Working

Capital

Funds

Fiscal

Year

2000

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UNITED STATES AIR FORCE Annual Financial Statement

United States 

Air Force

Message from the Commander, Air Force

Materiel Command . . . . . . . . . . . . . . . . . . . .2

Message from the Assistant Secretary of the Air

Force, Financial Management and

Comptroller . . . . . . . . . . . . . . . . . . . . . . . . . .3

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

Air Force Foundations . . . . . . . . . . . . . . . . . .5

Supply Management Activity Group . . . . . .13

Depot Maintenance Activity Group . . . . . . .21

Information Services Activity Group . . . . . .39

Cash Management . . . . . . . . . . . . . . . . . . . .43

Limitations of the Financial Statements . . . . . . . . .46

Principal Statements . . . . . . . . . . . . . . . . . . . . . . . .47

Footnotes to the Principal Statements . . . . . . . . . . .65

Required Supplemental Information . . . . . . . . . . . .95

Audit Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . .101

United States Air Force FY 2000 Financial Statement

1

Working

Capital Funds

Table of Contents
United States Air Force FY 2000 Financial Statement

2

Message from the Commander,

Air Force Materiel Command

1Source: Systems Compliance Database, formerly Air Force Automated Systems Inventory (AFASI)

2Source: FY02 Budget Estimate Submission (BES)

DEPARTMENT OF THE AIR FORCE

HEADQUARTERS AIR FORCE MATERIEL COMMAND

WRIGHT-PATTERSON AIR FORCE BASE, OHIO 45433-5001

February 2001

Message from the Commander, Air Force Materiel Command

FY2000 was a most challenging year. Through extraordinary Y2K efforts, we began the new millennium

with virtually no disruption to the Command’s 186 legacy systems.1 Additionally, by September 2000 we had successfully transferred 4.3 million hours2 of Depot Maintenance Workload from two closing Air Logistics Centers to

the locations where it would be accomplished in the future. Our FY2001 budget includes the planned transfer of the

Air Force Fuels Division to the Defense Logistics Agency. 

On a less positive note, the year’s financial performance was disappointing. The cost of transferring the

workload from the two closing Air Logistics Centers coupled with ever-increasing costs of maintaining and supplying

a fleet of aging aircraft significantly exceeded our budget estimates and drove a loss to the bottom line. In FY2001,

our priorities will continue to focus on increasing the readiness of Air Force systems while we work a number of initiatives to reduce and contain our costs.

Among these initiatives is our continuing efforts to provide meaningful and timely financial information to

our managers through auditable financial statements. We’re improving our Depot Maintenance contract and organic

financial systems and have established a full-time project management office to adopt commercial-like accounting

practices for the Supply Management Activity Group (SMAG).

It is very important to note that while net operating results were down on the financial side, the SMAG, the

Depot Maintenance Activity Group (DMAG), and the Information Services Activity Group (ISAG) achieved a majority of the performance goals set for FY2000. This is significant considering the breadth and depth of the worldwide

support these activities provided to the Air Force. Overall, support to the warfighter was excellent.

Realizing the Air Force Vision of Global Vigilance, Reach and Power ensures FY2001 will be another year

filled with challenges and opportunities. AFMC stands poised to do our part in meeting those challenges by providing increased warfighter support at a reasonable cost.

LESTER L. LYLES

General, USAF

Commander
DEPARTMENT OF THE AIR FORCE

WASHINGTON DC 20330-1130

February 2001

Message from the Assistant Secretary of the Air Force

Financial Management and Comptroller

I am pleased to present the Air Force Working Capital Funds financial statement for Fiscal Year 2000. This

statement fulfills the requirements of the Chief Financial Officers Act and portions of the requirements of the

Government Performance and Results Act.

The statement displays the financial and performance measures associated with the three major business areas

that our Working Capital Funds encompass—supply, depot maintenance, and information systems. The three major

business areas successfully met most of their financial goals in FY2000 and achieved many of their target performance goals. The business activities that are included in our working capital funds delivered spare parts and made

other contributions in support of continuing operations for KFOR in the Balkans.

We also made progress in improving financial management in the working capital funds in FY2000. We produced more timely financial reports for managers during FY2000, who made wider use of the Keystone system that

provides supply managers with valuable data on revenues and expenses. We made further progress on operating

capability of a major new depot accounting and production system called the Depot Maintenance Accounting and

Production System (DMAPS). This system will comply with the Chief Financial Officers Act, and more importantly

will provide the managers of our depots with timely data on the actual cost of repairing systems.

The working capital funds are also excellent examples of GPRA in action in the Air Force. The Government

Performance and Results Act (GPRA) requires that managers establish performance measures, set goals using those

measures, and then use the measures and goals for day-to-day management as well as for year-end reporting.

Consistent with the requirements of GPRA, this statement compares year-end results to our goals using the same

measures that senior managers regularly employ to judge the health of our working capital funds.

The Air Force takes its responsibility for stewardship of the public funds seriously. We are therefore strongly

committed to improvement in all aspects of financial management.

JAMES R. SPEER

Acting Assistant Secretary of the Air Force

(Financial Management and Comptroller)

United States Air Force FY 2000 Financial Statement

3

Message from the Assistant Secretary of the Air Force,

Financial Management and Comptroller

OFFICE OF THE ASSISTANT SECRETARY

Mission

The mission of the U.S. Air Force is to defend the

United States through aerospace power.

Vision 2020

America’s Air Force—Global Vigilance, Reach, and

Power.

Core Values

! Integrity First

! Service Before Self

! Excellence in All We Do

Core Competencies

! Aerospace Superiority

! Global Attack

! Rapid Global Mobility

! Precision Engagement

! Information Superiority

! Agile Combat Support

Overview

United States Air Force FY 2000 Financial Statement

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Air Force

Foundations
United States Air Force FY 2000 Financial Statement

6

Air Force Working Capital Funds

Air Force Working

Capital Fund

The Air Force Materiel Command (AFMC)

accounts for more than 95 percent of Air Force

Working Capital Fund (AFWCF) revenue and

expense activity (excluding the transportation

working capital fund, which is managed by the

U.S. Transportation Command). The AFWCF business areas support major Air Force goals and mission-essential tasks by providing inventory management for spare parts and associated logistics

support services to fulfill Air Force needs during

war and peace. Depot maintenance provides economical and responsive repair, overhaul, and modification of aircraft, missiles, engines, other major

end items, and associated components, and the

information services business area provides for the

maintenance and development of automated information systems for the Air Force, Department of

Defense (DoD), and other government agencies.

Air Force Working Capital Fund

Concept

“Working capital funds are revolving funds within

DoD that finance organizations that are intended to

operate like commercial businesses. Income (or

budgetary resources) derived from the sale of

goods and services is then used to finance the

Defense Working Capital Fund (DWCF) business

areas’ continuing operations without fiscal year

limitations. Unlike profit-oriented commercial businesses, DWCF businesses strive to reach breakeven prices charged to customers. Revenue from

customers sustains the full cost and the continuous

cycle of DWCF business operations.

These business units sell goods or services to internal DoD customers at a price necessary to recover

the total cost incurred to provide those goods and

services. Working capital fund business units

finance their operations with cash from the revolving fund; the revolving fund is then replenished by

payments from the business units’ customers.”

—Defense Systems Management College1

Working capital funds (WCFs) allow the Air Force

to:

! Establish strong customer/provider relationships

! Identify the total cost of providing support

products and services

! Focus management attention on net results,

including costs and performance

! Ensure readiness through reduced support costs,

stabilized rates, and customer service.

1Source: DSMC Acquisition Logistics Guide—Life Cycle Costs (LCC), www.dsmc.dsm.mil/educdept/lmdeptresources/papers/chap13.doc

and DSMC Financial Management Terms, www.dsmc.dsm.mil/courses/crsdesc/bcf-103/fmtermstn.doc.
Air Force Working Capital Fund

Activity Groups

The AFWCF is managed primarily through the following activity groups:

Supply Management Activity Group

The Supply Management Activity Group (SMAG)

was established to provide inventory management

for spare parts and associated logistics support

services to fulfill USAF needs during war and

peace. SMAG manages approximately 2 million

items, including weapon systems spare parts, fuel,

medical/dental supplies and equipment, and items

used for non-weapon systems applications.

Materiel is procured from vendors and held in

inventory for sale to authorized customers. SMAG

acquires and repairs inventories using funds

received from prior sales. The activity group pays

operating costs using revenue from sales. SMAG

consists of five divisions that collectively provide

the above-mentioned services. The five divisions

are the Materiel Support Division (MSD), General

Support Division (GSD), Fuels Division,

Medical/Dental Division, and Air Force Academy

Cadet Issue Division.

Depot Maintenance Activity Group

The Depot Maintenance Activity Group (DMAG)

was established to provide economical and responsive repair, overhaul, and modification of aircraft,

missiles, engines, other major end items, and associated components. DMAG provides a wide range

of specialized services to DoD as well as other U.S.

and foreign agencies. Both AFMC depots and contract operations provide repair and overhaul services. Depot maintenance operates on funds received

from the sale of its services.

Information Services Activity Group

The Information Services Activity Group (ISAG)

was established to maintain and develop automated

information systems for specific Air Force, DoD,

and other government agencies. Central design

activities (CDAs) develop and implement new

applications, maintain and modify existing programs, provide training and documentation, and

United States Air Force FY 2000 Financial Statement

7

Air Force Working Capital Funds
United States Air Force FY 2000 Financial Statement

Air Force Working Capital Funds

customize off-the-shelf software based on their customers’ specific needs.

Mission Impact

The impact of AFWCF support on Air Force mission capability may be gauged by the trends reflected in key operational and financial business performance indicators (BPIs). These indicators also

are the key measure to assess performance under

the Government Performance and Results Act

(GPRA). Key operational BPIs include the following:

! MSD Retail Issue Effectiveness—The percentage of occasions on which Base Supply is

able to issue a serviceable part after an order is

placed, regardless of stock level authorizations.

! MSD Retail Stockage Effectiveness—The

percentage of occasions on which Base Supply

is able to issue a serviceable part that it is

authorized to stock.

8
United States Air Force FY 2000 Financial Statement

9

Air Force Working Capital Funds

! DMAG Depot Maintenance Aircraft

Delivery Performance—The percentage of aircraft delivered from depot maintenance on or

before negotiated delivery dates.

Key financial BPIs measure the effectiveness of

AFWCF resource management. Typical measures

are as follows:

! Net Operating Results (NOR)—NOR is calculated by taking the difference between revenue and expenses. It is a bottom-line profit

and loss indicator.

! Unit Cost Target (UCT)—A target performance indicator measuring projected resources

consumed versus projected output. Actual unit

cost is measured against target unit cost.

Policies and Procedures

Activity group operations are based on policies and

procedures that remain in effect from the establishment of the AFWCF.

Funding Authority

The Office of Under Secretary of Defense

(Comptroller) (OUSD(C)), through the Assistant

Secretary of the Air Force, Financial Management

and Comptroller (SAF/FM), provides activity

groups their annual cost authority. Unit cost targets

have been developed to provide standards for managing cost per unit of output. UCTs are established

during the budget process by dividing the projected

total program/product cost by the projected units of

measurable output. Capital investment targets are

specified to support replacement and modernization

of equipment and other capital assets through the

budget, obligation, and procurement processes.

Rates

Rates are established to recoup full costs and are

adjusted for prior year gains or losses. These rates

are stabilized during the year of execution. The

scope of costs paid by AFWCF activities and

passed to customers in rates and prices have been

refined to represent the full costs of goods and

services more accurately.
Summary of Working Capital Funds

United States Air Force FY 2000 Financial Statement

Air Force Working Capital Funds

10
United States Air Force FY 2000 Financial Statement

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Air Force Working Capital Funds

Mission Statement

The mission of the Supply Management Activity Group

(SMAG) is to provide policy, guidance, and resources to

meet Air Force needs for spare parts during war and

peace. SMAG manages approximately 2 million items,

including weapon systems spare parts, fuels,

medical/dental supplies and equipment, and items used

for non-weapon systems applications. Materiel is procured from vendors and held in inventory for sale to

authorized customers.

SMAG consists of five divisions: the Materiel Support

Division (MSD), General Support Division (GSD), Fuels

Division, Medical/Dental Division, and Air Force

Academy Cadet Issue Division. The Air Force Materiel

Command (AFMC) manages the MSD, GSD, and Fuels

divisions. Air Force Headquarters (HQ USAF) manages

the Medical/Dental and Air Force Academy Cadet Issue

divisions.

MSD is responsible for Air Force-managed depot-level

reparable spare parts and consumable spares. MSD’s

principal products are serviceable spare parts and assemblies unique to Air Force weapon systems. The sale of

reparable parts composes about 90 percent of total sales.

The remainder consists of sales of nonreparable or consumable items within the MSD. Although most consumable items have been transferred to the Defense Logistics

United States Air Force FY 2000 Financial Statement

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Overview

Supply

Management Activity

Group
United States Air Force FY 2000 Financial Statement

14

Agency (DLA) for management, items designated

as weapon system-critical remain on the AFMC

product list.

GSD items support installation maintenance and

administrative functions, field and depot maintenance of aircraft, ground and airborne communication and electronic systems, and other sophisticated

systems and equipment. These items also include

individual clothing items issued to new recruits;

organizational clothing items, such as firemen’s

protective overgarments; and air crew helmets and

chemical warfare protective overgarments. GSD

supports 80 Air Force installations throughout the

world.

Aviation, ground, and missile fuels categories comprise the Fuels Division. Aviation and ground fuels

categories support the Air Force, Air National

Guard (ANG), Air Force Reserve Command

(AFRC), and other DoD and government agencies,

commercial enterprises, and foreign governments.

The missile fuels category supports the National

Aeronautics and Space Administration (NASA),

Air Force space launch programs, and commercial

space launch programs, in addition to the customers named above.

The Surgeon General of the Air Force is responsible for overall management of the Medical/Dental

Division. This peacetime operating authority provides effective support necessary to maintain established norms in the health care of Air Force active

military, retirees, and dependents. The division’s

war reserve materiel (WRM) requirement is to provide medical supplies and equipment vital to support forces in combat and contingency operations.

The Air Force Academy Cadet Issue Division

finances the purchase of uniforms, uniform accessories, and computers for sale to cadets. The division’s customer base includes more than 4,000

cadets who receive distinctive uniforms procured

from a number of domestic manufacturing contractors.

Customers, Products, and

Services

In addition to parts management, the Supply

Management Mission Area (SMMA) provides a

wide range of logistics support services, to include

requirements forecasting, item introduction, cataloging, provisioning, procurement, repair, technical

support, data management, item disposal, distribution management, and transportation. SMMA provides support to a variety of customers. For FY

Supply Management Activity Group
United States Air Force FY 2000 Financial Statement

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2000, the customer base consisted primarily of the

following:

! Air Force Major Commands (MAJCOM)

(58 percent of sales)

! AFMC depot maintenance and contractors

(18 percent of sales) 

! Air National Guard and Air Force Reserves

(17 percent of sales) 

! Other military services within DoD, other federal agencies, and foreign military sales (FMS)

(7 percent of sales).

All customers pay for supply services at the same

full cost recovery rate. In addition to providing normal resupply, the supply business also provides initial provisioning support to the Air Force

Acquisition Executive. The SMMA consists of a

Direct Budget Authority (DBA) and SMAG.

Performance Measures

Supply Management Highlights

SMAG experienced continued improvements in

most of its customer support and financial metrics

during FY 2000. The activity group met or exceeded most of its FY 2000 goals for the key business

performance indicators (BPIs) shown in the table

below.

Due in large part to the SMMA’s continued supply

chain manager (SCM) initiatives, constraints analysis programs (CAP), contract repair process (CRP),

and depot repair enhancement program (DREP),

SMAG continued to improve its war-fighting support. The mission area’s SCM initiatives are aimed

at integrating key business processes that support

the flow of products, information, and money to

improve the efficiency of the supply pipeline. The

CAP is an ongoing study of the major constraints

that prevent optimum support. Its purpose is to

identify, isolate, and correct the constraints that

hamper support. The purpose of the CRP and

DREP is to enhance the repair capability of both

Supply Management Activity Group
United States Air Force FY 2000 Financial Statement

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organic depot and contract repair facilities by determining the best use of people, parts, and funds to

fill demands.

The activity group experienced continued reduction

of its backorders and logistics response times while

meeting its financial goals during FY 2000. The

FY 2000 SMAG highlights include:

Backorders—SMAG’s impressive backorder

reduction trend continued. The activity group

reduced the number of MSD backorder units from

373,700 to 263,026 in FY 2000.

Logistics Response Time (LRT)—SMAG continued to increase the speed at which it satisfied MSD

backorders, reducing the activity group’s overall

logistics response time from 41 days to 36.8 days

in FY 2000.

Financial Success—Collectively, SMAG met its

FY 2000 goals for unit cost target and net operating

result, with each division meeting its target.

SCM Tool Development—In FY 2000, SMAG

continued to develop and refine its web-based tools

to assist SCMs and Air Force and FMS customers

in tracking performance.

! The Backorder Analysis and Reporting Tool

(BART), a Microsoft Access-based tool developed by KPMG Consulting, provides front-end

query and report capability for backorder data.

This database houses D035A (Item Manager

Wholesale Requisition Process) data. BART

allows an SCM to monitor his or her progress

in reducing backorders and to identify inefficiencies in the supply pipeline.

Issue effectiveness indicates the ability of Base

Supply to issue a serviceable part when any

demand is placed. Stockage effectiveness 

examines how often Base Supply fills an

authorized base stock level or demand.

Supply Management Activity Group
United States Air Force FY 2000 Financial Statement

17

! In addition to BART, the Issue and

Stockage Effectiveness Tool (ISET),

developed by the Sacramento Air

Logistics Center (SM-ALC) in FY 1999,

was web-enabled in FY 2000 through a

contract with the Air Force Logistics

Management Agency (AFLMA). ISET

retains all the drill-down capability of

the original tool, and increases its capability by storing more issue effectiveness/stockage effectiveness data. ISET

allows an SCM to identify by National

Stock Number (NSN) those items that

are below desired support targets. Once

identified, the SCM can work with key

personnel or organizations in the supply

chain to remedy any problems.

SCM-based Target Setting—Acknowledging that

each SCM manages unique items with particular

supply chain issues, problems, and concerns, the

AFMC and Logistics Business Board (LBB) tasked

each SCM to set their own targets for each of the

four operational BPIs tracked by SMAG. In May

2000, each SCM developed their own targets for

MSD backorders, LRT, issue effectiveness, and

stockage effectiveness. In turn, AFMC Logistics

(AFMC/LG) rolled up these individual targets to

set new Air Logistics Center (ALC) and AFMC

strategic targets through FY 2006.

Materiel Support Division Issue and

Stockage Effectiveness

MSD fell just short of its issue and stockage effectiveness goals by 0.82 percent and 0.11 percent,

respectively, for FY 2000. MSD’s issue effectiveness for FY 2000 was 59.18 percent. The division

missed its goal of 60 percent by 0.82 percent.

MSD’s stockage effectiveness for FY 2000 was

69.89 percent. The division missed its goal of 70

percent by 0.11 percent.

Materiel Support Division Logistics

Response Time

LRT measures the time from when a customer

places an order to the time they receive an AFMCmanaged item. With the emergence of an

Expeditionary Aerospace Force, which is capable

of deploying anywhere in the world at a moment’s

notice, LRT has become a key BPI for both AFMC

and the customer. Tracked monthly by AFMC/LG,

LRT data is available to all SCMs through a web

site maintained by HQ AFMC/LGIL, and the SCM

Analysis Branch. This information can be accessed

online at www.afmc-mil.wpafb.af.mil/HQ-AFMC/

LG/LSO/lot. A key SCM responsibility is to monitor the four segments of the LRT process to ensure

Supply Management Activity Group
United States Air Force FY 2000 Financial Statement

18

Supply Management Activity Group

that they fall within acceptable limitations. The

four segments are as follows:

! Requisitioning Processing—Time from the

base’s initiation of an order to receipt of the

order by the depot

! Inventory Control Point (ICP) Processing—

Time from the receipt of an order to preparing a

part for shipment

! DLA Pick and Pack—Time to prepare an item

for shipment

! Transportation Time—Time to ship an item

from the depot to the customer.

In FY 2000, SMAG exceeded its LRT goal of 38

days with a FY 2000 cumulative LRT of 36.8 days.

Again, it is the job of the SCM, who is accountable

for the health of the supply pipeline for every item,

to ensure timely delivery of parts to the customer.

To do this, the SCM may be required to develop

contracts or service level agreements (SLAs) with

suppliers, depot managers, contract repair facilities, commercial shipping companies, single managers, or DLA to find ways to shorten LRT.

Materiel Support Division Backorder

Reduction

A backorder is demand for an item that cannot be

immediately satisfied from existing inventory.

Backorder reductions have become a major HQ

AFMC initiative to improve support to the

warfighter. AFMC made considerable efforts during FY 2000 to achieve a 30-percent reduction

overall throughout the year (from 374,000 units to

263,000 units). This success is due largely to a

number of backorder reduction initiatives that ALC

implemented, which will continue throughout FY

2001. BART is being used to track SMAG’s backorder reduction effort. This tool allows an SCM to

analyze backorder trends. Each SCM is encouraged

to use BART to identify major drivers of backorder

increases by NSN.

Financial Measures

Net Operating Result

The net operating result (NOR) is the difference

between revenue and expenses, or a bottom-line

profit and loss indicator. The objective of the

SMMA is to break even over a two-year budget

cycle. This is accomplished by setting rates, which

offset the net prior year profit or loss. The MSD

NOR for FY 2000 was a $184.5 million loss,

$132.4 million below the budgeted NOR loss of

$52.1 million. Since MSD is to break even over a

two-year budget cycle, the rates were not sufficient

to fully recover all costs.

For the General Support Division, the FY 2000

NOR goal was a loss of $1.1 million, but the actual

result was a profit of $92.8 million. The increased

NOR was driven by higher than planned adjustments for physical inventory and incoming shipment discrepancy gains. Inventory gains resulted

from AFMC’s effort to reconcile its own D035 system with DLA’s Distribution Standard System and

to clean up outstanding Received-Not-Billed and

Billed-Not-Received transactions at the Air

Logistics Centers.

For the Fuels Division in FY 2000, the NOR target

was a $3.2 million loss, and the actual result was a

$39.5 million loss. The lower NOR was driven by

reduced revenue due to under execution of the flying hour program and reduced requirement for the
United States Air Force FY 2000 Financial Statement

19

ground fuel and missile fuel programs.

Furthermore, the lower NOR can be attributed to

fuel costs in excess of the plan.

Unit Cost Target

Unit cost target (UCT) is a limitation imposed by

the OUSD(C) on the annual operating budget

(AOB), restricting obligations to a percentage of

gross sales. The AOB is the funding document that

provides the authority to incur costs. The UCT is

determined by dividing costs by sales. It also can

be described as the ratio of obligations to gross

sales. Costs are defined as obligations (excluding

initial and capital expenses) and credit returns.

Theoretically, SMAG should aim for a unit cost

target ratio of one to one, meaning a break-even

point where sales equal costs. The FY 2000 MSD

actual UCT of 0.985 was programmed and

achieved by each Center.

Supply Management Activity Group

Financial BPIs for SMAG
United States Air Force FY 2000 Financial Statement

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Efforts to Improve Financial

Management

Goals and Initiatives

Inventory Valuation

A predominant driver in DFAS and Air Force

reporting differences involves the valuation of

MSD’s extensive inventory. Currently, the Air

Force is using Latest Acquisition Cost (LAC) to

value all inventory. To properly record the inventory at historical value on the financial statements, a

complex adjustment is made using an approved

spreadsheet based on the OSD model. The Air

Force has elected to change to the historical

method of Moving Average Cost (MAC). The

change in method will ensure the inventory value is

auditable, as well as provide better management

visibility to the SCM. An additional issue the Air

Force is addressing is the matching principle for

expenses to revenue generated. Under this issue,

movement to Federal Accounting Standards

Advisory Board (FASAB) Standard 6, capitalized

assets, was studied. However, the movement to a

different standard did not fully solve the issue and

created additional problems that were not acceptable to the Air Force. Standard 6 is no longer an

option. The Air Force is now studying the commercial practice of applying an obsolescence or usage

factor over time to match the expense to the

expected revenue. The proper application of this

concept will be addressed throughout FY 2001.

Financial Reporting in Fiscal Year

2001

AFMC’s goal is the use of official Accounting

Report 1307 accounting data to both budget for and

evaluate execution of MSD performance. The Air

Force continues to work closely with DFAS to

ensure accounting statements are in full compliance

with generally accepted accounting principles and

plans to achieve CFO Act compliance as expeditiously as possible. Other SMMA FY 2001 goals

and objectives can be found in the FY 2001

SMMA Plan at www.scm.wpafb.af.mil and are

summarized below:

! Increase issue effectiveness to 63 percent

! Increase stockage effectiveness to 72 percent

! Reduce LRT to 36 days

! Reduce backorders to 238,200 units

! Meet or exceed a NOR of zero

! Hold unit cost increases of SMMA products

and services to no more than the rate of inflation

! Determine the FY 2005 SMMA workforce end

state

! Size and configure the SMMA infrastructure

for the FY 2005 mission

! Improve SMAG forecasting, budgeting, and

execution processes.

Supply Management Activity Group
Mission Statement

The Depot Maintenance Activity Group (DMAG) provides major overhaul and repair of systems and spare

parts while striving to meet or exceed required standards

for quality, timeliness, and cost. In peacetime, readiness

is enhanced by efficiently and economically repairing,

overhauling, and modifying aircraft, engines, missiles,

components, and software to meet customer demands.

During wartime or contingencies, repair operations surge

and capacity is realigned to support the warfighter’s

immediate needs.

Repair and overhaul is accomplished through both the

Air Force Materiel Command depots and contract operations. Customers pay for depot maintenance repair when

the item is needed. Depot maintenance operates on the

funds received through sales of its products and services.

Less than 1 percent of the activity group’s annual budget

comes from funds authorized by Congress.

Customers, Products, and

Services

Depot maintenance supports a number of customers.

DMAG’s single largest customer is the Supply

Management Activity Group, which generates approximately 40 percent of their total revenue. The components repaired for supply management replenish spare

United States Air Force FY 2000 Financial Statement

21

Overview

Depot Maintenance

Activity Group
United States Air Force FY 2000 Financial Statement

22

Depot Maintenance Activity Group

parts to the Air Force supply chain. Approximately

55 percent of depot maintenance revenue comes

directly from work performed for the major commands, the Air National Guard, and the Air Force

Reserve Command. The balance of work comes

from other services, government agencies, and foreign countries.

Depot maintenance provides scheduled overhaul

for airframes and engines based on a planned

timetable for each weapon system. Missiles and

ground electronic systems are repaired through

scheduled and unscheduled depot maintenance.

Individual components routed from the field also

are repaired. AFMC depots also provide an extensive software capability to develop or modify software used to operate weapon systems and software

designed for diagnostic purposes. Finally, storage,

reclamation, and regeneration services are provided

for all military services at the Aerospace

Maintenance and Regeneration Center (AMARC)

at Davis-Monthan Air Force Base, Arizona, for

equipment not currently needed by active forces.

Depot Workload Strategy

The nation needs military depot repair and overhaul capability to maintain weapon systems at a

reasonable cost with minimum interruptions to Air

Force operations. Organic depot maintenance is an

important and logical part of depot maintenance

capability and provides support for military-unique

technologies. The Air Force has developed a depot

maintenance strategy that takes advantage of both

public- and private-sector sources of depot maintenance repair to supply reliable, flexible, cost-effective, and timely depot maintenance support.

Previously, no clear policy existed. In the wake of

recent base closures, interest from the private sector to perform depot maintenance has increased.

New weapon systems with advanced technologies

and alternative repair strategies, such as public/private partnering and teaming, present new challenges to depot maintenance management. 

The new depot maintenance strategy has four

major facets. First, it supports the needs of the

combat forces of today and tomorrow through

assured peacetime readiness. Second, it retains a

reserve capacity to surge, meeting contingency

operations. Next, it provides the best value to taxpayers by allocating work between strong public-
United States Air Force FY 2000 Financial Statement

23

and private-sector maintenance capabilities.

Allocation occurs through best value assessments

and formal competitions. Finally, the strategy complies with all legislative commitments.

The depot maintenance strategy’s purpose is to

determine how to size the Air Force organic depot

maintenance infrastructure. The process defines the

necessary capabilities that should be retained by

the Air Force and the depot maintenance workload

that should be performed by the private sector. By

direction of the Secretary of the Air Force, the

depot maintenance strategy uses Core Plus to

determine the basic size and composition of government depots.

Core depot maintenance, frequently shortened to

“core,” is the organic depot capability required to

assure mission support for the weapon systems/

equipment designated for the contingency plan. It

encompasses both the depot capability (facilities,

equipment, processes, and skills) and the workload

required for maintaining the capability. The

legislative branch has defined core logistics capabilities in Title 10 of the U.S.

Code (U.S.C.), Section 2464. The definition reads: 

“Core logistics capabilities are essential

for national defense that are

Government-owned and Government

operated (including Government personnel and Government-owned and

Government-operated equipment and

facilities) to ensure effective and timely

response to a mobilization, national

defense contingency situation, or other

emergency requirement.”

Core Plus refers to organic depot workloads not

required to maintain a core logistics capability.

Core Plus work includes public/private competitive

awards, best value, last source, foreign military

sales, DLA, and repair requirements for other military services and government agencies.

Depots will be right-sized through 2005, maintaining Core Plus through new technology infusion in

new weapon system workloads. Existing depot

technology will be refreshed with the Capital

Purchases Program (CPP), expense dollars, and

acquisition program funds. Air Force-acquired

commercial derivative equipment will remain as

supported by the private sector. Workloads without

a clear depot source designation will be assigned

by performing a best value assessment (Core Plus).

In 1995, the capacity utilization of the five Air

Force organic depots was 65 percent. Current targets propose 85 percent as full utilization (given

fluctuating demand). With the execution of the

Defense Base Realignment and Closure Act of

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United States Air Force FY 2000 Financial Statement

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Depot Maintenance Activity Group

1990 (Public Law 101-510, Title XXIX, November

9, 1990, as amended) (BRAC-95), the Sacramento

Air Logistics Center (SM-ALC) was closed and the

workload from the San Antonio Air Logistics

Center (SA-ALC) was realigned among other air

logistics centers. Through consolidation of the core

workloads and winning of non-core workloads, the

remaining three depots improved capacity utilization to 90 percent.

As the Air Force modernizes, the future workload

mix at the depots will continue to evolve. The distribution of work between the public and private

sector will be based on the attributes of mission

and work requirements. The Air Force will periodically revisit organic and contract capabilities to

determine the logic of maintaining work at particular locations. A corporate depot assignment process

will provide the overarching guidance. To implement this strategy, the depot assignment process

must be integrated with acquisition strategy panel

reviews. This ensures corporate compliance of Air

Force depot decisions with all legal constraints.

The accomplishment of a biennial review of the

depot maintenance strategy substantiates currency

with Air Force doctrine and policies. This depot

maintenance strategy will enable effective performance of depot maintenance in the most economic

manner. Peacetime readiness and wartime sustainability to the Air Force will receive the right workload mix of public- and private-sector depots.

Workload Consolidation

In 1997, core workloads from the two closing

depots (San Antonio and Sacramento) began transitioning to Ogden (OO-ALC), Oklahoma City

(OC-ALC), and Warner-Robins (WR-ALC) Air

Logistics Centers and Tobyhanna Army Depot. By

drawing down the AFMC infrastructure from five

to three depots, general and administrative costs

required to support the original five depots were

greatly reduced.

Competition

As discussed previously, once the minimum core

capability is established in the organic depots, the

remaining non-core workloads will be accomplished in a manner that achieves the best value to

the customer. This is achieved through public/private competition of non-core depot workloads. The

three major competition packages [San Antonio

C-5, Sacramento Composite, and San Antonio

Propulsion Business Area (PBA)] are expected to

ultimately produce a total savings of 16 percent.

Sources of Maintenance

The depot maintenance environment continues to

change in response to a decreasing military force

structure, aging weapons systems, and advancing
United States Air Force FY 2000 Financial Statement

25

technology. Weapon systems embody new materials and technologies that require new maintenance

processes, improvements in reliability, and reductions in maintenance frequency. The net result is a

requirement for greater flexibility in addressing

both wartime and peacetime workload changes.

This flexibility is achieved by employing both

organic and contractor repair sources.

Organization of Depots

DMAG organic services are provided by three principal ALCs, other service depots, and AMARC at

Davis-Monthan Air Force Base, Arizona. Organic

depot maintenance sites are as follows:

! Ogden Air Logistics Center (OO-ALC), Ogden,

Utah

! Oklahoma City Air Logistics Center

(OC-ALC), Oklahoma City, Oklahoma

! Warner-Robins Air Logistics Center 

(WR-ALC), Robins, Georgia

! Aerospace Maintenance and Regeneration

Center (AMARC), Tucson, Arizona.

Depot Maintenance Manager

The Depot Maintenance Manager (DMM) concept’s goal is to achieve accountability at the lowest level in depot maintenance. The DMM is typically the Product Directorate Chief Deputy, normally a Colonel or GM-15, responsible for the

daily management of repair, maintenance, and

modification of weapon systems and materials

assigned to a directorate. This includes management of organic production accomplished within

the directorate’s Resource Control Centers (RCCs)

and contract production managed by the directorate. The DMM may be responsible for production pertaining to multiple weapon systems (e.g.,

B-1, F-16, C-130) and commodities (e.g., software,

avionics, engines, engine accessories). The DMM

is responsible for managing all production elements

and ensuring compliance with applicable regulatory

direction.

Each DMM must ensure that his or her portion of

the business area stays within its revenue and

expense goals while executing customer requirements. DMMs are responsible for ensuring that

schedule and quality goals are met and for identifying, tracking, and controlling costs. DMMs recognize that MAJCOM customer accounts have a specific fund level based on the President’s Budget

(PB). Cost authority given to AFMC and allocated

to the ALCs must match the DMAG PB. DMMs,

in coordination with Air Force Materiel Command

Headquarters, work with their customers to ensure

funding, reprogramming actions, and investment

decision/requirement deferrals, or the reprioritization of requirements that support warfighter needs.

Depot Maintenance Activity Group
United States Air Force FY 2000 Financial Statement

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Depot Maintenance Activity Group

If such changes occur and are approved, the DMM

must validate, justify, and defend the new growth

requirement. DMMs also are responsible for closely monitoring programmed versus unprogrammed

funding execution. HQ AFMC, in conjunction with

the MAJCOMs, will defend these requirements to

Air Force Headquarters for additional or reprioritization of funds. The justification must occur as

early in the fiscal year as possible. This does not

negate the necessity for the DMMs to accurately

forecast budget requirements in the out years to the

greatest extent possible.

Contract Repair Process

The Contract Repair Process (CRP), formerly

known as Contract Repair Enhancement Program

(CREP), is transitioning to contracting standards

for repair of exchangeable commodities. The

revised vision statement reads:

“CRP is a contract repair process that

responds directly to customer demands

while simultaneously reducing inventory,

process steps, queue time, and total system

operating costs. This environment requires

long-term business relationships with contractors to take advantage of innovative

ideas and efficient management practices

such that customer demands are satisfied

using the least resources.”

A Materiel Management Team Leader leads

Contract Repair Teams, with the Production

Management Specialist, Seller, and Procuring

Contracting Officers as the core team. CRP

requires that middle managers be actively engaged

and use their knowledge to identify opportunities to

gain additional leverage by combining multiple

requirements into corporate contracts.

Providing the contractor with incentives better

meets the Air Force’s customer demands.

Performance-based “delivery on demand” contracts

in which the contractor delivers a “serviceable

upon receipt” item from a requisition within a specified time period is the leading tenet of CRP. Other

tenets include process flow day reduction, rapid

transportation, and direct shipment on demand.
United States Air Force FY 2000 Financial Statement

27

Depot Workload Distribution

50/50 Management Process

Title 10 U.S.C. 2466 establishes a limitation of

50 percent on the portion of depot maintenance

workload that may be performed by other than

government personnel. Depot maintenance work

performed under Interim Contractor Support

(ICS) and Contract Logistics Support (CLS) contracts also are included in the 50/50 calculation.

The Air Force workload distribution and tracking process has experienced significant improvement over the past two years and has become a

model for DoD. The Air Force’s ability to comply with Section 2466 has been seriously challenged with the award of the BRAC-directed SAALC and SM-ALC workload competitions and a

general increasing trend toward contract logistics

support. A Secretary of the Air Force waiver for

Section 2466 compliance was exercised for FY

2000. An integrated process team (IPT), with representation from the Assistant Secretary of the Air

Force (Acquisitions) (SAF/AQ), the Air Staff, and

HQ AFMC, has been tasked to develop a Section

2466 compliance plan that is expected to feature

significant workload shifts and execution targets

for all Air Force Defense Acquisition Commanders

(DACs) and Program Executive Officers (PEOs).

Finally, Air Force logistics and acquisition guidance is now in effect to ensure Air Force corporate

consideration of each major decision on Section

2466 compliance.

Service Level Agreements

A service level agreement (SLA) is an agreement

between the provider of a service and the customer

detailing the type, quantity, cost, and payment for

the service to be delivered. The Directorate of

Requirements (HQ AFMC/DR) has developed a

template for service level agreements (SLAs). The

Single Managers (SMs) and Supply Chain

Managers (SCMs) are tailoring the templates by

program. After these are established and deemed an

effective management tool, SLAs between the SMs

and DMMs will be developed.

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United States Air Force FY 2000 Financial Statement

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Depot Maintenance Activity Group

Depot Maintenance Accounting

and Production System

AFMC is implementing the Depot Maintenance

Accounting and Production System (DMAPS) to

bring substantial improvement to financial management and reporting for organic Depot Maintenance

Mission Area (DMMA) facilities. It also will provide AFMC with the capability to capture and

report actual and planned direct material and direct

labor at the task level on a daily basis. The ability

to apply overhead and general and administrative

expenses on a planned dollar rate per direct labor

hour also will be provided. DMMA has the capability to observe production costs on a daily basis

at the task level. DMAPS will move AFMC closer

to CFO Act and Cost Accounting Standards (CAS)

compliance than the current legacy systems allow.

Other features include:

! Incorporates the Defense Industrial Financial

Management System (DIFMS)

! Standard DoD financial reporting system

! Fully automated billing process

! Reduction of some legacy systems

! Consolidated fund control process.

DMAPS impacts all organic DMMA employees

and heavily impacts production, material, financial,

and customer order/funding processes at the ALCs.

It also impacts the DFAS-Denver location.

Production—DMAPS encompasses all organic

production processes used by production personnel

(planners, mechanics, and supervisors) from opening to closing of a job order number (JON). In

addition, all indirect DMMA employees will use

the new Time and Attendance System.

Materiel—Principal resources involved in organic

DMMA materiel processes include item managers,

equipment specialists, materiel planners, and shop

floor personnel (to identify and requisition

materiel). Other personnel include Depot Repair

Enhancement Program production maintenance

technicians, and Aircraft Repair Enhancement

Program (AREP) forward logistics specialists.

Finance—Participants in this process include management analysts from workloading and the production directorates, as well as analysts from the

budget office and cost accounting (cost accumulation and reporting).
United States Air Force FY 2000 Financial Statement

29

Customer Order and Funding—This process

touches nearly every ALC activity. It begins with

buyer/seller functions (workload negotiation);

includes the budget office (data input, rates, and

analysis); and ends with cost accounting (cost

accumulation and reporting).

DMAPS Program Phases

Phase I (Production)—Production cutover began

in July 2000 at OO-ALC and is scheduled for

January 2001 at WR-ALC and May 2001 at

OC-ALC. Phase I includes the following:

! Time and Attendance (TAA)

! Six Air Force legacy systems

! An integration engine to interface with legacy

systems and data.

Phase II (Financial and Materiel)—

Implementation is scheduled for April 2001 at

OO-ALC, October 2001 at WR-ALC, and

January 2002 at OC-ALC. Phase II includes the

following:

! Defense Industrial Financial Management

System (DIFMS)

! NAVAIR Industrial Materiel Management

System (NIMMS) Automated Bill of

Material (ABOM)

! Twenty-one Air Force legacy systems

! Four DFAS Denver legacy systems

! Air Force and DFAS Denver integration

engine to interface with legacy systems and

data.

Contract Maintenance

Accounting and Production

System

The purpose of the Contract Maintenance

Accounting and Production System (CMAPS) is to

obtain timely and accurate data related to repair,

overhaul, modification, software updates, and other

types of contracts under the contract portion of the

Depot Maintenance Activity Group (Contract

DMAG). CMAPS is the production reporting and

financial accounting system for Contract DMAG.

CMAPS supports the management of contract

maintenance production, government furnished

materials/government furnished equipment

(GFM/GFE) usage, and funding/accounting visibility to the ALCs and DFAS. The system tracks

repair/maintenance work and associated DMAG

Depot Maintenance Activity Group
United States Air Force FY 2000 Financial Statement

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Depot Maintenance Activity Group

funds obligated and expended for labor (contract),

materials, and overhead. CMAPS also validates,

records, and maintains outstanding orders for GFM

to contractors. It also accumulates and processes

GFM billing data. General ledger accounting, cost

accounting, production costing, financial management, and asset accounting provide financial tracking. Materials and equipment furnished by the government to contractors for use in the repair and

testing of end items are tracked through the contractual and interservice repair process by contract

work, location, and usage.

CMAPS replaces the G072D, G009, and H075C

legacy systems. CMAPS modernizes the information technology and logistical functionality supporting AFMC contract depot maintenance. It

streamlines contractor production reporting, meets

CFO Act goals, adds GFM management, and is

integrated with the command’s Agile Logistics initiative. CMAPS standardizes and shares information in the data depot and supports relational database technology on mid-tier, web-based platforms.

CMAPS also provides:

! Products and reports to improve inventory and

accounting visibility for contract depot maintenance

! GFM management and financial reports

! Reports on contractor authorized use of GFM

! DFAS customer billings and general ledger

accounts.

Quality Assurance

An effective quality assurance (QA) program is

essential to ensuring the technical compliance of

depot products and services. QA helps ensure that

products and services conform to all technical

requirements and are delivered to the customer at

the lowest cost. The quality assurance program

includes the following:

! The publication of AFMC Instruction (AFMCI)

21-115, “Depot Maintenance Quality

Assurance” (October 19, 1999), provides the

policy and procedural guidance that will reinstate an effective program.

! Establishing and staffing the Air Force Materiel

Command Headquarters Depot Maintenance

Quality (HQ AFMC/LGPQ), in addition to their

Product Directorate counterparts, creates the

infrastructure necessary for the implementation

of QA guidance.

! Center QA manuals and Product Directorate

Quality Assurance Plans (QAPs) implement the

new policy and procedures at the ALC/center

level.
United States Air Force FY 2000 Financial Statement

31

! Yearly task evaluations will ensure that workers

are qualified and certified to produce technically compliant products and services.

! The publication, AFMCI 21-132, “Depot

Maintenance Technical Compliance Review

Procedures” (January 5, 2000), provides annual

self-assessment and monthly metrics reviews.

These generate feedback to management in four

critical areas: technical data and work control

documents, personnel qualification and certification, tools and equipment, and process discipline.

Value Engineering

One effective and proven tool for cost reduction is

Value Engineering (VE). This approach analyzes

systems, facilities, processes, and supplies to

achieve the required result at the lowest total cost,

while retaining the user performance requirements.

Value Engineering is based on questioning the

necessity of all functions of a product or process.

By performing functional/value and cost/benefit

analysis, essential functions are retained and unnecessary functions are eliminated or modified. More

information is available in Air Force Policy

Directive (AFPD) 63-9, Air Force Instruction (AFI)

63-801, DoD Handbook 4245.8, and in the

Principles and Applications of Value Engineering

(PAVE) course. Further information on the VE program or availability of the course is available at the

Aeronautical Systems Center (ASC) VE web site at

www.en.wpafb.af.mil/ve/index.htm.

Performance Measures

DMAG’s performance effectiveness is represented

by 11 metrics—four financial effectiveness measures and seven performance effectiveness

measures.

Mission performance indicators (MPIs) assess cost,

schedule, and quality of the DMMA output. These

MPIs are designed to achieve accountability at the

appropriate depot maintenance level, the DMM.

MPIs measure compliance with DMMA objectives.

While summary information is reported to HQ

AFMC, the centers have the ability to “peel back”

the metrics to the shop level. Further MPIs may be

developed as additional DMMA strategic plan

objectives are approved.

DMAG performance effectiveness measures

include: Organic Production Hours, expressed in

direct production standard hours (DPSHs), which

depict how well DMAG supported its planned production output; Days Held Index (Aircraft), which

tracks delivery performance against the initial

Aircraft and Missile Maintenance Production

Compression Report (AMREP) date; Aircraft Due

Date Performance (Command), which portrays

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United States Air Force FY 2000 Financial Statement

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Depot Maintenance Activity Group

schedule effectiveness at the command level;

Aircraft Due Date Performance (Maintenance),

which indicates schedule effectiveness at the depot

level; Total Aircraft Quality Defect Rate, which

measures the quality of the completed work by the

operating unit possessing the aircraft; Engine

Quality Rate, which measures the quality of engine

production; and Exchangeable Quality Defect Rate,

which measures the quality of the completed

exchangeables by operating unit.

Organic Production Hours

Production hours (planned and actual) are

expressed in numbers of DPSH and direct production actual hours (DPAH). This represents the number of labor hours planned and used in the production effort, as negotiated by the system/item management and depot maintenance management

groups. DPSHs are allocated by month to cover the

anticipated productivity requirements. Management

compares monthly actual DPSHs to monthly

planned DPSHs to determine efficiencies.

Production hours consumed are reviewed in

monthly increments and are cumulative.

Results for FY 2000. Planned organic production

hours were 23,941,000, while actual organic production hours equaled 22,310,000. Total production

hours for the command finished the year below

plan by 1.6 million hours or approximately

7 percent under plan. Specific variations are

explained according to their commodity group:

! The Aircraft commodity group closed out the

year 558,000 hours below plan. Specifically,

previously undetected corrosion and extensive

structural work on C-135, E-3, and C-5 aircraft

slowed production efforts and contributed to the

underproduction. Bomber and fighter aircraft

production remained steady and on target

throughout the year.
United States Air Force FY 2000 Financial Statement

33

! Exchangeable commodities ran low throughout

the year due to transitioning workloads among

closing/gaining centers; Propulsion Business

Area (PBA) competition, transfer, and startup;

and parts shortages affecting avionics, landing

gear, and engine module repair at the centers.

! Software production came in 11,000 hours

above target, finishing better than target for the

first time in years.

Days Held Index (Aircraft)

The purpose of this metric is to determine the

length of time that the depot or depot maintenance

contractor possesses aircraft for maintenance or

modifications. Total actual flow days divided by

total planned flow days yields the index.

Acceptable performance is a Days Held Index of

less than the Air Force standard of one.

Looking at the days held index for the past 12

months, increases and decreases notwithstanding,

the overall trend (variance between planned and

actual flowdays) throughout the year was above the

standard. This difference between the index and

standard is consistent with the Aircraft Due Date

Performance measure. This measure indicates the

effect of delays in aircraft production for both

organic and contracts. Specific delay reasons are

discussed with the Aircraft Due Date Performance

measure.

Aircraft Due Date Performance

(Command)

Aircraft Due Date Performance (Command) measures the ability of air logistics centers and depot

maintenance contractors to produce aircraft according to schedule. This includes all factors that may

not be within their control (e.g., weather, parts,

availability of flight crews, engineering evaluations, etc.). The measure tracks organic and contract aircraft by Mission Design Series (MDS) and

measures aircraft produced against either the initial

or adjusted schedule, but not both. Aircraft produced early and on time divided by the total aircraft produced equals the due date performance.

The thresholds for early, on-time, or late production

are as follows:

! Early—produced more than five days prior to

scheduled out date

! On time—produced on scheduled out date plus

five days

! Late—Produced more that five days after

scheduled out date.

Depot Maintenance Activity Group
United States Air Force FY 2000 Financial Statement

34

Depot Maintenance Activity Group

Annual production results were 850 aircraft

(including aircraft produced at AMARC) produced—190 (22 percent) early, 376 (44 percent) on

time, and 284 (33 percent) late. Cumulative aircraft

delivery performance averaged 67 percent for the

year. Over-and-above maintenance due to extensive

structural work (C-135), severe corrosion (C-135,

E-3), horizontal stabilizer (C-5), and cracked wing

fingers (F-16) were the primary drivers. In addition, post-dock maintenance; functional check

flight problems (both on the ground and in the air);

parts, manpower, and skill-level imbalances; and

fuel problems contributed significantly to delivery

problems.

Aircraft Due Date Performance

(Maintenance)

Aircraft Due Date Performance (Maintenance)

measures the ability of air logistics centers and

depot maintenance contractors to produce aircraft

according to schedule while factoring out those

occurrences which were not within the control of

maintenance (e.g., weather, parts, availability of

flight crews, engineering evaluations, etc.). With

the exception of the aforementioned criteria, this

measure is the same as Aircraft Due Date

Performance (Command).

Total Aircraft Quality Defect Rate

The Total Aircraft Quality Defect Rate is a record

of the number of defects discovered by the owning

units of an aircraft returned from Programmed

Depot Maintenance (PDM). It is expressed as an

average of defects per aircraft produced.

Performance is acceptable when the critical or

major defects accepted rate is equal to or less than

the Air Force standard of 0.1. That is, one defect

for every 10 aircraft produced. During FY 2000,

the organic and contract work force achieved a rate

of 0.21 defects per aircraft.

Engine Quality Rate

The Engine Quality Rate measures the ability of

the depot to produce engines that are defect-free for

use by customers. This measure shows the longterm quality trend of the engines being delivered to

the customer. Engine quality is measured over an

18-month period allowing for the interval between

engine completion and quality defect report (QDR)

processing and receipt. The engine quality rate

(percent accepted defect-free engines produced) is

established by dividing accepted defect-free
United States Air Force FY 2000 Financial Statement

35

Depot Maintenance Activity Group

engines produced by total engines produced. The

standard used varies and is a weighted standard

based on the Type Model Series (TMS) for various

engines. The Engine Quality Rate achieved the

standard in 10 out of the previous 18 months. The

defect rate trend has remained relatively constant

over the past 12 months, despite turmoil associated

with transitioning repair workload to new locations

and facilities.

Exchangeable Quality Defect Rate

The Exchangeable Quality Defect Rate measures

the ability of the depot, both organic and contract,

to produce components that are defect-free and

ready for customer use. This measure also determines the long-term quality trend of the components being delivered to the customer.

Exchangeable quality is measured over an

18-month period, allowing for the interval between

component completion and QDR processing and

receipt. The exchangeable quality rate is determined by dividing total exchangeable defects

reported by total exchangeables produced.

The defect rate trend has increased slightly over the

past 12 months. This is due in part to transitioning

repair workload to new locations and facilities, and

training the workforce at the gaining repair facilities to operate the equipment and repair the components. In addition, exchangeable production

dropped off during this year of transition. Due to

the decrease in production, the exchangeable defect

rate is artificially high. The rate is expected to

regain customary levels during FY 2001.

Financial Measures

DMAG financial effectiveness measures include

net operating result (NOR), which is computed as

revenue minus the cost of goods sold (COGS) plus

other (includes equipment write-offs and extraordinary items); revenue, which is the income received

from customers for goods or services provided by

depot maintenance; cost of goods produced, which

measures the cost incurred to produce a given

quantity and mix of products and/or services; and

expense rate, which compares planned and actual

cost of goods produced.
United States Air Force FY 2000 Financial Statement

36

Depot Maintenance Activity Group

Net Operating Result

The NOR is the difference between revenue and

cost of goods sold (COGS) and other. In business

terms, this is the profit or loss from annual operations. The variance of actual NOR from target

NOR is one of the most important indicators of the

effectiveness of business operations. Revenue and

costs are based on work performed. Targets for

financial effectiveness are set according to the FY

2000 column of the FY 2001 President’s Budget.

The DMAG NOR reflects a loss of $109.0 million,

which results in $82.1 million less than the targeted

NOR loss of $26.9 million.

Revenue

DMAG’s total revenue was $100.1 million higher

than anticipated ($5,273.8 million vs. $5,173.7 million). Organic revenue is over plan by $70.6 million due to engine and other major end items

(OMEI) revenue being over plan. In addition, PBA

reimbursement is included in revenue. Contract

revenue is $29.5 million over plan, primarily due to

exchangeables.

Expenses

This measures the costs incurred during the production of a given quantity and mix of products

and services. The total expenses were $503.9 million higher than planned for FY 2000. In support of

the workload transition from the closing centers,

more work was performed by contract depot maintenance than planned, and more material costs were

incurred.

Organic Expense Rate

DMAG uses an organic expense rate instead of a

UCT to measure performance. This measures the

rate that expenses were consumed in relationship to

total production hours. The total expense rate was

14.3 percent ($146.37 million vs. $128.01 million)

higher than planned. The materiel expense rate is

18.6 percent over the end-of-year plan due to

increased usage and higher-than-expected material

inflation. The Air Force is currently performing an

analysis to determine how much of the rate change

is due to material price changes and how much is

due to changes in the consumption of material. The

expense rate was 39.9 percent over the end-of-year

plan, primarily due to higher usage of contract augmentees than planned to support transition workloads.

Efforts to Improve Financial

Management

Goals and Initiatives

DMAG’s mission objective for FY 2001 is to meet

or exceed the support requirements and expectations of its combat-ready customers. Components

and end items must be produced as required by the

customers when needed and be delivered where

needed, in a timely manner and at a reasonable

cost. The following major initiatives commit us to
United States Air Force FY 2000 Financial Statement

37

improve the cost- and time-effectiveness of depot

business and production practices in Expeditionary

Aerospace Force support, weapon systems support,

cost reduction, work force management, and infrastructure realignment. These objectives support the

Air Force mission essential tasks identified in Air

Force Doctrine Document 1-1 Depot Maintenance

Business Area (DMBA).

Expeditionary Aerospace Force

Objectives

! Reduce total flow days for aircraft undergoing

depot maintenance by 40 percent by the end of

FY 2005 from FY 1998 baseline for both contract and organic repair (1996 baseline for aircraft)

! Engineer labor standards to accurately

describe changing work requirements

! Meet end item delivery commitments 95 percent of the time by the end of FY 2005.

Weapon Systems Support

! Sustain and improve weapon systems by meeting or exceeding specific cost, schedule, safety,

and certification commitments by FY 2005

! Establish technically compliant operations

across all product lines by FY 2003

! Establish in-process measures ensuring the production of technically compliant products.

These metrics are categorized into the following areas:

" Technical Data—Indicate if the technical

data in use is current and accurate

" Tools and Equipment—Indicate if the

tools and equipment in use are correct and

in serviceable condition

" Training and Qualification—Indicate if

the maintenance workforce has the technical expertise and is capable of proficient

task accomplishment

" Task Execution—Indicate if the maintenance workforce is safely and efficiently

executing tasks in accordance with technical data and other directives.

Cost

! Reduce unit cost of AFMC products and

services in real terms (without inflation) 8 percent from the FY 1998 baseline by FY 2007,

while maintaining appropriate performance

standards

! Reduce average customer price after inflation

by 8 percent, from the FY 1998 baseline, by

FY 2007

! Achieve materiel cost savings by doing the

following:

" Identifying and developing action plans to

reduce the causes of backorders and awaiting parts (AWP) that cause constant

workaround processes

" Updating depot maintenance materiel policy

Depot Maintenance Activity Group
United States Air Force FY 2000 Financial Statement

38

" Improving bill of material (BOM) accuracy

by conducting an audit and implementing

recommendations

" Exploring and implementing prudent use of

the International Merchant Purchase

Authorization Card (IMPAC)

" Establishing a command materiel support

ability process in partnership with Defense

Logistics Agency (DLA) using the

Reparability Forecast Model (RFM)

" Training the workforce in proper BOM

management

" Investigating and implementing prudent

prime vendor initiatives

" Investigating and implementing prudent

direct vendor delivery programs

! Strengthen contract depot maintenance management by doing the following:

" Developing standardized review and tracking of contracts at the Program

Management Specialist (PMS) level

" Updating pertinent regulations, manuals,

and instructions

" Providing standardized training

" Determining specific areas of contract depot

maintenance for review

! Consolidate core capabilities/technologies

from closing depots to remaining depots by end

of FY 2001

! Compete non-Core workload

! Develop partnerships with industry to place

unused but essential capacity into service

! Manage costs each year to ensure that NOR

goals are met without suffering a financial

loss.

Work Force

! Develop a qualified, flexible work force in

sufficient numbers with appropriate employment/skills mix by FY 2005 to support the

AFMC FY 2007 Performance and Cost

Objectives

! Determine DMAG work force end states

based on FY 2005 DMAG end states to include

a strategic, top-level assessment of work force

skills, skill levels, and demographics needed in

FY 2005

! Apply work force shaping decisions to individual positions.

Infrastructure

! Support missions and people at AFMC

installations with capital infrastructure that is

properly sized, configured, and maintained to

enable productive operations and achieve Air

Force quality of life standards by FY 2010.

! Plan an investment strategy supporting

infrastructure that will cover current and

future requirements:

" CPP—Minor construction, equipment

replacement, and software development

" New applications of technology

" Military construction (MILCON)

" New systems

! Plan to continually look at the surge in depot

maintenance workload requirements resulting from wartime operations in determining

shortages or excesses in areas of capability

classified as Core or Core Plus. Use these

results to develop and maintain overall strategies and plans for increasing capacities where

needed and for divesting excess capacities.

Depot Maintenance Activity Group
Mission Statement

The Information Services Activity Group’s (ISAG’s)

mission is to develop, acquire, sustain, integrate, modernize, and secure combat support information systems

for the Air Force and Department of Defense (DoD)

customers.

The ISAG provides technological support for all levels

of information systems, from developing leading-edge

technologies to maintaining and modifying older legacy

systems. It offers comprehensive support to its customers, including developing, maintaining, integrating,

and sustaining their combat support information systems.

ISAG enhances readiness during war and peace by sustaining global combat support information systems,

which provide information to combat forces where and

when they need it, thus improving the forces’ response

capability.

Two Air Force activities act as one central design

activity (CDA) under Air Force Materiel Command’s

Electronic Systems Center (ESC) at Hanscom Air Force

Base, Massachusetts. The two activities are the Materiel

Systems Group (MSG), at Wright-Patterson Air Force

Base, Ohio, and the Standard Systems Group (SSG), at

Maxwell Air Force Base–Gunter Annex, Alabama.

United States Air Force FY 2000 Financial Statement

39

Overview

Information

Services Activity

Group
United States Air Force FY 2000 Financial Statement

40

Information Services Activity Group

Customers, Products, and

Services

ISAG provides, through the CDA, information

products and services via two business lines. The

product support business line provides the development and operational sustainment of automated

information and communications systems on existing hardware and software platforms for AFMClevel logistics support systems and Air Force baselevel standard support systems. This includes a

24-hour, seven-day help desk for field users to call

for hardware and software systems support. This

business line also provides automated information

and communications systems requirement analysis,

system design, development, testing, integration,

implementation support, and documentation services on mainframe, mid-tier, and personal computer

hardware/software platforms for Air Force and

DoD customers using the Software Engineering

Institute Capability Maturity Model processes.

The Commercial Information Technology Product

Area Directorate (CITPAD) business line provides

other authorized information system services or

products through the acquisition and operation of

the CITPAD commodity contracts for the Air Force

and other DoD agencies.

ISAG may furnish these products or services to

other agencies and private parties, as authorized by

law. These services are authorized to be provided

by organic or contract sources.

The product support business line provides CDA

services based on service level agreements (SLAs)

with known customers and on the sale of direct

billable hours. However, the CITPAD business line

provides goods and services (e.g., personal computers and local area network hardware and services,

including installations worldwide) to thousands of

individual customers across the Air Force and

DoD, making SLAs and the use of direct billable

hours impractical.

Instead, the CITPAD portion of ISAG contributes

to the overall revenue of the organization through

the collection of a surcharge on orders for equipment and services required by the users of the contracts or blanket purchase agreements (BPAs).

As previously mentioned, ISAG operates in two

major locations, each with slightly different market

sectors. MSG, headquartered at Wright-Patterson Air

Force Base, Ohio, with two operating locations at

the Oklahoma City Air Logistics Center (OC-ALC)

and the Ogden Air Logistics Center (OO-ALC),

has historically concentrated on depot management

information systems. SSG, headquartered at

Maxwell Air Force Base–Gunter Annex, Alabama,
United States Air Force FY 2000 Financial Statement

41

Information Services Activity Group

has focused on flight line management information

systems.

Performance Measures

Deficiency Reports and Software

Releases

Software deficiency reports (DIREPs) are one

measure of the quality of software produced.

Software releases are software components issued

to fix DIREPs and to incorporate minor enhancements as part of sustainment. Priority 1 DIREPs

(emergency calls) and priority 2 DIREPs (routine

calls) are quantitative measurements reported

monthly. The number of priority 1 and priority 2

DIREPs per 100,000 lines of code are identified,

reported monthly, and corrected, and the corrective

action is provided as feedback to ISAG developers

and customers.

ISAG’s FY 2000 performance is as follows:

! Software Releases—88 percent on time

! Priority 1 Deficiency Reports—61 percent

closed within 48 hours

! Priority 2 Deficiency Reports—57 percent

closed within 45 days.

These performances were all within the acceptable

limitations endorsed by AFMC.

Earned Value Management

Earned Value Management (EVM) is a management tool that allows customer and software factory/contractor program managers to have visibility

into technical, cost, and schedule progress on their

projects. An earned value management system

ensures that program managers are provided with

cost and schedule performance data that:

! Relates time-phased budgets to specific contract tasks and/or statements of work

! Indicates work progress

! Properly relates cost, schedule, and technical

accomplishments

! Is valid, on time, and auditable

! Supplies managers with information at a practical level of summarization

! Is derived from the same internal earned value

management systems the contractor uses to

manage the contract.

Initial implementation of EVM on ISAG software

programs began in May 1998. The FY 2000 ISAG

cost variance and schedule variance were better

than the standard of 13 percent for the entire fiscal

year.
United States Air Force FY 2000 Financial Statement

42

Financial Measures

Net Operating Result

The primary indicator of ISAG financial effectiveness is net operating result (NOR), which is computed as revenue minus cost of operations. A $11.1

million loss was set for the FY 2000 NOR to

achieve a zero accumulated operating result (AOR)

by FY 2001. ISAG recorded a NOR loss of $11.2

million in FY 2000.

Revenue

Revenue is earned through the sale of direct billable labor hours at the ISAG composite rate; direct

reimbursements for pass-through contract efforts

and extraordinary expenses (e.g., mission-unique

travel, equipment, and supplies); and the collection

of CITPAD surcharge revenue. The variance in revenue of $7.9 million is driven by an unplanned

Oracle and Gold license purchase in FY 2000.

Cost of Operations

For ISAG, cost of operations measures the

resources consumed in filling customer orders.

These costs include labor and non-labor expenses,

both direct and overhead. As stated above, this

higher cost is driven by an unplanned Oracle and

Gold license purchase in FY 2000.

Efforts to Improve Financial

Management

Goals and Initiatives

CDA will provide mission support services to the

Air Force and other customers in a multitude of

functional areas, including supply, maintenance,

financial management, medical, transportation,

munitions, logistics, plans, contracting, and military justice. To do so most efficiently and effectively, the following strategic initiatives have been

developed to reduce costs and keep the work force

trained to remain competitive through FY 2007.

AFMC objectives for the Expeditionary Aerospace

Force, weapon systems, cost, work force, and infrastructure are supported by the seven ISAG initiatives that have been developed:

! Objective 1: Meet or exceed commitments

! Objective 2: Improve customer satisfaction

! Objective 3: Protect information systems

! Objective 4: Meet NOR and AOR targets

! Objective 5: Optimize work force

! Objective 6: Improve communications

! Objective 7: Properly size capital infrastructure.

Information Services Activity Group
The Air Force Working Capital Fund ended FY 2000

with $542.6 million in cash. The FY 2000 revised, endof-year budget projection was $456.2 million. The cash

increase was largely due to cash infusions in support of

operational losses. A summary of cash changes includes

the following:

! The Depot Maintenance Activity Group cash balance

decreased $81 million in FY 2000. This decrease can

be attributed to declining organic revenue coupled

with increasing expenses for operating material and

supplies.

! The Fuel Division cash balance decreased $88.1 million in FY 2000. This decrease was primarily the

result of a cash transfer to the Materiel Support

Division. 

! The General Support Division cash balance

decreased $33.1 million in FY 2000. This decrease

was the result of a cash transfer to MSD.

! The MSD cash balance increased $417.8 million in

FY 2000. To better manage the cash accounts,

AFWCF approved a $403.6 million cash adjustment.

Air Force Materiel Command is working to identify

and correct the cash balance discrepancy in the MSD

repair process.

United States Air Force FY 2000 Financial Statement

43

Overview

Cash Management
United States Air Force FY 2000 Financial Statement

44

The DoD cash management policy recommends

maintaining the minimum cash balance necessary

to meet both operational and disbursement requirements in support of the capital program. Cash generated from operations is the primary means of

maintaining adequate cash levels. The ability to

generate cash is dependent on setting rates to

recover full costs to include prior year losses, accurately projecting workloads, and meeting established operational goals.

Effective cash management is directly dependent

on the availability of accurate and timely data on

cash levels and operational results. Cash levels

should be maintained at seven to 10 days of operational cost and cash adequate to meet six months of

capital disbursements. The recommended cash

range for FY 2000 was $638.3 million (seven days)

and $921.4 million (10 days). The amount of cash

ending the fiscal year was not adequate to meet the

standards set by the Office of the Secretary of

Defense.

Cash management efforts continue to focus on analyzing data and developing tools to identify

changes in cash. Although the data currently available is outdated for current needs, accuracy has

been improving. AFMC has completed a statement

of sources and uses of cash in FY 2000 and has

implemented use of the statements to identify areas

of cash increases and drains. Work continues on

identifying and correcting the processes that are

causing cash drains.

Cash Management
Working

Capital

Funds

Annual Financial

Statement

United States Air Force FY 2000 Financial Statement

45

Fiscal Year 2000
The financial statements have been prepared to

report the financial position and results of operations for the entity, pursuant to the requirements of

the 31 U.S.C. 3515(b).

While the statements have been prepared from the

books and records of the entity, in accordance with

the formats prescribed by the Office of

Management and Budget, the statements are in

addition to the financial reports used to monitor

and control budgetary resources, which are prepared from the same books and records.

To the extent possible, the financial statements

have been prepared in accordance with Federal

accounting standards. At times, the Air Force is

unable to implement all elements of the standards

due to financial management systems limitations.

The Air Force continues to implement system

improvements to address these limitations. There

are other instances when the Air Force’s application of the accounting standards is different from

the auditor’s application of the standards. In those

situations, the Air Force has reviewed the intent of

the standard and applied it in a manner that management believes fulfills that intent.

The statements should be read with the realization

that they are for a component of the U.S.

Government, a sovereign entity. One implication of

this is that the liabilities cannot be liquidated without legislation that provides resources to do so.

United States Air Force FY 2000 Financial Statement

46

Limitations of the Financial Statements
Working

Capital

Funds

Principal

Statements

Annual Financial

Statement

United States Air Force FY 2000 Financial Statement

47

Fiscal Year 2000
United States Air Force FY 2000 Financial Statement

48

Principal Statements

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The accompanying notes are an integral part of the financial statements.
United States Air Force FY 2000 Financial Statement

49

Consolidated Balance Sheet

The accompanying notes are an integral part of the financial statements.
United States Air Force FY 2000 Financial Statement

50

Consolidated Statement of Net Cost

The accompanying notes are an integral part of the financial statements.

See notes 1 and 19.
United States Air Force FY 2000 Financial Statement

51

Consolidated Statement of Changes in Net Position

The accompanying notes are an integral part of the financial statements.

See notes 1 and 20.
United States Air Force FY 2000 Financial Statement

52

Combined Statement of Budgetary Resources

The accompanying notes are an integral part of the financial statements.

See notes 1 and 21.
United States Air Force FY 2000 Financial Statement

53

Combined Statement of Financing

The accompanying notes are an integral part of the financial statements.

See notes 1 and 22.
United States Air Force FY 2000 Financial Statement

54

Consolidating Balance Sheet

The accompanying notes are an integral part of the financial statements.

See notes 1 and 21.
United States Air Force FY 2000 Financial Statement

55

Consolidating Balance Sheet

The accompanying notes are an integral part of the financial statements.

See notes 1 and 21.
United States Air Force FY 2000 Financial Statement

56

Consolidating Statement of Net Cost

The accompanying notes are an integral part of the financial statements.

See notes 1 and 19.
United States Air Force FY 2000 Financial Statement

57

Principal Statements

The accompanying notes are an integral part of the financial statements.

This page intentionally left blank.
United States Air Force FY 2000 Financial Statement

58

Consolidating Statement of Changes in Net Position

The accompanying notes are an integral part of the financial statements.

See notes 1 and 20.
United States Air Force FY 2000 Financial Statement

59

Consolidating Statement of Changes in Net Position

The accompanying notes are an integral part of the financial statements.

See notes 1 and 20.
United States Air Force FY 2000 Financial Statement

60

Combining Statement of Budgetary Resources

The accompanying notes are an integral part of the financial statements.

See notes 1 and 21.
United States Air Force FY 2000 Financial Statement

61

Combining Statement of Budgetary Resources

The accompanying notes are an integral part of the financial statements.

See notes 1 and 21.
United States Air Force FY 2000 Financial Statement

62

Combining Statement of Financing

The accompanying notes are an integral part of the financial statements.

See notes 1 and 22.
United States Air Force FY 2000 Financial Statement

63

Combining Statement of Financing

The accompanying notes are an integral part of the financial statements.

See notes 1 and 22.
United States Air Force FY 2000 Financial Statement

64

Principal Statements

The accompanying notes are an integral part of the financial statements.

This page intentionally left blank.
Working

Capital

Funds

Footnotes to the

Principal

Statements

Annual Financial

Statement

United States Air Force FY 2000 Financial Statement

65

Fiscal Year 2000
Note 1—Significant Accounting

Policies

A. Basis of the Presentation

These financial statements have been prepared to

report the financial position and results of operations of the United States Air Force, Working

Capital Fund (WCF), as required by the Chief

Financial Officers (CFOs) Act of 1990, expanded

by the Government Management Reform Act

(GMRA) of 1994, and other appropriate legislation.

The financial statements have been prepared from

the books and records of the Air Force WCF in

accordance with “Department of Defense Financial

Management Regulation” (DoDFMR), the Office

of Management and Budget (OMB) Bulletin No.

97-01, “Form and Content of Agency Financial

Statements” and to the extent possible, generally

accepted accounting principles. The Air Force

WCF financial statements are in addition to the

financial reports also prepared by the United States

Air Force pursuant to OMB directives that are used

to monitor and control the Air Force’s use of budgetary resources.

The Air Force WCF is unable to implement all elements of generally accepted accounting principles

(GAAP) and OMB Bulletin No. 97-01 due to limitations of its financial management processes and

systems, including nonfinancial feeder systems and

processes. Reported values and information for the

Air Force WCF major asset and liability categories

are derived largely from nonfinancial feeder systems, such as inventory systems and logistic systems. These were designed to support reporting

requirements focusing on maintaining accountability over assets and reporting the status of federal

appropriations rather than applying the current

emphasis of business-like financial statements. As

a result, the Air Force WCF cannot currently

implement every aspect of GAAP and the OMB

Bulletin No. 97-01. The Air Force WCF continues

to implement process and system improvements

addressing the limitations of its financial and nonfinancial feeder systems.

There are other instances when the Air Force WCF

has reviewed the intent of the standard and applied

it in a manner consistent with the standard, but the

auditors interpret the standard differently.

Financial statement elements impacted include

financing payments under fixed price contracts,

operating materials and supplies (OM&S), and disposal liabilities.

A more detailed explanation of these financial

statement elements is discussed in the applicable

footnote.

B. Mission of the Reporting Entity

The United States Air Force was created on

September 18, 1947, by the National Security Act

of 1947. The National Security Act Amendments

of 1949 established the Department of Defense

(DoD) and made the Air Force a department within

DoD. The overall mission of the Department is to

organize, train, and equip armed forces to deter

aggression and, if necessary, defeat aggressors of

the United States and its allies. The overall mission of the Air Force is to defend the United States

through control and exploitation of air and space.

Fiscal year (FY) 2000 represents the fifth year that

the Department will prepare and have audited, DoD

United States Air Force FY 2000 Financial Statement

66

Footnotes to the Principal Statements
Agency-wide financial statements as required by

the CFO Act and the GMRA.

In support of these objectives, stock and industrial

revolving fund accounts were created by the

National Security Act of 1947, as amended in 1949

and codified in Title 10, U.S.C., Section 2208. The

revolving funds were established as a means to

more effectively control the cost of work performed by DoD. The DoD began operating under

the revolving fund concept as early as July 1, 1951.

The asset accounts used to prepare the statements

are categorized as either entity or nonentity. Entity

accounts consist of resources that the agency has

the authority to use, or where management is legally obligated to use funds to meet entity obligations.

Nonentity accounts are assets that are held by an

entity but are not available for use in the operations

of the entity. 

The accompanying financial statements account for

all resources for which the Air Force Working

Capital Fund is responsible except that information

relative to classified assets, programs, and operations has been excluded from the statement or otherwise aggregated and reported in such a manner

that it is no longer classified. 

When possible, the financial statements are presented on the accrual basis of accounting as

required by federal financial accounting standards.

For fiscal year (FY) 2000, the Air Force Working

Capital Fund’s financial management systems are

unable to meet all of the requirements for full

accrual accounting. Efforts are underway to bring

the Department of Defense’s (DoD) systems into

compliance with all elements of generally accepted

accounting principles and OMB Bulletin No.

97-01.

C. Budgets and Budgetary

Accounting

The Air Force’s funds are divided into the general,

working capital (revolving funds), trust, special,

and deposit funds. These appropriations and funds

are used in the course of executing the Air Force’s

missions. 

Revolving funds receive their initial working capital through an appropriation or a transfer of

resources from existing appropriations of funds and

use those capital resources to finance the initial

cost of products and services. Financial resources

to replenish the initial working capital and to permit continuing operations are generated by the

acceptance of customer orders. The Defense

Working Capital Fund (“the Fund”) operates with

financial principles that provide improved cost visibility and accountability to enhance business management and improve the decision making process.

The activities provide goods and services on a

reimbursable basis. Receipts derived from operations generally are available in their entirety for use

without further congressional action.

Air Force systems are not transaction-driven for

budgetary accounts, therefore proprietary accounts

are used to develop the Report on Budget

Execution, SF133 and Statement of Budgetary

Resources for reporting budgetary data.

Implementation of the CSMAS and DCD systems

will result in budgetary data that is transactiondriven.

United States Air Force FY 2000 Financial Statement

67

Footnotes to the Principal Statements
Supply Management

The Air Force Stock Funds were established within

the DoD under 10 U.S.C. 2208, as described in

DoD Directives 7420.13 and DoD Financial

Management Regulation 7000.14-R, to finance

inventories of supplies. Most inventories of supplies are financed by use of a stock fund.

Exceptions include an item financed with a procurement appropriation or when financing by other

means has been deemed more economical and efficient. A stock fund operates as a revolving fund

acquiring inventories with funds received from

prior sales to customers.

There are now five active business activities in the

Supply Management Activity Group (SMAG).

They are: Materiel Support Division (MSD),

General Support Division (GSD), Medical-Dental

Division, Fuels Division (including aviation,

ground, missile and cost of operations fuels), and

Academy Division. Troop Support is a residual

activity.

Depot Maintenance

The Air Force Depot Maintenance activity group

performs manufacturing, development and test

work as well as aviation maintenance. Primarily in

support of Air Force organizations, it also supports

other DoD components, government agencies, and

foreign governments. Due to a decreased force

structure and technology advances, the Depot

Maintenance environment is rapidly changing.

Weapons systems embodying new material and

technologies require new maintenance processes

while improvements in reliability reduce the frequency of maintenance for many items. The net

result requires a great flexibility in addressing both

wartime and peacetime workload changes. The Air

Force Depot Maintenance activity group achieves

this flexibility by employing the unique strengths

of organic (in house) and contractor repair sources.

Base Support

1999 was the final year audited financial statements and footnotes were prepared for this business activity. Effective September 30, 1999 all

remaining residual activity was transferred to the

Supply Management Activity Group. The Air

Force Base Support activity group consisted of

residual accounting for the Laundry and Dry

Cleaning Service, the Air Force commissary, and

the San Antonio Real Property Maintenance

Agency (SARPMA). The Laundry and Dry

Cleaning Service provided laundry and dry cleaning and other textile services to the government,

DoD, and other authorized activities and individuals worldwide using government-owned facilities.

Primary customers were medical facilities serving

Army, Marine, Navy, and Air Force installations.

In FY 1995, the Laundry and Dry Cleaning Service

was removed from the Defense Business

Operations Fund (DBOF) and returned to the Air

Force to be funded with Air Force O&M appropriations, except for accounting of residual unliquidated balances. The Air Force Commissary was

decapitalized as a working capital fund and capitalized under the Defense Commissary Agency

(DeCA). SARPMA was disestablished in 1989.

Like laundry and dry cleaning, only residual

accounting for unliquidated balances remains.

Transportation

Air Mobility Command’s (AMC’s) Air Force

unique transportation responsibilities include the

United States Air Force FY 2000 Financial Statement

68

Footnotes to the Principal Statements
executive travel mission and operation of other

operational support aircraft, the Air Weather

Service, AMC training, AMC base operations,

tanker operations, and other miscellaneous AMC

functions. The Air Force unique transportation

DBOF was established during FY 1993 and disestablished in FY 1995 in accordance with the

Defense Working Capital Fund (DWCF) improvement plan. Only residual accounting of unliquidated balances remains. 

Information Services—Air Force Central

Design Activities

The Air Force Central Design Activities (CDAs)

provide software design, development, maintenance, and technical support services. As of

October 1, 1995, the Air Force CDA business area

transferred to the DBOF. This transfer complied

with PBD 433 in expanding the Information

Services Business Area. Transfer procedures were

set forth in DFAS-HQ/AB memo of May 3, 1995.

The Central Design Activities included the

Standard Systems Group and the Materiel Systems

Group. Prior to this transfer, the CDAs were funded by Air Force Operations and Maintenance

funds. During FY 1996, DFAS-Denver provided

only interim accounting support because the CDAs

accounting support was in transition to the

Industrial Fund Accounting System (IFAS) and

subsequent transfer to the Pensacola Operating

Location. In FY 1997, the CDAs went on-line

with IFAS and all financial reports, including the

CFO Statements, are prepared at DFAS Cleveland

and forwarded to DFAS Denver for inclusion with

Air Force WCF statements.

United States Transportation Command

(USTC)

For Audited Financial Statements (AFS) only,

USTC is not reported with Air Force Working

Capital Funds. In fiscal year 1998, the Office of

the Under Secretary of Defense, Chief Financial

Officer, directed DFAS to report USTC statements

with Other Defense Organizations Working Capital

Fund Consolidated statements. The USTC remains

part of the Air Force Budget operations for all

other financial reporting.

Operations of these activities are based on the policies and procedures that include:

! Funding Authority—Prior to FY 1992, industrial fund activities were not issued funding documents. Activities now receive their obligation

authority for customer orders from the Air

Force Deputy Assistant Secretary, Budget

(SAF/FMB). The total costs that can be

incurred are a function of the cost goals applied

to the actual customer funded workload.

! Minor Construction Funding—Policy and procedures have been changed to fund minor construction projects costing $100,000 or more, but

less than $300,000, through a separate section

of the capital budget and depreciate them over a

20 year period.

! Software Development Costs—Policy and procedures have been changed to move the development costs of new software meeting the time

and cost thresholds (2 years or more and

$100,000 or more) to the capital budget.

Software releases will be amortized after

release.

United States Air Force FY 2000 Financial Statement

69

Footnotes to the Principal Statements
! Capital Budgeting—Activity group budgets are

segregated into operating and capital budgets.

Any investment in equipment, software, or

minor construction, and other management

improvements costing $100,000 or more with a

useful life of 2 years or greater, are funded

through the capital budget and their costs

depreciated/amortized over the relevant life

cycle.

! Asset Capitalization and Depreciation—The

assets of the industrial and stock funds were

transferred to DBOF and subsequently to WCF.

The capital assets, excluding land, which

exceed a unit cost of $100,000 or more, are

subject to depreciation. In addition, capital

assets previously capitalized using established

thresholds for prior years will continue to be

depreciated if depreciation was being recorded

prior to the increase to the $100,000 threshold.

! Rates and Prices—All Air Force activity group

areas in WCF are expected to set their rates and

prices based upon full cost recovery, ensuring

that cost reductions made by an activity will be

passed on to the customers. Rates and prices

will not change during the year of execution. 

The FY 2000 Air Force DWCF operations encompass three activity groups: Supply Management,

Depot Maintenance, and Information Services.

These activity groups use their resources to finance

the initial cost of products or services for activities

of the United States government, primarily those of

the DoD. Work is generated by the acceptance of

customer orders from ordering activities.

D. Basis of Accounting

The Air Force’s Working Capital Funds generally

record transactions on an accrual accounting basis

as is required by GAAP. However, some of the Air

Force’s financial and nonfinancial feeder systems

and processes are not designed to collect and

record financial information on the full accrual

accounting basis. The Air Force has undertaken

efforts to determine the actions required to bring all

of its financial and nonfinancial feeder systems and

processes into compliance with all elements of

GAAP. One such action is the current revision of

its accounting systems to record transactions based

on the United States Government Standard General

Ledger (SGL). Until such time as all of the

processes are updated to collect and report financial

information as required by GAAP, some of the Air

Force’s financial data will be based on budgetary

obligations, disbursements, collection transactions,

and nonfinancial feeder systems. One example is

the information presented on the Statement of Net

Cost. Most of this information is based on accrued

costs; however, some of this information is based

on obligations and disbursements.

Under the accrual method, revenues are recognized

when earned and expenses are recognized when

incurred, without regard to receipt or payment of

cash. Budgetary accounting is accomplished

through unique general ledger accounts to facilitate

compliance with legal and internal control requirements associated with the use of federal funds.

However, the cash basis of accounting may be followed if the reported activity and balances are not

materially significant. In addition to the accrual

basis of accounting, Depot Maintenance also uses

the full absorption accounting principle. During

United States Air Force FY 2000 Financial Statement

70

Footnotes to the Principal Statements
FY 1996, DFAS-DE, SAF/FMB, and OSD/FM

jointly agreed on the use of this principle by Depot

Maintenance. This means that depreciation and

bad debt expenses are included in determining the

cost of services sold. The effect of known intrafund transactions are eliminated.

To the extent that guidance is not provided by the

DoD Accounting Manual, DoD Components are

allowed to follow other guidance promulgated by

the Defense Finance and Accounting Service

(DFAS), the General Accounting Office (GAO),

the Office of Management and Budget (OMB), the

Department of Treasury, the Federal Accounting

Standards Advisory Board (FASAB), or the

Financial Accounting Standards Board.

The Air Force uses several service-unique general

ledger structures plus data converted from the

Defense Business Management System (DBMS).

The financial statements depicted are derived from

supply, maintenance and accounting records utilizing the Air Force service and DBMS-unique general ledger structures. The activity groups’ general

ledger accounts are “crosswalked” to the USSGL

chart of accounts to produce the financial

statements.

In addition, the Air Force identifies programs based

upon the major appropriation groups provided by

Congress. The Air Force is in the process of

reviewing available data and attempting to develop

a cost reporting methodology that balances the

need for cost information required by the SFFAS

No. 4, “Managerial Cost Accounting Concepts and

Standards for the Federal Government,” with the

need to keep the financial statements from becoming overly voluminous.

E. Revenues and Other Financing

Sources

Revenue is recognized according to the percentage

of completion method for depot maintenance and

ordinance WCF activities. Revenue for supply

management WCF activities is recognized when an

inventory item is dropped from inventory for sale. 

For financial reporting purposes, DoD policy

requires the recognition of operating expenses in

the period incurred. However, because the Air

Force’s financial and nonfinancial feeder systems

were not designed to collect and record financial

information on the full accrual basis, accrual

adjustments are made for major items such as payroll expenses, accounts payable, and environmental

liabilities. Expenditures for capital and other longterm assets are not recognized as expenses until

consumed in the Air Force’s operations. Net

increases or decreases in unexpended appropriations are recognized as a change in the net position.

Each working capital activity group recognizes revenue in the following manner:

Supply Management. Air Force Supply

Management revenue is recognized at the point of

sale under constructive delivery terms (normally

dropped from inventory when an item is released

from inventory or delivered to the customer).

Foreign Military Sales (FMS) transactions additionally require proof of shipment before revenue is

recognized. Generally, Supply Management revenue consists of sales at standard prices less sales

return. Sales of MSD items are at exchange price.

The Medical-Dental division and the Air Force

Academy Store add surcharges to their billings

United States Air Force FY 2000 Financial Statement

71

Footnotes to the Principal Statements
rather than include a surcharge in the standard

price. Intra-division Supply Management Sales

have been eliminated. Cash discounts and interfund retail stock loss allowances are additional revenue.

Depot Maintenance. The Under Secretary of

Defense (Comptroller) directed, per memorandum

dated January 1992, all services to use the percentage of completion accounting method to recognize

revenue and expenses. The DoD 7000.14-R,

Financial Management Regulation, Chapter 11B,

January 1995, also prescribes this method of

accounting. Air Force Depot Maintenance uses a

method called incremental revenue recognition that

basically agrees with the prescribed method. As

Depot Maintenance completes a job order, revenue

is recognized by either calculating the hourly sales

rate or an end item sales price, depending on the

type of workload. Within the Depot Maintenance

activity group, organic revenue is generally recognized at job completion; however, the related

expenses are accrued monthly. In addition, other

contract revenue is based on the percentage-ofcompletion method augmented with prorations

based on activity group policies.

Information Services. The Information Services

Activity Group (ISAG) recognizes revenue in one

of two ways as a service type organization based

on the service level agreement between the customer and the provider. When the effort is priced

on a “Level of Effort” basis, the revenue is recognized based on completed units (direct labor hours)

times the stabilized rate plus any extraordinary

contract costs (contract, program equipment, etc.)

incurred by the activity. When the effort is priced

on a “Firm Fixed Price” basis, the revenue is recognized each month as a percentage of completion.

Operating expenses for activities are recognized in

the period incurred. Expenditures for capital and

other long-term assets are not recognized as

expenses until depreciated.

F. Accounting for Intragovernmental

Activities

The Air Force, as an agency of the federal government, interacts with and is dependent upon the

financial activities of the federal government as a

whole. Therefore, these financial statements do not

reflect the results of all financial decisions applicable to the Air Force as though the agency was a

stand-alone entity.

The Air Force’s proportionate share of public debt

and related expenses of the federal government are

not included. Debt issued by the federal government and the related costs are not apportioned to

federal agencies. The Air Force’s financial statements, therefore, do not report any portion of the

public debt or interest thereon, nor do the statements report the source of public financing whether

from issuance of debt or tax revenues. 

Financing for the construction of DoD facilities is

obtained through budget appropriations. To the

extent this financing ultimately may have been

obtained through the issuance of public debt, interest costs have not been capitalized since the

Department of the Treasury does not allocate such

interest costs to the benefiting agencies.

The Air Force’s civilian employees participate in

the Civil Service Retirement System (CSRS) and

Federal Employees Retirement System (FERS),

while military personnel are covered by the

United States Air Force FY 2000 Financial Statement

72

Footnotes to the Principal Statements
Military Retirement System (MRS). Additionally

employees and personnel covered by FERS and

MRS also have varying coverage under Social

Security. The Air Force funds a portion of the

civilian and military pensions. Reporting civilian

pension under CSRS and FERS retirement systems

is the responsibility of Office of Personnel

Management (OPM). The Air Force recognizes an

imputed expense for the portion of civilian employee pensions and other retirement benefits funded by

OPM in the Statement of Net Cost; and recognizes

corresponding imputed revenue for the civilian

employee pensions and other retirement benefits in

the Statement of Changes in Net Position. 

The Department reports the assets, funded actuarial

liability, and unfunded actuarial liability for the

military personnel in the Military Retirement Fund

(MRF) financial statements. The Department recognizes the actuarial liability for the military retirement health benefits in the Other Defense

Organization column of the DoD Agency-wide

statements. 

To prepare reliable financial statements, transactions occurring between entities within the DoD or

between two or more federal agencies must be

eliminated. However, the Air Force, as well as the

rest of the federal government, cannot accurately

identify all intragovernmental transactions by customer. For FYs 1999 and 2000, the Air Force provided summary seller-side balances for revenue,

accounts receivable, and unearned revenue to the

buyer-side departmental accounting offices and

required the adjustment of the buyer-side records to

recognize unrecorded costs and accounts payable.

Internal DoD intragovernmental balances were then

eliminated. In addition, the Air Force implemented

the policies and procedures contained in the

Intragovernmental Eliminations Task Force’s

“Intragovernmental Fiduciary Transactions

Accounting Guide” for reconciling intragovernmental transactions pertaining to investments in

federal securities, borrowings from Treasury and

the Federal Financing Bank, Federal Employee

Compensation Act transactions with the

Department of Labor, and benefit program transactions with the OPM.

Each year, the DoD Components sells assets to foreign governments under the provisions of the Arms

Export Control Act of 1976. Under the provision

of the Act, the Department has authority to sell

defense articles and services to foreign countries,

generally at no profit or loss to the U.S.

Government. Customers are required to make payments in advance.

G. Funds with the U.S. Treasury and

Cash

The Air Force’s financial resources are maintained

in U.S. Treasury accounts. The majority of cash

collections, disbursements, and adjustments are

processed worldwide at Defense Finance and

Accounting Service (DFAS) and Military Service

and U.S. Army Corps of Engineers (USACE) disbursing stations, as well as Department of State

financial service centers. Each disbursing station

prepares monthly reports, which provide information to the U.S. Treasury on check issues, interagency transfers and deposits. In addition, the

DFAS centers and the USACE Finance Center submit reports to Treasury, by appropriation, on collections received and disbursements issued. Treasury

then records this information to the appropriation

United States Air Force FY 2000 Financial Statement

73

Footnotes to the Principal Statements
Fund Balance With Treasury (FBWT) account

maintained in the Treasury’s system. Differences

between the Air Force’s recorded balance in the

FBWT account and Treasury’s FBWT often result

and are reconciled. Material Disclosures are provided at Note 3.

H. Foreign Currency

Not applicable.

I. Accounts Receivable

As presented in the Balance Sheet statement,

accounts receivable includes accounts, claims, and

refunds receivable from other federal entities or

from the public. Allowances for uncollectible

accounts due from the public are based upon analysis of collection experience by fund type. The

Department does not recognize an allowance for

estimated uncollectible amounts from another federal agency. Claims against another federal agency

are to be resolved between the agencies. If the

claim cannot be resolved by the agencies involved,

it should be referred to the General Accounting

Office. Only Supply Management allows for

uncollectible accounts based upon analysis of historical data from prior year accounts receivable balances, write-offs, and collection policy. Material

disclosures are provided at Note 5.

J. Loans Receivable

Not Applicable.

K. Inventories and Related Property

Inventories are reported at approximate historical

cost based on Latest Acquisition Cost (LAC)

adjusted for holding gains and losses. The LAC

method is used because inventory data is maintained in logistics systems designed for material

management purposes. For the most part, these

systems value inventory at selling prices or LAC

and reported amounts must be adjusted, using a

formula to approximate historical costs. 

Within the Materiel Support Division, inventory is

valued at either LAC or carcass. Carcass value is

calculated within the pricing system and is included in any transaction when needed. Gains and

losses that result from valuation changes for inventory items are recognized and reported in the net

cost statement and included in the calculation of

the cost of goods sold. Only the Supply

Management activity group accounts for inventories. To calculate the allowances for gain or loss

on inventories, an inventory worksheet is prepared

monthly for each fund code within Supply

Management Activity Group. Inventory is not

applicable to the remaining Air Force activity

groups.

The related property portion of the amount reported

on the Inventory and Related Property line includes

OM&S and stockpile materials. The OM&S are

valued at standard purchase price. The Department

is using both the purchase and the consumption

method of accounting for OM&S, as defined in the

SFFAS No. 3. “Accounting for Inventory and

Related Property.” 

Material disclosures related to inventory and related property are provided at Note 9.

L. Investments in U.S. Treasury

Securities

Not Applicable.

United States Air Force FY 2000 Financial Statement

74

Footnotes to the Principal Statements
M. General Property, Plant and

Equipment (PP&E)

General property, plant, and equipment (PP&E)

assets are capitalized at historical acquisition cost

plus capitalized improvements when an asset has a

useful life of 2 or more years, and when the acquisition cost equals or exceeds the DoD capitalization

threshold of $100,000. Also, improvement costs

over the DoD capitalization threshold of $100,000

for General PP&E should be capitalized. The

Department has contracted with two certified public accounting (CPA) firms to obtain an independent assessment of the validity of the General PP&E

capitalization threshold. At the conclusion of the

studies, both CPA firms recommended that the

Department retain its current capitalization threshold of $100,000. All General PP&E , other than

land, is depreciated on a straight-line basis. Land

is not depreciated.

Prior to FY 1996, General PP&E with an acquisition cost of $15,000, $25,000, and $50,000 for FYs

1993, 1994, and 1995 respectively, and an estimated useful life of 2 or more years was capitalized.

These assets remain capitalized and reported on

WCF financial statements. 

When it is in the best interest of the government,

the Air Force provides to contractors government

property necessary to complete contract work.

Such property is either owned or leased by the Air

Force, or purchased directly by the contractor for

the government based on contract terms. When the

value of contractor procured General PP&E

exceeds the DoD capitalization threshold, such

should be included in the value of General PP&E

reported on the Air Force’s Balance Sheet. The

Department recently completed a study that indicates that the value of General PP&E above the

DoD capitalization threshold and not older than the

DoD Standard Recovery Periods for depreciation,

and that is presently in the possession of contractors, is not material to the Department’s financial

statements. Regardless, the Department is developing new policies and a contractor reporting process

that will provide appropriate General PP&E information for future financial statement reporting purposes. Accordingly, the Air Force currently reports

only government property in the possession of contractors that is maintained in the Air Force’s property systems. 

For entities operating as business type activities

(WCFs), all PP&E used in the performance of their

mission is categorized as General PP&E. Heritage

Assets and Stewardship Land under the control of a

WCF organization are reported on the

Supplemental Stewardship Report of the applicable

military department. 

Material disclosures are provided at Note 10.

N. Advance and Prepayments

Payments in advance of the receipt of goods and

services are recorded as advances or prepayments

and reported as an asset on the Balance Sheet.

Advances and prepayments are recognized as

expenditures and expenses when the related goods

and services are received. Information Services

posts payments in advance that are applicable to

travel advances. These advances are recognized as

expenditures and expenses when the related goods

and services are received. Depot Maintenance

posted prepayments and deferred charges to

United States Air Force FY 2000 Financial Statement

75

Footnotes to the Principal Statements
intragovernment and with the public. For all the

other Air Force activity groups, this area is not

applicable.

O. Leases

Not Applicable.

P. Other Assets

The Air Force conducts business with commercial

contractors under two primary types of contracts—

fixed price and cost reimbursable. To alleviate the

potential financial burden on the contractor that

these long-term contracts can cause, the Air Force

provides financing payments. One type of financing payment that the Air Force makes is based

upon a percentage of completion. In accordance

with SFFAS No 1., “Accounting for Selected

Assets and Liabilities,” such payments are treated

as construction in process and are reported on the

General PP&E line and in Note 10, General PP&E,

Net. In addition, based on the provision of the

Federal Acquisition Regulations, the Air Force

makes financing payments under fixed price contracts that are not based on a percentage of completion. The Air Force reports these financing payments as advances or prepayments in the “Other

Assets” line item. The Air Force treats these payments as advances or prepayments because the Air

Force becomes liable only after the contractor

delivers the goods in conformance with the contract terms. If the contractor does not deliver a satisfactory product, the Air Force is not obligated to

reimburse the contractor for its costs and the contractor is liable to repay the Air Force for the full

amount of the advance. The Air Force does not

believe that the SFFAS No. 1 addresses this type of

financing payment. The auditors disagree with the

Air Force’s application of the accounting standard

pertaining to advances and prepayments because

they believe that the SFFAS No. 1 is applicable to

this type of financing payment.

Q. Contingencies and Other

Liabilities

The SFFAS No. 5, “Accounting for Liabilities of

the Federal Government,” defines a contingency as

an existing condition, situation, or set of circumstances that involve an uncertainty as to possible

gain or loss to the Air Force. The uncertainty will

be resolved when one or more future events occur

or fail to occur. A contingency is recognized as a

liability when it is probable that the future event or

events will confirm the loss or the incurrence of a

liability for the reporting entity and the amount of

loss can be reasonably estimated. Financial statement reporting is limited to disclosure when conditions for liability recognition do not exist but there

is at least a reasonable possibility that a loss or

additional loss will be incurred. Examples of loss

contingencies include the collectibility of receivables, pending or threatened litigation, and possible

claims and assessments. The Air Force’s loss contingencies arising as a result of pending or threatened litigation or claims and assessments occur due

to events such as aircraft, ship and vehicle accidents, medical malpractice, property or environmental damages, and contract disputes.

R. Accrued Leave

Civilian annual leave and military leave are

accrued as earned and the accrued amounts are

reduced as leave is taken. The balances for annual

United States Air Force FY 2000 Financial Statement

76

Footnotes to the Principal Statements
and military leave at the end of the fiscal year

reflect current pay rates for the leave that is earned

but not taken.

S. Net Position

Net Position consists of unexpended appropriations

and cumulative result of operations. Unexpended

appropriations represent amounts of authority

which are unobligated and have not been rescinded

or withdrawn, and amounts obligated but for which

legal liabilities for payments have been incurred.

Only Supply Management has unexpended appropriations.

Cumulative results of operations for WCFs represents the excess of revenues over expenses since

fund inception, less refunds to customers and

returns to the U.S. Treasury.

T. Treaties for Use of Foreign Bases

The DoD Components have the use of land, buildings, and other facilities, which are located overseas and have been obtained through various international treaties and agreements negotiated by the

Department of State. DoD capital assets overseas

are purchased with appropriated funds; however,

title to land and improvements is retained by the

host country. Generally, treaty terms allow the

DoD Components continued use of these properties

until the treaties expire. These fixed assets are subject to loss in the event treaties are not renewed or

other agreements are not reached which allow for

the continued use by the DoD. Therefore, in the

event treaties or other agreements are terminated

whereby use of foreign bases is no longer allowed,

losses will be recorded for the value of any nonretrievable capital assets after negotiations between

the United States and the host country have been

concluded to determine the amount to be paid the

United States for such capital investments.

U. Comparative Data

The OMB has waived the requirement to present

comparative financial statements for FY 2000.

V. Undelivered Orders

The Air Force records obligations for goods and

services that have been ordered but not yet

received. No liability for payment has been established in the financial statements because

goods/services have yet to be delivered.

Note 2—Assets

United States Air Force FY 2000 Financial Statement

77

Footnotes to the Principal Statements
3. Explanation of Reconciliation Amount: A

reconciling amount of ($303.06) in SMAG, FC 64

is being investigated. A transfer of $327,973K represents cash transferred to Other Defense

Organizations for United States Transportation

Command (USTC). The transfer of USTC is for

CFO reporting only. See footnote 1.C.2. paragraphs in the USTC footnotes.

4. Other Information Related to Fund Balance

with Treasury: The Fund Balance with Treasury

does not include any amounts for which the

Department of the Treasury is willing to accept

corrections to canceled appropriation accounts, in

accordance with SFFAS Number 1, “Accounting

for Selected Assets and Liabilities”.

The FBWT number for Supply Management is

($263,811,983.81). A negative balance for the

Materiel Support Division (MSD) is the primary

cause. SAF/FMBMR has provided a disclosure

which can be found in the SMAG footnotes. 

Fund Balances with Treasury are maintained at the

Air Force DWCF corporate business area today. In

1992, when the Defense Business Operating Fund

was established, the FBWT was moved from the

Air Force level to the Department of Defense level.

In 1996, the DWCF was established and the FBWT

was given back to the Air Force level. However,

the allocation of FBWT was at a lower level than

the level transferred out. (The cash balance had

been maintained at 10 days worth of cash. What

was allocated back was 3 days worth of cash. The

days are based on the average of cash needed to

pay vendors.) The fund has been “under funded”

since that time. 

In addition, the policy of full cost recovery was put

in place when DBOF was established (1992). At

the same time the reparable spares were capitalized

into the SMAG from the general funds general

ledger. These two changes drove significant

changes to the development of surcharge rates now

called cost recovery rates. In 1997, the Materiel

Support Division was formed as a merger of

Reparable Support Division, Systems Support

Division and the Cost Of Operations Division.

Also, the entire pricing and cost recovery development process was changed as an attempt to

improve the process. MSD is the only division of

SMAG which includes both the overhead costs and

repair costs. Combining this with changing flying

United States Air Force FY 2000 Financial Statement

78

Footnotes to the Principal Statements

Note 3—Fund Balance with Treasury
hour programs, base closures, and continuing peace

keeping missions, means budgeting and pricing for

MSD was severely challenged. Each year, since

inception, the MSD pricing computation had to be

changed to meet the changing missions.

On Line Payment and Collection (OPAC)

Differences—Any differences are reported with Air

Force General Fund statements.

Check Issue Discrepancy—Any differences are

reported with Air Force General Fund statements.

United States Air Force FY 2000 Financial Statement

79

Footnotes to the Principal Statements

Note 5—Accounts Receivable

4. Allowance method: The Supply Management

activity group uses an allowance method based on

historical data from prior year accounts receivable

balances, write-offs, and collection policy. Review

of individual accounts receivable transferred to

DFAS-Denver, Debt Management Operations

Division, often reveals invalid receivables that the

Standard Base Supply System should have posted

as an issue without reimbursement, instead of a

sale. Depot Maintenance generally uses the direct

write-off method for uncollectible accounts.

5. Other information: Intragovernmental

Accounts Receivable. The Air Force’s accounting

systems do not capture trading partner data at the

transaction level in a manner that facilitates trading

partner aggregations. Therefore, the Air Force was

unable to reconcile intragovernmental accounts

receivable balances with its trading partners. The

Department intends to develop long-term systems

improvements that will include sufficient up-front

edits and controls to eliminate the need for afterthe-fact reconciliations. The volume of intragovernmental transactions is so large that after-the-fact

reconciliation can not be accomplished with the

existing or foreseeable resources.

Guidance was issued by DFAS Arlington to reclassify Foreign Military Sales Trust Fund receivables

as public rather than government.

Prior to FY 2000, DMAG sales and services provided to the foreign military sales trust fund were

considered intragovernmental for statement prepaNote 4—Investments

Not Applicable.
ration and eliminating entry purposes. Beginning

with FY 2000, these transactions are now treated as

nongovernmental. This change reclassified approximately $9.6 million in accounts receivable and

$70.7 million in revenue from governmental to

nongovernmental for the FY 2000 statements.

United States Air Force FY 2000 Financial Statement

80

Footnotes to the Principal Statements

Note 6—Other Assets

4. Other Information Related to Other Assets:

The Air Force has reported outstanding financing

payments for fixed price contracts as an advance

and prepayment, because under the terms of the

fixed price contracts, the Air Force becomes liable

only after the contractor delivers the goods in conformance with the contract terms. If the contractor

does not deliver a satisfactory product, the Air

Force is not obligated to reimburse the contractor

for its costs and the contractor is liable to repay the

Air Force for the full amount of the advance. The

Air Force does not believe that the SFFAS No. 1,

Accounting for Selected Assets and Liabilities

addresses this type of financing payment. The

auditors disagree with the Air Force’s application

of the accounting standard pertaining to advances

and prepayments because they believe that the

SFFAS No. 1 is applicable to this type of financing

payment. 

ISAG—All other assets for ISAG represent travel

advances of $17,000. ISAG reflects a decrease in

Other Assets due to a change in crosswalks.

Previously, Other Intragovernmental Assets reflected the values of GLA 1315, Refunds Receivable.

For FY 2000 Accounts Receivable correctly

includes the amount of Refunds Receivable. 

DMAG—Other Assets With the Public, consists of

USSGL 1410, Advances to Others, in the amount

of $22,456,000 and USSGL 1450, Prepayments, in

the amount of $2,617,000.

SMAG—The majority of other assets are reported

by five Air Logistics Centers as sales of Materiel

Support Division (MSD) assets to foreign governments. These deliveries cannot be billed until each

delivery is matched to a proof of shipment within

SAMIS. The Other Nonfederal Assets account

consists of the following categories and dollar

amounts, in thousands:

The total SMAG other assets consists of the following:

! Other assets accounts receivable—deliveries

suspense: $475,241,000

! Air Force assets—other DoD FMS (depot):

$2,071,000
! Other assets uncollected federal excise taxes:

$1,740,000

! Other assets returns to vendors pending credit:

$168,141,000

! Other assets miscellaneous other assets:

$10,589,000

United States Air Force FY 2000 Financial Statement

81

Footnotes to the Principal Statements

Note 9—Inventory and Other Related Property

Note 7—Cash and Other Monetary Assets

The $102,000 is comprised of two entities:

" SMAG—$24,000 for fuels is an undeposited

collection.

" ISAG—$78,000, representing undeposited collections, was a posting error at Pensacola during September processing. It has since been

corrected in October 2000.

Note 8

Not Applicable.
2. Restrictions of Inventory Use, Sale, or

Disposition: Normally all items in the inventory

are sold. Under rare situations, issues without

reimbursement are made when authorized by DoD

directives.

3. Definitions of Columns Titles. Inventory,

Gross Value represents the standard value used for

inventory transactions in the financial system.

Revaluation Allowance is the total difference

between standard inventory values and either historical cost or net realizable value. Inventory, Net

is approximate historical cost or net realizable

value.

4. Other Information: Inventory data reported on

the financial statements are derived from logistics

systems designed for material management purposes. These systems do not maintain historical cost

data necessary to comply with the Statement of

Federal Financial Accounting Standard (SFFAS)

No. 3, “Accounting for Inventory and Related

Property.” In addition, while these logistics systems provide management information on the

accountability and visibility over inventory items,

the timeliness at which this information is provided

creates issues regarding the categorization of

Inventory as held for use, held in reserve for future

use, or excess, obsolete, and unserviceable.

Furthermore, past audit results have led to uncertainties pertaining to the completeness and existence of the inventory quantities used to derive the

values reported in the financial statements.

Supply Management is the only Air Force Activity

group that has inventory. The Supply Management

activities maintain day-to-day individual inventory

stock records on items valued in the supply systems at Latest Acquisition Cost (LAC). This valuation method is per the direction of the DoD

Comptroller. These values are based on prices paid

for recently acquired items. However, the values

United States Air Force FY 2000 Financial Statement

82

Footnotes to the Principal Statements

Note 9.A—Inventory, Net
are adjusted downward for unserviceable, anticipated excess, and anticipated condemnation items.

The unserviceable inventories are not valued at

standard price. They are valued at forecast acquisition cost less repair cost. Unserviceable inventories applies to the Materiel Support Division which

is the only activity that carries depot-level

repairable items. Potential excess, obsolete and

beyond repair inventory is not valued at standard.

It is the net realized value which is 1.8 percent of

acquisition cost.

The Inventory Held for Repair includes inventory

awaiting repair or being repaired at a base maintenance facility, a depot maintenance facility, or a

contractor repair facility. All three of those categories are supported by details in the appropriate

logistics system and are reconciled to the general

ledger account monthly.

Included in the Inventory Held for Sale balance is

Inventory Intransit between Storage Locations.

There are no logistics system details to support this

balance. It is computed as part of the home office

function by subtracting the Inventory Transferred

In from the Inventory Transferred Out general

ledger accounts. The difference is the Inventory

Intransit balance.

Work-In Process (WIP) is used to value that portion of the maintenance contract that has been completed. The value of WIP is used in the cost of

goods computation and appears on the AR(M)1307

report. A comparison of current and prior year

WIP indicates an increase in contract labor and

material. DMAG recognizes revenue incrementally. As job orders are completed, revenue is recognized by multiplying the completed job order by

the appropriate sales rate. Since job orders can be

associated with a specific contract, it can be said

that a portion of that contract has been completed.

United States Air Force FY 2000 Financial Statement

83

Footnotes to the Principal Statements

Note 9.B—Operating Materials and Supplies, Net

2. Definitions: OM&S Amount represents the

standard value used for OM&S transactions in the

financial system. OM&S, Net is the approximate

historical cost or net realizable value.

3. Restrictions on Operating Materials and

Supplies. All Air Force activity groups, except

Supply Management, have operating materials and

supplies. The activity groups use these materials

and supplies in support of their respective missions.
4. Other Information: Operating Materials &

Supplies (OM&S) data reported on the financial

statements are derived from logistics systems

designed for material management purposes.

These systems do not maintain the historical cost

data necessary to comply with the valuation

requirements of the Statement of Federal Financial

Accounting Standard (SFFAS) No. 3, “Accounting

for Inventory and Related Property.” In addition,

while these logistics systems provide management

information on the accountability and visibility

over OM&S items, the timeliness at which this

information is provided creates issues regarding the

categorization of OM&S as held for use, held in

reserve for future use, or excess, obsolete, and

unserviceable. Furthermore, past audit results have

led to uncertainties pertaining to the completeness

and existence of OM&S quantities used to derive

the values reported in the financial statements.

The Air Force attempts to use the consumption

method of accounting for OM&S unless the Air

Force believes the OM&S to be in the hands of the

end user for use in normal operations. As stated

above, current financial and logistics systems can

not fully support the consumption method.

According to federal accounting standards, the consumption method of accounting should be used to

account for OM&S unless: (1) the amount of

OM&S is not significant, (2) OM&S are in the

hands of the end user for use in normal operations,

or (3) it is cost-beneficial to expense OM&S when

purchased (purchase method). The DoD, in consultation with its auditors, is: (1) developing specific criteria for determining when OM&S amounts

are not significant for the purpose of using the consumption method; (2) developing functional

requirements for feeder systems to support the consumption method; and (3) identifying feeder systems that are used to manage OM&S items and

develop plans to revise those systems to support

the consumption method. However, for fiscal year

2000, significant portions of the Air Force’s

OM&S were reported under the purchase method

because either the systems could not support the

consumption method of accounting or because

management believes the item to be in the hands of

an end user. In some cases, the auditors disagree

with the Department’s determination that the items

are in the hands of the end user.

The U.S. Government Standard General Ledger

(USG SGL) does not include an account for

OM&S held for repair, nor does OMB’s government-wide Form and Content guidance provide for

specific footnote disclosure of the OM&S held for

repair. Accordingly, no amount was disclosed last

year for OM&S held for repair. 

The value of Air Force government furnished

material (GFM) and contractor acquired material

(CAM) in the hands of contractors is generally not

included in the OM&S values reported above. The

DoD is presently reviewing its process for reporting these amounts in an effort to determine the

appropriate accounting treatment and the best

method to annually collect and report required

information without duplicating information

already in other existing logistics systems.

United States Air Force FY 2000 Financial Statement

84

Footnotes to the Principal Statements
2. Other Information: In Fiscal Year 2000, real

property reported by the Automated Civil

Engineering System (ACES), personal property

reported by the Air Force Equipment Management

System (AFEMS), and the Information Processing

Management System (IPMS), data has not been

validated and reconciled to reported figures

received from the field activities.

Any WCF Special Tools and Special Test equipment in the possession and control of the Air Force

are reported in the Air Force General Funds financial statements. 

The value of Air Force General PP&E real property

in the possession of contractors is included in the

values reported above for the Major Asset Classes

of Land and Buildings, Structures, and Facilities.

The value of General PP&E personal property

(Major Asset Classes of Software and Equipment)

does not include all of the General PP&E above the

DoD capitalization threshold in the possession of

contractors. The net book amount of such property

is immaterial in relation to the total General PP&E

net book value. In accordance with an approved

strategy with the Office of Management and

Budget, the General Accounting Office and the

Inspector General, DoD, is developing new policies

and a contractor reporting process to capture

General PP&E information for future reporting

purposes for compliance with federal-wide

accounting standards.

Past audit results have led to uncertainties as to

whether all General PP&E assets in the possession

or control (existence) of the Department’s are properly and accurately recorded in the system

(completeness).

United States Air Force FY 2000 Financial Statement

85

Footnotes to the Principal Statements

Note 10—General PP&E, Net
4. Other Information: Amount of $198,890,000

(Military Retirement Benefits and Other

Employment-Related Actuarial Liabilities ) represents AFWCF FY2000 Workmen’s compensation.

Amounts are broken out among activity groups as

follows:

! SMAG: 16,196,000

! DMAG: 173,671,000

! ISAG: 9,023,000

See notes 12, 15, and 16.

United States Air Force FY 2000 Financial Statement

86

Footnotes to the Principal Statements

Note 11—Liabilities Not Covered by Budgetary Resources

Note 12—Accounts Payable

4. Other Information: Intragovernmental

Accounts Payable. For the majority of buyer-side

transactions, the Air Force WCF’s accounting systems do not capture trading partner data at the

transaction level in a manner that facilitates trading

partner aggregations. Therefore, the Air Force

WCF was unable to reconcile intragovernmental

accounts payable balances with its trading partners.

The Department intends to develop long-term systems improvements that will include sufficient upfront edits and controls to eliminate the need for

after-the-fact reconciliations. The volume of

intragovernmental transactions is so large that

after-the-fact reconciliation can not be accomplished with the existing or foreseeable resources.

The abnormal public balance is a result of posting

Undistributed Disbursements. Component is not a

true business activity and as such carries no

accounts receivable or payable. Amounts reported

for accounts receivable and payable are a result of

posting undistributed collections to accounts
receivable and undistributed disbursements to

accounts payable. The effect of posting normal

balance undistributed always results in abnormal

balances. for accounts receivable and payable. In

Component’s case, because of the transfer of undistributed to this business activity, the transfer drove

public accounts payable abnormal not only in

Component but at the consolidated Air Force level

as well.

Two ALCs within DMAG reported abnormal

accounts payable balances in September, San

Antonio with $30,712,000 and Warner Robins

(Contract) with $33,439,000. Warner Robins,

Organic had only an abnormal balance for public

accounts payable, $92,000. These abnormal balances were adjusted up to a zero balance using

expense as the contra. San Antonio’s abnormal

balance was created by a large amount in undistributed disbursements which is a debit balance.

Warner Robins’ abnormal balance was created

through a systems problem. Transactions were

established at the wrong price due to the D035A

system sending random wrong price indicators to

the G072D system. This problem has been reported through a Discrepancy Report to the Ogden

Megacenter.

See notes 11, 15, and 16.

Note 13

Not Applicable.

Note 14

Not Applicable.

United States Air Force FY 2000 Financial Statement

87

Footnotes to the Principal Statements

Note 15—Other Liabilities
4. Other Information Pertaining to Other

Liabilities: Based upon the Air Force’s interpretation of the Statement of Federal Financial

Accounting Standard (SFFAS) No. 5, an environmental disposal liability is recognized for the asset

when management makes a formal decision to dispose of the asset. The Air Force’s auditors disagree with this interpretation of the standard. Their

interpretation is that the environmental liability

recognition should begin at the time the asset is

placed in service. This issue raised by the auditors

is one that has government-wide implications for

all agencies. Until the issue is resolved on a government-wide basis, the DoD continues to adhere

to the explicit literal provisions of SFFAS No. 5.

United States Air Force FY 2000 Financial Statement

88

Footnotes to the Principal Statements

ISAG Intragovernmental Advances from Others: 84,000 (Air Force Operations and Maintenance)

Nonfederal other Liabilities:

Accrued Contractual Services: 117,348,000

Accrued Travel and Transportation 3,565,000

Miscellaneous Other Liabilities 3,124,000

See notes 11, 12, and 16.

Note 16

Not Applicable.

Note 17—Military Retirement Benefits and Other Employment-Related

Actuarial Liabilities

2. Other Information Pertaining to Military

Retirement Benefits and Other EmploymentRelated Actuarial Liabilities: 

Actuarial Cost Method Used: 

Assumptions: Market Value of Investments in

Market-based and Marketable Securities: 
Future workers’ compensation (FWC) figures are

provided by the Department of Labor (DOL). The

liability for FWC benefits includes the expected

liability for death, disability, medical, and miscellaneous costs for approved compensation cases, plus

a component for incurred but not reported claims.

The liability is determined using a method that utilizes historical benefit payment patterns related to a

specific incurred period to predict the ultimate payments related to that period.

The portion of the military retirement benefits

applicable to the Air Force is reported on the financial statements of the Military Retirement Trust

Fund.

Health benefits are funded centrally at the DoD

level. As such, the portion of the health benefits

liability that is applicable to the Air Force is reported only on the DoD agency-wide financial statements. 

Assumptions: Consistent with past practice, these

projected annual benefit payments have been discounted to present value using the OMB’s economic assumptions for 10-year Treasury notes and

bonds.

The interest rate assumptions utilized for discounting were as follows:

2000

6.15% in Year 1,

6.28% in Year 2,

6.30% in Year 3, and thereafter

To provide more specifically for the effects of

inflation on the liability for FWC benefits wage

inflation factors, cost of living adjustments

(COLAs) and medical inflation factors, consumer

price index medical (CPIMs), were applied to the

calculation of projected future benefits. These factors were also used to adjust the methodology’’ historical payments to current year constant dollars.

The compensation COLAs and CPIMs used in the

projections were as follows:

FY COLA CPIM

2000 1.97% 3.69%

2001 2.83% 4.24%

2002 2.90% 4.10%

2003 2.53% 4.16%

2004+ 2.60% 4.16%

The model’s resulting projections were analyzed to

insure that the amounts were reliable. The analysis

was based on three tests: 

1. A comparison was done of the new model’s

prior year projected payments for the current

year to the actual payments.

2. A comparison was done of the change in the

liability amount by agency to the change in the

aggregate liability.

3. A comparison was done of the historical payment data imported into the new model to the

benefit payment in prior years.

United States Air Force FY 2000 Financial Statement

89

Footnotes to the Principal Statements
2. Other Information Pertaining to Unexpended

Appropriation: Unexpended obligations reported

as a component of Unexpended Appropriations

include both Undelivered Orders-Unpaid and

Undelivered Orders-Paid only for Direct

Appropriated funds. This amount is distinct from

Change in Amount of Goods, Services, and

Benefits Ordered but Not Yet Received on the

Statement of Financing, which includes the change

during the fiscal year in unexpended obligations

against budget authority from all sources.

Only Supply Management has unexpended appropriations. Undelivered orders used in the calculation of net position includes both Undelivered

Orders-Unpaid and Undelivered Order-Paid for

Direct Appropriated funds.

United States Air Force FY 2000 Financial Statement

90

Footnotes to the Principal Statements

Note 19—General Disclosures Related to the Statement of Net Cost

Imputed Expenses

Note 18—Unexpended Appropriations
3. Other Information: The DMAG prior period

adjustments are to correct errors or omissions in

prior year accounting reports. 

Davis Monthan has a prior period adjustment of

($1,118,000) to correct an FY99 end of year 1307

Report miscalculation. Research revealed the

September, 1999, 1307 Report overstated

Accumulated Operating Results (AOR) by this

amount which was the result of a formula error that

caused the FY99 prior period adjustment to be

posted on the 1307 Report in the wrong sign. This

meant that the $559,000 FY99 prior period adjustment was doubled in the calculation of AOR, and

therefore, AOR was overstated.

Ogden Air Logistics Center (ALC) has a prior period adjustment of $623,000 to correct an FY99 end

of year 1307 report miscalculation. Research

revealed the September, 1999 1307 Report understated AOR by this amount which was the result of

a formula error that caused the FY99 prior period

adjustment to be posted on the 1307 Report in the

wrong sign. This meant that the $311,000 FY99

prior period adjustment was doubled in the the calculation of AOR, and therefore, AOR was understated.

ISAG has a prior period adjustment of ($4,170)

that is the net of the write off for an unsupported

balance for travel advances recorded in FY96

($1,000) and write off of an erroneous balance for

Commercial Accounts Payable and Government

Accounts Payable recorded in FY97.

Financing Sources, Other, on the Statement of

Changes in Net Position, is composed of the following:

ISAG—$18,801,000 (reclassified from account

5790, Invested Capital Used, to account 7190,

Other Gains)

SMAG—$370,987,000 (reclassified from account

5790, Invested Capital Used, to account 7190,

Other Gains)

Total—$389,788,000

United States Air Force FY 2000 Financial Statement

91

Footnotes to the Principal Statements

Note 20—Disclosures Related to the Statement of Changes in Net

Position
3. Other Information:

Undelivered Orders Presented in Statement of

Budgetary Resources: Undelivered Orders presented in the Statement of Budgetary Resources

includes Undelivered Orders-Unpaid for both

Direct and Reimbursable funds. It does not include

Undelivered Orders-Paid.

Spending Authority from Offsetting Collections:

Adjustments in funds that are temporarily not

available pursuant to Public Law, and those that are

permanently not available (included in the

“Adjustments” line on the Statement of Budgetary

Resources), are not included in “Spending

Authority From Offsetting Collections and

Adjustments” line of the Statement of Budgetary

Resources or the “Spending Authority for

Offsetting Collections and Adjustments” line of the

Statement of Financing.

The consolidated Statements of Budgetary

Resources for Air Force Component, DMAG, and

SMAG differ from September 30, 2000, SF 133s

because of the Rebaselining Initiative. A complete

set of DFAS Arlington guidance which includes

spreadsheets documenting required adjustments is

on file at DFAS AAC/DE and is available upon

request.

United States Air Force FY 2000 Financial Statement

92

Footnotes to the Principal Statements

Note 21—Disclosures Related to the Statement of Budgetary

Resources

Transfers In and Out of property for General and

Working Capital Funds; and transfers of collections

and disbursements to the Component level for

applicable Defense Working Capital Funds which

are reflected on the Statement of Changes in Net

Position and are not included in the Statement of

Financing.

Because this is a combining statement, interagency

eliminations are not required.

Budgetary data is not in agreement with proprietary

expenses and assets capitalized. This causes a difference in net cost between the statement of net

cost and the statement of financing. Statement of

financing costs capitalized on the balance sheet has

Note 22—Disclosures Related to the Statement of Financing
Note 23

Not Applicable.

United States Air Force FY 2000 Financial Statement

93

Footnotes to the Principal Statements

Note 24—Other Disclosures

* Net totals of contract payment notice rejects,

Inter-service, and Recons. CPN rejects total

$723,000. MAFR rejects are now included as

Intransits. There were no Air to Air rejects. Cross

Disbursing rejects $44,000. Recons difference

$2.229 million. The net change is coming from

CPN rejects decreasing $6.2 million, Air to Air

decreasing $1.2 million, Cross Disbursing decreasing $750,000, and Recons increasing $4.8 million. 

** Unobligated NULOs, including those awaiting

correction from paying station. At the end of FY

00, obligated and unobligated NULOs totaling

$24.6 million were reported at accounting classification reference number (ACRN) level (gross)

compared to $47 million in Sep 99. Of the $24.6

million, $5.2 million were 0 to 120 days old, $1.6

million were 121 to 180 days old, and $17.8 million were over 180 days old. 

*** Treasury Variance is no longer a category of

Intransits per DFAS-HQ instruction. Treasury

Variance is still a part of Undistributed. Intransits

now includes MAFR Rejects. FY00 MAFR

Rejects greater than 60 days total $922 thousand.

DFAS-HQ performance contract set a goal to

reduce Problem Disbursements and Intransits by 75

percent by September 2000 from September 1998

base line. DFAS-DE has achieved this goal.

These figures do not include the Military Sealift

Command and Military Traffic Management

Command pieces of the U.S. Transportation

Command.

been adjusted to make the two statements match.

Differences between budgetary and proprietary data

for Department of the Defense General Funds is a

previously identified deficiency. During FY 2001

DoD will develop alternative procedures to better

prepare the statement of financing for FY 2001

AFS reporting.
United States Air Force FY 2000 Financial Statement

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Footnotes to the Principal Statements

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Capital

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Required

Supplementary

Information

Annual Financial

Statement

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Fiscal Year 2000
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Required Supplementary Information
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Required Supplementary Information
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Required Supplementary Information
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Required Supplementary Information
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Required Supplementary Information

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Working

Capital

Funds

Audit

Opinion

Annual Financial

Statement

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101

Fiscal Year 2000
INSPECTOR GENERAL

DEPARTMENT OF DEFENSE

400 ARMY NAVY DRIVE

ARLINGTON, VIRGINIA 22202-4704

February 7, 2001

MEMORANDUM FOR UNDER SECRETARY OF DEFENSE (COMPTROLLER) DIRECTOR, DEFENSE

FINANCE AND ACCOUNTING SERVICE

SUBJECT: Endorsement of the Disclaimer of Opinion on the FY 2000 Air Force Working Capital Fund

Financial Statements (Project No. D-2001FD-0051.02)

The Chief Financial Officers Act of 1990, as amended by the Federal Financial Management Act of

1994, requires financial statement audits by the Inspectors General. We delegated to the Air Force Audit

Agency (AFAA) the audit of the FY 2000 Air Force Working Capital Fund financial statements. Summarized

as follows are the AFAA disclaimer of opinion on the FY 2000 Air Force Working Capital Fund financial

statements, and the results of our review of the AFAA audit. The information provided in this memorandum

contains reasons for the AFAA disclaimer. We endorse the disclaimer of opinion expressed by AFAA.

Disclaimer of Opinion. The AFAA disclaimer of opinion on the FY 2000 Air Force Working Capital

Fund financial statements, dated February 7, 2001, states that AFAA was unable to express an opinion on the

financial statements. We concur with the AFAA disclaimer of opinion. The AFAA disclaimer of opinion concludes that the financial information was unreliable and financial systems and processes, as well as associated

internal control structures, were inadequate to produce reliable financial information, as indicated in the following examples:

#Air Force supply management systems did not provide sufficient audit trails to confirm and value the in-transit inventory reported as part of inventory held for sale on the Balance Sheet.

$ Air Force depot maintenance systems lacked a transaction-driven general ledger supported by appropriate subsidiary ledgers and special journals. In addition, the depot maintenance systems did not perform

percentage-of-completion accounting or properly account for cost of goods sold and work-in-process.

$ The Air Force Working Capital Fund property, plant, and equipment valuation are unverifiable.

$ The Air Force Working Capital Fund general ledger was inconsistent with the U.S. Government

Standard General Ledger.

United States Air Force FY 2000 Financial Statement

102

Audit Opinion
Internal Controls. The AFAA tested internal controls but did not express a separate opinion because

opining on internal controls was not one of its objectives. However, AFAA determined that internal controls

did not provide reasonable assurance of achieving the internal control objectives described in Office of

Management and Budget Bulletin 01-02, “Audit Requirements for Federal Financial Statements,” dated

October 16, 2000. For example, the Air Force was unable to provide supporting documentation for $22.6 million of disbursement transactions and $516.9 million in open obligations. Additionally, the Defense Finance

and Accounting Service made $4.2 billion in improper and unsupported monthly adjustments and $31.9 billion

in improper and unsupported year-end adjustments to the Air Force Working Capital accounting records. The

Air Force and the Defense Finance and Accounting Service recognized many of the financial reporting weaknesses and reported them in their FY 2000 Annual Statements of Assurance. Details on the internal control

weaknesses will be provided in separate AFAA reports.

Compliance With Laws and Regulations. AFAA identified areas of noncompliance with laws and

regulations. Under the Federal Financial Management Improvement Act of 1996, AFAA work showed that

the financial management systems did not substantially comply with Federal financial management system

requirements, applicable Federal financial accounting standards, and the U.S. Government Standard General

Ledger at the transaction level.

Review of Air Force Audit Agency Work. To fulfill our responsibilities for determining the accuracy

and completeness of the independent work that AFAA conducted, we reviewed the audit approach and planning and monitored progress at key points. We also performed other procedures to determine the fairness and

accuracy of the approach and conclusions.

We reviewed the AFAA work on the FY 2000 Air Force Working Capital Fund financial statements

from November 21, 2000, through February 7, 2001, in accordance with generally accepted Government

auditing standards.

David K. Steensma

Deputy Assistant Inspector General

for Auditing

United States Air Force FY 2000 Financial Statement

103

Audit Opinion
DEPARTMENT OF THE AIR FORCE

WASHINGTON DC 20330-1000

7 February 2001

To the Acting Secretary of the Air Force

Chief of Staff, USAF

We were engaged to audit the Air Force Working Capital Fund financial state-ments for the fiscal year ended

30 September 2000. The annual financial statements consist of the Balance Sheet and related Statement of

Net Cost, Statement of Change in Net Position, Statement of Budgetary Resources, and Statement of

Financing. Preparation of the financial statements is the responsibility of the Defense Finance and Accounting

Service (DFAS) and Air Force management. This report presents our independent opinion on the financial

statements, evalua-tion of the effectiveness of internal controls over financial reporting, and assessment of

compliance with laws and regulations.

OPINION ON THE FINANCIAL STATEMENTS

We were not able to obtain sufficient evidential matter, or to apply other auditing procedures, to satisfy ourselves as to the fairness of the Air Force Working Capital Fund financial statements. Therefore, in accordance

with Government Auditing Standards and the provisions of Office of Management and Budget (OMB)

Bulletin 01-02, Audit Requirements for Federal Financial Statements, 16 October 2000, we are unable to

express, and we do not express, an opinion on the reliability of the Air Force Working Capital Fund financial

statements for the fiscal year ended 30 September 2000. As a result of our inability to audit, we concluded the

amounts reported in the consolidated financial statements and related notes may not provide reliable information for government and public decision-making purposes.

We base our disclaimer on the inability of Air Force and DFAS to correct previ-ously reported material deficiencies that affect the reliability of the Air Force Working Capital Fund Fiscal Year (FY) 2000 financial statements. The Air Force and DFAS continue their efforts to improve financial reporting; however, the financial

systems and processes, as well as the associated internal control structure, remain inadequate to produce reliable financial information. For example:

$ Air Force supply management systems still did not provide sufficient audit trails to confirm and value

the in-transit inventory reported as part of inventory held for sale on the Balance Sheet.

United States Air Force FY 2000 Financial Statement

104

Audit Opinion

OFFICE OF THE SECRETARY
$ Air Force depot maintenance systems lacked a transaction-driven general ledger supported by appropriate subsidiary ledgers and special journals. Also, the depot maintenance systems did not perform percentage-of-completion accounting or properly account for cost of goods sold and work-in-process.

$ The Air Force Working Capital Fund property, plant, and equipment (PP&E) valuation continued to be

unverifiable.

$ The Air Force Working Capital Fund general ledger was inconsistent with the U.S. Government

Standard General Ledger.

REQUIRED SUPPLEMENTARY INFORMATION

The Required Supplementary Information for Deferred Maintenance is not a re-quired part of the Air Force

Working Capital Fund principal financial statements. Therefore, we did not audit, and do not express an opinion on, such information. Further, we did not apply certain procedures prescribed by professional standards

because the information reported derives from the same data sources as the finan-cial statements and, as such,

may not provide a reliable source for the information.

MANAGEMENT INITIATIVES

The Air Force and DFAS continue actions to improve Air Force Working Capital Fund financial data accuracy

and reporting. Examples of ongoing initiatives that should contribute to this goal are discussed below. During

future audits, we will evaluate the effectiveness of these actions.

$ In the supply management area, the Air Force established a program management office to develop an

accounting process for recording in-ventory at historical value. The program management office has

also undertaken initiatives to identify the actions necessary to comply with generally accepted accounting principles for inventory assets and support the information reported in the financial statements.

The Air Force anticipates these efforts will be completed by FY 2003.

$ In the depot maintenance area, the Air Force continues efforts to implement system corrections

required to comply with federal financial accounting requirements. When implemented, the depot

maintenance systems will (1) provide an automated transaction-driven general ledger, (2) maintain subsidiary support for account balances, (3) recognize revenue using the percentage-of-completion

methodology, and (4) account for costs of goods sold and work-in-process based on actual costs

incurred. The Air Force plans to implement the changes to the organic and contract depot maintenance

systems by FY 2002.

$ The Air Force has engaged accounting firms to assist in assessing the existence, completeness, and valuation of PP&E assets recorded in the databases of various capital asset systems. These efforts began

in November 1998 and continued during FY 2000.

United States Air Force FY 2000 Financial Statement

105

Audit Opinion
$ To correct general ledger deficiencies, the Air Force and DFAS have initiatives underway to implement

the U.S. Government Standard Gen-eral Ledger in the Air Force Working Capital Fund accounting systems. Among these initiatives are the conversion of the Standard Material Accounting System, the

Defense Industrial Financial Management System, and the Contract Maintenance Accounting and

Production System to the U.S. Government Standard General Ledger. The Air Force and DFAS estimate completion of these efforts by FY 2003.

We believe these efforts are steps in the right direction and will help to resolve many of the problems with

existing systems. We will continue to work closely with management to address the material deficiencies precluding an unqualified audit opinion.

REPORT ON INTERNAL CONTROLS

Management is responsible for establishing and maintaining an internal control structure to provide reasonable, but not absolute, assurance that transactions are properly recorded, processed, and summarized to (a) permit financial statement preparation in accordance with generally accepted accounting standards and (b) safeguard assets against loss from unauthorized acquisition, use, or disposal. Because of inherent limitations in

any internal control, errors or fraud may nevertheless occur and not be detected. Also, projecting internal control evaluation results to future periods is subject to the risk that procedures may become inadequate. In addition, our consideration of internal controls would not necessarily disclose all material weaknesses. Under

auditing standards, a material weakness is a condition where controls do not reduce to a relatively low level

the risk that errors or irregularities, in amounts that would be material in relation to the financial statements,

may occur and not be detected on a timely basis by employees performing their assigned functions.

Reportable conditions involve matters coming to our attention that relate to significant deficiencies in the

design or operation of the internal control structure over financial reporting that, in our judgment, could

adversely affect the Air Force’s ability to record, process, sum-marize, and report Working Capital Fund financial data.

Over the last 9 years, we identified numerous findings and made recommendations to improve internal controls related to financial reporting for the Air Force Work-ing Capital Fund. Although we have noted progress

in several areas to correct these previously identified problems, a significant number of corrective actions are

still in progress. Appendix I identifies the prior audit findings and recommendations that remained open during FY 2000.

Furthermore, although we accomplished internal control testing, our financial statement audit objectives did

not include providing a separate internal control opinion; accordingly, we do not express such an opinion.

However, the OMB Bulletin, Audit Requirements for Federal Financial Statements, requires that we describe

material weaknesses and reportable conditions identified during the audit. Therefore, the following paragraphs

summarize material weaknesses and report-able conditions that existed in the design or operation of the interUnited States Air Force FY 2000 Financial Statement

106

Audit Opinion
nal control structure over financial reporting in effect at 30 September 2000. Based on these weaknesses, we

determined the internal control structure did not provide reasonable assurance of achieving the internal control

objectives described in the OMB bulletin. Most material weaknesses and reportable conditions presented in

this report are the same as those included in prior-year Air Force Working Capital Fund financial statement

audit reports. Specific weaknesses, along with recom-mended remedial actions, timeframes for corrective

actions, and management comments, are more fully described in separate audit reports issued to Air Force and

DFAS management.

SUPPORTING DOCUMENTATION

a. DFAS-Columbus did not provide supporting documentation for 32 ($22.6 million) of 86 ($65 million)

disbursement transactions tested. (Draft Report of Audit 00068002, Air Force Working Capital Fund, Fiscal

Year 2000, Collections and Disbursements)

b. Air Force fund managers were not able to provide supporting documentation for 374 ($516.9 million)

of 725 ($891 million) Wholesale Supply and Information Services Activity Group open obligation transactions

tested (such as undelivered orders outstanding, accounts payable, unfilled customer orders, and accrued

expenses). (Draft Reports of Audit 00068023, Air Force Working Capital Fund, FY 2000 Statement of

Budgetary Resources-Wholesale Supply Selected Accounts, and 00068024, Air Force Working Capital Fund,

FY 2000 Statement of Budgetary Resources-Information Services Activity Group Selected Accounts)

ACCOUNTING ADJUSTMENTS

DFAS-Denver Center made $4.2 billion in improper and unsupported monthly adjustments and $31.9 billion in

improper and unsupported year-end adjustments to Air Force Working Capital Fund accounting records.

(Office of the Inspector General, Department of Defense, Draft Report of Project D2001FD-0014, untitled)

PERFORMANCE MEASURES

We obtained an understanding of the sources and controls related to performance measures reported in the

overview to the principal statements and notes. Although we performed only a limited review, we did note a

condition that, in our judgment, could adversely affect the Air Force Working Capital Fund’s ability to collect,

process, record, summarize, and report performance information. The Overview Section accompanying the

Working Capital Fund financial statements indicated that a key performance indicator impacting support of Air

Force mission capability was the Aircraft Quality Defect Rate.1 In FY 2000, we reported that the Quality

Deficiency Reporting System (G02 1) maintained incomplete information, Consequently, the performance

results relating to depot maintenance aircraft defi-ciency reporting may be misstated. (Report of Audit

99062011, Quality Deficiency Reporting, 7 July 2000)

United States Air Force FY 2000 Financial Statement

107

Audit Opinion

1 The Aircraft Quality Defect Rate measures the quality of completed aircraft work from programmed depot maintenance.
REPORT ON COMPLIANCE WITH LAWS AND REGULATIONS

Air Force management is responsible for complying with laws and regulations applicable to the Air Force

Working Capital Fund. Issues that should concern management include compliance with laws and regulations

pertaining to the objectives of Air Force Working Capital Fund programs and the activities, functions, and

manner in which programs and services are delivered. Material instances of non-compliance are failures to

follow requirements or violations of prohibitions contained in laws or regulations that cause us to conclude the

aggre-gation of the misstatements resulting from those failures or violations is material to the financial statements, or the sensitivity of the matter would cause others to perceive the misstatements as significant.

As part of obtaining reasonable assurance that financial statements are free of material misstatement, we tested

Air Force compliance with certain laws and regulations where noncompliance could have a direct and material

effect on finan-cial statement amounts, to include requirements contained in the Federal Financial

Management Improvement Act (FFMIA) and Federal Managers’ Financial Integ-rity Act (FMFIA). Our

financial statement audit objectives did not include providing a separate opinion on overall compliance with

laws and regulations, and accordingly, we do not express such an opinion.

FEDERAL FINANCIAL MANAGEMENT IMPROVEMENT ACT

Under the Federal Financial Management Improvement Act of 1996, we are required to report whether the

agency’s financial management systems substantially comply with federal financial management systems

requirements, federal accounting standards,2 and the U.S. Government Standard General Ledger at the transaction level. Our follow-up audit work confirmed that previously reported issues continued to exist during FY

2000. Below, we address the instances of non-compliance with the three FFMIA requirements and describe

the details related to the specific weaknesses, along with recommended corrective actions, timeframes for corrective actions, and management comments, in the cited reports.

a. Federal Financial Management System Requirements. For FY 2000, the financial management

systems that support the Air Force Working Capital Fund did not substantially comply with federal financial

management system require-ments to (1) maintain adequate subsidiary records for audit trails in Air Force and

DFAS financial management systems; (2) implement accounting systems with transaction-driven general

ledgers; and (3) provide adequate application controls, such as separation of duties, support for transactions,

transaction controls, and data reconciliation, to critical Air Force feeder systems, In addition, due to significant

application control weaknesses in the accounting and feeder systems, neither the DFAS nor the Air Force

could ensure the systems properly recorded, processed, and summarized only valid transactions and provided

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Audit Opinion

2 The American Institute of Certified Public Accountants recognizes the Statements of Federal Financial Accounting Standards

issued by the Federal Accounting Standards Advisory Board as generally accepted accounting principles for federal government

agencies.
accurate information. During the FY 2000 reporting period, the financial management systems contin-ued to

contain reportable conditions, such as inadequate access controls, insufficient audit trails and data verification/reconciliation processes, and inade-quate system documentation. These weaknesses increased the risk for

fraud, errors, and material misstatements to occur within the system and the resulting financial statements.

The DFAS and Air Force have acknowledged many of the system weaknesses and reported them in their FY

2000 annual assurance state-ments on internal management controls. To address these control weaknesses, the

DFAS and Air Force are eliminating or replacing non-compliant legacy systems, modifying existing systems,

and changing business practices to correct previously identified control deficiencies.

b. Federal Accounting Standards. For FY 2000, the financial management systems that supported the

Air Force Working Capital Fund did not substantially comply with federal accounting standards. Specifically:

(1) SFFAS No. 1, Accounting for Selected Assets and Liabilities. The Depot Maintenance Activity

Group (DMAG) recorded accrued liability and work-in-process costs based on estimated amounts instead of

actual costs incurred. (Report of Audit 98068038, Contract Depot Maintenance Financial Processing, Depot

Maintenance Activity Group, Air Force Working Capital Fund, Fiscal Year 1998, 12 July 1999)

(2) SFFAS No. 3, Accounting for Inventory and Related Property. The DMAG recorded the value

of operating materials and supplies at current stock list prices instead of historical cost. (Report of Audit

98068038, Contract Depot Maintenance Financial Processing, Depot Maintenance Activity Group, Air Force

Working Capital Fund, FY 1998, 12 July 1999)

(3) SFFAS No. 6, Accounting for Property, Plant, and Equipment. Air Force Working Capital Fund

entities did not record all costs incurred in valuing PP&E assets. (Report of Audit 98068002, Air Force

Supply/Depot Maintenance Property, Plant, and Equipment; and Report of Audit 98068038, Contract Depot

Maintenance Financial Processing, Depot Maintenance Activity Group, Air Force Working Capital Fund,

Fiscal Year 1998, 12 July 1999)

(4) SFFAS No. 7, Accounting for Revenue and Other Financing. The DMAG recorded revenue

based on completed units instead of the percentage-of-completion method. (Memorandum Report 98068006,

Depot Maintenance Activ-ity Group, Air Force Working Capital Fund; and Report of Audit 98068038,

Contract Depot Maintenance Financial Processing, Depot Maintenance Activity Group, Air Force Working

Capital Fund, Fiscal Year 1998, 12 July 1999)

In the FY 2000 Working Capital Fund management representation letter, the Air Force acknowledged the

financial management systems contain several departures from federal accounting standards. The Air Force is

working hard to solve these problems but will require several years to achieve substantial progress.

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Audit Opinion
c. U.S. Government Standard General Ledger at the Transaction Level. For FY 2000, the Air Force

Working Capital Fund accounting systems had not fully implemented the U.S. Government Standard General

Ledger at the transaction level for budgetary accounts. Therefore, instead of using budgetary accounts to prepare the Report of Execution, the DFAS-Denver Center relied on proprietary and statistical accounts and data

not recorded in the accounting records. As a result, the amounts presented in the Statement of Budgetary

Resources and the Statement of Financing were not auditable. (Office of the Inspector General, Department of

Defense, Draft Report of Project D2001FD-0014, untitled)

The DFAS plans to incorporate the U.S. Government Standard General Ledger in the Standard Material

Accounting System and Defense Industrial Financial Management System. In addition, the Air Force plans to

implement the U.S. Government Standard General Ledger in the Contract Maintenance Accounting and

Production System. The DFAS and Air Force estimate these efforts will be completed by FY 2003.

FEDERAL MANAGERS’ FINANCIAL INTEGRITY ACT

With respect to management’s disclosure of internal control material weaknesses in the DFAS and Air Force

Working Capital Fund Federal Managers’ Financial Integrity Act reports, we did not identify any material

weaknesses related to finan-cial reporting not previously reported.

OBJECTIVE, SCOPE, AND METHODOLOGY

Management is responsible for:

$ Preparing the annual financial statements in conformity with applicable accounting principles,

$ Establishing and maintaining internal controls and systems to provide reasonable assurance that the

broad control objectives of the Federal Managers’ Financial Integrity Act are met, and

$ Complying with applicable laws and regulations.

The Air Force Audit Agency (AFAA) is responsible for:

$ Planning and performing an audit to obtain reasonable assurance about whether the principal financial

statements are reliable (free of material misstatement) and presented fairly in conformity with OMB

Bulletin 97-0 1, Form and Content of Agency Financial Statement, 16 October 1996, as amended 11

September 2000, and applicable accounting prin-ciples;

$ Obtaining reasonable assurance about whether relevant management internal controls are in place and

operating effectively; and

$ Testing management’s compliance with selected provisions of laws and regulations and performing

limited procedures to test the consistency of other information presented in the annual financial statement with the consolidated financial statements.

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Audit Opinion
To fulfill these responsibilities, we:

$ Examined, on a test basis, evidence supporting the amounts and disclo-sures in the principal financial

statements;

$ Assessed the accounting principles used and significant estimates made by management;

$ Evaluated the overall presentation of the financial statements;

$ Tested compliance with selected provisions of laws and regulations;

$ Obtained an understanding of the design of internal controls, determined whether they have been

placed in operation, assessed control risk, and performed tests of the reporting entity’s internal controls; and

$ Followed up on previously reported deficiencies.

In reviewing the Air Force Working Capital Fund consolidated financial statements, we evaluated internal controls to determine the reliability of financial and performance reporting related to the principal statements,

accompanying footnotes, and performance measures.

In the area of financial reporting, we determined whether Air Force and DFAS personnel properly recorded,

processed, and summarized transactions to permit the preparation of financial statements in accordance with

federal accounting standards. We also (1) evaluated the safeguarding of assets against loss from unauthorized

acquisition, use, or disposition; (2) obtained an understanding of the design of internal controls; (3) determined

whether they were in operation; (4) assessed control risk; and (5) tested controls.

We obtained an understanding of internal control designs related to the existence and completeness of assertions regarding the performance measures included in the overview accompanying the Air Force Working

Capital Fund financial statements.

The Department of Defense Inspector General (DoD IG), Denver Field Office, assisted us in reviewing the

DFAS-Denver Center’s compilation of the FY 2000 Air Force Working Capital Fund financial statements. We

believe our audit work and that of the DoD IG provide a reasonable basis for our audit opinion.

We accomplished the audit from January to December 2000 at the Office of the Secretary of the Air Force,

Financial Management and Comptroller; DFAS loca-tions (DFAS centers and DFAS field organizations); HQ

Air Force Materiel Command (AFMC); and Air Force active duty units. We provided a draft of this report to

management in January 2001.

SUMMARY OF PRIOR AUDIT COVERAGE

The General Accounting Office (GAO), DoD IG, and AFAA have conducted multiple reviews related to financial management issues. We issued a disclaimer for our FY 1999 Air Force Working Capital Fund Financial

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Audit Opinion
Statements review (Report of Audit 99068011, Opinion on Fiscal Year 1999 Air Force Working Capital Fund

Financial Statements, 9 February 2000). The GAO reports can be accessed over the Internet at

http://www.gao.gov; DoD IG reports, at http://www.dodig.osd.mil; and AFAA reports, at

http://www.afaa.af.mil.

We appreciate the cooperation and courtesies extended to our auditors.

JACKIE R. CRAWFORD

The Auditor General

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Audit Opinion

The U.S. Air Force Annual Financial Statement is available for viewing

on the Internet at www.saffm.hq.af.mil under the FMP tab.