Department of Defense 

Agency Financial Report

AFR 2010 November 15, 2010
Summary of Performance and Financial

Information

This document will summarize the Department’s financial

and performance information from

the AFR and APR, making the information more

transparent and accessible to Congress, the public, and

other key constituents.

Agency Financial Report  (AFR)

The AFR consists of the  Management’s Discussion

and Analysis that provides executive‐level

information  on the Department’s history, mission

organization, key performance activities, analysis o

the financial statements, controls and legal

compliance and other challenges facing

the Department.  

Additional information is available in Addendum A

Other Accompanying Information of the AFR. 

We welcome your feedback

regarding the content of this report.

To comment or to request

copies of the report, please e‐mail

us at DoDAFR@osd.mil,

or write to:

U.S. Department of Defense

Office of the Under Secretary of Defense (OUSD)

(Comptroller)

1100 Defense Pentagon

Washington, DC 20301‐1100

• Agency Financial Report –

Published November 15, 2010

• Annual Performance Report –

Published by February 7, 2011

• Summary of Performance and

Financial Information –

Published by February 15, 2011

All three reports will be available at the Comptroller’s

website:

http://www.defenselink.mil/comptroller/reports.ht

ml

Annual Performance Report (APR)

The APR will be included in the Congressional Budget

Justification and will provide the detailed performance

information and description of results by performance measu

FOREWORD

The Department of Defense Agency Financial

Report (AFR) for Fiscal Year 2010 provides an

overview of the Department’s financial

information and performance goals and

objectives.  It also describes our priorities in

response to challenges encountered in defense

of our nation.  

For FY 2010, the Department has chosen to

produce the Annual Financial Report as an

alternative to the Performance and

Accountability Report (PAR).  The alternative

report is intended to simplify and summarize

information to increase transparency while

utilizing the Internet for providing additional

details. The Department’s FY 2010reporting

consist of three components:
Department of Defense Agency Financial Report for FY 2010

i

Table of Contents

Message from the Deputy Secretary of Defense 2

Management’s Discussion and Analysis 3

Fiscal Year 2010 Overview 3

Mission 5

Organization 6

Resources 8

Program Performance Overview 11

Message from the Chief Financial Officer 18

Financial Performance Overview 19

Management Assurances 29

Managers’ Internal Control Program 30

Top Management Challenges and Management Responses 32

Other Management Information and Initiatives 40

Financial Information 44

Independent Auditor’s Report 44

Principal Financial Statements and Notes 54

Required Supplementary Stewardship Information 122

Required Supplementary Information 124

Appendix A: Glossary 129

Appendix B: Useful Web Sites 130

Addendum A – Other Accompanying Information A-1

Summary of Management and Performance Challenges A-1

Managers’ Internal Control Program A-22

Improper Payments Information Act Reporting A-32

Addendum B – Defense Security Cooperation Agency B-1

Principal Financial Statements and Notes B-1
Department of Defense Agency Financial Report for FY 2010

MESSAGE FROM THE DEPUTY SECRETARY OF DEFENSE

I am pleased to present this Agency Financial Report, which identifies how 

the Department of Defense (DoD) used public funds during the fiscal year

(FY) that ended September 30, 2010. The Department is fully committed to 

proper accounting, reporting, and accountability for all its resources.

In FY 2010 – while military operations continued in 

Afghanistan, Iraq, and elsewhere in the world – DoD 

launched an equally important battle: to improve 

efficiency, effectiveness, and cost-consciousness 

within its own organization. Initial efforts focused on 

ending or restructuring troubled or excess weapons 

programs. In FY 2010, about 20 programs were 

affected, with additional changes included in the 

FY 2011 budget request.

The savings were substantial. The Nation’s difficult 

economic and financial situation means, however, that 

additional changes will be needed so the Department 

can maintain the modest, real budget growth 

necessary to sustain current force structure and make

additional investments in modernization. 

In a series of statements and pronouncements during 

the course of FY 2010, Secretary of Defense 

Robert Gates challenged the Defense Department to find additional costsavings, primarily within its own business operations. Specifically, the 

Secretary outlined a four-track approach for cutting support costs, with all 

savings to be reinvested in higher priority warfighting needs: 

Make changes, primarily in business processes, significant enough to 

save $100 billion over the next five years.

Solicit and implement cost-saving ideas from DoD employees and outside 

sources. 

Focus on far-reaching changes in broad areas, including acquisition, 

logistics, and military health care.

Pursue the specific organizational and other changes outlined by the 

Secretary in a presentation on August 9, 2010. 

This broad, multi-pronged effort will bear fruit for years to come, and will help 

ensure that the Department manages taxpayer resources carefully and 

effectively. In addition, it provides tangible evidence that the Department is 

committed to making every defense dollar count. 
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

3

MANAGEMENT’S DISCUSSION AND ANALYSIS

FISCAL YEAR 2010 OVERVIEW

The FY 2010 defense budget was crafted to reshape the priorities of 

America’s defense establishment, applying the lessons learned in 

Afghanistan and Iraq while also 

confronting the range of other potential 

threats around the world. The DoD’s

strategy and budget in FY 2010 strike an 

improved balance in three dimensions:

between prevailing in current conflicts and

preparing for a complex future; between 

institutionalizing proven wartime 

adaptations and preserving this nation’s 

existing conventional and strategic 

advantages; and between accelerating 

acquisition and management reform while 

retaining proven best practices. 

The Department remains committed to the goal of disrupting, dismantling, 

and defeating al-Qaeda in Afghanistan and Pakistan. At the direction of the 

President, beginning in December 2009, an additional 30,000 United States 

(U.S.) troops deployed to Afghanistan to meet Operation Enduring Freedom 

(OEF) mission requirements and implement the type of strategy that 

produced significant progress in Iraq. The U.S. forces, deployed in 

conjunction with international forces, operate under a strategic framework 

based in large part on U.S. counterinsurgency doctrine, which focuses on 

population security while also conducting counterterrorism operations. 

The Department depends on America’s men and women in uniform to 

execute its mission operations, and continues its commitment to attract and 

take care of its all-volunteer force – DoD’s most important resource. The 

approximately 2.3 million Active and Reserve Soldiers, Sailors, Marines, and 

Airmen received pay increases and additional basic allowance for military 

housing. In addition, approximately 9.3 million eligible Service members, 

family members, and retirees received world-class healthcare. 

The Department has placed continued emphasis in FY 2010 on improving 

cyber defense capabilities to protect its vital information networks. The 

Department established the new U.S. Cyber Command to address

vulnerabilities and meet the ever-growing array of cyber threats to military 

information systems. 

The Department invested in increased intelligence, surveillance, and 

reconnaissance support for the warfighter, such as unmanned aerial 

vehicles that have been in such high demand in both Afghanistan and Iraq. 

Secretary of Defense Robert Gates.
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

4

The Department fielded more of our most 

capable theater missile defense systems to 

better protect our forces and those of our 

allies in theater from ballistic missile attack. 

After receiving the President’s approval in 

September 2009, the Department started to 

implement a phased, adaptive approach for 

missile defense in Europe to respond to the 

growing Iranian missile threat.

The Department continues to implement 

needed reforms that improve the 

effectiveness of how it acquires new 

defense systems to maintain the U.S. 

military’s technological and conventional 

edge. Over the past fiscal year, the 

Department worked to implement the Weapon Systems Acquisition Reform 

Act, intended to improve defense acquisition outcomes. The Department

also hired acquisition professionals to revitalize the defense acquisition 

workforce and create a framework for restoring affordability and efficiency to 

defense procurement.

In addition to acquisition improvements, the Department curtailed or

cancelled nearly 20 troubled or excess programs as part of the FY 2010 

budget that would have cost more than $300 billion to complete. The 

Department launched efficiency initiatives designed to significantly reduce 

excess overhead costs and apply savings to force structure and 

modernization efforts. These measures can ensure that the annual rate of 

growth in warfighting needs is at the level 

necessary to give the Military Services what 

they require.

The Department is making significant 

progress in financial management, 

including moving toward audit readiness 

and installing new financial systems. 

Additionally, the business environment 

within the operational theater strengthened 

to improve effectiveness and ensure better control over resources. The 

Department is also actively pursuing the Administration’s goal of further 

reducing improper payments, demonstrated by reducing improper contract 

payments by more than 75 percent in FY 2010. 

In summary, during FY 2010, the Department sustained a military and 

provided necessary capabilities to fight two wars; confronted global terrorist 

threats; and provided needed humanitarian assistance and disaster 

response. Throughout, the Department remained focused on taking care of 

its people and their families.

An RQ-4 Global Hawk soars through the skies in route to record 

intelligence, surveillance and reconnaissance data. Because of 

its large coverage area the Global Hawk has become a useful 

tool for recording data and sending it to warfighters on the 

ground. 

(Courtesy Photo, Beale Air Force Base).

“DoD cannot expect America’s elected 

representatives to approve budget increases 

each year unless we are doing everything 

possible to make every dollar count.”

Robert M. Gates

Secretary of Defense
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

5

Mission

One of the core responsibilities of the U.S. government is to protect the life 

and liberty of the American people or, as phrased in the Constitution, to 

―provide for the common defense.‖ The mission of the Department of 

Defense is to provide the military forces needed to deter war and to protect 

the security of our country. Today’s DoD plays a critical role in defending 

and advancing the safety and security of 

American citizens and interests. Whether 

in a period of peace or war, the U.S. Armed 

Forces have prepared for the unexpected, 

deterred aggression, responded to attack, 

rebuilt nations emerging from the ravages 

of conflict, and helped create and maintain 

a stable and resilient international system.

The United States faces a complex and uncertain security landscape in 

which the pace of change continues to accelerate. The distribution of global 

political, economic, and military power is becoming more diffuse. The rise of 

China, the world’s most populous country, and India, the world’s largest 

democracy, will continue to shape an international system—one in which the 

United States must increasingly work with key allies and partners to sustain 

stability and peace.

America’s interests link to the integrity and 

resilience of the international system. Chief 

among these interests are security, 

prosperity, broad respect for universal 

values, and an international order that 

promotes cooperative action. Consistent 

with the President’s vision, the United 

States will advance these interests by 

strengthening our domestic foundation and 

integrating all elements of national power;

engaging abroad, based on mutual interest 

and mutual respect; and promoting an 

international order that advances our interests by reinforcing the rights and 

responsibilities of all nations.

America’s interests and role in the world require armed forces with 

unmatched capabilities and a willingness on the part of the nation to employ 

them in defense of our interests and the common good. The United States 

remains the only nation able to project and sustain large-scale operations 

over extended distances. This unique position generates an obligation to be 

responsible stewards of the power and influence that history, determination, 

and circumstance have provided.

DoD Mission Statement

Provide military forces 

needed to deter war and protect 

the security of our country. 

U.S. Agency for International Development Administrator Rajiv Shah, Defense 

Secretary Robert M. Gates, Secretary of State Hillary Rodham Clinton, moderator 

Frank Sesno, take part in the U.S. Global Leadership Coalition discussion in 

Washington, D.C., Sept. 28, 2010. 

DOD photo by Cherie Cullen 
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

6

Organization

Since the creation of the Continental Army in 1775, the U.S. military has 

evolved to become a global presence. The Department embraces the core 

values of all successful organizations: leadership, professionalism, and 

technical knowledge. Its employees are dedicated to duty, integrity, ethics, 

honor, courage, and loyalty.

The Department is the successor agency to the National Military 

Establishment created by the National Security Act of 1947 (50 U.S.C. 401). 

The National Security Act Amendments of 1949 established DoD as an 

executive department with the Secretary of Defense as its head. 

Under the President, who also is Commander in Chief, the Secretary of 

Defense exercises authority, direction, and control over the Department. 

The Department is composed of the Office of the Secretary of Defense; the 

separately organized military departments of the Army, Navy, and Air Force; 

the Joint Chiefs of Staff providing military advice; the unified Combatant 

Commands; the Defense Agencies; the DoD Field Activities; and such other 

offices, agencies, activities, and commands as may be established for 

specific purposes. Figure 1-1 shows how the Department is structured.

B10-01

Secretary of Defense

Deputy Secretary of Defense

Department 

of the Army

Secretary 

of the Army

Office

of the 

Secretary 

of the 

Army

The 

Army 

Staff

Department 

of the Air Force

Secretary

of the Air Force

Office of 

the 

Secretary 

of the

Air Force

The 

Air 

Staff

Office of the Inspector General 

of the Department of Defense

Department 

of the Navy

Secretary 

of the Navy

Office 

of the 

Chief of 

Naval 

Operations

Office of 

the 

Secretary 

of the 

Navy

Headquarters

Marine

Corps

Office of the 

Secretary of 

Defense

• Under Secretaries,

• Assistant Secretaries, 

and 

• Other Specified 

Officials

Combatant Commanders

Defense 

Agencies

DoD Field 

Activities

The 

Air Force

The Marine 

Corps

The

Navy

The

Army

• US Africa Command

• US Central Command

• US European Command

• US Joint Forces Command

• US Northern Command

• US Pacific Command

• US Southern Command

• US Special Operations Command

• US Strategic Command

• US Transportation Command

Figure 1-1. Department of Defense Organizational Structure

The Organization 

of the Joint Chiefs

of Staff

Chairman of the 

Joint Chiefs of 

Staff

The 

Joint Staff
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

7

Office of the Secretary of Defense 

The Office of the Secretary of Defense 

includes: the offices of the Deputy 

Secretary of Defense; Under Secretary of 

Defense for Acquisition, Technology & 

Logistics; Under Secretary of Defense for 

Policy; Under Secretary of Defense 

(Comptroller)/Chief Financial Officer, DoD;

Under Secretary of Defense for Personnel 

and Readiness; Under Secretary of 

Defense for Intelligence; Deputy Chief 

Management Officer; General Counsel of the Department of Defense;

Inspector General of the Department of Defense; Assistants to the Secretary 

of Defense; Director of Operational Test and Evaluation; and such other staff 

offices established by the Secretary of Defense to assist in carrying out his 

duties and responsibilities. The heads of these offices are staff advisers to 

the Secretary and perform functions he assigns to them. 

Military Departments

Each of the Departments of the Army, Navy, and Air Force, organized under 

its own Secretary, functions under the authority, direction, and control of the 

Secretary of Defense. The Secretary of each military department is 

responsible to the Secretary of Defense for the operation and efficiency of 

his department. The military departments receive orders through the 

respective Secretaries or their designees, as established by the Secretary of 

Defense or provided by law.

The Joint Chiefs of Staff 

The Joint Chiefs of Staff consist of the Chairman, the Vice Chairman, the 

Chief of Staff, U.S. Army; the Chief of Naval Operations; the Chief of Staff, 

U.S. Air Force; and the Commandant of the Marine Corps. Subject to the 

authority of the Chairman, they constitute the immediate military staff of the 

Secretary of Defense. The Chairman is the principal military adviser to the 

President, the National Security Council, and the Secretary of Defense.

Other members of the Joint Chiefs of Staff are the senior military officers of 

their respective services and are military advisers to the President, the 

National Security Council, and the Secretary of Defense. 

The Combatant Commands 

The commanders of unified Combatant Commands are responsible to the 

President and the Secretary of Defense for accomplishing the military 

missions assigned to them and for exercising command authority over 

forces assigned to them. The operational chain of command runs from the 

President to the Secretary of Defense to the commanders of the Combatant 

Commands. 

Department of Defense 

Service Components

B10-08
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

8

Resources

The Department requires resources (personnel, facilities and infrastructure, 

and budget authority) to carry out key missions and execute management 

reforms. The strategic placement of our personnel, installations, and 

facilities are key for protecting our homeland and national resources. These 

resources have never been more important than they are today as the U.S. 

fights terrorists who plan and carry out attacks on our facilities and our 

people. 

Our workforce consists of more than three

million employees, both afloat and ashore, 

deployed throughout the world to meet 

mission requirements. Nearly half of the 

Department’s workforce is comprised of men 

and women on Active Duty. To provide 

Americans with the highest level of national 

security, the Department consists of more 

1,435,731 men and women on Active Duty, 

859,436 Reserve and National Guard, and 

790,559 civilians (Figure 1-2).

During FY 2010, the Department mobilized 

approximately 120,000 Reserve Component 

members at any given time. The men and women of the Reserve and 

National Guard provided security and assistance in both the Afghanistan and 

Iraq theaters and maintained aircraft in the Horn of Africa, to name a few of 

their many missions. The skills and capabilities of the Reserve Component 

members match current and anticipated DoD requirements, thereby reducing 

the stress on the total force while increasing the capacity.

In FY 2010, every Service and all Components (Active and Reserve) again 

met or exceeded not only the aggressive numerical goals that had been set 

for new recruits, but also rigid quality goals for these recruits, including 

education and aptitude. The nation can be proud of these achievements, as 

well as the commitment of Service members and their families, as reflected in 

record high retention-rates.

Throughout FY 2010, the civilian workforce continued to play a critical role in 

supporting the accomplishment of DoD’s mission. In FY 2010, we witnessed 

their continued voluntary and enthusiastic participation in new and challenging 

roles, especially in support of DoD’s wartime efforts. The newly established

Civilian Expeditionary Workforce Program has deployed volunteers to war 

zones to serve in career fields as far-reaching as intelligence, public affairs, 

policy development, and logistics. The remarkable people who comprise 

civilian and military teams are the Department’s greatest asset in providing a 

strong and agile national security response.

Figure 1-2. Staffing for FY 2010

(As of August 31, 2010)

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Reserve

388,902

12%

Active Duty

1,435,731

47%

Civilian

790,559

26%

National Guard

470,534

15%
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

9

The Department’s worldwide infrastructure includes nearly 539,000 facilities 

(buildings and structures) located at more than 5,000 sites around the world, 

on more than 28 million acres. These sites vary greatly in size. They range 

from the very small (an unoccupied site supporting a single navigational aid 

that sits on less than one-half acre of land) to the vast and immense, such 

as the Army's White Sands Missile Range in New Mexico (with over 

3.6 million acres) or the Navy’s large complex of installations in Norfolk, 

Virginia. To protect the security of the U.S., the Department operates 

approximately 15,800 aircraft and 500 ships. 

To support mission requirements, the 

Department continues to focus on investing 

financial resources effectively to meet the 

needs of the warfighter and the ever-changing 

battlefield. We continue to invest in weapon 

systems and capabilities to counter 

21st Century threats, support the workforce, 

and accomplish mission requirements and 

objectives. During FY 2010, DoD’s enacted 

budget authority amounted to $691.2 billion. 

Figure 1-3 depicts the composition of DoD’s 

budget authority.

The Overseas Contingency Operations 

(OCO) resources enable the Department to

support and to fund efforts in Afghanistan, 

Iraq, Pakistan, and other areas around the 

globe. In Iraq, the Department executed the 

responsible drawdown of forces as it 

concluded Operation Iraqi Freedom and 

transitioned to Operation New Dawn. In 

Afghanistan, U.S. forces increased in FY 2010 to execute the President’s 

plan. The U.S. troops continue to work with Afghan Security Forces and 

international partners to build a country that will not be a safe haven for 

terrorists.

The Department’s funding levels ensured the nation could meet all national 

security objectives. Funding enabled the Department to maintain readiness 

to conduct missions abroad and a full spectrum of training, combat training 

center rotations, and recruiting and retention efforts. Modernization and 

recapitalization of equipment, focused on today’s threats, greatly improved 

combat capabilities. These new capabilities included procurement and 

development of platforms, such as the fifth generation Joint Strike Fighter 

aircraft; the Littoral Combat Ship; unmanned aerial vehicles, such as Global 

Hawk and Predator; new generation ground vehicles, such as the Stryker; 

communications, navigation, missile warning, space situational awareness, 

and environmental monitoring satellites; and missile defense systems. 

B10-17

Budget by Appropriation

Military Personnel 151.8

Operation and Maintenance 298.0

Procurement 126.5

RDT&E 85.5

Military Construction 22.4

Family Housing 2.3

Revolving Funds 4.7

Total $691.2

OCO

$129.5B

(19%)

Base

Budget

$528.2B

(76%)

Haiti 

Supp

$0.7B

(<1%)

$ in Billions

Figure 1-3. Department of Defense 

FY 2010 Enacted Budget ($691.2B) 

OCO

Supp

$32.8B

(5%)
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

10

In FY 2010, resources funded the construction and maintenance of 

additional modernized housing, both government-owned and privatized. 

These constructed housing units support the Army and Marine Corps’ 

growth in ground forces. In addition, DoD built wounded warrior facilities

and schools and recapitalized other medical facilities. The Department 

funded the operation of 254 commissary stores and education for over 

85,122 students in 191 schools.

In addition, the Department provided critical 

logistics, transportation, and communication 

capabilities to meet urgent disaster relief 

requirements in response to the devastating 

magnitude 7.0 earthquake that struck Haiti. 

The DoD also responded to Pakistan’s call 

for humanitarian assistance as part of a 

multinational effort following the tragic and 

devastating flooding that started on 

July 29, 2010. 

The Base Realignment and Closure (BRAC) 

initiative continued with $7.5 billion in 

funding to keep the Department on track to 

meet its 2011 completion date. Military 

construction is well underway and 

personnel movements have begun. 

To ensure the security of the U.S., the Department remains dedicated to 

obtaining the required resources and making the best use of them. Taking 

care of our people, reshaping and modernizing the force, and supporting our 

troops in the field also remains a high priority for the Department, which is 

committed to spending funds carefully and effectively.

Haitian children watch as U.S. Marines and Sailors with Operation Continuing Promise 2010 (CP10) repair a hospital roof in Port-de-Paix, Haiti, July 29, 2010. CP10 was a collaborative between military and civilian personnel that provided humanitarian assistance and disaster relief to the residents of Caribbean and Central and South American countries. (U.S. Marine Corps photo by Sgt. Samuel R. Beyers/Released) DOD photo

Men from the town of Kalam, Pakistan, form a chain to quickly unload a U.S. 

Army Chinook helicopter that is delivering humanitarian assistance and picking 

up victims of the flood in the Khyber Pakhtunkhwa province, Aug. 10, 2010. 

DOD photo

Haitian children watch as U.S. Marines and Sailors with Operation Continuing Promise 2010 (CP10) repair a hospital roof in Port-de-Paix, Haiti, 

July 29, 2010. CP10 was a collaborative between military and civilian personnel that provided humanitarian assistance and disaster relief to the residents of 

Caribbean and Central and South American countries. 

(U.S. Marine Corps photo by Sgt. Samuel R. Beyers/Released) DOD photo
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

11

Program Performance Overview

Department of Defense Strategic Plan

The Department examines America’s 

defense needs by conducting the 

Quadrennial Defense Review (QDR). This 

review examines national defense strategy, 

force structure, force modernization plans, 

infrastructure, budget plans, and other 

elements of the defense program and 

policies of the United States, consistent with 

the most recent National Security Strategy 

and National Military Strategy. The QDR 

report constitutes DoD’s strategic plan.

In FY 2010, the Department completed and 

issued the latest QDR; however, DoD 

formulated the goals for FY 2010 before 

completion of this latest QDR. Thus the 

goals do not reflect that document’s 

conclusions. Instead, the Department 

based the FY 2010 goals, depicted in 

Figure 1-4, on the 2008 National Defense Strategy objectives, plus an 

additional objective focused on business operations. 

Strategic Goal 1, ―Win Our Nation’s 

Wars,‖ focuses on the ongoing conflict

and extended stabilization campaigns in 

Afghanistan and Iraq.

Strategic Goal 2, ―Deter Conflict and 

Promote Security,‖ focuses on 

integrated security cooperation and 

reorienting the Armed Forces to deter 

and defend against transnational 

terrorists around the world. 

Strategic Goal 3, ―Defend the Homeland,‖ 

focuses on DoD’s contributions to our 

homeland defense mission. Success, 

under this goal, requires that all elements 

of national power work together to protect 

our national interests. 

Strategic Goal 4, ―Integrate Business 

Operations,‖ focuses on improving and 

integrating DoD business operations to 

better support the warfighter.

Defense Secretary Robert M. Gates conducts a press conference at the 

Pentagon, August 9, 2010. Gates said he is taking steps to reduce overhead 

and flatten the DoD organization. With these moves, the secretary said, he 

wants to instill a culture of saving in the department. 

DoD photo by Cherie Cullen B10-04

Goal 2

Deter Conflict 

and Promote 

Security

Goal 1

Win Our 

Nation’s 

Wars

Goal 3

Defend 

the 

Homeland

Goal 4

Integrate Business Operations

Supporting Goal

Primary Warfighting Goals

Figure 1-4. FY 2010 Strategic Goals
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

12

Department of Defense Performance Hierarchy

Primary responsibility for performance 

improvement rests with the Deputy 

Secretary of Defense in his role as the Chief 

Management Officer (CMO). The Deputy 

Secretary is assisted by the Deputy 

CMO/DoD Performance Improvement 

Officer, who advises and integrates 

performance information across the 

Department. The Principal Staff Assistants 

within the Office of the Secretary of 

Defense, in coordination with the Joint 

Chiefs of Staff, recommend the strategic 

objectives and performance targets, 

determined to be the most relevant for 

enterprise (DoD-wide) strategic focus. The 

strategic objectives and performance 

targets (measures and milestones) are 

subject to annual refinement based on 

changes in missions and priorities. 

Figure 1-5 highlights that every level within 

the Department is accountable for 

performance and delivering results. 

FY 2010 Department of Defense Key 

Performance Outcomes

The Department’s initial FY 2010 Performance Plan included 

53 performance targets at the enterprise (DoD-wide) level. Subsequently, 

the Deputy Secretary of Defense, in his role as CMO, approved a number of 

changes based on new Administration 

direction calling for, among other things, 

development of a limited number of Priority 

Performance Goals. As a result, the 

Department increased the number of 

enterprise-level performance targets, from 53 

to 66 targets, in FY 2010. 

The following tables, organized by DoD 

Strategic Goal and Objective, depict 19 key 

performance outcomes for FY 2010. Unless 

otherwise stated, the tables report progress 

through third quarter, FY 2010. Based on 

third quarter data, the Department is on track 

to meet 74 percent (Figure 1-6) of these key 

outcomes. 

B10-05

Mission

Program-Level 

Performance Targets 

DoD Component-Level 

Performance Targets 

OSD Enterprise-Level 

Performance Targets 

Strategic 

Objectives

Strategic 

Goals

Mission 

Drivers

Personnel 

Accountability

National 

Defense 

Strategy

National 

Military 

Strategy

National 

Security 

Strategy

Figure 1-5. FY 2010 Strategic Goals

B10-18

Targets

at Risk

26%

Targets

on Track

74%

Figure 1-6. FY 2010 DoD Key 

Performance Outcome Analysis

74% of Performance Targets on Track
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

13

Strategic Goal 1: Win Our Nation’s Wars

Two key performance outcomes reflect the Department’s success in meeting 

its military operational objectives in Afghanistan and Iraq. As reflected in the 

following chart, all Combatant Commanders reported they were ready to 

execute 100 percent of their Current Operations. In addition, the Joint 

Contracting Command (JCC) was successful in addressing critical personnel 

shortfalls in theater. As of third quarter, the JCC achieved its longer term 

goal for maintaining a 90 percent assignment rate of Contracting Officer 

Representatives (CORs) supporting Afghan contingency operations.

STRATEGIC GOAL 1: WIN OUR NATION’S WARS

Performance Measures Strategic Plan Long-Term 

Performance Targets

Annual Performance Targets/Results

FY 2009 

Results

FY 2010 

Targets

FY 2010

3 Qtr 

Results

Strategic Objective 1. OCO: Successfully conduct Overseas Contingency Operations (OCO) and support

contingency business operations.

1.OCO: Percent of the 

Combatant Commanders’ 

(COCOMs) Current -Operations 

which they report ready to 

execute 

1. OCO: For each fiscal year, 

DoD COCOMs will be ready to 

execute 100 percent of Current 

Operations.

100% 100% 100%

*1.OCO: Percent assigned of 

required Contracting Officer 

Representatives (CORs)

supporting Afghan contingency 

operations 

1. OCO: Beginning in FY 2012, 

the DoD will maintain an 

assignment rate of 90 percent of 

required Contracting Officer 

Representatives (CORs) 

supporting Afghan contingency 

operations. 

Not 

Available 85% 90%

*Reflects DoD priority goal.

Strategic Goal 2: Deter Conflict and Promote Security

Five performance outcomes are key to satisfying the Department’s 

deterrence missions and achieving its national security objectives. The first 

two targets focus on Combatant Command readiness. As of third quarter, 

all Combatant Command reported they were ready to execute 100 percent 

of their Core or Theater Campaign Plan missions; however, they are falling 

short in meeting the goal of being ready to execute all of their Contingency 

Plans due to heavy resource commitment to our current efforts in 

Afghanistan. A third measure focuses on DoD Special Operations Forces’ 

capability to address irregular/unconventional warfare. As of third quarter, 

the Department surpassed its annual target for increasing the number of 

DoD Special Operations personnel and is on track to meet its technology 

security actions target for providing international partners with access to 

equipment, technology, and training. The fifth and final outcome focuses on 

Defense Enterprise Human Intelligence (HUMINT). As of the third quarter, 

the Department exceeded its annual performance target by achieving a 

99 percent customer satisfaction rate with Defense HUMINT support.
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

14

STRATEGIC GOAL 2: DETER CONFLICT AND PROMOTE SECURITY

Performance Measures Strategic Plan Long-Term 

Performance Targets

Annual Performance Targets/Results

FY 2009 

Results

FY 2010 

Targets

FY 2010

3 Qtr 

Results

Strategic Objective 2.1F1: Institutionalize irregular warfare and strengthen alliances and partnerships

in order to deter conflicts and promote international security.

2.1F1: Percent of Combatant 

Commanders (COCOMs) that 

are ready to execute their 

Core or Theater Campaign 

Plan missions

2.1F1: For each fiscal year, 

DoD COCOMs will be ready to 

execute 100 percent of Core or 

Theater Campaign Plan 

missions. 

100% 100% 100%

2.1F1: Percent of COCOMs’

Contingency Plans which they 

report ready to execute 

2.1F1: For each fiscal year, 

DoD COCOMs will be ready to 

execute 100 percent of their 

Contingency Plans.

89% 80%  78.6%

2.1F1: Cumulative percent 

increase in DoD Special 

Forces and Navy SEAL 

personnel achieved

2.1F1: By FY 2012, DoD will 

increase its Special Forces and 

Navy SEAL personnel by

32 percent from the FY 2006 

actual end strength of 13,206.

23% 26% 27%

2.1F1: Annual number of 

Technology Security Actions

(TSAs) approved

2.1F1: Beginning in FY 2007, 

DoD will increase the number 

of relevant technologies 

involving transfers to 

international partners by 

two percent per year.

143,600 146,472 96,149

Strategic Objective 2.1X2: Improve intelligence, surveillance, and reconnaissance (ISR) to enhance 

Battle Space awareness.

2.1X2: Rate of customer 

satisfaction with Defense 

enterprise HUMINT support

2.1X2: By FY 2011, DoD will 

achieve and maintain a 

customer satisfaction rate with 

Defense Enterprise HUMINT 

support of 90 percent or 

greater.

99% 88% 99%

Strategic Goal 3: Defend the Homeland

The Department assesses its contributions to our homeland defense mission 

by measuring two key performance outcomes, both of which focus on the 

capabilities necessary to mitigate attacks on the U.S. and its territories. As of 

third quarter, the Department is slightly ahead of schedule in destroying treatydeclared category 1 chemical weapons. In addition, DoD is on track to have 

13 additional zonal diagnostic labs built and equipped for biological agent 

detection and response by the end of the FY 2010. 
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

15

Strategic Goal 4: Integrate Business Operations

The Department assesses its infrastructure operations by measuring ten key 

performance targets. The first two targets address the acquisition function. 

While the Department exceeded its target in hiring additional acquisition 

personnel, the number of significant cost overruns on Major Defense 

Acquisition Programs (MDAPs) has more than tripled over the prior year 

(FY 2009) level. In addition, the Icelandic volcano delayed air shipments to 

the European theater, preventing the Department from achieving its FY 2010 

customer wait time target for providing joint warfighting support to our 

operating forces.

The Department is on track to achieve four key performance outcomes that 

affect its ability to maintain an ―All Volunteer‖ military force. One outcome

reflects implementation of a healthcare-related process change used to 

determine military medical fitness for duty. As of third quarter, DoD 

surpassed its annual target concerning the percent of military members 

participating in a single disability evaluation. In addition, the Department 

continues to maintain its prescribed Active and Reserve Component end

strength, and reducing the number of soldiers under stop loss. 

The Department made less progress in two priority performance areas 

associated with security assistance and DoD audit readiness. As of the third 

quarter, FY 2010, the Department was under-executing its security 

assistance training target, but was projected to meet the training target by 

fiscal year end. Additionally, the Department was at risk of not meeting its 

audit readiness target for DoD appropriations received, primarily due to 

contractual process delays. However, the Department expects to have the 

independent audit firm validation contract in place and have 80 percent of 

this goal validated by the end of FY 2011.

STRATEGIC GOAL 3: DEFEND THE HOMELAND

Performance Measures Performance Measures

Strategic Plan Long-term Performance 

Targets

FY 2009 

Results

FY 2010 

Targets 

FY 2010

3 Qtr 

Results

Strategic Objective 3.1F2: Improve capabilities to prevent and mitigate attacks on U.S. personnel, 

facilities, and key assets.

3.1F2: Cumulative percent of 

treaty-declared category 1 

chemical weapons destroyed

3.1F2: By FY 2021, DoD will 

have destroyed 100 percent of 

treaty-declared category 1 

chemical weapons. 

65.5% 74.2% 75%

3.1F2: Cumulative number of 

zonal diagnostic labs built and 

equipped for biological agent 

detection and response

3.1F2: By FY 2013, DoD will 

have built and equipped 43 

zonal diagnostic labs for 

biological agent detection and 

response.

19 32 20
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

16

The tenth and final key outcome focuses on another DoD priority 

performance goal area—i.e., personnel security clearance reform. By third 

quarter, FY 2010, the Department had cut in half the number of days it took 

in the prior year (FY 2009) to adjudicate personnel security clearance cases.

STRATEGIC GOAL 4: INTEGRATE BUSINESS OPERATIONS

Performance Measures Performance Measures

Strategic Plan Long-term Performance 

Targets

FY 2009 

Results

FY 2010 

Targets 

FY 2010

3 Qtr 

Results

Strategic Objective 4.2E: Improve acquisition performance by integrating lifecycle management 

principles into DoD and Service acquisition, maintenance, and sustainment 

processes. 

*4.2E: Number of Major 

Defense Acquisition Program 

(MDAP) breaches equal to or 

greater than 15 percent of 

current Acquisition Program 

Baseline (APB) unit cost or 

equal to or greater than 30 

percent of original APB unit 

cost

4.2E: Beginning in FY 2010, DoD 

will ensure the number of 

breaches (significant cost 

overruns) for MDAPs is equal to or 

less than the previous fiscal year. 2 2 7

*4.2E: Cumulative increase in 

the number of DoD civilian and 

military end strength 

performing acquisition 

functions

4.2E: By FY 2015, DoD will 

increase the total number of DoD 

civilian and military personnel 

performing acquisition functions by 

19,887 end strength.

1,985 6,065 6,248

Strategic Objective 4.2L: Integrate joint supply chains from source of supply to operational customers.

4.2L: Average customer wait 

time

4.2L: Beginning in FY 2007, DoD 

will reduce average customer wait 

time to 15 days.

16.2 15 16.7

Strategic Objective 4.2M: Ensure the trust of the Total Force, their families, and the nation through 

superior care and support.

4.2M: Percent of military 

members participating in a 

single, disability 

evaluation/transition medical 

exam to determine fitness for 

duty and disability rating

4.2M: By FY 2011, 100 percent of 

military members will participate in 

a single, disability evaluation/ 

transition medical exam to 

determine fitness for duty and 

disability rating.

27% 40% 47%

Strategic Objective 4.2P: Maintain and shape a mission ready All Volunteer force and enhance the 

civilian workforce.

4.2P: Percent variance in 

Active Component end 

strength 

4.2P: For each fiscal year, DoD

must maintain Active component 

end strength at or not to exceed 

three percent above the 

SECDEF/NDAA-prescribed end 

strength for that fiscal year.

0.9% 0-3% 0.9%
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

17

The Department will address final year-end results for all 66-performance

outcomes in DoD’s more detailed performance report for FY 2010, submitted 

with the FY 2012 Congressional Budget Justification on or about 

February 7, 2011 at http://www.defenselink.mil/comptroller/.

STRATEGIC GOAL 4: INTEGRATE BUSINESS OPERATIONS

Performance Measures Performance Measures

Strategic Plan Long-term Performance 

Targets

FY 2009 

Results

FY 2010 

Targets 

FY 2010

3 Qtr 

Results

4.2P: Percent variance in 

Reserve Component end 

strength

4.2P: For each fiscal year, DoD

Reserve component end strength 

will not vary by more than 

three percent from the SECDEF/ 

NDAA-prescribed end strength for 

that fiscal year. 

0% +/-3% 1%

4.2P: Number of soldiers

under stop loss

4.2P: By FY 2011, the 

Department will reduce the 

number of soldiers under stop loss 

to zero.

9,753 6,609 4,794

Strategic Objective 4.2T: Prepare the force to meet current and emerging challenges faced by 

operational commanders and reinvigorate the acquisition and security 

cooperation workforces.

*4.2T: Cumulative percent of 

incumbents who have been 

trained in security assistance 

in positions that require 

security assistance training

4.2T: By FY 2011, DoD will 

increase the percent of 

incumbents who trained in security 

assistance for positions that 

require security assistance training 

to 95 percent or better.

67% 80% 70%

Strategic Objective 4.2U: Strengthen joint headquarters, personnel security clearance, and financial 

management activities. 

*4.2U: Percent of DoD 

Statement of Budgetary 

Resources Appropriations 

Received (line 3A) validated

4.2U: By FY 2013, 100 percent of 

DoD Statement of Budgetary 

Resources Appropriations 

Received (line 3A) will be 

reviewed, verified for accuracy, 

and ―validated‖ or approved as 

audit-ready.

18.5% 53% 18.5%

*4.2U: Average number of 

days required to adjudicate the 

fastest 90 percent of initial top 

secret and secret personnel 

security clearance cases

4.2U: Beginning in FY 2010, the 

Department will adjudicate the 

fastest 90 percent of initial top 

secret and secret personnel 

security clearance cases within 20 

days.

25 20 11

*Reflects DoD priority goal.
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

18

Message from the Chief Financial Officer

As Chief Financial Officer for the Department of Defense (DoD), I am 

pleased to present our Agency Financial Report for FY 2010. This report 

summarizes how the Department managed $691.2 billion in funds 

appropriated by the Congress to sustain America’s Armed Forces and to 

support operations in Afghanistan and Iraq. We believe that the information 

found here will be helpful to taxpayers who want to understand Defense 

spending.

DoD financial managers can be proud of some significant 

accomplishments. Most importantly, they ensure that 

warfighters have the resources and financial services needed 

to meet the country’s national security requirements.

DoD also has been a successful partner in the 

Administration’s efforts to reduce improper payments. The 

Department’s improper payment rate for vendors is less than 

a tenth of one percent. The rate is less than one percent for 

most types of payments to employees, and the majority of 

these are underpayments that are quickly corrected.

However, DoD financial management suffers from enterprisewide problems with systems and processes, and the lack of 

auditable financial statements is one manifestation of these 

problems. In response, DoD has established a new 

approach to this longstanding problem, focusing its efforts to achieve 

auditability on the budgetary and other information most used to manage. 

The new approach has provided a common focus and a sense that the audit 

effort is worthwhile. To implement this new approach, DoD also has: 

Established long term but also interim goals for achieving auditable 

statements;

Created a governance process that includes close partnership with 

the Department’s chief management officers; and

Programmed substantial resources to correct the problems that 

prevent auditability.

As DoD’s Chief Financial Officer, I am fully committed to meeting the 

resource needs of our warfighters. I am equally committed to managing 

taxpayer dollars in a manner that is effective and efficient, and to providing 

high-quality financial information that fully documents the Department’s 

financial activities. 
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

19

Financial Performance Overview

The Department displays significant strengths in its financial management of 

taxpayer resources. Most importantly, Defense financial managers are 

successfully providing DoD’s warfighters with the resources and financial 

services necessary to meet our national security objectives. They are doing 

so in Afghanistan, Iraq, and around the world. 

The Department also has effective financial processes for many key 

functions. For example, DoD’s payment processes successfully ensure 

timely and accurate payments in a very high percentage of cases, including 

employee payments, with 99 percent accuracy. In addition, DoD issues over 

$30 billion in commercial payments every month ($1.5 billion every business 

day), with an error rate at less than a tenth of one percent. 

The Department has reduced interest payments dramatically. As of 

August 2010, DoD had reduced interest penalty payments by 29 percent 

since FY 2007, despite a 26 percent increase in amounts paid. Along with 

these significant improvements, DoD’s summary cash reconciliation rates 

with the Department of the Treasury are very high. As we work to further 

improve DoD financial management, we must be careful not to achieve 

improvements at the expense of these successes.

Overall, the Department has made progress toward improving financial 

information and audit readiness in several entities. For example, the U.S. 

Army Corps of Engineers achieved fully auditable financial statements. 

Several Defense Agencies maintain auditable statements, including the 

Defense Finance and Accounting Service and the Defense Contract Audit 

Agency. Several large trust funds managed by DoD also are auditable. It 

also is clear, however, that the most daunting challenges for the Department 

remain ahead, particularly the challenge of moving the Military Services 

toward auditability.

Enterprise-Level Weaknesses

The Department recognizes that there are enterprise-wide weaknesses in 

DoD financial management. Some enterprise-level issues currently prevent 

the Department as a whole from receiving an unqualified opinion on its 

financial statements. The DoD’s current business environment – including 

systems and processes – do not record the financial results of business 

events (such as contract signing) in a consistent and reliable manner. Many 

of DoD’s information systems are old, designed decades ago to meet 

budgetary rather than proprietary accounting standards, and tend to be nonstandard and without good financial controls. 

The Department’s enormous size and geographical dispersion substantially 

complicate the Department’s financial improvement efforts. The DoD 

obligates an average of $2 billion to $3 billion every business day and 

handles hundreds of thousands of payment transactions, which take place in 

thousands of worldwide locations, including war zones. Because of DoD’s 
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

20

size and mission requirements, it is not feasible to deploy a vast number of 

accountants to manually reconcile our books. 

For these reasons, the Government Accountability Office (GAO) designated 

DoD’s financial management operations and controls as a high-risk area in 

1995. The GAO assessment reflects the inherent problems that have 

developed as DoD business operations have grown within a large, 

decentralized organization that is both mission-oriented and functionally 

―stove-piped.‖ In this environment, individual organizational elements 

control and execute their budgets using different processes, controls, and 

systems, which makes it problematic to aggregate and report financial 

information as envisioned by the Chief Financial Officers Act. Further, the 

lack of compliant, integrated financial and financial-feeder business systems 

is a material weakness that makes this challenge even more daunting for an 

organization with this size and complexity. 

Audits performed by DoD IG identified long-standing material weaknesses 

that continue for FY 2010. The material weaknesses fall into two categories:

(1) Noncompliant Systems. Most legacy systems do not comply 

with the wide range of systems requirements, and do not provide 

assurance that core financial systems and related information is 

traceable to source transactional information. Smaller 

organizations have successfully applied compensating controls, 

as demonstrated by favorable audit opinions, but these are not 

practical in larger organizations, such as the Military 

Departments.

(2) Legacy Financial Processes. Many financial processes, such 

as accounts receivable and accounts payable, do not comply with 

Generally Accepted Accounting Principles (GAAP) because they 

are dependent on the noncompliant legacy systems currently 

used to compile financial information for DoD financial 

statements. 

The Department acknowledges these material weaknesses. DoD is working 

toward implementing solutions to improve Department-wide financial 

processes, controls, and systems. 

Audit Readiness

The Department plans to achieve its financial management goals and audit 

readiness through an active partnership between the Deputy Chief 

Management Officer (DCMO), the Under Secretary of Defense (Comptroller) 

(USD(C)), and the Department’s Chief Management Officers (CMOs). This 

partnership allows us to draw support from across the enterprise, including 

the acquisition, logistics, and other business communities. To enhance 

oversight and governance, USD(C) created the Financial Improvement and 

Audit Readiness (FIAR) Governance Board, co-chaired by the DoD 

Comptroller and the DCMO. This board includes the Military Department 
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

21

CMOs, DoD’s financial management leaders, and senior representatives 

from the functional communities. The Department also established the DoD 

Audit Advisory Committee (DAAC), which provides independent advice to 

the Secretary of Defense regarding DoD’s financial management, including 

financial reporting policies, processes, systems of internal controls, audit 

processes, and processes for monitoring compliance with relevant laws and 

regulations. The DAAC members, appointed by the Secretary of Defense to 

three-year terms, are distinguished members of the audit, accounting, and 

financial communities.

The Department’s Audit Readiness Plan. The Department has instituted 

a new approach to improve information and move toward audit readiness. 

Recognizing that many decisions are budget-related, DoD adjusted its FIAR 

strategy (depicted in Figure 1-7) to focus first on improving processes, 

controls, and systems that produce budgetary information and the existence 

and completeness (E&C) information needed to manage mission-critical 

assets. At the same time, the Department will seek a cost-effective 

approach that results in an unqualified audit opinion on all its financial 

statements. For more information on DoD’s FIAR Plan, refer to 

http://comptroller.defense.gov/FIAR/. 

By focusing on accuracy and timeliness of budgetary information, the 

Department will improve the reliability of information used most often by 

management and meet the goal of obtaining auditable financial statements, 

starting with the Statement of Budgetary Resources (SBR). Improving the 

reliability of information on the existence and completeness of mission-critical 

assets – such as Military Equipment, Real Property, Inventory, Operating 

Materials and Supplies, and General Equipment – will ensure that dependable 

information is available to those who manage assets. 

Over the last year, the Department took a number of significant steps to 

ensure progress in achieving FIAR goals. These steps include: 

Redefining the FIAR strategy to focus improvement efforts on the 

information most used to manage; 

Figure 1-7. FIARAudit Readiness Strategy

B10-20
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

22

Setting long-term and interim goals; 

Increasing resources (people and dollars) for FIAR activities within the 

Office of the USD(C) and Component entities; 

Expanding the FIAR Governance Board to include most senior DoD 

financial leaders, functional community representatives, and DCMO, and 

the Military Department CMOs;

Developing a phased-improvement methodology, identifying essential 

key tasks within each phase; and 

Formally issuing DoD-wide FIAR guidance that explains, in detail, the 

FIAR strategy and FIAR methodology.

Audit Progress to Date. The following FY 2010 achievements highlighted 

in Figure 1-8 reflect the Department’s progress to improve financial 

management:

The United States Marine Corps (USMC) asserted audit readiness and 

the DoD IG is auditing its FY 2010 Statement of Budgetary Resources. 

Although the audit outcome may not immediately result in a ―clean 

opinion,‖ USMC made significant progress in improving budget and other 

financial information and obtaining support from various communities to

achieve auditable financial statements. 

The Defense Information Systems Agency Working Capital Fund 

addressed financial management deficiencies identified in a 2009 audit 

and asserted audit readiness for its financial statements.

The Air Force and the Defense Logistics Agency asserted audit 

readiness on Appropriations Received 

in the fourth quarter of FY 2010.

The Navy asserted audit readiness for 

existence and completeness of Military 

Equipment and the Ordnance category 

of Operating Materials and Supplies in 

the fourth quarter of FY 2010.

The Navy asserted audit readiness for 

Transportation of People in the fourth 

quarter of FY 2010.

Air Force continues to make significant 

progress to achieve its Mission Critical 

Asset Existence and Completeness 

priority for Military Equipment and 

Operating Materials and Supplies before 

the end of FY 2011.

Figure 1-8. FIARPriority Audit 

Readiness Assertions

Component Audit Readiness Assertions Date

DISA - WCF All Financial Statements 3Q 2010

USMC SBR 4Q 2008

Navy Appropriations Received 2Q 2009

Navy Civilian Pay 3Q 2010

Air Force Appropriations Received 4Q2010

Air Force Rescissions 4Q2010

Air Force Non-expenditure Transfers 4Q2010

DLA Appropriations Received 4Q 2010

Navy Military Equipment 4Q 2010

Navy OM&S - Ordnance 4Q 2010

Mission Critical Asset Existence and Completeness Audit

Statement of Budgetary Resources (SBR) Audit

All Financial Statements
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

23

Full Auditability

The FY 2010 National Defense Authorization Act (NDAA) requires the 

Department to assert that its financial statements are ready for audit no later 

than September 30, 2017. The Department is committed to improving the 

reliability and accuracy of financial information with the highest priority 

placed on information most useful for decision-making. This priority has not 

changed, and the Department is continuing to focus on budget and mission 

critical-asset information. 

In its report on the FY 2011 NDAA, the Senate Armed Services Committee 

directed the Department to perform a cost-benefit analysis of asset valuation

alternatives and to develop a business case to justify its resulting decision. 

The Department currently is assessing the costs and associated benefits of 

reporting and auditing Balance Sheet cost information and will report the 

results in the May 2011 FIAR Plan Status Report. The Department also is 

discussing possible changes in financial reporting with the Office of 

Management and Budget (OMB) and the GAO.

In conclusion, the Department will aggressively work toward achieving

current priorities and will continue to work with the Congress, GAO, and 

OMB to resolve the Department’s concerns related to the cost of attaining 

full auditability under the existing Federal accounting and auditing standards.

Improvements to Financial Systems

Working within the framework of the Business Enterprise Architecture (BEA)

that defines basic standards for end-to-end business processes and data, 

the Department continues implementation of Enterprise Resource Planning 

(ERP) systems. These ERP initiatives target implementation of a 

standardized financial information structure that is compliant with Federal 

Financial Management Improvement Act (FFMIA) and BEA requirements.

In FY 2010, the Services and Defense Agencies made significant progress 

in implementing ERPs. The Army implemented two mini-deployments and a 

larger wave three deployment in the General Fund Enterprise Business 

System to 5,000 end users. The Navy deployed its ERP to 12,000 users 

Figure 1-9. FIARPlan Relationship to the DoD Strategic Management Plan 

and Other DoD Plans

OUSD (AT&L) Plans

DoD Strategic Management Plan

Defense Enterprise

Transition Plan

Component Accountability 

Plans

Component Financial 

Improvement Plans

Component ETPand 

System Implementation 

Plans

Asset 

Accountability 

and Valuation

Asset 

Accountability 

and Valuation

FM System

Improvements

FM System

Improvements

1

Volunteer Force

2

Contingency Ops

3

Acquisition Reform

4

Civilian Workforce

5

Financial Mgmt

Financial Improvement 

and Audit Readiness 

(FIAR) Plan
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

24

within the Naval Air Systems Command, Naval Supply Systems Command, 

and Space and Naval Warfare Systems Center. The Air Force deployed 

complete accounting capability to Scott Air Force Base using the Defense 

Enterprise Accounting and Management System. 

The Department also successfully implemented the Defense Agencies 

Initiative for all accounting functionality at two Defense Agencies. The Air 

Force, in partnership with the Defense Finance and Accounting Service, 

implemented Columbus Cash Accountability System. This system will 

identify Fund Balance with Treasury in-transit collection and disbursement 

transactions that need correction, redirection, or research, thereby providing 

actionable information for corrective action. 

In addition, Military Departments and Defense Agencies implemented the 

Real Property Installation Lifecycle Management System to improve real 

property installation management and visibility and achieve better 

connection to direct and indirect costs. 

The Department will continue to implement ERP solutions to improve the 

accuracy and reliability of its financial statements. The Investment Review 

Boards and the Defense Business Systems Management Committee will 

continue to provide oversight to ensure that progress continues and that 

implementation issues are timely and effectively resolved. 

Financial Analysis

The Department’s FY 2010 financial statements are presented in the Financial 

Information section. The DoD’s management is responsible for the integrity of 

the financial information presented in these financial statements. At this time, 

management cannot provide reasonable assurance of effective internal 

management controls over financial reporting; however, DoD’s financial 

improvement initiatives and systems’ modernization efforts continue to 

demonstrate progress. The Department’s leadership is committed to 

improving internal controls and safeguarding the resources entrusted to us.

These statements were prepared from the books and records of the 

Department in accordance with U.S. generally accepted accounting principles 

(USGAAP), when possible, the Office of Management and Budget (OMB) 

Circular No. A-136, ―Financial Reporting Requirements,‖ and the ―DoD 

Financial Management Regulation.‖ 

The financial statements have been prepared to report DoD’s financial 

position and results of operations, and include the:

Statement of Budgetary Resources

Statement of Net Cost 

Balance Sheet

Statement of Changes in Net Position
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

25

Summary of FY 2010 Financial Reporting. 

For FY 2010, the financial statements for six of 

33 reporting entities within the Department 

received unqualified audit opinions. See 

Figure 1-10. 

Budgetary Resources. In accordance with 

Federal statutes and implementing regulations, 

obligations may be incurred and payments made 

only to the extent that budgetary resources are 

available to cover such items. The Statement of 

Budgetary Resources presents the DoD’s total 

budgetary resources, their status at the end of the year, and the relationship 

between the budgetary resources and the outlays made against them. 

The Department’s FY 2010 enacted appropriations total $691.2 billion, as 

depicted in Figure 1-3 on page 9. The Department also received resources 

from the U.S. Treasury for retirement and health benefits and appropriations 

in support of civil work projects executed by the U.S. Army Corps of 

Engineers. In total, the Department received $769 billion in FY 2010

resources, as shown in Figure 1-11. Additional budgetary resources for the 

year include $201 billion for outstanding requirements carried forward from 

FY 2009, $187 billion in collections related to reimbursed activity, and 

$73 billion in contract authority. In total, the Department had $1.2 trillion in 

available budgetary resources. 

Of the $1.2 trillion in total budgetary resources, $1.1 trillion (92 percent)

were obligated and $994 billion (90 percent) of obligations were disbursed. 

The remaining ten percent of unobligated budgetary resources relate to 

B10-11

DoD Reporting Entity Audit Opinions

U.S. Army Corps of Engineers Unqualified

Military Retirement Fund Unqualified

Defense Commissary Agency Unqualified

Defense Finance and 

Accounting Service Unqualified

Defense Contract Audit Agency Unqualified

Office of the Inspector General Unqualified

Figure 1-10. Audit Opinions

B10-12

Employer 

Contribution to 

Retirement 

Benefits

$27

4%

Procurement

$126

16%

Family 

Housing & 

Facilities

$25

3%

Military

Pay & 

Benefits

$125

16%

Operations, 

Readiness & 

Support

$303

39%

Military 

Retirement 

Benefits

$73

10%

$ in Billions

$769B

Contract Authority

$73 (6%)

Reimbursed Collections

$187 (15%)

Enacted Appropriations

$691 (56%)

Trust Fund Receipts

$ 73 (6%)

Civil Work Projects

$ 5 (1%)

Brought Forward Authority 

$201 (16%)

$1.2T

FY 2010 

Appropriations 

Received

$ in Billions

Breakout

Research 

Development 

& Test

$85

11%

Figure 1-11. FY 2010 Total Budgetary Resources

Civil Works

$5

1%
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

26

appropriations available to cover multi-year modernization projects, which 

require additional time to procure. 

The Department obligated much of its FY 2010 resources to responsibly

draw down the military forces in Iraq as it concluded Operation Iraqi 

Freedom and transitioned to Operation New Dawn. In Afghanistan, U.S. 

forces worked with Afghan Security Forces and international partners to 

build a country that will not be a safe haven for terrorists. In addition, the 

Department used resources to maintain readiness to conduct missions 

abroad as well as to modernize and recapitalize equipment that greatly 

improve combat capabilities. 

Net Cost of Operations. The Statement of Net Cost reports total expenses 

incurred less the revenues received from external sources to finance those 

expenses. The resulting balance of net cost is essentially equivalent to the 

outlays reported on the Statement of Budgetary Resources, less the assets 

purchased plus accrued liabilities and accounts payable. Differences 

between outlays of budgetary resources and net cost generally arise from 

the timing of expenses recognized. The Statement of Net Cost presents net 

cost of all the Department’s programs for the Military Services and 

Components, as well as the Military Retirement benefits as depicted in 

Figure 1-12.

The Department’s costs incurred relate primarily to operational activities and 

military retirement and health benefits. These costs were offset with 

revenues from external sources primarily from earnings on investments and 

contributions for retirement and health benefits, as well as earnings from 

reimbursed activities, resulting in $802.8 billion in net costs of operations. 

As depicted in Figure 1-12, the $802.8 billion represents a $151.3 billion 

(23 percent) increase from FY 2009. The Military Retirement Benefits 

accounted for $125.2 billion (83 percent) of the increase largely due to a 

B10-14

$802.8B

Civil

Works 

$11.5

1%

Procurement

$103.4

13%

Family

Housing & 

Facilities

$2.4

1%

Military Pay 

& Benefits

$153.3

19%

Operations, 

Readiness

& Support

$220.2

27%

$ in Billions

Military 

Retirement 

Benefits

$204.8

26%

Health

Care

$34.1

4%

Breakout

FY 06

101.5

484.5

FY 07

73.9

527.5

FY 08

136.2

534.0

FY 09

79.6

571.9

FY 10

204.8

598.0

586.0 601.4 670.2 651.5 802.8

DoD Costs

Military 

Retirement

$802.8B

Net Cost of

Operations

Figure 1-12. Net Cost of Operations

RDT&E

$73.1

9%
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

27

$136.4 billion increase from changes in key actuarial assumptions, offset by 

an $11.7 billion increase in earned revenue. Also contributing to the 

increase is $19.0 billion in procurement costs to modernize and recapitalize 

equipment, greatly improving combat capabilities, and a $9.6 billion increase 

in Military Pay and Benefits to attract and retain high-quality military 

personnel to execute the Department’s mission. 

Balance Sheet. The Balance Sheet, which 

reflects the Department’s financial condition as 

of September 30, 2010 (Figure 1- 13), reports 

the DoD’s resources (Assets), the amounts 

owed requiring use of assets available 

(Liabilities), and the difference between them 

(Net Position). 

The $1.9 trillion in assets shown in (Figure 1-14)

represents amounts the Department owns and manages. Assets increased 

$132.9 billion (7 percent) from FY 2009, largely due to increases in 

Investments in U.S. Treasury securities and increases in General Property, 

Plant, and Equipment. 

The $62.7 billion net increase in investments relate to expected normal 

growth to cover unfunded portions of future military retirement and health 

benefits. Funds not needed to pay current benefits are held in separate trust 

and special funds and are invested in U.S. Treasury securities. 

The $37.5 billion net increase in General Property Plant and Equipment

includes increases of $11.5 billion in facilities (buildings and structures) and 

$7.8 billion in construction in progress. These increases were associated with 

construction and maintenance of housing, wounded warrior facilities and 

schools, and recapitalization of other medical facilities. In addition, Military 

Equipment increased $7.2 billion, reflecting the Department’s commitment to 

modernize and recapitalize equipment to improve combat capabilities. 

B10-11a

Balance Sheet

Total Assets $ 1,930.3 

Total Liabilities $ 2,322.4 

Total Net Position $ (392.1)

$ in Millions

Figure 1-13. Net Assets and

Liabilities

Figure 1-14. Assets and Liabilities

B10-15 Assets $1.9T Liabilities $2.3T

Fund Balance 

with Treasury

$521.6

27%

Investments

$499.6

26%

Accounts 

Receivable

$11.6

1%

Other

Assets

$69.6

4%

Inventory

$232.2

12%

Property, Plant 

and Equipment

$595.7

30%

Military Retirement and 

Employment Benefits

$2,176.7

94%

Environmental 

and Disposal 

Liabilities

$62.9

3%

Accounts 

Payable

$32.9

1%

Other Liabilities

$49.9

2%

$ in Billions
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

28

The Department’s liabilities increased $160.5 billion (7 percent) during 

FY 2010, primarily due to growth in actuarial liabilities (Figure 1-15) related 

to military retirement pension and health care benefits. The Department is 

confident in its ability to meet its financial obligations. The U.S. Treasury will 

fund $1.4 trillion (60 percent) of the $2.3 trillion in liabilities resulting from 

actuarial liability that existed at the inception of the Military Retirement and 

Health programs. Additionally, approximately $552.4 billion is already 

available, primarily invested in U.S. Treasury securities that cover an 

additional 24 percent of the outstanding liability. Figure 1-15 identifies the 

unfunded liabilities that require future resources. 

Summary 

Although the financial statements are not auditable for FY 2010, the 

Department’s financial managers are meeting warfighter needs for 

resources and financial services. The 

Department is committed to resolving its

financial management challenges by 

moving away from ―stove-piped‖ financial 

and accounting systems toward end-to-end 

business processes that cross multiple 

disciplines. A top priority is to achieve 

auditability of the Statements of Budgetary 

Resources (SBR) and to verify the 

existence and completeness of missioncritical assets. Focusing on the information 

people use to manage and make decisions, 

DoD can lay the groundwork for the broad 

business management requirements 

necessary for financial reform. This 

approach will improve the business 

operations, along with the quality and integrity of information, and ultimately 

allow DoD’s financial statements to be reliable and auditable.

Figure 1-15. Unfunded Liabilities

B10-14

$ in Billions

Liabilities Covered by 

Budgetary Resources

$552.4

24%

76%

Liabilities 

Not Covered by 

Budgetary Resources

$1,770.0

Unfunded Military Retirement and Health 

Benefits funded by Treasury

$1,353.5 (76%)

DoD Unfunded Military Retirement and Health 

Benefits $338.0 (19%)

Unfunded Environmental Liabilities $58.7 (4%)

All Other Unfunded Liabilities $19.8 (1%)

Breakout

Under Secretary of Defense Comptroller Robert Hale, left, and Vice Adm. 

Steve Stanley, then Director, Force Structure, Resources and Assessment, 

Joint Staff, hold a press conference to provide an overview of the Fiscal Year 

2011 budget and the Fiscal Year 2010 supplemental war funding request at 

the Pentagon in Arlington, Virginia, Feb. 1, 2010. 

(DoD photo by Cherie Cullen/Released) 
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

29

Management Assurances
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

30

Managers’ Internal Control Program

The Department is responsible for establishing, maintaining, and assessing 

internal controls in order to provide reasonable assurance that it meets the 

objectives of the Federal Managers’ Financial Integrity Act (FMFIA), 

31 U.S.C 3512, Sections 2 and 4, and the Federal Financial Management 

Improvement Act (FFMIA), Public Law 104-208. The OMB provides FMFIA 

guidance in OMB Circular No. A-123, entitled ―Management’s Responsibility 

for Internal Control in the Federal Government.‖ 

In addition, the Department provides FMFIA guidance in DoD 

Instruction 5010.40, ―Managers’ Internal Control Program (MICP) 

Procedures,‖ and annually, the Office of the Under Secretary of Defense 

(Comptroller) (OUSD(C)) provides detailed MICP implementing guidance 

memoranda. 

The MICP requires the Department’s management to conduct selfassessments of internal management 

controls, in accordance with the FMFIA. 

These internal management controls are the 

checks and balances that assist program and 

financial managers to achieve results and 

safeguard the integrity of the programs. The 

FMFIA requires the head of each agency to 

provide an annual assurance statement that 

outlines what the agency has done to meet 

these requirements, including details for 

remaining material weaknesses. The detailed 

FMFIA results are available in Addendum A, 

Other Accompanying Information, under

Management Assurances and Financial 

Statement Material Weaknesses.

Management uses the following criteria to classify conditions as material 

weaknesses:

Merits the attention of the Executive Office of the President and the 

relevant Congressional oversight committees;

Impairs fulfillment of essential operations or mission;

Significantly weakens established safeguards against waste, loss, 

unauthorized use or misappropriation of funds, property, other assets, or 

conflicts of interest;

Substantial noncompliance with laws and regulations; or

Nonconformance with government-wide, financial management system 

requirements.

U.S. Army General David H. Petraeus, commander, International Security 

Assistance Force, talks to soldiers on Forward Operating Base Salerno in Khost

province, Afghanistan, Aug. 19, 2010. The soldiers are assigned to the 101st 

Airborne Division's Air Assault, 3rd Brigade Combat Team. 

U.S. Air Force Photo By Staff Sgt. Bradley Lail

.
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

31

The Department’s leadership is committed to ensuring effective internal 

management controls for all mission-essential processes to support the 

reliability of financial information. The MICP holds managers throughout the 

Department accountable for ensuring effective internal management controls

in their areas of responsibility. All Components are required to conduct a 

robust programmatic approach to establish and assess internal 

management controls for all non-financial, mission-essential operations. 

Components that produce stand-alone financial statements also are required 

to include financial reporting assurance in their programs. 

The Department revitalized the MICP in FY 2010. In December 2009 the 

OUSD(C) program managers met with Component leaders and hosted a 

two-day seminar to communicate the Chief Financial Officer’s vision and the 

risk-based, self-assessment approach. The Department tasked 

Components to assign responsibility for the analysis of specific functional 

areas within the organization to the workforce and to incentivize employees 

to self-report inefficiencies that may potentially impact the mission of the 

organization. 

The Department advocates a ―tone at the top‖ approach, with renewed 

emphasis on the importance of the internal control program that will 

permeate the culture of the entire organization. Instead of relying on 

external auditors to identify material internal control weaknesses, DoD 

employees have the in-depth knowledge and expertise in their operations to 

identify and develop solutions that mitigate high-risk control weaknesses. 

For FY 2011, the Department plans to validate each Component’s 

implementation of MICP principles to include documentation of functional 

processes and procedures and solutions for correcting inefficiencies and 

related internal control deficiencies. This documentation is comprised of

flowcharting key business processes that impact financial reporting and nonfinancial operations, identifying and assessing risk within the processes, 

identifying internal controls, testing internal controls, establishing or 

strengthening controls found to be deficient, and reporting on the results of 

the assessments and tests. 

In FY 2010, for nonfinancial operations, the 

Department is reporting two additional 

internal control weaknesses: 1) Personnel 

Resources, Qualifications and Training, and

2) Acquisition and Procurement. Both of 

these weaknesses complement the GAO and 

DoD IG recommendations to elevate these 

two items as both ―High Risk‖ and of 

―Management Concern‖ due to the significant 

impact inefficiencies in these areas have had 

on the overall mission of the Department. 

 

Statement of Assurance

More information regarding the 

Department’s process for 

developing the Statement of 

Assurance is available at:

http://www.defenselink.mil/comptroller/micp.html. 
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

32

Top Management Challenges and Management’s Responses

The Reports Consolidation Act of 2000 requires the annual financial report 

include a statement from the DoD IG that summarizes the most serious 

management and performance challenges facing the Agency and briefly 

assesses the progress toward addressing those challenges. The DoD IG

identified the following eight management and performance challenges 

facing the Department for FY 2010. These challenges are in addition to 

GAO’s list of government-wide, high-risk management areas. 

Financial Management

Acquisition Processes and Contract Management

Joint Warfighting and Readiness

Information Assurance, Security, and Privacy

Health Care

Equipping and Training Iraqi and Afghan Security Forces

Nuclear Enterprise

American Recovery and Reinvestment Act (ARRA)

The following pages highlight these challenges and management’s 

assessment in addressing these issues. 

1. Financial Management. The Department continues to face financial 

management challenges that adversely affect its ability to provide 

reliable, timely, and useful financial and managerial data needed to 

support operating, budgeting, and policy decisions. In the FY 2009 audit 

of DoD’s consolidated financial statements, DoD IG reported the same 

13 material internal control weaknesses as the previous year, 

weaknesses that affect the safeguarding of assets, proper use of funds, 

and impair the prevention and identification of fraud, waste, and abuse. 

These pervasive and longstanding financial management issues directly 

affect DoD’s ability to obtain an unqualified opinion on its financial 

statements. The DoD IG is auditing the U.S. Marine Corps’ FY 2010 

Statement of Budgetary Resources (SBR), the first audit of a Military 

Component’s financial statement. The U.S. Marine Corps has 

encountered many challenges during this first-time audit, and the 

Department is learning from this audit experience as well. Although DoD 

is far from reaching an unqualified opinion, the Department has 

demonstrated improvement. The ongoing initiatives in the area of 

financial management demonstrate that the Department is responding to 

the significant and pervasive financial management issues and is 

positioning itself to leverage planned systems and business 

improvements to achieve sustainable and long-term solutions.
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

33

Management’s Assessment. The Department adjusted its FIAR strategy 

to focus on improving information most often needed to manage the 

Department. Recognizing that many decisions are budget related, DoD’s 

priorities focus on improving processes, controls, and systems that produce 

budgetary information and the information needed to manage DoD’s

mission-critical assets. To date, the Department has made measured 

progress in improving financial information. Specifically, the DoD IG is 

auditing the Marine Corp’s FY 2010 SBR resulting in significant 

improvements to budget and other financial information. In addition, the 

Defense Information Systems Agency Working Capital Fund addressed

financial management deficiencies and asserted audit readiness for its 

financial statements; and the Air Force and Defense Logistics Agency 

asserted audit readiness on appropriations received in the fourth quarter for 

FY 2010. The DoD’s leadership remains focused on improving information 

most needed to manage the Department. 

2. Acquisition Processes and Contract Management. Acquisition

initiatives that began in the 1990s led to reductions in acquisition 

oversight resources. When the spending trend dramatically reversed 

after September 11, 2001, the Department was not able to react quickly 

to the need for more contract and oversight support. In FY 2010, the 

Defense budget, including funds for contingency operations, exceeded

nearly $700 billion. This total is more than double the last DoD budget 

preceding September 11, 2001. Keeping pace with this spending would 

be a difficult proposition if acquisition and oversight resources were 

increasing at a proportional rate. In 2009, the level of staffing of the 

acquisition workforce was below those in 1998. Efforts to train and 

ready the DoD acquisition workforce to handle a significant increase in 

workload demand and complexity resulting from extensive services 

contracting, counter-insurgency operations, and other critical missions 

continue to challenge the Department. The DoD continues to make 

limited progress in controlling the cost and schedule of major acquisition 

programs and will have to make critical decisions about which systems 

should be cut based on competing resources. Through the last two DoD 

budgets, the Secretary of Defense has made difficult decisions by 

proposing to end all or part of at least a half dozen major defense 

acquisition programs that were either no longer needed or performing 

poorly.

Management’s Assessment. The Secretary of Defense established a

23-point plan of action to reform acquisition processes through initiatives 

that target affordability and control cost growth; incentivize productivity and 

innovation in industry; promote real competition; improve tradecraft in 

services acquisition; and reduce non-productive processes and 

bureaucracy. The Department is implementing these initiatives and is 

monitoring policy implementation and compliance. In addition, the 

Department recently developed a new Joint Contingency Contracting 
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

34

Handbook that provides essential information, tools, templates, and training 

material to meet the challenges in any contracting environment. In addition, 

the Department increased its acquisition workforce by 6,200 professionals 

and continued to work toward achieving the Secretary of Defense’s growth

goals of 20,000 professionals by FY 2015. 

3. Joint Warfighting and Readiness. Despite the high operating 

tempo, U.S. Forces are executing their missions globally. Sustained 

operations in Iraq and Afghanistan have affected equipment, the troops, 

and their families. In the near-term, DoD’s execution of the withdrawal in 

Iraq and the redeployment or resetting of equipment, either for use in 

Afghanistan or for standing inventory, requires management’s continued 

attention and presents its own challenges to the overall joint warfighting 

and readiness process. In the long-term, the Department faces the 

challenge of resetting the Services; retraining skills that have not been 

required for the current operations; and reengaging with other nations’ 

militaries. This challenge encompasses the need to ensure basic 

services continue uninterrupted for the members of the armed forces and 

their families. Available resources and capabilities are finite and require 

constant monitoring to enable the Department to operate successfully 

with the shifting global dynamics. Maintaining readiness, resetting the 

force during the extended war, modernizing to face future challenges, 

and allowing troops to reconnect with their families are challenges that 

the Department and the Congress must continually address.

Management’s Assessment. The Department remains focused on 

ensuring the forces deployed to fight our Nation’s wars are trained, 

equipped, and ready to perform their assigned missions. Our forwarddeployed forces are ready, but that readiness often comes at the expense of 

the non-deployed force readiness. Non-deployed forces often experience 

less than optimal dwell time and focus their non-deployed training time on 

their next Iraq or Afghanistan mission requirements. This focus, however, 

can result in forces not being trained for the full spectrum of potential global 

missions, and combined with the impact of stay-behind equipment and 

personnel turmoil, can lead to reduced readiness levels. Withdrawing large 

numbers of troops and equipment from Iraq, while simultaneously increasing 

force and equipment levels in Afghanistan, is an extremely complex 

operation. To successfully meet this challenge of the future, the Department 

will have to engage the total force, which will include continued use of the 

Reserve Components for operational missions. The Department is 

expending significant effort to ensure this is accomplished in the most 

effective and cost-efficient manner. We also recognize our obligation to 

properly take care of our soldiers, sailors, airmen, and marines -- and their 

families -- that have carried the burden of extended combat operations, 

multiple deployments, and the resultant human toll from those efforts. We 

must be particularly vigilant of those traumatized in our Nation’s battles, 

trauma which can have long-term effects on the individual. The Department 
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

35

is intent on striking the optimal, albeit delicate balance to meet our 

competing needs in these challenging fiscal times. Key competing 

challenges include maintaining readiness, resetting the force, structuring the 

force to meet future threats, modernization, and taking care of our most 

valuable asset – our people.

4. Information Assurance, Security, and Privacy. Managing risk 

continues to be a daunting challenge to the Department. One significant 

area where the Department must assess the risk that a particular threat 

will adversely impact its operations is in the acceptance and use of 

internet-based capabilities. Internet-based capabilities include social 

networking services, social media, instant messaging, and discussion 

forums. During this past year, DoD has taken steps to address the 

issues surrounding its use of Internet-based capabilities. Another 

challenge that DoD faces is defending its information and information 

systems against today’s mounting cyber threats. On a daily basis, those 

wanting to not only steal DoD information but do harm to DoD programs, 

operations, and personnel continuously attack DoD’s information 

technology infrastructures. In May 2010, DoD announced the 

establishment of the U.S. Cyber Command, a sub-unified command 

subordinate to the U.S. Strategic Command that will work to improve 

DoD’s capabilities to ensure resilient, reliable information and 

communication networks, counter cyberspace threats, and assure 

access to cyberspace. 

Management’s Assessment. On February 25, 2010, the Deputy

Secretary of Defense issued Directive-Type Memorandum (DTM) 09-026,

which establishes DoD policy and assigns responsibilities for effective use of 

Internet-based capabilities, including social networking services. While DoD 

has postured itself to embrace the benefits of Internet-based capabilities in 

its daily operations, it still faces a challenge of ensuring Commanders at all 

levels and heads of DoD Components take the appropriate actions to 

safeguard missions and preserve operations security. In May 2010, DoD 

took a significant step to address its most daunting challenge of defending 

its information and information systems by announcing the establishment of 

the U.S. Cyber Command. The U.S. Cyber Command will improve DoD’s 

capabilities to ensure resilient, reliable information and communication 

networks, counter cyberspace threats, and assure access to cyberspace. 

Service elements, such as the Army Forces Cyber Command, will support 

the U.S. Cyber Command’s mission. To be successful, the Department will 

be required to use all its current cyber assets and develop new ones. 

Civilian acquired cyber capabilities reside in the Reserve Component is one 

place to expand the Department’s cyber capabilities. While the Department 

has taken a significant step, challenges remain in centralizing cyberspace 

operations, developing workable strategies, protecting information networks, 

and obtaining cyber expertise.
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

36

In March 2010, the Department announced proposed changes to the 

Defense Federal Acquisition Regulation Supplement (DFARS) in the Federal 

Register Volume 75, No. 41, that address requirements for safeguarding 

unclassified information. In addition, DoD continued to enhance the 

Defense Industrial Base (DIB) Cyber Security and Information Assurance 

Program, established in 2007. Under DoD Instruction 5205.13, dated 

January 29, 2010, DoD outlined its policy to create a timely, coordinated, 

and effective partnership with the DIB to develop standard policy and 

procedures in areas such as contracting and acquisition and to improve the 

protection of unclassified DoD information on DIB unclassified systems and 

networks. 

5. Health Care. The DoD Military Health System (MHS) must provide 

quality care for approximately 9.6 million eligible beneficiaries within 

fiscal constraints while facing increased user demands, legislative 

imperatives, and inflation that make cost control difficult in both the 

public and private sectors. The DoD budget for health care costs was 

approximately $50 billion in FY 2010, an increase of more than 

60 percent ($31 billion) since FY 2005. The DoD Military Health System 

has been moving forward on improving health care while attempting to 

control costs. The MHS implemented the Quadruple Aim Concept, 

building upon the Institute for Healthcare Improvement’s Triple Aim 

concept that describes the results achieved when all elements of a 

health care system work together. Quarterly Force Health Protection 

Survey results show continued improvement in service members’ 

medical readiness, except for the Reserves and National Guard. The 

Department established specific milestones to implement a personal 

health record prototype and to expand bi-directional sharing of health 

information with the Department of Veterans Affairs. The Department 

has encountered delays in establishing the electronic health record, but 

continues to progress in sharing electronic medical records with the 

Department of Veterans Affairs.

Management’s Assessment. The Department is actively working to 

eliminate unnecessary administrative overhead and unwarranted variation in 

both its clinical and administrative processes. The DoD agreed upon a set 

of strategic imperatives, used in quarterly reviews, to ensure it meets its 

targets for both quality and cost. One area of particular emphasis this year 

is to reduce overutilization of emergency rooms, a significant contributor to 

recent increases in per capita cost.

The Department is working with the Reserves and National Guard to 

address challenges in force readiness, particularly in the area of mental

readiness. Recent data is showing significant improvement in overall 

medical readiness. Our human capital team is actively addressing the need 

for additional mental health services in support of the readiness of the force. 

Over the past three years, DoD added nearly 3000 new mental health 

professionals to the workforce and expanded the TRICARE network in the 
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

37

area of behavioral health. Deployment of the Patient Centered Medical 

Home, which includes embedded behavioral health workers in primary care, 

will add to the capability to address the psychological health needs of 

service members and their families.

The Department is continuously improving care for the wounded, ill, and 

injured, and their families. Since 2007, over 13,000 Service members have 

enrolled in the integrated disability evaluation system. The Department 

reduced the disability evaluation period, and Service member satisfaction 

with the process is improving. In addition, the National Intrepid Center of 

Excellence, which provides specialized services for service members with 

Post Traumatic Stress Disorder and traumatic brain injuries, will reach full 

operating status before the end of the year.

In addition, strengthened acquisition structure and processes ensure effective 

and efficient major acquisitions, such as the Electronic Health Record. The 

Department of Defense and the Department of Veterans Affairs are working 

together to implement the Virtual Lifetime Electronic Record (VLER), with 

successful pilots now operating at several sites. The VLER vision is to make 

health, benefits, and personnel information of a Service member or Veteran 

from the time of accession to internment, available as necessary. The MHS is 

actively working to achieve meaningful use of health information with the rapid 

implementation of secure messaging and providing essential health 

information to patients in digital formats.

6. Equipping and Training Iraq and Afghan Security Forces. The 

Department faces significant challenges in accomplishing U.S. policy 

and related DoD military strategic goals in Southwest Asia. In Iraq, DoD

is continuing the training, equipping, and mentoring of the Iraqi Security 

Forces (ISF), including development of the ISF’s logistics sustainment 

base, while conducting a responsible drawdown of military forces by 

December 31, 2011. In addition, DoD is faced with transitioning all 

remaining training, equipping, and mentoring activities to the Office of 

Security Cooperation under Chief of Mission authority, as well as laying 

the groundwork for a robust security assistance and Foreign Military 

Sales program that will endure after the last U.S. military forces leave in 

December 2011. In the Afghanistan-Pakistan region, DoD challenges 

include an intensive effort to train, equip, and mentor the Afghan 

National Security Forces to enable them to assume a lead security 

operations role to enable a conditions-based drawdown of U.S. combat 

forces beginning the summer of 2011. Another major objective includes 

assisting the Pakistan Security Forces develop the capacity to maintain 

internal security and eliminate extremist Taliban and al-Qaeda forces in 

the Northwest Frontier safe haven. Limited resources are available for 

these complex tasks. 

Management’s Assessment. The DoD objective between now and 

December 2011 is to develop an ISF capable of providing internal security 
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

38

as well as a minimal foundation for external defense. Following the 

withdrawal of U.S. forces from Iraq in December 2011, the ISF will continue 

to mature in their leadership roles providing security and overall stability for 

the citizens of Iraq. The citizens of Iraq continue to develop their confidence 

in the ISF, and it is becoming clear that the growing professionalism of the 

ISF is a source of national pride.

A key strategic focus remains on training, equipping, and partnering with the 

Afghan National Security Forces (ANSF) to enable the transition of lead 

security responsibility to the Government of Afghanistan and initiate a 

―conditions-based‖ redeployment of U.S. combat forces, beginning in 

July 2011, with the ANSF leading security responsibilities by 2014.

The North Atlantic Treaty Organization (NATO) and the Government of 

Afghanistan continue to grow both the quality and quantity of the ANSF. 

Both the Afghan National Army (ANA) and the Afghan National Police (ANP) 

still need support from the international community—particularly in pledging 

institutional trainers for the ANSF and Operational Mentoring and Liaison

Teams and Police Operational Mentoring and Liaison Teams—in order to 

train the ANSF and provide mentors and partners in the field.

As of August 2010, both ANA and ANP force levels were well above target 

goals, at approximately 136,000 and 120,000, respectively. NATO Training 

Mission-Afghanistan implemented several positive changes in the ANSF 

training regime since November 2009, including increasing the number of 

trainers, providing better marksmanship training, adding literacy training, and 

opening branch schools for higher end training. Still challenges remain, 

including Officer and Non-Commissioned Officer shortages.

7. Nuclear Enterprise. Since the end of the Cold War, there has been a 

dramatic decline in the level and intensity of focus on the nuclear 

enterprise and the nuclear mission. To reverse this trend, the 

Department is re-focusing on the nuclear enterprise. The Department 

continues to analyze and identify key deficiencies and methods for 

improvement and to develop and implement corrective action plans. 

Sustained commitment is required to create an environment that 

emphasizes the nuclear mission and provides adequate funding and 

leadership to ensure implementation.

Management’s Assessment. The Department continues to make 

substantial progress in improving the nuclear enterprise. The DoD has

taken positive action to address recommendations made in DOD IG and 

other oversight reports, conducted reviews of the enterprise to identify and 

correct deficiencies, and created new management structures, such as the 

Air Force Global Strike Command. In addition, the release of the Nuclear 

Posture Review and the Section 1251 Report to the Congress on DoD plans 

for the nuclear deterrent over the next ten years have provided an 

overarching path forward for sustaining the nuclear enterprise. The 

Department remains fully committed to restoring confidence in the nuclear 
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

39

enterprise and in the safe handling and accountability of DoD nuclear 

assets. While success in accomplishing this task will require years of 

sustained commitment, the Department will continue to engage in a robust 

effort to implement report recommendations and corrective action plans to 

address deficiencies. 

8. American Recovery and Reinvestment Act (ARRA). Under ARRA, 

the Congress initially appropriated $7.4 billion to the Department to 

preserve and create jobs; promote economic recovery; assist those most 

affected by the recession; provide investments to increase economic 

efficiency through technological advances in science and health; and 

invest in transportation, environmental protection, and other 

infrastructure. The DoD Agency Plan and four program-specific plans 

met the 12 minimum OMB requirements. As noted in our 2009 DOD IG

Assessment of Progress, DoD execution of the Recovery Act was not 

moving as quickly as the Department had planned, and much of the 

spending and actual work on the projects would occur in FY 2010. The 

DoD Recovery Act funds for facility repair projects, valued at $4.3 billion, 

were to expire for obligation at the end of FY 2010. The DoD continued 

to press forward to obligate these funds and, as of September 30, 2010, 

with the aid of a statutorily directed $260.5 million ARRA rescission, 

obligated 99.9 percent of the remaining $4.0 billion in expiring funds. The 

DoD also achieved its goal of expending by the end of FY 2010 at least 

45 percent of all ARRA funds by expending 45 percent by 

September 30, 2010. Funds for new construction are available for 

obligation until FY 2014. As of September 30, 2010, DoD had obligated 

71 percent of these funds. The continuing pressure to commence 

activities and expend Recovery Act funds as quickly as possible, 

consistent with prudent management, will add pressure to the 

Department’s understaffed contracting professionals to award and 

administer contracts in an expedited manner. Additionally, without 

adequate and continuous management attention to Recovery Act 

implementation, especially contractor oversight and recipient reporting, 

the Department will have a recurring challenge to effectively meet the 

intent of the Recovery Act and maintain adequate transparency, 

accountability, and stewardship of taxpayer funds.

Management’s Assessment. As of September 30, 2010, the 

Department obligated $6.5 billion (90 percent) and disbursed $3.2 billion 

(45 percent) of the $7.2 billion in ARRA funds for over 4,600 projects at over 

400 sites. Obligations for Military Construction and Energy Conservation 

Investment projects and outlays for all programs will continue through 

FY 2011. 
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

40

Other Management Information and Initiatives

Department of Defense Implementation of the ARRA of 2009

On February 17, 2009, the Congress passed 

ARRA and appropriated $7.4 billion to the 

Department for military construction, facility 

repair, energy efficiency investments, nearterm energy research, and assistance to 

certain military members and civilians, who 

experienced financial losses during the 

U.S. housing market downturn. In addition, 

the USACE received $4.6 billion for its civil 

works program that is separate from DoD’s

other ARRA funds. The Congress rescinded 

$0.23 billion of ARRA funds in Public Law 

111-226, reducing the total DoD Recovery 

Act funding to $7.2 billion (Figure 1-16). The 

purpose for these investments is to stimulate 

the U.S. economy while enhancing our 

national security. Building new facilities, 

repairing aging facilities, or bringing buildings up to date with the most modern 

energy efficiency standards creates and preserves U.S. jobs. Targeted 

research on energy projects creates technical jobs and aids the Department in 

reducing its long-term energy costs and improving current energy efficiency in 

the near-term. 

As of September 30, 2010, the Department obligated $6.5 billion (90 percent) 

and disbursed $3.2 billion (45 percent) in ARRA funds of the $7.2 billion in 

ARRA funds for over 4,600 projects at over 400 sites. Savings of $370 million 

realized from project awards funded 380 of these projects. The table below 

describes the breakout of obligation and disbursements by major programs. 

Obligations for Military Construction and Energy Conservation Investment

projects and disbursements for all programs will continue through FY 2011. 

PROGRAM

Dollars in Billions

For Period Ended September 30, 2010

Authority Obligations Expenditures

Facilities Sustainment, Restoration, and Modernization $ 4.01 $ 4.00 $ 2.18

Military Construction $ 2.18 $ 1.55 $ 0.26

Energy Conservation Investment $ 0.12 $ 0.09 $ 0.05

Near Term Energy-Efficient Technologies $ 0.30 $ 0.30 $ 0.13

Home Owners Assistance Program $ 0.56 $ 0.52 $ 0.48

TOTAL $ 7.17 $ 6.46 $ 3.10

For details regarding the Department’s recovery act implementation and 

accountability, refer to DoD website at http://www.defenselink.mil/recovery. 

Facility 

Infrastructure 

Investments:

$4.01B

Military 

Construction:

$2.18B

Near Term 

Energy 

Technology 

Research:

$0.3B

Homeowner’s 

Assistance 

Fund: $0.6B

$7.2B B10-06

Energy 

Conservation 

Investment 

Program: $0.1B

Figure 1-16. Recovery Act Funds 

for the Department of Defense
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

41

The Department’s Path Forward for 2011 and Beyond 

Protecting the American people and advancing our Nation’s interests is a

mission the Department does not take lightly. Recognizing that the U.S. is 

a Nation at war, the U.S. and its allies and partners remain engaged in a 

broader war – a multifaceted political, military and moral struggle – against 

al-Qaeda and its allies around the world. As a global power, the strength 

and influence of the U.S. intertwine deeply with the fate of the broader 

international system – a system of alliances, partnerships, and multinational 

institutions that our country has helped build and sustain for more than sixty 

years. The U.S. military must, therefore, be prepared to support broad 

national goals of promoting stability in key regions, providing assistance to 

nations in need, and promoting the common good. 

With these realities in mind, the Department must rebalance the capabilities 

of America’s Armed Forces to prevail in today’s wars while building the 

capabilities needed to deal with future threats. The Department also must 

reform DoD’s institutions and processes to better support the urgent needs 

of the warfighter; buy weapons that are usable, affordable, and truly needed; 

and spend taxpayer dollars wisely and responsibly.

In order to help defend and advance our national interests, the Department 

balances resources and risk to prevail in today’s wars, prevent and deter

conflict, prepare to defeat adversaries and succeed in a wide range of 

contingencies, and preserve and enhance the All-Volunteer Force. These 

priorities shape not only considerations on the capabilities our Armed Forces 

need, but also the aggregate capacity required to accomplish current and 

future missions. The approach must evolve and adapt in response to a 

changing security environment.

As the U.S. military proceeds with the responsible drawdown in Iraq, the 

U.S. will continue to play important roles advising, training, and supporting 

Iraqi forces and to work with partners and allies to locate and dismantle 

terrorist networks. While U.S. forces are heavily engaged in current wars, 

DoD’s prevent-and-deter activities focus on preventing the emergence or 

reemergence of transnational terrorist threats and deterring other potential 

major adversaries. In addition, the Defense Department will continue to 

provide the President with options across a wide range of contingencies,

such as responding to an attack or natural disasters at home, defeating 

aggression by adversary states, supporting and stabilizing fragile states that 

face serious internal threats, and preventing human suffering due to mass 

atrocities or large-scale natural disasters abroad.

To significantly enhance the U.S. forces’ ability to protect and advance U.S. 

interests, the Department is focusing on rebalancing America’s Armed

Forces in preparing them for the future by achieving the following key 

objectives: 
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

42

Defend the U.S. and support civil authorities at home

Succeed in counterinsurgency, stability and counterterrorism operations

Build the security capacity of partner states

Deter and defeat aggression in anti-access environments

Prevent proliferation and counter weapons of mass destruction

Operate effectively in cyberspace 

Years of war have demanded that America’s Armed Forces rapidly innovate 

and adapt—the Department’s institutional base must do the same. The 

Secretary is taking actions that enable the Department to redirect resources 

away from lower-priority programs and activities to address needs that are 

more pressing. Where it has not been possible to set initiatives in motion to 

meet certain future operational needs, the Secretary has identified vectors 

for the evolution of the force, calling on DoD Components to devote 

sustained efforts toward developing new concepts and capabilities to 

address those needs. Assessments of future operating environments will 

continue, with an eye toward refining our understanding of future needs. At 

the same time, the Department will continue to look aggressively for savings 

in underperforming programs and activities, divestiture, technology 

substitution, less-pressing mission and program areas, and other accounts, 

so that more resources can be devoted to filling these gaps.

The Department also is assessing other 

areas requiring particular attention. 

Reforming security assistance will be 

necessary to meet urgent warfighter needs 

and to create new and more responsive 

mechanisms for security assistance. 

Improving how we buy will transform how the 

Department matches requirements with 

mature technologies, maintains disciplined 

systems engineering approaches, 

institutionalizes rapid acquisition capabilities, 

and implements more comprehensive 

testing. Our efforts must also include 

reforming the U.S. export control system for the 21st century, and spurring

continued improvements in the provision of rapid logistical support to our 

forces abroad. Strengthening the industrial base will maintain our strategic 

advantage by establishing a consistent, realistic, and long-term strategy for

shaping the structure and capabilities of the defense technology and 

industrial bases—a strategy that better accounts for the rapid evolution of 

commercial technology, as well as the unique requirements of ongoing 

conflicts. 

“In order to help defend and advance 

our national interests, the Department 

of Defense balances resources and 

risk among four priority objectives: 

prevail in today’s wars, prevent and 

deter conflict, prepare to defeat 

adversaries and succeed in a wide 

range of contingencies, and preserve 

and enhance the All-Volunteer Force.”

Excerpt from 2010 QDR
Department of Defense Agency Financial Report for FY 2010

Management’s Discussion and Analysis 

43

The established priorities, along with both the FY 2010 and FY 2011 budgets, reflect the 

Secretary’s consistent emphasis on ensuring the Department does everything possible to 

enable success in today’s wars while preparing for a complex and uncertain future. The

Department’s key priority objectives along with modernization of capabilities and its investment 

portfolios is critical to shaping how the Department of Defense will support America’s men and

women in uniform today, and build the policy and programmatic foundation for security in the 

years to come.

Summary

While focusing on balancing the capabilities to fight today’s wars, the Department's leadership 

remains committed to improving financial management processes, controls, and systems. The 

size and complexity of DoD’s business operations and the rapid pace of change in the business 

environment make it imperative to create a more agile, responsive, and efficient organization. 

The Department stands strong and committed to transforming the DoD’s institutions and 

processes, including our financial management practices, to better support the urgent needs of 

the warfighter; buy weapons that are usable, affordable, and truly needed; and spend taxpayer 

dollars wisely and responsibly.
Department of Defense Agency Financial Report for FY 2010

Financial Information

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Financial Information

Independent Auditor’s Report
Department of Defense Agency Financial Report for FY 2010

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Department of Defense Agency Financial Report for FY 2010

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Department of Defense Agency Financial Report for FY 2010

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Department of Defense Agency Financial Report for FY 2010

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Department of Defense Agency Financial Report for FY 2010

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Department of Defense Agency Financial Report for FY 2010

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Department of Defense Agency Financial Report for FY 2010

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Department of Defense Agency Financial Report for FY 2010

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Department of Defense Agency Financial Report for FY 2010

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Department of Defense Agency Financial Report for FY 2010

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PRINCIPAL FINANCIAL STATEMENTS AND NOTES

Limitations of the Financial Statements

The principal financial statements have been prepared to report the financial position and 

results of operations of the Department, pursuant to the requirements of 31 U.S.C. 3515(b). 

The statements are prepared from accounting records of the Department in accordance with 

OMB Circular No. A-136 and, to the extent possible, USGAAP. The statements, in addition to 

the financial reports, are used to monitor and control budgetary resources, which are prepared 

from the same records. The statements should be read with the realization that they are for a 

component of the U.S. Government, a sovereign entity.

The financial statements of the Department include four principal statements listed in Figure 2-1.

The financial statements reflect the aggregate financial posture of the Department and include both 

the proprietary (federal accounting standards) and budgetary resources of the Department. The 

Department is large and complex with an asset base of $1.9 trillion, and more than 3 million military 

and civilian employees on installations in every state and around the world.

Figure 2-1. Four Principal Financial Statements

Statement What Information It Provides

Balance Sheet Reflects the Department’s financial position as of the statement date (September 30, 2010). The 

assets are the amount of future economic benefits owned or managed by the Department. The 

liabilities are amounts owed by the Department. The net position is the difference between the 

assets and liabilities.

Statement of Net Cost Shows separately the components of the net cost of the Department’s operations for the period. Net 

cost is equal to the gross cost incurred by the Department less any exchange revenue earned from 

its activities.

Statement of Changes 

in Net Position

Presents the sum of the cumulative results of operations since inception and unexpended 

appropriations provided to the Department that remain unused at the end of the fiscal year. The 

statement focuses on how the net cost of operations is financed. The resulting financial position 

represents the difference between assets and liabilities as shown on the consolidated balance sheet.

Statement of 

Budgetary Resources

Provides information about how budgetary resources were made available as well as their status at 

the end of the period. It is the only financial statement exclusively derived from the Department’s 

budgetary general ledger in accordance with budgetary accounting rules. 
Department of Defense Agency Financial Report for FY 2010

Financial Information

55

Department of Defense Consolidated Balance Sheet

Agency Wide Dollars in Millions

2010

Consolidated

Restated

2009

Consolidated

ASSETS (Note 2)

Intragovernmental:

Fund Balance with Treasury (Note 3) $ 521,641.7 $ 502,754.3

Investments (Note 4) 497,136.9 434,884.0

Accounts Receivable (Note 5) 1,249.2 1,219.6

Other Assets (Note 6) 1,874.7 2,594.7

 Total Intragovernmental Assets $ 1,021,902.5 $ 941,452.6

Cash and Other Monetary Assets (Note 7) 2,066.7 2,316.8

Accounts Receivable, Net (Note 5) 9,756.2 7,731.4

Loans Receivable (Note 8) 522.3 398.5

Inventory and Related Property, Net (Note 9) 232,234.3 229,270.0

General Property, Plant and Equipment, Net (Note 10) 595,656.6 558,131.0

Investments (Note 4) 2,489.7 2,017.1

Other Assets (Note 6) 65,635.1 56,131.9

Stewardship Property, Plant & Equipment (Note 10)

TOTAL ASSETS $ 1,930,263.4 $ 1,797,449.3

LIABILITIES (Note 11)

Intragovernmental:

Accounts Payable (Note 12) $ 1,754.5 $ 2,207.8

Debt (Note 13) 518.3 391.7

Other Liabilities (Note 15) 13,781.4 11,485.7

Total Intragovernmental Liabilities $ 16,054.2 $ 14,085.2

Accounts Payable (Note 12) 31,135.4 35,579.8

Military Retirement and Other Federal Employment Benefits (Note 17) 2,176,698.9 2,012,166.1

Environmental and Disposal Liabilities (Note 14) 62,902.2 66,230.0

Loan Guarantee Liability (Note 8) 19.8 21.1

Other Liabilities (Note 15) 35,563.5 33,837.9

Commitments & Contingencies (Note 16)

TOTAL LIABILITIES $ 2,322,374.0 $ 2,161,920.1

NET POSITION

Unexpended Appropriations - Earmarked Funds (Note 23) $ 304.8 $ 5.6

Unexpended Appropriations - Other Funds 528,499.8 503,394.3

Cumulative Results of Operations - Earmarked Funds (1,440,006.0) (1,343,134.7)

Cumulative Results of Operations - Other Funds 519,090.8 475,264.0

TOTAL NET POSITION $ (392,110.6) $ (364,470.8)

TOTAL LIABILITIES AND NET POSITION $ 1,930,263.4 $ 1,797,449.3

The accompanying notes are an integral part of these financial statements.
Department of Defense Agency Financial Report for FY 2010

Financial Information

56

Department of Defense Consolidated Statement of Net Cost

Agency Wide Dollars in Millions

2010

Consolidated

Restated

2009

Consolidated

Program Costs

Gross Costs $ 701,969.3 $ 669,954.2

Military Retirement Benefits 56,741.5 56,179.3

Civil Works 13,300.4 11,712.0

Military Personnel 154,374.9 144,750.6

Operations, Readiness & Support 276,976.6 272,133.8

Procurement 107,960.0 89,150.2

Research, Development, Test & Evaluation 82,506.6 84,388.7

Family Housing & Military Construction 10,109.3 11,639.6

(Less: Earned Revenue) (63,242.2) (46,167.9)

Net Cost before Losses/(Gains) from Actuarial Assumption Changes 

for Military Retirement Benefits $ 638,727.1 $ 623,786.3

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits 164,089.0 27,703.1

Net Cost of Operations $ 802,816.1 $ 651,489.4

The accompanying notes are an integral part of these financial statements.
Department of Defense Agency Financial Report for FY 2010

Financial Information

57

Department of Defense Consolidated Statement of Changes in Net Position

Agency Wide Dollars in Millions

2010

Earmarked Funds

2010

All Other Funds

2010

Eliminations

2010

Consolidated

Restated

2009

Earmarked Funds

Restated

2009

All Other Funds

2009

Eliminations

Restated

2009

Consolidated

Cumulative Results Of Operations

Beginning Balances $ (1,252,265.5) $ 385,526.0 $ 0.0 $ (866,739.5) $ (1,259,693.0) $ 335,935.7 $ 0.0 $ (923,757.3)

Prior Period Adjustments:

 Changes in accounting principles 0.0 0.0 0.0 0.0 0.0 1,689.6 0.0 1,689.6

 Corrections of errors (276.3) (854.9) 0.0 (1,131.2) 0.5 (11,545.3) 0.0 (11,544.8)

Beginning balances, as adjusted $ (1,252,541.8) $ 384,671.1 $ 0.0 $ (867,870.7) $ (1,259,692.5) $ 326,080.0 $ 0.0 $ (933,612.5)

Budgetary Financing Sources:

 Appropriations used 23.9 738,746.2 0.0 738,770.1 3.8 708,428.3 0.0 708,432.1

 Nonexchange revenue 2,960.9 (15.0) 0.0 2,945.9 2,767.7 (13.7) 0.0 2,754.0

 Donations and forfeitures of cash and cash equivalents 46.3 0.0 0.0 46.3 38.0 0.2 0.0 38.2

 Transfers(in/out without reimbursement) (780.1) 983.2 0.0 203.1 (836.7) 930.9 0.0 94.2

 Other 1.4 (810.5) 0.0 (809.1) 0.0 (4.2) 0.0 (4.2)

Other Financing Sources (Non-Exchange)

 Donations and forfeitures of property 0.0 6.4 0.0 6.4 0.7 1.5 0.0 2.2

 Transfers(in/out without reimbursement ) (244.3) 810.5 0.0 566.2 (88.2) 45.4 0.0 (42.8)

 Imputed financing 0.6 18,507.2 12,911.6 5,596.2 0.0 17,017.3 12,313.5 4,703.8

 Other 29.0 2,417.5 0.0 2,446.5 (19.2) 1,272.9 0.0 1,253.7

Total Financing Sources $ 2,037.7 $ 760,645.5 $ 12,911.6 $ 749,771.6 $ 1,866.1 $ 727,678.6 $ 12,313.5 $ 717,231.2

Net Cost of Operations 88,237.1 727,489.5 12,910.5 802,816.1 (5,284.6) 669,087.5 12,313.5 651,489.4

Net Change $ (86,199.4) $ 33,156.0 $ 1.1 $ (53,044.5) $ 7,150.7 $ 58,591.1 $ 0.0 $ 65,741.8

Cumulative Results of Operations $ (1,338,741.2 $ 417,827.1 $ 1.1 $ (920,915.2) $ (1,252,541.8) $ 384,671.1 $ 0.0 $ (867,870.7)

Unexpended Appropriations

Beginning Balances 5.6 504,339.3 0.0 504,344.9 4.9 446,864.3 0.0 446,869.2

Prior Period Adjustments:

 Correction of Error 0.0 (945.0) 0.0 (945.0) 0.0 24,949.2 0.0 24,949.2

Beginning balances, as adjusted $ 5.6 $ 503,394.3 $ 0.0 $ 503,399.9 $ 4.9 $ 471,813.5 $ 0.0 $ 471,818.4

Budgetary Financing Sources:

 Appropriations received 323.2 775,081.9 0.0 775,405.1 4.5 754,440.5 0.0 754,445.0

 Appropriations transferred (in/out) 20.2 608.6 0.0 628.8 0.0 (188.4) 0.0 (188.4)

 Other adjustments 0.1 (11,859.2) 0.0 (11,859.1) 0.0 (14,243.0) 0.0 (14,243.0)

 Appropriations used (23.9) (738,746.2) 0.0 (738,770.1) (3.8) (708,428.3) 0.0 (708,432.1)

Total Budgetary Financing Sources $ 319.6 $ 25,085.1 $ 0.0 $ 25,404.7 $ 0.7 $ 31,580.8 $ 0.0 $ 31,581.5

Unexpended Appropriations $ 325.2 $ 528,479.4 $ 0.0 $ 528,804.6 $ 5.6 $ 503,394.3 $ 0.0 $ 503,399.9

Net Position $ (1,338,416.0) $ 946,306.5 $ 1.1 $ (392,110.6) $ (1,252,536.2) $ 888,065.4 $ 0.0 $ (364,470.8)

The accompanying notes are an integral part of these financial statements.
Department of Defense Agency Financial Report for FY 2010

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58

Department of Defense Combined 

Statement Of Budgetary Resources 

Agency Wide

Page 1 of 2

Dollars in Millions

Budgetary

Financing Accounts

Nonbudgetary

Financing Accounts

2010

Combined

Restated

2009

Combined

2010

Combined

Restated

2009

Combined

Budgetary Resources

Unobligated balance, brought forward,

October 1

$ 146,041.0 $ 134,381.8 $ 23.6 $ 26.3

Recoveries of prior year unpaid obligations 54,701.2 63,272.9 0.0 47.5

Budget authority

Appropriation 899,278.4 855,564.3 0.0 0.0

 Borrowing authority 0.0 0.0 26.8 58.4

 Contract authority 73,059.7 67,626.3 0.0 0.0

Spending authority from offsetting collections

 Earned:

 Collected 184,468.6 178,143.5 69.6 45.1

 Change in receivables from federal sources (350.9) 1,188.9 0.0 0.0

 Change in unfilled customer orders:

 Advance received (81.9) 1,030.8 0.0 0.0

 Without advance from federal sources 2,415.7 (88.3) (34.9) (10.8)

 Expenditure transfers from trust funds 851.0 862.5 0.0 0.0

 Subtotal $ 1,159,640.6 $ 1,104,328.0 $ 61.5 $ 92.7

Nonexpenditure transfers, net, anticipated

and actual 803.3 (15.7) 0.0 0.0

Temporarily not available pursuant to

Public Law (60,328.7) (39,190.4) 0.0 0.0

Permanently not available (87,880.6) (85,969.3) (13.9) (0.1)

Total Budgetary Resources $ 1,212,976.8 $ 1,176,807.3 $ 71.2 $ 166.4

Status of Budgetary Resources

Obligations incurred:

Direct 857,647.6 847,069.9 46.3 142.7

Reimbursable 195,380.6 183,695.8 0.0 0.0

Subtotal $ 1,053,028.2 $ 1,030,765.7 $ 46.3 $ 142.7

Unobligated balance:

Apportioned 137,589.8 128,132.0 24.8 0.3

Exempt from apportionment 6,172.0 3,374.0 0.0 0.0

Subtotal $ 143,761.8 $ 131,506.0 $ 24.8 $ 0.3

Unobligated balance not available 16,186.8 14,535.6 0.1 23.4

Total status of budgetary resources $ 1,212,976.8 $ 1,176,807.3 $ 71.2 $ 166.4

The accompanying notes are an integral part of these financial statements.
Department of Defense Agency Financial Report for FY 2010 

Financial Information

59

Department of Defense Combined 

Statement of Budgetary Resources 

Agency Wide

Page 2 of 2

Dollars in Millions

Budgetary

Financing Accounts

Nonbudgetary

Financing Accounts

2010

Combined

Restated

2009

Combined

2010

Combined

Restated

2009

Combined

Change in Obligated Balance:

Obligated balance, net

Unpaid obligations, brought forward,

October 1 453,958.7 432,118.5 770.4 872.9

Less: Uncollected customer payments from

federal sources, brought forward, October 1

(67,702.3) (66,602.2) (132.2) (143.0)

Total unpaid obligated balance $ 386,256.4 $ 365,516.3 $ 638.2 $ 729.9

Obligations incurred net 1,053,028.2 1,030,765.7 46.3 142.7

Less: Gross outlays (993,664.7) (945,652.5) (197.3) (197.7)

Less: Recoveries of prior year unpaid

obligations, actual (54,701.2) (63,272.9) 0.0 (47.5)

Change in uncollected customer payments

from federal sources

(2,064.7) (1,100.5) 34.9 10.8

Obligated balance, net, end of period

Unpaid obligations 458,621.0 453,958.8 619.4 770.4

Less: Uncollected customer payments

from federal sources

(69,767.0) (67,702.7) (97.3) (132.2)

Total, unpaid obligated balance, net,

end of period $ 388,854.0 $ 386,256.1 $ 522.1 $ 638.2

Net Outlays

Net Outlays:

Gross outlays 993,664.7 945,652.5 197.3 197.7

Less: Offsetting collections (185,237.8) (180,036.9) (69.6) (45.1)

Less: Distributed offsetting receipts (77,722.2) (65,912.1) 0.0 0.0

Net Outlays $ 730,704.7 $ 699,703.5 $ 127.7 $ 152.6

The accompanying notes are an integral part of these financial statements.
Department of Defense Agency Financial Report for FY 2010 

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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 Department of Defense (DoD), as required by the Chief Financial Officers Act 

of 1990, expanded by the Government Management Reform Act of 1994, and other appropriate 

legislation. The financial statements have been prepared from the books and records of the 

Department in accordance with, to the extent possible, U.S. generally accepted accounting 

principles (USGAAP) promulgated by the Federal Accounting Standards Advisory Board; the 

Office of Management and Budget (OMB) Circular No. A-136, Financial Reporting 

Requirements; and the DoD Financial Management Regulation (FMR). The accompanying 

financial statements account for all resources for which the Department is responsible unless 

otherwise noted. Information relative to classified assets, programs, and operations is excluded 

from the statements or otherwise aggregated and reported in such a manner that it is not 

discernable.

The Department is unable to fully implement all elements of USGAAP and OMB Circular No. 

A-136, due to limitations of financial and nonfinancial management processes and systems that 

support the financial statements. The Department derives reported values and information for 

major asset and liability categories largely from nonfinancial systems, such as inventory and 

logistics systems. These systems were designed to support reporting requirements for 

maintaining accountability over assets and reporting the status of federal appropriations rather 

than preparing financial statements in accordance with USGAAP. The Department continues to 

implement process and system improvements addressing these limitations.

The Department has 13 auditor-identified material weaknesses: (1) Financial Management 

Systems; (2) Fund Balance with Treasury; (3) Accounts Receivable; (4) Inventory; (5) Operating 

Materials [sic] and Supplies; (6) General Property, Plant, and Equipment; (7) GovernmentFurnished Materials [sic] and Contractor-Acquired Materials [sic]; (8) Accounts Payable; (9) 

Environmental Liabilities; (10) Statement of Net Cost; (11) Intragovernmental Eliminations; (12) 

Other Accounting Entries; and (13) Reconciliation of Net Cost of Operations to Budget.

1.B. Mission of the Reporting Entity 

The Department was established by the National Security Act of 1947. The Department 

provides the military forces needed to deter war and protect the security of our country. Since 

the creation of America’s first army in 1775, the Department and predecessor organizations 

have evolved into a global presence with a worldwide infrastructure dedicated to defending the 

United States by deterring and defeating aggression and coercion in critical regions. 

The Department includes the Military Departments and the Defense Agencies. The Military 

Departments consist of the Army, the Navy (of which the Marine Corps is a component), and the 

Air Force. The Defense Agencies provide support services commonly used throughout the 

Department.

1.C. Appropriations and Funds 

The Department receives appropriations and funds as general, working capital (revolving), trust, 

special, and deposit funds. The Department uses these appropriations and funds to execute 

missions and subsequently report on resource usage.

General Funds are used for financial transactions funded by congressional appropriations, 

including personnel, operation and maintenance, research and development, procurement, and 

military construction. These general funds also include supplemental funds enacted by the 
Department of Defense Agency Financial Report for FY 2010 

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American Recovery and Reinvestment Act (Recovery Act) of 2009. Details relating to Recovery 

Act appropriated funds are available on line at http://www.defenselink.mil/recovery. 

Working Capital Funds (WCF) received funding to establish an initial corpus through an 

appropriation or a transfer of resources from existing appropriations or funds. The corpus 

finances operations and transactions that flow through the fund. The WCF resources the goods 

and services sold to customers on a reimbursable basis and maintains the corpus. 

Reimbursable receipts fund future operations and generally are available in their entirety for use 

without further congressional action. At various times, Congress provides additional 

appropriations to supplement WCF as an infusion of cash when revenues are inadequate to 

cover costs within the corpus.

Trust funds contain receipts and expenditures of funds held in trust by the government for use in 

carrying out specific purposes or programs in accordance with the terms of the donor, trust 

agreement, or statute. Special fund accounts are used to record government receipts reserved 

for a specific purpose. Certain trust and special funds may be designated as earmarked funds. 

Earmarked funds are financed by specifically identified revenues, required by statute to be used 

for designated activities, benefits or purposes, and remain available over time. The Department 

is required to separately account for and report on the receipt, use and retention of revenues 

and other financing sources for earmarked funds.

Deposit funds are used to record amounts held temporarily until paid to the appropriate 

government or public entity. They are not Department funds, and as such, are not available for 

the Department’s operations. The Department is acting as an agent or custodian for funds 

awaiting distribution.

The Department is a party to allocation transfers with other federal agencies as a transferring 

(parent) entity or receiving (child) entity. An allocation transfer is an entity’s legal delegation of 

authority to obligate budget authority and outlay funds on its behalf. Generally, all financial 

activity related to allocation transfers (e.g., budget authority, obligations, outlays) is reported in 

the financial statements of the parent entity. Exceptions to this general rule apply to specific 

funds for which OMB has directed that all activity be reported in the financial statements of the 

child entity. These exceptions include U.S. Treasury-Managed Trust Funds, Executive Office of 

the President (EOP), and all other funds specifically designated by OMB. Based on an 

agreement with OMB, funds for Security Assistance programs are reported separately from the 

Department's financial statements and notes. 

The Department receives allocation transfers from the following agencies: Departments of 

Agriculture, Interior, Energy, and Transportation; the Appalachian Regional Commission; and 

the Federal Highway Administration.

Additionally, the Department receives allocation transfers from certain funds meeting the OMB 

exception and all related activity is included in the Department’s financial statements. The 

exceptions reported by the Department include South Dakota Terrestrial Wildlife Habitat 

Restoration, Inland Waterways and Harbor Maintenance, and the EOP other than funds 

executed by Defense Security Cooperation Agency for Security Assistance.

As a parent, the Department allocates funds to the Departments of Transportation and 

Agriculture, and reports all related activity in these financial statements.

1.D. Basis of Accounting 

The Department’s financial management systems are unable to meet all full accrual accounting 

requirements. Many of the Department’s financial and nonfinancial feeder systems and 

processes were designed and implemented prior to the issuance of USGAAP. These systems 
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were not designed to collect and record financial information on the full accrual accounting basis 

as required by USGAAP. Most of the Department’s financial and nonfinancial legacy systems 

were designed to record information on a budgetary basis.

The Department’s financial statements and supporting trial balances are compiled from the 

underlying financial data and trial balances of the Military Services and Defense Agencies and 

their sub-entities. The underlying data is largely derived from budgetary transactions 

(obligations, disbursements, and collections), from nonfinancial feeder systems, and accruals 

made for major items such as payroll expenses, accounts payable, and environmental liabilities. 

Some of the sub-entity level trial balances may reflect known abnormal balances resulting 

largely from business and system processes. At the consolidated level, these abnormal 

balances may not be evident. Disclosures of abnormal balances are made in the applicable 

footnotes, but only to the extent that the abnormal balances are evident at the consolidated 

level. 

The Department is determining the actions required to bring financial and nonfinancial feeder 

systems and processes into compliance with USGAAP. One such action is the current revision 

of accounting systems to record transactions based on the U.S. Standard General Ledger 

(USSGL). Until all of the Department’s financial and nonfinancial feeder systems and processes 

are able to collect and report financial information as required by USGAAP, the Department’s 

financial data will be derived from budgetary transactions, data from nonfinancial feeder 

systems, and accruals.

1.E. Revenues and Other Financing Sources 

The Department receives congressional appropriations as financing sources for general funds 

that expire annually, on a multi-year basis, or do not expire. When authorized by legislation, 

these appropriations are supplemented by revenues generated by sales of goods or services. 

The Department recognizes revenue as a result of costs incurred for goods and services 

provided to other federal agencies and the public. Full-cost pricing is the Department’s standard 

policy for services provided as required by OMB Circular No. A-25, User Charges. The 

Department recognizes revenue when earned within the constraints of its current system 

capabilities. In some instances, revenue is recognized when bills are issued. 

Depot Maintenance and Ordnance WCF activities recognize revenue according to the 

percentage of completion method. Supply Management WCF activities recognize revenue from 

the sale of inventory items.

The Department does not include nonmonetary support provided by U.S. allies for common 

defense and mutual security in amounts reported in the Statement of Net Cost and Note 21, 

Reconciliation of Net Cost of Operations to Budget. The U.S. has cost sharing agreements with 

countries having a mutual or reciprocal defense agreement, where U.S. troops are stationed, or 

where the U.S. Fleet is in a port.

1.F. Recognition of Expenses

For financial reporting purposes, the Department’s policy requires the recognition of operating 

expenses in the period incurred. Current financial and nonfinancial feeder systems were not 

designed to collect and record financial information on the full accrual accounting basis. 

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

liabilities, and unbilled revenue. In the case of Operating Materiel and Supplies (OM&S), 

operating expenses are generally recognized when the items are purchased. Efforts are 

underway to transition to the consumption method for recognizing OM&S expenses. Under the 

consumption method, OM&S would be expensed when consumed. Due to system limitations, in 
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some instances expenditures for capital and other long-term assets may be recognized as 

operating expenses. The Department continues to implement process and system 

improvements to address these limitations.

1.G. Accounting for Intragovernmental Activities 

Accounting standards require that an entity eliminate intraentity activity and balances from 

consolidated financial statements in order to prevent overstatement for business with itself. 

However, the Department cannot accurately identify intragovernmental transactions by 

customer because the Department’s systems do not track buyer and seller data at the 

transaction level. Generally, seller entities within the Department provide summary seller-side 

balances for revenue, accounts receivable, and unearned revenue to the buyer-side internal 

Department accounting offices. In most cases, the buyer-side records are adjusted to agree 

with the Department’s seller-side balances and are then eliminated. The Department is 

implementing replacement systems and a standard financial information structure which will 

incorporate the necessary elements that will enable the Department to correctly report, 

reconcile, and eliminate intragovernmental balances. 

The U.S. Treasury’s Federal Intragovernmental Transactions Accounting Policies Guide and 

Treasury Financial Manual Part 2 – Chapter 4700, Agency Reporting Requirements for the 

Financial Report of the United States Government, provide guidance for reporting and 

reconciling intragovernmental balances. While the Department is unable to fully reconcile 

intragovernmental transactions with all federal agencies, the Department is able to reconcile 

balances pertaining to investments in federal securities, borrowings from the U.S. Treasury and 

the Federal Financing Bank, Federal Employees’ Compensation Act transactions with the 

Department of Labor, and benefit program transactions with the Office of Personnel 

Management. 

The Department’s proportionate share of public debt and related expenses of the Federal 

government is not included. The Federal government does not apportion debt and related costs 

to federal agencies. The Department’s financial statements do not report any public debt, 

interest, or source of public financing, whether from issuance of debt or tax revenues. 

Generally, financing for the construction of the Department’s facilities is obtained through 

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 U.S. Treasury does 

not allocate such costs to the Department.

1.H. Transactions with Foreign Governments and International Organizations 

Each year, the Department sells defense articles and services to foreign governments and 

international organizations 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 Federal 

Government. Payment in U.S. dollars is required in advance.

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

The Department’s monetary resources are maintained in U.S. Treasury accounts. The 

disbursing offices of Defense Finance and Accounting Service (DFAS), the Military 

Departments, the U.S. Army Corps of Engineers (USACE), and the Department of State’s 

financial service centers process the majority of the Department’s cash collections, 

disbursements, and adjustments worldwide. Each disbursing station prepares monthly reports 

to the U.S. Treasury on checks issued, electronic fund transfers, interagency transfers, and 

deposits.
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In addition, DFAS sites and USACE Finance Center submit reports to the U.S. Treasury by 

appropriation on interagency transfers, collections received, and disbursements issued. The 

U.S. Treasury records these transactions to the applicable Fund Balance with Treasury (FBWT) 

account. On a monthly basis, the Department's FBWT is adjusted to agree with the U.S. 

Treasury's accounts.

1.J. Cash and Other Monetary Assets

Cash is the total of cash resources under the control of the Department, which includes coin, 

paper currency, negotiable instruments, and amounts held for deposit in banks and other 

financial institutions. Foreign currency consists of the total U.S. dollar equivalent of both 

purchased and nonpurchased foreign currencies held in foreign currency fund accounts. 

Foreign currency is valued using the U.S. Treasury prevailing rate of exchange.

The majority of cash and all foreign currency is classified as ―nonentity‖ and is restricted. 

Amounts reported consist primarily of cash and foreign currency held by disbursing officers to 

carry out their paying, collecting, and foreign currency accommodation exchange missions.

The Department conducts a significant portion of operations overseas. Congress established a 

special account to handle the gains and losses from foreign currency transactions for five 

general fund appropriations:(1) operations and maintenance; (2) military personnel; (3) military 

construction; (4) family housing operation and maintenance; and (5) family housing 

construction. The gains and losses are calculated as the variance between the exchange rate 

current at the date of payment and a budget rate established at the beginning of each fiscal 

year. Foreign currency fluctuations related to other appropriations require adjustments to the 

original obligation amount at the time of payment. The Department does not separately identify 

foreign currency fluctuation transactions.

1.K. Accounts Receivable 

Accounts receivable from other federal entities or the public include: accounts receivable, claims 

receivable, and refunds receivable. Allowances for uncollectible accounts due from the public 

are based upon an analysis of collection experience by fund type. The Department does not 

recognize an allowance for estimated uncollectible amounts from other federal agencies. 

Claims against other federal agencies are to be resolved between the agencies in accordance 

with dispute resolution procedures defined in the Intragovernmental Business Rules published 

in the Treasury Financial Manual at http://www.fms.treas.gov/tfm/vol1/07-03.pdf.

1.L. Direct Loans and Loan Guarantees 

The Department operates a direct loan and loan guarantee program authorized by the National 

Defense Authorization Act for FY 1996 (Public Law (PL) 104-106, Section 2801). The Act 

includes a series of authorities that allow the Department to work with the private sector to 

renovate military housing. The Department’s goals are to obtain private capital to leverage 

government dollars, make efficient use of limited resources, and use a variety of private sector 

approaches to build and renovate military housing faster and at a lower cost to the American 

taxpayers.

The Act also provides the Department with a variety of authorities to obtain private sector 

financing and expertise to improve military housing. The Department uses these authorities 

individually or in combination. They include guarantees (both loan and rental), 

conveyance/leasing of existing property and facilities, differential lease payments, investments 

(both limited partnerships and stock/bond ownership), and direct loans. 
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The National Defense Authorization Act for FY 2005 (PL 108-375, Section 2805) provided 

permanent authorities to the Military Housing Privatization Initiative (MHPI).

The Department operates the Armament Retooling and Manufacturing Support Initiative under 

Title 10 United States Code 4551-4555. This loan guarantee program is designed to encourage 

commercial use of inactive government facilities. The revenue generated from property rental 

offsets the cost of maintaining these facilities.

The Department administers the Foreign Military Financing program on behalf of the EOP. This 

program is authorized by sections 23 and 24 of the Arms Export Control Act of 1976, as 

amended, PL 90-629, as amended, and Section 503(a). This program provides loans to help 

countries purchase U.S. produced weapons, defense equipment, services, or military training. 

The direct loans and loan guarantees related to Foreign Military Sales are not included in these 

financial statements, per the Department’s agreement with OMB; this information is provided 

separately as other accompanying information.

The Federal Credit Reform Act of 1990 governs all amended direct loan obligations and loan 

guarantee commitments made after FY 1991.

1.M. Inventories and Related Property 

The Department values approximately 72 percent of resale inventory using the moving average 

cost method. An additional 9 percent (fuel inventory) is reported using the first-in-first-out 

method. The Department reports the remaining 19 percent of resale inventories at an 

approximation of historical cost using latest acquisition cost adjusted for holding gains and 

losses. The latest acquisition cost method is used because legacy inventory systems were 

designed for materiel management rather than accounting. Although these systems provide 

visibility and accountability over inventory items, they do not maintain historical cost data 

necessary to comply with Statement of Federal Financial Accounting Standards (SFFAS) No. 3, 

Accounting for Inventory and Related Property. Additionally, these systems cannot produce 

financial transactions using the USSGL, as required by the Federal Financial Management 

Improvement Act of 1996 (PL 104-208). The Department is continuing to transition the balance 

of the inventories to the moving average cost method through the use of new inventory systems. 

Most transitioned balances, however, were not baselined to auditable historical cost and remain 

noncompliant with SFFAS No. 3.

The Department manages only military or government-specific materiel under normal 

conditions. Materiel is a unique term that relates to military force management, and includes 

items such as ships, tanks, self-propelled weapons, aircraft, etc., and related spares, repair 

parts, and support equipment. Items commonly used in and available from the commercial 

sector are not managed in the Department’s materiel management activities. Operational 

cycles are irregular, and the military risks associated with stock-out positions have no 

commercial parallel. The Department holds materiel based on military need and support for

contingencies. The Department is currently developing a methodology to be used to account for 

―inventory held for sale‖ and ―inventory held in reserve for future sale,‖ with a completion date of 

year-end FY 2011 reporting.

Related property includes OM&S and stockpile materiel. The OM&S, including munitions not 

held for sale, are valued at standard purchase price. The Department uses both the 

consumption method and the purchase method of accounting for OM&S. Items that are 

centrally managed and stored, such as ammunition and engines, are generally recorded using 

the consumption method and are reported on the Balance Sheet as OM&S. When current 

systems cannot fully support the consumption method, the Department uses the purchase 

method. Under this method, materiel and supplies are expensed when purchased. During FY 

2010 and FY 2009, the Department expensed significant amounts using the purchase method 
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because the systems could not support the consumption method or management deemed that 

the item was in the hands of the end user. This is a material weakness for the Department and 

long-term system corrections are in process. Once the proper systems are in place, these items 

will be accounted for under the consumption method of accounting.

The Department determined that the recurring high dollar-value of OM&S in need of repair is 

material to the financial statements and requires a separate reporting category. Many highdollar items, such as aircraft engines, are categorized as OM&S rather than military equipment.

The Department recognizes excess, obsolete, and unserviceable inventory and OM&S at a net 

realizable value of $0 pending development of an effective means of valuing such materiel. 

Inventory available and purchased for resale includes consumable spare and repair parts, and 

repairable items owned and managed by the Department. This inventory is retained to support 

military or national contingencies. Inventory held for repair is damaged inventory that requires 

repair to make it suitable for sale. Often, it is more economical to repair these items rather than 

to procure them. The Department often relies on weapon systems and machinery no longer in 

production. As a result, the Department supports a process that encourages the repair and 

rebuilding of certain items. This repair cycle is essential to maintaining a ready, mobile, and 

armed military force. Work in process balances include: (1) costs related to the production or 

servicing of items, including direct material, labor, and applied overhead;

(2) the value of finished products or completed services that are yet to be placed in service; and 

(3) munitions in production and depot maintenance work with associated costs incurred in the 

delivery of maintenance services.

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

The Department reports investments in U.S. Treasury securities at cost, net of amortized 

premiums or discounts. Premiums or discounts are amortized over the term of the investments 

using the effective interest rate method or another method that yields similar results. The 

Department’s intent is to hold investments to maturity unless they are needed to finance claims 

or otherwise sustain operations. Consequently, a provision is not made for unrealized gains or 

losses on these securities.

The Department invests in nonmarketable, market-based U.S. Treasury securities, which are 

issued to federal agencies by the U. S. Treasury’s Bureau of the Public Debt. They are not 

traded on any securities exchange but mirror the prices of particular U.S. Treasury securities 

traded in the government securities market.

The Department’s net investments are held by various trust and special funds. These funds 

include the Military Retirement Fund; Medicare-Eligible Retiree Health Care Fund; Other 

Defense Organizations General Fund trust and special funds; donations (gift funds); and the 

U. S. Treasury managed trust funds reported by USACE including the South Dakota Terrestrial 

Habitat Restoration, Inland Waterways, and Harbor Maintenance Trust Funds.

Other investments represent joint ventures with private developers constructing or improving 

military housing on behalf of the Department under the authority of the MHPI, authorized by 

PL 104-106, Section 2801. These investments do not require market value disclosure. The 

Department’s potential losses on these ventures are limited to the amounts invested.

1.O. General Property, Plant and Equipment 

The Department uses the estimated historical cost for valuing military equipment. The 

Department identified the universe of military equipment by accumulating information relating to 

program funding and associated military equipment, equipment useful life, program acquisitions, 
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and disposals to establish a baseline. The military equipment baseline is updated using 

expenditure, acquisition, and disposal information.

The Department’s General Property, Plant, and Equipment (PP&E) capitalization threshold is

$100 thousand except for real property, which is $20 thousand. The Department has not fully 

implemented the threshold for real property; therefore, the Department is primarily using the 

capitalization threshold of $100 thousand for General PP&E, and most real property.

With the exception of USACE Civil Works and WCF, General PP&E assets are capitalized at 

historical acquisition cost when an asset has a useful life of two or more years and when the 

acquisition cost equals or exceeds the Department’s capitalization threshold. The Department 

also requires the capitalization of improvements to existing General PP&E assets if the 

improvements equal or exceed the capitalization threshold and extend the useful life or increase 

the size, efficiency, or capacity of the asset. The Department depreciates all General PP&E, 

other than land, on a straight-line basis.

The WCFs capitalize all PP&E used in the performance of their mission. These assets are 

capitalized as General PP&E, whether or not they meet the definition of any other PP&E category.

The USACE Civil Works General PP&E is capitalized at acquisition cost plus capitalized 

improvements when an asset has a useful life of two or more years and the acquisition cost 

exceeds $25 thousand. The exception is buildings and structures related to hydropower 

projects, which are capitalized regardless of cost.

When it is in the best interest of the government, the Department provides government property 

to contractors to complete contract work. The Department either owns or leases such property, 

or it is purchased directly by the contractor for the government based on contract terms. When 

the value of contractor-procured General PP&E meets or exceeds the Department’s 

capitalization threshold, federal accounting standards require that it be reported on the 

Department’s Balance Sheet.

The Department developed policy and a reporting process for contractors with government 

furnished equipment that provides appropriate General PP&E information for financial statement 

reporting. The Department requires that entities maintain, in their property systems, information 

on all property furnished to contractors. These actions are structured to capture and report the 

information necessary for compliance with federal accounting standards. The Department has 

not fully implemented this policy primarily due to system limitations.

1.P. Advances and Prepayments 

When advances are permitted by law, legislative action, or presidential authorization, the 

Department’s policy is to record advances or prepayments in accordance with USGAAP. As 

such, payments made in advance of the receipt of goods and services should be reported as an 

asset on the Balance Sheet. The Department’s policy is to expense and/or properly classify 

assets when the related goods and services are received. The Department has not fully 

implemented this policy primarily due to system limitations.

1.Q. Leases 

Lease payments for the rental of equipment and operating facilities are classified as either 

capital or operating leases. When a lease is essentially equivalent to an installment purchase of 

property (a capital lease), and the value equals or exceeds the current capitalization threshold, 

the Department records the applicable asset as though purchased, with an offsetting liability, 

and depreciates it. The Department records the asset and liability at the lesser of the present 

value of the rental and other lease payments during the lease term (excluding portions 
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representing executory costs paid to the lessor) or the asset’s fair market value. The discount 

rate for the present value calculation is either the lessor’s implicit interest rate or the 

government’s incremental borrowing rate at the inception of the lease. The Department, as the 

lessee, receives the use and possession of leased property, for example real estate or 

equipment, from a lessor in exchange for a payment of funds. An operating lease does not 

substantially transfer all the benefits and risks of ownership. Payments for operating leases are 

expensed over the lease term as they become payable.

Office space and leases entered into by the Department are the largest component of operating 

leases and are based on costs gathered from existing leases, General Services Administration 

bills, and interservice support agreements. Future year projections use the Consumer Price 

Index. 

1.R. Other Assets 

Other assets include those assets, such as military and civil service employee pay advances, 

travel advances, and certain contract financing payments that are not reported elsewhere on the 

Department’s Balance Sheet.

The Department 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 long-term contracts can cause, the Department may provide financing payments. 

Contract financing payments are defined in the Federal Acquisition Regulation, Part 32, as 

authorized disbursements to a contractor prior to acceptance of supplies or services by the 

government. Contract financing payment clauses are incorporated in the contract terms and 

conditions and may include advance payments, performance-based payments, commercial 

advances and interim payments, progress payments based on cost, and interim payments 

under certain cost reimbursement contracts. It is the Department’s policy to record certain 

contract financing payments as other assets. The Department has not fully implemented this 

policy primarily due to system limitations.

Contract financing payments do not include invoice payments, payments for partial deliveries, 

lease and rental payments, or progress payments based on a percentage or stage of 

completion. The Defense Federal Acquisition Regulation Supplement authorizes progress 

payments based on a percentage or stage of completion only for construction of real property, 

shipbuilding and ship conversion, alteration, or repair. Progress payments based on percentage 

or stage of completion are reported as Construction in Progress. 

1.S. Contingencies and Other Liabilities 

The SFFAS No. 5, Accounting for Liabilities of the Federal Government, as amended by 

SFFAS No. 12, Recognition of Contingent Liabilities Arising from Litigation, defines a 

contingency as an existing condition, situation, or set of circumstances that involves an 

uncertainty as to possible gain or loss. The uncertainty will be resolved when one or more 

future events occur or fail to occur. The Department recognizes contingent liabilities when past 

events or exchange transactions occur, a future loss is probable, and the loss amount 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 of incurring a loss or additional losses. 

The Department’s risk of loss and resultant contingent liabilities arise from pending or 

threatened litigation or claims and assessments due to events such as aircraft, ship and vehicle 

accidents; medical malpractice; property or environmental damages; and contract disputes.
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Other liabilities also arise as a result of anticipated disposal costs for the Department’s assets. 

Consistent with SFFAS No. 6, Accounting for Property, Plant, and Equipment, recognition of an 

anticipated environmental disposal liability begins when the asset is placed into service. Based 

on the Department’s policy, which is consistent with SFFAS No. 5, Accounting for Liabilities of 

the Federal Government, nonenvironmental disposal liabilities are recognized when 

management decides to dispose of an asset. The Department recognizes nonenvironmental 

disposal liabilities for military equipment nuclear-powered assets when placed into service. 

These amounts are not easily distinguishable and are developed in conjunction with 

environmental disposal costs. 

1.T. Accrued Leave 

The Department reports liabilities for military leave and accrued compensatory and annual leave 

for civilians. Sick leave for civilians is expensed when taken. The liabilities are based on 

current pay rates.

1.U. Net Position 

Net position consists of unexpended appropriations and cumulative results of operations.

Unexpended appropriations represent the amounts of budget authority that are unobligated and 

have not been rescinded or withdrawn. Unexpended appropriations also represent amounts 

obligated for which legal liabilities for payments have not been incurred.

Cumulative results of operations represent the net difference between expenses and losses, 

and financing sources (including appropriations, revenue, and gains) since inception. The 

cumulative results of operations also include donations and transfers in and out of assets that 

were not reimbursed.

1.V. Treaties for Use of Foreign Bases 

The Department has the use of land, buildings, and other overseas facilities that are obtained 

through various international treaties and agreements negotiated by the Department of State. 

The Department purchases capital assets overseas with appropriated funds, however, the host 

country retains title to the land and capital improvements. Treaty terms generally allow the 

Department continued use of these properties until the treaties expire. In the event treaties or 

other agreements are terminated, use of the foreign bases is prohibited and losses are recorded 

for the value of any nonretrievable capital assets. The settlement due to the U.S. or host nation 

is negotiated and takes into account the value of capital investments and may be offset by the 

cost of environmental cleanup.

1.W. Undistributed Disbursements and Collections 

Undistributed disbursements and collections represent the difference between disbursements 

and collections matched at the transaction level to specific obligations, payables, or receivables 

in the source systems and those reported by the U.S. Treasury.

Supported disbursements and collections are evidenced by corroborating documentation. 

Unsupported disbursements and collections do not have supporting documentation for the 

transaction and most likely would not meet audit scrutiny.

The Department’s policy is to allocate supported undistributed disbursements and collections 

between federal and nonfederal categories based on the percentage of distributed federal and 

nonfederal accounts payable and accounts receivable. Supported undistributed disbursements 

and collections are then applied to reduce accounts payable and receivable accordingly. 

Unsupported, undistributed disbursements are recorded as disbursements in transit and reduce 
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nonfederal accounts payable. Unsupported, undistributed collections are recorded in 

nonfederal other liabilities.

1.X. Fiduciary Activities

Fiduciary cash and other assets are not assets of the Department and are not recognized on the 

balance sheet. Fiduciary activities are reported in the financial statement note schedules.

1.Y. Significant Events

During FY 2010, the Department implemented Statement of Federal Financial Accounting 

Standard (SFFAS) No. 33, ―Pensions, Other Retirement Benefits, and Other Postemployment 

Benefits: Reporting the Gains and Losses from Changes in Assumptions and Selecting 

Discount Rates and Valuation Dates‖ that prescribes a standard for selecting the discount rate 

and valuation date used in estimating actuarial liabilities and requires a separate presentation of 

gains and losses from changes in long-term assumptions used to estimate the actuarial liability. 

Refer to Note 17, Military Retirement and Other Federal Employment Benefits and Note 18, 

General Disclosures Related to the Statement of Net Cost, for additional information. 

Note 2. Nonentity Assets

Nonentity Assets Dollars in Millions

As of September 30 2010 Restated

2009

Intragovernmental Assets

Fund Balance with Treasury $ 620.5 $ 823.2

Accounts Receivable 0.5 0.0

Total Intragovernmental Assets $ 621.0 $ 823.2

Nonfederal Assets

Cash and Other Monetary Assets $ 2,001.0 $ 2,239.4

Accounts Receivable 6,412.3 4,583.5

Other Assets 184.8 186.2

Total Nonfederal Assets $ 8,598.1 $ 7,009.1

Total Nonentity Assets $ 9,219.1 $ 7,832.3

Total Entity Assets $ 1,921,044.3 $ 1,789,617.0

Total Assets $ 1,930,263.4 $ 1,797,449.3

Nonentity assets are assets for which the Department maintains stewardship accountability and 

reporting responsibility but are not available for the Department’s normal operations. 

The Department identified the following restatements: (1) errors impacting ending account 

balances while migrating from a manual to an automated interface between budget execution 

and financial statement reporting systems; (2) property, plant and equipment valued incorrectly; 

(3) overstated accounts receivable (nonfederal) established to recover pharmacy costs from 

drug manufacturers; (4) inventory valued incorrectly; and (5) contract financing payments based 

on auditor-recommended adjustments. To correct the errors, the Department restated Note 2, 

Nonentity Assets, Total Entity Assets by $2.0 billion. Refer to Note 26, Restatements, for further 

information. 
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Intragovernmental Fund Balance with Treasury (FBWT) consists of deposit funds. Deposit 

funds are generally used to record amounts held temporarily until paid to the appropriate party. 

Additionally, the balance includes residual amounts of seized Iraqi cash and the Development 

Fund for Iraq (DFI). Seized Iraqi cash is former Iraqi regime monies confiscated by coalition 

forces and restricted for support of the Iraqi people. The DFI consists of proceeds from Iraqi oil 

sales, repatriated assets from the United States and other nations, and deposits from 

unencumbered oil-for-food proceeds. DFI funds are restricted for Iraqi infrastructure and other 

Iraqi support needs. 

Intragovernmental Accounts Receivable consists of amounts due from cancelled appropriations.

Nonfederal Cash and Other Monetary Assets primarily consists of cash held by Disbursing 

Officers to carry out payment, collection, and foreign currency accommodation exchange 

missions. 

Nonfederal Accounts Receivable consists of amounts due from canceled year appropriations,

and interest, fines, and penalties due on debt. Generally, the Department cannot use the 

collections and must distribute them to the U.S. Treasury. Where the Department has specific 

statutory authority to retain collections from certain canceled year accounts receivable, those

receivables are reported as entity assets. 

Nonfederal Other Assets consists of an Advance Payment Pool Agreement with a nonprofit 

educational institution to finance research and development projects.

Note 3. Fund Balance with Treasury

Fund Balance with Treasury Dollars in Millions

As of September 30 2010 2009

Fund Balance

Appropriated Funds $ 507,886.2 $ 491,763.4

Revolving Funds 9,965.4 7,804.2

Trust Funds 2,400.9 1,874.0

Special Funds 716.3 395.8

Other Fund Types 672.9 916.9

Total Fund Balance $ 521,641.7 $ 502,754.3

Fund Balance Per Treasury Versus Agency

Fund Balance per Treasury $ 528,003.5 $ 509,703.2

Fund Balance per Agency 521,641.7 502,754.3

Reconciling Amount $ 6,361.8 $ 6,948.9

Other Fund Types primarily consists of deposit funds, receipt accounts, and Development Fund 

for Iraq.

The Department shows a reconciling net difference of $6.4 billion with the U.S. Treasury. This 

includes canceling year authority of $5.5 billion, unavailable receipts of $688.0 million, and 

fiduciary activities of $178.9 million. 
Department of Defense Agency Financial Report for FY 2010 

Financial Information

72

Status of Fund Balance with Treasury Dollars in Millions

As of September 30 2010

Restated

2009

Unobligated Balances

Available $ 143,733.4 $ 131,437.2

Unavailable 503,114.4 440,714.6

Obligated Balance not yet Disbursed 459,240.3 454,275.7

Nonbudgetary FBWT 807.8 899.8

NonFBWT Budgetary Accounts (585,254.2) (524,573.0)

Total Fund Balance $ 521,641.7 $ 502,754.3

The Department identified errors impacting ending FY 2009 account balances while migrating 

from a manual to an automated interface between budget execution and financial statement 

reporting systems. To correct the errors, the Department restated Note 3, Fund Balance with 

Treasury, Status of Fund Balance with Treasury. Refer to Note 26, Restatements, for further 

information.

The Status of Fund Balance with Treasury (FBWT) reflects the budgetary resources to support 

the FBWT and is a reconciliation between budgetary and proprietary accounts. It primarily 

consists of unobligated and obligated balances. The balances reflect the budgetary authority 

remaining for disbursement against current or future obligations. 

Unobligated Balance is classified as available or unavailable and represents the cumulative 

amount of budgetary authority that has not been set aside to cover outstanding obligations. The 

unavailable balance consists primarily of funds invested in U.S. Treasury securities that are 

temporarily precluded from obligation by law. Certain unobligated balances are restricted for 

future use and are not apportioned for current use. Unobligated balances for trust fund 

accounts are restricted for use by the public law that established the funds. 

Obligated Balance not yet Disbursed represents funds that have been obligated for goods and 

services not received and those received, but not paid. 

Nonbudgetary FBWT includes accounts that do not have budgetary authority, such as deposit 

funds, unavailable receipt accounts, clearing accounts, and nonentity FBWT. 

NonFBWT Budgetary Accounts reduces the Status of FBWT and consists of investments in 

U.S. Treasury securities, unfilled customer orders without advance, contract and borrowing 

authority, and receivables. 
Department of Defense Agency Financial Report for FY 2010 

Financial Information

73

Note 4. Investments and Related Interest

 Investments and Related Interest Dollars in Millions

As of September 30

2010

Cost Amortization 

Method

Amortized 

(Premium) / 

Discount

Investments, 

Net

Market 

Value 

Disclosure

Intragovernmental Securities

Nonmarketable, Market-Based

Military Retirement Fund $ 325,124.5 See Below $ (6,559.6) $ 318,564.9 $ 351,050.7

Medicare-Eligible Retiree 

Health Care Fund 168,568.9 See Below (4,134.2) 164,434.7 182,212.1

US Army Corps of 

Engineers 5,716.8 See Below (11.2) 5,705.6 5,987.4

Other Funds 3,525.3 See Below (39.3) 3,486.0 3,670.9

Total Nonmarketable,MarketBased $ 502,935.5 $ (10,744.3) $ 492,191.2 $ 542.921.1

Accrued Interest 4,945.7 4,945.7 4,945.7

Total Intragovernmental 

Securities $ 507,881.2 $ (10,744.3) $ 497,136.9 $ 547,866.8

Other Investments

Total Other Investments $ 2,489.7 $ 0.0 $ 2,489.7 N/A

Amortization Method Used: Effective Interest

Investments and Related Interest Dollars in Millions

As of September 30

Restated 2009

Cost Amortization 

Method

Amortized 

(Premium) / 

Discount

Investments, 

Net

Market Value 

Disclosure

Intragovernmental Securities

Nonmarketable, 

Market-Based

 Military Retirement Fund $ 281,250.3 See Below $ (5,774.0) $ 275,476.3 $ 283,292.6

 Medicare-Eligible Retiree

 Health Care Fund 150,184.3 See Below (3,345.5) 146,838.8 150,820.6

 US Army Corps of

 Engineers 5,239.5 See Below (41.7) 5,197.8 5,363.2

 Other Funds 2,915.6 See Below (28.8) 2,886.8 2,618.8

 Total Nonmarketable,

 Market-Based $ 439,589.7 See Below $ (9,190.0) $ 430,399.7 $ 442,095.2

Accrued Interest 4,484.3 4,484.3 4,484.3

Total Intragovernmental 

Securities $ 444,074.0 $ (9,190.0) $ 434,884.0 $ 446,579.5

Other Investments

Total Other Investments $ 2,017.1 $ 0.0 $ 2,017.1 N/A

Amortization Method Used: Effective Interest
Department of Defense Agency Financial Report for FY 2010 

Financial Information

74

The Department invests primarily in non-marketable, market-based securities which fluctuate in 

tandem with the current selling price of the equivalent marketable security on the open market. 

These securities are purchased with the intent to hold until maturity, thus balances are not 

adjusted to market value.

The U.S. Treasury securities are issued to the earmarked funds as evidence of its receipts and 

are an asset to the Department and a liability to the U.S. Treasury. The Federal Government 

does not set aside assets to pay future benefits or other expenditures associated with 

earmarked funds. The cash generated from earmarked funds are deposited in the U.S. 

Treasury, which uses the cash for general government purposes. Since the Department and 

the U.S. Treasury are both part of the Federal Government, these assets and liabilities offset 

each other from the standpoint of the Federal Government as a whole. For this reason, they do 

not represent an asset or a liability in the U.S. Governmentwide financial statements. 

The U.S. Treasury securities provide the Department with authority to draw upon the U.S. 

Treasury to make future benefit payments or other expenditures. When the Department 

requires redemption of these securities to make expenditures, the Government will finance them 

from accumulated cash balances by raising taxes or other receipts, borrowing from the public or

repaying less debt, or curtailing other expenditures. The Federal Government uses the same 

method to finance all other expenditures.

Other Funds primarily consists of $2.2 billion in investments of the DoD Education Benefits 

Trust Fund, $843.0 million in investments of the Host Nation Support for U.S. Relocation 

Activities Trust Fund, and $413.8 million in investments of the Voluntary Separation Incentive 

Trust Fund.

Note 5. Accounts Receivable

Accounts Receivable Dollars in Millions

As of September 30

2010

Gross Amount Due

Allowance For 

Estimated 

Uncollectibles

Accounts 

Receivable, Net

Intragovernmental Receivables $ 1,249.2 N/A $ 1,249.2

Nonfederal Receivables 

(From the Public) 10,411.4 (655.2) 9,756.2

Total Accounts Receivable $ 11,660.6 $ (655.2) $ 11,005.4
Department of Defense Agency Financial Report for FY 2010 

Financial Information

75

Accounts Receivable Dollars in Millions

As of September 30

Restated

2009

Gross Amount Due

Allowance For 

Estimated 

Uncollectibles

Accounts 

Receivable, Net

Intragovernmental Receivables $ 1,219.6 N/A $ 1,219.6

Nonfederal Receivables 

(From the Public) 8,245.8 (514.4) 7,731.4

Total Accounts Receivable $ 9,465.4 $ (514.4) $ 8,951.0

Accounts receivable represent the Department’s claim for payment from other entities. The 

Department only recognizes an allowance for uncollectible amounts from the public. Claims 

with other federal agencies are resolved in accordance with the Intragovernmental Business 

Rules.

The Department identified errors impacting ending account balances while migrating from a 

manual to an automated interface between budget execution and financial statement reporting 

systems; and overstated accounts receivable (nonfederal) established to recover pharmacy 

costs from drug manufacturers. To correct the errors, the Department restated Note 5, 

Accounts Receivable. Refer to Note 26, Restatements, for further information.

Note 6. Other Assets

Other Assets Dollars in Millions

As of September 30 2010

Restated

2009

Intragovernmental Other Assets

Advances and Prepayments $ 1,749.8 $ 2,469.8

Other Assets 124.9 124.9 

Total Intragovernmental Other Assets $ 1,874.7 $ 2,594.7

Nonfederal Other Assets

Outstanding Contract Financing Payments $ 63,420.7 $ 54,541.6

Advances and Prepayments 1,810.7 1,234.1

Other Assets (With the Public) 403.7 356.2

Total Nonfederal Other Assets $ 65,635.1 $ 56,131.9

Total Other Assets $ 67,509.8 $ 58,726.6

The Department overstated contract financing payments in FY 2009. To adjust the balances, 

the Department restated Nonfederal Other Assets by $505.6 million. Refer to Note 26, 

Restatements, for further information.

Intragovernmental Other Assets represents the Department’s right to approximately 6 million 

barrels of crude oil held by the Department of Energy. 
Department of Defense Agency Financial Report for FY 2010 

Financial Information

76

The balance of Outstanding Contract Financing Payments includes $61.9 billion in contract 

financing payments and an additional $1.6 billion in estimated future payments to contractors

upon delivery and government acceptance of satisfactory products. Refer to Note 15, Other 

Liabilities, for further information. 

Contract terms and conditions for certain types of contract financing payments convey rights to 

the Government that protect the contract work from state or local taxation, liens or attachment 

by contractor's creditors, transfer of property, or disposition in bankruptcy. However, these 

rights should not be misconstrued to mean that ownership of contractor’s work has transferred 

to the Federal Government. The Federal Government does not have the right to take the work, 

except as provided for in contract clauses related to termination or acceptance, and the 

Department is not obligated to make payment to contractors until delivery and acceptance. 

The balance of Other Assets (With the Public) includes $218.9 million for inventory returned to 

vendors pending credit and $184.8 million for an Advance Payment Pool Agreement with a 

nonprofit institution. 

Note 7. Cash and Other Monetary Assets

Cash and Other Monetary Assets Dollars in Millions

As of September 30 2010 2009

Cash $ 634.8 $ 810.8

Foreign Currency 1,431.9 1,506.0

Other Monetary Assets 0.0 0.0

Total Cash, Foreign Currency, and Other Monetary Assets $ 2,066.7 $ 2,316.8

Cash (except for $65.7 million in undeposited collections and imprest funds) and Foreign 

Currency represent nonentity assets and are restricted and unavailable to fund the 

Department's mission.

Note 8. Direct Loan and Loan Guarantees

Direct Loan and Loan Guarantee Programs

The Department operates the following direct loan and/or loan guarantee programs:

Military Housing Privatization Initiative (MHPI) and 

Armament Retooling and Manufacturing Support Initiative (ARMS)

The Federal Credit Reform Act of 1990 governs all new and amended direct loan obligations 

and loan guarantee commitments made after FY 1991. 

Direct loans are reported at the net present value of the following projected cash flows:

Loan disbursements;

Repayments of principal; and

Payments of interest and other payments over the life of the loan after adjusting for 

estimated defaults, prepayments, fees, penalties, and other recoveries.

Loan guarantee liabilities are reported at the net present value. The cost of the loan guarantee 

is the net present value of the following estimated projected cash flows:
Department of Defense Agency Financial Report for FY 2010 

Financial Information

77

Payments by the Department to cover defaults and delinquencies, interest subsidies, or 

other payments; offset by

Payments to the Department including origination and other fees, penalties, and recoveries.

Military Housing Privatization Initiative

The MHPI includes both direct loan and loan guarantee programs. The programs are

authorized by the National Defense Authorization Act for FY 1996 (PL 104-106, Section 2801) 

and includes a series of authorities that allow the Department to work with the private sector to 

renovate and build military family housing. The MHPI accelerates the construction of new 

housing built to market standards and leverages private sector capital. One of the goals of the 

Department is to obtain private sector capital to leverage government dollars. The Department 

provides protection to the private sector partner against specific risks, such as base closure or 

member deployment.

Armament Retooling and Manufacturing Support Initiative

The ARMS Initiative, Title 10 United States. Code 4551-4555, is a loan guarantee program 

designed to encourage commercial use of the Army's inactive ammunition plants through 

incentives for businesses willing to locate to a government ammunition production facility. The 

production capacity of these facilities is greater than current military requirements, however; this 

capacity may be needed by the military in the future. Revenues from property rentals are used 

to help offset the overhead costs for the operation, maintenance and environmental cleanup at 

the facilities. 

In an effort to preclude any additional loan liability, the Army instituted an ARMS loan guarantee 

moratorium in FY 2004. The Army continues to operate under the moratorium and does not 

anticipate new loans. 

Summary of Direct Loans and Loan Guarantees Dollars in Millions

2010 2009

Loans Receivable

Direct Loans:

Foreign Military Loan Liquidating Account $ 0.0 $ 0.0

Military Housing Privatization Initiative 522.3 398.4

Foreign Military Financing Account 0.0 0.0

Military Debt Reduction Financing Account 0.0 0.0

 Total Direct Loans $ 522.3 $ 398.4

Defaulted Loan Guarantees:

Foreign Military Financing Account 0.0 0.0

Military Housing Privatization Initiative 0.0 0.0

Armament Retooling & Manufacturing Support Initiative 0.0 0.1

 Total Default Loan Guarantees $ 0.0 $ 0.1

Total Loans Receivable $ 522.3 $ 398.5

Loan Guarantee Liability

Foreign Military Liquidating Account $ 0.0 $ 0.0

Military Housing Privatization Initiative 16.2 18.7

Armament Retooling & Manufacturing Support Initiative 3.6 2.4

 Total Loan Guarantee Liability $ 19.8 $ 21.1
Department of Defense Agency Financial Report for FY 2010 

Financial Information

78

Direct Loans Obligated Dollars in Millions

2010 2009

Direct Loans Obligated Prior to FY 1992

(Allowance for Loss Method):

Foreign Military Loan Liquidating Account 

Loans Receivable Gross $ 0.0 $ 0.0

Interest Receivable 0.0 0.0

Foreclosed Property 0.0 0.0

Allowance for Loan Losses 0.0 0.0

 Value of Assets Related to Direct Loans, Net 0.0 0.0

Direct Loans Obligated After FY 1991

(Present Value Method):

Military Housing Privatization Initiative 

Loans Receivable Gross $ 651.5 $ 510.9

Interest Receivable 0.0 0.0

Foreclosed Property 0.0 0.0

Allowance for Subsidy Cost (Present Value) (129.2) (112.5)

 Value of Assets Related to Direct Loans 522.3 398.4

Foreign Military Financing Account 

Loans Receivable Gross 0.0 0.0

Interest Receivable 0.0 0.0

Foreclosed Property 0.0 0.0

Allowance for Subsidy Cost (Present Value) 0.0 0.0

 Value of Assets Related to Direct Loans 0.0 0.0

Military Debt Reduction Financing Account 

Loans Receivable Gross 0.0 0.0

Interest Receivable 0.0 0.0

Foreclosed Property 0.0 0.0

Allowance for Subsidy Cost (Present Value) 0.0 0.0

 Value of Assets Related to Direct Loans 0.0 0.0

Total Direct Loans Receivable $ 522.3 $ 398.4

Loans receivable, net, or value of assets related to loans, is not the same as the proceeds the 

Department would expect to receive from selling the loans.

Interest receivable is calculated using the interest earned method.

Total Amount of Direct Loans Disbursed Dollars in Millions

2010 2009

Direct Loan Programs

Military Housing Privatization Initiative $ 151.0 $ 171.7

Foreign Military Financing Account 0.0 0.0

Military Debt Reduction Financing Account 0.0 0.0

Total $ 151.0 $ 171.7
Department of Defense Agency Financial Report for FY 2010 

Financial Information

79

 Subsidy Expense for Direct Loan by Program

Dollars in Millions

2010 Interest 

Differential Defaults Fees Other Total

New Direct Loans Disbursed:

Military Housing Privatization Initiative $ 18.7 $ 16.2 $ 0.0 $ 0.0 $ 34.9

Foreign Military Financing Account 0.0 0.0 0.0 0.0 0.0

Military Debt Reduction Financing 

Account 0.0 0.0 0.0 0.0 0.0

 Total $ 18.7 $ 16.2 $ 0.0 $ 0.0 $ 34.9

2009 Interest 

Differential Defaults Fees Other Total

New Direct Loans Disbursed:

Military Housing Privatization Initiative $ 16.0 $ 16.4 $ 0.0 $ 0.0 $ 32.4

Foreign Military Financing Account 0.0 0.0 0.0 0.0

Military Debt Reduction Financing 

Account 0.0 0.0 0.0 0.0 0.0

Total $ 16.0 $ 16.4 $ 0.0 $ 0.0 $ 32.4

2010 Modifications

Interest Rate 

Reestimates

Technical 

Reestimates

Total 

Reestimates Total

Direct Loan Modifications and Reestimates:

Military Housing Privatization Initiative $ 0.0 $ (4.0) $ (7.7) $ (11.7) $ (11.7)

Foreign Military Financing Account 0.0 0.0 0.0 0.0 0.0

Military Debt Reduction Financing 

Account 0.0 0.0 0.0 0.0 0.0

 Total $ 0.0 $ (4.0) $ (7.7) $ (11.7) $ (11.7)

2009

ModificationsInterest Rate 

Reestimates

Technical 

Reestimates

Total 

Reestimates Total

Direct Loan Modifications and Reestimates:

Military Housing Privatization Initiative $ 0.0 $ (3.4) $ (12.5) $ ( 15.9) $ ( 15.9)

Foreign Military Financing Account 0.0 0.0 0.0 0.0 0.0

Military Debt Reduction Financing 

Account 0.0 0.0 0.0 0.0 0.0

 Total $ 0.0 $ (3.4) $ (12.5) $ (15.9) $ (15.9)

2010 2009

Total Direct Loan Subsidy Expense:

Military Housing Privatization Initiative $ 23.2 $ 16.5

Foreign Military Financing Account 0.0 0.0

Military Debt Reduction Financing 

Account 0.0 0.0

 Total $ 23.2 $ 16.5
Department of Defense Agency Financial Report for FY 2010 

Financial Information

80

Subsidy Rate for Direct Loans by Program Dollars in Millions

As of September 30 Interest 

Differential Defaults

Fees and 

other 

Collections

Other Total

Budget Subsidy Rates for Direct Loans

Military Housing Privatization Initiative 19.61% 10.43% 0.00% 0.00% 30.04%

Foreign Military Financing Account 0.00% 0.00% 0.00% 0.00% 0.00%

Military Debt Reduction Financing 

Account 0.00% 0.00% 0.00% 0.00% 0.00%

Subsidy rates pertain to the loan agreements contracted during the current fiscal year. These 

rates cannot be applied to the direct loans disbursed during the current reporting year to yield 

the subsidy expense. The subsidy expense for new loans disbursed in the current year results

from disbursements of loans from current and prior year loan agreements. The subsidy 

expense reported in the current year also includes reestimates. 

Schedule for Reconciling Subsidy Cost Allowance Balances 

for Post FY1991 Direct Loans Dollars in Millions

2010 2009

Beginning Balance, Changes, and Ending Balance:

Beginning Balance of the Subsidy Cost Allowance $ 112.5 $ 103.6

Add: Subsidy Expense for Direct Loans Disbursed during the Reporting Years by Component

Interest Rate Differential Costs 18.7 16.0

Default Costs (Net of Recoveries) 16.2 16.4

Fees and Other Collections 0.0 0.0

Other Subsidy Costs 0.0 0.0

Total of the above Subsidy Expense Components $ 34.9 $ 32.4

Adjustments

Loan Modifications $ 0.0 $ 0.0

Fees Received 0.0 0.0

Foreclosed Property Acquired 0.0 0.0

Loans Written Off 0.0 0.0

Subsidy Allowance Amortization (6.5) (7.6)

Other 0.0 0.0

Total of the above Adjustment Components $ (6.5) $ (7.6)

Ending Balance of the Subsidy Cost Allowance before 

Reestimates

$ 140.9 $ 128.4

Add or Subtract Subsidy Reestimates by Component

Interest Rate Reestimates (4.0) (3.4)

Technical/Default Reestimate (7.7) (12.5)

Total of the above Reestimate Components $ (11.7) (15.9)

Ending Balance of the Subsidy Cost Allowance $ 129.2 $ 112.5
Department of Defense Agency Financial Report for FY 2010 

Financial Information

81

Defaulted Guaranteed Loans Dollars in Millions

As of September 30 2010 2009

Defaulted Guaranteed Loans from Pre-FY 1992 Guarantees (Allowance for Loss Method):

Foreign Military Loan Liquidating Amount

Defaulted Guaranteed Loans Receivable, Gross $ 0.0 $ 0.0

Interest Receivable 0.0 0.0

Foreclosed Property 0.0 0.0

Allowance for Loan Losses 0.0 0.0

Value of Assets Related to Defaulted Guaranteed 

Loans Receivable, Net $ 0.0 $ 0.0

Defaulted Guarranteed Loans from Post-FY 1991 Guarantees (Present Value Method):

Military Housing Privatization Initiative

Defaulted Guaranteed Loans Receivable, Gross $ 0.0 $ 0.0

Interest Receivable 0.0 0.0

Foreclosed Property 0.0 0.0

Allowance for Subsidy Cost (Present Value) 0.0 0.0

Value of Assets Related to Defaulted Guaranteed 

Loans Receivable, Net $ 0.0 $ 0.0

Armament Retooling & Manufacturing Support Initiative

Defaulted Guaranteed Loans Receivable, Gross $ 0.7 $ 0.7

Interest Receivable 0.0 0.0

Foreclosed Property 0.0 0.0

Allowance for Subsidy Cost (Present Value) (0.7) (0.6)

Value of Assets Related to Defaulted Guaranteed 

Loans Receivable, Net $ 0.0 $ 0.1

Total Value of Assets Related to Defaulted

Guaranteed Loans Receivable $ 0.0 $ 0.1

Guaranteed Loans Outstanding Dollars in Millions

As of September 30

Outstanding Principal 

of Guaranteed Loans,

Face Value

Amount of Outstanding

Principal Guaranteed

 2010

Guaranteed Loans Outstanding

Military Housing Privatization Initiative $ 461.6 $ 461.6

Armament Retooling & Manufacturing Support 

Initiative 2.7 2.3

Foreign Military Liquidating Account 0.0 0.0

Total $ 464.3 $ 463.9
Department of Defense Agency Financial Report for FY 2010 

Financial Information

82

 2009 

Guaranteed Loans Outstanding

Military Housing Privatization Initiative $ 467.2 $ 467.2

Armament Retooling & Manufacturing Support 

Initiative 3.0 2.4

Foreign Military Liquidating Account 0.0 0.0

Total $ 470.2 $ 469.6

 2010

New Guaranteed Loans Disbursed

Military Housing Privatization Initiative $ 0.0 $ 0.0

Armament Retooling & Manufacturing Support 

Initiative 0.0 0.0

Total $ 0.0 $ 0.0

 2009

New Guaranteed Loans Disbursed

Military Housing Privatization Initiative $ 0.0 $ 0.0

Armament Retooling & Manufacturing Support 

Initiative 0.0 0.0

Total $ 0.0 $ 0.0

Liabilities for Loan Guarantees Dollars in Millions

As of September 30 2010 2009

Liabilities for Losses on Loan Guarantees from Pre 1992 

(Allowance for Loss):

Foreign Military Liquidating Account $ 0.0 $ 0.0

 Total Loan Guarantee Liability (Pre-FY 1992) $ 0.0 $ 0.0

Liabilities for Loan Guarantee from Post 1991 

(Present Value)

Military Housing Privatization Initiative $ 16.2 $ 18.7

Armament Retooling & Manufacturing Support Initiative 3.6 2.4

 Total Loan Guarantee Liability (Post FY 1991) $ 19.8 $ 21.1

Total Loan Guarantee Liability $ 19.8 $ 21.1

 Subsidy Expense for Loan Guarantees by Program 

 As of September 30 Dollars in Millions

2010 Interest 

Differential Defaults Fees Other Total

New Loan Guarantees Disbursed

Military Housing Privatization Initiative $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0

Armament Retooling & Manufacturing 

Support Initiative 0.0 0.0 0.0 0.0 0.0

 Total $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0
Department of Defense Agency Financial Report for FY 2010 

Financial Information

83

2009 Interest 

Differential Defaults Fees Other Total

New Loan Guarantees Disbursed

Military Housing Privatization Initiative $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0

Armament Retooling & Manufacturing 

Support Initiative 0.0 0.0 0.0 0.0 0.0

 Total $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0

2010 Modifications

Interest 

Rate 

Reestimates

Technical 

Reestimates

Total 

Reestimates Total

Modifications and Reestimates:

Military Housing Privatization Initiative $ 0.0 $ (1.1) $ (2.4) $ (3.5) $ (3.5)

Armament Retooling & Manufacturing 

Support Initiative 0.0 0.0 0.0 0.0 0.0

 Total $ 0.0 $ (1.1) $ (2.4) $ (3.5) $ (3.5)

2009 Modifications

Interest 

Rate 

Reestimates

Technical 

Reestimates

Total 

Reestimates Total

 Modifications and Reestimates:

 Military Housing Privatization 

 Initiative $ 0.0 $ (1.6) $ (3.0) $ (4.6) $ (4.6)

 Armament Retooling & 

 Manufacturing Support Initiative 0.0 0.1 0.0 0.1 0.1

 Total $ 0.0 $ (1.5) $ (3.0) $ (4.5) $ (4.5)

2010 2009

 Total Loan Guarantee:

 Military Housing Privatization 

 Initiative $ (3.5) $ (4.6)

 Armament Retooling & 

 Manufacturing Support Initiative 0.0 0.1

 Total $ (3.5) $ (4.5)

There are no new loan guarantees in FY 2010.

Subsidy Rates for Loan Guarantees by Program

As of September 30 Interest 

Supplements Defaults

Fees and 

other 

Collections

Other Total

Budget Subsidy Rates for Loan Guarantees

 Military Housing Privatization 

 Initiative 0.00% 0.00% 0.00% 0.00% 0.00%

 Armament Retooling & 

 Manufacturing Support Initiative 0.00% 0.00% 0.00% 0.00% 0.00%

There are no new loan guarantees in FY 2010.
Department of Defense Agency Financial Report for FY 2010 

Financial Information

84

Schedule for Reconciling Loan Guarantee Liability Balances for 

Post-FY 1991 Loan Guarantees Dollars in Millions

As of September 30 2010 2009

Beginning Balance, Changes, and Ending Balance:

Beginning Balance of the Loan Guarantee Liability $ 21.1 $ 24.5

Add: Subsidy Expense for Guaranteed Loans Disbursed during the Reporting Years by Component

Interest Supplement Costs $ 0.0 $ 0.0

Default Costs (Net of Recoveries) 0.0 0.0

Fees and Other Collections 0.0 0.0

Other Subsidy Costs 0.0 0.0

Total of the above Subsidy Expense Components $ 0.0 $ 0.0

Adjustments

Loan Guarantee Modifications $ 0.0 $ 0.0

Fees Received 0.0 0.0

Interest Supplements Paid 0.0 0.0

Foreclosed Property and Loans Acquired 0.0 0.0

Claim Payments to Lenders 0.0 0.0

Interest Accumulation on the Liability Balance 1.1 1.1

Other 1.1 0.0

Total of the above Adjustments $ 2.2 $ 1.1

Ending Balance of the Loan Guarantee Liability before 

Reestimates $ 23.3 $ 25.6

Add or Subtract Subsidy Reestimates by Component

Interest Rate Reestimate $ (1.1) $ (1.5)

Technical/Default Reestimate (2.4) (3.0)

Total of the above Reestimate Components $ (3.5) $ (4.5)

Ending Balance of the Loan Guarantee Liability $ 19.8 $ 21.1

Administrative Expenses

Administrative Expenses are limited to separately identified expenses for administering preFY 1992 and post-FY 1991 Direct Loans and Loan Guarantee Programs. The Department does 

not maintain a separate program to capture the expenses related to direct loans and loan 

guarantees for MHPI. Administrative expenses for the ARMS Initiative represent a fee paid to 

the U.S. Department of Agriculture, Rural Business Cooperative Service for servicing the loan 

guarantee program.

Note 9. Inventory and Related Property, Net

Inventory and Related Property Dollars in Millions

As of September 30 2010

Restated

2009

Inventory, Net $ 84,625.0 $ 83,288.0

Operating Materiel & Supplies, Net 147,011.2 145,258.4

Stockpile Materiel, Net 598.1 723.6

Total Inventory and Related Property $ 232,234.3 $ 229,270.0
Department of Defense Agency Financial Report for FY 2010 

Financial Information

85

 Inventory, Net Dollars in Millions

As of September 30

2010

Valuation Method Inventory, 

Gross Value

Revaluation 

Allowance Inventory, Net

Inventory Categories

Available and Purchased 

for Resale $ 81,226.4 $ (18,648.9) $ 62,577.5 LAC,MAC

Held for Repair 28,950.1 (7,947.2) 21,002.9 LAC,MAC

Excess, Obsolete, and 

Unserviceable 8,443.0 (8,443.0) 0.0 NRV

Raw Materiel 710.6 0.0 710.6 MAC,SP,LAC

Work in Process 334.0 0.0 334.0 AC

Total Inventory, Net $ 119,664.1 $ (35,039.1) $ 84,625.0

Legend for Valuation Methods:

Adjusted LAC = Latest Acquisition Cost, adjusted for holding gains and losses

SP = Standard Price

AC = Actual Cost

NRV = Net Realizable Value

MAC = Moving Average Cost

 Inventory, Net Dollars in Millions

As of September 30

Restated 2009

Valuation Method Inventory, 

Gross Value

Revaluation 

Allowance Inventory, Net

Inventory Categories

Available and Purchased 

for Resale $ 87,742.2 $ (23,949.4) $ 63,792.8 LAC,MAC

Held for Repair 28,055.7 (9,578.0) 118,477.7 LAC,MAC

Excess, Obsolete, and 

Unserviceable 7,833.8 (7,833.8) 0.0 NRV

Raw Materiel 490.3 0.0 490.3 MAC,SP,LAC

Work in Process 527.2 0.0 527.2 AC

Total Inventory, Net $ 124,649.2 $ (41,361.2) $ 83,288.0

Legend for Valuation Methods:

Adjusted LAC = Latest Acquisition Cost, adjusted for holding gains and losses

SP = Standard Price

AC = Actual Cost

NRV = Net Realizable Value

MAC = Moving Average Cost

During FY 2010, the Department identified inventory valued incorrectly. To correct the error, the 

Department restated Note 9, Inventory and Related Property, Available and Purchased for 

Resale, by $473.4 million. Refer to Note 26, Restatements, for further information.

Restrictions

The following are restrictions on the use, sale, or disposition of inventory. 

War reserve materiel valued at $2.7 billion; 

Commissary items valued at $401.9 million held for purchase by authorized patrons; and

Dispositions pending litigation or negotiation valued at $87.6 million. 

There are no known restrictions on inventory disposition related to environmental or other 

liabilities. 
Department of Defense Agency Financial Report for FY 2010 

Financial Information

86

General Composition of Inventory

Inventory includes spare and repair parts, clothing and textiles, and fuels held for sale. 

Inventory is tangible personal property that is: 

Held for sale, or held for repair and eventual sale; 

In the process of production for sale; or 

To be consumed in the production of goods for sale or in the provision of service for a fee. 

The Department assigns inventory items to a category based upon the type and condition of the 

asset.

 Operating Materiel and Supplies, Net Dollars in Millions

As of September 30

2010

Valuation 

OM&S, Gross Method

Value

Revaluation 

Allowance OM&S, Net

OM&S Categories

Held for Use $ 131,524.9 $ 0.0 $ 131,524.9 SP, LAC, MAC

Held for Repair 17,532.2 (2,045.9) 15,486.3 SP, LAC, MAC

Excess, Obsolete, and 

Unserviceable 2,631.6 (2,631.6) 0.0 NRV

Total OM&S $ 151,688.7 $ (4,677.5) $ 147,011.2

Legend for Valuation Methods:

Adjusted LAC = Latest Acquisition Cost, adjusted for holding gains and losses

SP = Standard Price

NRV = Net Realizable Value

MAC = Moving Average Cost

 Operating Materiel and Supplies, Net Dollars in Millions

As of September 30

Restated 2009

Valuation 

OM&S, Gross Method

Value

Revaluation 

Allowance OM&S, Net

OM&S Categories

Held for Use $ 128,932.9 $ 0.0 $ 128,932.9 SP, LAC, MAC

Held for Repair 17,984.2 (1,658.7) 16,325.5 SP, LAC, MAC

Excess, Obsolete, and 

Unserviceable 3,386.2 (3,386.2) 0.0 NRV

Total OM&S $ 150,303.3 $ (5,044.9) $ 145,258.4

Legend for Valuation Methods:

Adjusted LAC = Latest Acquisition Cost, adjusted for holding gains and losses

SP = Standard Price

NRV = Net Realizable Value

MAC = Moving Average Cost

Restrictions

Some munitions included in Operating Materiel and Supplies (OM&S) are restricted due to 

condition. Restricted munitions are considered obsolete or unserviceable when they cannot 

meet performance requirements. However, obsolete and unserviceable OM&S may be used in 

emergency combat situations in which no other suitable munitions are immediately available. 
Department of Defense Agency Financial Report for FY 2010 

Financial Information

87

General Composition of OM&S

OM&S includes spare and repair parts, ammunition, tactical missiles, aircraft configuration pods, 

and centrally-managed aircraft engines held for consumption. The Department assigns OM&S 

items into a category based upon the type and condition of the asset.

 Stockpile Materiel, Net Dollars in Millions 

As of September 30

2010

Valuation 

Method Stockpile, 

Materiel Amount

Allowance 

for Gains 

(Losses)

Stockpile 

Materiel, 

Net

Stockpile Material Categories

Held for Sale $ 568.8 $ 0.0 $ 568.8 AC, LCM

Held in Reserve for Future 

Sale 29.3 0.0 29.3 AC, LCM

Total Stockpile Material $ 598.1 $ 0.0 $ 598.1

Legend for Valuation Methods:

AC = Actual Cost LCM = Lower of Cost or Market

 Stockpile Materiel, Net Dollars in Millions 

As of September 30

Restated 2009

Valuation 

Method

Stockpile, 

Materiel 

Amount

Allowance 

for Gains 

(Losses)

Stockpile 

Materiel, 

Net

Stockpile Material Categories

Held for Sale $ 694.3 $ 0.0 $ 694.3 AC, LCM

Held in Reserve for Future 

Sale 29.3 0.0 29.3 AC, LCM

Total Stockpile Material $ 723.6 $ 0.0 $ 723.6

Legend for Valuation Methods:

AC = Actual Cost LCM = Lower of Cost or Market

Restrictions

Materiel held by the National Defense Stockpile (NDS) is restricted unless released by 

congressional action and made available for sale on the open market. Stockpile materiel may 

not be disposed except for: (1) necessary upgrading, refining, or processing; (2) necessary 

rotation to prevent deterioration; (3) determination as excess with potential financial loss if 

retained; or (4) authorization by law. 

Before selling any materiel, Congress must enact specific enabling legislation (e.g., the National 

Defense Authorization Act). When authorized to offer materiel for sale, NDS removes the

materiel from Materiel Held in Reserve and reclassifies these items as Materiel Held for Sale. 

The estimated market price of the stockpile materiel held for sale as of 4th Quarter, FY 2010, is 

$1.3 billion

General Composition of Stockpile Materiel

The Department holds strategic and critical stockpile materiel due to statutory requirements for 

use in national defense, conservation, or national emergencies.
Department of Defense Agency Financial Report for FY 2010 

Financial Information

88

Note 10. General PP&E, Net

General PP&E, Net 2010 Dollars in Millions

As of 

September 30

Depreciation/ 

Amortization 

Method

Service 

Life

Acquisition 

Value

(Accumulated 

Depreciation/ 

Amortization)

Net Book 

Value

Major Asset Classes

Land N/A N/A $ 10,502.8 N/A $ 10,502.8

Buildings, Structures, 

and Facilities S/L 20 or 40 207,363.3 (111,929.1) 95,434.2

Leasehold 

Improvements S/L Lease term 976.0 (402.2) 573.8

Software S/L 2-5 or 10 9,440.1 (6,148.3) 3,291.8

General Equipment S/L 5 or 10 90,290.3 (58,283.2) 32,007.1

Military Equipment S/L Various 822,316.6 (408,613.4) 413,703.2

Assets Under Capital 

Lease1 S/L Leaseterm 957.0 (642.2) 314.8

Construction-inProgress N/A N/A 38,604.1 N/A 38,604.1

Other 1,226.0 (1.2) 1,224.8

Total 

General PP&E $ 1,181,676.2 $ (586,019.6) $ 595,656.6

1 Note 15 for additional information on Capital Leases

Legend for Valuation Methods: S/L = Straight Line N/A = Not Applicable

General PP&E, Net Restated 2009 Dollars in Millions

As of 

September 30

Depreciation/ 

Amortization 

Method

Service 

Life

Acquisition 

Value

(Accumulated 

Depreciation/ 

Amortization)

Net Book 

Value

Major Asset Classes

Land N/A N/A $ 10,501.3 N/A $ 10,501.3

Buildings, Structures, 

and Facilities S/L 20 or 40 191,993.0 (108,100.2) 83,892.8

Leasehold 

Improvements S/L Lease term 703.1 (548.0) 155.1

Software S/L 2-5 or 10 9,022.9 (5,610.1) 3,412.8

General Equipment S/L 5 or 10 74,776.3 (52,333.9) 22,442.4

Military Equipment S/L Various 796,842.6 (390,333.2) 406,509.4

Assets Under Capital 

Lease1 S/L Leaseterm 956.3 (601.2) 355.1

Construction-inProgress N/A N/A 30,809.5 N/A 30,809.5

Other 53.9 (1.3) 52.6

Total 

General PP&E $ 1,115,658.9 $ (557,527.9) $ 558,131.0

1 Note 15 for additional information on Capital Leases

Legend for Valuation Methods: S/L = Straight Line N/A = Not Applicable
Department of Defense Agency Financial Report for FY 2010 

Financial Information

89

The Department identified and restated property, plant and equipment valued incorrectly. Refer 

to Note 26, Restatements, for further information.

Heritage Assets and Stewardship Land 

Statement of Federal Financial Accounting Standards No. 29, ―Heritage Assets and 

Stewardship Land,‖ requires note disclosures for these types of assets. The Department’s 

policy is to preserve its heritage assets, which are items of historical, cultural, educational, or 

artistic importance. 

The mission of the Department is to provide the military forces necessary to deter war and 

protect the security of the United States. In that mission, the Department, with minor exceptions, 

uses most of the buildings and stewardship land in its daily activities and includes the buildings 

on the Balance Sheet as multi-use heritage assets (capitalized and depreciated).

Differences in the heritage assets and stewardship land quantities from the FY 2009 ending and 

FY 2010 beginning unit counts resulted from efforts to improve quality of reported data. During 

FY 2009, FY 2008 data was used to report some categories of heritage assets and stewardship 

land.

Heritage assets within the Department consist of buildings and structures, archeological sites, 

and museum collections. The Department defines these as follows:

Buildings and Structures. Buildings and structures that are listed, or eligible for listing, on 

the National Register of Historic Places, including Multi-Use Heritage Assets. 

Archeological Sites. Sites that have been identified, evaluated, and determined to be 

eligible for or are listed on the National Register of Historic Places in accordance with 

Section 110 National Historic Preservation Act. 

Museum Collection Items. Items which are unique for one or more of the following reasons: 

historical or natural significance; cultural, educational, or artistic importance; or significant 

technical or architectural characteristics.

The Department is unable to identify all quantities of heritage assets and stewardship land 

added through donation or devise in FY 2010 due to limitations of the Department’s financial 

and nonfinancial management processes and systems that feed the financial statements. 

Currently, the Department has identified 42 Fine Art Objects acquired through donation or 

devise during FY 2010

Categories Measure 

Quantity

As of 

9/30/09 Additions Deletions As of 9/30/10

Buildings and Structures Each 50,090 25,935 3,271 72,754

Archeological Sites Each 29,650 1,061 2,130 28,581

Museum Collection Items 

(Objects, not including fine art) Each 1,260,709 68,287 5,205 1,323,791

Museum Collection Items 

(Objects, fine art) Each 30,238 2,695 70 32,863

Stewardship land is land and land rights owned by the Department, but not acquired for, or in 

connection with, items of General Property, Plant, and Equipment. All land provided to the 

Department from the public domain or at no cost, regardless of its use, is classified as 

Stewardship Land.
Department of Defense Agency Financial Report for FY 2010 

Financial Information

90

Stewardship land is presented in context of all categories of DoD lands and reported in acres 

based on the predominant use of the land. The three categories of Stewardship land held in 

public trust are: State-Owned Land, Withdrawn Public-Land, and Public Land.

The Department’s stewardship land consists mainly of mission essential land. 

The Department held the following acres of land as of September 30, 2010.

Facility 

Code Predominant Land Use 

Categories

As of 

9/30/09

(Acres in 

Thousands)

Additions Deletions As of 

9/30/10

9110 Government Owned Land 6,490 3,626 426 9,690

9111 State Owned Land 12 12 12 12

9120 Withdrawn Public Land 16,078 117 55 16,140

9130 Licensed and Permitted Land 2,030 523 203 2,350

9140 Public Land 202 12 11 203

9210 Land Easement 324 80 27 377

9220 In-leased Land 264 112 106 270

9230 Foreign Land 448 32 1 479

Grand Total 29,521

Total – All Other Lands 13,166

Total – Stewardship Lands 16,355

Other Disclosures

The Department has use of overseas land, buildings, and other facilities obtained through 

international treaties and agreements negotiated by the Department of State. Treaty covenants 

restrict the Department’s use and disposal of real property (land and buildings) located outside 

the United States.

The Department does not have the acquisition value for all General PP&E and uses several 

cost methodologies to provide General PP&E values for financial statement reporting purposes. 

Other consists of assets awaiting disposal.

Assets Under Capital Lease Dollars in Millions

As of September 30 2010

Restated 

2009

Entity as Lessee, Assets Under Capital Lease

Land and Buildings $ 759.8 $ 759.8

Equipment 197.2 196.5

Accumulated Amortization (642.2) (601.2)

Total Capital Leases $ 314.8 $ 355.1 
Department of Defense Agency Financial Report for FY 2010 

Financial Information

91

Note 11. Liabilities Not Covered by Budgetary Resources

Liabilities Not Covered by Budgetary Resources Dollars in Millions

As of September 30 2010 Restated 

2009

Intragovernmental Liabilities

Accounts Payable $ 13.2 $ 4.3

Debt 5.6 8.1

Other 2,184.4 1,873.5

Total Intragovernmental Liabilities $ 2,203.2 $ 1,885.9

Nonfederal Liabilities

Accounts Payable $ 1,057.1 $ 628.2

Military Retirement and Other Federal Employment Benefits 1,691,538.8 1,587,744.7

Environmental Liabilities 58,671.4 62,565.3

Other Liabilities 16,493.5 14,829.0

Total Nonfederal Liabilities $ 1,767,760.8 $ 1,665,767.2

Total Liabilities Not Covered by Budgetary Resources $ 1,769,964.0 $ 1,667,653.1

Total Liabilities Covered by Budgetary Resources $ 552,410.0 $ 494,267.0

Total Liabilities $ 2,322,374.0 $ 2,161,920.1

Liabilities Not Covered by Budgetary Resources includes liabilities for which congressional 

action is needed before budgetary resources can be provided.

The Department identified errors impacting ending account balances while migrating from a 

manual to an automated interface between budget execution and financial statement reporting 

systems; and contract financing payments based on auditor recommended adjustments. To 

correct the errors, the Department restated Note 11, Liabilities Not Covered by Budgetary 

Resources, Total Liabilities Covered by Budgetary Resources by $58.0 million. Refer to Note 

26, Restatements, for further information.

Intragovernmental Accounts Payable and Nonfederal Accounts Payable primarily represent 

liabilities in cancelled appropriations that, if paid, will be disbursed using funds current in the 

year of disbursement.

Debt consists primarily of borrowing from the U.S. Treasury for capital improvements to the 

Washington Aqueduct Project. Arlington County and Falls Church, Virginia, will complete 

reimbursement to the Department by 2023.

Intragovernmental Liabilities Other primarily consists of $1.4 billion in unfunded Federal 

Employees Compensation Act liabilities, $550.3 million in unfunded unemployment liabilities, 

and $251.2 million in unfunded Judgment Fund liabilities not due during FY 2009.

Military Retirement and Other Federal Employment Benefits consists of various employee 

actuarial liabilities not due and payable during the current fiscal year. These liabilities primarily 

consist of $944.1 billion in pension liabilities and $738.9 billion in health benefit liabilities. Refer 

to Note 17, Military Retirement and Other Federal Employment Benefits, for additional details 

and disclosures.

Environmental Liabilities represents the Department’s liability for existing and anticipated 

environmental clean up and disposal.
Department of Defense Agency Financial Report for FY 2010 

Financial Information

92

Nonfederal Liabilities, Other primarily consists of $10.9 billion in unfunded annual leave, 

$3.0 billion in expected expenditures for disposal of conventional munitions, and $2.1 billion in 

contingent liabilities. 

Note 12. Accounts Payable

Accounts Payable

As of September 30

Dollars in Millions

2010

Accounts Payable

Interest, Penalties, 

and Administrative 

Fees

Total

Intragovernmental Payables $ 1,754.5 N/A $ 1,754.5

Nonfederal Payables 

(To the Public) 31,129.0 6.4 31,135.4

Total Accounts Payable $ 32,883.5 $ 6.4 $ 32,889.9

Accounts Payable

As of September 30

Dollars in Millions

Restated 2009

Accounts Payable

Interest, Penalties, 

and Administrative 

Fees

Total

Intragovernmental Payables $ 2,207.8 N/A $ 2,207.8

Nonfederal Payables 

(To the Public) 35,573.5 6.3 35,579.8

Total Accounts Payable $ 37,781.3 $ 6.3 $ 37,787.6

The Department identified errors impacting ending FY 2009 account balances while migrating 

from a manual to an automated interface between budget execution and financial statement 

reporting systems. To correct the errors, the Department restated Accounts Payable 

(Nonfederal). Refer to Note 26, Restatements, for further information. 

Accounts Payable includes amounts owed to federal and nonfederal entities for goods and 

services received by the Department. The Department’s systems do not track 

intragovernmental transactions by customer at the transaction level. Buyer-side accounts 

payable are adjusted to agree with interagency seller-side accounts receivable. Accounts 

Payable was adjusted by reclassifying amounts between federal and nonfederal entities. 
Department of Defense Agency Financial Report for FY 2010 

Financial Information

93

Note 13. Debt

Debt Dollars in Millions

As of September 30

2010

Beginning Balance Net 

Borrowing Ending Balance

Agency Debt 

(Intragovernmental)

Debt to the Treasury $ 391.7 $ 126.6 $ 518.3

Debt to the Federal 

Financing Bank 0.0 0.0 0.0 

Total Agency Debt $ 391.7 $ 126.6 $ 518.3

Debt Dollars in Millions

As of September 30

2009

Beginning Balance Net 

Borrowing Ending Balance

Agency Debt 

(Intragovernmental)

Debt to the Treasury $ 245.7 $ 146.0 $ 391.7

Debt to the Federal 

Financing Bank 16.9 (16.9) 0.0

Total Agency Debt $ 262.6 $ 129.1 $ 391.7

The Department’s debt consists of interest and principal payments due to the U.S. Treasury and 

the Federal Financing Bank. The Department borrows funds for the Washington Aqueduct 

Project, the Military Housing Privatization Initiative, and the Armament Retooling and 

Manufacturing Support Program.

The Department must pay the debt on direct loans if borrowers (e.g. county or city governments, 

or housing builders) default. For loan guarantees, the Department must pay the amount of 

outstanding principal guaranteed. 
Department of Defense Agency Financial Report for FY 2010 

Financial Information

94

Note 14. Environmental Liabilities and Disposal Liabilities

 Environmental Liabilities and Disposal Liabilities Dollars in Millions

As of September 30 2010 2009

Environmental Liabilities–Nonfederal

Accrued Environmental Restoration Liabilities

Active Installations—Installation Restoration Program 

(IRP) and Building Demolition and Debris Removal 

(BD/DR) $ 8,065.3 $ 7,957.4

Active Installations—Military Munitions 

Response Program (MMRP) 4,646.6 5,223.5

Formerly Used Defense Sites-IRP & BD/DR 3,426.3 3,452.9

Formerly Used Defense Sites--MMRP 11,811.9 13,545.9

Other Accrued Environmental Liabilities—Non-BRAC

 Environmental Corrective Action 429.2 772.8

 Environmental Closure Requirements 2,162.5 2,193.7

Environmental Response at Operational Ranges 127.2 164.0

 Asbestos 1,335.8 1,183.3

 Non-Military Equipment 113.5 114.4

 Other 1,201.6 1,222.8

Base Realignment and Closure Installations (BRAC)

Installation Restoration Program 3,936.4 3,684.7

Military Munitions Response Program 1,015.5 1,063.6

Environmental Corrective Action / Closure Requirements 329.5 344.0

Environmental Disposal for Military Equipment / 

Weapons Programs 

Nuclear Powered Military Equipment / 

Spent Nuclear Fuel 13,290.9 12,672.4

Non-Nuclear Powered Military Equipment 36.4 36.4

Other Weapons Systems 183.6 194.4

Chemical Weapons Disposal Program

Chemical Demilitarization – Chemical Materials Agency 

(CMA) 5,286.9 6,956.0

CAMD Demilitarization – Assembled Chemical Weapons 

Alternatives (ACWA) 5,503.1 5,447.8

Total Environmental Liabilities $ 62,902.2 $ 66,230.0

Other Accrued Environmental Liabilities, Non-BRAC, Other primarily consists of remediation 

related to Formerly Utilized Sites Remedial Action Program (FUSRAP). The Department is 

responsible for FUSRAP, which remediates radiological contamination from the Department of 

Energy’s U.S. Atomic Energy and Weapons Program. 
Department of Defense Agency Financial Report for FY 2010 

Financial Information

95

The unrecognized portion of the estimated total cleanup costs associated with General 

Property, Plant & Equipment (PP&E) is $2.9 billion for FY 2010. Not all Components of the 

Department are able to compile the necessary information for this disclosure, thus the amount 

reported may not accurately reflect the Department’s total unrecognized costs associated with 

General PP&E. The Department is implementing procedures to address these deficiencies.

Other Disclosures

Types of Environmental Liabilities and Disposal Liabilities Identified

The Department has cleanup requirements for Defense Environmental Restoration Program 

(DERP) sites at active installations, BRAC installations, Formerly Used Defense Sites, sites at 

active installations that are not covered by DERP, weapons systems programs, and chemical 

weapons disposal programs. The weapons systems programs consist of chemical weapons 

disposal, nuclear-powered aircraft carriers, nuclear-powered submarines, and other nuclear 

ships. All cleanup is done in coordination with regulatory agencies, other responsible parties, 

and current property owners.

Applicable Laws and Regulations for Cleanup Requirements

The Department is required to clean up contamination resulting from past waste disposal 

practices, leaks, spills, and other past activity that created a public health or environmental risk. 

The Department accomplishes this effort in coordination with regulatory agencies and, if 

applicable, other responsible parties and current property owners. The Department is also 

required to recognize closure and post-closure costs for its General PP&E and environmental 

corrective action costs for current operations. Each of the Department’s major reporting entities 

is responsible for tracking and reporting all required environmental information related to 

environmental restoration costs, other accrued environmental costs, disposal costs of weapons 

systems, and environmental costs related to BRAC actions that have taken place.

The Department follows the Comprehensive Environmental Response, Compensation, and 

Liability Act (CERCLA), Superfund Amendment and Reauthorization Act, Resource 

Conservation and Recovery Act (RCRA) or other applicable federal or state laws to clean up 

contamination. The CERCLA and RCRA require the Department to clean up contamination in 

coordination with regulatory agencies, current owners of property damaged by the Department, 

and third parties that have a partial responsibility for the environmental restoration. Failure to 

comply with agreements and legal mandates puts the Department at risk of incurring fines and 

penalties.

The cleanup requirements for nuclear-powered aircraft carriers, submarines, and other nuclear 

ships are based on laws that affect the Department’s conduct of environmental policy and 

regulations. The Atomic Energy Act of 1954, as amended, assures the proper management of 

source, special nuclear, and byproduct materiel. As in all cases with nuclear power, the 

Department coordinates actions with the Department of Energy. The Nuclear Waste Policy Act 

of 1982 requires all owners and generators of high-level nuclear waste and spent nuclear fuel to 

pay their respective shares of the full cost of the program. Finally, the Low-Level Radioactive 

Waste Policy Amendments Act of 1986 provides for the safe and efficient management of lowlevel radioactive waste.

The Chemical Weapons Disposal Program is based on FY 1986 National Defense Authorization 

Act (PL 99-145, as amended) that directed the Department to destroy the unitary chemical 

stockpile in accordance with the requirements of the Chemical Weapons Convention Treaty. 
Department of Defense Agency Financial Report for FY 2010 

Financial Information

96

The Army, as Executive Agent within the Department, provides policy, direction, and oversight 

for both the Chemical Stockpile Program and the Nonstockpile Chemical Materiel Project. As 

such, the Army is responsible for the safe and economical disposal of the U.S. stockpile of lethal 

and incapacitating chemical warfare agents and munitions. 

Methods for Assigning Total Cleanup Costs to Current Operating Periods

The Department uses engineering estimates and independently validated models to estimate 

environmental costs. The models include the Remedial Action Cost Engineering Requirements 

(RACER) application and the Normalization of Data (NORM) System. The Department 

validates the models in accordance with DoD Instruction 5000.61 and uses the models to 

estimate the liabilities based on data received during a preliminary assessment and initial site 

investigation. The Department primarily uses engineering estimates after obtaining extensive 

data during the remedial investigation/feasibility phase of the environmental project. 

Once the environmental cost estimates are complete, the Department complies with accounting 

standards to assign costs to current operating periods. The Department has already expensed 

the costs for cleanup associated with General PP&E placed into service before October 1, 1997, 

unless the costs are intended to be recovered through user charges. If the costs are to be 

recovered through user charges, the Department expenses cleanup costs associated with that 

portion of the asset life that has passed since the General PP&E was placed into service. The 

Department systematically recognizes the remaining cost over the remaining life of the asset. 

For General PP&E placed into service after September 30, 1997, the Department expenses 

associated environmental costs systematically over the life of the asset using two methods: 

physical capacity for operating landfills and life expectancy in years for all other assets. The 

Department expenses the full cost to clean up contamination for Stewardship PP&E at the time 

the asset is placed into service. 

Nature of Estimates and the Disclosure of Information Regarding Possible Changes Due

to Inflation, Deflation, Technology, or Applicable Laws and Regulations

The Department had changes in estimates resulting from overlooked or previously unknown 

contaminants, reestimation based on different assumptions, and other changes in project scope. 

Environmental liabilities may change in the future due to changes in laws and regulation, 

changes in agreements with regulatory agencies, and advances in technology.

Uncertainty Regarding the Accounting Estimates Used to Calculate the Reported 

Environmental Liabilities

The environmental liabilities for the Department are based on accounting estimates, which 

require certain judgments and assumptions that are reasonable based upon information 

available at the time the estimates are calculated. The actual results may materially vary from 

the accounting estimates if agreements with regulatory agencies require remediation to a 

different degree than anticipated when calculating the estimates. Liabilities can be further 

affected if investigation of the environmental sites reveals contamination levels that differ from 

the estimate parameters.

The Department has a liability to take environmental restoration and corrective action for buried 

chemical munitions and agents; however, it is unable to estimate at this time because the extent 

of the buried chemical munitions and agents is unknown. The Department is also unable to 

provide a complete estimate for FUSRAP. The Department has ongoing studies and will update 

its estimate as additional liabilities are identified. In addition, not all components of the 

Department recognize environmental liabilities associated with General PP&E due to process 

and system limitations. 
Department of Defense Agency Financial Report for FY 2010 

Financial Information

97

The Department has the potential to incur costs for restoration initiatives in conjunction with 

returning overseas Defense facilities to host nations. The Department is unable to provide a 

reasonable estimate at this time because the extent of required restoration is unknown. 

Note 15. Other Liabilities

 Other Liabilities Dollars in Millions

As of September 30

2010

Current Liability Noncurrent 

Liability Total

Intragovernmental

Advances from Others $ 1,473.1 $ 0.0 $ 1,473.1

Deposit Funds and Suspense Account

 Liabilities 906.0 0.0 906.0

Disbursing Officer Cash 2,190.3 0.0 2,190.3

Judgment Fund Liabilities 261.2 0.0 261.2

FECA Reimbursement to the

 Department of Labor 621.4 780.9 1,402.3

Custodial Liabilities 3,806.2 2,595.4 6,401.6

Employer Contribution and 

 Payroll Taxes Payable 530.1 0.0 530.1

Other Liabilities 616.8 0.0 616.8

Total Intragovernmental Other

 Liabilities $ 10,405.1 $ 3,376.3 $ 13,781.4

Nonfederal

Accrued Funded Payroll and Benefits $ 10,375.8 $ 0.0 $ 10,375.8

Advances from Others 4,498.7 0.0 4,498.7

Deferred Credits 0.00 0.0 0.0

Deposit Funds and Suspense Accounts 430.1 0.0 430.1

Temporary Early Retirement Authority 0.0 0.0 0.0

Nonenvironmental Disposal Liabilities

 Military Equipment (Nonnuclear) 8.8 245.2 254.0

 Excess/Obsolete Structures 105.8 131.3 237.1

 Conventional Munitions Disposal 0.0 2,072.3 2,072.3

Accrued Unfunded Annual Leave 10,977.1 0.0 10,977.1

Capital Lease Liability 12.1 63.4 75.5

Contract Holdbacks 733.6 0.2 733.8

Employer Contribution and Payroll Taxes

Payable 588.5 0 588.5

Contingent Liabilities 1,255.6 3,793.2 5,048.8

Other Liabilities 271.3 0.5 271.8

Total Nonfederal Other Liabilities $ 29,257.4 $ 6,306.1 $ 35,563.5

Total Other Liabilities $ 39,662.5 $ 9,682.4 $ 49,344.9
Department of Defense Agency Financial Report for FY 2010 

Financial Information

98

 Other Liabilities Amounts in Millions

As of September 30

Restated 2009

Current Liability Noncurrent 

Liability Total

Intragovernmental

Advances from Others $ 1,619.9 $ 0.0 $ 1,619.9

Deposit Funds and Suspense Account

Liabilities 471.4 0.0 471.4

Disbursing Officer Cash 2,419.6 0.0 2,419.6

Judgment Fund Liabilities 171.9 0.0 171.9

FECA Reimbursement to the Department

of Labor 589.9 804.0 1,393.9

Custodial Liabilities 3,676.0 908.8 4,584.8

Employer Contribution and 

Payroll Taxes Payable 454.8 0.0 454.8

Other Liabilities 369.4 0.0 369.4

Total Intragovernmental Other 

Liabilities $ 9,772.9 $ 1,712.8 $ 11,485.7

Nonfederal

Accrued Funded Payroll and Benefits $ 9,799.0 $ 0.0 $ 9,799.0

Advances from Others 4,472.0 0.0 4,472.0

Deferred Credits (0.3) 0.0 (0.3)

Deposit Funds and Suspense Accounts 216.4 0.0 216.4

Nonenvironmental Disposal Liabilities

 Military Equipment (Nonnuclear) 3.5 262.4 265.9

 Excess/Obsolete Structures 105.6 599.0 704.6

 Conventional Munitions Disposal 0.0 2,072.3 2,072.3

Accrued Unfunded Annual Leave 9,807.6 0.0 9,807.6

Capital Lease Liability 11.4 100.0 111.4

Contract Holdbacks 659.9 0.4 660.3

Employer Contribution and Payroll 

Taxes Payable 741.5 0.0 741.5

Contingent Liabilities 1,237.3 2,913.2 4,150.5

Other Liabilities 835.6 1.1 836.7

Total Nonfederal Other Liabilities $ 27,889.5 $ 5,948.4 $ 33,837.9

Total Other Liabilities $ 37,662.4 $ 7,661.2 $ 45,323.6

The Department identified errors impacting ending FY 2009 account balances while migrating 

from a manual to an automated interface between budget execution and financial statement 

reporting systems. To correct the errors, the Department restated Other Liabilities (Nonfederal). 

Refer to Note 26, Restatements, for additional information. 

Nonfederal Other Liabilities primarily consist of accrued estimates for repairs; accrued moving 

allowance and miscellaneous expenses; and accrued liabilities for inventory owned and 

managed on behalf of foreign governments. 
Department of Defense Agency Financial Report for FY 2010 

Financial Information

99

Contingent Liabilities includes $1.6 billion related to contracts authorizing progress payments 

based on cost as defined in the Federal Acquisition Regulation (FAR). In accordance with 

contract terms, specific rights to contractors’ work vests with the Federal Government when a 

specific type of contract financing payment is made. This action protects taxpayer funds in the 

event of contract nonperformance. These rights should not be misconstrued as rights of 

ownership. The Department is under no obligation to pay contractors for amounts greater than 

the amounts authorized in contracts until delivery and government acceptance. Due to the 

probability the contractors will complete their efforts and deliver satisfactory products, and 

because the amount of potential future payments are estimable, the Department has recognized 

a contingent liability for estimated future payments which are conditional pending delivery and 

government acceptance.

Total contingent liabilities for progress payments based on cost represent the difference 

between the estimated costs incurred to date by contractors and amounts authorized to be paid 

under progress payments based on cost provisions within the FAR. Estimated contractorincurred costs are calculated by dividing the cumulative unliquidated progress payments based 

on cost by the contract-authorized progress payment rate. The balance of unliquidated 

progress payments based on cost is deducted from the estimated total contractor-incurred costs 

to determine the contingency amount.

Capital Lease Liability Dollars in Millions

As of September 30

2010 — Asset Category

Land and 

Buildings Equipment Other Total

Future Payments Due

2011 $ 41.3 0.1 0.0 41.4

2012 15.5 0.1 0.0 15.6

2013 11.1 0.0 0.0 11.1

2014 8.8 0.0 0.0 8.8

2015 8.7 0.0 0.0 8.7

After 5 Years 0.0 0.0 0.0 0.0

Total Future Lease 

Payments Due $ 85.4 $ 0.2 $ 0.0 $ 85.6

Less: Imputed Interest 

Executory Costs 10.1 0.0 0.0 10.1

Net Capital Lease Liability $ 75.3 $ 0.2 $ 0.0 $ 75.5

Capital Lease Liabilities Covered by Budgetary Resources 70.4

Capital Lease Liabilities Not Covered by Budgetary Resources 5.1

Capital Lease Liability Dollars in Millions

As of September 30

Restated 2009 — Asset Category

Land and 

Buildings Equipment Other Total

Future Payments Due

2010 $ 43.9 $ 0.0 0.0 43.9

2011 41.3 0.0 0.0 41.3

2012 15.5 0.0 0.0 15.5

2013 11.1 0.0 0.0 11.1

2014 8.8 0.0 0.0 8.8

After 5 Years 8.7 0.0 0.0 8.7
Department of Defense Agency Financial Report for FY 2010 

Financial Information

100

Total Future Lease Payments Due $ 129.3 $ 0.0 $ 0.0 $ 129.3

Less: Imputed Interest Executory Costs 17.9 0.0 0.0 17.9

Net Capital Lease Liability $ 111.4 $ 0.0 $ 0.0 $ 111.4

Capital Lease Liabilities Covered by Budgetary Resources 98.4

Capital Lease Liabilities Not Covered by Budgetary Resources 13.0

Note 16. Commitments and Contingencies

Legal Contingencies

The Department is a party in various administrative proceedings and legal actions related to 

claims for environmental damage, equal opportunity matters, and contractual bid protests. The 

Department has accrued contingent liabilities for legal actions where the Office of General 

Counsel (OGC) considers an adverse decision probable and the amount of loss is measurable. 

In the event of an adverse judgment against the Government, some of the liabilities may be 

payable from the U.S. Treasury Judgment Fund. The Department records Judgment Fund 

liabilities in Note 12, Accounts Payable, and in Note 15, Other Liabilities. 

The Department has 40 legal actions with individual claims greater than the Department's

FY 2010 materiality threshold of $128.7 million. The total of the 40 actions is approximately 

$2.4 trillion. Of this amount, the OGC determined that claims totaling approximately 

$10 billion are classified "reasonably possible," $46.1 billion are classified "remote," and 

$2.3 trillion are classified "unable to determine the probability of loss." The Department also had 

a number of potential claims that individually did not meet the Department's materiality threshold 

but did meet the individual Components' thresholds. These claims are disclosed in the 

Components' financial statements.

Other Commitments and Contingencies

The Department is a party in numerous individual contracts that contain clauses, such as price 

escalation, award fee payments, or dispute resolution, that may result in a future outflow of 

expenditures. Currently, the Department has limited automated system processes by which it 

captures or assesses these potential contingent liabilities, therefore, the amounts reported may 

not fairly present the Department’s contingent liabilities. 

Contingencies considered both measurable and probable have been recognized as liabilities. 

Refer to Note 15, Other Liabilities, for further information.

Note 17. Military Retirement and Other Federal Employment Benefits

Military Retirement and Other Federal Employment Benefits Dollars in Millions

As of September 30

2010

Liabilities (Less: Assets Available to 

Pay Benefits) Unfunded Liabilities

Pension and Health Actuarial 

Benefits

Military Retirement Pensions $ 1,258,463.1 $ (314,380.5) $ 944,082.6

Military Retirement Health 

Benefits 329,492.1 0.0 329,492.1

Military Medicare-Eligible 

Retiree Benefits 572,995.2 (163,587.6) 409,407.6

Total Pension and Health 

Actuarial Benefits $ 2,160,950.4 $ (477,968.1) $ 1,682,982.3
Department of Defense Agency Financial Report for FY 2010 

Financial Information

101

Military Retirement and Other Federal Employment Benefits Dollars in Millions

As of September 30

2010

Liabilities

(Less: Assets 

Available to Pay 

Benefits)

Unfunded Liabilities

Other Actuarial Benefits

FECA $ 6,418.7 $ 0.0 $ 6,418.7

Voluntary Separation Incentive Programs 959.3 (397.0) 562.3

DoD Education Benefits Fund 1,900.5 (1,900.5) 0.0

Other 6,470.0 (4,894.4) 1,575.6

Total Other Actuarial Benefits $ 15,748.5 $ (7,191.9) $ 8,556.6

Total Military Retirement and Other 

Federal Employment Benefits $ 2,176,698.9 $ (485,160.0) $ 1,691,538.9

Actuarial Cost Method Used: Aggregate Entry-Age Method 

Assumptions: Effective Interest 

Market Value of Investments in Market-based and Marketable Securities: $354.2 billion

Military Retirement and Other Federal Employment Benefits Dollars in Millions

As of September 30

2009

Liabilities (Less: Assets Available to 

Pay Benefits) Unfunded Liabilities

Pension and Health Actuarial 

Benefits

Military Retirement Pensions $ 1,173,456.3 $ (271,798.1) $ 901,658.2

Military Retirement Health 

Benefits 313,959.2 0.0 313,959.2

Military Medicare-Eligible 

Retiree Benefits 509,466.4 (145,850.2) 363,616.2

Total Pension and Health 

Actuarial Benefits $ 1,996,881.9 $ (417,648.3) $ 1,579,233.6

Military Retirement and Other Federal Employment Benefits Dollars in Millions

As of September 30

2009

Liabilities

(Less: Assets 

Available to Pay 

Benefits)

Unfunded Liabilities

Other Actuarial Benefits

FECA $ 6,318.2 $ 0.0 $ 6,318.2

Voluntary Separation Incentive Programs 1,042.1 (450.4) 591.7

DoD Education Benefits Fund 1,797.2 (1,797.2) 0.0

Other 6,126.7 (4,525.3) 1,601.4

Total Other Actuarial Benefits $ 15,284.2 $ (6,772.9 ) $ 8,511.3

Total Military Retirement and Other Federal 

Employment Benefits $ 2,012,166.1 $ (424,421.2) $ 1,587,744.9

Actuarial Cost Method Used: Aggregate Entry-Age Method 

Assumptions: Effective Interest 

Market Value of Investments in Market-based and Marketable Securities: $374.5 billion
Department of Defense Agency Financial Report for FY 2010 

Financial Information

102

During FY 2010, the Department implemented Statement of Federal Financial Accounting 

Standard (SFFAS) No. 33, ―Pensions, Other Retirement Benefits, and Other Postemployment 

Benefits: Reporting the Gains and Losses from Changes in Assumptions and Selecting 

Discount Rates and Valuation Dates.‖ The standard requires the separate presentation of gains 

and losses from changes in long-term assumptions used to estimate liabilities associated with 

pensions, other retirement and other postemployment benefits. The SFFAS No. 33 also 

provides a standard for selecting the discount rate and valuation date used in estimating these 

liabilities.

Military Retirement Pensions

The Military Retirement Fund is a defined benefit plan authorized by Public Law (PL) 98-94 to 

provide funds used to pay annuities and pensions to retired military personnel and their 

survivors. The Department of Defense (DoD) Retirement Board of Actuaries approves the longterm economic assumptions for inflation, salary, and interest. The actuaries calculate the 

actuarial liabilities annually using economic assumptions and actual experience (e.g., mortality 

and retirement rates). Due to reporting deadlines, the current year actuarial present value of 

projected plan benefits rolls forward from the prior year’s valuation results. The actuaries used 

the following assumptions to calculate the FY 2010 roll-forward amount:

Military Retirement Pensions Inflation Salary Interest

Fiscal Year 2010 0.0% (actual) 3.4% (actual) 5.0%

Fiscal Year 2011 0.0% (actual) 1.4% (estimated) 5.0%

Long Term 2.4% 3.6% 5.0%

Actuarial Cost Method Used: Aggregate Entry-Age Normal Method

Market Value of Investments in Market-Based and Marketable Securities: $354.2 billion

Assumed Interest Rate: 5.0%

Military Retirement and Other Federal Employment Benefits

Dollars in Millions

As of September 30

2010

Military 

Retirement 

Pensions

Military Pre -

Medicare 

Eligible Retiree 

Health Benefits

Military 

Medicare -

Eligible Retiree 

Health Benefits

Voluntary 

Separation 

Incentive 

Programs

DoD 

Education 

Benefits 

Fund

 Beginning Actuarial Liability $ 1,173,456.1 313,959.2 509,466.4 1,042.1 1,797.2

 Normal Cost Liability 23,932.7 10,977.0 10,583.7 0.0 464.1

 Assumption Change Liability 66,642.6 0.0 0.0 21.1 (59.4)

 Benefit Outlays (50,416.6) (11,161.9) (8,633.9) (141.5) (417.5)

Interest Cost 66,965.8 18,367.4 29,658.1 43.7 81.9

Actuarial (gains)/losses due to 

changes in experience (22,117.6) (1,389.0) 3,323.2 (6.2) 35.8

Actuarial (gains)/losses due to 

changes in trend assumptions

0.0 (34,532.1) (90,883.7) 0.0 0.0

Actuarial (gains)/losses due to other 

factors 0.0 33,271.5 119,481.3 0.0 (1.5)

Ending Actuarial Liability $ 1,258,463.0 329,492.1 572,995.1 959.2 1,900.6

Change in Actuarial Liability $ 85,006.9 15,532.9 63,528.7 (82.9) 103.4

Actuarial Cost Method Used: Aggregate Entry-Age Method 

Assumptions: Effective Interest 

Market Value of Investments in Market-based and Marketable Securities: $354.2 billion
Department of Defense Agency Financial Report for FY 2010 

Financial Information

103

Historically, the initial unfunded liability of the program was amortized over a 50-year period. 

Effective FY 2008, the initial unfunded liability is amortized over a 42-year period to ensure the 

annual payments cover the interest on the unfunded actuarial liability, with the last payment 

expected to be made October 1, 2025. All subsequent gains and losses experienced are 

amortized over a 30-year period. 

Military Retirement Health Benefits (MRHB)

The MRHB are post-retirement benefits the Department provides to non-Medicare-eligible 

military retirees and other eligible beneficiaries through private sector health care providers and 

the Department’s medical treatment facilities. The actuaries calculate the actuarial liabilities 

annually using assumptions and actual experience. For the FY 2010 actuarial liability 

calculation, the actuaries used the following assumptions: 

MRHB Medical Trend FY 2009 – FY 2010 Ultimate Rate 

FY 2034

Medicare Inpatient (Direct Care) 3.63% 5.65%

Medicare Outpatient (Direct Care) 2.76% 5.65%

Medicare Prescriptions (Direct Care) 2.75% 5.65%

Non-Medicare Inpatient (Direct Care) 7.24% 5.65%

Non-Medicare Outpatient (Direct Care) 7.60% 5.65%

Non-Medicare Prescriptions (Direct Care) 2.00% 5.65%

Non-Medicare Inpatient (Purchased Care) 3.00% 5.65%

Non-Medicare Outpatient (Purchased Care) 3.00% 5.65%

Non-Medicare Prescriptions (Purchased Care) 8.76% 5.65%

U.S. Family Health Plan (USFHP) (Purchased Care) 7.51% 5.65%

Actuarial Cost Method Used: Aggregate Entry-Age Normal Method

 Assumed Interest Rate: 5.0%

Medicare-Eligible Retiree Health Care Fund (MERHCF) Benefits 

In accordance with PL 106-398, MERHCF accumulates funds to finance the health care 

program liabilities of Medicare-eligible retirees for all the Uniformed Services and specific 

Medicare-eligible beneficiaries. The DoD Board of Actuaries approves the long-term 

assumptions for medical trends and interest. The actuaries calculate the actuarial liabilities 

annually using actual experience (e.g., mortality and retirement rates, direct care costs, 

purchased care). Due to reporting deadlines, the current year actuarial present value of 

projected plan benefits rolls forward from the prior year’s results. The actuaries used the 

following assumptions to calculate the FY 2010 roll-forward amount:

MERHCF Benefits — Medical Trend FY 2009 – FY 2010 Ultimate Rate 

FY 2034

Medicare Inpatient (Direct Care) 3.63% 5.65%

Medicare Inpatient (Purchased Care) 4.63% 5.65%

Medicare Outpatient (Direct Care) 2.76% 5.65%

Medicare Outpatient (Purchased Care) 3.26% 5.65%

Medicare Prescriptions (Direct Care) 2.75% 5.65%

Medicare Prescriptions (Purchased Care) 7.51% 5.65%

Medicare USFHP (Purchased Care) 5.49% 5.65%

Actuarial Cost Method Used: Aggregate Entry-Age Normal Method

Market Value of Investments in Market-Based and Marketable Securities: $184.0 billion

Assumed Interest Rate: 5.0%
Department of Defense Agency Financial Report for FY 2010 

Financial Information

104

The MERHCF liability includes Medicare liabilities for all Uniformed Services. The $573.0 billion 

liability includes $560.1 billion for the Department, $11.6 billion for the Coast Guard, $1.2 billion 

for the Public Health Service, and $81.5 million for National Oceanic and Atmospheric 

Administration (NOAA). The FY 2010 contributions from each of the Uniformed Services were 

$10.8 billion from the Department, $263.8 million from the Coast Guard, $35.6 million from the 

Public Health Service, and $1.8 million from NOAA.

Federal Employees Compensation Act (FECA) 

The Department of Labor (DOL) annually determines the liability for future workers’ 

compensation benefits, which includes the expected liability for death, disability, medical, and 

miscellaneous costs for approved compensation cases, plus a component for incurred-but-notreported claims. The liability is determined using historical benefit payment patterns related to a 

specific incurred period to predict the final payment related to that period. Consistent with past 

practice, these projected annual benefit payments have been discounted to present value using 

the Office of Management and Budget’s economic assumptions for 10-year U.S. Treasury notes 

and bonds. A 3.65% interest rate was assumed for year one and 4.30% was assumed for year 

two and thereafter.

The DOL calculates this liability using wage inflation factors (cost of living adjustments or 

COLAs) and medical inflation factors (consumer price index medical or CPIM). The actual rates 

for these factors for charge back year (CBY) 2010 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 were as follows:

Federal Employees — Compensation Act (FECA)

CBY COLA CPIM

2010 N/A N/A

2011 2.23% 3.45%

2012 1.13% 3.43%

2013 1.70% 3.64%

2014 1.90% 3.66%

2015+ 1.93% 3.73%

The model’s resulting projections were analyzed by DOL to ensure the estimates were reliable. 

The analysis was based on four tests: (1) a sensitivity analysis of the model of economic 

assumptions, (2) a comparison of the percentage change in the liability amount to the 

percentage change in the actual incremental payments, (3) a comparison of the incremental 

paid losses per case (a measure of case-severity) in CBY 2010 to the average pattern observed 

during the prior three charge back years, and (4) a comparison of the estimated liability per case 

in the 2010 projection to the average pattern for the projections for the most recent three years.

Voluntary Separation Incentive (VSI) Program 

The VSI Program was established by PL 102-190 to reduce the number of military personnel on 

active duty. The DoD Board of Actuaries approved the assumed annual interest rate of 4.1% 

used to calculate the actuarial liability. Since the VSI Program is no longer offered, the actuarial 

liability calculated annually is expected to continue to decrease with benefit outlays and 

increase with interest cost. 

Market Value of Investments in Market-based and Marketable Securities: $446.7 million
Department of Defense Agency Financial Report for FY 2010 

Financial Information

105

DoD Education Benefits Fund (EBF)

The EBF program was established by PL 98-525 to recruit and retain military members and aid 

in the readjustment of military members to civilian life. The actuaries calculate the actuarial 

liability annually based on the assumed interest rate of 4.1% that was approved by the EBF 

Board of Actuaries. 

Market Value of Investments in Market-based and Marketable Securities: $2.4 billion

Other Federal Employment Benefits

Other Federal Employment Benefits primarily consists of accrued pensions and annuities, and 

an estimated liability for incurred-but-not-reported medical claims not processed prior to fiscal 

year end.

Note 18. General Disclosures Related to the Statement of Net Cost

General Disclosures Related to the Statement of Net Cost Dollars in Millions

As of September 30 2010

Restated

2009

Intragovernmental Costs $ 35,897.0 $ 33,891.6

Public Costs 830,161.3 663,765.7

Total Costs $ 866,058.3 $ 697,657.3

Intragovernmental Earned Revenue (23,473.3) (10,577.0)

Public Earned Revenue (39,768.9) (35,590.9)

Total Earned Revenue $ (63,242.2) $ (46,167.9)

Net Cost of Operations $ 802,816.1 $ 651,489.4

The Department identified the following restatements: (1) errors impacting ending account 

balances while migrating from a manual to an automated interface between budget execution 

and financial statement reporting systems; (2) property, plant and equipment valued incorrectly; 

(3) overstated accounts receivable (nonfederal) established to recover pharmacy costs from 

drug manufacturers; (4) inventory valued incorrectly; and (5) contract financing payments based 

on auditor recommended adjustments. The corrections resulted in a $156.1 million net reduction 

of Gross Costs on the Statement of Net Cost (SNC) and are reflected in Public Costs on the 

restated Note 18, General Disclosures Related to the SNC. Refer to Note 26, Restatements, for 

further information.

Other Disclosures

The SNC represents the net cost of programs and organizations of the Federal Government that 

are supported by appropriations or other means. The intent of the SNC is to provide gross and 

net cost information related to the amount of output or outcome for a given program or 

organization administered by a responsible reporting entity. The Department’s current 

processes and systems do not capture and report accumulated costs for major programs based 

upon the performance measures as required by the Government Performance and Results Act. 

The Department is in the process of reviewing available data and developing a cost reporting 

methodology as required by the SFFAS No. 4, ― Managerial Cost Accounting Concepts and 

Standards for the Federal Government‖, as amended by SFFAS No. 30, ―Inter-entity Cost 

Implementation‖.

Intragovernmental costs and revenue represent transactions made between two reporting 

entities within the Federal Government. Public costs and revenues are exchange transactions 
Department of Defense Agency Financial Report for FY 2010 

Financial Information

106

made between the reporting entity and a nonfederal entity. Public costs include actuarial 

gains/losses on pension, other retirement benefits, and/or other postemployment benefits 

assumption changes.

The Department’s systems do not track intragovernmental transactions by customer at the 

transaction level. Buyer-side expenses are adjusted to agree with internal seller-side revenues. 

Expenses are generally adjusted by reclassifying amounts between federal and nonfederal 

expenses. Intradepartmental revenues and expenses are then eliminated.

The SNC presents information based on budgetary obligation, disbursement, and collection 

transactions, as well as data from nonfinancial feeder systems. Amounts are adjusted for 

accruals such as payroll expenses, accounts payable, and environmental liabilities. The 

General Fund data is primarily derived from budgetary transactions (obligations, disbursements, 

and collections), data from nonfinancial feeder systems, and accruals made for major items. 

While Working Capital Funds primarily record transactions on an accrual basis, the systems do 

not always capture actual costs in a timely manner. 

The Department’s accounting systems generally do not capture information relative to heritage 

assets separately and distinctly from normal operations. 

During FY 2010, the Department implemented SFFAS No. 33, Pension, Other Retirment 

Benefits, and Other Postemployment Benefits: Reporting the Gains and Losses from Changes 

in Assumptions and Selecting Discount Rates and Valuation Dates. The standard requires the 

separate presentation of gains and losses from changes in long-term assumptions used to 

measure liabilities associated with pensions, other retirement benefits, and other 

postemployment benefits. The SFFAS No. 33 also provides a standard for selecting the 

discount rate and valuation date used in estimating these liabilities. 

Note 19. Disclosures Related to the Statement of Changes in Net Position

Budgetary Financing Sources – Nonexchange revenue and its related contra account has an 

abnormal balance of $8.8 million. This is due to a decrease in the allowance for loss on nonentity receivable for 4th Quarter, FY 2010.

The Department identified the following restatements: (1) errors impacting ending account 

balances while migrating from a manual to an automated interface between budget execution 

and financial statement reporting systems; (2) property, plant and equipment valued incorrectly; 

(3) overstated accounts receivable (nonfederal) established to recover pharmacy costs from 

drug manufacturers; (4) inventory valued incorrectly; and (5) contract financing payments based 

on auditor recommended adjustments. To correct the errors the Department restated the 

Statement of Changes in Net Position (SCNP) by $2.1 billion. Refer to Note 26, Restatements, 

for further information.

Other Financing Sources, Other consists primarily of nonexchange gains and losses to 

reconcile the proprietary and budgetary amounts, as well as gains and losses on disposition of 

assets. Due to financial system limitations, the Department adjusts for these unreconciled 

differences. 

Earmarked Cumulative Results of Operations ending balance on the SCNP does not agree with 

the Earmarked Cumulative Results reported on the Balance Sheet because the cumulative 

results on the Balance Sheet are presented net of eliminations. In the SCNP, offsetting 

balances for intradepartmental activity between Earmarked Funds and All Other Funds are 

reported on the same lines. The Eliminations column contains all appropriate elimination 

entries, which net to zero within each respective line, except for intraentity imputed financing 

costs. 
Department of Defense Agency Financial Report for FY 2010 

Financial Information

107

Appropriations Received on the SCNP do not match the Appropriations on the Statement of 

Budgetary Resources (SBR). The difference of $123.9 billion is primarily related to the Military 

Retirement Fund and Medicare-Eligible Retirement Health Care Fund appropriations. In order 

to preserve visibility with the President’s Budget, these appropriations are effectively reported 

twice on the SBR. They are reported once by the Military Departments and Defense Agencies 

as appropriated and once by the individual trust funds as receipts. Refer to Note 20, 

Disclosures Related to the Statement of Budgetary Resources, for further details.

Note 20. Disclosures Related to the Statement of Budgetary Resources

Disclosures Related to the Statement of Budgetary Resources Dollars in Millions

As of September 30, 2009 2010 Restated 

2009

Net Amount of Budgetary Resources Obligated for Undelivered Orders at 

the End of the Period. $ 467,972.2 $ 450,737.4

Restatements

During the transition to an automated interface between the budget execution and financial 

statement reporting systems, the Department identified $1.3 billion in errors related to FY 2009 

and prior years for the Statement of Budgetary Resources. To correct the errors, the 

Department restated several balances in the Statement of Budgetary Resources. Refer to Note 

26, Restatements, for additional details.

Reconciliation Differences

Appropriations Received on the SBR exceeds Appropriations Received on the Statement of 

Changes in Net Position by $123.9 billion. This difference represents trust and special fund 

receipts reported as exchange revenue on the Statement of Net Cost and included in 

appropriations on the SBR. In accordance with Office of Management and Budget (OMB) 

guidance, $104.9 billion of General Fund appropriations received by the Department are also 

recognized on the SBR as appropriations received for trust and special funds. The difference is 

primarily due to duplicate reporting in the SBR of the Military Services’ contributions and U.S. 

Treasury’s payments to the Military Retirement Fund and the Department of Defense MedicareEligible Retiree Health Care Fund. 

The SBR 2009 comparative column includes $93.9 billion more in budget authority than 

reported in the 2009 actual column of the President’s FY 2011 Budget. The difference is 

primarily due to the duplicate reporting discussed above and advances the U.S. Army Corps of 

Engineers (USACE) received from the District of Columbia. USACE reports the advances 

(account 96X6094) in its SBR. However, this account is not included in the budget. 

The SBR FY 2009 column includes $331.2 million less in obligations than reported in the 2009

actual column of the President’s FY 2011 Budget. The difference is primarily due to abnormal 

(negative) collections reported in the SBR. These abnormal collection were reported as 

obligations and outlays in the President’s Budget.

The SBR FY 2009 column includes $65.9 billion less in net outlays than reported in the 2009

actual column of the President’s FY 2011 Budget. The SBR reduces net outlays by the 

distributed offsetting receipts. In addition $288.1 million of abnormal collections were reported 

as obligations and outlays in the President’s Budget.

The SBR includes $77.2 billion less in net outlays than reported in the SF-133, Report on 

Budget Execution. The SBR reduces net outlays by the distributed offsetting receipts. 

However, the SF-133, Report on Budget Execution does not reduce the Department’s outlays 
Department of Defense Agency Financial Report for FY 2010 

Financial Information

108

by the distributed offsetting receipts. In addition, budget authority, obligations, and net outlays 

in the SBR will differ from amounts reported in the SF-133, Report on Budget Execution for 

deposit account 96X6094. Deposit account 96X6094 represents advances the U.S. Army 

Corps of Engineers (USACE) receive from the District of Columbia. USACE reports this depost 

account in its SBR. However, this depost account is not included in the budget. USACE is 

working with the OMB examiner to change the reporting of these advances in FY 2011.

Permanent Indefinite Appropriations

The Department of Defense (DoD) received the following permanent indefinite appropriations: 

Department of the Army General Gift Fund (10 USC 2601(b)(1))

Department of the Navy General Gift Fund (10 USC 2601(b)(2))

Department of the Air Force General Gift Fund (10 USC 2601 (b)(3))

Department of Defense General Gift Fund (10 USC 2601)

Disposal of Department of Defense Real Property (40 USC 485(h)(2)(A)(B))

Foreign National Employees Separation Pay Account, Defense (10 USC 1581)

United States Naval Academy Gift and Museum Fund (10 USC 6973-4)

Ship Stores Profits, Navy (10 USC 7220, 31 USC 1321)

Midshipmen’s Store (10 USC 6971B) 

Burdensharing Contributions (10 USC 2350j)

Forest Program (10 USC 2665) 

Medicare Eligible Retiree Health Care Fund (MERHCF) (10 USC 1111)

Military Retirement Fund (10 USC 1461)

Education Benefits Fund (10 USC 2006)

Host Nation Support for U.S. Relocation Activities (10 USC 2350k)

Hydraulic Mining Debris Reservoir (33 USC 683)

Maintenance and Operation of Dams and Other Improvements of Navigable Waters 

(16 USC 810(a))

Payments to States (33 USC 701c-3)

Wildlife Conservation (16 USC 670-670(f))

Ainsworth Bequest (31 USC 1321)

DoD Family Housing Improvement Fund (10 USC 2883 (a))

DoD Military Unaccompanied Housing Improvement Fund (10 USC 2883 (a))

Voluntary Separation Incentive Fund (10 USC 1175(h))

Rivers & Harbors Contributed Funds (33 USC 560, 701h)

Concurrent Receipt Accrual Payments to the Military Retirement Fund (10 USC 1466(b)(1))

Rocky Mountain Arsenal, Restoration (100 Statue, 4003 SEC 1367)

Department of Defense Family Improvement Fund (Section 504(f), Federal Credit Reform 

Act of 1990 and 2 U.S.C. 661c(f))
Department of Defense Agency Financial Report for FY 2010 

Financial Information

109

Homeowners Assistance Fund (10 USC 4551-4555; 42 USC 3374(d), Title United States 

Code; Public Law 111-5)

The above permanent indefinite appropriations cover a wide variety of purposes to help the 

Department accomplish its missions. These purposes include: (1) military retirees’ health care 

benefits, retirement and survivor pay, and education benefits for veterans; (2) wildlife habitat 

restoration and water resources maintenance; (3) relocation of armed forces to a host nation; 

(4) separation payments for foreign nationals; and (5) upkeep of libraries and museums. 

Apportionment Categories for Obligations incurred

The Department reported the following amounts of direct obligations: (1) $585.1 billion in 

category A; (2) $270.0 billion in category B; and (3) $2.6 billion in exempt from apportionment. 

The Department reported reimbursable obligations of (1) $23.8 billion in category A, (2) $171.6

billion in category B and (3) $39.5 million in exempt from apportionment. Category A relates to 

appropriations for a specific period of time (e.g., Military Personnel appropriation), and category 

B relates to appropriations for a specific project (e.g., Military Construction appropriation).

Legal Arrangements Affecting the Use of Unobligated Balances

A portion of the Department’s unobligated balances represents trust fund receipts collected in 

the current fiscal year that exceed the amount needed to pay benefits or other valid obligations. 

These receipts are temporarily precluded from obligation by law due to a benefit formula or 

other limitation. The receipts, however, are assets of the funds and are available for obligation 

as needed in the future. The Department operates within the constraints of fiscal law and has 

no additional legal arrangements affecting the use of unobligated balances.

Other Disclosures

The SBR includes intraentity transactions because the statements are presented as combined.

The Department utilizes borrowing authority for the Military Housing Privatization Initiative and 

the Armament Retooling and Manufacturing Support Initiative. Borrowing authority is used in 

accordance with OMB Circular No. A-129, ―Managing Federal Credit Programs.‖

The Department received additional funding of $158.3 billion to cover obligations incurred above 

baseline operations, which includes $151.6 billion in support of the Overseas Contingency 

Operations.

Note 21. Reconciliation of Net Cost of Operations to Budget

Reconciliation of Net Cost of Operations to Budget Dollars in Millions

As of September 30, 2010 and 2009 2010

Restated

2009

Resources Used to Finance Activities

Budgetary Resources Obligated:

Obligations incurred $ 1,053,074.5 $ 1,030,908.4

Less: Spending authority from offsetting collections and recoveries (-) (242,038.4) (244,492.1)

Obligations net of offsetting collections and recoveries $ 811,036.1 $ 786,416.3

Less: Offsetting receipts (-) (77,722.2) (65,912.1)

Net obligations $ 733,313.9 $ 720,504.2
Department of Defense Agency Financial Report for FY 2010 

Financial Information

110

Reconciliation of Net Cost of Operations to Budget Dollars in Millions

As of September 30, 2010 and 2009 2010

Restated

2009

Other Resources:

Donations and forfeitures of property $ 6.4 $ 2.2

Transfers in/out without reimbursement (+/-) 566.2 (42.8)

Imputed financing from costs absorbed by others 5,596.2 4,703.8

Other (+/-) 2,446.5 1,253.7

Net other resources used to finance activities $ 8,615.3 $ 5,916.9

Total resources used to finance activities $ 741,929.2 $ 726,421.1

Resources Used to Finance Items not Part of the Net Cost of 

Operations

Change in budgetary resources obligated for goods, services and 

benefits ordered but not yet provided:

Undelivered Orders (-) $ (17,234.8) $ (43,375.4)

Unfilled Customer Orders 2,298.9 931,6

Resources that fund expenses recognized in prior 

Periods (-)

(7,004.9) (13,983.5)

Budgetary offsetting collections and receipts that do not affect Net Cost 

of Operations 2,599.2 1,928.6

Resources that finance the acquisition of assets (-) $ (125,255.3) $ (145,109.8)

Other resources or adjustments to net obligated resources that do not 

affect Net Cost of Operations:

Less: Trust or Special Fund Receipts Related to exchange in the 

Entity’s Budget (-)

$ 0.0 $ (10.0) 

Other (+/-) (3,008.2) 24,649.8

Total resources used to finance items not part of the Net Cost of 

Operations $ (147,605.1) $ (174,968.7)

Total resources used to finance the Net Cost of Operations $ 594,324.1 $ 551,452.4

Components of the Net Cost of Operations that will not Require or 

Generate Resources in the Current Period

Components Requiring or Generating Resources in Future Period:

Increase in annual leave liability $ 2,688.6 $ 819.9

Increase in environmental and disposal liability 873.4 929.2

Upward/Downward reestimates of credit subsidy 

expense (+/-)

4.7 0.4

Increase in exchange revenue receivable from the public (-) (295.0) 815.5

Other (+/-) 166,438.4 32,796.5

Total components of Net Cost of Operations that will Require or 

Generate Resources in future periods $ 169,710.1 $ 35,361.5

Components not Requiring or Generating Resources:

Depreciation and amortization $ 39,255.3 $ 41,079.5

Revaluation of assets or liabilities (+/-) 4,119.3 5,969.1

Other (+/-)

Trust Fund Exchange Revenue (46,694.0) (34,909.0)

Cost of Goods Sold 67,434.1 72,948.9

Operating Materiel and Supplies Used 28,690.0 30,868.3

Other (54,022.8) (51,281.3)
Department of Defense Agency Financial Report for FY 2010 

Financial Information

111

Reconciliation of Net Cost of Operations to Budget Dollars in Millions

As of September 30, 2010 and 2009 2010

Restated

2009

Total Components of Net Cost of Operations that will not Require 

or Generate Resources $ 38,781.9 $ 64,675.5

Total components of Net Cost of Operations that will not Require 

or Generate Resources in the current period $ 208,492.0 $ 100,037.0

Net Cost of Operations $ 802,816.1 $ 651,489.4

The Department identified errors impacting ending FY 2009 account balances while migrating 

from a manual to an automated interface between budget execution and financial statement 

reporting systems. To correct the errors the Department restated Note 21, Reconciliation of Net 

Cost of Operations to Budget. Refer to Note 26, Restatements, for further information.

Due to the Department’s financial system limitations, budgetary data does not agree with 

proprietary expenses and capitalized assets. The difference between budgetary and proprietary 

data is a previously identified deficiency. The following adjustments (absolute value) were 

made to balance the Reconciliation of Net Cost of Operations to the Statement of Net Cost:

(Amounts in millions)

Resources that Finance the Acquisition of Assets $8,623.9

Other Components not Requiring or Generating Resources 786.4

Total Amount $9,410.3

The following Reconciliation of Net Cost of Operations to Budget lines are presented as 

combined instead of consolidated due to intraagency budgetary transactions not being 

eliminated:

Obligations Incurred

Less: Spending Authority from Offsetting Collections and Recoveries

Obligations Net of Offsetting Collections and Recoveries

Less: Offsetting Receipts

Net Obligations

Undelivered Orders

Unfilled Customer Orders

Other Resources, Other, primarily consists of $2.5 billion in nonexchange gains and losses 

necessary to reconcile the proprietary and budgetary amounts, as well as ($0.1) billion in gains 

and losses on disposition of assets.

Other Resources or Adjustments to Net Obligated Resources that Do Not Affect Net Cost of 

Operations, Other, primarily consists of ($2.5) billion in nonexchange gains and losses 

necessary to reconcile the proprietary and budgetary amounts, ($0.6) billion in financial sources 

transferred in without reimbursement, and $0.1 billion in gains and losses on disposition of 

assets.

Components Requiring or Generating Resources in Future Period, Other, consists primarily of 

$165.8 billion in other federal employment benefits. 
Department of Defense Agency Financial Report for FY 2010 

Financial Information

112

Components not Requiring or Generating Resources, Other primarily consists of cost 

capitalization offsets and other expenses not requiring budgetary resources.

Note 22. Disclosures Related to Incidental Custodial Collections

The Department collected $1.2 million of incidental custodial revenues generated primarily from 

forfeitures of unclaimed money and property. These funds are not available for use by the 

Department. At the end of each fiscal year, the accounts are closed and the balances rendered 

to the U.S. Treasury.

Note 23. Earmarked Funds

Earmarked Funds Dollars in Millions

As of September 30

2010

Military 

Retirement 

Fund

MedicareEligible 

Retiree 

Health Care 

Fund

Other 

Earmarked 

Funds

Eliminations Total

Balance Sheet

Assets

Fund balance with Treasury $ 25.4 $ 196.0 $ 3,181.0 $ 0.0 $ 3,402.4

Investments 321,686.8 166,203.5 9,246.4 0.0 497,136.7

Accounts and Interest 

Receivable 37.0 562.9 1,107.8 (42.5) 1,665.2

Other Assets 0.0 0.0 1,441.1 0.0 1,441.1

Total Assets $ 321,749.2 $ 166,962.4 $ 14,976.3 $ (42.5) $ 503,645.4

Liabilities and Net Position

Military Retirement Benefits 

and Other Federal 

Employment Benefits

$ 1,262,672.9 $ 573,671.3 $ 2,859.8 $ 0.0 $1,839,204.0

Other Liabilities 2.0 303.7 2,594.2 (118.3) 2,781.6

Total Liabilities $ 1,262,674.9 $ 573,975.0 $ 5,454.0 $ (118.3) $1,841,985.6

Unexpended Appropriations $ 0.0 $ 0.0 $ 325.2 $ (20.4) $ 304.8

Cumulative Results of 

Operations (940,925.7) (407,012.6) 9,197.1 (101,264.8) (1,440,006.0)

Total Liabilities and Net 

Position $ 321,749.2 $ 166,962.4 $ 14,976.3 $ (101,403.5) $ 402,284.4

Statement of Net Cost

Program Costs $ 136,098.0 $ 71,579.4 $ 2,302.9 $ (2,497.6) $ 207,482.7

Less Earned Revenue (93,929.7) (26,420.1) (1,393.4) 104,870.9 (16,872.3)

Net Program Costs 42,168.3 45,159.3 909.5 102,373.3 190,610.4

Net Cost of Operations $ 42,168.3 $ 45,159.3 $ 909.5 $ 102,373.3 $ 190,610.4

Statement of Changes in Net Position

Net Position Beginning of the 

Period $ (898,757.4) $ (361,576.6) $ 8,074.1 $ 0.0 $(1,252,259.9)

Net Cost of Operations 42,168.3 45,159.3 909.5 102,373.4 190,610.5

Budgetary Financing Sources 0.0 0.0 2,572.0 1,088.2 3,660.2

Other Financing Sources 0.0 (276.7) (214.3) 0.0 (491.0)

Change in Net Position $ (42,168.3) $ 45,436.0 $ 1,448.2 $ (101,285.2) $ (187,441.3)

Net Position End of Period $ (940,925.7) $ (407,012.6) $ 9,522.3 $ (101,285.2) $(1,439,701.2)
Department of Defense Agency Financial Report for FY 2010 

Financial Information

113

Other Disclosures

The Statement of Federal Financial Accounting Standards (SFFAS) No. 27, ―Identifying and 

Reporting Earmarked Funds,‖ requires the disclosure of Earmarked Funds separate from All 

Other Funds on the Statement of Changes in Net Position and Balance Sheet. Funds must 

meet three criteria to be classified as earmarked: (1) a statute committing use of specificallyidentified revenues for designated purposes, (2) explicit authority to retain the revenues, and 

 Earmarked Funds Dollars in Millions

As of September 30

2009

Military 

Retirement 

Fund

MedicareEligible 

Retiree 

Health Care 

Fund

Other 

Earmarked 

Funds

Eliminations Total

Balance Sheet

Assets

Fund balance with Treasury $ 20.5 $ 5.0 $ 2,246.2 $ 0.0 $ 2,271.7

Investments 278,347.0 148,403.4 8,133.7 0.0 434,884.1

Accounts and Interest 

Receivable 31.9 147.9 988.8 (6.0) 1,162.6

Other Assets 0.0 0.0 2,136.9 0.0 2,136.9

Total Assets $ 278,399.4 $ 148,556.3 $ 13,505.6 $ (6.0) $ 440,455.3

Liabilities and Net Position

Military Retirement Benefits 

and Other Federal 

Employment Benefits

$ 1,177,154.9 $ 510,286.8 $ 2,839.4 $ 0.0 $1,690,281.1

Other Liabilities 1.9 122.9 2,591.6 (72.0) 2,644.4

Total Liabilities $1,177,156.8 $ 510,409.7 $ 5,431.0 $ (72.0) $1,692,925.5

Unexpended Appropriations $ 0.0 $ 0.0 $ 5.6 $ 0.0 $ 5.6

Cumulative Results of 

Operations (898,757.4) (361,853.4) 8,069.0 (90,592.9) $(1,343,134.7)

Total Liabilities and Net 

Position $ 278,399.4 $ 148,556.3 $ 13,505.6 $ (90,664.9) $ 349,796.4

Statement of Net Cost

Program Costs $ 73,004.0 $ 17,612.9 $ 2,510.2 $ (2,567.2) $ 90,559.9

Less Earned Revenue (75,267.8) (22,469.4) (674.6) 94,121.9 (4,289.9)

Net Program Costs (2,263.8) (4,856.5) 1,835.6 91,554.7 86,270.0

Net Cost of Operations $ (2,263.8) $ (4,856.5) $ 1,835.6 $ 91,554.7 $ 86,270.0

Statement of Changes in Net Position

Net Position Beginning of the 

Period $ (901,021.2) $ (366,709.9) $ 8,043.0 $ 0.0 $(1,259,688.1)

Net Cost of Operations (2,263.8) (4,856.5) 1,835.6 91,554.7 86,270.0

Budgetary Financing Sources 0.0 0.0 1,973.7 943.6 2,917.3

Other Financing Sources 0.0 0.0 (106.5) 18.2 (88.3)

Change in Net Position $ 2,263.8 $ 4,856.5 $ 31.6 $ (90,592.9) $ (83,441.0)

Net Position End of Period $ (898,757.4) $ (361,853.4) $ 8,074.6 $ (90,592.9) $(1,343,129.1)
Department of Defense Agency Financial Report for FY 2010 

Financial Information

114

(3) a requirement to account and report on the revenues. The Department’s earmarked funds 

are either special or trust funds and use both receipt and expenditure accounts to report activity 

to the U.S. Treasury. There have been no changes in legislation that significantly changed the 

purposes of the funds.

The Total column is shown as consolidated and relates only to Earmarked Funds. The 

Eliminations column includes eliminations associated with Earmarked Funds and excludes the 

offsetting eliminations from All Other Funds. This exclusion causes assets to not equal liabilities 

and net position in the note. However, the amounts in the Total column equal the amounts 

reported for Earmarked Funds on the Balance Sheet.

The SFFAS No. 27 requires the presentation of gross amounts of Earmarked Funds separate 

from All Other (nonearmarked) Funds. Cumulative Results of Operations ending balances for 

Earmarked Funds on the SCNP do not agree with the Cumulative Results of Operations for 

Earmarked Funds reported on the Balance Sheet because the Cumulative Results of 

Operations on the Balance Sheet are presented net of eliminations, whereas the SCNP 

presents Cumulative Results of Operations gross Cumulative Results of Operations. 

Military Retirement Fund (MRF), 10 United States Code (USC) 1461. The MRF accumulates 

funds in order to finance, on an actuarially sound basis, the liabilities of the Department’s military 

retirement and survivor benefit programs. Financing sources for the MRF are interest earnings on 

Fund assets, monthly Department contributions, and annual contributions from the U.S. Treasury. 

The monthly Department contributions are calculated as a percentage of basic pay. The 

contribution from the U.S. Treasury represents the amortization of the unfunded liability for service 

performed prior to October 1, 1984, plus the amortization of actuarial gains and losses that have 

arisen since then. The U.S. Treasury annual contribution also includes the normal cost amount 

for the concurrent receipt provisions of the FY 2004 National Defense Authorization Act. 

Medicare-Eligible Retiree Health Care Fund (MERHCF), 10 USC 1111. The MERHCF 

accumulates funds to finance, on an actuarially sound basis, liabilities of the Department and 

the uniformed services health care programs for qualified Medicare-eligible beneficiaries. 

Financing sources for MERHCF are provided primarily through an annual actuarial liability 

payment from the U.S. Treasury, annual contributions from each Uniformed Service (Army, 

Navy, Air Force, Marine Corps, U.S. Coast Guard, National Oceanic and Atmospheric 

Administration, and U.S. Public Health Service) and interest earned from the Fund's 

investments. 

Other Earmarked Funds

Special Recreation Use Fees, 16 USC 4061-6a note. The United States Army Corps of 

Engineers (USACE) is granted the authority to charge and collect fair and equitable Special 

Recreation Use Fees at campgrounds located at lakes or reservoirs that are under the 

jurisdiction of USACE. Types of allowable fees include daily use fees, admission fees, 

recreational fees, annual pass fees, and other permit type fees. The receipts are used for the 

operation and maintenance of the recreational sites.

Hydraulic Mining in California, Debris, 33 USC 683. Operators of hydraulic mines through 

which debris flows in part or in whole to a body restrained by a dam or other work erected by the 

California Debris Commission are required to pay an annual tax as determined by the 

Commission. Taxes imposed under this code are collected and expended under the 

supervision of USACE and the direction of the Department of the Army. The funds are used for 

repayment of funds advanced by the Federal government or other agencies for construction, 

restraining works, settling reservoirs, and maintenance. 
Department of Defense Agency Financial Report for FY 2010 

Financial Information

115

Payments to States, Flood Control Act of 1954, 33 USC 701c-3. Seventy-five percent of all 

funds received and deposited from the leasing of lands acquired by the United States for flood 

control, navigation, and allied purposes (including the development of hydroelectric power) are 

returned to the state in which the property is located. USACE collects lease receipts into a receipt 

account. Funds are appropriated for the amount of receipts the following fiscal year. The funds 

may be expended by the states for the benefit of public schools and public roads of the counties in 

which such property is situated, or for defraying any of the expenses of county government.

Maintenance and Operation of Dams and Other Improvements of Navigable Waters, 16 

USC 803(f) and 810. When a reservoir or other improvement is constructed by the U.S., the 

Federal Energy Regulatory Commission (FERC) assesses charges against licensees directly 

benefited. The statute requires all proceeds from any Indian reservation be placed to the credit of 

the Indians of the reservation. All other charges arising from licenses, except those charges 

established by the FERC for administrative reimbursement, are paid to the U.S. Treasury and 

allocated for specific uses. The Army is allocated 50 percent of charges from all licenses, except 

licenses for the occupancy and use of public lands and national forests. These funds are 

deposited in a special fund and used for maintenance, operation, and improvement of dams and 

other navigation structures that are owned by the United States, or in construction, maintenance, 

or operation of headwater, or other improvements to navigable waters of the United States. 

Fund for NonFederal Use of Disposal Facilities (for dredged material), 33 USC 2326. Any 

dredged material disposal facility under the jurisdiction of, or managed by, the Secretary of the 

Army may be used by a nonfederal interest if the Secretary determines that such use will not 

reduce the availability of the facility for project purposes. Fees may be imposed to recover capital, 

operation, and maintenance costs associated with such use. Any monies received through 

collection of fees under this law shall be available to, and used by, the Secretary of the Army for 

the operation and maintenance of the disposal facility from which the fees were collected.

South Dakota Terrestrial Wildlife Habitat Restoration Trust Fund, Public Law 106-53 Sec. 603.

Yearly transfers are made from the General Fund of the U.S. Treasury to the Trust Fund for 

investment purposes. Investment activity is managed by the Bureau of the Public Debt (BPD). 

The BPD purchases and redeems nonmarketable market-based securities. Investments include 

one-day certificates, bonds, and notes. When the fund reaches the aggregate amount of $108 

million, withdrawals may be made by USACE for payment to the State of South Dakota. The 

state uses the payments to fund annually-scheduled work for wildlife habitat restoration. 

Costal Wetlands Restoration Trust Fund and Costal Wetlands Planning, Protection, and 

Restoration Act, 16 USC 3951-3956. USACE (along with the Environmental Protection 

Agency, and the Fish and Wildlife Service) is granted the authority to work with the State of 

Louisiana to develop, review, evaluate, and approve a plan to achieve a goal of "no net loss of 

wetlands" in coastal Louisiana. USACE is also responsible for allocating funds among the 

named task force members. Federal contributions are established at 75 percent of project costs 

or 85 percent if the state has an approved Coastal Wetlands Conservation Plan.

Rivers and Harbors Contributed and Advance Funds, 33 USC 701h, 702f, and 703.

Whenever any state or political subdivision offers to advance funds for a flood control project 

duly adopted and authorized by law, the Secretary of the Army may, in his discretion, receive 

such funds and expend them in the immediate prosecution of such work. The funding may be 

used to construct, improve, and maintain levees, water outlets, flood control, debris removal, 

rectification and enlargement of river channels, etc. in the course of flood control and river and 

harbor maintenance. 
Department of Defense Agency Financial Report for FY 2010 

Financial Information

116

Inland Waterways Trust Fund, 26 USC 9506. This law made the Inland Waterways Trust Fund 

available for USACE expenditures for navigation, construction, and rehabilitation projects on 

inland waterways. Collections for excise taxes from the public are made into the Trust Fund. 

The collections are invested and investment activity is managed by the BPD. The BPD 

purchases and redeems nonmarketable market-based securities. Investments include one-day 

certificates, bonds, and notes.

Harbor Maintenance Trust Fund, 26 USC 9505. The USACE Civil Works mission is funded by 

the Energy and Water Development Appropriations Act. The Water Resources Development 

Act of 1986 covers a portion of USACE operations and maintenance costs for deep draft 

navigation. The Harbor Maintenance Trust Fund is available for making expenditures to carry 

out the functions specified in the Act and for the payment of all expenses of administration 

incurred by the U.S. Treasury, USACE, and the Department of Commerce. Collections are 

made into the Trust Fund from taxes collected from imports, domestics, passengers, and foreign 

trade. The collections are invested and investment activity is managed by the BPD.

Foreign National Employees Separation Pay Account Trust Fund, 10 USC 1581. This fund 

makes payments from amounts obligated by the Secretary of Defense that remain unexpended 

for separation pay for foreign national employees of the Department. The foreign national 

employees’ separation pay funded by Foreign Military Sales administrative funds is maintained 

as a separate fund. 

Defense Commissary Agency Surcharge Trust Fund, 10 USC 2685. This fund was 

established as the repository for the surcharge on sales of commissary goods paid for by 

authorized patrons to finance certain operating expenses and capital purchases of the 

Commissary System, which are precluded by law from being paid with appropriated funds. 

Most surcharge revenue is generated by the 5 percent surcharge applied to each sale. These 

funds may be used to pay for commissary store-related information technology investments, to 

purchase commissary equipment, to finance advance design modifications to prior year 

projects, for both minor and major construction projects, and to maintain and repair commissary 

facilities and equipment. 

Education Benefit Fund, 10 USC 2006. This fund was established to finance, on an 

actuarially sound basis, the liabilities of the Department’s education benefit programs for current 

and former active duty, guard, and reserve members of the armed forces, and members of the 

Coast Guard. Financing sources for the Education Benefit Fund are interest earnings on Fund 

assets and monthly Department contributions. 

Voluntary Separation Incentive Fund, 10 USC 1175. This fund was established to finance, 

on an actuarially sound basis, the liabilities of the Department’s incentive program for early 

separation from military service. Financing sources for the Voluntary Separation Incentive Fund 

are interest earnings on Fund assets and annual Department contributions

Military Housing Privatization Initiative, Public Law 104-106, Section 2801. The MHPI 

includes both direct loan and loan guarantee programs, is authorized by the National Defense 

Authorization Act for FY 1996, and includes a series of authorities that allow the Department to 

work with the private sector to renovate and build military family housing. The MHPI 

accelerates the construction of new housing built to market standard and leverages private 

sector capital with government dollars. The Department provides protection to the private 

sector partner against specific risks, such as base closure or member deployment.

Armament Retooling and Manufacturing Support Initiative, 10 USC 4551-4555. The 

Armament Retooling and Manufacturing Support Initiative is a loan guarantee program designed 

to incentivize commercial use of the Army's inactive ammunition plants for businesses willing to 
Department of Defense Agency Financial Report for FY 2010 

Financial Information

117

locate to a government ammunition production facility. The production capacity of these 

facilities is greater than current military requirements, however, this capacity may be needed in 

the future. Revenue from property rentals are used to pay for the operation, maintenance and 

environmental cleanup at the facilities.

Note 24. Fiduciary Activities

Schedule of Fiduciary Activity Dollars in Millions

As of September 30 2010 2009

Fiduciary net assets, beginning of year $ 187.4 $ 166.4

Contributions 256.7 264.6

Investment earnings $ 17.2 $ 17.0

Distributions to and on behalf of beneficiaries (282.4) (260.6)

Increase/(Decrease) in fiduciary net assets (8.5) 21.0

Fiduciary net assets, end of period $ 178.9 $ 187.4

Schedule of Fiduciary Net Assets Dollars in Millions

As of September 30 2010 2009

Fiduciary Assets

 Cash and cash equivalents $ 178.9 $ 187.4

Total Fiduciary Net Assets $ 178.9 $ 187.4

Fiduciary activities exist when the Department has collected, received, held, or made disposition 

of assets on behalf of an individual or nonfederal entity. Fiduciary assets are not recognized on 

the Balance Sheet.

Public Law 89-538 authorized the Department, through the Savings Deposit Program, to collect 

voluntary contributions from members of the Armed Forces serving outside the United States or 

its possessions in designated areas. These contributions and earned interest are deposited in 

the U.S. Treasury on behalf of the members.

Note 25. Other Disclosures

Other Disclosures Dollars in Millions

 As of September 30

2010— Asset Category

Land and 

Buildings Equipment Other Total

Entity as Lessee – Operating Leases

Future Payments Due

Fiscal Year 2011 $ 550.4 $ 2.0 $ 106.5 $ 658.9

Fiscal Year 2012 518.2 1.7 109.7 629.6

Fiscal Year 2013 479.7 1.3 112.7 593.7

Fiscal Year 2014 471.7 1.3 116.0 589.0

Fiscal Year 2015 489.0 1.3 135.5 625.8

After 5 Years 907.0 1.1 121.2 1,029.3

Total Future Lease Payments Due $ 3,416.0 $ 8.7 $ 701.6 $ 4,126.3
Department of Defense Agency Financial Report for FY 2010 

Financial Information

118

Operating leases are leases that do not transfer all the benefits and risks of ownership of capital 

leases. Payments are charged as expenses over the lease term. Office space is the largest 

component of land and building leases. Other leases are generally one-year leases that are not 

building or equipment leases. Future year cost projections use the Consumer Price Index. 

Note 26. Restatements

The Department restated its financial statements as of September 30, 2009 to correct errors in 

assets, liabilities, gross costs, and net position identified during ongoing audit readiness efforts. 

Adjustment #1: During the transition to an automated interface between the budget execution 

and financial statement reporting systems, the Department identified $1.3 billion in errors related 

to FY 2009 and prior years account balances. To correct the errors, the Department restated the 

Statement of Budgetary Resources; Accounts Receivable (Nonfederal), Accounts Payable 

(Nonfederal), Other Liabilities (Nonfederal), Unexpended Appropriations, and Cumulative 

Results of Operations on the Balance Sheet; Gross Costs on the Statement of Net Costs, 

Unexpended Appropriations and Cumulative Results of Operations on the Statement of 

Changes of Net Position. Related notes restate were: Note 2, Nonentity Assets; Note 5, 

Accounts Receivable (Nonfederal); Note 11, Liabilities Not Covered by Budgetary Resources; 

Note 12, Accounts Payable (Nonfederal); Note 15, Other Liabilities (Nonfederal); Note 18,

General Disclosures Related to the Statement of Net Cost; Note 20, Disclosures Related to the 

Statement of Budgetary Resources; Note 21, Reconciliation of Net Cost of Operations to 

Budget; and Note 23, Earmarked Funds.

Adjustment #2: The Department corrected a $1.5 billion overstatement of General Property, 

Plant and Equipment for property purchased prior to FY 2009 to remove programs capitalized 

that should have been expensed, to correct the related depreciation expense and to align the 

accounting records to the property accountability system. This correction decreased General 

Property, Plant and Equipment, Net; and Cumulative Results of Operations on the Balance 

Sheet; Cumulative Results of Operations on the Statement of Changes in Net Position; Gross 

Costs on the Statement of Net Costs; and General Property, Plant and Equipment. Note 2, 

Nonentity Assets; Note 10, General Property, Plant Equipment; Note 18, General Disclosures 

Related to the Statement of Net Cost; and Note 21, Reconciliation of Net Cost of Operations to 

Budget were restated.

Adjustment #3: The Department restated $503.2 million of Accounts Receivable (Nonfederal) 

for refunds requested from pharmaceutical manufacturers participating in the DoD’s Retail 

Pharmacy Program. Upon the advice of the General Counsel the Department has removed 

these receivables pending a final court decision. The Department restated Accounts Receivable 

(Nonfederal) and Cumulative Results of Operations on the Balance Sheet; Gross Costs on the 

Statement of Net Costs, and Cumulative Results of Operations on the Statement of Changes in 

Net Position. Related notes restated were: Note 2, Nonentity Assets; Note 5, Accounts 

Receivable; Note 18, General Disclosures Related to the Statement of Net Cost; Note 21, 

Reconciliation of Net Cost of Operations to Budget; and Note 23, Earmarked Funds.

Adjustment #4: The Department corrected a $473.4 million understatement of inventory and 

related property resulting from incorrect credits to the inventory allowance account for customer 

returns of inventory. The allowance account was not adjusted when the returned inventory was 

subsequently resold. The Department restated Inventory and Related Property, Net; and 

Cumulative Results of Operations on the Balance Sheet; Gross Costs on the Statement of Net 

Costs, and Cumulative Results of Operation on the Statement of Changes in Net Position. 

Related notes restated were: Note 2, Nonentity Assets; Note 9, Inventory and Related Property; 
Department of Defense Agency Financial Report for FY 2010 

Financial Information

119

Note 18, General Disclosures Related to the Statement of Net Cost; and Note 21, Reconciliation 

of Net Cost of Operations to Budget.

Adjustment #5: The Department reduced outstanding contract financing payment by $505.6 

million and accounts payable by $69 million in FY 2009 based on auditor recommended 

adjustments. Restatements were made to Other Assets (Nonfederal), Accounts Payable 

(Nonfederal), and Unexpended Appropriations on the Balance Sheet; Gross Costs on the 

Statement of Net Costs, Unexpended Appropriations on the Statement of Changes in Net 

Position; and the Statement of Budgetary Resources. Related notes restated were Note 2, 

Nonentity Assets; Note 18, General Disclosures Related to the Statement of Net Cost; Note 20, 

Disclosures Related to the Statement of Budgetary Resources; and Note 21, Reconciliation of 

Net Cost of Operations to Budget.

Effect on FY 2010 beginning Comparative Results and Unexpended Appropriations

FY 2010 Statement of Changes in Net Position Dollars in Billions

Cumulative Results of Operations FY 2010

Correction of Errors (+/-) Adjustment #1 $ 0.4

Correction of Errors (+/-) Adjustment #2 (1.5)

Correction of Errors (+/-) Adjustment #3 (0.5)

Correction of Errors (+/-) Adjustment #4 0.5

Beginning balance adjustments $ (1.1)

Unexpended Appropriations

Correction of Errors – Adjustment #1 $ (0.4)

Correction of Errors – Adjustment #5 (0.6)

Beginning balance adjustments $ (1.0)

Effect on Comparative Balances

FY 2009 Balance Sheet Dollars in Billions

Accounts Receivable, Net (Nonfederal) – Adjustment #3 $ (0.5)

Inventory – Adjustment #4 0.5

General Property, Plant and Equipment, Net – Adjustment #2 (1.5)

Other Assets (Nonfederal) – Adjustment #5 (0.5)

Total Assets $ (2.0)

Accounts Payable (Nonfederal) – Adjustment #5 0.1

Total Liabilities $ 0.1

Net Position $ (2.1)

Total Liabilities and Net Position $ (2.0)
Department of Defense Agency Financial Report for FY 2010 

Financial Information

120

FY 2009 Balance Sheet Dollars in Billions

FY 2009 Statement of Net Cost Dollars in Billions

Gross Costs – Adjustment #1 $ (0.8)

Gross Costs – Adjustment #2 (0.3)

Gross Costs – Adjustment #3 0.5

Gross Costs – Adjustment #4 (0.1)

Gross Costs – Adjustment #5 0.6

Net Cost of Operations $ ( 0.1) 

FY 2009 Statement of Changes in Net Position Dollars in Billions

Cumulative Results of Operations

Correction of Errors (+/-) Adjustment #1 $ 0.4

Correction of Errors (+/-) Adjustment #2 (1.8)

Correction of Errors (+/-) Adjustment #4 0.4

Beginning balance adjustments $ (1.0)

Budgetary Financing Sources:

Appropriations used – Adjustment #1 $ (0.8)

Appropriations used – Adjustment #5 0.6

 Net Cost of Operations Adjustment #1 $ 0.8

 Net Cost of Operations Adjustment #2 0.3

 Net Cost of Operations Adjustment #3 (0.5)

 Net Cost of Operations Adjustment #4 0.1

 Net Cost of Operations Adjustment #5 (0.6)

Cumulative Results $ (1.1)

Unexpended Appropriations

Correction of Errors – Adjustment #1 $ (1.2)

Beginning balance adjustments $ (1.2)

Budgetary Financing Sources:

Appropriations Used – Adjustment #1 0.8

Appropriations Used – Adjustment #5 (0.6)

Unexpended Appropriations $ (1.0)

Net Position $ (2.1)
Department of Defense Agency Financial Report for FY 2010 

Financial Information

121

FY 2009 Balance Sheet Dollars in Billions

FY 2009 Statement of Budgetary Resources Dollars in Billions

Budgetary Resources:

Unobligated Balance, brought forward – Adjustment #1 $ (1.3)

Total Budgetary Resources $ (1.3)

Status of Budgetary Resources:

Obligations Incurred:

 Direct – Adjustment #1 $ (1.7)

 Direct – Adjustment #5 (0.1)

 Reimbursable – Adjustment #1 0.4

 Unobligated balance: Apportioned – Adjustment #5 0.1

Total Status of Budgetary Resources $ (1.3)

Change in Obligated Balance:

 Obligations Incurred – Adjustment #1 $ (1.3)

 Obligations Incurred – Adjustment #5 (0.1)

 Less: Gross Outlays – Adjustment #1 1.3

 Unpaid Obligations – Adjustment #5 (0.1)

Net Outlays:

Gross Outlays – Adjustment #1 $ (1.3)
Department of Defense Agency Financial Report for FY 2010 

Financial Information

122

Required Supplementary Stewardship Information

Federal financial reporting requires DoD to report on its stewardship over certain resources that 

cannot be measured in traditional financial reports. These resources do not meet the criteria for 

assets and liabilities required to be reported in the financial statements, but are important to 

understand the operations and financial condition of DoD at the date of the financial statements 

and in subsequent periods. 

The Department’s stewardship investments are comprised of, and are measured in terms of, 

expenses incurred for: 1) federally-financed, but not federally-owned, physical property 

(Nonfederal Physical Property); and 2) federally-financed research and development (Research 

and Development (R&D)). Information on additional reporting requirements for Nonfederal 

Physical Property and R&D follows. 

NONFEDERAL PHYSICAL PROPERTY 

The Nonfederal Physical Property investments support the purchase, construction, or major 

renovation of physical property owned by state and local governments. In addition, Nonfederal 

Physical Property investments include federally-owned physical property transferred to state 

and local governments. 

Nonfederal Physical Property 

Department of Defense Consolidated — Nonfederal Physical Property

Yearly Investments in State and Local Governments

For Fiscal Years 2010 through 2006 Dollars in Millions

Categories 2010 2009 2008 FY 2007 FY 2006

Transferred Assets:

National Defense Mission Related $ 2,126.2 $ 1,224.7 $ 1,169.2 $ 1,051.0 $ 1,295.5

Funded Assets:

National Defense Mission Related 0.0 26.7 19.6 2.8 8.5

Total $ 2,126.2 $ 1,251.4 $ 1,188.8 $ 1,053.8 $ 1,304.0

INVESTMENTS IN RESEARCH AND DEVELOPMENT

Investment values included in this report are based on R&D expenses. The R&D programs are 

classified in the following categories: Basic Research, Applied Research, and Development. 

The amounts reported in the Investments in R&D table show outlays from FY 2006 – FY 2010

for all DoD Components. The definition for each type of R&D Category and Subcategories are 

explained below.

Basic Research is the systematic study to gain knowledge or understanding of the fundamental 

aspects of phenomena and of observable facts without specific applications, processes, or 

products in mind. Basic Research involves the gathering of a fuller knowledge or understanding 

of the subject under study. Major outputs are scientific studies and research papers.

Applied Research is the systematic study to gain knowledge or understanding necessary for 

determining the means by which a recognized and specific need may be met. It is the practical 

application of such knowledge or understanding for the purpose of meeting a recognized need. 

This research points toward specific military needs with a view toward developing and 

evaluating the feasibility and practicability of proposed solutions and determining their 

parameters. Major outputs are scientific studies, investigations, and research papers, hardware 

components, software codes, and limited construction of, or part of, a weapon system, to 

include non-system-specific development efforts.
Department of Defense Agency Financial Report for FY 2010 

Financial Information

123

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 consists of the five stages defined in the Investments in R&D table.

Advanced Technology Development is the systematic use of the knowledge or understanding 

gained from research and directed toward proof of technological feasibility and assessment of 

producibility rather than directed toward the development of hardware for service use. It 

employs demonstration activities intended to prove or test a technology or method.

Advanced Component Development and Prototypes evaluates integrated technologies in an 

operating environment as realistic as possible to assess the performance or cost reduction 

potential of advanced technology. Programs in this phase are generally system specific. Major 

outputs of Advanced Component Development and Prototypes are hardware and software 

components and complete weapon systems ready for operational and developmental testing 

and field use.

System Development and Demonstration concludes the program or project and prepares it for 

production. It consists primarily of preproduction efforts, such as logistics and repair studies. 

Major outputs are weapons systems finalized for complete operational and developmental 

testing.

Research, Development, Test, and Evaluation Management Support is support for installations 

and operations for general research and development use. This category includes costs 

associated with test ranges, military construction maintenance support for laboratories, 

operation and maintenance of test aircraft and ships, and studies and analyses in support of the 

Research and Development program. 

Operational Systems Development is concerned with development projects in support of 

programs or upgrades still in engineering and manufacturing development stages which have 

received approval for production and production funds have been budgeted in subsequent fiscal 

years.

Investments in Research and Development (R&D)

Department of Defense Consolidated

Yearly Investments in Research and Development

For the Current and Four Preceding Fiscal Years Dollars in Millions

Categories 2010 2009 2008 2007 2006

Basic Research $ 1,805.5 $ 821.0 $ 1,346.4 $ 1,445.7 $ 1,408.5

Applied Research 4,927.0 1,944.0 3,812.3 4,647.1 4,756.9

Development

Advanced Technology 

Development 6,353.4 2,263.2 5,977.9 6,019.7 5,737.4

Advanced Component 

Development and 

Prototypes

14,304.6 12,148.3 15,410.6 14,109.6 11,906.9

System Development 

and Demonstration 15,156.7 21,501.9 18,052.9 16,737.8 13,209.8

Research, 

Development, Test 

and Evaluation 

Management Support

5,503.6 5,141.3 5,471.0 4,705.4 3,736.0

Operational Systems 

Development 23,986.2 42,450.6 20,246.7 13,535.1 5,509.8

Totals: $72,037.0 $86,270.3 $70,317.8 $61,200.4 $46,265.3
Department of Defense Agency Financial Report for FY 2010 

Financial Information

124

Required Supplementary Information

REAL PROPERTY DEFERRED MAINTENANCE

This section includes the deferred maintenance information and Statement of Disaggregated 

Budgetary Resources.

Real Property Deferred Maintenance and Repair

For Fiscal Year Ended September 30, 2010 Dollars in Millions

Property Type

Current Fiscal Year (CFY)

1. Plant 

Replacement 

Value

2. Required Work 

(Deferred Maintenance 

& Repair)

3. Percentage

1. Category 1 $490,578 $92,502 19%

2. Category 2 $40,564 $11,801 29%

3. Category 3 $10,727 $1,031 10%

The deferred maintenance amount is based on facility Q-ratings found in the Department’s real 

property inventory. Q-ratings represent work needed to bring a facility to a fully serviceable 

condition with no repair needs. The reported deferred maintenance is the difference between 

the facility Q-rating and the target Q-rating that represents the acceptable operating condition 

established by each Component within the Department. The percentage column reflects the 

percent of total plant replacement value for each category represented by deferred maintenance.

Facility Categories are as follows:

Category 1: Buildings, Structures, and Utilities that are enduring and required to support an 

ongoing mission, including multi-use Heritage Assets.

Category 2: Buildings, Structures, and Utilities that are excess to requirements or planned 

for replacement or disposal, including multi-use Heritage Assets.

Category 3: Buildings, Structures, and Utilities that are Heritage Assets.

MILITARY EQUIPMENT DEFERRED MAINTENANCE

Depot maintenance requirements for military equipment are developed during the annual 

budget process. The table below shows the deferred unfunded requirements for the depot 

maintenance program. 

Military Equipment Deferred Maintenance

For Fiscal Year Ended September 30, 2010 Dollars in Million

Major Categories Amounts

1. Aircraft $2,032.1

2. Automotive Equipment $226.9

3. Combat Vehicles $410.0

4. Construction Equipment $65.9

5. Electronics and Communications Systems $927.7

6. Missiles $279.4

7. Ships $85.2

8. Ordnance Weapons and Munitions $153.2

9. General Purpose Equipment $93.8

10. All Other Items Not Identified to above Categories $151.4

Total $4,425.6
Department of Defense Agency Financial Report for FY 2010

Financial Information

125

Statement Of Disaggregated Budgetary Resources

For the Years Ended September 30, 2010 and 2009

Dollars in Millions

2010

Military 

Personnel Procurement

Research, 

Development, 

Test and 

Evaluation

Family Housing 

/Military 

Construction

Military 

Retirement 

Benefits Civil Works

Operations, 

Readiness, & 

Support

2010

Combined

2009

Combined

Budgetary Financing Account

Budgetary Resources

Unobligated balance, brought forward, October 1 $ 1,793.3 $ 65,091.5 $ 14,808.0 $ 15,212.0 $ 0.0 $ 17,344.6 $ 31,791.6 $ 146,041.0 $ 134,381.8

Recoveries of prior year unpaid obligations 8,388.5 8,415.8 4,198.0 3,511.5 0.0 40.1 30,147.3 54,701.2 63,272.9

Budget authority

Appropriation 151,763.5 125,850.3 77,262.6 15,316.7 119,894.5 6,558.2 402,632.6 899,278.4 855,564.3

 Contract authority 0.0 0.0 0.0 0.0 0.0 0.0 73,059.7 73,059.7 67,626.3

Spending authority from offsetting collections

 Earned

 Collected 1,081.4 3,322.6 9,862.4 7,721.2 0.0 10,201.9 152,279.1 184,468.6 178,143.5

 Change in receivables from Federal sources 112.1 410.0 (499.4) (51.1) 0.0 4.4 (326.9) (350.9) 1,188.9

 Change in unfilled customer orders

 Advance received (0.1) (10.5) (48.4) (50.8) 0.0 62.2 (34.3) (81.9) 1,030.8

 Without advance from Federal sources 5.0 (24.3) 228.7 1,085.6 0.0 (192.4) 1,313.1 2,415.7 (88.3)

 Expenditure transfers from trust funds 0.0 0.0 0.0 0.0 0.0 851.0 0.0 851.0 862.5

 Subtotal 152,961.9 129,548.1 86,805.9 24,021.6 119,894.5 17,845.3 628,923.3 1,159,640.6 1,104,328.0

Nonexpenditure transfers, net, anticipated and actual 1,469.1 8,728.6 351.4 (570.5) 0.0 183.6 (9,358.9) 803.3 (15.7)

Temporarily not available pursuant to Public Law 0.0 0.0 0.0 0.0 (60,175.6) 0.0 (153.1) (60,328.7) (39,190.4)

Permanently not available (256.1) (3,073.4) (1,685.4) (1,461.8) 0.0 (8.0) (81,395.9) (87,880.6) (85,969.3)

Total Budgetary Resources $ 164,356.7 $ 208,710.6 $ 104,477.9 $ 40,712.8 $ 59,718.9 $ 35,045.6 $ 599,954.3 $ 1,212,976.8 $ 1,176,807.3 
Department of Defense Agency Financial Report for FY 2010

Financial Information

126

Status Of Budgetary Resources

For the Years Ended September 30, 2010 and 2009

Dollars in Millions

2010

Military 

Personnel Procurement

Research, 

Development, 

Test and 

Evaluation

Family 

Housing 

/Military 

Construction

Military 

Retirement 

Benefits Civil Works

Operations, 

Readiness & 

Support

2010

Combined

2009

Combined

AFR

Obligations incurred:

Direct $ 161,600.8 $ 125,706.2 $ 78,044.3 $ 14,192.9 $ 59,719.0 $ 13,114.0 $ 405,270.4 $ 857,647.6 $ 847,069.9

Reimbursable 1,213.9 3,714.4 10,482.2 10,826.4 0.0 10,862.5 158,281.2 195,380.6 183,695.8

 Subtotal 162,814.7 129,420.6 88,526.5 25,019.3 59,719.0 23,976.5 563,551.6 1,053,028.2 1,030,765.7 

Unobligated balance:

Apportioned 523.2 76,841.0 14,466.3 15,222.8 0.0 10,038.5 20,498.0 137,589.8 128,132.0

Exempt from apportionment 0.0 0.0 0.0 0.0 0.0 1,030.6 5,141.4 6,172.0 3,374.0

 Subtotal 523.2 76,841.0 14,466.3 15,222.8 0.0 11,431.9 25,639.4 143,761.8 131,506.0 

Unobligated balance not available 1,018.7 2,449.0 1,485.0 470.8 0.0 0.0 10,763.3 16,186.8 14,535.6

Total status of budgetary resources 164,356.6 208,710.6 104,477.8 40,712.9 59,719.0 35,045.6 599,954.4 1,212,976.8 1,176,807.3 

Change in Obligated Balance:

Obligated balance, net

Unpaid obligations, brought forward, October 1 $ 9,482.2 $ 153,616.0 $ 42,679.2 $ 26,257.9 $ 3,871.9 $ 11,299.6 $ 206,751.9 $ 453,958.7 $ 432,118.5

Less: Uncollected customer payments from

Federal sources, brought forward, October 1

9.1 (3,980.1) (5,143.9) (9,411.9) 0.0 (3,253.3) (45,922.2) (67,702.3) (66,602.2)

Total unpaid obligated balance $ 9,491.3 $ 149,635.9 $ 37,535.3 $ 16,846.0 $ 3,871.9 $ 8,046.3 $ 160,829.7 $ 386,256.4 $ 365,516.3 

Obligations incurred net 162,814.7 129,420.6 88,526.5 25,019.3 59,719.0 23,976.6 563,551.5 1,053,028.2 1,030,765.7

Less: Gross outlays (152,257.3) (133,280.6) (82,872.0) (19,802.3) (59,014.1) (22,101.4) (524,337.0) (993,664.7) (945,652.5)

Obligated balance transferred, net 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Less: Recoveries of prior year unpaid

obligations, actual (8,388.5) (8,415.8) (4,198.0) (3,511.5) 0.0 (40.1) (30,147.3) (54,701.2) (63,272.9)

Change in uncollected customer payments

from Federal sources

(117.1) (385.7) 270.8 (1,034.5) 0.0 187.9 (986.1) (2,064.7) (1,100.5)

Obligated balance, net, end of period

Unpaid obligations 11,651.1 141,340.2 44,135.7 27,963.3 4,576.9 13,134.6 215,819.2 458,621.0 453,958.8

Less: Uncollected customer payments

(+/-) from Federal sources

(107.9) (4,365.8) (4,873.1) (10,446.4) 0.0

(3,065.4)

(46,908.4) (69,767.0) (67,702.7)

Total, unpaid obligated balance, net,

end of period $ 11,543.2 $ 136,974.4 $ 39,262.6 $ 17,516.9 $ 4,576.9 $ 10,069.2 $ 168,910.8 $ 388,854.0 $ 386,256.1 

Net

Net Outlays:

Gross outlays $ 152,257.3 $ 133,280.6 $ 82,872.0 $ 19,802.3 $ 59,014.1 $ 22,101.4 $ 524,337.0 $ 993,664.7 $ 945,652.5

Less: Offsetting collections (1,081.3) (3,312.1) (9,814.0) (7,670.4) 0.0 (11,115.1) (152,244.9) (185,237.8) (180,036.9)

Less: Distributed Offsetting receipts 0.0 0.0 0.0 0.0 (73,739.4) (1,071.5) (2,911.3) (77,722.2) (65,912.1)

Net Outlays $ 151,176.0 $ 129,968.5 $ 73,058.0 $ 12,131.9 $ (14,725.3) $ 9,914.8 $ 369,180.8 $ 730,704.7 $ 699,703.5 
Department of Defense Agency Financial Report for FY 2010 

Financial Information

127

Combined Statement Of Budgetary 

Resources

For the Years Ended September 30, 2010 and 2009

Dollars in Millions

Non Budgetary

Other 2010 Combined 2009 Combined

Non Budgetary Financing Accounts

Budgetary Resources

Unobligated balance, brought forward, October 1 $ 23.6 $ 23.6 $ 26.3

Recoveries of prior year unpaid obligations 0.0 0.0 47.5

Budget authority

Borrowing authority 26.8 26.8 58.4

Spending authority from offsetting collections

 Earned

 Collected 69.6 69.6 45.1

 Change in unfilled customer orders

 Without advance from Federal sources (34.9) (34.9) (10.8)

 Subtotal 61.5 61.5 92.7

Permanently not available (13.9) (13.9) (0.1)

Total Budgetary Resources $ 71.2 $ 71.2 $ 166.4 
Department of Defense Agency Financial Report for FY 2010 

Financial Information

128

Statement of Disaggregated 

Budgetary Resources

For the Years Ended September 30, 2010

and 2009

Dollars in Millions

Non Budgetary

Other 2010 Combined 2009 Combined

Non Budgetary Financing Accounts

Obligations incurred:

Direct $ 46.3 $ 46.3 $ 142.7 

 Subtotal $ 46.3 $ 46.3 $ 142.7 

Unobligated balance:

Apportioned 24.8 24.8 0.3 

 Subtotal 24.8 24.8 0.3 

Unobligated balance not available 0.1 0.1 23.4 

Total status of budgetary resources $ 71.2 $ 71.2 $ 166.4 

Change in Obligated Balance:

Obligated balance, net

Unpaid obligations, brought forward,

October 1 $ 770.4 $ 770.4 $ 872.9 

Less: Uncollected customer payments from

Federal sources, brought forward, October 1 (132.2) (132.2) (143.0)

Total unpaid obligated balance $ 638.2 $ 638.2 $ 729.9 

Obligations incurred net 46.3 46.3 142.7 

Less: Gross outlays (197.3) (197.3) (197.7)

Less: Recoveries of prior year unpaid

obligations, actual 0.0 0.0 (47.5)

Change in uncollected customer payments 

from Federal sources 34.9 34.9 10.8 

Obligated balance, net, end of period

Unpaid obligations 619.4 619.4 770.4 

Less: Uncollected customer payments

(+/-) from Federal sources (97.3) (97.3) (132.2)

Total, unpaid obligated balance, net, end

of period $ 522.1 $ 522.1 $ 638.2 

Net

Net Outlays:

Gross outlays $ 197.7 $ 197.7 $ 197.7 

Less: Offsetting collections (69.6) (69.6) (45.1)

Net Outlays $ 127.7 $ 127.7 $ 152.6 
APPENDIX A Glossary

129

Acronym Definition

AFR Agency Financial Report 

ANA Afghan National Army

ANP Afghan National Police

ANSF Afghan National Security Forces

ARRA American Recovery and Reinvestment 

Act

BEA Business Enterprise Architecture

BRAC Base Realignment and Closure

CFO Chief Financial Officer

CMO Chief Management Officer

COCOM Combatant Command

COR Contracting Officer Representative

DAAC DoD Audit Advisory Committee

DBSMC Defense Business Systems

Management Committee

DCMO Deputy Chief Management Officer

DFAS Defense Finance and Accounting 

Service

DLA Defense Logistics Agency

DoD Department of Defense

DIB Defense Industrial Board

DTM Directive-Type Memorandum

EHR Electronic Health Record

ERP Enterprise Resource Planning

FBWT Fund Balance With Treasury

FFMIA Federal Financial Management 

Improvement Act

FIAR Financial Improvement and Audit 

Readiness

FIPS Federal Information Processing 

Standard

FMFIA Federal Managers’ Financial Integrity 

Act

FY Fiscal Year

GAAP Generally Accepted Accounting 

Principles

GAO Government Accountability 

Office

GPRA Government Performance and Results 

Act

HUMINT Human Intelligence

IPIA Improper Payment Information Act

ISF Iraqi Security Forces

IT Information Technology

JCC Joint Contracting Command

Acronym Definition

MDAP Major Defense Acquisition Programs

MHS Military Health System

MICP Managers’ Internal Control Program

NATO North Atlantic Treaty Organization

NDAA National Defense Authorization Act

OCO Overseas Contingency Operations

OEF Operation Enduring Freedom

OIF Operation Iraqi Freedom

DOD IG Office of Inspector General

OMB Office of Management and Budget

OND Operation New Dawn

PCS Permanent Change of Station

QDR Quadrennial Defense Review

SBR Statement of Budgetary Resources

SEAL Sea, Air and Land Teams

SECDEF Secretary of Defense

TDY Temporary Duty

USACE U.S. Army Corps of Engineers

USD(C) Under Secretary of Defense 

(Comptroller)

USSOUTHCOM U.S. Southern Command

VLER Virtual Lifetime Electronic Record

Weapon of Mass Destruction

APPENDIX A: GLOSSARY
Department of Defense Agency Financial Report 2010

APPENDIX B Useful Web Sites for Relevant Information

130

APPENDIX B: USEFUL WEB SITES FOR RELEVANT INFORMATION

Web Address and Report Description

www.defenselink.mil

Main DoD Web site, and links to other DoD Web sites.

www.defenselink.mil/comptroller

The DoD Comptroller Web site includes: 

Agency Financial Report

Reports DoD’s financial condition, financial execution, plans, and 

accomplishments.

Annual Performance Plan

Describes DoD’s strategic goals and objectives and the respective performance 

measures and targets used to assess progress.

Annual Performance Report

Contains details of DoD’s performance results and progress in achieving its 

strategic goals as required by the Government Performance and Results Act 

(GPRA).

Citizen’s Report

Summarizes DoD’s mission, key goals, budget allocation, and progress on key 

performance goals linking to the strategic goals.

Congressional Budget Justification

The Department of Defense’s budget request to the Congress.

Financial Improvement and Audit Readiness Plan

Describes DoD’s strategy for improving financial management and reports progress 

in achieving financial statement audit readiness.

www.bta.mil

The DoD’s Business Transformation Agency Web site includes:

Business Enterprise Architecture

Blueprints DoD standard processes, data, data standards, business rules, 

operating requirements, and information exchanges for the Department’s business 

and financial management activities.

Enterprise Transition Plan

Sets the defense business systems modernization strategy and defines the target 

systems environment.

www.defenselink.mil/qdr/report/Report20060203.pdf

Quadrennial Defense Review 

Dated February 1, 2010, provides DoD’s strategic plan.
Contributors to the 

Fiscal Year 2010 Agency Financial Report

In addition to the significant

contributions of the

individuals listed below,

hundreds of individuals in the

Office of the Secretary of

Defense and the Military

Services contributed to the

development of this Agency

Financial Report

Anitra Akanbi

Becky Allen

Crystal Allen

Christina Anctil

Phillip Anderson

Iman Aquil

John Argodale

Lauren Bands

Corey Beckett

Sally Beecroft

Marc Brito

Michael Bryant

Mark Burns

Carol Campbell

Fred Carr

Ann Cataldo

Joan Causey

Sharon Cave

Anthony Chavez

Chun‐I Chiang

Jocelyn Conway

Carmen Covey

Donna Cox

Nick Crabtree

Barbara Crawford

Victoria Crouse

Karen Cwiekalo

Gerald Davenport

Lori Johns

Brad Kennedy

Tammy Kicas

Elaine Kingston

Mary Kohlmeier

William Lehr

David Martin

COL David Mason

Rhonda Meade

Michael McCord

CAPT David

McFarland

Wesley Miller

Kira Mingua

Jason Monday

Lydia Moschkin

Robert Moss

Carolyn Napper

Elise Newton

Brook Moore

Lydia Moschkin

Karen Opie‐Toler

Sandra Paylor‐

Sanders

Carol Phillips

Tony Poleo

Joseph Quinn

Robert Rainey

Tony Poleo

Joseph Quinn

Robert Rainey

David Ramseyer

Alice Rice

Elizabeth Ridge

Joie Ritchie

Javier Rivera

Terry Roberts

Brian Romberger

Helen Rosen

John Ruoff

Carrie Shell

Jean Shepherd

Robert Silverstein

Joel Sitrin

Alfonza Smith

Ebony Smith

Jennifer Smith

Robert F. Smith

Wanda Smith

Timothy Soltis

Jimaye Sones

Caral Spangler

Sandra Stockel

Brent Stevenson

Kathy Street

Dennis Taitano

Sylvia Taylor‐Porter

David Thomas

Bob Thompson

Jeanne Tran

Kelly Wagenmaker

Michael Walsh

LT COL Lester Weilacher

Martha Welch

Keith Welk

James Williams

Dwight Young

Document Automation

& Production Service (DAPS)

Audrey Davis

Pat Dees

Sharon DePrato

Joseph Doyle

Mark Easton

Eric

Engelbrektsson

Maryla Engelking

Teri Escalante

Dorothy Ferguson

Bobbie Fife

David Fisher

Jodie Fisher

Virginia Fortune

Kyle Fugate

Greg Galusha

Linda Gileau

Kathryn Gillis

Donjette Gilmore

Carlos Glover

Phillip Graham

David Gross

Robert Hale

Bill Hawbecker

Scott Henderson

Beth Hetman

Timothy Hippely

Mark Hoffman
WELCOME TO THE

DEPARTMENT OF DEFENSE

We are interested in your feedback

regarding the content of this report.

Please feel free to send your comments

or requests for copies of this report to

DoDAFR@osd.mil

or

United States Department of Defense

Office of the Under Secretary of Defense (Comptroller)

1100 Defense Pentagon

Washington, DC 20301‐1100

You may also view this document at:

www.defenselink.mil/comptroller/afr
Department of Defense 

Agency Financial Report

Addendum A 2010 November 15, 2010
 

Department of Defense Agency Financial Report for FY 2010 

ADDENDUM A – OTHER ACCOMPANYING INFORMATION 

Other Accompanying Information provides additional details that support the fiscal year 

(FY) 2010 Department of Defense (DoD) Agency Financial Report (AFR). This addendum 

includes the following sections: 

• Inspector General’s (IG) summary of the most significant management and performance 

challenges facing the Department, to include DoD’s responses to the IG’s assessments. 

• Managers’ Internal Control Program and Financial Statement Audit Material Weaknesses. 

• Improper Payments Information Act Reporting. 

 MANAGEMENT AND PERFORMANCE CHALLENGES 

The Reports Consolidation Act of 2000 requires that the AFR include a statement prepared by 

the Agency’s Inspector General that summarizes what he or she considers to be the most 

serious management and performance challenges facing the Agency and a brief assessment of 

the progress made in addressing those challenges. The DoD IG identified the following eight 

management and performance challenges facing the Department in FY 2010: 

1. Financial Management 

2. Acquisition Processes and Contract Management 

3. Joint Warfighting and Readiness 

4. Information Assurance, Security, and Privacy 

5. Health Care 

6. Equipping and Training Iraq and Afghan Security Forces 

7. Nuclear Enterprise 

8. American Recovery and Reinvestment Act 

The following tables outline these challenges and include both the IG’s and the Department’s 

management assessment of progress made in addressing these issues. 

1. Financial Management 

1-1A. Financial Information IG Summary of Challenge 

The Department continues to face financial management challenges that adversely affect its ability to provide 

reliable, timely, and useful financial and managerial data needed to support operating, budgeting, and policy 

decisions. Since the 1990s, the DoD IG has identified financial management as a management challenge. The 

DoD’s financial management problems are so significant that they constitute the single largest and most 

challenging impediment to the U.S. Government’s ability to obtain an opinion on its consolidated financial 

statements. 

In the FY 2009 audit opinion on DoD’s consolidated financial statements, the DoD IG reported the same 

13 material internal control weaknesses as the previous year. These pervasive and longstanding financial 

management issues directly affect DoD’s ability to obtain an unqualified opinion on its financial statements. These 

weaknesses affect the safeguarding of assets, proper use of funds, and impair the prevention and identification of 

fraud, waste, and abuse. 

ADDENDUM A Other Accompanying Information

1 
 

Department of Defense Agency Financial Report for FY 2010 

1-1B. Financial Information IG Assessment of Progress 

A significant measure of DoD’s ongoing progress in the area of financial management is the ability to obtain an 

unqualified opinion on its financial statements. The Defense Commissary Agency, Defense Contract Audit 

Agency, Defense Finance and Accounting Service, Military Retirement Fund, National Reconnaissance Office, 

U.S. Army Corps of Engineers, and DoD IG financial statements all have received unqualified audit opinions. 

One of DoD’s goals is to improve its ability to provide timely, complete, and accurate financial information through 

an integrated set of enterprise business systems. The Department, through the Enterprise Transition Plan, plans 

to support metrics in improved financial information. 

In addition, the IG is auditing the U.S. Marine Corps’ (USMC) Statement of Budgetary Resources, the first Military 

Component to undergo such an audit. While the opinion has not yet been determined and the USMC has 

encountered many challenges during this first-time audit, the Department is learning from this audit experience. 

1-2A. Improving Financial Information IG Summary of Challenge 

The following elements and actions continue to be key for improving DoD’s financial management: 

• Create an environment that effectively identifies, coordinates, implements, and monitors financial 

management improvement efforts and holds managers accountable for the successful and timely 

implementation of these efforts. 

• Fully implement and maintain an effective internal review and monitoring process to identify all material 

financial management and reporting deficiencies, internal control weaknesses, and quality of data issues. 

• Develop corrective action plans that adequately correct deficiencies and result in financial reporting that is 

in accordance with accounting principles generally accepted in the United States (USGAAP). 

• Implement corrective action plans that address systems, controls, reporting, and quality of data. 

1-2B. Improving Financial Information IG Assessment of Progress 

The DoD’s ongoing initiatives in financial management improvement demonstrate that management is responding 

to the significant and pervasive financial management issues identified. The Department is positioning itself to 

leverage planned systems and business improvements to achieve sustainable, long-term solutions. 

Public Law 111-84, “National Defense Appropriations Act for Fiscal Year 2010,” Section 1003, October 28, 2009, 

requires that the Department assert to audit readiness no later than September 30, 2017. This requires the 

Financial Improvement and Audit Readiness (FIAR) Plan correct the financial management deficiencies that impair 

DoD’s ability to prepare timely, reliable, and complete financial management information and ensure financial 

statements are ready for audit. The priorities set forth in Section 1003 include improving budgetary information to 

achieve an unqualified opinion on DoD’s Statement of Budgetary Resources and, as a secondary goal, improving 

the accuracy and reliability of management information of mission-critical assets and validating its accuracy 

through existence and completeness audits. 

The Department adjusted its FIAR plan to align with the requirements outlined in Public Law 111-84. The 

May 2010 plan updates and refines FIAR priorities to focus on improving controls and processes that support the 

information used most often to manage the Department and to continue working toward financial, information 

technology and supporting documentation improvements that facilitate achievement of unqualified audit opinions 

on financial statements. The new strategy consists of five waves of priority: 

• Wave 1–Appropriations received audit; 

• Wave 2–Statement of Budgetary Resources audit; 

• Wave 3–Mission-critical asset existence and completeness audit; 

• Wave 4–Full audit, except for legacy asset valuation; and 

• Wave 5–Full financial statement audit. 

In response to Public Law 110-181, “National Defense Authorization Act for Fiscal Year 2008,” Section 904, 

January 28, 2008, the Department established the DoD Chief Management Officer (CMO) and the Military 

Department CMO positions, which are responsible for the management and effective and efficient organization of 

the business operations of the Department or the respective Military Department. 

ADDENDUM A Other Accompanying Information

2 
 

Department of Defense Agency Financial Report for FY 2010 

Additionally, Section 908, “Business Transformation Initiatives for the Military Departments,” Public Law 110-417, 

“Duncan Hunter National Defense Authorization Act for Fiscal Year 2009,” October 14, 2008, assigns 

responsibilities and establishes an organizational structure within each Military Department for business 

transformation. 

The IG considers the following DoD financial management efforts to be limited successes: 

• Implementation of integrated organizational structures and processes to address financial management 

improvement; 

• Assignment of accountability to DoD managers; and 

• DoD improvement initiatives at the entity and line item level. 

Although the IG anticipates that the Department will need to make improvements in these areas, the IG considers 

these to be critical steps for establishing a culture and institutionalizing a structure that will facilitate identifying 

internal control weaknesses and planning effectively for their resolution. This culture and structure also will hold 

DoD managers accountable for improving internal controls over financial reporting. Further, these steps should 

result in a financial management structure that can provide accurate, relevant, and timely financial management 

information for decision-making. 

1. Financial Management Management’s Overall Assessment Assent 

The Department updated its financial improvement and audit readiness strategy to focus on improving the 

processes, controls, and systems that support the information most often needed to manage the Department, 

while continuing to work toward financial improvements that will result in receipt of an unqualified audit opinion on 

the financial statements. Components have developed consistent, detailed Financial Improvement Plans to 

accomplish the new priorities. To achieve these objectives, the USD(C ) assigned a high priority to: 

• Budgetary Information. Recognizing that many decisions are budget related (e.g., status of funds received, 

obligated, and expended), DoD’s priorities focus on improving the processes, controls, and systems that 

produce budgetary information that is timely and accurate. This focus will allow the Department to improve 

information most often used by management and meet the goal of obtaining auditable financial statements, 

beginning first with the Statement of Budgetary Resources (SBR). 

• Mission-Critical Asset Information. This second priority focuses on improving the information needed to 

effectively manage DoD’s mission-critical assets. Mission-critical assets include Military Equipment, Real 

Property, Inventory, Operating Materials and Supplies, and General Equipment. Achieving this objective not 

only will ensure reliable information for managing DoD assets, but is an essential first step to reporting the 

value of these assets on DoD’s Balance Sheet. 

To date, the Department has made measured progress in improving financial information. Specifically, the U.S. 

Marine Corps (USMC)’s Statement of Budgetary Resources financial statement is under audit, which has resulted 

in significant improvements to budget and other financial information. In addition, the Defense Information 

Systems Agency (DISA) Working Capital Fund remediated financial management deficiencies and asserted audit 

readiness for its financial statements. The Air Force and Defense Logistics Agency (DLA) asserted audit 

readiness on appropriations received in the fourth quarter, FY 2010. 

The Department will continue to implement Enterprise Resource Planning (ERP) solutions and modernize other 

business and financial systems, which enable the use of standard business processes and controls across the 

Department and will improve the financial information that feeds the preparation of the financial statements. The 

ERP initiatives must comply with the Standardized Financial Information Structure, which also will assist the 

Department in complying with the Federal Financial Management Improvement Act (FFMIA) and Business 

Enterprise Architecture (BEA) requirements. The Investment Review Boards (IRBs) and the Defense Business 

System Management Committee will continue oversight of ERP system implementation to ensure progress 

continues and implementation issues are effectively resolved in a timely manner. 

To enhance financial improvement and audit readiness oversight and governance, the USD(C) created the FIAR 

Governance Board, which is co-chaired by the USD(C) and Deputy CMO, and includes Military Department CMOs 

as well as DoD’s financial management senior leaders and senior representatives from the functional 

communities. The Component CMOs facilitate prioritization of financial management improvement efforts across 

the functional areas of the Department and are critical to DoD’s success. The Department also established a DoD 

Audit Advisory Committee (DAAC), which provides independent advice to the Secretary of Defense regarding 

DOD’s financial management, including financial reporting policies, processes, systems of internal controls, audit 

ADDENDUM A Other Accompanying Information

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Department of Defense Agency Financial Report for FY 2010 

processes, and processes for monitoring compliance with relevant laws and regulations. The Committee 

members, appointed by the Secretary of Defense to three-year terms, are distinguished members of the audit, 

accounting, and financial communities. 

In summary, the Department agrees with the IG’s summary of challenges and assessment of progress and 

continues to work aggressively to resolve the long-standing material weaknesses and achieve auditable financial 

statements. 

2. Acquisition Processes and Contract Management 

2-1A. Acquisition Workforce IG Summary of Challenge 

Since the 1990s, DoD IG has identified DoD acquisition and contract management processes as a challenge area. 

Acquisition initiatives that began in the 1990s led to reductions in acquisition oversight assets. When the spending 

trend dramatically reversed after September 11, 2001, the Department was not able to react quickly to the need for 

more contract and oversight support. The emphasis on urgency to support the war effort, especially for 

contracting in an expeditionary environment, has only served to increase the challenges. In FY 2010, the Defense 

budget--including funding for contingency operations--could exceed $700 billion. This total is more than double 

the amount in the DoD budget that preceded September 11, 2001. Keeping pace with this spending would be a 

difficult proposition even if acquisition and oversight assets were increasing at a proportional rate; however, as of 

2009, the level of staffing of the acquisition workforce was below those in 1998. 

2-1B. Acquisition Workforce IG Assessment of Progress 

Efforts to train and ready the DoD acquisition workforce to handle a significant increase in acquisition workload 

demand and the complexity resulting from extensive services contracting, counterinsurgency operations, and other 

critical missions, continues to challenge the Department. As noted in the February 2010 Quadrennial Defense 

Review, the Department recognizes the need to continue to: develop a total defense workforce to better support 

the urgent needs of the warfighter; buy weapons that are usable, affordable, and truly needed; and ensure that 

taxpayer dollars are spent wisely and responsibly. In addition, the Defense Acquisition Strategic Workforce Plan, 

dated April 2010, captures how the Department will support the intent of the President and the Secretary of 

Defense to improve the acquisition workforce. The report highlights the theme of the Under Secretary of Defense 

for Acquisition, Technology, and Logistics, which serves as a reminder that while “workforce size is important, 

quality is paramount.” 

Numerous initiatives, both from within and resulting from proposed legislation, continue to address acquisition 

workforce challenges. Specifically, on April 6, 2009, the Secretary of Defense announced his intent to reform the 

DoD acquisition process by increasing the size of the Defense Acquisition Workforce (DAW) by 20,000 

employees. The DoD’s initiatives appear on track, with the acquisition workforce growing from approximately 

126,000 to 133,000 personnel in FY 2009. The Department will continue its efforts to return the acquisition 

workforce to a level above the 146,000 personnel in 1998. 

Further, in April 2010, the House of Representatives passed a new acquisition reform bill, H.R. 5013, 

“Implementing Management for Performance and Related Reforms to Obtain Value in Every Acquisition Act of 

2010” (the IMPROVE Acquisition Act). This bill would require the Department to better manage the defense 

acquisition system; incentivize the development of a larger, better trained, and more professional acquisition 

workforce; reform DoD’s financial management with a view toward ensuring greater auditability of the DoD 

Components’ financial statements; and seek to expand the defense industrial base to enhance competition. 

2-2A. Major Weapon Acquisition IG Summary of Challenge 

The Department continues to be challenged in its ability to execute acquisition programs without significant cost 

overruns and major schedule delays. The DoD acquisition mission represents the largest buying enterprise in the 

world. The number of Major Defense Acquisition Programs (MDAPs) increased to 103 in FY 2009, with little 

corresponding increase to investment funding. This trend, along with ever increasing reporting requirements, 

continues to make procuring affordable programs a challenge. The vast majority of these programs perform within 

cost and schedule estimates; however, there continues to be a small set of troubled programs that experience cost 

overruns and schedule delays. The Department is forced to take money from healthy programs to support these 

troubled programs, which in turn reduces quantity and capability, and extends program schedules. The 

ADDENDUM A Other Accompanying Information

4 
 

Department of Defense Agency Financial Report for FY 2010 

Department must continue to improve its acquisition reform efforts, particularly in high cost programs, to limit the 

impact to the warfighter. 

2-2B. Major Weapon Acquisition IG Assessment of Progress 

The Department continues to make limited progress in controlling the cost and schedule of major acquisition 

programs and will have to make critical decisions about which systems should be cut based on competing 

resources. The Secretary of Defense has, through the last two DoD budgets, made difficult decisions by proposing 

to end all or part of at least a half dozen major defense acquisition programs that were no longer needed or were 

poorly performing. Additionally, the Department identified in the Quadrennial Defense Review (QDR) that the 

Department must improve requirements definition and stop underestimating the costs of weapon systems. The 

Department must have cost, schedule, and performance realism in the acquisition process while holding the 

Department and industry accountable. 

The Department has revised its policies and guidance to improve its acquisition of weapon systems and address 

contract management issues. For example, the Department revised its policy governing major defense acquisition 

programs to provide key department leaders with the knowledge to make informed decisions before a program 

starts and to maintain discipline once it begins. The revised policy includes the completion of key systems 

engineering activities before the start of the systems development, a requirement for more prototyping early in 

programs, and the establishment of review boards to monitor weapon system configuration changes. The 

Department also issued guidance to address contracting weaknesses and promote the use of sound business 

arrangements. The Department established a framework for reviewing major services acquisitions, developed 

guidance on linking monetary incentives for contractors to acquisition outcomes, and implemented regulations to 

better manage its use of contracting arrangements that can pose additional risks for the Department. The 

Director, Defense Procurement Acquisition Policy started initiatives to establish an Office of the Secretary of 

Defense (OSD)–level peer review of proposed contract actions over $1 billion. The OSD-level peer review 

involves a 3-day review of the proposed contract action by four independent SES-level personnel. Below the

$1 billion threshold, the Departments are responsible for performing their own peer review of the proposed 

contract action. These are positive steps, but inconsistent implementation has hindered past DoD efforts to 

address these high-risk areas. To improve outcomes, the Department must ensure these policy changes and 

others are consistently put into practice and reflected in decisions made on individual acquisitions. 

Congress passed the Weapon Systems Acquisition Reform Act (WSARA) of 2009, which was designed to limit 

cost overruns, strengthen oversight and accountability, enhance competition and end conflicts of interest. Since 

the enactment of WSARA, the Department has notably implemented many of the organizational changes required 

as evidenced by the creation and the appointment of individuals to the following positions: Director, Cost 

Assessment and Program Evaluation; Director, Developmental Test and Evaluation; Director for Performance 

Assessments and Root Cause Analyses ; and the Director, Defense Research and Engineering. 

In addition, the Under Secretary of Defense for Acquisition Technology and Logistics addressed many of the 

acquisition process related changes and reporting requirements in a directive type memorandum. While the 

Department has made some progress, implementation and continued improvement is needed to not only respond 

to existing shortcomings but to anticipate and address potential future challenges, such as the decreased funding, 

a diminishing industrial base, or limited acquisition workforce resources. 

2-3A. Contracting and the Impact on Decision Making IG Summary of Challenge 

The DoD acquisition and contracting community is tasked to manage an increasing Defense budget while relying 

on a smaller, less experienced and inadequately trained workforce. In order to meet the needs of the warfighter 

and to operate in the existing environment, DoD personnel have had to increase their reliance on contractors. The 

Department, as the largest purchasing organization in the world, spends about $400 billion on contracts to nonDoD entities, with the $400 billion equally divided between products and services. The Department has 

increasingly turned to contractors to fill roles previously held by government employees and to perform many 

functions that closely resemble inherently governmental functions, such as contracting support, which includes 

awarding, and approving contracts and contractual documents, and administering contracts; determining contact 

requirements, program management, and engineering and technical support for program offices. This reliance on 

contractors has called into question the proper balance between public and private employees performing agency 

missions and has increased DoD’s vulnerability to contracting fraud, waste, abuse, or misuse of taxpayer dollars. 

ADDENDUM A Other Accompanying Information

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Department of Defense Agency Financial Report for FY 2010 

One way in which the Department coped with the limited resources was to use other agencies’ contracting 

resources. Increasingly, funds were sent to other agencies to perform work for the Department, and in FY 2005, 

interagency contracting was added to the Government Accountability Office’s list of high-risk areas. The 

Department continues to experience difficulties with the use of interagency contracting. Problems continue to be 

identified in the areas of source selection determinations, price reasonableness determinations, requirements 

determinations, surveillance, and justification for using non-DoD contracts. 

The Department continues to be challenged to strike a balance between urgent contracting to support the 

warfighter and performing all of the appropriate acquisition requirements. The effectiveness of contractor support 

of expanded U.S. operations in Afghanistan and other contingency operations could be hindered by the failure to 

extract and apply lessons learned from Iraq. Our audits continue to identify weaknesses with requirements 

definition, source selection, contract monitoring, acceptance of supplies and services, and contract payments. 

2-3B. Contracting and the Impact on Decision Making IG Assessment of Progress 

In response to Section 813 of the John Warner National Defense Authorization Act for FY 2007, Public Law 109-364, 

the Department established a Panel on Contracting Integrity. The Panel, consisting of senior leaders, is focused 

on eliminating areas of vulnerability in contracting that allow fraud, waste, and abuse. The committee has 

established subcommittees in the areas of current structure of contracting integrity, sustained senior leadership, 

capable contracting workforce, adequate pricing, appropriate contracting approaches and techniques, sufficient 

contract surveillance, contracting integrity in a contingent environment, procurement fraud indicators, contractor 

employee conflicts of interest, and recommendations for change. The Panel identified 25 actions for 

implementation in 2010. The Panel reported that many of these actions for implementation were a natural followon from those completed in 2009, while others addressed the requirements of the National Defense Authorization 

Act of FY 2010 and the Weapon Systems Acquisition Reform Act of 2009, and others build upon previous Panel 

efforts. 

On July 26, 2009, in response to the Commission on Wartime Contracting (COWC) in Iraq and Afghanistan’s 

interim report, entitled “At What Cost? Contingency Contracting in Iraq and Afghanistan,” June 10, 2009, the Under 

Secretary of Defense for Acquisition, Technology and Logistics (AT&L) created the DoD Task Force on Wartime 

Contracting to evaluate the interim report. The COWC interim report contains 55 observations, approximately twothirds (35) of which relate directly to the 8 issues of immediate concern. The remaining one-third (20) are ancillary 

(did not directly correlate to an issue of immediate concern). Of the 35 observations, the Department already has 

significant initiatives underway that address 94 percent of these observations. The Department indicated they are 

making significant progress on the initiatives with 83 percent (19 initiatives) being free from major challenges. The 

Department continues to experience barriers in resourcing contingency contracting officer representatives, hiring 

subject matter experts, and utilizing the services of the Defense Contract Audit Agency. 

On June 28, 2010, the Under Secretary of Defense (ATL) issued a mandate to all DoD Acquisition professionals 

for restoring affordability and productivity in Defense spending. Some initiatives outlined in the mandate include 

leveraging real competition, use of proper contract type for developments and procurements of goods and 

acquisition of services, targeting non-value added costs, involving dynamic small business, and rewarding 

excellent suppliers. In addition to these measures, the mandate addressed strengthening DoD acquisition 

workforce, improving audits, mandating affordability as a requirement, stabilizing production rates, eliminating 

redundancy in portfolios, and protecting the technology base. 

2. Acquisition Processes and Contract Management Management’s Overall Assessment 

The Secretary of Defense established a 23-point plan of action to improve acquisition efficiency in five areas: 

Target Affordability and Control Cost Growth; Incentivize Productivity and Innovation in Industry; Promote Real 

Competition; Improve Tradecraft in Services Acquisition; and Reduce Non-Productive Processes and 

Bureaucracy. The Department is institutionalizing these initiatives, and policy implementation and compliance will 

be closely monitored. In addition, the Department recently developed a new Joint Contingency Contracting 

Handbook that provides essential information, tools, templates, and training material to meet the challenges in any 

contracting environment. In addition, the Department increased its acquisition workforce by 6,200 professionals 

and continues to work toward the Secretary of Defense’s growth goals of 20,000 professionals by FY 2015. 

ADDENDUM A Other Accompanying Information

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Department of Defense Agency Financial Report for FY 2010 

3. Joint Warfighting and Readiness 

3-1A. Joint Warfighting and Readiness IG Summary of Challenge 

The challenge of joint warfighting and readiness is to provide the right force, the right personnel, and the right 

equipment and supplies in the right place, at the right time, and in the right quantity, across the full range of military 

operations. This challenge is compounded by the strain on resources because of Operations Iraqi Freedom and 

Enduring Freedom. Maintaining or increasing the Departments joint warfighting and readiness will require 

significant resources and continuous management attention. The challenges facing the Department will increase, 

in both the near- and long-term, as the Department continues the scheduled withdrawal of forces from Iraq and the 

redeployment of forces to Afghanistan. In the near-term, the Department’s execution of the withdrawal in Iraq and 

redeployment, and the resetting of equipment either for use in Afghanistan or for standing inventory, requires 

management’s continued attention and will present its own challenges to overall joint warfighting and readiness 

processes. In the long-term, the Department faces the challenge of resetting the Services; retraining skills that 

have not been required for the current operations; and reengaging with other nations’ militaries. This challenge 

encompasses the need to ensure basic services continue uninterrupted for the members of the armed forces and 

their families. The DoD’s available resources and capabilities are finite and require constant monitoring to enable 

the Department to operate successfully with the shifting global dynamics. The combination of these various 

factors continues to challenge the Department. The realignment of forces in the Pacific area of responsibility 

presents its own set of challenges, including ensuring the Department can maintain its overall readiness posture in 

the Pacific against the threats it faces. In addition, the realignment of forces requires effective negotiation and 

relations with the Government of Japan. 

3-1B. Joint Warfighting and Readiness IG Assessment of Progress 

The Department is making progress on the issue of joint warfighting and readiness, but that progress must be 

monitored to ensure it continues. The Department cannot afford to ignore new and, in some cases, recurring 

situations that will require attention. For example, although the withdrawal from Iraq is underway, it must be 

monitored to ensure all equipment and personnel are properly accounted for and only items approved for transfer 

are transferred. As the Department draws down assets and equipment from Iraq, it must ensure that all units 

actively participate in the drawdown to ensure accountability and visibility of all equipment, that serviceable 

material is reused to maximum potential, and ensure the safety of personnel in the field and at receiving activities. 

This will ensure that the equipment disposition supports either the Department or the coalition forces. Similarly, 

the increase of forces in Afghanistan must be monitored to ensure forces receive the support required. This 

includes ensuring that the warfighter, and the civilians and contractors supporting them, have the appropriate 

protective equipment and that this equipment is properly returned for reset and reuse. 

Despite a high operating tempo, U.S. Forces are effectively executing their missions globally. Sustained 

operations in Iraq and Afghanistan impact equipment, the troops, and their families. Forward deployed units are 

trained, manned, and equipped to accomplish missions. Increased deployments and shorter dwell times impact 

the readiness of equipment, the troops, and their families. Insufficient dwell time affects readiness of the total 

force, because it does not allow our troops time to reconnect fully with an important support system – their 

families. Maintaining readiness, resetting the force during the extended war, modernizing to face future 

challenges, and allowing troops to reconnect with their families are challenges that the Department and Congress 

must continually address. The ongoing efforts to relocate service members to Guam and other locations around 

the globe will enable the armed forces to better shape and focus their force structure in a way that will provide 

greater flexibility in responding to threats. We have noted, however, that there are substantial Guam infrastructure 

shortcomings that fall outside of DoD funding authority that could adversely impact the realignment. The 

Department needs to ensure that interagency planning and execution occur, as these concerns will need to be 

addressed with additional non-DoD funding. Additionally, competing priorities and the number of contractors 

available could adversely impact the realignment. 

3. Joint Warfighting and Readiness Acquisition Management’s Overall Assessment 

The Department remains focused on ensuring the forces deployed to fight our Nation’s wars are trained, equipped, 

and ready to perform their assigned missions. Our forward-deployed forces are ready, but that readiness often 

comes at the expense of the non-deployed force readiness. Non-deployed forces often experience less than 

optimal dwell time and focus their non-deployed training time on their next Iraq or Afghanistan mission 

ADDENDUM A Other Accompanying Information

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Department of Defense Agency Financial Report for FY 2010 

requirements. This focus, however, can result in forces not being trained for the full spectrum of potential global 

missions, and combined with the impact of stay-behind equipment and personnel turmoil, can lead to reduced 

readiness levels. Withdrawing large numbers of troops and equipment from Iraq, while simultaneously increasing 

force and equipment levels in Afghanistan, is an extremely complex operation. The Department is expending 

significant effort to ensure this is accomplished in the most effective and cost-efficient manner. We also recognize 

our obligation to properly take care of our soldiers, sailors, airmen, and Marines -- and their families -- that have 

carried the burden of extended combat operations, multiple deployments, and the resultant human toll from those 

efforts. We must be particularly vigilant of those traumatized in our Nation’s battles, trauma which can have longterm effects on the individual. The Department is intent on striking the optimal, albeit delicate balance to meet our 

competing needs in these challenging fiscal times. Key competing challenges include maintaining readiness, 

resetting the force, structuring the force to meet future threats, modernization, and taking care of our most valuable 

asset – our people.

4. Information Assurance, Security and Privacy 

4-1A. Risk Management IG Summary of Challenge 

Managing risk continues to be a daunting challenge to the Department. One significant area where the 

Department must assess the risk that a particular threat will adversely impact its operations is in the acceptance 

and use of internet-based capabilities. Internet-based capabilities include social networking services, social 

media, instant messaging, and discussion forums. Commanders at all levels and heads of DoD Components must 

understand the risks, vulnerabilities, and threats associated with providing access to these internet-based 

capabilities and implement safeguards and countermeasures to defend against such threats. 

4-1B. Risk Management IG Assessment of Progress 

During this past year, the Department has taken steps to address the issues surrounding its use of internet-based 

capabilities. In November 2009, the IG cancelled its review of DoD compliance with policies and procedures for 

interactive internet activities. The cancellation occurred to allow the Department to fully address the Deputy 

Secretary of Defense’s requirement to present to the Secretary of Defense the threats and benefits, as well as the 

policies and processes, to ensure the responsible and effective use of emerging internet-based capabilities. On

February 25, 2010, the Deputy Secretary of Defense issued Directive-Type Memorandum (DTM) 09-026, which 

establishes DoD policy and assigns responsibilities for responsible and effective use of internet-based capabilities, 

including social networking services. 

The DTM provides for the following: (1) The Non-Classified Internet Protocol Router Network shall be configured 

to provide access to internet-based capabilities across all DoD Components; (2) Commanders at all levels and 

heads of DoD Components shall continue to defend against malicious activity and deny access to prohibited 

content and activities via social media; and (3) Use of internet-based capabilities shall comply with 

paragraph 2-301 of Chapter 2 of the Joint Ethics Regulation. While the Department has postured itself to embrace 

the benefits of internet-based capabilities in its daily operations, it still faces a challenge of ensuring Commanders 

at all levels and heads of DoD Components take the appropriate actions to safeguard missions and preserve 

operations security.

4-2A. Protecting DoD Information IG Summary of Challenge 

One of the most daunting challenges that the Department faces is defending its information and information 

systems against today’s mounting cyber threats. On a daily basis, DoD’s information technology infrastructures 

are continuously attacked by those wanting to not only steal DoD information, but to do harm to DoD programs, 

operations, and personnel. As the President of the United States has stated, cyber security is one of the most 

serious economic and national security challenges we face as a Nation. The DoD’s major challenge is going to be 

in centralizing its resources to develop a comprehensive strategy for marshalling its cyber security defenses and 

implementing policies and procedures to overcome, on an instantaneous basis, any cyber threat. 

Another challenge that the Department faces in protecting DoD information is ensuring that its information 

assurance workforce is properly trained and certified in today’s every changing information technology. The 

members of the information assurance workforce are responsible for protecting information and information 

systems, and as such, must be trained and certified to a DoD baseline requirement. 

ADDENDUM A Other Accompanying Information

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Department of Defense Agency Financial Report for FY 2010 

In addition, a continuing challenge is to ensure the protection of DoD information in the hands of contractors. The 

Department must ensure that the diligence and resources it has placed on its internal information and information 

systems is mirrored by those contractors either running DoD systems or maintaining DoD information on their 

systems. 

4-2B. Protecting DoD Information IG Assessment of Progress 

In May 2010, the Department took a significant step to address one of its most daunting challenges of defending 

its information and information systems. The Department announced the establishment of the U.S. Cyber 

Command, a sub-unified command subordinate to the U.S. Strategic Command. The U.S. Cyber Command will 

improve DoD’s capabilities to ensure resilient, reliable information and communication networks, counter 

cyberspace threats, and assure access to cyberspace. Service elements, such as the Army Forces Cyber 

Command, will support the U.S. Cyber Command’s mission. While the Department has taken a significant step, 

challenges remain in centralizing cyberspace operations, developing workable strategies, protecting DoD 

information networks, and obtaining cyber expertise. 

The Department has made progress in meeting the milestones outlined in DoD 8570.01-M, entitled “Information 

Assurance Workforce Improvement Program,” December 19, 2005. As the IG reported in Report 

No. D-2010-058, “Selected Controls for Information Assurance at the Defense Threat Reduction Agency (DTRA),” 

May 14, 2010, DTRA had only approximately fifty percent of the required information assurance positions filled 

with certified personnel. The Department remains challenged to ensure that all information assurance personnel 

obtain the required certifications in their respective functional areas. 

In July 2009, the Department issued DTM 08-027, entitled “Security of Unclassified DoD Information on Non-DoD 

Information Systems.” This was a significant step in the right direction to provide security for all unclassified DoD 

information on non-DoD information systems. The DTM outlined DoD’s policy to incorporate appropriate 

requirements into all contracts, grants, and other legal agreements with non-DoD entities. In fact, in March 2010, 

the Department announced the proposed changes to the Defense Federal Acquisition Regulation Supplement 

(DFARS) in the Federal Register, Volume 75, No. 41. In addition, the Department continued to enhance the 

Defense Industrial Base (DIB) Cyber Security and Information Assurance Program, established in 2007. Under 

DoD Instruction 5205.13, dated January 29, 2010, the Department outlined the policy to create a timely, 

coordinated, and effective partnership with the DIB that would develop standard procedures, for areas, such as 

contracting and acquisition policy and procedures, to improve the protection of unclassified DoD information on 

DIB unclassified systems and networks. 

Although the Department has made good progress, it still faces the challenge of finalizing changes to the DFARS 

to implement the DoD requirement for all DoD contractors and their subcontractors to provide adequate security of 

DoD information in the contractor’s and/or subcontractor’s possession. 

4. Risk Management and Protecting DoD 

 Information Management’s Overall Assessment 

On February 25, 2010, the Deputy Secretary of Defense issued DTM 09-026, which establishes DoD policy and 

assigns responsibility for effective use of internet-based capabilities, including social networking services. While 

the Department has postured itself to embrace the benefits of internet-based capabilities in its daily operations, it 

still faces the challenge of ensuring Commanders at all levels and heads of DoD Components take appropriate 

actions to safeguard missions and preserve operations security. In May 2010, the Department took a significant 

step to address its most daunting information security challenge--defending its information and information 

systems--by announcing the establishment of the U.S. Cyber Command, a sub-unified command subordinate to 

the U.S. Strategic Command. The U.S. Cyber Command will improve DoD’s capabilities to ensure resilient, 

reliable information and communication networks, counter cyberspace threats, and assure access to cyberspace. 

Service elements, such as the Army Forces Cyber Command, will support the U.S. Cyber Command’s mission. 

While this is a significant step, challenges remain in centralizing cyberspace operations, developing workable 

strategies, protecting DoD information networks, and obtaining cyber expertise. 

In March 2010, the Department announced proposed changes to the DFARS in the Federal Register, Volume 75, 

No. 41, that address requirements for safeguarding unclassified information. In addition, the Department 

continues to enhance the Defense Industrial Base (DIB) Cyber Security and Information Assurance Program, 

established in 2007. Under DoD Instruction 5205.13, dated January 29, 2010, the Department outlined its policy 

to create a timely, coordinated, and effective partnership with the DIB to develop standard procedures in areas 

ADDENDUM A Other Accompanying Information

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Department of Defense Agency Financial Report for FY 2010 

such as contracting and acquisition and to improve the protection of unclassified DoD information on DIBunclassified systems and networks.

5. Health Care 

5-1A. Cost Containment IG Summary of Challenge 

The DoD Military Health System (MHS) must provide quality care for approximately 9.6 million eligible 

beneficiaries within fiscal constraints while facing increased user demands, legislative imperatives, and inflation 

that make cost control difficult in both the public and private sectors. During a hearing with the Senate 

Appropriations Subcommittee on Defense, the Secretary of Defense stated the escalating cost of health care is a 

problem that must be addressed. The DoD budget for health care costs was approximately $50 billion in FY 2010, 

an increase of more than 60 percent since FY 2005 ($31 billion). In addition, the American Recovery and 

Reinvestment Act of 2009 provides $0.4 billion for facilities sustainment and $1.3 billion for construction of 

hospitals. Another part of the challenge in containing health care costs is combating fraud. Health care fraud is 

among the top 5 categories of criminal investigations, representing 9.4 percent of the 1,871 open cases of the DoD 

IG's Defense Criminal Investigative Service at the beginning of FY 2010. Increasing health care benefits also 

provides additional pressure to manage and contain costs.

5-1B. Cost Containment IG Assessment of Progress 

The DoD MHS has been moving forward on improving health care while attempting to control costs. The MHS 

implemented the Quadruple Aim Concept, building upon the Institute for Healthcare Improvement’s Triple Aim 

concept that describes the results that can be achieved when all elements of a health care system work together. 

The MHS uses Quadruple Aim to shape its vision, identifying readiness, population health, experience of care, and 

per capita cost as the four aims that set the strategic direction to improve mission outcomes. The MHS leadership 

accepted a value dashboard to monitor implementation of strategic imperatives and serve as good indicators of 

mission success. The MHS is focusing on many areas to manage per capita costs. Three new TRICARE 

contracts were awarded in July 2009; however, award protests resulted in staggered implementation of the 

contracts. The contracts provide incentives for customer satisfaction and include the managed-care support 

contractors as partners in support of medical readiness. 

An internal Assistant Secretary of Defense (Health Affairs) review identified areas that assist in managing costs, to 

include US Family Health Plan, fraud management, and pharmaceuticals. Additionally, the Quadruple Aim 

approach to cost control will simultaneously improve quality and reduce cost by focusing on the elimination of 

unnecessary care, tests, and procedures, and by focusing on delivering health care in the most appropriate 

setting. 

5-2A. Medical Readiness IG Summary of Challenge 

The ability to support and develop the people in the MHS continues to be a challenge. Maintaining medical 

readiness of the medical staff and units includes ensuring that medical staff can perform at all echelons of 

operation and that the units have the right mix of skills, equipment sets, logistics support, and evacuation and 

support capabilities. The challenge of keeping members of the Reserves and National Guard medically ready to 

deploy continues because of the frequency and duration of deployments. 

Increased numbers of returning service members with psychological health issues, along with a shortage of 

uniformed and civilian mental health workers, will require examination of automated screening tools and improved 

diagnostics to provide earlier detection and intervention. In addition, addressing the psychological effects of 

deployment on family members and non-active duty personnel will continue to be a challenge. 

5-2B. Medical Readiness IG Assessment of Progress 

The Department published the MHS Human Capital Strategic Plan for 2008 to 2013 and established an MHS 

Human Capital Strategic Support Office. Quarterly Force Health Protection Survey results show continued 

improvement in service members’ medical readiness, except for the Reserves and National Guard. The MHS is 

developing strategic imperatives and performance measures under the readiness portion of the Quadruple Aim to 

increase individual and family medical readiness. The MHS has continued to meet all mission requirements 

despite very high operational tempo. Data from the Joint Theater Trauma Registry reveal unprecedented 

ADDENDUM A Other Accompanying Information

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Department of Defense Agency Financial Report for FY 2010 

outcomes, including reduction in died of wounds rates and the lowest ever disease non-battle injury rates. 

The MHS identified psychological health and resiliency as a strategic imperative, with performance measures and 

goals established for Post-Traumatic Stress Disorder and depression screening, referral, and engagement. 

5-3A. Wounded Warrior Care IG Summary of Challenge 

Strengthening comprehensive and integrated health care from accession through active service, to rehabilitation, 

and transition to Veterans Affairs (VA) care is a major challenge for the MHS. The number of wounded warriors 

associated with Southwest Asia and other such conflicts, particularly those affected with Traumatic Brain Injury 

and Post-Traumatic Stress Disorder, requires diligent management of health care resources. Another related 

challenge to force health protection and medical readiness is oversight of post deployment health needs, including 

identifying and managing those requiring care. Although a number of objectives have been identified by the 

Department and the VA and programs have been initiated, the quality and oversight of these programs must be 

tightly managed. Transitioning wounded, ill, or injured service members to post-deployment care will grow as a 

challenge while Overseas Contingency Operations, Operation New Dawn (OND) and OEF, continue. The 

Department needs to improve the medical care and benefits transition program to achieve a streamlined, 

transparent, and timely process as wounded warriors move from the DoD system to the Department of VA system.

5-3B. Wounded Warrior Care IG Assessment of Progress 

The revised MHS strategic plan recognizes continuum of care as a strategic priority concerning the experience of 

care. Disparities in the transition of health care and benefits were readily identified, yet actionable solutions are 

difficult to implement and monitor. 

The Center for the Intrepid in San Antonio, Texas, and the Defense Centers of Excellence for Psychological Health 

and Traumatic Brain Injury, a network of centers of excellence including the National Intrepid Center of Excellence 

under construction on the National Naval Medical Center campus in Bethesda, Maryland, provide promising 

venues to introduce new therapies for amputees, burn victims, and those with traumatic brain injuries and 

psychological disorders. 

The Department established the Senior Oversight Council (SOC) in FY 2008 to ensure that all aspects of care, 

rehabilitation and reintegration for wounded warriors is accomplished. One focus of the SOC is to overhaul the 

disability processing system and implement improved case management for recovering warriors. The Department 

is institutionalizing the changes directed by the SOC. 

The Armed Forces Health Surveillance Center was established to ensure tracking and ongoing surveillance of the 

health of service members is accomplished in a joint manner and coordinated with Veterans Affairs. 

5-4A. Electronic Health Records IG Summary of Challenge 

Providing information to the right people so they can make informed decisions continues to be a challenge in the 

health care community. Along with the benefits of expanding automation efforts comes the increased risk to 

security and privacy of information. The transition from paper to electronic patient records increases the exposure 

of sensitive patient information to inadvertent or intentional compromise, highlighting the need for appropriate 

information assurance procedures. Developing and maintaining information operations that ensure the protection 

and privacy of data will continue to grow as a challenge. 

5-4B. Electronic Health Records IG Assessment of Progress 

The MHS Information Management/Information Technology Strategic Plan for 2010 to 2015 includes the electronic 

health record as a strategic goal. The goal over the next five years is to focus on improving the electronic health 

record family of applications to create a comprehensive and reliable system. Specific milestones were established 

to implement a personal health record prototype and to expand bidirectional sharing of health information between 

the Department of Defense and the Department of Veterans Affairs; however, DoD has encountered delays in 

establishing the electronic health record. The DoD continues to progress in sharing electronic medical records 

with the Department of Veterans Affairs. The final report on the Department and VA joint assessment project 

recommended that the Departments pursue a common-services approach to sharing inpatient records, which will 

allow the Department and VA to build upon their already extensive information sharing capabilities. It also will set 

the stage for the appropriate level of interoperability with other government and private sector organizations.

ADDENDUM A Other Accompanying Information

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Department of Defense Agency Financial Report for FY 2010 

5-5A. Implementing BRAC IG Summary of Challenge 

Implementing recommendations resulting from the 2005 Base Realignment and Closure (BRAC) process will 

continue to be a challenge. In addition to improving the readiness and cost efficiency associated with realigning 

base structure, a primary objective of the process was to examine and implement opportunities for greater joint 

activity among the Military Departments. Recapitalization of the physical infrastructure is a challenge, and medical 

facilities planning for health care on Guam will present additional infrastructure challenges. Military treatment 

facilities are aging and in need of replacement. Managing funds provided by the American Recovery and 

Reinvestment Act of 2009 for facilities sustainment, restoration, and modernization projects and new construction 

will also be a challenge. 

5-5B. Implementing BRAC IG Assessment of Progress 

The BRAC process addresses part of the aging infrastructure, but to fully address the challenge, better 

standardized data on the condition of facilities is needed. The MHS has begun the multiyear transition and 

acquisition process of improving capability and access to care in two major and several minor markets. The new 

Walter Reed National Military Medical Center at Bethesda is expected to be completed in 2011. 

By establishing more unity of purpose in each of the major markets, the market leaders should be able to distribute 

resources across hospitals and clinics within a market to meet the needs of the entire population of eligible 

beneficiaries. In addition, the increased span of control will enable improved continuity of care and coordination of 

safety and quality programs. In the National Capital Region, the Secretary of Defense established the Joint Task 

Force National Capital Region--Medical to clarify command and control, and implemented a single manning 

document categorizing civilian positions as DoD. The Tri-service Medical Education and Training Campus, 

scheduled to open in phases between 2010 and 2011, should improve the quality and consistency of training for 

all enlisted, contributing to a culture of jointness and interoperability. 

Co-locating of the headquarters functions of Health Affairs, the TRICARE Management Activity, the Army Medical 

Command, the Navy Bureau of Medicine, and the Air Force Medical Service by September 2011 should enhance 

efforts to achieve unity of purpose for MHS policy, strategy and financial programming and yield greater 

consistency across the Services in program execution. 

Several infrastructure issues are addressed through implementation of the American Recovery and Reinvestment 

Act of 2009. New hospitals are planned at Fort Hood and Camp Pendleton, with construction contracts expected 

to be awarded by September 30, 2010. In addition, a major renovation at Jacksonville Naval Hospital is funded 

through the Recovery Act, with the construction contract awarded in December 2009. We currently are reviewing 

these three major Recovery Act military construction projects. In addition, the DoD IG currently is assessing 

medical facilities planning in Guam. The results of our review will be reflected in the next management challenges 

document. The TRICARE Management Activity also has plans for $400 million of specific Recovery Act facilities 

sustainment, restoration, and modernization projects to improve medical facilities. 

5-6A. Humanitarian Assistance IG Summary of Challenge 

The Department’s expanded role in providing humanitarian assistance and disaster relief to support U.S. strategic 

objectives and promote human dignity through better health has been identified as a core capability of the MHS, 

but will continue to provide financial and organizational challenges. The MHS will be challenged to develop a 

strategy that complements the overall DoD strategy and that interfaces well with other executive agencies, 

including the Agency for International Development, Department of State, Department of Health and Human 

Services, and Department of Homeland Security, organizations that traditionally have played the lead role in 

humanitarian assistance and disaster response. 

5-6B. Humanitarian Assistance IG Assessment of Progress 

Building a bridge to peace through humanitarian assistance and disaster relief is a goal under the MHS strategic 

plan, in response to Combatant Command goals. The most recent MHS Strategic Plan, covering 2008 through 

2010, recognizes many of these challenges and includes a performance metric to measure success in increasing 

operability with other governmental and non-governmental organizations and international partners. 

ADDENDUM A Other Accompanying Information

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Department of Defense Agency Financial Report for FY 2010 

5. Health Care Management’s Overall Assessment 

The Department is actively working to eliminate unnecessary administrative overhead and unwarranted variation in 

both its clinical and administrative processes, having set strategic imperatives used in quarterly reviews to ensure 

targets for both quality and cost are met. This year, particular emphasis is focused on reducing overutilization of 

emergency rooms, a significant contributor to recent increases in per capita cost. 

The Department is working with the Reserves and National Guard to address challenges in force readiness, 

particularly in the area of mental readiness. Recent data shows significant improvement in overall medical readiness. 

Our human capital team is actively addressing the need for additional mental health services in support of the 

readiness of the force. Over the past three years, we have added nearly 3,000 new mental health professionals to 

DoD workforce, and we have greatly expanded the TRICARE network in the area of behavioral health. Deployment 

of the Patient Centered Medical Home, which includes embedded behavioral health workers in primary care, will add 

to our capability to address the psychological health needs of service members and their families. 

The Department is continuously improving care for the wounded, ill and injured, and their families. Since 2007, over 

13,000 Service members have enrolled in the integrated disability evaluation system. The Department reduced the 

disability evaluation period, and service member satisfaction with the process is improving. In addition, the National 

Intrepid Center of Excellence, which provides specialized services for service members with Post-Traumatic Stress 

Disorder and traumatic brain injuries, will reach full operating status before the end of the year. 

In addition, strengthened acquisition structure and processes ensure effective and efficient major acquisitions, 

such as the Electronic Health Record (EHR). The Department of Defense and the Department of Veterans Affairs 

are working together to implement the Virtual Lifetime Electronic Record (VLER), with successful pilots now 

operating at several sites. The VLER vision is to ensure health, benefits, and personnel information of a Service 

member or Veteran, from the time of accession to interment, is available, as necessary. The MHS is actively 

working to achieve meaningful use of health information with the rapid implementation of secure messaging and in 

providing essential health information to patients in digital formats. 

6. Equipping and Training Iraqi and Afghan Security Forces 

6-1A. Iraqi Security Forces IG Summary of Challenge 

Over the next 18 to 24 months, U.S. policy and related DoD military strategy in Iraq will be implemented by 

aggressive, high-intensity operations that prioritize continuance of the training, equipping, and mentoring of the 

Iraqi Security Forces (ISF). This will include developing the ISF's logistics sustainment base and conducting a 

responsible drawdown to 50,000 military forces by August 30, 2010, and all remaining military forces by 

December 31, 2011. In addition, the Department is faced with transitioning all remaining training, equipping, and 

mentoring activities to an Office of Security Cooperation under Chief of Mission authority, as well as laying the 

groundwork for a robust security assistance and Foreign Military Sales program that will endure after the last U.S. 

military forces leave in December 2011.

6-1B. Iraqi Security Forces IG Assessment of Progress 

A major national security goal of the U.S. is the establishment of a sovereign, stable, and self-reliant Iraq that 

contributes to the peace and security of the region and with whom the U.S. can forge a long-term security 

partnership. An ISF capable of providing for internal security as well as an external defense capability prior to the 

withdrawal of U.S. Forces from Iraq in December 2011 is essential to achieving these U.S. national objectives. 

Since the end of FY 2009, in conjunction with the drawdown of U.S. military forces from Iraq, the U.S. has 

deployed to Iraq newly organized and trained Advisory and Assistance Brigades that focus on stability operations. 

The mission of these Advisory and Assistance Brigades is to conduct stability and civil capacity building 

operations; to partner with, enable, and advise the ISF; and if required, conduct full spectrum operations. 

The U.S. has made progress in developing an ISF logistical system with a capability to sustain independent 

combat operations. However, this mission objective has not been a command priority until recently, and the 

window of opportunity to leverage our forces’ presence is narrowing. The emphasis on ISF force sustainment 

underway will require an expedited, intensive push by U.S. Forces-Iraq in order to address the most significant ISF 

logistical support deficiencies, avert significant degradation of operational readiness, and establish an enduring 

logistical system before the last U.S. military forces leave on December 31, 2011. 

ADDENDUM A Other Accompanying Information

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Department of Defense Agency Financial Report for FY 2010 

Considerable progress has been made in developing options and plans for transitioning the U.S. security 

assistance mission in Iraq to an Office of Security Cooperation under the authority of the Chief of Mission. 

Effective implementation of those transition plans, however, especially in the areas of manpower, personnel, 

training and budgeting, could present the U.S. with significant challenges. But, effective transition planning and 

implementation will help establish a favorable strategic partnership with Iraq. 

6-2A. Afghan National Security Forces IG Summary of Challenge 

Over the next 18 to 24 months, U.S. policy and related DoD military strategy in the Afghanistan-Pakistan region 

will be implemented by aggressive, high intensity operations that prioritize: continuing the build-up of combat 

forces in Afghanistan to achieve positive momentum on the battlefield; providing continued training, equipping and 

mentoring of the Afghan National Security Forces (ANSF) to enable them to assume a leading security operations 

role; initiating a “conditions-based” drawdown of US combat forces from Afghanistan, beginning the summer of 

2011; and developing the capacity of the Pakistan Security Forces to maintain internal security and eliminate 

extremist Taliban and al-Qaeda forces in the Northwest Frontier safe haven. 

6-2B. Afghan National Security Forces IG Assessment of Progress 

The Afghan government continues to pursue significant expansion of the ANSF, with the support of the 

international community. Both the Afghan National Army and the Afghan National Police (ANP) may need 

augmentation in order to win, in partnership with international security forces, the counterinsurgency fight and, 

ultimately, to develop the capacity to conduct and sustain independent operations. 

The success of operations in Afghanistan will be partially measured by how well the Afghan population is prepared 

to provide for, and protect, themselves when U.S. and coalition forces withdraw. The ability to protect themselves 

will fall on the ANSF, including the ANP. The Department of Defense is assuming responsibility for the training of 

the ANP from the Department of State (DOS). We reviewed the status of Afghanistan Security Forces (ASF) 

funds that the Department of Defense provided to the Department of State (DOS) for the training of the Afghan 

National Police (ANP). Both Departments have agreed to have DoD assume contractual responsibility for the 

primary ANP training program, which includes Regional Training Centers, basic ANP training, mentoring within the 

Afghan Ministry of Interior, and the DoD police mentor teams embedded in ANP units in districts throughout 

Afghanistan. The Department of State did not maintain adequate oversight of Government-furnished property; 

maintain contract files as required by the Federal Acquisition Regulation; always match goods to receiving reports, 

or follow internal control procedures requiring in-country contracting officer’s representatives to review contractor 

invoices to determine if the costs were allowable, allocable, or reasonable prior to payment, and to validate 

deliverables. We were unable to determine if DOS expended Afghanistan Security Forces funds provided by the 

Department of Defense in accordance with Congressional intent. We identified $80 million in expired ASF funds 

that the DOS had not returned to DoD or the U.S. Treasury. The DOS and DoD have not provided enough 

resources to adequately train members of the Afghan Women’s Police Corps. 

As the program transitions, there is risk that all ongoing efforts be accurately identified and transferred. There will 

be continued risk that the program evolve as needed to address the changing security environment in Afghanistan. 

The program was originally envisioned to provide security forces capable of performing traditional law enforcement 

duties. As the security situation in Afghanistan deteriorated, the program needed to include more paramilitary-type 

security skills as well as traditional law enforcement. The Department must be fluid in its ability to change the 

program as needed to adapt to this changing environment. 

6. Equipping and Training Iraqi and Afghan 

 Security Forces Management’s Overall Assessment 

The DoD objective between now and December 2011 is to develop an ISF capable of providing internal security as 

well as a minimal foundation for external defense. Following the withdrawal of U.S. forces from Iraq in

December 2011, the ISF will continue to mature in their leadership roles providing security and overall stability for 

the citizens of Iraq. The citizens of Iraq continue to develop their confidence in the ISF, and it is becoming clear 

that the growing professionalism of the ISF is a source of national pride. 

A key strategic focus remains on training, equipping, and partnering with the Afghan National Security Forces (ANSF) 

to enable the transition of lead security responsibility to the Government of Afghanistan and initiate a “conditionsbased” redeployment of U.S. combat forces, beginning in July 2011, with the ANSF being in the lead by 2014. 

ADDENDUM A Other Accompanying Information

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Department of Defense Agency Financial Report for FY 2010 

The North Atlantic Treaty Organization (NATO) and the Government of Afghanistan continue to grow both the 

quality and quantity of the ANSF. Both the Afghan National Army (ANA) and the Afghan National Police (ANP) still 

need support from the international community—particularly in pledging institutional trainers for the ANSF and 

Operational Mentoring and Liaison Teams (OMLTs) and Police Operational Mentoring and Liaison Teams --to train 

the ANSF and provide mentors and partners in the field. 

As of August 2010, both ANA and ANP force levels were well above target goals, at approximately 136,000 and 

120,000, respectively. The NATO Training Mission-Afghanistan (NTM-A) implemented several positive changes in 

the ANSF training regime since November 2009, including increasing the number of trainers, providing better 

marksmanship training, adding literacy training, and opening branch schools for higher end training. Still, 

challenges remain, including Officer and Non-Commissioned Officer shortages. 

7. Nuclear Enterprise 

7-1A. Decline of Focus on the Nuclear Enterprise IG Summary of Challenge 

The Department faces complex and long-standing nuclear enterprise management challenges that affect DoD’s 

ability to provide public assurance that it can meet its nuclear operational and surety responsibilities. A 2008 

Defense Science Board report states that since the end of the Cold War, there has been a marked but gradual 

decline in the level and intensity of focus on the nuclear enterprise and the nuclear mission. When comparing the 

current level of focus to that of 1990, the aggregate change is dramatic. 

The decline is characterized by: 

• Embedding nuclear mission forces in non-nuclear organizations. 

• Markedly reducing levels of leadership whose daily focus is on nuclear enterprise. 

• Generally devaluing the nuclear mission and those who perform the mission. 

Numerous reports and studies issued over the past decade have documented the decline. From 1991 to 2009, 

the IG identified and reported on aspects of this decline in a series of classified audit reports related to the security 

of nuclear systems. Although specific report details are classified, the weaknesses identified in each of those 

reports are a direct result of the decline in emphasis of the nuclear enterprise and mission. 

7-1B. Decline of Focus on the Nuclear Enterprise IG Assessment of Progress 

The Department has continued to sustain its focus to renew the nuclear enterprise. In September 2009, the DoD 

IG issued a report on DoD actions in response to the recommendations contained in the Commander Directed 

Report of Investigation Concerning an Unauthorized Transfer of Nuclear Warheads Between Minot AFB, North 

Dakota, and Barksdale AFB, Louisiana, August 30, 2007; the Air Force Blue Ribbon Review of Nuclear Weapons 

Policies and Procedures, February 8, 2008; and the Defense Science Board Permanent Task Force’s “Report on 

the Unauthorized Movement of Nuclear Weapons;” and the DoD IG found that the Department is taking actions to 

address those report recommendations. 

The Department has continued to analyze and study critical elements of the nuclear enterprise. In addition to the 

three reports noted earlier, the Department has issued numerous additional reports related to the nuclear enterprise, 

including: 

• Nuclear Surety Staff Oversight of US Air Force Nuclear Surety Inspections, 

April 1, 2008 

• Air Force Inventory and Assessment: Nuclear Weapons and Nuclear Weapons-Related Materiel, 

May 25, 2008 

• Air Force Comprehensive Assessment of Nuclear Sustainment, July 26, 2008 

• SECDEF Task Force on DoD Nuclear Weapons Management, Phase II, September 12, 2008 

• Air Force Nuclear Task Force (Nuclear Roadmap), October 24, 2008 

• Nuclear Weapons Management, January 8, 2009 

During FY 2011, the DoD IG will begin a review of DoD actions in response to these additional reports.

ADDENDUM A Other Accompanying Information

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Department of Defense Agency Financial Report for FY 2010 

Joint Chiefs of Staff. In March 2010, in response to the reports on the decline in focus on the nuclear enterprise, 

the Chairman of the Joint Chiefs of Staff approved a comprehensive reorganization of the Joint Staff Operations 

Directorate to add a new Deputy Director for Command, Control, and Nuclear Operations. This reorganization 

placed a single General Officer in a position to oversee all aspects of nuclear operations for the Chairman. This 

new Deputy Directorate was officially stood up on October 1, 2010. Additionally, the Chairman approved a 

reorganization of the Joint Staff Strategic Plans and Policy Directorate to add a new Deputy Director for Strategic 

Stability, effective September 1, 2010, to oversee all aspects of nuclear and weapons of mass destruction for the 

Chairman. 

Department of the Air Force. On August 7, 2009, the United States Air Force activated the Air Force Global 

Strike Command. Its mission is to “Develop and provide combat-ready forces for nuclear deterrence and global 

strike operations – Safe, Secure, Effective - to support the President of the United States and combatant 

commanders.” The Command assumed the nuclear capable assets of Air Force Space Command on 

December 1, 2009, and Air Combat Command on February 1, 2010. The activation of the Air Force Global Strike 

Command is a significant step in the Air Force’s efforts to reinvigorate the Air Force Nuclear Enterprise. 

The Air Force also established the Nuclear Oversight Board, whose charter is to oversee and drive structural, 

procedural and cultural enhancements to the Air Force Nuclear Enterprise. Chaired by the Secretary of the Air 

Force and the Chief of Staff of the Air Force, this group brings together Air Force senior leaders to address and 

resolve nuclear mission issues. Additionally, the Air Force established the Assistant Chief of Staff Strategic 

Deterrence and Nuclear Integration to integrate all aspects of nuclear policy, operations, and sustainment across 

the Air Staff and has enhanced the Air Force Nuclear Weapons Center to ensure sustainment of Nuclear 

Enterprise systems. 

The Air Force has created policy and procedures to manage, process, and assess Nuclear Weapon Reserve 

Material and an account for it through an automated supply chain system called Positive Inventory Control Fusion. 

Additionally, the Air Force consolidated Nuclear Weapon Reserve material storage facilities and reduced 

unnecessary fielding in operational bases. 

Department of the Navy. Following the Defense Science Board investigation of unauthorized movement of 

nuclear weapons between Minot AFB and Barksdale AFB, the Department of the Navy independently undertook 

internal assessments to evaluate the state of the Navy’s nuclear enterprise. In May 2008, the Secretary of the 

Navy directed Strategic Systems Programs (SSP) to conduct a comprehensive Self-Assessment. The Secretary 

also directed Naval Reactors to conduct an audit and review of the Self-Assessment and a broad review of 

operations within the Navy’s Nuclear Weapon Enterprise. SSP’s Self Assessment indicated that the Navy was 

operating at a satisfactory level with respect to Nuclear Weapons management, but identified six areas that were 

deemed in need of some improvement. Naval Reactors’ subsequent audit report stated that the Review Team 

“found the Navy’s nuclear weapons and related Components to be controlled and managed in an overall 

satisfactory manner, with some areas identified that required improvement. The Review Team did not identify any 

findings that would affect the health and safety of the public.” Additionally, in June 2008, the Secretary of Defense 

(SECDEF) appointed a Task Force to address the nuclear mission of the Air Force (Phase I) and the nuclear 

mission of the DoD overall (Phase II). The Phase II report (Schlesinger Report) defined policy, organizational and 

procedural issues that needed to be addressed across DoD in order to retain disciplined and effective nuclear 

forces. The Task Force found that the Navy has maintained its commitment to the nuclear mission, although there 

was evidence of some “fraying around the edges” and made recommendations to ensure a credible nuclear 

deterrent now and for the foreseeable future. 

Other Actions. In December 2009, the Federal Advisory Committee for the Nuclear Command and Control 

System Comprehensive Review issued its final report. This classified report contains findings and 

recommendations to address issues related to U.S. Nuclear Command and Control System. The DoD IG will 

monitor DoD progress in addressing the issues raised in this report. 

In April 2010, the Department issued the Nuclear Posture Review report, which establishes the nuclear policy, 

strategy, capabilities, and force protection for the next five to ten years. Among other reasons, this report is crucial 

for establishing requirements and funding priorities for the nuclear enterprise. 

In our view, the Department has undertaken significant actions to reverse the decline and reinvigorate the nuclear 

enterprise. Sustained commitment and funding will be required to maintain the momentum of the current efforts. 

ADDENDUM A Other Accompanying Information

16 
 

Department of Defense Agency Financial Report for FY 2010 

7-2A. Incidents Indicate Systemic Problems IG Summary of Challenge 

During FY 2008, the Department experienced a series of incidents that indicated significant problems with nuclear 

enterprise management. Failure to follow prescribed verification procedures resulted in nuclear warheads being 

inadvertently transferred from Minot Air Force Base (AFB) to Barksdale AFB. Sensitive missile components were 

erroneously shipped to Taiwan. The 5th Bomb Wing at Minot AFB failed a nuclear surety inspection and had to be 

re-inspected to a satisfactory rating. Despite improvement in many areas, systemic challenges still remain. 

7-2B. Incidents Indicate Systemic Problems IG Assessment of Progress 

Although the Department has undertaken significant efforts to reinvigorate the nuclear enterprise, significant 

issues continue to arise. Security continues to a major issue for the DoD Nuclear Enterprise. During the past 

12 months, unauthorized personnel have twice gained access onto NATO military installations. While U.S. 

personnel and munitions were never at risk, and nuclear security was not compromised, the incidents do illustrate 

the importance of the Department continuing to maintain focus on security and force protection issues. 

In September 2009, the DoD IG issued a “Report on the B-61 Nuclear Weapon Use Control” which contained 

recommendations on funding the B-61 Life Extension Program. The Air Force concurred with report 

recommendations. After our report was issued, the Nuclear Posture Review validated the requirement for the

B-61 Life Extension Program. The DoD IG recently completed fieldwork on a review of “Sustaining the Weapons 

Storage and Security System” and will make recommendations for improving maintenance and addressing spare 

parts issues. Addressing the maintenance issue will be critical to support the Nuclear Posture Review long-term 

goal of continuing to field the B-61 weapon. 

In February 2010, the Office of the Deputy Assistant to the Secretary of Defense for Nuclear Matters provided the 

DoD IG with a briefing on the status of the DoD Nuclear Weapons Physical Security Roadmap for addressing 

physical security issues. The briefing indicated that the Department is making significant progress. During 

FY 2011, the DoD IG will begin a follow-up audit of its 2002 report on Physical Security of Nuclear Weapons 

Located in the Continental United States. During this audit, we will assess DoD progress in addressing the 

physical security issues and determine if there are any impediments. 

The Air Force has taken actions to improve the inspection process. The Air Force Inspection Agency now 

conducts 100% oversight of all Nuclear Surety Inspections. The Air Force Inspection Agency stood up a 

centralized core team of inspectors that integrates Major Command (MAJCOM) Inspector General teams, which 

should provide a more consistent application of inspection standards and ensuring root-cause for issues are 

determined and shared across the Air Force. Additionally, the Nuclear Inspection Enterprise stood up a Nuclear 

Surety Inspection Review Group, which meets semi-annually to discuss pertinent inspection issues and ensure 

consistency and standardization across the Nuclear Inspection Enterprise. 

In 2008, the Department of the Navy established the OPNAV Nuclear Weapons Council (ONWC) and Navy 

Nuclear Weapons Senior Leader Oversight Council (SLOC) to coordinate all OPNAV staff responsibilities for 

nuclear weapons activities and to coordinate and strengthen ties between Navy’s nuclear weapon operations, 

material support, and oversight functions. These two councils are being consolidated into a single Navy Nuclear 

Weapons Oversight Council (NNWOC). One of the focus areas for NNWOC is addressing recommendations for 

the Navy from the Schlesinger and Naval Reactors reports by approving corrective actions and closure plans. 

Additionally, the Navy’s Strategic Systems Programs established Oversight and Compliance Offices in Kings Bay, 

GA and Bangor, WA to fulfill Director, Strategic Systems Programs responsibility across the nuclear weapons 

surety spectrum of operations. 

7-3A. Keys to Improvement IG Summary of Challenge 

The Department needs to sustain its focus on the nuclear enterprise. The following elements are key to 

improvement: 

• Create an environment that emphasizes the nuclear mission and that a reliable, safe, secure, and 

credible nuclear deterrent is essential to national security and is a high DoD priority. 

• Conduct detailed reviews and studies of all critical elements of the nuclear enterprise to identify key 

deficiencies and methods for improvement. 

• Develop corrective action plans that correct the deficiencies and provide adequate funding and leadership 

to ensure implementation. 

ADDENDUM A Other Accompanying Information

17 
 

Department of Defense Agency Financial Report for FY 2010 

• Implement the corrective actions and conduct follow-up reviews to ensure that the action plans are 

correcting the deficiencies. 

7-3B. Keys to Improvement IG Assessment of Progress 

The Department has taken significant action to conduct detailed reviews and studies of critical elements of the 

nuclear enterprise to identify key deficiencies and methods for improvement. Additionally, they are implementing 

report recommendations and developing corrective action plans that correct the deficiencies. 

We fully support these efforts. However, successfully addressing the deficiencies in the nuclear enterprise will 

require years of sustained effort. Fixing the problems will require commitment, effort, and resources. The IG will 

monitor DoD’s progress in implementing the various report and study recommendations. 

7. Nuclear Enterprise Management’s Overall Assessment 

The Department continues to make substantial progress in improving the nuclear enterprise. The Department has 

taken positive action to address recommendations made in IG and other oversight reports, conducted reviews of 

the enterprise to identify and correct deficiencies, and created new management structures, such as the Air Force 

Global Strike Command. In addition, the release of the Nuclear Posture Review and the Section 1251 Report to 

Congress on DoD plans for the nuclear deterrent over the next ten years have provided an overarching path 

forward for sustaining the nuclear enterprise. The Department remains fully committed to restoring confidence in 

the nuclear enterprise and in the safe handling and accountability of DoD nuclear assets. While success in 

accomplishing this task will require years of sustained commitment, the Department will continue to engage in a 

robust effort to implement report recommendations and corrective action plans to address deficiencies. 

8. American Recovery and Reinvestment Act (ARRA) 

8-1A. American Recovery and Reinvestment Act IG Summary of Challenge 

In passing the American Recovery and Reinvestment Act (ARRA) of 2009, commonly referred to as the Recovery 

Act (Public Law 111-5), the Congress provided supplemental appropriations to preserve and create jobs; promote 

economic recovery; assist those most affected by the recession; provide investments to increase economic 

efficiency through technological advances in science and health; and invest in transportation, environmental 

protection, and other infrastructure. Under the Recovery Act, Congress appropriated $7.4 billion to the Department 

for the following programs: 

• Facilities Sustainment, Restoration, and Modernization ($4.26 billion) 

• Military Construction ($2.18 billion) 

• Near Term Energy-Efficient Technologies ($300 million) 

• Energy Conservation Investment ($120 million) 

• Homeowners Assistance Program ($555 million) 

The United States Army Corps of Engineers (USACE) received a $4.6 billion appropriation for its civil works 

program. The $4.6 billion provided for the civil works program included $2 billion for construction and 

$2.075 billion for Operations and Maintenance. 

The Recovery Act also provided unprecedented efforts to ensure the responsible distribution of funds for the Act’s 

purposes, and transparency and accountability for expenditures, so that the public would know how, when, and 

where tax dollars were being spent. Further, the Recovery Act stated that the President and the heads of Federal 

departments and agencies were to manage and expend the funds made available in the Act to achieve its 

purpose, which included commencing expenditures for activities as quickly as possible, consistent with prudent 

management. 

The Department is pursuing three broad goals with Recovery Act Funding: preserve and create American jobs, 

care for U.S. Service members and their families, and improve DoD energy efficiency. The Department intends to 

expend DoD funds as quickly as possible on facilities sustainment, restoration, and modernization, military 

construction, energy conservation, near-term energy efficiency technology demonstration and research, and 

homeowners’ assistance. Specific investments in military construction will further the goal of providing stimulus to 

the economy while helping to improve the quality of life for the troops and their families. 

ADDENDUM A Other Accompanying Information

18 
 

Department of Defense Agency Financial Report for FY 2010 

By September 30, 2010, the Department plans to have started 4,700 construction and facility repair projects 

(meaning contract award and construction/repair work had commenced) using $6.5 billion of the Recovery Act 

funds. The Department is planning on over 4,488 repair projects, totaling $4 billion for installations in all 50 states, 

two territories and the District of Columbia. An additional $1.785 billion is available for new construction, including 

$1.33 billion for replacement of aging hospitals, $115 million for family housing construction, $240 million for 

21 Child Development Centers, $100 million for two Warrior in Transition facilities. In addition, $555 million of 

Recovery Act Homeowners Assistance funds are available to reduce the impact of the downturn in the housing 

market on military members and civilians. The Department is using $120 million in Recovery Act funds for 

45 energy efficiency projects and an additional $300 million for 51 energy programs researching ways to reduce 

DoD’s energy demand via increasing fuel efficiency or advancing new technologies related to alternative energy 

sources. 

The USACE list of Recovery Act-funded Civil Works projects valued at $4.6 billion includes approximately 

172 construction projects, 523 Operation and Maintenance projects, 45 Mississippi River and Tributaries projects, 

64 Investigations projects, and nine projects under the Formerly Utilized Sites Remedial Action Program. 

Regulatory Program funds are distributed to USACE districts based upon workload. The projects selected 

represent a set of productive investments that will contribute to economic development and aquatic ecosystem 

restoration. 

The Department continues to place an emphasis on meaningful and effective competition to get the best deal for 

the warfighters and the taxpayers. Given the importance of the Recovery Act dollars in stimulating the economy, 

the Department has taken extra steps, including frequent communications with Senior Procurement Executives 

(SPEs), regarding the expectations for contract implementation. SPEs in the Department are communicating more 

frequently with their respective acquisition workforce, including flash notices and reminders of Recovery Act 

regulations, specifically the importance of competition. The Department in responding to a Recovery 

Accountability and Transparency Board’s survey of contract workforce staffing, indicated that their Acquisition 

Workforce staffing was less than adequate to handle the additional requirements from the Recovery Act and those 

staffing shortages would impact both Recovery and non-Recovery Act work. 

The Recovery Act also established unprecedented efforts to provide transparency and accountability of 

expenditures so that the public would know how, when, and where tax dollars were being spent. The reporting 

requirements by recipients of DoD Recovery Act awards and by Federal agencies and departments on the use of 

Recovery Act funds are contained in legislation, regulations, and Office of Management and Budget (OMB) 

guidance. The OMB interim guidance clarifies the responsibilities of Federal contractors and agency officials 

regarding Federal contracts that use Recovery Act funds. The guidance requires agencies to review contractor 

reports to ensure the information provided in the report is consistent with the award. Further, OMB interim 

guidance stipulates that agencies are to have oversight processes in place to review contractor reports and to 

conduct limited reviews intended to identify significant errors or material omissions in the reports. The Department 

had established processes to perform limited data quality reviews intended to identify material omissions and/or 

significant reporting errors and to notify the recipients of Recovery Act funds of the need to make appropriate and 

timely changes. 

8-1B. American Recovery and Reinvestment Act IG Assessment of Progress 

The OMB specified the initial step for each agency receiving Recovery Act funds to take was to develop formal 

documented plans identifying how the recovery funds will be applied and managed. OMB required that agencies 

discuss both Recovery Act goals and how different parts of the agency are coordinating efforts toward successful 

implementation and monitoring of these goals; required agencies to submit separate plans for each program 

funded by the Recovery Act; and stipulated 12 minimum requirements that each plan must address. The DoD 

Agency Plan and four program-specific plans met the 12 minimum OMB requirements. We did not review the 

Homeowners Assistance Program (HAP) plan but have initiated an audit of actual DoD HAP program claims and 

payments. The review will continue into FY 2011. 

In our 2009 IG Assessment of Progress for this management challenge area, we noted that DoD’s execution of the 

$12 billion of Recovery Act funds was not moving as quickly as the Department had planned, and much of the 

spending and actual work on the projects would occur in FY 2010. The DoD Recovery Act funds for facility repair 

and research and development projects, valued at $4.26 billion, would expire for obligation at the end of FY 2010. 

The DoD continued to press forward to obligate these funds and, as of September 30, 2010, with the aid of a 

statutorily directed $260.5 million ARRA rescission, the Department obligated 99.9 percent of the remaining

$4 billion in expiring funds. The Department also achieved its goal of expending at least 45 percent of all ARRA 

ADDENDUM A Other Accompanying Information

19 
 

Department of Defense Agency Financial Report for FY 2010 

funds by the end FY 2010. Funds for new construction are available for obligation until FY 2014. As of September 

30, 2010, the Department had obligated 71 percent of these funds. The continuing pressure to commence 

activities and expend Recovery Act funds as quickly as possible, consistent with prudent management, will add 

pressure to DoD’s understaffed contracting professionals to award and administer contracts in an expedited 

manner. 

In addition, contractors who are awarded these contracts must also satisfy the new Recovery Act reporting 

requirements. Recipients of Recovery Act funds must submit estimates of jobs created and jobs retained for each 

Recovery Act project or activity during each fiscal year quarter. The Department must ensure the accuracy and 

timeliness of the recipient’s reports. Our initial FY 2010 reviews of DoD and USACE recipient reporting internal 

controls found that the Department did not have a well-defined process to perform limited data quality reviews 

intended to identify material omissions and/or significant reporting errors and to notify the recipients of the need to 

make appropriate and timely changes. Nor did the Department have specific policies and procedures to perform 

these tasks. Conversely, USACE had developed processes to perform limited data quality reviews for its Civil 

Works Programs but these processes did not completely and adequately identify errors in recipient reported data, 

or establish adequate logic checks to validate “the number of jobs created” reported by recipients. We are 

continuing reviews of DoD and USACE controls over recipient reporting. 

Without adequate and continuous management attention to Recovery Act implementation, especially contractor 

oversight and recipient reporting, the Department will have a recurring challenge to effectively meet the intent of 

the Recovery Act and maintain adequate transparency, accountability, and stewardship of taxpayer funds. 

8. American Recovery and Reinvestment Act Management’s Overall Assessment

The Congress initially appropriated $7.4 billion in ARRA funds to the Department. With a statutorily-directed 

$260.5 million rescission, the Department received a net amount of $7.2 billion in Recovery Act funds. Through 

September 30, 2010, the Department of Defense awarded $6.5 billion in Recovery Act funds, over 90% of the 

$7.2 billion in ARRA funds allocated to the Department. These $6.5 billion in awards include the $4 billion allotted 

for Facilities Sustainment, Restoration, and Modernization projects, the $0.3 billion allotted for Near Term EnergyEfficient Technologies projects, and $1.7 billion (74%) of the $2.3 billion allotted for Military Construction or Energy 

Conservation Investment projects, funds that are available for obligation through September 30, 2014. The 

obligations for Military Construction or Energy Conservation Investment projects and project completions in all 

programs will continue to increase throughout FY 2011. 

The President established high standards of transparency and accountability for the use of Recovery Act funds. 

Since the signing of the ARRA, the Department has worked closely with OMB and other White House offices to 

effectively implement award and reporting requirements. The Secretary of Defense designated the Principal 

Deputy Under Secretary of Defense (Comptroller) to serve as DoD’s primary point-of-contact to the White House. 

A DoD Senior Steering Committee monitors ARRA program implementation, establishes policies and procedures, 

and reviews key metrics as funds are obligated and executed. 

The OUSD(C) uses its centralized Business Enterprise Integration System (BEIS) to track the obligation and 

execution of ARRA funds at the project-level, which ensures compliance with the financial management policies 

pertaining to the Recovery Act. Also, the Department established performance measures, supported by 

standardized definitions, quantifiable outputs, and designated measurement frequencies, to monitor execution of 

the funds. These measures include: 

• Percent net change of child development center slots, barracks bed spaces, and family houses created; 

• Change in facility condition; 

• Number of families aided by Homeowners Assistance funding; and 

• Estimated annual energy savings. 

• Results of these performance measures are updated and readily accessible on the DoD ARRA public 

website, www.recovery.gov and www.defense.gov/recovery. 

In response to unprecedented requirements to inform the public as to the use of ARRA funds and ensure 

transparency and accountability of expenditures, the Department issued guidance entitled, “Posting PreSolicitation and Award Notices, Reporting Contract Actions, and Reporting Performance Assessments for Actions 

Funded by the American Recovery and Re-Investment Act of 2009,” on March 13, 2009. Also, on July 6, 2009, 

DoD issued guidance entitled “Use of the Purchase Card – American Recovery and Reinvestment Act (ARRA),” to 

ensure the transparency of card transactions via required reporting. 

ADDENDUM A Other Accompanying Information

20 
 

Department of Defense Agency Financial Report for FY 2010 

In addition, recipients who received contracts funded with ARRA dollars are responsible for reporting this award 

information, including number of jobs generated, on a public website. These recipient reporting requirements are 

contained in legislation, regulations, and OMB guidance. On December 16, 2009, the Department issued initial 

guidance, entitled “Guidance on Reviewing Contractor Reports Required by the American Recovery and 

Reinvestment Act of 2009,” that established DoD quality review processes to validate recipient reports and identify 

significant errors or material omissions in the recipients’ reports. Subsequent to issuing this guidance, OMB 

issued several policy updates in this area. To minimize proliferation of multiple policy memoranda, the Department 

uses OMB-issued guidance to validate the accuracy and completeness of recipient reports. To increase the 

accuracy of the recipient’s reports, the Department provided each ARRA recipient with a partially completed 

reporting template, entitled “Key Award Information for Contractor Reports,” that identified various federal 

procurement and/or accounting data and codes recipient were required to report on the public website. These 

templates greatly increased the accuracy of recipient reports, as this data and coding is not typically understood or 

known to the contractors. The Department also created a website that provides guidance to contractors and 

reviewers (http://www.acq.osd.mil/dpap/pdi/eb/arra.html). This website contains key information required for 

successful implementation of recipient reporting, along with a direct link to the OMB FAQ webpage for up-to-date 

guidance and direction.

ADDENDUM A Other Accompanying Information

21 
 

Department of Defense Agency Financial Report for FY 2010 

MANAGERS INTERNAL CONTROL PROGRAM 

The OUSD(Comptroller) leads DoD’s Federal Managers’ Financial Integrity Act (FMFIA) 

program, designated as the Managers’ Internal Control Program (MICP). The MICP holds 

managers throughout the Department accountable for ensuring effective internal management 

controls in their areas of responsibility. All Components are required to conduct a robust 

programmatic approach to establish and assess internal management controls for all nonfinancial, mission-essential operations. Components that produce stand-alone financial 

statements are also required to include financial reporting assurance in their programs. 

Financial Statement Material Weaknesses 

The following Table 1 lists the DoD IG-identified 13 material weaknesses in financial statement 

reporting. 

Table 1. Summary of Financial Statement Audit 

Audit Opinion: Disclaimer 

Restatement: Yes 

Material Weakness Beginning 

Balance New Resolved Consolidated Ending 

Balance 

1 Accounts Payable 1 1 

2 Accounting Entries 1 1 

3 Environmental Liabilities 1 1 

4 Government Property in Possession of 

Contractors 

1 1 

5 Intragovernmental Eliminations 1 1 

6 Operating Materials and Supplies 1 1 

7 Reconciliation of Net Cost of 

Operations to Budget 

1 1 

8 Statement of Net Cost 1 1 

9 Financial Management Systems 1 1 

10 Fund Balance with Treasury 1 1 

11 General Property, Plant & Equipment 1 1 

12 Inventory 1 1 

13 Accounts Receivable 1 1 

Total Material Weaknesses 13 0 0 0 13 

Types of Material Weaknesses 

The DoD management-identified weaknesses are determined by assessments of internal 

management controls, as required by the FMFIA and OMB Circular No. A-123, and fall into 

three categories: 

1. FMFIA Section 2, Financial Reporting Material Weaknesses (see Table 2a). 

2. FMFIA Section 2, Non-Financial Operations Material Weaknesses (see Table 2b). 

3. FMFIA Section 4, Financial System Nonconformance Weaknesses (see Table 2c). 

ADDENDUM A Other Accompanying Information

22 
 

Department of Defense Agency Financial Report for FY 2010 

The Department began FY 2010 with 17 outstanding material weaknesses, and during the year 

added two new material weaknesses, for a total of 19 material weaknesses at year end. 

Tables 2a, 2b, and 2c identify the resulting management-identified weaknesses. 

1. FMFIA Section 2, Financial Reporting Material Weaknesses. Under the oversight of the 

DoD Senior Assessment Team, DoD’s assessment of financial reporting identified the following 

material weaknesses, listed in Table 2a, which previously have been reported. The column 

entitled "Ref Table 1" crosswalks the reported FMFIA manager-identified weaknesses to similar 

weaknesses identified by the IG, which are listed in Table 1. 

Table 2a. Effectiveness of Internal Control Over Financial Reporting (FMFIA Section 2) 

Statement of Assurance: No Assurance 

Material Weaknesses Ref 

Table 1 

Beginning

Balance New Resolved Consolidated Reassessed Ending 

Balance 

1. Military Equipment Assets 11 1 1 

2. Real Property Assets 11 1 1 

3. Environmental Liabilities 3 1 1 

4. Health Care Liabilities 1 1 

5. Fund Balance with Treasury 10 1 1 

6. Accounts Receivable 13 1 1 

7. Inventory 12 1 1 

8. Operating Materials and 

Supplies 6 1 1 

9. Accounts Payable 1 1 1 

10. General Purpose Equipment 11 & 4 1 1 

11. Financial Reporting 

Compilation 2, 7, & 8 1 1 

12. Financial Reporting of 

Intragovernmental 

Eliminations 

5 1 1 

Total Financial Reporting 

Material Weaknesses 12 12 

 

ADDENDUM A Other Accompanying Information

23 
 

Department of Defense Agency Financial Report for FY 2010 

Table 2a-1 provides the description and corrective action plan for each material weakness 

related to internal controls over financial reporting. 

Table 2a-1 FY 2010 Internal Control Over Financial Reporting Material Weaknesses (1 of 4)

Material Weaknesses Year 

Identified 

DoD 

Components Corrective Actions 

Target 

Correction 

Date 

1 Military Equipment Assets: 

The DoD's financial systems 

do not support capturing and 

recording the historical cost of 

military equipment in order to 

comply with accounting 

standards. 

FY 2003 OUSD(AT&L);

Army; Navy; 

SOCOM1

Components are following a 

strategy to first validate the 

existence and completeness of 

mission-critical asset records in 

logistics and accounting 

systems. Upon confirmation of 

the accuracy of item counts in 

property records, Components 

will implement controls and 

processes to value military 

equipment using transactional 

data or estimates, as 

appropriate. 

FY 2016 

2 Real Property Assets: The 

Department does not have 

adequate internal controls in 

place to provide assurance 

that real property assets are 

identified and properly 

reported in its financial 

reports. The Department, the 

Military Services, and 

applicable Defense Agencies 

are addressing these areas. 

FY 2003 OUSD(AT&L)2; 

SOCOM; 

Navy; NGA; Air 

Force; Army; 

DLA; MDA 

Components are implementing 

sustainable real property, 

physical and fiscal 

accountability business 

processes, and consistent 

management controls. They 

are also completing a 

Department-wide real property 

reconciliation that will validate 

existence and completeness by 

verifying system data to location 

of physical assets. 

FY 2014 

3 Environmental Liabilities: 

DoD’s internal controls for 

reporting environmental 

liabilities do not provide 

assurance that clean- up 

costs for all of its ongoing, 

closed, and disposal 

operations are identified, 

consistently estimated, and 

appropriately reported. 

FY 2001 Air Force; 

Army; USACE3

Using OUSD(AT&L) guidance, 

Components are validating the 

completeness of the 

environmental liability universe 

and ensuring liability estimates 

are supported with adequate 

audit trails and documentation. 

FY 2012 

1 SOCOM: Special Operations Command 

2 OUSD(AT&L): Office of the Secretary of Defense (Acquisition, Technology, and Logistics) 3 USACE: U.S. Army Corps of Engineers

 

ADDENDUM A Other Accompanying Information

24 
 

Department of Defense Agency Financial Report for FY 2010 

Table 2a-1 FY 2010 Internal Control Over Financial Reporting Material Weaknesses (2 of 4)

Material Weaknesses Year 

Identified 

DoD 

Components Corrective Actions 

Target 

Correction 

Date 

4 Health Care Liabilities: The 

current military health system 

financial processes cannot 

collect sufficient transactionlevel cost and performance 

information regarding 

procedures performed in 

military treatment facilities to 

support reliable financial 

reports. 

FY 2003 MERHCF1; 

SMA2

Medical Components are 

implementing procedures to 

improve procedure coding and 

financial reconciliation for 

military treatment facilities’ 

operations as well as 

developing proposals to 

reimburse military treatment 

facilities on a per capita basis. 

Such proposals would be 

similar to arrangements with 

managed-care providers. 

Implementation of Service 

ERPs will also improve overall 

financial reporting. 

FY 2017 

5 Fund Balance with Treasury: 

The Department is unable to 

reconcile transactions posted 

to its Fund Balance With 

Treasury (FBWT) general 

ledger accounts with 

transactions reported to and 

posted to Department of the 

Treasury’s accounts. 

FY 2006 DIA3

; DLA4; Air 

Force; Navy; 

SMA; Army; 

CBDP5

; 

SOCOM6

Components will work toward 

integrating compliant target 

systems with feeder systems to 

maintain transaction-level 

supporting documentation for 

disbursements and collections. 

Components also are 

developing the processes and 

controls to reconcile 

transaction-level differences 

between Treasury and 

Department accounts in a 

timely, efficient manner. 

FY 2017 

6 Accounts Receivable: The 

Department is unable to 

accurately record, report, 

collect, and reconcile 

intragovernmental accounts 

receivable as well as 

accounts receivable due from 

the public. 

FY 2003 DLA; SMA; Air 

Force; Army

Components are continuing 

efforts to implement ERP 

systems to improve collections 

of payments and minimize 

manual processes. Improving 

reconciliations between 

systems, to include 

identification of aging accounts, 

is another key aspect of the 

DoD efforts to resolve this 

weakness. 

FY 2017 

1 MERCHF: Medicare Eligible Retiree Health Care Fund 2 SMA: Service Medical Activity 

3 DIA: Defense Intelligence Agency 

4 DLA: Defense Logistics Agency 

5 CBDP: Chemical and Biological Defense Programs 

6 SOC: Special Operations Command 

ADDENDUM A Other Accompanying Information

25 
 

Department of Defense Agency Financial Report for FY 2010 

Table 2a-1 FY 2010 Internal Control Over Financial Reporting Material Weaknesses (3 of 4)

Material Weaknesses Year 

Identified 

DoD 

Components Corrective Actions 

Target 

Correction 

Date 

7 Inventory: The Department is 

unable to accurately account 

for, value, and report 

inventory on DoD’s financial 

statements. 

FY 2003 Navy; DLA1; 

Army; Air 

Force; Navy 

Department efforts to improve 

accounting for inventory focus 

on ensuring adequate 

documentation exists to support 

consistent, accurate in-transit 

inventory valuations, tracking of 

inventory and visibility of 

inventory. The ability to identify 

and implement proper inventory 

sampling methodologies is also 

an important element. 

FY 2016 

8 Operating Materials and 

Supplies (OM&S): The 

Department cannot 

accurately account for the 

value of operating material 

and supplies. 

FY 2007 Army; Navy; 

Air Force; 

SOCOM2

Components are implementing 

ERP systems that will track 

OM&S purchases and 

issuances at a transaction level 

to address this weakness. 

FY 2017 

9 Accounts Payable: The 

Department does not have 

adequate internal controls in 

place to provide assurance 

that accounts payable are 

recorded and properly 

reported in its financial 

reports. 

FY 2004 DSS3

; NSA4; 

Army; DLA; Air 

Force; Navy; 

SMA5

; 

SOCOM 

Components are implementing 

business process changes to 

ensure payables are recorded 

upon receipt of goods or 

services rather than at 

disbursement, as well as 

improving capabilities to record 

accruals. 

FY 2017 

10 General Purpose Equipment: 

The Department does not 

meet Federal accounting 

standards for financial 

reporting of general personal 

property, specifically the 

financial value of general 

equipment. 

FY 2006 Army; 

USACE6; Air 

Force; Navy; 

NDU7; MDA8; 

NSA; DLA; 

DSS; NGA9; 

OSD10; 

USFOR-A11; 

DIA12; SOCOM 

Component efforts are 

underway to validate existence 

and completeness before 

moving forward to record 

accurate valuation. A critical 

part of this effort is to identify 

property in the possession of 

contractors and ensure 

accurate information is recorded 

in the property system. 

FY 2015 

11 Financial Reporting 

Compilation: Due to 

inadequate internal 

management controls, the 

Department is unable to 

produce accurate Statements 

of Net Cost, Budgetary 

Resources, and Net Position, 

or adequately document 

accounting adjustments. 

FY 2008 Army; USACE The Department continues to 

improve business processes 

and controls through the 

implementation of ERP systems 

that produce accurate, timely 

and auditable financial reports. 

FY 2015 

1 DLA: Defense Logistics Agency 7. NDU: National Defense University 2 SOCOM: Special Operations Command 8. MDA: Missile Defense Agency 3 DSS: Defense Security Service 9. NGA: National Geospatial Intelligence Agency 4 NSA: National Security Agency 10. OSD: Office of the Secretary of Defense 5 SMA: Service Medical Activity 11. USFOR-A: U.S. Forces - Afghanistan 6 USACE: U.S. Army Corps of Engineers 12 DIA: Defense Intelligence Agency

ADDENDUM A Other Accompanying Information

26 
 

Department of Defense Agency Financial Report for FY 2010 

Table 2a-1 FY 2010 Internal Control Over Financial Reporting Material Weaknesses (4 of 4)

Material Weaknesses Year 

Identified 

DoD 

Components Corrective Actions 

Target 

Correction 

Date 

12 Financial Reporting of 

Intragovernmental 

Eliminations: The Department 

is unable to collect, 

exchange, and reconcile 

buyer and seller intragovernmental transactions, 

resulting in adjustments that 

cannot be supported. 

FY 2008 DCFO1; Army The Department has developed 

standard business processes 

and data to capture trading 

partner information at the 

transaction level and to support 

eliminations. 

FY 2014 

1. DCFO: Deputy Chief Financial Office, Office of the Under Secretary of Defense (Comptroller) 

2. FMFIA Section 2, Nonfinancial Operations Material Weaknesses. The Department’s 

36 Component heads utilize an entity-wide, risk-based self assessment approach to establish 

and assess internal management controls for nonfinancial, mission-essential operations. 

Table 2b shows the weaknesses resulting from this assessment. In FY 2010, the Department 

identified six nonfinancial operations material weaknesses. Four of these material weaknesses 

previously were reported and were not resolved in FY 2010. The material weakness, “Certain 

Audits Do Not Meet Professional Standards,” was reported as resolved in FY 2009 and 

reopened in FY 2010. In addition to these five nonfinancial material weaknesses, the 

Department identified an additional weakness in FY 2010: “Personnel Resourcing, 

Qualifications and Training.” 

Table 2b. Effectiveness of Internal Control Over Nonfinancial Operations (FMFIA Section 2) 

Statement of Assurance: Qualified 

Nonfinancial Material 

Weaknesses 

Beginning 

Balance New Resolved Consolidated Reassessed Ending 

Balance 

1. Personnel Resourcing, 

Qualifications and Training 1 1 

2. Information Technology 

Management and 

Assurance 

1 1 

3. Personnel Security 

Investigations 1 1 

4. Internal Controls Over 

Contingency Contracting 1 1 

5. Contracting for Services 1 1 

6. Certain Audits Do Not Meet 

Professional Standards* 1 1 

Total Material Weaknesses 

Nonfinancial Operations 4 2 6 

 

ADDENDUM A Other Accompanying Information

27 
 

Department of Defense Agency Financial Report for FY 2010 

Table 2b-1 provides the description and corrective action plan for each material weakness 

related to internal controls over non-financial operations. 

Table 2b-1 FY 2010 Internal Control Over Non-Financial Reporting Material Weaknesses (1 of 2)

Material Weaknesses Year 

Identified 

DoD 

Components Corrective Actions 

Target 

Correction 

Date 

1 Personnel Resourcing, 

Qualifications and Training: 

Several DoD Components have 

identified weaknesses resulting 

from an inability to hire, train, and 

retain enough qualified personnel 

to meet mission requirements. 

FY 2008* OSD1; 

DCMA2; 

USFOR-A3; 

SOCOM4 

OSD requested a review of 

Acquisition and Procurement 

personnel to determine the 

workforce mix that meets risk 

assessment requirements. DCMA 

has increased the number of cost 

analysts and industrial engineers, 

established a Cost and Pricing 

Center, and plans to assess 

training and career competency 

progress of cost/price analysts. 

DCMA also plans to evaluate 

results of the FY 2010 hiring efforts 

upon completion of the 24-month 

training period. USFOR-A plans 

to establish policies and 

procedures to support logistics 

operations and will increase the 

number of logistical personnel. 

FY 2014 

2 Information Technology 

Management and Assurance: 

Reviews at several DoD 

Components indicate weaknesses 

in the management and assurance 

of the reliability and security of the 

information technology 

infrastructure. 

FY 2003 ASD(NII))5

; 

AFRICOM6

; 

Navy; 

SOCOM; 

PACOM7

; 

NDU8

; DIA9

AFRICOM plans to assess its 

consolidated enterprise and to 

develop additional requirements; 

engineer, implement, operate, and 

maintain a Joint Enterprise 

Network; and provide additional 

capabilities for the Tactical Local 

Area Network. The Navy plans to 

release policies that address 

deficiencies for Magnetic Hard 

Drive Disposals and unnecessary 

or unlawful collection of social 

security numbers. DON will also 

create personal information 

protection refresher training and 

reconcile remaining Common Tier 

Accounts. 

FY 2012 

1 OSD: Office of the Secretary of Defense 

2 DCMA: Defense Contract Management Agency 

3 USFOR-A: U.S. Forces – Afghanistan 

4 SOCOM: Special Forces Command 

5 ASD(NII): Assistant Secretary of Defense for Networks and Integration Information 6 AFRICOM: United States African Command 

7 PACOM: Pacific Command 

8 NDU: National Defense University 

9 Defense Intelligence Agency

ADDENDUM A Other Accompanying Information

28 
 

Department of Defense Agency Financial Report for FY 2010 

Table 2b-1 FY 2010 Internal Control Over Non-Financial Reporting Material Weaknesses (2 of 2)

Material Weaknesses Year 

Identified 

DoD 

Components Corrective Actions 

Target 

Correction 

Date 

31 Personnel Security Investigations: 

The GAO noted in FY 2005 that 

the DoD Personnel Security 

Program is a high-risk program due 

to issues related to timeliness, 

quality, and program oversight, and 

monitoring of the personnel 

security clearance process. DSS 

reported issues related to the 

identification and integration of 

critical information from the 

Counter Intelligence Program and 

DSS organizational entities. 

FY 2003 OUSD(I)2; 

DSS3 The Department plans to implement a DoD Adjudicator 

Certification Program; pilot an 

Automated Record Check 

Procedure; develop a 

comprehensive case management 

system; conduct an evaluation to 

project DoD-wide military and 

civilian investigations; and provide 

an assessment of annual 

performance and trends towards 

workload, related timelines and 

associated costs. DSS plans to 

establish the Joint Threat 

Assessment Fusion Center and will 

test and validate that all corrective 

actions have been completed. 

FY 2011 

4 Internal Controls Over Contingency 

Contracting: The Army reported 

that the acquisition workforce was 

not adequately staffed, trained, 

structured or empowered to meet 

current and future in-theater 

contracting requirements. 

FY 2007 OUSD 

(AT&L)4

; 

Army; DCMA5

Self-inspections and procurement 

management reviews will continue 

to validate the use of the 

Management Control Evaluation 

Checklist and compliance with 

internal control procedures for 

adequate contractor surveillance, 

manning and training. 

FY 2014 

5 Contracting for Services: GAO has 

designated DoD contract 

management as a high-risk area 

due to a lack of guidance, planning, 

tracking, oversight, training and 

screening related to service 

contracts. The Army reported that 

because Contracting Officer’s 

Representatives (COR) were poorly 

trained, justifications for services 

contracts were inadequate and 

there were improper uses of 

contractor labor. 

FY 2006 Army The Army plans to implement 

revised management and oversight 

of service contracts, develop COR 

guidance, and provide additional 

resources for contract surveillance. 

FY 2012 

6 Certain Audits Do Not Meet 

Professional Standards: A GAO 

audit and DCAA investigation 

identified widespread problems 

with DCAA audit quality, 

attributable in part to a focus on 

production volume at the expense 

of quality. 

FY 2009 DCAA6

 DCAA is developing policies and 

procedures for auditors and will 

institute peer reviews, life-cycle 

training, and workforce surveys. 

FY 2012 

1 The Secretary of Defense Communications Office (SDCO) reported a weakness in Personnel Resourcing, Qualifications, 

and Training in FY 2008. In FY 2010, this weakness was elevated to a Department-wide system material weakness. 2

 OUSD(I): Office of the Under Secretary of Defense (Intelligence) 3 DSS: Defense Security Service 

4 OUSD(AT&L): Office of the Under Secretary of Defense (Acquisition, Technology, and Logistics) 

5 DCMA: Defense Contract Management Agency 

6 DCAA: Defense Contract Audit Agency

ADDENDUM A Other Accompanying Information

29 
 

Department of Defense Agency Financial Report for FY 2010 

3. FMFIA Section 4, Financial System Nonconformance Weaknesses: The Department 

requires financial system conformance with federal requirements and reports. The Department 

reported one weakness that includes a wide range of pervasive problems related to financial 

systems. Table 2c shows the resulting weakness. 

Table 2c. Conformance with Financial Management System Requirements (FMFIA Section 4) 

Statement of Assurance: No Assurance 

System Nonconformance Ref 

Table 1 

Beginning

Balance New Resolved Consolidated Reassessed Ending

Balance 

1. Financial Management 

Systems 9 1 1 

Total System Conformance 

Material Weaknesses 1 1 

Table 2c-1, below, provides the description and corrective action plan for the material weakness 

related to internal controls over financial systems. 

TABLE 2c-1 FY 2010 Internal Controls Over Financial Systems Material Weakness 

Material Weakness Year 

Identified 

DoD 

Components Corrective Actions 

Target 

Correction 

Date 

1 Financial Management Systems: 

Most DoD financial systems were 

developed decades ago to meet the 

requirements of budgetary accounting 

and do not provide the capability to 

record costs and assets in 

compliance with current accounting 

standards. Improvements to the 

current systems environment also are 

complicated by the use of and 

reliance upon many mixed (feeder) 

systems that are not well integrated 

with each other or the core financial 

system. 

FY 2001 Army; 

Air Force; 

OSD1

; 

DFAS2

; 

DTRA3

; 

DIA4; DLA5 

Most DoD Components 

have embarked on an effort 

to implement a compliant 

end-to-end financial 

management system, 

anchored by an enterprise 

resource planning (ERP) 

system that provides the 

core financial system as well 

as replacing many of the 

mixed (feeder) systems. 

FY 2017 

1

 Office of the Secretary of Defense 

2

 Defense Finance and Accounting Service 

3

 Defense Threat Reduction Agency 

4

 Defense Intelligence Agency 

5

 Defense Logistics Agency

ADDENDUM A Other Accompanying Information

30 
 

Department of Defense Agency Financial Report for FY 2010 

Statement of Assurance over Financial Reporting, Nonfinancial Operations and Financial 

Systems Process: 

The revised OMB Circular A-123 requires an annual Statement of Assurance that provides 

assurances on the effectiveness of internal controls of overall operations (non-financial program 

and administrative controls), the internal controls over financial reporting, and the internal 

controls over financial systems. The Department’s 36 Component heads are required to report 

their respective Component Statements of Assurance to the Secretary of Defense. The 

Component heads represent the 3 Military Departments, 10 Combatant Commands, Joint Staff, 

Office of Secretary of Defense, DoD Office of Inspector General, 19 Department Agencies, and 

the DoD Financial Reporting Senior Assessment Team. Following the submission of the 

Components’ Statements of Assurance, the Secretary of Defense produces an overall DoD 

Statement of Assurance that reflects the systemic material weaknesses, or material 

weaknesses commonly reported by the Components throughout the Department. Creating an 

annual Statement of Assurance includes flowcharting key business processes that impact 

financial reporting and non-financial operations, identifying and assessing risk within the 

processes, identifying internal controls, testing internal controls, establishing controls found to 

be deficient, and reporting on the results of the assessments and tests. The Department 

asserts that all Components, as prescribed by DoD’s regulatory guidelines, have reported their 

individual statements of assurance over internal control to the Secretary of Defense. More 

information concerning DoD’s process for developing the Statement of Assurance is available at 

http://comptroller.defense.gov/micp.html. 

Federal Financial Management Improvement Act (FFMIA) 

The DoD IG and the audit agencies within the Military Services have reported on DoD’s noncompliance with FFMIA. The DoD’s noncompliance is due to the reliance upon legacy financial 

management systems by the various Components. These financial systems, for the most part, 

do not comply with the wide range of requirements for systems compliance and therefore do not 

provide the necessary assurance that the core financial system or the mixed systems 

information can be traced to source transactional information. Table 3 reflects DoD’s 

compliance with FFMIA. 

Table 3. Compliance with Federal Financial Management Improvement Act 

Agency Auditor 

Overall Substantial Compliance No No 

1. System Requirements No No 

2. Accounting Standards No No 

3. U.S. Standard General Ledger at Transaction Level No No 

ADDENDUM A Other Accompanying Information

31 
 

Department of Defense Agency Financial Report for FY 2010 

IMPROPER PAYMENTS INFORMATION ACT REPORTING 

The Improper Payments Information Act (IPIA) of 2002, as implemented by OMB 

Circular No. A-123, Appendix C, “Requirements for Effective Measurement and Remediation of 

Improper Payments,” requires federal agencies to review all programs and activities annually 

and identify those that may be susceptible to significant erroneous payments. On 

November 20, 2009, the President issued Executive Order (EO) 13520, “Reducing Improper 

Payments,” which added several new reporting requirements for Federal agencies, including 

quarterly reporting of high-dollar improper payments to individuals and entities. The Improper 

Payments Elimination and Recovery Act (IPERA), which was passed unanimously by both 

houses of Congress and signed into law on July 22, 2010, is targeted at reducing wasteful 

spending by identifying government programs that are susceptible to significant improper 

payments and requiring corrective action plans be implemented to alleviate the waste. The 

IPERA, which amends the IPIA, established new reporting thresholds based on percentages of 

program outlays or dollar amounts of annual improper payments. 

Based on the large volume of transactions and high dollar amounts, OMB requires the 

Department to report on the following programs: (1) Military Health Benefits; (2) Military Pay; 

(3) Civilian Pay; (4) Military Retirement; and (5) Travel Pay. The Improper Payment Reduction 

Outlook table, included at the end of this section, presents improper payment estimates for 

these programs, as well as out-year reduction targets. Commercial Pay information is included 

in the section entitled Recovery Auditing. 

Risk Assessment 

The DoD’s risk assessments for each of the programs identified above address the 

effectiveness of internal controls in place to prevent improper payments (such as pre-payment 

reviews and automated business activity tools), as well as system weaknesses identified 

internally or by outside audit activities. The DoD’s improper payment percentages are 

extremely low. Numerous pre- and post-payment controls further minimize and reduce 

improper payments. 

Statistical Sampling Process 

The Department uses random sampling methods designed to meet or exceed OMB’s 

requirement to estimate annual improper payments with a 90 percent confidence interval, plus 

or minus 2.5 percent. For Military Pay, Civilian Pay, Military Retirement, and Travel Pay postpayment reviews performed by the Defense Finance and Accounting Service (DFAS) and the 

U.S. Army Corps of Engineers (USACE), the Department uses statistically valid random 

sampling methods. The smaller reporting Components perform a 100 percent post-payment 

review. 

Military Health Benefits. TRICARE is a triple-option health benefit plan available to Active Duty 

family members, retirees and their family members, and family members of deceased service 

members and Reserve members under the Tricare Reserve Select program. To determine an 

estimate of the annual amount of improper payments, the Department uses a statistically valid 

sampling method for the managed-care support services contracts and the Medicare dual 

eligibility contractor (TRICARE Dual Eligibility Fiscal Intermediary Contract). This process takes 

place quarterly. 

ADDENDUM A Other Accompanying Information

32 
 

Department of Defense Agency Financial Report for FY 2010 

The Department samples two types of records, paid claims and denied claims, processed by the 

managed-care support contractors and the Medicare dual eligibility contractor. 

• For the managed-care support services contracts, the Department selects the sample of 

paid claims from all records with government payments between $100 to $100,000, and 

audits all records with a payment of $100,000 and over. The Department uses the same 

methodology to select the sample of denied payment claims. The Department stratifies both 

the paid and denied claims samples at multiple levels within the $100 to $100,000 range. 

• For the Medicare dual eligibility contract, the Department reviews paid claims by sampling all 

records with government payments between $1 to $25,000, and audits all records with a 

government payment of $25,000 and over. The Department selects the denied claims 

sample from all records with a billed amount between $1 to $500,000, and audits all records 

with billed amounts over $500,000. The Department stratifies the paid claims sample at 

multiple levels within the $1 to $25,000 range and the denied claims sample at multiple 

levels within the $1 to $500,000 range. 

Military Pay. The DFAS selects accounts for each Component to review and produce annual 

estimates of improper payments. The Department samples accounts for both the Active Duty 

(Army, Navy, Air Force, and Marine Corps) and Reserve Components (Army Reserve, Army 

National Guard, Navy Reserve, Air Force Reserve, Air National Guard, and Marine Corps 

Reserve) on a monthly basis. 

Civilian Pay. Each of the Components (Army, Air Force, Navy/Marine Corps, Overseas and 

Defense Agencies) review sampled accounts on a monthly basis. The DFAS processes the 

largest portion of DoD’s civilian payments; however, both the Navy and Army independently 

process civilian payments for civilian mariners and local national payrolls in foreign countries. 

Military Retirement. The monthly random sampling universe of Military Retirement payments 

includes both the confirmed deceased retiree accounts and the overall population of retired and 

annuitant pay accounts. In FY 2011, the Department plans to expand the scope of the retired 

and annuitant pay reviews to include additional targeted pay entitlements that may be at risk of 

improper payments. 

Travel Pay. The DFAS reports the largest portion of DoD’s travel payments made by both the 

Defense Travel System (DTS) and the Windows Integrated Automated Travel System 

(WinIATS) for the Department of the Army. The DoD’s total travel payment population includes 

travel payments computed, paid, and reported independently by the Military Services and other 

Defense agencies. The Improper Payment Reduction Outlook table, included at the end of this 

section, represents the combined results of the review of DFAS-disbursed travel payments, as 

well as for Army-Europe, Army-Korea, the Air Force, the Navy, USACE, the National 

Geospatial-Intelligence Agency (NGA), and the Defense Media Activity. 

The DFAS sampling universe includes trip records settled and paid for each Military Service 

Component and the Defense Agencies through DTS, and for Temporary Duty (TDY) and 

Permanent Change of Station (PCS) vouchers computed and paid by DFAS for the Army 

through WinIATS. 

ADDENDUM A Other Accompanying Information

33 
 

Department of Defense Agency Financial Report for FY 2010 

Root Causes of Errors and Corrective Action Plans 

Military Health. For several years, the TRICARE Management Activity (TMA) has had contract 

performance standards in place to ensure accurate health claims processing and payment. The 

annual audit process identifies overpayment amounts and projects these errors to the audit 

universe. Subsequently, the managed-care support contractor becomes liable for this total 

amount. The performance accuracy standard for this contract is no more than 2 percent in 

payment errors; however, the actual error rate (reported 12 months in arrears) normally falls 

below 1 percent. This unique contractual design, coupled with numerous pre- and postpayment controls, effectively minimizes the Government’s risk for improper payments in this 

program. 

The primary causes of military health care errors benefit payment errors are: 

• Incorrect pricing (42 percent); 

• Cost share/deductible errors (22 percent); 

• Incorrect benefit determinations (14 percent); 

• Government payment miscalculations because of other health insurance (8 percent); 

• Miscellaneous (14 percent) 

The TMA requires the contractor to accept the risk for making any improper payments. 

Historically, the error rates have been below 1 percent, with the FY 2010 actual error rate at 

0.42 percent. 

Military Pay. The Department projects $505.9 million (0.61 percent of total net pay) in military 

pay improper payments based on review, estimates, and forecasts for October 2009 through 

September 2010. Approximately $319 million (63 percent) of the total improper payments 

occurred within the Reserve/Guard Components. The Army Reserve and Army National Guard 

accounted for $249.2 million (49 percent) of the $505.9 million in Reserve/Guard Component 

improper payments. 

Underpayments accounted for $338.8 million (67 percent) of the $505.9 million in improper 

payments. Most of these underpayments occurred within the Army Reserve and Army National 

Guard ($207 million) and represent unpaid leave that the member did not use before discharge 

or de-activation back to Reserve from Active duty status. The primary reasons for the under 

payments: 

• Leave Accountability/Lump Sum Leave (79 percent), resulting from un-reconciled/unpaid 

leave balances for Reservists/Guardsmen. 

• Family Separation Allowance (18 percent), resulting from incorrect reporting of the entitlement. 

• Basic Allowance for Housing (3 percent), resulting from incorrect reporting of the entitlement. 

Eighty seven percent of the $167.1 million in overpayments for military pay were recovered or 

have an action in place to recover the overpayment. In-service collections for overpayments, 

among select entitlement categories, amount to $144.7 million (28.6 percent) of total military 

pay improper payments. 

Most improper payments identified from random reviews, as well as in-service collections, are 

attributed to untimely or inaccurate entry into the pay systems. To rectify the causes for 

ADDENDUM A Other Accompanying Information

34 
 

Department of Defense Agency Financial Report for FY 2010 

ADDENDUM A Other Accompanying Information

35 

payment errors, the Department continues to advise the Military Services of these results and 

associated reasons for the errors. The DFAS provides the Military Service financial managers 

with monthly reports on the results of random reviews, reasons for and dollar value of errors, 

and year-to-date trends. 

Civilian Pay. The Department projects $81.2 million (0.24 percent of total net pay) in total 

-

tirement. Payments to deceased retirees continue to be the highest risk for 

o deceased 

civilian pay improper payments, $79.4 million in overpayments and $1.6 million in 

underpayments. Nearly 100 percent of the overpayments identified through in-service civilian 

pay collections have been recovered or have an action in place to recover the overpayment. 

Payment errors attributed to time and attendance accounted for $37 million of the total civilian 

pay in-service collections, and overseas-related civilian pay errors are estimated at 

$16.8 million. The remaining payment errors were detected through random post-payment 

reviews and were primarily caused by time and attendance and personnel action input errors. 

The primary causes of the improper payments identified from random reviews, as well as in

service collections, are untimely or inaccurate entry into the pay systems. Because most 

government payroll systems base their time and attendance submissions on anticipated versus 

actual hours worked, the Department must correct overpayments and underpayments in a 

subsequent pay period. Collections among the overseas civilian accounts often are attributed to 

repayment of overseas pay allowances that erroneously continued after the individual returned 

to the United States. The DFAS works diligently with the Components on corrective actions, 

advising them of the results of monthly civilian pay random reviews and the associated reasons 

for errors. 

Military Re

improper payments in the Military Retirement program. Based on FY 2010 reviews, the 

Department projects approximately $58.5 million (0.14 percent) in improper payments for this 

program, with almost the entire amount paid to deceased retirees. In many instances, 

payments to deceased retirees are unavoidable due to payment cycle dates and the fact that 

notifying a payroll activity of the retiree’s passing is unlikely to be the first action taken by the 

next-of-kin. A review of confirmed payments to deceased retirees in FY 2010 indicated that the 

Department recovered 96.3 percent of the overpayments within 60 days, demonstrating the 

effectiveness of controls within the retired pay system once the Department receives 

confirmation of a retiree’s death. 

The DoD’s control processes to prevent, identify, and reduce overpayments t

retirees include a series of periodic eligibility notifications, early detection data mining efforts, 

and partnerships with other Federal and state entities. The Department takes a proactive 

approach, routinely comparing retired and annuity payroll master file databases with the Social 

Security Administration’s deceased records and periodically comparing records with the Office 

of Personnel Management’s deceased files. The Department also compares its files with the 

Department of Veterans Affairs’ cemetery database and with individual states with sizable 

retiree and annuitant populations (e.g., Texas, California, and Florida). If a retiree is identified 

through this process as being deceased, an additional validation step is required or the account 

is suspended from further payment. The DoD's expanded definition of "acceptable source 

documents for notice of death" allows DFAS to initiate reclamation actions earlier, thereby 

increasing recovery of funds paid after date of death. 
 

Department of Defense Agency Financial Report for FY 2010 

Travel Pay. The FY 2010 projected improper payments in DTS and rates for both DTS 

(1.6 percent) and WinIATS (5.4 percent) reflect slight increases from the FY 2009 estimates. 

The FY 2010 improper payment estimates include random reviews of DTS trip records for the 

Military Services as well as monthly random reviews of WinIATS TDY and military PCS 

vouchers computed and disbursed by DFAS. 

The primary reasons for DTS improper payments include: 

• Lodging (43 percent): The Department reimbursed lodging expense without a receipt or 

based on an invalid receipt. The Department reimbursed lodging at the full rate when it 

should have reduced the payment to reflect actual cost, including when there was no cost 

incurred for the lodging. The traveler claimed lodging under both the “lodging” and 

“reimbursable expense” categories, resulting in a duplicate reimbursement. 

• Airfare (15 percent): The Department did not pay for airfare in accordance with the receipt 

or did not pay airfare at all. The Department reimbursed the traveler without supporting 

documentation and the travel card issuing bank could not verify the transaction. 

• Rental Car (15 percent): The Department reimbursed the rental car expense without a 

receipt or based on an invalid receipt. The traveler did not adjust the original cost estimate 

of the rental car to reflect the actual cost. The traveler claimed rental car expense under 

both the “transportation” and the “reimbursable expense” categories, resulting in a duplicate 

reimbursement. 

The other causes (27 percent) of DTS errors fall into several miscellaneous categories. 

Errors in the traveler’s request and Approving Official (AO) oversight resulted in nearly all of the 

monetary errors detected during the random reviews. On a quarterly basis, the DFAS provides 

the Defense Travel Management Office (DTMO) and DoD Components with error trend reports. 

The DFAS post-payment review personnel give presentations at Defense Travel Administrators 

training conferences and also brief senior service executives on these post-payment review 

statistics, trends, and illustrations of input errors. In addition, any improper payments identified 

are forwarded to the appropriate Debt Management Monitor for debt establishment and 

recovery. 

The primary reasons for WinIATS improper payments: 

• Per Diem (37 percent): Per diem/Meals & Incidental Expenses (M&IE) was paid at the 

incorrect rate, while the traveler was in leave status, and/or the traveler was paid advance 

per diem when it was not authorized. 

• Missing/Invalid Orders (9 percent): The Department reimbursed the claim without TDY and 

PCS orders or based on invalid orders. 

• Lodging (2 percent): The Department reimbursed lodging expense without the required 

lodging documentation (i.e., invalid lodging receipts), the statement of government-rate nonavailability is missing, incorrect per diem rates were paid, and/or lodging taxes were 

incorrectly paid. 

The other causes (52 percent) of WinIATS errors fall into several miscellaneous categories. 

The Department attributes the majority of errors to processing inaccuracies at the time of 

settlement and travel technician input errors. The DFAS has established an extensive set of 

preventative and monitoring actions, including: 

ADDENDUM A Other Accompanying Information

36 
 

Department of Defense Agency Financial Report for FY 2010 

• Post-payment reviewers meet monthly with travel pay operations personnel to discuss 

findings and preventative measures; 

• Pre-payment accuracy rates are reported by travel pay operations and monitored daily; 

• Implementation of travel pay examiner training programs based on post-payment review 

findings and recommendations; 

• Linked pre-payment to post-payment checklists to identify and prevent improper payments. 

Program Improper Payment Reporting 

The following table summarizes DoD’s improper payment reduction outlook and total program 

outlays (payments) from FY 2009 through FY 2013. 

Improper Payment Reduction Outlook (Note 8)

FY 2009 FY 2010 FY 2011 Estimate FY 2012 Estimate FY 2013 Estimate 

Program Outlays 

($ B) 

IP 

(%) 

IP 

($ M) 

Outlays 

($ B) 

IP

(%) 

IP 

($ M) 

Outlays

($ B) 

IP

(%) 

IP 

($ M) 

Outlays

($ B) 

IP

(%) 

IP 

($ M) 

Outlays 

($ B) 

IP 

(%) 

IP 

($ M) 

Military 

Health 

Benefits 

(Note 1) 

$11.7 0.42 $49.1 $12.5 2.0 $249.6 $18.9 2.0 $378 $20.1 2.0 $402.4 $21.6 2.0 $432.9 

Military Pay 

(Note 2) $84.60 0.48 $406.50 $82.5 0.61 $505.9 $71 0.55 $390.5 $71 0.53 $377.9 $71.3 0.50 $356.5 

Civilian Pay 

(Note 3) $29.40 0.32 $94.60 $34.0 0.27 $81.2 $32.3 0.26 $84 $32.3 0.25 $80.8 $32.3 0.24 $77.5 

Military 

Retirement 

(Note 4) $38.90 0.13 $49.50 $43.2 0.14 $58.5 $44.5 0.12 $53.4 $44.5 0.12 $53.4 $44.5 0.12 $53.4 

Travel Pay 

(Notes 5, 6, 7) $6.60 0.95 $59.90 $9.3 1.91 $174.6 $9.4 1.85 $173.9 $9.4 1.80 $169.2 $9.4 1.77 $164 

Note 1 Military Health Benefits: For FY 2009, approximate overpayments were $13.8 million and underpayments were $35.3 million. TMA always 

reported its actual improper payment dollars and percentage 12 months in arrears. Therefore, in the FY 09 AFR, only the basic 2% estimate 

was shown, whereas in the FY 10 AFR, the FY 09 actuals were available and included in the current year’s table. Outyear projections are 

flatlined at 2%, as this is the contract performance standard representing worst-case scenario. Historically, the actual error rate has been less 

than 1%. 

Note 2 Military Pay: For FY 2010, overpayments were $167.1 million, underpayments were $338.8 million 

Note 3 Civilian Pay represents data from DFAS, Army, and Navy. FY 2010 overpayments were $79.5 million, underpayments were $1.6 million. 

Note 4 Military Retirement: FY 2010 overpayments were $58.2 million, underpayments were $0.3 million. 

Note 5 Travel Pay: Includes data from DFAS, Army, Navy, Air Force, USACE, NGA, and DMA. TMA is no longer required to report separately, as all 

TMA travel payments now are processed by DFAS. 

Note 6 DFAS data represents July 2009 through June 2010 vouchers identified in FY 2010 and includes $1.7 million in duplicate payments that 

occurred between March 2008 and February 2009. The Department identifies the duplicate payments through a specific process established to 

determine if travelers filed in both DTS and WinIATS for the same period of travel. Navy data represents Fourth quarter, 2009 through third 

Quarter, FY 2010. Overpayments totaled $145.7 million and underpayments totaled $28.9 million. 

Note 7 The large increase in travel outlays for FY 2010 was due to an increase in Army-Europe’s deployments. The increase was carried forward for 

outyear projections for this year’s reporting, but may be revised based on FY 2011 activities. 

Note 8 Outyear projections for Travel, Civilian Pay, and Military Pay represent input from DFAS only.

ADDENDUM A Other Accompanying Information

37 
 

Department of Defense Agency Financial Report for FY 2010 

The Department established a separate, additional process to identify duplicate travel payments 

in DTS and WinIATS for the Army and the Defense Agencies. The Department identifies 

travelers who filed vouchers in both systems through use of payment and accounting data from 

the two travel systems stored in the Operation Data Store, along with dates of travel. Once 

DFAS confirms a duplicate payment, it notifies the Component of the findings and quickly 

establishes a collection action to recover the funds. The FY 2010 duplicate improper payments 

total $1.7 million, which includes duplicates paid from March 2008 to February 2009 that were 

identified in the current fiscal year. The $1.7 million is included in the total amount of improper 

travel payments reported in the preceding table. 

Recovery Auditing Reporting 

The Department utilizes a number of different mechanisms to prevent, identify, collect, and 

report improper payments. Regulatory requirements regarding agency recovery auditing 

programs state the importance of having a cost-effective program of internal control to prevent, 

detect, and recover overpayments to contractors resulting from payment errors. 

 The Department’s pre-payment controls include: 

• All relevant documents are available before making payment (e.g. invoice, packing list, 

receiving report, inspection report); 

• Payment of only the original invoice; 

• Performance of recovery audits. 

The Department conducts manual reviews of payment documentation at various steps in the 

pre-payment process. For example, the Department ensures it meets all Certifying Officer 

Legislation requirements prior to payment certification, to include receipt of proper 

documentation. In addition, before disbursement the Department performs various prevalidation checks, such as verification of payment amounts, payment type, etc. The Department 

currently uses the Business Activity Monitoring (BAM) tool, initially deployed in August 2008, to 

identify and prevent improper payments in DoD’s four largest commercial payment systems, 

which include the Mechanization of Contract Administrative Services (MOCAS), Computerized 

Accounts Payable System-Windows (CAPS-Windows), Integrated Accounts Payable System 

(IAPS), and OnePay. These systems account for an estimated 85 percent of all Defense 

commercial payments. These types of preventative (vs. detective) program integrity activities 

consistently prove to be the most cost effective. 

The DFAS also identifies improper commercial payments based on overpayments made from 

previous invoices detected in the current pay cycle, overpayments discovered during the 

contract reconciliation process, and payments made to the incorrect vendor. Further, the 

Department captures these improper payments in either the Contractor Debt System (CDS) or 

Improper Payment On-Line Database (IPOD) to identify, track, recover, and analyze to 

determine the root cause(s) of the improper payment. 

To further ensure proper identification and recovery of improper commercial payments, the 

Department uses various post-payment initiatives, including periodic duplicate payment reviews 

performed by the DFAS Internal Review Directorate for the four major commercial payment 

systems. The DFAS Internal Review (IR) auditors analyze monthly extracts of invoice and 

disbursing data for payments made through these systems and perform various quality control 

ADDENDUM A Other Accompanying Information

38 
 

Department of Defense Agency Financial Report for FY 2010 

checks to ensure the data is consistent and reasonable to volume and frequency. The DFAS IR 

auditors identify groups they believe to be duplicate payments and refer these to DFAS 

Accounts Payable staff for final determination. The DFAS Accounts Payable staff updates 

IPOD with the agreed-upon determination and follows up to ensure DoD recoups all outstanding 

duplicate payments. 

The Defense Logistics Agency (DLA) hired an external contractor that began conducting postpayment recovery audits in April 2009. This firm has identified approximately $1.7 million in 

improper payments, and recovery efforts recently have been initiated. The DFAS now makes all 

of DLA’s payments; however, the figures shown in the following table, entitled “FY 2010 

Recovery Audit Activity,” represent disbursements from DLA’s legacy system. 

Prior to FY 2010, TMA recovered approximately $34.5 million out of approximately $47.5 million in 

cumulative amounts identified. The majority of these recoveries were accomplished several years 

ago, when a private sector firm performed recovery auditing on amended Medicare cost reports. 

The Defense Contract Audit Agency has performed the recovery auditing function for TMA since 

FY 2008 and has recovered approximately $6 million through FY 2009. The Department will 

report FY 2010 recoveries in the FY 2011 Annual Financial Report once the final audits are 

completed (TMA reports 12 months in arrears for all payments made outside of DFAS). 

In FY 2010, the USACE identified $4.1 million in improper payments and recovered all but 

$30,000 thus far, representing a 99 percent recovery rate. 

 

ADDENDUM A Other Accompanying Information

39 
 

Department of Defense Agency Financial Report for FY 2010 

Reporting 

Categories DFAS (Note 2) USACE ARMY DLA (Note 3) TOTALS (Note 4)

Amount Subject to 

Review for Current 

Year Reporting $ 384,123,184,671 $26,694,071,778 $94,833,389 $26,553,907,970 410,912,089,838 $ 

Actual Amount 

Reviewed and 

Reported - CY $ 384,123,184,671 $26,694,071,778 $67,867,930 $2,984,126,054 410,885,124,379 $ 

Overpayment Amounts 

Identified for Recovery - 

CY $ 339,562,492 $4,092,110 $81,181 $1,737,198 $ 343,735,783

Amounts Recovered - 

CY $ 294,392,830 $4,061,331 $55,001 $46,999 $ 298,509,162

Overpayment Amounts 

Identified for Recovery - 

Prior Years (PYs) $ 213,465,364 $34,848,647 483 $0 $ 248,314,494

Amounts Recovered 

PYs $ 142,727,026 $34,325,917 483 $0 $ 177,053,426

Cumulative Amounts 

Identified for Recovery 

(CY+PYs) $ 553,027,856 $38,940,757 $81,664 $1,737,198 $ 592,050,277

Cumulative Amounts 

Recovered (CY+PYs) $ 437,119,856 $38,387,248 $55,484 $46,999 $ 475,562,588

Internal Costs $ 7,468,367 $672,749 $43,617 $ 8,184,733

Recovery Rate 79% 99% 68% 2.7% 80%

FY 2010 Recovery Audit Activity (Note 1,5,6)

Note 1: The figures reflected in the FY 2009 AFR Recovery Auditing Chart were incorrect, as updates arrived too late for inclusion in last year’s 

AFR. The Amounts Identified for Recovery (CY 2009) should have been $47.1M not $94M. In addition, the DFAS data contained in the 

chart for FY 2009 was through July 2009, not September 2009. 

Note 2: Data represent MOCAS and Vendor Pay disbursements. 

Note 3: The $26.6B subject to review represents total payments processed through DLA’s legacy system (SAMMS) for FY 2005-2007. These 

amounts were disbursed through MOCAS and therefore are not included in the chart totals to prevent possible duplication. 

Note 4: Totals (except for internal costs) include small amounts reported by Army Europe and Korea. 

Note 5: Navy commercial payments now are disbursed through DFAS and so no longer are reported separately. 

Note 6: TRICARE Management Activity reports $31.8M in recoveries out of $47.5M in overpayments identified from FY 2004-2009. FY 2010 actual 

results will be available for reporting in the FY 2011 AFR for TMA. 

Business Activity Monitoring (BAM) 

The DFAS utilizes the Business Activity Monitoring (BAM) tool to perform continuous, 

automated analysis of transactions. BAM is a software tool that provides transaction review 

using computer logic and algorithms to detect and prevent improper payments. The financial 

transactions are assembled from various source systems and then subjected to forensic 

financial logic and comparison. 

The DFAS uses BAM to review the four largest DoD entitlement systems (MOCAS, CAPSWindows, IAPS, and OnePay), which ensures review of 85 percent of all contract and vendor 

payments made by DFAS. 

ADDENDUM A Other Accompanying Information

40 
 

Department of Defense Agency Financial Report for FY 2010 

ADDENDUM A Other Accompanying Information

41 

The BAM process facilitates rich metrics collection, which allows DFAS to focus on prevention 

and elimination of erroneous payments. Metrics collected in the Improper Payments BAM 

process in FY 2009 fueled Lean6 projects, which resulted in BAM logic changes to increase 

detection, system change requests for entitlement source systems, and improvements in 

operational business processes. 

Accountability 

Certifying officer legislation holds certifying and disbursing officers accountable for government 

funds. In accordance with 10 U.S.C. 2773a, pecuniary liability attaches automatically when 

there is a fiscal irregularity, i.e., (1) a physical loss of cash, vouchers, negotiable instruments, or 

supporting documents, or (2) an improper payment. Efforts to recover from a recipient must be 

undertaken in accordance with the debt collection procedures, as outlined in the DoD Financial 

Management Regulation Volume 5, Chapters 28 and 29, and Volume 10, Chapter 18. 

Infrastructure 

The Department has much of the information and infrastructure needed to reduce improper 

payments in each of the five improper payment program areas as well as the area of 

commercial pay. The DoD has implemented the BAM tool to identify potential improper 

commercial payments prior to disbursement. With the additional requirements for tracking and 

reporting payment errors that were issued during FY 2010, such as Executive Order 13520, 

“Reducing Improper Payments,” the enactment of the Improper Payments Elimination and 

Recovery Act, the Payment Recapture Audit memorandum, and the Do Not Pay List, DoD will 

reevaluate and prioritize its resource allocations to ensure maximum compliance. 

Barriers 

The barrier that existed for Military Retirement in prior annual reporting has been eliminated. 

Under the authority of Section 324 of the 2008 National Defense Authorization Act, DFAS was 

able to migrate the management and operation of Retired and Annuitant Pay back to the 

Federal sector. This change is expected to generate more flexibility, equal or better customer 

service, and $20 million to $23 million in savings over 10 years. Conversion back to the DFAS 

was completed during FY 2010. 
Department of Defense 

Agency Financial Report

Addendum B 2010 November 15, 2010
 

Department of Defense Agency Financial Report for FY 2010 

ADDENDUM B Unaudited Financial Statements - DSCA

1 

The following Defense Security Cooperation Agency financial statements include these 

programs executed on behalf of Executive Office of the President (EOP). The Department 

continues to report activity resulting from EOP allocation transfers within the DoD financial 

statements. 

Consolidated Balance Sheet 

Security Assistance Dollars in Thousands 

2010 

Consolidated

2009 

Consolidated 

ASSETS (Note 2) 

 Intragovernmental: 

 Fund Balance with Treasury (Note 3) $ 20,121,055 $ 20,764,468 

 Other Assets (Note 6) 670 0 

 Total Intragovernmental Assets $ 20,121,725 $ 20,764,468 

 Cash and Other Monetary Assets (Note 7) 18,647,997 17,208,614 

 Accounts Receivable, Net (Note 5) 42,609 40,578 

 Loans Receivable (Note 8) 1,075,587 1,164,410 

 Other Assets (Note 6) 20,504,441 14,833,562 

 TOTAL ASSETS $ 60,392,359 $ 54,011,632 

 LIABILITIES (Note 11) 

 Intragovernmental: 

 Accounts Payable (Note 12) 189,675 0 

 Debt (Note 13) 462,989 619,562 

 Other Liabilities (Note 15 and 16) 630,948 651,037 

Total Intragovernmental Liabilities $ 1,283,612 $ 1,270,599

 Accounts Payable (Note 12) 330,940 405,251 

 Employment Benefits (Note 17) 486 429 

 Other Liabilities (Note 15 and 16) 53,914,931 47,303,711 

Commitments & Contingencies (Note 16)

 TOTAL LIABILITIES $ 55,529,969 $ 48,979,990 

 NET POSITION 

 Unexpended Appropriations - Other Funds 2,524,190 3,530,529 

 Cumulative Results of Operations - Other Funds 2,338,200 1,501,113 

 TOTAL NET POSITION $ 4,862,390 $ 5,031,642 

 TOTAL LIABILITIES AND NET POSITION $60,392,359 $ 54,011,632 
 

Department of Defense Agency Financial Report for FY 2010 

ADDENDUM B Unaudited Financial Statements - DSCA

2 

Consolidated Statement of Net Cost 

Security Assistance Dollars in Thousands 

2010 

Consolidated

2009 

Consolidated

Program Costs 

 Gross Costs $23,517,323 $ 23,838,982 

 (Less: Earned Revenue) (134,858) (58,392) 

 Net Cost before Losses (Gains) from Actuarial Assumption

 Changes for Military Retirement Benefits $23,382,465 $ 23,780,590 

 Net Cost of Operations $23,382,465 $ 23,780,590 
Department of Defense Agency Financial Report for FY 2010 

Consolidated Statement of Changes in Net Position Security Assistance For Periods ended September 30, 2010 and 2009 2010 Earmarked Funds 2010 All Other Funds 2010 Eliminations 2010 Consolidated 2

Earmar

CUMULATIVE RESULTS OF OPERATIONS Beginning Balances $ 0 $ 1,501,113 $ 0 $ 1,501,113 $ Beginning balances, as adjusted $ 0 $ 1,501,113 $ 0 $ 1,501,113 $ Budgetary Financing Sources:  Appropriations used 0 5,423,865 0 5,423,865  Nonexchange revenue 0 18,795,687 0 18,795,687 Total Financing Sources $ 0 $ 24,219,552 $ 0 $ 24,219,552 $ Net Cost of Operations (+/-) 0 23,382,465 0 23,382,465 Net Change $ 0 $ 837,087 $ 0 $ 837,087 $ Cumulative Results of Operations $ 0 $ 2,338,200 $ 0 $ 2,338,200 $ UNEXPENDED APPROPRIATIONS Beginning Balances 0 3,530,529 0 3,530,529 Beginning balances, as adjusted $ 0 $ 3,530,529 $ 0 $ 3,530,529 $ Budgetary Financing Sources:  Appropriations received 0 4,411,706 0 4,411,706  Appropriations transferred (in/out) 0 9,500 0 9,500  Other adjustments (rescissions, etc) 0 (3,680) 0 (3,680)  Appropriations used 0 (5,423,865) 0 (5,423,865) Total Budgetary Financing Sources $ 0 $ (1,006,339) $ 0 $ (1,006,339) $ Unexpended Appropriations $ 0 $ 2,524,190 $ 0 $ 2,524,190 $ Net Position $ 0 $ 4,862,390 $ 0 $ 4,862,390 $ 

ADDENDUM B 

3 
 

Department of Defense Agency Financial Report for FY 2010 

ADDENDUM B Unaudited Financial Statements - DSCA 

4 

Combined Statement Of Budgetary Resources

Security Assistance 

Dollars in Thousands

Budgetary 

Financing Accounts 

Nonbudgetary 

Financing Accounts 

2010 

Combined

2009 

Combined

2010 

Combined 

2009 

Combined

Budgetary Resources 

Unobligated balance, brought forward, 

October 1 $ 1,316,139 $ 186,394 $ 11,433 $ 12,043 

Recoveries of prior year unpaid obligations 23,609 13,427 0 0 

Budget authority 

 Appropriation 28,422,462 31,247,463 0 0 

 Borrowing authority 0 0 4,650 3,747 

 Contract authority 27,267,781 35,987,005 0 0 

 Spending authority from offsetting collections 

 Earned 

 Collected 50 22 290,551 251,868 

 Subtotal $ 55,690,293 $ 67,234,490 $ 295,201 $ 255,615 

Nonexpenditure transfers, net, anticipated 

and actual 9,500 2,480 0 0 

Permanently not available (24,014,438) (24,919,038) $ (294,069) (244,353) 

Total Budgetary Resources $ 33,025,103 $ 42,517,753 $ 12,565 $ 23,305 

Obligations incurred: 

Direct 32,896,764 41,201,614 5,455 11,872 

 Subtotal $ 32,896,764 $ 41,201,614 $ 5,455 $ 11,872 

Unobligated balance: 

Apportioned 106,845 1,300,745 (3,556) 727 

 Subtotal $ 106,845 $ 1,300,745 $ (3,556) $ 727 

Unobligated balance not available 21,494 15,394 10,666 10,706 

Total status of budgetary resources $ 33,025,103 $ 42,517,753 $ 12,565 $ 23,305 
 

Department of Defense Agency Financial Report for FY 2010 

ADDENDUM B Unaudited Financial Statements - DSCA 

5 

Combined Statement Of Budgetary Resources 

Security Assistance 

Dollars in Thousands

Budgetary 

Financing Accounts 

Nonbudgetary 

Financing Accounts 

2010 

Combined

2009 

Combined

2010 

Combined 

2009 

Combined

Change in Obligated Balance: 

Obligated balance, net 

Unpaid obligations, brought forward, October 1 87,898,916 73,811,001 2,587,278 2,645,228

Total unpaid obligated balance 87,898,916 73,811,001 2,587,278 2,645,228

Obligations incurred net (+/-) 32,896,764 41,201,614 5,455 11,872

Less: Gross outlays (29,070,137) (27,100,272) (130,509) (69,822)

Less: Recoveries of prior year unpaid obligations, actual (23,609) (13,427) 0 0 

Obligated balance, net, end of period 

Total, Unpaid obligations balance, net, end of period 91,701,934 87,898,916 2,462,224 2,587,278

Total, unpaid obligated balance, net, end of period $ 91,701,934 $ 87,898,916 $ 2,462,224 $ 2,587,278

Net Outlays 

Net Outlays: 

Gross outlays 29,070,137 27,100,272 130,509 69,822

Less: Offsetting collections (50) (22) (290,551) (251,868)

Less: Distributed Offsetting receipts (24,010,756) (18,716,162) 0 0 

Net Outlays $ 5,059,331 $ 8,384,088 $ (160,042) $ (182,046)

Note 1. Significant Accounting Policies 

1.A. Basis of Presentation 

These financial statements have been prepared, in accordance with Chief Financial Officers Act 

of 1990 (CFO), to report the financial position and results of operations of the Foreign Military 

Sales (FMS) Trust Fund and its accounts, as identified in the President’s Budget Request, the 

Foreign Operations (International Affairs) appropriated accounts. The FMS Trust Fund 

accounts for U.S. government funds appropriated for security assistance and for funds 

deposited by foreign countries and international organizations, or by others for their use. The 

FMS Trust Fund and other accounts for funds appropriated for security assistance are managed 

by the Defense Security Cooperation Agency (DSCA) on behalf of the Department of Defense 

(DoD), in accordance with the authority of the Executive Office of the President (EOP) and the 

requirements of the CFO Act of 1990, as expanded by the Government Management Reform 

Act of 1994, and other applicable laws and regulations. 

The financial statements were prepared from accounting records that are maintained by the 

Military Departments, Other Defense Organizations (ODO), and the Defense Finance and 

Accounting Service (DFAS) in accordance with, and to the extent possible, U.S. generally 

accepted accounting principles (USGAAP) promulgated by the Federal Accounting Standards 

Advisory Board (FASAB); the Office of Management and Budget (OMB) Circular No. A-136, 

Financial Reporting Requirements; and the Department of Defense (DoD) Financial 

Management Regulation (FMR). 

The accompanying financial statement information accounts for all FMS Trust Fund resources 

and the accounts for funds appropriated for security assistance, unless otherwise noted. 

Information relative to classified assets, programs, and operations is excluded from the 

statements or otherwise aggregated and reported in such a manner that it is not discernable. 
 

Department of Defense Agency Financial Report for FY 2010 

ADDENDUM B Unaudited Financial Statements - DSCA 

6 

The FMS Trust Fund accounting systems, including its subaccounts and the accounts for funds 

appropriated for security assistance, are unable to fully implement all elements of USGAAP and 

OMB Circular No. A-136 due to limitations of financial management processes, financial 

systems, and nonfinancial systems and processes that support the financial statements. Many 

of the accounts derive their reported values and other information for major asset and liability 

categories largely from nonfinancial systems, such as the Military Departments’ inventory and 

logistic systems. Such legacy systems were designed to support reporting requirements for 

maintaining asset accountability and reporting the status of federal appropriations rather than 

preparing financial statements consistent with USGAAP. There are ongoing efforts to 

implement process and system improvements addressing these limitations. 

The Department currently has 13 auditor identified material weaknesses. Of these, the FMS 

Trust Fund and the accounts for funds appropriated for security assistance may include: 

(1) Financial Management Systems, (2) Intergovernmental Eliminations, (3) Fund Balance with 

Treasury, (4) Statement of Net Cost, (5) Other Accounting Entries, (6) Reconciliation of Net 

Cost of Operations to Budget, (7) Accounts Payable, and (8) Accounts Receivable. 

1.B. Mission of the Reporting Entity 

The DSCA mission is to lead, direct, and manage security cooperation programs and resources 

to support the U.S. national security objectives. Such programs build relationships with foreign 

countries and international organizations that promote the U.S. interests, develop allied and 

partner capacities for self-defense and coalition participation in overseas contingency 

operations, and promote peacetime and contingency access for U.S. forces. The DSCA 

accomplishes its responsibilities for security cooperation in concert with the Department of State 

(DOS), Military Departments, other U.S. Government organizations, U.S. industry, and nongovernmental organizations. Together we provide financial and technical assistance, Foreign 

Military Financing (FMF) for defense articles and services, including training, provided through 

the FMS program, as well as training provided and funded under International Military Education 

and Training (IMET) authorities. 

1.C. Appropriations and Funds 

The FMS Trust Fund is a U.S. Treasury account (Treasury Account Symbol (TAS) 8242) which 

contains deposits from FMS foreign country and international organization customers, as well as 

funds transferred into the account from U.S. Government appropriations, for use in carrying out 

specific purposes or programs in accordance with the Arms Export and Control Act (AECA), as 

amended (22 U.S.C. § 2751 et seq.), the Foreign Assistance Act of 1961 (FAA), as amended, 

(22 U.S.C. § 2151 et seq.), and other legal authorities. The monies in the FMS Trust Fund are 

subject to U.S. Treasury account system controls from the date of receipt to the date of 

expenditure or refund. At the country or customer level, there are separate subaccounts used 

by the Department through DSCA and DFAS to separately and individually account for each 

FMS customer’s deposits, other collections or deposits, payments of bills, refunds, and 

adjustments. At the U.S. Treasury level, the corpus of the FMS Trust Fund represents the total 

aggregations of balances (receipts minus disbursements) for all activities and programs. 

The Department utilizes separate U.S. Treasury Accounts for the general fund Foreign 

Operations (International Affairs) appropriations. These accounts are: 

• International Military Education and Training (TAS 1081) 

• Foreign Military Financing Program Account (TAS 1082) 

• Foreign Military Loan Liquidating Account (TAS 4121) 

• Foreign Military Financing Direct Loan Financing Account (TAS 4122) 
 

Department of Defense Agency Financial Report for FY 2010 

ADDENDUM B Unaudited Financial Statements - DSCA 

7 

• Military Debt Reduction Financing Account (TAS 4174) 

The DSCA receives funds for the FMS Trust Fund and the accounts for funds appropriated for 

ed for financial 

nds held in trust by the U.S. 

fers from certain fund(s) that meet the OMB exception, and 

ment systems utilized for the FMS Trust Fund and the accounts for 

financial 

 and ODOs, is determining the actions required to bring its 

security assistance as general, special, and trust funds. The DSCA uses these appropriations 

and funds to execute its missions and subsequently reports on resource usage. 

General and special appropriations transferred into the FMS Trust Fund are us

transactions, including personnel, operations and maintenance of security assistance functions, 

and financing of FMS, which may include sales of defense articles and services from stock or 

through procurement, and the sale of foreign military construction. 

The FMS Trust Fund accounts for receipts and expenditures of fu

government for use in carrying out specific purposes or programs in accordance with applicable 

laws, regulations, and agreements. 

The DSCA receives allocation trans

all related activity is included in DSCA financial statements, which are reported separately from 

the DoD financial statements, for: International Military Education and Training, Foreign Military 

Financing Program Account, Foreign Military Loan Liquidating Account, Foreign Military 

Financing Direct Loan Financing Account, Military Debt Reduction Financing Account, and the 

FMS Trust Fund. An allocation transfer is an entity’s legal delegation of authority to obligate 

budget authority and outlay funds on its behalf. Generally, all financial activity related to 

allocation transfers are reported in the financial statements of the parent entity. Exceptions to 

this general rule will apply to specific funds for which OMB has directed that all activity will be 

reported in the financial statements of the child to the transfer. Exceptions include all U.S. 

Treasury-Managed Trust Funds, EOP, and all other funds specifically designated by OMB. 

1.D. Basis of Accounting 

The legacy financial manage

funds appropriated for security assistance are unable to meet full accrual accounting. Many of 

the DSCA, Military Departments, and ODO financial and nonfinancial feeder systems and 

processes were designed and implemented prior to the issuance of USGAAP guidance. These 

legacy systems were not designed to collect and record financial information on a full accrual 

accounting basis as required by USGAAP. Most of DSCA, MILDEP, and ODO financial and 

nonfinancial legacy systems were designed to record information on a budgetary basis. 

The FMS Trust Fund and the accounts for funds appropriated for security assistance 

statements and supporting trial balances are compiled from the underlying financial data and trial 

balances of the Military Departments, ODOs, and their sub-entities. The underlying data is largely 

derived from budgetary transactions (obligations, disbursements, and collections), from 

nonfinancial feeder systems, and accruals made for major items such as payroll expenses and 

accounts payable. Some of the lower level trial balances may reflect known abnormal balances 

resulting largely from business and system processes. At the consolidated Military Service and 

Defense Agency level, these abnormal balances may not be evident. Disclosures of abnormal 

balances are made in the applicable footnotes, but only to the extent that the abnormal balances 

are evident at the consolidated level. 

The DSCA, with Military Departments

financial and nonfinancial feeder systems and processes into compliance with USGAAP. One 

such action is the current revision of accounting systems to record transactions based on the U.S. 

Standard General Ledger (USSGL). Until all DSCA, Military Departments, and ODO systems and 

related processes have been updated to collect and report financial information as required by 

USGAAP, reported financial data is based on budgetary transactions data from nonfinancial 

feeder systems, and accruals. 
 

Department of Defense Agency Financial Report for FY 2010 

ADDENDUM B Unaudited Financial Statements - DSCA 

8 

1.E. Revenues and Other Financing Sources 

As authorized by legislation, payments for the sales of defense articles and services are 

s provided on an annual or multiyear basis for 

requires the recognition of operating expenses in the period incurred. Current 

 systems for the FMS Trust Fund and the accounts for funds 

tity eliminates intraentity activity and balances from 

t overstatement for business with itself. 

ts for the 

portion debt and its related costs to 

deposited into the FMS Trust Fund. Appropriation

security assistance are a financing source and are transferred into the FMS Trust Fund, or 

deposited into the accounts for funds appropriated for security assistance. Pricing for defense 

articles and services, including training, is established to recover costs as required by the 

AECA, the FAA, and OMB Circular A-25, User Charges. The FMS Trust Fund and the accounts 

for funds appropriated for security assistance recognize revenue when earned within the 

constraints of current system capabilities. 

The DSCA does not include nonmonetary support provided by friendly foreign countries and 

international organizations in amounts reported in the Statement of Net Cost and the Note 21, 

Reconciliation of Net Cost of Operations to Budget. 

The DSCA participates in assistance in kind agreements in its overseas presence. The 

assistance in kind provided in support of security cooperation programs includes the use of 

facilities and personnel (guards and drivers) at a small number of Security Cooperation Offices 

worldwide. 

1.F. Recognition of Expenses 

DoD policy 

financial and nonfinancial feeder

appropriated for security assistance were not designed to collect and record transactions on an 

accrual accounting basis. Estimates are made for major items such as payroll expenses, 

accounts payable, and unbilled revenue. 

1.G. Accounting for Intragovernmental Activities 

Accounting standards require that an en

consolidated financial statements in order to preven

However, DSCA cannot accurately identify most of its intragovernmental transactions because 

Military Department’s systems do not track buyer and seller data needed to match related 

transactions. In most cases, the buyer-side records are adjusted to agree with DoD seller-side 

balances and are then eliminated. The Department is implementing replacement systems and a 

standard financial information structure that will incorporate the necessary elements that will 

enable DoD to correctly report, reconcile, and eliminate intragovernmental balances. 

The U.S. Treasury’s Federal Intragovernmental Transactions Accounting Policy Guide and U.S. 

Treasury Financial Manual, Part 2 Chapter 4700, Agency Reporting Requiremen

Financial Report of the United States Government provide guidance for reporting and 

reconciling intragovernmental balances. The FMS Trust Fund and the accounts for funds 

appropriated for security assistance are unable to fully reconcile intragovernmental transactions 

with all federal agencies; however, the FMS Trust Fund is able to reconcile balances pertaining 

to borrowing from the U.S. Treasury and the Federal Financing Bank, Federal Employees’ 

Compensation Act (FECA) transactions with the Department of Labor, and benefit program 

transactions with the Office of Personnel Management. 

The DoD’s proportionate share of public debt and related expenses to the Federal Government 

is not included. The Federal Government does not ap

federal agencies. The DoD’s financial statements do not report any public debt, interest, or 

source of public financing whether from issuance of debt or tax revenues. 
 

Department of Defense Agency Financial Report for FY 2010 

ADDENDUM B Unaudited Financial Statements - DSCA 

9 

1.H. Transactions with Foreign Governments and International Organizations 

 assistance 

 in U.S. Treasury accounts and the Federal Reserve Bank in 

llars for payment of defense articles and services per 

 accounts for funds appropriated for security assistance accounts 

Each year, the FMS Trust Fund and the accounts for funds appropriated for security

sells defense articles and services to foreign governments and international organizations under 

the provisions of the AECA. 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 Federal Government. Payment in U.S. dollars is required in advance. 

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

The FMS Trust Fund monies are held

individual accounts established by the U.S. for foreign countries. Funds held in the Federal 

Reserve Bank are transferred to the FMS Trust Fund account to be disbursed for FMS purposes. 

For monetary financial resources maintained in U.S. Treasury accounts, the disbursing offices 

of DFAS, the Military Departments, the U.S. Army Corps of Engineers (USACE), and the DOS’s 

financial service centers process the majority of the FMS Trust Fund and the accounts for funds 

appropriated for security assistance cash collections, disbursements, and adjustments 

worldwide. Each disbursing station prepares monthly reports that provide information to the 

U.S. Treasury on checks issued, electronic fund transfers, interagency transfers, and deposits. 

In addition, DFAS sites and USACE Finance Center submit reports to the U.S. Treasury, by 

appropriation, on interagency transfers, collections received, and disbursements issued. The 

U.S. Treasury records this information to the applicable Fund Balance with Treasury (FBWT) 

account. On a monthly basis, FMS Trust Fund and the accounts for funds appropriated for 

security assistance FBWT is adjusted to agree with the U.S. Treasury accounts. 

1.J. Cash and Other Monetary Assets 

The FMS Trust Fund only accepts U.S. do

DoD 5015.38M Security Assistance Management Manual; Chapter 5; Foreign Military Sales 

Case Development. All payments and collections are in U.S. dollars. 

1.K. Accounts Receivable 

The FMS Trust Fund and the

receivable from other federal entities or the public include accounts receivable, claims 

receivable, and refunds receivable. 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 other federal agencies. 

Claims against other federal agencies are to be resolved between the agencies in accordance 

with dispute resolution procedures defined in the Intragovernmental Business Rules published 

in the Treasury Financial Manual at http://www.fms.treas.gov/tfm/vol1/07-03.pdf. 

1.L. Direct Loans and Loan Guarantees 

The DSCA administers the Foreign Military Financing program on behalf of the EOP. Direct 

loans and loan guarantees are authorized by sections 23 and 24 of the AECA of 1976, as 

amended, (P.L. 90-269), as amended, and section 503(a) and other specific legislation. These 

loans and guarantees assist friendly foreign countries and international organizations in 

purchasing U.S. defense articles and services. 
 

Department of Defense Agency Financial Report for FY 2010 

ADDENDUM B Unaudited Financial Statements - DSCA 

10 

1.M. Inventories and Related Property 

The FMS Trust Fund and the accounts for funds appropriated for security assistance do not 

maintain inventory. The defense articles are provided to the FMS customer from the U.S. 

Government or the contractor pursuant to a contract with the U.S. Government. Defense 

articles sold from the Department or the U.S. Coast Guard are assets of the providing 

component until title is transferred to foreign customer. 

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

Not applicable. 

1.O. General Property, Plant and Equipment 

Not applicable. 

1.P. Advances and Prepayments 

When advances are permitted by law, legislative action, or presidential authorization, DoD’s 

policy is to record advances and prepayments in accordance with USGAAP. As such, 

payments made in advance of the receipt of goods and services are reported as an asset on the 

Balance Sheet. The DoD’s policy is to expense and/or properly classify assets when the related 

goods and services are received. Not all military services who execute on behalf DSCA have 

implemented this policy primarily due to system limitations. 

1.Q. Leases 

Lease payments for the rental of DSCA operating facilities are contracted for and classified as 

operating leases. The DSCA, as the lessee, receives the use and possession of leased 

property, for example real estate, from a lessor in exchange for payment of funds. An operating 

lease does not substantially transfer all the benefits and risk of ownership. Payments for 

operating leases are charged to expenses over the lease terms as it becomes payable. 

Office space and leases are funded by the FMS Trust Fund. These costs were gathered from 

existing operating leases and General Services Administration bills, and interservice support 

agreements. Future year projections use the Consumer Price Index. The FMS Trust Fund and 

the accounts for funds appropriated for security assistance do not have capital leases. 

1.R. Other Assets 

Other assets includes civil service employee pay advances, travel advances, and certain 

contract financing payments that are not reported elsewhere on the FMS Trust Fund and the 

accounts for funds appropriated for security assistance Balance Sheet. 

The FMS Trust Fund and the accounts for funds appropriated for security assistance conduct 

business with commercial contractors using two primary types of contracts: fixed price and cost 

reimbursable. Contract financing payments are defined in the Federal Acquisition Regulations, 

Part 32, as authorized disbursements to a contractor prior to acceptance of supplies or services 

by the Government. These payments are designed to alleviate the potential financial burden on 

contractors performing on certain long-term contracts and facilitate competition for defense 

contracts. Contract financing payments clauses are incorporated in the contract terms and 

conditions and may include advance payments, performance-based payments, commercial 

advance and interim payments, progress payments based on cost, and interim payments under 

certain cost-reimbursement contracts. It is DoD policy to record certain contract financing 

payments as other assets. 
 

Department of Defense Agency Financial Report for FY 2010 

ADDENDUM B Unaudited Financial Statements - DSCA 

11 

Contract financing payments do not include invoice payments, payments for partial deliveries, 

lease and rental payments, or progress payments based on a percentage or stage of 

completion. The Defense Federal Acquisitions Regulation Supplement authorizes progress 

payments based on a percentage or stage of completion only for construction of real property, 

shipbuilding, and ship conversion, alteration, or repair. Progress payments based on 

percentage or stage of completion are reported as Construction in Progress. 

1.S. Contingencies and Other Liabilities 

The SFFAS No. 5, Accounting for Liabilities of the Federal Government, as amended by SFFAS 

No. 12, Recognition of Contingent Liabilities Arising from Litigation, defines a contingency as an 

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

gain or loss. The uncertainty will be resolved when one or more future events occur or fail to 

occur. The FMS Trust Fund and the accounts for funds appropriated for security assistance 

recognize contingent liabilities when past events or exchange transactions occur, a future loss is 

probable, and the loss amount 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 of incurring a loss or additional losses. 

The FMS Trust Fund and the accounts for funds appropriated for security assistance risk of loss 

due to contingencies arise as a result of pending or threatened litigation or claims and 

assessments due to events such as aircraft, ship, and vehicle accidents; medical malpractice; 

property or environmental damages; and contract disputes. 

1.T. Accrued Leave 

The FMS Trust Fund reports liabilities for military leave and accrued compensatory and annual 

leave for civilians. Sick leave for civilians is expensed as taken. The liabilities are based on 

current pay rates. 

1.U. Net Position 

Net Position consists of unexpended appropriations and cumulative results of operations. 

Unexpended Appropriations represent the amounts of budget authority that are unobligated and 

have not been rescinded or withdrawn. Unexpended Appropriations also represent amounts 

obligated for which legal liabilities for payments have not been incurred. Cumulative Results of 

Operations represent the net difference between expenses and losses and financing sources 

(including appropriations, revenue, and gains) since inception. The Cumulative results of 

operations also include donations and transfer in and out of assets that were not reimbursed. 

1.V. Treaties for Use of Foreign Bases 

Not applicable. 

1.W. Undistributed Disbursements and Collections 

The FMS Trust Fund and accounts for funds appropriated for security assistance follow DoD 

policy, which is to allocate supported undistributed disbursements and collections between 

federal and nonfederal categories based on the percentage of federal and nonfederal accounts 

payable and accounts receivable. Supported undistributed disbursements and collections are 

then applied to reduce accounts payable and receivable accordingly. Unsupported 

undistributed disbursements are recorded as disbursements in transit and reduce nonfederal 

accounts payable. Unsupported undistributed collections are recorded in nonfederal other 

liabilities. 
 

Department of Defense Agency Financial Report for FY 2010 

ADDENDUM B Unaudited Financial Statements - DSCA 

12 

Undistributed disbursements and collections represent the difference between disbursements 

and collections matched at the transaction level to a specific obligation, payable, or receivable in 

the source systems and those reported by the U.S. Treasury. Supported disbursements and 

collections are evidenced by collaborating documentation. Unsupported disbursements and 

collections do not have supporting documentation for the transaction and most likely would not 

meet audit scrutiny. 

1.X. Significant Events 

Not applicable. 

1.Y. Fiduciary Activities 

Not applicable. 

Note 2. Nonentity Assets 

Nonentity Assets Dollars in Thousands 

As of September 30 2010 2009 

Intragovernmental Assets 

Fund Balance with Treasury $ 14,688,827 $ 15,202,854 

Other Assets 671 0 

Total Intragovernmental Assets $ 14,689,498 $ 15,202,854 

Nonfederal Assets 

Cash and Other Monetary Assets $ 18,647,997 $ 17,208,614 

Accounts Receivable 673,437 691,508 

Other Assets 20,500,849 14,456,802 

Total Nonfederal Assets $ 39,822,283 $ 32,356,924 

Total Nonentity Assets $ 54,511,781 $ 47,559,778

Total Entity Assets 5,880,580 6,451,854

Total Assets $ 60,392,361 $ 54,011,632

Nonentity Assets are assets for which the Foreign Military Sales (FMS) Trust Fund and the 

accounts for funds appropriated for security assistance maintains stewardship accountability 

and reporting responsibility, but are not available for the agency’s operations. 

Fund Balance with Treasury and Cash and Other Monetary Assets consist of advance deposits 

from friendly countries and international organizations to facilitate the purchase of U.S. defense 

articles and services based on future requirement forecasts. 

Accounts Receivable consist of amounts for interest, fines, and penalties due on debt from 

loans and nonfederal funds owed to the FMS Trust Fund country accounts that are in litigation 

at Department of Justice or collection status at Defense Finance Accounting Service. Some 

portion of these uncollected funds may be payable to the FMS Administrative Surcharge 

account, but are not discernable prior to collection. 

Intragovernmental and Nonfederal other Assets consist primarily of advances paid for 

undelivered defense articles and services intended for future delivery to the FMS customer. 
 

Department of Defense Agency Financial Report for FY 2010 

ADDENDUM B Unaudited Financial Statements - DSCA

13 

Note 3. Fund Balance with Treasury 

Fund Balance with Treasury Dollars in Thousands 

As of September 30 2010 2009 

Fund Balance 

Appropriated Funds $ 2,568,679 $ 3,577,215 

Trust Funds 14,688,827 15,202,854 

Other Fund Types 2,863,549 1,984,399 

Total Fund Balance $ 20,121,055 $ 20,764,468 

Fund Balance Per Treasury Versus Agency 

Fund Balance per Treasury $ 20,121,055 $ 20,764,468 

Fund Balance per Agency 20,121,055 20,764,468 

Reconciling Amount $ 0 $ 0 

The $2.9 billion reported as Fund Balances, Other Fund Types consists of funds on deposit for 

the management of Foreign Military Sales (FMS) Administration, Contract Administrative 

Services, Transportation, Attrition and General Services Administration Packing, Crating and 

Handling. 

Status of Fund Balance with Treasury Dollars in Thousands 

As of September 30 2010 2009 

Unobligated Balances 

Available $ 103,289 $ 1,301,473 

Unavailable 32,159 26,100 

Obligated Balance not yet Disbursed 94,164,157 90,486,194 

Nonbudgetary FBWT 24,010,761 24,913,352 

NonFBWT Budgetary Accounts (98,189,311) (95,962,651) 

Total Fund Balance $ 20,121,055 $ 20,764,468 

The Status of Fund Balance with Treasury (FBWT) reflects the budgetary resources to support 

FBWT and is a reconciliation between budgetary and proprietary accounts. It primarily consists 

of unobligated and obligated balances. The balances reflect the budgetary authority remaining 

for disbursement against current or future obligations. 

Unobligated Balance is classified as available or unavailable and represents the cumulative 

amount of budgetary authority that has not been set aside to cover outstanding obligations. The 

unavailable balance consists primarily of funds invested in U.S. Treasury securities that are 

temporarily precluded from obligation by law. Certain unobligated balances are restricted for 

future use and are not apportioned for current use. Unobligated balances for trust fund 

accounts are restricted for use by the public law that established the funds. 

Obligated Balance not yet disbursed represents funds that have been obligated for goods and 

services not received and those received but not paid. 
 

Department of Defense Agency Financial Report for FY 2010 

ADDENDUM B Unaudited Financial Statements - DSCA

14 

Nonbudgetary FBWT includes accounts that do not have budgetary authority, such as deposit 

funds, unavailable receipt account, clearing accounts and nonentity FBWT. The Nonbudgetary 

FBWT consists of receipts from foreign governments to liquidate contract authority. Obligations 

are incurred using contract authority and liquidated with these appropriations. 

NonFBWT Budgetary Accounts reduces the Status of FBWT. The NonFBWT Budgetary 

Accounts primarily consists of nonentity cash deposited in the Federal Reserve Bank and 

contract authority. 

Unobligated balances are segregated to show available and unavailable amounts in the note 

schedule. Certain unobligated balances are restricted to future use and are not apportioned for 

current use. The unobligated balance is restricted for use for specific purposes and time. 

Note 5. Accounts Receivable 

Accounts Receivable Dollars in Thousands 

As of September 30

2010 

Gross Amount Due

Allowance For 

Estimated 

Uncollectibles 

Accounts 

Receivable, Net 

Intragovernmental Receivables $ 0 N/A $ 0 

Nonfederal Receivables 

(From the Public) 42,609 0 42,609 

Total Accounts Receivable $ 42,609 $ 0 $ 42,609 

Accounts Receivable Dollars in Thousands 

As of September 30

2009 

Gross Amount Due

Allowance For 

Estimated 

Uncollectibles 

Accounts 

Receivable, Net 

Intragovernmental Receivables $ 0 N/A $ 0 

Nonfederal Receivables 

(From the Public) 40,578 0 40,578 

Total Accounts Receivable $ 40,578 $ 0 $ 40,578 

The accounts receivable represents the Foreign Military Sales (FMS) Trust Fund claim for 

payment from other entities. The FMS Trust Fund only recognizes an allowance for 

uncollectible amounts from the public. Claims with other federal agencies are resolved in 

accordance with the Intragovernmental Business Rules. 

The Allowances for Estimated Uncollectibles are based upon collection experience. Historically 

these amounts have been collected at completion of ligation, thus an allowance for 

uncollectable has not been recognized. 
 

Department of Defense Agency Financial Report for FY 2010 

ADDENDUM B Unaudited Financial Statements - DSCA

15 

Note 6. Other Assets 

Other Assets Dollars in Thousands 

As of September 30 2010 2009 

Intragovernmental Other Assets 

Advances and Prepayments $ 670 $ 0 

 Other Assets 0 0 

 Total Intragovernmental Other Assets $ 670 $ 0 

Nonfederal Other Assets 

Outstanding Contract Financing Payments $ 1,833,123 $ 1,878,470 

Advances and Prepayments 18,671,318 12,955,092 

Total Nonfederal Other Assets $ 20,504,441 $ 14,833,562 

Total Other Assets $ 20,505,111 $ 14,833,562 

Contract terms and conditions for certain types of contract financing payments convey certain 

rights to the Foreign Military Sales (FMS) Trust Fund that protect the contract work from state or 

local taxation, liens or attachment by the contractor's creditors, transfer of property, or 

disposition in bankruptcy. However, these rights should not be misconstrued to mean that 

ownership of the contractor’s work has transferred to the Government. The Government does 

not have the right to take the work, except as provided in contract clauses related to termination 

or acceptance, and the FMS Trust Fund is not obligated to make payment to the contractor until 

delivery and acceptance of a satisfactory product. 

The balance of Outstanding Contract Financing Payments includes $1.4 billion in contract 

financing payments and an additional $399 million in estimated future payments to contractors 

upon delivery and government acceptance of a satisfactory product. (See additional discussion 

in Note 15, Other Liabilities). 

Note 7. Cash and Other Monetary Assets 

Cash and Other Monetary Assets Dollars in Thousands 

As of September 30 2010 2009 

Cash $ 18,647,997 $ 17,208,614 

Total Cash, Foreign Currency, and Other Monetary Assets $ 18,647,997 $ 17,208,614 

Restricted cash of $18.6 billion includes advance deposits from foreign nations in the Federal 

Reserve Bank which have not been transferred to the Foreign Military Sales Trust Fund and are 

not available for agency use (nonentity cash). 

Note 8. Direct Loan and Loan Guarantees 

Direct Loan and Loan Guarantee Programs 

The Defense Security Cooperation Agency (DSCA) operates the following direct loans and/or 

loan guarantee Programs: 
 

Department of Defense Agency Financial Report for FY 2010 

ADDENDUM B Unaudited Financial Statements - DSCA

16 

The Arms Export Control Act, as amended, authorizes funds to be appropriated to the President 

for financing the sales of defense articles and defense services to eligible foreign countries. 

Each loan is reviewed in the light of the purchasing country’s financial condition, its need for 

credit, U.S. economic or military assistance programs in the country and region, and other 

proposed arms purchases by the country. The President delegates the Secretary of Defense 

the authority to issue and guaranty loans through the designated administering agency, DSCA. 

The loans are issued to friendly and less economically developed countries. Pursuant to the 

authority contained in the Act, DSCA operates the four funds, known as: For pre-1992 loans 

(1) Foreign Military Loan Liquidating Account (FMLLA). For post-1991 loans (2&3) the Foreign 

Military Direct Loan Program and Financing Accounts for post-1991 loans, and (4) the Military 

Debt Reduction Financing Account (MDRFA) for reducing loan receivables for eligible countries. 

The FMLLA is a liquidating account that includes all assets, liabilities, and equities for loan 

balances recorded prior to FY 1992. No new loan disbursements are made from this account. 

Certain collections made into this account are made available for default claim payments. The 

Federal Credit Reform Act (FCRA) provides permanent indefinite authority to cover obligations 

for default payments in the event the funds in the liquidating account are otherwise insufficient. 

Foreign Military Financing Direct Loan Program Account (FMFDLPA) is a program account that 

was established pursuant to FCRA to provide the funds necessary for the subsidy element of 

loans. Expenditures from this account finance the subsidy element of direct loan disbursements 

and are transferred into the Foreign Military Financing Direct Loan Financing Account 

(FMFDLFA) to make required loan disbursements for approved Foreign Military Sales or 

commercial sales. 

The FMFDLFA account is a financing account that is used to make disbursements of Foreign 

Military Loan funds for approved procurements and for subsequent collections for the loans after 

September 30, 1991. The account uses permanent borrowing authority from the U.S. Treasury 

combined with transfers of appropriated funds from FMFDLPA account to make the required 

disbursements to loan recipient country borrowers for approved procurements. Receipts of debt 

service collections from borrowers are used to repay borrowings from U.S. Treasury. 

MDRFA is a financing account that was established for the debt relief of certain countries as 

established by Public Law 103-87. The MDRFA buys the portfolio of loans from the FMLLA, 

thus transferring the loans from the FMLLA to the MDRFA. The Paris Club negotiates the debt 

forgiveness with Highly Indebted Poor Countries (HIPC). 

The Paris Club has nineteen member countries that negotiate rescheduling or refinancing of 

debt for HIPC. The Paris Club provides debt reduction initially on payments coming due over a 

specific period corresponding to the length of an International Monetary Fund (IMF) supported 

economic reform program. Reduction then is staged, with each successive stage contingent 

upon debtor country compliance with its IMF-support program. Under Naples Terms, stock of 

debt reduction is provided after three years of good performance with respect to IMF reform 

programs and payments to Paris Club creditors. The United States incurs the budget cost of 

the eventual stock of debt reduction when it agrees to the initial “maturities” reduction of 

payments coming due, since bilateral agreements commit us to stock reduction once the Paris 

Club agrees to provide them. 

The FCRA governs all amended direct loan obligations and loan guarantee commitments made 

after FY 1991 resulting in direct loans or loan guarantees. 

Direct loans are reported at the net present value of the following projected cash flows: (1) loan 

disbursements, (2) repayments of principal, and (3) payments of interest and other payments 

over the life of the loan after adjusting for estimated defaults, prepayments, fees, penalties, and 

other recoveries.
 

Department of Defense Agency Financial Report for FY 2010 

ADDENDUM B Unaudited Financial Statements - DSCA

17 

Summary of Direct Loans and Loan Guarantees Dollars in Thousands 

As of September 30 2010 2009 

Loans Receivable 

Direct Loans: 

Foreign Military Loan Liquidating Account $ 1,052,375 $ 1,146,424 

Foreign Military Financing Account 10,651 6,899 

Military Debt Reduction Financing Account 12,561 11,087 

Total Loans Receivable $ 1,075,587 $ 1,164,410

Direct Loans Obligated Dollars in Thousands 

As of September 30 2010 2009 

Direct Loans Obligated After FY 1992 

(Allowance for Loss Method): 

Foreign Military Loan Liquidating Account: 

Loans Receivable Gross $ 873,975 $ 1,015,340 

Interest Receivable 1,455,012 1,343,379 

Allowance for Loan Losses (1,276,612) (1,212,295) 

Value of Assets Related to Direct Loans $ 1,052,375 $ 1,146,424

Direct Loans Obligated After FY 1991 

(Present Value Method): 

Foreign Military Financing Account: 

Allowance for Subsidy Cost (Present Value) $ 10,651 $ 6,899 

Value of Assets Related to Direct Loans $ 10,651 $ 6,899 

Military Debt Reduction Financing Account: 

Loans Receivable Gross $ 190,745 $ 190,905

Interest Receivable 56,738 43,777 

Allowance for Subsidy Cost (Present Value) (234,922) (223,595) 

Value of Assets Related to Direct Loans, Net 12,561 11,087 

Total Direct Loans Receivable $ 1,075,587 $ 1,164,410 

Other Disclosures: 

The DSCA bills the countries every six months for loan repayments. Applying terms of the 

loans with the countries, accrued interest receivable is calculated as simple interest method. 

Interest accrued on unpaid balances use the same interest rate plus 4% for loans owed to the 

Federal Financing Bank. 

The allowance for credit subsidy account for the FMFDLFA account is calculated taking into 

consideration three transactions: (1) transfers of subsidy from the program account to the 

financing account; (the subsidy is the difference between the expected cash outlays from the 

U.S. Government and the present value of the expected collections); (2) interest payments from 

the U.S. Treasury to the financing fund; and (3) upward adjustments due to reestimates as U.S. 

Treasury borrowing rates change over time from the loan repayment rate and an increase in 

estimated defaults on the loan. 
 

Department of Defense Agency Financial Report for FY 2010 

ADDENDUM B Unaudited Financial Statements - DSCA

18 

The abnormal debit balance for the allowance of $10.6 million in the FMFDLF is the 

unamortized portion of the subsidy that results from a credit balance reflecting the cost of the 

loan to the U.S. Government. A debit balance results from: (1) interest expense paid on U.S. 

Treasury borrowings and (2) downward adjustments due to reestimates when the loan 

repayment rate exceeds the U.S. Treasury borrowing rate, and a decrease in estimated 

defaults. The loans in the FMFDLF account are categorized as moderate to medium risk and 

were expected to have an increasing amount of defaults over the years. This was built into the 

subsidy amount. As the loan matured, none of the loans defaulted and the U.S. Treasury 

borrowing rates fell below some of the loan interest rates. This resulted in downward 

reestimates and a negative subsidy rate for the loans, which resulted in a debit balance in the 

allowance for subsidy. This unexpected debit balance has occurred for several years due to the 

downward reestimates due to zero defaults. 

Total Amount of Direct Loans Disbursed Dollars in Thousands 

As of September 30 2010 2009 

Direct Loan Programs 

Foreign Military Financing Account $ 125,054 $ 57,950 

Total $ 125,054 $ 57,950

Schedule for Reconciling Subsidy Cost Allowance Balances 

for Post FY1991 Direct Loans Dollars in Thousands 

As of September 30 2010 2009

Beginning Balance, Changes, and Ending Balance:

Beginning Balance of the Subsidy Cost Allowance $ 216,696 $ 205,084

Adjustments

 Loans Written Off (160) (8,156)

 Subsidy Allowance Amortization 7,735 19,768

Total of the above Adjustment Components $ 7,575 $ 11,612

Ending Balance of the Subsidy Cost Allowance before 

Reestimate $ 224,271 $ 216,696 

Add or Subtract Subsidy Reestimate by Component

Interest Rate Reestimate 0 0

 Total of the above Reestimate Components 0 0

Ending Balance of the Subsidy Cost Allowance $ 224,271 $ 216,696 

Administrative Expenses 

Administrative expenses for loans are not funded in the loan program account. The Office of 

Management and Budget made the decision to fund administration of loans in the Foreign 

Military Financing Grant account (11*1082) since the dollar amount was so low. 
 

Department of Defense Agency Financial Report for FY 2010 

ADDENDUM B Unaudited Financial Statements - DSCA

19 

Note 11. Liabilities Not Covered by Budgetary Resources 

Liabilities Not Covered by Budgetary Resources Dollars in Thousands 

As of September 30 2010 2009 

Intragovernmental Liabilities 

Debt $ 0 $ 30,515 

Other 120 107 

Total Intragovernmental Liabilities $ 120 $ 30,622 

Nonfederal Liabilities 

Military Retirement and Other Federal Employment Benefits 486 429 

Total Nonfederal Liabilities $ 486 $ 429 

Total Liabilities Not Covered by Budgetary Resources $ 606 $ 31,051

Total Liabilities Covered by Budgetary Resources $ 55,529,363 $ 48,948,939

Total Liabilities $ 55,529,969 $ 48,979,990

The Liabilities Not Covered by Budgetary Resources includes liabilities for which congressional 

action is needed before budgetary resources can be provided. These liabilities are categorized 

as not covered because there is no current or immediate appropriation available for liquidation. 

Military Retirement and Other Federal Employment Benefits consists of Federal Employee 

Compensation Act (FECA) actuarial liabilities of $486.4 thousand that is not due and payable 

during the current fiscal year. Refer to Note 17, Military Retirement and Other Federal 

Employment Benefits, for additional details and disclosures. 

Intragovernmental Liabilities Other, represents the amount payable to Department of Labor for 

FECA liabilities. 

Note 12. Accounts Payable 

 Accounts Payable 

As of September 30

Dollars in Thousands

2010

Accounts Payable 

Interest, Penalties, 

and Administrative 

Fees 

Total 

Intragovernmental Payables $ 189,675 N/A $ 189,675 

Nonfederal Payables 

(To the Public) 330,940 0 330,940 

Total Accounts Payable $ 520,615 $ 0 $ 520,615 
 

Department of Defense Agency Financial Report for FY 2010 

ADDENDUM B Unaudited Financial Statements - DSCA

20 

 Accounts Payable 

As of September 30

Dollars in Thousands

2009

Accounts Payable 

Interest, Penalties, 

and Administrative 

Fees 

Total 

Intragovernmental Payables $ 0 N/A $ 0 

Nonfederal Payables 

(To the Public) 405,251 0 405,251 

Total Accounts Payable $ 405,251 $ 0 $ 405,251 

Accounts Payable includes amounts owed to federal and nonfederal entities for goods and 

services received by Foreign Military Sales (FMS) Trust Fund and the accounts for funds 

appropriated for security assistance. 

The systems utilized by the FMS Trust Fund and the accounts for funds appropriated for 

security assistance do not track intragovernmental transactions by customer at the transaction 

level. The FMS therefore cannot reconcile accounts payable with other federal entities. 

Buyer-side accounts payable are adjusted to agree with internal seller-side accounts receivable. 

In 3rd quarter 2010, the FMS Trust Fund incorporated the DoD trading partner process. The 

FMS Trust Fund recognized federal accounts payable and expenses by reclassifying amounts 

between federal and nonfederal and accruing additional accounts payable and expenses. 

Note 13. Debt 

Debt Dollars in Thousands 

As of September 30 

2010 

Beginning Balance Net 

Borrowing Ending Balance 

Agency Debt 

(Intragovernmental) 

Debt to the Treasury $ 37,819 $ 3,623 $ 41,442 

Debt to the Federal 

Financing Bank 581,743 (160,196) 421,547 

Total Debt $ 619,562 $ (156,573) $ 462,989

Debt Dollars in Thousands 

As of September 30 

2009 

Beginning Balance Net 

Borrowing Ending Balance 

Agency Debt 

(Intragovernmental) 

Debt to the Treasury $ 37,595 $ 224 $ 37,819 

Debt to the Federal 

Financing Bank 687,963 (106,220) 581,743 

Total Debt $ 725,558 $ (105,996) $ 619,562
 

Department of Defense Agency Financial Report for FY 2010 

ADDENDUM B Unaudited Financial Statements - DSCA

21 

The Federal Credit Reform Act (FCRA) of 1990 provides financing accounts with indefinite 

authority to borrow from the U.S. Treasury to fund disbursements of loans made to sovereign 

nations for security assistance. This debt to the U.S. Treasury is reflected in the Foreign Military 

Financing Direct Loan Financing account and the Military Debt Reduction account. 

Beginning in January 1975, the Defense Security Cooperation Act (DSCA) and the Federal 

Financing Bank (FFB), acting under section 24 of the Arms Export Control Act, as amended, 

entered into an agreement whereby the FFB would make loan agreements with friendly nations 

and acquire promissory notes guaranteed by DSCA. The promissory notes are considered 

DSCA borrowings from the FFB. The promissory notes still owed to the FFB are reflected in the 

Foreign Military Loan Liquidating account. 

The majority of the debt represents direct and guaranteed loans to foreign countries for pre1992 and post-1991 loans. The FCRA governs all direct loan obligations and loan guarantee 

commitments made after FY 1991. Before 1992, funds were borrowed from the FFB to either 

directly loan the funds to foreign countries or to reimburse guaranteed loans defaulted. 

Beginning in 1992, based on the FCRA, the security assistance program began borrowing the 

funds from the U.S. Treasury. 

The DSCA must pay the debt if the foreign country borrower defaults on the loan. For loan 

defaults, DSCA must pay the outstanding principal amounts guaranteed. 

Note 15. Other Liabilities 

 Other Liabilities Dollars in Thousands

As of September 30

2010 

Current Liability Noncurrent 

Liability Total 

Intragovernmental 

FECA Reimbursement to the 

Department of Labor $ 54 $ 66 $ 120

Custodial Liabilities 0 630,828 630,828

Total Intragovernmental Other Liabilities $ 54 $ 630,894 $ 630,948

Nonfederal 

Accrued Funded Payroll and Benefits $ 416 $ 0 $ 416

Advances from Others 52,047,828 1,833,123 53,880,951

Contract Holdbacks 33,564 0 33,564

Contingent Liabilities 0 0 0

 Total Nonfederal Other Liabilities $ 52,081,808 $ 1,833,123 $ 53,914,931

Total Other Liabilities $ 52,081,862 $ 2,464,017 $ 54,545,879
 

Department of Defense Agency Financial Report for FY 2010 

ADDENDUM B Unaudited Financial Statements - DSCA

22 

 Other Liabilities Dollars in Thousands

As of September 30

2009 

Current Liability Noncurrent 

Liability Total 

Intragovernmental 

FECA Reimbursement to the 

Department of Labor $ 37 $ 70 $ 107

Custodial Liabilities 0 650,930 650,930

Total Intragovernmental Other Liabilities $ 37 $ 651,000 $ 651,037

Nonfederal 

Accrued Funded Payroll and Benefits $ 330 $ 0 $ 330

Advances from Others 46,908,847 0 46,908,847

Contract Holdbacks 17,773 0 17,773

Contingent Liabilities 0 376,761 376,761

 Total Nonfederal Other Liabilities $ 46,926,950 $ 376,761 $ 47,303,711

Total Other Liabilities $ 46,926,987 $ 1,027,761 $ 47,954,748

Other Liabilities 

Contingent Liabilities includes $1.8 billion related to contracts authorizing progress payments 

based on cost as defined in the Federal Acquisition Regulation (FAR). In accordance with 

contract terms, specific rights to the contractors’ work vest with the Federal Government when a 

specific type of contract financing payment is made. This action protects taxpayer funds in the 

event of contract nonperformance. These rights should not be misconstrued as rights of 

ownership. The Department is under no obligation to pay contractors for amounts greater than 

the amounts authorized in contracts until delivery and government acceptance. Due to the 

probability the contractors will complete their efforts and deliver satisfactory products, and 

because the amount of potential future payments are estimable, the Department has recognized 

a contingent liability for estimated future payments which are conditional pending delivery and 

government acceptance. 

Total Contingent Liabilities for progress payments based on cost represent the difference 

between the estimated costs incurred to date by contractors and amounts authorized to be paid 

under progress payments based on cost provisions within the FAR. Estimated contractorincurred costs are calculated by dividing the cumulative unliquidated progress payments based 

on cost by the contract-authorized progress payment rate. The balance of unliquidated 

Progress Payments Based on Cost is deducted from the estimated total contractor-incurred 

costs to determine the contingency amount. 

Note 16. Commitments and Contingencies 

Claims may be presented and/or the U.S. Government may be a party in various administrative 

proceedings or court litigations, but it is highly unlikely that any can implicate the Foreign Military 

Sales Trust Fund. The U.S. funds appropriated for security assistance generally are not legally 

available for paying claims. 
 

Department of Defense Agency Financial Report for FY 2010 

ADDENDUM B Unaudited Financial Statements - DSCA

23 

Note 17. Military Retirement and Other Federal Employment Benefits 

Military Retirement and Other Federal Employment Benefits Dollars in Thousands 

As of September 30 

2010 

Liabilities 

Assumed 

Interest Rate 

(%) 

(Less: Assets 

Available to Pay 

Benefits) 

Unfunded 

Liabilities 

Pension and Health Actuarial 

Benefits 

FECA $ 486 0.0 $ 0.0 $ 486

Total Military Retirement 

and Other Federal 

Employment Benefits 

$ 486 0.0 $ 0.0 $ 486 

Military Retirement and Other Federal Employment Benefits Dollars in Thousands 

As of September 30 

2009 

Liabilities 

Assumed 

Interest Rate 

(%) 

(Less: Assets 

Available to Pay 

Benefits) 

Unfunded 

Liabilities 

Pension and Health Actuarial 

Benefits 

FECA $ 429 0.0 $ 0.0 $ 429

Total Military Retirement 

and Other Federal 

Employment Benefits 

$ 429 0.0 $ 0.0 $ 429 

Federal Employees’ Compensation Act 

Actuarial Cost Method Used and Assumptions: 

The Defense Security Cooperation Agency Foreign Military Sales (FMS) Trust Fund actuarial 

liability for workers’ compensation benefits is developed by the Department of Labor and 

provided to the FMS Trust Fund at the end of each fiscal year. The liability for future workers’ 

compensation 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 OMB’S economic assumptions for 10-year Treasury notes 

and bonds. Interest rate assumptions utilized for discounting were as follows: 

Discount Rates

 3.65 % in Year 1 

 4.30 % in Year 2 and thereafter 

 
 

Department of Defense Agency Financial Report for FY 2010 

ADDENDUM B Unaudited Financial Statements - DSCA

24 

To provide more specifically for the effects of inflation on the liability for future workers’ 

compensation 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. The actual rates for these factors for the charge back 

year (CBY) 2008 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 CBYs were as follows: 

Federal Employees — Compensation Act (FECA) 

CBY COLA CPIM 

2011 2.23% 3.45% 

2012 1.13% 3.43% 

2013 1.70% 3.64% 

2014 1.90% 3.66% 

2015+ 1.93% 3.73% 

The model’s resulting projections were analyzed to ensure that the estimates were reliable. The 

analysis was based on four tests: (1) a sensitive analysis of the model to economic 

assumptions; (2) a comparison of the percentage change in the liability amount to the 

percentage change in the actual incremental payments; (3) a comparison of the incremental 

paid losses per case (a measure of case-severity) in CBY 2010 to the average pattern observed 

during the most current three CBYs; (4) a comparison of the estimated liability per case in the 

CBY 2010 projection to the average pattern for the projections of the most recent three years. 

Note 18. General Disclosures Related to the Statement of Net Cost 

General Disclosures Related to the Statement of Net Cost Dollars in Thousands 

As of September 30 2010 2009 

Intragovernmental Costs $ 1,814,121 $ 113,230 

Public Costs 21,703,202 23,725,752 

Total Costs $ 23,517,323 $ 23,838,982

Intragovernmental Earned Revenue (3,940) (2,220) 

Public Earned Revenue (130,918) (56,172) 

Total Earned Revenue $ (134,858) $ (58,392)

Net Cost of Operations $ 23,382,465 $ 23,780,590

Intragovernmental costs and revenue are related to transactions made between two reporting 

entities within the Federal Government. 

The Statement of Net Cost (SNC) represents the net cost of programs and organizations of the 

Federal Government supported by appropriations or other means. The intent of the SNC is to 

provide gross and net cost information related to the amount of output or outcome for a given 

program or organization administered by a responsible reporting entity. The Department’s 

current processes and systems do not capture and report accumulated costs for major 

programs based upon the performance measures as required by the Government Performance 

and Results Act. The Department is in the process of reviewing available data and developing a 

cost reporting methodology as required by the Statement of Federal Financial Accounting 

Standards (SFFAS) No. 4, “Managerial Cost Accounting Concepts and Standards for the 

Federal Government”, as amended by SFFAS No. 30, “Inter-entity Cost Implementation.” 
 

Department of Defense Agency Financial Report for FY 2010 

ADDENDUM B Unaudited Financial Statements - DSCA

25 

Public costs and revenues are exchange transactions made between the reporting entity and a 

nonfederal entity. 

The systems utilized by Defense Security Cooperation Agency for the Foreign Military Sales 

(FMS) Trust Fund and the accounts for funds appropriated for security assistance do not track 

intragovernmental transactions by customer at the transaction level. In 3rd quarter 2010, the 

FMS Trust Fund incorporated the DoD trading partner process. The FMS Trust Fund adjusted 

expenses by reclassifying amounts between federal and nonfederal expenses and accruing 

additional payables and expenses. 

In 3rd quarter 2010, the FMS Trust Fund was incorporated into the DoD trading partner process. 

Buyer-side accounts payable and related expenses are adjusted to agree with seller-side 

accounts receivable. The FMS Trust Fund recognized expenses by reclassifying amounts 

between federal and nonfederal and accruing additional expenses. 

Note 19. Disclosures Related to the Statement of Changes in Net Position 

The appropriations received on the Statement of Budgetary Resources do not agree with 

appropriations received on the Statement of Changes in Net Position. The difference of 

$24 billion is due to the Foreign Military Sales Trust Fund receipts from foreign governments 

that liquidate contract authority, but are not recorded as appropriations, on the Statement of 

Changes in Net Position. These receipts are transferred from the receipt account to cover 

disbursements as they occur, similar to the receipt of appropriations. 

Note 20. Disclosures Related to the Statement of Budgetary Resources 

Disclosures Related to the Statement of Budgetary Resources Dollars in Thousands 

As of September 30 2010 2009 

Net Amount of Budgetary Resources Obligated for Undelivered Orders at 

the End of the Period. $ 112,315,078 $ 103,035,669 

On the Statement of Budgetary Resources (SBR), obligations incurred of $32.9 billion are direct 

and exempt from apportionment. 

The SBR includes intraentity transactions because the statements are presented combined. 

Borrowings from the U.S. Treasury are required to be repaid once a year at the end of the fiscal 

year. The financing sources for the repayments on borrowings are loan repayments from the 

countries or permanent indefinite appropriations through subsidy reestimates. 

The portions of the Foreign Military Sales (FMS) Trust Fund receipts collected in the current 

fiscal year that exceed current outlays are temporarily precluded from obligation by law. These 

receipts, however, are available for obligation as needed in the future. 

The Federal Credit Reform Act of 1990 (FCRA) provides permanent indefinite appropriations to 

fund upward subsidy reestimates that fund repayments of principal and interest of U.S. Treasury 

borrowings with the Foreign Military Financing Direct Loan Program and the Military Debt 

Reduction Financing Account. The FCRA also provides permanent indefinite appropriations to 

fund loan defaults with the Federal Financing Bank in the Foreign Military Loan Liquidating 

Account. 

The appropriations received on the SBR do not agree with appropriations received on the 

Statement of Changes in Net Position. The difference of $24 billion is due to the FMS Trust 

Fund contract authority not being reported as appropriation received on the Statement of 

Changes in Net Position. 
 

Department of Defense Agency Financial Report for FY 2010 

ADDENDUM B Unaudited Financial Statements - DSCA

26 

Legal limitations and time restriction on the use of unobligated appropriation balances are 

provided under Public Law. 

The abnormal balance on the Non-budgetary SBR Unobligated Balance Apportioned line is due 

to a loss on a subsidized loan. This loss results from a loan that was repaid within two days. 

Although this loan was paid within two days, the interest owed to the U.S. Treasury was 

calculated in six months intervals. The resulting abnormal balance is the difference between the 

six months interest paid by DSCA to the Treasury and the two days on interest paid by the 

country to DSCA. 

Note 21. Reconciliation of Net Cost of Operations to Budget 

Reconciliation of Net Cost of Operations to Budget Dollars in Thousands 

As of September 30 2010 2009 

Resources Used to Finance Activities: 

Budgetary Resources Obligated: 

Obligations incurred $ 32,902,219 $ 41,213,486 

Less: Spending authority from offsetting collections and recoveries (-) (314,210) (265,317) 

Obligations net of offsetting collections and recoveries $ 32,588,009 $ 40,948,169 

Less: Offsetting receipts (-) (24,010,756) (18,716,162) 

Net Budgetary Resources Obligated $ 8,577,253 $ 22,232,007 

Total resources used to finance activities $ 8,577,253 $ 22,232,007 

Resources Used to Finance Items not Part of the Net Cost of Operations 

Change in budgetary resources obligated for goods, services and 

benefits ordered but not yet provided: 

Undelivered Orders (-) (9,279,409) (17,435,986) 

Budgetary offsetting collections and receipts that do not affect Net Cost of 

Operations 24,301,304 18,968,030 

Resources that finance the acquisition of assets (-) (130,507) (69,823) 

Total resources used to finance items not part of the Net Cost of 

Operations $ 14,891,388 $ 1,462,221 

Total resources used to finance the Net Cost of Operations $ 23,468,641 $ 23,694,228 

Components of the Net Cost of Operations that will not Require or Generate Resources 

in the Current Period 

Components Requiring or Generating Resources in Future Period:

Other (+/-) $ 71 $ 113 

Total components of Net Cost of Operations that will Require or 

Generate Resources in future periods $ 71 $ 113 

Components not Requiring or Generating Resources: 

Revaluation of assets or liabilities $ (86,247) $ 86,249 

Total components of Net Cost of Operations that 

will not Require or Generate Resources in the current period $ (86,176) $ 86,362 

Net Cost of Operations $ 23,382,465 $ 23,780,590 
 

Department of Defense Agency Financial Report for FY 2010 

ADDENDUM B Unaudited Financial Statements - DSCA

27 

The following note schedule lines are presented as combined instead of consolidated due to 

intraagency budgetary transactions not being eliminated: 

• Obligations Incurred 

• Less: Spending Authority from Offsetting Collections and Recoveries 

• Obligations Net of Offsetting Collections and Recoveries 

• Less: Offsetting Receipts 

• Net Obligations 

• Undelivered Orders 

• Unfilled Customer Orders 

The $71 thousand Components Requiring or Generating Resources in Future Period, Other 

represents the FECA liabilities and the related actuarial liabilities not requiring current year 

budget authority. 

Due to the Foreign Military Sales Trust Fund system limitations, budgetary data is not in 

agreement with proprietary expenses and assets capitalized. The difference between 

budgetary and proprietary data is a previously identified deficiency.