Fiscal Year 2013

OFFICE OF THE UNDER SECRETARY OF DEFENSE 

(COMPTROLLER) / CHIEF FINANCIAL OFFICER

UNITED STATES

DEPARTMENT OF DEFENSE

AGENCY FINANCIAL REPORT
FOREWORD 

The U.S. Department of Defense Agency Financial 

Report (AFR) for Fiscal Year (FY) 2013 provides 

an overview of the Department’s financial 

information and performance goals and 

objectives. It also describes our priorities in 

upholding our mission and responding to 

challenges encountered in the defense of our 

Nation.

For FY 2013, the Department has chosen to 

produce the Agency Financial Report as an 

alternative to the Performance and Accountability 

Report (PAR). The alternative report is intended 

to simplify and summarize information while 

providing transparent financial and performance 

reporting. The FY 2013 AFR consists of three 

components.

• Agency Financial Report –

Published December 16, 2013

• Annual Performance Report –

Published February 2014

• Summary of Performance and Financial 

Information – Published February 15, 2014

All three reports will be available at the 

Comptroller’s website:

http://comptroller.defense.gov/

Agency Financial Report (AFR)

The AFR consists of the Management’s Discussion 

and Analysis (MD&A), the Financial Section, and 

the related appendices. The MD&A provides 

executive-level information about the 

Department’s history, mission, organization, 

performance activities, analysis of the financial 

statements, controls and legal compliance, and 

other challenges facing the Department. The 

Financial Section contains the Independent 

Auditor’s Report, the principal financial 

statements and notes, and Required 

Supplementary Information. Additional 

information is available in Addendums A and B, 

and appendices. 

Annual Performance Report (APR)

The APR will be included in the Congressional 

Budget Justification and will provide the detailed 

performance information and description of 

results by performance measures.

Summary of Performance and 

Financial Information (SPFI)

The SPFI will summarize the Department’s 

financial and performance information from the 

AFR and APR, making the information more 

transparent and accessible to Congress, the 

public, and other key constituents.

Soldiers at the National Training Center, Fort Irwin, California.

U.S. Air Force Photo by Senior Airman Daniel Hughes
U.S. Department of Defense Agency Financial Report for FY 2013

Table of Contents

i

TABLE OF CONTENTS

Message from the Acting Deputy Secretary of Defense...............................iii

Message from the Chief Financial Officer .................................................... v

Management’s Discussion and Analysis

Fiscal Year 2013 Overview........................................................................ 7

Performance Goals, Objectives, and Results ............................................. 12

Financial Overview ................................................................................ 21

Financial Highlights and Analysis.......................................................... 21

Financial Management Improvement Initiatives ..................................... 28

Financial Management Certification Program...................................... 28

More Disciplined Use of Resources.................................................... 29

Financial Flexibility for Warfighters ................................................... 30

FIAR Initiative ............................................................................... 32

Systems, Controls, and Legal Compliance................................................. 34

Managers’ Internal Control Program ..................................................... 34

Statement of Assurance...................................................................... 35

Business and Financial Management Systems ........................................ 40

Improper Payment and Recoveries ....................................................... 42

Management Challenges ........................................................................ 44

Path Forward ....................................................................................... 45

Organization......................................................................................... 46

Financial Section

Independent Auditor’s Report ................................................................ 51

Principal Financial Statements and Notes ................................................. 64

Required Supplementary Stewardship Information ...................................131

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

Addendum A: Other Information

IG-Identified Management and Performance Challenges............................A-1

Managers’ Internal Control Program ..................................................... A-31

Improper Payment and Payment Recapture Programs............................. A-48

Addendum B: Defense Security Cooperation Agency

Financial Statements and Notes ..............................................................B-1

Appendices

Appendix A: Glossary ........................................................................1 of 3

Appendix B: Useful Web Sites .............................................................1 of 1

Appendix C: Index of AFR Figures .......................................................1 of 2
U.S. Department of Defense Agency Financial Report for FY 2013

Table of Contents

ii

The estimated cost of report or study for 

the Department of Defense is 

approximately $202,000 in 

Fiscal Years 2013 – 2014. 

This includes $50,000 in expenses and 

$151,000 in DoD labor. 

Generated on 2013Dec10

RefID: 4-6D880B3

U.S. Department of Defense Agency Financial Report for FY 2013

iv

This Page Left Blank Intentionally

U.S. Department of Defense Agency Financial Report for FY 2013

vi

This Page Left Blank Intentionally
FISCAL YEAR 2013

UNITED STATES DEPARTMENT OF DEFENSE

AGENCY FINANCIAL REPORT

MANAGEMENT

DISCUSSION AND

ANALYSIS
This Page Left Blank Intentionally
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

7

MANAGEMENT’S DISCUSSION AND ANALYSIS

FISCAL YEAR 2013 OVERVIEW

The Department of Defense (DoD) is made up of a 

civilian and military workforce, with our military 

tracing its roots back to pre-Revolutionary times. As 

such, the Department is arguably the nation’s oldest 

and largest government agency, though it took its 

present shape with the passage of the National 

Security Act of 1947.

Today, more than six decades later, the Department 

fields, sustains, and employs the military capabilities 

necessary to protect the United States and its allies 

and to advance our national interests. America’s

national security depends on military and civilian 

personnel, defense installations, and facilities that 

are in the right place, at the right time, with the 

necessary qualities and capacities. The Department 

is also one of the nation’s largest employers, with 

approximately 1.4 million personnel on active duty,

790,000 civilians, and 835,000 men and women in 

the National Guard and Reserve forces. There are 

also more than 2 million military retirees and family 

members receiving benefits.

In fiscal year (FY) 2013, the Department began implementing the Defense Strategic 

Guidance (DSG) issued by the President and the Secretary of Defense in 2012. Entitled

Sustaining U.S. Global Leadership: Priorities for 21st Century Defense, this new guidance 

revised the Department’s strategy from the 2010 Quadrennial Defense Review (QDR). The 

DSG addressed emerging strategic and fiscal circumstances, including budget cuts 

mandated by the Budget Control Act of 2011 (BCA), as well as the drawdown from Iraq and 

the planned transition in Afghanistan. The DSG was built around four overarching principles: 

(1) to maintain the world's finest military, (2) to avoid hollowing out the force, (3) to take 

needed reductions in a balanced, strategy-driven manner, and (4) to preserve the quality of 

the All-Volunteer Force by keeping faith with men and women in uniform and their families. 

The Defense Strategic Guidance called for a future military force that is smaller and leaner, 

but which is agile, flexible, rapidly deployable, and technologically advanced. As a result, 

the Department took steps to implement force structure reductions (including ground forces 

and tactical air), while lessening the risks of a smaller force by emphasizing readiness 

across the Military Services and missions.

This approach requires further investments in new capabilities, including the F-35 Joint 

Strike Fighter, a new bomber, undersea capabilities, munitions, and intelligence, 

reconnaissance, and surveillance (ISR) platforms. The goal of these investments is to 

maintain the most technologically advanced military, able to meet challenges from both 

Chuck Hagel

Secretary of Defense
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

8

state and non-state adversaries through the availability of key capabilities such as ISR and 

strengthened by Special Operations Forces, space systems, ballistic missile defense, cyber

security, homeland defense, and the ability to counter weapons of mass destruction.

The new defense strategy also supports the U.S. rebalance toward the Asia-Pacific region, 

an area that is vital to U.S. economic and security interests and which presents emerging 

challenges and opportunities. The strategy involves expanded networks of cooperation with 

partners throughout the region, strengthened missile defense posture, investment in 

intellectual capital, and enhanced access and sustainment across the region. 

In FY 2013, the Department also continued efforts across a range of other mission areas. 

Priorities included countering the threat of terrorism globally, defeating Al Qaida, protecting 

the homeland against attack, and conducting operations in and around the Middle East. 

These priority defense efforts occurred in a constantly evolving security environment, with 

both strategic opportunities and challenges presented by political developments in the 

Middle East and North Africa. 

To support these ongoing operations, as well as to preserve operational readiness for future 

challenges, the Department is also maintaining its capacity to operate in multiple theaters 

and to project power through the use of carriers, bombers, forward-staging bases, 

Deputy Secretary of Defense Ashton B. Carter visits with Pacific Command personnel to thank 

them for their service during a critical transition of U.S. forces in the Asia-Pacific theater.

DoD photo by Tech. Sgt. Michael Holzworth, U.S. Air Force
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

9

large-deck amphibious ships, and tactical airlift. Additionally the Department developed 

agreements between Combatant Commands (COCOMs) to allow force sharing of critical 

high-demand, low-density assets. These actions are expanding DoD’s ability to respond to 

threats across multiple theaters. 

Throughout the year, the Department continued activities to deny safe haven to al Qaida 

and to deny the Taliban the ability to overthrow the government of Afghanistan. For more 

than a decade, the United States has provided most of the support needed by the

International Security Assistance Force (ISAF), which is focused on developing the 

capabilities of the Afghan National Security Forces (ANSF). 

The ANSF has nearly doubled in size since 2009 and is now at 98 percent of its authorized 

end strength. The ANSF conducts 95 percent of conventional operations and 98 percent of 

special operations in Afghanistan. The focus of the ANSF development mission has shifted to 

improving the sustainability of the ANSF in order to ensure that its progress is enduring. The 

ISAF assistance to the ANSF targets five operational pillars, which are key to long-term 

sustainability: leadership, command and control, logistics and sustainment, combined arms 

integration, and training. In FY 2013, the ANSF assumed security lead across the country, 

and will assume full responsibility for security on January 1, 2015.

Building partnership capacity worldwide is also important for sharing the costs and 

responsibilities of global leadership. The Department has pursued emerging partnerships 

with a growing number of nations. We are advancing low-cost, small-footprint approaches 

to achieve security objectives, relying on 

exercises, rotational presence, and advisory 

capabilities. The United States has also helped

to develop the capacity of allies and partners to 

support American interests and objectives 

across a range of security challenges. 

Additionally, the Department identified more 

cost-effective ways to conduct security 

cooperation, including new and more efficient 

use of existing authorities, such as the Global 

Security Contingency Fund and Section 1206 of 

the National Defense Authorization Act for 

FY 2006.

The Department’s FY 2013 enacted budget of 

$614.8 billion (Figure 1) consisted of two parts: 

$527.5 billion in base operating funds, and 

$87.3 billion to support Overseas Contingency 

Operations (OCO). The budget incorporated

funding reductions that reduced future spending 

by $228 billion during FY 2012 – FY 2016, and

$487 billion during FY 2012 – FY 2021. 

What the FY 2013 budget did not take into consideration is the devastating impact that 

would result from sequestration, the permanent cancellation of budgetary resources by a 

uniform percentage applied to all programs, projects, and activities within a budget account. 

Figure 1. DoD FY 2013 Enacted 

Budget ($614.8B)

B13-17

OCO

$87.3B

(14%)

Base

Budget

$527.5B

(86%)

$ in Billions

Note: Amounts may not add due to rounding

Budget by Appropriation $ in Billions

Military Personnel $149.7

Operation and Maintenance $272.8

Procurement $109.8

RDT&E $69.6

Military Construction $8.9

Family Housing $1.6

Revolving Funds $2.5

Total $614.8
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

10

The BCA sought to reduce the annual Federal 

deficit by $1.2 trillion by the end of 2021. When 

lawmakers failed to accomplish this, the BCA

triggered automatic budget cuts. The budget 

cuts total $1.2 trillion over 10 years, split 

roughly equally between defense and domestic 

discretionary spending. The effects of 

sequestration on many budget items was 

increased by the exclusion of a large fraction of 

the overall DoD budget, namely military pay 

and benefits. Other budget areas had to absorb 

larger percentage cuts so that the Department

could meet its overall mandatory reductions.

Anticipating the possibility of sequestration, the 

Department began taking action in 

January 2013 to slow spending. The 

Department imposed hiring freezes, laid off 

temporary and term employees, cut travel and 

conferences, and reduced facilities 

maintenance.

In March, the triggering of sequestration 

resulted in a reduction of $37 billion (Figure 2)

during the last six months of the fiscal year. Coupled with the unexpected shortfall in 

wartime or OCO funding, which led to a total operating shortfall of $30 billion, the effects of 

sequestration on the Department’s operations was damaging and far-reaching. The 

Department endured major cuts in training and maintenance, seriously damaging military 

readiness. The Air Force shut down flying at 13 combat-coded fighter and bomber 

squadrons and curtailed exercises. The Army cancelled seven combat training center 

rotations and five brigade-level exercises that are essential in preparation for deploying 

units. The Navy delayed deployment of the USS TRUMAN carrier strike group to the Persian 

Gulf, curtailed the sailing of the USNS COMFORT to Latin America, and cancelled other ship 

deployments. In addition, the Department was forced to impose unpaid furloughs on civilian 

employees, with approximately 650,000 civilian employees affected for six days.

Sequestration deprived the Department of its ability to implement the BCA-mandated

FY 2013 reductions in a balanced, strategy-driven manner. The adverse effects on the 

Department’s operations have been damaging and far reaching, especially with regard to 

readiness. 

Despite the continuing uncertainty, the Department must have a plan for future budgets. In 

March 2013, Secretary Hagel directed Deputy Secretary Ashton Carter to conduct a 

Strategic Choices and Management Review (SCMR), with the support of the Chairman of the 

Joint Chiefs of Staff, General Martin Dempsey, and the Department’s civilian and military 

leadership. The SCMR developed a menu of choices for aligning Defense strategy with a 

range of budget scenarios. 

Figure 2. DoD FY 2013 Sequester 

Impact (-$37.2B)

B13-45

$ in Billions

Note: Amounts may not add due to rounding

Budget by Appropriation $ in Billions

Military Personnel --

Operation and Maintenance $-20.3

Procurement $-9.8

RDT&E $-6.1

Military Construction $-0.8

Family Housing $-0.2

Revolving Funds --

Total $-37.2

Military 

Construction

$-0.8B

Family 

Housing

$-0.2B

Operation & 

Maintenance

$-20.3B

RDT&E

$-6.1B

Procurement

$-9.8B
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

11

The SCMR focused on both strategic and managerial choices, ranging from options for future 

force structure needs to institutional reform, efficiencies, and compensation. The SCMR 

sought to preserve the key tenets of the President's 2012 DSG, and to optimize savings 

gained from reducing overhead and structural costs with minimal impact on the capability 

and readiness of the force. The SCMR will help guide the Services and defense agencies in 

developing budgets for FY 2015 – FY 2019. It will also serve as an input to the 2014 QDR, 

which will determine the Department’s strategic course in the years ahead. 

Throughout FY 2013, the Department remained dedicated to obtaining, investing, and 

effectively using its financial resources to ensure the security of the United States and meet 

the needs of both the warfighter and the ever-changing battlefield. Taking care of our 

people, reshaping and modernizing the force in the current fiscal environment, and 

supporting our troops in the field remain the highest priorities for the Department.

President Barack Obama, Defense Secretary Chuck Hagel and Army General Martin Dempsey, 

Chairman, Joint Chiefs of Staff, during a ceremony for 9/11 victims. 

DOD photo by Erin A. Kirk-Cuomo
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

12

PERFORMANCE GOALS, OBJECTIVES, AND RESULTS 

OVERVIEW

Each year, the Department develops and tracks performance measures to assess our 

progress in meeting DoD’s Strategic Plan priorities, as defined in the Quadrennial Defense 

Review (QDR). This section reports on the results of 15 key DoD performance measures as 

of third quarter, FY 2013, and 2 key measures as of the end of FY 2013. These 

17 performance measures best align to the following financial management themes: 

• Act as good stewards of the public funds

• Implement and deepen program alignment to the new defense strategy

• Create a force that is ready across a spectrum of missions

• Keep people central to our 

plans.

The sequestration provisions of 

the Budget Control Act of 2011, 

which resulted in across-theboard cuts in nearly all of the 

Department’s FY 2013 

discretionary spending areas, 

already has significantly 

impacted the Department’s 

ability to achieve its strategic 

goals. As training exercises and 

operational budgets 

are reduced to meet 

sequestration targets, the 

readiness of DoD organizations 

will likely be affected. In 

September 2013 testimony on 

Capitol Hill, the Service 

Secretaries stated that the 

extent of sequestration’s impact could be significant to U.S. forces and, therefore, will almost 

certainly affect performance results in FY 2014. 

Despite these fiscal challenges, the Department made progress in FY 2013. Of the performance 

measures highlighted in this section, 14 (82 percent) are on track to meet year-end goals. The 

final results and associated trend analysis for all 75 of the Department’s performance measures 

will be addressed in the Department’s FY 2013 Annual Performance Report (APR), submitted 

with the Department’s FY 2015 Congressional Budget Justification in February 2014. The APR 

can be viewed at http://comptroller.defense.gov/budget.html or on Performance.gov, 

http://goals.performance.gov/agency/dod, under “Agency Plans and Reports.” 

U.S. soldiers patrol down a mountain after visiting an Afghan 

border police observation point in Kunar province, 

Afghanistan.

U.S. Army photo by Sgt. Jon Heinrich
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

13

Strategic Goal 1: Prevail in Today’s Wars

The United States military protects the nation’s economic vitality and interests throughout 

the world. In this environment of significant mission requirements, coupled with current and 

future budget reductions, the DoD Combatant Commander’s ability to execute 100 percent 

of current operations is critical. Current operations are intended to help us prevail in today’s 

wars by continuing to develop functional relationships and conduct joint exercises with 

coalition partners. As it relates to the Afghan National Security Force (ANSF), the North 

Atlantic Treaty Organization International Security Assistance Force is on track to transition 

full security responsibility to the Afghan government by the end of 2014. As of third quarter 

FY 2013, all COCOMs reported meeting the goal to be 100 percent ready to execute current 

operations (Strategic Objective 1.1-OCO). 

Strategic Goal 2: Prevent and Deter Conflict

The following performance measures (Strategic Objective 2.1-1F1) are critical to satisfying 

the Department’s deterrence missions, which rely upon our ability to quickly confront and 

defeat aggression from any adversary, anytime, anywhere. 

The Department exceeded strategic measure 2.1.3-1F1, the percent of Army Brigade 

Combat Teams (BCT) converted to a modular design and available to meet operational 

demands. The modular design shifts the Army away from a division-centric force structure 

to a brigade-centric force structure, where BCTs with a modular design possess more 

organic capabilities and are less reliant upon division-level support. The Army's conversion 

of BCTs to a modular design has resulted in a force that is more capable, standardized, and 

flexible to respond to a wide range of missions.

At the end of the third quarter, the Army completed the modular conversion of 71 BCTs. 

Additionally, the Army completed the modular conversion of its 228 planned Multi-functional 

and Functional Support (MFF) brigades. 

STRATEGIC GOAL 1: PREVAIL IN TODAY’S WARS.

Key Performance Measures Strategic Plan Long-Term 

Performance Goals

Performance Goals/Results

FY 2012 

Results

FY 2013 Q3 

Goals

FY 2013 Q3 

Results

Strategic Objective 1.1-OCO: Degrade the Taliban to levels manageable by the ANSF, while increasing the 

size and capability of the ANSF.

1.1.1-OCO: Percent of the 

Combatant Commanders’ 

(COCOMs) Current Operations 

which they report ready to 

execute.

1.1.1-OCO: For each FY, 

Combatant Commanders 

(COCOMs) will be ready to 

execute 100% of Current 

Operations.

 100% 100%  100%

 Met or Exceeded Target  Did Not Meet Target 
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

14

Strategic Goal 3: Prepare to Defeat Adversaries and Succeed in a 

Wide Range of Contingencies

In an increasingly dangerous world, the Department’s ability to respond to natural and 

manmade disasters is of paramount importance. To that end, the Department continues to 

focus on improving the responsiveness and flexibility of the Consequence Management 

Response forces. Consequence management 

responses can be defined as the steps taken 

by the government to restore general 

security and health, to restore core

government functions (police, fire, etc.), 

and to provide emergency relief to those

affected by the consequences of a chemical, 

biological, nuclear, or high-yield explosive 

scenario. The ability to train, equip, evaluate, 

and validate these response units is critical to 

ensure the Department is prepared to 

respond to catastrophic events. 

In partnership with other Federal agencies, 

the Department continues to prioritize a 

return to full-spectrum training. Several of 

the performance measures tracked are 

associated with the readiness of the 

Chemical, Biological, Radiological, or 

Nuclear (CBRN) response force. 

STRATEGIC GOAL 2: PREVENT AND DETER CONFLICT.

Key Performance 

Measures

Strategic Plan Long-Term 

Performance Goals

Performance Goals/Results

FY 2012 

Results

FY 2013 Q3 

Goals

FY 2013 Q3 

Results

Strategic Objective 2.1-1F1: Extend a global posture to prevail across all domains by increasing capacity 

in general purpose forces and by enhancing stability operations and foreign security force competency.

2.1.3-1F1: Cumulative 

percent of Army Brigade 

Combat Teams (BCTs) 

converted to a modular

design and available to meet 

military operational 

demands.

2.1.3-1F1: By FY 2014, 100% 

of Army BCTs will have 

concerted to a modular design 

and be available to meet 

military operational demands. 

69% 99%  100%

2.1.4-1F1: Cumulative 

number of Army Multifunctional and Functional 

Support (MFF) brigades 

converted to a modular 

design and available to

meet military operational 

demands.

2.1.4-1F1: By FY 2013, the 

DoD will convert 228 Army 

Multi-functional and Functional 

Support (MFF) brigades to a 

modular design. 228 228  228

 Met or Exceeded Target  Did Not Meet Target

Marines assigned to aircraft rescue and 

firefighting units work together to put out a fire 

at the air station burn pit during a training fire 

exercise on Marine Corps Air Station, Beaufort, 

S.C. Their gear protects them from flames that 

reach 1200 degrees.

U.S. Marine Corps photo by 

Lance Cpl. Justin M. Boling
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

15

The CBRN response force performs life-saving capabilities in emergency medical situations, 

search and extraction, decontamination, security incidents, and command and control 

needs. The 18,000-person enterprise supporting these efforts is ready to deploy within 

three hours following an incident.

This Strategic Objective (3.1-1F2B) includes measures for the Homeland Response Forces 

(HRF) and the Chemical, Biological, Radiological/Nuclear, and Explosive (CBRNE) –

Enhanced Response Force Package (CERFP). These forces perform life-saving activities and 

are distributed throughout the nation to ensure rapid arrival at major metropolitan areas 

impacted by CBRN incidents. The 10 HRFs and 17 CERFPs undergo rigorous training and 

yearly exercises to ensure they can achieve the highest performance standards for their 

incident response missions. Both the CERFPs and the HRFs met their third quarter 

performance goals.

Another critical element used to measure improvement in the responsiveness and flexibility 

of Consequence Management Response forces relates to the response times for the 

5,000-person Defense CBRNE Response Force (DCRF) and two, 1,500-person Control 

Response Elements (C2CRE). The DCRFs and C2CREs combine together to provide the initial 

Federal CBRN response capabilities at one catastrophic incident site, or separately at 

multiple sites affected by lower-magnitude incidents. 

STRATEGIC GOAL 3: PREPARE TO DEFEAT ADVERSARIES AND SUCCEED IN A 

WIDE RANGE OF CONTINGENCIES.

Key Performance Measure Strategic Plan Long-Term 

Performance Goals

Performance Goals/Results

FY 2012 

Results

FY 2013 Q3 

Goals

FY 2013 Q3 

Results

Strategic Objective 3.1-1F2B: Improve the responsiveness and flexibility of Consequence Management 

Response forces. 

3.1.1-1F2B: Cumulative 

number of Homeland 

Response Forces (HRFs)

trained, equipped, evaluated, 

and validated at a reduced 

response time of 6-12 hours.

3.1.1-1F2B: By FY 2012, the 

DoD will have and maintain 10

National Guard HRFs trained, 

equipped, evaluated, and 

validated at a reduced 

response time of 6-12 hours to 

a very significant or 

catastrophic event.

10 10  10

3.1.2-1F2B: Cumulative 

number of Chemical, 

Biological, Radiological, 

Nuclear and High-Yield 

Explosives Enhanced 

Response Force Packages 

(CERFPs) trained, equipped, 

evaluated, and validated at a 

response time of 6-12 hours.

3.1.2-1F2B: By FY 2012, the 

DoD will have and maintain 17 

National Guard CERFPs 

trained, equipped, evaluated, 

and validated at a response 

time of 6-12 hours in order to

backfill existing CERFPs that 

will convert to HRFs.

17 17  17

3.1.3-1F2B: Number of 

Defense CBRNE Response 

Forces (DCRFs) trained, 

equipped, evaluated, and

certified at a response time of 

24-48 hours.

3.1.3-1F2B: By FY 2012, the 

DoD will have and maintain 

one DCRF trained, equipped, 

evaluated, and certified at a 

response time of 24–48 hours.

1 1  1
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

16

STRATEGIC GOAL 3: PREPARE TO DEFEAT ADVERSARIES AND SUCCEED IN A 

WIDE RANGE OF CONTINGENCIES.

Key Performance Measure Strategic Plan Long-Term 

Performance Goals

Performance Goals/Results

FY 2012 

Results

FY 2013 Q3 

Goals

FY 2013 Q3 

Results

3.1.4-1F2B: Number of 

Command and Control (C2) 

CBRNE Response Elements 

(C2CREs) trained, equipped 

and evaluated, as well as 

certified or validated as 

applicable at a response time 

of 96 hours.

3.1.4-1F2B: By FY 2012, the 

DoD will have and maintain 

two C2CREs trained, 

equipped and evaluated as 

well as certified or validated as 

applicable at a response time 

of 96 hours.

2 2  2

 Met or Exceeded Target  Did Not Meet Target

Strategic Goal 4: Preserve and Enhance the All-Volunteer Force

During the past decade, the men and women who comprise the All-Volunteer Force (AVF) –

to include Active, Reserve and National Guard Components—have shown unwavering 

resourcefulness, flexibility, and commitment. The AVF is the backbone of the U.S. military, 

and the Department continues to provide high-quality care to all military personnel, their 

dependents, and retirees (Strategic Objective 4.1-2M). The Department has prioritized 

critical programs, such as assistance to help veterans transition to civilian life, wounded 

warrior care, suicide prevention, and sexual assault prevention and response. 

The Nation faces many challenges worldwide, and as a result, often must be prepared to 

respond on very short notice. Therefore, it is critical that Service members are medically 

ready to deploy quickly. 

The Department assesses how well the Military Health System (MHS) manages care for 

Service members. As of third quarter, MHS exceeded the goal to maintain an average 

Defense Health Program (DHP) medical cost at or below the average private-sector 

healthcare cost. 

Additionally, through the Individual Medical Readiness (IMR) programs, Commanders can 

evaluate the medical readiness of each Service member. Medical readiness means that 

Service members are free from health-related conditions that could limit their ability to 

carry out assigned duties. The Department met its third quarter medical readiness target.

The Department remains committed to ensuring that Wounded, Ill, or Injured (WII) Service 

members, or those at the end of their service, are processed in a timely manner through 

the Integrated Disability Evaluation System (IDES), a joint DoD and Department of Veterans 

Affairs (VA) system. The Department and the VA fell short in this performance measure and 

did not meet its third quarter FY 2013 goal of 60 percent of Service members processed 

through the IDES within 295 days (Active) and 305 days (Reserve Components). The 

Department is dedicated to preventing personnel from over-exposure to combat and 

operational deployments while at the same time ensuring it has the right force structure to 

accomplish the mission (Strategic Objective 4.2-2P). 
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

17

An Air Force Master Sergeant hugs his children after 

returning from a deployment.

U.S. Air Force photo by Master Sgt. Mark Olsen

Deployment-to-Dwell metrics and policies were established to mitigate stress on the force 

due to increased operational tempo for Operation Iraqi Freedom (OIF) and Operation 

Enduring Freedom (OEF). Deployment to Dwell (D2D) is a unit and individual management 

metric based on time deployed versus time not deployed. The purpose of the metric is to 

establish a consistent set of standards to characterize and manage the employment of the 

total force in order to preclude the over-exposure of personnel to combat operational 

deployments. The Secretary of 

Defense has established goals and 

thresholds for D2D ratios at 1:2 

and 1:1, respectively. However, 

there are challenges associated 

with ensuring completeness and 

accuracy of reporting across 

Services, as well as ensuring 

common definitions are applied. As 

a result, the Department is rewriting the existing policy to apply 

more broadly than OIF and OEF.

The DoD civilian workforce supports 

the all-volunteer force with 

professionalism and dedication. The 

Department relies on its civilian 

workforce to perform a variety of 

key missions in support of the

military. As of the third quarter, the 

Department did not meet its goal to improve and maintain the timely hiring of skilled 

professionals. The Department is committed to reducing the number of days it takes to hire 

a civilian employee to 80 days or less; however, achieving this target has been impacted by 

Component hiring freezes, workforce furloughs, and concerns over future funding cuts.

STRATEGIC GOAL 4: PRESERVE AND ENHANCE THE ALL-VOLUNTEER FORCE.

Key Performance 

Measures

Strategic Plan Long-Term 

Performance Goals

Performance Goals/Results

FY 2012 

Results

FY 2013 Q3 

Goals

FY 2013 Q3 

Results

Strategic Objective 4.1-2M: Provide top-quality physical and psychological care to wounded warriors, 

while reducing growth in overall healthcare costs.

4.1.1-2M: Average percent 

variance in Defense Health 

Program (DHP) annual cost 

per equivalent life increase 

compared to average civilian 

sector increase.

4.1.1-2M: Beginning in FY 

2007, the DoD will maintain 

an average DHP medical cost 

per equivalent life increase at 

or below the average 

healthcare premium increase 

in the civilian sector. 

-6.4% ≤0% -2.1%
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

18

STRATEGIC GOAL 4: PRESERVE AND ENHANCE THE ALL-VOLUNTEER FORCE.

Key Performance 

Measures

Strategic Plan Long-Term 

Performance Goals

Performance Goals/Results

FY 2012 

Results

FY 2013 Q3 

Goals

FY 2013 Q3 

Results

4.1.2-2M: Percentage of 

Armed Forces who meet 

Individual Medical 

Readiness (IMR)

requirements.

4.1.2-2M: By FY 2015, 85% 

of the Armed Forces will have 

an IMR that indicates

readiness for deployment.

84% 82%  82%

4.1.3-2M: Percent of 

Service members who are 

processed through 

Integrated Disability 

Evaluation System (IDES) 

within 295 days (Active) and 

305 days (Reserve) 

Components.

4.1.3-2M: By FY 2014, 80% 

of Service members will be 

processed through the IDES 

within 295 days (Active) and 

305 days (Reserve) 

Components.

24% 60%  26%

Strategic Objective 4.2-2P: Ensure the Department has the right workforce size and mix, manage the 

deployment tempo with greater predictability, and ensure the long-term viability of the Reserve 

Component.

4.2.3-2P: Percentage of the 

Department’s active duty 

Army who meet the planning 

objectives for time deployed 

in support of combat 

operations versus time at 

home.

4.2.3-2P: By FY 2015, at 

least 95% of active duty Army 

personnel will meet the 

deployment to dwell objective 

of 1:2.

91% 83.8%  96%

4.2.8-2P: Number of days 

for external civilian hiring 

(end-to-end timeframe).

4.2.8-2P: Beginning in FY 

2013, the Department will 

improve and maintain its 

timeline for all external (direct 

hire authority, expedited hire 

authority, and delegated 

examining) civilian hiring 

actions at 80 days or less. 

83 days 80 days  98

days

 Met or Exceeded Target  Did Not Meet Target 

Strategic Goal 5: Reform the Business and Support Functions of the 

Defense Enterprise

To effectively manage business capabilities, the Department maintains a portfolio of 

strategic initiatives across core support functions, such as Financial Management (FM), 

Personnel and Readiness, Acquisition and Logistics, and Information Technology (IT). 

Reorienting the management of Defense business around cross-functional, end-to-end 

processes enables informed enterprise-wide decisions, guides the selection of targeted 

investments in business capabilities, and drives interoperability, efficiency, and a reduction 

of duplicative systems. The Department is transforming its business through key initiatives, 

including audit readiness, better buying power (BBP), and mobile and web-enabled 

applications. Ultimately, the Department cannot execute its core war fighting mission 

without the efficient execution of business operations. 
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

19

To improve the financial management and stewardship of taxpayer funds, the Department

aims to provide decision makers with accurate, reliable, and relevant financial management 

information. Continuous improvements in acquisition processes and the improved 

functionality and interoperability of the business and financial information systems will 

continue to contribute to reforming business and support functions (Strategic 

Objective 5.3-2E). Successful implementation of these business initiatives will position the 

Department to achieve an audit-ready Schedule of Budgetary Activity (SBA) by the end of 

FY 2014 and ensure that all financial statements are audit ready by the end of FY 2017

(Strategic Objective 5.5-2U/V).

STRATEGIC GOAL 5: REFORM THE BUSINESS AND SUPPORT FUNCTIONS OF THE 

DEFENSE ENTERPRISE.

Key Performance Measures Strategic Plan Long-Term 

Performance Goals

Performance Goals/Results

FY 2012 

Results

FY 2013 Q3 

Goals

FY 2013 Q3 

Results

Strategic Objective 5.5-2U/V: Improve financial management and increase efficiencies in headquarters and 

administrative functions, support activities, and other overhead accounts.

5.5.1-2U: Percentage of

DoD’s general funds, FBWT,

validated as audit-ready.

5.5.1-2U: By FY 2014, 100% 

percent of DoD’s FBWT will be 

validated as audit ready. 9% 9%  9%

5.5.2-2U: Percentage of

DoD’s general fund SBR for 

material Components 

validated as audit-ready.

5.5.2-2U: By FY 2014, 100% of 

DoD’s general fund SBR for 

material Components will be 

validated as audit-ready.

14% 14%  19%

5.5.4-2U: Percentage of SBR 

for Appropriations Received 

validated as audit-ready.

5.5.4-2U: By FY 2013, the DoD

will improve its audit readiness on 

the SBR for Appropriations 

Received to 100%.

88% 88%  100%

 Met or Exceeded Target  Did Not Meet Target 

The Department met its Quarter 3, FY 2013 goal to validate 9 percent of its Fund Balance 

with Treasury (FBWT) as audit ready. In addition, it exceeded the Quarter 3, FY 2013 goal, 

which is to validate 14 percent of the DoD’s General Fund Statement of Budgetary 

Resources (SBR) as audit ready, by four percent. 

As of the third quarter, the Department met its FY 2013 goal by validating 100 percent of 

the Appropriations Received reported on the SBR as ready for audit. Meeting the goal of 

audit readiness on the General Fund SBR for Appropriations Received demonstrates that the 

Department can accurately account for and distribute funds provided by Congress to the 

right accounts, in accordance with law. In addition, audit readiness of Appropriations 

Received helps ensure that future activities supporting the auditability of the General Fund 

SBR are successful
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

20

In the area of acquisition (Strategic Objective 5.3-2E), the Department’s Better Buying 

Power 2.0 (BBP 2.0) guidance in early FY 2013 mandated affordability as a requirement and 

emphasized the affordability constraints imposed in the first BBP effort. The BBP 2.0 focuses 

on seven areas to achieve greater efficiency and productivity in defense spending:

• Achieve Affordable Programs;

• Control Costs Throughout the Product Life Cycle;

• Incentivize Productivity and Innovation in Industry and Government;

• Reduce Unproductive Processes and Bureaucracy;

• Promote Effective Competition;

• Improve Tradecraft in Acquisition of Services, and

• Improve the Professionalism of the Acquisition Workforce

The goals and results for the following two key measures for improving acquisition 

processes, Strategic Objective 5.3-2E, are reported through Quarter 4 FY 2013.

STRATEGIC GOAL 5: REFORM THE BUSINESS AND SUPPORT FUNCTIONS OF THE 

DEFENSE ENTERPRISE.

Key Performance Measures Strategic Plan Long-Term 

Performance Goals

Annual Performance Goals/Results

FY 2012

Results

FY 2013 

Goals

FY 2013 

Results

Strategic Objective 5.3-2E: Improve acquisition processes, from requirements definition to the execution 

phase, to acquire military-unique and commercial items.

5.3.1-2E: Percentage of 

contract obligations

competitively awarded.

5.3.1-2E: Beginning in FY 2012, 

the Department will increase, by 

1% annually, the amount of 

contract obligations competitively 

awarded.

57.5% 60%  56.9%

5.3.6-2E: Average rate of 

acquisition cost growth from 

the previous year for Major 

Defense Acquisition Programs 

(MDAPs) starting in FY 2002.

5.3.6-2E: Beginning in FY 2012, 

the DoD will ensure that average 

rate of acquisition cost growth from 

the previous year for MDAPs 

starting in FY 2002 does not 

exceed 3%.

-0.27% 3%  -1.42%

 Met or Exceeded Target  Did Not Meet Target 

The Department did not meet its FYE 2013 goal of 60 percent for competitive contract 

obligations in FY 2013. The Department continues to share best practices at quarterly 

competition meetings and is exploring initiatives to support the BBP 2.0 competition 

guidance. The BBP 2.0 will promote competition by emphasizing how vital it is to create and 

maintain competitive environments when acquiring both products and services. The 

Department did, however, significantly reduce the average rate of acquisition cost growth 

from the previous year for Major Defense Acquisition Programs (MDAPs).
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

21

FINANCIAL OVERVIEW

The previous sections of this report provide an overview of the Department’s operations in 

FY 2013 and the results for a few of the key performance metrics that measure how we met 

the Department’s goals and objectives as of the third quarter of FY 2013. Meeting our 

defense goals requires financial resources, which are reported in the Department’s financial 

statements that appear later in this report. 

At present, the Department cannot produce auditable financial statements, and 

management cannot provide unqualified assurance as to the effectiveness of our internal 

controls over financial reporting. While we are confident we know where taxpayer funds are 

obligated, the Department lacks the ability to prove reliable and well-controlled business 

processes and consistently provide supporting documentation to auditors in a timely 

manner. The Financial Improvement and Audit Readiness (FIAR) initiative, which is briefly 

discussed later in this report, guides the Department’s efforts to improve our financial 

management. Our goal is to achieve audit readiness for the Department’s budgetary 

activities in FY 2014, and for all financial statements by 2017.

Despite the Department’s financial statement auditability challenges, we have been able to 

effectively use the financial data summarized in this section to regularly and timely pay 

employees and vendors, adequately track payments made, and successfully manage overall 

operations.

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 (USGAAP) 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. 

The Defense Finance and Accounting Service (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
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

22

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 provide the 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 Overview section and depicted in Figure 3, the Department’s FY 2013 

enacted appropriations total $614.8 billion. The change in FY 2013 enacted amounts is 

mostly attributable to decreases in appropriations for overseas contingency operations 

(OCO) and sequestration actions required by the Budget Control Act of 2011. 

As shown in Figure 4, the Department reported $1.1 trillion in FY 2013 total budgetary 

resources. The total appropriations amount of $733.5 billion reported on the Statement of 

Budgetary Resources consists of 

enacted appropriations and 

appropriations provided by the U.S. 

Treasury for DoD retirement and health 

benefits. The Department also receives 

appropriations to finance civil work 

projects managed by the U.S. Army 

Corps of Engineers. 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 as “Temporarily not 

available,” represent budget authority 

the Department will execute in future 

years to pay the current unfunded 

liabilities carried in these large funds. 

Additional budgetary resources include 

$195.0 billion of unobligated balances 

stemming from prior year budget 

Figure 3. Trend in DoD Enacted 

Appropriations

Figure 4. Composition of DoD Total 

Budgetary Resources

Description FY 2013

($ in billions)

DoD Enacted Appropriations $614.8 

Sequestration (37.2)

U.S. Treasury contribution for Military 

Retirement and Health Benefits 80.7

Civil Works Projects executed by the 

USACE 8.9

Trust Fund Receipts 123.9

Trust Fund Resources Temporarily not 

Available (57.6)

Total Appropriations Reported on SBR $733.5 

Brought Forward Unobligated Budget 

Authority 195.0

Spending Authority from Offsetting 

Collections 103.7

Contract Authority 65.6

Total Budgetary Resource $1,097.8

B13-35

513.0 528.2 529.0 530.6 527.5

153.0 163.0 159.0 115.1 87.3

$0

$100

$200

$300

$400

$500

$600

$700

$800

FY 2009 FY 2010 FY 2011 FY 2012 FY 2013

Base Budget OCO

$666.0 $691.2

$645.7

$688.0

$614.8

$ in Billions
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

23

authority, $103.7 billion in spending authority from offsetting collections, and $65.6 billion 

of contract authority.

Of the $1.1 trillion in total budgetary resources, $954 billion were obligated and $922 billion 

of obligations were disbursed. The remaining unobligated budgetary resources balance 

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

projects require additional time to procure. Additionally, appropriations that are expired for 

purposes of new obligations remain available for valid upward adjustments to prior year 

obligations.

Balance Sheet

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

September 30, 2013, reports amounts available to provide future economic benefits 

(Assets) owned or managed by the Department, amounts owed (Liabilities) requiring use of 

available assets, and the difference between them (Net Position).

The $2.2 trillion in assets shown in Figure 5 represent amounts the Department owns and 

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

Treasury (FBWT) represent 84 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 $94.1 billion (5 percent) from FY 2012, largely due to $69.8 billion 

increase in Investments in U.S. Treasury securities and $38.2 billion increase in General 

Property, Plant, and Equipment, which were offset by $29.5 billion decrease in the 

Department’s FBWT. 

Figure 5. Summary of Total Assets

B13-31

$1,797.5 

$1,915.9 

$2,031.5 $2,085.7 

$2,179.8 

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

$2,200

$2,400

FY 2009 FY 2010 FY 2011 FY 2012 FY 2013

Trend in Assets $ in Billions

Breakout

Property, 

Plant, and 

Equipment

$639.6

29%

Fund 

Balance with 

Treasury

$482.7

22%

Investments

$714.8

33%

Accounts 

Receivable

$11.7

1% Other 

Assets*

$77.0

3%

Inventory

$254.0

12%

FY 2013 

Assets

* Includes Other Assets, Cash and Other 

Monetary Assets, and Loans Receivable
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

24

Investments increased by $69.8 billion due to the $66.8 billion deposit of additional funds 

from the U.S. Treasury and Military Sservices to cover the normal growth of future military 

retirement and health benefits. Funds not needed to cover current benefits are invested in 

U. S. Treasury Securities. 

The $38.2 billion increase in the Department’s General Property, Plant, and Equipment is 

primarily the result of the ongoing audit readiness efforts to validate existence and 

completeness and improve the valuation of its assets. As the Department continues to 

review property accountability records, adjustments are made to properly report assets not 

previously recorded and properly value assets previously recorded.

The $29.5 billion reduction in the Department’s Fund Balance with Treasury is largely 

related to the $37.2 billion decrease in appropriations required by the sequestration actions 

in the Budget Control Act of 2011.

As seen in Figure 6, the Department’s total liabilities decreased $46 billion during FY 2013, 

almost exclusively due to downward adjustments in the estimated actuarial liability 

associated with military retirement pension and health care benefits. The Department’s 

Office of the Actuary revised the cost basis for the estimate as well as the actuarial 

assumptions used to determine the projected liability. 

The Department is confident in its ability to meet its financial obligations for the $2.4 trillion 

of liabilities reported in FY 2013. Figure 7 identifies the 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 actuarial 

liability accounts for approximately $1.4 trillion (81 percent) of the total $1.7 trillion in 

liabilities that are not currently covered by budgetary resources. Additionally, the 

Department has resources available to cover approximately $668.9 billion of the remaining 

liabilities, including funds primarily invested in U.S. Treasury securities. 

Figure 6. Summary of Total Liabilities

B13-32

$2,161.9 

$2,322.4 $2,351.5 

$2,458.0 $2,412.1 

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

$2,200

$2,400

$2,600

FY 2009 FY 2010 FY 2011 FY 2012 FY 2013

Trend in Liabilities $ in Billions

Breakout

Accounts 

Payable

$21.7

1%

Military Retirement 

and Employment 

Benefits

$2,280.6

95%

Environmental 

and Disposal 

Liabilities

$58.3

2%

Other Liabilities*

$51.5

2%

FY 2013 

Liabilities

* Includes Other Liabilities, Debt, 

and Loan Guarantee Liability
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

25

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 

assets purchased and capitalized on the Balance Sheet. Differences between outlays of 

budgetary resources and net cost generally arise from the timing of expense recognition. 

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 $558 billion in net costs of operations during the fiscal year. 

As depicted in Figure 8 (below), the $558 billion in net costs of operations represents a 

$210.9 billion decrease (27 percent) from FY 2012 reported net costs.

The largest impact to costs during FY 2013 is a $133.3 billion change to actuarial 

assumptions used in estimating and recording accruals for future estimated payments of 

military retirement and health care benefits. The change in actuarial assumptions is 

reflected as a gain on the net cost of operations and has the impact of reducing the overall 

net cost of operations and reducing the liabilities on the balance sheet.

Figure 7. Unfunded Liabilities

B13-33

$ in Billions

Liabilities 

covered by 

Budgetary 

Resource

$668.9

28%

Liabilities not 

covered by 

Budgetary 

Resources

$1,743.2

72%

All Other 

Unfunded 

Liabilities

$17.9

Unfunded 

Environmental 

Liabilities

$54.6

DoD Unfunded 

Military Retirement 

Benefits

$251.7

Unfunded Military 

Retirement and 

Benefits funded 

by Treasury

$1,419.0

Breakout

$1,743.2

$1.7T
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

26

There is also a decrease in net cost resulting from FY 2013 and FY 2012 audit readiness efforts 

to properly report the value of property, plant, and equipment, including the accumulated 

depreciation of assets. The impact in FY 2013 is $23.8 billion and in FY 2012 is $17.3 billion.

Statement of Changes in Net Position

The Statement of Changes in Net Position (SCNP), located in the Financial Information 

section of this report, 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.

Financial Performance Summary

Key information reflecting the Department’s financial statements is summarized in Figure 9

below. This figure 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. As noted, the lack of auditable financial data is a limiting 

factor in the ability of the Department to explain all material variances presented in the 

comparative statements. 

Figure 8. Summary of Net Cost of Operations

571.9 615.0 615.3 622.3

558.0

79.6

204.8

68.9

146.6

$0

$100

$200

$300

$400

$500

$600

$700

$800

FY 2009 FY 2010 FY 2011 FY 2012 FY 2013

DoD Costs Military Retirement Benefit Costs* B13-34

$651.1

$819.8

$684.2

$768.9

$558.0

Trend in Net Cost of Operations

Procurement

$73.2

13%

Operations, 

Readiness & 

Support

$240.8

43%

Research, 

Development, 

Test & 

Evaluation

$62.5

11%

Military 

Personnel

$144.9

26%

Civil Works

$7.9

2%

Family Housing 

& Military 

Construction

$28.7

5%

Breakout

FY 2013 

Net Cost of 

Operations

$ in Billions

* The Department realized a net gain in the Military Retirement 

Appropriation Group during FY 2013, included in the 

Operations, Readiness & Support appropriation group.
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

27

Figure 9. Financial Performance Summary

Dollars in Billions

FY 2013 Restated

FY 2012 Change % Change

ASSETS

Fund Balance with Treasury $ 482.7 $ 512.1 $ (29.4) -6.0%

Investments 714.8 644.9 69.9 11.0%

Accounts Receivable 11.7 13.0 (1.3) -10.0%

Other Assets 77.0 71.0 $6.0 8.0%

Inventory and Related Property, Net 254.0 243.3 10.7 4.0%

General Property, Plant and Equipment, Net 639.6 601.4 $ 38.2 6.0%

TOTAL ASSETS $ 2,179.8 $ 2,085.7 $ 94.1 5.0%

LIABILITIES

Accounts Payable $ 21.7 $ 21.3 $ 0.4 1.9%

Other Liabilities 51.5 50.2 1.3 2.6%

Military Retirement and Other Federal 

Employment Benefits 2,280.6 2,323.9 (43.3) -1.9%

Environmental and Disposal Liabilities 58.3 62.6 (4.3) -6.9%

TOTAL LIABILITIES $ 2,412.1 $ 2,458.0 $ (45.9) -1.9%

TOTAL NET POSITION (ASSETS MINUS LIABILITIES) $ (232.3) $ (372.3) $ 140.0 37.6%

Total Financing Sources 727.2 728 (0.8) -0.1%

Less: Net Cost 558.0 768.9 $ (210.9) -27.4%

NET CHANGE OF CUMULATIVE RESULTS OF 

OPERATIONS 169.2 (40.9) $ 210.1 513.7%

TOTAL BUDGETARY RESOURCES $ 1,097.8 $ 1,204.8 $ (107.0) -8.9%
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

28

FINANCIAL MANAGEMENT IMPROVEMENT INITIATIVES

In FY 2013, the Department carried out 

its mission in the face of unprecedented 

budgetary challenges. Continuing 

resolutions, sequestration, and furloughs 

became a regular part of our vocabulary. 

Although it was not “business as usual,” 

the financial management (FM) workforce 

remained committed to focusing on every 

element of our mission to support 

America's warfighters. We are dedicated 

to improving FM and providing the 

financial resources necessary to meet our 

national security objectives. 

Despite the changing economic 

landscape, we continued to focus our 

attention on providing our leaders and 

managers with timely and accurate 

financial information for decision-making, 

cost management, and audit readiness. 

The following initiatives are examples of 

our progress toward improving financial management.

FINANCIAL MANAGEMENT CERTIFICATION PROGRAM 

In this era of budgetary uncertainty, it would be easy to put training and professional 

development on a back burner; however, that would be a mistake. The greater the fiscal 

challenges, the greater the need for experienced, well-trained, and knowledgeable FM 

personnel. For this reason, the Under Secretary of Defense (Comptroller)/Chief Financial 

Officer decided that the Department’s Financial Management Certification Program, an 

initiative that began in FY 2012, would continue to move forward. 

The FM Certification Program, signed into policy on March 22, 2013, promotes a 

well-trained, flexible FM workforce that can effectively support our mission, achieve 

auditable financial statements, and adapt to the changing fiscal landscape. The 

FM Certification Program’s goals are to: 

• Advance the professionalism of the Department’s FM workforce.

• Encourage career broadening and leadership training for employees. 

• Improve employee knowledge and skills related to audit readiness and decision support.

• Establish a standard DoD FM body of knowledge.

• Apply the benefits resulting from implementing the Department’s Enterprise Resources 

Planning (ERP) systems. 

• Strengthen public confidence in the Department’s financial management. 

The Honorable Jessica L. Wright, Acting Under 

Secretary of Defense for Personnel and 

Readiness, and the Honorable Robert F. Hale, 

Under Secretary of Defense (Comptroller)/Chief 

Financial Officer, brief reporters on the 

Department’s civilian furlough planning efforts as 

a result of sequestration. 

DOD photo by U.S. Navy Petty Officer 1st Class 

Chad J. McNeeley
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

29

Within the program, each civilian and military FM position is assigned a certification level

(1, 2 or 3) that requires a minimum number of training hours that are targeted to financial 

management, leadership, and specific topics, such as audit readiness, fiscal law, and ethics. 

In addition to the training, a minimum number of years of financial management experience 

are required for each certification level. Upon meeting the certification level conditions, 

employees must meet continuing education requirements every two years. 

Full implementation of the FM Certification Program is targeted for the end of FY 2014. As 

we continue to face budgetary challenges, the Department’s FM Certification Program will 

enable us to do an even better job managing the Department’s financial challenges, 

supporting our warfighters, and producing auditable financial information. 

MORE DISCIPLINED USE OF RESOURCES

In continuation of the reform agenda advanced in previous budgets, the Department 

reviewed all budgetary areas for potential savings in its “More Disciplined Use of Resources” 

campaign. Strategies to realize savings include achieving new efficiencies, eliminating 

duplication and overhead, tightening personnel costs, enhancing contract competition, and 

reevaluating modernization programs. 

As a result of these efforts, the Department has proposed about $60 billion in cost 

reductions over the period of FY 2013 through FY 2017 (Future Years Defense Program) 

from the amount of funds requested in the Department’s FY 2012 budget. Examples of 

some of the savings include:

• Streamlining Business Practices and Support Services. The Department saved $21 billion 

by streamlining business practices and support services, such as installation and 

administrative functions, contracting, and staffing. 

• Adjusting Civilian Pay Raises. The Department saved $10 billion from reducing civilian 

pay increases from FY 2013 through 2016.

• Promoting Better Buying Power and Strategic Sourcing. The Department saved $8 billion 

by obtaining greater efficiency and productivity in defense spending and improving the 

way the Department acquires critical defense goods and services.

• Consolidating Information Technology Enterprise Services. The Department saved 

$4 billion by consolidating Army, Navy, and Air Force information technology (IT)

enterprise services. 

The Department remains committed to performing its mission while operating efficiently, 

reducing costs, and effectively managing taxpayer dollars. As the military force structure 

draws down, the Department will continue to examine other opportunities to streamline 

installation support and management overhead to match capacity to the new force 

structure. 
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

30

FINANCIAL FLEXIBILITY FOR WARFIGHTERS

Financial flexibility for warfighters is a critical component in the Department’s efforts to 

protect our national security in an unpredictable world. Financial flexibility provides the 

agility to adjust priorities, and make investment decisions quickly, inside of the two-year 

standard needed for the Department’s deliberate budgeting process. The Department works 

closely with the Congress to use financial flexibility and to ensure that response to urgent 

needs remains top priority. 

The contingencies in Iraq and Afghanistan prompted the development of the quick reaction 

organizations, and significant U.S. force elements will remain engaged in Afghanistan and 

around the world for the foreseeable future. Clearly, the Department must continue to 

address emerging warfighter requirements rapidly. Last year, the Department, in a report to 

Congress, published Review of Acquisition Processes for Rapid Fielding of Capabilities in 

Response to Urgent Operational Needs, which explained a process for integrating efforts 

across a number of organizations that respond quickly to emerging warfighter needs, and 

addressed processes for urgent needs, requirements, acquisition, funding, operation and 

sustainment, and ultimate disposition of capabilities acquired in response to urgent needs. 

Also, last year, the Deputy Secretary of Defense issued DoD Directive 5000.71, The Rapid 

Fulfillment of Combatant Commander Urgent Operational Needs, that documents the role of 

the Warfighter Senior Integration Group (SIG) and its oversight of financial flexibility to 

fulfill these urgent needs. The SIG continues to lead and facilitate agile and rapid responses 

to combatant commander urgent operational needs, and for rapidly adjusting program and 

budgetary priorities. The Deputy Secretary of Defense chairs the SIG, which prioritizes 

actions and resources to resolve urgent warfighter issues. The SIG facilitates decisions and 

action to provide our forces with timely solutions to address previously unforeseen threats. 

This year, the Deputy’s Management Action Group reviewed the Department’s quick 

reaction processes and determined these processes must become an enduring capability, 

even as our forces in Afghanistan transition to an advisory role. Moving forward, the SIG will 

continue to coordinate rapid response efforts through the Joint Improvised Explosive Device 

Defeat Organization, the Intelligence, Surveillance & Reconnaissance Task Force, the Joint 

Rapid Acquisition Cell, and the Afghanistan Resources Oversight Council.

Recently, the Secretary of Defense applied the Rapid Acquisition Authority (RAA) provisions 

of Public Law 107-314, in determining the Secretary of the Army could waive specific 

administrative regulations and laws, as necessary, to allow the use of DoD funds for the 

rapid delivery of lethal miniature aerial munitions to support urgent operational needs of our 

forces in Afghanistan. Units in Afghanistan had proven the effectiveness of this 

developmental weapon during field operational assessments, and subsequently the Joint 

Staff validated their urgent requirement. Upon receiving the Defense Secretary’s RAA 

determination, the Secretary of the Army used $40 million of available funds to contract for 

the improved capability. 
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

31

Given the delayed enactment of the Department’s FY 2013 appropriations, as well as the 

effects of the BCA, the Department has, whenever possible, exercised the full range of 

available financial flexibility tools to resolve warfighter urgent needs. Among these tools is 

the ability to reprogram a small percentage of the Department’s budget using general 

transfer authority, and transfer accounts like the Joint Improvised Explosive Device Defeat 

Fund, the Joint Urgent Operational Needs Fund, and the Global Security Contingency Fund. 

For urgent needs beyond the scope of these appropriations, the Department uses other 

tools, such as RAA, as amended. These authorities allow the Department to be financially 

agile in a rapidly changing world. 

A U.S. soldier during a mission to maintain freedom of movement for military and commercial 

traffic in Wardak province, Afghanistan. 

U.S. Army photo by Spc. Chenee' Brooks 
U.S. Department of Defense Agency Financial Report for FY 2013 

Management’s Discussion and Analysis

32

FINANCIAL IMPROVEMENT AND AUDIT READINESS INITIATIVE

The Department remains committed to achieving audit readiness on all financial statements by 

September 30, 2017. Achieving audit readiness means the Department has reliable financial 

management practices, systems, and internal controls that are capable of producing accurate 

and complete financial information. 

Financial statement auditability is important to the Department for many reasons. It is required 

by law, but will also confirm that the Department is properly and effectively managing and 

executing the resources entrusted to it by Congress and the public. The FIAR initiative carries 

out the Department’s strategy to achieve audit readiness for all financial statements. 

Focusing first on improving the information most 

often used to manage DoD operations, the FIAR 

Initiative targeted two financial reporting 

priorities: Budgetary information validated as 

audit ready by September 30, 2014, and the 

existence and completeness of mission-critical 

assets validated by June 30, 2016. Meeting these 

priorities will ensure the Department makes the 

best use of every dollar while supporting its 

national security mission. 

Part of the challenge in successfully passing a 

financial statement audit lies with DoD’s unique 

size and mission. Figure 10 shows the 

magnitude of financial activities processed by 

DFAS in FY 2013, excluding processing by other 

DoD entities, such as the U.S. Army Corps of Engineers (USACE) or the Defense Health 

Agency1

. The Department tracks audit readiness progress through financial statement audit 

opinions, DoD OIG or Independent Public Accounting firm examinations, and audit readiness 

assertions. Substantial progress is being made, as reflected in the $235 billion (19 percent) 

of total budgetary resources that have an opinion or are currently under audit. Six DoD 

organizations received unqualified audit opinions on their FY 2012 financial statements, and

three DoD reporting organizations received qualified opinions. 

To achieve full audit readiness by September 30, 2017 and begin full financial statement 

audits in FY 2018, the DoD Components that have not achieved a financial statement audit 

are employing a mandatory, comprehensive strategy comprising four waves: 

• Wave 1 – Appropriations Received have been validated as audit ready.

• Wave 2 – Statement of Budgetary Resources – procedures currently are being

performed to achieve audit readiness.

 

1 Effective October 1, 2013, the Department established the Defense Health Agency, which absorbed the functions 

of the TRICARE Management Activity and assumed responsibility for common clinical and business processes across 

the Military Health System.

Figure 10. Transactions Processed 

by DFAS in FY 2013

Description FY 2013

Number of Active DoD 

Appropriations Managed 1,232

Number of Pay Transactions 161.8 million

Number of People/Accounts 6.6 million

Disbursements to Pay Recipients $579 billion

Number of Travel payments 6 million

Number of Commercial Invoices 

Paid 10.3 million

Military Retirement and Health 

Benefit Funds Managed $700 billion
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

33

• Wave 3 – Mission Critical Asset Existence and Completeness – procedures currently are 

being currently performed to achieve audit readiness by type of assessable unit and 

must be completed prior to achieving Wave 4.

• Wave 4 – Full Financial Statement Audit has been started, as discussed below.

In March 2013, the Department validated audit readiness of Appropriations Received and 

completed Wave 1. Additionally, for both budgetary resources and mission critical assets 

existence and completeness, 26 examinations have been completed or are in sustainment 

and 30 examinations are underway, pending, or have found that additional corrective 

actions are needed.

Secretary Hagel recently recorded an all-hands message that underscores the importance of 

the FIAR initiative. The video message may be viewed at 

http://comptroller.defense.gov/fiar/index.html. Detailed information on the status of the 

Department’s FIAR initiative can be found in the Department’s biannual FIAR Plan Status 

Reports at http://comptroller.defense.gov/fiar/plan.html. 

The Department also manages the Managers’ Internal Control Program (MICP) with the goal 

of providing instructions, guidance, and training on how to effectively execute an internal 

control program, enhance knowledge and understanding of audit readiness goals and 

priorities, and disseminate best practices and lessons learned. An overview of the 

Department’s MICP program is contained in the next section, entitled Systems, Controls, 

and Legal Compliance, with more detailed information reported in Addendum A.

U.S. sailors conduct a visit, board, search and seizure exercise with Bangladeshi sailors during 

Cooperation Afloat Readiness and Training Bangladesh 2013 in Chittagong, Bangladesh. The sailors 

are assigned to the Maritime Civil Affairs and Security Training Command.

U.S. Navy photo by Petty Officer 1st Class Jay C. Pugh
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

34

SYSTEMS, CONTROLS, AND LEGAL COMPLIANCE

MANAGERS’ INTERNAL CONTROL PROGRAM

The Department has a fundamental responsibility to be an effective steward of government 

money. Effective internal controls provide reasonable assurance that an organization

achieves its objectives through:

(1) Effective and efficient operations.

(2) Reliable financial reporting.

(3) Compliance with laws and regulations. 

Effective internal controls represent an 

organization’s plans, methods, and 

procedures used to meet its mission, goals, 

and objectives, and serve as the first line of 

defense in safeguarding assets and 

preventing and detecting errors, fraud, 

waste, abuse, and mismanagement. 

The Department is responsible for 

establishing, supporting, and assessing 

internal controls in order to provide 

reasonable assurance that it meets the objectives of the Federal Managers’ Financial 

Integrity Act, PL 97-255, sections 2 and 4; the Federal Financial Management Improvement 

Act, PL 104-208; and the Office of Management and Budget’s Circular (OMB) No. A-127, 

entitled “Financial Management Systems.” 

OMB Circular No. A-123, entitled “Management’s Responsibility for Internal Control in the 

Federal Government,” requires agencies and individual Federal managers to take the 

following systematic and proactive measures:

• Develop and implement appropriate, cost-effective internal controls.

• Assess the adequacy of internal controls in Federal programs and operations.

• Assess and document internal controls over financial reporting and financial 

management systems.

• Identify deficiencies and necessary improvements.

• Take corresponding corrective actions. 

• Report annually on internal controls through management assurance statements.

Based on the Department’s assessment of internal controls, the Secretary of Defense has 

signed the following Statement of Assurance.

Figure 11. Commitment to MICP

- The Office of the Under Secretary of Defense 

(Comptroller) is responsible for implementing 

and managing the Secretary of Defense's 

program over internal management controls.

- The Federal Managers' Financial Integrity Act 

(FMFIA) is implemented through the DoD 

Managers' Internal Control Program (MICP).

- The MICP requires all DoD managers to 

review, assess, and report on the effectiveness 

of internal management controls within the 

Department of Defense.

DoDI 5010.40 – May 30, 2013
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

35

STATEMENT OF ASSURANCE
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

36

The Department supports and provides oversight of an MICP, led by the Office of the Under 

Secretary of Defense, Comptroller (OUSD(C)). The OUSD(C) provides the instructions, 

guidance, and training needed to accomplish the following goals: 

• Share knowledge and insight with the DoD Components on effective execution of an

internal control program.

• Enhance the Department’s knowledge and understanding of its audit readiness goals and 

priorities.

• Disseminate best practices and lessons learned, and assess the 49 DoD Components’ 

internal control programs during on-site validations, designed to measure the progress 

of organizations as well as their strengths and challenges.

Accomplishments

An internal control could be defined as a business practice, policy, or procedure established 

within an organization to create value or minimize risk. In most cases our focus is on 

reducing risk and addressing weaknesses, but organizational submissions by management 

also include accomplishments which, in the judgment of their Commanders, have created 

value by improving or strengthening the way we do business. The MICP also plays a role in 

ensuring these kinds of improvements are sustained and remain relevant to mission needs.

The following examples highlight a few of the many improvements brought about through 

efforts to improve internal controls.

• Force Readiness Reporting. In FY 2013, the Air Force assessed the effectiveness of its 

corrective actions to remediate its material weakness in the timely and accurate 

reporting of force readiness assessments. The Air Force established policies for 

monitoring the Air and Space Expeditionary Force Unit Type Code Reporting Tool (ART) 

for late and unreported Unit Type Codes, which represent manpower and/or equipment

capabilities, as well as updating its policies and procedures for submitting reclamas 

(requests to reconsider proposed action taken). The Air Force has consistently met the 

timeliness standards for ART reporting (97 percent) and reclama processing (90 

percent), demonstrating that its material weakness has been mitigated.

• Communications Security (COMSEC). The Pentagon Force Protection Agency (PFPA) 

overhauled the COMSEC accountability system to improve efficiency. The PFPA 

eliminated excess equipment, updated files and records, provided additional training to 

hand receipt holders, and effectively provided semi-annual inventories of 100 percent of 

account holdings. As a result, an audit of the PFPA COMSEC account received its firstever satisfactory rating with no discrepancies. In addition, PFPA was commended for its 

excellent accountability and control of more than 2,000 COMSEC items, resulting in the 

ability to complete the COMSEC audit with increased efficiency.

• MICP Documentation Retention. The Joint Improvised Explosive Device Defeat 

Organization, the Joint Staff, and the United States Special Operations Command 

(USSOCOM) developed and deployed SharePoint sites or similar portals to improve 

standardization, consistency, and availability of MICP supporting documentation. Policies 

and procedures within each Component’s MICP guide their respective teams on how to 

load documentation to their sites, to provide appropriate documentation for easy 
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

37

retrieval upon request, and to establish requirements and workflow streams for 

supporting documentation review. The implementation of the SharePoint sites/portals 

has increased the Components’ efficiency by greatly enhancing organizational 

collaboration, refining documentation collection and retention, facilitating timely 

feedback to managers, improving the ability to determine program status by assessable 

unit, and allowing team members to digitally store and access supporting documentation 

by way of an online library. 

• MICP Evaluation Checklist. The Navy prepared a MICP Evaluation Checklist to facilitate 

control self-assessments and provide its organizations with core areas that can be 

independently assessed outside of independent audits and inspections. The checklists 

serve as a baseline tool that the 19 Major Assessable Units can use to report their 

Statement of Assurance on non-financial operations, which ultimately are reflected in 

the Navy’s Statement of Assurance. Practical toolsets, such as the MICP Evaluation 

Checklist, is an important part of an effective, risk-based process for addressing 

deficiencies within the Department, as identified by the Government Accountability 

Office (GAO).

• MICP Computer-Based Training (CBT). In FY 2013, the Army added a seventh training 

course to its current CBT MICP curriculum. The MICP training is available Army-wide at 

no cost, as opposed to relying on an external vendor that would charge approximately 

$595 per person. 

The MICP also plays a role in ensuring that these kinds of improvements are sustained and 

remain relevant to mission needs. 

Assessment

The Department’s management uses the following criteria to classify conditions as material 

weaknesses in internal control: 

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

Congressional oversight committees.

• Impairs fulfillment of essential operations or mission.

• Significantly weakens established safeguards against waste, loss, unauthorized use or 

misappropriation of funds, property, other assets, or conflicts of interest.

• Constitutes substantial noncompliance with laws and regulations. 

• Represents nonconformance with government-wide, financial management system 

requirements. 

Individual DoD Components issue assurance statements assessing and certifying the 

effectiveness of internal controls. The Components’ assurance statements serve as the 

primary basis for the Secretary’s assurance statement on the effectiveness of the 

Department’s entity wide internal controls. Information gathered from various sources 

serves as the basis for the assurance statements. This information includes 

management-initiated internal controls testing, program reviews, and evaluations. In 

addition, the DoD IG and the Government Accountability Office (GAO) conduct reviews, 

audits, inspections, and investigations, and the findings are considered in the individual 
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

38

Component’s assurance statements and provide the foundation for their individual 

assessments.

The Department has effective processes in many key areas. As a result, there has been 

significant progress toward improving both financial and operational internal controls. 

However, it remains clear the most daunting of challenges remain ahead, and more 

emphasis on effective and efficient operations is critical. In the upcoming fiscal year, the 

Department will continue to provide best practices and facilitate more validation 

assessments in order to meet the challenge. 

Material Weaknesses

The Department’s list of outstanding material weaknesses in Financial Reporting (16), 

Financial Systems, and Non-Financial operations (16 weaknesses) for FY 2013 are listed in 

Figure 12. Additional details related to the material weaknesses reported in Figure 12, such 

as corrective action plans and timelines, are detailed in Addendum A, “Managers’ Internal 

Control Program,” of this report. 

A U.S. Army Staff Sergeant scans the surrounding area to look for potential enemy movement. 

U.S. Army photo by Sgt. Justin A. Moeller 
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

39

Figure 12. Summary List of Outstanding Material Weaknesses 

Areas of Material 

Weakness

Number of 

Material 

Weaknesses

Year 

Identified Component

Target 

Correction 

Year

FINANCIAL REPORTING – 16 Material Weaknesses

1 Financial Reporting 16 FY 2001 Departmentwide FY 2017

FINANCIAL SYSTEMS

2 Financial Management 

Systems 1 FY 2001 Departmentwide FY 2017

NON-FINANCIAL OPERATIONS – 16 Material Weaknesses

3 Acquisition 1 FY 2011 Departmentwide

Reassessed 

annually based 

on incremental 

improvements

4 Security 3 FY 2006

Air Force; 

DSCA; DTRA; 

Navy; 

USEUCOM; 

USFOR-A; 

USSOCOM

FY 2016

5 Information Technology 1 FY 2010 USAFRICOM FY 2014

6 Comptroller and/or 

Resource Management 3 FY 2011 Departmentwide FY 2017

7 Contract Administration 2 FY 2009 Departmentwide

Reassessed 

annually based 

on incremental 

improvements

8 Force Readiness 1 FY 2011 Air Force FY 2014

9

Personnel and/or 

Organizational 

Management

3 FY 2006 Departmentwide FY 2015

10 Property Management 1 FY 2011 Departmentwide FY 2016

11 Supply Operations 1 FY 2011 Departmentwide

Reassessed 

annually based 

on incremental 

improvements

Total Material 

Weaknesses 33
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

40

BUSINESS AND FINANCIAL MANAGEMENT SYSTEMS

The Department recognizes that to successfully meet our goal of achieving and sustaining 

improvements in our internal controls, financial management and auditable financial 

statements, we must improve our business systems. The Department remains committed to 

delivering a streamlined, 21st-century systems environment with IT capabilities that support 

effective and efficient business processes and operations. 

For example, in FY2013, the Department deployed the Enterprise-wide Contractor 

Manpower Reporting Application to improve visibility and accountability for more than a 

quarter trillion dollars DoD spends each year on contracts for services. The entire 

Department now has the reporting capability to comply with the requirement at 

10 USC § 2330a to collect direct labor hours and associated cost information. The 

information provided by this capability can be 

used along with civilian and military workforce 

planning factors to ensure appropriate 

utilization, cost effectiveness, and alignment 

to mission for contracted services.

Additionally, this information is critical to the 

Department’s compliance with 10 USC § 235, 

to provide budgetary projections associated 

with contracted service, which will help the 

Department’s long-term traceability of funds 

and financial auditability.

Following the passage of Section 901 of the 

FY 2012 National Defense Authorization Act, 

now codified at 10 USC § 2222 and entitled, 

“Defense business systems: architecture, 

accountability, and modernization,” the 

Department significantly changed its 

requirements for investment reviews and the certification of defense business systems, 

which now must occur before funds, whether appropriated or non-appropriated, could be 

obligated. 

For example, in FY 2012 the Department created the Defense Business Council (DBC), 

responsible for managing defense business operations and serving as the Department’s 

single Investment Review Board (IRB) for defense business systems. The DBC/IRB, chaired 

by the Deputy Chief Management Officer (DCMO), reviews the planning, design, acquisition, 

development, deployment, operation, maintenance, modernization, and cost benefit 

analysis of any defense business system with a total cost in excess of $1 million over the 

period of the current Future-Years Defense Program. 

The IRB reviews investments totaling over $7 billion in funding for business systems

information technology. The Department's new investment management process ensures IT 

investments are aligned with strategies, allows the Department to make more informed 

investment decisions, eliminates legacy systems no longer required, enhances

interoperability, and helps the Department transform to an environment where business 

applications can be rapidly deployed on a common computing infrastructure. The process 

A Staff Sergeant holds an engine brake for 

his mechanic teammate during the third 

annual 800th Logistics Support Brigade 

Truck Rodeo Competition.

Photo Credit: Staff Sgt. Emily Anderson, 

80th Training Command Public Affairs
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

41

also ensures that each investment is an appropriate use of taxpayer dollars and aligns to 

the Department’s goal of delivering agile, effective, and efficient business solutions that 

support and enable our warfighters.

In April, 2013, the DCMO issued guidance to ensure that the Department continues to treat 

its business system investments with the discipline to enable cost savings that will be 

redirected to support critical warfighter needs. The guidance, now updated annually, created

an integrated business framework that aligns 

the DoD strategy with the functional and 

organizational strategies from investment 

decision through system implementation. 

This framework will provide a basis for 

portfolio review from multiple perspectives, 

such as cost, utility, and strategic alignment.

The updated FM functional strategy, 

explained in the Defense Business Systems 

Investment Management Process Guidance, 

provides business direction toward achieving 

results linked to the business goals in the 

Department’s Strategic Management Plan. 

For the first time, the DBC was able to 

analyze and review entire organizational 

portfolios of Defense business systems and 

make decisions on capital improvements and 

inform changes needed in the Business 

Enterprise Architecture. The DBC will oversee 

the implementation of this guidance as it reviews functional strategies, approves

organizational execution plans, defines the Department’s target business environment, and 

approves the content for the DoD Business Enterprise Architecture. In addition, the portfolio 

review provided necessary feedback to improve the Functional Strategy itself.

Specific to FM systems, some of the FM challenges are being addressed through incremental 

system improvements tied to desired outcomes. These enhancements are documented in 

the FM functional strategy.

The updated FM functional strategy outlines an approach to improve financial information 

for business decisions, increase interoperability, improve funds traceability, and strengthen 

internal controls. Through the review process and certification of investments, the DBC will 

incorporate the initiatives documented in the business direction into the capital planning for 

system improvements. This will better align initiatives to desired outcomes.

The statutorily mandated Enterprise Transition Plan and Defense Business Systems 

Investment Management Process Guidance include additional information about the 

Department’s defense business systems and the Integrated Business Framework, including 

the plans for acquiring new systems and modernizing or retiring legacy systems. The

Financial Improvement and Audit Readiness Plan discusses the link between these systems 

and the Department’s auditability efforts.

Members of the 618th Tanker Airlift Control 

Center use information technology to 

coordinate with aircrews, maintenance 

personnel and aerial porters around the world 

from the unit’s operations floor at 

Scott Air Force Base, IL. 

U.S. Air Force photo by 

Staff Sgt. Chad Trujillo 
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

42

IMPROPER PAYMENTS AND RECOVERIES

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

Payments Elimination and Recovery Act of 2010 (IPERA), requires agencies to report on 

improper payments and payment recapture (recovery audit) programs to the President and 

Congress. The Department began reporting improper payments in Fiscal Year (FY) 2004 and 

has continued to report annually thereafter. 

The Department reports improper payments in the following categories:

• Military Health Benefits 

• Military Pay 

• Civilian Pay 

• Commercial Pay 

• Military Retirement

• Travel Pay

The Department continually looks for opportunities to improve its improper payment 

methodologies. The Department is currently implementing recommendations reflected in the 

DoD IG’s review of the DoD program, entitled “DoD Efforts to Meet the Requirements of the 

Improper Payments Elimination and Recovery Act in FY 2012,” issued in March 2013, as well 

as recommendations the Government Accountability Office (GAO) identified in its report, 

“Significant Improvements Needed in Efforts to Address Improper Payment Requirements,” 

issued in May 2013. The Department is working to implement each report recommendation 

as quickly as possible.

The Department has also improved its payment integrity program and continues to identify 

additional ways to enhance the prevention, identification, and recovery of improper 

payments. Examples of recent successes include: 

• All DoD FY 2013 payment sampling plans were approved by the Office of Management 

and Budget (OMB). 

• The sampling methodology used for DFAS Commercial Pay in FY 2013 mirrored what 

was done in FY 2012. However, for FY 2014, a stratified statistical sampling will be 

implemented to provide confidence not only in the estimated payment error rate, but 

also for the estimated payment error dollars. 

• For the first time in FY 2013, the Navy is reporting commercial pay improper payments 

recorded in its Enterprise Resource Program (ERP) System. 

• The Defense Health Agency reported on its pharmacy program improper payments and 

has implemented a recovery audit pilot study to identify and recapture outstanding 

credit balances at 10 major hospitals. 
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

43

• The Defense Travel Management Office (DTMO) developed and implemented a

compliance tool for performing recovery audits for Travel Pay, and plans to expand it 

Department-wide during FY 2014. The DTMO also plans to add another recovery effort 

for a tax reclamation contract during FY 2014. 

• The Defense Health Agency’s innovative contract performance standards, which 

monetarily incentivize contractors to reduce improper payments, and the Business 

Activity Monitoring (BAM) tool, used by DFAS to review commercial payments to identify 

and stop potential errors before disbursements are made, continue to be governmentwide best practices in preventing improper payments. 

Through these efforts and others, the Department is positioning itself to be fully compliant 

with additional elements required by the Improper Payments Elimination and Recovery 

Improvement Act (IPERA) for FY 2014 reporting. However, until the Department has an 

auditable Statement of Budgetary Resources, it will not be possible to fully reconcile outlays 

to ensure all required payments are reviewed for reporting purposes. As previously 

discussed in this report and as reported in the DoD Financial Improvement and Audit 

Readiness Plan Status Report for November 2013, the Department is working hard to 

become fully auditable by 2017. As part of this effort, each of the Defense disbursing 

Components is diligently reviewing and reporting on all payments that are subject to IPERA,

and ensuring the processes used are compliant with laws and regulations. 
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

44

MANAGEMENT CHALLENGES

While we have made progress in managing the Department’s financial resources, challenges 

still remain. The DoD Office of the Inspector General works to promote efficiency and

effectiveness in the Department’s programs and operations.

Under the Reports Consolidation 

Act of 2000, the Agency 

Financial Report must include a 

statement, prepared by the 

Department’s Inspector General 

(IG), summarizing what the IG 

considers the most serious 

management and performance 

challenges facing the 

Department, along with a brief 

assessment of the Department’s 

progress made in addressing 

those challenges. The IG-cited 

management and performance 

challenges facing the 

Department are in the following 

areas:

• Financial Management

• Acquisition Processes and 

Contract Management

• Joint Warfighting and Readiness

• Cyber Security

• Health Care

• Equipping and Training Afghan National Security Forces

• The Nuclear Enterprise

Detailed information regarding these challenges, along with the Department’s management 

response, is included in the Other Information (Addendum A) section of this report. The 

IG-identified challenges are in addition to those identified in the Government Accountability 

Office report, entitled High Risk Series, An Update, issued February 2013. 

An Afghan Local Police (ALP) member, center, helps a 

coalition forces service member inspect an ALP weapon in 

Khost village, Farah province, Afghanistan. 

U.S. Marine Corps photo by Sgt. Pete Thibodeau
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

45

PATH FORWARD

The United States faces a complex and growing array of national security challenges, 

including the need to confront violent extremism around the globe; the proliferation of lethal 

weapons and materials; the destabilizing behavior of nations such as Iran and North Korea; 

the rise of new powers in Asia; and the new security landscape in the wake of the Arab 

revolutions. At the same time, the US must contend with the need to resolve difficult fiscal 

circumstances and uncertainty at home. 

Amidst this confluence of changing strategic and fiscal circumstances, the Department’s 

strategy calls for transitioning from an emphasis on today’s wars to preparing for future 

challenges, while also advancing the Department’s efforts to reform and support the 

national imperative of deficit reduction through a lower level of defense spending. As the 

United States draws down from operations in Afghanistan, the Department is planning how 

to structure its armed forces to operate in the future security environment. 

Now, the Department must make tough choices amid declining budgets to ensure our 

Armed Forces have the capabilities and readiness they need to secure our nation’s interests 

and to operate across the range of 

complex missions, ranging from 

counterterrorism and countering 

weapons of mass destruction, to 

maintaining a safe, secure and 

effective nuclear deterrent and 

projecting power abroad.

As we conduct the 2014 QDR, the 

Department will develop a strategic 

course best preserving our ability to 

defend our national security 

interests in a very uncertain fiscal 

environment. The QDR will consider 

future risks and opportunities 

affecting our national security 

interests, the Administration’s 

priorities, and fiscal limitations. Also, 

it will seek to ensure our Armed 

Forces remain capable across the full 

range of potential challenges we 

may face and the Department meets its responsibility to preserve a ready force to defend 

the country and America's vital interests around the world. 

A paratrooper with the 82nd Airborne Division’s 

1st Brigade Combat Team provides overwatch security 

to fellow paratroopers and Afghan National Security 

Forces, Ghazni Province, Afghanistan. The agricultural 

areas surrounding Combat Outpost Giro are a haven 

for insurgent activities.

U.S. Army photo by Sgt. Michael J. MacLeod
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

46

ORGANIZATION

Management of a large, complex enterprise like the

Department requires an equally sophisticated 

organization. In keeping with the information 

typically presented in the Agency Financial Report, 

the following section briefly describes the 

Department’s organization.

Since the creation of America’s first army in 1775, 

the Department and its predecessor organizations 

have evolved into a global presence of more than 

three million individuals stationed throughout the 

world, dedicated to defending the United States by 

deterring and defeating aggression and coercion in 

critical regions. The Department embraces the core 

values of leadership, professionalism, and technical knowledge; its employees are dedicated 

to duty, integrity, ethics, honor, courage, and loyalty.

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

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

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

Staff, the Joint Staff, the Office of the Inspector General of the Department of Defense 

(DoD IG), the Military Departments, the Defense Agencies, the DoD Field Activities, the 

Combatant Commands, and such other offices, agencies, activities, organizations, and 

commands established or designated by law, the President, or the Secretary of Defense. 

Figure 14. Department of Defense Organizational Structure

Secretary

of the Air Force

Office

of the

Secretary

of the

Air Force

The

Joint Chiefs

Secretary

of the Navy

Office

of the

Secretary

of the

Navy

Secretary

of the Army

Office

of the

Secretary

of the

Army

Secretary of Defense

Department of Defense

Office of the Inspector General

of the Department of Defense

Combatant 

Commands

Department of

the Air Force

Chairman of the

Joint Chiefs of 

Staff

The

Joint Staff

Department of

the Navy

Office

of the

Chief

of Naval 

Operations

Headquarters 

Marine

Corps

Department of 

the Army

The

Army

Staff

The

Navy

The

Marine

Corps

The

Army

Defense 

Agencies

DoD Field 

Activities 

The

Air

Staff

The

Air Force

Office of the

Secretary of 

Defense

Joint Chiefs

of Staff

Deputy 

Secretary, 

Under 

Secretaries, and 

Assistant 

Secretaries of 

Defense; and 

other specified 

officials

Figure 13. The DoD Mission

The mission of 

the Department 

of Defense is to 

protect the 

American people 

and advance our 

national 

interests. B10-30
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

47

THE OFFICE OF THE SECRETARY OF DEFENSE 

The function of OSD (Figure 15) is to assist the Secretary of Defense in carrying out the 

Secretary’s duties and responsibilities and to carry out such other duties as prescribed by 

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

oversight of defense strategy and policy. The OSD is comprised of the Deputy Secretary of 

Defense, who also serves as the Chief Management Officer, the Under Secretaries of 

Defense (USDs), the Deputy Chief Management Officer (DCMO), the General Counsel, the 

Assistant Secretaries of Defense (ASDs), the Assistants to the Secretary of Defense, the 

OSD Directors, and their equivalents, the OSD Directors’ staffs, the DoD IG, and the other 

staff offices within OSD established by law or by the Secretary. 

Figure 15. Office of the Secretary of Defense Organizational Structure

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 U.S. Army, the Chief of Naval 

Operations, the Chief of Staff of the U.S. 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.

* 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

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

Director, 

Operational

Test &

Evaluation

General

Counsel,

DoD

ASD

(Legislative 

Affairs)

ATSD

(Public

Affairs)

DoD Chief 

Information 

Officer

Assistant to the 

Secretary of 

Defense

(Intelligence 

Oversight) 

Director, 

Administration 

& Management 

Director,

Net

Assessment 

Deputy Secretary of Defense

Chief Management Officer/

Chief Operating Officer

Secretary of Defense
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

48

OFFICE OF THE INSPECTOR GENERAL

The Office of Inspector General, DoD, is an independent and objective unit within the 

Department which conducts and supervises audits and investigations relating to the 

Department’s programs and operations.

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 and Secretary of 

Defense determine whether

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 duty 

Military Service members, Reservists on active duty orders, or a combination of the two. The 

National Guard has a unique dual mission with both Reserve Component and State 

responsibilities (Figure 16). The National Guard, when commanded by the Governor of each 

state or territory, can be called into action during local, statewide, or other emergencies, such 

as storms, drought, or civil disturbances (non-federalized service). When ordered to active duty 

for mobilization or called into federal service for national emergencies, units of the Guard are 

placed under operational control of the appropriate Combatant Commander. The Guard and 

Reserve forces are recognized as indispensable and integral parts of the Nation's defense and 

fully part of the applicable Military Department.

Figure 16. Reserve Forces and National Guard

B10-25

Federal and 

State Missions

Federal Missions
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

49

DEFENSE AGENCIES AND DOD FIELD ACTIVITIES 

Defense Agencies and DoD Field Activities (Figure 17) are established as DoD Components 

by law, the President, or the Secretary of Defense to provide for the performance, on a 

DoD-wide basis, of a supply or service activity common to more than one Military 

Department when it is determined to be more effective, economical, or efficient to do so. 

Each of the 18 Defense Agencies and 9 DoD Field Activities operate under the authority, 

direction, and control of the Secretary of Defense, through an OSD Principal Staff Assistant 

(PSA) or the Chairman of the Joint Chiefs of Staff.

Figure 17. Defense Agencies and DoD Field Activities

COMBATANT COMMANDS 

The Commanders of the Combatant Commands (Figure 18) are responsible to the President 

and the Secretary of Defense for accomplishing the military missions assigned to them and 

shall 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 

* Eight Defense Agencies are designated as Combat Support Agencies

with joint oversight by the Chairman of the Joint Chiefs of Staff

Defense Agency

DoD Field Activity

Key

Deputy Secretary of Defense

Secretary of Defense

Defense 

Intelligence 

Agency*

Defense 

Security

Service

National

GeospatialIntelligence

Agency*

National

Reconnaissance

Office

National Security 

Agency/

Central Security 

Service*

Defense

Commissary

Agency

DoD

Education

Activity

DoD Human

Resources

Activity

Defense 

Health 

Agency*

USD

(Intelligence)

USD

(P&R)

USD

(Comptroller)

Defense

Contract

Audit

Agency

Defense

Finance &

Accounting

Service

USD

(Policy)

Defense

Security

Cooperation

Agency

Defense

POW/Missing

Personnel

Office

Defense

Technology

Security

Administration

USD

(AT&L)

Defense

Advanced

Research

Projects 

Agency

Defense

Contract

Management

Agency*

Defense

Logistics

Agency*

Defense

Threat

Reduction

Agency*

Missile

Defense

Agency

Defense

Technical

Information

Center

DoD Test

Resource

Management

Center

Office of

Economic

Adjustment

GC DoD

Defense

Legal

Services

Agency

ATSD

(Public

Affairs)

Defense

Media

Activity

DoD CIO

Defense

Information

Systems

Agency *

DA&M

Pentagon

Force

Protection

Agency

Washington

Headquarters

Services
U.S. Department of Defense Agency Financial Report for FY 2013

Management’s Discussion and Analysis

50

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 (STRATCOM), U.S. Transportation Command (TRANSCOM), 

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, and developing Special Operations Forces strategy, 

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

support and base operating support. 

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

only Combatant Command directly receiving Congressional appropriations.

Figure 18. Combatant Commands Geographic and Functional Areas

B10-04

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

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

United States

Northern Command

United States

Pacific Command

United States

European Command

United States

Southern Command

United States

Africa Command

United States

Central Command

USNORTHCOM

USEUCOM

USPACOM

USSOUTHCOM

USCENTCOM

USAFRICOM
FISCAL YEAR 2013

UNITED STATES DEPARTMENT OF DEFENSE

AGENCY FINANCIAL REPORT

FINANCIAL SECTION
This Page Left Blank Intentionally
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

51

FINANCIAL SECTION

INDEPENDENT AUDITOR’S REPORT
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

52
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

53
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

54
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

55
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

56
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

57
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

58
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

59
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

60
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

61
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

62
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

63
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

64

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 and, to the extent possible, 

U.S. Generally Accepted Accounting Principles (USGAAP). The statements, in addition to the 

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

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

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

The financial statements of the Department include four principal statements listed in 

Figure 19.

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 $2.2 trillion, and 

more than 3 million military and civilian employees on installations in every state and 

around the world.

Figure 19. Four Principal Financial Statements

Statement What Information It Provides

Balance Sheet Reflects the Department’s financial position as of the statement date 

(September 30, 2013). 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. 
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

65

Department of Defense Consolidated Balance Sheet

Agency Wide Dollars in Millions

As of September 30, 2013 and 2012

2013

Consolidated

Restated 2012

Consolidated 

ASSETS (Note 2)

Intragovernmental:

Fund Balance with Treasury (Note 3) $ 482,661.7 $ 512,121.6

Investments (Note 4) 711,497.5 641,666.5

Accounts Receivable (Note 5) 1,284.2 1,439.6

Other Assets (Note 6) 1,757.6 1,583.2

Total Intragovernmental Assets $ 1,197,201.0 $ 1,156,810.9

Cash and Other Monetary Assets (Note 7) 1,529.7 1,822.0

Accounts Receivable, Net (Note 5) 10,456.2 11,522.4

Loans Receivable (Note 8) 1,267.7 957.5

Inventory and Related Property, Net (Note 9) 253,997.5 243,299.7

General Property, Plant and Equipment, Net (Note 10) 639,611.9 601,458.0

Investments (Note 4) 3,333.9 3,255.0

Other Assets (Note 6) 72,466.9 66,601.2

TOTAL ASSETS $ 2,179,864.8 $ 2,085,726.7

Stewardship Property, Plant & Equipment (Note 10)

LIABILITIES (Note 11)

Intragovernmental:

Accounts Payable (Note 12) $ 1,574.7 $ 1,762.9

Debt (Note 13) 1,174.7 952.6

Other Liabilities (Note 15) 12,887.7 12,941.6

Total Intragovernmental Liabilities $ 15,637.1 $ 15,657.1

Accounts Payable (Note 12) 20,149.1 19,492.0

Military Retirement and Other Federal Employment Benefits (Note 17) 2,280,567.8 2,323,924.3

Environmental and Disposal Liabilities (Note 14) 58,333.9 62,602.6

Loan Guarantee Liability (Note 8) 45.8 12.7

Other Liabilities (Note 15) 37,393.5 36,308.1

TOTAL LIABILITIES $ 2,412,127.2 $ 2,457,996.8

Commitments & Contingencies (Note 16)

NET POSITION

Unexpended Appropriations – Other Funds $ 499,735.3 $ 528,955.6

Cumulative Results of Operations – Funds From Dedicated Collections 

(Note 23) 12,707.8 11,967.6

Cumulative Results of Operations – Other Funds (744,705.5) (913,193.3)

TOTAL NET POSITION $ (232,262.4) $ (372,270.1)

TOTAL LIABILITIES AND NET POSITION $ 2,179,864.8 $ 2,085,726.7

The accompanying notes are an integral part of these financial statements.
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

66

Department of Defense Consolidated Statement of Net Cost

Agency Wide Dollars in Millions

For the Years Ended September 30, 2013 and 2012

2013

Consolidated

2012

Consolidated 

Program Costs

Gross Costs $ 695,856.1 $ 781,731.1

Military Retirement Benefits 64,422.3 85,570.4

Civil Works 9,756.7 10,967.2

Military Personnel 146,052.1 150,330.5

Operations, Readiness & Support 292,744.2 295,704.1

Procurement 76,216.1 130,578.8

Research, Development, Test & Evaluation 70,321.0 76,772.6

Family Housing & Military Construction 36,343.7 31,807.5

(Less: Earned Revenue) (75,009.7) (83,304.8)

Net Cost before Losses/(Gains) from Actuarial Assumption 

Changes for Military Retirement Benefits $ 620,846.4 $ 698,426.3

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits (62,838.6) 70,427.3

Net Cost of Operations $ 558,007.8 $ 768,853.6

The accompanying notes are an integral part of these financial statements.
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

67

Department of Defense Consolidated Statement of Changes in Net Position 

Agency Wide Dollars in Millions

For the Years Ended September 30, 2013 and 2012

2013 

Consolidated

Restated 2012 

Consolidated

Cumulative Results Of Operations

Beginning Balances $ (901,225.7) $ (861,349.6)

Prior Period Adjustments:

Changes in accounting principles 0.0 0.0

Corrections of errors 0.0 1,005.7

Beginning balances, as adjusted (Includes Funds from Dedicated 

Collections – See Note 23) $ (901,225.7) $ (860,343.9)

Budgetary Financing Sources:

Appropriations used 687,146.0 730,579.5

Nonexchange revenue 2,890.5 2,689.4

Donations and forfeitures of cash and cash equivalents 75.1 29.7

Transfers in/out without reimbursement 142.8 133.6

Other (84.2) (146.4)

Other Financing Sources

Donations and forfeitures of property 9.9 37.5

Transfers in/out without reimbursement (14.6) 66.1

Imputed financing 4,896.8 5,048.1

Other 32,173.5 (10,465.7)

Total Financing Sources $ 727,235.8 $ 727,971.8

Net Cost of Operations (+/-) 558,007.8 768,853.6

Net Change $ 169,228.0 $ (40,881.8)

Cumulative Results of Operations (Includes Funds from Dedicated 

Collections – See Note 23) $ (731,997.7) $ (901,225.7)

Unexpended Appropriations

Beginning Balances (Includes Funds from Dedicated Collections –

See Note 23) 528,955.6 541,329.1

Prior Period Adjustments: 0.0 0.0

Correction of Error 0.0 (955.1)

Beginning balances, as adjusted $ 528,955.6 $ 540,374.0

Budgetary Financing Sources:

Appropriations received 710,120.8 736,782.2

Appropriations transferred in/out (208.9) (391.3)

Other adjustments (51,986.2) (17,229.8)

Appropriations used (687,146.0) (730,579.5)

Total Budgetary Financing Sources (Includes Funds from 

Dedicated Collections – See Note 23) $ (29,220.3) $ (11,418.4)

Unexpended Appropriations (Includes Funds from Dedicated 

Collections – See Note 23) $ 499,735.3 $ 528,955.6

Net Position $ (232,262.4) $ (372,270.1)

The accompanying notes are an integral part of these financial statements.
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

68

Department of Defense Combined 

Statement of Budgetary Resources 

Agency Wide

For the Years Ended September 30, 2013 

and 2012

Page 1 of 2

Dollars in Millions

Budgetary 

Financing Accounts

Non-Budgetary 

Financing Accounts

2013

Combined

2012

Combined

2013

Combined

2012

Combined

Budgetary Resources

Unobligated balance, brought forward, October 1 $ 145,692.5 $ 162,271.1 $ 15.5 $ 17.5

Unobligated balance brought forward, October 1, 

as adjusted 145,692.5 162,271.1 15.5 17.5

Recoveries of prior year unpaid obligations 63,172.6 65,533.9 0.0 0.0

Other changes in unobligated balance (13,817.9) (12,952.1) 0.0 0.0

Unobligated balance from prior year budget 

authority, net 195,047.2 214,852.9 15.5 17.5

Appropriation (discretionary and mandatory) 733,535.9 792,178.8 0.0 0.0

Borrowing Authority (discretionary and mandatory) 0.0 0.0 26.9 172.6

Contract authority (discretionary and mandatory) 65,506.0 80,486.2 0.0 0.0

Spending authority from offsetting collections 

(discretionary and mandatory) 103,712.7 117,242.4 83.2 62.6

Total Budgetary Resources $ 1,097,801.8 $ 1,204,760.3 $ 125.6 $ 252.7

Status of Budgetary Resources

Obligations incurred $ 953,988.4 $ 1,059,067.8 $ 78.8 $ 237.2

Unobligated balance, end of year:

Apportioned 109,896.8 115,696.1 0.0 1.6

Exempt from Apportionment 4,046.6 3,976.1 0.0 0.0

Unapportioned 29,870.0 26,020.3 46.8 13.9

Total unobligated balance, end of year $ 143,813.4 $ 145,692.5 $ 46.8 $ 15.5

Total Budgetary Resources $ 1,097,801.8 $ 1,204,760.3 $ 125.6 $ 252.7

Change in Obligated Balance

 Unpaid obligations:

Unpaid obligations, brought forward, October 1 $ 468,570.2 $ 454,926.2 $ 541.8 $ 569.1

Obligations incurred 953,988.4 1,059,067.8 78.8 237.2

Outlays (Gross) (922,020.8) (979,889.9) (319.9) (264.5)

Recoveries of prior year unpaid obligations (63,172.6) (65,533.9) 0.0 0.0

Unpaid obligations, end of year 437,365.2 468,570.2 300.7 541.8

 Uncollected payments:

Uncollected pymts, Fed sources, brought forward, 

Oct 1

(77,953.4) (75,184.3) (83.5) (99.9)

Change in uncollected pymts, Fed sources 749.5 (2,769.1) 31.1 16.4

Uncollected pymts, Fed sources, end of year (77,203.9) (77,953.4) (52.4) (83.5)

 Memorandum Entries:

Obligated balances, start of year $ 390,616.8 $ 379,741.9 $ 458.3 $ 469.2

Obligated balance, end of year $ 360,161.3 $ 390,616.8 $ 248.3 $ 458.3

The accompanying notes are an integral part of these financial statements.
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

69

Department of Defense Combined 

Statement of Budgetary Resources 

Agency Wide

For the Years Ended September 30, 2013 

and 2012

Page 2 of 2

Dollars in Millions

Budgetary 

Financing Accounts

Non-Budgetary 

Financing Accounts

2013

Combined

2012

Combined

2013

Combined

2012

Combined

Budgetary Authority and Outlays, Net:

Budget Authority, gross (discretionary and 

mandatory) $ 902,754.6 $ 989,907.4 $ 110.1 $ 235.2

Actual offsetting collections (discretionary and 

mandatory) (167,910.0) (190,586.0) (126.7) (92.6)

Change in uncollected customer payments from 

Federal sources (discretionary and mandatory) 749.5 (2,769.1) 31.1 16.4

Anticipated offsetting collections ( discretionary and 

mandatory) 0.0 0.0 0.0 0.0

Budget Authority, net (discretionary and 

mandatory) $ 735,594.1 $ 796,552.3 $ 14.5 $ 159.0

Outlays, gross (discretionary and mandatory) $ 922,020.8 $ 979,889.9 $ 319.9 $ 264.5

Actual offsetting collections (discretionary and 

mandatory) (167,910.0) (190,586.0) (126.7) (92.6)

Outlays, net (discretionary and mandatory) 754,110.8 789,303.9 193.2 171.9

Distributed offsetting receipts (82,767.6) (79,238.4) 0.0 0.0

Agency Outlays, net (discretionary and 

mandatory) $ 671,343.2 $ 710,065.5 $ 193.2 $ 171.9

The accompanying notes are an integral part of these financial statements.
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

70

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES

1.A. Basis of Presentation 

These financial statements have been prepared to report the financial position and results of 

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

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

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

records of the Department in accordance with, to the extent possible, U.S. generally 

accepted accounting principles (USGAAP) promulgated by the Federal Accounting Standards 

Advisory Board (FASAB); the (OMB) Circular No. A-136, “Financial Reporting 

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

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

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

is excluded from the statements or otherwise aggregated and reported in such a manner 

that it is not discernible.

The Department is unable to fully implement all elements of USGAAP and 

OMB Circular No. A-136, due to limitations of financial and nonfinancial management 

processes and systems that support the financial statements. The Department derives 

reported values and information for major asset and liability categories largely from 

nonfinancial systems, such as inventory and logistics systems. These systems were 

designed to support reporting requirements for maintaining accountability over assets and 

reporting the status of federal appropriations rather than preparing financial statements in 

accordance with USGAAP. The Department continues to implement process and system 

improvements addressing these limitations.

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

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

(5) Operating Materials and Supplies (OM&S); (6) General Property, Plant, and Equipment; 

(7) Government Property in Possession of Contractors; (8) Accounts Payable; 

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

Eliminations; (12) Accounting Entries; and (13) Reconciliation of Net Cost of Operations to 

Budget.

1.B. Mission of the Reporting Entity 

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

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

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

organizations have evolved into a global presence with a worldwide infrastructure dedicated 

to defending the United States by deterring and defeating aggression and coercion in critical 

regions. 

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

Departments consist of the Army, the Navy (of which the Marine Corps is a component), 

and the Air Force. The Defense Agencies provide support services commonly used 

throughout the Department.
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

71

1.C. Appropriations and Funds 

The Department receives appropriations and funds as general, working capital (revolving), 

trust, special, and deposit funds. The Department uses these appropriations and funds to

execute 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. These general funds also include supplemental funds enacted by 

the American Recovery and Reinvestment Act (Recovery Act) of 2009. Details relating to 

Recovery Act appropriated funds are available on-line at DoD Information Related to the 

American Recovery and Reinvestment Act of 2009.

Working capital funds (WCF) received funding to establish an initial corpus through an 

appropriation or a transfer of resources from existing appropriations or funds. The corpus 

finances operations and transactions that flow through the fund. The WCF resources the 

goods and services sold to customers on a reimbursable basis and maintains the corpus. 

Reimbursable receipts fund future operations and generally are available in their entirety for 

use without further congressional action. At various times, Congress provides additional 

appropriations to supplement 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 as 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.
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

72

Additionally, the Department receives allocation transfers from certain funds meeting the 

OMB exception and all related activity is included in the Department’s financial statements. 

The exceptions reported by the Department include South Dakota Terrestrial Wildlife Habitat 

Restoration, Inland Waterways and Harbor Maintenance. The Department receives allocation 

transfers for the Security Assistance programs that meet 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 allocates funds to the Departments of Transportation and 

Agriculture, and reports all related activity in these financial statements.

1.D. Basis of Accounting 

The Department’s financial management systems are unable to meet all full accrual 

accounting requirements. Many of the Department’s financial and nonfinancial feeder 

systems and processes were designed and implemented prior to the issuance of USGAAP. 

These systems were not designed to collect and record financial information on the full 

accrual accounting basis as required by USGAAP. Most of the Department’s financial and 

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

The Department’s financial statements and supporting trial balances are compiled from the 

underlying financial data and trial balances of the Military Services and Defense Agencies 

and their sub-entities. The underlying data is largely derived from budgetary transactions 

(obligations, disbursements, and collections), from nonfinancial feeder systems, and 

accruals made for major items such as payroll expenses, accounts payable, and 

environmental liabilities. Some of the sub-entity level trial balances may reflect known 

abnormal balances resulting largely from business and system processes. At the 

consolidated level these abnormal balances may not be evident. Disclosures of abnormal 

balances are made in the applicable footnotes, but only to the extent that the abnormal 

balances are evident at the consolidated level. 

The Department is determining the actions required to bring financial and nonfinancial 

feeder systems and processes into compliance with USGAAP. One such action is the current 

revision of accounting systems to record transactions based on the U.S. Standard General 

Ledger (USSGL). Until all of the Department’s financial and nonfinancial feeder systems and 

processes are able to collect and report financial information as required by USGAAP, the 

Department’s financial data will be derived from budgetary transactions, data from 

nonfinancial feeder systems, and accruals.

1.E. Revenues and Other Financing Sources 

The Department receives congressional appropriations as financing sources for general 

funds, and on occasion, will also receive congressional appropriations for working capital 

funds. 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 services provided as required by 

OMB Circular A-25, “User Charges.” The Department recognizes revenue when earned 
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

73

within the constraints of its current system capabilities. In some instances, revenue is 

recognized when bills are issued. 

Depot Maintenance and Ordnance WCF activities recognize revenue according to the 

percentage of completion method. Supply Management WCF activities recognize revenue 

from the sale of inventory items.

The Department does not include nonmonetary support provided by U.S. allies for common 

defense and mutual security in amounts reported in the Statement of Net Cost and Note 21, 

Reconciliation of Net Cost of Operations to Budget. The U.S. has cost sharing agreements 

with countries having a mutual or reciprocal defense agreement, where U.S. troops are 

stationed, or where the U.S. Fleet is in a port.

1.F. Recognition of Expenses

For financial reporting purposes, the Department’s policy requires the recognition of 

operating expenses in the period incurred. Current financial and nonfinancial feeder systems 

were not designed to collect and record financial information on the full accrual accounting 

basis. Estimates are made for major items such as payroll expenses, accounts payable, 

environmental liabilities, and unbilled revenue. In the case of OM&S, operating expenses are 

generally recognized when the items are purchased. Efforts are underway to transition to 

the consumption method for recognizing OM&S expenses. Under the consumption method, 

OM&S would be expensed when consumed. Due to system limitations, in some instances 

expenditures for capital and other long-term assets may be recognized as operating 

expenses. The Department continues to implement process and system improvements to 

address these limitations.

1.G. Accounting for Intragovernmental Activities

Accounting standards require that an entity eliminate intra-entity activity and balances from 

consolidated financial statements in order to prevent overstatement for business with itself. 

However, the Department cannot accurately identify intragovernmental transactions by 

customer because the Department’s systems do not track buyer and seller data at the 

transaction level. Generally, seller entities within the Department provide summary 

seller-side balances for revenue, accounts receivable, and unearned revenue to the 

buyer-side internal accounting offices. In most cases, the buyer-side records are adjusted to 

agree with the Department’s seller-side balances and are then eliminated. The Department 

is implementing replacement systems and a standard financial information structure which 

will incorporate the necessary elements that will enable the Department to correctly report, 

reconcile, and eliminate intragovernmental balances. 

The 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. 
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

74

The Department’s proportionate share of public debt and related expenses of the Federal 

Government is not included. The Federal Government does not apportion debt and related 

costs to federal agencies. The Department’s financial statements do not report any public 

debt, interest, or source of public financing, whether from issuance of debt or tax revenues. 

Generally, financing for the construction of the Department’s facilities is obtained through 

appropriations. To the extent this financing ultimately may have been obtained through the 

issuance of public debt, interest costs have not been capitalized since the U.S. Treasury 

does not allocate such costs to the Department.

1.H. Transactions with Foreign Governments and International 

Organizations 

Each year, the Department sells defense articles and services to foreign governments and 

international organizations under the provisions of the Arms Export Control Act of 1976. 

Under the provisions of the Act, the Department has authority to sell defense articles and 

services to foreign countries and international organizations generally at no profit or loss to 

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

1.I. Funds with the U.S. Treasury 

The Department’s monetary resources are maintained in U.S. Treasury accounts. The 

disbursing offices of Defense Finance and Accounting Service (DFAS), the Military 

Departments, the U.S. Army Corps of Engineers (USACE), and the Department of State’s 

financial service centers process the majority of the Department’s cash collections, 

disbursements, and adjustments worldwide. Each disbursing station prepares monthly 

reports to the U.S. Treasury on checks issued, electronic fund transfers, interagency 

transfers, and deposits.

In addition, DFAS sites and the USACE Finance Center submit reports to the U.S. Treasury 

by appropriation on interagency transfers, collections received, and disbursements issued. 

The U.S. Treasury records these transactions to the applicable FBWT account. On a monthly 

basis, the Department's FBWT 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 which includes coin, 

paper currency, negotiable instruments, and amounts held for deposit in banks and other 

financial institutions. Foreign currency consists of the total U.S. dollar equivalent of both 

purchased and nonpurchased foreign currencies held in foreign currency fund accounts. 

Foreign currency is valued using the U.S. Treasury prevailing rate of exchange.

The majority of cash and all foreign currency is classified as “nonentity” and is restricted. 

Amounts reported consist primarily of cash and foreign currency held by disbursing officers 

to carry out their paying, collecting, and foreign currency accommodation exchange 

missions.

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

a special account to handle the gains and losses from foreign currency transactions for five 

general fund appropriations: (1) operations and maintenance; (2) military personnel; 

(3) military construction; (4) family housing operation and maintenance; and (5) family 
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

75

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. 

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 Department operates a direct loan and loan guarantee program authorized by the 

National Defense Authorization Act for FY 1996 (Public Law (PL) 104-106, Section 2801). 

The Act includes a series of authorities that allow the Department to work with the private 

sector to renovate military housing. The Department’s goals are to obtain private capital to 

leverage government dollars, make efficient use of limited resources, and use a variety of 

private sector approaches to build and renovate military housing faster and at a lower cost 

to the American taxpayers.

The Act also provides the Department with a variety of authorities to obtain private sector 

financing and expertise to improve military housing. The Department uses these authorities 

individually or in combination. They include guarantees (both loan and rental), 

conveyance/leasing of existing property and facilities, differential lease payments, 

investments (both limited partnerships and stock/bond ownership), and direct loans. 

National Defense Authorization Act for FY 2005 (PL 108-375, Section 2805) provided 

permanent authorities to the Military Housing Privatization Initiative (MHPI).

The Department operates the Armament Retooling and Manufacturing Support Initiative 

under Title 10 United States Code 4551-4555. This loan guarantee program was designed to 

encourage commercial use of inactive government facilities. The revenue generated from 

property rental offsets the cost of maintaining these facilities.

The Department administers the Foreign Military Financing program on behalf of the EOP. 

This program is authorized by sections 23 and 24 of the Arms Export Control Act of 1976, as 

amended, PL 90-629, as amended, and section 503(a). This program provides loans to help 

countries purchase U.S. produced weapons, defense equipment, services, or military 

training. The direct loans and loan guarantees related to Foreign Military Sales are not 

included in these financial statements, per the Department’s agreement with OMB; this 

information is provided separately as other information.

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

guarantee commitments made after FY 1991.
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

76

1.M. Inventories and Related Property

The Department values approximately 84 percent of resale inventory using the moving 

average cost method. An additional 13 percent (fuel inventory) is reported using the 

first-in-first-out method. The Department reports the remaining 3 percent of resale 

inventories at an approximation of historical cost using latest acquisition cost adjusted for 

holding gains and losses. The latest acquisition cost method is used because legacy 

inventory systems were designed for materiel management rather than accounting. 

Although these systems provide visibility and accountability over inventory items, they do 

not maintain historical cost data necessary to comply with Statement of Federal Financial 

Accounting Standards (SFFAS) No. 3, “Accounting for Inventory and Related Property.”

Additionally, these systems cannot produce financial transactions using the USSGL, as 

required by the Federal Financial Management Improvement Act of 1996 (PL 104-208). The 

Department is continuing to transition the balance of the inventories to the moving average 

cost method through the use of new inventory systems. Most transitioned balances, 

however, were not baselined to auditable historical cost and remain noncompliant with 

SFFAS No. 3.

The Department manages only military or government-specific materiel under normal 

conditions. Materiel is a unique term that relates to military force management, and includes 

items such as ships, tanks, self-propelled weapons, aircraft, etc., and related spares, repair 

parts, and support equipment. Items commonly used in and available from the commercial 

sector are not managed in the Department’s materiel management activities. Operational cycles 

are irregular, and the military risks associated with stock-out positions have no commercial 

parallel. The Department holds materiel based on military need and support for contingencies. 

The Department is currently developing a methodology to be used to account for “inventory 

held for sale” and “inventory held in reserve for future sale.”

Related property includes OM&S and stockpile materiel. The OM&S, including munitions not 

held for sale, are valued at standard purchase price. The Department uses both the 

consumption method and the purchase method of accounting for OM&S. Items that are 

centrally managed and stored, such as ammunition and engines, are generally recorded 

using the consumption method and are reported on the Balance Sheet as OM&S. When 

current systems cannot fully support the consumption method, the Department uses the 

purchase method. Under this method, materiel and supplies are expensed when purchased. 

During FY 2013 and FY 2012, the Department expensed significant amounts using the 

purchase method because the systems could not support the consumption method or 

management deemed that the item was in the hands of the end user. This is a material 

weakness for the Department and long-term system corrections are in process. Once the 

proper systems are in place, these items will be accounted for under the consumption 

method of accounting.

The Department determined that the recurring high dollar-value of OM&S in need of repair 

is material to the financial statements and requires a separate reporting category. Many 

high-dollar items, such as aircraft engines, are categorized as OM&S rather than military 

equipment.

The Department recognizes excess, obsolete, and unserviceable inventory and OM&S at a net 

realizable value of $0 pending development of an effective means of valuing such materiel.
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

77

Inventory available and purchased for resale includes consumable spare and repair parts, 

and repairable items owned and managed by the Department. This inventory is retained to 

support military or national contingencies. Inventory held for repair is damaged inventory 

that requires repair to make it suitable for sale. Often, it is more economical to repair these 

items rather than to procure them. The Department often relies on weapon systems and 

machinery no longer in production. As a result, the Department supports a process that 

encourages the repair and rebuilding of certain items. This repair cycle is essential to 

maintaining a ready, mobile, and armed military force. Work in process balances include: 

(1) costs related to the production or servicing of items, including direct material, labor, and 

applied overhead; (2) the value of finished products or completed services that are yet to 

be placed in service; and (3) munitions in production and depot maintenance work with 

associated costs incurred in the delivery of maintenance services.

1.N. Investments in U.S. Treasury Securities

The Department reports investments in U.S. Treasury securities at cost, net of amortized 

premiums or discounts. Premiums or discounts are amortized over the term of the 

investments using the effective interest rate method or another method that yields similar 

results. The Department’s intent is to hold investments to maturity unless they are needed

to finance claims or otherwise sustain operations. Consequently, a provision is not made for 

unrealized gains or losses on these securities.

The Department invests in nonmarketable market-based U.S. Treasury securities issued to 

federal agencies by the U.S. Treasury’s Bureau of Fiscal Services. These securities are not 

traded on any financial exchange but are priced consistently with publically traded 

U.S. Treasury securities.

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

include the Military Retirement Fund, Medicare-Eligible Retiree Health Care Fund, Other 

Defense Organizations General Fund trust and special funds, donations (gift funds), and the 

U.S. Treasury managed trust funds reported by USACE including the South Dakota 

Terrestrial Habitat Restoration, Inland Waterways, and Harbor Maintenance Trust Funds.

Other investments represent joint ventures with private developers constructing or improving 

military housing on behalf of the Department under the authority of MHPI, authorized by 

PL 104-106, Section 2801. These investments do not require market value disclosure. The 

Department’s potential losses on these ventures are limited to the amounts invested.

1.O. General Property, Plant and Equipment

The Department uses the estimated historical cost for valuing military equipment. The 

Department identified the universe of military equipment by accumulating information 

relating to program funding and associated military equipment, equipment useful life, 

program acquisitions, and disposals to establish a baseline. The military equipment baseline 

is updated using expenditure, acquisition, and disposal information.

The Department’s General Property, Plant, and Equipment (PP&E) capitalization threshold is

$100 thousand except for real property, which is $20 thousand. The Department has not fully 

implemented the threshold for real property; therefore, the Department is primarily using the 

capitalization threshold of $100 thousand for General PP&E, and most real property.
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

78

With the exception of USACE Civil Works and WCF, General PP&E assets are capitalized at 

historical acquisition cost when an asset has a useful life of two or more years and when the 

acquisition cost equals or exceeds the Department’s capitalization threshold. The 

Department also requires the capitalization of improvements to existing General PP&E 

assets if the improvements equal or exceed the capitalization threshold and extend the 

useful life or increase the size, efficiency, or capacity of the asset. The Department 

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

The WCF capitalizes all PP&E used in the performance of their mission. These assets are 

capitalized as General PP&E, whether or not they meet the definition of any other PP&E 

category.

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

improvements when an asset has a useful life of two or more years and the acquisition cost 

exceeds $25 thousand. The exception is buildings and structures related to hydropower 

projects, which are capitalized regardless of cost.

When it is in the best interest of the government, the Department provides government 

property to contractors to complete contract work. The Department either owns or leases 

such property, or it is purchased directly by the contractor for the government based on 

contract terms. When the value of contractor-procured General PP&E meets or exceeds the 

Department’s capitalization threshold, federal accounting standards require that it be 

reported on the Department’s Balance Sheet.

To provide appropriated General PP&E information for financial statement reporting, the 

Department developed a policy and a reporting process for contractors with government 

furnished equipment.

1.P. Advances and Prepayments

When advances are permitted by law, legislative action, or presidential authorization, the 

Department’s policy is to record advances or prepayments in accordance with USGAAP. As 

such, payments made in advance of the receipt of goods and services 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. 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 
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

79

operating lease does not substantially transfer all the benefits and risks of ownership. 

Payments for operating leases are expensed over the lease term as they become payable.

Office space and leases entered into by the Department are the largest component of 

operating leases and are based on costs gathered from existing leases, General Services 

Administration bills, and interservice support agreements. Future year projections use the 

Consumer Price Index.

1.R. Other Assets

Other assets include those assets, such as military and civil service employee pay advances, 

travel advances, and certain contract financing payments that are not reported elsewhere 

on the Department’s Balance Sheet.

The Department conducts business with commercial contractors under two primary types of 

contracts: fixed price and cost reimbursable. To alleviate the potential financial burden on 

the contractor that long-term contracts can cause, the Department may provide financing 

payments. Contract financing payments are defined in the Federal Acquisition Regulation, 

Part 32, as authorized disbursements to a contractor prior to acceptance of supplies or 

services by the Government. Contract financing payment clauses are incorporated in the 

contract terms and conditions and may include advance payments, performance-based 

payments, commercial advances and interim payments, progress payments based on cost, 

and interim payments under certain cost reimbursement contracts. It is the Department’s 

policy to record certain contract financing payments as other assets. The Department has 

not fully implemented this policy primarily due to system limitations.

Contract financing payments do not include invoice payments, payments for partial 

deliveries, lease and rental payments, or progress payments based on a percentage or 

stage of completion. The Defense Federal Acquisition Regulation Supplement authorizes 

progress payments based on a percentage or stage of completion only for construction of 

real property, shipbuilding, and ship conversion, alteration, or repair. Progress payments

based on percentage or stage of completion are reported as Construction in Progress.

1.S. Contingencies and Other Liabilities

The SFFAS No. 5, “Accounting for Liabilities of the Federal Government,” as amended by 

SFFAS No. 12, “Recognition of Contingent Liabilities Arising from Litigation,” defines a 

contingency as an existing condition, situation, or set of circumstances that involves an 

uncertainty as to possible gain or loss. The uncertainty will be resolved when one or more 

future events occur or fail to occur. The Department recognizes contingent liabilities when 

past events or exchange transactions occur, a future loss is probable, and the loss amount 

can be reasonably estimated.

Financial statement reporting is limited to disclosure when conditions for liability recognition 

do not exist, but there is at least a reasonable possibility of incurring a loss or additional 

losses. The Department’s risk of loss and resultant contingent liabilities arise from pending 

or threatened litigation or claims and assessments due to events such as aircraft, ship and 

vehicle accidents; medical malpractice; property or environmental damages; and contract 

disputes.
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

80

Other liabilities also arise as a result of anticipated disposal costs for the Department’s 

assets. Consistent with SFFAS No. 6, “Accounting for Property, Plant, and Equipment,”

recognition of an anticipated environmental disposal liability begins when the asset is placed 

into service. Based on the Department’s policy, which is consistent with SFFAS No. 5, 

nonenvironmental disposal liabilities are recognized when management decides to dispose 

of an asset. The Department recognizes nonenvironmental disposal liabilities for military 

equipment nuclear-powered assets when placed into service. These amounts are not easily 

distinguishable and are developed in conjunction with environmental disposal costs.

1.T. Accrued Leave 

The Department reports liabilities for military leave and accrued compensatory and annual 

leave for civilians. Sick leave for civilians is expensed when taken. The liabilities are based 

on current pay rates.

1.U. Net Position 

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

Unexpended appropriations represent the amounts of budget authority that are unobligated 

and have not been rescinded or withdrawn. Unexpended appropriations also represent 

amounts obligated for which legal liabilities for payments have not been incurred.

Cumulative results of operations represent the net difference between expenses and losses, 

and financing sources (including appropriations, revenue, and gains), since inception. The 

cumulative results of operations also include donations and transfers in and out of assets 

that were not reimbursed.

1.V. Treaties for Use of Foreign Bases 

The Department has the use of land, buildings, and other overseas facilities that are 

obtained through various international treaties and agreements negotiated by the 

Department of State. The Department purchases capital assets overseas with appropriated 

funds; however, the host country retains title to the land and capital improvements. Treaty 

terms generally allow the Department continued use of these properties until the treaties 

expire. In the event treaties or other agreements are terminated, use of the foreign bases is 

prohibited and losses are recorded for the value of any nonretrievable capital assets. The 

settlement due to the U.S. or host nation is negotiated and takes into account the value of 

capital investments and may be offset by the cost of environmental cleanup.
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

81

1.W. Undistributed Disbursements and Collections 

Undistributed disbursements and collections represent the difference between 

disbursements and collections matched at the transaction level to specific obligations, 

payables, or receivables in the source systems and those reported by the U.S. Treasury.

Supported disbursements and collections may be evidenced by corroborating documentation 

that would generally support 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 

required to establish the Accounts Payable/Receivable were previously made. As a result, 

misstatements of reported Accounts Payable and Receivable are likely present in the 

Department’s 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 non-Federal accounts payable/receivable at the 

time accounting reports are prepared. Accordingly, the Department’s policy is to allocate 

supported undistributed disbursements and collections between federal and non-Federal

categories based on the percentage of distributed federal and non-Federal accounts payable 

and accounts receivable. Both supported and unsupported undistributed disbursements and 

collections are then 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 No. 33, “Pensions, Other Retirement Benefits, and Other 

Postemployment Benefits: Reporting the Gains and Losses from Changes in Assumptions 

and Selecting Discount Rates and Valuation Dates,” 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.

1.Z. Significant Events

During FY 2013, the Department implemented SFFAS No. 43, “Funds from Dedicated 

Collections: Amending SFFAS 27, Identifying and Reporting Earmark Funds.” SFFAS No. 43

provides clarifying language to be used by reporting entities when classifying funds and 

provides additional reporting alternatives for financial statement presentation and note 

disclosure. Refer to Note 19, Disclosures on Statement of Changes in Net Position and 

Note 23, Funds from Dedicated Collections, for additional information.
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

82

NOTE 2. NONENTITY ASSETS

Nonentity Assets Dollars in Millions

As of September 30 2013 2012

Intragovernmental Assets

Fund Balance with Treasury $ 1,184.0 $ 788.8

Total Intragovernmental Assets $ 1,184.0 $ 788.8

Non-Federal Assets

Cash and Other Monetary Assets $ 1,393.6 $ 1,709.1

Accounts Receivable 6,830.4 7,172.8

Other Assets 174.1 179.1

Total Non-Federal Assets $ 8,398.1 $ 9,061.0

Total Nonentity Assets $ 9,582.1 $ 9,849.8

Total Entity Assets $ 2,170,282.7 $ 2,075,876.9

Total Assets $ 2,179,864.8 $ 2,085,726.7

Nonentity assets are not available for use in the Department’s normal operations. The 

Department has stewardship accountability and reporting responsibility for nonentity assets.

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 primarily consist of cash held by Disbursing 

Officers to carry out payment, collection, and foreign currency exchanges.

Non-Federal Accounts Receivable consist 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.

Non-Federal Other Assets consists of an Advanced Payment Pool Agreement (APPAs) for 

research and development projects. The Department utilizes APPAs when multiple contracts 

with a nonprofit educational institution require advance payments.

NOTE 3. FUND BALANCE WITH TREASURY

Fund Balance with Treasury Dollars in Millions

As of September 30 2013 Restated 2012

Fund Balance

Appropriated Funds $ 468,669.9 $ 500,572.1

Revolving Funds 10,477.7 8,051.7

Trust Funds 1,666.0 2,132.9

Special Funds 686.2 533.7

Other Fund Types 1,161.9 831.2

Total Fund Balance $ 482,661.7 $ 512,121.6

Fund Balance Per Treasury Versus Agency

Fund Balance per Treasury $ 492,296.4 $ 521,342.1

Fund Balance per Agency 482,661.7 512,121.6

Reconciling Amount $ 9,634.7 $ 9,220.5
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

83

Other Fund Types primarily consist of deposit fund and receipt accounts. 

The Department shows a reconciling net difference of $9.6 billion with U.S. Treasury. This 

includes canceling year authority of $9.1 billion, unavailable receipts of $377.7 million, 

allocation transfers of $78.4 million and fiduciary activities of $45.1 million.

Status of Fund Balance with Treasury Dollars in Millions

As of September 30 2013 2012

Unobligated Balances

Available $ 113,939.3 $ 119,674.0

Unavailable 643,857.4 582,311.3

Obligated Balance not yet Disbursed 437,665.8 469,112.0

Non-Budgetary FBWT 1,654.7 723.3

Non-FBWT Budgetary Accounts (714,455.5) (659,699.0)

Total Fund Balance $ 482,661.7 $ 512,121.6

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 the public laws that establish 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. 
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

84

NOTE 4. INVESTMENTS AND RELATED INTEREST

Investments and Related Interest Dollars in Millions

2013

As of September 30

Cost Amortization 

Method

Amortized 

(Premium)/ 

Discount

Investments, 

Net

Market 

Value 

Disclosure

Intragovernmental Securities

Nonmarketable, Market-Based

Military Retirement Fund $ 494,977.7 See Below $ (15,416.9) $ 479,560.8 $ 522,376.6

Medicare-Eligible Retiree Health 

Care Fund 223,228.7 See Below (8,291.7) 214,937.0 242,383.0

US Army Corps of Engineers 8,100.0 See Below (127.3) 7,972.7 8,078.3

Other Funds 3,213.4 See Below (114.9) 3,098.5 3,231.5

Total Nonmarketable, Market-Based 729,519.8 (23,950.8) 705,569.0 776,069.4

Accrued Interest 5,928.5 5,928.5 5,928.5

Total Intragovernmental Securities $ 735,448.3 $ (23,950.8) $ 711,497.5 $ 781,997.9

Other Investments

Total Other Investments $ 3,333.9 See Below $ 0.0 $ 3,333.9 N/A

Amortization Method Used: Effective Interest

Investments and Related Interest Dollars in Millions

Restated 2012

As of September 30

Cost Amortization 

Method

Amortized 

(Premium)/ 

Discount

Investments, 

Net

Market 

Value 

Disclosure

Intragovernmental Securities

Nonmarketable, Market-Based

Military Retirement Fund $ 435,206.4 See Below $ (11,012.4) $ 424,194.0 $ 536,544.6

Medicare-Eligible Retiree Health 

Care Fund 207,793.6 See Below (6,433.4) 201,360.2 262,831.3

US Army Corps of Engineers 7,264.6 See Below (57.7) 7,206.9 7,416.2

Other Funds 3,278.3 See Below (79.8) 3,198.5 3,461.3

Total Nonmarketable, Market-Based 653,542.9 (17,583.3) 635,959.6 810,253.4

Accrued Interest 5,706.9 5,706.9 5,706.9

Total Intragovernmental Securities $ 659,249.8 $ (17,583.3) $ 641,666.5 $ 815,960.3

Other Investments

Total Other Investments $ 3,255.0 See Below $ 0.0 $ 3,255.0 N/A

Amortization Method Used: Effective Interest

The Department invests primarily in non-marketable, market-based 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 funds from dedicated collections as evidence of its 

receipts and are an asset to the Department and a liability to the U.S. Treasury. The Federal 

Government does not set aside assets to pay future benefits or other expenditures 

associated with funds from dedicated collections. Cash generated from funds from dedicated 

collections is deposited in the U.S. Treasury and used for general government purposes. 
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

85

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. Government-wide 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 $1.9 billion in investments of the DoD Education Benefits 

Trust Fund, $884.1 million in investments of the Host Nation Support for U.S. Relocation 

Activities Trust Fund, and $272.6 million in investments of the Voluntary Separation 

Incentive Trust Fund.

Other Investments consists of Military Housing Privatization Initiative 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

2013

As of September 30

Gross Amount Due

Allowance for 

Estimated 

Uncollectibles

Accounts 

Receivable, Net

Intragovernmental Receivables $ 1,284.2 N/A $ 1,284.2

Non-Federal Receivables 

(From the Public) 11,262.8 (806.6) 10,456.2

Total Accounts Receivable $ 12,547.0 $ (806.6) $ 11,740.4

Accounts Receivable Dollars in Millions

2012

As of September 30

Gross Amount Due

Allowance for 

Estimated 

Uncollectibles

Accounts 

Receivable, Net

Intragovernmental Receivables $ 1,439.6 N/A $ 1,439.6

Non-Federal Receivables 

(From the Public) 12,420.5 (898.1) 11,522.4

Total Accounts Receivable $ 13,860.1 $ (898.1) $ 12,962.0

Accounts receivable represent the Department’s claim for payment from other entities. The 

Department only recognizes an allowance for uncollectible amounts from the public. Claims with 

other Federal agencies are resolved in accordance with the Intragovernmental Business Rules.
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

86

NOTE 6. OTHER ASSETS

Other Assets Dollars in Millions

As of September 30 2013 2012

Intragovernmental Other Assets

Advances and Prepayments $ 1,620.2 $ 1,447.3

Other Assets 137.4 135.9

Total Intragovernmental Other Assets $ 1,757.6 $ 1,583.2

Non-Federal Other Assets

Outstanding Contract Financing Payments $ 68,594.7 $ 65,342.9

Advances and Prepayments 3,681.4 1,063.6

Other Assets (With the Public) $ 190.8 $ 194.7

Total Non-Federal Other Assets $ 72,466.9 $ 66,601.2

Total Other Assets $ 74,224.5 $ 68,184.4

Other Disclosures

Intragovernmental Other Assets are largely related to the Department’s right to 

approximately 6.4 million barrels of crude oil held by the Department of Energy. 

The Other Assets (With the Public) balance is primarily comprised of APPAs for research and 

development projects. AAPAs are utilized when multiple contracts with a nonprofit 

educational institution require advance payments.

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.

Outstanding Contract Financing Payments includes $64.9 billion in contract financing 

payments and an additional $3.7 billion in estimated future payments to contractors upon 

delivery and government acceptance of satisfactory product. Refer to Note 15, Other 

Liabilities, for further information.

NOTE 7. CASH AND OTHER MONETARY ASSETS

Cash and Other Monetary Assets Dollars in Millions

As of September 30 2013 2012

Cash $ 430.7 $ 443.9

Foreign Currency 1,099.0 1,378.1

Total Cash, Foreign Currency, and Other Monetary Assets $ 1,529.7 $ 1,822.0

Cash (except for $136.1 million in undeposited collections, imprest funds and other cash) 

and Foreign Currency represent nonentity assets and are restricted and unavailable to fund 

the Department’s mission.
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

87

NOTE 8. DIRECT LOAN AND LOAN GUARANTEES

Direct Loan and Loan Guarantee Programs 

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

• Military Housing Privatization Initiative (MHPI)

• Armament Retooling and Manufacturing Support Initiative (ARMS)

The Federal Credit Reform Act of 1990 governs all new and amended direct loan obligations 

and loan guarantee commitments made after FY 1991. 

Direct loans are reported at the net present value of the following projected cash flows:

• Loan disbursements

• Repayments of principal

• Payments of interest and other payments over the life of the loan after adjusting for 

estimated defaults, prepayments, fees, penalties, and other recoveries

Loan guarantee liabilities are reported at the net present value. The cost of the loan 

guarantee is the net present value of the following estimated projected cash flows:

• Payments by the Department to cover defaults and delinquencies, interest subsidies, or 

other payments; offset by payments to the Department including origination and other 

fees, penalties, and recoveries.

Military Housing Privatization Initiative

The MHPI includes both direct loan and loan guarantee programs. The programs are 

authorized by the National Defense Authorization Act for FY 1996 (PL 104-106, 

Section 2801) and include 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.

Armament Retooling and Manufacturing Support Initiative

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

designed to encourage commercial use of the Army’s inactive ammunition plants through 

incentives for businesses willing to locate to a government ammunition production facility. 

The production capacity of these facilities is greater than current military requirements; 

however, this capacity may be needed by the military in the future. Revenue offsets

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

In an effort to preclude additional loan liability, the Army instituted an ARMS loan guarantee 

moratorium in FY 2004 and does not anticipate new loans.
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

88

Summary of Direct Loans and Loan Guarantees Dollars in Millions

2013 2012

Loans Receivable

Direct Loans:

Military Housing Privatization Initiative 1,267.7 957.5

Total Direct Loans $ 1,267.7 $ 957.5

Total Loans Receivable $ 1,267.7 $ 957.5

Loan Guarantee Liability

Military Housing Privatization Initiative 45.8 11.7

Armament Retooling & Manufacturing Support Initiative 0.0 1.0

Total Loan Guarantee Liability $ 45.8 $ 12.7

Direct Loans Obligated Dollars in Millions

2013 2012

Direct Loans Obligated After FY 1991

(Present Value Method):

Military Housing Privatization Initiative

Loans Receivable Gross $ 1,355.8 $ 1,119.6

Allowance for Subsidy Cost (Present Value) (88.1) (162.1)

Value of Assets Related to Direct Loans, Net 1,267.7 957.5

Total Direct Loans Receivable $ 1,267.7 $ 957.5

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

2013 2012

Direct Loan Programs

Military Housing Privatization Initiative $ 241.3 $ 261.1

Total $ 241.3 $ 261.1
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

89

Subsidy Expense for Direct Loan by Program Dollars in Millions

2013 Interest 

Differential Defaults Fees Other Total

New Direct Loans Disbursed

Military Housing Privatization Initiative $ 5.9 $ 34.9 $ 0.0 $ 0.0 $ 40.8

Total $ 5.9 $ 34.9 $ 0.0 $ 0.0 $ 40.8

2012 Interest 

Differential Defaults Fees Other Total

New Direct Loans Disbursed

Military Housing Privatization Initiative $ 21.3 $ 22.2 $ 0.0 $ 0.0 $ 43.5

Total $ 21.3 $ 22.2 $ 0.0 $ 0.0 $ 43.5

2013 Modifications

Interest Rate 

Reestimates

Technical 

Reestimates

Total 

Reestimates Total

Direct Loan Modifications and Reestimates

Military Housing Privatization Initiative $ 0.0 $ (10.7) $ (84.0) $ (94.7) $ (94.7)

Total $ 0.0 $ (10.7) $ (84.0) $ (94.7) $ (94.7)

2012 Modifications

Interest Rate 

Reestimates

Technical 

Reestimates

Total 

Reestimates Total

Direct Loan Modifications and Reestimates

Military Housing Privatization Initiative $ 0.0 $ (9.6) $ (4.1) $ (13.7) $ (13.7)

Total $ 0.0 $ (9.6) $ (4.1) $ (13.7) $ (13.7)

2013 2012

Total Direct Loan Subsidy Expense:

Military Housing Privatization Initiative $ (53.9) $ 29.8

Total $ (53.9) $ 29.8

Subsidy Expense for Direct Loan by Program

As of September 30, 2013

Interest 

Differential Defaults Fees Other Total

Budget Subsidy Rates for Direct Loans

Military Housing Privatization Initiative 3.89% 12.37% 0.00% 0.00% 16.26%

Subsidy rates pertain to loan agreements contracted during the current fiscal year. 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 

from disbursements of loans from current and prior year loan agreements. Subsidy expense 

reported in the current year also includes reestimates.
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

90

Schedule for Reconciling Subsidy Cost Allowance Balances

for Post-FY 1991 Direct Loans Dollars in Millions

2013 2012

Beginning Balance, Changes, and Ending Balance:

Beginning Balance of the Subsidy Cost Allowance $ 162.1 $ 139.4

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

Interest Rate Differential Costs 5.9 21.3

Default Costs (Net of Recoveries) 34.9 22.2

Total of the above Subsidy Expense Components $ 40.8 $ 43.5

Adjustments

Subsidy Allowance Amortization (10.4) (7.1)

Other (9.7) 0.0

Total of the above Adjustment Components $ (20.1) $ (7.1)

Ending Balance of the Subsidy Cost Allowance before Reestimates $ 182.8 $ 175.8

Add or Subtract Subsidy Reestimates by Component

Interest Rate Reestimates $ (10.7) $ (9.6)

Technical/Default Reestimate (84.0) (4.1)

Total of the above Reestimate Components (94.7) (13.7)

Ending Balance of the Subsidy Cost Allowance $ 88.1 $ 162.1

Defaulted Guaranteed Loans Dollars in Millions

As of September 30 2013 2012

Defaulted Guaranteed Loans from Post-FY 1991 Guarantees (Present Value Method):

Armament Retooling & Manufacturing Support Initiative

Defaulted Guaranteed Loans Receivable, Gross $ 0.7 $ 0.7

Allowance for Subsidy Cost (Present Value) (0.7) (0.7)

Value of Assets Related to Defaulted Guaranteed Loans 

Receivable, Net $ 0.0 $ 0.0

Total Value of Assets Related to Defaulted $ 0.0 $ 0.0
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

91

Guaranteed Loans Outstanding Dollars in Millions

As of September 30

Outstanding 

Principal of 

Guaranteed Loans, 

Face Value

Amount of 

Outstanding 

Principal 

Guaranteed

2013

Guaranteed Loans Outstanding

Military Housing Privatization Initiative $ 670.8 $ 670.8

Total $ 670.8 $ 670.8

2012

Guaranteed Loans Outstanding

Military Housing Privatization Initiative $ 448.4 $ 448.4

Total $ 448.4 $ 448.4

2013

New Guaranteed Loans Disbursed

Military Housing Privatization Initiative $ 222.5 $ 222.5

Total $ 222.5 $ 222.5

2012

New Guaranteed Loans Disbursed

Military Housing Privatization Initiative $ 0.0 $ 0.0

Total $ 0.0 $ 0.0

Liabilities for Loan Guarantees Dollars in Millions

As of September 30 2013 2012

Liabilities for Loan Guarantee from Post 1991

(Present Value)

Military Housing Privatization Initiative $ 45.8 $ 11.7

Armament Retooling & Manufacturing Support Initiative 0 1.0

Total Loan Guarantee Liability (Post FY 1991) $ 45.8 $ 12.7

Total Loan Guarantee Liability $ 45.8 $ 12.7
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

92

Subsidy Expense for Direct Loan by Program

As of September 30 Dollars in Millions

2013 Interest 

Differential Defaults Fees Other Total

New Loan Guarantees Disbursed

Military Housing Privatization Initiative $ 0.0 $ 33.7 $ 0.0 $ 0.0 $ 33.7

Armament Retooling & 

Manufacturing Support Initiative 0.0 0.0 0.0 0.0 0.0

Total $ 0.0 $ 33.7 $ 0.0 $ 0.0 $ 33.7

2012 Interest 

Differential Defaults Fees Other Total

New Loan Guarantees Disbursed

Military Housing Privatization Initiative $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0

Armament Retooling & 

Manufacturing Support Initiative 0.0 0.0 0.0 0.0 0.0

Total $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0

2013 Modifications

Interest Rate 

Reestimates

Technical 

Reestimates

Total 

Reestimates Total

Modifications and Reestimates

Military Housing Privatization Initiative $ 0.0 $ (0.9) $ (0.3) $ (1.2) $ (1.2)

Armament Retooling & 

Manufacturing Support Initiative 0.0 0.0 (1.1) (1.1) (1.1)

Total $ 0.0 $ (0.9) $ (1.4) $ (2.3) $ (2.3)

2012 Modifications

Interest Rate 

Reestimates

Technical 

Reestimates

Total 

Reestimates Total

Modifications and Reestimates

Military Housing Privatization Initiative $ 0.0 $ (0.9) $ (1.7) $ (2.6) $ (2.6)

Armament Retooling & 

Manufacturing Support Initiative 0.0 0.8 (0.0) 0.8 0.8

Total $ 0.0 $ (0.1) $ (1.7) $ (1.8) $ (1.8)

2013 2012

Total Loan Guarantee

Military Housing Privatization Initiative $ 32.5 $ (2.6)

Armament Retooling & 

Manufacturing Support Initiative (1.1) 0.8

Total $ 31.4 $ (1.8)

The Department incurred two new loan guarantees after determining the projects were 

more advantageous to administer these projects as loan guarantees rather than direct 

loans.

Subsidy Expense for Direct Loan by Program

As of September 30, 2013

Interest 

Supplements Defaults

Fees and 

other 

Collections

Other Total

Budget Subsidy Rates for Loan Guarantees

Military Housing Privatization Initiative 0.0% 6.56% 0.0% 0.0% 6.56%

Armament Retooling & 

Manufacturing Support Initiative 0.0% 0.0% 0.0% 0.0% 0.0%
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

93

Subsidy rates pertain to loan agreements contracted during the current fiscal year. 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 2013 2012

Beginning Balance, Changes, and Ending Balance

Beginning Balance of the Loan Guarantee Liability $ 12.7 $ 13.9

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

Default Costs (Net of Recoveries) 33.7 0.0

Total of the above Subsidy Expense Components $ 33.7 $ 0.0

Adjustments

Interest Accumulation on the Liability Balance 1.7 0.6

Total of the above Adjustments $ 1.7 $ 0.6

Ending Balance of the Loan Guarantee Liability before Reestimates $ 48.1 $ 14.5

Add or Subtract Subsidy Reestimates by Component

Interest Rate Reestimate $ (0.9) $ (0.1)

Technical/Default Reestimate (1.4) (1.7)

Total of the above Reestimate Components $ (2.3) (1.8)

Ending Balance of the Loan Guarantee Liability $ 45.8 $ 12.7

Administrative Expenses are limited to separately identified expenses for administering 

pre-FY 1992 and post-FY 1991 Direct Loans and Loan Guarantee Programs. The Department 

does not maintain a separate program to capture expenses related to direct loans and loan 

guarantees for MHPI. Administrative expenses for the ARMS Initiative represent a fee paid 

to the U.S. Department of Agriculture, Rural Business Cooperative Service.
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

94

NOTE 9. INVENTORY AND RELATED PROPERTY

Inventory and Related Property Dollars in Millions

As of September 30 2013 2012

Inventory, Net $ 85,368.0 $ 90,156.8

Operating Materiel & Supplies, Net 168,110.0 152,591.5

Stockpile Materiel, Net 519.5 551.4

Total Inventory and Related Property $ 253,997.5 $ 243,299.7

Inventory, Net Dollars in Millions

2013 Valuation 

Method

As of September 30

Inventory, 

Gross Value

Revaluation 

Allowance Inventory, Net

Inventory Categories

Available and Purchased for Resale $ 57,101.0 $ (3,402.3) $ 53,698.7 FIFO,LAC,

MAC

Held for Repair 34,312.3 (4,105.8) 30,206.5 LAC,MAC

Excess, Obsolete, and Unserviceable 6,967.1 (6,967.1) 0.0 NRV

Raw Materiel 1,412.4 0.0 1,412.4 MAC,SP,LAC

Work in Process 50.4 0.0 50.4 AC

Total Inventory, Net $ 99,843.2 $ (14,475.2) $ 85,368.0

Legend for Valuation Methods:

Adjusted LAC = Latest Acquisition Cost, adjusted for holding gains and losses

SP = Standard Price

AC = Actual Cost

NRV = Net Realizable Value

MAC = Moving Average Cost

FIFO = First In, First Out

Inventory, Net Dollars in Millions

2012

Valuation 

Method

As of September 30

Inventory, 

Gross Value

Revaluation 

Allowance Inventory, Net

Inventory Categories

Available and Purchased for Resale $ 61,608.0 $ (2,602.5) $ 59,005.5 FIFO,LAC, 

MAC

Held for Repair 33,864.2 (4,143.9) 29,720.3 LAC,MAC

Excess, Obsolete, and Unserviceable 6,833.8 (6,833.8) 0.0 NRV

Raw Materiel 1,352.6 0.0 1,352.6 MAC,SP,LAC

Work in Process 78.4 0.0 78.4 AC

Total Inventory, Net $ 103,737.0 $ (13,580.2) $ 90,156.8

Legend for Valuation Methods:

Adjusted LAC = Latest Acquisition Cost, adjusted for holding gains and losses

SP = Standard Price

AC = Actual Cost

NRV = Net Realizable Value

MAC = Moving Average Cost

FIFO = First In, First Out
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

95

Restrictions

The following are restrictions on the use, sale, or disposition of inventory: 

• War reserve materiel valued at $1.5 billion;

• Commissary items valued at $375.9 million held for purchase by authorized patrons; 

and

• Dispositions pending litigation or negotiation valued at $68.9 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.

Operating Materiel and Supplies, Net Dollars in Millions

2013 Valuation 

Method

As of September 30

OM&S, Gross 

Value

Revaluation 

Allowance OM&S, Net

Inventory Categories

Held for Use $ 142,845.3 $ (8.7) $ 142,836.6 SP, LAC, MAC

Held for Repair 25,285.3 (11.9) 25,273.4 SP, LAC, MAC

Excess, Obsolete, and Unserviceable 2,134.8 (2,134.8) 0.0 NRV

Total OM&S $ 170,265.4 $ (2,155.4) $ 168,110.0

Legend for Valuation Methods:

Adjusted LAC = Latest Acquisition Cost, adjusted for holding gains and losses

SP = Standard Price

NRV = Net Realizable Value

MAC = Moving Average Cost

Operating Materiel and Supplies, Net Dollars in Millions

2012

Valuation 

Method

As of September 30

OM&S, Gross 

Value

Revaluation 

Allowance OM&S, Net

Inventory Categories

Held for Use $ 134,535.9 $ (28.0) $ 134,507.9 SP, LAC, MAC

Held for Repair 18,882.2 (798.6) 18,083.6 SP, LAC, MAC

Excess, Obsolete, and Unserviceable 1,925.0 (1,925.0) 0.0 NRV

Total OM&S $ 155,343.1 $ (2,751.6) $ 152,591.5

Legend for Valuation Methods:

Adjusted LAC = Latest Acquisition Cost, adjusted for holding gains and losses

SP = Standard Price

NRV = Net Realizable Value

MAC = Moving Average Cost
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

96

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.

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. The estimated market 

price of stockpile materiel held for sale as of 4th Quarter, FY 2013, is $1.3 billion.

Stockpile Materiel, Net Dollars in Millions

2013

Valuation 

Method

As of September 30

Stockpile, 

Materiel

Amount

Allowance for 

Gains 

(Losses)

Stockpile, 

Materiel,

Net

Stockpile Materiel Categories

Held for Sale $ 424.5 $ 0.0 $ 424.5 AC, LCM

Held for Reserve for Future Sale 95.0 0.0 95.0 AC, LCM

Total Stockpile Materiel $ 519.5 $ 0.0 $ 519.5

Legend for Valuation Methods:

AC = Actual Cost LCM = Lower of Cost or Market

Stockpile Materiel, Net Dollars in Millions

2012

Valuation 

Method

As of September 30

Stockpile, 

Materiel

Amount

Allowance for 

Gains 

(Losses)

Stockpile, 

Materiel,

Net

Stockpile Materiel Categories

Held for Sale $ 522.1 $ 0.0 $ 522.1 AC, LCM

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

Total Stockpile Materiel $ 551.4 $ 0.0 $ 551.4

Legend for Valuation Methods:

AC = Actual Cost LCM = Lower of Cost or Market
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

97

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.

NOTE 10. GENERAL PP&E, NET

General PP&E, Net Dollars in Millions

2013

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 $ 10,781.2 N/A $ 10,781.2

Buildings, Structures, and Facilities S/L 20 or 40 269,766.1 (127,980.0) 141,786.1

Leasehold Improvements S/L Lease term 403.8 (167.9) 235.9

Software S/L 2 – 5 or 10 11,024.7 (8,038.9) 2,985.8

General Equipment S/L 5 or 10 100,529.7 (63,823.5) 36,706.2

Military Equipment S/L Various 883,098.7 (483,845.8) 399,252.9

Assets Under Capital Lease1 S/L Lease term 632.8 (438.5) 194.3

Construction-in-Progress N/A N/A 46,635.7 N/A 46,635.7

Other 1,035.8 (2.0) 1,033.8

Total General PP&E $ 1,323,908.5 $ (684,296.6) $ 639,611.9

1 Note 15 for additional information on Capital Leases

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

General PP&E, Net Dollars in Millions

2012

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 $ 10,706.2 N/A $ 10,706.2

Buildings, Structures, and Facilities S/L 20 or 40 248,871.1 (120,845.8) 128,025.3

Leasehold Improvements S/L Lease term 880.5 (302.2) 578.3

Software S/L 2 – 5 or 10 11,324.7 (7,640.2) 3,684.5

General Equipment S/L 5 or 10 105,745.4 (69,931.6) 35,813.8

Military Equipment S/L Various 878,687.7 (500,413.0) 378,274.7

Assets Under Capital Lease1 S/L Lease term 901.4 (520.4) 381.0

Construction-in-Progress N/A N/A 42,825.7 N/A 42,825.7

Other 1,171.4 (2.9) 1,168.5

Total General PP&E $ 1,301,114.1 $ (699,656.1) $ 601,458.0

1 Note 15 for additional information on Capital Leases

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

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.
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

98

The Department does not have the acquisition value for all General PP&E and uses several 

cost methodologies to provide General PP&E values for financial statement reporting 

purposes. Extensive efforts are in progress to achieve audit readiness. The ongoing 

discovery and validation phases identify adjustments to values resulting in current year 

gains/losses. 

Other General Property, Plant, and Equipment includes assets awaiting disposition.

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 mission of the Department is to provide the military forces necessary to deter war and 

protect the security of the United States. The Department, with minor exceptions, uses 

most of the buildings and stewardship land in its daily activities and includes the buildings 

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

Differences in the heritage assets and stewardship land quantities from the FY 2012 ending 

to the FY 2013 beginning unit counts resulted from efforts to improve quality of reported 

data.

Heritage assets within the Department consist of buildings and structures, archeological 

sites, and museum collections. The Department defines these as follows:

• Buildings and Structures. Buildings and structures listed, or eligible for listing, on the 

National Register of Historic Places, including Multi-Use Heritage Assets. 

• Archeological Sites. Sites identified, evaluated, and determined to be eligible for or are 

listed on the National Register of Historic Places in accordance with Section 110 of the 

National Historic Preservation Act.

• Museum Collection Items. Items unique for one or more of the following reasons: 

historical or natural significance; cultural, educational, or artistic importance; or 

significant technical or architectural characteristics.

The Department is unable to identify all quantities of heritage assets and stewardship land 

added through donation or devise in FY 2013 due to limitations of the Department’s financial 

and nonfinancial management processes and systems.

Categories Measure 

Quantity

As of 

9/30/12 Additions Deletions As of 9/30/13

Buildings and Structures Each 56,175 61 240 55,996

Archeological Sites Each 29,913 162 8 30,067

Museum Collection Items 

(Objects, not including fine art) Each 1,233,347 11,815 316 1,244,846

Museum Collection Items (Objects, 

fine art) Each 53,430 3,397 0 56,827

Stewardship land includes both land and land rights owned by the Department, but not 

acquired for, or in connection with, items of General Property, Plant, and Equipment. All 

land provided to the Department from the public domain or at no cost, regardless of its use, 

is classified as Stewardship Land.
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

99

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.

Facility 

Code

Predominant Land Use 

Categories

As of 

9/30/12

(Acres in 

Thousands)

Additions Deletions As of 

9/30/13

9110 Government Owned Land 6,552 0 0 6,552

9111 State Owned Land 5 0 0 5

9120 Withdrawn Public Land 14,714 692 10 15,396

9130 Licensed and Permitted Land 917 27 0 944

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 23,707

Total – All Other Lands 8,295

Total – Stewardship Lands 15,412

Differences in the heritage assets and stewardship land quantities from the FY 2012 ending 

to the FY 2013 beginning unit counts resulted from efforts to improve quality of reported 

data.

Assets Under Capital Lease Dollars in Millions

As of September 30 2013 2012

Entity as Lessee, Assets Under Capital Lease

Land and Buildings $ 260.0 $ 273.0

Equipment 372.9 628.4

Accumulated Amortization (438.5) (520.4)

Total Capital Leases $ 194.4 $ 381.0
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

100

NOTE 11. LIABILITIES NOT COVERED BY BUDGETARY RESOURCES

Liabilities Not Covered by Budgetary Resources Dollars in Millions

As of September 30 2013 2012

Intragovernmental Liabilities

Accounts Payable $ 2.2 $ 12.9

Debt 1.7 4.3

Other 1,936.8 2,141.0

Total Intragovernmental Liabilities $ 1,940.7 $ 2,158.2

Non-Federal Liabilities

Accounts Payable $ 206.2 $ 53.0

Military Retirement and Other Federal Employment Benefits 1,670,714.4 1,771,202.7

Environmental and Disposal Liabilities 54,593.4 57,911.8

Other Liabilities 15,726.6 16,323.7

Total Non-Federal Liabilities $ 1,741,240.6 $ 1,845,491.2

Total Liabilities Not Covered by Budgetary Resources $ 1,743,181.3 $ 1,847,649.4

Total Liabilities Covered by Budgetary Resources $ 668,945.9 $ 610,347.4

Total Liabilities $ 2,412,127.2 $ 2,457,996.8

Liabilities Not Covered by Budgetary Resources includes liabilities requiring congressional 

action before budgetary resources can be provided.

Intragovernmental Accounts Payable represents subsidy payments for the Military Housing 

Privatization Initiative and liabilities in canceled appropriations that, if paid, will be 

disbursed using current year funds. 

Non-Federal Accounts Payable primarily represents liabilities in canceled appropriations that, 

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. The related reimbursement to the Department by Arlington 

County and Falls Church, Virginia, will be completed by 2023 and is recorded as non-Federal 

accounts receivable. 

Environmental Liabilities represents the Department’s liability for existing and anticipated 

environmental clean-up and disposal. Refer to Note 14, Environmental Liabilities, for 

additional details.

Intragovernmental Other Liabilities primarily consists of unfunded liabilities for Federal 

Employees Compensation Act, Unemployment Insurance, and Judgment Fund. 

Non-Federal Other Liabilities primarily consists 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 $1.1 trillion in pension liabilities and $558.5 billion in health benefit 

liabilities. Refer to Note 17, Military Retirement and Other Federal Employment Benefits, for 

additional details.
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

101

NOTE 12. ACCOUNTS PAYABLE

Accounts Payable Dollars in Millions

2013

As of September 30

Accounts Payable

Interest, Penalties, 

and Administrative 

Fees

Total

Intragovernmental Payables $ 1,574.7 N/A $ 1,574.7

Non-Federal Payables

(To the Public) 20,138.9 10.2 20,149.1

Total Accounts Payable $ 21,713.6 $ 10.2 $ 21,723.8

Accounts Payable Dollars in Millions

2012

As of September 30

Accounts Payable

Interest, Penalties, 

and Administrative 

Fees

Total

Intragovernmental Payables $ 1,762.9 N/A $ 1,762.9

Non-Federal Payables

(To the Public) 19,498.2 (6.2) 19,492.0

Total Accounts Payable $ 21,261.1 $ (6.2) $ 21,254.9

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.

NOTE 13. DEBT

Debt Dollars in Millions

2013

As of September 30 Beginning Balance Net Borrowing Ending Balance

Agency Debt (Intragovernmental)

Debt to the Treasury $ 952.6 $ 222.1 $ 1,174.7

Total Agency Debt $ 952.6 $ 222.1 $ 1,174.7

Debt Dollars in Millions

2012

As of September 30 Beginning Balance Net Borrowing Ending Balance

Agency Debt (Intragovernmental)

Debt to the Treasury $ 783.4 $ 169.2 $ 952.6

Total Agency Debt $ 783.4 $ 169.2 $ 952.6
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

102

The Department’s debt consists of interest and principal payments due to the U.S. Treasury. 

The Department borrows funds for the Military Housing Privatization Initiative 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.

NOTE 14. ENVIRONMENTAL AND DISPOSAL LIABILITIES

Environmental and Disposal Liabilities Dollars in Millions

As of September 30 2013 2012

Environmental Liabilities–Non-Federal

Accrued Environmental Restoration Liabilities

Active Installations – Installation Restoration Program (IRP) and 

Building Demolition and Debris Removal (BD/DR) $ 10,026.3 $ 10,571.0

Active Installations – Military Munitions Response Program (MMRP) 3,416.9 3,953.9

Formerly Used Defense Sites – IRP & BD/DR 3,018.8 3,063.4

Formerly Used Defense Sites – MMRP 10,096.8 10,842.6

Other Accrued Environmental Liabilities – Non-BRAC

Environmental Corrective Action $ 1,005.9 $ 786.4

Environmental Closure Requirements 1,824.6 1,838.8

Environmental Response at Operational – Ranges 128.7 93.7

Asbestos 1,030.7 1,057.4

Non-Military Equipment 575.7 554.1

Other 1,107.9 1,121.7

Base Realignment and Closure Installations (BRAC)

Installation Restoration Program $ 3,394.9 $ 3,388.2

Military Munitions Response Program 690.3 703.1

Environmental Corrective Action/Closure Requirements 197.6 159.5

Asbestos 0.3 0.3

Environmental Disposal for Military Equipment/Weapons Programs

Nuclear Powered Military Equipment/Spent Nuclear Fuel $ 14,076.4 $ 14,055.9

Non-Nuclear Powered Military Equipment 36.4 36.4

Other Weapons Systems 147.5 146.0

Chemical Weapons Disposal Program

Chemical Demilitarization – Chemical Materials Agency (CMA) $ 1,503.8 $ 3,691.1

CAMD Demilitarization – Assembled Chemical Weapons Alternatives 

(ACWA) 6,054.4 6,539.1

Total Environmental Liabilities $ 58,333.9 $ 62,602.6

Other Accrued Environmental Liabilities, Non-Base Realignment and Closure (BRAC), Other 

consists primarily of Formerly Utilized Sites Remedial Action Program (FUSRAP) 

remediation. The FUSRAP remediates radiological contamination from the Department of 

Energy’s U.S. Atomic Energy and Weapons Program.

The unrecognized portion of the estimated total cleanup costs associated with General 

Property, Plant, and Equipment (PP&E) is $3.2 billion for FY 2013. The amount reported 

does not accurately reflect the Department’s total unrecognized costs associated with 

General PP&E. The Department is implementing procedures to address deficiencies.
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

103

OTHER DISCLOSURES

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 in accordance with the requirements of the Chemical Weapons 

Convention Treaty.
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

104

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 

previously 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.

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.
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

105

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 is also unable to provide a complete estimate for FUSRAP. The Department has 

ongoing studies and will update its estimate as additional liabilities are identified. In 

addition, not all components of the Department recognize environmental liabilities 

associated with General PP&E due to process and system limitations.

The Department has the potential to incur costs for restoration initiatives in conjunction with 

returning overseas Defense facilities to host nations. The Department is unable to provide a 

reasonable estimate because the extent of required restoration is unknown.
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

106

NOTE 15. OTHER LIABILITIES

Other Liabilities Dollars in Millions

2013

As of September 30 Current Liability Noncurrent 

Liability Total

Intragovernmental

Advances from Others $ 733.0 $ 0.0 $ 733.0

Deposit Funds and Suspense 

Account Liabilities 1,242.6 0.0 1,242.6

Disbursing Officer Cash 1,577.7 0.0 1,577.7

Judgment Fund Liabilities 234.3 0.0 234.3

FECA Reimbursement to the 

Department of Labor 621.3 707.7 1,329.0

Custodial Liabilities 4,498.7 2,383.7 6,882.4

Employer Contribution and 

Payroll Taxes Payable 397.3 0.0 397.3

Other Liabilities 491.4 0.0 491.4

Total Intragovernmental Other $ 9,796.3 $ 3,091.4 $ 12,887.7

Non-Federal

Accrued Funded Payroll and 

Benefits $ 9,857.5 $ 0.0 $ 9,857.5

Advances from Others 4,862.7 0.0 4,862.7

Deferred Credits 0.0 0.0 0.0

Deposit Funds and Suspense 

Accounts 377.7 0.0 377.7

Nonenvironmental Disposal 

Liabilities

Military Equipment 

(Nonnuclear) 161.5 63.1 224.6

Excess/Obsolete Structures 79.2 218.9 298.1

Conventional Munitions 

Disposal 0.0 2,136.6 2,136.6

Accrued Unfunded Annual Leave 10,504.7 0.0 10,504.7

Capital Lease Liability 171.7 14.3 186.0

Contract Holdbacks 1,569.9 0.2 1,570.1

Employer Contribution and 

Payroll Taxes Payable 398.9 0.0 398.9

Contingent Liabilities 523.7 6,296.1 6,819.8

Other Liabilities 156.8 0.0 156.8

Total Non-Federal Other 

Liabilities $ 28,664.3 $ 8,729.2 $ 37,393.5

Total Other Liabilities $ 38,460.6 $ 11,820.6 $ 50,281.2
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

107

Other Liabilities Dollars in Millions

2012

As of September 30 Current Liability Noncurrent 

Liability Total

Intragovernmental

Advances from Others $ 1,185.8 $ 0.0 $ 1,185.8

Deposit Funds and Suspense 

Account Liabilities 153.3 0.0 153.3

Disbursing Officer Cash 1,889.4 0.0 1,889.4

Judgment Fund Liabilities 328.1 0.0 328.1

FECA Reimbursement to the 

Department of Labor 616.9 756.1 1,373.0

Custodial Liabilities 4,647.9 2,508.0 7,155.9

Employer Contribution and 

Payroll Taxes Payable 365.6 0.0 365.6

Other Liabilities 490.5 0.0 490.5

Total Intragovernmental Other $ 9,677.5 $ 3,264.1 $ 12,941.6

Non-Federal

Accrued Funded Payroll and 

Benefits $ 9,387.2 $ 0.0 $ 9,387.2

Advances from Others 4,225.2 0.0 4,225.2

Deferred Credits 0.0 0.0 0.0

Deposit Funds and Suspense 

Accounts 473.1 0.0 473.1

Nonenvironmental Disposal 

Liabilities

Military Equipment 

(Nonnuclear) 151.3 26.5 177.8

Excess/Obsolete Structures 66.1 525.6 591.7

Conventional Munitions 

Disposal 0.0 2,136.6 2,136.6

Accrued Unfunded Annual Leave 10,638.2 0.0 10,638.2

Capital Lease Liability 184.0 22.3 206.3

Contract Holdbacks 964.2 0.2 964.4

Employer Contribution and 

Payroll Taxes Payable 371.4 0.0 371.4

Contingent Liabilities 531.9 6,421.2 6,953.1

Other Liabilities 182.6 0.5 183.1

Total Non-Federal Other 

Liabilities $ 27,175.2 $ 9,132.9 $ 36,308.1

Total Other Liabilities $ 36,852.7 $ 12,397.0 $ 49,249.7
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

108

Intragovernmental Other Liabilities primarily consists of unemployment compensation 

liabilities.

Non-Federal Other Liabilities primarily consist of accruals for services, accrued liabilities for 

inventory owned and managed on behalf of foreign governments, and undistributed 

international tariff receipts.

Contingent Liabilities includes $3.7 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 

Capital Lease Liability Dollars in Millions

2013 – Asset Category

As of September 30

Land and 

Buildings Equipment Other Total

Future Payments Due

2014 $ 30.1 $ 0.0 $ 1.1 $ 31.2

2015 30.7 0.0 0.0 30.7

2016 21.4 0.0 0.0 21.4

2017 22.1 0.0 0.0 22.1

2018 22.5 0.0 0.0 22.5

After 5 Years 146.4 0.0 0.0 146.4

Total Future Lease Payments Due $ 273.2 $ 0.0 $ 1.1 $ 274.3

Less: Imputed Interest Executory Costs 88.3 0.0 0.0 88.3

Net Capital Lease Liability $ 184.9 $ 0.0 $ 1.1 $ 186.0

Capital Lease Liabilities Covered by Budgetary Resources 186.0

Capital Lease Liabilities Not Covered by Budgetary Resources 0.0

Capital Lease Liability Dollars in Millions

2012 – Asset Category

As of September 30

Land and 

Buildings Equipment Other Total

Future Payments Due

2013 $ 17.5 $ 0.1 $ 2.8 $ 20.4

2014 19.6 0.0 1.1 20.7

2015 19.1 0.0 0.0 19.1

2016 10.4 0.0 0.0 10.4

2017 11.7 0.0 0.0 11.7

After 5 Years 126.9 0.0 0.0 126.9

Total Future Lease Payments Due $ 205.2 $ 0.1 $ 3.9 $ 209.2

Less: Imputed Interest Executory Costs 2.9 0.0 0.0 2.9

Net Capital Lease Liability $ 202.3 $ 0.1 $ 3.9 $ 206.3

Capital Lease Liabilities Covered by Budgetary Resources 206.3

Capital Lease Liabilities Not Covered by Budgetary Resources 0.0
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

109

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.

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 reports 44 legal actions with individual claims greater than the 

Department’s FY 2013 materiality threshold of $139.3 million. The total of the 44 actions is 

approximately $13 trillion. Of this amount, the OGC determined that claims totaling 

approximately $7.3 billion are classified “reasonably possible,” $3 trillion are classified 

“remote,” and $10 trillion are classified “unable to determine the probability of loss.” The 

Department also had a number of potential claims that individually did not meet the 

Department's materiality threshold but did meet the individual Components’ thresholds. 

These claims are disclosed in the Components' financial statements. 

Other Commitments and Contingencies

The Department is a party in numerous individual contracts that contain clauses, such as 

price escalation, award fee payments, or dispute resolution, that may result in a future 

outflow of expenditures. Currently, the Department has limited automated system 

processes by which it captures or assesses these potential contingent liabilities. Therefore, 

the amounts reported may not fairly present the Department’s contingent liabilities. 

Contingencies considered both measurable and probable have been recognized as liabilities. 

Refer to Note 15, Other Liabilities, for further information.
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

110

NOTE 17. MILITARY RETIREMENT AND OTHER FEDERAL EMPLOYMENT 

BENEFITS

Military Retirement and Other Federal Employment Benefits Dollars in Millions

2013

As of September 30

Liabilities

(Less: Assets 

Available to Pay 

Benefits)

Unfunded 

Liabilities

Pension and Health Actuarial Benefits

Military Retirement Pensions $ 1,519,779.5 $ (416,190.0) $ 1,103,589.5

Military Retirement Health 

Benefits 243,049.7 0.0 243,049.7

Military Medicare-Eligible Retiree 

Benefits 502,399.5 (186,963.8) 315,435.7

Total Pension and Health 

Actuarial Benefits $ 2,265,228.7 $ (603,153.8) $ 1,662,074.9

Other Benefits

FECA $ 6,749.8 $ 0.0 $ 6,749.8

Voluntary Separation Incentive 

Programs 587.9 (265.6) 322.3

DoD Education Benefits Fund 1,369.3 (1,369.3) 0.0

Other 6,632.1 (5,064.9) 1,567.2

Total Other Benefits $ 15,339.1 $ (6,699.8) $ 8,639.3

Total Military Retirement and 

Other Federal Employment 

Benefits

$ 2,280,567.8 $ (609,853.6) $ 1,670,714.2

Actuarial Cost Method Used: Aggregate Entry-Age Method 

Assumptions: Effective Interest 

Market Value of Investments in Market-based and Marketable Securities: $773 billion
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

111

Military Retirement and Other Federal Employment Benefits Dollars in Millions

2012

As of September 30

Liabilities

(Less: Assets 

Available to Pay 

Benefits)

Unfunded 

Liabilities

Pension and Health Actuarial Benefits

Military Retirement Pensions $ 1,477,918.0 $ (371,657.5) $ 1,106,260.5

Military Retirement Health 

Benefits 298,216.9 0.0 298,216.9

Military Medicare-Eligible Retiree 

Benefits 532,781.3 (174,703.7) 358,077.6

Total Pension and Health 

Actuarial Benefits $ 2,308,916.2 $ (546,361.2) $ 1,762,555.0

Other Actuarial Benefits

FECA $ 6,540.8 $ 0.0 $ 6,540.8

Voluntary Separation Incentive 

Programs 678.2 (308.5) 369.7

DoD Education Benefits Fund 1,385.4 (1,385.4) 0.0

Other 6,403.7 (4,666.3) 1,737.4

Total Other Actuarial Benefits $ 15,008.1 $ (6,360.2) $ 8,647.9

Total Military Retirement and 

Other Federal Employment 

Benefits

$ 2,323,924.3 $ (552,721.4) $ 1,771,202.9

Actuarial Cost Method Used: Aggregate Entry-Age Method 

Assumptions: Effective Interest 

Market Value of Investments in Market-based and Marketable Securities: $807.7 billion
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

112

Military Retirement and Other Federal Employment Benefits Dollars in Millions

2013

As of September 30

Military 

Retirement 

Pensions

Military PreMedicare 

Eligible 

Retiree 

Health 

Benefits

Military 

MedicareEligible 

Retiree Health 

Benefits

Voluntary 

Separation 

Incentive 

Programs

DoD 

Education 

Benefits Fund

Beginning Actuarial Liability $ 1,477,918.0 $ 298,216.9 $ 532,781.3 $ 678.2 $ 1,385.4

Normal Cost Liability 31,699.1 10,777.2 11,496.6 0.0 166.2

Interest Cost 67,465.6 13,949.8 24,817.7 21.3 53.4

Plan Amendments 0.0 (3,265.0) (43,560.9) 0.0 0.0

Experience Losses (Gains) (14,703.5) 5,837.3 (9,615.3) (11.0) (65.0)

Other factors (0.2) (0.2) 0.0 0.1 136.2

Subtotal: Expenses before 

Losses (Gains) from Actuarial 

Assumption Changes

84,461.0 27,299.1 (16,861.9) 10.4 290.8

Actuarial (Gain)/Loss due to :

Changes in trend assumptions 0.0 (16,894.7) (24,355.0) 0.0 0.0

Changes in assumptions other 

than trend 11,906.3 (53,967.9) 20,467.0 5.7 0.0

Subtotal: Losses (Gains) from 

Actuarial Assumption Changes 11,906.3 (70,862.6) (3,888.0) 5.7 0.0

Total Expenses 96,367.3 (43,563.5) (20,749.9) 16.1 290.8

Less Benefit Outlays 54,505.8 11,603.7 9,631.9 106.4 306.9

Total Changes in Actuarial 

Liability $ 41,861.5 $ (55,167.2) $ (30,381.8) $ (90.3) $ (16.1)

Ending Actuarial Liability $ 1,519,779.5 $ 243,049.7 $ 502,399.5 $ 587.9 $ 1,369.3

The Department complies with SFFAS No. 33, “Pensions, Other Retirement Benefits, and 

Other Postemployment Benefits: Reporting the Gains and Losses from Changes in 

Assumptions and Selecting Discount Rates and Valuation Dates.” The standard requires the 

separate presentation of gains and losses from changes in long-term assumptions used to 

estimate liabilities associated with pensions, other retirement and postemployment benefits. 

The SFFAS No. 33 also provides a standard for selecting the discount rate and valuation 

date used in estimating these liabilities.

Military Retirement Pensions

The Military Retirement Fund is a defined benefit plan authorized by Public Law (PL) 98-94

to provide funds used to pay annuities and pensions to retired military personnel and their 

survivors. The Department of Defense (DoD) 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). Due to reporting deadlines, the current year actuarial 

present value of projected plan benefits rolls forward from the prior year’s valuation results. 

The actuaries used the following assumptions to calculate the FY 2013 roll-forward amount:
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

113

Military Retirement Pensions Inflation Salary Interest

Fiscal Year 2013 1.7% (actual) 1.7% (actual) 4.6%

Fiscal Year 2014 2.0% (estimated) 1.0% (estimated) 4.3%

Long Term 2.4% 2.8% 4.3%

Actuarial Cost Method Used: Aggregate Entry-Age Normal Method

Market Value of Investments in Market-Based and Marketable Securities: $526.2 billion

Assumed Interest Rate: 4.3%

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 October 1, 2025. All subsequent gains and losses experienced are 

amortized over a 30-year period. 

Military Retirement Health Benefits (MRHB)

The MRHB are post-retirement benefits the Department provides to non-Medicare-eligible 

military retirees and other eligible beneficiaries through private sector health care providers 

and the Department’s medical treatment facilities. The actuaries calculate actuarial liabilities 

annually using assumptions and actual experience. In FY 2013, the actuaries revised the 

cost basis for the estimate to include only operations and maintenance and military 

personnel costs in order to reflect the operational environment of the Military Health System 

as it relates to retirees. For the FY 2013 actuarial liability calculation, actuaries used the 

following assumptions: 

MHRB Medical Trend FY 2012 –

FY 2013

Ultimate Rate 

FY 2037

Medicare Inpatient (Direct Care) 0.13% 5.15%

Medicare Outpatient (Direct Care) 2.13% 5.15%

Medicare Prescriptions (Direct Care) 0.00% 5.15%

Non-Medicare Inpatient (Direct Care) 4.00% 5.15%

Non-Medicare Outpatient (Direct Care) 5.50% 5.15%

Non-Medicare Prescriptions (Direct Care) 3.10% 5.15%

Non-Medicare Inpatient (Purchased Care) 2.70% 5.15%

Non-Medicare Outpatient (Purchased Care) 4.48% 5.15%

Non-Medicare Prescriptions (Purchased Care) 3.81% 5.15%

U.S. Family Health Plan (USFHP) (Purchased Care) 4.39% 5.15%

Actuarial Cost Method Used: Aggregate Entry-Age Normal Method

Assumed Interest Rate: 4.4%

Medicare-Eligible Retiree Health Care Fund (MERHCF) Benefits 

In accordance with PL 106-398, MERHCF accumulates funds to finance the health care 

program liabilities of Medicare-eligible retirees for all the Uniformed Services and specific 

Medicare-eligible beneficiaries. The DoD Board of Actuaries approves the long-term 

assumptions for medical trends and interest. The actuaries calculate the actuarial liabilities 

annually using actual experience (e.g., mortality and retirement rates, direct care costs, 

purchased care). Due to reporting deadlines, the current year actuarial present value of 

projected plan benefits rolls forward from the prior year’s results. The actuaries used the 

following assumptions to calculate the FY 2013 roll-forward amount:
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

114

MERHCF Benefits – Medical Trend FY 2012 –

FY 2013

Ultimate Rate 

FY 2037

Medicare Inpatient (Direct Care) 0.13% 5.15%

Medicare Inpatient (Purchased Care) 2.13% 5.15%

Medicare Outpatient (Direct Care) 2.13% 5.15%

Medicare Outpatient (Purchased Care) 3.13% 5.15%

Medicare Prescriptions (Direct Care) 0.00% 5.15%

Medicare Prescriptions (Purchased Care) 4.54% 5.15%

Medicare USFHP (Purchased Care) 3.14% 5.15%

Actuarial Cost Method Used: Aggregate Entry-Age Normal Method

Market Value of Investments in Market-Based and Marketable Securities: $244.4 billion

Assumed Interest Rate: 4.4%

The MERHCF liability includes Medicare liabilities for all Uniformed Services. The 

$502.4 billion liability includes $490.8 billion for the Department, $10.3 billion for the Coast 

Guard, $1.2 billion for the Public Health Service and $76.0 million for National Oceanic and 

Atmospheric Administration (NOAA). The FY 2013 contributions from each of the Uniformed 

Services were $8.3 billion from the Department, $201.6 million from the Coast Guard, 

$27.6 million from the Public Health Service, and $1.4 million from NOAA.

Federal Employees Compensation Act (FECA) 

The Department of Labor (DOL) annually determines the liability for future workers’ 

compensation benefits, which includes the expected liability for death, disability, medical, 

and miscellaneous costs for approved compensation cases, plus a component for 

incurred-but-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 using the OMB’s economic assumptions for 10-year 

U.S. Treasury notes and bonds. An interest rate for wage benefits of 2.7 percent was 

assumed for year one and 3.1 percent for year two and thereafter. An interest rate for 

medical benefits of 2.3 percent was assumed for year one and 2.9 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) 2013 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

2014 1.67% 3.46%

2015 1.80% 3.82%

2016 2.20% 3.83%

2017 2.20% 3.82%

2018+ 2.20% 3.82%
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

115

The model’s resulting projections were analyzed by DOL to ensure the estimates were 

reliable. The analysis was based on four tests: (1) a sensitivity analysis of the model of 

economic assumptions; (2) a comparison of the percentage change in the liability amount to 

the percentage change in the actual incremental payments; (3) a comparison of the 

incremental paid losses per case (a measure of case-severity) in CBY 2013 to the average 

pattern observed during the prior three charge back years; and (4) a comparison of the 

estimated liability per case in the 2013 projection to the average pattern for the projections 

for the most recent three years.

Voluntary Separation Incentive (VSI) Program 

The VSI Program was established by PL 102-190 to reduce the number of military personnel 

on active duty. The DoD Board of Actuaries approved the assumed annual interest rate of 

3.2 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. 

Market Value of Investments in Market-based and Marketable Securities: $278.4 million

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 annually based on the assumed interest rate of 3.5% that was approved by the DoD 

Board of Actuaries. 

Market Value of Investments in Market-based and Marketable Securities: $2.1 billion

Other Federal Employment Benefits

Other Federal Employment Benefits primarily consists of accrued pensions and annuities, 

and an estimated liability for incurred-but-not-reported medical claims not processed prior 

to fiscal year-end.
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

116

NOTE 18. GENERAL DISCLOSURES RELATED TO THE STATEMENT OF NET 

COST

Costs and Exchange Revenue Dollars in Millions

As of September 30 2013 2012

Military Retirement Benefits 

1. Gross Cost

A. Intragovernmental Cost $ 205.3 $ 6.1

B. Non-Federal Cost $ 64,217.0 $ 85,564.3

C. Total Cost $ 64,422.3 $ 85,570.4

2. Earned Revenue

A. Intragovernmental Revenue $ (22,387.6) $ (19,073.3)

B. Non-Federal Revenue $ 0.0 $ 0.0

C. Total Revenue $ (22,387.6) $ (19,073.3)

3. Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ 8,018.2 $ 88,311.0

Total Net Cost $ 50,052.9 $ 154,808.1

Civil Works

1. Gross Cost

A. Intragovernmental Cost $ 1,465.1 $ 1,435.6

B. Non-Federal Cost $ 8,291.6 $ 9,531.6

C. Total Cost $ 9,756.7 $ 10,967.2

2. Earned Revenue

A. Intragovernmental Revenue $ (1,135.5) $ (1,393.5)

B. Non-Federal Revenue $ (700.4) $ (774.1)

C. Total Revenue $ (1,835.9) $ (2,167.6)

3. Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ 0.0 $ 0.0

Total Net Cost $ 7,920.8 $ 8,799.6

Military Personnel

1. Gross Cost

A. Intragovernmental Cost $ 30,997.8 $ 38,673.2

B. Non-Federal Cost $ 115,054.3 $ 111,657.3

C. Total Cost $ 146,052.1 $ 150,330.5

2. Earned Revenue

A. Intragovernmental Revenue $ (1,155.6) $ (1,119.5)

B. Non-Federal Revenue $ (3.1) $ (339.1)

C. Total Revenue $ (1,158.7) $ (1,458.6)

3. Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ 0.0 $ 0.0

Total Net Cost $ 144,893.4 $ 148,871.9

Operations, Readiness & Support

1. Gross Cost

A. Intragovernmental Cost $ (49,654.7) $ (56,303.5)

B. Non-Federal Cost $ 342,398.9 $ 352,007.6

C. Total Cost $ 292,744.2 $ 295,704.1

2. Earned Revenue

A. Intragovernmental Revenue $ 8,918.3 $ 13,726.5

B. Non-Federal Revenue $ (40,099.7) $ (48,357.2)
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

117

Costs and Exchange Revenue Dollars in Millions

As of September 30 2013 2012

C. Total Revenue $ (31,181.4) $ (34,630.7)

3. Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ (70,856.8) $ (17,883.7)

Total Net Cost $ 190,706.0 $ 243,189.7

Procurement

1. Gross Cost

A. Intragovernmental Cost $ 31,638.1 $ 30,773.4

B. Non-Federal Cost $ 44,578.0 $ 99,805.4

C. Total Cost $ 76,216.1 $ 130,578.8

2. Earned Revenue

A. Intragovernmental Revenue $ (2,104.6) $ (3,192.3)

B. Non-Federal Revenue $ (935.0) $ (305.7)

C. Total Revenue $ (3,039.6) $ (3,498.0)

3. Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ 0.0 $ 0.0

Total Net Cost $ 73,176.5 $ 127,080.8

Research, Development, Test & Evaluation

1. Gross Cost

A. Intragovernmental Cost $ 21,332.1 $ 22,256.0

B. Non-Federal Cost $ 48,988.9 $ 54,516.6

C. Total Cost $ 70,321.0 $ 76,772.6

2. Earned Revenue

A. Intragovernmental Revenue $ (5,126.6) $ (7,676.9)

B. Non-Federal Revenue $ (2,687.8) $ (1,590.3)

C. Total Revenue $ (7,814.4) $ (9,267.2)

3. Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ 0.0 $ 0.0

Total Net Cost $ 62,506.6 $ 67,505.4

Family Housing & Military Construction

1. Gross Cost

A. Intragovernmental Cost $ 1,494.7 $ 2,019.9

B. Non-Federal Cost $ 34,849.0 $ 29,787.6

C. Total Cost $ 36,343.7 $ 31,807.5

2. Earned Revenue

A. Intragovernmental Revenue $ (7,147.1) $ (8,579.0)

B. Non-Federal Revenue $ (445.0) $ (4,630.4)

C. Total Revenue $ (7,592.1) $ (13,209.4)

3. Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ 0.0 $ 0.0

Total Net Cost $ 28,751.6 $ 18,598.1

Consolidated

1. Gross Cost

A. Intragovernmental Cost $ 37,478.4 $ 38,860.7

B. Non-Federal Cost $ 658,377.7 $ 742,870.4

C. Total Cost $ 695,856.1 $ 781,731.1

2. Earned Revenue

A. Intragovernmental Revenue $ (30,138.7) $ (27,308.0)
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

118

Costs and Exchange Revenue Dollars in Millions

As of September 30 2013 2012

B. Non-Federal Revenue $ (44,871.0) $ (55,996.8)

C. Total Revenue $ (75,009.7) $ (83,304.8)

3. Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ (62,838.6) $ 70,427.3

4. Costs Not Assigned to Programs $ 0.0 $ 0.0

5. (Less: Earned Revenues) Not Attributed to Programs $ 0.0 $ 0.0

Total Net Cost $ 558,007.8 $ 768,853.6

Abnormal Balances

Operations, Readiness & Support Intragovernmental Gross Cost and Earned Revenue on the 

SNC have abnormal balances of $49.7 billion and $9.0 billion, respectively. The current 

business practice is to include all elimination reporting in this program group, which results 

in the abnormal balance presentation.

Other Disclosures

The 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 

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

amended by SFFAS No. 30, “Inter-Entity Cost Implementation.”

Intragovernmental costs and revenue 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 SNC presents information based on budgetary obligation, disbursement, and collection 

transactions, as well as data from nonfinancial feeder systems. General Fund data is 

primarily derived from budgetary transactions (obligations, disbursements, and collections), 

data from nonfinancial feeder systems, and accruals (payroll expenses, accounts payable, 

and environmental liabilities). Working Capital Funds primarily record transactions on an 

accrual basis; however, the systems do not always capture actual costs timely. 

The Department’s accounting systems generally do not capture information relative to 

heritage assets separately and distinctly from normal operations.
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

119

The Department’s military retirement and postemployment costs are reported in accordance 

with 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.” 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. SFFAS No. 33

also provides a standard for selecting the discount rate and valuation date used to estimate 

these liabilities.

NOTE 19. DISCLOSURES RELATED TO THE STATEMENT OF CHANGES IN NET 

POSITION

Other Financing Sources, Other consists primarily of nonexchange gains and losses 

necessary to reconcile the proprietary and budgetary amounts, as well as gains and losses 

on disposition of assets. Due to financial system limitations, the Department adjusts for 

these unreconciled differences.

Effective with FY 2013 reporting, the Department has elected an alternative presentation for 

the Statement of Changes in Net Position (SCNP) as provided for in SFFAS 43: “Funds from 

Dedicated Collections: Amending SFFAS 27, Identifying and Reporting Earmarked Funds.”

Prior to the implementation of SFFAS 43, the SCNP contained separate columns for 

reporting of funds from dedicated collections. Beginning in FY 2013, the SCNP includes a 

reference to the “Funds from Dedicated Collections” footnote and no longer includes a 

separate column on the face of the statement.

Appropriations Received on the Statement of Budgetary Resources (SBR) exceed 

Appropriations Received on the SCNP by $23.4 billion. This difference represents 

$123.9 billion in trust and special fund receipts reported as exchange revenue on the 

Statement of Net Cost and $0.2 billion in receipts and appropriations made available for 

obligation included in appropriations on the SBR, offset by $57.0 billion in receipts and 

appropriations temporarily precluded from obligation, $42.7 billion in permanent reductions, 

and $1.0 billion in receipts unavailable for obligation upon collection and current year 

authority transfers. 

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 2013 2012

Net Amount of Budgetary Resources Obligated for Undelivered Orders at 

the End of the Period. $ 458,821.6 $ 486,886.1

Reconciliation Differences

Appropriations Received on the SBR exceed Appropriations Received on the Statement of 

Changes in Net Position by $23.4 billion. This difference represents $123.9 billion in trust 

and special fund receipts reported as exchange revenue on the Statement of Net Cost and 

$0.2 billion in receipts and appropriations made available for obligation included in 

appropriations on the SBR, offset by $57.0 billion in receipts and appropriations temporarily 
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

120

precluded from obligation, $42.7 billion in permanent reductions, and $1.0 billion in receipts 

unavailable for obligation upon collection and current year authority transfers.

In accordance with OMB guidance, $109.7 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 for 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 FY 2012 column includes $109.9 billion more in budget authority than reported in the 

2012 actual column of the President’s FY 2014 Budget. The difference is primarily due to 

duplicate reporting in the SBR of the Military Services’ contributions and U.S. Treasury’s 

payments to the Military Retirement Trust Fund and Medicare-Eligible Retiree Health Care Fund.

The SBR FY 2012 column includes $449.6 million more in obligations than reported in the 

2012 actual column of the President’s FY 2014 Budget. The difference is primarily due to the 

timing of the recognition of obligations.

The SBR FY 2012 column includes $25.6 billion less in net outlays than reported in the 2012 

actual column of the President’s FY 2014 Budget. The SBR reduces net outlays by the 

distributed offsetting receipts. The President’s Budget does not reduce the Department’s 

outlays by the distributed offsetting receipts.

Permanent Indefinite Appropriations

The Department of Defense 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)
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

121

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), Title United States 

Code; 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)

Department of Defense Vietnam War Commemoration Fund, Defense (P.L. 110-181, 

122 Stat. 141 (Sec. 598))
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

122

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 Obligations Incurred

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 obligations incurred:

Year Ended September 30, 2013 Dollars in Billions

Apportionment 

Category A

Apportionment 

Category B

Exempt From 

Apportionment Total

Obligations Incurred – Direct 464.6 183.8 136.7 785.1

Obligations Incurred – Reimbursable 33.7 135.2 0.1 169.0

Totals Obligations Incurred: $ 498.3 $ 319.0 $ 136.8 $ 954.1

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

The SBR includes intra-entity transactions because the statements are presented as 

combined.

The Department utilizes borrowing authority for the Military Housing Privatization Initiative 

and the Armament Retooling and Manufacturing Support Initiative. Borrowing authority is 

used in accordance with OMB Circular A-129, “Managing Federal Credit Programs.”

The Department received additional funding of $87.3 billion to cover obligations incurred 

above baseline operations in support of contingency operations.
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

123

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 2013 2012

Resources Used to Finance Activities

Budgetary Resources Obligated:

Obligations incurred $ 954,067.2 $ 1,059,305.0

Less: Spending authority from offsetting collections and recoveries (-) (230,340.8) (258,964.9)

Obligations net of offsetting collections and recoveries $ 723,726.4 $ 800,340.1

Less: Offsetting receipts (-) (82,767.6) (79,238.4)

Net obligations $ 640,958.8 $ 721,101.7

Other Resources:

Donations and forfeitures of property $ 9.9 $ 37.5

Transfers in/out without reimbursement (+/-) (14.6) 66.1

Imputed financing from costs absorbed by others 4,896.8 5,048.1

Other (+/-) 32,173.5 (10,465.7)

Net other resources used to finance activities $ 37,065.6 $ (5,314.0)

Total resources used to finance activities $ 678,024.4 $ 715,787.7

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 (-) $ 28,064.4 $ (16,379.3)

Unfilled Customer Orders (1,767.8) 3,715.0

Resources that fund expenses recognized in prior Periods (-) (92,516.0) (19,822.5)

Budgetary offsetting collections and receipts that do not affect Net Cost of 

Operations 2,122.8 966.1

Resources that finance the acquisition of assets (-) (105,940.4) (105,865.0)

Other resources or adjustments to net obligated resources that do not 

affect Net Cost of Operations:

Less: Trust or Special Fund Receipts Related to exchange in the 

Entity’s Budget (-) 0.0 0.0

Other (+/-) (32,309.2) 10,323.4

Total resources used to finance items not part of the Net Cost of 

Operations $ (202,346.2) $ (127,062.3)

Total resources used to finance the Net Cost of Operations $ 475,678.2 $ 588,725.4

Components of the Net Cost of Operations that will not Require or Generate Resources in the Current 

Period

Components Requiring or Generating Resources in Future Period:

Increase in annual leave liability $ 189.5 $ 253.6

Increase in environmental and disposal liability 624.1 657.2

Upward/Downward reestimates of credit subsidy expense (+/-) (24.8) (12.0)

Increase in exchange revenue receivable from the public (-) 194.0 84.6

Other (+/-) 42,826.9 124,388.8

Total components of Net Cost of Operations that will Require or 

Generate Resources in future periods $ 43,809.7 $ 125,372.2

Components not Requiring or Generating Resources:

Depreciation and amortization $ 44,524.6 $ 47,978.8

Revaluation of assets or liabilities (+/-) 3,528.3 2,693.3

Other (+/-)

Trust Fund Exchange Revenue (51,893.3) (50,977.7)
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

124

Reconciliation of Net Cost of Operations to Budget Dollars in Millions

As of September 30 2013 2012

Cost of Goods Sold 66,612.8 78,140.6

Operating Materiel and Supplies Used 12,936.2 27,873.0

Other (37,188.7) (50,952.0)

Total Components of Net Cost of Operations that will not Require or 

Generate Resources $ 38,519.9 $ 54,756.0

Total components of Net Cost of Operations that will not Require or 

Generate Resources in the current period $ 82,329.6 $ 180,128.2

Net Cost of Operations $ 558,007.8 $ 768,853.6

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:

Dollars in Millions

Resources that Finance the Acquisition of Assets $ 6,308.4

Other Components not Requiring or Generating Resources $ 79,345.8

Total Amount $ 85,654.2

The following Reconciliation of Net Cost of Operations to Budget lines are presented as 

combined instead of consolidated due to intra-agency budgetary transactions not being 

eliminated:

• Obligations Incurred

• Less: Spending Authority from Offsetting Collections and Recoveries

• Obligations Net of Offsetting Collections and Recoveries

• Less: Offsetting Receipts

• Net Obligations

• Undelivered Orders

• Unfilled Customer Orders

Other Resources, Other primarily consists of non-exchange gains and losses necessary to 

reconcile the proprietary and budgetary amounts, as well as gains and losses from 

disposition of assets. 

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 necessary to 

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 and other expenses not requiring budgetary resources.
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

125

NOTE 22. DISCLOSURES RELATED TO INCIDENTAL CUSTODIAL 

COLLECTIONS

The Department collected $9.8 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.

NOTE 23. FUNDS FROM DEDICATED COLLECTIONS

Funds from Dedicated Collections Dollars in Millions

2013

As of September 30

Harbor 

Maintenance 

Trust Fund

Rivers and 

Harbors 

Contributed 

and Advance 

Fund

Other Funds Eliminations Consolidated 

Total

Balance Sheet

Assets

Fund Balance with Treasury $ 107.5 $ 1,093.5 $ 949.0 $ 0.0 $ 2,150.0

Investments 7,877.5 0.0 911.9 0.0 8,789.4

Accounts and Interest Receivable 448.8 3.9 5.0 (2.9) 454.8

Other Assets 659.6 30.0 804.9 0.0 1,494.5

Total Assets $ 9,093.4 $ 1,127.4 $ 2,670.8 $ (2.9) $ 12,888.7

Liabilities and Net Position

Accounts Payable and Other 

Liabilities 13.0 1,125.4 74.2 (10.6) 1,202.0

Total Liabilities $ 13.0 $ 1,125.4 $ 74.2 $ (10.6) $ 1,202.0

Unexpended Appropriations $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0

Cumulative Results of Operations $ 9,080.4 $ 2.0 $ 2,596.6 $ 1,028.8 $ 12,707.8

Total Liabilities and Net Position $ 9,093.4 $ 1,127.4 $ 2,670.8 $ 1,018.2 $ 13,909.8

Statement of Net Cost

Program Costs $ 145.3 $ 340.9 $ 1,296.1 $ (123.1) $ 1,659.2

Less Earned Revenue 0.0 (366.9) (305.0) 0.1 (671.8)

Net Program Costs 145.3 (26.0) 991.1 (123.0) 987.4

Net Cost of Operations $ 145.3 $ (26.0) $ 991.1 $ (123.0) $ 987.4

Statement of Changes in Net Position

Net Position Beginning of the 

Period $ 8377.2 $ 4.8 $ 2,410.4 $ 0.0 $ 10,792.4

Net Cost of Operations 145.3 (26.0) 991.1 (123.0) 987.4

Budgetary Financing Sources 848.6 0.0 1129.2 938.8 2,916.6

Other Financing Sources (0.1) (28.8) 48.1 (33.0) (13.8)

Change in Net Position $ 703.2 $ (2.8) $ 186.2 $ 1,028.8 $ 1,915.4

Net Position End of Period $ 9,080.4 $ 2.0 $ 2,596.6 $ 1,028.8 $ 12,707.8
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

126

Funds from Dedicated Collections Dollars in Millions

Restated 2012

As of September 30

Harbor 

Maintenance 

Trust Fund

Rivers and 

Harbors 

Contributed 

and Advance 

Fund

Other Funds Eliminations Consolidated

Total

Balance Sheet

Assets

Fund Balance with Treasury $ 102.7 $ 979.2 $ 862.5 $ 0.0 $ 1,944.4

Investments 7,112.1 0.0 838.1 0.0 7,950.2

Accounts and Interest Receivable 475.4 2.7 6.2 (7.3) 477.0

Other Assets 700.7 31.0 744.3 0.0 1,476.0

Total Assets $ 8,390.9 $ 1,012.9 $ 2,451.1 $ (7.3) $ 11,847.6

Liabilities and Net Position

Accounts Payable and Other 

Liabilities 13.7 1,008.0 40.8 (16.4) 1,046.1

Total Liabilities $ 13.7 $ 1,008.0 $ 40.8 $ (16.4) $ 1,046.1

Unexpended Appropriations $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0

Cumulative Results of Operations 8,377.2 4.9 2,410.3 1,175.2 11,967.6

Total Liabilities and Net Position $ 8,390.9 $ 1,012.9 $ 2,451.1 $ 1,158.8 $ 13,013.7

Statement of Net Cost

Program Costs $ 36.2 $ 464.4 $ 1326.5 $ (110.8) $ 1,716.3

Less Earned Revenue 0.0 (499.2) (317.1) 0.2 (816.1)

Net Program Costs 36.2 (34.8) 1,009.4 (110.6) 900.2

Net Cost of Operations $ 36.2 $ (34.8) $ 1,009.4 $ (110.6) $ 900.2

Statement of Changes in Net Position

Net Position Beginning of the 

Period $ 7,598.8 $ 12.2 $ 2,570.8 $ 0.0 $ 10,181.8

Net Cost of Operations 36.2 (34.8) 1,009.4 (110.6) 900.2

Budgetary Financing Sources 832.8 0.0 859.8 991.9 2,684.5

Other Financing Sources (18.2) (42.1) (10.9) 72.7 1.5

Change in Net Position $ 778.4 $ (7.3) $ (160.5) $ 1,175.2 $ 1,785.8

Net Position End of Period $ 8,377.2 $ 4.9 $ 2,410.3 $ 1,175.2 $ 11,967.6

Restatements

In accordance with clarifying language provided by the SFFAS 43: “Funds from Dedicated 

Collections: Amending SFFAS 27, Identifying and Reporting Earmarked Funds,” FY 2012 

balances were realigned. After evaluating funds against the SFFAS 43 criteria, the following 

funds are not considered Funds from Dedicated Collections:

• Military Retirement Fund 

• Medicare-Eligible Retiree Health Care Fund

• Armament Retooling and Manufacturing Support Initiative

• Military Housing Privatization Initiative
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

127

• Education Benefit Fund

• Voluntary Separation Incentive Fund

Other Disclosures

The SFFAS 43 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 the U.S. Treasury. 

There has been no legislation significantly altering the purposes of the funds.

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. The United States Army Corps of 

Engineers (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 

Fiscal Services (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 prosecution 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 4061-6a note. The USACE charges and collects Special 

Recreation Use Fees at campgrounds located at lakes or 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 
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

128

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 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 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 develop, review, 

evaluate, and approve a plan to achieve a goal of “no net loss of wetlands” in coastal 

Louisiana. The USACE is also responsible for allocating funds. 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 operating expenses and capital purchases of the Commissary 

System, 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 
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

129

modifications to prior year construction projects, and maintenance and repair of facilities 

and equipment.

NOTE 24. FIDUCIARY ACTIVITIES

Schedule of Fiduciary Activity Dollars in Millions

As of September 30 2013 2012

Fiduciary net assets, beginning of year $ 158.7 $ 199.5

Contributions 194.1 222.5

Investment earnings 12.4 15.2

Distributions to and on behalf of beneficiaries (223.3) (278.5)

Increase/(Decrease) in fiduciary net assets (16.8) (40.8)

Fiduciary net assets, end of period $ 141.9 $ 158.7

Schedule of Fiduciary Net Assets Dollars in Millions

As of September 30 2013 2012

Fiduciary Assets

Cash and cash equivalents $ 141.9 $ 158.7

Total Fiduciary Net Assets $ 141.9 $ 158.7

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 of capital leases. 

Payments are expensed over the life of the lease. Office space is the largest component of 

land and building leases. Future year cost projections use the Consumer Price Index.

Other Disclosures Dollars in Millions

2013 – Asset Category

As of September 30

Land and 

Buildings Equipment Other Total

Entity as Lessee – Operating Leases

Future Payments Due

Fiscal Year 2014 $ 509.4 $ 35.5 $ 55.7 $ 600.6

Fiscal Year 2015 516.4 35.1 57.4 608.9

Fiscal Year 2016 516.2 35.2 59.4 610.8

Fiscal Year 2017 520.7 35.4 61.4 617.5

Fiscal Year 2018 511.4 35.5 63.6 610.5

After 5 Years 1,287.8 4.3 66.0 1,358.1

Total Future Lease Payments Due $ 3,861.9 $ 181.0 $ 363.5 $ 4,406.4
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

130

Other leases are primarily commercial leases with the general public and include automobile 

leases. 

NOTE 26. RESTATEMENTS

During FY 2013, the Department implemented SFFAS 43, “Funds from Dedicated 

Collections: Amending SFFAS 27, Identifying and Reporting Earmarked Funds.” SFFAS 43

provides clarifying language when classifying funds and additional reporting alternatives for 

financial statement presentation and note disclosure. Prior year balances were restated to 

comply with the current presentation. Refer to Note 19, Disclosures on Statement of 

Changes in Net Position and Note 23, Funds from Dedicated Collections, for additional 

information. 
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

131

REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION

Federal financial reporting requires DoD to report on its stewardship over certain resources 

that cannot be measured in traditional financial reports. These resources do not meet the 

criteria for assets and liabilities required to be reported in the financial statements, but are 

important to understand the operations and financial condition of DoD at the date of the 

financial statements and in subsequent periods.

The Department’s stewardship investments are comprised of, and are measured in terms of, 

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 2013 through 2009 Dollars in Millions

Categories 2013 2012 2011 2010 2009

Transferred Assets:

National Defense Mission Related $ 1,376.8 $ 1,445.4 $ 2,304.5 $ 2,126.2 $ 1,224.7

Funded Assets:

National Defense Mission Related $ 11.8 $ 7.7 $ 12.0 $ 0.0 $ 26.7

Total $ 1,388.6 $ 1,453.1 $ 2,316.5 $ 2,126.2 $ 1,251.4

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 2009 – FY 2013 for all DoD Components. The definition for each type of R&D Category 

and Subcategories are explained below.

Basic Research is the systematic study to gain knowledge or understanding of the 

fundamental aspects of phenomena and of observable facts without specific applications, 

processes, or products in mind. Basic Research involves the gathering of a fuller knowledge 

or understanding of the subject under study. Major outputs are scientific studies and 

research papers.
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

132

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.
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

133

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 2013 2012 2011 2010 2009

Basic Research $ 1,841.5 $ 1,645.3 $ 1,816.6 $ 1,805.5 $ 821.0

Applied Research 5,477.4 5,819.3 6,848.3 5,758.4 2,604.6

Development

Advanced Technology 

Development 4,898.3 5,868.0 6,024.3 6,353.4 2,263.2

Advanced Component 

Development and Prototypes 12,464.8 13,005.0 13,964.2 14,304.6 12,148.3

System Development and 

Demonstration 12,524.6 11,926.3 13,882.0 15,156.7 21,501.9

Research, Development, Test 

and Evaluation Management 

Support

4,906.5 5,640.5 5,659.2 5,503.6 5,141.3

Operational Systems 

Development 21,180.9 23,274.6 23,861.3 23,986.2 42,450.6

Totals: $ 63,294.0 $ 67,179.0 $ 72,055.9 $ 72,868.4 $ 86,930.9
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

134

REQUIRED SUPPLEMENTARY INFORMATION

This section includes the deferred maintenance and repairs information and Statement of 

Disaggregated Budgetary Resources.

REAL PROPERTY DEFERRED MAINTENANCE AND REPAIRS

The deferred maintenance and repairs amount is based on facility Q-ratings found in the 

Department’s real property inventory. Q-ratings represent work needed to bring a facility to 

a fully serviceable condition with no repair needs. The reported deferred maintenance is the 

difference between the facility Q-rating and the target Q-rating that represents the 

acceptable operating condition established by each Component within the Department. The 

percentage column reflects the percent of total plant replacement value for each category 

represented by deferred maintenance.

Facility Categories are as follows:

• Category 1: Buildings, Structures, and Utilities that are enduring and required to support 

an ongoing mission, including multi-use Heritage Assets.

• Category 2: Buildings, Structures, and Utilities that are excess to requirements or 

planned for replacement or disposal, including multi-use Heritage Assets.

• Category 3: Buildings, Structures, and Utilities that are Heritage Assets. 

Real Property Deferred Maintenance and Repairs

As of September 30, 2013 Dollars in Millions

Property Type

Current Fiscal Year (CFY)

1. Plant 

Replacement 

Value

2. Required Work 

(Deferred 

Maintenance & 

Repair)

3. Percentage

1. Category 1 $ 948,609 $ 96,679 10%

2. Category 2 $ 28,993 $ 4,425 15%

3. Category 3 $ 21,641 $ 3,480 18%
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

135

Military Equipment Deferred Maintenance and Repairs

Depot maintenance requirements for military equipment are developed during the annual 

budget process. The table below shows the deferred unfunded requirements for the depot 

maintenance program.

Military Equipment Deferred Maintenance and Repairs

For Fiscal Year Ended September 30, 2013

Major Categories Dollars in Millions

1. Aircraft $ 618.7

2. Automotive Equipment $ 78.4

3. Combat Vehicles $ 61.7

4. Construction Equipment $ 8.7

5. Electronics and Communications Systems $ 138.8

6. Missiles $ 116.6

7. Ships $ 707.6

8. Ordnance Weapons and Munitions $ 64.8

9. All Other Items Not Identified to above Categories $ 366.3

Total $ 2,161.6
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

136

Statement of Disaggregated 

Budgetary Resources 2013

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

2013 Combined 2012 Combined

Budgetary Resources

Unobligated balance, brought 

forward, October 1 $ 2,463.8 $ 63,347.7 $ 15,203.9 $ 16,057.9 $ 0.0 $ 8,610.1 $ 40,009.1 $ 145,692.5 $ 162,271.1

Adjustment to unobligated balance 

brought forward, Oct 1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Unobligated balance brought 

forward, October 1, as adjusted 2,463.8 63,347.7 15,203.9 16,057.9 0.0 8,610.1 40,009.1 145,692.5 162,271.1

Recoveries of prior year unpaid 

obligations 14,394.5 12,838.5 2,665.7 2,431.7 0.0 415.3 30,426.9 63,172.6 65,533.9

Other changes in unobligated 

balance (406.3) (1,770.8) (825.5) (301.7) 0.0 0.0 (10,513.6) (13,817.9) (12,952.1)

Unobligated balance from prior year 

budget authority, net 16,452.0 74,415.4 17,044.1 18,187.9 0.0 9,025.4 59,922.4 195,047.2 214,852.9

Appropriations (discretionary and 

mandatory) 146,740.1 95,634.8 60,131.7 6,995.5 63,194.3 10,431.7 350,407.8 733,535.9 792,178.8

Borrowing Authority (discretionary 

and mandatory) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Contract Authority (discretionary and 

mandatory) 0.0 0.0 0.0 0.0 0.0 0.0 65,506.0 65,506.0 80,486.2

Spending Authority from offsetting 

collections (discretionary and 

mandatory)

1,246.8 2,664.00 7,695.8 5,129.6 128.5 10,821.8 76,026.2 103,712.7 117,242.4

Total Budgetary Resources $ 164,438.9 $ 172,714.2 $ 84,871.6 $ 30,313.0 $ 63,322.8 $ 30,278.9 $ 551,862.4 $ 1,097,081.8 $ 1,204,760.3

Status of Budgetary Resources:

Obligations Incurred 161,374.3 120,858.9 70,187.8 15,356.8 63,322.8 17,917.2 504,970.6 953,988.4 1,059,067.8

Unobligated balance, end of year:

Apportioned 692.7 47,045.0 12,943.3 13,300.0 0.0 11,038.0 24,877.8 109,896.8 115,696.1

Exempt from Apportionment 0.0 0.0 0.0 0.0 0.0 1,319.5 2,727.1 4,046.6 3,976.1

Unapportioned 2,371.9 4,810.3 1,740.5 1,656.2 0.0 4.2 19,286.9 29,870.0 26,020.3

Unobligated balance brought 

forward, end of year $ 3,064.6 $ 51,855.3 $ 14,683.8 $ 14,956.2 $ 0.0 $ 12,361.7 $ 46,891.8 $ 143,813.4 $ 145,692.5

Total Budgetary Resources $ 164,438.9 $ 172,714.2 $ 84,871.6 $ 30,313.0 $ 63,322.8 $ 30,278.9 $ 551,862.4 $ 1,097,801.8 $ 1,204,760.3
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

137

Statement of Budgetary 

Resources 2013

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

2013 Combined 2012 Combined

Change in Obligated Balance

 Unpaid obligations

Unpaid obligations, brought forward, 

October 1 (Gross) $ 11,975.7 $ 151,469.5 $ 47,712.4 $ 28,530.9 $ 4,643.2 $ 8,374.7 $ 215,863.8 $ 468,570.2 $ 454,926.2

Adjustments to unpaid obligations, 

start of year 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Obligations incurred 161,374.3 120,858.9 70,187.8 15,356.8 63,322.8 17,917.2 504,970.6 953,988.4 1,059,067.8

Outlays (gross) (145,219.5) (115,344.9) (71,741.2) (18,288.5) (62,620.8) (18,062.6) (490,743.3) (922,020.8) (979,889.9)

Actual Transfers, unpaid obligations 

(net) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Recoveries of prior year unpaid 

obligations (14,394.5) (12,838.5) (2,665.7) (2,431.7) 0.0 (415.3) (30,426.9) (63,172.6) (65,533.9)

Unpaid Obligations, end of year 13,736.0 144,145.0 43,493.3 23,167.5 5,345.2 7,814.0 199,664.2 437,365.2 468,570.2

 Uncollected Payment

Uncollected customer payments from 

Federal Sources, end of year (126.9) (4,239.5) (5,720.5) (12,277.8) 0.0 (2,176.7) (53,412.0) (77,953.4) (75,184.3)

Change in uncollected pymts, Fed 

sources (60.8) 72.5 98.5 2,302.1 0.0 235.4 (1,898.2) 749.5 (2,769.1)

Actual transfers, uncollected pymts, 

Fed sources 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Uncollected pymts, Fed sources, end 

of year (187.7) (4,167.0) (5,622.0) (9,975.7) 0.0 (1,941.3) (55,310.2) (77,203.9) (77,953.4)

Obligated balance, start of year $ 11,848.8 $ 147,230.0 $ 41,991.9 $ 16,253.1 $ 4,643.2 $ 6,198.0 $ 162,451.8 $ 390,616.8 $ 379,741.9

Obligated balance, end of year $ 13,548.3 $ 139,978.0 $ 37,871.3 $ 13,191.8 $ 5,345.2 $ 5,872.7 $ 144,354.0 $ 360,161.3 $ 390,616.8

Budget Authority and Outlays, Net:

Budget Authority, gross (discretionary 

and mandatory) $ 147,986.9 $ 98,298.8 $ 67,827.5 $ 12,125.1 $ 63,322.8 $ 21,253.5 $ 491,940.0 $ 902,754.6 $ 989,907.4

Actual offsetting collections 

(discretionary and mandatory ) (1,186.1) (2,741.0) (7,794.5) (7,431.7) (128.5) (10,963.5) (137,664.7) (167,910.0) (190,586.0)

Change in uncollected customer 

payments from Federal Sources 

(discretionary and mandatory)

(60.8) 72.5 98.5 2,302.1 0.0 235.4 (1,898.2) 749.5 (2,769.1)

Anticipated offsetting collections 

(discretionary and mandatory) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Budget authority, net 

(discretionary and mandatory) $ 146,740.0 $ 95,630.3 $ 60,131.5 $ 6,995.5 $ 63,194.3 $ 10,525.4 $ 352,377.1 $ 735,594.1 $ 796,552.3

Outlays, gross (discretionary and 

mandatory) $ 145,219.5 $ 115,344.9 $ 71,741.2 $ 18,288.5 $ 62,620.8 $ 18,062.6 $ 490,743.3 $ 922,020.8 $ 979,889.9
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

138

Statement of Budgetary 

Resources 2013

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

2013 Combined 2012 Combined

Actual offsetting collections 

(discretionary and mandatory) (1,186.1) (2741.0) (7,794.5) (7,431.7) (128.5) (10,963.5) (137,664.7) (167,910.0) (190,586.0)

Outlays, net (discretionary and 

mandatory) 144,033.4 112,603.9 63,946.7 10,856.8 62,492.3 7,099.1 353,078.6 754,110.8 789,303.9

Distributed offsetting receipts 0.0 (0.8) 0.0 0.0 (79,998.2) (806.7) (1,961.9) (82,767.6) (79,238.4)

Agency outlays, net (discretionary 

and mandatory) $ 144,033.4 $ 112,603.1 $ 63,946.7 $ 10,856.8 $ (17,505.9) $ 6,292.4 $ 351,116.7 $ 671,343.2 $ 710,065.5
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

139

Combined Statement of 

Budgetary Resources Non Budgetary

For the Years ended September 30

Dollars in Millions Other 2013 Combined 2012 Combined

Budgetary Resources

Unobligated balance, brought 

forward, October 1 $ 15.5 $ 15.5 $ 17.5

Unobligated balance brought 

forward, October 1, as adjusted $ 15.5 $ 15.5 $ 17.5

Recoveries of prior year unpaid 

obligations 0.0 0.0 0.0

Other changes in unobligated 

balance 0.0 0.0 0.0

Unobligated balance from prior 

year budget authority, net 15.5 15.5 17.5

Appropriations (discretionary and 

mandatory) 0.0 0.0 0.0

Borrowing Authority (discretionary 

and mandatory) 26.9 26.9 172.6

Contract Authority (discretionary 

and mandatory) 0.0 0.0 0.0

Spending Authority from offsetting 

collections (discretionary and 

mandatory)

83.2 83.2 62.6

Total Budgetary Resources $ 125.6 $ 125.6 $ 252.7

Status of Budgetary Resources:

Obligations Incurred $ 78.8 $ 78.8 $ 237.2

Unobligated balance, end of year:

Apportioned 0.0 0.0 1.6

Exempt from Apportionment 0.0 0.0 0.0

Unapportioned 46.8 46.8 13.9

Unobligated balance brought 

forward, end of year $ 46.8 $ 46.8 $ 15.5

Total Budgetary Resources $ 125.6 $ 125.6 $ 252.7
U.S. Department of Defense Agency Financial Report for FY 2013

Financial Section

140

Statement of Disaggregated 

Budgetary Resources Non Budgetary

For the Years ended September 30

Dollars in Millions

Other 2013 Combined 2012 Combined

Change in Obligated Balance

 Unpaid obligations:

Unpaid obligations, brought 

forward, October 1 (gross) $ 541.8 $ 541.8 $ 569.1

Obligations incurred 78.8 78.8 237.2

Outlays (gross) (319.9) (319.9) (264.5)

Recoveries of prior year unpaid 

obligations 0.0 0.0 0.0

Unpaid obligations, end of year 300.7 300.7 541.8

 Uncollected payments:

Uncollected pymts, Fed sources, 

brought forward, October 1 (83.5) (83.5) (99.9)

Change in uncollected customer 

payments, Fed sources

31.1 31.1 16.4

Uncollected pymts, Fed sources, 

end of year (52.4) (52.4) (83.5)

Obligated balances, start of year 458.3 458.3 469.2

Obligated balance, end of year 

(net) $ 248.3 $ 248.3 $ 458.3

Budget Authority and Outlays, Net:

Budget Authority, gross 

(discretionary and mandatory) 110.1 110.1 235.2

Actual offsetting collections 

(discretionary and mandatory) (126.7) (126.7) (92.6)

Change in uncollected customer 

payments from Federal Sources 

(discretionary and mandatory)

31.1 31.1 16.4

Anticipated offsetting collections 

(discretionary and mandatory) 0.0 0.0 0.0

Budget authority, net 

(discretionary and mandatory) $ 14.5 $ 14.5 $ 159.0

Outlays, gross (discretionary and 

mandatory) 319.9 319.9 264.5

Actual offsetting collections 

(discretionary and mandatory) (126.7) (126.7) (92.6)

Outlays, net (discretionary and 

mandatory) 193.2 193.2 171.9

Distributed offsetting receipts 0.0 0.0 0.0

Agency outlays, net 

(discretionary and mandatory) $ 193.2 $ 193.2 $ 171.9
FISCAL YEAR 2013

UNITED STATES DEPARTMENT OF DEFENSE

AGENCY FINANCIAL REPORT

ADDENDUM A
This Page Left Blank Intentionally
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-1

ADDENDUM A, OTHER INFORMATION

Other Information provides additional details that support the Fiscal Year (FY) 2013

Department of Defense (DoD) Agency Financial Report (AFR). This addendum includes the 

following sections:

Inspector General’s Summary of Management and Performance Challenges for FY 2013

Managers’ Internal Control Program 

Improper Payment and Payment Recapture Programs 

INSPECTOR GENERAL’S SUMMARY OF 

MANAGEMENT AND PERFORMANCE CHALLENGES 

FOR FY 2013

INTRODUCTION

The Reports Consolidation Act of 2000 requires that the Agency Financial Report (AFR)

include a statement, prepared by the Department’s Inspector General (IG), which

summarizes what the IG considers to be the most serious management and performance 

challenges facing the Department, along with a brief assessment of the Department’s 

progress made in addressing those challenges. In FY 2013, the IG identified the following 

seven categories of management 

and performance challenges facing 

the Department:

1. Financial Management

2. Acquisition Processes and 

Contract Management

3. Joint Warfighting and Readiness

4. Cyber Security

5. Health Care

6. Equipping and Training Afghan 

Security Forces

7. The Nuclear Enterprise Chairman of the Joint Chiefs of Staff GEN Martin E. 

Dempsey talks with U.S. Marine Corps drill instructors 

at the 4th Recruit Training Battalion, Parris Island, SC, 

on March 21, 2013. The 4th Recruit Training Battalion is 

a female-only unit at Parris Island.

DoD photo by Master Sgt. Charles Marsh, U.S. Air Force
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-2

SUMMARY OF IDENTIFIED CHALLENGES

The following tables report the IG’s summary of the challenges, an assessment of the 

Department’s progress in addressing these challenges, and the Department’s response.

1. IG-Identified Challenge: Financial Management

1-1A. Achieving Financial Statement 

Audit Readiness IG Summary of Challenge

The Department’s financial management challenges impair its ability to provide reliable, 

timely, and useful financial and managerial data to support operating, budgeting, and policy 

decisions. Gaps in the financial framework harm the accuracy, reliability, and timeliness of 

budgetary and accounting data and financial reporting, reducing the effectiveness of decisions 

made by leaders at all levels. Key to solving the Department’s financial management problems 

is the production of auditable financial statements and receiving unqualified opinions on them. 

Achieving auditable financial statements is a longstanding and daunting task. The success 

of the DoD financial improvement and audit readiness effort depends on the Department’s 

ability to:

• Resolve material internal control weaknesses to ensure internal controls are properly

designed, properly implemented, and working effectively.

• Monitor and resolve new material internal control weaknesses identified as part of 

ongoing readiness efforts.

• Sustain improvement in internal controls and systems to provide consistent and 

repeatable financial data used in decision making and reporting.

• Effectively develop and implement the financial-improvement effort by monitoring DoD 

progress in achieving milestones, developing comprehensive improvement initiatives 

across DoD functional areas, and holding managers accountable for the timely 

implementation of those efforts.

Congress requires the Department to validate as audit-ready the DoD Statement of 

Budgetary Resources (SBR) and the other DoD financial statements by September 30, 2014,

and September 30, 2017, respectively. Meeting those deadlines will be a significant challenge 

for the Department. Furthermore:

• Public Law 111-383, Section 881, requires the Department to establish interim 

milestones to achieve audit readiness of its financial statements earlier than 

September 30, 2017. These interim milestones for Military Departments and Defense 

Components call for the achievement of audit readiness for each major element of the 

Statements of Budgetary Resources (SBR), such as “civilian pay, military pay, supply 

orders, contracts, and the funds balance with the Treasury.”

• Public Law 112-81, Section 1003, requires the Department to have a plan that 

includes interim objectives and a schedule of milestones for each Military Department 

and for the Defense agencies, to support the goal of validating the SBR as audit-ready 

by September 30, 2014. The Department must aggressively pursue the development 

and implementation of comprehensive improvement initiatives and must monitor 

progress according to interim milestones. The Department may need to revise these 

initiatives and milestones as it identifies additional deficiencies and corrective actions, 

as a result of DoD’s iterative Financial Improvement and Audit Readiness (FIAR) 

process.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-3

• Public Law 112-239, Section 1005(b)(1), requires that the plans to achieve audit 

readiness of the SBR “by September 30, 2014, include steps to minimize one-time 

fixes and manual work-arounds, be sustainable and affordable, and not delay the full 

auditability of financial statements.” Meeting the accelerated 2014 milestone for 

auditability of the SBR will be a challenge for the Department. 

The Department must continue to develop and implement a comprehensive plan that 

identifies the interim objectives and schedule of milestones to achieve audit readiness of the 

SBR for the Working Capital Fund and General Funds. The interim milestones must address 

the existence and completeness of each major category of DoD assets, which includes military 

equipment, real property, inventory, and operating material and supplies.

Additionally, Section 881 of Public Law 111-383 requires the Department to examine the 

costs and benefits of alternative approaches to valuing its assets, develop remediation plans 

when interim milestones cannot be met, and identify incentives to achieving auditability by 

September 30, 2017.

1-1B. Achieving Financial Statement 

Audit Readiness IG Assessment of Progress

Although the Department is far from reaching an unqualified opinion on its financial 

statements, it has made progress. The DoD senior leadership has placed an increased 

emphasis on achieving this goal. We believe this increased emphasis is essential to the 

Department’s ability to meet its internal milestones, as well as the 2014 and 2017 audit 

readiness mandates. 

Despite pervasive and longstanding Department financial management problems, the 

Army Corps of Engineers and various Defense agencies, such as the Defense Commissary 

Agency and Defense Contract Audit Agency, and the Military Retirement Fund, have received 

unqualified audit opinions. The Department must sustain its achievements as well as advance 

in the remaining significant areas.

The Department continues to make progress toward meeting the 2014 audit readiness 

goal of the SBR; however, it is still uncertain whether the Department will meet the 2014 goal. 

The Department continues to learn and improve from the DoD IG audits of the SBR for the 

U.S. Marine Corps (USMC), the first Military Service to undergo such an audit. The USMC 

encountered many challenges during this first type of audit, which resulted in disclaimers of 

opinion in FY 2010 and FY 2011. The USMC is undergoing its third audit, and progress was 

seen in the Corp’s ability to produce supporting documentation on historical transactions 

within the Schedule of Budgetary Activity (SBA). The USMC, the Navy, and the Department 

are using this experience to correct weaknesses, as well as prepare the other Military Services 

for their eventual SBR audit.

The May 2013 FIAR Plan Status Report only addresses audit readiness of certain aspects of 

the SBR and states that the Department does not expect every Component to achieve an SBA 

clean audit opinion in FY 2015. The Department reported in the November 2011 FIAR Plan 

update, and continued to report in the May 2013 FIAR Plan update, that it had significantly 

changed its audit goals to include achieving audit readiness of the General Fund SBR by the 

end of FY 2014, in addition to achieving audit readiness of all DoD financial statements by the 

end of FY 2017. However, in the November 2012 FIAR Plan update, the Department reported 

it would limit first-year SBR audits in FY 2015 to audits of schedules containing only currentyear appropriation activity (i.e., a Schedule of Budgetary Activity). 

Additionally, in the May 2013 FIAR Plan update, the Department reported that the initial 

audits of the General Fund Schedule of Budgetary Activity will not include balances from prior

year activity. The Department will also begin audits of the complete SBR only after achieving 

successful audits of current-year appropriation activity. Meaningful progress in FY 2014 for the 

SBR audit-readiness goal will be critical, and this will continue to be a high-visibility area.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-4

1-1C. Achieving Financial Statement 

Audit Readiness Department Response

The Department generally agrees with IG’s assessment of DoD’s progress in achieving 

audit readiness. Significant progress continues to be made, and the Department is fully 

committed to achieving audit readiness on its full financial statements by

September 30, 2017. 

The FIAR Strategy focuses on achieving audit readiness of the Statement of Budgetary 

Resources (SBR) by September 30, 2014. Audit readiness means the Department has 

improved financial practices, processes, and systems, and strengthened internal controls so 

that there is reasonable confidence that the information can withstand an audit by an 

independent auditor. 

The scope of FY 2015 audits will be on current-year information contained in the SBR. The 

Department refers to current year information of the SBR as the Schedule of Budgetary 

Activities or SBA. The initial General Fund SBA audits will not include balances from prior year 

activity. The U.S. Marine Corps audit, which has been audited by the DoD IG, employed this 

same approach. The Government Accountability Office and the DoD IG have been fully briefed 

and agree that focusing FY 2015 audits on current year information is a cost-effective and 

sensible path to full audit readiness. The Department is developing guidance for achieving 

Wave 4, full financial statement audit readiness.

Achieving auditable financial statements will help the Department improve processes and 

make better use of resources. More importantly, auditable financial statements will 

demonstrate to the American public and Congress that the Department is a good steward of 

government funds. Although the Department is diligently working to achieve SBR audit 

readiness by the end of FY 2014 and begin SBA audits in FY 2015, several challenges exist 

outside the Department’s control that have the potential to impede progress. 

For more information, refer to the FIAR Plan Status Report.

1-2A. Modernizing Financial Systems 

(Enterprise Resource Planning) IG Summary of Challenge

To develop effective financial-management processes throughout the Department, the 

Department has begun to implement new financial management systems and business 

processes. We believe properly planned and integrated systems, with strong internal controls, 

are critical to providing useful, timely, and complete financial management data and to 

achieving auditability. Timely and effective implementation of the enterprise resource planning 

systems (ERPs) is critical for the Department to achieve its financial improvement and auditreadiness goals.

The Department noted in the latest FIAR update that the ERPs continue to be essential to 

the Department’s audit-readiness efforts. However, not all ERPs will be deployed by the 2014 

and 2017 readiness deadlines. This will require the Department to continue to rely on legacy 

systems.

1-2B. Modernizing Financial Systems 

(Enterprise Resource Planning) IG Assessment of Progress

The Department plans to spend about $15 billion to develop and implement ERPs. These 

systems have experienced cost increases and schedule delays. The Department noted that 

some ERPs will not be fully deployed by the 2014 and 2017 audit-readiness dates, and 

therefore it must continue to rely on legacy systems. This will increase the risk that the SBR,

or a schedule of current year budget activity, will not be auditable by September 30, 2014, 
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-5

and that the Department will not meet the goal of full financial statement audit readiness by 

September 30, 2017. Reliance on legacy systems, along with schedule delays and poorly 

developed, poorly implemented ERPs, will diminish the savings expected from transforming 

operations through business-system modernization.

Furthermore, without fully deployed ERPs, the Department will be challenged to produce 

reliable financial data and auditable financial statements without resorting to extreme efforts, 

such as data calls or manual workarounds, to provide financial data on a recurring basis. For 

example, the Department reported in the May 2013 FIAR Plan Status Report that the Air Force 

ERPs will not be fully deployed by 2014. As a result, the Air Force will rely on manual controls 

and legacy system enhancements to meet the goal of SBR audit readiness by 

September 30, 2014.

The Department has not reengineered its business processes to the extent necessary; 

instead, it has often customized commercial ERPs to accommodate existing processes. This 

creates a need for system interfaces and weakens controls built into the ERP system. The ERPs 

were designed to replace numerous subsidiary systems, reduce the number of interfaces, 

standardize data, eliminate redundant data entry, and provide an environment for end-to-end 

business processes, while being a foundation for sustainable audit readiness. However, the 

numerous interfaces between the ERP system and existing systems may be overwhelming and 

inadequately defined. Each interface presents a risk that the system might not function as 

designed, and each prevents the linking of all transactions in an end-to-end process. The 

Department needs to ensure ERP system development addresses the required business 

processes and functions.

Without the effective and timely development and implementation of ERP systems, and 

without senior-level governance, the Department will continue to struggle to improve its 

financial management processes and provide accurate, timely, and meaningful financial 

management information for internal and external users and achieve long-term sustainability 

of the financial-management improvements. Recent audits continue to find that system 

program managers have not configured systems to report U.S. Government Standard General 

Ledger (USSGL) financial data using the DoD Standard Financial Information Structure (SFIS). 

Additionally, other audits have found that the Department has not sufficiently 

reengineered its business enterprise architecture processes nor incorporated the functionality 

in ERP systems. The Department has established certification requirements, and the Deputy 

Chief Management Officer and Deputy Chief Financial Officer have established validation and 

certification procedures for implementing SFIS requirements and ensuring business process 

reengineering has taken place. However, these procedures were not stringent enough to 

ensure compliance. The Department continues to improve its validation and certification 

procedures.

1-2C. Modernizing Financial Systems 

(Enterprise Resource Planning) Department Response

The Department is committed to supporting improvements to financial processes through 

the implementation of ERP systems. In support of these efforts, the Department has been 

working diligently to improve business processes, oversight of the development of the ERPs,

and implementation of formal business process reviews in support of auditability.

While it is true that legacy systems will continue to be employed during the development 

and full deployment of the ERPs, the implementations that have already occurred throughout 

the Department have resulted in the ability to phase out dozens of legacy systems. Several of 

the Department’s ERPs have been or will be implemented to support the 2017 auditability 

goal. However, where we are dependent on legacy systems, the Components’ Financial 

Improvement Plans incorporate actions necessary to ensure that accurate, reliable financial 

information is reported.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-6

Modernizing DoD business systems is a key aspect of our overall effort to achieve and 

sustain auditability. The Department plans to achieve the audit goals with a combination of 

both target and legacy systems. While taking pro-active steps to align individual ERP programs 

with auditability outcomes, we also are focused on delivering audit-ready processes and 

controls that will remain outside the ERP systems. This will allow us to develop a sustainable 

business environment that can be cost-effectively audited. 

The ERP programs, by their very nature, are designed to:

• Handle transactions in a defined end-to-end process;

• Enforce process and execution standardization among implementing organizations;

• Manage consolidated business data in a single repository that allows centralized access 

control, and

• Facilitate the flow of information both within an organization and with external 

stakeholders. 

These design principles within the ERP directly enable capabilities essential to auditability, 

such as the ability to trace all transactions from source to statement; the ability to recreate a 

transaction; documented, repeatable processes and procedures; demonstrable compliance 

with laws, regulations and standards; and a control environment that is sufficient to reduce 

risk to an acceptable level. 

Essentially, ERPs are acquired with industry best practices/“to-be” processes embedded 

within them. Each of the Department’s ERP programs went through significant, up-front 

blueprinting and gap analysis to determine which configuration or customization was 

necessary for the system to work within its particular business environment. The Department 

has focused on properly enforcing compliance with the target financial management 

environment, built on a backbone of the core ERP systems and aligned with the Business 

Enterprise Architecture’s end-to-end processes. 

The Department’s new investment management process will ensure:

• Investments are aligned to strategies;

• Allow the Department to make more informed investment decisions;

• Eliminate legacy systems that are no longer required;

• Enhance interoperability, and

• Help the Department transform to an environment where business applications can be 

rapidly deployed on a common computing infrastructure. 

The new process also will ensure that each investment is an appropriate use of taxpayer 

dollars and aligns to the Department’s architecture and our shared goal of delivering agile, 

effective and efficient business solutions that support and enable our warfighters.

To implement this new investment management process, the Deputy Chief Management 

Officer issued guidance to ensure that the Department continues to treat its business system 

investments with the firmness of purpose and discipline that will enable cost savings to be 

redirected to critical operational needs of the warfighter. The guidance, now updated annually, 

creates an integrated business framework to align broad Departmental strategy with functional 

and organizational strategy, all the way to system implementations. This framework utilizes 

new plans, called Functional Strategies and Organizational Execution Plans, to help achieve the 

Department’s target business environment.

The Department’s financial management functional strategy includes compliance and 

standards related to financial management strategic initiatives, such as SFIS/Standard Line of 

Accounting, US Standard General Ledger, and FIAR audit readiness. As part of each Service or 

Agency’s Organizational Execution Plan-Financial Management, each of the strategic initiatives 

must be addressed with reference for compliance. Additionally, each system owner is required 
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-7

to update the DoD Information Technology Portfolio Repository with compliance to both the 

Business Enterprise Architecture and SFIS standards as part of the Investment Review Board

process.

1-3A. Improper Payments IG Summary of Challenge

Improper payments, a longstanding problem in the Department, are often the result of 

unreliable data and/or a lack of adequate internal controls, which increases the likelihood of 

fraud. As a result, the Department lacks assurance that billions of dollars of annual payments 

are disbursed correctly. The Department’s inadequate financial systems and controls hamper 

its ability to make proper payments. In addition, the pace of operations and volume of 

Department spending create additional risk for improper payments, and both hinder the 

Department’s ability to detect and recover those improper payments.

The Department faces difficulties in the completeness and accuracy of its improper

payment reviews and the information reported. However, problems remain, including the 

auditability of the SBR. This leaves the Department unable to reconcile outlays to the quarterly 

or annual gross outlays reported in the SBR to ensure all required payments for reporting 

purposes have been captured. In addition, during a reconciliation of FY 2012 outlays, the 

Department identified $12.3 billion in outlays that should have been reviewed for improper 

payments, but were not. These areas require improvement before the Department will be able 

to provide complete and accurate information on its estimated amount of improper payments.

1-3B. Improper Payments IG Assessment of Progress

Although the Department made strides to improve the identification and reporting of 

improper payments and took many corrective actions to implement recommendations made 

by the DoD IG, more work is needed to improve controls over payments processed throughout 

the Department. 

The Department improved its program during FY 2012, including statistically projecting

improper-payment error rates for contract and vendor payments, as well as reviewing 

additional military health benefit programs that previously had not been included in improperpayment reviews. However, there are indications that the amount of estimated improper 

payments may be understated. For example, a March 2013 audit showed that during a DoD 

reconciliation of FY 2012 outlays, the Department identified $12.3 billion in outlays that should 

have been reviewed for improper payments but were not. The $12.3 billion is lower than 

previous unreconciled amounts, but improper payment reviews of these outlays would likely 

increase improper payment amounts reported. 

Additionally, the estimated amount of improper payments for the Department’s 

commercial pay program for FY 2012 ($100.1 million) is significantly less than the Defense 

Logistics Agency (DLA) Troop Support’s recovery of payments on one subsistence contract 

from December 2005 through September 2011, which totaled $756.9 million. The DLA said

that recoveries had averaged approximately $21 million per month since March 2012. 

Additional sources included the Defense Contract Audit Agency’s audits and contracting 

officers’ subsequent recovery actions. In addition, the April 1, 2012 through

September 30, 2012, DoD Inspector General Semiannual Report to Congress, reported that 

Contracting Officers initiated actions during this period to disallow $692.0 million of costs 

questioned in Defense Contract Audit Agency (DCAA) contract audits.

We commend the Department on aggressively pursuing recovery of identified improper 

payments, but unless it continues to improve its methodology for reviewing all its 

disbursements, it will likely underestimate overpayments and, as a result, miss opportunities 

to collect additional improper payments.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-8

1-3C. Improper Payments Department Response

The Department appreciates the DoD IG’s recognition of DoD’s improvements in 

identifying, reporting, and recovering improper payments and in implementing corrective 

actions. The Department is committed to complying with all laws and regulations established 

to reduce improper payments. 

The $12.3 billion in outlays that the IG reports were not reviewed for improper payments, 

but possibly should have been, has dropped precipitously over the past several years and now 

represents a very small fraction of Department’s total outlays. The Department is marching 

toward audit readiness for the Schedule of Budgetary Activity by the end of FY 2014 and the 

longer-term goal of full financial statement audit readiness by the end of FY 2017. 

We do not agree with the following information reported by the DoD IG: 

• The $756.9 million the IG reported as an improper payment, with recoveries averaging 

approximately $21 million per month, did not result from an improper payment, but 

rather is the result of a contract price adjustment. 

• The $692 million in contract questioned costs identified by DCAA, or any other audit 

entity, are not a result of an improper payment, but are decisions made by the 

Contracting Officer based on audit findings and recommendations driven by contract 

terms and conditions and Federal Acquisition Regulations.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-9

2. IG-Identified Challenge: Acquisition Processes and Contract 

Management

2-1A. Enhancing the Acquisition 

Workforce IG Summary of Challenge

The Department senior leadership continues to recognize the importance of fielding a 

capable acquisition workforce to manage and oversee DoD acquisition and contracting. To 

accomplish the acquisition mission, the Department is placing greater emphasis on developing 

a higher-quality workforce with the needed competencies. 

Even though the Defense acquisition workforce has grown over the last few years, the 

Department continues to struggle to rebuild an acquisition workforce that is trained and 

equipped to oversee DoD acquisitions. The Department should continue to provide 

developmental opportunities to ensure that acquisition personnel can manage complex 

programs. Regardless of the looming decline in the Defense budget, the acquisition workforce 

will continue to be vital in providing the warfighters with new capabilities. Previous Defense 

budget cuts significantly reduced the capability of the acquisition workforce; the Department 

should maintain focus on strengthening the acquisition workforce throughout the lean financial 

years expected ahead.

On April 24, 2013, the Under Secretary of Defense (Acquisition, Technology, and Logistics) 

(USD(AT&L)) announced Better Buying Power 2.0, aimed at obtaining greater efficiencies and 

productivity in defense spending. The Better Buying Power (BBP) 2.0 outlined four initiatives 

to meet the objective of focusing on training and improvement of the acquisition workforce. 

These BBP initiatives include:

• Establishing higher standard for key leadership positions

• Establishing stronger professional qualification requirements for all acquisition 

specialties

• Increasing the recognition of excellence in acquisition management

• Continuing to increase the cost consciousness of the acquisition workforce – change 

the culture

2-1B. Enhancing the Acquisition 

Workforce IG Assessment of Progress

The Department has filled 7,700 new acquisition positions since 2008, and as of the 

second quarter of 2013, the acquisition workforce comprises more than 152,800 personnel. 

The Defense Acquisition Workforce Development Fund budget request for $276.2 million in 

FY 2014 supports the Department’s shift from primarily recruiting and hiring to training and 

improvement in the qualifications and experience of the acquisition workforce. However, 

budget constraints raise questions as to whether the Department will be able to sustain these 

initiatives. Sustained commitment and management attention is essential to ensuring the 

improvements to the acquisition workforce are not lost or diminished.

2-1C. Enhancing the Acquisition 

Workforce Department Response

The Department concurs with the IG’s assessment.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-10

2-2A. Weapon System Acquisition IG Summary of Challenge

The Department remains challenged in its management of Major Defense Acquisition 

Programs (MDAPs), which have decreased in number. As of December 2012, the Military 

Departments reported 78 Acquisition Category I Programs (MDAPs), which is down from the 

83 programs reported in December 2011. 

Although the performance of no two acquisition programs is the same, and a good number 

of them operate within cost and schedule constraints, there are still too many programs with 

significant cost growth and delays in delivering capabilities. Our audits have identified 

programs that did not complete required testing, identify the correct procurement quantity, or 

define capability requirements. The Department should continue to look for a better balance 

between its limited resources and the capabilities needed to succeed in current and future 

conflicts. As budgets come under increasing scrutiny under sequestration, the Department is 

challenged to evaluate the merits of all programs as to their usefulness and the need for 

further program adjustments or terminations to remain within budget constraints.

2-2B. Weapon System Acquisition IG Assessment of Progress

Through leadership at the highest levels, the Department has demonstrated its 

commitment to addressing shortcomings identified in the management of weapon system 

acquisitions. The Department continues to reprioritize and rebalance its investments in 

weapon systems and has made progress in improving efficiency.

The Department’s FY 2014 Annual Performance Plan goals show the Department’s 

commitment to containing weapon system acquisition program cycle time and cost by 

assessing the root causes of weapon system acquisition outcomes and monitoring the 

effectiveness of its acquisition policies.

In BBP 2.0, the USD(AT&L) mandated affordability as a requirement and emphasized the 

affordability constraints imposed in the first Better Buying Power effort started in 

September 2010. The BBP 2.0 also states that the Department will focus on controlling costs 

throughout the product lifecycle, using the following initiatives:

• Implementing “should cost” based management

• Eliminating redundancy within warfighter portfolios

• Instituting a system to measure the cost performance of programs and institutions and 

to assess the effectiveness of acquisition policies

• Building stronger partnerships with the requirements community

• Increasing the incorporation of defense exportability features in initial designs

The Department, as it continues to make the hard decisions about what is affordable, is 

beginning to apply extra scrutiny to weapon systems that are behind schedule and over cost. 

Senior leadership has recently demonstrated sound stewardship by eliminating MDAPs that 

were underperforming or over budget, or whose value given the continuing investment was in 

question.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-11

2-2C. Weapon System Acquisition Department Response

The Department concurs with the IG’s assessment. In addition to the initiatives discussed 

by the IG, the Department has taken a number of steps to improve the operation of the 

defense acquisition system in order to deliver more capability to the warfighter for less than it 

has in the past. The USD(AT&L) directed a major revision to DoD Instruction (DoDI) 5000.02,

which describes the operation of the defense acquisition system. 

The revision, which is expected to be signed by the end of calendar year 2013:

• Decreases emphasis on “rules” and increases emphasis on process intent and 

thoughtful program planning.

• Provides program structures and procedures tailored to the dominant characteristics of 

the product being acquired and to unique program characteristics (e.g., risk and 

urgency).

• Increases emphasis on planning effective business arrangements and overall program 

affordability.

• Enhances the discussion of program management responsibility and key supporting 

disciplines to include systems engineering, developmental testing and cost estimating.

2-3A. Contract Management IG Summary of Challenge

The Department continues to struggle to consistently provide effective oversight of its 

contracting efforts. The Department’s continuing contracting deficiencies include obtaining 

adequate competition in contracts, defining contract requirements, overseeing contract 

performance, obtaining fair and reasonable prices, and maintaining contract documentation for 

contract payments.

The Department relies heavily on contractors to provide acquisition management and 

contract support functions, which often includes support to acquisition planning, requirement 

determinations, contract award determinations, performance reviews, bid analysis, cost 

assessments, and other contract monitoring functions. The Department’s increased use of 

contractors as acquisition support highlights DoD’s shortcomings. Service contracts constitute 

more than 50 percent of the Department’s contract spending.

The Department faces several challenges in contract oversight and administration. Our 

audits continue to identify that without proper oversight, the Department cannot be certain 

that contractors are performing in accordance with contract requirements, cannot support 

payments of award or incentive fees, cannot support the certification of invoices for services 

performed, and cannot ensure that services are performed, leaving the Department vulnerable 

to increased fraud, waste, and abuse.

The Department continues to face challenges in obtaining fair and reasonable prices for 

parts. Audits first started identifying problems with price-based acquisition and commercial 

pricing in the late 1990s, and it was not until 2008 that legislative changes allowed contracting 

officers to request information on labor costs, material costs, and overhead rates for 

commercial items.

More recently, the Department has moved to new performance-based logistics (PBL) 

arrangements, which have added a new challenge to obtaining fair and reasonable prices for 

parts, since the Services are now procuring parts from the weapons systems contractors 

instead of other sources, such as the Defense Logistics Agency. Often these parts are 

purchased unnecessarily and at higher prices rather than utilizing existing DLA inventory.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-12

2-3B. Contract Management IG Assessment of Progress

The Department continues to strengthen contracting and has issued policy, procedures, 

and guidance addressing current contracting challenges. The Department began the Better 

Buying Power effort in 2010 and continued with the second phase of the initiative, BBP 2.0, in 

April 2013. The BBP 2.0 has seven areas of focus, and three of them help the Department 

address contract-management challenges: Promoting effective competition; Improving 

tradecraft in acquisition of services; and Incentivizing productivity and innovation in industry 

and Government

To promote effective competition, BBP 2.0 emphasizes competition strategies, creating 

and maintaining competitive environments and increasing small business roles and 

opportunities among other initiatives. When competition is applied effectively, it results in 

lower costs to the Government, greater innovation from industry, and added savings to the 

taxpayer.

Because service contracts make up so much of the Department’s purchases, the BBP 2.0 

area of improving tradecraft in the acquisition of services is very important. The Department 

will focus on assigning senior managers for the acquisition of services, improving requirements 

definitions and preventing requirements creep, and strengthening contract management 

outside the normal acquisition chain among other initiatives.

As part of its area of incentivizing productivity and innovation in Industry and 

Government, BBP 2.0 has an initiative to increase effective use of PBL and states that the 

history of PBL contracting demonstrates the Department can achieve improved readiness at 

significant savings if PBL arrangements are properly structured and executed. The success of 

the PBL arrangement depends on the workforce having the expertise and support to properly 

develop and implement these arrangements and continued emphasis to utilize lower cost 

inventory already on hand rather than continuing to purchase parts from contractors.

2-3C. Contract Management Department Response

The Department agrees with the IG’s summary of challenges and assessment of progress 

and continues to work aggressively to resolve the long-standing material weaknesses in 

contract management. These key initiatives include: 

The USD(AT&L) has established a Services Acquisition (SA) Directorate to oversee and 

improve services acquisitions, which constitute more than half of DoD’s contracted obligations. 

Planning, managing, and overseeing contractors who perform service functions demands a 

different approach than that used to oversee contractors who are developing our weapon 

systems. The SA Directorate is leading the improvement of DoD’s tradecraft in acquisition of 

services, which is a key part of the Department’s BBP efficiencies initiative. To deliver better 

value to both the warfighter and the taxpayer while improving the way the Department does 

business, the Services Acquisition directorate is establishing:

• A stand-alone DoD instruction solely for the acquisition of services.

• Functional Domain Experts to manage services portfolios.

• Better services requirements development processes and tools.

• Service Requirement Review Boards and Tripwires to better manage and validate

requirements.

• “Should cost” methodology for services acquisitions.

• Appropriate metrics to actively manage services acquisitions. 
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-13

Additionally, the Department is working on strengthening services contract management 

outside of the normal acquisition chain (e.g., installations and commands) as well as 

developing processes to ensure individuals who are not Defense Acquisition Workforce 

Improvement Act certified, and who are involved in services acquisitions, are properly trained. 

This new management structure and training capabilities, coupled with changes in the way the 

Department analyzes and tracks services acquisitions, will allow us to continuously improve, 

from requirements definition to closeout, focusing on outcome-based capabilities.

• Continued use of “peer reviews” to improve the quality of contracting processes across 

the Department and facilitate cross-sharing of best practices and lessons learned.

• On December 6, 2012, the Director of Defense Procurement and Acquisition Policy

issued a memorandum, entitled “Service Acquisition Workshop.” This policy requires 

Senior Officials to immediately ensure that all multi-functional teams that support 

service acquisition requirements valued at $1 billion or more participate in a Service 

Acquisition Workshop (SAW) as a prerequisite to Office of the Secretary of Defense 

(OSD) review/approval of the service acquisition strategy. Additionally, Senior Officials 

were encouraged to consider mandating SAWs for services acquisitions valued at 

$100 million or more.

• On January 14, 2013, the USD(AT&L) issued a memorandum, entitled “Traceability of 

Contract Execution Expenditures for Services,” that highlights the importance of 

tracing contract expenditures for services. To improve tracking of service contract 

commitments and obligations, all DoD Components must update their acquisition and 

financial procedures and systems to ensure all purchase requests include a four-digit 

Product Service Code at a line item level of detail. 

• On March 12, 2013, the Director of Defense Pricing issued a memorandum, entitled 

“Contract Business Analysis Repository,” that informs the DoD Components about the 

capabilities of Contract Business Analysis Repository (CBAR) and instructs them to 

begin loading business clearance information into CBAR effective June 24, 2013. The 

CBAR facilitates the sharing of information among DoD contracting officers and assists 

them during their preparation for negotiations with contractors to support getting the 

best deal for the warfighters and taxpayers.

• All Components are now participating in using the DoD Contracting Officer 

Representative Tracking (CORT) tool with over 30,000 active Contracting Officer’s 

Representative (COR) users. In April 2013, the CORT tool was successfully transitioned 

to the Wide Area Workflow (WAWF) portal as its permanent hosting platform for the 

CORT. The CORT is a web-based tool that enables military departments and defense 

agencies to manage nomination, training and tracking of their respective cadres of 

CORs and the contract(s) assigned to each COR. 

• On August 30, 2013, Director, Defense Procurement and Acquisition Policy signed the 

Services Acquisition Functional Integrated Product Team charter to improve services 

acquisition via targeted, effective training of services acquisition stakeholders.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-14

3. IG-Identified Challenge: Joint Warfighting and Readiness

3-1A. Joint Warfighting and Readiness IG Summary of Challenge

U.S. military forces are entering a time of transition. In the years since the terrorist attack 

on September 11, 2001, the war in Iraq has ended and the lead security responsibility in 

Afghanistan is transitioning to the Afghan government. Military forces are engaged in a 

strategic rebalance to the Asia-Pacific region while continuing to maintain enough presence in 

the Middle East to protect our national interests. At the same time, fiscal deficits and economic 

problems are driving reductions in Federal spending, including reduced funding for defense 

programs. It is critical that the Department continually assess warfighter capabilities and 

readiness and make the necessary adjustments to ensure our military is agile, flexible, and 

ready for the full range of contingencies.

The Department will face many challenges as it continues force reductions while striving to 

achieve a modern, ready, and balanced force to meet future requirements. Among these 

challenges are a decreasing budget, a drawdown of forces from Afghanistan, the need to reset 

equipment and personnel across the Services, a return to full-spectrum training, and a 

rebalance of force structure and investments toward the Asia-Pacific and Middle East regions.

The new budget reality is being felt across the Department, especially in areas such as 

maintenance of existing equipment and systems, the fielding and implementation of new 

systems, and the frequency and extent of training and exercises. The impact of the 

sequestration was felt almost immediately as the Navy adjusted repair and overhaul schedules 

for ships and the Air Force began restricting flying hours for squadrons. The Services and the 

Combatant Commands need to ensure that the impact of the current sequestration, as well as 

future budget reductions, has minimal impact on the ability to respond to future threats.

The drawdown of forces from Afghanistan will challenge the Department to transition from 

counterinsurgency operations to full-spectrum operations elsewhere in the world. Therefore, 

the Department is refocusing training programs to include joint, interagency, and international 

training aspects; enhancing knowledge of various languages and cultural, ethnic, and religious 

sensitivities; and training the reserve forces, whose readiness was impaired for the sake of 

readiness of the deployed forces. The retrograde and reset for equipment will continue to 

affect the Services over the next several years, as equipment continues to be returned after 

seeing utilization rates exceeding many of their designed operating parameters. The enhanced 

focus on the Pacific and Middle East will also challenge the Department as it reaffirms alliances 

in the region and looks to establish new ones.

3-1B. Joint Warfighting and Readiness IG Assessment of Progress

The Department must assess warfighter capabilities and readiness across the full range of 

strategic, operational, and tactical considerations. This includes large questions, such as 

whether the joint force is capable of achieving the strategic objectives set forth in the National 

Security Strategy, to the tactical focus on individual unit readiness. The Department is 

making progress in addressing the many difficulties in the drawdown in Afghanistan, resetting 

equipment, and ensuring the long-term viability of the all-volunteer force. However, the 

Department must also be ready to address fiscal challenges, starting with the first round of 

sequestration. There are already reductions in spending for available training hours and 

needed maintenance and reset needs.

The National Security Strategy released in January 2012 placed increased emphasis on the 

Pacific theater. This will present challenges to all the Components of the Department as they 

shift their focus to the Pacific. The armed forces will have to train to fight in conventional and 

unconventional scenarios, and they will be challenged to do so with diminishing resources, 
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-15

while maintaining their readiness. The Department will have to provide additional oversight to 

ensure that the equipment reset process is managed so that only unusable equipment is 

disposed and new equipment is fielded to the intended users. The Department must also 

provide the necessary levels of oversight to ensure that forces returning from Afghanistan, 

and their families, continue to receive the support they need.

As the drawdown continues in Afghanistan, the Department must ensure the reserve 

Components have the equipment and training necessary in order to meet their missions. For 

example, we recently reported that the Army officials did not implement procedures to 

properly account for the transfer and replacement of 239,332 pieces of Army Reserve 

Component equipment, valued at $5.8 billion. As a result, Army Reserve Components had lost 

transparency of their equipment transfers and may experience shortages that could hinder 

their ability to train soldiers and respond to emergencies.

Efforts to redeploy military units around the globe will enable the armed forces to better 

shape and focus their force structure to provide greater flexibility in responding to threats.

The realignment of forces from Okinawa, Japan, to Guam still faces formidable challenges that 

have increased projected costs and schedules for the planned effort.

3-1C. Joint Warfighting and Readiness Department Response

Despite our consistently high operations tempo, the Department remains committed to 

ensuring deployed forces around the globe are trained, equipped, and ready to perform their 

assigned missions. Deploying capable and ready forces for current operations continues to 

impact the non-deployed forces’ ability to prepare for full spectrum operations. Non-deployed 

forces are focusing their available training time to prepare for their next mission in support of 

Operation Enduring Freedom, hedging against execution of other potential contingencies. 

The withdrawal of forces from Afghanistan has reduced the stress on forces in the near 

term; however, fiscal constraints will result in tough decisions on materiel, manpower, and 

infrastructure could negate the positive aspects expected from the reductions in operational 

stress. Additionally, even with the reduction of ground forces in the Central Command area of 

responsibility, it is anticipated the demand for Naval and Air Forces will continue unabated in 

the near term. 

The Department is continually developing and refining comprehensive plans for both 

resetting and rebalancing the total force, which includes all reserve Component forces, in the 

most effective and efficient manner possible. We recognize the most important part of 

maintaining joint warfighting capability and readiness is caring for the all-volunteer force. 

Finding the proper balance between maintaining readiness, force structure, modernization, 

fiscal realities, and future threats remains the highest priority of the Department’s leadership.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-16

4. IG-Identified Challenge: Cyber Security

4-1A. Cyber Security IG Summary of Challenge

Cyber security will, for the foreseeable future, continue to be a leading challenge for DoD –

the United States’ largest Government agency, with buildings and structures at more than 

5,000 different locations. Cyber security is the prevention of damage to, protection of, and 

restoration of computers, electronic communication systems, electronic communications 

services, wire communication, and electronic communication, including information contained 

therein, to ensure its availability, integrity, authentication, confidentiality, and 

non-repudiation. Every day, hackers infiltrate key Government and business computer 

networks. Government estimates indicate American companies lose $250 billion a year in 

intellectual property through network intrusions.

According to the Defense Science Board Task Force Report, “Resilient Military Systems and 

the Advanced Cyber Threat,” January 2013, U.S. Military forces are critically dependent on 

networks and information systems to execute missions. The forces are highly vulnerable if 

threats to those networks and information systems are not mitigated. For example, hackers 

take advantage of systems that continuously scan address spaces of target organizations, 

waiting for unprotected systems to be attached to the network. Attackers also look for 

computers that are not up to date with patches because they are not frequently connected to 

the network. The DoD Chief Information Officer stated, “There will never be a time that we 

can assume a ‘comfort’ posture.” Therefore, it is imperative that DoD leadership challenge its 

personnel to be ever vigilant and to continuously monitor and protect DoD networks and 

information systems.

4-1B. Cyber Security IG Assessment of Progress

Over the last three years, the DoD IG has performed a series of audits on DoD’s 

Information Assurance Vulnerability Management (IAVM) Program. The IAVM process provides 

positive control of the vulnerability notification process for network assets by requiring 

Components’ receipt acknowledgement and giving deadlines for implementing appropriate 

countermeasures, depending on the criticality of the vulnerability. 

Since our involvement in this key area, we have noted continued progress by the 

Department. For example, the Department issued the Chairman of the Joint Chiefs of Staff 

Instruction (CJCSI) 6510.01F in February 2011, which updated the roles and responsibilities of 

the Information Assurance Vulnerability Management Program. The CJCSI 6510.01F also 

stated that detailed processes will be featured in an upcoming manual. To continue this 

progress, the Department still needs to update DoD Directive (DoDD) 0-8530.1, Computer 

Network Defense (CND), January 8, 2001, and DoD Instruction (DoDI) 0-8530.2 “Support to 

Computer Network Defense (CND),” March 9, 2001. As recent as the second quarter of 

FY 2013, we have seen that the lack of updated guidance, such as that contained in the 

Chairman of the Joints Chiefs of Staff Manual and DoD Directives, has increased the risk that 

information assurance vulnerability alerts classified as critical remain unpatched.

4-1C. Cyber Security Department Response

The Department continues to strengthen cyber security and address the threat posed by 

network attacks. The establishment of the U.S. Cyber Command and the supporting Service 

Component Commands has increased the Department’s ability to plan, coordinate, integrate, 

synchronize, and conduct activities to lead the day-to-day defense and protection of DoD 

information networks. Implementing a Department-wide enterprise Host-based Security 
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-17

System (HBSS), which includes a Host-based Intrusion Prevention (HIPS) module chosen in 

place of a host-based intrusion detection system to extend active protection to the desktop 

level, has been a key component of our defense-in-depth strategy as we take steps to 

effectively isolate the Department’s official-use networks from the Internet while maintaining 

connectivity. This has been undertaken in phases, as we first focused on Secret network 

implementation and then unclassified networks. This implementation has been directed 

through U.S. Cyber command tasking and fragmentary orders. 

Implementation of the HBSS HIPS module has been particularly challenging, as individual 

Components have had to adapt their HIPS implementation to work with the existing legacy 

information systems running on their networks. Some of these legacy systems are still vital for 

warfighting support. The U.S. Cyber Command and the supporting Component Commanders 

continue to focus on implementation, with Defense Information Systems Agency’s assistance 

in providing program office and fielding support to ensure future versions of HBSS and HIPS 

software are modified, as necessary, to enable more rapid implementation. 

In regard to the Department’s challenges to recruit and retain cyber personnel, the 

U.S. Cyber Command is aggressively working through the manning process to fulfill 

established requirements in a time of shrinking budgets. 

One of the focus areas of the DoD Chief Information Officer’s (CIO’s) 10-Point Plan for 

Information Technology (IT) Modernization is to strengthen IT investments. Section 804 of the 

NDAA for FY 2010 required the Secretary of Defense to develop and implement a new 

acquisition process for information systems. The process was to be based on 

recommendations from the March 2009 report of the Defense Science Board Task Force on 

Department of Defense Policies and Procedures for the Acquisition of Information Technology. 

This report concluded that “the conventional DoD acquisition process is too long and too 

cumbersome to fit the needs of the many systems that require continuous changes and 

upgrades...” The DoD CIO’s 10-Point Plan includes structuring IT programs – via smaller, 

frequent deliveries – implementing an enterprise approach for the procurement of common IT 

hardware and software, obtaining transparency of IT investments with a full DoD IT 

investment portfolio, and reviewing major IT investments for performance, funding execution, 

and enterprise alignment.

4-2A. Cyber Workforce IG Summary of Challenge

According to the National Initiative for Cyber Security Education, as the world grows more 

connected through cyberspace a highly skilled cyber security workforce is required to secure, 

protect, and defend our Nation’s information systems. While the demand for cyber security 

professionals is high, the supply is low. For example, according to one leading research 

director, “Top notch cyber threat hunters and tool builders are in short supply. There are 

probably fewer than 800 of them in the entire country.”

In the current environment of budget cuts, pay freezes, and furloughs, the Department 

faces a significant challenge in filling the multitude of cyber positions it needs to operate, 

defend, and protect its networks. In January 2013, it was reported that the Department

planned to expand its cyber workforce five-fold, to transition from a mainly defensive force to 

one capable of a wide range of offensive operations. In addition, a June 2013 article on the 

Navy’s U.S. Fleet Cyber Command reported that the Navy Cyber Command, in the next 

three years, will bring on nearly 1,000 cyber Service members. This is happening at a time 

when each of the other three Services’ Cyber Commands is looking to increase the ranks of its 

own cyber workforce. In fact, the Government Accountability Office (GAO) issued its current 

High Risk Series update in February 2013, and strategic human capital management remains 

on the list of high risks. Specifically, GAO identified six Government-wide mission-critical 

occupations, one of which was information technology management/cyber security. Therefore, 

it is imperative that the Department develop the capability to recruit, train, and retain a cyber 

workforce in the competitive national environment.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-18

4-2B. Cyber Workforce IG Assessment of Progress

Growing and retaining a skilled cyber force is one of the biggest gaps in the cyberspace 

mission area. The Department has taken steps recently to build its cyber workforce. The DoD 

FY 2014 budget submission funds the re-organization of cyber forces into teams that will 

specialize in three functions: defending networks, degrading adversary cyber capabilities, and 

supporting defense of national infrastructure. The Department plans to assign more DoD 

civilians and contractors to this effort. In addition, the 2014 budget adds resources to increase 

the quality and throughput of DoD’s training pipeline. Moreover, in June 2013, the Department 

coordinated a working draft of a DoD Cyberspace Workforce Strategy. The working draft 

contained the strategy for transforming DoD cyberspace workforce management and 

processes to recruit, train, and retain staff. Although the Department has made progress in 

the planning stages, it must maintain momentum through implementation.

4-2C. Cyber Workforce Department Response

The Department is committed to developing a cyber workforce that is correctly sized and 

structured to secure, protect, and defend Department networks in the context of this 

ever-changing domain. This requires a comprehensive strategy for recruitment, training and 

retention that attracts skilled individuals and delivers training that is adaptable and responsive 

to evolving security threats. The Department plans to structure its cyber workforce in a way 

that provides both defensive and offensive capabilities.

The Department has developed a comprehensive strategy that outlines recruitment goals, 

reorganizes the cyber workforce, and incorporates tools for retention. This plan depends on 

adequate funding in FY 2014. The Department has developed a strategy providing for a 

phased cyber workforce development that is large enough and strategically structured to 

secure, protect, and defend Department networks. Budget constraints, including indiscriminate 

cuts, put that strategy at risk.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-19

5. IG-Identified Challenge: Health Care

5-1A. Medical Readiness IG Summary of Challenge

Medical readiness continues to be a challenge for the Department. Maintaining individual 

readiness for the Reserve Component is particularly challenging, because much of the 

responsibility for achieving individual medical readiness rests on the reservist. Reservists are 

responsible for maintaining individual medical readiness but are provided some help by the 

Department. Additionally, managing the overall health of 9.6 million eligible beneficiaries, which 

affects medical readiness, is a continuing challenge for the Military Health System (MHS). The 

MHS must identify unhealthy behaviors and provide interventions across the population. By 

reducing obesity and tobacco use, for example, the long-term health implications of diabetes 

and lung disease can be reduced significantly. Conditions such as these are expensive and long 

term in nature and could degrade medical readiness of military members.

5-1B. Medical Readiness IG Assessment of Progress

According to a 2012 RAND Corporation report, the Department is making progress in 

raising Reserve Component individual readiness percentages. The Department’s goal is to 

have 75 percent of Reservists fully medically ready. At the end of the second quarter of 

FY 2006, the Reserve Component reported that only 26 percent of its forces were fully 

medically ready. By the first quarter of FY 2010, 47 percent of Reserve Component forces 

were fully medically ready. According to the TRICARE Management Activity (TMA)1

, as of 

March 2013, 60 percent of the Reserve Component forces were fully medically ready. The 

Department should continue to emphasize improving individual medical readiness and strive to 

meet its 75 percent goal.

Additionally, the MHS management developed the family medical readiness strategic 

imperative, but its performance measure is in the concept phase. The MHS continues to 

implement the “medical home” concept throughout the direct-care system. With the medical 

home, the patient will have more direct access to a medical team equipped to recognize 

unhealthy behaviors and intervene early. In addition, line officers need to ensure nonmedical 

alternatives, such as recreational and athletic facilities, are in adequate condition and available 

to the military community. 

Additionally, evidence-based community cessation programs for addictive behaviors should 

also be readily accessible. The MHS fully supports the National Prevention Strategy and the 

transition from a system of sick care to one based on wellness and prevention. One example 

of this commitment is the reduction in cigarette use among active duty forces from FY 2010 to 

FY 2011. The MHS has committed to supporting the National Partnership for Patients initiative 

with the Department of Health and Human Services to improve care, transition, and 

prevention of harm during treatment.

5-1C. Medical Readiness Department Response

The Department concurs with the IG’s assessment.

 1 Effective October 1, 2013, the Department established the Defense Health Agency, which absorbed the functions 

of the TRICARE Management Activity and assumed responsibility for common clinical and business processes across 

the Military Health System.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-20

5-2A. Cost Containment IG Summary of Challenge

The MHS must provide quality care for 9.6 million beneficiaries within fiscal constraints

and while facing increased user demand, legislative imperatives, and inflation. These factors 

make cost control difficult in the public and private sectors. Over the last decade, health-care 

costs have grown substantially, and MHS costs have been no exception. The DoD budget for 

health-care costs was $51 billion in FY 2013, an increase of 74 percent since FY 2005. The 

MHS costs have more than doubled, from $19 billion in FY 2001 to the Department’s request 

of $49.4 billion for FY 2014. The FY 2013 amount does not include reductions due to 

sequestration. 

Another challenge in containing health-care costs is fraud. Health-care fraud is among the 

top five categories of criminal investigations of the DoD IG’s Defense Criminal Investigative 

Service, representing 15.7 percent of the 1,787 open cases at the beginning of FY 2013. 

Increasing health-care benefits also provides additional pressure to manage and contain costs.

5-2B. Cost Containment IG Assessment of Progress

The Department’s efforts in controlling health-care costs will continue to be a challenge. 

The MHS is focusing on many areas to manage per-capita health-care costs. Three 

managed-care support contracts are in effect; however, award protests resulted in staggered 

implementation of the new-generation TRICARE contracts. These contracts provide incentives 

for customer satisfaction and include managed-care support contractors as partners in support 

of medical readiness. The Department continues to examine how the MHS purchases health 

care from the private sector.

The Department has identified areas that assist in managing costs, including fraud 

management and prescription drugs. The managed-care support contracts have 

program-integrity units that review claims for indicators of fraud. We reported in 

December 2012 that these units met the requirements in their contracts. Specifically, the 

contractors:

• Submitted the required quarterly and annual reports; 

• Implemented standard operating procedures for case development; 

• Used anti-fraud software; submitted the minimum case referrals to TMA Program 

Integrity; 

• Performed prepayment reviews; and 

• Established mandatory fraud and abuse training. 

The MHS has attempted to manage costs through increased use of the TRICARE Mail Order 

Pharmacy program. The TMA has implemented an aggressive communication plan to 

encourage the increased use of receiving prescription drugs through the mail to reduce costs.

The MHS Quadruple Aim Concept focuses on four factors in providing quality health care to 

DoD beneficiaries: readiness, population health, experience of care, and cost. Continuing to 

implement the MHS Quadruple Aim Concept should improve quality and reduce costs by 

focusing on improved care coordination and delivering care in the appropriate setting. 

Additionally, the MHS identified optimization of the pharmacy practices and implementation of 

the patient-centered medical home as strategic initiatives, both of which aim to increase the 

quality of health care while reducing its cost.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-21

5-2C. Cost Containment Department Response

The Department concurs with the IG’s assessment.

5-3A. Optimizing Health-Care 

Governance IG Summary of Challenge

Ensuring that the MHS is organized in the most effective and cost-efficient manner is a 

major challenge. In March 2013, the Secretary of Defense directed the implementation of MHS 

reform. The centerpiece of this reform is the establishment of the Defense Health Agency (DHA) 

to assume responsibility for shared services, functions, and activities of the MHS and other 

common clinical and business processes. This new agency will operate as a Combat Support 

Agency and assumed many responsibilities of the TMA, which was disestablished on 

October 1, 2013. Over the next year, the MHS will face the challenge of transitioning to this new 

structure while continuing to execute the MHS mission. Additionally, the Secretary of Defense 

required the implementation of multi-Service market-management authorities for medical 

treatment facilities (MTFs) in six regions. The management authorities will:

• Manage the allocation of the budget for the market;

• Direct the adoption of common clinical and business functions;

• Optimize readiness to deploy medically ready forces and ready medical forces;

• Direct the movement of workload and workforce between or among the MTFs. 

This joint approach to managing health care-related services in geographic markets will be 

especially challenging, considering that the MTFs in these markets have been managed 

individually to date by each of the Military Services. The MHS will also be challenged to 

standardize medical services across the Service Components.

5-3B. Optimizing Health-Care 

Governance IG Assessment of Progress

Although the transition to the DHA and the implementation of the multi-Service market 

management authorities are in their infancy, the Department has made significant strides.

The Department issued a draft DoD Directive for comment that establishes the DHA and the 

details of its mission, sets up the organizational structure, and delegates responsibilities and 

functions throughout the agency. The draft directive incorporated language consistent with the 

Secretary’s requirement to implement multi-Service market-management authorities. In fact, 

the draft Directive states that the DHA, as part of its mission, supports coordinated 

management of the enhanced multi-Service market areas to create and sustain a 

cost-effective, coordinated, and high-quality health care system in those areas. 

Additionally, the directive mandates that the DHA exercise control over the MTFs within 

the National Capital Region (one of the six market areas identified). The DHA reached its initial 

operating capability on October 1, 2013, and will achieve full operating capability within two 

years of the Secretary’s memorandum. The Services’ potential resistance to relinquishing 

control over managerial functions of their MTFs may be difficult to fully overcome. Lessons 

from prior shared-services models should help the Department with this transition.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-22

5-3C. Optimizing Health-Care 

Governance Department Response

The Department concurs with the IG’s assessment.

5-4A. Rehabilitation and Transition 

Care IG Summary of Challenge

The continued strengthening of comprehensive and integrated health care – from 

accession through active service, to rehabilitation, and when necessary, the transition of our 

wounded warriors to the Department of Veterans Affairs (VA) – is a major challenge for the 

MHS. Despite the drawdown in Southwest Asia, the Department must remain focused on 

providing adequate rehabilitation and transition care for wounded warriors. Key areas 

requiring management attention include rehabilitation and transition care for those with 

traumatic brain injuries or mental-health disorders and those in need of prosthetic devices.

Access to mental-health care also remains a challenge. Suicide prevention, though not a 

specific MHS responsibility, confronts the MHS with the need to provide timely and thorough 

mental-health care for its beneficiaries.

Although the Department and the VA have identified objectives and initiated programs, 

the quality and oversight of these programs must be tightly managed. The Department should 

continue to strive to make the medical care and benefits transition program an efficient, 

transparent, and timely process, as wounded warriors move from the DoD system to the VA 

system.

5-4B. Rehabilitation and Transition 

Care IG Assessment of Progress

During the last two years, DoD IG has noted the need for timely access to specialty care, 

improvements in training programs and plans, and improved medication management. 

Although challenges remain, DoD IG identified initiatives in the Department for supporting the 

comprehensive care, healing, and transition of wounded warriors. One initiative entailed 

recovery-team forums to develop individualized treatment for each wounded warrior. Another 

aimed to reduce the potential for exploitation of warriors, avoiding negative consequences to 

the overall health and welfare of the warriors. Wounded-warrior care centers were also 

developing meaningful programs of constructive activities to assist with warriors’ transition. 

These notable initiatives should continue Department-wide.

5-4C. Rehabilitation and Transition 

Care Department Response

The Department concurs with the IG’s assessment.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-23

6. IG-Identified Challenge: Equipping and Training Afghan National 

Security Forces

6-1A. Iraq Security Forces IG Summary of Challenge

With the drawdown of U.S. combat forces from Iraq in 2011 and the establishment of 

normal diplomatic relations, equipping and training of the Iraq Security Forces no longer is 

considered to present a significant challenge for reporting. The United States is now 

represented in Iraq by the U.S. Ambassador, with the Department serving in a supporting 

role. The Office of Security Cooperation – Iraq (OSC-1), operating under Chief of Mission 

authority but administered by DoD personnel, is charged with performing vital bilateral 

security cooperation and security assistance functions. The OSC-1, comprised of DoD military, 

civilian, and contractor personnel, represents a cornerstone capability for building an enduring 

foundation for a long-term security relationship with the Government of Iraq.

6-2A. Afghan National Security Forces IG Summary of Challenge

Between now and the end of 2014, the Department will continue to develop the Afghan 

National Security Force’s (ANSF) capability to take ultimate responsibility for Afghanistan’s 

security. Challenges include:

• Developing ministerial capability to plan and manage resources and human capital;

• Ensuring enabling-force capabilities are fielded prior to withdrawal of Coalition 

capabilities;

• Measuring and reporting ANSF operational readiness and effectiveness;

• Professionalizing the ANSF;

• Preparing for post-2014 operations.

Coalition force drawdown and retrograde, as well as securing Afghanistan’s national 

elections in April 2014, will add additional challenges as ANSF completes the transition to full 

responsibility for security.

• Security Ministries. The Department must continue its focus on advising and 

assisting the development of the resource management capabilities of the Ministry of 

Interior and Ministry of Defense. Budget planning and execution, training and 

development of human resources, increasing the ranks of civilian professionals, and 

leader emphasis on command and control of logistics are key areas for continued 

emphasis. Additionally, coordination between the Afghan National Army (ANA), the 

Afghan National Police (ANP), and the Afghan Air Force (AAF) will be important to 

providing adequate support to the 2014 elections as well as to providing a 

multi-layered, long-term defense against insurgents and criminals.

• Enabling Force Capabilities. Completing the fielding of “enablers”, or military

capabilities essential to building ANSF’s capacity to accomplish its missions, is

increasingly important. Fielding and integration of combat and support capabilities

in the ANA and ANP will remain a priority. As Coalition advisors and trainers are

withdrawn, the Department must ensure that capability gaps do not occur.

Additionally, the Department must continue to identify, assess, and address the

advice, training, and assistance requirements for fielding enabling capabilities

beyond 2014.

• Assessment of ANSF Progress. Assessing capabilities and capability gaps will become 

more difficult during Coalition force withdrawal. The Department’s visibility of the 

operational readiness and effectiveness of ANSF units is diminishing as the numbers of 
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-24

partners and advisors continue to decrease. The challenge is to ensure that sufficient 

skilled and qualified advisors are in key positions to continue assessing and developing 

ANSF leadership, command and control, and critical units.

• Professionalization. The Department must continue to support ANSF’s current 

efforts to professionalize the force. Command reports show that recruitment and 

management of initial training at the enlisted and officer levels are becoming ANSF 

strengths. Developing quality leadership, managing sustainment and professional 

training, accurate training and personnel records, and providing career development 

opportunities, have all been identified as areas requiring continued efforts to develop 

and train professionals in the force.

• Post-2014 Operations. Although no decision has been made on the timing of when a 

transition of DoD’s security cooperation and assistance activities to the Department of 

State will occur, the Department should begin planning for an eventual transition. The 

size, purpose, and support of Coalition forces and civilians remaining in Afghanistan in 

2015 should be determined as soon as possible to facilitate planning and minimize risk 

of complications for this transition.

6-2B. Afghan National Security Forces IG Assessment of Progress

Despite the current challenges in Afghanistan, much progress has been made. Most of the 

challenges above are recognized in Command reports as Coalition and ANSF priorities.

Since force levels are at over 95 percent of personnel end strength objective in both the 

ANA and ANP, and are approaching 90 percent of personnel end strength objectives in the 

AAF, the emphasis on ANSF development has shifted from force quantity, or growing the 

force, to force quality – sustaining and professionalizing the force.

Ministerial development is a primary emphasis, and the Coalition is increasing resource 

management training for security ministry personnel. Ministerial advisors are delivering 

assessments of the security ministry departments, reporting departmental setbacks as well as 

successes, and planning and revising training milestones and objectives as necessary.

With Coalition support, ANSF is committed to fielding a wide array of combat and combat 

support enablers that will provide ANSF the capability to operate independently and 

sustainably. Although ANSF logistics and force sustainment is still a primary concern as a force 

enabler, recent DoD IG assessments have noted some increased understanding and 

appreciation of the ANSF logistics system at the unit level. 

Additionally, the shortage of human capital remains a challenge for ANSF; nevertheless, 

ANSF continues to support human capital development and training, particularly literacy 

training. The ANSF is scheduled to begin administering the literacy program by mid-2014.

The ANSF continues to take responsibility for its own training. Coalition reports confirm 

that the number of Afghan trainers has increased steadily over time, easing the burden on the 

Coalition Forces to provide military and civilian trainers between now and December 2014. 

Reportedly, ANSF is also managing its non-commissioned officer (NCO) and officer ranks more 

aggressively, for example, taking action to meet ANP non-commissioned officer (NCO)

shortages by training and promoting qualified and experienced enlisted soldiers and junior 

NCOs.

Importantly, operational readiness and effectiveness of the ANA, measured by units rated 

“effective with advisors” or “independent with advisors,” reportedly increases with each 

quarterly assessment. From October 2012 to March 2013, ANP ratings have become more 

static, and on-site tracking of the readiness and effectiveness of many ANP units has been 

discontinued due to the shortage of ANP advisors and partner units. To address this reporting 
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-25

gap, the Coalition developed a second rating method in an effort to more accurately capture 

the readiness of ANSF units losing advisors or partners.

As of June 18, 2013, ANSF had assumed the lead for security nationwide, a significant 

milestone. Coalition forces have assumed a Train, Advise, and Assist rather than a combat 

role, except for force protection and certain counter-terrorism operations conducted with 

ANSF. As a consequence, Coalition casualties have significant reduced and those incurred by 

ANSF have commensurately increased. The Coalition is providing equipment to mitigate this 

trend to the extent possible, especially with respect to Improvised Explosive Device attacks, 

which account for many of the ANSF wounded or killed.

The Coalition is monitoring the performance of ANSF in the current fighting season to 

determine its strengths and weaknesses. According to the “Report on Progress Toward 

Security and Stability in Afghanistan”, issued in July 2013 by the Secretary of Defense, Afghan 

forces generally have acquitted themselves well but will continue to face development 

challenges, including a number that will likely require continued support post-2014 to ensure 

they subsequently reach full independence and sustainability.

6-2C Afghan National Security Forces Department Response

The Department concurs with the IG’s assessment.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-26

7. IG-Identified Challenge: The Nuclear Enterprise

7-1A. Modernizing the Nuclear Force in 

the Face of Declining Resources IG Summary of Challenge

Following the Soviet Union’s collapse, the U.S. military began to shift from a nuclear 

centric “Cold War” posture, which had been the foundation of U.S. military strategy since the 

end of World War II. The new focus is to maintain a smaller, multi-purpose force which can

address a larger spectrum of operations with the same weapon systems and personnel. With 

the start of the Overseas Contingency Operations following the attacks of 

September 11, 2001, greater focus has been placed on the military’s ability to conduct limited 

armed conflicts and counter-insurgency operations.

During this transformation, each of the various defense programs was forced to redefine 

their capabilities and display how they meet this new paradigm. The key to a program’s 

survival rests on its ability to validate its flexibility and capability to adapt to wide, 

multiple-mission roles. Weapon systems and defense programs displaying this capability were 

able to compete for funding during a time of shrinking budgets. All nuclear programs were 

perceived as a series of weapon systems rendered obsolete by current events. Those 

programs were also identified as being single-purpose systems that were inflexible and costly.

The nuclear infrastructure, delivery systems, manning, policies, and acquisition began to 

suffer. During a time when other countries modernized their nuclear forces, the budget was 

only sufficient to maintain a force that was 20 – 50 years old. Recently, the Services initiated 

modernization programs that, if funded, will lead to developing a modernized nuclear force 

within two decades.

Justifications for such improvements encounter scrutiny because of the basic nature of 

nuclear weapons and their use as a deterrent. Mandated budget sequestrations may affect 

current capabilities if age-related issues of the nuclear enterprise are not addressed.

7-1B. Modernizing the Nuclear Force in 

the Face of Declining Resources IG Assessment of Progress

The Services have initiated several programs to transform the aging nuclear force into a 

modern nuclear deterrent arm capable of operating into the latter part of the 21st century. 

Renovating the nuclear enterprise comprises several programs that will sustain nuclear assets 

and develop replacement systems integrating the latest technologies. When completed in 

2030, almost every component of the strategic nuclear force will be replaced or updated. 

However, federally-mandated budget cuts could threaten the upgrade and development of 

programs and extend the possible implementation dates or cancel completely some programs.

In an effort to accurately identify the critical command and control functions which are 

crucial in a nuclear crisis, the OSD Director of Cost Assessment and Program Evaluation 

developed a modeling simulation that maps the systems and flow of information used for force 

direction, force management, and adaptive planning of the nuclear forces. This tool allows 

planners and acquisition specialists to view the effectiveness of certain command and control 

systems in performing various tasks in the degraded communications environments expected 

during a nuclear attack. Using this tool, system users will be able to develop a strategy of how 

the command and control architecture operates and map out where vulnerabilities could exist 

and in defining acquisition priorities.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-27

As part of the force modernization efforts to replace both the B-52 and B-2 bomber fleets, 

the Air Force has begun developmental steps to build the next generation of bombers, known 

as the Long Range Strike-Bomber. In 2013, senior Air Force officials reaffirmed that the 

80 - 100 new bombers will be designed to meet their primary mission as a nuclear-delivery 

platform. However, the projected deployment date planned for the mid-2020s may be delayed 

due to the current budget situation.

As part of an on-going sustainment program, the B-2 bomber force is upgrading radar and 

nuclear command and control communications capabilities. The upgrades should extend for 

many years the service life of this bomber. Simultaneously, the B-52 fleet has been 

undergoing upgrades to global positioning systems, on-board computers, and an expansion to 

the variety of weapons the bomber can carry. These upgrades will ensure that the fleet is 

viable until the new bomber is operational.

The Air Launched Cruise Missile is the main-stay weapon for the B-52 fleet and allows the 

crews to strike targets well outside an adversary’s defense system. As missile stockpiles age 

and decline in number, the Air Force is studying various options to replace the current cruise 

missile fleet. If no delays are encountered, the Air Force estimates a production start in 2025.

The Minuteman III Intercontinental Ballistic Missile (ICBM) fleet was originally fielded in 

the mid-1970s and has been undergoing several upgrades and corrective maintenance 

actions. The ICBM Modernization and Replacement Program, the most current of these 

enhancement plans, will extend the operational life of the ICBMs through 2020 and possibly to 

2040. This program modernizes the missile’s guidance control and targeting systems and 

changes the rocket motor propellants.

In FY 2012, the Air Force initiated a two-year study to replace the Minuteman ICBM 

system. The project will examine the essential capabilities and future technologies that could 

be available to incorporate into the design of the next generation ICBM. The Air Force will 

decide the acquisition path at the completion of the study.

The Navy continues developing a follow-on ballistic missile submarine to replace the 

current 30-year-old Ohio class submarine fleet. Under the management of the Strategic 

Systems Program office, the Ohio Replacement Program was formed to research and design 

the next-generation strategic deterrence submarine. This program will deploy 12 submarines, 

beginning with the lead ship of the class being delivered in 2028, near the projected 

decommission date for the first of the Ohio class strategic missile boats.

Similar to the Minuteman Ill upgrade program, the Navy has begun carrying out a project 

to modernize the Trident II sea-launched ballistic missile. This sustainment upgrade is 

projected to extend the missile’s operational life through 2030. Pre-sequester cost reductions 

have delayed a Trident replacement until at least 2029.

As the Services have initiated a full-scale rejuvenation of all three legs of the nuclear triad, 

they must balance the various programs against an ever-tightening budget if the nuclear 

enterprise is to fully benefit from this rejuvenation.

7-1C. Modernizing the Nuclear Force in 

the Face of Declining Resources Department Response

The Department continues progress with its nuclear weapon systems and platform 

modernization programs, despite federally mandated budget cuts. The Department is working 

closely with the National Nuclear Security Administration to address future program gaps. 

With this modernization effort, the Department is actively sustaining and upgrading existing 

nuclear forces, ensuring a viable nuclear deterrent until follow-on weapon systems are 

implemented. 
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-28

Although faced with significant fiscal challenges, the Department has issued clear guidance 

that the Nuclear Enterprise is of the highest priority and, as a result, funding levels will be 

maintained. Progress has been made in improving the morale and proficiency of personnel 

within the nuclear enterprise, but challenges remain in light of budget cuts and the uncertainty 

of the career field amidst potential arms control reductions. At the same time, a robust 

inspection program continues to ensure the highest of standards of performance are 

maintained. The focused efforts of the Department and the interagency team maintain a safe, 

secure, and effective nuclear deterrent. The Department will continue to work with the 

interagency to address the challenges and opportunities presented in this report to maintain a 

well-managed and efficient nuclear enterprise.

7-2A. Redefining the Importance of 

the Nuclear Enterprise and 

Overcoming Past Neglect

IG Summary of Challenge

Several high-profile incidents over the past 10 years highlight the lack of emphasis on the 

nuclear enterprise. Recent news reports regarding morale and proficiency problems at one of 

the three Air Force Missile Bases will only continue to make the general public question the 

nuclear deterrent mission’s reliability.

Reestablishing the enterprise’s importance and performance will take time, funding, and a 

fundamental change in attitude by everyone associated with the nuclear weapons community.

The nuclear enterprise will face additional challenges to complete this transformation due to 

mandated funding cuts. These reductions will also negatively affect maintaining the proficiency 

required for managing the nuclear force.

7-2B. Redefining the Importance of 

the Nuclear Enterprise and 

Overcoming Past Neglect

IG Assessment of Progress

While the decline or even the perception of such neglect cannot be corrected overnight, 

the revamped nuclear enterprise is making headway to address the key problems. The most 

significant challenge that the enterprise faces is to maintain the nuclear communities’ current 

systems at the highest level of mission capability while meeting public expectations of flawless 

operations. This must be done despite budget cuts resulting from the government-directed 

sequester.

The efforts and challenges facing the nuclear community:

DoD. The Deputy Secretary of Defense directed the Defense Information System Agency 

to stand up an organization to address end-to-end system engineering in the enterprise. This 

new group will also bridge the nuclear command, control, and communications with the 

various critical systems that support continuity of government and operations, and 

presidential/senior leadership communications, in a crisis.

Joint Staff. As the focal point for the oversight of the nuclear enterprise, the Joint Staff’s 

Deputy Directorate for Nuclear Command and Control continues to assess the capabilities of 

the nuclear command, control and communications systems necessary to ensure both the 

safeguarding and viability of the nuclear deterrent mission.

• To improve the procedures used for nuclear command and control orders, the Joint 

Staff has comprehensively evaluated the nuclear command and control guidance and 

processes it issues to the enterprise. The evaluation was done to ensure that the 

guidance and doctrines derived from the Joint Staff documents streamline systems’

operational capabilities while maintaining the needed nuclear safeguards.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-29

• The Joint Staff continues to expand on the fidelity of its Staff/Command Assistance 

Visit program. This program measures the level of proficiency with which combatant 

command centers and certain military nuclear command and control platforms provide

the President with control of nuclear forces in a time of crisis. Under a 2012 initiative, 

the scope of the Joint Staff assessments has expanded to ensure that the evaluations 

provide a more detailed assessment of the personnel and capabilities of the command 

locations. These details are provided by presenting more in-depth testing and scenario 

evaluations to judge operator knowledge and performance of the different systems.

• The Joint Staff is also continuing programs that evaluate the systems used in both the 

command and control of the nuclear enterprise, the transmission and reception of 

nuclear control orders. Detailed scenario tests have continued despite 

federally-mandated budget constraints. The operating constraints thrust on 

participating units, caused by additional budget reductions, may affect the 

effectiveness of future assessments.

Navy. Navy E-6 units that support the communications networks will continue to meet 

their nuclear support requirements, but these units expect the loss of flight hours to affect 

crew training. While reduced training hours will affect the enterprise’s flying component, the 

budget cuts will not affect the Submarine Ballistic Missile fleet.

Air Force. Despite the mandated sequestrations, the Air Force has given priority to 

funding the nuclear deterrence mission. However, combat air forces supporting the nuclear 

mission may be affected if funding is depleted before the end of the fiscal year. 

• The Air Force has been forced to reduce the depot level maintenance and engine 

service sustainment programs for the B-52 and KC-135 fleet. Even with giving priority 

to the nuclear mission, the Air Force’s 18 percent reduction in flight hours will affect 

the manned bomber force’s training proficiency.

• Since its creation in August 2009, Air Force Global Strike Command has brought the 

Air Force deterrent mission together under one command. However, a 2013 DoD IG

audit found that the Air Force Headquarters staff is still struggling to decide where 

managing some of its nuclear responsibility actually rests. One example identified in a 

recent IG report found that the nuclear command, control, and communications 

systems management was alternating between the nuclear directorate. Another 

example involves stove-piping nuclear communications systems within one command, 

while another command is responsible for managing overall cyber and cryptographic 

upgrades.

• The DoD IG examined the Response Task Force program’s ability to effectively react to 

weapon incidents and found that it had made great progress in this area. However, the 

Department needs to better define the requirements and readiness levels required for 

the Response Task Forces.

The Military Services continue to emphasize the physical security programs supporting the 

nuclear forces. The DoD IG will continue to monitor-long term improvements, such as the 

Air Force’s work to field a replacement for the UH-1 “Huey” helicopter.

An Associated Press article about 19 Intercontinental Ballistic Missile crewmembers at 

Minot Air Force Base, North Dakota, being relieved from missile duty could be negatively 

perceived by the general public. However, the actions mentioned in the article resulted from 

proactive leadership trying to ensure that the highest levels of competency exist in the U.S. 

nuclear force. The Air Force has acknowledged the challenge to improve sagging morale that 

was identified from this incident. Senior Air Force leaders have acknowledged that morale 

problems at Minot stem from missile crew members’ perception of a lack of communication 

from higher headquarters about the future of the nuclear force and the crews’ concerns that 

they lack career advancement and diverse assignments. As part of this corrective action, the 

Air Force will need to address how it will manage nuclear-related career fields to ensure the 

enterprise has the necessary expertise and leadership through enrichment opportunities and 

advancement. The Chairman of the Joint Chiefs of Staff personally acted to show that senior 
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-30

leadership was concerned about this issue by visiting Minot in mid-June 2013. He told the 

troops in an hour-long address that, “As far as I’m concerned, we can’t pay you enough for 

what you do for our country.” This message to the troops will greatly help if meaningful 

actions follow to establish challenging career paths.

In response to these problems, national leadership has directed studies to address the 

causes of missile force deterioration. Once these studies are completed, a course of action will 

be created to return both the credibility and surety that is essential to maintain an effective 

deterrence force.

7-2C. Redefining the Importance of 

the Nuclear Enterprise and 

Overcoming Past Neglect

Department Response

The Department continues progress with its nuclear weapon systems and platform 

modernization programs, while maintaining close collaboration with the interagency team to 

make difficult choices in light of fiscal austerity and federally mandated budget cuts. The 

Department is also working closely with the National Nuclear Security Administration to 

address future capability gaps. Concurrent with this modernization effort, the Department is 

actively sustaining and upgrading existing nuclear forces, ensuring a viable nuclear deterrent 

until follow-on weapon systems are fielded. 

Although faced with significant fiscal challenges, the Department has issued clear guidance 

that the Nuclear Enterprise is of the highest priority and funding levels will be maintained. 

Progress has been made in improving the morale and proficiency of personnel within the 

nuclear enterprise, but challenges remain in light of current fiscal challenges and the 

uncertainty of the career field with regards to potential future arms control reductions. At the 

same time, a robust inspection program continues to ensure the highest of standards of 

performance are maintained. The focused efforts of the Department and the interagency team 

maintain a safe, secure, and effective nuclear deterrent. The Department will continue to work 

with the interagency to address the challenges and opportunities presented in this report to 

maintain a well-managed and efficient nuclear enterprise.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-31

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 Overview 

section of this report, the OUSD(Comptroller) leads the Department’s Federal Managers’ 

Financial Integrity Act (FMFIA) program, known as the Managers’ Internal Control 

Program (MICP). 

Managers throughout the Department are accountable for ensuring effective internal 

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

programmatic approach to establish and assess internal controls for all mission-essential 

operations. Components identified in the Department’s FIAR Guidance are required to 

include assurances over the internal controls related to financial reporting and financial 

systems. 

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.

• Impairs fulfillment of essential operations or mission.

• 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, or

• Nonconformance with government-wide, financial management system requirements.

Management-identified weaknesses are determined by assessing internal controls, as 

required by the FMFIA, the Federal Financial Management Improvement Act (FFMIA), and 

OMB Circular No. A-123, and fall into one of the following three categories: 

1. FMFIA Section 2, Financial Reporting Material Weaknesses (see Table 1a).

2. FMFIA Section 2, Operational Material Weaknesses (see Table 1b). 

3. FMFIA Section 4, Financial System Nonconformance Weaknesses (see Table 1c). 

FEDERAL MANAGERS’ FINANCIAL INTEGRITY ACT (FMFIA)

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 16 areas of material weakness in FY 2013. 

Table 1a lists these material weaknesses, captured by end-to-end process and then the area 

of material weakness, and highlights changes from the weaknesses reported in the FY 2012 

Agency Financial Report. Table 1a also includes a column, entitled “Ref Table 2,” that 

crosswalks these 16 weaknesses to those identified by the DoD IG (Table 2).
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-32

Table 1a. Effectiveness of Internal Controls over Financial Reporting (FMFIA Section 2)

Statement of Assurance: No assurance 

End-to-End 

Process

Areas of Material 

Weakness

Ref

Table 2

FY 2013 

Beginning

Balance

New Resolved Reassessed FY 2013 Ending

Balance

Budget-to-Report

Budget Authority –

Appropriations Received 

& Funds Distribution

1 (1)

2 0

Fund Balance with 

Treasury (FBWT) 10 1 1

Financial Reporting 

Compilation

2, 7, & 

8 1 1

Intragovernmental 

Eliminations 5 1 1

Hire-to-Retire

Health Care Liabilities 1 1

Civilian Pay 1 1

Military Pay 1 1

Order-to-Cash Accounts Receivable 13 1 1

Procure-to-Pay

Contract/Vendor Pay 1 1 1

Reimbursable Work 

Orders (Budgetary) 1 1 1

Transportation of People 1 1 1

Acquire-to-Retire

Financial Reporting of 

Valuation of Equipment3 11 2 (1) 1

Real Property Assets 11 1 1

Environmental Liabilities 3 1 1

Plan-to-Stock

Inventory 12 1 1

Operating Materials & 

Supplies (OM&S) 6 1 1

Military Standard 

Requisitioning and Issue 

Procedures (MILSTRIP)4 1 1 1

Total Financial 

Reporting Material 

Weaknesses

18 (1) (1) 16

As reflected in Table 1a, the Department is reporting 16 material weaknesses in internal 

controls over financial reporting, 2 fewer weaknesses than reported in FY 2012. 

 2 As of the third quarter, the Department met its FY 2013 goal by validating 100 percent of the Appropriations 

Received reported on the Statement of Budgetary Resources as ready for audit.

3 In a memo issued September 20, 2013, the Department combined the reporting categories of Military Equipment 

(initially identified as a material weakness in FY 2003) and General Equipment (initially identified as a material 

weakness in FY 2006). Combining these two categories into one reduced the number of reported material 

weaknesses. 

4 MILSTRIP was previously reported under the “Procure to Pay” end-to-end process.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-33

• Using a mock audit approach (internal versus independent auditors), the OUSD(C) 

verified that the previously-reported material weakness in appropriations received for 

Defense agencies was resolved. The validation testing used in the mock audit

confirmed that Appropriations Received for the Defense Agencies was fairly stated in 

all material respects in the FY 2012 Statement of Budgetary Resources.

• Also in FY 2013, the Department issued policy guidance that combined Military 

Equipment and General Equipment into one category; previously, these areas were 

reported separately in the financial statements. Accordingly, the material 

weaknesses for these areas are now captured in one category, entitled Equipment. 

Table 1a-1 provides a brief description of each of the 16 material weaknesses in financial 

reporting, corrective actions, and the target correction year.

Table 1a-1. FY 2013 Material Weaknesses in Internal Controls over Financial Reporting 

Material Weaknesses Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

1 FBWT

• Ineffective processes and 

controls to reconcile 

transactions posted to the 

Department’s FBWT 

accounts with the 

Department of Treasury’s 

(Treasury) records. 

• 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 Army; Navy; 

Defense 

Agencies

• Develop processes and 

controls to reconcile 

transaction level differences 

in a timely, efficient manner

• Improve supporting 

documentation for 

disbursements and 

collections. 

FY 2015

2 Financial Reporting 

Compilation

• Ineffective processes and 

controls to prepare 

accurate financial 

statements supported by 

general ledger balances 

that align with Department 

strategic and performance 

plans.

FY 2007 Departmentwide

• Implement a Standard 

Financial Information 

Structure (SFIS) to 

standardize financial 

reporting that aligns with the 

Department’s mission. 

• Implement controls that 

ensure adequate 

documentation exists to 

validate and support journal 

entries. 

FY 2015
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-34

Table 1a-1. FY 2013 Material Weaknesses in Internal Controls over Financial Reporting 

Material Weaknesses Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

Financial Reporting 

Compilation

(continued)

• Inability to reconcile 

detail-level transactions 

with the general ledgers 

and to provide adequate 

supporting documentation 

for adjustment entries.

• Inaccurate posting of 

transactions and 

abnormal account 

balances due to system 

interface issues. 

• Develop process to: reconcile 

trial balances (general 

ledgers) and financial 

statements (DDRS) 

accounts; a routine general 

ledger tie point analysis; 

identify and address root 

causes for abnormal 

balances; and review posting 

logic to reduce number of 

unsupported journal entries.

3 Intragovernmental 

Eliminations

• Ineffective processes and 

controls to collect, 

exchange, and reconcile 

intragovernmental buyer 

and seller transactions, 

resulting in unsupported 

adjustments.

• Inability to provide valid 

and complete supporting 

documentation in a timely 

manner

FY 2008 Departmentwide

• Implement enterprise 

resource planning (ERP) 

systems and SFIS structure 

to correctly report, reconcile, 

and eliminate 

intragovernmental balances.

• Develop interfaces between 

data standardization 

repositories;

• Implement controls to ensure 

adequate documentation 

exists to validate and support 

journal entries.

FY 2017

4 Health Care Liabilities

The current military health 

system financial processes 

cannot collect sufficient 

transaction-level cost and 

performance information for 

procedures performed in 

military treatment facilities.

FY 2003 MERHCF; 

SMA

• Implement procedures to 

improve coding and financial 

reconciliations for military 

treatment facilities’ 

operations as well as 

developing and implementing 

a methodology to reimburse 

military treatment facilities on 

a per capita basis.

• Implement SMA ERPs to 

improve overall financial 

reporting.

FY 2017

5 Civilian Pay

• Ineffective processes and 

controls to record civilian 

pay transactions and 

personnel actions in a 

timely, complete, and 

accurate manner.

FY 2011 Departmentwide • Continue evaluating the 

sufficiency of the current 

SSAE 16 efforts. This 

includes determining whether 

the assessment includes all 

complete end-to-end 

processes.

FY 2014
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-35

Table 1a-1. FY 2013 Material Weaknesses in Internal Controls over Financial Reporting 

Material Weaknesses Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

Civilian Pay 

(continued)

This includes unreliable 

supporting documentation 

for personnel actions and 

timekeeping, and 

inadequate reconciliations 

between Defense Civilian 

Pay System (DCPS) and 

the general ledger.

• Reporting entities, in 

conjunction with Service 

providers, develop and 

implement a methodology to 

reconcile DCPS to the 

general ledger.

• lmplement controls to ensure 

supporting documentation 

exists, is reviewed, approved, 

validated, retained, and 

readily available. 

6 Military Pay

Ineffective processes and 

controls to record military 

pay transactions and 

personnel actions in a 

timely, complete, and 

accurate manner. This 

includes unreliable 

supporting documentation 

for personnel actions, and 

lack of reconciliations 

between Defense Joint 

Military Pay System 

(DJMS) and the general 

ledger.

FY 2011 Departmentwide • Implement control processes 

that ensure supporting 

documentation exists, is 

reviewed, approved, 

validated, retained, and 

readily available. 

• Implement reconciliations to 

address the completeness of 

data entered into the 

Defense Joint Military Pay 

System. 

FY 2014

7 Accounts Receivable

Ineffective processes and 

controls to ensure complete 

and accurate recording and 

sufficient documentation to 

support accounts receivable 

and related accruals. This 

includes the inability to 

accurately record, report, 

collect, and reconcile 

accounts receivable due 

from the public. 

FY 2003 Army; Air 

Force; DLA; 

SMA

• Continue implementing 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. 

FY 2015

8 Contract/Vendor Pay

• Ineffective processes and 

controls to record 

transactions and contract 

actions in a timely, 

complete, and accurate 

manner. This includes the 

inability to reconcile 

contract balances and 

transaction details to 

source systems.

FY 2003 Departmentwide

• Implement reconciliations 

and/or /interface controls 

between general ledgers and 

source systems. 

• Implement improvements 

and/or methodologies to 

monitor contract obligation 

balances, conduct timely 

deobligations, and estimate 

and post related accounts 

payable accruals. 

FY 2014
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-36

Table 1a-1. FY 2013 Material Weaknesses in Internal Controls over Financial Reporting 

Material Weaknesses Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

• Inability to support the 

validity of open contract 

obligations. This includes 

lack of evidence 

supporting receipt and 

acceptance of goods and 

services.

• Ensure controls designed to 

account for Contract and 

Vendor Pay transactions 

have been implemented, are 

operating effectively, and are 

appropriately documented.

• Continue SSAE 16 

preparation activities.

9 Reimbursable Work Orders 

(Budgetary)

• Inability to reconcile 

Reimbursable Work Order 

buyer and seller 

balances/transaction 

details to field activity 

systems in a complete 

and timely manner.

• Lack of evidence to 

support receipt and 

acceptance of goods and 

services, and the validity 

of open obligations, 

• Inability to verify the 

timely and accurate 

collection of 

disbursements, and 

validate that recorded 

reimbursable agreements 

meet the time, purpose, 

and amount criteria. 

FY 2011 Departmentwide

• Implement controls to 

validate receipt and 

acceptance of goods and 

services.

• Implement training, improved 

guidance, and management 

oversight related to TriAnnual Reviews.

• Develop interfaces between 

data standardization 

repositories and accounting 

systems of record. 

FY 2014

10 Transportation of People

Inadequate controls over 

transportation of people 

processes. This includes 

inadequate segregation of 

duties, lack of 

reconciliations, and 

untimely voucher filing.

FY 2011 Departmentwide

• Develop plans to address 

segregation of duties internal 

control issues within the 

transaction system due to 

overlapping permission-level 

assignments, as well as 

demonstrating effective 

information technology 

general and application 

controls.

• Monitor open travel 

obligations and enforce 

supervisory review to ensure 

timely submission of 

travelers’ vouchers. 

• Implement activities to 

monitor open travel 

obligations and enforce 

effective supervisory review.

FY 2014
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-37

Table 1a-1. FY 2013 Material Weaknesses in Internal Controls over Financial Reporting 

Material Weaknesses Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

11 Financial Reporting of 

Valuation of Equipment5

Ineffective processes and 

controls to account for 

quantity and value of 

military and general 

equipment.

FY 2003 Departmentwide

• Continue efforts to ensure 

that assets are recorded in 

the appropriate Accountable 

Property System of Record 

and can be reconciled to the 

general ledgers.

• Provide field site training and 

complete inventories.

• Apply controls and 

procedures to manage 

equipment accountability, 

including adequate 

documentation to support 

ownership.

FY 2017

12 Real Property Assets

• Ineffective processes and 

controls to account for the 

quantity and value of real 

property. This includes 

the consistent reporting of 

real property records in 

accordance with 

accounting standards. 

Inaccurate and untimely 

recording of transactions 

when construction in 

progress is transferred to 

real property accounts.

• Inadequate real property 

documentation.

FY 2003 Departmentwide

• Implement adequate 

business processes and 

management controls to 

reconcile real property 

records, and to ensure 

assets exist and records are 

complete.

• Periodically evaluate the 

quality of real property data 

by making comparisons with 

physical assets and annual 

reconciliations. 

FY 2017

13 Environmental Liabilities

The Department cannot 

provide assurance that 

clean-up costs for all of its 

ongoing, closed, and 

disposal operations are 

identified, consistently 

estimated, and 

appropriately reported. 

FY 2001 Departmentwide

• Implement systems, 

processes, and controls to 

ensure the accuracy of sitelevel liability data to report 

environmental liabilities.

• Update cost to complete 

estimating guidance and 

training procedures.

FY 2015

 5 Financial Reporting of Valuation of Equipment includes Military Equipment (identified in FY 2003) and General 

Purpose Equipment (identified in FY 2006), reported as two separate material weaknesses in prior years. 
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-38

Table 1a-1. FY 2013 Material Weaknesses in Internal Controls over Financial Reporting 

Material Weaknesses Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

14 Inventory

• Insufficient documentation 

of business and financial 

processes and controls.

• Tracking value of 

historical cost of 

inventory, purchased 

under legacy systems and 

transferred to ERPs

• Reconciliations to ledgers 

FY 2005 Army; Navy; 

Air Force; 

DLA

• Execute FIAR Improvement 

Plans, to include tracking 

inventory values to historical 

cost, and reconciliation of 

inventory to the general 

ledgers. 

FY 2017

15 OM&S

• Insufficient documentation 

of business and financial 

processes and controls.

• Tracking value of 

historical cost of 

inventory, purchased 

under legacy systems and 

transferred to ERPs.

• Governmentowned/Contractor 

managed inventory not 

accounted for in DoD 

accountable property 

system.

FY 2005 Army; Navy; 

Air Force; 

USSOCOM

• Document business and 

financial processes and 

controls to include tracking 

inventory values to historical 

cost.

• Develop interim auditable 

solution for Government 

owned/Contractor managed 

inventory.

FY 2017

16 Military Standard 

Requisitioning and Issue 

Procedures (MILSTRIP)6 

• Insufficient documentation 

of business and financial 

processes and controls to 

include transactions not 

accurately reconciled to 

the financial management 

systems of record and 

ineffective reconciliation 

process for unliquidated 

obligations (ULO).

FY 2013 Departmentwide

• Document business and 

financial processes to identify 

root causes, review and 

prioritize FISCAM control 

testing, and ensure a 

comprehensive ULO 

reconciliation process. 

FY 2014

 6 In FY 2012, MIPSTRIP was reported in the Procure-to-Pay category
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-39

2. FMFIA SECTION 2, NON-FINANCIAL (OPERATIONAL) 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 into one of 17 reporting categories, in accordance with the 

DoD Instruction 5010.40, “Managers Internal Control Program Procedures,” revised 

May 30, 2013. 

Table 1b lists the FY 2013 material weaknesses in the internal controls over non-financial 

operations and highlights changes from the weaknesses reported in the FY 2012 Agency 

Financial Report. The Department did not identify any new material weaknesses in 

operations in FY 2013; however, based on the updated procedures in DoD Instruction and 

re-evaluation of the previously-reported material weaknesses, some changes have occurred. 

These changes are identified in the footnotes in Table 1b and Table 1b-1. 

Table 1b. Effectiveness of Internal Controls over Non-Financial Operations (FMFIA Section 2)

Statement of Assurance: Qualified

Area of Material 

Weakness

Beginning 

Balance New Resolved Reassessed Ending Balance

1 Acquisition 1 1

2 Security7 4 (1) 3

3 Information Technology7 0 1 1

4 Comptroller and/or 

Resource Management8 2 1 3

5 Contract Administration 2 2

6 Force Readiness9 2 (1) 1

7

Personnel and/or 

Organizational 

Management

3 3

8 Property Management 1 1

9 Supply Operations 1 1

Total NonFinancial/Operational

Material Weaknesses

16 (1) 1 16

 7 In FY 2012, four material weaknesses were reported in the category of “Communications, Intelligence, and/or 

Security.” To better align with the updated DoD Instruction 5010.40, one weakness is now reported under the 

Information Technology category. 

8 In FY 2012, two material weaknesses were reported in the category of Comptroller and/or Resource Management. 

In FY 2013, one weakness previously reported for unreliable business processes and the need for a well-trained 

financial management workforce has been separated into two weaknesses.

9 In FY 2012, two material weaknesses were reported in Force Readiness. In FY 2013, the Air Force assessed and 

determined that its corrective actions to remediate its material weakness in the timely and accurate reporting of 

force readiness assessments has been resolved
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-40

Table 1b-1, below, provides the description and corrective action plan for each of the 

material weakness in non-financial operations identified in Table 1b.

Table 1b-1. FY 2013 Material Weaknesses in Internal Controls over Non-Financial Operations

Material Weaknesses Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

1 Acquisition 

The Department lacks 

processes to maximize 

the return on weapon 

system investments. In 

addition, the 

Department must find 

ways to deliver more 

capability to the 

warfighter at a lower 

cost.

FY 2011 Departmentwide

• The Department is developing 

an analytical approach to 

prioritize capability needs, 

empowering portfolio managers 

to prioritize needs, make 

decisions, and allocate 

resources. This enables 

programs and individuals to be 

held accountable for policy 

implementation within milestone 

and funding decisions through 

the use of reporting metrics.

Reassessed 

annually 

based on 

incremental 

improvements

2 Security7

a Weaknesses exist in 

the Department’s 

management and 

assurance of the 

reliability and security 

of the information 

technology 

infrastructures.

FY 2006 Navy; 

USAFRICOM; 

Air Force, 

USFOR-A

• The Navy is developing and 

implementing instructions and 

policies for tracking equipment 

accounts supporting Navy 

contracts and a uniform 

equipment request and loan 

tracking system for managing 

and tracking information. 

• USAFRICOM plans to assess its 

consolidated enterprise and to 

develop additional requirements; 

engineer, implement, operate, 

and maintain a joint enterprise 

network and provide additional 

capabilities for the tactical local 

area network.

FY 2014

b Controls related to 

safeguarding 

Personally Identifiable 

Information (PII) are 

ineffective. Metrics 

demonstrate a need to 

strengthen the existing 

controls or develop 

new safeguarding 

policies. 

FY 2011 Navy • The Navy plans to implement 

the use of individual unique 

identification numbers. In 

addition, the Navy will continue 

to monitor statistical data to 

evaluate whether high risk 

breaches continue to decline.

FY 201410

 10 Target Correction Year was reassessed and extended from FY 2013 to FY 2014
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-41

Table 1b-1. FY 2013 Material Weaknesses in Internal Controls over Non-Financial Operations

Material Weaknesses Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

c Operations Security 

(OPSEC) controls 

related to the 

safeguarding of 

classified information 

are not sufficient. As a 

result, intentional 

and/or accidental 

disclosure of classified 

information by military, 

civilian and contracted 

personnel may 

potentially be accessed 

by adversaries.11

FY 2011 Air Force; 

DSCA; DTRA; 

USSOCOM

• DoD Components are 

developing enhanced Ethics and 

Security Awareness training at 

all levels to ensure that 

personnel are trained to prevent 

the compromise of classified 

information.

FY 201611

3 Information 

Technology7

Internal assessments 

have identified 

weaknesses in the 

Department’s Cyber 

Security controls, 

potentially increasing 

vulnerability of DoD 

systems.

FY 2010 USAFRICOM • Department will continue 

ongoing actions to address 

weaknesses in the complex 

network of systems referred to 

as the DoD Information Network 

Systems. The Department is 

updating identified security 

controls to current industry 

standards. 

• The Joint Information 

Environment, scheduled for 

completion in FY 2018, is 

creating a shared infrastructure 

and single security architecture 

that gives better visibility of 

network activity at points of 

vulnerability. 

• In FY 2014, DoD will continue to 

implement insider threat 

protection such as Public Key 

Infrastructure and data access 

monitoring.

FY 2014

 11 Description expanded from Information Assurance to more broadly capture the material weakness in operational 

security controls related to safeguarding of classified materials. Target Correction Year extended from FY 2013 to 

FY 2016.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-42

Table 1b-1. FY 2013 Material Weaknesses in Internal Controls over Non-Financial Operations

Material Weaknesses Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

4 Comptroller and/or 

Resource Management

a The Department’s 

current business 

processes, systems, 

and internal controls do 

not provide reliable, 

accurate and verifiable 

financial statements.8

FY 2011 Departmentwide

• The Department is implementing 

established guidance that will 

enable Components to improve 

their processes, systems and 

controls. The biannual FIAR 

Plan Status Report outlines the 

Department’s and Components’ 

progress and future plans for 

implementing ERPs and 

improving standard operating 

procedures and controls related 

to producing financial 

statements by FY 2017.

FY 2017

b The financial 

management workforce, 

which includes civilian, 

military, and contracted 

personnel need to be 

well-trained in all 

financial managementrelated functions, and 

be able to implement 

effective financial 

management policies, 

processes, and 

procedures.8

FY 2011 Departmentwide

• The Department is in the 

process of conducting 

competency gap analyses of its 

current and expected future 

financial management 

workforce.

• The Department is working to 

develop guidance for strategic 

workforce planning, and improve 

the related performance 

measures.

FY 2017

c Weaknesses within the 

funds control processes 

result in the inability to 

adequately track funds 

consistent with 

regulations, policies, 

existing laws, and use 

fund execution 

information to support 

budget requests. The 

lack of adequate funds 

control has led to 

several Anti Deficiency 

Act violations.

FY 2011 JIEDDO; 

PACOM; 

USSOCOM

• The Department is enhancing 

systems for tracking funds in 

addition to publishing guidance 

and scheduling training for 

personnel related to funding 

activities. The Department 

requires Components to review 

and evaluate training records to 

ensure personnel certifying and 

handling funds have financial 

management and fiscal law 

training.

FY 2014
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-43

Table 1b-1. FY 2013 Material Weaknesses in Internal Controls over Non-Financial Operations

Material Weaknesses Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

5 Contract Administration

a The Department’s lack 

of well-defined 

requirements, the use 

of ill-suited business 

arrangements, and the 

inadequate number of 

trained acquisition and 

contract oversight 

personnel contribute to 

unmet expectations 

and place the 

Department at risk of 

potentially paying more 

than necessary.

FY 200912 Departmentwide 

• The Department is revising 

guidance on contracting 

operations, which includes 

oversight, responsibilities, 

policy, and defining roles, as 

well as assessing the 

effectiveness of efforts to 

improve competition, contracting 

arrangements, and incentives. 

The Department intends to fully 

integrate operational contract 

support through education and 

pre-deployment training in 

addition to establishing 

improved processes and 

procedures.

Reassessed 

annually 

based on 

incremental 

improvements

b The backlog of 

contracts to be closed

out continues to be a 

challenge. These delays 

result in problems with 

funds reconciliation, 

delays in final payment 

and release of excess 

funds, cancellation of 

funds, and the inability 

to close accounting 

records. 

FY 2012 Defense 

Contract 

Management 

Agency 

(DCMA)

• DCMA and Defense Contract 

Audit Agency (DCAA) have been 

partnering and evaluating an 

option that would allow for a 

review of a sample of proposals 

within acceptable risk 

allowances. This will provide 

DCMA contracting officers the 

ability to settle indirect rates and 

close out overage contracts. 

Additionally, DCMA and DCAA 

are working collaboratively in 

developing and implementing 

training, creating a standardized 

format for more effective and 

efficient dissemination of 

information.

FY 2014

6 Force Readiness

The Air Force has 

failed to effectively 

implement a weaponsof-mass-destruction 

emergency response 

program, which 

includes plans, policy, 

and reporting 

requirements, in 

addition to the 

management of 

equipment funds and 

inventory levels. 

FY 2011 Air Force • The Air Force is developing a 

weapons-of-mass-destruction 

emergency response program, 

which includes training 

personnel and ordering 

necessary equipment to ensure 

appropriate inventory levels and 

standardized policies for 

reporting emergencies exist.

FY 201413

 12 Correction from previously-reported date of FY 2006 13 Target Correction Date extended from FY 2013 to allow additional time to implement training, policies, and 

procedures related to responding to emergencies
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-44

Table 1b-1. FY 2013 Material Weaknesses in Internal Controls over Non-Financial Operations

Material Weaknesses Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

7 Personnel and/or 

Organizational 

Management:

a Audits have found that 

DCAA personnel 

lacked sufficient 

professional judgment 

and quality to properly 

plan, execute and 

report findings due to 

improper personnel 

qualifications and 

organizational 

mismanagement.

FY 2009 DCAA • DCAA has developed and 

implemented policies and 

procedures to ensure auditors 

receive sufficient training. 

• DCAA also plans to institute 

peer reviews in order to confirm 

the progress made towards 

improving audit quality. 

FY 201414

b The lack of quality 

assurance training for 

the acquisition 

workforce, along with 

the increasing 

complexity of products 

purchased, inhibits the 

agency’s ability to 

conduct necessary and 

critical reviews of 

contract 

documentation. With 

DCMA currently having 

72% of the 8,000+ 

acquisition workforce 

with less than 5 years 

with the Agency, the 

urgency of 

professionalizing this 

training is apparent.

FY 2010 DCMA • DCMA is developing and 

implementing a formalized 

education, training, and 

certification program for all 

levels of employees. 

FY 2014

c OSD has identified 22 

Mission Critical 

Occupations with 

potential skillset gaps 

that may impact the 

ability to meet mission 

objectives.

FY 2006 Departmentwide

• DoD has implemented a process 

to identify occupations and 

function groups with skill gaps 

and to develop corrective action 

plans to remediate identified 

gaps. The process includes 

conducting internal and external 

environmental scans of political 

actions, legal policies, needed 

workforce skills, organizational 

goals and constraints, impacts 

to the workforce, and strategic 

roles in accomplishing the 

mission and executing strategy. 

FY 2015

 14 Target Correction Date extended from FY 2013 due to a delay in completing external peer reviews.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-45

Table 1b-1. FY 2013 Material Weaknesses in Internal Controls over Non-Financial Operations

Material Weaknesses Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

Mission Critical 

Occupations (continued)

• The scan determines current 

workforce supply, evaluates 

future demand for filling current 

and new positions, analyzes 

recruitment and retention of 

data, develops forecasts using 

data provided by Functional 

Community Managers, and 

conducts skill gap analyses to 

identify strategies for skill gap 

closure.

8 Property Management

The Department has 

not properly trained 

staff or enabled 

sufficient tools to 

address the 

accountability 

requirements in place 

to adequately oversee 

and execute personal 

property transactions, 

including government 

furnished property in 

the hands of 

contractors.

FY 2011 Departmentwide 

• The Department is establishing 

procedures and training 

personnel on property 

management policies. 

• The Components will establish 

accountable records that will 

identify property, to include 

Government Furnished Property.

OUSD (AT&L) will validate 

accountable property records 

and supporting documentation 

through existence and 

completeness testing.

FY 2016

9 Supply Operations

The Department lacks 

management of supply 

inventories and 

responsiveness to 

warfighters’ 

requirements.

FY 2011 Departmentwide

• The Department is improving 

Supply Chain Management 

operations through better 

demand forecasting, asset 

visibility, and distribution 

processes including: 

• Developing and implementing a 

comprehensive inventory 

management plan, expanding 

automated process to worldwide 

inventory and linkages to 

distribution, and executing 

materiel distribution through 

stock positioning.

Reassessed 

annually 

based on 

incremental 

improvements
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-46

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 1c shows the resulting weakness.

Table 1c. Conformance with Financial Management System Requirements (FMFIA Section 4)

Statement of Assurance: Systems do not conform to financial management system requirements

Non-Conformances Ref

Table 1

Beginning

Balance New Resolved Reassessed EndingBalance

1. Financial Management 

Systems 9 1 1

Total System Conformance 

Material Weaknesses 9 1 1

Table 1c-1, below, provides the description and corrective action plan for the material 

weakness related to internal control over financial systems.

TABLE 1c-1. FY 2013 Internal Control over Financial Systems Material Weakness

Material Weaknesses Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

1 Financial Management 

Systems: The 

Department’s financial 

systems were originally 

developed to meet the 

requirements of 

budgetary accounting 

and do not provide the 

capability to record 

costs and assets in 

compliance with current 

accounting standards. 

Improvements to the 

current systems 

environment are 

complicated by the use 

of and reliance upon 

many mixed systems 

that are not well 

integrated.

FY 2001 DepartmentwideMost DoD Components have 

embarked on an effort to implement 

a compliant, end-to-end financial 

management system, anchored by 

ERPs that provide the core 

financial system as well as 

replacing many of the mixed 

(feeder) systems. 

FY 2017
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-47

SUMMARY OF FINANCIAL STATEMENT AUDIT 

The following Table 2 lists the DoD IG’s identified 13 areas of material weakness in the

Department’s financial statement reporting. 

Table 2. 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

FEDERAL FINANCIAL MANAGEMENT IMPROVEMENT ACT 

The DoD IG and the audit agencies within the Military Services have reported on DoD’s 

noncompliance with FFMIA. The DoD’s noncompliance is due to 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 DoD’s compliance with 

FFMIA. 

Table 3. Compliance with Federal Financial Management Improvement Act

Agency Auditor

1. System Requirements Noncompliance noted Noncompliance noted

2. Accounting Standards Noncompliance noted Noncompliance noted

3. U.S. Standard General Ledger at Transaction Level Noncompliance noted Noncompliance noted
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-48

IMPROPER PAYMENT AND PAYMENT RECAPTURE PROGRAMS 

INTRODUCTION

The 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), requires agencies to report on 

its improper payments and payment recapture programs to the President and Congress in 

the annual Agency Financial Report (AFR). The Department reports improper payments in 

the following six categories:

• Military Health Benefits – Disbursed by the Defense Health Agency (DHA) 

• Military Pay – Disbursed by DFAS 

• Civilian Pay – Disbursed by DFAS 

• Commercial Pay (vendor and contract payments) – Disbursed by DFAS, the Navy, and 

the U.S. Army Corps of Engineers (USACE) 

• Military Retiree and Annuitant Benefit Payments – Disbursed by DFAS 

• Travel Pay – Disbursed by DFAS, the Army, the Navy, the Air Force, and USACE

The DFAS, USACE, and DHA are the primary disbursing components within the Department. 

The Army, Navy, and Air Force all report travel payments that are not-disbursed by DFAS.

This section explains the Department’s improper payments and payment recapture 

programs in accordance with Office of Management and Budget (OMB) Circular No. A-136, 

Financial Reporting Requirements.

I. Risk Assessment

II. Statistical Sampling Process

III. Root Causes of Errors and Corrective Actions

IV. Program Improper Payment Reporting 

V. Recapture of Improper Payment Reporting 

VI. Accountability

VII. Agency Information Systems and Other Infrastructure

VIII. Statutory and Regulatory Barriers

IX. Additional Information

I. Risk Assessment

Since FY 2006, when OMB determined that all DoD payments are risk susceptible, the 

Department has maintained a more conservative position than required by IPERA and 

considers all payment categories as high risk. Nonetheless, DFAS performed a risk 

assessment of its disbursements using OMB criteria as contained in OMB Circular No. A-123, 

Appendix C, Management’s Responsibility for Internal Control. The DFAS also monitors 

changes in programs associated with OMB-mandated criteria (e.g., a large increase in 

annual outlays, regulatory changes, newly-established programs, etc.) to track unfavorable 

trends to allow implementation of corrective measures as early as possible.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-49

The USACE risk assessments for travel and commercial payments address the effectiveness 

of internal controls, such as pre-payment reviews, to prevent improper payments as well as 

system weaknesses identified internally or by outside audit activities. The U.S. Corps of 

Engineers Financial Management System (CEFMS) provides internal system standards that 

adhere to U.S. generally accepted accounting principles, as well as process controls that 

provide the safeguards to monitor and ensure that pre-payment examination requirements 

are met. The USACE also monitors changes in programs to track trends and implement 

corrective actions, as necessary. 

The DHA risk assessment process is managed through contracts with an external 

independent contractor (EIC) to provide an independent, impartial review of 

reimbursements and claims processing procedures used by DHA’s care contractors. The EIC 

identifies improper payments as a result of contractors’ noncompliance with DHA 

payment/reimbursement policies, regulations, and contract requirements. The risk level of 

programs is evaluated based on results of these compliance reviews.

II. Statistical Sampling Process

The primary disbursing Components use statistically valid sampling methods designed to 

meet or exceed OMB’s requirements of 90 percent confidence level, ±2.5 percentage points, 

to estimate and project the Department’s annual improper payments for each payment 

type. The smaller disbursing Components normally perform 100 percent post-payment 

reviews, or a full review of payments above a certain dollar threshold, with random 

sampling for lower-dollar payments. All Department sampling plans were approved by OMB 

for FY 2013.

Military Health Benefits. There are two types of payment samples: one for denied claims 

and one for non-denied claims (claims that were paid). In this way, DHA can be sure that 

claims were either paid or denied correctly. The DHA uses a stratified random sample 

process to select medical, pharmacy or dental claims for review. 

Military Pay. On a monthly basis, the Department statistically samples Military Pay 

accounts sorted 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 DFAS selects the accounts for each 

Component to review and then DFAS produces annual estimates of improper payments.

Civilian Pay. On a monthly basis, DFAS statistically samples Civilian Pay accounts broken 

out by Army, Air Force, Navy/Marine Corps, and Defense Agencies. 

Commercial Pay:

DFAS. The DFAS statistically samples commercial pay invoices on a monthly basis for 

contract and vendor payments. Approximately 2,000 invoices were reviewed each month. 

Based on a recommendation from a recent GAO report, DFAS is reevaluating its sampling 

methodology for the FY 2014 commercial pay program.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-50

Navy. The Navy samples the contract and vendor payment population computed in its 

Enterprise Resource Planning (ERP) system. The standardized sampling framework was 

developed by the Navy’s Financial Management Office and approved by statisticians in the 

Navy’s Center for Cost Analysis, as well as by OMB. Trained Navy financial management 

staff extract data from the ERP and provide payment samples to the Commands. The 

Commands review the sampled payments to ensure the payments are legal and proper. 

For FY 2013, the Navy used a two-stage sampling methodology for Navy ERP commercial 

payments to ensure coverage for sampling. The Navy reviewed the data from FY 2012 to 

ensure the six months included for FY 2013 provided an accurate representation of a full 

year’s data in terms of transaction volume and dollar amounts.

• In the first stage of the sampling methodology, the Navy used the RANDOMIZER 

statistical software to identify the sample size for each Command. This approach 

provides a uniform number of samples to be drawn from each Command based on the 

percentage of all payments processed by the Command to the total number of payments 

processed in the ERP. 

• In the second stage, simple random sampling was used to draw a sample of sufficient 

size to yield an estimate with a 90 percent confidence level and a margin of error of 

±2.5 percent. Using this methodology, each payment within a Command has an equal 

probability of selection from the ERP. A random sample of commercial payments 

processed was examined. The sample size was designed with a confidence level of 

90 percent with a ±2.5 percent confidence interval.

The estimated FY 2013 improper payments for Navy commercial pay did not exceed the 

IPERA and OMB A-123, Appendix C, reporting thresholds. In fact, the FY 2013 testing for 

Navy ERP commercial payments identified no improper payments.

The Navy reviews ERP commercial pay disbursements that are computed by the Navy. The 

Navy’s commercial pay sampling and review plan was not in place early enough to report 

improper payments for the entire fiscal year. Therefore, the Navy is reporting commercial 

pay improper payment results only for the last two fiscal quarters of FY 2013. The Navy ERP 

disbursement universe for FY 2013 was approximately $1.2 billion.

USACE. The post-payment reviews were conducted using a statistically valid (95 percent 

confidence level, ±2.5 percentage points) sample taken from the entire USACE commercial 

pay universe. In addition, the USACE Finance Center (UFC) used pre-payment 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 grouped by the retired and annuitant pay 

accounts. The reviews for retired and annuitant pay include sampling drilling reserve units, 

retiree offsets, survivor benefit plans, transfers to/from the Temporary Disability Retired List 

to the Permanent List, and Veterans Affairs offsets. Special reviews continue for Combat 

Related Special Compensation, Concurrent Receipt of Disability Payment, daily payroll 

accounts, newly established accounts, and other targeted areas.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-51

Travel Pay:

The Department. The Department’s total travel payments include those computed, paid, and 

reported independently by the Military Services and other Defense agencies. Department travel, 

as depicted in Table 4, represents the combined results of the review of DFAS-disbursed travel 

payments as well as non-DFAS-disbursed travel payments for Army, Air Force, and Navy. 

The DFAS reports the largest portion of the Department’s travel payments made by the 

Defense Travel System (DTS), and Windows Integrated Automated Travel System 

(WinIATS) for the Department of the Army and select Defense Agencies. On a monthly 

basis, DFAS statistically samples DTS travel vouchers grouped by Service and the aggregate 

of the Defense Agency vouchers. The DFAS also statistically samples monthly WinIATS 

travel vouchers, broken out by Army activity and type of payment, both Temporary Duty 

Travel (TDY) and Permanent Change of Station (PCS). 

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, ±2.5 percentage points.

II. Root Causes of Errors and Corrective Actions

Military Health Benefits. As shown in 

Figure A-1, the Department projects a 

0.32 percent error rate for FY 2013 

Military Health Benefits improper 

payments. For ten years, the 

Department’s purchased-care contracts 

have included payment accuracy 

performance standards for processing 

military health benefit claims. 

Specifically, if improper payments 

exceed the two percent payment 

accuracy performance standard during 

a quarterly or semi-annual performance 

review, the DHA purchased-care 

contractor(s) may be subject to 

financial penalties. Conversely, if 

improper payments fall below the 

performance standard, the contractors 

may receive a financial incentive 

award. In addition, an external claims contractor conducts annual health care cost audits of 

payments made by the managed-care support contractors (MCSCs). Confirmed 

overpayments are projected to the review universe, and the MCSCs are liable for the total 

unallowed health care amounts paid. 

For the past several years, DHA purchased-care contractors have been 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 

Figure A-1 Improper Payment Rate –

Military Health Benefits

B13-37

0.24% 0.15%

0.32%

2.00% 2.00% 2.00%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

FY 2011

Actual

FY 2012

Actual

FY 2013

Actual

FY 2014

Target

FY 2015

Target

FY 2016

Target

FY 2013 Target 2.00%
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-52

contractors to keep payment error rates as low as possible to avoid financial penalties, or to 

achieve increased contract financial awards. Actual error rates, however, have been 

consistently less than 1⁄2 of 1 percent. This contract design, combined with numerous 

pre-payment and post-payment controls, effectively curtails improper payments for 

purchased-care contracts and ensures the Government’s risk for improper payments in the 

military health benefits program is very low. 

Root Causes. The primary reasons for payment errors in the Military Health Benefits 

program for this reporting cycle are: 

• Incorrect pricing of medical procedures and equipment, 47 percent 

• Authorization or Pre-Authorization needed prior to receiving medical care, 14 percent

• Cost-share/deductible miscalculations, 11 percent

• All other causes combined, 28 percent

Corrective Actions. The DHA purchased-care contractors are monetarily incentivized or dis 

incentivized, through contractual 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 contractual reimbursements.

Military Pay. As shown in Figure A-2,

the Department estimates a 

0.29 percent error rate in FY 2013 

Military Pay improper payments, based 

on reviews, estimates, and forecasts 

from October 2012 through 

September 2013. The error rate 

increase in FY 2013 from FY 2012 is 

attributable to an expanded list of 

entitlement categories from what was 

historically used.

Overpayments comprise 90 percent of 

the Military Pay improper payments. 

These overpayments were not found in 

statistical sampling, but in the 

separation debts (out-of-service debts 

established after a member has left the 

Service) and through in-service debt 

collections reported by the Military 

Services. 

Root Causes. The primary reason for recurring Military Pay errors is the high turnover in 

military payroll clerks throughout the Military Services. This primary reason is often the 

underlying cause of the next most common causes of Military Pay errors – the large amount 

of untimely or inaccurate information entered into pay systems, and from administrative 

and documentation errors that occur during and between monthly pay periods (military 

members are paid just once per month). Entitlement changes, especially for deployed 

Figure A-2. Improper Payment Rate –

Military Pay

0.49%

0.24%

0.29% 0.29% 0.29% 0.29%

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

FY 2011

Actual

FY 2012

Actual

FY 2013

Actual

FY 2014

Target

FY 2015

Target

FY 2016

Target B13-38

FY 2013 Target 0.24%
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-53

Service members, can greatly change the amount due. Changes must be corrected in the 

following month’s pay. Nonetheless, nearly 100 percent of improper payments for Military 

Pay have been recovered or a collection action has been established to recover the amount.

The primary types of Military Pay improper payments result from administrative and 

documentation errors as described above. These entitlements are:

• Basic Allowance for Housing (39 percent) resulting from incorrect reporting of the 

entitlement.

• Base pay for Active Duty and incorrect Active Duty pay for Reservists (9 percent) 

resulting from incorrect reporting of the entitlement.

• Hostile fire/imminent danger pay (11 percent) resulting from incorrect reporting of the 

entitlement.

• Family separation allowance, Active and Reserve, (5 percent) resulting from incorrect 

reporting of the entitlement.

Miscellaneous categories, including results from underpayments, account for 36 percent of 

all improper payments. (Miscellaneous categories are comprised of over 25 different 

entitlements.)

Corrective Actions. Corrective actions taken include instituting more comprehensive training 

programs with standard desk procedures to provide a reference for new clerks. 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. The DFAS provides the 

Military Service financial managers with monthly reports on the results of statistical reviews, 

including the reasons for and dollar value of errors and year-to-date trends, to inform their 

training plans.

Civilian Pay. As shown in Figure A-3,

the Department projects a 0.17 percent 

error rate for Civilian gross pay 

payments, primarily overpayments, for 

FY 2013. The increase in payment 

errors from FY 2012 is primarily due to 

an issue with the Living Quarters 

Allowance (LQA) that surfaced

mid-year. 

The LQA is intended as a recruiting 

incentive for hiring personnel to work 

overseas. The Department of State 

guidance states that employees, who are 

hired overseas after working for more 

than one overseas employer, are not 

eligible to receive LQA. An audit of 

overseas civilian pay accounts revealed 

that many overseas employees were 

erroneously paid LQA for an extended 

Figure A-3. Improper Payment Rate –

Civilian Pay

0.16%

0.14%

0.17% 0.17% 0.17% 0.17%

0.00%

0.05%

0.10%

0.15%

0.20%

FY 2011

Actual

FY 2012

Actual

FY 2013

Actual

FY 2014

Target

FY 2015

Target

FY 2016

Target B13-39

FY 2013 Target 0.14%
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-54

period of time. Collection of these overpayments is under review, and where warranted, the 

repayments may be waived on an individual basis. Improper payments made during FY 2013 

($11.7 million) are reported in Table 4. Overpayments that were not waived are being 

recaptured and are reported in Table 9. 

Root Causes. The Civilian Pay improper payments primarily were caused by untimely or 

inaccurate entry of information into the pay systems. 

• Time and attendance, 35 percent 

• Overseas and other allowances, 44 percent

• Late personnel actions, 21 percent

The Defense civilian payroll systems, like most government payroll systems, base their time 

and attendance submissions on anticipated versus actual hours worked. Therefore, the 

Department must correct overpayments and underpayments in a subsequent pay period. 

In addition to LQA overpayments, 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 recomputing pay and allowances and creating a collection (Accounts Receivable) action to offset 

the overpayment. The initial improper payments are discovered through various sources, such 

as agency reviews, bi-weekly exception reports, and employee or supervisor notification. 

Corrective Actions. The Department is considering conducting pay audits at the time of 

employee leaves his position. The employee knows that when they return to the United 

States, they are no longer eligible for the additional money. Instituting a post payment 

review of employees’ leave and earnings statements might result in the prevention of a 

number of overpayments and/or may also deter employees from continuing to receive 

entitlements for which they are no longer eligible. 

The 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. The 

DFAS also advises Components on best business practices to prevent future improper 

payments, and it participates at various conferences to instruct personnel on how to 

correctly submit information to help prevent improper payments.

Independent public auditors performed a Statement on Standards for Attestation 

Engagement No. 16 (SSAE 16) on the effectiveness of select internal controls for DFAS 

Civilian Pay and Disbursing Operations, and issued an unqualified opinion with no material 

weaknesses identified.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-55

Commercial Pay

DFAS. The DFAS continues to conduct statistically-valid reviews of DFAS-computed invoices 

in the Mechanization of Contract Administrative Services (MOCAS) contract payment 

system, the DFAS legacy commercial pay systems, and the Service Component ERPs. 

(Beginning in mid-FY 2013, the Navy reviewed and sampled the payments it computed in 

the Navy ERP.)

As shown in Figure A-4, based on 

statistical sampling methods, the 

FY 2013 estimated error rate in total 

estimated commercial payments is 0.03 

percent, for total estimated improper 

payments of $117.3 million. The DFAS 

also collects data on contractoridentified improper payments and 

regularly performs analyses to inform 

its preventative efforts. 

The DFAS identifies and prevents 

improper payments in DoD’s five 

largest commercial payment systems 

through use of the pre-payment 

Business Activity Monitoring (BAM) tool. 

These systems account for 

approximately 85 percent of all DoD 

commercial payment dollars. These 

types of preventative control activities 

consistently prove to be the most cost-effective. 

Root Causes. The majority of errors in commercial pay improper payments are caused by 

pay technician input errors. 

Reasons for improper payments identified from monthly random sample reviews include: 

• Entitlement Errors, 48 percent 

• Contract Input Errors, 21 percent 

• Missing Documentation, 16 percent 

• Miscellaneous, 15 percent

Using BAM, DFAS identifies and prevents improper payments in DoD’s five largest 

commercial payment systems which are MOCAS, CAPS-Windows, IAPS, One-Pay, and EBS. 

These systems account for 86 percent of all DoD commercial payment dollars. 

The DFAS identifies and monitors the root cause for all improper payments by researching 

supporting documentation and assigning an assessment code that identifies the type and 

reason for the improper payment. In addition, root causes of improper payments detected 

by BAM are reviewed and analyzed monthly and through formal bi-annual reviews. Root 

cause analysis is shared with the DFAS payment offices on a monthly basis and is used to 

Figure A-4. Improper Payment Rate –

DFAS Commercial Pay

0.06%

0.02%

0.03% 0.03% 0.03% 0.03%

0.00%

0.01%

0.02%

0.03%

0.04%

0.05%

0.06%

0.07%

FY 2011

Actual

FY 2012

Actual

FY 2013

Actual

FY 2014

Target

FY 2015

Target

FY 2016

Target B13-43

FY 2013 Target 0.02%
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-56

identify areas for operational improvement. The information is also used to implement 

refinements to BAM and develop new integrity checks.

Corrective Actions. Corrective actions include:

• Ongoing training for pay technicians to increase their ability to compute and input 

accurately.

• The MOCAS payment office conducted a series of all-hand and classroom training 

session throughout FY 2013 to address liquidation and recoupment errors.

• The MOCAS databases began to receive automated special pay instructions in the fourth 

quarter, FY 2013, which will help reduce progress payment recoupment errors by 

facilitating standardization and reducing manual intervention by pay technicians.

• Continued work with Contracting Officers to simplify contract terms and eliminate the 

need for manual calculations.

• Increased trend analysis over individual improper vendor payments, to include actual 

BAM improper payment (normally referred to as true positives) data used to conduct 

vendor outreach on proper billing methods.

• Continued electronic commerce improvement initiatives, such as the automation of third 

party payments, aimed at minimizing manual intervention and improving quality.

The Department is very pleased with the continuing success of its pre-payment review using 

BAM. Since its initial roll out in August 2008, BAM has prevented more than $7 billion in 

improper payments. The ongoing payment error analyses allow for the continual 

enhancement of BAM logic and improved disbursement accuracy. 

Another initiative to reduce improper payments includes outreach 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.

USACE. As shown in Figure A-5, USACE 

projects a zero percent error rate in 

improper payments for Commercial Pay. 

The USACE functions as the real estate 

agency for the Department, with 

responsibility for leasing office space for 

all military recruiters. This responsibility 

applies to small offices in rural and 

semi-rural areas as well as larger spaces 

in more urban areas. 

Navy. Preventing, detecting, and 

correcting improper payments is a top 

Figure A-5. Improper Payment Rate –

USACE Commercial Pay

0.04%

0.03%

0.00%

0.03% 0.03% 0.03%

0.00%

0.01%

0.02%

0.03%

0.04%

0.05%

FY 2011

Actual

FY 2012

Actual

FY 2013

Actual

FY 2014

Target

FY 2015

Target

FY 2016

Target B13-44

FY 2013 Target 0.03%
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-57

priority for the Navy. The Navy’s commitment to compliance with IPIA and its amendments 

include activities such as:

• Reconciling the payment universe to ensure all programs are captured for review; 

• Reviewing programs to identify additional corrective actions to achieve reduction 

targets;

• Identifying and designating Senior Accounting Officials at the Military-Service level for 

the Navy and the Marine Corps to oversee and report on their improper payment 

programs. 

The Navy’s continuing emphasis on accountability and integrity, at every level, underscores 

its commitment to achieve the goals set forth in IPERA. The Navy continues to report 

progress through monthly performance reviews with the Assistant Secretary of the Navy for 

Financial Management and Comptroller as well as through monthly financial operations 

metrics meetings with the OUSD(C) Deputy Chief Financial Officer.

Management has taken several additional steps to ensure its ERP adheres to IPIA and IPERA 

requirements. 

• Assigned responsibility for monitoring oversight of the Navy’s IPERA Program.

• Identified Oversight Officials, responsible for preparing and updating the Navy’s annual 

IPERA sampling plans, drawing monthly samples, and reviewing and monitoring IPIA 

test results.

• Issued desk procedures and provided training to staff that identifies step-by-step 

instructions on how to conduct IPIA reviews, and in the event that improper payments 

are identified, how to identify root causes and corrective actions to address them.

• Issued the Navy ERP Compliance Guide to the Commands in the Navy ERP in June 2013. 

The handbook defines and 

standardizes procedures associated 

with IPERA requirements. 

Military Retirement. Based on 

FY 2013 reviews, DFAS projects a 

0.04 percent error rate for improper 

payments in the Military Retirement 

program (refer to Figure A-6), with 

almost the entire amount related to 

payments made to deceased retirees 

and annuitants. 

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 

Figure A-6. Improper Payment Rate –

Military Retirement

0.04%

0.02%

0.04% 0.04% 0.04% 0.04%

0.00%

0.01%

0.02%

0.03%

0.04%

0.05%

FY 2011

Actual

FY 2012

Actual

FY 2013

Actual

FY 2014

Target

FY 2015

Target

FY 2016

Target B13-40

FY 2013 Target 0.04%
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-58

monthly benefit. Family members or executors are required to return any overpayments of 

the decedent's military retired pay. The delay in notifying the payroll activity of the death of 

a Military Retiree results in unavoidable overpayments to deceased retirees. Our review of 

confirmed overpayments to deceased retirees in FY 2013 disclosed that the Department 

recovered approximately 95 percent of the overpayments within 60 days, demonstrating the 

effectiveness of controls within the retired pay system once the Department is notified of a 

retiree’s death. 

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

• Annual certification of existence for all annuitants

• Periodic, random certifications for retirees over a certain age

• Validating Military Retiree existence if payments are returned and/or if 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, also are used. 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 Death Master File, 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.

Travel Pay.

The Department. The FY 2013 projected 

6.5 percent error rate for travel 

improper payments, shown in 

Figure A-7, represents Military DTS trip

records and WinIATS TDY and PCS 

vouchers for both civilians and military 

members, which are computed and 

disbursed by DFAS. In addition, this 

figure also includes travel 

reimbursements disbursed outside of 

DFAS by the Army, Navy, and Air Force.

DTS Root Causes. The primary reasons 

for DTS improper payments are voucher 

input error by the traveler and/or 

approving official failure to catch the 

error(s) before reimbursement occurs. 

Figure A-7. Improper Payment Rate –

DoD Travel Pay

3.28%

5.00%

6.50%

3.25% 3.24% 3.23%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

FY 2011

Actual

FY 2012

Actual

FY 2013

Actual

FY 2014

Target

FY 2015

Target

FY 2016

Target B13-41

FY 2013 Target 3.26%
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-59

The error types include:

• Per Diem (61 percent): The Department incorrectly reimbursed the traveler for lodging 

expenses without validating the claim with receipts, and/or reimbursed for meals at an 

incorrect rate.

• Reimbursable Expense (28 percent): Because of traveler mistakes when completing 

vouchers in DTS, the Department incorrectly reimbursed airfare, non-travel related 

expenses, and/or rental car expenses.

• Missing Documentation (11 percent): The Department reimbursed claimed lodging, 

airfare or rental car expenses not supported with a receipt.

DTS Corrective Actions. On a quarterly basis, DFAS provides the Defense Travel Management 

Office and DoD Components with error trend reports. The DFAS post-payment review personnel 

give presentations at various DTS training sessions and brief senior Service executives on these 

post-payment review statistics, trends, and input errors. Any improper payments identified are 

forwarded to the appropriate Debt Management Monitor to establish a debt and recover the 

improper payment. Also, the Department has implemented a Defense Travel Management 

Office Compliance Tool (details discussed later in this section). 

WinIATS Root Causes. The primary reasons for WinIATS improper payments are voucher 

input errors by the traveler and/or approving official failure to catch the error(s) before 

reimbursement occurs. The error types include:

• Per Diem (85 percent): Per Diem/Meals & Incidental Expenses and Lodging paid at the 

incorrect rate, not at all, or when unauthorized.

• Reimbursable Expense (9 percent): Airfare, household goods storage, and lodging tax 

paid incorrectly or not at all.

• Other miscellaneous (6 percent).

WinIATS Corrective Actions. The DFAS implemented several steps to prevent improper 

payments, including:

• Post-payment reviewers meet monthly with travel pay operations personnel to discuss 

findings and preventative measures. Travel Pay examiner training programs, based on 

post-payment review findings and recommendations, are ongoing.

• Pre-payment validations and cross checks have been implemented to ensure the traveler 

was not previously reimbursed for the same trip through this or another travel system, 

therefore avoiding a duplicate payment.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-60

USACE. 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. Travel pay errors generally 

occur for two reasons:

• Travelers make mistakes when 

completing their travel vouchers

• Approving Officials (AO) fail to 

properly review travel vouchers 

before approval

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 three years to maintain their certification 

eligibility. 

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.

DoD’s Participation in Do Not Pay

Effective June 1, 2013, all Federal agencies are required to use the “Do Not Pay” (DNP) 

initiative. Specifically, in a Presidential Memorandum, entitled Enhancing Payment Accuracy 

Through a Do Not Pay List, the President directed that agencies review current pre-payment 

and pre-award procedures and ensure that a thorough review of available databases, with 

relevant information on eligibility, occurs before the release of any Federal funds, to the extent 

permitted by law. Treasury is implementing these databases on an ongoing basis. Agencies are 

screening against databases that are currently available, which includes the Excluded Parties 

List and the Public Death Master File.

This network of databases, and additional databases designated by the Director of OMB in 

consultation with agencies, are collectively known as the Do Not Pay List. The DFAS 

implemented DNP in its prepayment environment for 99 percent of all invoices received 

60 days before the deadline. The DFAS sends a weekly file to the DNP database and 

receives results the following day. The DFAS then researches these results to determine if 

the proposed payment is proper. To date, DFAS has not yet identified any potential 

improper payments using the DNP list. On a monthly basis, DFAS shares this information 

with its payment offices to identify areas for operational improvement. 

Figure A-8. Improper Payment Rate –

USACE Travel Pay

1.00%

0.40%

1.43%

1.00% 1.00% 1.00%

0.00%

0.25%

0.50%

0.75%

1.00%

1.25%

1.50%

1.75%

FY 2011

Actual

FY 2012

Actual

FY 2013

Actual

FY 2014

Target

FY 2015

Target

FY 2016

Target B13-42

FY 2013 Target 0.045%
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-61

The USACE also participates in the DNP initiative. On a daily basis, USACE sends 100% of 

its pending commercial payments to match against the Death Master File and the Excluded 

Parties List. To date, no improper payments have been identified.

The Navy has implemented controls to meet the DNP requirement. Specifically, on a weekly 

basis, the Navy sends its ERP payment files (both internally and externally entitled) to the 

DNP portal to identify criteria that may indicate that the payment may not be legal and/or 

valid. Invoices that match with the database are reviewed to ensure that payment and 

vendor data is correct. Thus far, no potential improper payments have been identified. 

Ongoing Improper Payment Prevention Efforts

The DFAS analyzes improper payments detected by BAM in the pre-payment environment. 

This year, DFAS refined or developed new system edits (also called integrity checks) to 

improve BAM’s ability to identify improper payments before disbursement. Examples of the 

success of these integrity checks in preventing improper payments in FY 2013 include: 

• A Wrong Vendor Paid edit detected over $96 million in potential improper payments.

• A modification to the Invoice Outlier edit broadened the scope for detecting potential 

overpayments. Since July 2013, over $2.8 million in potential improper payments were 

identified that, without this modification, might not have been identified.

• The $100 Million Threshold integrity check detected over $861 million in potential 

improper payments.

The DFAS currently is adding vendor data to the BAM exception queries. This will designate 

vendors that have been identified multiple times with improper payment exceptions, 

allowing for vendor outreach and further training on proper billing.

IV. Program Improper Payment Reporting 

Table 4 below summarizes DoD’s improper payment reduction outlook and total program 

outlays (payments) from FY 2012 through FY 2016.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-62

Table 4. Improper Payment Reduction Outlook

FY 2012 FY 2013 FY 2014 Estimate FY 2015 Estimate FY 2016 Estimate

Program

Outlays 

($B)

IP 

(%)

IP 

Over 

($M)

IP 

Under 

($M)

IP 

Total 

($M)

Outlays 

($B)

IP 

(%)

IP 

Over 

($M)

IP 

Under 

($M)

IP 

Total 

($M)

Outlays 

($B) IP (%) IP ($M)

Outlays 

($B)

IP 

(%)

IP 

($M)

Outlays 

($B)

IP

(%)

IP 

($M)

Military 

Health 

Benefits 1,2

$ 20.9 0.15 $ 22.5 $ 8.8 $ 31.3 $ 20.5 0.32 $ 60.3 $ 7.3 $ 67.6 $ 21.2 2.00 $424.0 $ 21.9 2.00 $438.0 $ 22.7 2.00 $454.0

Military Pay3 $ 95.5 0.24 $197.8 $ 29.0 $226.8 $ 98.7 0.29 $258.5 $ 28.1 $286.6 $ 95.0 0.29 $275.5 $ 94.0 0.29 $272.6 $ 93.5 0.29 $271.2

Civilian Pay3 $ 59.0 0.14 $ 81.8 $ 0.0 $ 81.8 $ 57.0 0.17 $ 96.4 $ 0.0 $ 96.4 $ 57.5 0.17 $97.8 $ 57.0 0.17 $96.9 $ 56.5 0.17 $ 96.1

Military 

Retirement3 $ 55.1 0.02 $ 12.8 $ 0.3 $ 13.1 $ 56.6 0.04 $ 19.9 $ 0.01 $ 19.9 $ 42.9 0.04 $ 17.2 $ 43.5 0.04 $ 17.4 $ 44.1 0.04 $ 17.6

DoD Travel 

Pay4,5,6 $ 8.4 5.0 $363.9 $ 55.4 $419.3 $ 7.3 6.5 $421.1 $ 53.7 $474.8 $ 8.5 3.25 $276.3 $ 8.5 3.24 $275.4 $ 8.5 3.23 $274.6

DFAS 

Commercial 

Pay3,6

$ 408.7 0.02 $ 89.6 $ 10.5 $100.1 $ 352.6 0.03 $ 49.4 $ 67.9 $117.3 $ 400.5 0.03 $120.2 $ 392.5 0.03 $117.8 $ 384.7 0.03 $115.4

USACE 

Travel Pay $ 0.19 0.4 $ 0.76 $ 0.0 $ 0.8 $ 0.16 1.43 $ 2.1 $ 0.175 $ 2.28 $ 0.13 1.00 $1.3 $ 0.09 1.00 $0.9 $ 0.07 1.00 $0.7

USACE 

Commercial 

Pay

$ 30.1 0.03 $ 8.8 $ 0.0 $ 8.8 $ 21.7 0.0 $ 0.0 $ 0.0 $ 0.0 $ 30.0 0.03 $ 9.0 $ 30.0 0.03 $ 9.0 $ 30.0 0.03 $ 9.0

Navy ERP

Commercial 

Pay7

N/A N/A N/A N/A N/A $1.2 0.0 $0.0 $ 0.0 $ 0.0 $ 2.9 TBD TBD $ 2.9 TBD TBD $ 2.9 TBD TBD

Note 1: DHA reports 12 months in arrears; therefore, FY 2013 reporting represents FY 2012 data. The error rate increase resulted from a small number of high-dollar claim errors assessed that significantly affected the annual 

error rate.

Note 2: DHA uses 2% as its out-year target because that is the contractual performance standard. The FY 2014-2016 outlays estimates were calculated using the OMB CPI-U Annual Averages and Percent Change Table. As 

DHA reports 12 months in arrears the FY 2013 CPI-U medical percent change was used to calculate the FY 2014 outlay estimates, while the FY 2014 and 2015 medical percent changes were used to calculate the 

FY 2015 and 2016 outlay estimates respectively. 

Note 3: 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 2013.

Note 4: DoD Travel Pay includes travel data from DFAS and for the Army, Navy, and Air Force for vouchers paid outside of DTS. Out-year projections reflect the FY 2014 travel pay remediation plan rate further reduced in 

FY 2015 and FY 2016.

Note 5: DoD Travel Pay represents DFAS and Navy travel vouchers settled from July 2012 through June 2013; for Army and Air Force, there is no quarter lag.

Note 6: Estimated improper payments due to insufficient or missing documentation for the DFAS portion of DoD Travel Pay was 14.4% and for DFAS Commercial Pay was 25%.

Note 7: This is the first year that Navy ERP is reporting for commercial pay; only six months of data is included. Since no improper payments were identified for FY 2013, out-year reduction targets are not applicable.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-63

V. Recapture of Improper Payment Reporting

DTS Compliance Tool

The Department has entered the realm of recapture auditing again in the form of an 

internally developed tool by the Defense Travel Management Office (DTMO). 

In December 2012, the Department established the Travel Policy Compliance Program, 

mandated by the National Defense Authorization Act for Fiscal Year 2012. Managed by the 

DTMO, 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 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 DTMO Compliance Program not only ensures travel claims are paid in accordance with 

regulations and assists in recouping funds, but it also mitigates budget cuts for travel, 

improves post-pay audits, educates travelers and administrators on travel policy, and 

identifies travel trends, training needs, and opportunities for greater controls in the future. 

In December 2012, certain organizations from all four Military Services selectively used the 

Travel Policy Compliance Tool in a pilot that included three areas of inquiry. In FY 2013, the 

compliance tool identified 9,746 potential errors totaling $1.5 million. As of 

September 30, 2013:

• $125,000 in errors were corrected without any funds due back to the Government

• $300,000 in errors were corrected and are awaiting collection

• $140,000 in errors were corrected and the funds have been recovered

The balance of the reimbursement errors (approximately $935,000) was still awaiting 

re-work by travelers, approving officials, or DTMO on September 30, 2013.

The Department currently is working to expand queries and implement the tool Departmentwide. In a July 18, 2013 memorandum, entitled Implementation of the Department of Defense 

Travel Pay Remediation Plan, the use of the Travel Policy Compliance Tool was mandated for all 

DTS users. Use of the Compliance Tool provides a mechanism to greatly facilitate DoD’s 

collections and improve our recovery rate. Funds recovered from prior years can be 

re-allocated for use in current year appropriations in accordance with Public Law 111-204, The 

Improper Payments Elimination and Recovery Act of 2010.

DFAS. In compliance with IPERA, 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 (COP) to look 

across the Defense agencies 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 180, 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 2013, the COP requested and confirmed nearly 800 offsets totaling 

approximately $10 million.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-64

USACE. The UFC utilizes a data mining tool as part of its post-payment/payment recapture 

program. This tool searches for potential errors, such as duplicate, missing, or suspicious 

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 pre-payment 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 and internal DoD agencies for all 

private-sector payments. This process utilizes post-payment review techniques, performed 

internally and by external contractors, paid from the proceeds of recovered funds.

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. Refer to Figure A-9 to view historical 

recovery amounts for DHA contractors.

The DHA currently is conducting a pilot study to evaluate its ability to identify and recover 

funds that are owed from private health care providers, resulting from overpayments that 

occurred as a result of secondary insurance payment errors. The pilot study will provide an 

accurate assessment of the potential recoveries and cost effectiveness if a full recovery 

audit is initiated, and will review ten of the largest-volume institutional providers. The 

results of the pilot, expected by the end of December 2013, will allow DHA to determine if a 

full-scale credit balance audit, where the contractor retains a fixed percentage of the 

recoveries as its fee, would be feasible to award in FY 2014.

Figure A-9. Historical Recovery Amounts for DHA Contractors

B13-46

32.9

14.8 11.6

34.2

12.6 11.8 9.4 8.8

33.4

44.8

28.8

36.4 33.5

29.9

18.8 19.5

0.0

10.0

20.0

30.0

40.0

50.0

FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013

Unallowed Amount Recovery Amount

$ in Millions

Note: DHA reports 12 months in arrears.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-65

Table 5 below summarizes DoD’s payment recapture audit efforts from FY 2009 through FY 2013.

Table 5. Payment Recapture Audit Reporting

Program

Type of 

Payment

Amount 

Subject to 

Review

(CY)

Actual 

Amount 

Reviewed 

and 

Reported 

(CY)

Amount

Identified 

for 

Recovery

(CY)

Amount

Recovered

(CY)

% of 

Amount

Recovered out of 

Amount 

Identified

(CY)

Amount 

Outstanding 

(CY)

% of 

Amount 

Outstanding out of 

Amount 

Identified 

(CY)

Amount 

Determined Not 

to be 

Collectable 

(CY)

% of 

Amount 

Determined Not 

to be 

Collectable out of 

Amount 

Identified 

(CY)

Amounts

Identified 

for 

Recovery

(PYs)

Amounts

Recovered

(PYs)

Cumulative 

Amounts

Identified 

for 

Recovery

(CY+PYs)

Cumulative 

Amounts

Recovered

(CY+PYs)

Cumulative 

Amounts

Outstandi

ng

(CY+PYs)

Cumulative 

Amounts 

Determined Not 

to be

Collectable

(CY+PYs)

DTMO 

Compliance 

Tool (pilot)1

Travel $ 5.3M $ 5.3M $ 1.5M $ 0.44M 29% $ 1.06M 71% $0.13M2 N/A N/A N/A N/A N/A N/A N/A

USACE3 Commercial $ 21.7B $ 21.7B $ 0.0M $ 0.0M 0% $ 0.0M 0% $ 0.0M 0% $ 59.4M $ 58.8M $ 59.4M $ 58.8M $ 0.6M $ 0.0M

“M” represents millions. “B” represents billions.

Note 1: The Defense Travel Management Office’s (DTMO) Compliance Tool is in its first year of recovery auditing. It began as a pilot program in December 2012. The tool works strictly with the Defense Travel 

System (DTS).

Note 2: $125,000 (rounded to $0.13M) in errors were accounted for through voucher correction; therefore, no overpayment had actually occurred and no collection was necessary.

Note 3: USACE uses the Oracle data-mining tool within CEFMS to perform its recovery audit on contract payments.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-66

Table 6 below summarizes DoD’s annual targets related to its payment recapture audit 

efforts for FY 2013 through FY 2016.

Table 7 below presents an aging schedule of overpayments collected outside of efforts of 

payment recapture audits.

Table 7. Aging of Outstanding Overpayments

Program Type of

Payment

CY Amount

Outstanding

(0 – 6 Months)

($M)

CY Amount

Outstanding

(6 Months – 1 Year)

($M)

CY Amount

Outstanding

(Over 1 Year)

($M)

DFAS Commercial1,2 $ 3.1 $ 1.3 $ 0.0

Military 

Retirement Pension $ 1.6 $ 0.0 $ 0.0

Note 1: Figures based on overpayments identified and paid during FY 2013.

Note 2: After 120 days, most debts are transferred to Treasury for collection.

Table 8 below presents a summary of how cumulative amounts recaptured have been 

utilized. 

Table 8. Disposition of Recaptured Funds

Program Type of

Payment

Agency

Expenses 

to 

Administer

the 

Program

Payment

Recapture

Auditor 

Fees

Financial

Management

Improvement

Activities

Original

Purpose

($M)

Office of

Inspector

General

Returned 

to

Treasury

USACE1 Commercial $ 20,000 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0

DTMO 

(DTS)2 Travel $ 0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0

Note 1: No overpayments identified; therefore, no funds recovered in FY 2013.

Note 2: As of fiscal year end, no recoveries had been re-allocated to the categories shown in Table 6.

Table 6. Payment Recapture Audit Targets

Program Type of

Payment

CY

Amount

Identified

($M)

CY

Amount

Recovered

($M)

CY

Recovery

Rate

(Amount

Recovered/

Amount

Identified)

CY + 1

Recovery

Rate

Target

CY + 2

Recovery

Rate

Target

CY + 3

Recovery

Rate

Target

DTMO 

(DTS)

1 Travel $ 1.5 $ 0.62 37.7% TBD TBD TBD

USACE Commercial $ 0.0 $ 0.0 0.0% 100.0% 100.0% 100.0%

Note 1: DTMO’s Compliance Tool was only online part of FY 2013.

Note 2: This amount (rounded) is equal to $.44M recovered + $0.13M that subsequently was substantiated with additional supporting 

documentation.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-67

Table 9 below summarizes improper payments identified and recovered outside of payment 

recapture audits. 

Table 9. Overpayments Recaptured Outside of Payment Recapture Audits

Source of 

Recovery

Amount

Identified

(CY)

Amount

Recovered

(CY)

Amount

Identified

(PY)

Amount

Recovered

(PY)

Cumulative 

Amount 

Identified 

(CY+PYs)

Cumulative 

Amount

Recovered

(CY+PYs)

DFAS

Commercial 

Pay1

$ 141.6M $ 137.2M $ 156.7M $ 153.6M $ 1.7B $ 1.6B

Military 

Retirement2 $ 19.9M $ 18.3M $ 67.4M $ 63.8M $ 262.6M $ 245.6M

Military Pay3, 4 $ 258.5M $ 219.3M $ 197.3M $ 146.8M $ 780.9M $ 668.8M

Civilian Pay3 $ 96.4M $ 96.4M $ 81.8M $ 81.8M $ 428.5M $ 428.5M

DoD Travel 

Pay5 $ 3.7M $ 0.1M $ 1.9M $ 0.1M $ 7.2M $ 0.3M

USACE Travel 

Pay6 $ 0.7M $ 0.5M $ 0.8M $ 0.8M $ 1.5M $ 1.3M

Defense 

Health Agency

(DHA) Health

Benefits

Contracts7

$ 8.7M $ 19.5M $ 127.4M $ 225.6M $ 136.1M $ 245.1M

“M” represents millions. “B” represents billions.

Note 1: Overpayments are based on the date payment was made or debt incurred. Prior year amounts shown in the OMB Max database do not reflect 

further collections or adjustments made in subsequent fiscal years.

Note 2: FY 2013 amounts identified and recovered are based on 100 percent review of deceased retiree and annuitant accounts. Recoveries normally run 

90 days behind; therefore, FY 2013 recoveries will not be completed until December 31, 2013.

Note 3: In-service collection dollars are used as a proxy for recovery amounts because actual results from statistical reviews are negligible.

Note 4: Recoveries provided in CY for Military Pay include out-of-service debt collections. Because debt recoveries are tracked for 12 months for AFR 

purposes, collections may not be realized until the end of FY 2014. 

Note 5: $569K in overpayments are not collectible as they were paid to foreign military students or represent individual debts of < $10.

Note 6: The balance of USACE Travel Pay recoveries are in the process of collection through salary offset or have been appealed to the Civilian Board of 

Contract Appeals for final determination.

Note 7: DHA contract improper payments and recoveries are reported 12 months in arrears to accommodate its 100 percent post-payment review.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-68

VI. 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 Financial Management Regulation, Volume 5, Chapter 33, 

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 5, Chapter 28, “Management 

and Collection of Individual Debt,” and DoD FMR, Volume 10, Chapter 18, “Contractor 

Debt”.

The DoD FMR contains other policies that specifically address Improper Payments 

(Volume 4, Chapter 14) and Recovery Auditing (Volume 10, Chapter 22). Beginning in 

Quarter 3, FY 2013, all reporting DoD Components were required to download their 

improper payment reports to the DFAS ePortal. 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. 

Travel Pay Improper Payment Remediation Plan. The Department lost its IPERA 

compliance determination, conferred by the DoDIG for the FY 2011 Improper Payment

Reporting (DoDIG Report No. D-2013-054), because DoD did not meet its FY 2012 Travel 

Pay improper payment reduction target. In accordance with IPERA requirements, the 

Department developed a remediation plan to help Components significantly reduce 

erroneous travel voucher submissions and associated approving official errors. All Defense 

Components submitted training plans to the Deputy Chief Financial Officer for approval, as 

he serves as the DoD Senior Accountable Official for Travel Pay improper payment 

remediation. Because the vast majority of travel pay errors result from travelers incorrectly 

completing their vouchers and approving officials failing to catch these errors, which 

comprise a substantive portion of the errors detected in DFAS’ statistical sampling of 

FY 2012 travel payments, training is now required for all travelers and approving officials 

every two years. 
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-69

VII. 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, as well as opportunities, to prevent and detect 

improper payments. This migration also can enhance the Department’s ability to improve its 

debt collection and recovery auditing abilities. The Department is addressing these areas 

both from a payment integrity as well as audit readiness perspective.

VIII. Statutory and Regulatory Barriers

The primary barriers in preventing improper payments in Military Pay are the statutory 

entitlements and regulatory monthly pay scheduled. For DHA collections, there are 

contractual requirements that allow up to 270 days instead of the standard delinquency 

deadline of 180 days to be transferred to the Treasury under the Debt Collection 

Improvement Act of 1996. Other than these, the Department has not identified any further 

statutory or regulatory barrier to improper payments identification, reporting, reduction, or 

collection.

IX Additional Information

The Department is positioning itself to be fully compliant with additional elements required by 

the Improper Payments Elimination and Recovery Improvement Act (IPERA) for FY 2014 

reporting. As previously discussed in this report and as reported in the DoD Financial 

Improvement and Audit Readiness Plan Status Report for November 2013, the Department is 

working hard to become fully auditable by 2017. As part of this effort, each of the Defense 

disbursing Components is diligently reviewing and reporting on all payments that are subject 

to IPERA, and ensuring the processes used are compliant with laws and regulations. 

The Department continually looks for opportunities to improve its methodologies, and the 

post-payment review teams are far from complacent. The Department is implementing 

recommendations from both the DoD Inspector General’s IPERA Compliance Review for 

FY 2012 (DoDIG Report No. D-2013-054) and from the GAO Report No. GAO-13-227 on 

improper payments, to guide our progress in our future improper payment efforts. 
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum A

A-70

This Page Left Blank Intentionally
FISCAL YEAR 2013

UNITED STATES DEPARTMENT OF DEFENSE

AGENCY FINANCIAL REPORT

ADDENDUM B
This Page Left Blank Intentionally
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum B

B-1

The following Defense Security Cooperation Agency (DSCA) financial statements include 

programs executed on behalf of the Executive Office of the President (EOP). The 

Department continues to report activity resulting from EOP allocation transfers within the 

Department of Defense (DoD) financial statements.

Consolidated Balance Sheet

Defense Security Cooperation Agency Dollars in Thousands

As of September 30, 2013 and 2012

2013

Consolidated

2012

Consolidated 

ASSETS (Note 2)

Intragovernmental:

Fund Balance with Treasury (Note 3) $ 24,420,154 $ 22,811,082

Total Intragovernmental Assets $ 24,420,154 $ 22,811,082

Cash and Other Monetary Assets (Note 7) $ 20,593,988 $ 20,124,963

Accounts Receivable, Net (Note 5) 20,906 50,338

Loans Receivable (Note 8) 723,975 836,068

Other Assets (Note 6) 31,801,934 26,737,655

TOTAL ASSETS $ 77,560,957 $ 70,560,106

LIABILITIES (Note 11)

Intragovernmental:

Accounts Payable (Note 12) $ 266,922 $ 252,698

Debt (Note 13) 116,604 224,158

Other Liabilities (Note 15 and 16) 652,851 657,368

Total Intragovernmental Liabilities $ 1,036,377 $ 1,134,224

Accounts Payable (Note 12) $ 400,521 $ 270,627

Employment Benefits (Note 17) 595 523

Other Liabilities (Note 15 and 16) 67,102,699 61,826,221

TOTAL LIABILITIES $ 68,540,192 $ 63,231,595

NET POSITION

Unexpended Appropriations – Other Funds $ 5,130,896 $ 3,800,488

Cumulative Results of Operations – Other Funds 3,889,869 3,528,023

TOTAL NET POSITION $ 9,020,765 $ 7,328,511

TOTAL LIABILITIES AND NET POSITION $ 77,560,957 $ 70,560,106

The accompanying notes are an integral part of these financial statements.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum B

B-2

Consolidated Statement of Net Cost

Defense Security Cooperation Agency Dollars in Thousands

For the Years Ended September 30, 2013 and 2012

2013

Consolidated

2012

Consolidated 

Program Costs

Gross Costs $ 30,906,145 $ 30,711,596

(Less: Earned Revenue) (14,556) (24,405)

Net Cost before Losses (Gains) from Actuarial Assumption Changes 

for Military Retirement Benefits $ 30,891,589 $ 30,687,191

Net Cost of Operations $ 30,891,589 $ 30,687,191

Consolidated Statement of Changes in Net Position

Defense Security Cooperation Agency Dollars in Thousands

For the Years Ended September 30, 2013 and 2012

2013 

Consolidated

2012

Consolidated

Cumulative Results Of Operations

Beginning Balances $ 3,528,023 $ 2,675,603

Beginning balances, as adjusted $ 3,528,023 $ 2,675,603

Budgetary Financing Sources:

Appropriations used $ 4,602,076 $ 5,229,397

Nonexchange revenue 26,651,359 26,310,214

Total Financing Sources $ 31,253,435 $ 31,539,611

Net Cost of Operations (+/-) 30,891,589 30,687,191

Net Change $ 361,846 $ 852,420

Cumulative Results of Operations $ 3,889,869 $ 3,528,023

Unexpended Appropriations

Beginning Balances $ 3,800,488 $ 2,615,107

Beginning balances, as adjusted $ 3,800,488 $ 2,615,107

Budgetary Financing Sources:

Appropriations received $ 6,418,005 $ 6,420,180

Appropriations transferred (in/out) (209,751) (33)

Other adjustments (rescissions, etc.) (275,770) (5,369)

Appropriations used (4,602,076) (5,229,397)

Total Budgetary Financing Sources $ 1,330,408 $ 1,185,381

Unexpended Appropriations $ 5,130,896 $ 3,800,488

Net Position $ 9,020,765 $ 7,328,511

The accompanying notes are an integral part of these financial statements.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum B

B-3

Combined Statement of Budgetary Resources

Defense Security Cooperation Agency

For the Years Ended September 30, 2013 and 2012

Budgetary 

Financing Accounts

Non-Budgetary 

Financing Accounts

Dollars in Thousands

2013

Combined

2012

Combined

2013

Combined

2012

Combined

Budgetary Resources

Unobligated balance, brought forward, October 1 $ 143,180 $ 26,792 $ 27,139 $ 28

Unobligated balance brought forward, October 1, 

as adjusted 143,180 26,792 27,139 28

Recoveries of prior year unpaid obligations 339,303 1,824,623 0 0

Other changes in unobligated balance (308,257) (1,749,780) 0 0

Unobligated balance from prior year budget 

authority, net 174,226 101,635 27,139 28

Appropriation (discretionary and mandatory) 6,240,741 8,164,557 0 0

Borrowing Authority (discretionary and mandatory) 0 0 1,709 1,627

Contract authority (discretionary and mandatory) 15,313,617 66,473,232 0 0

Spending authority from offsetting collections

(discretionary and mandatory) 49,346 123,730 0 27,437

Total Budgetary Resources $ 21,777,930 $ 74,863,154 $ 28,848 $ 29,092

Status of Budgetary Resources

Obligations incurred $ 21,636,029 $ 74,719,974 $ 1,709 $ 1,953

Unobligated balance, end of year:

Apportioned 112,118 12,011 0 27,111

Exempt from Apportionment 0 22,690 0 0

Unapportioned 29,783 108,479 27,139 28

Unobligated balance brought forward, end of 

year $ 141,901 $ 143,180 $ 27,139 $ 27,139

Total Budgetary Resources $ 21,777,930 $ 74,863,154 $ 28,848 $ 29,092

Change in Obligated Balance

Unpaid obligations, brought forward, October 1 $ 138,729,747 $ 96,993,018 $ 2,462,224 $ 2,462,224

Obligations incurred 21,636,029 74,719,974 1,709 1,953

Outlays (Gross) (31,024,118) (31,158,623) (1,709) (1,953)

Recoveries of prior year unpaid obligations (339,303) (1,824,623) 0 0

Obligated balances, end of year

Unpaid Obligations, end of year 129,002,355 138,729,747 2,462,224 2,462,224

Obligated balance, start of year $ 138,729,747 $ 96,993,018 $ 2,462,224 $ 2,462,224

Obligated balance, end of year $ 129,002,355 $ 138,729,747 $ 2,462,224 $ 2,462,224

Budgetary Authority and Outlays, Net:

Budget Authority, gross (discretionary and 

mandatory) $ 21,603,704 $ 74,761,519 $ 1,709 $ 29,064

Actual offsetting collections (discretionary and 

mandatory) (49,346) (123,730) (141,320) (179,092)

Budget Authority, net (discretionary and 

mandatory) $ 21,554,358 $ 74,637,789 $ (139,611) $ (150,028)

Outlays, gross (discretionary and mandatory) 31,024,118 31,158,623 1,709 1,953

Actual offsetting collections (discretionary and 

mandatory) (49,346) (123,730) (141,320) (179,092)

Outlays, net (discretionary and mandatory) 30,974,772 31,034,893 (139,611) (177,139)

Distributed offsetting receipts (26,651,359) (26,310,214) 0 0

Agency Outlays, net (discretionary and 

mandatory) $ 4,323,413 $ 4,724,679 $ (139,611) $ (177,139)

The accompanying notes are an integral part of these financial statements.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum B

B-4

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES

1.A. Basis of Presentation 

These financial statements have been prepared, in accordance with the Chief Financial 

Officers (CFO) Act of 1990, to report the financial position and results of operations of the 

Foreign Military Sales (FMS) Trust Fund and its accounts, as identified in the President’s 

Budget Request, the Foreign Operations (International Affairs) appropriated accounts. The 

FMS Trust Fund includes accounts for U.S. government funds appropriated for security 

assistance, and for funds deposited by foreign countries and international organizations, or 

by others for their use. The FMS Trust Fund and other accounts for funds appropriated for 

security assistance are managed by the Defense Security Cooperation Agency (DSCA) on 

behalf of the Department of Defense (DoD), in accordance with the authority of the 

Executive Office of the President (EOP), and the requirements of the CFO Act of 1990, as 

expanded by the Government Management Reform Act of 1994, and other applicable laws 

and regulations.

The financial statements were prepared from accounting records that are maintained by the 

Military Departments (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 (USGAAP) promulgated by the Federal Accounting 

Standards Advisory Board; the Office of Management and Budget (OMB) Circular No. A-136, 

“Financial Reporting Requirements”; and the DoD Financial Management Regulation (FMR).

The accompanying financial statement information accounts for all FMS Trust Fund 

resources and the accounts for funds appropriated for security assistance unless otherwise 

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

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

discernible.

The FMS Trust Fund accounting systems, including its sub accounts, and the accounts for 

funds appropriated for security assistance, are unable to fully implement all elements of 

USGAAP and the OMB Circular No. A-136, due to limitations of financial management 

processes, financial systems, and nonfinancial systems and processes that support the 

financial statements. Many of the accounts derive their reported values and other data and 

information for major asset and liability categories largely from nonfinancial systems, such 

as 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 USGAAP. 

There are ongoing efforts to implement process and system improvements addressing these 

limitations.

The DoD currently has 16 auditor identified material weaknesses. Of these, the FMS Trust 

Fund and the accounts for funds appropriated for security assistance may include: 

(1) Financial Management Systems; (2) Intergovernmental Eliminations; (3) Fund Balance 

with Treasury; (4) Statement of Net Cost; (5) Other Accounting Entries; (6) Reconciliation 

of Net Cost of Operations to Budget; (7) Accounts Payable; and (8) Accounts Receivable.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum B

B-5

1.B. Mission of the Reporting Entity 

The DSCA mission is to lead, direct and manage security cooperation programs and 

resources to support the U.S. national security objectives. Such programs build relationships 

with foreign countries and international organizations that promote the U.S. interests, 

develop allied and partner capacities for self-defense and coalition participation in overseas 

contingency operations, and promote peacetime and contingency access for U.S. forces. The 

DSCA accomplishes its responsibilities for security cooperation in concert with the 

Department of State (DOS), MILDEPs, other U.S. Government organizations, U.S. industry, 

and non-governmental organizations. Together we provide financial and technical 

assistance, Foreign Military Financing (FMF) for defense articles and services, including 

training, provided through the FMS program, as well as training provided and funded under 

International Military Education and Training (IMET) authorities.

1.C. Appropriations and Funds 

The FMS Trust Fund is a U.S. Treasury account (Treasury Account Symbol (TAS) 8242) 

which contains deposits from FMS foreign country and international organization customers, 

as well as funds transferred into the account from U.S. Government appropriations, for use 

in carrying out specific purposes or programs in accordance with the Arms Export and 

Control Act, as amended (AECA) (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 the 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 sub accounts used by DoD 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 DoD utilizes separate U.S. Treasury Accounts for the general fund Foreign Operations 

(International Affairs) appropriations. These accounts are:

• International Military Education and Training (TAS 1081)

• Foreign Military Financing Program Account (TAS 1082)

• Foreign Military Loan Liquidating Account (TAS 4121)

• Foreign Military Financing Direct Loan Financing Account (TAS 4122)

• Military Debt Reduction Financing Account (TAS 4174)

• Special Defense Acquisition Fund (TAS 4116)

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 
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum B

B-6

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 are allocation transfers from the EOP that meet the OMB 

exception and all related activity are included in DSCA financial statements, which are 

reported as a separate section of the DoD financial statements.

1.D. Basis of Accounting 

The legacy financial management systems utilized for the FMS Trust Fund and the accounts 

for funds appropriated for security assistance are unable to meet full accrual accounting. 

Many of the DSCA, MILDEP, and ODO financial and nonfinancial feeder systems and 

processes were designed and implemented prior to the issuance of USGAAP guidance. These 

legacy systems were not designed to collect and record financial information on a full 

accrual accounting basis as required by USGAAP. Most of DSCA, MILDEP, and ODO financial 

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

The FMS Trust Fund and the accounts for funds appropriated for security assistance 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 that the 

abnormal balances are evident at the consolidated level. 

The DSCA, with MILDEPs and ODOs, is determining the actions required to bring its financial 

and nonfinancial feeder systems and processes into compliance with USGAAP. One such 

action is the current revision of accounting systems to record transactions based on the 

U.S. Standard General Ledger (USSGL). Until all DSCA, MILDEP, and ODO systems and 

related processes have been updated to collect and report financial information as required 

by USGAAP, reported financial data is based on budgetary transactions data from 

nonfinancial feeder systems, and accruals.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum B

B-7

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 FMS Trust Fund and the 

accounts for funds appropriated for security assistance recognize revenue when earned 

within the constraints of current system capabilities.

The DSCA does not include nonmonetary support provided by friendly foreign countries and 

international organizations in amounts reported in the Statement of Net Cost and Note 21, 

Reconciliation of Net Cost of Operations to Budget.

The DSCA participates in assistance in kind agreements in its overseas presence. The 

assistance in kind provided in support of security cooperation programs includes the use of 

facilities and personnel (guards and drivers) at a small number of Security Cooperation 

Offices worldwide.

1.F. Recognition of Expenses

DoD policy requires the recognition of operating expenses in the period incurred. Current 

financial and nonfinancial feeder systems for the FMS Trust Fund and the accounts for funds 

appropriated for security assistance were not designed to collect and record transactions on 

an accrual accounting basis. Estimates are made for major items such as payroll expenses, 

accounts payable, and unbilled revenue. The DSCA continues to implement process and 

system improvements to address these limitations.

1.G. Accounting for Intragovernmental Activities 

Accounting standards require that 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 MILDEP 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 sellerside balances and are then eliminated. The DoD is implementing replacement systems and a 

standard financial information structure to incorporate the necessary elements to enable 

DoD 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,” provide guidance for reporting and 

reconciling intragovernmental balances. The FMS Trust Fund and the accounts for funds 

appropriated for security assistance are unable to fully reconcile intragovernmental 

transactions with all federal agencies; however, the FMS Trust Fund is able to reconcile 

balances pertaining to borrowing from the U.S. Treasury and the Federal Financing Bank, 

Federal Employees’ Compensation Act (FECA) transactions with the Department of Labor, 

and benefit program transactions with the Office of Personnel Management.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum B

B-8

The DoD’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 DoD’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, the FMS Trust Fund and the accounts for funds appropriated for security 

assistance sells defense articles and services to foreign governments and international 

organizations under the provisions of the AECA. Under the provisions of the Act, DoD 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, the Military Departments, the U.S. Army Corps of Engineers (USACE), and 

the DOS’s financial service centers process the majority of the FMS Trust Fund and the 

accounts for funds appropriated for security assistance cash collections, disbursements, and 

adjustments worldwide. Each disbursing station prepares monthly reports that provide 

information to the U.S. Treasury on checks issued, electronic fund transfers, interagency 

transfers, and deposits.

In addition, DFAS sites and USACE Finance Center submit reports to the U.S. Treasury by 

appropriation, 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 FMS Trust Fund and the accounts for funds appropriated 

for security assistance FBWT is adjusted to agree with the U.S. Treasury accounts.

1.J. Cash and Other Monetary Assets 

Cash is the total of cash resources under the control of DoD which includes coin, paper 

currency, negotiable instruments, which are 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 DoD 5015.38M Security Assistance Management Manual; Chapter 5; Foreign Military 

Sales Case Development. All payments and collections are in U.S. dollars. 
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum B

B-9

1.K. Accounts Receivable 

The FMS Trust Fund and the accounts for funds appropriated for security assistance 

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 DoD does not 

recognize all 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 FMS Trust Fund and the accounts for funds appropriated for security assistance do not 

maintain inventory. The defense articles are provided to the FMS customer from the 

U.S. Government or the contractor pursuant to a contract with the U.S. Government. 

Defense articles sold from the DoD or the U.S. Coast Guard are assets of the providing 

component until title is transferred to foreign customer.

1.N. Investments in U.S. Treasury Securities 

Not applicable

1.O. General Property, Plant and Equipment 

Not applicable

1.P. Advances and Prepayments 

When advances are permitted by law, legislative action, or presidential authorization, the 

DoD’s policy is to record advances and prepayments in accordance with USGAAP. As such, 

payments made in advance of the receipt of goods and services are reported as an asset on 

the Balance Sheet. The DoD’s policy is to expense and/or properly classify assets when the 

related goods and services are received. Not all military services who execute on behalf of 

DSCA have implemented this policy primarily due to system limitations.

1.Q. Leases 

Lease payments for the rental of DSCA operating facilities is contracted for and classified as 

operating leases. The DSCA, as the lessee, receives the use and possession of leased property, 

for example real estate, from a lessor in exchange for payment of funds. An operating lease 

does not substantially transfer all the benefits and risk of ownership. Payments for operating 

leases are charged to expenses over the lease terms as it becomes payable.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum B

B-10

Office space and leases are funded by the FMS Trust Fund. These costs were gathered from 

existing operating leases and General Services Administration bills, and interservice support 

agreements. Future year projections use the Consumer Price Index. The FMS Trust Fund 

and the accounts for funds appropriated for security assistance do not have capital leases.

1.R. Other Assets 

Other assets includes civil service employee pay advances, travel advances, and certain 

contract financing payments that are not reported elsewhere on the FMS Trust Fund and the 

accounts for funds appropriated for security assistance Balance Sheet. 

The FMS Trust Fund and the accounts for funds appropriated for security assistance conduct 

business with commercial contractors using two primary types of contracts: fixed price and 

cost reimbursable. Contract financing payments are defined in the Federal Acquisition 

Regulations, Part 32, as authorized disbursements to a contractor prior to acceptance of 

supplies or services by the Government. These payments are designed to alleviate the 

potential financial burden on contractors performing on certain long-term contracts and 

facilitate competition for defense contracts. Contract financing payments clauses are 

incorporated in the contract terms and conditions and may include advance payments, 

performance-based payments, commercial advance and interim payments, progress 

payments based on cost, and interim payments under certain cost-reimbursement 

contracts. It is DoD policy to record certain contract financing payments as other assets.

Contract financing payments do not include invoice payments, payments for partial 

deliveries, lease and rental payments, or progress payments based on a percentage or 

stage of completion. The Defense Federal Acquisitions Regulation Supplement authorizes 

progress payments based on a percentage or stage of completion only for construction of 

real property, shipbuilding, and ship conversion, alteration, or repair. Progress payments 

based on percentage or stage of completion are reported as Construction in Progress

1.S. Contingencies and Other Liabilities 

The Statement of Federal Financial Accounting Standards (SFFAS) No. 5, “Accounting for 

Liabilities of the Federal Government,” as amended by SFFAS No. 12, “Recognition of 

Contingent Liabilities Arising from Litigation,” defines a contingency as an existing condition, 

situation, or set of circumstances that involves an uncertainty as to possible gain or loss. 

The uncertainty will be resolved when one or more future events occur or fail to occur. The 

FMS Trust Fund and the accounts for funds appropriated for security assistance recognize 

contingent liabilities when past events or exchange transactions occur, a future loss is 

probable, and the loss amount can be reasonably estimated.

Financial statement reporting is limited to disclosure when conditions for liability recognition 

do not exist but there is at least a reasonable possibility of incurring a loss or additional 

losses. The FMS Trust Fund and the accounts for funds appropriated for security assistance 

risk of loss due to contingencies arise as a result of pending or threatened litigation or 

claims and assessments due to events such as aircraft, ship, and vehicle accidents; medical 

malpractice; property or environmental damages; and contract disputes.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum B

B-11

1.T. Accrued Leave 

The FMS Trust Fund reports liabilities for military leave and accrued compensatory and 

annual leave for civilians. Sick leave for civilians is expensed as taken. The liabilities are 

based on current pay rates.

1.U. Net Position 

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

Unexpended appropriations represent the amounts of budget authority that are unobligated 

and have not been rescinded or withdrawn. Unexpended appropriations also represent 

amounts obligated for which legal liabilities for payments have not been incurred. 

Cumulative results of operations represent the net difference between expenses and losses 

and financing sources (including appropriations, revenue, and gains) since inception. The 

cumulative results of operations also include donations and transfer in and out of assets 

that were not reimbursed.

1.V. Treaties for Use of Foreign Bases 

Not applicable

1.W. Undistributed Disbursements and Collections

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 required to establish the Accounts Payable/Receivable were previously made. 

As a result, misstatements of reported Accounts Payable and Receivables are likely present 

in the DSCA financial statements.

Due to noted material weaknesses in current accounting and financial feeder systems, the 

DoD is generally unable to determine whether undistributed disbursements and collections 

should be applied to federal or nonfederal accounts payables/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, which 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. Both supported and unsupported undistributed disbursements and 

collections are then applied to reduce accounts payable and receivable accordingly.

1.X. Fiduciary Activities 

Not applicable
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum B

B-12

1.Y. Military Retirement and Other Federal Employment Benefits 

Not applicable

1.Z. Significant Events

Not applicable

NOTE 2. NONENTITY ASSETS

Nonentity Assets Dollars in Thousands

As of September 30 2013 2012

Intragovernmental Assets

Fund Balance with Treasury $ 7,799,844 $ 14,872,317

Total Intragovernmental Assets $ 7,799,844 $ 14,872,317

Nonfederal Assets

Cash and Other Monetary Assets $ 20,593,988 $ 20,124,963

Accounts Receivable 673,617 707,589

Other Assets 31,777,541 26,733,628

Total Nonfederal Assets $ 53,045,146 $ 47,566,180

Total Nonentity Assets $ 60,844,990 $ 62,438,497

Total Entity Assets $ 16,715,967 $ 8,121,609

Total Assets $ 77,560,957 $ 70,560,106

Nonentity Assets are assets for which the Foreign Military Sales (FMS) Trust Fund and the 

accounts for funds appropriated for security assistance maintains stewardship accountability 

and reporting responsibility, but are not available for the agency’s operations. 

Fund Balance with Treasury and Cash and Other Monetary Assets consist of advance 

deposits from friendly countries and international organizations to facilitate the purchase of 

U.S. defense articles and services based on future requirement forecasts. 

Accounts Receivable consist of amounts for interest, fines, and penalties due on debt from 

loans and nonfederal funds owed to the FMS Trust Fund country accounts that are in 

litigation at Department of Justice or collection status at Defense Finance 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.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum B

B-13

NOTE 3. FUND BALANCE WITH TREASURY 

Fund Balance with Treasury Dollars in Thousands

As of September 30 2013 2012

Fund Balance

Appropriated Funds $ 5,318,823 $ 3,837,638

Trust Funds 19,101,331 14,872,317

Other Fund Types 0 4,101,127

Total Fund Balance $ 24,420,154 $ 22,811,082

Fund Balance Per Treasury Versus Agency

Fund Balance per Treasury $ 24,420,154 $ 22,811,082

Fund Balance per Agency 24,420,154 22,811,082

Reconciling Amount $ 0 $ 0

Status of Fund Balance with Treasury Dollars in Thousands

As of September 30 2013 2012

Unobligated Balances

Available $ 112,117 $ 61,812

Unavailable 56,921 108,507

Obligated Balance not yet Disbursed 131,464,580 141,191,970

Non-Budgetary FBWT 26,651,365 26,310,220

Non-FBWT Budgetary Accounts (133,864,829) (144,861,427)

Total Fund Balance $ 24,420,154 $ 22,811,082

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 that has not been set aside to cover outstanding obligations. 

The unavailable balance consists primarily of funds invested in U.S. Treasury securities that 

are temporarily precluded from 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 that established the funds.

Obligated Balance not yet Disbursed represents funds that have been obligated for goods 

and services not received and those received but not paid.

Non-budgetary FBWT includes accounts that do not have budgetary authority, such as 

deposit funds, unavailable receipt accounts, clearing accounts and nonentity FBWT. The 

Non-budgetary FBWT consists of Contingency Operations provided to Department of 

Defense in supplemental appropriations, and Contingency Operations funding transferred 

from Department of State (DOS), which DOS received in supplemental appropriations. 

Obligations are incurred using contract authority and liquidated with these appropriations. 

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.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum B

B-14

NOTE 5. ACCOUNTS RECEIVABLE

Accounts Receivable Dollars in Thousands

2013

As of September 30

Gross Amount Due

Allowance for 

Estimated 

Uncollectibles

Accounts 

Receivable, Net

Intragovernmental Receivables $ 0 N/A $ 0

Nonfederal Receivables 

(From the Public) 20,913 (7) 20,906

Total Accounts Receivable $ 0 $ 0 $ 0

Accounts Receivable Dollars in Thousands

2012

As of September 30

Gross Amount Due

Allowance for 

Estimated 

Uncollectibles

Accounts 

Receivable, Net

Intragovernmental Receivables $ 0 N/A $ 0

Nonfederal Receivables 

(From the Public) 50,377 (39) 50,338

Total Accounts Receivable $ 50,377 $ (39) $ 50,388

The accounts receivable represent the Foreign Military Sales (FMS) Trust Fund claim for 

payment from other entities. The FMS Trust Fund only recognizes an allowance for 

uncollectible amounts from the public. Claims with other federal agencies are resolved in 

accordance with the Intragovernmental Business Rules.

NOTE 6. OTHER ASSETS

Other Assets Dollars in Thousands

As of September 30 2013 2012

Nonfederal Other Assets

Outstanding Contract Financing Payments $ 3,497,621 $ 2,985,170

Advances and Prepayments 28,304,313 23,752,485

Total Nonfederal Other Assets $ 31,801,934 $ 26,737,655

Total Other Assets $ 31,801,934 $ 26,737,655

Contract terms and conditions for certain types of contract financing payments convey 

certain rights to the Foreign Military Sales (FMS) Trust Fund that protect the contract work 

from state or local taxation, liens or attachment by the contractor's creditors, transfer of 

property, or disposition in bankruptcy. However, these rights should not be misconstrued to 

mean that ownership of the contractor’s work has transferred to the Government. The 

Government does not have the right to take the work, except as provided in contract 

clauses related to termination or acceptance, and the FMS Trust Fund is not obligated to 

make payment to the contractor until delivery and acceptance of a satisfactory product. 
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum B

B-15

The balance of Outstanding Contract Financing Payments includes $2.2 billion in contract 

financing payments and an additional $1.3 billion in estimated future payments to 

contractors upon delivery and government acceptance of a satisfactory product. (See 

additional discussion in Note 15, Other Liabilities).

NOTE 7. CASH AND OTHER MONETARY ASSETS

Cash and Other Monetary Assets Dollars in Thousands

As of September 30 2013 2012

Cash $ 20,593,988 $ 20,124,963

Total Cash, Foreign Currency, and Other Monetary Assets $ 20,593,988 $ 20,124,963

Restricted cash of $20.6 billion includes advance deposits from foreign nations in the 

Federal Reserve Bank which have not been transferred to the Foreign Military Sales Trust 

Fund and are not available for agency use (nonentity cash).

NOTE 8. DIRECT LOAN AND LOAN GUARANTEES

Direct Loan and Loan Guarantee Programs

The Defense Security Cooperation Agency (DSCA) operates the following direct loans and/or 

loan guarantee Programs:

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: For pre-1992 loans (1) Foreign Military Loan Liquidating Account (FMLLA). For 

post-1991 loans (2&3) the Foreign Military Direct Loan Program and Financing Accounts for 

post-1991 loans, and (4) the Military Debt Reduction Financing Account (MDRFA) for 

reducing loan receivables for eligible countries. 

The FMLLA is a liquidating account that includes all assets, liabilities, and equities for loan 

balances recorded prior to FY 1992. No new loan disbursements are made from this 

account. Certain collections made into this account are made available for default claim 

payments. The Federal Credit Reform Act (FCRA) provides permanent indefinite authority to 

cover obligations for default payments in the event the funds in the liquidating account are 

otherwise insufficient.

Foreign Military Financing Direct Loan Program Account (FMFDLPA) is a program account 

that was established pursuant to 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 Foreign Military Financing Direct Loan Financing 

Account (FMFDLFA) to make required loan disbursements for approved Foreign Military 

Sales or commercial sales. 
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum B

B-16

The Foreign Military Direct Loan Program is still active with one outstanding loan with 

Poland. Poland’s loan works as a line of credit where they can borrow from it whenever they 

want. They have not borrowed from that line of credit since FY 2010, although we anticipate 

them borrowing in the next FY.

The FMFDLFA is a financing account that is used to make disbursements of Foreign Military 

Loan funds for approved procurements and for subsequent collections for the loans after 

September 30, 1991. The account uses permanent borrowing authority from the 

U.S. Treasury combined with transfers of appropriated funds from FMFDLPA to make the 

required disbursements to loan recipient country borrowers for approved procurements. 

Receipts of debt service collections from borrowers are used to repay borrowings from 

U.S. Treasury.

MDRFA is a financing account that was established for the debt relief of certain countries as 

established by Public Law 103-87. The MDRFA buys the portfolio of loans from the FMLLA, 

thus transferring the loans from the FMLLA 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 that correspond 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.

Summary of Direct Loans and Loan Guarantees Dollars in Thousands

As of September 30 2013 2012

Loans Receivable

Direct Loans:

Foreign Military Loan Liquidating Account $ 733,641 $ 847,442

Foreign Military Financing Account (27,111) (27,111)

Military Debt Reduction Financing Account 17,445 15,737

Total Loans Receivable $ 723,975 $ 836,068
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum B

B-17

Direct Loans Obligated Dollars in Thousands

As of September 30 2013 2012

Direct Loans Obligated After FY 1992 

(Allowance for Loss Method):

Foreign Military Loan Liquidating Account:

Loans Receivable Gross $ 480,672 $ 610,482

Interest Receivable 1,744,628 1,659,237

Allowance for Loan Losses (1,491,659) (1,422,277)

Value of Assets Related to Direct Loans, Net $ 733,641 $ 847,442

Direct Loans Obligated After FY 1991 

(Present Value Method):

Foreign Military Financing Account:

Allowance for Subsidy Cost (Present Value) $ (27,111) $ (27,111)

Value of Assets Related to Direct Loans $ (27,111) $ (27,111)

Military Debt Reduction Financing Account:

Loans Receivable Gross $ 0 $ 0

Interest Receivable 0 0

Allowance for Subsidy Cost (Present Value) 17,445 15,737

Value of Assets Related to Direct Loans, Net $ 17,445 $ 15,737

Total Direct Loans Receivable $ 723,975 $ 836,068

Other Disclosures:

The DSCA bills the countries every six months for loan repayments. Applying terms of the 

loans with the countries, accrued interest receivable is calculated 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 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. 

The abnormal debit balance for allowance of $17.4 million in the MDRFA is the unamortized 

portion of the subsidy that results from a debit balance reflects the cost of the loan to the 

U.S. Government. A debit balance results from: (1) interest expense paid on U.S. Treasury 

borrowings; and (2) downward adjustments due to reestimates when the loan repayment 

rate exceeds the U.S. Treasury borrowing rate, and a decrease in estimated defaults. The 

loans in the MDRFA account were originally FMFDLFA loans and were categorized as 

moderate to medium risk and were expected to have an increasing amount of defaults over 

the years, but since have defaulted. This was built into the original subsidy amount. As the 

loan matured, and then eventually defaulted, along with the U.S. Treasury borrowing rates 

falling below the loan interest rates. This resulted in downward reestimates and a negative 

subsidy rate for the loans, which resulted in a debit balance in the allowance for subsidy.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum B

B-18

Total Amount of Direct Loans Disbursed Dollars in Thousands

As of September 30 2013 2012

Direct Loan Programs

Foreign Military Financing Account $ 0 $ 0

Total $ 0 $ 0

Schedule for Reconciling Subsidy Cost Allowance Balances

For Post-FY 1991 Direct Loans Dollars in Thousands

As of September 30 2013 2012

Beginning Balance, Changes, and Ending Balance:

Beginning Balance of the Subsidy Cost Allowance $ 11,374 $ 235,558

Adjustments

Loans Written Off 0 0

Subsidy Allowance Amortization (1,708) (224,184)

Total of the above Adjustment Components $ (1,708) $ (224,184)

Ending Balance of the Subsidy Cost Allowance before Reestimate $ 9,666 $ 11,374

Add or Subtract Subsidy Reestimate by Component

Interest Rate Reestimate 0 0

Total of the above Reestimate Components 0 0

Ending Balance of the Subsidy Cost Allowance $ 9,666 $ 11,374

Administrative Expenses

Administrative expenses for loans are not funded in the loan program account. The Office of 

Management and Budget made the decision to fund administration of loans in the Foreign 

Military Financing Grant account (11*1082) since the dollar amount was so low. 

NOTE 11. LIABILITIES NOT COVERED BY BUDGETARY RESOURCES

Liabilities Not Covered by Budgetary Resources Dollars in Thousands

As of September 30 2013 2012

Intragovernmental Liabilities:

Accounts Payable $ 0 $ 0

Other 139 118

Total Intragovernmental Liabilities $ 139 $ 118

Nonfederal Liabilities:

Military Retirement and Other Federal Employment Benefits 595 523

Total Nonfederal Liabilities 595 523

Total Liabilities Not Covered by Budgetary Resources 734 641

Total Liabilities Covered by Budgetary Resources $ 68,539,458 $ 63,230,954

Total Liabilities $ 68,540,192 $ 63,231,595

The Liabilities Not Covered by Budgetary Resources includes liabilities for which 

congressional action is needed before budgetary resources can be provided. These liabilities 

are categorized as not covered because there is no current or immediate appropriation 

available for liquidation. 
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum B

B-19

Military Retirement and Other Federal Employment Benefits consists of Federal Employee 

Compensation Act (FECA) actuarial liabilities of $594.6 thousand that is not due and payable 

during the current fiscal year. Refer to Note 17, Military Retirement and Other Federal 

Employment Benefits, for additional details and disclosures.

Intragovernmental Liabilities Other, represents the amount payable to Department of Labor 

for FECA liabilities.

NOTE 12. ACCOUNTS PAYABLE

Accounts Payable Dollars in Thousands

2013

As of September 30

Accounts Payable

Interest, Penalties, 

and Administrative 

Fees

Total

Intragovernmental Payables $ 266,922 N/A $ 266,922

Nonfederal Payables

(To the Public) 400,521 0 400,521

Total Accounts Payable $ 667,443 $ 0 $ 667,443

Accounts Payable Dollars in Thousands

2012

As of September 30

Accounts Payable

Interest, Penalties, 

and Administrative 

Fees

Total

Intragovernmental Payables $ 252,698 N/A $ 252,698

Nonfederal Payables

(To the Public) 270,627 0 270,627

Total Accounts Payable $ 523,325 $ 0 $ 523,325

Accounts Payable includes amounts owed to federal and nonfederal entities for goods and 

services received by Foreign Military Sales (FMS) Trust Fund and the accounts for funds

appropriated for security assistance.

The systems utilized by the FMS Trust Fund and the accounts for funds appropriated for 

security assistance do not track intragovernmental transactions by customer at the 

transaction level. The FMS therefore cannot reconcile accounts payable with other federal 

entities. Buyer-side accounts payable are adjusted to agree with interagency seller-side 

accounts receivable.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum B

B-20

NOTE 13. DEBT

Debt Dollars in Thousands

2013

As of September 30 Beginning Balance Net Borrowing Ending Balance

Agency Debt 

(Intragovernmental)

Debt to the Treasury $ 33,967 $ 1,708 $ 35,675

Debt to the Federal Financing 

Bank 190,191 (109,262) 80,929

Total Debt $ 224,158 $ (107,554) $ 116,604

Debt Dollars in Thousands

2012

As of September 30 Beginning Balance Net Borrowing Ending Balance

Agency Debt 

(Intragovernmental)

Debt to the Treasury $ 43,600 $ (9,633) $ 33,967

Debt to the Federal Financing 

Bank 297,309 (107,118) 190,191

Total Debt $ 340,909 $ (116,751) $ 224,158

The Federal Credit Reform Act (FCRA) of 1990 provides financing accounts with indefinite 

authority to borrow from the U.S. Treasury to fund disbursements of loans made to 

sovereign nations for security assistance. This debt to the U.S. Treasury is reflected in the 

Foreign Military Financing Direct Loan Financing Account and the Military Debt Reduction 

Account.

Beginning in January 1975, the Defense Security Cooperation Agency (DSCA) and the 

Federal Financing Bank (FFB), acting under section 24 of the Arms Export Control Act, as 

amended, entered into an agreement whereby the FFB would make loan agreements with 

friendly nations and acquire promissory notes guaranteed by DSCA. The promissory notes 

are considered DSCA borrowings from the FFB. The promissory notes still owed to the FFB 

are reflected in the Foreign Military Loan Liquidating Account.

The majority of the debt represents direct and guaranteed loans to foreign countries for 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. 
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum B

B-21

NOTE 15. OTHER LIABILITIES

Other Liabilities Dollars in Thousands

2013

As of September 30 Current Liability Noncurrent 

Liability Total

Intragovernmental

FECA Reimbursement to the 

Department of Labor $ 59 $ 81 $ 140

Custodial Liabilities 0 652,711 652,711

Total Intragovernmental Other 

Liabilities $ 59 $ 652,792 $ 652,851

Nonfederal

Accrued Funded Payroll and 

Benefits $ 44 $ 0 $ 44

Advances from Others 63,474,620 3,477,539 66,952,159

Contract Holdbacks 150,496 0 150,496

Total Nonfederal Other 

Liabilities $ 63,625,160 $ 3,477,539 $ 67,102,699

Total Other Liabilities $ 63,625,219 $ 4,130,331 $ 67,755,550

Other Liabilities Dollars in Thousands

2012

As of September 30 Current Liability Noncurrent 

Liability Total

Intragovernmental

FECA Reimbursement to the 

Department of Labor $ 45 $ 72 $ 117

Custodial Liabilities 0 657,251 657,251

Total Intragovernmental Other 

Liabilities $ 45 $ 657,323 $ 657,368

Nonfederal

Accrued Funded Payroll and 

Benefits $ 118 $ 0 $ 118

Advances from Others 58,796,076 2,985,170 61,781,246

Contract Holdbacks 44,857 0 44,857

Total Nonfederal Other 

Liabilities $ 58,841,051 $ 2,985,170 $ 61,826,221

Total Other Liabilities $ 58,841,096 $ 3,642,493 $ 62,483,589

Other Liabilities

Contingent Liabilities includes $3.5 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 
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum B

B-22

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 16. COMMITMENTS AND CONTINGENCIES

Claims may be presented and/or the U.S. Government may be a party in various 

administrative proceedings or court litigations, but it is highly unlikely that any can implicate 

the Foreign Military Sales Trust Fund. The U.S. funds appropriated for security assistance 

generally are not legally available for paying claims.

NOTE 17. MILITARY RETIREMENT AND OTHER FEDERAL EMPLOYMENT 

BENEFITS

FEDERAL EMPLOYEES’ COMPENSATION ACT (FECA)

Actuarial Cost Method Used and Assumptions:

The Defense Security Cooperation Agency Foreign Military Sales (FMS) Trust Fund actuarial 

liability for workers’ compensation benefits is developed by the Department of Labor and 

provided to the FMS Trust Fund at the end of each fiscal year. The liability for future 

workers’ compensation benefits includes the expected liability for death, disability, medical, 

Military Retirement and Other Federal Employment Benefits Dollars in Thousands

2013

As of September 30

Liabilities

Assured 

Interest Rate 

(%)

(Less: Assets 

Available to 

Pay Benefits)

Unfunded 

Liabilities

Pension and Health Actuarial Benefits

FECA $ 595 0.0 $ 0 $ 595

Total Military Retirement and Other Federal 

Employment Benefits $ 595 0.0 $ 0 $ 595

Military Retirement and Other Federal Employment Benefits Dollars in Thousands

2012

As of September 30

Liabilities

Assured 

Interest Rate 

(%)

(Less: Assets 

Available to 

Pay Benefits)

Unfunded 

Liabilities

Pension and Health Actuarial Benefits

FECA $ 523 0.0 $ 0 $ 523

Total Military Retirement and Other Federal 

Employment Benefits $ 523 0.0 $ 0 $ 523
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum B

B-23

and miscellaneous costs for approved compensation cases, plus a component for incurred 

but not reported claims. The liability is determined using a method that utilizes historical 

benefit payment patterns related to a specific incurred period to predict the ultimate 

payments related to that period. Consistent with past practice, these projected annual 

benefit payments have been discounted to present value using the Office of Management 

and Budget’s economic assumptions for 10-year Treasury notes and bonds. Interest rate 

assumptions utilized for discounting were as follows:

Discount Rates

2.7% in Year 1

3.1% in Year 2 and thereafter

To provide more specifically for the effects of inflation on the liability for future workers’ 

compensation benefits, wage inflation factors (cost of living adjustments or COLAs) and 

medical inflation factors (consumer price index medical or CPIMs) were applied to the 

calculation of projected future benefits. The actual rates for these factors for the charge 

back year (CBY) 2013 were also used to adjust the methodology’s historical payments to 

current year constant dollars.

Federal Employees – Compensation Act (FECA)

CBY COLA CPIM

2014 1.67% 3.46%

2015 1.80% 3.82%

2016 2.20% 3.83%

2017 2.20% 3.82%

2018+ 2.20% 3.82%

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 by agency 

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 2013 to the average 

pattern observed during the most current three CBYs and (4) a comparison of the estimated 

liability per case in the CBY 2013 projection to the average pattern for the projections of the 

most recent three years.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum B

B-24

NOTE 18. GENERAL DISCLOSURES RELATED TO THE STATEMENT OF

NET COST

Costs and Exchange Revenue Dollars in Thousands

As of September 30 2013 2012

Operations, Readiness & Support

1. Gross Cost

A. Intragovernmental Cost $ 7,424,481 $ 7,596,317

B. Nonfederal Cost $ 23,481,664 $ 23,115,279

C. Total Cost $ 30,906,145 $ 30,711,596

2. Earned Revenue

A. Intragovernmental Revenue $ 0 $ (327)

B. Nonfederal Revenue $ (14,556) $ (24,078)

C. Total Revenue $ (14,556) $ (24,405)

3. Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ 0 $ 0

Total Net Cost $ 30,891,589 $ 30,687,191

Costs and Exchange Revenue Dollars in Thousands

As of September 30 2013 2012

Consolidated

1. Gross Cost

A. Intragovernmental Cost $ 7,424,481 $ 7,596,317

B. Nonfederal Cost $ 23,481,664 $ 23,115,279

C. Total Cost $ 30,906,145 $ 30,711,596

2. Earned Revenue

A. Intragovernmental Revenue $ 0 $ (327)

B. Nonfederal Revenue $ (14,556) $ (24,078)

C. Total Revenue $ (14,556) $ (24,405)

3. Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ 0 $ 0

Total Net Cost $ 30,891,589 $ 30,687,191

Intragovernmental costs and revenue represent transactions made between two reporting 

entities within the Federal Government.

The Statement of Net Cost (SNC) represents the net cost of programs and organizations of 

the Federal Government that are supported by appropriations or other means. The intent of 

the SNC is to provide gross and net cost information related to the amount of output or 

outcome for a given program or organization administered by a responsible reporting entity. 

The Department’s current processes and systems do not capture and report accumulated 

costs for major programs based upon the performance measures as required by the 

Government Performance and Results Act. The Department is in the process of reviewing 

available data and developing a cost reporting methodology as required by the SFFAS No. 4, 

“Managerial Cost Accounting Concepts and Standards for the Federal Government,” as 

amended by SFFAS No. 30, “Inter-entity Cost Implementation.”

Public costs and revenues are exchange transactions made between the reporting entity and 

a nonfederal entity.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum B

B-25

The systems utilized by Defense Security Cooperation Agency for the Foreign Military Sales 

(FMS) Trust Fund and the accounts for funds appropriated for security assistance do not 

track intragovernmental transactions by a customer at the transaction level. The FMS Trust 

Fund adjusted expenses by reclassifying amounts between federal and nonfederal expenses 

and accruing additional payables and expenses. Intradepartment revenues and expenses 

are then eliminated.

Intragovernmental costs and revenue represent transactions made between two reporting 

entities within the Federal Government.

The DSCA does not 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.

NOTE 19. DISCLOSURES RELATED TO THE STATEMENT OF CHANGES IN NET 

POSITION

The Appropriations on the SBR does not agree with the Appropriations Received on the 

Statement of Changes in Net Position. The difference of $177.3 million is mainly attributed 

to the mandatory spending reductions for International Military Education & Training and 

the Foreign Military Financing Grant account. 

NOTE 20. DISCLOSURES RELATED TO THE STATEMENT OF BUDGETARY 

RESOURCES

Disclosures Related to the Statement of Budgetary Resources Dollars in Thousands

As of September 30 2013 2012

Net Amount of Budgetary Resources Obligated for Undelivered Orders at 

the End of the Period. $ 153,849,411 $ 163,493,527

On the Statement of Budgetary Resources (SBR), obligations incurred of $21.6 billion are 

direct and exempt from apportionment.

The SBR includes intra-entity transactions because the statements are presented combined.

Borrowings from the U.S. Treasury are required to be repaid once a year at the end of the 

fiscal year. The financing sources for the repayments on borrowings are loan repayments 

from the countries or permanent indefinite appropriations through subsidy reestimates.

The portions of the Foreign Military Sales (FMS) Trust Fund receipts collected in the current 

fiscal year that exceed current outlays are temporarily precluded from obligation by law. 

These receipts, however, are available for obligation as needed in the future.

The Federal Credit Reform Act of 1990 (FCRA) provides permanent indefinite appropriations 

to fund upward subsidy reestimates that fund repayments of principal and interest of 

U.S. Treasury borrowings with the Foreign Military Financing Direct Loan Program and the 

Military Debt Reduction Financing Account. The FCRA also provides permanent indefinite 

appropriations to fund loan defaults with the Federal Financing Bank in the Foreign Military 

Loan Liquidating Account.
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum B

B-26

The Appropriations on the SBR does not agree with the Appropriations Received on the 

Statement of Changes in Net Position. The difference of $177.3 million is mainly attributed 

to the permanent reduction of the Military Financing Grant Account due to U.S. Government 

Sequestration mandatory spending cuts.

Legal limitations and time restriction on the use of unobligated appropriation balances are 

provided under Public Law.

NOTE 21. RECONCILIATION OF NET COST OF OPERATIONS TO BUDGET

Reconciliation of Net Cost of Operations to Budget Dollars in Thousands

As of September 30 2013 2012

Resources Used to Finance Activities:

Budgetary Resources Obligated:

Obligations incurred $ 21,637,738 $ 74,721,927

Less: Spending authority from offsetting collections and recoveries (-) (529,970) (2,127,443)

Obligations net of offsetting collections and recoveries $ 21,107,768 $ 72,594,484

Less: Offsetting receipts (-) (26,651,359) (26,310,214)

Net Budgetary Resources Obligated $ (5,543,591) $ 46,284,270

Total resources used to finance activities $ (5,543,591) $ 46,284,270

Resources Used to Finance Items not Part of the Net Cost of Operations

Change in budgetary resources obligated for goods, services and 

benefits ordered but not yet provided:

Undelivered Orders (-) $ 9,644,116 $ (42,084,474)

Resources that fund expenses recognized in prior Periods 0 0

Budgetary offsetting collections and receipts that do not affect Net Cost 

of Operations 26,792,680 26,489,306

Resources that finance the acquisition of assets (-) (1,709) (1,953)

Total resources used to finance items not part of the Net Cost of 

Operations $ 36,435,087 $ (15,597,121)

Total resources used to finance the Net Cost of Operations $ 30,891,496 $ 30,687,149

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 (+/-) $ 93 $ 42

Total components of Net Cost of Operations that will Require or 

Generate Resources in future periods $ 93 $ 42

Components not Requiring or Generating Resources:

Revaluation of assets or liabilities $ 0 $ 0

Total components of Net Cost of Operations that 

will not Require or Generate Resources in the current period $ 93 $ 42

Net Cost of Operations $ 30,891,589 $ 30,687,191
U.S. Department of Defense Agency Financial Report for FY 2013

Addendum B

B-27

The following Reconciliation of Net Cost of Operations to Budget lines are presented as 

combined instead of consolidated due to intra-agency budgetary transactions not being 

eliminated:

Obligations Incurred

Less: Spending Authority from Offsetting Collections and Recoveries

Obligations Net of Offsetting Collections and Recoveries

Less: Offsetting Receipts

Net Obligations

Undelivered Orders

Unfilled Customer Orders

Due to the Foreign Military Sales Trust Fund system limitations, budgetary data is not in 

agreement with proprietary expenses and assets capitalized. The difference between 

budgetary and proprietary data is a previously identified deficiency.

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 2013

Addendum B

B-28

This Page Left Blank Intentionally
U.S. Department of Defense Agency Financial Report for FY 2013

Appendix A

Page 1 of 3

APPENDIX A: GLOSSARY OF ACRONYMS AND ABBREVIATIONS

Acronym Definition

AFR Agency Financial Report

ANSF Afghan National Security Force

APR Annual Performance Report

AVF All Volunteer Force

BAM Business Activity Monitoring tool

BBP Better Buying Power

BCA Budget Control Act of 2011

BCT Brigade Combat Team

C2CRE Command and Control Response Elements

CBRN Chemical, Biological, Radiological, or Nuclear

CBRNE Chemical, Biological, Radiological/Nuclear, and Explosive

CEFMS Corps of Engineers Financial Management System

CERFP CBRNE Enhanced Response Force Packages

CFO Chief Financial Officer

CIO Chief Information Officer

CMO Chief Management Officer

COCOM Combatant Command

COMSEC Communications Security

COR Contracting Officer Representative

D2D Deployment to Dwell

DBC Defense Business Council

DCAA Defense Contract Audit Agency

DCMA Defense Contract Management Agency

DCMO Deputy Chief Management Officer

DCRF Defense CBRNE Response Force

DFAS Defense Finance and Accounting Service

DHA Defense Health Agency

DHP Defense Health Program

DLA Defense Logistics Agency

DoD Department of Defense

DoDI Department of Defense Instruction

DSG Defense Strategic Guidance

DTMO Defense Travel Management Office

DTS Defense Travel System 

ERP Enterprise Resource Planning

EIC External Independent Contractor

FBWT Fund Balance With Treasury

FFMIA Federal Financial Management Improvement Act of 1996

FIAR Financial Improvement and Audit Readiness
U.S. Department of Defense Agency Financial Report for FY 2013

Appendix A

Page 2 of 3

Acronym Definition

FM Financial Management

FMFIA Federal Managers’ Financial Integrity Act of 1982

FY Fiscal Year

GAO Government Accountability Office

HBSS Host-Based Security System

HIPS Host-based Intrusion Prevention System

HRF Homeland Response Force

ICBM Intercontinental Ballistic Missile

IDES Integrated Disability Evaluation System 

IG Inspector General

IMR Individual Medical Readiness

IPERA Improper Payments Elimination and Recovery Act of 2010

IPERIA Improvement Payments Elimination and Recovery 

Improvement Act of 2012

IPIA Improper Payment Information Act of 2002

IRB Investment Review Board

ISAF International Security Assistance Force

ISR Intelligence, Surveillance and Reconnaissance

IT Information Technology

LQA Living Quarters Allowance

MDAP Major Defense Acquisition Programs

MFF Multi-Functional and Functional Support 

MHS Military Health System

MICP Managers’ Internal Control Program

MOCAS Mechanization of Contract Administrative Services

OCO Overseas Contingency Operations

OEF Operation Enduring Freedom

OIF Operation Iraqi Freedom

OIG Office of the Inspector General

OMB Office of Management and Budget

OPSEC Operations Security

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)

PCS Permanent Change of Station 

PFPA Pentagon Force Protection Agency

PP&E Property, Plant, and Equipment

PSA Principal Staff Assistants

QDR Quadrennial Defense Review

RAA Rapid Acquisition Authority

SBA Schedule of Budgetary Activity
U.S. Department of Defense Agency Financial Report for FY 2013

Appendix A

Page 3 of 3

Acronym Definition

SBR Statement of Budgetary Resources

SCMR Strategic Choices and Management Review

SFIS Standard Financial Information Structure

SIG Senior Integration Group

SNC Statement of Net Cost

SSAE Statement on Standards for Audit Engagements 

TDY Temporary Duty 

TMA TRICARE Management Agency 

UFC USACE Finance Center

U.S. United States

USACE United States Amy Corps of Engineers

USD Under Secretary of Defense

USD(AT&L) Under Secretary of Defense for Acquisition, Technology and 

Logistics

USGAAP 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

WAWF Wide Area Workflow

WII Wounded, Ill, or Injured 

WinIATS Windows Integrated Automated Travel System 
U.S. Department of Defense Agency Financial Report for FY 2013

This Page Left Blank Intentionally
U.S. Department of Defense Agency Financial Report for FY 2013

Appendix B

Page 1 of 1

APPENDIX B: USEFUL WEBSITES

Link URL

Budget Control Act of 2011 http://www.gpo.gov/fdsys/pkg/PLAW112publ25/pdf/PLAW-112publ25.pdf

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 Defense Business Council http://dcmo.defense.gov/governance/dbc-irb.html

DoD Enterprise Transition Plan http://dcmo.defense.gov/publications/enterprisetransition-plan.html

DoD Financial Improvement and Audit 

Readiness

http://comptroller.defense.gov/fiar/

DoD Financial Management 

Certification Program

http://comptroller.defense.gov/FMCert.html

DoD Financial Management 

Regulation

http://comptroller.defense.gov/fmr

DoD Joint Chiefs of Staff http://www.jcs.mil/

DoD Managers’ Internal Control 

Program

http://comptroller.defense.gov/micp.html

DoD, Office of the Inspector General http://www.dodig.mil/

DoD Strategic Management Plan http://dcmo.defense.gov/publications/strategicmanagement-plan.html

Federal Financial Management 

Improvement Act

http://www.dol.gov/ocfo/media/regs/FFMIA.pdf

Federal Managers’ Financial Integrity 

Act

http://whitehouse.gov/omb/financial_fmfia1982

National Guard http://www.nationalguard.mil

Office of Management and Budget 

Circulars 

http://www.whitehouse.gov/omb/financial_offm_circulars

Quadrennial Defense Review http://www.defense.gov/qdr

Sustaining U.S. Global Leadership: 

Priorities for 21st Century Defense

http://www.defense.gov/news/Defense_Strategic_Guidanc

e.pdf

Federal Accounting Standards 

Advisory Board

http://fasab.gov/accounting-standards/authoritativesource-of-gaap/

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 http://www.stratcom.mil

U.S. Transportation Command http://www.transcom.mil
U.S. Department of Defense Agency Financial Report for FY 2013

This Page Left Blank Intentionally
U.S. Department of Defense Agency Financial Report for FY 2013

Appendix C

Page 1 of 2

APPENDIX C, DIRECTORY OF FIGURES AND TABLES

MANAGEMENT’S DISCUSSION AND ANALYSIS

Fiscal Year 2013 Overview 

Figure 1. Department of Defense FY 2013 Enacted Budget ........................................................ 9

Figure 2. Department of Defense FY 2013 Sequester Impact ....................................................10

Financial Overview

Figure 3. Trend in DoD Enacted Appropriations .......................................................................22

Figure 4. Composition of DoD Total Budgetary Resources .........................................................22

Figure 5. Summary of Total Assets ........................................................................................23

Figure 6. Summary of Total Liabilities ....................................................................................24

Figure 7. Unfunded Liabilities................................................................................................25

Figure 8. Summary of Net Cost of Operations .........................................................................26

Figure 9. Financial Performance Summary..............................................................................27

Figure 10. Transactions Processed by DFAS in FY 2013 ..............................................................32

Systems, Controls, and Legal Compliance

Figure 11. Commitment to MICP .............................................................................................34

Figure 12 . Summary List of Outstanding Material Weaknesses ....................................................40

Organization

Figure 13. Department Mission ...............................................................................................46

Figure 14 . Department of Defense Organizational Structure .......................................................46

Figure 15. Office of the Secretary of Defense Organizational Structure.........................................47

Figure 16. Reserve Forces and National Guard ..........................................................................48

Figure 17. Defense Agencies and DoD Field Activities ................................................................49

Figure 18. Combatant Commands Geographic and Functional Areas ............................................50

FINANCIAL SECTION

Department of Defense Principal Financial Statements and Notes

Figure 19. Four Principal Financial Statements ..........................................................................64

ADDENDUM A: OTHER INFORMATION 

Managers Internal Control Program

Table 1a. Effectiveness of Internal Control over Financial Reporting ....................................... A-32

Table 1a-1. Effectiveness of Internal Controls over Financial Reporting Material Weaknesses........ A-33

Table 1b. Effectiveness of Internal Controls of Overall Operations .......................................... A-39

Table 1b-1. FY 2013 Internal Control of Overall Operations Material Weaknesses........................ A-40

Table 1c. Conformance with Financial Management System Requirements .............................. A-46

Table 1c-1. FY 2013 Internal Control over Financial Systems Material Weakness ........................ A-46

Table 2. Summary of IG-Identified DoD Material Weaknesses in Financial Reporting............... A-47

Table 3. Compliance with Federal Financial Management Improvement Act ........................... A-47
U.S. Department of Defense Agency Financial Report for FY 2013

Appendix C

Page 2 of 2

Improper Payment and Payment Recapture Programs

Table 4. Improper Payment Reduction Outlook .................................................................. A-62

Table 5. Payment Recapture Audit Reporting ..................................................................... A-65

Table 6. Payment Recapture Audit Targets ........................................................................ A-66

Table 7. Aging of Outstanding Overpayments .................................................................... A-66

Table 8. Disposition of Recaptured Funds .......................................................................... A-66

Table 9. Overpayments Recaptured Outside of Payment Recapture Audits ............................ A-67

Figure A-1. Improper Payment Rate – Military Health Benefits ................................................. A-51

Figure A-2. Improper Payment Rate – Military Pay.................................................................. A-52

Figure A-3. Improper Payment Rate – Civilian Pay.................................................................. A-53

Figure A-4. Improper Payment Rate – DFAS Commercial Pay ................................................... A-55

Figure A-5. Improper Payment Rate – USACE Commercial Pay ................................................. A-56

Figure A-6. Improper Payment Rate – Military Retirement Pay ................................................. A-57

Figure A-7. Improper Payment Rate – DFAS Travel Pay........................................................... A-58

Figure A-8. Improper Payment Rate – USACE Travel Pay......................................................... A-60

Figure A-9. Historical Recovery Amounts for DHA Contractors .................................................. A-64

NOTE: The financial statements and related tables included in the accompanying notes to the 

financial statements are not assigned figure or table numbers within the AFR and, as such, are not 

included in this directory.
WELCOME TO THE 

DEPARTMENT OF DEFENSE

We are interested in your feedback 

regarding the content of this report.

Please feel free to send your comments to

DoDAFR@osd.mil 

or

United States Department of Defense

Office of the Under Secretary of Defense (Comptroller)

1100 Defense Pentagon

Washington, DC 20301‐1100

You may also view this document at:

http://comptroller.defense.gov/afr/fy2013.html

KNOW YOUR BUSINESS

CONTROL YOUR FUTURE

FINANCIAL IMPROVEMENT AND AUDIT READINESS