Supplementary Statement

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Exchange Fund Account

Table Summary

The table presents, in millions of dollars, a two-year comparative of the Statement of Financial Position as at 31 March. It consists of three columns: a detailed listing of components; current year; previous year. The first series of rows presents the financial assets divided into cash and cash equivalents and investments followed by the total investment and total financial assets. The final row presents the liabilities.

(in millions of Canadian dollars)

Statement of Financial Position (unaudited)
as at 31 March

  2015 2014
Financial assets    
Cash and cash equivalents (Note 2, Note 3) 695 677
Investments (Note 2)    
Marketable securities (Note 3) 81,442 67,054
Special drawing rights (Note 3) 9,818 9,628
Gold (Note 3) 6 6
Total investments 91,266 76,688
Total financial assets 91,961 77,365
Liabilities    
Due to the Consolidated Revenue Fund (Note 4) 91,961 77,365

Paul Rochon
Deputy Minister
Department of Finance

Randy Larkin, CPA, CMA
Chief Financial Officer
Department of Finance

Table Summary

The table presents, in millions of dollars, a two-year comparative of the Statement of Operations for the year ended 31 March. It consists of three columns: a detailed listing of components; current year; previous year. The first series of rows presents the net revenues from investments followed by a total. The next row presents the net foreign exchange gain (loss). The final row presents the net revenue for the year.

(in millions of Canadian dollars)

Statement of Operations (unaudited)
for the year ended 31 March

  2015 2014
Net revenue from investments    
Marketable securities    
Interest 1,152 1,130
Gains on sales of marketable securities 238 294
Transaction costs and other (negative 4) (negative 1)
Interest on cash and cash equivalents   1
Interest on special drawing rights 6 8
Gains on sales of gold   12
Total net revenue from investments 1,392 1,444
Other    
Net foreign exchange gain (loss) (negative 552) 61
Net revenue for the year (Note 2) 840 1,505

Notes to the Financial Statements for the year ended 31 March 2015 (unaudited)

1. Authority and Objectives

The Exchange Fund Account (the Account) is governed by Part II of the Currency Act. The Account is in the name of the Minister of Finance and is administered by the Bank of Canada as fiscal agent. The Financial Administration Act does not apply to the Account.

The legislative mandate of the Account is to aid in the control and protection of the external value of the Canadian dollar. The Minister of Finance empowers the Account to acquire or sell assets deemed appropriate for this purpose, in accordance with the Account's Statement of Investment Policy.

Assets held in the Account are managed to provide foreign‑currency liquidity to the government and to promote orderly conditions for the Canadian dollar in foreign exchange markets, if required. Canada's current policy is to intervene in foreign exchange markets on a discretionary, rather than a systematic, basis and only in the most exceptional of circumstances. Since September 1998, no transactions have been aimed at moderating movements in the value of the Canadian dollar.

In accordance with the Currency Act, the net revenue for the year is paid to or charged to the Consolidated Revenue Fund (CRF) of the Government of Canada within three months after the end of the fiscal year, and the Minister of Finance reports to Parliament on the operations of the Account within the first 60 days on which Parliament is sitting after the end of the fiscal year. These statements have been prepared by the Department of Finance.

2. Significant accounting policies

As stipulated in the Currency Act, the financial statements of the Account are prepared in a manner consistent with the accounting policies used by the Government of Canada to prepare its financial statements.

a. Revenue recognition

Revenue from investments is recognized on an accrual basis and includes interest earned, the amortization of premiums and discounts using the straight‑line method, gains or losses on sales of securities and on sales of gold, and revenues from securities lending activities. Interest is accrued on short‑term deposits, deposits held under repurchase agreements, marketable securities, and special drawing rights (SDRs).

b. Expense recognition

The Account's administrative, custodial, and fiscal agency services are provided and paid for by the Bank of Canada and the Department of Finance. These costs have not been recognized in the Statements.

In addition, the notional cost of the funding of the Account's assets and advances from the CRF are not recognized in the Statements.

c. Financial assets
Cash and cash equivalents

Cash and cash equivalents consists of cash and short‑term deposits. Short‑term deposits are measured at cost and are generally held to maturity. The resulting revenue is included in interest on cash and cash equivalents.

Deposits held under repurchase agreements

Deposits held under repurchase agreements are measured at cost. The resulting revenue is included in income from marketable securities. At the reporting date, and in the prior year, the Account did not hold deposits held under repurchase agreements.

Marketable securities

Purchases and sales of securities are recognized at the settlement dates. Marketable securities are measured at cost and are adjusted for amortization of purchase discounts and premiums on a straight‑line basis over the term to maturity of the security. The carrying value of marketable securities includes accrued interest.

On de‑recognition of a financial asset measured at amortized cost, the difference between the asset's carrying amount and the sum of the consideration received and receivable is recognized in net revenue.

Short‑term deposits, deposits held under repurchase agreements and marketable securities are written down to their recoverable amount in the event of an other‑than‑temporary impairment in value. Write‑downs to reflect other‑than‑temporary impairment are recognized in Total net revenue from investments in the Statement of Operations.

Securities lending program

Under the securities lending program, the Account has agency agreements with two major financial institutions. Loans of securities are effected on behalf of the Account by these agents, who guarantee the loans and obtain collateral of equal or greater value from approved counterparties. These transactions can range from 1 to 31 days in duration. The securities loaned continue to be accounted for as investment assets. Income on securities lending transactions is included in Total net revenue from investments on the Statement of Operations.

Special Drawing Rights

The SDR serves as the unit of account for the International Monetary Fund (IMF) and its value is based on a "basket" of four major currencies: the euro, the US dollar, the British pound sterling and the Japanese yen.

SDRs are initially recognized at cost and are subsequently remeasured at each reporting date into Canadian dollars at market exchange rates.

Gold

Gold is carried in the Account at a value of 35 SDRs per fine ounce.

Translation of foreign currencies and special drawing rights

Assets denominated in foreign currencies and SDRs are translated into Canadian‑dollar equivalents at the rates prevailing as of the date of the Statements, which were as follows:

Table Summary

The table presents a two-year comparative of the translation of foreign currencies and special drawing rights into Canadian dollar equivalents. It consists of three columns: a detailed listing of components; current year; previous year.

Translation of foreign currencies and special drawing rights

  2015 2014
US dollars 1.2666 1.1055
Euros 1.3615 1.5230
Japanese yen 0.0106 0.0107
British pound sterling 1.8792 1.8430
SDRs 1.7473 1.7087

Gains or losses resulting from the translation of assets and advances from the CRF denominated in foreign currencies and SDRs, as well as from transactions throughout the fiscal year, are recognized as net foreign exchange gains or losses and are included in the Statement of Operations.

Investment revenue in foreign currencies and SDRs is translated into Canadian‑dollars at the foreign exchange rates prevailing on the date the revenue is earned.

d. Use of estimates and measurement uncertainty

The preparation of the Statement requires management to make estimates and assumptions based on information available as of the date of the Statements. Significant estimates are primarily in the area of the fair values of financial instruments, including any impairment (Note 3).

3. Financial Instruments

Table Summary

The table presents, in millions of dollars, a two-year comparative of the fair value of financial assets. It consists of three columns: a detailed listing of components; 31 March of the current year; 31 March of the previous year each divided into the same two columns; carrying value and fair value. The first series of rows presents the cash and cash equivalents listed in different foreign currencies and short-term deposits followed by a total. The next series of rows presents the investments listed by marketable securities in different foreign currencies followed by a total, by SDRs and gold followed by a total. The final row presents the total financial assets.

(in millions of Canadian dollars)

Fair value of financial assets

  31 March 2015 31 March 2014
Carrying amount Fair value Carrying amount Fair value
Cash and cash equivalents        
US dollars 441 441 391 391
Euros 189 189 51 51
Japanese yen 17 17 10 10
British pound sterling 48 48 2 2
Short‑term deposits     223 223
Total cash and cash equivalents 695 695 677 677
Investments        
Marketable securities        
US dollars 60,558 61,895 46,636 47,423
Euros 17,685 19,088 19,903 21,037
Japanese yen 794 797 316 318
British pound sterling 2,405 2,461 199 198
Total marketable securities 81,442 84,241 67,054 68,976
SDRs 9,818 9,818 9,628 9,628
Gold 6 144 6 137
Total investments 91,266 94,203 76,688 78,741
Total financial assets 91,961 94,898 77,365 79,418

The estimated fair value of cash and cash equivalents approximates their carrying value, given their short term to maturity.

The estimated fair values of marketable securities are based on quoted market prices and include accrued interest. If such prices are not available, the fair value is determined by discounting future cash flows using an appropriate yield curve. During the year, and in the prior year, no marketable securities were written down to reflect other‑than‑temporary impairment in value.

Since SDRs are translated into Canadian‑dollar equivalents at the rates prevailing at the Statement date, the carrying value approximates fair value on the reporting date.

The estimated fair value of gold is based on the London gold fixing of $1,503.45 at 31 March 2015 ($1,428.03 at 31 March 2014) per fine ounce.

Credit risk

Credit risk is the risk that a counterparty to a financial contract will cause a loss to the Account by failing to discharge its obligations in accordance with agreed upon terms.

To ensure that the Account's asset portfolio is prudently diversified with respect to credit risk, the Statement of Investment Policy prescribed by the Minister of Finance specifies limits on holdings by class of issuer (sovereign, agency, supranational, corporation or commercial financial institution), by any one issuer or counterparty, and by type of instruments.

The Statement of Investment Policy also specifies the treatment of holdings that do not meet eligibility criteria or limits due to exceptional circumstances such as ratings downgrades.

With respect to the Statement of Investment Policy, the Account may hold fixed income securities of highly rated sovereigns, central banks, government‑supported entities and supranational organizations. To be eligible for investment, an entity must have a credit rating in the top seven categories from two of four designated rating agencies (Standard & Poor's, Moody's, Fitch, and Dominion Bond Rating Service). The Account may also make deposits and execute other transactions, up to prescribed limits, with commercial financial institutions that meet the same rating criteria.

As stipulated in the Currency Act, the Minister may appoint agents to perform services concerning the Account. Through the securities‑lending program, agents can lend securities only up to a prescribed maximum amount and only to a list of approved counterparties. Each borrower must enter into a Securities Loan Agreement with at least one of the agents. Borrowers are also required to provide collateral for securities borrowed, according to a specific list approved by the Government. Collateral is limited to specific security types, terms to maturity, and credit ratings.

The agents also provide an indemnity in the event of default by the borrower. The Account enters into securities lending transactions in order to increase its return on investments.

Market risk

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market prices. Market risk comprises three types of risk: interest rate risk, currency risk, and other price risk. Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market interest rates. Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Other price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices, other than those arising from interest rate risk or currency risk. The Account is not exposed to significant other price risk.

Interest rate and currency risks are managed, with due consideration of the risk to the Government of Canada, through the asset‑liability management policy. This policy utilizes a strategy of matching the duration structure and the currency of the Account's assets with the foreign currency borrowings of the Government of Canada that notionally finance the Account's assets. Other price risks are mitigated by holding high quality liquid assets.

Liquidity risk

Liquidity risk is the risk that an entity will encounter difficulty in meeting its obligations associated with financial liabilities. Liquidity risk is minimized by limiting the portion of the Government of Canada's foreign liabilities that needs to be renewed within a one year period. In addition, liquidity risk is mitigated by holding short‑term investments that are matched to the Government of Canada's maturing liabilities in foreign currencies.

Securities lending

As at 31 March 2015, the Account's investments included securities held by its agents in connection with the securities lending program. Investments with a fair market value of $387 million ($316 million at 31 March 2014) and an amortized cost of $380 million ($332 million at 31 March 2014) were being used in the securities lending program. A higher fair value compared to amortized cost is attributable to regular market fluctuations.

No securities were lent to eligible borrowers at the reporting date (nil at 31 March 2014).

4. Due to the Consolidated Revenue Fund (CRF)

The Account is funded by the Government of Canada through interest‑free advances from the CRF. Advances to the Account from the CRF are authorized by the Minister under the terms and conditions prescribed by the Minister of Finance. Pursuant to Section 19 of the Currency Act, these advances are limited to US $150 billion by order of the Minister of Finance effective March 26, 2015.

The CRF advances the proceeds of the Government of Canada's borrowings in foreign currencies and allocations of SDRs by IMF to the Account. Subsequent repayments of foreign currency debt are made using the assets of the Account and result in reductions of foreign currency advances from the CRF. Interest payable by the Government of Canada on borrowings in foreign currencies and charges on allocations of SDRs to Canada are charged directly to the CRF.

The Account requires Canadian‑dollar advances to settle its purchases of foreign currencies. Canadian dollars received from sales of foreign currencies are remitted to the CRF. This, together with foreign currency payments made on behalf of the Government of Canada causes reductions in the level of outstanding Canadian‑dollar advances, and can result in overall net deposits of Canadian‑dollars by the Account with the CRF.

At 31 March, advances from the CRF were comprised of the following currencies:

Table Summary

The table presents, in millions of Canadian dollars, a two-year comparative of the currency composition of the advances from the CRF. It consists of three columns: a detailed listing of components; current year; previous year. The first series of rows presents the foreign currencies and SDRs followed by a subtotal. The next row presents the Canadian dollars. The next row presents the net revenue. The final row presents the total.

(in millions of Canadian dollars)

Currency composition of advances from the CRF

  2015 2014
US dollars 63,301 50,846
Euros 16,822 18,725
Japanese yen 2,440 317
British pound sterling 797 201
SDRs 8,035 7,858
Subtotal — Foreign currencies 91,395 77,947
Canadian dollars (negative 274) (negative 2,087)
Net revenue 840 1,505
Total 91,961 77,365

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