CORCAN Revolving Fund

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Statement of management responsibility

We have prepared the accompanying financial statements of the CORCAN Revolving Fund as required by and in accordance with the Treasury Board Policy on Special Revenue Spending Authorities. These financial statements were prepared by the management of the Fund in accordance with the significant accounting policies set out in note 2 of the financial statements, on a basis consistent with that of the preceding year.

Responsibility for the integrity and objectivity of these financial statements rests with the management of the Fund. To assure maximum objectivity and freedom from bias, the financial data contained in these financial statements has been examined by the audit committee of the Department. The information included in these financial statements is based on management's best estimates and judgement with due consideration given to materiality. To fulfil its accounting and reporting responsibilities, the Fund maintains a set of accounts which provides a centralized record of the Fund's financial transactions. Financial information submitted to the Public Accounts of Canada and included in the Departmental Performance Report is consistent with these financial statements.

The Fund's directorate of financial services develops and disseminates financial management and accounting policies and issues specific directives which maintain standards of accounting and financial management. The Fund maintains systems of financial management and internal control which gives due consideration to costs, benefits and risks. They are designed to provide reasonable assurance that transactions are properly authorized by Parliament, are executed in accordance with prescribed regulations, and are properly recorded to maintain accountability of Government funds and safeguard the assets under the Fund's administration. Financial management and internal control systems are augmented by the maintenance of internal audit programs. The Fund also seeks to assure the objectivity and integrity of data in its financial statements by the careful selection, training and development of qualified staff, by organizational arrangements that provide appropriate divisions of responsibility and by communication programs aimed at ensuring that its regulations, policies, standards and managerial authorities are understood throughout the organization.

Management has presented the financial statements to the Fund's external auditor, Ernst & Young, who audited them and has provided an independent opinion which has been appended to these financial statements.

Approved by:

Kelly Hartle
A/Chief Executive Officer
CORCAN

Chadi Haddad, MBA, CPA, CMA
Director, CORCAN Financial Services
CORCAN

May 24, 2017
Ottawa, Canada

Statement of authority (used) provided (unaudited) for the year ended March 31

(in thousands of dollars)

  2017 2016
EstimatesLink to footnote 1 Actual EstimatesLink to footnote 1 Actual
Net results 2,672 (negative 468)
Items not requiring use of funds 1,644 1,190 2,007 1,670
Operating source of funds 1,644 3,862 2,007 1,202
Items requiring use of funds
Net tangible capital assets acquisitions (negative 850) (negative 174) (negative 200) (negative 22)
Transition payments for implementing salary payments in arrears (negative 5)
Net other assets and liabilities (negative 150) 229 (negative 700) (negative 1,264)
Authority provided (used) 644 3,917 1,107 (negative 89)

Reconciliation of unused authority (unaudited) as at March 31

(in thousands of dollars)

  2017 2016
Debit (credit) balance in the accumulated net charge against the Fund's authority account 15,622 10,598
Payables charged against the appropriation at year-end (negative 14,371) (negative 15,044)
Receivables credited to the appropriation at year-end 1,822 3,602
Net authority provided (used), end of year 3,073 (negative 844)
Authority limit 5,000 5,000
Unused authority carried forward 8,073 4,156

Independent auditors' report

To the Commissioner of Correctional Service Canada

We have audited the accompanying financial statements of the CORCAN Revolving Fund, which comprise the statement of financial position as at March 31, 2017 and the statements of operations and net assets and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. These financial statements have been prepared by management of the CORCAN Revolving Fund to comply with section 6.4 of the Treasury Board of Canada's Policy on Special Revenue Spending Authorities.

Management's responsibility for the financial statements

Management is responsible for the preparation of these financial statements in accordance with section 6.4 of the Treasury Board of Canada's Policy on Special Revenue Spending Authorities and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors' responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements of the CORCAN Revolving Fund as at and for the year ended March 31, 2017 are prepared, in all material respects, in accordance with section 6.4 of the Treasury Board of Canada's Policy on Special Revenue Spending Authorities.

Basis of accounting and restriction on use

Without modifying our opinion, we draw attention to note 2 to the financial statements, which describes the basis of accounting. The financial statements are prepared to assist the CORCAN Revolving Fund to comply with the financial reporting provisions of the Treasury Board of Canada referred to above. Our auditors' report is intended solely for the information and use of the CORCAN Revolving Fund and the Treasury Board of Canada and should not be used by parties other than CORCAN Revolving Fund or the Treasury Board of Canada.

Ernst & Young LLP
Chartered Professional Accountants,
Licensed Public Accountants

May 24, 2017
Ottawa, Canada

Statement of financial position as at March 31

(in thousands of dollars)

  2017 2016
Assets
Financial assets
Accounts receivable (note 4) 3,840 5,309
Inventories (note 5) 12,594 11,848
Subtotal 16,434 17,157
Non-financial assets
Capital assets, net (note 6) 3,247 4,473
Total 19,681 21,630
Liabilities
Accounts payable (note 7) 11,834 12,834
Deferred revenue 1,517 221
Vacation pay and salary accrual 3,910 3,419
Employee termination benefits (note 8) 1,178 1,547
Lease obligation for tangible capital assets (note 15) 96 115
Subtotal 18,535 18,136
Net assets (note 10) 1,146 3,494
Total 19,681 21,630

Statement of operations and net assets for the year ended March 31

(in thousands of dollars)

  2017 2016
Revenues (note 3 and note 11) 70,051 73,287
Cost of goods sold (note 11) 69,016 74,240
Gross Margin 1,035 (negative 953)
Other revenues
Training, correctional and other fees (note 3) 21,168 20,197
Miscellaneous 154 152
Subtotal 21,322 20,349
Expenses (note 12)
National/regional headquarters 7,360 7,442
Employment and employability programs 9,140 8,384
Selling and marketing 3,185 4,038
Subtotal 19,685 19,864
Net results 2,672 (negative 468)
Net assets, beginning of year 3,494 5,685
Net financial resources provided and change in the accumulated net charge against the Fund's authority, during the year (negative 5,024) (negative 1,719)
Transfer of the transition payments for implementing salary payments in arrears (note 14) (negative 5)
Other 4 1
Net assets, end of year (note 10) 1,146 3,494

Statement of cash flows for the year ended March 31

(in thousands of dollars)

  2017 2016
Operating activities
Net results 2,672 (negative 468)
Add (deduct) items not involving cash
Termination benefits expense (note 8) (negative 195) 29
Amortization (note 6) 1,375 1,569
Loss on disposal/write down of capital assets 10 72
Subtotal 3,862 1,202
Changes in non-cash working capital balances related to operations
Accounts receivable 1,469 (negative 1,877)
Inventories (negative 746) (negative 1,629)
Other 1
Employee termination benefits (note 8) (negative 174) (negative 171)
Accounts payable (negative 1,000) 3,909
Deferred revenues 1,296 114
Vacation pay and salaries accrual 491 197
Transition payments for implementing salary payments in arrears (note 14) (negative 5)
Net financial resources provided by operating activities 5,198 1,741
Investing activities
Capital asset acquisitions (negative 155) (negative 16)
Lease payments of capital assets (negative 19) (negative 6)
Net financial resources used in investing activities (negative 174) (negative 22)
Net financial resources provided and change in the accumulated net charge against the Fund's authority 5,024 1,719
Accumulated net charge against the Fund's authority, beginning of year 10,598 8,879
Accumulated net charge against the Fund's authority, end of year (note 10) 15,622 10,598

Notes to the financial statements for the year ended March 31, 2017

1. Authority and purpose

The CORCAN Revolving Fund ("CORCAN" or "the Fund") is a special operating agency within Correctional Service Canada ("CSC") financed by way of a Revolving Fund. CORCAN was established under Appropriation Act No. 4, 1991 – 1992, which authorized the operation of the Fund effective April 1, 1992 in accordance with terms and conditions prescribed by the Treasury Board of Canada ("Treasury Board"). CORCAN's purpose is to aid in the safe reintegration of offenders into Canadian society by providing employment and training opportunities to offenders incarcerated in federal penitentiaries and, for brief periods of time, after they are released into the community. The Fund has a continuing non-lapsing authority from Parliament to make payments out of the Consolidated Revenue Fund for working capital, capital acquisitions and temporary financing of accumulated operating deficits, the total of which is not to exceed $5,000,000 at any time. An amount of $15,218,000 representing net assets assumed by the Fund was charged to this authority when the Fund became operative on April 1, 1992. The Fund is a non-taxable entity.

2. Significant accounting policies

(a) Basis of accounting

These financial statements have been prepared in accordance with the significant accounting policies set out below to comply with the Treasury Board's reporting requirements for revolving funds prescribed by the Receiver General for Canada. The basis of accounting used in these financial statements differs from the Canadian Public Sector Accounting Standards as follows:

(b) Recognition of revenue and expenses

Except as noted below, the Fund recognizes revenue when persuasive evidence of a final agreement exists, delivery has occurred and services have been rendered, the selling price is fixed or determinable and collectability is reasonably assured.

Revenue is accounted for in the period in which the underlying transaction or event occurred that gave rise to the revenue. Revenue that has been received but not yet earned is recorded as deferred revenue.

For construction contracts, the percentage-of-completion method of accounting is used. Degree of completion is determined by comparing direct costs incurred to date to the total direct costs anticipated for the entire contract. The effect of changes to the total estimated income for each contract is recognized in the period in which the determination is made, and losses, if any, are recognized fully when anticipated.

Expenses are recorded in the period they are incurred. Vacation pay and compensatory leave are expensed as the benefits accrue to employees under their respective terms of employment.

(c) Net cash provided by government

CORCAN operates within the Consolidated Revenue Fund, which is administered by the Receiver General of Canada. All cash received by CORCAN is deposited to the Consolidated Revenue Fund. The net cash provided by the federal government is the difference between all cash receipts and all cash disbursements including transactions between departments of the federal government.

(d) Accounts receivable

Accounts receivable are stated at amounts expected to be ultimately realized; an allowance is made for receivables where recovery is considered uncertain.

(e) Inventories

Raw materials, finished goods and work in progress inventories are valued at the lower of cost and net realizable value. The Fund makes provisions for obsolete inventory on a site-by-site basis.

(f) Capital assets

Capital assets with an initial cost of $10,000 or greater are recorded at cost and are amortized on a straight-line basis over their estimated useful lives commencing in the month after they are put into service, as follows:

Equipment 10 years
Leasehold improvements term of the lease
Vehicle fleet 5 years
Other 3 years

(g) Pension plan

Employees of the Fund are covered by the Public Service Retirement Pension Plan (the "Plan") administered by the Government of Canada. Under present legislation, contributions made by the Fund to the Plan are limited to an amount equal to the employee's contributions on account of current service. These contributions represent the total pension obligations of the Fund and are charged to operations on a current basis. The Fund is not required under present legislation to make contributions with respect to actuarial deficiencies of the Public Service Superannuation Account and/or with respect to charges to the Consolidated Revenue Fund for the indexation of payments under the Supplementary Retirement Benefits Act.

(h) Employee termination benefits

Employees of CORCAN, as stipulated under their previous collective agreement, were entitled to termination benefits under labour contracts or conditions of employment. These benefits were accrued as employees rendered the necessary services. The obligation relating to the benefits earned by employees is calculated using information derived from the results of the actuarially determined liability for employee termination benefits for the government as a whole.

(i) Sick leave

Employees are permitted to accumulate unused sick leave. However, such leave entitlements may only be used in the event of an illness. As per current government practice, unused sick leave upon employee termination is not payable to the employee. Accordingly, no amount has been accrued in these financial statements.

(j) Financial instruments

The fair value of the financial instruments approximates costs unless otherwise specified. The Fund's financial instruments consist of accounts receivable and accounts payable. It is management's opinion that the Fund is not exposed to significant interest rate, currency or credit risks arising from these financial instruments.

(k) Measurement uncertainty

The preparation of these financial statements in accordance with the Treasury Board's accounting policies requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses reported in the financial statements. At the time of preparation of the statements, management believes the estimates and assumptions used to be reasonable. The most significant items where estimates are used are the liability for employee termination benefits and the useful lives of capital assets. Actual results could significantly differ from these estimates. Management's estimates are reviewed periodically and, as adjustments become necessary, they are recorded in the financial statements in the period they become known.

3. Related party transactions

CORCAN is related as a result of common ownership to all Government of Canada departments, agencies, and Crown corporations. CORCAN enters into transactions with these entities in the normal course of business and on normal trade terms.

During the year, CSC, the parent organization of CORCAN, has provided and will continue to provide CORCAN with the use of existing infrastructure including buildings and shops as well as maintenance of said facilities, financial systems, human resource services and corporate financial services. The cost of these services is not included as an expense in CORCAN's statement of operations and net assets.

The correctional and training fees are provided by CSC to offset salary and operating costs that cannot be recovered by CORCAN through the sale of goods and services due to the correctional environment in which it operates.

The Government of Canada has structured some of its administrative activities for efficiency and cost-effectiveness purposes so that one department performs these on behalf of all without charge. The costs of these services, which include payroll, IT, desktop and other telecommunication support and services, cheque issuance services and legal services provided by Public Works and Government Services Canada, Shared Services Canada and Justice Canada, are not included as an expense in CORCAN's statement of operations and net assets.

CORCAN entered into the following transactions with the CSC and other government departments:

(in thousands of dollars)

  2017 2016
Correctional Service Canada
Trade revenues 22,245 17,325
Training, correctional and other fees 21,168 20,197
Other Government Departments
Trade revenues 43,822 48,712
Total 87,235 86,234

4. Accounts receivable

Accounts receivable consist of the following:

(in thousands of dollars)

  2017 2016
Government of Canada 1,822 3,602
Outside parties 2,225 1,758
Subtotal 4,047 5,360
Allowance for doubtful accounts (negative 207) (negative 51)
Total 3,840 5,309

5. Inventories

Inventories consist of the following:

(in thousands of dollars)

  2017 2016
Raw materials 6,580 6,225
Work in progress 317 829
Finished goods 6,305 5,151
Subtotal 13,202 12,205
Provision for obsolete inventory (negative 608) (negative 357)
Total 12,594 11,848

6. Capital assets

Capital assets consist of the following:

(in thousands of dollars)

Cost Opening balance Acquisitions Disposals and write-offs Closing balance
Equipment 27,085 680 (negative 558) 27,207
Leasehold improvements 1,343 1,343
Vehicle fleet 2,108 91 (negative 30) 2,169
Equipment under capital lease 120 120
Other 114 114
Total 30,770 771 (negative 588) 30,953
Accumulated amortization Opening balance Amortization Disposals and write-offs Closing balance
Equipment 22,860 1,271 36 24,167
Leasehold improvements 1,280 59 1,339
Vehicle fleet 2,035 21 (negative 2) 2,054
Equipment under capital lease 8 24 32
Other 114 114
Total 26,297 1,375 34 27,706
Net book value 2017 2016
Equipment 3,040 4,225
Leasehold improvements 4 63
Vehicle fleet 115 73
Equipment under capital lease 88 112
Other
Total 3,247 4,473

7. Accounts payable

Accounts payable consist of the following:

(in thousands of dollars)

  2017 2016
Government of Canada 2,744 3,943
Outside parties 9,090 8,891
Total 11,834 12,834

8. Employee future benefits

Pension benefits: CORCAN's employees participate in the Public Service Pension Plan ("PSPP"), 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% per year of pensionable service, times the average of the best five consecutive years of earnings. The benefits are integrated with Canada/Québec Pension Plans' benefits and they are indexed to inflation.

Both plan members and CORCAN contribute to the cost of the Plan. Effective January 2013, important changes were made to the Public Service Superannuation Act (the act governing the PSPP) through the Jobs and Growth Act, 2012, including:

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

Termination Benefits: Following the ratification of new collective agreements, the unionized employees in the Core Public Administration have accepted the elimination of severance benefits for voluntary separation, namely for retirement or resignation. The Treasury Board had subsequently eliminated severance benefits for voluntary separation for the executive and non-represented employees. As at March 31, 2014, there were no CORCAN employees with collective agreements where severance pay had not been eliminated.

Employees were given three payment options: a single and immediate cash-out of their severance pay, a deferral of this payment to when they terminate their employment or a combination of both options.

The employee termination benefits were adjusted using an actuarial rate provided by the Treasury Board for the government as a whole.

Information about the termination benefits, measured as at March 31, is as follows:

(in thousands of dollars)

  2017 2016
Accrued benefit obligation, beginning of the year 1,547 1,689
Expenses for the year (negative 195) 29
Benefits paid during the year (negative 174) (negative 171)
Accrued benefit obligation, end of the year 1,178 1,547

9. Contractual obligations

CORCAN is committed to pay under the terms of lease agreements a total amount of $1,571,634. These commitments are related to the Kingston warehouse, the lease for national corporate office space and other minor commitments. The amount paid during the year for the Kingston warehouse was $1,100,000 (2016 – $1,152,000).

Future yearly payment amounts are estimated as follows:

(in thousands of dollars)

2018 1,572
2019 1,109
2020 1,101
2021 460
2022 and thereafter 2
Total 4,244

10. Net assets

Net assets consist of the following:

(in thousands of dollars)

  2017 2016
Contributed capital 30,542 30,542
Accumulated net charges against the Fund's authority (negative 15,622) (negative 10,598)
Accumulated deficit (negative 13,778) (negative 16,446)
Transition payments for implementing salary payments in arrears (negative 5)
Other 4 1
Net assets, end of year 1,146 3,494

Contributed capital represents the value of capital assets financed from contributed capital at the inception of the Fund.

Accumulated net charge against the Fund's authority represents the amount of the Fund's non-lapsing authority that has been provided (used) since inception of the Fund.

The accumulated deficit is an accumulation of each year's surpluses (losses).

11. Segmented information

Segmented information consists of the following:

(in thousands of dollars)

Year ended March 31, 2017 Manufacturing Construction Textile Services Other Total
Revenues 41,188 13,267 9,801 5,795 70,051
Cost of goods sold 41,123 12,056 9,613 6,224 69,016
Gross margin 65 1,211 188 (negative 429) 1,035
Identifiable assets
Accounts receivable 1,696 656 322 503 663 3,840
Inventories 9,578 2,575 441 12,594
Capital assets, net 2,628 79 107 369 64 3,247
Amortization of capital assets 996 15 43 243 78 1,375
Year ended March 31, 2016 Manufacturing Construction Textile Services Other Total
Revenues 45,567 12,123 9,087 6,510 73,287
Cost of goods sold 46,449 11,849 8,551 7,391 74,240
Gross Margin (negative 882) 274 536 (negative 881) (negative 953)
Identifiable assets
Accounts receivable 1,435 470 172 900 2,332 5,309
Inventories 8,627 2,801 420 11,848
Capital assets, net 3,622 35 59 615 142 4,473
Amortization of capital assets 1,147 34 25 190 173 1,569

12. Expenses

The following table presents details of national and regional headquarters, employment and employability programs, and selling and marketing expenses by category:

(in thousands of dollars)

  2017 2016
Salaries 8,425 9,224
Employee benefits 2,184 1,867
Professional and special services 6,291 6,658
Rentals 1,514 1,247
Transportation and communications 374 262
Utilities, materials and supplies 489 308
Other expenditures 327 225
Purchased repair and maintenance 76 70
Information 5 3
Total 19,685 19,864

13. Contingencies

In the normal course of operations, CORCAN is involved in various claims and legal proceedings. It is the opinion of management that no significant claims exist as at March 31, 2017.

14. Transition payments for implementing salary payments in arrears

The Government of Canada implemented salary payments in arrears in 2014 – 2015. As a result, a one-time payment was issued to employees and will be recovered from them in the future. The transition to salary payments in arrears forms part of the transformation initiative that replaces the pay system and also streamlines and modernizes the pay processes. This change to the pay system had no impact on the expenses of the Fund. However, it did result in the use of authorities by the Fund and impacted the accumulated net charge against the Fund's authority. Prior to the end of fiscal 2015, transition payments for implementing salary payments in arrears were transferred to a central account administered by Public Works and Government Services Canada, who is responsible for the administration of the Government pay system.

15. Lease obligations for tangible capital assets

On December 1, 2015, CORCAN entered into an agreement with Giben America, Inc to rent equipment under a capital lease. The asset was capitalized at $120,438 using an implicit interest rate of 8%. The related obligation is liquidated over the lease term of 5 years and is segregated between current and long-term portions on the statement of financial position. Minimum lease payments during the current year totaled $27,161, including interest of $8,496 charged to operations.

The lease obligation for tangible capital assets:

(in thousands of dollars)

2018 27
2019 27
2020 27
2021 and thereafter 32
Subtotal 113
Less: interest 17
Total 96
Less: current portion 19
Long-term portion 77

16. Comparative figures

Comparative figures have been reclassified to conform to the current year's presentation.

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