 |
|
Defence Construction (1951) Limited
Notes to Financial Statements
March 31, 2008
1. Authority and objective
Defence Construction (1951) Limited was incorporated under the Companies Act in 1951 pursuant to the authority of the Defence Production Act and continued under the Canada Business Corporations Act. The Corporation is an agent Crown corporation named in Part I of Schedule III to the Financial Administration Act. Since 1996, responsibility for the Corporation has rested with the Minister of Public Works and Government Services. The Corporation is not subject to income taxes.
The mandate of the Corporation is to provide procurement, construction, professional, operations and maintenance services in support of the defence of Canada. The prime, but not exclusive, beneficiary of the Corporation’s services has always been the Department of National Defence. Other government departments and agencies who play a role in Canada’s defence may also avail themselves of these services. Revenue is generated from fees charged for specific services provided.
2. Significant accounting policies
These financial statements are prepared in accordance with Canadian generally accepted accounting principles. The significant accounting policies followed in the preparation of these financial statements are summarized below.
Standards and Interpretations effective in the current year:
Comprehensive income
The Corporation adopted CICA Handbook Section 1530, “Comprehensive Income”. Comprehensive income includes net earnings and other comprehensive income (OCI). OCI refers to changes in net assets from certain transactions and other events and circumstances, other than transactions with shareholders. These changes are recorded directly as a separate component of shareholders’ equity and excluded from net earnings. The adoption of the new requirement did not affect the Corporation’s financial statements. The Statement of Operations has been renamed to Statement of Operations and Comprehensive Loss.
Equity
Effective April 1, 2007, the Corporation adopted CICA Handbook Section 3251, “Equity” which establishes the standards for presentation of equity and changes in equity during the reporting period including the requirement to separately disclose each component of equity and the changes during the reporting period. These components are: accumulated other comprehensive loss, retained earnings, contributed surplus, share capital and reserves.
Financial instruments – Recognition and measurement
Effective April 1, 2007, the Corporation adopted CICA Handbook Section 3855, “Financial Instruments – Recognition and Measurement” which prescribes that all financial instruments within the scope of this standard, including derivatives, be initially measured at fair value and included on an entity’s balance sheet. Subsequent measurement of financial instruments should be either at their fair value or, in limited circumstances when fair value may not be considered most relevant, at cost or amortized cost. It also specifies when gains and losses as a result of changes in fair value are to be recognized in the statement of operations. The adoption of this new requirement did not affect the Corporation’s financial statements.
Financial instrument classification is as follows:
| Cash | Held for trading |
| Accounts receivable | Loans and receivables |
| Due from related parties | Loans and receivables |
| Accounts payable and accrued liabilities | Other liabilities |
| Due to related parties | Other liabilities |
Embedded derivatives
Upon adoption of section 3855, the Corporation reviewed all outstanding contracts. There were no embedded derivatives that required recognition as an asset or liability on the balance sheet.
Early adoption of Standards and Interpretations:
The Corporation has elected to adopt the following in advance of their effective dates:
Capital disclosures
The Corporation adopted CICA Handbook Section 1535, “Capital Disclosures” which requires that an entity disclose qualitative information about its objectives, policies and processes for managing capital, qualitative data about what it regards as capital and whether it has complied with any externally imposed capital requirements and if not the consequences of such non-compliance. The Corporation has presented the required disclosures related to this Section in Note 3 below.
Financial instruments – Disclosure and presentation
he new CICA Handbook Section 3862, “Financial Instruments – Disclosures” and Section 3863, “Financial Instruments – Presentation” require the disclosure of information with regards to the significance of financial instruments for the Corporation’s financial position and performance and the nature and extent of risks arising from financial instruments to which the Corporation is exposed during the period and at the balance sheet date, and how the Corporation manages those risks.
The new disclosure and presentation requirements of sections 3862 and 3863 did not have a material impact on the Corporation’s financial statements and, where applicable, have been incorporated into the financial statements and accompanying notes.
Accounting policies:
Cash
Cash consists of funds held in one bank account.
Due from related parties and accounts receivables
Due from related parties and accounts receivable are stated at amortized cost, which approximates fair
value, given the short dated nature of these financial assets.
Property, plant and equipment
Property, plant and equipment are comprised of leasehold improvements, equipment (which includes furniture)
and computers (which includes hardware, purchased software and implementation costs). These assets
are amortized on a straight-line basis as follows:
| Equipment | 5 years |
| Computers | 3 years |
| Leasehold improvements | Initial lease term |
In the year of acquisition, a full year of amortization is recognized.
Accounts payable and due to related parties
Accounts payable and due to related parties are stated at amortized cost, which approximates fair value, given the short dated nature of these financial liabilities.
Employee future benefits
Employees are entitled to specific severance and other non-pension benefits. The projected accrued benefit obligations are actuarially determined using the projected benefit method pro-rated on services (which incorporates management best estimates of expected salary escalation, retirement ages of employees and expected health care costs). The current year expense is comprised of current service cost during the year, imputed interest on the projected benefit obligation and the amortization of the actuarial loss in excess of 10% of the benefit obligation over the average remaining service period of active employees.
Pension benefits
All eligible employees of the Corporation participate in the Public Service Pension Plan administered by the Government of Canada. Although the Public Service Pension Plan is a defined benefit plan, it meets the definition of a multi-employer plan, which is accounted for as a defined contribution plan, as sufficient information is not available to record it as a defined benefit plan. The Corporation’s contributions to the Plan are currently based on a multiple of the employees’ required contributions, and may change over time depending on the experience of the Plan. These contributions represent the total pension obligations of the Corporation and are expensed during the year in which the services are rendered. The Corporation is not required under present legislation to make contributions with respect to actuarial deficiencies of the Public Service Pension Plan.
Revenue
The Corporation recognizes revenue when persuasive evidence of an arrangement exists, the service has been performed, the price to the recipient is fixed or determinable and collection is reasonably assured.
Measurement uncertainty
The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting year. The most significant estimate in these financial statements is the provision for employee future benefits. Actual results could differ significantly from this estimate.
3. Capital disclosures
The Corporation’s objectives in managing capital are to safeguard the Corporation’s ability to continue as a going concern and fulfill its stated mandate, generate sufficient cash to meet its anticipated operating and capital requirements and settle its financial obligations as they become due. In determining the amount of cash reserves carried for operating needs, the Corporation considers the planning and operating risk inherent in its operations, particularly the risk associated with potential and unanticipated changes to the amount or timing of construction project expenditures by the Department of National Defence. The Corporation allows for reasonable levels of contingencies in its financial projections to ensure that it can continue to fulfill its mandate and serve its client in an effective and timely manner. Cash levels are constantly monitored and any surpluses or shortfalls that may occur from time to time during certain operating periods are taken into account in the determination of billing rates for future services. The Corporation’s capital consists of its share capital and retained earnings.
4. Property, plant and equipment (in thousands of dollars)
| 2008 | 2007 | |||
| Cost | Accumulated Amortization | Net | Net | |
| Equipment | $ 1,770 | $ 1,412 | $ 358 | $ 437 |
| Computers | 8,617 | 7,955 | 662 | 556 |
| Leasehold improvements | 973 | 464 | 509 | 602 |
| $ 11,360 | $ 9,831 | $ 1,529 | $ 1,595 |
5. Provision for employee future benefits
Severance and other non-pension benefits (in thousands of dollars)
The benefit plan is not funded and thus has no assets, resulting in a plan deficit equal to the accrued benefit obligation.
| 2008 | 2007 | |
| Total provision for employee future benefits | $ 10,013 | $ 8,313 |
| Less: current portion | 228 | 237 |
| $ 9,785 | $ 8,076 | |
| 2008 | 2007 | |
| Projected accrued benefit obligation | $ 11,358 | $ 9,047 |
| Unamortized actuarial losses | (1,345) | (734) |
| Provision for employee future benefits | $ 10,013 | $ 8,313 |
| Current year's expense | $ 2,027 | $ 1,782 |
| Benefits paid during the year | $ 327 | $ 360 |
The significant actuarial assumptions adopted in measuring the Corporation’s severance and other benefit plans are as follows:
| 2008 | 2007 | |
| Discount rate for projected benefit obligation | 4.96% | 5.15% |
| Average rate of general salary increases | 3.50% | 3.24% |
| Inflation rate | 2.50% | 2.24% |
| Average rate of extended health care cost increases | 4.50% | 4.24% |
| Mortality rated based on mortality tables: | ||
| Uninsured Pensioner 1994 with mortality porjections to year 2015 (UP94@2015) for 2008 and 2007. |
UP94@2015 | UP94@2015 |
| Retirement age | 59 | 59 |
The measurement date for the last actuarial valuation of the accrued benefit obligation was April 9, 2008. The next actuarial valuation is planned for April 2009.
Pension benefits
The current year’s contributions by the Corporation to the Plan were $4,498,014 (2007 - $4,006,873). The current year’s contributions by the employees of the Corporation to the Plan were $2,029,674 (2007 - $1,673,219).
6. Related party transactions
The Corporation is related in terms of common ownership to all Government of Canada departments, agencies and Crown corporations. The Corporation enters into transactions with these entities in the normal course of business under its stated mandate. These transactions are measured at the exchange amount which is the actual amount of the consideration given or received for the services provided. The Corporation’s services revenue is generated primarily from services provided to the Department of National Defence.
The Department of National Defence provides office space free of charge for some employees of the Corporation.
Amounts due from and to related parties at the end of the fiscal year are as follows (in thousands of dollars):
| 2008 | 2007 | |
| Due from: | ||
| Department of National Defence | $ 9,493 | $ 7,267 |
| Public Works and Government Services Canada | 4 | 84 |
| Natural Resources Canada | 3 | - |
| $ 9,500 | $ 7,351 | |
| Due to: | ||
| Department of National Defence | $ 5 | $ 6 |
| Public Works and Government Services Canada | 19 | 22 |
| Justice Canada | - | 2 |
| Human Resources and Social Development Canada | 12 | 8 |
| Canada School of Public Service | 1 | 8 |
| Public Service Commission of Canada | 1 | - |
| $ 38 | $ 46 |
The aging of receivables at the end of the year (in thousands of dollars):
| 2008 | 2007 | |
| Current (<61 days) | $ 9,226 | $ 7,050 |
| Past due (61-120 days) | 213 | 118 |
| Past due (<120 days) | 61 | 183 |
During the year the Corporation wrote-off $1,558 (2007- $1,648) of amounts due from related parties primarily to account for invoicing corrections. The Corporation has no significant exposure to credit risk given that its revenue is derived from the Government of Canada. Based on historic default rates, the Company believes that there are minimal requirements for an allowance for doubtful accounts.
7. Lease commitments
The Corporation leases office space for its operations. The future minimum annual lease payments are as follows:
Year ending March 31 (in thousands of dollars):
| 2009 | $ 1,703 | |
| 2010 | 1,782 | |
| 2011 | 1,704 | |
| 2012 | 1,443 | |
| 2013 | 1,353 | |
| 2014 | 1,023 | |
| $ 9,008 |
8. Financial instruments
Financial instruments consist of cash, due from and due to related parties, accounts receivable and accounts payable. Accounts receivable and accounts payable are primarily due on demand and non-interest bearing. The carrying amounts of these financial instruments approximate fair values due to their short-term nature. With the exception of amounts due from the Department of National Defence and other government departments, there is no concentration of accounts receivable with any one customer and, accordingly, no significant credit risk exists.
9. Contingencies
Letters of credit aggregating $200,000 (2007 - $200,000) in respect of contractual obligations are currently outstanding. The Corporation is currently involved in legal claims in respect of contractual obligations totalling $14,791,595 (2007 - $14,628,938) and in respect of employment matters totalling $75,000 (2007 - $75,000). In the opinion of management and legal counsel, the position of the Corporation is defensible. However, the final outcome of such claims is not determinable. In accordance with the terms of an Annex to the Memorandum of Understanding between the Corporation and the Department of National Defence, the settlements resulting from the resolution of any existing and future legal claims in respect of contractual obligations will be entirely funded by the Department, in the year of settlement. As a result of this Annex, and its assessment of risk, the Corporation does not consider it necessary to record any liabilities in its financial statements relating to legal claims.
