2020–21 Agricultural Research Institute of Ontario financial statements

Independent auditor's report

To the Members of: Agricultural Research Institute of Ontario

Opinion

We have audited the accompanying financial statements of Agricultural Research Institute of Ontario, which comprise the statement of financial position as at March 31, 2021 and the statements of revenues and expenditures and changes in fund balances, remeasurement losses and cash flows for the year then ended and Notes to the financial statements, including a summary of significant accounting policies.

In our opinion, these financial statements present fairly, in all material respects, the financial position of Agricultural Research Institute of Ontario as at March 31, 2021 and the results of its operations and its cash flows for the year then ended in accordance with Canadian public sector accounting standards.

Basis of opinion

We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the financial statements section of our report. We are independent of the Agricultural Research Institute of Ontario in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Responsibilities of management and those charged with governance 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.

In preparing the financial statements, management is responsible for assessing the organization's ability to continue as a going concern, disclosing, as applicable, matters related to a going concern and using the going concern basis of accounting unless management either intends to liquidate the organization or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the organization's financial reporting process.

Auditor's responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements, as a whole, are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgement and maintain professional skepticism throughout the audit. We also:

• identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or override of internal control.
• obtain an understanding of internal control relevant to the audit 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 organization's internal control.
• evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
• conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the organization's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the organization to cease to continue as a going concern.
• evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

RLB
Chartered Professional Accountants
Licensed Public Accountants
Guelph, Ontario
July 13, 2021

Statement of financial position as at March 31, 2021

Statement of revenues and expenditures and changes in fund balances for year ended March 31, 2021

Statement of remeasurement losses for year ended March 31, 2021

Statement of cash flows for year ended March 31, 2021

Notes to the financial statements

Note 1: Nature of organization

Under the province of Ontario Agencies and Appointments Directive, the Agricultural Research Institute of Ontario (ARIO) is classified as a Board Governed Operational Service Agency reporting to the Minister of Agriculture, Food and Rural Affairs. In addition, ARIO is a non-profit organization within the meaning of the Income Tax Act (Canada) and is exempt from income taxes. It was created by the ARIO Act with specific responsibilities for the co ordination and direction of agri-food research programs and research infrastructure in Ontario. These activities relate to a broad range of commodities and disciplines, covering all aspects of the agri-food system.

Funding for programs supported by ARIO is available from various sources. The Ontario Government, through the Ministry of Agriculture, Food and Rural Affairs (OMAFRA), is the primary source of funding. The Ontario Government also provides funding for open research programs. Under the ARIO Act, ARIO may accept grants and donations for research. Other funds usually come from commercial sources (such as agri-business, marketing boards and producer associations) and can be either designated for specific projects or non designated. In addition, ARIO reinvests royalties earned from ministry-funded research.

All receipts are held in trust by the Director of Research and are allocated in accordance with the terms of the funds. Transactions between OMAFRA and the below programs are recorded at the exchange value.

The current research trust funds managed by the secretariat to ARIO are as follows:

• ARIO
• Open Competitive Research (includes new directions, food safety, other)
• Infrastructure

COVID‑19 acknowledgement

Due to restrictions under the Emergency Management and Civil Protection Act, R.S.O. 1990, and its regulations put in place in response to an ongoing pandemic known as the COVID‑19 pandemic, there were and continue to be limitations on the activities permitted under law which impacts or has impacted the ability of ARIO to carry out operational and major capital construction activities.

Should these limitations result in a delay in completing the business of ARIO (that is, operating, reporting and capital activities) ARIO, in its capacity as a Board Governed Operational Service Agency reporting to the Minister of Agriculture, Food and Rural Affairs, will act in a timely manner to mitigate any delays so as to continue operations for which the agency is prescribed under the ARIO Act.

Note 2: Summary of significant accounting policies

The financial statements have been prepared in accordance with Canadian public sector accounting standards for government not-for-profit organizations, including the 4200 series of standards, as issued by the Public Sector Accounting Board (PSAB for Government NPOs) and include the following significant accounting policies:

Basis of accounting

ARIO follows the deferral method of accounting for contributions. Restricted contributions are recognized as revenue of the appropriate research trust fund in the year in which the related expenses are incurred. Unrestricted contributions and all other revenues are recognized as revenue of the appropriate research trust fund when received or receivable if the amount to be received can be reasonably estimated and collection is reasonably assured. Investment income is accrued in the period the investment returns are earned.

Financial instruments

Measurement of financial instruments

The organization initially measures its financial assets and liabilities at fair value, except for certain non-arm's length transactions.

The organization subsequently measures all its financial assets and financial liabilities at amortized cost, except for investments, which are measured at fair value. Changes in fair value are recognized in the statement of remeasurement losses.

Impairment

Financial assets measured at amortized cost are tested for impairment when there are indicators of impairment. If an impairment has occurred, the carrying amount of financial assets measured at amortized cost is reduced to the greater of the discounted future cash flows expected or the proceeds that could be realized from the sale of the financial asset. The amount of the write down is recognized in the statement of revenues and expenditures. The previously recognized impairment loss may be reversed to the extent of the improvement, directly or by adjusting the allowance account, provided it is no greater than the amount that would have been reported at the date of the reversal had the impairment not been recognized previously. The amount of the reversal is recognized in the statement of revenues and expenditures.

Transaction costs

The organization recognizes its transaction costs in expenditures in the period incurred. However, financial instruments that will not be subsequently measured at fair value are adjusted by the transaction costs that are directly attributable to their origination, issuance or assumption.

Unclaimed expenditures

Unclaimed expenditures are defined as the total approved budget for open research projects less expenses incurred to date.

Tangible capital assets

Tangible capital assets are recorded at cost using straight-line amortization of 25 to 40 years for land and building assets.

Tangible capital assets under construction (new buildings) are not amortized.

Impairment of long-lived assets

Long lived assets are tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss is recognized when the carrying value exceeds the total undiscounted cash flows expected from their use and eventual disposition. The amount of the impairment loss is determined as the excess of the carrying value of the asset over its fair value.

Deferred capital contributions

Deferred capital contributions are recognized in the same period as the related expenditure and amortized at the same rate as the buildings to which they relate.

Restrictions on the expenditure of funds

The purpose, funding, terms and conditions and duration of each research trust fund are stipulated in the relevant Order-in-Council, memorandum of understanding or ministry correspondence.

Use of estimates

The preparation of financial statements in accordance with PSAB for Government NPOs requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Significant areas requiring the use of management estimates and assumptions relate to the valuation of accounts payable and accruals and the useful life of capital assets. Actual results could differ from those estimates.

Note 3: Financial instruments

Fair value

PS3450, Financial Instruments Disclosures requires disclosures about the inputs to fair value measurements, including their classification within a hierarchy that prioritizes the inputs to fair value measurement. The three levels of the fair value hierarchy are:

• Level 1: unadjusted quoted prices in active markets for identical assets or liabilities
• Level 2: inputs other than quoted prices that are observable for the asset or liability either directly or indirectly
• Level 3: inputs that are not based on observable market data

ARIO's financial instruments are classified as Level 2 except for cash which is classified as Level 1 as at March 31, 2021 and 2020.

There were no transfers in or out of Level 1 or Level 2 for the years ended March 31, 2021 and 2020.

Associated risks

Market price risk

Market price risk is the risk that the value of an instrument will fluctuate as a result of changes in market prices, whether caused by factors specific to an individual investment, its issuer or all factors affecting all instruments traded in the market. As all of ARIO's financial instruments are carried at fair value with fair value changes recognized in the statement of remeasurement losses, all changes in market conditions will directly affect the increase (decrease) in accumulated remeasurement losses. Market price risk is managed by the investment manager through construction of a diversified portfolio of instruments traded on various markets and across various industries.

A 1% increase (decrease) in the value of the investments would increase (decrease) the asset value and the change in unrealized gains in investments by $173,329 (2020: $287,220). The price of the investments is affected by changes in market values, foreign exchange rates and interest rates impacting the underlying financial instruments held within the individual investments managed by the investment manager.

Interest rate risk

Interest rate risk refers to the adverse consequences of interest rate changes on the Institute's cash flows, financial position and income. Interest rate changes have an indirect impact on the investment assets in ARIO. ARIO uses investment diversification to manage this risk.

Liquidity risk

Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities.

All of ARIO's fixed income securities are considered to be readily realizable as they can be quickly liquidated at amounts close to their fair value in order to meet liquidity requirements.

Foreign currency risk

Foreign currency risk is the risk that fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. ARIO is not exposed to significant foreign currency risk.

Credit risk

Credit risk is the risk that a customer or counterpart may be unable or unwilling to meet a commitment that it has entered into with ARIO. ARIO is not exposed to significant credit risk.

Note 4: Contributed assets

Contributed assets of $11,681,691 (2020: $11,681,691) are recorded in the Infrastructure Fund and represent the cost of the land transferred to ARIO from the Government of Ontario. During the year, there was no activity (2020: no activity).

Note 5: Tangible capital assets

As at March 6, 2007, the titles for capital assets (land and buildings) with a carrying value of approximately $60.9 million were transferred to ARIO from the Government of Ontario. Carrying value is being used as the transfer value since the transfer took place between non arm's length parties, is non-monetary in nature and does not have commercial substance. As an agency of the Government of Ontario, ARIO reports these capital assets (and other assets and liabilities) in consolidation with OMAFRA on an annual basis.

Note 6: Deferred capital funded contributions

Deferred capital funded contributions relating to construction of capital funded projects represents the amount of grants and other restricted funding received by ARIO for construction projects.

Note 7: Deferred capital contributions

Deferred capital contributions represent the unamortized amount of the net book value of the buildings transferred to ARIO from the Government of Ontario in 2007. The amortization of capital contributions is recorded as revenue in the statement of revenues and expenditures. The changes in the deferred capital contributions are as follows:

Note 8: ARIO research

During 2019, the University of Guelph began program administration for the above intellectual property fund.

Note 9: Grants received from the provincial government

The following grants, recorded at the exchange value, have been received from OMAFRA and successor ministries:

The following Provincial Government capital transfer payment grants have been partially capitalized as Deferred Capital Funded Contributions and partially recognized as Revenues as follows:

Note 10: Funding agreements with third parties

The ARIO, His Majesty the King in right of Ontario as represented by OMAFRA and the Integrated Grain Processors Co-operative (IGPC) have jointly signed an agreement whereby, pursuant to a Capital Grant Agreement effective June 2006 between OMAFRA and IGPC, IGPC agreed to contribute to a research and development fund in exchange for the capital grant support provided by OMAFRA through the Ontario Ethanol Growth Fund (OEGF). IGPC has agreed to contribute $280,000 annually for 10 years (for a total of $2,800,000) starting in April 2012 and ending with the final payment in April 2021. These funds are being paid directly to ARIO to be used to support research priorities in the agri-food sector in Ontario. Funds recognized to date are $2,800,000. See Schedule 2.

His Majesty the King in right of Ontario as represented by OMAFRA and Kawartha Ethanol have signed a Capital Grant Agreement effective August 1, 2008 between OMAFRA and Kawartha Ethanol whereby Kawartha Ethanol agreed to contribute to a research and development fund in exchange for the capital grant support provided by OMAFRA through the OEGF. Kawartha Ethanol has agreed to contribute $98,000 annually for 10 years (for a total of $980,000) starting April 2013 and ending with the final payment in April 2022. These funds are to be paid directly to ARIO to be used to support research priorities in the agri-food sector in Ontario. Funds recognized to date are $784,000, while receipts to date are $686,000. See Schedule 2.

Note 11: Canadian Agricultural Partnership (CAP) Funding

During the prior year, ARIO received funding for five research infrastructure projects from the CAP program:

• Elora Research Station Insentec Beef Feeder, Feed Equipment Upgrades to support the expanded dairy and beef research herds at Elora. Muck Station Upgrades to enable the modernization and renewal of research platforms.
• Vineland Research Innovation Centre (VRIC) — Tree Compartment Project and Research and Lab Equipment Upgrades to significantly modernize key aspects of several research platforms at VRIC by increasing the ability of the station to undertake a wider variety of research projects through modernization and enhanced program support.

These programs were both completed by March 31, 2021.

Note 12: Prior period adjustment

An adjustment was made to accounts receivable to recognize a prior year amount which was recognized upon receipt in the current year. Further, an adjustment was made to tangible capital assets under development to expense a previously capitalized item that was double counted in the prior year. Accordingly, a prior period restatement was done with the following changes:

Note 13: Recovery of holding costs — SOLGEN

The Ministry of the Solicitor General (SOLGEN) indicated their interest in acquiring a parcel of land in Kemptville that ARIO had marked for disposition. Until the time that ARIO is able to complete the approved transfer of land over to SOLGEN, ARIO is responsible to pay for all holding costs prior to the transfer which is expected to take place by December 31, 2021. This includes costs for any necessary upgrades and costs to maintain the property at its current state. ARIO is now recovering these costs incurred in the previous year from SOLGEN.

Schedule 1: Research trust funds: Financial position as at March 31, 2021

Schedule 2: Research trust funds: Revenues and expenditures and changes in fund balances for the year ended March 31, 2021