Consolidated financial statements - March 31, 2018

To the National Research Council Canada

We have audited the consolidated financial statements of National Research Council Canada, which comprise the consolidated statement of financial position as at 31 March 2018, and the consolidated statements of operations and departmental net financial position, change in departmental net financial assets, and cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.

Management's responsibility for the financial statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with Canadian public sector accounting standards, 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 accompanying consolidated financial statements present fairly, in all material respects, the financial position of National Research Council Canada as at 31 Mar 2018 and the results of its operations, changes in its departmental net financial position and its cash flows for the year then ended in accordance with Canadian public sector accounting standards.

Other matter

The consolidated financial statements of National Research Council Canada as at March 31, 2017 and for the year then ended were audited by another auditor who expressed an unmodified opinion on those statements on June 29, 2017.

1. Authority and Objectives

The National Research Council Canada ( NRC ) exists under the National Research Council Act ( NRC Act) and is a departmental corporation named in Schedule II of the Financial Administration Act. The mission of NRC is to have an impact by advancing knowledge, applying leading-edge technologies, and working with other innovators to find creative, relevant and sustainable solutions to Canada's current and future economic, social and environmental challenges.

In delivering its mandate, NRC reports under the following program activities:

• Technology Development and Advancement: Develops and advances technologies to enhance the prosperity of Canadian industries in support of federal priorities and to bring new and innovative products and processes to the marketplace.
• Industrial Research Assistance Program ( IRAP ): Provides a range of technical and business-oriented advisory services, as well as financial support for small and medium-sized Canadian businesses engaged in research and development of technological innovations to augment their capacity and capability to innovate, commercialize and generate significant economic activity for Canadian industry.
• Science Infrastructure and Measurement: Manages national science and infrastructure critical to research, development and innovation by Canadian scientific and technological communities and helps clients make the most of this infrastructure by facilitating access to a wide range of Canadian and international user communities and by participating in networks.
• Internal Services: Groups of activities and resources administered to support the needs of programs and other corporate obligations of the organization. Includes only those activities and resources that apply across the organization and not those provided specifically to a program.

a) Parliamentary authorities

NRC is financed mainly by the Government of Canada through Parliamentary authorities. Financial reporting of authorities provided to NRC 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 Consolidated Statement of Operations and Departmental Net Financial Position and in the Consolidated Statement of Financial Position are not necessarily the same as those provided through authorities from Parliament. Note 3 provides a reconciliation between the bases of reporting. The planned results amounts in the "Expenses" and "Revenues" sections of the Consolidated Statement of Operations and Departmental Net Financial Position are the amounts reported in the Consolidated Future oriented Statement of Operations included in the 2017-18 Departmental Plan. The planned results amounts in the "Government funding and transfers" section of the Consolidated Statement of Operations and Departmental Net Financial Position and the Consolidated Statement of Change in Departmental Net Financial Assets were prepared for internal management purposes and have not been previously published.

b) Consolidation

These consolidated financial statements include both NRC and its portion of the accounts for organizations for which it has consolidated operations between January 1 and December 31, 2017. These organizations include the Canada-France-Hawaii Telescope Corporation ( CFHT ) and the TMT International Observatory, LLC ( TIO ). The NRC relationship with CFHT and TIO meets the definition of a government partnership under Canadian public sector accounting standards, which requires that its results be proportionally consolidated within those of NRC . All inter organizational balances and transactions are eliminated as part of the consolidation process. CFHT and TIO have audited financial statements as at December 31, 2017 that have been proportionally consolidated with NRC 's March 31, 2018 financial statements.

c) Net cash provided by Government

NRC operates within the Consolidated Revenue Fund (CRF), which is administered by the Receiver General for Canada. All cash received by NRC is deposited to the CRF and all cash disbursements made by NRC 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 (including agencies) of the Government.

d) Amounts due from the CRF

Amounts due from 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 NRC is entitled to draw from the CRF without further authorities to discharge its liabilities.

e) Revenues

Revenues are recognized in the year in which the underlying transaction or event occurred that gave rise to revenue as follows:

• Research and technical services: Revenues are recognized as services are provided based on percentage-of-completion.
• Licences and fees for intellectual property: Revenues are recognized at the point of time when the customer has a right to use NRC 's intellectual property and the performance obligation is satisfied.
• Royalties generated from usage or based on customer's sales from licences: Revenues are recognized over the licence period as performance is satisfied and the right to payment is enforceable.
• Sales of goods and information products: Revenue is recognized when goods or information products are delivered to the client.
• Rentals: Revenue is recognized in the period to which the lease or use of property relates.
• Grants and contributions: Revenue is recognized when the transfer payment is authorized and any eligibility criteria are met, except to the extent that transfer stipulations give rise to an obligation that meets the definition of a liability.

Funds received for which NRC has an obligation to other parties for the provision of goods, services or the use of assets in the future are recorded as deferred revenue.

Receipts are deposited to the CRF . Under the NRC Act, money received by NRC through the conduct of its operations is respendable in the current or in subsequent years.

Revenues that are non-respendable are not available to discharge NRC 's liabilities. While the President of NRC is expected to maintain accounting control, he 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 as a reduction of NRC 's gross revenues.

f) Expenses

• Expenses are recorded on the accrual basis.
• Contributions are recognized in the year in which the recipient has met the eligibility criteria or fulfilled the terms of a contractual transfer agreement, provided that the transfer is authorized and a reasonable estimate can be made.
• Grants are recognized in the year in which the conditions for payment are met. In the case of grants that do not form part of an existing program, the expense is recognized 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 consolidated financial statements.
• 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 and agencies for accommodation, employer contributions to the health and dental insurance plans, legal services, workers' compensation and the services related to the email, data centre and network services and the email, data centre and network support unit as well as the acquisition and provision of hardware and software for end user devices are recorded as operating expenses at their estimated cost.

g) Employee future benefits

h) Lease inducements

Lease inducements represent incentives received by NRC to enter into lease agreements for property at a nominal cost of one dollar. Lease inducements are deferred and amortized on the same basis as the related tangible capital assets.

i) Accounts receivable

Accounts receivable are stated at the lower of cost and net recoverable value. A valuation allowance is recorded for receivables where recovery is considered uncertain.

j) Contingent liabilities

Contingent liabilities are potential liabilities, which may become actual liabilities when one or more future events occur or fail to occur. To the extent that 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 consolidated financial statements.

k) Environmental liabilities

Environmental liabilities consist of estimated costs related to the remediation of contaminated sites as well as estimated costs related to obligations associated with the retirement of tangible capital assets and other environmental liabilities.

9. Employee Future Benefits

a) Pension benefits

Eligible NRC 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 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/Quebec Pension Plans benefits and they are indexed to inflation.

Both the employees and NRC contribute to the cost of the Plan. Due to the amendment of the Public Service Superannuation Act following the implementation of provisions related to Canada's 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 on or after January 1, 2013. Each group has a distinct contribution rate.

The 2017-2018 expense amounts to $35,551,328 ($38,163,026 in 2017). For Group 1 members, the expense represents approximately 1.01 times (1.12 times in 2017) the employee contribution and, for Group 2 members, approximately 1.00 times (1.08 times in 2017) the employee contributions.

NRC 's responsibility with regard 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.

a) Common services provided without charge by other government departments and agencies

During the year, NRC received services without charge from other government departments and agencies. These services have been recognized in NRC 's Consolidated Statement of Operations and Departmental Net Financial Position as follows:

(in thousands of dollars)

The Government has centralized some of its administrative activities for efficiency, cost-effectiveness purposes and economic 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, are not included in NRC 's Consolidated Statement of Operations and Departmental Net Financial Position.

The activities related to the email, data centre and network services unit and the email, data centre and network support unit were transferred to Shared Services Canada (SSC) on November 15, 2011. Additionally, the activities related to the acquisition and provision of hardware and software for end user devices were transferred to SSC on April 3, 2013. The services provided after these transfer dates are recognized without charge.

b) Other transactions with related parties

(in thousands of dollars)

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

c) Canada-France-Hawaii Telescope Corporation

NRC has a related party relationship with the following non-federal government entity:

NRC was a founding member of the Canada-France-Hawaii Telescope Corporation (CFHT), a tax-exempt, not-for-profit organization established under Hawaii state law to design, construct and operate a large optical telescope near the summit of Mauna Kea, Hawaii, USA , along with laboratories, equipment and associated installations. CFHT was established in 1974 by a Tripartite Agreement among NRC , the Centre National de la Recherche Scientifique of France and the University of Hawaii. NRC makes annual contributions to fund its 42.5% share of the cost of operations of the telescope and receives no direct benefit in return. However, as a result of NRC 's contributions, Canada receives access to telescope observation hours for Canadian astronomers. As a founding member, NRC can appoint four of the 10 members of the Board of Directors. The NRC relationship with CFHT is considered a government partnership for accounting purposes and CFHT results are proportionally consolidated in these statements. In 2018, NRC contributed $4.0 million to CFHT ($4.1 million in 2017). These contributions are eliminated upon consolidation. CFHT 's condensed financial information for the year ended December 31 is as follows:

(in thousands of dollars)

NRC 's future contractual obligations to CFHT are not included in the transfer payment contractual obligations (Note 13) and are as follows:

(in thousands of dollars)

d) TMT International Observatory, LLC

NRC has a related party relationship with the following non-federal government entity:

NRC is a member since April 2015 of the TMT International Observatory, LLC ( TIO ), a tax-exempt, not-for-profit organization established under the state law of Delaware, USA . TIO was incorporated in May 2014 and formed for the purpose of the execution of the Thirty Meter Telescope Project through the construction, commissioning and operation of an observatory. The Corporation was established in 2014 by the Regents of the University of California, the California Institute of Technology, the National Institutes of Natural Sciences (Japan) and the National Astronomical Observatories of the Chinese Academy of Sciences. The Department of Sciences of Technology, Government of India and NRC subsequently became members in 2014 and 2015, respectively. The NRC relationship with TIO is considered a government partnership for accounting purposes and TIO results are proportionally consolidated in these statements.The NRC membership participation was 19.5% as of December 31, 2017 based on the aggregate pledged by all current parties. In 2018, NRC contributed $8.0 million for TIO 's Assets Under Construction ($6.9 million in 2017). TIO 's condensed financial information for the year ended December 31 is as follows:

(in thousands of dollars)

NRC 's future contractual obligations to TIO are based on Parliamentary authorities granted in 2015. NRC is aware of delays in the project, but no impact to future obligations has been identified at the completion of these consolidated financial statements. These contractual obligations for TIO are not included in the transfer payment contractual obligations (Note 13) and are as follows:

(in thousands of dollars)

17. Transfers From/To Other Government Departments

Transfer of tangible capital assets between other government departments and NRC have occurred in 2017 and 2018.

The transactions are as follows:

(in thousands of dollars)

18. Segmented Information

Presentation by segment is based on the NRC 's program alignment architecture (PAA). NRC allocates transactions over the PAA in accordance with stewardship principles, based on the Centre, Branch or IRAP that is responsible for managing the resource.

The presentation by segment is based on the same accounting policies as described in the Summary of significant accounting policies in Note 2. The following table presents the expenses incurred and revenues generated for the main program activities, by major object of expenses and by major type of revenues. The segment results for the year are as follows:

(in thousands of dollars)

19. Financial Instruments

NRC 's financial instruments consist of due from CRF , accounts receivable, investments and accounts payable and accrued liabilities. Unless otherwise noted, it is management's opinion that NRC is not exposed to significant interest, currency or credit risk arising from these financial instruments. Unless otherwise disclosed in these consolidated financial statements, management estimates that the carrying values of the financial instruments approximate their fair value due to their impending maturity.