Employment and Social Development Canada Consolidated Financial Statements (Unaudited) for the year ended March 31, 2020

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Statement of Management Responsibility Including Internal Control over Financial Reporting

Responsibility for the integrity and objectivity of the accompanying consolidated financial statements for the year ended March 31, 2020, and all information contained in these statements rests with the management of Employment and Social Development Canada (ESDC). These consolidated financial statements have been prepared by management using the Government of Canada'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 consolidated financial statements. Some of the information in the consolidated 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 ESDC’s financial transactions. Financial information submitted in the preparation of the Public Accounts of Canada, and included in ESDC’s Departmental Results Report (DRR), is consistent with these consolidated financial statements.

Management is also responsible for maintaining an effective system of internal control over financial reporting (ICFR) 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 consolidated 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 ESDC and through conducting an annual risk-based assessment of the effectiveness of the system of ICFR.

The system of ICFR 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 ICFR for the year ended March 31, 2020, was completed in accordance with the Treasury Board Policy on Financial Management and the results and action plans are summarized in the annex.

The effectiveness and adequacy of ESDC’s system of internal control is reviewed by the work of internal audit staff, who conduct periodic audits of different areas of ESDC’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 consolidated financial statements of ESDC have not been audited.

Original copy signed by:
Mark Perlman, CPA, CMA
Chief Financial Officer
Employment and Social Development Canada

Original copy signed by:
Graham Flack
Deputy Minister
Employment and Social Development Canada

Gatineau, Canada
October 2, 2020

Consolidated Statement of Financial Position (Unaudited) as at March 31

Table notes:

• The accompanying notes form an integral part of these consolidated financial statements.
• For contractual liabilities and contractual rights, see Note 14.
• For contingent liabilities, see Note 15.

Original copy signed by:
Mark Perlman, CPA, CMA
Chief Financial Officer
Employment and Social Development Canada

Original copy signed by:
Graham Flack
Deputy Minister
Employment and Social Development Canada

Gatineau, Canada October 2, 2020

Consolidated Statement of Operations and Departmental Net Financial Position (Unaudited) for the year ended March 31

Table notes:

• The accompanying notes form an integral part of these consolidated financial statements.
• For segmented information, see Note 17.

Consolidated Statement of Change in Departmental Net Financial Assets (Unaudited) for the year ended March 31

Table notes:

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

Consolidated Statement of Cash Flows (Unaudited) for the year ended March 31

Table notes:

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

Notes to the Consolidated Financial Statements (Unaudited)

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 (ESD).

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, Canada Emergency Response Benefit Act and, where applicable, related Regulations.

Employment and Social Development Canada achieves its objectives through the following departmental core responsibilities:

Social Development

To increase inclusion and opportunities for Canadians to participate in their communities.

Pensions and Benefits

Assist Canadians in maintaining income for retirement, and provide financial benefits to survivors, people with disabilities and their families.

Learning, Skills Development and Employment

Help Canadians access post secondary education and get the skills and training they need to participate in a changing labour market, as well as provide support to those who are temporarily unemployed.

On March 25, 2020, Bill C 13, an Act respecting certain measures in response to COVID 19, received Royal Assent. Part 2 enacted the Canada Emergency Response Benefit Act to authorize the income support payments to workers who suffer a loss of income for reasons related to the COVID 19. The department is reporting expenses for the Canada Emergency Response Benefit (CERB) as part of its Learning, Skills Development and Employment core responsibility. The current year includes presentation of management's best estimate of the benefits for the period of March 15 to March 31, 2020.

Working Conditions and Workplace Relations

Promotes safe, healthy, fair and inclusive work conditions and cooperative workplace relations.

Information Delivery and Services for Other Departments

Internal Services

Internal Services are those groups of related activities and resources that the federal government considers to be services in support of programs and/or required to meet corporate obligations of an organization. Internal Services refers to the activities and resources of the 10 distinct services that support program delivery in the organization, regardless of the internal services delivery model in a department. These services are: Management and Oversight Services; Communications Services; Legal Services; Human Resources Management Services; Financial Management Services; Information Management Services; Information Technology Services; Real Property Management Services; Materiel Management Services; and Acquisition Management Services.

2. Summary of significant accounting policies

These consolidated financial statements have been prepared using ESDC'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 2019 to 2020 Departmental Plan. Planned results are not presented in the ''Government funding and transfers'' section of the Consolidated Statement of Operations and Departmental Net Financial Position and in the Consolidated Statement of Change in Departmental Net Financial Asset because these amounts were not included in the 2019 to 2020 Departmental Plan.

(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 (CPP) is excluded from ESDC's reporting entity because changes to the CPP require the agreement of two thirds of the provinces and it is therefore not controlled by the Deputy Minister.

ESDC has received dividends on behalf of the Government of Canada from the Canada Mortgage and Housing Corporation (CMHC). As per the Government of Canada Accounting Handbook, these dividends are not recorded in ESDC's consolidated financial statements as they do not relate to ESDC's activities. ESDC is simply acting as a flow through mechanism for administrative purposes in order to enable the Government of Canada to receive the dividends.

(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 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 from the CRF represent the net amount of cash that ESDC is entitled to draw from the CRF without further authorities to discharge its liabilities.

(e) Revenues

Revenues are recorded on an accrual basis of accounting:

• 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 during 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, 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.

(f) Expenses

Expenses are recorded on an accrual basis of accounting:

• 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: The accumulation of severance benefits for voluntary departures ceased for applicable employee groups. The remaining obligation for employees who did not withdraw benefits 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 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, museum collections, and immovable assets located on reserves as defined in the Indian Act.

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) Related party transactions

Related party transactions, other than inter entity transactions, are recorded at the exchange amount. Inter entity transactions are transactions between commonly controlled entities. Inter entity transactions, other than restructuring transactions, are recorded on a gross basis and are measured at the carrying amount, except for the following:

• Services provided on a recovery basis are recognized as revenues and expenses on a gross basis and measured at the exchange amount.
• Certain services received on a without charge basis are recorded for departmental financial statement purposes at the carrying amount.

(m) 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 and accompanying notes. The estimates are based on facts and circumstances, historical experience, general economic conditions and reflect management's best estimate of the related amount at the end of the reporting period. 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.

The COVID-19 pandemic has led to additional measurement uncertainty in the preparation of these financial statements given the declining economic situation that prevailed after year end. The full potential impact of the COVID-19 outbreak is unknown as it will depend on future developments that are uncertain. Such uncertainties include the duration and depth of the outbreak. ESDC expects that the estimates and assumptions used in the preparation of these financial statements will continue to be affected for the near term.

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 1 year may be funded through parliamentary authorities in prior, current or future years. Furthermore, as a consolidated specified purpose account, the EI Operating 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:

4. Accounts receivable and advances

5. Loans receivable

Canada Student Loans

The Canada Student loans consist of 3 different types of loans, Direct Loans, Guaranteed Loans and Risk Shared Loans. Since August 1, 2000, Canada Student Loans are issued under the Direct Loan Regime. Before this date, the loans were issued under the Guaranteed Loan Regime (1964 1995) or under the Risk Shared Loan Regime (1995-2000). Direct loans issued on or after August 1, 2000 are administered under the authority of section 6.1 of the Canada Student Financial Assistance Act, which authorizes the Minister of Employment, Workforce Development and Disability Inclusion to enter into loan agreements directly with any qualifying students. Guaranteed loans provided by financial institutions between 1964 and August 1995, under the Canada Student Loans Act, are fully guaranteed by ESDC to the lenders. Risk shared loans issued prior to August 1, 2000 and on or after August 1, 1995 are amounts related to student loans subrogated to the Crown under the authority of the Canada Student Financial Assistance Act.

An allowance is recorded to provide for bad debts and Repayment Assistance Plan (RAP) for Canada Student Loans. The allowance for direct loans is determined according to an actuarial estimate provided by the Office of the Superintendent of Financial Institutions (Chief Actuary). Based on projected defaulted loans and recovery rates, the Chief Actuary establishes the allowance rates to be applied to the outstanding balances of the portfolio according to the status of the loans. For the year ended March 31, 2020, the bad debt and RAP allowance rates on direct loans were established as follows:

Source: Actuarial Report on the Canada Student Loans Program, as at July 31, 2019.

The total amount of direct loans issued under the authority of the Canada Student Financial Assistance Act and outstanding risk-shared loans bought back by ESDC may not exceed $34 billion. The total amount of direct loans and outstanding risk-shared loans as at March 31, 2020 amounted to $22.0 billion ($21.1 billion in 2019).

Canada Apprentice Loans

Canada Apprentice Loans (CAL) are administrated under the authority of section 4 of the Apprentice Loans Act which came into effect on January 2, 2015. The Minister of Employment, Workforce Development and Disability Inclusion is authorized to enter into a loan agreement directly with any eligible apprentice.

An allowance is recorded to provide for CAL bad debts and Repayment Assistance Plan (RAP). The allowance is determined according to an actuarial estimate provided by the Chief Actuary. Based on projected defaulted loans and recovery rates, the Chief Actuary establishes the allowance rates to be applied to the outstanding balances of the portfolio according to the status of the loans. For the year ended March 31, 2020, the bad debt allowance rate was established at 4.9% (5.1% in 2019) and the RAP allowance rate was established at 2.7% (3.0% in 2019), resulting in an allowance of $20.4 million ($19.1 million in 2019).

The total amount of CAL issued under the authority of Apprentice Loans Act may not exceed $1.5 billion. The total amount of outstanding apprentice loans as at March 31, 2020 amounted to $270.8 million ($237.2 million in 2019).

Interest and repayment terms

Under these 2 programs, no security is received from the borrowers and the loans bear interest at either a floating rate (prime rate) or a fixed rate (prime rate + 2.0%). Borrowers are not required to pay interest on their loans while they are still studying or enrolled in their apprentice program.

Borrowers having difficulty repaying their loans may be eligible for assistance under the Repayment Assistance Plan. The typical repayment period is 10 years, with a maximum period of 15 years for borrowers that are eligible if their affordable payment, which is based on family income and family size, is less than their required monthly payment. Depending on their regime, borrowers may also benefit from another type of loan forgiveness program in the event of severe permanent disability or death.

When ESDC no longer has reasonable assurance of recovering the full amount of a loan at the expected date, the loan becomes impaired. Interest revenue is not recorded on impaired loans. Loans that are considered impaired are eventually subject to the write off process. Subsequent recoveries on these loans are recorded as a reduction of the expense in the consolidated statement of operations and departmental net financial position. For the year ended March 31, 2020, the total bad debt expense on loans receivable amounted to $408.2 million ($137.3 million in 2019).

To support borrowers during the COVID 19 pandemic the Government of Canada suspended repayments of Canada Student Loans and Canada Apprentice Loans for the period of March 30, 2020 to September 30, 2020. During this time, no interest will accrue on these loans.

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 Accounts also record the amounts transferred to or received from the CPP Investment Board.

7. 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 Crown-Indigenous Relations.

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 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.

The Government Annuities Account is valued on an actuarial basis each year, initially using prescribed mortality and interest rates, with the deficit or surplus charged or credited to the Consolidated Revenue Fund. Starting in 2018, any adjustments required under the Government's accounting policies are recorded through an allowance adjustment account. The allowance account reflects the adjustment to the liability due to the differential between prescribed rates and best estimates of experience adjusted mortality tables and discount rate. The discount rate used to measure the present value of accrued benefits is based on the Government's cost of borrowing derived from the yields on the actual zero coupon yield curve for Government of Canada bonds which reflect the timing of the expected future cash flows.

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% per year of pensionable service, times the average of the best 5 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 the Economic Action Plan 2012, employee contributors have been divided into 2 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 2020 expense amounts to $184.6 million ($172.7 million in 2019). For Group 1 members, the expense represents approximately 1.01 times (1.01 times in 2019) the employee contributions and, for Group 2 members, approximately 1.00 times (1.00 times in 2019) the employee contributions.

ESDC's responsibility with regard to the Plan is limited to its contributions. Actuarial surpluses or deficiencies are recognized in the Consolidated Financial Statements of the Government of Canada, as the Plan's sponsor.

(b) Severance benefits

Severance benefits provided to ESDC'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, 2020, substantially all settlements for immediate cash out were completed. Severance benefits are unfunded and, consequently, the outstanding obligation will be paid from future authorities.

11. Tangible capital assets

Table notes:

• (1) Adjustments include assets under construction of $8.3 million that were transferred to the other categories upon completion of the assets. Transfers of tangible capital assets from other government departments amounted to a net book value of $44,232 ($48,888 of cost less $4,656 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, 2020, these undetected overpayments and underpayments are estimated to be $862.6 million ($605.8 million in 2019) and $193.2 million ($135.3 million in 2019) respectively for EI claims and $856.6 million ($1,171.7 million in 2019) and $117.3 million ($148.6 million in 2019) 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 and contractual rights

(a) 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:

Table notes:

• Labour Market Development Agreements with 8 of the provinces and 1 territory require a 2 year notice for cancellation of the agreements, other provinces and territories require a 1 year notice. The obligations for 2022 cannot be reasonably estimated.

(b) Contractual rights

The activities of ESDC sometimes involve the negotiation of contracts or agreements with outside parties that result in the department having rights to both assets and revenues in the future. They principally involve the administration of services on behalf of other government departments and other organizations. Major contractual rights that will generate revenues in future years and that can reasonably be estimated are summarized as follows:

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.

16. Related party transactions

ESDC is related as a result of common ownership to all government departments, agencies, and Crown corporations. Related parties also include individuals who are members of key management personnel or close family members of those individuals, and entities controlled by, or under shared control of, a member of key management personnel or a close family member of that individual.

The department enters into transactions with these entities in the normal course of business and on normal trade terms.

(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 $22.3 million in 2020 ($24.5 million in 2019).

(c) Other transactions with related parties

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

Table notes:

• Expenses and revenues disclosed in this table exclude common services provided without charge, which are already disclosed in section (a).

17. Segmented information

Presentation by segment is based on ESDC's core responsibilities. 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 for the core responsibilities, by major object of expenses and by major type of revenues. The segment results for the period are as follows:

18. Subsequent events

COVID-19 pandemic

In March 2020, the World Health Organization classified the outbreak of COVID 19 disease as a global pandemic. In response, the government enacted emergency measures to combat the spread of the virus and announced the COVID-19 Economic Response Plan to help stabilize the economy during the pandemic.

The emergency measures introduced by the government are intended to protect the health and safety of Canadians and provide direct support to Canadian workers and businesses. The impact of the measures for which accounting recognition criteria were met prior to March 31, 2020, are recognized in ESDC's 2020 consolidated financial statements. Since most of the measures were implemented subsequent to year end, the ESDC 2021 consolidated financial statements will be more significantly impacted.

The most significant of these measures is the Canada Emergency Response Benefit (CERB), a taxable benefit of $2,000 every 4 weeks for up to 16 weeks for eligible Canadians. Subsequent to March 31, 2020, it was announced that the benefit would be extended to a maximum of 28 weeks.

CERB payments to individuals eligible for EI are recorded as part of EI expenses and are paid out of the EIO Account. Payments to those individuals not eligible for EI are recorded under the Canada Emergency Response Benefit and have not been charged to the EIO Account.

As a result of the economic impact of the COVID-19, on September 14, 2020, the Government of Canada used its authority under the Act to temporary limit the change in the premium rate to zero for 2021 and 2022 in order to freeze the EI premium rate at the 2020 level. The Government of Canada also confirmed that it will be crediting the EIO Account for the costs related to the CERB.

Other emergency measures introduced by the government were either new measures or changes and enhancements to programs that existed at March 31. The announcements were made between March 2020 and the completion of these financial statements. Below is a non exhaustive list of the principal programs that have been announced or are impacted by these measures:

• Old Age Security and Guaranteed Income Supplement
• Canada Summer Jobs
• Reaching Home initiative
• Canada Student Loans program
• Canada Emergency Student Benefit
• Canada Student Grants
• Canada Student Service Grant

Major government announcements including the Speech from the Throne in September 2020 and legislation introduced in Parliament authorizing new spending measures from April 1, 2020 onward will have an impact on the consolidated financial statements. As this pandemic is ongoing and the government response continues to evolve, the government is unable to determine the impact on the financial results of future years. The effects of the pandemic will continue into the foreseeable future, and the government will continue to assess and monitor the effects on its financial condition, and provide regular updates on its financial results through regular reporting processes and periodic economic and fiscal updates.

19. Comparative information

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

Employment and Social Development Canada Annex to the Statement of Management Responsibility Including Internal Control Over Financial Reporting for the fiscal year ended March 31, 2020

1. Introduction

This document provides summary information on the measures taken by management to maintain an effective system of internal control over financial reporting (ICFR). In particular, it provides summary information on the assessments conducted by Employment and Social Development Canada (ESDC) as at March 31, 2020, including progress, results and related action plans unique to the Department.

Detailed information on ESDC's authority, mandate and program activities can be found in the Departmental Plan and Departmental Results Report.

2. Departmental system of internal control over financial reporting

2.1 Internal Control Management

ESDC 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 is well equipped to exercise these responsibilities effectively. The Department's focus is to ensure risks are managed well through a responsive and risk-based control environment that enables continuous improvement and innovation.

The Department has a well-established governance and accountability structure to support departmental assessment efforts and oversight of its system of internal control. The ESDC Financial Internal Control Framework was revised and approved by the primary departmental assurance providers and the Deputy Minister in October 2019. The Framework was a collaborative effort between the Assistant Deputy Minister and members of the Internal Control and Financial Assurance Senior Working Group (ICFA SWG) to depict the financial control activities within the responsibility of each of its members. The Framework also includes:

• Organizational accountability structures as they relate to internal control management to support sound financial management including roles and responsibilities for senior managers in their areas of responsibility for control management; and
• Monitoring and regular updates on internal control management plus assessment results and action plans to the Chief Financial Officer (CFO), Corporate Management Committee (CMC) and Departmental Audit Committee (DAC).

The DAC is an advisory committee which provides objective views on the Department's risk management, control and governance processes as well as general reporting.

Other key committees with responsibilities for maintaining and overseeing the effectiveness of its system of ICFR include:

Portfolio Management Board (PMB)

As the main decision-making body of the portfolio, the PMB determines strategic directions and priorities; approves portfolio-wide plans and strategies; and makes decisions on strategic issues that affect the portfolio as a whole. The PMB also acts as the key portfolio vehicle for information sharing, consultation and collaboration at the Deputy Minister and Assistant Deputy Minister (ADM) levels. The CFO is a member of this committee.

Corporate Management Committee (CMC)

Oversees the implementation of the portfolio's management agenda, as approved by the PMB, including the achievement of the management outcomes and objectives set out in the Integrated Business Plan, the Management Accountability Framework, and the corporate fiscal and planning processes. The committee also oversees departmental activities related to the operationalization of departmental security measures. The CFO is a member of this committee.

ICFA SWG

This ADM-level working group was created to promote a departmental-wide coordinated approach to audit, oversight and other monitoring activities undertaken across the department with a focus on financial internal controls. Its membership includes the primary departmental assurance providers and the group focuses on collaboration at all levels within its member branches with the objective of strengthening internal controls in support of the Deputy Minister's responsibilities as Accounting Officer. The CFO is the chair of the ICFA SWG committee.

ESDC's control environment also includes a series of measures to equip its staff to manage risks well through raising awareness, providing appropriate training to enhance skills and expertise required. Key measures are comprised of:

• An Office of Values and Ethics;
• ESDC Code of Conduct;
• Guidelines of Professional conduct for the Labour Program and Service Canada;
• A dedicated division under the CFO on internal control;
• Documentation of main business processes and related key risk and control points to support the management and oversight of its system of ICFR;
• Ongoing communications in core areas of financial management;
• Departmental policies tailored to ESDC's control environment;
• Periodically updated delegated authorities matrix;
• A Risk Assessment, Management and Mitigation methodology for Grants and Contributions;
• Integrated Business Plan;
• Multi-year risked based internal audit plan;
• ESDC Financial Internal Control Framework;
• Regularly updated Corporate Risk Profile;
• Recipient Audit Strategy; and
• Payment Accuracy Review (PAAR) and Processing Accuracy Review (PRAR) for major benefit programs.

2.2 Service arrangements relevant to financial statements

ESDC relies on other organizations for the processing of certain transactions that are recorded in its financial statements as follows:

Common Arrangements:

• Public Services and Procurement Canada centrally administers the payments of salaries, the delivery of compensation and benefits services, the procurement of goods and services in accordance with the ESDC delegation instrument and provides accommodation services;
• Treasury Board Secretariat provides the Department with information used to calculate various accruals and allowances, such as the accrued severance liability;
• The Department of Justice provides legal services to ESDC; and
• Shared Services Canada (SSC) provides information technology services to ESDC in the areas of data center and network services.

Specific Arrangements:

• ESDC, through the Service Canada (SC) initiative, acts as a focal point for government access to Canadians. As a result, ESDC has entered into several agreements with many federal -government departments designed to provide Canadians with better access to programs and services;
• A private service provider, pursuant to a contract with the Canada Student Loans Program, administers the delivery of the Direct loans issued under the Canada Student Loans Program. As a result, reliance is placed on the control procedures of the external service provider and the annual audit on financial information and internal controls performed by an external audit firm;
• The Canada Revenue Agency (CRA) provides full collection services to ESDC for the recovery of its Accounts Receivable. Although CRA uses ESDC's departmental accounts receivable systems (DARS), reliance is placed on the control procedures at CRA for the collection services and CRA's reporting capacity; and
• The CRA also administers a number of activities for the Canada Pension Plan (CPP), Old Age Security (OAS) and the Employment Insurance (EI) Operating Account.

3. Departmental assessment results during fiscal year 2020

In 2017 the Department commenced its full implementation of its ongoing risk-based monitoring program of ICFR.

In 2020, ESDC completed or substantially completed its assessment of the following key control areas based on its 2019 ongoing risk-based monitoring plan:

• Entity Level Controls (Risk Assessment Component);
• IT General Controls (ITGC) (Year 3 of a 3 year cycle);
• Employment Insurance
• Old Age Security; and
• Pay Administration.

ESDC determined that key financial controls examined are generally working effectively to prevent or detect a material misstatement to the Financial Statements. There are however areas that have been identified requiring remediation including:

Entity Level Controls - Risk Assessment Component

The assessment of the Risk Assessment Components was conducted as part of a 3-year cycle to assess all of the 5 ELC components (Risk Assessment, Control Environment, Control Activities, Information & Communication, and Monitoring).

The assessment found no significant control deficiencies.

IT General Controls

The ongoing monitoring of ITGCs is conducted as part of a three-year cycle, which assesses SAP and 16 feeder systems. The assessment of ITGCs could not be fully completed during the year due to the competing priorities of the stakeholders due to the pandemic. The SAP and the DARS systems were assessed as planned and key recommendations were noted in the access management and change management control pillars. The assessment of the remaining feeder systems will be finalized in 2021.

The management response action plan (MRAP) will be prepared by the process owner with a view to strengthen control. The progress against this plan will be tracked during the fiscal year 2020 to 2021.

Employment Insurance (EI)

The assessment of the EI process included the following 26 sub-processes: documents receive by mail, paper application submission, electronic application submission, paper Record of Employment (ROE) submission, electronic ROE submission, workload assignment, adjudication process, calculation process, electronic payment, payment rejects, bi-weekly reporting, recording payments, Processing Accuracy Review (PRAR), Payment Accuracy Review (PAAR), monitoring, internal access controls, managing employment insurance administrative costs, administrative fees for the employment insurance program, establishment of contribution revenue, monthly transfers from the Canada Revenue Agency, contribution revenue estimate revision, year-end accounting process, overpayment adjustment in DARS, overpayment under appeals or reconsiderations, recording accounts receivable from DARS to SAP, and Year-end reconciliation of DARS against SAP.

The assessment found no significant control deficiencies.

Old Age Security

The assessment of the Old Age Security process included the following 11 sub-processes: processing incoming mail, new application, modifications to existing OAS accounts, reconciliation of OAS payments, priority payments, manage overpayments and write-offs, manage overpayments and remissions, monitoring - Processing Accuracy Review (PRAR), monitoring - Payment Accuracy Review (PAAR), monitoring - financial system reconciliation, and monitoring - review delegation of authorities, for payments over $10,000, system access and reporting. As a result of the assessment, one key recommendation regarding the review of OAS System access rights was noted.

The MRAP will be prepared by the process owner with a view to strengthen control. The progress against this plan will be tracked during the fiscal year 2020 to 2021.

Pay Administration

The assessment of the Pay Administration process included the following 3 sub-processes: pre-payment, payment, and post-payment. As a result of the assessment, one key recommendation regarding strengthening the post-payment verification to include a review of the validity of Section 34 approvals in Phoenix for time and labour transactions and leave without pay transaction was noted.

The MRAP will be prepared by the process owner with a view to strengthen control. The progress against this plan will be tracked during the fiscal year 2020 to 2021.

4. Departmental action plan

Progress during fiscal year 2019 to 2020

During 2019 to 2020, ESDC conducted its ongoing monitoring according to the previous year's rotational plan as shown in the following table:

Action plan for the next fiscal year and subsequent years

ESDC's ongoing risk-based monitoring plan was changed from 3 years to 5 years commencing in 2020 for all key control areas. The extension of the ongoing monitoring plan is to account for the expanded scope of work to encompass additional financial management processes to comply with the Treasury Board Secretariat Policy on Financial Management by 2023. Also, ESDC will revert to a rotational assessment for Entity Level Controls as no significant control weaknesses were identified to warrant a more frequent reassessment.

The 5-year ongoing monitoring plan is shown in the table below. Note that the plan will be adjusted as required subject to an annual revalidation of the high-risk control areas, the timing of other relevant audit and monitoring activities and the impact of changes that occurred during the year or that are planned for the coming year(s).

Table notes:

During 2021, ESDC will assess the impact of the pandemic crisis on its risk assessment as well as on its key control areas.