United States Air Force

Financial Statements

2001

United States Air Force FY 2001 Financial Statements

1

FiscalYear2001 AirForce

AnnualFinancialStatements

Message from the Secretary of the Air Force . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

Message from the Assistant Secretary of the Air Force,

Financial Management and Comptroller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

General Funds

Overview

Air Force in Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

Air Force Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

Fiscal Year 2001 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Performance Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

Financial Management Reform Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19

Air Force Future Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27

Working Capital Fund

Overview

Air Force Working Capital Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29

Air Force Working Capital Fund Organization . . . . . . . . . . . . . . . . . . . . . . . . . .32

Supply Management Activity Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34

Performance Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35

Financial Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37

Goals and Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38

Depot Maintenance Activity Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38

Financial Business Performance Measures . . . . . . . . . . . . . . . . . . . . . . .42

Performance Effectiveness Measures . . . . . . . . . . . . . . . . . . . . . . . . . . .43

Goals and Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45

Information Services Activity Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46

Performance Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47

Financial Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49

Goals and Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49

Cash Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50

Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51

General Funds Principal Statements and Related Notes . . . . . . . . . . . . . . . . . . . . . . .55

General Funds Audit Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .123

Working Capital Fund Principal Statements and Related Notes . . . . . . . . . . . . . . . . .145

Working Capital Fund Audit Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .201

Table ofContents

Table of C

ontents
SECRETARY OF THE AIR FORCE

WASHINGTON

February 2002

Message from the Secretary of the Air Force

Fiscal Year 2001 was a challenging year for the United States Air Force. We answered our

nation’s call to patrol the skies of Iraq and the Balkans and responded to the terrorist attacks of

September 11, 2001, by mobilizing Air Force personnel and deploying long-range strike and

humanitarian missions in Afghanistan while defending our homeland. In addition to meeting these operational requirements,

we continued our commitment to recruit, retain, and develop highly skilled people and accelerated our transformation into a

global reconnaissance and strike force for the 21st century. The Air Force worked hard to make critical investments to improve

the capability of our current aging weapon systems, and, at the same time, bring new capabilities to the joint warfighting

effort.

Meeting these many challenges required exceptional management and judicious execution of resources. In FY01, the Air

Force budget was roughly $93 billion. Consistent with the requirements of the Chief Financial Officers Act, this statement documents the expenditures devoted to our General Funds and Working Capital Fund activities. The statement also briefly reviews

selected performance measures established as part of the Government Performance and Results Act.

We made effective use of our budget dollars by remaining a leader in financial reform. In FY01 we made strides in achieving

auditable and reliable financial statements. Significant actions have been taken to improve the controls in key feeder systems

and in the recording and reviewing of obligations. Additionally, we maintained our commitment to train our financial management workforce to meet the increasing demands to provide decision support analysis and improved financial information to

the warfighter.

The Air Force is committed to providing the most capable air and space force to the joint warfighting commanders and meeting the national security challenges of the 21st century. We will continue our faithful stewardship of funds to ensure our dominance as the world’s leader in air and space power.

United States Air Force FY 2001 Financial Statements

2

Message fro

m the

Secretary of the Air Force
DEPARTMENT OF THE AIR FORCE

WASHINGTON DC

February 2002

Message from the Assistant Secretary of the Air Force

Financial Management and Comptroller

The Air Force is committed to providing timely, accurate and reliable financial information to create

strategic value for operational decision-making and maintaining accountability to our stakeholders—

the American public. We take our responsibility for stewardship of the public funds seriously and are working hard to improve

all aspects of financial management. In the spirit of progress, I am pleased to present the Air Force annual financial statements for fiscal year 2001. These statements fulfill the requirements of the Chief Financial Officers Act and portions of the

requirements of the Government Performance and Results Act.

The statement documents how the Air Force invested $92.7 billion of taxpayers’ funds in support of our nation’s defense. In

addition, the document briefly reviews our FY 2001 goals in light of actual performance. The Air Force successfully met its

operational commitments in FY 2001, including the initiation and conduct of new missions for homeland air defense and the

war against terrorism after the tragic events of September 11, 2001. The additional mission requirements of this war beyond

existing worldwide commitments have stretched our resources. However, we are working to maximize our productivity to minimize the additional funds that this war will require. Although we are not a business, we are shifting our paradigm to manage

both operational and financial performance like a business.

Our strategic intent is to make financial management an enterprise-wide priority and to redefine the role of finance as an

enabler of decisions. To fulfill these increasing responsibilities and to aid warfighters in producing effective and efficient outcomes, we have made further progress towards the creation of a world-class financial organization this fiscal year. We are

implementing both revolutionary and evolutionary system corrections to achieve an auditable financial statement. For example,

the Air Force continues to make progress in linking our key transaction-based feeder systems to the general accounting systems. Yet, much work remains to be done to reach our goal of an enterprise-wide, end-to-end accounting system. We are also

reengineering internal processes while balancing the cost of internal controls with their potential for reducing financial fraud.

Finally, we have made measurable progress in improving the professional development, training, and certification of our key

financial management personnel.

Overall, I am proud to report that your Air Force is building a foundation of sound financial management and control and

accountability to drive down costs to promote its proven reputation as the most dominant air and space power in the world.

MICHAEL MONTELONGO

Assistant Secretary of the Air Force

(Financial Management and Comptroller)

Message fro

m the

Assistant Secretary of the Air Force

United States Air Force FY 2001 Financial Statements 3

OFFICE OF THE ASSISTANT SECRETARY

General Funds

Air Force in Action

United States Air Force FY 2001 Financial Statements 5

Overview

AirForce in Action

In 2001, the United States Air Force (USAF) accelerated its transformation into an

unmatched global reconnaissance and strike force responsive to the nation’s need, while

still meeting the current operational requirements of its joint warfighting commanders.

From precise, long-range strikes and humanitarian relief efforts in Afghanistan, to continuing surveillance over Iraq and the Balkans, to integral and timely contributions to homeland security, the Air Force is answering the nation’s call for action.

America’s Airmen steadfastly served as part of the team to safeguard the enduring freedom of its citizens. Fiscal year (FY) 2001 witnessed the Air Force’s most important asset—

its people—standing vigilant across the globe, whether they were building tomorrow’s

integrated reconnaissance capabilities and strike systems, serving as the focal point for

national security in space, or maintaining a robust and capable strategic deterrent.
United States Air Force FY 2001 Financial Statements

General Funds

6

Air Force Organizations

Overview

AirForce Organizations

The Air Force has molded and transformed into a peerless air and space power, a vital

component of joint operations. Despite a decade of decreasing manpower and increasing operational deployments, the Air Force has emerged as a multi-capable, flexible, and

decisive instrument of national power. This success is directly attributable to outstanding

people: they remain the Air Force’s highest priority. Accordingly, they represent the most

vital Air Force resource, over and above weapons systems, infrastructure, and similar fundamentals. Air Force personnel provide not only a sense of continuity but also a steady

hand as the Air Force transitions to increasingly sophisticated technical systems.

Underpinning the high caliber of the Air Force members are the bedrock values of the

U.S. Air Force. These core values reflect the proud Air Force heritage; transcend generations of our members; and provide a lineage as the Service transforms, evolves, and

adapts into the 21st century. Indeed, the USAF has always been on the leading edge of

technological transformation, due in large measure to the surpassing skills and

unequaled commitment of service to country by Air Force personnel.
Detailed information on Air Force personnel and other Air

Force resources is included in subsequent performance-related sections.

Major Commands, Direct Reporting

Units, and Field Operating Agencies

Major Commands

The Air Force is organizationally aligned into constituent

groups starting with major commands. A major command

(MAJCOM) represents a subdivision of the Air Force assigned

one or more elements of the Air Force mission and is subordinate to Headquarters USAF (HQ USAF). Operational and

Support commands reflect the two types of MAJCOMs. The

Air Force Major Commands, along with their respective

strengths, are listed here.

Direct Reporting Units

Direct Reporting Units (DRUs) report directly to the

Headquarters Air Force, owing to singular mission responsibilities. They may range in size and function from the cadets

and personnel at the U.S. Air Force Academy (USAFA) to the

cadre at the Air Force Doctrine Center (AFDC).

Field Operating Agencies

Field Operating Agencies (FOAs) execute responsibilities

under the organizational aegis of a functional manager at

Headquarters Air Force. FOAs include such entities as the Air

Force Legal Services and Air Force Audit Agency, and accomplish their missions separate from major commands.

General Funds

Air Force Organizations

United States Air Force FY 2001 Financial Statements 7
United States Air Force FY 2001 Financial Statements

General Funds

8

General Funds

Overview

FiscalYear2001 Results

The Fiscal Year (FY) 2001 budget increased nearly ten percent from FY 2000. The total

Air Force budget authority was $92.7 billion. This amount includes operation and maintenance (O&M); procurement (PROC); research, development, test, and evaluation

(RDT&E); military personnel (MILPERS); military family housing (MFH); military construction (MILCON); and Base Realignment and Closure (BRAC). These funds do not include

revenue received from the working capital fund, other services, DoD agencies, or other

Federal agencies.

The trend in increasing budget authority will likely continue in the future because our

nation is at war in the fight against terrorism, and the President has remarked that we will

probably be at war for quite some time. As a result, providing the necessary resources to

warfighters is extremely important to our nation’s defense and contributes directly to international efforts to eliminate terrorism. President Bush stated on January 23, 2002, “the

United States will not cut corners” when it comes to national defense. The Commander in

Chief added, “The tools of modern warfare are effective. They are expensive and in order

“It is a great day to be an airman in

today’s Air Force, with an incredible sense

of purpose and knowledge of our place in

history. It is also a great day to be a part

of the Air Force family.”

—James G. Roche

Secretary of the Air Force
to win this war against terror, they are essential. Whatever it

takes, whatever it costs, this patient, this resolved nation will

win the first war of the 21st century.”

Budget by Appropriation Categories

Six major appropriation categories, along with BRAC and the

National Defense Airlift (NDA) fund, comprised the Air Force

FY 2001 budget of $92.7 billion. The appropriation categories included:

(1) O&M—pays the salaries and benefits of civilian employees and other day-to-day operating costs (e.g., fuels and

spare parts)

(2) Procurement—finances major systems purchases

(3) MILPERS—finances the salary and benefits of uniformed

personnel

(4) RDT&E—funds system development

(5) MILCON—pays for facilities construction

(6) MFH—provides for the operation, maintenance, and construction of housing units

(7) BRAC—congressionally mandated facility cessation funds

(8) NDA fund—provides for programs, projects, and funds

activities appropriate to the C-17 program. In addition,

the Other category includes Foreign Military Financing,

Environmental Restoration, and Wildlife Conservation on

Military Reservations that total less than $3 million in

funding.

General Funds

General Funds

United States Air Force FY 2001 Financial Statements 9
United States Air Force FY 2001 Financial Statements

General Funds

10

General Funds
General Funds

General Funds

United States Air Force FY 2001 Financial Statements

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Overview

Performance Measures

In FY 2001, the Air Force again chronicled its results under congressionally mandated

performance metrics. This section recounts the measurements for each Air Force goal,

along with other selected performance measures.

The Government Performance and Results Act (GPRA) of 1993 requires agencies to

establish the performance goals necessary to accomplish their respective missions.

Consistent with the goals of the GPRA requirement, the Air Force has historically measured performance according to three overarching goals directly related to mission

accomplishment.

Goal 1—Quality People: Ensure a high-quality force of dedicated professionals, and

provide an enhanced quality of life and strong sense of community.

“Over the past decade, our nation has demanded increasingly

more effort and sacrifice from the Air Force team—our active

duty airmen, civil servants, guardsmen, reservists, and contractors—and that team has responded brilliantly.”

—James G. Roche

Secretary of the Air Force
United States Air Force FY 2001 Financial Statements

Goal 2—Strategy/Operational Performance: Enable joint

force commanders to respond to a full spectrum of crises by

providing appropriately sized, strategically constituted, ready

forces to execute Air Force mission tasks.

Goal 3—Transformation: Prepare for an uncertain future by

providing a transformation program that implements the full

range of technological advantages and qualitatively superior

warfighting capabilities.

Collectively, these goals establish a common organizational

direction for USAF subordinate units as they develop their

strategic goals, perform essential tasks, and measure their

performance.

These Air Force corporate goals link to overall Department of

Defense (DoD) goals.

A comparison of FY 2001 actual performance results to target performance (where possible) is consistent with the GPRA.

The First Goal: Quality People

The foundation of the United States Air Force is its people.

They are the Air Force’s single most crucial readiness component. The people who fight and win America’s air wars must

be skilled, motivated, and dedicated.

The Air Force relies on a highly skilled, educated, and technologically superior force to function as an effective warfighting team.

Force structure drawdowns and a mounting demand for U.S.

military presence around the globe continues to increase

deployed and non-deployed personnel commitments. Still, Air

Force members stand proud to serve their country. Senior Air

Force leaders value their service and readily undertake the

obligation to care for them and their families.

Active Military Active Civilian

FY 1990—535,000 FY 1990—215,000

FY 1999—366,000 FY 1999—132,000

FY 2000—356,000 FY 2000—161,000

FY 2001—353,000 FY 2001—150,000

The Active Military chart shows how much the active military

is shrinking. While the reduction in military personnel has leveled off somewhat in the past few years, active military has

declined approximately 34 percent from 1990 levels.

The Active Civilian chart shows that civilian population trends

in the active Air Force have declined by more than 30 percent since FY 1990. Due to personnel drawdowns of the past

decade, new hires have been limited. Moreover, many experienced employees have moved on to other jobs or have taken

advantage of early retirement options. As a result, 42 percent

of Air Force civilian personnel will be eligible to retire in the

next five years. The Air Force is taking the necessary steps to

reshape the civilian force to ensure future availability of sufficient and experienced personnel with the requisite skills to fill

the positions.

General Funds

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General Funds
In addition to the dramatic decline in the military force since

the end of the Cold War, the other most significant occurrence has been the shift of people and mission tasking from

the active force to the reserve component. The reserve component consists of the Air Force Reserve Command and the

Air National Guard. These personnel are not just “add-ons”

to the active force, but an integral part of the team—nearly

half of the mission-oriented squadrons in the total Air Force

are in the reserve components. The vital role reserve forces

play today is underscored by the fact that a clear majority of

the Air Force’s total air refueling capability is in the Air

National Guard and the Air Force Reserve.

In concert with the proper emphasis on personnel, the USAF

ranks quality of life (QoL) as one of its top priorities. USAF

QoL initiatives acknowledge the intense demands placed on

the mission-focused total force. The Air Force will, with the

continued support of Congress, pursue adequate manpower;

improve workplace environments; seek fair and competitive

compensation and benefits; balance deployments and exercise schedules; provide safe, affordable, and adequate housing; enhance community and family programs; improve educational opportunities; and provide quality health care.

Continued efforts to compensate the mission-focused total

force progressed significantly when the President signed the

FY 2001 National Defense Authorization Act (NDAA). As a

result, key legislation directly impacting total force pay and

compensation, travel and transportation entitlements, retirement, survivor benefit programs, education programs, and

healthcare was authorized and implemented over this past

year.

Recruiting

As FY 2001 ended, the Air Force was slightly short of its total

force goal because retention remains down. The Air Force

exceeded its FY 2001 recruiting goal of 34,600, sending

35,381 people to basic training. Further, the Air Force enters

FY 2002 with the strongest Delayed Entry Program bank in

recent years. About half of the FY 2002 accession needs are

already under contract and scheduled to enter active duty

during the next year.

The Air Force exceeded its FY 2001 recruiting goal, not by

lowering standards, but by intensifying efforts to promote the

benefits of the Air Force. This success, in the face of stiff competition from the private sector and an increased propensity

to pursue college opportunities, is the result of hard work and

new approaches.

Correspondingly, the Air Force Reserve surpassed its FY 2001

recruiting goal of 10,037 by accessing 10,516—105 percent

of the goal.

Such success reflects a combination of measures—more

recruiters on the street, a focused television advertising campaign, and higher enlistment bonuses. These are all important to manning the force, and the Air Force will continue to

make recruiting a top priority.

General Funds

General Funds

United States Air Force FY 2001 Financial Statements

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“Each Airman, officer or enlisted, is the

key to our future.”

—James G. Roche

Secretary of the Air Force
United States Air Force FY 2001 Financial Statements

In support of its recruiting mission, the Air Force:

◗ Increased the number of production recruiters from 1,085

at the beginning of FY 1999 to 1,465 by the end of FY

2001

◗ Instituted an aggressive advertising campaign to include a

full year of national television advertising

◗ Kept pace in cyberspace, modernizing the innovative and

artistically designed USAF web site to promote a better

understanding of the Air Force overall, thereby effectively

reaching the Internet generation.

The need to recruit qualified and diverse men and women,

both military and civilian, to serve in the U.S. Air Force

remains as important today as it was when the service was

established. A service population reflective of the strengths of

a diverse America will provide the necessary new talent

required for today’s unique challenges. If the Air Force succeeds in propagating its message to young people across the

nation, then it is confident in a positive response.

The Air Force hopes to attract more former airmen (as well as

soldiers, sailors, and marines) to return to active duty in FY

2002. The service actively recruited these experienced military

professionals, returning 1,155 veterans to uniform in FY

2001. In FY 2002, the Air Force hopes to bring more than

2,000 former members into the active duty ranks.

The Air Force achieved 102 percent of its FY 2001 enlisted

recruiting goals by accessing 35,000 airmen to active duty

against a goal of 34,600. In terms of quality, more than 99

percent of those enlisting are high school graduates.

Training

Recruiting good people into the Air Force is just the beginning. They need training to perform highly technical work—

the basis of the Air Force’s record of military success.

The Air Force continues to offer professional military education (PME) programs that span the careers of both officers

and enlisted members. From Airman Leadership School to the

Air War College, PME provides opportunities to all Air Force

personnel, granting them the skills and knowledge they need

to manage Air Force resources and to operate weapons systems.

The newest PME course, the Air and Space Basic Course

(ABC) offered at Maxwell Air Force Base, Alabama, is

designed to meet the needs of newly commissioned line, nonline, active-duty, Guard and Reserve officers, and selected

civilian interns.

Technical training courses are a vital part of the broader

training system. For example, the 51-day Security Forces

Apprentice course teaches airmen all aspects of their multifaceted career field missions. The Community College of the

Air Force (CCAF) offers numerous courses leading to an

associates degree and had awarded more than 216,000

degrees at the close of FY 2001.

General Funds

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General Funds
Pilot Training

Pilot training is of particular concern to the Air Force, considering the number and quality of trained pilots correlates

directly to the ability of the service to accomplish its mission.

One useful pilot training measure is the Hours per Crew per

Month (HCM) that active duty pilots in Air Force combatcoded units spend flying and training.

Retention

Unfortunately, retention problems offset the benefit of FY

2001’s successful recruiting campaign. Although the Air

Force exceeded its first-term retention target of 55 percent

(achieving 57 percent), it missed the targets set for both second-term and career airman retention.

In FY 2002, the Air Force is initiating a campaign to “rerecruit” the force. Recognizing talented military professionals

as an invaluable asset, the Air Force is making a concerted

effort to “re-recruit” individuals who have not yet committed

to continuing their Air Force career. This effort concentrates

on development engineers and pilots, but will expand to

other officer and enlisted Air Force speciality codes.

The Air Force Reserve met its end strength goal by reaching

100 percent.

Pilot Retention

A special subset of the retention challenge is keeping experienced pilots. The U.S. Air Force boasts the world’s most efficient and talented support force, combined with technologically superior, integrated air and space systems. However,

retention of skilled pilots remains crucial to accomplishing

operational missions. Further, at a cost of several million dollars to train and season, a veteran pilot is the Air Force’s

most expensive personnel asset. A strong economy and

unprecedented airline hiring, along with continued high operations tempo, contributed to a shortage of approximately

1,200 pilots, 9 percent of the requirement.

Although the terrorist attacks of September 11 significantly

affected airline hiring in the short-term, the long-term effects

remain less clear. The Air Force expects the airline industry to

fully recover, resuming the pull on the USAF pilot force. As

such, pilot retention will continue to be a significant issue for

the long-term health of USAF warfighting capability.

Therefore, the focus on retention initiatives is long-term rather

than short-term. Initiative options include: increasing active

duty service commitment, increasing compensation, managing operations tempo, and enhancing quality of life programs.

General Funds

General Funds

United States Air Force FY 2001 Financial Statements

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United States Air Force FY 2001 Financial Statements

Active Air Force HCM is a programmatic indicator that

demonstrates the impact of Planning, Programming, and

Budgeting actions on combat crew flying hours. As presented,

HCM is an aggregate of similar-type aircraft in four combat/

combat support groups—fighter, bomber, tanker, and airlift.

HCM values vary widely by weapon system and MAJCOM

due to mission profiles, crew composition, and training

requirements for dissimilar aircraft. Variations over time in

each major weapon system’s programmed hours relates to

changes in missions, training requirements, and average sortie duration (ASD). As a result of significant differences

between categories, the HCM aggregate values are not in an

overall Air Force composite HCM.

(The hours shown in the Flying Hours Program Execution table

are the congressionally funded O&M hours. They do not

include incremental contingency hours, Transportation

Working Capital Fund hours, foreign national reimbursable

hours, Special Operations hours, and RDT&E hours. The flight

suspension of the T-3A significantly impacted FY 1998–1999

budget execution. If the congressional program is adjusted to

account for this grounding, the execution percentage for FY

1998 and 1999 would have been 96.5 percent and 95 percent, respectively.)

Active Air Force execution of programmed flying hours varies

within major weapon systems from year to year for numerous

reasons. These include fact-of-life program changes during

the year, support to regional contingencies, weapon system

retirement, conversion of hours between weapon systems,

maintenance issues, and aircraft flight operations suspensions.

The Second Goal: Strategy/Operational

Performance

In FY 2001, innovative Air Force strategy devised exceptionally productive use of operational units in the full spectrum of

military operations, from deterrence and combat contingency

operations to humanitarian aid and disaster assistance. These

accomplishments in strategy implementation (e.g., the

Expeditionary Air Force (EAF)) were even more striking considering the countervailing factors of constrained resources,

aging aircraft, and acute recapitalization needs.

Mission Capable Rates

A measure of aircraft readiness is mission capable (MC)

rates. Expressed in percentages, MC rates are the number of

times USAF aircraft are ready to perform an assigned mission. By this yardstick, Air Force readiness amounted to 73.5

percent in FY 2001. This reflects the first increase in mission

capability since FY 1991.

While the aggregate MC rate stands at 73.5 percent, specific

MC rates vary according to aircraft type. The charts on pages

17 and 18 reflect this delineation. Notably:

◗ Fighter MC rates decreased slightly from FY 2000’s rate of

74.3 percent to 73.8 percent in FY 2001, while Bomber

MC figures increased significantly, from 65.5 percent in FY

2000 to 70.8 percent in FY 2001.

General Funds

16

General Funds
◗ Strategic Airlift MC improved one percent to 69.1 percent

in FY 2001.

◗ The MC rates for aircraft in the “Other” category also

improved, increasing 2.5 percent from FY 2000.

While improved in FY 2001, the MC rates still lag behind

desired USAF readiness goals. Several interrelated factors

explain this readiness shortcoming and the consequent failure

to meet goals. The most prominent factors responsible for

lagging MC rates are inconsistent spares funding over the last

decade, high operations tempo, maintenance manpower

shortages, and most significantly, aging aircraft. Many efforts,

including recent spares funding plus-ups and an initiative to

robustly fund current and future years spares requirements,

are beginning to yield positive results on MC rates.

Efforts by senior Air Force leadership to address other factors

also are underway. The Expeditionary Air and Space Force

(EAF) initiative, featuring regular deployment schedules,

appears to be stabilizing operations tempo and positively

impacting retention levels. Recent testimony by the then-Air

Force Chief of Staff emphasized the need to recapitalize the

force structure to mitigate the effects of aging aircraft and

infrastructure. Ensuring operational readiness will continue to

receive priority attention at all levels.

General Funds

General Funds

United States Air Force FY 2001 Financial Statements

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United States Air Force FY 2001 Financial Statements

The Third Goal: Transformation

Transformation represents the linchpin of the recently completed Quadrennial Defense Review (QDR). The Air Force is

inherently transformational, as it constantly adapts to new

threats and manages new technology to face future challenges.

For the Air Force, transformation means fundamental change

that harnesses advanced technologies. These technologies

then enable new concepts of operation that can assist in

meeting responsibilities and missions the USAF may face. In

addition, transformation involves organizational change that

better enables the USAF to accomplish its demanding and

far-flung missions.

The Air Force believes that the transforming process—and

with it, meaningful transformation—can only be achieved

through a committed process of change. The Air Force

approach to transformation starts with the notion that it cannot achieve meaningful transformation without integrating the

service’s expanding capabilities with those of the other services and elements of national power.

The USAF views transformation as an activity by which the

nation and its military fundamentally change operational concepts, doctrine, organizational structure, training and education, personnel policies, and military technology to expand

strategic options and shrink those of adversaries in a rapidly

changing environment.

Noteworthy transformation efforts in FY 2001 included a

major thrust in the space arena. There, the Air Force began

realizing one of the operational goals of the Quadrennial

Defense Review—enhancing the capability and survivability of

space systems. For the first time, the Air Force integrated a

potential adversary’s space capabilities into wargaming exercises, ensuring the preparedness of USAF personnel to react

to attacks on United States space-related infrastructure. Space

systems have now been integrated into virtually every aspect

of U.S. military operations and are essential to mission success.

Other transformational efforts include the overarching horizontal integration of Command & Control Intelligence,

Surveillance, and Reconnaissance (C2ISR) systems; the provision of vital ISR assets to joint operations in critical regions of

the world; and the examination of the potential to transform

single-mission platforms into multi-mission platforms.

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General Funds

“There can be no doubt that the

quality of our Air Force is

directly attributable to the quality of the men and women who

volunteer to serve.”

—General John P. Jumper

Air Force Chief of Staff
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Management Reform Initiatives

United States Air Force FY 2001 Financial Statements

19

Overview

Financial Management

Reform Initiatives

The Assistant Secretary of the Air Force for Financial Management and Comptroller

(SAF/FM) strongly supports financial management reform to provide reliable and accurate financial information for Air Force stakeholders. This increased financial information

fidelity will enable warfighters to choose more prudently among competing alternatives to

produce more efficient and effective outcomes. Through close cooperation with Air Force

commanders and managers, the Air Force is making significant progress toward improving financial management and complying with the Chief Financial Officers (CFO) Act of

1990.

As in the past, the Air Force aggressively pursued its goals for financial management

reform during FY 2001. The Air Force continues to rely on many government groups,

including Air Force Financial Management personnel, the Air Force Audit Agency, the

Defense Finance and Accounting Service (DFAS), and other public and private organizations to achieve those goals.
United States Air Force FY 2001 Financial Statements

The Air Force needs financial management reform to:

◗ Provide better financial information to our commanders

and managers

◗ Improve confidence in the Air Force as a good steward of

taxpayer dollars

◗ Meet public law requirements

◗ Support the President’s Management Agenda and the

Secretary of Defense’s goal for auditable financial statements.

There are many elements to financial management reform

success. Among them are improvements in professional qualifications of Air Force financial managers, achieving auditable

financial statements, improving compliance with financial

rules and regulations, improving cost accounting, driving

down the cost of processing transactions, and providing

increased decision-support analysis. Efforts have concentrated

on improving financial data, financial systems, and professional qualifications, while also increasing compliance, data

accuracy, efficiency, and visibility.

Improving Financial Data

The Air Force is striving to achieve auditable financial statements, consistent with CFO Act requirements. The Air Force is

focusing on the accounting framework, which includes three

accounting areas: budgetary, financial, and managerial cost

accounting. After the CFO Act passed, the Air Force focus

shifted from budgetary accounting for the expenditure of

funds towards accounting for assets and liabilities, much like

private businesses. Today, with the requirements for performance-based budgeting and reporting and managerial cost

accounting receiving greater attention, the Air Force is conducting pilot experiments with Activity-Based

Costing/Management systems to provide better financial

information to decision-makers and to identify areas to capture efficiencies.

Improving Budgetary Accounting

Over the past four years, the Air Force has placed significant

emphasis on the Budgetary Resources Statement because of

its importance in reflecting stewardship responsibilities. This

statement and the related disclosures present information on

three major elements—funding authorized by Congress, status of those funds, and the total obligated balance at the end

of the fiscal year. To date, the Air Force has made considerable progress toward achieving a positive opinion on this

statement. Accurately presented on this statement are two of

the three major elements. On the final element, composed

chiefly of obligation balances, the financial community has

taken significant steps to improve the year-end obligated balance by reviewing all obligations tri-annually for accuracy,

completeness, and timeliness, and at the same time de-obligating the funds that are no longer required. In addition, the

Department of Defense Inspector General, in conjunction with

the Air Force Audit Agency, contracted with a Certified Public

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Accounting firm to audit the FY 2001 General Fund

Budgetary Resources Statement.

Improving Financial Accounting

The Air Force is working hard to improve its financial

accounting, which will offer a two-tiered benefit: (1) verify the

accuracy of the data used to manage the Air Force and (2)

comply with the CFO Act. We are addressing the key deficiencies in reporting assets and liabilities on the Air Force

balance sheet through a CFO Integrated Process Team (IPT),

headed by a senior financial and logistics manager, to

address issues. The IPT uses a coordinated approach, with

representatives from all functional communities as well as the

Air Force Audit Agency and the DFAS Denver Center. By

working together and fully identifying, properly valuing, and

correctly accounting for assets, liabilities, and related transactions, the Air Force has resolved significant issues. Examples

include environmental costs, computing software development costs, and reclassifying assets.

Improving Managerial Cost Accounting

A primary objective of the financial management community

is providing commanders with the best cost information available to aid decision-making. Several key initiatives illustrate

progress in this area.

During FY 2001, the Air Force further improved the Air Force

Total Ownership Cost (AFTOC) management information system. AFTOC provides detailed information on the costs of

supporting weapon systems. The Commanders’ Resource

Integration System (CRIS) will provide a data warehouse information storage and analysis system, offering a resource

analysis tool for flying hour programs. Plans are underway to

merge the AFTOC and CRIS databases, resulting in an Air

Force Central Cost Data Warehouse.

The Air Force began deployment of the Depot Maintenance

Accounting and Production System (DMAPS)/Defense

Industrial Financial Management System (DIFMS), which will

provide actual data on repair costs for major weapons—a

key cost accounting improvement for a business that spends

nearly $4 billion per year.

Improving Financial Systems

During the year, DoD established a Project Management

Office with the primary goal of documenting the current

financial management systems architecture and developing a

pro forma plan. Contract awards for assistance in this effort

have been initiated with private consulting and accounting

firms. The Air Force is closely involved in and supportive of

this transformation effort.

While DoD works on developing the overall architecture for

financial management systems, the Air Force continues its

efforts related to critical “feeder” systems that provide financial data to the accounting systems. The massive effort of

upgrading the critical feeder systems to comply with Federal

financial management requirements has been underway since

1996, when the Air Force first identified the critical feeder systems. Feeder system managers must ensure that they take

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United States Air Force FY 2001 Financial Statements

21
United States Air Force FY 2001 Financial Statements

their systems through the steps of awareness, assessment,

renovation or replacement, validation, and compliance. At

the close of FY 2001, monitoring of 48 feeder systems continues (including eight newly developed systems), and we are

tracking progress towards CFO compliance.

Several of our most important systems have made significant

progress. Two major systems began the final validation

process during FY 2001: the Automated Civil Engineer

System-Real Property (ACES-RP) and the Air Force Equipment

Management System (AFEMS). Finalized results of these validation audits will be in the second quarter in FY 2002.

One of the largest and most complex of the modifications to

feeder systems is a suite of systems supporting the Air Force

depots that repair aircraft and other weapon systems. The

Depot Maintenance Accounting and Production System

(DMAPS) and associated Defense Industrial Fund

Management System (DIFMS) will provide much better cost

accounting data and comply with the CFO Act. Fielding these

systems is currently underway at the three Air Logistics

Centers.

Improving Professional Qualifications

The Air Force continues to improve the professional qualifications of its financial management personnel. In May 1999,

Air Force financial management leadership issued guidelines

for the professional development of its financial managers.

These guidelines apply to those in designated positions that

are involved in policy decisions or are responsible for enforcing financial laws and regulations. However, the Air Force is

encouraging all financial management personnel to follow

the guidelines and to complete an Individual Development

Plan that exhibits a path to attain the appropriate qualifications.

The guidelines for professional development cover continuing

professional education (CPE), general education, professional

and military education, experience, and test-based certification. The specific provisions of the guidelines can be found

on the SAF/FM web site at: www.saffm.hq.af.mil.

Continuing professional education is a key part of these

guidelines because it enables financial managers to stay current in the profession. The guidelines call for those in designated positions to obtain 80 hours of CPE every two years,

with at least 20 hours each year. For those Air Force personnel who face difficulty in completing CPE because they work

at remote locations and have unpredictable schedules, Air

Force financial leaders plan to make CPE easier to complete

through distance learning courses, videotapes, articles, and

quizzes on the SAF/FM home page, and other techniques.

More courses are in development to expand training opportunities.

The guidelines also encourage financial managers to obtain

a test-based certification. As part of this effort, the Air Force

supports the American Society of Military Comptrollers’ testbased certification and training program focused on defense

financial matters. Since the certification program’s inception

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in January 2000, 101 Air Force members have received the

Certified Defense Financial Manager (CDFM) designation.

The Air Force is transforming its workforce through a new

program called Developing Aerospace Leaders (DAL). The

purpose of this program is to determine the skills, knowledge,

and abilities related to specific occupations, as well as the

universal characteristics necessary to grow an Air Force

leader regardless of specific occupation. Once those competencies are defined, the Air Force will develop its officers

through targeted training, education, and experience. This

development program will include increasing breadth of

experience through broadening assignments outside a person’s core competencies.

Increase Compliance

A successful financial management environment demands a

system of checks and balances to ensure compliance with

financial laws and regulations. The Air Force Accounting and

Finance Office persists in capitalizing on technological

advancements to achieve increased but cost effective financial compliance. Working with financial experts from the field,

it reviewed current business practices and identified critical

processes for incorporation into a set of standardized selfinspection criteria. These new criteria are available to the

entire financial management community through a new webbased Self-Inspection Program (SIP). This program encompasses all facets of Air Force financial operations while ensuring standardization and allowing growth within this everchanging business environment. The SIP helps ensure compliance and reduce financial fraud.

The Air Force continues to make significant progress in one

key area of compliance—the number of reportable Anti-deficiency Act (ADA) violations. The number of reported violations is one indicator of the adequacy of the Air Force’s

administrative funds control processes. In FY 1999, the Air

Force reported only two ADA violations. Although there was

an increase to five violations in FY 2000, this number

decreased to only three reportable ADA violations in FY

2001.

The Air Force is placing more emphasis on preventive initiatives, including increased fiscal and appropriation law training, along with comprehensive management program and

budget reviews. Last year, the Air Force completed a webbased fiscal law course specifically directed at persons with

responsibility for ensuring the proper use of appropriated

funds. The training focuses on the laws governing the availability and use of Federal funds. This self-administered and

certifying training course helps financial managers in establishing, reviewing, and maintaining effective administrative

controls over appropriations and funds. Additional improvement in the Air Force anti-deficiency program is attributable

to increased support from senior SAF/FM leaders, more

attention and involvement from major command financial

management organizations identifying and investigating antideficiency cases, better screening of suspected violations, and

improved anti-deficiency training.

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Management Reform Initiatives

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United States Air Force FY 2001 Financial Statements
United States Air Force FY 2001 Financial Statements

The Air Force also works with DFAS to reduce the overall level

of problem disbursements. Problem disbursements are

unmatched disbursements (UMDs) plus negative unliquidated

obligations (NULOs). A UMD is a financial disbursement not

readily matched to a recorded obligation. A NULO is a financial disbursement that appears to exceed the matched obligation. The work done in this area has achieved significant

progress (see UnMatched Disbursements (UMD) and

Negative Unliquidated Obligations (NULO) chart).

As the charts shows, problem disbursements fell sharply from

$665 million in 1998 to $91 million in FY 2001. The Air

Force and DFAS continue efforts to reduce the overall level of

problem disbursements.

Improve Data Accuracy, Efficiency, and

Visibility

The Air Force is using the latest computer technologies to

improve the accuracy and efficiency of entering financial

information and data. The Air Force also is deploying systems

to improve the access and visibility of numerous types of

resource information. This visibility increases the potential to

spot and fix errors, plus provides better and broader financial

analysis. The end goal is to use current technology so that

more time is devoted to creating strategic value through

financial information and less time is needed to ensure the

foundational efforts associated with transaction-based data

inputs. Summaries of systems being improved or deployed to

help achieve the goal are included here.

Air Force Financial Systems Management

Office

The Air Force Financial Systems Management Office

(AFFSMO) was created in FY 2001 to provide a single office

for program management, oversight, and integration of existing and new Air Force financial systems. Currently, the office

is located at Wright-Patterson AFB, Ohio, and oversees the

Automated Business Services System, the Commanders’

Resource Integration System, the Job Order Cost Accounting

System, and the Automated Purchase Card System. The office

also explores and tests potential systems such as Wide Area

Work Flow and Oracle Financial Systems.

Automated Business Services System (ABSS)

ABSS is now fully deployed to all active-duty, reserve, and

guard Air Force locations. ABSS is designed to improve financial efficiency and accuracy in response to the VicePresidential mandate to achieve paperless acquisition within

DoD. ABSS has met and exceeded this mandate by processing more than 90 percent of the Air Force’s acquisition documents in paperless format. This success was achieved

because ABSS automates funding documents, such as purchase requests, and electronically feeds the accounting and

contracting systems with commitment data. In 2001, ABSS

made another “first,” by deploying a new version with digital

signatures—more technically known as Public Key

Infrastructure (PKI) technology. This system improvement

allows for increased internal controls, while simultaneously

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reducing the use of paper documents as an official record.

Future improvements include moving ABSS completely to a

secure web-based environment, thereby allowing efficient, yet

secure, transactions from anywhere at anytime.

LeaveWeb

This simple but effective military leave processing system uses

web technologies to increase the accuracy and timeliness of

military leave and pay accounting. New system deployment

included the Pentagon, Air Mobility Command, Pacific Air

Forces, and United States Air Force in Europe, and the system

will deploy to remaining Air Force units over the next year.

The system allows a military member to go online and fill out

a LeaveWeb form using a standard web browser. Like ABSS,

entering the pertinent information for a member happens

once, and then flows from person-to-person, office-to-office

as electronic data. Anyone within the chain of command with

proper permission rights may access this information online to

approve or deny a leave request, determine leave status, run

unit analysis reports, or make administrative changes. At the

end of every day, a military pay technician downloads the

stored information, digitally certifies the data for accuracy,

and then uploads the information to DFAS using the military

pay systems. With the use of LeaveWeb, leave accounting

accuracy and internal controls have improved dramatically,

while customer satisfaction and efficiency have skyrocketed.

Commanders’ Resource Integration System

(CRIS)

CRIS is a data warehouse information storage and analysis

system developed by ACC and now managed by the Air

Force Financial Systems Management Office. The system

allows financial management and other personnel the ability

to perform in-depth resource analysis of accounting, financial, personnel, and logistics information. With this crosscutting and timely information, analysts finally can be “analysts”

rather than “data gatherers.” The system takes daily data

feeds from legacy systems and puts them in a central data

warehouse. The data is cleansed and balanced for accuracy,

then stored or delivered to its customers for analysis. A customer can access the data warehouse using an online access

tool, similar to a Microsoft Excel spreadsheet. Because CRIS

gathers data from numerous stovepipe legacy systems, for the

first time the analyst has access to the entire procurement,

accounting, personnel, and logistics process. This new capability allows the Air Force to correct inaccuracies between systems, substantially reduce the time spent on data collection

and analysis, and provide rock-solid financial justifications.

CRIS is currently deployed to all Air Force major commands

and will eventually expand to the Air Staff and base-level

units in FY 2002. The data warehouse also will expand to

include more types of data feeds. The access to total resource

data has proved to be another invaluable tool towards

achieving CFO Act compliance. With more users and more

data, it will become even more useful.

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United States Air Force FY 2001 Financial Statements

25
United States Air Force FY 2001 Financial Statements

Customer Automation and Reporting

Environment (CARE)

CARE is an automated process that provides support for the

administration of government and corporate credit card travel

and expenses and project purchases through a purchasing

card. CARE is a real success story in the Air Force financial

management world. Rebates are up dramatically from previous years. Most of the increase is attributable to a faster turnaround time in making payments to the U.S. Bank, or the

purchase card issuer. The Air Force began rolling out CARE

to the stateside bases in early 2001, and will complete the

implementation by Spring 2002. CARE includes additional

features that will assist not only the cardholder but also

approving officials in managing the program. CARE also

allows for account setup and maintenance and contains an

automated purchase card log and reconciliation tool. This

tool will greatly reduce the amount of time and effort the

financial management community expends in obtaining confirmation statements. Additionally, CARE allows charge reallocation to other accounting lines after disbursement, without

the preparation of a manual journal voucher to redistribute.

CARE processes all the required accounting entries, thereby

reducing or eliminating technician reentry errors within DFAS

or Financial Service Offices.

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General Funds

Air Force Future Challenges

United States Air Force FY 2001 Financial Statements

27

Overview

AirForce Future Challenges

In more than 50 years of existence, the United States Air Force has become the world’s

premier air and space force.

Despite this unrivaled capability, the Air Force unceasingly strives to improve through the

process of transformation.

To guide the vital transformation effort, the Air Force is focusing on Strategy, People,

Recapitalization, and Efficiencies and Innovation.

The emphasis on strategy involves such innovative constructs as the Expeditionary Air and

Space Force (EAF); the horizontal integration of Command and Control, Intelligence,

Surveillance, and Reconnaissance (C2ISR) systems; and the emerging Global Strike Task

Force (GSTF) concept.

“The American people have the

highest confidence in our military

forces and are justifiably proud

of the Air Force’s numerous

achievements and bright future.”

—James G. Roche

Secretary of the Air Force
United States Air Force FY 2001 Financial Statements

Air Force personnel are the highest priority for its leaders. The

Air Force is committed to comprehensive initiatives in recruiting, “re-recruiting” (retention), and quality of life issues. The

Air Force is committed to ensuring these initiatives continue to

receive due emphasis.

Recapitalization represents an imposing challenge for the Air

Force, but the service is firmly committed to improving air and

space capabilities. This entails pursuing necessary investments—key operational assets, modernizing the aging aircraft

fleet, and remedying a deteriorating infrastructure. To be sure,

the Air Force must recover from a decade-long spending hiatus to provide the tools for its personnel to accomplish its mission.

The U.S. Air Force embraces the critical goal of efficiencies

and innovation as it charts its future course. Efficient service

practices can free otherwise-wasted resources for vital operational needs and thus increase the effectiveness of USAF air

and space capabilities. Air Force innovation is already manifesting itself in acquisition excellence, financial management

modernization, a long-range depot strategy, innovative

warfighting concept development, and the realization of

extraordinary synergy from the implementation of the 2001

Space Commission.

As the Air Force looks to the future, it remains committed to

realizing the full potential of organizational changes, new

concepts of operations, and next-generation technologies to

provide unequaled air and space capability to the joint

warfighting commanders.

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Air Force Future Challenges
Working Capital Fund

W

orking Capital Fund C

oncept

United States Air Force FY 2001 Financial Statements

29

Overview

Working CapitalFund Concept

“Working capital funds are revolving funds within DoD which finance organizations that are intended to operate like commercial businesses. Income (or budgetary resources) derived from the sale of

goods and services are 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 break-even 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

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)
United States Air Force FY 2001 Financial Statements

Working Capital Fund

30

Air Force W

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Overview

AirForce Working CapitalFund

(AFWCF)

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, managed by the United States Transportation Command).

The AFWCF consists of three activity groups—supply management, depot maintenance

and information systems. Supply Management supports major Air Force goals and mission-essential tasks by providing inventory management for spare parts and associated

logistics support services to fulfill United States Air Force (USAF) needs during war and

peacetime. Depot Maintenance provides economical and responsive repair, overhaul,

and modification of aircraft, missiles, engines, other major end items, and their associated components. The Information Services business area provides for the maintenance

and development of automated information systems for specific activities of the Air Force,

Department of Defense (DoD), and other Government agencies.

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.

Funding Authority

The Office of the Under Secretary of Defense (Comptroller)

(OUSD(C)) through the Assistant Secretary of the Air Force

(Financial Management and Comptroller) (SAF/FM) allocates

to activity groups their annual cost authority. Unit cost targets

provide standards for managing cost per unit of output,

established during the budget process by dividing the projected total program/product cost by the projected units of measurable output. Specific capital investment targets are established to support the replacement and modernization of

equipment and other capital assets through the budget, obligation, and procurement processes.

Rates

Established rates are set to recoup full costs with adjustments

made for prior year gain or loss. Therefore, during the year

of execution there are stabilized rates. The scope of costs

paid by AFWCF activities and passed to customers in rates

and prices has been refined to represent more accurately the

full costs of goods and services.

Mission Impact

The trends reflected in key operational and financial business

performance indicators (BPIs) gauge the impact of AFWCF

support on Air Force mission capability. These indicators also

are the key measure to assess performance under the

Government Performance and Results Act (GPRA). Key operational BPIs include the following:

◗ Materiel Support Division (MSD) Retail Issue

Effectiveness—The percentage of occasions in which Base

Supply is able to issue a serviceable part once an order is

placed, regardless of stock level authorizations.

◗ MSD Retail Stockage Effectiveness—The percentage of

occasions in which Base Supply is able to issue a serviceable part once an order is placed for items authorized a

stock level.

◗ Depot Maintenance Activity Group (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 include:

◗ 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)—UCT is a target performance

indicator measuring projected resources consumed versus

projected output. It is actual unit cost compared against

target unit cost.

Working Capital Fund

Air Force W

orking Capital Fund

United States Air Force FY 2001 Financial Statements 31
United States Air Force FY 2001 Financial Statements

Working Capital Fund

32

Air Force W

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Overview

AirForce Working CapitalFund

Organization

Air Force Working Capital Fund Activity Groups and Divisions
Working Capital Fund

Air Force W

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United States Air Force FY 2001 Financial Statements 33
United States Air Force FY 2001 Financial Statements

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 peacetime and wartime. SMAG acquires and repairs

inventory items using funds received from prior sales. The

activity group pays operating costs using revenue from sales.

Mission Statement

The mission of SMAG is to provide policy, guidance, and

resources to meet Air Force needs for spare parts during war

and peace. SMAG manages approximately two million items

including weapon systems spare parts, medical/dental supplies and equipment, and items used for non-weapon systems

applications. Materiel procured from vendors held in inventory is for sale to authorized customers.

SMAG consists of five divisions: the Materiel Support Division

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

Medical/Dental Division, and Air Force Academy Cadet Issue

Division. The Air Force Materiel Command (AFMC) manages

the MSD and GSD. The United States Air Force Headquarters

(HQ USAF) manages the Medical/Dental Division and Air

Force Academy Cadet Issue Division. Beginning in FY 2002,

Headquarters Defense Logistics Agency/Defense Energy

Service Center assumes management of the Fuels Division.

MSD is responsible for Air Force-managed, depot-level

reparable spare parts and consumable spares. The principal

products of MSD are serviceable spare parts/assemblies

unique to Air Force weapon systems. The sale of reparable

parts represents about 90 percent of total sales. The remainder represents sales of nonreparable or consumable items

within the MSD. Although most consumable items are transferred to the Defense Logistics 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 more than 150 Air

Force installations throughout the world.

Aviation, ground, and missile fuels categories comprise the

Fuels Division. The Fuels Division supplies aviation and

ground fuels to the Air Force Air National Guard, Air Force

Reserve Command, and other Department of Defense and

Government agencies; commercial enterprises; foreign governments; and commercial operations. 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.

34

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Working Capital Fund
The Surgeon General of the Air Force is responsible for the

overall management of the Medical/Dental Division. This

peacetime operating authority provides the effective support

necessary to maintain established norms in the health care of

USAF active military, retirees, and their dependents. The war

reserve materiel (WRM) requirement of this division 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 the management of parts, the Supply

Management Mission Area (SMMA) provides a wide range of

logistics support services, including 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. In FY

2001, the customer base consisted primarily of the following:

◗ Air Force Major Commands (MAJCOMS) (47 percent of

sales)

◗ AFMC depot maintenance and contractors (25 percent of

sales)

◗ Air National Guard and Air Force Reserves (12 percent of

sales)

◗ Other military services within the DoD, other agencies

within the Federal Government, and foreign military sales

(FMS) (16 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.

Performance Measures

Supply Management Highlights

SMAG saw continued improvements in most of its customer

support and financial metrics during FY 2001. The activity

group met or exceeded most of its FY 2001 goals in its key

business performance indicators (BPIs). Due in large part to

SMMA’s continued supply chain manager (SCM) initiatives,

the Constraints Analysis Programs (CAP), the Contract Repair

Process (CRP), and the Depot Repair Enhancement Program

(DREP), SMAG continued to improve its support to the

warfighter.

The SCM mission area initiatives aim at integrating key business processes that support the flow of products, information,

and money to improve the efficiency of the supply pipeline.

They also seek to identify and resolve constraints. This year

the SMMA initiated a Workload Planning (WP) study at

Warner Robins ALC. The WP team used two forecasting tools:

Demand Solutions and the Execution and Prioritization of

Repair Support System (EXPRESS). The study showed that by

proactively inducting and producing a limited number of traditionally high-demand items, greater production efficiencies

were realized, resulting in better support to the war fighter.

The purpose of the CRP and DREP is to enhance the repair

Working Capital Fund

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United States Air Force FY 2001 Financial Statements 35
United States Air Force FY 2001 Financial Statements

capability of both organic depot and contract repair facilities

by determining the best use of people, parts, and funds to fill

demands.

The SMMA continued to see improvement for its customer

support performance indicators in FY 2001. Since FY 1998,

SMMA has witnessed steady improvement in Issue and

Stockage Effectiveness, Logistics Response Times, and

Backorder Reduction Efforts. While the FY 2001 results were

improvements over FY 2000, the SMMA fell short of reaching

the challenging FY 2001 targets set by its SCMs in May

2000. The FY 2001 highlights include:

Backorders—The SMMA’s impressive backorder reduction

trend continued. The number of MSD units backordered was

reduced from 263,026 to 252,012 in FY 2001. However,

this was short of the FY 2001 goal of 238,000 units.

Backorder reduction was well on its way to meeting the goal,

averaging 245,000 units for the last six months of the year,

but the events at the close of the year generated many additional backorders as organizations prepared for operations

NOBLE EAGLE and ENDURING FREEDOM.

Logistics Response Time (LRT)—The SMMA met its FY 2001

reduction goal, finishing the year at 35.7 days, just under the

targeted 36 days. The cumulative average for the year was

36 days. There was considerable fluctuation from month to

month, ranging from a high of 42.8 days to a low of 31.8

days. This is not unusual, nor is it necessarily negative as LRT

often increases as older backorders are filled.

SCM Tool Development—In FY 2001, SMMA continued to

develop and refine its web-based tools to assist the SCMs

and their customers in tracking and analyzing performance.

◗ This year SMMA added the Mission Capable (MICAP)

Analysis & Reporting Tool (MART) to its “SCM Toolbox.”

The MART allows SMMA personnel to stratify MICAP hours

and incidents by ALC, SCM, weapon system, MAJCOM,

cause code, and condition code as well as identifying

those National Stock Numbers (NSNs) with the highest

number of MICAP hours. This allows the SCM to identify

the major drivers of MICAP hours.

Issue Effectiveness (IE) and Stockage Effectiveness (SE)—While

IE improved from FY 2000, increasing from 59 percent to 60

percent, the SMMA fell short of its FY 2001 goal of 63 percent. The SMMA experienced a slight decline in its SE performance, dropping from 70 percent in FY 2000 to 69 percent in FY 2001. These mixed results are the product of a

diverse realm of factors that include inexperience in setting

the goals, resulting in overly optimistic forecasted results, as

well as limiting factors for depot production, including capacity, carcass, and parts shortages.

MICAP Hours—The SMMA began tracking MICAP hours as a

metric in FY 2001. During this year, the number of MICAP

hours was significantly reduced from 5.1 M to 4.2 M hours.

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

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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, Air Force Materiel Command (Logistics) (AFMC/LG)

used these individual targets to set new Air Logistics Center

(ALC) and AFMC strategic targets through FY 2006.

Financial Measures

Financial Success

Collectively, SMAG exceeded its FY 2001 goals for unit cost

target (UCT) and net operating result (NOR), with each division meeting its target.

Net Operating Result

The NOR is the difference between revenue and expenses, or

a bottom-line profit and loss indicator. The objective of the

Supply Management Mission Area is to break even over a

two-year budget cycle. This is done by setting rates that offset

the prior year net profit or loss. The MSD NOR for FY 2001

was a $193 million gain, $96 million above our budgeted

NOR gain of $97 million.

For the General Support Division, the FY 2001 NOR goal

was a loss of $62.9 million, to return past profits to the customer, but the actual result was a profit of $22.9 million. The

increase in NOR was driven by higher-than-planned adjustments for physical inventory.

Unit Cost Target

UCT is a limitation imposed by the Office of the Under

Secretary of Defense (Comptroller) on the annual operating

budget (AOB), restricting obligations to a percentage of gross

sales. The AOB is the funding document providing the

authority to incur costs. The UCT is determined by dividing

costs by sales. Another description is the ratio of obligations

to gross sales. A definition for costs is an obligation (excluding initial and capital expenses) and credit returns.

Theoretically, SMAG should aim for a unit cost target ratio of

1:1, meaning a break-even point where sales equals costs.

Programmed and achieved by each MSD Center in FY 2001

is actual UCT of 1.053.

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United States Air Force FY 2001 Financial Statements 37

SMAG Financial Business Performance Indicators (BPIs)
United States Air Force FY 2001 Financial Statements

Goals and Initiatives—Efforts to Improve

Financial Management

Inventory Valuation

A predominant driver in the Defense Finance and Accounting

Service (DFAS) and Air Force reporting differences involves

the valuation of SMAG’s extensive inventory. Currently, the Air

Force is using Latest Acquisition Cost (LAC) for valuing inventory. A complex adjustment using an approved spreadsheet

based on the Office of the Secretary of Defense (OSD) model

permits the proper recording of the inventory at historical

value on the financial statements. 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, and it will provide better management visibility to

the SCM. An additional issue the Air Force is addressing is

the matching principle for expenses to revenue generated.

The Air Force is studying the commercial practice of applying

an obsolescence or usage factor over time to match the

expense to the expected revenue. Throughout FY 2001, the

Air Force addressed the proper application of this concept.

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 their associated components.

DMAG provides a wide range of specialized services to the

DoD as well as other U.S. and foreign agencies.

Mission Statement

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, DMAG

enhances readiness 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.

Both AFMC depots and contract operations perform repairs

and overhauls. Customers pay for a depot maintenance

repaired item when it is needed. Depot maintenance operates

on the funds received through selling its products and services. Less than one percent of the activity group’s annual budget comes directly from funds authorized by Congress.

Customers, Products, and Services

Depot maintenance supports a variety of customers. DMAG’s

single largest customer is the Supply Management Activity

Group (SMAG), which generates approximately 44 percent of

its total revenue. The components repaired for supply management replenish spare parts to the Air Force supply chain.

Approximately 48 percent of depot maintenance revenue

comes directly from work performed for the major commands, the Air National Guard (ANG), and Air Force Reserve

Command (AFRC). The balance of work comes from other

services, Government agencies, and foreign countries.

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MSD Business Performance Indicators (BPIs)
The overhaul of airframes and engines is driven by a planned

timetable or number of cycles. Repairs also are made to individual components routed from the field. Repairs are made to

missiles and ground electronic systems through scheduled

and unscheduled maintenance. AFMC depots provide extensive software capability for developing or modifying software

used in operating weapon systems, as well as diagnostic software. Finally, DMAG provides storage, reclamation, and

regeneration for equipment not currently used by the active

forces of all military services, at the Aerospace Maintenance

and Regeneration Center at Davis-Monthan AFB, Arizona.

Depot Workload Strategy

Depot maintenance is a critical element of USAF’s overall

warfighting capability. Air Force experience, from Desert

Storm through ENDURING FREEDOM, continues to reaffirm

that organic depots are essential to Air Force air and space

power. The current depot posture has been influenced by the

downsizing of our operational force; the reduction of our

organic infrastructure; the introduction of new technologies;

and recent depot legislative changes. To maintain a ready

and controlled source of depot maintenance, the Air Force is

preparing a Long Term Depot Maintenance Plan for submission to the Office of the Secretary of Defense (OSD) and

Congress in 2002.

The overarching objective of this plan is to ensure that Air

Force equipment is safe and ready to operate across the

whole range of events, from training to supporting major theater wars (MTW) and small scale contingencies (SSC).

Partnering with private industry is a key element of the Air

Force plan and provides the best-value approach to supporting the warfighter. Leveraging the best of public and private

capabilities ensures the Air Force will continue to provide

focused support to the warfighter by taking advantage of

what each does best. Partnering is the method by which the

Air Force will bring in technologies to support core capability

requirements in the future. In addition, the Air Force will be

able to efficiently utilize its facilities and provide critical support to the warfighter.

The Air Force Long-Term Depot Maintenance Plan provides

military strength by ensuring the possession of an organic

“core” capability sized to support all potential military operations. It will be a living document and will posture the USAF’s

organic depots to continue supporting the warfighter for the

next 20 years.

Organization of Depots

Three principal ALCs and the Aerospace Maintenance and

Regeneration Center (AMARC) at Davis-Monthan AFB,

Arizona, provide DMAG organic services.

Air Force organic depot maintenance sites include:

◗ Ogden Air Logistics Center (OO-ALC); Ogden, Utah

◗ Oklahoma City Air Logistics Center (OC-ALC); Oklahoma

City, Oklahoma

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United States Air Force FY 2001 Financial Statements 39
United States Air Force FY 2001 Financial Statements

◗ Warner Robins Air Logistics Center (WR-ALC); Warner

Robins, Georgia

◗ AMARC; Tucson, Arizona.

Cost Reduction Strategies

The following steps will further reduce the cost of depot maintenance:

◗ Hiring Industrial Engineering Technicians to review depot

maintenance standards and processes. This will ensure

accurate costs are used in budgets.

◗ Hiring Production Management Specialists (PMSs) at the

Centers to improve the contract depot maintenance program. This plan compares material financial performance

from FY 1998 (the year before additional PMSs were

hired) to performance through the current period.

Preliminary results show favorable savings initiatives.

◗ Directly shipping materials from the vendor to the depots,

reducing inventory and improving vendor relations.

◗ Eliminating equipment no longer needed due to workload

consolidations, thereby reducing depreciation costs.

Depot Maintenance Manager (DMM)

The goal of the Depot Maintenance Manager (DMM) is to

achieve accountability at the lowest level in depot maintenance. The DMM is typically the Product Directorate Chief,

who is responsible for the day-to-day management of repair,

maintenance, and modifications to weapon systems and

materials assigned to a Directorate. This also includes the

management of organic production accomplished within the

Directorate’s Resource Control Centers (RCCs) and directorate-managed contract production.

DMMs must ensure that their portion of the mission area stays

within its revenue and expense goals while executing customer requirements. Each DMM is responsible for meeting

schedules and quality goals, as well as identifying, tracking,

and controlling costs.

Systems Development

Depot Maintenance Accounting and Production System (DMAPS)

AFMC’s implementation of DMAPS substantially improves the

financial management and reporting of organic Depot

Maintenance. It provides AFMC with the capability to capture

actual and planned direct material, as well as direct labor at

the task level, for daily reporting purposes. It also applies

overhead and general and administrative expenses on a

planned dollar rate per direct labor hour. This gives managers an opportunity to review production costs at the task

level on a daily basis. DMAPS enables AFMC to move closer

to Chief Financial Officer (CFO) and Cost Accounting

Standards (CAS) compliance. Other benefits include:

◗ Standard DoD financial reporting system

◗ Fully automated billing process

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◗ Reduction of legacy systems

◗ Consolidated fund control process.

DMAPS impacts all organic DMMA employees, especially

those in the production, material, financial, and customer

order/funding processes at the ALCs. DMAPS also influences

the Defense Finance and Accounting Service (DFAS) in

Denver, Colorado.

DMAPS is expected to become operational in the third quarter of 2002 at the Ogden ALC. Implementation at Warner

Robins and Oklahoma City ALCs is ongoing.

Contract Depot Maintenance Accounting and Production System

CMAPS will monitor all contract actions resulting in the production and shipment of contract end items. The system also

will provide data and reports that assist the AFMC sustainment community in managing government furnished material

(GFM). A new process within GFM is the establishment of validated Bills of Material (BOM) for each contract end item utilizing GFM. CMAPS will track actual material as well as its

cost. The system also will provide visibility of both end items

and GFM to the sustainment community.

A new area under development within CMAPS is government

furnished equipment (GFE). The system monitors GFE at the

Contract Number and Contract Facility level in addition to:

National Stock Number (NSN), Part Number, Nomenclature,

Serial Number, Acquisition Amount, Date Installed,

Depreciation Life, Remaining Depreciation Life, and

Accumulated Depreciation.

Workforce

The following objectives are part of AFMC’s Workforce

Shaping Study to acquire and sustain the human resources

necessary to support DMAG. The overall objective is to

achieve a trained and flexible workforce, possessing the

appropriate mix of skills and expertise to accomplish the

command’s mission. Details of this command-wide effort are

available at https://www.afmc-mil.wpafb.af.mil/

HQ-AFMC/DP/2005/, and a summary follows:

◗ By FY 2002, develop the command human resources

management processes required to provide the appropriate quality and quantity of employees to support the command mission.

◗ Use the processes to assemble and deploy a workforce by

FY 2007 to achieve the FY 2009 command objectives.

◗ By FY 2004, ensure that civilian and military forces obtain

the experience, education, and training necessary to support the command mission. Develop and implement programs, policies, and formal career paths designed to

encourage career broadening, multi-skill experiences, and

functional and managerial training (e.g., Career Program

Education and Training Plans, Developing Acquisition

Leaders Program).

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United States Air Force FY 2001 Financial Statements

DMAG Mission Performance Measures

To measure compliance with the DMMA objectives, Business

Performance Indicators (BPIs) that assess cost, schedule and

quality of DMMA output are used. These BPIs are designed to

achieve accountability at the appropriate depot maintenance

level, the DMM.

Ten metrics represent the performance effectiveness of

DMAG. Four are Financial Effectiveness Measures and six are

Performance Effectiveness Measures.

Financial Effectiveness Measures

The DMAG Financial Effectiveness Measures are: (a) Net

Operating Result (NOR), which is a computation of revenue

minus cost of goods sold; (b) Revenue, which is the income

received from customers for goods or services provided by

depot maintenance; (c) Cost of Goods Sold, which measures

the cost incurred to produce a given quantity and mix of

products and/or services; and (d) Expense Rate, which compares planned and actual Cost of Goods Produced.

Net Operating Result

The Net Operating Result (NOR) is the difference between

Revenue and Cost of Goods Sold. In business terms, this is

the profit or loss from annual operations. The variance of

actual from target NOR is one of the most important indicators of the effectiveness of business operations. The DMAG

FY 2001 NOR was a loss of $28.2 million, compared to a

planned loss of $14.3 million.

Revenue

Actual revenue for FY 2001 was $7.1 million higher than

anticipated, totaling $5,633.2 million versus $5,626.1 million planned.

Cost of Goods Produced

The Cost of Goods Produced measures the costs incurred

during the production of a given quantity and mix of products

and services. The total cost of goods produced was $21.0

million higher than planned for FY 2001. To support workload transitioning from the closing Centers, contract depot

maintenance performed more work and incurred increased

costs.

Organic Expense Rate

The total expense rate was 2.4 percent higher than planned.

The material expense rate was 0.7 percent over the end-ofyear plan. The labor expense rate was 4.4 percent over the

end-of-year plan. More overtime and higher than planned

production overhead labor drove this variance.

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DMAG Financial Business Performance Indicators (BPIs)
Performance Effectiveness Measures

BPIs assess cost, schedule, and quality of the DMMA output.

These BPIs are designed to achieve accountability at the

appropriate depot maintenance level, the Depot Maintenance

Manager. They measure compliance with DMMA objectives.

The DMAG Performance Effectiveness Measures are:

(a) Organic Production Hours [Direct Product Standard Hours

(DPSH)], which depicts how well the DMAG supported its

planned production output

(b) Days Held Index (Aircraft), which tracks delivery performance against the initial Aircraft and Missile Maintenance

Production/Compression Report (AMREP) date

(c) Aircraft Due Date Performance, which portrays schedule

effectiveness

(d) Total Aircraft Quality Defect Rate, which measures the

quality of the completed work by the operating unit possessing the aircraft

(e) Engine Quality Rate, which measures the quality of engine

production

(f) Exchangeable Quality Defect Rate, which measures the

quality of the completed exchangeable by the operating

unit.

Organic Production Hours

Production hours (planned and actual) are expressed in Direct

Product Standard Hours (DPSH) and Direct Product Actual

Hours (DPAH). This represents the number of labor hours

planned and used in the production effort. Management

compares monthly actual DPSHs to monthly planned DPSHs

to determine efficiencies. Production Hours are reviewed

monthly.

Results for FY 2001

Planned Organic Production Hours were 22,478,000.

Actual Organic Production Hours equaled 21,723,000. Total

production hours for the command finished the year below

plan by 700,000 hours, or approximately 3 percent under

plan. An explanation of the variance is provided by group:

Aircraft commodity group closed out the year 296,000 hours

above plan due to a solid recovery. Steady improvements

were made on the C and KC-135 production carry-over

work. Process improvements that overcame the double wing

drop problems resulted in a positive variance for the F-16 aircraft of 94,000 DPSH, or 5.2 percent.

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DMAG Performance Effectiveness Measures
United States Air Force FY 2001 Financial Statements

Exchangeable commodities were below plan throughout the

year due to lack of parts, lack of an experienced labor force,

test station downtime, commodity equipment problems,

process qualification issues, and a reduced engine schedule.

Software production was below target by 98,000 hours due

to manpower shortages at OC, OO, and WR.

Days Held Index (Aircraft)

The purpose of this metric is to determine the length of time

the depot or depot maintenance contractor possesses an 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 1.0.

Looking at the Days Held Index for the past 12 months,

increases and decreases notwithstanding, the overall trend

(variance between planned and actual flow days) 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 contract.

Aircraft Due Date Performance

Aircraft Due Date Performance measures the ability of the Air

Logistics Centers and depot maintenance contractors to produce aircraft according to schedule. This includes all factors,

which 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: Early—produced more

than 5 days prior to scheduled out date; On-time—produced

on scheduled out date ± 5 days; and Late—produced more

that 5 days after scheduled out date.

Annual production results for FY 2001 were: 1099 total aircraft produced, 778 (71 percent) On Time/Early.

Primary drivers for late aircraft were over and above maintenance related to structural and fuel problems (C-135, C-5),

torque deck panels (C-5), and queuing problems due to double wing drops for cracked wing fingers (F-16). In addition,

post-dock maintenance, functional check flight problems

(both on the ground and in the air), parts, manpower, facility

constraints, and fuel problems contributed significantly to

delivery problems.

Total Aircraft Quality Defect Rate

The Total Aircraft Quality Defect Rate is an index of the number of defects found by the owning units of an aircraft

returned from Programmed Depot Maintenance (PDM). The

meaning is expressed as an average of defects per aircraft.

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Engine Quality Rate

The Engine Quality Rate measures the ability of the depot to

produce engines that are defect-free for use by USAF customers. This measure shows the long-term quality trend of

engines delivered to the customer. The standard Engine

Quality Rate was achieved 10 out of the previous 18 months.

The defect rate trend has remained relatively constant over

the past 12 months, a significant achievement considering the

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 use by the customer.

This rate also measures the long-term quality trend of components delivered to the customer. The exchangeable quality

rate is determined by dividing total exchangeable defects

reported by total exchangeable produced. The defect rate

trend has decreased slightly over the past 12 months. In addition, exchangeable production increased during the year.

Goals and Initiatives—Efforts to Improve

Financial Management

DMMA objectives flow to the AFMC Strategic Plan. DMMA

objectives are expressed as Depot Maintenance Mission

Essential Tasks.

Depot Maintenance Mission-Essential Task 1: Provide organic

and contract depot repair capability for fielded and emerging

weapon systems.

(a) Objective 1: Meet end item delivery commitments 90 percent of the time by the end of FY 2005, commensurate

with the adjusted schedule (AMREP date). Exchangeable

delivery commitments are based on the flow day metric.

(b) Objective 2: Ensure technically compliant operations

across all product lines.

(c) Objective 3: Manage controllable costs (labor and other)

to meet or beat the rate of DoD inflation.

(d) Objective 4: Ensure consideration of new and existing

weapon systems/technologies during the biennial core

assessment to retain a viable organic core capability in the

future.

(e) Objective 5: Continue development, implementation, and

execution of partnering agreements to support sustainment

strategies and to integrate the partnering agreement

implementation methodology into the Depot Maintenance

Strategy by the end of FY 2002.

(f) Objective 6: Meet or exceed Net Operating Result goals

by managing costs each year.

(g) Objective 7: Drive accepted quality defect rates to .03 per

exchangeable item, according to individually established

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United States Air Force FY 2001 Financial Statements

Model Design (MD) and Engine Aircraft Type Model (TM)

defect rates.

(h) Objective 8: Improve DMMA budget forecasting, budgeting, and execution processes by forecasting within 1 percent of: (a) total revenue; (b) cost of goods sold; (c)

expenses; and 2 percent of direct product standard hours

(DPSHs) produced versus center targets. Budget for 100

percent of new customer orders is generated from the

Annual Workload Review.

Depot Maintenance Mission-Essential Task 2: Ensure the ability to rapidly respond to user requirements driven by contingency operations.

Objective: Develop short-term and long-term strategies by the

end of FY 2002 to implement the depot maintenance strategic plan. Ensure the strategies provide the workload capacity

and capability to meet depot maintenance:

(a) peacetime support

(b) surge requirements

(c) core requirements by end of FY 2005.

Information Services Activity Group

(ISAG)

The Information Services Activity Group (ISAG) was established to develop and maintain 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 customize

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

Mission Statement

ISAG’s mission is to develop, acquire, sustain, integrate,

modernize, and secure combat support information systems

for USAF and DoD customers.

ISAG provides technological support for all levels of information systems, from the development of leading-edge technologies to the maintenance and modification of older legacy systems. It offers comprehensive support to its customers, including the development, maintenance, integration, and sustainment of 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 CDA under the command

of the Air Force Materiel Command, Electronic Systems

Center (ESC) at Hanscom AFB, Massachusetts. The two activities are the Materiel Systems Group (MSG), located at

Wright-Patterson AFB, Ohio, and the Standard Systems Group

(SSG), located at Maxwell AFB-Gunter Annex, Alabama.

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Customers, Products, and Services

ISAG provides, through the CDA, information products and

services via two business lines—the information technology

solutions line and the Commercial Information Technology

Product Area Directorate (CITPAD).

The information technology solutions business line provides

the development and operational sustainment of automated

information and communications systems on existing hardware and software platforms for AFMC-level logistics support

systems and Air Force base-level standard support systems.

This includes a 24-hour, seven-day help desk for field users to

call for hardware and software systems support. Additionally,

this business line provides automated information and communications systems requirements 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 CITPAD business line provides other authorized information system services or products through the acquisition and

operation of the CITPAD commodity contracts for the

Department of 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 authorized

services are provided by either organic or contract sources.

The product support business line provides CDA services

based on: (1) service-level agreements (SLAs) with known customers and (2) 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 overall

organization revenue by collecting a surcharge on orders for

equipment and services required by users of contracts or

blanket purchase agreements (BPAs).

As previously mentioned, ISAG operates in two major locations, each having slightly different market sectors. MSG,

headquartered at Wright-Patterson AFB, 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 AFB-Gunter

Annex, Alabama, has focused on flight line management

information systems.

Performance Measures 

Deficiency Reports and Software Releases

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United States Air Force FY 2001 Financial Statements

ments as part of sustainment. Priority 1 DIREPs (emergency

calls) and priority 2 DIREPs (routine calls) are reported monthly as quantitative measurements. The number of priority 1

and priority 2 DIREPs per 100,000 lines of code are identified, reported monthly, and corrected. Feedback is provided

to ISAG developers and customers about the corrective

action.

FY 2001 performance is as follows:

◗ Software Releases—98 percent on time

◗ Priority 1 Deficiency Reports—67 percent closed within

48 hours

◗ Priority 2 Deficiency Reports—82 percent closed within

45 days.

AFMC certifies that these performances are all within the

acceptable limitations.

Earned Value Management (EVM)

Earned Value Management (EVM) is a management tool that

allows customer and software factory/contractor program

managers to assess a project’s technical, cost, and schedule

progress. An EVM system ensures that program managers

receive 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 accomplishment

◗ Is valid, timely, and auditable

◗ Supplies managers with information at a practical level of

summarization

◗ Is derived from the same internal EVM systems used by the

contractor to manage the contract

Initial implementation of EVM on ISAG software programs

began in May 1998. The FY 2001 ISAG cost variance and

schedule variance were better than the standard of 13 percent for the entire fiscal year.

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Financial Measures

Net Operating Result

The net operating result (NOR) is a primary indicator of

ISAG’s financial effectiveness. The computation for NOR is

revenue minus cost of operations. For FY 2001, a $5.9 million loss was the NOR target to achieve a zero accumulated

operating result (AOR) by FY 2002. ISAG recorded a NOR

loss of $6.9 million in FY 2001.

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 surcharges. Customer funding cuts

and new business did not materialize as planned, resulting in

a revenue variance of $34.6 million.

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, customer funding cuts and program terminations drive

the variance in cost of operations ($34.6 million).

Goals and Initiatives—Efforts to Improve

Financial Management

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. The goal of the following strategic initiatives is to efficiently and effectively reduce costs and keep the

workforce trained to remain competitive through FY 2007.

AFMC objectives for the Expeditionary Air and Space Force

support weapon systems, cost reductions, work force training,

and infrastructure developed in the seven ISAG initiatives:

◗ 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 workforce

◗ Objective 6: Improve communications

◗ Objective 7: Properly size capital infrastructure.

Working Capital Fund

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ISAG Financial Performance Measures
United States Air Force FY 2001 Financial Statements

Cash Management

The Air Force Working Capital Fund (AFWCF) ended FY

2001 with $918.5 million in cash. The FY 2001 revised, endof-year budget projection was $326.9 million. The cash

increase was largely due to a $500-million-dollar advance

billing of DMAG customers in September 2001. The following is a summary of the cash changes:

◗ The DMAG cash balance increased $190 million in FY

2001. The increase is attributable to the advance billing

mentioned above.

◗ The General Support Division cash balance decreased by

$97.4 million in FY 2001. The decrease was the result of

purchases exceeding sales and the effect of a negative

surcharge.

◗ The Materiel Support Division cash balance increased

$320.2 million in FY 2001. This increase was primarily

due to gains in the overhead account, timely collection of

receivables, and reduction of repair expense losses.

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, including 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 maintain at least seven to

10 days of operational costs as well as cash adequate to

meet six months of capital disbursements. The recommended

cash range for FY 2001 was $705 million (seven days) and

$977 million (10 days). At the end of the fiscal year, the

amount of cash was adequate to meet 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 currently available data is outdated for current

needs, accuracy has been improving. AFMC completed a

statement of sources and uses of cash in FY 2000 and implemented use of the statements to identify areas of cash

increases and drains. Work is continuing with regard to identifying and correcting processes that cause cash drains.

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Fiscal Year 2001 Air Force

Annual Financial Statements

Financial Statements
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Financial Statements

Limitations of the

Financial Statements

The financial statements have been prepared to report the financial position and results of operations for the entity, pursuant to the requirements of the Title 31, United States Code, Section

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 Department is unable to implement all elements of the standards due to financial management systems limitations. The Department continues to implement

system improvements to address these limitations. There are other instances when the

Department’s application of the accounting standards is different from the auditor’s application

of the standards. In those situations, the Department 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 United

States Government, a sovereign entity. One implication of this is that the liabilities cannot be liquidated without legislation that provides resources to do so.

As of the date these statements were prepared, the Federal Accounting Standards Advisory

Board (FASAB) had not determined the final reporting requirements for National Defense

Property, Plant and Equipment (ND PP&E). DoD cannot fully comply with existing reporting

requirements, because many of the Department’s accountability and logistics systems do not

contain the cost of the ND PP&E assets. These systems were designed for the purpose of maintaining accountability and meeting other logistics requirements and not for capturing the cost of

ND PP&E.

Given the complexity of the existing temporary reporting requirements, the enormous cost of

implementing the temporary requirements and the temporary nature, DoD is suspending the

reporting of ND PP&E information until such time as the FASAB adopts permanent reporting

requirements.
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Consolidated Balance Sheet—General Funds

As of September 30 ($ in Thousands)

The accompanying notes are an integral part of the financial statements.
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General Funds Principal Statements

Consolidated Statement of Net Cost—General Funds

For the years ended September 30 ($ in Thousands)

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

See notes 1 and 19.
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Consolidated Statement of Changes in Net Position—General Funds

For the years ended September 30 ($ in Thousands)

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

See notes 1 and 20.
United States Air Force FY 2001 Financial Statements

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Combined Statement of Budgetary Resources—General Funds

For the years ended September 30 ($ in Thousands)

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

See notes 1 and 21.
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Combined Statement of Financing—General Funds

For the years ended September 30 ($ in Thousands)

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

See notes 1 and 22.
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Footnotes to the

Principal Statements

Note 1. Significant Accounting Policies

1.A. Basis of Presentation

These financial statements report the financial position and results of operations of the

Department of the Air Force as required by the Chief Financial Officers (CFO) Act of

1990, as expanded by the Government Management Reform Act (GMRA) of 1994 and

other appropriate legislation. The financial statements were prepared from the books and

records of the Air Force in accordance with Department of Defense Financial

Management Regulation (DoDFMR) adapted from Office of Management and Budget

(OMB) Bulletin No. 01-09, Form and Content of Agency Financial Statements, and to the

greatest extent possible, Federal Generally Accepted Accounting Principles (GAAP). The

accompanying financial statements account for all resources for which the Air Force 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. The Air Force’s financial statements are in addition

to the financial reports prepared by the Air Force pursuant to OMB directives used to

monitor and control Department of Defense’s (DoD’s) use of budgetary resources.

The Air Force is unable to implement fully all elements of Federal GAAP and the OMB

Bulletin No. 01-09 due to limitations in the financial management processes and systems, including nonfinancial feeder systems and processes. Reported values and information from the Air Force’s 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 preparing financial

statements in accordance with Federal GAAP. As a result, the Air Force currently cannot

implement every aspect of GAAP and the OMB Bulletin No. 01-09. The Air Force continues to implement process and system improvements addressing the limitation of its financial and non-financial feeder systems.
United States Air Force FY 2001 Financial Statements

There are instances where the Air Force has reviewed the intent of the accounting standard and applied it in a manner consistent with the intent of the standard, but auditors interpret the standard differently. Financial statement elements impacted

include payments under firm fixed price contracts, operating materials and supplies (OM&S) and disposal liabilities.

A more detailed explanation of these financial statement elements is provided in the applicable footnote.

1.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 DoD and made the Air Force a department within DoD. The overall mission of the

Air Force is to defend the United States through control and exploitation of air and space.

The accompanying financial statements account for resources for which the Air Force is responsible except information relative

to classified assets, programs, and operations is excluded from the statements or is aggregated and reported in such a manner that it is no longer classified.

The accounts used to prepare the statements are classified as entity/nonentity. Entity accounts consist of resources the agency

has authority to decide how to use or is legally obligated to use to meet entity obligations. Nonentity accounts are assets held

by an entity but are not available for use in operations.

The Air Force incorporates into the accounting systems internal controls, reconciliations, management by exception reports,

and other management control information. 

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

standards. 

Following is a list of Air Force account numbers and titles (all accounts are entity accounts unless otherwise noted):

Air Force Account Number Title

57 * 0704 Military Family Housing (O&M and Construction), Air Force

57 * 0810 Environmental Restoration, Air Force

57 * 1999 Unclassified Receipts and Expenditures, Air Force

57 * 3010 Aircraft Procurement, Air Force

57 * 3011 Procurement of Ammunition, Air Force

57 * 3020 Missile Procurement, Air Force

57 * 3080 Other Procurement, Air Force

57 * 3300 Military Construction, Air Force

57 * 3400 Operation and Maintenance (O&M), Air Force

57 * 3500 Military Personnel, Air Force

57 * 3600 Research, Development, Testing, and Evaluation (RDT&E), AF

57 * 3700 Personnel, Air Force Reserve

57 * 3730 Military Construction, Air Force Reserve

57 * 3740 Operation and Maintenance (O&M), Air Force Reserve

57 * 3830 Military Construction, Air National Guard

57 * 3840 Operation and Maintenance (O&M), Air National Guard

57 * 3850 Personnel, Air National Guard

57 X 5095 Wildlife Conservation, etc., Military Reservations, Air Force

57 X 8418 Air Force Cadet Fund

57 X 8928 Air Force General Gift Fund

57 * 3XXX Budget Clearing Accounts

57 * 6XXX (Nonentity) Deposit Fund Accounts

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1.C. Appropriations and Funds

The Air Force’s appropriations and funds are divided into general, working capital (revolving), trust, special, and deposit

funds. These appropriations and funds are used to fund and report how the resources have been used in the course of executing the Air Force’s missions. These notes describe attributes of these funds.

General funds are used for financial transactions arising under congressional appropriations, including personnel, operation

and maintenance, research and development, procurement, and construction accounts. Air Force working capital fund activities are reported in a separate set of audited financial statements and related footnotes.

Trust funds are used to record receipt and expenditure of funds held in trust by the Government to carry out specific purposes

or programs in accordance with the terms of the donor trust agreement or statute.

Special funds account for government receipts earmarked for a specific purpose.

Deposit funds generally are used to (1) hold assets for which the Air Force acts as agent or custodian or whose distribution

awaits legal determination or (2) account for unidentified remittances.

1.D. Basis of Accounting

The Air Force generally records transactions on a budgetary basis and not an accrual accounting basis as is required by

Federal GAAP. For FY 2001, the Air Force’s financial management systems are unable to meet all of the requirements for full

accrual accounting. Many of the Air Force’s financial and nonfinancial feeder systems were designed and implemented prior

to the issuance of Federal GAAP for federal agencies and, therefore, were not designed to collect and record financial information on the full accrual accounting basis as required by Federal GAAP. The Air Force has undertaken efforts to determine

the actions required to bring its financial and nonfinancial feeder systems and processes into compliance with all elements of

Federal GAAP. One such action is the current revision of its accounting systems to record transactions based on the United

States Government Standard General Ledger (USSGL). Until such time as all of the Air Force’s financial and nonfinancial feeder systems and processes are updated to collect and report financial information as required by Federal GAAP, the Air Force’s

financial data will be based on budgetary transactions (obligations, disbursements, and collections), transactions from nonfinancial feeder systems, and adjusted for known accruals of major items such as payroll expenses, accounts payable, and environmental liabilities. However, when possible, the financial statements are presented on the accrual basis of accounting as

required. One example of information presented on the budgetary basis is the data on the Statement of Net Cost. Much of

this information is based on obligations and disbursements and may not always represent all accrued costs.

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 Statement of Federal Financial Accounting Standards (SFFAS) No. 4, “Managerial Cost

Accounting Concepts and Standards for the Federal Government,” with the need to keep the financial statements from being

overly voluminous.

1.E. Revenues and Other Financing Sources

Financing sources for general funds are primarily provided through congressional appropriations received on both an annual

and a multi-year basis. When authorized, these appropriations are supplemented by revenues generated by sales of goods or

services through a reimbursable order process. The Air Force recognizes revenue as a result of costs incurred or services perGeneral Funds

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formed on behalf of other federal agencies and the public. Revenue is recognized when earned under the reimbursable order

process.

1.F. Recognition of Expenses

For financial reporting purposes, the DoD policy requires the recognition of operating expenses in the period incurred.

However, because the Air Force’s financial and non-financial feeder systems were not designed to collect and record financial

information on the full accrual accounting basis, accrual adjustments are made for major items such as payroll expenses,

accounts payable, and environmental liabilities. Expenditures for capital and other long-term assets are not recognized as

expenses in the Air Force’s operations until depreciated in the case of PP&E or consumed in the case of OM&S. Net increases

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

Certain expenses, such as annual and military leave earned but not taken, are financed in the period in which payment is

made.

Operating expenses were adjusted as a result of the elimination of balances between DoD Components. See note on

Intragovernmental Expenses and Revenue for disclosure of adjustment amounts.

1.G. 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 transactions 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 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 pensions under CSRS and FERS retirement systems is the responsibility of the 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 the OPM in the Statement of Net Cost; and recognizes corresponding imputed financing sources from the civilian employee pensions and other retirement benefits in the Statement of Changes in Net Position. 

The DoD reports the assets, funded actuarial liability, and unfunded actuarial liability for the military personnel in the Military

Retirement Fund (MRF) financial statements. The DoD recognizes the actuarial liability for the military retirement health benefits

in the Other Defense Organization General Fund column of the DoD agency-wide consolidating/combining statements. 

To prepare reliable financial statements, transactions occurring between components or activities within the Air Force, must be

eliminated. However, the Air Force, as well as the rest of the federal government, cannot accurately identify all intragovernGeneral Funds

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ment transactions by customer. The Defense Finance and Accounting Service (DFAS) is responsible for eliminating transactions

between components or activities of the Air Force. For FYs 1999, 2000 and 2001, seller entities within the DoD provided

summary seller-side balances for revenue, accounts receivable, and unearned revenue to the buyer-side internal DoD accounting offices. In most cases, the buyer-side records have been adjusted to recognize unrecorded costs and accounts payable.

Intra-DoD intragovernmental balances were then eliminated. 

The Department of the Treasury, Financial Management Service (FMS) is responsible for eliminating transactions between the

DoD and other federal agencies. In September 2000, the FMS issued the “Federal Intragovernmental Transactions Accounting

Policies and Procedures Guide.” The DoD was not able to fully implement the policies and procedures in this guide related to

reconciling intragovernmental assets, liabilities, revenues and expenses for non-fiduciary transactions. The Air Force however,

was able to implement the policies and procedures contained in the “Intragovernmental Fiduciary Transactions Accounting

Guide,” as updated by the “Federal Intragovernmental Transactions Accounting Policies and Procedures Guide,” for reconciling intragovernmental transactions pertaining to investments in federal securities, and Federal Employees’ Compensation Act

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

1.H. Transactions with Foreign Governments and International Organizations

Each year, the DoD components sell defense articles and services to foreign governments and international organizations, primarily under the provisions of the “Arms Export Control Act of 1976.” Under provisions of the Act, DoD has authority to sell

defense articles and services to foreign countries and international organizations, generally at no profit or loss to the U.S.

Government. Customers may be required to make payments in advance.

1.I. Funds with the U.S. Treasury

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 the DFAS, Military Services, and the USACE disbursing stations, as well as the

Department of State financial service centers. Each disbursing station prepares monthly reports which provide information to

the U.S. Treasury on check issues, electronic fund transfers, interagency transfers and deposits.

In addition, the DFAS sites and USACE Finance Center submit reports to the Department of the Treasury, by appropriation, on

interagency transfers, collections received, and disbursements issued. The Department of Treasury records this information to

the applicable Fund Balance with Treasury (FBWT) account maintained in the Treasury’s system. Differences between the Air

Force’s recorded balance in the FBWT accounts and Treasury’s FBWT accounts sometimes result and subsequently are reconciled. Differences are provided at note 3. Differences between accounting offices’ detail level records and Treasury’s FBWT

accounts are disclosed in a subsequent note on “Disclosures Related to Problem Disbursements, In-transit Disbursements and

Suspense/Budget Clearing Accounts,” specifically, differences caused by in-transit disbursements and unmatched disbursements (which are not recorded in the accounting offices’ detail-level records).

1.J. Foreign Currency

The Air Force conducts a significant portion of its operations overseas. The Congress established a special account to handle

gains and losses from foreign currency transactions for five general fund appropriations (operation and maintenance, military

personnel, military construction, family housing operation and maintenance and family housing construction). Gains and losses are computed as the variance between the exchange rate current at the date of payment and a budget rate used at the

beginning of each fiscal year. Foreign currency fluctuations related to other appropriations require adjustment to the original

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obligation amount at the time of payment. These currency fluctuations are not identified separately. Material disclosures are

provided at note 7.

1.K. Accounts Receivable

As presented in the Balance Sheet, accounts receivable include accounts, claims, and refunds receivable from other federal

entities or from the public. Allowances for uncollectible accounts are based upon collection experience by fund type. The Air

Force does not recognize an allowance for estimated uncollectible amounts from another federal agency. Material disclosures

are provided at note 5.

1.L. Loans Receivable. As Applicable.

Not applicable.

1.M. Inventories and Related Property

The related property portion of the amount reported on the Inventory and Related Property line includes operating material &

supplies (OM&S). The OM&S are valued at standard purchase price. Ammunition and munitions that are not held for sale are

treated as OM&S. For the most part, the DoD is using the consumption method of accounting for OM&S, since OM&S is

defined in the SFFAS No.3, “Accounting for Inventory and Related Property” as material, which has not yet been issued to the

end user. Once OM&S are issued, the material is expensed. Material disclosures related to inventory and related property are

provided in the note on Inventory and Related Property.

1.N. Investments in U.S. Treasury Securities

Gifts to the Air Force are invested in U.S. Treasury securities. Investments in U.S. Treasury securities are reported at cost, net of

amortized premiums or discounts. Premiums or discounts are amortized into interest income over the term of the investment

using the effective interest rate method or other method if similar results are obtained. The intent is to hold investments to

maturity, unless needed to finance purchases in accordance with the donor’s intent. Consequently, a provision is not made for

unrealized gains or losses on these securities. Related earnings are allocated to appropriate Air Force activities to be used in

accordance with the directions of the donor. Material disclosures are provided at note 4.

1.O. General Property, Plant and Equipment

General PP&E assets are capitalized at historical acquisition cost plus capitalized improvements when an asset has a useful life

of two 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 are required to be capitalized. The

DoD 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 DoD 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. 

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 PP&E is required to be included in the value of General PP&E reported on the Air Force’s Balance Sheet. The

DoD completed a study that indicates that the value of General PP&E above the DoD capitalization threshold and not older

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than the DoD Standard Recovery Periods for depreciation, and that is presently in the possession of contractors, is not material

to the DoD financial statements. Regardless, the DoD is developing new policies and a contractor reporting process that will

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

reports only government property in the possession of contractors maintained in the Air Force property systems. 

To bring the Air Force into fuller compliance with federal accounting standards, DoD has issued new property accountability

and reporting regulations that require the DoD Components to maintain, in DoD Component property systems, information on

all property furnished to contractors. This action and other DoD proposed actions are structured to capture and report the

information necessary for compliance with federal accounting standards. 

Material disclosures are provided in the note on General PP&E.

1.P. Advances and Prepayments

Payments in advance of the receipt of goods and services are recorded as prepaid and deferred charges at the time of prepayment and reported as an asset on the Balance Sheet. Prepaid charges are expensed when the related goods and services are

received.

1.Q. Leases

Generally, lease payments are for the rental of equipment vehicles and operating facilities and are classified as either capital

or operating leases. When a lease essentially is equivalent to an installment purchase of property (a capital lease) and the

value equals or exceeds the capitalization threshold, the applicable asset and liability are recorded. The amount recorded is

the lesser of the present value of the rental and other lease payments during the lease term, excluding that portion of the payments representing executory costs paid to the lessor, or the asset’s fair value. Leases that do not transfer substantially all of

the benefits or risks of ownership are classified as operating leases and are expensed as payments are made over the lease

term.

1.R. Other Assets

The Air Force conducts business with commercial contractors under two primary types of contracts: fixed price and cost reimbursable. In order to alleviate the potential burden on the contractor the Air Force provides financing payments. One type of

financing payment, for real property, is based on the percentage of completion. In accordance with the SFFAS No. 1,

Accounting for Selected Assets and Liabilities, such payments are treated as construction in progress and reported on the

General PP&E line and in note 10, General PP&E, Net. In addition, based on the Federal Acquisition Regulation, the Air Force

makes financing payments under fixed price contracts not based on percentage of completion. The Air Force treats these payments as advances or prepayments because the Air Force becomes liable only after the contractor delivers the goods. If the

contractor does not deliver a satisfactory product, the Air Force is not obligated to reimburse the contractor and the contractor

is liable to repay the Air Force for the full amount of the advance. The DoD has completed a review of applicable federal

accounting standards; public laws on contract financing; Federal Acquisition Regulation Parts 32, 49, and 52; and the OMB

guidance in 5 Code of Federal Regulations Part 1315, “Prompt Payment.” The DoD has concluded that SFFAS No. 1 does not

address fully or adequately the subject of progress payment accounting and is considering what action is appropriate.

1.S. 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 involves an uncertainty as to possible loss to the Air Force. The uncertainty will be resolved

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when one or more future events occur or fail to occur. A contingency is recognized as a liability when a past event or

exchange transaction has occurred, a future loss is probable and the amount of loss can be estimated reasonably. 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 will be incurred. Examples of loss contingencies include the collectibility of receivables, pending or

threatened litigation, possible claims and assessments. The Air Force loss contingencies arising as a result of pending or

threatened litigation or claims and assessments occur due to events such as aircraft and vehicle accidents, medical malpractice, property or environmental damages, and contract disputes.

Other liabilities arise as a result of anticipated disposal costs for the Air Force assets. This type of liability has two components:

non-environmental and environmental. Recognition of an anticipated environmental disposal liability commences when the

asset is placed into service, consistent with SFFAS No. 6, “Accounting for Property, Plant, and Equipment”. Based upon the Air

Force policies and consistent with SFFAS No. 5, “Accounting for Liabilities of Federal Government”, a non-environmental disposal liability is recognized for an asset when management makes a decision to dispose of the asset. Such amounts are developed in conjunction with and not easily identifiable separately from environmental disposal costs. Material disclosures are provided in the notes on Environmental Liabilities and Environmental Disposal Liabilities and Other Liabilities.

1.T. Accrued Leave

Civilian annual leave and military leave that have been accrued and not used as of the balance sheet date are reported as

liabilities. The liability reported at the end of the fiscal year reflects current pay rates.

1.U. Net Position

Net Position consists of unexpended appropriations and cumulative results 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 not been incurred.

Cumulative results of operations represent the balances that results from subtracting expenses and losses from financing,

including appropriations, revenue, and gains since inception of the activities. Beginning in FY 1998, this includes the cumulative amount of donations and transfers of assets in and out without reimbursement.

1.V. 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. The DoD capital assets

overseas are purchased with appropriated funds; however, title to land and improvements are 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 Components. Therefore, in the event treaties or other agreements are terminated whereby use of the foreign bases is no longer allowed, losses will be recorded for the value of any non-retrievable capital assets after negotiations

between the U.S. and the host country have been concluded to determine the amount to be paid the U.S. for such capital

investments.

1.W. Comparative Data

Beginning in FY 2001, the Air Force presents the current and previous year’s financial data for comparative purposes. This

data will be presented in the financial statements, as well as in the notes to the principal statements.

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1.X. Unexpended Obligations

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 and services have yet to be delivered.

Note 2. Assets

Entity assets consist of resources that the Air Force has the authority to use, or where management is legally obligated to use

funds to meet its obligations. Nonentity accounts are assets that are held by the Air force, but are not available for use in the

operations of the Air Force.

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Note 3. Fund Balance with Treasury

Explanation of Reconciliation Amount

The reconciling amount is due to an error made at Treasury during September 2001 reporting. This amount represents a variance in unrealized discounts in the Air Force Gift Fund. The Air Force records are correct and Treasury records will be corrected in FY 2002.

Other Information

The FBWT in appropriations canceling on September 30, 2001, was withdrawn in accordance with Treasury policy. This

amount was $1.7 billion for FY 2001.

The On-Line Paying and Collection (OPAC) differences are reconcilable differences that represent amounts reported by an

organization but not reported by its trading partner. As of September 30, 2001 and 2000, there were no OPAC differences

greater than 180-days old. A majority of the differences represent internal DoD transactions and, therefore, do not affect the

FBWT at the DoD consolidated level. However, for individual entity level statements, these differences would affect the amount

reported for FBWT. The DoD is working with the DFAS, and the Department of Treasury to develop an automated tool to reconcile the Treasury’s Statement of Differences. The accounting and paying centers established metrics and implemented

monthly reporting requirements for FY 2001. These actions aided the Air Force in clearing old balances and establishing better internal controls over the OPAC process.

DFAS is in the process of collecting information for all check issue discrepancy data unsupportable because: (1) records have

been lost during deactivation of disbursing offices; (2) the Treasury will not assist in research efforts for transactions over 1-year

old; or (3) corrections were processed for transactions that Treasury removed from the check comparison report. Transactions

that have no supporting documentation due to one of the preceding situations shall be provided to the Treasury with a request

to remove them from the Treasury Check Comparison Report. The vast majority of the remaining check issue discrepancies are

a result of timing differences between the Air Force and Treasury for processing checks. Further, no empirical evidence has

been presented that demonstrates check issue discrepancies adversely affect the FBWT.

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Note 4. Investments

See “Investments in U. S. Treasury” section of Note 1 for additional information on investments.

Note 5. Accounts Receivable

Allowance Method

The total allowance is determined at the Air Force departmental level. These department level amounts are derived as follows:

For closed years receivables, an arbitrary allowance rate of 50 percent results in an estimated allowance of $292.3 million.

Interest allowance of $5.4 million is calculated using an average percent of write-offs to outstanding public accounts receivable over a five-year period. Closed year receivables and interest are payable to the Treasury when collected. For Air Force

entity receivables, the allowance is computed each year based on the average percent of write-offs to outstanding public

accounts receivable for the last five years and results in an estimated allowance of $4.0 million.

Other Information

As presented on the Consolidated Balance Sheet, accounts receivable include reimbursements receivable and refunds receivable such as out-of-service debts (amounts owed by former service members), contractor debt, and unused travel tickets. It

also includes net interest receivable. Canceled accounts receivables are reported as nonentity receivables because these

amounts are deposited into a Treasury miscellaneous receipt account when collected. A reconciliation between Report on

Receivables Due from the Public and the Balance Sheet was accomplished. The differences between the Balance Sheet and

Report on Receivables Due From the Public (line 7) are $1.1 million and $17.4 million for entity and nonentity receivables,

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respectively. These differences relate to undistributed collections that are prorated between public and intragovernmental

receivables on the balance sheet at fiscal year-end. Also, a $312,000 net difference was due to refunds receivables, reimbursement receivables and posting adjustments between the two reports. Gross interest receivables, nonentity, public was

$79.4 million with an allowance for estimated uncollectibles of $5.4 million, resulting in a net of $74.0 million.

Increases in intragovernmental and public receivables for FY 2001 are due to a decrease in public and governmental undistributed collections. Also, a modification to a Deferred Payment Agreement (in litigation) plus interest being charged on these

receivables, increased nonentity public receivables. 

The amount of public receivables over 180 days is $644.7 million of which $497.5 million represent principal and interest in

a deferred payment status. The aging of intragovernmental receivables is currently unavailable.

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 DoD intends to develop long-term systems improvements that will include sufficient 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.

Note 6. Other Assets

The amount of $151.3 million is composed of $125.9 million in advances to contractors and suppliers, and $25.4 million in

non-federal advances. Other assets will fluctuate from year to year depending on the timing and/or quantity of advances and

recoveries of advances.

Advances to contractors as reported on the SF 1219, Statement of Accountability are being reported for payments as part of

an advance-payment pool agreement made with the Massachusetts Institute of Technology and other non-profit institutions.

Advance-payment pool agreements are used for the financing of cost-type contracts with non-profit educational or research

institutions for experimental, or research and development work, when several contracts or a series of contracts require financing by advance payments.

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Note 7. Cash and Other Monetary Assets

The nonentity assets shown consist of cash reported on disbursing officers’ (DO’s) SF 1219, Statement of Accountability. The

amount of $463.6 million represents undeposited collections of $196.7 million, DO cash of $84.3 million, and deposits from

foreign governments to the FMS Trust Fund of $182.6 million. The deposits from foreign governments were not included in FY

2000 and are the cause of much of the increase from FY 2000 to FY 2001.

Note 8. Direct Loan and/or Loan Guarantee Programs

Not applicable.

Note 9. Inventory and Related Property Operating Materials and Supplies, Net

Other Information

In FY 2001 the DoD proposed a change in the definition of National Defense Property Plant and Equipment (ND PP&E),

removing several types of assets from this category. The Air Force elected to reclassify tactical missiles, cruise missiles, aircraft

engines, missile motors, and pods as OM&S. This accounting policy change required a prior period adjustment of approximately $37 billion to bring these items onto the balance sheet.

The OM&S data reported on the financial statements are derived from logistics systems designed for material management

purposes, i.e. accountability and visibility. The reported balances from these systems, however, are not recorded at historical

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cost in conformance with the valuation requirements in the SFFAS No. 3, “Accounting for Inventory and Related Property”.

Instead, the Air Force uses standard price to value its inventory without computing any unrealized holding gains or losses. For

the most part, the Air Force uses the consumption method of accounting for OM&S (acquisitions and deletions), as defined in

SFFAS No. 3, by expensing materials once issued.

The general composition of OM&S held for use includes $16.9 billion in munitions and $30.4 billion in assorted aircraft

engines, missile motors and miscellaneous parts. Material held for use includes material held due to operational economies

and material held due to managerial determination. 

The value of some, but not all, of the Air Force’s Government Furnished Material (GFM) and Contractor Acquired Material

(CAM) in the hands of contractors is included in the OM&S balances.

Excess, Obsolete, and Unserviceable OM&S are revalued from their standard price to their net realizable value (NRV). Based

upon current policies and procedures, the NRV is 1.9 percent of the standard price and the reported value of Excess, Obsolete

and Unserviceable OM&S value was reduced $2.2 billion.

In FY 2001, the Air Force contracted with contractors to manage the C-17, C-130J and the F-22 aircraft programs. The value

reported for OM&S managed by these contractors amounted to $580.5 million. In addition, nine manually maintained

accounts reported inventory balances for this fiscal year. The data from these accounts is not complete as to acquisitions and

issues, so the difference between the beginning and ending balance was recorded in Other Gains (unrecognized) which will

effect the Statement of Financing and Statement of Net Cost. Additionally, no OM&S financial data pertinent to “Classified”

accounts is included. 

Note 10. General PP&E, Net

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Real Property represents the facilities, infrastructure, and land maintained by the Air Force and is carried at historical cost net

of accumulated depreciation. The increase in land values is due to the reporting of land at overseas locations. Also included

in the value of real property is real property in the possession of contractors. Assets remaining at base realignment and closure

locations are not included in the PP&E amounts reflected on the financial statements. These assets have been considered

excess and have no further operational value to the Air Force. 

Reporting for internal use software under SFFAS No. 10 is effective for the FY 2001 financial statements. Included in the software assets are software costs of systems that budgeted over $2 million for internal use software. Software costs of new development efforts and those that added significant functionality were capitalized and reported as assets. Software costs for maintenance and modernizations were expensed. 

Personal property in the Air Force consists of general equipment, ADP hardware, medical equipment, and special tools and

special test equipment. As of September 30, 2001, an estimated $20.8 million of general equipment was not valued at historical cost. To assure that this data was included in the financial statements, the Air Force used the latest acquisition cost for

each item and/or estimated the date of acquisition to provide a basis for manually reporting. 

The Air Force reported $170.3 million in Special Tools and Special Test Equipment (ST/STE) on the financial statements. Since

the date placed in service was not available, the Air Force used the “date aircraft delivered”. The cost data could not be validated, but it appears most items are fully depreciated. 

The value of personal property does not include all of the personal property in the possession of contractors. The net book

value of such property is immaterial in relation to the total General PP&E net book value. In accordance with an approved

strategy with the OMB, the GAO and the Department of Defense Inspector General (DoDIG), the DoD is developing new policies and a contractor reporting process to capture personal property information for future reporting purposes in compliance

with federal-wide accounting standards.

The $3.1 million reported as other represents the year end estimated timber value on Air Force properties. The value used is

based on budgetary amounts to be realized in FY 2002. The value based on timber cutting contracts for FY 2002 and the

remaining uncut portions of FY 2001 contracts was not available. In FY 2000 a timber value of $.4 million was reported on

another Other Assets line on the Balance Sheet. The FY 2000 value was incomplete, as collections for FY 2002 timber sales

were in excess of $2 million. 

Note 10.A. Assets Under Capital Lease

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Description of Lease Arrangements

The Air Force is the leasee in twelve capital leases. Eleven are for Military Family Housing acquired through Section 801

Family Housing Program, and one is for a piece of medical equipment. The leased facilities are capitalized and reported as an

asset when the cost of the facilities exceeds the capitalization threshold. Facilities not meeting the capitalization threshold are

expensed. All leases prior to FY 1992 are funded on a fiscal year basis. This correlates to six of the Military Family Housing

Leases.

Note 11. Liabilities Not Covered by Budgetary Resources

Other Intragovernmental Liabilities Covered by Budgetary Resources consists of $128 million in advances from others, $1.3

million in deposit fund liabilities, $604.5 million in resources payable to treasury, $612 million in DO cash liability, and $32.2

million in civilian benefits liability-government portion. The increase over FY 2000 is due to DO cash liability.

DO Cash Liability includes $182.6 million of deposits of foreign governments to the FMS Trust Fund as referenced in note 7.

Other Intragovernmental Liabilities Not Covered by Budgetary Resources consists of $131.2 million in accounts payable canceled appropriations, $417.3 million in judgement fund liabilities, $299.3 million in FECA reimbursement to DoL, and $31.3

million in military unemployment compensation liabilities. The increase over FY 2000 is due to judgement fund liability.

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Other Non-federal Liabilities Covered by Budgetary Resources consists of $994.5 million in accrued payroll and benefits liabilities for military and civilians, $36.0 million in Temporary Early Retirement Authority liabilities, $58.4 million in advances from

others, and $7.1 million in deposit fund liabilities. The increase over FY 2000 is due to accrued payroll and benefits liabilities.

Other Non-federal Liabilities Not Covered by Budgetary Resources consists of $80.7 million in accounts payable canceled

appropriations, $3.6 million in civilian unemployment compensation liabilities, $93 million in environmental liabilities, $462.1

million in capital lease liabilities, $637.1 million in contingent liabilities, $1,745.6 million in accrued annual leave liabilities

for military and civilians, and $.7 million in accrued interest liability. The decrease from FY 2000 is due to contingent liabilities, nonenvironmental disposal liabilities, and accounts payable in canceled appropriations. 

Note 12. Accounts Payable

For the majority of buyer-side transactions, the Air Force feeder and DFAS 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 payable balances with its trading partners. The DoD intends to develop long-term systems improvements that will include sufficient up-front 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 DoD summary level seller accounts receivables were compared to the Air Force accounts payable. An adjustment was

posted to the Air Force accounts payable based on the comparison with the accounts receivable of the DoD components providing goods or services to the Air Force. Positive differences were treated as unrecognized accounts payable and in the case

of the Air Force, accounts payable were adjusted upwards in the amount of $985.1 million.

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Note 13. Debt

The intragovernmental debt consists of interest, penalties, and administrative fees and results from payments made out of the

DoD Education Benefits Fund. Payments to Post-Vietnam Era Voluntary and Involuntary Separatees are made in advance of

contributions from the services. The DoD Board of Actuaries has determined that the services must pay the accumulated interest on this unfunded liability.

Note 14. Environmental Liabilities and Environmental Disposal Liabilities

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The relatively small change of just over 4% in the Defense Environmental Restoration Program (DERP) restoration liability

between September 30, 2000 and September 30, 2001 results largely from the addition of almost 100 new sites that resulted

in a $421 million increase in estimated cost. Also, the addition of two installations to the Environmental Protection Agency’s

National Priority Listing, and new information on the characterization of existing sites resulted in an upward revision of the cost

estimates for prior year sites.

Environmental range liabilities are reversed to zero. Restoration cost for ordnance and their chemical contamination on closed

ranges is estimated at approximately $595 million as of September 30, 2001. The estimate does not reflect the total potential

restoration liability associated with ranges.

Non-DERP, Non-BRAC restoration liabilities increased by slightly more than $70 million during FY 2001. The increase is

accounted for by the addition of just over $112 million for new reported liabilities during the year. The reported liability is

expected to increase during FY 2002 as the Air Force expands reporting of these restoration activities. Reporting has expanded

to include sites not reported previously and to reflect application of validated cost estimating tools. Likewise, accounting for the

obligation and expenditure of funds on these restoration actions was established during FY 2001. Current liabilities for NonDERP, Non-BRAC restoration liabilities cannot be determined because of lack of data concerning expenditures in this category.

This is the first statement that reports environmental disposal liabilities for the future closure of Air Force facilities. These disposal liabilities are for landfills of $12.2 million, underground storage tanks (USTs) of $7.5 million, and hazardous waste treatment, storage and disposal facilities (TSDFs) of $41.8 million. The liability for landfills and USTs are on an incremental basis

using percentage of capacity to determine landfill liabilities and a twenty-year life to determine UST liabilities. If landfill and

UST liabilities had been recognized on a total basis at September 30, 2001, it would have been $80.1 million and $41.8 million, respectively. TSDF disposal liabilities represent the one time closure cost estimate for each facility plus thirty years of monitoring following closure, as required by regulation. UST disposal liability is based on a twenty-year amortization of the onetime closure costs. Additionally, two years of annual monitoring costs are recognized in the year of closure. Landfill disposal

liability is recognized on the basis of percentage of capacity used during the year. Percentage of usage during the year is multiplied by the one time closure cost estimate, and the liability is accrued annually based on usage. Once the landfill is closed,

there is thirty years of annual monitoring cost added to the liability and recognized. The monitoring cost estimate is re-evaluated each year following closure. The accounting system currently does not track amounts obligated or expensed for these individual areas. Therefore, every year the initial liability will be reversed and the new liability established based on estimates

made that year. The Air Force expects the disposal liability to increase during FY 2002 with improved reporting. The basis for

the cost estimates used to establish the September 30, 2001 disposal liabilities were as follows:

TSDFs 58% used a validated process or an actual contract bid

36% used historical cost as the basis

6% used some other method

USTs 92% used a validated process or an actual contract bid

8% used some other method

Landfills 99% used a validated process or an actual contract bid

1% used some other method

The other methods generally listed engineering estimates based on generally accepted engineering techniques but not specifically validated by the Air Force. Current liabilities cannot be determined due to lack of expenditure data in these categories.

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The Air Force Base Conversion Agency (AFBCA) estimates a $1.917 billion liability as of September 30, 2001. This amount

includes all cleanup to meet regulatory requirements and to transfer property. However, this amount does not include potential

future cost associated with long-term landfill management for which the Air Force may never be absolved of responsibility due

to State laws. Pending implementation of DoD and Air Force guidance, an Air Force validated, verified and accredited method

of calculating future costs will be available for the September 30, 2002 report.

The September 30, 2001 environmental disposal liability of $49.4 million in Other National Defense Weapon Systems

includes strategic, tactical, active, inactive missiles and missile motors. The Air Force identified $48 million in environmental

liability for the disposal of Minuteman III and Peacekeeper strategic, inactive missile motors. The estimated environmental disposal liability for tactical, active, inactive missiles and missile motors is $1.4 million.

Note 15.A. Other Liabilities

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Intragovernmental

Accounts Payable-Canceled Appropriations—Unfunded liabilities from “M” accounts and closed years total to $211.9 million,

which is included on the balance sheet. Although closed appropriation liability balances are unreliable, it is possible this liability will be liquidated using current year funding at the time of liquidation.

Judgement Fund Liabilities—Judgement Fund liabilities result from contractor claims under the Contracts Disputes Act on Air

Force contracts that have been adjudicated by a court or a board in favor of the contractor. Initially, the Department of the

Treasury pays the monetary awards to the contractor. However, subsequently the Air Force must reimburse the Treasury’s

Judgement Fund for the amount that was paid to the contractors.

Other Liabilities—The amount of $63.5 million represents military unemployment compensation of $31.3 million and $32.2

million of government contribution of employee benefits. 

Non-Federal

Accrued Funded Payroll and Benefits—The increase is due to the accrual of the military payroll.

Nonenvironmental Disposal Liabilities

Included in the reported amounts are the current cost basis estimates for disposing of, or demolishing, approximately $93 million worth of excess/obsolete structures at active installations, in accordance with disposal plans directed by Defense Reform

Initiative Directive No. 36, dated May 5,1998. The expected completion date is FY 2003.

The FY 2001 nonenvironmental ND PP&E (nonnuclear) disposal liability was $0; there were no missiles at the end of the fiscal

year for which a formal management decision had been made to decommission. A potential maximum nonenvironmental disposal liability of $3.8 million was also determined based on the quantities of missiles and missile motors designated for disposal or identified in demilitarization plans. The maximum nonenvironmental disposal liability includes both strategic and tactical, active and inactive missiles and missile motors. The maximum nonenvironmental disposal liability for strategic missiles and

missile motors was calculated to be $0. The maximum nonenvironmental disposal liability for tactical missiles and missile

motors was $2.9 million for active missiles, $.9 million for inactive missiles, and $0 for missile motors

Accounts Payable-Canceled Appropriation—See above

Other Liabilities—The amount of $641.4 million represents legal contingencies of $637.1 million, civilian unemployment

compensation of $3.6 million and accrued interest liability of $.7 million.

The recorded estimated probable liability amount of $4.2 million has been included in the accompanying financial statements

for open contractor claims greater than $100,000 and neither under appeal nor in litigation. In addition to the contractor

claims under appeal and the open contractor claims for an amount greater than $100,000, the Air Force was party to numerous other contractor claims in amounts less than $100,000 per claim. These claims are a routine part of the contracting business and are typically resolved through mutual agreement between the contracting officer and the contractor. Because of the

routine nature of these claims, no requirement exists for a consolidated tracking mechanism to record the amount of each

claim, the number of open claims, or the probability of the claim being settled in favor of the claimant. The potential liability

arising from these claims in aggregate would not materially affect the operations or financial condition of the Air Force. A reasonably possible liability is estimated at $.4 million and is not included in the reported amount.

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The total estimated probable liability for claims and litigations against the Air Force handled by the Civil Law and Litigation

Directorate, as of September 30, 2001, was valued at $534.2 million and has been included in the accompanying financial

statements. As of September 30, 2001, the Air Force was party to 1,840 claims and litigation actions. This liability dollar

amount recorded in the financial statements is an estimate based on the weighted average payout rate for the previous three

years. A reasonably possible liability is estimated at $1.1 billion and is not included in the reported amount. Neither past payments nor the current contingent liability estimate provides a basis for accurately projecting the results of any individual lawsuit

or claim. It is uncertain that claims will ever accrue to the Air Force. In addition, many claims and lawsuits, even if successful,

will not be paid out of Air Force Funds. Rather, judgements over $100 thousand are ordinarily paid from the Judgement Fund,

not from Air Force accounts even though claims were the result of Air Force operations. In many cases involving attorney fees,

the amounts are not known until the last appeal is concluded. 

As of September 30, 2001, the Air Force was a party to 149 contract appeals before the Armed Services Board of Contract

Appeals (ASBCA). The probable amount of loss from contractor claims of $98.8 million has been reflected in the financial

statements. The contractor claims involve unique circumstances that are considered by the ASBCA in formulating decisions on

the cases. Such claims are funded primarily from Air Force appropriations. A reasonably possible liability is estimated at $7.7

million and is not included in the reported amount.

Other

The Legal Representation Letter describes contingent liabilities from cases which may or may not be paid from the Treasury’s

Claims, Judgement, and Relief Acts Fund depending on the final outcome. Since Air Force appropriations do not necessarily

pay for all judgements or settlements for cases and the probability of payments is unknown, these contingencies from pending

cases are not reflected in the financial statement. 

With respect to the major fiduciary balances with the OPM and the DOL, the Air Force was able to reconcile with the OPM

and the DOL. During these reconciliations immaterial differences were identified.

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Note 15.B. Capital Lease Liability

The Air Force is the leasee in twelve capital leases. Eleven are for military family housing and one is for a piece of medical

equipment. All leases prior to FY 1992 are funded on a FY basis. This correlates to six of the military family housing leases. 

The piece of medical equipment asset value was decreased by $2,242.32 in FY 2002 from the renegotiation of the purchase

price resulting in the annual payment reduction from approximately $250,000 to $167,000 for two years.

Note 16. Commitments and Contingencies

All disclosures related to known commitments and contingencies have been disclosed in the notes on Environmental Liabilities

and Environmental Disposal Liabilities and Other Liabilities.

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Note 17. Military Retirement Benefits and Other Employment Related Actuarial

Liabilities

The liability for future workers’ compensation (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. Consistent with past practice, these projected annual benefit payments have been

discounted to present value using the OMB economic assumptions for 10-year Treasury notes and bonds. Interest rate

assumptions utilized for discounting were as follows:

FY 2001

5.21% in year 1

5.21% in year 2

and thereafter

To provide more specifically for the effects of inflation on the liability for FWC benefits, wage inflation factors (cost of living

adjustments or COLAs) and medical inflation factors (consumer price index medical or CPIMs) were applied to the calculation

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

The compensation COLAs and CPIMs used in the projections for various charge back years (CBY) were as follows:

CBY COLA CPIM

2001 3.33% 4.44%

2002 3.00% 4.15%

2003 2.56% 4.09%

2004 2.50% 4.09%

2005+ 2.50% 4.09%

The model’s resulting projections were analyzed to insure that the estimates were reliable. The analysis was based on two tests:

(1) a comparison of the percentage change in the liability amount by agency to the percentage change in the actual payments, and (2) a comparison of the ratio of the estimated liability to the actual payment of the beginning year calculated for

the current projection to the liability-payment ratio calculated for the prior projection. 

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Note 18. Unexpended Appropriations

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 line of the Statement of Financing, which includes the change during the

fiscal year in unexpended obligations against budget authority from all sources.

Note 19.A. General Disclosures Related to the Statement of Net Cost

The amounts presented in the Statement of Net Cost are based on obligations and disbursements and therefore may not in all

cases report actual accrued costs. The Air Force generally records transactions on a cash basis and not an accrual basis as is

required by generally accepted accounting principles. Therefore, the Air Force’s systems do not capture all actual costs. As

such, information presented in the Statement of Net Cost is based on budgetary obligations, disbursements, and collection

transactions, as well as nonfinancial feeder systems; and is adjusted to record known accruals for major items such as payroll

expenses, accounts payable, environmental liabilities, etc. and known imputed expenses.

Note 19.B. Imputed Expenses

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Note 19.C. Exchange Revenue

Goods and services provided through reimbursable programs to the public or another U.S. Government entity (intra-Air Force,

intra-DoD or other federal government entity) are provided at cost. Such reimbursable sales are reported as earned revenues.

Costs are equal to the amount reported as earned. Since FY 2000 sales to the Foreign Military Trust Fund and related cost of

sales have been reclassified as non-federal, transactions with the public, rather than intragovernmental transactions as in years

prior.

Note 19.D. Stewardship Assets

Stewardship assets include Heritage Assets, Stewardship Land and National Defense PP&E. 

Costs for acquiring, constructing, improving, reconstructing, or renovating heritage assets; costs of acquiring stewardship land;

and costs to prepare stewardship land for its intended use are required to be recognized and disclosed in the Statement of Net

Cost or in the notes. Such costs, if any, are not separately identifiable and are not believed to be material. 

Expenditures totaling $9.46 billion (excluding the cost of goods and services provided to others) are deemed to be for

National Defense PP&E. The $9.46 billion represents $7.43 billion for national defense aircraft procurement and $2.03 billion

for national defense missile procurement. The amounts are net of expenditures capitalized as operating materials and supplies

(engines and other items) and are unadjusted for current year progress payments, which are capitalized. Outstanding progress

payments will be expensed upon delivery of equipment. See note 6. These costs, adjusted for current year progress payments,

are included in the Procurement Program Costs section of the Statement of Net Cost:

Note 19.E. Intragovernmental Revenue and Expense

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 revenue 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 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 Air Force’s operating expenses were adjusted based on a comparison between the Air Force’s accounts payable and the

DoD summary level seller accounts receivables. An adjustment was posted to accounts payable and operating expenses to

reflect unrecognized accounts payable and operating expenses. The operating expenses of the Air Force were adjusted

upwards in the amount of $985.1 million.

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Note 20. Disclosures Related to the Statement of Changes in Net Position

Prior Period Adjustments consist of:

Implementation of change in DoD policy regarding National Defense Property, Plant and Equipment.

Reclassification of engines and other aircraft equipment from National Defense Property and

Equipment (off the balance sheet) to operating materials and supplies (on the balance sheet). 

Adjustment net of depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$37,561,527

Adjustments to further implementation of the Automated Civil Engineer System used for reporting

real property by correcting beginning of year balances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2,894,028

Adjustments of beginning balances carried in various equipment systems and records based on end

of year balances and current year changes. Adjustment net of depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . .(1,062,842)

Adjustment to correct duplication of amount reported in two systems. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(133,667) 

Adjustment to correct reporting of items in hands of contractor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(109,208) 

Adjustments to correct assets under capital lease reporting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(144,513)

Total Prior Period Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$39,005,325

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Note 21.A. Disclosures Related to the Statement of Budgetary Resources

Unexpended Obligations presented in the Statement of Budgetary Resources (SBR) includes Unexpended Obligations for both

direct and reimbursable funds.

The statement does not include any amounts for which the Department of Treasury is willing to accept corrections to canceled

appropriation amounts, in accordance with SFFAS Number 1. Also, negative budgetary resources of $89 million (relating to

Offsetting Receipts of Accounts shown on the Report on Budget Execution, or SF 133) are not included in the SBR (combined,

combining or disaggregated).

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 SBR), are not included in Spending Authority from Offsetting Collections and

Adjustments line of the SBR or the Spending Authority for Offsetting Collections and Adjustments line of the Statement of

Financing.

Due to accounting system deficiencies, the proper amount of intra-agency eliminations for this statement cannot be determined.

Accounting systems currently do not provide or capture data needed for obligations incurred and recoveries of prior year obligations in accordance with OMB Circular A-34, “Instructions on Budget Execution” requirements. Although DFAS Denver

Center developed an alternative methodology to calculate these items, the auditors and DFAS Denver Center concur this

methodology also distorts the obligation figures. As a result, the amount of distortion cannot be reliably determined, and may

or may not be material.

Disaggregated SBR are included in the Required Supplementary Information section of the statements. The abnormal balance

on the Unobligated Balances—Not Available in the Research, Development, Test, & Evaluation grouping relates to the cancellation of reimbursable authority at fiscal yearend.

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Note 21.B. Disclosures Related to Problem Disbursements, In-transit

Disbursements and Suspense/Budget Clearing Accounts

The Air Force has $ 2.3 billion problem disbursements and in-transit disbursements that represent disbursements of Air Force

funds that have been reported by a disbursing station to the Department of the Treasury but have not yet been precisely

matched against the specific source obligation giving rise to the disbursements. For the most part, these payments have been

made using available funds and based on valid receiving reports for goods and services delivered under valid contracts. The

problem disbursements and in-transit disbursements arise when the various contracting, disbursing, and accounting systems fail

to match the data necessary to properly account for the disbursement transactions in all applicable accounting systems.

Defense Finance and Accounting Service has efforts underway to improve the systems and to resolve all previous problem disbursements and to process all in-transit disbursements. As of September 30, 2001, these efforts resulted in a $50 million

decrease in reported problem disbursements. In-transits have increased $989 million since September 2000. In-transit disbursements increased primarily due to realignment of workload between the Field Sites to better serve our customers. This has

caused delays in the processing of transactions as the transactions were routed to the incorrect accounting station and then

had to be transferred to the correct accounting station. A secondary cause was the implementation of Departmental Cash

Management System For and By Others (DFB) system. Implementation started in July 1999 and completed in July 2001. We

experienced a four-month learning curve at each Field Site with this new system that also delayed the processing of by-others

transactions. We anticipate significant benefits from both of these initiatives in fiscal year 2002. Previous year’s reports have

shown only aged in-transit disbursements. This report includes all in-transit disbursements for the two years shown.

The Air Force has made a concerted effort to reduce balances in the suspense and budget clearing accounts, and to establish

an accurate and consistent use of these accounts. The information presented indicates the significant reductions (with the

exception noted below) that the Air Force has achieved in the various suspense/budget clearing accounts.

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The large increases in F3885 for FY 2000 and FY 2001 are due to numerous OPAC transactions received during the last

business day of September that, by established procedure, are placed in this suspense account until they can be assigned to a

valid appropriation.

On September 30 of each fiscal year, all of the uncleared suspense/budget clearing account balances are reduced to zero by

transferring the balances to proper appropriation accounts using a logical methodology, such as prorating the amounts on a

percentage basis derived by comparing the disbursements in the suspense/clearing account to total disbursements.

The amounts in brackets in account F3880 represent collections. 

Note 22. Disclosures Related to the Statement of Financing

Intra-entity transactions have not been eliminated. The accompanying Statements of Financing are presented as combined or

combining statements.

Financing Imputed for Cost Subsidies of $586.9 million consists of the imputed financing items listed in the note on disclosures related to the Statement of Changes in Net Position.

The components and total of liabilities not covered by budgetary resources are disclosed in the note on liabilities that presents

liabilities covered and not covered by budgetary resources.

Note 23. Disclosures Related to the Statement of Custodial Activity

Not Applicable.

Note 24. Other Disclosures 

Entity As Leassee—Operating Leases

Medical Equipment—Operating leases are one year leases with four option years. Each year, facilities must specifically exercise the option to continue the lease. The operating leases that contain an option to purchase allows the government to purchase the equipment at fair market value at the end of the lease period.

Military Family Housing—The figures represent operating leased facilities in the U.S. and overseas applicable to active Air

Force, Air Force Reserve and Air National Guard. 

Motor Vehicles—Operating Leases for Motor Vehicles are essentially one year leases funded in appropriation 3400 (O&M). As

the out year estimates indicate, Air Force expects to continue to reduce the level of owned assets, while increasing the number

of operational leases. Air Force will continue to displace commercial leases in favor of IFMS (General Services Administration)

leases because IFMS leases are typically more economical. 

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Note 24.A. Other Disclosures 

Interest Payable: DFAS Columbus has accumulated prompt payment interest of approximately $.7 million during FY 2001 for

Air Force contracts. The interest payments were not made because the unpaid invoices are under a reconciliation process in

an interest-bearing mode.

Undistributed Collections and Disbursements: Accounts receivable and payable are adjusted for undistributed collections and

disbursements. These transactions represent the Air Force’s in-float (undistributed) collections and disbursements for transactions that were reported by a disbursing station but not recorded by the appropriate accountable station. Undistributed

amounts are prorated by appropriation based on the percentage of distributed government and public receivables and

payables.

Canceled Balances: All unliquidated balances associated with closed accounts have been canceled in accordance with Public

Law 101-510. Canceled accrued expenditures unpaid are reflected in the financial statements as unfunded liabilities.

Canceled undelivered orders outstanding are not included in the financial statements; however, these orders may result in

future expenditures. Due to systems deficiencies, canceled receivables are included in the Air Force Balance Sheet. Canceledyear appropriation balances for receivables and payables are not reliable.

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Combining Statements
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General Funds C

onsolidating and

C

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Consolidating Balance Sheet—General Funds

As of September 30 ($ in Thousands)

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

See notes 1 and 21.
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C

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

See notes 1 and 21.
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General Funds C

onsolidating and

C

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Consolidating Statement of Net Cost—General Funds

For the years ended September 30 ($ in Thousands)

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

See notes 1 and 19.
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onsolidating and

C

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

See notes 1 and 19.
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General Funds C

onsolidating and

C

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Consolidating Statement of Changes in Net Position—General Funds

For the years ended September 30 ($ in Thousands)

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

See notes 1 and 20.
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C

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

See notes 1 and 20.
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General Funds C

onsolidating and

C

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Combining Statement of Budgetary Resources—General Funds

For the years ended September 30 ($ in Thousands)

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

See notes 1 and 21.
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C

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

See notes 1 and 21.
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General Funds C

onsolidating and

C

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Combining Statement of Financing—General Funds

For the years ended September 30 ($ in Thousands)

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

See notes 1 and 22.
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C

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

See notes 1 and 22.
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The accompanying notes are an integral part of the financial statements.
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Heritage Assets

Museums 

The Air Force Museum, located at Wright-Patterson Air Force Base, Ohio, houses the main collection of historical artifacts that

are registered as historical property in the USAF Museum System. The other 18 Air Force museums are considered Air Force

Field Museums or Heritage Centers, which also contain items of historical interest. 

During FY 2001, the beginning balances of the AF Museums and the Major Collections categories have been restated. At the

end of FY 2000, the AF reported 14 museums and 8 major collections. Based on additional guidance, 5 of the major collections have been reclassified and moved to the museum category. In addition, one significant Heritage Center was inadvertently

omitted from the list. During FY 2001, no museums were added to the Air Force inventory. However, McClellan Aviation

Museum was deleted (privatized), as the result of the closure of McClellan AFB. All are reported in acceptable condition. 

Monuments and Memorials

Of the151 monuments and memorials, 123 are located at the Air Force Academy in the Air Gardens and Honor Court. Most

of these monuments and memorials honor specific individuals or cadet wings for various accomplishments. The remaining 28

memorials, all with costs that exceed $100,000, are located on various Air Force bases throughout the United States. All are

reported in acceptable condition.

Cemeteries & Archeological Sites

The Air Force has administrative and curatorial responsibilities for 39 cemeteries on its bases. The cemeteries are maintained

by the bases and are in good condition. The Air Force has 1,518 archeological sites, including both listed archeological sites

and eligible archeological sites. In addition, the Air Force has 10,362 potentially eligible archeological sites that are not listed

on this report. The increase over last year’s figure is a result of the completion of more archeological surveys, making more

sites eligible to be classified as an archeological site, and bringing the data into agreement with the Federal Archeology

Report (March 01).

Buildings and Structures

The Air Force currently considers 4,340 buildings and structures as heritage assets. In FY 2001, the Air Force performed a

closer review of its heritage asset data. The review captured previously unreported structures and refined reporting criteria of

heritage assets, such as reporting a garage structure not attached to a house as a separate structure from the house. The

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Stewardship Land

(Acres, in Thousands)

The Air Force has 7,734 acres of mission-essential land under their administration. Lands purchased by the Air Force with the

intent to construct buildings or facilities are considered general PP&E and are reported on the balance sheet. All stewardship

lands, as reported, are in acceptable condition, based on designated use.

United States Air Force FY 2001 Financial Statements

result was an increase of 313 heritage structures. Most of these buildings and structures are considered Multi-use Heritage

Assets, and as such, have been reported as general property, plant and equipment on the Balance Sheet. The buildings and

structures are maintained by each base civil engineering group and are considered to be in good condition. 

Major Collections

The Air Force has 4 significant or major collections consisting of: (a) the Air Force Art Collection, and (b) three collections at

the Air Force Academy containing historical items and memorabilia as well as distinctive works of art. During FY 2001, the Air

Force Academy identified the Gimbel Collection as a significant collection to be reported separately. The major collections

beginning balance of eight collections (FY 2000 ending balance) has been restated based on FY 2001 Form and Content.

The Air Force now considers five heritage centers and their contents as museums rather than collections. The curators for all

major collections reported the contents to be in good condition. Almost all of the materials are protected in an environment

suitable for long-term storage.

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Nonfederal Physical Property

Yearly Investment in State and Local Governments

(in Millions of Dollars)

The Air National Guard investments in non-federal physical property are strictly through the Military Construction Cooperative

Agreements (MCCAs). These agreements involve the transfer of money only and allow joint participation with States, Counties,

and Airport Authorities for construction or repair of airfield pavements and facilities required supporting the flying mission

assigned at these civilian airfields.

Investment values included in this report are based on Nonfederal Physical Property outlays (expenditures). Outlays are used

because current DoD systems are unable to capture and summarize costs in accordance with the Federal Accounting

Standards Advisory Board Requirements.
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Investments in Research and Development

Yearly Investment in Research and Development

(in Millions of Dollars)

Basic Research—The Air Force’s Defense Research Sciences basic research program funded basic scientific disciplines that are

core to developing future warfighting capabilities. Funding was provided to twelve scientific projects, with one project focused

on education programs for scientists and engineers and on international programs. The scientific projects were focused on

atmospherics, biological sciences, chemistry, electronics, fluid mechanics, human performance, materials, mathematical and

computer sciences, physics, propulsion, space sciences, and structures. Basic research in self-healing polymer composites will

provide longer life for space structures and materials. Research in tracking algorithms will improve tracking of ground moving

targets.

Applied Research—The Air Force’s Applied Research program is developing technologies to support both an air and space

force of the future. Technology developments are focused in those areas that are essential to future warfighting capabilities. 

(1) One example is development of simulations of spontaneous magnetic field generation in plasma. This is a step toward

three-dimensional prototyping of high-powered microwave sources. 

(2) Another example is the cloning of the nitrate reductase gene of the anthrax bacteria into e. coli, providing a safe stimulant

for the Agent Defeat weapons test program.

Development—Development takes what has been discovered or learned from basic and applied research and uses it to establish technological feasibility, assessment of operability, and production capability. Development is comprised of five stages

defined below:

Advanced Technology Development—The Air Force’s Advanced Technology Development program demonstrates, in a realistic operational environment, integrated sets of technology to prove military worth and utility.

(1) One technology achievement is the demonstration of automatic intrusion detection environment capabilities at nine

operational sites. This provides near-real-time cyber attack warning at local, regional, and global levels. 
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(2) Another achievement includes development of the only SAE-certified, non-petroleum based, environmentally friendly,

cost-effective deicer in the world. 

Demonstration and Validation—The Air Force’s demonstration and validation programs are comprised of system specific

advanced technology integration efforts accomplished in an operational environment to help expedite transition from the

laboratory to operational use.

An example of the Air Force’s Demonstration and Validation effort is the Combat Identification Developed, Enhanced

Recognition and Sensing Laser Radar (ERASER) system, a new tool for non-cooperative, ground target identification. ERASER allows attack aircraft to stand off at longer ranges when employing weapons, increasing effectiveness/survivability, and

reducing fratricide. ERASER consists of a modified laser designator and an extremely sensitive infrared camera. During this

year, the Air Force conducted a flight test program of the ERASER system. 

Engineering Manufacturing and Development—The Air Force’s engineering and manufacturing development (EMD) efforts

are development projects which have not received approval for full-production.

(1) An example of the Air Force EMD is Joint Direct Attack Munitions (JDAM), a low cost, autonomously controlled,

adverse weather, global position system aided inertial navigation guidance kit for the Air Force/Navy 1,000 pound

(MK-83), 2,000 pound (MK-84 and BLU-109), and 500 pound (MK-82) general purpose bombs. 

(2) Another example is the successful completion of the Joint Strike Concept Demonstration Program (CDP) in FY 2001.

All CDP flight-testing is complete and flight test results have met or exceeded expectations. The CDP program demonstrated a) commonality and modularity among the JSF variants, b) slow speed handling qualities for the Carrier

Variant, and c) Short Takeoff/Vertical Landing (STOVL) hover and transition capability. 

RDT&E Management Support—The Air Force’s Research, Development, Test and Evaluation (RDT&E) Management Support

efforts include projects directed toward support of installations or operations required for general research and development use.

(1) An examples is the GPS Range Integration which greatly enhances Eglin’s Range Time-Space-Position-Information

(TSPI) reducing the number of support aircraft required per test while allowing for more complex mission scenarios.

GPS Range Integration supports JDAM, AGM-130H, AIM-9X, F-22, joint service exercises and future DT&E and OT&E

tests. 

(2) Another example is the Advanced Data Acquisition and Processing System (ADAPS). The ADAPS project is located at

Edwards AFB, and provides advanced, high rate, end-to-end, timely flight test data processing that meets complex

program test requirements that the previous systems could not meet. Programs supported by ADAPS include JSF, F-22,

C-17, Global Hawk, JDAM, AIM-9X and others. 

Operational Systems Development—The Air Force’s operational system efforts include projects in support of development

acquisition programs or upgrades in SDD

(1) An example is the C-17 Required Navigation Performance RNP-4, providing the C-17 with continuous navigation performance without time limitations and allowing required air traffic control data to be transmitted via a high frequency

data link. Development of design and requirement integration efforts continued this year. 
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United States Air Force FY 2001 Financial Statements

111

(2) Another example is the C-5 Reliability Enhancement & Reengineering Program (RERP), which improves C-5 reliability,

maintainability & availability and reduces total ownership cost. By replacing the power plant and fixing unreliable system components, C-5 RERP increases capability, throughput and access to GATM airspace. In November 2001, C-5

RERP completed Milestone B, as approved by the Defense Acquisition Board. A SDD Contract is expected to be

awarded to Lockheed Martin in 2001. 
United States Air Force FY 2001 Financial Statements

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Supplementary Information

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Information
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Supplementary Information

Disaggregated Statement of Budgetary Resources—General Funds

For the years ended September 30 ($ in Thousands)
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Supplementary Information

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National Defense Property, Plant, and Equipment

Deferred Maintenance Amounts

(Amounts in Thousands)

The readiness of Air Force facilities is assessed using the Installation Readiness Report (IRR). The IRR assigns C-ratings ranging

from C-4 (worst) to C-1 (best). Facilities are aggregated in nine facility classes. The FY 2000 IRR indicates that 64% of Air

Force facilities are rated C-4 or C-3 (i.e. below minimal acceptable performance).

The figures presented above are estimated amounts for FY01 from the Fiscal Year 2003 Amended Budget Estimate Submission

(ABES). The figures include amounts for Active Air Force and Air National Guard. The Air Force Reserve reported no deferred

maintenance for FY01 from the FY 2003 ABES. Other Weapons Systems include engines ($21.9 million), software ($57.9 million), other major end items ($19.3 million), non-Materiel Support Division ($6.1 million), area, base and manufacturing support ($2.4 million) and storage ($.3 million).

United States Air Force FY 2001 Financial Statements

General Property Plant and Equipment

Real Property Deferred Sustainment Tables

(Amounts in Thousands)

Sustainment requirements for facilities were extracted from the Facility Sustainment Model (FSM) version 3.0, dated 8 Oct

2001 (less MILPERS contribution (49%)) and deflated to FY 2001 using SAF/FMCEE published inflation indices. Sustainment

actuals were developed based on 85% of FY 2001 maintenance, repair and minor construction (not including demolition). 

The military family housing sustainment requirement is based on a combination of historical expenditures for day-to-day maintenance and condition assessment surveys for real property maintenance by contract (RPMC). These requirements are published in the 1999 Family Housing Master Plan.

Deferred sustainment includes amounts for multi-use heritage assets. It does not include the FY 2001 Air Force backlog of

$21.2 billion ($9.6 billion non-Military Family Housing (MFH) MILCON, $4.8 billion MFH MILCON, and $6.8 billion O&M).

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Supplementary Information
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Supplementary Information

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INSPECTOR GENERAL

DEPARTMENT OF DEFENSE

400 ARMY NAVY DRIVE

ARLINGTON, VIRGINIA 22202-4704

February 21, 2001

MEMORANDUM FOR UNDER SECRETARY OF DEFENSE (COMPTROLLER)

SUBJECT: Endorsement of the Disclaimers of Opinion on the FYs 2001 and 2000 Department of the Air Force General

Fund Financial Statements (Project No. D2001FD-0112)

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 FYs

2001 and 2000 Air Force General Fund Financial Statements.1 We contracted with KPMG LLP, an independent certified public

accounting firm, to audit the FY 2001 Air Force General Fund Statement of Budgetary Resources. Summarized as follows are

the AFAA and KPMG disclaimers of opinion on the FYs 2001 and 2000 Department of the Air Force General Fund Financial

Statements and the results of our reviews of the AFAA and KPMG audits. The information provided in this memorandum contains reasons for the AFAA and KPMG disclaimers. We endorse the disclaimers of opinion expressed by AFAA, dated February

8, 2002, and KPMG, dated January 31, 2002.

For FY 2001, Office of Management and Budget policy required that the financial statements, except for the

Statement of Budgetary Resources, be prepared on a consolidated basis. Consolidation means that intra-agency transactions

are to be eliminated. The Statement of Budgetary Resources was required to be prepared on a combined basis. Combination

means that component figures are added without eliminating intra-agency transactions. In addition, Office of Management

and Budget policy required that the current fiscal year financial statements be presented on a comparative basis with financial

statements of the previous fiscal year. Accordingly, the AFAA report covers FYs 2001 and 2000. However, we engaged KPMG

LLP to audit only the FY 2001 Statement of Budgetary Resources. The KPMG report addresses only FY 2001.

Disclaimers of Opinion. The AFAA disclaimer of opinion on the FYs 2001 and 2000 Department of the Air Force

General Fund Financial Statements, except for the Statement of Budgetary Resources, dated February 8, 2002, states that

AFAA was unable to express an opinion on the financial statements (Attachment 1). The KPMG disclaimer of opinion on the FY

2001 Department of the Air Force General Fund Statement of Budgetary Resources, dated January 31, 2002, states that

KPMG was unable to express an opinion on the financial statement (Attachment 2). We concur with the AFAA and KPMG disclaimers of opinion. The following deficiencies identified by the Department of the Air Force in the notes to the financial statements preclude an audit opinion.

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1On January 25, 2002, the General Accounting Office issued a new Government Auditing Standard on organizational independence. The

new standard is to be applied on a prospective basis and does not affect the audit work that was ongoing for the FY 2001 financial statements. We will apply the new standard for future audit work and will not delegate the financial statement audit work.
United States Air Force FY 2001 Financial Statements

◗ The Air Force did not implement the U.S. Government Standard General Ledger at the transaction level.

◗ The Air Force is unable to implement fully all elements of generally accepted accounting principles for Federal

entities (Federal GAAP) and the Office of Management and Budget Bulletin 01-09, “Form and Content of Agency

Financial Statements,” due to limitations in the financial management processes and systems, including nonfinancial feeder systems and processes.

◗ The Air Force generally records transactions on a budgetary basis and not on an accrual basis as required by

Federal GAAP. For FY 2001, the Air Force’s financial management systems were unable to meet all requirements

for full accrual accounting.

◗ The Air Force could not accurately identify all intragovernmental transactions by customer.

◗ The Air Force does not recognize an allowance for uncollectible amounts from another Federal agency.

◗ The Air Force valued operating. material and supplies at standard purchase price instead of historical cost as

required by Federal GAAP.

Internal Controls. The AFAA and KPMG did not express opinions on internal controls. However, AFAA identified the

following material control weaknesses. Air Force Systems Support Group functional analysts made adjusting journal entries to

Air Force, Air Force Reserve, and Air National Guard real property records that were not properly supported. Also, the Air

Force incorrectly recorded locally purchased equipment costs in the Air Force Equipment Management System, causing a misstated general property, plant, and equipment account balance.

Compliance With Laws and Regulations. The AFAA and KPMG did not express opinions on compliance with laws and

regulations. However, AFAA concluded that Air Force and Defense Finance and Accounting Service systems and controls did

not achieve full compliance with applicable laws and regulations that could have a direct and material effect on the FYs 2001

and 2000 Air Force Financial Statements. Under the Federal Financial Management Improvement Act of 1996, the AFAA work

showed that financial management systems did not substantially comply with Federal financial management system requirements, applicable Federal accounting standards, and the U.S. Government Standard General Ledger at the transaction level.

Details on the adequacy of internal controls and compliance with laws and regulations are discussed in the AFAA report.

Review of Audit Work. To fulfill our responsibilities for determining the accuracy and completeness of the independent

audit work that AFAA conducted, we reviewed the audit approach, planning, and the summary working papers that supported

their conclusions. We found no indication that we could not rely on the AFAA disclaimer of opinion. To fulfill our responsibilities for determining the accuracy and completeness of the independent audit work that KPMG conducted, we evaluated the

audit approach, planning, and key judgments, met with the partner and staff members, reviewed summary working papers

supporting the disclaimer of opinion, and performed other procedures we deemed appropriate in the circumstances. We found

no indication that we could not rely on the KPMG disclaimer of opinion.

Thomas F. Gimble

Acting

Deputy Assistant Inspector General

for Auditing

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DEPARTMENT OF THE AIR FORCE

WASHINGTON DC 20330-1000

8 February 2002

To the Secretary of the Air Force

Chief of Staff, USAF

With the exception of the Statement of Budgetary Resources for Fiscal Year (FY) 2001, we were engaged to audit the accompanying Air Force General Fund financial statements for the FYs ended 30 September 2000 and 2001.1 The accounting firm

of KPMG LLP was engaged to audit the Statement of Budgetary Resources. The annual financial statements consist of the

Balance Sheet and the related Statement of Net Cost, Statement of Changes in Net Position, Statement of Budgetary

Resources, and Statement of Financing. Preparing these financial statements is the responsibility of the Defense Finance and

Accounting Service (DFAS) and Air Force management. This report presents our opinion on the financial statements, evaluation

on the effectiveness of internal controls over financial reporting, and assessment of compliance with laws and regulations.

OPINION ON THE FINANCIAL STATEMENTS

We are unable to express, and we do not express, an opinion on the Air Force Balance Sheet or the Statements of Net Cost,

Changes in Net Position, and Financing for the FYs ended 30 September 2000 and 2001. We were unable to obtain sufficient, competent evidential matter, or apply other auditing procedures, to satisfy ourselves as to the fairness of these statements

under provisions of the Government Auditing Standards and Office of Management and Budget (OMB) Bulletin 01-02, Audit

Requirements for Federal Financial Statements, 16 October 2000. Material uncertainties exist regarding the reasonableness of

amounts reported on these statements. Air Force management has disclosed many of these uncertainties in the financial statement notes as compliance or data problems. For example:

◗ The DFAS has not fully implemented the U.S. Government Standard General Ledger and many of the accounting systems

and Air Force non-accounting feeder systems and processes do not collect and report accounting information required by

federal accounting standards.2 (Financial Statement Note 1) 

◗ The Air Force does not accumulate cost information as required by federal accounting standards. (Financial Statement

Note 1)

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1 Management presented consolidated comparative FYs 2000 and 2001 financial statements as of 30 September 2001. Consequently, in

accordance with Government Auditing Standards, our review covered the periods presented.

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

the Federal Accounting Standards Advisory Board and issued by the Office of Management and Budget, as generally accepted accounting

principles for federal government agencies.
United States Air Force FY 2001 Financial Statements

◗ The Air Force interacts with the federal government as a whole; however, the financial statements do not reflect the results

of all accounting transactions applicable to the Air Force as though the Agency were a stand-alone entity. (Financial

Statement Note 1)

◗ The DFAS and the Air Force cannot accurately identify all intragovernmental transactions by customer and, therefore, cannot be sure transactions occurring between entities within DoD, or between two or more federal agencies, are eliminated.

(Financial Statement Note 1)

◗ The Air Force is unable to reconcile intragovernmental accounts receivable or accounts payable balances, or reconcile

intragovernmental revenue balances with its trading partners. (Financial Statement Notes 5, 12, and 19)

◗ The balances reported by DFAS for operating materials and supplies are not recorded in conformance with federal

accounting standards. Instead of recording operating materials and supplies at historical cost, the Air Force uses standard

price to value its inventory without computing unrealized holding gains or losses. Further, the Air Force does not fully use

the consumption method in accounting for this property. (Financial Statement Note 9)

◗ The Air Force generally records transactions on a cash basis and not on an accrual basis as required by generally accepted

accounting principles. (Financial Statement Note 19)

Our disclaimer is also based on our inability to reconcile or validate $1.6 billion of $2.6 billion in reported construction-inprogress because Army Corps of Engineers and Naval Facilities Engineering Command supporting documentation was not

timely received, and project costs were not identified to allow audit testing. Furthermore, while the Air Force provided input,

the DoD did not publish the FY 2001 Financial Management Improvement Plan in time for us to determine if known Air Force

and DFAS financial system weaknesses were included and remediation plans established.

REQUIRED SUPPLEMENTARY INFORMATION

The Required Supplementary Information is not a required part of the principal financial statements, but is supplementary information required by OMB Bulletin 01-09, Form and Content of Agency Financial Statements, 25 September 2001. We did not

audit the Required Supplementary Information and, therefore, express no opinion on the information.

The Required Supplementary Stewardship Information is not a required part of the principal statements and, therefore, is not

required to be audited. However, the OMB still requires Required Supplementary Stewardship Information to be reported,

including national defense property, plant, and equipment. As instructed by DoD, the Air Force did not report this information.

While we selectively reviewed additions and deletions to National Defense Property, Plant, and Equipment records, we express

no opinion on the Required Supplementary Stewardship Information.

MANAGEMENT ACTIONS

During the past several years, the Office of the Under Secretary of Defense (Comptroller/Chief Financial Officer) initiated several strategies designed to produce auditable financial statements and improve financial data accuracy and reporting. The

DFAS and Air Force continue to support those initiatives. To illustrate:

◗ During FY 2001, DoD established the financial management modernization initiatives, of which the Assistant Secretary of

the Air Force (Financial Management & Comptroller) is a member. The purpose of this initiative is to establish a DoD

Program Management Office to document the current and future DoD financial management systems architecture. The Air

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Force is in the process of supplying critical feeder system and other feeder system information. DoD anticipates completion

of this phase of the initiative in FY 2002.

◗ To comply with federal accounting standards, the Air Force continues to implement the consumption method of accounting

and moving average valuation for operating materials and supplies. In addition, in FY 2001 the Federal Accounting

Standards Advisory Board proposed amending the definition for National Defense Property, Plant, and Equipment. The Air

Force interprets these changes as directly affecting some items previously reported as property, plant, and equipment and

categorizes these assets as supplies to be accounted for according to Statement of Federal Financial Accounting Standard

(SFFAS) No. 3, Accounting for Inventory and Related Property. The Office of the Under Secretary of Defense (Comptroller),

in concert with the Services, has contracted a study to review the Services’ strategies for accurately defining, classifying, and

reporting National Defense Property, Plant, and Equipment.

◗ In FY 2001, to comply with SFFAS No. 10, Accounting for Internal Use Software, the Air Force began an effort to identify

and account for internal use software and report those assets on the financial statements. Managers established definitions,

software development plans, data sources, and a reporting mechanism to report $28 million in software assets. The Air

Force will continue this effort in FY 2002.

◗ The Air Force continued to develop the Total Ownership Cost management information system in FY 2001. This system

analyzes myriad standard system data to provide detailed information on weapon system costs. Also, the Commanders’

Resource Integration System will provide data warehouse information storage and analysis, and performs flying hour program analysis. The Air Force plans to merge these two systems to create an overall Air Force Central Cost Data

Warehouse.

◗ We believe these efforts will help resolve many existing problems with systems and financial reporting. We will work closely

with management to address material deficiencies that preclude 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 for financial statement preparation in

accordance with standards, and for safeguarding assets against loss from unauthorized use. Because of inherent limitations in

any system of internal controls, errors or fraud may not be detected. Also, internal controls in future periods may become

inadequate. As a result, our consideration of internal controls may not necessarily disclose all material weaknesses. 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 within a timely period by employees performing their assigned functions.

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, OMB Bulletin 01-02 requires that we

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

summarize material weaknesses and reportable conditions that existed in the design or operation of the internal control structure over financial reporting in effect at 30 September 2001 for the Air Force consolidated financial statements. These weaknesses, along with recommended remedial actions and time frames for corrective actions, are more fully described in supporting audit reports issued to Air Force and DFAS management.

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REAL PROPERTY ADJUSTING JOURNAL ENTRIES

Air Force Systems Support Group functional analysts made adjusting journal entries to Air Force, Air Force Reserve, and Air

National Guard real property records that were not properly supported. Analysts made these entries to correct imbalances

between Automated Civil Engineer System facility inventory data and general ledger account balances. Because the entries

were not processed at facility level, we could not verify the propriety of the transactions by tracing them to individual facilities.

As a result, we could not confirm the validity of $11.8 billion of adjusting journal entries included in the Property, Plant, and

Equipment line item on the Balance Sheet. While this is a substantial improvement over the $31.1 billion identified in our FY

2000 audit, the conditions causing this problem continue and should be reported as a material weakness. The Air Force did

not include this issue in their FY 2001 Statement of Assurance. (AFAA Project F2001-B05300-0023, Accounting for Air Force

Real Property)

ELECTRONIC SYSTEMS INTERFACE

The Air Force incorrectly recorded locally purchased equipment costs in the Air Force Equipment Management System, causing

a misstated general property, plant, and equipment account balance. This condition occurred because the electronic interface

between the Standard Base Supply System, which records purchase and receipt of assets, and the Air Force Equipment

Management System, which maintains asset inventory and depreciation records, did not accurately transfer asset costs.

Specifically, the data element to track asset unit values in the supply system is 10 digits versus 7 digits in the Equipment

Management System. As a result, the value of assets with unit costs of $10 million or more was understated on the Balance

Sheet by $190 million. (AFAA Project F2001-B05300-0031, Accounting for Property, Plant, and Equipment – Personal

Property)

PERFORMANCE MEASURES

Our limited review of internal controls related to performance measures, reported in the Management Discussion and Analysis

section of the principal statements, did not identify any control weaknesses. Because we only obtained an understanding of the

sources and controls related to performance measures, our work was not intended to determine whether controls were in

place and working as designed. However, we concluded the information presented in the Management Discussion and

Analysis section was materially consistent with the financial statements and footnotes.

REPORT ON COMPLIANCE WITH LAWS AND REGULATIONS

Air Force management is responsible for complying with applicable laws and regulations. Issues that should concern management include compliance with laws and regulations pertaining to the objectives of Air Force General Fund programs, and the

activities, functions, and manner in which programs and services are delivered. Material instances of noncompliance are failures to follow requirements or violations of laws or regulations that make us conclude the misstatements resulting from these

violations are material to the financial statements, or the sensitivity of the matter would cause others to perceive the misstatements as significant. To obtain reasonable assurance that financial statements are free of material misstatement, we tested

compliance with laws and regulations where noncompliance could have a direct and material effect on financial statement

amounts, to include requirements contained in the Federal Financial Management Improvement Act (FFMIA) and Federal

Managers’ Financial Integrity Act (FMFIA). We concluded Air Force and DFAS systems and controls did not achieve full compliance with applicable laws and regulations that could have a direct and material effect on the FY 2001 Air Force financial

statements. We considered noncompliance issues discussed below in forming our opinion on the financial statements. Our

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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

The FFMIA requires report disclosure on whether Air Force financial management systems substantially comply with federal

financial management system requirements, federal accounting standards, and the U.S. Government Standard General Ledger

at the transaction level. Our audit tests disclosed instances where Air Force or DFAS systems did not substantially comply with

the three FFMIA requirements. 

a. Federal Financial Management System Requirements. In their FY 2001 Statement of Assurance, DFAS-Denver reported that

journal vouchers were not supported due to DoD system weaknesses. Specifically, transactions are manually posted rather than

processed by automated accounting systems to a general ledger account or a formal record of original entry from the original

source document. As a result, journal vouchers were not always supported or documented. In addition, accounting systems do

not capture trading partner data at the transaction level to facilitate eliminations, and intragovernmental accounts receivable

and accounts payable balances cannot be reconciled. Also, the Air Force cannot reconcile revenue balances with its trading

partners and states that the volume of intragovernmental transactions is too large for an after-the-fact reconciliation. The Air

Force reported consolidated intragovernmental accounts receivable of $394 million and accounts payable of $741 million.

b. Federal Accounting Standards. Air Force management acknowledged in FY 2001 that its financial management systems did

not allow substantial compliance with federal accounting standards. Specifically, financial statement footnotes disclosed the

following areas of noncompliance.

◗ The Air Force and DFAS identify costs in the Statement of Net Cost based upon the major appropriation groups funded by

Congress instead of specific programs and activities as set forth in SFFAS No. 4, Managerial Cost Accounting Concepts and

Standards for the Federal Government;

◗ The Air Force does not record operating materials and supplies balances derived from logistics systems in conformance

with SFFAS No. 3. Instead of recording operating materials and supplies at historical cost, the Air Force uses standard price

to value its inventory without computing unrealized holding gains and losses;

◗ The Air Force and DFAS do not fully use the consumption method of accounting for operating materials and supplies in

compliance with SFFAS No. 3; and

◗ The Air Force and DFAS generally record transactions on a cash basis instead of the accrual basis as required by generally

accepted accounting principles which affects the amounts presented in the Statement of Net Cost. Further, not all government furnished material and material in the hands of contractors is included in the operating materials and supplies balances.

c. Standard General Ledger. As disclosed in the financial statement footnotes, DFAS managers had not implemented the U.S.

Government Standard General Ledger. Lacking a transaction-driven general ledger process, managers extracted data from

multiple automated and manual systems, many of which were outside the accounting and finance network, to derive account

balances. This process significantly increased the potential for account balance misstatements.

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FEDERAL MANAGERS’ FINANCIAL INTEGRITY ACT

Air Force management acknowledged in the FY 2001 Statement of Assurance and in the Management Discussion and

Analysis section of the financial statements that Air Force systems do not fully comply with federal financial management system requirements. Both of these documents describe actions underway to bring systems into conformance with requirements.

Because the FY 2001 DoD Financial Management Improvement Plan was not yet published, we could not confirm that all system deficiencies were reported, along with remediation plans. We did confirm, however, material control weaknesses disclosed

in our audit reports, except as cited above, were reported in Air Force or DFAS-DE FY 2001 Statements of Assurance.

OBJECTIVE, SCOPE, AND METHODOLOGY

Management responsibilities are to:

◗ Prepare the annual financial statements in conformity with applicable accounting principles.

◗ Establish and maintain internal controls and systems to provide reasonable assurance that the broad control objectives of

the FMFIA are met.

◗ Implement and maintain financial management systems that comply substantially with federal financial management systems requirements, applicable federal accounting standards, and the U.S. Government Standard General Ledger at the

transaction level.

◗ Comply with other applicable laws and regulations.

AFAA responsibilities are to:

◗ Plan and perform 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 01-09, Form and Content of Agency

Financial Statements, and applicable accounting principles.

◗ Obtain reasonable assurance about whether relevant management internal controls are in place and operating effectively. 

◗ Test management compliance with selected provisions of laws and regulations and perform limited procedures to test the

consistency of other information presented with the financial statements.

To fulfill these responsibilities, we:

◗ Examined, on a test basis, evidence supporting the amounts and disclosures in the principal financial statements.

◗ Assessed the accounting principles used and significant management estimates.

◗ 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 had been placed in operation,

assessed control risk, and obtained sufficient evidence from our tests to support our assessment of internal controls.

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◗ Selectively tested evidence supporting additions, deletions, and disclosures in the Required Supplementary Stewardship

Information.

◗ Followed up on previously reported deficiencies.

In reviewing the Air Force consolidated financial statements, we evaluated internal controls to determine the reliability of financial and performance reporting related to the principal statements, accompanying footnotes, and the Overview of the

Reporting Entity, including performance measures. In the area of financial reporting, we determined whether Air Force and

DFAS personnel properly recorded, processed, and summarized transactions to permit financial statement preparation in

accordance with federal accounting standards. We also (1) evaluated the safeguarding of assets against loss from unauthorized use or disposition; (2) obtained an understanding of the design of internal controls; (3) determined whether the controls

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

With respect to information in the Overview of the Reporting Entity, we determined whether the information presented was

materially consistent with the information presented in the principal statements and accompanying footnotes. In the area of

performance measures, we obtained an understanding of the sources and controls related to performance measures in the

overview accompanying the Air Force consolidated financial statements. We obtained an understanding of the design of internal controls related to the existence and completeness assertions. We accomplished the audit at the Office of the Assistant

Secretary of the Air Force, Financial Management and Comptroller; DFAS locations (DFAS centers and DFAS field sites); HQ

Air Force Materiel Command; and Air Force active duty units. Specific locations are listed in the individual audit reports. We

completed audit fieldwork in December 2001 and provided a draft report to management in January 2002.

SUMMARY OF PRIOR AUDIT COVERAGE

The DoD Inspector General, GAO, and the AFAA have conducted multiple reviews related to financial management issues.

Last year, we issued a disclaimer on the FY 2000 Air Force consolidated financial statements. The DoD Inspector General

reports can be accessed over the Internet at http://www.dodig.osd.mil; the GAO reports can be accessed at

http://www.gao.gov; and AFAA reports, at http://www.afaa.hq.af.mil.

We appreciate the cooperation and courtesies extended to our auditors.

EARL J. SCOTT

The Deputy Auditor General

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INDEPENDENT AUDITORS’ REPORT

Secretary of the Air Force and

Office of Inspector General, Department of Defense:

Report on the Combined Statement of Budgetary Resources

We were engaged to audit the accompanying combined General Fund statement of budgetary resources of the United States

Air Force (Air Force) for the year ended September 30, 2001. This financial statement is the responsibility of the management

of the Air Force.

The Air Force was unable to make available for audit all records and related data, including the management representation

letter, on a timely basis. As such, we were unable to complete our audit procedures by the date specified under the terms of

our engagement.

Because of the matters discussed in the preceding paragraph, the scope of our work was not sufficient to enable us to express,

and we do not express, an opinion on the accompanying combined General Fund statement of budgetary resources of the

United States Air Force, for the year ended September 30, 2001.

The information in the required supplementary information section is not a required part of the financial statement, but is supplementary information required by the Federal Accounting Standards Advisory Board or Office of Management and Budget

(OMB) Bulletin No. 97-01, Form and Content of Agency Financial Statements, as amended, as it relates to the combined

General Fund statement of budgetary resources. Because of the matters discussed in the second paragraph, we were unable

to apply certain limited procedures which would have consisted principally of inquiries of management regarding the methods

of measurement and presentation of this information. Therefore, we express no opinion on it and cannot comment on its

measurement or presentation.

The combining information on the combining General Fund statement of budgetary resources is presented for purposes of

additional analysis of the combined statement rather than to present the budgetary resources of the Air Force Active, Air Force

Reserve and Air National Guard, individually. Because of matters discussed in the second paragraph, the scope of our work

was not sufficient to enable us to express, and we do not express, an opinion on the combining General Fund statement of

budgetary resources in relation to the combined statement taken as a whole.

Internal Control over Financial Reporting and Compliance With Laws and Regulations

In connection with our engagement, we were also engaged to consider the Air Force’s internal control over financial reporting

as it related to the combined General Fund statement of budgetary resources and to test the Air Force’s compliance with certain provisions of applicable laws and regulations that could have a direct and material effect on its combined statement of

budgetary resources.

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2001 M. Street, NW

Washington, DC 20036
United States Air Force FY 2001 Financial Statements

Our consideration of internal control over financial reporting would not necessarily disclose all matters in the internal control

over financial reporting that might be reportable conditions. Under standards issued by the American Institute of Certified

Public Accountants, reportable conditions are matters coming to our attention relating to significant deficiencies in the design

or operation of the internal control over financial reporting that, in our judgment, could adversely affect the Air Force’s ability

to record, process, summarize, and report financial data consistent with the assertions by management in the combined

General Fund statement of budgetary resources.

Material weaknesses are reportable conditions in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements, in amounts that would be material in relation to the

financial statement being audited, may occur and not be detected within a timely period by employees in the normal course of

performing their assigned functions. Because of inherent limitations in internal control, misstatements, due to error or fraud

may nevertheless occur and not be detected.

The Air Force was unable to make available for audit all records and related data, including the management representation

letter, on a timely basis. As such, we were unable to complete our audit procedures by the date specified under the terms of

our engagement. Therefore, the scope of our work was not sufficient to enable us to report on matters involving internal control over financial reporting related to the combined General Fund statement of budgetary resources and its operation that

may be considered reportable conditions and material weaknesses, and accordingly, we do not report on those matters.

In addition, because of the matters discussed in the preceding paragraph, the scope of our work was not sufficient to enable

us to complete our tests of compliance with laws and regulations that could have a direct and material effect on the combined

General Fund statement of budgetary resources, as required under Government Auditing Standards and OMB Bulletin No. 

01-02, Audit Requirements for Federal Financial Statements, or on the requirements of the Federal Financial Management

Improvement Act of 1986 (FFMIA) relating to (1) Federal management system requirements, (2) applicable Federal accounting

standards, and (3) the U.S. Government Standard General Ledger at the transaction level. Therefore, the scope of work was

not sufficient to able us to report on whether the Air Force’s financial management systems complied with applicable laws and

regulations or with the three requirements of FFMIA described above, and accordingly, we do not report on those matters.

Distribution

This report is intended for the information and use of Air Force’s management, the Department of Defense Office of the

Inspector General, OMB and the U.S. Congress, and is not intended to be and should not be used by anyone other than

these specified parties.

January 31, 2002

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Combined General Funds Statement of Budgetary Resources

United States Air Force

For the year ended September 30, 2001 ($ in Thousands)
United States Air Force FY 2001 Financial Statements

Note 1. Significant Accounting Policies

1.A. Reporting Entity

The National Security Act of 1947 created the Air Force on September 18, 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 Air Force is to defend the United States and protect its interest through air and space power.

1.B. Basis of Presentation

The combined General Fund statement of budgetary resources (the Statement) has been prepared to report the budgetary

resources of the United States Air Force’s General Fund. The Statement was prepared from the books and records of the Air

Force in accordance with generally accepted accounting principles applicable to federal entities. The Statement includes Air

Force activities financed by General Funds. General Funds are used to record financial transactions arising under congressional appropriations. The Air Force manages sixteen general fund accounts, consisting of seven funded by annual year appropriations and nine funded with multiple year appropriations.

1.C. Basis of Accounting

The Air Force records transactions on a budgetary basis of accounting. Budgetary accounting is accomplished through unique

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

The Statement has been prepared from the accounting records in conformity with generally accepted accounting principles

and the form and content for Federal entity financial statements specified by the Office of Management and Budget (OMB) in

OMB Bulletin 97-01, as amended, as related to the statement of budgetary resources.

Generally accepted accounting principles for Federal entities are the standards prescribed by the Federal Accounting

Standards Advisory Board, which is the official accounting standard-setting body for the Federal. Government.

As provided by OMB Bulletin 97-01, as amended, the Statement is prepared on a combined basis; therefore, intra-entity

transactions and balances have not been eliminated.

1.D. Revenues and Other Financing Sources

Financing sources for the General Fund are primarily provided through congressional appropriations received on both an

annual and a multi-year basis. When authorized, these appropriations are supplemented by revenues generated by sales of

goods or services through a reimbursable order process. The Air Force recognizes revenue because of costs incurred or services performed on behalf of other federal agencies and the public. Revenue is recognized when earned under the reimbursable

order process. The authority to obligate is recognized (i.e., obligations may be recorded) when orders from a government entity are accepted or orders accompanied by advances from a non-federal entity are received. Obligation authority must be

recorded before performance on an order begins.

The appropriations used to fund, execute and report on total financial activity of the General Fund includes operations, investment (procurement) and research, development, test and evaluation (RDT&E).

a. Operation accounts represent those funds used for the pay of operating forces. These funds also finance the functional and administrative support needed to operate and maintain Air Force installations.

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b. Investment (procurement) accounts are used for specific purposes that are approved by and reportable to Congress.

These accounts are used for the acquisition of technology, property, and infrastructures.

c. The Air Force conducts and contracts for RDT&E of advance weapon systems. The RDT&E programs support modernization of weapon systems through military research, exploratory development, and the development and testing of

prototypes and full-scale pre-production hardware.

1.E. Accounting for Intragovernmental Activities

Transactions between the Air Force and other entities within DoD or with another Federal agency are intragovernmental transactions. The Air Force cannot identify all intergovernmental transactions by customer, and as such, as permitted by OMB

Bulletin 97-01, the Statement is prepared on a combined basis without elimination of intragovernmental transactions.

1.F. Accounts Receivable

Spending Authority from Offsetting Collections and Obligation Balances, Net includes accounts and claims from other federal

entities and from the public. Claims against another Federal agency are to be resolved between the agencies.

1.G. Undelivered Orders

The Air Force records obligations for goods and services that have been ordered but not received.

1.H. Canceled Balances

All unliquidated balances associated with closed accounts were canceled in accordance with Public Law 101-510.

Note 2. Disclosures Related to the Statement of Budgetary Resources

As of September 30, 2001, the Air Force had undelivered orders totaling $32 billion. Undelivered orders include unexpended

obligations for both appropriated and reimbursable funds. Undelivered orders are included in Obligations Incurred on the

Statement.

The Statement does not include any amounts for which the United States Department of Treasury is willing to accept corrections to canceled appropriation amounts. Negative budgetary resources of $89 million (relating to offsetting receipts of

Accounts included on the Report on Budget Execution, or the Standard Form 133) are not included in the Statement.

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), are not included in Spending Authority from Offsetting Collections and

Adjustments line of the Statement.

The Schedule of General Fund Budgetary Resources by Major Budget Account, included as required supplementary information includes an amount in the Unobligated Balances – Not Available in the Research, Development, Test, & Evaluation

account that relates to the cancellation of reimbursable authority at fiscal year end.

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Note 3. Suspense and Budget Clearing Accounts

As of September 30, 2001, balances in the suspense and budget clearing accounts are as follows:

The Air Force has made a concerted effort to reduce balances in the suspense and budget clearing accounts, and to establish

an accurate and consistent use of these accounts.

On September 30 of each fiscal year, all of the uncleared suspense and budget clearing account balances are reduced to

zero by transferring the balances to proper appropriation accounts using a logical methodology, such as prorating the

amounts on a percentage basis derived by comparing the disbursements in the suspense and clearing account to total disbursements.

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Combining General Funds Statement of Budgetary Resources

United States Air Force

For the year ended September 30, 2001 ($ in Thousands)
United States Air Force FY 2001 Financial Statements

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Required Supplementary Information

Schedule of General Funds Budgetary Resources by Major Budget Account

United States Air Force

For the year ended September 30, 2001 ($ in Thousands)
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Consolidated Balance Sheet—Working Capital Fund

As of September 30 ($ in Thousands)

The accompanying notes are an integral part of the financial statements.
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Consolidated Statement of Net Cost—Working Capital Fund

For the years ended September 30 ($ in Thousands)

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

See notes 1 and 19.
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Consolidated Statement of Changes in Net Position—Working Capital Fund

For the years ended September 30 ($ in Thousands)

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

See notes 1 and 20.
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Combined Statement of Budgetary Resources—Working Capital Fund

For the years ended September 30 ($ in Thousands)

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

See notes 1 and 21.
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Combined Statement of Financing—Working Capital Fund

For the years ended September 30 ($ in Thousands)

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

See notes 1 and 22.
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Footnotes to the

Principal Statements

Note 1. Significant Accounting Policies

1.A. Basis of 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. 01-09, “Form and Content of

Agency Financial Statements” and to the extent possible federal generally accepted

accounting principles. The Air Force WCF’s financial statements are in addition to the

financial reports that are prepared by the United States Air Force pursuant to OMB directives to monitor and control the Air Force’s use of budgetary resources.

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

accounting principles (GAAP) and the OMB Bulletin No. 01-09 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’s major asset and liability categories are derived largely from nonfinancial feeder systems, such as inventory

systems and logistic systems. These systems were designed to support the requirements to

maintain accountability over assets and to report the status of federal appropriations

rather than to reflect 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. 01-09. The Air Force WCF continues to implement process and system

improvements to address the limitations of its financial and non-financial 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
United States Air Force FY 2001 Financial Statements

the standard differently. Financial statement elements impacted include financing payments under fixed price contracts, operating materials and supplies (OM&S), and disposal liabilities.

The accompanying financial statements account for all resources for which the Air Force WCF is responsible except that information relative to classified assets, programs, and operations have been excluded from the statement or otherwise aggregated

and reported in such a manner that it is no longer classified. Fiscal year (FY) 2001 represents the sixth year that the

Department will prepare and have audited DoD Agency-wide financial statements as required by the CFO Act and GMRA.

A more detailed explanation of these financial statement elements is discussed in the applicable footnote.

1.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. 

The 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. DoD established the revolving funds as a means to more effectively control the cost

of work performed. The DoD began operating under the revolving fund concept as early as July 1, 1951. 

1.C. Appropriations and Funds

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 (DCWF) 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, in some cases proprietary and statistical

accounts are used to develop the Report on Budget Execution, SF133 and Statement of Budgetary Resources for reporting

budgetary data. 

Supply Management

The Air Force Stock Funds were established within the DoD under 10 U.S.C. 2208, as described in 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 to be more economical and efficient. A stock fund operates as a revolving fund acquiring inventories with funds

received from prior sales to customers.

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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 supporting Air Force organizations, DMAG also supports other DoD components, government agencies, and foreign governments. The DMAG 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 flexibility in addressing both wartime and peacetime workload changes. The DMAG

achieves this flexibility by employing the unique strengths of organic (in-house) and contractor repair sources.

Transportation

The unique transportation responsibilities of Air Mobility Command (AMC) include the 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 Transportation Defense Business Operations Fund (DBOF) was established

during FY 1993 and disestablished in FY 1995 in accordance with the DWCF improvement plan. Only residual accounting of

unliquidated balances remains, with expected close-out during FY02.

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 DBOF. This transfer complied with Program

Budgeting Document (PBD) 433 in expanding the Information Services Business Area. Transfer procedures were set forth in

DFAS-Arlington memo dated 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 Field Site. In FY 1997, the CDAs went

on-line with IFAS and all financial reports, excluding the Audited Financial Statements (AFS), are prepared by DFAS-Cleveland

and forwarded to DFAS-Denver for inclusion with Air Force WCF statements. In FY 2002, DFAS-Denver will take over the

responsibility of all monthly CDAs’ financial reporting and the AFS.

United States Transportation Command (USTC)

For AFS purposes only, USTC is not reported within Air Force Working Capital Funds. The Office of the Under Secretary

Defense, Chief Financial Officer, directed in fiscal year 1999, the reporting of USTC with Other Defense Organizations

Working Capital Fund Consolidated statements submitted by DFAS-Indianapolis. The USTC remains part of the Air Force

Budget operations for all other financial reporting.

Air Force Working Capital Fund Component

The Air Force Component Activity’s purpose is to act as a balancing/adjusting column for Air Force WCF. The January 21,

1997 memorandum, “Policy and Procedures for Cash Management Working Capital Funds (DWCF),” established the

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“Component Level Adjustment” column. Additional DFAS-Arlington memorandums dated January 21, 1997, “Operating Policy

and Procedures for the Management of Defense Working Capital Funds (DWCF) Fund Balance with Treasury Management

and Contract Authority,” and January 28, 1997, “Entries to Establish Defense Working Capital (DWCF) Fund Balance with

Treasury at the Air Force subnumbered Account Level,” provided specific and detailed instructions/procedures to maintain

accountability for fund balances with Treasury. Undistributed disbursements, collections, and other amounts that cannot be

identified to a functional area within the respective WCF, shall be reported in this column.

Operations of the activities within the Air Force WCF are based on policies and procedures that include: 

(1) Funding Authority:

Prior to FY 1992, industrial fund activities were not issued funding documents. Activities now receive 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. 

(2) Minor Construction Funding:

Policy and procedures have been changed to fund minor construction projects that cost $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.

(3) Software Development Costs:

Policy and procedures have been changed to move the development costs of new software that meets capitalization requirements to the capital budget. Software will be amortized after release.

(4) Capital Budgeting:

Activity group budgets are segregated into operating and capital budgets. Any investment in equipment, software, minor construction, and other management improvements that meet capitalization requirements are funded through the capital budget

and the cost depreciated/amortized over the relevant life cycle.

(5) 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 the established thresholds for prior years will continue to be depreciated, if depreciation was being recorded prior to

the increase to the $100,000 threshold.

(6) Rates and Prices:

All Air Force activity groups within 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 normally will not change during the

year of execution, but occasionally do change based on certain world situations. If there is a need for a price change in Depot

Maintenance, the authority is requested from HQ Air Force Material Command. 

The FY 2001, 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

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the United States government, primarily those of the DoD. Work is generated by the acceptance of customer orders from

ordering activities

1.D. Basis of Accounting

The Air Force’s Working Capital Funds generally record transactions on an accrual accounting basis as is required by Federal

GAAP. However, some of the Air Force’s financial and non-financial 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

required actions to bring all of its financial and non-financial feeder systems and processes into compliance with all elements

of the 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/systems 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, collections and transactions, from non-financial 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 principal. During FY 1996, DFAS-DE, SAF/FMB,

and OSD/FM jointly agreed on the use of this principal by Depot Maintenance. This requires that overhead costs such as

depreciation and bad debt expenses are included in the cost of services sold. The effect of known intrafund transactions are

eliminated

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.

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 are not available for use in the operations of the entity. 

Material disclosures are provided at Note 10

1.E. Revenues and Other Financing Sources

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.

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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 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 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

Current revenue recognition for Organic DMAG is the Incremental Revenue Recognition (IRR) method. This is based on completed units times the sales rate rather than the percentage of completion method. Organic DMAG will use the percentage of

completion method when the Depot Maintenance Accounting and Production System (DMAPS) is implemented at Ogden Air

Logistics Center (ALC) during the first quarter of FY2002. DMAPS is scheduled to be implemented at the other two ALCs,

Oklahoma City and Warner Robins, by the end of FY 2003.

Revenue recognition for Contract DMAG is based on units produced times the Unit Sales Price (USP) and does not recognize

IRR at this time. Contract DMAG will use the percentage of completion method for recognizing revenue when the Contract

Maintenance Accounting and Production System (CMAPS) is implemented in mid FY2003.

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. ISAG uses completed contract and in some instances the

percentage of completion method.

1.F. Recognition of Expenses

For financial reporting purposes, the DoD policy requires the recognition of operating expenses in the period incurred.

However, because the Air Force’s financial and non-financial feeder systems were not designed to collect and record financial

information on the full accrual accounting basis, accrual adjustments are made for major items such as payroll expenses, and

accounts payable. Expenditures for capital and other long-term 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 net position.

Certain expenses, such as annual and military leave earned but not taken, are financed in the period in which payment is

made.

1.G. 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

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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 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, 2000, and 2001, seller entities within the Department provided summary seller-side balances for revenue, accounts receivable, and unearned revenue to the buyer-side internal DoD

accounting offices. In most cases, the buyer-side records have been adjusted to recognize unrecorded costs and accounts

payable. Intra-DoD intragovernmental balances were then eliminated.

The Department of the Treasury, Financial Management Service (FMS) is responsible for eliminating transactions between the

Department and other federal agencies. In September 2000, the Department of the Treasury, FMS issued the “Federal

Intragovernmental Transactions Accounting Policies and Procedures Guide.” The Department was not able to fully implement

the policies and procedures in this guide related to reconciling intragovernmental assets, liabilities, revenues, and expenses for

non-fiduciary transactions. However, the Air Force was able to implement the policies and procedures contained in the

“Intragovernmental Fiduciary Transactions Accounting Guide,” as updated by the “Federal Intragovernmental Transactions

Accounting Policies and Procedures Guide,” for reconciling intragovernmental transactions pertaining to investments in federal

securities, borrowings from the United States (U.S.) Treasury and the Federal Financing Bank, Federal Employees’

Compensation Act transactions with the Department of Labor (DoL), and benefit program transactions with the OPM.

1.H. Transactions with Foreign Governments and International Organizations

Each year, the DoD Components sell defense articles and services to foreign governments and international organizations, primarily under the provisions of the “Arms Export Control Act of 1976.” Under the provisions of the Act, the Department has

authority to sell defense articles and services to foreign countries and international organizations, generally at no profit or loss

to the U.S. Government. Customers may be required to make payments in advance.

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1.I. Funds with the U.S. Treasury

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, electronic funds transfers,

interagency transfers and deposits. In addition, the DFAS centers and the USACE Finance Center submit reports to Treasury, by

appropriation, on interagency transfers, collections received and disbursements issued. The Department of the Treasury then

records this information to the applicable 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 may result and are subsequently reconciled.

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, allocations of FBWT were

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. 

Material Disclosures are provided at Note 3.

1.J. Foreign Currency

Not applicable.

1.K. 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, writeoffs, and collection policy.

Material disclosures are provided at Note 5.

1.L. Loans Receivable

Not Applicable.

1.M. Inventories and Related Property

Inventory data is maintained in logistics systems designed for material management purposes. Inventories are reported at

approximate historical cost based on Latest Acquisition Cost (LAC) adjusted for holding gains and losses. Approximately 60%

of the General Support Division is managed in the Standard Base Supply System using a Moving Average Cost for the value of

the inventory. This change was effective October 2000. The remaining 40% of the GSD inventory is managed in the Stock

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Control and Distribution System using the LAC method for valuation. Within the Materiel Support Division, inventory is valued

at either LAC or carcass. Carcass value is calculated within the pricing system.

Only the Supply Management Activity Group maintains inventories. Gains and losses resulting from valuation changes for

inventory items are recognized and reported in the Statement of Net Cost and included in the calculation of Cost of Goods

Sold. To calculate the allowances for gain or loss on inventories, an inventory worksheet is prepared monthly for each fund

code within the Supply Management Activity Group. 

The related property portion of the amount reported on the Inventory and Related Property line reflects OM&S. The OM&S are

valued at standard purchase price. Ammunition and munitions that are not held for sale are treated as OM & S. For the most

part, the Department is using the consumption method of accounting for OM&S, as defined in the SFFAS No. 3. “Accounting

for Inventory and Related Property,” as material which has not been issued to the end user. Once OM&S is issued, the material

is expensed.

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

1.N. Investments in U.S. Treasury Securities

Not Applicable.

1.O. General Property, Plant and Equipment

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 are capitalized. All General

PP&E , other than land, is depreciated using the straight-line method. 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 are reported

on WCF financial statements.

For entities operating as business type activities (WCFs), all PP&E used in the performance of their mission is categorized as

General PP&E, whether or not it meets the definition of any other PP&E categories. National Defense PP&E, Heritage Assets

and Stewardship Land owned/maintained on a WCF installation are reported in the Supplemental Stewardship Report of the

applicable military department. 

Material disclosures are provided at Note 10 

1.P. Advances 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. 

1.Q. Leases

Not Applicable.

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1.R. 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, for real property, 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 Department has completed a review of all applicable federal accounting standards; applicable public laws on contract financing; Federal Acquisition Regulation Parts 32, 49,

and 52; and the OMB guidance in 5 Code of Federal Regulations Part 1315, “Prompt Payments.” DoD has concluded that

SFFAS No. 1 does not fully or adequately address the subject of progress payment accounting and is considering what further

action is appropriate.

1.S. 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 involves 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 a past event or

exchange transaction has occurred, a future loss is probable 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, 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 contractual disputes.

1.T. Accrued Leave

Civilian annual leave and military leave that have been accrued and not used as of the balance sheet date are reported as

liabilities. The liability reported at the end of the fiscal year reflects the current pay rates

1.U. Net Position

Net Position consists of unexpended appropriations and cumulative results 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 not been incurred.

Cumulative results of operations represents the difference, since inception of an activity between expenses and losses and

financing sources including appropriations, revenue, and gains. Beginning with FY1998, this included the cumulative amount

of donations and transfers of assets in and out without reimbursement.

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1.V. 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. The DoD capital assets

overseas are purchased with appropriated funds; however, title to land and improvements are 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 Department. 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.

1.W. Comparative Data

Beginning in FY 2001, the Air Force will present the current and previous years’ financial data for comparative purposes. This

data will be presented in the financial statements, as well as in the notes to the principal statements. Material variances of 10%

or more on the Balance Sheet and the Statement of Net Cost will be discussed in the applicable footnote.

1.X. Unexpended Obligations

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.

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Note 2. Assets

Composition and variances of assets are explained in detail in the following subsequent notes:

Fund Balance with Treasury: Note 3

Accounts Receivable: Note 5

Other Assets: Note 6

Inventory and Related Property: Note 9

General Property, Plant and Equipment: Note 10

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Note 3. Fund Balance with Treasury

Explanation of Reconciliation Amount

The reconciling amount above represents $361,934,413 for United States Transportation Command (USTC) which is reported

by Treasury as part of Air Force Working Capital Fund and reported as Other Defense Organizations for AFS. See footnote

1C(2) in the USTC footnotes for further information concerning this matter. Additionally, a reconciling amount of $303 for

SMAG was corrected during FY 2002.

Other Information

The overall FBWT for AFWCF increased in FY01 in the amount of $342M. The AFWCF is required to maintain an operating

cash balance of at least $200M. Prior to September, the overall FBWT was approaching a critical level, indicating the need for

the advance billing. In Sep 2001 SAF and AFMC requested an advance billing to DMAG customers in the amount of $500M.

The full effect of these advance billings is not realized because in FY01 the AFWCF exceeded planned net operating losses in

the amount of $137M. 

The SMAG business area has a negative fund balance of $98M, which has shown an improvement over the prior year negative fund balance of $261M. When cash was transferred from the Department of Defense WCF to the Air Force level in 1996,

insufficient levels of cash were received to cover the corresponding liabilities. Disconnects in pricing in prior years also contributed to the negative balance. Consumable Item Transfers and reductions in overhead expenses are allowing for the

increase in cash. In addition, SMAG has continued accelerated billing to maintain the cash balance. Billings are processed

twice a month for most locations, allowing for timely cash inflows. 

Differences exist between the FBWT and activity (field) reported disbursements and collections. These differences are accounted

for in the undistributed collections and disbursements general ledger accounts, and are mostly supported. Refer to the supplementary information in Note 24A for a detailed explanation of undistributed accounts.

Note 4. Investments

Not Applicable

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United States Air Force FY 2001 Financial Statements

Note 5. Accounts Receivable

Allowance Method

The Supply Management Activity Group uses an allowance method for non-government receivables, which is based on historical data. Depot Maintenance and Information Services generally use the direct write-off method for uncollectible accounts. 

Other information

The Air Force 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 DoD intends to develop long-term systems improvements that will include sufficient up-front 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 total undistributed collections applied to accounts receivable for the AFWCF was ($135 billion), and is broken out by

business area in the table below. See supplementary information in Note 24A for additional discussion of undistributed.

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The total A/R decrease of $236 million can be attributed to more aggressive collection of outstanding receivables and validation and correction of accounts receivable balances. In SMAG extensive efforts have been devoted to validating and resolving

large accounts receivable balances. While significant progress was achieved, there remains approximately $70 million that is

questionable and still needs to be researched. The DMAG increase of $1 million in nonfederal accounts receivable from FY

2000 to FY 2001 is due to an erroneous posting in September 2001 of federal accounts receivables to the nonfederal

account. This created an overstatement of nonfederal accounts receivable and an understatement of federal accounts receivable by this amount. The remaining decrease in DMAG intragovernmental accounts receivable is due to the discovery of a

problem with the posting of DMAG organic incremental revenue recognition. A team from AFMC, SAF, and DFAS discovered

this problem in midyear FY 2001. The posting ignored the fact that work orders associated with the revenue recognition were

already included in progress billings. Thus, both accounts receivable and progress billings were overstated. The team recommended the liquidation of progress billings before updating unbilled accounts receivable.

Note 6. Other Assets

The Air Force reports 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

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contractor for its costs and the contractor is liable to repay the Air Force for the full amount of the outstanding contract payments. The Department has completed its review of all applicable federal accounting standards; applicable public laws on

contract financing; Federal Acquisition Regulation Parts 32, 48, and 52; and the OMB guidance in 5 CFR Part 1315, “Prompt

Payment.” The Department has concluded that the SFFAS No. 1, Accounting for Selected Assets and Liabilities does not fully or

adequately address the subject of progress payment accounting and is considering what further action is appropriate.

Intragovernmental Other Assets

In Materiel Support Division the FY01 buyer-side advances to others were adjusted upward $56 million to agree with sellerside advances from others on the books of other DoD reporting entities. Returns pending credit were also adjusted to agree

with seller-side data, with an ending total of $998 thousand. The total intergovernmental other assets, entirely from the

SMAG/MSD business area, is $57 million. The overall decrease in FY01 is attributed to less adjustments needed for elimination entries.

Nonfederal Other Assets

Total Nonfederal Other Assets represents advances to contractors totaling $153 million and other assets totaling $315 million.

SMAG has $108 million in Advances with the Public. DMAG has $45 million in advances to contractors, a decrease of $87

million from FY2000. This is attributed directly to the closures of San Antonio Air Logistics Center and Sacramento Air Logistics

Center in FY2001. 

The remaining other assets in the amount of $315 million belongs to the SMAG business area. The majority is reported by

four 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 the Security Assistance Management Information System

(SAMIS). 

The Other Nonfederal Assets account consists of the following categories and dollar amounts, in thousands:

Other assets accounts receivable—deliveries suspense . . . . . . . . . . . . . . .$40,260

Air Force assets - other DoD foreign military sales (depot) . . . . . . . . . . . . . . . .(138)

Uncollected overhead (Kelly) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15,677

Other assets returns to vendors pending credit . . . . . . . . . . . . . . . . . . . . .259,332

Other assets miscellaneous other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$315,134

The above amount for other assets accounts receivable—deliveries suspense has been overstated by values from 1993 and

prior years. Air Force and DFAS are aware of a material misstatement of this balance that resulted from system problems

between FIABS and SAMIS. AFMC and DFAS are currently working to resolve this problem. An adjustment of $376 million was

made to SMAG other assets accounts receivable—deliveries expense shown above to correct the misstatement in FY01.

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Note 7. Cash and Other Monetary Assets

At the end of FY01, the AFWCF had no cash or monetary assets on hand.

Note 8. Direct Loan and/or Loan Guarantee Programs

Not Applicable

Note 9. Inventory and Related Property

Note 9.A. Inventory, Net

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United States Air Force FY 2001 Financial Statements

Definitions: Inventory, Gross Value represents the standard value used for inventory transaction in the financial system.

Revaluation Allowance is the total different between standard inventory values and historical cost or net realizable value.

Inventory, Net is approximate historical cost or net realizable value

Other Information

Inventory values reported in the financial statements are derived from logistics systems designed for materiel management purposes. The General Support Division systems value inventory at moving average, however, the Material Support Division systems do not maintain the historical cost data necessary to comply with the SFFAS No. 3, “Accounting for Inventory and Related

Property. All the inventory systems provide management with accountability information and visibility over inventory items.

These logistics systems support the categorization of inventory as; held for sale, held in reserve for future sale, or excess, obsolete, and unserviceable, yet, the business practices in the supply community do not use these categories. Additionally, past

audit results have led to uncertainties about the completeness and existence of the inventory quantities used to derive the balances reported in the financial statements.

Approximately 60% of the General Support Division is managed in the Standard Base Supply System using a Moving Average

Cost for the value of the inventory. This change was effective October FY01. The remaining 40% of the GSD inventory is managed in the Stock Control and Distribution System using the LAC method for valuation. 

Excess, Obsolete and Unserviceable Inventory are re-valued from their standard or moving average price to their net realizable value (NRV). Based upon current policies and procedures, the NRV is 1.9 percent of the price. Therefore the reported

value of Excess, Obsolete and Unserviceable inventory value was reduced approximately $4.3 billion.

The Depot Maintenance Activity Group has approximately $1.1 million recorded in Work in Process in note 9.A. because the

U.S. Government Standard General Ledger (USSGL) does not provide a Work in Process account under Operating Materials

and Supplies. This amount recorded in the Work in Process account represents labor, applied overhead, and supplies used in

the delivery of maintenance services. The decrease in DMAG Work in Process (WIP) from FY2000 to FY2001 is directly attributable to the closures of the San Antonio and Sacramento ALCs and contracting out more work. 

In the SMAG Materiel Support Division, the inventory reconciliation program in the Standard Materiel Accounting System was

changed for July processing to correctly reflect the balances in the supply system. This resulted in a decrease in the value of

the inventory amounting to approximately $6.3 billion.

Note 9.B. Operating Materials and Supplies, Net

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The Operating Materials & Supplies (OM&S) data reported on the financial statements are derived from logistics systems

designed for material management purposes, i.e. accountability and visibility. The reported balances from these systems are

not recorded at historical cost, in conformance with the valuation requirements in the Statement of Federal Financial

Accounting Standard (SFFAS) No. 3, “Accounting for Inventory and Related Property.” Instead the Air Force uses standard price

to value its operating materials and supplies without computing unrealized holding gains or losses. Furthermore, past audit

results have led to uncertainties pertaining to the completeness and existence of the OM&S quantities used to derive the balances reported in the financial statements.

For the most part, DMAG is using the consumption method of accounting for OM&S, since OM&S is defined in the SFFAS No.

3 as material which has not yet been issued to the end user. Once issued, the material is expensed. As stated above, current

financial and logistics systems cannot fully support the consumption method. For FY 2001, significant portions of the Air

Force’s OM&S were reported under the purchase method - expensed when purchased - either because the systems could not

support the consumption method of accounting or because management believes the items to be in the hands of the end user. 

Note 10. General PP&E, Net

In Fiscal Year 2001, 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 by DFAS. However, the Depot

Maintenance ALCs and Aerospace Maintenance and Regeneration Center (AMARC) use the Automated Civil Engineer System

(ACES) to capture the costs of real property based on preponderance of use for each building. The accounting entries are

recorded directly into the field level trial balances. With the implementation of the Defense Industrial Fund Management

System (DIFMS), ACES will be the source for all real property accounting entries. The Ogden ALC implements DIFMS the first

quarter of FY2001, and the other ALCs are scheduled to implement DIFMS by the end of FY 2003.

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.

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United States Air Force FY 2001 Financial Statements

The value of Air Force General PP&E real property in the possession of contractors is included in the value 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 identified uncertainties as to whether all General PP&E assets in the possession or control (existence) of

the Air Force are properly and accurately recorded in the system (completeness).

Note 11. Liabilities Not Covered by Budgetary Resources

Refer to Notes 12 and 15 for further information regarding Accounts Payable and Other Liabilities covered by budgetary

resources.

The $242 million in Military Retirement Benefits and Other Employment-Related Actuarial Liabilities represents AFWCF FY2001

Workman’s Compensation. Amounts are broken out by business area as follows (in thousands):

SMAG $ 19,284

DMAG $211,867

ISAG $10,986

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Note 12. Accounts Payable

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 Air

Force 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

cannot be accomplished with the existing or foreseeable resources.

The DoD summary level seller accounts receivables were compared to each business area’s accounts payable. Adjustments

were posted to DMAG’s accounts payable based on the comparison with the accounts receivable of the DoD Components

providing goods and services to each business area. Positive differences were treated as unrecognized accounts payable and

accounts payable were adjusted upwards in the amount of $193 million for DMAG, $2,734 million for SMAG, and $3,360

million for ISAG.

Three DMAG entities had abnormal Accounts Payable balances on their trial balances, so accruals were done for Warner

Robins Contract, Warner Robins Organic, and Oklahoma City Contract to bring their abnormal balances up to $0.00, as

illustrated below. In the following presentation of values, parenthesis indicate credit balances. The last column indicates the

amount of Accrued Accounts Payable offsetting the abnormal balances. In the case of the abnormal undistributed for Warner

Robins Organic, the entire amount was applied against the Federal Accounts Payable rather than pro rata to the Non-Federal

Accounts Payable as this would have caused an increase in an existing abnormal balance.

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United States Air Force FY 2001 Financial Statements

The amount of undistributed disbursements that were applied to accounts payable for SMAG was $376 million, DMAG was

$182,686 million ISAG was $22,415 million and AFTrans was $951 million. The positive amounts decreased Accounts

Payable and the negative amounts increased Accounts Payable.

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172

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N

otes to Principal Statement
Note 13. Debt

Not applicable

Note 14. Environmental Liabilities and Environmental Disposal Liabilities

Not applicable

Note 15.A. Other Liabilities

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United States Air Force FY 2001 Financial Statements

Intragovernmental

Advances from Others in the amount of $347 million are from the DMAG business area, and represent a portion of the

$500M advanced billings in September (refer to Note 3). The advance billing resulted in a large increase in advances over the

prior year.

Other liabilities consist of $6 million in accrued payroll and employer contributions payable. These liabilities are classified as

intergovernmental as they are provided by the Department of Labor and elimination entries are necessary. DMAG’s portion is

$5 million , ISAG is $31 thousand, and SMAG is $487 thousand. 

Nonfederal

Accrued Funded Payroll and Benefits of $150 million represents leave and benefits owed to employees. The ISAG portion is

$11 million, the DMAG portion is $127 million, the SMAG portion is $9 million, and the AFTRANS portion is $1 million. The

amount in AFTRANS is a residual balance that has carried forward from prior years, and will be researched and eliminated

with the final closing of the activity projected for FY02. These benefits are classified as funded, as they are included in computing the rates that the AFWCF activities charge their customers. 

Advances from Others in the amount of $1 million are from the DMAG business area. This amount represents a portion of the

advance billing referenced above and Note 3.

Nonfederal other liabilities total $3 billion. This amount represents DMAG progress billings, $834 million and work in

progress accrued expenses, $1,924 million for a total DMAG amount of $2,759 million. The ISAG portion of $116 million

represents contract services and various miscellaneous items.

The SMAG portion of $84 million represents contract holdbacks in the amount of $274 thousand and other liabilities amounting to $83 million, which is money that various countries have deposited with the SMAG as a buy in on future purchases they

plan to make under the foreign military sales program. These funds are considered a liability as the funds are returned if the

countries do not make future purchases. Revenue is not recognized on these transactions until the purchase takes place.

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174

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otes to Principal Statement
Note 16. Commitments and Contingencies

Not Applicable.

Note 17. Military Retirement Benefits and Other Employment Related Actuarial

Liabilities

The liability for future workers’ compensation (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. Consistent with past practice, these projected annual benefit payments have been

discounted to present value using the OMB economic assumptions for 10-year Treasury notes and bonds. Interest rate

assumptions utilized for discounting were as follows:

2001

5.21% in year 1

5.21% in year 2

And thereafter

The compensation COLAs and CPIMs used in the projections for various charge back years (CBY) were as follows:

CBY COLA CPIM

2001 3.33% 4.44%

2002 3.00% 4.15%

2003 2.56% 4.09%

2004 2.50% 4.09%

2005+ 2.50% 4.09%

The model’s resulting projections were analyzed to insure that the estimates were reliable. The analysis was based on two tests:

(1) a comparison of the percentage change in the liability amount by agency to the percentage change in actual payments,

and (2) a comparison of the ratio of the estimated liability to the actual payment of the beginning year calculated for the current projection to the liability-payment ration calculated for the prior projection.

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175
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Note 18. Unexpended Appropriations

The $63,971 thousand was erroneously reported as Unexpended Appropriations in FY 2000 and has been corrected in FY

2001.

Note 19.A General Disclosures Related to the Statement of Net Cost

The amounts presented in the Statement of Net Cost are based on obligations and disbursements and therefore may not in all

cases report actual accrued costs. The Air Force generally records transactions on a cash basis and not an accrual basis as is

required by generally accepted accounting principles. Therefore, the Air Force’s systems do not capture all actual costs. As

such, information presented in the statement of Net Cost is based on budgetary obligations, disbursements, and collection

transactions, as well as nonfinancial feeder systems; and is adjusted to known accruals for major items such as payroll expenses, accounts payable, environmental liabilities, etc. and known imputed expenses.

Note 19.B. Imputed Expenses

Note 19.C. Intragovernmental Revenue and Expense

The majority of DoD accounting systems do not capture trading partner data at the transaction level in a manner that facilitates trading partner aggregations. Therefore, most DoD Agencies were unable to reconcile intragovernmental revenue balances with their 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 after-the -fact reconciliations.

The Air Force’s operating expenses were adjusted based on a comparison between the Air Force’s Accounts Payable and the

DoD summary level seller accounts receivables. An adjustment was posted to Accounts Payable and Operating Expenses to

reflect unrecognized Accounts Payable and Operating Expenses. The Operating Expenses of the Air Force were adjusted

upwards in the amount of $1,368,948 thousand.

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176

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Note 20. Disclosures Related to the Statement of Changes in Net Position

Other Information (in thousands)

Adjustments for FMS Receivables: These adjustments were computed by DFAS-DE and coordinated with HQ AFMC/FM.

Attempts to reconcile this account for the period FY1993-1997 were not successful so the prior period adjustment established

a baseline for the FY2001. pending systems changes in FY2002.

Adjustments for Purchases at Standard Price: An adjustment was done for MSD to correct Purchases at Standard Price. A processing error was identified for Purchases at Standard Price. 

Adjustments for LAC/MAC Conversions: Effective October 2000 the inventory valuation method was changed for all General

Support Division (GSD) inventory supported by the Standard Base Supply System (SBSS) from latest acquisition cost (LAC) to

moving average cost (MAC) (60%). The GSD inventory supported by the Stock Control and Distribution System (D035K)

remained at LAC (40%). This change drove a change to the financial statements because the inventory allowance technique

only applies to inventory valued at LAC. The inventory allowance as of October 1, 2000 applied to the entire GSD inventory

as of that date. The journal voucher for the amount of the inventory allowance that applied to the SBSS inventory was

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United States Air Force FY 2001 Financial Statements

processed to reduce the inventory allowance and record the prior period adjustment. This supported the need to provide

financial statements that fairly represented the net value of the inventory.

Note 21.A. Disclosures Related to the Statement of Budgetary Resources

The Department has identified the Government Performance and Results Act (GPRA) performance measures based on missions

and outputs. The Department, however, is unable to accumulate costs for major programs based on those performance measures, because its financial processes and systems were not designed to collect and report this type of cost information. Until

the process and systems are upgraded, the Department will break out programs by its nine major appropriation groupings.

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.

Intraentity transactions have not been eliminated because the statements are present as combined and combining. 

Budget Authority:

Depot Maintenance received an appropriation in the amount of $8,375 thousand through a Treasury Appropriation Warrant.

Abnormal Balance:

Depot Maintenance has an abnormal unobligated balance - beginning of period on the Combining Statement of Budgetary

Resources. This is due to an overstatement of obligations created on the Contract side of DMAG by a duplication of reporting

material inventories at contractors’ facilities. These same materials are reported under two different General Ledger Accounts,

once as an estimated amount of material usage, and once as the actual amount of material usage. 

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otes to Principal Statement
Note 21.B. Disclosures Related to Problem Disbursements, In-transit

Disbursements and Suspense/Budget Clearing Accounts

The Air Force has $627 million problem disbursements and in-transit disbursements that represent disbursements of Air Force

funds that have been reported by a disbursing station to the Department of the Treasury but have not yet been precisely

matched against the specific source obligation giving rise to the disbursements. For the most part, these payments have been

made using available funds and based on valid receiving reports for goods and services delivered under valid contracts. The

problem disbursements and in-transit disbursements arise when the various contracting, disbursing, and accounting systems fail

to match the data necessary to properly account for the disbursement transactions in all applicable accounting systems.

Defense Finance and Accounting Service has efforts underway to improve the systems and to resolve all previous problem disbursements and to process all in-transit disbursements. There was no significant change to Problem Disbursements since

September 2000. In-transit disbursements have increased $61 million since September 2000. In-transit disbursements

increased primarily due to realignment of workload between the Field Sites to better serve our customers. This has caused

delays in the processing of transactions as the transactions were routed to the incorrect accounting station and then had to be

transferred to the correct accounting station. A secondary cause was the implementation of Departmental Cash Management

System For and By Others (DFB) system. Implementation started in July 1999 and completed in July 2001. We experienced a

four-month learning curve at each Field Site with this new system that also delayed the processing of by-others transactions.

We anticipate significant benefits from both of these initiates in fiscal year 2002. Previous year’s reports have shown only aged

in-transit disbursements. This report includes all in-transit disbursements for the two years shown.

Note 22. Disclosures Related to the Statement of Financing

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. On the Statement of Financing, Transfers-In, Costs

Capitalized on the Balance Sheet and Collections that Decrease Credit Program Receivables or Increase Credit Program

Liabilities were adjusted in order to align the amount of net cost on the Statement of Financing with the amount reported on

the Statement of Net Cost. Detail of adjustments by line follow.

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United States Air Force FY 2001 Financial Statements

Note: credits (indicated by parenthesis) represent increases. Intraentity transactions have not been eliminated because the

statements are presented as combined and combining.

Note 23. Disclosures Related to the Statement of Custodial Activity

Not Applicable.

Note 24. Other Disclosures 

Undistributed Collections and Disbursements

Timing differences often occur between when cash transactions are recorded at Treasury and when the field records the transactions in the general ledger. The differences are accounted for in the undistributed collection and disbursements accounts,

which offset accounts receivable and accounts payable in the accounting records. Undistributed amounts are reconciled

monthly to ensure that they are fully supported. With the exception of the Material Support Division, all of the undistributed

transactions are 100% supported. 

Various categories make up the total undistributed. Intransit items and uncleared interfund represent the majority of the undistributed. The intransit category consists of transactions that are paid/collected by one entity on behalf of another entity. The

transaction is recorded at Treasury in the month of occurrence, however it generally takes 30-60 days to be distributed to the

accountable entity. Interfund transactions are intra-government no check drawn transactions that are generated by the billing

activity at end of month. They are then transmitted to a central location to be distributed to the accountable entity. Since this is

an end of month process, the accountable entity does not receive the data until the next month. Recons and suspense are also

a category of undistributed. Recons are created when the cumulative disbursements and collections reported by the field entities on monthly reports do not equal cumulative amounts generated from current month transactions. When differences occur

between the fields weekly and monthly reports, the amount is suspensed until out of balances can be researched and corrected in subsequent months. The suspense category may also contain amounts that are not supported by voucher data, but have

been reported to Treasury. Once again, this is researched and corrected. Other miscellaneous posting errors can contribute to

undistributed balances, which are identified monthly and corrected at the appropriate location.

The Material Support Division currently has an unsupported balance of $28M. In FY01, the unsupported balance has been

stabilized for the most part. The accountability for this appropriation is shared between Denver and Columbus. Procedures

have been developed to separate the actual FBWT between the two sites. The Denver site has been able to support its portion

of the undistributed. Procedures are still being developed with Columbus to support their portion. Plans are in place for

Denver to take over accountability for the entire appropriation in FY03. This will bring all of the supporting information into

Denver systems and will allow complete reconciliation. ISAG currently has an unsupported balance of $16M, which is also stabilized. Research is being conducted with the Cleveland DFAS center to resolve the unsupported amounts. Overall, the unsupported undistributed represents only 7 percent of the total undistributed.

Performance measurements are in place to ensure timely processing of AFWCF transactions. In addition, new systems were

implemented in FY01 that should impact the time frames involved in processing transactions in future years, which should

decrease the total undistributed.

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181

Working Capital Fund

Consolidating and

Combining Statements
United States Air Force FY 2001 Financial Statements

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Consolidating Balance Sheet—Working Capital Fund

For the years ended September 30 ($ in Thousands)

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

See notes 1 and 21.
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United States Air Force FY 2001 Financial Statements

183

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

See notes 1 and 21.
United States Air Force FY 2001 Financial Statements

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Consolidating Statement of Net Cost—Working Capital Fund

For the years ended September 30 ($ in Thousands)

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

See notes 1 and 19.
United States Air Force FY 2001 Financial Statements

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Consolidating Statement of Changes in Net Position—Working Capital Fund

For the years ended September 30 ($ in Thousands)

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

See notes 1 and 20.
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The accompanying notes are an integral part of the financial statements.

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

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INSPECTOR GENERAL

DEPARTMENT OF DEFENSE

400 ARMY NAVY DRIVE

ARLINGTON, VIRGINIA 22202-4704

February 21, 2001

MEMORANDUM FOR UNDER SECRETARY OF DEFENSE (COMPTROLLER)

SUBJECT: Endorsement of the Disclaimer of Opinion on the FYs 2001 and 2000 Air Force Working Capital Fund Financial

Statements (Project No. D2001 FD-0176)

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 FYs

2001 and 2000 Air Force Working Capital Fund Financial Statements.1 Summarized as follows is the AFAA disclaimer of

opinion on the FYs 2001 and 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, dated February 8, 2002.

For FY 2001, Office of Management and Budget policy required that the financial statements, except for the

Statement of Budgetary Resources, be prepared on a consolidated basis. Consolidation means that intra-agency transactions

are to be eliminated. The Statement of Budgetary Resources was required to be prepared on a combined basis. In a combined

statement, component figures are added without eliminating intra-agency transactions. In addition, Office of Management and

Budget policy required that the current fiscal year financial statements be presented on a comparative basis with financial

statements of the previous fiscal year. Accordingly the AFAA report covers FYs 2001 and 2000.

Disclaimer of Opinion. The AFAA disclaimer of opinion on the FYs 2001 and 2000 Air Force Working Capital Fund

Financial Statements, dated February 8, 2002, states that AFAA was unable to express an opinion on the financial statements.

We concur with the AFAA disclaimer of opinion. The following deficiencies identified by the Department of the Air Force in the

notes to the financial statements preclude an audit opinion.

◗ The Air Force did not implement the U.S. Government Standard General Ledger at the transaction level.

◗ The Air Force is unable to implement fully all elements of generally accepted accounting principles for Federal

entities and the Office of Management and Budget Bulletin 01-09, “Form and Content of Agency Financial

Statements,” due to limitations in the financial management processes and systems, including nonfinancial feeder

systems and processes.

◗ The Air Force does not recognize an allowance for estimated uncollectible amounts from another Federal agency.

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1 On January 25, 2002, the General Accounting Office issued a new Government Auditing Standard on organizational independence. The

new standard is to be applied on a prospective basis and does not affect the audit work that was ongoing for the FY 2001 financial statements. We will apply the new standard for future audit work and will not delegate the financial statement audit work
United States Air Force FY 2001 Financial Statements

Internal Controls. The AFAA did not express an opinion on internal controls but concluded that the internal control

structure 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.”

Compliance With Laws and Regulations. The AFAA did not express an opinion on compliance with laws and regulations that could have a direct and material effect on the financial statements, but identified the following instances of noncompliance. For FY 2001, the financial management systems that support the Air Force Working Capital Fund did not substantially

comply with Federal financial management system requirements to (1) maintain adequate subsidiary records for audit trails in

Air Force and Defense Finance and Accounting Service financial management systems, (2) implement accounting systems with

transaction-driven general ledgers, and (3) provide adequate application controls to critical Air Force feeder systems. The

financial management systems that supported the Air Force Working Capital Fund did not substantially comply with Federal

accounting standards. The Air Force Working Capital Fund accounting systems did not fully implement the U.S. Government

Standard General Ledger at the transaction level for budgetary accounts. Details on the adequacy of internal controls and

compliance with laws and regulations are discussed in the AFAA report.

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

the independent audit work that AFAA conducted, we reviewed the audit approach, planning, and summary working papers

supporting the AFAA report. We found no indication that we could not rely on the AFAA disclaimer of opinion or its related

evaluation of internal controls and compliance with laws and regulations.

Thomas F. Gimble

Acting

Deputy Assistant Inspector General

for Auditing

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DEPARTMENT OF THE AIR FORCE

WASHINGTON DC 20330-1000

8 February 2002

To the Secretary of the Air Force

Chief of Staff, USAF

We were engaged to audit the Air Force Working Capital Fund financial statements for the fiscal years ended 30 September

2000 and 2001.1 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 and Air Force management. This report presents our

independent opinion on the financial statements, evaluation 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 years ended 30 September 2000 and 2001. 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 Defense Finance and Accounting Service (DFAS) to correct previously

reported material deficiencies that affect the reliability of the Air Force Working Capital Fund Fiscal Years (FY) 2000 and 2001

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.

◗ 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.

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OFFICE OF THE SECRETARY

1 Management presented consolidated comparative Fiscal Years 2000 and 2001 financial statements as of 30 September 2001.

Consequently, in accordance with Government Auditing Standards, our review covered the periods presented and we expressed a disclaimer

on the financial statements taken as a whole.
United States Air Force FY 2001 Financial Statements

◗ The Air Force Working Capital Fund Property, Plant, and Equipment valuation continued to be unverifiable. 

◗ The Air Force Working Capital Fund general ledger was inconsistent with the U.S. Government Standard General Ledger.

MANAGEMENT’S DISCUSSION AND ANALYSIS (OVERVIEW)

The information presented in the Overview Section accompanying the Air Force Working Capital Fund financial statements,

though not a required part of the principal financial statements, is supplementary information required by OMB Bulletin No.

01-09, Form and Content of Agency Financial Statements. We express no opinion on the Overview information because we

did not apply all auditing procedures prescribed by professional standards since the information reported derives from the

same data source as the financial statements and, as such, may not be reliable.

REQUIRED SUPPLEMENTARY INFORMATION

The Air Force and DFAS did not present deferred maintenance as Required Supplementary Information. The Financial

Accounting Standards Advisory Board determined deferred maintenance should supplement, though not be part of, the principle financial statements.

MANAGEMENT ACTIONS

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, Air Force and DFAS personnel are redesigning current supply management logistics and

accounting systems to correct inventory financial reporting deficiencies. Specifically, the Air Force established a program

management office to evaluate and direct changes in business practices and inventory systems to comply with generally

accepted accounting principles for reparable inventory assets. For example, the Program Management Office directed system changes for valuing inventory based on historical cost. The Air Force and DFAS anticipate completing these efforts during FY 2003.

◗ In the depot maintenance area, the Air Force continues efforts to implement depot maintenance system corrections that will

provide audit trails and comply with federal financial accounting requirements. When implemented, the depot maintenance

systems should (a) provide an automated transaction-driven general ledger that complies with the U.S. Government

Standard General Ledger, (b) perform budgetary accounting, (c) maintain subsidiary support for account balances, (d) recognize revenue using the percentage-of-completion methodology, and (e) properly capture depot maintenance costs. The

Air Force plans to implement these changes during FY 2003.

◗ The Air Force and DFAS have initiatives underway to implement the U.S. Government Standard General Ledger in the Air

Force Working Capital Fund accounting systems including the Consolidated Reporting System II.2 The estimated completion

date for these initiatives is FY 2003. 

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

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2 The Consolidated Reporting System II will consolidate the trial balances from various Defense Working Capital Fund departmental financial reporting systems into one consolidated departmental trial balance accounting system.
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. Auditing standards define a material weakness as 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, summarize, and

report Working Capital Fund financial data.

Over the last 10 years, we identified numerous findings and made recommendations to improve internal controls related to

financial reporting for the Air Force Working Capital Fund. Although progress occurred in several areas to correct these previously identified problems, a significant number of corrective actions are still in progress. Appendix I identifies prior audit

reports, and the material weaknesses addressed in these reports, that remained open during FY 2001.

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, OMB Bulletin 01-02

requires that we describe material weaknesses and reportable conditions identified during the audit. Therefore, the following

paragraphs summarize material weaknesses and reportable conditions that existed in the design or operation of the internal

control structure over financial reporting in effect at 30 September 2001. 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. Report of Audit F2002-0003-C06800, Internal Controls Related to the Fiscal Year 2001 Air Force Working

Capital Fund Financial Statements, 30 January 2002, summarizes the material weaknesses and reportable conditions presented below and cites supporting reports performed in accordance with Government Auditing Standards.

RECONCILIATION

Air Force and DFAS personnel did not perform reconciliation and systems validations to verify the accuracy of foreign military

sales Accounts Receivable, Progress Payments to Contractors, and Materiel Support Division Accounts Payable. Specifically: 

◗ Air Force and DFAS had not implemented internal controls to validate foreign military sales Accounts Receivable balances.

Therefore, we were not able to validate Accounts Receivable balances totaling approximately $556 million (absolute value)

as of 30 June 2001. A previous Air Force Audit Agency report identified related problems with inadequate support for

prices, resulting in overstated sales accounts.3 Both DFAS and Air Force Materiel Command personnel are working to

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3 Air Force Audit Agency (AFAA) Report of Audit 99062008, Reduced-Price Foreign Military Sales and Related Grant Transactions,

28 March 2000.
United States Air Force FY 2001 Financial Statements

establish an accurate prior-year baseline (as of 30 September 2000) and monthly reconciliation procedures between the

Financial Inventory Accounting and Billing System (FIABS)4 and the Security Assistance Management Information System

(SAMIS).5

◗ DFAS accounting technicians did not perform end-of-month reconciliations between the FIABS and Central Procurement

Accounting System (CPAS)6 to validate the Progress Payments to Contractors balances totaling about $118.9 million as of

30 June 2001.

◗ Supply management personnel did not perform required reviews and reconciliations of dormant Materiel Support Division

accounts at closing air logistics centers. Specifically, 16 ($9.4 million) of 29 ($17.6 million) CPAS undelivered orders outstanding were invalid or did not match unliquidated obligation balances recorded in the payment system.

SUPPORTING DOCUMENTATION

Air Force Working Capital Fund resource managers did not always maintain adequate documentation or use transaction subsidiary ledgers and special journals to support recorded trial balance accounts. Specifically:

◗ Wholesale supply personnel recorded liabilities and corresponding expenses in the Defense Business Management System

(DBMS)7 without supporting documentation to verify actual receipt of goods or services. Specifically, receiving report or certificate of service documentation was not available for 108 ($61.1 million) of 150 ($116.7 million) sampled items because

personnel did not routinely request documentation before establishing liabilities and expenses.

◗ Wholesale supply personnel did not maintain supporting documentation for 85 ($63.9 million) of 150 ($116.7 million)

wholesale supply overhead obligation balances recorded in DBMS.

◗ Air logistics center personnel did not (a) maintain documentation sufficient to support the total military personnel budget

($2.5 million), (b) properly compute budgeted military personnel costs, or (c) capture actual military personnel costs. In

addition, these officials did not identify and record in accounting records the variance between budgeted and actual military personnel costs. Although the budgeted amount is not material, the deficiencies identified are significant internal control issues. 

◗ Air Force Working Capital Fund personnel did not use transaction subsidiary ledgers or special journals to support wholesale supply trial balance accounts. Specifically, an analysis of the 31 May 2001 trial balance accounts revealed 25 of 60

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4 FIABS, the original accounting system for Wholesale Supply, compiles transaction data received from logistics feeder systems and debits or

credits individual transaction values to an existing General Ledger Account balance.

5 SAMIS provides the Air Force Security Assistance Center and financial management personnel with information to manage the security

assistance programs. Its functions include preparing quarterly billing reports, reimbursements, vouchers, and various management products.

6 CPAS is an on-line, transaction-processing management and accounting system that controls the program, budget, and fund authorizations for HQ Air Force Materiel Command allocation of central procurement appropriations.

7 DBMS is the accounting system used by the Air Force Materiel Command to capture and report Supply Management Activity Group

wholesale overhead costs.
Air Force Working Capital Fund Undelivered Orders Outstanding, Accounts Payable, Unfilled Customer Orders, Accounts

Receivable, and Revenue general ledger accounts contained discrepancies totaling $750.4 million between feeder systems

and the Air Force trial balance values. In addition, Air Force and DFAS personnel could not provide an individual transaction database that reconciled to the end of month trial balance cumulative values for Undelivered Orders Outstanding,

Accounts Payable, Unfilled Customer Orders, and Accounts Receivable accounts. As a result of the substantial differences

between the wholesale supply accounting system and the trial balances for these four accounts, management could not rely

upon the accuracy of the reported value of these accounts to make decisions affecting wholesale supply operations.

Currently, efforts are underway to accumulate and consolidate individual transaction data from the FIABS into the Standard

Materiel Accounting System that would provide the subsidiary ledgers or specialized journals needed to support cumulative

general ledger account balances. Air Force Working Capital Fund officials anticipate completing this process in FY 2004 or

FY 2005.

◗ Standard Systems Group (SSG) financial management personnel did not comply with internal control procedures for establishing and liquidating Information Services Activity Group Accounts Payable liabilities. Specifically, SSG personnel established Accounts Payable liabilities without obtaining receiving reports indicating the government actually received the goods

or services. Therefore, we could not validate SSG Accounts Payable balances totaling $6.5 million as of 10 August 2001.

ACCOUNT VERIFICATION AND VALIDATION

Air Force personnel did not implement internal controls for account verification and validation when they regionalized the

Supply Management Activity Group (SMAG) duties and responsibilities. Specifically, personnel did not validate Unfilled

Customer Orders or General Support Division and Material Support Division Accounts Payable and Undelivered Orders

Outstanding for 53 ($749 thousand) of 3,058 ($69.2 million) sampled transactions. Additionally, supply personnel did not

review or validate any of the Fuels Accounts Payable balances totaling $126 million as of 30 September 2001.

FUND MANAGEMENT PROCEDURES

Fund managers did not receive sufficient information to effectively perform their duties. Specifically, resource advisors and fund

holders were unable to conduct adequate reconciliation to verify the accuracy of Accounts Payable charged against their funds

because they were not provided copies of receiving reports.

INFORMATION SYSTEM ACCESS

Air Force Materiel Command financial system security managers could improve their control over personnel access to the

wholesale supply logistics and accounting systems. Specifically, 3 of 20 individuals reviewed retained access to the Wholesale

and Retail Receiving and Shipping System (D035K)8 and the CPAS when their official duties no longer required access.

CUT-OFF CONTROLS

DFAS officials could not assure accounting personnel recorded collection and disbursement transactions in the proper

accounting period. Specifically, four of seven DFAS field locations had not implemented detailed end-of-period cut-off controls

or procedures.

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8 D035K is an on-line system whose functions include computing retail requirements; maintaining, cataloging, and managing control data;

and recording material receiving, storing, and inventory information.
United States Air Force FY 2001 Financial Statements

CUSTODY AND PHYSICAL SECURITY CONTROLS

DFAS activities did not consistently adhere to custody and physical security control procedures at 4 of 11 locations reviewed.

The specific weaknesses included improper appointment of disbursing officers, inadequate accountability on deposit tickets,

and insufficient physical security involving alarm systems, vaults, safes, keys, and disbursing office configuration.

PERFORMANCE MEASURES

Based on our understanding of the design of internal controls relating to program and financial performance measures reported in the Overview Section of the Air Force Working Capital Fund financial statements, we did not identify any control weaknesses relating to the program performance measures. However, given the internal control weaknesses with respect to financial

reporting, financial performance results may be misstated.

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 aggregation 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.

To obtain 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 financial statement

amounts. These laws and regulations include requirements contained in the Federal Financial Management Improvement Act

and Federal Managers’ Financial Integrity Act. 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, 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 2001. Below, we address the instances of non-compliance with the

three Federal Financial Management Improvement Act 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 2001, the financial management systems that support the Air

Force Working Capital Fund did not substantially comply with federal financial management system requirements 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

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could ensure the systems properly recorded, processed, and summarized only valid transactions and provided accurate information. During the FY 2001 reporting period, the financial management systems continued to contain reportable conditions,

such as inadequate access controls, insufficient audit trails and data verification/reconciliation processes, and inadequate system documentation. These weaknesses increased the risk for fraud, errors, and material misstatements to occur within the system and the resulting financial statements. The Air Force and DFAS have acknowledged many of the system weaknesses and

reported them in their FY 2001 annual assurance statements on internal management controls. To address these control weaknesses, the Air Force and DFAS 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 2001, 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) recognized depot maintenance cost of goods and services sold at estimated amounts instead of actual amounts. (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 and DFAS personnel did not account for government-furnished equipment provided to depot maintenance contractors at no cost to the DMAG. (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 Activity

Group, Air Force Working Capital Fund, 12 March 1999; 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).

As disclosed in the financial statement footnotes, the financial management systems contain several departures from federal

accounting standards. The Air Force has put forth significant effort to solve these problems but will require several years to

achieve substantial progress.

c. U.S. Government Standard General Ledger at the Transaction Level. For FY 2001, 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 continued to rely 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. (FY 2001

Air Force Working Capital Fund Financial Statement Note 1; and Office of the Inspector General, Department of Defense,

Report No. D-2001-163, Accounting Entries Made in Compiling the FY 2000 Financial Statements for the Working Capital

Funds of the Air Force and Other Defense Organizations, 26 July 2001)

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United States Air Force FY 2001 Financial Statements

The DFAS plans to incorporate the U.S. Government Standard General Ledger in the Air Force Working Capital Fund accounting systems including the Consolidated Reporting System II. In addition, the Air Force plans to implement the U.S. Government

Standard General Ledger in the Contract Maintenance Accounting and Production System. The Air Force and DF AS estimate

these efforts will be completed during 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 financial 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 control objectives of

OMB Bulletin 01-02 are met.

◗ Complying with applicable laws and regulations.

The 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 01-09, Form and Content of

Agency Financial Statement, 25 September 2001.

◗ Obtaining reasonable assurance about whether relevant management internal controls are in place and operating effectively.

◗ 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.

To fulfill these responsibilities, we:

◗ Examined, on a test basis, evidence supporting the amounts recorded in the general ledger accounts.

◗ Assessed the accounting principles used and significant estimates made by management.

◗ 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.

◗ Followed up on previously reported deficiencies.

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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 (a) evaluated the safeguarding of assets against loss from unauthorized acquisition, use, or disposition; (b) obtained

an understanding of the design of internal controls; (c) determined whether they were in operation; (d) assessed control risk;

and (e) 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.

We believe our audit work provides a reasonable basis for our audit disclaimer.

We accomplished the audit from April to December 2001 at the Office of the Secretary of the Air Force, Financial

Management and Comptroller; DFAS locations (DFAS centers and field organizations); HQ Air Force Materiel Command; and

Air Force active duty units. We provided a draft of this report to management in January 2002.

SUMMARY OF PRIOR AUDIT COVERAGE

The General Accounting Office (GAO), DoDIG, and AFAA have conducted multiple reviews related to financial management

issues. We issued a disclaimer for our FY 2000 Air Force Working Capital Fund Financial Statements review (Report of Audit

00068004, Opinion on Fiscal Year 2000 Air Force Working Capital Fund Financial Statements, 1 March 2001). The GAO

reports can be accessed over the Internet at http://www.gao.gov; DoDIG 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.

EARL J. SCOTT

The Deputy Auditor General

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The U.S. Air Force Annual Financial Statement is available for viewing on the Internet at

www.saffm.hq.af.mil/FMP/cfo.html.