difference between actual and expected experience and changes in actuarial assumptions used to determine the present value of the benefit obligations. These actuarial gains and losses are recorded directly to retained earnings without reclassification to profit or loss in a subsequent period.

Other comprehensive loss or income is excluded from the calculation of the Government's annual deficit. It is instead recorded directly to the Government's accumulated deficit. Upon realization of the gains and losses on financial instruments, the associated amounts are reclassified to the profit or loss of enterprise Crown corporations and other government business enterprises and then reflected in the Government's annual deficit. The actuarial gains and losses related to pensions and other employee future benefits are not reclassified.

The following table presents the different components of other comprehensive income as well as accumulated other comprehensive income included in the Government's accumulated deficit:

6. Contingent liabilities

Contingent liabilities arise in the normal course of operations and their ultimate disposition is unknown. The following table presents the different components of the provision for contingent liabilities:

a. Claims

The Government has recorded a provision for claims where it is likely that there will be a future payment and a reasonable estimate of the loss can be made. This estimate is determined using relevant historical experience, facts and circumstances. In situations where the estimate of loss is based on a range of amounts, the amount accrued within the range is management’s best estimate of the potential loss which may be at an amount lesser than the maximum of the range. Significant exposure to a liability could exist in excess of what has been accrued. Claims for which the outcome is not determinable and for which an amount has not been accrued are estimated at approximately $10,053 million ($9,354 million in 2017).

Pending and threatened litigation and other claims

There are thousands of pending and threatened litigation cases as well as claims outstanding against the Government. These claims include items with pleading amounts and items where an amount is not specified. While the total amount claimed in these actions is significant, their outcomes are not known in all cases. As a result, provisions are recorded based on management’s best estimate of the potential loss.

Specific claims

Specific claims deal with the past grievances of First Nations related to Canada’s obligations under historic treaties or the way it managed First Nations’ funds or other assets. The past grievances may be proceeding via the legal system or via the specific claims program. The Government of Canada will pursue a settlement agreement with the First Nation when a claim demonstrates an outstanding lawful obligation. There are currently 545 (528 in 2017) specific claims under negotiation, accepted for negotiation or under review. A liability is estimated and recorded for claims that have progressed to a point where quantification is possible. This estimate also includes projections based on historical rates and costs of settlement for similar claims and includes an estimate for claims which have been filed but not yet assessed.

Comprehensive land claims

Comprehensive land claims arise in areas of the country where Aboriginal rights and title have not been resolved by treaty or by other legal means. There are currently 73 (70 in 2017) comprehensive land claims under negotiation, accepted for negotiation or under review. A liability is estimated and recorded for claims that have progressed to a point where quantification is possible. This estimate also includes projections based on historical rates and costs of settlement for similar claims.

b. Guarantees provided by the Government

Guarantees provided by the Government

Guarantees provided by the Government include guarantees on the borrowings of enterprise Crown corporations and other government business enterprises, loan guarantees, insurance programs managed by the Government, and other explicit guarantees. At March 31, guarantees provided by the Government include:

c. Other

Assessed taxes under appeal

Contingent liabilities include previously assessed federal taxes where amounts are being appealed to the Tax Court of Canada, the Federal Court of Canada, or the Supreme Court of Canada. As of March 31, 2018, $5,404 million ($5,588 million in 2017) was being appealed to the courts. The Government has recorded, in the amounts payable related to tax or in reduction of the amounts receivable from taxpayers, as applicable, the estimated amount of appeals that are considered likely to be lost and that can be reasonably estimated.

International organizations

The Government has callable share capital whereby certain international organizations have the ability to require payments. As at March 31, 2018, the callable share capital amounts to $32,030 million ($31,780 million in 2017). No payments (nil in 2017) have been requested by international organizations or paid by the Government in the year related to the callable share capital.

Insurance programs of agent enterprise Crown corporations

Four agent enterprise Crown corporations operate insurance programs for the Government. In the event that the corporations have insufficient funds, the Government will have to provide financing. The Canada Deposit Insurance Corporation operates the Deposit Insurance Fund which provides basic protection coverage to depositors for up to $100,000 deposited with each member bank, trust or loan company; the Canada Mortgage and Housing Corporation operates the Mortgage Insurance Fund which provides insurance for mortgage lending on Canadian housing by private institutions and the Mortgage-Backed Securities Guarantee Fund which guarantees the timely payment of the principal and interest for investors of securities based on the National Housing Act through the Mortgage-Backed Securities program and the bonds issued by the Canada Housing Trust through the Canada Mortgage Bond program; Export Development Canada provides export and foreign investment insurance to help with export trade; and Farm Credit Canada sells group creditor life and accident insurance to its customers through a program administered by a major insurance provider. At March 31, 2018, total insurance in force amounts to $1,754,457 million ($1,728,312 million in 2017). The Government expects that all four corporations will cover the cost of both current claims and possible future claims.

Further details on contingent liabilities can be found in Section 11 (unaudited) of this volume.

7. Environmental liabilities and asset retirement obligations

Environmental liabilities and asset retirement obligations include:

a. Remediation of contaminated sites

The Government's “Federal Approach to Contaminated Sites” sets out a framework for management of contaminated sites using a risk-based approach. Under this approach the Government has inventoried the contaminated sites identified on federal lands or on lands where the Government has assumed responsibility for the clean-up, allowing them to be classified, managed and recorded in a consistent manner. This systematic approach aids in the identification of the high risk sites in order to allocate limited resources to those sites which pose the highest risk to human health and the environment.

The Government has identified 7,242 sites (7,531 sites in 2017) where contamination may exist and assessment, remediation and monitoring may be required. Of these, the Government has identified 2,326 sites (2,382 sites in 2017), where action is required and for which a gross liability of $5,447 million ($5,705 million in 2017) has been recorded. This liability estimate has been determined based on site assessments performed by environmental experts or estimated by departments. In addition, a statistical model based upon a projection of the number of sites that will proceed to remediation and upon which current and historical costs are applied is used to estimate the liability for a group of unassessed sites. This group includes 3,944 unassessed sites (4,055 sites in 2017), of which 2,088 sites (1,879 sites in 2017) are projected to proceed to remediation and for which an estimated liability of $263 million ($239 million in 2017) has been recorded. These two estimates combined, totalling $5,710 million ($5,944 million in 2017), represents management’s best estimate of the costs required to remediate sites to the current minimum standard for its use prior to contamination, based on information available on March 31.

For the remaining 972 sites (1,094 sites in 2017), no liability for remediation has been recognized. Some of these sites are at various stages of testing and evaluation and if remediation is required, liabilities will be reported as soon as a reasonable estimate can be determined. For other sites, the Government does not expect to give up any future economic benefits (there is likely no significant environmental impact or human health threats). These sites will be re-examined and a liability for remediation will be recognized if future economic benefits will be given up.

The following table presents the total estimated amounts of these liabilities by nature and source, the associated expected recoveries and the total undiscounted future expenditures as at March 31, 2018, and March 31, 2017. When the liability estimate is based on a future cash requirement, the amount is adjusted for inflation using a forecast CPI rate of 1.9% (2% in 2017). Inflation is included in the undiscounted amount. The Government of Canada's cost of borrowing by reference to the actual zero-coupon yield curve for Government of Canada bonds has been used to discount the estimated future expenditures.

March 2018 discount rates range from 1.79% (0.89% in 2017) for 2 year term to 2.24% (2.55% in 2017) for a 30 or greater year term.

Also during the year 600 sites (739 sites in 2017) were closed as they were either remediated or assessed to confirm that they no longer meet all the criteria required to record a liability for contaminated sites.

b. Other environmental liabilities

The Government has identified approximately 643 unexploded explosive ordnance (UXO) suspected sites (635 in 2017) for which clearance action may be necessary. Of these sites, 43 (68 in 2017) are confirmed UXO affected sites. Based on management’s best estimates, a liability of $122 million ($184 million in 2017) has been recorded for clearance action on 10 of the confirmed UXO sites (10 in 2017). Remediation has been done on 7 of the sites (1 in 2017) and they will be closed in the next fiscal year. The remaining 633 suspect sites (624 in 2017) are currently in the assessment stage and a reasonable estimate cannot yet be determined. Of these sites, the obligation for clearance action is likely for 33 of them, indeterminable for 78 and unlikely for the 522 remaining.

c. Asset retirement obligations

The asset retirement obligation is $6,482 million ($6,498 million in 2017) of which Atomic Energy of Canada Ltd. has recorded $6,473 million ($6,492 million in 2017) for nuclear facility decommissioning.

The changes in the asset retirement obligations during the year are as follows:

The undiscounted future expenditures, adjusted for inflation, for the plan projects comprising the liability are $15,933 million ($16,546 million at March 31, 2017).

Key assumptions used in determining the provision are as follows:

The Government's ongoing efforts to assess contaminated sites, UXO affected sites and asset retirement obligations may result in additional environmental liabilities.

8. Unmatured debt

Unmatured debt includes:

Unamortized discounts result from Treasury bills and Canada bills which are issued at a discount in lieu of interest. Discounts or premiums also result from the Government's bond buyback program and from issuance of market debt when the face value of the instrument issued differs from the proceeds received. The unamortized portion represents the amount of premium and discount that has not yet been recorded to public debt charges.

At March 31, 2018, the fair value of market debt including unamortized discounts and premiums is $730,732 million ($751,856 million in 2017). For marketable bonds denominated in Canadian dollars and foreign currencies, treasury bills issued in Canadian dollars, retail debt, Canada bills and medium-term notes issued in US dollars and Euros, fair values are established using market quotes or the discounted cash flow calculated using year-end market interest and exchange rates.

The Government has entered into individual cross-currency swap contracts with various counterparties. Terms and conditions associated with these outstanding contracts are established using International Swaps and Derivatives Association (ISDA) master agreements, which are in place with each counterparty. Cross-currency swaps are used primarily to fund foreign-denominated asset levels in the foreign exchange accounts.

Included in Cross-currency swap revaluations is $947 million ($1,636 million at March 31, 2017) related to individual cross-currency swap contracts that have a net foreign-exchange asset value to the Government upon revaluation and $8,782 million ($9,400 million at March 31, 2017) relating to individual cross-currency swap contracts that have a net foreign-exchange liability value, resulting in an overall cross-currency swap net liability revaluation of $7,835 million ($7,764 million at March 31, 2017).

a. Market debt

The following table presents the contractual maturity of debt issues and interest rates by currency and type of instrument at gross value (in Canadian dollars) and the effective average annual interest rates as at March 31, 2018:

b. Obligation related to capital leases

The total obligation related to capital leases as at March 31, 2018, is $3,203 million ($3,226 million in 2017). Interest on this obligation of $185 million ($200 million in 2017) is reported in the Consolidated Statement of Operations and Accumulated Deficit as part of public debt charges. Future minimum lease payments are summarized as follows:

A significant number of leases have a duration from inception that falls within the range of 10 to 25 years.

9. Public sector pensions and other employee and veteran future benefits

a. Overview of benefit plans

i. Pension benefits

The Government sponsors a number of defined benefit pension plans covering substantially all the employees of the federal public service, as well as certain Public Service corporations as defined in the Public Service Superannuation Act, territorial governments, members of the Canadian Forces (including the Reserve Force), members of the Royal Canadian Mounted Police, federally appointed judges and Members of Parliament, including Senators. The public service, Canadian Forces—Regular Force and Royal Canadian Mounted Police pension plans represent the three main public sector pension plans sponsored by the Government. In addition, some of the consolidated Crown corporations and other entities maintain their own defined benefit pension plans covering substantially all of their employees. In this note, the term "employees" is used in a general manner to apply to plan members of the different groups.

The defined benefit pension plans are designed to provide employees with a retirement income during their lifetime and, in the case of Government-sponsored plans, are indexed to inflation. The indexation for Crown corporations and other entities pension plans varies depending on the specific plan. In the event of death, the pension plans also provide an income for a plan member's eligible survivors and dependants.

Pension benefits generally accrue as follows:

• For the three main public sector pension plans, pension benefits generally accrue based on a member's average earnings during the best five consecutive years of earnings and years of pensionable service. Plan members can accumulate up to a maximum of 35 years at a rate of 2% per year of pensionable service. Pension benefits are coordinated with the Canada and the Quebec Pension Plan benefits.
• For the Canadian Forces—Reserve Force pension plan, pension benefits accrue based on total pensionable service and pensionable earnings over the service period.
• For the Members of Parliament retiring allowance plan, basic allowances accrue at a rate of 3% per year of pensionable service multiplied by the average of the best five consecutive years of sessional indemnity and/or pensionable earnings up to a maximum of 75% of the plan member's average sessional indemnity and/or pensionable earnings as applicable. For service after December 31, 2015, retiring allowance benefits are coordinated with the Canada and the Quebec Pension Plan benefits at age 60. Members of Parliament are entitled to benefits after they have contributed to the plan for at least six years.
• For federally appointed judges, pension benefits do not have an explicit accrual rate. Instead, federally appointed judges may retire with a pension equivalent to two thirds of the salary annexed to their office, once the member has completed 15 years of pensionable service and the sum of the member's age and years of service equals 80 or more.
• For the consolidated Crown corporations and other entities pension plans, pension benefits accrue depending on the terms of the plans; generally based on a combination of an accrual rate per years of pensionable service and pensionable earnings average as per plan terms. Some plans are closed to new entrants.

ii. Other future benefits

In addition to pension plans, the Government and the consolidated Crown corporations and other entities sponsor different types of future benefit plans, with varying terms and conditions. The benefits are available to employees during or after employment or upon retirement. Other future benefits include disability and associated benefits available to war veterans, current and retired members of the Canadian Forces and the Royal Canadian Mounted Police, their survivors and dependants, health care and dental benefits available to retired employees and their dependants, accumulated sick leave entitlements, severance benefits and workers’ compensation benefits.

b. Financing arrangements

The Government has a statutory obligation to pay the pension benefits it sponsors. Pursuant to pension legislation, the transactions for funded and unfunded pension benefits are tracked in the pension accounts within the accounts of Canada. The details (unaudited) of the pension accounts can be found in Section 6 of this volume.

i. Funded pension benefits

The pension plans are generally financed from employee and employer contributions, as well as investment earnings. Pension benefits funded by the Government relate to post March 2000 service that falls within the Income Tax Act limits for the three main public sector pension plans and all service for the Canadian Forces—Reserve Force pension plan. An amount equal to contributions less benefit payments and other charges is invested by the Public Sector Pension Investment Board (PSPIB). Funded pension benefits also relate to consolidated Crown corporations and other entities where pension plans' funds are held in external trusts that are legally separate from Crown corporations and other entities.

ii. Unfunded pension benefits

For unfunded pension benefits, separate invested funds are not maintained. These relate to all pre April 2000 service, and only to post March 2000 service that falls above the Income Tax Act limits for the three main public sector pension plans, all service periods for the pension plans of the federally appointed judges and Members of Parliament, and some of the consolidated Crown corporations and other entities' pension plans. Employee and employer contributions for unfunded pension benefits sponsored by the Government are part of general government funds. Contributions amounted to $1,942 million ($408 million in 2017) of which $146 million ($118 million in 2017) represents regular employer contributions, $1,735 million ($234 million in 2017) represents special employer contributions, and $61 million ($56 million in 2017) represents employee contributions.

iii. Other future benefits

Other employee and veteran future benefit plans sponsored by the Government and almost all of the other employee future benefits sponsored by the consolidated Crown corporations and other entities are unfunded. The health care and dental plans for retired employees are contributory plans, whereby contributions by retired plan members are made to obtain coverage. These contributions amounted to $395 million ($332 million in 2017). The cost of benefits earned and benefits paid are presented net of these contributions. Additional details can be found in Section 6 (unaudited) of this volume.

c. Actuarial valuations

i. For funding purposes

Pursuant to the Public Pensions Reporting Act, actuarial valuations of the pension plans sponsored by the Government are performed at least every three years to determine the state of the pension plans, as well as to assist in making informed decisions regarding the financing of the Government's pension benefit obligations. The actuarial assumptions underlying the valuations are based on the actuary's best estimates.

The most recent triennial actuarial valuations were conducted as at March 31, 2015, for the Royal Canadian Mounted Police pension plan; as at March 31, 2016, for the Canadian Forces―Regular Force, Canadian Forces―Reserve Force, the Members of Parliament and the federally appointed judges pension plans; and as at March 31, 2017, for the public service pension plan, for which the valuation is currently in-progress.

Federally regulated private pension plans sponsored by consolidated Crown corporations and other entities are governed by the provisions of the Pension Benefits Standards Act, 1985 and are required to adhere to the directives of the Superintendent of Financial Institutions. The actuarial valuations are conducted at least every three years, or more often depending on the financial situation of the plan.

ii. For accounting purposes

Actuarial valuations of the public sector pension and other employee and veteran future benefit plans are performed every year to measure and report the obligations and to attribute the costs of the benefits to the period. Actuarial valuations are conducted as at March 31, except for some of the consolidated Crown corporations and other entities for which the actuarial valuations are conducted as at December 31. The actuarial valuations are based on the most recent or any in-progress actuarial valuation for funding purposes, as applicable, in regards to the majority of the demographic assumptions. The other assumptions underlying the valuations are based on best estimates of the Government or of management of the consolidated Crown corporations and other entities.

d. Changes to benefit plans

i. Plan amendments

In 2018, amendments were made to veteran future benefits. These include the creation of the new Pain and Suffering Compensation benefit that will replace the existing Disability Award; the new Additional Pain and Suffering Compensation benefit, to compensate veterans with a service related injury or illness which is causing severe and permanent impairment that is creating a barrier to re-establishment in civilian life; and the consolidation of some financial benefits into one new Income Replacement Benefit. These amendments resulted in a one-time past service cost reduction of $1,625 million plus a one-time past service cost of $4,305 million, for a net one-time past service cost of $2,680 million. As a result, a previously unrecognized net actuarial loss of $1,625 million was immediately recorded.

In 2017, amendments to veteran future benefits resulted in one-time past service costs of $353 million. Amendments to the pension plan of a consolidated Crown corporation resulted in a one-time past service cost of $28 million and the immediate recognition of a previously unrecognized net actuarial gain of $12 million. An amendment to employee severance benefits resulted in a one-time past service cost of $7 million.

ii. Plan curtailments

In 2018, the veteran Supplementary Retirement Benefit was curtailed. This curtailment resulted in a one-time past service cost reduction of $162 million and the immediate recognition of a previously unrecognized net actuarial loss of $14 million. As well, the deeming date for the transfer of Royal Canadian Mounted Police civilian member's pension entitlements to the public service pension plan was postponed to May 21, 2020. This postponement had no impact on curtailment costs in 2018 (one-time past service cost reduction of $27 million in the Royal Canadian Mounted Police pension plan and immediate recognition of a previously unrecognized net actuarial loss of $15 million in 2017, as restated—Note 2a).

Over the past several years, the accumulation of severance benefits for voluntary departures has ceased for all employee groups except for Ministers' exempt staff. Employees subject to these changes were given the option to be paid the full or partial value of benefits earned to date or collect the full or remaining value of benefits upon departure from the public service. No curtailments occurred this year (one-time past service cost reduction of $48 million and immediate recognition of a previously unrecognized net actuarial loss of $109 million in 2017, representing the portion related to the obligation for employees subject to the curtailments).

iii. Plan settlements

In 2018, payments of $275 million ($3 million in 2017) were made to employees affected by the curtailments of severance benefits who opted to cash out the full or partial value of their accumulated benefits. The settlements resulted in a one-time past service cost reduction of $60 million (nil in 2017) and immediate recognition of a previously unrecognized net actuarial gain of $2 million (nil in 2017).

e. Net future benefit liabilities

The accrued benefit obligations in respect of public sector pension and other employee and veteran future benefit plans are presented net of pension assets and unrecognized net actuarial gain or loss, as well as contributions and benefits paid by some of the consolidated Crown corporations and other entities after their measurement date of December 31 up to March 31, in the Consolidated Statement of Financial Position. The details are as follows:

i. Accrued benefit obligations

The changes in the accrued benefit obligations during the year were as follows:

ii. Pension assets

Pension assets include investments held by the PSPIB and external trusts of consolidated Crown corporations and other entities and contributions receivable from employees for past service buyback elections.

The changes in pension assets during the year were as follows:

At March 31, 2018, the market value of the investments is $164,027 million ($145,565 million in 2017). The actual return on investments is $14,340 million ($15,858 million in 2017) and the actual rate of return on investments calculated on a time-weighted basis was 10.1% (12.8% in 2017) during the year.

iii. Net future benefit liabilities

A reconciliation of the accrued benefit obligations to the amounts of net future benefit liabilities follows:

f. Future benefit and interest expenses

The cost of public sector pension and other employee and veteran future benefit plans is comprised of benefit and interest expenses. Components are as follows:

g. Actuarial assumptions

The assumptions used in the actuarial valuations for accounting purposes are based on the Government's or the consolidated Crown corporations and other entities management's best estimates of expected long-term experience and short-term forecasts, as well as the majority of the demographic assumptions underlying the most recent or any in-progress actuarial valuations for funding purposes. The assumptions include estimates of discount rates, future inflation, returns on investments, general wage increases, workforce composition, retirement rates and mortality rates.

The discount rates used to measure the present value of the accrued obligations for public sector pensions and other employee and veteran future benefits sponsored by the Government are as follows:

• for funded pension benefits, the streamed expected rates of return on invested funds; and
• for unfunded pension and other future benefits, the Government's cost of borrowing derived from the yields on the actual zero-coupon yield curve for Government of Canada bonds which reflect the timing of the expected future cash flows.

The principal actuarial assumptions used in measuring the accrued benefit obligations as at March 31 for Government‒sponsored plans, as well as the related future benefit and interest expenses for the year, were as follows:

The discount rates used to measure the significant classes of pensions and other employee future benefits sponsored by the consolidated Crown corporations and other entities are based on a variety of methodologies. To measure the present value of their accrued benefit obligations, these consolidated Crown corporations and other entities used expected rates of return on invested funds ranging from 5.3% to 6.4% (5.3% to 6.0% in 2017) for the funded pension benefits, discount rates ranging from 2.2% to 3.5% (2.2% to 3.8% in 2017) for the unfunded pension benefits and discount rates ranging from 2.2% to 3.5% (2.1% to 3.8% in 2017) for the other employee future benefits. The long-term general wage increase ranged from 2.8% to 3.8% (2.8% to 3.8% in 2017). The long-term inflation rate has remained consistent at 2.0% (2.0% in 2017).

The expected average remaining service life (EARSL) of the employees represent periods ranging from 4 to 23 years (4 to 23 years in 2017) according to the plan in question; more specifically, from 12 to 15 years (11 to 15 years in 2017) for the three main public sector pension plans. The average remaining life expectancy (ARLE) of the benefit recipients under wartime veteran plans represent periods ranging from 6 years to 8 years (6 to 11 years in 2017).

h. Sensitivity analysis

Changes in assumptions can result in significantly higher or lower estimates of the accrued benefit obligations. The table below illustrates the possible impact of a 1% change in the principal actuarial assumptions.

10. Other liabilities

Other liabilities include:

a. Canada Pension Plan Account

As explained in Note 1, the financial activities of the Canada Pension Plan (CPP) are not included in these consolidated financial statements.

The CPP is a federal/provincial social insurance program established by an Act of Parliament. It is compulsory and in operation in all parts of Canada, except for the Province of Quebec. The objective of the program is to provide a measure of protection to workers and their families against the loss of earnings due to retirement, disability or death. The CPP is financed from employees, employers and self-employed workers contributions, as well as investments earnings. The CPP's investments are held and managed by the Canada Pension Plan Investment Board (CPPIB). As administrator of the CPP, the Government's authority to provide benefits is limited to the consolidated net assets of the CPP. At March 31, 2018, the fair value of the CPP's consolidated net assets is $360,997 million ($320,895 million in 2017).

Pursuant to the Canada Pension Plan Act, the transactions of the CPP are recorded in the Canada Pension Plan Account (the Account) within the accounts of Canada. The Account also records the amounts transferred to or received from the CPPIB. The $32 million ($106 million in 2017) balance in the Account represents the CPP's deposit with the Receiver General for Canada and, therefore, is reported as a liability.

b. Others

Deposit and trust accounts are a group of liabilities representing the Government's financial obligations in its role as administrator of certain funds that it has received or collected for specified purposes and that it will pay out accordingly. To the extent that the funds received are represented by negotiable securities, these are deducted from the corresponding accounts to show the Government's net liability. Certain accounts earn interest which is charged to interest on the public debt. One of the largest deposit and trust accounts is the Indian band funds account in the amount of $591 million ($645 million in 2017). This account was established to record funds belonging to Indian bands throughout Canada pursuant to the Indian Act.

Other specified purpose accounts are liability accounts that are used to record transactions made under authorities obtained from Parliament through either the Financial Administration Act or other specific legislation. Certain accounts earn interest which is charged to interest on the public debt. The largest other specified purpose account is the Public Service Death Benefit Account totalling $3,715 million ($3,627 million in 2017). This account was established under the Public Service Superannuation Act to provide life insurance to contributing members of the public service.

11. Cash and cash equivalents

Cash and cash equivalents are as follows:

12. Taxes and other accounts receivable

Taxes receivable represent tax revenues that were assessed by year end as well as amounts receivable due to the accrual of tax revenues as at March 31. These accrued receivables are not due until the next fiscal year. They also include other receivables for amounts collectible through the tax system such as provincial and territorial taxes, Employment Insurance premiums and Canada Pension Plan contributions.

The Government has established an allowance for doubtful accounts of $14,345 million ($14,253 million in 2017) and has recorded a bad debt expense of $3,325 million ($2,759 million in 2017). The allowance for doubtful accounts is management's best estimate of the uncollectible amounts that have been assessed, including the related interest and penalties. The allowance for doubtful accounts has two components. A general allowance is calculated based on the age and type of tax accounts using rates based on historical collection experience. A specific allowance is calculated based on an annual review of all accounts over $10 million. The allowance for doubtful accounts is adjusted every year through a provision for doubtful accounts and is reduced by amounts written off as uncollectible during the year. The annual provision is reported as a bad debt expense which is charged against other expenses. The details of the taxes receivable and allowance for doubtful accounts are as follows:

Other accounts receivable represent billed or accrued financial claims arising from amounts owed to the Government at year end, and cash collateral pledged to counterparties.

Billed or accrued financial claims arising from amounts owed to the Government total $8,108 million ($6,535 million in 2017) and are presented net of an allowance for doubtful accounts of $1,295 million ($2,367 million in 2017). Further details can be found in Section 7 (unaudited) of this volume.

Cash collateral pledged to counterparties of $8,716 million ($6,873 million in 2017) represents collateral support under International Swaps and Derivatives Association (ISDA) master agreements in respect of outstanding cross-currency swap arrangements. Further details can be found in Note 17.

13. Foreign exchange accounts

Foreign exchange accounts represent financial claims and obligations of the Government as a result of Canada's foreign exchange operations.

The Government holds certain investments in its Exchange Fund Account to provide general liquidity and to promote orderly conditions in the foreign exchange market for the Canadian dollar. As at March 31, 2018, the fair value of the marketable securities held in the Exchange Fund Account is $92,837 million ($82,512 million in 2017), established using market quotes or other available market information. Further details on these investments are provided in the unaudited financial statements of the Exchange Fund Account in Section 8 of this volume.

Subscriptions and loans to the International Monetary Fund (IMF) and special drawing rights allocations are denominated in special drawing rights (SDR). The SDR serves as the unit of account for the IMF and its value is based on a basket of key international currencies (US dollar, Euro, Japanese yen, British pound sterling and Chinese renminbi [as of October 1, 2016]). Canada participates in three lending arrangements with the IMF along with a group of other member countries. Collectively, maximum direct lending under the arrangements is limited to no more than the equivalent of SDR 12,967 million ($24,286 million) at March 31, 2018.

The following table presents the balances of the foreign exchange accounts:

14. Enterprise Crown corporations and other government business enterprises

a. Enterprise Crown corporations and other government business enterprises

The following table presents the Government's recorded loans, investments and advances in significant enterprise Crown corporations and other government business enterprises:

The following table presents the summary financial position and results of enterprise Crown corporations and other government business enterprises:

b. Non-public property

Non-public property (NPP), as defined under the National Defence Act, consists of money and property contributed to or by Canadian Forces members and is administered for their benefit and welfare by the Canadian Forces Morale and Welfare Services (CFMWS). The CFMWS is responsible for delivering selected morale and welfare programs, services and activities through three operational divisions, Canadian Forces Exchange System (CANEX), Personnel Support Programs and Service Income Security Insurance Plan (SISIP) Financial Services. Under the National Defence Act, NPP is explicitly excluded from the Financial Administration Act. The Government provides some services related to NPP activities such as accommodation and security for which no amount is charged. The cost of providing these services is included in the consolidated financial statements of the Government of Canada. In 2018, CFMWS administered estimated revenues and expenses of $440 million ($420 million in 2017) and $436 million ($396 million in 2017) respectively and had net equity of $777 million at March 31, 2018 ($755 million at March 31, 2017). These amounts are excluded from the consolidated financial statements of the Government of Canada.

15. Other loans, investments and advances

The following table presents a summary of the balances of other loans, investments and advances by category:

The following table presents a summary of the balances of other loans, investments and advances by currency:

Loans to national governments consist mainly of loans for financial assistance totalling $400 million ($400 million in 2017), international development assistance to developing countries totalling $109 million ($125 million in 2017), and development of export trade totalling $527 million ($489 million in 2017) which are administered by Export Development Canada. Certain loans are non-interest bearing and others bear interest at rates varying from 0.1% to 10.3%. These loans are repayable over 1 to 28 years, with final instalments due in 2045.

Loans, investments and advances to international organizations include subscriptions to the share capital of international banks totalling $14,360 million ($13,677 million in 2017) as well as loans and advances to associations and other international organizations totalling $8,392 million ($8,189 million in 2017). These subscriptions are composed of both paid-in and callable capital. The majority of these investments are treated as concessionary as they do not provide a return on investment, but are repayable on termination of the organization or withdrawal from it. Most loans and advances to international organizations are made to banks and associations that use these funds to make loans to developing countries at significantly concessionary terms.

Loans for the development of export trade are either non-interest bearing or bear interest at rates varying from 1.0% to 9.0% and are administered by Export Development Canada. Collateral of $228 million ($243 million in 2017) is held on these loans and they are repayable over 1 to 4 years with final instalments due in 2022.

Loans to provinces and territories include loans made under relief acts and other legislation. Loans totalling $388 million ($290 million in 2017) are non-interest bearing and will be repaid by reducing transfer payments over 1 to 8 years.

Unconditionally repayable contributions are in substance loans aimed at stimulating economic development or for assistance. They bear various interest rates, some of which have concessional terms, and are repayable at various due dates with final instalments due within 4 to 25 years of initial disbursement.

Other loans, investments and advances include loans under the Canada Student Loans Program, and other investments in bonds, market funds and fixed income securities. Loans under the Canada Student Loans Program of $19,960 million ($18,783 million in 2017) are provided interest-free to full-time students and afterward bear interest at either a variable prime rate plus 2.5% or a fixed prime rate plus 5.0%. The repayment period is generally 10 years. Other investments were $2,121 million ($2,364 million in 2017).

16. Tangible capital assets

Tangible capital assets consist of acquired, built, developed or improved tangible assets whose useful life extends beyond the fiscal year and which are intended to be used on an ongoing basis for producing goods or delivering services, including military activities. Tangible capital assets include: land; buildings; works and infrastructure; machinery and equipment including computer hardware and software; vehicles including ships, aircraft and others; leasehold improvements; and assets under construction. Tangible capital assets also include assets under capital lease. Renewal options for assets under capital leases are typically for periods of 3 to 5 years and are exercisable at the discretion of the lessee. Detailed information on tangible capital assets is provided in Section 10 (unaudited) of this volume.

Except for land, the cost of tangible capital assets used in Government operations is generally amortized on a straight-line basis over the estimated useful life of the asset as follows:

The following table presents a summary of the transactions and balances for the main categories of tangible capital assets:

17. Financial instruments

The Government uses various financial instruments to manage financial risks associated with its financial assets and liabilities. The Government does not hold or use derivative instruments for trading or speculative purposes.

a. Derivative financial instruments

i. Swap agreements

Government debt is issued at both fixed and variable interest rates and is denominated in Canadian dollars, US dollars and Euros. The Government has entered into cross currency swap agreements to facilitate management of its debt structure. Using cross currency swap agreements, Canadian dollar and other foreign currency debt has been converted into US dollars or other foreign currencies with either fixed interest rates or variable interest rates. As a normal practice, the Government's swap positions are held to maturity.

The interest paid or payable and the interest received or receivable on all swap transactions are recorded as part of public debt charges. Unrealized gains or losses due to fluctuations in the foreign exchange value of the swaps are presented in the cross currency swap revaluation account and are recognized as part of net foreign exchange revenues in the Consolidated Statement of Operations and Accumulated Deficit.

The Government enters into two-way Credit Support Annex agreements for cross currency swaps with certain counterparties pursuant to International Swaps and Derivatives Association (ISDA) master agreements. Under the terms of those agreements, the Government may be required to pledge and/or receive eligible collateral relating to obligations to the counterparties. In the normal course of business, these pledged collateral amounts (which may include cash and/or securities) will be returned to the pledgor when there are no longer any outstanding obligations. At March 31, 2018, cash collateral pledged of $8,716 million ($6,873 million in 2017) is recorded in other accounts receivable, and cash collateral received of $96 million ($94 million in 2017) is recorded in other liabilities. In addition, the Government holds collateral in securities from counterparties with a nominal amount of $2,086 million and fair value of $2,456 million (nominal amount of $2,002 million and fair value of $2,539 million in 2017), which has not been recognized in the statement of financial position as the Government does not obtain economic ownership unless the pledgor defaults.

Cross currency swaps with contractual principal amounts outstanding at March 31, stated in Canadian dollars, are as follows:

ii. Foreign-exchange forward agreements

The Government's lending arrangements with the IMF, included in the foreign exchange accounts, are denominated in special drawing rights (SDR). However, the Government typically funds these loans with US dollars. Consequently, since the value of the SDR is based upon a basket of key international currencies (US dollar, Euro, Japanese yen, British pound sterling and Chinese renminbi), a currency mismatch results, whereby fluctuations in the value of the loan asset are not equally offset by fluctuations in the value of the related funding liability. Therefore, the Government enters into forward agreements to hedge this foreign exchange risk.

Unrealized gains or losses due to fluctuations in the foreign exchange value of these agreements are recorded in accounts payable and accrued liabilities and are recognized as part of the net foreign exchange revenues in the Consolidated Statement of Operations and Accumulated Deficit.

The notional principal amount of a foreign-exchange forward agreement refers to the principal amount used to calculate contractual cash flows. This amount does not represent an asset or liability, and is not included in the Consolidated Statement of Financial Position. Foreign-exchange forward agreements outstanding at March 31, with notional principal amounts in Canadian dollars of $1,291 million ($1,364 million at March 31, 2017), mature during the next fiscal year.

iii. Credit risk related to swap and foreign-exchange forward agreements

The Government manages its exposure to credit risk by dealing principally with financial institutions having acceptable credit ratings, based on external credit ratings and internal credit analysis, in accordance with the Statement of Investment Policy for the Government of Canada.

Credit risk is also managed through collateral provisions in swap and foreign-exchange forward agreements. Collateral pledged by counterparties to the Government may be liquidated in the event of default to mitigate credit losses.

The Government does not have a significant concentration of credit risk with any individual institution and does not anticipate any counterparty credit loss with respect to its swap and foreign-exchange forward agreements.

The following table presents the contractual or notional principal amounts of the swap and foreign-exchange forward agreements organized by credit ratings based on published Standard & Poor's credit ratings and stand-alone credit profiles at year end:

b. Managing foreign currency and interest rate risks and sensitivity analysis to foreign currency exposures

Foreign currency and interest rate risks are managed using a strategy of matching the duration and the currency of the foreign exchange accounts assets and the related foreign currency borrowings of the Government. At March 31, 2018, assets within the foreign exchange accounts and their related foreign currency borrowings substantially offset each other on a market value basis. Accordingly, the impact of price changes affecting these assets and the liabilities funding these assets naturally offset each other, resulting in no significant impact to the Government's net debt.

Assets related to the IMF are only partially matched by related foreign currency borrowings as they are denominated in SDRs, however, foreign-exchange risks relating to loans to the IMF have been managed through entering into various foreign-exchange forward agreements.

The majority of the government foreign currency assets and related liabilities are held in four currency portfolios: the US dollar, the Euro, the British pound sterling and the Japanese yen. At March 31, 2018, a 1% appreciation in the Canadian dollar as compared to the US dollar, the Euro, the British pound sterling and the Japanese yen would result in a foreign exchange loss of $3 million due to the exposure of the US dollar portfolio and a foreign exchange loss of $1 million due to the exposure of the Euro portfolio. There is no significant exposure related to the British pound sterling and the Japanese yen portfolios.

The net foreign exchange gain included in net foreign exchange revenues, other revenues and other expenses on the Consolidated Statement of Operations and Accumulated Deficit amounts to $54 million (net foreign exchange gain of $91 million in 2017).

c. Fair value information

The carrying values of other accounts payable and accrued liabilities, interest and matured debt, cash and cash equivalents, other accounts receivable and other loans, investments and advances are assumed to approximate their fair values due to their short-term to maturity or allowances recorded to reduce their carrying values to amounts that approximate their estimated realizable values.

The following table presents the fair value of derivative financial instruments with contractual or notional principal amounts outstanding at March 31:

Fair values of the swap and foreign-exchange forward agreements are the estimated amount that the Government would receive or pay, based on market factors, if the agreements were terminated on March 31. They are established by discounting the expected cash flows of the swap and foreign-exchange forward agreements, calculated from the contractual or notional principal amounts, using year-end market interest and exchange rates. A positive (negative) fair value indicates that the Government would receive (make) a payment if the agreements were terminated on March 31.

18. Contractual obligations and contractual rights

a. Contractual obligations

The nature of government activities results in large multi-year contracts and agreements, including international treaties, protocols and agreements of various size and importance. Any financial obligations resulting from these are recorded as a liability when the terms of these contracts or agreements for the acquisition of goods and services or the provision of transfer payments are met. Detailed information on contractual obligations is provided in Section 11 (unaudited) of this volume. Major contractual obligations that will generate expenditures in future years and that can be reasonably estimated are summarized as follows:

b. Contractual rights

The activities of government sometimes involve the negotiation of contracts or agreements with outside parties that result in the government having rights to both assets and revenues in the future. They principally involve sales of goods and services, leases of property, and royalties and revenue/profit-sharing arrangements while all other contractual rights are combined for reporting purposes. The government has agreements that provide contractual rights to future revenue based on a percentage of revenue or profits of the other party to the agreement, or based on receiving an amount for each unit of goods sold. The terms of these contracts or agreements may not allow for a reasonable estimate of future revenues. Where the terms of contracts and agreements allow for a reasonable estimate, the major contractual rights are summarized in the table presented below. Detailed information on contractual rights is provided in Section 11 (unaudited) of this volume.

19. Segmented information

The Government segmented information is based on the ministry structure, which groups the activities of departments, agencies and consolidated Crown corporations and other entities for which a Minister is responsible, and the enterprise Crown corporations and other government business enterprises as described in Note 1 and Note 14. The five main ministries are reported separately and the others are grouped together with the provision for valuation and other items. The presentation by segment is based on the same accounting policies as those described in the Summary of significant accounting policies in Note 1. Inter-segment transfers are measured at the exchange amount. The following tables present the segmented information by Ministry and enterprise Crown corporations and other government business enterprises before the elimination of internal transactions that are eliminated in the adjustments column before arriving at the total for the year ended March 31:

20. Subsequent event

On August 31, 2018, the Government of Canada purchased the Trans Mountain Pipeline System and Expansion Project from Kinder Morgan Cochin ULC, including the related pipeline and terminal assets for $4.5 billion. The business was acquired through an enterprise Crown corporation. This transaction will be reflected in the 2019 financial statements through loans, investments and advances on the Government of Canada’s Consolidated Statement of Financial Position.

Public Accounts of Canada 2018 Volume I—Bottom of the page Navigation

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