Unaudited Financial Statements for the period ending March 31, 2010

Preface to the Departmental Financial Statements of Environment Canada

The fundamental purpose of the departmental financial statements is to provide information to Parliament and Canadians, to facilitate an understanding and evaluation of the full nature and extent of the financial affairs and resources for which Environment Canada is responsible.

Environment Canada's unaudited financial statements are a key public financial report and are published yearly in the fall as part of the Departmental Performance Report. They are produced on a basis consistent with the department's annual Public Accounts Volume II submissions, which are consolidated with the Government of Canada Public Accounts.

Public Accounts

Volume I of the Government of Canada Public Accounts presents the financial statements of the government, which represent a consolidation of all federal departments and agencies financial statements. The Government of Canada financial statements are presented on an accrual basis of accounting consistent with Canadian generally accepted accounting principles for the public sector.

Volume II of the Public Accounts is designed to reflect the form and content of Part II of the Main Estimates, which displays the source and disposition of Parliamentary Appropriation and spending authorities provided to departments and agencies, and is presented on a modified cash basis of accounting. Under the modified cash basis of accounting, certain specific payables and receivables are accrued while items such as inventories, prepaid expenses, and capital assets are recorded as expenditures used during the year.

Departmental Financial Statements

Treasury Board policy requires departmental financial statements to be included and published as part of their Departmental Performance Reports. The Office of the Comptroller General of Canada determines the presentation and format of the financial statements to ensure consistency across departments of the Government of Canada. Environment Canada's financial statements are presented on an accrual basis of accounting consistent with Canadian generally accepted accounting principles for the public sector. The departmental financial statements are derived from the-Department's Volume I and II Public Accounts submission, and the reconciliation between parliamentary Appropriations Used (modified cash basis) and the Net Cost of Operations (accrual basis) is set out in Note 3 to the financial statements.

For the fiscal year ended March 31, 2010, the format and presentation of Environment Canada's financial statements have changed in accordance with revisions to Treasury Board Accounting Standards, as disclosed in the accompanying notes to Environment Canada's Financial Statements.

Departmental Performance Report

Departmental Performance Reports are individual department and agency accounts of results achieved against planned performance expectations as set out in respective Reports on Plans and Priorities. The Departmental Performance Reports, which cover the most recently completed fiscal year, are tabled in Parliament in the fall by the President of the Treasury Board on behalf of ministers who preside over appropriation dependent departments and agencies identified in Schedules I, I.1 and II of the Financial Administration Act.

Performance and financial information disclosed in the Departmental Performance Report, other than the departmental financial statements, are presented on a modified cash basis as performance results are disclosed based upon the use of Parliamentary Appropriations.

Financial information submitted to the Public Accounts of Canada and included in the department's Departmental Performance Report is consistent with these financial statements.

Statement of Management Responsibility including Internal Control over Financial Reporting 2009-2010

Responsibility for the integrity and objectivity of the accompanying financial statements for the year ended March 31, 2010, and all information contained in these statements rests with the management of the Department of Environment Canada. These financial statements have been prepared by management in accordance with Treasury Board accounting policies, which are consistent with Canadian generally accepted accounting principles for the public sector.

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 assessment of the effectiveness of the system of internal control over financial reporting.

An assessment of the year ended March 31, 2010 was completed by Environment Canada, in accordance with the Policy on Internal Control and the results and action plans are summarized in the annex.

The system of internal control over financial reporting is designed to mitigate risk to a reasonable level and may not prevent or detect misstatements. It is based on an ongoing process designed to identify and prioritize risks and the controls to mitigate these risks.

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 External Audit Advisory Committee, which reviews and provides guidance to the Deputy Minister of the Department of Environment Canada on the adequacy of control systems, the quality of financial reporting, and on disclosures in the financial statements.

The financial statements of the Department of Environment Canada have not been audited.

Contingent liabilities (Note 10)
Contractual obligations (Note 11)

The accompanying notes are an integral part of the financial statements

Segmented information (Note 13)

The accompanying notes are an integral part of the financial statements

The accompanying notes are an integral part of the financial statements

The accompanying notes are an integral part of the financial statements

1. Authority and objectives
2. Summary of significant accounting policies
3. Parliamentary authorities
4. Accounts receivable and advances
5. Tangible capital assets
6. Accounts payable and accrued liabilities
7. Deferred revenue
8. Lease obligation for tangible capital assets
9. Employee future benefits
10. Environmental and contingent liabilities
11. Contractual obligations
12. Related party transactions
13. Segmented information
14. Adoption of new Treasury Board accounting policies
15. Comparative information

1. Authority and objectives

Environment Canada was established under legislation by the Department of the Environment Act. Under this Act, the powers, duties and functions of the Minister of the Environment extend to and include matters relating to:

• The preservation and enhancement of the quality of the natural environment (including water, air and soil quality);
• Renewable resources, including migratory birds and other non-domestic flora and fauna;
• Water;
• Meteorology;
• Enforcement of any rules or regulations made by the International Joint Commission relating to boundary waters; and
• Coordination of the policies and programs of the Government of Canada respecting the preservation and enhancement of the quality of the natural environment.

Environment Canada delivers its mandate through the following programs:

• Weather and Environmental Prediction Program
• Biodiversity and Wildlife Program
• Environmental Science and Monitoring Program
• Chemicals Management Program
• Clean Air Program
• Water Program
• Legislation and Information Program
• Ecosystems Initiatives Program
• Mackenzie Gas Project (see below)
• Internal Services

Responsibility for the Mackenzie Gas Project (MGP) has been transferred to the Minister of the Environment from the Ministry of Industry Canada, effective October 2008. Similarly, responsibility for the Toronto Waterfront Revitalization Initiative and the Harbourfront Corporation has been transferred to the Minister of Finance, effective October 30, 2008 through Order in Council. Changes to Parliamentary Authorities for those initiatives occurred through either the Main Estimates or Supplementary Estimates in 2009-2010. As such, Environment Canada is responsible to report on the Mackenzie Gas Project and on any residual recoveries of expenditures for the Toronto Waterfront Revitalization Initiative and Harbourfront Corporation within its 2009-2010 unaudited financial statements.

In addition, Environment Canada has authority under numerous pieces of legislation which affect how the department operates. The most significant Acts are as follows:

• Antarctic Environmental Protection Act
• Canada Water Act
• Canada Wildlife Act
• Canadian Environmental Assessment Act
• Canadian Environmental Protection Act, 1999
• Department of the Environment Act
• Fisheries Act (Sections 36-42)
• International River Improvements Act
• Migratory Birds Convention Act, 1994
• Species at Risk Act
• Weather Modification Information Act
• Wild Animal and Plant Protection and Regulation of International and Interprovincial Trade Act
• Kyoto Protocol Implementation Act (2007, c. 30)
• Federal Sustainable Development Act (2008, c. 33)

2. Summary of significant accounting policies

These financial statements have been prepared in accordance with Treasury Board accounting policies which are consistent with Canadian generally accepted accounting principles for the public sector. The presentation and results using the stated accounting policies do not result in any significant differences from Canadian generally accepted accounting principles.

Significant accounting policies are as follows:

(a) Parliamentary authorities
Environment Canada is financed by the Government of Canada through Parliamentary authorities. Financial reporting of authorities provided to Environment 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 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.

(b) Net Cash Provided by Government
Environment Canada operates within the Consolidated Revenue Fund (CRF), which is administered by the Receiver General for Canada. All cash received by Environment Canada is deposited to the CRF and all cash disbursements made by Environment 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.

(c) Amount Due from the Consolidated Revenue Fund (CRF)
Amount Due from CRF is the result of timing differences at year-end between when a transaction affects authorities and when it is processed through the CRF and represents the net amount of cash that the Department is entitled to draw from the CRF without further appropriations to discharge its liabilities.

(d) Revenues
Revenues from regulatory fees are recognized in the accounts based on the services provided in the year. Funds received from external parties for specified purposes are recorded upon receipt as deferred revenue. These revenues are recognized in the period in which the related expenses are incurred. Other revenues are accounted for in the period in which the underlying transaction or event occurred that gave rise to the revenue takes place. Funds that have been received are recorded as deferred revenues (Note 7), provided the department has an obligation to other parties for the provision of goods, services or the use of assets in the future.

(e) Expenses
Expenses are recorded on the accrual basis:

• Grants are recognized in the year in which the conditions for payment are met. In the case of grants which do not form part of an existing program, the expense is recognized 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;
• Contributions are recognized in the year in which the recipient has met the eligibility criteria or fulfilled the terms of a contractual transfer agreement, provided that the transfer is authorized and a reasonable estimate can be made;
• 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 worker's compensation are recorded as operating expenses at their estimated cost. The providers of these services determine the estimated costs to be recorded by the departments.

(f) Employee future benefits

• Pension benefits: Eligible employees participate in the Public Service Pension Plan, a multi-employer pension plan administered by the Government. Environment Canada’s contributions to the Plan are charged to expenses in the year incurred and represent the total departmental obligation to the Plan. Current legislation does not require Environment Canada to make contributions for any actuarial deficiencies of the Plan.
• Severance benefits: Employees are entitled to severance benefits under labour contracts or conditions of employment. These benefits are accrued as employees render the services necessary to earn them. 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.

(g) Accounts and loans receivables
Accounts and loans receivables are stated at the lower of cost and net recoverable value; a valuation allowance is recorded for receivables where recovery is considered uncertain.

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

(i) 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 Environment Canada becomes aware of the contamination and is obligated, or is likely to be obligated to incur such costs. If the likelihood of Environment Canada’s obligation to incur these costs is either not determinable, or if an amount cannot be reasonably estimated, the costs are disclosed as contingent liabilities in the notes to the financial statements.

(j) Inventory
Inventory consists of parts, material and supplies held for future program delivery and not intended for resale. Inventory is valued at cost using the average cost method. If there is no longer any service potential, inventory is valued at the lower of cost or net realizable value.

(k) 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. Environment Canada does not capitalize intangibles, works of art and historical treasures that have cultural, aesthetic or historical value, assets located on Indian Reserves and museum collections.

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

Assets under construction are recorded in the applicable capital asset class in the year that they become available for use and are not amortized until they become available for use.

(l) Measurement uncertainty
The preparation of these financial statements in accordance with Treasury Board accounting policies which, are consistent with Canadian generally accepted accounting principles for the public sector, requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in the financial statements. At the time of preparation of these statements, management believes the estimates and assumptions to be reasonable. The most significant items where estimates are used are contingent liabilities, environmental liabilities, the liability for employee severance benefits 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

Environment Canada receives most of its funding through annual Parliamentary authorities. Items recognized in the Statement of Operations and the Statement of Financial Position in one year may be funded through Parliamentary authorities in prior, current or future years. Accordingly, Environment 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:

1. This amount represents monies that are kept in trust by Environment Canada for Nature Conservancy of Canada
2. This loss is the result of disposing of assets with a net book value of $1.83 million for proceeds of $955 thousand.

4. Accounts receivable and advances

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

5. Tangible capital assets

Amortization expense for the year ended March 31, 2010 is $41,681,506 ($33,431,976 in 2009).

1. Assets under construction include: buildings, engineering works, software and other construction. Disposals include those assets under construction that have been placed in service. Assets that are still under construction are not treated as depreciable assets as they are not yet available for use.
2. Net acquisition of tangible capital assets ($52,901,000) presented on the Statement of Cash Flow and on Note 3(a) excludes the capitalization of the lease of the Super Computer.

6. Accounts payable and accrued liabilities

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

7. Deferred revenue

Deferred revenue represents the balance at year-end of unearned revenue stemming from amounts received from external parties which are restricted to fund the expenditures related to specific research projects and amounts received for fees prior to services being performed. Revenue is recognized in the period these expenditures are incurred or the services performed. Details of the transactions related to this account are as follows:

8. Lease obligation for tangible capital assets

The Department entered into agreements to lease certain space and equipment under capital leases with a cost of $34,857,900 and accumulated amortization of $9,710,148 as at March 31, 2010 ($18,198,560 of cost and $5,094,993 in accumulated amortization respectively as at March 31, 2009) as reflected in note 5. The obligations related to the upcoming years include Carleton University for which, on October 13, 2000, Environment Canada entered into an agreement to rent office laboratory space for the National Wildlife Research Centre (NWRC), at an annual cost of $1.3 million under a capital lease which expires in 2028. The 2009-10 obligations also include the Super Computer which is reported as a capital lease beginning 2009-10. The current lease for the Super Computer expires in 2012 with a possibility of an extension to 2014.

9. Employee future benefits

(a) Pension benefits
Environment 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% per year of pensionable service, times the average of the best five consecutive years of earnings. The benefits are integrated with Canada/Québec Pension Plans benefits and they are indexed to inflation.

Both the employees and Environment Canada contribute to the cost of the Plan. The 2009-2010 expense amounts to $70,764,543 ($58,601,522.0 in 2008-2009) which represents approximately 1.9 times the contributions by employees (2 times in 2008-2009).

Environment 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.

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

10. Environmental and contingent liabilities

(a) Contaminated sites
Liabilities are accrued to record the estimated costs related to the management and remediation of contaminated sites where Environment Canada is obligated or likely to be obligated to incur such costs. Environment Canada has identified approximately 11 projects (10 in 2008-2009) where action is required and for which a liability of $88,795,353 ($56,268,622 in 2008-2009) has been recorded in accrued liabilities. Environment Canada has identified $27,635,807 ($60,710,707 in 2008-2009) in contingent liabilities as it is unclear at this time whether Environment Canada is obligated to incur these estimated remediation costs in the future. In these cases, further investigation is required before a liability can be recorded. The contingent liabilities are reviewed each year to reflect any changes in the estimates.

(b) Claims and litigation
Claims have been made against the Department in the normal course of operations. These claims include items with pleading amounts and others for which no amount is specified. Based on the Department's assessment, legal proceedings for claims estimated at $33,500,000 ($44,940,000 in 2008-2009) were pending at March 31, 2010. Some of these potential liabilities may become actual liabilities when one or more future events occur or fail to occur. To the extent that the future event is likely to occur or fail to occur, and a reasonable estimate of the loss can be made, an estimated liability is accrued and an expense recorded in the financial statements. There were no estimated liabilities booked as an expense in 2009-2010 ($495,000 in 2008-2009).

11. Contractual obligations

The nature of Environment Canada's activities can result in large multi-year contracts and obligations that have yet to be recorded as liabilities in the Accounts of Canada but for which Environment Canada is obligated to make future payments in order to meet its legal contractual requirements. Significant contractual obligations that can be reasonably estimated are summarized as follows:

12. Related party transactions

Environment Canada is related as a result of common ownership to all Government departments, agencies, and Crown corporations. The Government has structured some of its administrative activities for efficiency and cost-effectiveness purposes so that one department performs these on behalf of all without charge. The costs of these services, which include payroll and cheque issuance services provided by Public Works and Government Services Canada and audit services provided by the Office of the Auditor General are not included as an expense in Environment Canada’s Statement of Operations. There are other types of services received without charge, such as accommodation, certain employee benefits, workers’ compensation costs and legal services which are attributed to Environment Canada and are disclosed in Environment Canada’s Statement of Operations in the following amounts:

(a) Common services provided without charge by other government departments:

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 the Department's Statement of Operations.

(b) Other transactions with related parties:

13. Segmented information

Presentation by segment is based on the Department's program activity architecture. The presentation by segment is based on the same accounting policies as described in the Summary of significant accounting policies in note 2. The following table presents

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1 (WEPP) Weather and Environmental Prediction Program
2 (BWP) Biodiversity and Wildlife Program
3 (ESMP) Environmental Science and Monitoring Program
4 (CMP) Chemicals Management Program
5 (CAP) Clean Air Program
6 (WP) Water Program
7 (LIP) Legislation and Information Program
8 (TWRI) Toronto Waterfront Revitalization Initiative
9 (EIP) Ecosystems Initiatives Program
10 (MGP) Mackenzie Gas Project
11 (IS) Internal Services

* Recoveries of expenses from prior years

14. Adoption of new Treasury Board accounting policies

Effective this fiscal year, Environment Canada adopted the revised Treasury Board Accounting Standards 1.2. The major change, required by the adoption of the revised standards, is the recording of the amount Due from the Consolidated Revenue Fund as an asset on the Statement of Financial Position.

The adoption of new Treasury Board accounting policies has been accounted for retroactively with the following impact on the comparative results for 2008-09.

15. Comparative information

Comparative figures have been reclassified to conform to the current year's presentation. This includes amounts reported against program activities in the Statement of Operations which needed to be restated to comply with the new Receiver General for Canada requirement of reporting Internal Services separately form other program activities. In addition, the Due from the Consolidated Revenue Fund found in the Statement of Financial Position and Statement of Equity had to be recorded to comply with Government of Canada new disclosure requirements.

• Note to Reader
• Annex to the Statement of Management Responsibility Including Internal Control over Financial Reporting
  1. Introduction
  2. Environment Canada's Control Environment Relevant To ICFR
  3. Assessment of Environment Canada's System of ICFR
  4. Assessment Results
  5. Environment Canada's Action Plan

Note to Reader

With the new Treasury Board Policy on Internal Control, effective April 1, 2009, departments are now required to demonstrate the measures they are taking to maintain an effective system of internal control over financial reporting (ICFR).

As part of this policy departments are expected to conduct annual assessments of their system of ICFR, establish action plan(s) to address any necessaryadjustments, and to attach to their Statements of Management Responsibility Including Internal Control over Financial Reporting a summary of their assessment results and action plan.

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

• transactions are appropriately authorized;
• financial records are properly maintained;
• assets are safeguarded from risks such as waste, abuse, loss, fraud and mismanagement; and
• applicable laws, regulations and policies are complied with.

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

The maintenance of an effective system of ICFR is an ongoing process designed to identify, assess effectiveness and adjust as required related controls to mitigate these risks, as well as to monitor its performance in support of continuous improvement. As a result, the scope, pace and status of departmental assessments of the effectiveness of their system of ICFR will vary from one organization to the other based on risks and taking into account their unique circumstances.

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

1. Introduction

This document is attached to the Environment Canada Statement of Management Responsibility Including Internal Control over Financial Reporting for the fiscal-year 2009-10 and is included with the financial statements. As required by the new Treasury Board Policy on Internal Control that came into effect on April 1, 2009, this document provides for the first time a summary of the information on the measures taken by Environment Canada to maintain an effective system of internal control over financial reporting (ICFR). In particular, it provides information on the progress and results achieved by the Department and the related action plans along with some financial highlights pertinent to understanding the financial control environment unique to the Department. The financial statements of Environment Canada are unaudited.

1.1 Authority, Mandate and Program Activities

Environment Canada leads the way in implementing the federal government’s environmental agenda. Our broad mandate covers the preservation and enhancement of the quality of the natural environment. This includes water, air and soil, flora and fauna, and renewable resources such as our lakes, forests and oceans. A number of acts and regulations provide the Department with its mandate and allow it to carry out its programs.

Detailed information on Environment Canada’s authority, mandate and program activities can be found in the 2009-10 Report on Plans and Priorities and 2009-10 Departmental Performance Report.

1.2 Financial Highlights

Information with respect to the financial statements of Environment Canada for fiscal-year ended 2009-10 as well as additional financial and appropriation based information contained in the 2009-10 Public Accounts of Canada Volume II are published on the Environment Canada website.

Environment Canada’s financial statements are presented on an accrual basis of accounting consistent with Canadian generally accepted accounting principles for the public sector. The departmental financial statements are derived from the Department’s Volume I and II Public Accounts submissions, and the reconciliation between Parliamentary Appropriations Used (modified cash basis) and the Net Cost of Operations (accrual basis) is set out in Note 3 to the financial statements.

Key financial highlights derived from the financial statements for fiscal-year ended 2009-10 are summarized below.

• Total Departmental expenses were $1,225 million in 2009-10 (total decrease of $13 million or 1% from the prior year). The major elements contributing to this overall decrease are a reduction in Transfer Payments of $82.6 million offset by a $33.7 million increase in salary expenses and a $30.7 million increase in Environmental Liabilities.
• Major revenue items include: Meteorological services; Ocean disposal permit applications, Hydraulics laboratory, and Ocean disposal monitoring fees.
• Tangible capital assets of $384.1 million in 2009-10 increased $26.9 million from $357.2 million in 2008-09 and represents the vast majority of total assets.
• Total liabilities were $493.6 million at the end of 2009-10, a decrease of $10 million (2 %) from the previous year’s total liabilities. The Accounts Payable and Accrued Liabilities continue to represent the largest component of liabilities at $227.1 million or 47% of total liabilities.

1.3 Service Arrangements Relevant to Financial Statements

Environment Canada relies on other organizations for the processing of certain transactions that are recorded in its financial statements. Public Works and Government Services Canada (PWGSC) centrally administers the payments of salaries and the procurement of goods and services. As well, Treasury Board Secretariat provides the Department with information used to calculate various accruals and allowances, such as the accrued severance liability.

In addition, Environment Canada provides certain corporate services to the Canadian Environmental Assessment Agency (CEAA). Although this arrangement increases the complexity of Environment Canada’s control environment and creates additional financial reporting risks related to the segregation of expenditures between these two entities, Environment Canada has in place compensating controls to ensure the effective segregation of financial reporting.

1.4 Material Changes in Fiscal-Year 2009-2010

There were no material changes in departmental programs or organization during the fiscal year other than:

• the transfer in of the Mackenzie Gas Project from Industry Canada to Environment Canada; and
• subsequent to the 2009-10 fiscal year end, Paul Boothe became the new Deputy Minister of Environment Canada by Order in Council effective July 26, 2010.

2. Environment Canada's Control Environment Relevant To ICFR

Environment Canada recognizes the importance of setting the tone from the top to help ensure that staff at all levels understand their roles in maintaining effective systems of ICFR and are well equipped to exercise these responsibilities effectively. Environment Canada’s focus is to ensure risks are well managed through a responsive and risk-based control environment that enables continuous improvement and innovation.

2.1 Key Positions, Roles and Responsibilities

Below are Environment Canada’s key positions and committees with responsibilities for maintaining and reviewing the effectiveness of its system of ICFR.

• Deputy Minister – Environment Canada’s Deputy Minister, as Accounting Officer, assumes overall responsibility and leadership for the measures taken to maintain an effective system of internal control, including the system of ICFR. In this role, the Deputy Minister chairs the Executive Management Committee, and seeks advice from the External Audit Advisory Committee on the results of the annual assessment of the effectiveness of the system of ICFR, prior to signing off on the Statement of Management Responsibility Including Internal Control Over Financial Reporting with the Chief Financial Officer (CFO).
• Chief Financial Officer (CFO) – Environment Canada’s CFO reports directly to the Deputy Minister and provides leadership for the coordination, coherence and focus on the design and maintenance of an effective and integrated system of financial management, including ICFR. In this role, the CFO undertakes an annual assessment of the effectiveness of ICFR and provides advice and results to the Deputy Minister and External Audit Advisory Committee for their review.
• Assistant Deputy Ministers and Other Senior Departmental Managers – Environment Canada’s senior departmental managers in charge of program delivery are responsible for maintaining and reviewing the effectiveness of the system of internal control, including ICFR, within their mandate and purview of responsibilities. They also seek the advice of, and support the CFO on the development and maintenance of an effective financial management, risk management and control framework over programs, and on the integration of financial and non-financial information.
• Chief Audit Executive (CAE) – Environment Canada’s CAE reports directly to the Deputy Minister and undertakes periodic reviews of the effectiveness of the system of internal control, including ICFR, as part of the Department’s Risk Based Audit Plan, and provides assurance through periodic internal audits which are instrumental to the maintenance of an effective system of ICFR.
• External Audit Advisory Committee (EAAC) – The EAAC is an independent external advisory committee that provides the Deputy Minister with independent advice and objective views on the Department’s risk management, control and governance frameworks. The EAAC is comprised of three external members and was established in 2007. As such, the EAAC reviews Environment Canada’s Corporate Risk Profile, and provides guidance to the Deputy Minister on the adequacy of the Department's systems of internal control, financial reporting and financial disclosures.
• Executive Management Committee (EMC) – This is the most senior management committee with oversight responsibilities of the Department. In relation to risk, EMC reviews and adjusts Environment Canada’s Corporate Risk Profile and develops and monitors the organization’s response to top corporate risks. EMC is also responsible for ensuring the effectiveness of risk mitigation measures and controls in place to address key corporate risks.
• Finance Committee – The Finance Committee, chaired by the Deputy Minister, provides a forum for senior departmental managers to address specific departmental financial issues, including decisions on the alignment of resources to program priorities and results, and budget allocation and reallocations across Branches. The Finance Committee also monitors the departmental financial situation against available authorities.

2.2 Key Measures Taken By Environment Canada

Environment Canada's control environment includes a series of measures which focus on ensuring that risks are effectively managed through a responsive and risk-based control environment, and on developing employee knowledge on internal control. Key measures include:

• the existence of Environment Canada’s Internal Audit Division which provides the Deputy Minister, senior departmental management, and the EAAC with objective and independent evidence-based information and advice to contribute to sound risk management, control and governance, and their work is based upon risk-based audit plans informed by the Corporate Risk Profile;
• the assessment and maintenance of a corporate risk management process for the Corporate Risk Profile. The profile is reviewed by EMC and the EAAC, and approved by the Deputy Minister, and is used as an effective control mechanism that involves taking stock periodically of the Department’s operating environment and its capacity to deal with key high-level risks linked to the achievement of corporate objectives;
• a Values, Integrity and Disclosure Directorate is in place to provide educational and awareness programs designed to: reinforce Public Service values and ethics; further strengthen a solid values and ethics infrastructure; and integrate values and ethics ever more deeply into Environment Canada’s culture. This includes measures to prevent conflict of interest and mechanisms for formal monitoring and follow-up on alleged wrong doings with formal reporting to the Deputy Minister and Central Agencies;
• the Corporate Accountability and Administrative Renewal (CAAR) initiative was established to improve the financial management infrastructure, business processes and tools of the department, and ICFR initiatives. Specific CAAR initiatives cover the most significant portion of ICFR mitigation capacity in response to the Corporate Risk Profile and results from the audit readiness assessment to strengthen financial reporting and disclosures;
• Treasury Board and departmental policies tailored to Environment Canada’s control environment are in place;
• the Delegated Financial Signing Authorities instrument is regularly reviewed and updated as needed;
• a Procurement Review Board (PRB) is in place at Environment Canada. The PRB is a key element of the risk management framework for departmental procurement and is responsible for reviewing and approving the procurement of goods, services and construction within the department;
• IT processing systems exist to achieve greater security, integrity, efficiency and effectiveness;
• a dedicated Quality Assurance Unit reporting to the Director General, Integrated Enterprise Services, responsible to independently review, either internally or via third parties, selected processes and controls, and build upon ICFR remediations;
• Annual Performance Agreements, which identify financial management mandated expectations, are in place with departmental managers; and
• training programs and regular communication to managers are in place to improve financial literacy of managers and better understand the importance of internal controls.

3. Assessment of Environment Canada's System of ICFR

3.1 Assessment Baseline

In 2006, the Government of Canada commenced an initiative to determine the ability of departments to ensure that annual financial statements can sustain efficient audits, including control-based audits in whole or in part, thus placing reliance on well functioning internal controls including ICFR. As a result, beginning in 2007-08, Environment Canada began formalizing its approach to managing systems of ICFR, including the need to undertake auditable financial statements readiness assessments and related ICFR action plans.

Whether it is to sustain efficient audits, including control-based audits in whole or in part, or meet the requirements of the new Treasury Board Policy on Internal Control, the Department is working towards maintaining an effective system of ICFR with the objective of providing reliable financial disclosures and reasonable assurances that:

1. transactions are appropriately authorized;
2. financial records are properly maintained;
3. assets are safeguarded; and
4. applicable laws, regulations and policies are complied with.

To meet these requirements, the Department is continuing its work on the assessment of the design and operating effectiveness of its system of ICFR. As of March 2009, Environment Canada, with the support from a global Chartered Accounting firm, completed the second phase of the Environment Canada Audit Readiness Assessment Report.

Environment Canada undertook a detailed review of the Audit Readiness Assessment Report and recommended initiatives. Additional planning was carried out within the Department to better understand the required audit readiness initiatives and how they would relate and integrate to other departmental priorities

Going forward, Environment Canada will assess the design effectiveness and the operating effectiveness of its system of ICFR and ultimately will need to have in place an on-going monitoring program to sustain and continuously improve the departmental system of ICFR. This includes the need to assess:

• design effectiveness which is a means to ensure that key control points are identified, documented, in place, aligned with risks (i.e. controls are balanced with and proportionate to the risks they aim to mitigate), and that any required remediation is addressed. This includes the mapping of key processes and IT systems to the main accounts by location as applicable. An effective design provides the department with the system and processes that enable employees to maintain an adequate system of ICFR; and
• operating effectiveness which means that key controls have been tested via walkthroughs over a defined period and that any required remediation is addressed.

3.2 Assessment Method at Environment Canada

In proceeding with preparations to ensure that its annual financial statements can sustain efficient audits, including control-based audits in whole or in part, Environment Canada has taken measures to assess its system of ICFR across four levels of control:

• Entity level controls;
• Transaction level controls;
• Information technology general controls; and
• Financial statement readiness controls.

In particular, starting from its financial statements, transaction level controls were assessed with a focus on the following significant accounts and related processes:

• Accounts Payables and Accrued Liabilities
• Payroll, Vacation Pay and Compensatory Leave
• Environmental/Contingent Liabilities and Employee Service Benefits
• Revenue
• Inventory
• Capital Assets and Capital Lease Obligations
• Financial Statement Close and Periodic Processes

For each account / location, Environment Canada completed the following assessment steps:

• gathered information pertaining to processes and locations, risks and controls relevant to ICFR, including appropriate policies and procedures;
• interviewed Finance and Corporate Branch staff at Environment Canada’s headquarters and in regions and discussed the existence of all processes and sub-processes;
• validated the preliminary assessment of significant accounts and processes for each of the regions;
• identified, described and prioritized key control deficiencies for all significant accounts;
• developed recommendations for remediating key processes’ control deficiencies;
• assigned ownership and accountabilities for remediation work; and
• prioritized deliverables and developed a detailed action plan to address required remediations.

4. Assessment Results

In assessing its key financial controls, Environment Canada focused on design effectiveness which is the prerequisite to testing operating effectiveness for internal controls over financial reporting.

For the year-ended March 31, 2009-10, Environment Canada commenced key first year initiatives of the five year ICFR Action Plan to strengthen the financial infrastructure and systems for better reporting (as elaborated in Section 5). This infrastructure development forms the basis for testing and remediation requirements of design effectiveness. Over the remaining four years, the Department will complete key financial infrastructure initiatives in order to systematically test ICFR operating effectiveness via walkthroughs.

4.1 Design Effectiveness of Key Controls

When designing the effectiveness of key financial controls, Environment Canada gathered documentation of all significant accounts and related processes (including its validation by process owners) and verified whether the four levels of control indentified in the Audit Readiness Assessment Report (entity, transaction / business process, IT general controls, and financial disclosure controls) were in place and corresponded to actual recommended practices.

As a result, the Department was provided with remediation recommendations from that report, which are currently being implemented over the remaining four years of the ICFR Action Plan. Work on this front covers both headquarters and all regional offices, where design effectiveness includes ensuring appropriate alignment of each key control with risks.

An important component is ensuring the proper balance of entity and transactional level reform. Environment Canada identified areas along with appropriate remediation with a view to strengthening financial statement disclosure controls and audit readiness over the planned 5 year time frame.

4.2 Operating Effectiveness of Key Controls

In 2009-10, Environment Canada set out its comprehensive plan to commence the assessment of operating effectiveness of key controls. Environment Canada’s plan is to identify whether most internal controls are functioning as designed and those that are not functioning properly be identified and corrective action initiated. Testing of the operating effectiveness of internal controls will be conducted in 2010-11 and beyond through the Quality Assurance Unit.

As at March 2010, a significant amount of substantive and compensating control remediation work resulting from the assessment of operating effectiveness was completed within the first year of the five year plan. Remediation and substantive control requirements to date have been addressed as soon as required adjustments were identified.

A number of important financial management system infrastructure initiatives were implemented across the Department including: Management Variance Reports (MVR); the PeopleSoft Human Resources Management System; as well as initiation of the multi-year Asset Lifecycle Management (ALM) module implementation within the Oracle Capital Asset Module.

The Department is actively participating in the planned upgrade of the departmental financial system based upon a common Oracle cluster configuration that is scheduled for delivery by 2013-14. In addition, Environment Canada is beginning to benefit from the multi-year roll-out of the Office of the Comptroller General’s common financial management business processes (FM-BP) initiative designed to build standardized, effective and integrated business processes and systems.

Furthermore, as these standardized business processes and common systems initiatives are being implemented across government, Environment Canada has put in place compensatory controls designed to remediate known control weaknesses identified in the Audit Readiness Assessment.

4.3 Ongoing Monitoring Program

Environment Canada has created a dedicated Quality Assurance Unit reporting to the Director General, Integrated Enterprise Services, responsible to independently review selected processes and controls, and build upon ICFR remediations. The objective will be to build capacity for a well integrated risk-based approach for the ongoing assessment of internal controls over financial reporting. The Quality Assurance Unit will monitor required remediation actions based upon lessons learned from the annual assessments and internal audits. This will include ensuring that there is a program in place that raises awareness and understanding of Environment Canada’s system of ICFR at all levels and ensures that employees have the knowledge, skills and tools required to carry out their responsibilities, as proposed in the redesigned departmental Financial Management Framework.

5. Environment Canada's Action Plan

5.1 Progress as at March 31, 2010

During 2009-10 Environment Canada continued to make significant progress in establishing the organizational infrastructure, program governance and initiation of several ICFR projects that will be critical to transforming the Department in order to maintain effective systems of ICFR. This was evidenced by the work commenced in 2009-10 through the CAAR initiative, of which ICFR multi-year remediation projects are a major component, to:

• improve financial management and accountability by strengthening the financial infrastructure in support of better information, such as delivering on key milestones of Year 1 projects to implement improved planning, budgeting and forecasting systems; upgrades to the capital asset lifecycle management system; and upgrades to the Human Resources Management system; and
• strengthen business processes and internal controls over financial management and financial reporting, to be pursued in concert with implementing the new Treasury Board Policy Framework for Financial Management and related policy requirements over the planned five year timeframe.

A sound control environment is essential to efficient and effective financial reporting. It is also a pillar through which leadership can demonstrate financial responsibility, transparency, accountability, and ethical conduct in financial and resources management to reduce the risk of control deficiencies across and within the Department. As such, the Department completed work to strengthen the current control environment by implementing the following key initiatives at the entity level in the areas of policy, planning, processes and capacity:

• commenced the documentation of the existing entity level controls and confirmed that substantive processes are in place to remediate control gaps;
• commenced the planning for the documentation and design testing of key processes and controls at the headquarters and regional levels over the remaining 4 year period; and
• action was taken to address identified gaps to build on departmental strengths.

Internal controls at the transactional level (including IT and Financial Statement Readiness levels) are heavily relied upon to gain assurance over the accuracy of financial reporting. There has been progress in remediating transactional level issues in the following areas: business process documentation and standardization, training, and IT. In 2009/10, Environment Canada implemented and/or improved business processes and related controls for each of its main accounts, including:

• chart of accounts review as part of the Oracle Financial Shared System project;
• contingent liabilities;
• implementation of new Work in Progress (WIP) processes; and
• procedures for periodic closings (effective for 2010-2011 as per Treasury Board Accounting Standard (TBAS) 1.3 Quarterly Financial Reporting requirement) to prepare for commencement in June 2011.

5.2 Action Plan for 2010/11 and Future Years

Environment Canada plans to undertake the following measures to strengthen the financial infrastructure and systems in support of an effective system of ICFR over the next year and thereafter.

The pace of progress in future years is subject to the balancing of priorities and risks against available funding of the Department.

These measures set out in the CAAR initiative aim to achieve:

• completion of initial year priorities (2009-10) to improve the management of financial information and reporting, and respond to key system priorities of human resource and asset management; and
• preparing for subsequent year priorities (2010-14) to reshape financial business processes to bring more efficiency, more effective and appropriate controls, and greater assurance to financial operations across Environment Canada and its information disclosure results.

The CAAR initiative will provide the foundation for strengthened internal control over financial reporting for more reliable financial statement disclosures, and preparedness for audit readiness.

The ICFR / CAAR 5 Year Plan is summarized below.

The financial statements of Environment Canada are unaudited. The financial disclosures as at March 31, 2010 are based upon the existing system of internal controls over financial reporting, supported by additional detailed analyses. As elaborated in the 5 year action plan above, two significant financial disclosure risks remain pertaining to the valuation and measurement of inventory and tangible capital assets. These risks should be addressed by 2013-14. Updates on improving controls in these areas will be provided through Policy on Internal Control disclosures in future years. In the interim, more emphasis will be placed on the analytical review of year end financial results, as well as detailed variance analyses, based upon the information on hand.