Consolidated Financial Statements (Unaudited) for the year ended March 31, 2017

1. Authority and objectives

Employment and Social Development Canada (ESDC) is a Department in the core public administration.  ESDC is a department named in Schedule I of the Financial Administration Act and reports to Parliament through the Ministers responsible for Employment and Social Development (ESDC).

The legislative mandate of ESDC is to improve the standard of living and quality of life of all Canadians by promoting a highly skilled and mobile workforce and an efficient and inclusive labour market, as well as to promote social well-being and income security.

Acts and Regulations for which ESDC Ministers are responsible include the: Department of Employment and Social Development Act, Old Age Security Act, Employment Insurance Act, Canada Pension Plan, Canada Student Financial Assistance Act, Canada Student Loans Act, Universal Child Care Benefit Act, Canada Disability Savings Act, Canada Education Savings Act, Labour Adjustment Benefits Act, Government Annuities Act, Government Annuities Improvement Act, Civil Service Insurance Act, Public Pensions Reporting Act, Apprentice Loans Act, Federal-Provincial Fiscal Arrangements Act, Canada Labour Code, Government Employees Compensation Act and, where applicable, related Regulations.

2. Summary of significant accounting policies

These consolidated 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:

(a) Parliamentary authorities – ESDC is financed by the Government of Canada through Parliamentary authorities. Financial reporting of authorities provided to ESDC 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 Consolidated Statement of Operations and Departmental Net Financial Position and in the Consolidated 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 ''Expenses'' and ''Revenues'' sections of the Consolidated Statement of Operations and Departmental Net Financial Position are the amounts reported in the Consolidated Future-oriented Statement of Operations included in the 2016-2017 Report on Plans and Priorities. Planned results are not presented in the ''Government funding and transfers'' section of the Statement of Operations and Departmental Net Financial Position and in the Statement of Change in Departmental Net Financial Asset because these amounts were not included in the 2016-2017 Report on Plans and Priorities.

(b) Consolidation – These consolidated financial statements include the transactions of the Employment Insurance Operating (EIO) Account, a consolidated specified purpose account which includes revenues credited and expenses charged under the Employment Insurance Act and for which the Deputy Minister as Chairperson of the Canada Employment Insurance Commission is accountable. The accounts of the EIO Account have been consolidated with those of ESDC, and all inter-organizational balances and transactions have been eliminated.

The Canada Pension Plan is excluded from ESDC's reporting entity because changes to the CPP require the agreement of two thirds of participating provinces and it is therefore not controlled by the Government.

(c) Net cash provided by Government – ESDC operates within the Consolidated Revenue Fund (CRF), which is administered by the Receiver General for Canada. All cash received by ESDC is deposited to the CRF, and all cash disbursements made by ESDC 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.

(d) Amounts due to or due from CRF – These amounts are the result of timing differences at year-end between when a transaction affects authorities and when it is processed through the CRF. Amounts due to the CRF represent the net amount of cash that have been credited to authorities used, but were not collected and deposited to the CRF at year-end.

(e)  Revenues – Revenues are recorded on the accrual basis:

• Employment Insurance (EI) premiums are recognized as revenue in the period in which they are earned, when workers, through their employment, generate these premiums and the related employer's contribution. Premiums earned in the period are measured from amounts assessed by the Canada Revenue Agency (CRA) and from estimates of amounts not assessed. Premium revenue also includes adjustments between actual and estimated premiums of previous years.
• Interest revenues on loans receivable are recognized in the year they are earned. Interest revenues are not recorded on impaired loans.
• Recoveries of CPP administration costs are recognized based on the services provided in the year.
• 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 ESDC's liabilities. While the Deputy Minister is expected to maintain accounting control, she has no authority regarding the disposition of non-respendable revenues. As a result, non-respendable revenues are considered to be earned on behalf of the Government of Canada and are therefore presented in reduction of the entity's gross revenues.

(f)   Expenses – 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 employer contributions to the health and dental insurance plans and legal services are recorded as operating expenses at their estimated cost.
• The expenses incurred on behalf of Government are linked to the assets held on behalf of Government. As a result, these expenses are considered to be incurred on behalf of the Government of Canada and are therefore presented in reduction of the entity's gross expenses.

(g)  Employee future benefits:

• Pension benefits: Eligible employees participate in the Public Service Pension Plan, a multiemployer pension plan administered by the Government. ESDC’s contributions to the Plan are charged to expenses in the year incurred and represent the total departmental obligation to the Plan. ESDC'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.
• 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.

(h) Accounts receivable and advances – Accounts receivable and advances are stated at the lower of cost and net recoverable value. A valuation allowance is recorded for accounts receivable where recovery is considered uncertain.

(i) Loans receivable – Canada Student Loans (CSL) and Canada Apprentice Loans (CAL) are recorded at original cost less reimbursements, forgiveness, write-offs and valuation allowances. The allowances for bad debts and Repayment Assistance Plan (RAP) for direct loans of CSL and for CAL are calculated based on rates determined according to an actuarial estimate and as per historical collection rates for guaranteed and risk-shared loans of CSL.

(j) 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 consolidated financial statements.

(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. ESDC 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 done 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 consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in the consolidated 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 determination of part of the EI premiums, the allowances for doubtful accounts, the OAS and EI benefit repayments, the liability for employee future benefits, the recovery of CPP administration costs, the accrued liabilities, the useful life of tangible capital assets, the liability of the Government Annuities Account, the estimated overpayments and underpayments of benefits disclosed in note 13 and the contingent liabilities. Actual results could significantly differ from those estimated. Management’s estimates are reviewed periodically and, as adjustments become necessary, they are recorded in the consolidated financial statements in the year they become known.

3. Parliamentary authorities

ESDC receives most of its funding through annual parliamentary authorities. Items recognized in the Consolidated Statement of Operations and Departmental Net Financial Position and the Consolidated Statement of Financial Position in one year may be funded through parliamentary authorities in prior, current or future years. Furthermore, as a consolidated specified purpose account, the EIO Account expenses and revenues recognized in ESDC’s Consolidated Statement of Operations and Departmental Net Financial Position do not affect parliamentary authorities. Accordingly, ESDC 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 (in thousands of dollars)

(b) Authorities provided and used (in thousands of dollars)

4. Accounts receivable and advances

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

5. Loans receivable

The breakdown of the gross loans is as follows:

6. Due to Canada Pension Plan

The Canada Pension Plan (CPP) is a federal/provincial plan established by an Act of Parliament in 1965.  The CPP is administered by the Government of Canada and the participating provinces; therefore, it is excluded from ESDC's reporting entity.

In accordance with the Canada Pension Plan, the financial activities of the CPP are recorded in the CPP Account.  CPP’s revenues and expenses, such as contributions, interests, investment income or loss from the CPP Investment Board, pension benefits and operating expenses, are reported as increases and decreases to the liability and are reported separately  in the CPP consolidated financial statements.  The CPP Account also records the amounts transferred to or received from the CPP Investment Board.

7. Accounts payable and accrued liabilities

The following table presents details of ESDC’s accounts payable and accrued liabilities:

8. Designated amount fund Trust account

This account was established pursuant to section 21 of the Financial Administration Act, to record amounts received and paid under Article 5 of the Indian Residential Schools Settlement Agreement. It was established on September 19, 2007, and provides for the payments referred to as Common Experience Payments (CEP) to eligible former students of recognized Indian Residential Schools and personal credits for educational programs and services to CEP recipients or to certain family members. The account is credited with interest, pursuant to section 21(2) of the Financial Administration Act. The Designated Amount Fund is co-administered by the Trustee, the Government of Canada, represented jointly by the Minister of Families, Children and Social Development and the Minister of Indigenous and Northern Affairs.

9. Government annuities account

ESDC administers the Government Annuities Account. This account was established by the Government Annuities Act, and modified by the Government Annuities Improvement Act, which discontinued sales of annuities in 1975. The account is valued on an actuarial basis each year, with the deficit or surplus charged or credited to the Consolidated Revenue Fund.

The purpose of the Government Annuities Act was to assist Canadians to provide for their later years through the purchase of Government annuities.

Receipts and other credits consist of premiums received, funds reclaimed from the Consolidated Revenue Fund for previously untraceable annuitants, earned interest and any transfer needed to cover the actuarial deficit. Payments and other charges represent matured annuities, the commuted value of death benefits, premium refunds and withdrawals, as well as actuarial surpluses and unclaimed annuities. The amounts of unclaimed annuities related to untraceable annuitants are transferred to non-tax revenues.

10. Employee future benefits

(a) Pension benefits: ESDC’s employees participate in the public service pension plan (the ''Plan''), which is sponsored and administered by the Government of Canada. Pension benefits accrue up to a maximum period of 35 years at a rate of 2 percent per year of pensionable service, times the average of the best five consecutive years of earnings. The benefits are integrated with Canada/Québec Pension Plans benefits and they are indexed to inflation.

Both the employees and ESDC contribute to the cost of the Plan. Due to the amendment of the Public Service Superannuation Act following the implementation of provisions related to Canada's Economic Action Plan 2012, employee contributors have been divided into two groups - Group 1 relates to existing plan members as of December 31, 2012 and Group 2 relates to members joining the Plan as of January 1, 2013. Each group has a distinct contribution rate.

The 2017 expense amounted to $159.6 million ($160.1 million in 2016). For group 1 members, the expense represents approximately 1.12 times (1.25 times in 2016) the employee contributions and, for Group 2 members, approximately 1.08 times (1.24 times in 2016) the employee contributions.

ESDC'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: Severance benefits provided to the Department's employees were previously based on an employee's eligibility, years of service and salary at termination of employment. However, since 2011, the accumulation of severance benefits for voluntary departures progressively ceased for substantially all employees. Employees subject to these changes were given the option to be paid the full or partial value of benefits earned to date or collect the full or remaining value of benefits upon departure from the public service. By March 31, 2017, all settlements for immediate cash out were completed. Severance benefits are unfunded and, consequently, the outstanding obligation will be paid from future authorities.

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

11. Tangible capital assets

Transfers of tangible capital assets to other departments amounted to a net book value of $20,578 ($35,857 of cost less $15,279 of accumulated amortization). These transfers are included in the adjustments columns.

12. Departmental net financial position

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

The Employment Insurance Operating (EIO) Account was established in the accounts of Canada by the Employment Insurance Act (the Act). All amounts received under the Act are deposited in the Consolidated Revenue Fund (CRF) and credited to the EIO Account. The benefits and the costs of administration of the Act are paid out of the CRF and charged to the EIO Account.

13. Estimated overpayments and underpayments of benefits

Given the large volume of EI claims and OAS related applications (OAS, Guaranteed Income Supplement and Allowance) and the need for prompt service, ESDC applies a risk-based approach to its control procedures. The verification of EI claims and OAS related applications is conducted both prior and after the payment of benefits, using a combination of up-front and automated control measures and post-payment verification activities.

In order to measure the accuracy of EI and OAS related benefit payments, respective programs were put in place to establish an annual payment accuracy rate and estimate, through statistical extrapolation, the most likely value of incorrect benefit payments. For benefits paid during the twelve months ended March 31, 2017, these undetected overpayments and underpayments are estimated to be $655.7 million ($863.7 million as at March 31, 2016) and $219.1 million ($232.4 million as at March 31, 2016) respectively for EI claims and $1,333.7 million ($591.4 million as at March 31, 2016) and $54.2 million ($40.3 million as at March 31, 2016) respectively for OAS related applications. The annual payment accuracy rate and estimated value of errors are used by the EI and OAS related programs to assess the quality and accuracy of decisions and the need, if any, to improve its systems and practices of processing claims and applications.

The overpayments established during the year, as indicated in Note 4, are not directly linked to the above noted estimated overpayments and underpayments of benefits for the same period.

14. Contractual obligations

The nature of ESDC’s activities can result in some large multi-year contracts and obligations whereby ESDC 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:

Labour Market Development Agreements with eight of the provinces and territories require a two year notice for cancellation of the agreements. The obligations for 2019 cannot be reasonably estimated.

15. Contingent liabilities

Claims, litigations and grievances have been made against ESDC in the normal course of operations. These claims include items with pleading amounts and other for which no amount is specified. While the total amount claimed in these actions is significant, their outcomes are not determinable. ESDC has recorded an allowance for claims and litigations where it is likely that there will be a future payment and a reasonable estimate of the loss can be made.

Beginning in January 2013, ten proposed class action claims were filed with the Federal Court, Ontario Superior Court, Alberta Court of Queen’s Bench, Manitoba Queen’s Bench, Saskatchewan Queen’s Bench and the Supreme Court of British Columbia against the Attorney General of Canada or Her Majesty the Queen. The claimants are claiming damages as a result of a privacy incident involving an external hard drive from an ESDC office, which may contain the personal information of 583,000 Canada Student Loans Program participants. Following decisions by the Federal Court and the Federal Court of Appeal, the class action was certified on the following claims: breach of contract, breach of warranty, intrusion upon seclusion, negligence and breach of confidence. The outcome of this claim is not determinable at this time. One of these plaintiffs requested consent to discontinue their action without costs. The Attorney General of Canada was instructed to accept this request.

On February 1, 2013, a proposed class action claim was filed with the Federal Court against Her Majesty the Queen. The claimants are claiming damages as a result of a privacy incident involving a memory key, which contains the personal information of approximately 5,045 Canadians. The claimants are alleging breach of contract, breach of warranty, negligence, breach of confidence and intrusion upon seclusion. The outcome of this claim is not determinable at this time.

16. Related party transactions

ESDC is related as a result of common ownership to all government departments, agencies, and Crown corporations. ESDC enters into transactions with these entities in the normal course of business and on normal trade terms.

During the year, ESDC received and provided common services which were obtained or delivered without charge from other government departments as disclosed below.

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

During the year, ESDC received services without charge from certain common service organizations, related to the employer’s contribution to the health and dental insurance plans and legal services. These services provided without charge have been recorded in the ESDC’s Consolidated 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 Services and Procurement Canada, information technology infrastructure services provided by Shared Services Canada and audit services provided by the Office of the Auditor General are not included in the ESDC’s Consolidated Statement of Operations and Departmental Net Financial Position.

(b) Common services provided without charge to other government departments

During the year, ESDC provided services without charge to other government departments, related to the provision of workers’ compensation services, amounted to $27.0 million in 2017 ($26.6 million in 2016).

(c) Other transactions with related parties

In the normal course of business, ESDC enters into transactions with government departments, agencies and Crown corporations. The revenues and expenses related to these transactions are as follows:

Table - Related party transactions - Other transactions with related parties (in thousands of dollars)

Expenses and revenues disclosed in (c) exclude common services provided without charge, which are already disclosed in (a).

17. Segmented information

Presentation by segment is based on ESDC’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 program activity, by major object of expenses and by major type of revenues. The segment results for the period are as follows: