ARCHIVED - Financial Statement Discussion and Analysis 2006 - 2007
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Table of contents
The following Financial Statement Discussion and Analysis (FSD&A) should be read in conjunction with the audited financial statements and accompanying notes of the National Research Council of Canada (NRC) for the fiscal year ended March 31, 2007. These financial statements have been prepared in accordance with Treasury Board accounting policies and year-end instructions issued by the Office of the Comptroller General, which are consistent with Canadian generally accepted accounting principles (GAAP) for the public sector. The FSD&A has been prepared following the Public Sector Statement of Recommended Practice SORP-1.
Responsibility for the preparation of the FSD&A rests with the management of NRC. The purpose of the FSD&A is to enhance the reader's understanding of NRC's financial position and results of operations. Additional information on NRC's performance will be available in the NRC Departmental Performance Report for 2006-07.
The FSD&A consists of three parts: Highlights, Financial Risk and Uncertainty, and Financial Analysis. All financial information presented herein is denominated in Canadian dollars, unless otherwise indicated.
Special note regarding forward-looking statements
The words "estimate", "will", "intend", "should", "anticipate" and similar expressions are intended to identify forward-looking statements. These statements reflect assumptions and expectations of NRC, based on its experience and perceptions of trends and current conditions. Although NRC believes the expectations reflected in such forward-looking statements are reasonable, they may prove to be inaccurate, and consequently NRC's actual results could differ materially from expectations set out in this FSD&A. In particular, the risk factors described in the "Financial Risk and Uncertainty" section of this report could cause actual results or events to differ materially from those contemplated in forward-looking statements.
Over the last number of years, the Government of Canada has been carrying out a government-wide project to improve the quality of financial management and internal control, an initiative embraced by NRC. An important part of this project is improving the effectiveness of financial management practices and applying the accrual method of accounting to prepare financial statements. This is a challenge in itself, as NRC is still required to use the modified cash method of accounting to report on certain financial results to the Government of Canada.
Fiscal year 2006-07 is the second year for NRC to have its financial statements audited by the Office of the Auditor General, in accordance with Canadian generally accepted accounting principles (GAAP) for the public sector and Treasury Board accounting policy. This is the first year that NRC's audited financial statements will be comparative.
NRC Strategy 2006-2011
NRC's strategy – Science at Work for Canada – was approved by NRC Council in March 2006 and covers a five-year period beginning April 1st, 2006.
NRC's vision is to be valued as the world's best national organization for research and innovation. NRC's purpose is to be a critical instrument of the federal government, translating science and technology into social and economic well-being for Canada.
NRC has identified three goals to enable NRC to achieve its vision. The first goal is to contribute to the global competitiveness of Canadian industry in key sectors and to the economic viability of communities. The second is to strengthen Canada's innovation system. The third is to make significant contributions to Canada's priorities in health and wellness, sustainable energy and the environment – areas critical to Canada's future.
To meet these goals for Canada, NRC has developed a strategy comprising four key thrusts. The first key thrust is to anticipate and perform research and development that improves the global competitiveness of Canadian industry. The second is to provide integrated industry support that engages key players. The third is to invest in and focus NRC's unique strengths and competencies on areas of importance to Canada. The fourth is to build a sustainable and agile national research and innovation organization for Canada.
NRC will measure its progress in managing and implementing this strategy using a dedicated performance management framework. NRC is currently in the process of implementing its new program structure and performance measurement framework to support this strategy.
NRC will develop specific measures for both its overall vision, as well as each of its defined goals, providing a firm basis for planning and managing operations in pursuit of milestones and key outcomes. Specific measures of NRC's performance management and reporting system will be adjusted to reflect theses new goals and strategies, allowing NRC to report on its achievements and outcomes in implementing its plans.
In keeping with the broad government goal of improved management in the public sector and the NRC Strategy for 2006-2011, NRC has continued to implement a number of initiatives to improve its corporate governance.
The Council Executive Committee has initiated a review of the role of Council, and it monitors the Council Audit, Evaluation and Risk Management, and Human Resources Committees to ensure these bodies are functioning in a manner that is consistent with their terms of reference and the mandate assigned to them by Council. The Council has also established special task forces to provide NRC with advice on strategic issues such as intellectual property management and the role of NRC in the broad Canadian innovation eco-system.
As part of the NRC Strategy, NRC Senior Executive Committee (SEC) established a Strategy and Priorities Committee (SPC) in 2005-06 that continues to provide senior management with ongoing advice on NRC priorities and strategic direction.
NRC uses portfolio management for its research institutes and programs. Under this structure, the Vice-Presidents play a key role in setting the strategic direction of the institutes within their portfolio and allocating resources to major priorities. Use of the portfolio management approach has improved NRC's ability to undertake and manage cross-institute projects, as well as to ensure that research is well aligned with NRC's corporate vision and strategic priorities.
In 2005-06, NRC adopted the financial management model proposed by the Office of the Comptroller General, which holds a Chief Financial Officer (CFO) accountable to both the Comptroller General and the department head for financial management in the organization. In 2006-07, in support of the CFO model, NRC completed the centralization of the finance function initiated in the previous year, placing financial advisors in each Vice-President's portfolio and requiring sign-off of financial information by each responsible manager. The full implementation of these changes will result in even greater accountability at all levels in the organization for sound financial management.
NRC continues to use a rigorous cycle for the planning and review of spending and revenue, which was implemented in 2005-06.
In 2006-07, NRC reinvigorated its internal audit function in accordance with the new Treasury Board of Canada Secretariat Internal Audit Policy by creating and staffing a Chief Audit Executive that reports directly to the President. Two vacant Audit Manager positions were subsequently filled with experienced and accredited professionals. Also in keeping with the new audit policy, NRC is moving actively to ensure its Audit Committee members are appointed by Treasury Board.
Revenue is important to NRC, not only as a means of financing its operating and capital expenditures, but also because it provides an indication of the value that NRC provides to its clients and collaborators. NRC's revenue growth rate was 6.4% in 2006-07, with revenues rising from $159.9 million in 2005-06 to $170.2 million in 2006-07. This growth was primarily due to increased revenue from the provision of services of a non-regulatory nature. This services revenue grew to $65 million in 2006-07 from $56.1 million in 2005-06. The key contributors responsible for this growth were the NRC-Institute for Biological Sciences (NRC-IBS), the NRC-Centre for Surface Transportation Technology (NRC-CSTT), the NRC-Herzberg Institute of Astrophysics (NRC-HIA), the NRC-Canadian Hydraulics Centre (NRC-CHC) and the Administrative Services and Property Management (ASPM) Branch. Further details can be found in the Financial Analysis section of this report under Revenue.
The breakdown of NRC revenue by type for 2006-07 and 2005-06 is as follows:
NRC's expenses in 2006-07 were $846.7 million, compared to $832.8 million in 2005-06, which represents an increase of 1.7%. Of this, approximately 49.6% represented salary and benefits costs, compared with 47.5% in 2005-06. Grants and contributions costs totaled $143 million in 2006-07, with most of this funding going to small and medium-sized enterprises (SMEs) through the NRC-Industrial Research Assistance Program (NRC-IRAP). Grants and contributions totaled $129.9 million in 2005-06.
The increase in expenses was mostly the result of a $23.6 million increase in salaries and employee future benefits offset by decreases in utilities, materials and supplies as well as professional and special services. The increase in salaries and employee future benefits is attributable to the Research Council Employees' Association pay equity settlement in 2006-07 and also the retroactive salaries and benefits related to three collective agreements ratified in May 2007, which were not present in 2005-06. An increase in staff levels to meet increased accountability requirements and revenue work also contributed to the rise in expenses. The increase in grants and contributions and the decrease in bad debts in 2006-07 are primarily related to an unusual bad debt adjustment to the 2005-06 IRAP-TPC repayable contributions that occurred as a result of a major follow-up exercise in that year. No significant adjustments were necessary in the follow-up of these repayable contributions during the current fiscal year. In addition, the amortization expense increased by $6.3 million in 2006-07. Further details can be found in the Financial Analysis section under Accounts Receivable and Expenses.
The significant categories of expenses for 2006-07 and 2005-06 are as follows:
Financial Risk & Uncertainties
NRC faces significant budget constraints from both internal and external pressures.
As a federal government departmental corporation, NRC funds the majority of its salary, operating and capital expenditures from allotments from the government. The non-salary portion of this funding is fixed, with no indexing for price increases. As a result, the actual funding for NRC, in terms of buying power, has been declining over the past decade. In particular, the impact of rising costs related to property taxes and utilities is significant for NRC.
NRC owns and manages 186 specialized buildings that comprise approximately 524,028 square meters of space. It also has an equipment and informatics base of approximately $202.8 million ($194.7 million in 2005-06) net book value. NRC's capacity to fund the upgrade or replacement of these assets from its appropriations is limited, and it will need to secure sources of funding external to NRC for this purpose.
In addition, since 2004, the federal government has announced a series of budget reductions across federal departments as part of its realignment strategy and initiative to increase its efficiency. The impact on NRC has been significant and challenging. The cumulative reductions to date have amounted to $20.4 million, with a minimum expected ongoing reduction of $12.9 million per year. On a short-term basis, NRC has had to manage these reductions by reducing investments in certain programs of a corporate nature.
To help position itself to meet these challenges, NRC implemented changes in 2005-06 and 2006-07 in its governance structure and made significant progress towards a new, focused business strategy (as detailed in the Highlights section). Both of these initiatives will improve the planning, allocation and monitoring of resources, which will in turn help alleviate some of the financial pressures currently being felt by NRC.
NRC is undertaking a thorough resource allocation review to ensure research in priority areas defined in its strategy is appropriately funded in the future. Significant organizational efforts to find sustainable ways to address budget pressures are underway. Many possible avenues are being explored including the re-alignment of programs, increased income generation, efficiency and cost savings, and positioning NRC for new strategic funding. Efforts to engage the Minister of Industry and central agencies on this issue are continuing.
Details of other factors influencing NRC's budget pressures and uncertainty are provided below.
In order to ensure value for money, Treasury Board's practice is to provide funding for new initiatives on a sunsetting basis. This means that rather than providing a permanent increase in the NRC allotment, the government allocates funding for a limited period of time, with the option for renewal. Renewal is conditional on performance, linkages to priorities and availability of funding. While this is recognized as a good management practice for the government as a whole, it creates an elevated level of uncertainty and instability in a research organization such as NRC.
Although funding is not necessarily provided on an ongoing basis, new government-approved initiatives, such as the establishment of technology cluster sites in communities across Canada, often entail an ongoing commitment from NRC in terms of the construction and maintenance of new specialized facilities and the hiring of staff. There is also an expectation by the communities that support these new initiatives, and in some cases invest in them, that they will exist beyond the particular funding window. These challenges add complexity to the organization's planning, budgeting and operations.
NRC purchases roughly $50 million per year in goods and services in currencies other than the Canadian dollar, which exposes NRC to fluctuations in foreign exchange. The majority of foreign purchases (88% on average over the last four years) are transacted in U.S. dollars. Due to the strengthening of the Canadian dollar over the last year, NRC has benefited from an increase in purchasing power over 2003-04 levels of approximately U.S. $5 million. A continued upswing of the Canadian dollar relative to the U.S. dollar will benefit NRC's purchasing power, whereas a future decline in the Canadian dollar will have the opposite effect.
The 2006-07 gain in purchasing power was somewhat negated by the reduction in Canadian dollars received from foreign sales. In 2006-07, NRC received Cdn $33.8 million on sales of U.S. $29.5 million. By way of comparison, in 2003-04, NRC received Cdn $35.9 million from U.S. $26.5 million in sales.
Dependence on Revenue
NRC's dependence on external sources of funding has been growing since the early 1990s. The portion of NRC's operating and capital expenditures funded from external sources of income was roughly 11% in 1991-92. In 2006-07, this percentage had climbed to over 17 %.
In particular, NRC maintains technology centres that rely on external sources of revenue to fund the majority of their operations, namely the NRC-Centre for Surface Transportation (NRC-CSTT) and the NRC-Canadian Hydraulics Centre (NRC-CHC). In addition, NRC's two largest institutes – the NRC-Institute for Aerospace Research (NRC-IAR) and the NRC-Canada Institute for Scientific and Technical Information (NRC-CISTI) – rely on external sources of revenue to fund over 40% of their operations. Significant downturns in the industries or federal departments that these groups support will greatly impact NRC's ability to continue operations at current levels.
Finally, it is important to note that NRC must strike a fine balance between providing contract research services that generate the needed revenue, and performing the government-funded research that keeps NRC at the leading-edge of science, technology and innovation. Too much emphasis on revenue generating contract research could compromise NRC's advanced knowledge and technology base, which in the long-term will reduce NRC's ability to serve industry and respond to the needs of the nation in critical fields such as energy, the environment, health and wellness, and other priority areas outlined in the business strategy.
The following is an analysis that explains the meaning of certain financial statement items unique to the federal government, and provides reasons for significant variances between 2006-07 and 2005-06.
Due from Consolidated Revenue Fund
This amount represents an amount of cash that NRC is entitled to draw from the federal government treasury. This includes cash to discharge its liabilities for which NRC has already received an appropriation, as well as revenue received but not spent.
The $30.9 million increase in this account between 2005-06 and 2006-07 is mainly due to the increase in revenue available for use in subsequent years.
IRAP-TPC Repayable Contributions
The NRC-Industrial Research Assistance Program (NRC-IRAP) has delivered the IRAP-TPC Program since 1998 on behalf of Technology Partnerships Canada (TPC), a special operating agency of Industry Canada. This program provides conditionally repayable contributions to small and medium-sized enterprises (SMEs) to support the pre-commercialization phase of their technology development. This conditional repayment program in most cases requires quarterly repayments of the contribution based on a percentage of the recipient's gross revenue. This program terminated March 31, 2006, although it will continue to fund, and require repayment from existing agreements during its wind-down phase.
It is important to note that this program supported small start-up firms, whose future success was often entirely dependent on one technology. Failure to bring the technology to market, at times, resulted in the firm ceasing operations. However, even with the high-risk nature of this program, NRC has received repayments amounting to approximately 20% of contributions disbursed as at March 31, 2007 (17% – 2006). With over 300 projects still being administered, this percentage is expected to increase over the next decade.
The IRAP-TPC accounts receivable as at March 31, 2007 were $10.7 million ($7.6 million - 2006) with a corresponding allowance for doubtful accounts of $7.1 million ($6.7 million - 2006).
|($ in millions)||2006-07||2005-06|
|Balance, beginning of year||7.6||1.0|
|Balance, end of year||10.7||7.6|
In 2006-07, NRC continued to assess all active contribution agreements to determine if the repayment phase conditions had been met. This major initiative had started during 2005-06 when substantial IRAP-TPC amounts were written off as they represented the value of the debt relating to firms that had ceased operations over the last few years.
Trade Receivables and NRC-IRAP Audit Recoveries
NRC had accounts receivable with external clients worth $19.6 million on its books as at March 31, 2007 ($18.6 million - 2006) with a corresponding allowance for doubtful accounts equal to $2.2 million ($2.0 million - 2006). This amount represents receivables for work done with external clients as well as receivables for audit findings for NRC-IRAP. Write-offs in 2006-07 were $603 thousand ($637 thousand in 2005-06), which is quite low given the value of NRC revenue.
Aged Accounts Receivable
The aging of all accounts receivable as at March 31 is as follows:
Inventory for Resale
NRC produces a number of products that are purchased by external clients, namely the Model National Construction Codes, monographs and certified reference materials. Inventory for resale decreased by $716 thousand (20%) over 2006 closing values due to the creation of an allowance for obsolete inventory of $600 thousand.
Capital Assets held for Sale
At March 31, 2006, NRC occupied a building on leased land on the campus of the University of British Columbia (UBC) in Vancouver. At the request of UBC, NRC agreed to construct a new building on the campus and relinquish the existing building for $15 million. The disposal occurred in 2007 and these proceeds were recognized in 2006-07, resulting in a gain of $7.4 million. NRC does not hold any other capital asset for resale.
As part of its mandate to promote industrial innovation in Canada, NRC provides financial assistance to firms through access to equipment, intellectual property and incubation space in its laboratories and Industrial Partnership Facilities. Since these companies are very often in their infancy and cannot afford to pay the full cost of the assistance received, NRC on occasion takes an equity position in the company in return for the assistance provided. This helps the firms survive the critical technology development stage. In turn, it allows NRC to earn a return that somewhat reflects the risk taken, should the company become successful. It is not management's intention to hold equity investments over the long-term. The NRC will consider timely opportunities for divestiture of equity investments by taking into account the interests, market liquidity and expected future growth of the company as well as NRC's desire to receive a fair return on the investment on behalf of Canadians.
The full value recorded on the statement of financial position reflects NRC's investment in publicly-traded companies as its shares in privately held corporations are deemed to have no market value. Details of NRC's investment in public companies are as follows:
|Company Name||Number of Shares||Amount Recorded in Financial Statements||Market Value at March 31, 2007|
|PharmaGap Inc.||1,305,425||$ 392,933||$ 261,085|
|Chemaphor Inc.||1,260,305||$ 252,061||$ 441,107|
|ACE Aviation Holdings Inc.||33||$ 743||$ 1,005|
|Pure Energy Visions Corp.||210,000||$ 1||$ 53,550|
|Lions Petroleum Inc.||1,050||$ 1||$ 545|
|Total||2,776,813||$ 645,739||$ 757,292|
The decrease in equity investments of $409 thousand (39%) from 2005-06 to 2006-07 is attributable to the sale of all JDS Uniphase shares on which NRC realized a gain of $142 thousand.
Holmes Fund Investments
The Holmes Endowment Fund is an investment bequeathed to NRC in July 1994. Up to two-thirds of the endowment fund's yearly net income is used to finance the H.L. Holmes award on an annual basis. The award covers a one or two-year period and provides the opportunity to post-doctoral students to study at world famous graduate schools or research institutes under outstanding researchers. In 2006-07, NRC granted $95 thousand to the recipient of the 2005 NRC H.L. Holmes Award winner, who received a total of $200 thousand, ending in September 2007. The recipient is using the award to fund two years of collaborative research at the University of Toronto and the Max Born Institute in Berlin, Germany.
Prepaid expenses increased from a total of $5.5 million as at March 31, 2006 to $12.8 million as at March 31, 2007. The $7.3 million increase between 2005-06 and 2006-07 is mainly due to the increase in prepaid expenses of subscriptions and prepaid expenses of payments in lieu of taxes.
The NRC-Canada Institute for Scientific and Technical Information (NRC-CISTI) is Canada's science library. It subscribes to many of the world's major scientific and technical journals and databases. Prepaid expenses for subscriptions increased from $3.4 million in 2005-06 to $9 million in 2006-07, due primarily to a more accurate and precise method for tracking the prepaid portion of these subscriptions.
Payments in Lieu of Taxes
The City of Montreal changed its billing process in 2006-07 to require one installment covering the full year of taxes, which resulted in an increase of $844 thousand in the prepaid portion of the property taxes for the NRC-Institute for Aerospace Research (NRC-IAR) and the NRC-Biotechnology Research Institute (NRC-BRI) in Montreal.
Capital assets increased by 9% from a total cost of $1,195 million in 2005-06 to $1,307 million in 2006-07. This $112 million increase is attributable to $120 million in acquisitions, offset by $8 million in transfers, disposals and write-offs.
NRC spent $62.1 million on capital expenditures during 2006-07, an amount somewhat lower than the $74.3 million spent in 2005-06. The main reason for this reduction is the completion in 2006-07 of a new laboratory for the NRC-Institute for Fuel Cell Innovation (NRC-IFCI) on the campus of the University of British Columbia (UBC). NRC spent $1.7 million on this facility in 2006-07, compared to $13.5 million in 2005-06.
The following represents the significant capital assets expenditures of 2006-07:
- NRC incurred expenditures on its NRC-Institute for Aerospace Research (NRC-IAR) for alterations and betterments of the Advanced Manufacturing and Technology Centre building in Montreal ($1.7 million) and on its NRC-Institute for Microstructural Science (NRC-IMS) building in Ottawa ($1 million) for the relocation of the laboratories and offices of the Quantum Physics Group.
- Approximately $40 million was expended on machinery, equipment, furniture and informatics equipment in 2006-07. The significant purchases were:
- Chiller replacements worth $667 thousand in order to provide a comfortable work environment for occupants and suitable temperature and humidity levels for informatics facilities in M-55 at the NRC-Canada Institute for Scientific and Technical Information (NRC-CISTI).
- E-infostructure worth $990 thousand for the NRC-Canada Institute for Scientific and Technical Information (NRC-CISTI). The Canada Scientific Infostructure concept embodies the development of sophisticated information technology applications and infrastructure and rich information content supported by intelligent search and analysis tools.>
- Completion of construction and renovations at the NRC-Institute for Aerospace Research (NRC-IAR) in Montreal costing $1.1 million and $559 thousand respectively.
- A Ground Effect Simulation System for the NRC-Institute for Aerospace Research (NRC-IAR) costing $506 thousand. NRC-IAR also paid $3 million for fiber placement of composite materials.
- Additional expenditures to the 3-Tesla Magnetic Resonance Imaging System for the NRC-Institute for Biodiagnostics (NRC-IBD) valued at $549 thousand for a total asset value of $4.2 million.
- A $1 million energy retrofit project at the NRC-Institute for Chemical Process and Environmental Technology (NRC-ICPET).
- A Waters Quadrupole Time-of-Flight Mass Spectrometer System costing $680 thousand for the NRC-Institute for Marine Biosciences (NRC-IMB). The instrument permits the analysis of highly complex biological samples with high accuracy.
- A beach replacement in the Offshore Engineering Basin for the NRC-Institute for Ocean Technology (NRC-IOT), valued at $684 thousand.
- Replacement of skylights costing $587 thousand for the NRC-Industrial Materials Institute (NRC-IMI).
- New offices and laboratories worth $1 million at M-50 for the NRC-Institute for Microstructural Sciences (NRC-IMS).
- A LTQ-Orbitrap Hybrid Mass Spectrometer costing $578 thousand for the NRC-Institute for National Measurement Standards (NRC-INMS).
- A Material Science Transmission EM and a Soft Material Transmission EM for the NRC-National Institute for Nanotechnology (NRC-NINT) costing $900 thousand and $1 million respectively.
- An Inductively Coupled Plasma system for the NRC-Steacie Institute for Molecular Sciences (NRC-SIMS), valued at $523 thousand.
- A further $2.4 million was expended for leasehold improvements at the NRC-National Institute for Nanotechnology (NRC-NINT) in 2006-07, bringing the total to $8 million. In addition, an amount of $733 thousand was expended for leasehold improvements at the NRC-Institute for Nutrisciences and Health (NRC-INH) in 2006-07.
There were $58.1 million of additions in leased capital assets in 2006-07:
- On May 23, 2006, NRC took possession of a new facility and entered into a non-monetary transaction with the University of Alberta (UofA) for the housing of the NRC-National Institute for Nanotechnology (NRC-NINT). The leased property is provided to NRC at a nominal cost of one dollar per year. The building was recorded as a leased capital asset at its fair value of $44.4 million. The annual amortization of the capital asset of $1.8 million is exactly offset by the amortization of the deferred contribution related to the leased building.
- On September 1, 2006, NRC took possession of a new facility and entered into a non-monetary transaction with the University of Prince Edward Island (UPEI) for the housing of the NRC-Institute for Nutrisciences and Health (NRC-INH). The leased property is provided to NRC at a nominal cost of one dollar per year. The building was recorded as a leased capital asset at its fair value of $13.7 million. The annual amortization of the capital asset of $548 thousand is exactly offset by the amortization of the deferred contribution related to the leased building.
Transfers, Disposals and Write-offs
The leasehold improvement for the previous lease of NRC-National Institute for Nanotechnology (NRC-NINT) was disposed of during 2006-07 for a cost of $2.5 million. The remaining balance is composed of disposals and write-offs of various machinery, equipment, furniture and informatics equipment.
Accounts Payable and Accrued Liabilities
The accounts payable and accrued liabilities increased by $7.4 million in 2006-07. This increase is mainly attributable to events subsequent to year-end for liabilities incurred at March 31, 2007, for example, the liabilities related to the retroactive portion of the salaries and benefits for the three collective agreements signed in May 2007.
Vacation Pay and Compensatory Leave
This amount varied by 8% from last year, representing an increase of $2.8 million, mostly due to an increase of accumulated vacation pay. The vacation pay liability increased by 7% ($2.7 million) from $36.4 million in 2005-06 to $39.1 million. This increase is mainly attributable to the fact that some collective agreements do not impose any maximum year-to-year carry forward of accumulated vacation due to the nature of the operations at NRC.
Specified Purpose Accounts
NRC undertakes collaborative work with clients for the mutual benefit of both parties. Funding provided by the collaborator is placed in a Specified Purpose Account (SPA) and used over the duration of the project. Amounts remaining in the SPA at year-end are recorded as deferred revenue as it is expected that it will be used in the upcoming year on the project. At the end of 2006-07, this amount totaled $13.1 million, representing a slight increase of 4% over the previous year.
Other deferred revenue consists primarily of research press deferred revenue, as well as conference and seminar registration deferred revenue. However, for 2005-06, it also included deferred revenue on disposition of capital assets held for resale.
NRC had other deferred revenues of $9.2 million at March 31, 2007 compared to $23.6 million at March 31, 2006. This decrease over 2005-06 is mostly related to the $15 million in proceeds related to the disposition of the University of British Columbia (UBC) building for the relocation of the NRC-Institute for Fuel Cell Innovation (NRC-IFCI). At the request of UBC, NRC agreed to construct a new building on the campus and relinquish the existing building and land lease for $15 million. At March 31, 2006, this $15 million was paid to NRC in advance and established as deferred revenue. As the transaction was completed in 2006-07, the amount has been removed from deferred revenue and recorded against the sale of the asset.
Research Press - The NRC-Canada Institute for Scientific and Technical Information (NRC-CISTI) publishes research journals that are available for purchase on a subscription basis. When NRC receives payment for the subscription, it records the amount as deferred revenue and then recognizes the revenue each month as the journal is issued.
Conference and Seminar Registration - NRC conducts many conferences and seminars, which often require registration many months in advance of the conference date. Receipts from registration are recorded as deferred and recognized when the conference takes place.
Contributions Related to Leased Capital Assets
NRC took possession of two new facilities in 2006-07, the first with the University of Alberta (UofA) in May 2006, and the second with the University of Prince Edward Island (UPEI) in September 2006. In addition to the University of Western Ontario (UWO) capital lease, which was present in 2005-06, the two new facilities are leased for $1 per year. Therefore, for each capital lease, an amount equal to the value of the leased capital asset was considered a non-monetary contribution and was established as deferred revenue. It is being recognized as revenue on the same basis as the amortization of the leased capital asset.
Employee Future Benefits
This represents amounts payable to employees as allowance for severance pay. The $3.5 million variance compared to 2005-06 represents the difference between the new costs accumulated during 2006-07 less the benefits actually paid during the year.
An environmental liability was established for $300 thousand for a contaminated site in Penticton, B.C. The site is a borrow pit used for construction projects that was subsequently used as a dumping site. The $300 thousand is an estimated cost to remediate the site. This amount has not changed from the previous year and there is no other environmental liability.
As previously stated in the Highlights section, NRC's revenues for 2006-07 were $170.2 million as compared to $159.9 million in 2005-06. This growth was primarily led by the increase in services of a non-regulatory nature revenues, as they increased from $56.1 million in 2005-06 to $65 million in 2006-07.
Services of a Non-Regulatory Nature and Other Fees and Charges
In 2006-07, 38% of NRC revenues ($65 million) were generated from services of a non-regulatory nature, which primarily consists of research services provided directly to industry and academic clients. This compares to $56.1 million or 35% of total revenues in 2005-06. In 2006-07, the NRC-Institute for Aerospace Research (NRC-IAR) and the NRC-Canada Institute for Scientific and Technical Information (NRC-CISTI) accounted for over 46% of NRC's service revenues, compared to 56% in 2005-06.
Much of the increased service revenues in 2006-07 were generated by several NRC institutes who are not traditionally high revenue earners, namely the NRC-Institute for Biological Sciences (NRC-IBS), the NRC-Herzberg Institute for Astrophysics (NRC-HIA) and the Administrative Services and Property Management Branch (ASPM). This service revenue growth was generated from several significant research projects with industry, which brought in an additional $3 million for NRC-IBS and $1.95 million for NRC-HIA. ASPM earned an additional $1.86 million attributable to conference registrations. As NRC continues to develop its relationships with industry, it is expected that services revenues will continue to grow in institutes that have not traditionally been high revenue earners.
Growth in revenues also occurred for NRC's two technology centres, which are very much focused on the provision of services to industry and other government departments. At the NRC-Centre for Surface Transportation Technology (NRC-CSTT), there was an increase of $1.2 million due to a large project in the Rail Division and at the NRC-Canadian Hydraulics Centre (NRC-CHC), there was an increase of $1.2 million due to a general increase in the number and value of contracts with private industry clients.
Sales of Goods and Information Products
As part of its goal to disseminate scientific and technical information of importance to industry, NRC has publications and certified reference materials that it sells to clients. Total sales of goods and information products were $11.3 million in 2006-07 and $12 million in 2005-06. This decline was due to reduced sales of NRC-Canada Institute for Scientific and Technical Information's (NRC-CISTI) journals, monographs and other publications.
Rights and Privileges
Royalty revenue is earned from companies that license the rights to use NRC technology. Royalties are typically based on a percentage of the licensee's sales. In 2006-07, NRC generated $6.7 million in royalties, up from $5.8 million in 2005-06. Of this total, $3.5 million ($3.8 million in 2005-06) was earned from the NRC-Institute for Biological Science (NRC-IBS), primarily for the license of the Meningitis C vaccine.
Lease and Use of Property
Facilitating access to NRC researchers and facilities is an important part of technology transfer at NRC. To this end, NRC provides laboratory space to companies on a commercial basis, often as part of a collaboration or technology transfer agreement. Revenue from lease and use of property amounted to $3.2 million in 2006-07, compared to $3.1 million in 2005-06.
Financial Arrangements with Other Government Departments
NRC undertakes research on behalf of other government departments, referred to as Financial Arrangements. The incremental costs associated with this work are reimbursed. In 2006-07, the amount of work undertaken for other government departments was significant, totaling $57 million ($58.8 million in 2005-06). Most of this work was with the Department of National Defense ($24.8 million in 2006-07, $25.2 million in 2005-06) and Natural Resources Canada ($7.2 million in 2006-07, $7.3 million in 2005-06). Also included in the Financial Arrangements revenue is $15 million ($18.8 million in 2005-06) from Industry Canada through Technology Partnerships Canada (TPC). This amount was received by NRC as part of a repayable contribution program and was used to provide contributions to firms ($11.6 million in 2006-07, $16.2 million in 2005-06) and to cover operating costs associated with the program ($3.4 million in 2006-07, $2.6 million in 2005-06). As the IRAP-TPC program terminated on March 31, 2006, only existing contracted projects will continue.
Revenues from Joint Project and Cost Sharing Agreements
NRC also receives income through collaborative research projects that involve cost sharing arrangements for work that is likely to lead to new expertise or technology. In 2006-07, collaborative funding across all sectors at NRC earned a total of $17.1 million. This was a decrease of 18% from the $21.0 million earned in 2005-06, largely due to the end of a major project with Genome Atlantic in early 2007.
Net Gain on Disposal of Capital Assets
NRC's revenues were also significantly affected by a gain on the sale of capital assets held for resale of $7.4 million. On December 12, 2002, the NRC reached an agreement with the University of British Columbia (UBC) to relinquish an existing land lease and the building thereon for $15 million. As indicated above under Deferred Revenue – Other, the disposal occurred in 2007 and these proceeds were recognized in 2006-07, resulting in a gain of $7.4 million. This gain has been offset by a loss on disposal of capital assets of $546 thousand.
As noted in the Highlights section, NRC's expenses increased from $832.8 million in 2005-06 to $846.7 million in 2006-07, of which approximately 49.6% (47.5% in 2005-06) represented salary and benefits costs. The increase in expenses was mostly the result of a $23.6 million increase in salaries and employee future benefits.
Salaries and Employee Future Benefits
The increase in salaries and employee future benefits is mainly attributable to the Research Council Employees' Association pay equity settlement in 2006-07. This amount was paid as compensation for lost wages and interest to all eligible employees who were defined as an NRC employee classified as an AD, CR or ST during the period April 1, 1989 to March 31, 1999. Furthermore, the retroactive salaries and benefits for the three collective agreements ratified in May 2007 amount to $4 million. There was also a general increase in salaries due to annual salary increases, promotions and new hirings to meet increased accountability requirements and increased revenue work. This is indicative of typical variations in NRC's staffing levels from year to year.
Grants and Contributions
Grants and contributions expenses totaled $143 million in 2006-07, compared to $129.9 million in 2005-06. Most of this funding was allocated to small and medium-sized enterprises (SMEs) through the NRC-Industrial Research Assistance Program (NRC-IRAP). Grants and contributions expenses increased by $13.1 million during fiscal year 2006-07.
The increase in grants and contributions was primarily due to an unusual bad debt adjustment to the 2005-06 IRAP-TPC repayable contributions as a result of the major follow-up exercise that occurred in that year.
The IRAP-TPC program is administered by NRC on behalf of Industry Canada to provide contributions to SMEs to support the pre-commercialization phase of their technology development. Since this program terminated March 31, 2006, there was a decrease of $4.7 million in contributions to firms in 2006-07. The net increase in grants and contributions in 2006-07 is mostly attributable to the accounting treatment of the recovery of these repayable contributions. When the recoveries of the repayable contributions under the IRAP-TPC program are invoiced, these amounts are recognized as a contribution expense recovery and also as a transfer payment expense to Industry Canada for the same amount. However, when a receivable for a repayable contribution is recognized as a bad debt expense, either via the allowance for uncollectibility or as a write-off, the transfer payment expense to Industry Canada is reduced accordingly. As a result of the review undertaken in fiscal year 2005-06, an unusual amount of $24.1 million was recorded as bad debt expense and as a transfer payment recovery. No such unusual adjustment was necessary in fiscal year 2006-07 as the bad debt expense related to the IRAP-TPC program amounted to $2.9 million. Further details can be found in the Financial Analysis section under Accounts Receivable and Bad Debts.
Other factors contributing to the fluctuation of grants and contributions include the decrease of $6.5 million in NRC-IRAP contributions to firms due to the lower availability of contribution funding for this program in 2006-07; the $3.2 million increase in contributions to the international telescopes for new instrumentation; and $1.5 million to the National Laboratory for Particle and Nuclear Physics.
Utilities, Materials and Supplies
The decrease of $6.8 million in utilities, materials and supplies is mainly due to the improved methodology used to calculate prepaid expenses, particularly prepaid subscriptions, as explained in the Financial Analysis section under Prepaid Expenses. Another $1 million of the decrease is attributable to the decline in funding for the Genomics and Health Initiative, which resulted in lower spending in 2006-07.
Professional and Special Services
Professional and special services expenses totaled $60.1 million in 2006-07 as compared to $64 million in 2005-06. This decrease is mostly caused by fewer construction contracts and other services related to assets under construction.
NRC's bad debt expense decreased from $23.9 million in 2005-06 to $3.7 million in 2006-07. The high bad debt expense in 2005-06 was primarily due to the review of the IRAP-TPC program that was undertaken in 2005-06. This review resulted in a one-time write-down of $17.6 million and an additional allowance for uncollectibility of $6.5 million for a total bad debt expense of $24.1 million related to the IRAP-TPC program. In 2006-07, this bad debt expense related to the IRAP-TPC program represented $2.9 million, as there were no unusual circumstances and all files were up-to-date. Further details can be found in the Financial Analysis section under Accounts Receivable and Grants and Contributions.
The main reason for the increase in other expenses is the portion of the pay equity settlement related to damages pursuant to the Canadian Human Rights Act to all Eligible Employees of the Research Council Employees' Association.
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