November 15, 2007

Department of Defense

Agency Financial Report

FISCAL YEAR 2007

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 Department of Defense Agency Financial Report 2007

Table of Contents

Message from the Deputy Secretary of Defense iii

Overview v

Year in Review vi

Section 1: Management’s Discussion and Analysis

	 Mission and Organizational Structure	 3

	 Analysis of Financial Statements	 5

	 Performance Goals, Objectives, and Results	 8

	 Analysis of Systems, Controls, and Legal Compliance	 10

	 Annual Assurance Statement	 10

	 Other Management Information, Initiatives, and Issues	 11

Section 2: Financial Information

	 Message from the Chief Financial Officer	 15

	 Independent Auditor’s Report	 16

	 Principal Financial Statements and Notes	 28

	 Required Supplementary Stewardship Information	 86

	 Required Supplementary Information	 88

Section 3: Other Accompanying Information

	 Inspector General’s Summary of Management and Performance Challenges

	 and Management’s Response to Auditor Challenges	 97

	 Summary of Financial Statement Audit and Management Assurances	 107

	 Improper Payments Information Act Reporting 111

Appendix

	 Glossary of Terms	 119

	 Useful Internet Links	 119
iii Department of Defense Agency Financial Report 2007

Message from the Deputy Secretary of Defense
 Department of Defense Agency Financial Report 2007

Overview

The Department of Defense (DoD) Fiscal Year (FY) 2007 Agency Financial Report (AFR) provides the President,

the Congress, other Federal departments and agencies, and the American public an overview of the Department’s

financial condition. The AFR is similar to the private sector’s annual report to stockholders.

The AFR covers the 12-month period ending September 30, 2007 in the following sections:

Section 1: Management’s Discussion and Analysis is a high-level summary of the Department’s financial

information for FY 2007. It describes the Department’s mission and organizational structure; includes financial

highlights and a statement of limitations on the financial statements; and provides management assurances over

internal control. 

Section 2: Financial Information includes a message from the Chief Financial Officer, the DoD Inspector

General Auditor’s Report and opinion, and the Department’s principal financial statements and notes, required

supplementary stewardship information and required supplementary information.

Section 3: Other Accompanying Information includes the Inspector General’s Summary of Management and

Performance Challenges and Management’s Responses, Summary of the Financial Statement Audit and Management

Assurances, and Improper Payment Information Act Reporting Details.

Appendix includes a glossary and a list of internet links for more detailed information about topics discussed in this

report.

We welcome your feedback regarding the content of this report. To comment or to request copies of the report,

please email us at DoDAFR@osd.mil, or write to:

U.S. Department of Defense

Office of the Under Secretary of Defense (Comptroller)

1100 Defense Pentagon

Washington, DC 20301-1100

This document also is available at http://www.defenselink.mil/comptroller/afr.
vi Department of Defense Agency Financial Report 2007 The Year in Review

From the mountains of South America to the deserts of

the Middle East to the tropical forests of the Pacific Rim,

members of the Department of Defense continue their

work to safeguard the American people. Wars in Iraq

and Afghanistan garner the most attention, but the United

States pursues violent extremists wherever they hide. And

while heavily engaged in countering today’s threats, the

Department also looks to future risks and challenges, to

ensure U.S. dominance over any threat that may arise. 

Humanitarian assistance and the building of partnerships

with other nations have become mainstream endeavors. 

The Year in Review provides a sampling of just some of the

Department’s activities around the world in the past year.

On January 10, 2007, President Bush announced a new

strategy in Iraq – what became known as the “surge.” By

the end of June, the last of five brigades arrived in Baghdad

to help U.S. and Iraqi forces progress beyond the clearing

of extremists. Results in Iraq, particularly in the political

realm, are mixed, but Coalition forces, including significant

numbers of Iraqi forces, are beginning to make progress

toward the strategy’s goal of holding territory and building

environments adverse to extremism.

In Afghanistan, the anticipated spring offensive by Taliban

members turned into an offensive on the part of Coalition

forces. The Taliban’s top military commander was killed

during an operation in May, while Coalition troops made

advances against Taliban strongholds throughout southern

and eastern Afghanistan.

In both Iraq and Afghanistan, military forces are working

closer with members of other U.S. Departments than

ever before. Provincial Reconstruction Teams, staffed by

partners from the State and Justice Departments, United

States Agency for International Development and others,

are working closely with Coalition forces to rebuild

infrastructure and give local citizens a chance to free

themselves from destitute conditions.

In the Horn of Africa, the Philippines and elsewhere,

American forces are working with foreign militaries like

never before. Navies from over a dozen nations not only

steam together in the Gulf of Arabia, they share intelligence

and plan operations together to fight as one force against

enemies ranging from terrorists to pirates. In September

2007, a bilateral exercise between the United States

and India, called Malabar, grew into a major combined

exercise that also included the navies of Australia, Japan

and Singapore. The UNITAS exercise between the United

States and South American nations is in its 48th year, and

continues to be a foundation of cooperation between

Western Hemisphere democracies.

Efforts to strengthen national partnerships during such

exercises have been matched by efforts to build friendships

at the local level. Through much of the history of our

military, humanitarian efforts have been relegated to a

tertiary role. Forces filled the role mostly in response to

disasters such as a tsunami or hurricane. Today, members

of the military are providing humanitarian services with

U.S. and Iraqi Army Soldiers unload humanitarian relief supplies in Abd al Hasan, Iraq, during a combat operation 

June 16, 2007. During the operation, U.S. and Iraqi Army soldiers deliver relief supplies and search houses to 

clear the area for future operations. The soldiers are from 2nd Battalion, 27th Infantry Regiment, 3rd Brigade 

Combat Team, 25th Infantry Division. (U.S. Air Force photo by SSgt Dallas Edwards)

Year in Review
vii The Year in Review Department of Defense Agency Financial Report 2007

increased frequency and effectiveness. Air Force physicians

have performed surgeries and cared for citizens in Vietnam. 

Soldiers built a school complex in Uganda. The Navy

dispatched USS Peleliu to the South Pacific and USNS 

Comfort to Latin America and the Caribbean to extend

America’s goodwill through humanitarian services.

While the Department is focused on today’s challenges,

we cannot overlook threats that may arise in the future. 

The government of Iran continues to cause concern as

its members promote violence and instability throughout

the Mideast region. The United States has increased

cooperation with countries like Russia and China. But a

lack of transparency, combined with aggressive statements

from government leaders, calls into question the direction of

our associations. And the United States, along with many

nations, continues to guard against the threat of nuclear

proliferation from North Korea. 

The Department is developing a host of platforms and

shifting mindsets to meet whatever challenges may arise. 

The Army continues to shift away from a static posture to

modular systems capable of deploying rapidly. The Brigade

Combat Team structure will also increase the Army’s

ability to build any force to meet any threat. The Navy’s

investment in littoral combat ships and riverine forces

will give the Navy a similar ability to undertake a range of

missions in blue, green and brown waters. The Air Force

is shifting from mass to precision maneuver as the driving

combat doctrine. The Marine Corps is focused on new

technology to maximize their combat power.

The “peace dividend” many hoped for during the 1990s is

giving way to the reality of today’s world with its numerous

centers of instability and crisis. In January 2007, Secretary

of Defense Gates announced his recommendation to

increase the size of the Army and Marine Corps by a

combined 92,000 men and women to help meet our

nation’s many commitments throughout the world. The

Department has also adjusted mobilization regiments for the

Guard and Reserve. These efforts are meant to relieve strain

on military members by decreasing the length and frequency

of deployments.

The Department’s mission is to protect the citizens of our

nation. But the Department also serves those undertaking

that mission. Men and women in uniform are more than our

nation’s sons and daughters. They are parents. They are

brothers, sisters, and children. They are our neighbors and

fellow Americans and should be looked after with the same

passion that they give in service to us. As we saw with the

problems at Walter Reed and other military health facilities,

some of our patriots have been let down. The Department

has renewed efforts to ensure that every person in uniform

is cared for not only on the battlefield, but at home as

well. The Department has updated policies to ensure that

its civilians, wounded while participating in a contingency

operation, are provided care on the battlefield and at home. 

The Department has also renewed efforts to get the latest

technologies to better protect forces in combat. For

example, Mine Resistant Ambush Protected vehicles are

arriving in Iraq.

As always, the remarkable achievements of the Department

of Defense could not be possible without the heroic efforts

of those in uniform. Each has sworn an oath to serve and

protect us. They do so with the utmost professionalism and

skill. We thank them for their service.

U.S. Marines from Task Force Military Police (1/12 TFMP) drive through the Mine Resistant Ambush Protected 

vehicle (MRAP) course at the 1/12 TFMP motor pool in Al Asad, Iraq, July 24, 2007. Marines from 1/12 TFMP 

maneuver through different road courses to obtain their MRAP license. (U.S. Marine Corps photo by Lance Cpl. 

Ashley S. Hoffman)

U.S. Navy Lt. John Shuler, a submarine exercise planner primary action officer for Exercise Malabar 07-01, 

discusses plans with Indian Navy Lt. Cmdr. Vivek Madhwal, an anti-submarine warfare officer with Indian navy 

destroyer INS Rana (D 52), in the ward room aboard Indian navy destroyer INS Mysore (D 60) while under 

way in the Philippine Sea April 6, 2007. The meeting is part of exercise Malabar 07-01, a U.S. and Indian naval 

exercise held off the coast of Okinawa, Japan. (U.S. Navy photo by Mass Communication Specialist 1st Class 

John L. Beeman)
Section 1

Management’s Discussion and Analysis

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Section 1
a system of identification 

using visual symbols, became 

a useful art in the Middle 

Ages, when warriors on 

the battlefield displayed an 

emblem on their shields and 

the tunics they wore over their 

armor. In America, heraldry 

symbols have been used 

by military forces as well as 

other organizational elements 

of the government since the 

beginning of the Revolution.

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Significance of the DoD Seal

of the United States 

is a symbol familiar to 

Americans. In addition, each 

department and agency of 

the government has its own 

seal which appears on 

documents and publications 

issued by the organization. 

The seal of the Department 

of Defense, shown above, 

was designed to visually 

depict the mission of the 

Department.

long associated with symbolism 

representing the United States 

of America and its military 

establishment, is an emblem of 

strength. In facing to the right, the 

field of honor is indicated. The 

eagle is defending the United 

States, represented by the shield of 

thirteen pieces. The thirteen pieces 

are joined together by the blue 

chief, representing the Congress. 

The rays and stars above the eagle 

signify glory, while the three arrows 

are collectively symbolic of the three 

component parts of the Department 

of Defense (Army, Navy, and Air 

Force). The laurel stands for honors 

received in combat defending the 

peace represented by the olive 

branch.

Heraldry,

The Great Seal

The American bald eagle,
 Section 1: Management’s Discussion and Analysis Department of Defense Agency Financial Report 2007

Section 1: Management’s Discussion 

and Analysis

The Department of Defense has chosen to produce

an alternative to the consolidated Performance and

Accountability Report called the Agency Financial Report

(AFR). The Department decided to participate in the

FY 2007 pilot pursuant to Office of Management and Budget

(OMB) Circular A-136, “Financial Reporting Requirements.” 

We will include our FY 2007 Annual Performance Report

and FY 2009 Annual Performance Plan with the FY 2009

Congressional Budget Justification (CBJ) that will be

submitted to the Congress and OMB in February 2008. As

a supplement to this report, we will issue a “Highlights”

document to be published on our website. The Highlights

document will contain budget, performance, and financial

information in a brief, user-friendly format.

Links to the Department’s Performance and Financial Documents

“Highlights FY 2007” summary of financial and performance information will be available February 2008, 

at http://www.defenselink.mil/comptroller/afr

FY 2009 Congressional Budget Justification (including the Annual Performance Report for FY 2007 and 

Annual Performance Plan for FY 2009) will be available February 2008, at http://www.defenselink.

mil/comptroller/defbudget/FY2009/

Using this approach the Department projects several

significant improvements:

•	 Enhanced readability by reducing the length of the

report.

•	 Reduced duplicative information in the content of this

report.

•	 Improved performance information by submitting it

with our FY 2009 CBJ submission to Congress and

OMB. The performance information will be based

upon a full year of actual data instead of estimating

fourth quarter as we have in the previous years.

•	 Enhanced transparency using website links.

•	 Reduced production costs.

To further streamline and consolidate its reports, the

Department will use website links and references to

provide some of the performance and financial information

associated with agency missions, functions, and strategic

plans. 

Mission and Organizational 

Structure

The mission of the United States Armed Forces is to provide

the military forces needed to deter war and to protect the

security of our country. Since the creation of America’s

first army in 1775, the Department has evolved to become

a global presence with individuals stationed in more than

140 countries dedicated to defending the United States and

its interests around the world. The Department embraces

the core values of leadership, professionalism, and technical

knowledge. Its employees are dedicated to duty, integrity,

ethics, honor, courage and commitment.

The chart below shows how the Department is structured.

Secretary of Defense

Deputy Secretary of Defense

Department of the Army

Secretary of the Army

UNDER

SECRETARIES

AND

ASST. SECRETARIES

OF THE ARMY

CHIEF OF 

STAFF, ARMY

Army Major

Commands & Agencies

Navy Major

Commands & Agencies

Marine Corps Major

Commands & Agencies

Air Force Major

Commands & Agencies

Department of the Air Force

Secretary of the Air Force

UNDER

SECRETARIES

AND

ASST. SECRETARIES

OF THE AIR FORCE

CHIEF OF 

STAFF, AIR FORCE

Joint Chiefs of Staff (JCS)

Chairman JCS

The Joint Staff

VICE CHAIRMAN JCS

CHIEF OF STAFF, ARMY

CHIEF OF NAVAL OPERATIONS

CHIEF OF STAFF, AIR FORCE

COMMANDANT, MARINE CORPS

Combatant Commands

- CENTRAL COMMAND

- EUROPEAN COMMAND

- JOINT FORCES COMMAND

- NORTHERN COMMAND

- PACIFIC COMMAND

- SOUTHERN COMMAND

- SPECIAL OPERATIONS COMMAND

- STRATEGIC COMMAND

- TRANSPORTATION COMMAND

DoD Field Activities Defense Agencies

Office of the

Secretary of Defense Inspector

General

UNDER SECRETARIES,

ASSISTANT SECRETARIES OF DEFENSE

AND EQUIVALENTS

Department of the Navy

Secretary of the Navy

UNDER

SECRETARIES

AND

ASST. SECRETARIES

OF THE NAVY

CHIEF OF 

NAVAL OPERATIONS

COMMANDANT

OF THE 

MARINE CORPS
 Department of Defense Agency Financial Report 2007 Section 1: Management’s Discussion and Analysis

The Secretary and the Office of the 

Secretary

The Secretary of Defense and the Office of the Secretary of

Defense are responsible for the formulation and oversight

of defense strategy and policy. The Office of the Secretary

of Defense supports the Secretary in policy development,

strategy formulation, planning, resource management, and

fiscal and program evaluation.

Military Departments

The Military Departments consist of the Army, Navy

(of which the Marine Corps is a component), and the

Air Force. In wartime, the U.S. Coast Guard becomes

a special component of the Navy; otherwise, it is part

of the Department of Homeland Security. The Military

Departments organize, staff, train, equip, and sustain

America’s military forces. When the President and Secretary

of Defense determine that military action is required, these

trained and ready forces are assigned to a Combatant

Commander responsible for conducting military operations.

Personnel in the Military Departments are assigned to

Active Duty, Reserve, and National Guard forces. Active

Duty forces are full-time military service members. Reserve

forces and National Guard forces, when ordered to active

duty, augment active forces. Reserve and National Guard

forces are an extension of Active Duty forces. The National

Guard has a unique dual mission with both federal and state

responsibilities. In peacetime the Guard is commanded by

the governor of each respective state or territory. Under

applicable state laws, their authority includes the ability

to call the Guard into action during local or statewide

emergencies, such as storms, drought, or civil disturbances. 

When ordered to active duty for mobilization or called

into federal service for emergencies, units of the Guard are

placed under operational control of the appropriate Military

Department. Guard and Reserve forces are recognized as

an indispensable and integral part of the nation’s defense

from the earliest days of a conflict.

Chairman of the Joint Chiefs of Staff 

The Chairman of the Joint Chiefs of Staff, who is the

principal military advisor to the President, the National

Security Council, and the Secretary of Defense, assists

the President and Secretary in providing for the strategic

direction of the Armed Forces, including operations

conducted by the Commanders of the Combatant

Commands. As part of this responsibility, the Chairman

also assists in the preparation of strategic plans and helps

to ensure that plans conform to the resource levels the

Secretary of Defense projects will be available.

Combatant Commands 

The nine Combatant Commands have responsibility for

missions around the world. For example, U.S. Central

Command is primarily responsible for conducting Operation

Enduring Freedom in Afghanistan and Operation Iraqi

Freedom in Iraq. The Army, Navy, Air Force, and Marine

Corps supply forces to these Commands. 

Five of these Commands have specific mission objectives for

their geographic areas of responsibility, as shown in the map

below:

•	 U.S. European Command (USEUCOM) is responsible

for activities in Europe, Greenland, Russia, and most of

Africa.

•	 U.S. Central Command (USCENTCOM) is responsible

for the Middle East, eastern Africa, and several of the

former Soviet republics. 

•	 U.S. Pacific Command (USPACOM) is responsible

for Northeast, South and Southeast Asia, as well as

Oceania.

•	 U.S. Southern Command (USSOUTHCOM) is

responsible for Central and South America, and the

Caribbean.

•	 U.S. Northern Command (USNORTHCOM) is

responsible for North America including Canada and

Mexico.

This structure undergoes periodic reviews. In 2007 the

President ordered the establishment of the U.S. Africa

Command, drawing territory from USEUCOM and

USCENTCOM. The headquarters will be functional in the

coming year.

The remaining four Commands have worldwide mission

responsibilities, each focused on a particular function:

•	 U.S. Strategic Command is responsible for providing

global deterrence capabilities and synchronizing

the Department’s efforts to combat weapons of mass

destruction.

PACOM

EUCOM

SOUTHCOM

NORTHCOM

PACOM 

CENTCOM

SOUTHCOM

NORTHCOM
Section 1: Management’s Discussion and Analysis Department of Defense Agency Financial Report 2007

•	 U.S. Special Operations Command is responsible for

leading, planning, synchronizing and, as directed,

executing global operations against terrorist networks.

•	 U.S. Transportation Command is responsible for

moving military equipment, supplies, and personnel

around the world in support of operations.

•	 U.S. Joint Forces Command is responsible for

developing future concepts for joint warfighting and

training.

Defense Agencies and Defense Field 

Activities 

These organizations provide support Department-wide. 

Defense Agencies provide a variety of support services

commonly used throughout the Department. For example,

the Defense Finance and Accounting Service (DFAS)

provides accounting services, contractor and vendor

payments, and payroll services. Defense Field Activities

perform missions more limited in scope, such as the

American Forces Information Service that serves as the focal

point for all Armed Forces information programs. 

Resources

Nearly half of the Department’s workforce are men and

women on Active Duty. To provide Americans with the

highest level of national security, the Department employs

more than 1.4 million men and women on Active Duty,

approximately 828,000 in the Reserve and National Guard,

and about 729,000 thousand civilians. The chart below

shows the employee breakdown.

*The percentages reflect data as of September 30, 2007, subject to rounding differences.

The Department’s worldwide infrastructure includes nearly

580,000 facilities (buildings, structures, and utilities) located

at more than 5,300 sites around the world, and more than

32 million acres. To protect the security of the United

States, the Department uses approximately 250,000

vehicles, 11,000 aircraft, and 500 vessels. 

Analysis of Financial Statements 

The Agency Financial Report affords the Department an

opportunity to provide its “investors” (e.g., stakeholders,

oversight, and the American people) with critical

information to assess current financial performance as well

as its future outlook. Though not a commercial entity, the

DoD has numerous stakeholders with interests similar to

those of public companies. 

For external reporting purposes, the Department reports

its financial information in four principal financial

statements, including a consolidated Balance Sheet along

with statements of Net Cost; Changes in Net Position,

and Budgetary Resources. These statements reflect the

Department’s financial position and changes in both

proprietary and budgetary activities. Comparatively, the

statements are similar to a corporate Balance Sheet, Income

Statement, Stockholders’ Equity, and Statement of Cash

Flow. The number of principal financial statements has

been reduced from six in the previous year to four this year

by presenting their information in the Notes to the financial

statements (see Notes 21 and 22).

The Department’s financial management environment is

complex and diverse. Comparatively, the Department’s

assets exceed the combined assets of the top six Fortune 500

companies, while gross costs exceed only those of the top

two. Current assets exceed current liabilities. Alternatively,

long-term liabilities exceed long-term assets. However,

83% of the long-term liabilities are covered by existing

assets or will be funded with resources outside of normal

DoD appropriations.

Structurally, the Department consists of 33 reporting entities. 

The Department submits nine separate financial statements

to OMB. These include the Department-wide financial

statements, the Military Retirement Fund, the U.S. Army

Corps of Engineers, and the general funds and working

capital funds for the Army, Air Force, and Navy. Overall,

the Department received a disclaimer of opinion from its

auditors for FY 2007, and the auditors have determined

information in the financial statements may not be reliable.

To date, four of the 33 reporting entities within the

Department are projected to achieve unqualified audit

opinions in FY 2007: the Defense Finance and Accounting

Service, the Defense Contract Audit Agency, the Defense

Commissary Agency, and the Office of the Inspector

General. At the Department-wide level, the Department

received favorable reviews for the fourth consecutive year

on two financial statement line items in FY 2007: 

(1) Federal Employees’ Compensation Act Liabilities, and

(2) Appropriations Received. 

National Guard

15%

Civilian

25%

Reserve

12%

Active Duty

48%

Staffing for FY 2007*
 Department of Defense Agency Financial Report 2007 Section 1: Management’s Discussion and Analysis

Over the past year, the Department has refined the audit

approach from one that focuses solely on line-items to one

that focuses on “segments.” This aligns end-to-end business

processes with financial management initiatives that focus

on improving the quality, accuracy, and reliability of the

Department’s financial information. The department has not

yet undergone segmented audits. Refer to section 1-9 for

additional details.

The Department’s financial statements for FY 2007

are presented in their entirety in Section 2, Financial

Information. A summary analysis of the statements is

provided in the following section. 

Financial Analysis

In general, the financial statements for the Department

reflect short-term solvency. The Department’s current assets

exceed current liabilities by approximately $337.6 billion

indicating DoD’s ability to satisfy immediate requirements. 

However, long-term liabilities exceed long-term assets by

approximately $882.0 billion as the future cost of military

retirement, health, and other employee benefits significantly

influence the long-term financial outlook. 

The Department’s unfunded liabilities consist primarily of

military retirement, health, and other employee benefits,

which comprise $1.5 trillion of DoD’s total liabilities. Of

this amount, $1.2 trillion of unfunded actuarial liabilities

related to estimated future year costs for the Military

Retirement Fund and the Medicare-eligible Retiree Health

Care Fund are covered by appropriations that are not part of

the Department’s budget. 

*The amounts reflect data as of September 30, 2007, subject to rounding differences.

With the exception of the “concurrent receipt” benefits

granted to military retirees, the Department receives

resources for all normal costs of retirement and Medicareeligible Retiree Health care through regular appropriations. 

Approximately $317.3 billion in unfunded liabilities for

retiree health programs remain to be funded from the

Department’s future appropriations. Once actuarial

liabilities to be covered by annual appropriations outside

the Department’s budget are factored out, the Department’s

assets exceed its remaining liabilities by approximately

$678.1 billion. This amount consists primarily of fixed

assets and inventory, therefore, they are not necessarily

available to cover liabilities. Additionally, significant

portions of the Department’s assets are earmarked for

specific purposes. 

During FY 2007, the Department received $658.6 billion

in appropriations from the Congress and invested these

resources in the key areas shown on the chart below. 

The Department, the Federal Government’s single largest

agency, receives more than half of the discretionary federal

budget. 

*The percentages reflect data as of September 30, 2007, subject to rounding differences.

By making investments in Departmental assets such as

people, infrastructure, operations and technologies, DoD

continues to defend national interests. Through August

2007, the Department spent approximately $118.2 billion

for the global war on terror. Over the past year,

$5.6 billion was spent on infrastructure, $31.2 billion

on military equipment, and $102.7 billion on military

personnel costs. The complete picture of the Department’s

financial information shows several trends and insights into

the financial health of the organization. 

•	 Total assets of the Department have grown 10% over

the past year, resulting from an increase in funds

available, as well as investments for long-term assets

and military equipment. 

•	 Liabilities have increased nearly 4% primarily due to

the long-term liability increases for military retirement

benefits.

•	 Costs increased 5% over the past year mainly due to

military retirement benefit costs.

Funded Liabilities

$411

Unfunded Liabilities

$1,640

Unfunded vs. Funded Liabilities*

(amounts in billions)

Other

2%

Construction

1%

Operations &

Maintenance

23%

Global War on Terror

25%

FY 2007 Resource Allocation*

Research & Development

12%

Military Personnel & Benefits

17%

Military Retirement Benefits

7% Procurement

13%
Section 1: Management’s Discussion and Analysis Department of Defense Agency Financial Report 2007

Long-Term Liabilities Related to Military Retirement 

Benefits 

The Military Retirement Fund was established in 1984

and certain costs were carried forward from pre-existing

liabilities. A Board of Actuaries appointed by the President

is responsible for approving actuarial assumptions for the

fund and setting the payment schedule. Historically, interest

costs have mounted because annual payments were less

than total cost of interest. The Board has determined that

a revised payment plan is necessary to pay the full cost of

interest and the unfunded liability which will be reduced

over time assuming no significant changes occur in benefits,

assumptions, and actuarial experience. 

Military Equipment

The actual change in military equipment for FY 2007

was $9.6 billion. Of that amount, $8.2 billion in training

equipment was reclassified to General Property, Plant

and Equipment in accordance with a DoD policy change

refining the definition of military equipment. Effective

FY 2007, the definition of military equipment specifically

excludes training equipment. As a result, the net increase in

military equipment was $1.4 billion. 

Real Property

Ongoing efforts to accurately identify and report real

property resulted in an increase of $4.9 billion to real

property during FY 2007. In general, the DoD occupies

more than 60% of the total property that federal agencies

own or lease. Managing federal assets differs from the

management of private sector assets. Primarily, the

proceeds from the sale of fixed assets are not available for

use by the agency, but are returned to the Department of

the Treasury. In the private sector, those same proceeds are

typically used to support or liquidate long-term debt.

Summary

In summary, the Department is improving financial

decision-making processes and progressing toward better

financial management. Great strides have been made

toward improving the long-term financial condition. The

short-term outlook is trending in a positive direction as the

value of current assets exceeds that of current of liabilities. 

In addition, equity is trending in a positive direction after not

factoring actuarial liabilities to be covered from non-DoD

resources. While resources are limited and there are vast

requirements that go unfunded each year, the Department’s

core missions are being satisfied by prioritizing and funding

the most critical requirements. For its longer-term outlook,

the Department has been assured of a continuing source

of appropriated funds to cover a significant portion of

long-term obligations, (primarily related to health care and

retirement benefit costs). 

Financial Improvement and Audit 

Readiness Plan

The Financial Improvement and Audit Readiness (FIAR) Plan

is the Department’s guide for comprehensively improving

financial management and preparing for audit. As evidence

that progress is being made, DoD is maintaining a green

score for progress in Improving Financial Performance under

the President’s Management Agenda. 

The September 2007 FIAR Plan is the fifth submission of the

Plan to the Congress and OMB. The plan demonstrates an

incremental approach that builds on the accomplishments of

previous efforts, incorporates lessons learned, and adapts as

necessary to sustain and advance progress already achieved. 

While the U.S. Army Corps of Engineers awaits the results

of their first financial statement audit for FY 2006, they

are simultaneously undergoing their FY 2007 audit. The

Defense Logistics Agency’s contingent legal liabilities have

been examined and verified as audit ready by the Inspector

General, and the Defense Information Systems Agency

is ready to assert that its Balance Sheet is ready for audit. 

Additionally, several large business process segments are

undergoing an independent examination to confirm audit

readiness. They are:

•	 The Navy’s nuclear and conventional ships

environmental liability, and

•	 The Air Force’s appropriations received, net transfers,

and fund balance with Treasury.

The Department’s overall goal is sustainable financial

management improvement. DoD believes receiving an

unqualified opinion on DoD’s consolidated financial

statements will demonstrate that the goal has been achieved.

While the Department remains committed to making

incremental improvements, many of the supporting details

of that strategy have been refined. The Department’s refined

audit strategy:

•	 Limits audits to entire financial statements rather than

audits on financial statement lines.

•	 Implements alternative methods of verifying

incremental progress or audit readiness.

•	 Incorporates a model to sustain progress once audit

readiness of a segment has been verified.

•	 Focuses on the business processes, or segments,

that underlie the amounts reported on the financial

statements rather than exclusively on balance sheet

lines.
 Department of Defense Agency Financial Report 2007 Section 1: Management’s Discussion and Analysis

•	 Recognizes that financial statement auditability,

and the correction of deficiencies for many business

processes, must be tied to the implementation of

Enterprise Resource Planning systems.

The refined audit readiness strategy transitions its

approach from one that focuses solely on a line-item

to one that focuses on segments. Segments are formed

by either bringing together closely related areas of

financial management or breaking apart areas into more

manageable portions. Segments more closely align financial

improvement initiatives to end-to-end business processes. 

The Navy has already transitioned to a segment approach,

and the Defense Logistics Agency has made significant

progress toward completing the transition.

To improve financial management and internal control,

the FIAR Plan organizes and integrates the Department’s

previously independent activities and aligns them with

business systems modernization. Integration of the FIAR

Plan, the Enterprise Transition Plan (ETP), the Component

Financial Improvement Plans (FIPs), the Enterprise Resource

Planning deployment plans, and system modernization

plans has set a comprehensive path for complying with

requirements, improving financial visibility into business

processes and information, and achieving audit readiness.

Enterprise Transition Plan 

The Enterprise Transition Plan (ETP) serves as the

Department’s roadmap for business transformation and

describes its strategy for achieving the Department’s

Enterprise and Component Priorities. One of the six Business

Enterprise Priorities described in the ETP is financial

visibility. The goal for financial visibility is more efficient

and effective decision-making throughout the Department

and assistance in achieving the Department-wide effort to

achieve financial auditability. Financial visibility means

having immediate access to accurate and reliable financial

information (planning, programming, budgeting, accounting,

and cost information) in support of financial accountability

and efficient and effective decision-making throughout

the Department in support of the warfighters and their

missions. The Department has established a broad strategy

to accomplish the goals of financial visibility. This strategy

relies on concurrent efforts in four areas that involve:

•	 Defining and implementing the Standard Financial

Information Structure (SFIS), a common language

that provides standard definitions, lengths, values,

and business rules that enable transparency and

interoperability of financial information across the

Department.

•	 Implementing financial systems that comply with

federal financial management requirements. The

Defense Agencies Initiative, for example, represents

the Department’s effort to extend its solution set

for streamlining financial management capabilities,

reducing material weaknesses, improving internal

controls, and achieving financial statement auditability

to 28 Defense Agencies and Field Activities. The

objective is to achieve an auditable business

environment with accurate, timely, and authoritative

financial data.

•	 Implementing the Business Enterprise Information

Service (BEIS) to aggregate financial information and

provide Department-wide financial reporting. The

BEIS provides services for financial reporting, cash

reporting and reconciliation, general ledger, reference

data, and enterprise business intelligence. The BEIS

will yield timely, accurate, and reliable financial

information and enable comparison of financial data

across the Department. It works with other financial

management initiatives such as the SFIS to provide

information for more informed financial decisionmaking.

•	 Implementing audit-ready financial processes and

practices (This effort includes activities tied to the FIAR

Plan).

Limitations of the Financial Statements

The principal financial statements have been prepared to

report the financial position and results of operations of

the Department of Defense, 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 A-136 and, to the extent possible, generally

accepted accounting principles. 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.

Performance Goals, Objectives, and 

Results

The OMB approved the Department’s participation in the

AFR pilot for FY 2007. As part of that pilot, the Department

will include its Annual Performance Report in its

FY 2009 Congressional Budget Justification (CBJ). The CBJ

will be submitted to the Congress in February 2008. The

links below take you to the Department’s performance

information, including plans and reports, and scores on the

President’s Management Agenda.
 Section 1: Management’s Discussion and Analysis Department of Defense Agency Financial Report 2007

The Department’s performance budget recognizes that

every level of the Department is accountable for measuring

performance and delivering results at multiple tiers of

the organization that support the Department’s strategic

objectives. The performance measures and targets,

identified in the Department’s FY 2007/2008 Performance

Budget/Plan, are presented at the Department’s enterprise

level. However, some measures and targets will undergo

reevaluation for FY 2009 to ensure that they are of a

cross-cutting and strategic nature. Such efforts reflect the

evolutionary nature of the performance budget and the

Department’s continuing efforts to ensure that performance

assessment is linked to identifiable and measurable strategic

outcomes. 

The Department’s FY 2007/2008 Performance Budget/Plan

identifies a select number of performance targets for

gauging success among a limited number of high priority

strategic objectives. The FY 2007 framework includes five

overarching general strategic goals, 17 strategic objectives,

and 42 performance targets. In addition, the Department

also will monitor five classified performance targets that

are not identified in the document that is available on our

public website. This plan constitutes the basis against

which performance results for FY 2007 will be assessed in

the Department’s CBJ.

Where and When the Department’s Performance Information Is Available

The Department of Defense Strategic Plan

http://www.defenselink.mil/qdr/report/Report20060203.pdf (Available now)

FY 2007/2008 Performance Budget/Plan

http://www.defenselink.mil/comptroller/defbudget/fy2008/fy2008_Performance_Budget.pdf 

(Available now)

FY 2009 Secretary’s Summary Justification (FY 2009 Performance Plan and FY 2007 Performance 

Report) http://www/defenselink.mil/comptroller/defbudget/FY2009 (Available February 2008)

The Department’s Scores on the President’s Management Agenda

http://www.whitehouse.gov/results/agenda/scorecard.html (Available now for the latest quarter)
10 Department of Defense Agency Financial Report 2007 Section 1: Management’s Discussion and Analysis

Analysis of Systems, Controls, and Legal Compliance

Annual Assurance Statement

Using assessments according to the OMB Circular A-123, Management’s Responsibility for Internal Control as the basis, the

Department prepared the FY 2007 Annual Statement of Assurance, presented on the next page. The Department asserts that

all Components have reported to the Secretary of Defense their individual statements of assurance over internal controls. The

tables referenced in the statement appear in Section 3: Other Accompanying Information.
11 Section 1: Management’s Discussion and Analysis Department of Defense Agency Financial Report 2007

Systems

The Federal Financial Management Improvement Act

(FFMIA) of 1996 requires federal agencies to:

•	 Conform to the U.S. Government Standard General

Ledger at the transaction level

•	 Comply with all applicable federal accounting

standards

•	 Establish financial management systems that meet

Government-wide standards requirements

•	 Support full disclosure of federal financial data,

including the costs of federal programs and activities

The Department’s Inspector General and the audit

agencies within the Military Services have reported on the

Department’s noncompliance with the Act’s requirements. 

Many of the Department’s legacy systems do not comply

with the wide range of requirements for systems compliance

and, therefore, do not provide the necessary assurances to

rely on information contained in either the legacy (source)

system or those systems that were fed information from the

legacy systems. 

To resolve these challenges, the Department’s FIAR Plan

and the ETP, discussed previously, document our strategies

for improving processes and ultimately achieving FFMIA

compliance.

Improper Payments Information Act 

Reporting

The Improper Payments Information Act (IPIA) of 2002, as

implemented by OMB, requires federal agencies to review

all programs and activities annually and identify those

that may be susceptible to significant erroneous payments. 

For FY 2007 IPIA reporting results, see Section 3: Other

Accompanying Information.

Other Management Information, 

Initiatives, and Issues

Looking Forward: Challenges for 2008 and 

Beyond

The “Defense Strategy and Strategic Planning” section

described in the 2006 Quadrennial Defense Review (QDR)

incorporates the National Defense, National Military, and

National Security Strategies. Past QDRs focused on the

proper “size” of the force. The 2006 QDR shapes the

Department’s future with a 20-year outlook by linking

strategy to defense resources and encompassing four areas

that drive capabilities development and force planning: 

•	 Defeating terrorist networks

•	 Defending the homeland in-depth

•	 Shaping the choices of countries at strategic crossroads

•	 Preventing hostile state or non-state actors from

acquiring or using weapons of mass destruction 

These interrelated areas illustrate the types of capabilities

and forces needed to address the challenges described

in the National Defense Strategy. They have helped the

Department shift its portfolio of capabilities to address

irregular, catastrophic, and disruptive challenges while

sustaining capabilities to address traditional challenges.

Although these focus areas do not encompass the full

range of military activities that the Department may have

to conduct, senior leaders have identified them as among

the most pressing issues. Improving capabilities and forces

to meet these challenges also will increase the overall

adaptability and versatility of our warfighters in responding

to other threats and contingencies.

Based on their evaluation of the four QDR focus areas, the

Department’s senior leaders decided to refine the capstone

force planning construct that translates the Department’s

strategy into guidance to shape and size military forces. 

This construct recognizes that the United States is a nation

at war. The Department is using lessons learned from recent

and ongoing operations in Iraq and Afghanistan and making

adjustments to capture the realities of a long war by: 

•	 Better defining the Department’s responsibilities

for homeland defense within a broader national

framework.

•	 Giving greater emphasis to the war on terror

and irregular warfare activities, including longduration unconventional warfare, counterterrorism,

counterinsurgency, and military support for

stabilization and reconstruction efforts.

•	 Accounting for, and drawing a distinction between,

steady-state force demands and surge activities over

multi-year periods. 

At the same time, this wartime construct requires the

capability to conduct multiple, overlapping wars. In

addition, it calls for the forces and capabilities needed

for deterrence, reflecting a shift from “one-size-fits-all”

deterrence toward more tailorable capabilities to deter

advanced military powers, regional weapons of mass

destruction states, or non-state terrorists. 

The 2006 QDR provided new direction for accelerating

the transformation of the Department to focus more on the

needs of Combatant Commanders and to develop portfolios

of joint capabilities rather than individual stove-piped
12 Department of Defense Agency Financial Report 2007 Section 1: Management’s Discussion and Analysis

programs. The essence of capabilities-based planning is

to identify capabilities that adversaries could employ and

capabilities that could be available to the United States. 

Once identified, the potential intersections are evaluated

which helps prevent over-optimization of the joint forces for

a limited set of threat scenarios. 

This paradigm shift continues emphasis on the needs of

the Combatant Commanders as the basis for programs

and budgetary priorities. The goal is to improve the

Department’s ability to meet the needs of the President

and the Combatant Commanders through the use of joint

capability portfolios. Moving toward a more “demanddriven” approach should reduce unnecessary program

redundancy, improve joint interoperability, and streamline

acquisition and budgeting processes. 

This environment also places new demands on the

Department’s Total Force concept. Although the allvolunteer force has been a key to successful U.S. military

operations over the past several decades, its continued

success is not preordained. The Total Force of Active and

Reserve military, civilian, and contractor personnel must

continue to develop the best mix of people equipped with

the right skills needed by the Combatant Commanders. To

this end, the QDR updates the Department’s workforce

management policies to guide investments in the force and

improve the workforce’s ability to adapt to new challenges. 

The 2006 QDR was designed to serve as a means to spur

the Department’s continuing adaptation and reorientation

to produce a truly integrated joint force that is more agile,

more rapidly deployable, and more capable against a

wider range of threats. Through continuous improvement,

constant reassessment, and application of lessons learned,

changes based on this review will continue to meet the

increasingly dangerous security challenges of the 21st

century.

Summary

Without doubt, reshaping the defense enterprise is difficult. 

The structures and processes developed over the past

half-century were forged in the Cold War and strengthened

over time through our successes. However, the strategic

landscape of the 21st century demands excellence across a

much broader set of national security challenges.

Military means alone will not win the global war on terror

or achieve other crucial national security objectives as

discussed in the 2006 QDR. Instead, the application

of diplomacy, at the national level and in concert with

allies and international partners, is critical. In addition to

coalition and partner-supported combat and preventive

operations, interaction with civilian populations will

be essential. To achieve the desired vision requires

determination and perseverance within the Department and

the Administration, and cooperation with the Congress.
Financial Information

Text

stars

wreath

arrows

Tail outline

wings

head

shield

Section 2
1775 The Army, Navy, 

and Marine Corps 

were established in 

concurrence with the 

American Revolution.

The War Department 

was established and 

was the precursor 

to what is now the 

Department of Defense.

The Department of 

the Navy, and the 

U.S. Coast Guard, 

were founded.

Congress established a 

civilian, Cabinet-level Secretary 

of Defense. The Department 

of the Air Force was created, 

the War Department was 

converted to the Department of 

the Army, and the three military 

departments of the Army, Navy 

and Air Force were placed 

under the direct control of the 

first Secretary of Defense.

The national defense 

structure was consolidated 

further, creating what 

we now know as the 

Department of Defense, 

and withdrawing cabinetlevel status for the three 

Military Department 

Secretaries.

1789 1798

1947 1949

How the Department Evolved
15 Section 2: Financial Information Department of Defense Agency Financial Report 2007

Message from the Chief Financial Officer
16 Department of Defense Agency Financial Report 2007 Section 2: Financial Information

Independent Auditor’s Report
17 Section 2: Financial Information Department of Defense Agency Financial Report 2007
18 Department of Defense Agency Financial Report 2007 Section 2: Financial Information
19 Section 2: Financial Information Department of Defense Agency Financial Report 2007
20 Department of Defense Agency Financial Report 2007 Section 2: Financial Information
21 Section 2: Financial Information Department of Defense Agency Financial Report 2007
22 Department of Defense Agency Financial Report 2007 Section 2: Financial Information
23 Section 2: Financial Information Department of Defense Agency Financial Report 2007
24 Department of Defense Agency Financial Report 2007 Section 2: Financial Information
25 Section 2: Financial Information Department of Defense Agency Financial Report 2007
26 Department of Defense Agency Financial Report 2007 Section 2: Financial Information
27 Section 2: Financial Information Department of Defense Agency Financial Report 2007
28 Department of Defense Agency Financial Report 2007 Section 2: Financial Information

Principal Financial Statements And 

Notes

The principal financial statements included in this report

have been prepared in accordance with the requirements of

the Chief Financial Officers Act of 1990, the Government

Management Reform Act of 1994, and the Office of

Management and Budget’s Circular A-136, “Financial

Reporting Requirements.” The responsibility for the integrity

of the financial information included in these statements

rests with the management of DoD. The Department’s fiscal

years 2007 and 2006 principal financial statements were

audited by the Office of Inspector General. The auditor’s

report accompanies the principal statements.

The Department’s principal financial statements for fiscal

years 2007 and 2006 consisted of the following:

The Balance Sheet

The Balance Sheet, which presents as of

September 30, 2007 and 2006 those resources owned or

managed by the Department which are available to provide

future economic benefits (assets); amounts owed by the

Department that will require payments from those resources

or future resources (liabilities); and residual amounts

retained by the Department, comprising the difference (net

position).

The Statement of Net Cost

The Statement of Net Cost, which presents the net cost of

the Department’s operations for the years ended

September 30, 2007 and 2006. The Department’s net

cost of operations includes the gross costs incurred by

the Department less any exchange revenue earned from

Department activities. 

The Statement of Changes in Net Position

The Statement of Changes in Net Position, which presents

the change in the Department’s net position resulting from

the net cost of the Department’s operations, budgetary

financing sources other than exchange revenues, and other

financing sources for the years ended September 30, 2007

and 2006.

The Statement of Budgetary Resources

The Statement of Budgetary Resources, which presents the

budgetary resources available to the Department during

FY 2007 and 2006, the status of these resources at

September 30, 2007 and 2006, and the outlay of budgetary

resources for the years ended September 30, 2007 and

2006.
29 Section 2: Financial Information Department of Defense Agency Financial Report 2007

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

As of September 30, 2007 and 2006

($ in millions)

2007 2006

Restated

Assets (Note 2)

Intragovernmental

Fund Balance with Treasury (Note 3) $ 407,167.0 $ 329,045.1 

Investments and Related Interest (Note 4) 333,711.0 299,261.2 

Accounts Receivable, Net (Note 5) 1,412.9 2,941.8 

Other Assets (Note 6) 1,212.5 1,189.6 

Total Intragovernmental Assets 743,503.4 632,437.7 

Cash and Other Monetary Assets (Note 7) 15,028.0 2,199.8 

Accounts Receivable, Net (Note 5) 7,469.4 7,864.1 

Loans Receivable (Note 8) 3,207.1 3,855.1 

Inventory and Related Property, Net (Note 9) 224,948.7 231,823.2 

General Property, Plant and Equipment, Net (Note 10) 474,530.5 465,439.5 

Investments and Related Interest (Note 4) 1,412.3 1,089.8 

Other Assets (Note 6) 36,246.1 27,928.7 

Total Assets $ 1,506,345.5 $ 1,372,637.9

Liabilities (Note 11)

Intragovernmental

Accounts Payable (Note 12) $ 1,911.5 $ 1,549.8 

Debt (Note 13) 3,242.3 3,697.8 

Other Liabilities (Notes 15 and 16) 11,501.0 13,199.7 

Total Intragovernmental Liabilities 16,654.8 18,447.3 

Accounts Payable (Note 12) 29,674.0 27,388.4 

Military Retirement and Other Federal Employment Benefits (Note 17) 1,874,679.5 1,815,769.5 

Environmental and Disposal Liabilities (Note 14) 72,489.9 69,985.1 

Loan Guarantee Liability (Note 8) 25.0 36.8 

Other Liabilities (Notes 15 and 16) 57,203.7 31,566.1 

Total Liabilities 2,050,726.9 1,963,193.2

Net Position

Unexpended Appropriations - Earmarked Funds (Note 23) 8.1 11.4 

Unexpended Appropriations - Other Funds 380,510.0 309,521.1 

Cumulative Results of Operations - Earmarked Funds (1,280,107.2) (1,271,684.5)

Cumulative Results of Operations - Other Funds 355,207.7 371,596.7 

Total Net Position (544,381.4) (590,555.3)

Total Liabilities and Net Position $ 1,506,345.5 $ 1,372,637.9

CONSOLIDATED BALANCE SHEET

Department of Defense

The accompanying notes are an integral part of these financial statements
30 Department of Defense Agency Financial Report 2007 Section 2: Financial Information

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

For the years ended September 30, 2007 and 2006

($ in millions)

2007 2006

Restated

Program Costs

Gross Costs $ 668,138.4 $ 634,544.0 

Less: Earned Revenue (45,686.4) (48,495.7)

Net Program Costs $ 622,452.0 $ 586,048.3 

Cost Not Assigned to Programs - - 

Less: Earned Revenue Not Attributable to Programs - - 

Net Cost of Operations $ 622,452.0 $ 586,048.3

CONSOLIDATED STATEMENT OF NET COST

Department of Defense
31 Section 2: Financial Information Department of Defense Agency Financial Report 2007

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

As of September 30, 2007 and 2006

($ in millions)

Earmarked Funds All Other Funds Eliminations

Cumulative Results of Operations

Beginning Balances $ (1,206,769.4) $ 306,681.6 $ - 

Prior Period Adjustments:

Changes in Accounting Principles - (4,230.9) - 

Correction of Errors - - - 

Beginning Balances, as adjusted (1,206,769.4) 302,450.7 - 

Budgetary Financing Sources

Appropriations used 3.3 585,691.3 - 

Nonexchange revenue 3,076.9 16,665.2 - 

Donations and forfeitures of cash and cash equivalents 63.8 - - 

Transfers in(out) without reimbursement 200.2 (78.4) - 

Other budgetary financing sources - - - 

Other Financing Sources (Non-Exchange)

Donations and forfeitures of property - 13.8 - 

Transfers in(out) without reimbursement 243.3 (330.2) - 

Imputed financing from costs absorbed by others - 14,813.4 10,392.1 

Other (21.8) (8,077.5) - 

Total Financing Sources 3,565.7 608,697.6 10,392.1 

Net Cost of Operations 8,617.5 624,226.6 10,392.1 

Net Change (5,051.8) (15,529.0) - 

Cumulative Results of Operations $ (1,211,821.2) $ 286,921.7 $ - 

Unexpended Appropriations

Beginning Balances $ 11.4 $ 309,521.1 $ - 

Prior Period Adjustments:

Changes in accounting principles - 3,745.5 - 

Corrections of errors - - - 

Beginning balances, as adjusted 11.4 313,266.6 - 

Budgetary Financing Sources

Appropriations received - 658,617.9 - 

Appropriations transferred in(out) - (197.4) - 

Other adjustments (rescissions, etc) - (5,485.8) - 

Appropriations used (3.3) (585,691.3) - 

Total Budgetary Financing Sources (3.3) 67,243.4 - 

Total Unexpended Appropriations 8.1 380,510.0 - 

Net Position $ (1,211,813.1) $ 667,431.7 $ -

Department of Defense

CONSOLIDATED STATEMENT OF CHANGES IN NET POSITION

FY 2007

Thiil f hfiil 
32 Department of Defense Agency Financial Report 2007 Section 2: Financial Information

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

As of September 30, 2007 and 2006

($ in millions) 2007 2006

Consolidated

Total

Consolidated

Total

Restated

Cumulative Results of Operations

Beginning Balances $ (900,087.8) $ (870,674.3)

Prior Period Adjustments:

Changes in Accounting Principles (4,230.9) -

Correction of Errors - (8,034.3)

Beginning Balances, as adjusted (904,318.7) (878,708.6)

Budgetary Financing Sources

Appropriations used 585,694.6 552,838.4 

Nonexchange revenue 19,742.1 3,057.1 

Donations and forfeitures of cash and cash equivalents 63.8 25.4 

Transfers in(out) without reimbursement 121.8 958.5 

Other budgetary financing sources - 0.6 

Other Financing Sources (Non-Exchange)

Donations and forfeitures of property 13.8 47.3 

Transfers in(out) without reimbursement (86.9) (83.7)

Imputed financing from costs absorbed by others 4,421.3 4,409.6 

Other (8,099.3) 3,415.9 

Total Financing Sources 601,871.2 564,669.1 

Net Cost of Operations 622,452.0 586,048.3 

Net Change (20,580.8) (21,379.2)

Cumulative Results of Operations $ (924,899.5) $ (900,087.8)

Unexpended Appropriations

Beginning Balances $ 309,532.5 $ 273,460.3 

Prior Period Adjustments:

Changes in accounting principles 3,745.5 - 

Corrections of errors - (0.5)

Beginning balances, as adjusted 313,278.0 273,459.8 

Budgetary Financing Sources

Appropriations received 658,617.9 559,255.2 

Appropriations transferred in(out) (197.4) (120.7)

Other adjustments (rescissions, etc) (5,485.8) (10,223.4)

Appropriations used (585,694.6) (552,838.4)

Total Budgetary Financing Sources 67,240.1 36,072.7 

Total Unexpended Appropriations 380,518.1 309,532.5

Net Position $ (544,381.4) $ (590,555.3)

Department of Defense

CONSOLIDATED STATEMENT OF CHANGES IN 

NET POSITION

The accompanying notes are an integral part of these financial statements.
33 Section 2: Financial Information Department of Defense Agency Financial Report 2007

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

For the Years Ended September 30, 2007 and 2006

($ in millions)

Budgetary Financing

Accounts

Non-Budgetary Credit

Reform Financing 

Accounts

Budgetary Resources

Unobligated balance, brought forward, October 1 $ 85,793.1 $ 46.8 

Recoveries of prior year unpaid obligations 44,879.2 - 

Budget Authority:

Appropriations received 762,641.4 13.1 

Borrowing authority - 381.8 

Contract authority 116,690.2 - 

Spending authority from offsetting collections:

Earned:

Collected 164,627.8 867.5 

Receivable from federal sources (1,277.6) - 

Change in unfilled customer orders:

Advanced received 448.9 - 

Without advance from federal sources 5,994.0 53.5 

Subtotal 1,049,124.7 1,315.9 

Nonexpenditure transfers, net, anticipated and actual (118.4) - 

Temporarily not available pursuant to Public Law (33,819.5) - 

Permanently not available (90,598.2) (791.1)

Total Budgetary Resources $ 1,055,260.9 $ 571.6 

Status of Budgetary Resources

Obligations Incurred:

Direct $ 772,419.6 $ 512.4 

Reimbursable 170,850.3 - 

Subtotal 943,269.9 512.4 

Unobligated balance:

Apportioned 98,585.7 23.2 

Exempt from apportionment 1,050.5 - 

Subtotal 99,636.2 23.2 

Unobligated balances not available 12,354.8 36.0 

Total Status of Budgetary Resources $ 1,055,260.9 $ 571.6 

COMBINED STATEMENT OF BUDGETARY RESOURCES

Department of Defense

2007
34 Department of Defense Agency Financial Report 2007 Section 2: Financial Information

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

For the Years Ended September 30, 2007 and 2006

($ in millions)

Budgetary

Financing

Accounts

Non-Budgetary Credit

Reform Financing 

Accounts

Change in Obligated Balance

Obligated balance, net

Unpaid obligations, brought forward, October 1 $ 349,774.5 $ 3,417.8 

Less: Uncollected customer payments from Federal sources, brought forward, 

October 1 (55,414.9) (76.9)

Total unpaid obligated balance 294,359.6 3,340.9 

Obligations incurred net 943,269.9 512.4 

Less: Gross outlays (814,588.1) (421.8)

Obligated balance transferred, net:

Actual transfers, unpaid obligations - - 

Actual transfers, uncollected customer payments from federal sources - - 

Total unpaid obligated balance transferred, net - - 

Less: Recoveries of prior year unpaid obligations, actual (44,879.2) - 

Change in uncollected customer payments from federal sources (4,716.4) (53.5)

Obligated balance, net, end of period:

 Unpaid obligations 433,577.1 3,508.4 

 Less: Uncollected customer payments from federal

 sources (60,131.3) (130.4)

 Total, unpaid obligated balance, net, end of period $ 373,445.8 $ 3,378.0

Net Outlays

Net Outlays:

 Gross outlays $ 814,588.1 $ 421.8 

 Less: Offsetting collections (165,077.2) (867.7)

Less: Distributed offsetting receipts (64,105.0) - 

 Net Outlays $ 585,405.9 $ (445.9)

COMBINED STATEMENT OF BUDGETARY RESOURCES

Department of Defense

2007

The accompanying notes are an integral part of these financial statements.
35 Section 2: Financial Information Department of Defense Agency Financial Report 2007

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

For the Years Ended September 30, 2007 and 2006

($ in millions)

Budgetary Financing 

Accounts (Restated)

Non-Budgetary Credit

Reform Financing 

Accounts

Budgetary Resources

Unobligated balance, brought forward, October 1 $ 68,608.6 $ 83.0 

Recoveries of prior year unpaid obligations 30,252.3 - 

Budget Authority:

Appropriations received 686,284.4 16.0 

Borrowing authority - 119.4 

Contract authority 59,451.7 - 

Spending authority from offsetting collections:

Earned:

Collected 164,718.1 1,169.6 

Receivable from federal sources 649.0 - 

Change in unfilled customer orders:

Advanced received 313.9 - 

Without advance from federal sources 179.1 (46.8)

Subtotal 911,596.2 1,258.2 

Nonexpenditure transfers, net, anticipated and actual (156.2) - 

Temporarily not available pursuant to Public Law (35,746.3) - 

Permanently not available (71,908.9) (1,083.2)

Total Budgetary Resources $ 902,645.7 $ 258.0

Status of Budgetary Resources

Obligations Incurred:

Direct $ 651,019.8 $ 211.3 

Reimbursable 165,521.3 - 

Subtotal 816,541.1 211.3 

Unobligated balance:

 Apportioned 74,623.8 1.2 

Exempt from apportionment 1,220.4 - 

Subtotal 75,844.2 1.2 

Unobligated balances not available 10,260.4 45.5 

Total Status of Budgetary Resources $ 902,645.7 $ 258.0

COMBINED STATEMENT OF BUDGETARY RESOURCES

Department of Defense

2006
36 Department of Defense Agency Financial Report 2007 Section 2: Financial Information

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

For the Years Ended September 30, 2007 and 2006

($ in millions)

Budgetary

Financing

Accounts

(Restated)

Non-Budgetary Credit

Reform Financing 

Accounts

Change in Obligated Balance

Obligated balance, net

Unpaid obligations, brought forward, October 1 $ 302,427.0 $ 3,863.8 

Less: Uncollected customer payments from Federal sources, brought forward, 

October 1 (54,586.9) (123.7)

Total unpaid obligated balance 247,840.1 3,740.1 

Obligations incurred net 816,541.1 211.3 

Less: Gross outlays (768,310.0) (657.3)

Obligated balance transferred, net:

Actual transfers, unpaid obligations - - 

Actual transfers, uncollected customer payments from federal sources - - 

Total unpaid obligated balance transferred, net - - 

Less: Recoveries of prior year unpaid obligations, actual (30,252.3) - 

Change in uncollected customer payments from federal sources (827.8) 46.8 

Obligated balance, net, end of period:

 Unpaid obligations 320,405.8 3,417.8 

 Less: Uncollected customer payments from federal sources (55,414.7) (76.9)

 Total, unpaid obligated balance, net, end of period $ 264,991.1 $ 3,340.9

Net Outlays

Net Outlays:

 Gross outlays $ 768,310.0 $ 657.3 

 Less: Offsetting collections (165,031.7) (1,169.4)

Less: Distributed Offsetting receipts (48,222.1) - 

 Net Outlays $ 555,056.2 $ (512.1)

COMBINED STATEMENT OF BUDGETARY RESOURCES

Department of Defense

2006

The accompanying notes are an integral part of these financial statements
37 Section 2: Financial Information Department of Defense Agency Financial Report 2007

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 the “DoD Financial Management Regulation,” the Office of Management and Budget

(OMB) Circular No. A-136, “Financial Reporting Requirements,” and to the extent possible, generally accepted accounting

principles (GAAP). Effective 4th Quarter, fiscal year (FY) 2006, the Department no longer publishes consolidating/combining

financial statements. 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 GAAP and OMB Circular No. A-136 due to limitations of

its financial and nonfinancial management processes and systems that support the financial statements. The Department

derives its 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 GAAP. The Department continues to implement process and system improvements addressing these

limitations.

Auditors are required to audit the financial statements of the following Department reporting activities: Army General Fund,

Army Working Capital Fund, Navy General Fund, Navy Working Capital Fund, Air Force General Fund, Air Force Working

Capital Fund, Military Retirement Fund, Medicare-Eligible Retiree Health Care Fund, and U.S. Army Corps of Engineers (Civil

Works).

In addition, the Department requires the Marine Corps General and Working Capital Funds and the following Defense

Agencies to prepare internal stand-alone auditable financial statements: Defense Logistics Agency, Defense Finance and

Accounting Service, Defense Information Systems Agency, Defense Contract Audit Agency, Defense Commissary Agency,

Defense Security Service, Defense Threat Reduction Agency, Defense Advanced Research Projects Agency, Chemical and

Biological Defense Program, Missile Defense Agency, Services Medical Activity, TRICARE Management Activity, U.S. Special

Operations Command, and Defense Security Cooperative Agency.

The Department currently has 13 auditor-identified material weaknesses: (1) Accounts Payable, (2) Accounting Entries,

(3) Environmental Liabilities, (4) Government Property and Materiel in Possession of Contractors, (5) Intragovernmental

Eliminations, (6) Operating Materiels and Supplies, (7) Reconciliation of Net Cost of Operations to Budget (formerly

Statement of Financing), (8) Statement of Net Cost, (9) Financial Management Systems, (10) Fund Balance with Treasury,

(11) General Property, Plant and Equipment, (12) Inventory, and (13) Accounts Receivable.

1.B. Mission of the Reporting Entity

The Department of Defense 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 its 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 of Defense includes the Military Departments, the Defense Agencies and the Department Field Activities. 

The Military Departments consist of the Army, Navy (of which the Marine Corps is a component), and the Air Force. The

Defense Agencies and the Department Field Activities provide support services commonly used throughout the Department.

1.C. Appropriations of Funds

The Department receives its appropriations and funds as general, working capital (revolving), trust, special, and deposit
38 Department of Defense Agency Financial Report 2007 Section 2: Financial Information

funds. The Department uses these appropriations and funds to execute its 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 accounts.

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, the Congress provides additional appropriations to supplement the 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. 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.

Special fund accounts are used to record government receipts reserved for a specific purpose.

Deposit funds are used to record amounts held temporarily until paid to the appropriate government or public entity. 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) or receiving (child)

entity. Allocation transfers are an agency’s legal delegation of its authority to obligate budget authority and outlay funds

to another agency. Generally, all financial activity related to these 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. 

The Department is a receiving (child) party to allocation transfers for the following agencies: Departments of Agriculture,

Interior, Energy, and Transportation; the Appalachian Regional Commission; and the Federal Highway Administration.

Additionally, the Department is a party to other allocation transfers as the child for certain funds meeting the OMB exception

and all related activity is thus 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.

As the parent, the Department allocates funds to the Departments of Transportation and Agriculture and reports related

activity in its financial statements.

1.D. Basis of Accounting

For FY 2007, the Department’s financial management systems are unable to meet all of the requirements for full accrual

accounting. Many of the Department’s financial and nonfinancial feeder systems and processes were designed and

implemented prior to the issuance of GAAP for federal agencies. These systems were not designed to collect and record

financial information on the full accrual accounting basis as required by GAAP. Most of the Department’s financial and

nonfinancial legacy systems were designed to record information on a budgetary basis.

The Department has undertaken efforts to determine the actions required to bring its financial and nonfinancial feeder

systems and processes into compliance with GAAP. One such action is the current revision of its 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 updated to collect and report financial information as required by GAAP,

the Department’s financial data will be derived from budgetary transactions (obligations, disbursements, and collections),
39 Section 2: Financial Information Department of Defense Agency Financial Report 2007

from nonfinancial feeder systems, and accruals made for major items such as payroll expenses, accounts payable, and

environmental liabilities.

In addition, the Department identifies program costs based upon the major appropriation groups provided by the Congress. 

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 working toward a cost reporting

methodology that will satisfy the requirement for cost information as mandated in the Statement of Federal Financial

Accounting Standards (SFFAS) No. 4, “Managerial Cost Accounting Concepts and Standards for the Federal Government.”

1.E. Revenues and Other Financing Sources

The Department receives congressional appropriations as financing sources for general funds that expire annually, on a

multiyear 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 A-25, “User Charges.” The Department recognizes revenue when earned within the

constraints of 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 other countries. Examples include countries where there is 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. However, because the Department’s 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, and environmental liabilities. In addition, expenditures for capital and other long-term assets

are recognized as operating expenses. Expenses for operating materials and supplies are currently recognized when the items

are purchased. 

1.G. Accounting for Intragovernmental Transactions

Preparation of reliable financial statements requires the elimination of transactions occurring among entities within

the Department or between two or more federal agencies. However, the Department cannot accurately eliminate

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. Intra-Department governmental

balances are then eliminated. The volume of intragovernmental transactions is so large that after-the-fact reconciliations

cannot be accomplished effectively. The Department is developing long-term system improvements to ensure accurate

intragovernmental information, to include sufficient up-front edits and controls, eliminating the need for after-the-fact

reconciliations. 

The U.S. Treasury Financial Management Service is responsible for eliminating transactions between the Department and

other federal agencies. 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 partners, the Department is able to reconcile

balances pertaining to investments in federal securities, borrowings from the U.S. Treasury and the Federal Financing Bank,
40 Department of Defense Agency Financial Report 2007 Section 2: Financial Information

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 its related costs to federal agencies. The Department’s financial statements,

therefore, do not report any portion of the public debt or interest thereon, nor do the statements report the source of public

financing, whether from issuance of debt or tax revenues. 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 U.S.

Government. Payment in U.S. dollars is required in advance.

The Department additionally reports foreign military sales transactions on behalf of the Executive Office of the President.

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 check issues, 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 these transactions to the applicable Fund

Balance with Treasury (FBWT) account. The Department’s recorded balance in FBWT accounts and U.S. Treasury’s FBWT

accounts must balance monthly. 

1.J. Foreign Currency

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. Cash seized during Operation Iraqi Freedom is restricted to assist the Iraqi people and

support the restoration of Iraq.

The Department conducts a significant portion of its operations overseas. The Congress established a special account

to handle the gains and losses from foreign currency transactions for five general fund appropriations: operation and

maintenance, military personnel, military construction, family housing operation and maintenance, and family housing

construction. 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.
41 Section 2: Financial Information Department of Defense Agency Financial Report 2007

1.K. Accounts Receivable

The Balance Sheet reports accounts receivable in three categories: accounts receivable, claims receivable, and refunds

receivable from other federal entities or from the public. 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, P.L. 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. 

The National Defense Authorization Act for FY 2005, P.L. 108-375, Section 2805 provided permanent authorities to the

Military Housing Privatization Initiative (MHPI).

The Department operates a loan guarantee program 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 EOP. This program is authorized by

sections 23 and 24 of the Arms Export Control Act of 1976, as amended, P.L. 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 included in the basic financial statements. 

The Federal Credit Reform Act of 1990 governs all amended direct loan obligations and loan guarantee commitments made

after FY 1991 resulting in direct loans or loan guarantees.

1.M. Inventories and Related Property

The Department values approximately 63% of its resale inventory using the moving average cost method. An additional

9% (fuel inventory) is reported using the first-in-first-out method. The Department reports the remaining 28% 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 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, P.L. 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. However, since the on-hand balances which were

transitioned were not, for the most part, baselined to auditable historical cost, the reported values remain noncompliant with

SFFAS No. 3 and GAAP.

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. Real property, installations, and utilities that are necessary to equip,

operate, maintain, and support military activities without distinction as to application for administrative or combat purposes

are excluded. Items commonly used in and available from the commercial sector are not managed in the Department’s
42 Department of Defense Agency Financial Report 2007 Section 2: Financial Information

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 does not attempt to account separately for “inventory held for sale” and “inventory held in reserve for future

sale” based on SFFAS No. 3 definitions, unless otherwise noted. 

Related property includes OM&S and stockpile materiels. 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, materiels and supplies are expensed

when purchased. During FY 2007, the Department expensed significant amounts using the purchase method 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 high-dollar items, such as aircraft engines, are categorized as

OM&S rather than military equipment.

The Department recognizes condemned materiel as “excess, obsolete, and unserviceable.” The cost of disposal is greater

than the potential scrap value; therefore, the net value of condemned materiel is zero. Potentially redistributed materiel,

classified in previous years as “excess, obsolete, and unserviceable,” is included in the “held for use” or “held for repair”

categories according to its condition.

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 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 costs related to the

production or servicing of items, including direct material, direct labor, applied overhead, and other direct costs. Work in

process also includes the value of finished products or completed services that are yet to be placed in service and transferred

to an asset account. Work in process includes munitions in production and depot maintenance work with its associated

labor, applied overhead, and supplies used in the delivery of maintenance services.

1.N. Investments

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 investment using the effective interest rate method or another method obtaining

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 securities. The two types of nonmarketable securities are par value and marketbased intragovernmental securities. The Bureau of the Public Debt issues nonmarketable par value intragovernmental

securities. Nonmarketable, market-based intragovernmental securities emulate marketable securities, but are not publicly

traded.

The Department’s net investments are held by various trust and special funds. These funds include the Military Retirement

Trust Fund; Medicare-Eligible Retiree Health Care Fund; Other Defense Organizations General Fund trust and special

funds; donations (Gift Funds); and the USACE South Dakota Terrestrial Habitat Restoration, Inland Waterways, and Harbor

Maintenance Trust Fund accounts.

Other investments represent limited partnerships entered into on behalf of the U.S. Government in support of the MHPI

authorized by P.L. 104-106, Section 2801. These investments do not require market value disclosure.
43 Section 2: Financial Information Department of Defense Agency Financial Report 2007

1.O. General Property, Plant and Equipment

The SFFAS No. 23, “Eliminating the Category National Defense Property, Plant, and Equipment,” established GAAP for

valuing and reporting military equipment (e.g., ships, aircraft, combat vehicles, weapons) in federal financial statements. 

The Standard provided for the use of estimated historical cost for valuing military equipment if obtaining actual historical

cost information is not practical. The Department used the Bureau of Economic Analysis (BEA) estimation methodology to

calculate the value of the military equipment for reporting periods from October 1, 2002, through March 31, 2006.

Effective 3rd Quarter, FY 2006, the Department replaced the BEA estimation methodology with one based on departmental

internal records for 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, and

disposals to create a baseline. The military equipment baseline is updated using expenditure information and information

related to acquisitions and disposals.

In FY 2006, the Department revised the real property capitalization threshold from $100 thousand to $20 thousand. 

The current $100 thousand capitalization threshold remains unchanged for the remaining General Property, Plant and

Equipment (PP&E) categories. Not all Military Departments have implemented this revised policy due to system and process

limitations. General PP&E assets are capitalized at historical acquisition cost plus capitalized improvements when an asset

has a useful life of two or more years and the acquisition cost equals or exceeds the Department’s capitalization threshold. 

The Department also requires capitalization of improvement costs over the Department’s capitalization threshold. The

Department depreciates all General PP&E, other than land, on a straight-line basis.

Prior to FY 1996, General PP&E was capitalized if it had an acquisition cost of $15 thousand, $25 thousand, and $50

thousand for FYs 1993, 1994, and 1995 respectively, and an estimated useful life of two or more years. General PP&E

previously capitalized at amounts below $100 thousand was written off General Fund financial statements in FY 1998. No

adjustment was made for WCF assets that remain capitalized and reported on WCF financial statements.

The USACE Civil Works General PP&E is capitalized at historical acquisition cost plus capitalized improvements when

an asset has a useful life of two or more years and the acquisition cost exceeds $25 thousand. One exception is that all

buildings and structures related to hydropower projects are capitalized regardless of cost. Prior to FY 2004, the USACE

capitalized all buildings and structures regardless of cost. In FY 2003, the USACE increased the threshold (effective FY

2004) for buildings and structures to $25 thousand for all Civil Works appropriations with the exception of Revolving Fund

and Power Marketing Agency assets and expensed all previously acquired assets that did not meet the new $25 thousand

threshold.

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 exceeds the Department’s

capitalization threshold, federal accounting standards require that it be reported on the Department’s Balance Sheet.

The Department is developing new policies and a contractor reporting process for Government furnished equipment that

will provide appropriate General PP&E information for future financial statement reporting purposes. Accordingly, the

Department reports only government property in the possession of contractors that is maintained in the Department’s

property systems. The Department has issued new property accountability and reporting requirements for Department

entities to maintain, in their property systems, information on all property furnished to contractors. This action and other

proposed actions are structured to capture and report the information necessary for compliance with federal accounting

standards.

1.P. Advances and Prepayments

The Department’s policy is to record advances and prepayments in accordance with GAAP. As such, payments made

in advance of the receipt of goods and services are reported as assets on the Balance Sheet. The Department’s policy

is to expense or capitalize assets when the related goods and services are received. Not all Department entities have

implemented this policy primarily due to system limitations.
44 Department of Defense Agency Financial Report 2007 Section 2: Financial Information

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 and liability. The Department records

the amounts as the lesser of the present value of the rental and other lease payments during the lease term (excluding

portions 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 risk of ownership. Payments for operating leases are charged to expense over the lease term as they become

payable. 

Office space and leases entered into by the Department are the largest component of operating leases. These costs were

gathered from existing leases, General Services Administration (GSA) bills, and interservice support agreements. Future year

projections use the consumer price index (CPI) rather than the Department’s inflation factor.

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 of monies 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.

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 for real property and ships are reported as

construction in progress. It is the Department’s policy to record certain contract financing payments as other asset.

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. Examples of loss contingencies include the collectibility

of receivables, pending or threatened litigation, and possible claims and assessments. 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.

Other liabilities arise as a result of anticipated disposal costs for the Department’s assets. This type of liability has two

components: nonenvironmental and environmental. 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 for assets when management decides to dispose of an
45 Section 2: Financial Information Department of Defense Agency Financial Report 2007

asset. The Department recognizes nonenvironmental disposal liabilities for military equipment nuclear-powered assets

when placed into service. Such amounts are developed in conjunction with, and not easily identifiable from, environmental

disposal costs.

1.T. Accrued Leave

The Department reports liabilities for military leave and accrued annual leave for DoD civilians. Sick leave for DoD civilians

is expensed when taken. The liability reported at the end of the accounting period reflects the current pay rates. 

1.U. Net Position

Net position consists of unexpended appropriations and cumulative results of operations.

Unexpended appropriations represents amounts of 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 represents the net difference between expenses and losses, and financing sources (including

appropriations, revenue, and gains), since inception. Beginning with FY 1998, cumulative results of operations also includes

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. Generally, treaty terms

allow the Department continued use of these properties until the treaties expire. In the event treaties or other agreements

are terminated, whereby use of the foreign bases is prohibited, 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. Comparative Data

The Department’s financial statements and notes are presented on a comparative basis.

1.X. Unexpended Obligations

The Department obligates funds to provide goods and services for outstanding orders not yet delivered. Unless title has

passed, the financial statements do not reflect a liability for payment for goods and services not yet delivered. Unexpended

obligations includes both obligations for which goods and services have been delivered (title passed) and a liability

recognized, and obligations for which no delivery has occurred and no liability recognized. The balance of unexpended

obligations appears immediately before net outlays in the Statement of Budgetary Resources, and is referred to as “Total,

unpaid obligated balances, net, end of period.”

1.Y. Undistributed Disbursements and Collection

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 activity field records as opposed to those reported

by the U.S. Treasury. These amounts should agree with the undistributed amounts reported on the departmental accounting

reports. In-transit payments are those payments that have been made, but have not been recorded in the fund holder’s

accounting records. These payments are applied to the outstanding accounts payable balance. In-transit collections are

those collections from other agencies or entities that have not been recorded in the accounting records. These collections

are applied to the accounts receivable balance. 
46 Department of Defense Agency Financial Report 2007 Section 2: Financial Information

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. 

Unsupported undistributed disbursements are recorded in accounts payable. Unsupported undistributed collections are

recorded in other liabilities.

1.Z. Significant Events

In FY 2007 the Department made several modifications to its financial reports and notes that had significant and pervasive

effects. These changes are summarized below:

In response to updated reporting requirements from OMB, the Department began reporting in its basic financial statements

all activity for the programs it administers on behalf of the Executive Office of the President including the Foreign Military

Sales Program (FMS). Previously, the Department reported these programs as “Other Accompanying Information” in its

Performance and Accountability Report.

Prior to FY 2007, the Department had reported the current year changes only in undelivered orders, contract authority,

collections, and disbursements for FMS. Based on changes to accounting and reporting methodologies, the Department

now correctly reflects undelivered orders, contract authority, and Fund Balance with Treasury (FBWT) for FMS in its financial

statements and notes with cumulative-from-inception balances. 

In addition, the Department no longer reports FMS undelivered orders and FBWT in the Statement of Custodial Activity

(SCA). The Department’s remaining custodial activity is immaterial and incidental to its primary mission. Therefore,

the Department is no longer producing a SCA. Note 22 has been renamed and revised to report “Incidental Custodial

Collections.”

In accordance with updated reporting requirements in OMB Circular A-136, the Department eliminated the Statement of

Financing and began presenting the information formerly contained in the Statement in Note 21 “Reconciliation of Net Cost

of Operations to Budget.”

Note 2. Nonentity Assets

As of September 30 2007 2006 Restated

(amounts in millions)

Intragovernmental Assets

Fund Balance with Treasury $ 9,926.3 $ 2,896.6

Accounts Receivable 0.9 11.6

Total Intragovernmental Assets 9,927.2 2,908.2

Nonfederal Assets

Cash and Other Monetary Assets 14,879.6 2,085.2

Accounts Receivable 5,162.9 5,486.7

Other Assets 9,386.9 196.8

Total Nonfederal Assets 29,429.4 7,768.7

Total Nonentity Assets 39,356.6 10,676.9

Total Entity Assets 1,466,988.9 1,361,961.0

Total Assets $ 1,506,345.5 $ 1,372,637.9

Nonentity assets are assets for which the Department maintains stewardship accountability and responsibility to report, but

are not available for the Department’s operations.

Nonentity Fund Balance with Treasury is comprised of deposit funds, seized Iraqi cash, the Development Fund for Iraq (DFI),

and advances from foreign governments for Foreign Military Sales Trust Funds (FMSTF) for the purchase of defense articles
47 Section 2: Financial Information Department of Defense Agency Financial Report 2007

Note 3. Fund Balance with Treasury

As of September 30 2007 2006 Restated

(amounts in millions)

Fund Balances

Appropriated Funds $ 383,074.3 $ 313,962.4

Revolving Funds 11,021.1 9,619.6

Trust Funds 9,703.5 2,212.2

Special Funds 396.5 328.1

Other Fund Types 2,971.6 2,922.8

Total Fund Balances 407,167.0 329,045.1

Fund Balances Per Treasury Versus Agency

Fund Balance per Treasury 399,862.9 329,921.4

Fund Balance per Agency 407,167.0 329,045.1

Reconciling Amount $ (7,304.1) $ 876.3

Fund Balance with Treasury includes immaterial nonentity balances the Department holds on behalf of others, and entity

balances which represent funds with Treasury for which the Department is authorized to make expenditures and pay

liabilities. It reflects the balance of all fund types held by the Department.

Other Fund Types primarily consists of deposit funds, receipt accounts, clearing accounts, seized Iraqi cash, Development

Fund for Iraq, and Foreign Military Sales Trust Funds (FMSTF) advance deposits. 

The Department shows a reconciling net difference of ($7.3) billion with the U.S. Treasury. This includes ($11.9) billion

differences due to the U.S. Treasury treatment of allocation transfers, offset by $3.2 billion in cancelled appropriations and

$1.4 billion in unavailable receipt accounts.

and services. Deposit funds are generally used to record amounts held temporarily until paid to the appropriate party. 

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. The 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 consists of cash received from foreign governments deposited in the Federal

Reserve Bank, U.S. commercial banks and foreign banks; and cash held by Disbursing Officers to carry out payment,

collection, and foreign currency accommodation exchange missions. 

Nonfederal Accounts Receivable consists of amounts due for cancelled year appropriations; and interest, fines and penalties

due on debt. The Department generally cannot use the collections and must distribute them to the U.S. Treasury. The

Department has specific statutory authority to retain collections from certain cancelled year accounts receivable as entity

assets.

Nonfederal Other Assets primarily consists of advances paid to contractors for undelivered defense articles and services owed

to foreign governments.

The Department is reporting nonentity balances of Fund Balance with Treasury of $8.5 billion, Cash and Other Monetary

Assets of $12.4 billion, and Other Assets of $9.2 billion on behalf of the Executive Office of the President. The Department

holds these amounts as stewards on the behalf of others and are therefore, not available for use by the Department.
48 Department of Defense Agency Financial Report 2007 Section 2: Financial Information

The balance in Fund Balance with Treasury includes $11.9 billion ($3.4 billion entity and $8.5 billion nonentity) that the

Department is executing on behalf of the Executive Office of the President. The Department holds these amounts as stewards

on the behalf of others and are therefore, not available for use by the Department.

Status of Fund Balance with Treasury

As of September 30 2007 2006 Restated

(amounts in millions)

Unobligated Balance

Available $ 99,188.4 $ 75,403.0

Unavailable 338,343.1 302,061.5

Obligated Balance not yet Disbursed 437,085.6 323,823.5

Nonbudgetary FBWT 4,755.7 7,640.4

NonFBWT Budgetary Accounts (472,205.8) (379,883.3)

Total $ 407,167.0 $ 329,045.1

The Status of Fund Balance with Treasury is the reconciliation between budgetary and proprietary accounts at Treasury. It

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.

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, receipt accounts,

clearing accounts, and nonentity FBWT. 

NonFBWT Budgetary Accounts reduces the Status of FBWT and consists of investments in U.S. Treasury securities, contract

and borrowing authority, unfilled customer orders without advance, and receivables. 

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. 

Disclosures Related to Suspense/Budget Clearing Accounts

As of September 30 2005 2006 2007

(Decrease)/

Increase 

FY 2006-2007

(amounts in millions)

Account

F3845 – Personal Property Proceeds $ 0.9 $ 0.7 $ 0.8 $ 0.1

F3875 – Budget Clearing Account Suspense 263.5 903.9 20.0 (883.9)

F3880 – Lost or Cancelled Treasury Checks 11.9 26.4 5.8 (20.6)

F3882 – Uniformed Services Thrift Savings Plan Suspense 83.5 108.5 115.8 7.3

F3885 – Interfund/IPAC Suspense (211.6) (114.9) (100.2) 14.7

F3886 – Thrift Savings Plan Suspense (4.9) (6.4) (10.1) (3.7)

Total $ 143.3 $ 918.2 $ 32.1 $ (886.1)
49 Section 2: Financial Information Department of Defense Agency Financial Report 2007

Abnormal Balances

The ($10.1) million balance for F3886 suspense account reflects the timing differences due to the additional processing time

for negative adjustments, lost earnings, forfeitures, and loan repayments. 

Other Disclosures

The F3845 suspense account represents the balance of proceeds from the sale of personal property. 

The F3875 and F3885 suspense accounts temporarily hold collections or disbursements until identified and applied to a valid

appropriation. 

The F3880 suspense account represents the balance of U.S. Treasury checks that: (1) have either been lost by the payee and

need to be reissued, (2) have never been cashed by the payee, or (3) have been cancelled by the U.S. Treasury and need to

be transferred to the original appropriation.

The F3882 and F3886 suspense accounts represent the difference between retirement funds withheld from members of the

uniformed services and civilians employed by the Department and amounts transferred to the Federal Retirement Thrift

Investment Board, who administers the Thrift Savings Plan.

Disclosures Related to Problem Disbursements and In-Transit Disbursements

As of September 30 2005 2006 Restated 2007

(Decrease)/

Increase from FY 

2006 – 2007

(amounts in millions)

Total Problem Disbursements, Absolute Value

Unmatched Disbursements (UMDs) $ 2,225.3 $ 1,353.4 $ 1,414.1 $ 60.7

Negative Unliquidated Obligations (NULO) 95.5 78.6 107.9 29.3

In-Transit Disbursements 6,869.4 6,994.3 7,534.3 540.0

Total $ 9,190.2 $ 8,426.3 $ 9,056.3 $ 630.0

The Department reports Problem Disbursements as an absolute value, which is the sum of the debit and credit transactions

without regard to the sign.

An Unmatched Disbursement occurs when a payment does not match an obligation in the accounting system. 

A Negative Unliquidated Obligation occurs when a payment matches, but exceeds a valid obligation in the accounting

system. 

In-Transit Disbursements represents disbursements and collections made by a disbursing activity on behalf of an accountable

activity and not posted to the accounting system. 

The amounts reported in FY 2005 and FY 2006 were changed to correct balances and to change reporting methodology from

net to absolute for In-Transit Disbursements. 
50 Department of Defense Agency Financial Report 2007 Section 2: Financial Information

Note 4. Investments and Related Interest

As of September 30 2007

(amounts in millions) Cost Amortization 

Method

Amortized 

(Premium)/

Discount

Investments, Net Market Value 

Disclosure

Intragovernmental Securities

Nonmarketable, Market- Based

Military Retirement Fund $ 222,030.5 See Below $ (6,666.2) $ 215,364.3 $ 212,242.6

Medicare Eligible Retiree Health Care Fund 110,206.3 See Below (1,762.9) 108,443.4 106,692.8

US Army Corps of Engineers 4,058.5 See Below (44.1) 4,014.4 4,043.1

Other Funds 2,039.0 See Below (11.5) 2,027.5 2,040.2

Total Nonmarketable, Market-Based 338,334.3 (8,484.7) 329,849.6 325,018.7

Accrued Interest 3,861.4 3,861.4 3,861.4

Total Intragovernmental Securities 342,195.7 (8,484.7) 333,711.0 328,880.1

Other Investments

Total Other Investments $ 1,412.3 $ 0.0 $ 1,412.3 $ N/A

As of September 30 2006

(amounts in millions) Cost Amortization 

Method

Amortized 

(Premium)/

Discount

Investments, Net Market Value 

Disclosure

Intragovernmental Securities

Nonmarketable, Market-Based

Military Retirement Fund $ 213,248.6 See Below $ (7,889.9) $ 205,358.7 $ 202,876.7

Medicare Eligible Retiree Health Care Fund 85,730.6 See Below (1,123.3) 84,607.3 82,962.7

US Army Corps of Engineers 3,632.9 See Below (81.3) 3,551.6 3,519.5

Other Funds 1,911.1 See Below (11.1) 1,900.0 1,900.6

Total Nonmarketable, Market-Based 304,523.2 (9,105.6) 295,417.6 291,259.5

Accrued Interest 3,843.6 3,843.6 3,843.6

Total Intragovernmental Securities 308,366.8 (9,105.6) 299,261.2 295,103.1

Other Investments

Total Other Investments $ 1,089.8 $ 0.0 $ 1,089.8 $ N/A

Amortization Method Used: Effective Interest

The market value of the non-marketable securities held by the Department fluctuates in tandem with the current selling price

of the equivalent marketable security on the open bond market. It is the intent of the Department to hold the investments to

maturity to prevent losses on the securities.

The Federal Government does not set aside assets to pay future benefits and expenditures associated with earmarked funds. 

The cash generated from earmarked funds is deposited in the U.S. Treasury, which uses the cash for general Government

purposes. The U.S. Treasury securities are issued to the earmarked funds as evidence of its receipts. The U.S. Treasury

securities are an asset to the Department and a liability to the U.S. Treasury. Because the Department and the U.S. Treasury

are both parts of the Government, these assets and liabilities offset each other from the standpoint of the 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, the Government finances the
51 Section 2: Financial Information Department of Defense Agency Financial Report 2007

Note 5. Accounts Receivable

As of September 30 2007 2006 Restated

(amounts in millions) Gross Amount Due Allowance For Estimated 

Uncollectibles

Accounts Receivable, 

Net

Accounts Receivable, 

Net

Intragovernmental Receivables $ 1,412.9 $ N/A $ 1,412.9 $ 2,941.8

Nonfederal Receivables (From the Public) 7,702.1 (232.7) 7,469.4 7,864.1

Total Accounts Receivable $ 9,115.0 $ (232.7) $ 8,882.3 $ 10,805.9

Aged Accounts Receivable

As of September 30

2007 2006

Intragovernmental Nonfederal Intragovernmental Nonfederal

(amounts in millions)

Category

Nondelinquent

Current $ 8,299.6 $ 1,771.0 $ 7,735.6 $ 1,840.8

Noncurrent 233.9 1,607.4 232.1 1,740.9

Delinquent

1 to 30 days 132.3 167.4 321.1 159.9

31 to 60 days 50.0 136.7 345.7 53.4

61 to 90 days 54.3 98.0 57.2 117.8

91 to 180 days 68.1 184.5 716.5 130.0

181 days to 1 year 49.8 201.9 908.7 207.2

Greater than 1 year and less than or equal to 2 years 65.4 205.4 44.4 192.2

Greater than 2 years and less than or equal to 

6 years 25.1 169.2 55.0 896.2

Greater than 6 years and less than or equal to 10 years 0.7 588.9 1.2 676.0

Greater than 10 years 0.0 2,714.4 0.0 2,640.5

Subtotal 8,979.2 7,844.8 10,417.5 8,654.9

 Less Supported Undistributed Collections (76.8) (162.1) (492.7) (478.9)

 Less Eliminations (7,166.8) 0.0 (6,986.3) 0.0

 Less Other (322.7) 19.4 (11.1) 38.5

Total $ 1,412.9 $ 7,702.1 $ 2,927.4 $ 8,214.5

The prior year Intragovernmental accounts receivable on the aging schedule does not agree with the accounts receivable

reported on the Balance Sheet. The FY 2006 aging schedule does not include $14.4 million for the Foreign Military Account

Program.

Nondelinquent noncurrent accounts receivable consists of nonfederal receivables of $1.6 billion on repayment schedules

primarily for long term water storage contracts with state and local municipalities. The balance represents intragovernmental

accounts receivable collected but not posted to accounting systems. 

securities out of accumulated cash balances, by raising taxes or other receipts, by borrowing from the public or repaying less

debt, or by curtailing other expenditures. This is the same way the Government finances all other expenditures.

Other Funds are primarily comprised of DoD Education Benefits Fund and Voluntary Separation Incentive investments. 
52 Department of Defense Agency Financial Report 2007 Section 2: Financial Information

Note 6. Other Assets

As of September 30 2007 2006

(amounts in millions)

Intragovernmental Other Assets

 Advances and Prepayments $ 1,087.6 $ 1,064.7

 Other Assets 124.9 124.9

 Total Intragovernmental Other Assets 1,212.5 1,189.6

Nonfederal Other Assets

 Outstanding Contract Financing Payments 25,030.3 25,630.4

 Advances and Prepayments From Foreign Governments 8,015.3 0.0

 Advances and Prepayments From the Public 1,549.6 1,176.2

 Other Assets (With the Public) 1,650.9 1,122.1

 Total Nonfederal Other Assets 36,246.1 27,928.7

Total Other Assets $ 37,458.6 $ 29,118.3

Intragovernmental Other Assets consists of the Department’s right to approximately six million barrels of crude oil held by the

Department of Energy. 

Advances and Prepayments From Foreign Governments is comprised of advances paid to contractors for undelivered defense

articles and services owed to foreign governments under the Foreign Military Sales Program.

Contract terms and conditions for certain types of contract financing payments convey rights to the Department 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 is obligated to make financing payments in accordance with contract

terms, but does not have the right to take the work except as provided for in contract clauses related to termination or

acceptance.

Outstanding Contract Financing Payments balance of $25.0 billion is comprised of $23.4 billion in contract financing

payments and an additional $1.7 billion in estimated future payments to the contractor upon delivery and Government

acceptance of a satisfactory product. (See additional discussion in Note 15, Other Liabilities.)

Nonfederal Other Assets consists primarily of undelivered assets.

The balance in Other Assets includes $9.4 billion that the Department is executing on behalf of the Executive Office of the

President. The Department holds these amounts as stewards on the behalf of others and the assets are therefore, not available

for use by the Department.

The Intragovernmental Other consists of pending customer returns.

The Nonfederal Other reflects reconciling differences between the general and subsidiary ledgers. 

The Department generates debt letters and pursues all debts over 30 days delinquent. For debts over 180 days delinquent,

the Department utilizes various offset programs and collection agencies to pursue collections. In certain instances, the status

of litigation affects the Department’s ability to pursue collection actions.
53 Section 2: Financial Information Department of Defense Agency Financial Report 2007

Note 7. Cash and Other Monetary Assets

As of September 30 2007 2006

(amounts in millions)

Cash $ 13,907.0 $ 1,389.0

Foreign Currency 1,121.0 810.8

Total Cash, Foreign Currency, & Other Monetary Assets $ 15,028.0 $ 2,199.8

The Department began reporting the accrued assets, liabilities, and expenses of the Foreign Military Sales Trust Fund during

FY 2007, resulting in the recognition of an additional $12.4 billion in cash. Nonentity assets of $15.0 billion, consisting of

$13.7 billion in cash and $1.1 billion in foreign currency which are restricted and unavailable for use in the Department’s

mission.

The balance in Cash includes $12.4 billion that the Department is executing on behalf of the Executive Office of the

President. The Department holds these amounts as stewards on the behalf of others and are therefore, not available for use

by the Department.

Note 8. Direct Loan and/or Loan Guarantee Programs

Direct Loan and/or Loan Guarantee Programs

The Department operates the following direct loan and loan guarantee programs:

•	 Foreign Military Account Program (FMA)

•	 Military Housing Privatization Initiative (MHPI)

•	 Armament Retooling and Manufacturing Support Initiative (ARMS)

The Federal Credit Reform Act of 1990 governs all amended direct loan obligations and loan guarantee commitments made

after FY 1991 and the resulting direct loans or loan guarantees. The OMB Circular A-11, section 185, "Federal Credit" and

OMB Circular A-129 provide additional guidance for direct loan and loan guarantee programs.

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:

•	 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.

Foreign Military Account Program 

The FMA is a military assistance program that includes both direct loan and loan guarantee programs. The Department is

authorized by the U.S. Congress to execute the authorities of the Foreign Assistance Act of 1961, as amended, section 503(a)

and the Arms Export Control Act of 1976, as amended, section 23. The Defense Security Cooperation Agency, under the

auspices of the Executive Office of the President (EOP), administers the FMA program. The FMA program is comprised of: 

(1) the pre 1992 Foreign Military Loan Liquidating Account, (2) the post 1991 Foreign Military Financing Account, and (3) the

post 1991 Military Debt Reduction Financing Account.
54 Department of Defense Agency Financial Report 2007 Section 2: Financial Information

Military Housing Privatization Initiative

The MHPI includes both direct loan and loan guarantee programs. The loan guarantee program is authorized by the National

Defense Authorization Act for FY 1996, Public Law 104-106, Statute 186, 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, builds to market standards, 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

The ARMS Initiative, authorized by Title 10 United States Code 4551-4555, is a loan guarantee program designed to

incentivize commercial use of the Army's inactive ammunition plants 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 in the future. Revenues from property rental are used to help offset the overhead costs

for the operation, maintenance and environmental cleanup at the facilities. 

In an effort to preclude 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

As of September 30 2007 2006 Restated

(amounts in millions)

Loans Receivable

Direct Loans

Foreign Military Loan Liquidating Account $ 2,683.2 $ 2,865.6

Military Housing Privatization Initiative 212.1 191.7

Foreign Military Financing Account 92.7 573.5

Military Debt Reduction Financing Account 219.0 224.3

Total Direct Loans 3,207.0 3,855.1

Defaulted Loan Guarantees

Armament Retooling & Manufacturing Support Initiative 0.1 0.0

Total Default Loan Guarantees 0.1 0.0

Total Loans Receivable 3,207.1 3,855.1

Loan Guarantee Liability

Military Housing Privatization Initiative 24.7 23.8

Armament Retooling & Manufacturing Support Initiative 0.3 13.0

Total Loan Guarantee Liability $ 25.0 $ 36.8

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.
55 Section 2: Financial Information Department of Defense Agency Financial Report 2007

Direct Loans Obligated

As of September 30 2007 2006 Restated

(amounts in millions)

Direct Loans Obligated Prior to FY 1992

 (Allowance for Loss Method):

Foreign Military Loan Liquidating Account

 Loans Receivable Gross $ 1,364.2 $ 1,629.3

 Interest Receivable 1,319.0 1,236.3

 Value of Assets Related to Direct Loans, Net 2,683.2 2,865.6

Direct Loans Obligated After FY 1991

 (Present Value Method):

Military Housing Privatization Initiative

 Loans Receivable Gross 308.0 296.3

 Allowance for Subsidy Cost (Present Value) (95.9) (104.6)

 Value of Assets Related to Direct Loans 212.1 191.7

Foreign Military Financing Account

 Loans Receivable Gross 0.0 214.4

 Interest Receivable 0.0 3.1

 Allowance for Subsidy Cost (Present Value) 92.7 356.0

 Value of Assets Related to Direct Loans 92.7 573.5

Military Debt Reduction Financing Account

 Loans Receivable Gross 512.1 511.3

 Interest Receivable 25.3 14.1

 Allowance for Subsidy Cost (Present Value) (318.4) (301.1)

 Value of Assets Related to Direct Loans 219.0 224.3

Total Direct Loans Receivable $ 3,207.0 $ 3,855.1

Abnormal Balances

The abnormal balance in the Allowance for Subsidy Cost for the Foreign Military Financing Account reflects loans prepaid in

FY 2006 and FY 2007. The allowance for subsidy cost was adjusted to reflect the balance due to the U.S. Treasury. 

Total Amount of Direct Loans Disbursed

As of September 30 2007 2006 Restated

(amounts in millions)

Direct Loan Programs

 Military Housing Privatization Initiative $ 11.9 $ 155.0

 Foreign Military Financing Account 299.0 274.9

Total $ 310.9 $ 429.9
56 Department of Defense Agency Financial Report 2007 Section 2: Financial Information

Subsidy Expense for Post FY 1991 Direct Loan

As of September 30

(amounts in millions)

2007 Interest 

Differential Defaults Fees Other Total

New Direct Loans Disbursed:

 Military Housing Privatization Initiative $ 2.1 $ 1.3 $ 0.0 $ 0.0 $ 3.4

2006 Interest 

Differential Defaults Fees Other Total

New Direct Loans Disbursed:

 Military Housing Privatization Initiative $ 27.9 $ 20.7 $ 0.0 $ 0.0 $ 48.6

2007 Modifications Interest Rate 

Reestimates

Technical 

Reestimates Total Reestimates Total

Direct Loan Modifications and Reestimates:

 Military Housing Privatization Initiative $ 0.0 $ (7.3) $ (8.2) $ (15.5) $ (15.5)

 Foreign Military Financing Account 0.0 62.6 0.0 62.6 62.6

Total $ 0.0 $ 55.3 $ (8.2) $ 47.1 $ 47.1

2006 Restated Modifications Interest Rate 

Reestimates

Technical 

Reestimates Total Reestimates Total

Direct Loan Modifications and Reestimates:

 Military Housing Privatization Initiative $ 0.0 $ (0.3) $ (7.8) $ (8.1) $ (8.1)

 Foreign Military Financing Account 0.0 0.0 (17.7) (17.7) (17.7)

Total $ 0.0 $ (0.3) $ (25.5) $ (25.8) $ (25.8)

2007 2006 Restated

Total Direct Loan Subsidy Expense:

 Military Housing Privatization Initiative $ (12.1) $ 40.5

 Foreign Military Financing Account 62.6 (17.7)

Total $ 50.5 $ 22.8

Subsidy Rate for Direct Loans by Program

As of September 30 Interest 

Differential Defaults Fees and Other Collections Other Total

Budget Subsidy for Direct Loans:

 Military Housing Privatization Initiative 16.07% 10.31% 0.00% 0.00% 26.38%

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 could result from disbursement of loans from both current and prior year loan agreements. The

subsidy expense reported in the current year also includes reestimates.
57 Section 2: Financial Information Department of Defense Agency Financial Report 2007

Schedule for Reconciling Subsidy Cost Allowance Balances for Post 1991 Direct Loans

As of September 30 2007 2006 Restated

(amounts in millions)

Beginning Balance of the Subsidy Cost Allowance $ 49.7 $ 63.1

Add: Subsidy Expense for Direct Loans Disbursed during the Reporting Years by Component

 Interest Rate Differential Costs 2.1 27.9

 Default Costs (Net of Recoveries) 1.3 20.7

 Total of the above Subsidy Expense Components 3.4 48.6

Adjustments

 Loans Written Off (5.0) (24.2)

 Subsidy Allowance Amortization 219.4 (12.0)

 Other 7.0 0.0

 Total of the above Adjustment Components 221.4 (36.2)

Ending Balance of the Subsidy Cost Allowance before Reestimates 274.5 75.5

Add or Subtract Reestimates by Component

 Interest Rate Reestimate 55.3 (0.3)

 Technical/Default Reestimate (8.2) (25.5)

 Total of the above Reestimate Components 47.1 (25.8)

Ending Balance of the Subsidy Cost Allowance $ 321.6 $ 49.7

Three Foreign Military Financing Account loans were prepaid in FY 2006 and FY 2007. The allowance for subsidy cost was

adjusted to reflect the balance due to the U.S. Treasury.

Defaulted Guaranteed Loans

As of September 30 2007 2006

(amounts in millions)

Defaulted Guaranteed Loans from Post-FY 1991 Guarantees

 (Present Value Method):

Armament Retooling & Manufacturing Support Initiative

 Defaulted Guaranteed Loans Receivable, Gross $ 14.4 $ 0.0

 Allowance for Subsidy Cost (Present Value) (14.3) 0.0

Total Value of Assets Related to Defaulted Guaranteed Loans Receivable $ 0.1 $ 0.0

The value of assets related to defaulted guaranteed loans totaling $0.1 million represents the net recovery from a defaulted

loan.
58 Department of Defense Agency Financial Report 2007 Section 2: Financial Information

Guaranteed Loans Outstanding

As of September 30 Outstanding Principal of 

Guaranteed Loans, Face Value

Amount of Outstanding 

Principal Guaranteed

(amounts in millions)

Guaranteed Loans Outstanding

 Military Housing Privatization Initiative $ 499.1 $ 499.1

 Armament Retooling & Manufacturing Support Initiative 4.1 3.5

Total 503.2 502.6

2007 New Guaranteed Loans Disbursed 0.0 0.0

2006 New Guaranteed Loans Disbursed

 Armament Retooling & Manufacturing Support Initiative 2.7 2.3

Total $ 2.7 $ 2.3

In FY 2006, an incremental disbursement of $2.7 million was made on a loan guaranteed previous to the 2004 moratorium

on new ARMS Initiative loans.

Liabilities for Post FY 1991 Loan Guarantees, Present Value

As of September 30 2007 2006

(amounts in millions)

 Military Housing Privatization Initiative $ 24.7 $ 23.8

 Armament Retooling & Manufacturing Support Initiative 0.3 13.0

Total Loan Guarantee Liability $ 25.0 $ 36.8

Pre-1992 loan guarantee liabilities are to be calculated based on the allowance method. Currently no allowances are

reported. 

Subsidy Expense for Loan Guarantees by Program

As of September 30

(amounts in millions)

Interest 

Differential Defaults Fees Other Total

2007 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

2006 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

Modifications Interest Rate 

Reestimates

Technical 

Reestimates Total Reestimates Total

2007 Modifications and Reestimates:

 Military Housing Privatization Initiative 0.0 0.0 (0.2) (0.2) (0.2)

 Armament Retooling & Manufacturing

 Support Initiative 0.0 2.1 (1.1) 1.0 1.0

Total $ 0.0 $ 2.1 $ (1.3) $ 0.8 $ 0.8
59 Section 2: Financial Information Department of Defense Agency Financial Report 2007

Modifications Interest Rate 

Reestimates

Technical 

Reestimates Total Reestimates Total

2006 Modifications and Reestimates:

 Military Housing Privatization Initiative $ 0.0 $ 0.0 $ (6.4) $ (6.4) $ (6.4)

 Armament Retooling & Manufacturing 

 Support Initiative 0.0 0.2 11.6 11.8 11.8

Total $ 0.0 $ 0.2 $ 5.2 $ 5.4 $ 5.4

2007 2006

Total Loan Guarantee:

 Military Housing Privatization Initiative $ (0.2) $ (6.4)

 Armament Retooling & Manufacturing Support 

 Initiative 1.0 11.8

Total $ 0.8 $ 5.4

Subsidy Rates for Loan Guarantees

There are no subsidy rates to report because the Department did not have any new loan guarantees in FY 2007.

Schedule for Reconciling Loan Guarantee Liability Balances for Post FY 1991 Loan Guarantees

As of September 30 2007 2006

(amounts in millions)

Beginning Balance of the Loan Guarantee Liability $ 36.8 $ 41.1

Add: Subsidy Expense for Guaranteed Loans Disbursed during the Reporting Years 0.0 0.0

Adjustments

 Foreclosed Property and Loans Acquired 2.3 0.0

 Claim Payments to Lenders (15.3) (11.4)

 Interest Accumulation on the Liability Balance 0.6 1.7

 Other (0.2) 0.0

 Total of the above Adjustments (12.6) (9.7)

Ending Balance of the Loan Guarantee Liability before Reestimates 24.2 31.4

Add or Subtract Subsidy Reestimates by Component

 Interest Rate Reestimate 2.1 0.2

 Technical/default Reestimate (1.3) 5.2

 Total of the above Reestimate Components 0.8 5.4

Ending Balance of the Loan Guarantee Liability $ 25.0 $ 36.8

Administrative Expenses 

Administrative Expenses are limited to separately identified expenses for administrating 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 and the FMA. Administrative expenses for ARMS represent a fee paid to U.S. Department of

Agriculture, Rural Business Cooperative.
60 Department of Defense Agency Financial Report 2007 Section 2: Financial Information

Note 9. Inventory and Related Property

As of September 30 2007 2006

(amounts in millions)

Inventory, Net $ 84,191.0 $ 83,861.1

Operating Materials & Supplies, Net 139,871.2 146,883.3

Stockpile Materials, Net 886.5 1,078.8

Total $ 224,948.7 $ 231,823.2

Inventory, Net

As of September 30 2007 2006

(amounts in millions) Inventory, Gross 

Value

Revaluation

Allowance Inventory, Net Inventory, Net ValuationMethod

Inventory Categories

Available and Purchased for Resale $ 86,546.5 $ (25,465.8) $ 61,080.7 $ 56,674.9 LAC,MAC

Held for Repair 31,477.7 (9,003.8) 22,473.9 26,349.0 LAC,MAC

Excess, Obsolete, and Unserviceable 7,324.0 (7,324.0) 0.0 0.0 NRV

Raw Materials 100.1 0.0 100.1 43.1 LAC,SP,MAC

Work in Process 536.3 0.0 536.3 794.1 AC

Total $ 125,984.6 $ (41,793.6) $ 84,191.0 $ 83,861.1

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

Restrictions

Generally, there are no restrictions on the use, sale, or disposition of inventory. However, some restrictions currently do

exist, and they include the following:

•	 War reserve materiel valued at $2.1 billion;

•	 Commissary items valued at $341.9 million for purchase by authorized patrons;

•	 Dispositions pending litigation or negotiation valued at $1.5 million; or

•	 Identified safety stocks restricted from sale outside the federal government.

There are no known restrictions on inventory disposition as related to environmental or other liabilities.

General Composition of Inventory

Inventory includes spare and repair parts, clothing and textiles, and fuels held for sale by the Defense Working Capital Funds. 

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.
61 Section 2: Financial Information Department of Defense Agency Financial Report 2007

Operating Materials and Supplies, Net

As of September 30 2007 2006

(amounts in millions) OM&S Gross Value Revaluation 

Allowance OM&S, Net OM&S, Net Valuation Method

OM&S Categories

Held for Use $ 123,958.8 $ (0.8) $ 123,958.0 $ 130,617.2 SP, LAC,MAC

Held for Repair 17,021.7 (1,108.5) 15,913.2 16,266.1 SP, LAC,MAC

Excess, Obsolete, and Unserviceable 2,387.3 (2,387.3) 0 0 NRV

Total $ 143,367.8 $ (3,496.6) $ 139,871.2 $ 146,883.3

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 Materiels and Supplies (OM&S) are restricted due to condition. Restricted munitions

are considered obsolete or unserviceable when they cannot be expected to meet performance requirements. Obsolete and

unserviceable OM&S may be used in emergency combat situations in which no other suitable munitions are immediately

available. 

General Composition of Operating Materials and Supplies

The 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 to a category based upon the type and condition of the asset. 

Stockpile Materials, Net

As of September 30 2007 2006

(amounts in millions) Stockpile Materials 

Amount

Allowance for 

Gains (Losses)

Stockpile Materials, 

Net

Stockpile Materials, 

Net Valuation Method

Stockpile Materials Categories

Held for Sale $ 857.2 $ 0.0 $ 857.2 $ 984.7 AC, LCM

Held in Reserve for Future Sale 29.3 0.0 29.3 94.1 AC, LCM

Total $ 886.5 $ 0.0 $ 886.5 $ 1,078.8

Legend for Valuation Methods:

AC = Actual Cost

LCM = Lower of Cost or Market

Restrictions

Stockpile materiels held by the National Defense Stockpile (NDS) are restricted until relieved by congressional action and

made available for sale on the open market. Stockpile materiels 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) as authorized by law. 

In 1994, the NDS voluntarily suspended mercury sales. The suspension was in response to concerns raised

by the U.S. Environmental Protection Agency regarding the accumulation of mercury in the global environment. 
62 Department of Defense Agency Financial Report 2007 Section 2: Financial Information

The Requirements Report to Congress proposes additional restrictions on the use of beryllium metal, mica block, and quartz.

General Composition of Stockpile Materiels

The Department holds strategic and critical stockpile materiels due to statutory requirements for use in national defense,

conservation, or national emergencies. 

Before any materiels are sold, Congress must enact specific enabling legislation (e.g., the National Defense Authorization

Act). When authorized to offer materiels for sale, NDS removes the materiels from Materiel Held in Reserve and reclassifies

them as Materiels Held for Sale. The estimated market price of the stockpile materiels held for sale is $1.2 billion.

Note 10. General PP&E, Net

As of September 30 2007 2006

(amounts in millions)

Depreciation/

Amortization 

Method

Service

Life Acquisition Value

(Accumulated

Depreciation/

Amortization)

Net Book Value Prior FY Net Book 

Value

Land N/A N/A $ 10,509.6 $ N/A $ 10,509.6 $ 10,533.4

Buildings, Structure, and 

Facilities S/L 20 or 40 173,311.1 (101,467.1) 71,844.0 69,455.2

Leasehold Improvements S/L Lease term 569.2 (340.8) 228.4 167.2

Software S/L 2-5 or 10 9,313.8 (5,801.5) 3,512.3 3,391.0

General Equipment S/L 5 or 10 71,015.8 (48,921.5) 22,094.3 16,718.1

Military Equipment S/L Various 657,100.3 (310,779.1) 346,321.2 344,945.0

Assets Under Capital Lease1 S/L lease term 982.7 (501.4) 481.3 149.7

Construction-in-Progress N/A N/A 19,480.5 N/A 19,480.5 20,019.5

Other 60.3 (1.4) 58.9 60.4

Total General PP&E $ 942,343.3 $ (467,812.8) $ 474,530.5 $ 465,439.5

1Note 15 for additional information on Capital Leases

Legend for Valuation Methods: S/L = Straight Line N/A = Not Applicable

Military Equipment

In accordance with the Statement of Federal Financial Accounting Standards (SFFAS) No. 23, "Eliminating the Category

National Defense Property, Plant, and Equipment," beginning in FY 2003, the Department capitalized military equipment

into General Property, Plant, and Equipment (PP&E) at estimated historical cost using information obtained from the Bureau

of Economic Analysis (BEA). During FY 2006, the Department replaced the BEA estimates with one based on departmental

internal records for military equipment.

Heritage Assets and Stewardship Land

The Federal Accounting Standards Advisory Board, SFFAS No. 29, “Heritage Assets and Stewardship Land,” requires note

disclosures for these types of assets. The Department’s policy is to preserve and account for its heritage assets’ historical,

cultural, educational, or artistic importance. Additionally, the Department possesses and maintains land not acquired in

connection with General PP&E, land donated to the Federal Government, and land previously recorded as public domain. 
63 Section 2: Financial Information Department of Defense Agency Financial Report 2007

Heritage Assets within the Department consist of buildings and structures, archeological sites, museums, and monuments

and memorials. Stewardship Land consists mainly of mission essential (donated, public domain, executive order) land. The

Department, with minor exceptions, uses most of the buildings and structures as part of its everyday activities and includes

them on the Balance Sheet as multi-use heritage assets (capitalized and depreciated).

Other Disclosures

The Department has the use of land, buildings, and other overseas facilities that are obtained through international treaties

and agreements negotiated by the Department of State. The Department is restricted by treaty covenants regarding the use

and disposal of real property (land and buildings) located outside the continental 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 primarily consists of assets awaiting disposal and the projected value of forest product sales.

Assets Under Capital Lease

As of September 30 2007 2006

(amounts in millions)

Entity as Lessee, Assets Under Capital Lease

Land and Buildings $ 719.5 $ 619.6

Equipment 263.2 8.2

Accumulated Amortization (501.4) (478.1)

Total Capital Leases $ 481.3 $ 149.7

Note 11. Liabilities Not Covered by Budgetary Resources

As of September 30 2007 2006 Restated

(amounts in millions)

Intragovernmental Liabilities

Accounts Payable $ 3.3 $ 1.0

Debt 1,850.0 1,842.3

Other 6,986.1 7,780.8

Total Intragovernmental Liabilities 8,839.4 9,624.1

Nonfederal Liabilities

Accounts Payable 461.8 371.9

Military Retirement and Other Federal Employment Benefits 1,547,796.2 1,524,140.2

Environmental Liabilities 68,718.8 65,343.7

Other Liabilities 13,904.4 14,664.4

Total Nonfederal Liabilities 1,630,881.2 1,604,520.2

Total Liabilities Not Covered by Budgetary Resources 1,639,720.6 1,614,144.3

Total Liabilities Covered by Budgetary Resources 411,006.3 349,048.9

Total Liabilities $ 2,050,726.9 $ 1,963,193.2

Liabilities Not Covered by Budgetary Resources represents liabilities for which congressional action is generally needed to

provide resources. The Department expects to receive the necessary budgetary resources to cover these liabilities in future

budget years.
64 Department of Defense Agency Financial Report 2007 Section 2: Financial Information

Intragovernmental Accounts Payable and Nonfederal Accounts Payable 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 loans made to foreign governments.

Intragovernmental Liabilities Other is comprised of custodial liabilities for non-entity assets. The amounts collected cannot

be used by the Department and must be returned to the U.S. Treasury. Intragovernmental Liabilities Other also includes

unfunded Federal Employees Compensation Act liabilities that were not due during FY 2007. 

Military Retirement and Other Federal Employment Benefits is comprised of employee actuarial liabilities not due and

payable during the current fiscal year. These liabilities are primarily comprised of $813.5 billion in pension liabilities and

$726.3 billion in health benefit liabilities. (Refer to Note 17, Military Retirement and Other Federal Employment Benefits, for

additional details and disclosures.)

Nonfederal Liabilities Other is comprised of unfunded annual leave, contingent liabilities, and expected expenditures for

disposal of conventional munitions.

Note 12. Accounts Payable

As of September 30 2007 2006 Restated

(amounts in millions) Accounts Payable Interest, Penalties, and 

Administrative Fees Total Total

Intragovernmental Payables $ 1,911.5 $ N/A $ 1,911.5 $ 1,549.8

Nonfederal Payables (to the Public) 29,671.7 2.3 29,674.0 27,388.4

Total $ 31,583.2 $ 2.3 $ 31,585.5 $ 28,938.2

Accounts payable are amounts owed to federal and nonfederal entities for goods and services received by the Department

that have not been paid. The Department’s systems do not track intragovernmental transactions by customer at the

transaction level. Therefore, buyer-side balances are adjusted to agree with seller-side balances for revenue, accounts

receivable, and unearned revenue. Accounts payable were adjusted by reclassifying amounts between federal and

nonfederal accounts payable.

Note 13. Debt

As of September 30 2007 2006 Restated

(amounts in millions) Beginning Balance Net Borrowing Ending Balance Net Borrowing Ending Balance

Agency Debt (Intragovernmental)

 Debt to the Treasury $ 659.0 $ (170.5) $ 488.5 $ 123.3 $ 659.0

 Debt to the Federal Financing Bank 3,038.8 (285.0) 2,753.8 (208.3) 3,038.8

 Total Agency Debt 3,697.8 (455.5) 3,242.3 ( 85.0) 3,697.8

Total Debt $ 3,697.8 $ (455.5) $ 3,242.3 $ ( 85.0) $ 3,697.8

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 Foreign Military Financing Program, the Washington Aqueduct Project, the U.S.

Navy Afloat Prepositioning Force Program, the Military Housing Privatization Initiative, and the Armanment Retooling and

Manufacturing Support. 
65 Section 2: Financial Information Department of Defense Agency Financial Report 2007

The majority of the debt represents direct and guaranteed loans to foreign governments. Before 1992, funds were borrowed

from the Federal Financing Bank to either directly loan the funds to foreign governments or to reimburse defaulted

guaranteed loans. Beginning in 1992, the Department began borrowing funds for the Foreign Military Account Program from

the U.S. Treasury, in accordance with the Federal Credit Reform Act of 1990, which governs all direct loan obligations and

loan guarantee commitments made after FY 1991. 

The Department must pay the debt on direct loans if borrowers (e.g. foreign governments, county or city governments, ship

owners, or housing builders) default. For loan guarantees, the Department must pay the amount of outstanding principal

guaranteed.

Note 14. Environmental and Disposal Liabilities

As of September 30 2007 2006

(amounts in millions) Current Liability Noncurrent Liability Total Total

Environmental Liabilities—Nonfederal 

Accrued Environmental Restoration Liabilities

Active Installations—Installation Restoration Program (IRP) and 

Building Demolition and Debris Removal (BD/DR) $ 1,179.5 $ 7,958.3 $ 9,137.8 $ 9,084.8

Active Installations—Military Munitions Response Program (MMRP) 130.2 5,274.5 5,404.7 5,396.5

Formerly Used Defense Sites—IRP and BD/DR 151.5 3,662.5 3,814.0 4,169.5

Formerly Used Defense Sites--MMRP 89.2 14,607.6 14,696.8 14,797.3

Other Accrued Environmental Liabilities—Active Installations

Environmental Corrective Action 50.3 868.1 918.4 727.4

Environmental Closure Requirements 7.1 1,017.7 1,024.8 409.4

Environmental Response at Operational Ranges 35.1 174.5 209.6 305.0

Other 149.2 593.7 742.9 781.4

Base Realignment and Closure (BRAC)

Installation Restoration Program 673.0 3,279.2 3,952.2 2,882.5

Military Munitions Response Program 35.6 993.1 1,028.7 913.2

Environmental Corrective Action / Closure Requirements 38.0 125.3 163.3 181.2

Other 0.0 0.0 0.0 149.2

Environmental Disposal for Weapons Systems Programs 

Nuclear Powered Aircraft Carriers 0.0 5,665.8 5,665.8 5,604.3

Nuclear Powered Submarines 484.0 3,202.4 3,686.4 3,377.7

Other Nuclear Powered Ships 226.9 66.5 293.4 277.2

Other National Defense Weapons Systems 0.8 204.3 205.1 233.8

Chemical Weapons Disposal Program 1,458.4 16,850.2 18,308.6 17,457.3

Other 0.0 3,237.4 3,237.4 3,237.4

Total Environmental Liabilities $ 4,708.8 $ 67,781.1 $ 72,489.9 $ 69,985.1
66 Department of Defense Agency Financial Report 2007 Section 2: Financial Information

Others Category Disclosure Comparative Table

As of September 30 2007 2006

(amounts in millions)

Other Accrued Environmental Liabilities—Active Installations—Other 

U.S. Army Corps of Engineers (USACE) remediation of the Formerly Utilized Sites Remedial Action 

Program (FUSRAP) $ 622.4 $ 653.4

USACE environmental liabilities not related to FUSRAP 4.4 0.0

Army Low Level Radioactive Waste Program 46.4 35.8

National Defense Stockpile (NDS) Transaction Fund 27.8 52.2

Defense Commissary Agency—asbestos and/or lead-based paint 40.7 29.0

TRICARE Management Activity Uniformed Services University of Health Sciences—disposal liability for 

research laboratories 0.0 11.0

Under Secretary of Defense—Operations and Maintenance—Other Defense Organizations 0.2 0.0

Navy estimate for disposal of polychlorinated biphenyls transformers 1.0 0.0

Total 742.9 781.4

Base Realignment and Closure (BRAC)—Other 

Army unliquidated obligations associated with cleanup contracts at BRAC installations 0.0 149.2

Total 0.0 149.2

Environmental Disposal for Weapons Systems Program—Other 

Navy Spent Nuclear Fuel 3,237.4 3,237.4

Total $ 3,237.4 $ 3,237.4

Other Accrued Environmental Liabilities, Active Installations, Other primarily consists of remediation related to FUSRAP. 

The USACE is responsible for FUSRAP, which remediates radiological contamination from the Department of Energy’s U.S.

Atomic Energy and Weapons Program.

Environmental Disposal for Weapons Systems Programs, Other represents spent nuclear fuel, which is used fuel removed

from the nuclear reactors of nuclear-powered ships and submarines. The estimate includes shipping, processing, and storing

spent nuclear fuel. 

Environmental Disclosures

As of September 30 2007 2006

(amounts in millions)

A. The unrecognized portion of the estimated total cleanup costs associated with General Property, Plant, 

and Equipment. $ 1,589.1 $ 1,527.4

B. Changes in total cleanup costs due to changes in laws, regulations, and/or technology. (12.7) (44.9)

C. Portion of the changes in estimated costs due to changes in laws and technology that is related to prior 

periods. $ (4.4) $ 0.0

Environmental Disclosures – Line A represents the unrecognized costs associated with General Property, Plant, and

Equipment (PP&E). The unrecognized portion of the estimated total cleanup costs is primarily associated with Non-Defense

Environmental Restoration Program (DERP), such as nuclear-powered carriers and submarines, conventional ships, spent

nuclear fuel, and landfills. Not all components of the Department disclose the unrecognized portion of the estimated

cleanup costs associated with General PP&E. The Department is implementing procedures to address this deficiency.
67 Section 2: Financial Information Department of Defense Agency Financial Report 2007

Environmental Disclosures – Line B represents the amount of changes in total cleanup costs due to changes in laws,

regulations, and/or technology. Not all components of the Department disclose changes in total cleanup costs due to

changes in laws, regulations, and/or technology. The Department is implementing procedures to address this deficiency.

Environmental Disclosures – Line C represents the portion of changes in estimated costs due to changes in laws and

technology that is related to prior periods. Not all components of the Department disclose the amount of change in estimates

for costs due to changes in laws and technology relating to prior periods. The Department is implementing procedures to

address this deficiency.

Other Disclosures

Types of Environmental Liabilities and Disposal Liabilities Identified

The Department has cleanup requirements for 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 consists 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) and the

Superfund Amendment and Reauthorization Act to clean up DERP-eligible contamination. Contamination clean up that

is not eligible for DERP is performed in accordance with the Resource Conservation and Recovery Act (RCRA) or other

applicable federal or state laws. 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 will put 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 low-level radioactive waste.

The Chemical Weapons Disposal Program is based on FY 1986 National Defense Authorization Act (PL 99-145, as amended

by subsequent acts) that directed the Department to destroy the unitary chemical stockpile by April 29, 2004. The current

guidelines for destruction are based on the Chemical Weapons Convention Treaty. The United States ratified the Treaty in

April 1997, requiring the stockpile of chemical weapons to be destroyed by April 2007, according to the terms outlined. 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. 
68 Department of Defense Agency Financial Report 2007 Section 2: Financial Information

Methods for Assigning Total Cleanup Costs to Current Operating Periods

The Department uses engineering estimates and independently validates models to estimate environmental costs. The

models are contained within the Remedial Action Cost Engineering Requirements and the Normalization of Data System. 

The Department validates the models in accordance with DoD Instruction 5000.61 and primarily 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 prior to October 1, 1997, unless the costs are intended to be recovered through user charges. If the costs are

recovered through user charges, then the Department expensed cleanup costs associated with that portion of the asset life

that had passed since the General PP&E was placed into service, and is systematically recognizing 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 lessons learned. 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 available information 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. The liabilities can be further impacted if investigation of the

environmental sites reveals contamination levels that differ from the estimate parameters.

The Army has a liability to take environmental restoration/corrective action for buried chemical munitions and agents, which

they are unable to estimate at this time because the extent of the buried chemical munitions and agents is not known. The

USACE is also unable to provide a complete estimate for the FUSRAP. The USACE 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. 

The Department is in the process of determining the extent of the liabilities at installations that are realigning or closing as a

result of recent BRAC requirements, in particular those liabilities associated with unexploded ordnance on training ranges. 

In addition, 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 not known.
69 Section 2: Financial Information Department of Defense Agency Financial Report 2007

Note 15. Other Liabilities

As of September 30 2007 2006 Restated

(amounts in millions) Current Liability Noncurrent Liability Total Total

Intragovernmental

Advances from Others $ 308.9 $ 0.0 $ 308.9 $ 448.8

Deposit Funds and Suspense Account Liabilities 1,181.6 0.0 1,181.6 2,009.3

Disbursing Officer Cash 2,620.0 0.0 2,620.0 2,273.2

Judgment Fund Liabilities 167.5 0.0 167.5 164.2

FECA Reimbursement to the Department of Labor 601.8 785.8 1,387.6 1,404.7

Custodial Liabilities 3,718.2 1,518.3 5,236.5 5,960.0

Employer Contribution & Payroll Taxes Payable 281.8 0.0 281.8 290.5

Other Liabilities 317.1 0.0 317.1 649.0

Total Intragovernmental Other Liabilities 9,196.9 2,304.1 11,501.0 13,199.7

Nonfederal

Accrued Funded Payroll and Benefits 6,197.3 0.0 6,197.3 4,497.8

Advances from Others 31,423.4 0.0 31,423.4 2,074.3

Deposit Funds and Suspense Accounts 59.9 0.0 59.9 205.6

Temporary Early Retirement Authority 0.0 0.0 0.0 0.1

Nonenvironmental Disposal Liabilities

Military Equipment (Nonnuclear) 8.2 263.0 271.2 285.2

Excess/Obsolete Structures 76.0 587.0 663.0 685.6

Conventional Munitions Disposal 0.0 1,284.1 1,284.1 1,217.8

Accrued Unfunded Annual Leave 8,708.2 0.0 8,708.2 9,403.9

Capital Lease Liability 17.8 165.7 183.5 226.1

Contract Holdbacks 827.6 0.0 827.6 747.0

Employer Contribution & Payroll Taxes Payable 1,565.9 0.0 1,565.9 1,226.8

Contingent Liabilities 2,984.2 2,250.1 5,234.3 5,204.1

Other Liabilities 781.3 4.0 785.3 5,791.8

Total Nonfederal Other Liabilities 52,649.8 4,553.9 57,203.7 31,566.1

Total Other Liabilities $ 61,846.7 $ 6,858.0 $ 68,704.7 $ 44,765.8

Intragovernmental Custodial Liabilities is primarily comprised of accounts receivable for cancelled appropriations and

interest, penalties, fines, and administrative fees from the public. The Department generally cannot use the collections and

must distribute them to the U.S. Treasury. The Department has specific statutory authority to retain collections from certain

cancelled year accounts receivable as entity assets.

Intragovernmental Other Liabilities is primarily comprised of other unfunded employment related liabilities.

Contingent Liabilities includes $1.7 billion in estimated future contract financing payments. In accordance with contract

terms, specific rights to the contractors’ work vests with the 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 deliver

and Government acceptance.
70 Department of Defense Agency Financial Report 2007 Section 2: Financial Information

Nonfederal Other Liabilities consists primarily of estimated accruals for work in process by contractors in support of depot

maintenance activities. 

The balance in Nonfederal Other Liabilities includes $29.2 billion that the Department is executing on behalf

of the Executive Office of the President. These amounts do not represent liabilities of the Department.

Capital Lease Liability

As of September 30 20072006

Asset Category

(amounts in millions) Land and 

Buildings Equipment Other Total Total

Future Payments Due

2007 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 63.0

2008 47.1 3.8 0.0 50.9 47.3

2009 43.9 1.5 0.0 45.4 43.9

2010 43.9 0.0 0.0 43.9 43.9

2011 41.3 0.0 0.0 41.3 36.8

2012 15.5 0.0 0.0 15.5 0.0

After 5 Years 28.6 0.0 0.0 28.6 52.1

Total Future Lease Payments Due 220.3 5.3 0.0 225.6 287.0

Less: Inputed Interest Executory Costs 42.0 0.1 0.0 42.1 60.9

Net Capital Lease Liability $ 178.3 $ 5.2 $ 0.0 $ 183.5 $ 226.1

Capital Lease Liabilities Covered by Budgetary Resources 150.8 181.2

Capital Lease Liabilities Not Covered by Budgetary Resources $ 32.7 $ 44.9

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

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

Note 15, “Other Liabilities.”

The OGC reported 63 legal actions with individual claims greater than the Department’s FY 2007 materiality threshold

of $110.5 million. The total of these 63 actions is approximately $1.6 trillion. Of this amount, the OGC determined that

claims totaling approximately $15.4 billion are reasonably possible, $12.9 billion are remote, and $1.57 trillion 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

Undelivered orders for open (unfilled or unreconciled) contracts citing cancelled appropriations, for which the Department

may incur a contractual commitment for payment, total $1.2 billion.

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 funds if contract terms are satisfied. Currently, the

Department has limited automated system processes by which it captures or assesses these potential contingent liabilities.
71 Section 2: Financial Information Department of Defense Agency Financial Report 2007

Note 17. Military Retirement and Other Federal Employment Benefits

As of September 30 2007 2006

(amounts in millions) Present Value of 

Benefits

Assumed 

Interest 

Rate (%)

(Less: Assets 

Available to Pay 

Benefits)

Unfunded Liability Present Value of 

Benefits

Pension and Health Actuarial Benefits

Military Retirement Pensions $ 1,025,320.6 6.0 $ (211,854.6) $ 813,466.0 $ 963,696.1

Military Retirement Health Benefits 317,332.8 6.0 0.0 317,332.8 299,203.8

Military Medicare-Eligible Retiree Benefits 516,479.2 6.0 (107,454.2) 409,025.0 538,032.5

Total Pension and Health Actuarial Benefits 1,859,132.6 (319,308.8) 1,539,823.8 1,800,932.4

Other Actuarial Benefits

FECA 6,830.1 5.2 0.0 6,830.1 6,856.0

Voluntary Separation Incentive Programs 1,250.5 4.0 (548.6) 701.9 1,391.2

Department Education Benefits Fund 1,858.2 5.0 (1,417.8) 440.4 1,785.3

Total Other Actuarial Benefits 9,938.8 (1,966.4) 7,972.4 10,032.5

Other Federal Employment Benefits 5,608.1 (5,608.1) 0.0 4,804.6

Total Military Retirement and Other Federal 

Employment Benefits $ 1,874,679.5 $ (326,883.3) $ 1,547,796.2 $ 1,815,769.5

Actuarial Cost Method Used: Aggregate entry-age normal method

Assumptions: See below

Market Value of Investments in Market-based and Marketable Securities: $324.8 billion

Military Retirement Pensions

The Military Retirement Fund (MRF) is a defined benefit plan authorized by Public Law (P.L.) 98-94 to provide funds used

to pay annuities and pensions to retired military personnel and their survivors. The Board approves the long-term 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 Department used

the following assumptions in calculating the FY 2007 roll-forward amount.

	 	 Inflation Salary Interest

	Fiscal Year 2007	 3.3% (actual)	 2.2% (actual)	 6.0%

	Fiscal Year 2008	 2.3% (estimated)	 3.5% (estimated)	 6.0%

Long-Term	 3.0% 3.75%	 6.0%

Historically, the initial unfunded liability of the program was being amortized over a 50-year period. Effective FY 2008,

the initial unfunded liability will be paid over a 42-year period to ensure the annual payments cover the interest on the

unfunded actuarial liablity, with the last payment expected to be made October 1, 2025. All subsequent gains and losses

experienced by the system are amortized over a 30-year period. 
72 Department of Defense Agency Financial Report 2007 Section 2: Financial Information

Change in MRF Actuarial Liability (Amounts in billions)

Actuarial Liability as of 9/30/06 $963.7

Expected Normal Cost for FY 2007 17.7

Plan Amendment Liability 1.5

Assumption Change Liability 26.5

Expected Benefit Payments for FY 2007 (43.5)

Interest Cost for FY 2007 57.1

Actuarial (gains)/losses due to changes in trend assumptions 2.2

Actuarial Liability as of 09/30/07 $1,025.3

Change in Actuarial Liability $61.6

Actuarial Cost Method Used: Aggregate entry-age normal method.

Market Value of Investments in Market-Based and Marketable Securities: $215.0 billion

Assumed Interest Rate: 6.0%

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 Department Medical Treatment Facilities. The Department

used the following assumptions in calculating the FY 2007 actuarial liability.

Medical Trend FY 2006 – FY 2007 Ultimate Rate FY 2031

Medicare Inpatient 6.74% 6.25%

Medicare Outpatient 6.54% 6.25%

Medicare Prescriptions (Direct Care) 6.25% 6.25%

Medicare Prescriptions (Purchased Care) 6.25% 6.25%

Non-Medicare Inpatient (Direct Care) 6.25% 6.25%

Non-Medicare Outpatient (Direct Care) 6.25% 6.25%

Non-Medicare Prescriptions (Direct Care) 6.25% 6.25%

Non-Medicare Inpatient (Purchased Care) 6.25% 6.25%

Non-Medicare Outpatient (Purchased Care) 9.48% 6.25%

Non-Medicare Prescriptions (Purchased Care) 9.84% 6.25%

Change in MRHB Actuarial Liability (Amounts in billions)

Actuarial Liability as of 09/30/06 (Department preMedicare + all Uniformed services

Medicare cost-basis effect) $299.2

Expected Normal Cost for FY 2007 $10.0

Expected Benefit Payments for FY 2007 ($10.4)

Interest Cost for FY 2007 $19.0

Actuarial (gains)/losses due to other factors ($11.9)

Actuarial (gains)/losses due to changes in trend assumptions $11.9

Actuarial Liability as of 09/30/07 (Department preMedicare + all Uniformed Services

Medicare cost-basis effect) $317.3

Change in Actuarial Liability $18.1

Actuarial Cost Method Used: Aggregate Entry-Age Normal Method

Assumed Interest Rate: 6.0%
73 Section 2: Financial Information Department of Defense Agency Financial Report 2007

Medicare-Eligible Retiree Health Care Fund (MERHCF) Benefits 

In accordance with P.L. 106-398, the MERHCF accumulates funds to finance the health care program liabilities of Medicareeligible retirees for all the Uniformed Services and specific Medicare-eligible beneficiaries. The Board 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 Department used the

following assumptions in calculating the FY 2007 roll-forward amount.

Medical Trend FY 2006 – FY 2007 Ultimate Rate FY 2031

Medicare Inpatient 6.74% 6.25%

Medicare Outpatient 6.54% 6.25%

Medicare Prescriptions (Direct Care) 6.25% 6.25%

Medicare Prescriptions (Purchased Care) 10.95% 6.25%

Changes in MERHCF Actuarial Liability	 	 	 	 	 	 (Amounts in billions)

Actuarial Liability as of 09/30/06 (all Uniformed Services Medicare) $538.0

Expected Normal Cost for FY 2007 10.8

Expected Benefit Payments for FY 2007 (8.5)

Interest Cost for FY 2007 34.0

Actuarial (gains)/losses due to other factors (4.8)

Actuarial (gains)/losses due to changes in trend assumptions (53.1)

Actuarial Liability as of 09/30/07 (all Uniformed Services Medicare) $516.5

Change in Actuarial Liability ($21.5)

Actuarial Cost Method Used for MERHCF Liability: Aggregate Entry-Age Normal

Market Value of Investments in Market-Based and Marketable Securities: $107.8 billion

Assumed Interest Rate: 6.0%

The MERHCF liability includes Medicare liabilities for all Uniformed Services. The $516.5 billion liability includes

$505.1 billion for the Department, $10.2 billion for the Coast Guard, $1.1 billion for the Public Health Service and

$72.8 million for National Oceanic and Atmospheric Association (NOAA). The FY 2007 contributions from each of the

services were: $11.2 billion by the Department, $278.7 million by the Coast Guard, $36.3 million by the Public Health

Service, and $1.8 million by NOAA.

Federal Employees Compensation Act (FECA) 

The Department of Labor (DOL) 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 not reported claims. The liability is determined annually 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 4.93% interest rate was assumed for year one and 5.08% was

assumed for year two and thereafter.

The DOL calculates this liability using wage inflation factors (cost of living adjustments or COLA) and medical inflation

factors (consumer price index medical or CPIM). The actual rates for these factors for charge back year (CBY) 2007 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.

CBY	 	 COLA	 	 CPIM

2007	 	 2.63%	 	 3.74%

2008	 	 2.90%	 	 4.04%

2009	 	 2.47%	 	 4.00%

2010	 	 2.37%	 	 3.94%

2011+	 	 2.30%	 	 3.94%
74 Department of Defense Agency Financial Report 2007 Section 2: Financial Information

The model’s resulting projections were analyzed 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 by agency to the percentage change in the actual incremental payments, (3) a comparison of the incremental paid

losses (the medical component in particular) in CBY 2007 (by injury cohort) to the average pattern observed during the prior

three charge back years, and (4) a comparison of the estimated liability per case in the 2007 projection to the average pattern

for the projections for the most recent three years.

Voluntary Separation Incentive (VSI) Program 

The P.L. 102-190 established the VSI program to reduce the number of military personnel on active duty. The VSI Board of

Actuaries approved the assumed annual interest rate of 4.5% used to calculate the actuarial liability. Since the VSI program

is no longer offered, the actuarial liability is expected to continue to decrease with benefit outlays and increase with interest

cost. The liability is calculated annually at the present value of all remaining payments. 

Market Value of Investments in Market-based and Marketable Securities: $573.1 million

DoD Education Benefits Fund (EBF)

The P.L. 98-525 established the EBF program to recruit and retain military members and aid in the readjustment of military

members to civilian life. The EBF Board of Actuaries approved the assumed interest rate of 5% used to calculate the actuarial

liability. 

Market Value of Investments in Market-based and Marketable Securities: $1.4 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

Intragovernmental Costs and Exchange Revenue

As of September 30 2007 2006 Restated

(amounts in millions)

Intragovernmental Costs $ 27,266.6 $ 31,990.6

Public Costs 640,871.8 602,553.4

Total Costs 668,138.4 634,544.0

Intragovernmental Earned Revenue (20,465.9) (24,327.1)

Public Earned Revenue (25,220.5) (24,168.6)

Total Earned Revenue (45,686.4) (48,495.7)

Net Cost of Operations $ 622,452.0 $ 586,048.3

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

Standard No. 4, “Managerial Cost Accounting Concepts and Standards for the Federal Government.”
75 Section 2: Financial Information Department of Defense Agency Financial Report 2007

Intragovernmental costs and revenues represent transactions made between two reporting entities within the Federal

Government. Public costs and revenues are exchange transactions made between the reporting entity and a nonfederal

entity.

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. 

The SNC presents information based on budgetary obligation, disbursement, and collection transactions. Amounts are

adjusted for accruals based on data from nonfinancial feeder systems for major items such as payroll expenses, accounts

payable, and environmental liabilities. The General Fund data is generally derived from budgetary transactions (obligations,

disbursements, and collections) from nonfinancial systems, and accruals made for major items. While Working Capital

Funds generally record transactions on an accrual basis, the systems do not always capture actual costs in a timely manner. 

The majority of the Department’s accounting systems do not capture information relative to heritage assets separately and

distinctly from normal operations. Where it was able to identify the cost of acquiring, constructing, improving, reconstructing

or renovating heritage assets, the Department has identified $2.0 million for the fiscal year.

Note 19. Disclosures Related to the Statement of Changes in Net Position

As of September 30 2007 2006 Restated

(amounts in millions) Cumulative Results of 

Operations

Unexpended 

Appropriations

Cumulative Results of 

Operations

Unexpended 

Appropriations

Prior Period Adjustments Increases (Decreases) to Net Position Beginning Balance

Changes in Accounting Standards $ (4,230.9) $ 3,745.5 $ 0.0 $ 0.0

Errors and Omissions in Prior Year 

Accounting Reports 0.0 0.0 (8,034.3) (0.5)

Total Prior Period Adjustments (4,230.9) 3,745.5 (8,034.3) (0.5)

Imputed Financing

Civilian CSRS/FERS Retirement 1,429.4 0.0 1,553.8 0.0

Civilian Health 2,784.7 0.0 2,646.5 0.0

Civilian Life Insurance 8.4 0.0 26.1 0.0

Judgment Fund 198.8 0.0 183.2 0.0

Total Imputed Financing $ 4,421.3 $ 0.0 $ 4,409.6 $ 0.0

The Department recognized a net prior period adjustment of ($485.4) million in FY 2007 and restated cumulative results

of operations by ($4.2) billion and unexpended appropriations by $3.7 billion. The adjustment relates to a change in

reporting parent/child allocation transfers, and is presented as a change in accounting principle. The change affects the

Balance Sheet and the Statement of Changes in Net Position. Parent/child reporting is intended to consolidate the complete

financial reporting of delegated activities and funds within the parent’s financial statements for overall performance reporting. 

In accordance with Office of Management and Budget (OMB) Circular A-136, “Financial Reporting Requirements,” the

Department, as the parent agency, reports the financial activity carried out by the child agencies who received transfer

appropriations from the Department. When the Department performs as the child, it does not report any information

relating to transfer appropriations received from other agencies except for Treasury-Managed Trust funds and funds for which

the Executive Office of the President (EOP) is the parent. The OMB Circular A-136 makes exceptions for these transfer

appropriations. The Department includes transfer appropriations received from the EOP whereby the EOP is the parent. The

EOP delegates authority to the Department for foreign military sales, and the Department reports the related activity in its

financial statements on behalf of the EOP.
76 Department of Defense Agency Financial Report 2007 Section 2: Financial Information

Contributions to the Office of Personnel Management (OPM) do not fully cover the Government's cost to provide benefits

for employees covered by the Civil Service Retirement System, the Federal Employees' Retirement System, the Federal

Employees' Health Benefits program, and the Federal Employees' Group Life Insurance program. An imputed cost is

recognized as the difference between the Government's cost of providing these benefits to employees and the Department’s

contributions. The OPM provides cost factors for the computation of imputed financing costs, and these estimates are

included in the Department’s financial statements.

Other Financing Sources, Other consists primarily of adjustments to reconcile budgetary and proprietary trial balances. Due

to financial system limitations, the Department adjusts for these unreconciled differences.

Unexpended Appropriations, Budgetary Financing Sources, Other Adjustments is comprised of rescissions, capital transfers,

and canceling appropriations. 

In the Statement of Changes in Net Position (SCNP), offsetting balances for intraDepartmental activity between Earmarked

Funds and All Other Funds is 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. 

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.

Appropriations on the Statement of Budgetary Resources (SBR) exceed Appropriations Received on the SCNP by

$104.1 billion. The SCNP recognizes appropriations received by the Military Departments and Defense Agencies totaling

$70.4 billion which are additionally recognized on the SBR as appropriated receipts in trust and special funds. Investments

in trust and special funds accumulate interest earnings; the interest earnings comprise most of the remaining difference of

$33.7 billion, which is recognized only on the SBR.

Note 20. Disclosures Related to the Statement of Budgetary Resources

As of September 30 2007 2006 Restated

(amounts in millions)

Net Amount Budgetary Resources Obligated for Undelivered Orders at the End of the Period $ 350,761.4 $ 297,272.1

Available Borrowing and Contract Authority at the End of the Period $ 0.0 $ 29,488.9

Reconciliation Differences

The Department modified this note to more accurately report the remaining available balance of borrowing and contract

authority. Previously, the Department reported the amount of borrowing and contract authority used, but not the amount

replaced by reimbursement or appropriation.

Appropriations Received on the Statement of Budgetary Resources (SBR) exceed Appropriations Received on the Statement

of Changes in Net Position by $104.1 billion. In accordance with Office of Management and Budget (OMB) guidance,

appropriations received by the Military Departments and Defense Agencies totaling $70.4 billion are subsequently

recognized a second time on the SBR as appropriations transferred into trust and special funds. Actual and anticipated

earnings in trust and special funds comprise the balance of the difference.

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))
77 Section 2: Financial Information Department of Defense Agency Financial Report 2007

•	 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 Account (10 USC 2350(j))

•	 Forest Program (10 USC 2665)

•	 Department of Defense Base Closure Account (10 USC 2687)

•	 Medicare Eligible Retiree Health Care Fund (MERHCF) (10 USC 1111)

•	 Military Retirement Fund (MRF) (10 USC 1461)

•	 Education Benefits Fund (10 USC 2006)

•	 Reserve Mobilization Income Insurance Fund (10 USC 12528)

•	 Host Nation Support for U.S. Relocation Activities (10 USC 2350(k))

•	 National Defense Sealift Fund (10 USC 2218)

•	 Environmental Restoration, Navy (10 USC 2702)

•	 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)

•	 Department of Defense Family Housing Improvement Fund (10 USC 2883 (a))

•	 Department of Defense Military Unaccompanied Housing Improvement Fund (10 USC 2883 (a))

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) environmental, coastal, and wildlife habitat restoration, and water resources maintenance;

(3) costs associated with the closure or realignment of military installations; (4) relocation of armed forces to a host nation;

(5) separation payments for foreign nationals; (6) the construction, purchase, alteration, and conversion of sealift vessels;

and (7) upkeep of libraries and museums. (See Note 23 for additional information on earmarked funds.)

In addition to the above, the Executive Office of the President has given the Department authority to execute the funds

listed below on its behalf:

•	 Special Defense Acquisition Fund (22 USC 2795)

•	 Foreign Military Loans Liquidating Account (22 USC 2764)

•	 Foreign Military Financing, Direct Loan Financing Account (2 USC 661 (d))

•	 Military Debt Reduction Financing Account (2 USC 661 (d))

•	 Advances, Foreign Military Sales (22 USC 2761-2762)

Apportionment Categories for Obligations

The Department reported the following amounts of direct obligations: (1) $516.3 billion in category A; (2) $159.9 billion

in category B; and (3) $96.7 billion in exempt from apportionment. The Department reported the following amounts

of reimbursable obligations: (1) $93.0 billion in category A; (2) $77.9 billion in category B; and (3) $14.0 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).

Other Disclosures

The President’s budget for FY 2009 has not yet been published. The budget is expected to be published on February 4, 2008,

and will be available at: http://www.defenselink.mil/comptroller/defbudget.

The SBR includes intraentity transactions because the statements are presented as combined.
78 Department of Defense Agency Financial Report 2007 Section 2: Financial Information

The Department utilizes borrowing authority for the Military Housing Privatization Initiative, the Armament Retooling and

Manufacturing Support Initiative, and the Foreign Military Account Program. Borrowing authority is used in accordance with

OMB Circular A-129, “Managing Federal Credit Programs.” 

The Department operates within the constraints of fiscal law and has no additional legal arrangements affecting the use of

unobligated balances.

The Department received additional funding of $70.0 billion to replenish expenses incurred outside of normal operating

expenses. The Department also received an additional $99.4 billion primarily for U.S. Troop Readiness, Veterans Care, and

Hurricane Katrina recovery.

The Department reported a change in obligated balances brought forward of $29.2 billion, and unobligated balances brought

forward of $1.0 billion, due to stipulations of OMB Circular A-136, “Financial Reporting Requirements.” (See Note 1,

“Significant Accounting Policies”, and Note 25, “Restatements” for details.)

The Department is executing balances of Contract Authority of $48.0 billion, Permanently not Available of ($16.6) billion,

and Distributed Offsetting Receipts of $15.8 billion, on behalf of the Executive Office of the President. These amounts do not

represent budgetary resources or obligations of the Department.

Note 21. Reconciliation of Net Cost of Operations to Budget

As of September 30 2007 2006 Restated

(amounts in millions)

Resources Used to Finance Activities:

Budgetary Resources Obligated:

Obligations Incurred $ 943,782.3 $ 816,752.4

Less: Spending Authority from Offsetting Collections and Recoveries (-) (215,593.3) (197,235.2)

Obligations Net of Offsetting Collections and Recoveries 728,189.0 619,517.2

Less: Offsetting Receipts (-) (64,105.0) (48,222.1)

Net Obligations 664,084.0 571,295.1

Other Resources:

Donations and Forfeitures of Property 13.8 47.3

Transfers in/out Without Reimbursement (+/-) (86.9) (83.7)

Inputed Financing from Costs Absorbed by Others 4,421.3 4,409.6

Other (+/-) (8,099.3) 3,415.9

Net Other Resources Used to Finance Activities (3,751.1) 7,789.1

Total Resources Used to Finance Activities 660,332.9 579,084.2

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 (-) (82,882.9) (19,138.7)

Unfilled Customer Orders 6,496.4 446.2

Resources that Fund Expenses Recognized in Prior Periods (-) (34,595.5) (6,392.3)

Budgetary Offsetting Collections and Receipts that do not Affect Net Cost of Operations 18,663.2 6,202.7

Resources that Finance the Acquisition of Assets (-) (92,704.7) (132,348.5)

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 (-) (10.0) (10.0)

Other (+/-) $ 8,172.3 $ (3,379.2)
79 Section 2: Financial Information Department of Defense Agency Financial Report 2007

Total resources used to finance items not part of the Net Cost of Operations $ (176,861.2) $ (154,619.8)

Total resources used to finance the Net Cost of Operations 483,471.7 424,464.4

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 1,866.1 7,401.2

Increase in Environmental and Disposal Liability 2,615.0 5,632.5

Upward/Downward Reestimates of Credit Subsidy Expense (+/-) (103.6) (35.6)

Increase in Exchange Revenue Receivable from the Public (-) (23.3) (47.7)

Other (+/-) 91,873.1 73,776.0

Total Components of Net Cost of Operations that Will Require 

or Generate Resources in Future Periods 96,227.3 86,726.4

Components not Requiring or Generating Resources:

Depreciation and Amortization 27,287.0 65,116.2

Revaluation of Assets or Liabilities (+/-) 6,073.3 5,174.4

Other (+/-)

Trust Fund Exchange Revenue (39,246.6) (40,583.4)

Cost of Goods Sold 56,125.0 47,718.4

Operating Material and Supplies Used 30,590.5 10,062.5

Other (38,076.2) (12,630.6)

Total Components of Net Cost of Operations that will not Require or Generate Resources 42,753.0 74,857.5

Total Components of Net Cost of Operations that will not Require or Generate Resources in the 

current period

138,980.3 161,583.9

Net Cost of Operations $ 622,452.0 $ 586,048.3

Beginning 4th Quarter, FY 2007, the Department began presenting the Statement of Financing (SOF) as a note in accordance

with OMB Circular A-136. The SOF is no longer considered a basic statement and is now referred to as Reconciliation of

Net Cost of Operations to Budget. The reconciliation of the former SOF is now incorporated into Note 21.

Due to the Department’s financial system limitations, budgetary data is not in agreement 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 $1,862.0

	 Other - Other Components Not Requiring or Generating Resources 55.5

	 Revaluation of Assets or Liabilities 14.3

	 Total Amount $1,931.8	

The following Reconciliation of Net Cost of Operations to Budget lines are presented as combined instead of consolidated

due to intra-agency 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
80 Department of Defense Agency Financial Report 2007 Section 2: Financial Information

Other Resources – Other and Other Resources or Adjustments to Net Obligated Resources that Do Not Affect Net Cost of

Operations – Other primarily consists of nonexchange gains and losses necessary to reconcile the proprietary and budgetary

accounts. 

Components Requiring or Generating Resources in Future Period - Other primarily consists of future funded expenses for the

current year change in actuarial liabilities.

Components not Requiring or Generating Resources - Other primarily consists of other expenses not requiring budgetary

resources, cost capitalization offsets, and applied overhead.

Liabilities not covered by budgetary resources on the Balance Sheet total $1.6 trillion. The amount reported as Components

Requiring or Generating Resources in Future Periods in Note 21, the Reconciliation of Net Cost of Operations to Budget,

totals $96.2 billion. The difference of $1.5 trillion is primarily due to the differing perspectives between the two reports. 

Liabilities not covered by budgetary resources report the cumulative balance for Balance Sheet liabilities not yet funded

whereas as Components Requiring or Generating Resources in Future Periods in Note 21 reflects only the current period

changes for all unfunded liabilities.

Note 22. Disclosures Related to Incidental Custodial Collections

Incidental custodial collections represent miscellaneous receipts, such as collections of fines and penalties, which are

deposited directly into the General Fund of the U.S. Treasury. These funds are not available for use by the Department. 

At the end of each fiscal year the accounts are closed and the balances absorbed by the U.S. Treasury. The Department

collected and distributed to the U.S. Treasury $92.4 million of incidental custodial revenues generated primarily from the

collection of fines and penalties. 

Note 23. Earmarked Funds

BALANCE SHEET

As of September 30, 2007

(amounts in millions)

Military Retirement 

Fund

Medicare Eligible 

Retiree Health Care 

Fund

Other Earmarked 

Funds Eliminations Total

ASSETS

Fund balance with Treasury $ 20.4 $ 5.0 $ 1,961.4 $ 0.0 $ 1,986.8

Investments 218,085.0 109,549.1 6,075.9 0.0 333,710.0

Accounts and Interest Receivable 143.1 10.3 515.2 (151.8) 516.8

Other Assets 0.0 0.0 2,215.7 0.0 2,215.7

Total Assets $ 218,248.5 $ 109,564.4 $ 10,768.2 $ (151.8) $ 338,429.3

LIABILITIES and NET POSITION

Military Retirement Benefits and 

Other Federal Employment Benefits $ 1,028,850.7 $ 517,104.6 $ 3,108.7 $ 0.0 $ 1,549,064.0

Other Liabilities 1.0 256.6 1,072.6 (133.8) 1,196.4

Total Liabilities 1,028,851.7 517,361.2 4,181.3 (133.8) 1,550,260.4

Unexpended Appropriations 0.0 0.0 8.1 0.0 8.1

Cumulative Results of Operations (810,603.2) (407,796.8) 6,578.8 (68,286.0) (1,280,107.2)

Total Liabilities and Net Position $ 218,248.5 $ 109,564.4 $ 10,768.2 $ (68,419.8) $ 270,161.3
81 Section 2: Financial Information Department of Defense Agency Financial Report 2007

BALANCE SHEET

As of September 30, 2007

(amounts in millions)

Military Retirement 

Fund

Medicare Eligible 

Retiree Health Care 

Fund

Other Earmarked 

Funds Eliminations Total

STATEMENT OF NET COST

For the Year Ended September 30, 2007

Program Costs $ 105,253.0 $ (13,945.8) $ 3,242.8 $ (2,542.8) $ 92,007.2

Less Earned Revenue (53,311.2) (31,539.3) (1,082.0) 70,427.7 (15,504.8)

Net Program Costs 51,941.8 (45,485.1) 2,160.8 67,884.9 76,502.4

Net Cost of Operations $ 51,941.8 $ (45,485.1) $ 2,160.8 $ 67,884.9 $ 76,502.4

STATEMENT OF CHANGES IN NET POSITION

For the period ended September 30, 2007

Net Position Beginning of the Period $ (758,661.4) $ (453,467.9) $ 5,371.4 $ 0.0 $ (1,206,757.9)

Net Cost of Operations 51,941.8 (45,485.1) 2,160.8 67,884.9 76,502.4

Budgetary Financing Sources 0.0 186.0 3,154.8 (414.2) 2,926.6

Other Financing Sources 0.0 0.0 221.5 13.1 234.6

Change in Net Position (51,941.8) 45,671.1 1,215.5 (68,286.0) (73,341.2)

Net Position End of Period $ (810,603.2) $ (407,796.8) $ 6,586.9 $ (68,286.0) $ (1,280,099.1)

Other Disclosures

The Statement of Federal Financial Accounting Standards (SFFAS) No. 27, “Identifying and Reporting Earmarked Funds,”

requires the disclosure of Earmarked Funds separately 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 specifically

identified revenues for designated purposes, (2) explicit authority to retain the revenues, and (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 during or subsequent

to this reporting period that significantly changed the purposes of any of the following 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 Statement of Changes in Net Position 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. The summation for Military Retirement Fund (MRF), Medicare-Eligible Retiree Health Care

Fund (MERHCF), and Other Earmarked Funds is equivalent to the gross amount presented on the Statement of Changes in Net

Position.

Military Retirement Fund, 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, 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 the Military Services and other Uniformed Services (the U.S. Coast Guard, the
82 Department of Defense Agency Financial Report 2007 Section 2: Financial Information

National Oceanic and Atmospheric Administration, and the 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 the 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 then expended under

the supervision of the 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 agency for construction, restraining works, settling reservoirs, and maintenance. 

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. The 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. The USC

states, "All proceeds from any Indian reservation shall be placed to the credit of the Indians of such reservation." However,

the USC also states, "...all other charges arising from licenses..." except those charges established by the Federal Power

Commission, now known as the Federal Energy Regulatory Commission, for purpose of administrative reimbursement

shall be paid to the U.S. Treasury from which specific allocations will be made. From the specific allocations, 50% of

charges from "all other licenses" is reserved and appropriated as a special fund in the U.S. Treasury to be expended under

the direction of the Secretary of the Army in the 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 of navigable waters of the United States. 

Fund for Non-Federal 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 (Secretary) 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 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 the USACE for payment to the State of South Dakota. The state uses the payments to fund the annually

scheduled work for wildlife habitat restoration. 

Coastal Wetlands Restoration Trust Fund and Coastal Wetlands Planning, Protection and Restoration Act, 16 USC 

3951-3956. The 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. The USACE is also responsible for allocating funds among the named task

force members. Federal contributions are established at 75% of project costs or 85% if the State has an approved Coastal

Wetlands Conservation Plan.
83 Section 2: Financial Information Department of Defense Agency Financial Report 2007

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/harbor maintenance. 

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

Developments Appropriations Act. The Water Resources Development Act of 1986 was implemented to cover 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% surcharge applied to each sale. These funds may be used to pay for commissary storerelated 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, Statute 186, Section 2801. The Military Housing

Privatization Initiative (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, builds to market

standards, 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 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. Revenues

from property rental are used to pay for the operation, maintenance and environmental cleanup at the facilities. 
84 Department of Defense Agency Financial Report 2007 Section 2: Financial Information

Note 24. Other Disclosures

As of September 30 2007 Asset Category

(amounts in millions) Land and Buildings Equipment Other Total

Entity as Lessee—Operating Leases

Future Payments Due

 Fiscal Year

FY 2008 $ 384.1 $ 15.7 $ 113.2 $ 513.0

FY 2009 366.2 15.1 117.7 499.0

FY 2010 317.7 15.1 122.4 455.2

FY 2011 299.1 15.2 127.3 441.6

FY 2012 279.5 15.2 132.4 427.1

After 5 years 530.2 1.2 137.7 669.1

Total Future Lease Payments Due $ 2,176.8 $ 77.5 $ 750.7 $ 3,005.0

Note 25. Restatements

During the reporting period, material errors were identified or accounting principle changes deemed necessary. As a result,

prior year changes have been made retrospectively in accordance with generally accepted accounting principles (GAAP).

Correction Due to Change in Allocation Transfer Reporting

Effective FY 2007, the Office of Management and Budget (OMB) Circular A-136 “Financial Reporting Requirements” changed

the reporting of allocation transfers. Due to this change, the Department reports in its basic financial statements the programs

it administers on behalf of the Executive Office of the President (EOP) including the Foreign Military Sales (FMS) Program. 

Previously, the Department recorded the majority of FMS programs as “Other Accompanying Information,” rather than as

part of the basic financial statements. The FMS Trust Fund was not part of this change, as it was formerly included in the

Department’s financial statements.

Per OMB Circular A-136 Section I.14.2, the cumulative effect of the change on prior periods should be reported as a change

in accounting principle, consistent with Statement of Federal Financial Accounting Standards No. 21, “Reporting Corrections

of Errors and Changes in Accounting Principles.” Although this is not considered an error, due to the material and pervasive

impact, the Department, in coordination with OMB and the U.S. Treasury, restated prior year comparative columns as

outlined below:

FY 2006 Balance Sheet 

(amounts in billions)

Fund Balance with Treasury	 $1.9

Loans Receivable	 3.7

Total Assets	 $5.6

Debt	 $3.3

Other Liabilities	 0.4

Total Liabilities	 $3.7

Net Position	 $1.9
85 Section 2: Financial Information Department of Defense Agency Financial Report 2007

FY 2006 Statement of Net Cost

(amounts in billions)

Gross Costs	 $4.8

Less: Earned Revenue	 (0.2)

Net Cost of Operations	 $4.6

Statement of Budgetary Resources

(amounts in billions)

Beginning Balance Change for FY 2007:

Unobligated Balance, Brought Forward	 ($1.0)

Obligated Balance, Brought Forward	 $29.2

Comparative Year Effect for FY 2006:

Appropriation	 $4.7

Spending Authority from Offsetting Collections

Earned

Collected	 1.1

Permanently Not Available	 (1.1)

Total Budgetary Resources	 $4.7

Obligations	 $4.7

Total Status of Budgetary Resources	 $4.7

Gross Outlays	 $5.2

Less: Offsetting Collections	 (1.1)

Distributed Offsetting Receipts	 13.8

Net Outlays	 $17.9

Beginning balances were changed to accommodate the proper reporting of the EOP balances in the Department's

Statement of Budgetary Resources. The Unobligated Balance, Brought Forward decrease of $1.0 billion was the result of

a decrease of $1.4 billion for FMS offset by an increase of $385.2 million in the Army General Fund Iraqi Reconstruction

Fund. The Obligated Balance, Brought Forward increase of $29.2 billion included an increase from FMS of $25.9 billion

and an increase of $3.5 billion in the Iraqi Reconstruction Fund. The amounts reported as Comparative Year Effect were

restatements of prior years.

Correction of Error

Following the current reporting period, the Department discovered an error in the computation of the Distributed Offsetting

Receipts reported on the Statement of Budgetary Resources. The Department previously included all of the annual

contribution from Treasury for the Military Retirement Fund and should have excluded the concurrent receipts of the

normal cost contribution as Distributed Offsetting Receipts. The Department had also included the Military Departments’

contributions, the non-DoD employing agency contributions, and the interest receivable for the DoD Medicare-Eligible

Retiree Health Care Fund as Distributed Offsetting Receipts. The Department confirmed with OMB and the U.S. Treasury

that only specific receipt accounts, and no accrued interest, should be reported as Distributed Offsetting Receipts. Due to

the size of the misstatement in FY 2006, the Department restated lines on the Statement of Budgetary Resources and Note 21,

“Reconciliation of Net Cost of Operations to Budget,” formerly the Statement of Financing. The restatement has no impact

on the Department’s overall net position. The Department restated the prior year comparative column decreasing Distributed

Offsetting Receipts by $13.8 billion in the Statement of Budgetary Resources. The Reconciliation of Net Cost of Operations

to Budget was adjusted by like amount in the Distributed Offsetting Receipts and Trust Fund Exchange Revenue lines,

resulting in no change in Net Cost of Operations.
86 Department of Defense Agency Financial Report 2007 Section 2: Financial Information

Required Supplementary Stewardship Information

Nonfederal Physical Property 

Department of Defense Consolidated

Nonfederal Physical Property

Yearly Investments in State and Local Governments

For Fiscal Years 2007 through 2003

(In Millions of Dollars)

Categories FY 2007 FY 2006 FY 2005 FY 2004 FY 2003

Transferred Assets:

National Defense Mission Related $ 23.0 $ 66.5 $ 70.7 $ 54.7 $ 85.0

Federal Mission Related 1,028.0 1,229.0 1,324.0 4,429.0 NR

Funded Assets:

National Defense Mission Related 2.8 8.5 8.3 18.3 11.3

Total $ 1,053.8 $ 1,304.0 $ 1403.0 $ 4,502.0 $ 96.3

NR = Not Reported

The Department incurs investments in Nonfederal Physical Property for the purchase, construction, or major renovation

of physical property owned by state and local governments, including major additions, alterations, and replacements, the

purchase of major equipment, and the purchase or improvement of other physical assets. In addition, Nonfederal Physical

Property Investments include federally-owned physical property transferred to state and local governments. 

The Department changed its methodology for reporting Nonfederal Physical Property during FY 2007. Investment values

included in this report are based on Nonfederal Physical Property outlays (expenditures). Outlays are used because current

Department accounting systems are unable to capture and summarize costs in accordance with federal accounting standards. 

Investments in Research and Development

Department of Defense Consolidated

Yearly Investments in Research and Development

For the Current and Four Preceding Fiscal Years

(In Millions of Dollars)

Categories FY 2007 FY 2006 FY 2005 FY 2004 FY 2003

Basic Research $ 71.1 $ 157.1 $ 199.5 $ 194.6 $ 516.8

Applied Research 430.2 1,442.5 1,713.1 1,711.2 1,775.7

Development

Advanced Technology Development 1,052.3 2,308.6 3,096.1 2,761.4 2,445.4

Advanced Component Development and Prototypes 5,217.7 7,232.7 8,745.3 7,278.0 5,569.6

System Development and Demonstration 236.3 515.7 461.7 345.7 1,380.9

Research, Development, Test and Evaluation Management 

Support 465.2 963.1 1,035.8 997.0 960.2

Operational System Development 340.8 713.4 876.8 1,213.2 1,099.9

Total $ 7,813.6 $ 13,333.1 $ 16,128.4 $ 14,501.1 $ 13,748.5
87 Section 2: Financial Information Department of Defense Agency Financial Report 2007

The Department changed its methodology for reporting Yearly Investments in Research and Development during FY 2007. 

Investment values included in this report are based on Research and Development (R &D) outlays (expenditures). Outlays

are used because current Department accounting systems are unable to capture and summarize costs in accordance with

Federal accounting standards. The R&D programs are classified in three categories: Basic Research, Applied Research and

Development. The definition for each type of R&D Category and the Development 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 gathering

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, research papers, hardware components, software codes, and limited

construction of, or part of, a weapon system to include nonsystem-specific development efforts.

•	 Development takes what has been discovered or learned from basic and applied research and uses it to establish

technological feasibility and to assess operability, and production capability. Development is comprised of five stages

defined below:

•	 Advanced Technology Development is the systematic use of the knowledge or understanding gained from research

directed toward proof of technological feasibility and assessment of operational and productibility aspects rather than

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 as realistic an operating

environment as possible to assess the performance or cost reduction potential of advanced technology. Programs in

this phase are generally system specific. Major outputs of hardware and software components, or 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 R&D program. 

•	 Operational Systems Development is concerned with development projects in support of programs or upgrades still in

engineering and manufacturing development, which have received approval for production, for which production funds

have been budgeted in subsequent fiscal years.
88 Department of Defense Agency Financial Report 2007 Section 2: Financial Information

Required Supplementary Information

Heritage Assets

Department of Defense Consolidated

Heritage Assets

For Fiscal Year Ended September 30, 2007

Categories Measure

Quantity

As of

10/01/06 Additions Deletions As of9/30/07

Buildings and Structures Each 23,444 1,304 7,631 17,117

Archeological Sites Site 97,911 992 70,948 27,955

Museums Each 103 5 5 103

Monuments and Memorials Each 2,022 47 54 2,015

Heritage Assets are real and personal property with significance in American history due to their architectural, archeological,

and cultural value. In FY 2007, the archeological sites reflect those sites identified, evaluated, and determined eligible for or

listed on the National Register of Historic Places. The FY 2007 categories are defined as follows:

Buildings and Structures. Buildings and structures that are listed on, 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 of the National Historic Preservation Act.

Museums. Buildings, places, or institutions devoted to the acquisition, conservation, study, exhibition, and educational

interpretation of objects having scientific, historical, or artistic value.

Monuments and Memorials. Sites and structures built to honor and preserve the memory of significant individuals or events

in history.

Stewardship Land

Department of Defense Consolidated

Stewardship Land

For Fiscal Year Ended September 30, 2007

(Acres in Thousands)

Land Use As of

10/01/06 Additions Deletions

As of

9/30/07

Mission 16,015 1,387 15 17,387

Parks and Historic Sites 1 1

Totals 16,016 1,387 15 17,388

Stewardship Land is land and land rights owned by the Department of Defense 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. Stewardship Land is reported in acres rather than at cost or fair value. 

The FY 2007 categories are defined as follows:

Mission. Stewardship Land is land used for military bases, test and training ranges, or other military mission related

functions.

Parks and Historic Sites. This category includes battlefields, cemeteries, and parks.
89 Section 2: Financial Information Department of Defense Agency Financial Report 2007

Real Property Deferred Maintenance

Department of Defense

Real Property Deferred Maintenance

For Fiscal Year Ended September 30, 2007

(In Millions of Dollars)

Property Type Current Fiscal Year (CFY)

Plant Replacement Value Required Work (deferred maintenance) Percentage

Category 1 $514,304.5 $61,634.5 12%

Category 2 $42,154.0 $8,881.6 21%

Category 3 $14,411.3 $1,503.1 10%

This year, the Department changed its methodology for reporting deferred maintenance. In previous reports, the amount was

based upon the Department’s Facilities Sustainment Model and represented the annual deferred sustainment (maintenance). 

This year, the amount is based upon facility Q-ratings found in the Department’s real property inventory that represent

the cumulative deferred amount for facility restoration and modernization, and thus are significantly larger than previous

years. While restoration and modernization is not precisely equivalent to deferred maintenance, the values are generally

representative of the magnitude of the deferred maintenance requirements. Over the next year, the Department will be

transitioning the Q-ratings to more precisely represent deferred maintenance requirements. 

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, representing the acceptable

operating condition. Acceptable operating condition levels vary by Component within the Department. The low value

is the mid-point of the Q-2 rating band, representing deferred work valued at 15% of the facility replacement value. This

point equates to the Department minimum goal for average facility condition. The high value is fully serviceable condition,

representing a facility with no deferred requirements. The reported deferred maintenance for the Department reflects the

mixture of acceptable operating condition values.

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

Deferred Maintenance of Military Equipment

Depot maintenance requirements for military equipment are developed during the annual budget process. The table below

displays the deferred unfunded requirements for the depot maintenance program. The Department Components’ FY 2008

Budget Estimates, contain detailed information on each program.

FY 2007

Military Equipment Type

Unfunded Deferred Requirement

(In Millions of Dollars)

Ship $136

Aircraft $1,225

Combat Vehicles $358

Other $1,048

Total $2,767
90 Department of Defense Agency Financial Report 2007 Section 2: Financial Information

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Other Accompanying Information

Text

stars

wreath

arrows

Tail outline

wings

head

shield

Section 3
The Pentagon Memorial

lives were lost in a single moment at the Pentagon. One 

hundred eighty four individuals forever linked through the 

horrific events that unfolded on September 11, 2001.

of others lost their lives and suffered injury that day while 

millions wept. That day was simply incomprehensible. It 

jolted us into a different world, a tragic reality that just did 

not seem real.

We claim this ground in rememberance of the events of 

September 11, 2001. To honor the 184 people whose 

lives were lost, their families, and all those who sacrifice that 

we may live in freedom.

Thousands

We will never forget.

One hundred eighty four 
97 Section 3: Other Accompanying Information Department of Defense Agency Financial Report 2007

Section 3: Other Accompanying 

Information

Inspector General’s Summary of 

Management and Performance Challenges 

and Management’s Response to Auditor 

Challenges

The Inspector General (IG) has determined that five of the

six management and performance challenges identified in

FY 2006 continue to be challenges for FY 2007. Human

capital has been removed as a separate challenge area

and has been incorporated into the remaining challenge

areas due to its fundamental relationship with virtually all

other facets of management. The following are the five

management and performance challenges identified by the

IG for FY 2007:

1.	 Financial Management

2.	 Acquisition Processes and Contract Management

3.	 Joint Warfighting and Readiness

4.	 Information Assurance, Security and Privacy

5.	 Health Care 

The table below outlines these challenges and includes both

the IG’s and Department of Defense (DoD) management’s

assessments of the Department’s progress in addressing the

issues. Columns A and B were prepared by the Inspector

General; Column C was prepared by the Department.

1. Financial Management

A. IG Summary of the Challenge B. IG Assessment of Progress C. Management’s Response

The Department faces financial management 

challenges that are complex, long-standing, and 

pervade virtually all its business operations. The 

challenges affect DoD’s ability to provide reliable, 

timely, and useful financial and managerial data 

needed to support operating, budgeting, and 

policy decisions. 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. 

The weaknesses that affect the auditability of 

the financial statements also impact other DoD 

programs and operations and contribute to waste, 

mismanagement, and inefficient use of DoD 

resources.

The Government Accountability Office identified 

DoD financial management as a high-risk area in 

1995, a designation that continues to date. This 

designation, together with the high-risk areas of 

business systems modernization (designated in 

1995), and supply chain management (designated 

in 1990) directly affect the Department’s ability to 

attain an unqualified audit opinion on its financial 

statements. In its June 30, 2007, Executive 

Branch Management Scorecard, the Office of 

Management and Budget assessed the status of the 

Department’s financial performance as “Red,” or 

“Unsatisfactory.”

The IG previously had identified and reported on 

several material control weaknesses that reflect 

some of the pervasive and long-standing financial 

management issues faced by DoD and which 

directly impact the Department’s ability to obtain 

an unqualified opinion on its financial statements. 

These weaknesses, which also affect the 

safeguarding of assets and proper use of funds and 

impair the prevention and identification of fraud, 

waste, and abuse, include the following:

• Fund balance with Treasury

• Inventory

• Operating materials and supplies

One significant measure of the ongoing progress 

in the area of financial management would be the 

Department’s ability to obtain an unqualified audit 

opinion on its financial statements. The DoD is far 

from reaching this milestone as demonstrated by the 

audit opinions received by the Department and its 

Components on their FY 2006 financial statements. 

However, the Department’s ongoing initiatives in 

the area of financial management improvement 

indicate that DoD management 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. The Financial 

Improvement and Audit Readiness (FIAR) Directorate 

is responsible for centrally coordinating the FIAR 

initiative; regularly updating a written plan with 

stated objectives and milestones; defining a process 

with protocols for making decisions; tracking 

progress; and providing guidance for the decisionmaking process through oversight groups consisting 

of participants from across DoD. 

The FIAR Plan categorizes the financial 

management challenges faced by the Department 

into three broad categories; those that depend on:

1. systems solutions,

2. process solutions, and 

3. both systems and process solutions. 

The FIAR plan focuses on the process solutions that 

DoD financial managers identify, develop, and 

implement to correct financial reporting deficiencies 

or internal control weaknesses. The IG has focused 

its audit efforts primarily on the FIAR improvement 

initiative. 

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.

• DoD improvement initiatives at the entity and 

line-item level. 

The Department is pleased to see the recognition 

on the part of the DoDIG regarding financial 

improvements being made across the DoD. We 

concur that the financial management area is a 

large challenge and we have comprehensive plans 

that highlight improvements on the path forward. 

Our financial management challenges are both 

pervasive and well documented. 

The Department’s roadmap for financial 

improvements is its Financial Improvement and 

Audit Readiness (FIAR) initiative. The FIAR Plan is 

our guide for comprehensively improving financial 

management and preparing for audit. It identifies 

critical activities for improving internal controls, 

resolving auditor identified weaknesses, optimizing 

fiscal stewardship, and achieving audit readiness. 

The Plan addresses action taken to correct both 

auditor identified material weaknesses along 

with internal management control weaknesses. 

Milestones are established to monitor progress 

and to ensure that required actions are completed 

and the Department is on schedule to achieve 

auditability. 

We also concur that the Department has made 

substantive progress in “establishing a culture 

and ingrained structure” and will continue our 

commitment to the on-going evolution of the 

Department’s business processes and organizational 

structure.

Based on the efforts achieved with the FIAR Plan, 

the Office of Management and Budget continues 

to rate the Department “green” for progress 

in Improving Financial Performance under the 

President’s Management Agenda. The FIAR Plan is 

closely integrated with the Department’s Enterprise 

Transition Plan, which guides the Department’s 

business transformation effort to modernize 

processes, systems, and information flows to 

support 21st century national security requirements. 

The links below connect to these plans and 

provide details about the Department’s goals and 

accomplishments.
98 Department of Defense Agency Financial Report 2007 Section 3: Other Accompanying Information

1. Financial Management

A. IG Summary of the Challenge B. IG Assessment of Progress C. Management’s Response

• Property, plant, and equipment

• Government-furnished material and contractoracquired material

• Environmental liabilities

• Financial management systems

• Intragovernmental eliminations

• Other accounting entries

• Statement of Net Cost

• Statement of Financing (see note 21)

• Accounts Payable

• Accounts Receivable 

The following elements and actions are key to 

improving the Department’s financial management:

• Create an environment that fully supports clean 

financial reporting. The financial managers 

need buy-in from senior management and 

personnel in the field offices in order to 

successfully implement the corrective action 

plans. 

• Maintain a significant level of continued 

review to identify all of the material financial 

management and reporting deficiencies, 

internal control weaknesses, and quality of data 

issues. 

• Develop corrective action plans that will 

adequately correct the deficiencies and result 

in financial reporting in accordance with 

generally accepted accounting principles. 

• Implement the corrective action plans that 

address the system, control, reporting, or 

quality of data weakness. 

Additionally, an overall shortage of qualified 

auditors and accountants has hindered progress 

on the challenges outlined above. Continual 

turnover of qualified staff who conduct audits at 

DoD Agencies and independent public accounting 

firms, and also turnover of qualified accounting 

staff to support financial functions and audits, has 

surfaced as a formidable obstacle to the effective 

and efficient execution of those audits. The 

Department needs improved recruiting and retention 

practices as well as robust training and continuity of 

operations planning to alleviate the problem.

Although the IG anticipates that DoD will need to 

make refinements in these areas, the IG considers 

these to be the critical steps for establishing a 

culture and ingrained structure that will enable DoD 

managers to identify internal control weaknesses 

and plan effectively for resolution of those 

weaknesses. The 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. 

We fully support the Department’s goal to 

implement internal controls that will result in 

sustained improvements in its ability to produce 

timely, reliable, and complete financial 

management information. To that end, DoD needs 

to continue the development of comprehensive, 

integrated plans that will lead to improved systems 

and internal control. We recognize that there 

are many variables affecting the execution of 

DoD improvement initiatives, such as specific 

Components’ ability to make corrective actions and 

meet the projected milestones. 

For example, the U.S. Army Corps of Engineers 

is making progress by working to fix the majority 

of the property, plant, and equipment beginning 

balances; and the Office of the Under Secretary 

of Defense (Comptroller) is tracking progress 

through weekly updates from the U.S. Army Corps 

of Engineers and DoD IG personnel. The IG will 

continue to provide input to the DoD managers on 

these initiatives as requested, or as part of the IG’s 

advisory role on the DoD committees that support 

these initiatives. However, the qualified staffing 

shortage will remain a concern for the foreseeable 

future until it is more adequately addressed.

FIAR Plan - http//:www.defenselink.mil/

comptroller/FIAR/documents/FIAR_Plan_Sept_

2007.pdf

Enterprise Transition Plan - http//:www.defenselink.

mil/dbt/products/2007_BEA_ETP/etp/ETP.html

2. Acquisition Processes and Contract Management

A. IG Summary of the Challenge B. IG Assessment of Progress C. Management’s Response

The Department continues to experience the 

management challenge to provide required materiel 

and services that are superior in performance, 

high in quality, sufficient in quantity, and within 

the timeframes needed by the warfighter while 

balancing the cost concerns for the taxpayer. With 

the war, the volume and complexity of purchases 

have increased to provide the additional support 

needed by the warfighter. The DoD spending in 

FY 2007 (with supplementals) will exceed 

$600 billion, which is more than double the 

spending from FY 2000. This, in turn, has led to 

efforts to increase the speed of the procurements 

to meet urgent warfighter needs. Some of these 

efforts have resulted in less than prudent contracting 

practices. Every acquisition dollar that is not 

prudently spent results in the unavailability of that 

dollar to fund other top priorities of the Secretary of 

Defense and wastes valuable taxpayer dollars.

The Department has made progress in improving 

acquisition processes. Despite this progress, the 

increasing volume of acquisitions, the decrease 

in the number of acquisition personnel, and the 

numerous types of contracting vehicles and methods 

for accomplishing acquisition make this a long-term 

challenge. The Department has worked closely 

with the IG and other agencies to develop solutions 

to make interagency contracting work better. The 

DoD also has demonstrated a strong commitment to 

hold contracting officers accountable for following 

the regulations and the law. However, the sheer 

number of contracting actions and the pressures on 

contracting officials to award procurements faster 

make the challenge of correcting the problem more 

difficult. These same issues are compounded when 

contracting for and in hostile environments such as 

Southwest Asia and the aftermath of tragedies such 

as Hurricane Katrina.

No Response
99 Section 3: Other Accompanying Information Department of Defense Agency Financial Report 2007

2. Acquisition Processes and Contract Management

A. IG Summary of the Challenge B. IG Assessment of Progress C. Management’s Response

While the problems encountered in the contracting 

process are not unique to the wartime environment, 

the risk of critical gaps in the contracting process 

increases during contingency operations. The 

challenge in a wartime environment is to mitigate 

these gaps. Gaps occurred when:

• user requirements were not met,

• funds were not spent appropriately and 

unaccounted for,

• goods and services were not properly 

accounted for,

• delivery of goods and services were not made 

properly,

• individuals involved in the acquisition process 

lacked integrity, and 

• adequate documentation was not retained or 

prepared.

The DoD acquisition workforce has not kept 

pace with the increasing demand for technical 

expertise, compounding the risk of critical gaps. 

Ensuring the appropriate size and experience 

level of the acquisition workforce in light of 

changing acquisition strategies and vehicles, 

prior downsizing, and an aging workforce, is 

a challenge. A recent congressional proposal 

calls for the transfer of 600 General Services 

Administration contracting officers to assist the 

Department in meeting its contracting needs.

Management also is challenged to make 

appropriate use of acquisition streamlining 

initiatives. Government quality assurance and 

pricing options are more limited under commercial 

contracts. Therefore, the procurement community 

must continue to closely monitor whether we are 

receiving the real benefits of the commercial 

marketplace including market-based pricing 

and products and services that meet warfighter 

requirements.

The Department also continued to experience 

a variety of shortcomings in its approach to 

compliance with the DoD acquisition guidance and 

the Federal Acquisition Regulation in FY 2007. 

The IG identified instances where acquisition 

officials made decisions to proceed with key 

milestones without sufficient documentation to 

support those decisions. In other cases, warfighter 

requirements were not adequately justified. In one 

case, acquisition officials prematurely released the 

presolicitation notice for the competition of a 

5.56-mm carbine before they performed other 

essential requirements to determine that a new 

competition was warranted or contacted the current 

contractor to determine whether the contractor 

would lower its unit prices.

The Department continues to experience significant 

challenges regarding purchases made through 

other agencies for the Department. Last year, 

the Inspector General continued to find a variety 

of problems with interagency orders. One 

significant recurring issue was the failure to allow 

all contractors the fair opportunity to compete 

for awards on multiple award contracts. Also, 

Military Interdepartmental Purchase Requests did not 

comply with the appropriations law and the Federal 

Acquisition Regulation for making purchases through 

other agencies. 

The Department needs to continue to be vigilant 

about allegations of corrupt acquisition, especially 

with the volume and speed of acquisitions in 

support of Operation Iraqi Freedom and Operation 

Enduring Freedom. In support of this mission, 

the Defense Criminal Investigative Service, as a 

member of the Department of Justice National 

Procurement Fraud Task Force Training Committee, 

assisted in the development of the Procurement 

Fraud Investigation Training Program, which has 

been made available to all Defense criminal 

investigative organizations through the Federal Law 

Enforcement Training Center.

Furthermore, the National Defense Authorization 

Act of FY 2007 directed the Department of Defense 

to convene a panel of senior leaders representing 

a cross-section of the Department. The panel’s 

mission is to conduct a Department-wide review 

of vulnerabilities to fraud, waste, and abuse in 

contracting integrity, to recommend corrective 

actions, and to report the panel’s findings and 

actions to the Congress by December 31, 2007. 

The report will be the first of three annual reports 

issued by the panel. The panel has developed 

subcommittees that will evaluate issues related to 

the challenge areas noted above. The creation of 

this panel is a positive step toward addressing and 

managing these challenges.

No Response
100 Department of Defense Agency Financial Report 2007 Section 3: Other Accompanying Information

2. Acquisition Processes and Contract Management

A. IG Summary of the Challenge B. IG Assessment of Progress C. Management’s Response

With the war effort, it was sometimes quicker 

and easier for contracting officers to go to 

known sources without ensuring that Federal 

Acquisition Regulation guidelines on exceptions 

from competition were met before making these 

awards. We found instances where sole source 

actions were not properly justified. The challenge 

remains to ensure that adequate market research is 

performed before contracts are awarded, thereby 

allowing capable contractors to compete for the 

large volume of procurements. 

A final challenge with the decline in the acquisition 

workforce is to provide adequate surveillance 

over cost-type service contracts. These contracts 

provide no incentive for contractors to control costs 

so adequate surveillance by the Department is 

especially important to make sure that we get the 

quality of services that we should expect while also 

best serving the taxpayer.

No Response

3. Joint Warfighting and Readiness

A. IG Summary of the Challenge B. IG Assessment of Progress C. Management’s Response

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 as a 

result of Operation Iraqi Freedom and Operation 

Enduring Freedom. Furthermore, this challenge 

encompasses the need for the Services and allies 

to be interoperable, communicate with each other 

effectively, share data when necessary, and train 

together when possible. To meet this challenge, the 

Department is continuously transforming. 

While U.S. forces continue to operate around 

the world, changes are underway to better align 

the resources of the Department to benefit the 

warfighters, wherever they are. Those changes 

have taken a variety of forms, not the least of 

which is the improvement of the tools used to 

fight the enemies of the United States. The 

fight against terrorism, as well as the ongoing 

Operations Enduring Freedom and Iraqi Freedom 

continue to test the limits of the Department and 

its ability to successfully defend the United States. 

But those have been shared battles, with each 

Service shouldering its portion of the load. For 

example, the IG’s investigative component, the 

Defense Criminal Investigative Service, has worked 

effectively with the Army’s Criminal Investigation 

Command, Federal Bureau of Investigation, 

and the Special Inspector General for Iraq 

Reconstruction, by assigning two special agents to 

Iraq and two special agents to Kuwait on 6-month 

rotating details. These agents specifically will 

address allegations related to bribery, kickbacks, 

contracting irregularities, and other matters that 

involve procurement fraud and public corruption that 

impact joint warfighting capabilities. In addition, 

in June 2007 the DoD IG established a field office 

in Afghanistan to conduct audits of contracts, funds 

management, and other accountability-related 

issues in support of Operation Enduring Freedom. 

The Department is making progress on the issue 

of Joint Warfighting and Readiness, but that 

progress must be monitored to ensure that it 

continues. Changes in the location and numbers 

of bases in the European and Pacific theaters 

and the continued operations in Southwest Asia 

have brought to light numerous challenges facing 

commanders. The DoD has taken steps to align 

materials pre-positioned in the European theater 

with the new basing structure for that Command. 

Our review of the management of pre-positioned 

munitions in the European theater showed that 

DoD had taken positive steps to reduce the 

amount of munitions stored in the European 

theater while still meeting requirements. The 

ability to equip in-lieu-of forces, as well as those 

forces performing nontraditional missions was 

highlighted by our work in the U.S. Central 

Command area of responsibility. Our audit 

of force structure changes in the U.S. Pacific 

Command highlighted the need for continued 

vigilance as DoD realigns forces to meet 

commitments in that theater. 

Transformational changes in the Army structure 

and warfighting policies have had an effect 

on the ability to provide weapons for the entire 

Army. Transformation to a modular force also 

has had an effect on making sure small arms 

get out to the warfighter; however, the Army 

continues to be responsive in efforts to forecast 

requirements for small arms. During our review 

of the availability of small arms for meeting 

current operational requirements, we concluded 

that the Army equipped its deployed forces 

in support of Operation Iraqi Freedom with 

the small arms necessary to meet Combatant 

Commanders’ requirements. However, before 

deployment, some units were not fully equipped 

with the types of small arms required to do 

their assigned mission, so they had to obtain 

those small arms from other sources, such as 

nondeployed units. This happened because the 

current mission requirements warrant different 

types of small arms not reflected in a unit’s 

Modified Table of Organization and equipment.

Joint warfighting capabilities and readiness remains 

a major focus of the Department. At the strategic 

level, considerable effort is expended to ensure our 

current and emerging joint warfighting capabilities and 

basing strategy support our strategic and operational 

needs, and the changes in the European theater 

cited by the IG are one example of that effort. As 

the Department realigns forces to better respond to 

today’s environment, forward positioned munitions 

are continuously evaluated to ensure requirements are 

met and excess munitions are retrograde to CONUS 

depots. However, current operations in OIF/OEF 

continue to be the major effort and place significant 

strain on the force. The Department is committed 

to ensuring forces deploying to OIF/OEF have the 

personnel, equipment and training necessary to meet 

operational needs. To do so, the non-deployed force 

has seen a decrease in readiness as some of their 

equipment and personnel are re-allocated to fully 

man/equip deploying units for their theater assigned 

missions. Additionally, these manning and equipment 

shortfalls can result in decreased training for nondeployed units. Moreover, some units are trained to 

new missions to relieve the stress on certain heavily 

demanded segments of the force (ex: military police). 

These in-lieu-of (ILO) units must be trained, and often 

receive new equipment, for this new mission before 

deploying to OIF/OEF. But to reiterate, great effort is 

expended to ensure all deploying units are manned, 

equipped and trained to meet the operational needs 

identified by the gaining combatant commander. 

As OIF/OEF operations continue, the Department 

is addressing the resources needed to reset and 

reconstitute the force. As the IG noted, considerable 

reset funds are expended today, and additional 

resources will be necessary in the coming years to 

repair or replace damaged or worn out equipment. 

Furthermore, as the Department works diligently to 

ensure success in OIF/OEF, we remain vigilant of 

other global areas
101 Section 3: Other Accompanying Information Department of Defense Agency Financial Report 2007

3. Joint Warfighting and Readiness

A. IG Summary of the Challenge B. IG Assessment of Progress C. Management’s Response

The Army continues to address small arms 

sustainment and modernization that should close 

future shortage gaps.

Ongoing reviews cover issues such as the 

Army’s reset program for equipment to determine 

the effectiveness of the technical inspection 

process for those units that are completing their 

tour in support of Operation Iraqi Freedom. 

Since FY 2002, the Army has allocated 

approximately $38.6 billion for equipment 

reset, with the Army receiving $17.1 billion in 

FY 2007 Global War on Terror supplemental 

funding. Another ongoing review is addressing 

whether U.S. ground forces supporting 

Operation Iraqi Freedom are receiving training 

necessary to meet operational requirements. 

Specifically, we will determine whether 

requirements reflect the training necessary in the 

area of operation and verify whether the ground 

forces are receiving the required training, as 

well as evaluate whether the training is meeting 

the needs of ground forces supporting Operation 

Iraqi Freedom. Additionally, we have an 

ongoing review evaluating the transformation 

of the U.S. global defense posture in the U.S. 

European Command. 

of concern, and regularly assess our preparedness to 

respond to contingencies/event elsewhere.

The Global War on Terror will continue to be a 

long and difficult war affecting the entire global 

community. It will require firm commitment and 

cooperation of U.S. allies and coalition partners, as 

well as international organizations, domestic state 

governments, and the private sector. The demands 

placed on the Armed Forces the past few years 

have been extensive, but our military is unwavering 

in its focus on, resolve, and dedication to peace 

and freedom. With the Congress’ continued strong 

support, the military will continue to effectively 

combat terrorism, counter the proliferation of 

weapons of mass destruction, help Iraq and 

Afghanistan build a stable and secure future, 

improve joint warfighting capabilities, and transform 

the Armed Forces to meet future threats.

The Department has made great strides toward 

addressing the challenge of defending our 

homeland. The Department has taken positive 

steps toward enhancing its ability to promote 

a greater understanding and cooperation 

among all DoD Components that are combating 

weapons of mass destruction. Also, the 

Department has made significant improvements 

in its controls over transfers of militarily sensitive 

technology to countries of concern during 

the past 6 years. Further, the Department 

has developed numerous policies, plans, 

and procedures for deterring, intercepting, 

and defeating threats to the U.S. homeland. 

However, terrorists and countries of concern are 

relentless in their pursuit to strike our cities, our 

citizens, and our interests abroad. Therefore, 

the Department must maintain its vigilance, as 

the traditional vanguard of America’s security, 

in addressing the dynamic and ever-changing 

challenges of defending our homeland.

While DoD has “taken positive steps toward 

enhancing its ability to promote a greater 

understanding and cooperation among all DoD 

Components that are Combating Weapons of Mass 

Destruction”, there is still more to be done. The 

Department needs to ensure it is effectively organized 

and staffed to oversee CWMD programs; the lack 

of a single portfolio manager for CWMD programs 

significantly hampers the Department’s ability to 

allocate investments across the eight WMD mission 

areas. Furthermore, to realize national goals in 

CWMD, DoD will need increased investment in WMD 

detection, WMD forensics and attribution, and WMD 

consequence management.

The Department’s available resources are finite 

and require constant monitoring of our abilities and 

of the world situation to enable the Department 

to successfully operate on a global scale. The 

continued operations in Iraq and Afghanistan 

require a significant commitment of forces. 

Meanwhile, the advances by the People’s Republic 

of China in modernizing its armed forces and the 

possibility of nuclear weapons in North Korea 

and Iran also require constant monitoring. The 

combination of these various factors continues to 

challenge the Department. 

The Department regularly assesses readiness to meet 

the demands of the national military strategy. This 

includes an assessment of our ability to conduct current 

operations as well as other, simultaneous scenarios. 

While OIF/OEF does put significant stress on our 

forces, leadership is routinely advised of situations 

being monitored globally, and our readiness to 

respond elsewhere, if needed. 
102 Department of Defense Agency Financial Report 2007 Section 3: Other Accompanying Information

3. Joint Warfighting and Readiness

A. IG Summary of the Challenge B. IG Assessment of Progress C. Management’s Response

Additionally, the Department is being asked to 

take on other roles that require different tactics, 

techniques, and procedures than warfighting 

operations, often at the same time. In November 

2005, the Deputy Secretary of Defense issued DoD 

Directive 3000.05, which established that stability 

operations are a core U.S. Military mission to be 

given priority comparable to combat operations 

and to be “. . . explicitly addressed and integrated 

across all DoD activities including doctrine, 

organizations, training, education, exercises, 

materiel, leadership, personnel, facilities, and 

planning.” 

A National Security Presidential Directive and the 

National Defense Authorization Act for 

FY 2006 recognize DoD’s role in reconstruction 

and stabilization efforts. In fact, some of the work 

being done in Southwest Asia can be considered 

part of these activities. These programs support 

Global War on Terror and other national interest 

areas. The DoD often takes on efforts in these 

areas, even though they might not be the agency or 

organization with primary responsibility – because 

they can. A number of challenges in this area 

exist. The doctrine must be developed and the 

difference between reconstruction and stability and 

warfighting missions must be clearly articulated 

while at the same time recognizing that the two 

might be conducted simultaneously. Building and 

rebuilding the DoD institutions and organizations 

and developing meaningful doctrine may require 

significant investment, including the need for the 

DoD training schools and educational system to 

address two different missions with different tactics, 

techniques, and procedures, that more than likely 

will be executed at the same time and place.

Since the issuance of DoD Directive 3000.5 

and NSPD 44, the Department has either led, 

participated in or supported change initiatives 

required to conduct stability, security, transition and 

reconstruction operations. These initiatives have 

included seeking new Congressional Authorities, 

launching a new Combatant Command with 

inherently unique interagency command structure, 

participating in an interagency crisis planning 

initiative, assisting in publishing guidelines for military 

and Non-governmental Humanitarian Organizations 

(NGHO’s) relationships, increasing billet sharing 

among the department and interagency and creating 

a department sponsored Consortium for Complex 

Operations (CCO). Undertaking these initiatives 

simultaneously has made analytical assessment of 

any one activity a challenge. That said, the broad 

front on which the department has engaged SSTR 

challenges illustrates the commitment to improving the 

department’s capability and capacity to conduct SSTR. 

The following assessment is provided in the broader 

categories of SSTR improvements:

Authorities. The department has sought and will 

continue to seek congressional support to build on our 

force’s ability to assist and train partners in the War on 

Terror, build our interagency partner capacity through 

the development of a Civilian Response Corps (CRC), 

and expanding the capability of the Commander’s 

Emergency Response Program (CERP). 

Planning. The department is experimenting with 

organizational structures in the Combatant Commands 

in effort to improve interagency communication and 

integration in campaign planning. These experiments 

include placing interagency officials in the command 

organization at the Africa Command headquarters 

and creating an interagency directorate at Southern 

Command. The department also participated in the 

first table top planning exercise using the Interagency 

Management System (IMS) sponsored by the 

Department of State. The IMS is designed to respond 

to complex crises and operations that have been 

identified as national priorities. 

Training and Education. The department is becoming 

more coordinated, integrated and standardized. 

Though not necessarily the model for all future SSTR 

missions, the Provincial Reconstruction Teams (PRTs) 

deployed to Iraq and Afghanistan are prepared in 

an integrated and coordinated enviroment. The 

Deparment’s CCO when operational in the Spring 

2008, will serve as a training and education hub to 

facilitate interagency education sharing. 

Doctrine. The department has issued a Joint 

Operational Concept (JOC) for SSTR operations. This 

is the first step in developing codified doctrine for 

force wide adaptation. Joint and Service exercises 

are incorporating SSTR into planning and execution 

to test and evaluate the JOC. Capabilities Based 

Assessments (CBAs) are under consideration which will 

inform force structure requirements in both the general 

purpose as well as the special operations forces. 

SSTR assessment will by the nature of the operations 

which occur during all phases of a campaign, 

including pre-hostilities, will be iterative and ongoing.
103 Section 3: Other Accompanying Information Department of Defense Agency Financial Report 2007

3. Joint Warfighting and Readiness

A. IG Summary of the Challenge B. IG Assessment of Progress C. Management’s Response

Transformation of logistics capabilities poses a 

significant challenge to the Department. The 

Department’s transformed logistics capabilities must 

support future joint forces that are fully integrated, 

expeditionary, networked, decentralized, 

adaptable, capable of decision superiority, and 

increasingly lethal. Additionally, transformed 

logistics capabilities must support future joint force 

operations that are continuous and distributed 

across the full range of military operations.

Supply chain management is a challenge for the 

Department. The Government Accountability 

Office identified supply chain management as a 

high-risk area because of weaknesses uncovered 

in key aspects, such as distribution, inventory 

management, and asset visibility. It has reported 

on numerous problems associated with supply chain 

management such as shortages of items caused 

by inaccurate or inadequately funded war reserve 

requirements and DoD’s lack of visibility and control 

over the supplies and spare parts it owns. 

The Department has made progress toward 

meeting its goal of transforming logistics through 

numerous initiatives. However, that progress 

is tempered by the sheer magnitude of logistics 

operations that will continue to make it a 

long-term challenge. To this goal, the Inspector 

General has evaluated such areas as inventory 

management, which remains a challenge within 

the Department. 

The Defense Logistics Agency successfully has 

managed selected items in its own inventory 

by providing a stable industrial base through a 

program entitled “Warstopper.” These items, 

critical to the Services’ mission, are needed 

to meet wartime surge requirements, but their 

peacetime requirements are not sufficient to 

maintain an industrial capability. Among the 

items included as warstopper items were nerve 

agent antidote auto-injectors; chemical protective 

over-garments and gloves; meals ready-to-eat; 

tray pack rations; combat boots, including 

cold weather boots; and barrier materials. 

The program provides an increased industrial 

capacity to provide surge and sustainment 

of selected warstopper items. However, the 

program also included items that did not fully 

meet its criteria, resulting in the use of scarce 

warstopper funds for non-program projects at the 

expense of higher priority projects.

While DoD officials established business rules, 

defined goals for measuring customer wait time, 

and reported customer wait time metrics from 

2001 to 2005, the metrics did not allow DoD 

officials to effectively measure the link between 

customer wait time and operational availability 

of equipment. Consequently, officials do not 

know how the customer wait time for high 

priority items will affect operational readiness.

The DoD supply chain is undergoing a significant 

transformation. Joint and Service logistics capabilities 

must support a joint force that is fully integrated, 

expeditionary, networked, decentralized, and 

adaptable. Without a coordinated and holistic 

approach, progress towards transforming the DoD 

Supply Chain will continue to be tempered by the 

sheer magnitude of logistics operations. 

Services must strive to fully integrate and synchronize 

the DoD Supply Chain by achieving unity of effort, 

JLE-wide visibility, and rapid/precise response to better 

generate and sustain joint readiness. The Services are 

engaged in numerous transformation efforts to enhance 

and better coordinate their efforts such as BRAC, Air 

Force eLog-21, Marine Corps MLI, USTRANSCOM 

Distribution Process Owner, OSD and Joint Staff’s DoD 

Joint Supply Chain Architecture efforts.

The Department also faces a challenge in meeting 

its goal to reduce preventable accidents. Accidents 

not only reduce readiness through lost man-hours 

and the unavailability of personnel but are 

estimated to cost the Department approximately 

$25 billion a year, not to mention the human 

suffering that is the most regrettable consequence 

of accidents. In March 2004, the Secretary 

challenged Department managers to reduce 

accidents 75 percent by 2008. In May 2007, 

the Secretary recommitted to the 75 percent 

accident reduction target and stated a goal of 

zero preventable accidents. The challenge for the 

Department is to make safety an institutional value. 

Responsibility for environment, safety, and health 

policy is dispersed throughout the Department.

Reducing preventable accidents remains a 

challenge for the Department. Based on current 

trends, the Department is unlikely to achieve 

the Secretary’s target of reducing accidents 

by 75 percent. The Defense Safety Oversight 

Council, established in June 2003 to facilitate 

oversight of the Department’s efforts to achieve 

the Secretary’s goal, has established eight task 

forces to address near-term issues and produce 

rapid results. The council is encouraging Service 

participation and partially funding Departmentwide adoption of the Voluntary Protection 

Program, an Occupational Health and Safety 

Administration-developed program designed to 

stress prevention activities.

The Department continues to strive towards reducing 

accidents and meet the SecDef 75% mishap reduction 

goals from the baseline of 2002. The Defense Safety 

Oversight Council (DSOC) monitors mishap metrics 

on a regular basis with specific focus on: civilian 

lost day rates, private motor vehicle (PMV) accident 

fatality rates, military injury case rates and aviation 

Class A rates. To date, the Department has shown 

improvements in all areas with the exception of military 

injuries, which show a 20% increase. This increase 

may be attributable to improved reporting procedures 

and DSOC routinely re-validates the data. Civilian lost 

day rates have shown a 29% reduction, PMV 20%, 

and aviation Class A with a 25% reduction. The 

Department has seen these improvements in mishap 

rates despite the increased exposure to risk due to 

increased training, deployments, and OPTEMPO 

in inherently dangerous environments. Further 

improvements may be gained through continued 

leadership commitment, coordinated efforts between 

the DSOC and the functional organizations, and 

investments in safety technologies and safety training. 
104 Department of Defense Agency Financial Report 2007 Section 3: Other Accompanying Information

4. Information Assurance, Security and Privacy

A. IG Summary of the Challenge B. IG Assessment of Progress C. Management’s Response

Ensuring that a robust information assurance and 

security program is in place is still a challenge to 

the Department. Such a program includes periodic 

risk assessments; security awareness training; 

security policies, procedures, and practices, as 

well as tests of their effectiveness; procedures 

for addressing deficiencies and for detecting, 

reporting, and responding to security incidents and 

privacy data breaches; and ensuring the continuity 

of operations.

The Department also faces the challenge 

of ensuring that privacy protections are not 

compromised by advances in technology.

One of the major challenges identified last year 

was protection of DoD information in the hands 

of contractors and the appropriate response to 

data breaches involving both privacy protected 

data, such as personally-identifiable information, 

and sensitive but unclassified information, such as 

contractor proprietary information. 

The Department made little improvement during 

the course of FY 2007 in its information assurance 

and security posture. Unresolved issues now are 

exacerbated by the recent losses of privacy and 

sensitive but unclassified data, and the lack of clear 

DoD policy regarding protection of such data and 

the reporting of incidents regarding its compromise. 

Of particular concern is protection of DoD 

information in the hands of contractors, to include 

all members of the Defense Industrial Base (DIB).

The Department has recognized these challenges 

and initiated cooperative efforts with the Directors 

of National Intelligence and the National Institute of 

Standards and Technology. These efforts establish 

a common set of information security controls, risk 

management framework, and security certification 

and accreditation process that can meet the needs 

of federal agencies managing and operating 

both national security and non-national security 

systems. Additionally, it has initiated outreach 

efforts to members of the Defense Industrial Base to 

improve identification of and response to instances 

of data breaches pertaining to DoD information in 

the hands of contractors. These efforts should be 

expanded and accelerated.

The Department has moved aggressively to address 

DIB information assurance (IA) vulnerabilities. 

Beginning in April 2007, DoD working groups 

developed a strategy to address DIB IA that was 

presented to the Deputy Secretary of Defense (DSD) 

in July.

At DSD direction, DoD reached out to industry 

under the DIB sector coordinating committee of 

the Critical Infrastructure Partnership Advisory 

Council (CIPAC) and has developed a concept of 

operations for threat information sharing, incident 

reporting and response and damage assessments. 

In addition, the CIPAC DIB working groups have 

developed an IA standard built on guidance 

published by the National Institute of Standards 

and Technology. This DoD/industry effort is 

working under an aggressive schedule to implement 

changes needed to address IA in the DIB.

The Department also is publishing updated 

guidance that explicitly addresses certification 

and accreditation of information systems operated 

by contractors on behalf of the Department, as 

required by the Federal Information Security 

Management Act of 2002. Additionally, in 

July 2007 the Department issued a policy 

memorandum requiring that all unclassified DoD 

information not cleared for public release that is 

stored on mobile computing devices (e.g., laptops) 

or removable storage media (e.g., thumb drives) 

be encrypted. The policy applies to supporting 

contractors as well as DoD organizations.

In May 2007, DoD revised and reissued the DoD 

Directive and Regulation, both entitled DoD Privacy 

Program. In those documents specific requirements 

were established to ensure the protection of 

personally identifiable information (PII) throughout 

the DoD including applicability to contractors. The 

regulation described specific reporting requirements 

to agency heads, the Defense Privacy Office and 

the US-Computer Emergency Response Team at the 

Department of Homeland Security. The requirement 

to notify individuals of the loss, theft or compromise 

previously directed by a DEPSECDEF Memo dated 

July 15, 2005 was incorporated into the regulation 

and included a sample notification letter.

In May 2007, OMB issued a memorandum 

“Safeguarding Against and Responding to Breaches 

of Personally Identifiable Information” requiring 

establishment of new policies to address safety and 

security measures to instill safeguards to prevent a 

breach. While DoD has adopted policies in many 

of the areas addressed, new requirements were 

established to augment, and thereby strengthen 

current agency policies.

The OMB Memo included new requirements to 

inform and train persons with access to PII. New 

training policies include specific focused training to 

managers as well as others in the workforce as a 

prerequisite to system/network access, and annual 

refresher training followed by signed certification of 

awareness by individuals.

Agencies were directed to review and reduce the 

volume of PII. DoD components were required to 

establish plans for the systematic review of holdings 

of PII to determine that such holdings are accurate, 
105 Section 3: Other Accompanying Information Department of Defense Agency Financial Report 2007

4. Information Assurance, Security and Privacy

A. IG Summary of the Challenge B. IG Assessment of Progress C. Management’s Response

relevant, timely, and complete, and to reduce them 

Agencies were directed to review and reduce the 

volume of PII. DoD components were required to 

establish plans for the systematic review of holdings 

of PII to determine that such holdings are accurate, 

relevant, timely, and complete, and to reduce them 

to the minimum necessary. Also included was 

direction to reduce the use of the Social Security 

number when found to be unnecessary. Plans for 

addressing these reviews were incorporated in 

the annual reporting requirement of the Federal 

Information Security Management Act for 2007 

and are ongoing. 

The DoD established and published new privacy 

policy for compliance by the DoD Components 

with the OMB Memo in a September 21, 2007 

Memo signed by the Director of Administration and 

Management. The new policies are applicable 

to all DoD personnel including contractors and 

business partners.

The DoD has taken constructive steps through 

the development of new policies and reporting 

requirements to safeguard PII in its possession to 

prevent loss, theft or compromise. With these 

new policy initiatives and increased individual 

and organization awareness, safeguarding and 

protection of PII and other sensitive information to 

prevent loss, theft or compromise will continue to 

improve.

5. Health Care

A. IG Summary of the Challenge B. IG Assessment of Progress C. Management’s Response

The DoD Military Health System must provide 

quality care for approximately 9.1 million eligible 

beneficiaries within fiscal parameters while facing 

growth pressures, legislative imperatives, and 

inflation that make cost control difficult in both the 

public and private sectors. The DoD challenge is 

magnified because the Military Health System’s 

primary mission is to provide health care support 

for the full range of military operations. Part of the 

challenge in delivering health care is combating 

fraud. Health care fraud is among the top five 

categories of criminal investigations; currently 

representing approximately 8 percent of the open 

cases of the Defense Criminal Investigative Service.

A major challenge to the Department is sufficient 

oversight of the growing cost of health care for 

its beneficiaries. The increased frequency and 

duration of military deployment further stresses 

the Military Health System in both the Active and 

Reserve Components. The DoD budget for health 

care costs was approximately $40 billion in 2007, 

including $21.9 billion in the Defense Health 

Program appropriation, $6.5 billion in the Military 

Departments’ military personnel appropriations, 

$0.4 billion for military construction, and 

$11.2 billion for contributions to the DoD 

Medicare-Eligible Retiree Health Care Fund to 

cover future costs of health care for Medicareeligible retirees, retiree family members, and 

survivors. Increasing health care benefits provides 

additional pressure to manage and contain costs. 

The Department is scheduled to transition to the next 

generation of TRICARE contracts during FY 2008. 

The DoD Military Health System has been moving 

forward on improving health care while attempting to 

control costs. The Military Health System has made 

progress in implementing new TRICARE contracts. 

The current contracts provide incentives for customer 

satisfaction and include the managed care support 

contractors as partners in support of medical readiness. 

The Military Health System continues to work with the 

contractors to refine the contracts with the ultimate 

goal of improving readiness and the quality of care. 

Lessons learned are being used to implement the next 

set of contracts, with formal acquisition scheduled to 

commence this fall when the request for proposals 

will be issued. It appears unlikely that DoD will 

obtain authority on the use of federal ceiling prices for 

pharmaceuticals in the near future, a process that would 

allow the Military Health System to realize millions 

of dollars in savings annually in pharmacy costs. 

However, DoD is making headway in economizing 

on pharmacy costs by implementing use of generic 

drugs and promoting use of the TRICARE Mail Order 

Pharmacy system.

The Medical Readiness Review has been completed. It 

was created to assess the baseline medical capabilities 

required to support the warfighter during peacetime and 

to assess the surge capabilities required for wartime. 

The Review evaluated medical personnel currently 

available, the cost of those personnel, and strategies 

necessary to supply those capabilities. It also reviewed 

wartime medical force requirements and compared 

those requirements to the current force structure, looking 

for gaps and redundancies. The Review recommended 

aligning medical support with the growing movement
106 Department of Defense Agency Financial Report 2007 Section 3: Other Accompanying Information

5. Health Care

A. IG Summary of the Challenge B. IG Assessment of Progress C. Management’s Response

The Department’s challenge is how to oversee the 

growing cost of health care for military members 

and to effectively transition to the next generation of 

TRICARE contracts.

Maintaining medical readiness continues to be a 

challenge. 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 reservists medically ready to 

deploy continues because of the frequency and 

duration of Reserve deployments. In addition, 

transitioning wounded, ill, or injured Service 

members to post-deployment care will continue to 

grow as a challenge while the Global War on 

Terror, Operation Iraqi Freedom, and Operation 

Enduring Freedom continue.

As with most Department functions, the Military 

Health System continues to face the challenges 

of increased joint operations. For example, the 

number of wounded warriors associated with 

Southwest Asia and other such conflicts significantly 

impacts the health care resources within the 

Department and can result in such issues as the 

conditions that were raised at Walter Reed Army 

Medical Center. And another related challenge 

to medical readiness are the issues inherent in 

providing efficient processes for post-deployment 

health care and benefits to severely injured and 

ill Service members. The Department needs to 

improve the medical care and benefits transition 

program to achieve a streamlined, transparent 

process as wounded warriors move from the 

DoD system to the Department of Veterans Affairs’ 

system.

Information assurance relating to sensitive medical 

information continues to be a challenge in the 

health care community. Episodes of potential 

exposure of electronic patient information during the 

year demonstrate the challenge to maintain security 

and privacy. Also, expanding automation efforts, 

including the transition from paper to electronic 

patient records, increases the exposure of sensitive 

patient information to inadvertent or intentional 

compromise. Maintaining information operations 

that ensure the protection and privacy of data will 

continue to grow as a challenge.

toward joint capabilities and recommended improving 

the medical planning process. The policies, techniques, 

and tools developed during the Review are now 

being imbedded within the system to determine future 

optimal force structure in a constantly changing threat 

environment. The DoD continually will reassess the 

results of the Review against the ever changing and 

expanding medical missions facing the Department at 

war and in support of homeland security contingency 

planning.

Disparities in the transition of health care and benefits 

are easily identified, yet actionable solutions are difficult 

to implement and streamline. On a positive note, 

DoD’s response to Traumatic Brain Injury and mental 

disorders, such as Post Traumatic Stress Disorder, is 

improving significantly—but much effort still is required 

to help Traumatic Brain Injury patients.

The Department established the Force Health Protection 

Quality Assurance Program to ensure that the health of 

Service members, as well as applicable DoD civilian 

and contractor personnel, is monitored, protected, 

sustained, and improved effectively across the full 

range of military activities and operations. Although 

the Military Health System has tools available for 

commanders to screen those pre-deployed, deployed, 

and post-deployed, and to assist the deployed 

reservists’ and guardsmen’s family members, the 

challenge of preparing reservists and guardsmen 

medically for deployment will go on as the Global War 

on Terror, Operation Iraqi Freedom, and Operation 

Enduring Freedom continue. 

Recent reports in the press on problems associated 

with post-deployment transition to care for wounded 

Service members has resulted in many reviews internal 

and external to the DoD including the President’s 

Commission on Care for America’s Returning Wounded 

Warriors. The President’s Commission made several 

recommendations focusing on ways to better serve the 

multiple needs of injured service members and their 

families; better support the wounded warriors in their 

recovery and return to military duty or their communities; 

and simplify the delivery of medical care and disability 

programs. In addition, the Congress provided 

$300 million for research and $600 million for care 

of trauma and serious injuries, including traumatic and 

other brain injuries. Implementing the recommendations 

resulting from the reviews will be core to the 

Department’s business this coming year.

The DoD continues to progress in sharing electronic 

medical records with the Department of Veterans 

Affairs. Under the auspices of the American Health 

Information Community, the DoD and the Department 

of Veterans Affairs are partnering on building a Joint 

Inpatient Record to complement existing outpatient 

records systems.

Implementing recommendations resulting from the 

2005 Base Realignment and Closure process will 

continue to be a challenge for the near future. 

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.

The Military Health System is facing a major challenge 

in overseeing the implementation of the 2005 Base 

Realignment and Closure recommendations and 

has begun the multi-year transition and acquisition 

process of improving capability and access to care 

in two major and several minor markets. Realignment 

recommendations for the National Capital Area and 

San Antonio regional markets are examples of DoD’s 

efforts to exploit joint medical opportunities as they 

transition to new facilities. 

Additionally, the Military Health System is ready to

Consistent with BRAC law and the 2005 

Quadrennial Defense Review (QDR) Medical 

Roadmap, DEPSECDEF has established a 

Joint Task Force to (1) ensure the effective 

and efficient delivery of world-class military 

healthcare within the NCR Tricare Sub-region 

(JOA) using all available military healthcare 

resources within this JOA, and (2) oversee 

the consolidation and realignment of military 

healthcare within the JOA in accordance with 

the BRAC.
107 Section 3: Other Accompanying Information Department of Defense Agency Financial Report 2007

5. Health Care

A. IG Summary of the Challenge B. IG Assessment of Progress C. Management’s Response

embark on a change in governance. The Department 

completed various studies of a unified medical 

command. Using those studies and recommendations 

made by the Defense Business Board, the Department 

decided on an incremental approach to increasing 

joint governance. The Department is exploring the 

opportunities provided by the 2005 Base Realignment 

and Closure recommendations as well as establishing 

a joint medical education and training center. In 

addition, the Department also is looking into bringing 

support functions such as finance, logistics, information 

technology, facilities, human capital management, 

and medical research and development under joint 

governance in a combined headquarters. These 

functions would serve as corporate assets and the 

Military Health System could potentially enhance 

medical readiness while gaining efficiency and 

economy of scale.

Summary of Financial Statement 

Audit and Management Assurances

The Federal Managers’ Financial Integrity Act (FMFIA)

requires Federal agencies to assess the effectiveness of

internal management controls for program, operational, and

administrative areas as well as accounting and financial

management. Internal management controls are the

organization, policies, and procedures that are considered

the tools that help program and financial mangers achieve

results and safeguard the integrity of their programs. The

program strengthens integrity and accountability within

programs and operations, and:

•	 Is critical for good government

•	 Demonstrates responsible stewardship over assets and

resources

•	 Promotes high-quality, responsible leadership

•	 Enhances the sound delivery of services to customers

•	 Maximizes desired program outcomes.

The Department conducts its assessments of the internal

management controls under a formalized program

conducted throughout the Department to include forwarddeployed units such as the Multi-National Forces - Iraq. 

Using assessments according to the Office of Management

and Budget Circular A-123, “Management’s Responsibility

for Internal Control,” as the basis, the Department prepared

the FY 2007 Annual Statement of Assurance (presented in

the Management’s Discussion and Analysis section of this

report). The Department asserts that all Components have

reported to the Secretary their individual statements of

assurance over internal control. 

The Department’s internal control program is divided into

two main processes: 

1.	 The overall statement of assurance that covers the

effectiveness of internal management controls for

all functions and processes except for the financial

reporting.

2.	 The statement of assurance over financial reporting

which covers the effectiveness of internal management

controls as prescribed by Appendix A of

Circular A-123.

The Department has 34 entities required to report including

(3) Military Departments, (9) Combatant Commands,

(1) Joint Staff, (1) Office of the Secretary of Defense,

(1) Office of the Inspector General, (18) Defense Agencies,

and and (1) Department Financial Reporting Senior

Assessment Team. Components are required to conduct a

robust programmatic approach to establishing and assessing

internal management controls for the overall operations

with the Component heads annually providing assurance to

the Secretary of Defense. Only specified Components are

also required to include financial reporting assurance. The

Department uses these feeder statements as the basis for the

Department’s Statement of Assurance. The Department has

dramatically reduced the number of outstanding material

weaknesses since fiscal year 2001, by 84 percent from

116 material weaknesses to 19 in fiscal year 2007. The

percentage of material weaknesses resolved rose from

21% in fiscal year 2006 to 34 percent in fiscal year 2007.

The Department reports several types of weaknesses. Table

1 shows the material weaknesses in financial statement

reporting as identified by the Department of Defense

Inspector General, who audits the annual financial

statements. Table 2 shows management self-identified

material weaknesses. Table 2a identifies financial reporting

weaknesses, Table 2b identifies overall material weaknesses,

and Table 2c identifies system nonconformances identified

by the Department through its internal control process. 
108 Department of Defense Agency Financial Report 2007 Section 3: Other Accompanying Information

Details about each weakness are presented in expanded

tables available at http://www.defenselink.mil/comptroller/

afr/fy2007/fy07afrsection3fmfia.pdf. Table 2d summarizes

the Department’s compliance with the Federal Financial

Management Improvement Act of 1996.

The Department-identified weaknesses fall into three

categories:

•	 Section 2 Financial Reporting Material Weaknesses: 

Financial reporting material weaknesses are identified

as materially affecting the Department’s financial

reporting identified under the oversight of the DoD

Senior Assessment Team during the limited assessment

of internal controls over financial reporting. The

Department is using an incremental approach in

complying with OMB Circular A-123, Appendix A. In

fiscal year 2007, the assessments conducted include:

fund balance with Treasury, investments, accounts

receivable, inventory and operating materials and

supplies, real property, military equipment, accounts

payable, Federal Employees’ Compensation Act

Liabilities, environmental liabilities, Medicare-eligible

Retiree Health Care Liabilities, and appropriations

received. 

•	 Section 2 Overall Operations Material Weaknesses: 

Overall operations material weaknesses materially

affect internal management controls usually affecting

multiple Department Components for all functions

except financial reporting weaknesses unless those

financial weaknesses were identified through

assessments which were not under the oversight of the

Department’s Senior Assessment Team. At this time,

only one material weakness, general personal property,

is functionally part of the financial reporting, but it is

included in the overall material weakness category

because the assessment did not fall under the oversight

of the Senior Assessment Team. 

•	 Section 4 System Nonconformance Material 

Weaknesses: System nonconformance material

weaknesses are identified as systems that nonconform

with Government-wide requirements such as the

Federal Financial Management Improvement Act

as prescribed by OMB Circular A-127, “Financial

Management Systems.” The Department is reporting

one weakness that covers the entire pervasive

problems identified with system nonconformance.

DoD Reportable Conditions are weaknesses identified as

materially affecting only one Department Component unless

the weakness is so pervasive that it is deemed material

to the Department as a whole. Reportable conditions, as

prescribed in the OMB Circular A-123, are not reported

in the Statement of Assurance, but are tracked internally

for correction. The Department is reporting five material

weaknesses in overall operations as being reassessed to

reportable conditions in fiscal year 2007.

The tables below summarize the results of the fiscal

year 2007 financial statement audit and the results of

management’s assessments of the Department’s internal

control process. Links in tables 2b, 2c, and 2d will take you

to specific details on each weakness. 

1

 In accordance with OMB guidance, the Statement of Financing is a note to the financial statements, Reference Note 21.

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 Elimination 1 1

6 Operating Materials and Supplies 1 1

7 Statement of Financing 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 12 1 0 0 13
109 Section 3: Other Accompanying Information Department of Defense Agency Financial Report 2007

Table 2a. Summary of Management Assurances

Effectiveness of Internal Control over Financial Reporting (FMFIA Section 2)

Statement of Assurance No Assurance

Material Weaknesses (information

deemed necessary for clarification)

Ref

Table 1

Beginning

Balance New Resolved Consolidated Reassessed Ending

Balance

1) Valuation of Property Plant and

Equipment -Military Equipment 11 1 1

2) Real Property Assets 11 1 1

3) Environmental Liabilities 3 1 1

4) Health Care 1 1

5) Fund Balance with Treasury

(includes reported problems with

unsupported accounting entries)

10 & 2 1 1

6) Accounts Receivable 13 1 1

7) Inventory Valuation 12 1 1

8) Operating Materials and Supplies 6 1 1

9) Accounts Payable (includes reported

problems with eliminations) 1 & 5 1 1

Total Financial Reporting Material

Weaknesses 5 4 0 0 0 9

Table 2b. Summary of Management Assurances

Effectiveness of Internal Control over Overall Operations (FMFIA Section 2)

Statement of Assurance Qualified

Overall Material Weaknesses

(information deemed necessary for

clarification)

Ref

Table 1

Beginning

Balance New Resolved Consolidated Reassessed Ending

Balance

1) Ending Balance Adjustments at

Defense Finance and Accounting

Service

1 1 0

2) Accounts Receivable

Noncompliance at Defense

Finance and Accounting Service

1 1 0

3) Foreign Military Sales Authority

(consolidated into Overall Operations

 Material Weakness #19)

1 1 0

4) Unsupported Adjustments at

Defense Logistics Agency

(consolidated into Financial Reporting

 Material Weakness #9)

1 1 0

5) Joint Training Exercises 1 1 0

6) Pharmaceuticals 1 1 0

7) Engineering Plan 1 1 0

8) Civilian Premium Payment 1 1 0

9) Information Technology Capital

Implementation 1 1 0

10) Systems Acquisition Program (consolidated into Overall Operations

 Material Weakness #27)

1 1 0

11) Status of Funds (reassessed as a

 DoD Reportable Condition) 1 1 0

12) Planning Program (reassessed as a

 DoD Reportable Condition) 1 1 0

13) Force Readiness 1 1 0

14) Program Inefficiencies 1 1 0

15) Inaccurate Accountability of

Equity (reassessed as a DoD

 Reportable Condition)

1 1 0

Table 2. Summary of Management Assurances
110 Department of Defense Agency Financial Report 2007 Section 3: Other Accompanying Information

Table 2b. Summary of Management Assurances

Effectiveness of Internal Control over Overall Operations (FMFIA Section 2)

Statement of Assurance Qualified

Overall Material Weaknesses

(information deemed necessary for

clarification)

Ref

Table 1

Beginning

Balance New Resolved Consolidated Reassessed Ending

Balance

16) Lack of Policy (reassessed as a

DoD Reportable Condition) 1 1 0

17) Foreign Military Sales Export

Controls 1 1 0

18) Foreign Language Inadequacies (reassessed as a DoD Reportable

 Condition)

1 1 0

19) Department of Defense Financial

Management Systems and

Processes (includes reported

 problems with unsupported

 accounting entries, reconciliation of

 net costs of operations to budget, and

 unauditable financial statements)

2,7,8,

& 9

1 1

20) Management of Information

Technology and Assurance 1 1

21) Personal Property (General Personal

 Property which includes reported

 problems with the cost of DoD

 property and material in the

 possession of contractors)

11 & 4 1 1

22) Personnel Security Investigations 1 1

23) Real Property Infrastructure 1 1

24) Government Card Program 1 1

25) Inventory Valuation (reassessed and

 moved to DoD Financial Reporting

 Material Weakness # 7)

1 1 0

26) Non-Department of Defense

Contracts 1 1 0

27) Contracting 1 1

28) Procurement Reporting 1 1 0

29) Accounts Payable (reassessed and

 moved to DoD Financial Reporting

 Material Weakness # 9)

1 1 0

30) Procurement Data 1 1

31) Interagency Acquisition and

Potential Anti-Deficiency Act Violations 1 1

Total Material Weaknesses for

Overall Operat ions 29 2 12 3 7 9

Table 2c. Summary of Management Assurances

Conformance with Financial Management System Requirements (FMFIA Section 4)

Statement of Assurance No Assurance

Material Weaknesses (information

deemed necessary for clarification)

Ref

Table 1

Beginning

Balance New Resolved Consolidated Reassessed

Ending

Balance

1) Department of Defense Financial

Management Systems and

Processes (includes reported problems

 with unsupported ac counting entries,

 reconciliation of net costs of operations

 to budget, and unauditable financial

 statements)

2,7,8,

& 9

1 1

Total System Conformance Material

Weaknesses 1 0 0 0 0 1

Total FMFIA Weaknesses 35 6 12 3 7 19
111 Section 3: Other Accompanying Information Department of Defense Agency Financial Report 2007

Table 2d. 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

Improper Payments Information Act 

Reporting

The Improper Payments Information Act (IPIA) of 2002, as

implemented by the OMB Circular 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. The

Department’s FY 2007 review did not identify any programs

or activities at risk of significant erroneous payments in

accordance with OMB criteria (programs with erroneous

payments exceeding both $10 million and 2.5% of

program payments). However, based on the large volume

of transactions or high dollar amounts, the following five

programs are reportable in FY 2007: (1) Military Health

Benefits, (2) Military Pay, (3) Civilian Pay, (4) Military

Retirement, and (5) Travel Pay. Improper payment estimates

for these programs are presented in the table below. 

Additionally, Commercial Pay information is included in

Section V, Recovery Audit.

FY 2007 Estimated Improper Payments

(dollars in millions)

Program Estimated $ Estimated %

Military Health Benefits $ 156 2.00 %

Military Pay $ 370 0.51 %

Civilian Pay $ 75 0.26 %

Military Retirement $ 49 0.13 %

Travel Pay $ 44 1.00 %

I. Risk Assessment

The Department’s risk assessments for each of the programs

identified above addressed the effectiveness of internal

controls in place to prevent improper payments (such as

prepayment reviews) as well system weaknesses identified

internally or by outside audit activities. While the

Department’s improper payment percentages are extremely

low, numerous pre- and post-payment controls further

minimize and eliminate improper payments. The following

paragraphs summarize the processes in place and the results

of survey assessment reviews.

II. Statistical Sampling Process

The Department uses random sampling methods designed

to meet or exceed the OMB requirement of annual estimates

of improper payments with a 90% confidence interval (plus

or minus 2.5%). Details on these sampling processes can

be found at http://www.defenselink.mil/comptroller/afr/

fy2007/FY07AFRSection3IPIA.pdf.

III. Corrective Action Plans

(1) Military Health Benefits. The Department’s contracts

have had payment performance standards for military

health benefit claims processing in place for many years. 

Overpayments found in the audit process are projected

to the audit universe, and the managed care support

contractor is liable for the total amount. This contractual

design, combined with numerous prepayment and postpayment controls which effectively minimize improper

payments, helps to ensure the Government is not at risk

for improper payments in military health benefit payments. 

Additional discussion of these controls can be found

at http://www.defenselink.mil/comptroller/afr/fy2007/

FY07AFRSection3IPIA.pdf.

√CHECK IT

The Department of Defense leadership is keenly aware and actively involved in helping its managers and employees

understand that effective internal management controls are important to getting the job done right. The Department reminds

its personnel that the Defense mission cannot be accomplished by the warfighters alone; everyone has a job to do, and every

job is important. Internal management controls help ensure that what should happen does happen on a daily basis, but first

internal management controls must be in place, effective and used. To help draw the attention of the approximately

2.9 million employees in more than 140 countries, the Deputy Secretary of Defense kicked off an awareness campaign

known as, the Check It Campaign. The slogan states, “Check It. What gets checked, gets done.”

Details about the campaign may be found at http://www.defenselink.mil/comptroller/micp/03_check_it_campaign/

index.html
112 Department of Defense Agency Financial Report 2007 Section 3: Other Accompanying Information

(2) Military Pay. Reviews of military pay accounts for

FY 2007 resulted in projected improper payments of an

estimated $292 million (.4% of approximately $73 billion

in total military net pay). The majority (approximately

$271 million) are attributable to the Reserve and Guard

Components, due to inaccurate and untimely reporting of

entitlement data to the automated pay system. The two

most significant reporting discrepancies involve leave

accountability (Lump Sum Leave payments) and Basic

Allowance for Housing. A special review and subsequent

data extract of Active Duty in-service collections performed

at the recommendation of the IG revealed approximately

$78 million in additional improper payments. Therefore,

the total improper payment estimate for military pay,

including Active Duty collections and adjusting sample

results to preclude over-estimation, is approximately

$370 million (.51%) of net pay.

The Department has worked closely with the Active Duty

Components to develop metrics and track timeliness and

accuracy of pay entitlements. Senior leaders participate

in regular Pay and Personnel Council meetings to discuss

problem areas and seek solutions to mitigate discrepancies

causing improper payments. This partnership with the

Active Duty Components has improved pay entitlement

timeliness and accuracy. The Department is developing

Reserve and Guard performance metrics and goals to

improve accuracy and timeliness, which should help to

reduce improper payments.

(3) Civilian Pay. Reviews indicate improper payments

have decreased in civilian pay over recent years; however,

efforts to identify and reduce actions contributing to net pay

errors continue. For FY 2007, civilian pay account reviews

project an estimated $7.1 million (.02%) in annual improper

payments out of approximately $29 billion in net pay to

civilian employees. However, based on findings from the

special review of military pay collections, a similar review

was conducted for civilian pay accounts. This special

review and subsequent data extract of civilian in-service

collections revealed approximately $68 million in additional

improper payments. Therefore, the total improper payment

estimate for civilian pay, including collections and adjusting

sample results as needed to prevent over-estimation, is

approximately $75 million (.26%) of net pay. The improper

payments that resulted in collection actions are primarily

attributed to untimely and inaccurate reporting of time and

attendance, personnel actions, and pay allowances. The

Pay and Personnel Council serves as a forum to address

civilian pay problem areas and seek methods to mitigate

risks and reduce improper payments. Civilian pay metrics

and corresponding accuracy and timeliness goals have been

developed at the Component level and serve as a baseline

for corrective action plans.

(4) Military Retirement. Payments to deceased retirees

continue to be the highest risk for improper payments

in military retired pay. Based on FY 2007 reviews, the

Department projected approximately $49 million in

improper payments for this program, with almost the entire

amount paid to deceased retirees. This represents an

overpayment rate of .13% of the estimated $37 billion in

annual military retirement payments. In certain situations,

payment to deceased retirees is unavoidable due to payment

cycle dates and the fact that notifying a payroll activity is

not likely to be the first action for next-of-kin at the time

of a retiree’s passing. A review of confirmed payments to

deceased retirees in FY 2007 indicated that the Department

recovered 93% of the overpayment amounts within 60 days,

demonstrating the effectiveness of controls within the retired

pay system once a retiree’s death confirmation is received

and processed for final disposition.

The Department’s control processes to prevent, identify,

and reduce overpayments to deceased retirees include a

series of periodic eligibility notifications, early detection

data mining efforts, and partnerships with other Federal

and state entities. The Department routinely compares

retired and annuity payroll master file databases to Social

Security Administration “deceased” records and periodically

compares records with the Office of Personnel Management

deceased files. The file comparisons are also conducted

with the Department of Veterans Affairs’ cemetery database

and with individual states with sizable retiree and annuitant

populations (e.g., Texas, California, and Florida). Retirees

identified as deceased in these comparisons must validate

their continued eligibility, or the accounts are suspended.

(5) Travel Pay. The Department performs monthly random

post-pay reviews of the Defense Travel System (DTS)

and regularly reports the results to management. Reports

address accuracy rate trends, over- and underpayment

dollar amounts, reasons for errors, and recommendations

for corrective actions to alleviate similar errors in the future. 

Results from reviews of trip records performed during

FY 2007 revealed an estimated $22 million (.91%) in

improper payments out of a travel settlement population

value of $2.4 billion in DTS disbursements.

The Air Force’s reviews of Reserve Travel System (RTS)

vouchers for FY 2007 resulted in an estimate of $19 million

(1.6%) in improper payments out of $1.2 billion in total

payments for the year. Erroneous payments identified in

RTS are sent to the appropriate Air Force bases for corrective

actions (including collections or supplemental payments). 

The Air Force bases confirm corrections are completed. 

Also, a report of commonly identified errors is sent to all Air

Force bases as a training tool. In the future, the Air Force

plans to process all vouchers through DTS.
113 Section 3: Other Accompanying Information Department of Defense Agency Financial Report 2007

The other Active Duty Components (Army, Navy, and

Marine Corps) primarily use the Integrated Automated Travel

System (IATS) for travel payments not processed through

DTS. Army payments are centrally processed through

IATS with the exception of two offices that process a

limited amount of travel payments. In FY 2007, Army IATS

payments were reviewed against DTS payments to identify

any duplicate payments between the two systems. The

Department is implementing a sampling and review process

for Army IATS in FY 2008 that meets the improper payment

reporting requirements. Additionally, the Department is

working with Navy and Marine Corps to ensure an adequate

sampling and review process is developed and implemented

in FY 2008 for their travel payments processed outside

DTS. It is worth noting, however, that DTS implementation

recently has been expanding exponentially throughout the

Department. As DTS functionality expands, Components

will continue transitioning away from the legacy systems.

Reviews of travel payment vouchers settled outside DTS for

the U.S. Army Corps of Engineers (USACE) in FY 2007

resulted in approximately $770 thousand (.5%) in improper

payments out of approximately $166 million in annual

payments. The majority of these improper payments are

due to traveler input errors and the failure of approving

officials to properly review the voucher prior to payment. 

During FY 2007, all travel approving officials completed

certification training. Additionally, the audit function will

be consolidated at the USACE Finance Center in FY 2008. 

This should ensure greater consistency and accuracy in the

audit of temporary duty travel vouchers.

IV. Program Improper Payment Reporting

The following table summarizes the Department’s improper

payment reduction outlook and total program outlays

(payments) from FY 2006 through FY 2010.

Improper Payment Reduction Outlook

FY 2006 FY 2007 FY 2008 Estimated FY 2009 Estimated FY 2010 Estimated

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

(Notes 1-4)

$8.7 0.96 $83.5 $7.8 2.0 $156.0 $8.9 2.0 $178.0 $9.4 2.0 $188.0 $8.9 2.0 $178.0

Military Pay

(Notes 5) $72.4 0.09 $65.9 $72.9 0.51 $370.0 $75.7 0.46 $349.6 $68.4 0.46 $314.6 $69.7 0.45 $313.4

Civilian Pay

(Notes 6-7) $33.2 0.05 $16.7 $29.2 0.26 $74.6 $29.7 0.25 $73.8 $30.8 0.24 $73.0 $31.8 0.23 $72.3

Military

Retirement $35.9 0.14 $49.4 $37.1 0.13 $48.7 $39.6 0.13 $51.2 $41.3 0.13 $51.9 $42.9 0.12 $52.3

Travel Pay

(Notes 8-9) $5.2 0.80 $29.4 $5.8 1.00 $43.6 $6.8 1.00 $68.0 $6.8 1.00 $68.0 $6.8 1.00 $68.0

IP – Improper Payments, B – Billions, M – Millions

Accompanying table notes can be found at http://www.defenselink.mil/comptroller/afr/fy2007/FY07AFRSection3IPIA.pdf.
114 Department of Defense Agency Financial Report 2007 Section 3: Other Accompanying Information

V. Recovery Auditing Reporting

The Department utilizes a number of different mechanisms

to prevent, identify, and collect improper payments, to

include recovery and contract auditing.

Recovery Auditing. The Department maintains an extensive

post-payment process for identifying improper payments. 

This process utilizes post-payment review techniques

performed both internally and by recovery auditing

contractors paid from the proceeds actually recovered. 

Agency-wide commercial payments result in a large volume

of transactions and high dollar values, so DoD maintains

vigilance to ensure payment accuracy, using various manual

and automated prepayment initiatives to prevent over- and

underpayments. 

Commercial pay overpayments identified for recovery are

attributable primarily to internal recovery audit efforts and

other means (including contract reconciliation and statistical

sampling). Selected high dollar value payments are

reviewed manually, and periodic independent reviews of

commercial payments improve improper payment detection,

correction, and prevention efforts. 

The Department’s Mechanization of Contract Administration

Services (MOCAS) system, used for contract payments,

processed 59% of the $320 billion in DFAS commercial

pay disbursements for FY 2007. Reviews of this system

accounted for 69% ($232.8 million) of the total

$338.4 million in improper commercial payments

identified by DFAS for FY 2007. Over half of this total was

underpayments. The Department disbursed approximately

$174 million in FY 2007 and $210 million in FY 2006 to

correct the identified underpayments. For FY 2006 and

FY 2007, MOCAS system reviews identified $66.2 million

in improper overpayments, of which $59.2 million has been

recouped. The Department also recouped $18.6 million in

commercial overpayments through contract recovery audits

since 1996.

In addition to the amounts identified through recovery

efforts, voluntary refunds received in FY 2006 and FY 2007

accounted for approximately $125 million in collections. 

The DFAS continues to work with the Defense Agencies to

improve the unsolicited refund process through improved

identification and classification of the root causes of

improper payments and take appropriate preventative

actions.

The Department also has utilized a recovery audit contractor

to identify for recapture overpayments made to hospitals that

failed to submit amended cost reports from calendar years

1992 through 1997. These reviews have helped to recoup

almost $23 million in overpayments.

The Department has recovered $30 million (99.9%) of the

overpayments identified by the USACE during FYs 2004

through 2007. These recoveries are a result of reviews of

payments, as well as vendor voluntary refunds. The two

programs with the most identified overpayments pertain to

military leases and utility payments. The USACE manages

the Military Lease Program for all military services. When

leased property is sold or leases are terminated without

timely notifications, extra payments may be made. The

USACE helps correct the error and notifies the Military

Service. The USACE also manages the utility payments for

the Department. When there is a merger or acquisition of

utility companies, payments may be made before USACE

is aware of changes to the payee information. To reduce

the likelihood of these errors, USACE monitors the news for

pending/new acquisitions and mergers of utility companies. 

Recovery Audit Activ ity

(amounts in million s)

Departmental

Recovery Audit

Totals (Note 1)

DFAS Agency-wide

Commercial

Payments (Note 2)

Mil itary Health

Benef its Recovery

Audit Contractor

Amount Subject to Review for FY 2007 Reporting $189,300 $189,300 $0

Actual Amount Reviewed and Reported (FY 2007) $189,300 $189,300 $0

Overpayment Amounts Identified for Recovery (FY 2007) $24.6 $24.6 $0

Amounts Recovered (FY 2007) $19.6 $18.9 $0.7

Overpayment Amounts Identified for Recovery (Prior Years) $65.9 $41.6 $16.1

Amounts Recovered (Prior Years) $69.6 $40.6 $20.8

Cumulative Amounts Identified for Recovery (FY 2007 and Prior) $90.5 $66.2 $16.1

Cumulative Amounts Recovered (FY 2007 and Prior) $89.2 $59.5 $21.5

Note 1: The Department recovery audit totals include $8.2 million in prior year recoveries ($6.3 million in FY 2004 and $1.9 million in FY 2005) from a recovery audit contract that concluded in FY 2005.

Note 2: The $189.3 billion represents the total dollar value of disbursements (payments) in the MOCAS system, which includes 59% of the dollars disbursed by DFAS for commercial pay. There were $59.1 million in overpayments and $173.7 million in 

underpayments reported for MOCAS. Underpayments are not subject to recovery action. In accordance with IG recommendations, the identified recoveries do not include voluntary repayments of overpayments from vendors (these amounts were included in 

reporting in prior years). Cumulative amounts reflect totals from FYs 2006 and 2007, since detailed information on collections by type (to exclude voluntary repayments) is not readily available for FY 2005 and prior.
115 Section 3: Other Accompanying Information Department of Defense Agency Financial Report 2007

Additionally, many major companies now notify the USACE

and the customer directly. Queries of related USACE

databases help ensure records are modified promptly upon

receipt of change notifications.

The Department of the Navy, Office of the Chief Information

Officer, conducted a pilot recovery audit in FY 2006 on a

sample of Navy telecommunications invoices. The results

of the pilot indicated that a full recovery audit initiative

might deliver a number of benefits to the Navy and assist

in the ongoing implementation of its Telecommunications

Management and Action Plan. A recovery audit contractor

began work in early calendar year 2007 to examine all

local, long distance, and data-related telecommunications

costs. The program currently remains in its initial stages

and no funds yet have been recovered or identified as

recoverable.

Contract Auditing. The Defense Contract Audit Agency

(DCAA) routinely performs billing system audits at major

contractors (e.g., contractors with a substantial amount

of flexibly priced contracts and fixed price contracts) to

determine the adequacy of the contractor’s billing system

internal controls and its compliance with those controls. 

This effort provides assurance to the Department that the

contract payment billings are based on costs incurred and

approved provisional billing rates. The DCAA also performs

paid voucher reviews at major contractors and special

purpose audits at contractor locations when an improper

payment risk factor is identified and neither a billing system

review nor a test of paid vouchers is planned.

VI. Accountability

Certifying officer legislation holds certifying and disbursing

officers accountable for government funds. In accordance

with Section 2773a of Title 10, United States Code,

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 in Volume V, Chapters 29 and 30, of the DoD

Financial Management Regulation.

VII. Infrastructure

The Department has the information and infrastructure

needed to reduce improper payments in each of the

improper payment program areas. The Department also is

implementing a Business Activity Monitoring service which

will employ the latest technology to increase the efficiency

and effectiveness of improper payment detection efforts for

commercial pay.

VIII. Barriers

The Department did not identify any program areas facing

statutory or regulatory barriers limiting corrective actions.

IX. Additional Comments

The OMB requested the Department identify Iraq improper

payment indicators. In support of this request, DFAS and

the USACE have conducted additional reviews on payments

for Iraq.

At the recommendation of the IG, DFAS initiated a review of

in-service collections in FY 2007. Findings confirmed that

these collections were related to initial improper payments. 

Therefore, special reviews of these populations are ongoing

for military pay and civilian pay collections. Results of these

new reviews are included in improper payments reporting.

Details about these special reviews can be found at

http://www.defenselink.mil/comptroller/afr/fy2007/

FY07AFRSection3IPIA.pdf.
Glossary of Terms & Useful Internet Links

Text

stars

wreath

arrows

Tail outline

wings

head

shield

Appendix
Acronym Full Title

BRAC	 Base Realignment and Closure

CBJ	 Congressional Budget Justification

DTS	 Defense Travel System

ETP	 Enterprise Transition Plan

FFMIA	 Federal Financial Management Improvement Act

FMFIA	 Federal Managers’ Financial Integrity Act

FIAR	 Financial Improvement and Audit Readiness

IATS	 Integrated Automated Travel System

IG	 Inspector General

IPIA	 Improper Payment Information Act

RTS	 Reserve Travel System

SFIS	 Standard Financial Information Structure

SFFAS	 Statement of Federal Financial Accounting Standards

Glossary of Terms

Link Topic/Subject

Internal links

http://www.defenselink.mil	 Main Department of Defense website, provides daily news

about activities and events, photographs, and links to all

Department of Defense websites.

http://www.dod.mil/comptroller/afr	 The Department’s Comptroller’s website, which includes the

FY 2007 Agency Financial Report and Highlights Document

and Performance and Accountability Reports.

http://www.dodig.osd.mil	 Office of the Inspector General, which contains information

about the OIG’s activities and reports.

http://www.defenselink.mil/comptroller Congressional Budget Justification February 2008

http://www.defenselink.mil/dbt The Department’s Business Transformation Agency. This

agency is responsible for transforming business operations

to achieve improved warfighter support while enabling

financial accountability across the Department.

http://www.defenselink.mil/qdr/report/Report20060203.pdf 	 Quadrennial Defense Review (2006)

External Links

http://www.results.gov	 Information about the President’s Management Agenda

http://www.expectmore.gov	 Information about the Program Assessment Rating Tool

http://www.whitehouse.gov/omb	 Office of Management and Budget’s website

http://www.gao.gov	 U.S. Government Accountability Office’s website

http://www.cfoc.gov	 Chief Financial Officers Council

http://www.firstgov.gov	 U.S. Government’s Official Web Portal

Useful Internet Links

119 Department of Defense Agency Financial Report 2007
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