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Accounts and Financial Statements
Defence Construction (1951) Limited
Notes to Financial Statements
March 31, 2009
1. Authority and Objective
Defence Construction (1951) Limited (the “Corporation”) 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.
Cash
Cash consists of funds held in one bank account.
Due from related parties and accounts receivable
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 | Shorter of the lease term or useful life |
In the year of acquisition, a full year of amortization is recognized.
Financial instruments
Financial assets and financial liabilities are initially recognized at fair value and their subsequent
measurement is dependent on their classification as described below. Their classification depends on
the purpose for which the financial instruments were acquired or issued, their characteristics and the
Corporation’s designation of such instruments.
Financial instrument classification is as follows:
| Cash | Held for trading |
| Advances and 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 |
Held for trading – Held for trading financial assets are measured at fair value at the balance sheet date with changes in their fair value recorded in income.
Loans and receivables – Loans and receivables are accounted for at amortized cost using the effective interest method.
Other liabilities – Other liabilities are recorded at amortized cost using the effective interest method and include all 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 gain/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 (the “Plan”)
administered by the Government of Canada. Although the 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 account for 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 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.
Future accounting standards
The Canadian Accounting Standards Board has announced that all publicly accountable Canadian
reporting entities will adopt International Financial Reporting Standards (IFRSs) as Canadian generally
accepted accounting principles for years beginning on or after January 1, 2011. The Corporation is currently
evaluating the impact of the adoption of these new standards.
3. Capital Management
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. 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) | 2009 | ||
| Cost | Accumulated amortization |
Net | |
| Equipment | $ 2,137 | $ 1,622 | $ 515 |
| Computers | 9,051 | 8,442 | 609 |
| Leasehold improvements | 1,354 | 668 | 686 |
| $ 12,542 | $ 10,732 | $ 1,810 | |
| (in thousands of dollars) | 2008 | ||
| Cost | Accumulated amortization |
Net | |
| Equipment | $ 1,770 | $ 1,412 | $ 358 |
| Computers | 8,617 | 7,955 | 662 |
| Leasehold improvements | 973 | 464 | 509 |
| $ 11,360 | $ 9,831 | $ 1,529 | |
5. Provision for Employee Future Benefits
Severance and other non-pension benefits
The benefit plan is not funded and thus has no assets, resulting in a plan deficit equal to the accrued
benefit obligation.
| (in thousands of dollars) | 2009 | 2008 |
| Total provision for employee future benefits | $ 12,343 | $ 10,013 |
| Less: current portion | 361 | 228 |
| $ 11,982 | $ 9,785 | |
| (in thousands of dollars) | 2009 | 2008 |
| Projected accrued benefit obligation | $ 11,716 | $ 11,358 |
| Unamortized actuarial gains (losses) | 627 | (1,345) |
| Provision for employee future benefits | $ 12,343 | $ 10,013 |
| Current year’s expense | $ 2,663 | $ 2,027 |
| Benefits paid during the year | $ 333 | $ 327 |
The significant actuarial assumptions adopted in measuring the Corporation’s severance and other benefit plans are as follows:
| 2009 | 2008 | |
| Discount rate for projected benefit obligation | 6.00% | 4.96% |
| Average rate of general salary increases | 3.50% | 3.50% |
| Inflation rate | 2.50% | 2.50% |
| Assumed health care cost trend rate | 4.50% | 4.50% |
| Ultimate health care cost trend rate | 4.50% | 4.50% |
| Year ultimate health care cost trend rate is reached | 2009 | 2009 |
| Uninsured Pensioner 1994 with mortality projections to year 2015 (UP94@2015) for 2009 and 2008 | UP94@2015 | UP94@2015 |
| Retirement age | 59 | 59 |
The health care cost trend rate is assumed to exceed inflation by 2% per annum for future years.
The measurement date for the last actuarial valuation of the accrued benefit obligation was April 1, 2009.
The next actuarial valuation is planned for April 2010.
Pension benefits
The Corporation and all eligible employees contribute to the Public Service Pension Plan (the “Plan”). This
Plan provides benefits based on years of service and average earnings at retirement. The benefits are fully
indexed to the increase in the Consumer Price Index. The current year’s contributions by the Corporation to
the Plan were $5,457,379 (2008 - $4,498,014). The current year’s contributions by the employees of the
Corporation to the Plan were $2,644,016 (2008 - $2,029,674).
The rates of contribution to the Plan are determined on a calendar year basis and were as follows:
| 2009 | 2008 | 2007 | |
| Employees – current service: | |||
| On earnings up to yearly maximum pensionable earnings (YMPE) | 5.2% | 4.9% | 4.6% |
| On earnings exceeding YMPE: 2009 - $46,300, 2008 - $44,900, 2007 - $43,700 | 8.4% | 8.4% | 8.1% |
| Employer - expressed as a multiple of employee contributions: | |||
| For contributions on current and elective service on single rate employee contributions | 1.91 | 2.02 | 2.14 |
| For elective service on double rate employee contributions | .46 | .51 | .56 |
| For Retirement Compensation Arrangement (RCA) on earnings that exceed: 2009 - $136,700, 2008 - $130,700, 2007 - $126,500 | 7.5 | 7.3 | 7.0 |
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. Substantially all of the Corporation’s services revenue of $71,570,000 (2008 - $55,458,000) is generated from services provided to the Department of National Defence (DND). In the National Capital Region, Public Works and Government Services Canada manages DND facilities and provides funds to the Corporation to engage contractors to perform infrastructure services.
In accordance with a Memorandum of Understanding between DND and the Corporation, DND is to provide office accommodations free of charge to the Corporation’s service delivery personnel at DND-owned bases and wings. Where office space is not provided, and for the Corporation’s service delivery personnel who cannot be accommodated at a DND owned facility, accommodation costs are recovered either as an out-ofpocket reimbursable disbursement or through the hourly billing rates established for the services provided.
Amounts due from and to related parties at the end of the year are as follows:
| (in thousands of dollars) | 2009 | 2008 |
| Due from: | ||
| Department of National Defence | $ 15,304 | $ 9,493 |
| Public Works and Government Services Canada | 38 | 4 |
| Natural Resources Canada | - | 3 |
| $ 15,342 | $ 9,500 | |
| Due to: | ||
| Department of National Defence | $ 102 | $ 5 |
| Public Works and Government Services Canada | 590 | 19 |
| Human Resources and Social Development Canada | - | 12 |
| Canada School of Public Service | 1 | 1 |
| Public Service Commission of Canada | 8 | 1 |
| $ 701 | $ 38 |
The aging of related party receivables at the end of the year was:
| (in thousands of dollars) | 2009 | 2008 |
| Current (<61 days) | $ 14,917 | $ 9,226 |
| Past due (61-120 days) | 214 | 213 |
| Past due (>120 days) | 211 | 61 |
During the year the Corporation wrote-off $8,560 (2008 - $1,558) of amounts due from related parties primarily to account for invoicing corrections.
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) | |
| 2010 | $ 2,056 |
| 2011 | 1,976 |
| 2012 | 1,718 |
| 2013 | 1,630 |
| 2014 | 1,344 |
| $ 8,724 | |
8. Financial Instruments
Financial instruments consist of cash, due from and due to related parties, advances, accounts receivable, accounts payable and accrued liabilities.
Fair value
Due from related parties, advances, accounts receivable, accounts payable, accrued liabilities and due to
related parties are primarily due on demand and non-interest bearing. The estimated fair value of these
financial instruments approximates their carrying value due to their short-term nature.
Credit risk
Credit risk is the risk that one party to a financial instrument might not meet its obligations under the terms
of the financial instrument. The carrying value of financial assets is $23,315,000
(2008 - $15,657,000) and
represents the Corporation’s maximum exposure to credit risk. The Corporation does not use credit derivatives
or similar instruments to mitigate this risk and, as such, the maximum exposure is the full carrying value or
face value of the financial asset. The Corporation minimizes credit risk on cash by depositing the cash with
only reputable and high quality financial institutions. The Corporation has no significant exposure to credit
risk on accounts receivable as substantially all of the accounts receivable are due from the Government of
Canada. 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. Based on historic
default rates, the Company believes that there are no requirements for an allowance for doubtful accounts.
Liquidity risk
Liquidity risk is the risk that an entity will encounter difficulty in meeting its obligations associated with
financial liabilities. The carrying value of financial liabilities is $6,849,000 (2008 - $4,340,000) and
represents the maximum exposure of the Corporation. The Corporation manages its liquidity risk by
monitoring and managing its cash flow from operations and anticipated investing activities. The liquidity
risk is low since the Corporation does not have debt instruments and derives its cash flow from services
offered to the Government of Canada. In addition, as at March 31, 2009, the Corporation’s financial assets
exceeded its financial liabilities by $16,466,000 (2008 - $11,317,000).
Market risk
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate
because of changes in market prices and comprises three types of risk: currency risk, interest rate risk and
other price risk. The Corporation’s financial assets and liabilities are not exposed to any one of these
market risks given their underlying nature and characteristics.
9. Contingencies
Letters of credit aggregating $200,000 (2008 - $200,000) in respect of contractual obligations are currently
outstanding. The Corporation is currently involved in legal claims in respect of contractual obligations
totalling $6,640,209 (2008 - $14,791,595) and $nil in respect of employment matters
(2008 - $75,000).
The final outcome of such claims is not determinable. In accordance with the terms of a Memorandum of
Understanding (MOU) between the Corporation and DND, settlements resulting from the resolution of any
existing and future legal claims in respect of contractual obligations will be entirely funded by DND, in the
year of settlement. As a result of this MOU, and its assessment of risk, the Corporation does not consider
it necessary to record any liabilities in its financial statements relating to legal claims.
