Military equipment valuation: achieving a clean audit.

The headline for a February 27, 2004, (1) article on GovExec.com reads, "Clean government audit remains elusive." The article's opening sentence states, "Financial management problems at the Pentagon continue to prevent the federal government from earning a passing audit."

This is not the kind of publicity that the Department of Defense (DoD) needs, particularly when the nation is fighting a war. That article and others like it were followed up by testimony (2) from the Comptroller General of the United States to the Senate Armed Services Committee, Subcommittee on Readiness and Management Support.

In that testimony, the Comptroller General said, "DoD's substantial longstanding financial and business management problems adversely affect the economy, effectiveness, and efficiency of its operations and have resulted in a lack of adequate transparency and appropriate accountability across all major business areas. As a result, DoD does not have timely, reliable information for management to use in making informed decisions." (3)

Where did the requirement for a clean audit originate, and is it important? Should program managers, contracting officers, logisticians, and industry care? The purpose of this article is to answer those questions.

The Requirement for a Clean Audit

In 1990, the Congress enacted and the President signed the Chief Financial Officers (CFO) Act. (4) The CFO Act established a requirement (5) that each executive agency of the federal government, which includes the Department and its Components--that is, the Office of the Secretary of Defense, Joint Chiefs of Staff, Military Departments, Defense Agencies, and DoD Field Activities--annually will prepare and submit to the Director of the Office of Management and Budget (OMB) a financial statement for the preceding fiscal year (FY).

In addition, the act (6) stated that each financial statement will be audited by the Inspector General of the preparing agency or by an external auditor determined by the Inspector General. Further, the Comptroller General of the United States can review any Inspector General audit and make recommendations to the Congress. (7)

In 1996, the Congress found that the federal government had made little progress in complying with the intent of the CFO Act over the previous five years. Federal accounting practices still did not result in accurate financial reporting, nor could financial information generated through current accounting practices be used to determine the full costs of programs and activities to support decision making. To restore public confidence in the federal government, federal agencies needed to make more substantial reforms to their financial management systems.

Thus, in 1996, the Congress passed and the President signed the Federal Financial Management Improvement Act. (8) Among several important objectives, this act required (9) each executive agency to implement and maintain financial management systems that comply with accounting standards established by the Federal Accounting Standards Advisory Board (FASAB).

When President George W. Bush assumed office, one of his early initiatives was to promulgate The President's Management Agenda (PMA). In announcing the PMA, President Bush stated, "In the long term, there are few items more urgent than ensuring that the federal government is well run and results-oriented. This Administration is dedicated to ensuring that the resources entrusted to the federal government are well managed and wisely used. We owe that to the American people." (10)

The PMA laid out five initiatives, one of which was improved financial performance. Improving financial performance, according to the PMA, includes obtaining a clean audit opinion because "a clean financial audit is a basic prescription for any well-managed organization." (11)

In response to the President's direction to obtain a clean audit opinion and, thereby, "get to green" on the performance scorecard, the Secretary of Defense [Donald Rumsfeld] immediately established the Financial Management Modernization Program (FMMP) (12) and directed that the Under Secretary of Defense (Comptroller) (USD(C)) and the Assistant Secretary of Defense (Networks and Information Integration) work together to get a clean financial audit opinion as quickly as possible. The USD(C) subsequently made a commitment to the OMB director that the Department would begin implementing policy, process, and system changes in FY 2003, (13) with the goal of completing implementation in time to achieve a clean audit opinion by the end of FY 2007. (14)

After a year and a half, the Department determined that the FMMP was misnamed. While Financial captured the attention of all financial personnel throughout the Department, most of the other communities assumed it had little impact on them. In reality, all critical business systems in the Department are impacted by this initiative because they interface with financial systems and rely on accurate financial information to conduct business.

So in May 2003 the program was renamed (15) the Business Management Modernization Program (BMMP) to better reflect the scope of this initiative, which imposes strict standards on all business systems in the Department and will require those systems to be compliant with DoD's Business Enterprise Architecture (BEA). The BEA was developed to ensure financial compliancy, data accuracy, streamlined processes, and improved decision making across the Department.

The Department has stated that gaining an unqualified audit opinion is the top priority within the BMMP. As President Bush stated, a clean audit opinion is a "good housekeeping seal of approval" that will demonstrate that the Department is a well-run business, one not fraught with "substantial long-standing financial and business management problems [that] adversely affect the economy, effectiveness, and efficiency of its operations." (16) A clean audit opinion will demonstrate that the Department deserves the public's trust and confidence.

Ultimately, the BMMP goals go far beyond getting an unqualified audit opinion. The real benefits will come from reengineering business processes and integrating systems to improve interoperability, information availability, and decision making.

Additionally, as the Department moves into a net-centric and data-centric environment, data will be entered only once and will be available across the network for use many times. This will eliminate unnecessary duplication, improve data accuracy, and, ultimately, reduce taxpayer costs.

The Balance Sheet

So, what is being audited? At the end of the fiscal year, the Department and many of its Components each prepare a Performance and Accountability Report (PAR). The PAR describes the reporting entity's performance against its strategic plan, strategic objective, annual performance goals, and annual performance results in accordance with the Government Performance and Results Act. (17) The PARs also show compliance with legal and regulatory requirements, summarize the status of the PMA objectives, and provide financial statements.

One of the principal components of DoD's financial statements is the balance sheet. The balance sheet provides a summary of DoD's assets and liabilities. One of the asset line items that the Department reports on its balance sheet is General Property, Plant and Equipment (GPP&E). GPP&E is the largest asset line item on the balance sheet, and it includes the value of real property (that is, land, buildings, structures, utilities, and equipment attached to buildings and structures that are not moveable) and personal property (that is, items that are not held for sale of consumed in normal operations, including such items as support equipment, plant equipment, vehicles, special test equipment, and special tooling).

Prior to FY 2003, GPP&E did not include military equipment (for example, aircraft, ships, satellites, and tanks). However, on May 8, 2003, the FASAB adopted "Statement of Federal Financial Accounting Standards 23," (18) which classified all military equipment as personal property. The impact of this change was significant because it required that military equipment be treated the same as other personal property assets.

In other words, military equipment (with a unit cost above the DoD-set capitalization threshold of $100,000) would subsequently have to be valued, depreciated, and reported on DoD's financial statements on the GPP&E line. None of DoD's policies, processes, of systems support this type of valuation and, as anyone working in acquisition or logistics knows, military equipment is exceptionally complex and very difficult to value.

The requirement to value and report military equipment became effective in FY 2003. (19) To provide a placeholder value that was reasonably credible until a more accurate value could be established, the Department turned to the Department of Commerce's Bureau of Economic Analysis for data on DoD's military equipment values. The mission of the Bureau is to produce economic account statistics that enable government and business decision makers, researchers, and the American public to follow and understand the performance of the nation's economy. The Bureau collects source data, conducts research and analysis, develops and implements estimation methodologies, and disseminates statistics to the public. (20)

The Bureau of Economic Analysis has been tracking budget data for DoD systems for many years. Bureau military equipment data are organized into 84 reporting categories (for example, airframes attack, airframes bombers, ships, and submarines). DoD adjusts these data to estimate the value of military equipment and then depreciates those values to arrive at a net book value and the amount of depreciation to be expensed in the reporting fiscal year.

Since these data estimates are not tied to actual costs and cannot be directly linked to source documents, they are not auditable. Still, for the first time, the Department has an estimate of the value of its military equipment ($1.1 trillion for FY 2003) and the net book (that is, depreciated) value of that equipment ($328 billion).

While the Bureau's adjusted data provide a placeholder value to put into the DoD quarterly performance reports, the Department recognized that it needed to develop another, more detailed and auditable process for valuation in order to achieve a clean audit. So the USD(C) and USD for Acquisition, Technology and Logistics (USD(AT&L)) turned to the Property and Equipment Policy (P&EP) Office, under the Director, Acquisition Resources and Analysis, Office of the USD(AT&L), to lead its military equipment valuation efforts.

The P&EP Office had been established in 2001 to coordinate and oversee DoD efforts to resolve existing property, plant, and equipment accountability, accounting, and reporting problems. (21) The revised mission of the P&EP Office is to ensure that a consistent approach and methodology for valuing military equipment are used across the DoD Components and that implementation satisfies the new accounting requirements and can withstand related audit scrutiny.

The P&EP Office's path to accomplish its new mission consists of three principal activities that concurrently are being executed: development of business rules, creation of baseline valuations, and determination of transaction-based valuations.

Development of Business Rules

First, the P&EP Office developed l0 business rules to guide the process of valuing military equipment:

* Full Cost

* Research, Development, Test, and Evaluation

* Clean-up Costs

* Classification

* Modifications, Modernizations, Upgrades, and Improvements

* Contract Close-out Adjustments

* Work-in-Progress

* Acquisition Date and Useful Life

* Reporting Entity

* Componentization

These rules are centered on defining what types of military equipment assets must be capitalized and how to value them. In general, a tangible asset must be capitalized if the "full cost" of the asset equals $100,000 or more, if it has an estimated useful life of two years or more, if it is for use by the entity, and it it is not for sale in the ordinary course of business. (22)

Determining the "full cost" of the asset is a complicated process, and it must include all direct costs (for example, the cost of the embedded government-furnished components) and all significant indirect costs (for example, potentially, program office costs). The Department has made a decision to exclude research and development costs, a method consistent with the private sector practice in valuing capital assets.

All of the business rules have been written, coordinated with the military departments, and concurred with by the DoD Deputy Chief Financial Officer. Currently, the P&EP Office is coordinating the business rules with the audit community. The coordination process should be completed by the end of FY 2004. Then the coordinated business rules will be turned over to the Accounting and Finance Policy and Analysis Office in the Office of the USD(C) to be included in the next update to the DoD Financial Management Regulation.

The P&EP Office also is rewriting part of the Federal Acquisition Regulation (FAR) that addresses property in the hands of contractors, which is referred to as government-furnished property (GFP). This rewrite is designed to sanction industry leading practices for property management, to recognize the stewardship responsibility that contractors have for property in their possession, to leverage the self-insurance rule, and to create a single clause for contract property management. The rewrite currently is being worked through the regulatory process, with a final rule anticipated by the end of FY 2004.

The FAR rewrite is a companion to DoD Instruction 5000.64, "Defense Property Accountability." (23) This instruction provides a comprehensive framework for DoD property accountability policies, procedures, and practices. It emphasizes the fact that the government's fiduciary records are the "official" property records. Both sets of business rules are important as parameters for how the Department will value military equipment programs and determine full cost.

Baseline Valuations

Second, to establish a value for military equipment based on something more accurate than Bureau of Economic Analysis estimates, the P&EP Office, working with its contractor (KPMG) has undertaken a massive effort to identify and value military equipment programs that produce assets that meet the capitalization requirements of the business rules.

Within those programs, the P&EP Office/contractor team derives a value for each "capitalizable" asset. This approach to valuing military equipment (baseline valuation) involves manually collecting budgetary and expenditure data from accounting systems, budget reports, and other documents, such as Selected Acquisition Reports (SARs) and departmental budget execution reports. As part of the data collection process, the P&EP Office/contractor team meets with officials of each military equipment program to resolve questions, verify the information, and examine underlying documents.

Under this approach, the value of an individual item of military equipment generally is determined by dividing the total estimated procurement costs of a program by the quantity of items to be acquired (either actual of projected through FY 2006). Multiplying the number of units of military equipment on hand by the value of an individual item results in the total amount to be capitalized. Depreciation is calculated based on the useful life of the asset and the date that the asset is placed in service. A work-in-process (WIP) ac count value is created to address disbursements made to date for military equipment end items yet to be delivered. The Office of the Inspector General, the DoD, and the Government Accountability Office (formerly the General Accounting Office) are reviewing this methodology, and the DoD anticipates their concurrence.

The baseline valuation approach will give DoD data as shown in Figure 1.

As of June 2004, the P&EP Office/ contractor team had identified over 800 programs with a total of more than 1,200 systems (for example, the Joint Strike Fighter program, which has three variant systems). The valuation team has completed over 260 program valuations to date (24) and has over 115 program valuations in process. The valuation team is working hard to complete all 800 program valuations by the end of FY 2005 so that the military departments can make the assertions required to begin the audit process.

Transaction-Based Valuation Approach--Working Toward a Permanent Solution

Third, while the baseline valuation process will provide significantly better values for military equipment than DoD has ever had, it still is not enough.

To satisfy the FASAB requirement to value military equipment, the Department has mandated that contracts awarded in FY 2007 (that is, after September 30, 2006) will require information derived from accounting transactions, invoices, and other authoritative documents that support the actual cost of assets. These costs must be such that auditors can trace them to the authoritative source documentation. This approach is called the transaction-based valuation approach. With this approach, DoD will do two things: It will track the asset from cradle to grave, and it will account for the value of the asset.

By September 30, 2006, 100 percent of the delivered DoD military equipment assets will be valued and reported using the baseline valuation approach. As new assets are delivered under contracts awarded on or after October 1, 2006, ah increasing amount of military equipment asset values will be derived from the valuation methodology contained in the mid-term systems solution and, eventually, the valuation methodology contained in the BMMP solution. Because of the long useful lives of some equipment (for example, ships), the transition from the baseline to the transaction-based methodology for certain assets may not be complete for as long as 30 years.

The transaction-based valuation approach must address three areas: processes, systems, and data.

Processes

Many of the processes necessary to support military equipment valuation exist today in DoD, although they may differ in operation within the various DoD Components. To move to a transaction-based valuation approach, these processes must be linked within the DoD Component and, in some cases, reengineered.

Systems

These are the systems that support the processes. In the mid-term, beginning in FY 2007, a system of systems to support the transaction-based valuation approach will be built using the systems currently in place, with one exception (discussed later). In the long term, the system of systems will be fielded through the BMMP initiative.

Data

The data needed for military equipment valuation are being collected today often many times. The data set must be rationalized, integrated, verified, and entered once--then used multiple times. The P&EP Office has identified 18 actions that must be completed by policy writers, process developers, and system owners to implement an auditable transaction-based valuation methodology. As of June 2004, the P&EP/contractor team had completed approximately 10 percent of the effort toward the achievement of these 18 actions.

Linked Processes

To implement this transaction-based approach, six key business processes must be modified and connected. These key processes are acquisition planning and contract writing; receipt, acceptance, and pay and work-in-process; military equipment valuation; asset accountability; fixed asset accounting; and financial reporting (Figure 2).

[FIGURE 2 OMITTED]

For each acquisition program that acquires end items with a potential full unit cost of over S 100,000, (25) the program manager (PM), as part of the acquisition strategy for that program at Milestone C, (26) will create a description of the PM's program to be included in the acquisition strategy for that program.

At this point in the life cycle of the program, the PM should have a good understanding of what types of items and services are going to be acquired. The description will identify the end items being acquired (with an indication of those with a unit cost over $100,000), what GFP will be provided, and what other types of items of services will be bought with program funding (for example, initial spares, manuals, support equipment, special tooling and test equipment, and production engineering support).

The description will be provided to the supporting accounting specialist, who will do two things. First, he or she will verify that the program contains end items that should be capitalized as GPP&E (based on the DoD Financial Management Regulation). Second, he of she will determine which items should be grouped together on a contract line item number (CLIN) in the contract and which should be on separate CLINs based on the accounting treatment for the item(s).

As the acquisition strategy is translated into contracts, the contracting officer will identify those contracts belonging to PMs with capital assets. Within the identified contracts, separate types of items must each be priced separately using separate CLINs or sub-line item numbers (SLINs). Contractors will price each line item separately on fixed-price contracts and estimate costs for each item on cost-type contracts. When items are delivered, those prices of updated estimated costs will be provided for the item being delivered. Note that there will be no requirement for the contractor to accumulate costs or bill financing payments by separate line item for military equipment valuation purposes.

Ah identified contract will be used to notify the accounting specialist to open a WIP account and the logistician to open a physical property record. The WIP account will capture payments made to contractors during contract performance and the value of GFP provided to contractors for use in building the end item. For example, the value of GFP will flow in WIP, and the GFP property record will be updated as the GFP is provided to the using contractor. The property record will include GFP used in the end item and will be tied into the unique identification (UID) registry.

When the military equipment is delivered in its final form, the value of the end item and each item type delivered and billed with the end item (for example, spares of support equipment) will be determined based on (derived from) the separately priced item types in the contract. The capital costs of the items delivered will be added to the values of embedded GFP, and any allocation of overhead costs (for example, a share of program office operating costs) to arrive at the full cost of the individual asset. At the same time, the receipt and acceptance system will identify the UID of the end item and the UIDs of the embedded items. This end item information will update the physical property record.

Once the full cost is derived for an individual asset, the WIP account will be closed. The value of the asset will be transferred to a fixed asset accounting system where the military equipment will be depreciated over its useful life (that is, until it is destroyed or processed for disposal). At the same time, the asset will be transferred to the appropriate Component's physical property accountability system, again to be tracked until the military equipment reaches the end of its operational life. (27)

Quarterly, the amount of WIP, military equipment value, and depreciation will be identified in the balance sheets of each military department. These amounts will be "rolled up" for inclusion in DoD's balance sheet and reported to the OMB.

There are a number of process changes that need to be made in order to put a linked set of processes in place. Figure 3 on page 20 identifies the process changes that the P&EP Office is pursuing.

Systems Solutions

The processes previously described will be supported by a number of systems. Because the DoD has a near-term goal of an unqualified audit opinion in FY 2007, the strategy for the mid-term systems solution is evolutionary, focusing on leveraging the capabilities of existing systems based on functionality, availability, and ability to develop an auditable value for military equipment.

This strategy reduces the time and costs associated with implementing solutions necessary to achieve compliance. It also takes into consideration strategic decisions already made by the Department. The BMMP portfolio management process calls for sunsetting (that is, eliminating) some systems included in the mid-term solution. Additionally, some processes initially may have to be manual.

Regardless, the system solution implemented will be designed to help the Department make progress toward achieving the highly integrated enterprise architecture vision for the long term. The BMMP enterprise architecture solution is the long-term system solution and will be fully compatible with the BEA. Figure 4 identifies the systems that are planned for use in the mid-term solution and the systems envisioned for the long-term solution.

While there area number of systems that comprise the mid- and long-term solutions, three sets of systems are especially critical to achieving a clean audit for military equipment. These sets of systems are the ones associated with receipt, acceptance, and pay; WIP and asset valuation; and fixed asset accounting and property accountability.

The first key set of systems supports receipt, acceptance, and pay. The mid- and long-term system solution for this key function is the Defense Contract Management Agency's Wide Area Workflow (WAWF) system. WAWF is critical because it is the "traffic cop" for military equipment valuation. It identifies the transactions in the system that are critical to valuation, determines the values to be captured, and directs those values to the appropriate systems for use. Today, WAWF is used for many, but not all, military equipment receipt, acceptance, and pay transactions.

To make military equipment valuation a success, WAWF must expand to include all military equipment and to capture government-to-industry, industry-to-government, and some government-to-government transactions that support the manufacture of military equipment end items.

The second key set of systems supports WIP and military equipment valuation. The mid-term solution here has yet to be built. However, the Navy, in coordination with the Army and the Air Force, is developing ah enterprise resource planning (ERP) system called Cabrillo-Military Equipment (ME). Cabrillo-ME provides the necessary functionality to capture WIP and to establish a military equipment value. Once Cabrillo-ME is completed in FY 2005, instances will be extended to meet Army-and Air Force-specific requirements and will be integrated into their current suite of systems. In the long term, the solution for WIP and ME valuation will be the ERP system that each military department adopts to support its integrated accounting functions.

The third key set of systems supports fixed asset accounting and physical asset accountability. Here, each military department has a system of systems in place that meet both needs for the mid-term. The Army plans to leverage its PBUSE system, the Navy will use Cabrillo, and the Air Force will use AFEMS, REMIS, and RAMPODS. In the long term, each military department will use its ERP system to support these functions.

Data

Just like systems, there are three key items of data that are required in order to achieve a clean audit opinion. Those three key pieces of data are the identity of the item, the value of the item, and the useful life of the item.

The first datum of significance is identity. Identity is important because it distinguishes items and provides a means to link important transactions to those items. UID is a set of data elements that provides this linkage. It will help us know what components are included in that asset, costs associated with that asset (end items, government-furnished components, and modifications), changes in custody, and when that item is no longer in use.

The second datum of significance is the value of the item. Value is at the heart of the valuation system, so its significance is obvious. However, value is also the most difficult piece of data to obtain because, as discussed previously the value is ah amalgam of various direct and indirect costs and what is added by major modifications and upgrades.

The third datum of significance is useful life. This is important from a financial perspective because the useful life of a capital asset determines the number of years that asset will be depreciated. Useful life also can be used to help planners schedule modifications, make buying decisions, and compare or assess programs. Initially, useful life is the engineering estimate of how long the item of equipment will be available for operational use. But useful life can be extended by upgrades and cut short when the item is destroyed during use.

While there are three significant data elements, there are a number of other data still being identified at this writing that are needed to track and understand identity, value, and useful life. For example, the dates that equipment is placed in service and disposed of or destroyed are needed to initiate and terminate the depreciation process. Contract number is needed to link capital assets and supporting items and services. Nomenclature is needed to understand what a particular UID represents. Despite the need for a number of data items, the intent is still to have data entered once and used many times, rather than entering the same data into multiple systems.

So, Who Cares?

Now to answer the question posed in the fourth paragraph at the beginning of this article: Who cares about military equipment valuation? The simple answer is that everyone in the acquisition, logistics, and accounting communities--and in those industries doing business with DoD--should! Each community is involved in and affected by military equipment valuation.

Acquisition Community

The PM starts the valuation process by describing his or her program as part of developing the acquisition strategy prior to Milestone C. This description will be shared with the accounting specialist-a new requirement for the PM.

The next step is for the contracting officer to do two things. First, he of she must identify which of the contracts will need to be "tagged" so that the accounting specialist can follow up. That information will be determinable by tagging all contracts from PMs with capital assets. Then, for those contracts that are tagged, the contracting officer will write a separate CLIN or SLIN for each separate item.

Accounting Community

Much of the work of valuing military equipment and reporting it on balance sheets is the work of the accounting and finance community, and much of this effort with be automated. However, once the PMs have described their programs, the accountants will work with the PMs to ensure that valuation templates are set up to guide how each procured item will be treated from ah accounting standpoint.

When a tagged contract is received, a WIP account will need to be opened. As payments are made against contracts, the accounting system will record those payments in the appropriate WIP account. Finally, accountants are responsible for ensuring that the financial reports are complete and accurate.

Logistics Community

Various logistics systems today track property, including military equipment. Once the new military equipment valuation processes and systems are in place, the logistics community will have better, more reliable data than it has ever had and will be relieved of some of the accounting for property values (which will be generated by the accounting system).

Industry

Most military equipment valuation work is performed by government personnel. However, contractors separately will have to price each type of asset in the contract bid. For fixed-price-type contracts, this will be done as part of the contract negotiation. For cost-type contracts, an estimate will be provided during contract negotiation, and that estimate will be updated for the specific asset upon delivery. There will be no requirement, however, for the contractor to accumulate costs by CLIN of SLIN or to bill financing payments by CLIN of SLIN for military equipment valuation purposes.

Conclusion

The whole process sounds complex-and it is.

The good news is that acquisition and logistics professionals will not have to become accountants. For the accountants, most of the detail work will be done by automated systems. While there is new work to do, that work will be building on what the acquisition, logistics, and accounting communities, along with their industry partners, do every day to produce equipment for our warfighters.

The end result of all this complexity will be better decisions and more confidence in us from our leadership, the Congress, and--most importantly--the American people.

(Editor's note: This article, substantially as printed above, also may be found on the for Acqusition, Technology and Logistics Web site at http://www.acq.osd. mil/me/overview/docs.)

(1) Gruber, Amelia. GovExec.com Daily Briefing. February 27, 2004. page 1.

(2) Walker, David M. Testimony before the Senate Armed Services Committee, Subcommittee on Readiness and Management Support, March 23, 2004, "DEPARTMENT OF DEFENSE: Further Actions Needed to Implement a Framework for Successful Financial and Business Management Transformation."

(3) Ibid. page 1.

(4) Public Law 101-576, November 15, 1990.

(5) Section 303(a), Pub. L. 101-576; 31 United States Code [section]3515(a).

(6) Section 304(a), Pub. L. 101-576; 31 United States Code [section] 3521 (e).

(7) Section304(a), Pub. L. 101-576; 31 United States Code [section] 3521 (g).

(8) Public Law 104-208, September 30, 1996.

(9) Section 803, Pub. L. 104-208; 31 United States Code [section] 3512 note.

(10) Bush, George W. The President's Management Agenda. Fiscal Year 2002. Executive Office of the President, Office of Management and Budget. Summer 2001. page 1.

(11) Ibid. page 20.

(12) Secretary of Defense Memorandum, July 19, 2001, subject: Financial Management Information within the Department of Defense.

(13) Under Secretary of Defense (Comptroller) Memorandum, April 8, 2002, subject: Interim Unaudited Financial Statements.

(14) Under Secretary of Defense (Comptroller) Memorandum, August 8, 2003, subject: Mid-Range Financial Improvement Plans.

(15) Under Secretary of Defense (Comptroller) Memorandum, May 20, 2003, subject: Renaming and Update of the Financial Management Modernization Program (FMMP) to the Business Management Modernization Program (BMMP).

(16) Walker, David M. Testimony before the Senate Armed Services Commit tee, Subcommittee on Readiness and Management Support, March 23, 2004, "DEPARTMENT OF DEFENSE: Further Actions Needed to Implement a Framework for Successful Financial and Business Management Transformation." Page 1.

(17) Government Performance and Results Act, Pub. L. 103-62, August 3, 1993.

(18) Federal Accounting Standards Advisory Board, Statement of Federal Financial Accounting Standards No. 23, subject: Eliminating the Category National Defense Property, Plant, and Equipment, May 2003, p. 1.

(19) Ibid. page 3.

(20) Bureau of Economic Analysis webpage, www.bea.gov/bea/about/mission.

(21) Under Secretary of Defense (Acquisition, Technology and Logistics) and Under Secretary of Defense (Comptroller) Memorandum, December 6, 2000, subject: Property, Plant and Equipment Program Management Office.

(22) Federal Accounting Standards Advisory Board, Statement of Federal Financial Accounting Standards Number 6, subject: Accounting for Property, Plant and Equipment, June 1996, p. 1.

(23) DoD Instruction 5000.64, Defense Property Accountability, August 13, 2002.

(24) As of July 15, 2004.

(25) Full cost means all costs incurred to acquire and bring the military equipment to a form and location suitable for its intended use. Examples of such costs include the cost of the end item with the cost of all associated government furnished equipment, training manuals, technical data, engineering support, etc., but excluding spares and support equipment.

(26) Department of Defense Instruction 5000.2, "Operation of the Defense Acquisition System," April 5, 2002.

(27) The fixed asset accounting and physical property accountability systems may be one and the same; e.g., the Air Force will use AFEMS for both processes.

Figure 1. Baseline Valuation (From the Department of Defense)

Valuation Calculation

Program Balances                      W/P
                                      Ref.
                                      To

Estimated Cumulative Cost of End             A
  Items in Service
Accumulated Depreciation                     B
NBV of End Items in Service                  C = A - B

Total Work-in-Process                        D

Cumulative Cost of End Items in              E = A + D
  Service and Work-in-Process
Depreciation Expense                         F

Estimated Cost per End Item
Total Estimated Program Costs                G
Total Number of End Items                    H
Estimated Cost per End Item          2.1.1   I = G / H

Total Military Equipment Additions
Estimated Cost per End Item                  I
Total End Items Placed in Service            J
Total Military Equipment Additions   2.1.2   K = I * J

Total Work-in-Process
Total Estimated Expenditures                 L
Total Military Equipment Additions           K
Total Work-in-Process                2.1.3   D = L - K

Depreciation
Estimated Useful Life                        M

Program Balances                     Projection Date 2006   W/P
                                          Data as of        Ref.
                                     September 30, 2002     From

Estimated Cumulative Cost of End          34,210,219,355    2.3
  Items in Service
Accumulated Depreciation                   6,108,967,742    2.3
NBV of End Items in Service               28,101,251,613    0

Total Work-in-Process                      3,243,575,545    2.1.3

Cumulative Cost of End Items in           37,453,794,900
  Service and Work-in-Process
Depreciation Expense                         977,434,839    2.3

Estimated Cost per End Item
Total Estimated Program Costs             58,917,600,000    2.2.1
Total Number of End Items                             62    B p 20
Estimated Cost per End Item                  950,283,871    2.1.1

Total Military Equipment Additions
Estimated Cost per End Item                  950,283,871    2.1.1
Total End Items Placed in Service                     36    3.18.2
Total Military Equipment Additions        34,210,219,355    2.1.2

Total Work-in-Process
Total Estimated Expenditures              37,453,794,900    2.2.2
Total Military Equipment Additions        34,210,219,355    2.1.2
Total Work-in-Process                      3,243,575,545    2.1.3

Depreciation
Estimated Useful Life                35                     0

Figure 3. Process and System Requirements 

Acquisition Planning and Contract Writing

* Identify types of program items to be procured (that is, deliverable end items, spares, manuals, government-furnished property (GFP), supporting equipment, etc.) and create a valuation template 

* Establish a Work-in-Process (WIP) account

* Identify contracts that contain capitalizable assets

* For identified contracts, write contracts to separately price each asset type

Item Acceptance and Work-in-Process

* Uniquely identify military equipment end items and GFP

* Connect unique identification to unit acquisition value for both end items and GFP at acceptance

* Upon end item delivery, allocate end item costs per contract line item number (CLIN) or sub-contract line item number (SLIN) structure

* Post valuation information to WIP

Military Equipment Valuation

* Upon delivery, perform the calculations required to establish end item full cost (based on valuation template)

* Generate the supporting information (for example, accounting transactions) to relieve WIP and post to fixed asset accounts

Fixed Asset Accounting

* Account for adjustments to asset value, including major modifications which could change the useful (for example, depreciable) life and asset disposition changes (disposed, lost, transferred)

* Relate subsequent modifications and upgrades to the original military equipment assets to which they apply

* Calculate depreciation expense

Asset Accountability

* Communicate selected asset disposition changes (disposal, loss, or transfer) to the Fixed Asset Accounting System

Financial Reporting

* Report on DoD Component and DoD's consolidated financial statements: WIP, depreciation expense, and net book value of military equipment

Figure 4. Systems Planned for Use in the Mid-Term Solution and
Envisioned for the Long-Term Solution

Functional System     Mid-Term                       Long-Term

Contract Writing      Army--PADDS, SPS;              SPS
                      Navy--SPS, PDZ, AMAS;
                      Air Force--ConWrite, SPS,
                      ACPS, COINS

Requisition           GFP Accountability System      TBD

Receiving             WAWF                           WAWF

Disbursement & A/P    Army--MOCAS, CAPS, SOMARDS,    Army--GFEBS, LMP;
                      STANFINS; Navy--STARS,         Navy--C-ERP,
                      SABRS, SIGMA,                  SABRS; Air
                      MOCAS; Air Force--MOCAS        Force--DEAMS

WIP                   Cabrillo ME                    Army--GFEBS, LMP;
                                                     Navy--C-ERP;
                                                     Air Force--DEAMS

ME Valuation          Cabrillo ME                    Army--GFEBS, LMP;
                                                     Navy--C-ERP;
                                                     Air Force--DEAMS

Fixed Asset           Army--PBUSE; Navy--Cabrillo;   Army--GFEBS, LMP;

Accounting            Air Force--REMIS, AFEMS,       Navy--C-ERP;
                      RAMPOD                         Air Force--IMDS

Accountability        Army - LMP, PBUSE, DPAS;       Army--SALE (GCSS-
                      Navy--NVR, CBSS, AIRRS,        A(e) LMP); Navy--
                      SERMIS, LMIS; Air              NVR, CBSS, AIRRS,
                      Force--REMIS, AFEMS,           SERMIS, TFSMS; Air
                      RAMPOD                         Force--IMDS

Financial Reporting   DDRS                           Army--GFEBS, LMP;
                                                     Navy--C-ERP;
                                                     Air Force--DEAMS

Note 1: Insofar as other Defense Agencies have military equipment that
meets reporting requirements, they will leverage the information
systems identified above for the Services.

Note 2: To identify the abbreviations and acronyms in the table, visit
the P&EP Office Web site at www. acq.osd mil/me.

Richard K. Sylvester is a member of the Senior Executive Service and Deputy Director, Acquisition Resources and Analysis for Property and Equipment Policy, Office of the Under Secretary of Defense (Acquisition, Technology and Logistics). He is a Level III-certified acquisition professional in program management. Prior to his current assignment, he led development of Department of Defense systems acquisition policy. His civilian honors include o Meritorious Presidential Rank Award and several Secretary of Defense Meritorious Civilian Service awards.