ARCHIVED - Financial Statement Discussion and Analysis
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Table of contents
- 2010-2011 Highlights
- Discussion and Analysis
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, 2011.
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).
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 “Risks and Uncertainties” section of this report could cause actual results or events to differ materially from those contemplated in forward-looking statements.
Statement of Management Responsibility Including Internal Control Over Financial Reporting
The NRC financial statements include a Statement of Management Responsibility Including Internal Control Over Financial Reporting, which outlines that the responsibility for the integrity and objectivity of the financial statements and information contained therein rests with management. The Statement has been changed in 2010-11 to include that, in addition to management’s assertion that a system of financial management and internal controls is in place, management is also responsible for maintaining an effective system of internal control over financial reporting and that an annual assessment of the effectiveness of the system is completed. This change was put in place with the implementation of the Treasury Board Policy on Internal Control. A description of how the system of internal controls is designed and maintained and monitored is also made available.
NRC’s 2010-11 Financial Statements were influenced by a number of factors, including Canada’s Economic Action Plan and expenditure restraint measures. These factors also played a role in the 2009-10 financial results, and help to explain some of the financial account variances from year-to-year, and contributed to changes in NRC’s Net Cost of Operations and Equity position, which decreased by $32.1 million and increased by $26.7 million in 2010-11, respectively.
Statement of Operations
Expenses: NRC incurred total expenses of $1.001 billion in 2010-11, down slightly from 1.021 billion in 2009-10 but higher than $899 million incurred in 2008-09. 2010-11 and 2009-10 expenses are similar, and both are significantly higher than 2008-09 due to Canada’s Economic Action Plan (CEAP). Introduced in January 2009, the CEAP was the Government’s response to a deep global recession. The CEAP has delivered billions of dollars in stimulus for the economy to protect Canadian jobs and income as well as ensure a prosperous economy of tomorrow. NRC received and spent $142.5 million in additional appropriations in 2010-11 to support scientific research and development activities performed by Canadian organizations, of which $140.3 million was spent on contributions with the remainder spent on personnel and operational costs. (NRC also received funds for the modernization of federal laboratories and for the remediation of contaminated sites from the CEAP, but these expenditures had little impact on the Statement of Operations.)
The following chart illustrates NRC’s total expenses categorized by major expense, over the past three fiscal years:
Accessible version of NRC’s total expenses categorized by major expense, over the past three fiscal years.
|Grants and Contributions||289||281||133|
- Personnel: NRC’s total expenses, as detailed in the Notes to the Financial Statements, are made up of 46% (45% in 2009-10) in salaries and employee benefits, which represent NRC’s most significant cost driver. Salaries and employee benefits were $457 million in 2010-11, down from $461 million in 2009-10. Several factors explain the $4 million (or 1%) decrease. The most significant were a $10.6 million increase to the charge for future employee severance benefits and a $1.6 million increase in vacation leave accruals, offset by a $7.1 million of decrease in salary costs due to fewer full time equivalent (FTE) personnel, a $5.4 million decrease in NRC’s share of the Government’s overall cost of employee benefits such as employer provided pension contributions and health and dental insurance, and a $3.0 million decrease as a result of increased capitalized salary costs relating to construction of capitalized assets.
- Grants and Contributions: NRC made total net grants and contributions of $289 million in 2010-11, as compared to $281 million in 2009-10 and $133 million in 2008-09. Canada’s Economic Action Plan (CEAP) provided NRC with additional funds in both 2009-10 and 2010-11 to support small and medium-sized enterprises with their innovation efforts through the NRC Industrial Research Assistance Program (NRC-IRAP). $142.8 million of additional Grants and Contributions funding was made available through the CEAP in 2010-11 ($144.1 million in 2009-10). This investment will help the Government build a competitive advantage for Canada based on excellence in science and technology. With this support, SMEs are better equipped to perform R&D, commercialize new products and processes, and access global markets.
- Operations: NRC’s operational costs (excluding salaries and employee benefits) decreased by $24 million from $279 million in 2009-10 to $255 million in 2010-11. The decrease in costs is mainly attributable to professional and special services which decreased by $7.6 million, bad debt expense which decreased by $5.6 million, and transportation and communication which decreased by $4.4 million. The decrease in operational costs is forecast to be maintained for upcoming years given NRC’s implementation of cost management measures within these areas.
Further details on expense variations are explained in the Financial Analysis section.
Revenue: Revenue is important to NRC, not only as a means of financing its operating and capital expenditures, but also because it is an indicator of the value that NRC provides to its clients and collaborators. It keeps NRC at the forefront of private sector technology trends and developments. NRC earned total revenues of $169.8 million in 2010-11, a $11.3 million increase from the $158.5 million earned in 2009-10. A $13.9 million increase in revenues from joint project and cost sharing arrangements was primarily due to NRC meeting its contractual obligations for revenue that was previously deferred. There was also a $11.9 million decrease in financial arrangements with other government departments, a decrease mainly caused by a $16.8 million financial arrangement with Industry Canada being funded through appropriations in 2010-11 and a $6 million increase in revenue from services of a non-regulatory nature.
NRC revenues, adjusted for non-recurring interdepartmental transactions, provide a more accurate representation of NRC’s normal operations. NRC revenues from normal operations increased by $27.3 million in 2010-11 from 2009-10. Sales of goods and services to external parties increased by $8.1 million ($8.5 million decrease from 2008-09). Financial arrangements with other government departments and agencies, and revenues from joint project and cost sharing agreements also both increased, by $5.4 million and $13.9 million respectively ($13.3 million and $16.4 million increases respectively from 2008-09).
Accessible version of NRC's Revenue from Normal Operations.
|Sales of goods and services||73.2||65.1||81.7|
|Financial arrangements with departments and agencies||55.7||50.3||42.4|
|Revenues from joint project and cost sharing agreements||32.6||18.7||16.2|
Sales of goods and services include services of a non-regulatory nature, sales of goods and information products, rights and privileges, as well as revenue derived from the lease and use of property. The increase in sales of goods and services is attributable to many factors, including the effect of the slow but steady recovery from the global economic downturn and an increased focus on revenue generating activities throughout NRC. Revenue increases occurred at many of NRC’s Institutes / Branches / Programs (IBP) to varying degrees, including a $2.2 million increase at NRC’s Institute for Aerospace Research (NRC-IAR) due to several large new projects at both the Aerodynamics Laboratory and Gas Turbine Laboratory and a $1.2 million increase at NRC’s Centre for Surface Transportation Technology (NRC-CSTT) mainly due to increased sales at its rail division.
The $5.4 million increase in financial arrangements with other government departments and agencies was due to increased revenue at several IBPs including $2.7 million at NRC’s Canada Institute for Scientific and Technical Information (NRC-CISTI) due to a new ongoing contract with Health Canada and a $1.2 million increase at NRC-IAR from new projects with the Department of National Defence. Increased revenues from joint project and cost sharing agreements are due to increases at several IBPs including a $1.1 million increase at NRC’s Steacie Institute for Molecular Sciences (NRC-SIMS) and a $1.0 million increase at NRC’s Industrial Materials Institute (NRC-IMI).
Further details on revenues are found in the Financial Analysis section.
Discontinued Operations: As part of the Strategic Review conducted in 2008, the Research Press program at NRC’s Canada Institute for Scientific and Technical Information (NRC-CISTI) was privatized in September 2010. All revenues and expenses relating to Research Press are excluded from the Statement of Operations for fiscal year 2010-11 and 2009-10 and are included instead on a net basis as Discontinued Operations. 2010-11 discontinued operations include $7.2 million of revenues and $7.9 million of expenses (11.1 million and 11.2 million respectively in 2009-10).
Statement of Financial Position
Assets: NRC’s total assets signify its ability to provide future services for Canadians. NRC had total assets of $820.4 million as at March 31, 2011, up slightly from $816.9 as at March 31, 2010. NRC’s largest single component of assets is tangible capital assets (detailed below), which represent $573.7 million or 70% of the total ($579.1 million or 71% of the total as at March 31, 2010). Other significant assets include $197.3 million ($197.4 million as at March 31, 2010) Due from Consolidated Revenue Fund (the amount of cash that NRC is entitled to withdraw from the federal government treasury) and Accounts Receivable valued at $25.8 million ($18.9 million as at March 31, 2010).
- Tangible Capital Assets: NRC’s infrastructure is an important element for the successful delivery of its mandate. Re-investments in tangible capital assets are crucial. As many of NRC’s most significant tangible capital assets continue to age, NRC\xE2\x80\x99s recapitalization program is important to ensuring NRC continues to be able to meet the needs of its clients. In 2010-11, NRC acquired and/or constructed $62.3 million in tangible capital assets, down from $66.9 million in 2009-10 and $62.6 million in 2008-09. The total amount of annual amortization, transfers, disposals, and write-offs were greater than tangible capital asset acquisitions, producing a decline in the total net book value of tangible capital assets over the past three years. NRC’s largest components of tangible capital investments are research buildings and facilities as well as machinery, equipment and furniture. Combined, they account for over 84% of the cost (77% of the net book value) of tangible capital investments.
Further details on tangible capital asset acquisitions are provided in the Financial Analysis section.
Liabilities: Accounts payable and accrued liabilities of $139.3 million as at March 31, 2011($144.3 million as at March 31, 2010) are NRC’s largest liabilities. The largest components are amounts owing to suppliers and contributions payable ($108.6 million), payables to other Federal Government departments and agencies ($21.3 million) and accrued salaries and employee benefits ($8.2 million). NRC also has a $63.7 million deferred revenue liability ($79.5 million as at March 31, 2010) representing revenue that has been collected but not yet earned, and $71.1 million of liabilities relating to employee future benefits ($69 million as at March 31, 2010). Vacation pay and compensatory leave represents a $38.5 million liability for NRC ($43 million as at March 31, 2010).
Equity of Canada: NRC’s equity of Canada as at March 31, 2011 was $507.5 million, up from $480.8 million as at March 31, 2010 and $491.4 million as at March 31, 2009. This amount illustrates NRC’s net resources (financial and non-financial) that will be used to provide future services for Canadians.
Canada’s Economic Action Plan: The effects of Canada’s Economic Action Plan (CEAP) can be felt across the scientific research and development community in both financial and non-financial terms. Over $157 million in CEAP funding was made available to NRC in both 2010-11 and 2009-10.
Funding of $145 million was made available to NRC-IRAP from the federal government in 2010-11 ($146 million in 2009-10) to stimulate wealth creation for Canada. NRC-IRAP provides financial assistance, along with technical and business advisory services to small and medium-sized enterprises (SMEs) across Canada to help them develop technologies for competitive advantage. This increased funding provided NRC-IRAP with the financial means to assist over 1,600 new clients in 2010-11 and 1,700 new clients in 2009-10. These new clients represent a four-fold increase over the amount of new funded clients in 2008-09.
CEAP funding of $10.4 million was made available in 2010-11 for the modernization of federal labs ($8.7 million in 2009-10). Details on the projects funded under this initiative can be found in the Tangible Capital Assets discussion of the Financial Analysis section. $2.5 million of CEAP funds were made available to accelerate the Federal Contaminated Site Action Plan in 2010-11 ($2.4 million in 2009-10).
NRC’s Strategic Direction: Under the leadership of NRC’s new President, a new strategic direction for the organization was developed by NRC’s management team in 2010-11. NRC intends to be a purposeful outcome based organization.
NRC’s new strategy identifies six major areas of focus to improve direction and accountability within the organization. These are natural resources, environment, health costs, security, community infrastructure, and industry competitiveness. NRC will contribute to Canadian issues and challenges associated with those themes through “programs”. Decisions about program and capital investment will ensure that programs align with strategy. Specialized infrastructure and expertise to help industry in targeted areas where there is a need for such support will also be provided.
NRC’s new flagship programs will be an important way for NRC to explain and demonstrate its capabilities and the benefits it provides for Canada. The flagship programs will be inspiring, large in scale and provide substantial public benefit. Four flagships are under development:
- Printable electronics – a new globally competitive electronics industry that will be viable in Canada.
- Resilient Wheat – develop a profitable strain of wheat that is highly tolerant to environmental and climate stress.
- Industrial Biomaterials – a Canadian based value chain that replaces imported products with economical high performance materials.
- Creating value from CO2: algal carbon conversion – reduce 20% of CO2 emissions from large Canadian point source emitters through production and conversion of algae to value added products.
Governance: NRC has implemented a number of initiatives to improve corporate governance in keeping with the broad government goal of improved management, accountability and transparency in the public sector.
An organizational-wide business planning process serves as a crucial mechanism for making both financial and non-financial decisions. NRC was successful in balancing its 2010-11 budget despite important financial pressures. Salary and operating budget reductions were imposed on institutes, programs and corporate branches, some programs and projects were cancelled or delayed, and additional revenue targets were imposed.
NRC also put into place an Investment Planning process during 2010-11 to set priorities and allocate resources. Two distinct types of projects fall under this new process – projects related to the management of science or research, and projects related to NRC’s research capability such as corporate management initiatives and projects related to real property (buildings, facilities), Information technology/Information management, or scientific equipment. Investment in NRC buildings was given particular attention in investment planning for 2011-12 – NRC set aside $14 million for recapitalization projects on NRC buildings.
This new process helps ensure that NRC complies with the Treasury Board Policy on Investment Planning. It focuses on governance, management controls and improving capacity and places an emphasis on NRC-wide management, to help ensure scarce resources are invested in areas where they will help NRC achieve its objectives. It also promotes clear accountability of managing projects. During 2010-11, applications were submitted for 103 different investment projects over 5 years, of which 29 were approved for funding in fiscal year 2011-12.
In accordance with the policy requirements, NRC has produced three linked deliverables:
- A five-year Investment Plan (IP) identifying investments in assets, acquired services and projects;
- An Organizational Project Management Capacity Assessment (OPMCA); and
- Project Complexity and Risk Assessments (PCRAs) for all projects over $1M to be undertaken within the planning period.
Financial management is an essential component of good governance and has substantial influence on corporate values and culture. During 2010-11, a focus was made to improve compliance with financial policy and procurement procedures. This included the development of procurement guides for users as well as testing of transactions to ensure compliance with financial and procurement policies.
Discussion and Analysis
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. Furthermore, with the exception of funds received from Canada’s Economic Action Plan in 2010-11 and 2009-10, NRC’s parliamentary appropriations have decreased over previous years.
The following chart illustrates NRC’s parliamentary appropriations over the past three fiscal years, including the Main Estimates, the Supplementary Estimates, Transfers, Adjustments and Warrants but excludes statutory appropriations (Spending of revenues pursuant to paragraph 5 (1) e of the National Research Council Act, Contributions to employee benefit plans, Spending proceeds from the disposal of surplus Crown assets, Collection agency fees and Losses on foreign exchange).
Accessible version of NRC’s parliamentary appropriations over the past three fiscal years.
|Operating Expenditures ‐ Vote 60||427.9||438.6||433.8|
|Grants and Contributions ‐ Vote 70||294.9||274.6||144.0|
|Capital Expenditures ‐ Vote 65||53.2||52.6||49.8|
In 2010-11, available parliamentary authorities increased by $10.2 million, from $765.8 million in 2009-10 to $776.0 million. While Grants and Contributions funding increased by $20.3 million, $16.8 million of the increase relates to NRC’s administration of Industry Canada’s Community Adjustment Fund (CAF). In 2009-10, CAF funding was received through revenue as a financial arrangement rather than through parliamentary authorities. Excluding CAF funding, NRC’s available parliamentary appropriations decreased by $6.6 million, primarily due to a $10.7 million reduction in Operating Expenditure funding. Available Parliamentary Authorities in both 2009-10 and 2010-11 are significantly higher than 2008-09 due to funding received from Canada’s Economic Action Plan. Without these elements, NRC’s available parliamentary authorities would have been at $618.6 million (625.8 million in 2009-10) with $42.8 million in capital expenditures ($43.9 million in 2009-10), $152.1 million in grants and contributions (147.1 million in 2009-10), and $423.2 million in operating expenditures (434.8 million in 2009-10).
NRC owns and manages 181 specialized buildings and facilities across Canada that comprise approximately 556,000 square meters of space. It also has an equipment and informatics base of $615.1 million in cost, with $188.2 million in net book value ($609.7 million in cost, with $199 million in net book value in 2009-10). NRC’s capacity to fund the upgrade or replacement of these assets from its appropriations is limited. However, through its 5 year investment plan, NRC is investing funds to maintain its buildings and laboratories to existing conditions.
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. Rather than providing a permanent increase in the NRC allotment, the government allocates funding for specified purposes for a limited period of time with the option for renewal. Renewal is conditional on various factors, including performance, achieving desired objectives, linkages to priorities, and availability of funds.
Although NRC 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 ongoing commitments from NRC such as maintenance of new facilities and new staff salaries. 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 original funding window. These challenges add complexity to planning, budgeting and operations.
Currently, NRC has numerous initiatives and projects funded on a sunsetting basis, examples of which include the following:
- Canada’s Economic Action Plan: The Economic Action Plan was implemented as a two-year program designed to stimulate Canada’s Economy during a severe global economic downturn. Over $157 million in funding was made available to NRC in both 2010-11 and 2009-10. 2010-11 was the final year that NRC will receive funding.
- Technology Cluster Initiatives: Since its inception in 2000-01, NRC has received over $620 million in funding for technology cluster initiatives. The funding for NRC’s technology cluster initiatives is set to expire at the end of 2011-12. NRC’s technology cluster initiatives play a key role in activities that support the integration of players in Canada’s innovation system. They nurture the growth of local scientific and innovative capability that drives dynamic and competitive industries; and also help to address challenges inherent in the current Canadian industrial structure (predominance of SMEs).
- TRIUMF: The current contribution agreement with TRIUMF (Canada’s National Laboratory for Particle and Nuclear Physics) expires at the end of 2014-15 and will provide $177 million in funding over the next four years. Since 1976, NRC has provided over $1 billion in funding to TRIUMF, with $45 million provided in 2010-11.
- Genomics R&D Initiatives: The Genomics R&D Initiatives (GRDI) is a federal program that coordinates genomics R&D in 6 federal departments and agencies to support their mandates, public policy objectives and key national interest in human health, agriculture and food safety, environment and natural resources management. In 2008-09, NRC and 5 other federal government departments received approval to renew the GRDI for total funding until 2010-11 of $59.7 million. NRC’s portion is $18 million ($6 million in each of 2008-09, 2009-10, and 2010-11). At present time there is no formal approval in place to renew the initiatives. However, they are part of the Government of Canada Fiscal Framework, and renewal is anticipated.
Foreign Currency: NRC purchased $43.1 million CDN in goods and services in foreign currencies in 2010-11 ($56.3 million in 2009-10), which exposes NRC to an element of risk due to fluctuations in foreign exchange. The most significant amount of purchases in foreign currencies is completed in US dollars (94% in 2010-11). Due to the strength of the CDN dollar over the US dollar in 2010-11, NRC’s $39.8 million in US dollar purchases cost $3.8 million CDN dollars less than that same spending would have cost at the 2009-10 exchange rate.
In addition, NRC had $38 million CDN in foreign currency receipts in 2010-11, of which $37.3 million (98%) was received in US currency, compared to $31 million out of $33.4 million (93%) received in 2009-10. The $36.6 million in US dollar receipts in 2010-11 were able to offset 92% (59% in 2009-10) of the $39.8 million in US dollar disbursements.
Revenue: NRC activities generate revenues which can be reinvested in operations. NRC has steadily increased its external sources of funding 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. This percentage climbed to 22% in 2010-11, approximately the same as the average over the previous five fiscal years.
NRC’s Centre for Surface Transportation Technology (NRC-CSTT) and NRC’s Canadian Hydraulics Centre (NRC-CHC) rely primarily on external sources of revenue to fund their operations. In addition, NRC’s largest institute – NRC’s Institute for Aerospace Research (NRC-IAR) – generates external revenue to fund 48% of its operations. Significant downturns in the industries or federal departments that these groups support could impact NRC’s ability to continue operations at current levels.
As part of its organizational strategy, NRC is looking to further increase external revenue in future years.
The following is an analysis that explains the meaning of main items appearing on the financial statements, significant variances, and financial trends.
Due from the Consolidated Revenue Fund (CRF): This account represents the amount of cash that NRC is entitled to withdraw from the federal government treasury. This includes cash to discharge liabilities for which NRC has already received an appropriation, as well as revenue received but not spent. NRC’s due from the CRF was $197.3 million as at March 31, 2011, down from $197.4 million as at March 31, 2010. Changes in the composition of the balance include a $3 million increase in accounts receivable from other government departments and a $0.5 million decrease in specified purpose account deferred revenue, partially offset by a $2.3 million increase in revenue available for use in subsequent years and a net $1.1 million increase in accounts payable eligible for payment from the CRF.
Accounts Receivable: Accounts receivable and advances totalled $25.8 million as at March 31, 2011, a $6.9 million increase from 2010. Details can be found in Note 4 to the financial statements.
Receivables from external parties: NRC had accounts receivable with external clients worth $19.2 million as at March 31, 2011 and a corresponding allowance for doubtful accounts of $682 thousand ($15.4 million and $856 thousand as at March 31, 2010), a favourable amount considering the total value of NRC’s external revenues. The $3.8 million increase in accounts receivable from external parties is consistent with the higher level of revenue generated from total sales of goods and services in the year.
Aged Accounts Receivable: The graph below shows the aged accounts receivable from external parties, other government departments, and employee advances, but does not include repayable contributions under the IRAP-TPC program, which are shown separately. In 2010-11, 92% (90% in 2009-10 and 94% in 2008-09) of accounts receivable are aged 90 days or below indicating that NRC is able to collect on its operating receivables in a timely manner.
Accessible version of NRC's aged accounts receivables.
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. Although no new contributions have been made since 2008-09, the wind down phase will require the collection of the repayable contributions over the next several years as per repayable contribution agreements in place and conditions therein.
The NRC-IRAP TPC 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. The NRC-IRAP TPC accounts receivable as at March 31, 2011 was $7.8 million ($10.6 million as at March 31, 2010) with a corresponding allowance for doubtful accounts of $5.7 million ($8.6 million as at March 31, 2010). The large allowance, as well as the fact that a majority of IRAP-TPC receivables are aged greater than 180 days (see graph below), highlight the high-risk nature of the program. However, in spite of this risk, NRC has received repayments amounting to approximately 37% of contributions disbursed as at March 31, 2011 (33% as at March 31, 2010). With 188 projects still being administered (215 as at March 31, 2010), this percentage is expected to increase over the next decade.
Accessible version of Aged Repayable Contributions - IRAP-TPC.
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. NRC has on occasion taken an equity position in a company in return for assistance provided. NRC divests of equity investments by taking into account the interests and market liquidity of the company involved.
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. NRC’s equity investments increased from $252 thousand to $472 thousand in 2010-11 following the conversion of a public company’s debt owing to NRC into equity. NRC also sold shares in a private company, realizing a gain of $133 thousand.
The following table provides an overview of NRC’s 2010-11 equity holdings and disposal transactions.
|Company||Opening balance (in dollars)||Book value of equity investments acquired, sold or written off during the year (in dollars)||Closing balance (in dollar)||Market value of publicly traded equity investments (in dollars)||Proceeds from sale of equity investments (in dollars)||Gain on sale of equity investments (in dollars)|
|Privately held Corporations||13||(11)||2||n/a||132,679||132,668|
|Omnitech Consultant Group Inc||1||(1)||0||0||0||0|
|Cequence Energy Ltd.||1||0||1||13,309||0||0|
NRC’s intention is to eventually liquidate the remaining equity positions, when conditions permit.
Endowment 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. 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 2010-11, NRC provided a grant totalling $97 thousand to the recipient of the 2009 NRC H.L. Holmes Award. The recipient is using the total award of $198 thousand to fund two years of collaborative research at the Harvard Medical School in Cambridge, Massachusetts to explore cellular processes leading to cholera, a severe diarrheal disease that afflicts or kills many in developing countries.
The endowment fund had a fair market value of $4.8 million on March 31, 2011 ($4.7 million as at March 31, 2010). The investments within the portfolio had an average effective return of 4.7%. The endowment fund is presented at an amortized cost of $4.6 million ($4.5 million as at March 31, 2010) on the Statement of Financial Position and not at fair value.
Prepaid Expenses: NRC’s prepaid expenses as at March 31, 2011 were $11.5 million ($10.3 million as at March 31, 2010). The increase of $1.2 million is mainly attributable to an increase in scientific journal subscriptions within the NRC Canada Institute for Scientific and Technical Information (NRC-CISTI), which increased from $4.3 million to $5 million. Subscriptions form the primary component of NRC’s prepaid expenses. Canada’s science library subscribes to many of the world’s major scientific and technical journals and databases.
Accessible version of NRC prepaid expenses pie chart.
|Subscriptions||Memberships||Payment in lieu of taxes||Other|
Other prepaid expenses include various items such as software license and maintenance, travel and conference reservations, rental fees and security deposits.
Tangible Capital Assets: NRC’s tangible capital asset net book value has decreased from $579.1 million in 2009-10 to $573.7 million in 2010-11. Total tangible capital asset acquisitions totalled $62.3 million, amortization totalled $67.2 million, and net assets transferred, disposed or written-off were $0.4 million.
Additions to Tangible Capital Assets totalled $62.3 million in 2010-11, including $10.1 million financed from funding received for the modernization of federal laboratories through Canada’s Economic Action Plan. This is a slight decrease from the $66.9 million spent in 2009-10. Of the $62.3 million in tangible capital asset additions, $24.1 million or 39% relate to spending on assets under construction as at March 31, 2011. The remaining balance is primarily made up of investments in NRC buildings and facilities ($18.7 million or 30%) as well as machinery and equipment ($14.8 million or 24%).
The following represents significant tangible capital assets expenditures in 2010-11:
- The recapitalization and deferred maintenance work completed in 2010-11 includes: upgrades to laboratories and equipment, replacement of windows, roofing material, building exteriors, electrical and mechanical systems. Two significant projects include a $2.6 million investment at NRC’s Institute for Aerospace Research (NRC-IAR) in exterior recladding to extend the life of a building and a $1.5 million investment at NRC’s Institute for National Measurement Standards (NRC-INMS) to retrofit a steam condensate line to extend its life and provide new connections.
- NRC-IAR invested $3.7 million for a total project cost of $4.9 million for the construction of an Icing System in Thompson Manitoba. This Icing System is integrated into an Engine Test Facility owned by a Joint Venture made up of Pratt and Whitney Canada and Rolls Royce Canada, and operated under contract by MDS Aero Test. NRC maintains ownership and operating responsibility for the Icing System and will be paid for its use by the Joint Venture. This facility supports the testing and certification of gas turbine engines in icy conditions. Participation in this facility meets multiple NRC objectives including contributing to the economic viability of northern communities, enhanced air transportation safety by providing access to an economical and sustainable test facility, and contributing to the competitiveness of Canadian industry in aerospace, a key industry sector.
- NRC-IAR invested $1.7 million in a test facility to support a large high pressure and high temperature combustion project. This is a key asset for industry to test and develop low emission gas turbines, and generates revenue for NRC through rentals of the test facility. Construction of this asset is expected to be completed during the 2011-12 fiscal year.
- NRC’s Industrial Materials Institute (NRC-IMI) spent $2.3 million to purchase and install a Dieffenbacher DYG 2500/2100 AS Compression Press with Active Parallel Levelling System for use at the Magna- NRC Composites Centre of Excellence. The press will be used to support multiple research projects encompassing the compression moulding and forming of many composite materials and is a key asset for NRC-IMI, the Composites Centre and the NRC Biosourced Industrial Materials Manufacturing (NBIMM) initiative. Construction of this asset is expected to be completed during the 2011-12 fiscal year.
- NRC-IMI spent $2.2 million to replace an exterior wall due to problems with the original construction in 1982. This new wall will increase the useful life of the building.
- NRC’s National Institute for Nanotechnology (NINT) invested $1.9 million in 2010-11 toward a $4.3 million project to build an equipment room and renovate existing floor space to meet the requirements of new equipment being installed as part of the Hitachi Microscopy Products Centre (HEMIC) initiative, a $14M collaboration expected to speed up commercialization of NINT microscope innovations.
- NRC’s Institute for Microstructural Sciences (NRC-IMS) invested $1.2 million on a SPTS Ii2L model Inductively Coupled Plasma (ICP) etch tool. The Canadian Photonics Fabrication Centre (CFPC) at NRC-IMS fabricates a variety of lasers, detectors and modulators for a large number of external clients. The fabrication process involves a dry etching process under vacuum. The new ICP etch tool will provide improved Etch process uniformity and control, reduced down time, and increased dry etch capacity in the largest segment of CPFC’s activities. Construction of this asset is expected to be completed during the 2011-12 fiscal year.
- NRC spent $1.0 million to upgrade its DDC building control systems for improved energy management and building performance at many facilities across NRC.
- NRC’s Institute for Chemical Process and Environmental Technology (NRC-ICPET) invested $900 thousand to construct the Analytical High Resolution Transition Electron Microscope as part of a specialized $4 million facility to meet current leading edge research requirements for imaging and analytical characterization of organic and inorganic materials. Construction of this asset is expected to be completed during the 2011-12 fiscal year.
The following diagram depicts NRC’s distribution of tangible capital asset acquisitions over the last two fiscal years.
Accessible version of NRC’s distribution of tangible capital asset acquisitions over the last two fiscal years.
|Assets under construction||38.7%||36.0%|
|Buildings and facilities||30.0%||12.6%|
|Machinery, equipment and furniture||23.7%||39.3%|
Accounts Payable and Accrued Liabilities: NRC’s accounts payable and accrued liabilities as at March 31, 2011 were $139.3 million ($144.3 million as at March 31, 2010). The decrease of $5 million is mainly due to a decrease in payables to other government departments and lower accrued salaries and employee benefits, partially offset by an increase in payables to suppliers. The following graph shows the three largest categories of accounts payable and accrued liabilities.
Accessible version of three largest categories of accounts payable and accrued liabilities graph.
|Suppliers and contribution recipients||108.6||104.4|
|Payables to other Federal Government departments and agencies||21.3||25.6|
|Accrued salaries, wages and employee benefits||8.2||11.5|
The $4.2 million increase in payables to suppliers and contribution recipients is due to increased amounts owing to external suppliers at year-end. The $4.3 million decrease in payables to other Federal Government departments and agencies is the result of higher payables in 2009-10 related to NRC’s portion of employee benefits following the payment of retroactive salaries in 2009-10.
NRC’s accrued salaries represents salary earned by personnel as at March 31, 2011 for which they have not received payment. The decrease of $3.3 million in comparison with the previous year is primarily explained by a decrease in the allowance recorded for termination benefits, partially offset by an increase of one day worked by NRC employees for which they had not yet been paid as at March 31, 2011.
NRC’s contaminated site liabilities have decreased by $1.8 million due to restoration costs incurred by NRC in the remediation of contaminated sites previously accrued. While NRC’s remaining liability is only $80 thousand, work on restoration and management of existing sites will continue in 2011-12 with funding provided by the Government through the Accelerated Federal Contaminated Sites Action Plan.
Vacation Pay and Compensatory Leave: After many years of steadily increasing vacation pay and compensatory leave liabilities, the amount decreased in each of the past two fiscal years, including a $4.5 million decrease in 2010-11 and a decrease of $5.9 million in 2009-10. The decrease is a result of additional restrictions imposed on carry-over conditions in recent collective bargaining agreements and management oversight activities taken to manage outstanding vacation liabilities.
Accessible version of vacation pay, compensatory;eave and employee future benefits graph.
|Vacation pay and compensatory leave||38.5||43.0||48.9|
|Employee future benefits||71.1||69.0||75.1|
Employee Future Benefits: Employee future benefits represent an allowance for severance benefits payable to employees upon termination of employment with the public service. The allowance for employee future benefits is established at year end based on the total annual salary cost of NRC’s indeterminate employees. The increase of $2.1 million results from a 0.52% increase in the rate used by Government Departments to estimate and accrue their portion of the allowance as well as a slight increase due to the natural rise in employment wages applicable to NRC’s continuing workforce.
Deferred Revenue: Deferred revenue totalled $63.7 million as at March 31, 2011, compared to $79.5 million in 2010, and is broken down in Note 9 of the financial statements.
Contributions Related to Leased Tangible Capital Assets
Deferred revenue for contributions related to leased tangible capital assets result from tangible capital assets provided to NRC under a lease agreement with monetary consideration below fair market value. The contributions related to leased tangible capital assets is associated with leases of facilities for $1 per year with the University of Western Ontario to accommodate NRC’s Industrial Materials Institute (NRC-IMI) and NRC’s Institute for Research Construction (NRC-IRC), the University of Alberta to accommodate NRCNINT, and the University of Prince Edward Island to accommodate NRC’s Institute for Marine Biosciences (NRC-IMB).
When new capital leases are recognized, NRC will establish a non-financial tangible capital asset as well as corresponding deferred revenue equal to the fair market 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. As at March 31, 2011 this balance was $48.0 million ($50.6 million as at March 31, 2010). The balance decreased by $2.6 million in the current year to account for revenue recognized in accordance with the useful life of the related asset.
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 the funds will be expended in the coming year(s) on the project. At the end of 2010-11, this amount totalled $9.8 million ($20.6 million as at March 31, 2010), representing a decrease of 52% over the previous year. This decrease is primarily the result of work being completed on projects for which the revenue was deferred in previous years.
NRC had other deferred revenues of $5.9 million as at March 31, 2011 ($8.3 million as at March 31, 2010). NRC-CISTI’s Research Press operation, which was privatized in September 2010, accounted for $4.7 million of the 2009-10 balance. This decrease is partially offset by a number of deferred revenue increases, including $0.9 million of deferred revenue for a project at NRC-HIA, $0.8 million of increased deferred revenue on percentage of completion contracts at NRC-IRC, and $0.8 million of deferred revenue at NRCNINT relating to grant money to help fund an expansion project taking place during the 2011-12 fiscal year.
The other main component of “other” deferred revenue is deferred conference and seminar registration fees. 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 from conference and seminar registration decreased by $0.1 million as of March 31, 2011.
Accessible version of deferred revenue graph.
|Contributions related with leased tangible capital assets||48||50.6||53.1|
|Specified Purpose Accounts||9.8||20.6||17.1|
|Other deferred revenue||5.9||8.3||7.0|
NRC’s total revenues were $169.8 million in 2010-11, compared to $158.5 million in 2009-10. Recent trends in revenue components are shown in the following chart.
Accessible version of Recent trends in revenue components graph.
|Services of non-regulatory nature||54.3||48.3|
|Rights and privileges||9.6||8.9|
|Lease and use of property||4.6||4.5|
|Sales of goods and information products||4.6||3.5|
|Financial arrangements with other government departments and agencies||56.8||68.7|
|Revenues from joint project and cost sharing agreements||32.6||18.7|
Services of a Non-Regulatory Nature: In 2010-11, 33% or $54.3 million (30% or $48.3 million in 2009-10) 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. As discussed in the Highlights section the $6 million increase is due to increases at many IBPs, most significantly a $2.2 million increase at NRC’s Institute for Aerospace Research (NRC-IAR) due to several large new projects at both the Aerodynamics Laboratory and Gas Turbine Laboratory and a $1.2 million increase at NRC’s Centre for Surface Transportation Technology (NRC-CSTT) mainly due to increased sales at its rail division.
Rights and Privileges: Royalty revenue is earned from companies that license the rights to use NRC technologies. Royalties are typically based on a percentage of the licensee’s sales. In 2010-11, NRC generated $9.6 million in royalties, up slightly from $8.9 million in 2008-09. The main contributor of revenue earned from this income stream is NRC’s Institute for Biological Sciences (NRC-IBS) which generated over $5 million in royalties.
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 $4.6 million in 2010-11, as compared to $3.5 million in 2009-10. The largest component of revenue derived from the sale of goods and information products are sales of codes, most significantly National Model Building Codes by NRC’s Institute for Research in Construction (NRC-IRC).
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 $4.6 million in 2010-11, compared to $4.5 million in 2009-10. The year over year consistency demonstrates NRC’s ability to continuously attract external stakeholders to utilize NRC facilities, laboratories and research equipment.
Financial Arrangements with Other Government Departments and Agencies: NRC undertakes research and administers funding on behalf of other federal government departments through NRC programs. The incremental costs associated with this work are reimbursed to NRC. In 2010-11, the amount of work undertaken for other government departments was significant, totalling $56.8 million ($68.7 million in 2009-10). When excluding the effect of transfer payment programs administered by NRC on behalf of Industry Canada (CAF and TPC), which decreased by $17.3 million in 2010-11, financial arrangements with other government departments and agencies have increased by $5.4 million. As discussed in the Highlights section, significant factors behind this increase include a $2.7 million increase at NRC-CISTI due to a new ongoing contract with Health Canada for shared library services, and a $1.2 million increase at NRC-IAR from new projects with the Department of National Defence. Revenue at NRC-CSTT decreased by $2.4 million due to a decrease in revenue from the Department of National Defense, its largest client. This decrease was offset by increases of $0.3-$0.7 million at 6 other IBPs.
Revenues from Joint Project and Cost Sharing Agreements: NRC receives income in the course of collaborative research projects that involve cost sharing arrangements for work that is likely to lead to new expertise or technology. In 2010-11, collaborative funding across all sectors at NRC earned $32.6 million ($18.7 million in 2009-10). Revenue from joint research projects are recognized on a percentage of completion basis. Consequently, revenues fluctuate as NRC resources are dedicated and used to deliver the terms set out in each agreement. As such, the increase achieved in 2010-11 on revenues from joint projects and cost sharing agreements demonstrate NRC’s progress and additional resources dedicated to such projects over the previous fiscal year.
As noted in the Highlights section, NRC’s expenses decreased slightly from $1.021 billion in 2009-10 to $1.001 billion in 2010-11. The two major categories of expenses are salaries and employee benefits (46% of total expenses in 2010-11 and in 2009-10) and grants & contributions (29% of total expenses in 2010-11, 28% in 2009-10).
Accessible version of NRC’s expenses graph.
|Salaries and employee benefits||456.9||460.8|
|Grants and contributions||288.6||281.2|
|Utilities, materials and supplies||80.1||83.6|
|Professional and special services||44.7||52.4|
|Transportation and communication||19.5||23.9|
|Repairs and maintenance||17.3||18.5|
|Payment in lieu of taxes||14.0||14.5|
Salaries and Employee Benefits: Salaries and employee benefits include such costs as gross salaries and wages, overtime pay, retroactive salary adjustments, employee entitlements and allowances, severance pay, pension and medical benefits. Total NRC salaries and employee benefits have decreased by $3.9 million in 2010-11, from $460.8 million in 2009-10 to $456.9 million in 2010-11. As discussed in the Highlights section, the main causes of this decrease include a $10.6 million increase to the charge for future employee severance benefits which was offset by a $5.4 million decrease in NRC’s share of the Government’s overall cost of employee benefits such as employer provided pension contributions and health and dental insurance, and a $3.0 million decrease as a result of an increased amount of capitalized salary costs relating to construction of capitalized assets. The remainder of the decrease is the result of decreased salary expenses due to fewer full time equivalent employees (FTEs) compared to 2009-10 (primarily term, casual and student employees) following budget reductions.
Grants and Contributions: Grants and contributions increased by $7.4 million, from $281.2 million in 2009-10 to $288.6 million in 2010-11. The increase is mainly due to adjustments made in 2009-10 in IRAP TPC repayable contributions, causing a net increase of $5 million to contributions expense in 2010-11.
The greatest component of NRC Grants and Contribution expenses relates to the NRC-IRAP program. NRC-IRAP provides grants to Canadian SMEs, Organizations and Youth Programs to stimulate wealth creation for Canada through technology by enhancing innovation and commercialization capacity. As noted in the Highlights section, grants and contributions were significantly higher in both 2009-10 and 2010-11 compared to previous years due to $143 million of additional funding received through Canada’s Economic Action Plan.
The following chart illustrates NRC’s net grants and contributions categorized by major program.
Accessible version of NRC’s net grants and contributions categorized by major program pie chart.
|Industrial Research and Assistance Programs
(contributions to SMEs, Organizations and Youth Programs)
||International Telescope contributions
||Other grants and contributions|
Utilities, Materials and Supplies: Utilities, materials and supplies include expenditures such as electricity, natural gas, serial renewals, electronic data processing (EDP) equipment with cost under $5,000, fuel, software, laboratory equipment and laboratory products. Utilities, material and supply costs decreased by $3.5 million from $83.6 million in 2009-10 to $80.1 million in 2010-11. The decrease is due to reduced spending in several areas including laboratory equipment and parts and electronic supplies.
Amortization: Tangible capital assets are expected to yield benefits over several accounting periods. As such, NRC’s use of these assets to provide services is recognized as an expense on a straight-line basis over the estimated useful life of each asset class. This expense, which was $67.1 million in 2010-11 ($67.3 million in 2009-10), is referred to as amortization.
Professional and Special Services: Professional and special services decreased by $7.6 million in 2010-11, from $52.3 million in 2009-10 to $44.7 million. Main causes for this 15% decrease include $3.1M of reduced engineering services, primarily due to the completion of a large revenue contract at NRC-HIA, reduced spending on consultants by $3.7 million, as well as a $1 million reduction in legal, patent and copyright services.
Transportation and Communication: Transportation and communication expenses decreased by $4.4 million in 2010-11, from $23.9 million in 2009-10 to $19.5 million. The 18% decrease is mainly attributable to NRC’s effort of reducing travel costs. In addition to travel restrictions imposed internally, the 2009 Federal Budget imposed a two year travel expenditure ceiling, capped at 2008-09 levels, on all federal departments and agencies. The decrease in transportation and communication spending is expected to remain at lower levels in the future.
Repairs and Maintenance: NRC has a significant amount of capital investments, such as buildings, facilities, and research equipment. The repair and maintenance costs incurred of $17.3 million in 2010-11 ($18.5 million in 2009-10) represent expenditures related to the maintenance of these assets. The decrease of $1.2 million or 6% is mainly due to reduced laboratory repair costs.
Bad Debts: NRC’s decrease in bad debt expense of $5.6 million ($6 million in 2009-10 and $0.4 million in 2010-11) was mainly attributable to the NRC-IRAP TPC program (refer to Accounts Receivable discussion above).
In 2010-11, there were fewer IRAP TPC clients invoiced as a result of the gradual winding down of the program and there was an increase in the number of “negotiated exit” arrangements with IRAP TPC clients that were in financial hardship. These arrangements resulted in reductions to both the accounts receivable and bad debt expenses relating to this program.
Other: Other expenses of $11.9 million ($13.2 million in 2009-10) include, but are not limited to rental charges of $4.6 million ($4.8 million in 2009-10), award costs of $2.7 million ($3.1 million in 2009-10), and information costs of $2.2 million ($2.5 million in 2009-10).
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