Financial Statements of Fisheries and Oceans Canada

Year ended March 31, 2013

Fisheries and Oceans Canada

Statement of Management Responsibility Including Internal Control Over Financial Reporting

Responsibility for the integrity and objectivity of the accompanying financial statements for the year ended March 31, 2013, and all information contained in these statements rests with the management of Fisheries and Oceans Canada. These financial statements have been prepared by management using the Government's accounting policies, which are based on Canadian public sector accounting standards.

Management is responsible for the integrity and objectivity of the information in these financial statements. Some of the information in the financial statements is based on management's best estimates and judgment, and gives due consideration to materiality. To fulfill its accounting and reporting responsibilities, management maintains a set of accounts that provides a centralized record of the department's financial transactions. Financial information submitted in the preparation of the Public Accounts of Canada, and included in the department's Departmental Performance Report, is consistent with these financial statements.

Management is also responsible for maintaining an effective system of internal control over financial reporting designed to provide reasonable assurance that financial information is reliable, that assets are safeguarded and that transactions are properly authorized and recorded in accordance with the Financial Administration Act and other applicable legislation, regulations, authorities and policies.

Management seeks to ensure the objectivity and integrity of data in its financial statements through careful selection, training, and development of qualified staff; through organizational arrangements that provide appropriate divisions of responsibility; through communication programs aimed at ensuring that regulations, policies, standards, and managerial authorities are understood throughout the department and through conducting an annual risk-based assessment of the effectiveness of the system of internal control over financial reporting.

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

A risk-based assessment of the system of internal control over financial reporting for the year ended March 31, 2013 was completed in accordance with the Treasury Board Policy on Internal Control and the results and action plans are summarized in the annex.

The effectiveness and adequacy of the department's system of internal control is reviewed by the work of internal audit staff, who conduct periodic audits of different areas of the department's operations, and by the Departmental Audit Committee, which oversees management's responsibilities for maintaining adequate control systems and the quality of financial reporting, and which recommends the financial statements to the Deputy Minister.

The financial statements of Fisheries and Oceans Canada have not been audited.

Statement of Financial Position (Unaudited)

As at March 31

Environmental and contingent liabilities (Note 8)
Contractual obligations (Note 13)
The accompanying notes form an integral part of these financial statements.

Statement of Operations and Departmental Net Financial Position (Unaudited)

For the Year Ended March 31

Segmented Information (Note 16)
The accompanying notes form an integral part of these financial statements.

Statement of Change in Departmental Net Debt (Unaudited)

For the Year Ended March 31

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

Statement of Cash Flows (Unaudited)

For the Year Ended March 31

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

Notes to the Financial Statements (Unaudited)

For the Year Ended March 31

1. Authority and objectives

Fisheries and Oceans Canada was established under the Department of Fisheries and Oceans Act and reports to Parliament through the Minister of Fisheries and Oceans.

Fisheries and Oceans Canada’s guiding legislation includes the Oceans Act and the Fisheries Act. Fisheries and Oceans Canada is also one of the three departments responsible for the Species at Risk Act.

Fisheries and Oceans Canada has three strategic outcomes that are delivered through twenty-six programs. The three strategic outcomes are:

Economically Prosperous Maritime Sectors and Fisheries: Through its policies, programs and services, and while supporting the sustainable and effective use of Canada’s water resources, Fisheries and Oceans Canada contributes to the capacity of Canada’s Maritime Sectors and Fisheries to derive economic benefits and further enhance their competitiveness.

Sustainable Aquatic Ecosystems: Fisheries and Oceans Canada’s programs and policies contribute to the conservation, protection, and sustainability of Canada’s aquatic ecosystems through the management of risks that affect species, oceans and fish habitats.

Safe and Secure Waters: Fisheries and Oceans Canada contributes to maintaining and improving maritime safety and security through the provision of maritime infrastructure, information, products and services necessary to ensure safe navigation and the protection of life and property.

Internal Services are activities and resources that are administered to support the needs of programs under all three strategic outcomes and other corporate obligations: Management and Oversight Services; Communications; Legal Services; Human Resources Management; Information Management; Information Technology; Financial Management; Travel and Other Administrative Services; Real Property; Materiel; and Acquisition. Internal Services include only those activities and resources that apply across an organization and not to those provided specifically to a program.

2. Summary of Significant Accounting Policies

These financial statements have been 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.

Significant accounting policies are as follows:

1. Parliamentary authorities – Fisheries and Oceans Canada is financed by the Government of Canada through Parliamentary authorities. Financial reporting of authorities provided to Fisheries and Oceans Canada do not parallel financial reporting according to generally accepted accounting principles since authorities are primarily based on cash flow requirements. Consequently, items recognized in the Statement of Operations and Departmental Net Financial Position and in the Statement of Financial Position are not necessarily the same as those provided through authorities from Parliament. Note 3 provides a reconciliation between the bases of reporting. The planned results amounts in the Statement of Operations and Departmental Net Financial Position are the amounts reported in the future-oriented financial statements included in the 2012-2013 Report on Plans and Priorities. The planned results for 2012-2013 have been restated to reflect the revenue held on behalf of Government. This restatement resulted in a $43.6 million increase in net cost of operations before Government funding and transfers. In addition, the planned results have also been reclassified to conform to the current year presentation.

2. Net cash provided by Government – Fisheries and Oceans Canada operates within the Consolidated Revenue Fund (CRF), which is administered by the Receiver General for Canada. All cash received by Fisheries and Oceans Canada is deposited to the CRF and all cash disbursements made by Fisheries and Oceans Canada are paid from the CRF. The net cash provided by Government is the difference between all cash receipts and all cash disbursements, including transactions between departments of the Government.

3. Amounts due from or to the CRF are the result of timing differences that occur at year-end between when a transaction affects authorities and when it is processed through the CRF. Amounts due from the CRF represent the net amount of cash that Fisheries and Oceans Canada is entitled to draw from the CRF without further authorities to discharge its liabilities.

4. Revenues:

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

   Funds received from external parties for specified purposes are recorded upon receipt as deferred revenue. These revenues are recognized in the period in which the related expenses are incurred.

   Funds that have been received are recorded as deferred revenue, provided Fisheries and Oceans Canada has an obligation to other parties for the provision of goods, services or the use of assets in the future.

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

   Revenues that are non-respendable are not available to discharge Fisheries and Oceans Canada’s liabilities. While the Deputy Minister is expected to maintain accounting control, he has no authority regarding the disposition of non-respendable revenues. As a result, non-respendable revenues are considered to be earned on behalf of the Government of Canada and are therefore presented in reduction of the entity’s gross revenues.

5. Expenses – are recorded on an accrual basis:

   Transfer payments are recorded as expenses when authorization for the payment exists and the recipient has met the eligibility criteria or the entitlements established for the transfer payment program. In situations where payments do not form part of an existing program, transfer payments are recorded as expenses when the Government announces a decision to make a non-recurring transfer, provided the enabling legislation or authorization for payment receives parliamentary approval prior to the completion of the financial statements. Transfer payments that become repayable as a result of conditions specified in the contribution agreement that have come into being are recorded as a reduction to transfer payment expense and as a receivable.

   Vacation pay and compensatory leave are accrued as the benefits are earned by employees under their respective terms of employment.

   Services provided without charge by other government departments for accommodation, employer contributions to the health and dental insurance plans, legal services and workers’ compensation are recorded as operating expenses at their estimated cost.

6. Employee future benefits:

   (i) Pension benefits: Eligible employees participate in the Public Service Pension Plan, a multi-employer plan administered by the Government of Canada. Fisheries and Oceans Canada’s contributions to the Plan are charged to expenses in the year incurred and represent the total departmental obligation to the Plan. Fisheries and Oceans Canada’s responsibility with regard to the Plan is limited to its contributions. Actuarial surpluses or deficiencies are recognized in the financial statements of the Government of Canada, as the Plan’s sponsor.

   (ii) Severance benefits: Employees entitled to severance benefits under labour contracts or conditions of employment earn these benefits as services necessary to earn them are rendered.

   The obligation relating to the benefits earned by employees is calculated using information derived from the results of the actuarially determined liability for employee severance benefits for the Government as a whole.

7. Accounts and loans receivable are stated at the lower of cost and net recoverable value. A valuation allowance is recorded for accounts receivable where recovery is considered uncertain.

8. Contingent liabilities – Contingent liabilities are potential liabilities that may become actual liabilities when one or more future events occur or fail to occur. To the extent that the future event is likely to occur or fail to occur, and a reasonable estimate of the loss can be made, an estimated liability is accrued and an expense recorded. If the likelihood is not determinable or if an amount cannot be reasonably estimated the contingency is disclosed in the notes to the financial statements.

9. Environmental liabilities – Environmental liabilities reflect the estimated costs related to the management and remediation of environmentally contaminated sites. Based on management’s best estimates, a liability is accrued and an expense recorded when the contamination occurs or when Fisheries and Oceans Canada becomes aware of the contamination and is obligated, or is likely to be obligated to incur such costs. If the likelihood of Fisheries and Oceans Canada’s obligation to incur these costs is not determinable, or if an amount cannot be reasonably estimated, the costs are disclosed as contingent liabilities in the notes to the financial statements.

10. Inventory - Inventory held for future program delivery consists of spare parts, materials, supplies and fuel. Spare parts, materials and supplies are valued at cost or net realizable value. Fuel is valued using the moving weighted average cost method.

    Inventory held for resale consists of supplies for the production of publications and publications which will be sold in the future. It is valued at the lower of cost or net realizable value.

11. Tangible capital assets – All tangible capital assets and leasehold improvements having an initial cost of $10,000 or more are recorded at their acquisition cost. Fisheries and Oceans Canada does not capitalize intangibles, works of art and historical treasures that have cultural, aesthetic or historical value, assets located on Indian reserves or museum collections.

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

    Asset Class	Amortization Period
    Buildings	15-40 years
    Work and infrastructure	5-75 years
    Machinery and equipment	3-25 years
    Informatics	3-5 years
    Furniture	10 years
    Ships and boats	5-40 years
    Aircrafts	15-25 years
    Vehicles	5-20 years
    Leasehold improvements	Period of expected use; lesser of economic life of the improvement or the lease term
    Assets under capital lease	Period of expected use; lesser of economic life of the improvement or the lease term
    Work in progress are recorded in the applicable asset class in the year that they become available for use and are not amortized until they become available for use.

     

12. Measurement uncertainty - The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in the financial statements. At the time of preparation of these statements, management believes the estimates and assumptions to be reasonable. The most significant items where estimates are used are the workforce adjustment liability, allowance for vacation pay and compensatory leave, liability for employee future benefits, environmental and contingent liabilities, allowance for bad debts, and the useful life of tangible capital assets. Actual results could significantly differ from those estimated. Management’s estimates are reviewed periodically and, as adjustments become necessary, they are recorded in the financial statements in the year they become known.

3. Parliamentary Authorities

Fisheries and Oceans Canada receives most of its funding through annual parliamentary authorities. Items recognized in the Statement of Operations and Departmental Net Financial Position and the Statement of Financial Position in one year may be funded through parliamentary authorities in prior, current or future years. Accordingly, Fisheries and Oceans Canada has different net results of operations for the year on a government funding basis than on an accrual accounting basis. The differences are reconciled in the following tables:

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

b) Authorities provided and used

4. Accounts Payable and Accrued Liabilities

The following table presents the details of Fisheries and Oceans Canada's accounts payable and accrued liabilities:

As part of Canada’s Economic Action Plan 2012 and Budget 2013, the Government announced savings measures to be implemented by departments over the next three fiscal years starting in 2012-2013. As a result, Fisheries and Oceans Canada has recorded an obligation for termination benefits for an amount of $76.7 million ($62.0 million in 2011-2012) as part of accrued liabilities to reflect the estimated workforce adjustment costs.

5. Deferred Revenue

Deferred revenue from the Fisheries and Aquaculture Management licenses represents the balance at year-end of unearned revenues stemming from fees received prior to services being performed. Other revenues are from external parties which are restricted to fund the expenditures related to specific projects. Revenue is recognized in the period in which these expenditures are incurred or in which the service is performed.

6. Other Liabilities

Other liabilities represent deferred revenue funds received by Fisheries and Oceans Canada under regulations, cost-sharing agreements or to fund projects.

Details of the transactions related to these accounts are as follows:

Research projects deposits: This account was established to record contributions received from organizations and individuals, for the furtherance of research work.

Federal/provincial cost-sharing agreements: This account was established to record the deposit of money received from the provinces for cost-shared programs. The funds are disbursed according to agreements

Sale of seized assets: This account was established to record the proceeds of sale of seized items by Fisheries and Oceans Canada from a person contravening the Fisheries Act. Money so received is held in the Consolidated Revenue Fund pending final resolution of the case by the Minister of Fisheries and Oceans Canada or the courts.

Contractor security deposits: This account was established to record money held to ensure that a contractor's obligations under contracts are carried out, to protect the interests of subcontractors, sub-subcontractors and suppliers, and to protect the Crown against loss should a bidder fail to honor a contract.

7. Employee Future Benefits

1. Pension Benefits

   Fisheries and Oceans Canada’s employees participate in the Public Service Pension Plan, which is sponsored and administered by the Government. Pension benefits accrue up to a maximum period of 35 years at a rate of 2 percent per year of pensionable service, times the average of the best five consecutive years of earnings. The benefits are integrated with Canada/Quebec Pension Plans benefits and they are indexed to inflation.

   Both the employees and Fisheries and Oceans Canada contribute to the cost of the Plan. The 2012-2013 expense amounts were $97 million ($96 million in 2011-2012), which represents approximately 1.7 times (1.8 times in 2011-2012) the contributions by employees.

   Fisheries and Oceans Canada’s responsibility with regard to the Plan is limited to its contributions. Actuarial surpluses or deficiencies are recognized in the financial statements of the Government of Canada, as the Plan’s sponsor.

2. Severance Benefits

   Fisheries and Oceans Canada provides severance benefits to its employees based on eligibility, years of service and salary at termination of employment. These severance benefits are not pre-funded. Benefits will be paid from future authorities.

   As part of the collective agreement negotiations with certain employee groups, and changes to the conditions of employment for executives and certain non-represented employees, the accumulation of severance benefits under the employee severance pay program ceased for these employees commencing in 2012. Employees subject to these changes have been given the option to be immediately paid full or partial value of benefits earned to date or collect the full or remaining value of benefits on termination from the public service. These changes have been reflected in the calculation of the outstanding severance benefit obligation.

Information about the severance benefits, measures as at March 31, is as follows:

8. Environmental and Contingent Liabilities

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

1. Contaminated Sites

   Liabilities are accrued to record the estimated costs related to the management and remediation of contaminated sites where Fisheries and Oceans Canada is obligated or likely to be obligated to incur such costs. As at the date of these financial statements, Fisheries and Oceans Canada has identified approximately 858 sites (935 sites in 2011-2012) where such action is possible and for which a liability of $94.4 million ($102.1 million in 2011-2012) has been recorded. Fisheries and Oceans Canada has estimated additional clean-up costs of $108.6 million ($119.7 million in 2011-2012) that are not accrued, as these are not considered likely to be incurred at this time. Fisheries and Oceans Canada’s ongoing efforts to assess contaminated sites may result in additional environmental liabilities related to newly identified sites, or changes in the assessments or intended use of existing sites.

   These liabilities will be accrued by Fisheries and Oceans Canada in the year in which they become likely and are reasonably estimable.

2. Claims and Litigation

   Claims have been made against Fisheries and Oceans Canada in the normal course of operations. These claims include items with pleading amounts and others for which no amount is specified. While the total amount claimed in these actions is significant, their outcomes are not determinable. Fisheries and Oceans Canada has recorded an allowance of $35.1 million ($34.6 million in 2011-2012) for claims and litigations where it is likely that there will be a future payment and a reasonable estimate of the loss can be made. Based on the Department’s assessment, legal proceedings for claims estimated at $322.3 million ($313.4 million in 2011-2012) will be pending at March 31, 2013.

9. Accounts Receivable and Advances

The following table presents details of Fisheries and Oceans Canada's accounts receivable and advances balances:

⁽¹⁾ Loans of $1.4 million have been made to haddock fishermen ($1.3 million, interest of 8% per annum, repayable over 4 years until 1979) and to Canadian producers of frozen groundfish ($0.1 million, interest of 13 % per annum, repayable over 7 years until 1987). Allowances on loans receivable are determined on a loan by loan basis. As a result of the postponement of principal and interest payments beyond the loan's original term, Fisheries and Oceans Canada has established an allowance equivalent to the total amount of principal and interest on the loans receivable.

10. Inventory

The following table presents details of inventory:

The cost of consumed inventory recognized as an expense in the Statement of Operations and Departmental Net Financial Position is $64.6million.

11. Tangible Capital Assets

⁽¹⁾ Adjustments include work in progress of $247 million that were transferred to other categories upon completion of the assets, reclassifications among categories and transfers of assets of $0.021 million and accumulated amortization of $0.016 million.

12. Departmental Net Financial Position

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

The Supplementary Fines – Fisheries Act Account was established pursuant to the Fisheries Act and related regulations to record fines and penalties levied by courts under the Act. The balance in the account is to be used for remedial or preventive action to fish habitat as well as the promotion of proper management, control, conservation, and protection of fisheries or fish habitat.

The Supplementary Fines – Species at Risk Account was established pursuant to the Species at Risk Act and related regulations to record fines and penalties levied by courts under the Act. The balance in the account is to be used for the purpose of conducting research into the protection of the wildlife species in respect of which the offence was committed.

Activity in the aforementioned accounts is as follows:

13. Contractual Obligations

The nature of Fisheries and Oceans Canada's activities can result in some large multi-year contracts and obligations whereby Fisheries and Oceans Canada will be obligated to make future payments in order to carry out its transfer payment programs or when the services/goods are received.

Significant contractual obligations that can be reasonably estimated are summarized as follows:

14. Related Party Transactions

Fisheries and Oceans Canada is related as a result of common ownership to all government departments, agencies, and Crown corporations. Fisheries and Oceans Canada enters into transactions with these entities in the normal course of business and on normal trade terms. During the year, Fisheries and Oceans Canada received services which were obtained without charge from other government departments as disclosed below.

a) Common Services Provided without Charge by Other Government Departments

During the year, Fisheries and Oceans Canada received services without charge from certain common service organizations, related to accommodation, legal services, the employer’s contribution to the health and dental insurance plans and workers’ compensation coverage. These services provided without charge have been recognized in Fisheries and Oceans Canada’s Statement of Operations and Departmental Net Financial Position as follows:

The Government has centralized some of its administrative activities for efficiency, cost effectiveness purposes and economic delivery of programs to the public. As a result, the Government uses central agencies and common service organizations so that one department performs services for all other departments and agencies without charge. The costs of these services, such as the payroll and cheque issuance services provided by Public Works and Government Services Canada and audit services provided by the Office of the Auditor General are not included in Fisheries and Oceans Canada’s Statement of Operations and Departmental Net Financial Position.

b) Other Transactions with Related Parties

Expenses and revenues disclosed in b) exclude common services provided without charges, which are already disclosed in a).

15. Transfer to Other Government Department

Effective November 15, 2011, Fisheries and Oceans Canada transferred responsibility for the delivery of Information Technology Services to Shared Services Canada as per Order-in-Council P.C. 2011-1291 and P.C. 2011-1297, including the stewardship responsibility for the assets and liabilities related to the program. Accordingly, Fisheries and Oceans Canada transferred the following balances of assets and liabilities to Shared Services Canada on November 15, 2011:

During the transition period from November 15, 2011 to March 31, 2012, Fisheries and Oceans Canada continued to administer the transferred activities on behalf of Shared Services Canada. The administered expenses amounted to $10.9 million for the period. These expenses are not recorded in the financial statements.

16. Segmented information

Presentation by segment is based on Fisheries and Oceans Canada's program alignment architecture. The presentation by segment is based on the same accounting policies as described in the Summary of Significant Accounting Policies in Note 2. The following table presents the expenses incurred and revenues generated by strategic outcomes, by major object of expense and by major type of revenue. The segment results for the period are as follows:

17. Adjustments to Prior Year's Results

During the year, Fisheries and Oceans Canada reviewed its processes and procedures related to the calculation of severance benefits liability and adopted a change to the methodology used to determine annual gross payroll subject to severance pay. The financial statements for the year ended March 31, 2012 have been revised. This resulted in an overstatement of liabilities and expenses of $41.6 million as at March 31, 2012.

18. Comparative Information

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

Fisheries and Oceans Canada

Annex to the Statement of Management Responsibility Including Internal Control over Financial Reporting

Fiscal year 2012-2013

Table of Contents

1. Introduction

2. Departmental system of internal control over financial reporting
   
   2.1 Internal Control Management
   2.2 Service Arrangements relevant to financial statements

3. Departmental assessment results during fiscal year 2012-2013
   
   3.1 Design effectiveness testing of key controls
   3.2 Operating effectiveness testing of key controls
   3.3 On-going monitoring of key controls

4. Fisheries and Oceans Canada's Action Plan
   
   4.1 Progress during fiscal year 2012-2013
   4.2 Status and action plan for the next fiscal year and subsequent years

1. Introduction

As required by the Treasury Board Policy on Internal Control, this document provides summary information on the measures taken by Fisheries and Oceans Canada to maintain an effective system of internal control over financial reporting including information on internal control management and assessment results and related action plans.

Further details regarding Fisheries and Oceans Canada’s mission, priorities, strategic outcomes and program activity architecture are available in the Departmental Performance Report and Report on Plans and Priorities.

2. Departmental system of internal control over financial reporting

2.1 Internal Control Management

Fisheries and Oceans Canada has a well-established governance and accountability structure to support departmental assessment efforts and oversight of its system of internal control. The Departmental Financial Management Framework which clearly articulates expectations, requirements and roles and responsibilities for internal controls was approved in June 2011 by the Deputy Minister, Commissioner of the Canadian Coast Guard, Associate Deputy Minister and Chief Financial Officer.

This management framework is in place and includes the following accountability elements in support of sound stewardship of public resources and reliable financial reporting:

• key expectations and requirements of the Deputy Minister as Accounting Officer, the Chief Financial Officer, Senior Departmental Managers (those reporting directly to the Deputy Minister), Departmental Managers, Financial Officers, and separately the Departmental Audit Committee for effective financial management, investment planning, internal control, and oversight;

• values and ethics;

• commitment to training in financial planning and budgeting for managers with budget responsibilities as well as ensuring managers are properly trained in effective financial management.

• the principles for sound financial management and internal control across the department that are consistent with the Financial Administration Act (FAA), and Treasury Board policy instruments; and

• the Financial Management Framework outlines Policy Disciplines, Governance Structures, and Processes and Enablers that, when applied to program management, will lead to positive financial, investment and business results.

The Departmental Financial Management Framework requires that the Deputy Minister is responsible to engage with the Departmental Audit Committee (DAC) on risk-based assessment plans and associated results related to effectiveness of the departmental system of internal control over financial reporting. Since 2010-2011, a dedicated Directorate for Internal Controls over Financial Reporting within the Chief Financial Officer Sector provides the coordination, coherence and focus on the design and maintenance of effective and integrated system of internal controls. Consistent with that framework, the Chief Financial Officer has provided, since 2011-12, quarterly updates on the internal control assessment results and action plans to the Deputy Minister and Departmental Audit Committee.

In support of the Financial Management Framework, the Departmental Policy on Internal Control was presented to the Departmental Management Board in November 2011. This policy specifies responsibilities for internal control, including internal control over financial reporting, for the Deputy Minister, Chief Financial Officer, and Senior Departmental Managers and their staff and provides instruction for management certification and self-assessment. Commencing in fiscal year 2011-2012, Senior Departmental Managers (those reporting directly to the Deputy Minister) have been required to sign-off, in consultation with the Chief Financial Officer, an annual certification for Internal Control over Financial Reporting.

Fisheries and Oceans Canada established a Departmental Audit Committee in 2007. This committee is comprised of three external members and is chaired by an external member. In 2012-2013, the Departmental Audit Committee met on a quarterly basis, providing advice and guidance on such matters as governance, risk management, financial disclosures and internal control.

2.2 Service Arrangements relevant to financial statements

The Department relies on other organizations for the processing of certain transactions that are recorded in its financial statements:

Common Arrangements:

• Accommodation services, as well as the administration of procurement of goods and services, are provided by Public Works and Government Services Canada.

• The Treasury Board Secretariat provides the Department with information to calculate various accruals and allowances, such as for severance liability and the Employee Benefit Plan (EBP), and pays the employer’s contribution to the health and dental insurance plans.

• Administration costs and commissions paid to provincial workers’ compensation boards are provided by Human Resources and Skills Development Canada.

• Shared Services Canada (SSC) provides IT infrastructure services to Fisheries and Oceans Canada in the areas of data centre and network services. The scope and responsibilities are addressed in the interdepartmental arrangement between SSC and the Department.

• Legal services are provided by Justice Canada.

Specific Arrangements:

• Billing, banking, electronic funds processing and similar payment services are provided by the Receiver General for Canada within the department of Public Works and Government Services Canada for much of the revenues from commercial fishing licenses.

• Billing and related administrative services for Marine Services revenues for the Pacific coast are provided by a private sector organization under contract with Fisheries and Oceans Canada. The external service provider has the authority and responsibility to manage the billing and collection of the Pacific region’s Marine Navigation Service Fee on behalf of the Government of Canada for which reliance is placed on the control environment of the external service provider. The design effectiveness testing of this arrangement has been completed and related observations with respect to assurance over controls have been communicated.

3. Departmental assessment results during fiscal year 2012-2013

The Fisheries and Oceans Canada assessments and action plans presented to Departmental Audit Committee are fundamental in meeting the requirements of the Treasury Board Policy on Internal Control. They constitute the base through which, over time, the Department will be able to provide reasonable assurance that it maintains an effective system of internal control over financial reporting (ICFR). The Department also assesses the design and operating effectiveness of new processes that result in changes to its system of ICFR, and ensures continuous improvement to its departmental system of ICFR. During 2012-13, the Department completed all design effectiveness testing and significantly advanced operating effectiveness testing of key control areas. On-going monitoring is being implemented as per the Internal Control Action Plan.

3.1 Design effectiveness testing of key controls

Fisheries and Oceans Canada completed all design effectiveness testing for the significant business processes and has significantly advanced operating effectiveness testing as per the Internal Control Action Plan. In the current year design effectiveness testing comprised the following: Capital Assets, Inventory, Grants and Contributions, Contingent Liabilities, Environmental Liabilities, Financial Close Process.

Results and remediation requirements were identified in Action Plans communicated to Departmental Management Board for each of the completed sub-processes in scope and remediation is underway. As a result of design effectiveness testing, the Department identified the following required remediation:

• There are significant gaps in roles and responsibilities for oversight of capital assets as well as challenges in providing guidance on the application of accounting standards.

• A Departmental estimate of contingent liability is not consistently determined for cases where there is a high likelihood of adverse outcome and a significant estimate of liability.

• There are no consistent controls for inventory that could be relied on for reporting purposes.

3.2 Operating effectiveness testing of key controls

In 2012-2013, Fisheries and Oceans Canada completed operating effectiveness testing of its entity level controls, environmental liabilities, grants and contributions, financial statement close process and substantially advanced pay administration and revenue.

Required remediation has been completed for the following control:

• Human Resources Staffing Officers and Compensation authenticate the delegation of authority, ensuring DFO pay process is better aligned to the common government-wide Financial Management Business Process Guideline on Pay Administration.

Required remediation for revenues is advanced and progressing for the following control:

• Fisheries and Oceans is phasing-in a new, common, licensing information system to ensure a uniform and National web-based transaction processing better aligned to the common government-wide Manage Revenue, Receivables, and Receipts. The phase-out of inconsistent manual payment services will proceed in 2013-2014.

The department also identified the following remediation required with respect to reporting of environmental liabilities and transactions processing (required remediation is advanced and will be completed in 2013-2014):

• Clear identification and audit trail of the accountability for environmental information and decisions is needed.

• Attention is required to review and update financial signing authorities in order to detect and correct the improper use of the authorities delegated.

3.3 On-going monitoring of key controls

In the current year, the department completed planned on-going monitoring of entity level controls. It was noted that planned remediation of weaknesses identified had taken place.

4. Fisheries and Oceans Canada's Action Plan

4.1 Progress during fiscal year 2012-2013

Fisheries and Oceans Canada has continued to make significant progress in assessing and improving its key controls. The Department met all commitments for fiscal year 2012-2013 as reported in the 2011-2012 Annex:

4.2 Status and action plan for the next fiscal year and subsequent years

Fisheries and Oceans Canada plans to continue remediation of adjustments identified during its assessments. Operating effectiveness testing will be conducted in those areas subject to reassessment unless significant remediation has been made to key controls in which case design effectiveness testing may be necessary.

The Department is also focussing on on-going monitoring. Fisheries and Oceans Canada has developed a risk-based monitoring plan that identifies key controls to be tested over a multi-year period in order to ensure that key controls are functioning over time as specified and any necessary corrective actions that are identified are initiated. The Department monitors the remediation of issues identified during design effectiveness testing and this monitoring includes tests of operating effectiveness, as necessary, in order to confirm whether remediation requirements identified have been addressed.

The operating effectiveness testing and rotational on-going monitoring plan over the next three years, subject to annual validation of risk and related remediation is shown in the following table: