United States General Accounting Office

GAO Report to Agency Officials

December 1997 FINANCIAL

MANAGEMENT

Issues to Be Considered

by DOD in Developing

Guidance for Disclosing

Deferred Maintenance

on Aircraft

GAO/AIMD-98-25

GAO United States

General Accounting Office

Washington, D.C. 20548

Accounting and Information

Management Division

B-274836 

December 30, 1997

The Honorable William J. Lynn, III

The Under Secretary of Defense (Comptroller)

The Honorable Deborah P. Christie

The Assistant Secretary of the Navy

 (Financial Management and Comptroller)

Recent laws have enhanced the legislative requirements to provide

policymakers and agency program managers with more reliable financial

information to formulate budgets, manage government programs, and help

make difficult policy choices.1

 Recognizing the extent of incomplete and

unreliable information on the cost and consequences of government

programs and activities, these laws have made implementing new

accounting standards and audited federal financial statements a priority.

New federal financial accounting standards have been adopted to enhance

federal financial statements by requiring that government agencies show

the financial results of their entire operations and provide relevant

information on their financial status. This report discusses one such

requirement for valuable information related to deferred maintenance on

mission assets.2

 The second in a series of reports on the Department of

Defense’s (DOD) implementation of this requirement, this report focuses on

Navy aircraft.3

 We are not making recommendations in this report. Rather,

we are identifying specific issues that need to be considered in carrying

out the basic recommendation in our September 30, 1997, letter to

expedite plans to implement the deferred maintenance standard.

Accurate reporting of deferred maintenance is important for key

decisionmakers, such as the Congress, DOD, and Navy managers. Further,

deferred maintenance applicable to mission assets, if reliably quantified

and reported, can be an important performance indicator of mission asset

condition (a key readiness factor), as well as an indicator of the proper

functioning of maintenance and supply lines. While the existence of

1

The Chief Financial Officers Act of 1990, the Government Performance and Results Act of 1993, the

Government Management Reform Act of 1994, and the Federal Financial Management Improvement

Act of 1996.

2

Statement of Federal Financial Accounting Standard No. 6, Accounting for Property, Plant, and

Equipment, dated November 30, 1995, defines federal mission property, plant, and equipment as

possessing certain characteristics related to (1) its use, such as having no expected nongovernmental

uses, and (2) its useful life, such as a very high risk of being destroyed in use or premature

obsolescence.

3

See Financial Management: DOD Needs to Expedite Plans to Implement Deferred Maintenance

Accounting Standard (GAO/AIMD-97-159R, September 30, 1997).

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B-274836 

deferred maintenance may indicate a need for additional resources for

maintenance, such resources may already be available within the current

funding of the military services.

Background In October 1990, the Federal Accounting Standards Advisory Board

(FASAB) was established by the Secretary of the Treasury, the Director of

the Office of Management and Budget (OMB), and the Comptroller General

of the United States to consider and recommend accounting standards to

address the financial and budgetary information needs of the Congress,

executive agencies, and other users of federal financial information. Using

a due process and consensus building approach, the nine-member Board,

which has since its formation included a member from DOD, recommends

accounting standards for the federal government. Once FASAB recommends

accounting standards, the Secretary of the Treasury, the Director of OMB,

and the Comptroller General decide whether to adopt the recommended

standards. If they are adopted, the standards are published as Statements

of Federal Financial Accounting Standards (SFFAS) by OMB and GAO. In

addition, the Federal Financial Management Improvement Act of 1996 as

well as the Federal Managers’ Financial Integrity Act of 1982, require

federal agencies to implement and maintain financial management systems

that will permit the preparation of financial statements that substantially

comply with applicable federal accounting standards.

SFFAS No. 6, Accounting for Property, Plant, and Equipment, issued on

November 30, 1995, requires the disclosure of deferred maintenance in

agencies’ financial statements for the fiscal year beginning October 1,

1997. SFFAS No. 6 defines deferred maintenance as “maintenance that was

not performed when it should have been or was scheduled to be and

which, therefore, is put off or delayed for a future period.” It includes

preventive maintenance and normal repairs, but excludes modifications or

upgrades that are intended to expand the capacity of an asset. The

deferred maintenance standard applies to all property, plant, and

equipment, including mission assets—which will be reported on the

supplementary stewardship report.4

 For DOD, mission assets, such as

submarines, ships, aircraft, and combat vehicles, is a major category of

property, plant, and equipment. In fiscal year 1996, DOD reported over

$590 billion in this asset category, of which over $297 billion belonged to

the Navy.

4

SFFAS No. 8, Supplementary Stewardship Reporting, requires the reporting of federal mission

property, plant, and equipment on the supplementary stewardship report for the fiscal years beginning

October 1, 1997. Prior to this standard, these assets were reported on the Statement of Financial

Position.

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SFFAS No. 6 recognizes that there are many variables in estimating deferred

maintenance amounts. For example, the standard acknowledges that

determining the condition of the asset—condition rating—is a

management function because different conditions might be considered

acceptable by different entities as well as for different items of property,

plant, and equipment held by the same entity. Amounts disclosed for

deferred maintenance may be measured using condition assessment

surveys5

 or life-cycle cost forecasts.6 Therefore, SFFAS No. 6 provides

flexibility for agencies’ management to (1) determine the level of service

and condition of the asset that are acceptable, (2) disclose deferred

maintenance by major classes of assets, and (3) establish methods to

estimate and report any material amounts of deferred maintenance.

SFFAS No. 6 also has an optional disclosure for stratifying between critical

and noncritical amounts of maintenance needed to return each major class

of asset to its acceptable operating condition. If management elects to

disclose critical and noncritical amounts, the disclosure must include

management’s definition of these categories.

Results in Brief The development of DOD and Navy policy and implementing guidance for

deferred maintenance is essential to ensure consistent reporting among

the military services and to facilitate the preparation of accurate DOD-wide

financial statements, particularly since the new accounting standard

provides extensive management flexibility in implementing the disclosure

requirement. Navy officials stated that they were reluctant to develop

procedures to implement the required accounting standard until DOD

issues overall policy guidance. Our September 30, 1997, letter points out

the need for accelerating DOD plans to issue implementing guidance to the

military services.

DOD and Navy officials have expressed numerous views as to how to apply

the deferred maintenance standard to aircraft. Since numerous views

exist, we believe it is even more important for clear guidance to be

developed. The opinions ranged from including only maintenance needed

on grounded aircraft to including all maintenance needs identified during

aircraft inspections. In formulating the DOD and Navy guidance, we believe

5

Condition assessment surveys are periodic inspections of property, plant, and equipment to determine

their current condition and estimated cost to correct any deficiencies.

6

Life-cycle costing is an acquisition or procurement technique that considers operating, maintenance,

and other costs in addition to the acquisition cost of assets. Since it results in a forecast of

maintenance expense, these forecasts may serve as a basis against which to compare actual

maintenance expense and estimate deferred maintenance.

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key issues must be resolved to allow for consistent reporting within the

Navy, among the military services, and from year to year, including

(1) what constitutes acceptable operating condition in aircraft and

(2) when unperformed maintenance on aircraft becomes deferred

maintenance. In addition, DOD needs to address in its implementing

guidance (1) whether the deferred maintenance standard should be

applied to certain groups of assets, such as equipment (for example,

aircraft engines) for which there is no current operational requirement,

and (2) whether the reported deferred maintenance should differentiate

between critical and noncritical and, if so, what constitutes critical.

Objective, Scope, and

Methodology

The objective of our work was to provide information on specific issues to

be considered in developing implementing guidance for disclosing

deferred maintenance on aircraft. We reviewed financial and operational

regulations and documentation related to managing and reporting on the

aircraft maintenance process. The documentation we reviewed included

fleet spreadsheets used to track depot maintenance requirements and

execution by specific aircraft. We also reviewed Navy Comptroller budget

documents as well as aircraft and engine maintenance databases. We

discussed this information with officials of DOD and Navy headquarters and

of various organizational levels within the Department of the Navy. While

the deferred maintenance standard applies to all maintenance, this report

addresses the aircraft depot level because (1) depot maintenance is the

most complex and expensive and (2) all military services operate aircraft

and experience deferred maintenance related to those assets. (See the

following section for a discussion of the Navy aircraft maintenance

process, including the levels of maintenance.) Navy officials provided the

estimates of deferred depot-level maintenance presented in this report. We

did not verify the accuracy and completeness of the data.

We conducted our review from August 1996 through August 1997 in

accordance with generally accepted government auditing standards. We

requested written comments on a draft of this report from the Secretary of

Defense or his designee. The Principal Deputy Under Secretary of Defense

provided us with written comments, which are discussed in the “Agency

Comments” section and are reprinted in appendix I.

Navy Aircraft

Maintenance Process

The Navy accomplishes maintenance at three levels: organizational,

intermediate, and depot. Organizational-level maintenance is

accomplished at the squadron level and consists of the removal and

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replacement of failed components and the cleaning, prevention, and

correction of corrosion. For example, the squadron would remove and

paint minor areas of corrosion on the exterior of the aircraft.

Intermediate-level maintenance is accomplished by Navy personnel on

board ships or stationed ashore at facilities dedicated to repairing

components and assemblies on site. For example, the intermediate level

would repair moderate corrosion to removable assemblies of the aircraft,

such as the nose cone. Depot-level maintenance is performed at

maintenance depots that are equipped to perform complete overhauls of

the aircraft. The depots repair major corrosion problems and structural

weakness throughout the airframe, such as repairing cracks in the

fuselage.

Depot maintenance for aircraft is periodically done on airframes, engines,

and other aircraft components. Generally, the engines, weapon systems,

and other components of the aircraft are removed and replaced with other

components when they need repair. The component needing repair is then

sent to a depot or an intermediate repair facility, depending on the nature

of the problem. Generally, the Navy identifies the airframes that will

receive depot-level maintenance based on an inspection. The length of

time an aircraft can operate between inspections—referred to as the

operating period—is determined by a combination of variables, such as

age of the aircraft and results of previous inspections. Usually, if an

aircraft passes the inspection, it is allowed to fly an additional year.

Because it is very time-consuming and, therefore, expensive to

disassemble an aircraft to completely inspect for corrosion, stress, or

other problems requiring depot maintenance, inspection is done only of

items considered key indicators of the overall condition of the aircraft.

Points are awarded for defects observed. When an aircraft accumulates

enough points, it “fails” and is identified as needing depot maintenance.

Problems noted can range from minor, such as surface corrosion on upper

exterior skin, to critical concerns, such as major corrosion on and around

the right hand rudder cable pulley support bracket, which, if it were to

break, would result in loss of aircraft control. When problems affecting

flight safety are identified, the aircraft is grounded until the maintenance is

done.

An aircraft that has accumulated enough points to fail the inspection, but

whose individual problems do not affect flight safety, can continue flying

until it reaches the end of its predetermined operating period. In addition,

a grace period of 90 calendar days of flying beyond the predetermined

Page 5 GAO/AIMD-98-25 Aircraft Deferred Maintenance Guidance
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operating period is generally allowed for flexibility in scheduling and

operational commitments. Since inspections can be done up to 6 months

before the aircraft reaches the end of its operating period, a “failed”

aircraft could conceivably fly for 9 months before having the depot

maintenance work done. If depot maintenance has not begun on the

aircraft by the end of its grace period, Navy regulations require that the

aircraft be grounded.

Although problems may be identified with the aircraft during the

inspection, the total points awarded for the defects may not be high

enough to “fail” the aircraft and send it to the depot. These aircraft

continue flying until the next scheduled inspection, usually another year.

Implementing

Guidance Needed to

Ensure Consistent

and Timely Reporting

of Deferred

Maintenance

Neither DOD nor the Navy have developed implementing guidance for

determining and disclosing deferred maintenance on financial statements.

Navy officials said that they are reluctant to develop their procedures until

DOD issues its guidance. As we reported in our September 30, 1997, letter,

the guidance is important to ensure consistency among the military

services and to facilitate the preparation of DOD-wide financial statements.

We also stated that the guidance needs to be available as close to the

beginning of the fiscal year as possible so that the military services have

time to develop implementing procedures and accumulate the necessary

data to ensure consistent DOD-wide implementation for fiscal year 1998.

DOD guidance for applying the deferred maintenance definition to aircraft

is essential to consistent reporting by all of the military services since each

service operates aircraft.

We found that operations and comptroller officials from both DOD and the

Navy have varying opinions concerning the nature of unperformed

maintenance that should be reported as “deferred.” Inspections, a type of

condition assessment, are a normal part of the management of the aircraft

and provide a reasonable basis for estimating deferred maintenance;

therefore, neither DOD nor Navy officials suggested using life-cycle costing

(an estimation tool allowed in lieu of condition assessments in SFFAS No. 6

as previously described). The differences in opinions arise from various

interpretations of how to apply the standard to the inspection and

maintenance process.

The views on how to apply the deferred maintenance standard to the

aircraft maintenance process ranged from considering only the work

needed on grounded aircraft to estimating the cost of repairing all

Page 6 GAO/AIMD-98-25 Aircraft Deferred Maintenance Guidance
B-274836 

maintenance problems identified on all aircraft during inspection, whether

the aircraft “failed” or not. At the end of fiscal year 1996 (the most recent

year for which historical data are available), the Navy data would have

supported reporting $98 million for depot maintenance needed for

grounded aircraft. While the Navy has no formal estimate for the cost of

repairing all depot-level maintenance problems identified with the

airframes during inspection, Navy officials believed that it would exceed

$200 million. This amount does not include depot-level maintenance for

aircraft components.

Including only amounts for maintenance that needs to be done on

grounded aircraft may not meet the intent of SFFAS No. 6. FASAB addressed

the deferred maintenance issue because of widespread concern over the

deteriorating condition of government-owned equipment. FASAB reported

that the consequences of underfunding maintenance (increased safety

hazards, poor service to the public, higher costs in the future, and

inefficient operations) are often not immediately reported, and that the

cost of the deferred maintenance is important to users of financial

statements and key decisionmakers. Reporting only grounded aircraft

would not disclose all of the costs that have been deferred until a future

period.

Other views expressed by DOD and Navy officials of what should be

reported as deferred maintenance fell between the two described

previously. One view was to report only the maintenance needed on

“failed aircraft” that had reached the operating period end date (estimated

by Navy to be about $163 million in fiscal year 1996). This would include

grounded aircraft and aircraft still flying during the 90-day grace period;

this is the amount reported in budget justification documents. Another

view was to report the maintenance needed on all “failed” aircraft,

regardless of the aircraft’s operating period end date (estimated by Navy

to be $196 million in fiscal year 1996).

Key Issues to Be

Resolved

Implementing guidance is needed so that all military services consistently

apply the deferred maintenance standard. As a result of the variations in

the way the deferred maintenance standard can be applied to aircraft, DOD

and the Navy must address a number of issues, including the following.

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B-274836 

• Acceptable asset condition - SFFAS No. 6 allows agencies to decide what

“acceptable condition” means and what maintenance needs to be done to

keep assets in that condition. Determining acceptable operating condition

could include whether (1) the aircraft can perform all or only part of its

mission, (2) the most important components of the aircraft function as

intended, (3) the aircraft passes inspection using engineering

specifications, (4) the aircraft meets specified readiness indicators, or

(5) the aircraft meets some other relevant criteria determined by

management. The determination may also be influenced by whether the

aircraft is assigned to a deployed unit. One example of the acceptable

operating condition issue is as follows. An F-14 aircraft’s primary mission

is long-range intercept (air-to-air combat), but it also has strike capability

(air-to-ground combat). The radar/fire control system has nodes that

provide the capability for the aircraft to launch specific types of missiles

and bombs. If the node that controls the aircraft’s ability to launch

Phoenix missiles is not functioning properly, the aircraft does not have

any air-to-ground capability, but can still fulfill its air-to-air mission using

Sidewinder and/or Sparrow missiles. Therefore, the question is whether

maintenance required on the node for the air-to-ground missiles should be

reported as deferred maintenance since it supports the secondary mission.

• Timing of deferred maintenance recognition - Generally, although the

military services use different specific criteria to identify the aircraft and

engines that will require depot maintenance, all three military services rely

on the concept of a standard operating period. Sometimes the period is

determined by flying hours and sometimes by elapsed time between

inspections. Grace periods are frequently allowed so that operational or

funding considerations can affect maintenance schedules. To ensure that

meaningful, consistent data are provided, DOD and the military services

need to decide which one of the many possible alternatives will be used to

determine when maintenance needed but not performed is considered

deferred. For example, an F-14 whose operating period ends September 30

could be inspected as early as March 31, 6 months prior to the end of the

operating period. If it fails inspection but is not grounded immediately for

safety reasons, it can continue to fly until December 29, the end of a 90-day

grace period. The timing issue involves when the needed maintenance

should be recognized as deferred—the date the operating period ends, the

date the grace period ends, the date the maintenance needs are identified,

the date the aircraft is grounded, or some other point in time.

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B-274836 

• Applicability of the reporting requirements - DOD and the military services

need to determine whether deferred maintenance should be reported for

assets that are not needed for current requirements. Further differences in

opinion exist concerning what should be recognized as deferred

maintenance for aircraft engines and other components. Since this aircraft

equipment can be removed from the aircraft and replaced, the question

arises as to whether the components waiting to be repaired at the depot

should be included in deferred maintenance if no aircraft are currently in

need of the component. For example, if a service reduces the number of

aircraft it is flying but does not reduce the inventory of related engines,

should it consider maintenance not done on the engines in excess of

current requirements as deferred maintenance? Reporting the

maintenance not performed on the engines as deferred would more

accurately reflect the cost of restoring all reported assets to operating

condition; however, it would also be reporting maintenance that is not

currently needed.

• Critical and noncritical deferred maintenance - If critical versus noncritical

deferred maintenance is to be disclosed, such a disclosure must be

consistent among the military services, and critical must be defined. For

example, different kinds of maintenance needed—from preventive to

urgent for continued operation—may be used to differentiate between

critical and noncritical. Also, if DOD chooses to disclose deferred

maintenance for all reported assets, including maintenance on assets

exceeding current operating requirements, identifying the types of assets

included in the deferred maintenance disclosure may be another way to

differentiate between critical and noncritical.

Although our work focused on the depot level, the deferred maintenance

standard applies to all maintenance that should have been done,

regardless of where the maintenance should have taken place. Therefore,

in addressing the issues in this report and others regarding deferred

maintenance, all levels of maintenance must be considered.

Agency Comments In comments on a draft of this report, the Department of Defense agreed

that it must consider the key issues identified in the report as it develops

implementing guidance and policy for reporting deferred maintenance.

We are sending copies of this report to the Chairmen and Ranking

Minority Members of the Senate Committee on Appropriations, the House

Committee on Appropriations, the Senate Committee on Armed Services,

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B-274836 

the House Committee on National Security, the Senate Committee on

Governmental Affairs, and the House Committee on Government Reform

and Oversight. We are also sending copies to the Director of the Office of

Management and Budget, the Secretary of Defense, the Assistant

Secretaries for Financial Management for the Air Force and Army, and the

Acting Director of the Defense Finance and Accounting Service. Copies

will be made available to others upon request.

Please contact me at (202) 512-9095 if you or your staffs have any

questions concerning this report. Cleggett Funkhouser, Merle Courtney,

Chris Rice, Rebecca Beale, and John Wren were major contributors to this

report.

Lisa G. Jacobson

Director, Defense Audits

Page 10 GAO/AIMD-98-25 Aircraft Deferred Maintenance Guidance
Page 11 GAO/AIMD-98-25 Aircraft Deferred Maintenance Guidance
Appendix I 

Comments From the Department of Defense

(918884) Page 12 GAO/AIMD-98-25 Aircraft Deferred Maintenance Guidance
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