Financial Statements for the Year Ended March 31, 2018 (Unaudited)

a) Parliamentary authorities

CIRNAC is financed by the Government of Canada through Parliamentary authorities. Financial reporting of authorities provided to CIRNAC do not parallel financial reporting according to generally accepted accounting principles since authorities are primarily based on cash flow requirements. Consequently, items recognized in the Statement of Operations and Departmental Net Financial Position and in the Statement of Financial Position are not necessarily the same as those provided through authorities from Parliament. Note 3 provides reconciliation between the bases of reporting.

The planned results amounts in the "Expenses" and "Revenues" sections of the Statement of Operations and Departmental Net Financial Position are consistent with the amounts reported in the Future-Oriented Statement of Operations included in the 2017-2018 Departmental Plan. These planned results include the amounts for operations transferred to Indigenous Services Canada as they were published prior to the announcement of creation of the new department. Planned results are not presented in the "Government funding and transfers" section of the Statement of Operations and Departmental Net Financial Position and in the Statement of Change in Departmental Net Debt because these amounts were not included in the 2017-2018 Departmental Plan.

b) Net cash provided by Government

CIRNAC operates within the Consolidated Revenue Fund (CRF), which is administered by the Receiver General for Canada. All cash received by CIRNAC is deposited to the CRF and all cash disbursements made by CIRNAC are paid from the CRF. The net cash provided by Government is the difference between all cash receipts and all cash disbursements, including transactions between departments of the Government.

c) Amounts due from/to the Consolidated Revenue Fund (CRF)

Amounts due from/to the CRF are the result of timing differences at year-end between when a transaction affects authorities and when it is processed through the CRF. Amounts due from the CRF represent the net amount of cash that CIRNAC is entitled to draw from the CRF without further authorities to discharge its liabilities.

d) Revenues

Revenues are recorded on the accrual basis:

• Revenues from regulatory fees are recognized in the accounts based on the services provided in the year.
• Other revenues are recognized in the period the event giving rise to the revenues accrued.
• Revenues that are non-respendable are not available to discharge CIRNAC's liabilities. While the Deputy Head is expected to maintain accounting control, he or she has no authority regarding the disposition of non-respendable revenues. As a result, non-respendable revenues are considered to be earned on behalf of the Government of Canada and are therefore presented in reduction of CIRNAC's gross revenues.

e) Expenses

Expenses are recorded on the accrual basis:

• Transfer payments are recorded as expenses when authorization for the payment exists and the recipient has met the eligibility criteria or the entitlements established for the transfer payment program. In situations where payments do not form part of an existing program, transfer payments are recorded as expenses when the Government announces a decision to make a non-recurring transfer, provided the enabling legislation or authorization for payment receives parliamentary approval prior to the completion of the financial statements. Transfer payments that become repayable as a result of conditions specified in the contribution agreement that have come into being are recorded as a reduction to transfer payment expense and as a receivable.
• Vacation pay and compensatory leave are accrued as the benefits are earned by employees under their respective terms of employment.
• Services provided without charge by other government departments for accommodation, employer contribution to the health and dental insurance plans, legal services, and workers' compensation are recorded as operating expenses at their carrying value.

f) Employee future benefits

• Pension benefits: Eligible employees participate in the Public Service Pension Plan, a multiemployer pension plan administered by the Government. CIRNAC's contributions to the plan are charged to expenses in the year incurred and represent the total departmental obligation to the Plan. The department's responsibility with regard to the Plan is limited to its contribution. Actuarial surpluses or deficiencies are recognized in the financial statements of the Government of Canada, as the Plan's sponsor.
• Severance benefits: The accumulation of severance benefits for voluntary departures ceased for applicable employee groups. The remaining obligation for employees who did not withdraw benefits is calculated using information derived from the results of the actuarially determined liability for employee severance benefits for the Government as a whole.

g) Accounts and loans receivable

Accounts and loans receivable are stated at the lower of cost and net recoverable value.

When necessary, an allowance for valuation is recorded to reduce the carrying value of accounts and loans receivable to amounts that approximate their net recoverable value.

The amount of allowance on loans receivable is determined on an assessment of collectability of each loan on an annual basis using a standard set of criteria to assess the default risk. Interest on loans receivable is calculated in accordance with the terms and conditions of each individual program.

If loans and interest receivables cannot be used to discharge CIRNAC's liabilities or to issue new loans, they are considered to be held on behalf of government and are therefore presented as an offsetting amount to CIRNAC's financial position.

h) Contingent liabilities

Contingent liabilities, including the provision for loans guarantees, are potential liabilities that may become actual liabilities when one or more future events occur or fail to occur. If the future event is likely to occur or fail to occur, and a reasonable estimate of the loss can be made, an estimated liability is accrued and an expense recorded. If the likelihood is not determinable or an amount cannot be reasonably estimated, the contingency is disclosed in the notes to the financial statements.

For loans guarantees, an allowance is recorded when it is determined that a loss is likely and the amount of the allowance is estimated taking into consideration the nature of the guarantee, loss experience and current conditions. The allowance is reviewed on an ongoing basis and changes in the allowance are recorded as expenses in the year they become known.

i) Contingent assets

Contingent assets are possible assets which may become actual assets when one or more future events occur or fail to occur. If the future even is likely to occur or fail to occur, the contingent asset is disclosed in the notes to the financial statements.

j) Environmental liabilities

An environmental liability for remediation of contaminated sites is recognized when all of the following criteria are satisfied:

• an environmental standard exists,
• contamination exceeds the environmental standard,
• CIRNAC is directly responsible or accepts responsibility,
• it is expected that future economic benefits will be given up, and
• a reasonable estimate of the amount can be made.

The liability reflects CIRNAC's best estimate of the amount required to remediate the sites to the current minimum standard for its use prior to contamination. When the cash flows required to settle or otherwise extinguish a liability are estimable, predictable and expected to occur over extended future periods, a present value technique is used. The discount rates used reflect the Government's cost of borrowing associated with the estimated number of years to complete remediation. The recorded liabilities are adjusted each year, for present value adjustments, inflation, new obligations, changes in management estimates and actual costs incurred. If the likelihood of the CIRNAC's responsibility is not determinable, a contingent liability is disclosed in the notes to the consolidated statements.

k) Tangible capital assets

All tangible capital assets and leasehold improvements having an initial cost of $10,000 or more are recorded at their acquisition cost. CIRNAC does not capitalize intangibles, works of art and historical treasures that have cultural, aesthetic or historical value, assets located on Indian Reserves and museum collections.

Capital assets include lands held for future claim settlements which are to be transferred to First Nations upon settlements.

Amortization of tangible capital assets is done on a straight-line basis over the estimated useful life of the assets as follows:

Assets under construction are recorded in the applicable capital asset class in the year they are put into service and are not amortized until they are put into service.

l) Measurement uncertainty

The preparation of these financial statements requires management to make estimates and assumptions that affect the reported and disclosed amounts of assets, liabilities, revenues and expenses reported in the financial statements and accompanying notes at March 31. The estimates are based on facts and circumstances, historical experience, general economic conditions and reflect the Government's best estimate of the related amount at the end of the reporting period. The most significant items where estimates are used are contingent liabilities, environmental liabilities, the liability for employee future benefits, the allowance for doubtful accounts and the useful life of tangible capital assets. Actual results could differ significantly from those estimated. Management's estimates are reviewed periodically and, as adjustments become necessary, they are recorded in the financial statements in the year they become known.

Environmental liabilities is subject to measurement uncertainty as discussed in Note 7 due to the evolving technologies used in the estimation of the costs for remediation of contaminated sites, the use of discounted present value of future estimated costs, and the fact that not all sites have had a complete assessment of the extent and nature of remediation. Changes to underlying assumptions, the timing of the expenditures, the technology employed, or the revisions to environmental standards or changes in regulatory requirements could result in significant changes to the environmental liabilities recorded.

m) Related party transactions

Related party transactions, other than inter-entity transactions, are recorded at the exchange amount.

Inter-entity transactions are transactions between commonly controlled entities. Inter-entity transactions, other than restructuring transactions, are recorded on a gross basis and are measured at the carrying amount, except for the following:

• Services provided on a recovery basis are recognized as revenues and expenses on a gross basis and measured at the exchange amount.
• Certain services received on a without charge basis are recorded for departmental financial statement purposes at the carrying amount.

a) Reconciliation of net cost of operations to current year authorities used

b) Authorities provided and used

In addition to the amount for authorities available for future years presented above, most of the other lapsed amounts may become available to CIRNAC in the 2019 fiscal year and in future years, but due to the timing of parliamentary approvals, these amounts had not been approved at March 31, 2018. Additional information on the use of authorities, including explanation of variances and lapsed amounts, can be found in CIRNAC's Departmental Result Report.

a) Contingent liabilities

Contingent liabilities arise in the normal course of operations and their ultimate disposition is unknown. They are grouped into three categories: claims and pending and threatened litigation, loan guarantees and environmental liabilities for contaminated sites.

b) Contingent assets

Contingent assets arise in the normal course of the operation and their ultimate disposition is unknown. CIRNAC has made claims against external parties for which recovery or gain is likely to materialize, however a reasonable estimate cannot be made. Contingent assets are not recognized in the financial statements.

a) Pension benefits

CIRNAC's employees participate in the Public Service Pension Plan (the "Plan"), which is sponsored and administered by the Government of Canada. Pension benefits accrue up to a maximum period of 35 years at a rate of 2 percent per year of pensionable service, times the average of the best five consecutive years of earnings. The benefits are integrated with Canada/Québec Pension Plan benefits and they are indexed to inflation.

Both the employees and CIRNAC contribute to the cost of the Plan. Due to the amendment of the Public Service Superannuation Act following the implementation of provisions related to Economic Action Plan 2012, employee contributors have been divided into two groups – Group 1 relates to existing plan members as of December 31, 2012 and Group 2 relates to members joining the Plan as of January 1, 2013. Each group has a distinct contribution rate.

The 2017-2018 expense amounts to $29.8 Million ($38.6 Million in 2016-2017). For Group 1 members, the expense represents approximately 1.01 times (1.12 times in 2016-2017) the employee contributions and, for Group 2 members, approximately 1.00 times (1.08 times in 2016-2017) the employee contributions.

CIRNAC's responsibility with regard to the Plan is limited to its contributions. Actuarial surpluses or deficiencies are recognized in the consolidated financial statements of the Government of Canada, as the Plan's sponsor.

b) Severance benefits

Severance benefits provided to CIRNAC's employees were previously based on an employee's eligibility, years of service and salary at termination of employment. However, since 2011 the accumulation of severance benefits for voluntary departures progressively ceased for substantially all employees. Employees subject to these changes were given the option to be paid the full or partial value of benefits earned to date or collect the full or remaining value of benefits upon departure from the public service. By March 31, 2018, substantially all settlements for immediate cash out were completed. Severance benefits are unfunded and, consequently, the outstanding obligation will be paid from future authorities.

The changes in the obligations during the year were as follows:

Direct loans portfolio

The objective of direct loans is to support active participation by First Nations and First Nations organizations and to promote a balanced exchange of ideas in negotiating the settlement of comprehensive land claims, specific claims, and treaties.

CIRNAC's direct loans portfolio has two active programs in support of this objective.

Defaulted guaranteed loans portfolio

The objective of loan guarantees is to encourage lending institutions to make loans for properties located on First Nations lands and to support access to credit markets for First Nations and First Nations organizations. Since properties located on First Nations lands cannot be used as collateral to secure the loans and lending institutions are prevented from foreclosing on these properties in the event of borrower default as prescribed by the Indian Act, lending institutions can be exposed to greater business risk in issuing loans for properties located on First Nations lands.

As guarantor, loan guarantees issued under the various programs may become receivables of the Department when, at the request of a lending institution, CIRNAC is required to honour these loan guarantees. As a result, CIRNAC makes payment to the lending institution and establishes a receivable from the First Nation or First Nation organization.

Following the creation of Indigenous Services Canada on November 30, 2017, the defaulted guarantees loans portfolio that were previously managed and recorded under CIRNAC is now under the responsibility Indigenous Services Canada.

CIRNAC had access to an annual $2 Million statutory authority for funding payments to lending institutions to honour loan guarantees. Payments made in excess of the $2 Million authority limit are charged to program expenses and funded by budgetary authorities.

There were no loan defaults in 2018 (0 in 2017) which resulted in no charge to CIRNAC's reserve for payments to cover defaults ($0 in 2017).

The significant terms and conditions of the two loan guarantee programs are as follows:

a) Common services provided without charge by other government departments

During the year, CIRNAC received services without charge from certain common service organizations related to accommodation, the employer's contribution to the health and dental insurance plans, legal services and workers' compensation coverage. These services provided without charge have been recorded at carrying value in CIRNAC's Statement of Operations and Departmental Net Financial Position as follows:

The Government has centralized some of its administrative activities for efficiency, cost-effectiveness purposes and economical delivery of programs to the public. As a result, the Government uses central agencies and common service organizations so that one department performs services for all other departments and agencies without charge. The costs of these services, such as the payroll and cheque issuance services provided by Public Services and Procurement Canada, audit services provided by the Office of the Auditor General are not included in CIRNAC's Statement of Operations and Departmental Net Financial Position.

b) Internal services provided without charge to other government departments

During the year, CIRNAC provided services without charge to Indigenous Services Canada for the provision of internal services in support of the Regional Operations and Education Social Development Policy Program. This is estimated to be approximately of $43.1 Million. Given the number of assumptions associated with the calculation of this charge, no amount have been recorded in the Department's Statement of Operations and Departmental Net Financial Position for these services provided without charge.

c) Other transactions with related parties

A portion of the other transactions with related parties as been reclassified under the transferred activities in Statement of operations, $3.0 Million as expenses in 2017-2018 and $2.9 Million as expenses in 2016-2017.

Expenses and revenues disclosed in (b) exclude common services provided without charges, which are already disclosed in (a).

a) Transfer to Indigenous Services Canada

Effective November 30, 2017, the Indigenous and Northern Affairs Canada transferred its Education and Social Development Programs and Partnership Sector and Regional Operations Sector to the department of Indigenous Services Canada in accordance with Order-in-Council P.C. 2017-1465, including the stewardship responsibility for the assets and liabilities related to the sectors.

Accordingly, Indigenous and Northern Affairs Canada transferred the following assets and liabilities to Indigenous Services Canada during 2017-2018:

In addition, the 2016-17 comparative figures have been reclassified on the Statement of Operations and Departmental Net Financial Position to present separately, the revenues and expenses of the transferred operations.

b) Transfer to Polar Knowledge Canada

Effective June 1, 2015, the Department transferred responsibility for the Arctic Science and Technology program to Polar Knowledge Canada in accordance with Order in Council P.C 2015-0581, including the stewardship responsibility for the assets and liabilities related to the program. The management of the construction of the Canadian High Artic Research Station will remain within CIRNAC until completion of this major crown project, which is expected to be in 2018-2019. Assets are transferred from CIRNAC to Polar Knowledge Canada in phases as the construction approaches its final stages. In 2017-2018, the department transferred Machinery and Equipment with net book value of $202,217 to Polar Knowledge Canada.

2.1 Internal control management

CIRNAC has a well-established governance and accountability structure to support departmental assessment efforts and oversight of its system of internal control. A departmental internal control management framework, approved by the Deputy Head, is in place and includes:

• Organizational accountability structures as they relate to internal control management to support sound financial management, including roles and responsibilities of senior managers in their areas of responsibility for control management;
• Values and ethics;
• Ongoing communication and training on statutory requirements, and policies and procedures for sound financial management and control; and
• At least semi-annual monitoring of and regular updates on internal control management, as well as the provision of related assessment results and action plans to the Deputy Head and departmental senior management and, as applicable, the Departmental Audit Committee.

The Departmental Audit Committee provides advice to the Deputy Head on the adequacy and functioning of the department's risk management, control and governance frameworks and processes.

2.2 Service arrangements relevant to financial statements

CIRNAC relies on other organizations for the processing of certain transactions that are recorded in its financial statements as follows:

Common arrangements:

• Public Services and Procurement Canada centrally administers the payments of salaries and the procurement of goods and services in accordance with the CIRNAC Delegation of Authority, and provides accommodation services;
• The Department of Justice Canada provides legal services to CIRNAC.
• The Treasury Board of Canada Secretariat provides CIRNAC with information used to calculate various accruals and allowances, such as the accrued severance liability; and
• Shared Services Canada provides information technology (IT) infrastructure services to CIRNAC in the areas of data centre and network services. The scope and responsibilities are addressed in the interdepartmental arrangements between Shared Services Canada and CIRNAC.

Specific Arrangements

• Health Canada provides CIRNAC with a SAP financial system platform to capture and report all financial transactions.
• CIRNAC provides internal services such as finance, human resources and information technology for Indigenous Services Canada under a Memorandum of Understanding between the departments.
• CIRNAC provides host services to Health Canada and Indigenous Services Canada for the Grants and Contributions Information Management System (GCIMS).
• Public Service & Procurement Canada provides platform access to its human resources management system of record (MyGCHR) to CIRNAC.
• CIRNAC provides internal services such as finance, human resources and information technology for Canadian Northern Economic Development Agency under a Memorandum of Understanding between the departments.

4.1 Progress on ongoing risk-based monitoring plan during fiscal year 2017-2018

CIRNAC continued to conduct its ongoing risk-based monitoring according to the previous fiscal year's rotational plan as shown in the following table.

4.2 Action plan for the next fiscal year and subsequent years

CIRNAC's rotational ongoing risk-based monitoring plan over the next five years, based on an annual validation of the high-risk processes and controls and related adjustments to the ongoing monitoring plan as required, is shown in the following table.