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

a) Parliamentary authorities

ISC is financed by the Government of Canada through Parliamentary authorities. Financial reporting of authorities provided to ISC 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 a reconciliation between the basis of reporting.

There are no planned results provided in the Statements of Operation and Departmental Net Financial Position since there was no Departmental Plan prepared for ISC for 2017-18.

b) Net cash provided by Government

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

Amounts due from or 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 ISC 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.
• Deferred revenue consists of amounts received in advance of the delivery of goods and rendering of services that will be recognized as revenue in a subsequent fiscal year as it is earned.
• Other revenues are recognized in the period the event giving rise to the revenue occurred.
• Revenues that are non-respendable are not available to discharge ISC'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 ISC'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, the employer's 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. ISC'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 based 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 ISC'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 ISC's financial position.

h) Contingent liabilities

Contingent liabilities, including the provision for loans guarantees, are potential liabilities which 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, a provision is accrued and an expense is 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) 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. ISC 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.

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.

k) 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 best estimate of the related amount at the end of the reporting period. The most significant items where estimates are used are contingent 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.

l) 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 ISC 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 an explanation of variances and lapsed amounts, can be found in ISC's Departmental Result Report.

Cash guarantee deposits

In fulfilling its duties under various acts that govern the use of federal Crown land, including land use activities, water resources, and water rights, ISC may issue licences, permits, and other instruments to individuals and organizations that propose to undertake resource exploration and other types of development projects.

In accordance with the terms and conditions of the instrument, ISC may require security deposits to ensure the lands and waters are returned in a condition acceptable to ISC. These guarantee deposits are received in the form of cash and are deposited to and held in the Consolidated Revenue Fund.

Other specified purpose accounts

These accounts are established to receive, hold and disburse moneys in accordance with relevant statutes, departmental policies and agreements. The most significant of these accounts is the Indian Moneys Suspense Account. This statutory account was established to hold moneys received for individual Indians and bands pending execution of the related lease, permit or licence, settlement of litigation, registration of the Indian or identification of the recipient, and for Indian locatees pursuant to land tenure instruments issued by ISC. These moneys are eventually disbursed to individual Indians, credited to Band Fund or Individual Trust Fund accounts, or returned to payers, as appropriate.

Indian Band Funds

These accounts were established to record moneys belonging to Indian bands throughout Canada pursuant to sections 61 to 69 of the Indian Act.

The funds are classified as either capital moneys or revenue moneys. Capital moneys of the band include all moneys derived from the sale of surrendered lands or the sale of band capital assets. Moneys from the sale of surrendered lands can include land sales, timber sales, oil and gas royalties, and sale of gravel. Revenue moneys are all moneys not classified as capital moneys.

Moneys are generally disbursed from these accounts pursuant to an authorized request from a band.

Indian Savings Accounts

These accounts were established to record moneys belonging to certain individual Indians pursuant to sections 52 and 52.1 to 52.5 of the Indian Act.

Sources of moneys include inheritances and per capita distribution of band funds. Moneys are generally disbursed from these accounts pursuant to an authorized request from an individual and upon reaching the age of majority.

Indian Estate Accounts

These accounts were established to record moneys belonging to dependant adults (referred to as mentally incompetent individuals in the Indian Act) and deceased Indians pursuant to sections 42 to 51 of the Indian Act.

Sources of moneys belonging to dependant adults include insurance proceeds, per capita distribution of band funds, and federal and provincial payments. Payments are made from these accounts for the maintenance and care of the individuals.

Estate accounts for deceased Indians include the proceeds of their liquidated assets that are held pending the settlement of the estate. The closing of an account usually corresponds with the final distribution to their heirs.

a) Contingent liabilities

Contingent liabilities arise in the normal course of operations and their ultimate disposition is unknown. They are grouped into two categories: claims and litigation and loan guarantees.

b) Contingent assets

Contingent assets arise in the normal course of operation and their ultimate disposition is unknown. The Department 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

ISC'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 ISC 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 2017-18 expense amounts to $20.4 Million. For Group 1 members, the expense represents approximately 1.01 times the employee contributions and, for Group 2 members, approximately 1.00 times the employee contributions.

ISC'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.

b) Severance benefits

Severance benefits provided to ISC'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, 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:

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 a 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, ISC is required to honour these loan guarantees. As a result, ISC makes payment to the lending institution and establishes a receivable from the First Nation or First Nation organization.

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

There were no loan defaults in 2018 and as a result, there was no charge to the reserve for payments to cover defaults.

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, ISC received services without charge from certain common service organizations related to accommodation, employer's contribution to the health and dental insurance plans, legal services and workers' compensation coverage. These services provided without charge have been recorded in ISC'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 and information technology infrastructure services provided by Shared Services Canada are not included in ISC's Statement of Operations and Departmental Net Financial Position.

b) Internal services provided without charge by other government departments

During the year, ISC received services without charge from Crown-Indigenous Relations and Northern Affairs Canada for the provision of internal services in support of the Regional Operations and Education Social Development Policy Program and from Health Canada for the provision of internal services in support of the First Nations and Inuit Health Canada. These are estimated to be approximately $43.1 Million and $11.3 Million. Given the number of assumptions associated with the calculation of these charges, no amounts 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

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

a) Transfer from the Department of Indigenous and Northern Affairs Canada

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

b) Transfer from the Department of Health Canada

Effective November 30, 2017, Health Canada transferred its First Nations and Inuit Health Branch 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, assets and liabilities transferred from these two departments are listed below:

2.1 Internal control management

Indigenous Services Canada has a well-established governance and accountability structure to support departmental assessment efforts and oversight of its systems 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

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

4.1 Progress on ongoing risk-based monitoring plan during fiscal year 2017-18

Assessments were conducted for Indigenous Services Canada based on ongoing risk-based monitoring plans as shown in the following table.

4.2 Action plan for the next fiscal year and subsequent years

Indigenous Services Canada will execute a risk-based transitional year monitoring plan in 2018-2019 while business processes from the two former departments are integrated. For succeeding years, a longer term monitoring plan will be prepared based on a comprehensive risk assessment of ISC integrated business processes.

Based on the current risk environment and prior coverage by Health Canada and Indigenous and Northern Affairs Canada, ISC will assess key financial controls in five processes in 2018-2019: