ARCHIVED - Financial Statement Discussion and Analysis 2007 - 2008
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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 for the National Research Council of Canada (NRC) for the fiscal year ended March 31, 2008.
The responsibility for the preparation of the FSD&A rests with the management of NRC. It has been prepared in accordance with the Public Sector Statement of Recommended Practice SORP-1.
The purpose of the FSD&A is to highlight information and provide explanations which enhance the users' understanding of NRC's financial position and results of operations, while demonstrating NRC's accountability for its resources. Additional information on NRC's performance is available in the NRC Departmental Performance Report (DPR) for 2007-08.
The FSD&A consists of two distinct segments: Highlights, and Discussion and Analysis. Please note that 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.
2007 - 2008 Highlights
Statement of Operations
Revenue: 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 earned total revenues of $155 million in 2007-08. Although total revenue decreased from $170 million in 2006-07, the reduction is not due to ongoing operations but rather to unusual revenue related issues. Sales of goods and services, revenue from other government departments excluding revenue adjustments related to the Technology Partnerships Canada (TPC) program, and revenue from joint project and cost sharing agreements totalled $146 million in 2007-08, as compared to $145 million in 2006-07.
Further details on revenue components are available in the Financial Analysis section.
Expenses: Over the past three fiscal years, NRC's total expenses have not significantly increased. In fact, NRC has only had a 2.3% rise in expenses since 2005-06. Furthermore, NRC's major expense components have remained stable, as seen in the diagram provided below. The following two categories of expenses are most important to NRC from both a research program and cost perspective, and represent 66% of total expenses. All other significant expense variations are explained in the Financial Analysis section.
Personnel: NRC's total expenses, as detailed in the Notes to the Financial Statements, are made up of 49% in salaries and employee future benefits. Personnel costs represent the most significant cost driver for NRC. Salaries and employee future benefits decreased to $418 million in 2007-08 from $420 million in 2006-07. Normal salary pay increases in 2007- 08 are mainly offset by an extraordinary charge in 2006-07 amounting to $11.6 million for the Research Council Employees' Association pay equity settlement for compensation of lost wages and interest to eligible employees employed between April 1, 1989 and March 31, 1999, as well as a retroactive pay increment cost due to the ratification of three collective agreements.
Furthermore, included in NRC's total salaries and employee future benefits are expenses related to a realignment exercise which occurred in 2007-08. This exercise, while difficult, was completed to better align resources with the NRC strategy and to better position NRC for the future.
Grants and Contributions: Grants and contributions remained relatively steady in 2007-08. NRC made total net contributions of $142 million in 2007-08, as compared to $143 million in 2006-07. Net contributions from NRC Industrial Research Assistance Program (NRC-IRAP) ($80.6 million) and contributions to the TRIUMF laboratory for particle and nuclear physics ($51.5 million) comprise 93% of the contributions made by NRC in the current fiscal year. In addition, contributions made through NRC Herzberg Institute of Astronomy (NRC-HIA) to support international telescopes ($9.2 million) make up the majority of the remaining balance.
Statement of Financial Position
Assets: NRC's total assets signify its ability to provide future services for Canadians. NRC's total assets as at March 31, 2008 totalled $851 million. NRC's largest single component is its capital assets, which represents 70% of the total. The following assets are highlighted to demonstrate NRC's activity with private and public sector clients.
- Capital Assets: In 2007-08, NRC acquired and or constructed $60.9 million in capital assets, which brings NRC's total capital asset net book value to $596 million. NRC's infrastructure is an important element for the successful delivery of its mandate; as such re-investments in capital assets are crucial. NRC's largest components of capital investments, as seen in the diagram below, are research buildings and facilities as well as machinery and equipment. Combined, they account for over 75% of the net book value of the capital investments.
Net Book Value of Capital Assets (in millions)
Accounts Receivable: At any given time, NRC has a significant amount of accounts receivable given that NRC finances a considerable amount of its operating and capital expenditures from external revenue. As at March 31, 2008, NRC's accounts receivable totalled $27.4 million ($26.9 million as at March 31, 2007).
Inventory for resale and consumption: Both inventory for resale of $2.3 million and inventory for consumption of $2.4 million present NRC's future service potential. Inventory for consumption represents inventory which will be used internally by NRC in order to administer its research programs, whereas inventory for resale is marketed in its current state to customers.
Net debt: The government's net debt position is often called its "future revenue requirements" because this indicator provides a measure of the future revenues required to pay for past transactions and events. NRC's net debt (financial assets less liabilities) as at March 31, 2008 reached $71 million, which represents a slight decrease of $1 million from the previous fiscal year. The decline in net debt signifies that NRC's future revenue generation needs have decreased by 1.4%. Furthermore, the current year's decline in net debt demonstrates that NRC's revenues earned in 2007-08 sufficiently covered NRC's total incremental spending, inclusive of its capital spending.
Equity of Canada: NRC's equity of Canada as at March 31, 2008 was $541 million ($544 million as at March 31, 2007), which illustrates NRC's net resources (financial and non-financial) that will be used to provide invaluable future services for Canadians. NRC's equity of Canada is comprised of its Non-Financial Assets ($612 million) less its Net Debt ($71 million). NRC's largest component of Non-Financial Assets is capital assets.
NRC Strategy 2006-2011: NRC continued implementation of its strategy, Science at Work for Canada and contributed to the advancement of the federal S&T Strategy. Following are some key achievements that were realized during the fiscal year:
- To help foster an Entrepreneurial Advantage, NRC developed initial plans for four of the identified NRC Key Industry Sectors (Aerospace, Construction, Information and Communication Technologies, Manufacturing and Materials). These sectors are of economic importance to Canada and their plans targeted research priorities of the federal S&T Strategy;
- To position Canada at the leading edge of important health and life science developments, and in keeping with one of the Strategy's core principles – partnerships – NRC created a National Bioproducts Program plan (to be co-led by NRC and Agriculture and Agri-Food Canada), including proposed areas of R&D focus;
- Guided by core principles of the federal S&T Strategy, NRC launched a cross-NRC initiative in Nanotechnology and developed a plan for a cross-NRC initiative in Advanced Materials, targeting both basic and applied research in this emerging and strategic opportunity area;
- To promote collaborative approaches, NRC began securing key third-party relationships in support of NRC National Programs and Key Industry Sectors of national interest from a social and economic perspective;
- Implemented a new NRC-wide business planning process and realigned organizational resources to more effectively support NRC program priorities as well as the priorities and directions in the federal S&T Strategy;
- Initiated facilities/equipment and information technology assessments to better understand long-term infrastructure investment requirements and identify opportunities for efficiency gains; and
- Launched a Central Business Services Office to help NRC better address client needs.
Governance: NRC has continued to implement a number of initiatives to improve its corporate governance, in keeping with the broad government goal of improved management in the public sector and the NRC Strategy.
In 2007-08, an updated Statement on the Role of Council was approved by members in order to incorporate greater input on strategic financial management. Consequently, NRC's Executive Committee will assume responsibility for strategic financial advice in current year budget reviews, including initial budget allocations; financial situation arising from NRC's multi-year plans; NRC's long term capital plan; and other matters that may have a significant impact on NRC's budget.
In 2007-08, NRC progressed in its implementation of the financial management model which holds the Chief Financial Officer (CFO) accountable to both the Comptroller General and the department head for financial management in the organization. The model was first introduced by NRC in 2005-06 as a result of recommendations provided for all federal government departments by the Office of the Comptroller General.
In 2007-08, all NRC Institutes/Branches/ Programs (IBP) were asked to develop rolling three-year business plans aligned with the NRC Strategy and the federal science and technology strategy. These business plans will be updated on an annual basis to reflect changing internal and external factors, as well as the ongoing decisions and priorities of both the federal government and the NRC Senior Executives. The business planning process not only supports ongoing NRC strategic planning efforts, but also serves as the organization's key mechanism for financial resource allocation decisions (which are made by the Senior Executive Committee of NRC). The information contained in the business plans is expected to help NRC with its efforts in financial planning and budgeting, long-term capital planning (including real property), human resource planning, and information technology planning. Finally, the business plans serve as a critical vehicle for NRC-wide communication, helping senior managers to identify opportunities for greater cross-NRC collaboration.
Financial Statement Audit of NRC: In 2007-08, NRC's financial statements were 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 financial statements were audited by the Office of the Auditor General. The audit provides added assurance with regards to the accuracy and completeness of NRC's financial information, therefore providing NRC's Council and senior management team with reliable information, from which strategic decisions can be taken.
Renewal of Terms and Conditions: In 2007-08, NRC-IRAP renewed the Terms and Conditions of its most significant transfer payment program ($72.5 million in expenses in 2007-08) for a period of 5 years. As such, Canada's small and medium sized enterprises will continue to receive essential technological and financial contributions from NRC, therefore increasing Canada's ability to innovate and maintain its presence within the global market place.
Audit of NRC-IRAP contribution recipients: In 2007-08, the audit completed on sample recipients of contributions from NRC-IRAP showed improved compliance with program requirements. In 2007-08, 87% of the contribution agreements audited received an unqualified audit opinion. This is a significant improvement from previous years, where unqualified audit results amounted to 54% in 2006-07 and 38% in 2005-06. A major contribution for this year's success is due to NRC-IRAP's recent implementation of a new financial monitoring framework which incorporates risk assessments prior to the commencement of, and during, each project.
Discussion and Analysis
Risks & Uncertainties
As a federal government departmental corporation, NRC funds the majority of its salary, operating and capital expenditures from parliamentary appropriations. 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 payment in lieu of taxes and utilities is significant for NRC.
NRC owns and manages 185 specialized buildings that comprise approximately 560,140 square meters of space. It also has an equipment and informatics base of approximately $197 million ($203 million in 2006-07) net book value. NRC's capacity to fund the upgrade or replacement of these assets from its appropriations is limited, and as a result 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 $33.3 million, with a minimum expected ongoing reduction of $12.9 million per year. On a short-term basis, NRC has adapted to these changes by reducing investments in certain programs.
To help position itself to meet these challenges, NRC has implemented changes in its governance structure since 2005-06 and has made significant progress towards a new, focused business strategy. In order to continuously improve the planning, allocation and monitoring of resources, NRC implemented an annual IBP business planning process in 2007-08.
Details of other factors influencing NRC's budget pressures are provided below.
Sunsetting Funding: In order to ensure value for money, a Government of Canada 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.
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.
Currently, NRC has several initiatives and projects funded on a sunsetting basis. Examples include the following:
- Technology Cluster Initiatives funding: Since its inception in 1999, NRC has received approval to spend a total of $598 million in technology cluster initiatives funding. To date, NRC has spent $475 million. The funding for all of NRC's technology cluster initiatives terminates in fiscal year 2009-10, at which point NRC must request additional support from the federal government.
- Astronomy funding: The funding for Phase I of Canada's Long Range Plan for Astronomy and Astrophysics (LRP) ended on March 31, 2007. Since its end, NRC has provided interim financing. A total of $97.5 million over five years is required for the LRP Phase II in order to maintain Canada's contribution to existing offshore telescopes and to pursue on-going LRP projects. Investing in the LRP Phase II could have additional future investment implications starting in 2010 depending on the government of Canada's decisions regarding its future role in the astronomy LRP Thirty Meter Telescope (TMT) and the Square Kilometer Array (SKA) projects.
- Genomics R&D Initiatives funding: In 2007-08, NRC sought approval to renew the Genomics R&D Initiatives, which includes NRC as well as 5 other federal government departments. Total funding requested amounts to $19.9 million until fiscal year 2010-11.
Foreign Currency: NRC purchases roughly $55 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 (89% on average over the last five years) are transacted in US dollars. Due to the strengthening of the Canadian dollar over the last year, NRC has benefited from an increase in purchasing power over 2006-07 levels of approximately $4.2 million US. A continued strong Canadian dollar relative to the US dollar will benefit NRC's purchasing power, whereas a future decline in the Canadian dollar will have the opposite effect.
The 2007-08 gain in purchasing power was somewhat negated by the reduction in Canadian dollars received from foreign sales. In 2007-08, NRC received $34 million CDN on sales of $32.9 million US. By way of comparison, in 2006-07, NRC received $33.8 million CDN from $29.5 million US in sales.
Dependence on Revenue: The nature of NRC's activities permits NRC to generate revenues in order to reinvest in its operations. 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 2007-08, this percentage had climbed to over 24%.
In particular, NRC maintains technology centres that rely on external sources of revenue to fund the majority of their operations, namely NRC Centre for Surface Transportation (NRC-CSTT) and NRC Canadian Hydraulics Centre (NRC-CHC). In addition, NRC's two largest institutes – NRC Institute for Aerospace Research (NRC-IAR) and NRC Canada Institute for Scientific and Technical Information (NRC-CISTI) – rely on external sources of revenue to fund over 45% and 35% of their operations respectively. 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 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 NRC Strategy.
The following is an analysis that explains the meaning of certain financial statement items, significant variances, and financial trends.
Due from Consolidated Revenue Fund: This amount represents the 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 $3.2 million decrease between 2006-07 and 2007-08 is due to the decrease in revenue available for use in subsequent years.
NRC-IRAP TPC Repayable Contributions
The NRC-IRAP Technology Partnerships Canada (TPC) program has been administered by NRC on behalf of Industry Canada since 1998. 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.
This program supports small start-up firms, whose future success is often entirely dependent on one technology. Failure to bring the technology to market, at times, can result in the firm ceasing operations. Even with the very high-risk nature of this program, NRC has received repayments amounting to approximately 25% of contributions disbursed as at March 31, 2008 (20% – 2007). With 280 projects still being administered, this percentage is expected to increase over the next decade.
The NRC-IRAP TPC accounts receivable as at March 31, 2008 was $9.9 million ($10.7 million - 2007) with a corresponding allowance for doubtful accounts of $8.3 million ($7.1 million - 2007), highlighting the high risk nature of the program.
Trade Receivables and NRC-IRAP Audit Recoveries
NRC had accounts receivable with external clients worth $20.9 million as at March 31, 2008 ($19.6 million - 2007) with a corresponding allowance for doubtful accounts equal to $1.1 million ($2.2 million - 2007). This amount represents receivables for work done with external clients as well as receivables for audit findings for NRC-IRAP. Write-offs in 2007-08 were $938 thousand ($603 thousand in 2006-07), which is low given the total value of NRC revenue.
Aged Accounts Receivable
In 2007-08 and 2006-07, 80% of accounts receivable are aged 90 days or below. NRC has successfully focused on collecting its outstanding receivables. The aging of all accounts receivable, gross of allowances, 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 is presented at its lower of cost or net realizable value and has decreased by $545 thousand (19%) over 2007 closing values. The decline is due to an increase in the allowance for obsolete inventory, increased by $500 thousand to $1.1 million in 2007-08.
Equity Investments: As part of its mandate to promote industrial innovation in Canada, NRC provides financial assistance to firms through access to equipment, intellectual property and incubation space in its laboratories and Industrial Partnership Facilities. Since these companies are often in their infancy and cannot afford to pay the full cost of the assistance received, NRC, on occasion, takes an equity position in the company in return for the assistance provided. This helps the firms survive the critical technology development stage. It is not management's intention to hold equity investments over the long-term. NRC will consider timely opportunities for divestiture of equity investments by taking into account the interests, market liquidity and expected future growth of the company.
The full value recorded on the statement of financial position reflects NRC's investment in publicly-traded companies as its shares in privately held corporations are deemed to have no market value. Details of NRC's investment in public companies are as follows:
|Company Name||Number of Shares||Amount Recorded in Financial Statements||Market Value at March 31, 2008|
|PharmaGap Inc.||1,305,425||$ 392,933||$ 117,488|
|Chemaphor Inc.||1,260,305||$ 252,061||$ 277,267|
|Pure Energy Visions Corp.||210,000||$ 1||$ 79,800|
|Omnitech Consultant Group Inc.||866,494||$ 1||$ 0|
|Imris Inc.||795,578||$ 1||$ 3,540,322|
|Total||4,437,802||$ 644,997||$ 4,014,877|
NRC's equity investments, presented on the Statement of Financial Position at $645 thousand, reached a fair market value of $4 million as at March 31, 2008, which represents an increase of $3.3 million from the previous fiscal year. The increase is mainly due to the initial public offering of IMRIS Inc. in 2007-08, in which NRC had previously received common shares in settlement of debt owing.
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 Canadian post-doctoral students to study at world famous graduate schools or research institutes under outstanding researchers. In 2007-08, NRC granted $93 thousand to the recipient of the 2007 NRC H.L. Holmes Award who will receive a total of $198 thousand, ending in July 2009. The recipient is using the award to fund two years of collaborative research at the Harvard Medical School.
In addition, the endowment fund reached a fair market value of $4.5 million as at March 31, 2008 ($4.3 million as at March 31, 2007). The investments within the portfolio had an average effective return of 4.7%. The endowment fund is presented at an amortized cost of $4.3 million ($4.2 million as at March 31, 2007) on the Statement of Financial Position and not at fair value.
Prepaid Expenses: NRC's prepaid expense as at March 31, 2008 was $13.6 million. NRC prepays for goods and services only when contractually obligated. Subscriptions form the primary component of NRC's prepaid expenses. NRC Canada Institute for Scientific and Technical Information (NRC-CISTI), Canada's science library, subscribes to many of the world's major scientific and technical journals and databases.
Prepaid Expenses (in millions)
Capital Assets: NRC's capital asset net book value has decreased from $601 million in 2006-07 to $596 million in 2007-08. This $5 million decrease largely transpired given that NRC's amortization for the year ($66.6 million) exceeded its acquisitions ($60.9 million). The cost of capital assets has increased by 3% to $1,348 million in 2007-08. The $40.6 million increase is attributable to $60.9 million in acquisitions, offset by $20.3 million in various transfers, disposals and write-offs.
NRC spent $60.9 million on capital expenditures during 2007-08, a slight decrease from the $62.1 million spent in 2006-07 (excluding new capital leases recognized of $58.1 million). Of the $60.9 million in capital asset additions, $21 million relates to assets which are currently under construction. The remaining balance is primarily made up of acquisitions related to machinery and equipment ($25.3 million), as well as buildings and facilities ($7.8 million).
The following represents significant capital assets expenditures in 2007-08:
- Energy Retrofit project in progress for NRC Institute for Chemical Process and Environmental Technology (NRC-ICPET). NRC has spent $2.6 million on this project in 2007-08. Once complete, the energy retrofit project will improve the operating efficiency and effectiveness of the building, therefore transferring the current investment into future cost savings for NRC. NRC-ICPET also installed an emergency generator at a cost of $426 thousand.
- NRC Institute for Research Construction (NRC-IRC) is in the process of constructing a new facility which will be used primarily to support activities within the Indoor Air Research and Development Initiative, which is part of the Clean Air Agenda. Costs incurred to March 31, 2008 for the construction of this facility amounts to $994 thousand.
- NRC Institute for Aerospace Research (NRC-IAR) is currently in the process of constructing and or renovating a number of its facilities. As at March 31, 2008, approximately $3.3 million has been spent. In addition, NRC-IAR is constructing a Fiber Placement Composite machine in order to develop and manufacture medium to full-scale size composite parts for aerospace applications. Costs to date for the construction of the equipment amount to $5.9 million.
- NRC Institute for Ocean Technology (NRC-IOT) has replaced the beach structure component of its wave tank in 2007-08 at a total cost of $750 thousand. The replacement of the major component was required to ensure that future research tests produce accurate results to ensure that NRC-IOT continues to provide world-class research.
- NRC Plant Biotechnology Institute (NRC-PBI) has purchased a new genetic analyzer in 2007- 08 at a total cost of $604 thousand. The instrument provides high throughput and high quality DNA sequence information which is essential for NRC research. This instrument is unique within NRC as well as within the federal government research system.
- NRC's oldest property located on Sussex Drive in the National Capital Region received a new skylight and ventilation system in 2007-08 at a total cost of $820 thousand. The renovations were required in order to maintain the accurate balance of atmospheric pressure within the building.
Accounts Payable and Accrued Liabilities: NRC's accounts payable and accrued liabilities decreased by $3.1 million in 2007-08, mainly explained by the following:
NRC's accrued salary which represents salary earned by personnel up to March 31, 2008 for which they have not received compensation, decreased by $2.3 million in comparison with the previous year. The accrual decreased this year given that a retroactive salary adjustment was recorded in the previous year following the ratification of the Administrative Services (AS), Administrative Support Group (AD) and Computer Systems Administrative (CS) collective agreements. In addition, NRC did not require an accrual at year end as was done in the previous year for its portion of payments in lieu of taxes from the City of Ottawa, given that all of its liabilities were paid as at March 31, 2008, reducing accounts payable and accrued liabilities by $2.2 million. The decreases are offset by a $1.1 million increase in contractor holdback liabilities at year-end, given that NRC had several large construction projects in progress.
Vacation Pay and Compensatory Leave: Due to the nature of NRC's operations, a number of NRC's collective agreements do not impose maximum limits of accumulated vacation to be carried forward to subsequent fiscal years by employees. Consequently, vacation pay and compensatory leave have steadily increased over the years.
Contributions Related to Leased Capital Assets
Deferred revenue is recognized for contributions related to leased capital assets. For NRC purposes, this is associated with leases of facilities for $1 per year with the University of Alberta, the University of Prince Edward Island, and the University of Western Ontario. As at March 31, 2008 this balance was $59.8 million. This balance has decreased by $2.7 million in the current year, and the decline is expected to continue given that associated revenue is recognized in accordance with the useful life of the related asset. Consequently, this account increases only when new capital leases are established. On such occasions, NRC will establish a non-financial capital asset as well as corresponding deferred revenue equal to the value of the capital lease. Over time and as the asset is used, NRC recognizes equal amounts of amortization and revenue (lease inducement revenue). As a result, no impact occurs on NRC's net cost of operations or its Equity of Canada.
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 2007-08, this amount totalled $14.5 million, representing an increase of 10% over the previous year.
Other deferred revenue consists primarily of research press deferred revenue, as well as conference and seminar registration deferred revenue. NRC had other deferred revenues of $6.9 million as at March 31, 2008 as compared to $9.2 million at March 31, 2007. The decrease of $2.3 million (25%) is mainly attributable to the decrease in the number of Research Press subscriptions outstanding as at March 31, 2008 as well as the decline in the value of the US dollar given that all Research Press subscriptions are sold in US currency.
Research Press: 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.
Deferred Revenue (in millions)
Environmental liability: NRC's environmental liability has decreased from $300 thousand to $100 thousand in 2007-08. The estimated liability to remediate the land was reduced following a comprehensive environmental study completed on NRC's Penticton solid waste landfill site. Furthermore, to ensure the protection of the environment and the public, NRC has finalized in 2007-08 its plan to assess all research sites occupied by NRC. The first phase, which is scheduled to be completed in 2008-09, consists of site risk assessments. This first phase is critical to ensure that NRC directs further attention and resources on priority research sites.
NRC's revenues for 2007-08 were $155 million as compared to $170 million in 2006-07. Recent trends in revenue components are shown in the following graph. The decrease results from isolated transactions, which when removed, demonstrate that NRC's ongoing operational revenue actually increased by $1 million in the current fiscal year.
Revenues (in millions)
Services of a Non-Regulatory Nature: In 2007-08, 40% ($62.9 million) of NRC revenues were generated from services of a non-regulatory nature, which primarily consists of research services provided directly to industry and academic clients. In 2007-08, NRC Institute for Aerospace Research (NRC-IAR) and NRC Canada Institute for Scientific and Technical Information (NRCCISTI) accounted for over 43% of NRC's service revenues, compared to 46% in 2006-07.
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 totalled $11.8 million in 2007-08, as compared to $11.3 million in 2006-07. The largest component of revenue derived from sales of goods and information products is due to research press journals sold through Canada's scientific library. Research press income earned in 2007-08 was $6.5 million, compared to $5.8 million in 2006-07. This increase would have been more significant, however the steady decline of the US dollar in 2007-08 has reduced the impact, given that all research press journals are sold in US currency.
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 2007-08, NRC generated $9.5 million in royalties, up from $6.7 million in 2006-07 and $5.8 million in 2005-06. The rise in revenue is primarily associated with NRC's Institute for Biological Sciences (IBS) which earned revenue of $5.3 million in 2007-08, up from $3.5 million in 2006-07 and $3.8 million in 2005-06, from which its largest royalties are earned through its license for 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 $4.3 million in 2007-08, as compared to $3.2 million in 2006-07. The 34% increase in the current year is primarily associated with additional agreements at NRC Biotechnology Research Institute and NRC Industrial Materials Institute.
Financial Arrangements with Other Departments and Agencies: NRC undertakes research on behalf of other federal government departments. The incremental costs associated with this work are reimbursed to NRC. In 2007-08, the amount of work undertaken for other government departments was significant, totalling $46.6 million ($57 million in 2006-07 and $58.8 million in 2005-06). The decline of $10.4 million in revenue is associated with NRC's Technology Partnerships Canada (TPC) program with Industry Canada. The TPC transfer payment program terminated on March 31, 2006, and as such only existing associated contracted projects continue to receive funding from NRC. Consequently, revenue has declined significantly in the past three years. In 2007-08, the NRC received a total of $4.5 million, as compared to $15 million in 2006-07 and $18.8 million in 2005-06.
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 2007-08, collaborative funding across all sectors at NRC earned a total of $15.5 million ($17.2 million in 2006-07 and $21 million in 2005-06). Revenue from joint research projects are not recognized until the project is complete. As such, revenue can fluctuate slightly depending on the number of on-going projects at year end.
As noted in the Highlights section, NRC's expenses increased from $847 million in 2006-07 to $853 million in 2007-08. 49% of expenses represents salary and benefits costs.
Expenses (in millions)
Salaries and Employee Future Benefits
Salaries decreased by approximately $1 million from 2006-07. In 2006-07, three collective agreements were ratified at year end, therefore causing a large one time adjustment of $4 million for retroactive pay increments in addition to a pay equity settlement of $7.6 million. The absence of one time adjustments in 2007-08 were offset by increases for general pay increments.
Grants and Contributions
In 2007-08, grants and contributions from NRC remained stable in comparison to the previous fiscal year. The largest category of NRC grants and contributions relates to funding allocated to small and medium-sized enterprises (SMEs) through NRC-IRAP. These increased to $72.5 million in 2007-08, from $65 million in 2006-07. However, NRC-IRAP distributed only $2.9 million in contribution for the TPC program, down from $11.6 million in 2006-07, due to the winding down of the program. A decrease in contributions expense of $3.6 million also resulted from an increase related to the allowance for uncollectible (or write-off) TPC receivables in 2007- 08, as the transfer payment to Industry Canada is reduced accordingly.
NRC's contribution to TRIUMF, Canada's national laboratory for particle and nuclear physics, increased from $45.5 million in 2006-07 to $51.5 million in 2007-08. The increase was provided to fund operation and maintenance expenses in order to satisfy facility conformity costs. TRIUMF is an unincorporated association that operates a research laboratory.
Contributions made through the NRC Herzberg Institute of Astronomy (NRC-HIA) to support international telescopes totalled $9.2 million in 2007-08, compared to $12.6 million in 2006-07. The decrease is due to instrument construction delays as well as the purchasing power increase of the Canadian dollar.
Utilities, Materials and Supplies
In 2007-08, expenses related to utilities, materials and supplies reached $89.3 million, as compared to $81 million in 2006-07. The $8.3 million increase primarily results from NRC's accounting treatment of prepaid expenses. In 2006-07, NRC-CISTI set up a large prepaid for its serial renewal subscriptions, consequently reducing the expense incurred in 2006-07. As a result, the expense incurred in 2007-08 increased by approximately $5.4 million. The remaining balance can be attributed to NRC Herzberg Institute for Astronomy, which incurred additional expenses of $2.9 million in 2007-08 due to project requirements.
NRC's bad debt expense increased from $3.7 million in 2006-07 to $6.4 million in 2007-08. The increase is related to write-offs recorded in the year for bad debts within NRC-IRAP's TPC program, as discussed within the Grants and Contributions section.
In 2007-08, award costs increased from $1.7 million in 2006-07 to $3.2 million in 2007-08. The additional award costs are related to NRC's rights and privileges revenue, which was $9.5 million in 2007-08. The awards expense has a direct relationship with revenue given that patent awards are distributed to personnel as income is earned from the respective license agreements. NRC distributes a maximum of 35% of revenue earned to personnel responsible for the creation of the commercial patent. Consequently, a rise in royalty revenue results in a corresponding increase in award costs.
Other Expenses amounted to $58 thousand in 2007-08, as compared to $3.1 million in 2006-07. The main reason for the decrease in other expenses is due to the pay equity settlement recognized in 2006-07 of $2.9 million related to damages pursuant to the Canadian Human Rights Act to all Eligible Employees of the Research Council Employees' Association.
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