United States General Accounting Office

GAO Report to Agency Officials

February 1998 FINANCIAL

MANAGEMENT

Issues to Be

Considered by DOD in

Developing Guidance

for Disclosing Deferred

Maintenance on Ships

GAO/AIMD-98-46

GAO United States

General Accounting Office

Washington, D.C. 20548

Accounting and Information

Management Division

B-278809 

February 6, 1998

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 all their 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 third in a series of

reports3

 on the Department of Defense’s (DOD) implementation of this

requirement, this letter focuses on Navy ships, including submarines. We

are not making recommendations in this report. Rather, we are identifying

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. We continue to be

concerned that while DOD agreed that such action was necessary, it has not

established milestones for key tasks, as intended by our recommendation,

to ensure that it has time to incorporate into the implementing policy the

1

The Chief Financial Officers Act (CFO) of 1990, the Government Performance and Results Act

(GPRA) of 1993, the Government Management Reform Act (GMRA) of 1994, and the Federal Financial

Management Improvement Act of 1996.

2

Statement of Federal Financial Accounting Standard (SFFAS) 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) their use, such as having no expected

nongovernmental uses, and (2) their useful lives, such as a very high risk of being destroyed in use or

premature obsolescence.

3

See our previous reports, Financial Management: DOD Needs to Expedite Plans to Implement

Deferred Maintenance Accounting Standard (GAO/AIMD-97-159R, September 30, 1997) and Financial

Management: Issues To Be Considered by DOD in Developing Guidance for Disclosing Deferred

Maintenance on Aircraft (GAO/AIMD-98-25, December 30, 1997).

Page 1 GAO/AIMD-98-46 Ships Deferred Maintenance Guidance
B-278809 

results of a study being conducted,4 and to publish that policy no later than

March 1998.

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 which is a key readiness factor. While the existence of 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 of 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

requires 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. Also, the Federal Managers’ Financial Integrity Act of 1982

requires agency heads to evaluate and report annually whether their

financial management systems conform to federal accounting standards.

Issued on November 30, 1995, and effective for the fiscal years beginning

after September 30, 1997, SFFAS No. 6, Accounting for Property, Plant, and

Equipment, requires the disclosure of deferred maintenance in agencies’

financial statements. SFFAS No. 6 defines deferred maintenance as

4

In October 1997, Office of the Under Secretary of Defense (Acquisition and Technology) maintenance

policy officials engaged a nonprofit organization, the Logistics Management Institute (LMI), to identify

and evaluate alternative reporting approaches for deferred maintenance, recommend the best solution

from the Chief Financial Officer (CFO) and maintenance community perspective, and recommend the

necessary policy and reporting protocols.

Page 2 GAO/AIMD-98-46 Ships Deferred Maintenance Guidance
B-278809 

“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

disclosed on the supplementary stewardship report.5

 For the Department

of Defense (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, including 338 active battle

force ships such as aircraft carriers, submarines, surface combatants,

amphibious ships, combat logistics ships, and support/mine warfare ships.

The Navy spent a little over $2 billion on ship depot maintenance for its

active fleet in fiscal year 1996.

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 is a management function because

different conditions might be considered acceptable by different entities

or for different items of property, plant, and equipment held by the same

entity. Amounts disclosed for deferred maintenance may be measured

using condition assessment surveys6

 or life-cycle cost forecasts.7

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 disclose any material amounts

of deferred maintenance.

SFFAS No. 6 also has an optional disclosure for distinguishing 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.

5

Statement of Federal Financial Accounting Standards No. 8, Supplementary Stewardship Reporting,

requires the reporting of federal mission property, plant, and equipment on the supplementary

stewardship report for fiscal years beginning after September 30, 1997. Prior to this standard, these

assets were reported on the statement of financial position.

6

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

their current condition and estimated cost to correct any deficiencies.

7

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.

Page 3 GAO/AIMD-98-46 Ships Deferred Maintenance Guidance
B-278809 

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 DOD to issue this overall guidance to the military services by

March 1998.

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

the deferred maintenance standard to ships. We believe this makes it even

more important for clear guidance to be developed. The opinions ranged

from including only unfunded ship overhauls to including cost estimates of

repairing all problems identified in each ship’s maintenance log. In

formulating the DOD and Navy guidance, we believe key issues need to be

resolved to allow for meaningful and consistent reporting within the Navy

and from year to year including (1) what maintenance is required to keep

the ships in an acceptable operating condition and (2) when to recognize

as deferred needed maintenance which has not been done on a ship. In

addition, DOD needs to address in its implementing guidance (1) whether

the deferred maintenance standard should be applied to all or only certain

groups of assets, such as ships being deactivated in the near future 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 identify information on specific issues to

be considered in developing implementing guidance for disclosing

deferred maintenance on ships. We reviewed financial and operational

regulations and documentation related to managing and reporting on the

ship maintenance process. The documentation we reviewed included fleet

spreadsheets used to track depot-level maintenance requirements and

execution by specific ship. We also reviewed Navy Comptroller budget

documents. We discussed this information with officials at DOD and Navy

headquarters and at various organizational levels within the Department of

the Navy. While the deferred maintenance standard applies to all levels of

maintenance, this report addresses ship depot-level maintenance because

it is the most complicated and expensive. (See the following section for a

discussion of the Navy ship maintenance process, including the levels of

maintenance.) The amounts for deferred depot level maintenance

Page 4 GAO/AIMD-98-46 Ships Deferred Maintenance Guidance
B-278809 

presented in this report were developed using information provided by

Navy managers. We did not independently verify the accuracy and

completeness of the data.

We conducted our review from July 1996 through November 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 Under Secretary of Defense (Comptroller)

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

Comments” section and are reprinted in appendix I.

Navy Ship

Maintenance Process

The Navy accomplishes maintenance on its ships (including submarines)

at three levels: organizational, intermediate, and depot.

Organizational-level maintenance includes all maintenance actions which

can be accomplished by a ship’s crew. For example, the ship’s crew may

replace or fix a cracked gasket or leaks around a hatch or doorway aboard

ship. Intermediate-level maintenance is accomplished by Navy

Intermediate Maintenance Activities (IMAs) for work that is beyond the

capability or capacity of a ship’s crew. For example, an IMA performs

calibration or testing of selected ship systems for which the ship’s crew

may not have the equipment or capability to perform. Depot-level

maintenance includes all maintenance actions that require skills or

facilities beyond those of the organizational and intermediate levels. As

such, depot-level maintenance is performed by shipyards with extensive

shop facilities, specialized equipment, and highly skilled personnel to

accomplish major repairs, overhauls, and modifications.

The Navy determines what depot-level maintenance is needed for its ships

through a requirements process that builds from broad maintenance

concepts outlined in Navy policy and culminates with the execution of an

approved schedule. There are three types of maintenance requirements

that are executed: (1) time-directed requirements, (2) condition-based

requirements, or (3) modernization requirements. Time-directed

requirements are derived from technical directives and include those that

are periodic in nature and are based on elapsed time or recurrent

operations. Condition-based requirements are based on the documented

physical condition of the ship as found by the ship’s crew or an

independent inspection team. Lastly, modernization requirements include

ship alterations, field changes, and service changes that either add new

capability or improve reliability and maintainability of existing systems

through design improvements or replacements.

Page 5 GAO/AIMD-98-46 Ships Deferred Maintenance Guidance
B-278809 

Initial depot-level maintenance requirements are determined and a

proposed maintenance schedule is developed and approved based on

overall ship maintenance policy, specific maintenance tasks, operational

requirements, force structure needs, and fielding schedules. These

approved maintenance schedules undergo numerous changes as new

requirements are identified, others are completed or canceled, operational

priorities change, and budgets fluctuate. Thus, these factors result in many

deviations from the plan once actual maintenance is executed and

complicate the measurement of exactly what maintenance should be

considered deferred. Less flexibility in scheduling is permissible with

submarines than surface ships because prescribed maintenance must be

done on submarines periodically for them to be certified to dive. If the

specified maintenance is not done by the time required, the submarine is

not to be operated until the maintenance is accomplished.

Implementing

Guidance Needed to

Ensure Consistent

and Timely Reporting

of Deferred

Maintenance

Neither DOD nor the Navy has 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 to DOD in our September 30, 1997,

letter, DOD 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 fiscal year 1998 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.

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.” The differences in

opinions arise from various interpretations of how to apply the standard to

the maintenance process. The views on how to apply the deferred

maintenance standard to the ship maintenance process ranged from

including only unfunded ship overhauls to estimating the cost of repairing

all problems identified in each ship’s maintenance log. Brief descriptions

of various views of how SFFAS No. 6 could be applied to disclosing deferred

depot-level maintenance for ships follow. The descriptions explain what

would be considered deferred maintenance for ships and the rationale for

each option.

Disclosing Only Unfunded

Ship Overhauls

In its budget justification documents, the Navy reports deferred

depot-level maintenance for unfunded ship overhauls. The Navy

Page 6 GAO/AIMD-98-46 Ships Deferred Maintenance Guidance
B-278809 

Comptroller officials’ rationale for excluding other types of depot-level

maintenance not done is that overhauls represent the Navy’s top priority

for accomplishing ship depot-level maintenance and, therefore, should be

highlighted for the Congress when a lack of funds prevents them from

occurring when needed. While overhauls consumed most of the

depot-level maintenance funding in past years, the Navy is performing

fewer overhauls as it moves toward a more incremental approach of doing

smaller amounts of depot-level work more frequently. Consequently,

overhauls now represent a relatively small part of the Navy’s ship

depot-level maintenance budget. In fiscal year 1996, over 80 percent of the

Navy’s ship depot-level maintenance budget was spent on work other than

ship overhauls. Specifically, the Navy reported spending almost 

$1.7 billion for other ship depot-level maintenance and $367.8 million for

ship overhauls.

The Navy officials’ rationale for disclosing only unfunded overhauls as

deferred depot-level maintenance in financial statements is that the data

are readily available and are consistent with what is being reported in

budget justification documents. However, this view omits all other types of

scheduled depot-level maintenance not done and clearly does 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. Using

this option, the amount disclosed for fiscal year 1996 (the most recent

fiscal year data available) would have been $0.

Disclosing Amounts in

Fleet Backlog Reports

Both Atlantic and Pacific fleet officials monitor deferred ship depot-level

maintenance and report these backlog amounts to the Navy Comptroller

although these amounts are not reported in the Navy’s budget justification

documents. These fleet backlog reports quantify the ship depot-level

maintenance work that should have been performed by the end of the

fiscal year according to the Chief of Naval Operations (CNO)8

 but was not

done and was not rescheduled. The rationale for using the amounts on the

fleet backlog reports for financial statement reporting is that the data are

8

The Chief of Naval Operations (CNO) Notice (OPNAVNOTE 4700) establishes the Navy’s planned

maintenance cycles for depot-level maintenance for all Navy ships, except those assigned to the

Military Sealift Command. Each maintenance cycle consists of a standard operating interval with an

allowable deviation and a standard duration for accomplishing the scheduled depot maintenance.

Page 7 GAO/AIMD-98-46 Ships Deferred Maintenance Guidance
B-278809 

readily available, and it is a more realistic representation of deferred

maintenance than just the unfunded ship overhauls. Using this option, the

amount disclosed in the Navy’s financial statements for fiscal year 1996

would have been about $117.5 million.

However, the fleet backlog reports do not include any depot-level work

rescheduled to future years. Under one approach, the estimated value of

work rescheduled beyond the ship’s approved maintenance schedule time

frames, as established by the CNO, would also be disclosed. The rationale

for adding the estimated value of work rescheduled beyond these time

frames is that the CNO Notice provides the Navy’s established requirements

for accomplishing ship depot-level maintenance; therefore, any work

rescheduled beyond the specified time frames should be considered

deferred. For example, maintenance work on two Pacific Fleet destroyers

was rescheduled beyond the CNO-specified time frames of June and

July 1996, respectively, to October 1996. On the other hand, maintenance

on two Atlantic Fleet submarines was rescheduled from the end of one

fiscal year to early the next fiscal year but still within CNO-specified time

frames. Under this option, the estimated value of the maintenance work

rescheduled to the next fiscal year on the destroyers would be recognized

as deferred maintenance at the end of the fiscal year. However, the value

of the rescheduled work on the submarines would not be recognized

because it was still to be performed within the CNO-specified time frames.

Under this option, using Navy data, the amount disclosed for fiscal year

1996 would have been about $15.1 million greater or $132.6 million.

Another option discussed with Navy officials would be to modify the fleet

backlog reports to include the estimated value of any scheduled

maintenance work not accomplished during the fiscal year, regardless of

the CNO-specified time frames. Under this approach, the estimated value of

work on the two submarines discussed above would also be recognized as

deferred maintenance. The rationale for this option is that any scheduled

work moved to the next fiscal year should be disclosed as deferred

maintenance at the end of the fiscal year when the scheduled maintenance

was to be performed. Under this option, using Navy data, the amount

disclosed for fiscal year 1996 would have been about $188.5 million.

Disclosing the Cost of

Repairing All Problems

Identified in Each Ship’s

Maintenance Log

Another view discussed with Navy officials for disclosing deferred ship

maintenance is to report the costs to perform the needed work on all items

listed on each ship’s maintenance log at the end of the fiscal year. The

rationale for using this source is that the log may more completely capture

Page 8 GAO/AIMD-98-46 Ships Deferred Maintenance Guidance
B-278809 

all levels of maintenance needed on each ship. Depending on the size and

condition of the ship, the maintenance log could contain only a few items

or many thousands. However, the Navy does not routinely determine the

cost of items that appear on a ship’s maintenance log. Further, although

these logs are supposed to be up-to-date and routinely checked for

accuracy and completeness, Navy fleet officials stated that estimating the

cost to repair the items on each ship’s log would be very time-consuming

and costly because maintenance tasks that are accomplished are not

routinely deleted from the log, and the time estimates contained in the logs

may be inaccurate. Nevertheless, officials said that using the estimated

value of all items listed on each ship’s maintenance log would exceed any

of the above estimates due to the sheer volume of items included.

Key Issues to Be

Resolved

As discussed in our earlier report, 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 ships (including submarines), DOD and the Navy

need to consider a number of issues, including the following.

• 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 be in terms of whether (1) the ship can perform all or only part of its

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

intended, (3) the ship meets specified readiness indicators, or (4) the ship

and/or its major components meets some other relevant criteria

determined by management. The determination may also be influenced by

whether the ship is currently deployed or scheduled to be deployed in the

near future.

An example of the acceptable operating condition issue is as follows. Each

ship is composed of many systems, and those systems critical to the ship’s

ability to meet its operational commitments and achieve high readiness

scores (such as the weapons systems) rarely have maintenance deferred.

On the other hand, maintenance on the ship’s distributive systems (such as

the ship’s pipes and hulls) are more likely to be deferred since this has

little direct impact on the ship’s readiness indicators. Therefore, the

question is whether needed maintenance not performed on the distributive

systems, should be disclosed as deferred maintenance since it has little

impact on the ship’s readiness scores but could affect the ship’s long-term

viability.

Page 9 GAO/AIMD-98-46 Ships Deferred Maintenance Guidance
B-278809 

• Timing of deferred maintenance recognition - Each ship class has standard

operating intervals between visits to the depot; however, changes to this

plan may take place as the scheduled maintenance approaches (except for

certain maintenance requirements for the submarines and aircraft carriers

which have mandated maintenance intervals to meet safety requirements)

due to operational considerations, funds available, and condition-based

inspections. To ensure that meaningful, consistent data are provided, DOD

and the military services will need to decide which one of the many

possible alternatives will be used to determine when maintenance needed

but not performed is considered deferred. The timing issue involves what

needed maintenance should be recognized as deferred as of the end of the

fiscal year—the date specified in the CNO Notice, the date the maintenance

needs were identified, or the date the maintenance was scheduled.

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

will need to determine whether deferred maintenance should be reported

for assets that are not needed for current requirements. For example,

should maintenance deferred on ships being considered for

decommissioning or not scheduled for deployment for a significant period

be recognized on DOD’s and the Navy’s financial statements? Reporting the

maintenance not done as deferred would more accurately reflect how

much it would cost to have all reported assets in an acceptable operating

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

really needed at this time and which may never be needed or done.

• Critical and noncritical deferred maintenance - If critical versus noncritical

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

consistent among the 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 not needed for current

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.

Page 10 GAO/AIMD-98-46 Ships Deferred Maintenance Guidance
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Agency Comments In comments on a draft of this report (see appendix I), the Department of

Defense agreed that it must consider the key issues identified in this report

as it implements deferred maintenance reporting requirements.

We are sending copies of this letter to the Chairmen and Ranking Minority

Members of the Senate Committee on Appropriations, the House

Committee on Appropriations, the Senate Committee on Armed Services,

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 of 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 letter. Cleggett Funkhouser, Merle Courtney,

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

report.

Lisa G. Jacobson

Director, Defense Audits

Page 11 GAO/AIMD-98-46 Ships Deferred Maintenance Guidance
Appendix I 

Comments From the Department of Defense

(918924) Page 12 GAO/AIMD-98-46 Ships Deferred Maintenance Guidance
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