OFFICE OF THE UNDER SECRETARY OF DEFENSE

(COMPTROLLER) / CFOP

FISCAL YEAR 2015

BUDGET REQUEST

UNITED STATES DEPARTMENT OF DEFENSE 

AGENCY FINANCIAL REPORT

FISCAL YEAR 2016
FOREWORD

Agency Financial Report 

This report, the United States Department of Defense (DoD) Agency Financial Report (AFR) 

for fiscal year (FY) 2016, provides an executive-level overview of the Department, including our

mission, organization, performance, highlights from the financial statements, internal controls and 

legal compliance, and challenges facing the Department. The Financial Section contains the 

agency-wide financial statements and notes, along with the Independent Auditor’s Report.

Additional and/or detailed information is available in the Other Information Section and 

Appendices to this report.

The Department has produced the AFR as an alternative to the Performance and Accountability 

Report (PAR). The AFR is intended to simplify and summarize information while providing 

transparent financial and performance reporting.

The Department will publish two additional required reports that provide varying details on 

financial and performance information:

Annual Performance Report 

Published with the Department’s annual budget submission in February 2017, the Annual 

Performance Report will provide a detailed description of performance measures and 

FY 2016 results.

Summary of Performance and Financial Information 

The Summary of Performance and Financial Information, published in February 2016 and 

available for viewing on the Under Secretary of Defense (Comptroller) public website, is a succinct 

summary of the FY 2016 financial and performance information previously reported in the AFR 

and APR, making the information more transparent and accessible to Congress, the public, and 

other key constituents.

A MV-22 Osprey with Marine Medium Tiltrotor Squadron 365 departs USS Bataan (LHD 5) during Amphibious 

Squadron Marine Expeditionary Unit Integration Training (PMINT). PMINT familiarizes Marines and sailors with 

amphibious operations and to safely execute embarkation training in preparation for future pre-deployment exercises. 

U.S. Marine Corps photo by Cpl. Hernan Vidana/Released
i

About the Department of Defense 

Agency Financial Report 

The DoD AFR is required by law, including the Government Management and Reform Act of 1994 

(GMRA) and the Chief Financial Officers Act of 1990. This report includes five main sections.

The Message from the Deputy Secretary of Defense, the Honorable Robert O. Work, introduces the 

Agency Financial Report. 

The Management’s Discussion and Analysis (MD&A) Section provides an executive-level overview 

of the DoD and our use of taxpayer resources in FY 2016. The MD&A describes the Department’s 

organization and strategic priorities, and provides summary-level reporting on DoD performance based on 

measurable objectives through the third quarter of FY 2016. The MD&A also includes a Financial 

Overview section that reports on FY 2016 financial highlights from the agency-wide consolidated financial 

statements, and updates on the Department’s financial management improvement initiatives. The MD&A 

section ends with an overview of the Department’s Managers’ Internal Controls program, business and 

financial management systems improvement strategy, and improper payments and recoveries program. 

The Agency-Wide Financial Statements Section, introduced by the Chief Financial Officer, includes 

the FY 2016 DoD financial statements and explanatory footnote disclosures, required supplementary 

information, and the Independent Auditor’s report on these statements and on the Department’s internal 

controls.

The Other Information Section reports detailed information on material weaknesses in internal 

controls, improper payments and recoveries, “Freeze the Footprint” real property, the Schedule of 

Spending, and DoD Inspector General-identified significant performance and management challenges 

facing the Department, along with DoD management responses.

The Appendices Section includes the Defense Security Cooperation Agency – Security Assistance 

Accounts financial statements and explanatory notes, accounts the Department executes on behalf of the 

Executive Office of the President. The Appendices section also includes a list of acronyms and 

abbreviations, useful websites, and an index of figures and tables included throughout this report.

The estimated cost of this report or study for the 

Department of Defense is approximately 

$281,000 in Fiscal Years 2016 - 2017. This 

includes $70,000 in expenses and $211,000 in 

DoD labor. 

Generated on 2016Nov18 RefID: 1-095B793
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U.S. Department of Defense Agency Financial Report for FY 2016 

Table of Contents 

iii 

Table of Contents

About the Department of Defense Agency Financial Report........................................................................ i 

Message from the Deputy Secretary of Defense ..........................................................................v

Management’s Discussion and Analysis

Department of Defense Overview ................................................................................................................. 1 

 Resources................................................................................................................................................ 5 

 Looking Forward .................................................................................................................................. 12

 Organization ......................................................................................................................................... 13 

Performance Overview ............................................................................................................................... 21 

Financial Overview ..................................................................................................................................... 27 

 Financial Highlights and Analysis........................................................................................................ 27 

 Financial Management Improvement Initiatives ................................................................................... 34 

 Financial Improvement and Audit Readiness Initiative ................................................................... 34 

 Financial Management Certification Program ................................................................................. 38

 Institutional Reform ........................................................................................................................ 39 

Internal Controls Overview ......................................................................................................................... 45 

Managers’ Internal Control Program .................................................................................................... 45 

 Statement of Assurance ........................................................................................................................ 47 

 Business and Financial Management Systems ..................................................................................... 52

 Improper Payment Reporting ............................................................................................................... 56 

Financial Section

Message from the Chief Financial Officer .................................................................................................. 58 

Principal Financial Statements and Notes ................................................................................................... 60 

Required Supplementary Stewardship Information .................................................................................. 132 

Required Supplementary Information ....................................................................................................... 134 

Independent Auditor’s Report .................................................................................................................. 143

Other Information 

Managers’ Internal Control Program Detailed Report .............................................................................. 155 

Improper Payment and Payment Recapture Programs Detailed Report ................................................... 178 

Freeze the Footprint .................................................................................................................................. 204 

Civil Monetary Penalty Adjustment for Inflation ..................................................................................... 205 

Schedule of Spending ............................................................................................................................... 206 

Inspector General’s Summary of Management and Performance Challenges .......................................... 208 

Appendices 

Appendix A: Defense Security Cooperation Agency – Security Assistance Accounts Financial Statements 

and Notes ........................................................................................................................... A-1 

Appendix B: List of Acronyms and Abbreviations................................................................................... B-1 

Appendix C: Useful Web Sites ................................................................................................................. C-1 

Appendix D: Index of Figures and Tables. ............................................................................................... D-1
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v

A MESSAGE FROM THE DEPUTY SECRETARY OF DEFENSE

I am extremely proud of our men and women in uniform and 

the civilians who support them in the critical mission of 

defending our great nation. We face no less than five complex 

strategic challenges – managing Russia, China, North Korea, 

Iran, and the continuing fight against extremist groups in the 

Middle East, North Africa, and across the globe. It is our 

responsibility to preserve collective defense and security, and to 

that end, we must ensure we maintain both a strong nuclear and 

conventional deterrence. In the face of these challenges, it is our 

duty to ensure that the American military is second to none. 

And, we must do so in a budget constrained environment. Doing 

that demands we make smart and often very tough choices on 

where and how we spend our limited resources.

This report summarizes how the Department has used 

taxpayer resources to accomplish our mission. It highlights the 

many challenges the Department faces to maintain its role as the global military leader. The report also 

provides brief updates on the Department’s continuing efforts to improve its financial management 

initiatives and resolve material weaknesses in business processes and systems to achieve its audit readiness 

goals.

Secretary Carter and I, along with the entire senior leadership of the Department, are focused on 

building a defense program that combines cutting edge technology with new ways of warfighting to ensure 

we always maintain a decisive edge over any adversary. The successful execution of a well-planned 

strategic defense program that strikes the proper balance between capacity, capabilities, and current and 

future readiness is dependent on the availability and the stability of the budget funding the Department 

receives.

I remain absolutely confident that we can accomplish the mission asked of us by our fellow Americans. 

That confidence stems from the one thing that never changes – the quality of our men and women in uniform 

and our DoD civilian employees. I remain convinced that we will always have an inherent advantage in 

our incredible people. It is our job to provide them with the most advanced gear and weaponry as well as 

training and support they need to dominate any adversary on any battlefield at any time.

I would encourage all concerned Americans to read this report. I am confident that they will come 

away with a new appreciation for the Department’s commitment to fiscal transparency, financial reporting 

and operational effectiveness.

Robert O. Work

Deputy Secretary of Defense
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FISCAL YEAR 2016

AGENCY FINANCIAL REPORT

MANAGEMENT’S

DISCUSSION AND 

ANALYSIS

UNITED STATES DEPARTMENT OF DEFENSE
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U.S. Department of Defense Agency Financial Report for FY 2016 

Management’s Discussion and Analysis

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MANAGEMENT’S DISCUSSION AND ANALYSIS

DEPARTMENT OF DEFENSE OVERVIEW

The mission of the Department of Defense (DoD) is to provide the military forces needed to 

deter war and to protect the security of our country. The Department is committed to protecting

the people of the United States, defending our national interests, and providing U.S. Military

with the resources to accomplish its mission.

Today, we are at an inflection point in the 

strategic landscape. After more than a 

decade-long focus on long-term counterterrorism 

and counterinsurgency campaigns, we must 

contend with a renaissance of great power 

competition, while continuing to counter threats 

posed by violent extremist organizations. The

advantages we have traditionally enjoyed are 

being challenged, and our margin of technological 

superiority is eroding through the rapid 

technological advancements enjoyed by both state 

and non-state adversaries. Others seek to

challenge international norms by operating just 

short of what the international system considers to 

be war.

It is said that security is like oxygen: when you 

have enough of it you pay no attention to it; but 

when you don’t have it, that’s all you can think of.

The Department maintains the finest fighting force in the world. The Department has an obligation

to ensure that the men and women who choose to serve are properly trained and equipped so they 

can provide that oxygen, the security, that allows for stability and prosperity for the American 

people and our allies.

The Department sets its strategic direction through the Quadrennial Defense Review (QDR), 

which was provided to Congress in March 2014. The QDR is a legislatively mandated report, 

issued every four years, which evaluates the threats and challenges to our enduring national 

interests. It is the key strategic document against which the Department’s priorities and requests 

for resources are aligned. The QDR, consistent with the President’s National Security Strategy, 

affirms the global leadership role of the United States. and sets a course that will help bring the 

military resources into balance over the next decade. The QDR outlines the Department’s

strategic priorities, which include: rebalancing our focus and our forces to the Asia-Pacific region

to preserve peace and stability; maintaining a strong commitment to security and stability in

Europe and the Middle East; and sustaining a global approach to countering violent extremists

Ash Carter

Secretary of Defense
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2

and terrorist threats, with an emphasis on the Middle East and Africa. It highlights the importance

of strengthening our alliances and partnerships globally.

The Asia-Pacific is a defining region for our nation’s future. Half of the world’s population

will live there by 2050. The progress enjoyed in this region since World War II has been

enabled by a peaceful security environment, which has been shaped by our enduring

presence and commitments. As our allies and partners continue to experience rapid social and

economic progress, we increasingly look to build their capacities to approach these global defense 

challenges together through a principled security network.

The rebalance to the Asia-Pacific remains a key component of the Department’s strategy.

Although the United States welcomes the rise of a China that is peaceful and a 

responsible player in international affairs, China’s actions in the South China Sea are

increasingly at odds with international norms and principles. Faced with North Korea’s

provocations, and its ballistic missile and nuclear programs, we are committed to maintaining

peace and stability on the Korean Peninsula and throughout the region. The Department will

maintain a robust footprint in Northeast Asia while enhancing our presence in Southeast Asia and 

Oceana.

Given our deep and abiding interests in a Europe that is whole, free, and at peace, Russian 

President Putin’s continued aggressive acts towards Ukraine and illegal annexation of Crimea are

unwelcome developments. The Department is working with U.S. allies and partners to

promote regional security as part of a strong and balanced approach to deter Russia’s aggression.

We are supporting Ukraine’s armed forces and have committed millions of dollars of

non-lethal materiel and assistance.

The North Atlantic Treaty Organization (NATO) remains a cornerstone of European

security. The last years have been significant in the history of the Alliance, given changing

dynamics in European security. We are helping NATO turn its attention to deterring an

increasingly aggressive Russia as well as addressing insecurity on NATO’s southern flank

after a long period of focus on Afghanistan. In light of these significant challenges, NATO

leaders have agreed to powerful steps: doubling the number of military exercises in the past

year, setting up new command centers, and establishing the Very High Readiness Joint Task

Force. The United States has continued to participate in military exercises throughout the

Baltic Republics, Poland, and other front-line states. In doing so, the United States and our allies

have upheld our commitment to collective self-defense.

The Middle East is undergoing a period of great social and political turmoil. The United 

States, with a coalition of allies and partners, is engaging in a campaign to degrade and defeat the

Islamic State of Iraq and the Levant (ISIL). Achieving a lasting defeat of ISIL requires a

“whole-of-government” effort, and of the nine lines of efforts that underpin the campaign, the

Department leads two: denying ISIL safe haven and building partner capacity. The Department’s

personnel remain committed to building the capacity of indigenous forces in both Syria and Iraq 

to counter ISIL. This is challenging to achieve, but ISIL’s lasting defeat requires these local
U.S. Department of Defense Agency Financial Report for FY 2016 

Management’s Discussion and Analysis

3

forces to prevail on the ground. We also continue to provide critical support to our partners in

the region and around the world in an effort to bolster their defenses and enable their activities

and operations aimed at countering ISIL. We are coordinating these efforts in the context of a

60-plus nation coalition.

In Afghanistan, the U.S. strategy is to continue building the capacity of the Afghan government 

as a reliable defense partner, and to protect U.S. national security interests in the region to ensure 

our gains are solidified. Afghanistan’s government is now fully responsible for the security of its 

people and is moving ahead on a reform agenda. President Obama announced that we will maintain 

a continued presence of up to 9,800 military personnel before drawing down to an authorized force 

level of 8,400 by January 2017. We will maintain our focus on training, advising, and assisting the 

Afghan National Defense and Security Forces (ANDSF) as part of the NATO-led Resolute Support 

Mission, as well as conducting a counterterrorism mission. The Department will continue to finance 

the sustainment and professionalization of the ANDSF of up to 352,000 personnel through 2017.

Although our long-standing problems with Iran are far from resolved, the nuclear deal agreed 

upon by the international community represents a detailed arrangement to prohibit Iran permanently

from obtaining a nuclear weapon. Although we welcome the positive conclusion of diplomatic 

negotiations, we will continue to hold Iran accountable for its actions while we ensure Israel’s 

qualitative military edge and work with our Gulf partners to make them more capable of defending 

themselves against external aggression.

The FY 2017 budget reflects recent strategic threats and changes that have taken place in Asia, 

the Middle East, and Europe. Aggressive Russian actions, terrorism by ISIL and others, and 

China’s island-building and claims of sovereignty in international waters all necessitate changes in 

our strategic outlook and in our operational commitments.

Addressing these challenges as part of DoD’s mission to defend the nation requires new and 

innovative thinking, new operational posture in strategic regions, and new and enhanced 

capabilities. As we confront rising international challenges, we are seizing opportunities, 

developing new operational concepts, pioneering and dominating technology frontiers, reforming 

the defense enterprise, and building the force of the future.

Against this backdrop of emerging challenges to U.S. national interests, the Department is

resetting and reconstituting the Joint Force after 15 years of war. The FY 2017 budget 

request strikes a prudent balance among the modernization of the Joint Force, its size, its readiness, 

and continues to keep faith with service members, their families and civilians. The FY 2017 

President’s Budget funding level will allow the Joint Force to respond to steady-state demand 

requirements, fulfill strategic obligations, and support the Services’ readiness recovery plans.

The Department continues to make key investments in the future force, with an emphasis

on restoring readiness, balancing the force, and achieving institutional reform. We are placing

a greater emphasis on research and development to help us maintain our competitive edge. We 

are also committing to the Department’s Third Offset Strategy that is designed to counter or offset 
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4

the technological advances of potential U.S. adversaries. In a time where many militarily relevant 

technologies are driven by the commercial sector, the Department will continue drawing from

the brightest innovators to find technologies that will give U.S. Military Forces an edge on the

battlefield of the future.

Finally, we must maintain full accountability and demonstrate that the Department is taking

effective action to make the best possible use of every taxpayer dollar. That means we must 

strive to manage the Defense enterprise efficiently and effectively, and reform our business and 

acquisition practices. If the trends hold, the geopolitical challenges ahead will only be more 

dynamic and fluid, and certainly no less challenging. The Department’s efforts are imperative to 

maintain readiness on all fronts for both the geopolitical challenges we see today, and for those to 

come.

 

Marines assigned to Bravo Company, Battalion 

Landing Team, 1st Battalion, 6th Marine Regiment, 

22nd Marine Expeditionary Unit (MEU), conduct a 

mass casualty training exercise aboard the 

amphibious assault ship USS Wasp (LHD 1) on July 

28, 2016. 22nd MEU, deployed with the Wasp 

Amphibious Ready Group, is conducting naval 

operations in the 6th Fleet area of operations in 

support of U.S. national security interests in Europe.

 Photo by Lance Cpl. Koby I. Saunders

A U.S. Marine Corps MV-22B Osprey tiltrotor aircraft 

with Marine Medium Tiltrotor Squadron (VMM) 266, 

Special Purpose Marine Air-Ground Task Force-Crisis 

Response-Africa (SPMAGTF-CR-AF), lands onboard the 

French amphibious assault ship BPC Dixmude (L9015) as 

part of bilateral training in the Gulf of Cadiz, Spain, Aug. 

6, 2016. The Dixmude served as a platform to assist 

SPMAGTF-CR-AF in maintaining their readiness by 

hosting carrier qualification training

 Photo by Lt. Cmdr. Florian Edus
U.S. Department of Defense Agency Financial Report for FY 2016 

Management’s Discussion and Analysis

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RESOURCES

FY 2016 budget reflected the Department’s attempt to fashion a coherent defense program 

with the proper balance between capacity, capabilities, and current and future readiness. The 

DoD’s FY 2016 discretionary budget authority of $580.3 billion, composed of $521.7 billion in 

the base budget and $58.6 billion in support of Overseas Contingency Operations (OCO). 

Figure 1 displays the DoD FY 2016 budget authority by appropriation. DoD priorities outlined in 

the 2014 QDR were sustained through programs and resources in the FY 2016 budget.

Key themes were:

• Seek a balanced force;

• Manage enduring readiness 

challenges;

• Continue to focus on institutional 

reform;

• Pursue investments in military 

capabilities;

• Provide for the people;

• Support overseas contingency 

operations.

Despite decreasing resources, the 

Department must continue to maintain its

decisive technological edge.

Seek a Balanced Force

The United States continues to face a rapidly 

changing security environment as warfare evolves across all domains. The Department must 

maintain ready forces with superior capabilities to deter potential adversaries and defeat attacks 

across full spectrum of conflict while addressing a wide range of security challenges. In addition, 

DoD must sustain robust investments in science, technology, research and development in areas 

most critical to meeting future challenges, including areas with the potential for game-changing 

advances.

As outlined in the January 2012 Defense Strategic Guidance and re-emphasized in the 

2014 QDR, the FY 2016 budget reflected the choices made to achieve a modern, ready, and

balanced force to meet the full range of potential military requirements. The U.S. Joint Force will 

be smaller and leaner, but more agile, flexible, ready to deploy, innovative, and technologically 

advanced. With the drawdown of U.S. Military commitments well underway in Afghanistan, the 

Army and the Marine Corps will no longer need to be sized to support the kind of large scale, 

long-term stability operations that dominated the past decade. However, as each Service reduces 

its end strength levels, the reductions are structured and paced to support surge, regeneration, and 

Figure 1. DoD FY 2016 Budget Authority

Totals may not agree due to rounding.
U.S. Department of Defense Agency Financial Report for FY 2016 

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6

mobilization capabilities needed for contingencies. Both the Army and the Marine Corps made 

significant progress toward achieving their targeted Active Component goals of 450,000 and 

182,000 end strength, respectively, while each of the other Services continue to balance and realign 

forces to meet global demands requiring slight increases in end strength (less than 2,000 per 

Service).

Reserve Components are an important element of the Total Force, and the Department is 

focused on optimizing the Active/Reserve force mix while sustaining readiness at appropriate 

levels. The reserves are trained, ready, and cost-effective forces that can be employed on a periodic 

operational basis while ensuring strategic surge capabilities for large-scale contingencies or other 

unanticipated national crises. Since the September 11 terrorist attacks, more than 933,000 Reserve 

Component members have been mobilized or served on active duty in support of OCO and 

27,000 reservists were active at the end of FY 2016. The National Guard and Reserves 

consistently demonstrate their readiness and ability to make sustained contributions to national 

security challenges.

Maintaining this balance is essential to fund the warfighting capabilities needed to maintain 

the Joint Force and to send U.S. personnel into combat with the best possible training and 

equipment.

Manage Enduring Readiness Challenges

The 2014 QDR highlighted the importance of and commitment to maintaining ready and 

capable forces. The Department continued initiatives started in the FY 2014 budget to transition 

from a force largely focused on current operations to one capable of meeting a broader mission 

portfolio. In FY 2016, U.S. Military Forces were postured globally to conduct counterterrorism, 

stability, and deterrence operations; maintain a stabilizing presence; conduct bilateral and 

multilateral training to enhance U.S. security relationships; and provide the crisis response 

capabilities required to protect U.S. interests. Readiness investments in training technologies;

force protection; command and control; and intelligence, surveillance and reconnaissance systems 

strengthened United States to stand as the most formidable military force in the world. The 

investments made in full-spectrum readiness focused on yielding a smaller but more ready and 

capable force.
U.S. Department of Defense Agency Financial Report for FY 2016 

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Continue to Focus on Institutional Reform

In FY 2016, the Department identified concrete, measurable management reforms in areas such 

as Major Headquarters Activities (MHA), Service Requirements Review Board (SRRB), Business 

Optimization, and Financial Improvement and Audit Readiness (FIAR). This collective effort is 

aimed at generating savings which can be reallocated to higher priority needs such as strengthening

the foundation and structure of our military and capabilities, and continuing to be careful stewards 

of taxpayer dollars.

In June 2015, the Department began work on the development of a consistent, defensible 

framework for MHA and a process for reliable tracking and reporting. The Deputy Secretary of 

Defense (DepSecDef) approved the framework in August 2015, and it was codified in the FY 2016 

National Defense Authorization Act (NDAA). The application of the revised MHA framework to 

the workforce continued throughout FY 2016 and its application to the workforce required 

collaboration across DoD Components and the development of business rules for consistency. 

Baselines were developed using FY 2016 as the base year, with application of the framework 

accomplished by organization. A phased approach for the completion of the FY 2016 baseline 

was employed across the Department.

The Department continues to seek opportunities to improve efficiency and reduce the cost of 

managing headquarters. In FY 2016, the SRRB conducted 20 Senior Review Panels, and reviewed 

the results of 50 organizations within the Fourth Estate. Through this effort the SRRB improved 

overall performance, strengthened business operations and achieved cost savings that can be 

transferred to higher priority needs.

U.S. Army Spc. Scarlett Mitchell, with U.S. Army Garrison Benelux, zeroes an M4A1 

carbine in the Training Support Center’s 25-meter indoor range, in Chièvres, Belgium, 

Aug. 24, 2016. 

U.S. Army photo by Pierre-Etienne Courtejoie
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The Department continues to improve business operations and governance over defense 

business systems. Measuring the net benefits ratio associated with discretionary development and 

modernization of Information Technology (IT) investments, DoD has currently identified 

$241.3 million in savings for Defense Programs over FY 2017-2021. These reviews allow the 

Department to understand and better manage its costs associated with database systems’ 

modernization and/or development across the Defense Business Mission Area. Furthermore, DoD 

enhances and implements financial policies and processes to streamline, simplify, and standardize 

the financial management business and systems environment to improve efficiencies and reduce 

costs for key end-to-end processes and data exchanges.

Pursue Investments in Military Capabilities

Better Buying Power (BBP) is the implementation of best practices to strengthen the 

Department's buying power, improve industry productivity, and provide an affordable, 

value-added military capability to the warfighters. Launched in 2010, BBP encompasses a set of 

fundamental acquisition principles to achieve greater efficiencies through affordability, cost 

control, elimination of unproductive processes and bureaucracy, and promotion of competition. 

The BBP initiatives also incentivize productivity and innovation in industry and government, and 

improve tradecraft in the acquisition of services. By placing stronger emphasis on innovation, 

technical excellence, and quality of products, the Services realized $6.8 billion in cost savings. 

Furthermore, the Space Launch Services achieved $4 billion in savings due to refined acquisition 

processes, and the Defense Contract Management Agency realized $225 million in savings

through processing time improvement.

The Department’s research and development efforts are conducted by government laboratories, 

nonprofit research institutions, and defense companies both large and small. The FY 2016 

resources included $12.5 billion in science and technology to support groundbreaking work in the 

Military Services, DoD laboratories and engineering centers across the country, and the Defense 

Advanced Research Projects Agency to develop and advance technologies and capabilities. These 

investments in technologically advanced weaponry are designed to yield a military force that 

achieves the nation’s security objectives and ensures that the United States remains a 

technologically superior global force to promote peace and security. Additionally, the Defense 

Innovation Initiative (DII) is a new Department-wide effort to identify and invest in unique ways 

to advance U.S. Military superiority, including investments, and incentivizing industry and 

government’s productivity and innovation in: 1) a long-range research and development program 

designed to identify new technologies and their uses; and push the envelope in new technologies 

like data science, biotech, cyber, and electronic warfare; 2) innovative leadership; 3) war-gaming; 

4) operational concepts; and 5) innovative business practices. Advancing undersea capabilities 

and developing new hypersonic missiles, artificial intelligence, autonomy and robotics, DoD 

continues to invest in new strategic approaches and capabilities to prevent and win conflicts against 

21st century threats.
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Moreover, DoD is investing in innovation by developing new partnerships with the private 

sector and technology communities across the country through collaboration of government and 

industry innovative technology experts that make up the Defense Innovation Unit-Experimental 

(DIUx). The Department directed $30 million in FY 2016 to non-traditional companies with 

emerging commercially-based technologies that meet the Department’s military needs, channeling 

resources into systems that will give future warfighters a battlefield advantage, and sustain 

continued pursuit of investments in military capabilities such as the F-35A, the latest addition to 

Air Craft Carriers (ACC’s) fleet of deployable and fifth-generation aircraft. The aircraft provides 

air superiority, interdiction, and suppression of enemy air defenses. It will provide pilots with 

unprecedented situational awareness of the battlespace that will be more extensive than any 

single-seat platform in existence.

Furthermore, FY 2016 resources advanced the Nation’s commanding lead in undersea 

capabilities by purchasing Virginia-class attack submarines over the next 5 years. Four of those 

submarines will be equipped with the versatile Virginia Payload Module. The Payload Module 

Staff Sgt. Nicholas Scheer, 788th Civil Engineer Squadron, explosive ordinance disposal technician briefs Geoff 

Daniels, Southwest Ohio Regional Representative for U.S. Sen. Sherrod Brown, on the capabilities of one of their 

robots during a tour of Wright-Patterson Air Force Base, Ohio, July 26, 2016. In addition to EOD, Daniels also visited 

the 88th Communication Squadron and other locations. 

U.S. Air Force photo by Wesley Farnsworth
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would increase the total number of torpedo-sized weapons carried by the Virginia-class design 

from an estimated 37 to 65 resulting in an increase of about 76 percent.

Provide for the People

The Department’s workforce, assigned or deployed worldwide, requires diverse talent from 

the lowest to highest grades and ranks. The Department’s commitment to a generous 

compensation package for those individuals willing to serve their country voluntarily is evidence 

in an examination of the annual budget request and demonstrate by the number of initiatives and 

programs that support their professional development and their personal and family lives. In 

FY 2016, approximately $139 billion supported over 2.5 million Active and Reserve members; 

another $250 billion was used for operations and maintenance costs.

Comprising nearly half of DoD’s budget, military and civilian personnel costs are the 

Department’s single largest expense category. To meet the needs of our diverse workforce and 

mission set, the Department provides not only highly competitive monetary compensation but also 

manages the Military Health System (MHS) and operates schools, grocery stores, restaurants, 

childcare facilities, and a myriad of other programs to support service members and their families 

worldwide. The MHS is a complex system that incorporates health care delivery, medical 

education, public health, private sector partnerships, and cutting edge medical research and 

development. The MSH provides health care for 9.4 million eligible beneficiaries including all 

service members, retirees and their families, dependent survivors, and certain eligible Reserve 

Component members and their families.

The Department is vigilant in its efforts to ensure these costs are appropriately balanced against 

the Department’s strategic goals. Specifically, the Department cannot allow its personnel costs to 

crowd out investments in the readiness and modernization that are essential to providing the 

training and equipment needed to accomplish the vast array of missions undertaken around the 

globe. Balancing resources is essential as the Department reshapes the forces needed to remain 

effective, and providing a robust pay and benefits package must be sustained to execute the 

Nation’s defense strategy.

Against the backdrop of a healthy and competitive military compensation package, the 

Department has done a significant amount of work to explore how it can balance the rate of growth 

in military pay, benefit costs, and individual compensation incentives in a way that is both 

responsible and fair. In FY 2016, Congress accepted a presidentially determined 1.3 percent basic 

pay raise versusthe 2.3 percent that would have occurred by operation of law. Congress authorized 

monthly basic allowance for housing rates to be set at 95 percent (versus 99 percent) of the median 

rental housing costs, phased in at 1 percent increments over 4 years.

Additionally, in the NDAA for FY 2016, Congress enacted the Blended Retirement System, a 

new retirement system for military members effective as of January 1, 2018. The system combines 

the traditional defined benefit of monthly retired pay with a defined contribution benefit through 

contributions to a member’s Thrift Savings Plan account. While all currently serving members 
U.S. Department of Defense Agency Financial Report for FY 2016 

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11

U.S. Army Staff Sgt. Leonard Sims, an infantryman assigned to the 2nd Battalion, 135th Infantry Regiment, Minnesota 

Army National Guard, provides security for Montenegrin soldiers with the 1st Infantry Unit, Montenegro Armed 

Forces, crossing a bridge during react to contact drills of exercise Immediate Response, at the Croatian Armed Forces 

training area in Slunj, Croatia, Sept. 12, 2016. Immediate Response is a U.S. Army Europe-led combined joint tactical 

field training exercise designed to build interoperability between NATO

U.S. Army photo by Staff Sgt. Opal Vaughn

are grandfathered under the current retirement system, those with fewer than 12 years of service 

as of January 1, 2018 will have the opportunity to choose whether to remain under the current 

system or opt into the Blended Retirement System. Members who join on or after January 1, 2018 

will automatically be covered by the Blended Retirement System. Although only 19 percent of 

entering military members today serve the full 20 years necessary to receive a retirement benefit 

under the current retirement system, under the Blended Retirement System, 85 percent of those 

who join will receive some form of retirement benefit if they serve at least 2 years.

The military life cycle is complex, dynamic, and key to military readiness. The Department 

must attract nearly 250,000 qualified new recruits to replenish the military workforce each year. 

Suicides and sexual assaults have also become major focus areas that require resources to combat. 

Despite global and fiscal challenges, the Department stands with service members, their families, 

retirees, and the civilian workforce. However, 15 years of war have taken a toll on the 

All-Volunteer Force. Multiple deployments with less respite between them, extensive use of the 

Guard and Reserves, and the force reductions that will take place over the next few years all 

contribute to a more complex and demanding environment. Declining budgets make it harder to 

reset the Force while sustaining the readiness needed for requirements such as deterring ISIL and 

responding to the Ebola outbreak. Caring for DoD’s people remains a top priority for the 

Department, Congress, and the Administration.
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Support Overseas Contingency Operations

The Department received $58 6 billion of Overseas Contingency Operations (OCO) funds 

primarily to conduct Operation Freedom's Sentinel (OFS) and other missions outside of 

Afghanistan (e.g., Horn of Africa (HOA)), Operation Inherent Resolve (OIR), and post-Operation 

New Dawn activities. These funds were also used to train and equip Iraqi security forces and 

vetted Syrian opposition forces, support European partners, and respond to terrorist threats. 

Additionally, Congress increased the Department's OCO request to fund some readiness 

requirements transferred from the base budget request, National Guard and Reserve Equipment, 

and improve intelligence, surveillance, and reconnaissance.

LOOKING FORWARD

Beyond FY 2016, the strategic priorities identified in the QDR 2014 remain the 

Department’s top priorities: rebalancing to the Asia-Pacific region, maintaining a strong

commitment to security and stability in Europe and the Middle East, sustaining a global 

counterterrorism campaign, strengthening key alliances and partnerships, and prioritizing key 

modernization efforts. The Department will also continue the fight against ISIL and other terrorist 

networks, address North Korean provocation, Russian aggression, and address adversaries against 

our friends and allies in the Middle East.

As reflected in the QDR, the current strategic and budgetary environment compels us to think

creatively about how we can restore the readiness of the force, while remaining globally

engaged. The Department seeks to achieve full-spectrum combat readiness in the FYs 2021-2023 

timeframe for the Army; for the Navy and Marine Corps it is estimated to be just outside the Future 

Years Defense Program (FYDP); and for the Air Force 8-10 years once conditions for recovery 

are set. More stable funding over the last two years has enabled measured progress, but funding 

alone is not sufficient for the Services to recuperate full-spectrum readiness. The Services require 

a combination of time, stable readiness funding profiles, and a balance between steady-state and 

contingency demand.

We are at a strategic turning point in the post-Cold War world. As Russia continues to act 

aggressively in its immediate periphery and beyond, Russia is modernizing both its nuclear and 

conventional military capabilities, and updating its warfighting doctrine. Although China’s rise is 

welcome, its increasing assertiveness in the South China Sea and elsewhere is out of step with 

international norms, and is increasing demand for our engagement in the Asia-Pacific region. 

Meanwhile, the U.S. Military’s technological edge, which we have relied upon for so long, is 

eroding. The resurgence of Russia and the rise of China will require that we exercise strategic 

muscles that we have allowed to atrophy since the end of the Cold War. The world cannot afford 

for U.S. leadership to waiver.
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In the two years since the launch of the Defense Innovation Initiative (DII) and Third Offset

Strategy, an ambitious Department-wide effort overseen by the Deputy Secretary,

Robert O. Work, we are identifying and investing in innovative ways to sustain and advance U.S. 

Military dominance for the 21st century.

Finally, as we continue to address the challenges outlined above, we will strive to preserve our 

most enduring and competitive advantage – our people. Under the Force of the Future Initiative, 

the Department intends to improve the recruitment and retention of the brightest and most 

committed young men and women and make Defense the most rewarding environment it can be, 

for those who choose to serve.

ORGANIZATION

The Department maintains and uses armed forces to support and defend the Constitution and 

protect the security of the United States, its possessions, and areas vital to its interest. This mission 

depends on our military and civilian personnel and equipment being in the right place, at the right 

time, with the right capabilities, and in the right quantities to protect our national interests. This 

has never been more important as the United 

States fights terrorists who plan and carry out 

attacks outside the traditional boundaries of 

the battlefield.

The Department is one of the nation’s

largest employers, with approximately 

1.3 million personnel in the Active 

Component, more than 810,000 personnel 

serving in the National Guard and Reserve 

forces, and about 750,000 civilians. Our

Military Service members and civilians

operate in every time zone and in every

climate. There are also nearly 2.3 million 

military retirees, family members, and 

survivors receiving benefits.

The Department manages a worldwide real property portfolio that spans all 50 states, U.S. 

territories and many foreign countries. The Department's real property infrastructure includes 

more than 571,000 facilities (buildings, structures and linear structures) located in more than

4,903 sites worldwide. These sites represent more than 26.3 million acres that individually, range

in size from training ranges to approximately 3 million acres, such as Range No.1 at Nellis Air 

Force Base, to single weather towers or navigational aids isolated on sites of less than one 

one-hundredth (0.01) of an acre. Of the land DoD manages, only 36 percent is held by DoD in fee 

interest. The remaining acres are controlled through other legal means such as leases, licenses, 

permits, public land orders, treaties, and agreements. Beyond the mission specific areas of 

Chief Master Sgt. Pete Webb, 919th Special 

Operations Wing, hands off the American flag to 

the color guard detail prior to the 9/11 Memorial 

Ceremony Sept. 11 at Duke Field, Fla. The flag 

used for the ceremony was also used during the 24-

hour memorial stair climb event. 

U.S. Air Force photo/Tech. Sgt. Sam King
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installations such as runways, training areas, and industrial complexes, DoD installations also 

contain many facilities and operations found in municipalities or on university campuses such as 

hospital and medical facilities, public safety facilities, community support complexes, housing and 

dormitories, dining facilities, religious facilities, utility systems and roadways. To protect the 

security of the United States, the Department operates 14,140 aircrafts and 275 Battle Force ships.

The Secretary of Defense is the principal assistant and advisor to the President in all matters 

relating to the Department, and he exercises authority, direction, and control over the Department. 

The Department is currently composed of the Office of the Secretary of Defense (OSD), Joint Chiefs 

of Staff, Joint Staff, Office of the Inspector General of the DoD (DoD IG), Military Departments, 

Defense Agencies, DoD Field Activities, Combatant Commands, and other offices, agencies, 

activities, organizations, and commands established or designated by law, the President, or the 

Secretary of Defense.

The operational chain of command runs from the President to the Secretary of Defense to the 

Commanders of the Combatant Commands. The Chairman of the Joint Chiefs of Staff functions 

within the chain of command by transmitting to the Commanders of the Combatant Commands 

the orders of the President or the Secretary of Defense.

Figure 2. Department of Defense Organizational Structure
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The Office of the Secretary of Defense

The function of OSD is to assist the Secretary of Defense in carrying out his duties and

responsibilities and other duties as prescribed by law. The OSD is composed of the Deputy

Secretary of Defense, who also serves as the Chief Management Officer and Chief Operating

Officer; the Under Secretaries of Defense (USDs); the Deputy Chief Management Officer

(DCMO); the Department of Defense Office of the General Counsel (DoD OGC); the Assistant

Secretaries of Defense (ASDs); the Assistants to the Secretary of Defense; the OSD Directors,

and their equivalents; the DoD IG; and other staff offices within OSD established by law or by the

Secretary.

The OSD Principal Staff Assistants (PSAs) are responsible for the oversight and formulation

of defense strategy, policy, and resource allocation, as well as for overseeing and managing the 

Defense Agencies and DoD Field Activities (Figure 3).

Figure 3. Office of the Secretary of Defense Principal Staff Assistants

* Although the IG DoD is statutorily part of OSD and is under the general supervision of the Secretary of Defense,

the Office of the IG DoD (OIG) functions as an independent and objective unit of the Department of Defense.

Secretary of Defense

Deputy Secretary of Defense 

Chief Management Officer/

Chief Operating Officer

USD

(Acquisition,

Technology, &

Logistics)

USD

(Policy)

USD

(Comptroller)/

Chief Financial

Officer

USD

(Personnel &

Readiness)

USD

(Intelligence)

Inspector

General

DoD*

Deputy Chief

Management

Officer

Director, Cost

Assessment &

Program

Evaluation

General

Counsel,

DoD

Director,

Operational

Test &

Evaluation

ASD

(Legislative

Affairs)

DoD Chief

Information

Officer

ATSD

(Public

Affairs)

Director,

Net

Assessment
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The Joint Chiefs of Staff and the Joint Staff

The Joint Chiefs of Staff, supported through the Chairman by the Joint Staff, constitute the

immediate military staff of the Secretary of Defense. The Joint Chiefs of Staff consist of the

Chairman, the Vice Chairman, the Chief of Staff of the Army, the Chief of Naval Operations,

the Chief of Staff of the Air Force, the Commandant of the Marine Corps, and the

Chief of the National Guard Bureau. The Joint Chiefs of Staff function as the military advisors

to the President, the National Security Council, the Homeland Security Council, and the Secretary

of Defense.

Office of the Inspector General

The DoD IG is an independent unit within the Department that conducts and supervises

audits and investigations relating to the Department’s programs and operations. The DoD IG 

serves as the principal advisor to the Secretary of Defense on all audit and criminal investigative

matters relating to the prevention and detection of fraud, waste, and abuse in the programs and

operations of the Department.

Military Departments

The Military Departments consist of the Departments of the Army, the Navy (of which the

Marine Corps is a Component), and the Air Force. Upon the declaration of war, if

Congress so directs in the declaration or when the President directs, the U.S. Coast Guard

becomes a special Component of the Navy; otherwise, it is part of the Department of 

Homeland Security. The three Military Departments organize, staff, train, equip, and sustain

America’s military forces and are composed of the four Military Services (or five when including

the U.S. Coast Guard, when directed). When the President determines military action is

required, these trained and ready forces are assigned or allocated to a Combatant Command

responsible for conducting military operations.

Military Departments include Active and Reserve Components. The Active Component is

composed of units under the authority of the Secretary of Defense manned by active d uty Military

Service members. The Reserve Component includes the Reservists of each Military Service and

the National Guard, which has a unique dual mission with both Federal and State responsibilities

(Figure 4). When commanded by the Governor of each State or territory, the National Guard can

be called into action during local, statewide, or other emergencies such as storms, drought, civil

disturbances, and in some cases supporting federal purposes for training or other duty

(non-federalized service).

When ordered to active duty for national emergencies, units of the National Guard or Reservists 

of the Military Services are placed under operational control of the appropriate Combatant

Commander. The National Guard and Reserve forces are recognized as indispensable and integral

parts of the Nation’s defense and fully part of the applicable Military Department.
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Figure 4. Reserve Components: Reserves and National Guard

Defense Agencies and DoD Field Activities

Defense Agencies and DoD Field Activities (Figure 5) are established as DoD

Components by law, the President, or the Secretary of Defense to provide, on a DoD-wide basis,

a supply or service activity common to more than one Military Department when it is more

effective, economical, or efficient to do so. Although Defense Agencies and DoD Field

Activities fulfill similar functions, the former tend to be larger, normally provide a broader scope

of supplies and services, and can be designated as Combat Support Agencies to support the

Combatant Commands directly. Each of the 20 Defense Agencies and 8 DoD Field Activities

operate under the authority, direction, and control of the Secretary of Defense through an

OSD Principal Staff Assistant.

Women with a U.S. Marine Corps female engagement team operating in Europe interact with students 

at the Cambridge School of Constanta, Romania, Sept. 28, 2016. The Marines spent two weeks doing 

military-to-military and military-to-civilian engagements to enhance regional security and stability. 

U.S. Marine Corps photo by Sgt. Michelle Reif
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Figure 5. Defense Agencies and DoD Field Activities
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Combatant Commands

The Commanders of the Combatant Commands (Figure 6) are responsible for accomplishing 

the military missions assigned to them. Combatant Commanders exercise command authority 

over assigned and/or allocated forces, as directed by the Secretary of Defense. The operational 

chain of command runs from the President to the Secretary of Defense to the Commanders of the 

Combatant Commands. The Chairman of the Joint Chiefs of Staff functions within the chain of 

command by transmitting the orders of the President or the Secretary of Defense to the 

Commanders of the Combatant Commands.

The U.S. Strategic Command (USSTRATCOM), U.S. Transportation Command

(USTRANSCOM), and U.S. Special Operations Command (USSOCOM) are functional

Combatant Commands, each with unique functions as directed by the President in the Unified

Command Plan. Among Combatant Commands, the USSOCOM has additional responsibilities

and authorities similar to a number of authorities exercised by the Military Departments and

Defense Agencies, including programming, budgeting, acquisition, training, organizing,

equipping, and providing Special Operations Forces (SOF), and developing SOF’s strategy,

doctrine, tactics, and procedures. The USSOCOM is reliant upon the Military Services for

common support and base operating support.

Service members from various nations eat lunch together during the Non-Lethal Executive Seminar 

(NOLES) 2016 at Ulaanbaatar, Mongolia, Sept. 22, 2016. Eighteen nations participated in the senior 

military leaders’ portion of the seminar. Both the United States and Mongolia have a continuing interest in 

strengthening their partnership with other Pacific nations, which will provide the cornerstone for security 

and stability in the region. 

U.S. Marine Corps photo by Cpl. Jonathan E. LopezCruet
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In addition to supplying assigned and allocated forces and capabilities to the Combatant

Commands, the Military Departments provide administrative and logistics support by managing

the operational costs and execution of these commands. The USSOCOM is the onlyCombatant

Command directly receiving congressional appropriations.

Figure 6. Combatant Commands

Six commanders have specific mission objectives for their geographical areas of responsibility:

United States United States United States United States United States United States

Northern Command Pacific Command European Command Southern Command Africa Command Central Command

USNORTHCOM

USEUCOM

Three commanders

have worldwide mission

responsibilities, each

focused on a particular

function:

United States

Strategic Command

United States

Transportation Command

United States

Special Operations

Command
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PERFORMANCEOVERVIEW

The Deputy Secretary of Defense, as the Department’s Chief Management Officer and Chief 

Operating Officer, is responsible for performance improvement within the Department. Each year, 

in accordance with public law and Office of Management and Budget (OMB) guidance1, the 

Department develops and tracks performance measures to meet DoD strategic priorities.

The Department published an updated FYs 2015-2018 Agency Strategic Plan (ASP) version 2.0 

in August 2016 in accordance with requirements of the Government Performance and Results

Modernization Act (GPRAMA) of 2010. The Department’s revised FYs 2015-2018 ASP strategic 

goals are:

 Strengthen and enhance the health and effectiveness of the total force;

 Defeat our adversaries, deter attacks, deny enemy objectives, and defend the Nation; 

and

 Achieve dominant capabilities through innovation, technical excellence, and defense

institution reform.

These goals reflect the Secretary of Defense’s three commitments, as outlined in the

2017 Defense Posture Statement, and further describe near and long-term a gency priority and 

performance goals and the f ederal cross-agency priority (CAP) goals to which the Department

contributes. The Department will continue to refine and mature its ASP to better inform internal

and external stakeholders, enhance

substance for improved decision-making,

planning, alignment of actions, and

resources to realize goals while also

addressing requirements of GPRAMA. 

The Department’s ASP builds from the

strategic authorities and direction to align

national defense efforts and resources to 

ultimately enable warfighter mission

execution.

This section provides an executive level

overview of DoD’s performance through

the third quarter, ending June 30, 2016,

with FY 2016 end results published in the 

Annual Performance Report section of the 

Department’s budget submission in 

February 2017.

 

1 Government Performance and Results Act of 1993 (GPRA) (Public Law 103-62); Government Performance and

Results Modernization Act of 2010 (GPRAMA) (Public Law 111-352); OMB Circular No. A-11, Preparation, 

Submission, and Execution of the Budget

Sailors assigned to Coastal Riverine Squadron Two (CRS-2) 

prepare to deploy a Mark V Zodiac boat from a Mark VI 

Patrol Boat during Valiant Shield 2016 in Santa Rita, Guam, 

Sep. 17, 2016. Valiant Shield is a biennial U.S. Air Force, 

Navy and Marine Corps exercise held in Guam, focusing on 

real-world proficiency in sustaining joint forces at sea, in the 

air, on land and in cyberspace. 

U.S. Navy Combat Camera photo by Mass Communication 

Specialist 1st Class Arthurgwain L. Marquez/Released
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SUMMARY OF PERFORMANCE RESULTS

The Department has been successful in meeting many of the priority measures for third quarter, 

FY 2016, including those related to strengthening business operations; achieving efficiencies, 

effectiveness and cost savings; audit readiness; and ensuring our veterans are ready for their 

transition to civilian life.

At the end of the third quarter in FY 2016, 81 percent of DoD quarterly performance measures 

were on track to meet the annual goals, while 19 percent did not meet third quarter targets and 

could be considered at risk of not achieving annual targets. Of the remaining performance 

measures, 22 measures will be reported after the close of FY 2016. A selection of Departmental 

successes and areas for improvement are highlighted below.

Processing Wounded Warriors Through the Integrated Disability Evaluation System 

Our Nation continues its commitment to 

support and care for those who keep our 

country safe. Providing top-quality 

physical and psychological care to 

wounded warriors and assisting with their 

transition to veteran status is a Department 

priority. In FY 2016, the Department 

continued its collaboration with the U.S. 

Department of Veterans Affairs (VA) to 

accelerate the transition of wounded, ill, 

and injured Service members into Veteran 

status by reducing disability evaluation 

processing time.

The Integrated Disability Evaluation 

System (IDES) is the mechanism the 

Department uses to determine if Service 

members coping with wounds, injuries, or illnesses that may prevent them from performing their 

duties are able to continue serving. IDES is a joint process established by the VA and the 

Department that eliminates duplicate Departmental disability examinations and ratings to provide 

more consistent disability determinations between Departments. IDES provides Service members 

more consistent access to accurate and timely information about the disability process and reduces 

the time Service members wait after discharge from Military Service to receive VA disability 

benefits and compensation.

The Department continues working with the Military Departments and the VA to improve the 

efficiency of the IDES which has had a distinct effect on IDES performance, most notably in 

reducing the time for Service members to complete the process. The Department exceeded its 

IDES performance measure target in support of the Agency Priority Goals (APG) for the first 

Soldiers defeat Marines to win gold in wheelchair basketball 

during the 2016 Department of Defense Warrior Games at 

the U.S. Military Academy in West Point, N.Y., June 21, 

2016. 

Photo by Roger Wollenberg
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(82 percent), second (86 percent), and third (84 percent) quarters of FY 2016. The performance 

measure combines the outcomes of timeliness for completing Department core IDES processes, 

service member satisfaction with DoD management of their case, the accuracy and consistency of 

Military Department disability determinations, and compliance with administrative processing 

requirements.

Reform the DoD Acquisition Process

In support of the BBP initiative, the Under Secretary of Defense for Acquisition, Technology,

and Logistics (USD(AT&L)) directed the acquisition professionals in the Department to deliver 

better value to the taxpayer and warfighter by improving the way the Department does business.

Next to supporting the Armed Forces at war, this was the President’s and Secretary of Defense’s 

highest priority for the Department’s acquisition professionals. The Department is committed to 

procuring the critical goods and services for the U.S. Armed Forces in the years ahead in the most 

cost-effective manner. DoD Components have incorporated BBP concepts into their policies and 

practices for the acquisition of weapon systems, goods, and services by instilling a cost-conscious 

culture and improving the workforce’s ability to adapt and apply the best approach for each 

situation. These efforts are enhanced by continuing analysis of Defense acquisition processes as 

described in the annual Performance of the Defense Acquisition System report. This report adds

insight and gauges progress that results in improvements in APG measures, showing positive 

trends and areas for improvement. The next step in the BBP continuum is BBP 3.0, Achieving 

Dominant Capabilities which places an additional emphasis on innovation, technical excellence, 

and quality of products.

Numerous barriers have impeded the Department’s efforts to increase competition rates 

including fewer new programs; budget constraints limiting funding for the purchase of technical 

data packages; extended Continuing Resolutions necessitating sole-source “bridge” contracts to 

avoid program disruptions; more programs past the stage where competition is economically 

viable; and lack of technical data packages and data rights on prior mature and aging aircraft 

programs.

DoD Components continue to incorporate BBP concepts into their acquisition programs, 

resulting in sound programs where requirements and resources are matched at program initiation.

Achieving Audit-Ready Financial Statements

The NDAA for FY 2010, as amended, mandated the Department have full financial statements 

validated as ready for audit by September 30, 2017. Accordingly, the Department has made this 

requirement a DoD priority goal. In FY 2017, 85 percent of the Department’s total budgetary 

resources (both General Fund and Working Capital Fund) and 43 percent of the Department’s total 

assets will be under audit.

The Department is continuing with the Schedule of Budgetary Activity (SBA) audits and 

expanding the scope to include the remaining statements by FY 2018, while sustaining a more 

disciplined environment, until full audit readiness is achieved. FY 2016 marks a shift in the focus 
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from audits of the SBA to audits of all four principle financial statements, increasing the magnitude 

and complexity level of preparing for audit. Strategically, we have a keen focus on addressing 

critical capability areas which include: establishing a universe of transactions (UoT); reconciling 

our fund balance with the Department of the Treasury; properly supporting our journal voucher 

adjustments; establishing an auditable existence and completeness, and valuation baseline, and go 

forward process for our property assets; establishing an auditable process for identifying, valuing 

and recording environmental and disposal liabilities; and implementing critical information 

technology general and application controls for material, financially relevant systems.

The Department continues to make progress and monitor remediation activities in these critical 

capability areas. Progress includes issuing policies to generally enforce standards and 

requirements; building data repositories and processes to collect and reconcile financial data; 

reconciling and researching differences with Treasury; performing physical inventories for our 

property assets; and working with system program managers and IT communities to identify the 

necessary system controls and integrated processes.

The sheer size of the Department and volume of financial transactions processed daily, directly 

impacts the challenges we continue to face. Challenges remain to include non-standard business 

processes and data; disparate IT systems; lack of front-end system edit checks and controls; and 

the need to protect sensitive activities. The Department will continue focusing on establishing and 

implementing sound processes and policies in these critical capability areas, while working in 

parallel to resolving known deficiencies.

A U.S. Air Force C-130 Hercules from Yokota Air Base, Japan, taxies to its ramp position following the first bilateral 

mission of the current iteration of a rotational Air Contingent at Brigadier General Benito N. Ebuen Air Base, LapuLapu City, Philippines, Sept. 26, 2016. Two C-130 Hercules aircraft and crews from 374th Airlift Wing, Yokota Air 

Base, Japan, the 36th Contingency Response Group from Andersen Air Force Base, Guam, and other units from 

across U.S. Pacific Command will conduct bilateral training missions and subject matter expert exchanges alongside 

their Philippine Air Force counterparts. The Air Contingent is helping to build the capacity of the Philippine Air 

Force and increases joint training, promotes interoperability and provides greater and more transparent air and 

maritime situational awareness to ensure safety for military and civilian activities in international waters and airspace. 

Its missions include air and maritime domain awareness, personnel recovery, combating piracy, and assuring access 

to the air and maritime domains in accordance with international law.

U.S. Air Force photo by Capt. Mark Lazane
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Energy

Improving facility energy performance at DoD installations will lower energy costs, improve 

energy security, improve mission effectiveness, and reduce reliance on fossil fuels. Efficiencies 

will be achieved by reducing the demand for traditional energy. Legislation mandates a 3 percent 

annual reduction in facilities energy intensity as measured in British Thermal Units per gross 

square foot. The Department has pursued a facility energy investment strategy designed to reduce 

the energy costs and improve the energy security of our bases.

Despite falling short of the FY 2015 intensity reduction goal of 30 percent, the Department 

reduced its energy intensity by 19.9 percent from the FY 2003 baseline and improved by 

2.2 percent over FY 2014. The FY 2015 results from the baseline for FYs 2016 – 2025 timeframe, 

wherein the annual goal is to reduce intensity by 25 percent or an average of 2.5 percent per year. 

While the Department continues to invest in cost-effective energy efficiency and conservation 

measures to improve goal progress, there will be challenges in future reductions. Facility energy 

metrics are reported on an annual basis.

Contract Obligations That Are Competitively Awarded

The BBP initiatives are aimed at achieving greater efficiencies through affordability and cost 

control. An element in achieving these objectives is the promotion of effective competition. For 

the third quarter of FY 2016, the Department achieved a competition rate of 49.8 percent. Based 

on current projections, the Department does not anticipate achieving the FY 2016 goal of 

57 percent.

Competition achievement by contracting organizations varies widely based upon the mission 

and type of supply or service being procured. The Department continues to take steps to increase 

competition for major systems by introducing competition during the sustainment phase of a 

product’s life cycle. DoD continues to emphasize the importance of maximizing opportunities for 

competitive contracting on a recurring basis at the Business Senior Integration Group meetings. 

In this forum, the Service Acquisition Executives discussed successes and challenges; results 

achieved by categories of supplies and services and/or by Program Executive Offices or 

Commands; strategies for introducing competitive pressures for future high dollar buys; and 

Contracting Enterprise Reviews.

The Defense Acquisition University’s 2016 Acquisition Training Symposium included 

breakout sessions on the subject of competition. The Deputy Director of Contract Policy and 

International Contracting began each session with an overview of DoD competition policy and 

statistics. The Component Program Offices and Contracting Leaders gave presentations 

highlighting the acquisitions, programs, policies and/or initiatives to improve competition and 

reduce barriers to competition. Examples included the Air Force’s Thule Base Maintenance 

Contract Competition; the Army’s TACOM Warren Competition Initiatives; Marine Corps Land 

Systems Amphibious Assault Vehicle Competitive Acquisition Strategy; and Defense Logistics 

Agency’s Increasing Competition efforts. Defense Procurement and Acquisition Policy plans to 
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continue holding competition sessions and exchanges to promote knowledge sharing and best 

practices amongst the acquisition workforce.

Summary

The Department is a performance-based organization. As a performance-based organization, 

the Department is committed to specific and measurable goals based on a defined mission, using 

performance data to continually improve operations. The Department has maintained its 

commitment to veterans transitioning into the civilian workforce; and its commitment to pursuing 

improvement opportunities related to acquisition reform and financial audit readiness.

Rico, 2nd Security Forces Squadron Military working dog, plays with a toy after completing an 

explosives/narcotic detection training at Barksdale Air Force Base, La., July 19, 2016. MWD teams train about 

15 hours weekly, rotating between scenarios involving explosive/narcotic detection, law enforcement, 

deployment and patrol exercises.

U.S. Air Force photo/Senior Airman Mozer O. Da Cunha
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FINANCIALOVERVIEW

The previous sections of this report provide a

description of the Department’s operations in

FY 2016 and a high-level overview of the

Department’s performance against objectives as of

the third quarter of FY 2016. The FY 2016 final

results for all Department performance measures

will be reported in the Department’s Annual

Performance Report, which will be available in

February 2017.

The Department’s challenges in producing

auditable financial statements persist, and

management is unable to provide unqualified

assurance as to the effectiveness of our internal

controls over financial reporting, operations, and

financial management systems. The Department’s

unique size and mission are part of the challenge 

in achieving a financial statement audit. For

example, Figure 7 shows the magnitude of D o D financial activities processed by the Defense 

Finance and Accounting Service (DFAS) in FY 2016, and does not include transactions processed

by other DoD entities, such as the U.S. Army Corps of Engineers or the Defense Health Agency.

FINANCIAL HIGHLIGHTS AND ANALYSIS

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

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

statements have been prepared from the accounting records of the Department in accordance with 

OMB Circular No. A-136, Financial Reporting Requirements, and to the extent possible, U.S. 

Generally Accepted Accounting Principles (GAAP) for Federal Entities, and the DoD

Financial Management Regulation. The statements, in addition to supporting financial reports, 

are used to monitor and control budgetary resources. The statements should be read with the 

realization that they are for a Component of the U.S. Government, a sovereign entity.

DFAS prepared the consolidated financial statements and explanatory notes, located in the 

Financial Information section of this report. The principal financial statements include:

 Statement of Budgetary Resources

 Balance Sheet

 Statement of Net Cost

 Statement of Changes in Net Position 

Description FY 2016

 Number of Pay Transactions $122.4 Million

 Number of Commercial Invoices 

 Paid $11.7 Million

 Number of Travel Payments $5.8 Million

 Number of General Ledger 

 Accounts Managed $151.8 Million

 Amount Disbursed $534.5 Billion

 Intragovernmental Payments 

 (IPAC) $103.7 Billion

 Amount of Military Retirement and 

 Health Benefits Funds Managed $899 Billion

 Foreign Military Sales Cases 

 Reimbursed by Foreign 

 Governments

$479 Billion

Figure 7. DoD FY 2016 Financial 

Activities Processed by DFAS
U.S. Department of Defense Agency Financial Report for FY 2016 

Management’s Discussion and Analysis

28

Statement of Budgetary Resources

One of the most critical financial 

improvement and audit readiness 

priorities in the Department involves the 

processes, controls, and systems that 

support information most often used to 

manage the Department, namely, 

budgetary resources. The Statement of 

Budgetary Resources (SBR) presents the 

Department’s total budgetary resources, 

their status at the end of the year, and the 

relationship between the budgetary 

resources and the outlays made against 

them. In accordance with federal statutes 

and implementing regulations, 

obligations may be incurred and 

payments made only to the extent that budgetary resources are available to cover such items. As

discussed in the DoD Overview section of this report and as depicted in Figure 8, the Department’s 

FY 2016 budget authority total is $580.3 billion.

In FY 2016, the Department reported 

$1.1 trillion in total budgetary resources

(as shown in Figure 9). The total 

appropriations amount of $745.7 billion, 

reported on the SBR, consists of DoD 

budget authority and appropriations 

provided by the U.S. Treasury for DoD 

military retirement and health benefits.

The Department also receives 

appropriations to finance civil work 

projects managed by the USACE.

Current year Trust Fund receipts, 

including the Military Retirement Fund 

and the Medicare Eligible Retiree 

Health Care Fund, are also included in 

the SBR “Total Appropriations” line. 

Trust fund receipts, labeled 

“Temporarily not available,” represent 

budget authority the Department will 

execute in future years to pay the current unfunded liabilities carried in these large funds.

Figure 8. Trend in DoD Budget Authority

Figure 9. Composition of DoD Total Budgetary 

Resources

Description FY 2016 

($ in Billions)

DoD Enacted Appropriations * $ 580.3 

U.S. Treasury contribution for Military 

Retirement and Health Benefits 90.2 

Civil Works Projects executed by the 

USACE 4.6 

Trust Fund Receipts 141.2 

Trust Fund Resources Temporarily not 

Available

 

(70.6)

Total Appropriations Reported on SBR $ 745.7 

Unobligated Balances from Prior Year 

Budget Authority 180.4 

Spending Authority from Offsetting 

Collections 105.9 

Contract Authority 69.7 

Total Budgetary Resource $ 1,101.7 

* DoD 2016 Budget Authority from Figure 1
U.S. Department of Defense Agency Financial Report for FY 2016 

Management’s Discussion and Analysis

29

Additional budgetary resources include $180.4 billion of unobligated balances stemming from 

prior year budget authority, $105.5 billion in spending authority from offsetting collections, and 

$69.7 billion of contract authority.

Of the $1.1 trillion in total budgetary resources, $945.7 billion was obligated and 

$895.6 billion of obligations were disbursed. The remaining unobligated budgetary resources 

balance relates to appropriations available to cover multi-year investment projects. These projects 

require additional time for delivery of goods and services. Expired appropriations remain available 

for valid upward adjustments to prior year obligations but are not available for new obligations.

Balance Sheet

The Balance Sheet, which reflects the Department’s financial position as of 

September 30, 2016, reports probable future economic benefits obtained or controlled by the 

Department (Assets), claims against those assets (Liabilities), and the difference between them 

(Net Position).

The $2.4 trillion in assets shown in Figure 10 represent amounts the Department owns and 

manages. Investments, General Property, Plant, and Equipment, and Fund Balance with Treasury 

(FBWT) represent 87 percent of the Department’s assets. General Property, Plant, and Equipment 

is largely comprised of military equipment and buildings, structures, and facilities used to support 

the Department’s mission requirements.

Total Assets increased $79.9 billion (3.4 percent) from FY 2015, largely due to increases in 

Investments in U.S. Treasury securities ($66.1 billion), General Property, Plant, and Equipment 

($50.3 billion), offset by a decrease of Other Assets ($38.1 billion). The latter two are primarily 

Figure 10. Summary of Total Assets
U.S. Department of Defense Agency Financial Report for FY 2016 

Management’s Discussion and Analysis

30

the result of a reclassification of $42.0 billion of contract financing payments from Advances and 

Prepayments to Construction in Progress in accordance with the Office of the Under Secretary of 

Defense (Comptroller) (OUSD(C)) guidance. The investments increase was primarily due to 

normal growth in the Military Retirement Fund. As displayed in Figure 13, the Department has 

realized growth in investments over the last several years. The growth results from investment of 

contributions from the U.S. Treasury and the Uniformed Services, net of benefits paid. Under the 

Department’s current strategy, invested balances will continue to grow to cover unfunded portions 

of future benefits. Funds not needed to cover current benefits were invested in U.S. Treasury 

Securities.

As seen in Figure 11, the Department’s total liabilities decreased $3.7 billion during FY 2016, 

largely due to downward adjustments in the estimated actuarial liability associated with military 

retiree health care benefits. This change is primarily attributable to changes in the underlying 

benefit plan, actuarial assumptions, experience, and expectations used to calculate the unfunded 

liability. The Department’s $2.4 trillion of liabilities reported in FY 2016 are backed by the full 

faith and credit of the U.S. Government.

Figure 12 shows the $1.6 trillion in unfunded liabilities that will require future resources. The 

U.S. Treasury is responsible for funding the actuarial liability that existed at the inception of the 

military retirement and health care programs. This $1.3 trillion actuarial liability accounts for 

approximately 81 percent of the total $1.6 trillion in liabilities not covered by budgetary resources. 

The Department has resources available to cover approximately $795.2 billion of the remaining 

liabilities, primarily invested in U.S. Treasury securities. In addition, there are military 

pre-medicare eligible retiree health benefits actuarial liabilities of $239.7 million.

Figure 11. Summary of Total Liabilities
U.S. Department of Defense Agency Financial Report for FY 2016 

Management’s Discussion and Analysis

31

Statement of Net Cost

The Statement of Net Cost presents the net cost of all the Department’s programs, including 

military retirement benefits. The statement reports total expenses incurred less revenues earned 

from external sources to finance those expenses. Generally, the resulting balance of net cost is 

equivalent to the outlays reported on the SBR, plus accrued liabilities, less the amount of assets 

purchased and capitalized on the Balance Sheet. The differences between reported outlays of the 

budgetary resources and reported net cost generally arise from when expenses are recognized.

The Department’s costs incurred relate primarily to operations, readiness, and support 

activities, military personnel cost, and costs related to the Department’s procurement programs. 

These costs were offset with investment earnings and contributions to support retirement and 

health benefit requirements, as well as earnings from reimbursed activities. This activity resulted 

in $589.6 billion in net cost of operations during the fiscal year.

Figure 12. Unfunded Liabilities
U.S. Department of Defense Agency Financial Report for FY 2016 

Management’s Discussion and Analysis

32

Statement of Changes in Net Position

The Statement of Changes in Net Position (SCNP) presents the total cumulative results of 

operations since inception and unexpended appropriations at the end of the fiscal year. The SCNP 

displays the components of net position separately to enable the user to better understand the nature 

of changes to net position as a whole. The statement focuses on how the net cost of operations as 

presented on the Statement of Net Cost is financed, as well as displaying the other items financing 

the Department’s operations. The Department’s ending net position increased $83.5 billion during 

FY 2016. The increase reflects primarily the increase in assets due to the normal growth in 

investments in the Military Retirement Fund. The growth results from investment of contributions 

from the U.S. Treasury and the Uniformed Services, net of benefits paid. Under the Department’s 

current strategy, invested balances will continue growing to cover unfunded portions of future 

benefits. The Department corrected the value of General Plant, Property and Equipment, 

increasing the Department’s ending net position by $8.3 billion. Other Financing Sources, Other 

consists primarily of nonexchange gains and losses necessary to reconcile the proprietary and 

budgetary amounts 

Financial Performance Summary

The Department’s financial performance is summarized in Figure 14. This table represents the 

Department’s condensed financial position, results of operations, and budgetary resources, and 

includes comparisons of financial balances from the current year to the prior year. The lack of 

auditable financial data is a limiting factor in the ability of the Department to explain all material 

Figure 13. Summary of Net Cost of Operations
U.S. Department of Defense Agency Financial Report for FY 2016 

Management’s Discussion and Analysis

33

variances presented in the comparative statements. Nevertheless, the data underlying the amounts 

is used to manage the Department’s operations successfully.

Figure 14. Financial Performance Summary

Dollars in Billions FY 2016 RestatedFY 2015 Change % Change

ASSETS

Fund Balance with Treasury $ 474.3 $ 467.4 $ 6.9 1.5%

Investments 914.1 848.0 66.1 7.8%

Accounts Receivable 8.8 7.7 1.1 14.3%

Other Assets 39.2 77.3 (38.1) -49.3%

Inventory and Related Property, Net 255.3 261.7 (6.4) -2.4%

General Property, Plant and Equipment, Net 711.7 661.4 50.3 7.6%

Total Assets $ 2,403.4 $ 2,323.5 $ 79.9 3.4%

LIABILITIES

Accounts Payable $ 20.2 $ 20.3 $ (0.1) -.5%

Other Liabilities 42.1 44.3 (2.2) -5.0%

Military Retirement and Other Federal 

Employment Benefits 2,297.9 2,302.0 (4.1) -0.2%

Environmental and Disposal Liabilities 62.7 60.0 2.7 4.5%

Total Liabilities $ 2,422.9 $ 2,426.6 $ (3.7) -0.2%

Total Net Position (Assets Minus Liabilities) $ (19.5) $ (103.1) $ 83.6 81.1%

Total Financing Sources 699.4 677.0 22.4 3.3%

Less Net Cost of Operations (589.6) (548.9) (40.7) 7.4%

Net Change of Cumulative Results of 

Operations 109.8 128.1 (18.3) 14.3%

Total Budgetary Resources $ 1,101.3 $ 1,067.2 $ (34.1) 3.2%

A construction crew works on a radome as part of a multi-step project July, 25, 2016, on Buckley Air Force Base, 

Colo. The 460th Space Communications Squadron, Air Force Wideband Enterprise Terminals Program office,

Tobyhanna Army Depot and Radome Services have been working together to replace an aging equipment on Buckley 

AFB in order to increase capabilities and keep up with technological advances.

U.S. Air Force photo by Airman 1st Class Gabrielle Spradling/Released Ohio
U.S. Department of Defense Agency Financial Report for FY 2016 

Management’s Discussion and Analysis

34

FINANCIAL MANAGEMENT IMPROVEMENT INITIATIVES

Financial Improvement and Audit Readiness Initiative

The Department’s FIAR Initiative guides the Department’s efforts to achieve compliance with 

the Chief Financial Officers Act of 1990 and undergo full financial statement audit. FIAR focuses 

on improving financial management, the ability to demonstrate reliable and well-controlled 

business processes and provide supporting documentation to auditors in a timely and consistent

manner. For an organization as large and complex as DoD, achieving an audit-ready state has 

been a long-term, challenging endeavor. Congress and DoD stakeholders have come to fully 

appreciate the magnitude of this effort.

Significant audit readiness progress has been made. Beginning in FY 2015, the Military 

Departments moved from audit readiness into an annual audit regimen. Initial audits are helping 

to drive change while also giving personnel valuable real world audit experience. As a result, DoD 

financial managers and functional leaders better understand auditors’ expectations and the higher 

level of consistency, discipline, and rigor that successful audits require. The auditors, in turn, are 

able to familiarize themselves with DoD’s organization, systems, and way of doing business, 

allowing them to be more efficient in conducting audits. The ongoing audits maintain the 

Department’s focus and drives progress toward an audit opinion, enhancing earlier audit readiness 

efforts. Operationally, audits provide objective feedback on DoD controls, processes, and systems. 

Audit findings and recommendations identify areas that need attention from an auditor’s 

perspective to prioritize remediation. Audits also reveal opportunities for process improvement 

and resource savings.

The primary measure of audit progress is the extent to which the Department's organizations 

are under some form of a financial audit regimen. USACE, as well as six Defense Agencies and 

funds, are sustaining positive opinions on their full financial statements. In FY 2016, the Army, 

Navy, and Air Force each expanded their audits of current-year budgetary activity to include an 

additional year’s appropriation. The full financial statements of the Defense intelligence agencies 

are all under audit. The Defense Information Systems Agency’s FY 2016 full financial statements 

are also under audit, and in August 2016, the Defense Logistics Agency FY 2017 full financial 

statements went under audit. Many of our Service Providers, such as DFAS and Defense Contract 

Management Agency, are sustaining examinations of their controls and systems that can then be 

used by their Component customer financial statement auditors, saving time and money.

In FY 2017, 90 percent of General Fund budgetary resources and 54 percent of Working 

Capital Fund budgetary resources will be under audit; 43 percent of total assets will also be under 

audit. In FY 2017, the U.S. Marine Corps will become the first Military Service to have its full 

financial statements under audit. In FY 2017, the Army and Navy full SBR will be under audit; 

and the Air Force SBA will be audited. In FY 2017, DFAS will complete examinations of Vendor 

Pay and Fund Balance with Treasury for the Other Defense Organizations (ODOs). All Military 

Services expect to be ready for full financial statement audits in FY 2018.
U.S. Department of Defense Agency Financial Report for FY 2016 

Management’s Discussion and Analysis

35

Over the next year, the Department will continue to improve and streamline business processes 

and systems. Figure 15 and 16 depict the percentage of the Department’s General Fund and 

Working Capital Fund projected to be under audit in FY 2016, FY 2017, and FY 2018. Additional

information on the FIAR initiative, as well as the Department’s FIAR Plan Status Reports

(FPSR), is available on the USD(C) website.

A AH-1W Super Cobra with Marine Medium Tiltrotor Squadron 264 (Reinforced), 22nd Marine 

Expeditionary Unit (MEU), takes off from the flight deck of the amphibious assault ship USS Wasp (LHD 

1) on July 28, 2016. The 22nd MEU, deployed with the Wasp Amphibious Ready Group, is conducting 

naval operations in support of U.S. national security interests in Europe.

U.S. Marine Corps photo by Cpl. Ryan G. Coleman)
U.S. Department of Defense Agency Financial Report for FY 2016 

Management’s Discussion and Analysis

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Figure 15. General Funds Projected Under Audit in FY 2016, FY 2017, and FY 2018

Based on FY 2015 Total Budgetary Resources

*Incremental Funding represents amounts received prior to FY 2015 which are not included in the FY 2016 SBA. 

Military Service Incremental Funding amounts are calculated using estimates based on FY 2015 Total Budgetary 

Resources.
U.S. Department of Defense Agency Financial Report for FY 2016 

Management’s Discussion and Analysis

37

Figure 16. Working Capital Funds Projected Under Audit in FY 2016, FY 2017, and FY 

2018

Based on FY 2015 Total Budgetary Resources
U.S. Department of Defense Agency Financial Report for FY 2016 

Management’s Discussion and Analysis

38

Financial Management Certification Program

One of the key strategic initiatives for the Department was to 

increase the knowledge and competency level of the DoD work force 

regarding financial management. The DoD Financial Management

(FM) Certification Program, sponsored by the OUSD(C), was 

implemented in FY 2014. As of September 30, 2016, more than

35,626 personnel achieved their required certification. This number 

represents 65 percent of the FM workforce, well above the FY 2016 

goal of certifying 55 percent of the FM workforce.

The Certification Program is course-based rather than test-based,

with course hour requirements aligned to FM and leadership competencies and other specific

courses, namely, audit readiness, ethics, and fiscal law. There are three levels of FM

Certification, and each level includes FM experience requirements. The FM workforce

must achieve certification within two years of assignment to an FM position. After meeting

initial certification requirements, FM personnel must meet continuing education and training

requirements every two years. The Comptroller team developed a comprehensive alignment 

process and aligned existing training to FM competencies. To date, 10,722 courses (3,211 training 

courses and 7,511 academic courses) have been aligned.

In addition to utilizing the existing FM training, the Comptroller team commenced development 

of FM web-based training courses in 2012. To date, 79 new courses have been developed, to 

support the FM certification program; and are available to the workforce, resulting in improved,

cost-free access to training in key subject areas.

To date, more than 400,000 FM web-based course completions have been recorded for the 

79 courses and over 54,583 of these course completions are in the FIAR area. This metric 

indicates that the Department is achieving one of its goals of improving employee knowledge and

competency level in audit readiness.

A mature FM Certification Program will reinforce the culture of professional development 

within DoD, ultimately increasing proficiency in technical and leadership disciplines and enabling 

the FM community to keep pace with evolving warfighter needs. OUSD(C) will continue to 

mature its training program and provide support to warfighters globally.
U.S. Department of Defense Agency Financial Report for FY 2016 

Management’s Discussion and Analysis

39

Institutional Reform

FY 2016 continued the reform agenda advanced in the previous five budgets, with 

ever-increasing emphasis on enhancing DoD business processes. The Department must continue 

to reduce the “cost of doing business” to maximize the availability of its constrained resources for 

the optimum balance of force structure capacity and technological capabilities. This includes 

divesting lower priority or excess force structure and excess infrastructure as well as compensation 

reforms.

The Department has learned from prior draw-downs that it is impossible to generate its entire 

needed savings just through efficiencies. DoD prioritizes by focusing on key missions relevant to 

the future security environment. The Department has also identified unneeded facilities and 

infrastructure that must be eliminated. As DoD draws down to a smaller, more capable, agile force, 

it must eliminate all areas of waste, including the maintenance of unneeded facilities.

DoD continues to realize benefits generated through a series of efficiency initiatives within its 

overhead and mission support functions. These initiatives are identifying and realizing savings that

are being made available to meet the emerging needs within the top line of the Department.

Current initiatives include reduction of MHA, service contract requirements reviews, IT

optimization, leased space consolidation, military healthcare reforms, operational energy 

improvements, implementing more efficient logistics practices, and business optimizations 

including exchanges and commissaries.

Contract Management: The Department obligates over $250 billion annually to contract for 

goods and services, including acquisition of major weapons systems, support for military bases, 

implementing new information technology, and other mission areas. The Department's leadership 

has taken significant steps to plan and monitor progress regarding the management and oversight 

of contracting techniques and approaches. In FY 2016, the OSD staff and the Defense Agencies 

and Field Activities institutionalized a requirements review process known as Service Requirements 

Review Boards (SRRB), complementing similar reviews already underway in the Military 

Departments. SRRBs focus on assessing, reviewing, and validating service contract requirements 

by senior leaders. The process requires organizations to review their service contract requirements 

and assess opportunities for efficiencies, to include elimination of non-value added services, 

identification and elimination of duplicative requirements, realignment of requirements to better 

align to mission, and identification of strategic sourcing opportunities. In addition, the OSD staff 

and Defense Agencies and Field Activities, via the SRRB process, were tasked with capturing 

savings of $1.9 billion by 2021 to facilitate budget cuts over the FYDP. In 2016, 20 senior review 

panels were conducted for 50 organizations, with savings of $141 million identified for FY 2017 

alone.

Major Headquarters Activities: In August 2015, the DepSecDef directed a 25 percent

reduction across all appropriations for DoD MHA in the Military Departments, OSD, the Joint Staff, 

the Defense Agencies and Field Activities, and the Combatant Commands from FYs 2017-2020. 
U.S. Department of Defense Agency Financial Report for FY 2016 

Management’s Discussion and Analysis

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The NDAA directed a $10 billion cost savings by FY 2019 and 25 percent headquarters reductions 

for FY 2016 by FY 2020. In December 2015, the DepSecDef approved an additional reduction of 

$1.39 billion through FY 2021 via programmatic reductions incorporated in to the FY 2017 

President’s Budget. These reductions included significant civilian manpower reductions to OSD 

and the headquarters elements of the Defense Agencies and Field Activities, and included military 

manpower reductions across all headquarters of all joint activities of the Department. The 

Department will be eliminating approximately $7.3 billion from MHA between FYs 2015-2021.

To apply these reductions consistently, the Department adopted a new definition of MHA, 

which was subsequently codified in FY 2016 NDAA. The Department is now in the process of 

applying the new definition uniformly across the board. When fully implemented, the new 

definition will be built into programming and budget elements, enabling the Department to track 

headquarters reduction consistently across organizations and over time. The new definition and 

framework essentially removes smaller organizations from consideration while counting more of 

the staff-like activity in the major DoD Components. As of April 2016, the Department has 

completed the re-baselining process for OSD, the Defense Agencies and Field Activities, the Joint 

Staff, and the Combatant Commands. The baselining process continues with the Military 

Department headquarters elements.

Leased Space: In FY 2014, the Department started with a baseline of 5.4 million square feet of 

DoD-occupied space in the National Capital Region (NCR). The Department set forth with a plan 

to reduce this footprint by 1.2 million square feet prior to FY 2020. To date, the Department has 

eliminated 267,000 square feet of leased space used in the NCR by making better use of government 

space, resulting in a savings to the Department of $10 million per year beginning in FY 2016. The 

Department will release an additional 886,000 square feet by FY 2020 for a total saving of 

$43 million per year thereafter. In addition to the FY 2014 planned efforts, the Department

continues to look for additional leased space savings within the NCR, and will also look into 

opportunities nation-wide.

Defense Resale: Recent budget proposals sought to reduce Defense Commissary Agency 

(DeCA) funding by more than 70 percent, or $1 billion per year, beginning in FY 2017. In order 

to implement a phased approach, the Department requested an alternate plan in the FY 2017 

President’s Budget to achieve DeCA savings of $1 billion per year by FY 2021, resulting in a total 

savings of $2 billion over the FYDP. A key element in the effort to achieve improved business 

practices in the commissaries and exchanges is the creation of a Defense Resale Business 

Optimization Board (DRBOB), empowered to find efficiencies and optimize the resale enterprise 

based on sound business practices. The DepSecDef chartered the DRBOB on February 5, 2016. 

The DRBOB is expected to establish a baseline of current benefits and determine costs, savings, 

and schedules associated with the implementation of business optimization proposals.

Information Technology Optimization: Several concurrent initiatives are contributing to 

$1.8 billion in savings in IT between FYs 2017-2021. Changes in Defense travel are underway 

with a new travel platform being implemented, resulting in savings of $520 million. Data center 
U.S. Department of Defense Agency Financial Report for FY 2016 

Management’s Discussion and Analysis

41

infrastructure improvements, circuit optimization and enterprise licensing will achieve a total 

savings of $715 million. Reviews of the MHS identified more than $430 million in savings and 

NCR IT-consolidation efforts are expected to achieve savings of $165 million.

Business Operations Improvements: The Department identified IT net benefits resulting from 

current Fourth Estate investments to develop, modernize, or enhance business systems. These 

benefits will enable a $310 million reduction of business operations costs resulting from IT 

modernization investments in the Fourth Estate between FYs 2017-2021. Although the net benefits 

analysis and findings do not currently capture any Defense health savings, the Department continues 

to analyze this business area to determine if additional potential savings can be achieved in the 

future.

Military Healthcare: The Department has proposed various ways to reform TRICARE for 

several years and the reforms currently reflected in the budget to give beneficiaries more simplicity 

and choice in how they manage their healthcare, while also incentivizing the much more affordable 

use of military treatment facilities. These reforms will not only save money but will also maximize 

the workload and readiness of our Military’s medical force; giving our doctors, nurses, medics, 

and corpsmen the experience they need to be effective in their mission. Together, this should 

generate about $548 million in savings in FY 2017 and almost $7 billion over the FYDP that can 

be better spent in other ways without sacrificing the care of our people.

Canadian Cpl. James Sinclair, center, a medic, with the 31 Canadian Forces Health Service, works alongside 

U.S. Soldiers during Combat Support Training Exercise at Fort McCoy, Wis., Aug. 20, 2016. 

U.S. Army photo by Staff Sgt. Debralee Best
U.S. Department of Defense Agency Financial Report for FY 2016 

Management’s Discussion and Analysis

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Operational Energy: The Department is reducing its demand of facility energy by investing 

in efficiency and conservation projects on its installations. The Department continues to reduce 

energy costs and maximize payback in order to achieve the best return on investment. The majority 

of DoD investments in energy conservation are sustainment and recapitalization projects funded by 

the Military Departments’ Operation and Maintenance appropriations. Such projects typically 

involve retrofits to incorporate improved lighting; high-efficiency heating, ventilation, and air 

conditioning systems; double-pane windows; energy management control systems; and new roofs.

In addition to using appropriated funding to improve efficiency, both in the Components' budget 

and the Defense-wide Energy Conservation Investment Program (ECIP), DoD Components are 

leveraging private capital through the use of performance-based contracts to improve the energy 

efficiency of existing buildings. In 2011, the President issued a memorandum calling on the Federal 

Government to initiate $2 billion worth of performance-based contracts. In May 2014, the 

President extended the goal to $4 billion to be achieved by December 2016. The Department is 

responsible for $2.2 billion of the Federal Government goal for performance based contracts.

The Department continues to invest in energy and water conservation, renewable and distributed 

energy, as well as energy resilience projects using both appropriations and third-party financing. 

For example, the ECIP is a $150 million annual Military Construction (MILCON) program 

centrally managed by OSD to fund projects that save energy or reduce Defense energy costs. It 

evaluates potential projects using a variety of criteria, including cost effectiveness, savings to 

investment ratio, and financial payback. Congressional appropriations amounting to approximately

$800 million funded 1,283 projects in FY 2014. The majority, 82 percent, were energy 

conservation projects. The rest of the projects are renewable energy and water conservation (12 and 

6 percent, respectively).

Logistics: “Effectiveness first--then efficiency” is the culture of the Defense Logistics Agency 

(DLA) Energy. DLA completed a 14-month resource management decision study for OSD that 

helped address a decades-old real property/audit readiness problem and identified more than 

$200 million in annual sustainment savings for the Department. DLA instituted right-size planning 

at strategic storage locations in Hawaii, Japan, and Spain that cut future construction and repair 

costs by 15 percent; and extended DLA’s Sustainment, Restoration, and Modernization (SRM) 

recurring maintenance program to the Air Force to increase operational availability and lower costs, 

in spite of having smaller annual SRM and MILCON budgets for the year. DLA Energy also 

introduced a new term in the DoD lexicon: SRM repair “velocity”, creating new accountability 

metrics and synchronizing program oversight controls which decreased requirement approval time 

by 66 percent, and increased the number of tanks returning to service by 64 percent for the year, 

which reduced repair backlogs in FY 2016 by 98 percent. 

DLA continued to set the standard for world-class support and productivity by delivering 

98 million barrels of fuel, 35 million cubic feet of helium and more than 58 million kilowatt hours 

of electricity to customers around the globe. The momentum continued in FY 2016 with a new 

imperative, “Global Commercial Supply Chain Velocity and Integration.” The realities of 
U.S. Department of Defense Agency Financial Report for FY 2016 

Management’s Discussion and Analysis

43

near-peer capabilities, aging and vulnerable infrastructure combine to make increased commercial 

integration a necessary step to support warfighter requirements in an era of declining logistics 

investment budgets. Future mandatory increases in redundancy and resiliency thus lie in the 

establishment of additional commercial capabilities, new safe-haven harbors, and cooperative 

storage contracts with partner-nations in Australia, Japan and Eastern Europe, and new research 

and development capabilities to decrease reliance on fixed infrastructure. Robust supply chains in 

the continental United States will facilitate the elimination of intermediate storage, and the 

establishment of “on-call” reserves which will cut inventory holding and storage costs by 

$200 million per year with no decrease in warfighter capability.

DLA Energy has partnered with various energy service companies (ESCO) to complete energy 

savings projects for Department installations. The ESCO conducts a comprehensive energy audit 

and identifies improvements to save energy. In consultation with DLA Energy and the 

installations, the ESCO designs and constructs projects that meet the installation’s needs and 

arranged the necessary funding for the project. The ESCO guarantees that the improvements will 

generate energy cost savings to pay for the project over the term of the contract (up to 25 years). 

For example, an investment of $133.5 million across seven installations is anticipated to yield 

more than $316 million in cost savings. After the contract ends, all additional cost savings accrue 

to the installations.

Finally, 2016 marks the beginning of DLA's pursuit of next generation alternative fuels: high 

volume, cost-competitive, lifecycle carbon-negative aviation and maritime products. The DLA's 

partnership with the White House Advanced Market Commitments Working Group focusing on 

emerging technologies in waste-to-energy capabilities and investment incentives, seek to spawn 

an indigenous U.S. industry in the next five years that better meets warfighter, environmental and 

cost needs for our nation.

As the DLA mission realigns with the realities facing its customers and the constraints caused 

by reducing budgets, each Distribution Center across the DLA network has right-sized their 

equipment fleets and improved their utilization rates. DLA identified 461 pieces of equipment for 

disposal in FY 2015 through a detailed analysis of requirements and benchmarking against the 

leading companies in the commercial sector. These efforts resulted in DLA’s ability to turn in older 

assets, reducing the size of the fleet from an average age of 10 years to 8 years, creating a more 

modern and standard fleet, and saving the taxpayers $2.9 million. 

The Department’s efforts have enabled DLA Distribution to increase ocean container utilization 

to over 85 percent, saving taxpayers $16.4 million over the last 3 years. In addition to looking at 

ocean containers, DLA analyzed the cost of its scheduled truck network and found ways to increase 

its efficiency and effectiveness. By determining the cost break-even points for each route, DLA 

has been able to optimize delivery to each customer, expanding old routes and creating new routes. 

DLA reduced transportation costs by providing regular deliveries to warfighter concentrations. 

Over the past 3 years, DLA Distribution has provided $27.4 million in savings directly to its 

customers by utilizing its scheduled truck routes. The Department is reviewing its transportation 
U.S. Department of Defense Agency Financial Report for FY 2016 

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program in order to develop a best-value solution to meet warfighter and customer needs while 

reducing taxpayer burden.

A United Launch Alliance Delta IV-Heavy rocket lifts off from Space Launch Complex 37B at Cape 

Canaveral Air Force Station, Florida, June 11, 2016, at 1:51 p.m. ET. The ULA Delta IV rocket carried a 

classified national security payload for the U.S. National Reconnaissance Office. 

Courtesy photo by ULA
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INTERNAL CONTROLS OVERVIEW

MANAGERS’INTERNAL CONTROL PROGRAM

OUSD(C) leads the Department’s Federal Manager s’ Financial Integrity Act (FMFIA)

program, known as the Managers’ Internal Control Program (MICP). The Department is committed

to ensuring effective internal management controls for all mission-essential processes. The MICP

holds both operational and financial DoD managers accountable to ensure effective internal

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

robust programmatic approach to establish and assess internal management controls for all

financial and non-financial mission-essential operations. Components that produce stand-alone

financial statements are also required to provide financial reporting assurance.

The Department advocates a “tone at the top” approach, with emphasis on the importance of

the internal control program, which permeates the entire DoD culture. The purpose of the MICP

is to identify, prioritize, and mitigate high operational and financial risk before it impedes the

mission. Per DoD Instruction 5010.40, each Component uses its leadership’s mission

requirements as a baseline for executing assessments of key functional operational and financial

areas. Instead of relying on external auditors to identify material control weaknesses,

Components rely upon appointed assessable unit managers for each key operational and financial

area to identify and self-report internal control deficiencies for review and comment by

leadership. This process complements the Government Accountability Office’s (GAO)

Standards for Internal Control in the Federal Government (“Green Book”) through the

Department’s reliance upon the Risk Enterprise Framework approach to ensure we prioritize

systemic operational and financial risk for corrective action.

Types of Material Weaknesses

The Department’s management uses the following criteria to classify conditions as

material weaknesses:

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

Congressional oversight committees;

 Hinders management’s ability to prevent or detect a material misstatement of the

financialstatements;

 Impairs fulfillment of essential operations or mission;

 Identified as a “high risk” by GAO or DoD IG;

 High impact of occurrence in terms of loss of dollars and loss of life;

 Significantly weakens established safeguards against waste, loss, unauthorized use or

appropriation of funds, property, other assets, or conflicts of interest;

 Constitutes substantial noncompliance with laws and regulations;

 Nonconformance with government-wide, financial management system requirements;

and

 Identified by independent public accountants as material weaknesses.
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Based on the Department’s assessment of internal controls, the DepSecDef signed the

Statement of Assurance that follows on the next page.

The Army Reserve’s 85th Support Command received a 100 percent passing rate, for the second year in a row, 

for the command's IR Annual Statement of Assurance (ASOA) report submission. The ASOA is a mandatory 

reporting requirement observing and assisting in the efficiency and processes of a command's staff sections. The 

85th Support Command was the only command to receive the 100 percent passing rate, for a consecutive second 

year, across all of the Army Reserve's major subordinate commands. 

U.S. Army photo by Anthony L. Taylor/Released
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STATEMENT OF ASSURANCE

The leaders of the Department of Defense recognize that a key factor in improving accountability in 

achieving the Department’s mission is to establish and maintain effective internal controls and financial 

management systems that meet the objectives of the Federal Managers’ Financial Integrity Act of 1982 

(FMFIA), the Federal Financial Management Improvement Act of 1996 (FFMIA), and related statutory and 

federal policy guidance. The reliance upon effective internal controls empowers leaders with timely and 

accurate information to assess whether the Department is achieving its goals.

The Department conducted its assessments of the effectiveness of internal controls over operations in 

accordance with the objectives of FMFIA. Based on this assessment, the Department provides a qualified 

statement of reasonable assurance that its internal controls over the effectiveness and efficiency of 

operations and compliance with applicable laws and regulations achieve the objectives of the FMFIA, as 

of September 30, 2016. The Department continues to prioritize efforts to also ensure that relevant 

Government Accountability Office “high risk areas” and the Department’s Office of Inspector General 

“management challenges” are being addressed.

While several entities within the Department are sustaining positive financial statement audit opinions, 

DoD as an agency cannot yet produce auditable financial statements. As a result, management provides no 

assurance as to the effectiveness of the Department’s internal controls over financial reporting in 

accordance with OMB Circular No. A-123, Appendix A, as of June 30, 2016. And while the Department is 

far from reaching an unqualified statement of reasonable assurance on its financial statements, it has made 

measured progress through increased senior leader emphasis on improving the quality of financial 

information and ultimately achieving this goal. The Department recognizes that auditable financial 

statements require a sound framework of internal controls and an organizational culture that promotes the 

identification, prioritization, and mitigation of financial reporting risk.

Closely related to efforts to improve financial reporting and achieve auditability, the Department also 

conducted its assessment of the effectiveness of internal controls over its integrated financial management 

systems. Based on the results of this assessment, and as confirmed by initial feedback from financial audits, 

the Department provides no assurance that its internal controls over its integrated financial management 

systems are compliant with FFMIA and OMB Circular No. A-123, Appendix D, as of June 30, 2016. The 

Department realizes that properly planned and integrated systems, with strong internal controls, are critical 

to providing useful, timely, and complete financial information and to achieving auditability.

Remediation of current deficiencies and weaknesses remains the priority for measuring progress against 

current audit goals. The Department’s Financial Improvement and Audit Readiness initiative is focused 

upon the identification and implementation of improvements in the Department’s financial processes and 

related internal controls. These improvements include the aggressive identification and prioritization of 

operational and financial risk in accordance with the Government Accountability Office’s 2014 “Standards 

for Internal Control in the Federal Government.” The Department remains committed to significant and 

measureable improvement in its ability to provide reliable, timely, and useful financial and managerial 

information to support management decisions.

Robert O. Work

Deputy Secretary of Defense
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FY 2016 Improvements in Internal Controls

Strong internal controls are essential to achieving and sustaining a cost-effective audit

regimen. Despite many challenges, the Department is steadily improving internal controls. 

Some challenges and accomplishments are highlighted below.

1. Intragovernmental Transactions: Intragovernmental transactions result when business is

conducted between two federal entities. Both entities must accurately record the event

so that the buying and selling documentation can be matched. Imbalances occur when

the federal entities are unable to account for and reconcile differences. These differences

often lack proper documentation. To address this issue, the Department is aligning

how it records intragovernmental transactions by mandating the use of the Department

of the Treasury’s G-Invoicing system. The Department mandated the use of G-Invoicing 

to broker and store the general terms and conditions for intragovernmental transactions and 

in FY 2016 established a goal of 75 percent for new reimbursable work to be conducted 

using G-Invoicing. The Department created targeted working groups to focus on 

developing standard processes for buying and selling, defining required system and data 

exchanges, and standardizing data elements. The working groups also developed processes 

for reporting program status, generating required financial reporting, and managing training 

for new processes and data standards. Additionally, the Department worked with Treasury 

and other federal agencies to publish a government-wide data standard for 

intragovernmental transactions. The Department implemented internal controls in 

intragovernmental transactions to provide visibility of the receipt of goods and/or services 

as receipt and acceptance must be recorded before payment; and effectively capturing 

trading partner information. These process improvements increase transparency across the 

government and provide the ability to trace funding from initial agreement to payment.

2. Critical Accounting Policies: The Department issued several critical policies to remediate

audit readiness impediments and develop practical and GAAP-compliant solutions to 

long-standing issues. During FY 2016, the Department’s policies addressed the following 

key areas:

 Financial Management Requirements for Using Sub-allotments

 DoD Risk Management Framework 

 Accounting for Internal Funds Distributions

 Data Standardization Memo for Accounting Systems to Comply with Data and 

Configuration Requirements

 Financial Reporting Policy for Real Property Estimated Useful Lives, Land 

Valuation, and Accounting for Real Property Outside the U.S

 Accounting Treatment of Long Range Ballistic Missiles

 Strategy and Implementation Guidance for General Equipment Valuation
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 Alternative Valuation Methodology for Establishing Opening Balances for 

Buildings, Structures and Linear Structures

 Inventory and Related Property Accounting Policy Requirements

These policies improved internal controls by establishing customer support requirements 

for sub-allotted funding. In addition, policies for accountability and valuation of assets 

include the development of methodologies for a GAAP-compliant process for allocating 

costs to capitalized equipment, establishing Construction in Progress opening balances, and 

using plant replacement values to establish and support real property opening balances.

3. Service Provider Integration: A service provider is an entity that performs a business

function or process on behalf of a DoD Component. In order for service provider

customers to become audit ready, a service provider’s audit readiness activities must

be fully integrated within its customers’ audit readiness activities. The Department

issued a service provider Statement on Standards for Attestation Engagements (SSAE) No. 

18 (formerly SSAE 16) examination policy memorandum that requires enhancements be 

made to improve the reliance and usefulness of SSAE No. 18. The Department also 

conducted tri-annual service provider working group meetings between service providers 

and their Component customers to identify audit relevant dependencies, clarify roles and 

responsibilities, and report audit readiness progress, deficiencies, and corrective actions. 

Successful service provider SSAE 16/18 have improved the quality of internal controls over 

service providers. The Department is expanding service provider integration by:

 Facilitating meetings where service providers identify and explain to Component 

customers the complementary user entity controls (CUECs) expected to be included 

in the SSAE 18 examinations. The Department hosted nine CUEC workshops, 

provided baseline / standardized control descriptions, and is developing baseline 

test plans to help ODOs implement effective controls to address the CUECs.

 Developing templates to assist the service providers in addressing the new 

requirements.

 Performing quality assurance reviews of service provider audit readiness 

deliverables.

 Reviewing service organization control examination reports to determine whether 

the examination scope was sufficient or additional examinations are needed to 

have complete coverage of audit relevant business processes and systems.

 Obtaining findings and recommendations from existing SSAE No. 16/18 

examinations with modified opinions and tracking service provider corrective 

actions and testing to ensure the findings and recommendations are remediated.

4. Treasury Index-97 Internal Control Management: The Department has taken strides to 

improve internal controls amongst the Treasury Index (TI)-97 entities. Specifically, in 

FY 2016 the OUSD(C)/FIAR began testing the audit infrastructure, key supporting 
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documentation, and internal controls for select processes on a monthly basis.

OUSD(C)/FIAR also maintains a Notice of Findings and Recommendations (NFR) 

tracking tool which serves as a centralized database that provides increased visibility into 

the Department’s audit readiness progress and overall risk. The tool also allows the 

Department to monitor the progress of remediation activities and corrective action plans 

for TI-97 entities. To support the goal of enhancing the Department’s internal controls, 

OUSD(C)/FIAR is laying the groundwork to support the audit of the Department’s 

financial statements. This includes documenting Entity-Level Controls (ELCs) in 

accordance with the GAO Green Book 17 principles of internal controls. OUSD(C) FIAR 

developed an ELC End State matrix for Components to use as a tool in documenting ELCs;

and plans to integrate ELC with MICP to improve cross-communication, share best 

practices and lessons learned, and push for continuous process improvements.

The Department’s efforts towards improving internal controls amongst the TI-97 entities 

has achieved significant milestones including remediation of issues identified during 

monthly testing efforts, development of end-to-end documentation, and greater 

accountability towards corrective action plan remediation.

5. Standard Financial Information Structure and Standard Line of Accounting: The 

Department lacked a common financial business language that standardizes data elements, 

business rules, and the transaction posting logic used in DoD financial management 

systems. To facilitate reconciliations between systems, the Standard Financial Information 

Structure (SFIS) and the Standard Line of Accounting (SLOA) were established for the 

Department's Enterprise Resource Planning Systems (ERPs)/accounting systems and key 

financial systems for data and interoperability standards. To verify compliance with data 

standards, the Joint Interoperability Test Command (JITC) began independent verifications 

of the ERPs/accounting systems and key financial systems to determine system compliance 

with SFIS, SLOA, U.S. Standard General Ledger posting logic, tie-points, and trading 

partner interoperability standards. Aligned with Federal Information System Controls 

Audit Manual general application and interface controls, the results of JITC verification 

provides further insight into compliance of DoD systems.

6. Fund Balance with Treasury and Cash Accountability: Unresolved FBWT differences

between DoD and Treasury are material and jeopardize achieving a “clean” audit opinion

on the financial statements. The Department endorsed a target end-state for cash 

accountability and reconciliations that delivers a single, auditable, enterprise-wide FBWT 

solution. The Department’s solution also aligns with Treasury’s modernization initiatives. 

The Department is defining data standards to improve data quality and auditability. SLOA 

validation service was developed for use early in the Procure-to-Pay process. This 

validation can also be used in other end-to-end processes, such as Orders-to-Cash, 

Hire-to-Retire, and Budget-to-Report. The infrastructure and data exchanges are under 

development and should be operational by the end of FY 2017.
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7. Information Technology System Initiatives: To achieve and sustain audit readiness, the 

Department must develop and maintain an audit-ready IT systems environment. The 

Department and system owners are working hard to develop a sustainable audit ready 

systems environment and have implemented the following actions:

 Required all Components to submit detailed information and milestones for 

material IT systems twice yearly to monitor and track audit readiness progress.

 Conducted a series of workshops to improve reporting entities' ability to use 

existing SSAE 18 examination reports and identify complimentary user entity 

controls for which they are responsible.

 Identified additional service provider processes and systems for which 

SSAE 18 examinations would support overall audit efficiency and worked with 

service providers to prioritize and accelerate delivery of the 

SSAE 18 examination reports.

 Developed supplemental guidance to the new system certification and 

accreditation process that defined supplemental activities required to 

concurrently address audit readiness requirements.

 Required Components and service providers to undergo SFIS Compliance 

Assessments for key accounting systems and service provider systems.

U.S. Marine Corps Lance Cpl. Cesar Salinas, an infantry Marine with 3rd Battalion, 5th Marine Regiment, 

assists his squad by providing reconnaissance with an Instant Eye at Marine Corps Base Camp Pendleton, 

Calif., July 13, 2016. The system is meant to increase initial visibility of the enemy before the Marines need 

to engage them and was built by the Marine Corps Warfighting Laboratory to assist Marines. The lab is 

conducting a Marine Air-Ground Task Force Integrated Experiment in conjunction with Rim of the Pacific 

exercise to explore new gear and assess its capabilities for potential future use. The Warfighting Lab identifies 

possible challenges of the future, develops new warfighting concepts, and tests new ideas to help develop 

equipment that meets the challenges of the future operating environment.

U.S. Marine Corps photo by Lance Cpl. Julien Rodarte
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BUSINESS AND FINANCIAL MANAGEMENT SYSTEMS

The Department is improving its business systems to successfully achieve and sustain

improvements in our internal controls, financial management, and auditable financial reports. 

Modernization and improved interoperability of DoD business systems is critical to efficiently

respond to Warfighter needs and sustain public confidence in our stewardship of taxpayer funds.

Following enactment of section 901 of the NDAA for FY 20122, the Department significantly

changed the requirements for investment reviews and the certification of defense business

systems, which now must occur before funds are obligated (appropriated or non-appropriated). 

The Department’s investment review process ensures that decisions on investments in business

systems align with the Defense-wide integrated business strategy (Figure 17). These decisions

also include retirement plans for legacy and non-target financial systems and ensure that

systems eliminate redundant activity and maximize operating efficiency through streamlining

business processes and the availability of timely, accurate, and useful business information.

Figure 17. The Department’s Integrated Business Framework

The Department’s FM Functional Strategy provides the Department’s vision, initiatives, goals, 

target environment, and expected outcomes over the next five years. The strategy is designed to 

ensure the Department achieves and sustains auditability and financial management improvement 

objectives.

The key components of the FM Functional Strategy include establishing data and data 

exchange standards, standard business processes, and system controls and enhancements that 

support improved processes, and leveraging technology across the Department’s end-to-end 

 

2 Section 901 of the National Defense Authorization Act for FY 2012, codified at 10 U.S.C. 2222, “Defense business 

systems: architecture, accountability, and modernization”
U.S. Department of Defense Agency Financial Report for FY 2016 

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processes. The primary objectives of the FM Functional Strategy are to achieve a fully integrated 

environment linked by standard processes, standard data, with the fewest number of systems and 

interfaces. Ultimately, this strategy will lead to stronger internal controls impacting financial 

reporting and auditability, and improve end-to-end funds traceability and linkage between budget 

and expenditures. Current enterprise-level initiatives include the SFIS the Department’s first ever

SLOA to improve funds traceability and financial reporting. The Department also participates in 

federal government-wide process improvement initiatives, such as the President’s transparency 

and open government initiatives, Treasury’s government-wide accounting and Direct-to-Treasury 

disbursing initiatives. The Department also promotesthe use of business analytics and maximizing 

existing ERP systems.

Figure 18. DoD Financial Management Improvement Initiatives

The FM Functional Strategy also provides the plan to retire and replace legacy financial

systems to simplify the FM systems environment and infrastructure. Under the legacy

systems reduction plan, financial management core and feeder systems should be reduced from

327 systems at the beginning of FY 2014 to 120 systems by the end of FY 2019.
U.S. Department of Defense Agency Financial Report for FY 2016 

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ENTERPRISE RESOURCE PLANNING SYSTEMS

The ERP systems are integral to implementing the strategic FM business process

improvements, achieving the planned target environment and reductions in the number of legacy

systems, and better enabling a sustainable audit environment. The ERPs provide a broad range

of functionality to support DoD business operations in financial management, supply chain

management, logistics, and human resource management. Some ERPs are fully fielded while

others are in a state of development and deployment.

Army ERPs

General Fund Enterprise Business System (GFEBS) is the General Fund accounting, asset

management, and financial system used to standardize, streamline, and share critical data across

the active Army, Army National Guard, and Army Reserve. GFEBS is a web-based ERP

solution that uses commercial off-the-shelf (COTS) business enterprise software to compile and

share accurate, up-to-date financial and accounting data.

Logistics Modernization Program (LMP) is one of the world’s largest, fully integrated

supply chain, maintenance, repair and overhaul, planning, execution, and financial management

systems. The LMP mission is to sustain, monitor, measure, and improve the modernized,

national-level logistics support solution. By modernizing both the systems and the processes

associated with managing the Army’s supply chain at the national and installation levels,

LMP will permit planning, forecasting, and rapid order fulfillment to supply lines. It will also 

improve distribution, reduce theater footprint, and ensure a warfighter who is equipped and

ready to respond to present and future threats.

Global Combat Support System – Army (GCSS-A) provides enterprise-wide visibility into

various logistics areas and is a key enabler for the Army in achieving auditability. The

GCSS-A provides the tactical warfighter with supply, maintenance, property accountability,

integrated materiel management center, management functionality, and support to tactical

financial processes.

Integrated Personnel Pay System – Army (IPPS-A) is a hybrid solution using ERP

software to deliver an integrated personnel and pay capability. The IPPS-A will provide the

Army with an integrated, multi-component personnel and pay system that streamlines Army

Human Resources processes, enhances the efficiency and accuracy of Army personnel and pay

procedures, and supports soldiers and their families. The IPPS-A will improve internal

controls to prevent erroneous military payments and loss of funds.

Navy ERPs

Navy Enterprise Resource Planning (Navy ERP) is an integrated business system that

provides streamlined financial, acquisition, and supply chain management to the Navy’s major

systems commands.
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Global Combat Support System – Marine Corps (GCSS-MC) is the core web-enabled,

centrally managed ERP for the Marine Corps. The GCSS-MC is focused on the acquisition

and implementation of the initial set of logistics capabilities to deliver improved supply and

maintenance management services. As the technology centerpiece of the Marine Corps’

overall logistics modernization effort, GCSS-MC will provide advanced expeditionary logistics

capabilities to ensure future combat efficiency.

Air Force ERPs

Defense Enterprise Accounting and Management System (DEAMS) is an automated 

accounting and financial management execution system for the Air Force and U.S. Transportation 

Command. DEAMS is the core accounting and financial management solution for the 

Transportation Working Capital Fund and General Fund. It serves as the financial foundation for 

all enterprise business system modernization across the Department. DEAMS provides accurate 

and timely financial information using standardized business processes and complies with 

applicable federal laws, regulations, and policies. By the first quarter of FY 2017, DEAMS will 

have approximately 12,600 users at 131 locations across the Air Force and Combatant Commands.

Air Force Integrated Personnel and Pay System (AF-IPPS) is a comprehensive,

self-service, web-based solution currently in development that integrates personnel and pay

processesinto one system and maintains an official member record throughout the airman’s career. 

An FFMIA-compliant system, AF-IPPS functionality will support audit readiness general and

application controls. Full deployment is projected for the fourth quarter of FY 2018.

U.S. Marines with 2nd Light Armored Reconnaissance Battalion, Bravo Company, 2nd Marine Division 

prepare for training exercises at Ft. Pickett, Va., Aug. 29, 2016. The Marines conducted live -fire exercises 

to maintain unit readiness and tactical proficiency. 

U.S. Marine Corps photo by Sgt. Rebecca L. Floto, 2d MARDIV Combat Camera
U.S. Department of Defense Agency Financial Report for FY 2016 

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Other Defense Organization ERPs

Defense Agencies Initiative (DAI) is a system dedicated to address financial management

improvements through standard end-to-end business processes delivered by COTS software. 

DAI provides accounting, procure to payment, and time and attendance capability today; and will

provide grants, financial management, and budget formulation capability in the future. By the

end of FY 2017, 20 of 26 Defense Agencies will have deployed DAI.

Enterprise Business System (EBS) uses a COTS product to manage DLA’s supply chain

management business. EBS also includes Electronic Procurement, Real Property, Inventory

Materiel Management and Stock Positioning, and Energy Convergence modules, providing

DLA leadership with the tools to respond to new challenges and trends.

IMPROPER PAYMENT REPORTING

The DoD Financial Management Regulation (FMR) 7000-14-R, Volume 4, Chapter 14,

defines improper payments as “any payment that should not have been made or was made in

an incorrect amount under statutory, contractual, administrative, or other legally applicable

requirements.”

In accordance with the Improper Payments Information Act of 2002 (IPIA) (P.L. 107-300);

Improper Payments Elimination and Recovery Act of 2010 ( I P E R A ) (P.L. 111-204); Improper 

Payment Elimination and Recovery Improvement Act of 2012 (IPERIA) (P.L.112-248); Executive

Order 13520, Reducing Improper Payments, issued November 20, 2009; and Appendix C of

OMB Circular No. A-123, Defense C omponents are required to report the status of improper

payments and recovery of these improper payments to the President and Congress in the

following categories:

• Commercial Pay

• Civilian Pay

• Military Pay

• Travel Pay

• Military Health Benefits

• MilitaryRetirements

Each DoD disbursing activity is committed to identifying the root causes of improper

payments, establishing an appropriate sampling methodology, developing and implementing

corrective action plans, and monitoring to ensure future improper payments are reduced and/or

eliminated.

One recent success: DFAS revised the statistical sampling methodology for Defense Travel 

System and Integrated Automated Travel Systems for Windows and Commercial Pay improper 

payments. Both revisions are stratified by invoice dollar amounts and are consistent with recent 

GAO and DoD IG recommendations. The reports will be generated cumulatively at the end of each 
U.S. Department of Defense Agency Financial Report for FY 2016 

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quarter for review. The Commercial Pay revised methodology includes two additional pay systems 

for a comprehensive review of all Departmental Commercial Pay programs.

As the Department moves towards the Congressional 2017 mandate to have fully

auditable financial statements, the reduction and prevention of improper payments will ensure

the Department achieves Congress’s established goal. Towards this goal, the Department is in the 

process of implementing a revised Travel Pay Remediation Plan, to prevent improper payments in 

this high risk area. Detailed information regarding improper payments is located in the Other 

Information section of this report.

U.S. Airmen assigned to the 20th Force Support Squadron Honor Guard fall in line before performing a firing party 

ceremonial procedure at Shaw Air Force Base, S.C., June 17, 2016. Honor guardsmen perform numerous details on 

base to include: retirements, change of commands, and promotion ceremony details. 

U.S. Air Force photo by Airman 1st Class Christopher Maldonado
FISCAL YEAR 2016

AGENCY FINANCIAL REPORT

FINANCIAL SECTION

UNITED STATES DEPARTMENT OF DEFENSE
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MESSAGE FROM THE CHIEF FINANCIAL OFFICER

It is my pleasure to present the Department of 

Defense (DoD) fiscal year (FY) 2016 financial

statements. This report reflects the Department's 

continued commitment to transparency and responsible

stewardship oftaxpayer dollars used to protect our nation.

DoD is a unique and complex organization faced with

many operational and strategic challenges. The

Department's mission, to protect our nation and that of our

allies and partners, is dependent on the availability of

timely and stable budgetary resources. The Department

must efficiently translate our mission into a comprehensive

budget request that ensures our warfighters have sufficient

resources required to be successful. Effective oversight of

budgetary resources is imperative for the accurate

allocation and timely execution of resources. The

Department continues to seek and evaluate ways to

achieve potential savings in its stewardship over budgetary

resources.

The Department is steadfast in its commitment to achieving auditable financial statements.

F 2016 marks the second year with each military service under a limited scope audit of their budgetary 

resources, with all organizations looking to expand to full financial statement audits not later than

FY 2018. For example, the Defense Logistics Agency, the Defense Information Systems Agency and

the U.S. Marine Corps are currently under contract for full financial statement audits in FY 2017; and

will be joined soon by the Army (Working Capital Fund). This process of an annual audit regimen

will reinforce the kind of discipline that our audit readiness efforts have envisioned with Independent 

Public Accounting firms providing feedback that will ensure that we can target our remediation efforts

with the appropriate priority. We continue to use the senior leadership "tone at the top" provided

by the Secretary and Deputy Secretary to reinforce the priority of our efforts and the fact that this is

truly a team sport, involving personnel from all aspects of our businessthat supports our warfighters.

Finally, our people continue to be our most valuable resource. The professional and career

development of the Department's financial management workforce is a priority. Our commitment to

building and sustaining a highly competent financial management workforce includes training and

financial management certification programs. I am proud of our professionals who have received their

DoD Financial Management Certification and those who are currently working towards this important

recognition of their knowledge and skills.

While much has been accomplished, many financial management challenges lie ahead for the

Department to fully achieve its audit goals. The Department remains committed to meeting these

challenges and achieving financial management excellence in the coming years. I am confident that

we have laid a foundation that will allow the Department to meet these challenges.

Michael McCord

UnderSecretary of Defense (Comptroller)/ 

Chief FinancialOfficer
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U.S. Department of Defense Agency Financial Report for FY 2016 

Financial Section

PRINCIPAL FINANCIAL STATEMENTS AND NOTES

LIMITATIONS OF THE FINANCIAL STATEMENTS

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

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

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

Management and Budget (OMB) Circular No. A-136, “Financial Reporting Requirements” and, 

to the extent possible, U.S. Generally Accepted Accounting Principles (GAAP). The statements, 

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

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

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

The financial statements of the Department include four principal statements listed in the table 

below. 

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

both the proprietary (Federal accounting standards) and budgetary resources of the Department. 

The Department is large and complex with an asset base of $2.4 trillion, and approximately 

1.3 million personnel in the active component, more than 810,000 personnel serving in the National 

Guard and Reserve forces, and about 750,000 civilians employees on installations in every state 

and around the world. 

Four Principal Financial Statements 

Statement What Information It Provides

Balance Sheet

Reflects the Department’s financial position as of the statement date 

(September 30, 2016). The assets are the amount of future economic benefits 

owned or managed by the Department. The liabilities are amounts owed by the 

Department. The net position is the difference between the assets and liabilities.

Statement of Net 

Cost

Shows separately the components of the net cost of the Department’s operations 

for the period. Net cost is equal to the gross cost incurred by the Department 

less any exchange revenue earned from its activities.

Statement of 

Changes in Net 

Position

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

unexpended appropriations provided to the Department that remain unused at the 

end of the fiscal year. The statement focuses on how the net cost of operations is 

financed. The resulting financial position represents the difference between 

assets and liabilities as shown on the consolidated balance sheet.

Statement of 

Budgetary 

Resources

Provides information about how budgetary resources were made available as 

well as their status at the end of the period. It is the only financial statement 

exclusively derived from the Department’s budgetary general ledger in 

accordance with budgetary accounting rules. The Statement of Budgetary 

Resources is the only principal financial statement prepared on a combined 

versus consolidated basis. As such, all intra-entity transactions are included in 

the balances reported in the statement. 

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U.S. Department of Defense Agency Financial Report for FY 2016 

Financial Section

61

Department of Defense Consolidated Balance Sheet

Agency Wide Dollars in Millions

As of September 30, 2016 and 2015

2016

Consolidated

Restated

2015

Consolidated 

ASSETS (Note 2)

Intragovernmental:

Fund Balance with Treasury (Note 3) $ 474,289.0 $ 467,374.4

Investments (Note 4) 910,567.9 844,664.9

Accounts Receivable (Note 5) 1,907.6 1,467.5

Other Assets (Note 6) 1,253.4 1,064.2

Total Intragovernmental Assets $ 1,388,017.9 $ 1,314,571.0

Cash and Other Monetary Assets (Note 7) 1,152.3 1,142.2

Accounts Receivable, Net (Note 5) 6,920.1 6,190.9

Loans Receivable (Note 8) 1,603.9 1,526.4

Inventory and Related Property, Net (Note 9) 255,289.9 261,717.1

General Property, Plant and Equipment, Net (Note 10) 711,717.2 661,380.5

Investments (Note 4) 3,521.7 3,371.9

Other Assets (Note 6) 35,130.6 73,620.9

TOTAL ASSETS $ 2,403,353.6 $ 2,323,520.9

Stewardship Property, Plant & Equipment (Note 10)

LIABILITIES (Note 11)

Intragovernmental:

Accounts Payable (Note 12) $ 1,922.4 $ 1,432.8

Debt (Note 13) 1,630.7 1,508.6

Other Liabilities (Note 15) 8,083.6 7,699.5

Total Intragovernmental Liabilities $ 11,636.7 $ 10,640.8

Accounts Payable (Note 12) 18.263.6 18,907.8

Military Retirement and Other Federal Employment Benefits 

(Note 17) 2,297,837.3 2,302,018.4

Environmental and Disposal Liabilities (Note 14) 62,670.3 60,030.1

Loan Guarantee Liability (Note 8) 70.9 66.5

Other Liabilities (Note 15) 32,421.6 34,927.1

TOTAL LIABILITIES $ 2,422,900.4 $ 2,426,590.8

Commitments & Contingencies (Note 16)

NET POSITION

Unexpended Appropriations – Other Funds $ 450,026.1 $ 474,792.9

Cumulative Results of Operations – Funds From Dedicated 

Collections (Note 23) 15,493.7 14,674.7

Cumulative Results of Operations – Other Funds (485,066.6) (592,537.5)

TOTAL NET POSITION $ (19,546.8) $ (103,069.9)

TOTAL LIABILITIES AND NET POSITION $ 2,403,353.6 $ 2,323,520.9

The accompanying notes are an integral part of these financial statements.
U.S. Department of Defense Agency Financial Report for FY 2016 

Financial Section

Department of Defense Consolidated Statement of Net Cost

Agency Wide Dollars in Millions

For the Years Ended September 30, 2016 and 2015

2016

Consolidated

Restated

2015

Consolidated 

Program Costs

Gross Costs $ 730,745.2 $ 644,859.1

Military Retirement Benefits 102,514.8 66,863.5

Civil Works 9,876.8 9,186.5

Military Personnel 138,720.9 139,311.4

Operations, Readiness & Support 285,649.8 242,952.0

Procurement 107,865.3 96,094.5

Research, Development, Test & Evaluation 73,771.0 70,461.4

Family Housing & Military Construction 12,346.6 19,989.8

(Less: Earned Revenue) (83,528.9) (68,509.8)

Net Cost before Losses/(Gains) from Actuarial Assumption 

Changes for Military Retirement Benefits $ 647,216.3 $ 576,349.3

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits (57,582.7) (27,449.5)

Net Cost of Operations (Note 18) $ 589,633.6 $ 548,899.8

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

62
U.S. Department of Defense Agency Financial Report for FY 2016 

Financial Section

Department of Defense Consolidated Statement of Changes in Net Position 

Agency Wide Dollars in Millions

For the Years Ended September 30, 2016 and 2015

2016

Consolidated

Restated

2015

Consolidated

Cumulative Results Of Operations

Beginning Balances (Includes Funds from Dedicated Collections –

See Note 23) $ (609,246.1) $ (725,468.3)

Prior Period Adjustments:

Changes in accounting principles (+/-) (1,498.9) 0.0

Corrections of errors (+/-) 31,383.3 19,490.9

Beginning balances, as adjusted (Includes Funds from Dedicated 

Collections – See Note 23) (579,361.7) (705,977.4)

Budgetary Financing Sources:

Other adjustments (rescissions, etc.) 9.0 (0.1)

Appropriations used 685,350.9 661,169.5

Nonexchange revenue 1,738.4 1,427.9

Donations and forfeitures of cash and cash equivalents 246.8 238.0

Transfers in/out without reimbursement 1,251.5 1,259.8

Other (6,134.5) (2,110.5)

Other Financing Sources

Donations and forfeitures of property 1.8 12.4

Transfers in/out without reimbursement 94.1 84.2

Imputed financing 4,573.4 4,899.3

Other 12,291.0 10,033.9

Total Financing Sources $ 699,422.4 $ 677,014.4

Net Cost of Operations (+/-) 589,633.6 548,899.8

Net Change $ 109,788.8 $ 128,114.6

Cumulative Results of Operations (Includes Funds from Dedicated 

Collections – See Note 23) $ (469,572.9) $ (577,862.8)

Unexpended Appropriations

Beginning Balances (Includes Funds from Dedicated Collections –

See Note 23) 474,792.9 $ 501,765.6

Prior Period Adjustments:

Corrections of errors 0.0 (72.7)

Beginning Balances, as adjusted 474,792.9 501,692.9

Budgetary Financing Sources:

Appropriations received 683,343.5 654,288.5

Appropriations transferred in/out 289.4 (164.7)

Other adjustments (23,048.8) (19,854.3)

Appropriations used (685,350.9) (661,169.5)

Total Budgetary Financing Sources (Includes Funds from 

Dedicated Collections – See Note 23) $ (24,766.8) $ (26,900.0)

Unexpended Appropriations (Includes Funds from Dedicated 

Collections – See Note 23) $ 450,026.1 $ 474,792.9

Net Position $ (19,546.8) $ (103,069.9)

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

63
U.S. Department of Defense Agency Financial Report for FY 2016 

Financial Section

Department of Defense Combined Statement 

of Budgetary Resources 

Agency Wide

For the Years Ended September 30, 2016 and 

2015

Page 1 of 2

Dollars in Millions

Budgetary 

Financing Accounts

Non-Budgetary 

Financing Accounts

2016 

Combined

2015 

Combined

2016

Combined

2015 

Combined

Budgetary Resources

Unobligated balance, brought forward, October 1 $ 149,462.3 150,715.4 $ 66.6 $ 47.1

Adjustment to unobligated balance brought 

forward, Oct 1 (+or-)

2,083.9 0.0 0.0 0.0

Unobligated balance, brought forward, October 1, 

as adjusted $ 151,546.2 $ 150,715.4 $ 66.6 $ 47.1

Recoveries of prior year unpaid obligations 50,516.5 53,417.1 0.0 0.0

Other changes in unobligated balance (21,673.4) (27,044.5) 0.0 0.0

Unobligated balance from prior year budget 

authority, net 180,389.3 177,088.0 66.6 47.1

Appropriations (discretionary and mandatory) 745,655.2 720,483.1 0.0 0.0

Borrowing authority (discretionary and 

mandatory) 0.0 0.0 27.0 81.4

Contract authority (discretionary and mandatory) 69,749.9 68,357.3 0.0 0.0

Spending authority from offsetting collections 

(discretionary and mandatory) 105,509.3 101,303.5 74.7 73.6

Total Budgetary Resources $ 1,101,303.7 $ 1,067,231.9 $ 168.3 $ 202.1

Status of Budgetary Resources

New obligations and upward adjustments (total) $ 945,747.3 $ 917,797.6 $ 88.6 $ 135.5

Unobligated balance, end of year:

Apportioned, unexpired accounts 108,698.3 105,090.8 0.0 0.0

Exempt from Apportionment, unexpired 

accounts 6,437.7 4,412.1 0.0 0.0

Unapportioned unexpired accounts 3,321.0 2,526.0 79.7 66.6

Unexpired unobligated balance, end of year 118,457.0 112,028.9 79.7 66.6

Expired unobligated balance, end of year 37,099.4 37,405.4 0.0 0.0

Unobligated balance, end of year (total) $ 155,556.4 $ 149,434.3 $ 79.7 $ 66.6

Total Budgetary Resources $ 1,101,303.7 $ 1,067,231.9 $ 168.3 $ 202.1

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

64
U.S. Department of Defense Agency Financial Report for FY 2016 

Financial Section

Department of Defense Combined Statement 

of Budgetary Resources 

Agency Wide

Ended September 30, 2016 and 

2015

Page 1 of 2 (continued)

Dollars in Millions

Budgetary 

Financing Accounts

Non-Budgetary 

Financing Accounts

2016 

Combined

2015 

Combined

2016 

Combined

2015 

Combined

Change in Obligated Balance

 Unpaid obligations:

Unpaid obligations, brought forward, October 1 $ 407,118.1 $ 430,506.3 $ 410.5 $ 484.9

New obligations and upward adjustments 945,747.3 917,797.6 88.6 135.5

Outlays (Gross) (895,579.5) (887,768.7) (214.9) (209.9)

Recoveries of prior year unpaid obligations (50,516.5) (53,417.1) 0.0 0.0

Unpaid obligations, end of year 406,769.4 407,118.1 284.2 410.5

 Uncollected payments:

Uncollected payments, Federal sources, brought 

forward, October 1 (72,850.2) (77,322.6) (72.4) (75.2)

Change in uncollected payments, Federal sources (1,331.1) 4,500.4 13.5 2.8

Uncollected payments, Federal sources, end of 

year

(74,181.3) (72,822.2) (58.9) (72.4)

 Memorandum (non-add) Entries:

Obligated balance, start of year $ 334,267.9 $ 353,183.7 $ 338.1 $ 409.7

Obligated balance, end of year $ 332,588.1 $ 334,295.9 $ 225.3 $ 338.1

Department of Defense Combined Statement of 

Budgetary Resources 

Agency Wide

For the Years Ended September 30, 2016 and 2015

Page 2 of 2

Dollars in Millions

Budgetary 

Financing Accounts

Non-Budgetary 

Financing Accounts

2016 

Combined

2015 

Combined

2016 

Combined

2015 

Combined

Budgetary Authority and Outlays, Net:

Budget authority, gross (discretionary and mandatory) $ 920,914.4 $ 890,143.9 $ 101.7 $ 155.0

Actual offsetting collections (discretionary and mandatory) (167,332.7) (168,617.1) (105.4) (101.7)

Change in uncollected customer payments from Federal 

sources (discretionary and mandatory) (1,331.1) 4,500.4 13.5 2.8

Recoveries of prior year paid obligations (discretionary 

and mandatory) 1,548.3 1,111.5 0.0 0.0

Budget Authority, net (discretionary and mandatory) $ 753,798.9 $ 727,138.7 $ 9.8 $ 56.1

Outlays, gross (discretionary and mandatory) $ 895,579.5 $ 887,768.7 $ 214.9 $ 209.9

Actual offsetting collections (discretionary and mandatory) (167,332.7) (168,617.1) (105.4) (101.7)

Outlays, net (discretionary and mandatory) 728,246.8 719,151.6 109.5 108.2

Distributed offsetting receipts (92,078.2) (86,772.6)) 0.0 0.0

Agency Outlays, net (discretionary and mandatory) $ 636,168.6 $ 632,379.0 $ 109.5 $ 108.2

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

65
U.S. Department of Defense Agency Financial Report for FY 2016 

Financial Section

LIST OF NOTES TO THE FINANCIAL STATEMENTS 

Note 1 Significant Accounting Policies ............................................................................................ 67 

Note Disclosures Related to the Balance Sheets 

Note 2 Non-Entity Assets ................................................................................................................... 79 

Note 3 Fund Balance with Treasury ................................................................................................... 80 

Note 4 Investments and Related Interest ............................................................................................ 82 

Note 6 Other Assets ............................................................................................................................ 84 

Note 7 Cash and Other Monetary Assets ............................................................................................ 85 

Note 8 Direct Loans and Loan Guarantees ......................................................................................... 85 

Note 9 Inventory and Related Property .............................................................................................. 91 

Note 10 General Property, Plant and Equipment, Net .......................................................................... 95 

Note 11 Liabilities Not Covered by Budgetary Resources ................................................................... 98 

Note 12 Accounts Payable .................................................................................................................... 99 

Note 13 Debt ....................................................................................................................................... 100 

Note 14 Environmental and Disposal Liabilities ................................................................................ 101 

Note 15 Other Liabilities .................................................................................................................... 105

Note 16 Commitments and Contingencies ......................................................................................... 108 

Note 17 Military Retirement and Other Federal Employment Benefits ............................................. 109 

Note 18 General Disclosures Related to the Statement of Net Cost ............................................. 115

Note 19 Disclosures Related to the Statement of Changes in Net Position .................................. 118 

Note 20 Disclosures Related to the Statement of Budgetary Resources ....................................... 119 

Note Disclosures Not Pertaining to a Specific Statement 

Note 21 Reconciliation of Net Cost of Operations to Budget ............................................................ 123

Note 22 Incidental Custodial Collections ........................................................................................... 125 

Note 23 Funds from Dedicated Collections........................................................................................ 126 

Note 24 Fiduciary Activities ............................................................................................................... 130 

Note 25 Other Disclosures .................................................................................................................. 130 

Note 26 Restatements ......................................................................................................................... 131

Required Supplementary Stewardship Information ........................................................................... 132

Required Supplementary Information.................................................................................................. 134

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U.S. Department of Defense Agency Financial Report for FY 2016 

Financial Section

67

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 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, 

and to the extent possible, U.S.GAAP promulgated by the Federal Accounting Standards Advisory 

Board; the (OMB) Circular No. A-136; and the DoD Financial Management Regulation (FMR). 

The accompanying financial statements account for all resources for which the Department is 

responsible unless otherwise noted. Information relative to classified assets, programs, and 

operations is excluded from the statements or otherwise aggregated and reported in such a manner 

that it is not discernible. 

The Department is unable to fully implement all elements of U.S. GAAP and 

OMB Circular No. A-136, due to limitations of financial and nonfinancial management processes 

and systems supporting the financial statements. The Department derives reported values and 

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

inventory and logistics systems. These systems were designed to support reporting requirements 

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

than preparing financial statements in accordance with U.S. GAAP. The Department continues to 

implement process and system improvements addressing these limitations. 

The Department has material weaknesses from internal assessments: (1) Fund Balance with 

Treasury; (2) Financial Reporting; (3) Health Care Liabilities; (4) Civilian Pay; (5) Military Pay; 

(6) Accounts Receivable; (7) Contracts/Vendor Pay; (8) Reimbursable Work Orders (Budgetary); 

(9) Transportation of Things; (10) Equipment Assets; (11) Real Property Assets; 

(12) Environmental Liabilities; (13) Inventory; (14) Operating Materials and Supplies; and 

(15) Military Standard Requisitioning and Issue Procedures. 

1.B. Mission of the Reporting Entity 

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

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

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

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

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

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

Departments consist of the Army, the Navy (of which the Marine Corps is a component), and the 

Air Force. The Defense Agencies provide support services commonly used throughout the 

Department. 
U.S. Department of Defense Agency Financial Report for FY 2016 

Financial Section

1.C. Appropriations and Funds

The Department receives appropriations and funds as general, working capital (revolving), 

trust, and special 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. 

WCFs 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 

flowing through the fund. Each WCF obtains the goods and services sold to customers on a 

reimbursable basis and maintains the corpus. Reimbursable receipts fund future operations and 

generally are available in their entirety for use without further congressional action. At various 

times, Congress provides additional appropriations to supplement 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. Special fund accounts are used to record government receipts reserved for 

a specific purpose. Certain trust and special funds may be designated funds from dedicated 

collections. Funds from dedicated collections 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 funds from dedicated collections. 

Deposit funds are used to record amounts held temporarily until paid to the appropriate 

government or public entity. They are not Department funds, and as such, are not available for the 

Department’s operations. The Department is acting as an agent or custodian for funds awaiting 

distribution. 

The Department is a party to allocation transfers with other federal agencies as a transferring 

(parent) entity or receiving (child) entity. An allocation transfer is an entity’s legal delegation of 

authority to obligate budget authority and outlay funds on its behalf. Generally, all financial 

activity related to allocation transfers (e.g., budget authority, obligations, outlays) is reported in 

the financial statements of the parent entity. Exceptions to this general rule apply to specific funds 

for which OMB has directed that all activity be reported in the financial statements of the child 

entity. These exceptions include U.S. Treasury-Managed Trust Funds, Executive Office of the 

President (EOP), and all other funds specifically designated by OMB. 

The Department receives allocation transfers from the following agencies: Departments of 

Agriculture, Interior, Energy, and Transportation; the Appalachian Regional Commission; and the 

Federal Highway Administration. 

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U.S. Department of Defense Agency Financial Report for FY 2016 

Financial Section

Additionally, the Department also receives allocation transfers from certain funds meeting the 

OMB exception and all related activity is included in the Department’s financial statements. These 

funds include South Dakota Terrestrial Wildlife Habitat Restoration, Inland Waterways and 

Harbor Maintenance. The Department receives allocation transfers for the Security Assistance 

programs meeting the OMB exceptions for EOP funds. These funds are reported separately from 

the DoD financial statements based on an agreement with OMB. 

As a parent, the Department reports in these financial statements funds allocated to the 

Departments of Transportation and Agriculture. 

1.D. Basis of Accounting

The Department is unable to meet all full accrual accounting requirements. This is primarily 

because many of the Department’s financial and nonfinancial systems and processes were 

designed prior to the legislative mandate to produce financial statements in accordance with U.S. 

GAAP. These systems were not designed to collect and record financial information on the full 

accrual accounting basis but were designed to record information on a budgetary basis. 

The Department’s financial statements and supporting trial balances are compiled from the 

underlying financial data and trial balances of the Military Services and Defense Agencies and 

their sub-entities. The underlying data is largely derived from budgetary transactions (obligations, 

disbursements, and collections), from nonfinancial feeder systems, and accruals made for major 

items such as payroll expenses, accounts payable, and environmental liabilities. Some of the 

sub-entity level trial balances may reflect known abnormal balances resulting largely from 

business and system processes. At the consolidated level these abnormal balances may not be 

evident. Disclosures of abnormal balances are made in the applicable footnotes, but only to the 

extent that the abnormal balances are evident at the consolidated level. 

The Department is continuing the actions required to bring financial and nonfinancial feeder 

systems and processes into compliance with U.S. GAAP. One such action is the current revision 

of accounting systems to record transactions based on the U.S. Standard General Ledger (USSGL). 

Until all of the Department’s financial and nonfinancial feeder systems and processes are able to

collect and report financial information as required by U.S. GAAP, there will be instances when 

the Department’s financial data is derived from budgetary transactions or data from nonfinancial 

feeder systems. 

1.E. Revenues and Other Financing Sources

The Department receives congressional appropriations as financing sources for general funds, 

and on occasion, will also receive congressional appropriations for WCFs. These funds either 

expire annually, some on a multi-year basis, or do not expire. When authorized by legislation, 

these appropriations are supplemented by revenues generated by sales of goods or services. The 

Department recognizes revenue as a result of costs incurred for goods and services provided to 

other federal agencies and the public. Full-cost pricing is the Department’s standard policy for 

69
U.S. Department of Defense Agency Financial Report for FY 2016 

Financial Section

services provided as required by OMB Circular No. A-25, “User Charges.” The Department 

recognizes revenue when earned within the constraints of its current system capabilities. In some 

instances, revenue is recognized when bills are issued. 

Depot Maintenance and Ordnance WCF activities recognize revenue according to the 

percentage of completion method. Supply Management WCF activities recognize revenue from 

the sale of inventory items. 

The Department does not include nonmonetary support provided by U.S. allies for common 

defense and mutual security in amounts reported in the Statement of Net Cost and Note 21, 

Reconciliation of Net Cost of Operations to Budget. The U.S. has cost sharing agreements with 

countries having a mutual or reciprocal defense agreement, where U.S. troops are stationed, or 

where the U.S. Fleet is in a port. 

In accordance with Statement of Federal Financial Accounting Standards (SFFAS) 7,

“Accounting for Revenue and Other Financing Sources and Concepts for Reconciling Budgetary 

and Financial Accounting” the Department recognizes nonexchange revenue when there is a 

specifically identifiable, legally enforceable claim to the cash or other assets of another party that 

will not directly receive value in return. 

1.F. Recognition of Expenses

For financial reporting purposes, the Department’s policy requires the recognition of operating 

expenses in the period incurred. Current financial and nonfinancial feeder systems were not 

designed to collect and record financial information on the full accrual accounting basis. Estimates 

are made for major items such as payroll expenses, accounts payable, environmental liabilities, 

and unbilled revenue. In the case of Operating Materiel and Supplies (OM&S), operating expenses 

are generally recognized when the items are purchased. The Department has issued guidance 

under which Federal entities may expense OM&S using the purchase method of accounting rather 

than the consumption method. Under the consumption method, OM&S would be expensed when 

consumed. Due to system limitations, in some instances, expenditures for capital and other 

long-term assets may be recognized as operating expenses. The Department continues to 

implement process and system improvements to address these limitations. 

1.G. Accounting for Intragovernmental Activities

Accounting standards require an entity to eliminate intra-entity activity and balances from 

consolidated financial statements to prevent overstatement for business with itself. However, the 

Department cannot accurately identify intragovernmental transactions by customer because the 

Department’s systems do not track buyer and seller data at the transaction level. Generally, seller 

entities within the Department provide summary seller-side balances for revenue, accounts 

receivable, and unearned revenue to the buyer-side internal accounting offices. In most cases, the 

buyer side records are adjusted to agree with the Department seller-side balances and are then 

eliminated. The Department is implementing replacement systems and a standard financial 

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U.S. Department of Defense Agency Financial Report for FY 2016 

Financial Section

71

information structure incorporating the necessary elements to enable the Department to correctly 

report, reconcile, and eliminate intragovernmental balances. 

The Treasury Financial Manual Part 2 – Chapter 4700, Agency Reporting Requirements for 

the Financial Report of the United States Government, provides guidance for reporting and 

reconciling intragovernmental balances. While the Department is unable to fully reconcile 

intragovernmental transactions with all federal agencies, the Department is able to reconcile 

balances pertaining to investments in federal securities, borrowings from the U.S. Treasury and 

the Federal Financing Bank, Federal Employees’ Compensation Act transactions with the 

Department of Labor, and benefit program transactions with the Office of Personnel Management. 

Imputed financing represents the cost paid on behalf of the Department by another Federal 

entity. The Department recognizes imputed costs for (1) employee pension, post-retirement health, 

and life insurance benefits; (2) post-employment benefits for terminated and inactive employees 

to include unemployment and workers compensation under the Federal Employees’ Compensation 

Act; and (3) losses in litigation proceedings. 

The Department’s proportionate share of public debt and related expenses of the 

Federal Government is not included. The Federal Government does not apportion debt and related 

costs to federal agencies. The Department’s financial statements do not report public debt, interest, 

or source of public financing, whether from issuance of debt or tax revenues. 

Generally, financing for the construction of the Department 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 service to 

foreign countries and international organizations generally at no profit or loss to the Federal 

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

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

The Department’s monetary resources are maintained in U.S. Treasury accounts. The 

disbursing offices of Defense Finance and Accounting Service (DFAS), the Military Departments, 

the U.S. Army Corps of Engineers (USACE), and the Department of State’s financial service 

centers process the majority of the Department’s cash collections, disbursements, and adjustments 

worldwide. Each disbursing station prepares monthly reports to the U.S. Treasury on checks 

issued, electronic fund transfers, interagency transfers, and deposits. 

In addition, DFAS and the USACE Finance Center submit reports to U.S. Treasury by 

appropriation on interagency transfers, collections received, and disbursements issued. U.S. 
U.S. Department of Defense Agency Financial Report for FY 2016 

Financial Section

Treasury records these transactions to the applicable Fund Balance with Treasury (FBWT) 

account. On a monthly basis, the Department’s FBWT is reviewed and adjusted, as required, to 

agree with the U.S. Treasury accounts. 

1.J. Cash and Other Monetary Assets

Cash is the total of cash resources under the control of the Department including coins, paper 

currency, negotiable instruments, and amounts held for deposit in banks and other financial 

institutions. Foreign currency consists of the total U.S. dollar equivalent of both purchased and 

nonpurchased foreign currencies held in foreign currency fund accounts. Foreign currency is 

valued using the U.S. Treasury prevailing rate of exchange. 

The majority of cash and all foreign currency is classified as “nonentity” and is restricted. 

Amounts reported consist primarily of cash and foreign currency held by disbursing officers to 

carry out their paying, collecting, and foreign currency accommodation exchange missions. 

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

special account to handle the gains and losses from foreign currency transactions for five general 

fund appropriations: (1) operations and maintenance; (2) military personnel; (3) military 

construction; (4) family housing operation and maintenance; and (5) family housing construction. 

The gains and losses are calculated as the variance between the exchange rate current at the date 

of payment and a budget rate established at the beginning of each fiscal year. Foreign currency 

fluctuations related to other appropriations require adjustments to the original obligation amount 

at the time of payment. The Department does not separately identify foreign currency fluctuation 

transactions. 

1.K. Accounts Receivable

Accounts receivable from other federal entities or the public include: accounts receivable, 

claims receivable, and refunds receivable. Allowances for uncollectible accounts due from the 

public are based upon an analysis of collection experience. The Department does not recognize 

an allowance for estimated uncollectible amounts from other federal agencies, as receivables from 

other federal agencies are considered to be inherently collectible. Claims for accounts receivable 

from other federal agencies are to be resolved between the agencies in accordance with the 

Intragovernmental Business Rules published in the Treasury Financial Manual. 

1.L. Direct Loans and Loan Guarantees

The Department operates a direct loan and loan guarantee program authorized by the 

National Defense Authorization Act for FY 1996 (Public Law (PL) 104-106, Section 2801). The 

Act includes a series of authorities allowing 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. 

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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. 

National Defense Authorization Act for FY 2005 (PL 108-375, Section 2805) provided 

permanent authorities to the Military Housing Privatization Initiative (MHPI). The Department 

administers the Foreign Military Financing program on behalf of the EOP. This program is 

authorized by sections 23 and 24 of the Arms Export Control Act of 1976, as amended, and 

provides loans to help countries purchase U.S. produced weapons, defense equipment, services, or 

military training. The direct loans and loan guarantees related to Foreign Military Sales are not 

included in these financial statements, per Department’s agreement with OMB; this information is 

provided separately as other information. 

1.M. Inventories and Related Property

The Department values approximately 98 percent of resale inventory using the moving average 

cost method. Additionally, the Department reports the remaining 2 percent of resale inventories 

at an approximation of historical cost using latest acquisition cost adjusted for holding gains and 

losses. The latest acquisition cost method is used because legacy inventory systems were designed 

for materiel management rather than accounting. Although these systems provide visibility and 

accountability over inventory items, they do not maintain historical cost data necessary to comply 

with SFFAS 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 (FFMIA) of 1996 (PL 104-208). The Department is continuing to 

transition the balance of the inventories to the moving average cost method through the use of new 

inventory systems. Most transitioned balances, however, were not baselined to auditable historical 

cost and remain noncompliant with SFFAS 3.

The Department manages only military or government-specific materiel under normal 

conditions. Materiel is a unique term that relates to military force management, and includes items 

such as ships, tanks, self-propelled weapons, aircraft, etc., and related spares, repair parts, and 

support equipment. Items commonly used in and available from the commercial sector are not 

managed in the Department’s materiel management activities. Operational cycles are irregular 

and the military risks associated with stock-out positions have no commercial parallel. The 

Department holds materiel based on military need and support for contingencies. The Department 

is currently developing a methodology to be used to account for “inventory held for sale” and 

“inventory held in reserve for future sale.”

Related property includes OM&S and stockpile materiel. The OM&S, including munitions 

not held for sale, are valued at standard purchase price. The Department uses both the consumption 

method and the purchase method of accounting for OM&S. Centrally managed and stored items, 

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such as ammunition and engines, are generally recorded using the consumption method and are 

reported on the Balance Sheet as OM&S. When current systems cannot fully support the 

consumption method, the Department uses the purchase method. Under this method, materiel and 

supplies are expensed when purchased. During FY 2015 and FY 2014, 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. 

Many high-dollar items, such as aircraft engines, are categorized as OM&S rather than general 

equipment. The Department determined the recurring high dollar-value of OM&S in need of repair 

is material to the financial statements and requires a separate reporting category. 

The Military Services recognize excess, obsolete, and unserviceable inventory and OM&S at 

a net realizable value of zero, pending development of an effective means of valuing such materiel. 

Items transferred from the Military Services and awaiting sale, disposal, or reuse are valued at 

$441.0 million. 

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 requiring repair 

to make it suitable for sale. Often, it is more economical to repair these items rather than to procure 

them. The Department often relies on weapon systems and machinery no longer in production. 

As a result, the Department supports a process encouraging the repair and rebuilding of certain 

items. This repair cycle is essential to maintaining a ready, mobile, and armed military force. 

Work in process balances include: (1) costs related to the production or servicing of items, 

including direct material, labor, and applied overhead; (2) the value of finished products or 

completed services yet to be placed in service; and (3) munitions in production and depot 

maintenance work with associated costs incurred in the delivery of maintenance services. 

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

The Department reports investments in U.S. Treasury securities at cost, net of amortized 

premiums or discounts. Premiums or discounts are amortized over the term of the investments 

using the effective interest rate method or another method yielding similar results. The 

Department’s intent is to hold investments to maturity unless they are needed to finance claims or 

otherwise sustain operations. Consequently, a provision is not made for unrealized gains or losses 

on these securities. 

The Department invests in nonmarketable market-based U.S. Treasury securities issued to 

federal agencies by U.S. Treasury’s Bureau of the Fiscal Service. These securities are not traded 

on any financial exchange but are priced consistently with publically traded U.S. Treasury 

securities. 

74
The Department’s net investments are held by various trust and special funds. These funds 

include the Military Retirement Fund; Medicare-Eligible Retiree Health Care Fund; trust and 

special funds executed by other defense organizations; donations (gift funds); and U.S. 

Treasury-managed trust funds reported by USACE including the South Dakota Terrestrial Habitat 

Restoration, Inland Waterways, and Harbor Maintenance Trust Fund accounts. 

Other investments represent joint ventures with private developers constructing or improving 

military housing on behalf of the Department under the authority of MHPI, authorized by 

PL 104-106, Section 2801. These investments do not require market value disclosure. The 

Department’s potential losses on these ventures are limited to the amounts invested. 

1.O. General Property, Plant and Equipment

In some instances, the Department uses the estimated historical cost for valuing equipment. 

To establish a baseline, the Department accumulated information relating to program funding and 

associated equipment, equipment useful life, program acquisitions, and disposals. The equipment 

baseline was updated using expenditure, acquisition, and disposal information. 

The USACE Civil Works General Property, Plant, and Equipment (PP&E) is capitalized at 

acquisition cost plus capitalized improvements when an asset has a useful life of two or more years 

and the acquisition cost exceeds $25 thousand. The exception is buildings and structures related 

to hydropower projects, which are capitalized regardless of cost. 

In addition, the Departments of the Air Force and Navy General Funds capitalize General 

PP&E acquisitions that are $1 million and greater. The remainder of the Department’s General 

PP&E capitalization threshold is $250 thousand. These capitalization thresholds apply to asset 

acquisitions and modifications/improvements placed into service after September 30, 2013. 

General PP&E assets acquired prior to October 1, 2013, were capitalized at prior thresholds 

($100 thousand for equipment and $20 thousand for real property). 

With the exception of USACE Civil Works and WCF, General PP&E assets are capitalized at 

historical acquisition cost when an asset has a useful life of two or more years and when the 

acquisition cost equals or exceeds the Department’s capitalization threshold. The Department 

capitalizes improvements to existing General PP&E assets if the improvements equal or exceed 

the capitalization threshold and extend the useful life or increase the size, efficiency, or capacity 

of the asset. The Department depreciates all General PP&E, other than land, on a straight-line 

basis. 

The WCFs capitalize all PP&E used in the performance of their mission. These assets are 

capitalized as General PP&E, whether or not they meet the definition of any other PP&E category. 

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 

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value of contractor-procured General PP&E meets or exceeds the Department’s capitalization 

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

The Department developed policy and a reporting process for contractors with government 

furnished equipment providing appropriate General PP&E information for financial statement 

reporting. The Department requires entities maintain, in their property systems, information on all 

property furnished to contractors. These actions are structured to capture and report the 

information necessary for compliance with federal accounting standards. The Department has not 

fully implemented this policy primarily due to system limitations. 

1.P. Advances and Prepayments

When advances are permitted by law, legislative action, or presidential authorization, the 

Department’s policy is to record advances or prepayments in accordance with U.S. GAAP. As 

such, payments made in advance of the receipt of goods and services should be reported as an asset 

on the Balance Sheet. The Department’s policy is to expense and/or properly classify assets when 

the related goods and services are received. The Department has not fully implemented this policy 

primarily due to system limitations. 

1.Q. Leases

Lease payments for the rental of equipment and operating facilities are classified as either 

capital or operating leases. When a lease is essentially equivalent to an installment purchase of 

property (a capital lease), and the value equals or exceeds the current capitalization threshold, the 

Department records the applicable asset as though purchased, with an offsetting liability, and 

depreciates it. The Department records the asset and liability at the lesser of the present value of 

the rental and other lease payments during the lease term (excluding portions representing 

executory costs paid to the lessor) or the asset’s fair market value. The discount rate for the present 

value calculation is either the lessor’s implicit interest rate or the government’s incremental 

borrowing rate at the inception of the lease. The Department, as the lessee, receives the use and 

possession of leased property, for example real estate or equipment, from a lessor in exchange for 

a payment of funds. An operating lease does not substantially transfer all the benefits and risks of 

ownership. Payments for operating leases are expensed over the lease term as they become 

payable. 

Office space and leases entered into by the Department are the largest component of operating 

leases and are based on costs gathered from existing leases, General Services Administration bills, 

and interservice support agreements. Future year projections use the Consumer Price Index. 

1.R. Other Assets

Other assets include those assets, such as military and civil service employee pay advances, 

travel advances, and certain contract financing payments not reported elsewhere on the 

Department’s Balance Sheet.

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The Department conducts business with commercial contractors under two primary types of 

contracts: fixed price and cost reimbursable. To alleviate the potential financial burden to 

contractors from long-term contracts, the Department may provide financing payments. Contract 

financing payments are defined in the Federal Acquisition Regulation, Part 32, as authorized 

disbursements to a contractor prior to acceptance of supplies or services by the Government. 

Contract financing payment clauses are incorporated in the contract terms and conditions and may 

include advance payments, performance-based payments, commercial advances and interim 

payments, progress payments based on cost, and interim payments under certain 

cost-reimbursement contracts. It is the Department’s policy to record certain contract financing 

payments as other assets. The Department has not fully implemented this policy primarily due to 

system limitations. 

Contract financing payments do not include invoice payments, payments for partial deliveries, 

lease and rental payments, or progress payments based on a percentage or stage of completion. 

The Defense Federal Acquisition Regulation Supplement authorizes progress payments based on 

a percentage or stage of completion only for construction of real property, shipbuilding and ship 

conversion, alteration, or repair. Progress payments based on percentage or stage of completion 

are reported as Construction in Progress. 

1.S. Contingencies and Other Liabilities

The SFFAS 5, “Accounting for Liabilities of the Federal Government,” as amended by

SFFAS 12, “Recognition of Contingent Liabilities Arising from Litigation,” defines a contingency 

as an existing condition, situation, or set of circumstances involving an uncertainty as to possible 

gain or loss. The uncertainty will be resolved when one or more future events occur or fail to 

occur. The Department recognizes contingent liabilities when past events or exchange transactions 

occur, a future loss is probable, and the loss amount can be reasonably estimated. 

Financial statement reporting is limited to disclosure when conditions for liability recognition 

do not exist, but there is at least a reasonable possibility of incurring a loss or additional losses. 

The Department’s risk of loss and resultant contingent liabilities arise from pending or threatened 

litigation or claims and assessments due to events such as aircraft, ship and vehicle accidents; 

medical malpractice; property or environmental damages; and contract disputes. 

Other liabilities also arise as a result of anticipated disposal costs for the Department’s assets. 

Consistent with SFFAS 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, consistent with SFFAS 5, nonenvironmental disposal liabilities are 

recognized when management decides to dispose of an asset. In addition, the Department 

recognizes nonenvironmental disposal liabilities for nuclear-powered military equipment when 

placed into service. These amounts are not easily distinguishable and are developed in conjunction 

with environmental disposal costs. 

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1.T. Accrued Leave

The Department reports liabilities for military leave and accrued compensatory and annual 

leave for civilians. Sick leave for civilians is expensed when taken. The liabilities are based on 

current pay rates. 

1.U. Net Position

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

Unexpended appropriations represent the amounts of budget authority that are unobligated and 

have not been rescinded or withdrawn. Unexpended appropriations also represent amounts 

obligated for which legal liabilities for payments have not been incurred. 

Cumulative results of operations represent the net difference between expenses and losses, and 

financing sources (including appropriations, revenue, and gains), since inception. The cumulative 

results of operations also include donations and transfers in and out of assets that were not 

reimbursed. 

1.V. Treaties for Use of Foreign Bases

The Department has the use of land, buildings, and other overseas facilities obtained through 

various international treaties and agreements negotiated by the Department of State. The 

Department purchases capital assets overseas with appropriated funds; however, the host country 

retains title to the land and capital improvements. Treaty terms generally allow the Department 

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

are terminated, use of the foreign bases is prohibited and losses are recorded for the value of any 

nonretrievable capital assets. The settlement due to the United States or host nation is negotiated 

and takes into account the value of capital investments and may be offset by the environmental 

cleanup cost. 

1.W. Undistributed Disbursements and Collections

Undistributed disbursements and collections represent the difference between disbursements 

and collections matched at the transaction level to specific obligations, payables, or receivables in 

the source systems and those reported by U.S. Treasury. 

Supported disbursements and collections have corroborating documentation for the summary 

level adjustments made to accounts payable and receivable. Unsupported disbursements and 

collections do not have supporting documentation for the transaction and most likely would not 

meet audit scrutiny. However, both supported and unsupported adjustments may have been made 

to the Department’s accounts payable and receivable trial balances prior to validating underlying 

transactions. 

Due to noted material weaknesses in current accounting and financial feeder systems, the 

Department generally cannot determine whether undistributed disbursements and collections 

should be applied to federal or nonfederal accounts payable/receivable at the time accounting 

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reports are prepared. Accordingly, 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 and collections are also applied to reduce accounts payable and 

receivable accordingly. 

1.X. Fiduciary Activities 

Fiduciary cash and other assets are not assets of the Department and are not recognized on the 

Balance Sheet. Fiduciary activities are reported on the financial statement note schedules. 

1.Y. Military Retirement and Other Federal Employment Benefits 

The Department applies SFFAS 33, “Pensions, Other Retirement Benefits, and Other 

Postemployment Benefits: Reporting the Gains and Losses from Changes in Assumptions and 

Selecting Discount Rates and Valuation Dates,” in selecting the discount rate and valuation date 

used in estimating actuarial liabilities. In addition, gains and losses from changes in long-term 

assumptions used to estimate the actuarial liability are presented separately on the Statement of 

Net Cost. Refer to Note 17, Military Retirement and Other Federal Employment Benefits and 

Note 18, General Disclosures Related to the Statement of Net Cost, for additional information. 

NOTE 2. NONENTITY ASSETS

Nonentity Assets Dollars in Millions

As of September 30 2016

Restated

2015

Intragovernmental Assets

Fund Balance with Treasury $ 2,216.7 $ 1,461.1

Accounts Receivable 54.1 0.0

Total Intragovernmental Assets $ 2,270.8 $ 1,461.1

Non-Federal Assets

Cash and Other Monetary Assets $ 1,063.5 $ 1,017.1

Accounts Receivable 3,080.2 2,741.2

Other Assets 0.0 3.0

Total Non-Federal Assets $ 4,143.7 $ 3,761.3

Total Nonentity Assets $ 6,414.5 $ 5,222.4

Total Entity Assets $ 2,396,939.1 $ 2,318,298.5

Total Assets $ 2,403,353.6 $ 2,323,520.9

Nonentity assets are not available for use in the Department’s normal operations. The 

Department has stewardship accountability and reporting responsibility for nonentity assets. 

Restatements 

The Department corrected a $31.4 billion understatement in General PP&E, identified during 

ongoing audit readiness efforts. See Note 26, Restatements, for further information. 

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Abnormal Balance 

Total Entity Assets, includes a $5.4 million abnormal balance in USSGL 159100, Other 

Related Property, due to a reporting error. The Department is researching the cause and anticipates 

correcting the error in FY 2017. 

Other Disclosures 

Intragovernmental FBWT consists primarily of deposit funds and receipt accounts. Deposit 

funds represent amounts held temporarily until paid to the appropriate party. Receipt accounts 

represent amounts collected on behalf of the U.S. Treasury General Fund. 

Non-Federal Cash and Other Monetary Assets consist primarily of cash held by Disbursing 

Officers to carry out payment, collection, and foreign currency exchanges. 

Non-Federal Accounts Receivable consists of amounts associated with canceled year 

appropriations, and interest, fines and penalties due on debt. Generally, the Department cannot 

use the collections and must remit them to the U.S. Treasury. 

NOTE 3. FUND BALANCE WITH TREASURY

Fund Balance with Treasury Dollars in Millions

As of September 30 2016 2015

Fund Balance

Appropriated Funds $ 457,587.2 $ 449,220.6

Revolving Funds 10,065.0 12,199.8

Trust Funds 3,304.7 3,255.5

Special Funds 1,368.9 1,135.8

Other Fund Types 1,963.2 1,562.7

Total Fund Balance $ 474,289.0 $ 467,374.4

Fund Balance Per Treasury Versus Agency

Fund Balance per Treasury $ 474,480.0 $ 467,439.7

Less: Fund Balance per Agency (474,289.0) (467,374.4)

Reconciling Amount $ 191.0 $ 65.3

Other Fund Types primarily consist of deposit funds and receipt accounts. These funds 

represent receipts held temporarily for distribution to another fund or entity or held as an agent for 

others. 

The Department shows a reconciling net difference of $191.0 million with the U.S. Treasury 

between the Department’s financial statement records and Treasury. This includes allocation 

transfers of $108.0 million as well as fiduciary activities of $80.1 million. The Department 

received allocation transfers as the "child." As "parent," the Department issued allocation 

transfers to other Federal Government agencies for execution on behalf of the Department. For 

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additional information, refer to Note 1, Significant Accounting Policies, Section 1C. Additionally, 

Fiduciary Activities are not reported in FBWT in accordance with SFFAS 31, “Accounting for 

Fiduciary Activities.”

Status of Fund Balance with Treasury Dollars in Millions

As of September 30 2016 2015

Unobligated Balances

Available $ 115,130.6 $ 109,497.3

Unavailable 846,765.2 775,736.4

Total Unobligated Balance 961,895.8 885,233.7

Obligated Balance not yet Disbursed 407,053.7 407,528.8

Non-Budgetary FBWT 2,809.4 2,348.6

Non-FBWT Budgetary Accounts (897,469.9) (827,736.7)

Total Fund Balance $ 474,289.0 $ 467,374.4

Other Disclosures 

The Status of FBWT reflects the budgetary resources to support FBWT and is a reconciliation 

between budgetary and proprietary accounts. It primarily consists of unobligated and obligated 

balances. The balances reflect the budgetary authority remaining for disbursements against current 

or future obligations. 

Unobligated Balance is classified as available or unavailable and represents the cumulative 

amount of budgetary authority set aside to cover future obligations. The unavailable balance 

consists primarily of funds invested in U.S. Treasury securities and are temporarily precluded from 

obligation by law. Certain unobligated balances are restricted for future use and are not 

apportioned for current use. Unobligated balances for trust fund accounts are restricted for use by 

public laws establishing the funds. 

Obligated Balance not yet Disbursed represents funds obligated for goods and services but not 

paid.

Non-Budgetary FBWT includes accounts without budgetary authority, such as deposit funds, 

unavailable receipt accounts, clearing accounts, and nonentity FBWT. 

Non-FBWT Budgetary Accounts reduce the Status of FBWT and consist of investments in 

U.S. Treasury securities, unfilled customer orders without advance, contract and borrowing 

authority, and receivables. 

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NOTE 4. INVESTMENTS AND RELATED INTEREST

Investments and Related Interest Dollars in Millions

2016

As of September 30

Cost Amortization

Method

Amortized 

(Premium)/ 

Discount

Investments, 

Net

Market 

Value 

Disclosure

Intragovernmental Securities

Nonmarketable, MarketBased

$ 684,211.3 See Below $ (29,836.4) $ 654,374.9 $ 754,114.1

Medicare-Eligible Retiree 

Health Care Fund 250,500.2 See Below (12,839.8) 237,660.4 284,553.0

US Army Corps of Engineers 8,928.9 See Below (60.9) 8,868.0 8,894.7

Other Funds 2,430.1 See Below (135.1) 2,295.0 2,360.7

Total Nonmarketable, MarketBased $ 946,070.5 $ (42,872.2) $ 903,198.3 $ 1,049,922.5

Accrued Interest 7,369.6 0.0 7,369.6 7,369.6

Total Intragovernmental 

Securities $ 953,440.1 $ 42,872.2) $ 910,567.9 $ 1,057,292.1

Other Investments

Total Other Investments $ 3,521.7 See Below $ 0.0 $ 3,521.7 N/A

Amortization Method Used: Effective Interest

Investments and Related Interest Dollars in Millions

2015

As of September 30

Cost Amortization 

Method

Amortized 

(Premium)/ 

Discount

Investments, 

Net

Market 

Value 

Disclosure

Intragovernmental Securities

Nonmarketable, Market-Based

Military Retirement Fund $ 620,997.2 See Below $ (25,237.9) $ 595,759.3 $ 640,927.1

Medicare-Eligible Retiree 

Health Care Fund 242,153.1 See Below (10,916.4) 231,236.7 258,944.2

US Army Corps of Engineers 8,904.4 See Below (105.7) 8,798.7 8,843.0

Other Funds 2,114.0 See Below (141.2) 1,972.8 2,047.3

Total Nonmarketable, MarketBased $ 874,168.7 $ (36,401.2) $ 837,767.5 $ 910,761.6

Accrued Interest 6,897.4 0.0 6,897.4 6,897.4

Total Intragovernmental 

Securities $ 881,066.1 $ (36,401.2) $ 844,664.9 $ 917,659.0

Other Investments

Total Other Investments $ 3,371.9 See Below $ 0.0 $ 3,371.9 N/A

Amortization Method Used: Effective Interest

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The Department invests primarily in non-marketable, market-based U.S. Treasury securities. 

The value of these securities fluctuates in tandem with the selling price of the equivalent 

marketable security. Securities are purchased with the intent to hold until maturity; thus, balances 

are not adjusted to market value. 

The U.S. Treasury securities are issued to authorized funds and are an asset to the Department 

and a liability to the U.S. Treasury. The Federal Government does not set aside assets to pay future 

benefits or other expenditures associated with these funds. Cash generated is deposited in the U.S. 

Treasury and used for general Government purposes. Since the Department and the U.S. Treasury 

are both part of the Federal Government, these assets and liabilities offset each other from the 

standpoint of the Federal Government as a whole. For this reason, they do not represent an asset 

or a liability in the U.S. Governmentwide financial statements. 

The U.S. Treasury securities provide the Department with authority to access funds to make 

future benefit payments or other expenditures. When the Department requires redemption of 

securities to make expenditures, the Federal Government will meet the requirement by using 

accumulated cash balances, raising taxes or other receipts, borrowing from the public or repaying 

less debt, or curtailing other expenditures. The Federal Government uses the same method to 

finance all other expenditures. 

Other Funds primarily consists of $1.3 billion in investments of the DoD Education Benefits 

Trust Fund and $778.2 million in investments of the Support for U.S. Relocation to Guam 

Activities Trust Fund. 

Other Investments consists of MHPI limited partnerships. The Department invests in 

nongovernmental entities involved in the acquisition or construction of family housing and 

supporting facilities at Army, Air Force, Navy, and Marine Corps installations. The Department 

provides cash, land, or facilities as equity, but has no management role. A limited partnership 

arrangement operates purely as a private business and does not require Market Value Disclosure. 

NOTE 5. ACCOUNTS RECEIVABLE

Accounts Receivable Dollars in Millions

2016

As of September 30

Gross Amount Due

Allowance for 

Estimated 

Uncollectibles

Accounts Receivable, 

Net

Intragovernmental Receivables $ 1,907.6 N/A $ 1,907.6

Non-Federal Receivables 

(From the Public) 7,278.9 (358.8) 6,920.1

Total Accounts Receivable $ 9,186.5 $ (358.8) $ 8,827.7

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Accounts Receivable Dollars in Millions

2015

As of September 30

Gross Amount Due

Allowance for 

Estimated 

Uncollectibles

Accounts Receivable, 

Net

Intragovernmental Receivables $ 1,467.5 N/A $ 1,467.5

Non-Federal Receivables 

(From the Public) 6,667.3 (476.4) 6,190.9

Total Accounts Receivable $ 8,134.8 $ (476.4) $ 7,658.4

Accounts receivable represent the Department’s claim for payment from other entities. The 

Department only recognizes an allowance for uncollectible amounts from the public. Allowances 

for uncollectible accounts due from the public are based on an analysis of collection experience. 

Claims with other Federal agencies are resolved in accordance with the Intragovernmental 

Business Rules. 

NOTE 6. OTHER ASSETS

Other Assets Dollars in Millions

As of September 30 2016 2015

Intragovernmental Other Assets

Advances and Prepayments $ 1,116.0 $ 905.5

Other Assets 137.4 158.7

Total Intragovernmental Other Assets $ 1,253.4 $ 1,064.2

Non-Federal Other Assets

Outstanding Contract Financing Payments $ 31,560.8 $ 68,913.8

Advances and Prepayments 3,556.9 4,693.3

Other Assets (With the Public) 12.9 13.8

Total Non-Federal Other Assets $ 35,130.6 $ 73,620.9

Total Other Assets $ 36,384.0 $ 74,685.1

Intragovernmental Other Assets are largely related to the Department’s right to approximately 

6.4 million barrels of crude oil, net book value of $123.3 million, held by the Department of 

Energy. 

The Other Assets (With the Public) balance includes advances to personnel, unassigned labor 

costs, and advances with select activities. 

Contract terms and conditions for certain types of contract financing payments convey rights 

to the Department, protecting the contract work from state or local taxation, liens or attachment by 

contractors’ creditors, transfer of property, or disposition in bankruptcy. However, these rights 

should not be misconstrued to mean that ownership of contractors’ work has transferred to the 

Department. The Department does not have the right to take the work, except as provided for in 

contract clauses related to termination or acceptance. The Department is not obligated to make 

payment to contractors until delivery and acceptance. 

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Outstanding Contract Financing Payments includes $26.2 billion in contract financing 

payments and an additional $5.4 billion in estimated future payments to contractors upon delivery 

and government acceptance. Refer to Note 15, Other Liabilities, for further information.

Other Disclosures 

During FY 2016, the Department continued to reclassify from Nonfederal Other Assets, 

Outstanding Contract Financing Payments to Construction in Progress in accordance with internal 

guidance. 

NOTE 7. CASH AND OTHER MONETARY ASSETS

Cash and Other Monetary Assets Dollars in Millions

As of September 30 2016 2015

Cash $ 384.2 $ 392.0

Foreign Currency 768.1 750.2

Total Cash, Foreign Currency, and Other Monetary Assets $ 1,152.3 $ 1,142.2

The majority of Cash and all Foreign Currency represent nonentity assets and are restricted 

and unavailable to fund the Department's mission. Cash also includes unrestricted entity assets of 

$87.2 million comprised of undeposited collections and other cash. 

NOTE 8. DIRECT LOAN AND LOAN GUARANTEES

Direct Loan and Loan Guarantee Programs 

The Department operates loan guarantee programs for MHPI. 

The Federal Credit Reform Act of 1990 governs all new and amended direct loan obligations 

and loan guarantee commitments made after FY 1991. 

Direct loans are reported at the net present value (NPV) 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 NPV. The cost of the loan guarantee is the NPV 

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. 

Military Housing Privatization Initiative 

The MHPI includes both direct loan and loan guarantee programs. The programs are 

authorized by the National Defense Authorization Act for FY 1996 (PL 104-106, Section 2801) 

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and includes a series of authorities allowing the Department to work with the private sector to 

renovate and build military family housing. The MHPI accelerates the construction of new 

housing built to market standards and obtains private sector capital to leverage government funds. 

The Department provides protection to private sector partners against specific risks, such as base 

closure or member deployment. 

Summary of Direct Loans and Loan Guarantees Dollars in Millions

2016 2015

Loans Receivable

Direct Loans:

Military Housing Privatization Initiative $ 1,603.9 $ 1,526.4

Total Direct Loans $ 1,603.9 $ 1,526.4

Total Loans Receivable $ 1,603.9 $ 1,526.4

Loan Guarantee Liability

Military Housing Privatization Initiative $ 70.9 $ 66.5

Total Loan Guarantee Liability $ 70.9 $ 66.5

Direct Loans Obligated Dollars in Millions

2016 2015

Direct Loans Obligated After FY 1991 

(Present Value Method):

Military Housing Privatization Initiative

Loans Receivable Gross $ 1,667.4 $ 1,557.6

Allowance for Subsidy Cost (Present Value) (63.5) (31.2)

Value of Assets Related to Direct Loans, Net 1,603.9 1,526.4

Total Direct Loans Receivable $ 1,603.9 $ 1,526.4

Direct Loans Receivable does not represent proceeds the Department would expect to receive 

from selling the loans. 

Interest receivable is calculated using the interest earned method. 

Total Amount of Direct Loans Disbursed Dollars in Millions

2016 2015

Direct Loan Programs

Military Housing Privatization Initiative $ 126.3 $ 74.4

Total $ 126.3 $ 74.4

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Subsidy Expense for Direct Loan by Program Dollars in Millions

2016

Interest 

Differential Defaults Fees Other Total

New Direct Loans Disbursed

Military Housing Privatization 

Initiative $ (2.4) $ 15.9 $ 0.0 $ 0.0 $ 13.5

Total $ (2.4) $ 15.9 $ 0.0 $ 0.0 $ 13.5

2015

Interest 

Differential Defaults Fees Other Total

New Direct Loans Disbursed

Military Housing Privatization 

Initiative $ 4.6 $ 10.6 $ 0.0 $ 0.0 $ 15.2

Total $ 4.6 $ 10.6 $ 0.0 $ 0.0 $ 15.2

2016 Modifications

Interest 

Rate 

Reestimates

Technical 

Reestimates Total

Direct Loan Modifications and Reestimates

Military Housing Privatization 

Initiative $ 0.0 $ 19.4 $ 6.6 $ 26.0

Total $ 0.0 $ 19.4 $ 6.6 $ 26.0

2015 Modifications

Interest 

Rate 

Reestimates

Technical 

Reestimates Total

Direct Loan Modifications and Reestimates

Military Housing Privatization 

Initiative $ 0.0 $ (6.4) $ (12.9) $

Total $ 0.0 $ (6.4) $ (12.9) $ (19.3)

2016 2015

Total Direct Loan Subsidy Expense:

Military Housing Privatization 

Initiative $ 39.5 $ (4.1)

Total $ 39.5 $ (4.1)

Subsidy Expense for Direct Loan by Program

As of September 30, 2016

Interest 

Differential Defaults Fees Other Total

Budget Subsidy Rates for Direct Loans

Military Housing Privatization 

Initiative 0.0% 0.0% 0.0% 0.0% 0.0%

Subsidy rates pertain to loan agreements contracted during the current fiscal year. There were 

no new loan agreements. 

These rates cannot be applied to direct loans disbursed during the current reporting year to 

yield the subsidy expense. Subsidy expense for new loans disbursed in the current year results 

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from disbursements of loans from current and prior year loan agreements. Subsidy expense 

reported in the current year also includes reestimates. 

Schedule for Reconciling Subsidy Cost Allowance Balances

for Post-FY 1991 Direct Loans Dollars in Millions

2016 2015

Beginning Balance, Changes, and Ending Balance:

Beginning Balance of the Subsidy Cost Allowance $ 31.2 $ 41.2

Add: Subsidy Expense for Direct Loans Disbursed during the 

Reporting Years by Component

Interest Rate Differential Costs (2.4) 4.6

Default Costs (Net of Recoveries) 15.9 10.6

Total of the above Subsidy Expense Components $ 13.5 $ 15.2

Adjustments

Subsidy Allowance Amortization (7.2) (5.9)

Total of the above Adjustment Components $ (7.2) $ (5.9)

Ending Balance of the Subsidy Cost Allowance before Reestimates $ 37.5 $ 50.5

Add or Subtract Subsidy Reestimates by Component

Interest Rate Reestimates $ 19.4 $ (6.4)

Technical/Default Reestimate 6.6 (12.9)

Total of the above Reestimate Components 26.0 (19.3)

Ending Balance of the Subsidy Cost Allowance $ 63.5 $ 31.2

Guaranteed Loans Outstanding Dollars in Millions

As of September 30

Outstanding 

Principal of 

Guaranteed 

Loans, Face 

Value

Amount of 

Outstanding 

Principal 

Guaranteed

2016

Guaranteed Loans Outstanding

Military Housing Privatization Initiative $ 958.9 $ 958.9

Total $ 958.9 $ 958.9

2015

Guaranteed Loans Outstanding

Military Housing Privatization Initiative $ 874.7 $ 874.7

Total $ 874.7 $ 874.7

2016

New Guaranteed Loans Disbursed

Military Housing Privatization Initiative $ 84.2 $ 84.2

Total $ 84.2 $ 84.2

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2015

New Guaranteed Loans Disbursed

Military Housing Privatization Initiative $ 20.3 $ 20.3

Total $ 20.3 $ 20.3

Liabilities for Loan Guarantees Dollars in Millions

As of September 30 2016 2015

Liabilities for Loan Guarantee from Post 1991 

(Present Value)

Military Housing Privatization Initiative $ 70.9 $ 66.5

Total Loan Guarantee Liability (Post FY 1991) $ 70.9 $ 66.5

Total Loan Guarantee Liability $ 70.9 $ 66.5

Subsidy Expense for Direct Loan by Program

As of September 30 Dollars in Millions

2016

Interest 

Differential Defaults Fees Other Total

New Loan Guarantees Disbursed

Military Housing Privatization 

Initiative $ 0.0 $ 12.0 $ 0.0 $ 0.0 $ 12.0

Total $ 0.0 $ 12.0 $ 0.0 $ 0.0 $ 12.0

2015

Interest 

Differential Defaults Fees Other Total

New Loan Guarantees Disbursed

Military Housing Privatization 

Initiative $ 0.0 $ 8.0 $ 0.0 $ 0.0 $ 8.0

Total $ 0.0 $ 8.0 $ 0.0 $ 0.0 $ 8.0

2016

Modifications

Interest 

Rate 

Reestimates

Technical 

Reestimates

Total 

Reestimates Total

Modifications and Reestimates

Military Housing Privatization 

Initiative $ 0.0 $ (2.0) $ (7.7) $ (9.7) $ (9.7)

Total $ 0.0 $ (2.0) $ (7.7) $ (9.7) $ (9.7)

2015

Modifications

Interest 

Rate 

Reestimates

Technical 

Reestimates

Total 

Reestimates Total

Modifications and Reestimates

Military Housing Privatization 

Initiative $ 0.0 $ (0.5) $ 0.5 $ 0.0 $ 0.0

Total $ 0.0 $ (0.5) $ 0.5 $ 0.0 $ 0.0

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2016 2015

Total Loan Guarantee

Military Housing Privatization 

Initiative $ 2.3 $ 8.0

Total $ 2.3 $ 8.0

Subsidy Expense for Direct Loan by Program

As of September 30, 2016

Interest 

Supplements Defaults

Fees and 

other 

Collections

Other Total

Budget Subsidy Rates for Loan 

Guarantees

Military Housing Privatization 

Initiative 0.0% 0.0% 0.0% 0.0% 0.0%

Subsidy rates pertain to loan agreements contracted during the current fiscal year. There were 

no new loan agreements. 

These rates cannot be applied to loan guarantees agreed to during the current reporting year to 

yield the subsidy expense. Subsidy expense reported in the current year also includes reestimates. 

Schedule for Reconciling Loan Guarantee Liability Balances

for Post-FY 1991 Loan Guarantees Dollars in Millions

As of September 30 2016 2015

Beginning Balance, Changes, and Ending Balance

Beginning Balance of the Loan Guarantee Liability $ 66.5 $ 56.8

Add: Subsidy Expense for Guaranteed Loans Disbursed during the 

Reporting Years by Component

Default Costs (Net of Recoveries) 12.0 8.0

Total of the above Subsidy Expense Components $ 12.0 $ 8.0

Adjustments

Interest Accumulation on the Liability Balance 2.1 1.7

Total of the above Adjustments $ 2.1 $ 1.7

Ending Balance of the Loan Guarantee Liability before Reestimates $ 80.6 $ 66.5

Add or Subtract Subsidy Reestimates by Component

Interest Rate Reestimate $ (2.0) $ (0.5)

Technical/Default Reestimate (7.7) 0.5

Total of the above Reestimate Components $ (9.7) $ 0.0

Ending Balance of the Loan Guarantee Liability $ 70.9 $ 66.5

Administrative Expenses 

Administrative Expenses are limited to separately identified expenses for administering 

pre-FY 1992 and post-FY 1991 Direct Loans and Loan Guarantee Programs. 

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NOTE 9. INVENTORY AND RELATED PROPERTY

Inventory and Related Property Dollars in Millions

As of September 30 2016 2015

Inventory, Net $ 94,832.4 $ 92,555.8

Operating Materiel & Supplies, Net 159,304.7 168,712.0

Stockpile Materiel, Net 1,152.8 449.3

Total Inventory and Related Property $ 255,289.9 $ 261,717.1

Abnormal Balance 

Inventory, Available and Purchased for Resale, Revaluation Allowance, has a $50.3 million 

abnormal balance due to reduction in the cost of items under LAC valuation. The Department 

anticipates correction in FY 2017. 

Inventory, Net Dollars in Millions

2016

Valuation 

Method As of September 30

Inventory, 

Gross Value

Revaluation 

Allowance

Inventory, 

Net

Inventory Categories

Available and Purchased for Resale $ 61,871.8 50.3 $ 61,922.1 MAC, LAC

Held for Repair 33,765.6 (3,646.6) 30,119.0 MAC, LAC

Excess, Obsolete, and Unserviceable 1,087.2 (646.1) 441.1 NRV

Raw Materiel 1,188.4 0.0 1,188.4 MAC, LAC

Work in Process 1,161.8 0.0 1,161.8 AC

Total Inventory, Net $ 99,074.8 $ (4,242.4) $ 94,832.4

Legend for Valuation Methods:

LAC = Latest Acquisition Cost, adjusted for holding gains and losses

AC = Actual Cost

MAC = Moving Average Cost

NRV = Net Realizable Value

Inventory, Net Dollars in Millions

2015

Valuation 

Method As of September 30

Inventory, 

Gross Value

Revaluation 

Allowance

Inventory, 

Net

Inventory Categories

Available and Purchased for Resale $ 61,299.6 $ (14.1) $ 61,285.5 MAC, LAC

Held for Repair 32,784.2 (3,445.3) 29,338.9 MAC, LAC

Excess, Obsolete, and Unserviceable 1,426.7 (974.8) 451.9 NRV

Raw Materiel 1,449.9 0.0 1,449.9 MAC, LAC

Work in Process 29.6 0.0 29.6 AC

Total Inventory, Net $ 96,990.0 $ (4,434.2) $ 92,555.8

Legend for Valuation Methods:

LAC = Latest Acquisition Cost, adjusted for holding gains and losses

AC = Actual Cost

MAC = Moving Average Cost

NRV = Net Realizable Value

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Inventory, Available and Purchased for Resale, includes a $5.4 million abnormal balance in 

USSGL 159100, Other Related Property, due to a reporting error. The Department is researching 

the cause and anticipates correcting the error in FY 2017 

Inventory Restrictions 

The following are restrictions on the use, sale, or disposition of inventory: 

 War reserve materiel valued at $2.5 billion; 

 Dispositions pending litigation or negotiation valued at $119.1 million. 

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

liabilities. 

General Composition of Inventory 

Inventory includes spare and repair parts, clothing and textiles, and fuels held for sale. 

Inventory is tangible personal property: 

 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 on asset type and condition. 

Items transferred from the Military Services and awaiting sale, disposal, or reuse are valued at 

$441.0 million. 

Operating Materiel and Supplies, Net Dollars in Millions

2016

Valuation 

Method As of September 30

OM&S, 

Gross Value

Revaluation 

Allowance OM&S, Net

OM&S Categories

Held for Use $ 104,985.0 $ 25.3 $ 105,010.3 LAC, MAC

Held for Repair 54,294.4 0.0 54,294.4 LAC, MAC

Excess, Obsolete, and Unserviceable 2,149.6 (2,149.6) 0.0 NRV

Total OM&S $ 161,429.0 $ (2,124.3) $ 159,304.7

Legend for Valuation Methods:

LAC = Latest Acquisition Cost, adjusted for holding gains and losses

MAC = Moving Average Cost

NRV = Net Realizable Value

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Abnormal Balance 

Held For Use, Revaluation Allowance, has a $25.3 million abnormal balance. The Department 

is researching and anticipates correction in FY 2017. 

OM&S Restrictions 

Some munitions included in OM&S are restricted due to condition. Restricted munitions are 

considered obsolete or unserviceable when they cannot meet performance requirements. However, 

obsolete and unserviceable OM&S may be used in emergency combat situations when no other 

suitable munitions are immediately available. 

General Composition of OM&S 

OM&S include 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 on asset type and condition. 

Operating Materiel and Supplies, Net Dollars in Millions

2015

Valuation 

Method As of September 30

OM&S, 

Gross Value

Revaluation 

Allowance OM&S, Net

OM&S Categories

Held for Use $ 121,858.5 $ 0.0 $ 121,858.5 LAC, MAC

Held for Repair 46,853.6 (0.1) 46,853.5 LAC, MAC

Excess, Obsolete, and Unserviceable 2,043.2 (2,043.2) 0.0 NRV

Total OM&S $ 170,755.3 $ (2,043.3) $ 168,712.0

Legend for Valuation Methods:

LAC = Latest Acquisition Cost, adjusted for holding gains and losses

MAC = Moving Average Cost

NRV = Net Realizable Value

Stockpile Materiel, Net Dollars in Millions

2016

Valuation 

Method

As of September 30

Stockpile, 

Materiel 

Amount

Allowance for 

Gains 

(Losses)

Stockpile, 

Materiel, 

Net

Stockpile Materiel Categories

Held for Sale $ 4.2 $ 0.0 $ 4.2 AC, LCM

Held for Reserve for Future Sale 1,148.6 0.0 1,148.6 AC, LCM

Total Stockpile Materiel $ 1,152.8 $ 0.0 $ 1,152.8

Legend for Valuation Methods:

AC = Actual Cost LCM = Lower of Cost or 

Market

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Stockpile Materiel Restrictions 

Materiel held by the National Defense Stockpile (NDS) is restricted unless released by 

congressional action and made available for sale on the open market. Stockpile materiel may not 

be disposed except for: (1) necessary upgrading, refining, or processing; (2) necessary rotation to 

prevent deterioration; (3) determination as excess with potential financial loss if retained; or 

(4) authorization by law. 

Before selling any materiel, Congress must enact specific enabling legislation (e.g., the 

National Defense Authorization Act). When authorized to offer materiel for sale, NDS reclassifies 

from Materiel Held in Reserve to Materiel Held for Sale. 

General Composition of Stockpile Materiel 

Due to statutory requirements, the Department holds strategic and critical stockpile materiel 

for use in national defense, conservation, or national emergencies. The estimated market price of 

stockpile materiel as of September 30, 2016, is $1.2 billion. 

Other Disclosures 

The Federal Accounting Standards Advisory Board issued SFFAS 48, “Opening Balances for 

Inventory, Operating Materials and Supplies, and Stockpile Materials” permitting alternative 

methods in establishing opening balances. SFFAS 48 is effective for periods beginning after 

September 30, 2016 with early implementation allowed. The Department adopted this standard 

for 2016 for Stockpile Materials. As a result of the implementation, the Department increased the 

beginning Cumulative Results of Operations and increased ending balance of Stockpile Materials 

by $733.7 million. 

Stockpile Materiel, Net Dollars in Millions

2015

Valuation 

Method

As of September 30

Stockpile, 

Materiel 

Amount

Allowance for 

Gains 

(Losses)

Stockpile, 

Materiel, 

Net

Stockpile Materiel Categories

Held for Sale $ 6.8 $ 0.0 $ 6.8 AC, LCM

Held for Reserve for Future Sale 442.5 0.0 442.5 AC, LCM

Total Stockpile Materiel $ 449.3 $ 0.0 $ 449.3

Legend for Valuation Methods:

AC = Actual Cost LCM = Lower of Cost or 

Market

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95

NOTE 10. GENERAL PP&E, NET

General PP&E, Net Dollars in Millions

2016

As of September 30

Depreciation/

Amortization 

Method

Service 

Life

Acquisition 

Value

(Accumulated 

Depreciation/

Amortization)

Net Book 

Value

Major Asset Classes

Land N/A N/A $ 10,658.7 N/A $ 10,658.7

Buildings, Structures, and 

Facilities S/L 20 or 402 384,144.7 (230,145.3) 153,999.4

Leasehold Improvements S/L Lease 

term

584.9 (265.3) 319.6

Software S/L 2 – 5 or 

10 9,464.5 (6,043.5) 3,421.0

General Equipment S/L Various 1,054,528.7 (639,666.1) 414,862.6

Assets Under Capital Lease1 S/L Lease 

term 353.7 (226.0) 127.7

Construction-in-Progress N/A N/A 118,089.1 N/A 118,089.1

Other N/A N/A 10,250.1 (11.0) 10,239.1

Total General PP&E $ 1,588,074.4 $ (876,357.2) $ 711,717.2

1 Note 15 for additional information on Capital Leases

2 During FY 16 select agencies elected an early implementation of SFFAS 50. For Building, Structures, and Facilities Estimated Useful Lives 

are 45 years (Buildings), 35 Years (Structures), and 40 Years ( Linear Structures).

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

General PP&E, Net Dollars in Millions

Restated 2015

As of September 30

Depreciation/

Amortization 

Method

Service 

Life

Acquisition 

Value

(Accumulated 

Depreciation/

Amortization)

Net Book 

Value

Major Asset Classes

Land N/A N/A $ 10,904.5 N/A $ 10,904.5

Buildings, Structures, and 

Facilities S/L 20 or 40 283,181.3 (136,918.4) 146,262.9

Leasehold Improvements S/L Lease 

term 515.2 (237.5) 277.7

Software S/L 2 – 5 or 

10 12,021.6 (8,426.0) 3,595.6

General Equipment S/L 5 or 10 1,010,573.5 (584,040.0) 426,533.5

Assets Under Capital Lease1 S/L Lease 

term

353.1 (208.7) 144.4

Construction-in-Progress N/A N/A 73,217.2 N/A 73,217.2

Other N/A N/A 446.4 (1.7) 444.7

Total General PP&E $ 1,391,212.8 $ (729,832.3) $ 661,380.5

1 Note 15 for additional information on Capital Leases

Legend for Valuation Methods: S/L = Straight Line N/A = Not Applicable
U.S. Department of Defense Agency Financial Report for FY 2016 

Financial Section

Restatements 

The Department corrected a $31.4 billion understatement of General PP&E. See Note 26, 

Restatements, for further information. 

Other Disclosures 

The Department has use of overseas land, buildings, and other facilities obtained through 

international treaties and agreements negotiated by the Department of State. Treaty covenants 

restrict the Department’s use and disposal of real property (land and buildings) located outside the 

United States. 

The Department does not have acquisition value for all General PP&E and uses several cost 

methodologies to provide General PP&E values for financial statement reporting purposes. The 

Federal Accounting Standards Advisory Board issued SFFAS 50, “Establishing Opening Balances 

for General Property, Plant and Equipment” permitting alternative methods in establishing opening 

balances for general PP&E. SFFAS 50 is effective for periods beginning after 

September 30, 2016, with early implementation allowed. Select agencies adopted this standard 

for 2016. 

Extensive efforts are in progress to achieve audit readiness. The ongoing discovery and 

validation phases identify adjustments reflected in prior period adjustments or current year 

gains/losses. 

Other General PP&E includes Real Property held in Caretaker Status. Caretaker Status is 

defined as those properties the Department still owns, but are being held awaiting disposition to 

another entity. 

During FY 2016, the Department continued to reclassify from Nonfederal Other Assets, 

Outstanding Contract Financing Payments to Construction in Progress in accordance with internal 

guidance. 

Heritage Assets and Stewardship Land 

The Department’s policy is to preserve its heritage assets including items of historical, cultural, 

educational, or artistic importance. The Department, with minor exceptions, uses the buildings and 

stewardship land in its daily activities and includes the buildings on the Balance Sheet as multi-use 

heritage assets. 

Heritage assets within the Department consist of buildings and structures, archeological sites, 

and museum collections. The Department defines these as follows: 

 Buildings and Structures are listed, or eligible for listing, on the National Register of 

Historic Places, including multi-use heritage assets. 

 Archeological Sites are listed, or eligible for listing, on the National Register of Historic 

Places in accordance with Section 110 of the National Historic Preservation Act. 

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 Museum Collection Items are considered unique due to historical, natural, cultural, 

educational, artistic, technical, or architectural significance. 

The Department is unable to identify quantities of heritage assets and stewardship land added 

through donation or devise due to limitations of the Department’s financial and nonfinancial 

management processes and systems. 

Heritage Assets 

Categories Measure 

Quantity

Beginning 

Balance Additions Deletions Ending Balance

Buildings and Structures Each 57,613 382 6,218 51,777

Archeological Sites Each 31,144 673 498 31,319

Museum Collection Items 

(Objects, not including fine art) Each 1,251,392 18,414 22,627 1,247,179

Museum Collection Items (Objects, 

fine art) Each 59,216 37,056 268 96,004

Differences in heritage assets quantities from the FY 2015 ending to the FY 2016 beginning 

unit counts resulted from periodic reviews by the Military Services. 

Stewardship land includes both land and land rights owned by the Department, but not acquired 

for, or in connection with, items of General PP&E. All land provided to the Department from the 

public domain at no cost, regardless of its use, is classified as Stewardship Land. 

Stewardship land is categorized and reported in acres based on the predominant use of the land. 

The three categories of Stewardship land held in public trust are: State Owned Land, Withdrawn 

Public Land, and Public Land. 

The Department’s stewardship land consists mainly of mission essential land.

Stewardship Land Acres in Thousands

Facility 

Code Predominant Land Use Categories Beginning Balance Additions Deletions Ending Balance 

9110 Government Owned Land 6,551 0 8 6,543

9111 State Owned Land 18 0 12 6

9120 Withdrawn Public Land 15,448 7 0 15,455

9130 Licensed and Permitted Land 947 0 2 945

9140 Public Land 11 0 0 11

9210 Land Easement 378 0 0 378

9220 In-leased Land 124 0 0 124

9230 Foreign Land 297 0 0 297

Grand Total 23,759

Total – All Other Lands 8,287

Total – Stewardship Lands 15,472

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Assets Under Capital Lease Dollars in Millions

As of September 30 2016 2015

Entity as Lessee, Assets Under Capital Lease

Land and Buildings $ 0.7 $ 0.0

Equipment 353.0 353.1

Accumulated Amortization (226.0) (208.7)

Total Capital Leases $ 127.7 $ 144.4

NOTE 11. LIABILITIES NOT COVERED BY BUDGETARY RESOURCES

Liabilities Not Covered by Budgetary Resources Dollars in Millions

As of September 30 2016 2015

Intragovernmental Liabilities

Accounts Payable 0.1 0.0

Debt 1.0 1.3

Other Liabilities 1,929.9 2,064.3

Total Intragovernmental Liabilities $ 1,931.0 $ 2,065.6

Non-Federal Liabilities

Accounts Payable $ 762.2 $ 540.1

Military Retirement and Other Federal Employment Benefits 1,500,390.0 1,570,899.0

Environmental and Disposal Liabilities 59,466.8 56,534.2

Other Liabilities 12,439.6 13,061.0

Total Non-Federal Liabilities $ 1,573,058.6 $ 1,641,034.3

Total Liabilities Not Covered by Budgetary Resources $ 1,574,989.6 $ 1,643,099.9

Total Liabilities Covered by Budgetary Resources $ 847,910.8 $ 783,490.9

Total Liabilities $ 2,422,900.4 $ 2,426,590.8

Other Disclosures 

Liabilities Not Covered by Budgetary Resources includes liabilities requiring congressional 

action before budgetary resources can be provided. 

Non-Federal Accounts Payable primarily represents liabilities in canceled appropriations, if 

paid, will be disbursed using current year funds. 

Debt consists primarily of borrowing from the U.S. Treasury for capital improvements to the 

Washington Aqueduct Project expected to be completed by 2023. The related reimbursement to 

the Department from Arlington County and Falls Church, Virginia, is recorded as non-Federal 

accounts receivable. 

Environmental and Disposal Liabilities represents the Department’s liability for existing and 

anticipated environmental clean-up and disposal. Refer to Note 14, Environmental and Disposal 

Liabilities, for additional details. 

Intragovernmental Other Liabilities consists primarily of unfunded liabilities for Federal 

Employees Compensation Act, Judgment Fund, and Unemployment Insurance. 

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99

Non-Federal Other Liabilities consists primarily of unfunded annual leave, contingent 

liabilities, and expected expenditures for disposal of conventional munitions. 

Military Retirement and Other Federal Employment Benefits consists of various employee 

actuarial liabilities not due and payable during the current fiscal year. These liabilities primarily 

consist of $906.1 billion in pension liabilities and $586.5 billion in health benefit liabilities. Refer 

to Note 17, Military Retirement and Other Federal Employment Benefits, for additional details. 

NOTE 12. ACCOUNTS PAYABLE

Accounts Payable Dollars in Millions

2016

As of September 30

Accounts Payable

Interest, Penalties, 

and Administrative 

Fees

Total

Intragovernmental Payables $ 1,922.4 N/A $ 1,922.4

Non-Federal Payables

(To the Public) 18,239.7 23.9 18,263.6

Total Accounts Payable $ 20,162.1 23.9 $ 20,186.0

Accounts Payable Dollars in Millions

2015

As of September 30

Accounts Payable

Interest, Penalties, 

and Administrative 

Fees

Total

Intragovernmental Payables $ 1,432.8 N/A $ 1,432.8

Non-Federal Payables

(To the Public) 18,886.2 21.6 18,907.8

Total Accounts Payable $ 20,319.0 $ 21.6 $ 20,340.6

Other Disclosures 

Accounts Payable include amounts owed to Federal and non-Federal entities for goods and 

services received by the Department. The Department’s systems do not track intragovernmental 

accounts payable transactions by customer. Buyer-side accounts payable are adjusted to agree 

with interagency seller-side accounts receivable by: (1) reclassifying amounts between Federal 

and non-Federal accounts payable, (2) accruing additional accounts payable and expenses, and 

(3) applying both supported and unsupported undistributed disbursements at the reporting entity 

level. 
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Financial Section

NOTE 13. DEBT

Debt Dollars in Millions

2016

As of September 30 Beginning Balance Net Borrowing Ending Balance

Agency Debt 

(Intragovernmental)

Debt to the Treasury $ 1,508.6 $ 122.1 $ 1,630.7

Total Agency Debt $ 1,508.6 $ 122.1 $ 1,630.7

Debt Dollars in Millions

2015

As of September 30 Beginning Balance Net Borrowing Ending Balance

Agency Debt 

(Intragovernmental)

Debt to the Treasury $ 1,392.3 $ 116.3 $ 1,508.6

Total Agency Debt $ 1,392.3 $ 116.3 $ 1,508.6

The Department’s debt consists of interest and principal payments due to the U.S. Treasury. 

The Department borrows funds for MHPI and the Washington Aqueduct Capital Improvements 

Project. 

The Department must pay the debt on direct loans if borrowers (e.g., local governments or 

housing builders) default. For loan guarantees, the Department must pay the amount of 

outstanding principal guaranteed. 

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NOTE 14. ENVIRONMENTAL AND DISPOSAL LIABILITIES

and Disposal Liabilities Dollars in Millions

As of September 30 2016 2015

Environmental Liabilities–Non-Federal

Accrued Environmental Restoration Liabilities

Active Installations – Installation Restoration Program (IRP) and 

Building Demolition and Debris Removal (BD/DR) $ 12,422.2 $ 9,728.3

Active Installations – Military Munitions Response Program 

(MMRP) 3,677.4 3,645.9

Formerly Used Defense Sites – IRP & BD/DR 3,019.4 3,055.0

Formerly Used Defense Sites – MMRP 7,699.4 10,767.9

Other Accrued Environmental Liabilities – Non-BRAC

Environmental Corrective Action $ 829.5 $ 883.8

Environmental Closure Requirements 4,203.7 2,943.3

Environmental Response at Operational – Ranges 62.4 88.7

Asbestos 2,014.6 1,493.5

Non-Military Equipment 0.4 288.1

Other 2,220.7 1,011.9

Base Realignment and Closure Installations (BRAC)

Installation Restoration Program $ 3,664.0 $ 3,188.8

Military Munitions Response Program 730.5 495.3

Environmental Corrective Action/Closure Requirements 201.3 213.8

Asbestos 14.2 9.9

Environmental Disposal for Military Equipment/Weapons 

Programs

Nuclear Powered Military Equipment/Spent Nuclear Fuel $ 14,562.2 $ 13,814.6

Non-Nuclear Powered Military Equipment 0.0 36.4

Other Weapons Systems 202.4 202.2

Chemical Weapons Disposal Program

Chemical Demilitarization – Chemical Materials Agency (CMA) $ 2,658.0 $ 3,046.4

CAMD Demilitarization – Assembled Chemical Weapons 

Alternatives (ACWA) 4,488.0 5,116.3

Total Environmental Liabilities $ 62,670.3 $ 60,030.1

Other Accrued Environmental Liabilities, Non-Base Realignment and Closure (Non-BRAC), 

Other consists primarily of Formerly Utilized Sites Remedial Action Program (FUSRAP) 

remediation of radiological contamination. The FUSRAP is a shared program between the 

Department and the Department of Energy’s U.S. Atomic Energy and Weapons Program.

The unrecognized portion of the estimated total cleanup costs associated with General PP&E 

is currently $2.7 billion. This estimate is incomplete and does not accurately reflect the 

Department’s total unrecognized costs associated with General PP&E. The Department is 

implementing procedures to address deficiencies. 

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Types of Environmental Liabilities and Disposal Liabilities Identified 

The Department has cleanup requirements for the Defense Environmental Restoration Program 

(DERP) for active installations, BRAC installations, and Formerly Used Defense Sites. The 

Department has additional cleanup requirements for active installations not covered by DERP, 

weapon systems programs, and chemical weapons disposal programs. The weapons systems 

program consists of chemical weapons disposal, nuclear powered aircraft carriers, nuclear powered 

submarines, and other nuclear ships. All cleanup efforts are performed 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 from past waste disposal practices, 

leaks, spills, and other activity resulting in 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 weapon systems, and environmental costs 

related to BRAC actions. 

The Department follows the Comprehensive Environmental Response, Compensation, and 

Liability Act (CERCLA, Public Law 96-510), Superfund Amendments and Reauthorization Act of 

1986 (SARA, Public Law 99-499), Resource Conservation and Recovery Act

(RCRA, Public Law 94-580) or other applicable federal or state laws to clean up contamination. 

The CERCLA and RCRA require the Department to clean up contamination in coordination with 

regulatory agencies, current owners of property damaged by the Department, and third parties with 

partial responsibility for environmental restoration. Failure to comply with agreements and legal 

mandates puts the Department at risk of incurring fines and penalties. 

Laws concerning cleanup requirements for nuclear-powered naval vessels govern the 

Department’s environmental policy and regulations. The Atomic Energy Act of 1954, as amended, 

assures the proper management of source, special nuclear, and byproduct materiel. The 

Department coordinates nuclear power actions with the Department of Energy. The 

Nuclear Waste Policy Act of 1982 (Public Law 97-425) requires owners and generators of 

high-level nuclear waste and spent nuclear fuel to pay their share of the cost of the program. The 

Low-Level Radioactive Waste Policy Amendments Act of 1985 (Public Law 99-240) 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 (Public Law 99-145, as amended) directing the Department to destroy the 

unitary chemical stockpile per the requirements of the Chemical Weapons Convention Treaty. 

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Methods for Assigning Total Cleanup Costs to Current Operating Periods 

The Department uses engineering estimates and independently validated models to project 

environmental costs. The models include the Remedial Action Cost Engineering Requirements 

application and the Normalization of Data System. The Department validates the models in 

accordance with DoD Instruction 5000.61, DoD Modeling and Simulation Verification, 

Validation, and Accreditation, and estimates liabilities based on data received during preliminary 

assessment and 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 charge costs to current operating periods. The Department expensed cleanup costs for 

General PP&E placed into service prior to October 1, 1997, unless costs are to be recovered 

through user charges. As costs are recovered, the Department expenses cleanup costs associated 

with the asset life that has passed since the General PP&E was placed into service. The Department 

systematically recognizes the remaining cost over the life of the assets. 

For General PP&E placed into service after September 30, 1997, the Department expenses 

associated environmental costs 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 when the asset is placed into service. 

In accordance with reporting requirements for asbestos, the Department reports liabilities for 

buildings and facilities containing both friable and non-friable asbestos. At this time the 

Department is unable to reasonably estimate an amount of the total cleanup costs related to friable 

and nonfriable asbestos. 

Nature of Estimates and the Disclosure of Information Regarding Possible Changes Due to 

Inflation, Deflation, Technology, or Applicable Laws and Regulations 

The Department revised estimates resulting from overlooked or previously unknown 

contaminants, re-estimation based on different assumptions, and other changes in project scope. 

Although the Department is unaware of pending changes, environmental liabilities are subject to 

changes in laws and regulations, agreements with regulatory agencies, and advances in technology. 

Uncertainty Regarding the Accounting Estimates Used to Calculate the Reported 

Environmental Liabilities 

Accounting estimates for environmental liabilities use reasonable judgments and assumptions 

based on available information. Actual results may materially vary if agreements with regulatory 

agencies require remediation to a different degree than anticipated when calculating the estimates. 

Liabilities can be further affected if investigation of the environmental sites reveals contamination 

levels differing from estimate parameters. 

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The Department is responsible for environmental restoration and corrective action for buried 

chemical munitions and agents; however, it is unable to provide a reasonable estimate because the 

extent of the buried chemical munitions and agents is unknown. The Department also cannot 

provide a complete estimate for FUSRAP. The Department has ongoing studies and will update 

its estimate as additional liabilities are identified. In addition, not all components of the 

Department recognize environmental liabilities associated with General PP&E due to process and 

system limitations. 

The Department may incur costs for restoration initiatives in conjunction with returning 

overseas Defense facilities to host nations. The Department is unable to provide a reasonable 

estimate because the extent of required restoration is unknown. 

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NOTE 15. OTHER LIABILITIES

Other Liabilities Dollars in Millions

2016

As of September 30 Current Liability Noncurrent Liability Total

Intragovernmental

Advances from Others $ 800.6 $ 0.0 $ 800.6

Deposit Funds and Suspense 

Account Liabilities

497.4 0.0 497.4

Disbursing Officer Cash 1,128.0 0.0 1,128.0

Judgment Fund Liabilities 530.4 0.0 530.4

FECA Reimbursement to the 

Department of Labor 538.5 662.1 1,200.6

Custodial Liabilities 916.3 2,138.7 3,055.0

Employer Contribution and 

Payroll Taxes Payable 658.8 0.0 658.8

Other Liabilities 212.8 0.0 212.8

Total Intragovernmental 

Other $ 5,282.8 $ 2,800.8 $ 8,083.6

Non-Federal

Accrued Funded Payroll and 

Benefits $ 5,813.0 $ 0.0 $ 5,813.0

Advances from Others 4,953.8 2.1 4,955.9

Deposit Funds and Suspense 

Accounts 2,223.8 0.0 2,223.8

Nonenvironmental Disposal 

Liabilities

Military Equipment 

(Nonnuclear) 154.7 47.0 201.7

Excess/Obsolete Structures 0.0 0.0 0.0

Conventional Munitions 

Disposal 0.0 6.0 6.0

Accrued Unfunded Annual 

Leave 10,242.4 0.0 10,242.4

Capital Lease Liability 0.0 0.0 0.0

Contract Holdbacks 783.3 0.8 784.1

Employer Contribution and 

Payroll Taxes Payable 529.6 0.0 529.6

Contingent Liabilities 313.2 7,121.4 7,434.6

Other Liabilities 230.5 0.0 230.5

Total Non-Federal Other 

Liabilities $ 25,244.3 $ 7,177.3 $ 32,421.6

Total Other Liabilities $ 30,527.1 $ 9,978.1 $ 40,505.2

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Other Liabilities Dollars in Millions

2015

As of September 30 Current Liability Noncurrent Liability Total

Intragovernmental

Advances from Others $ 651.8 $ 0.0 $ 651.8

Deposit Funds and Suspense 

Account Liabilities 674.3 0.0 674.3

Disbursing Officer Cash 1,047.8 0.0 1,047.8

Judgment Fund Liabilities 590.2 0.0 590.2

FECA Reimbursement to the 

Department of Labor 550.8 687.1 1,237.9

Custodial Liabilities 529.7 2,188.4 2,718.1

Employer Contribution and 

Payroll Taxes Payable 528.9 0.0 528.9

Other Liabilities 250.5 0.0 250.5

Total Intragovernmental 

Other $ 4,824.0 $ 2,875.5 $ 7,699.5

Non-Federal

Accrued Funded Payroll and 

Benefits $ 9,335.1 $ 0.0 $ 9,335.1

Advances from Others 4,875.0 1.5 4,876.5

Deposit Funds and Suspense 

Accounts 1,602.0 0.0 1,602.0

Nonenvironmental Disposal 

Liabilities

Military Equipment 

(Nonnuclear) 173.5 49.2 222.7

Excess/Obsolete Structures 18.0 278.8 296.8

Conventional Munitions 

Disposal 0.0 6.0 6.0

Accrued Unfunded Annual 

Leave 9,931.7 0.0 9,931.7

Capital Lease Liability 149.0 0.0 149.0

Contract Holdbacks 923.0 1.4 924.4

Employer Contribution and 

Payroll Taxes Payable 418.3 0.0 418.3

Contingent Liabilities 253.3 6,633.0 6,886.3

Other Liabilities 278.3 0.0 278.3

Total Non-Federal Other 

Liabilities $ 27,957.2 $ 6,969.9 $ 34,927.1

Total Other Liabilities $ 32,781.2 $ 9,845.4 $ 42,626.6

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Other Disclosures 

Advances from Others represent liabilities for collections received to cover future expenses or 

acquisition of assets. 

Deposit funds and Suspense Accounts represent liabilities for receipts held in suspense 

temporarily for distribution to another fund or entity or held as an agent for others and paid at the 

direction of the owner. 

Disbursing Officers Cash represents liabilities for currency on hand, cash on deposit at 

designated depositories, cash in the hands of deputy disbursing officers, cashiers and agents, 

negotiable instruments on hand, etc. 

Capital Lease Liability Dollars in Millions

2016 – Asset Category

As of September 30

Land and 

Buildings Equipment Other Total

Future Payments Due

2017 $ 0.0 $ 0.0 $ 0.0 $ 0.0

2018 0.0 0.0 0.0 0.0

2019 0.0 0.0 0.0 0.0

2020 0.0 0.0 0.0 0.0

2021 0.0 0.0 0.0 0.0

After 5 Years 0.0 0.0 0.0 0.0

Total Future Lease Payments Due $ 0.0 $ 0.0 $ 0.0 $ 0.0

Less: Imputed Interest Executory Costs (0.0) (0.0) (0.0) 0.0

Net Capital Lease Liability $ 0.0 $ 0.0 $ 0.0 $ 0.0

Capital Lease Liabilities Covered by Budgetary Resources $ 0.0

Capital Lease Liabilities Not Covered by Budgetary Resources $ 0.0

Capital Lease Liability Dollars in Millions

2015 – Asset Category

As of September 30

Land and 

Buildings Equipment Other Total

Future Payments Due

2016 $ 21.4 $ 0.0 $ $ 21.4

2017 21.9 0.0 0.0 21.9

2018 22.5 0.0 0.0 22.5

2019 21.6 0.0 0.0 21.6

2020 21.9 0.0 0.0 21.9

After 5 Years 103.0 0.0 0.0 103.0

Total Future Lease Payments Due $ 212.3 $ 0.0 $ 0.0 $ 212.3

Less: Imputed Interest Executory Costs (63.3) (0.0) (0.0) (63.3)

Net Capital Lease Liability $ 149.0 $ 0.0 $ 0.0 $ 149.0

Capital Lease Liabilities Covered by Budgetary Resources $ 149.0

Capital Lease Liabilities Not Covered by Budgetary Resources $ 0.0

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Custodial Liabilities represents liabilities for collections reported as non-exchange revenues 

where the Department is acting on behalf of another Federal entity. 

Intragovernmental Other Liabilities primarily consists of unemployment compensation 

liabilities. 

Nonfederal Other Liabilities primarily consist of estimated costs for services provided; accrued 

liabilities for inventory owned and managed on behalf of foreign governments; and undistributed 

international tariff receipts. 

Contingent Liabilities include $5.4 billion related to contracts authorizing progress payments 

based on cost as defined in the Federal Acquisition Regulation (FAR). In accordance with contract 

terms, specific rights to contractors’ work vests with the Federal Government when a specific type 

of contract financing payment is made. This action protects taxpayer funds in the event of contract 

nonperformance. These rights should not be misconstrued as rights of ownership. The Department 

is under no obligation to pay contractors amounts in excess of progress payments until delivery 

and government acceptance. Due to the probability the contractors will complete their efforts and 

deliver satisfactory products, and because the amount of contractor costs incurred but yet unpaid 

are estimable, the Department has recognized a contingent liability for the estimated unpaid costs 

that are considered conditional for payment pending delivery and government acceptance. 

Total contingent liabilities for progress payments based on cost represent the difference between 

the estimated costs incurred to date by contractors and amounts authorized to be paid under 

progress payments based on cost provisions within the FAR. Estimated contractor-incurred costs 

are calculated by dividing the cumulative unliquidated progress payments based on cost by the 

contract-authorized progress payment rate. The balance of unliquidated progress payments based 

on cost is deducted from the estimated total contractor-incurred costs to determine the contingency 

amount. 

The Defense Health Agency has a $1.3 million delinquent liability with the Department of 

Labor for Federal Employee Compensation Act reimbursement.

NOTE 16. COMMITMENTS AND CONTINGENCIES

Legal Contingencies 

 The Department is a party in various administrative proceedings and legal actions related 

to claims for environmental damage, equal opportunity matters, and contractual bid protests. The 

Department has accrued contingent liabilities for legal actions where the Office of General Counsel 

(OGC) considers an adverse decision probable and the amount of loss is measurable. In the event 

of an adverse judgment against the Government, some of the liabilities may be payable from the 

U.S. Treasury Judgment Fund. The Department records contingent liabilities in Note 15, Other 

Liabilities. 

 The Department reports 49 legal actions with individual claims greater than the 

Department’s FY 2016 materiality threshold of $146.6 million. These actions total approximately 

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$1.4 trillion. Of this amount, the OGC classified claims totaling approximately $2.0 billion as 

“probable,” $6.4 billion as “reasonably possible,” $1.1 trillion as “remote,” and $305.6 billion as 

“unable to determine the probability of loss.” The Department also has 123 actions at 

approximately $6.9 billion above the individual Components’ thresholds, but below the 

Department’s materiality threshold.

Other Commitments and Contingencies 

 The Department is a party in numerous individual contracts containing clauses, such as 

price escalation, award fee payments, or dispute resolution, potentially resulting in a future outflow 

of budgetary resources. Currently, the Department's automated system processes have limited 

capability to capture these potential liabilities; therefore, the amounts reported may not fairly 

present the Department’s commitments and contingencies. Contingencies considered both 

measurable and probable have been recognized as liabilities. Refer to Note 15, Other Liabilities, 

for further information. 

NOTE 17. MILITARY RETIREMENT AND OTHER FEDERAL EMPLOYMENT BENEFITS

Military Retirement and Other Federal Employment Benefits Dollars in Millions

2016

As of September 30

Liabilities

(Less: Assets 

Available to Pay 

Benefits)

Unfunded Liabilities

Pension and Health Actuarial 

Benefits

Military Retirement Pensions $ 1,490,292.5 $ (584,180.9) $ 906,111.6

Military Pre Medicare-Eligible 

Retiree Health Benefits 239,734.7 0.0 239,734.7

Military Medicare-Eligible 

Retiree Health Benefits 557,806.2 (210,970.9) 346,835.3

Total Pension and Health 

Actuarial Benefits $ 2,287,833.4 $ (795,151.8) $ 1,492,681.6

Other Benefits

FECA $ 5,931.9 $ 0.0 $ 5,931.9

Voluntary Separation Incentive 

Programs 380.4 (153.3) 227.1

DoD Education Benefits Fund 1,215.9 (1,215.9) 0.0

Other 2,475.7 (926.3) 1,549.4

Total Other Benefits $ $ (2,295.5) $ 7,708.4

Total Military Retirement and 

Other Federal Employment 

Benefits

$ 2,297,837.3 $ (797,447.3) $ 1,500,390.0

Actuarial Cost Method Used: Aggregate Entry-Age Method 

Assumptions: Effective Interest 

Market Value of Investments in Market-based and Marketable Securities: $1.0 trillion

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The Department complies with SFFAS 33. The standard requires the separate presentation of 

gains and losses from changes in long-term assumptions used to estimate liabilities associated with 

pensions, other retirement and postemployment benefits. The SFFAS 33 also provides a standard 

for selecting the discount rate and valuation date used in estimating these liabilities. 

Military Retirement and Other Federal Employment Benefits Dollars in Millions

2016

As of September 30

Military 

Retirement 

Pensions

Military 

PreMedicare 

Eligible 

Retiree 

Health 

Benefits

Military 

MedicareEligible 

Retiree 

Benefits

Voluntary 

Separation 

Incentive 

Programs

DoD 

Education 

Benefits 

Fund

Beginning Actuarial Liability $ 1,558,518.6 $ 220,876.2 $ 508,194.0 $ 453.1 $ 1,137.3 

Normal Cost 31,243.9 8,709.5 10,690.2 0.0 102.3

Interest Cost 63,367.2 9,208.4 21,074.3 11.5 37.9

Plan Amendments (18,677.2) (657.3) (5,184.3) 0.0 (31.1)

Experience Losses (Gains) (25,452.1) 11,118.0 29,782.8 (7.6) (31.0)

Other Factors 0.0 0.0 0.0 0.0 241.6

Subtotal: Expenses before Losses 

(Gains) from Actuarial 

Assumption Changes

50,481.8 28,378.6 56,363.0 3.9 319.7

Actuarial (Gain)/Loss due to:

Changes in Trend Assumptions 0.0 1,057.2 (9,522.1) 0.0 0.0

Changes in Assumptions Other 

than Trend (61,248.7) (497.4) 12,623.0 5.2 0.0

Subtotal: Losses (Gains) from 

Actuarial Assumption Changes (61,248.7) 559.8 3,100.9 5.2 0.0

Total Expenses (10,766.9) 28,938.4 59,463.9 9.1 319.7

Less Benefit Outlays 57,459.2 10,079.9 9,851.7 81.8 241.1

Total Changes in Actuarial 

Liability $ (68,226.1) $ 18,858.5 $ 49,612.2 $ (72.7) $ 78.6 

Ending Actuarial Liability $ 1,490,292.5 $ 239,734.7 $ 557,806.2 $ 380.4 $ 1,215.9 

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Military Retirement Pensions 

The Military Retirement Fund is a defined benefit plan authorized by Public Law (PL) 98-94

to provide funds used to pay annuities and pensions to retired military personnel and their 

survivors. DoD Board of Actuaries 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). The actuaries used the 

following assumptions to calculate the FY 2016 roll-forward amount: 

Military Retirement Pensions Inflation Salary Interest

Fiscal Year 2016 0.0% (actual) 1.3% (actual) 4.1%

Fiscal Year 2017 0.4% (estimated) 1.6% (estimated) 3.9%

Long Term 1.7% 2.1% 3.9%

Actuarial Cost Method Used: Aggregate Entry-Age Normal Method

Market Value of Investments in Market-Based and Marketable Securities: $759.2 billion

Assumed Interest Rate: 3.9%

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

Effective FY 2008, the initial unfunded liability is amortized over a 42-year period to ensure annual 

payments cover interest on the unfunded actuarial liability, with the last payment expected 

Military Retirement and Other Federal Employment Benefits Dollars in Millions

2015

As of September 30

Liabilities

(Less: Assets 

Available to Pay 

Benefits)

Unfunded Liabilities

Pension and Health Actuarial 

Benefits

Military Retirement Pensions $ 1,558,518.6 $ (521,296.7) $ 1,037,221.9

Military Pre Medicare-Eligible 

Retiree Health Benefits 220,876.2 0.0 220,876.2

Military Medicare-Eligible 

Retiree Health Benefits 508,194.0 (203,254.5) 304,939.5

Total Pension and Health 

Actuarial Benefits $ 2,287,588.8 $ (724,551.2) $ 1,563,037.6

Other Actuarial Benefits

FECA $ 6,056.0 $ 0.0 $ 6,056.0

Voluntary Separation Incentive 

Programs 453.1 (180.1) 273.0

DoD Education Benefits Fund 1,137.3 (1,137.3) 0.0

Other 6,783.2 (5,250.8) 1,532.4

Total Other Actuarial Benefits $ 14,429.6 $ (6,568.2) $ 7,861.4

Total Military Retirement and 

Other Federal Employment 

Benefits

$ 2,302,018.4 $ (731,119.4) $ 1,570,899.0

Actuarial Cost Method Used: Aggregate Entry-Age Method 

Assumptions: Effective Interest 

Market Value of Investments in Market-based and Marketable Securities: $908.4 billion

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October 1, 2025. All subsequent gains and losses experienced by the system are amortized over a 

30 year period. 

Military Retirement Health Benefits (MRHB) 

The MRHB are post-retirement benefits the Department provides to non-Medicare-eligible 

military retirees and other eligible beneficiaries through private sector health care providers and 

the Department’s medical treatment facilities. The actuaries calculate actuarial liabilities annually 

using assumptions and actual experience. For the FY 2016 actuarial liability calculation, actuaries 

used the following assumptions: 

MRHB Medical Trend FY 2015 –

FY 2016

Ultimate Rate 

FY 2040

Non-Medicare Inpatient (Direct Care) 5.70% 4.45%

Non-Medicare Outpatient (Direct Care) 6.00% 4.45%

Non-Medicare Prescriptions (Direct Care) 5.00% 4.45%

Non-Medicare Inpatient (Purchased Care) 1.54% 4.45%

Non-Medicare Outpatient (Purchased Care) 3.00% 4.45%

Non-Medicare Prescriptions (Purchased Care) 3.92% 4.45%

U.S. Family Health Plan (USFHP) (Purchased Care) 3.88% 4.45%

Actuarial Cost Method Used: Aggregate Entry-Age Normal Method

Assumed Interest Rate: 4.0%

Medicare-Eligible Retiree Health Care Fund (MERHCF) Benefits 

In accordance with PL 106-398, MERHCF accumulates funds to finance the health care 

program liabilities of Medicare-eligible retirees for all the Uniformed Services and specific 

Medicare-eligible beneficiaries. The DoD Board of Actuaries approves the long-term assumptions 

for medical trends and interest. The actuaries calculate the actuarial liabilities annually using 

actual experience (e.g., mortality and retirement rates, direct care costs, purchased care). The 

actuaries used the following assumptions to calculate the FY 2016 roll-forward amount: 

MERHCF Benefits – Medical Trend FY 2015 –

FY 2016

Ultimate Rate 

FY 2040

Medicare Inpatient (Direct Care) 2.95% 4.45%

Medicare Inpatient (Purchased Care) 1.00% 4.45%

Medicare Outpatient (Direct Care) 5.00% 4.45%

Medicare Outpatient (Purchased Care) 3.00% 4.45%

Medicare Prescriptions (Direct Care) 5.00% 4.45%

Medicare Prescriptions (Purchased Care) 4.67% 4.45%

Medicare USFHP (Purchased Care) 2.77% 4.45%

Actuarial Cost Method Used: Aggregate Entry-Age Normal Method

Market Value of Investments in Market-Based and Marketable Securities: $286.8 billion

Assumed Interest Rate: 4.0%

The MERHCF liability includes Medicare liabilities for all Uniformed Services. The 

$557.8 billion liability includes $554.6 billion for the Department, $11.7 billion for the Coast 

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Guard, $1.4 billion for the Public Health Service, and $87.0 million for National Oceanic and 

Atmospheric Administration (NOAA). The FY 2016 contributions from each of the Uniformed 

Services were $6.6 billion from the Department, $169.0 million from the Coast Guard, 

$26.0 million from the Public Health Service, and $1.0 million from NOAA.

Federal Employees Compensation Act (FECA) 

The Department of Labor (DOL) annually determines the liability for future workers’ 

compensation benefits including the expected liability for death, disability, medical, and 

miscellaneous costs for approved compensation cases, plus a component for 

incurred-but-not-reported claims. The liability is determined using 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 based on interest rate assumptions on the U.S. Treasury’s Yield Curve for Treasury 

Nominal Coupon Issues (the TNC Yield Curve) to reflect the average duration of income payments 

and medical payments. An interest rate for wage benefits of 2.8 percent was assumed for year one 

and 2.8 percent for year two and thereafter. An interest rate for medical benefits of 2.3 percent 

was assumed for year one and 2.3 percent for year two and thereafter. 

The DOL calculates this liability using wage inflation factors (cost of living adjustments or 

COLAs) and medical inflation factors (consumer price index medical or CPIM). The actual rates 

for these factors for charge back year (CBY) 2016 were also used to adjust the methodology’s 

historical payments to current year constant dollars. 

The compensation COLAs and CPIMs used in the projections for various charge back years 

were as follows: 

Federal Employees Compensation Act (FECA)

CBY COLA CPIM

2017 1.31% 2.99%

2018 1.13% 3.09%

2019 1.23% 3.40%

2020 1.45% 3.68%

 2021+ 1.85% 3.87%

To test the reliability of the model discussed above, DOL made comparisons between projected 

payments in the last year to actual amounts, by agency. Changes in the liability from last year’s 

analysis to this year’s analysis were also examined by agency, with any significant differences by 

agency inspected in greater detail. DOL concluded that the model has been stable and has 

projected the actual payments by agency well.

DoD Education Benefits Fund (EBF) 

The EBF was established by PL 98-525 to recruit and retain military members and aid in the 

readjustment of military members to civilian life. The actuaries calculate the actuarial liability 

113
U.S. Department of Defense Agency Financial Report for FY 2016 

Financial Section

annually based on the assumed interest rate of 3.5 percent as approved by the DoD Board of 

Actuaries. 

The Market Value of Investments in Market-based and Marketable Securities: $1.3 billion. 

Voluntary Separation Incentive (VSI) Program 

The VSI Program was established by PL 102-190 to reduce the number of military personnel 

on active duty. The DoD Board of Actuaries approved the assumed annual interest rate of 

2.5 percent used to calculate the actuarial liability. Since VSI is no longer offered, the actuarial 

liability calculated annually is expected to continue to decrease with benefit outlays and increase 

with interest cost. 

The Market Value of Investments in Market-based and Marketable Securities: $166.8 million. 

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. 

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U.S. Department of Defense Agency Financial Report for FY 2016 

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NOTE 18. GENERAL DISCLOSURES RELATED TO THE STATEMENT OF NET COST

Costs and Exchange Revenue Dollars in Millions

As of September 30 2016

Restated 

2015

Military Retirement Benefits 

Gross Cost

Intragovernmental Cost $ 3.6 $ 4.8

Non-Federal Cost $ 102,511.2 $ 66,858.7

Total Cost $ 102,514.8 $ 66,863.5

Earned Revenue

Intragovernmental Revenue $ (21,837.1) $ (15,731.5)

Non-Federal Revenue $ 0.0 $ 0.0

Total Revenue $ (21,837.1) $ (15,731.5)

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ (58,147.7) $ (20,568.0)

Total Net Cost $ 22,530.0 $ 30,564.0

Civil Works

Gross Cost

Intragovernmental Cost $ 1,507.1 $ 1,387.8

Non-Federal Cost $ 8,369.6 $ 7,798.7

Total Cost $ 9,876.8 $ 9,186.5

Earned Revenue

Intragovernmental Revenue $ (930.1) $ (641.8)

Non-Federal Revenue $ (599.4) $ (752.7)

Total Revenue $ (1,529.5) $ (1,394.5)

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ 0.0 $ 0.0

Total Net Cost $ 8,347.2 $ 7,792.0

Military Personnel

Gross Cost

Intragovernmental Cost $ 52,639.3 $ 48,493.9

Non-Federal Cost $ 86,081.6 $ 90,817.5

Total Cost $ 138,720.9 $ 139,311.4

Earned Revenue

Intragovernmental Revenue $ (1,227.9) $ (1,205.5)

Non-Federal Revenue $ (43.1) $ (39.1)

Total Revenue $ (1,271.0) $ (1,244.6)

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ 0.0 $ 0.0

Total Net Cost $ 137,449.9 $ 138,066.8

Operations, Readiness & Support

Gross Cost

Intragovernmental Cost $ (59,943.5) $ (60,576.3)

Non-Federal Cost $ 345,593.4 $ 303,528.3

Total Cost $ 285,649.8 $ 242,952.0

Earned Revenue

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U.S. Department of Defense Agency Financial Report for FY 2016 

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Costs and Exchange Revenue Dollars in Millions

As of September 30 2016

Restated 

2015

Intragovernmental Revenue $ 10,346.6 $ 10,480.5

Non-Federal Revenue $ (51,949.2) $ (42,632.3)

Total Revenue $ (41,602.6) $ (32,151.8)

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ 565.0 $ (6,881.5)

Total Net Cost $ 244,612.3 $ 203,918.7

Procurement

Gross Cost

Intragovernmental Cost $ 24,285.0 $ 23,400.9

Non-Federal Cost $ 83,580.4 $ 72,693.6

Total Cost $ 107,865.4 $ 96,094.5

Earned Revenue

Intragovernmental Revenue $ (2,252.0) $ (2,580.5)

Non-Federal Revenue $ (1,629.5) $ (1,323.5)

Total Revenue $ (3,881.5) $ (3,904.0)

$ 0.0 $ 0.0

Total Net Cost $ 103,983.9 $ 92,190.5

Research, Development, Test & Evaluation

Gross Cost

Intragovernmental Cost $ 16,802.2 $ 20,159.6

Non-Federal Cost $ 56,968.8 $ 50,301.8

Total Cost $ 73,771.0 $ 70,461.4

Earned Revenue

Intragovernmental Revenue $ (7,649.5) $ (7,571.4)

Non-Federal Revenue $ (255.6) $ (385.1)

Total Revenue $ (7,905.1) $ (7,956.5)

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ 0.0 $ 0.0

Total Net Cost $ 65,865.9 $ 62,504.9

Family Housing & Military Construction

Gross Cost

Intragovernmental Cost $ 647.1 $ 1,067.9

Non-Federal Cost $ 11,699.4 $ 18,921.9

Total Cost $ 12,346.5 $ 19,989.8

Earned Revenue

Intragovernmental Revenue $ (4,910.6) $ (5,753.3)

Non-Federal Revenue $ (591.5) $ (373.6)

Total Revenue $ (5,502.1) $ (6,126.9)

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ 0.0 $ 0.0

Total Net Cost $ 6,844.4 $ 13,862.9

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U.S. Department of Defense Agency Financial Report for FY 2016 

Financial Section

Costs and Exchange Revenue Dollars in Millions

As of September 30 2016

Restated 

2015

Gross Cost

Intragovernmental Cost $ 35,940.8 $ 33,938.6

Non-Federal Cost $ 694,804.4 $ 610,920.5

Total Cost $ 730,745.2 $ 644,859.1

Earned Revenue

Intragovernmental Revenue $ (28,460.6) $ (23,003.5)

Non-Federal Revenue $ (55,068.3) $ (45,506.3)

Total Revenue $ (83,528.9) $ (68,509.8)

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ (57,582.7) $ (27,449.5)

Costs Not Assigned to Programs $ 0.0 $ 0.0

(Less: Earned Revenues) Not Attributed to Programs $ 0.0 $ 0.0

Total Net Cost $ 589,633.6 $ 548,899.8

The Statement of Net Cost (SNC) represents the net cost of programs and organizations of the 

Department 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 capture costs based on appropriation groups as presented in the schedule above. The 

lower level costs for major programs are not presented 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 required by SFFAS 4, “Managerial 

Cost Accounting Concepts and Standards for the Federal Government,” amended by SFFAS 30,

“Inter-Entity Cost Implementation.”

Intragovernmental costs and revenues represent transactions between two reporting entities 

within the Federal Government. Public costs and revenues are exchange transactions between the 

reporting entity and a non-Federal entity. 

The Department’s systems do not track intragovernmental transactions by customer. Buyer 

side expenses are adjusted to agree with internal seller side revenues. Expenses are generally 

adjusted by reclassifying amounts between Federal and non-Federal expenses. Intradepartmental 

revenues and expenses are then eliminated. 

The information presented on the SNC is compiled from many financial systems and sources. 

Newer financial systems record costs based on business events (e.g., receipt of goods or services), 

while many older financial systems record costs based upon financial transactions (e.g., invoices). 

In addition, some costs (e.g., actuarial) are derived from non-financial systems. 

Restatement 

The Department corrected an $11.7 billion overstatement of Procurement Non-Federal Gross 

Cost. See Note 26, Restatements, for further information. 

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U.S. Department of Defense Agency Financial Report for FY 2016 

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Abnormal Balances 

Operations, Readiness & Support Intragovernmental Gross Cost and Earned Revenue on the 

SNC have abnormal balances of $59.9 billion and $10.4 billion, respectively in FY 2016, and 

abnormal balances of $60.6 billion and $10.5 billion, respectively in FY 2015. The current 

business practice is to report most eliminations in this program group resulting in the abnormal 

balance presentation. 

Operations, Readiness & Support Intragovernmental Earned Revenue includes an abnormal 

balance of $3.2 million in USSGL 719000, Other Gains. The Department is currently researching 

and anticipates correction in FY 2017. 

Other Disclosures

The Department’s military retirement and postemployment costs are reported in accordance 

with SFFAS 33. The standard requires the separate presentation of gains and losses from changes 

in long term assumptions used to estimate liabilities associated with pensions, other retirement 

benefits, and other postemployment benefits on the SNC. 

NOTE 19. DISCLOSURES RELATED TO THE STATEMENT OF CHANGES IN NET POSITION

Restatements

The Department corrected a $31.4 billion understatement in Cumulative Results of 

Operations - Other, identified during ongoing audit readiness efforts. See Note 26, Restatements, 

for further information. 

Other Disclosures 

The Federal Accounting Standards Advisory Board issued SFFAS 48, and SFFAS 50. These 

standards permit alternative methods in establishing opening balances and are effective for periods 

beginning after September 30, 2016 with early implementation allowed. Select agencies adopted 

these standards for 2016. As a result of the implementation, the Department decreased the 

beginning Cumulative Results of Operations by $1.5 billion, decreased the ending balance of 

General PP&E by $2.2 billion, and increased the ending balance of Stockpile Materials by 

$733.7 million. 

Other Financing Sources, Other consists primarily of nonexchange gains and losses necessary 

to reconcile the proprietary and budgetary amounts. 

Reconciliation Differences 

In accordance with OMB and U.S. Treasury guidance, Appropriations reported on the 

Statement of Budgetary Resources exceeds Appropriations Received on the Statement of Changes 

in Net Position by $62.4 billion. 

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U.S. Department of Defense Agency Financial Report for FY 2016 

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119

Period Ended September 30, 2016

Reconciliation of Appropriations on the Statement of Budgetary Resources to 

Appropriations Received on the Statement of Changes in Net Position Dollars in Billions

Total

Appropriations, Statement of Budgetary Resources $ 745.7

Less: Appropriations Received, Statement of Changes in Net Position (683.3)

Total Reconciling Amount $ 62.4

Items Reported as Reductions to Appropriations, Statement of Budgetary Resources

 Permanent and Temporary Reductions $ (79.5)

 Miscellaneous items 0.7

Items Reported in Net Cost of Operations, Statement of Changes in Net Position

 Trust and Special Fund Receipts $ 141.2

Total Reconciling Items $ 62.4

NOTE 20. DISCLOSURES RELATED TO THE STATEMENT OF BUDGETARY RESOURCES

Disclosures Related to the Statement of Budgetary Resources Dollars in Millions

As of September 30 2016 2015

Net Amount of Budgetary Resources Obligated for Undelivered Orders at 

the End of the Period $ 401,966.2 $ 429,619.1

Restatement 

The Unobligated Balance Brought Forward, Oct 1, was restated by $2.1 billion to properly 

record reimbursable activity between certain industrial operations and supply management 

programs. This change reflects contract authority, outlays, and unobligated balances not reported 

for FY 2005 through FY 2012. 

In addition, there was an adjustment made to September 30, 2015, balances by Office of 

Management and Budget after the publication of the FY 2015 Annual Financial Report. The result 

was a $28.0 million restatement of Unobligated Balance Brought Forward, Oct 1, and Uncollected 

Payments, Federal Sources, Brought Forward, Oct 1. 

Reconciliation Differences 

In accordance with OMB and U.S. Treasury guidance, Appropriations reported on the 

Statement of Budgetary Resources exceeds Appropriations Received on the Statement of Changes 

in Net Position by $62.4 billion. Reference Note 19, Disclosures Related to the Statement of 

Changes in Net Position, for additional details. 

Differences exist between the amounts reported on the SBR and on the Budget of the U.S. 

Government (the Budget). The FY 2018 Budget will display the FY 2016 actual values and is 

expected to be published in February 2017. The FY 2017 Budget contains the actual values for 

FY 2015 reporting. 
U.S. Department of Defense Agency Financial Report for FY 2016 

Financial Section

Reconciliation of Combined SBR to President’s Budget Dollars in Billions

Fiscal Year 2015 Actual

As of September 30

Budgetary 

Resources

Obligations 

Incurred

Distributed 

Offsetting 

Receipts

Agency 

Outlays, Net

Combined SBR $ 1,067.4 $ 917.9 $ 86.8 $ 632.5

Differences:

Adjustments to SBR 3.51 3.51

Other (0.5)

2

(0.5)2 0.0 (0.5)2

Budget of the U.S. Government $ 1,070.43 $ 920.9 $ 86.8 $ 632.0

1. The $3.5 billion difference reported above for Budgetary Resources and Obligations Incurred is primarily due 

to late adjustments to the SBR not reported in the Governmentwide Treasury Account Symbol Adjusted Trial 

Balance System which flows to the Office of Management and Budget MAX website.

2. The $(0.5) billion difference reported above for Budgetary Resources is primarily due to pending adjustments 

to the SBR, different reporting requirements on the SBR versus the Budget, and other differences requiring 

research.

3. The source of the Budgetary Resources figure was the DoD SBR to SF133 Reconciliation Summary on the 

Office of Management and Budget MAX website.

Permanent Indefinite Appropriations 

DoD received the following permanent indefinite appropriations: 

Department of the Army General Gift Fund (10 USC 2601(C)(1)) 

Department of the Navy General Gift Fund (10 USC 2601(C)(2)) 

Department of the Air Force General Gift Fund (10 USC 2601(C)(3)) 

Department of Defense General Gift Fund (10 USC 2601) 

Disposal of Department of Defense Real Property (40 USC 485(h)(2)(A)(B)) 

Lease of Department of Defense Real Property (40 USC 485(h)(2)(A)(B)) 

Foreign National Employees Separation Pay Account, Defense (10 USC 1581) 

United States Naval Academy Gift and Museum Fund (10 USC 6973-4) 

Ship Stores Profits, Navy (10 USC 7220, 31 USC 1321) 

Burdensharing Contributions (10 USC 2350j) 

Forest Program (10 USC 2665) 

Medicare-Eligible Retiree Health Care Fund (10 USC 1111) 

Military Retirement Fund (10 USC 1461) 

Education Benefits Fund (10 USC 2006) 

Host Nation Support for U.S. Relocation Activities (10 USC 2350k) 

Hydraulic Mining Debris Reservoir (33 USC 683) 

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U.S. Department of Defense Agency Financial Report for FY 2016 

Financial Section

Maintenance and Operation of Dams and Other Improvements of Navigable Waters 

(16 USC 810(a)) 

Payments to States (33 USC 701c-3) 

Wildlife Conservation (16 USC 670-670(f)) 

Ainsworth Bequest (31 USC 1321) 

DoD Family Housing Improvement Fund (10 USC 2883 (a)) 

DoD Military Unaccompanied Housing Improvement Fund (10 USC 2883 (a)) 

Voluntary Separation Incentive Fund (10 USC 1175(h)) 

Rivers & Harbors Contributed Funds (33 USC 560, 701h) 

Concurrent Receipt Accrual Payments to the Military Retirement Fund (10 USC 1466(b)(1)) 

Rocky Mountain Arsenal, Restoration (100 Statute, 4003 SEC 1367) 

DoD Family Housing Improvement Fund, Direct Loan, Financing Account (2 USC 661d) 

DoD Family Housing Improvement Fund, Guaranteed Loan, Financing Account (2 USC 661d) 

Homeowners Assistance Fund (10 USC 4551-4555; 42 USC 3374(d); Public Law 111-5) 

Payments to Military Retirement Fund, Defense (10 USC, 1466) 

Payment to Department of Defense Medicare-Eligible Retiree Health Care Fund (10 USC 1116(a)) 

Arms Initiative, Guaranteed Loan Financing Account, Army (10 USC 2501, 10 USC 4551-4555) 

Medicare-Eligible Retiree Health Fund Contribution, Navy (10 USC 1116) 

Medicare-Eligible Retiree Health Fund Contribution, Marine Corps (10 USC 1116) 

Medicare-Eligible Retiree Health Fund Contribution, Reserve Personnel, Navy (10 USC 1116) 

Medicare-Eligible Retiree Health Fund Contribution, Reserve Personnel, Marine Corps 

(10 USC 1116) 

Medicare-Eligible Retiree Health Fund Contribution, Army (10 USC 1116) 

Medicare-Eligible Retiree Health Fund Contribution, Reserve Personnel, Army (10 USC 1116) 

Medicare-Eligible Retiree Health Fund Contribution, National Guard Personnel, Army 

(10 USC 1116) 

Medicare-Eligible Retiree Health Fund Contribution, Air Force (10 USC 1116) 

Medicare-Eligible Retiree Health Fund Contribution, Reserve Personnel, Air Force (10 USC 1116) 

Medicare-Eligible Retiree Health Fund Contribution, National Guard Personnel, Air Force 

(10 USC 1116) 

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122

Department of Defense Vietnam War Commemoration Fund, Defense (PL 110-181, 122 Stat. 141 

(Sec. 598)) 

The above permanent indefinite appropriations cover a wide variety of purposes to help the 

Department accomplish its missions. These purposes primarily include: (1) military retirees’ health 

care benefits, retirement and survivor pay, and education benefits for veterans; (2) wildlife habitat 

restoration and water resources maintenance; (3) relocation of armed forces within a host nation; 

(4) separation payments for foreign nationals; and (5) upkeep of libraries and museums. 

Apportionment Categories for New Obligations and Upward Adjustments (Total) 

Apportionment categories are determined in accordance with the guidance provided in 

OMB Circular No. A-11, “Preparation, Submission and Execution of the Budget.” 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). The Department reported the following amounts of new obligations and upward 

adjustments (total):

Period Ended September 30, 2016 Dollars in Billions

Apportionmen

t Category A

Apportionmen

t Category B

Exempt From 

Apportionmen

t

Total

Obligations Incurred – Direct $ 396.1 $ 227.9 $ 148.8 $ 772.8

Obligations Incurred – Reimbursable 15.5 149.5 8.0 173.0

Total Obligations Incurred: $ 411.6 $ 377.4 $ 156.8 $ 945.8

Legal Arrangements Affecting the Use of Unobligated Balances 

A portion of the Department’s unobligated balances represent trust fund receipts collected in 

the current fiscal year exceeding the amount needed to pay benefits or other valid obligations. 

These receipts are temporarily precluded from obligation by law due to a benefit formula or other 

limitation. The receipts, however, are assets of the funds and are available for obligation in the 

future. The Department operates within the constraints of fiscal law and has no additional legal 

arrangements affecting the use of unobligated balances. 

Other Disclosures 

In accordance with OMB guidance, $115.5 billion of General Fund appropriations received by 

the Department are also recognized on the SBR as appropriations received for trust and special 

funds. The primary difference is due to this OMB guidance requiring duplicate reporting on the 

SBR of the Military Services’ contributions and U.S. Treasury’s payments to the Military 

Retirement Trust Fund and Medicare-Eligible Retiree Health Care Fund. 

The SBR includes intra-entity transactions because the statements are presented as combined. 
U.S. Department of Defense Agency Financial Report for FY 2016 

Financial Section

The Department utilizes borrowing authority for the Military Housing Privatization Initiative. 

Borrowing authority is used in accordance with OMB Circular No. A-129, Policies for Federal 

Credit Programs and Non-Tax Receivables. 

The Department received additional funding of $58.6 billion to cover obligations incurred 

above baseline operations in support of contingency operations. 

The Department's FY 2015 comparative statement has been modified to conform to 

OMB Circular No. A-136. 

NOTE 21. RECONCILIATION OF NET COST OF OPERATIONS TO BUDGET

Reconciliation of Net Cost of Operations to Budget Dollars in Millions

As of September 30 2016 Restated 2015

Resources Used to Finance Activities

Budgetary Resources Obligated:

Obligations incurred $ 945,835.9 $ 917,933.1

Less: Spending authority from offsetting collections and recoveries (-) (218,548.2) (217,308.3))

Obligations net of offsetting collections and recoveries $ 727,287.7 $ 700,624.8

Less: Offsetting receipts (-) (92,078.2) (86,772.6)

Net obligations $ 635,209.5 $ 613,852.2

Other Resources:

Donations and forfeitures of property $ 1.8 $ 12.4

Transfers in/out without reimbursement (+/-) 94.1 84.2

Imputed financing from costs absorbed by others 4,573.4 4,899.3

Other (+/-) 12,291.0 10,033.9

Net other resources used to finance activities $ 16,960.3 $ 15,029.8

Total resources used to finance activities $ 652,169.8 $ 628,882.0

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 (-) $ 30,209.2 $ 28,943.9

Unfilled Customer Orders 1,014.4 (2,449.9)

Resources that fund expenses recognized in prior Periods (-) (71,848.0) (41,865.4)

Budgetary offsetting collections and receipts that do not affect Net Cost 

of Operations 929.9 1,560.8

Resources that finance the acquisition of assets (-) (110,735.2) (83,090.3)

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 (-)

(297.2) (334.3)

Other (+/-) (12,398.7) (9,575.5)

Total resources used to finance items not part of the Net Cost of 

Operations $ (163,125.6) $ (106,810.7)

Total resources used to finance the Net Cost of Operations $ 489,004.2 $ 522,071.3

Components of the Net Cost of Operations that will not Require or 

Generate Resources in the Current Period

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U.S. Department of Defense Agency Financial Report for FY 2016 

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Reconciliation of Net Cost of Operations to Budget Dollars in Millions

As of September 30 2016 Restated 2015

Components Requiring or Generating Resources in Future Period:

Increase in annual leave liability $ 59.0 $ 94.9

Increase in environmental and disposal liability 2,320.7 64.0

Upward/Downward reestimates of credit subsidy expense (+/-) 40.3 (15.1)

Increase in exchange revenue receivable from the public (-) 371.8 (3,380.2)

Other (+/-) 71,644.3 9,008.1

Total components of Net Cost of Operations that will Require or 

Generate Resources in future periods $ 74,436.1 $ 5,771.7

Components not Requiring or Generating Resources:

Depreciation and amortization $ 34,741.5 $ 33,113.8

Revaluation of assets or liabilities (+/-) (1,860.9) (3,474.3)

Other (+/-)

Trust Fund Exchange Revenue (47,295.0) (44,444.1)

Cost of Goods Sold 59,210.3 63,318.3

Operating Materiel and Supplies Used 51,872.9 39,594.1

Other (70,515.5) (67,051.1)

Total Components of Net Cost of Operations that will not Require or 

Generate Resources $ 26,153.3 $ 21,056.7

Total components of Net Cost of Operations that will not Require or 

Generate Resources in the current period $ 100,589.4 $ 26,828.4

Net Cost of Operations $ 589,633.6 $ 548,899.7

The Reconciliation of Net Cost of Operation to Budget reconciles the cost reflected on the 

Statement of Net Cost to the budgetary information on the Statement of Budgetary Resources. 

This is accomplished by aligning budgetary obligations and non-budgetary resources available 

with the cost of the Department’s operations. 

Restatements 

The Department corrected an $11.7 Billion overstatement of Gross Costs. Components Not 

Requiring or Generating Resources: Other (+/-): Other for FY 2015 has been restated to reflect 

this correction. Refer to Note 26, Restatements, for further information. 

Abnormal Balances 

Revaluation of assets or liabilities (+/-) includes an abnormal balance of $3.2 million in 

USSGL 719000, Other Gains. The Department is currently researching and anticipates correction 

in FY 2017. 

Other Disclosures 

Due to the Department’s financial systems limitations, budgetary data does not agree with 

proprietary expenses and capitalized assets. This difference is a previously identified deficiency. 

The following adjustments (absolute value) were made to balance the Reconciliation of Net 

Cost of Operations to Budget: 

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U.S. Department of Defense Agency Financial Report for FY 2016 

Financial Section

Adjustments to Reconcile Net Cost of Operations to Budget Dollars in Millions

Resources that Finance the Acquisition of Assets $ 8,380.6

Revaluation of Assets or Liabilities $ 1,804.1

Other Components not Requiring or Generating Resources 8,386.2

Total Amount $ 18,570.9

The following Reconciliation of Net Cost of Operations to Budget lines are presented as 

combined instead of consolidated as intra-agency budgetary transactions are not being 

eliminated: 

 Obligations Incurred 

 Less: Spending Authority from Offsetting Collections and Recoveries 

 Obligations Net of Offsetting Collections and Recoveries 

 Less: Offsetting Receipts 

 Net Obligations 

 Undelivered Orders 

 Unfilled Customer Orders 

Other Resources, Other primarily consists of non-exchange gains and losses to revalue assets, 

as well as reconcile the proprietary and budgetary amounts. 

Other Resources or Adjustments to Net Obligated Resources that Do Not Affect Net Cost of 

Operations, Other primarily consists of non-exchange gains and losses to revalue assets, as well as 

reconcile the proprietary and budgetary amounts. 

Components Requiring or Generating Resources in Future Period, Other consists primarily of 

future funded expenses. 

Components not Requiring or Generating Resources, Other primarily consists of cost 

capitalization offsets, applied overhead, and other expenses not requiring budgetary resources. 

NOTE 22. DISCLOSURES RELATED TO INCIDENTAL CUSTODIAL COLLECTIONS

The Department collected $5.5 million of incidental custodial revenues generated primarily 

from forfeitures of unclaimed money and property. These funds are not available for use by the 

Department. At the end of each fiscal year, the accounts are closed and the balances are 

relinquished to the U.S. Treasury. 

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U.S. Department of Defense Agency Financial Report for FY 2016 

Financial Section

NOTE 23. FUNDS FROM DEDICATED COLLECTIONS

Funds from Dedicated Collections Dollars in Millions

2016

As of September 30

Harbor 

Maintenance 

Trust Fund

Rivers and 

Harbors 

Contributed 

and Advance 

Fund

Other Funds Eliminations

Total Funds 

from 

Dedicated 

Collections

Balance Sheet

Assets

Fund Balance with Treasury $ 112.1 $ 1,264.6 $ 2,147.0 $ 0.0 $ 3,523.7

Investments 8,773.3 0.0 864.1 0.0 9,637.4

Accounts and Interest Receivable 492.4 0.6 7.6 0.2 500.8

Other Assets 600.5 260.8 777.4 0.0 1,638.7

Total Assets $ 9,978.3 $ 1,526.0 $ 3,796.1 $ 0.2 $ 15,300.6

Liabilities and Net Position

Accounts Payable and Other Liabilities 6.1 1,293.1 62.6 (4.2) 1,357.6

Total Liabilities $ 6.1 $ 1,293.1 $ 62.6 $ (4.2) $ 1,357.6

Cumulative Results of Operations $ 9,972.2 $ 232.9 $ 3,733.5 $ 1,555.1 $ 15,493.7

Total Liabilities and Net Position $ 9,978.3 $ 1,526.0 $ 3,796.1 $ 1,550.9 $ 16,851.3

Statement of Net Cost

Program Costs $ 86.3 $ 162.9 $ 1,244.9 $ (115.7) $ 1,378.4

Less Earned Revenue 0.0 (428.5) (277.0) 0.0 ( 705.5)

Net Program Costs 86.3 ( 265.6) 967.9 (115.7) 672.9

Net Cost of Operations $ 86.3 $ ( 265.6) $ 967.9 $ (115.7) $ 672.9

Statement of Changes in Net Position

Net Position Beginning of the Period $ 9,897.9 $ (14.2) $ 3,339.3 $ 0.0 $ 13,223.2

Net Cost of Operations (86.3) 265.6 (967.9) 115.7 (672.9)

Budgetary Financing Sources 160.6 0.0 1,311.4 1,415.3 2,887.3

Other Financing Sources 0.0 (18.5) 50.5 24.1 56.1

Change in Net Position $ 74.3 $ 247.1 $ 394.0 $ 1,555.1 $ 2,270.5

Net Position End of Period $ 9,972.2 $ 232.9 $ 3,733.5 $ 1,555.1 $ 15,493.7

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Funds from Dedicated Collections Dollars in Millions

2015

As of September 30

Harbor 

Maintenan

ce Trust 

Fund

Rivers and 

Harbors 

Contribute

d and 

Advance 

Fund

Other 

Funds Eliminations

Total

Funds from 

Dedicated 

Collections

Balance Sheet

Assets

Fund Balance with Treasury $ 107.6 $ 1,251.4 $ 2,299.4 $ 0.0 $ 3,658.4

Investments 8,702.1 0.0 326.0 0.0 9,028.1

Accounts and Interest Receivable 492.8 2.4 7.2 (5.2) 497.2

Other Assets 602.7 27.9 787.2 0.0 1,417.8

Total Assets $ 9,905.2 $ 1,281.7 $ 3,419.8 $ (5.2) $ 14,601.5

Liabilities and Net Position

Accounts Payable and Other 

Liabilities 7.3 1,295.9 80.3 (4.9) 1,378.6

Total Liabilities $ 7.3 $ 1,295.9 $ 80.3 $ (4.9) $ 1,378.6

Cumulative Results of Operations $ 9,897.9 $ (14.2) $ 3,339.5 $ 1,451.5 $ 14,674.7

Total Liabilities and Net Position $ 9,905.2 $ 1,281.7 $ 3,419.8 $ 1,446.6 $ 16,053.3

Statement of Net Cost

Program Costs $ 68.6 $ 444.1 $

1,192.

3

$ (123.6) $ 1,581.4

Less Earned Revenue 0.0 (447.5) (332.0) 0.2 (779.3)

Net Program Costs 68.6 (3.4) 860.3 (123.4) 802.1

Net Cost of Operations $ 68.6 (3.4) $ 860.3 $ (123.4) $ 802.1

Statement of Changes in Net Position

Net Position Beginning of the Period $ 9,612.3 $ (1.3) $ 2,990.3 $ 0.0 $ 12,601.3

Net Cost of Operations (68.6) 3.4 (860.3) 123.4 (802.1)

Budgetary Financing Sources 360.1 0.0 1,139.2 1,314.0 2,813.3

Other Financing Sources (5.9) (16.3) 70.3 14.1 62.2

Change in Net Position $ 285.6 $ (12.9) $ 349.2 $ 1,451.5 $ 2,073.4

Net Position End of Period $ 9,897.9 $ (14.2) $ 3,339.5 $ 1,451.5 $ 14,674.7

The SFFAS 43, “Funds from Dedicated Collections: Amending SFFAS 27, Identifying and 

Reporting Earmarked Funds,” requires disclosure of Funds from Dedicated Collections separate 

from All Other Funds on the Balance Sheet. Funds must meet three criteria to be classified as 

funds from dedicated collections: (1) a statute committing the use of specifically-identified 

revenues provided by non-Federal sources for designated purposes; (2) explicit authority to retain 

the revenues; and (3) a requirement to separately account and report on the revenues. The 

Department’s funds from dedicated collections are either special or trust funds and use both receipt 

and expenditure accounts to report activity to U.S. Treasury. There has been no legislation 

significantly altering the purposes of the funds. 

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The Total column is shown as consolidated and relates only to Funds from Dedicated 

Collections. The Eliminations column includes eliminations associated with Funds from 

Dedicated Collections 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 as Funds from Dedicated Collections on the 

Balance Sheet. 

The Department has the following Funds from Dedicated Collections: 

Harbor Maintenance Trust Fund, 26 USC 9505. USACE Civil Works mission is funded by 

the Energy and Water Development Appropriations Act. The Water Resources Development Act 

of 1986 covers a portion of USACE operations and maintenance costs for deep draft navigation. 

The Harbor Maintenance Trust Fund is available for making expenditures to carry out the functions 

specified in the Act and for the payment of all administrative expenses incurred by the U.S. 

Treasury, USACE, and the Department of Commerce. Taxes collected from imports, domestics, 

passengers, and foreign trade are deposited into the Trust Fund. The Bureau of the Fiscal Service 

(BFS) manages and invests for the Trust Fund. 

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 authorized by 

law, the Secretary of the Army may accept such funds and expend them in the immediate 

performance of such work. The funding is used to construct, improve, and maintain levees, water 

outlets, flood control, debris removal, rectification and enlargement of river channels, etc. in the 

course of flood control and river and harbor maintenance. 

Other Funds from Dedicated Collections 

Special Recreation Use Fees, 16 USC 460l-6a note. The USACE charges and collects Special 

Recreation Use Fees at campgrounds located at lakes and reservoirs under their jurisdiction. 

Allowable fees include daily use fees, admission fees, recreational fees, annual pass fees, and other 

permit type fees. Receipts cover operation and maintenance of recreational sites. 

Hydraulic Mining in California, Debris, 33 USC 683. Operators of hydraulic mines allowing 

debris to flow 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. The USACE 

collects taxes and expends funds under the direction of the Department of the Army. Funds repay 

advances by the Federal Government or other agencies for construction, restraining works, settling 

reservoirs, and maintenance. 

Payments to States, Flood Control Act of 1954, 33 USC 701c-3. The USACE collects receipts 

for the leasing of lands acquired by the U.S. for flood control, navigation, and allied purposes 

(including the development of hydroelectric power). Funds received are appropriated and made 

available for use in the following fiscal year with seventy-five percent of funds provided to the 

state where the property is located. States may expend the funds for the benefit of public schools 

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and public roads of the counties where the property is located, or for defraying county government 

expenses. 

Maintenance and Operation of Dams and Other Improvements of Navigable Waters, 

16 USC 803(f) and 810. The Federal Energy Regulatory Commission (FERC) assesses charges 

against licensees when a reservoir or other improvement is constructed by the U.S. All proceeds 

from Indian reservations are credited to the Indians of the reservations. All other proceeds arising 

from licenses, except those established by the FERC for administrative reimbursement, are paid to 

the U.S. Treasury and allocated for specific uses. The Department of the Army is allocated fifty 

percent of charges from all licenses, except licenses for the occupancy and use of public lands and 

national forests. These funds are deposited in a special fund and used for maintenance, operation, 

and improvement of dams and other navigation structures owned by the U.S., or in construction, 

maintenance, or operation of headwater, or other improvements to navigable waters of the U.S. 

Fund for Non-Federal Use of Disposal Facilities (for dredged material), 33 USC 2326. 

Non-Federal interests may use dredged material disposal facilities under the jurisdiction of, or 

managed by, the Secretary of the Army if the Secretary determines use will not reduce the 

availability of the facility for project purposes. Fees may be imposed to recover capital, operation, 

and maintenance costs of the disposal facility from which the fees were collected. 

Coastal Wetlands Restoration Trust Fund and Coastal Wetlands Planning, Protection, and 

Restoration Act, 16 USC 3951-3956. The USACE, Environmental Protection Agency, and Fish 

and Wildlife Service are authorized to work with the State of Louisiana to achieve a goal of "no 

net loss of wetlands" in coastal Louisiana. The USACE is also responsible for allocating funds. 

Federal contributions are 75 percent of project costs or 85 percent if the state has an approved 

Coastal Wetlands Conservation Plan. This Trust Fund receives funding from the Sport Fish 

Restoration and Boating Trust Fund. 

Inland Waterways Trust Fund, 26 USC 9506. Excise taxes from the public are used by USACE 

for navigation, construction, and rehabilitation projects on inland waterways. The BFS manages 

and invests for the Trust Fund. 

Defense Commissary Agency Surcharge Trust Fund, 10 USC 2685. Surcharge on sales of 

commissary goods finance the Commissary System operating expenses and capital purchases, 

precluded by law from being paid with appropriated funds. Revenue is generated through a five 

percent surcharge applied to each sale. These funds finance commissary-related information 

technology investments, equipment, advance design modifications to prior year construction 

projects, and maintenance and repair of facilities and equipment. 

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NOTE 24. FIDUCIARY ACTIVITIES

Schedule of Fiduciary Activity Dollars in Millions

As of September 30 2016 2015

Fiduciary net assets, beginning of year $ 80.9 $ 88.0

Contributions 90.4 93.6

Investment earnings 0.3 0.3

Distributions to and on behalf of beneficiaries (91.5) (101.0)

Increase/(Decrease) in fiduciary net assets (0.8) (7.1)

Fiduciary net assets, end of period $ 80.1 $ 80.9

Schedule of Fiduciary Net Assets Dollars in Millions

As of September 30 2016 2015

Fiduciary Assets

Cash and cash equivalents $ 80.1 $ 80.9

Total Fiduciary Net Assets $ 80.1 $ 80.9

Fiduciary activities exist when the Department has collected, received, held, or made 

disposition of assets on behalf of an individual or non-Federal entity. Fiduciary assets are not 

recognized on the Balance Sheet. 

Public Law 89-538 authorized the Department, through the Savings Deposit Program, to 

collect voluntary contributions from members of the Armed Forces serving in designated areas. 

These contributions and earned interest are deposited in the U.S. Treasury on behalf of the 

members. 

NOTE 25. OTHER DISCLOSURES

Operating leases do not transfer the benefits and risks of ownership as compared to capital 

leases. Payments are expensed over the life of the lease. Future year cost projections use the 

Consumer Price Index. Office space is the largest component of land and building leases. Other 

leases are primarily commercial leases with the general public and include automobile leases. 

Other Disclosures Dollars in Millions

2016 – Asset Category

As of September 30

Land and 

Buildings Equipment Other Total

Entity as Lessee – Operating Leases

Future Payments Due

Fiscal Year 2017 $ 754.7 $ 8.4 $ 49.0 $ 812.1

Fiscal Year 2018 542.1 8.1 49.0 599.2

Fiscal Year 2019 527.4 7.3 49.1 583.8

Fiscal Year 2020 530.0 7.4 49.3 586.7

Fiscal Year 2021 528.5 7.4 47.4 583.3

After 5 Years 841.5 5.4 80.1 927.0

Total Future Lease Payments Due $ 3,724.2 $ 44.0 $ 323.9 $ 4,092.1

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NOTE 26. RESTATEMENTS

The Department restated its financial statements as of September 30, 2015, to correct errors in 

assets, net cost, and net position identified during ongoing audit readiness efforts. Auditors issued 

a Notice of Finding and Recommendation stating “the General PP&E balance on the September 

30, 2015 financial statements does not accurately or completely represent expenditures associated 

with the construction in progress (CIP) of General PP&E assets.” The Department initiated several 

corrective action plans to remediate this finding including the processing of these correcting 

entries.

General Equipment CIP was not recorded for multi-year acquisition programs for ships and 

aircrafts during their construction. CIP should have been recorded for these assets until they were 

delivered and reported as equipment. 

The following notes were restated: Note 2, Nonentity Assets; Note 10, General Property, Plant 

and Equipment, Net; Note 18, General Disclosures Related to the Statement of Net Cost; Note 19, 

Disclosures Related to the Statement of Changes in Net Position; and Note 21, Reconciliation of 

Net Cost of Operations to Budget. 

Effect on FY 2016 Beginning Cumulative Results of Operations:

FY 2016 Statement of Changes in Net Position Amounts in Billions

CUMULATIVE RESULTS OF OPERATIONS

Correction of Errors (+/-) $ 31.4

Beginning balance adjustments $ 31.4

Effect on Comparative Balances: 

FY 2015 Balance Sheet Amounts in Billions

General Property, Plant and Equipment, Net $ 31.4

Total Assets $ 31.4

Cumulative Results of Operations – Other 31.4

Net Position 31.4

Total Liabilities and Net Position $ 31.4

FY 2015 Statement of Net Cost Amounts in Billions

 Gross Costs $ (11.7)

Net Cost of Operations $ (11.7)

FY 2015 Statement of Changes in Net Position Amounts in Billions

CUMULATIVE RESULTS OF OPERATIONS

Correction of Errors (+/-) $ 19.7

Beginning balance adjustments 19.7

Net Cost of Operations $ 11.7

Cumulative Results of Operations $ 31.4

Net Position $ 31.4

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REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION

Federal financial reporting requires the Department to report on its stewardship over certain 

resources that cannot be measured in traditional financial reports. These resources do not meet the 

criteria for assets and liabilities required to be reported in the financial statements, but are 

important to understand the operations and financial condition of the Department at the date of the 

financial statements and in subsequent periods. 

The Department’s stewardship investments are comprised of, and are measured in terms of, 

expenditures for: (1) Nonfederal Physical Property (federally-financed, but not federally owned) 

and (2) federally-financed Research and Development (R&D). Information on additional reporting 

requirements for Nonfederal Physical Property and R&D follows. 

NON-FEDERAL PHYSICAL PROPERTY

The Nonfederal Physical Property investments support the purchase, construction, or major 

renovation of physical property owned by state and local governments. In addition, Nonfederal 

Physical Property investments include federally-owned physical property transferred to state and 

local governments. The Department participates in cost-sharing agreements with nonfederal 

sponsors which are governed under numerous Water Resources Development Acts. The 

Department’s transferred assets include expenditures supporting the design, build, and 

construction services/management for the missions of commercial navigation, flood/storm damage 

reduction, hydropower, regulatory, environmental, recreation and water supply. 

Non-Federal Physical Property

Department of Defense Consolidated – Non-Federal Physical Property

Yearly Investments in State and Local Governments

For Fiscal Years 2011 through 2015 Dollars in Millions

Categories 2016 2015 2014 2013 2012

Transferred Assets:

National Defense Mission Related $ 1,265.2 $ 1,307.2 $ 1,113.2 $ 1,376.8 $ 1,445.4

Funded Assets:

National Defense Mission Related $ 17.2 $ 12.7 $ 12.4 $ 11.8 $ 7.7

Total $ 1,282.4 $ 1,319.9 $ 1,125.6 $ 1,388.6 $ 1,453.1

INVESTMENTS IN RESEARCH AND DEVELOPMENT

Investment values included in this report are based on R&D expenditures. The R&D programs 

are classified in the following categories: Basic Research, Applied Research, and Development. 

The amounts reported in the Investments in R&D table show outlays from FY 2012 – FY 2016 for 

all DoD Components. The definition for each type of R&D Category and Subcategories are 

explained below. 

Basic Research is the systematic study to gain knowledge or understanding of the fundamental 

aspects of phenomena and of observable facts without specific applications, processes, or products 

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U.S. Department of Defense Agency Financial Report for FY 2016 

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in mind. Basic Research involves the gathering of a fuller knowledge or understanding of the 

subject under study. Major outputs are scientific studies and research papers. 

Applied Research is the systematic study to gain knowledge or understanding necessary for 

determining the means by which a recognized and specific need may be met. It is the practical 

application of such knowledge or understanding for the purpose of meeting a recognized need. 

This research points toward specific military needs with a view toward developing and evaluating 

the feasibility and practicability of proposed solutions and determining their parameters. Major 

outputs are scientific studies, investigations, research papers, hardware components, software 

codes, or limited construction of a weapon system component, to include non-system-specific 

development efforts. Development takes what has been discovered or learned from basic and 

applied research and uses it to establish technological feasibility, assessment of operability, and 

production capability. Development consists of the five stages defined in the Investments in R&D 

table.

Advanced Technology Development is the systematic use of the knowledge or understanding 

gained from research and directed toward proof of concept and feasibility rather than directed 

toward the development of hardware for service use. It employs demonstration activities intended 

to test a technology or method. 

Advanced Component Development and Prototypes evaluates integrated technologies in an 

operating environment as realistic as possible to assess the performance or cost reduction potential 

of advanced technology. Programs in this phase are generally system specific. Major outputs of 

Advanced Component Development and Prototypes are hardware and software components and 

complete weapon systems ready for operational and developmental testing and field use. 

System Development and Demonstration concludes the program or project and prepares it for 

production. It consists primarily of preproduction efforts, such as logistics and repair studies. 

Major outputs are weapons systems finalized for complete operational and developmental testing. 

Research, Development, Test, and Evaluation Management Support bolsters 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 furthering the Research and Development 

program. 

Operational Systems Development finances projects, programs, or upgrades in engineering and 

manufacturing development stages which have received approval for production, including 

production funds that have been budgeted in subsequent fiscal years. 

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Investments in Research and Development (R&D)

Department of Defense Consolidated

Yearly Investments in Research and Development

For the Current and Four Preceding Fiscal Years Dollars in Millions

Categories 2016 2015 2014 2013 2012

Basic Research $ 2,106.8 $ 1,958.0 $ 1,948.2 $ 1,841.5 $ 1,645.3

Applied Research 6,307.5 5,744.7 5,500.6 5,477.4 5,819.3

Development

Advanced Technology 

Development 5,525.8 5,007.6 5,253.3 4,898.3 5,868.0

Advanced Component 

Development and Prototypes 12,517.9 11,954.9 10,947.0 12,464.8 13,005.0

System Development and 

Demonstration 11,037.7 10,733.8 11,459.7 12,524.6 11,926.3

Research, Development, Test 

and Evaluation Management 

Support

5,335.5 5,163.3 5,262.5 4,906.5 5,640.5

Operational Systems 

Development 20,428.8 20,441.9 20,334.3 21,180.9 23,274.6

Totals: $ 63,260.0 $ 61,004.2 $ 60,705.6 $ 63,294.0 $ 67,179.0

REQUIRED SUPPLEMENTARY INFORMATION

This section includes the deferred maintenance and repairs information and Statement of 

Disaggregated Budgetary Resources in accordance with SFFAS 42, “Deferred Maintenance and 

Repairs: Amending Statements of Federal Financial Accounting Standards 6, 14, 29 and 32.”

REAL PROPERTY DEFERRED MAINTENANCE AND REPAIRS

Real Property Deferred Maintenance and Repairs

As of September 30, 2016 Dollars in Millions

Property Type

FY 2016

1. Plant Replacement Value

2. Required Work 

(Deferred Maintenance & 

Repair)

3. Percentage

1. Category 1 $ 1,094,166.9 $ 116,366.5 11%

2. Category 2 $ 77,488.1 $ 12,552.8 16%

3. Category 3 $ 33,389.9 $ 6,278.7 19%

Total $ 1,205,044.9 $ 135,198.0 11%

Property Type

FY 2015

1. Plant Replacement Value

2. Required Work 

(Deferred Maintenance & 

Repair)

3. Percentage

1. Category 1 $ 1,017,329.0 $ 126,070.4 12%

2. Category 2 $ 41,661.5 $ 8,081.4 19%

3. Category 3 $ 28,085.3 $ 6,791.7 24%

Total $ 1,087,075.8 $ 140,943.5 13%

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Maintenance and repairs are activities directed toward keeping real property assets in an 

acceptable condition. Activities include preventive maintenance; replacement of parts, systems, 

or components; and other activities needed to preserve or maintain the asset. Maintenance and 

repairs, as distinguished from capital improvements, exclude activities directed towards expanding 

the capacity of an asset or otherwise upgrading it to serve needs different from, or significantly 

greater than, its current use. 

DM&R are maintenance and repairs that were not performed when they should have been or 

were scheduled to be and which are put off or delayed for a future period. DM&R are identified 

through condition assessment surveys in accordance with Undersecretary Defense (Acquisition 

Technology and Logistics) policy memorandum, “Standardizing Facility Condition Assessments,” 

September 10, 2013. The real property record is the data source for obtaining the total deferred 

maintenance and repairs for the Agency Financial Report. Facility Categories are as follows: 

 Category 1: Buildings, Structures, and Linear Structures that are enduring and required to 

support an ongoing mission, including multi-use Heritage Assets. 

 Category 2: Buildings, Structures, and Linear Structures that are Heritage Assets .

 Category 3: Buildings, Structures, and Linear Structures that are excess to requirements or 

planned for replacement or disposal, including multi-use Heritage Assets. 

As of the end of the fiscal year, the Department estimates facility maintenance cost of more 

than $135.2 billion for facilities with replacement cost of $1.2 trillion. The totals include 

$3.3 billion in civil works related maintenance needs under the USACE with replacement cost of 

more than $267.1 billion. 

Maintenance and Repair Policies 

The Department is migrating to the Sustainment Management System (SMS), to perform a 

cyclical assessment of real property facilities and assign a facility condition index, which considers 

an asset’s key life-cycle attributes such as age and material. 

Maintenance and Repair Prioritization and Acceptable Condition Standards 

The Department considers mission, health and safety, and quality of life when assigning 

priority to maintenance needs and assessing whether a facility is in acceptable condition. 

Generally, an asset is considered acceptable when it is in good condition with an assigned FCI of 

90 percent or above. 

Deferred Maintenance and Repair Exclusions 

The deferred maintenance and repair information presented relates to all DoD facilities and is 

not restricted to capitalized assets. 

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Equipment Deferred Maintenance and Repairs

Equipment Deferred Maintenance and Repairs

For Fiscal Year Ended September 30 

Dollars in Millions

Major Categories 2016 2015

1. Aircraft $ 407.3 $ 199.5

2. Automotive Equipment 385.6 354.1

3. Combat Vehicles 190.1 10.7

4. Construction Equipment 10.8 5.8

5. Electronics and Communications Systems 30.7 15.2

6. Missiles 82.6 80.2

7. Ships 301.7 0.0

8. Ordnance Weapons and Munitions 42.1 65.0

9. All Other Items Not Identified to above Categories 278.8 472.5

Total $ 1,729.7 $ 1,203.0

Maintenance and Repair Policies 

Depot maintenance requirements for equipment are developed during the annual budget 

process and updated based on work completion, shifts in priorities, work stoppages, or additional 

requirements. 

Maintenance and Repair Prioritization and Acceptable Condition Standards 

The Department prioritizes maintenance and repair requirements based on mission and health 

and safety. In addition emerging requirements and real world events drive review and 

reprioritization of maintenance and repair requirements. The Department employs risk-based 

methodologies in determining acceptable levels of equipment operational risk. 

Deferred Maintenance and Repair Exclusions 

The deferred maintenance and repair information presented relates to all DoD equipment and 

is not restricted to capitalized assets. 

Significant Changes in Deferred Maintenance and Repair 

The Department’s deferred maintenance and repair work for equipment, platforms, and 

weapon systems increased by $526.7 million during FY 2016. This increase was largely the result 

of ship and aircraft maintenance deferred due to limited shipyard and depot capacity. Various 

additional factors resulted in the rescheduling of aircraft and missile maintenance and repair to 

future years. Recognition of the need to sustain digital technologies that did not exist in previous 

years also contributed to the increase. 

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Financial Section 

Statement of Disaggregated 

Budgetary Resources 2016

For the Years Ended September 30

Dollars in Millions

Military

Personnel Procurement

Research, 

Development, 

Test and 

Evaluation

Family Housing/ 

Military 

Construction

Military 

Retirement 

Benefits

Civil Works

Operations, 

Readiness & 

Support

2016 Combined

Budgetary Resources

Unobligated balance, brought forward, 

October 1

$ 4,481.7 $ 56,162.6 $ 15,375.6 $ 13,952.7 $ 0.0 $ 10,034.7 $ 49,455.0 $ 149,462.3

Adjustment to unobligated balance brought forw

ard, Oct 1 (+ or -)

0.0 0.0 0.0 0.0 0.0 0.0 2,083.9 2,083.9

Unobligated balance brought

forward, Oct 1, as adjusted 4,481.7 56,162.6 15,375.6 13,952.7 0.0 10,034.7 51,538.9 151,546.2

Recoveries of prior year unpaid obligations 5,919.8 6,715.2 3,107.3 2,110.0 0.0 287.4 32,376.8 50,516.5

Other changes in unobligated balance (1,384.9) (1,260.5) (1,202.1) (37.4) 0.0 9.5 (17,798.0) (21,673.4)

Unobligated balance from prior year budget 

authority, net 9,016.6 61,617.3 17,280.8 16,025.3 0.0 10,331.6 66,117.7 180,389.3

Appropriations (discretionary and mandatory) 138,576.0 118,487.6 71,284.1 6,764.8 66,964.2 6,551.6 337,026.9 745,655.2

Contract Authority (discretionary and 

mandatory) 0.0 0.0 0.0 0.0 0.0 0.0 69,749.9 69,749.9

Spending Authority from offsetting collections 

(discretionary and mandatory) 1,253.8 3,695.5 8,543.2 5,250.1 0.0 11,447.6 75,319.1 105,509.3

Total Budgetary Resources $ 148,846.4 $ 183,800.4 $ 97,108.1 $ 28,040.2 $ 66,964.2 $ 28,330.8 $ 548,213.6 $ 1,101,303.7

Status of Budgetary Resources:

New obligations and upward adjustments (total) 144,636.1 122,067.1 81,817.2 13,145.4 66,964.2 18,419.0 498,698.3 945,747.3

Unobligated balance, end of year:

Apportioned, unexpired accounts 459.8 57,517.1 12,658.5 12,501.3 0.0 8,281.3 17,280.3 108,698.3

Exempt from Apportionment, unexpired 

accounts 0.0 0.0 0.0 0.0 0.0 1,626.9 4,810.8 6,437.7

Unapportioned, unexpired accounts 0.0 77.2 294.0 294.0 0.0 0.0 2,655.8 3,321.0

Unexpired unobligated balance, end of year 459.8 57,594.3 12,952.5 12,795.3 0.0 9,908.2 24,746.9 118,457.0

Expired unobligated balance, end of year 3,750.5 4,139.0 2,338.4 2,099.5 0.0 3.6 24,768.4 37,099.4

Unobligated balance, end of year $ 4,210.3 $ 61,733.3 $ 15,290.9 $ 14,894.8 $ 0.0 $ 9,911.8 $ 49,515.3 $ 155,556.4

Total Budgetary Resources $ 148,846.4 $ 183,800.4 $ 97,108.1 $ 28,040.2 $ 66,964.2 $ 28,330.8 $ 548,213.6 $ 1,101,303.7

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Statement of Disaggregated 

Budgetary Resources 2016

For the Years Ended September 30

Dollars in Millions

Military

Personnel Procurement

Research, 

Development, 

Test and 

Evaluation

Family Housing/ 

Military 

Construction

Military 

Retirement 

Benefits

Civil Works

Operations, 

Readiness & 

Support

2016 Combined

Change in Obligated Balance

Unpaid obligations

Unpaid obligations, brought forward, October 1 

(Gross) $ 12,049.8 $ 130,935.9 $ 43,235.8 $ 19,433.3 $ 5,126.8 $ 7,593.7 $ 188,742.8 $ 407,118.1

New obligations and upward adjustments 144,636.1 122,067.1 81,817.2 13,145.4 66,964.2 18,419.0 498,698.3 945,747.3

Outlays (gross) (142,207.8) (105,884.4) (74,704.9) (11,802.3) (71,354.6) (18,232.7) (471,392.8) (895,579.5)

Recoveries of prior year unpaid obligations (5,919.8) (6,715.2) (3,107.3) (2,110.0) 0.0 (287.4) (32,376.8) (50,516.5)

Unpaid Obligations, end of year 8,558.3 140,403.4 47,240.8 18,666.4 736.4 7,492.6 183,671.5 406,769.4

Uncollected Payments

Uncollected customer payments from Federal 

Sources, brought forward (172.4) (3,769.0) (5,760.6) (8,848.6) 0.0 (1,647.8) (52,651.9)

Change in uncollected payments, Federal 

sources

(90.8) 60.2 (215.6) 281.3 0.0 (118.7) (1,247.5) (1,331.1)

Uncollected payments, Federal sources, end 

of year (263.2) (3,708.8) (5,976.2) (8,567.3) 0.0 (1,766.5) (53,899.3) (74,181.3)

Memorandum (non-add) entries:

Obligated balance, start of year $ 11,877.4 $ 128,166.9 $ 37,475.2 $ 10,584.7 $ 5,126.8 $ 5,945.9 $ 136,090.9 $ 334,267.9

Obligated balance, end of year $ 8,295.1 $ 136.694.6 $ 41.264.6 $ 10,099.1 $ 736.4 $ 5,726.1 $ 129,772.1 $ 332,588.0

Budget Authority and Outlays, Net:

Budget Authority, gross (discretionary and 

mandatory) $ 139,829.8 $ 122,183.1 $ 79,827.3 $ 12,014.9 $ 66,964.2 $ 17,999.2 $ 482,095.9 $ 920,914.4

Actual offsetting collections (discretionary and 

mandatory ) (1,172.7) (4,148.0) (8,522.8) (5,571.3) 0.0 (11,227.3) (136,690.6) (167,332.7)

Change in uncollected customer payments from 

Federal Sources (discretionary and mandatory) (90.8) 60.2 (215.6) 281.3 0.0 (118.7) (1,247.5) (1,331.1)

Recoveries of prior year paid obligations 

(discretionary and mandatory) 9.8 390.7 195.2 39.9 0.0 9.5 903.2 1,548.3

Budget authority, net (discretionary and 

mandatory) $ 138,576.1 $ 118,486.0 $ 71,284.1 $ 6,764.8 $ 66,964.2 $ 6,662.7 $ 345,061.0 $ 753,798.9

Outlays, gross (discretionary and mandatory) $ 142,207.8 $ 105,884.4 $ 74,704.9 $ 11,802.3 $ 71,354.6 $ 18,232.7 $ 471,392.8 $ 895,579.5

Actual offsetting collections (discretionary and 

mandatory) (1,172.7) (4,148.0) (8,522.8) (5,571.3) 0.0 (11,227.3) (136,690.6) (167,332.7)

Outlays, net (discretionary and mandatory) 141,035.1 101,736.4 66,182.1 6,231.0 71,354.6 7,005.4 334,702.2 728,246.8

Distributed offsetting receipts 0.0 (0.2) (0.8) 0.0 (89,920.3) (614.7) (1,543.0) (92,078.2)

Agency outlays, net (discretionary and 

mandatory) $ 141,035.1 $ 101,736.2 $ 66,181.3 $ 6,231.0 $ (18,565.7) $ 6,390.7 $ 333,159.2 $ 636,168.6

138
U.S. Department of Defense Agency Financial Report for FY 2016 

Financial Section 

Statement of Disaggregated 

Budgetary Resources 2015

For the Years Ended September 30

Dollars in Millions

Military

Personnel Procurement

Research, 

Development, 

Test and 

Evaluation

Family Housing/ 

Military 

Construction

Military 

Retirement 

Benefits

Civil Works

Operations, 

Readiness & 

Support

2015 Combined

Budgetary Resources

Unobligated balance, brought forward, October 1 $ 4,355.7 $ 52,146.6 $ 14,363.5 $ 15,643.1 $ 0.0 $ 10,987.4 $ 53,219.1 $ 150,715.4

Recoveries of prior year unpaid obligations 5,784.1 9,163.5 2,755.3 1,367.6 0.0 337.1 34,009.5 53.417.1

Other changes in unobligated balance (1,579.1) (2,140.3) (1,018.1) (431.3) 0.0 (2.3) (21,873.4) (27,044.5)

Unobligated balance from prior year budget 

authority, net 8,560.7 59,169.8 16,100.7 16,579.4 0.0 11,322.2 65,355.2 177,088.0

Appropriations (discretionary and mandatory) 139,661.9 101,441.1 65,242.5 5,218.8 66,336.8 6,151.7 336,430.3 720,483.1

Contract Authority (discretionary and mandatory) 0.0 0.0 0.0 0.0 0.0 0.0 68,357.3 68,357.3

Spending Authority from offsetting collections 

(discretionary and mandatory) 1,259.5 2,609.1 8,322.3 5,006.3 0.0 10,257.7 73,848.6 101,303.5

Total Budgetary Resources $ 149,482.1 $ 163,220.0 $ 89,665.5 $ 26,804.5 $ 66,336.8 $ 27,731.6 $ 543,991.4 $ 1,067,231.9

Status of Budgetary Resources:

New obligations and upward adjustments (total) 145,000.4 107,430.9 74,289.8 12,851.8 66,336.8 17,696.9 494,191.0 917,797.6

Unobligated balance, end of year:

Apportioned, unexpired accounts 641.0 50,692.5 11,650.2 11,466.0 0.0 8,554.8 22,086.3 105,090.8

Exempt from Apportionment, unexpired 

accounts 0.0 0.0 0.0 0.0 0.0 1,484.8 2,927.3 4,412.1

Unapportioned, unexpired accounts 0.0 577.3 1033.2 250.5 0.0 (5.0) 670.0 2,526.0

Unexpired unobligated balance, end of year 641.0 51.269.8 12,683.4 11,716.5 0.0 10,034.6 25,683.6 112,028.9

Expired unobligated balance, end of year 3,840.7 4,519.4 2,692.2 2,236.2 0.0 0.0 24,116.9 37,405.4

Unobligated balance, end of year $ 4,481.7 $ 55,789.2 $ 15,375.6 $ 13,952.7 $ 0.0 $ 10,034.7 $ 49,800.5 $ 149,434.3

Total Budgetary Resources $ 149,482.1 $ 163,220.1 $ 89,665.4 $ 26,804.5 $ 66,336.8 $ 27,731.5 $ 543,991.5 $ 1,067,231.9

139
U.S. Department of Defense Agency Financial Report for FY 2016 

Financial Section 

Statement of Budgetary 

Resources 2015

For the Years Ended September 30

Dollars in Millions

Military

Personnel Procurement

Research, 

Development, Test 

and Evaluation

Family Housing/ 

Military 

Construction

Military Retirement 

Benefits Civil Works

Operations, 

Readiness & 

Support

2015 

Combined

Change in Obligated Balance

Unpaid obligations

Unpaid obligations, brought forward, 

October 1 (Gross) $ 13,156.8 $ 136,099.6 $ 45,995.7 $ 21,835.8 $ 5,481.9 $ 8,041.9 $ 199,894.6 $ 430,506.3

New 0bligations and upward adjustments 145,000.4 107,430.9 74,289.8 12,851.8 66,336.8 17,696.9 494,191.0 917,797.6

Outlays (gross) (140,323.2) (103,578.2) (74,294.4) (13,886.7) (66,691.9) (17,807.9) (471,186.4) (887,768.7)

Recoveries of prior year unpaid obligations (5,784.2) (9,163.6) (2,755.3) (1,367.6) 0.0 (337.2) (34,009.2) (53,417.1)

Unpaid Obligations, end of year 12,049.8 130,788.7 43,235.8 19,433.3 5,126.8 7,593.7 188,890.0 407,118.1

Uncollected Payments

Uncollected customer payments from Federal 

Sources, end of year (137.6) (4,213.4) (6,583.1) (10,184.7) 0.0 (1,803.0) (54,400.8) (77,322.6)

Change in uncollected payments, Federal 

sources

(34.8) 474.2 822.5 1,336.1 0.0 155.2 1,747.2 4,500.4

Memorandum (non-add) entries:

Uncollected payments, Federal sources, 

end of year (172.4) (3,739.2) (5,760.6) (8,848.6) 0.0 (1,647.8) (52,653.6) (72,822.2)

Obligated balance, start of year $ 13,019.2 $ 131,886.2 $ 39,412.6 $ 11,651.1 $ 5,481.9 $ 6,238.9 $ 145,493.8 $ 353,183.7

Obligated balance, end of year $ 11,877.4 $ 127,049.5 $ 37,475.2 $ 10,584.7 $ 5,126.8 $ 5,945.9 $ 136,236.4 $ 334,295.9

Budget Authority and Outlays, Net:

Budget Authority, gross (discretionary and 

mandatory) $ 140,921.4 $ 104,050.2 $ 73,564.8 $ 10,225.1 $ 66,336.8 $ 16,409.4 $ 478,636.2 $ 890,143.9

Actual offsetting collections (discretionary 

and mandatory ) (1,313.4) (3,214.8) (9,220.5) (6,352.9) 0.0 (10,320.4) (138,195.1) (168,617.1)

Change in uncollected customer payments 

from Federal Sources (discretionary and 

mandatory)

(34.8) 474.2 822.5 1,336.1 0.0 155.2 1,747.2 4,500.4

Recoveries of prior year paid obligations

(discretionary and mandatory) 88.7 133.1 75.7 10.5 0.0 15.3 788.2 1,111.5

Budget authority, net (discretionary and 

mandatory) $ 139,661.9 $ 101,442.7 $ 65,242.5 $ 5,218.8 $ 66,336.8 $ 6,259.5 $ 342,976.5 $ 727,138.7

Outlays, gross (discretionary and mandatory) $ 140,323.2 $ 103,578.2 $ 74,294.4 $ 13,886.7 $ 66,691.9 $ 17,807.9 $ 471,186.4 $ 887,768.7

Actual offsetting collections (discretionary 

and mandatory) (1,313.4) (3,214.8) (9,220.5) (6,352.9) 0.0 (10,320.4) (138,195.1) (168,617.1)

Outlays, net (discretionary and 

mandatory) 139,009.8 100,363.4 65,073.9 7,533.8 66,691.9 7,487.5 332,991.3 719,151.6

Distributed offsetting receipts 0.0 (0.7) (2.0) 0.0 (83,777.3) (797.6) (2,195.0) (86,772.6)

Agency outlays, net (discretionary and 

mandatory) $ 139,009.8 $ 100,362.7 $ 65,071.9 $ 7,533.8 $ (17,085.4) $ 6,689.9 $ 330,796.3 $ 632,379.0

140
U.S Department of Defense Agency Financial Report for FY 2016 

Financial Section

Statement of Disaggregated 

Budgetary Resources Non-Budgetary

For the Years ended September 30

Dollars in Millions Other 2016 Combined 2015 Combined

Budgetary Resources

Unobligated balance, brought 

forward, October 1

$ 66.6 $ 66.6 $ 47.1

Borrowing Authority (discretionary 

and mandatory) 27.0 27.0 81.4

Spending Authority from offsetting 

collections (discretionary and 

mandatory)

74.7 74.7 73.6

Total Budgetary Resources $ 168.3 $ 168.3 $ 202.1

Status of Budgetary 

Resources:

New obligations and upward 

adjustments (total) $ 88.6 $ 88.6 $ 135.5

Unobligated balance, end of year:

Unapportioned 79.7 79.7 66.6

Unexpired unobligated, end of 

year

Expired unobligated, end of 

year

Unobligated balance, end of 

year (total) $ 79.7 $ 79.7 $ 66.6

Total Budgetary Resources $ 168.3 $ 168.3 $ 202.1

141
U.S Department of Defense Agency Financial Report for FY 2016 

Financial Section

Statement of Disaggregated 

Budgetary Resources Non Budgetary

For the Years ended September 30

Dollars in Millions

Other 2016 Combined 2015 Combined

Change in Obligated Balance

Unpaid obligations:

Unpaid obligations, brought forward, 

October 1 (gross) $ 410.5 $ 410.5 $ 484.9

New obligations and upward 

adjustments 88.6 88.6 135.5

Outlays (gross) (214.9) (214.9) (209.9)

Unpaid obligations, end of year 284.2 284.2 410.5

Uncollected payments:

Uncollected payments, Federal 

sources, brought forward, October 1 (72.4) (72.4) (75.2)

Change in uncollected customer 

payments, Federal sources

13.5 13.5 2.8

Uncollected payments, Federal 

sources, end of year (58.9) (58.9) (72.4)

Obligated balances, start of year 338.1 338.1 409.7

Obligated balance, end of year (net) $ 225.3 $ 225.3 $ 338.1

Budget Authority and Outlays, Net:

Budget Authority, gross (discretionary 

and mandatory) 101.7 101.7 155.0

Actual offsetting collections 

(discretionary and mandatory) (105.4) (105.4) (101.7)

Change in uncollected customer 

payments from Federal Sources 

(discretionary and mandatory)

13.5 13.5 2.8

Recoveries of prior year obligations 

(discretionary and mandatory)

Budget authority, net (discretionary 

and mandatory) $ 9.8 $ 9.8 $ 56.1

Outlays, gross (discretionary and 

mandatory) 214.9 214.9 209.9

Actual offsetting collections 

(discretionary and mandatory) (105.4) (105.4) (101.7)

Outlays, net (discretionary and 

mandatory) 109.5 109.5 108.2

Agency outlays, net (discretionary 

and mandatory) $ 109.5 $ 109.5 $ 108.2

142
INSPECTOR GENERAL

DEPARTMENT OF DEFENSE

4800 MARK CENTER DRIVE

ALEXANDRIA, VIRGINIA 22350-1500

May 4, 2017

MEMORANDUM FOR UNDER SECRETARY OF DEFENSE (COMPTROLLER)/

CHIEF FINANCIAL OFFICER, DOD

SUBJECT: Independent Auditor’s Report on the Department of Defense FY 2016 and

FY 2015 Basic Financial Statements (Report No. DODIG-2017-017)

We are providing the subject report to be published in the Department of Defense

FY 2016 Agency Financial Report in conjunction with the Department of Defense

FY 2016 and FY 2015 Basic Financial Statements provided to us in draft on

November 15, 2016. The report includes our disclaimer of opinion on the basic financial

statements and our required Report on Internal Control Over Financial Reporting and

Compliance With Applicable Provisions of Laws, Regulations, Contracts, and Grant

Agreements. We are issuing our disclaimer of opinion to accompany the Department of

Defense FY 2016 and FY 2015 Basic Financial Statements and, therefore, this audit

report should not be disseminated separately from those statements.

We appreciate the courtesies extended to the staff. Please direct questions to me

at (703) 601-5945 or (DSN) 329-5945.

Lorin T. Venable, CPA

Assistant Inspector General

Financial Management and Reporting

143
May 4, 2017

MEMORANDUM FOR ASSISTANT SECRETARY OF DEFENSE (COMPTROLLER)/

CHIEF FINANCIAL OFFICER, DOD

SUBJECT: Independent Auditor’s Report on the Department of Defense FY 2016 

and FY 2015 Basic Financial Statements 

(Project No. D2016-D000FE-0133.000, Report No. DODIG-2017-017) 

Report on the Basic Financial Statements

Public Law 101-576, “Chief Financial Officers Act of 1990,” as amended, requires 

the DoD Inspector General to audit the accompanying DoD Agency-Wide consolidated 

balance sheet as of September 30, 2016, and 2015, and the related consolidated 

statement of net cost, consolidated statement of changes in net position, combined 

statement of budgetary resources, and notes to the basic statements (basic 

financial statements). 

Management’s Responsibility for the Annual 

Financial Statements

DoD management is responsible for the annual financial statements. Management is 

responsible for: (1) preparing financial statements that conform with U.S. generally 

accepted accounting principles (U.S. GAAP); (2) establishing, maintaining, and 

assessing internal control to provide reasonable assurance that they met broad 

control objectives of Public Law 97-255, “Federal Managers’ Financial Integrity Act 

of 1982” (FMFIA); (3) ensuring that the DoD’s financial management systems 

substantially comply with Public Law 104-208, “Federal Financial Management 

Improvement Act of 1996” (FFMIA) requirements; and (4) complying with 

applicable laws and regulations. 

INSPECTOR GENERAL

DEPARTMENT OF DEFENSE

4800 MARK CENTER DRIVE 

ALEXANDRIA, VIRGINIA 22350-1500 

144
Auditor’s Responsibility

Our responsibility is to express an opinion on the basic financial statements based 

on conducting the audit in accordance with generally accepted government auditing 

standards and the Office of Management and Budget (OMB) Bulletin No. 15-02, “Audit 

Requirements for Federal Financial Statements,” August 4, 2015. However, based on 

the matters described in the following Basis for Disclaimer of Opinion paragraph, we 

were unable to obtain sufficient appropriate audit evidence to provide a basis for an 

audit opinion. 

Basis for Disclaimer of Opinion

Section 1008(d) of the FY 2002 National Defense Authorization Act limits the 

DoD Inspector General to performing only those audit procedures required by 

generally accepted government auditing standards that are consistent with the 

representations made by management. DoD management asserted to us that 

DoD FY 2016 and FY 2015 Basic Financial Statements would not substantially 

conform to U.S. GAAP and that DoD financial management and feeder systems 

were unable to adequately support material amounts on the basic financial 

statements as of September 30, 2016. Accordingly, we did not perform all the 

auditing procedures required by generally accepted government auditing standards 

and OMB Bulletin No. 15-02 to determine whether material amounts on the basic 

financial statements were presented fairly. We considered the scope limitation in 

forming our conclusions on the basic financial statements. 

Disclaimer of Opinion

Because of the significance of the matters described in the Basis for Disclaimer of 

Opinion paragraph, we could not obtain sufficient appropriate evidence to provide 

a basis for an audit opinion. Accordingly, we do not express an opinion on the 

DoD FY 2016 and FY 2015 Basic Financial Statements. Thus, the basic financial 

statements may have undetected misstatements that are both material and pervasive. 

145
Emphasis of Matter 

As discussed in Note 26 to the basic financial statements, the DoD restated the FY 2015 

Basic Financial Statements and related notes to correct errors in assets, net cost, and 

net position identified during ongoing audit readiness efforts. We did not modify our 

disclaimer report on the FY 2015 Basic Financial Statements with respect to this matter. 

Other Information in the Annual Financial Statements

We performed our audit to form an opinion on the basic financial statements as a 

whole. DoD management presented the Management’s Discussion and Analysis, 

Required Supplementary Stewardship Information, Required Supplementary 

Information, and Other Information for additional analysis as part of the annual 

financial statements. These elements are not required parts of the basic financial 

statements. Therefore, we do not express an opinion or provide any assurance on 

the information. We reviewed the other information for inconsistencies with the 

audited basic financial statements. Based on our limited review, we did not find any 

material inconsistencies between the information and the basic financial statements 

and applicable sections of OMB Circular No. A-136 (Revised), “Financial Reporting 

Requirements,” October 7, 2016, and DoD Regulation 7000.14-R, “Financial 

Management Regulation,” volume 6b, “Form and Content of the Department of 

Defense Audited Financial Statements.”

Report on Compliance With Applicable Provisions of Laws, 

Regulations, Contracts, and Grant Agreements 

We limited our audit to determining compliance with provisions of applicable laws 

and regulations, contracts, and grant agreements that have a direct and material effect 

on the basic financial statements, and compliance with OMB regulations and audit 

requirements for financial reporting because management represented that instances 

of noncompliance identified in prior audits continue to exist. Therefore, we did not 

determine whether the DoD complied with all applicable laws and regulations, 

contracts, and grant agreements related to financial reporting. It was not our objective 

to provide an opinion on compliance with certain provisions of laws and regulations, 

contracts, and grant agreements, and accordingly, we do not express such an opinion.

See Attachment 1 for additional details on internal control and compliance with legal 

and other regulatory requirements. 

146
Agency Comments and Our Evaluation 

We provided a draft of this report to the Under Secretary of Defense (Comptroller)/

Chief Financial Officer, DoD, who provided technical comments that we have 

incorporated as appropriate. DoD officials expressed their continuing commitment 

to address the problems this report outlines. 

This report will be made publicly available pursuant to section 8M, paragraph (b)(1)(A) 

of the Inspector General Act of 1978, as amended. However, this report is intended 

solely for the information and use of Congress, the OMB, the U.S. Government 

Accountability Office; the Under Secretary of Defense (Comptroller)/Chief Financial 

Officer, DoD; and the DoD Office of Inspector General. It is not intended to be used 

and should not be used by anyone else. 

We appreciate the courtesies extended to the staff. Please direct questions to me at 

(703) 601-5945 or (DSN) 329-5945. 

Lorin T. Venable, CPA

Assistant Inspector General

Financial Management and Reporting

Attachment: As stated

147
Report on Internal Control Over Financial Reporting

Internal Control Compliance

In planning our audit, we considered the DoD’s internal control over financial reporting. 

We did this to determine our procedures for auditing the basic financial statements 

appropriate to the circumstances, for the purposes of expressing our opinion on the 

basic financial statements, but not appropriate for the purpose of expressing an opinion 

on the effectiveness of the internal control. Accordingly, we do not express an opinion 

on internal control over financial reporting. 

Management Responsibilities

Management is responsible for implementing and maintaining effective internal 

controls to include providing reasonable assurance that DoD personnel recorded, 

processed, and summarized accounting data properly; met the requirements of 

applicable laws and regulations; and safeguarded assets against misappropriation 

and abuse. 

Auditor’s Responsibilities

Our purpose was not to express an opinion on internal controls over financial reporting, 

and we do not do so. However, the following material weaknesses continue to exist, and

could adversely affect the DoD’s financial operations. 

Previously Identified Material Weaknesses

Management acknowledged that previously identified material weaknesses continued 

to exist. A material weakness is a deficiency, or a combination of deficiencies, in 

internal control such that there is a reasonable possibility that a material misstatement 

of the DoD’s financial statements will not be prevented, or detected and corrected, on a 

timely basis. The following material weaknesses continue to exist. 

Financial Management Systems. Statement of Federal Financial Accounting 

Concepts (SFFAC) No. 1, “Objectives of Federal Financial Reporting,” requires financial 

management system controls that are adequate to ensure that transactions are 

executed in accordance with budgetary and financial laws and other requirements, 

consistent with the purposes authorized, and recorded in accordance with Federal 

accounting standards. SFFAC No. 1 also requires that financial management system 

controls ensure assets are properly safeguarded to deter fraud, waste, and abuse and 

that performance measurement information be adequately supported. 

148
The Under Secretary of Defense (Comptroller)/Chief Financial Officer, DoD, 

acknowledged that DoD financial management and feeder systems do not substantially 

comply with Federal financial management system requirements. The DoD financial 

management and feeder systems were not designed to adequately support various 

material amounts on the basic financial statements. These systemic deficiencies in 

financial management and feeder systems and inadequate DoD business processes 

prevent the DoD from collecting and reporting financial and performance information 

that is accurate, reliable, and timely. 

Fund Balance With Treasury. Statement of Federal Financial Accounting 

Standards (SFFAS) No. 1, “Accounting for Selected Assets and Liabilities”; the Treasury 

Financial Manual; and DoD Regulation 7000.14-R, “DoD Financial Management 

Regulation,” require the DoD to resolve financial and accounting inconsistencies to 

accurately report Fund Balance with Treasury. However, inconsistencies continued 

to exist related to in transit disbursements, unmatched disbursements, negative 

unliquidated obligations, and unreconciled differences between U.S. Treasury 

records and DoD accounting records.

Accounts Receivable. According to SFFAS No. 1, Federal entities should recognize 

a receivable when they establish a claim to cash or other assets against other 

entities, based on either legal provisions or goods and services provided. The DoD 

acknowledged that it was unable to accurately record, report, collect, and reconcile 

intragovernmental accounts receivable, as well as accounts receivable from the public.

Inventory. SFFAS No. 3, “Accounting for Inventory and Related Property,” requires the 

DoD to use historical cost, the latest acquisition cost (adjusted for holding gains and 

losses), or moving average cost for valuing inventory. However, the DoD acknowledged 

that the existing inventory value for most activities was not reported in accordance 

with U.S. GAAP, and the DoD’s legacy systems do not maintain the historical cost data 

necessary to comply with SFFAS No. 3. Additionally, the DoD did not distinguish 

between Inventory Held for Sale and Inventory Held in Reserve for Future Sale, as 

required by SFFAS No. 3.

Operating Materials and Supplies. SFFAS No. 3 states that Operating Materials and 

Supplies must be expensed when the items are consumed. The DoD acknowledged 

that significant amounts of Operating Materials and Supplies were expensed when 

purchased instead of when consumed. In addition, the DoD could not accurately report 

the value of operating materials and supplies, which allows the potential for a 

misstatement in financial reporting.

4

149
General Property, Plant, and Equipment. SFFAS No. 6, “Accounting for Property, 

Plant, and Equipment,” requires the DoD to record General Property, Plant, and 

Equipment (General PP&E) at acquisition cost, capitalize improvement costs, and 

recognize depreciation expense. However, the cost and depreciation of DoD General 

PP&E was not reliably reported because of: (1) an accounting requirement that 

classified Military Equipment as General PP&E (such costs were previously expensed); 

(2) a lack of supporting documentation for aged General PP&E items; and (3) a failure 

to integrate most legacy property and logistics systems with acquisition and financial 

systems. In addition, DoD property and logistics systems were not designed to capture 

acquisition cost and the cost of modifications and upgrades, or to calculate depreciation. 

The DoD acknowledged that it did not meet U.S. GAAP for the financial reporting of 

personal property, and the documentation for personal property was neither accurate 

nor reliable. In addition, the DoD did not have adequate internal controls in place to 

provide reasonable assurance that real property assets were identified and properly 

reported in its financial reports. The DoD also acknowledged that its inability to 

accurately report the value of military equipment increases the risk that the financial 

statements are materially misstated.

Government Property in Possession of Contractors. SFFAS No. 6 requires that 

property and equipment in the possession of a contractor, acquired on behalf of the 

Government (for example, the Government will ultimately hold title) for use in 

accomplishing a contract be considered Government property. Such property should 

be accounted for based on the nature of the item, regardless of who has possession. 

The DoD acknowledged that it was unable to comply with these requirements for 

Government Property in Possession of Contractors. As a result, the value of DoD 

property and material in the possession of contractors was not reliably reported.

Accounts Payable. According to SFFAS No. 5, “Accounting for Liabilities of the Federal 

Government,” an entity recognizes a liability when one party receives goods or services 

in return for a promise to provide money or other resources in the future. The DoD 

acknowledged that it did not meet accounting standards for the financial reporting of 

public accounts payable. The DoD cannot support its accounts payable balances 

because it lacks standard procedures for recording, reporting, and reconciling the 

amounts between the financial, accounting, and reporting systems.

150
Environmental Liabilities. The DoD acknowledged that its internal controls for 

reporting environmental liabilities did not provide reasonable assurance that cleanup 

costs for all of its ongoing, inactive, closed, and disposal operations were identified, 

consistently estimated, and appropriately reported. In addition, guidance and audit 

trails for estimating environmental liabilities were insufficient, and the inventory of 

ranges and operational activities was incomplete. The DoD also acknowledged it is 

uncertain of the accuracy of the accounting estimates used to calculate the reported 

environmental liabilities

Statement of Net Cost. SFFAC No. 2, “Entity and Display,” requires the Statement of 

Net Cost to provide an understanding of the net costs of each organization and each 

program. In addition, the Statement of Net Cost is to provide gross and net cost 

information that can be related to the amounts of outputs and outcomes for the 

programs and organization. The DoD acknowledged the following deficiencies 

related to the Statement of Net Cost. 

• The amounts presented for General Funds may not report actual

accrued costs.

• Although the funds were generally recorded on an accrual basis for Working

Capital Funds, the systems did not always capture actual costs on time.

• The Statement of Net Cost is not presented by programs that align with major

goals and outputs described in the DoD’s strategic and performance plans, as

required by the Government Performance and Results Act.

• Revenues and expenses were reported by appropriation categories

because financial processes and systems do not collect costs in line with

performance measures.

Intragovernmental Eliminations. The DoD disclosed that it could not accurately 

identify most of its intragovernmental transactions by customer because its systems do 

not track the buyer and seller data needed to match related transactions. In addition, 

the DoD was unable to fully reconcile intragovernmental transactions with all Federal 

partners. The DoD acknowledged that its inability to reconcile most intragovernmental 

transactions resulted in adjustments that cannot be fully supported. 

151
Accounting Entries. The DoD acknowledged that it continued to enter material 

amounts of unsupported accounting entries in its financial management systems 

because of inadequacies in the systems. In addition, the DoD did not always record 

account entries in accordance with U.S. GAAP. The unsupported accounting entries 

present a material uncertainty regarding the reliability of the financial statements. 

Reconciliation of Net Cost of Operations to Budget. SFFAS No. 7, “Accounting for 

Revenue and Other Financing Sources,” requires a reconciliation of proprietary and 

budgetary information to assist users in understanding the relationship between the 

net cost of operations and the budgetary resources obligated by the entity during the 

period. The DoD acknowledged that it was unable to reconcile budgetary obligations to 

net costs without making unsupported adjustments. Specifically, budgetary data do not 

agree with proprietary expenses and capitalized assets. 

Previously Identified Significant Deficiencies

Management acknowledged that previously identified significant deficiencies continue 

to exist. A control deficiency exists when the design or operation of a control does not 

allow management or employees, in the normal course of performing their assigned 

functions, to prevent or detect misstatements on a timely basis. A significant deficiency 

is a deficiency or a combination of deficiencies in internal control that is less severe 

than a material weakness yet important enough to merit attention by those charged 

with governance. 

We previously reported a significant deficiency relating to the DoD process for 

reporting contingent legal liabilities as required by SFFAS No. 5, as amended by SFFAS 

No. 12, “Recognition of Contingent Liabilities Arising From Litigation.” DoD reporting of 

contingent liabilities in the FY 2015 Basic Financial Statements meets the intent of 

SFFAS No.5 as amended by SFFAS No. 12. As such, we no longer consider the DoD’s 

process for reporting contingent legal liabilities as a significant deficiency. However, 

the DoD Office of General Counsel stated in its legal representation letter to us that it 

was unable to express an opinion on the likely outcome of 29 of 49 pending legal 

actions. As a result, the DoD’s management decisions based in whole or in part on 

this information may be adversely affected. 

Internal control work we conducted as part of our prior audits would not necessarily 

disclose all material weaknesses and significant deficiencies. We did not identify 

material weaknesses that were not reported as such in the DoD’s FMFIA report. 

152
Report on Compliance with Applicable Provisions of 

Law, Regulations, Contracts, and Grant Agreements

U.S. generally accepted government auditing standards and OMB guidance require 

auditors to report on entities’ compliance with selected provisions of laws and 

regulations, contracts, and grant agreements. Management is responsible for 

compliance with existing laws and regulations, contracts, and grant agreements 

related to financial reporting. Management has also acknowledged to us that 

previously reported instances of noncompliance continue to exist. Therefore, we did 

not determine whether the DoD complied with selected provisions of all applicable 

laws and regulations, contracts, and grant agreements related to financial reporting. 

We caution that other noncompliance may have occurred and not been detected. 

Furthermore, the results of our limited procedures may not be sufficient for other 

purposes. Our objective was not to, and we do not, express an opinion on compliance 

with applicable laws, regulations, contracts, and grant agreements. Because of other 

scope limitations discussed in this report, we limited our work to determining 

compliance with selected provisions of the applicable laws and regulations. 

Antideficiency Act

Section 1341, title 31, United States Code (31 U.S.C. § 1341 [1990]), limits the DoD 

and its agents to making or authorizing expenditures or obligations that do not 

exceed the available appropriations or funds. Additionally, the DoD or its agents may 

not contract or obligate for the payment of money before an appropriation is made 

available for that contract or obligation unless otherwise authorized by law. As stated 

in 31 U.S.C. § 1517 (2004), the DoD and its agents are prohibited from making or 

authorizing expenditures of obligations exceeding an apportionment or the amount 

permitted by prescribed regulations. According to 31 U.S.C. § 1351 (2004), if an officer 

or employee of an executive agency violates the Antideficiency Act (ADA), the head of 

the agency must report immediately to the President and Congress all relevant facts and 

a statement of actions taken. During FY 2016, the DoD reported 45 ADA violations 

within four completed cases.

DoD Regulation 7000.14-R, “Financial Management Regulation,” volume 14, chapter 7, 

“Antideficiency Act Report,” establishes time-frames for identifying and reporting ADA 

violations. The regulation states that the formal investigation and reporting on ADA 

violations should take no more than 15 months. Nine investigations of potential ADA 

violations have been open for more than 15 months. 

153
Compliance With FFMIA Requirements

The FFMIA requires the DoD to establish and maintain financial management 

systems that comply substantially with the Federal financial management systems 

requirements, applicable Federal accounting standards, and the U.S. Government 

Standard General Ledger at the transaction level. For areas in which an agency is not 

in compliance, OMB Circular No. A-136 requires the agency to identify remediation 

activities planned or underway to bring the systems into substantial compliance with 

the FFMIA. The DoD is applying appropriate financial resources to achieve audit 

readiness. Financial system resources include resources for designing and achieving 

an audit-ready systems environment, including new system deployment costs, other 

than the Enterprise Resource Planning (ERP) systems. It also includes the resources 

to make needed and cost-effective changes to legacy systems that will be part of the 

audit-ready systems environment. ERP systems will be an essential part of the DoD’s 

audit-readiness efforts. However, the DoD reported in the Financial Improvement and 

Audit Readiness Plan Status Report, May 2016, that custom-built legacy systems, 

financial systems, and nonfinancial feeder systems will still be material to audit 

readiness. Some of the systems are being replaced, but many will still be in use 

after FY 2017 when the DoD is required to produce auditable financial statements. 

Therefore, the DoD will continue to rely on legacy systems to meet the 

audit-readiness dates.

For FY 2016, the DoD did not substantially comply with the FFMIA. The Under 

Secretary of Defense (Comptroller)/Chief Financial Officer, DoD, acknowledged to 

us that DoD financial management and feeder systems could not provide adequate 

evidence supporting various material amounts on the financial statements and that 

previously identified material weaknesses continue. The financial management and 

feeder systems did not substantially comply with the Federal financial management 

systems requirements, Federal accounting standards, or the U.S. Government Standard 

General Ledger at the transaction level as of September 30, 2016. Therefore, based on 

the representation of the DoD, we did not substantiate whether the DoD complied with 

FFMIA and OMB implementation guidance. 

Recommendations 

This report does not include recommendations to correct the material weaknesses and 

instances of noncompliance with laws and regulations because previous audit reports 

contained recommendations for corrective actions or because current audit projects 

will include appropriate recommendations. 

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Financial Section 

This Page Intentionally Left Blank 

155
FISCAL YEAR 2016

AGENCY FINANCIAL REPORT

OTHER 

INFORMATION

UNITED STATES DEPARTMENT OF DEFENSE
U.S. Department of Defense Agency Financial Report for FY 2016 

Other Information 

Alaska Army National Guard Soldiers with B Company, 1st Battalion (Airborne),143rd Infantry Regiment, jump out of 

a UH-60 Black Hawk for the unit's final jump before they retire their airborne status, Aug. 5, 2016 at Joint Base 

Elmendorf-Richardson, Alaska. The Soldiers will remain in Alaska but fall under the 1st Battalion, 297th Infan try 

Regiment. 

U.S. Air Force photo by Senior Airman James Richardson

160806-N-ZE250-245MEDITERRANEAN SEA (Aug. 6, 2016) - USS Carney (DDG 64) conducts a replenishment-atsea with the Military Sealift Command fleet replenishment oiler USNS Big Horn (T-AO-198) and USS Wasp (LHD 1) 

in the Mediterranean Sea Aug. 6, 2016. Carney, an Arleigh Burke-class guided-missile destroyer, forward-deployed to 

Rota, Spain, is conducting a routine patrol in the U.S. 6th fleet area of operations in support of U.S. national security 

interests in Europe. 

U.S. Navy photo by Mass Communication Specialist 3rd Class Weston Jones/Released)
U.S. Department of Defense Agency Financial Report for FY 2016 

Other Information 

OTHER INFORMATION 

MANAGERS’ INTERNAL CONTROL PROGRAM

The Department’s management has a fundamental responsibility to develop and maintain 

effective internal controls to ensure federal programs operate and federal resources are used 

efficiently and effectively to achieve desired objectives. As discussed in the Internal Controls 

section of this report, managers throughout the Department are accountable for ensuring effective 

internal controls in their areas of responsibility. All DoD Components are required to establish 

and assess internal controls for financial reporting, mission-essential operations, and financial 

management systems. 

Management-identified weaknesses are determined by assessing internal controls, as required 

by the Federal Managers’ Financial Integrity Act of 1982 (FMFIA), the Federal Financial 

Management Improvement Act of 1996 (FFMIA), and Office of Management and Budget 

(OMB) Circular No. A-123, and fall into one of the following categories: 

 1. FMFIA Section 2, Financial Reporting Material Weaknesses (see Table 2a). 

 2. FMFIA Section 2, Non-Financial Operations Material Weaknesses (see Table 2b). 

 3. FMFIA Section 4, Financial System Nonconformance Weaknesses (see Table 2c). 

 4. FFMIA, Compliance with Section 803(a), FFMIA (see Table 3). 

From left to right, Machinist Mate 1st Class Micah Patterson, Boatswains Mate 1st Class Stephen Wodraska, 

Engineman 2nd Class Richard Meyer, Mineman 1st Class Coy Tully and Mineman 3rd Class Pete Calvert, assigned 

to Commander, Task Group 56.1, launch a MK 18 MOD 2 unmanned underwater vehicle from a rigid -hull inflatable 

boat during Squadex 2016. Squadex 2016 demonstrates U.S./U.K. mine detection capabilities in the U.S. 5th Fleet 

area of operations. 

U.S. Navy Combat Camera photo by Mass Communication Specialist 1st Class Blake Midnight

155
U.S. Department of Defense Agency Financial Report for FY 2016

Other Information

156

Summary of DoD Inspector General Identified Material Weaknesses in Internal Controls 

over Financial Reporting 

Table 1 lists the DoD Inspector General (IG) - identified 13 areas of material weakness in the

Department’s financial statement reporting.

Table 1. Summary of Financial Statement Audit

Audit Opinion: Disclaimer

Restatement: Yes

Areas of Material Weakness Beginning

Balance New Resolved Consolidated EndingBalance

1 Accounts Payable 1 1

2 Accounting Entries 1 1

3 Environmental Liabilities 1 1

4 Government Property in Possession of 

Contractors 1 1

5 Intragovernmental Eliminations 1 1

6 Operating Materials and Supplies 1 1

7 Reconciliation of Net Cost of 

Operations to Budget 1 1

8 Statement of Net Cost 1 1

9 Financial Management Systems 1 1

10 Fund Balance with Treasury 1 1

11 General Property, Plant & Equipment 1 1

12 Inventory 1 1

13 Accounts Receivable 1 1

Total Material Weaknesses 13 13

Summary of Management Assurances

1. FMFIA SECTION 2, FINANCIAL REPORTING MATERIAL WEAKNESSES. Under the oversight 

of the DoD Financial Improvement Audit Readiness (FIAR) Governance Board, discussed in the 

FIAR Plan Status Report, the Department’s assessment of the effectiveness of its internal controls 

over financial reporting identified 44 material weaknesses in FY 2016.

Table 2 lists the material weaknesses in internal controls over financial reporting, captured by 

end-to-end process and the assessable unit for the material weakness, and incorporates changes 

from the weaknesses reported in the FY 2015 Agency Financial Report. 
U.S. Department of Defense Agency Financial Report for FY 2016 

Other Information 

 

1

 In FY2015 the Department reported material weaknesses in seventeen areas/assessable units. The total weaknesses in all areas were forty-four. 

The FY2016 beginning balance was updated to reflect the individual count of material weaknesses for each area of material weakness. 

2

 Transportation of People is not material to the Department and is no longer reported as a Department-wide area of material weakness. 

3

 GFP was previously reported as an Internal Controls over Non-financial Operations (ICONO) material weakness, but was re-assessed in FY2016 

as an Internal Controls over Financial Reporting (ICOFR) material weakness 

4

 IUS was previously reported as an ICONO material weakness, but was re-assessed in FY2016 as an ICOFR material weakness 

5

 In FY2016 the descriptions for Civilian Pay was consolidated into two overarching areas as the material weaknesses addressed similar challenges. 

The Department used the same approach and consolidated the descriptions for Accounts Receivable into one overarching area. 

Table 2. Effectiveness of Internal Controls over Financial Reporting (FMFIA Section 2)

Statement of Assurance: No Assurance

End-to-End 

Process

Areas of Material 

Weakness

FY 2015 

Ending 

Balance

Revised 

FY 2016 

Beginning

Balance1

New Resolved Consolidated Reassessed

FY 2016 

Ending

Balance

Budget-toReport

Fund Balance with 

Treasury (FBWT) 1 3 3

Financial Reporting 

Compilation 1 6 6

Hire-to-Retire

Health Care

Liabilities

1 2 2

Civilian Pay 1 3 (1) 2

Military Pay 1 4 4

Order-to-Cash Accounts Receivable -

Public 1 2 (1) 1

Procure-to-Pay

Contract/Vendor Pay 1 4 3 7

Reimbursable Work 

Orders (Budgetary) 1 3 3

Transportation of 

Things 1 2 2

Transportation of 

People2 1 2 (2) 0

Acquire-toRetire

Equipment Assets 1 1 1 2

Real Property Assets 1 2 2

Environmental 

Liabilities 1 2 2

Government Furnished 

Property (GFP)3

- 0 1 1

Internal Use Software 

(IUS)4

- 0 1 1

Plan-to-Stock

Inventory 1 4 4

Operating Materials & 

Supplies (OM&S) 1 3 3

Military Standard 

Requisitioning and 

Issue Procedures 

(Requisitioning 

Procedures)

1 1 1

Total Financial Reporting Material 

Weaknesses 16 44 1 (2)5 3 46

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U.S. Department of Defense Agency Financial Report for FY 2016 

Other Information 

Table 2a provides a brief description of each of the material weaknesses in financial reporting, 

with corrective actions and the target correction year. 

Table 2a. FY 2016 Material Weaknesses in Internal Controls over Financial Reporting 

Areas of Material 

Weakness

Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

1 Fund Balance with 

Treasury 

 Ineffective processes and 

controls to reconcile 

transactions posted to the 

Department’s FBWT 

accounts with the 

Department of 

Treasury’s records. 

 Collections and 

Disbursements are 

reported to Treasury but 

are not recorded in the 

Department’s general 

ledger. 

 Ineffective processes to 

provide sufficient and 

accurate documentation 

to support FBWT 

transactions and 

reconciling items. 

FY 2005 Departmentwide

 Track and reconcile 

collection/disbursement 

activity from the core financial 

systems and associated feeder 

systems to the Department’s 

general ledgers and to 

Treasury accounts.

 Develop an auditable FBWT 

reconciliation process, to 

include implementation of 

internal controls that ensure 

reconciling differences are 

resolved in a timely and 

accurate manner.

 Analyze and resolve 

transactions posted to budget 

clearing accounts (“suspense” 

accounts).

 Analyze and resolve 

transactions reported on 

Treasury’s Statement of 

Differences (e.g., deposit intransit, Intra-Governmental 

Payment and Collection, and 

check issue differences).

 Perform aging analysis and 

apply reconciliations 

backwards to any years 

possible.

 Perform Statement on 

Standards for Attestation 

Engagements (SSAE) 16/ 

(SSAE) 18, Reporting on 

Controls on FBWT –

Transaction Distribution 

which includes Defense Cash 

Accountability Systems.

FY 2019

2 Financial Reporting 

Compilation

 Ineffective processes and 

controls to prepare 

accurate financial 

statements supported by 

general ledger balances 

FY 2007 Departmentwide

 Implement a Standard 

Financial Information 

Structure (SFIS) to 

standardize financial reporting 

that aligns with the 

Department’s mission. 

FY 2022

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U.S. Department of Defense Agency Financial Report for FY 2016 

Other Information 

Table 2a. FY 2016 Material Weaknesses in Internal Controls over Financial Reporting 

Areas of Material 

Weakness

Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

that align with 

Department strategic and 

performance plans, to 

include incorrect 

crosswalk and mapping 

of transactions to ensure 

completeness and 

accuracy of the financial 

reporting.

 Inability to reconcile 

detail-level transactions 

with the general ledgers 

and to provide adequate 

supporting 

documentation for 

adjustment entries.

 Accounting balances are 

unsupported due to 

inadequate financial 

management systems and 

related processes and 

procedures.

 Inconsistency in 

documented processes 

and procedures for 

performing 

reconciliations and 

resolving differences and 

the actual processes in 

practice.

 Lack of developed 

approach for performing 

reconciliations and 

retaining data for 

sensitive activities.

 Inconsistent procedures 

for recording Journal 

Vouchers and Standard 

Business Transactions 

(SBT) and supporting 

documentation retention 

procedures poses a 

significant risk to 

producing accurate and 

complete financial 

statements and reports.

 Implement controls that 

ensure adequate 

documentation exists to 

validate and support journal 

entries. 

 Obtain population of feeder 

system data transactions and 

perform reconciliations from 

feeder systems to the financial 

statements. 

 Implement strategy for 

obtaining, reconciling and 

securely storing sensitive data.

 Implement G-Invoicing, to 

include system change request 

requirements.

 Implement the SFIS Standard 

Line of Accounting tools to 

validate financial data quality 

and to build and implement 

accounting system interfaces.

159
U.S. Department of Defense Agency Financial Report for FY 2016 

Other Information 

Table 2a. FY 2016 Material Weaknesses in Internal Controls over Financial Reporting 

Areas of Material 

Weakness

Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

3 Health Care Liabilities

 Insufficient financial 

reporting and accounting 

for all health care costs 

and the lack of processes 

to reconcile Medical 

Expense and 

Performance Reporting 

System data.

 Inability to obtain 

sufficient documentation 

from compliant 

transaction-based 

accounting systems to 

support the costs of direct 

care provided by DoDmanaged military 

treatment facilities.

FY 2003 Departmentwide

 Develop and implement 

methodology for patient 

itemized bills to address the 

auditor-identified weakness 

related to direct care. 

Itemized patient bills for all 

patients provided care will be 

attainable with the 

deployment of the new 

Electronic Health Record 

scheduled for full deployment 

across the Military Health 

Services by close of FY 2022. 

FY 2022

4 Civilian Pay

 Ineffective processes and 

controls to record civilian 

pay transactions and 

personnel actions in a 

timely, complete, and 

accurate manner, to 

include unreliable 

supporting 

documentation for 

personnel actions and 

timekeeping, and 

inadequate 

reconciliations between 

Defense Civilian Pay 

System (DCPS) and the 

general ledger.

 No assessment of internal 

controls for time and 

attendance processes. 

FY 2011 Departmentwide

 Develop and implement 

controls to record personnel 

actions and timekeeping 

accurately and implement 

document retention policies 

and procedures to ensure that 

sufficient supporting 

documentation is available. 

 Develop and implement 

Complementary User Entity 

Controls identified in the 

DCPS SSAE16.

 Develop and implement a 

methodology to reconcile 

DCPS to the general ledger. 

 Implement controls for 

general ledger posting 

procedures. 

FY 2017

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U.S. Department of Defense Agency Financial Report for FY 2016 

Other Information 

Table 2a. FY 2016 Material Weaknesses in Internal Controls over Financial Reporting 

Areas of Material 

Weakness

Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

5 Military Pay

 Ineffective processes and 

controls to record 

military pay transactions 

and personnel actions in 

a timely, complete, and 

accurate manner. 

 Lack of reconciliations 

between Defense Joint 

Military Pay System 

(DJMS) and the general 

ledger.

 Unreliable and/or lack of 

supporting 

documentation for 

personnel actions. 

 Outdated military pay 

and financial 

management information 

technology systems lack 

modern capabilities to 

support required 

auditability framework. 

Current deficiencies 

require unsustainable 

manual activities to 

support auditability.

FY 2011 Departmentwide

 Develop and implement a five 

year plan for an integrated pay 

and personnel system (IPPS), 

which will be designed to 

determine pay and 

entitlements, report ad hoc 

financial management data, 

and capture and store key 

supporting documents.

 Implement reconciliations to 

address the completeness of 

data entered into DJMS. 

FY 2021

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Other Information 

Table 2a. FY 2016 Material Weaknesses in Internal Controls over Financial Reporting 

Areas of Material 

Weakness

Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

6 Accounts Receivable -

Public

 Ineffective processes and 

controls to ensure 

complete and accurate 

recording of accounts 

receivable and the 

availability of sufficient 

documentation to support 

accounts receivable 

balances. 

FY 2003 Departmentwide

 Implement ERP systems to 

improve collections of public 

accounts receivables, aging of 

receivables, and minimize 

manual processes. 

 Implement process 

improvements, such as 

training, guidance, and policy 

changes. 

 Develop documentation in 

sufficient detail to address the 

edit checks and validations 

performed. 

 Utilize the Tri-Annual Review 

process to monitor the status 

of dormant reimbursable 

agreement receivables and 

unfilled orders. Reviews will 

evaluate timeliness, accuracy, 

and completeness for closeout 

when applicable.

FY 2017

7 Contract/Vendor Pay

 Lack of standard data 

structure governing 

purchase request format 

prevents traceability and 

use of electronic 

transactions from 

initiation of funding 

through contract 

execution. 

 Need to implement 

standard processes for 

recording contract 

obligations electronically 

in financial systems.

 Current environment 

does not enable match of 

award to accounting data 

for public transparency, 

(e.g., Data Act).

 Lack of timely contract 

closeout and deobligation of funds limits 

Department’s access to 

capital.

FY 2003 Departmentwide

 Publish DoD Instruction 

setting policies, procedures, 

and data standards for 

purchase requests.

 Design and implement 

automated pre-award funds 

validation to ensure 

accounting systems can 

accurately record proposed 

contract award structure.

 Scorecard all accounting and 

entitlement systems to track 

progress toward compliance 

with standard procedures.

 Design and implement 

controls to ensure contract 

data can be accurately 

matched to recorded 

accounting data for public 

posting.

 Develop department-wide 

contract closeout standard 

operating procedures to ensure 

financial systems are in 

balance and deobligation of 

funds occur returning 

FY 2019

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U.S. Department of Defense Agency Financial Report for FY 2016 

Other Information 

Table 2a. FY 2016 Material Weaknesses in Internal Controls over Financial Reporting 

Areas of Material 

Weakness

Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

 Insufficient policies 

governing the recording 

of accruals related to 

contracts.

 Inability to reconcile 

contract data to financial 

data. Unable to reconcile 

buyer and seller 

intragovernmental and 

intergovernmental 

transactions.

available funds back to 

programs in a timely manner.

 Expand use of accrual 

recording based on Wide Area 

WorkFlow acceptance data to 

additional accounting systems.

 Develop policies, procedures, 

and data standards for 

electronic 

intergovernmental/intragovern

mental transactions. Pilot 

capability to obtain contract 

source data and source 

documentation for 

reconciliations to the financial 

records.

8 Reimbursable Work Orders

 Lack of evidence of 

performance, 

acknowledgement of 

receipt of 

intragovernmental 

goods and services, 

and validity of open 

obligations. 

 Inability to verify the 

timely and accurate 

collection of 

disbursements and 

validate recorded 

reimbursable 

agreements meet the 

time, purpose, and 

amount criteria. 

 Components are 

unable to collect, 

exchange, and 

reconcile buyer and 

seller

intragovernmental

transactions, resulting 

in adjustments that 

cannot be verified or 

substantiated. In 

addition, Department 

procedures required 

that buyer-side 

transaction data be 

FY 2011 Departmentwide

 Treasury has identified GInvoicing as a solution to 

intragovernmental 

transaction (IGT) 

differences and will 

develop an online portal for 

conducting Buy/Sell 

transactions, to manage the 

processing and approval of 

general terms and 

conditions (GT&C) 

Agreements, Orders, and 

Invoices. 

 Reporting entities will 

perform gap analysis on key 

processes, build and enter 

GT&C’s agreements in GInvoicing system. 

Participate in G-Invoicing 

training, and build orders in 

accordance with data 

standards.

 Reporting entities will fund, 

design, and build all 

accounting system 

interfaces in alignment with 

Treasury’s G-Invoicing 

release schedule.

 Reporting entities and 

Defense Finance and 

Accounting Service 

(DFAS) will implement 

FY 2019

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Other Information 

Table 2a. FY 2016 Material Weaknesses in Internal Controls over Financial Reporting 

Areas of Material 

Weakness

Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

forced to agree with 

seller-side transaction 

data without 

substantiating 

documentation or 

performing proper 

reconciliations.

training, guidance, and 

management oversight 

related to Tri-Annual 

Reviews and identify and 

implement standard 

enterprise reconciliations 

that provide for validation 

of the seller/buyer-side 

balances and input of 

supported journal vouchers 

for timing differences.

9 Transportation of Things

 Effective controls are 

not in place to prevent 

unauthorized use of 

Transportation Account 

Codes (TAC) or 

unauthorized shipments 

from occurring.

 The Department does 

not have a centralized 

process to capture, 

retain, and retrieve 

transportation 

documentation, which is 

required to support 

Transportation of 

Things (ToT) 

transactions, 

management evaluation, 

and future examination / 

audits.

FY 2014 Departmentwide

 Develop controls, processes, 

and policy and procedures for 

ToT.

 Continue to identify and 

implement standard systems 

and processes across the 

transportation community for 

Third Party Payment System 

Freight, Defense Personal

Property Program, and 

Transportation Working 

Capital Fund.

FY 2018

164
U.S. Department of Defense Agency Financial Report for FY 2016 

Other Information 

Table 2a. FY 2016 Material Weaknesses in Internal Controls over Financial Reporting 

Areas of Material 

Weakness

Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

10 Equipment Assets

 Processes and controls to 

account for the quantity 

and value of military and 

general equipment are 

not effective. 

 DoD has insufficient 

internal controls and 

supporting 

documentation 

requirements to ensure 

timely recording, relief 

and accuracy of

Construction in Progress 

(CIP).

FY 2006 Departmentwide

 Develop implementation 

guidance to determine the 

value of military and general 

equipment in accordance with 

the recently published 

accounting standard for 

reporting entities undergoing 

audit for the first time.

 DoD Components are 

implementing a “go forward” 

approach for valuing military 

and general equipment and 

sustaining these values 

(including CIP) in accordance 

with Generally Accepted 

Accounting Principles

(GAAP); as well as 

modifying the accountable 

systems of record (APSRs) to 

capture required data.

 Update the DoD Financial 

Management Regulation 

(FMR) chapters for 

accounting for military and 

general equipment.

 Validate asset listings and 

document process and control 

environments.

 Apply controls and procedures 

to manage property 

accountability, including 

adequate documentation to 

support acquisition and 

disposal processes throughout 

the year.

 Report quarterly on status of 

establishing accountable 

records for all capitalized 

equipment. 

 Continue to convene the 

General Equipment Working 

Group to highlight policy and 

guidance gaps impacting the 

valuation of General 

Equipment and use the 

working Group as a forum for 

sharing lessons learned.

FY 2022

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U.S. Department of Defense Agency Financial Report for FY 2016 

Other Information 

Table 2a. FY 2016 Material Weaknesses in Internal Controls over Financial Reporting 

Areas of Material 

Weakness

Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

 Revise DoD Instruction 

5000.64 to address internal 

control improvements over 

property accountability such 

as designating a Component 

Property Lead, annually 

assessing Accountable 

Property System of Record 

capabilities, new guidance for 

transfers and new guidance for 

“non fielded” property.

11 Real Property Assets

 Real property processes, 

controls and supporting 

documentation do not 

substantiate that (1) all 

existing assets are 

recorded in an APSR 

(2) all assets recorded in 

the APSR properly 

reflect DoD’s legal 

interest in the asset, (3) 

all assets are properly 

valued and (4) all assets 

are appropriately 

presented and 

consistently reported in 

the financial statements.

 DoD has insufficient 

internal controls and 

supporting 

documentation 

requirements to ensure 

timely recording, relief 

and accuracy of CIP 

and real property. 

FY 2003 Departmentwide

 Complete floor-to-book and 

book-to-floor baseline 

reconciliation of real 

property assets with 

adequate documentation to 

support existence and 

completeness and rights and 

obligations assertions. 

Document go-forward 

processes and control 

environment for all 

lifecycle processes to 

include, acquisition (and 

CIP), inventory, 

reconciliation with financial 

statements, and disposal. 

 Establish systems to 

properly account for and 

value real property assets, 

including CIP.

 Implement periodic 

evaluations over the quality 

of real property data by 

making comparisons with 

physical assets and annual 

reconciliations.

FY 2017

12 Environmental Liabilities

 Inability to provide 

assurance that clean-up 

costs for all of its 

ongoing, closed, and 

disposal operations are 

identified, consistently 

estimated, and 

appropriately reported.

 Unable to consistently 

report environmental 

liability disclosures and 

FY 2001 Departmentwide

 Continue to implement new 

DoD strategy for achieving 

Environmental and 

Disposal Liabilities Audit 

Readiness, providing 

guidance on capturing the 

environmental liability 

universe, estimation and 

modeling practices for 

developing the cost 

estimates, documenting and 

supporting those estimates, 

FY 2017

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Other Information 

Table 2a. FY 2016 Material Weaknesses in Internal Controls over Financial Reporting 

Areas of Material 

Weakness

Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

supporting 

documentation is not 

properly maintained and 

readily available for all 

environmental sites.

and roll-forward procedures 

for ensuring that estimates 

are up to date.

 Implement business 

processes and controls to 

ensure transactions are 

recorded timely and 

accurately, and supporting 

documentation is retained 

and available.

 Identify common practices 

associated with assetrelated environmental 

liabilities (e.g., general 

equipment, real property), 

to fully identify the asset 

universe and consistently 

value the associated 

environmental disposal 

liabilities.

 Develop documentation for 

EL cost estimating models 

(e.g., RACER) to validate 

cost estimating model 

inputs and algorithms, 

centralize common 

documentation where 

feasible, and provide 

guidance on how to assess 

reasonableness of estimates 

produced as compared to 

actual expenditures.

13 Government Furnished 

Property Lack of guidance 

and training on required 

policies and procedures for 

appropriately managing 

property provided to 

contractors (this includes 

contractor acquired 

property (CAP) and GFP). 

As a result, DoD’s 

accountability records are 

incomplete. Audit reports 

have consistently identified 

a lack of accountability for 

GFP and CAP.

FY 2011 Departmentwide

 Components to continue to 

report quarterly on progress in 

establishing accountable 

records for all GFP assets, 

correcting policy deficiencies, 

and ensuring controls are in 

place when property is 

furnished on contracts. In 

addition, implement 

Contractor Acquired Property 

guidance for establishing 

accountability and valuation.

 Continue to report quarterly 

on progress in establishing 

accountable records for all 

capitalized equipment, 

FY 2017

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Other Information 

Table 2a. FY 2016 Material Weaknesses in Internal Controls over Financial Reporting 

Areas of Material 

Weakness

Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

correcting policy deficiencies, 

and ensuring controls are in 

place when property is 

furnished or purchased 

through contracts.

 Develop measures for 

components to follow in 

implementing property 

management policies, 

including the proper 

accountability for property 

provided to contractors.

 Improve policy and guidance 

for GFP management and 

CAP delivery to ensure 

accurate accountability and 

financial reporting.

 Analyze existing end to 

end business processes 

identifying opportunities to 

improve capture and 

sharing of electronic data.

 Validate accountable 

property records and 

supporting documentation 

through existence and 

completeness testing.

14 Internal Use Software 

 The Department has 

not properly addressed 

the management and 

financial reporting of 

IUS which is required 

by the Financial 

Management 

Regulation. DoD will 

not be able to pass 

audit without 

developing and 

implementing IUS 

guidance.

FY 2015 Departmentwide

 Components to begin 

managing and reporting 

IUS as required in the draft 

DoD Instruction for IUS 

accountability. This 

includes the identification 

of accountable officers, the 

universe of IUS, and annual 

IUS inventory 

requirements.

 Publish a new DoD 

Instruction addressing IUS 

accountability and 

accountability and 

management of IUS assets. 

 Continue to convene the 

IUS Working Group 

established to address 

prospective IUS accounting 

and accountability policy 

and implementation.

FY 2020

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Other Information 

Table 2a. FY 2016 Material Weaknesses in Internal Controls over Financial Reporting 

Areas of Material 

Weakness

Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

15 Inventory 

 DoD does not have 

sufficient policies and 

procedures in place to 

support inventory 

transactions and related 

journal vouchers (JV).

 There is a lack of 

controls to provide 

assurance that inventory 

recorded in the financial 

statements exist and is 

complete.

 There is a lack of clear 

audit trails to trace 

transactions from 

source documentation 

to the reported total 

dollar values on the 

Inventory line item on 

the financial statements.

 Material-in-transit is 

reported at the summary 

level instead of detail 

level and there is a lack 

of adequate processes 

and controls to assure 

the amount reported is 

correct.

FY 2005 Departmentwide

 Develop methodology and 

inventory condition code 

reports to support monthly 

JV related to inventory, 

including retention of 

supporting documentation 

for all inventory 

transactions and related JVs.

 Ensure periodic inventories 

and reconciliation of 

inventory accounts to the 

systems of record is 

performed. 

 Implement methodology to 

value inventory in the 

absence of historical costs 

(for baseline of asset 

inventory). 

 Develop and implement 

processes and controls to 

support the valuation of 

inventory on a “go-forward” 

basis. 

 Modify systems to account 

for Material-in-transit at the 

detailed level.

FY 2017

16 Operating Materials & 

Supplies (OM&S)

 Historical cost data is not 

maintained and therefore 

inventory values cannot 

be reported as required 

by GAAP.

 Inability to perform and 

document annual 

physical inventories of 

OM&S and maintain 

clear audit trails to 

permit the tracing of 

transactions from source 

documentation.

 Government-owned / 

Contractor managed and 

Government Furnished 

FY 2005 Departmentwide

 Develop and document 

adequate business and 

financial processes and 

controls to include 

establishing a baseline and 

“go forward” approach to 

track inventory values for 

newly acquired OM&S.

 Develop interim and go 

forward auditable solutions 

for Government 

owned/Contractor managed 

and GFM inventories.

 Identify and document the 

current inventory 

reconciliation processes, 

FY 2019

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Other Information 

Table 2a. FY 2016 Material Weaknesses in Internal Controls over Financial Reporting 

Areas of Material 

Weakness

Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

Material (GFM) 

inventories are not 

accounted for in DoD 

accountable property 

systems.

including key controls and 

financial transactions.

17 Military Standard 

Requisitioning and Issue 

Procedures (Requisitioning 

Procedures) 

 Bulk obligations are 

not reconciled to 

transaction level 

detail.

FY 2013 Navy  Develop and implement 

process to reconcile bulk 

obligation data to detail 

execution level. 

 Ensure compliance with 

existing policy to integrate 

obligation requirements with 

the MILSTRIP Tri-Annual 

Review.

FY 2017

Gunner’s Mate 2nd Class James Callison coils line aboard the guided-missile destroyer USS Momsen (DDG 

92) during a replenishment-at-sea with the fleet replenishment oiler USNS Joshua Humphreys (T-AO 188). The 

guided-missile destroyers USS Spruance (DDG 111), USS Decatur (DDG 73- and Momsen are deployed in 

support of maritime security and stability in the Indo-Asia Pacific as part of a U.S. 3rd Fleet Pacific Surface 

Action Group (PAC SAG) under Commander, Destroyer Squadron (CDS) 31.

U.S. Navy photo by Mass Communication Specialist 1st Class Jay Pugh/Released

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Other Information 

2. FMFIA SECTION 2, NON-FINANCIAL OPERATIONS MATERIAL WEAKNESSES. The DoD 

Components use an entity-wide, risk-based, self-assessment approach to establish and assess 

internal controls for mission-essential operations. The material weaknesses in operational areas 

are categorized in separate reporting categories. 

Table 2b lists the FY 2016 material weaknesses in the internal controls over operations. 

Table 2b. Effectiveness of Internal Controls over Non-Financial Operations (FMFIA Section 2)

Statement of Assurance: Qualified

Area of Material 

Weakness

FY 2015 

Ending

Balance

Revised 

FY 2016 

Beginning 

Balance6

New Resolved Reassessed

FY 2016 Ending 

Balance

Acquisition 1 2 (2) 0

Security 1 1 (1) 0

Information Technology 1 4 (4) 0

Comptroller and/or 

Resource Management 1 3 (2) 1

Contract Administration 1 3 3

Force Readiness 1 1 1 2

Personnel and/or 

Organizational 

Management

1 1 1

Government Furnished 

Property7(GFP)

1

1 (1) 0

Internal Use Software8

(IUS)

1 (1) 0

Supply Operations 1 1 1

Total Operations Material 

Weaknesses 9 18 1 (8) (3) 8

Table 2b-1 provides a brief description of each of the area of material weaknesses in internal 

controls over operations, the associated corrective action, and the target correction year. 

Table 2b-1. FY 2016 Material Weaknesses in Internal Controls over Non-Financial Operations

Areas of Material Weakness

Year 

Identified

DoD 

Components Corrective Actions

Target

Correction 

Year

1 Comptroller and Resource 

Management

 Ineffective internal controls 

and management oversight for 

FY2013 Departmentwide

 Brief leadership, appoint and 

train staff, develop risk 

profiles, conduct initial, 

quarterly and annual 

FY2018

 

6

 The FY2016 beginning balance was updated to reflect the individual count of material weakness for each area of material weakness from the prior 

year. 

7

 GFP was previously reported as an ICONO material weakness, but was re-assessed in FY2016 as an ICOFR material weakness. 

8

 IUS was previously reported as an ICONO material weakness, but was re-assessed in FY2016 as an ICOFR material weakness

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Other Information 

Table 2b-1. FY 2016 Material Weaknesses in Internal Controls over Non-Financial Operations

Areas of Material Weakness

Year 

Identified

DoD 

Components Corrective Actions

Target

Correction 

Year

processes such as management 

of improper payments and use 

of government travel charge 

cards, IUS, and property 

furnished to contractors

validation and assessment, and 

automate as appropriate.

 Implement instructions from 

the October 2016 DoD 

memorandum “Preventing 

Travel Pay Improper 

Payments and Enforcing 

Recovery” including: (1) 

Implement sufficient controls 

to verify that all required 

receipts and substantiating 

documents are provided and 

uploaded into travel systems, 

(2) Verify that claimed 

amounts match documents 

and receipts, (3) Implement 

adequate segregation of duties 

in payment approvals, and (4) 

Maintain continuous 

monitoring over improper 

payments and take appropriate 

action to mitigate instances of 

improper payments.

2 Contract Administration

 The Department must 

strategically manage Services 

Acquisition (SA), define 

outcomes, and capture data to 

do so.

 The Department continues to 

face challenges meeting fiscal 

year competition goals and 

needs to address ill-suited 

contract arrangements and 

utilize incentives.

 The Acquisition workforce is 

not appropriately sized, 

trained, and equipped to meet 

the Department’s needs.

FY 2009 Departmentwide

 Continue to track and monitor 

training requirements for 

Acquisition workforce 

including new training for 

Mid/High Level Requirements 

and Contracting Professionals. 

 Continue to implement the 

April 2016 DoD publication, 

“Guidance on Using Incentive 

and Other Contract Types” 

when selecting and 

negotiating a contract type.

Reassessed 

annually 

based on 

incremental 

improvements

3 Force Readiness

 There is a lack of diversity 

within the Sea, Air, and Land 

(SEAL) Special Operations 

Forces which indicates a 

FY 2011 Departmentwide

 Implement diversity outreach 

initiatives that will review 

outreach and awareness 

activities to ensure that the 

Special Operations Forces is 

recruiting candidates with 

FY 2020

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Other Information 

Table 2b-1. FY 2016 Material Weaknesses in Internal Controls over Non-Financial Operations

Areas of Material Weakness

Year 

Identified

DoD 

Components Corrective Actions

Target

Correction 

Year

potential operational 

weakness. The Global War on 

Terrorism identified the need 

for an operational need for 

SEALs with diverse 

backgrounds.

 Independent and internal 

reviews of DOD's nuclear 

enterprise identified problems 

and recommendations needed 

for a safe, reliable, and 

credible nuclear deterrent. 

These included internal 

control related items such as a 

need for increased managerial 

oversight, for an improved 

self-assessment program, for 

increased oversight capability, 

and for useful nuclear 

inspection reports. The 

reviews also made 

recommendations to address 

these problems.

diverse backgrounds and 

skills.

 Develop corrective action 

plans that align with the 

recommendations from the 

independent reviews.

 Track, monitor, and validate 

implementation of corrective 

actions.

4 Personnel and Organizational 

Management

 There are weaknesses in 

standard processes for the 

authorization of personnel 

actions and time and 

attendance controls. 

FY 2009 Departmentwide

 Identify gaps, develop and 

implement a plan to create and 

publish the necessary 

documents to address the 

gaps.

FY 2018

5 Supply Operations

 Government Accountability 

Office (GAO) identified 

several

Department-wide 

weaknesses in the areas of 

asset visibility, inventory 

management, and materiel 

distribution.

FY 2011 Departmentwide

 Improve Supply Chain 

Management operations 

through better demand 

forecasting, asset visibility, 

and distribution processes.

Reassessed 

annually 

based on 

incremental 

improvements

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U.S. Department of Defense Agency Financial Report for FY 2016 

Other Information 

3. FMFIA SECTION 4, FINANCIAL SYSTEM NONCONFORMANCE WEAKNESSES. The Department 

requires financial system conformance with federal requirements and reports. The Department 

reported one weakness that includes a wide range of pervasive problems related to financial 

systems. 

Table 2c. Conformance with Financial Management System Requirements (FMFIA Section 4)

Statement of Assurance: Systems do not conform to financial management system requirements

Non-Conformances

FY 2015 

Ending 

Balance

Revised 

FY 2016 

Beginning 

Balance 9

New Resolved Reassessed Ending

Balance

1. Financial Management 

Systems 1 4 4

Total System Conformance 

Material Weaknesses 1 4 4

 

9

 In FY2015 the Department reported system nonconformance in one assessable unit. The total weaknesses in this area were four. The FY2016 

beginning balance was updated to reflect the individual count of material weaknesses for each area of material weakness. 

Three MV-22B Osprey tiltrotor aircraft with Marine Medium Tiltrotor Squadron 262 (Reinforced), 31st Marine 

Expeditionary Unit, idle atop the flight deck of the USS Bonhomme Richard (LHD 6) during Valiant Shield 16 in the 

Commonwealth of the Northern Mariana Islands. Valiant Shield 16 is a biennial field training exercise designed to 

develop the integration of joint U.S. forces. The training enables real-world proficiency of joint forces to detect, 

locate, track and engage units – at sea, in the air, on land, and in cyberspace – to prepare for a range of possible 

military missions. 

U.S. Marine Corps photo by Cpl. Samantha Villarreal/Released

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Other Information 

Table 2c-1, below, provides the description and corrective action plan for the material 

weakness related to internal control over financial systems. 

Table 2c-1. FY 2016 Internal Control over Financial Systems Material Weakness

Area of Material Weakness Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

1  Financial Management Systems:

The Department’s financial 

systems currently do not provide 

the capability to record financial 

transactions in compliance with 

FFMIA, current federal financial 

management requirements, 

applicable federal accounting 

standards, and the Treasury 

USSGL at the transaction level.

 The Department’s IT systems 

environment includes numerous 

legacy systems, core enterprise 

systems that support the major 

end-to-end processes, and nine 

Enterprise Resource Planning 

(ERP) systems. Most of the 

business legacy systems were

designed to support functional 

purposes, such as human 

resource management, property 

management, and logistics 

management, and not originally 

for auditable financial statement 

reporting. The current systems 

environment is made up of 

many mixed (feeder and general 

ledger) systems that lack 

integration and are not in line 

with the Federal Information 

System Controls Audit Manual 

(FISCAM) requirements with 

regards to entity-level 

technology general controls, 

application-level general 

controls and automated 

application controls.

 Inadequate configuration and 

user management of newly 

implemented systems with lack 

of proper design and 

effectiveness of internal controls 

for access, segregation of duties, 

configuration management, 

system interfaces and audit 

trails.

FY 2001 Departmentwide

 Develop effective financial 

management systems processes 

throughout the Department, 

including ERPs and other core 

financial systems, and prepare a 

plan to correct or replace many 

of the mixed (feeder and general 

ledger) systems.

 Continue pre-deployment 

testing of end-to-end financial 

management systems in order to 

make necessary system 

improvements towards FFMIA 

compliance. 

 Continue to evaluate and track 

CAPs to include completion of 

assessments of legacy financial 

management and critical feeder 

systems and required system 

change requests to 

accommodate related control 

deficiency remediation 

activities.

 Identify systems that affect 

internal controls over financial 

reporting and financial 

statement audit readiness, 

develop systems documentation, 

test controls and supporting 

documentation transactions, and 

remediate deficiencies and 

weaknesses (which may require 

modifications to the systems) in 

preparation for audit or 

SSAE16.

FY 2017

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Other Information 

Table 2c-1. FY 2016 Internal Control over Financial Systems Material Weakness

Area of Material Weakness Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

 The Department has not fully 

defined and consistently 

implemented the full range of 

business systems modernization 

management controls. As a 

result, it may not be able to 

adequately ensure that its 

business system investments are 

the right solutions for addressing 

its business needs, as indicated 

by GAO 2015 High Risk report.

Aviation Boatswain’s Mate (Handling) Airman Nelson Lopez Delgado, from Havana, Cuba, prepares to lower the U.S. 

flag for evening colors on the Navy's only forward-deployed aircraft carrier, USS Ronald Reagan (CVN 76). During 

evening colors the U.S. flag is lowered at sunset each day while Ronald Reagan is in port. Ronald Reagan provides a 

combat-ready force, which protects and defends the collective maritime interests of the U.S. and its allies and partners 

in the Indo-Asia-Pacific region. 

 

U.S. Navy photo by Mass Communication Specialist 2nd Class James Mullen/Released

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Other Information 

FEDERAL FINANCIAL MANAGEMENT IMPROVEMENT ACT 

The DoD IG and the audit agencies within the Military Services have reported on the 

Department’s noncompliance with FFMIA. The Department’s noncompliance is due to its 

reliance upon legacy financial management systems by the various Components. These legacy 

financial systems, for the most part, do not comply with the wide range of requirements for 

systems compliance, in accordance with FFMIA and therefore do not provide the necessary level 

of assurance that the core financial system data or the mixed systems information can be traced 

to source transactional documentation. Table 3 reflects the Department’s compliance with 

FFMIA. 

Table 3. Compliance with Federal Financial Management Improvement Act

Table 3. Compliance with Federal Financial Management Improvement Act

Agency Auditor

1. System Requirements Lack of substantial 

compliance noted

Lack of substantial 

compliance noted

2. Accounting Standards Lack of substantial 

compliance noted

Lack of substantial 

compliance noted

3. U.S. Standard General Ledger at Transaction Level Lack of substantial 

compliance noted

Lack of substantial 

compliance noted

Gas Turbine Systems Technician (Mechanical) 3rd Class Brandon Rasberry, from Humble, Texas, takes a fuel sample 

aboard USS Ross (DDG 71) during a replenishment at sea with the Military Sealift Command fleet replenishment 

oiler USNS Big Horn (T-AO 198) Aug. 1, 2016. Ross, an Arleigh Burke-class guided-missile destroyer, forwarddeployed to Rota, Spain, is conducting naval operations in the U.S. 6th Fleet Area of Operations in support of U.S. 

national security interests in Europe and Africa.

U.S. Navy photo by Mass Communication Specialist 1st Class Theron J. Godbold/Released

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U.S. Department of Defense Agency Financial Report for FY 2016 

Other Information 

IMPROPER PAYMENT AND PAYMENT RECAPTURE PROGRAMS

The Federal Improper Payments Coordination Act of 2015 amended the Improper Payments 

Elimination and Recovery Improvement Act (IPERIA) of 2012 and earlier legislation affecting 

improper payments10 and requires extension of the Do Not Pay Initiative and Departmental 

reporting of its data analytics performance. The intent is to ensure Federal and State Entities 

maintain strong financial management controls to better detect and prevent improper payments, 

and to report on these programs to the President and Congress in the annual Agency Financial 

Report. Amending legislation changed how the Department’s improper payments and payment 

recapture programs are reported. The following subcategories are included in this section: 

I. Risk Assessment 

II. Statistical Sampling Process 

III. Program Improper Payment Reporting 

IV. Root Causes of Errors 

V. Corrective Actions 

VI. Internal Controls over Payments 

VII. Accountability 

VIII. Agency Information Systems and Other Infrastructure 

IX. Statutory and Regulatory Barriers 

X. Payment Recapture Audit Reporting

XI. Disposition of Funds Recaptured Reporting

XII. Aging of Outstanding Overpayments Reporting

XIII. Additional Information 

XIV. Agency Reduction of Improper Payments with the Do Not Pay Initiative 

The Department reports improper payments for the following six programs: 

1. Military Health Benefits – Disbursed by Treasury for the Defense Health 

Agency (DHA) 

2. Military Pay – Disbursed by DFAS 

3. Civilian Pay – Disbursed by DFAS 

4. Commercial Pay (vendor and contract payments) – Disbursed by DFAS, Navy, and 

U.S. Army Corps of Engineers (USACE) 

5. Military Retiree and Annuitant Benefit Payments – Disbursed by DFAS 

6. Travel Pay – Disbursed by DFAS, Navy, and USACE 

The DFAS, USACE, and DHA are the primary disbursing Components within the Department. 

 

10 Improper Payments Information Act of 2002 (IPIA), as amended by The Improper Payments Elimination and Recovery Act of 2010 (IPERA) and 

The Improper Payments Elimination and Recovery Improvement Act of 2012 (IPERIA)

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U.S. Department of Defense Agency Financial Report for FY 2016 

Other Information 

I. Risk Assessment

DFAS. The DFAS risk assessment for disbursements uses established criteria contained in the 

OMB Circular No. A-123, Appendix C. DFAS monitors changes in programs associated with 

OMB-mandated criteria (for example, a large increase in annual outlays, regulatory changes, or 

newly-established programs) to identify unfavorable trends and allow for early implementation of 

corrective actions. 

USACE. The USACE risk assessments for travel and commercial payments address the 

effectiveness of internal controls, such as prepayment reviews, to prevent improper payments as 

well as system weaknesses identified internally or externally by external audit activities. The U.S. 

Corps of Engineers Financial Management System (CEFMS) provides internal system standards 

that adhere to U.S. GAAP, as well as process controls that provide the safeguards to monitor and 

ensure that prepayment examination requirements are met. The USACE also monitors changes in 

programs to track trends and implement corrective actions, as necessary. 

DHA. The DHA risk assessment process is managed through an external independent 

contractor (EIC) to provide independent, impartial review of reimbursements and claims 

processing procedures used by DHA’s purchased-care contractors. The EIC identifies improper 

payments resulting from the contractors’ noncompliance with The Military Health Care System 

(collectively referred to as TRICARE in this report) benefit and/or reimbursement policies, 

regulations, and contract requirements. The risk level of programs is evaluated based on results 

of these compliance reviews. 

Navy. The Department of the Navy’s Office of Financial Operations is updating guidance to 

reflect recent changes resulting from IPIA amendments (IPERA and IPERIA) and updates to 

OMB’s Circular A-123, Appendix C. Communicating updated guidance to stakeholders will be 

accompanied with a more formal program governance structure, including the establishment of a 

program office and formal appointment of a Component Senior Accountable Official. A “Tone at 

the Top” memorandum for distribution is also being prepared for communication to all 

commanders and accountable officials, reflecting the Department of the Navy’s commitment to 

good stewardship of taxpayer dollars and reminding appointing officials of their duty to hold 

accountable those responsible for certifying payments, as well as those which certifiers rely upon 

to make payments (e.g., Departmental Accountable Officials). 

II. Statistical Sampling Process11

The primary disbursing Components use statistically valid sampling methods designed to meet 

or exceed OMB’s requirements of a 90 percent confidence level and a margin of error of 

±2.5 percent. By using these methods, disbursing Components are able to identify valid sample 

sizes and project improper payment percentages for the Department’s improper payment 

programs. The smaller disbursing Components normally perform 100 percent post payment 

 

11 Refer to detail at Under Secretary of Defense (Comptroller) > Financial Management > Reports for Reporting Components Statistical Sampling 

Plans. 

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U.S. Department of Defense Agency Financial Report for FY 2016 

Other Information 

reviews or a full review of payments above a specific dollar threshold, with random sampling for 

lower-dollar payments. Updated sampling plans for DFAS Commercial Pay and DFAS Travel 

Pay were submitted to OMB for Fiscal Year (FY) 2016. In FY 2017 DFAS will address previous 

GAO recommendations by further updating its sampling plans for Travel Pay, Military Pay, and 

Civilian pay, changing each to a methodology that stratifies the populations by the dollar amount 

of the payment. 

Military Health Benefits. The EIC compliance reviews include two sample types to measure 

improper payments: a payment sample (to ensure payment accuracy by identifying underpayment 

and overpayments) and a denied payment sample (to ensure proper claim denial). Payment 

samples are conducted as a stratified random sample based on paid amounts, while denied samples 

are conducted as a stratified random sample based on billed amounts. 

 Payment Samples: Payment Samples for paid claims include between 4 and 12 strata, 

depending on the composition of the claims in the universe. Mathematical formulas are 

used to identify optimal strata boundary points, and sample sizes are calculated to yield an 

estimate with a minimum of 90 percent confidence and a margin of error of ±2.5 percent. 

All claims with a paid amount above a high-dollar threshold (i.e., $200,000) are reviewed, 

and claims with a paid amount below a $100 low-dollar threshold are excluded. The 

high-dollar thresholds may vary from contract to contract. 

 Denied Payment Sample: Denied payment samples are limited to claims with 

$0 government payment. The denied payment sample is similar in design to the payment 

sample, but the denied sample is stratified based on billed amount because the paid amount 

for a denied claim is equal to $0. All claims with a billed amount above a high-dollar 

threshold (i.e., $200,000) are reviewed, and claims with a billed amount below a 

$100 low-dollar threshold are excluded. These thresholds may vary from contract to 

contract. 

In addition, DHA conducts an internal statistically valid review of low-dollar claims excluded 

from the payment samples. Results from this internal review are combined with results from the 

EIC compliance reviews to arrive at an overall payment accuracy measurement for all DHA 

claims. 

The DHA continually evaluates the accuracy and design of its sampling methodologies for all 

contracts and implements revisions, if warranted by the distribution of data within audit universes 

or the outcome of compliance reviews. 

Military Pay. On a monthly basis, the Department statistically samples Military Pay accounts 

stratified by Active Duty (Army, Navy, Air Force, and Marine Corps) and Reserve Components 

(Army Reserve, Army National Guard, Navy Reserve, Air Force Reserve, Air National Guard, 

and Marine Corps Reserve). The Defense Management Data Center (DMDC) provides a sample 

of the total universe of military pay accounts for each branch and Component. DFAS reviews the 

pay accounts and provides annual estimates of improper payments. 

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U.S. Department of Defense Agency Financial Report for FY 2016 

Other Information 

Civilian Pay. On a monthly basis, DFAS statistically samples Civilian Pay accounts stratified 

by Army, Air Force, Navy/Marine Corps, and Defense Agencies. DMDC provides a sample of 

the total universe of civilian pay accounts, by payroll ID, for review. DFAS reviews the pay 

accounts and provides annual estimates of improper payments. 

Commercial Pay. For FY 2016 nine contract and vendor pay systems12 were identified as “at 

risk” of making improper payments based on historical post payment, self-identified reviews and 

the volume of outlays. These nine systems cover over 90 percent of the Commercial Pay program 

outlays. 

DFAS designed its samples using a dollar-stratified sampling plan and the Neyman Allocation 

method. The Neyman Allocation method stratifies by dollar amount using financial data within 

each system and allocates to those strata. The overall variable sample size was calculated for the 

combined systems to produce a point estimate with a 95 percent confidence interval and a margin 

of error of ±2.5 percent. Samples were then randomly selected using the Statistical Package for 

the Social Sciences (SPSS) statistical software from the nine systems as a whole. Each invoice 

within each stratum had an equal probability of selection. 

The sampling framework, designed by DFAS statisticians and reviewed by its Internal Review 

office, addressed GAO and DoD OIG audit recommendations. The sampling framework also was 

submitted to OMB, and no issues were noted. 

Navy. The Navy compliance review includes contract and vendor payments computed in the 

Navy ERP, as well as two Commercial Bill Paying Offices overseas (Naples and Singapore). In 

FY 2017, Navy ERP will transition to DFAS for reporting. 

USACE. The USACE post payment compliance reviews were conducted using a statistically 

valid, 95 percent confidence level and a margin of error of ±2.5 percent, sample taken from the 

entire USACE Commercial Pay universe. In addition, the USACE Finance Center (UFC) used 

prepayment controls, post payment contract audits, and data mining to prevent and identify 

improper payments in Commercial Pay. 

Military Retiree and Annuitant Benefit Payments. On a monthly basis, DFAS statistically 

samples military retirement payments stratified by the retired and annuitant pay accounts. The 

review contains samples of: drilling reserve units, retiree offsets, survivor benefit plans, transfers 

to/from the Temporary Disability Retired List to the Permanent List, and Veterans Affairs offsets. 

Continuous random reviews are done for: Combat Related Special Compensation, Concurrent 

Receipt of Disability Payment, daily payroll accounts, newly established accounts, and other 

targeted areas. 

 

12 Computerized Accounts Payable System for Windows (CAPS-W), Defense Agencies Initiative (DAI), Enterprise Business System (EBS), 

General Funds Enterprise Business System (GFEBS), Integrated Accounts Payable System (IAPS), Mechanization of Contract Administrative 

Services (MOCAS), and One Pay (ONEPAY). In FY 2016, DFAS began reviewing the Defense Agency Accounting and Management System 

(DEAMS) and Navy Enterprise Resource Planning (NERP) (paid by DFAS). 

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U.S. Department of Defense Agency Financial Report for FY 2016 

Other Information 

Travel Pay 

DFAS. DFAS uses an annual sampling plan stratified by Component for its Travel Pay 

reviews. Data is obtained through the Defense Technology Security Administration/Management 

Information System (DTSA/MIS) website, COGNOS, and the Rome Temporary Duty (TDY) 

database and used to produce monthly sample sets for review based on the annual plan. The annual 

sample size for each Component (Army, Navy, USMC, Air Force, and DoD Agencies for Defense 

Travel System (DTS); Active, Reserve, Casualty, Contingency, Civilian PCS, DoD Agencies, 

IMET, Military PCS, and Navy Reserve for Windows Integrated Automated Travel System 

(WinIATS)) is divided by 12 to obtain a monthly sample size. The Postpay Review & Analysis 

(PR&A) team statisticians select a random sample from each Component. The PR&A Travel Pay 

team reviews the samples to provide annual estimates of overpayments, provide error trends to the 

Services and Agencies, and recommend changes to regulations and travel pay systems. At the end 

of the fiscal year, PR&A statisticians use the monthly results to produce improper payment 

estimates, in accordance with OMB Circulars A-136 and A-123, IPIA, IPERA, and IPERIA, for 

each Component, DTS overall, WinIATS overall, and Travel Pay overall. 

USACE. The UFC processes USACE travel payments using the CEFMS and WinIATS. The 

payment population includes both TDY and PCS travel voucher reimbursements. All PCS and 

TDY vouchers over $2,500 are 100 percent reviewed for accuracy. The remaining vouchers are 

statistically sampled at 95 percent confidence level and a margin of error of ±2.5 percent. 

An F-22 Raptor, from Langley Air Force Base, Va., banks off after receiving fuel from a KC-135 Stratotanker 

over the Nevada Test and Training Range in a training sortie during Red Flag 16-3, July 21, 2016. During Red 

Flag 16-3, units from the U.S. Air Force, Marine Corps and Navy will work together to succeed in air, space 

and cyberspace. 

U.S. Air Force photo by Senior Airman Jake Carter/Released

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U.S. Department of Defense Agency Financial Report for FY 2016 

Other Information 

III. Program Improper Payment Reporting 

Table 4 summarizes the Department’s improper payment reduction outlook and total program outlays (prospective payments) from 

FY 2015 through FY 2019. 

Table 4. Improper Payment Reduction Outlook ($ in millions) 

Program or Activity

FY 2015 

Outlays 

FY 2015 IP 

%

FY 2015 IP 

FY 2016 

Outlays 

FY 2016 IP 

%

FY 2016 IP 

FY 2016 

Overpayment

FY 2016 

Underpayment 

FY 2017 Est. 

Outlays 

FY 2017 Est. 

IP %

FY 2017 Est. 

IP 

FY 2018 Est. 

Outlays 

FY 2018 Est. 

IP %

FY 2018 Est. 

IP 

FY 2019 Est. 

Outlays 

FY 2019 Est. 

IP %

FY 2019 Est. 

IP 

Military Health 

Benefits 1, 2 $19,700.00 0.80 $157.67 $20,461.50 3 0.74 4 $146.10 5 $121.60 $24.50 $20,870.70 1.75 $365.20 $21,663.80 1.75 $379.10 $22,465.30 1.75 $393.10

Military Pay 6 $107,400.00 0.23 $242.90 $114,902.75 0.17 $196.23 $183.66 $12.57 $93,500.00 0.29 $271.20 $93,500.00 0.29 $271.20 $122,930.00 0.29 $356.50

Civilian Pay 6 $56,600.00 0.10 $57.20 $58,088.10 0.10 $58.73 $58.73 $0.00 $56,500.00 0.17 $96.10 $56,500.00 0.17 $96.10 $59,600.00 0.17 $101.31

Military Retirement 6 $59,300.00 0.04 $20.80 $59,931.73 0.02 $9.46 $8.92 $0.54 $44,100.00 0.04 $17.60 $44,100.00 0.04 $17.60 $60,930.00 0.04 $24.37

DoD Travel Pay 7 $6,600.00 7.90 $521.47 $6,254.67 7.23 $451.99 $442.05 $9.94 $9,104.71 4.46 $406.07 $9,104.71 4.46 $406.07 $8,501.05 4.75 $403.80

DFAS Commercial 

Pay 6,8 $287,800.00 0.09 $256.00 $248,536.45 0.04 $110.82 $110.82 $0.00 $384,700.00 0.03 $115.40 $384,700.00 0.03 $115.40 $287,800.00 0.03 $86.34

USACE Travel Pay $170.00 0.02 $0.04 $188.00 0.20 $0.38 $0.38 $0.00 $180.00 0.17 $0.30 $180.00 0.17 $0.30 $180.00 0.17 $0.30

USACE Commercial $18,200.00 0.00 $0.00 $18,158.00 0.00 $0.00 $0.00 $0.00 $18,200.00 0.00 $0.00 $18,200.00 0.00 $0.00 $18,200.00 0.00 $0.00

Navy ERP 

Commercial Pay 9 $5,000.00 0.00 $0.00 $6,901.27 0.00 $0.00 $0.00 $0.00 $0.00 0.00 $0.00 $0.00 0.00 $0.00 $0.00 0.00 $0.00

Navy Commercial Bill 

Pay Office – Naples 10 $0.00 0.00 $0.00 $472.03 0.01 $0.06 $0.00 $0.06 $472.00 0.01 $0.05 $472.00 0.01 $0.05 $472.00 0.01 $0.04

Note 1: DHA reports 12 months in arrears; therefore its FY 2016 reporting represents FY 2015 data.

Note 2: DHA uses 1.75% as its out-year target because that is the contractual performance standard. The FY 2017-2019 outlays estimates were calculated using the OMB CPI-U Annual Averages and Percent Change Table. As DHA 

reports 12 months in arrears, the FY 2016 CPI-U medical percent change was used to calculate the FY 2017 outlay estimates, while the FY 2017 and 2018 medical percent changes were used to calculate the FY 2018 and 2019 outlay 

estimates, respectively.

Note 3: Total outlays for DHA totaled $20,461,486,927. However, the IP % is based on $19,681,648,723. The difference in totals is the result of: 1) the TPharm quarterly 2015’05-2015’07 audit was not conducted due to system 

constraints (that have since been resolved); 2) the TPharm 2014'10-2015'09 low dollar audit was not conducted due to contractor’s opposition to participate (which the agency is working to rectify); and 3) the ADDP semi-annual 

2014’08-2015’01 audit was not conducted due to system constraints (that have since been resolved).

Note 4: The improper payment rate total of 0.74% does not represent a true statistical overall estimate for DHA due to three samples that were not conducted (specified in Note 3 above).

Note 5: The "FY2016 IP" total for DHA represents improper payment dollars extrapolated from actual audits. This number will not equal "FY2016 IP %" of "FY2016 Outlays" because the IP % was not applied to claims in samples that 

were not conducted (see Note 3 above). Also, the sum of paid dollars for individual audit universes will not equal the total FY outlays (see Appendix A for additional explanation).

Note 6: Out-year reduction targets for Mil Pay, Civ Pay, Mil Retirement, and DFAS Commercial Pay represent a continuation of the very low IP rates experienced in FY 2016.

Note 7: DFAS Travel Pay includes travel data for WinIATS processed and paid through DFAS and DTS for all services and Agencies. The review covered disbursed payments from July 2015 through June 2016.

Note 8: DFAS Commercial Pay review covered disbursed payments from July 2015 through June 2016 for the nine systems outlined in the risk assessment.

Note 9: Effective FY 2017, Navy ERP Commercial Pay will be transferred to DFAS.

Note 10: Navy Commercial Bill Pay Office – Naples began reviews and reporting in FY 2016. Navy Commercial Bill Pay Office – Singapore begins reviews and reporting in FY 2017.

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U.S. Department of Defense Agency Financial Report for FY 2016 

Other Information 

IV. Root Causes of Errors 

Table 5 summarizes the Department’s improper payment root causes.

Table 5. Improper Payment Root Cause Category Matrix ($ in millions)

Reason for Improper 

Payment

Military Pay Civilian Pay Retired Pay Commercial Pay Travel Pay USACE Travel Pay DHA (Military Health 

Benefits) 

OverpaymentUnderpaymentOverpaymentUnderpaymentOverpaymentUnderpaymentOverpaymentUnderpaymentOverpaymentUnderpaymentOverpaymentUnderpaymentOverpaymentUnderpayment

Program Design or 

Structural Issue $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Inability to 

Authenticate Eligibility $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.12 $0.08

Failure to 

Verify:

Death 

Data $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Financial 

Data $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Excluded 

Party Data $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Prisoner 

Data $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Other 

Eligibility 

Data 

$0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Administr

ative or 

Process 

Errors 

Made by:

Federal 

Agency $183.66 1 $12.57 1 $58.73 1 $0.00 $0.64 $0.54 $110.82 $0.06 $252.18 $9.89 $0.00 $0.00 $0.00 $0.00

State or 

Local 

Agency 

$0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Other 

Party $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Medical Necessity $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $3.13 $0.00

Insufficient 

Documentation to 

Determine

$0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $189.74 $0.00 $0.00 $0.00 $0.03 $0.00

Other Reason (a) $0.00 $0.00 $0.00 $0.00 $8.28 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Other Reason (b) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.13 $0.00 $0.00 $0.00 $0.00 $0.00

Other Reason (c) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.05 $0.00 $0.00 $0.00 $0.00

Other Reason (d) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.38 $0.00 $0.00 $0.00

Other Reason (e) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $118.32 $24.42

TOTAL $183.66 $12.57 $58.73 $0.00 $8.92 $0.54 $110.82 $0.06 $442.05 $9.94 $0.38 $0.00 $121.60 $24.50

(a) Notification of death after monthly payments disbursed for Military Retirees and Annuitants.

(b) Department of the Navy overpayments were primarily due to missing receipts.

(c) Department of Navy underpayments were due to miscalculation of travel entitlements.

(d) USACE overpayments result from erroneous TAO/CO Approval. USACE underpayments result from employee failures to claim authorized expenses.

(e) DHA reasons for overpayments and underpayments include: incorrect pricing, government pay miscalculation, cost/share deductible, procedure code errors, and payment omissions.

Note 1: The amounts reported have been recovered or a debt has been established for recovery.

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U.S. Department of Defense Agency Financial Report for FY 2016 

Other Information 

Military Health Benefits 

The projected FY 2016 error rate for 

military health benefits (MHB) improper 

payment is 0.74 percent. 

The DHA’s purchased-care contracts are 

designed to include payment accuracy 

performance standards for processing MHB 

claims. Specifically, if improper payments 

exceed the payment accuracy performance 

standard, as stipulated in Military Health 

Care System policy manuals, or exceed more 

stringent purchased-care performance 

standards, the contractors are subject to 

financial penalties. Conversely, if the 

purchased-care contractor’s improper 

payments fall below the DHA TRICARE 

policy requirement or unique contract performance standard(s), the purchased-care contractor may 

receive a financial incentive award. 

Purchased-care contractor payment accuracy performance is analyzed during the EIC quarterly 

and semi-annual compliance reviews. In addition to these reviews, annual reviews are conducted 

on claims representing underwritten healthcare costs that are paid by the managed-care support 

contractors (MCSCs). Confirmed overpayments from annual audits are projected to the sample 

universe, and the MCSCs are liable for the total extrapolated error amount. 

For the past several years, purchased-care contractors were held to payment accuracy 

performance standards with either contract financial penalties or incentives, depending on the 

contract type and requirement(s). This contract design encourages contractors to keep payment 

error rates as low as possible to avoid financial penalties, or to obtain increased contract financial 

incentives. Actual error rates have been consistently less than DHA’s policy or contract 

performance standards. This contract design, combined with numerous pre- and post-payment 

controls, effectively curtails improper payments by the DHA’s purchased-care contractors and 

ensures the Government’s risk for improper payments in the MHB program is low.

In FY 2014, the formula used to calculate the DoD improper payment rate for the MHB 

program was changed. Specifically, the error rate was changed to calculate the error as a percent 

of dollars paid versus dollars billed. The errors identified in random samples were extrapolated 

using a weighted formula. Consequently, the FY 2014 error rate cannot be compared with 

previous years due to this change. 

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

1.80%

FY2015

Actual IP %

FY2016

Actual IP %

FY2017

Target %

FY2018

Target IP %

FY2019

Target IP %

0.80% 0.74%

1.75% 1.75% 1.75%

Figure 19: Improper Payment Rate - Military 

Health Benefits

FY 2016 Target 1.75%

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U.S. Department of Defense Agency Financial Report for FY 2016 

Other Information 

Root Causes. The primary reasons for payment errors in the MHB program for this reporting 

cycle are: 

 Incorrect pricing of medical procedures and equipment, 32 percent; 

 Lack of authorization or pre-authorization, required prior to receiving medical care, 

18 percent; 

 Other Health Insurance – Government Pay Miscalculated, 12 percent; and 

 All other causes combined, 50 

percent. 

Military Pay. The Department projects 

a 0.17 percent error rate in FY 2016 Military 

Pay for improper payments based on review 

of trends in data from October 2015 to 

September 2016. Overpayments, which 

comprise 93 percent of the Military Pay 

improper payments, were scarcely found in 

statistical sampling, less than 

0.005% percent, but primarily in debts 

established after a member has left the 

Military Service and through Active Duty 

debt collections reported by the Military 

Services. 

Root Causes. The primary reason for 

recurring Military Pay errors is the units and service members untimely submittal of military pay 

documents for processing. Nearly 100 percent of the improper payments identified during this 

reporting period were recovered, or in the process of being recovered. 

Military Pay improper payments typically result in incorrect entitlement allocation as described 

above. These entitlements are: 

 Basic allowance for housing, 55 percent; 

 Base pay for Active Duty and incorrect Active Duty pay for Reservists, 10.5 percent; 

 Overseas housing allowance, 6 percent; 

 Family separation allowance, Active and Reserve, 5.5 percent; 

 Hostile fire/imminent danger pay, 5 percent; and 

 Miscellaneous categories, including results from underpayments, account for 

18 percent of all improper payments. Miscellaneous categories include over 25 different 

entitlements. 

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

FY2015

Actual IP %

FY2016

Actual IP %

FY2017

Target %

FY2018

Target IP %

FY2019

Target IP %

0.23%

0.17%

0.29% 0.29% 0.29%

FY 2016 Target .29%

Figure 20: Improper Payment Rate - Military Pay

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U.S. Department of Defense Agency Financial Report for FY 2016 

Other Information 

Civilian Pay. The Department projects a 

0.10 percent error rate in FY 2016 for Civilian 

pay payments, primarily overpayments. 

Root Causes. The Civilian Pay improper 

payments primarily were overpayments due to 

administrative errors caused by untimely or 

inaccurate entry of information into the pay 

systems. This is in part due to the high 

turnover rate of civilian payroll clerks. 

Improper payments identified include: 

 Time and attendance, 49 percent; 

 Overseas and other allowances, 

28 percent; and 

 Late personnel actions, 23 percent. 

DCPS, like most government payroll 

systems, require time and attendance 

submissions occur prior to the end of the actual pay period to meet processing deadlines; therefore, 

the Department must correct overpayments and underpayments in a subsequent pay period. 

Errors in overseas Civilian Pay accounts often occur due to payment of an entitlement that 

erroneously continued after the employee has returned to the United States. These improper 

payments often result from inaccurate personnel actions generated by human resources offices. 

Corrections subsequently are generated by human resource offices and transmitted to the civilian 

payroll system. These corrections result in pay and allowance re-computations therefore creating 

a collection action to offset the overpayment. The initial improper payments are discovered 

through agency reviews, bi-weekly exception reports, and employee or supervisor notification. 

Commercial Pay 

DFAS. The FY 2016 estimated improper payment amount is $110.82 million, with a 

95 percent confidence interval, and an estimated 0.04 percent error rate. DFAS continued the 

current sampling methodology, stratified by invoice dollar amount, to conduct statistically valid 

reviews of invoices computed in the MOCAS contract payment system, the DFAS legacy 

commercial pay systems (IAPS, ONEPAY, CAPS), and the Army (GFEBS) and Defense Agency 

Component ERPs (DAI, EBS, DEAMS, and NERP). For NERP, DFAS reviews the invoices paid 

by DFAS. 

0.00%

0.02%

0.04%

0.06%

0.08%

0.10%

0.12%

0.14%

0.16%

0.18%

FY2015

Actual IP %

FY2016

Actual IP %

FY2017

Target %

FY2018

Target IP %

FY2019

Target IP %

0.10% 0.10%

0.17% 0.17% 0.17%

FY 2016 Target .17%

Figure 21: Improper Payment Rate - Civilian Pay

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U.S. Department of Defense Agency Financial Report for FY 2016 

Other Information 

Root Causes. The Commercial Pay improper payments result from administrative and 

documentation errors. Improper payments identified from quarterly random sample reviews 

include administrative errors, 100 percent, resulting from voucher examiner error, erroneous 

interest paid, and failure to provide special pay instructions. 

Business Activity Monitoring (BAM) 

Tool. Using the BAM tool, DFAS identifies 

and prevents improper payments in a 

prepayment environment in the Department’s 

five largest commercial payment systems, 

which includes MOCAS, CAPS-W, IAPS, 

One-Pay, and EBS accounting. These 

systems comprise approximately 87 percent 

of all DoD commercial payment dollars. 

Since the implementation of BAM in 

August 2008, the tool has prevented a 

significant amount of improper payments. 

Continuous payment error analyses allow for 

the recurrent enhancement of BAM logic and 

improved disbursement accuracy. 

This year, DFAS enhanced BAM criteria 

(integrity checks) to identify and prevent 

potential improper payments to improve the tool's performance. An example of the success of 

these enhancements is the strengthening of vendor payment integrity checks by utilizing more 

accurate data fields for comparisons. 

DFAS identifies and monitors the root cause for all improper payments by researching 

supporting documentation and assigning an assessment (reason) code that identifies the type and 

cause of the improper payment. In addition, root causes of potential improper payments detected 

by BAM are reviewed and analyzed monthly. Root cause analysis is shared with the DFAS 

payment offices on a monthly basis and is used to identify areas for operational improvement. It 

is also used to implement refinements to BAM and develop new integrity checks. 

USACE. USACE projected a 0.00 percent error rate for Commercial Pay for FY 2016. 

Navy. The Navy ERP projected a 0.00 percent error rate for Commercial Pay for FY 2016. 

0.00%

0.01%

0.02%

0.03%

0.04%

0.05%

0.06%

0.07%

0.08%

0.09%

FY2015

Actual IP %

FY2016

Actual IP %

FY2017

Target %

FY2018

Target IP %

FY2019

Target IP %

0.09%

0.04%

0.03% 0.03% 0.03%

FY 2016 Target .03%

Figure 22: Improper Payment Rate - DFAS 

Commercial Pay

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U.S. Department of Defense Agency Financial Report for FY 2016 

Other Information 

Military Retiree and Annuitant Benefit Payments. The Department projects a 0.02 percent 

error rate for the Military Retirement Program for FY 2016. Nearly 100 percent of the errors 

identified resulted from payments made by DFAS to deceased retirees or annuitants prior to DFAS 

receiving notification of their passing. 

Root Causes. Eligibility for military retired 

pay ends on the retiree’s date of death. 

Prompt reporting of a deceased retiree's death 

can help avoid possible financial hardship to 

the Service member’s annuitant by expediting 

the correct calculation and processing of the 

monthly benefit. Family members or 

executors are required to return any 

overpayments of a deceased retiree’s military 

retired pay. 

Untimely notification of a retiree’s or 

annuitant’s death, by family members or other 

entities, often results in an initial, unavoidable 

overpayment to a deceased retiree. A review 

of overpayments to deceased retirees in FY 

2016 disclosed that the Department recovered 

approximately 93 percent of overpayments 

within 60 days of initial notification of the 

retiree’s or annuitant’s death.

Travel Pay 

Department. The Department projected a 7.23 percent error rate for travel improper payments 

for FY 2016. This represents DTS trip records and WinIATS Temporary Duty (TDY) and 

Permanent Change of Station (PCS) vouchers for both civilians and military members, which are 

computed and disbursed by DFAS. In addition, the 7.23 percent error rate includes travel payments 

disbursed outside of DFAS by the Navy. 

DFAS. DFAS reports the largest portion of DoD’s travel payments, processed in DTS and 

WinIATS for the Department of the Army and select Defense Agencies. On a monthly basis, 

DFAS statistically samples DTS travel vouchers stratified by Military Service and the aggregate 

of the Defense Agency vouchers. In addition, DFAS also statistically samples monthly WinIATS 

travel vouchers, stratified by Army activity and type of payment, for both Temporary Duty Travel 

(TDY) and PCS. The DFAS improper payment rate for FY 2016 was 8.11 percent, a reduction 

from the FY 2015 DFAS improper payment rate of 8.80 percent. Comparatively on a system basis, 

the FY 2016 improper payment rate for the DTS was 8.43 percent. The FY 2016 improper 

payment rate for the WinIATS was 5.45 percent. 

0.00%

0.01%

0.01%

0.02%

0.02%

0.03%

0.03%

0.04%

0.04%

FY2015

Actual IP %

FY2016

Actual IP %

FY2017

Target %

FY2018

Target IP %

FY2019

Target IP %

0.04%

0.02%

0.04% 0.04% 0.04%

FY 2016 Target .04%

Figure 23: Improper Payment Rate - Military 

Retirement

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U.S. Department of Defense Agency Financial Report for FY 2016 

Other Information 

DTS Root Causes. The primary reason for DTS improper payments is voucher input errors by 

the traveler. In addition, approving officials’ failure to identify error(s) prior to authorizing 

reimbursement contributed to improper payments from an internal control perspective. Moreover, 

the errors identified in the sample can be reported as administrative errors or errors that may result 

in an actual loss of funds to the government. The administrative errors include missing or invalid 

receipts (as defined in the Joint Travel Regulations (JTR)) or omission of required elements 

(i.e., dates and/or signatures). 

 Administrative Errors represent over half of total errors (administrative and monetary). 

 Receipts: Failure to attach receipts to the travel voucher, invalid or incorrect receipts, and 

illegible receipts. 

 Signatures/Dates: Failure of the traveler and/or approving official to sign and/or date the 

DD Form 1351-2, Travel Voucher, prior to submission by the Non-DTS Entry Agent 

(NDEA) into DTS. 

 Monetary errors that may result in an actual loss of funds. 

 Statement of Non-availability (SNA): An SNA is required prior to payment of funds for 

members assigned to a war zone for separate lodging, meals and other expenses. 

 Meals & Flat Rate Per Diem: Failure to properly pay flat rate per diem (partial per diem) 

once a member is TDY for 31 or more days. 

 Lodging: The attached receipt for lodging does not reflect the same amount claimed on the 

travel voucher. 

 All other monetary errors, not categorized above, include a combination of 28 additional 

categories. 

WinIATS Root Causes. The primary reasons for WinIATS improper payments are voucher input 

errors by the traveler and/or the approving official’s failure to identify the error(s) before 

reimbursement occurs. Error types include: 

 Signatures/dates: Failure by the traveler, approving official or certifying official to sign 

and date the travel voucher or the voucher is approved prior to the end of the TDY; 

 International Military Education & Training (IMET): IMET represents almost half of all 

overpayments identified in WinIATS and is caused by dating and submitting travel 

vouchers, by the student, prior to completion of training. IMET regulations were updated 

during December 2015 and as a result errors have been reduced. Overpayments attributed 

to IMET are non-collectable via a recovery process. Recovery is accomplished by the 

Department of State through subsequent year offsets and reductions to allocations;

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 Unauthorized Individually Billed Account (IBA): Travelers are directed to use Centrally 

Billed Accounts (CBAs) vice IBAs to procure travel by the order writing authority. 

Procurement via an IBA is not authorized; and 

 Meals and M&IE: Mispaid for reasons including wrong locality (per diem rate), wrong 

meal rate, paid while on leave, etc.

USACE. The Army Corps of Engineers continued working to reduce its Travel Pay error rate 

over the past 12 months (refer to Table 1). The USACE continues to emphasize and promote 

refresher training for all approving officials and travelers, which positively impacts the error rate. 

Also, the UFC performs a 100 percent audit of all airline credits issued against travelers’ 

individually billed travel card accounts. This ensures that all airline credits, issued as a result of 

flight changes, are properly recouped. 

Root Causes (see also Table 2). The primary reasons travel pay errors occur are: 

 Errors generated by travelers when completing their travel vouchers; and 

 Improper review of travel vouchers by Approving Officials (AO). 

V. Corrective Actions

Military Health Benefits. 

Corrective Actions. The DHA purchased-care contractors are monetarily incentivized or 

dis-incentivized, through payment accuracy performance standards, to reduce and/or eliminate 

improper payments. The fewer improper payments the contractors make, the less money is 

deducted from their reimbursements. 

Additionally, details of the EIC compliance reviews are shared with the purchased-care 

contractors, DHA Program Offices, purchased-care contract Contracting Officers, and Contracting 

Officer Representatives to coordinate appropriate corrective action plans with the respective 

purchased-care contractor. 

 Upon completion of an EIC compliance review, respective contractors review results, 

formulate an action plan to mitigate future findings and derive a process to avoid future 

improper payments. 

 If warranted, contractor claims processing systems are modified to meet the Department’s 

healthcare policy, reimbursement, or benefit requirements. 

 If audit results show a potential error pattern for a certain type of claim, additional claims 

are pulled to conduct a focused study, and adjustment actions are taken as appropriate. 

Each purchased-care contractor has its own business process for evaluating compliance review 

results, conducting root cause analyses to ensure the accuracy of future claims payment, and 

developing internal corrective action plans. If required, DHA Contracting Officers and 

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Contracting Officer Representatives issue contractor corrective action plans to resolve and track 

noncompliance with TRICARE healthcare policy/regulations and purchased-care contracts.

Military Pay 

Corrective Actions. The Department institutes comprehensive training programs with standard 

desk procedures to ensure continuity of operation as new payroll clerks onboard. In addition, the 

Department, primarily through DFAS, advises the Military Services of the results of payment 

reviews and the associated root causes of the errors. DFAS provides the Military Service with 

monthly reports on the results of statistical reviews, including the reasons for and dollar value of 

errors and year-to-date trends, to enhance service training. 

Civilian Pay 

Corrective Actions. DFAS continues to advise Components of the results of payment reviews 

and the associated reasons for errors that result in improper payments to civilian employees. DFAS 

also advises Components on best business practices to prevent future improper payments and 

participates in various conferences to guide personnel on how to correctly submit information to 

prevent improper payments. 

Commercial Pay 

Corrective Actions. The Department continues to implement corrective actions to prevent, 

identify, and reduce overpayments. Corrective actions include: 

 Ongoing training for pay technicians to increase their ability to compute and input claims 

accurately; 

 Creation of a new database in MOCAS, Accounts Payable, that can provide reports 

highlighting data inaccuracies on the front end of the payment process; 

 Continuing to work with Contracting Officers to simplify contract terms and eliminate the 

need for manual calculations; 

 Initiating multiple special projects targeting specific problem areas to increase data 

accuracy and reduce payment errors; and 

 Continuing electronic commerce improvement initiatives, such as the automation of third 

party payments, aimed at minimizing manual intervention and improving quality. 

DFAS is working to add Procedures Guidance and Instruction (PGI) data to enhance detection 

capability within MOCAS. The PGI is a MOCAS system and Enterprise Solutions and Standards, 

Accounts Payable (ESS AP), Continuing Controls Maintenance initiative that created special 

payment instruction codes and data fields. These new data elements present an opportunity for 

new integrity checks to be created within the BAM tool for MOCAS. 

Another initiative to reduce improper payments includes reaching out to the various sites to 

inform them of findings and results of reviews based on monthly ESS AP analysis of detected 

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improper payments. This site outreach is designed to reduce vendor billing errors caused by 

duplicate manual and electronic submission of invoices. In addition, the Department conducts 

manual reviews to ensure it meets all Certifying Officer Legislation requirements prior to 

certifying payment, such as ensuring proper documentation and correct payment amounts before 

disbursement. 

Military Retiree and Annuitant Benefit Payments 

Corrective Actions. The Department’s control processes to prevent, identify, and reduce 

overpayments to deceased retirees and annuitants include: 

 Validating existence of retiree and/or annuitant, if living outside the United States; 

 Certifying, annually, the existence and entitlement for all annuitants: 

 Who are under 55 years of age; 

 Who receive hard copy checks in a foreign country; and 

 Who have a permanent disability (regardless of age); 

 Conducting periodic, random certifications for retirees over a certain age; and 

 Validating military retiree’s existence if payments are returned and/or if a benefit account 

was suspended for several months due to bad check/correspondence address. 

Early detection and data mining efforts, along with partnerships with other Federal and state 

entities, are used to detect improper payments. The Department takes a proactive approach to 

ensure the accuracy of Military Retiree payments by routinely comparing retired and annuitant 

payroll master file databases with the Social Security Administration’s (SSA) Death Master File 

(DMF), and periodically comparing records with the Office of Personnel Management’s deceased 

files, Department of Veterans Affairs’ database, and with individual states with sizable retiree and 

annuitant populations (e.g., Texas, California, and Florida). Payments for military retirees 

identified as deceased are suspended pending validation of death or validation of continued 

eligibility. The Department's expanded definition of acceptable source documents for notice of 

death has allowed DFAS to initiate earlier reclamation actions, thereby enhancing faster recovery 

of overpaid funds. Refer to the Do Not Pay discussion, later in this section, for discussion on the 

Department’s use of the Social Security DMF. 

Travel Pay 

DFAS.

DTS Corrective Actions. In early FY 2017 DFAS will launch a post-pay database 

consolidating its Travel Pay reviews and results. The database will allow DFAS to provide DoD 

leadership with timely, detailed information to assist in identifying root causes, recovery of funds, 

and other data at the service and activity level. The enhancement will provide information to use 

on the front-end of travel pay to reduce the improper payment rate. This will be an addition to the 

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error trend reports that DFAS provides to the DoD Components. Also, the Department continues 

its use of the DoD Travel Policy Compliance Tool, discussed in the Payment Recapture Audit 

Reporting section of this report. 

WinIATS Corrective Actions. DFAS implemented steps to prevent improper payments, including: 

 Conducting monthly meetings with post payment reviewers and Travel Pay operations 

personnel to discuss findings and preventative measures. DFAS has implemented a review 

forum to implement common policy between all parties engaged in computing, establishing 

policy, or conducting reviews. 

USACE.

Corrective Actions. The USACE continues to educate travelers and travel AOs through 

required training, including refresher training for seasoned travelers and AOs. Additionally, all 

AOs are required to complete fiscal law training every year to maintain their certification. When 

improper payments are identified, the UFC notifies the parties involved to determine the 

circumstances surrounding the error and to assist them in identifying business process 

improvements to prevent future recurrences. These areas are also covered thoroughly in refresher 

training. 

Navy.

Corrective Actions. In FY 2016, the Department of the Navy continued to work with DFAS 

and its two services (US Navy and Marine Corps) to validate root causes and implement corrective 

actions, including improvements to reports, classification of improper payments, updated sampling 

plans, and improved training.

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VI. Internal Controls over Payments

Table 6 summarizes DoD risk assessments (1-4) within each internal control standard. 

Table 6. Status of Internal Controls

Internal Control Standards DHA* Navy ERP 

Com Pay

Navy 

Com Bill 

Pay 

Naples

WINIATS

USACE 

Com 

Payments

USACE 

Travel 

Payments

Control Environment 3 4 4 3 4 4

Risk Assessment 3 4 4 2 4 4

Control Activities 3 4 4 2 4 4

Information and Communication 3 4 4 2 4 4

Monitoring 3 4 4 3 4 4

NOTE: *DHA consists of North, South, West, TDEFIC, TOP, TPharm and ADDP.

Definitions:

1=Controls are not in place to prevent improper payments.

2=Minimal controls are in place to prevent improper payments.

3=Controls are in place to prevent improper payments, but there is room for improvement.

4=Sufficient controls are in place to prevent improper payments.

DFAS. The Managers’ Internal Control Program and the DFAS FY 2016 Statement of Assurance 

provided reasonable assurance to management that controls for operations, financial reporting, and 

financial systems were/are established and operating effectively. 

DHA. DHA has payment accuracy performance standards requiring contractors to meet 

TRICARE policy or contract performance standards or be subject to financial penalty. The current 

baseline for contractor performance standard is 1.75 percent. However, DHA Program Offices 

have developed more stringent contract performance requirements lowering the requirement to 

less than 1 percent. 

DHA monitors contractor performance by conducting EIC compliance reviews. In addition, 

DHA has numerous prepayment (i.e., claims auditing software, TRICARE documentation 

policies, duplicate claim check) and post payment controls (i.e., EIC audits, DCAA contract audits, 

recovery activities, Medicare cost report and internal contractor post payment audits) built into the 

military health benefits contract requirements and contractor’s claims processing systems to 

minimize improper payments. 

Navy. During FY 2016 Navy performed a comprehensive review of its system of internal controls 

over improper payments. Improvement areas for FY 2017 include, updates to guidance, 

governance, risk assessments, sampling plans, “Tone at the Top” guidance, program management, 

user entity controls, and accountability through reporting. 

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USACE. USACE internal process controls are built into CEFMS and are an integral part of the 

overall business processes. Process controls include, but are not limited to: decentralization of 

support activities, certification and separation of duties requirements for disbursement of funds; 

documentation requirements for invoices (i.e., receiving reports); and disbursement limitations 

with respect to obligations (i.e., disbursement amounts cannot exceed obligation amounts). 

VII. Accountability

The Under Secretary of Defense (Comptroller)/Chief Financial Officer is the Accountable 

Official for the Department and is responsible for ensuring that, to the greatest extent possible, all 

DoD disbursements are accurate. 

Certifying Officer Legislation, 10 U.S.C. 2773a, holds Certifying and Disbursing Officers 

accountable for government funds. In accordance with this law, 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). This is further captured in the 

DoD FMR, Volume 5, Chapter 3, entitled, “Certifying Officers, Accountable Officials, and Review 

Officials.” The Department’s efforts to recover overpayments from a recipient must be undertaken in 

accordance with the debt collection procedures outlined in the DoD FMR, Volume 16, entitled, “Debt 

Management”.

The DoD FMR contains other policies that specifically address Improper Payments 

(DoD FMR Volume 4, Chapter 14) and Recovery Auditing (DoD FMR Volume 10, Chapter 22). 

Beginning in Quarter 3, FY 2013, all reporting DoD Components were required to begin downloading 

their improper payment reports to the DFAS ePortal, as the Office of the Deputy Chief Financial 

Officer’s Accounting & Finance Policy Directorate was designated as the Executive Agent to manage 

this information and its associated reporting requirements. This centralized electronic system allows 

the reporting Components to access improper payment information without regard to the time zone in 

which they are located. More importantly, it allows management to ensure all Components’ 

submissions are timely and accurate. 

Because DoD Travel currently has the highest error rate among all DoD-reported programs, 

the focus for the Department is to identify and reduce travel improper payments and enhance the 

recovery efforts for overpayments. 

VIII. Agency Information Systems and Other Infrastructure

The Department has much of the information and infrastructure needed to reduce improper 

payments. The Department uses the BAM tool and the Do Not Pay portal to identify potential 

improper payments prior to disbursement. 

The Department’s ongoing migration from a legacy system environment to new ERP systems 

presents a number of challenges and opportunities to prevent and detect improper payments. This 

migration also can enhance the Department’s ability to improve its debt collection and recovery 

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auditing abilities. The Department is addressing these areas both from a payment integrity as well 

as audit readiness perspective. 

DHA. The DHA has much of the information and infrastructure needed to reduce improper 

payments. Purchased-care contractors utilize claims adjudication systems to determine the 

appropriate reimbursement methodology based on information included in the claims such as type 

of service, provider record, and claim form type. In addition, the Department analyzes data from 

the TRICARE Encounter Data Set (TEDS), representing payments as reported by purchased-care 

contractors. The TEDS contain various edits to verify patient and provider eligibility, benefit 

calculations, and reimbursement methodologies determined by DHA. 

Further, the DHA has developed the TRICARE Duplicate Claims System (DCS). This tool 

facilitates the identification of duplicate claim payments, the initiation and tracking of 

recoupments, and the removal of duplicate records from the TEDS database. DHA purchased care 

contractors are contractually required to use the DCS and resolve duplicate payments. 

IX. Statutory and Regulatory Barriers

The primary barriers in preventing improper payments in Military Pay are the statutory 

entitlements and regulatory monthly pay schedule. For DHA collections, there are contractual 

requirements that allow up to 270 days, instead of the standard delinquency deadline of 120 days, 

to be transferred to the Treasury under the Debt Collection Improvement Act of 1996. 

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X. Payment Recapture Audit Reporting

Table 7 shows improper payment recaptures. 

Table 7. Improper Payment Recaptures with and without Audit Programs 

Overpayments Recaptured outside of Payment Recapture Audits ($ in millions)

Program or 

Activity

Amount 

Identified

Total Amount 

Extrapolated

(estimated 

throughout Total 

Outlays) 

Amount Recaptured (Refunds 

throughout FY 2015) 4

Military Pay 1 $183.66 $148.13

Civilian Pay 1 $55.83 $55.83

Military Retirement 2 $8.81 $8.28

DoD Travel Pay 3 $2.30 $0.57

DFAS Commercial 

Pay $185.50 $153.90

USACE $5.00 $5.00

DHA 4 $2.11 $121.60 $346.87

Note 1: Military Pay and Civilian Pay include In-Service Collections for recovery amounts. Military Pay also includes 

Out-of-Service Debts. Both In-Service Collections and Out-of-Service Debts continue to be collected beyond the AFR 

period.

Note 2: The amounts identified and recovered are based on 100% review of Deceased Retired and Deceased Annuitant 

accounts.

Note 3: The amounts identified and recaptured are based on the amounts identified in the statistical reviews. 

Overpayments for Foreign Students (IMET) are not subject to recovery and are not included.

Note 4: DHA “Amount Recaptured” represents dollars paid back to DHA throughout FY 2015. These refunds include 

overpayments identified in FY 2015 audits as well as refunds occurring in the course of routine claim adjustments (for 

claims initially paid in FY 2015 and other fiscal years). These refunds also include claims for TPharm claims that were 

not conducted (see footnotes for Table 1).

DoD Travel Policy Compliance Tool. In December 2012, the Department established the 

DoD Travel Policy Compliance Program, mandated by the National Defense Authorization Act 

for FY 2012. Managed by the Defense Travel Management Office, the program was established 

to ensure travel claims do not exceed reasonable or actual expenses as well as to minimize 

inaccurate, unauthorized, overstated, inflated, or duplicate travel claims. The DoD Travel Policy 

Compliance Tool, an automated application, reviews DTS travel vouchers in near real time and 

identifies potential improper payments. If a potential improper payment is identified, travelers and 

their AOs are notified via e-mail to either submit a corrected claim or explain why the claim is 

correct. Service administrators can run reports to review all identified errors and track corrections. 

The DoD Travel Policy Compliance Tool not only assists in recouping funds, but it also 

improves post-payment audits, educates travelers and administrators on travel policy, and 

identifies opportunities for greater controls in the future. As of September 30, 2014, all DoD 

Components using DTS are actively using the Compliance Tool, and all DTS vouchers are being 

examined using 12 areas of inquiry. 

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As of September 26, 2016 (cumulative since December 26, 2012): 

 $16,433,50113 in errors were identified; 

 $4,031,769 in payment errors were corrected without any funds due back to the 

Government; 

 $2,745,834 in errors were corrected and are awaiting collection; and 

 $7,242,129 in errors were corrected and the funds have been recovered. 

In addition to examining DTS vouchers, the Compliance Tool has expanded to include 

additional data sources, such as Government Travel Charge Card (GTCC) data, and is now 

comparing amounts claimed on vouchers with amounts charged on the GTCC to identify potential 

overpayments. As new data sources become available, they may be used to identify additional 

errors. 

Use of the Compliance Tool provides a mechanism to greatly facilitate DoD’s collections and 

improve the recovery rate for Travel Pay overpayments. In addition, funds recovered from prior 

years can be re-allocated for use in current year appropriations, in accordance with Public Law 

111-204, IPERA. 

DFAS. The Department continues to use its internal staff and procedures to identify and 

recover overpayments. The DFAS recovery percentages remain close to the 85th percentile, as 

required by OMB. The use of the BAM tool on the front-end of commercial payment transactions 

continues to provide a successful means of preventing improper payments and thereby reducing 

the need to pursue overpayment recoveries. 

In early FY 2017, DFAS will launch a post-pay database consolidating its Travel Pay reviews 

and results. A key feature of this database will be the inclusion of additional fields to provide more 

detailed front-end data. The database will enable DFAS to provide DoD leadership with 

increasingly actionable data to reduce improper payments. It will function in addition to the error 

trend reports that DFAS provides to the DoD Components. Also, the Department will continue to 

use the DoD Travel Policy Compliance Tool. 

In compliance with IPERIA, as well as the Debt Collection Improvement Act of 1996, the 

Department uses a number of other methods to prevent, identify, and collect improper payments. 

For example, DFAS has implemented a Centralized Offset Program to look across the Components 

for opportunities to offset debts within the first 90 days of delinquency. Once this deadline passes, 

DFAS transfers the debts to the Treasury Department, no longer waiting until day 120 as allowed 

by statute, to utilize all debt collection tools available earlier in the debt lifecycle to increase the 

likelihood of collecting the debt. During FY 2016, the Centralized Offset Program requested and 

confirmed 901 offsets totaling approximately $7.00 million. 

 

13 DoD Travel Policy Compliance Program numbers provided are cumulative from the beginning of the program (December 26, 2012)

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USACE. The UFC uses a data mining tool as part of its post payment/payment recapture 

program. This tool searches for potential errors, such as duplicate, missing, or irregular invoices, 

as well as specific types of recurring payments. There are ten scenarios built into the data mining 

tool, which searches 100 percent of all USACE commercial payments. The use of a data-mining 

tool complements the prepayment system edits built into CEFMS. Payment safeguards include a 

requirement to match a receiving report with an invoice and thereby prevent use of duplicate 

invoice numbers for the same obligation. 

DHA. The DHA uses a number of different mechanisms to prevent, identify, and collect 

improper payments, to include claims auditing by an EIC, contractor utilization of the DHA DCS, 

and periodic independent reviews of private-sector payments. All overpayment recoveries are 

returned to the MHBs program. 

Contract payments comprise a large volume of transactions with high-dollar values; therefore, 

DHA is vigilant to ensure payment accuracy. In addition to the post-payment reviews, the DHA 

also utilizes various internal manual and automated prepayment initiatives to prevent 

overpayments and underpayments. 

XI. Disposition of Funds Recaptured Reporting

The Department has no reportable data for “Disposition of Funds Recaptured through Payment 

Recapture Audits”.

XII. Aging of Outstanding Overpayments Reporting

The Department has no reportable data for “Aging of Outstanding Overpayments in the 

Payment Recapture Audits”.

XIII. Additional Information

The Department is committed to full compliance with the requirements of IPERIA and the 

Federal Improper Payments Coordination Act of 2015. As part of the Department’s audibility 

efforts, each disbursing Component is diligently reviewing and reporting all payments subject to 

IPERIA and the Federal Improper Payments Coordination Act of 2015, as well as examining 

processes for identifying the complete universe of disbursements. 

Moreover, the Department continues to explore measures to improve its front-end internal 

controls to prevent improper payments, and strengthen post payment review teams to recover 

identified improper payments. Also, the Department is actively implementing recommendations 

from the following reports: 

 DoD IG 2016 report, “DoD Actions Were Not Adequate to Reduce Improper Travel 

Payments” (Report No. DODIG-2016-060); and 

 GAO 2013 report, “Significant Improvements Needed in Efforts to Address Improper 

Payment Requirements” (Report No. GAO-13-227).

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Accordingly, the Chief Financial Officer issued a policy memorandum, “Preventing Travel Pay 

Improper Payments and Enforcing Recovery” on October 7, 2016. The memorandum included a 

Travel Pay Improper Payments Remediation Plan. Also, the Department continues to adopt best 

practices related to statistical sampling and improved system controls, procedures, and guidance. 

Presently, the Department is implementing dollar-stratified sampling for Travel Pay, Military Pay, 

and Civilian Pay to obtain a sample population that best represents the entire population for those 

programs. 

XIV. Agency Reduction of Improper Payments with the Do Not Pay Initiative

Table 8 summarizes the Department’s successes attributed to the Do Not Pay Initiative.

Table 8. Results of the Do Not Pay Initiative in Preventing Improper Payments

Number (#) 

of payments 

reviewed for 

possible 

improper 

payments

Dollars ($) of 

payments 

reviewed for 

possible 

improper 

payments 

(in millions)

Number 

(#) of 

payments 

stopped

Dollars 

($) of 

payments 

stopped

Number 

(#) of 

potential 

improper 

payments 

reviewed 

and 

determined 

accurate

Dollars ($) of 

potential 

improper 

payments 

reviewed and 

determined 

accurate 

(in millions)

DFAS NTDO 

reviews with the 

IPERIA specified 

databases 

6,620,895 $644,638.11 0 $0.00 84,709 $5,227.11

DFAS TDO 

reviews with the 

IPERIA specified 

databases*

0 $0.00 0 $0.00 0 $0.00

DHA Reviews 

with the IPERIA 

specified 

databases

438 $1,754.14 0 $0.00 438 $1,754.14

USACE Reviews 

with the IPERIA 

specified 

databases

304,481 $82,044.00 0 $0.00 360 $29,819.94

*Non Treasury Disbursing Office (NTDO) Data is based on invoice and invoice amount vs. payment.

The Do Not Pay (DNP) Initiative (detailed reporting in Table 7), as currently implemented, is 

programmed to verify that vendors are in fact authorized to receive payments from DoD. Improper 

payments may still occur at some later point due to reasons that DNP cannot detect. 

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DFAS. DFAS sends a Commercial Pay weekly batch file, made up of invoices in a non-pay 

status, to the DNP database and receives results the next day. DFAS then researches these results 

to determine if the payment is proper based on established business rules. To date, DFAS has not 

identified any potential improper payments using the DNP list.

DFAS continues to conduct comparisons against all the DNP databases with the exception of 

the debt check, which is a duplication of the Treasury Offset Program, and the Credit Alert System, 

which does not apply to Commercial Payments. 98% of the false positives received, are based on 

the death master database results along with name match results from the rest of the DNP 

databases. The other 2 percent are deemed not to be improper payments due to established 

business rules related to performance in accordance with the contract.

USACE. The USACE matches its payment files daily in the DNP Portal to prevent any 

improper payments. 

DHA. Individual Payments. The DHA processes relatively few (5-20) case recoupment 

refunds each month for small dollar amounts ($5 – $20,000). The Single Online Search service is 

utilized before any payment is distributed to verify (1) a business or individual has not been placed 

on the List of Excluded Individuals/Entities, and (2) an individual has not died. Any matches will 

be referred to the DHA Office of General Counsel. 

Vendor, Contract Payments. The DHA processes approximately 260 routine payments per 

month for 19 unique contractor payees. The Single Online Search service is utilized once a month, 

before payments are distributed, to verify that each DHA contractor payee has not been placed on 

the Excluded Parties List System or the List of Excluded Individuals/Entities. Any matches are 

validated with the Treasury Offset Program ensuring the contractor does not have the same 

Employer Identification Number as a person’s Social Security Number. The contractor is 

responsible for resolving these matching issues due to proprietary reasons. If the contractor is on 

the list, the finding is referred to the assigned Contracting Officer. DHA processed approximately 

438 payments totaling $1,754,135,258.78 with no matches on the Do-Not-Pay system for FY 2016. 

The risk for payments to a subcontractor or individual via the contractor, however, lies outside 

of DHA control. DHA contractors are not required to utilize the Do-Not-Pay database, and there 

is no current mechanism in place to require the contractors to use the Do-Not-Pay databases at the 

prepayment phase to comply with the Federal Improper Payments Coordination Act of 2015.

Navy ERP. Navy ERP transactions are included in the DFAS Do Not Pay Figures. 

Military Retiree and Annuitant Benefit Payments – File Matching with the Death Master 

File outside DNP 

Prior to implementation of the Do Not Pay initiative, the DMDC had a computer matching 

agreement with SSA to use its DMF to identify potential accounts that need to be suspended or 

cancelled as a result of a retiree’s or annuitant’s passing. As part of the end-of-month processing, 

DFAS produces two files (one for retirees, one for annuitants) that are sent to DMDC to match or 

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conduct comparisons against the monthly DMF file. The results are compiled and forwarded to 

DFAS. 

DFAS then runs its match process to suspend pay accounts (but not cancel) and to notify next 

of kin that this action was based on information received from SSA. This correspondence contains 

instructions on how to close out the account or reactivate if the death was mistakenly reported by 

SSA; however, this is rare. 

The vast majority of these monthly benefits are paid via Electronic Funds Transfer (EFT). The 

disbursement system suspends payment to prevent additional benefits from being improperly paid. 

Any EFT payment that was mistakenly disbursed is automatically reclaimed from the bank account 

after the official notification of death is processed. The normal recovery rate is approximately 

95 percent within 60 days of the official death confirmation. 

An Airman from Dover Air Force Base is basket-lifted by a Coast Guard H-65 Dolphin helicopter 

during water survival training Aug. 6, 2015, Bowers Beach, Del. Airmen with the 512th Airlift Wing 

and 436th Airlift Wing performed water survival training focusing on treading water, raft survival, and 

the basket lift helicopter evacuation.

U.S. Air Force photo by Tech. Sgt. Nathan Rivard

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FREEZE AND REDUCE THE FOOTPRINT 

DoD supports the principles of OMB’s plan, National Strategy for the Efficient Use of Real 

Property (2015-2020), Reducing the Federal Portfolio through Improved Space Utilization, 

Consolidation and Disposal, by demonstrating a continual reduction in the DoD infrastructure 

footprint. Since the inception of the government wide plans to freeze and then reduce the footprint 

of the federal real property inventory, DoD has been the leader among Federal agencies by 

contributing over 50 percent of the total federal footprint reduction. As of the FY 2015 Federal 

Real Property Profile submission, DoD has disposed another 4,238,768 square feet in office and 

warehouse footprint. 

Since most of DoD’s infrastructure is not likely candidates for consolidation or reuse by other 

Federal Agencies, much of the DoD reduction must be in the form of demolition. Since demolition 

incurs an initial cost to produce eventual operating savings, frequent budget cuts have had a 

negative impact on the funding of much needed demolition. But DoD continues to aggressively 

pursue plans for supporting the Reduce the Footprint initiative within the current budgetary 

constraints. The DoD Reduce the Footprint implementation plan for the period FY 2017-2021 

projects an additional reduction of another 35,928,100 square feet of real property. 

Since the original FY 2012 Baseline was established for Freeze the Footprint, there was a 

realization that some assets types were not correctly identified in the correct categories for counting 

the new Reduce the Footprint policy. A decision was made to use the time between FY 2012 data 

and the FY 2015 Federal Real Property Profile (FRPP) submission to properly align the assets into 

correct categories. The FY15 FRPP would then establish a new baseline for Reduce the Footprint. 

Table 9: Freeze the Footprint Baseline Comparison 

Table 10: Annual Operating Costs 

FY 2012

Baseline

FY 2015 Adjusted 

Baseline

Change (FY 2012 – 

FY2015)

Square Footage (SF in millions) 313.5 339.2 25.7

FY 2012

Calculated Cost 

FY 2015

Calculated Cost 

Change (FY 2012 -

FY2015)

Annual Operating Costs ($ in 

millions)

13,510. 5 14,665.1 1,154.7 

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CIVIL MONETARY PENALTY ADJUSTMENT FOR INFLATION 

On November 2, 2015, the President signed into law the Federal Civil Penalties Inflation 

Adjustment Act Improvements Act of 2015 (the 2015 Act), which further amended the Federal 

Civil Penalties Inflation Adjustment Act of 1990 (the Inflation Adjustment Act). The 2015 Act, 

Public Law 114-74, requires DoD to annually adjust applicable civil monetary penalties for 

inflation to improve the effectiveness and retain the deterrent effect of such penalties. The 

implementation of this rule will deter violations of law, encourage corrective action(s) of existing 

violations, and prevent waste, fraud, and abuse within the Department. 

 

Name of Penalty Authority (Statute)

Year of 

Previous 

Adjustment

Year of 

Current 

Adjustment

Current Penalty 

Level ($ 

Amount)

Unauthorized Activities 

Directed at or Possession 

of Sunken Military Craft

National Defense 

Authorization Act for 

FY 2005, 10 U.S.C 113, 

note

2004 2016 $124,588.00

Unlawful Provision of 

Health Care

10 U.S.C. 1094(c)(1) 1996 2016 $10,940.00

Wrongful Disclosure—

Medical Records:

First Offense

Subsequent Offense

10 U.S.C. 1102(k) 1996 2016

$6,469.00

$43,126.00

Violation of the Pentagon 

Reservation Operation and 

Parking of Motor Vehicles 

Rules and Regulations

10 U.S.C. 2674(c)(2) 1990 2016 $1,782.00

Violation Involving False 

Claim

31 U.S.C. 3802(a)(1) 1996 2016 $10,781.00

Violation Involving False 

Statement

31 U.S.C. 3802(a)(2) 1996 2016 $10,781.00

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SCHEDULE OF SPENDING 

Department of Defense Combined Schedule of Spending

Agency Wide Dollars in Millions

For the Years Ended September 30, 2016 and 

2015 2016 2015 

What Money is Available to Spend?

Total Resources $ 1,101,472.0 $ 1,067,434.3

Less: Amount Available but Not Agreed to be Spent (115,136.1) (109,503.1)

Less: Amount Not Available to be Spent (40,500.1) (39,998.1)

Total Amounts Agreed to be Spent $ 945,835.8 $ 917,933.1

How was the Money Spent/Issued?

Civil Work

Personnel Compensation and Benefits $ 3,842.5 $ 2,364.6

Contractual Services and Supplies 9,001.4 9,977.1

Acquisitions of Assets 4,191.0 4,074.3

Grants and Fixed Charges 13.2 7.8

Other 1,370.9 1,273.1

Total Civil Works 18,419.0 $ 17,696.9

Military Retirement

Personnel Compensation and Benefits $ 9,721.9 $ 9,507.8

Contractual Services and Supplies 0.0 0.0

Acquisitions of Assets 0.0 0.0

Grants and Fixed Charges 57,242.3 56,829.0

Other

Total Military Retirement $ 66,964.2 $ 66,336.8

Military Personnel

Personnel Compensation and Benefits $ 120,195.8 $ 120,770.4

Contractual Services and Supplies 7,488.3 7,241.5

Acquisitions of Assets 20.6 0.6

Grants and Fixed Charges 380.8 288.1

Other 16,550.6 16,699.8

Total Military Personnel $ 144,636.1 $ 145,000.4

Operation, Readiness & Support

Personnel Compensation and Benefits $ 164,176.2 $ 147,748.2

Contractual Services and Supplies 279,952.7 313,317.6

Acquisitions of Assets 23,265.3 18,499.7

Grants and Fixed Charges 2,401.6 2,055.2

Other 28,991.0 12,705.8

Total Operations, Readiness & Support $ 498,786.8 $ 494,326.5

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Department of Defense Combined Schedule of Spending

Agency Wide Dollars in Millions

For the Years Ended September 30, 2016 and 

2015 2016 2015 

Procurement

Personnel Compensation and Benefits $ 97.2 $ (3.9)

Contractual Services and Supplies 24,485.5 23,696.3

Acquisitions of Assets 96,815.8 80,330.0

Grants and Fixed Charges 233.5 142.9

Other 435.1 3,265.5

Total Procurement $ 122,067.1 $ 107,430.8

Research, Development, Test & Evaluation

Personnel Compensation and Benefits $ 4,872.4 $ 4,555.4

Contractual Services and Supplies 66,730.3 57,995.4

Acquisitions of Assets 9,002.0 5,616.8

Grants and Fixed Charges 1,654.8 1,687.4

Other (442.3) 4,434.8

Total Research, Development, Test & Evaluation $ 81,817.2 $ 74,289.8

Family Housing and Military Construction

Personnel Compensation and Benefits $ 743.9 $ 848.4

Contractual Services and Supplies 2,587.3 2,015.9

Acquisitions of Assets 7,294.5 7,228.4

Grants and Fixed Charges 82.2 24.6

Other 2,437.5 2,734.6

Total Family Housing and Military Construction $ 13,145.4 $ 12,851.9

Total Amounts Agreed to be Spent $ 945,835.8 $ 917,933.1

The Combined Schedule of Spending presents an overview of the funding received by the 

Department and how it was spent (i.e., obligated) during the reporting period. The Schedule of 

Spending presents total budgetary resources and fiscal year-to-date total obligations for the 

reporting entity. The budgetary information in the Schedule of Spending is presented on a 

combined basis and not a consolidated basis in order to remain consistent with the information 

reported on the Report on Budget Execution and Budgetary Resources (SF-133) and statement of 

budgetary resources. 

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DOD INSPECTOR GENERAL’S SUMMARY OF MANAGEMENT AND 

PERFORMANCE CHALLENGES FOR FY 2016 

Each year, DoD IG prepares a statement summarizing the most serious management and 

performance challenges facing the Department and provides a brief assessment of the 

Department’s progress in addressing these challenges. 

For FY 2016, the DoD IG identified challenges in the following ten categories: 

 Countering Global Strategic Challenges 

 Countering the Terrorist Threat 

 Enabling Effective Acquisition and Contract Management 

 Increasing Cyber Security and Cyber Capabilities 

 Improving Financial Management 

 Protecting Key Defense Infrastructure 

 Developing Full Spectrum Total Force Capabilities 

 Building and Maintaining Force Readiness 

 Ensuring Ethical Conduct 

 Promoting Continuity and Effective Transition Management 

The DoD IG’s memorandum and report on “Top Management and Performance Challenges 

Facing the Department of Defense” follows, reprinted in its entirety as received. 

U.S. Marines with Combined Anti-Armored Team, 1st Battalion, 1st Marine Regiment, 

taking part in Exercise Koolendong 16 and are part of the Marine Rotational Force-Darwin, 

stop to scan for targets while training in maneuvering through a wooded area in a convoy 

operation at Bradshaw Field Training Area, Northern Territory, Australia Aug. 8, 2016. 

U.S. Marine Corps photo by Sgt. Sarah Anderson

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INSPECTOR GENERAL

DEPARTMENT OF DEFENSE

4800 MARK CENTER DRIVE ALEXANDRIA, 

VIRGINIA 22350-1500

October 5, 2016

MEMORANDUM FOR SECRETARY OF DEFENSE 

 SUBJECT: Top Management and Performance Challenges Facing the Department of Defense

Public Law (PL) 106-531, the “Reports Consolidation Act of 2000,” requires that Inspectors 

General prepare an annual statement that summarizes what they consider to be the “most serious 

management and performance challenges facing the agency.” PL 106-531 further states that the 

“agency head may comment on the inspector general’s statement, but may not modify the statement.”

By statute, this statement is required to be included in the Department’s Agency Financial Report.

Attached is the Department of Defense Office of Inspector General’s statement regarding the 

top management and performance challenges facing DoD. The challenges outlined in this statement 

were identified based on our oversight work, research, and judgment; as well as our consideration of 

oversight work done by other components within the DoD and the Government Accountability Office.

In this statement, we summarize each challenge, outline steps the DoD has taken to address 

it, and discuss ongoing future oversight work related to the challenge. This year’s list identifies the 

top ten challenges as: 

• Countering Global Strategic Challenges

• Countering the Terrorist Threat

• Enabling Effective Acquisition and Contract Management

• Increasing Cyber Security and Cyber Capabilities

• Improving Financial Management

• Protecting Key Defense Infrastructure

• Developing Full Spectrum Total Force Capabilities

• Building and Maintaining Force Readiness

• Ensuring Ethical Conduct

• Promoting Continuity and Effective Transition Management

The OIG looks forward to working with the DoD to continually improve the DoD’s efforts 

to address these important challenges.

Glenn A. Fine

Acting Inspector General

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1 – Countering Global Strategic Challenges 

Global Threats from China, Russia, Iran, and North Korea 

Interagency Cooperation

Evolving global threats are a top challenge for the DoD. Secretary of Defense Carter has 

identified the five most significant global strategic challenges to U.S. interests as Russia, China, 

North Korea, Iran, and terrorism. In a speech at a Center for New American Security conference on 

March 17, 2016, The Secretary stated that these threats require new ways of planning, budgeting, 

and operating. He noted that the DoD must have the capability to staff, equip, and deploy personnel 

and equipment to combat multiple challenges throughout the world. 

Maintaining a level of preparedness to address multiple global threats poses major management 

challenges for the DoD. 

Global Threats

As the Secretary stated in his testimony to the Senate Armed Services Committee on September 

22, 2016, “We don’t have the luxury of choosing between these challenges, which is why American 

soldiers, sailors, airmen, and Marines are working with partners from our worldwide coalition in 

more ways and with more power every day.”

With regard to the challenge from China, the 2017 Defense Posture Statement reported that the 

specific U.S. objective in Asia and the Pacific is “maintaining freedom of navigation and overflight, 

full and unimpeded lawful commerce, and that disputes are resolved peacefully.” To accomplish 

this, he said, “the United States will continue to fly, sail, and operate wherever international law 

allows.”

However, in recent years, China has undertaken aggressive and expansionist reclamation 

activities in the South China Sea and East China Sea. By creating artificial islands in maritime 

territory claimed by multiple neighboring countries, China has increased regional tensions and 

presented a significant challenge to U.S. interests in the region. Additionally, China has been

building and improving its military capabilities, such as nuclear weapons, ballistic and cruise 

missiles, counter-space and offensive cyber capabilities, electronic warfare systems, a stronger, 

more lethal surface and submarine warfare capability, and a more sophisticated air force. 

At a June 2016 conference, the Secretary stated, “Although we have disagreements with China, 

especially over its destabilizing behavior in the South China Sea, we’re committed to working with 

them and to persuade them to avoid self-isolation. That is one reason why we’ll continue to pursue 

a stronger, bilateral military-to-military relationship with our colleagues in China.” The Secretary 

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also emphasized the importance of maintaining trilateral and multilateral country relationships in 

the Asia-Pacific region in support of U.S. strategic interests. 

Similarly, the Chief of Naval Operations at the same conference noted that the United States has 

many strong bilateral relationships in the Pacific but that increasing trilateral and multilateral 

collaboration is key to maintaining regional stability. 

In addition to security challenges in the Pacific region posed by China, North Korea and its pursuit 

of nuclear weapons and ballistic missile technologies, and its role in their proliferation, presents a 

growing strategic threat. North Korea directly threatens its neighbors, South Korea and Japan, with 

which the United States has security treaty commitments. Moreover, North Korean leaders regularly 

assert that the United States is its principal enemy. 

According to the Secretary in the 2016 Defense Posture Statement, the DoD is working to

develop a comprehensive set of alliance capabilities to counter the growing North Korean ballistic 

missile threat. In that regard, the United States and South Korea jointly announced consultations 

concerning the feasibility of deploying a Terminal High-Altitude Area Defense system to the 

Korean peninsula. The United States currently maintains a significant ground, air, and sea force 

based in South Korea and Japan to deter North Korean aggression. Any aggression by North Korea 

against the security of South Korea or Japan could require a U.S. response and appropriate action

by DoD and its U.S. Forces Korea command. 

According to the Secretary's 2017 Defense Posture statement, Russia’s increasingly aggressive 

posture in Europe poses major challenges. The posture statement notes that “Russia has in recent 

years appeared intent to erode the principled international order that has served us, our friends and

allies, the international community, and also Russia itself so well for so long.” Russia has violated 

the sovereignty of the Ukraine, Moldova, and Georgia, and it actively seeks to intimidate its Baltic 

neighbors. In addition to seizing the Crimea, sovereign territory of the Ukraine, Russia has 

deployed a significant military force to the eastern Ukraine and continues to threaten to destabilize 

the rest of the country. Its tactics range from the use of media manipulation, support for right-wing 

political parties, cyber weapons that can disrupt critical infrastructure, and hostile intervention by

Russian military aircraft flown dangerously close to ships and aircraft from the U.S. and North 

Atlantic Treaty Organization (NATO).

Russia is making a significant investment in building its military capabilities. It has modernized 

its forces to develop, for example, an asymmetric, unconventional warfare capability and new 

weapons systems. It has also enhanced training of its military personnel and units and strengthened

their discipline. 

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Russia’s advanced military systems also seek to threaten U.S. advantages in certain areas we

have traditionally dominated, such as the capability to disrupt battlefield communications and the 

use of precision artillery. This has prompted the United States and NATO allies to reinforce their 

internal security capacity to deter or respond to Russian aggression. In addition, the United States 

and NATO are committed to building the military capabilities of the Baltic Republics, as well as

those of Poland and Romania, through training, advising, and equipping their forces. 

According to White House officials, through the European Reassurance Initiative, the DoD is

seeking to build the resilience and capability of our allies and partners and to enable a quicker and

more robust response in support of NATO’s common defense. This initiative increases the presence 

of U.S. and NATO forces in Europe through stepped-up unit rotations and continued deferral of 

some planned force reductions. In addition, U.S. and NATO forces have deployed units to Baltic 

countries and Romania, Poland, and Bulgaria. U.S. and NATO forces are also conducting training 

and joint exercises with these partner countries’ security forces. The total U.S. investment in the 

European Reassurance Initiative has quadrupled over the past year, from $789 million to $3.4 billion 

proposed for FY 2017.

Iran also poses increased global security threats. Its continued sponsorship of regional terrorist 

groups and its nuclear ambitions require the DoD to maintain an adequate deterrent capability and 

ensure that the United States can immediately respond if Iran commits acts of aggression. For 

example, as the Secretary of Defense stated in in his testimony on March 17, 2016, “We must still 

deter Iranian aggression and counter Iran’s malign influence against our friends and allies in the 

region, especially Israel, to whom we maintain an unwavering and unbreakable commitment.”

According to the 2017 DoD Defense Posture Statement, Iran supports the Assad regime in Syria, 

backs Hezbollah in Syria and Lebanon, and is contributing to disorder in Yemen, while still 

directing hostility and violence to the United States’ closest ally in the region, Israel. 

Finally, the threat from terrorism and the other strategic threats discussed above underscore the 

DoD’s need to maintain an adequate deterrent capability. Given the simultaneous nature of the 

evolving threats, the need for continual upgrades in weapons systems and force readiness is a 

challenge particularly under the resource constraints imposed by the DoD budget. These and other 

related management challenges are discussed throughout this document. We address in the next 

section of this document the need for interagency cooperation in addressing these five evolving 

global threats. 

Interagency Cooperation

The DoD must work with other key elements of the U.S. Government to confront evolving 

strategic challenges. Interagency cooperation and unity of effort are fundamental to countering 

global threats successfully. For example, in September 2014, President Obama announced a 

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comprehensive strategy to degrade and ultimately destroy the Islamic State in Iraq and the Levant 

(ISIL), setting out nine strategic lines of effort to combat its terrorist activities. These nine lines of 

effort cross agency lines and include active military operations throughout the world, financial and 

investigative activities among coalition partners, cutting off terrorists’ resources, countering ISIL’s

messaging, and law enforcement activities that protect the homeland. Each line of effort is assigned 

a designated lead agency or agencies for coordinating and implementing activities, including the 

Departments of Defense, State, Treasury, and Homeland Security, as well as the U.S. Agency for 

International Development, the Director of National Intelligence, and the National Counterterrorism 

Task Force. 

Interagency cooperation in the oversight of these activities is critical. For example, section 8L of 

the Inspector General Act of 1978, as amended, mandates that a Lead Inspector General (IG) 

develop and carry out a joint strategic plan to conduct comprehensive oversight of all aspects of 

contingency operations. The DoD IG has been appointed the Lead IG for the two current 

contingency operations for Operation Inherent Resolve (OIR), the effort to degrade and destroy 

ISIL, and Operation Freedom’s Sentinel (OFS), the effort to provide support to Afghanistan to help 

build and sustain an enduring security capability. The Inspectors General for the U.S. Department 

of State and U.S. Agency for International Development are key partners in fulfilling the oversight 

requirements associated with the Lead IG activities. The objective of Lead IG oversight is to ensure 

adequate oversight of any contingency operation through either joint or individual audits, 

inspections, and investigations. The Lead IG and supporting IGs continue to identify and make 

recommendations to correct inefficiencies and ineffectiveness in programs throughout their 

respective agencies. These cooperative efforts are ongoing and collectively reported on a quarterly 

basis. 

In short, the DoD, individually and through interagency efforts, faces a difficult management 

challenge to effectively combat evolving and growing strategic threats throughout the world. 

2 – Countering the Terrorist Threat

Developing Partner Security Forces 

Insider Threat

As noted in the previous section, countering terrorist threats remains a top challenge and a critical 

national security priority. For example, on September 27, 2016, the Director of the National 

Counterterrorism Center testified before Congress stating, “Having passed the 15-year mark since 

9/11, the array of terrorist actors around the globe is broader, wider, and deeper than it has been at

any time since that day.” He added, “The threat landscape is less predictable and, while the scale 

of the capabilities currently demonstrated by most of these violent extremist actors does not rise to 

the level that core al-Qaida had on 9/11, it is fair to say that we face more threats originating in 

more places and involving more individuals than we have at any time in the past 15 years.”

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In its strategic guidance document, “Sustaining U.S. Global Leadership: Priorities for 21st 

Century Defense,” the DoD identified countering “non-state threats” as part of a complex set of 

challenges in the global security environment. The document further stated that the DoD will 

continue working with allies and partners to establish control over ungoverned territories and 

directly strike the most dangerous groups and individuals when necessary. 

With regard to threat to DoD forces and insider threats, in a recent statement to the Senate Armed

Services Committee, Secretary Carter discussed the importance of countering the terrorist threat to 

DoD personnel and facilities. He stated that the DoD is working to ensure “force protection for our 

troops and the DoD facilities where they work and reside—both on base, and the thousands of offbase installations we operate. Last summer’s tragedy in Chattanooga Tennessee, underscored how 

ISIL seeks to target U.S. troops and DoD civilians, which is why we’re putting in place stronger 

physical security systems, including stronger entry controls, better alarm systems, reinforced doors, 

additional ways to safely exit our facilities, and more.”

In addition to threats posed by foreign entities, the DoD also seeks to counter internal threats by

developing insider threat programs to deter, detect, and mitigate actions by employees who may 

represent a threat to national security. According to the National Counterintelligence and Security 

Center, “the most damaging U.S. counterintelligence failures, over the past century, were 

perpetrated by a trusted insider with ulterior motives.”

Building Partner Capacity

According to its strategic guidance document, the DoD views building partnership capacity as an

essential strategy in helping to respond to terrorism as well as sharing the costs and responsibilities 

of this ongoing challenge. Accordingly, the DoD’s strategy addressed regional military challenges 

by partnering with and helping to develop the military capabilities of allied nations. A major DoD 

program for working with foreign militaries is the Defense Institution Building program, which is 

managed by the Defense Security Cooperation Agency. The Defense Institution Building 

Program’s aim is to establish responsible defense governance to help partner nations build effective, 

transparent, and accountable defense institutions. 

In Iraq, the United States and its coalition partners are engaged in OIR, the mission to degrade 

and destroy ISIL. According to the 2017 Defense Posture Statement, the U.S. strategy includes 

providing military support to coalition partners and making significant investments in training, 

advising, assisting, and equipping the Iraqi Security Forces (including Kurdish and Sunni Popular 

Mobilization forces), and in enabling moderate Syrian anti-ISIL forces. 

This is a difficult mission with no easy solutions, particularly in Syria. The train, advise, assist,

and equip program is essential to building the capacity of Iraqi security forces. Iraqi Sunni tribal 

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forces and vetted Syrian opposition forces were key to OIR progress in 2016. Iraqi Sunni tribal 

forces supported the liberation of Sunni-dominated Falluja, and the Syrian fighters succeeded in 

liberating Manbij and closing the Turkish border to ISIL. 

Several DoD OIG oversight reviews examined aspects of the fight against ISIL. For example, a 

September 2015 DoD OIG assessment evaluated U.S and Coalition efforts to train, advise, and 

assist the Iraqi Army to initiate and sustain combat operations to defeat ISIL. The report made 

recommendations that the U.S and Coalition authorities update operational and program plans,

communications and quality assurance processes, and improve the mentorship of Ministry of 

Defense personnel. 

Ongoing DoD OIG oversight efforts are assessing U.S and Coalition efforts to train, advise,

assist, and equip the Kurdish Security Forces, the Iraqi Counterterrorism Service, and Iraqi Special 

Operations Forces. Future oversight will examine U.S and Coalition efforts to build the capacity 

of the Iraq Federal Police, DoD’s analysis of information contained in social media in support of 

OIR, and whether DoD and the U.S. Department of State are effectively planning and coordinating 

stabilization efforts in Iraq and Syria. 

In Afghanistan, the United States is conducting operations through OFS against terrorist groups 

in the region. The United States is also supporting the NATO-led Resolute Support Mission to 

develop the institutional capacity of Afghanistan’s Ministries of Defense and Interior to support and

sustain the Afghan National Defense and Security Forces (ANDSF). The United States faces 

ongoing challenges in its efforts to develop a self-sustaining ANDSF. Moreover, the pace of 

progress in building Afghan national institutions and effective leadership within those institutions 

is slow and may be insufficient to achieve broad U.S. objectives in a reasonable time frame. 

Prior DoD OIG oversight in Afghanistan identified key challenges in these efforts, such as

inadequate capacity of the Ministries of Defense and Interior to lead and sustain the ANDSF; poor 

asset accountability and sustainment of vehicles and equipment; and insufficient logistic 

sustainment capability within the Afghan National Police. Shortcomings in building adequate 

systems to sustain growing Afghan security forces is a recurrent theme in DoD OIG oversight work 

and underlies many of the ANDSF capability gaps that have been identified. For example, the DoD 

OIG has found that mechanisms to provide supplies, equipment, maintenance, and personnel to 

Afghan army and police forces remain immature and unreliable. 

Other oversight organizations, such as the Special Inspector General for Afghanistan 

Reconstruction (SIGAR) have identified challenges with building partner capacity. For example, 

an April 2016 report, coauthored by SIGAR and the U.S. Institute of Peace, identified lessons 

learned in the international efforts to rebuild Afghanistan. The report cited a number of challenges, 

including the need to address conflicting goals held by the various parties involved in Afghanistan. 

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The report noted that warfighting goals are focused on immediate effects on the battlefield while 

developmental goals focused on sustainable achievements resulting from multiyear efforts. The 

report found that many nations were unclear as to what they were trying to achieve in Afghanistan 

or how to prioritize their warfighting versus development goals. 

The report also found that the Coalition lacked shared, well-defined donor objectives and goals. 

Finally, with regard to improving chances for success in Afghanistan, the report noted that the 

success of development efforts hinged on donors' knowledge of the local areas and their ability to 

gain the buy-in of Afghans living there. However, donors' ability to tailor their efforts to local needs 

was often undermined by inappropriate measures of progress, inability to move around the country, 

and frequent rotation of personnel. 

Future DoD OIG oversight will examine the Afghan Ministry of Interior’s development of its 

internal controls capability; the Afghan government’s controls over U.S. direct funding assistance; 

and U.S and Coalition efforts to train, advise, and assist the Afghan Air Force. DoD OIG 

intelligence assessments will also focus on U.S. counterterrorism capabilities and effectiveness in 

support of OIR and OFS. 

In an April 2016 review, the GAO cited building partner capacity as a central focus of the U.S. 

counterterrorism strategy, as underscored by the allocation of $675 million for Global Train and 

Equip program activities in fiscal year 2015. The allocation was a sharp increase compared to the 

$275 million annual average in the preceding 6 years. The GAO concluded that although DoD had 

established an interagency process to develop and select security assistance project proposals, the 

DoD did not require documentation of receiving units’ capacity to absorb the assistance offered or 

fully document consideration of other key elements in planning fiscal year 2015 projects. 

According to the GAO, fully documenting the basis of project approval decisions could enhance 

transparency, provide additional assurance that resources are efficiently allocated, and help ensure 

the long-term benefits of projects and careful use of scarce U.S. and partner nation resources. 

Insider Threat

It is also important to recognize that threats to the United States, its citizens, and its military can

come from insider threats, not only foreign governments and terrorist groups. Perhaps the most 

compelling recent example of an insider threat that has caused great harm to U.S. intelligence 

gathering capabilities is the case of Edward Snowden. He is the former National Security Agency 

contractor employee who remains a fugitive due to his admitted theft and release of classified

National Security Agency information. In 2014, President Obama stated that Snowden’s leaks of 

classified information revealed “methods to our adversaries that could impact our operations in 

ways that we may not fully understand for years to come.”

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Insiders can further can commit terrorist acts or cause harm to U.S. personnel or organizations 

because they have an awareness of their organization’s vulnerabilities or exploitable security 

measures. Insiders can engage in terrorist activities through compromising sensitive information 

or through the use or threat of violence. 

For example, in November 2009, an Army officer shot and killed 13 people and wounded 

32 others on base at Fort Hood, Texas. That officer had exchanged e-mails with an al Qaeda figure 

asking whether individuals that attack fellow soldiers were considered martyrs. In September 2013, 

a Navy contractor killed 12 civilian employees and contractors and wounded 4 others at the 

Washington Navy Yard, D.C., in an act of workplace violence. 

DoD’s reviews of each incident resulted in numerous recommendations associated with 

personnel policy, installation security, force protection, casualty response, and support to DoD 

healthcare providers. A July 2015 GAO report concluded that the majority of policy and guidance 

related to DoD’s key force protection had been updated, but some guidance did not yet reflect 

insider threat considerations. The GAO further found that while selected installations have taken 

actions to protect against insider threats, the DoD has not consistently shared this information, and 

the DoD was still in the process of implementing recommendations from the Fort Hood and 

Washington Navy Yard reviews. 

In May 2016, the DoD required contractors, for the first time, to establish and implement their 

own insider threat program to detect, deter, and mitigate insider threats. The revised National 

Industrial Security Program Operating Manual requires contractors to have a written program plan 

in place to begin implementing revised insider threat requirements no later than November 30, 

2016.

In 2014, the DoD also created the Insider Threat Management and Analysis Center and DoD 

Component Insider Threat Records System. The system’s purpose is to analyze, monitor, and audit 

insider threat information for insider threat detection and mitigation within DoD concerning DoD 

and U.S. Government installations, facilities, personnel, missions, or resources. The system 

supports insider threat programs, enables the identification of systemic insider threat issues and

challenges, provides a basis for the development and recommendation of solutions to mitigate 

potential insider threats, and assists in identifying best practices amongst other Federal Government 

insider threat programs. Future DoD OIG oversight will assess whether the DoD Insider Threat 

Management and Analysis Center has adequate controls over the collection, analysis, and

dissemination of insider threat and workplace violence information. 

To address insider threat concerns involving the security of military housing, the DoD OIG 

reviewed access controls for general public tenants leasing housing on military installations and 

found that DoD officials did not ensure that tenants were properly screened before granting 

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unescorted access to installations. Additionally, access badges were issued with expiration dates 

that exceeded tenants’ lease terms. As a result, the DoD assumed an unnecessary safety and security 

risk to military personnel, their dependents, civilians, and assets. 

In sum, while the DoD recognizes the challenges posed by insider threats, they remain a 

vulnerability and require continued focus from the DoD. 

3 – Enabling Effective Acquisition and Contract Management 

Linking Requirements to Strategic Military Plans Contract Management and 

Oversight 

Illegal Technology Transfer 

Acquisition and contract management have been high-risk areas for the DoD for many years. 

Although Congress and the DoD have long sought to improve the acquisition of major weapon

systems, many DoD programs are still falling short of cost, schedule, and performance expectations. 

This can result in unanticipated cost overruns, program development spanning decades, and, in 

some cases, a reduction in the capability ultimately delivered to the warfighter. 

In addition to acquisition challenges, the DoD obligates more than $300 billion annually on 

contracts for goods and services, including support for military installations, information 

technology, consulting services, and commercial items. The DoD must also reengineer its processes 

to evaluate contracts for spare parts pricing and manage its contracts for weapons system support. 

Furthermore, the DoD must continually focus on preventing the illegal transfer of operational 

and defense technologies. 

Acquisition Challenges

The scope and size of acquisition programs for DoD weapon systems is enormous. As of April 

2016, the DoD portfolio of defense acquisition programs totaled 1,375 programs. In the FY 2017 

Presidential Budget, the DoD requested $183.9 billion to fund those acquisition programs. Over 

the past year, the number of programs in the DoD portfolio of major defense acquisitions increased 

from 78 to 79, while its total planned investment in these programs decreased from $1.45 trillion 

to $1.44 trillion. 

In recent years, the DoD has taken steps to improve the acquisition of major weapon systems, 

such as implementation of DoD’s Better Buying Power initiatives. In 2010, the DoD launched these 

initiatives to strengthen the DoD’s buying power; improve industry productivity; and provide an

affordable, value-added military capability to the warfighter. The Better Buying Power initiatives 

provide a set of fundamental acquisition principles to achieve greater efficiencies through

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affordability, cost control, elimination of unproductive processes and bureaucracy, and promotion 

of competition. The initiatives are also designed to incentivize productivity and innovation in 

industry and Government, and improve the processes for the acquisition of services. 

Despite this initiative and these positive steps, acquisition programs continue to exceed the cost 

and schedule defined in the program’s strategy documents. DoD OIG audits have found program 

managers contribute to acquisition challenges by approving concurrent development and testing of 

software and hardware during production that expose programs to undue risks of additional design

changes and costly retrofits. For example, the DoD OIG evaluated the Navy’s efforts to prepare 

and manage the Ship-to-Shore Connector ship acquisition program for initial production. The DoD 

OIG found that program officials’ plan to conduct concurrent developmental testing and production 

may require the Navy to make substantial and costly modifications resulting from design and 

integration deficiencies found during production. The DoD OIG found in other audits that some 

programs are proceeding into production before manufacturing processes are fully established,

which causes cost and schedule delays. 

According to the DoD, the promotion of competition is a central tenet in acquisition reform and 

the single best way to motivate contractors to provide the best value. However, a GAO assessment 

of weapons programs found inconsistent use of acquisition strategies that include competition. Of

43 programs that GAO assessed as a part of its 2016 selected weapon programs assessment, 

21 programs conducted or planned to conduct competitive prototyping before development start 

and 26 had acquisition strategies that included some measure to encourage competition after 

development start. In addition, 13 programs reported pursuing measures to promote competition 

both before and after the start of system development. GAO found that those programs experienced 

less development cost growth than those that promoted competition in only one phase of 

acquisition. GAO also reported its prior work has shown that competitive prototyping can help 

programs reduce technical risk, refine requirements, and validate designs and cost estimates prior 

to making major commitments of resources. Programs that do not take this step may miss an 

opportunity to lower costs and reduce risk. 

Overall, DoD OIG audits have determined that the DoD has made progress in acquisition 

program management, but the DoD continues to experience programmatic problems, such as cost 

overruns and schedule delays in acquisition programs. For example, the DoD OIG has continued 

to identify acquisition challenges in which: 

 program personnel inappropriately requested waivers and deferrals from operational test 

requirements; 

 program personnel certified that programs were ready for initial operational test and 

evaluation when programs were not; 

 program personnel did not adequately document the acquisition process to define, validate, 

fund, and execute requirements; and 

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 programs did not meet system performance requirements. 

Additionally, the DoD OIG continues to identify other challenges in the acquisition process. For 

example, contracting personnel did not: 

 always determine fair and reasonable prices for spare parts, 

 acquire excess spare parts inventory, and

 adequately manage contracts for weapons system support.

The DoD OIG made specific recommendations to address these challenges, and the Services 

have made progress in implementing them. For example, the DoD OIG evaluated the Navy’s

management of waivers and deferrals from operational test requirements for nine major weapon 

systems. The DoD OIG review of waiver requests at the Naval Air Systems Command found that 

Navy program managers and system sponsors did not fully implement Navy policies for requesting 

waivers and deferrals before certifying if the programs were ready for Initial Operational Test and 

Evaluation to support the final production decision. As a result, six of nine programs reviewed 

completed Initial Operational Test and Evaluation with unresolved deficiencies that negatively 

impacted the warfighter’s primary missions. The Navy took immediate actions by issuing interim 

guidance to address the gaps in the testing and identification of deficiencies caused by program 

offices unchecked use of the waiver and deferral process. Additionally, the Vice Chairman of the 

Joint Chiefs of Staff updated the Manual for the Operation of the Joint Capabilities Integration and 

Development System to include a requirement that program managers notify Joint Requirement 

Oversight Council when a program is not meeting its primary mission requirement. In another 

review, the DoD OIG we found that the Army plans to spend $2.52 billion over 20 years to procure 

and maintain 501,289 carbine rifles that its own analysis shows could be delayed for another 

10 years with no negative impact to the warfighter. The Army agreed with the DoD OIG 

recommendation to eliminate funding for the program. 

In another example, the DoD OIG determined that the Army should specifically define the 

capability requirements to increase the likelihood that the Integrated Air and Missile Defense Battle 

Command System, valued at approximately $6.4 billion, would provide useful and supportable 

capabilities that could be effectively developed, tested, and produced at an affordable cost. The 

Under Secretary of Defense for Acquisition, Technology, and Logistics agreed to postpone the 

initial production decision until the project manager completes testing that shows the Army system 

will meet the planned requirements. The Commander, Army Fires Center of Excellence, agreed to 

fully define system capability requirements for the planned second increment of the system. 

Moreover, the acquisition of weapon systems that meet warfighter requirements is critical to

enabling the United States to implement its strategic military plans. From 2001 through 2014, test 

results for 123 weapons systems developed as major defense acquisition programs showed that over 

40 percent of weapons systems managed as major defense acquisition programs could not fully 

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meet mission requirements at the time of initial deployment. The discovery of programs not 

meeting performance requirements at this late phase of the development process results in further 

unforeseen delays. 

Software development is one major factor that affects the ability of weapon systems to meet 

mission requirements. In a March 2016 assessment of selected DoD weapons programs, the GAO

found that of 55 programs assessed, 40 reported software development as a high-risk area.

According to the GAO report, the three most common reasons for high risk in software development 

were the challenge of completing the software development needed to conduct developmental 

testing; underestimating the difficulty of the originally planned software effort; and hardware 

design changes that necessitate additional software development. 

Despite DoD’s efforts to reduce waste, accelerate schedules, and control costs, new weapon 

systems are regularly fielded later than originally planned, which results in increased expenses in 

DoD’s acquisition programs. Part of the problem is that weapons manufacturers are incentivized 

to submit optimistic cost and schedule estimates to be awarded major contracts. Service officials 

may agree with these projections to protect their acquisition budgets. Weapons system program 

managers, caught in the middle, want to avoid disruption stemming from comparing optimistic cost 

estimates with unrealistic performance requirements after their programs have started. 

The DoD OIG typically audits programs that are 15 to 18 months from a major acquisition

milestone decision. Since FY 2013, the DoD OIG has identified about $31 billion in acquisition 

program quantities that were not validated or properly approved. Additionally, the DoD OIG have 

determined the capability requirements have not been adequately defined and tested and that test 

community recommendations or deficiencies have not been adequately addressed and, in some 

cases, ignored. Acquisition reform has not alleviated DoD OIG findings that programs continue to 

exceed cost and schedule baselines and have not adequately defined performance metrics. 

In FY 2017, the DoD OIG plans to perform additional audits on the acquisition process, 

including acquisitions on programs such as the Navy Expeditionary Fast Transport program, Marine 

Corps Amphibious Assault Vehicle, Navy Mine Countermeasures Mission Package, and Army and

Marine Corps Joint Light Tactical Vehicle.

Contract management and oversight

The DoD spends approximately $300 billion each year on contracts for services and supplies. 

It faces challenges with contracting for sustainment contracts, procuring domestically produced 

items, contracting with small business, oversight of contracting officer’s representatives (CORs), 

and completing assessment reports on contractor performance. 

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DoD OIG oversight of DoD’s contracting continues to identify challenges with sustainment 

contract costs. For example, the DoD OIG identified an Air Force contract in which, over a 4-year 

period, $1 billion was spent without achieving its acquisition objective of increasing aircraft 

availability while decreasing sustainment costs. Also, in another instance, the DoD OIG found that 

DoD invested in a modernization program to update its aircraft, reduce operating costs, and extend 

the service life for decades without fully validating almost $60 million in sustainment costs. 

The DoD also struggles to comply with the Berry Amendment and the Buy American Act. The 

Berry Amendment promotes the purchase of goods produced in the United States by directing how 

the DoD can use funds to purchase items such as fabrics, food, and hand tools. The Buy American 

Act of 1933 requires, with certain exceptions, that only articles, materials, and supplies that have 

been mined, produced, or manufactured in the United States are used to fulfill Federal procurement 

and construction contracts. Overall, the DoD OIG has found that the Services did not consistently 

comply with the Berry Amendment and the Buy American Act. 

Contracting personnel were not always familiar with legal and DoD requirements to procure 

items produced in the United States. Additionally, contracting personnel issued contracts that did 

not include the appropriate contract clauses to implement the Berry Amendment and Buy American 

Act. Service personnel had limited assurance that the purchased items complied with the Buy 

American Act, and suppliers may have provided items that were not produced in the United States. 

Contracting personnel also may have violated the Anti-deficiency Act when they used appropriated 

funds to purchase non-domestically produced items when domestically produced items were 

available. 

The Federal Acquisition Regulation requires the Federal Government to provide maximum 

practicable opportunities in its acquisitions to small business. Small businesses must also have the 

maximum practicable opportunity to participate as subcontractors in the contracts awarded by any 

executive agency that is consistent with efficient contract performance. The DoD’s contracting 

with small businesses has improved. For example, in FY 2015, the DoD exceeded its goal for 

awarding prime contracts to small businesses.

The DoD OIG’s work has identified that the DoD is at risk for contractors passing inflated costs 

to the DoD but not savings. Furthermore, subcontract evaluations present additional challenges.

Major subcontractors often represent 50 percent or more of total cost on major defense acquisition 

programs. Prime contractor access to subcontractor cost or pricing data, including historical actual 

costs, may be limited, resulting in the DoD overpaying for those subcontractor costs. As of 

August 2016, the DoD OIG identified that the DoD spent at least $194 million more than fair and 

reasonable prices for commercial and noncommercial spare parts. Additionally, we estimate that 

the DoD could spend an additional $402.5 million more than fair and reasonable prices for spare 

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parts based on expected future use. This is a systemic challenge that has not vastly improved, 

although the DoD OIG has issued more than 30 reports on spare-part pricing in the last 18 years. 

The DoD also continues to struggle with providing effective contract oversight. Specifically, 

DoD OIG audits determined that contracting officers did not always appoint CORs, CORs were not 

always adequately trained, contracting officials did not always develop adequate quality assurance 

surveillance plans or were missing them altogether, and CORs did not always maintain supporting 

documentation. Some contracting officers did not define responsibilities for CORs, or assigned 

multiple contracts to one COR who may not have had sufficient time to perform all oversight 

responsibilities. The CORs did not use the oversight procedures established in the quality assurance 

surveillance plan to monitor contractor performance.

Without effective oversight by CORs, the DoD will not have sufficient information to assure 

goods and services received are consistent with contract quality requirements and performed in a 

timely manner. 

The DoD OIG has also identified significant problems with past performance reporting across 

the DoD. The Federal Acquisition Regulations require that contractor performance information be 

collected and used in source selection evaluations. Source selection officials should rely on clear 

and timely evaluations of contractor performance to make informed business decisions when 

awarding Government contracts and orders. This information is critical to ensuring that the Federal 

Government only does business with companies that provide quality products and services in 

support of DoD missions. DoD OIG audits have found that DoD officials have not evaluated

contractor performance in accordance with guidance.

Illegal Technology Transfer

Technological superiority is critical to U.S. military strategy. The DoD spends billions each

year to develop and acquire sophisticated technologies that provide an advantage for the warfighter 

during combat or other missions. Many of these technologies are also sold or transferred to other 

countries to promote U.S. economic, foreign policy, and national security interests. These 

technologies can also be acquired through foreign investment in U.S. companies that develop or 

manufacture them. However, sensitive DoD technology is also a target for unauthorized transfer, 

such as theft, espionage, reverse engineering, and illegal export. 

The DoD continues to face the challenge of preventing the illegal transfer of these sensitive 

technologies. To avoid illegal technology transfer, U.S. technology must be transferred in

accordance with U.S. export control laws. The U.S. Export Control Act regulates the transfer of 

U.S. technology, including arms and defense technology. 

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Each year, the Defense Security Service publishes a report of its findings on foreign attempts to

collect sensitive or classified information and technology. In the FY 2015 report, the Defense 

Security Service reported a continued increase in reported foreign collection attempts to obtain 

sensitive or classified information and technology. These collection attempts targeted all aspects 

of DoD technologies, including electronics; command, control, communication, and computers; 

aeronautic systems; and marine systems. 

The Defense Security Service report identified the most common methods of operation, 

including academic solicitation, suspicious network activity, and attempted acquisition of 

technology through commercial, government, and government-affiliated organizations. The report 

stated that the threat faced by illegal transfer of DoD technology “shows no sign of waning, and 

securing our cutting-edge technology remains key to maintaining our military and economic 

advantage.”

The DoD has published agency-wide policies and worked to strengthen programs to identify and 

protect technologies critical to U.S. interests. The Defense Security Service administers the 

National Industrial Security Program for DoD and 30 other Federal agencies. Recognizing that

U.S. industries develop and produce the majority of U.S. defense technology, the National Industrial 

Security Program ensures DoD contractors properly safeguard classified information and 

information associated with critical technologies. To remain a facility that is cleared by the National 

Industrial Security Program, DoD contractors must meet specific requirements to ensure they are 

safeguarding critical technologies in their possession while negotiating bids, contracts, programs 

or performing research and development efforts. DoD policy requires DoD organizations and 

contractors to report unlawful attempts to access or illegally transfer critical technologies to the 

appropriate counterintelligence or law enforcement agency. 

As the criminal investigative arm of the DoD OIG, the Defense Criminal Investigative Service 

(DCIS) conducts counter-proliferation investigations that pertain to the illegal transfer of sensitive 

DoD technologies. As of September 30, 2016, the DCIS had 198 open counter- proliferation cases 

that represent approximately 12 percent of its active investigations. In FY 2016, the DCIS 

counter-proliferation investigations resulted in 12 criminal charges, 11 convictions, and over 

$20 million in recoveries for the Government. 

The DCIS routinely works with counterpart Federal law enforcement agencies and de-conflict 

investigative activity through the Department of Homeland Security’s Export Enforcement 

Coordination Center. The following examples highlight a few of recent DCIS investigations. 

Three Chinese Nationals affiliated with the Chinese company HK Potential were arrested in

Connecticut and convicted for a scheme to steal and illegally export sophisticated U.S. military 

semiconductors. These semiconductors were designed for ballistic missile and satellite 

applications. To conceal the theft, the perpetrators provided counterfeit semiconductors to replace 

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the original semiconductors. One defendant has been sentenced to 15 months confinement and was 

ordered to forfeit $63,000. The other two defendants are awaiting sentencing. In a separate case,

a California woman was convicted and sentenced to 50 months in prison for conspiring to export 

fighter jet engines, an unmanned aerial vehicle and related technical data to China in violation of 

the Arms Export Control Act. In another example, a Chinese National was arrested for illegally 

attempting to export high-grade carbon fiber to China. The individual allegedly expressed a 

willingness to pay a premium to avoid U.S. export laws. The carbon fiber, which has many 

aerospace and defense applications, is strictly controlled. 

In short, the DoD has initiated several initiatives to improve its acquisition and contract 

management processes. However, more needs to be done to reduce the high risks within acquisition

and contract management. In addition, steps need to be taken to ensure arms and defense 

technology must be transferred in accordance with U.S. export control laws. 

4 – Increasing Cyber Security and Cyber Capabilities 

Offensive and Defense Operations 

Technology Platforms and Infrastructure

Since 2013, the Director of National Intelligence has identified cyber threats as the top strategic 

global threat facing the United States. In testimony to Congress in 2013 and 2014, the Director 

cited a wide range of potential adversaries who attempt to disrupt or manipulate U.S. activities, 

relying on digital technology or the Internet. The GAO also identifies cybersecurity of Federal 

information systems and networks as a high-risk area because all sectors of the Government-energy,

transportation systems, communications, financial services, and defense of the homeland-are 

dependent on information systems and electronic data to perform operations and to process, 

maintain, and report essential information. 

The DoD has become increasingly reliant on cyberspace to enable its military, intelligence, and

business operations to perform the full spectrum of military operations without disruption, and 

cyber threats and exploitable vulnerabilities have grown substantially. The Secretary of Defense 

recognized the need to increase the DoD’s cybersecurity efforts and has requested $6.7 billion in 

FY 2017 to support the DoD’s cybersecurity efforts, 

To guide DoD’s cyber activities and operations, in 2011 the Secretary of Defense signed the 

initial “DoD Strategy for Operating in Cyberspace.” This document also established the Cyber 

Mission Force, and, in 2012, the DoD began to build the Cyber Mission Force of approximately 

6,200 military, civilian, and contractor support personnel to perform critical DoD cyber missions. 

The Cyber Mission Force performs defensive cyberspace operations, defends the United States and 

its interests against cyberattacks, and supports combatant commands in integrating cyberspace 

effects into command plans. 

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In April 2015, the Secretary of Defense issued a new DoD Cyber Strategy to build upon the 

initial concepts and set prioritized goals and objectives through 2020. This strategy defines three 

separate, but interdependent DoD cyber missions: 

 defend DoD Information Networks, systems, and information; 

 defend, in coordination with the Department of Homeland Security and other Federal 

 agencies, the U.S. homeland and U.S. national interests against cyberattacks; and 

 support combatant command operational and contingency planning. 

In addition to the Cyber Mission Force buildup, the DoD has invested about $20 billion since 

2012, earmarked for cybersecurity enhancements and technology acquisitions to improve its ability 

to protect DoD and U.S. interests from cyberattacks. 

The Commander, U.S. Cyber Command, who is responsible for leading DoD offensive 

cyberspace operations, stated that the DoD has made progress in developing strategies and goals to 

combat cyber threats. However, the DoD continues to face significant challenges in protecting and 

securing its networks, systems, and infrastructure from cyber threats and in increasing its overall 

cyber capabilities. Cyberspace threats to the DoD continue to increase at an alarming rate. In April 

2016, the Commander reported that cyberspace operations by a range of state and non-state actors 

have intensified against the DoD. The Commander cited individual criminal acts as the most 

significant number of attacks but noted that nation states, such as Russia, China, Iran, and North 

Korea, still represent the gravest threats to national security because they have the skills, resources, 

and patience to sustain sophisticated campaigns to penetrate and compromise DoD’s networks. The 

Commander also stated that cyberattacks against the power grid, communications networks, and 

vital U.S. services could significantly affect command and control of DoD operations and, more 

broadly, the basic business functions of the United States. 

Among other significant cyberattacks, North Korea conducted a cyberattack against Sony 

Pictures Entertainment, and the Chinese conducted a cyberattack against the Office of Personnel 

Management. Both cyberattacks affected security and had significant economic impacts. More 

recently, well-publicized cyberattacks have breached systems used by the Democratic National 

Committee, the Democratic Congressional Campaign Committee, and the World Anti-Doping 

Agency. 

Defending DoD Information Technology Networks

The DoD must defend its many information technology networks, both unclassified and

classified, from compromise. This is a significant challenge. The DoD Information Network is a 

globally interconnected, end-to-end set of information capabilities that collects, processes, stores, 

disseminates, and manages critical information. It includes owned and leased communications and 

computing systems and services, software, data, and security and other associated services. 

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The network seeks to design, build, configure, secure, operate, maintain, and sustain DoD 

communications systems and networks in a way that creates and preserves data availability, 

integrity, and confidentiality, as well as user authentication and nonrepudiation. 

To improve its ability to defend the DoD Information Network, the DoD established the Joint 

Force Headquarters–DoD Information Network in January 2015 to lead and coordinate command 

and control decisions and tactical operations affecting the defense of DoD’s systems, networks, and 

data. The Commander, Joint Force Headquarters–DoD Information Network, also coordinates with 

the Commander, U.S. Cyber Command. 

The Commander, U.S. Cyber Command, also serves as the Director of the National Security 

Agency. The Secretary, Congress, and President are considering separating these commands. The 

GAO is currently assessing, among other things, the advantages and disadvantages of the 

Commander, U.S. Cyber Command, serving as the Director of the National Security Agency and 

how the DoD measures performance for this relationship in response to a proposed congressional 

mandate. 

To assess the DoD’s efforts to protect its information networks, the DoD OIG issued a report in 

2013 on maintaining authorization accreditation for select DoD information systems. The report 

concluded that 2 of the 10 information systems reviewed operated on the DoD Information Network 

for as long as 14 months without proper security controls to continue their authorization agreements. 

The DoD OIG recommended that the Air Force take appropriate action to shut down network access 

or accept the risk of operating without approved security controls for all systems with expired 

authorities to operate. 

The DoD OIG also conducted audits related to the protection of physical and logical access to

the Secret Internet Protocol Router Network. The audits found consistent and systemic weaknesses 

that affected the security of the classified network. The DoD OIG recommended specific physical 

security improvements and other cybersecurity-related actions to limit access points, account for 

all circuits, and manage general and privileged account access. Although not completed, the Navy 

and Air Force have begun corrective actions to address specific and systemic weaknesses identified 

in these OIG audits. 

Developing and Using Cyber Capabilities and Infrastructure

The DoD also faces challenges in developing or acquiring unique cyber capabilities to conduct 

defensive and offensive operations. In September 2015 testimony, the Deputy Secretary of Defense 

and the Commander, U.S. Cyber Command, stated that the DoD continues to develop a broad range 

of cyberspace capabilities and a separate infrastructure to respond to or conduct cyberspace attacks. 

In November 2015, however, the DoD OIG issued a classified report concluding that the Military 

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Services were independently developing cyber platforms and cyber capabilities, which could result 

in redundant capabilities that do not align with the mission needs of the Cyber Mission Force. 

Among other actions, the DoD OIG recommended developing a unified strategic plan to address 

capability development to meet both Service-specific and joint mission requirements. Although 

not completed, U.S. Cyber Command and the Military Services have begun to address joint 

capability development needs of the Cyber Mission Force. 

The DoD is now building a unified platform to integrate disparate cyber platforms and

capabilities. However, the unified platform will not be operational for several years. To ensure 

that the Cyber Mission Force and the Services are able to meet joint and Service-specific operational 

requirements, the DoD needs to unify capability development and accelerate research and 

development of cyber capabilities, including basic and applied research to develop cyber 

technologies that can be used in a wide range of operational environments. 

Additionally, the DoD is in the process of implementing the Joint Information Environment, an

initiative announced in August 2010 by the Secretary of Defense to consolidate information 

technology infrastructure to achieve savings in acquisition, sustainment, and manpower costs and 

improve the DoD’s ability to defend its networks against growing cyber threats. This is designed, 

in part, to reduce the DoD Information Network attack surface by establishing a single security 

architecture, optimizing identity and access management, and migrating to cloud computing. 

However, since 2014, the DoD OIG and the GAO have issued reports on the DoD’s challenges in 

implementing Joint Information Environment initiatives. 

The DoD has been actively engaged with the National Institute of Standards and Technology to

improve the understanding of cloud computing across the Federal Government and has 

implemented enhancements to the DoD’s Select and Native Programming Data Input System for 

Information Technology to more accurately account for cloud budgets and to collect information 

on DoD cloud contracts. 

However, in recent audit reports, the DoD OIG concluded that the DoD did not have an effective 

cloud computing implementation strategy or process to collect data and measure the effectiveness 

and efficiency of the DoD cloud initiative. The DoD OIG recommended that the DoD develop an 

implementation plan that described required tasks, resources, and milestones for transitioning to 

cloud services and establishing a repository for collecting cloud-related information. 

The GAO also issued a report in July 2016 that concluded the DoD’s almost $1 billion 

investment in the Joint Information Environment by yearend FY 2016 has yet to result in fully 

defining the scope and cost of the program. The GAO recommended defining the scope and

expected cost of the Joint Information Environment and fully identifying the composition of the 

cyber workforce needed to operate within the program. In response to the report, the DoD stated 

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that it was in the process of completing documentation to address new Joint Information 

Environment program and cost assessments. 

Planning and Conducting Defensive and Offensive Operations 

Defensive and offensive cyberspace operations, whether conducted individually or 

simultaneously, are important for defending the U.S. homeland and national interests and 

supporting operational and contingency operations. In accordance with the October 16, 2012 

Presidential Policy Directive-20, “U.S. Cyber Operations Policy,” the DoD can conduct offensive 

and defensive cyberspace operations. For example, as part of OIR, the DoD is conducting offensive 

cyberspace operations to counter cyber threats and limit disruptive and destructive cyber 

capabilities used by ISIL and to disrupt and interrupt its ability to operate, communicate, and

command and control forces in a digital battlefield. However, the DoD is continuously challenged 

with attracting and retaining a skilled cyber workforce; limiting vulnerabilities and points of attack 

to its thousands of systems and networks; developing, testing, and using cyber capabilities; and

integrating cyberspace operations into command plans. 

The DoD’s cyber missions require collaboration with foreign allies and partners. The DoD 

seeks to build partnership capacity in cybersecurity and cyber defense, and to deepen operational 

partnerships where appropriate. The DoD is focusing its international engagement on the Middle 

East, the Asia-Pacific, and key NATO allies. 

Building and Retaining DoD’s Cyber Workforce

To address the cybersecurity challenge, the DoD must attract and retain a cyber workforce with 

specialized skills. In 2016, the GAO identified the shortage of cybersecurity professionals in the 

Federal Government as a high-risk area. Since the DoD began building the Cyber Mission Force 

in 2012 and fielding teams in FY 2013, it has created 123 of the 133 planned teams with 

approximately 5,000 of the 6,200 planned personnel. Of these 123 teams, 27 are reportedly fully 

operational and have supported DoD and other national missions to protect critical systems, 

networks, and infrastructure. But hiring and retaining these talented and skilled personnel is a 

difficult challenge for any Government agency, given the intense competition for these skills. 

The DoD Cyber Mission Force, U.S. Cyber Command, and the Military Services have identified 

a strategy to build, develop, and increase the number of professions with unique skills to perform 

critical functions such as computer network defense. The strategy generally entails developing and 

using new military occupational specialties, ratings and designators within the Military Services, 

training and career development paths, and retention options to bolster critical skills and improve 

the cyber workforce. 

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The DoD OIG issued a classified report in 2015 concluding that the Services faced continued 

challenges in fielding Cyber Mission Force teams. Among other actions, the DoD OIG 

recommended revising or developing fielding strategies and expanding training capacity to build 

Cyber Mission Force teams. Since the issuance of that report, the Deputy Secretary of Defense and

the Commander, U.S. Cyber Command, stated that the DoD was attracting and recruiting a cyber 

workforce at a faster pace because of changes that gave the DoD enhanced authority to hire critical 

cyber professionals. 

With regard to oversight of information technology systems and building the cyber workforce, 

the OIG will continue to conduct oversight in this challenging area. In FY 2017, the DoD OIG has 

ongoing or planned audits that will determine whether the: 

 National Security Agency implemented appropriate controls to protect its systems, 

networks, and data from insider threats; 

 combatant commands integrated offensive and defensive cyberspace operations into 

command plans; 

 U.S. Cyber Command and the Military Services integrated the National Guard and Reserve 

Components in the Cyber Mission Force; 

 Military Services and Defense Information Systems Agency effectively implemented Joint 

Regional Security Stacks as part of its Joint Information Environment initiatives 

 Army secured electronic health records; 

 DoD Components developed and tested contingency plans to minimize disruptions to 

operations; 

 Military Services implemented approved and secure physical access control systems at

DoD facilities and installations; and 

 DoD effectively and appropriately shared cyber threat indicators within the Federal 

government. 

In sum, although the DoD has taken steps to increase cybersecurity through offensive and

defensive operations and build its Cyber Mission Force, significant challenges remain. The DoD 

needs to continue to focus in areas such as maintaining a skilled cyber workforce, developing and 

using cyber capabilities, and integrating cyberspace operations into command plans. The challenge 

for cybersecurity is that adversaries and defenders constantly innovate and adapt capabilities, and 

it is a continuous effort to protect DoD’s systems and networks from increasingly sophisticated 

cyberattacks. The DoD must develop and evolve its tactics, techniques, and technology and build 

and retain a highly skilled cyber workforce to detect and respond to increasingly sophisticated 

threats, whether defensively or offensively. 

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5 – Improving Financial Management 

Financial Auditability Eliminating 

Improper Payments

Financial management challenges continue to impair the DoD’s ability to provide reliable, 

timely, and useful financial and managerial information to support operating, budgeting, and policy 

decisions. DoD financial management covers a complex array of financial topics— including 

procurement, inventory, payroll, asset management, and real property—across a very complex

organization structure. However, the DoD is the only Federal agency that has never undergone a 

full financial statement audit. Moreover, the DoD financial statements are the major impediment 

to a successful audit of the U.S. Government. 

The DoD financial statements have not been ready for audit since the DoD began preparing 

financial statements in the early 1990s. Neither the DoD as a whole nor its Military Services have 

been able to provide auditors sufficient evidence to undergo a financial statement audit. 

The DoD is required by the Chief Financial Officers Act of 1990 to achieve a full financial 

statement audit covering its budget, assets, and liabilities. Public Law 111-844 specifically requires 

DoD to have audit-ready financial statements by September 30, 2017. In addition, the Office of 

Management and Budget Circular No. A-123 defines management’s responsibilities for enterprise 

risk management and internal control. The Circular emphasizes the need to integrate and coordinate 

risk management and strong and effective internal controls into existing business activities and as

an integral part of managing an agency. Enterprise risk management is a key element of reaching 

financial auditability and the DoD continues to be challenged by these requirements. 

Financial Auditability

Providing auditable financial statements is critical for ensuring that programs are working and 

funds are being used properly. Unreliable financial information makes it difficult to accurately 

develop and execute budgets or to determine the effectiveness and efficiency of military operations. 

DoD financial management challenges make it difficult to see potential waste, mismanagement, 

and cost overruns. Financial management procedures are often manual and limit the DoD’s ability 

to develop repeatable processes that could be achieved through well- designed automated solutions. 

If the DoD can achieve a favorable opinion on its financial statements, these improvements can

also help management make better decisions when predicting operational requirements. For 

example, the DoD OIG found that some budget submitting offices in the Navy could not support 

the validity and accuracy of obligations during its triannual review of unliquidated obligation and 

unfilled customer orders in May 2014. This inability to support the obligations did not provide the 

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Navy with the assurance that its financial reporting accurately reflected the status of its obligation 

and may have lost the opportunity to use funds for other purposes. 

Current State of Audits

DoD OIG audits continue to show a lack of supporting documentation for account balances and 

system data that are not reliable, accurate, or timely. Asset information, such as inventories, 

continues to show problems with valuation, location, and counts that can result in operations placing 

orders for new parts or equipment even though there are sufficient supplies on hand. 

Lack of well-designed system interfaces also hamper the DoD’s ability to compile accurate and

timely financial and program information. For instance, the DoD OIG has found that the DoD lacks 

adequate internal controls over the disbursement and obligation of appropriated funds, key 

reconciliations to “balance the checkbook,” appropriately valuing its assets, improving controls in 

key financial systems, and preparing unsupported journal vouchers used to force accounting entries 

in the financial statements to match. The DoD OIG’s July 2015 audit report summarizing prior 

audits of DoD financial management highlighted these material internal controls weaknesses and

identified that the corrective action for over 130 recommendations still needed to be implemented. 

Some recommendations were over 4 years old. 

The DoD OIG also performed a series of audits on improvements needed in DoD’s management 

of suspense accounts. These suspense account audits highlighted that the DoD could not account 

for all of its transactions on the DoD’s financial statements. Suspense accounts are designed to

temporarily hold funds that belong to the Federal Government that do not have enough accounting 

information to immediately post the transaction to the proper financial statement. 

However, DoD did not have controls in place to accurately record suspense account balances on 

the proper component-level financial statements or clear suspense account transactions and

incorrectly recorded collections from revenue-generating programs, service member tax

withholdings. In July of 2016, the DoD OIG reported that the Army did not adequately support

trillions of dollars in journal voucher adjustments on its FY 2015 financial statements and that it 

materially misstated its inventory by millions of dollars. The value of unsupported journal vouchers 

continue to limit the reliability of the financial accounting information for decision makers who 

need to know whether programs are working and funds are being used properly. Inaccurate 

inventory information also limits DoD’s ability to ensure materiel and equipment is available to for 

operational readiness. 

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Corrective Actions Taken by the DoD

Although DoD plans to conduct its full financial statement audits beginning October 1, 2017, as

required by law, several key challenges continue to face the DoD when preparing for the audits. 

To address these challenges, the DoD is leading enterprise-wide initiatives that seek to support audit 

readiness or improve overall financial management. The DoD continues to update the Financial 

Management Regulation and issue policy memorandum to implement accounting policies and 

better ensure sustainable, repeatable, and standard processes. It also established formal governing 

bodies to emphasize the importance of DoD business and financial operations and achieving audit 

readiness. The DoD has also created working groups to ensure that solutions to its financial 

impediments comply with accounting standards and can pass auditor testing. DoD leaders are 

closely monitoring its progress. 

What is Left to Do – Auditor’s Perspective

Achieving audit readiness by September 30, 2017, will be a difficult challenge. These 

challenges cut across DoD Components and require DoD-wide changes to policies, procedures, and 

regulations. The major impediments to auditability require the DoD to improve and in some cases 

change its way of doing business. Long-standing business processes that have supported DoD 

missions are not always sufficient for an audit and must be transformed. For example, audits 

conducted by independent public accounting firms of the Services’ FY 2015 Schedule of Budgetary 

Activity cited more than 700 combined findings and recommendations that revealed individual and 

systemic issues that resulted in unfavorable opinions on the Schedules. 

Correcting material weaknesses and significant deficiencies that have been identified by public 

accounting firms should be the first priority of the Military Services. The DoD also needs to

develop sustainable and repeatable processes to better respond to audit requirements and provide 

the best supporting documentation for sampled transactions. 

To achieve and sustain audit readiness, the DoD must also focus on its high-risk areas such as

the ability to eliminate the use of journal vouchers as a means of addressing unsupported accounting 

transactions. The DoD should also consider further consolidating the financial management

systems throughout the DoD. The sheer number of business and financial systems is staggering 

when compared to other Federal agencies, and the level of effort and cost of ensuring all systems 

are audit ready is significant. DoD needs to expedite the retirement of legacy systems and ensure 

that remaining systems are interfaced appropriately. These systems should capture and process 

timely and accurate financial and program data that decision makers can rely upon to ensure 

programs are working and funds are being used properly. 

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The DoD’s financial management environment is decentralized and consists of hundreds of 

systems processing transactions reported in the financial statements. Because the financial 

management processes lack adequate controls to support such a complex and convoluted structure 

they must eliminate systems and continue to develop and document adequate controls that comply 

with accounting standards. 

Achieving audit readiness and improved financial statements requires leadership focusing 

attention on this effort. In this effort, leaders across the DoD are communicating that audit readiness 

remains a DoD-wide priority. Secretary Carter and Deputy Secretary Work continue to emphasize 

the importance of improving DoD business and financial operations and achieving audit readiness. 

The DoD are also monitoring progress. For example, in March 2016, a senior leadership committee 

co-chaired by the Deputy Secretary of Defense and the Vice Chairman of the Joint Chiefs of Staff 

reviewed the status of audit readiness. Each Military Department reported it was on track to be 

ready for an audit by September 30, 2017. The Deputy Secretary stressed the importance of making 

and sustaining improvements. 

Yet, while the DoD plans to have 90 percent of DoD’s total budgetary resources and 43 percent 

of total assets under audit in FY 2017, there are still critical capabilities and remediation efforts that 

need to be accelerated in order for full financial statement audits to begin in FY 2018. 

Further, the DoD needs to address how to protect sensitive data while still presenting financial 

statements in compliance with U.S. GAAP. These challenges are magnified as the DoD is also 

facing continuous personnel and budgetary constraints as another fiscal year begins under a 

continuing resolution. 

In addition, the DoD must be able to account for its assets reported on its Balance Sheet, 

including adequate support for how much assets cost, how much the DoD owns, and where the 

assets are located. In addition, audit success is closely linked to cash traceability, including proper 

management and accountability of all transactions to include fully reconciling financial transaction 

universes. Unsupported journal vouchers and unresolved differences between DoD and the 

Department of the Treasury are material and jeopardize achieving audit ready financial statements. 

Without these improvements, the DoD financial statements will continue to remain unreliable 

and managers will not be able to rely on its accounting systems to make important management and 

resource decisions. 

Improper Payments

Improper payments are defined as payments, including both overpayments and underpayments, 

that should not have been made or that were made in an incorrect amount. Reducing improper 

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payments is another important financial management challenge facing the DoD. Improper 

payments are often the result of unreliable data or a lack of adequate internal controls that increase 

the likelihood of fraud. 

Recently, DoD OIG reports highlighted improper payments related Government travel charge 

cards. For example, in March 2016, the DoD OIG reported that the DoD Components did not take 

adequate actions to reduce estimated improper payments in the DoD Travel Pay program, as

required by the Improper Payments Elimination and Recovery Act (IPERA). The DoD OIG 

reported that the DoD missed its improper payment reduction goals for 3 consecutive years. In

addition, the GAO reported in June 2016 that the DoD did not submit proposals for reauthorization 

or statutory changes to Congress in response to 3 consecutive years of noncompliance with IPERA 

requirements in its Travel Pay program. 

For the DoD FY 2015 Agency Financial Report, the DoD met five of the six requirements in

accordance with the IPERA. Specifically, the DoD published a financial report; conducted 

program-specific risk assessments; published corrective action plans; published improper payment 

estimates; and reported improper payment rates of less than 10 percent. However, the DoD did 

not achieve its improper payment reduction targets for one of the eight payment programs with 

established targets. Not attaining reduction targets indicates that additional corrective actions are 

needed to reduce improper payments. 

Overall, the DoD OIG found that the DoD has made progress in improving the identification 

and reporting of improper payments. For example, it has taken corrective actions to implement 

recommendations made by the DoD OIG to reduce improper payments in the DoD Travel Pay 

program and complying with IPERA, such as submitting remediation plans to address internal 

control deficiencies, and developing metrics and quality assurance goals related to IPERA 

reporting. 

Additionally, two recent DoD OIG reports identified challenges with improper payments related 

to Government travel credit cards. A May 2015 report found that from July 1, 2013, through June 

30, 2014, DoD cardholders had 4,437 transactions totaling $952,258, where they likely used their 

travel cards at casinos for personal use. In addition the DoD OIG identified 900 DoD cardholder 

transactions totaling $96,576 at adult entertainment establishments. An August 2016 report found

that DoD management and travel card officials did not take appropriate action when notified that 

cardholders potentially misused their travel card. Specifically, DoD management did not perform 

reviews on sampled cardholders, did not take action to eliminate additional misuse, and did not 

review cardholder travel vouchers that indicated personal use. By reducing improper payment, 

DoD can use those funds to meet other critical operational needs. 

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6 – Protecting Key Defense Infrastructure

Installations and Energy 

Space

Defense Industrial and Technological Base

Protecting key defense infrastructure, such as installations, space, and the defense industrial 

base, is a critical challenge for the DoD. The DoD must ensure that its installations worldwide are 

protected and sustained to meet operational mission requirements. The DoD must also maintain 

and protect its assets in space. In addition, the DoD needs to address supply chain vulnerabilities 

and its strategic competitors. 

Installations and Energy

The DoD manages over 500 installations worldwide, consisting of nearly 300,000 buildings. It

must ensure that each installation is maintained and sustained to support operational mission 

requirements. To accomplish this, the DoD is constantly prioritizing its military construction, 

sustainment, and recapitalization requirements. The DoD must meet these requirements, with 

constrained funding, while managing the security risks to installations and the challenge to

contribute to mission readiness. 

The growing need for military construction projects has increased the need for accurate and 

reliable justifications and cost estimates for military construction projects. The DoD has made 

progress in managing installations efficiently and economically. In particular, the DoD has 

increased the use of renewable energy and energy saving projects on DoD installations to provide 

energy security and to help the DoD comply with various energy mandates and goals. Some of the 

renewable energy and energy saving projects include improved lighting; high- efficiency heating, 

ventilation, and air conditioning systems; double-pane windows, solar and wind electricity, and

new roofs. 

In FY 2015, the DoD spent $16.7 billion to satisfy the DoD’s energy needs. However, OIG 

audits show that DoD has not implemented sufficient controls to effectively monitor and oversee 

renewable energy and energy contracting. Specifically, a series of audits demonstrated that DoD 

does not have sufficient programs to ensure that energy savings performance contracts and utility 

energy services contracts were providing cost savings. In some cases, the DoD spent millions on 

projects that may not have achieved sufficient energy savings to pay back the utility company’s

investment as required or to support payments to the contractor based on estimated guaranteed 

future annual cost savings. 

In addition, energy availability directly affects the capabilities of weapons platforms, facilities, 

and equipment, while remaining a substantial expense for the DoD. Energy is an important part in 

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sustaining worldwide military operations because energy is used by installations, ships, aircraft, 

and combat vehicles. Some of the DoD’s largest challenges are supporting energy innovation in 

current operations and integrating energy considerations into force development. Furthermore, the 

DoD is striving to meet the President’s goal to produce or procure not less than 25 percent of its 

total energy consumption from renewable sources by 2025. 

Space

The DoD's assured access to space and its ability to maintain space control is a significant 

management challenge. Space control seeks to support freedom of action in space and, when

necessary, defeat adversary efforts that interfere with or attack U.S. or allied space systems and 

negate adversary space capabilities. 

Currently, with regard to assured access to space, the Air Force is attempting to reduce the cost 

of national security launches and eliminate the reliance on Russian-made RD-180 engines. To

accomplish these objectives and to move to a new generation of launch vehicles, the Air Force must 

certify two new launch vehicles being developed by the United Launch Alliance (ULA) and 

Space-X. In addition to access to space, the DoD needs to maintain the long-term dominance of its 

space technologies and capabilities. In September 2016 testimony before the Senate Armed 

Services Committee, for example, General Hyten emphasized the importance of operations in

space, "In space, threats continue to grow.as potential adversaries attempt to counter what has 

become a critical advantage for our Nation and our allies." 

Recent OIG space-related projects include ongoing quality assurance inspections of ULA and

Space-X launch vehicle manufacturing and test operations. The OIG plans to conduct other 

space-related oversight projects in the future. 

Defense Industrial and Technology Base 

The DoD draws from a large network of global suppliers for its equipment and support needs. 

For example, in fiscal year 2014, the DoD managed over 4.7 million parts that are used in

communications and weapon systems, at a cost of over $96 billion. In many cases, this has allowed 

U.S. firms to harness the creativity of the global market. However, these supply chains create 

vulnerabilities and are subject to manipulation by strategic competitors. 

One of the vulnerabilities within the global supply chain is the widespread existence of

counterfeit parts. Counterfeit parts can, for example, delay missions, affect the integrity of systems, 

and ultimately endanger the lives of service members. Almost anything is at risk of being 

counterfeited, including microelectronics used in fighter jets and missile guidance systems, 

fasteners used in aircraft, and materials used in engine mounts. 

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In response to this risk, in 2013, the DoD created policy to prevent the introduction of counterfeit 

into the supply chain, as well as testing and other means by which to detect counterfeit materials 

that may have already entered it. The DoD also issued regulations, as required by the 2012 National 

Defense Authorization Act, that require DoD personnel and contractors to report suspected 

counterfeit electronic parts to a cooperative activity between Government and industry. Called 

the Government-Industry Data Exchange Program, this program allows Government and industry 

participants to share information on nonconforming parts, including suspect counterfeit parts,

through a web-based database. The act also requires that contractors develop and maintain systems 

to detect and avoid counterfeit electronic parts. 

The GAO recently reviewed DoD’s efforts to address vulnerabilities to counterfeit parts in its 

supply chain. The GAO found several aspects of DoD’s implementation of its mandatory reporting 

for suspect counterfeit parts have limited its effectiveness as an early warning system. The GAO

also concluded that, without proper oversight ensuring that the reporting requirement was 

consistently applied, the DoD could not ensure it is effectively managing the risks associated with 

counterfeit parts. 

Investigation of product substitution, including counterfeit, defective or substandard products, 

is one of the top investigative priorities of the DCIS. Product substitution disrupts readiness, 

wastes economic resources, and threatens the safety of military and Government personnel and 

other end users. As of September 30, 2016, the DCIS had 159 active product substitution cases that 

represented approximately 10 percent of active investigations. In FY 2016, the DCIS’ product 

substitution investigations resulted in 5 arrests, 17 criminal charges, 11 convictions, and over 

$41 million in recoveries for the Government. 

A recent DCIS product substitution investigation led to the conviction of an individual, who 

imported thousands of counterfeit integrated circuits from China and Hong Kong and resold them 

to U.S. customers, including contractors who supplied them to the DoD for use in nuclear 

submarines. The perpetrator pled guilty to conspiring to traffic in counterfeit military goods, and

was sentenced to 37 months imprisonment, and ordered to pay $352,076 in restitution to the 

31 companies. In addition, the perpetrator was issued two forfeiture money judgments totaling over 

$1.8 million. A separate DCIS investigation found that a company supplied nonconforming 

mechanical parts to the Defense Logistics Agency for use on various weapons systems, including 

aircraft, vessels, and vehicles. The majority of these parts were critical application items, which are 

items essential to weapon system performance or operation, or the preservation of life or safety of 

operating personnel. A jury convicted the company’s president of mail fraud and false claims. The 

individual is awaiting sentencing and was debarred, along with the company, from Government 

contracting for a period of 3 years. 

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In summary, the DoD has made progress in installation and energy management, and it has 

recognized the urgency of maintaining control of space. It must also focus on preventing the 

introduction of counterfeit parts in the supply chain, which is a difficult and widespread challenge. 

7 – Developing Full Spectrum Total Force Capabilities 

Structure and Posture of the Force and Building Diverse Capabilities Despite 

Budget Pressures

Chemical, Biological, Radiological, Nuclear, and Explosives Issues

Designing, building and posturing a total force, active and reserve, capable of executing a wide 

range of missions across the full spectrum of potential conflict is a continuous challenge for the 

DoD. Increasingly diverse threats and capability requirements combined with significant budget 

pressure requires the DoD to make difficult strategic choices in developing its total force. 

For much of the last decade, the DoD has focused on capabilities needed for combatting violent 

extremists and building partner capacity in Afghanistan, Iraq, and, most recently, Syria. As noted 

in previous challenges, violent extremism and terrorism continue to threaten the United States and 

its allies. At the same time, Russia, Iran, North Korea, and China are threatening U.S. strategic 

interests and the stability of regions throughout the world. Other countries and non- state actors

continue attempts to obtain and upgrade modern conventional weapons, advanced technologies, 

and weapons of mass destruction. 

As the DoD builds on the new capabilities it has developed in the fight against violent 

extremists, it also must refocus on capabilities necessary to counter current and future strategic 

threats. This refocus extends across all domains (land, sea, air, space, and information) and 

heightens competition for resources, the need for new ways of thinking to extend U.S. military 

dominance, and the critical importance of optimizing the value of DoD capabilities and components 

across the full spectrum of conflict. 

The most recent DoD initiative to maintain U.S. military superiority over its adversaries, 

primarily China and Russia, is its Third Offset Strategy. Announced in FY 2015, this strategy seeks 

to develop and employ new technologies and operational concepts to offset adversaries’

investments while increasing U.S. capabilities in a way that it cost effective. With its emphasis on 

research and development, experimentation, war gaming, and faster adoption of new technologies,

the Third Offset Strategy is a timely and promising initiative that will benefit from OIG oversight. 

In addition to pursuing innovative technologies and operational concepts, the DoD continues to

assess the size and mix of its total force to maintain an optimal mix of active and reserve forces that 

can defeat our enemies and defend the homeland. For example, the DoD is reviewing how it will 

train and use Active and Reserve Components and where to position its personnel and assets 

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throughout the world to ensure it has adequate total force capability. This is not a new issue. In

2007, the Secretary of Defense wrote that the DoD was assessing options on how best to support 

global military operational needs, including whether the DoD has the right policies to govern how 

Reserve, National Guard, and Active Component units are used. In 2008, the Secretary issued 

guidance emphasizing that the Reserve Components provide operational capabilities and strategic 

depth to meet U.S. defense requirements across the full spectrum of conflict and that the military 

services need to better integrate Reserve Component capabilities into their respective total force 

structures. The Services efforts to assess the right balance of active duty, reserve, and National 

Guard resources are discussed below.

In May 2011, the Secretary of the Air Force discussed reshaping the structure of the Air Force 

in the face of enduring budget constraints. At that time, the Air Force had 144 initiatives across the 

service aimed at identifying efficiencies and the right mix of personnel, technology, and

modernization. In 2014, Congress also established the National Commission on the Structure of 

the Air Force to recommend how the force structure should be modified to meet present and 

expected mission requirements within available resources. The Commission’s report, issued in

January 2014, provided recommendations to rebalance Active, Reserve, and Air National Guard 

components; increase the end strength of the Reserve components; and increase regular, periodic,

and predictable use of Reserve component forces. 

The National Commission made recommendations to increase the number of “associate units”

between Active and Reserve components and to create a single integrated chain of command for 

these associate units. Acting on these recommendations in the report, the Air Force intends to reach 

initial operational capability in its Integrated Wing Pilot Program in FY 2017. This program will 

align Active and Reserve components under a single chain of command to leverage the strengths 

of both components and meet mission requirements more efficiently and effectively. 

The FY 2015 National Defense Authorization Act established the National Commission on the 

Future of the Army to evaluate, in part, how Army National Guard and Army Reserve personnel 

are integrated into the Total Force. DoD and Army policy directs the Army to ensure total force 

policies encourage the optimum use of active and reserve component personnel and to organize, 

man, train, and equip the Army, Army National Guard, and Army Reserve as “an integrated, 

operational Total Force.” During a speech on August 3, 2016, the Secretary of Defense stated, “The 

days of the National Guard serving exclusively as a strategic reserve are over.” He added that the 

Guard is an “indispensable component of the Total Force,” whether in day-to-day activities or 

large-scale operations. Army National Guard officials acknowledge that this new role will require 

a shift in the mindset of Guard unit leadership and personnel. 

As part of a series of audits on the readiness of military units, the DoD OIG is completing an

audit of National Guard Armored Brigade Combat Teams training to perform unified land 

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operations—a full spectrum operations capability. Based on interim audit results, the DoD OIG 

issued a Notice of Concern to the Army National Guard regarding turnover within key leadership

positions and methods used to assess and report readiness for some units. The DoD OIG also 

determined that training programs were not effective in ensuring whether units could attain and 

sustain mission proficiency. The DoD OIG recommended that the Army and the Army National 

Guard provide commanders clear guidance for managing training programs, maintaining unit 

cohesion, and ensuring assessments more accurately reflect training readiness. 

During FY 2017, the DoD OIG will conduct an audit of personnel readiness reporting levels in 

National Guard units. Personnel readiness data, such as the type, number, rank, and status of 

personnel assigned to a unit, is critical information that leaders need to make informed decisions on 

whether units are available to deploy. As the role of the reserve components in DoD’s total force 

continues to evolve, DoD’s ability to rely on personnel readiness data provided by the Guard units 

will become increasingly important. The planned audit will focus on accuracy of reported personnel 

readiness levels at select Army National Guard and Air National Guard units. 

The Navy is increasing its fleet from 280 ships at the end of FY 2016 to 308 ships in FY 2021.

The fleet consists of aircraft carriers, submarines, surface combatants, amphibious ships, combat 

logistics ships, and support ships. The Navy’s top shipbuilding priority is to replace the aging Ohio 

class ballistic missile submarines, which are a key component of the nation’s nuclear triad. The 

Navy plans to build the first new Ohio-class submarine in FY 2021. Additionally, although the 

Navy is statutorily required to maintain 11 aircraft carriers, it has operated 10 carriers since the 

retirement of the USS Enterprise in 2012. Extended deployments of the remaining ships have 

placed stress on crews. The critical and costly carrier and submarine programs consume about half 

of the Navy's shipbuilding resources, affecting the Navy's ability to build ships of other classes. 

The Navy has identified additional amphibious vessel requirements and has a significant shortfall 

in small surface combatants. While prioritizing shipbuilding, the Navy is also taking steps to 

improve information warfare capabilities, invest in naval aviation, rapidly integrate unmanned 

systems, and bolster investments in advanced weapons. Filling capability gaps while maintaining 

the current fleet and meeting global operational and forward presence requirements is a significant 

management challenge for the Navy that requires objective oversight. 

Regarding force size, the DoD’s FY 2017 budget request includes a total force of 

2,073,200 active, reserve, and guard soldiers. The following table shows the total force requests 

for each service in FY 2017. 

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Table. DoD Total Force Request for the FY 2017 Budget

Army Navy Marine

Corps

Air Force

Active 450,000 323,100 182,000 317,000

Reserve 195,000 58,900 38,500 68,500

Guard 335,000 - - 105,200

Total 980,000 382,000 220,500 490,700

This force size, the smallest in decades, increases the need for effective management, as well as

comprehensive oversight to ensure the most effective and efficient employment of the total force. 

For over 50 years, U.S. airpower superiority has been a core component of our full-spectrum 

total force capabilities. Each Military Service is experiencing challenges in maintaining air combat 

power advantage over our adversaries. After 25 years of near constant combat and use, DoD’s fleet 

of aircraft is aging and in need of overhaul or replacement. Military aviators remain heavily 

engaged around the world, yet full-spectrum readiness and the size of the force remain a significant 

concern. To address these challenges, the DoD is acquiring new aircraft such as the MV-22 and 

the F-35 Joint Strike Fighter, as well as slowing the retirement of aircraft like the F/A 18 and

A-10 through overhaul and sustainment efforts.

In 2013, the Army began its Aviation Restructuring Initiative in which it planned to cut its

aviation force to achieve end-strength and budget-driven structure limitations. The initiative 

proposed to retire or reassign aircraft and deactivate aviation brigades. The goal of the Army’s

Aviation Restructuring Initiative is to protect modernization efforts and optimize the mix of Active 

and Reserve components. For example, the initiative transfers the Apache Helicopters from the 

Guard to active duty units and reassigns the H-60 from the active duty units to the Guard. In

September 2016, the DoD OIG began an audit of the Army’s modernization efforts related to the 

H-60 Black Hawk fleet. 

Aging aircraft also has an impact on the training readiness of the aviators who have less 

equipment on which to train. In March 2016, the Senate Armed Services Committee specifically 

expressed concerns about whether Marine Corps aviators were conducting sufficient training and if 

squadrons had the appropriate number of aircraft to maintain training readiness and respond in

crisis. As part of an ongoing series on the readiness of military units, the DoD OIG has initiated an

audit to assess whether Marine Corps aviation squadrons have adequate aircraft capable of 

performing assigned missions and sufficient trained aviators to meet readiness requirements. 

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The DoD’s efforts to improve active and reserve integration provide depth that increases the 

DoD’s ability to protect U.S. interests in regions throughout the world such as the Asia-Pacific 

Region. In 2011, President Obama called for the United States to return its attention to the 

Asia-Pacific region and called for a rebalancing of forces in the area. In 2015, Secretary Carter 

stated that the DoD’s roles in the Asia-Pacific rebalance are to: 

 invest in future security capabilities such as a new long-range stealth bomber, a long-range 

anti-ship cruise missile, and rapid runway repair; 

 field capabilities—like the Virginia-class submarine and F-35 Joint Strike Fighter 

developed over the last decade for use in the region; 

 leverage new uses for existing technologies such as adapting the Tomahawk from a fixed, 

land-based target environment to use in a mobile maritime environment; 

 adapt regional force posture to include the construction of new facilities and geographic 

distribution of equipment and personnel across the region; and 

 reinforce alliances and partnerships through efforts such as security and technology 

cooperation and humanitarian and disaster relief. 

To determine if units are equipped to execute their missions, the DoD OIG has audited the 

distribution of equipment across the Asia-Pacific region. Specifically, the DoD OIG conducted 

multiple audits on the ability of Military Services to effectively equip their units in the region. For 

example, the DoD OIG recently conducted a series of munitions inventory audits in the region to 

determine whether the Navy and Air Force had an accurate account of the type, quantities, and

condition of its munitions. Two additional DoD OIG audits determined that Army and Marine 

Corps units in Korea did not have sufficient, properly maintained chemical- biological personal 

protective equipment and that units were not training to conduct operations under appropriate threat 

conditions. In FY 2017, DoD OIG will conduct a followup audit to determine whether Air Force 

commands have implemented corrective actions related to a 2013 DoD OIG audit on the stocking 

and distribution of expeditionary airfield resources and repair kits. These audits demonstrate that 

the U.S. Pacific Command preparedness for contingency operations remains a challenge. In

addition, the DoD is transferring defense equipment to its international partners to enhance their 

military capabilities and enable their military forces to work with U.S. forces in deterring and 

defeating aggression. Under the Foreign Military Sales Program, the DoD sells advanced defense 

equipment, such as unmanned aircraft systems and radar systems, to international partners and 

conducts post-delivery monitoring to ensure transferred equipment is used for intended purposes 

established in international agreements. The DoD OIG recently announced the first in a series of 

audits to evaluate DoD’s oversight of U.S. defense equipment transferred to international partners 

in the Asia-Pacific region. The audit will determine whether U.S. Pacific Command is conducting 

its Enhanced End-Use Monitoring Program to ensure that advanced defense equipment transferred 

to international partners is being used for intended purposes. 

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The DoD IG, as the Chairperson of the of the Interagency Coordination Group of Inspectors 

General for the Guam Realignment, issues an annual report on the programs and operations on 

Guam funded with military construction appropriations. The annual report also summarizes 

oversight efforts of the DoD OIG, the Department of the Interior, and the Service-level audit 

agencies related to these funds. In addition to its role on the Interagency Coordination Group, the 

DoD OIG also continues to provide oversight through audits related to the realignment. For 

example, in 2015, the DoD OIG reviewed the administration of the Guam Multiple Award 

Construction Contract, a $4 billion contract issued by the Navy for military construction projects 

related to the relocation of Marines to Guam. The report identified weaknesses in the Navy’s

contract administration processes, which led to the construction of facilities that did not meet 

mission and regulatory requirements. 

Where forces are deployed throughout the world is another critical issue for maintaining 

full- spectrum total force capabilities. Evolving threats throughout the world, as discussed 

previously, affect these key strategic decisions. For example, in recent years, the U.S. and NATO 

allies across Europe are increasingly challenged by political instability in the region, often spurred 

by Russia. However, following the dissolution of the Union of Soviet Socialist Republics and the 

Warsaw Pact, the DoD reduced its force posture and closed bases in Europe. In light of recent 

conflicts and instability, the DoD has committed to supporting U.S. interests and allies in the region 

through increased presence and multinational training events and exercises. 

From FY 2015 to FY 2017, the DoD budgeted nearly $5.2 billion to fund the European 

Reassurance Initiative. Through the initiative, the DoD seeks to reassure our NATO allies and 

bolster the security and capacity of our partners. The initiative consists of increasing the presence 

of U.S. forces in Europe through stepped-up rotations and continued deferral of some previously 

planned force reductions or potential force restructuring initiatives. Specifically, the Army is 

augmenting its presence through the rotation of stateside units. The Air Force is sustaining its 

current air superiority force structure in Europe and augmenting NATO’s Baltic Air Policing 

mission. The Navy will continue its expanded presence in the Black and Baltic Seas. 

To assess the effect of this initiative, in April 2016, the DoD OIG initiated an assessment of the 

effectiveness of the European Reassurance Initiative. This assessment will evaluate, among other 

matters, whether improvements have been made to European partner country infrastructure and 

whether U.S. and NATO forces have increased force responsiveness, interoperability, and 

sustainability. The DoD OIG also recently announced an audit to determine whether the U.S. 

European Command is integrating offensive and defensive cyberspace operations into its

operational and contingency plans. 

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Chemical, Biological, Radiological, Nuclear and Explosive Issues

Countering the potentially catastrophic effects of Chemical, Biological, Radiological, Nuclear, 

and Explosive (CBRNE) weapons is a key component to the challenge of maintaining full- spectrum 

total force capabilities. DoD’s challenge in this area is two-fold. The DoD must protect military 

personnel from CBRNE threats and train them to carry out military operations under CBRNE 

threats or hazards. The DoD must also ensure proper handling of the CBRNE materials in its 

possession and protect the public from exposure. Adequately training and equipping the force to 

recognize, respond, operate, and recover from CBRNE attacks and hazards remains a challenge for 

the DoD and an oversight priority for DoD OIG. 

Hostile actors, including terrorists and supporters of terrorists, are seeking to acquire weapons 

of mass destruction and materials to construct weapons of mass destruction. This poses a 

significant and potentially catastrophic threat to the United States and its allies. CBRNE threats 

include the intentional employment of, or intent to employ, weapons or improvised devices that

produce CBRNE hazards. To counter this threat, the DoD must enable its forces to deter, prevent, 

protect, mitigate, respond, and recover from CBRNE threats and effects. Achieving this mission 

requires, in part, equipping the force to successfully conduct military operations under CBRNE 

threats and effects. 

As previously discussed, the DoD OIG recently conducted two audits that identified weaknesses 

in CBRNE equipment and collective training for Army and Marine units in Korea. Because of 

concern that similar equipment and training weaknesses may exist in other commands, the DoD 

OIG intends to assess whether U.S. Special Operations Command has sufficient quantities and types 

of CBRNE equipment on hand. The audit will also evaluate if personnel are adequately trained and 

CBRNE qualified. 

The DoD OIG is also conducting a series of projects concerning the security of and 

accountability for CBRNE materials in DoD’s possession. In April 2016, the DoD OIG issued a 

report on the evaluation of controls over biological materials in DoD Component laboratories. 

The evaluation highlighted weaknesses in the oversight of several DoD laboratories including 

inconsistent guidance and inspection policies across the Military Services and inadequate training 

of officials conducting inspections of the facilities. The DoD OIG is also completing an audit that 

will address the controls over chemical surety materials at DoD installations and laboratories. The 

review will address the security controls over these materials including accountability for the 

chemical agents, access controls to facilities, and vetting of personnel who have access to and 

protect chemical materials. In 2017, the DoD OIG plans to conduct a review of the Nuclear Surety 

Program that will review the controls over personnel with access to or responsibility for 

safeguarding nuclear materials. The DoD OIG continues to oversight of the governance and 

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sustainment of the U.S. nuclear weapons enterprise. A 2016 OIG review detailed weaknesses and 

open recommendations from the last 5 years of DoD OIG nuclear reports, such as weaknesses in

guidance for implementing Presidential and DoD directives, requirements for nuclear weapon

security and employment, manning and training of theater nuclear planners, budget or funding 

priority to sustain nuclear command and control capabilities, and logistics and parts issues to sustain 

the Minute Man III missiles. In addition, a September 2016, DoD OIG report documented a lack 

of interdepartmental coordination on intelligence requirements for the nuclear enterprise. 

Other reviews related to DoD’s capabilities are ongoing. For example, the DoD OIG is currently 

reviewing the National Airborne Operations Center’s ability to sustain its mission with the E-6B 

aircraft and evaluating the DoD’s ability to organize, train, and equip explosive ordnance disposal 

teams that support the DoD’s nuclear weapons mission. In FY 2017, the DoD OIG plans to examine 

the availability and reliability of the E-6B program (airborne command, control, and 

communications), the sustainment of nuclear ballistic missile submarines, and the ability of the 

nuclear detonation detection system to meet its DoD requirements. 

In short, the DoD has recognized the importance of continually assessing and modifying its force 

structure and capabilities to counter evolving strategic threats, and this effort remains a continuing 

management challenge, particularly given growing pressure on resources. 

8 – Building and Maintaining Force Readiness 

Equipment Accountability and Reset Suicide Prevention

Healthcare—Cost, Fraud, Access to Care Talent Management, Force of the 

Future

Building and maintaining the readiness of the current force to execute its diverse missions is one 

of DoD’s core challenges and responsibilities. The DoD must ensure its forces are manned, trained, 

and equipped to deter and defeat our adversaries and to protect U.S. interests at home and abroad. 

The DoD faces the challenge of rebuilding readiness after 15 years of continuous deployment. 

DoD leaders have stressed the need to balance current readiness against modernization and future 

force development to ensure forces can prevail against current and future threats. To maintain force 

readiness, the DoD needs to provide adequate equipment and also ensure the return of costly 

serviceable equipment from overseas deployments. In addition, the DoD must provide quality 

health care for members of the Military Services and their families, focus on suicide prevention, 

and recruit and retain high quality military and civilian personnel. 

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Equipment Accountability and Reset

An important aspect of readiness is the availability and functionality of the equipment for both 

training an operational needs. Properly accounting for equipment protects taxpayer money and

allows DoD to appropriately and promptly respond to new contingencies worldwide. It also ensures 

that needed DoD equipment is not left behind, whether it is rolling stock or nonrolling stock. 

Rolling stock refers to vehicles such as tactical vehicles, ambulances, and wrecker trucks. 

Nonrolling stock refers to items such as generators, weapons, and radios. After equipment is

returned to the United States, it is reset or refurbished so that it can be re-issued to military personnel 

for training and deployment. 

Property accountability has been a continuous challenge for the DoD in both Iraq and

Afghanistan. At its peak in 2012, more than 18,000 pieces of DoD equipment were used in

Afghanistan, with limited accountability. As a result, multiple DoD OIG reports documented the 

loss of hundreds of millions of dollars in equipment, including thousands of sensitive items. For 

example, a 2014 report concluded that the Army reported accumulated losses of $586.8 million in 

equipment in Afghanistan for 1 year. An OIG audit also found poor security, limited qualified 

property accountability experts, and the lack of urgency when reporting inventory losses in a timely 

manner in Afghanistan. DoD OIG audit reports also recommended improvements to the security 

and storage of equipment in Afghanistan, Kuwait, and the United Arab Emirates, particularly with 

sensitive items such as communications equipment.

Suicide Prevention

Suicide continues to be a public health concern for America and its military veterans. 

Historically, the suicide rate was lower in the military than the civilian population. However, in

2008, for the first time, the suicide rate in the Army exceeded the age and gender adjusted rate in

the civilian populace and continued to be higher through 2015. Active Component suicides slightly 

decreased from FY 2014 through FY 2015, but Reserve Component suicides increased. According 

to recent DoD data, there were a total of 478 suicides in 2015. 

The DoD has developed and promoted prevention policies, practices and programs to attempt to

reduce military suicide. For example, the Defense Suicide Prevention Office (DSPO) leads working 

groups of representatives from the Services, the Office of the Assistant Secretary of Defense for 

Health Affairs, and other stakeholders on expanding access to behavioral health care for service 

members. The DSPO also implemented the DoD Strategy for Suicide Prevention in 2015 that 

attempts to coordinate suicide prevention efforts across the DoD. For example, the DSPO has 

published and distributed guides to military family members on suicide warning signs, risk factors, 

and actions to take in a crisis. DSPO also sponsors research initiatives and training that address 

gaps in suicide prevention and resilience policies and practices. 

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In addition, the DoD collaborates with the Veterans Administration to develop suicide 

prevention and intervention policy. For example, in June 2103 the DoD and Veterans 

Administration jointly developed the Clinical Practice Guideline, “Assessment and Management of 

Patients at Risk for Suicide,” which recommends best practices for assessing and managing the risk 

of suicide among active duty military and veterans. 

However, shortcomings in DoD suicide prevention efforts remain. A September 2015 DoD OIG 

report found that DoD lacked a clearly defined governance structure and alignment of 

responsibilities for the Defense Suicide Prevention Program. In addition, the report identified the 

lack of clear processes for planning, directing, guiding, and resourcing to effectively develop and 

integrate the Suicide Prevention Program within the DoD. In response to DoD OIG 

recommendations, the DSPO issued and implemented the 2015 Strategy for Suicide Prevention to 

coordinate suicide prevention efforts across the DoD. In response to another OIG report, the DSPO 

developed and is in the process of issuing guidance for data collection and reporting on suicide 

events that will also address DoD suicide prevention efforts. 

To continue monitoring suicide prevention efforts, the DoD OIG will conduct an evaluation of 

DoD Suicide Prevention Policy Dissemination and Implementation. 

Health Care

Providing quality health care for members of the Military Services and their families remains a 

challenge that is critical to force readiness. The Military Health System must provide care for over 

9 million beneficiaries within fiscal constraints, while facing increased user demand and inflation. 

These challenges make cost control difficult. Over the last decade, health care costs in the United 

States have grown substantially, and Military Health System costs have been no exception. The 

DoD FY 2014 appropriations for health care were $32.7 billion, an increase of about 80 percent 

since FY 2005. Appropriations have almost tripled since the FY 2001 appropriation of 

$12.1 billion. In its FY 2017 budget, the DoD requested $33.8 billion for the Defense Health 

Program. 

The DoD faces additional health care challenges such as preventing health care fraud, containing 

costs, and ensuring access to quality care. Health care fraud is another one of the top investigative 

priorities of DCIS. The DCIS has many open health care criminal investigations. 

As of September 30, 2016, DCIS had 492 open health care cases that represent approximately 

30 percent of DCIS’s open investigations. In FY 2016, DCIS’ health care fraud investigations 

resulted in 45 criminal charges, 34 convictions, and over $763million in recoveries for the 

Government. In FY 2016, DCIS’ health care fraud cases have resulted in 32 criminal charges, 

16 convictions, and over $380 million in recoveries for the Government. 

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As noted above, the DoD continues to struggle to contain costs in TRICARE programs. As one 

example affecting the rise in costs, the TRICARE Pharmacy Program experienced a dramatic rise 

in the receipt and payment of compounded drug prescriptions. Compounding pharmacies combine, 

mix, or alter two or more ingredients to create a customized medication for patients. From October 

2014 to April 2015, payments for compound drugs increased from $84 million to $550 million per

month, or 555 percent over the 7-month period. However, much of the increase was based on 

fraudulent activity. The DCIS opened 133 investigations relating to fraud by compounding 

pharmacies, many of which addressed allegations of health care kickbacks between the pharmacies, 

the marketers of the drugs, and the prescribing physicians. Often, the marketers used “pyramid

schemes” to recruit individuals to promote the medications, and they often contacted TRICARE 

beneficiaries using direct marketing techniques. Frequently there was no doctor-patient 

relationship between the prescribing physicians and the beneficiaries, which is a requirement to bill 

under the TRICARE Program. Additionally, the majority of these fraudulent prescriptions were for 

creams that supposedly treated generic conditions such as pain and scarring.

A joint DCIS and FBI investigation led to the indictments of two individuals associated with a 

Texas-based company that marked compounded pain and scar creams to TRICARE beneficiaries 

on behalf of compounding pharmacies. The individuals were indicted on various health care fraud 

and other charges. The indictment alleged that defendants paid kickbacks of $250 per month to 

TRICARE beneficiaries for each compounded prescription they obtained, and paid physicians 

$60 for each compounded pain or scar cream they prescribed. The loss to TRICARE from their 

alleged scheme exceeded $65 million. The indictment contains a forfeiture allegation which would 

require the defendants, upon conviction, to surrender property traceable to the offenses including 

four homes, 18 bank accounts, and 21 cars and trucks, two motor coaches, and a boat. The 

investigation remains ongoing. A separate DCIS compounding pharmacy investigation resulted in

a company paying DHA approximately $8 million to resolve allegation that it violated the False 

Claims Act by billing the TRICARE Program for compounded prescriptions that were not medically 

necessary and were not reimbursable. 

While most of DCIS’ compounding pharmacy investigations remain ongoing, they have already 

resulted in 38 criminal charges, four convictions, over $300 Million in seized assets, and over 

$90 million of recoveries.

In May 2015, DHA implemented new controls to reduce payments for compound drugs from 

$497 million in April 2015 to approximately $10 million in June 2015. The DoD OIG reported in

July 2016 that while the controls were effective in reducing costs for compound drugs, additional 

controls were necessary to prevent reimbursement for certain non- covered compound drug 

ingredients. DHA concurred with the recommendation and is taking action to improve controls. 

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In addition to controlling health care costs, the DoD should improve collections for services 

provided at military treatment facilities. The DoD OIG issued five reports from August 2014 

through April 2016 and concluded that military treatment facilities did not actively pursue 

collections from non-DoD beneficiaries for 120 accounts, valued at $11.3 million, of the 

125 accounts the DoD OIG reviewed. Also, the military treatment facilities did not appropriately 

transfer funds to the U.S. Treasury for 114 delinquent accounts, valued at $13.4 million, of the 

125 accounts the DoD OIG reviewed for collection.

The DoD OIG is also planning to review whether DoD is adequately meeting quality of care and 

patient safety standards for DoD service members and beneficiaries. 

Talent Management, Force of the Future

The DoD is the nation’s largest employer, with over 1.3 million men and women on active duty, 

700,000 civilian personnel, and 800,000 personnel serving in the National Guard and Reserve 

forces. The DoD must remain competitive in its challenging efforts to recruit, develop, promote,

and retain talented and skilled service members and civilians to serve the nation. 

One example of this challenge is the reported shortage of Air Force drone and jet pilots. Air 

Force leadership has testified that the Air Force needs over 500 fighter jet pilots and approximately 

500 drone pilots. Air Force leadership further testified that airlines have been recruiting Air Force 

pilots and that contracting firms have been offering high salaries to drone pilots. The GAO also 

testified that a series of interviews with drone pilots found low morale and that the pilots believed 

that a negative stigma was attached to their role. These challenges highlight the importance of 

talent management within the DoD. 

In November 2015, the Secretary of Defense announced an initiative to examine DoD’s civilian

and military personnel practices. The goal of these efforts is to identify innovative and new ways 

to revitalize personnel and talent management systems and processes, which address changes in

generations, technologies and labor markets. To meet the intent of this initiative, the DoD has 

identified approaches to modernize DoD personnel policies, procedures, and practices. In January 

2016, the Secretary of Defense announced a second set of workforce reforms to improve the 

retention of service members and encourage public service. 

In sum, the DoD continues to struggle in the areas of equipment accountability, suicide 

prevention, containing health care costs, and recruiting and retaining individuals. The OIG will 

continue to perform work in these areas in order to monitor the DoD’s progress. 

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9 – Ensuring Ethical Conduct 

Accountability and Integrity Whistleblower Issues 

Sexual Assault Prevention and Response 

Public trust and confidence in the DoD can be undermined by the small percentage of individuals 

who commit misconduct or crimes. High-profile scandals, corruption, waste, abuse of authority, 

acts of reprisal, or sexual assault involving DoD personnel are contrary to the DoD’s high standards 

of integrity. The DoD must seek to minimize such misconduct and hold accountable anyone who 

commits it.

The Secretary of Defense and DoD leaders have repeatedly recognized this and stressed the need 

to make it a priority for the DoD to maintain ethical conduct and a culture in which honesty, 

accountability, respect, and integrity guide individual actions and decisions. 

For example, in a memorandum dated February 12, 2016, “Leader-Led, Values-Based Ethics 

Engagement,” the Secretary of Defense informed the DoD’s leaders of his expectations regarding 

the importance of integrity and public confidence in Defense activities and its people. The Secretary 

directed that leaders, at every level, engage personally with their subordinates to discuss 

values-based decision making as set forth in the Joint Ethics Regulation to foster a culture of ethics 

and promote accountability, respect, and transparency throughout the DoD. 

To pursue this objective, in March 2014 the Secretary of Defense established the position of 

Senior Advisor for Military Professionalism, which is currently filled by Rear Admiral Margaret 

“Peg” Klein. The Secretary charged Admiral Klein to work directly with the Service Secretaries 

and Chiefs regarding the DoD’s focus on ethics, character, competence, and accountability in all 

activities at every level of command. In addition to regularly stressing positive examples of ethical 

leadership, in February 2016 Admiral Klein led the first DoD Professionalism Summit, which 

provided military leaders the opportunity to collaborate and share information on values- based 

leadership, character, and leadership development. The DoD OIG has engaged Admiral Klein and 

the Service IGs in regular meetings to share information on matters relating to senior official and

whistleblower investigations, including the types of substantiated misconduct, outreach and training 

efforts, and efforts to improve the investigation of misconduct. 

In another example of Service-level leadership, in April 2016 the Chief of Naval Operations 

(CNO) released the personal message he had provided to the Naval Flag officers and Senior 

Executive Service members emphasizing the Navy’s core values of honor, courage, and

commitment and the core attributes of integrity, accountability, initiative and toughness. The CNO 

emphasized to the Navy senior leaders that their personal conduct, and the example it sets, are 

essential to their credibility, as well as the overall integrity and efficiency of the Navy. 

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Investigations of Allegations of Senior Official Misconduct

Addressing misconduct when it occurs is essential to promoting ethical conduct throughout the 

DoD. It is important to hold individuals accountable if they have committed misconduct or clear 

individuals who have not. Therefore, investigations of misconduct should be conducted thoroughly 

and in a timely manner. 

The DoD OIG and the Military Service IGs have received a large number of complaints and 

investigations involving allegations of senior official misconduct over the past several years. For 

example, from FY 2013 through FY 2015, the DoD and Military Service IGs received an average 

of 792 complaints and conducted an average of 260 investigations involving non-reprisal 

allegations against senior officials per year. Of those investigations, an average of 79 (30%) were 

substantiated each year. The types and severity of some of the substantiated misconduct is

troubling. For example, recent investigations have substantiated serious misconduct by senior DoD 

officials such as accepting gifts from a Defense contractor, engaging in inappropriate relationships, 

and misusing Government resources. 

Timeliness of investigations of misconduct remains a challenge. To pursue this objective, the 

Deputy Secretary of Defense asked the DoD OIG to lead a task force to examine ways to improve 

the timeliness of senior official investigations throughout the DoD. The DoD OIG teamed with the 

Military Service IGs and made recommendations to improve timeliness of investigations such as

deploying a uniform administrative investigation case tracking system across the DoD, 

implementing a standardized system of investigative milestones among the Service IGs, providing 

uniform training for investigators, and monitoring the timeliness of investigations on a regular basis. 

Despite these steps, timeliness of investigations remains a challenge throughout the DoD, given 

the increasing number of cases, the need for addressing allegations fully, and the limited level of 

resources devoted to these investigations. 

Whistleblower Reprisal Investigations

Whistleblowers are important to exposing waste, fraud, and abuse in Government programs, and 

they are instrumental in saving taxpayers’ money and improving the efficiency of Government 

operations. Whistleblowers must be protected from reprisals for protected disclosures. The DoD 

OIG is responsible for conducting and overseeing investigations when whistleblowers allege they 

have suffered reprisal. Without such investigations to protect whistleblowers from reprisal, 

individuals who can help save taxpayers’ money—and possibly even save lives—may not report 

crucial information about wrongdoing and waste. 

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The DoD OIG and the Service IGs therefore seek to conduct thorough, fair, and timely 

investigations into allegations of whistleblower reprisal. It is a challenging task, particularly given 

the burgeoning whistleblower reprisal caseload and the flat level of resources available for such 

investigations in the DoD OIG and the Service IGs. 

The DoD OIG has implemented improvements to the military whistleblower reprisal 

investigation program and is seeking to implement others. For example, the DoD OIG is seeking 

improvements throughout the DoD such as standardizing whistleblower reprisal investigations and 

implementing a DoD enterprise case management system for tracking administrative investigations. 

In addition, in 2016 the DoD OIG established a dedicated team to investigate reprisal complaints 

stemming from whistleblowers who reported sexual assault. This action implemented one of the 

recommendations made by the Judicial Proceedings Panel in its “Report on Retaliation Related to 

Sexual Assault Offenses,” which recommended that the DoD OIG investigate all complaints of 

professional retaliation related to sexual assault and ensure that these investigations are conducted 

by personnel with specialized training. 

Sexual Assault Prevention and Response

Sexual assaults remain a significant challenge for the DoD. The DoD must focus on reducing 

sexual assaults and protect those who report sexual assaults from retaliation. According to the DoD 

Annual Report on Sexual Assault in the Military Fiscal Year 2015 issued on May 2, 2016, DoD’s

prevention programs focus on “reinforcing the cultural imperatives of mutual respect and trust, 

professional values, and team commitment to create an environment where sexist behaviors, sexual 

harassment, and sexual assault are not condoned, tolerated, or ignored.” This report indicated that 

the DoD is working to address six key areas: 1) Advancing sexual assault prevention; 

2) Encouraging greater reporting of sexual assaults; 3) Encouraging the reporting of sexual 

harassment complaints; 4) Improving response to male victims; 5) Combatting retaliation associated 

with sexual assault reporting; and 6) Tracking accountability in the military justice system. 

According to the DoD annual report, fewer sexual assaults occurred in the military in 2014 than 

in 2006 when the DoD Sexual Assault Prevention and Response Program began, but a greater 

percentage of victims reported the crime. The DoD attributes changes in reporting behavior in part 

to the growth in sexual assault prevention and response programs since 2006. The annual report 

also stated that more must be done to implement an enduring culture change to enable service 

members to operate in a climate without sexual assault, including: 

 creating the 2017-2021 Sexual Assault Prevention Plan of Action to advance the 

effectiveness of military sexual assault prevention programming; and 

 launching the DoD Prevention Collaboration Forum to initiate greater coordination with 

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other DoD programs that address readiness impacting problems to leverage a unified 

approach to prevention—these programs include Family Advocacy Program, Defense 

Suicide Prevention Office, and the Office of Diversity Management and Equal Opportunity. 

With respect to oversight of investigations of sexual assault allegations, the DoD OIG has a unit 

staffed with criminal investigators to oversee the DoD’s sexual assault investigations. The DoD 

OIG also implemented overarching sexual assault investigative policy guidance to ensure uniform 

reporting and DoD investigations of sexual assaults. Since then, DoD policies have been updated 

to remain current of new legislative requirements, including the establishment of Special Victim 

Investigation Program implementing guidance for the investigation of all unrestricted reports of 

sexual assault with adult victims, crimes with child victims, and reports of domestic violence. 

Nevertheless, preventing sexual assaults, ensuring victims who report sexual assault do not suffer 

retaliation, and fully investigating allegations in a timely manner remain a continuing challenge 

throughout the DoD.

Public Corruption Investigations 

Public Corruption involving the DoD and its personnel and programs wastes billions of tax

dollars and can undermine public trust in the DoD. Yet, criminal misconduct by Government and 

contractor personnel in the DoD continues to pose a management challenge. The DCIS considers 

public corruption investigations to be among its highest priorities. In FY 2015, DCIS’s public 

corruption investigations led to 52 criminal charges, 52 criminal convictions, and over $18 million 

in restitution and other monetary recoveries payable to the Government. The data for DCIS’s work 

for FY 2016 is expected to be comparable. 

A particularly compelling example of public corruption in DoD programs involves a 

decades long conspiracy of bribery and fraud by Glenn Defense Marine Asia PTE, LTD (GDMA). 

The investigation is ongoing and is being conducted jointly by DCIS and the Naval Criminal 

Investigative Service. The scheme involved the routine overbilling for goods and services that 

GDMA provided to Navy ships at various Asian seaports, including fuel, tugboat services, and

sewage disposal. As of October 1, 2016, 15 individuals have been charged in connection with this 

scheme. A total of 11 of those individuals have pleaded guilty, including a Navy Rear Admiral, a 

Navy Captain, several other Navy officers and enlisted personnel, a NCIS special agent, GDMA’s

president, a former GDMA employee, and the GDMA corporate entity. 

In summary, ensuring ethical conduct must be the focus of continual attention. The creation of 

a position such as the Senior Advisor for Military Professionalism to addresses ethical matters, and 

the emphasis placed on improving programs to prevent and investigate sexual assaults, demonstrate 

commitment at DoD’s highest levels to address this challenge. However, an organization the size 

of the DoD will inevitably be faced with waste, fraud, abuse, assaults, and ethical misconduct by

some employees and contractors. The DoD needs to remain focused on ensuring ethical conduct 

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and providing necessary resources and support for investigations to hold accountable those who do 

not uphold the high standards of the DoD. 

10 – Promoting Continuity and Effective Transition Management 

Changes of Presidential Administrations typically bring widespread turnover in DoD leadership 

positions as political appointees depart and potential delays occur in filling those vacancies. 

According to the most recent edition of the Plum Book, in 2012 the DoD had 54 Presidentially 

Appointed, Senate-confirmed positions and 544 non-Presidentially Appointed Senate-confirmed 

positions potentially filled by political appointees. 

While managing Presidential transitions is a challenging issue for all Federal departments and 

agencies, it is especially true for the DoD because of the national security implications. The 

importance of effectively managing the transition to a new administration is heightened now with 

the DoD engaged in two overseas contingency operations (OIR and OFS) and countering the 

evolving threats around the world. Gaps in leadership, delays in approving key decisions, and 

uncertainty about policy objectives can have significant effects on national security. For that

reason, it is critical that the transition to new leadership be smooth, effective, timely, and seamless. 

Moreover, on a regular basis, changes of leadership at all levels occur frequently throughout the 

DoD. Senior military leaders rotate positions every 1 to 3 years, as do military leaders at junior 

levels and forward deployed forces. This also presents a challenge for the DoD in ensuring 

continuity of operations. 

Presidential Appointments

Expediting the appointment of incoming senior leaders within DoD is critical to the efficient 

and effective transfer of responsibility. During vacancies in leadership positions, career officials in

acting positions are often responsible for managing their organizations. These officials are not able 

to make significant program or operational changes within their components. 

In addition, comprehensive and accurate reporting on DoD programs, operations, and challenges 

is an important element for ensuring efficient and effective policy implementation by the incoming 

administration. DoD Components must be prepared to provide the incoming presidential transition 

staff with necessary briefings to assist in the identification of component- specific policy or program 

initiatives and challenges that require immediate attention. These comprehensive briefings should 

continue whenever new leadership arrives at the DoD. Operations 

Access to DoD facilities and information, facilitation of communication between DoD and 

presidential transition organizations, and the provision of logistics support to the incoming 

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administration are also vital elements to achieving a successful Presidential transition. Focus needs 

to be given to areas such as access to information technology resources, full briefings on critical 

areas, and rapid processing of security clearances. 

DoD leaders are focusing of transition planning. The Head of DoD Transition has been 

identified and the DoD Transition Task Force has been created and is meeting regularly to advance 

transition planning. As part of this effort, the DoD has already begun preparing a transition book 

and briefing materials for the transition teams and the new administration. The DoD transition

book provides a high-level overview of each of the Defense agencies and Components. The book 

includes briefs on the functions, missions, structure, short and longer term deliverables, current 

budgets, and manpower. 

The DoD OIG is also preparing a separate transition briefing book to provide a more in-depth 

view of the OIG organization and the work being conducted by our auditors, investigators, and 

evaluators. 

Regular rotation of military leadership in the DoD is a well-established concept. Regular 

rotations expand an individual's functional, cross-functional, and leadership experience. Rotations 

also provide opportunities for military personnel to obtain depth and breadth of knowledge, broader 

perspective of the DoD’s mission, and professional enhancement. However, these rotations result 

in frequent turnover for both senior and junior military leaders throughout the DoD and require 

careful planning and transition procedures. For example, requiring a strong management internal 

control plan, as well as documented processes and procedures, can ease these transitions and ensure 

minimal mission impact. Turnover is a perpetual challenge for the DoD, separate and apart from 

the significant turnover that accompanies a change of Presidential Administration. 

In sum, the DoD must provide the new administration and its leadership, as well as the new 

officers that assume their roles during the frequent changes in leadership in the military ranks, with 

the knowledge and tools necessary to begin the work of leadership throughout DoD as soon as

possible without gaps or delays. 

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DOD’S RESPONSE TO IG’S SUMMARY OF MANAGEMENT 

AND PERFORMANCE CHALLENGES FOR FY 2016 

1 – Countering Global Strategic Challenges

Global Threats from China, Russia, Iran, and North Korea 

Interagency Cooperation

The Department acknowledges the DoD IG’s assessment of Countering Global Strategic 

Challenges.

2 – Countering the Terrorist Threat

 Developing Partner Security Forces

 Insider Threat

Developing Partner Security Forces 

The Department acknowledges the DoD IG’s assessment.

Insider Threat

The Department's resolve to institutionalize an effective insider threat program has not wavered. 

Significant progress has been achieved in establishing insider threat programs throughout the DoD 

Enterprise. New capabilities exist to enhance the screening of DoD personnel, control logical and 

physical access to DoD information and facilities, and share information vital to defeat insider 

threats. Although keeping pace with these advancements in policy is a challenge, issuances 

governing insider threat, physical, personnel, and industrial security are all pursuing refinements to 

keep pace with these advancements. DoD policy will soon be published to close the last 

recommendations from the Fort Hood shootings and implement measures that will assist 

commanders and supervisors with assessing risk and responding to impending threats. Physical 

security policies are being revised to address control procedures, badging and vetting criteria for all 

persons requiring access to DoD installations, facilities, and resources. As noted by the DoD IG, 

the National Industrial Security Program Operating Manual (Change 2) has imposed insider threat 

program requirements on DoD-cleared industry. The DoD Insider Threat Management and 

Analysis Center (DITMAC) has attained initial operating capability, receiving event reports from 

the Component analysis centers and full operational capability is projected in FY 2019. The linkage 

between the Component insider threat hubs and the DITMAC will further ensure that critical data 

regarding an adjudicative matter or security incident is reviewed quickly and swift action is taken 

if warranted. The DITMAC system, which facilitates this data exchange, has been accredited and 

continuous system improvements will enhance the analysis function and forge a more responsive 

and comprehensive risk assessment.

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3 – Enabling Effective Acquisition and Contract Management

 Linking Requirements to Strategic Military Plans

 Contract Management and Oversight

Illegal Technology Transfer

Linking Requirements to Strategic Military Plans

As the IG notes, since 2010, the Department has instituted three iterations of Better Buying Power 

(BBP) initiatives that reflect our long-term commitment to continuous improvement of the 

defense acquisition system. Since then, the Department has seen a significant decline in the 

number of critical Nunn-McCurdy cost breaches from a high of 7 in 2009 to about 1 per year at 

present. Moreover, the growth of contracted costs for major programs has dropped during BBP 

from 9 percent in 2011 to a new 30-year low of 3.5 percent.

Recent major programs that project total funding reductions for development have risen from 

27 percent in 2009 to 46 percent in 2015. Similarly for procurement, the numbers have risen 

from 39 percent to 77 percent.

The DoD has almost halted average incremental cost growth on major programs. Median biennial 

cost growth since 2011 on major active programs has run below 1 percent in development and 

production compared to highs near 6 percent at the turn of the century. Median total production 

cost growth on these active programs has run under 10 percent since 2010 and was under 5 percent 

in 2015 compared to 20-30 percent on a dollar basis in the early 2000s.

The Department remains committed to improving acquisition performance and will continue to 

emphasize reducing costs and establishing thoughtful business arrangements; ensure that 

requirements are fully supported and carefully reviewed prior to program initiation; and address 

program affordability as a systematic element of acquisition decision making.

Contract Management and Oversight

Contract Management continues to be a high priority for DoD leadership. Defense Procurement and 

Acquisition Policy (DPAP) is working aggressively to resolve the issues in the DoD IG’s assessment 

by taking a number of steps to improve those identified issues including all aspects of the costing, 

pricing, and financing of its contracts. Many of the BBP initiatives are currently in process and are 

not meant to be one-time events, but a set of continuous learning and improvement approaches. 

Specific DPAP contributions to support BBP initiatives and improvements in contract management 

include:

On April 1, 2016, the Director of DPAP issued new DoD Source Selection Procedures (SSP) that 

rescinded the SSP issued on March 4, 2011 with exceptions detailed in the SSP. The guidance 

expands the discussion of both Tradeoff and Lowest Price Technically Acceptable source selection 

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procedures consistent with BBP initiatives, modifies evaluation methodologies, updates statutory 

and regulatory references, and includes best practices obtained through peer reviews.

On April 1, 2016, the Director of DPAP issued "Guidance on Using Incentive and Other Contract 

Types" developed as an element of the Under Secretary of Defense for Acquisition, Technology and 

Logistics (USD(AT&L)) BBP 3.0 - Achieving Dominant Capabilities through Technical Excellence 

and Innovation initiative. The analysis behind the 2014 Annual Report on the Performance of the 

Defense Acquisition System, published by the USD(AT&L)) on June 13, 2014, demonstrated that 

the use of cost-plus-incentive-fee and fixed-price-incentive Firm Target contracts was highly 

correlated with programs that achieved better cost and schedule performance outcomes. This 

guidance addresses, in a comprehensive way, the considerations our contracting and acquisition 

professionals should take into account when selecting and negotiating the most appropriate contract 

type for a given requirement.

To address negotiation of fair and reasonable prices for spare parts and other commercial items, the 

Director, DPAP issued “Guidance on Commercial Item Determinations and the Determination of 

Price Reasonableness for Commercial Items” on September 2, 2016. This memo provides guidance 

and previews policy changes that will implement the FY2016 National Defense Authorization Act 

provisions relating to commercial item pricing. The Department published 2016-D006 as a proposed 

Defense Federal Acquisition Regulation Supplement (DFARS) rule on August 11, 2016 to 

implement these provisions.

As a result of continuous emphasis and tracking of the Past Performance metric, the Department 

currently has an 85 percent compliance rate compared to the Federal Government Agencies’ average 

of 61 percent. The Federal Acquisition Regulation (FAR) does allow contracting officers to 

document the reasons when past performance is not an appropriate evaluation factor for an 

acquisition. However, the Department has taken the initiative to expand the collection and use of 

past performance information for competitive solicitations for supplies using FAR part 13 simplified 

acquisition procedures, including acquisitions valued at less than or equal to $1 million through our 

Past Performance Information Retrieval System, Statistical Reporting Next Generation 

(PPIRS-SRNG) system. In order to continue the positive trends achieved to date, DPAP will 

continue to track and share past performance quarterly results with the Components.

Through 2016, Quarterly Business Senior Integration Group meetings continued with senior leader 

focus and attention on competition achievement to increase visibility and accountability. At these 

meetings, the Service Acquisition Executives attributed difficulties with achieving Service goals for 

competition rates to high value sole source foreign military sales and “Bridge” contracts that 

impacted competition achievement. Contracts for major non-competitive shipbuilding and aviation 

programs driven by historical strategic decisions made years ago continued to influence competition 

opportunities for the long term. In FY 2016, DoD achieved a competition rate of 52.8 percent against 

a 57 percent goal. In FY 2017, competition will continue to remain a focus item at quarterly Business 

Senior Integration meetings.

DPAP Conducted Training

On April 27, 2016, DPAP presented two breakout sessions on the subject of competition at the 

Defense Acquisition University’s (DAU) 2016 Acquisition Training Symposium. The Deputy 

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Director of Contract Policy and International Contracting began each session with an overview of 

DoD competition policy and statistics. Then Component Program Offices and Contracting Leaders 

gave presentations highlighting the acquisitions, programs, policies and/or initiative that enabled 

improved competition and reduced barriers to competition.

On July 19-21, 2016, the Director, Defense Pricing and the Director, Cost Assessment and Program 

Evaluation hosted the first DoD Contracting and Cost Community Collaboration Conference. This 

three day event was designed to foster a better reciprocal understanding of pricing and costing 

estimating capabilities across DoD and to ensure the people on the contract negotiations “front lines” 

are postured to get the very best deal they can on behalf of the taxpayers using consistent negotiating, 

estimating and pricing techniques. The approximately 450 attendees were current and future major 

program lead contracting officers from the Components and DoD cost estimating community.

Improve Tradecraft in Acquisition of Services

On January 5, 2016, DoD released the DoD Instruction (DoDI) 5000.74 - Defense Acquisition of 

Services. This new instruction establishes policy, assigns responsibilities, and provides direction for 

the acquisition of contracted services, and implements a management structure for the acquisition of 

contracted services. This instruction is available at: http://www.dtic.mil/whs/directives.

Over FY 2016, DoD completed full initial implementation of Services Requirements Review Boards 

(SRRBs) by executing the 4th Estate SRRBs, validating services requirements and joining the 

Military Departments (MILDEPS) in addressing this statutory requirement. MILDEP and 4th Estate 

organizations now have processes by which to not only validate requirements, but also to make tradeoff decisions regarding competing mission requirements.

Acquisition of Services Functional Integrated Product Team (FIPT) continues the development, 

execution, and tracking of focused goals, training curriculum, and metrics. The FIPT team has 

established criteria for identifying the non-Defense Acquisition Workforce Improvement Act 

(DAWIA) workforce with acquisition-related responsibilities, defined the competencies needed, and 

identified several training sources for the variety of competencies and skills required for robust 

services acquisition and management. During FY 2016, the FIPT has identified gaps in training 

coverage for Functional Services Managers and has developed additional training curricula. 

Specifically:

 Facilitated two services acquisition (SA) training events for Senior to Mid-Level SA 

professionals in both the Requirements and Contracting fields. 170 personnel were trained 

via panel discussion, case studies and exercises, focusing on the roles in SA, BBP, Oversight 

/ DoDI 5000.74, Functional Domain Experts, other SA training initiatives, and SRRBs.

 In June 2016, DAU released the new ACQ 165 Defense Acquisition of Services course and 

started development of ACQ 255, Program Management for Services Acquisition. 

Additional training sessions were offered through special sessions of DAU’s ACQ 265, 

Mission Focused Services Acquisition, and COR 222, Training for Contracting Officer 

Representatives, for non-DAWIA services community stakeholders.

 Army Logistics University in Fort Lee, VA, held 14 additional 10-day Operational Contract 

Support (OCS) courses in planning, managing, and administering contract service 

requirements for both Army and other DoD personnel. This existing initiative provided 

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training for 350 non-acquisition workforce attendees in all facets of OCS, including robust 

requirements development.

Contracting Officer Representatives 

The Department continues to take steps and improve on existing initiatives to improve the 

effectiveness of contract oversight. The Department published DoDI 5000.72, Department of 

Defense Standard for Contracting Officer Representative Certification. In addition to explaining the 

COR nomination and designation process, this instruction identifies the training and experience a 

COR must fulfill depending on the complexity of the contract action. The instruction also provides 

a comprehensive list of the potential duties and responsibilities a COR may be delegated by the 

contracting officer depending on the contract action. The result is to make COR Letters of 

Designation more specific and complete. The Department continues to analyze COR related training 

curriculum provided to DoD personnel to make sure it is current and meets learning objectives. DAU 

has continued to increase the number of Service Acquisition Workshops conducted. DAU also 

opened up ACQ 265 Mission-Focused Services Acquisition classroom offerings to personnel not in 

the defense acquisition workforce. These learning assets improve the ability of the workforce, and 

the development of performance work statements and quality assurance surveillance plans.

The Department is currently developing a COR Guide to streamline the way CORs can learn more 

about how to execute COR duties, tasks and responsibilities. In addition, the guide will highlight 

the unique aspects of supply, services, construction, and contingency environment contracts. The 

guide is intended to be reader friendly and provide better context for the COR.

DAU’s contracting training resources continue to focus on COR training. Specifically, DAU’s COR 

Training for FY 2013, FY 2014, FY 2015, and FY 2016 reflect the following number of graduates:

The DoD COR Tracking tool, a web-based tool, enables MILDEPS and Defense Agencies to manage 

nomination, designation, training and tracking of their respective cadres of CORs and the contract(s) 

assigned to each COR. As of October 2016, there are 63,982 registered CORs.

Buy American Act and Berry Amendment

The Department is currently taking steps to address the Buy American Act and Berry Amendment 

issues and correct the deficiencies identified in the DoD IG reports, including thoroughly 

investigating possible cases where the Anti-Deficiency Act may have been violated. The 

Department is also revising the training curriculum provided to DoD acquisition personnel for both 

the Buy American Act and Berry Amendment and will require that the new training be taken by 

DoD contracting personnel in the future. The Berry Amendment continuous learning module, 

Course 

Number(s) Course Name Graduates FY13

Graduates 

FY14

Graduates 

FY15

Graduates 

FY16*

CLC 106 COR with a Mission Focus 27,892 26,454 26,180 25,974

COR/CLC 206 COR in a Contingency Environment 11,131 7,996 7,410 7,403

COR/CLC 222 Contracting Officer Representative Course 26,341 23,758 26,604 28,114

Total 65,364 58,208 60,194 61,491

* FY16 Total (as of 4 Oct 2016)

Of note, CLCs 222 and 106 are ranked number five and number six amongst the "most taken" DAU online learning resources.

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CLC 125 Berry Amendment, offered by DAU, was updated and made available to the acquisition 

workforce on September 14, 2016. The Buy American Act revised training (CLC 027) is still in 

development with an anticipated completion date of April 2017. Once the training packages are 

fully updated and available to the workforce, the Director of DPAP will prepare guidance to the 

Defense contracting workforce to require training in these areas. Anticipate guidance issuance in 

the 3rd quarter of FY 2017.

Illegal Technology Transfer

The Department is committed to maintaining U.S. technical superiority. While we know we are at 

risk, we are putting mitigation techniques in place to make improvements in areas that may require 

additional attention. The mitigations include building strategic relationships with our intelligence, 

counterintelligence and law enforcement government partners to focus resources on protecting 

sensitive technologies. Through these strategic relationships we are integrating acquisition and 

technical expertise with expertise from Director of National Intelligence, USD (Intelligence), and 

Defense Security Service to smartly prioritize our resources on protection of U.S. sensitive 

technologies.

4 – Increasing Cyber Security and Cyber Capabilities

Offensive and Defense Operations

Technology Platforms and Infrastructure

The Department acknowledges the DoD IG’s assessment of Increasing Cyber Security and Cyber 

Capabilities.

5 – Improving Financial Management

Financial Auditability

Eliminating Improper Payments

Financial Auditability

In FY 2017, 90 percent of General Fund budgetary resources and 54 percent of Working Capital 

Fund budgetary resources will be under audit; 43 percent of total assets will also be under audit.

In FY 2018, 100 percent of DoD assets are projected to be under audit. The number of 

organizations and the scope of audits will continue to expand until the Department can begin a 

full agency-wide financial statement audit, likely the largest, single consolidated audit in the 

world.

In FY 2017, the U.S. Marine Corps will become the first Military Service to have its full financial 

statements audited. USACE, as well as six Defense Agencies and funds, is already sustaining 

positive opinions on its full financial statements. The Defense intelligence agencies began full 

financial statement audits in FY 2015, and two of the largest Defense Agencies (DISA and DLA)

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began full financial statement audits in FY 2016. Many of our service providers are sustaining 

examinations of their controls and systems that can then be used by their Component customer 

financial statement auditors, saving time and money. 

There are benefits to being under audit. The Department’s initial audits are helping to drive 

change while also giving valuable “real world” audit experience. As a result, DoD financial 

managers and functional leaders have a better understanding of auditors’ expectations and the 

higher level of consistency, discipline, and rigor that auditors require. Operationally, audits give 

objective feedback on controls, systems, and processes. Corrective actions result in more 

complete understanding of where the Department’s assets are located, and where the Department’s 

costs are actually accruing. This creates opportunities for resources savings and/or reallocation.

While the Department is making great progress, several risk areas remain. It will be several years 

before the Department begins to see positive audit opinions emerge, so it is critical that we address 

priority areas of deficiency. The Department has closed 48 percent of the FY 2015 audit findings. 

The audits of FY 2016 are showing similar results and reinforce the need to resolve the systemic 

issues of:

 Reducing manual corrections when compiling financial statements, known as journal 

vouchers,

 Providing accounting details and audit evidence,

 Valuing our property, and

 Retiring legacy Information Technology (IT) systems and deploying audit-ready IT 

systems.

These systemic issues are rooted in historical accounting practices that must be brought up to 

today’s accounting standards. System work-arounds and the significant progress the Department 

has made in other areas are enabling DoD to proceed with current audits. However, the magnitude 

and pervasiveness of these issues will prevent the Department from obtaining a positive opinion. 

The DoD must identify and resolve the root causes of these issues to fully realize the Departmentwide audit goals and benefits.

To ensure that the Department continues to gain value from the audits, the leadership team is 

focused on monitoring overall progress of audit and remediation of the associated findings. DoD

accomplishes the following:

 Notice of Findings and Recommendations/Corrective Action Plans (CAPs) Monitoring -

Fourth Estate reports progress monthly, FIAR monitors remediation progress and validates 

CAP closure.

 The MILDEPs report status of their CAPs during the FIAR Governance Board meetings as 

well and the board monitors the progress and elevates lack of progress issues as necessary.

 Critical capabilities every 60days –The Department compiles results and produces scorecard 

that is briefed to FIAR Committee, FIAR Governance Board, and Deputy Management 

Action Group.

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 Interim Milestone Charts - MILDEPs and material Fourth Estate Entities report interim 

milestones and projected completion dates of each critical capability every 60 days. The 

Department compiles results and produces charts that are briefed to the FIAR Committee 

and FIAR Governance Board.

This oversight drives accountability and provides a forum to elevate and address issues that may 

hinder remediation efforts in support of audit.

Improper Payments

The Department appreciates DoD IG’s recognition of our efforts to accurately identify and report 

improper payments as well as implement corrective actions to reduce improper payments. The 

Department’s improper payment program consists of six individual programs (i.e., military health 

benefits, military pay, civilian pay, commercial pay, military retiree and annuitant benefit payments, 

and travel pay) with total outlays greater than $500 billion each fiscal year. Overall, the 

Department’s improper payment program is fundamentally sound as five of the six programs, which 

account for approximately 99% of total outlays, consistently report exceptionally low percentages 

(less than one percent) of improper payments each fiscal year. However, the Department continues 

to exceed its target percentage for travel pay improper payments.

The primary causes for travel pay improper payments are administrative errors, traveler input errors, 

and inadequate reviews by approving and certifying officials. The Department acknowledges that 

corrective actions must be implemented to reduce improper payments in the travel pay program and 

comply with the Improper Payments Elimination and Recovery Act.

Accordingly, the Chief Financial Officer issued a policy memorandum, “Preventing Travel Pay 

Improper Payments and Enforcing Recovery” on October 7, 2016. The memorandum designates a 

Department Senior Accountable Official (SAO) for reducing improper payments, emphasizes the 

significance of front-end internal controls, requires Components to evaluate their travel training 

effectiveness, re-establishes travel pay improper payment metrics, and reinforces pecuniary liability 

for erroneous payments resulting from approving improper payments. In addition, the 

memorandum included a Travel Pay Improper Payments Remediation Plan, which requires each 

Component to designate an SAO for improper payments and directs Component SAOs to take 

specific actions to prevent improper payments.

Moreover, the Department continues to aggressively pursue and recover identified improper 

payments, and through our auditability efforts, improve our methodology for reviewing and 

identifying the complete universe of disbursements. All of these actions, coupled with the 

Department’s commitment to full financial statement audit, will increase public confidence in the 

Department’s stewardship of taxpayer dollars as well as further strengthen the improper payment 

program.

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6 – Protecting Key Defense Infrastructure

Installations and Energy

Space

Defense Industrial and Technological Base

Installations and Energy

The Department reviewed the DoD IG’s assessment of installations and energy and non-concurs. 

The assessment appears to be misaligned with the Department’s information on military 

construction, renewable energy, operational energy and the use of energy savings performance 

contracts. Due to the apparent misalignment, this response focuses on the IG’s statement:

Specifically, a series of audits demonstrated that DoD does not have sufficient programs to 

ensure that energy savings performance contracts (ESPC) and utility energy services contracts 

were providing cost savings. In some cases, the DoD spent millions on projects that may not 

have achieved sufficient energy savings to pay back the utility company’s investment as 

required, or to support payments to the contractor based on estimated guaranteed future annual 

cost savings.

A specific reference for the audits discussed was not provided in the document; however, DoD has 

taken steps to improve its process.

In coordination with Department of Energy’s (DOE) Federal Energy Management Program (FEMP), 

FEMP published “M&V Guidelines: Measurement and Verification for Performance-Based 

Contracts (Version 4.0)” which provides the format for reporting any impacts to estimated savings 

of a given contract. In addition, contractors were informed the DOE ESPC indefinite 

delivery/indefinite quantity (IDIQ) requires the use of the new guidelines. A similar effort will be 

coordinated with the Army’s ESPC Multiple Award Task Order Contract. Finally, DoD is currently 

developing a revised reporting process to improve DoD and its Components oversight of third-party 

financed projects.

In summary, DoD proactively seeks process improvements in third-party financed project 

oversight. The Department continues to address any IG concerns and will continue to ensure a 

process is in place to verify third-party financed projects estimated savings.

Space

The Department reviewed the DoD IG’s assessment of space and non-concurs. The language as 

written does not accurately capture the identified challenges. As it is currently written, the language 

confuses mission assurance, space control, and assured access; and neglects space situational 

awareness which is a foundational capability to mission assurance and space control.

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Defense Industrial and Technology Base

DoD takes a holistic risk-based approach to prevent infiltration of counterfeit parts and materials 

into the DoD supply chain. This approach spans the product lifecycle and includes:

 Strengthening procurement processes through rulemaking

 Partnering with industry to develop/adopt counterfeit prevention standards

 Increasing workforce awareness through counterfeit prevention training

 Detecting counterfeit parts and materials through materiel inspection and testing

 Reporting counterfeit occurrences in the Government-Industry Data Exchange Program 

(GIDEP) and monitoring trends

 Managing obsolescence through total life-cycle system management

We are teamed with our industry partners to support their counterfeit programs. Specific industry 

engagements include participating in anti-counterfeit working groups led by industry associations 

such as the Aerospace Industry Association and SAE International; leveraging commercial anticounterfeiting standards such as AS5553, S6174 and AS6081 as we develop proposed concepts of 

identifying trustworthy suppliers; and holding Government-Industry Call-To-Action meetings to 

exchange lessons learned and review technical advice on anti-counterfeit practices.

In 2013, the Department established policy and assigned responsibilities with DoDI 4140.67 to 

prevent the introduction of counterfeit materiel at any level of the DoD supply chain, including 

special requirements prescribed by section 818 of Public Law 112-81 related to electronic parts. 

DoD policy requires DoD Components to report all occurrences of suspect and confirmed counterfeit 

materiel to DoD criminal investigative organizations, and other DoD law enforcement authorities at 

the earliest opportunity. In addition, DoD Components must report occurrences of suspect and 

confirmed counterfeit materiel to deficiency reporting systems and the GIDEP within 60 days. We 

work with law enforcement on counterfeit investigations, and where appropriate, debar companies 

and prosecute counterfeiters.

To strengthen the GIDEP even further, the Department will publish a new DoD Instruction on use 

of GIDEP during the first quarter of FY17 which will include identification of roles and 

responsibilities for submission of reports and oversight of such submission, the level of evidence 

needed to report a part as suspect counterfeit in GIDEP, and guidance for when access to GIDEP 

reports should be restricted to government only.

To broaden the understanding of the counterfeit part challenges to the DoD supply chain, the 

Department has developed training programs taught at DAU focused on understanding how 

counterfeit parts and materials enter the supply chain; the vulnerability of certain products and 

processes within the supply chain; techniques to review and audit suppliers; procedures for 

accountability; and documentation for ensuring materiel authenticity. Other DOD activities have 

also implemented training programs such as the Defense Logistics Agency, where over 

18,000 personnel annually complete counterfeit parts threat awareness training.

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The Department has strengthened its counterfeit parts mitigation capability through a number of 

initiatives. The Defense Logistics Agency quality checks and applies authentication technology 

Deoxyribonucleic Acid (DNA) to every microcircuit it procures (over 80,000 annually). The DNA 

mark enables rapid screening of the microcircuit throughout the supply chain and retrieval of the 

microcircuit’s pedigree information anytime throughout its serviceable life. The capability to 

identify the pedigree information is invaluable during fraud and quality investigations. 

Enhancements to DOD’s Past Performance Information Retrieval Service - Statistical Reporting 

(PPIRS-SR) provide contacting specialists the capability to identify high risk suppliers, parts that are 

at higher risk for counterfeiting and parts that are overpriced before awarding contacts. DARPA’s 

Supply Chain Hardware Integrity for Electronics Defense research and development effort seeks to 

eliminate counterfeit integrated circuits from the electronics supply chain by making counterfeiting 

too complex and time-consuming to be cost effective. These are just a few of initiatives the 

Department has implemented to combat counterfeit parts which are not addressed in the IG’s 

summary.

DFARS to the Federal Acquisition Regulation (FAR) addresses counterfeit risk as well, for 

example:

1. DFARS case (2012-D055) “Detection and Avoidance of Counterfeit Electronic Parts” 

implements provisions of both FY12 NDAA §818 and FY13 NDAA §833.

2. FAR case (2013-002) “Expanded Reporting of Non-conforming Items” increases and 

improves the reporting of non-conforming items (including suspected and confirmed 

counterfeit) into the GIDEP.

3. FAR case (2012-032), “Higher Level Contract Quality Requirements” provides for 

increased contract quality standards.

4. FAR case (2014 –D005), “Detection and Avoidance of Counterfeit Electronic Parts –

Further Implementation” addresses procurement from trusted suppliers and applies to all 

contractors of electronic parts.

In summary, the DoD has a holistic risk based approach to address counterfeit parts and materials, 

not only today but into the future. The Department has addressed all GAO concerns and has a robust 

process in place that will continue to evolve to address the on-going challenge of combatting 

counterfeit parts and materials introduction into the DoD supply chain.

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7 – Developing Full Spectrum Total Force Capabilities

Structure and Posture of the Force and Building Diverse Capabilities Despite Budget Pressures

Chemical, Biological, Radiological, Nuclear, and Explosives Issues

Structure and Posture of the Force and Building Diverse Capabilities Despite Budget 

Pressures

The Department acknowledges the DoD IG’s assessment.

Chemical, Biological, Radiological, Nuclear, and Explosives Issues

The Department reviewed the DoD IG’s assessment of Chemical, Biological, Radiological, Nuclear, 

and Explosives (CBRNE) issues. Although the Department concurs with the findings, the 

recommendations focused on unit level logistics and training and did not indicate any CBRNE

acquisition programmatic shortfalls. The Department appreciates visibility over these reports to 

assess potential issues in the fielding of CBRNE equipment. The issues captured in this IG report 

were not the result of any Chemical and Biological Defense Program fielding issues but rather unit 

level logistics and command emphasis issues.

The Department has several ongoing efforts to institutionalize corrective actions for the deficiencies 

noted in the report including the active review and assessment of its policies and standards related 

to biosafety and biosecurity for Biological Select Agents and Toxins (BSAT) materials. We are 

ensuring that the DoD IG's recommendations are carefully considered and appropriately captured 

in policy revisions and in the development of associated guidance.

The Secretary of the Army was designated by the Deputy Secretary of Defense as the Executive 

Agent (EA) for the DoD BSAT Biosafety Program in July 2015. That designation was included as 

a responsibility for the Secretary of the Army in the DoDI 5210.88, Security Standards for 

Safeguarding Biological Select Agents and Toxins (BSAT), published on January 19, 2016. DoDI 

5210.88 specifically states the Secretary of the Army "serves as DoD Executive Agent for the DoD 

BSAT Biosafety Program with responsibility for the technical review, inspection, and 

harmonization of biosafety protocols and procedures across DoD laboratories that handle BSAT 

and tasking authority of all DoD Components for this purpose."

The Army Biosafety Task Force established in July 2015 to comprehensively address the issues 

identified as a result of the inadvertent shipment of live anthrax also came to the conclusion that 

biosafety and biosecurity are inextricably linked. The Task Force work highlighted that the 

separation of these programs creates gaps that make the consistent application and oversight of 

biosafety and biosecurity policies across the Services and labs difficult.

To make the program more effective and reduce the risk to DoD, the EA authority will be expanded 

to oversee both the biosafety and biosecurity programs for the Department. USD(AT&L) has been 

directed to promulgate a DoD Directive outlining the roles and responsibilities of the Army EA.

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In addition, the Army EA directed that inspections conducted at BSAT facilities be performed by 

one joint inspection team rather than by multiple teams from the different Services. A detailed 

inspection plan is being written which will include training requirements for the team as well as 

procedures for the conduct of inspections.

8 – Building and Maintaining Force Readiness 

Equipment Accountability and Reset

Suicide Prevention

Healthcare - Cost, Fraud, Access to Care

Talent Management, Force of the Future

Equipment Accountability and Reset

The Department acknowledges the DoD IG’s assessment.

Suicide Prevention

The Defense Suicide Prevention Office, within the Office of the Assistant Secretary of Defense 

for Readiness, leads working groups of representatives from the Services, the Office of the 

Assistant Secretary of Defense for Health Affairs, and other stakeholders for the purpose of 

ensuring a comprehensive approach to suicide prevention. The September 2015 DoD IG report 

found eight recommendations for improving suicide prevention efforts. All but one of these 

recommendations are complete. The remaining recommendation concerns the drafting and 

publication of a DoDI governing the Defense Suicide Prevention Program. A draft Instruction is 

currently in coordination, and once published all IG recommendations will be met.

Health Care—Cost, Fraud, Access to Care

The Department acknowledges the challenges associated with improving access to care within the 

environment of increasing demand for, and utilization of, care along with constrained resources. 

Several initiatives have already been implemented to address this, including expanding the Nurse 

Advice Line, extending hours at clinics, and improving the referral management process. Other 

initiatives to expand access via non-traditional forums (e.g., secure messaging and telehealth) are 

in progress.

As of September 30, 2016, DCIS had 494 open health care cases, versus the 492 noted in the IG 

Report. DCIS’ compounding pharmacy investigations have resulted in over $100 million of 

recoveries, versus the $90 million noted in the IG Report. Furthermore, Health Affairs disagrees 

with the following sentence in the IG report: “So far in FY 2016, DCIS’ health care fraud cases 

have resulted in 32 criminal charges, 16 convictions, and over $380 million in recoveries for the 

Government.”

DHA has worked closely with the pharmacy contractor to implement additional controls on 

compound pharmacy claims. This ongoing program has been extremely effective as evidenced by 

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U.S. Department of Defense Agency Financial Report for FY 2016 

Other Information 

the reduction in compound drug spending from $497 million in April 2015, to less than $2 million 

in May 2016, or a 99.6 percent reduction. This reduction in spending has remained constant since 

May 2016. For additional perspective, spending in May 2016 was near FY 2008 levels, which was 

prior to any fraudulent compound activity. The TRICARE Pharmacy compound management 

program still preserves beneficiary access to safe and effective compound medications through the 

Prior Authorization process.

After a Secretary of Defense-directed, comprehensive 90-day review of the Military Health System 

(MHS) that focused on access to care, quality of care, and patient safety, the Secretary of Defense 

issued a memorandum on October 1, 2014, calling for follow-up on performance measures that 

were identified as statistical outliers in access, quality of care, and patient safety metrics. Other 

specified tasks from the Secretary included improving transparency and transforming the MHS 

into a High Reliability Organization. Many initiatives are complete or underway that focus on 

improving patient care access, safety, and quality. The DoD IG-planned review will continue to 

assess and provide important feedback not only on the progress of this work to date but also with 

respect to future strategy and plans.

Talent Management, Force of the Future

The Department reviewed the DoD IG’s assessment of Talent management, force of the future issue. 

However, the Department is unable to validate the section on Air Force pilot shortages and low 

morale at this time.

The Department does not agree with the IG’s use of the word “revitalize” to characterize the goal of 

Force of the Future. A more accurate description of this effort would be to attract and retain both 

military and civilian personnel and to develop top-notch talent management systems and processes. 

Furthermore, it should be noted that while the second set of Force of the Future reforms did originally 

include initiatives encouraging public service, those initiatives are not being pursued at this time. 

Rather, the Department would recommend that the DoD IG assess and report on initiatives that are 

currently being pursued, which include improving quality of life and parental options for military 

families.

Finally, the Department believes that the Force of the Future initiatives do not indicate that DoD 

continues to struggle with recruiting and retaining individuals, as noted in the DoD IG report. 

Projecting perceived pilot shortages as a Department-wide recruitment and retention challenge 

mischaracterizes a tactical concern as a strategic one. The Department believes that the Force of the 

Future initiatives, far from responding to a shortcoming, are instead proactive innovationsthat reflect 

the changes in today’s technology-driven and interdisciplinary environment. These adaptations will 

ensure that DoD continues to attract and retain top talent in the future.

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Other Information 

9 – Ensuring Ethical Conduct

Accountability and Integrity

Whistleblower Issues

Sexual Assault Prevention and Response

Accountability and Integrity

The Department acknowledges the DoD IG’s assessment.

Whistleblower Issues 

The Department acknowledges the DoD IG’s assessment.

Sexual Assault Prevention and Response

The Department reviewed the DoD IG’s assessment of Sexual Assault Prevention and Response. 

The IG report notes that “the DoD IG has a unit staffed with criminal investigators to oversee the

DoD’s sexual assault investigations.” It is unclear whether this unit refers to the new “Reprisal”

team focused solely on sexual assault report-related retaliation/reprisal claims. The report’s 

language suggests that the DoD IG investigates all sexual assaults in the DoD; whereas the military 

criminal investigative organizations have the lead on this. 

10 – Promoting Continuity and Effective Transition Management

The Department agrees with the DoD IG’s assessment of Promoting Continuity and Effective 

Transition Management. The Secretary of Defense, all other senior leaders, and the entire 

Department take the transition from one administration to another very seriously for many reasons, 

including those highlighted in the IG report. The Secretary has tasked the Department to ensure the 

most effective and efficient transition possible. On a government-wide level, DoD planning has 

benefitted from the Presidential Transitions Improvements Act of 2015 and the Executive Order on 

Facilitation of a Presidential Transition signed by the President in May 2016. Internal to DoD, the 

Secretary of Defense initiated formal DoD Transition planning in May 2016 as well, consistent with 

DoD Directive 5105.76, Transition of Administration Appointees and Other Officials. Since that 

time, a DoD Transition Senior Steering Group and Transition Assistance Coordinators from each 

major DoD Component have been meeting regularly to implement transition preparation activities 

across the Department. Consistent with the Presidential Transitions Improvements Act, the 

Department is on track to certify by November 1st our preparedness to begin transition activities. 

The dynamic nature of a Presidential transition is significant in scope and scale of leadership 

positions potentially impacted, particularly across the Office of the Secretary of Defense (OSD) staff 

where the majority of the political appointee positions exist. The Secretary, and the Department's 

senior leadership, have continued to ensure maintenance and currency of distinct succession plans 

for every Presidentially Appointed, Senate-confirmed position, as well as other senior leadership 

positions. Further, they've ensured that senior career employees are properly prepared to perform 

the duties of senior leadership positions, as appropriate, should there be a vacancy during transition. 

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U.S. Department of Defense Agency Financial Report for FY 2016 

Other Information 

In rough estimation, approximately 10 percent of the OSD positions are political appointees, 20 

percent are military, and nearly 70 percent are career personnel. Therefore, a core cadre remains

even in the most dynamic times; and from this the Department works its deliberate transition 

planning. The Department appreciates the points made by the IG and is firmly committed to a 

transition that is smoothly carried out in a highly effective and efficient manner.

Naval Facilities Engineering Command, Engineering and Expeditionary Warfare Center managed the 

deployment of the Fred. Olsen Ltd. "Lifesaver" Wave Energy Conversion device between March 22 

and 25, to the Navy's Wave Energy Test Site. NAVFAC EXWC established and still manages the WETS 

facility located off Marine Corps Base, Hawaii.

U.S. Navy Photo (Released)

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FISCAL YEAR 2016

AGENCY FINANCIAL REPORT

APPENDICES

UNITED STATES DEPARTMENT OF DEFENSE
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U.S. Department of Defense Agency Financial Report for FY 2016

Appendix A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-1

APPENDIX A: DEFENSE SECURITY COOPERATION AGENCY–

SECURITY ASSISTANCE ACCOUNTS

The Defense Security Cooperation Agency (DSCA) is the Department of Defense (DoD) 

lead agency for the execution of security assistance functions, under Executive Order 11958. 

The financial statements and explanatory notes in this appendix pertain to the following 

accounts, generally referred to as “security assistance” provided by the Department of State: 

Foreign Military Sales (FMS) Trust Fund; the International Military Education and Training 

Account; Foreign Military Financing Program Account; Foreign Military Loan Liquidating 

Account; FMF Direct Loan Financing Account; Military Debt Reduction Financing Account; 

and the Special Defense Acquisition Fund, granted to the Executive Office of the President 

(EOP) pursuant to the Arms Export Control Act (AECA), as amended. The DSCA receives 

separate funding for the administration of the DoD Regional Centers for Security Studies 

reported in the DoD consolidated financial statements and separate from the security assistance 

functions, not reported in these financial statements.

Balance Sheet

Defense Security Cooperation Agency – Security Assistance Accounts Dollars in Thousands

As of September 30, 2016 and 2015

2016 

Consolidated

2015 

Consolidated 

ASSETS (Note 2)

Intragovernmental

Fund Balance with Treasury (Note 3) $ 38,071,762 $ 30,334,836

Total Intragovernmental Assets $ 38,071,762 $ 30,334,836

Cash and Other Monetary Assets (Note 6) $ 20,675,249 $ 23,881,227

Accounts Receivable, Net (Note 4) 33,692 1,788

Loans Receivable (Note 7) 602,885 646,632

Other Assets (Note 5) 36,865,603 33,811,386

TOTAL ASSETS $ 96,249,190 $ 88,675,869

LIABILITIES (Note 8)

Intragovernmental

Accounts Payable (Note 9) $ 425,854 $ 405,228

Debt (Note 10) 2,498,711 39,354

Other Liabilities (Note 11 and 12) 964,018 641,292

Total Intragovernmental Liabilities $ 3,888,583 $ 1,085,874

Accounts Payable (Note 9) $ 436,809 $ 300,379

Federal Employment Benefits (Note 13) 626 634

Other Liabilities (Note 11 and 12) 81,536,600 78,600,258

TOTAL LIABILITIES $ 85,862,618 $ 79,987,145

Commitments & Contingencies (Note 12)

NET POSITION

Unexpended Appropriations – Other Funds $ 5,579,779 $ 4,374,115

Cumulative Results of Operations – Other Funds 4,806,793

TOTAL NET POSITION $ 10,366,572 $ 8,688,724

TOTAL LIABILITIES AND NET POSITION $ 96,249,190 $ 88,675,869

The accompanying notes are an integral part of these financial statements.
U.S. Department of Defense Agency Financial Report for FY 2016

Appendix A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-2

Statement of Net Cost

Defense Security Cooperation Agency – Security Assistance 

Accounts Dollars in Thousands

For the Years Ended September 30, 2016 and 2015

2016 

Consolidated

2015 

Consolidated 

Program Costs

Gross Costs $ 36,259,031 $ 38,858,023

(Less: Earned Revenue) (162,286) (35,913)

Net Cost of Operations $ 36,096,745 $ 38,822,110

Statement of Changes in Net Position

Defense Security Cooperation Agency – Security Assistance 

Accounts Dollars in Thousands

For the Years Ended September 30, 2016 and 2015

2016 

Consolidated

2015

Consolidated

Cumulative Results Of Operations

Beginning balances $ 4,314,609 $ 3,903,024

Budgetary Financing Sources

Appropriations used $ 4,531,603 $ 6,809,314

Nonexchange revenue 32,051,703 32,424,381

Other Financing sources

Other (+/-) 5,623 0

Total Financing Sources $ 36,588,929 $ 39,233,695

Net Cost of Operations (+/-) 36,096,745 (38,822,110)

Net Change $ 492,184 $ 411,585

Cumulative Results of Operations $ 4,806,793 $ 4,314,609

Unexpended Appropriations

Beginning Balances $ 4,374,115 $ 5,325,422

Budgetary Financing Sources

Appropriations received $ 6,133,813 $ 5,986,603

Appropriations transferred (in/out) (386,909) (120,686)

Other adjustments (rescissions, etc.) (9,637) (7,910)

Appropriations used (4,531,603) (6,809,314)

Total Budgetary Financing Sources $ 1,205,664 $ (951,307)

Unexpended Appropriations $ 5,579,779 $ 4,374,115

Net Position $ 10,386,572 $ 8,688,724

The accompanying notes are an integral part of these financial statements.
U.S. Department of Defense Agency Financial Report for FY 2016

Appendix A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-3

Statement of Budgetary Resources

Defense Security Cooperation Agency –

Security Assistance Accounts

For the Years Ended September 30, 

2016 and 2015 (Page 1 of 2)

Budgetary 

Financing Accounts

Non-Budgetary 

Financing Accounts

Dollars in Thousands

2016 

Combined

2015 

Combined

2016 

Combined

2015 

Combined

Budgetary Resources

Unobligated balance, brought forward, 

October 1

$ 781,197 $ 144,457 $ 15,659 $ 27,139

Recoveries of prior year unpaid obligations 31,740 1,403,726 1,966,472 0

Other changes in unobligated balance (183,228) (111,846) 0 0

Unobligated balance from prior year budget 

authority, net 629,709 1,436,337 1,982,131 27,139

Appropriation (discretionary and mandatory) 8,220,054 2,371,714 0 0

Borrowing Authority (discretionary and 

mandatory) 0 0 492,885 1,885

Contract authority (discretionary and 

mandatory) 28,924,655 43,541,802 0 0

Spending authority from offsetting collections

(discretionary and mandatory) 243,549 116,941 409,006 11,351

Total Budgetary Resources $ 38,017,967 $ 47,466,794 $ 2,884,022 $ 40,375

Status of Budgetary Resources

New obligations and upward adjustments 

(total) $ 34,428,653 $ 46,685,597 $ 342,275 $ 24,716

Unobligated balance, end of year:

Apportioned unexpired accounts 1,662,923 159,359 13 (22,749)

Unapportioned, unexpired accounts 1,893,368 604,711 2,541,734 38,408

Unexpired unobligated balance, end of year 3,556,291 764,070 2,541,747 15,659

Expired unobligated balance, end of year 33,113 17,128 0 0

Unobligated balance, end of year (total) $ 3,589,404 $ 781,197 $ 2,541,747 $ 15,659

Total Budgetary Resources $ 38,017,967 $ 47,466,794 $ 2,884,022 $ 40,375

The accompanying notes are an integral part of these financial statements.
U.S. Department of Defense Agency Financial Report for FY 2016

Appendix A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-4

Statement of Budgetary Resources

Defense Security Cooperation Agency –

Security Assistance Accounts

For the Years Ended September 30, 

2016 and 2015 (Page 2 of 2)

Budgetary 

Financing Accounts

Non-Budgetary 

Financing Accounts

Dollars in Thousands

2016 

Combined

2015 

Combined

2016 

Combined

2015 

Combined

Change in Obligated Balance

Unpaid obligations, brought forward, 

October 1 $ 147,685,828 $ 137,707,793 $ 2,033,076 $ 2,462,224

New obligations and upward adjustments 

(total) 34,428,563 46,685,597 342,275 24,716

Outlays (Gross) (32,822,449) (35,303,836) (408,879) (453,864)

Recoveries of prior year unpaid obligations (31,740) (1,403,726) (1,966,472) 0

Unpaid Obligations, end of year 149,260,202 147,685,828 0 2,033,076

Uncollected payments

Uncollected pymts, Fed sources, brought 

forward Oct 1 (-)

$ 12 $ 0 $ 0 $ 0

Change in uncollected payments, Federal 

sources

(7) 12 0 0

Uncollected payments, Federal sources, end 

of year 5 12 0 0

Memorandum (non-add) entries

Obligated balance, start of year $ 147,685,840 $ 137,707,793 $ 2,033,076 $ 2,462,224

Obligated balance, end of year $ 149,260,207 $ 147,685,840 $ 0 $ 2,033,076

Budgetary Authority and Outlays, Net

Budget Authority, gross (discretionary and 

mandatory) $ 37,388,258 $ 46,030,455 $ 901,891 $ 13,236

Actual offsetting collections (discretionary 

and mandatory) (244,314) (117,087) (493,805) (471,042)

Change in uncollected customer payments 

from Federal sources (discretionary and 

mandatory)

(7) 12 0 0

Recoveries of prior year paid obligations 

(discretionary and mandatory) 772 137 0 0

Budget Authority, net (discretionary and 

mandatory) $ 37,144,709 $ 45,913,520 $ 408,086 $ (457,806)

Outlays, gross (discretionary and mandatory) $ 32,822,449 $ 35,303,836 408,879 453,864

Actual offsetting collections (discretionary 

and mandatory) (244,314) (117,087) (493,805) (471,042)

Outlays, net (discretionary and mandatory) 32,578,135 35,186,749 (84,926) (17,178)

Distributed offsetting receipts 32,051,703 (32,424,380) 0 0

Agency Outlays, net (discretionary and 

mandatory) $ 526,432 $ 2,762,369 $ (84,926) $ (17,178)

The accompanying notes are an integral part of these financial statements.
U.S. Department of Defense Agency Financial Report for FY 2016

Appendix A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-5

TABLE OF CONTENTS FOR NOTES TO THE FINANCIAL 

STATEMENTS

DSCA-Security Assistance Accounts (SAA) Financial Statements

Page

Note 1 Significant Accounting Policies............................................................................. A-6

Note Disclosures Related to the DSCA-SAA Balance Sheets

Note 2 Nonentity Assets..................................................................................................... A-14

Note 3 Fund Balance with Treasury................................................................................... A-15

Note 4 Accounts Receivable .............................................................................................. A-16

Note 5 Other Assets ........................................................................................................... A-16

Note 6 Cash and Other Monetary Assets........................................................................... A-17

Note 7 Direct Loan and Loan Guarantee Programs........................................................... A-17

Note 8 Liabilities Not Covered by Budgetary Resources.................................................. A-21

Note 9 Accounts Payable ................................................................................................... A-22

Note 10 Debt ........................................................................................................................ A-23

Note 11 Other Liabilities...................................................................................................... A-24

Note 12 Commitments and Contingencies........................................................................... A-25

Note 13 Federal Employment Benefits................................................................................ A-26

Note 14 General Disclosures Related to the Statement of Net Cost............................... A-27

Note 15 Disclosures Related to the Statement of Changes in Net Position ................... A-28

Note 16 Disclosures Related to the Statement of Budgetary Resources........................ A-29

Note Disclosures Not Pertaining to a Specific Statement

Note 17 Reconciliation of Net Cost of Operations to Budget.............................................. A-30
U.S. Department of Defense Agency Financial Report for FY 2016

Appendix A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-6

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 DSCA, consisting of FMS Trust Fund and several other accounts, identified in the 

President’s Budget Request, as the Foreign Operations (International Affairs) appropriated 

accounts. The FMS Trust Fund includes accounts for U.S. government funds appropriated for 

security assistance and funds deposited by foreign countries and international organizations, or 

by others for their use. Refer to paragraph 1.C, Appropriations and Funds, for a list of these 

accounts.

The FMS Trust Fund and other accounts for funds appropriated for security assistance are 

managed by DSCA on behalf of DoD, in accordance with the authority of EOP, the requirements 

of the Chief Financial Officers Act of 1990, as expanded by the Government Management 

Reform Act of 1994 (GMRA), and other applicable laws and regulations. The FMS Trust Fund 

and the accounts for funds appropriated for security assistance hereafter will be referred to as the 

DSCA Security Assistance Accounts.

The financial statements were prepared from accounting records that are maintained by the 

Military Departments (MILDEPs), Other Defense Organizations (ODO), and the Defense 

Finance and Accounting Service (DFAS) in accordance with, and to the extent possible, 

U.S. generally accepted accounting principles (GAAP) promulgated by the Federal Accounting 

Standards Advisory Board; the Office of Management and Budget (OMB) Circular No. A-136, 

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

The accompanying financial statement information accounts for all DSCA Security 

Assistance Accounts 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 to not be discernible.

The accounting systems used by DSCA Security Assistance Accounts are unable to fully 

implement all elements of U.S. GAAP and OMB Circular No. A-136, due to limitations of 

financial management processes, financial systems, and nonfinancial systems and processes 

supporting the financial statements. Many of the accounts derive their reported values and other

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

the MILDEPs’ inventory and logistic systems. Such legacy systems were designed to support 

reporting requirements for maintaining asset accountability and reporting the status of federal 

appropriations rather than preparing financial statements consistent with U.S. GAAP. There are 

ongoing efforts to implement process and system improvements addressing these limitations.

The DSCA Security Assistance Accounts contribute to several of the Department’s 

13 auditor-identified material weaknesses: (1) Financial Management Systems, 

(2) Intergovernmental Eliminations, (3) Fund Balance with Treasury, (4) Statement of Net Cost, 
U.S. Department of Defense Agency Financial Report for FY 2016

Appendix A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-7

(5) Other Accounting Entries, (6) Reconciliation of Net Cost of Operations to Budget, 

(7) Accounts Payable, and (8) Accounts Receivable.

1.B. Mission of the Reporting Entity

The DSCA mission is to lead, direct, and manage security cooperation programs and 

resources to support the U.S. national security objectives. Such programs build relationships 

with foreign countries and international organizations promoting the U.S. interests, develop 

allied and partner capacities for self-defense and coalition participation in overseas contingency 

operations, and promote peacetime and contingency access for U.S. forces. The DSCA 

accomplishes its responsibilities for security cooperation in concert with the Department of State 

(DOS), MILDEPs, other U.S. Government organizations, U.S. industry, and non-governmental 

organizations. Together we provide financial and technical assistance, FMF for defense articles 

and services, including training, provided through the FMS program, as well as training provided 

and funded under International Military Education and Training (IMET) authorities.

1.C. Appropriations and Funds

The FMS Trust Fund is a U.S. Treasury account (Treasury Account Symbol (TAS) 8242) 

containing deposits from FMS foreign country and international organization customers, as well 

as funds transferred into the account from U.S. Government appropriations, for use in carrying 

out specific purposes or programs in accordance with the AECA, as amended 

(22 U.S.C. § 2751 et seq.), the Foreign Assistance Act of 1961, as amended (FAA), 

(22 U.S.C. § 2151 et seq.), and other legal authorities. The monies in the FMS Trust Fund are 

subject to U.S. Treasury account system controls from the date of receipt to the date of 

expenditure or refund. At the country or customer level there are separate subsidiary accounts 

used by the Department through DSCA and DFAS to separately and individually account for 

each FMS customer’s deposits, other collections or deposits, payments of bills, refunds, and 

adjustments. At the U.S. Treasury level, the corpus of the FMS Trust Fund represents the total 

aggregations of balances (receipts minus disbursements) for all activities and programs.

The Department uses separate U.S. Treasury Accounts for the general fund Foreign 

Operations (International Affairs) appropriations. These accounts are:

 International Military Education and Training (TAS 1081)

 Foreign Military Financing Program Account (TAS 1082)

 Foreign Military Loan Liquidating Account (FMLLA) (TAS 4121)

 Foreign Military Financing Direct Loan Financing Account (TAS 4122)

 Military Debt Reduction Financing Account (TAS 4174)

 Special Defense Acquisition Fund (TAS 4116)
U.S. Department of Defense Agency Financial Report for FY 2016

Appendix A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-8

The DSCA receives funds for the FMS Trust Fund and the accounts for funds appropriated 

for security assistance as general, special, and trust funds. The DSCA uses these appropriations 

and funds to execute its missions and subsequently reports on resource usage.

General and special appropriations transferred into the FMS Trust Fund are used for financial 

transactions, including personnel, operations and maintenance of security assistance functions, 

and financing of FMS, which may include sales of defense articles and services from stock or 

through procurement, and the sale of foreign military construction.

The FMS Trust Fund accounts for receipts and expenditures of funds held in trust by the 

U.S. government for use in carrying out specific purposes or programs in accordance with 

applicable laws, regulations, and agreements.

The DSCA is a party to allocation transfers with other federal agencies as a receiving (child) 

entity. An allocation transfer is an entity’s legal delegation of authority to obligate budget 

authority and outlay funds on its behalf. Generally, all financial activity related to allocation 

transfers are reported in the financial statements of the parent entity. Exceptions to this general 

rule will apply to specific funds for which OMB has directed that all activity will be reported in 

the financial statements of the child entity. Exceptions include all U.S. Treasury-Managed Trust 

Funds, EOP, and all other funds specifically designated by OMB. The DSCA’s appropriations 

related to security assistance are allocation transfers from the EOP meeting the OMB exception 

and all related activity is reported separately from the consolidated DoD financial statements.

1.D. Basis of Accounting 

The legacy financial management systems used by DSCA Security Assistance Accounts are 

unable to meet full accrual accounting requirements. Many of the DSCA, MILDEP, and ODO 

financial and nonfinancial feeder systems and processes were designed and implemented prior to 

the issuance of U.S. GAAP guidance. These legacy systems were not designed to collect and 

record financial information on a full accrual accounting basis as required by U.S. GAAP. Most 

of DSCA, MILDEP, and ODO financial and nonfinancial legacy systems were designed to 

record information on a budgetary basis.

The DSCA Security Assistance Accounts financial statements and supporting trial balances 

are compiled from the underlying financial data and trial balances of the MILDEPs, ODOs, and 

their sub-entities. The underlying data is largely derived from budgetary transactions 

(obligations, disbursements, and collections), from nonfinancial feeder systems, and accruals 

made for major items such as payroll expenses, and accounts payable. Some of the sub-entity 

level trial balances may reflect known abnormal balances resulting largely from business and 

system processes. At the consolidated DSCA level these abnormal balances may not be evident. 

Disclosures of abnormal balances are made in the applicable footnotes, but only to the extent the 

abnormal balances are evident at the consolidated level. 

The DSCA, with MILDEPs and ODOs, is continuing the actions required to bring its 

financial and nonfinancial feeder systems and processes into compliance with U.S. GAAP. One 
U.S. Department of Defense Agency Financial Report for FY 2016

Appendix A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-9

such action is the current revision of accounting systems to record transactions based on the 

U.S. Standard General Ledger. Until all DSCA, MILDEP, and ODO systems and related 

processes are able to collect and report financial information as required by U.S. GAAP, reported 

financial data is based on budgetary transactions, data from nonfinancial feeder systems.

1.E. Revenues and Other Financing Sources 

As authorized by legislation, payments for the sales of defense articles and services are 

deposited into the FMS Trust Fund. Appropriations provided on an annual or multiyear basis for 

security assistance are a financing source and are transferred into the FMS Trust Fund, or 

deposited into the accounts for funds appropriated for security assistance. Pricing for defense 

articles and services, including training, is established to recover costs as required by the AECA, 

the FAA, and OMB Circular A-25, User Charges. The DSCA Security Assistance Accounts 

recognize revenue when earned within the constraints of current system capabilities.

The DSCA does not include nonmonetary support provided by friendly foreign countries and 

international organizations in amounts reported in the Statement of Net Cost (SNC) and Note 17, 

Reconciliation of Net Cost of Operations to Budget.

The DSCA participates in assistance-in-kind agreements in its overseas presence. The 

assistance-in-kind provided in support of security cooperation programs includes the use of 

facilities and personnel (guards and drivers) at a small number of Security Cooperation Offices 

worldwide.

The DSCA collects payments from foreign customers in advance of delivery of goods or 

services and records unearned revenue accordingly. All FMS Trust Fund revenue is reclassified 

as nonexchange once customers confirm the receipt of goods and services, since the FMS Trust 

Fund does not provide any of the goods or services directly, but serves as an intermediary for the 

U.S. military services and contractors.

1.F. Recognition of Expenses

Department policy requires the recognition of operating expenses in the period incurred. 

Current financial and nonfinancial feeder systems used by DSCA Security Assistance Accounts 

were not designed to collect and record transactions on an accrual accounting basis. Estimates 

are made for major items such as payroll expenses, accounts payable, and unbilled revenue. The 

DSCA continues to implement process and system improvements to address these limitations.

1.G. Accounting for Intragovernmental Activities 

Accounting standards require an entity eliminates intra-entity activity and balances from 

consolidated financial statements in order to prevent overstatement for business with itself. 

However, DSCA cannot accurately identify most of its intragovernmental transactions because 

the Department’s systems do not track buyer and seller data needed to match related transactions. 

In most cases, the buyer-side records are adjusted to agree with DoD seller-side balances and are 

then eliminated. The Department is implementing replacement systems and a standard financial 
U.S. Department of Defense Agency Financial Report for FY 2016

Appendix A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-10

information structure incorporating the necessary elements to enable the Department to correctly 

report, reconcile, and eliminate intragovernmental balances.

The Treasury Financial Manual Part 2 – Chapter 4700, Agency Reporting Requirements for 

the Financial Report of the U.S. Government, provides guidance for reporting and reconciling 

intragovernmental balances. The FMS Trust Fund and the accounts for funds appropriated for 

security assistance are unable to fully reconcile intragovernmental transactions with all federal 

agencies; however, the FMS Trust Fund is able to reconcile balances pertaining to borrowing 

from the U.S. Treasury and the Federal Financing Bank, Federal Employees’ Compensation Act

(FECA) transactions with the Department of Labor, and benefit program transactions with the 

Office of Personnel Management.

Imputed financing represents the costs paid on behalf of the FMS Trust Fund by the Office of 

Personnel Management for employee pension, post-retirement health, and life insurance benefits; 

and the Department of Labor post-employment benefits for terminated and inactive employees to 

include unemployment and workers compensation under the Federal Employees’ Compensation 

Act.

The Department’s proportionate share of public debt and related expenses to 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 do not report any public debt, 

interest, or source of public financing whether from issuance of debt or tax revenues.

1.H. Transactions with Foreign Governments and International 

Organizations 

Each year, DSCA Security Assistance Accounts administers the sale of defense articles and 

services to foreign governments and international organizations under the provisions of the 

AECA. Under the provisions of the Act, the Department has authority to sell defense articles 

and services to foreign countries and international organizations generally at no profit or loss to 

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

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

The FMS Trust Fund monies are held in U.S. Treasury accounts and the Federal Reserve 

Bank in individual accounts established by the U.S. for foreign countries. Funds held in the 

Federal Reserve Bank are transferred to the FMS Trust Fund account to be disbursed for FMS 

purposes.

For monetary financial resources maintained in U.S. Treasury accounts, the disbursing 

offices of DFAS, MILDEPs, the U.S. Army Corps of Engineers (USACE), and the DOS’s 

financial service centers process the majority of DSCA Security Assistance Accounts cash 

collections, disbursements, and adjustments worldwide. Each disbursing station prepares 

monthly reports providing information to the U.S. Treasury on checks issued, electronic fund 

transfers, interagency transfers, and deposits.
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In addition, DFAS sites and USACE Finance Center submit reports to the U.S. Treasury, by 

appropriation, on interagency transfers, collections received, and disbursements issued. The 

U.S. Treasury records this information to the applicable Fund Balance with Treasury (FBWT) 

account. On a monthly basis, the FBWT for the DSCA Security Assistance Accounts is adjusted 

to agree with the U.S. Treasury accounts.

1.J. Cash and Other Monetary Assets 

Cash is the total of cash resources under the control of the Department including coin, paper 

currency, negotiable instruments held for deposit in banks or other financial institutions and is 

classified as “nonentity” and is restricted. 

The FMS Trust Fund only accepts U.S. dollars for payment of defense articles and services 

per DSCA Manual 5105.38-M, Security Assistance Management Manual,

Chapter 5; Foreign Military Sales Case Development. All payments and collections are in 

U.S. dollars. 

1.K. Accounts Receivable 

The DSCA Security Assistance Accounts’ accounts receivable from other federal entities or 

the public include: accounts receivable, claims receivable, and refunds receivable. Allowances 

for uncollectible accounts due from the public are based upon 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.

1.L. Direct Loans and Loan Guarantees 

The DSCA administers the FMF program on behalf of the EOP. Direct loans and loan 

guarantees are authorized by sections 23 and 24 of the AECA of 1976, as amended, P.L. 90-269, 

as amended, and section 503(a) and other specific legislation. These loans and guarantees assist 

friendly foreign countries and international organizations in purchasing U.S. defense articles and 

services.

1.M. Inventories and Related Property 

The DSCA Security Assistance Accounts do not maintain inventory. The defense articles are 

provided to FMS customers from the U.S. Government or the contractor pursuant to a contract 

with the U.S. Government. Defense articles sold from the Department or the U.S. Coast Guard 

are assets of the providing component until title is transferred to the foreign customer.

1.N. Advances and Prepayments 

When advances are permitted by law, legislative action, or presidential authorization, the 

Department’s policy is to record advances and prepayments in accordance with U.S. GAAP. As 
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such, payments made in advance of the receipt of goods and services are reported as an asset on 

the Balance Sheet. The Department’s policy is to expense and/or properly classify assets when 

the related goods and services are received. Not all military services executing on behalf of 

DSCA have implemented this policy primarily due to system limitations.

1.O. Leases 

The FMS Trust Fund and the accounts for funds appropriated for security assistance do not 

have capital leases and currently are not able to reliably estimate the value of operating leases.

1.P. Other Assets 

Other assets include civil service employee pay advances, travel advances, and certain 

contract financing payments not reported elsewhere on the DSCA Security Assistance Accounts 

Balance Sheet.

The DSCA Security Assistance Accounts conduct business with commercial contractors 

using two primary types of contracts: fixed price and cost reimbursable. Contract financing 

payments are defined in the Federal Acquisition Regulations, Part 32, as authorized 

disbursements to a contractor prior to acceptance of supplies or services by the Government. 

These payments are designed to alleviate the potential financial burden on contractors 

performing on certain long-term contracts and facilitate competition for defense contracts. 

Contract financing payment clauses are incorporated in the contract terms and conditions and 

may include advance payments, performance-based payments, commercial advance and interim 

payments, progress payments based on cost, and interim payments under certain costreimbursement contracts. It is DoD policy to record certain contract financing payments as other 

assets.

Contract financing payments do not include invoice payments, payments for partial 

deliveries, lease and rental payments, or progress payments based on a percentage or stage of 

completion. The Defense Federal Acquisitions Regulation Supplement authorizes progress 

payments based on a percentage or stage of completion only for construction of real property, 

shipbuilding, and ship conversion, alteration, or repair. Progress payments based on percentage 

or stage of completion are reported as Construction in Progress.

1.Q. Contingencies and Other Liabilities 

Statement of Federal Financial Accounting Standard (SFFAS) 5, Accounting for Liabilities of 

the Federal Government as amended by SFFAS No. 12, SFFAS 12, Recognition of Contingent 

Liabilities Arising from Litigation defines a contingency as an existing condition, situation, or 

set of circumstances involving 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 DSCA Security Assistance 

Accounts recognize contingent liabilities when past events or exchange transactions occur, a 

future loss is probable, and the loss amount can be reasonably estimated.
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Financial statement reporting is limited to disclosure when conditions for liability recognition 

do not exist but there is at least a reasonable possibility of incurring a loss or additional losses. 

The DSCA Security Assistance Accounts’ risk of loss due to contingencies arise as a result of 

pending or threatened litigation or claims and assessments due to events such as aircraft, ship, 

and vehicle accidents; medical malpractice; property or environmental damages; and contract 

disputes.

1.R. Accrued Leave 

The FMS Trust Fund reports liabilities for accrued compensatory and annual leave for 

civilians. Sick leave for civilians is expensed as taken. The liabilities are based on current pay 

rates.

1.S. Net Position 

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

Unexpended appropriations represent the amounts of budget authority that are unobligated and 

have not been rescinded or withdrawn. Unexpended appropriations also represent amounts 

obligated for which legal liabilities for payments have not been incurred. Cumulative results of 

operations represent the net difference between expenses and losses and financing sources 

(including appropriations, revenue, and gains) since inception. The cumulative results of 

operations also include donations and transfer in and out of assets that were not reimbursed.

1.T. Undistributed Disbursements and Collections

Undistributed disbursements and collections represent the difference between disbursements 

and collections matched at the transaction level to specific obligations, payables, or receivables 

in the source systems and those reported by the U.S. Treasury. Supported disbursements and 

collections may be evidenced by the availability of corroborating documentation generally 

support the summary level adjustments made to accounts payable and receivable. Unsupported 

disbursements and collections do not have supporting documentation for the transactions and 

most likely would not meet audit scrutiny. However, both supported and unsupported 

adjustments may have been made to the DSCA accounts payable and receivable trial balances 

prior to validating underlying transactions. As a result, misstatements of reported Accounts 

Payable and Receivables are likely included in the DSCA financial statements.

Due to noted material weaknesses in current accounting and financial feeder systems, the 

Department is generally unable to determine whether undistributed disbursements and 

collections should be applied to federal or nonfederal accounts payable/receivable at the time 

accounting reports are prepared. Accordingly, the FMS Trust Fund and accounts for funds 

appropriated for security assistance follow the DoD policy 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 
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undistributed disbursements and collections are also applied to reduce accounts payable and 

receivable accordingly.

NOTE 2. NONENTITY ASSETS

Nonentity Assets Dollars in Thousands

As of September 30 2016 2015

Intragovernmental Assets

Fund Balance with Treasury $ 14,338,784 $ 9,974,511

Total Intragovernmental Assets $ 14,338,784 $ 9,974,511

Nonfederal Assets

Cash and Other Monetary Assets $ 20,675,249 $ 23,881,227

Accounts Receivable 679,617 642,939

Other Assets 36,863,633 33,808,506

Total Nonfederal Assets $ 58,218,499 $ 58,332,672

Total Nonentity Assets $ 72,557,283 $ 68,307,183

Total Entity Assets $ 23,691,907 $ 20,368,686

Total Assets $ 96,249,190 $ 88,675,869

Nonentity Assets are assets for which the DSCA Security Assistance Accounts maintain 

stewardship accountability and reporting responsibility, but are not available for the agency’s 

operations. 

FBWT and Cash and Other Monetary Assets consist of advance deposits from friendly 

countries and international organizations to facilitate the purchase of U.S. defense articles and 

services based on future requirement forecasts. 

Accounts Receivable consist of amounts for interest, fines, and penalties due on debt from 

loans and nonfederal funds owed to the FMS Trust Fund country accounts in litigation at 

Department of Justice or collection status at Defense Finance and Accounting Service. Some 

portion of these uncollected funds may be payable to the FMS Administrative Surcharge 

account, but are not discernible prior to collection.

Nonfederal Other Assets consist primarily of advances paid for undelivered defense articles 

and services intended for future delivery to the FMS customer.
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NOTE 3. FUND BALANCE WITH TREASURY 

Fund Balance with Treasury Dollars in Thousands

As of September 30 2016 2015

Fund Balance

Appropriated Funds $ 8,521,871 $ 4,599,767

Trust Funds 29,549,891 25,735,069

Total Fund Balance $ 38,071,762 $ 30,334,836

Fund Balance Per Treasury Versus Agency

Fund Balance per Treasury $ 38,071,762 $ 30,344,836

Fund Balance per Agency 38,071,762 30,334,836

Reconciling Amount $ 0 $ 0

Status of Fund Balance with Treasury Dollars in Thousands

As of September 30 2016 2015

Unobligated Balances

Available $ 1,662,936 $ 136,610

Unavailable 8,267,271 4,258,521

Total Unobligated Balance 9.930,207 4,395,131

Obligated Balance not yet Disbursed 149,260,201 149,718,904

Non-FBWT Budgetary Accounts (121,118,646) (123,779,199)

Total Fund Balance $ 38,071,762 $ 30,334,836

The Status of FBWT reflects the budgetary resources to support FBWT and is a 

reconciliation between budgetary and proprietary accounts. It primarily consists of unobligated 

and obligated balances. The balances reflect the budgetary authority remaining for disbursement 

against current or future obligations.

Unobligated Balance is classified as available or unavailable and represents the cumulative 

amount of budgetary authority not set aside to cover outstanding obligations. The unavailable 

balance consists primarily of funds invested in U.S. Treasury securities temporarily precluded 

from obligations by law. Certain unobligated balances are restricted for future use and are not 

apportioned for current use. Unobligated balances for trust fund accounts are restricted for use by 

the public law established the funds.

Obligated Balance not yet Disbursed represents funds that have been obligated for goods and 

services not received and those received but not paid.

Non-FBWT Budgetary Accounts reduces the Status of FBWT. The Non-FBWT Budgetary 

Accounts primarily consists of nonentity cash deposited in the Federal Reserve Bank and 

contract authority.
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NOTE 4. ACCOUNTS RECEIVABLE

Accounts Receivable Dollars in Thousands

2016

As of September 30

Gross Amount 

Due

Allowance for 

Estimated 

Uncollectibles

Accounts 

Receivable, Net

Nonfederal Receivables 

(From the Public) $ 33,700 $ (8) $ 33,692

Total Accounts Receivable $ 33,700 $ (8) $ 33,692

Accounts Receivable Dollars in Thousands

2015

As of September 30

Gross Amount 

Due

Allowance for 

Estimated 

Uncollectibles

Accounts 

Receivable, Net

Nonfederal Receivables 

(From the Public) $ 1,793 (5)) $ 1,788

Total Accounts Receivable $ 1,793 $ (5) $ 1,788

The accounts receivable represent the FMS Trust Fund claim for payment from contractors 

and individuals for refunds and overpayments. The FMS Trust Fund only recognizes an 

allowance for uncollectible amounts from the public. 

NOTE 5. OTHER ASSETS

Other Assets Dollars in Thousands

As of September 30 2016 2015

Nonfederal Other Assets

Outstanding Contract Financing Payments $ 4,977,786 $ 4,318,500

Advances and Prepayments 31,887,817 29,492,886

Total Nonfederal Other Assets $ 36,865,603 $ 33,811,386

Total Other Assets $ 36,865,603 $ 33,811,386

Contract terms and conditions for certain types of contract financing payments convey 

certain rights to the FMS Trust Fund protecting 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 ownership of the 

contractor’s work has transferred to the Government. The Government does not have the right to 

take the work, except as provided in contract clauses related to termination or acceptance, and 

the FMS Trust Fund is not obligated to make payment to the contractor until delivery and 

acceptance of a satisfactory product. 
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The balance of Outstanding Contract Financing Payments includes $2.7 billion in contract 

financing payments and an additional $2.3 billion in estimated future payments to contractors 

upon delivery and government acceptance of a satisfactory product. See additional discussion in

Note 11, Other Liabilities.

NOTE 6. CASH AND OTHER MONETARY ASSETS

Cash and Other Monetary Assets Dollars in Thousands

As of September 30 2016 2015

Cash $ 20,675,249 $ 23,881,227

Total Cash, Foreign Currency, and Other Monetary Assets $ 20,675,249 $ 23,881,227

Restricted cash of $20.7 billion includes advance deposits from foreign nations in the Federal 

Reserve Bank which have not been transferred to the FMS Trust Fund and are not available for 

agency use (nonentity cash).

NOTE 7. DIRECT LOAN AND LOAN GUARANTEE PROGRAMS

Direct Loan and Loan Guarantee Programs

DSCA operates the following direct loans and/or loan guarantee programs:

The Arms Export Control Act, as amended, authorizes funds to be appropriated to the 

President for financing the sales of defense articles and defense services to eligible foreign 

countries. Each loan is reviewed in the light of the purchasing country’s financial condition, its 

need for credit, U.S. economic or military assistance programs in the country and region, and 

other proposed arms purchases by the country. The President delegates to the Secretary of 

Defense the authority to issue and guaranty loans through the designated administering agency, 

DSCA. The loans are issued to friendly, less economically developed countries. Pursuant to the 

authority contained in the Act, DSCA operates the four funds, known as: 

 Foreign Military Loan Liquidating Account (FMLLA)), for pre-1992 loans

 FMF Direct Loan Program Account (FMFDLPA), for post-1991 loans 

 FMF Direct Loan Financing Accounts (FMFDLFA), for post-1991 loans

 Military Debt Reduction Financing Account (MDRFA) for reducing loan receivables for 

eligible countries. 

The FMLLA is a liquidating account including all assets, liabilities, and equities for loan 

balances recorded prior to FY 1992. No new loan disbursements are made from this account. 

Certain collections made into this account are made available for default claim payments. The 

Federal Credit Reform Act (FCRA) provides permanent indefinite authority to cover obligations 

for default payments in the event the funds in the liquidating account are otherwise insufficient.
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The FMFDLPA is a program account established pursuant to the FCRA to provide the funds 

necessary for the subsidy element of loans. Expenditures from this account finance the subsidy 

element of direct loan disbursements and are transferred into the FMFDLFA to make required 

loan disbursements for approved FMS or commercial sales. 

The FMFDLPA is still active with one outstanding loan. The loan works as a line of credit 

where the country can borrow from it at any time. The country initiated a loan during the fourth 

quarter for the first time since FY 2010. The country normally borrows one day and 

immediately repays it the next day, which occurred in FY 2016.

The FMFDLFA is a financing account used to make disbursements of Foreign Military Loan 

funds for approved procurements and for subsequent collections for the loans after 

September 30, 1991. The account uses permanent borrowing authority from the U.S. Treasury 

combined with transfers of appropriated funds from FMFDLPA to make the required 

disbursements to loan recipient country borrowers for approved procurements. Receipts of debt 

service collections from borrowers are used to repay borrowings from U.S. Treasury.

The MDRFA is a financing account established for the debt relief of certain countries as 

established by Public Law 103-87. The MDRFA buys the portfolio of loans from the FMLLA, 

thus transferring the loans from the FMLLA account to the MDRFA account. The Paris Club 

negotiates the debt forgiveness with Highly Indebted Poor Countries (HIPC). 

The Paris Club has nineteen member countries that negotiate rescheduling or refinancing of 

debt for HIPC. The Paris Club provides debt reduction initially on payments coming due over a 

specific period corresponding to the length of an International Monetary Fund (IMF) supported 

economic reform program. Reduction then is staged, with each successive stage contingent upon 

debtor country compliance with its IMF-support program. Under Naples Terms, stock of debt 

reduction is provided after three years of good performance with respect to IMF reform programs 

and payments to Paris Club creditors. The United States incurs the budget cost of the eventual 

stock of debt reduction when it agrees to the initial “maturities” reduction of payments coming 

due, since bilateral agreements commit us to stock reduction once the Paris Club agrees to 

provide them. 

The FCRA governs all amended direct loan obligations and loan guarantee commitments 

made after FY 1991 resulting in direct loans or loan guarantees.

Direct loans are reported at the net present value of the following projected cash flows: 

(1) loan disbursements, (2) repayments of principal, and (3) payments of interest and other 

payments over the life of the loan after adjusting for estimated defaults, prepayments, fees, 

penalties, and other recoveries.
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Summary of Direct Loans and Loan Guarantees Dollars in Thousands

As of September 30 2016 2015

Loans Receivable

Direct Loans

Foreign Military Loan Liquidating Account $ 645,920 $ 641,139

Foreign Military Financing Account (252,601) (15,631)

Military Debt Reduction Financing Account 209,566 21,124

Total Loans Receivable $ 602,885 $ 646,632

Abnormal Balances

The abnormal balances in the FMF Account are due to one day loans initiated by one 

country. To cover these loans, the DSCA borrowed the funds for the loan from the Treasury. 

The interest calculations provided by Treasury required DSCA to record an allowance for the 

loans even though the loans had been repaid.

Direct Loans Obligated Dollars in Thousands

As of September 30 2016 2015

Direct Loans Obligated After FY 1992 

(Allowance for Loss Method)

Foreign Military Loan Liquidating Account

Loans Receivable Gross $ 342,629 $ 354,529

Interest Receivable 2,007,609 1,921,079

Allowance for Loan Losses (1,704,318) (1,634,469)

Value of Assets Related to Direct Loans, Net $ 645,920 $ 641,139

Direct Loans Obligated After FY 1991 

(Present Value Method)

Foreign Military Financing Account

Allowance for Subsidy Cost (Present Value) $ (252,601) $ (15,631)

Value of Assets Related to Direct Loans $ (252,601) $ (15,631)

Military Debt Reduction Financing Account

Loans Receivable Gross $ 180,000 $ 0

Allowance for Subsidy Cost (Present Value) 29,566 21,124

Value of Assets Related to Direct Loans, Net $ 209,566 $ 21,124

Total Direct Loans Receivable $ 602,885 $ 646,632

The DSCA bills the countries every six months for loan repayments. Applying terms of the 

loans with the countries, accrued interest receivable is calculated using the simple interest 

method. Interest accrued on unpaid balances use the same interest rate plus 4 percent for loans 

owed to the Federal Financing Bank.

The allowance for credit subsidy account for the FMFDLFA account is calculated taking into 

consideration three transactions: (1) transfers of subsidy from the program account to the 

financing account; (the subsidy is the difference between the expected cash outlays from the 
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U.S. Government and the present value of the expected collections); (2) interest payments from 

the U.S. Treasury to the financing fund; and (3) upward adjustments due to reestimates as 

U.S. Treasury borrowing rates change over time from the loan repayment rate and an increase in 

estimated defaults on the loan. 

Abnormal Balances

Direct Loans Obligated” to read “The abnormal balance of $29.6 million for MDRFA, 

Allowance for Subsidy Cost (Present Value) is the DSCA requires from U.S. Treasury to close 

DSCA’s outstanding loan.

Total Amount of Direct Loans Disbursed Dollars in Thousands

As of September 30 2016 2015

Direct Loan Program

Foreign Military Financing Account $ 246,604 $ 429,147

Total $ 246,604 $ 429,147

Schedule for Reconciling Subsidy Cost Allowance Balances

For Post-FY 1991 Direct Loans Dollars in Thousands

As of September 30 2016 2015

Beginning Balance, Changes, and Ending Balance

Beginning Balance of the Subsidy Cost Allowance $ (5,493) $ 7,871

Adjustments

Subsidy Allowance Amortization 228,528 (13,364)

Total of the above Adjustment Components $ 228,528 $ (13,364)

Ending Balance of the Subsidy Cost Allowance before 

Reestimate $ 223,035 $ (5,493)

Ending Balance of the Subsidy Cost Allowance $ 223,035 $ (5,493)

Administrative Expenses

Administrative expenses for loans are not funded in the loan program account. OMB 

directed the administration of loans be funded by the FMF Program (11*1082).
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NOTE 8. LIABILITIES NOT COVERED BY BUDGETARY RESOURCES

Liabilities Not Covered by Budgetary Resources Dollars in Thousands

As of September 30 2016 2015

Intragovernmental Liabilities

Other $ 139 $ 154

Total Intragovernmental Liabilities $ 139 $ 154

Nonfederal Liabilities

Accounts Payable 1,506 1,598

Federal Employment Benefits 626 634

Total Nonfederal Liabilities 2,132 2,232

Total Liabilities Not Covered by Budgetary Resources 2,271 2,386

Total Liabilities Covered by Budgetary Resources $ 85,860,347 $ 79,984,759

Total Liabilities $ 85,862,618 $ 79,987,145

These liabilities are categorized as not covered because there is no current or immediate 

appropriation available to pay them. 

Military Retirement and Other Federal Employment Benefits consists of Federal Employee 

Compensation Act (FECA) actuarial liabilities of $626.1 thousand not due and payable during 

the current fiscal year. Refer to Note 13, Federal Employment Benefits, for additional details and 

disclosures.

Intragovernmental Liabilities Other represents the amount payable to Department of Labor 

for FECA liabilities.
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NOTE 9. ACCOUNTS PAYABLE

Accounts Payable Dollars in Thousands

2016

As of September 30

Accounts Payable

Interest, 

Penalties, and 

Administrative 

Fees

Total

Intragovernmental Payables $ 425,854 N/A $ 425,854

Nonfederal Payables 

(To the Public) 436,809 0 436,809

Total Accounts Payable $ 862,663 $ 0 $ 862,663

Accounts Payable Dollars in Thousands

2015

As of September 30

Accounts Payable

Interest, 

Penalties, and 

Administrative 

Fees

Total

Intragovernmental Payables $ 405,228 N/A $ 405,228

Nonfederal Payables 

(To the Public) 300,379 0 300,379

Total Accounts Payable $ 705,607 $ 0 $ 705,607

Accounts Payable includes amounts owed to federal and nonfederal entities for goods and 

services received by DSCA Security Assistance Accounts.

The systems used by the DSCA Security Assistance Accounts do not track intragovernmental 

accounts payable transactions by customer. The DSCA therefore cannot reconcile accounts 

payable with other federal entities. Buyer-side accounts payable are adjusted to agree with 

interagency seller-side accounts receivable.
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NOTE 10. DEBT

Debt Dollars in Thousands

2016

As of September 30

Beginning 

Balance Net Borrowing Ending Balance

Agency Debt 

(Intragovernmental)

Debt to the Treasury $ 39,354 $ 2,459,357 $ 2,498,711

Total Debt $ 39,354 $ 2,459,357 $ 2,498,711

Debt Dollars in Thousands

2015

As of September 30

Beginning 

Balance Net Borrowing Ending Balance

Agency Debt 

(Intragovernmental)

Debt to the Treasury $ 37,469 $ 1,885 $ 39,354

Total Debt $ 37,469 $ 1,885 $ 39,354

The Federal Credit Reform Act (FCRA) of 1990 provides financing accounts with indefinite 

authority to borrow from the U.S. Treasury to fund disbursements of loans made to sovereign 

nations for security assistance. This debt to the U.S. Treasury is reflected in the FMF Direct 

Loan Financing Account and the Military Debt Reduction Account.

The majority of the debt represents direct and guaranteed loans to foreign countries for 

pre-1992 and post-1991 loans. The FCRA governs all direct loan obligations and loan guarantee 

commitments made after FY 1991. Before 1992, funds were borrowed from the FFB to either 

directly loan the funds to foreign countries or to reimburse guaranteed loans defaulted. 

Beginning in 1992, based on the FCRA, the security assistance program began borrowing the 

funds from the U.S. Treasury.

The DSCA must pay the debt if the foreign country borrower defaults. For loan defaults 

DSCA must pay the outstanding principal amounts guaranteed.
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NOTE 11. OTHER LIABILITIES

Other Liabilities Dollars in Thousands

2016

As of September 30

Current Liability Noncurrent 

Liability Total

Intragovernmental

Advances from Others $ 317,960 $ 0 $ 317,960

FECA Reimbursement to the 

Department of Labor 63 76 139

Custodial Liabilities 0 645,919 645,919

Total Intragovernmental 

Other Liabilities $ 318,023 $ 645.995 $ 964,018

Nonfederal

Accrued Funded Payroll and 

Benefits $ 101 $ 0 $ 101

Advances from Others 75,916,642 4,977,367 80,894,009

Contract Holdbacks 642,484 0 642,484

Employer Contribution and 

Payroll Taxes Payable 6 0 6

Total Nonfederal Other 

Liabilities $ 76,559,233 $ 4,977,367 $ 81,536,600

Total Other Liabilities $ 76,877,256 $ 5,623,362 $ 82,500,618

Other Liabilities Dollars in Thousands

2015

As of September 30

Current Liability Noncurrent 

Liability Total

Intragovernmental

FECA Reimbursement to the 

Department of Labor $ 66 $ 88 $ 154

Custodial Liabilities 0 641,138 641,138

Total Intragovernmental 

Other Liabilities $ 66 $ 641,226 $ 641,292

Nonfederal

Accrued Funded Payroll and 

Benefits $ 35 $ 0 $ 35

Advances from Others 73,749,884 4,318,161 78,068,045

Contract Holdbacks 532,156 0 532,156

Employer Contribution and 

Payroll Taxes Payable 22 0 22

Total Nonfederal Other 

Liabilities $ 74,282,097 $ 4,318,161 $ 78,600,258

Total Other Liabilities $ 74,282,163 $ 4,959,387 $ 79,241,550
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Advances from Others represent liabilities for collections received to cover future expenses 

or acquisition of assets.

Custodial Liabilities represents liabilities for collections reported as non-exchange revenues 

where the Department is acting on behalf of another Federal entity.

Contract Holdbacks are amounts earned by contractors or suppliers during the production 

period but not yet paid to the contractor/supplier to ensure future performance.

Other Liabilities

Nonfederal Advances from Others, Noncurrent includes $4.9 billion related to contracts 

authorizing progress payments based on cost as defined in the Federal Acquisition Regulation

(FAR). In accordance with contract terms, specific rights to the contractors’ work vest with the 

Federal Government when a specific type of contract financing payment is made. This action 

protects taxpayer funds in the event of contract nonperformance. These rights should not be 

misconstrued as rights of ownership. The Department is under no obligation to pay contractors 

for amounts greater than the amounts authorized in contracts until delivery and government 

acceptance. Due to the probability the contractors will complete their efforts and deliver 

satisfactory products, and because the amount of potential future payments are estimable, the 

Department has recognized a contingent liability for estimated future payments which are 

conditional pending delivery and government acceptance.

Total Contingent Liabilities for progress payments based on cost represent the difference 

between the estimated costs incurred to date by contractors and amounts authorized to be paid 

under progress payments based on cost provisions within the FAR. Estimated 

contractor-incurred costs are calculated by dividing the cumulative unliquidated progress 

payments based on cost by the contract-authorized progress payment rate. The balance of 

unliquidated progress payments based on cost is deducted from the estimated total 

contractor-incurred costs to determine the contingency amount.

NOTE 12. COMMITMENTS AND CONTINGENCIES

The U.S. Government may be a party in various administrative proceedings or court 

litigations, but it is highly unlikely any will implicate the FMS Trust Fund. The U.S. funds 

appropriated for security assistance generally are not legally available for paying claims.
U.S. Department of Defense Agency Financial Report for FY 2016

Appendix A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-26

NOTE 13. FEDERAL EMPLOYMENT BENEFITS

Federal Employees’ Compensation Act (FECA)

Actuarial Cost Method Used and Assumptions

DSCA FMS Trust Fund actuarial liability for workers’ compensation benefits is developed 

by the Department of Labor and provided to the FMS Trust Fund at the end of each fiscal year. 

The liability for future workers’ compensation benefits includes the expected liability for death, 

disability, medical, and miscellaneous costs for approved compensation cases, plus a component 

for incurred but not reported claims. The liability is determined using a method utilizing 

historical benefit payment patterns related to a specific incurred period to predict the ultimate 

payments related to that period. Consistent with past practice, these projected annual benefit 

payments have been discounted to present value based on interest rate assumptions on the U.S. 

Department of the Treasury’s Yield Curve for Treasury Nominal Coupon Issues (the TNC Yield 

Curve) to reflect the average duration of income payments and medical payments. An interest 

rate for wage benefits of 2.781 percent was assumed for year one and 2.781 percent for year two 

and thereafter. An interest rate for medical benefits of 2.261 percent was assumed for year one 

and 2.261 percent for year two and thereafter. 

The DOL calculates this liability using wage inflation factors (cost of living adjustments or 

COLAs) and medical inflation factors (consumer price index medical or CPIM). The actual rates 

for these factors for charge back year (CBY) 2016 were also used to adjust the methodology’s 

historical payments to current year constant dollars.

Federal Employment Benefits Dollars in Thousands

2016

As of September 30

Liabilities

(Less: Assets 

Available to Pay 

Benefits)

Unfunded 

Liabilities

Pension and Health Actuarial Benefits

FECA $ 626 $ 0 $ 626

Total Federal Employment Benefits $ 626 $ 0 $ 626

Federal Employment Benefits Dollars in Thousands

2015

As of September 30

Liabilities

(Less: Assets 

Available to Pay 

Benefits)

Unfunded 

Liabilities

Pension and Health Actuarial Benefits

FECA $ 634 $ 0 $ 634

Total Federal Employment Benefits $ 634 $ 0 $ 634
U.S. Department of Defense Agency Financial Report for FY 2016

Appendix A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-27

The compensation COLAs and CPIMs used in the projections for various CBYs were as 

follows:

Federal Employees Compensation Act (FECA)

CBY COLA CPIM

2017 1.31% 2.99%

2018 1.13% 3.09%

2019 1.23% 3.40%

2020 1.45% 3.68%

2021+ 1.85% 3.87%

The model’s resulting projections were analyzed to ensure that the estimates were reliable. 

The analysis was based on four tests: (1) a sensitive analysis of the model to economic 

assumptions, (2) a comparison of the percentage change in the liability amount to the percentage 

change in the actual incremental payments, (3) a comparison of the incremental paid losses per 

case (a measure of case-severity) in CBY 2016 to the average pattern observed during the most 

current three CBYs, and (4) a comparison of the estimated liability per case in the CBY 2016 

projection to the average pattern for the projections of the most recent three years.

NOTE 14. GENERAL DISCLOSURES RELATED TO THE STATEMENT OF 

NET COST

Costs and Exchange Revenue

Dollars in 

Thousands

As of September 30 2016 2015

Operations, Readiness & Support

Gross Cost

Intragovernmental Cost $ 2,679,071 $ 3,458,594

Nonfederal Cost $ 33,579,960 $ 35,399,429

Total Cost $ 36,259,031 $ 38,858,023

Earned Revenue

Intragovernmental Revenue $ (154,631) $ (11,270)

Nonfederal Revenue $ (7,655) $ (24,643)

Total Revenue $ (162,286) $ (35,913)

Total Net Cost $ 36,096,745 $ 38,822,110

SNC represents the net cost of programs and organizations of the Department as 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. Intragovernmental costs and revenue represent 
U.S. Department of Defense Agency Financial Report for FY 2016

Appendix A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-28

transactions between two reporting entities within the Federal Government. Public costs and 

exchange revenues are transactions made between the reporting entity and a nonfederal entity.

The systems utilized by DSCA for the FMS Trust Fund and the accounts for funds 

appropriated for security assistance do not fully meet accounting standards. Information 

presented is based on budgetary obligations, disbursements, and collection transactions, as well 

as nonfinancial feeder systems adjusted to record known accruals for major items, such as 

payroll expenses and accounts payable. The Department’s current processes and systems do not 

capture and report accumulated costs for major programs based upon the performance measures

as required by the Government Performance and Results Act. The Department is in the process 

of reviewing available data and developing a cost reporting methodology as required by the 

SFFAS 4, Managerial Cost Accounting Concepts and Standards for the Federal Government, as 

amended by SFFAS 30, Inter-entity Cost Implementation.

Additionally, these systems do not track intragovernmental transactions by a customer at the 

transaction level. The FMS Trust Fund adjusts expenses by reclassifying amounts between 

federal and nonfederal expenses and accruing additional payables and expenses. 

Intradepartmental revenues and expenses are then eliminated.

NOTE 15. DISCLOSURES RELATED TO THE STATEMENT OF CHANGES 

IN NET POSITION

The Appropriations on the Statement of Budgetary Resources (SBR) does not agree with the

Appropriations Received on the Statement of Changes in Net Position. The difference of 

$2.1 billion is primarily attributable to mandatory adjustments required by OMB.

Year Ended September 30, 2016

Reconciliation of Appropriations on the Statement of Budgetary Resources to 

Appropriations Received on the Statement of Changes in Net Position

Dollars in 

Thousands

Total

Appropriations, Statement of Budgetary Resources $ 8,220,054

Less: Appropriations Received, Statement of Changes in Net Position (6,133,813)

Total Reconciling Amount $ 2,086,241

Items Reported as Decreases to Appropriations, Statement of Budgetary 

Resources

Temporary Reductions $ (200,780)

Transfers (212,543)

Contract Authority 2,499,564

Total Reconciling Items $ 2,086,241
U.S. Department of Defense Agency Financial Report for FY 2016

Appendix A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-29

NOTE 16. DISCLOSURES RELATED TO THE STATEMENT OF 

BUDGETARY RESOURCES

Disclosures Related to the Statement of Budgetary Resources Dollars in Thousands

As of September 30 2016 2015

Net Amount of Budgetary Resources Obligated for Undelivered 

Orders at the End of the Period $ 161,856,016 $ 165,850,074

Abnormal Balances

The abnormal balance of $22.7 million on the NonBudgetary, Appropriation line is due to a 

one day loan initiated by one country. The DSCA borrowed the funds for the loan from the 

Treasury. The short duration of the loan caused the interest received on the loan to be less than 

the minimum interest due to Treasury. The DSCA will pay the additional interest due on the loan 

to Treasury.

Other Disclosures

Obligations incurred of $34.4 billion are direct and exempt from apportionment.

The SBR includes intra-entity transactions because the statements are presented on a 

combined basis.

Borrowings from the U.S. Treasury are required to be repaid once a year at the end of the 

fiscal year. The financing sources for the repayments on borrowings are loan repayments from 

the countries or permanent indefinite appropriations through subsidy reestimates.

The portions of the FMS Trust Fund receipts collected in the current fiscal year that exceed 

current outlays are temporarily precluded from obligation by law. These receipts, however, are 

available for obligation as needed in the future.

The Federal Credit Reform Act of 1990 (FCRA) provides permanent indefinite 

appropriations to fund upward subsidy reestimates that fund repayments of principal and interest 

of U.S. Treasury borrowings with the FMF Direct Loan Program and the Military Debt 

Reduction Financing Account. The FCRA also provides permanent indefinite appropriations to 

fund loan defaults with the Federal Financing Bank in the Foreign Military Loan Liquidating 

Account.

The Appropriations line item on the SBR does not agree with Appropriations Received on 

the Statement of Changes in Net Position. Refer to Note 15, Disclosures Related to the Statement 

of Changes in Net Position, for additional details.

Legal limitations and time restriction on the use of unobligated appropriation balances are 

provided under Public Law.
U.S. Department of Defense Agency Financial Report for FY 2016

Appendix A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-30

NOTE 17. RECONCILIATION OF NET COST OF OPERATIONS TO 

BUDGET

Reconciliation of Net Cost of Operations to Budget

Dollars in 

Thousands

As of September 30 2016 2015

Resources Used to Finance Activities

Budgetary Resources Obligated

Obligations incurred $ 34,770,838 $ 46,710,313

Less: Spending authority from offsetting collections and 

recoveries (2,736,339) (1,991,844)

Obligations net of offsetting collections and recoveries $ 32,034,499 $ 44,718,469

Less: Offsetting receipts (32,051,703) (32,424,380)

Net Budgetary Resources Obligated $ (17,204) $ 12,294,089

Other Resources:

Other (+/-) 5,623 0

Net other resources used to finance activates 5,623 0

Total resources used to finance activities $ (11,581) $ 12,294,089

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 $ 3,994,132 $ (5,918,010)

Resources that fund expenses recognized in prior periods (115) (14)

Budgetary offsetting collections and receipts that do not affect 

Net Cost of Operations 32,545,507 32,895,422

Resources that finance the acquisition of assets (408,879) (453,863)

Other resources or adjustment to net obligated resources that do 

not affect Net Cost of Operations:

Other (+/-) (5,622) 0

Total resources used to finance items not part of the Net Cost 

of Operations $ 36,130,571 $ 26,523,535

Total resources used to finance the Net Cost of Operations $ 36,112,367 $ 38,817,624

Components of the Net Cost of Operations that will not 

Require or Generate Resources in the Current Period

Components Requiring or Generating Resources in Future 

Period

Other $ 0 $ 1,607

Total components of Net Cost of Operations that will Require 

or Generate Resources in future periods $ 0 $ 1,607
U.S. Department of Defense Agency Financial Report for FY 2016

Appendix A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-31

Reconciliation of Net Cost of Operations to Budget

Dollars in 

Thousands

As of September 30 2016 2015

Components not Requiring or Generating Resources

Other $ (16,697) $ 2,879

Total Components of Net Cost of Operations that will not 

Require or Generate Resources $ (16,697) $ 2,879

Total components of Net Cost of Operations that 

will not Require or Generate Resources in the current period $ (16,697) $ 4,486

Net Cost of Operations $ 36,095,670 $ 38,822,110

The Reconciliation of Net Cost of Operations to Budget reconciles the cost reflected on the 

SNC to the budgetary information reflected on the SBR. This is accomplished by means of a 

reconciliation of budgetary obligations and non-budgetary resources available to the reporting 

entity with its net cost of operations.

The following Reconciliation of Net Cost of Operations to Budget lines are presented as 

combined instead of consolidated as intraagency budgetary transactions are not 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

Due to system limitations, budgetary data is not in agreement with proprietary expenses and 

assets capitalized. The difference between budgetary and proprietary data is a previously 

identified deficiency.

Components Requiring or Generating Resources in Future Period, Other, is attributable to 

Federal Employee Compensation Act actuarial expense.
U.S. Department of Defense Agency Financial Report for FY 2016

Appendix B List of Acronyms and Abbreviations

B-1

APPENDIX B: LIST OF ACRONYMS AND ABBREVIATIONS

Acronym Definition

ACC Air Craft Carriers

AF-IPPS Air Force Integrated Personnel and Pay System ERP

AFR Agency Financial Report

AFRICOM Africa Combatant Command

ANDSF Afghan National Defense Security Force

APP Annual Performance Plan

APR Annual Performance Report

APSR Accountable Systems of Record

ASD Assistant Secretary of Defense

BAM Business Activity Monitoring 

BBP Better Buying Power

BRAC Base Realignment and Closure

BSAT Biological Select Agents and Toxins

CAP Contractor Acquired Property

CAP Corrective Action Plan

CEFMS Corps of Engineers Financial Management System

CFO Chief Financial Officer

CIO Chief Information Officer

CIP Construction in Progress

CMO Chief Management Officer

COLA Cost of Living Adjustment

COR Contracting Officer Representative

COTS Commercial off-the-shelf

CPIM Consumer Price Index, Medical

DAI Defense Agency Initiative 

DAU Defense Acquisition University

DAWIA Defense Acquisition Workforce Improvement Act

DCAA Defense Contract Audit Agency

DCIS Defense Criminal Investigative Service

DCMA Defense Contract Management Agency

DCMO Deputy Chief Management Officer

DCPS Defense Civilian Pay System

DCS Duplicate Claims System 

DEAMS Defense Enterprise Accounting and Management System

DepSecDef Deputy Secretary of Defense

DERP Defense Environmental Restoration Program

DFAS Defense Finance and Accounting Service

DHA Defense Health Agency

DHP Defense Health Program
U.S. Department of Defense Agency Financial Report for FY 2016

Appendix B List of Acronyms and Abbreviations

B-2

Acronym Definition

DIUx Defense Innovation Unit-Experimental

DJMS Defense Joint Military Pay System

DLA Defense Logistics Agency

DMDC Defense Management Data Center

DMF Death Master File

DNP Do Not Pay

DoD Department of Defense

DoDI Department of Defense Instruction

DoS Department of State

DPAP Defense Procurement and Acquisition Policy

DSCA Defense Security Cooperation Agency

DTS Defense Travel System 

EA Executive Agency

EBS Enterprise Business System

EFT Electronic Funds Transfer

EIC External Independent Contractor

EOP Executive Office of the President

ERP Enterprise Resource Planning

FBWT Fund Balance With Treasury

FFMIA Federal Financial Management Improvement Act of 1996

FIAR Financial Improvement and Audit Readiness

FIPT Functional Integrated Product Team

FM Financial Management

FMFIA Federal Managers’ Financial Integrity Act of 1982

FMR Financial Management Regulation

FMS Foreign Military Sales

FUSRAP Formerly Utilized Sites Remedial Action Program

FPSR FIAR Plan Status Report

FY Fiscal Year

FYDP Future Years Defense Program

GAO Government Accountability Office

GCSS-A Global Combat Support System - Army

GCSS-MC Global Combat Support System - MC

GFEBS General Fund Enterprise Business System

GFP Government Furnished Property

GFM Government Furnished Material

GIDEP Government-Industry Data Exchange Program

HIPC Highly Indebted Poor Countries

HOA Horn of Africa

IDES Integrated Disability Evaluation System 

IG Inspector General
U.S. Department of Defense Agency Financial Report for FY 2016

Appendix B List of Acronyms and Abbreviations

B-3

Acronym Definition

IMF International Monetary Fund

IPERA Improper Payments Elimination and Recovery Act of 2010

IPERIA Improper Payments Elimination and Recovery Improvement Act of 

2012

IPIA Improper Payment Information Act of 2002

IPPS-A Integrated Personnel Pay System - Army

ISIL Islamic State of Iraq and the Levant

IT Information Technology

IUS Internal Use Software

JITC Joint Interoperability Test Command

JV Journal Vouchers

LAC Latest Acquisition Cost

LMP Logistics Modernization Program

MAC Moving Average Cost

MDA Missile Defense Agency

MDAP Major Defense Acquisition Programs

MERHCF Medicare-Eligible Retiree Health Care Fund

MHPI Military Housing Privatization Initiative

MHS Military Health System

MICP Managers’ Internal Control Program

MILDEP Military Department

MOCAS Mechanization of Contract Administrative Services

MRF Military Retirement Fund

MRHB Military Retirement Health Benefits

NATO North Atlantic Treaty Organization

NDAA National Defense Authorization Act

NDS National Defense Stockpile

NPV Net Present Value

NRV Net Realizable Value

O&M Operations and Maintenance

OCO Overseas Contingency Operations

ODO Other Defense organizations

OFS Operation Freedom’s Sentinel

OIF Operation Iraqi Freedom

OIG Office of the Inspector General

OIR Operation Inherent Resolve

OM&S Operating Material and Supplies

OMB Office of Management and Budget

OSD Office of the Secretary of Defense

OUSD Office of the Under Secretary of Defense

OUSD(C) Office of the Under Secretary of Defense (Comptroller)
U.S. Department of Defense Agency Financial Report for FY 2016

Appendix B List of Acronyms and Abbreviations

B-4

Acronym Definition

PCS Permanent Change of Station 

PFPA Pentagon Force Protection Agency

PP&E Property, Plant, and Equipment

PSA Principal Staff Assistants

QDR Quadrennial Defense Review

R&D Research and Development

SAO Senior Accountability Officer

SBA Schedule of Budgetary Activity

SBR Statement of Budgetary Resources

SCNP Statement of Changes in Net Position

SFFAS Statement of Federal Financial Accounting Standards

SFIS Standard Financial Information Structure

SLOA Standard Line of Accounting

SNC Statement of Net Cost

SRRB Service Requirements Review Board

SSA Social Security Administration

SSAE Statement on Standards for Attestation Engagement

SSP Source Selection Procedures

TAC Transportation Account Codes

TAP Transition Assistance Program

TDY Temporary Duty 

TEDS TRICARE Encounter Data Set 

ToT Transportation of Things

UFC USACE Finance Center

U.S. United States

USACE United States Army Corps of Engineers

USD Under Secretary of Defense

USD(AT&L) Under Secretary of Defense for Acquisition, Technology and Logistics

U.S. GAAP United States Generally Accepted Accounting Principles

USMC United States Marine Corps

USSGL United States Standard General Ledger

USSOCOM United States Special Operations Command

USSTRATCOM United States Strategic Command

USTRANSCOM United States Transportation Command

VA Department of Veterans Affairs

WCF Working Capital Fund

WII Wounded, Ill, or Injured 
U.S. Department of Defense Agency Financial Report for FY 2016

Appendix C Useful Websites

C-1

APPENDIX C: USEFUL WEBSITES

Link URL

Budget Control Act of 2011 http://www.gpo.gov/fdsys/pkg/PLAW112publ25/pdf/PLAW-112publ25.pdf

Defense Advanced Research Projects 

Agency

http://www.darpa.mil

Defense Business Council http://dcmo.defense.gov/Governance/DefenseBusinessCounc

il.aspx

Defense Commissary Agency http://www.commissaries.com

Defense Contract Audit Agency http://www.dcaa.mil

Defense Contract Management 

Agency

http://www.dcma.mil

Defense Finance and Accounting 

Service

http://www.dfas.mil

Defense Health Agency http://www.health.mil/dha

Defense Intelligence Agency http://www.dia.mil

Defense Information Systems Agency http://www.disa.mil

Defense Logistics Agency http://www.dla.mil

Defense Media Activity http://www.dma.mil

Defense POW/MIA Accounting 

Agency

http://www.dpaa.mil/

Defense Security Cooperation Agency http://www.dsca.mil

Defense Security Service http://www.dss.mil

Defense Strategic Guidance 2012 http://www.defense.gov/news/Defense_Strategic_Guidance.p

df

Defense Technical Information Center http://www.dtic.mil

Defense Technology Security 

Administration

http://www.dtsa.mil

Defense Threat Reduction Agency http://www.dtra.mil

Department of the Air Force http://www.af.mil

Department of the Army http://www.army.mil

Department of Defense (DoD) http://www.defense.gov/

Department of the Navy http://www.navy.mil

DoD Education Activity http://www.dodea.edu/

DoD Enterprise Transition Plan http://dcmo.defense.gov/Publications/EnterpriseTransitionPla

n.aspx

DoD Financial Improvement and 

Audit Readiness

http://comptroller.defense.gov/fiar

DoD Financial Management 

Certification Program

http://comptroller.defense.gov/externalLinks/FMCert.aspx

DoD Financial Management 

Regulation

http://comptroller.defense.gov/fmr

Defense Human Resources Activity http://www.dhra.mil
U.S. Department of Defense Agency Financial Report for FY 2016

Appendix C Useful Websites

C-2

Link URL

Joint Chiefs of Staff http://www.jcs.mil/

DoD Managers’ Internal Control 

Program

http://comptroller.defense.gov/fiar/micp.aspx

DoD, Office of Inspector General http://www.dodig.mil/

DoD Strategic Management Plan http://dcmo.defense.gov/Publications/DoD-ASP/

Federal Accounting Standards 

Advisory Board

http://fasab.gov/

Federal Financial Management 

Improvement Act

https://www.dol.gov/ocfo/media/regs/ffmia.pdf

Federal Managers’ Financial Integrity 

Act

http://www.gpo.gov/fdsys/pkg/STATUTE96/pdf/STATUTE-96-Pg814.pdf

Missile Defense Agency http://www.mda.mil

National Geospatial-Intelligence 

Agency

https://www.nga.mil/Pages/default.aspx

National Guard http://www.nationalguard.mil

National Reconnaissance Office http://www.nro.gov

National Security Agency/Central 

Security Service

https://www.nsa.gov/

Office of Economic Adjustment http://www.oea.gov

Office of Management and Budget https://www.whitehouse.gov/omb/information-foragencies/circulars

The Pentagon Force Protection 

Agency

http://www.pfpa.mil

Quadrennial Defense Review 2014 http://www.defense.gov/qdr

U.S. Africa Command http://www.africom.mil

U.S. Central Command http://www.centcom.mil

U.S. European Command http://www.eucom.mil

U.S. Marine Corps http://www.marines.mil

U.S. Northern Command http://www.northcom.mil

U.S. Pacific Command http://www.pacom.mil

U.S. Southern Command http://www.southcom.mil

U.S. Special Operations Command http://www.socom.mil

U.S. Strategic Command https://www.stratcom.mil/

U.S. Transportation Command http://www.transcom.mil

Washington Headquarters Services http://www.whs.mil
U.S. Department of Defense Agency Financial Report for FY 2016

Appendix D Index of Figures and Tables

D-1

APPENDIX D: INDEX OF FIGURES AND TABLES

FIGURES

Figure 1. DoD FY 2016 Budget Authority ................................................................................................... 5

Figure 2. Department of Defense Organizational Structure........................................................................ 14

Figure 3. Office of the Secretary of Defense Principal Staff Assistants..................................................... 15

Figure 4. Reserve Components: Reserves and National Guard .................................................................. 17

Figure 5. Defense Agencies and DoD Field Activities............................................................................... 18

Figure 6. Combatant Commands ................................................................................................................ 20

Figure 7. DFAS Statistics FY 2016 ............................................................................................................ 27

Figure 8. Trend in DoD Budget Authority.................................................................................................. 28

Figure 9. Composition of DoD Total Budgetary Resources....................................................................... 28

Figure 10. Summary of Total Assets .......................................................................................................... 29

Figure 11. Summary of Total Liabilities..................................................................................................... 30

Figure 12. Unfunded Liabilities.................................................................................................................. 31

Figure 13. Summary of Net Cost of Operations ......................................................................................... 32

Figure 14. Financial Performance Summary .............................................................................................. 33

Figure 15. General Funds Projected Under Audit in FY 2016, FY 2017, and FY 2018............................. 36

Figure 16. Working Capital Funds Projected Under Audit in FY 2016, FY 2017, and FY . 2018..............37

Figure 17. The Department’s Integrated Business Framework .................................................................. 52

Figure 18. DoD Financial Management Improvement Initiatives .............................................................. 53

Figure 19. Improper Payment Rate – Military Health Benefits................................................................ 185

Figure 20. Improper Payment Rate – Military Pay................................................................................... 186

Figure 21. Improper Payment Rate – Civilian Pay ................................................................................... 187

Figure 22. Improper Payment Rate – DFAS Commercial Pay ................................................................. 188

Figure 23. Improper Payment Rate – Military Retirement ....................................................................... 189

TABLES

Table 1. Summary of Financial Statement Audit...................................................................................... 156

Table 2. Effectiveness of Internal Controls over Financial Reporting...................................................... 157

Table 2a. FY 2016 Material Weaknesses in Internal Controls over Financial Reporting ........................ 158

Table 2b. Effectiveness of Internal Controls over Non-Financial Operations.......................................... 171

Table 2b-1. FY 2016 Material Weaknesses in Internal Controls over Non-Financial Operations..........171

Table 2c. Conformance with Financial Management System Requirements ........................................... 174

Table 2c-1. FY 2016 Internal Control over Financial Systems Material Weakness................................. 175

Table 3. Compliance with Federal Financial Management Improvement Act ......................................... 177

Table 4. Improper Payment Reduction Outlook ....................................................................................... 183

Table 5. Improper Payment Root Cause Category Matrix........................................................................ 184

Table 6. Status of Internal Controls.......................................................................................................... 195

Table 7. Improper Payment Recaptures with and without Audit Programs.............................................. 198

Table 8. Results of the Do Not Pay Initiative in Preventing Improper Payments..................................... 201

Table 9. Freeze the Footprint Baseline Comparison................................................................................. 204

Table 10. Annual Operating Costs............................................................................................................ 204
The U.S. Navy's Blue Angels perform precision formation flying and aerobatics during the Arctic Thunder 

Open House, July 30, 2016 at Joint Base Elmendorf-Richardson. The biennial event is historically the 

largest multi-day event in the state and one of the premier aerial demonstrations in the world. The event 

features more than 40 key performers and ground acts to include the JBER joint forces, U.S. Air Force F -

22, and U.S. Navy Blue Angels demonstrations teams.

U.S. Air Force photo by Senior Airman James Richardson

The guided-missile destroyers USS Momsen (DDG 92), left, maneuvers for a replenishment-at-sea with the 

fleet replenishment oiler USNS Joshua Humphreys (T-AO 188). The guided-missile destroyers USS Spruance 

(DDG 111), USS Decatur (DDG 73- and Momsen are deployed in support of maritime security and stability in 

the Indo-Asia Pacific as part of a U.S. 3rd Fleet Pacific Surface Action Group (PAC SAG) under Commander, 

Destroyer Squadron (CDS) 31.

U.S. Navy photo by Chief Mass Communication Specialist (select) Jay C. Pugh/Released
This Page Intentionally Left Blank
Contributors to the Agency Financial Report

This Agency Financial Report is the reflection of devoted and hard-working people across the 

Office of the Secretary of Defense and the Department. They include uniformed Service Members, 

civilian personnel, and contractors, among them men and women from all walks of life who deploy

and carry out their missions in harm’s way. We owe all of them our gratitude. In particular, we 

want to thank the following individuals for their special contributions to this report. 

Dr. Omolola Ademola-Fawole Mr. Anthony Okonkwo

Ms. Gretchen Anderson Mr. Edward Phillips

Mr. Brian Banal Mr. David R. Puffet

Ms. Charlotte Beacham Ms. Katrina Rawl

Mr. Edward Burke Ms. Alice Rice

Mr. Robert Coffman Mr. Joel Ridenour

Dr. Pamela Clay Mr. Gary Sanders

Mr. Gerald Davenport

Ms. Rosie Heraud

Ms. Terri Schulze

Ms. Vanessa Stanton

Mr. Don Hopkins

Mr. Dean Hunstad

Ms. Nancy Valeski

Mr. Keith Welk

Ms. Karla Johnson-Griffith

Ms. Mobola Kadiri

Mr. Christopher Woods

Ms. Kim Laurance

Mr. Jae Lee

Dr. Sherri Malace

Mr. David Martin

Ms. Lora Muchmore
OFFICE OF THE UNDER SECRETARY OF DEFENSE

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