November 16, 2009

Department of Defense

AGENCY FINANCIAL 

REPORT FOR 

FISCAL YEAR 2009
FOREWORD

The Department of Defense Agency 

Financial Report (AFR) for Fiscal Year 2009 

provides an overview of the Department’s 

financial information and performance goals 

and objectives. It also describes our 

priorities in response to challenges 

encountered in defense of our nation. 

For FY 2009, 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 to increase transparency while 

utilizing the Internet for providing additional 

details. The Department’s FY 2009 reporting 

consist of three components: 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

This document will summarize the 

Department’s financial and 

performance information from 

the AFR and APR, making the 

information more transparent and 

accessible to Congress, the public, 

and other key constituents. 

Agency Financial Report 

(AFR)

The AFR consists of the 

Management’s Discussion 

and Analysis that provides 

executive-level information 

on the Department’s history, 

mission, organization, key 

performance activities, analysis

of the financial statements, 

controls and legal compliance 

and other challenges facing

the Department. 

Additional information is available in Addendum A, 

Financial Section, Addendum B, Other Accompanying 

Information, and Addendum C, Defense Security 

Cooperation Agency of the AFR. 

We welcome your feedback 

regarding the content of this report. 

To comment or to request 

copies of the report, please e-mail 

us at DoDAFR@osd.mil, 

or write to:

U.S. Department of Defense

Office of the Under Secretary of Defense (OUSD)

(Comptroller)

1100 Defense Pentagon

Washington, DC 20301-1100

Department of Defense

AGENCY

FINANCIAL 

REPORT

November 16, 2009

Department of Defense

CONGRESSIONAL

BUDGET

JUSTIFICATION

February 1, 2010

Department of Defense

SUMMARY OF

PERFORMANCE 

AND 

FINANCIAL 

INFORMATION

February 15, 2010

• Agency Financial Report –

Published November 16, 2009

• Annual Performance Report –

Published by February 1, 2010

• Summary of Performance and

Financial Information –

Published by February 15, 2010

All three reports will be available at the Comptroller’s

website: http://www.defenselink.mil/comptroller/reports.html
Department of Defense Agency Financial Report for FY 2009 

 

i 

Table of Contents 

Message from the Deputy Secretary of Defense ..................................................................1

Message from the Chief Financial Officer .............................................................................2 

Management’s Discussion and Analysis 

Mission, Fiscal Year 2009 Overview, and Organization ................................................3 

Program Performance Overview .................................................................................11 

Financial Performance Overview.................................................................................17 

Management Assurances............................................................................................24 

Other Management Information and Initiatives...................................................................30 

Appendix A: Glossary ..........................................................................................................33

Appendix B: Useful Web Sites for Relevant Information ..................................................34

Addendum A – Financial Information 

Independent Auditor’s Report........................................................................................1 

Principal Financial Statements and Notes ...................................................................12 

Required Supplementary Stewardship Information .....................................................79 

Required Supplementary Information..........................................................................82 

Addendum B – Other Accompanying Information 

Inspector General’s Summary of Management and Performance Challenges, 

 and Management’s Responses to Inspector General’s Challenges...........................1 

Management Assurances and Financial Statement Material Weaknesses .................26 

Improper Payments Information Act Reporting ............................................................69 

Addendum C – Defense Security Cooperation Agency 

Principal Financial Statements and Notes .....................................................................1 


Department of Defense Agency Financial Report for FY 2009 

Management’s Discussion and Analysis 

 3 

Management’s Discussion and Analysis 

MISSION, FISCAL YEAR 2009 OVERVIEW, AND ORGANIZATIONAL STRUCTURE 

Mission 

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

war and to protect the security of our country. One of the core responsibilities of the U.S. 

government is to protect the life and liberty of the American people or, as phrased in the 

Constitution, to “provide for the common defense.” Today’s Department of Defense plays a 

critical role in defending and advancing the safety and security of American citizens and interests. 

Whether in a period of peace or war, the U.S. Armed Forces have prepared for the unexpected, 

deterred aggression, responded to attack, rebuilt nations emerging from the ravages of conflict, 

and helped to create and maintain a stable and resilient international system. 

Fiscal Year 2009 Overview 

The DoD is committed to executing our mission and responding to 21st Century national 

security requirements. In Fiscal Year (FY) 2009, the Department carried out its mission in many 

ways. We continued to engage in Operation Iraqi Freedom (OIF) military operations while 

executing a substantial portion of our responsible troop withdrawal from Iraq. In FY 2009, 

Counter-Insurgency Operations (COIN) brigade combat teams (BCTs) in Iraq decreased from 

14 to 12. Since the President announced the responsible withdrawal in May 2009, the 

Department saved $554 million in contractor costs, transferred 20,000 units of equipment to 

Afghanistan, and returned 10 percent of total OIF equipment to the U.S. The FY 2010 plans 

reflect the President’s decision to decrease force levels to six Advisory and Assistance Brigades 

by August 31, 2010. 

While performing mission requirements in Iraq, we also increased our efforts in Operation 

Enduring Freedom (OEF) in Afghanistan. In FY 2009, we executed the President’s decision to 

increase force levels from three to six BCTs with a Marine Expeditionary Brigade, a Stryker 

BCT, an Afghan Security Force training BCT, and additional supporting forces and capabilities. 

The additional 33,000 troops were critical in training Afghan Security Forces, bolstering 

International Security Assistance Force security in Regional Command East, retaking Helmand 

Province, and increasing security in Kandahar. 

While continuing to support OIF and OEF, the Department conducted numerous other military 

operations, including humanitarian efforts and relief operations throughout the world. For 

example, DoD provided disaster relief efforts in Taiwan, including supplies and airlift support, in 

response to the devastation caused by typhoon Marokot. In addition DoD provided humanitarian 

assistance, including building basic infrastructure, such as schools and roads, basic medical relief, 

and projects that enable host nations to prepare for disasters in as many as 80 countries. 

The Department depends on the Military Services to execute operations and in FY 2009 the 

Department took a number of steps to strengthen the Military Services. In FY 2009, the Army and 

Marine Corps successfully achieved their “grow the force” active military goals of 547,400 and 

202,000 enlisted, respectively, more than two years ahead of schedule. The successful effort will 

allow the Army and Marine Corps to reduce the stress on their forces and will ultimately result in 

military members spending less time deployed. The Department also continued the growth of the 

special operations force level by over 5,000 military personnel. In addition to “growing the force,” 

the Department created an additional regional command. The Africa Command (AFRICOM) was 

established on October 1, 2008, the first day of FY 2009. This command will greatly enhance the 

nation’s focus on outreach and counterterrorism efforts in Africa. 
Department of Defense Agency Financial Report for FY 2009 

Management’s Discussion and Analysis 

 4 

To carry out its key missions, the Department maintained focus and commitment to take care of 

its people: the all-volunteer military force, including the wounded Service members, military 

families, and civilians. Both military and civilian personnel received a 3.9 percent pay raise. 

The basic allowances for military housing and subsistence increased an average of 5.9 percent 

and 10.0 percent, respectively, to ensure that military families could cover increased costs. In 

recognition of the needs of our wounded warriors, the Department improved military health care 

facilities through funding initiatives such as warrior transition units. In addition, healthcare was 

provided for 9.3 million eligible beneficiaries in 59 inpatient medical facilities, more than 800 

medical and dental clinics, as well as private sector care through the TRICARE program. To 

address the needs of military families, DoD invested in family support efforts such as childcare 

centers, schools, and youth programs. 

The Department invested in new weapon system platforms and capabilities such as unmanned 

aerial vehicles, mine resistance ambush protected vehicles, and precision guided munitions to 

improve the nation’s ability to combat unconventional threats. While investing in new weapon 

systems, the Department focused on aligning acquisitions to operational demands and 

requirements. 

The Department implemented plans to improve acquisition effectiveness. We are committed to 

pursuing a number of acquisition excellence initiatives that address contracting and contract 

management issues, to include contracting in an expeditionary environment, addressing the 

Government Accountability Office’s (GAO) high-risk area of interagency contracting, growing the 

contracting workforce, and increasing DoD organic acquisition management capability. 

In addition to acquisition improvements, the Department continues to make improvements in 

financial management and audit readiness. The DoD established plans to improve business 

practices and internal controls to enhance visibility and accountability of its resources. The 

Department strengthened the business environment within the operational theater to increase 

effectiveness in terms of responsive mission support and better control over resources. To 

accomplish this, the Department formed a cross-functional team of senior leaders to ensure that 

the people, processes, and systems were in place at appropriate levels to provide management 

visibility and assurance over controls. The underlying goal is to provide support for improved 

mission effectiveness, enhanced personnel safety/security, reduced likelihood of loss of funds 

or erroneous payments, less rework, and better cost visibility and control. By applying lessons 

learned from prior theater experience, the Department hopes to develop an enhanced capability 

for future contingencies and theater operations. 

In FY 2009, the Department established plans for continued management reform organized 

around high-priority performance goals. These plans will: 

• Increase energy efficiencies 

• Reform the personnel security clearance process 

• Execute Virtual Lifetime Electronic Record (VLER) milestones 

• Streamline the hiring process 

• Spend American Recovery and Reinvestment Act (ARRA) funds quickly and effectively 

• Provide effective business operations and ensure logistics support to Overseas Contingency 

Operations (OCO) 

• Increase the audit readiness of individual DoD components 

• Reform the DoD acquisition process 

• Enhance the security cooperation workforce 
Department of Defense Agency Financial Report for FY 2009 

Management’s Discussion and Analysis 

 5 

In summary, during FY 2009, the Secretary emphasized the strategic priorities of taking care of 

our people; reshaping and modernizing the force; reforming how the Department buys 

equipment and services; and supporting the troops in the field. 

Resources 

The DoD requires resources (personnel, facilities and infrastructure, and budget authority) to 

carry out key missions and execute management reforms. The strategic placement of our 

personnel, installations, and facilities are key for protecting our homeland and national 

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

fights terrorists who plan and carry out attacks 

on our facilities and our people. 

Our workforce consists of over 3 million 

employees, both afloat and ashore, deployed 

throughout the world to meet mission 

requirements. Nearly half of the Department’s 

workforce is comprised of men and women on 

Active Duty. To provide Americans with the 

highest level of national security, the Department 

consists of 1,462,170 men and women on Active 

Duty, 846,788 in the Reserve and National 

Guard, and 935,768 civilians (Figure 1-1). 

During FY 2009 approximately 140,000 Reserve 

Component members were mobilized at any 

given time. The men and women of the Reserve 

and National Guard provided security and 

assistance in both the Iraq and Afghanistan 

theaters, maintained aircraft in the Horn of Africa, 

and conducted medical outreach in South America, to name a few of their many missions. The 

skills and capabilities the Reserve component members possess match current and anticipated 

DoD requirements, thereby reducing the stress, while increasing the capacity, of the Total Force. 

In FY 2009, for the first time in the 35 year history of today’s all volunteer military, every Service 

and all Components (Active and Reserve) met or exceeded not only the aggressive numerical 

goals that had been set for new recruits, but also rigid quality goals for these recruits including 

education and aptitude. The Nation may be proud of these achievements, as well as the 

commitment of Service members and their families, as reflected in record high retention rates. 

Throughout FY 2009, the civilian workforce continued to play a critical role in supporting the 

accomplishment of the Department's mission. In FY 2009, we witnessed their voluntary and 

enthusiastic participation in new and challenging roles, especially in support of the Department's 

OCO. Their resounding answer to the Secretary's call to serve resulted in over 4,000 DoD 

deployed civilians contributing to Department missions in Iraq and Afghanistan. The newly 

established Civilian Expeditionary Workforce Program has added to this effort by deploying 

volunteers in career fields as far-reaching as intelligence, public affairs, policy development, and 

logistics. The remarkable people who comprise the Department’s civilian and military team are 

our greatest asset in providing a strong and agile national security response. 

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

structures) located at more than 5,500 sites around the world, on more than 29 million acres. 

These sites vary greatly in size. They range from the very small (unoccupied sites supporting a 

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

Figure 1-1 

Staffing for FY 2009

B10-02

Reserve1

379,853

12% Active Duty

1,462,170

45%

Civilian

935,768

29%

National Guard1

466,935

14%

1. Reserve and Guard numbers are as of August 31, 2009.
Department of Defense Agency Financial Report for FY 2009 

Management’s Discussion and Analysis 

 6 

such as the Army's White Sands Missile Range 

in New Mexico with over 3.6 million acres, or 

the Navy’s large complex of installations in 

Norfolk, Virginia. To protect the security of the 

U.S., the Department operates approximately 

11,500 aircraft and 600 ships, including 

submarines, aircraft carriers, and support ships. 

To support our mission requirements, the 

Department continues to focus on investing its 

financial resources effectively to meet the 

needs of the warfighter and the ever-changing 

battlefield. We continue to invest in weapon 

systems and capabilities to counter 21st Century 

threats, support the workforce, and accomplish 

mission requirements and objectives. During 

FY 2009, the DoD’s enacted budget authority 

amounted to $666 billion. The composition of 

the budget authority is depicted in Figure 1-2. 

The OCO resources enable the Department to 

support and to fund efforts in Afghanistan, Iraq, 

Pakistan, and other areas around the globe. In 

Iraq, the Department began the responsible 

drawdown of forces, building on Iraq’s improved 

security gains. In Afghanistan, U.S. forces increased in FY 2009 to address the increased 

violence. U.S. troops continue to work with Afghan Security Forces and international partners to 

build a country that will not be a safe haven for terrorists. 

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

Funding enabled the Department to maintain the readiness to conduct the missions abroad and 

a full spectrum of training, combat training center rotations and recruiting and retention efforts. 

Modernization and recapitalization of equipment that greatly improved combat capabilities 

focused on today’s threats. These new capabilities included procurement and development of 

such platforms as the fifth generation Joint Strike Fighter aircraft; the Littoral Combat Ship; 

unmanned aerial vehicles such as Global Hawk, Reaper and Predators; new generation ground 

vehicles such as the Stryker; communications, navigation, missile warning, space situational 

awareness and environmental monitoring satellites; and missile defense systems. 

Fiscal Year 2009 resources funded the construction and maintenance of additional modernized, 

government-owned housing. Housing units to support the Army and Marine Corps’ growth in 

ground forces were constructed. Additional wounded warrior facilities were built and schools 

and other medical facilities were recapitalized. FY 2009 funded the operation of 254 

commissary stores and education for over 87,000 students in 192 schools. 

The Base Realignment and Closure (BRAC) initiative continued with $9 billion in funding in 

order to keep the Department on track to meet its 2011 completion date. Contracts were 

awarded and work began on the planned 24 realignments and 24 base closures. 

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

resources and making the best use of them. Taking care of our people, reshaping and 

modernizing the force, and supporting our troops in the field also remains a high priority for the 

Department, which is committed to ensuring that these funds are used carefully and effectively. 

Figure 1-2 

Department of Defense

FY 2009 Budget ($666B)

B10-17

$ in Billions

Revolving Funds 3.1

Family Housing 3.1

Military Construction 21.9

Total 513.3

RDT&E 79.5

Procurement 101.7

Operation and Maintenance 179.0

Military Personnel 124.9

Base Budget by Appropriation

Revolving Funds 3.1

Family Housing 3.1

Military Construction 21.9

Total 513.3

RDT&E 79.5

Procurement 101.7

Operation and Maintenance 179.0

Military Personnel 124.9

Base Budget by Appropriation

OCO

Supp

$80

(12%)

OCO 

Bridge

$66

(10%)

Base

Budget

$513

(77%)

ARRA

$7

(1%)

$ in Billions
Department of Defense Agency Financial Report for FY 2009 

Management’s Discussion and Analysis 

 7 

Organization 

The Department must be effectively structured to make best use of its resources. Since the 

creation of the Continental Army in 1775, the U.S. military has evolved to become a global 

presence. The DoD was created by the National Security Act of 1947 by combining the 

Department of War and the Department of the Navy and was called the National Military 

Establishment; it became the DoD when the act was amended in 1949. Under the act, the 

Secretary of Defense, who is appointed by the President with the consent of the Senate, 

supervises the entire military. Under the Secretary of Defense is the Joint Chiefs of Staff. The 

Joint Chiefs consist of a chairperson, who holds the grade of General or Admiral, the heads of the 

three main Military Departments, and the Commandant of the Marine Corps. The Secretary of the 

Army, the Secretary of the Navy, and the Secretary of the Air Force were subordinated to give the 

Secretary of Defense full Cabinet authority over the Department. 

The DoD embraces the core values of all successful organizations: leadership, professionalism, 

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

and loyalty. Figure 1-3 shows how the Department is structured. 

The Secretary and the Office of the Secretary 

The Secretary of Defense and the Office of the Secretary of Defense are responsible for the 

formulation and oversight of America’s defense strategy and policy. The Office of the Secretary 

of Defense supports the Secretary in policy development, planning, resource management, and 

fiscal and program evaluation. 

Figure 1-3 

B10-01

Secretary of Defense Secretary of Defense

Deputy Secretary of Defense Deputy Secretary of Defense

Department 

of the Army

Department 

of the Army

Secretary 

of the Army

Secretary 

of the Army

Under

Secretary

and

Assistant

Secretaries

of the 

Army

Chief

of

Staff

Army

Department 

of the Air Force

Department 

of the Air Force

Secretary

of the Air Force

Secretary

of the Air Force

Under

Secretary

and

Assistant

Secretaries

of the

Air Force

Chief

of

Staff

Air Force

Inspector 

General

Inspector 

General

Department 

of the Navy

Department 

of the Navy

Secretary 

of the Navy

Secretary 

of the Navy

Under

Secretary

and

Assistant

Secretaries

of the 

Navy

Chief

of

Naval

Operations

Commandant

of

Marine

Corps

Joint Chiefs

of Staff

Joint Chiefs

of Staff

Chairman JCS

The Joint Staff

Chairman JCS

The Joint Staff

• Vice Chairman JCS

• Chief of Staff Army 

• Chief of Naval 

Operations

• Chief of Staff 

Air Force

• Commandant of the 

Marine Corps

Office of the 

Secretary of 

Defense

Office of the 

Secretary of 

Defense

Under 

Secretaries,

Assistant 

Secretaries

of Defense

and Equivalents

Under 

Secretaries,

Assistant 

Secretaries

of Defense

and Equivalents

Combatant Commanders Combatant Commanders

Defense 

Agencies

Defense 

Agencies

DoD Field 

Activities

DoD Field 

Activities

Air Force

Major 

Commands

& Agencies

Air Force

Major 

Commands

& Agencies

Marine Corps 

Major 

Commands

& Agencies

Marine Corps 

Major 

Commands

& Agencies

Navy

Major 

Commands

& Agencies

Navy

Major 

Commands

& Agencies

Army

Major 

Commands

& Agencies

Army

Major 

Commands

& Agencies • Africa Command

• Central Command

• European Command

• Joint Forces Command

• Northern Command

• Pacific Command

• Southern Command

• Special Operations Command

• Strategic Command

• Transportation Command

• Africa Command

• Central Command

• European Command

• Joint Forces Command

• Northern Command

• Pacific Command

• Southern Command

• Special Operations Command

• Strategic Command

• Transportation Command

Department of Defense Organizational Structure
Department of Defense Agency Financial Report for FY 2009 

Management’s Discussion and Analysis 

 8 

Military Departments 

The Military Departments consist of the Army, 

the Navy (of which the Marine Corps is a 

component), and the Air Force. In wartime, the 

U.S. Coast Guard becomes a special 

component of the Navy; otherwise, it is a 

maritime service within the Department of 

Homeland Security. The Military Departments 

organize, train, and equip America’s military 

forces. When the President and Secretary of 

Defense determine that military action is 

required, these trained and ready forces are 

assigned to a Combatant Command responsible 

for conducting the military operations. 

The Military Departments include Active Duty, Reserve, and National Guard forces. Active Duty 

forces are full-time Military Service Members. The Reserves, when directed by Congress or 

Presidential declaration, support the active forces. They are an extension of the Active Duty 

personnel and perform similarly when called into service. The Reserves may also be called 

upon to conduct counterdrug operations, provide disaster aid, and perform other peacekeeping 

missions. The National Guard has a unique dual mission, with both Federal and State 

responsibilities. In peacetime, the Governor of each respective State or territory commands the 

Guard. The Governor can call the Guard into action during local or Statewide emergencies, 

such as storms, wild fires, or civil disturbances. When ordered to active duty for mobilization or 

called into Federal Service for emergencies, units of the Guard are under the control of the 

appropriate DoD Military Department. The Guard and Reserve are recognized as indispensable 

and integral parts of our Nation's defense from the earliest days of a conflict. 

• Department of the Army. The mission of the Department of the Army is to provide 

organized, trained, and equipped ground and combat support forces to the Combatant 

Commanders in support of National Security and Defense Strategies. The Army is 

committed to remaining the world’s preeminent land power – relevant and ready at all times 

to serve the nation and support our allies. 

• Department of the Navy. The mission of the Department of the Navy is to organize, train, 

and equip combat-ready Navy and Marine Corps forces capable of winning wars, deterring 

aggression and maintaining freedom of the seas. 

• Department of the Air Force. The mission of the United States Air Force is to organize, 

train, and equip forces to fly, fight, and win in air, space, and cyberspace. The Air Force 

also strives to preserve the peace and security of the U.S. by providing the Combatant 

Commanders air-combat, air-service, aerospace, missile, and airlift forces. 

• Defense Agencies and Defense Field Activities. Defense Agencies and DoD Field 

Activities provide support services commonly used throughout the Department. For 

example, the Defense Finance and Accounting Service (DFAS) provides accounting and 

payroll services, and contractor and vendor payments. Another example is the Defense 

Logistics Agency (DLA), which provides logistics support and supplies to all DoD activities. 

B10-08

Department of Defense 

Service Components
Department of Defense Agency Financial Report for FY 2009 

Management’s Discussion and Analysis 

 9 

Combatant Commands 

The Secretary of Defense exercises his authority over how the military is trained and equipped 

through the Service secretaries; however, the Secretary of Defense uses a totally different 

method to exercise his authority to deploy troops and exercise military power. This latter 

authority is directed, with the advice of the Chairman of the Joint Chiefs of Staff, to the ten 

Combatant Commands who are responsible for conducting DoD missions around the world 

(Figure 1-4). 

The combatant commanders are the direct link from the military forces to the President and the 

Secretary of Defense. 

Six commanders have specific mission objectives for geographical areas of responsibility as 

depicted in Figure 1-5. 

• U.S. Northern Command (USNORTHCOM) is responsible for North America. 

• U.S. Pacific Command (USPACOM) is responsible for Northeast Asia, South Asia, and 

Southeast Asia, as well as Oceania. 

• U.S. European Command (USEUCOM) is responsible for activities in Europe, Greenland, 

and Russia. 

• U.S. Southern Command (USSOUTHCOM) is responsible for Central and South America, 

and the Caribbean. 

• U.S. Africa Command (USAFRICOM) is responsible for all of Africa, with the exception of Egypt. 

• U.S. Central Command (USCENTCOM) is responsible for the Middle East, several of the 

former Soviet republics, and Egypt. This Command is bears primary responsibility for 

Operation Enduring Freedom in Afghanistan and Operation Iraqi Freedom. 

Figure 1-4 

Department of Defense Operational Leadership

USAF, General 

Kevin P. "Chilli" Chilton,

Commander

Strategic 

Command 

USN, Admiral 

Eric T. Olson, 

Commander

Special Operations 

Command 

USAF, General 

Duncan J. McNabb, 

Commander

Transportation 

Command 

USMC, General 

James N. Mattis,

Commander

Joint Forces 

Command 

USAF, General 

Gene Renuart, 

Commander

USNORTHCOM

USN, Admiral 

Robert F. Willard, 

Commander

USPACOM

USN, Admiral 

James G. Stavridis, 

Commander

USEUCOM

USAF, General 

Douglas M. Fraser, 

Commander

USSOUTHCOM

USA, General 

William E. "Kip" Ward, 

Commander

USAFRICOM

USA, General 

David H. Petraeus, 

Commander

USCENTCOM

USN, Admiral 

Michael Mullen, 

Chairman

Joint Chiefs

of Staff

Robert Gates,

United States 

Secretary of Defense

Secretary 

of Defense

B10-09
Department of Defense Agency Financial Report for FY 2009 

Management’s Discussion and Analysis 

 10 

Four commanders have worldwide mission responsibilities, each focused on a particular function: 

• U.S. Strategic Command (USSTRATCOM) is responsible for providing global deterrence 

capabilities and synchronizing DoD efforts to combat weapons of mass destruction worldwide. 

• U.S. Special Operations Command (USSOCOM) is responsible for providing fully capable 

Special Operations Forces to defend the U.S. and its interests and synchronize planning of 

global operations against terrorist networks. 

• U.S. Transportation Command (USTRANSCOM) is responsible for moving military 

equipment, supplies, and personnel around the world in support of operations. 

• U.S. Joint Forces Command (USJFCOM) is responsible for developing future concepts for 

joint warfighting. 

Figure 1-5 

Combatant Commands Geographic and Functional Areas

B10-03

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

Four 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

Joint Forces

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

USPACOM

USCENTCOM

USAFRICOM

USNORTHCOM

USEUCOM

USPACOM

USSOUTHCOM

USPACOM

USCENTCOM

USAFRICOM
Department of Defense Agency Financial Report for FY 2009 

Management’s Discussion and Analysis 

 11 

Program Performance Overview 

DEPARTMENT OF DEFENSE STRATEGIC PLAN 

The Department examines America’s defense needs by conducting the Quadrennial Defense 

Review (QDR) to provide a blueprint for a strategy-based, balanced, and affordable defense 

program. The Department is conducting the QDR for FY 2010 as required by law and it will be 

completed and released by February 1, 2010. The QDR 2010 will tie to the new National 

Security Objectives and establish the Administration’s approach to carrying out defense 

objectives. As required for the AFR, the remainder of this section discusses the performance 

plan and goals for FY 2009. These goals were based on the QDR 2006 and will be updated 

when QDR 2010 is complete. A copy of the Department’s QDR 2006 can be found at 

www.defenselink.mil/qdr/report/Report20060203.pdf. 

The QDR 2006 was the first contemporary 

defense review to coincide with an ongoing 

major conflict. Consequently, Strategic Goal 1 

(Figure 1-6) focuses on the ongoing major 

conflict and extended stabilization campaigns in 

Iraq and Afghanistan. At the same time, QDR 

2006 recognized that the Department needed to 

recast its view of future warfare through the 

lens of a long duration and globally distributed 

conflict. Therefore, Strategic Goal 2 focuses on 

reorienting the Armed Forces to deter and 

defend against transnational terrorists around 

the world. Strategic Goal 5 recognizes that DoD 

cannot meet today’s complex challenges alone. 

This goal recognizes integrated security 

cooperation and strategic communication as 

additional tool sets the Combatant 

Commanders may use to fight wars. Together, 

these three goals encompass the Department’s 

warfighting missions. Strategic Goals 3 and 4 

focus on reshaping the defense infrastructure and developing a Total Force, respectively, in 

ways that better support the warfighter. These supporting goals enable accomplishment of the 

Department’s primary Strategic Goals 1, 2, and 5. 

DEPARTMENT OF DEFENSE PERFORMANCE BUDGET HIERARCHY 

Figure 1-7 depicts the Department’s performance budget hierarchy. This hierarchy highlights 

that every level within the Department is accountable for measuring performance and delivering 

results at multiple tiers of the organization. 

Primary responsibility for performance improvement in DoD rests with the Deputy Secretary of 

Defense in his role as the Chief Management Officer (CMO). The Deputy Secretary is assisted by 

a Deputy CMO and the DoD Performance Improvement Officer (PIO), who advises and integrates 

performance information across DoD. The DoD strategic objectives and performance targets are 

recommended by Principal Staff Assistants (PSAs) within the Office of the Secretary of Defense, 

in coordination with the Joint Staff, as most relevant for enterprise or DoD-wide strategic focus. 

The DoD strategic objectives and performance targets (measures and milestones) are subject to 

annual refinement based on changes in missions and priorities. 

Figure 1-6 

FY 2009 Strategic Goals

B10-04

Successfully Conduct Overseas 

Contingency Operations

Reorient Capabilities and Forces

Achieve Unity of Effort

Reshape the 

Defense 

Enterprise

Develop a 21st 

Century Total 

Force

Goals 3 & 4 

are Supporting 

Goals

Goal 2 Goal 2

Goal 4 Goal 4

Goal 3 Goal 3

Goal 1 Goal 1

Goal 5 Goal 5
Department of Defense Agency Financial Report for FY 2009 

Management’s Discussion and Analysis 

 12 

FISCAL YEAR 2009 DEPARTMENT OF 

DEFENSE KEY PERFORMANCE 

OUTCOMES 

The Department submitted its detailed Fiscal 

Year (FY) 2009 Performance Plan in the 

FY 2009 Budget Request Summary Justification 

dated February 4, 2008 that is available at 

http://www.defenselink.mil/comptroller/defbudget

/fy2009/FY2009_Budget_Request_Justification.

pdf. This initial plan included 51 performance 

targets at the enterprise, or DoD-wide level. 

Since that time, the Deputy Secretary of 

Defense/CMO approved some changes to this 

initial plan that resulted in a net reduction of two 

in the number of enterprise-level performance 

targets (from 51 to 49) for FY 2009. The 

following tables, organized by QDR Strategic 

Goal and Strategic Objective, depict 16 key 

performance outcomes for FY 2009. Based on 

fourth quarter data, the Department met or 

showed improvement in 88 percent (Figure 1-8) 

of these key outcome areas when compared to 

prior year (FY 2008) results. 

Strategic Goal 1: Successfully Conduct 

Overseas Contingency Operations 

Since 2001, the Department has been engaged 

in developing the forces and capabilities of Iraq 

and Afghanistan to provide for their own 

defense. Iraqi Security Forces (ISF) training is 

critical to enabling the Department to reallocate 

its resources and military forces in FY 2010 and 

beyond to Afghanistan and other regions as 

may be directed. Consequently, two key 

outcomes under this goal area focus on training 

Iraqi and Afghan Security forces as primary 

indicators for transitioning the security of both 

nations to their respective governments. By the 

end of FY 2009, the Department significantly 

surpassed its annual performance target with 

regard to training Iraqi Security Forces and 

accomplished 98 percent of its performance 

goal associated with the number of 

trained/assigned Afghan National Security 

Forces (ANSF). 

Figure 1-7 

B10-05

Mission

Program-Level 

Performance Targets 

DoD Component-Level 

Performance Targets 

OSD Enterprise-Level 

Performance Targets 

Strategic 

Objectives

Strategic 

Goals

Mission 

Drivers

Personnel 

Accountability

National 

Defense 

Strategy

National 

Defense 

Strategy

National 

Military 

Strategy

National 

Military 

Strategy

National 

Security 

Strategy

National 

Security 

Strategy

Department of Defense 

Performance Budget Hierarchy

Figure 1-8 

FY 2009 DoD Key Performance 

Outcome Analysis

B10-18

88% of Goals Met or Improved

Met or

Exceeded 

7 Goals

44%

Did Not 

Meet 

2 Goals

12%

Improved 

But Did Not 

Meet 

7 Goals

44%
Department of Defense Agency Financial Report for FY 2009 

Management’s Discussion and Analysis 

 13 

STRATEGIC GOAL 1 (revised): SUCCESSFULLY CONDUCT OVERSEAS 

 CONTINGENCY OPERATIONS

Annual Performance Targets/Results 

Performance Measures Strategic Plan Long-term 

Performance Targets FY 2008 

Results 

FY 2009 

Targets 

FY 2009 

Results 

Strategic Objective 1.1: Conduct a large-scale, potentially long-duration irregular warfare campaign 

that includes counterinsurgency, security stability, transition, and 

reconstruction operations. 

1.1-1a: Cumulative number of 

ISF trained 

1.1-1a: By FY 2009, the DoD 

will train 588,000 ISF 558,279 588,000 Sensitive1

1.1-1b: Cumulative number of 

ANSF trained/assigned 

1.1-1b: By FY 2009, the DoD 

will develop a trained/assigned 

ANSF level of 187,196. 

144,000 187,196 184,059 

1/ DoD previously reported on the number of Iraqi Security Forces personnel authorized and assigned by the Ministries of 

Defense and Interior and trained with the assistance of Coalition forces. With the expiration of the mandate of UNSCR 1790, the

data is now considered sensitive as it pertains to the specific military personnel strength for a sovereign nation. 

Strategic Goal 2: Reorient Capabilities and Forces 

Five key performance outcomes relate to the Department’s second goal to reorient its 

capabilities and forces. The first two outcomes reflect new DoD capabilities necessary to 

mitigate attacks on the U.S. and its territories. A third measure focuses on increasing DoD 

Special Operations Forces capabilities to address irregular/unconventional warfare. The final 

two outcomes are focused on converting Army force structure to modular designs required to 

meet military operational missions and achieving significant transformation of the Army in a 

generation. 

STRATEGIC GOAL 2: REORIENT CAPABILITIES AND FORCES 

Annual Performance Targets/Results 

Performance Measures Strategic Plan Long-term 

Performance Targets FY 2008 

Results 

FY 2009 

Targets 

FY 2009 

Results 

Strategic Objective 2.1 (Revised): Improve capabilities to prevent and mitigate attacks on U.S. personnel, 

 facilities, and key assets. 

2.1-1: Number of National 

Guard Weapons of Mass 

Destruction –Civil Support 

Teams (WMD-CSTs) certified 

2.1-1: By FY 2009, 55 National 

Guard WMD-CSTs will be 

certified. 53 55 55 

2.1-2: Number of National 

Guard CBRNE Enhanced 

Response Force Packages 

(CERFPs) trained 

2.1-2: By FY 2008, 17 National 

Guard CERFPs will be trained 

for WMD or other catastrophic 

responses. 

17 17 15 
Department of Defense Agency Financial Report for FY 2009 

Management’s Discussion and Analysis 

 14 

STRATEGIC GOAL 2: REORIENT CAPABILITIES AND FORCES 

Annual Performance Targets/Results 

Performance Measures Strategic Plan Long-term 

Performance Targets FY 2008 

Results 

FY 2009 

Targets 

FY 2009 

Results 

Strategic Objective 2.2: Deter and defend against transnational terrorists attacks and globally 

distributed aggressors and shape the choices of countries at strategic 

crossroads, while postured for a second, nearly simultaneous campaign. 

2.2-2: Percent increase in 

DoD Special Forces and Navy 

SEAL personnel achieved 

2.2-2: By FY 2012, the DoD 

will increase its Special Forces 

and Navy SEAL personnel by 

32 percent from the FY 2006 

actual of 13,206 end strength. 

12.4% 17% 23% 

2.2-4a: Number of Army 

Brigades Combat Teams 

(BCTs) converted to a 

modular design and available 

to meet military operational 

demands. 

2.2-4a: By FY 2013, 76 

modular Army BCTs will be 

available to meet military 

operational demands. 38 47 46 

2.2-4b: Number of Army Multifunctional and Functional 

(MFF) Support brigades 

converted to a modular 

design and available to meet 

military operational demands. 

2.2-4b: By FY 2013, 227 

modular Army MFF brigades 

will be available to meet 

military operational demands. 188 201 196 

Strategic Goal 3: Reshape the Defense Enterprise 

Three key performance outcomes are identified as representative samples of the Department’s 

enterprise reshaping goal. The first outcome, average customer wait time, is used by DoD’s 

logistics community to improve joint warfighting support for maintenance and repair activities of 

major equipment and sustainment of the operating forces. Two other key outcomes focus on 

improving the quality of life for Service Members and their families. The strategic goals optimize 

long-term performance, readiness, and return on investment of facilities across the Department. 

These measure the number of inadequate military housing units in the continental U.S. 

(CONUS) and outside the continental U.S. (OCONUS). 

STRATEGIC GOAL 3: RESHAPE THE DEFENSE ENTERPRISE 

Annual Performance Targets/Results 

Performance Measures Strategic Plan Long-term 

Performance Targets FY 2008 

Results 

FY 2009 

Targets 

FY 2009 

Results 

Strategic Objective 3.3: Implement improved logistics operations to support joint warfighting 

priorities. 

3.3-1: Average customer wait 

time (days) 

3.3-1: Beginning in FY 2007, 

DoD will reduce average 

customer wait time to 15 days. 

16.7 15 16.2 
Department of Defense Agency Financial Report for FY 2009 

Management’s Discussion and Analysis 

 15 

STRATEGIC GOAL 3: RESHAPE THE DEFENSE ENTERPRISE 

Annual Performance Targets/Results 

Performance Measures Strategic Plan Long-term 

Performance Targets FY 2008 

Results 

FY 2009 

Targets 

FY 2009 

Results 

Strategic Objective 3-4: Maintain capable, efficient, and cost-effective installations to support the DoD 

workforce. 

3.4-4a: Number of inadequate 

family housing units CONUS 

3.4-4b: By FY 2009, DoD will 

eliminate all inadequate family 

housing CONUS 5,085 0 4,600 

3.4-4b: Number of inadequate 

family housing units OCONUS 

3.4-4b: By FY 2009, DoD will 

eliminate all inadequate family 

housing OCONUS 7,273 0 2,367 

Strategic Goal 4: Develop a 21st Century Total Force 

Four key performance outcomes under this goal are focused on sustaining the capacity of the 

All-Volunteer Force to meet DoD steady-state and surge activities. Two measures assess DoD 

Active and Reserve component end-strength against levels prescribed by the Secretary of 

Defense for mission accomplishment. A third measures the percent of Armed Forces without 

any deployment-limiting medical conditions to ensure readiness for mission capability. A fourth, 

and final key outcome, under this goal, is focused on closing the current gap in language 

capabilities by assessing the percent of operational and contingency language skills to meet 

mission requirements. 

STRATEGIC GOAL 4: DEVELOP A 21ST CENTURY TOTAL FORCE 

Annual Performance Targets/Results 

Performance Measures Strategic Plan Long-term 

Performance Targets FY 2008 

Results 

FY 2009 

Targets 

FY 2009 

Results 

Strategic Objective 4.1: Ensure an “All Volunteer” military force is available to meet the steady-state 

and surge activities of the DoD. 

4.1-1a: Percent variance in 

Active component end 

strength. 

4.1-1a: For each fiscal year, the 

DoD Active component end 

strength will not vary by more than 

three percent from the SECDEF 

prescribed end strength for that 

fiscal year. 

2.1% +/- 3% 0.9% 

4.1-1b: Percent variance in 

Reserve component end 

strength. 

4.1-1b: For each fiscal year, the 

DoD Reserve component end 

strength will not vary by more than 

three percent from the SECDEF 

prescribed end strength for that 

fiscal year. 

0% +/-3% 1% 
Department of Defense Agency Financial Report for FY 2009 

Management’s Discussion and Analysis 

 16 

STRATEGIC GOAL 4: DEVELOP A 21ST CENTURY TOTAL FORCE 

Annual Performance Targets/Results 

Performance Measures Strategic Plan Long-term 

Performance Targets FY 2008 

Results 

FY 2009 

Targets 

FY 2009 

Results 

Strategic Objective 4.1: Ensure an “All Volunteer” military force is available to meet the steady-state 

and surge activities of the DoD. 

4.1-2: Percent of deployable 

Armed Forces without any 

deployment- limiting medical 

condition. 

4.1-2: By FY 2010, DoD will 

sustain the percent of deployable 

Armed Forces without any 

deployment-limiting medical 

condition to equal to or greater 

than 92 percent. 

84% >92% 85% 

Strategic Objective 4.4: Improve workforce skills to meet mission requirements. 

4.4-1: Percent of operational 

and contingency language 

needs met 

4.4-1: By FY 2011, DoD will 

increase the percent of operational 

and contingency language needs 

met by three percent from the FY 

2008 baseline. 

Nonapplicable +1% <.1% 

Strategic Goal 5: Achieve Unity of Effort 

The Department’s fifth and final strategic goal focuses on building the capacity of international 

partners by improving access to equipment, technology, and training. Two key outcomes 

involve risk-reduction activities to control export of technology and activities that shape the 

international environment toward U.S. interest and track training capabilities among international 

partners for countering threats and challenges of terrorism. The first outcome focuses on 

increasing the number of international students participating in DoD-sponsored educational 

activities. The second measures the number of various technological and security reviews of 

goods and services approved for transfer to international partners. 

STRATEGIC GOAL 5: ACHIEVE UNITY OF EFFORT 

Annual Performance Targets/Results 

Performance Measures Strategic Plan Long-term 

Performance Targets FY 2008 

Results 

FY 2009 

Targets 

FY 2009 

Results 

Strategic Objective 5.1: Build capacity of international partners in fighting the war on terror. 

5.1-1: Annual number of 

international students 

participating in Departmentsponsored educational 

activities 

5.1-1: Beginning in FY 2007, 

the DoD will increase the 

number of international students 

participating in Departmentsponsored educational activities 

by at least two percent per year. 

55,895 56,400 60,409 

5.1-2: Annual number of 

Technology Security Actions 

(TSAs) approved 

5.1-2: Beginning in FY 2007, 

DoD will increase the number of 

relevant technologies involving 

transfers to international partners 

by two percent per year. 

118,367 120,704 143,600 

Final year-end results for all 49 DoD performance outcomes will be addressed in the 

Department’s more detailed performance report for FY 2009, submitted with the DoD’s FY 2011 

Congressional Budget Justification, on or about February 1, 2010. This report will be posted 

with the FY 2011 budget materials at http://www.defenselink.mil/comptroller/. 
Department of Defense Agency Financial Report for FY 2009 

Management’s Discussion and Analysis 

 17 

Financial Performance Overview 

FINANCIAL ANALYSIS 

The Department’s FY 2009 financial statements are presented in Addendum A, the Financial 

Information. The Department’s management is responsible for the integrity of the financial 

information presented in these financial statements. At this time, management cannot provide 

reasonable assurance of effective internal management controls over financial reporting. 

However, the Department’s financial improvement initiatives and systems modernization efforts 

continue to demonstrate progress. The Department is committed to improving internal controls 

and safeguarding the resources entrusted to us. 

These statements were prepared from the books and records of the Department in accordance 

with U.S. generally accepted accounting principles (USGAAP) when possible, the Office of 

Management and Budget (OMB) Circular No. A-136, “Financial Reporting Requirements,” and 

the “DoD Financial Management Regulation.” 

The financial statements have been prepared to report the financial position and results of 

operations which include: 

• Statement of Budgetary Resources 

• Statement of Net Cost 

• Balance Sheet 

• Statement of Changes in Net Position 

Summary of FY2009 Financial Reporting. 

For FY 2009, 6 of the 33 reporting entities are 

projected to receive unqualified audit opinions 

and the Medicare-Eligible Retiree Health Care 

Fund is projected to receive a qualified opinion. 

See Figure 1-9. 

Budgetary Resources. In accordance with 

Federal statutes and implementing regulations, 

obligations may only be incurred and payments 

made to the extent that budgetary resources 

are available to cover such items. The 

Statement of Budgetary Resources presents 

total budgetary resources, their status at the 

end of the year, and the relationship between 

the budgetary resources and the outlays made 

against them. 

The Department’s FY 2009 enacted appropriations total $666 billion as described in Figure 1-2 

on page 5. The Department also received resources from the U.S. Treasury for retirement and 

health benefits and appropriations in support of civil work projects that are executed by the U.S. 

Army Corps of Engineers. This provided total receipts of $747 billion for FY 2009 as illustrated 

in Figure 1- 10. Additional budgetary resources for the year are comprised of $199 billion for 

outstanding requirements carried forward from FY 2008, $178 billion in collections related to 

reimbursed activity, and $68 billion in contract authority that provided the Department with total 

budgetary resources of $1.2 trillion, also shown in Figure 1-10. 

Figure 1-9 

Audit Opinions

B10-11

Defense Contract Audit Agency Unqualified

Qualified Medicare-Eligible Retiree Health 

Care Fund

Office of the Inspector General Unqualified

Unqualified Defense Finance and Accounting 

Service2

Defense Commissary Agency Unqualified 

Military Retirement Fund Unqualified

U.S. Army Corps of Engineers1 Unqualified

DoD Reporting Entity Audit Opinions

Defense Contract Audit Agency Unqualified

Qualified Medicare-Eligible Retiree Health 

Care Fund

Office of the Inspector General Unqualified

Unqualified Defense Finance and Accounting 

Service2

Defense Commissary Agency Unqualified 

Military Retirement Fund Unqualified

U.S. Army Corps of Engineers1 Unqualified

DoD Reporting Entity Audit Opinions

1 Opinion expected by 12/15/09

2 Out-of-Cycle Audit Opinion
Department of Defense Agency Financial Report for FY 2009 

Management’s Discussion and Analysis 

 18 

From the $1.2 trillion in total budgetary resources available during FY 2009, $1.0 trillion, or 

88 percent, was obligated and $947 billion, or 92 percent, of obligations was disbursed for 

intended purposes. The remaining eight percent relate to appropriations available to cover 

multi-year modernization projects requiring additional time to procure. 

The Department obligated much of its FY 2009 resources to maintain and recruit a highly 

trained fighting force in support of wartime operations. Additionally, the Department continued 

to accomplish the military tasks associated with Operation Iraqi Freedom as we plan for our 

drawdown. We also increased the number of troops deployed to Afghanistan in defense against 

the enemy to prevent further attack on our homeland. In addition, resources were used to 

improve and maintain warfighting capabilities for the world’s most advanced weapon systems 

and technological advancements to maintain U.S. advantage over the nation’s enemies. In 

response to the Department’s commitment to efficiency, resources of the FY 2010 budget 

requests will consider termination of certain acquisition programs that have not been able to 

adequately control cost growth. 

Net Cost of Operations. The Statement of Net Cost reports expenses incurred less revenues 

from external sources that financed those expenses. This is essentially equivalent to outlays 

displayed on the Statement of Budgetary Resources less capitalized asset purchases plus 

accrued liabilities and accounts payable. Differences between budgetary resources and net 

cost generally arise from timing of cost recognition. The Statement of Net Cost presents net 

cost of all the Department’s programs for the Military Departments and Components as well as 

the Military Retirement benefits as depicted in Figure 1-11. 

Figure 1-10 

FY 2009 Total Budgetary Resources

B10-12

Civil Works & 

Cemeterial

$16

2%

Strategic 

Modernization

$216

29%

Family 

Housing & 

Facilities

$31

4%

Military

Pay & 

Benefits

$117

15%

Operations, 

Readiness & 

Support

$274

37%

Military 

Retirement 

Benefits

$65

9%

$ in Billions

$747B

Amounts include DoD direct appropriations and funds appropriated for the 

U.S. Corps of Engineer and Military Retiree Health and Pension Benefits

Contract Authority

$68 (6%)

Reimbursed Collections

$178 (15%)

Enacted Appropriations

$666 (56%)

Trust Fund Receipts

$65 (5%)

Civil Work Projects

$16 (1%)

Brought Forward Authority 

$199 (17%)

$1.2T

FY 2009 

Appropriations 

Received

$ in Billions

Breakout

Employer 

Contribution 

to Retirement 

Benefits

$28

4%
Department of Defense Agency Financial Report for FY 2009 

Management’s Discussion and Analysis 

 19 

The Department’s costs incurred relate primarily to operational activities, environmental 

cleanup, and military retirement and health benefits. These costs were offset with revenues 

from external sources that result primarily from earning on investments and contributions for 

retirement and health benefits as well as earnings from reimbursed activities resulting in net 

cost of operations of $651.6 billion. As depicted in Figure 1-10, this represents a decrease of 

$18.5 billion, or 3 percent from last year that directly corresponds with a decrease in cost 

recognized for actuarial liabilities of Military Retirement Benefits. The decrease is due largely to 

the stabilization of the interest rate assumption affecting the value of investments available to 

pay benefits as well as a decrease related to actuarial experience from military pay and cost of 

living adjustments. While net cost of operations decreased overall, the Department did 

experience increases in cost related to operational readiness in support of wartime operations, 

health care and employee pay increases. 

Balance Sheet. The Balance Sheet reflects the 

Department’s financial condition as of 

September 30, 2009 (Figure 1- 12). It shows 

the Department’s resources (Assets), the 

amounts owed requiring use of assets available 

(Liabilities) and the difference between them 

(Net Position). 

Assets of $1.8 trillion described in Figure 1-13 

represent amounts that the Department owns 

and manages. Assets increased $124.9 billion, 

or 7 percent, at the end of FY 2009. This increase is largely attributable to increases in General 

Property Plant and Equipment and Investments that consist of U.S. Treasury securities. 

As a result of the Department’s continued commitments to Operation Enduring Freedom in 

Afghanistan and other operational demands, Military Equipment increased $52.7 billion 

reflecting the receipt of Apache helicopters, Stryker vehicles, Mine Resistant Ambush Protected 

(MRAP) vehicles, and High Mobility Multipurpose Wheeled Vehicles (HMMWV). Also 

contributing is the receipt of naval vessels such as aircraft carriers, cargo ships, submarines, 

destroyer ships and the receipt of aircraft such as F-22 and C-17 aircraft. 

Figure 1-11 

Net Cost of Operations

B10-14

$651.6B

Civil Works & 

Cemeterial

$10.1

1%

Strategic 

Modernization

$160.4

25%

Family

Housing & 

Facilities

$4.2

1%

Military 

Pay & 

Benefits

$143.7

22%

Operations, 

Readiness

& Support

$216.4

33%

$ in Billions

Military 

Retirement 

Benefits

$83.6

13%

Health

Care

$33.2

Breakout 5%

FY 05

121.8

513.1

FY 06

101.5

484.5

FY 07

73.9

527.5

FY 08

136.2

534.0

FY 09

83.6

568.0

FY 05

121.8

513.1

FY 06

101.5

484.5

FY 07

73.9

527.5

FY 08

136.2

534.0

FY 09

83.6

568.0

634.9 586.0 601.4 670.2 651.6

DoD Costs

Military 

Retirement

651.6B

Net Cost of

Operations

Figure 1-12 

Net Assets and Liabilities

B10-11a

Total Net Position $ (362,394.60)

Total Liabilities 2,161,862.10

Total Assets $1,799,467.50 

Balance Sheet

Total Net Position $ (362,394.60)

Total Liabilities 2,161,862.10

Total Assets $1,799,467.50 

Balance Sheet

$ in Millions
Department of Defense Agency Financial Report for FY 2009 

Management’s Discussion and Analysis 

 20 

The net increase in investments of $40.4 billion is related to expected normal growth to cover 

unfunded portions of future military retirement and health benefits. Funds not needed to pay 

current benefits are held in separate trust and special funds and invested in U.S. Treasury 

securities. 

The Department’s liabilities experienced a moderate increase in comparison to prior years. The 

FY 2009 liabilities increased $26 billion or 1 percent and consist primarily of actuarial liabilities 

(Figure 1-12) related to military retirement pension and health care benefits. The Department is 

confident in its ability to meet its financial obligations. Of the $2.2 trillion in liabilities, $1.3 trillion 

or 59 percent will be funded by the U.S. Treasury for the actuarial liability existing at inception of 

the Military Retirement and Health programs. Additionally, approximately $494.2 billion is 

already available primarily in invested U.S. Treasury securities that are covering an additional 

23 percent of the outstanding liability. Figure 1-14 identifies the unfunded liabilities requiring 

future resources. 

Figure 1-14 

Unfunded Liabilities

B10-14

$ in Billions

Liabilities Covered by 

Budgetary Resources

$494.2

23%

77%

Liabilities 

Not Covered by 

Budgetary Resources

$1,667.7

Unfunded Military Retirement and Health 

Benefits funded by Treasury

$1,265.3 (76%)

DoD Unfunded Military Retirement and Health 

Benefits $322.5 (19%)

Unfunded Environmental Liabilities $62.6 (4%)

All Other Unfunded Liabilities $17.3 (1%)

Breakout

Figure 1-13 

Assets and Liabilities

Assets $1.8T Liabilities $2.2T B10-15

Fund Balance 

with Treasury

$502.8

28%

Investments

$436.9

24%

Accounts 

Receivable

$9.5

1%

Other

Assets

$61.9

3%

Inventory

$228.8

13%

Property, Plant 

and Equipment

$559.6

31%

Military Retirement and 

Employment Benefits

$2,012.2

93%

Environmental 

and Disposal 

Liabilities

$66.2

3%

Accounts 

Payable

$37.7

2%

Other Liabilities

$45.8

2%

$ in Billions
Department of Defense Agency Financial Report for FY 2009 

Management’s Discussion and Analysis 

 21 

LIMITATIONS OF THE FINANCIAL STATEMENTS 

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

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

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

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

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

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

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

DOD FINANCIAL MANAGEMENT: BACKGROUND AND OVERVIEW 

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

1995. GAO’s assessment reflects the inherent problems that have developed as DoD business 

operations have grown within a large decentralized organization that is both mission-oriented and 

functionally “stovepiped.” In this environment, individual organizational elements have the tools to 

control and execute their individual budgets. However, the aggregation of financial information 

generated from end-to-end processes to provide a proprietary picture of the enterprise, as 

envisioned by the Chief Financial Officer’s Act, is problematic. This is an enterprise challenge that 

requires an enterprise solution. Further, the lack of compliant, integrated financial and financial 

feeder business systems is a significant material weakness that makes this challenge even more 

daunting with an organization the size and complexity of DoD. 

Various individual organizational efforts have resulted in varying degrees of success. 

For example, six agencies within DoD have received unqualified audit opinions. The Department 

developed a Business Enterprise Architecture (BEA) and initiated implementation of a series of 

major Enterprise Resource Planning (ERP) systems that will strengthen, better integrate, and 

control our basic business. In 2005, under the leadership of the DoD Comptroller, the Financial 

Improvement and Audit Readiness (FIAR) program was implemented, using the BEA and an 

enterprise-wide approach to move the Department forward. The goal is to develop documented 

and transaction-based business processes to produce reliable and accurate financial information 

for decision-makers. A long-term objective of this effort would be to produce an unqualified 

financial opinion on DoD proprietary financial statements. 

These efforts created a basic foundation that improved audit readiness in several balance sheet 

elements but lacked a clear, well coordinated focus across DoD. On August 11, 2009, the 

Under Secretary of Defense (Comptroller) (USD(C)) issued a DoD-wide memorandum defining 

the priorities the Department will follow to improve its financial information and processes and 

for achieving audit readiness. In that memorandum, the USD(C) stated that the first, and most 

important step, is improving financial information and processes to make them more useful and 

reliable for managers. Achieving unqualified audit opinions should be one result of these efforts. 

Two key priorities are: 

(1) Improving information and processes and achieving an auditable Statement of Budgetary 

Resources, because budgetary information is used widely and regularly by DoD 

management. 

(2) Verifying the existence and completeness of mission critical assets. That is, they must 

verify that records accurately capture the number of each type of weapon system, real 

property, inventory, and operating materials and supplies. 

The DoD Components are updating their Financial Improvement Plans (FIPs) to address these 

priorities. These changes will be included in the next DoD FIAR Plan to be published in 

May 2010. 
Department of Defense Agency Financial Report for FY 2009 

Management’s Discussion and Analysis 

 22 

RELIABILITY OF DOD FINANCIAL STATEMENTS 

The Department recognizes the value of unqualified audit opinions and the benefit reliable 

financial information provides for users and decision-makers. As a result of continued 

improvements, DoD received unqualified audit opinions on the FY 2008 Financial Statements 

for $1.5 trillion, or 39 percent, of all assets and liabilities. DoD expects the unqualified audit 

opinions to carry forward to FY 2009 and future years. Accomplishments for FY 2009 included: 

• USACE Civil Works received an unqualified audit opinion on its FY 2008 Financial 

Statements. 

• Navy Nuclear and Conventional Ships Environmental Liabilities achieved audit readiness. 

• Navy asserted audit readiness for Funds Receipt and Distribution. 

• A contract was awarded to audit the Marine Corps FY 2010 Statement of Budgetary 

Resources. 

• TRICARE Management Activity’s (TMA) Contract Resource Management Financial 

Statements are presently under audit. 

• TMA Uniformed Services University of Health Sciences (USUHS) asserted audit readiness 

for their Statement of Budgetary Resources. 

• TMA USUHS Balance Sheet and Statements of Net Cost and Net Position audit readiness 

are presently being validated. 

Although the Department is aggressively working to improve financial management and 

reporting, audits performed by the DoD Office of Inspector General (DoD OIG) continued to 

identify long-standing material weaknesses during FY 2009. The material weaknesses are 

categorized as either system or financial process weaknesses: 

(1) Noncompliant Systems. Most legacy systems do not comply with the Core Federal 

Financial Management System Requirements issued by the Financial Systems Integration 

Office. Compensating controls in smaller organizations have been successfully applied as 

seen by favorable audit opinions but this is not practical in larger organizations such as the 

Military Service Departments. 

(2) Financial Processes. Many financial processes such as accounts receivables and 

accounts payables do not comply with USGAAP, since they are associated with 

noncompliant legacy systems that are presently used to compile the financial statements. 

DoD acknowledges these material weaknesses and is working to mitigate them and implement 

solutions through improvements to Department-wide financial processes, controls and systems. 

As a result, the FY 2009 financial statements for the following Components: Army, Navy and Air 

Force General funds; Army, Navy and Air Force working capital funds; and, the DoD 

Agencywide financial statements are not auditable because the statements do not comply with 

USGAAP requirements. The budgetary information is subjected to a variety of controls and 

execution reviews and is regarded as reliable. However, further improvements are on-going. 

IMPROVEMENTS TO FINANCIAL REPORTING 

By focusing on the weaknesses identified in processes, controls, and systems used in the 

production of financial statements, the Department continues to improve the accuracy and 

reliability of its financial statements. Since FY 2001, DoD successfully reduced its overall 

management-identified internal control weaknesses that include non-financial operations by 85 

percent from 116 to 17 in FY 2009. In addition, the Department recently made significant 
Department of Defense Agency Financial Report for FY 2009 

Management’s Discussion and Analysis 

 23 

improvements to the FIAR plan framework, mandating its use by the Components for their FIPs. 

The FIAR framework also better integrates the OMB Circular No. A-123, Appendix A, designed 

to strengthen internal controls by requiring the Components to focus on key financial reporting 

control objectives and capabilities. The framework also requires the identification of 

accountable organizations, individuals and resource requirements. 

During FY 2009, the Department also established a DoD Audit Advisory Committee (DAAC) to 

provide the Secretary of Defense with independent advice on DoD’s financial management, 

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

and processes for monitoring compliance with relevant laws and regulations. 

We will leverage the CMO/Deputy CMO functional role to support the cross-functional enterprise 

requirement for financial improvement and reporting. The USD(C) collaborates with and is 

dependent on organizations to implement and operate effective internal controls to achieve 

reliable financial management. The CMOs of the Military Departments are critical to the 

Department’s success by facilitating the prioritization of financial management improvement 

efforts across the functional areas of the Department. 

IMPROVEMENTS TO FINANCIAL SYSTEMS 

Working within the framework of the BEA that defines basic standards for end-to-end business 

processes and data, the Department continues implementation of Enterprise Resource Plan 

(ERP) systems. These systems enforce standardization of business processes and controls 

across the Department, improving the financial information that feeds the financial statement 

preparation process. These ERP initiatives are targeted at implementing a standardized 

financial information structure in compliance with the Federal Financial Management 

Improvement Act and BEA requirements. 

In FY 2009, the Services and Agencies made significant progress in implementing ERPs. The 

Army implemented the first of seven waves of the General Fund Enterprise Business System to 

1500 financial end-users throughout the U.S. The Naval Supply Systems Command became the 

second major acquisition command to implement the Navy ERP in FY 2009. The remaining major 

acquisition commands with the Navy will be implemented between now and 2013, beginning with 

the Space and Naval Warfare Systems Headquarters in October 2009. The Defense Enterprise 

Accounting and Management System deployed commitment accounting at Scott Air Force Base 

and will deploy complete accounting capability in the second quarter of FY 2010. 

The Department also successfully implemented the Defense Agencies Initiative for accounting 

functionality at two Defense Agencies. The Department will continue to implement ERP 

solutions to improve the accuracy and reliability of its financial statements. Oversight will 

continue to be provided by the Investment Review Boards (IRBs) and the Defense Business 

Systems Management Committee (DBSMC) to ensure progress continues and implementation 

issues are effectively resolved and in a timely manner. 

SUMMARY 

Although the Department’s financial statements are not auditable for FY 2009, the Department 

is committed to resolving its financial management challenges. The USD(C) issued a mandate 

to define the priorities of the Department first achieve auditability of its Statements of Budgetary 

Resources and to verify the existence and completeness of mission critical assets. In order to 

execute these priorities, the Department will address identified weaknesses in processes, 

controls, and systems used to develop the financial statements. The FIAR Plan, along with 

initiatives of the DAAC, DCMO, and transition to ERPs under the oversight of the IRBs and 

DBSMC, will further the Department’s progress. 
Department of Defense Agency Financial Report for FY 2009 

Management’s Discussion and Analysis 

 24 

Management Assurances 
Department of Defense Agency Financial Report for FY 2009 

Management’s Discussion and Analysis 

 25 

DEPARTMENT OF DEFENSE MANAGERS’ INTERNAL CONTROL PROGRAM 

The Department’s Managers’ Internal Control Program requires the Department’s management 

to conduct self-assessments of internal management controls, in accordance with the Federal 

Managers’ Financial Integrity Act (FMFIA). These internal management controls are the checks 

and balances that assist program and financial managers to achieve results, and safeguard the 

integrity of the programs. As prescribed by OMB Circular No. A-123, the Department’s internal 

management control program assesses operations and functions of nonfinancial, financial 

reporting and financial systems and processes. The FMFIA requires the head of each agency to 

provide an annual assurance statement outlining what the agency has done to meet this 

requirement, including details of remaining material weaknesses. The detailed FMFIA results 

are available in Addendum B section on Summary of Management Assurances and Financial 

Statement Audit. 

TOP MANAGEMENT CHALLENGES AND MANAGEMENT’S RESPONSES 

The Reports Consolidation Act of 2000 requires the inclusion of a statement prepared by the 

DoD OIG summarizing the most serious management and performance challenges facing the 

Agency and briefly assessing the progress in addressing those challenges. The DoD IG 

identified the following eight management and performance challenges facing the Department 

for FY 2009. These challenges are in addition to GAO’s list of governmentwide, high-risk 

management areas. 

• Financial Management 

• Acquisition Processes and Contract Management 

• Joint Warfighting and Readiness 

• Information Assurance, Security, and Privacy 

• Health Care 

• Equipping and Training Iraqi and Afghan Security Forces 

• Nuclear Enterprise 

• ARRA 

The following pages highlight these challenges and management’s assessments in addressing 

these issues. 

1. Financial Management. The Department continues to face financial management 

challenges that adversely affect DoD’s ability to provide reliable, timely, and useful financial and 

managerial data needed to support operating, budgeting, and policy decisions. The DoD’s 

financial management problems are so significant they constitute one of the largest and most 

challenging impediments to the U.S. Government’s ability to obtain an opinion on its 

consolidated financial statements. Although DoD is far from reaching an unqualified opinion, the 

Department has demonstrated improvement. The Department’s ongoing initiatives in the area of 

financial management indicate DoD management is responding to the significant and pervasive 

financial management issues and is positioning itself to leverage planned systems and business 

improvements to achieve sustainable and long-term solutions. 

• Management’s Assessment. On August 11, 2009, the USD(C) established DoD-wide 

priorities for improving financial information and achieving audit readiness. The Deputy 

Secretary of Defense approved these priorities, which were vetted with key stakeholders in 

the Department, as well as with Congress, OMB, and GAO. Therefore, the Department 

agrees with DoD IG’s summary of challenges and assessment of progress. However, the 

Department revised its priorities to first focus limited resources on improving information 
Department of Defense Agency Financial Report for FY 2009 

Management’s Discussion and Analysis 

 26 

used by management, while at the same time keeping the end goal of auditable financial 

statements in sight. 

2. Acquisition Processes and Contract Management. Acquisition initiatives that began in 

the 1990s led to reductions in acquisition oversight assets. When the spending trend 

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

the need for more contract and oversight support. As of May 2008, approximately 25,000 

contracting officers were available to handle procurement of goods and services, which totaled 

about $400 billion in FY 2008. Keeping pace with this spending would be a difficult proposition if 

acquisition and oversight assets were increasing at a proportional rate. Progress in training and 

equipping more contract officials within DoD to handle the increased workload will take time. 

Dealing with the decreasing acquisition workforce has created a myriad of other challenges 

such as increased reliance on interagency contracting, distorted use of acquisition initiatives, 

and lack of oversight of services contracting. However, a number of initiatives are underway that 

are addressing the challenges, both within the Department and from proposed legislation, that 

should lead to improvement and better meet these challenges. 

• Management’s Assessment. The DoD continues to work a number of acquisition 

excellence initiatives that address contracting and contract management issues. These 

initiatives include an increase in staffing in the Office of the Director, Defense Procurement 

and Acquisition Policy (DPAP) dedicated to contracting in expeditionary operations and the 

development of the first-ever Joint Contingency Contracting Handbook that provides 

essential tools (critical action checklists, laminated foldout charts, etc.) and training for 

contingency contracting officers. The DoD’s commitment to a long-range vision for improving 

the contracting and contract management processes and the continued accomplishment of 

near-term initiatives should ensure both immediate and long-term improvements in 

contracting and contract management in expeditionary operations.

3. Joint Warfighting and Readiness. The challenge to provide the right force, the right 

personnel, and the right equipment and supplies in the right place, at the right time, and in the 

right quantity, across the full range of military operations is compounded by the strain on 

resources as a result of OIF and OEF. Despite high operating tempo, U.S. Forces are executing 

their missions globally. Sustained operations in Iraq and Afghanistan are impacting equipment, 

the troops, and their families. The challenges facing the Department will increase both in the 

near-term and long-term as the Department prepares for and begins the scheduled withdrawal 

of forces from Iraq and the deployment and redeployment of forces to Afghanistan. In the nearterm, the Department must plan for and execute the withdrawal and redeployment. In the longterm, the Department faces the challenge of resetting the Services, retraining skills that have 

not been required for the current operations, and reengaging with other nations’ militaries. The 

Department is making progress on the issue of Joint Warfighting and Readiness, but progress 

must be monitored to ensure it continues. The Department cannot afford to ignore new, and in 

some cases, recurring situations that will require its attention. 

• Management’s Assessment. Personnel and Readiness Management concurs with DoD 

IG’s Summary of Challenge and Assessment of Progress. 

4. Information Assurance, Security, and Privacy. A significant on-going challenge to the 

Department is ensuring that a robust risk management, security, and information assurance 

program is in place. In addition to ensuring that security and privacy protections are not 

compromised by advances in technology, DoD faces the challenge of securing information from 

cyberattacks; protecting DoD information in the hands of contractors; providing appropriate 

response to data breaches involving both privacy-protected data and sensitive, as well as 

unclassified information; and the proper sanitization and disposal of excess unclassified 

information technology equipment. The Department continues to lack an accurate, authoritative 
Department of Defense Agency Financial Report for FY 2009 

Management’s Discussion and Analysis 

 27 

data repository for information regarding DoD systems and does not have a requirement for an 

inventory of systems containing DoD information operated by contractors and other non-DoD 

entities. The Department has made little improvement in its information assurance and security 

posture. 

• Management’s Assessment. The Department has made advances in the accuracy of its 

authoritative data repository for information regarding IT systems (the Defense IT Portfolio 

Repository (DITPR)). Automated data entry controls, which prevent the introduction of 

inconsistent data, have now been implemented by the Navy and Air Force and are in the 

process of being implemented by the Army. 

The Department has taken steps to secure DoD information used by contractors and other 

non-DoD entities. On July 31, 2009, Directive-Type Memorandum (DTM) 08-027, "Security 

of Unclassified DoD Information on Non-DoD Information Systems" was signed out with the 

purpose of providing policy regarding the security management of unclassified DoD 

information on non-DoD information systems. This DTM applies to all unclassified DoD 

information in the possession or control of non-DoD entities on non-DoD information 

systems, to the extent provided by the applicable contract, grant, or other legal agreement 

or understanding with the DoD. 

Also, the Department made significant advances in FY 2009 in the area of Information 

Assurance, Security and Privacy through several initiatives. For example, the expanded 

fielding of Host Based Security System (HBSS), and the funding of requirements identified 

during Operation Buckshot Yankee have been very positive steps towards improving the 

Department's information. 

5. Health Care. The DoD Military Health System faces the challenge of providing quality care 

for approximately 9.3 million eligible beneficiaries. The increased frequency and duration of 

military deployment further stresses the Military Health System in both the Active and Reserve 

Components. Key issues affecting this challenge include cost containment, medical readiness, 

wounded warrior care, electronic health records, BRAC and humanitarian assistance. The new 

Military Health System Strategic Plan (May 2008) recognizes many of these challenges and 

provides a roadmap for progress in meeting the challenges. 

• Management’s Assessment. The Department remains committed to providing quality care 

to our warfighters and recognizes that continued health care reform will result in efficiencies 

and costs saving. DoD is implementing continuous process improvements across its system 

to make health care processes safer and more cost-effective. In addition, DoD is 

implementing programs to increase evidence-based practices to ensure that the right care is 

delivered and unnecessary tests and procedures are avoided. This kind of health care 

reform has the potential both to improve quality and reduce costs. 

The Department is working with the Reserves and National Guard to address challenges in 

force readiness, particularly in the area of dental readiness. The DoD’s human capital team 

is also addressing the need for additional mental health services. Over the past two years, 

we have added over 1900 new mental health professionals to the DoD workforce. In 

addition to the actions noted above, the acquisition structure and processes within Office of 

the Secretary of Defense (Health Affairs) (OASD(HA)) and the TRICARE Management 

Activity are being strengthened to ensure that major acquisitions such at the Electronic 

Health Record (EHR) are accomplished efficiently and effectively. The DoD and the 

Department of Veterans Affairs are working together to implement the VLER. The VLER 

vision is that health, benefits, and personnel information of a Service Member or Veteran will 

be available to those who need the data from the time of accession to internment. 
Department of Defense Agency Financial Report for FY 2009 

Management’s Discussion and Analysis 

 28 

6. Equipping and Training Iraqi and Afghan Security Forces. The Iraqi and Afghan security 

forces continue to lack the ability to conduct numerous tasks without U.S. Forces and Coalition 

enablers, such as logistics, air support, intelligence, and health care systems. The lack of 

enablers also severely restricts their ability to defend against internal and external threats. They 

continue to experience shortfalls in self-sustaining logistics and medical care, and in generating 

trained and qualified officer and noncommissioned officer logistics personnel to meet 

requirements. In addition, many units lack the personnel, equipment, and reliable vehicles to 

conduct operations without U.S. Forces and Coalition support. Further, the drawdown of U.S. 

Forces in Iraq presents new challenges in building and mentoring ISF logistics systems and 

other enablers. The intended build-up of ANSF poses significant challenges to accomplishing 

the U.S. mission to train and equip in Afghanistan. Overall, significant progress is being made, 

but much work remains before these security forces can operate independently without the 

support of U.S. and Coalition forces. 

• Management’s Assessment. The U.S.’s four areas of focus to develop the ISF remain 

unchanged: support force generation and force replenishment; improve the proficiency and 

professionalism of Iraqi forces; build specific logistic, sustainment, and training capacities; 

and develop ministerial and institutional capacity. The four near-term areas of emphasis 

also remain unchanged: ensure Iraqi forces continue to improve in logistics, maintenance, 

and life support; ensure the size, capability, professionalism, and leadership of the ISF 

enable increasing assumption of additional security roles from U.S. forces; enhance the 

capabilities of Iraqi Special Operations Forces and Counter-Terrorism Forces; and ensure 

Iraqi Air Force and Navy growth stays on track. Following the withdrawal of U.S. combat 

forces from Iraqi cities on June 30, 2009, the ISF continue to mature in their leadership roles 

providing security and overall stability for the citizens of Iraq. The citizens of Iraq continue to 

develop their confidence in the ISF, and it is becoming clear that the growing 

professionalism of the ISF is a source of national pride. 

The Department agrees with DoD IG’s assessment of progress made by the ANSF. The 

ANA is one of the most trusted and respected institutions within Afghanistan. As of 

November 2009, the Afghan National Army (ANA) has grown to a force size of 

approximately 95,500 and is growing towards an end strength of 134,000 in October 2010. 

The Afghan National Police (ANP) currently lags behind the ANA in development, but much 

progress has been made. The ANP is at a force level of 93,300 and growing towards 

96,800. Sixty-four Districts have completed Focused District Development training as of 

September 2009. The establishment of the North Atlantic Treaty Organization Training 

Mission-Afghanistan/Combined Security Transition Command-Afghanistan will improve 

overall coordination of ANSF development. The total number of Coalition trainers available 

may increase pending the President’s decision on committing further troops. 

The ANA has made great progress over the past year. As the ANA grows to 134,000, it is 

increasingly improving in capability and in building logistics capacity. While the Department 

agrees with the need for a more robust ANA logistics processes, it should be noted that 

priority has been placed on the development of ANA combat forces first, supported by ISAF 

enablers. Logistic enablers will be developed by design after combat elements have been 

fielded. Afghanistan poses unique issues in terms of implementing an integrated nationwide logistics system. Many areas within Afghanistan lack reliable power and 

communications capacity and do not allow for a networked logistics system. Additionally, 

the issue is made even more challenging because of low literacy rates among the populace 

and the lack of trained personnel with logistics background. 

The DoD is focused on improving logistics within the ANA. One of the objectives of the 

CSTC-A Campaign Plan is to develop an efficient logistics system that is capable of 
Department of Defense Agency Financial Report for FY 2009 

Management’s Discussion and Analysis 

 29 

acquiring and distributing resources to the ANA. The CSTC-A is developing a unified ANA 

logistics strategy which will ensure standardized logistics mentoring within the ANA. A 

robust Ministerial Development program is in place which focuses on building logistics 

capabilities within the MOD and the General Staff Headquarters. 

The Department agrees that a coordinated ANSF Health Care system is desirable but DoD 

cannot accomplish this without support from the Afghan Government. The International 

Community and other areas of the U.S. Government outside of DoD will need to be involved 

in this effort as well. 

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

the level and intensity of focus on the nuclear enterprise and the nuclear mission. To reverse 

this trend, the Department has begun to re-focus on the nuclear enterprise. The Department is 

vigorously analyzing and identifying key deficiencies and methods for improvement and 

developing corrective action plans. Sustained commitment is required to create an environment 

that emphasizes the nuclear mission and provides adequate funding and leadership to ensure 

implementation. 

• Management’s Assessment. The Department has made substantial progress in reversing 

the decline of the nuclear enterprise. The DoD continues to address recommendations 

made within several DoD reports. Governance and oversight of the nuclear weapons 

enterprise is another point of focus with better stewardship and higher accountability 

resulting from changes made to the inventory management structure. The Department is 

fully committed to restoring confidence in the nuclear enterprise and in the safe handling 

and accountability of DoD nuclear assets. The Department is engaged in a robust effort to 

implement report recommendations and corrective action plans to address all deficiencies. 

8. ARRA. Under the ARRA Congress appropriated $7.4 billion to DoD to preserve and create 

jobs; promote economic recovery; assist those most affected by the recession; provide 

investments to increase economic efficiency through technological advances in science and 

health; and invest in transportation, environmental protection, and other infrastructure. The DoD 

is pursuing three broad goals with ARRA funding: preserve and create American jobs, care for 

U.S. Service members and their families, and improve DoD energy-efficiency. The DoD intends 

to expend funds as quickly possible on facilities sustainment, restoration and modernization, 

military construction, energy conservation, near-term energy-efficiency technology, and 

homeowners assistance. While DoD has completed its agency and program specific plans, the 

Department has noted that execution of the ARRA is not moving as quickly as planned and 

much of the spending and work on the projects will not occur until FY 2010. Additionally, as with 

other contingency-like operations, the Department’s ability to identify, start, meet milestones, 

and account for the efforts will be a recurring challenge. 

• Management’s Assessment. The Department has obligated $3.3 billion in ARRA funds 

through Sept. 30, 2009, which is 45 percent of the $7.4 billion allocated to the Department. 

This includes $2.5 billion, or 58 percent, of all Facilities Sustainment, Restoration, and 

Modernization projects; $0.1 billion, or 47 percent, of all Near Term Energy-Efficient 

Technologies projects; and $0.6 billion, or 26 percent, of all Military Construction or Energy 

Conservation Investment projects. Obligations and project completions should continue to 

expand throughout FY 2010. 

The Department of Defense has always strived to be a good steward of the American people's 

tax dollars and takes this responsibility serious. To this end, the DoD management has taken 

actions that provide direction to succeed in addressing these and other challenges, while 

simultaneously providing unparalleled capability and support to the warfighter. 
Department of Defense Agency Financial Report for FY 2009 

Management’s Discussion and Analysis 

 30 

Other Management Information and Initiatives 

DEPARTMENT OF DEFENSE (DOD) IMPLEMENTATION OF THE ARRA OF 2009 

On February 17, 2009, the Congress passed 

the ARRA and appropriated $7.4 billion to DoD 

(Figure 1 - 15) for: military construction, facility 

repair, energy efficiency investments, near-term 

energy research, and assistance to certain 

military members, past and present, who have 

experienced financial losses through the 

downturn in the U.S. housing market. In 

addition, the USACE received $4.6 billion for its 

civil works program that is separate from the 

Department’s other Recovery Act funds. The 

$4.6 billion provided for the civil works program 

includes $2 billion for construction and 

$2.1 billion for operation and maintenance. The 

purpose for these investments is to stimulate 

the U.S. economy while enhancing our national 

security. U.S. jobs are created and preserved 

when funds are spent on U.S. military 

installations to build new facilities, repair aging 

facilities, or bring buildings up to date with the 

most modern energy efficiency standards. 

Technical jobs are created through targeted 

research on energy projects that aid the Department in reducing its long-term energy costs and 

improving current energy efficiency in the near-term. 

The infrastructure of DoD is vast and stretches across all fifty states and seven of its territories. 

The Department oversees more than $700 billion of real property, with more than 4,800 sites in 

the U.S. and its territories. These sites are located in heavily populated urban areas, such as 

Washington D.C., and also remote areas of the western U.S. and Alaska. The DoD 

infrastructure includes over 50,000 structures for family housing and over 11,000 barracks or 

mess facilities. There are over 80 airports, 59 inpatient facilities (hospitals), 378 medical clinics, 

and 285 dental clinics. These structures are in constant need of maintenance that is usually 

performed by companies located in the surrounding communities. Major construction projects – 

such as the replacement of aging hospitals – can often create thousands of jobs that go beyond 

the local community and promote employment in whole regions. 

The Department has obligated and expended $3.3 billion in Recovery Act funds through Sept. 

30, 2009, which is over 45 percent of the $7.4 billion allocated to the Department. This includes 

$2.5 billion or 58 percent of all Facilities Sustainment, Restoration, and Modernization projects, 

$0.1 billion or 47 percent of all Near Term Energy-Efficient Technologies projects, and 

$0.6 billion or 26 percent of all Military Construction or Energy Conservation Investment 

projects. Obligations and project completions should continue to expand throughout FY 2010. 

Figure 1-15 

Recovery Act Funds for the 

Department of Defense

Facility 

Infrastructure 

Investments:

$4.27B

Facility 

Infrastructure 

Investments:

$4.27B

Military 

Construction:

$2.18B

Military 

Construction:

$2.18B

Near Term 

Energy 

Technology 

Research:

$0.30B

Homeowner’s 

Assistance 

Fund: $0.56B

$7.4B B10-06

Energy 

Conservation 

Investment 

Program: $0.12B
Department of Defense Agency Financial Report for FY 2009 

Management’s Discussion and Analysis 

 31 

PROGRAM For Period Ended September 30, 2009 

Dollars in Billions Authority Obligations 

Facilities Sustainment, Restoration, and 

Modernization $ 4.27 $ 2.50 

Military Construction $ 2.18 $ 0.57 

Energy Conservation Investment $ 0.12 $ 0.03 

Near Term Energy-Efficient Technologies $ 0.30 $ 0.14 

Home Owners Assistance Program $ 0.56 $ 0.01 

TOTAL $ 7.43 $ 3.25 

For details regarding the Department’s recovery act implementation and accountability refer to 

the DoD website at http://www.defenselink.mil/recovery. 

THE DEPARTMENT’S PATH FORWARD FOR 2010 AND BEYOND 

Today’s security environment is very complex. We are faced with a wide range of security 

challenges that include, but are not limited to, the following: violent extremist movements, the 

spread of weapons of mass destruction, rising powers with sophisticated weapons, failed or 

failing states, and increasing encroachment across the global commons (air, sea, space, and 

cyberspace). The U.S. must account for these powerful trends that are reshaping the 

international landscape and will dramatically complicate the exercise of American statecraft and 

overseas relations. In addition to the current global economic downturn, these trends include 

climate change, cultural and demographic shifts, increasing scarcity of resources, and the 

spread of destabilizing technologies. The U.S. must prevail in current conflicts while also 

preparing for future conflicts that may arise. 

The Department will continue to adopt a strategic direction that reflects the principle of 

balance—balance between winning current conflicts and preparing for future contingencies, and 

balance between institutionalizing capabilities, such as counterinsurgency and foreign military 

assistance, and maintaining the U.S.’ existing conventional and strategic edge against other 

military forces. 

President Obama’s FY 2010 budget proposal marks the first step in codifying this approach. 

This proposal is truly the nation’s first 21st Century defense budget that recognizes that the 

nature of conflict has fundamentally changed over the past two decades. Conflict has shifted 

from previous security realities of the post-Cold War to a more complex and dangerous century. 

The most dramatic shift was to increase and institutionalize funding for programs that directly 

support those fighting America’s wars and their families. It changed the way we look at the 

procurement process to maximize the versatility of military capabilities across the widest 

possible spectrum of conflict. 

The QDR 2010 will build on this foundation to further reshape the priorities of America’s defense 

establishment. The QDR 2010 is part of the evolutionary process now underway to better align 

our strategy and supporting programs with the demands of current and projected security 

environment. It is examining the Department’s long-standing assumptions to determine which 

still apply and which need to change to reflect the multiplicity of actors leveraging wide-ranging 

tools to challenge our traditional strengths. The QDR 2010 will set a long-term course for DoD to 

follow and will provide a strategic framework for DoD’s annual program, force development, 

force management, and corporate support mechanisms. 
Department of Defense Agency Financial Report for FY 2009 

Management’s Discussion and Analysis 

 32 

Specific areas of emphasis for this QDR include: 

• Institutionalizing capabilities for irregular warfare and civil support abroad and capacities, to 

include building partnership capacity, 

• Addressing threats posed by adversaries with advanced anti-access capabilities and WMD, 

• Strengthening our global force posture, 

• Strengthening DoD support to civilian-led operations and activities, and 

• Managing the Department’s internal business processes to improve their efficiency and 

effectiveness. 

The QDR 2010 will be informed by similar reviews being conducted by the Department of 

Homeland Security (Quadrennial Homeland Security Review), the Director of National 

Intelligence (Quadrennial Intelligence Community Review), and incorporate guidance from 

relevant National Security Council (NSC) reviews. In addition, a series of separate 

congressionally directed reviews of the Department’s nuclear, space and missile defense 

postures will be closely coordinated with the QDR, but still provide separate reports to 

Congress. 

SUMMARY 

The Department of Defense serves as a steward on behalf of the American people for providing 

unparalleled national defense capability and support to the warfighter. While providing military 

capabilities to counter 21st Century threats to national security, the Department's leadership is 

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

complexity of the Department's business operations and the rapid pace of change in the 

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

organization. We stand strong and committed to transforming our financial management 

practices to improve the accuracy and reliability of our financial information used by business 

managers across the Department. Our commitment to financial management improvement and 

transformation is demonstrated by our efforts to standardize our business architecture, develop 

integrated financial management improvement plans, and establish committees to address 

regulatory and policy issues and monitor progress. 
Department of Defense Agency Financial Report for FY 2009 

APPENDIX A Glossary 

33 

Appendix A: Glossary

Acronym Definition 

AFR Agency Financial Report 

ANSF Afghan National Security Forces 

ARRA American Recovery and Reinvestment 

Act 

BCT Brigade Combat Team 

BEA Business Enterprise Architecture 

CBRNE Chemical, Biological, Radiological, 

Nuclear, and High-Yield Explosive 

CBJ Congressional Budget Justification 

CERFP CBRNE Enhanced Response Force 

Package 

CFO Chief Financial Officer 

CMO Chief Management Officer 

CONUS Continental United States 

DAAC DoD Audit Advisory Committee 

DBSMC Defense Business System Management 

Committee 

DFAS Defense Finance and Accounting Service 

DLA Defense Logistics Agency 

DoD Department of Defense 

DPAP Defense Procurement Acquisition Policy 

DUSD Deputy Under Secretary of Defense 

ERP Enterprise Resource Planning 

FFMIA Federal Financial Management 

Improvement Act 

FIAR Financial Improvement and Audit 

Readiness 

FIPS Federal Information Processing Standard 

FMFIA Federal Managers’ Financial Integrity Act 

FY Fiscal Year 

GAAP Generally Accepted Accounting 

Principles 

GAO Government Accountability 

Office 

GPRA Government Performance and Results 

Act 

Acronym Definition 

IG Inspector General 

IPIA Improper Payment Information Act 

IRB Investment Review Board 

ISF Iraqi Security Forces 

MFF Multi-Functional and Functional Support 

NSC National Security Council 

OCONUS Outside the Continental United States 

OIG Office of the Inspector General 

OMB Office of Management and Budget 

PIO Performance Improvement Officer 

PSA Principal Staff Assistant 

QDR Quadrennial Defense Review 

SecDef Secretary of Defense 

TMA TRICARE Management Activity 

TSA Technology Security Action 

USACE U.S. Army Corps of Engineers 

USAFRICOM U.S. African Command 

USCENTCOM U.S. Central Command 

USD(C) Under Secretary of Defense 

(Comptroller) 

USEUCOM U.S. European Command 

USGAAP U.S. Generally Accepted Accounting 

Principles 

USNORTHCOM U.S. Northern Command 

USPACOM U.S. Pacific Command 

USSOUTHCOM U.S. Southern Command 

USUHS Uniformed Services University of the 

Health Sciences 

WMD Weapon of Mass Destruction 

WMD-CST Weapons of Mass Destruction—Civil 

Support Team 
 

Department of Defense Agency Financial Report 2009 

APPENDIX B Useful Web Sites for Relevant Information 

34 

Appendix B: Useful Web Sites for Relevant Information 

Web Address and Report Description 

www.defenselink.mil 

• Main DoD Web site, and links to other DoD Web sites.

www.defenselink.mil/comptroller 

The DoD Comptroller Web site includes: 

• Agency Financial Report 

Reports the Department’s financial condition, financial execution, plans, and 

accomplishments. 

• Annual Performance Plan 

Describes the Department’s strategic goals and objectives, and the respective 

performance measures and targets that are used to assess progress. 

• Annual Performance Report 

Contains details of the Department’s performance results and progress in 

achieving its strategic goals, and is required by the Government Performance and 

Results Act (GPRA). 

• Citizen’s Report 

Summarizes the Department’s mission, key goals, budget allocation, and progress 

on key performance goals linking to the strategic goals. 

• Congressional Budget Justification 

The Department of Defense’s budget request to Congress. 

• Financial Improvement and Audit Readiness Plan 

Describes the Department's strategy for improving financial management and 

reports progress in achieving financial statement audit readiness. 

www.bta.mil 

The DoD’s Business Transformation Agency Web site includes: 

• Business Enterprise Architecture 

Blueprints DoD standard processes, data, data standards, business rules, 

operating requirements, and information exchanges for the Department’s business 

and financial management activities. 

• Enterprise Transition Plan 

Sets the defense business systems modernization strategy and defines the target 

systems environment. 

www.defenselink.mil/qdr/report/Report20060203.pdf 

• Quadrennial Defense Review 

Dated February 6, 2006, provides the Department’s strategic plan. 

Quadrennial Defense Review is under revision and will be available early next 

year. 
Contributors to the Fiscal Year 2009 Agency Financial Report

In addition to the 

significant contributions 

of the individuals listed 

below, hundreds of 

individuals in the Office 

of the Secretary of 

Defense and the Military 

Services contributed to 

the development of this 

Agency Financial Report

Ebony Adkins

Anitra Akanbi

Becky Allen 

Christina Anctil

Phillip Anderson

Iman Aquil

John Argodale

Pamelia Bain 

Lauren Bands

Corey Beckett

Sally Beecroft

Marc Brito

Michael Bryant

Mark Burns

Melissa Carandang

Debra Carey

Fred Carr

Ann Cataldo

Sharon Cave

Anthony Chavez

Chun-I Chiang

Elizabeth Christian

Audrey Clark

Pamela Conklin

Jocelyn Conway

Charlie Cook

LaTasha Copper

Carmen Covey

Donna Cox

Nick Crabtree

Barbara Crawford

Victoria Crouse

Dina Crowley

Karen Cwiekalo

Gerald Davenport

Audrey Davis

Katherine Day

Michael Dinneen

Thomas Dixon

Joseph Doyle

Mark Easton

Eric Engelbrektsson

Maryla Engelking

Dorothy Ferguson

Bobbie Fife

David Fisher

Jodie Fisher

COL Jeffrey Ford

Virginia Fortune

Kyle Fugate

Greg Galusha

Scott Gentry

Linda Gileau

Kathryn Gillis

Carlos Glover

Wayne Goff

Phillip Graham

David Gross

Robert Hale

Beth Hetman

Timothy Hippely

Mark Hoffman

Jacqueline Jenkins

Lori Johns

Peggy Johnson

Elizabeth Jordan

Brad Kennedy

Tammy Kicas

Elaine Kingston

Mary Kohlmeier

William Lehr

Linda Leuck

Ava Lun

Normand Lussier

Joy Marcou

David Martin

COL David Mason

Rhonda Meade

Michael McCord

Robert McNamara

Wesley Miller

Jason Monday

Lydia Moschkin

Robert Moss 

Karen Nakama

Carolyn Napper

Claire Nelson

Erin Nelson

Elise Newton 

Lydia Moschkin

Robert Moss 

Meghan Murphy

Karen Nakama

Carolyn Napper

Claire Nelson

Erin Nelson

Elise Newton

Karen Opie-Toler

Stewart Petchenick

Mark Peterson

Tony Poleo

Michael Powers

Joseph Quinn

Robert Rainey

David Ramseyer

Alice Rice

CAPT Stephan Rice

Elizabeth Ridge

Joie Ritchie

Javier Rivera

Terry Roberts

Andrew Rogers

Brian Romberger

Helen Rosen

John Ruoff

Lynn Scott

Radha Sekar

Lt CoL Charles Shea

Carrie Shell

Jean Shepherd

Kathy Sherrill

Robert Silverstein

Joel Sitrin

Alfonza Smith

Dave Smith

Jennifer Smith

Robert F. Smith

Wanda Smith

Timothy Soltis

Jimaye Sones

Barry Sterling

COL Vance Stewart

Sandra Stockel

Kathy Street

Stephen Tabone

Dennis Taitano

Sylvia Taylor-Porter

David Thomas

Bob Thompson

Ron Tollefson

Jeanne Tran

Michael Walsh

Jon Ware

Michael Weber

Richard Brent White

Benjamin Williams

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& Production Service 

(DAPS)
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DEPARTMENT OF DEFENSE

We are interested in your feedback

regarding the content of this report.

Please feel free to send your comments

or requests for copies of this report to

DoDAFR@osd.mil

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You may also view this document at:

www.defenselink.mil/comptroller/afr
November 16, 2009

Department of Defense

AGENCY FINANCIAL 

REPORT FOR 

FISCAL YEAR 2009

ADDENDUM A

FINANCIAL INFORMATION
Department of Defense Agency Financial Report for FY 2009 

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Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

12 

PRINCIPAL FINANCIAL STATEMENTS 

AND NOTES 

The financial statements of the Department 

include four principal statements listed in 

Figure 2-1. 

The financial statements reflect the aggregate 

financial posture of the Department and include 

both the proprietary (federal accounting 

standards) and budgetary resources of the 

Department. The Department is large and 

complex with an asset base of $1.8 trillion, and 

more than 3 million military and civilian 

employees on installations in every state and 

around the world. 

 

Figure 2-1. Four Principal Financial Statements

Statement What Information It Provides 

Balance Sheet Reflects the Department’s financial position as of the statement date (September 30, 2009). The 

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

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

assets and liabilities. 

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

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

its activities. 

Statement of Changes 

in Net Position 

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

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

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

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

Statement of 

Budgetary Resources 

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

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

budgetary general ledger in accordance with budgetary accounting rules. 
Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

13 

Department of Defense Consolidated Balance Sheet 

Agency Wide Dollars in Millions 

2009 

Consolidated 

Restated 

2008 

Consolidated

ASSETS (Note 2) 

Intragovernmental: 

 Fund Balance with Treasury (Note 3) $ 502,754.3 $ 468,396.9 

 Investments (Note 4) 434,884.0 394,508.5 

 Accounts Receivable (Note 5) 1,219.6 1,326.2 

 Other Assets (Note 6) 2,594.7 1,282.9 

 Total Intragovernmental Assets $ 941,452.6 $ 865,514.5 

 Cash and Other Monetary Assets (Note 7) 2,316.8 2,804.8 

 Accounts Receivable, Net (Note 5) 8,234.1 7,825.3 

 Loans Receivable (Note 8) 398.5 236.0 

 Inventory and Related Property, Net (Note 9) 228,796.6 233,586.6 

 General Property, Plant and Equipment, Net (Note 10) 559,614.3 506,953.6 

 Investments (Note 4) 2,017.1 1,861.5 

 Other Assets (Note 6) 56,637.5 55,829.4 

Stewardship Property, Plant & Equipment (Note 10) 

 TOTAL ASSETS $ 1,799,467.5 $ 1,674,611.7 

 

 LIABILITIES (Note 11) 

Intragovernmental: 

 Accounts Payable (Note 12) $ 2,207.8 $ 1,687.4 

 Debt (Note 13) 391.7 262.6 

 Other Liabilities (Note 15) 11,485.7 12,047.0 

Total Intragovernmental Liabilities $ 14,085.2 $ 13,997.0 

 Accounts Payable (Note 12) 35,519.8 32,622.8 

 Military Retirement and Other Federal Employment Benefits (Note 17) 2,012,166.1 1,984,605.4 

 Environmental and Disposal Liabilities (Note 14) 66,230.0 70,505.9 

 Loan Guarantee Liability (Note 8) 21.1 24.5 

 Other Liabilities (Note 15) 33,839.9 34,107.6 

Commitments & Contingencies (Note 16) 

 TOTAL LIABILITIES $ 2,161,862.1 $ 2,135,863.2 

 

 NET POSITION 

 Unexpended Appropriations - Earmarked Funds (Note 23) $ 5.6 $ 4.9 

 Unexpended Appropriations - Other Funds 504,339.3 472,983.4 

 Cumulative Results of Operations - Earmarked Funds (1,342,858.4) (1,345,925.0) 

 Cumulative Results of Operations - Other Funds 476,118.9 411,685.2 

 TOTAL NET POSITION $ (362,394.6) $ (461,251.5) 

 

 TOTAL LIABILITIES AND NET POSITION $ 1,799,467.5 $ 1,674,611.7 

The accompanying notes are an integral part of these financial statements. 
Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

14 

Department of Defense Consolidated Statement of Net Cost 

Agency Wide Dollars in Millions 

2009 

Consolidated 

Restated 

2008 

Consolidated

Program Costs 

Gross Costs $ 697,813.3 $ 726,427.3 

Military Retirement Benefits 87,880.4 160,282.8 

Civil Works 11,712.0 8,849.4 

Military Pay & Benefits 144,750.6 137,701.7 

Family Housing & Facilities 11,639.6 9,326.0 

Operations, Readiness & Support 268,007.0 251,313.0 

Strategic Modernization 173,823.7 158,954.4 

 (Less: Earned Revenue) (46,167.9) (56,272.5) 

Military Retirement Benefits (4,313.9) (24,099.5) 

Civil Works (1,657.1) (1,339.0) 

Military Pay & Benefits (1,019.4) (976.3) 

Family Housing & Facilities (7,465.5) (5,919.4) 

Operations, Readiness & Support (18,349.5) (11,503.1) 

Strategic Modernization (13,362.5) (12,435.2) 

 Net Cost of Operations $ 651,645.4 $ 670,154.8 

The accompanying notes are an integral part of these financial statements. 
Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A 

15 

Department of Defense Consolidated Statement of Changes in Net Position Agency Wide 

2009 

Earmarked Funds 

2009 

All Other Funds 

2009 

Eliminations 

2009 

Consolidated 

2008 

Earmarked Fu

Cumulative Results Of Operations Beginning Balances $ (1,259,693.0) $ 335,935.7 $ 0.0 $ (923,757.3) $ (1,211,82Prior Period Adjustments:  Changes in accounting principles 0.0 1,689.6 0.0 1,689.6  Corrections of errors 0.0 (10,482.5) 0.0 (10,482.5) Beginning balances, as adjusted $ (1,259,693.0) $ 327,142.8 $ 0.0 $ (932,550.2) $ (1,211,82Budgetary Financing Sources:  Appropriations used 3.8 708,653.2 0.0 708,657.0  Nonexchange revenue 2,767.7 (13.7) 0.0 2,754.0 3,63 Donations and forfeitures of cash and cash equivalents 38.0 0.2 0.0 38.2 3 Transfers(in/out without reimbursement) (836.7) 930.9 0.0 94.2 (718 Other 0.0 (4.2) 0.0 (4.2) Other Financing Sources (Non-Exchange)  Donations and forfeitures of property 0.7 1.5 0.0 2.2  Transfers(in/out without reimbursement ) (88.2) 45.4 0.0 (42.8) (436 Imputed financing 0.0 17,017.3 12,313.5 4,703.8  Other (19.4) 1,273.1 0.0 1,253.7 (12Total Financing Sources $ 1,865.9 $ 727,903.7 $ 12,313.5 $ 717,456.1 $ 2,50Net Cost of Operations (5,561.6) 669,520.5 12,313.5 651,645.4 50,37Net Change $ 7,427.5 $ 58,383.2 $ 0.0 $ 65,810.7 $ (47,87Cumulative Results of Operations $ (1,252,265.5) $ 385,526.0 $ 0.0 $ (866,739.5) $ (1,259,693Unexpended Appropriations Beginning Balances 4.9 446,864.3 0.0 446,869.2 Prior Period Adjustments:  Correction of Error 0.0 26,119.1 0.0 26,119.1 Beginning balances, as adjusted $ 4.9 $ 472,983.4 $ 0.0 $ 472,988.3 $ Budgetary Financing Sources:  Appropriations received 4.5 754,440.5 0.0 754,445.0  Appropriations transferred (in/out) 0.0 (188.4) 0.0 (188.4)  Other adjustments 0.0 (14,243.0) 0.0 (14,243.0)  Appropriations used (3.8) (708,653.2) 0.0 (708,657.0) (3Total Budgetary Financing Sources $ 0.7 $ 31,355.9 $ 0.0 $ 31,356.6 $ (Unexpended Appropriations $ 5.6 $ 504,339.3 $ 0.0 $ 504,344.9 $ Net Position $ (1,252,259.9) $ 889,865.3 $ 0.0 $ (362,394.6) $ (1,259,688

The accompanying notes are an integral part of these financial statements. 
Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

16 

Budgetary 

Financing Accounts 

Nonbudgetary 

Financing Accounts Department of Defense Combined 

Statement Of Budgetary Resources 

Agency Wide 

Dollars in Millions 2009 

Combined 

Restated 

2008 

Combined 

2009 

Combined 

Restated 

2008 

Combined 

Budgetary Resources 

Unobligated balance, brought forward, 

October 1 $ 135,669.8 $ 111,980.6 $ 26.3 $ 25.5 

Recoveries of prior year unpaid obligations 63,272.9 49,744.1 47.5 0.0 

Budget authority 

 Appropriation 855,564.3 859,403.8 0.0 0.0 

 Borrowing authority 0.0 0.0 58.4 130.0 

 Contract authority 67,626.3 78,927.8 0.0 0.0 

Spending authority from offsetting collections 

 Earned: 

 Collected 178,143.5 174,493.0 45.1 53.9 

 Change in receivables from federal sources 1,188.4 791.8 0.0 0.0 

 Change in unfilled customer orders: 

 Advance received 1,031.0 753.2 0.0 0.0 

 Without advance from federal sources (88.3) 5,679.1 (10.8) 12.6 

 Expenditure transfers from trust funds 862.5 766.0 0.0 0.0 

 Subtotal $ 1,104,327.7 $ 1,120,814.7 $ 92.7 $ 196.5 

Nonexpenditure transfers, net, anticipated 

and actual (15.7) (264.1) 0.0 0.0 

Temporarily not available pursuant to 

Public Law (39,190.4) (59,949.4) 0.0 0.0 

Permanently not available (85,969.3) (85,156.8) (0.1) (27.6) 

Total Budgetary Resources $ 1,178,095.0 $ 1,137,169.1 $ 166.4 $ 194.4 

Status of Budgetary Resources 

Obligations incurred: 

Direct 848,896.2 811,662.0 142.7 168.1 

Reimbursable 183,271.6 189,837.4 0.0 0.0 

Subtotal $ 1,032,167.8 $ 1,001,499.4 $ 142.7 $ 168.1 

Unobligated balance: 

Apportioned 128,048.6 120,047.8 0.3 0.3 

Exempt from apportionment 3,373.5 1,060.7 0.0 0.0 

Subtotal $ 131,422.1 $ 121,108.5 $ 0.3 $ 0.3 

Unobligated balance not available 14,505.1 14,561.2 23.4 26.0 

Total status of budgetary resources $ 1,178,095.0 $ 1,137,169.1 $ 166.4 $ 194.4 

The accompanying notes are an integral part of these financial statements. 
Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

17 

Budgetary 

Financing Accounts 

Nonbudgetary 

Financing Accounts Department of Defense Combined 

Statement of Budgetary Resources 

Agency Wide 

Dollars in Millions 2009 

Combined 

Restated 

2008 

Combined 

2009 

Combined 

Restated 

2008 

Combined 

Change in Obligated Balance: 

Obligated balance, net 

Unpaid obligations, brought forward, 

October 1 432,118.5 372,558.6 872.9 768.0 

Less: Uncollected customer payments from 

federal sources, brought forward, October 1 (66,602.2) (60,131.3) (143.0) (130.4) 

Total unpaid obligated balance $ 365,516.3 $ 312,427.3 $ 729.9 $ 637.6 

Obligations incurred net 1,032,167.8 1,001,499.4 142.7 168.1 

Less: Gross outlays (946,940.6) (892,195.4) (197.7) (63.2) 

Less: Recoveries of prior year unpaid 

obligations, actual (63,272.9) (49,744.1) (47.5) 0.0 

Change in uncollected customer payments 

from federal sources (1,100.0) (6,470.9) 10.8 (12.6) 

Obligated balance, net, end of period 

Unpaid obligations 454,072.8 432,118.5 770.4 872.9 

Less: Uncollected customer payments 

from federal sources (67,702.2) (66,602.2) (132.2) (143.0) 

Total, unpaid obligated balance, net, 

end of period $ 386,370.6 $ 365,516.3 $ 638.2 $ 729.9 

Net Outlays 

Net Outlays: 

Gross outlays 946,940.6 892,195.4 197.7 63.2 

Less: Offsetting collections (180,037.1) (176,012.2) (45.1) (53.9) 

Less: Distributed offsetting receipts (65,912.1) (70,247.6) 0.0 0.0 

Net Outlays $ 700,991.4 $ 645,935.6 $ 152.6 $ 9.3 

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

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

18 

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, as required by the Chief Financial Officers Act of 

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

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

Department in accordance with and to the extent possible, U.S. 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. The accompanying financial 

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

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

statements or otherwise aggregated and reported in such a manner that it is not discernable. 

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

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

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

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

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

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

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

implement process and system improvements addressing these limitations. 

The OMB requires financial statements of the following Department reporting activities to 

undergo audits: Army General Fund, Army Working Capital Fund, Navy General Fund, Navy 

Working Capital Fund, Air Force General Fund, Air Force Working Capital Fund, Military 

Retirement Fund, and U.S. Army Corps of Engineers (Civil Works). 

In addition, the Department requires the Medicare-Eligible Retiree Health Care Fund, Marine 

Corps General and Working Capital Funds, and the following Defense Agencies to prepare 

internal stand-alone auditable financial statements: Defense Logistics Agency, Defense Finance 

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

Agency, Defense Commissary Agency, Defense Security Service, Defense Threat Reduction 

Agency, Defense Advanced Research Projects Agency, Chemical and Biological Defense 

Program, Missile Defense Agency, Services Medical Activity, TRICARE Management Activity, 

and U.S. Special Operations Command. 

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

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

Materiel and Supplies; (6) General Property, Plant, and Equipment; (7) Government-Furnished 

Materiel and Contractor-Acquired Materiel; (8) Accounts Payable; (9) Environmental Liabilities; 

(10) Statement of Net Cost; (11) Intragovernmental Eliminations; (12) Other Accounting Entries; 

and (13) Reconciliation of Net Cost of Operations to Budget. 

1.B. Mission of the Reporting Entity 

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

Department provides the military forces needed to deter war and protect the security of our 

country. Since the creation of America’s first army in 1775, the Department of Defense 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. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

19 

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

Military Departments consist of the Army, the Navy (of which the Marine Corps is a component), 

and the Air Force. The Defense Agencies provide support services commonly used throughout 

the Department. 

1.C. Appropriations and Funds 

The Department receives appropriations and funds as general, working capital (revolving), trust, 

special, and deposit funds. The Department uses these appropriations and funds to execute 

missions and subsequently report on resource usage. 

General Funds are used for financial transactions funded by congressional appropriations, 

including personnel, operation and maintenance, research and development, procurement, and 

military construction. These general funds also include supplemental funds enacted by the 

American Recovery and Reinvestment Act (Recovery Act) of 2009. Details relating to Recovery 

Act appropriated funds are available on-line at http://www.defenselink.mil/recovery. 

Working Capital Funds (WCF) received funding to establish an initial corpus through an 

appropriation or a transfer of resources from existing appropriations or funds. The corpus 

finances operations and transactions that flow through the fund. The WCF resources the goods 

and services sold to customers on a reimbursable basis and maintains the corpus. 

Reimbursable receipts fund future operations and generally are available in their entirety for use 

without further congressional action. At various times, Congress provides additional 

appropriations to supplement WCF as an infusion of cash when revenues are inadequate to 

cover costs within the corpus. 

Trust funds contain receipts and expenditures of funds held in trust by the government for use in 

carrying out specific purposes or programs in accordance with the terms of the donor, trust 

agreement, or statute. Special fund accounts are used to record government receipts reserved 

for a specific purpose. Certain trust and special funds may be designated as earmarked funds. 

Earmarked funds are financed by specifically identified revenues, required by statute to be used 

for designated activities, benefits or purposes, and remain available over time. The Department 

is required to separately account for and report on the receipt, use and retention of revenues 

and other financing sources for earmarked funds. 

Deposit funds are used to record amounts held temporarily until paid to the appropriate 

government or public entity. They are not Department funds, and as such, are not available for 

the Department’s operations. The Department is acting as an agent or custodian for funds 

awaiting distribution. 

The Department is a party to allocation transfers with other federal agencies as a transferring 

(parent) entity or receiving (child) entity. An allocation transfer is an entity’s legal delegation of 

authority to obligate budget authority and outlay funds on its behalf. Generally, all financial 

activity related to allocation transfers (e.g., budget authority, obligations, outlays) is reported in 

the financial statements of the parent entity. Exceptions to this general rule apply to specific 

funds for which OMB has directed that all activity be reported in the financial statements of the 

child entity. These exceptions include U.S. Treasury-Managed Trust Funds, Executive Office of 

the President (EOP), and all other funds specifically designated by OMB. Based on an 

agreement with OMB, funds for Security Assistance programs are reported separately from the 

Department's financial statements and notes. 

The Department receives allocation transfers from the following agencies: Departments of 

Agriculture, Interior, Energy, and Transportation; the Appalachian Regional Commission; and 

the Federal Highway Administration. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

20 

Additionally, the Department receives allocation transfers from certain funds meeting the OMB 

exception and all related activity is included in the Department’s financial statements. The 

exceptions reported by the Department include South Dakota Terrestrial Wildlife Habitat 

Restoration, Inland Waterways and Harbor Maintenance, and the EOP other than funds 

executed by Defense Security Cooperation Agency for Security Assistance. 

As the 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 Military Service and Defense 

Agency level these abnormal balances may not be evident. These abnormal balances are 

disclosed in the applicable footnotes, but only to the extent that the abnormal balances are 

evident at the consolidated level. 

The Department is determining the actions required to bring financial and nonfinancial feeder 

systems and processes into compliance with USGAAP. One such action is the current revision 

of accounting systems to record transactions based on the U.S. Standard General Ledger 

(USSGL). Until all of the Department’s financial and nonfinancial feeder systems and processes 

are able to collect and report financial information as required by USGAAP, the Department’s 

financial data will be derived from budgetary transactions, data from nonfinancial feeder 

systems, and accruals. 

1.E. Revenues and Other Financing Sources 

The Department receives congressional appropriations as financing sources for general funds 

that expire annually, on a multiyear basis, or do not expire. When authorized by legislation, 

these appropriations are supplemented by revenues generated by sales of goods or services. 

The Department recognizes revenue as a result of costs incurred for goods and services 

provided to other federal agencies and the public. Full-cost pricing is the Department’s standard 

policy for services provided, as required by OMB Circular No. A-25, User Charges. The 

Department recognizes revenue when earned within the constraints of its current system 

capabilities. In some instances, revenue is recognized when bills are issued. 

Depot Maintenance and Ordnance WCF activities recognize revenue according to the 

percentage of completion method. Supply Management WCF activities recognize revenue from 

the sale of inventory items. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

21 

The Department does not include nonmonetary support provided by U.S. allies for common 

defense and mutual security in amounts reported in the Statement of Net Cost and Note 21, 

Reconciliation of Net Cost of Operations to Budget. The U.S. has cost sharing agreements with 

countries having a mutual or reciprocal defense agreement, where U.S. troops are stationed, or 

where the U.S. Fleet is in a port. 

1.F. Recognition of Expenses 

For financial reporting purposes, the Department’s policy requires the recognition of operating 

expenses in the period incurred. Current financial and nonfinancial feeder systems were not 

designed to collect and record financial information on the full accrual accounting basis. 

Estimates are made for major items such as payroll expenses, accounts payable, environmental 

liabilities, and unbilled revenue. In the case of Operating Materiel and Supplies (OM&S), 

operating expenses are generally recognized when the items are purchased. Efforts are 

underway to transition to the consumption method for recognizing OM&S expenses. Under the 

consumption method, OM&S would be expensed when consumed. Due to system limitations, in 

some instances expenditures for capital and other long-term assets may be recognized as 

operating expenses. The Department continues to implement process and system 

improvements to address these limitations. 

1.G. Accounting for Intragovernmental Activities 

Accounting standards require that an entity eliminate intraentity activity and balances from 

consolidated financial statements in order to prevent overstatement for business with itself. 

However, the Department cannot accurately identify intragovernmental transactions by 

customer because the Department’s systems do not track buyer and seller data at the 

transaction level. Generally, seller entities within the Department provide summary seller-side 

balances for revenue, accounts receivable, and unearned revenue to the buyer-side internal 

Department accounting offices. In most cases, the buyer-side records are adjusted to agree 

with the Department’s seller-side balances and are then eliminated. The Department is 

implementing replacement systems and a standard financial information structure that will 

incorporate the necessary elements that will enable the Department to correctly report, 

reconcile, and eliminate intragovernmental balances. 

The U.S. Treasury’s Federal Intragovernmental Transactions Accounting Policies Guide and 

Treasury Financial Manual Part 2 – Chapter 4700, Agency Reporting Requirements for the 

Financial Report of the United States Government, provide guidance for reporting and 

reconciling intragovernmental balances. While the Department is unable to fully reconcile 

intragovernmental transactions with all federal agencies, the Department is able to reconcile 

balances pertaining to investments in federal securities, borrowings from the U.S. Treasury and 

the Federal Financing Bank, Federal Employees’ Compensation Act transactions with the 

Department of Labor, and benefit program transactions with the Office of Personnel 

Management. 

The Department’s proportionate share of public debt and related expenses of the Federal 

government is not included. The Federal government does not apportion debt and related costs 

to federal agencies. The Department’s financial statements do not report any public debt, 

interest, or source of public financing, whether from issuance of debt or tax revenues. 

Generally, financing for the construction of the Department’s facilities is obtained through 

appropriations. To the extent this financing ultimately may have been obtained through the 

issuance of public debt, interest costs have not been capitalized since the U.S. Treasury does 

not allocate such costs to the Department. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

22 

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 this 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 USACE Finance Center submit reports to the U.S. Treasury by 

appropriation on interagency transfers, collections received, and disbursements issued. The 

U.S. Treasury records these transactions to the applicable Fund Balance with Treasury (FBWT) 

account. On a monthly basis, the Department's FBWT is adjusted to agree with the U.S. 

Treasury's accounts. 

1.J. Cash and Other Monetary Assets 

Cash is the total of cash resources under the control of the Department, which includes coin, 

paper currency, negotiable instruments, and amounts held for deposit in banks and other 

financial institutions. Foreign currency consists of the total U.S. dollar equivalent of both 

purchased and nonpurchased foreign currencies held in foreign currency fund accounts. 

Foreign currency is valued using the U.S. Treasury prevailing rate of exchange. 

The majority of cash and all foreign currency is classified as “nonentity” and is restricted. 

Amounts reported consist primarily of cash and foreign currency held by disbursing officers to 

carry out their paying, collecting, and foreign currency accommodation exchange missions. 

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

special account to handle the gains and losses from foreign currency transactions for five 

general fund appropriations: (1) operation and maintenance; (2) military personnel; (3) military 

construction; (4) family housing operation and maintenance; and (5) family housing 

construction. The gains and losses are calculated as the variance between the exchange rate 

current at the date of payment and a budget rate established at the beginning of each fiscal 

year. Foreign currency fluctuations related to other appropriations require adjustments to the 

original obligation amount at the time of payment. The Department does not separately identify 

foreign currency fluctuation transactions. 

1.K. Accounts Receivable 

Accounts receivable from other federal entities or the public include: accounts receivable, claims 

receivable, and refunds receivable. Allowances for uncollectible accounts due from the public 

are based upon an analysis of collection experience by fund type. The Department does not 

recognize an allowance for estimated uncollectible amounts from other federal agencies. 

Claims against other federal agencies are to be resolved between the agencies in accordance 

with dispute resolution procedures defined in the Intragovernmental Business Rules published 

in the Treasury Financial Manual at http://www.fms.treas.gov/tfm/vol1/07-03.pdf. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

23 

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. 

The National Defense Authorization Act for FY 2005 (PL 108-375, Section 2805) provided 

permanent authorities to the Military Housing Privatization Initiative (MHPI). 

The Department operates the Armament Retooling and Manufacturing Support Initiative under 

Title 10 United States Code 4551-4555. This loan guarantee program is designed to encourage 

commercial use of inactive government facilities. The revenue generated from property rental 

offsets the cost of maintaining these facilities. 

The Department administers the Foreign Military Financing program on behalf of the EOP. This 

program is authorized by sections 23 and 24 of the Arms Export Control Act of 1976, as 

amended, PL 90-629, as amended, and section 503(a). This program provides loans to help 

countries purchase U.S. produced weapons, defense equipment, services, or military training. 

The direct loans and loan guarantees related to Foreign Military Sales are not included in these 

financial statements, per the Department’s agreement with OMB; this information is provided 

separately as other accompanying information. 

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

guarantee commitments made after FY 1991. 

1.M. Inventories and Related Property 

The Department values approximately 68 percent of resale inventory using the moving average 

cost method. An additional 6 percent (fuel inventory) is reported using the first-in-first-out 

method. The Department reports the remaining 26 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 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

24 

sector are not managed in the Department’s materiel management activities. Operational 

cycles are irregular, and the military risks associated with stock-out positions have no 

commercial parallel. The Department holds materiel based on military need and support for 

contingencies. The Department is currently developing a methodology to be used to account for 

“inventory held for sale” and “inventory held in reserve for future sale,” with a completion date of 

year-end FY 2010 reporting. 

Related property includes OM&S and stockpile materiel. The OM&S, including munitions not 

held for sale, are valued at standard purchase price. The Department uses both the 

consumption method and the purchase method of accounting for OM&S. Items that are centrally 

managed and stored, such as ammunition and engines, are generally recorded using the 

consumption method and are reported on the Balance Sheet as OM&S. When current systems 

cannot fully support the consumption method, the Department uses the purchase method. 

Under this method, materiel and supplies are expensed when purchased. During FY 2009 and 

FY 2008, 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 longterm system corrections are in process. Once the proper systems are in place, these items will 

be accounted for under the consumption method of accounting. 

The Department determined that the recurring high dollar-value of OM&S in need of repair is 

material to the financial statements and requires a separate reporting category. Many highdollar items, such as aircraft engines, are categorized as OM&S rather than military equipment. 

The Department recognizes condemned materiel as “Excess, Obsolete, and Unserviceable.” 

The cost of disposal is greater than the potential scrap value; therefore, the net value of 

condemned materiel is zero. 

Inventory available and purchased for resale includes consumable spare and repair parts, and 

repairable items owned and managed by the Department. This inventory is retained to support 

military or national contingencies. Inventory held for repair is damaged inventory that requires 

repair to make it suitable for sale. Often, it is more economical to repair these items rather than 

to procure them. The Department often relies on weapon systems and machinery no longer in 

production. As a result, the Department supports a process that encourages the repair and 

rebuilding of certain items. This repair cycle is essential to maintaining a ready, mobile, and 

armed military force. Work in process balances include: (1) costs related to the production or 

servicing of items, including direct material, labor, and applied overhead; (2) the value of 

finished products or completed services that are yet to be placed in service; and (3) munitions in 

production and depot maintenance work with associated costs incurred in the delivery of 

maintenance services. 

1.N. Investments in U.S. Treasury Securities 

The Department reports investments in U.S. Treasury securities at cost, net of amortized 

premiums or discounts. Premiums or discounts are amortized over the term of the investments 

using the effective interest rate method or another method that yields similar results. The 

Department’s intent is to hold investments to maturity unless they are needed to finance claims 

or otherwise sustain operations. Consequently, a provision is not made for unrealized gains or 

losses on these securities. 

The Department invests in nonmarketable, market-based U.S. Treasury securities, which are 

issued to federal agencies by the U. S. Treasury’s Bureau of the Public Debt. They are not 

traded on any securities exchange but mirror the prices of particular U.S. Treasury securities 

traded in the government securities market. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

25 

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

include the Military Retirement Fund; Medicare-Eligible Retiree Health Care Fund; Other 

Defense Organizations General Fund trust and special funds; donations (gift funds); and the 

U. S. Treasury managed trust funds reported by USACE including the South Dakota Terrestrial 

Habitat Restoration, Inland Waterways, and Harbor Maintenance Trust Funds. 

Other investments represent joint ventures with private developers constructing or improving 

military housing on behalf of the Department under the authority of the MHPI, authorized by 

PL 104-106, Section 2801. These investments do not require market value disclosure. The 

Department’s potential losses on these ventures are limited to the amounts invested. 

1.O. General Property, Plant and Equipment 

The Department uses the estimated historical cost for valuing military equipment. The 

Department identified the universe of military equipment by accumulating information relating to 

program funding and associated military equipment, equipment useful life, program acquisitions, 

and disposals to establish a baseline. The military equipment baseline is updated using 

expenditure, acquisition, and disposal information. 

The Department’s General Property, Plant, and Equipment (PP&E) capitalization threshold is 

$100 thousand except for real property, which is $20 thousand. The Department has not fully 

implemented the threshold for real property; therefore, the Department is primarily using the 

capitalization threshold of $100 thousand for General PP&E, and most real property. 

With the exception of USACE Civil Works and WCF, General PP&E assets are capitalized at 

historical acquisition cost when an asset has a useful life of two or more years and when the 

acquisition cost equals or exceeds the Department’s capitalization threshold. The Department 

also requires the capitalization of improvements to existing General PP&E assets if the 

improvements equal or exceed the capitalization threshold and extend the useful life or increase 

the size, efficiency, or capacity of the asset. The Department depreciates all General PP&E, 

other than land, on a straight-line basis. 

The WCFs capitalize all PP&E used in the performance of their mission. These assets are 

capitalized as General PP&E, whether or not they meet the definition of any other PP&E category. 

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

improvements when an asset has a useful life of two or more years and the acquisition cost 

exceeds $25 thousand. The exception is buildings and structures related to hydropower 

projects, which are capitalized regardless of cost. 

When it is in the best interest of the government, the Department provides government property 

to contractors to complete contract work. The Department either owns or leases such property, 

or it is purchased directly by the contractor for the government based on contract terms. When 

the value of contractor-procured General PP&E meets or exceeds the Department’s 

capitalization threshold, federal accounting standards require that it be reported on the 

Department’s Balance Sheet. 

The Department developed policy and a reporting process for contractors with government 

furnished equipment that provides appropriate General PP&E information for financial statement 

reporting. The Department requires that entities maintain, in their property systems, information 

on all property furnished to contractors. These actions are structured to capture and report the 

information necessary for compliance with federal accounting standards. The Department has 

not fully implemented this policy primarily due to system limitations. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

26 

1.P. Advances and Prepayments 

When advances are permitted by law, legislative action, or presidential authorization, the 

Department’s policy is to record advances or prepayments in accordance with USGAAP. As 

such, payments made in advance of the receipt of goods and services should be reported as an 

asset on the Balance Sheet. The Department’s policy is to expense and/or properly classify 

assets when the related goods and services are received. The Department has not fully 

implemented this policy primarily due to system limitations. 

1.Q. Leases 

Lease payments for the rental of equipment and operating facilities are classified as either 

capital or operating leases. When a lease is essentially equivalent to an installment purchase of 

property (a capital lease), and the value equals or exceeds the current capitalization threshold, 

the Department records the applicable asset as though purchased, with an offsetting liability, 

and depreciates it. The Department records the asset and liability at the lesser of the present 

value of the rental and other lease payments during the lease term (excluding portions 

representing executory costs paid to the lessor) or the asset’s fair market value. The discount 

rate for the present value calculation is either the lessor’s implicit interest rate or the 

government’s incremental borrowing rate at the inception of the lease. The Department, as the 

lessee, receives the use and possession of leased property, for example real estate or 

equipment, from a lessor in exchange for a payment of funds. An operating lease does not 

substantially transfer all the benefits and risks of ownership. Payments for operating leases are 

expensed over the lease term as they become payable. 

Office space and leases entered into by the Department are the largest component of operating 

leases and are based on costs gathered from existing leases, General Services Administration 

bills, and interservice support agreements. Future year projections use the Consumer Price 

Index. 

1.R. Other Assets 

Other assets include those assets, such as military and civil service employee pay advances, 

travel advances, and certain contract financing payments that are not reported elsewhere on the 

Department’s Balance Sheet. 

The Department conducts business with commercial contractors under two primary types of 

contracts: fixed price and cost reimbursable. To alleviate the potential financial burden on the 

contractor that long-term contracts can cause, the Department may provide financing payments. 

Contract financing payments are defined in the Federal Acquisition Regulation, Part 32, as 

authorized disbursements to a contractor prior to acceptance of supplies or services by the 

government. Contract financing payment clauses are incorporated in the contract terms and 

conditions and may include advance payments, performance-based payments, commercial 

advances and interim payments, progress payments based on cost, and interim payments 

under certain cost reimbursement contracts. It is the Department’s policy to record certain 

contract financing payments as other assets. The Department has not fully implemented this 

policy primarily due to system limitations. 

Contract financing payments do not include invoice payments, payments for partial deliveries, 

lease and rental payments, or progress payments based on a percentage or stage of 

completion. The Defense Federal Acquisition Regulation Supplement authorizes progress 

payments based on a percentage or stage of completion only for construction of real property, 

shipbuilding and ship conversion, alteration, or repair. Progress payments based on percentage 

or stage of completion are reported as Construction in Progress. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

27 

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. 

Other liabilities arise as a result of anticipated disposal costs for the Department’s assets. 

Consistent with SFFAS No. 6, Accounting for Property, Plant, and Equipment, recognition of an 

anticipated environmental disposal liability begins when the asset is placed into service. Based 

on the Department’s policy, which is consistent with SFFAS No. 5, Accounting for Liabilities of 

the Federal Government, nonenvironmental disposal liabilities are recognized when 

management decides to dispose of an asset. The Department recognizes nonenvironmental 

disposal liabilities for military equipment nuclear-powered assets when placed into service. 

These amounts are not easily distinguishable and are developed in conjunction with 

environmental disposal costs. 

1.T. Accrued Leave 

The Department reports liabilities for military leave and accrued compensatory and annual leave 

for civilians. Sick leave for civilians is expensed when taken. The liabilities are based on 

current pay rates. 

1.U. Net Position 

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

Unexpended appropriations represent the amounts of budget authority that are unobligated and 

have not been rescinded or withdrawn. Unexpended appropriations also represent amounts 

obligated for which legal liabilities for payments have not been incurred. 

Cumulative results of operations represent the net difference between expenses and losses, 

and financing sources (including appropriations, revenue, and gains), since inception. The 

cumulative results of operations also include donations and transfers in and out of assets that 

were not reimbursed. 

1.V. Treaties for Use of Foreign Bases 

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

through various international treaties and agreements negotiated by the Department of State. 

The Department purchases capital assets overseas with appropriated funds, however, the host 

country retains title to the land and capital improvements. Treaty terms generally allow the 

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

other agreements are terminated, use of the foreign bases is prohibited and losses are recorded 

for the value of any nonretrievable capital assets. The settlement due to the U.S. or host nation 

is negotiated and takes into account the value of capital investments and may be offset by the 

cost of environmental cleanup. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

28 

1.W. Unexpended Obligations 

The Department obligates funds to provide goods and services for outstanding orders not yet 

delivered. Unless title has passed, the financial statements do not reflect a liability for payment 

for goods and services not yet delivered. Unexpended obligations includes both obligations for 

which goods and services have been delivered (title passed) and a liability recognized, and 

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

unexpended obligations appears immediately before net outlays in the Statement of Budgetary 

Resources, and is referred to as “Total, unpaid obligated balances, net, end of period.” 

1.X. Undistributed Disbursements and Collections 

Undistributed disbursements and collections represent the difference between disbursements 

and collections matched at the transaction level to specific obligations, payables, or receivables 

in the source systems and those reported by the U.S. Treasury. 

Supported disbursements and collections are evidenced by corroborating documentation. 

Unsupported disbursements and collections do not have supporting documentation for the 

transaction and most likely would not meet audit scrutiny. 

The Department’s policy is to allocate supported undistributed disbursements and collections 

between federal and nonfederal categories based on the percentage of distributed federal and 

nonfederal accounts payable and accounts receivable. Supported undistributed disbursements 

and collections are then applied to reduce accounts payable and receivable accordingly. 

Unsupported, undistributed disbursements are recorded as disbursements in transit and reduce 

nonfederal accounts payable. Unsupported, undistributed collections are recorded in 

nonfederal other liabilities. 

1.Y. 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. 

Note 2. Nonentity Assets 

Nonentity Assets Dollars in Millions 

As of September 30 2009 Restated 

2008 

Intragovernmental Assets 

Fund Balance with Treasury $ 823.2 $ 1,170.2 

Accounts Receivable 0.0 0.1 

Total Intragovernmental Assets $ 823.2 $ 1,170.3 

Nonfederal Assets 

Cash and Other Monetary Assets $ 2,239.4 $ 2,681.8 

Accounts Receivable 4,583.5 5,079.9 

Other Assets 186.2 183.4 

Total Nonfederal Assets $ 7,009.1 $ 7,945.1 

Total Nonentity Assets $ 7,832.3 $ 9,115.4 

Total Entity Assets $ 1,791,635.2 $ 1,665,496.3 

Total Assets $ 1,799,467.5 $ 1,674,611.7 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

29 

Nonentity assets are assets for which the Department maintains stewardship, accountability, 

and reporting responsibility, but are not available for the Department’s normal operations. 

The Department identified a prior period adjustment to assets, resulting in a net $25.3 million 

increase to nonentity, nonfederal accounts receivable. Refer to Note 26, Restatements, for 

further information. 

Intragovernmental Fund Balance with Treasury (FBWT) consists of deposit funds, seized Iraqi 

cash, and the Development Fund for Iraq (DFI). Deposit funds are generally used to record 

amounts held temporarily until paid to the appropriate party. Humanitarian relief and 

reconstruction deposit funds are funds held for expenditures on behalf of the Iraqi people. 

Seized Iraqi cash is former Iraqi regime monies confiscated by coalition forces and restricted for 

support of the Iraqi people. The DFI consists of proceeds from Iraqi oil sales, repatriated assets 

from the United States and other nations, and deposits from unencumbered oil-for-food 

proceeds. DFI funds are restricted for Iraqi infrastructure and other Iraqi support needs. 

Nonfederal Cash and Other Monetary Assets primarily consists of cash held by Disbursing 

Officers to carry out payment, collection, and foreign currency accommodation exchange 

missions. 

Nonfederal Accounts Receivable consists of certain amounts due related to canceled year 

appropriations and interest, fines, and penalties due on debt. Generally, the Department cannot 

use the collections and must distribute them to the U.S. Treasury. In those cases where the 

Department has specific statutory authority to retain collections from certain canceled year 

accounts, the receivables are reported as entity assets. 

Nonfederal Other Assets consists of an Advance Payment Pool Agreement with a nonprofit 

educational institution to finance research and development projects. 

Note 3. Fund Balance with Treasury 

Fund Balance with Treasury Dollars in Millions 

As of September 30 2009 2008 

Fund Balance 

 Appropriated Funds $ 491,763.4 $ 455,876.7 

 Revolving Funds 7,804.2 8,978.8 

 Trust Funds 1,874.0 1,818.5 

 Special Funds 395.8 436.4 

 Other Fund Types 916.9 1,286.5 

Total Fund Balance $ 502,754.3 $ 468,396.9 

Fund Balance Per Treasury Versus Agency 

 Fund Balance per Treasury $ 509,703.2 $ 473,736.8 

 Fund Balance per Agency 502,754.3 468,396.9 

Reconciling Amount $ 6,948.9 $ 5,339.9 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

30 

Other Fund Types primarily consists of deposit funds, receipt accounts, and DFI. 

The Department shows a reconciling net difference of $6.9 billion with the U.S. Treasury. This 

primarily includes $6.3 billion in canceled appropriations, $545.7 million in unavailable receipts 

accounts, $187.4 million in fiduciary activities, and ($80.4) million in allocation transfers. 

Status of Fund Balance with Treasury Dollars in Millions 

As of September 30 2009 2008 

Unobligated Balances 

Available $ 131,353.4 $ 121,096.4 

Unavailable 440,684.0 401,136.6 

Obligated Balance not yet Disbursed 454,389.6 432,553.3 

Nonbudgetary FBWT 899.8 1,060.8 

NonFBWT Budgetary Accounts (524,572.5) (487,450.2) 

Total Fund Balance $ 502,754.3 $ 468,396.9 

The Status of FBWT reflects the budgetary resources to support the FBWT and is a 

reconciliation between budgetary and proprietary accounts. It primarily consists of unobligated 

and obligated balances. The balances reflect the budgetary authority remaining for 

disbursement against current or future obligations. 

Unobligated Balance is classified as available or unavailable and represents the cumulative 

amount of budgetary authority that has not been set aside to cover outstanding obligations. The 

unavailable balance consists primarily of funds invested in U.S. Treasury securities that are 

temporarily precluded from obligation by law. Certain unobligated balances are restricted for 

future use and are not apportioned for current use. Unobligated balances for trust fund 

accounts are restricted for use by the public law that established the funds. 

Obligated Balance not yet Disbursed represents funds that have been obligated for goods and 

services not received and those received, but not paid. 

Nonbudgetary FBWT includes accounts that do not have budgetary authority, such as deposit 

funds, unavailable receipt accounts, clearing accounts, and nonentity FBWT. 

NonFBWT Budgetary Accounts reduces the Status of FBWT and consists of investments in 

U.S. Treasury securities, unfilled customer orders without advance, contract and borrowing 

authority, and receivables. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

31 

Note 4. Investments and Related Interest 

 Investments and Related Interest Dollars in Millions 

2009 

 As of September 30 

Cost Amortization 

Method 

Amortized 

(Premium) / 

Discount 

Investments, 

Net 

Market Value 

Disclosure 

Intragovernmental Securities 

Nonmarketable, 

Market-Based 

 Military Retirement Fund $ 281,250.3 See Below $ (5,774.0) $ 275,476.3 $ 283,292.6

 Medicare-Eligible Retiree 

Health Care Fund 150,184.3 See Below (3,345.5) 146,838.8 150,820.6

 US Army Corps of Engineers 5,239.5 See Below (41.7) 5,197.8 5,363.2

 Other Funds 2,915.6 See Below (28.8) 2,886.8 2,618.8

Total Nonmarketable, 

Market-Based $ 439,589.7 $ (9,190.0) $ 430,399.7 $ 442,095.2

Accrued Interest 4,484.3 4,484.3 4,484.3

Total Intragovernmental 

Securities $ 444,074.0 $ (9,190.0) $ 434,884.0 $ 446,579.5

Other Investments 

Total Other Investments $ 2,017.1 $ 0.0 $ 2,017.1 N/A

Amortization Method Used: Effective Interest 

Investments and Related Interest Dollars in Millions 

2008 

 As of September 30 

Cost Amortization 

Method 

Amortized 

(Premium) / 

Discount 

Investments, 

Net 

Market Value 

Disclosure 

Intragovernmental Securities 

Nonmarketable, 

Market-Based 

 Military Retirement Fund $ 255,722.1 See Below $ (5,423.8) $ 250,298.3 $ 240,912.7 

 Medicare-Eligible 

Retiree Health Care Fund 135,483.4 See Below (2,683.7) 132,799.7 127,002.4 

 US Army Corps of 

Engineers 4,790.4 See Below (26.0) 4,764.4 4,909.9 

 Other Funds 2,382.0 See Below (19.6) 2,362.4 2,391.2 

Total Nonmarketable, 

Market-Based $ 398,377.9 $ (8,153.1) $ 390,224.8 $ 375,216.2 

 Accrued Interest 4,283.7 4,283.7 4,283.7 

Total Intragovernmental 

Securities $ 402,661.6 $ (8,153.1) $ 394,508.5 $ 379,499.9 

Other Investments 

Total Other Investments $ 1,861.5 $ 0.0 $ 1,861.5 N/A 

 Amortization Method Used: Effective Interest 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

32 

The Department’s earmarked funds invest primarily in non-marketable, market-based securities 

that fluctuate in tandem with the current selling price of the equivalent marketable security on 

the open market. These securities are purchased with the intent to hold until maturity, thus 

balances are not adjusted to market value. 

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

are an asset to the Department and a liability to the U.S. Treasury. The Federal Government 

does not set aside assets to pay future benefits or other expenditures associated with 

earmarked funds. The cash generated from earmarked funds are deposited in the U.S. 

Treasury, which uses the cash for general government purposes. Since the Department and 

the U.S. Treasury are both part of the Federal Government, these assets and liabilities offset 

each other from the standpoint of the Federal Government as a whole. For this reason, they do 

not represent an asset or a liability in the U.S. Governmentwide financial statements. 

The U.S. Treasury securities provide the Department with authority to draw upon the U.S. 

Treasury to make future benefit payments or other expenditures. When the Department must 

redeem these securities, the government will finance them from accumulated cash balances by 

raising taxes or other receipts, borrowing from the public, 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 and $459.5 million in investments of the Voluntary Separation Incentive Trust Fund. 

Note 5. Accounts Receivable 

Accounts Receivable Dollars in Millions

2009 

As of September 30

Gross Amount Due

Allowance For 

Estimated 

Uncollectibles 

Accounts 

Receivable, Net 

Intragovernmental Receivables $ 1,219.6 N/A $ 1,219.6 

Nonfederal Receivables 

(From the Public) 8,804.4 (570.3) 8,234.1 

Total Accounts Receivable $ 10,024.0 $ (570.3) $ 9,453.7 

Accounts Receivable Dollars in Millions 

2008 

As of September 30

Gross Amount Due

Allowance For 

Estimated 

Uncollectibles 

Accounts 

Receivable, Net 

Intragovernmental Receivables $ 1,326.2 N/A $ 1,326.2 

Nonfederal Receivables 

(From the Public) 8,211.6 (386.3) 7,825.3 

Total Accounts Receivable $ 9,537.8 $ (386.3) $ 9,151.5 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

33 

While migrating from a manual to an automated interface between budget execution and 

financial statement reporting systems, the Department corrected errors resulting in an increase 

to nonfederal receivables of $40.8 million in FY 2008. Refer to Note 26, Restatements, for 

further information. 

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. 

Note 6. Other Assets 

Other Assets Dollars in Millions 

As of September 30 2009 Restated 

2008 

Intragovernmental Other Assets 

 Advances and Prepayments $ 2,469.8 $ 1,158.0 

 Other Assets 124.9 124.9 

 Total Intragovernmental Other Assets $ 2,594.7 $ 1,282.9 

Nonfederal Other Assets 

 Outstanding Contract Financing Payments $ 55,047.2 $ 54,136.1 

 Advances and Prepayments 1,234.1 1,282.8 

 Other Assets (With the Public) 356.2 410.1 

 Total Nonfederal Other Assets $ 56,637.5 $ 55,829.4 

Total Other Assets $ 59,232.2 $ 57,112.3 

The Department restated the FY 2008 balance in Nonfederal Other Assets by $26.9 billion. The 

Department incorrectly reported contract financing payments for shipbuilding as expenses 

rather than assets. Refer to Note 26, Restatements, for further information. 

Intragovernmental Other Assets represents the Department’s right to approximately 6 million 

barrels of crude oil held by the Department of Energy. 

The balance of Outstanding Contract Financing Payments includes $53.2 billion in contract 

financing payments and an additional $1.5 billion in estimated future payments to contractors 

upon delivery and government acceptance of a satisfactory product. See additional discussion 

in Note 15, Other Liabilities. 

Contract terms and conditions for certain types of contract financing payments convey rights to 

the Department that protect the contract work from state or local taxation, liens or attachment by 

the contractor's creditors, transfer of property, or disposition in bankruptcy. However, these 

rights should not be misconstrued to mean that ownership of the contractor’s work has 

transferred to the Federal Government. The Federal Government does not have the right to 

take the work, except as provided for in contract clauses related to termination or acceptance, 

and the Department is not obligated to make payment to the contractor until delivery and 

acceptance. 

The balance in Other Assets (With the Public) includes $186.2 million for an Advance Payment 

Pool Agreement with nonprofit institutions and $143.9 million for inventory returned to vendors 

pending credit. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

34 

Note 7. Cash and Other Monetary Assets 

Cash and Other Monetary Assets Dollars in Millions 

As of September 30 2009 2008 

Cash $ 810.8 $ 1,421.3 

Foreign Currency 1,506.0 1,383.5 

Total Cash, Foreign Currency, and Other Monetary Assets $ 2,316.8 $ 2,804.8 

Cash (except for $76.4 million in undeposited collections and $1.0 million in imprest funds) and 

Foreign Currency represent nonentity assets and are restricted and unavailable to fund the 

Department's mission. 

Note 8. Direct Loan and Loan Guarantees 

Direct Loan and Loan Guarantee Programs 

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

• Military Housing Privatization Initiative (MHPI) and 

• Armament Retooling and Manufacturing Support Initiative (ARMS) 

The Federal Credit Reform Act of 1990 governs all new and amended direct loan obligations 

and loan guarantee commitments made after FY 1991. 

Direct loans are reported at the net present value of the following projected cash flows: 

• Loan disbursements; 

• Repayments of principal; and 

• Payments of interest and other payments over the life of the loan after adjusting for 

estimated defaults, prepayments, fees, penalties, and other recoveries. 

Loan guarantee liabilities are reported at the net present value. The cost of the loan guarantee 

is the net present value of the following estimated projected cash flows: 

• 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 loan guarantee program 

is authorized by the National Defense Authorization Act for FY 1996 (Public Law 104-106, 

Section 2801) and includes a series of authorities that allow the Department to work with the 

private sector to renovate and build military family housing. The MHPI accelerates the 

construction of new housing built to market standards and leverages private sector capital. The 

Department provides protection to the private sector partner against specific risks, such as base 

closure or member deployment. One of the goals of the Department is to obtain private sector 

capital to leverage government dollars. The Department provides protection to the private 

sector partner against specific risks, such as base closure or member deployment. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

35 

Armament Retooling and Manufacturing Support Initiative 

The ARMS Initiative, Title 10 U.S. Code 4551-4555, is a loan guarantee program designed to 

encourage commercial use of the Army's inactive ammunition plants through incentives for 

businesses willing to locate to a government ammunition production facility. The production 

capacity of these facilities is greater than current military requirements, however, this capacity 

may be needed by the military in the future. Revenues from property rentals are used to help 

offset the overhead costs for the operation, maintenance and environmental cleanup at the 

facilities. 

In an effort to preclude any additional loan liability, the Army instituted an ARMS loan guarantee 

moratorium in FY 2004. The Army continues to operate under the moratorium and does not 

anticipate new loans. 

Summary of Direct Loans and Loan Guarantees Dollars in Millions 

As of September 30, 2009 and 2008 2009 2008 

Loans Receivable 

Direct Loans: 

 Military Housing Privatization Initiative $ 398.4 $ 236.0 

 Total Direct Loans $ 398.4 $ 236.0 

Defaulted Loan Guarantees: 

 Armament Retooling & Manufacturing 

 Support Initiative 0.1 0.0 

 Total Default Loan Guarantees $ 0.1 $ 0.0 

Total Loans Receivable $ 398.5 $ 236.0 

Loan Guarantee Liability 

 Military Housing Privatization Initiative $ 18.7 $ 22.2 

 Armament Retooling & Manufacturing 

 Support Initiative 2.4 2.3 

 Total Loan Guarantee Liability $ 21.1 $ 24.5 

Direct Loans Obligated Dollars in Millions 

As of September 30, 2009 and 2008 2009 2008 

Direct Loans Obligated After FY 1991 

(Present Value Method):

Military Housing Privatization Initiative 

Loans Receivable Gross $ 510.9 $ 339.6 

Allowance for Subsidy Cost (Present Value) (112.5) (103.6) 

Value of Assets Related to Direct Loans 398.4 236.0 

Total Direct Loans Receivable $ 398.4 $ 236.0 

Loans receivable, net, or value of assets related to loans, is not the same as the proceeds the 

Department would expect to receive from selling the loans. 

Interest receivable is calculated using the interest earned method. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

36 

Total Amount of Direct Loans Disbursed Dollars in Millions 

As of September 30, 2009 and 2008 2009 2008 

Direct Loan Programs 

Military Housing Privatization Initiative $ 171.7 $ 31.7 

Total Direct Loans Disbursed $ 171.7 $ 31.7 

 Subsidy Expense for Direct Loan by Program 

 As of September 30, 2009 and 2008 Dollars in Millions 

2009 Interest 

Differential Defaults Fees Other Total 

New Direct Loans Disbursed: 

Military Housing Privatization Initiative $ 16.0 $ 16.4 $ 0.0 $ 0.0 $ 32.4 

2008 Interest 

Differential Defaults Fees Other Total 

New Direct Loans Disbursed: 

Military Housing Privatization Initiative $ 12.6 $ 3.0 $ 0.0 $ 0.0 $ 15.6 

2009 Modifications 

Interest Rate 

Reestimates 

Technical 

Reestimates 

Total 

Reestimates Total 

Direct Loan Modifications and Reestimates:

Military Housing Privatization Initiative $ 0.0 $ (3.4) $ (12.5) $ ( 15.9) $ (15.9) 

2008 Modifications 

Interest Rate 

Reestimates 

Technical 

Reestimates 

Total 

Reestimates Total 

Direct Loan Modifications and 

Reestimates:

Military Housing Privatization Initiative $ 0.0 $ (0.8) $ (2.2) $ ( 3.0) $ ( 3.0) 

2009 2008 

Total Direct Loan Subsidy Expense: 

Military Housing Privatization Initiative $ 16.5 $ 12.6 

Subsidy Rate for Direct Loans by Program Dollars in Millions 

As of September 30, 2009 and 2008 Interest 

Differential Defaults

Fees and 

other 

Collections 

Other Total 

Budget Subsidy Rates for Direct Loans 

 Military Housing Privatization Initiative 19.46% 11.85% 0.00% 0.00% 31.31% 

Subsidy rates pertain to the loan agreements contracted during the current fiscal year. These 

rates cannot be applied to the direct loans disbursed during the current reporting year to yield 

the subsidy expense. The subsidy expense for new loans disbursed in the current year results 

from disbursements of loans from current and prior year loan agreements. The subsidy 

expense reported in the current year also includes reestimates. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

37 

Schedule for Reconciling Subsidy Cost Allowance Balances 

for Post FY1991 Direct Loans Dollars in Millions 

As of September 30, 2009 and 2008 2009 2008 

Beginning Balance, Changes, and Ending Balance: 

Beginning Balance of the Subsidy Cost Allowance $ 103.6 $ 95.9 

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

 Interest Rate Differential Costs 16.0 12.6 

 Default Costs (Net of Recoveries) 16.4 3.0 

Total of the above Subsidy Expense Components $ 32.4 $ 15.6 

Adjustments

 Subsidy Allowance Amortization (7.6) (4.9) 

Total of the above Adjustment Components $ (7.6) $ (4.9) 

Ending Balance of the Subsidy Cost Allowance before 

Reestimate $ 128.4 $ 106.6 

Add or Subtract Subsidy Reestimate by Component

Interest Rate Reestimate (3.4) (0.8) 

Technical/Default Reestimate (12.5) (2.2) 

 Total of the above Reestimate Components (15.9) (3.0) 

Ending Balance of the Subsidy Cost Allowance $ 112.5 $ 103.6 

Defaulted Guaranteed Loans Dollars in Millions 

As of September 30, 2009 2009 2008 

Defaulted Guaranteed Loans from Post-FY 1991 Guarantees (Present Value Method):

Armament Retooling & Manufacturing Support Initiative 

Defaulted Guaranteed Loans Receivable, Gross $ 0.7 $ 15.1 

Allowance for Subsidy Cost (Present Value) ( 0.6) (15.1) 

Total Value of Assets Related to Defaulted 

Guaranteed Loans Receivable $ 0.1 $ 0.0 

Guaranteed Loans Outstanding Dollars in Millions 

As of September 30, 2009

Outstanding Principal 

of Guaranteed Loans, 

Face Value 

Amount of Outstanding 

Principal Guaranteed 

Guaranteed Loans Outstanding 

Military Housing Privatization Initiative $ 467.2 $ 467.2 

Armament Retooling & Manufacturing Support 

Initiative 3.0 2.4 

Total Guaranteed Loans Outstanding $ 470.2 $ 469.6 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

38 

Guaranteed Loans Outstanding Dollars in Millions 

As of September 30, 2008

Outstanding Principal 

of Guaranteed Loans, 

Face Value 

Amount of Outstanding 

Principal Guaranteed 

Guaranteed Loans Outstanding 

Military Housing Privatization Initiative $ 499.1 $ 499.1 

Armament Retooling & Manufacturing Support 

Initiative 3.1 2.6 

Total Guaranteed Loans Outstanding $ 502.2 $ 501.7 

Liabilities for Loan Guarantees Dollars in Millions 

As of September 30, 2009 and 2008 2009 2008 

Liabilities for Loan Guarantee from Post FY 1991 

(Present Value): 

 Military Housing Privatization Initiative $ 18.7 $ 22.2 

 Armament Retooling & Manufacturing Support Initiative 2.4 2.3 

 Total Loan Guarantee Liability $ 21.1 $ 24.5 

 Subsidy Expense for Loan Guarantees by Program 

 As of September 30, 2009 and 2008 Dollars in Millions 

2009 Modifications 

Interest 

Rate 

Reestimates 

Technical 

Reestimates 

Total 

Reestimates Total 

 Modifications and Reestimate: 

 Military Housing Privatization 

 Initiative $ 0.0 $ (1.6) $ (3.0) $ ( 4.6) $ ( 4.6) 

 Armament Retooling & 

 Manufacturing Support Initiative 0.0 0.1 0.0 0.1 0.1 

 Total $ 0.0 $ ( 1.5) $ ( 3.0) $ ( 4.5) $ ( 4.5) 

2008 Modifications 

Interest 

Rate 

Reestimates 

Technical 

Reestimates 

Total 

Reestimates Total 

 Modifications and Reestimate: 

 Military Housing Privatization 

 Initiative $ 0.0 $ (0.9) $ (2.9) $ ( 3.8) $ ( 3.8) 

 Armament Retooling & 

 Manufacturing Support Initiative 0.0 0.4 1.7 2.1 2.1 

 Total $ 0.0 $ (0.5) $ ( 1.2) $ (1.7) $ (1.7) 

2009 2008 

 Total Loan Guarantee Subsidy Expense: 

 Military Housing Privatization 

 Initiative $ (4.6) $ (3.8) 

 Armament Retooling & 

 Manufacturing Support Initiative 0.1 2.1 

 Total $ (4.5) $ ( 1.7) 

There are no new loan guarantees in FY 2009. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

39 

Schedule for Reconciling Loan Guarantee Liability Balances for 

Post-FY 1991 Loan Guarantees Dollars in Millions 

As of September 30, 2009 2009 2008 

Beginning Balance, Changes, and Ending Balance: 

Beginning Balance of the Loan Guarantee Liability $ 24.5 $ 25.0 

Adjustments

 Foreclosed Property and Loans Acquired 0.0 0.7 

 Claim Payments to Lenders 0.0 (0.8) 

 Interest Accumulation on the Liability Balance 1.1 1.3 

 Other 0.0 0.0 

Total of the above Adjustments $ 1.1 $ 1.2 

Ending Balance of the Loan Guarantee Liability before 

Reestimates $ 25.6 $ 26.2 

Add or Subtract Subsidy Reestimates by Component

 Interest Rate Reestimate (1.5) (0.5) 

 Technical/Default Reestimate (3.0) (1.2) 

 Total of the above Reestimate Components $ (4.5) $ (1.7) 

Ending Balance of the Loan Guarantee Liability $ 21.1 $ 24.5 

Administrative Expenses 

Administrative Expenses are limited to separately identified expenses for administering pre 

FY 1992 and post FY 1991 Direct Loans and Loan Guarantee Programs. The Department does 

not maintain a separate program to capture the expenses related to direct loans and loan 

guarantees for MHPI. Administrative expenses for the ARMS Initiative represent a fee paid to 

the U.S. Department of Agriculture, Rural Business Cooperative Service for servicing the loan 

guarantee program. 

Note 9. Inventory and Related Property 

Inventory and Related Property Dollars in Millions 

As of September 30 2009 Restated 

2008 

Inventory, Net $ 82,814.6 $ 84,159.0 

Operating Materiel & Supplies, Net 145,258.4 148,663.6 

Stockpile Materiel, Net 723.6 764.0 

Total Inventory and Related Property $ 228,796.6 $ 233,586.6 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

40 

 Inventory, Net Dollars in Millions 

2009 

As of September 30

Inventory, 

Gross Value 

Revaluation 

Allowance Inventory, Net 

Valuation Method

 Inventory Categories 

Available and Purchased 

for Resale $ 87,742.2 $ (24,422.8) $ 63,319.4 LAC,MAC 

 Held for Repair 28,055.7 (9,578.0) 18,477.7 LAC,MAC 

Excess, Obsolete, and 

Unserviceable 7,833.8 (7,833.8) 0.0 NRV 

 Raw Materiel 490.3 0.0 490.3 MAC,SP,LAC 

 Work in Process 527.2 0.0 527.2 AC 

Total Inventory, Net $ 124.649.2 $ (41,834.6) $ 82,814.6 

Legend for Valuation Methods:

Adjusted LAC = Latest Acquisition Cost, adjusted for holding gains and losses 

SP = Standard Price 

AC = Actual Cost 

NRV = Net Realizable Value 

MAC = Moving Average Cost 

 Inventory, Net Dollars in Millions 

Restated 2008 

As of September 30

Inventory, 

Gross Value 

Revaluation 

Allowance Inventory, Net 

Valuation Method

 Inventory Categories 

Available and Purchased 

for Resale $ 97,701.0 $ (29,755.9) $ 67,945.1 LAC,MAC 

 Held for Repair 25,684.0 (10,195.2) 15,488.8 LAC,MAC 

Excess, Obsolete, and 

Unserviceable 7,761.3 (7,761.3) 0.0 NRV 

 Raw Materiel 103.5 0.0 103.5 MAC,SP,LAC 

 Work in Process 621.6 0.0 621.6 AC 

Total Inventory, Net $ 131,871.4 $ (47,712.4) $ 84,159.0 

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 

Current Year Adjustments from Implementation of Changes in Accounting Principles 

During the 3rd Quarter, FY 2009 a DoD Component implemented an Enterprise Resource 

Planning (ERP) system. This ERP provided the means to revalue inventory from latest 

acquisition cost (LAC) to moving average cost (MAC), which is the Department's current policy 

for reporting inventory. Both methods are intended to value inventory at historic cost, but LAC 

valued inventory approximates historic cost by using an allowance account, while MAC 

averages the price paid for the inventory and does not use an allowance account. Without the 

allowance account, inventory valued at LAC will generally overstate the historic cost because 

current prices used to value the inventory exceed the actual prices paid in earlier periods. As a 

result of this implementation, FY 2009 Inventory Available and Purchased for Resale increased 

by a net of $2.7 billion. Revaluing the inventory at MAC decreased the inventory value by $2.8 

billion. However this decrease was offset by an increase caused by writing off the $5.5 billion 

allowance account that had been used to offset the higher reported amount of the LAC valued. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

41 

Comparative Year Restatements from Correction of Errors 

The Department identified $3.9 billion in Inventory and Related Property, Net overstatements 

from the incorrect posting of inventory in transit, resulting in a decrease to Inventory Available 

and Purchased for Resale. In addition, while preparing for another ERP migration, the 

Department identified a $1.5 billion gain that was incorrectly reported as inventory allowance in 

the legacy system. This change increased FY 2008 Inventory Available and Purchased for 

Resale. Refer to Note 26, Restatements, for further information. 

Restrictions 

The following are restrictions on the use, sale, or disposition of inventory. 

• War reserve materiel valued at $1.3 billion; 

• Commissary items valued at $400.1 million held for purchase by authorized patrons; and 

• Dispositions pending litigation or negotiation valued at $3.8 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 that is: 

• Held for sale, or held for repair and eventual sale; 

• In the process of production for sale; or 

• To be consumed in the production of goods for sale or in the provision of service for a fee. 

The Department assigns inventory items to a category based upon the type and condition of the 

asset. 

 Operating Materiel and Supplies, Net Dollars in Millions 

2009 

As of September 30

OM&S, Gross 

Value 

Revaluation 

Allowance OM&S, Net 

Valuation 

Method 

OM&S Categories 

Held for Use $ 128,932.9 $ (0.0) $ 128,932.9 SP, LAC, MAC 

Held for Repair 17,984.2 (1,658.7) 16,635.5 SP, LAC, MAC 

Excess, Obsolete, and 

Unserviceable 3,386.2 (3,386.2) 0.0 NRV 

Total OM&S $ 150,303.3 $ (5,044.9) $ 145,258.4 

Legend for Valuation Methods:

Adjusted LAC = Latest Acquisition Cost, adjusted for holding gains and losses 

SP = Standard Price 

NRV = Net Realizable Value 

MAC = Moving Average Cost 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

42 

 Operating Materiel and Supplies, Net Dollars in Millions 

Restated 2008 

As of September 30

OM&S, Gross 

Value 

Revaluation 

Allowance OM&S, Net 

Valuation 

Method 

OM&S Categories 

Held for Use $ 131,648.7 $ (0.0) $ 131,648.7 SP, LAC, MAC 

Held for Repair 18,374.0 (1,359.1) 17,014.9 SP, LAC, MAC 

Excess, Obsolete, and 

Unserviceable 3,598.6 (3,598.6) 0.0 NRV 

Total OM&S $ 153,621.3 $ (4,957.7) $ 148,663.6 

Legend for Valuation Methods:

Adjusted LAC = Latest Acquisition Cost, adjusted for holding gains and losses 

SP = Standard Price 

NRV = Net Realizable Value 

MAC = Moving Average Cost 

Restrictions 

Some munitions included in Operating Materiel and Supplies (OM&S) are restricted due to 

condition. Restricted munitions are considered obsolete or unserviceable when they cannot 

meet performance requirements. However, obsolete and unserviceable OM&S may be used in 

emergency combat situations in which no other suitable munitions are immediately available. 

General Composition of OM&S 

OM&S includes spare and repair parts, ammunition, tactical missiles, aircraft configuration pods, 

and centrally-managed aircraft engines held for consumption. The Department assigns OM&S 

items into a category based upon the type and condition of the asset. 

 Stockpile Materiel, Net Dollars in Millions 

2009 

As of September 30

Stockpile, 

Materiel Amount 

Allowance 

for Gains 

(Losses) 

Stockpile 

Materiel, 

Net 

Valuation 

Method 

 Stockpile Material Categories

 Held for Sale $ 694.3 $ 0.0 $ 694.3 AC, LCM 

Held in Reserve for Future 

Sale 29.3 0.0 29.3 AC, LCM 

Total Stockpile Material $ 723.6 $ 0.0 $ 723.6 

Legend for Valuation Methods:

AC = Actual Cost LCM = Lower of Cost or Market 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

43 

 Stockpile Materiel, Net Dollars in Millions 

Restated 2008 

As of September 30

Stockpile, 

Materiel 

Amount 

Allowance 

for Gains 

(Losses) 

Stockpile 

Materiel, 

Net 

Valuation 

Method 

 Stockpile Material Categories

 Held for Sale $ 734.6 $ 0.0 $ 734.6 AC, LCM 

Held in Reserve for Future 

Sale 29.4 0.0 29.4 AC, LCM 

Total Stockpile Material $ 764.0 $ 0.0 $ 764.0 

Legend for Valuation Methods:

AC = Actual Cost LCM = Lower of Cost or Market 

Restrictions 

Materiel held by the National Defense Stockpile (NDS) is restricted unless released by 

congressional action and made available for sale on the open market. Stockpile materiel may 

not be disposed except for: (1) necessary upgrading, refining, or processing; (2) necessary 

rotation to prevent deterioration; (3) determination as excess with potential financial loss if 

retained; or (4) authorization by law. 

Before selling any materiel, Congress must enact specific enabling legislation (e.g., the National 

Defense Authorization Act). When authorized to offer materiel for sale, NDS removes the 

materiel from Materiel Held in Reserve and reclassifies these items as Materiel Held for Sale. 

The estimated market price of the stockpile materiel held for sale as of 4th Quarter, FY 2009, is 

$1.3 billion 

General Composition of Stockpile Materiel 

The Department holds strategic and critical stockpile materiel due to statutory requirements for 

use in national defense, conservation, or national emergencies. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

44 

Note 10. General PP&E, Net 

General PP&E, Net 2009 Dollars in Millions 

As of 

September 30, 2009

Depreciation/ 

Amortization 

Method 

Service 

Life 

Acquisition 

Value 

(Accumulated 

Depreciation/ 

Amortization) 

Net Book 

Value 

Major Asset Classes 

Land N/A N/A $ 10,501.3 N/A $ 10,501.3

Buildings, Structures, 

and Facilities S/L 20 or 40 191,643.9 (107,987.4) 83,656.5

Leasehold 

Improvements S/L Lease term 703.1 (548.0) 155.1

Software S/L 2-5 or 10 9,022.9 (5,610.1) 3,412.8

General Equipment S/L 5 or 10 80,690.7 (56,528.7) 24,162.0

Military Equipment S/L Various 796,842.6 (390,333.2) 406,509.4

Assets Under Capital 

Lease1 S/L Lease 

 term 956.3 (601.2) 355.1

Construction-inProgress N/A N/A 30,809.5 N/A 30,809.5

Other 53.9 (1.3) 52.6

Total 

General PP&E $ 1,121,224.2 $ (561,609.9) $ 559,614.3

1 Note 15 for additional information on Capital Leases 

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

General PP&E, Net Restated 2008 Dollars in Millions 

As of 

September 30, 2008

Depreciation/ 

Amortization 

Method 

Service 

Life 

Acquisition 

Value 

(Accumulated 

Depreciation/ 

Amortization) 

Net Book 

Value 

Major Asset Classes 

Land N/A N/A $ 10,522.3 N/A $ 10,522.3

Buildings, Structures, 

and Facilities S/L 20 or 40 180,196.7 (105,262.3) 74,934.4

Leasehold 

Improvements S/L Lease term 587.1 (391.5) 195.6

Software S/L 2-5 or 10 8,894.9 (5,529.0) 3,365.9

General Equipment S/L 5 or 10 75,324.1 (52,811.2) 22,512.9

Military Equipment S/L Various 751,010.9 (379,727.4) 371,283.5

Assets Under Capital 

Lease1 S/L Lease 

 term 953.5 (536.0) 417.5

Construction-inProgress N/A N/A 22,665.0 N/A 23,665.0

Other 57.7 (1.2) 56.5

Total 

General PP&E $ 1,051,212.2 $ (544,258.6) $ 506,953.6

1 Note 15 for additional information on Capital Leases 

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

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

45 

The Department reduced the September 30, 2008, PP&E by $8.0 billion to correct errors 

discovered as a result of data cleansing. During the migration to another capital asset system, 

the Department restated $9.1 billion in military equipment overvalued in a legacy system. In 

addition, the Department recognized $1.1 billion in Construction-in-Progress expensed, instead 

of capitalized, through September 30, 2008. Also, the Department identified $23.9 million in 

upward adjustments when migrating from a manual to an automated interface between budget 

execution and financial statement reporting systems. Refer to Note 26, Restatements, for 

further information. 

Heritage Assets and Stewardship Land 

The SFFAS No. 29, Heritage Assets and Stewardship Land, requires note disclosures for these 

types of assets. The Department’s policy is to preserve its heritage assets, which are items of 

historical, cultural, educational, or artistic importance. 

Heritage assets within the Department consist of buildings and structures, archeological sites, 

and museum collections. The Department defines these as follows: 

• Buildings and Structures. Buildings and structures that are listed, or eligible for listing, on 

the National Register of Historic Places, including Multi-Use Heritage Assets. 

• Archeological Sites. Sites that have been identified, evaluated, and determined to be 

eligible for or are listed on the National Register of Historic Places in accordance with 

Section 110 National Historic Preservation Act. 

• Museum Collection Items. Items which are unique for one or more of the following reasons: 

historical or natural significance; cultural, educational, or artistic importance; or significant 

technical or architectural characteristics. 

The Department revised heritage assets reported as of September 30, 2008, to correct errors 

discovered as a result of data cleansing. 

The Department holds the following quantities of heritage assets at September 30, 2009. 

Categories Measure 

Quantity 

As of 

9/30/08 Additions Deletions As of 9/30/09 

Buildings and Structures Each 18,810 24,783 570 43,023 

Archeological Sites Each 11,095 1,090 89 12,096 

Museum Collection Items 

(Objects, not including fine art) Each 1,818,948 38,126 596,547 1,260,527 

Museum Collection Items 

(Objects, fine art) Each 41,730 798 2,729 39,799 

In FY 2009, the Department acquired 24,783 buildings and structures, 1,090 archeological sites, 

154 fine art objects, and 16,865 other museum collection items through donation. 

Stewardship Land is land and land rights owned by the Department, but not acquired for, or in 

connection with, items of GPP&E. All land provided to the Department from the public domain 

or at no cost, regardless of its use, is classified as Stewardship Land. 

The Department’s stewardship land consists mainly of mission essential land acquired by 

donation or devise. Fiscal Year Ended September 30, 2009, stewardship land data is not yet 

available due to limitations of the Department’s financial and nonfinancial management 

processes and systems that feed into the financial statements. The Department held the 

following acres of land as of September 30, 2008. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

46 

Facility 

Code Predominant Land Use 

Categories 

As of 

9/30/07 

(Acres in 

Thousands)

Additions Deletions As of 

9/30/08 

9110 Government Owned Land 8,067 9 97 7,979 

9111 State Owned Land 142 0 140 2 

9120 Withdrawn Public Land 16,137 0 80 16,057 

9130 Licensed and Permitted Land 2,819 0 815 2,004 

9140 Public Land 706 0 0 706 

9210 Land Easement 496 0 59 437 

9220 In-leased Land 519 0 39 780 

9230 Foreign Land 613 0 25 588 

Grand Total 28,553 

 Total – All Other Lands 11,788 

 Total – Stewardship Lands 16,765 

The mission of the Department is to provide the military forces necessary to deter war and 

protect the security of the United States. In that mission, the Department, with minor 

exceptions, uses most of the buildings and stewardship land in its daily activities and includes 

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

Other Disclosures 

The Department has use of overseas land, buildings, and other facilities obtained through 

international treaties and agreements negotiated by the Department of State. Treaty covenants 

restrict the Department’s use and disposal of real property (land and buildings) located outside 

the United States. 

The Department does not have the acquisition value for all General PP&E and uses several 

cost methodologies to provide General PP&E values for financial statement reporting purposes. 

Other consists of assets awaiting disposal. 

 

Assets Under Capital Lease Dollars in Millions 

As of September 30 2009 2008 

Entity as Lessee, Assets Under Capital Lease 

Land and Buildings $ 759.8 $ 654.9 

Equipment 196.5 298.6 

Accumulated Amortization ( 601.2) (536.0) 

Total Capital Leases $ 355.1 $ 417.5 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

47 

Note 11. Liabilities Not Covered by Budgetary Resources 

Liabilities Not Covered by Budgetary Resources Dollars in Millions 

As of September 30 2009 Restated 

2008 

Intragovernmental Liabilities 

 Accounts Payable $ 4.3 $ 0.7 

 Debt 8.1 12.1 

 Other 1,873.5 10,088.4 

Total Intragovernmental Liabilities $ 1,885.9 $ 10,101.2 

Nonfederal Liabilities 

 Accounts Payable $ 628.2 $ 670.4 

 Military Retirement and Other Federal Employment Benefits 1,587,744.7 1,599,400.6 

 Environmental Liabilities 62,565.3 66,870.0 

 Other Liabilities 14,829.0 17,253.7 

Total Nonfederal Liabilities $ 1,665,767.2 $ 1,684,194.7 

Total Liabilities Not Covered by Budgetary Resources $ 1,667,653.1 $ 1,694,295.9 

Total Liabilities Covered by Budgetary Resources $ 494,209.0 $ 441,567.3 

Total Liabilities $ 2,161,862.1 $ 2,135,863.2 

Liabilities Not Covered by Budgetary Resources includes liabilities for which congressional 

action is needed before budgetary resources can be provided. 

Intragovernmental Accounts Payable and Nonfederal Accounts Payable primarily represent 

liabilities in cancelled appropriations that, if paid, will be disbursed using funds current in the 

year of disbursement. 

Debt consists primarily of borrowing from the U.S. Treasury for capital improvements to the 

Washington Aqueduct Project. Arlington County and Falls Church, Virginia, will complete 

reimbursement to the Department by 2023. 

Intragovernmental Liabilities Other primarily consists of $1.4 billion in unfunded Federal 

Employees Compensation Act liabilities, $313.6 million in unfunded unemployment liabilities, 

and $172.0 million in unfunded Judgment Fund liabilities not due during FY 2009. 

Military Retirement and Other Federal Employment Benefits consists of various employee 

actuarial liabilities not due and payable during the current fiscal year. These liabilities primarily 

consist of $901.7 billion in pension liabilities and $677.6 billion in health benefit liabilities. Refer 

to Note 17, Military Retirement and Other Federal Employment Benefits, for additional details 

and disclosures. 

Environmental Liabilities represents the Department’s liability for existing and anticipated 

environmental clean up and disposal. 

Nonfederal Liabilities, Other primarily consists of $9.7 billion in unfunded annual leave, 

$2.1 billion in expected expenditures for disposal of conventional munitions, and $2.0 billion in 

contingent liabilities. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

48 

Note 12. Accounts Payable 

Dollars in Millions

2009 

 Accounts Payable 

 

As of September 30 Accounts Payable 

Interest, Penalties, 

and Administrative 

Fees 

Total 

Intragovernmental Payables $ 2,207.8 N/A $ 2,207.8 

Nonfederal Payables 

(To the Public) 35,513.5 6.3 35,519.8 

Total Accounts Payable $ 37,721.3 $ 6.3 $ 37,727.6 

Dollars in Millions

Restated 2008 

Accounts Payable 

 

As of September 30 Accounts Payable 

Interest, Penalties, 

and Administrative 

Fees 

Total 

Intragovernmental Payables $ 1,687.4 N/A $ 1,687.4 

Nonfederal Payables 

(To the Public) 32,621.6 1.2 32,622.8 

Total Accounts Payable $ 34,309.0 $ 1.2 $ 34,310.2 

The Department recognized a $1.1 billion prior period adjustment to correct understated 

Accounts Payable (Nonfederal) and related expenses for FY 2008. The Department also 

corrected the methodology for reporting accruals for undistributed disbursements to prevent the 

understatement beginning in FY 2009. Additionally, while migrating from a manual to an 

automated interface between budget execution and financial statement reporting systems, the 

Department identified a FY 2008 prior period adjustment to liabilities, resulting in $538.3 million 

decrease to nonfederal payables. Refer to Note 26, Restatements, for additional details. 

Accounts Payable includes amounts owed to federal and nonfederal entities for goods and 

services received by the Department. The Department’s systems do not track intragovernmental 

transactions by customer at the transaction level. Buyer-side accounts payable are adjusted to 

agree with internal seller-side accounts receivable. Accounts Payable was adjusted by 

reclassifying amounts between federal and nonfederal entities. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

49 

Note 13. Debt 

Debt Dollars in Millions 

2009 

As of September 30 Beginning Balance Net 

Borrowing Ending Balance 

Agency Debt 

(Intragovernmental) 

Debt to the Treasury $ 245.7 $ 146.0 $ 391.7

Debt to the Federal 

Financing Bank 16.9 (16.9) 0.0 

Total Debt $ 262.6 $ 129.1 $ 391.7

Debt Dollars in Millions 

2008 

As of September 30 Beginning Balance Net 

Borrowing Ending Balance 

Agency Debt 

(Intragovernmental) 

Debt to the Treasury $ 236.3 $ 9.4 $ 245.7 

Debt to the Federal 

Financing Bank 70.7 (53.8) 16.9 

Total Debt $ 307.0 $ (44.4) $ 262.6

The Department’s debt consists of interest and principal payments due to the U.S. Treasury and 

the Federal Financing Bank. The Department borrows funds for the Washington Aqueduct 

Project, the Military Housing Privatization Initiative, and the Armament Retooling and 

Manufacturing Support Program. 

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

ship owners, or housing builders) default. For loan guarantees, the Department must pay the 

amount of outstanding principal guaranteed. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

50 

Note 14. Environmental Liabilities and Disposal Liabilities 

 Environmental Liabilities and Disposal Liabilities Dollars in Millions 

As of September 30 2009 2008 

Environmental Liabilities–Nonfederal

Accrued Environmental Restoration Liabilities 

Active Installations—Installation Restoration Program 

(IRP) and Building Demolition and Debris Removal 

(BD/DR) $ 7,957.4 $ 8,873.5

Active Installations—Military Munitions 

Response Program (MMRP) 5,223.5 5,035.1

Formerly Used Defense Sites-IRP & BD/DR 3,452.9 3,233.2

Formerly Used Defense Sites--MMRP 13,545.9 14,859.0

Other Accrued Environmental Liabilities—Non-BRAC 

 Environmental Corrective Action 772.8 812.8

 Environmental Closure Requirements 2,193.7 1,868.1

Environmental Response at Operational Ranges 164.0 204.7

 Asbestos 1,183.3 428.6

 Non-Military Equipment 114.4 89.2

 Other 1,222.8 1,118.2

Base Realignment and Closure Installations (BRAC) 

Installation Restoration Program 3,684.7 3,772.6

Military Munitions Response Program 1,063.6 1,075.0

Environmental Corrective Action / Closure Requirements 344.0 372.8

Environmental Disposal for Military Equipment / 

Weapons Programs 

Nuclear Powered Military Equipment / 

Spent Nuclear Fuel 12,672.4 12,255.7

Non-Nuclear Powered Military Equipment 36.4 39.1

Other National Defense Weapons Systems 194.4 197.4

Chemical Weapons Disposal Program 

Chemical Agents and Munitions Destruction (CAMD) 6,956.0 10,636.7

CAMD Assembled Chemical Weapons Assessment 

(ACWA) 5,447.8 5,634.2

Total Environmental Liabilities $ 66,230.0 $ 70,505.9

 

Other Accrued Environmental Liabilities, Non-BRAC, Other primarily consists of remediation 

related to Formerly Utilized Sites Remedial Action Program (FUSRAP). The Department is 

responsible for FUSRAP, which remediates radiological contamination from the Department of 

Energy’s U.S. Atomic Energy and Weapons Program. 

The unrecognized portion of the estimated total cleanup costs associated with General PP&E is 

$2.1 billion for FY 2009. Not all Components of the Department are able to compile the 

necessary information for this disclosure, thus the amount reported may not accurately reflect 

the Department’s total unrecognized costs associated with General PP&E. The Department is 

implementing procedures to address these deficiencies. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

51 

Other Disclosures 

Types of Environmental Liabilities and Disposal Liabilities Identified 

The Department has cleanup requirements for Defense Environmental Restoration Program 

(DERP) sites at active installations, BRAC installations, Formerly Used Defense Sites, sites at 

active installations that are not covered by DERP, weapons systems programs, and chemical 

weapons disposal programs. The weapons systems programs consist of chemical weapons 

disposal, nuclear-powered aircraft carriers, nuclear-powered submarines, and other nuclear 

ships. All cleanup is done in coordination with regulatory agencies, other responsible parties, 

and current property owners. 

Applicable Laws and Regulations for Cleanup Requirements 

The Department is required to clean up contamination resulting from past waste disposal 

practices, leaks, spills, and other past activity that created a public health or environmental risk. 

The Department accomplishes this effort in coordination with regulatory agencies and, if 

applicable, other responsible parties and current property owners. The Department is also 

required to recognize closure and post-closure costs for its General PP&E and environmental 

corrective action costs for current operations. Each of the Department’s major reporting entities 

is responsible for tracking and reporting all required environmental information related to 

environmental restoration costs, other accrued environmental costs, disposal costs of weapons 

systems, and environmental costs related to BRAC actions that have taken place. 

The Department follows the Comprehensive Environmental Response, Compensation, and 

Liability Act (CERCLA), Superfund Amendment and Reauthorization Act, Resource 

Conservation and Recovery Act (RCRA) or other applicable federal or state laws to clean up 

contamination. The CERCLA and RCRA require the Department to clean up contamination in 

coordination with regulatory agencies, current owners of property damaged by the Department, 

and third parties that have a partial responsibility for the environmental restoration. Failure to 

comply with agreements and legal mandates puts the Department at risk of incurring fines and 

penalties. 

The cleanup requirements for nuclear-powered aircraft carriers, submarines, and other nuclear 

ships are based on laws that affect the Department’s conduct of environmental policy and 

regulations. The Atomic Energy Act of 1954, as amended, assures the proper management of 

source, special nuclear, and byproduct materiel. As in all cases with nuclear power, the 

Department coordinates actions with the Department of Energy. The Nuclear Waste Policy Act 

of 1982 requires all owners and generators of high-level nuclear waste and spent nuclear fuel to 

pay their respective shares of the full cost of the program. Finally, the Low-Level Radioactive 

Waste Policy Amendments Act of 1986 provides for the safe and efficient management of lowlevel radioactive waste. 

The Chemical Weapons Disposal Program is based on FY 1986 National Defense Authorization 

Act (PL 99-145, as amended) that directed the Department to destroy the unitary chemical 

stockpile in accordance with the requirements of the Chemical Weapons Convention Treaty. 

The Army, as Executive Agent within the Department, provides policy, direction, and oversight 

for both the Chemical Stockpile Program and the Nonstockpile Chemical Materiel Project. As 

such, the Army is responsible for the safe and economical disposal of the U.S. stockpile of lethal 

and incapacitating chemical warfare agents and munitions. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

52 

Methods for Assigning Total Cleanup Costs to Current Operating Periods 

The Department uses engineering estimates and independently validated models to estimate 

environmental costs. The models include the Remedial Action Cost Engineering Requirements 

(RACER) application and the Normalization of Data (NORM) System. The Department 

validates the models in accordance with DoD Instruction 5000.61 and uses the models to 

estimate the liabilities based on data received during a preliminary assessment and initial site 

investigation. The Department primarily uses engineering estimates after obtaining extensive 

data during the remedial investigation/feasibility phase of the environmental project. 

Once the environmental cost estimates are complete, the Department complies with accounting 

standards to assign costs to current operating periods. The Department has already expensed 

the costs for cleanup associated with General PP&E placed into service before October 1, 1997, 

unless the costs are intended to be recovered through user charges. If the costs are to be 

recovered through user charges, the Department expenses cleanup costs associated with that 

portion of the asset life that has passed since the General PP&E was placed into service. The 

Department systematically recognizes the remaining cost over the remaining life of the asset. 

For General PP&E placed into service after September 30, 1997, the Department expenses 

associated environmental costs systematically over the life of the asset using two methods: 

physical capacity for operating landfills and life expectancy in years for all other assets. The 

Department expenses the full cost to clean up contamination for Stewardship PP&E at the time 

the asset is placed into service. 

Nature of Estimates and the Disclosure of Information Regarding Possible Changes Due 

to Inflation, Deflation, Technology, or Applicable Laws and Regulations 

The Department had changes in estimates resulting from overlooked or previously unknown 

contaminants, reestimation based on different assumptions, and other changes in project scope. 

Environmental liabilities may change in the future due to changes in laws and regulation, 

changes in agreements with regulatory agencies, and advances in technology. 

Uncertainty Regarding the Accounting Estimates Used to Calculate the Reported 

Environmental Liabilities 

The environmental liabilities for the Department are based on accounting estimates, which 

require certain judgments and assumptions that are reasonable based upon information 

available at the time the estimates are calculated. The actual results may materially vary from 

the accounting estimates if agreements with regulatory agencies require remediation to a 

different degree than anticipated when calculating the estimates. Liabilities can be further 

affected if investigation of the environmental sites reveals contamination levels that differ from 

the estimate parameters. 

The Department has a liability to take environmental restoration and corrective action for buried 

chemical munitions and agents; however, it is unable to estimate at this time because the extent 

of the buried chemical munitions and agents is unknown. The Department is also unable to 

provide a complete estimate for FUSRAP. The Department has ongoing studies and will update 

its estimate as additional liabilities are identified. In addition, not all Components of the 

Department recognize environmental liabilities associated with General PP&E due to process 

and system limitations. 

The Department has the potential to incur costs for restoration initiatives in conjunction with 

returning overseas Defense facilities to host nations. The Department is unable to provide a 

reasonable estimate at this time because the extent of required restoration is unknown. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

53 

Note 15. Other Liabilities 

 Other Liabilities Dollars in Millions

2009 

As of September 30 Current Liability Noncurrent 

Liability Total 

Intragovernmental 

Advances from Others $ 1,619.9 $ 0.0 $ 1,619.9

Deposit Funds and Suspense Account 

Liabilities 471.4 0.0 471.4

Disbursing Officer Cash 2,419.6 0.0 2,419.6

Judgment Fund Liabilities 171.9 0.0 171.9

FECA Reimbursement to the Department of 

Labor 589.9 804.0 1,393.9

Custodial Liabilities 3,676.0 908.8 4,584.8

Employer Contribution and 

Payroll Taxes Payable 454.8 0.0 454.8

Other Liabilities 369.4 0.0 369.4

 Total Intragovernmental Other Liabilities $ 9,772.9 $ 1,712.8 $ 11,485.7

Nonfederal 

Accrued Funded Payroll and Benefits $ 9,799.7 $ 0.0 $ 9,799.7

Advances from Others 4,472.2 0.0 4,472.2

Deferred Credits (0.3) 0.0 (0.3)

Deposit Funds and Suspense Accounts 216.4 0.0 216.4

Nonenvironmental Disposal Liabilities 

 Military Equipment (Nonnuclear) 3.5 262.4 265.9

 Excess/Obsolete Structures 105.6 599.0 704.6

 Conventional Munitions Disposal 0.0 2,072.3 2,072.3

Accrued Unfunded Annual Leave 9,807.6 0.0 9,807.6

Capital Lease Liability 11.4 100.0 111.4

Contract Holdbacks 659.9 0.4 660.3

Employer Contribution and Payroll Taxes 

Payable 741.7 0.0 741.7

Contingent Liabilities 1,237.3 2,913.2 4,150.5

Other Liabilities 836.5 1.1 837.6

 Total Nonfederal Other Liabilities $ 27,891.5 $ 5,948.4 $ 33,839.9

Total Other Liabilities $ 37,664.4 $ 7,661.2 $ 45,325.6
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

54 

 Other Liabilities Dollars in Millions

Restated 2008 

As of September 30 Current Liability Noncurrent 

Liability Total 

Intragovernmental 

Advances from Others $ 736.9 $ 0.0 $ 736.9

Deposit Funds and Suspense Account 

Liabilities 829.2 0.0 829.2

Disbursing Officer Cash 2,856.0 0.0 2,856.0

Judgment Fund Liabilities 167.7 0.1 167.8

FECA Reimbursement to the Department of 

Labor 548.0 847.1 1,395.1

Custodial Liabilities 3,851.0 1,619.4 5,470.4

Employer Contribution and 

Payroll Taxes Payable 377.7 0.0 377.7

Other Liabilities 213.9 0.0 213.9

 Total Intragovernmental Other Liabilities $ 9,580.4 $ 2,466.6 $ 12,047.0

Nonfederal 

Accrued Funded Payroll and Benefits $ 8,143.1 $ 0.0 $ 8,143.1

Advances from Others 3,144.4 0.0 3,144.4

Deposit Funds and Suspense Accounts 325.2 0.0 325.2

Nonenvironmental Disposal Liabilities 

 Military Equipment (Nonnuclear) 7.7 244.5 252.2

 Excess/Obsolete Structures 116.2 616.6 732.8

 Conventional Munitions Disposal 0.0 2,043.0 2,043.0

Accrued Unfunded Annual Leave 9,025.9 0.0 9,025.9

Capital Lease Liability 3.8 142.5 146.3

Contract Holdbacks 558.9 11.3 570.2

Employer Contribution and Payroll Taxes 

Payable 1,844.1 0.0 1,844.1

Contingent Liabilities 1,216.5 5,968.0 7,184.5

Other Liabilities 695.4 0.5 695.9

 Total Nonfederal Other Liabilities $ 25,081.2 $ 9,026.4 $ 34,107.6

Total Other Liabilities $ 34,661.6 $ 11,493.0 $ 46,154.6

As a result of ongoing audit readiness efforts, the Department identified adjustments to FY 2008 

Custodial Liabilities, resulting in a $337.2 million increase in Total Intragovernmental Other 

Liabilities. Refer to Note 26, Restatements, for further information. 

Intragovernmental Other Liabilities primarily consists of unemployment compensation liabilities. 

Contingent Liabilities includes $1.5 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 vests with the Federal Government when 

a specific type of contract financing payment is made. This action protects taxpayer funds in the 

event of contract nonperformance. These rights should not be misconstrued as rights of 

ownership. The Department is under no obligation to pay contractors for amounts greater than 

the amounts authorized in contracts until delivery and government acceptance. Due to the 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

55 

probability the contractors will complete their efforts and deliver satisfactory products, and 

because the amount of potential future payments are estimable, the Department has recognized 

a contingent liability for estimated future payments which are conditional pending delivery and 

government acceptance. 

Total contingent liabilities for progress payments based on cost represent the difference 

between the estimated costs incurred to date by contractors and amounts authorized to be paid 

under progress payments based on cost provisions within the FAR. Estimated contractorincurred costs are calculated by dividing the cumulative unliquidated progress payments based 

on cost by the contract-authorized progress payment rate. The balance of unliquidated 

progress payments based on cost is deducted from the estimated total contractor-incurred costs 

to determine the contingency amount. 

Nonfederal Other Liabilities primarily consists of accrued estimates for repairs and cargo 

expenses. 

Capital Lease Liability Dollars in Millions 

2009 — Asset Category 

As of September 30 

Land and 

Buildings Equipment Other Total 

Future Payments Due 

2010 $ 43.9 0.0 0.0 43.9 

2011 41.3 0.0 0.0 41.3 

2012 15.5 0.0 0.0 15.5 

2013 11.1 0.0 0.0 11.1 

2014 8.8 0.0 0.0 8.8 

After 5 Years 8.7 0.0 0.0 8.7 

Total Future Lease 

Payments Due $ 129.3 $ 0.0 $ 0.0 $ 129.3 

Less: Imputed Interest 

Executory Costs 17.9 0.0 0.0 17.9 

Net Capital Lease Liability $ 111.4 $ 0.0 $ 0.0 $ 111.4 

Capital Lease Liabilities Covered by Budgetary Resources 98.4 

Capital Lease Liabilities Not Covered by Budgetary Resources 13.0 

Capital Lease Liability Dollars in Millions 

2008 — Asset Category 

As of September 30 

Land and 

Buildings Equipment Other Total 

Future Payments Due 

2009 $ 43.9 $ 1.5 0.0 45.4 

2010 43.9 0.0 0.0 43.9 

2011 41.3 0.0 0.0 41.3 

2012 15.5 0.0 0.0 15.5 

2013 11.1 0.0 0.0 11.1 

After 5 Years 17.3 0.0 0.0 17.3 

Total Future Lease Payments Due $ 173.0 $ 1.5 $ 0.0 $ 174.5 

Less: Imputed Interest Executory Costs 28.2 0.0 0.0 28.2 

Net Capital Lease Liability $ 144.8 $ 1.5 $ 0.0 $ 146.3 

Capital Lease Liabilities Covered by Budgetary Resources 123.9 

Capital Lease Liabilities Not Covered by Budgetary Resources 22.4 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

56 

Note 16. Commitments and Contingencies 

Legal Contingencies 

The Department is a party in various administrative proceedings and legal actions related to 

claims for environmental damage, equal opportunity matters, and contractual bid protests. The 

Department has accrued contingent liabilities for legal actions where the Office of General 

Counsel (OGC) considers an adverse decision probable and the amount of loss is measurable. 

In the event of an adverse judgment against the Government, some of the liabilities may be 

payable from the U.S. Treasury Judgment Fund. The Department records Judgment Fund 

liabilities in Note 12, Accounts Payable, and in Note 15, Other Liabilities. 

In FY 2009, the Department reported 49 legal actions with individual claims greater than the 

Department's FY 2009 materiality threshold of $118.9 million. The total of the 49 actions is 

approximately $2.4 trillion. Of this amount, the OGC determined that claims totaling 

approximately $7.7 billion are classified "reasonably possible," $39.5 billion are classified 

"remote," and $2.3 trillion are classified "unable to determine the probability of loss." The 

Department also had a number of potential claims that individually did not meet the 

Department's materiality threshold but did meet the individual Components' thresholds. These 

claims are disclosed in the Components' financial statements. 

Other Commitments and Contingencies 

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

for which the Department may incur a contractual commitment for payment, total $803.7 million. 

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 details. 

Note 17. Military Retirement and Other Federal Employment Benefits 

Military Retirement and Other Federal Employment Benefits Dollars in Millions 

2009 

As of September 30 

Liabilities 

Assumed 

Interest Rate 

(%) 

(Less: Assets 

Available to Pay 

Benefits) 

Unfunded 

Liabilities 

Pension and Health Actuarial 

Benefits 

Military Retirement Pensions $ 1,173,456.3 5.75 $ (271,798.1) $ 901,658.2 

Military Retirement Health 

Benefits 313,959.2 5.75 0.0 313,959.2

Military Medicare-Eligible 

Retiree Benefits 509,466.4 5.75 (145,850.2) 363,616.2

Total Pension and Health 

Actuarial Benefits $ 1,996,881.9 $ (417,648.3) $ 1,579,233.6
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

57 

Military Retirement and Other Federal Employment Benefits Dollars in Millions 

2009 

As of September 30 

Liabilities 

Assumed 

Interest Rate 

(%) 

(Less: Assets 

Available to Pay 

Benefits) 

Unfunded 

Liabilities 

Other Actuarial Benefits 

FECA $ 6,318.2 4.2 $ 0.0 $ 6,318.2

Voluntary Separation Incentive Programs 1,042.1 4.5 (450.4) 591.7

DoD Education Benefits Fund 1,797.2 4.5 (1,797.2) 0.0

Total Other Actuarial Benefits $ 9,157.5 $ (2,247.6) $ 6,909.9

Other Federal Employment Benefits $ 6,126.7 $ (4,525.3) $ 1,601.4

Total Military Retirement and Other 

Federal Employment Benefits $ 2,012,166.1 $ (424,421.2) $ 1,587,744.9

Actuarial Cost Method Used: Aggregate Entry-Age Method 

Assumptions: Effective Interest 

Market Value of Investments in Market-based and Marketable Securities: $441.2 billion 

Military Retirement and Other Federal Employment Benefits Dollars in Millions 

2008 

As of September 30 

Liabilities 

Assumed 

Interest Rate 

(%) 

(Less: Assets 

Available to Pay 

Benefits) 

Unfunded 

Liabilities 

Pension and Health Actuarial 

Benefits 

Military Retirement Pensions $ 1,150,748.8 5.75 $ (246,956.7) $ 903,792.1 

Military Retirement Health 

Benefits 317,967.9 5.75 0.0 317,967.9 

Military Medicare-Eligible 

Retiree Benefits 500,195.7 5.75 (131,941.1) 368,254.6 

Total Pension and Health 

Actuarial Benefits $ 1,968,912.4 $ (378,897.8) $ 1,590,014.6

Military Retirement and Other Federal Employment Benefits Dollars in Millions 

2008 

As of September 30 

Liabilities 

Assumed 

Interest Rate 

(%) 

(Less: Assets 

Available to Pay 

Benefits) 

Unfunded 

Liabilities 

Other Actuarial Benefits 

FECA $ 6,862.2 4.4 $ 0.0 $ 6,862.2 

Voluntary Separation Incentive Programs 1,146.0 4.5 (501.5) 644.5 

DoD Education Benefits Fund 1,959.2 4.5 (1,817.3) 141.9 

Total Other Actuarial Benefits $ 9,967.4 $ (2,318.8 ) $ 7,648.6

Other Federal Employment Benefits $ 5,725.6 $ (3,988.2) $ 1,737.4

Total Military Retirement and Other 

Federal Employment Benefits $ 1,984,605.4 $ (385,204.8) $ 1,599,400.6

Actuarial Cost Method Used: Aggregate Entry-Age Method 

Assumptions: Effective Interest 

Market Value of Investments in Market-based and Marketable Securities: $374.5 billion 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

58 

Military Retirement Pensions 

The Military Retirement Fund (MRF) is a defined benefit plan authorized by PL 98-94 to provide 

funds used to pay annuities and pensions to retired military personnel and their survivors. The 

DoD Retirement 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 2009 roll-forward amount: 

Military Retirement Pensions Inflation Salary Interest 

Fiscal Year 2009 5.8% (actual) 3.9% (actual) 5.75% 

Fiscal Year 2010 0.0% (estimated) 3.4% (estimated) 5.75% 

Long Term 3.0% 3.75% 5.75% 

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

Effective FY 2008, the initial unfunded liability is amortized over a 42-year period to ensure the 

annual payments cover the interest on the unfunded actuarial liability, with the last payment 

expected to be made October 1, 2025. All subsequent gains and losses experienced are 

amortized over a 30-year period. 

Change in MRF Actuarial Liability Dollars in Billions 

Actuarial Liability as of September 30, 2008 $ 1,150.7 

Expected Normal Cost for FY 2009 22.5 

Plan Amendment Liability .3 

Assumption Change Liability 7.8 

Expected Benefit Payments for FY 2009 (50.5) 

Interest Cost for FY 2009 65.6 

Actuarial (gains)/losses due to changes in trend assumptions (23.0) 

Actuarial Liability as of September 30, 2009 1,173.4 

Change in Actuarial Liability $ 22.7 

Actuarial Cost Method Used: Aggregate Entry-Age Normal Method 

Market Value of Investments in Market-Based and Marketable Securities: $286.2 

Assumed Interest Rate: 5.75% 

Military Retirement Health Benefits 

The Military Retirement Health Benefits (MRHB) are post-retirement benefits the Department 

provides to non-Medicare-eligible military retirees and other eligible beneficiaries through private 

sector health care providers and the Department’s medical treatment facilities. The actuaries 

calculate the actuarial liabilities annually using assumptions and actual experience. For the FY 

2009 actuarial liability calculation, the actuaries used the following assumptions: 

 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

59 

MRHB Medical Trend FY 2008 – FY 2009 Ultimate Rate 

FY 2033 

Medicare Inpatient (Direct Care) 5.13% 6.25% 

Medicare Outpatient (Direct Care) 4.13% 6.25% 

Medicare Prescriptions (Direct Care) 3.00% 6.25% 

Non-Medicare Inpatient (Direct Care) 4.00% 6.25% 

Non-Medicare Outpatient (Direct Care) 3.00% 6.25% 

Non-Medicare Prescriptions (Direct Care) 3.00% 6.25% 

Non-Medicare Inpatient (Purchased Care) 7.32% 6.25% 

Non-Medicare Outpatient (Purchased Care) 9.95% 6.25% 

Non-Medicare Prescriptions (Purchased Care) 7.96% 6.25% 

U.S. Family Health Plan (USFHP) (Purchased Care) 9.00% 6.25% 

Change in MHRB Actuarial Liability Dollars in Billions 

Actuarial Liability as of September 30, 2008 (Department preMedicare + all 

Uniformed Services Medicare cost-benefit effect) $ 318.0 

Expected Normal Cost for FY 2009 10.9 

Expected Benefit Payments for FY 2009 (10.6) 

Interest Cost for FY 2009 18.6 

Actuarial (gains)/losses due to other factors (25.1) 

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

Actuarial Liability as of September 30, 2009 (Department preMedicare + all 

Uniformed Services Medicare cost-benefit effect) $ 314.0 

Change in Actuarial Liability $ (4.0) 

Actuarial Cost Method Used: Aggregate Entry-Age Normal Method 

Assumed Interest Rate: 5.75% 

Medicare-Eligible Retiree Health Care Fund Benefits 

In accordance with PL 106-398, Medicare-Eligible Retiree Health Care Fund (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 MERHCF 

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 2009 roll-forward amount: 

MERHCF Benefits — Medical Trend FY 2008 – FY 2009 Ultimate Rate 

FY 2033 

Medicare Inpatient (Direct Care) 5.13% 6.25% 

Medicare Inpatient (Purchased Care) 6.13% 6.25% 

Medicare Outpatient (Direct Care) 4.13% 6.25% 

Medicare Outpatient (Purchased Care) 5.13% 6.25% 

Medicare Prescriptions (Direct Care) 3.00% 6.25% 

Medicare Prescriptions (Purchased Care) 8.44% 6.25% 

USFHP (Purchased Care) 9.00% 6.25% 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

60 

Change in MERHCF Actuarial Liability Dollars in Billions 

Actuarial Liability as of September 30, 2008 

(all Uniformed Services Medicare) $ 500.2 

Expected Normal Cost for FY 2009 10.4 

Expected Benefit Payments for FY 2009 (8.4) 

Interest Cost for FY 2009 29.1 

Actuarial (gains)/losses due to other factors (18.6) 

Actuarial (gains)/losses due to changes in trend assumptions ( 3.2) 

Actuarial Liability as of September 30, 2009 

(all Uniformed Services Medicare) $ 509.5 

Change in Actuarial Liability $ 9.3 

Actuarial Cost Method Used: Aggregate Entry-Age Normal Method 

Market Value of Investments in Market-Based and Marketable Securities: $152.4 Million 

Assumed Interest Rate: 5.75% 

The MERHCF liability includes Medicare liabilities for all Uniformed Services. The $509.5 billion 

liability includes $498.1 billion for the Department, $10.2 billion for the Coast Guard, $1.1 billion 

for the Public Health Service, and $72.3 million for National Oceanic and Atmospheric 

Administration (NOAA). The FY 2009 contributions from each of the Uniformed Services were 

$10.4 billion from the Department, $257.3 million from the Coast Guard, $34.8 million from the 

Public Health Service, and $1.7 million from NOAA. 

Federal Employees Compensation Act (FECA) 

The Department of Labor (DOL) annually determines the liability for future workers’ 

compensation benefits, which includes the expected liability for death, disability, medical, and 

miscellaneous costs for approved compensation cases, plus a component for incurred-but-notreported claims. The liability is determined using historical benefit payment patterns related to a 

specific incurred period to predict the final payment related to that period. Consistent with past 

practice, these projected annual benefit payments have been discounted to present value using 

the Office of Management and Budget’s economic assumptions for 10-year U.S. Treasury notes 

and bonds. A 4.22% interest rate was assumed for year one and 4.71% was assumed for year 

two and thereafter. 

The DOL calculates this liability using wage inflation factors (cost of living adjustments or 

COLAs) and medical inflation factors (consumer price index medical or CPIM). The actual rates 

for these factors for charge back year (CBY) 2009 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: 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

61 

Federal Employees — Compensation Act (FECA) 

CBY COLA CPIM 

2010 .47% 3.42% 

2011 1.40% 3.29% 

2012 1.50% 3.48% 

2013 1.80% 3.71% 

 2014+ 2.00% 3.71% 

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 2009 to the average pattern observed 

during the prior three charge back years, and (4) a comparison of the estimated liability per case 

in the 2009 projection to the average pattern for the projections for the most recent three years. 

Voluntary Separation Incentive Program 

PL 102-190 established the Voluntary Separation Incentive (VSI) Program to reduce the number 

of military personnel on active duty. The VSI Board of Actuaries approved the assumed annual 

interest rate of 4.5% used to calculate the actuarial liability. Since the VSI Program is no longer 

offered, the actuarial liability 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: $481.6 million 

DoD Education Benefits Fund 

PL 98-525 established the Education Benefits Fund (EBF) program to recruit and retain military 

members and aid in the readjustment of military members to civilian life. The actuaries 

calculate the actuarial liability annually based on the assumed interest rate of 4.5% that was 

approved by the EBF 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. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

62 

Note 18. General Disclosures Related to the Statement of Net Cost 

General Disclosures Related to the Statement of Net Cost Dollars in Millions 

As of September 30 2009 

Restated 

2008 

Intragovernmental Costs $ 33,891.6 $ 26,771.0 

Public Costs 663,921.7 699,656.3 

Total Costs $ 697,813.3 $ 726,427.3 

Intragovernmental Earned Revenue (10,577.0) (29,652.6) 

Public Earned Revenue (35,590.9) (26,619.9) 

Total Earned Revenue $ (46,167.9) $ (56,272.5) 

Net Cost of Operations $ 651,645.4 $ 670,154.8 

The Department restated FY 2008 gross costs by $8.1 billion. As a result of ongoing audit 

readiness efforts, the Department identified $7.2 billion in contract financing payments classified 

as expenses rather than assets due to legacy system deficiencies. The Department also 

recognized a $1.1 billion prior period adjustment to correct understated Accounts Payable 

(Nonfederal) and related expenses for FY 2008. The Department corrected the methodology for 

reporting accruals for undistributed disbursements to prevent the understatement beginning in 

FY 2009. These reductions were offset by a $233 million increase in expenses related to 

inventory accounting. Refer to Note 26, Restatements, for further information. 

Abnormal Balance 

Contra Revenue for Services Provided (USSGL 5209) has an abnormal balance of $9.2 million. 

When the Department provides service to a public customer, an additional surcharge is added 

to the billing and posted to this account. The surcharge is reclassified to the Revenue from 

Services Provided account when collected. The Department is researching the issue. 

Other Disclosures 

The Statement of Net Cost (SNC) represents the net cost of programs and organizations of the 

Federal government supported by appropriations or other means. The intent of the SNC is to 

provide gross and net cost information related to the amount of output or outcome for a given 

program or organization administered by a responsible reporting entity. The Department’s 

current processes and systems do not capture and report accumulated costs for major 

programs based upon the performance measures as required by the Government Performance 

and Results Act. The Department is in the process of reviewing available data and developing a 

cost reporting methodology as required by the SFFAS No. 4, Managerial Cost Accounting 

Concepts and Standards for the Federal Government, as amended by SFFAS No. 30, Interentity Cost Implementation. 

Intragovernmental costs and revenue represent transactions made between two reporting 

entities within the Federal government. Public costs and revenues are exchange transactions 

made between the reporting entity and a nonfederal entity. 

The Department’s systems do not track intragovernmental transactions by customer at the 

transaction level. Buyer-side expenses are adjusted to agree with internal seller-side revenues. 

Expenses are generally adjusted by reclassifying amounts between federal and nonfederal 

expenses. Intradepartmental reciprocal balances are then eliminated. 

The SNC presents information based on budgetary obligation, disbursement, and collection 

transactions, as well as data from nonfinancial feeder systems. Amounts are adjusted for 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

63 

accruals such as payroll expenses, accounts payable, and environmental liabilities. The 

General Fund data is primarily derived from budgetary transactions (obligations, disbursements, 

and collections), data from nonfinancial feeder systems, and accruals made for major items. 

While Working Capital Funds primarily record transactions on an accrual basis, the systems do 

not always capture actual costs in a timely manner. 

The Department’s accounting systems generally do not capture information relative to heritage 

assets separately and distinctly from normal operations. 

Note 19. Disclosures Related to the Statement of Changes in Net Position 

Contra Revenue for Services Provided (USSGL 5209) has an abnormal balance of $9.2 million. 

Refer to Note 18, General Disclosures Related to the Statement of Net Cost, for additional 

information. 

The Department recognized prior period adjustments decreasing the beginning balances of 

Cumulative Results of Operations by $8.8 billion and $10.5 billion for FY 2009 and FY 2008, 

respectively. Unexpended Appropriations beginning balances increased $26.1 billion and $20.0 

billion for FY 2009 and FY 2008, respectively, due to the correction of errors from prior years. 

Refer to Note 26, Restatements, for additional information on all prior period adjustments. 

Other Financing Sources, Other consists primarily of adjustments to reconcile budgetary and 

proprietary trial balances. Due to financial system limitations, the Department adjusts for these 

unreconciled differences. 

Earmarked Cumulative Results of Operations ending balance on the Statement of Changes in 

Net Position (SCNP) does not agree with the Earmarked Cumulative Results reported on the 

Balance Sheet because the cumulative results on the Balance Sheet are presented net of 

eliminations. In the SCNP, offsetting balances for intradepartmental activity between 

Earmarked Funds and All Other Funds are reported on the same lines. The Eliminations 

column contains all appropriate elimination entries, which net to zero within each respective line, 

except for intraentity imputed financing costs. 

Appropriations Received on the SCNP do not match the Appropriations on the Statement of 

Budgetary Resources (SBR) due to trust fund appropriations and special fund receipts. The 

difference of $101.1 billion is primarily related to the MRF and MERHCF appropriations. In 

order to preserve visibility with the President’s Budget, these appropriations are effectively 

reported twice on the SBR; they are reported once by the Military Departments and Defense 

Agencies as appropriated and once by the individual trust funds as receipts. Refer to Note 20, 

Disclosures Related to the Statement of Budgetary Resources, for further details. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

64 

Note 20. Disclosures Related to the Statement of Budgetary Resources 

Disclosures Related to the Statement of Budgetary Resources Dollars in Millions 

As of September 30, 2009 2009 Restated 

2008 

Net Amount of Budgetary Resources Obligated for Undelivered Orders at 

the End of the Period. $ 451,881.1 $ 433,190.8 

Reconciliation Differences 

Appropriations Received on the Statement of Budgetary Resources (SBR) exceeds 

Appropriations Received on the Statement of Changes in Net Position by $101.1 billion. This 

difference represents trust and special fund receipts reported as exchange revenue on the SNC 

and included in appropriations on the SBR. In accordance with Office of Management and 

Budget guidance, $94.1 billion of General Fund appropriations received by the Department are 

also recognized on the SBR as appropriations received for trust and special funds. The 

difference is primarily due to duplicate reporting in the SBR of the Military Services’ 

contributions and U.S. Treasury’s payments to the MRF and the MERHCF. 

The SBR comparative column (FY 2008) includes $90.1 billion more in budget authority than 

reported in the 2008 actual column of the President’s FY 2010 Budget. The difference is 

primarily due to the duplicate reporting discussed above and advances the U.S. Army Corps of 

Engineers (USACE) received from the District of Columbia. USACE reports the advances 

(account 96X6094) in its SBR. However, this account is not included in the budget. 

The SBR FY 2008 column includes $808.8 million more in obligations than reported in the 2008 

actual column of the President’s FY 2010 Budget. The difference is primarily due to FY 2007 

obligations that were not included in the SBR until FY 2008. These obligations were reported 

correctly in the 2007 column of the President’s Budget. 

The SBR FY 2008 column includes $70.2 billion less in net outlays than reported in the 2008 

actual column of the President’s FY 2010 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 (DoD) received the following permanent indefinite appropriations: 

• Department of the Army General Gift Fund (10 USC 2601(b)(1)) 

• Department of the Navy General Gift Fund (10 USC 2601(b)(2)) 

• Department of the Air Force General Gift Fund (10 USC 2601 (b)(3)) 

• Department of Defense General Gift Fund (10 USC 2601) 

• Disposal of Department of Defense Real Property (40 USC 485(h)(2)(A)(B)) 

• 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) 

• Midshipmen’s Store (10 USC 6971B) 

• Burdensharing Contributions Account (10 USC 2350j) 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

65 

• Forest Program (10 USC 2665) 

• DoD Base Closure Account (10 USC 2687) 

• Medicare Eligible Retiree Health Care Fund (MERHCF) (10 USC 1111) 

• Military Retirement Fund (MRF) (10 USC 1461) 

• Education Benefits Fund (10 USC 2006) 

• Host Nation Support for U.S. Relocation Activities (10 USC 2350k) 

• National Defense Sealift Fund (10 USC 2218) 

• Environmental Restoration, Navy (10 USC 2702) 

• Hydraulic Mining Debris Reservoir (33 USC 683) 

• Maintenance and Operation of Dams and Other Improvements of Navigable Waters 

(16 USC 810(a)) 

• Payments to States (33 USC 701c-3) 

• Wildlife Conservation (16 USC 670-670(f)) 

• Ainsworth Bequest (31 USC 1321) 

• 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) 

The above permanent indefinite appropriations cover a wide variety of purposes to help the 

Department accomplish its missions. These purposes include: (1) military retirees health care 

benefits, retirement and survivor pay, and education benefits for veterans; (2) environmental, 

coastal, and wildlife habitat restoration, and water resources maintenance; (3) costs associated 

with the closure or realignment of military installations; (4) relocation of armed forces to a host 

nation; (5) separation payments for foreign nationals; (6) the construction, purchase, alteration, 

and conversion of sealift vessels; and (7) upkeep of libraries and museums. 

Apportionment Categories for Obligations incurred 

The Department reported the following amounts of direct obligations: (1) $560.9 billion in 

category A; (2) $287.8 billion in category B; and (3) $306.6 million in exempt from 

apportionment. The Department reported reimbursable obligations of $22.0 billion in category A 

and $161.3 billion in category B. Category A relates to appropriations for a specific period of 

time (e.g., Military Personnel appropriation), and category B relates to appropriations for a 

specific project (e.g., Military Construction appropriation). 

Legal Arrangements Affecting the Use of Unobligated Balances 

A portion of the Department’s unobligated balances represents trust fund receipts collected in 

the current fiscal year that exceed the amount needed to pay benefits or other valid obligations. 

These receipts are temporarily precluded from obligation by law due to a benefit formula or 

other limitation. The receipts, however, are assets of the funds and are available for obligation 

as needed in the future. The Department operates within the constraints of fiscal law and has 

no additional legal arrangements affecting the use of unobligated balances. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

66 

Other Disclosures 

The President’s budget for FY 2011 has not yet been published. The budget is expected to be 

published in February 2010, and available at: http://www.defenselink.mil/comptroller/defbudget. 

The SBR includes intraentity transactions because the statements are presented as combined. 

The Department utilizes borrowing authority for the Military Housing Privatization Initiative and 

the Armament Retooling and Manufacturing Support Initiative. Borrowing authority is used in 

accordance with OMB Circular No. A-129, Policies for Federal Credit Programs and Non-Tax 

Receivables. 

The Department received additional funding of $152.4 billion (net of rescissions) to cover 

obligations incurred above baseline operations, primarily in support of the Overseas 

Contingency Operations and disaster relief. In addition, the Department received $12.0 billion 

of funding from the American Recovery and Reinvestment Act of 2009. 

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, 2009 and 2008 2009 Restated 

2008 

Resources Used to Finance Activities 

Budgetary Resources Obligated: 

Obligations incurred $ 1,032,310.5 $ 1,001,667.5 

Less: Spending authority from offsetting collections and recoveries (-) (244,491.8) (232,293.7) 

Obligations net of offsetting collections and recoveries $ 787,818.7 $ 769,373.8 

Less: Offsetting receipts (-) (65,912.1) (70,247.6) 

Net Budgetary Resources Obligated $ 721,906.6 $ 699,126.2 

Other Resources: 

Donations and forfeitures of property $ 2.2 $ 1.5 

Transfers in/out without reimbursement (+/-) (42.8) (51.2) 

Imputed financing from costs absorbed by others 4,703.8 4,174.9 

Other (+/-) 1,253.7 6,974.1 

Net other resources used to finance activities $ 5,916.9 $ 11,099.3 

Total resources used to finance activities $ 727,823.5 $ 710,225.5 

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 (-) $ (44,519.1) $ (83,404.5) 

 Unfilled Customer Orders 931.8 6,444.9 

Resources that fund expenses recognized in prior 

Periods (-) (13,878.5) (29,958.6) 

Budgetary offsetting collections and receipts that do not affect Net Cost 

of Operations 1,928.6 2,562.6 

Resources that finance the acquisition of assets (-) $ (145,039.9) $ (139,518.3) 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

67 

Reconciliation of Net Cost of Operations to Budget Dollars in Millions 

As of September 30, 2009 and 2008 2009 Restated 

2008 

Other resources or adjustments to net obligated resources that do 

not affect Net Cost of Operations:

Less: Trust or Special Fund Receipts Related to exchange in the 

Entity’s Budget (-) $ (10.0) $ (10.0) 

Other (+/-) 24,615.8 14,112.7 

Total resources used to finance items not part of the Net Cost of 

Operations $ (175,971.3) $ (229,771.2) 

Total resources used to finance the Net Cost of Operations $ 551,852.2 $ 480,454.3 

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 $ 819.9 $ 646.0 

Increase in environmental and disposal liability 929.2 1,813.2 

Upward/Downward reestimates of credit subsidy 

expense (+/-) 0.4 (1.7) 

Increase in exchange revenue receivable from the public (-) 815.5 (24.7) 

Other (+/-) 32,691.5 139,220.3 

Total components of Net Cost of Operations that will Require or 

Generate Resources in future periods $ 35,256.5 $ 141,653.1 

Components not Requiring or Generating Resources: 

Depreciation and amortization $ 41,355.9 $ 37,690.3 

Revaluation of assets or liabilities (+/-) 5,969.1 8,387.5 

Other (+/-) 

Trust Fund Exchange Revenue (34,909.0) (46,429.9) 

Cost of Goods Sold 73,037.1 64,716.5 

Operating Material and Supplies Used 30,868.3 25,695.8 

Other (51,784.7) (42,012.9) 

Total Components of Net Cost of Operations that will not Require 

or Generate Resources $ 64,536.7 $ 48,047.4 

Total components of Net Cost of Operations that will not Require 

or Generate Resources in the current period $ 99,793.2 $ 189,700.5 

Net Cost of Operations $ 651,645.4 $ 670,154.8 

Due to the Department’s financial system limitations, budgetary data do not agree with 

proprietary expenses and capitalized assets. The difference between budgetary and proprietary 

data is a previously identified deficiency. The following adjustments (absolute value) were 

made to balance the Reconciliation of Net Cost of Operations to the Statement of Net Cost: 

(Amounts in millions) 

Resources that Finance the Acquisition of Assets $4,383.8 

Other Components not Requiring or Generating Resources 26.2 

Total Amount $4,410.0 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

68 

The following Reconciliation of Net Cost of Operations to Budget lines are presented as 

combined, instead of consolidated, due to intraagency budgetary transactions not being 

eliminated: 

• Obligations Incurred 

• Less: Spending Authority from Offsetting Collections and Recoveries 

• Obligations Net of Offsetting Collections and Recoveries 

• Less: Offsetting Receipts 

• Net Obligations 

• Undelivered Orders 

• Unfilled Customer Orders 

Other Resources, Other, primarily consists of $1.2 billion in transfers in or out of fixed assets 

without reimbursement and various nonexchange gains and losses that have no budgetary 

impact. 

Other Resources or Adjustments to Net Obligated Resources that Do Not Affect Net Cost of 

Operations, Other, primarily consists of $26.9 billion in prior period adjustments to properly 

recognize payments related to shipbuilding procurement costs as contract financing payments. 

Refer to Note 26, Restatements, for further details. This adjustment is partially offset by the 

$1.2 billion in transfers and nonexchange gains and losses referenced above. 

Components Requiring or Generating Resources in Future Period, Other, primarily consists of 

future funded expenses for the current year change in actuarial liabilities of $22.7 billion and the 

increase in contingent liabilities. Refer to Note 17, Military Retirement and Other Federal 

Employment Benefits, for additional disclosures on the change in actuarial liabilities. 

Components not Requiring or Generating Resources, Other, primarily consists of cost 

capitalization offsets and other expenses not requiring budgetary resources. 

Note 22. Disclosures Related to Incidental Custodial Collections 

The Department collected $1.2 million of incidental custodial revenues generated primarily from 

the collection of fines, penalties, and forfeitures. These funds are not available for use by the 

Department. At the end of each fiscal year, the accounts are closed and the balances rendered 

to the U.S. Treasury. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

69 

Note 23. Earmarked Funds 

Earmarked Funds Dollars in Millions 

2009 

 As of September 30 

Military 

Retirement 

Fund 

MedicareEligible 

Retiree 

Health Care 

Fund 

Other 

Earmarked 

Funds 

Eliminations Total 

Balance Sheet 

Assets 

Fund balance with Treasury $ 20.5 $ 5.0 $ 2,246.2 $ 0.0 $ 2,271.7 

Investments 278,347.0 148,403.4 8,133.7 0.0 434,884.1 

Accounts and Interest 

Receivable 31.9 424.7 988.3 (6.0) 1,438.9 

Other Assets 0.0 0.0 2,136.9 0.0 2,136.9 

Total Assets $ 278,399.4 $ 148,833.1 $ 13,505.1 $ (6.0) $ 440,731.6 

Liabilities and Net Position 

Military Retirement Benefits 

and Other Federal 

Employment Benefits 

$ 1,177,154.9 $ 510,286.8 $ 2,839.4 $ 0.0 $1,690,281.1 

Other Liabilities 1.9 122.9 2,591.6 (72.0) 2,644.4 

Total Liabilities $ 1,177,156.8 $ 510,409.7 $ 5,431.0 $ (72.0) $1,692,925.5 

Unexpended Appropriations $ 0.0 $ 0.0 $ 5.6 $ 0.0 $ 5.6 

Cumulative Results of 

Operations (898,757.4) (361,576.6) 8,068.5 (90,592.9) (1,342,858.4) 

Total Liabilities and Net 

Position $ 278,399.4 $ 148,833.1 $ 13,505.1 $ (90,664.9) $ 350,072.7 

Statement of Net Cost 

Program Costs $ 73,004.0 $ 17,336.1 $ 2,510.2 $ (2,567.2) $ 90,283.1 

Less Earned Revenue (75,267.8) (22,469.4) (674.6) 94,121.9 (4,289.9) 

Net Program Costs (2,263.8) (5,133.3) 1,835.6 91,554.7 85,993.2 

Net Cost of Operations $ (2,263.8) $ (5,133.3) $ 1,835.6 $ 91,554.7 $ 85,993.2 

Statement of Changes in Net Position

Net Position Beginning of the 

Period $ (901,021.2) $ (366,709.9) $ 8,043.0 $ 0.0 $(1,259,688.1)

Net Cost of Operations (2,263.8) (5,133.3) 1,835.6 91,554.7 85,993.2

Budgetary Financing Sources 0.0 0.0 1,973.7 943.6 2,917.3

Other Financing Sources 0.0 0.0 (107.0) 18.2 (88.8)

Change in Net Position $ 2,263.8 $ 5,133.3 $ 31.1 $ (90,592.9) $ (83,164.7)

Net Position End of Period $ (898,757.4) $ (361,576.6) $ 8,074.1 $ (90,592.9) $(1,342,852.8)
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

70 

 Earmarked Funds Dollars in Millions 

2008 

 As of September 30 

Military 

Retirement 

Fund 

MedicareEligible 

Retiree 

Health Care 

Fund 

Other 

Earmarked 

Funds 

Eliminations Total 

Balance Sheet 

Assets 

 Fund balance with Treasury $ 17.5 $ 5.0 $ 2,237.7 $ 0.0 $ 2,260.2 

 Investments 253,046.7 134,291.6 7,170.2 0.0 394,508.5 

Accounts and Interest 

Receivable 24.5 12.5 551.2 (5.8) 582.4 

 Other Assets 0.0 0.0 1,999.5 0.0 1,999.5 

Total Assets $ 253,088.7 $ 134,309.1 $ 11,958.6 $ (5.8) $ 399,350.6 

Liabilities and Net Position 

Military Retirement Benefits 

and Other Federal 

Employment Benefits 

$ 1,154,108.1 $ 500,819.2 $ 3,105.3 $ 0.0 $1,658,032.6 

Other Liabilities 1.8 199.8 810.3 (85.7) 926.2 

Total Liabilities $1,154,109.9 $ 501,019.0 $ 3,915.6 $ (85.7) $1,658,958.8 

Unexpended Appropriations $ 0.0 $ 0.0 $ 4.9 $ 0.0 $ 4.9 

Cumulative Results of 

Operations (901,021.2) (366,709.9) 8,038.1 (86,232.0) $(1,345,925.0) 

Total Liabilities and Net 

Position $ 253,088.7 $ 134,309.1 $ 11,958.6 $ (86,317.7) $ 313,038.7 

Statement of Net Cost 

 Program Costs $ 171,077.5 $ (8,429.7) $ 2,252.9 $ (2,524.3) $ 162,376.4 

 Less Earned Revenue (80,659.5) (32,657.2) (1,206.9) 89,991.0 (24,532.6) 

 Net Program Costs 90,418.0 (41,086.9) 1,046.0 87,466.7 137,843.8 

Net Cost of Operations $ 90,418.0 $ (41,086.9) $ 1,046.0 $ 87,466.7 $ 137,843.8 

Statement of Changes in Net Position

 Net Position Beginning of the 

Period $ (810,603.2) $ (407,796.8) $ 6,586.9 $ 0.0 $(1,211,813.1)

 Net Cost of Operations 90,418.0 (41,086.9) 1,046.0 87,466.7 137,843.8

 Budgetary Financing Sources 0.0 0.0 2,950.3 1,229.6 4,179.9

 Other Financing Sources 0.0 0.0 (448.2) 5.1 ( 443.1)

Change in Net Position $ (90,418.0) $ 41,086.9 $ 1,456.1 $ (86,232.0) $ (134,107.0)

Net Position End of Period $ (901,021.2) $ (366,709.9) $ 8,043.0 $ (86,232.0) $(1,345,920.1)
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

71 

Other Disclosures 

The SFFAS No. 27, Identifying and Reporting Earmarked Funds, requires the disclosure of 

Earmarked Funds separate from All Other Funds on the SCNP and Balance Sheet. Funds must 

meet three criteria to be classified as earmarked: (1) a statute committing use of specificallyidentified revenues for designated purposes, (2) explicit authority to retain the revenues, and 

(3) a requirement to account and report on the revenues. The Department’s earmarked funds 

are either special or trust funds and use both receipt and expenditure accounts to report activity 

to the U.S. Treasury. There have been no changes in legislation that significantly changed the 

purposes of the funds. 

The Total column is shown as consolidated and relates only to Earmarked Funds. The 

Eliminations column includes eliminations associated with Earmarked Funds and excludes the 

offsetting eliminations from All Other Funds. This exclusion causes assets to not equal liabilities 

and net position in the note. However, the amounts in the Total column equal the amounts 

reported for Earmarked Funds on the Balance Sheet. 

The SFFAS No. 27 requires the presentation of gross amounts of Earmarked Funds separate 

from All Other (nonearmarked) Funds. Cumulative Results of Operations ending balances for 

Earmarked Funds on the SCNP do not agree with the Cumulative Results of Operations for 

Earmarked Funds reported on the Balance Sheet because the Cumulative Results of 

Operations on the Balance Sheet are presented net of eliminations, whereas the SCNP 

presents Cumulative Results of Operations gross. 

Military Retirement Fund, 10 United States Code (USC) 1461. The MRF accumulates funds in 

order to finance, on an actuarially sound basis, the liabilities of the Department’s military 

retirement and survivor benefit programs. Financing sources for the MRF are interest earnings on 

Fund assets, monthly Department contributions, and annual contributions from the U.S. Treasury. 

The monthly Department contributions are calculated as a percentage of basic pay. The 

contribution from the U.S. Treasury represents the amortization of the unfunded liability for service 

performed prior to October 1, 1984, plus the amortization of actuarial gains and losses that have 

arisen since then. The U.S. Treasury annual contribution also includes the normal cost amount 

for the concurrent receipt provisions of the FY 2004 National Defense Authorization Act. 

Medicare-Eligible Retiree Health Care Fund, 10 USC 1111. The MERHCF accumulates funds 

to finance, on an actuarially sound basis, liabilities of the Department and the uniformed 

services health care programs for qualified Medicare-eligible beneficiaries. Financing sources 

for MERHCF are provided primarily through an annual actuarial liability payment from the U.S. 

Treasury, annual contributions from each Uniformed Service (Army, Navy, Air Force, Marine 

Corps, U.S. Coast Guard, National Oceanic and Atmospheric Administration, and U.S. Public 

Health Service) and interest earned from the Fund's investments. 

Other Earmarked Funds 

Special Recreation Use Fees, 16 USC 4061-6a note. The USACE is granted the authority to 

charge and collect fair and equitable Special Recreation Use Fees at campgrounds located at 

lakes or reservoirs that are under the jurisdiction of USACE. Types of allowable fees include 

daily use fees, admission fees, recreational fees, annual pass fees, and other permit type fees. 

The receipts are used for the operation and maintenance of the recreational sites. 

Hydraulic Mining in California, Debris, 33 USC 683. Operators of hydraulic mines through 

which debris flows in part or in whole to a body restrained by a dam or other work erected by the 

California Debris Commission are required to pay an annual tax as determined by the 

Commission. Taxes imposed under this code are collected and expended under the 

supervision of USACE and the direction of the Department of the Army. The funds are used for 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

72 

repayment of funds advanced 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. Seventy-five percent of all 

funds received and deposited from the leasing of lands acquired by the United States for flood 

control, navigation, and allied purposes (including the development of hydroelectric power) are 

returned to the state in which the property is located. USACE collects lease receipts into a receipt 

account. Funds are appropriated for the amount of receipts the following fiscal year. The funds 

may be expended by the states for the benefit of public schools and public roads of the counties in 

which such property is situated, or for defraying any of the expenses of county government. 

Maintenance and Operation of Dams and Other Improvements of Navigable Waters, 16 

USC 803(f) and 810. When a reservoir or other improvement is constructed by the U.S., the 

Federal Energy Regulatory Commission (FERC) assesses charges against licensees directly 

benefited. The statute requires all proceeds from any Indian reservation be placed to the credit of 

the Indians of the reservation. All other charges arising from licenses, except those charges 

established by the FERC for administrative reimbursement, are paid to the U.S. Treasury and 

allocated for specific uses. The Army is allocated 50 percent of charges from all licenses, except 

licenses for the occupancy and use of public lands and national forests. These funds are 

deposited in a special fund and used for maintenance, operation, and improvement of dams and 

other navigation structures that are owned by the United States, or in construction, maintenance, 

or operation of headwater, or other improvements to navigable waters of the United States. 

Fund for NonFederal Use of Disposal Facilities (for dredged material), 33 USC 2326. Any 

dredged material disposal facility under the jurisdiction of, or managed by, the Secretary of the 

Army may be used by a nonfederal interest if the Secretary determines that such use will not 

reduce the availability of the facility for project purposes. Fees may be imposed to recover capital, 

operation, and maintenance costs associated with such use. Any monies received through 

collection of fees under this law shall be available to, and used by, the Secretary of the Army for 

the operation and maintenance of the disposal facility from which the fees were collected. 

South Dakota Terrestrial Wildlife Habitat Restoration Trust Fund, Public Law 106-53 Sec. 603.

Yearly transfers are made from the General Fund of the U.S. Treasury to the Trust Fund for 

investment purposes. Investment activity is managed by the Bureau of the Public Debt (BPD). 

The BPD purchases and redeems nonmarketable market-based securities. Investments include 

one-day certificates, bonds, and notes. When the fund reaches the aggregate amount of $108 

million, withdrawals may be made by USACE for payment to the State of South Dakota. The 

state uses the payments to fund annually-scheduled work for wildlife habitat restoration. 

Costal Wetlands Restoration Trust Fund and Costal Wetlands Planning, Protection, and 

Restoration Act, 16 USC 3951-3956. USACE (along with the Environmental Protection 

Agency, and the Fish and Wildlife Service) is granted the authority to work with the State of 

Louisiana to develop, review, evaluate, and approve a plan to achieve a goal of "no net loss of 

wetlands" in coastal Louisiana. USACE is also responsible for allocating funds among the 

named task force members. Federal contributions are established at 75 percent of project costs 

or 85 percent if the state has an approved Coastal Wetlands Conservation Plan. 

Rivers and Harbors Contributed and Advance Funds, 33 USC 701h, 702f, and 703.

Whenever any state or political subdivision offers to advance funds for a flood control project 

duly adopted and authorized by law, the Secretary of the Army may, in his discretion, receive 

such funds and expend them in the immediate prosecution of such work. The funding may be 

used to construct, improve, and maintain levees, water outlets, flood control, debris removal, 

rectification and enlargement of river channels, etc. in the course of flood control and river and 

harbor maintenance. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

73 

Inland Waterways Trust Fund, 26 USC 9506. This law made the Inland Waterways Trust Fund 

available for USACE expenditures for navigation, construction, and rehabilitation projects on 

inland waterways. Collections for excise taxes from the public are made into the Trust Fund. 

The collections are invested and investment activity is managed by the BPD. The BPD 

purchases and redeems nonmarketable market-based securities. Investments include one-day 

certificates, bonds, and notes. 

Harbor Maintenance Trust Fund, 26 USC 9505. The USACE Civil Works mission is funded by 

the Energy and Water Development Appropriations Act. The Water Resources Development 

Act of 1986 covers a portion of USACE operations and maintenance costs for deep draft 

navigation. The Harbor Maintenance Trust Fund is available for making expenditures to carry 

out the functions specified in the Act and for the payment of all expenses of administration 

incurred by the U.S. Treasury, USACE, and the Department of Commerce. Collections are 

made into the Trust Fund from taxes collected from imports, domestics, passengers, and foreign 

trade. The collections are invested and investment activity is managed by the BPD. 

Foreign National Employees Separation Pay Account Trust Fund, 10 USC 1581. This fund 

makes payments from amounts obligated by the Secretary of Defense that remain unexpended 

for separation pay for foreign national employees of the Department. The foreign national 

employees’ separation pay funded by Foreign Military Sales administrative funds is maintained 

as a separate fund. 

Defense Commissary Agency Surcharge Trust Fund, 10 USC 2685. This fund was 

established as the repository for the surcharge on sales of commissary goods paid for by 

authorized patrons to finance certain operating expenses and capital purchases of the 

Commissary System, which are precluded by law from being paid with appropriated funds. 

Most surcharge revenue is generated by the 5 percent surcharge applied to each sale. These 

funds may be used to pay for commissary store-related information technology investments, to 

purchase commissary equipment, to finance advance design modifications to prior year 

projects, for both minor and major construction projects, and to maintain and repair commissary 

facilities and equipment. 

Education Benefit Fund, 10 USC 2006. This fund was established to finance, on an 

actuarially sound basis, the liabilities of the Department’s education benefit programs for current 

and former active duty, guard, and reserve members of the armed forces, and members of the 

Coast Guard. Financing sources for the Education Benefit Fund are interest earnings on Fund 

assets and monthly Department contributions. 

Voluntary Separation Incentive Fund, 10 USC 1175. This fund was established to finance, 

on an actuarially sound basis, the liabilities of the Department’s incentive program for early 

separation from military service. Financing sources for the Voluntary Separation Incentive Fund 

are interest earnings on Fund assets and annual Department contributions 

Military Housing Privatization Initiative, Public Law 104-106, Section 2801. The MHPI 

includes both direct loan and loan guarantee programs, is authorized by the National Defense 

Authorization Act for FY 1996, and includes a series of authorities that allow the Department to 

work with the private sector to renovate and build military family housing. The MHPI 

accelerates the construction of new housing built to market standard and leverages private 

sector capital with government dollars. The Department provides protection to the private 

sector partner against specific risks, such as base closure or member deployment. 

Armament Retooling and Manufacturing Support Initiative, 10 USC 4551-4555. The 

Armament Retooling and Manufacturing Support Initiative is a loan guarantee program designed 

to incentivize commercial use of the Army's inactive ammunition plants for businesses willing to 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

74 

locate to a government ammunition production facility. The production capacity of these 

facilities is greater than current military requirements, however, this capacity may be needed in 

the future. Revenue from property rentals are used to pay for the operation, maintenance and 

environmental cleanup at the facilities. 

Note 24. Fiduciary Activities 

Schedule of Fiduciary Activity Dollars in Millions

As of September 30 2009 

Fiduciary net assets, beginning of year $ 166.4

 Contributions 264.6 

 Investment earnings 17.0 

Distributions to and on behalf of beneficiaries (260.6) 

Increase/(Decrease) in fiduciary net assets $ 21.0 

Fiduciary net assets, end of period $ 187.4 

Schedule of Fiduciary Net Assets Dollars in Millions

As of September 30 2009 

Fiduciary Assets 

 Cash and cash equivalents $ 187.4 

Total Fiduciary Net Assets $ 187.4 

Fiduciary activities exist when the Department has collected, received, held, or made disposition 

of assets on behalf of an individual or nonfederal entity. Fiduciary assets are not recognized on 

the Balance Sheet. 

Public Law 89-538 authorized the Department, through the Savings Deposit Program, to collect 

voluntary contributions from members of the Armed Forces serving outside the United States or 

its possessions in designated areas. These contributions and earned interest are deposited in 

the U.S. Treasury on behalf of the members. 

Note 25. Other Disclosures 

Other Disclosures Dollars in Millions 

2009— Asset Category 

 As of September 30 

Land and 

Buildings Equipment Other Total 

Entity as Lessee – Operating Leases 

Future Payments Due 

Fiscal Year 2010 $ 386.4 $ 64.6 $ 110.0 $ 561.0 

Fiscal Year 2011 359.2 66.1 114.3 539.6 

Fiscal Year 2012 337.3 23.4 118.8 479.5 

Fiscal Year 2013 321.2 5.2 119.1 445.5 

Fiscal Year 2014 319.8 1.0 123.5 444.3 

After 5 Years 770.8 1.0 0.0 771.8 

Total Future Lease Payments 

Due $ 2,494.7 $ 161.3 $ 585.7 $ 3,241.7 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

75 

Operating leases are leases that do not transfer all the benefits and risk of ownership of capital 

leases. Payments are charged as expenses over the lease term. Office space is the largest 

component of land and building leases. Other leases are generally one-year leases that are not 

building or equipment leases. Future year cost projections use the Consumer Price Index. 

Note 26. Restatements 

The Department restated its financial statements as of September 30, 2008 to correct errors in 

assets, liabilities, gross costs, and net position identified during ongoing audit readiness efforts. 

Most errors were discovered as a result of data cleansing and reconciliation efforts during 

preparation for migration to new accounting and logistics systems and during data reconciliation 

following FY 2009 and FY 2008 migration to Enterprise Resource Planning (ERP) systems. The 

most material errors related to recognition of payments for shipbuilding procurement costs. A 

$1.7 billion adjustment not resulting in restatement was also made for a change in accounting 

principle to revalue a portion of the Department’s inventory to moving average cost with the 

ongoing implementation of the Logistics Modernization Program ERP system. 

Adjustment #1: The Department made corrections to recognize $26.9 billion in assets for 

contract financing payments of shipbuilding procurement during the period October 1, 2005 

through September 30, 2008. During this period shipbuilding payments meeting the definition of 

contract financing payments were incorrectly expensed due to limitations within the 

Department’s legacy accounting and reporting systems. The errors resulted in the 

understatement of Other Assets (Nonfederal), Unexpended Appropriations, and Undelivered 

Orders – Obligations, Prepaid/Advanced; and the overstatement of Net Cost, Expended 

Appropriations, and Delivered Orders – Obligations, Paid in the periods the payments were 

made. The corrections resulted in the restatement of the FY 2008 beginning balance of 

Cumulative Results of Operations and Unexpended Appropriation for shipbuilding payments 

prior to FY 2008 of $19.7 billion and the restatement to reduce FY 2008 net cost by $7.2 billion 

for payments that had been expensed in FY 2008. This restatement corrected Other Assets, 

Nonfederal on the Balance Sheet; Gross Costs on the Statement of Net Cost; Undelivered 

Orders – Obligations, Prepaid/Advanced and Delivered Orders – Obligations, Paid on the 

Statement of Budgetary Resources; and Cumulative Results of Operation and Unexpended 

Appropriations on the Statement of Changes in Net Position. Related notes restated were: 

Note 6, Other Assets and Note 18, General Disclosures Related to the Statement of Net Cost. 

Adjustment #2: During the migration to another capital asset system, the Department 

identified and restated $9.1 billion in military equipment valued incorrectly in the legacy system. 

This restatement decreased General PP&E on the Balance Sheet and Cumulative Results of 

Operations on the SCNP. Note 10, General PP&E was also restated. 

Adjustment #3: The Department identified $3.4 billion in Inventory and Related Property, Net 

overstatements resulting from the incorrect posting of inventory in transit which also understated 

net cost of operations. The corrections restated the FY 2008 beginning balance of Cumulative 

Results of Operations for incorrect postings prior to FY 2008 of $3.2 billion and the FY 2008 net 

cost by $233.0 million for incorrect postings in FY 2008. The Department restated Inventory 

and Related Property, Net on the Balance Sheet and Cumulative Results of Operations on the 

Statement of Changes in Net Position. The related notes restated were: Note 9, Inventory and 

Related Property, Net and Note 18, General Disclosures Related to the Statement of Net Cost. 

Adjustment #4: During the migration to another ERP system, the Department identified and 

restated $1.5 billion in gains that were incorrectly recorded as inventory allowances due to 

legacy system deficiencies. This restatement corrected Inventory on the Balance Sheet and 

Other Financing Sources and Cumulative Results of Operations on the Statement of Changes in 

Net Position. Note 9, Inventory and Related Property was also restated. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

76 

Adjustment #5: The Department made corrections to recognize $1.1 billion in Construction-inProgress payments made for the Pentagon Reservation Maintenance Fund through 

September 30, 2008. During this period payments were expensed in error. The errors resulted 

in the understatement of PP&E and the overstatement of Net Cost in the periods the payments 

were made. The corrections restated the FY 2008 beginning balance of Cumulative Results of 

Operations for payments prior to FY 2008 of $1.1 billion and the FY 2008 net cost by $27.9 

million for payments expensed in FY 2008. This corrected General PP&E on the Balance 

Sheet; Gross Costs on the Statement of Net Cost; and Cumulative Results of Operation on the 

Statement of Changes in Net Position. Related notes restated were: Note 10, General Property, 

Plant and Equipment and Note 18, General Disclosures Related to the Statement of Net Cost. 

Adjustment #6: While migrating from a manual to an automated interface between budget 

execution and financial statement reporting systems, the Department identified $697.7 million in 

errors in ending FY 2008 account balances. To correct the errors, the Department restated 

Accounts Receivable, General PP&E, Other Assets, Accounts Payable and Other Liabilities 

(Nonfederal and Intragovernmental) on the Balance Sheet; and Unexpended Appropriations and 

Cumulative Results of Operation on the Statement of Changes in Net Position. Related notes 

restated were: Note 2, Nonentity Assets; Note 5, Accounts Receivable; Note 6, Other Assets; 

Note 10, General Property, Plant, and Equipment; Note 12, Accounts Payable; and Note 15, 

Other Liabilities. 

Adjustment #7: The Department identified $494.7 million overstatement in Inventory and 

Related Property, Net resulting from the incorrect posting of inventory in transit. The 

Department restated Inventory and Related Property, Net on the Balance Sheet and Cumulative 

Results of Operations on the Statement of Changes in Net Position. Note 9, Inventory and 

Related Property was also restated. 

Adjustment #8: The Department recognized a $1.1 billion prior period adjustment to correct 

understated Accounts Payable (Nonfederal) and related expenses for FY 2008. The 

Department also corrected the methodology for reporting accruals for undistributed 

disbursements to prevent the understatement, beginning in FY 2009. This adjustment 

increased Accounts Payable, (Nonfederal), Net Cost, Expended Appropriations, and Delivered 

Orders - Obligations, Unpaid; and decreased Unexpended Appropriations, and Undelivered 

Orders - Obligations, Unpaid. Related notes restated were: Note 12, Accounts Payable and 

Note 18, General Disclosures Related to the Statement of Net Cost. 

Effect on Comparative Balances 

FY 2009 Statement of Changes in Net Position Dollars in Billions 

Cumulative Results of Operations FY 2009 

Changes in Accounting Principles (No restatement) $ 1.7 

Correction of Errors (+/-) Adjustment #2 (9.1) 

Correction of Errors (+/-) Adjustment #3 (3.4) 

Correction of Errors (+/-) Adjustment #4 1.5 

Correction of Errors (+/-) Adjustment #5 1.1 

Correction of Errors (+/-) Adjustment #6 (0.1) 

Correction of Errors (+/-) Adjustment #7 (0.5) 

Beginning balance adjustments $ (8.8) 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

77 

FY 2009 Statement of Changes in Net Position Dollars in Billions 

Unexpended Appropriations 

Correction of Errors – Adjustment #1 $ 27.2 

Correction of Errors – Adjustment #8 (1.1) 

Beginning balance adjustments $ 26.1 

Effect on Comparative Balances 

FY 2008 Balance Sheet Dollars in Billions 

Inventory – Adjustment #3 $ (3.4) 

Inventory – Adjustment #4 1.5 

Inventory – Adjustment #7 (0.5) 

General PP&E Net – Adjustment #2 (9.1) 

General PP&E Net – Adjustment #5 1.1 

Other Assets (Nonfederal) – Adjustment #1 26.9 

Total Assets $ 16.5 

Other Liabilities (Intergovernmental) – Adjustment #6 $ 0.3 

Accounts Payable (Nonfederal) – Adjustment #6 (0.5) 

Accounts Payable (Nonfederal) – Adjustment #8 1.1 

Total Liabilities $ 0.9 

Net Position $ 15.6 

FY 2008 Statement of Net Cost Dollars in Billions 

Gross Costs – Adjustment #1 $ (7.2) 

Gross Costs – Adjustment #3 0.2 

Gross Costs – Adjustment #8 1.1 

Net Cost of Operations $ ( 5.9) 

FY 2008 Statement of Changes in Net Position Dollars in Billions 

Cumulative Results of Operations 

Correction of Errors (+/-) Adjustment #2 $ (9.1) 

Correction of Errors (+/-) Adjustment #3 (3.2) 

Correction of Errors (+/-) Adjustment #4 0.7 

Correction of Errors (+/-) Adjustment #5 1.1 

Correction of Errors (+/-) Adjustment #6 (0.1) 

Budgetary Financing Sources: 

Appropriations used – Adjustment #1 $ (7.2) 

Appropriations used – Adjustment #8 1.1 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

78 

FY 2008 Balance Sheet Dollars in Billions 

Other Financing Sources: 

Other (+/-) – Adjustment #4 0.8 

Other (+/-) – Adjustment #7 (0.5) 

Total Financing Sources $ (5.8) 

Net Cost of Operations Adjustment #1 $ (7.2) 

Net Cost of Operations Adjustment #3 0.2 

Net Cost of Operations Adjustment #8 1.1 

Net Change $ 0.1 

Cumulative Results $ (10.5) 

Unexpended Appropriations 

Correction of Errors – Adjustment #1 $ 19.7 

Correction of Errors – Adjustment #6 0.3 

Budgetary Financing Sources: 

Appropriations Used – Adjustment #1 7.2 

Appropriations Used – Adjustment #8 (1.1) 

Total Budgetary Financing Sources $ 6.1 

Unexpended Appropriations $ 26.1 

Net Position $ 15.6 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

79 

Required Supplementary Stewardship Information 

Federal financial reporting requires DoD to report on its stewardship over certain resources that 

cannot be measured in traditional financial reports. These resources do not meet the criteria for 

assets and liabilities required to be reported in the financial statements, but are important to 

understand the operations and financial condition of DoD at the date of the financial statements 

and in subsequent periods. 

The Department’s stewardship investments are comprised of, and are measured in terms of, 

expenses incurred for: 1) federally-financed, but not federally-owned, physical property 

(Nonfederal Physical Property); and 2) federally-financed research and development (Research 

and Development (R&D)). Information on additional reporting requirements for Nonfederal 

Physical Property and R&D follows. 

NONFEDERAL PHYSICAL PROPERTY 

The Nonfederal Physical Property investments support the purchase, construction, or major 

renovation of physical property owned by state and local governments. In addition, Nonfederal 

Physical Property investments include federally-owned physical property transferred to state 

and local governments. 

Nonfederal Physical Property 

Department of Defense Consolidated — Nonfederal Physical Property

Yearly Investments in State and Local Governments 

For Fiscal Years 2009 through 2005 Dollars in Millions

Categories 2009 2008 2007 FY 2006 FY 2005 

Transferred Assets: 

 National Defense Mission Related $ 1224.7 $ 1,169.2 $ 1,051.0 $ 1,295.5 $ 1,394.7 

Funded Assets: 

National Defense Mission Related 26.7 19.6 2.8 8.5 8.3

Total $ 1,251.4 $ 1,188.8 $ 1,053.8 $ 1,304.0 $ 1,403.0 

INVESTMENTS IN RESEARCH AND DEVELOPMENT 

Investment values included in this report are based on R&D expenses. The R&D programs are 

classified in the following categories: Basic Research, Applied Research, and Development. 

The amounts reported in the Investments in R&D table show outlays from FY 2005 – FY 2009 

for all DoD Components. The definition for each type of R&D Category and Subcategories are 

explained below. 

Basic Research is the systematic study to gain knowledge or understanding of the fundamental 

aspects of phenomena and of observable facts without specific applications, processes, or 

products in mind. Basic Research involves the gathering of a fuller knowledge or understanding 

of the subject under study. Major outputs are scientific studies and research papers. 

Applied Research is the systematic study to gain knowledge or understanding necessary for 

determining the means by which a recognized and specific need may be met. It is the practical 

application of such knowledge or understanding for the purpose of meeting a recognized need. 

This research points toward specific military needs with a view toward developing and 

evaluating the feasibility and practicability of proposed solutions and determining their 

parameters. Major outputs are scientific studies, investigations, and research papers, hardware 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

80 

components, software codes, and limited construction of, or part of, a weapon system, 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 technological feasibility and assessment of 

producibility rather than directed toward the development of hardware for service use. It 

employs demonstration activities intended to prove or test a technology or method. 

Advanced Component Development and Prototypes evaluates integrated technologies in an 

operating environment as realistic as possible to assess the performance or cost reduction 

potential of advanced technology. Programs in this phase are generally system specific. Major 

outputs of Advanced Component Development and Prototypes are hardware and software 

components and complete weapon systems ready for operational and developmental testing 

and field use. 

System Development and Demonstration concludes the program or project and prepares it for 

production. It consists primarily of preproduction efforts, such as logistics and repair studies. 

Major outputs are weapons systems finalized for complete operational and developmental 

testing. 

Research, Development, Test, and Evaluation Management Support is support for installations 

and operations for general research and development use. This category includes costs 

associated with test ranges, military construction maintenance support for laboratories, 

operation and maintenance of test aircraft and ships, and studies and analyses in support of the 

Research and Development program. 

Operational Systems Development is concerned with development projects in support of 

programs or upgrades still in engineering and manufacturing development stages which have 

received approval for production and production funds have been budgeted in subsequent fiscal 

years. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

81 

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 2009 2008 2007 FY 2006 FY 2005 

Basic Research $ 821.0 $ 1,346.4 $ 1,445.7 $ 1,408.5 $ 1,447.3 

Applied Research 1,944.0 3,812.3 4,647.1 4,756.9 4,569.9 

Development 

Advanced Technology 

Development 2,263.2 5,977.9 6,019.7 5,737.4 5,795.2 

Advanced Component 

Development and 

Prototypes 

12,148.3 15,410.6 14,109.6 11,906.9 12,793.3 

System Development 

and Demonstration 21,501.9 18,052.9 16,737.8 13,209.8 12,253.1 

Research, 

Development, Test 

and Evaluation 

Management Support 

5,141.3 5,471.0 4,705.4 3,736.0 3,590.6 

Operational Systems 

Development 42,450.6 20,246.7 13,525.1 5,509.8 5,334.6 

Totals: $86,270.3 $70,317.8 $61,200.4 $46,265.3 $45,784.0 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

82 

Required Supplementary Information 

REAL PROPERTY DEFERRED MAINTENANCE 

This section includes the deferred maintenance information and Statement of Disaggregated 

Budgetary Resources. 

Real Property Deferred Maintenance and Repair 

For Fiscal Year Ended September 30, 2009 Dollars in Millions

Property Type Current Fiscal Year (CFY) 

1. Plant 

Replacement 

Value 

2. Required Work 

(Deferred Maintenance 

& Repair) 

3. Percentage 

1. Category 1 $557,465 $68,048 12% 

2. Category 2 $47,238 $7,859 17% 

3. Category 3 $43,871 $9,249 21% 

The deferred maintenance amount is based on facility Q-ratings found in the Department’s real 

property inventory. Q-ratings represent work needed to bring a facility to a fully serviceable 

condition with no repair needs. The reported deferred maintenance is the difference between 

the facility Q-rating and the target Q-rating that represents the acceptable operating condition 

established by each Component within the Department. The percentage column reflects the 

percent of total plant replacement value for each category represented by deferred maintenance. 

Facility Categories are as follows: 

• Category 1: Buildings, Structures, and Utilities that are enduring and required to support an 

ongoing mission, including multi-use Heritage Assets. 

• Category 2: Buildings, Structures, and Utilities that are excess to requirements or planned 

for replacement or disposal, including multi-use Heritage Assets. 

• Category 3: Buildings, Structures, and Utilities that are Heritage Assets. 

 MILITARY EQUIPMENT DEFERRED MAINTENANCE 

Depot maintenance requirements for military equipment are developed during the annual 

budget process. The table below shows the deferred unfunded requirements for the depot 

maintenance program. 

Military Equipment Deferred Maintenance 

For Fiscal Year Ended September 30, 2009 Dollars in Million

Major Categories Amounts 

1. Aircraft $1,180.3 

2. Automotive Equipment $102.3 

3. Combat Vehicles $504.3 

4. Construction Equipment $49.6 

5. Electronics and Communications Systems $433.3 

6. Missiles $116.8 

7. Ships $187.1 

8. Ordnance Weapons and Munitions $65.5 

9. General Purpose Equipment $446.7 

10. All Other Items Not Identified to above Categories $83.7 

Total $3,169.6 
Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A 

83 

2009 

Statement Of Disaggregated Budgetary Resources For the Years Ended September 30, 2009 and 2008 Dollars in Millions

Military 

Retirement 

Fund 

MedicareEligible 

Retiree 

Health Care 

Fund 

Research, 

Development, 

Test and 

Evaluation 

Civil 

Works 

Operation 

 and 

Maintenance Procurement

Military 

Personnel 

Budgetary Financing Account Budgetary Resources Unobligated balance, brought forward, October 1 $ 0.0 $ 0.0 $ 16,505.0 $ 11,692.7 $ 10,628.8 $ 65,031.0 $ 819.5 Recoveries of prior year unpaid obligations 0.0 0.0 3,871.7 689.4 22,711.1 11,566.7 15,712.1 Budget authority  Appropriation 75,145.3 22,396.7 78,227.3 17,012.8 268,820.3 127,678.6 144,786.6  Contract authority 0.0 0.0 0.0 0.0 0.0 0.0 0.0  Spending authority from offsetting collections  Earned  Collected 0.0 0.0 9,602.2 11,886.1 26,850.3 3,496.6 1,019.7  Change in receivables from Federal sources 0.0 0.0 420.8 (83.8) 1,023.6 60.7 22.1  Change in unfilled customer orders  Advance received 0.0 0.0 246.5 259.2 7.7 (44.3) 0.0  Without advance from Federal sources 0.0 0.0 (749.9) (2,080.9) 183.4 316.2 7.4  Expenditure transfers from trust funds 0.0 0.0 0.0 862.5 0.0 0.0 0.0  Subtotal 75,145.3 22,396.7 87,746.9 27,855.9 296,885.3 131,507.8 145,835.8 Nonexpenditure transfers, net, anticipated and actual 0.0 0.0 (120.8) 170.5 4,463.3 4,957.3 1,212.3 Temporarily not available pursuant to Public Law (24,841.3) (14,106.1) 0.0 (10.0) 0.0 0.0 0.0 Permanently not available 0.0 0.0 (2,269.2) (4.1) (7,708.5) (2,378.7) (628.8) Total Budgetary Resources $ 50,304.0 $ 8,290.6 $ 105,733.6 $ 40,394.4 $ 326,980.0 $ 210,684.1 $ 162,950.9 
Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A 

84 

2009 

Status Of Budgetary Resources For the Years Ended September 30, 2009 and 2008 Dollars in Millions

Military 

Retirement 

Fund 

MedicareEligible 

Retiree 

Health Care 

Fund 

Research, 

Development, 

Test and 

Evaluation Civil Works 

Operation 

 and 

Maintenance Procurement

Military 

Personnel 

Obligations incurred: 

Direct $ 50,304.0 $ 8,290.6 $ 80,445.6 $ 12,428.7 $ 285,501.9 $ 142,182.7 $ 160,105.4 Reimbursable 0.0 0.0 10,480.0 10,621.2 28,343.5 3,379.9 1,052.2 

 Subtotal 50,304.0 8,290.6 90,925.6 23,049.9 313,845.4 145,562.6 161,157.6 Unobligated balance: 

Apportioned 0.0 0.0 13,450.4 16,266.7 4,692.3 63,530.4 523.7 Exempt from apportionment 0.0 0.0 0.0 1,077.7 0.0 0.0 0.0 

 Subtotal 0.0 0.0 13,450.4 17,344.4 4,692.3 63,530.4 523.7 Unobligated balance not available 0.0 0.0 1,357.6 0.1 8,442.3 1,591.1 1,269.6 Total status of budgetary resources 50,304.0 $ 8,290.6 $ 105,733.6 $ 40,394.4 $ 326,980.0 $ 210,684.1 $ 162,950.9 Change in Obligated Balance: Obligated balance, net 

Unpaid obligations, brought forward, October 1 $ 3,359.2 $ 240.1 $ 40,306.8 $ 9,392.9 $ 122,107.1 $ 148,367.0 $ 8,658.8 Less: Uncollected customer payments from Federal sources, brought forward, October 1 0.0 0.0 (5,473.0) (5,418.0) (13,021.2) (3,603.1) 38.6 Total unpaid obligated balance $ 3,359.2 $ 240.1 $ 34,833.8 $ 3,974.9 $ 109,085.9 $ 144,763.9 $ 8,697.4 

Obligations incurred net 50,304.0 8,290.6 90,925.6 23,049.9 313,845.4 145,562.6 161,157.6 Less: Gross outlays (49,964.5) (8,357.6) (84,681.5) (20,453.8) (281,916.2) (128,776.9) (144,622.1) Obligated balance transferred, net 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Less: Recoveries of prior year unpaid obligations, actual 0.0 0.0 (3,871.7) (689.4) (22,711.1) (11,566.7) (15,712.1) Change in uncollected customer payments from Federal sources 0.0 0.0 329.1 (2,164.7) (1,207.1) (376.9) (29.5) Obligated balance, net, end of period 

Unpaid obligations 3,698.7 173.1 42,679.2 11,299.6 131,325.2 153,586.0 9,482.2 Less: Uncollected customer payments (+/-) from Federal sources 0.0 0.0 (5,143.9) (3,253.3) (14,228.3) (3,980.0) 9.1 Total, unpaid obligated balance, net, end of period $ 3,698.7 $ 173.1 $ 37,535.3 $ 8,046.3 $ 117,096.9 $ 149,606.0 $ 9,491.3 

Net Net Outlays: 

Gross outlays $ 49,964.5 $ 8,357.6 $ 84,681.5 $ 20,453.8 $ 281,916.2 $ 128,776.9 $ 144,622.1 Less: Offsetting collections 0.0 0.0 (9,848.7) (13,007.8) (26,858.0) (3,452.3) (1,019.7) Less: Distributed Offsetting receipts (51,125.0) (11,752.4) 0.0 (583.2) 0.0 0.0 0.0 Net Outlays $ (1,160.5) $ (3,394.8) $ 74,832.8 $ 6,862.8 $ 255,058.2 $ 125,324.6 $ 143,602.4 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

85 

Non Budgetary Combined Statement Of Budgetary 

 Resources 

 For the Years Ended September 30, 2009 and 2008

 Dollars in Millions

Other 2009 Combined 2008 Combined

Non Budgetary Financing Accounts 

Budgetary Resources 

Unobligated balance, brought forward, October 1 $ 26.3 $ 26.3 $ 25.5 

Recoveries of prior year unpaid obligations 47.5 47.5 0.0 

Budget authority 

 Borrowing authority 58.4 58.4 130.0 

 Spending authority from offsetting collections 

 Earned 

 Collected 45.1 45.1 53.9 

 Change in unfilled customer orders 

 Without advance from Federal sources (10.8) (10.8) 12.6 

 Subtotal 92.7 92.7 196.5 

Permanently not available (0.1) (0.1) (27.6) 

Total Budgetary Resources $ 166.4 $ 166.4 $ 194.4 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM A Financial Information

86 

 Statement of Disaggregated Non Budgetary 

 Budgetary Resources 

 For the Years Ended September 30, 2009 

 and 2008 

 Dollars in Millions

Other 2009 Combined 2008 Combined 

Non Budgetary Financing Accounts 

Obligations incurred: 

Direct $ 142.7 $ 142.7 $ 168.1 

 Subtotal $ 142.7 $ 142.7 $ 168.1 

Unobligated balance: 

Apportioned 0.3 0.3 0.3 

 Subtotal 0.3 0.3 0.3 

Unobligated balance not available 23.4 23.4 26.0 

Total status of budgetary resources $ 166.4 $ 166.4 $ 194.4 

Change in Obligated Balance: 

Obligated balance, net 

Unpaid obligations, brought forward, 

October 1 $ 872.9 $ 872.9 $ 768.0 

Less: Uncollected customer payments from 

Federal sources, brought forward, October 1 (143.0) (143.0) (130.4) 

Total unpaid obligated balance $ 729.9 $ 729.9 $ 637.6 

Obligations incurred net 142.7 142.7 168.1 

Less: Gross outlays (197.7) (197.7) (63.2) 

Less: Recoveries of prior year unpaid 

obligations, actual (47.5) (47.5) 0.0 

Change in uncollected customer payments 

from Federal sources 10.8 10.8 (12.6) 

Obligated balance, net, end of period 

Unpaid obligations 770.4 770.4 872.9 

Less: Uncollected customer payments 

(+/-) from Federal sources (132.2) (132.2) (143.0) 

Total, unpaid obligated balance, net, end 

of period $ 638.2 $ 638.2 $ 729.9 

Net 

Net Outlays: 

Gross outlays $ 197.7 $ 197.7 $ 63.2 

Less: Offsetting collections (45.1) (45.1) (53.9) 

Net Outlays $ 152.6 $ 152.6 $ 9.3 
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November 16, 2009

Department of Defense

AGENCY FINANCIAL 

REPORT FOR 

FISCAL YEAR 2009

ADDENDUM B

OTHER ACCOMPANYING

INFORMATION
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

1 

Addendum B – Other Accompanying Information 

The Other Accompanying Information provides additional details that support the Fiscal 

Year (FY) 2009 Department of Defense (DoD) Agency Financial Report (AFR). This addendum 

includes: 

(1) Inspector General’s (IG) summary of the most significant management and 

performance challenges facing the Department, to include the Department’s 

responses to DoD IG’s assessments. 

(2) Summary of Management Assurances and Financial Statement Audit Material 

Weaknesses 

(3) Improper Payments Information Act Reporting 

(4) Defense Security Cooperation Agency Financial Statements and Notes 

INSPECTOR GENERAL’S SUMMARY OF MANAGEMENT AND PERFORMANCE 

CHALLENGES FOR FY 2009 

The Reports Consolidation Act of 2000 requires that the Agency Financial Report include a 

statement prepared by the Agency’s IG summarizing what the IG considers the most serious 

management and performance challenges facing the Agency and briefly assessing the progress 

in addressing those challenges. The DoD IG identified the following eight management and 

performance challenges facing the Department for FY 2009: 

1. Financial Management 

2. Acquisition Processes and Contract Management 

3. Joint Warfighting and Readiness 

4. Information Assurance, Security and Privacy 

5. Health Care 

6. Equipping and Training Iraqi and Afghan Security Forces 

7. Nuclear Enterprise 

8. American Recovery and Reinvestment Act 

The table below outlines these challenges and includes both DoD IG’s and the Department’s 

management assessment of progress made by DoD in addressing these issues. 

1. Financial Management 

1-1A. Financial Information IG Summary of Challenge 

The Department continues to face financial management challenges that adversely affect DoD’s ability to provide 

reliable, timely, and useful financial and managerial data needed to support operating, budgeting, and policy 

decisions. Since the 1990s, DoD IG has identified financial management as a challenge area. The DoD’s financial 

management problems are so significant they constitute the single largest and most challenging impediment to the 

U.S. Government’s ability to obtain an opinion on its consolidated financial statements. 

In the FY 2008 audit opinion on DoD’s consolidated financial statements, the DoD IG reported the same 13 

material internal control weaknesses as the previous year. These pervasive and longstanding financial 

management issues directly affect the Department’s ability to obtain an unqualified opinion on its financial 

statements. These weaknesses affect the safeguarding of assets, proper use of funds, and impair the prevention 

and identification of fraud, waste, and abuse. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

2 

1-1B. Financial Information IG Assessment of Progress 

One significant measure of the ongoing progress in the area of financial management would be the Department’s 

ability to obtain an unqualified opinion on its financial statements. The Defense Commissary Agency (DeCA), 

Defense Contract Audit Agency (DCAA), Defense Finance and Accounting Service,(DFAS), Military Retirement 

Fund, and DoD IG all continued to receive unqualified opinions, while the Medicare-Eligible Health Care Fund 

continued to receive a qualified audit opinion. The U.S. Army Corps of Engineers (USACE) showed significant 

financial management improvement because the qualified opinion on its FY 2007 financial statements was 

upgraded to an unqualified opinion on the FY 2008 financial statements. 

Although DoD is far from reaching an unqualified opinion, the Department has demonstrated improvement. One 

improvement area is the ability to provide timely, complete, and accurate financial information through an 

integrated set of enterprise business systems. DoD, through the Enterprise Transition Plan, plans to support 

metrics in improved financial information. 

1-2A. Improving Financial Information IG Summary of Challenge 

The following elements and actions continue to be key for improving the Department’s financial management: 

• Creating an environment that will effectively identify, coordinate, implement, and monitor the financial 

management improvement efforts and hold managers accountable for the successful and timely 

implementation of those efforts. 

• Fully implementing and maintaining an effective internal review and monitoring process to identify all 

material financial management and reporting deficiencies, internal control weaknesses, and quality of 

data issues. 

• Developing corrective action plans that will adequately correct deficiencies and result in financial 

reporting in accordance with generally accepted accounting principles. 

• Implementing corrective action plans that address the systems, controls, reporting, and quality of data 

weaknesses. 

1-2B. Improving Financial Information IG Assessment of Progress 

The Department’s ongoing initiatives in the area of financial management improvement demonstrate DoD 

management is responding to the significant and pervasive financial management issues identified. The 

Department is positioning itself to leverage planned systems and business improvements to achieve sustainable 

and long-term solutions. One initiative is the Financial Improvement and Audit Readiness (FIAR) Plan. 

Since the Department issued the first FIAR Plan in December 2005, the Department has continued to evaluate the 

overall approach to DoD financial improvement efforts. As the FIAR Plan has evolved, the Department has made, 

and continues to make, changes to that approach. The Department has issued seven updated versions of the 

FIAR Plan since the December 2005 version. The Department issued the December 2005 FIAR Plan as the 

roadmap to fix internal controls, correct processes, and obtain an unqualified audit opinion by focusing on certain 

financial statement line items. As discussed in the March 2008 update to the FIAR Plan, the Department refined 

the FIAR Plan’s audit strategy to validate and sustain financial improvements and audit readiness not across 

individual line items, as previously done, but across segments of the business environment. In the March 2009 

FIAR Plan, the Department acknowledged that a new strategy was being formulated to focus on the tasks that will 

provide the greatest improvements in the Department’s ability to manage its finances. Preliminary planning efforts 

by the Department to revise the approach indicate that the Department plans to focus improvement efforts 

primarily on the financial information for budgetary and mission critical assets, which the Department considers the 

most useful type of financial information for managers and warfighters. 

Further, recent legislation established requirements that should assist the Department to refine and strengthen the 

framework for the financial improvement efforts and integrate those efforts with the Department’s overall business 

transformation effort. The “National Defense Authorization Act for Fiscal Year 2008,” P.L. 110-181, section 904, 

January 28, 2008 established the DoD Chief Management Officer (CMO) and the military department CMO 

positions that are responsible for the management and effective and efficient organization of the business 

operations of the Department or the respective military department. The responsibilities of the DoD CMO position 

include the development of a strategic management plan that identifies: 

• Performance goals and measures for improving and evaluating the overall efficiency and effectiveness of 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

3 

the Department’s business operations, and progress in achieving an integrated management system. 

• Key initiatives and resources to achieve the performance goals. 

• Procedures to monitor progress in meeting the performance goals and measures. 

• Procedures to review and approve plans and budgets for changes in business operations or requests for 

defense business systems. 

Additionally, section 908, “Business Transformation Initiatives for the Military Departments” of the “Duncan Hunter 

National Defense Authorization Act for Fiscal Year 2009,” P.L. 110-417, October 14, 2008 assigns responsibilities 

and establishes an organizational structure within each military department for business transformation. 

Specifically, Section 908 requires each Military Department, acting through the military department CMO position 

to: 

• Develop a comprehensive business transformation plan, an enterprise-wide business systems 

architecture, and a transition plan. 

• Implement those plans. 

• Establish a business transformation office that reports directly to the military department CMO. 

One of the responsibilities of the military department business transformation office and CMO, is to ensure each 

element of the business transformation initiative for that military department is consistent with the Department’s 

overall Business Enterprise Architecture and Transition Plan. 

The IG considers the following DoD financial management efforts to be limited successes: 

• Implementation of integrated organizational structures and processes to address financial management 

improvement 

• Assignment of accountability to DoD managers 

• DoD improvement initiatives at the entity and line item level 

Although the IG anticipates that DoD will need to make improvements in these areas, the IG considers these the 

critical steps for establishing a culture and institutionalizing a structure that will facilitate DoD managers in 

identifying internal control weaknesses and plan effectively for resolution of those weaknesses. This culture and 

structure also will hold DoD managers accountable for improving internal controls over financial reporting. Further, 

these steps should result in a financial management structure that can provide accurate, relevant, and timely 

financial management information for decision-making. 

1. Financial Management Management’s Overall Assessment 

On August 11, 2009, the Under Secretary of Defense (Comptroller) (USD(C)) established DoD-wide priorities for 

improving financial information and achieving audit readiness. These DoD-wide priorities were approved by the 

Deputy Secretary of Defense and vetted with key stakeholders in the Department, as well as Congress, Office of 

Management and Budget (OMB) and Government Accountability Office (GAO). 

The USD(C) audit priorities recognize the importance of achieving auditable financial statements and resolving the 

long-standing 13 material weaknesses, but focuses improvement efforts first on financial and other information 

most useful to DoD decision makers. The USD(C) priorities are: 

• Budgetary Information - Budget authority, obligations, expenditures, and outlays leading to auditable 

Statements of Budgetary Resources. 

• Mission Critical Asset Information - Existence, location, condition, and other information pertaining to 

mission critical assets (i.e., Military and General Equipment, Real Property, Inventory, and Operating 

Materials and Supplies). 

The DoD FIAR Plan and the Component’s financial improvement plans are being modified to address and 

accomplish the USD(C)’s priorities. In addition to addressing the USD(C)’s priorities, the Department has taken 

significant steps to improve the overall effectiveness of the FIAR Plan, many of which address the issues identified 

in the IG’s challenges and assessment of progress. They include: 

• FIAR Framework -- A standard template for the Components’ Financial Improvement Plans (FIPs) was 

developed and is now being used that brings consistency to the FIPs and identifies key control objectives 

and capabilities ensuring improved internal controls and sustainability. 

• FIAR Metrics -- Metrics were developed and are being implemented to better track progress and provide 

oversight to management, Congress, OMB and GAO. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

4 

• Accountability -- Component FIPs are required to identify accountable organizations and people to ensure 

that such organizations and people are aware of their responsibilities and to hold them accountable. 

• Resources -- Resource requirements to execute improvement work are now being captured to ensure 

resource requirements are known and planned. 

In summary, the Department agrees with the IG’s summary of challenges and assessment of progress and 

continues to work aggressively to resolve the long-standing material weaknesses and achieve auditable financial 

statements. However, as indicated above, the Department’s priorities have been revised to focus limited resources 

on improving information used by management and keep the end goal of auditable financial statements in sight. 

2. Acquisition Processes and Contract Management 

2-1A. Acquisition Workforce IG Summary of Challenge 

Since the 1990s, DoD IG has identified DoD acquisition and contract management processes as a challenge area. 

Acquisition initiatives that began in the 1990s led to reductions in acquisition oversight assets. When the spending 

trend dramatically reversed after September 11th, the Department was not able to react quickly to the need for more 

contract and oversight support. The emphasis on urgency to support the war effort, especially for contracting in an 

expeditionary environment, has only served to increase the challenges. One way in which DoD coped with the limited 

resources was to use other agencies’ contracting resources. Increasingly, funds were sent to other agencies to 

perform work for the Department and in FY 2005 interagency contracting was added to the challenges when it 

became a GAO high-risk area. In FY 2010, the Defense budget with funding for contingency operations could 

approach about $700 billion. This total is more than double the last DoD budget preceeding September 11, 2001. 

Keeping pace with this spending would be a difficult proposition if acquisition and oversight assets were increasing at 

a proportional rate. However, from 1990 until the end of FY 1999, total personnel included in the DoD acquisition 

workforce decreased about 50 percent, from 460,516 to 230,556 personnel. 

As one example, the Army’s Logistics Civil Augmentation Program (LOGCAP) Office, which is co-located in Illinois 

with the Rock Island contracting center, suffers from significant understaffing. Its executive director told the 

Commission on Wartime Contracting that Rock Island is authorized 384 people to support its contracting mission, 

but as of February 2009, only 279 were on hand. The result is 6-day workweeks of 10 to 12 hours per day. Rock 

Island is working to hire additional staff to get up to 300. 

As of May 2008, there were approximately 25,000 contracting officers to handle procurements of goods and 

services that had grown to about $400 billion by FY 2008. Other organizations such as Defense Contract 

Management Agency (DCMA), which is responsible for much of the administration and surveillance of DoD 

contracts, decreased its staff levels by similar amounts during the same period. Even within DoD IG’s Office, we 

reported in our March 31, 2008 Growth Plan that our auditors are unable to keep pace with the ballooning Defense 

budget and this growth “leaves the Department increasingly more vulnerable to fraud, waste, and abuse.” 

2-1B. Acquisition Workforce IG Assessment of Progress 

Progress in training and equipping more contract officials within DoD to handle the increased workload will take 

time. However, a number of initiatives are underway that are addressing the challenges, both within the 

Department and from proposed legislation. A commission, headed by Dr. Jacques Gansler, evaluated the Army 

Expeditionary Contracting and recommended urgent reform. As a result, the U.S. Army Materiel Command 

activated the Army Contracting Command, which will oversee more than $85 billion in contracts annually and 

focus on maintaining and improving the Army's ability to respond globally in support of warfighters' needs. 

In April 2009, Secretary Gates announced plans to hire 20,000 new acquisition professionals by 2015. Of those, 

9,000 will be new jobs and 11,000 will convert from contractor held positions. The shift will begin in FY 2010 with 

1,600 new jobs and 2,500 conversions. The positions will fill gaps identified in a recent workforce competency 

survey, according to the Department’s acquisition policy director. 

2-2A. Major Weapon Acquisition IG Summary of Challenge 

Challenges also continued with major acquisition programs. Many large weapons systems acquisitions are 

receiving Congressional scrutiny because of continued cost, schedule, and control problems. The GAO reported 

between FY 2003 and FY 2008 the number of DoD major defense acquisition programs increased from 77 to 96, 

total planned commitments grew from $1.2 trillion to $1.6 trillion, and the average schedule delay in delivering 

initial capabilities increased from 16 to 22 months. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

5 

As program costs increase, DoD must request more funding to cover the overruns, make trade-offs with existing 

programs, delay the start of new programs, or take funds from other accounts. Delays in providing capabilities to 

the warfighter will result in the need to operate costly legacy systems longer than expected, to find alternatives to 

fill capability gaps, or to go without the capability. 

2-2B. Major Weapon Acquisition IG Assessment of Progress 

The DoD also outlined a series of initiatives to the House Oversight Committee on acquisition improvements. 

Three recent studies produced 55 recommendations for improving acquisition processes. Of the 55 

recommendations, 48 have been fully or partially implemented. Initiatives include early and competitive 

prototyping, continuous improvement through use of process review tools, stability in program management 

tenure, use of capital funding and configuration steering boards, and a capital funding pilot program. Another 

proposed initiative to improve major acquisition programs would require all new efforts to move through a “material 

development decision” milestone and would shift the crucial Milestone B decision to later in the process. 

DoD continues to make limited progress in controlling cost and schedule of major acquisition programs and will 

have to make critical decisions about which systems should be cut based on competing resources. The DDG 1000 

is one recent example of a major system that succumbed to cost and schedule pressures. 

However, progress has been made to implement new policies. The Department has revised its policies and 

guidance to improve its acquisition of weapon systems and address contract management issues. For example, in 

December 2008, DoD revised its policy governing major defense acquisition programs to provide key department 

leaders with the knowledge needed to make informed decisions before a program starts and to maintain discipline 

once it begins. The revised policy includes the completion of key systems engineering activities before the start of 

the systems development, a requirement for more prototyping early in programs, and the establishment of review 

boards to monitor weapon system configuration changes. The DoD also issued guidance to address contracting 

weaknesses and promote the use of sound business arrangements. The DoD established a framework for 

reviewing major services acquisitions, developed guidance on linking monetary incentives for contractors to 

acquisition outcomes, and implemented regulations to better manage its use of contracting arrangements that can 

pose additional risks for DoD. These are positive steps, but inconsistent implementation has hindered past DoD 

efforts to address these high-risk areas. To improve outcomes DoD must ensure these policy changes and others 

are consistently put into practice and reflected in decisions made on individual acquisitions. 

Further, the Weapon Systems Acquisition Reform Act of 2009 strengthened the Department’s oversight of the 

acquisition process with the objective of reducing program cost overruns, shortening the delivery schedule, and 

improving system performance. Through this Act, Congress legislated that the Department establish an 

independent Director of Cost Assessment and Program Evaluation to improve cost estimates and a Director of 

Developmental Test and Evaluation to ensure developmental test and evaluation activities of the Department are 

fully integrated into, and consistent with, the systems engineering planning processes. It also provides an 

increased role for the commanders of the combatant commands in identifying joint military requirements. 

2-3A. Contracting and the Impact on Decision Making IG Summary of Challenge 

Dealing with the decreasing acquisition workforce has created a myriad of other challenges. 

The Department has increasingly relied on interagency contracting and use of contractors to fill the gap from the 

reduced acquisition and oversight workforce, bordering on inherently governmental functions, thereby potentially 

taking on decision-making roles. Key areas where use of contractor support has bordered on inherently 

government functions that impact decision-making include: strategic planning within programs and organizations; 

acquisition planning for specific acquisitions; source selection assistance and source selection decision making; 

contract administration and surveillance; and contractor testing of systems and weapons in which they participate 

in the development. 

Our recent audit coverage has found a number of problems with use of interagency contracting, including lack of 

competition, inadequate and unreasonable price determinations, and insufficient surveillance. In addition, the use 

of contractors has raised concerns about contractor ethics requirements and conflicts of interest. 

Distorted use of acquisition initiatives, such as commercial item procurements to achieve speed and reduce 

oversight in procurements, continues to challenge contracting officials and the oversight community. Use of 

commercial items is beneficial when there is an established market to allow contracting officials to use the 

marketplace to establish reasonable pricing for the items we buy. It also reduces the need for Government quality 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

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assurance when the Department can rely on a well-established commercial quality assurance program. However, 

because the broad definition of commercial items includes items that are not commercial items, but are “of a type” 

or have not been in the marketplace, such as items offered to the public or items that will be available in time to 

meet the Government’s needs, cause significant challenges to ensure reasonable prices and sufficient quality 

assurance practices. 

Another concern voiced by DoD IG in testimony from 1998 was the lack of oversight in services contracting, 

another high-risk area for waste and mismanagement. Services contracts were a growth area in DoD, and 

continue to increase because of the expanded emphasis on outsourcing. In FY 1998, about $49 billion was spent 

on services contracts. However, there were almost no oversight mechanisms for service contracting, and the 

Office of the Secretary of Defense (OSD) received little information on how the Department was managing 

services contracts. We saw no comprehensive efforts by the Department to oversee or manage the growth, costs, 

profits, or fees for services contracts. In just the last decade, the value of services contracting more than tripled 

and yet the number of acquisition and oversight staff was essentially flattened. For FY 2008, DoD, as the largest 

purchasing organization in the world, obligated over $396 billion for contracts. More than 50 percent of those 

dollars were spent on the acquisition of services. 

The Department continues to be challenged to strike a balance between urgent contracting to support the 

warfighter and performing all of the appropriate acquisition requirements. Our audit coverage has found numerous 

shortcuts in the acquisition process related to urgent procurements. This is especially true when contracting in an 

expeditionary environment. In one instance, we estimated that 68 percent of Non Tactical Vehicle (NTV) contract 

files did not contain adequate justification for the NTVs and 85 percent did not contain documentation to show 

contracting officers appointed contracting officer’s representatives to oversee the contracts. 

2-3B. Contracting and the Impact on Decision Making IG Assessment of Progress 

The Under Secretary of Defense (Acquisition, Technology, and Logistics (USD(AT&L)), and the Under Secretary 

of Defense (Comptroller)/Chief Financial Officer (USD(C)/CFO) have taken a series of corrective actions to 

improve systemic problems that our audits disclosed on interagency contracting. Each Under Secretary issues 

policy memoranda to implement actions based on our recommendations, and the USD (C)/CFO formed a task 

force to review the potential Antideficiency Act Violations we reported. 

In addition, Section 813 of the John Warner National Defense Authorization Act (NDAA) for FY 2007 directed DoD 

to establish a Panel on Contracting Integrity. The Panel, consisting of senior leaders, is focused on eliminating 

areas of vulnerability in contracting that allow fraud, waste, and abuse. The committee has established 

subcommittees in the areas of sustained senior leadership, capable contracting workforce, adequate pricing, 

appropriate contracting approaches, and techniques, sufficient contract surveillance, contracting integrity in a 

contingent environment, procurement fraud indicators, and contractor employee conflicts of interest. Initially, the 

Panel developed 21 recommendations for FY 2008 and an additional 28 actions for FY 2009 and is working to 

improve the contracting process. 

In September 2008, the USD (AT&L) issued a memorandum on peer reviews of contracts for supplies and 

services. The memorandum established DoD policy for peer reviews. The objectives of peer reviews are three 

fold: 1) to ensure that Contracting Officers across the Department are implementing policy and regulations in a 

consistent manner; 2) to continue to improve the quality of contracting processes across the Department; and 3) to 

facilitate cross-sharing of best practices and lessons learned across the Department. 

On February 18, 2009, AT&L issued a memorandum on review criteria for the acquisition of services. AT&L 

reviews and approves all proposed acquisitions for services with a total estimated value greater than $1 billion, as 

well as service acquisitions that are categorized as “Special Interest.” These reviews seek to ensure the 

requirements are clear and well defined, the acquisition approach and business strategy are appropriate, and 

there are mechanisms in place to provide for proper oversight of contractor performance. 

In addition, the Joint Contracting Command-Iraq/Afghanistan updated its Acquisition Instruction to include 

guidance for maintaining contract files. Implementation of this guidance will help ensure contracting officers 

maintain contract files that provide an adequate history of the contract actions. 

2. Acquisition Processes and Contract Management Management’s Overall Assessment 

The DoD continues to work a number of acquisition excellence initiatives that address contracting and contract 

management issues to include contracting in an expeditionary environment, addressing the GAO high-risk area of 

interagency contracting, growing the contracting workforce, and increasing DoD organic acquisition management 

capability. 
 

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ADDENDUM B Other Accompanying Information

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DoD initiatives to improve contingency contracting include increasing staffing in the Office of the Director, Defense 

Procurement and Acquisition Policy (DPAP) dedicated specifically to contracting in expeditionary operations and 

development of the first-ever Joint Contingency Contracting Handbook that provides essential tools and training for 

contingency contracting officers. The recently released second edition of the handbook, includes many 

enhancements such as critical action checklists, laminated foldout charts, color-coded pages to flag vital information, 

and summary-level key points. Draft Expeditionary Contracting Policy has been developed, and forms a foundation 

for the handbook. DPAP is also developing electronic solutions for in-theater problems experienced in requirements 

generation, contract writing, invoicing, and the use of the Government Purchase Card. 

DPAP continues to lead efforts across the Department to ensure initiatives to benefit the warfighter in current and 

future contingencies are developed, staffed, and implemented. A campaign, led by a joint Task Force, is developing 

near-term and long-term solutions to resourcing contingency contract administration services (CCAS). The CCAS 

effort is examining the manning levels needed to support contracting, quality assurance, and property administration 

functions for a contingency operation involving two major regional conflicts. The Deputy Secretary of Defense has 

tasked the Services to plan for and fund the necessary resources, and the Services have responded. 

In another example, DPAP is providing support and input to the Commission on Wartime Contracting in 

Iraq/Afghanistan, which was established in the FY 2009 National Defense Authorization Act. Appointed by the 

Secretary of Defense to assist in the Commission’s mission, DPAP led and escorted members of the Commission, 

as well as Department of State representatives, on a December 2008 trip into theater of operations that provided 

the Commission with its first sense of the climate and working conditions in a deployed environment. 

The Department established a Joint Task Force to evaluate the June 10, 2009 interim report of the Commission on 

Wartime Contracting, with particular focus on the interim report’s issues of concern. Among the issues that the 

Task Force is examining is the LOGCAP program. The Task Force findings and recommendations will be provided 

in October 2009. The Task Force exemplifies the Department’s dedication to improving contingency contracting in 

Iraq and Afghanistan. The group advocates the good work accomplished by the Department’s committed 

professionals. The involved organizations will continue to enhance contingency contracting, regardless of the 

locale, to best support our troops in any deployed mission. 

In response to GAO concerns regarding interagency contracting, the Director, DPAP issued a policy memorandum 

on October 31, 2008, which endorsed the Office of Federal Procurement Policy memorandum of June 2008 and 

required the use of an Interagency Agreement for any interagency acquisition, regardless of dollar value. The 

memorandum provides clarifications on DoD policy regarding Interagency Acquisition. The Department has posted 

on its Interagency Acquisition webpage a model Interagency Agreement required for all interagency acquisitions in 

excess of $500,000. In August 2009, the Department issued a comprehensive policy memorandum, including a list 

of Frequently Asked Questions (FAQs) that specifically addressed numerous findings in relevant DoD IG audits 

related to interagency acquisition. 

The DoD continues to work a number of initiatives that address the contracting workforce. The cornerstone of 

many of these initiatives is the Contracting Competency Assessment, completed in September 2008. This effort 

targeted 20,573 contracting professionals DoD-wide and achieved a participation rate of over 87 percent. The 

purpose was to assess individual capabilities and training needs, and evaluate overall organization/command 

capabilities and gaps. Assessment results were given to each participating organization/command to provide 

senior procurement executives and contracting leaders with an organization/command-level view of their 

workforce’s overall proficiency levels. A key role for senior contracting leaders was to apply their leadership 

judgment to these results as a way to identify workforce gaps and the appropriate gap closure strategies, align 

their workforce with their mission, and develop a workforce for the future. 

The Defense Acquisition Workforce Development Fund (DAWDF) and the FY 2010 Defense Budget together 

provide senior leaders with the means to close workforce gaps and adjust human capital strategies. Today, the 

Department is implementing DAWDF initiatives to include training enhancement and capacity expansion, retention 

and recognition efforts, career broadening and academic programs, intern programs, recruiting incentives, 

outreach programs, journeyman-hiring programs, and hiring expert knowledge and/or highly qualified 

professionals. In addition, the Department will grow the contracting workforce and increase DoD organic 

acquisition management capability. This will create a better balance between our government workforce and 

contractor support personnel and ensure that critical and inherently governmental functions are performed by 

government employees. The Department’s strategy will increase and improve the Department's oversight 

capabilities, thereby ensuring we get what we pay for; ferret out waste, and assist in combating contract fraud. 

Together, these actions ensure we will have the workforce we need to deliver mission critical capabilities. 

The DoD’s commitment to a long-range vision for improving the contracting and contract management processes 

and the continued accomplishment of near-term initiatives ensures both immediate and long-term improvements in 

contracting and contract management in expeditionary operations. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

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3. Joint Warfighting and Readiness 

3-1A. Joint Warfighting and Readiness IG Summary of Challenge 

The challenge of Joint Warfighting and Readiness is to provide the right force, the right personnel, and the right 

equipment and supplies in the right place, at the right time, and in the right quantity, across the full range of military 

operations. This challenge is compounded by the strain on resources because of Operation Iraqi Freedom (OIF) 

and Operation Enduring Freedom (OEF). The challenges facing the Department will increase, in both the nearand long-term, as the Department prepares for, and begins, the scheduled withdrawal of forces from Iraq and the 

deployment and redeployment of forces to Afghanistan. In the near-term, the Department must plan for and 

execute the withdrawal and redeployment. In the long-term, the Department faces the challenge of resetting the 

Services; retraining skills that have not been required for the current operations; and reengaging with other 

nations’ militaries. This challenge encompasses the need to ensure basic services continue uninterrupted for the 

members of the armed forces and their families. The other management challenges encompass areas that support 

the ability of the U.S. to conduct joint warfighting and readiness issues. The synergy of those other management 

challenges will shape the U.S. ability to achieve its national objectives through joint operations. 

3-1B. Joint Warfighting and Readiness IG Assessment of Progress 

The Department is making progress on the issue of Joint Warfighting and Readiness, but that progress must be 

monitored to ensure it continues. The Department cannot afford to ignore new, and in some cases, recurring, 

situations that will require attention. For example, although planning is underway for the withdrawal from Iraq, it 

must be monitored to ensure all equipment and personnel are properly accounted for; only items approved for 

transfer are transferred; and the training of indigenous forces continues. Similarly, the increase of forces in 

Afghanistan must be monitored to ensure forces receive the support required. In addition, the ongoing efforts to 

relocate service members to Guam and other locations around the globe will enable the armed forces to better 

shape and focus their force structure in a way that will provide greater flexibility in responding to threats. However, 

some challenges facing the Department were evident during reviews pertaining to the reset of Army equipment 

returning from OIF and the training of DoD ground forces supporting OIF. 

Military operations depend on information and information systems for many simultaneous and integrated activities. 

Information Operations are essential to the successful execution of military operations. Therefore, a key goal of 

Information Operations is to achieve and maintain information superiority for the U.S. and its allies. 

Although DoD has made strides in advancing Information Operations as a core military competency, we concluded 

that there is a weakness in DoD oversight management processes. Until DoD improves oversight, it cannot 

efficiently and effectively advance Information Operations into a warfighting capability for combatant commanders 

3-2A. Alignment of Resources IG Summary of Challenge 

While U.S. forces continue to operate around the world, changes are underway to better align the resources of the 

Department to benefit the warfighters, wherever they are. Those changes have taken a variety of forms, not the 

least of which is the improvement of the tools used to fight the enemies of the U.S.. 

The fight against terrorism, as well as the ongoing OEF and OIF, continue to test the limits of the Department and 

its ability to successfully defend the U.S.. These have been shared battles, with each Service shouldering its 

portion of the load. For example, DoD IG’s investigative component, the Defense Criminal Investigative Service, 

has worked effectively with the Army’s Criminal Investigation Command, the Federal Bureau of Investigation, the 

Special Inspector General for Iraq Reconstruction, and the Special Inspector General for Afghanistan 

Reconstruction by assigning 12 special agents to Iraq, Kuwait, and Afghanistan for 6 month rotating details. These 

agents specifically address allegations related to bribery, kickbacks, contracting irregularities, and other matters 

that involve procurement fraud and public corruption that impact joint warfighting capabilities. In addition, in June 

2007 DoD IG established a field office in Afghanistan to conduct audits of contracts, funds management, and other 

accountability related issues in support of Operation Enduring Freedom. 

The Department’s available resources are finite and require constant monitoring of our abilities and of the world 

situation to enable the Department to operate successfully on a global scale. The combination of these various 

factors continues to challenge the Department. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

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3-2B. Alignment of Resources IG Assessment of Progress 

Despite high operating tempo, U.S. Forces are effectively executing their missions globally. Sustained operations 

in Iraq and Afghanistan impact equipment, the troops, and their families. Forward deployed units are trained, 

manned, and equipped to accomplish missions. However, non-deployed units’ unit readiness levels are impacted 

because resources are limited. Non-deployed units realize additional costs by ensuring that deployed and next-todeploy units have adequate manning, training, and equipment. In addition, the continued use of equipment over 

the past several years in harsh environments is causing wear and tear at higher rates than planned. 

Increased deployments and shorter dwell times impact the readiness of equipment, the troops, and their families. 

Insufficient dwell time affects readiness of the total force because it does not allow our troops time to reconnect 

fully with an important support system – their families. 

Maintaining readiness, resetting the force during the extended war, modernizing to face future challenges, and 

allowing troops to reconnect with their families are challenges that the Department and Congress must continually 

address. 

3. Joint Warfighting and Readiness Acquisition Management’s Overall Assessment 

USD Personnel and Readiness concurs with the IG’s Summary of Challenge and Assessment of Progress. 

4. Information Assurance, Security and Privacy 

4-1A. Risk Management IG Summary of Challenge 

Ensuring a robust risk management, security, and information assurance program has been – and continues to be 

– a significant, on-going challenge to the Department. Such a program includes periodic risk assessments; 

physical and information security awareness training; security policies, procedures, and practices, as well as tests 

of their effectiveness; procedures for addressing deficiencies and for detecting, reporting, and responding to 

security incidents and privacy data breaches; and ensuring the continuity of operations. 

On top of the challenge of ensuring that advances in technology do not compromise security and privacy 

protections, DoD faces the additional challenge of securing information from cyber attacks. The Defense Science 

Board Task Force noted that as reliance on automated information systems for command, control, 

communications, and operations increases, it is essential that defenses of these information systems also 

increase. Cyber attacks can result in a commander’s loss of confidence in information systems, the loss of 

classified information, or even the loss of critical operational capabilities. 

DoD must also develop policies and procedures to ensure the integrity of information and the oversight of such 

tools for the recent widespread use of social networking technologies. 

4-1B. Risk Management IG Assessment of Progress 

The Department has made little improvement in its information assurance and security posture. Previous issues 

have been exacerbated by ongoing losses of privacy and sensitive, but unclassified government data. The lack of 

clear DoD policy regarding protection of such data and the reporting of incidents regarding its compromise has 

also contributing to the ongoing issues. Still of particular concern is protection of DoD information in the hands of 

contractors, to include all members of the Defense Industrial Base, and other non-DoD entities such as foreign, 

state, local and tribal governmental entities. 

4-1. Risk Management Management’s Overall Assessment 

With regard to DoD’s improvements in Information Assurance (IA) and security posture, DoD made the following 

significant advances in FY09: 

• Expanded enterprise rollout of Host Based Security System for both Secret Internet Protocol Router 

Network and Nonsecured Internet Protocol Router Network IAW Communications Task Order (CTO) 07-

12 and Fragmentary Order (FRAGO) 13. 

• Implemented Security Contact Automate Protocol compliant Federal Desktop Core Configuration 

compliance scanning capability as part of Host Based Security System Policy Auditor module. This 

capability supports OMB direction for automated compliance scanning capability. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

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• As part of the Enterprise Solutions Steering Group (ESSG) efforts, DoD is in process of developing a 

replacement and updated contract for automated computer vulnerability scanning and remediation tools. 

• ESSG insider threat mitigation tool availability has been coordinated with DNI and Office of the National 

Counter Intelligence Executive (ONCIX) representatives as part of an increased focus on Insider Threat 

mitigation. 

• Coordinated with U.S. Strategic Command Headquarters (USSTRATCOM-HQ), Joint Task Force – 

Global Network Operation and Defense Information Systems Agency in the development and details 

supporting Computer Network Defense priorities and funding for FY09-13 Operation Buckshot Yankee 

Requirements. 

• Established blanket purchase agreements for data at rest encryption products to facilitate the protection 

of sensitive data, both through disk encryption and file encryption. 

• Increased the number of certified IA professionals in support of DoD Instruction (DoDI) 8570. 

Supported USSTRATCOM requirements for Operation Gladiator Phoenix and the development and coordination 

of an IA Campaign Plan outlining multiple initiatives to ensure IA supremacy and capability to respond to and 

protect DoD networks and systems from cyber attack. 

• Finalized and coordinated with DoD Components details of a cyber demilitarized zone standard security 

design. 

• Improved operational testing of IA/computer network defense security through Bulwark Defender and 

other exercises. 

• In support of DoDI 8530, achieved Certification and Accreditation of all Computer Network Defense 

Service Provider Organizations. 

• DoD expanded the Data at Rest enterprise effort providing multiple technical solutions to address the 

need for encryption of data at rest for laptop computers. 

• In response to the proliferation and utilization of social networking technologies DoD is in process of 

developing and coordinating a policy that will address DoD use of these technologies, including 

consideration of potential cyber risks and appropriate mitigation strategies. 

• In FY 2009, DoD developed and coordinated with DoD Components an updated Information Assurance 

Strategy document outlining the primary IA goals and capabilities being pursued by the Department in 

order to adequately defend and protect the networks. 

• Directive Type Memorandum (DTM) M-08-27, “Security of Unclassified DoD Information on Non-DoD 

Information Systems” dated 31 July 2009, established policy for managing the security of unclassified 

DoD information on non-DoD (including contractor) information systems. This new guidance stresses 

that appropriate requirements must be incorporated into all contracts, grants, and other legal agreements 

or understandings with non-DoD entities. 

• AT&L proposed interim contracting guidance to strengthen the DTM. A modification to the Defense 

Federal Acquisition and Contracting Regulation has been developed on cyber security reporting and 

information assurance standards and is expected to be released for Advanced Notice of Proposed 

Rulemaking in the fall of 2009. 

• DoD initiated a pilot program addressing Defense Industrial Base (DIB) Cyber Security and IA activities. 

This program establishes a comprehensive approach between DoD and industry for protecting 

unclassified DoD information requiring controls transiting or residing on DIB unclassified networks. 

Through this collaborative effort, the pilot program involves 29 companies and is focused on threat 

information sharing of unclassified and classified threat information, incident reporting and mitigation, 

and cyber intrusion damage assessment. The DoD Cyber Crime Center is designated the operational 

focal point for the DIB and U.S. government in executing this program. The objective is to transition from 

pilot to program status in FY 2010 and open the program to all qualified cleared defense contractors, 

which number over 2600 companies. A phased expansion is planned to accommodate the increased 

number of DIB partners. 

• DoD also has policies that govern the use of certain insecure technologies. Specifically, DoD has policy 

governing the use of file transfer protocol (FTP), which as an insecure protocol is subject to limitations set 

out in policy guidance on where it can be employed and what types of data may be hosted on an FTP 

server. 

4-2A. Protecting DoD Information IG Summary of Challenge 

One of the major challenges remaining is the protection of DoD information in the hands of contractors and the 

appropriate response to data breaches involving both privacy-protected data, such as personally identifiable 

information, and sensitive, but unclassified, information, such as contractor proprietary information. This challenge 

is amplified by challenges associated with continued critical inaccuracies in the DoD database used for oversight 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

11 

of the DoD information system inventory. Further, DoD has made very limited progress in developing a Homeland 

Security Presidential Directive-12 compliant Personal Identity Verification credential, thereby failing to take 

advantage of possible enhancements to DoD physical and logical access security programs. 

Another significant challenge with protecting DoD information is concerned with the sanitizing and disposal of 

excess unclassified information technology equipment in accordance with Federal, DoD security, and 

environmental regulations. Specifically, excess unclassified information technology equipment must be disposed of 

in a manner that safeguards sensitive information. 

4-2B. Protecting DoD Information IG Assessment of Progress 

The Department continues to lack an accurate, authoritative data repository for information regarding DoD 

systems and does not have a requirement for an inventory of systems containing DoD information operated by 

contractors and other non-DoD entities. Metrics based on systems regarding DoD information security and privacy 

are not that meaningful for management oversight and verification of reported data. Further, DoD has yet to 

develop a Homeland Security Presidential Directive-12 compliant Personal Identity Verification credential, thus 

failing to achieve the possible benefits of utilizing such a credential for logical and physical access envisioned by 

the 2004 Presidential Directive. In addition, internal controls over card stock for existing DoD identification 

credentials are inadequate. 

DoD Components have not been properly sanitizing and accounting for unclassified information technology 

equipment before releasing this equipment to other organizations. As a result, DoD could not ensure that 

personally identifiable information or other sensitive information was protected from unauthorized release. 

4-2. Protecting DoD Information Management’s Overall Assessment 

• Assistant Secretary of Defense, Network and Information Integration/DoD Chief Information Officer does 

maintain an accurate and authoritative data repository for information regarding DoD systems. It is called 

the Defense IT Portfolio Repository (DITPR). Automated data entry controls which prevent the 

introduction of inconsistent data have been implemented in DITPR, as well as in DITPR feeder systems 

maintained by the Departments of the Navy and Air Force. Similar measures are in the process of being 

implemented in the Army. These continuous improvements in DITPR have resulted in an inventory that 

is increasingly accurate and authoritative and provides meaningful data on which to base metrics for 

management oversight. 

• Federal Information Security Management Act requires an inventory of agency-operated systems and 

systems operated on behalf of agencies. It does not require agencies to maintain inventories of systems 

owned and operated by contractors and other non-DoD entities simply because they may contain DoD 

information provided by DoD or developed as a function of doing business with the Department. DTM 08-

027, discussed above, and other guidance issued by the Department address security requirements for 

such systems. The Department has no plans to attempt to compile an inventory of the estimated 40,000 

plus information systems in this category. 

• DoD is now able to issue a Homeland Security Presidential Directive-12 compliant Personal Identity 

Verification (PIV) credential. 

• During FY09, DoD made changes to its Public Key Infrastructure (PKI) architecture to publish Certificate 

Revocation Lists (CRLs) every 18 hours, as required by the Federal Common Policy Framework 

Certificate Policy. 

• DoD worked along with the Federal community to revise the timeframe requirement for populating the 

next update field in CRLs, as specified in the Federal Common Policy Framework Certificate Policy, 

section 4.9.7. DoD can now meet the requirement . 

• DoD worked with the Federal community and OMB to come to agreement on an approach for handling 

the requirement to indicate the status of a Mission Assurance Category-I. The DoD meets the approach. 

• The Department has introduced a new configuration of the Common Access Card (CAC), the "Gemalto 

TOP DL GX4 144K," into the issuance infrastructure and began initial deployment in August 2009 of a 

compliant PIV credential from workstations configured with the latest Real-time Automated Personal 

Identification System release. Among other things, this configuration supports the following 

enhancements: 

• DoD CAC PIV endpoint implementation 

• Asserting the common policy object identifier in DoD's PIV Authorization Certificate 

• End Entity certificates with Rivest, Schamir, Adlemn (RSA) 2048 key lengths algorithms and SHA-1, 

signed with RSA 2048 keys 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

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• Deputy Secretary of Defense Memorandum, “Disposition of Unclassified DoD Computer Hard Drives,” 

dated June 4, 2001, is still relevant and effective guidance for ensuring that hard drives of DoD 

computers being disposed of outside of the Department are properly sanitized or destroyed. A DoD IG 

audit discovered instances where the guidance was not being followed by DoD organizations. 

• The guidance will be updated in upcoming revisions to relevant DoD information assurance issuances 

and expanded as required to cover other information technology equipment. 

5. Health Care 

5-1A. Cost Containment IG Summary of Challenge 

The DoD Military Health System must provide quality care for approximately 9.3 million eligible beneficiaries within 

fiscal constraints while facing increased user demands, legislative imperatives, and inflation that make cost control 

difficult in both the public and private sectors. During a hearing with the Senate Appropriations Subcommittee on 

Defense, the Secretary of Defense stated the escalating cost of health care is a problem that must be addressed. The 

DoD budget for health care costs was approximately $45 billion in 2009, a 45 percent increase since FY 2005 ($31 

billion). In addition, the American Recovery and Reinvestment Act of 2009, provides $0.4 billion for facilities 

sustainment and $1.3 billion for construction of hospitals. Another part of the challenge in containing health care costs 

is combating fraud. Health care fraud is among the top 5 categories of criminal investigations; currently representing 

approximately 8.7 percent of the 1,825 open cases of DoD IG’s Defense Criminal Investigative Service. Increasing 

health care benefits also provides additional pressure to manage and contain costs. 

5-1B. Cost Containment IG Assessment of Progress 

The DoD Military Health System has been moving forward on improving health care while attempting to control 

costs. Three new TRICARE contracts were awarded in July 2009. The contracts provide incentives for customer 

satisfaction and include the managed care support contractors as partners in support of medical readiness. An 

internal ASD (HA) review identified areas that assist in managing costs, to include US Family Health Plan, fraud 

management, and pharmaceuticals. DoD obtained authority to use federal ceiling prices for pharmaceuticals, and 

issued the final rule effective May 26, 2009. The DoD is also making headway in economizing pharmacy costs by 

implementing use of generic drugs and promoting use of the TRICARE Mail Order Pharmacy system. Additionally, 

the Military Health System has adopted an approach to cost control that will simultaneously improve quality and 

reduce cost by focusing on the elimination of unnecessary care, test and procedures. 

5-2A. Medical Readiness IG Summary of Challenge 

The ability to support and develop the people in the Military Health System continues to be a challenge. 

Maintaining medical readiness of the medical staff and units includes ensuring medical staff can perform at all 

echelons of operation, and the units have the right mix of skills, equipment sets, logistics support, and evacuation 

and support capabilities. The challenge of keeping members of the Reserves and National Guard medically ready 

to deploy continues because of the frequency and duration of deployments. 

5-2B. Medical Readiness IG Assessment of Progress 

The Department published the Military Health System Human Capital Strategic Plan for 2008 to 2013 and 

established a Military Health System Human Capital Strategic Support Office. Quarterly Force Health Protection 

Survey results show continued improvement in service members' medical readiness, except for the Reserves and 

National Guard. The Military Health System has continued to meet all mission requirements despite very high 

operational tempo. Data from the Joint Theater Trauma Registry reveal unprecedented outcomes, including 

reduction in died of wounds rates and the lowest ever disease non-battle injury rates. 

5-3A. Wounded Warrior Care IG Summary of Challenge 

Strengthening comprehensive and integrated health care from accession, through active service, to rehabilitation, 

and transition to Veterans Affairs (VA) care is a major challenge for the Military Health System. The number of 

wounded warriors associated with Southwest Asia and other conflicts requires diligent management of health care 

resources. Another related challenge to force health protection and medical readiness is oversight of postdeployment health needs, including identifying and managing those requiring care. Although a number of 

objectives have been identified by DoD and the VA, and programs have been initiated, the quality and oversight of 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

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these programs must be tightly managed. Transitioning wounded, ill, or injured service members to postdeployment care will grow as a challenge while the Global War on Terror, OIF, and OEF continue. The 

Department needs to improve the medical care and benefits transition program to achieve a streamlined, 

transparent, and timely process as wounded warriors move from the DoD system to the Department of VA system. 

Increased numbers of returning service members with psychological health issues and traumatic brain injuries, 

along with a shortage of uniformed and civilian mental health workers, will require examination of automated 

screening tools and improved diagnostics to provide earlier detection and intervention. In addition, addressing the 

psychological effects of deployment on family members and non-active duty personnel will continue to be a 

challenge. 

5-3B. Wounded Warrior Care IG Assessment of Progress 

The revised Military Health System strategic plan recognizes continuum of care as a strategic priority. As stated 

last year, disparities in the transition of health care and benefits were readily identified, yet actionable solutions are 

difficult to implement and monitor. 

The Center for the Intrepid in San Antonio, Texas, and the new Defense Centers of Excellence being constructed 

on the National Naval Medical Center campus in Bethesda, Maryland, provide promising venues to introduce new 

therapies for amputees, burn victims, and those with traumatic brain injuries and psychological disorders. 

The Department established the Senior Oversight Council (SOC) in FY 2008 to ensure that all aspects of care, 

rehabilitation, and reintegration for wounded warriors was accomplished. One focus of the SOC is to overhaul the 

disability processing system and implement improved case management for recovering warriors. The Department 

is institutionalizing the changes directed by the SOC. 

The Armed Forces Health Surveillance Center was established to ensure tracking and ongoing surveillance of the 

health of service members would be accomplished in a joint manner and coordinated with VA. 

5-4A. Electronic Health Records IG Summary of Challenge 

Providing information to the right people so they can make informed decisions continues to be a challenge in the 

health care community. Along with the benefits of expanding automation efforts comes the increased risk to 

security and privacy of information. The transition from paper to electronic patient records increases the exposure 

of sensitive patient information to inadvertent or intentional compromise, highlighting the need for appropriate 

information assurance procedures. Maintaining information operations that ensure the protection and privacy of 

data will continue to grow as a challenge. 

5-4B. Electronic Health Records IG Assessment of Progress 

The organizational goal to deliver information that aids in better decision-making was added to the Military Health 

System strategic plan. Specific milestones were established to implement a personal health record prototype, and 

to expand bidirectional sharing of health information between DoD and the Department of Veterans Affairs. In 

addition, a deadline was established to define the Military Health System strategic plan for implementing a 

paperless electronic health record. The DoD continues to progress in sharing electronic medical records with the 

Department of Veterans Affairs. The DoD and VA executive leadership initiated a joint assessment project to 

determine the best approach for sharing inpatient electronic health records. The final report on the assessment 

project recommends the Departments pursue a common-services approach, which will allow DoD and VA to build 

upon their already extensive information sharing capabilities. It also will set the stage for the appropriate level of 

interoperability with other government and private sector organizations. 

5-5A. Implementing BRAC IG Summary of Challenge 

Implementing recommendations resulting from the 2005 Base Realignment and Closure (BRAC) process will 

continue to be a challenge. In addition to improving the readiness and cost efficiency associated with realigning 

base structure, a primary objective of the process was to examine and implement opportunities for greater joint 

activity among the Military Departments. Recapitalization of the physical infrastructure is a challenge. 

5-5B. Implementing BRAC IG Assessment of Progress 

The BRAC process addresses part of the aging infrastructure, but to fully address the challenge, better 
 

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standardized data on the condition of facilities is needed. The Military Health System has begun the multiyear 

transition and acquisition process of improving capability and access to care in two major and several minor 

markets. Groundbreaking for the new Walter Reed National Military Medical Center at Bethesda occurred July 3, 

2008. 

Additionally, the Military Health System is following a roadmap for changes in governance that should result in 

increased unity of purpose and functional integration. 

By establishing more unite of purpose in each of the major markets, the market leaders should be able to integrate 

resources across hospitals and clinics within a market to meet the needs of the entire population of eligible 

beneficiaries. In addition, the increased management oversight will enable improved continuity of care and 

coordination of safety and quality programs. In the National Capital Region, the Secretary of Defense established 

the Joint Task Force National Capital Region Medical to clarify command and control, and implemented a single 

manning document and categorized civilian positions as DoD. Through the establishment of joint governance for 

the Tri-service Medical Education and Training Campus, the Military Health System should improve the quality and 

consistency of training for all enlisted, contributing to a culture of jointness and interoperability. 

The combination of all medical research and development assets under joint governance should foster better 

coordination of research activities, eliminate redundant efforts, and focus resources on developing solutions for 

both the warfighter and the clinician. 

Co-locating of the headquarters functions of Health Affairs, the TRICARE Management Activity, the Army Medical 

Command, the Navy Bureau of Medicine, and the Air Force Medical Service should enhance efforts to achieve 

unity of purpose for Military Health System policy, strategy, and financial programming, and yield greater 

consistency across the Services in program execution. 

5-6A. Humanitarian Assistance IG Summary of Challenge 

The Department’s role in providing humanitarian assistance and disaster relief to support U.S. strategic objectives 

and promote human dignity through better health has been identified as a core capability of the Military Health 

System, but will continue to provide financial and organizational challenges. The Military Health System will 

collaborate with ASD (GSA) to develop a strategy that complements the overall DoD strategy and interfaces well 

with other executive agencies, including the Agency for International Development, and the Departments of State, 

Health and Human Services, and Homeland Security, which have traditionally played the lead role in humanitarian 

assistance and disaster responses. 

5-6B. Humanitarian Assistance IG Assessment of Progress 

Building a bridge to peace through humanitarian assistance and disaster relief is a goal under the Military Health 

System strategic plan, in response to Combatant Command goals. The May 2008 Military Health System Strategic 

Plan recognizes many of these challenges and includes a set of performance metrics to measure mission success. 

5. Health Care Management’s Overall Assessment 

The Department concurs with the above assessment and offers the following additional comments. The 

Department agrees with analyses by organizations such as the Institute of Medicine that state a significant portion 

of health care spending is waste; true health care reform must reduce that waste. Some of the waste consists of 

overutilization of expensive tests and medical services, which are not only costly, but also dangerous. In addition, 

key healthcare processes are inefficient. DoD is implementing continuous process improvement across its system 

to make health care processes safer and more cost effective. In addition, DoD is implementing programs to 

increase evidence based practices to ensure that the right care is delivered and unnecessary tests and procedures 

are avoided. This kind of health care reform has the potential to both improve quality and reduce costs. 

The Department is working with the Reserves and National Guard to address challenges in force readiness, 

particularly in the area of dental readiness. The DoD’s human capital team is actively addressing the need for 

additional mental health services in support of the readiness of the force. Over the past two years, we have added 

over 1900 new mental health professionals to the DoD work force. 

In addition to the actions noted above, the acquisition structure and processes within the Office of the Assistant 

Secretary of Defense (Health Affairs) (OASD(HA)) and the TRICARE Management Activity are being strengthened 

to ensure that major acquisitions such at the Electronic Health Record (EHR) are accomplished efficiently and 

effectively. The DoD and Department of Veterans Affairs are working together to implement the Virtual Lifetime 

Electronic Record (VLER). The VLER vision is that health, benefits, and personnel information of a Service 

member or Veteran from the time of accession to internment will be available to those who need the data. 
 

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Although the intent was for DoD to incorporate the expanded mission of humanitarian assistance within the normal 

planning and budgeting framework, that has not yet been accomplished. That will not, however, prevent the 

Department from continuing to support these activities 

6. Equipping and Training Iraqi and Afghan Security Forces 

6-1A. Iraqi Security Forces IG Summary of Challenge 

The Iraqi Security Forces (ISF) are comprised of the military and police. Although the Iraqi government, with the 

support of the Coalition, has achieved the generation of the core of ISF with respect to the Iraqi Army and Police, it 

is still committed to developing the necessary enabling forces to expand current capabilities and build the 

foundation of a credible and enduring Iraq Air Force and Navy for the future, and to modernize the ISF to be able 

to provide for the protection of the country against external threats. It still needs to address a fundamental 

leadership shortage in the Army and Police. In addition, building the institutional capacity of the Ministry of 

Defense (MoD) and Ministry of Interior (MoI) is still a priority. President Obama defined his major goals for Iraq: a 

sovereign, stable and self-reliant Iraq that contributes to the peace and security of the region, and with whom the 

U.S. can forge a long-term security partnership. An Iraq capable of providing for internal security with a 

foundational external defense capability prior to the withdrawal of U.S. Forces from Iraq in December 2011, is 

essential to achieving these U.S. national objectives." 

6-1B. Iraqi Security Forces IG Assessment of Progress 

Efforts are ongoing to build the capability of the ISF, MoD, and MoI to sustain themselves, without Coalition 

logistical support, and for the forces to be able to operate independently without the full range of Coalition combat 

enablers, such as air and ground transport of troops, equipment, and supplies, tactical air support, fire support; 

communications, intelligence, surveillance, and reconnaissance capabilities, logistics, sustainment, and health 

services support. 

6-2A. Iraqi National Army IG Summary of Challenge 

While the MoD has filled approximately 92 percent of its authorized numbers, it continues to experience shortfalls 

in generating the officer and noncommissioned officer (NCO) personnel needed to meet requirements. As of 

November 2008, the Iraqi Army was manned at 57 percent of its authorized officers and 45 percent of its 

authorized NCOs. The MoD experienced difficulties in developing a sustained funding plan. Its continued practice 

of centralized decision-making continues to inhibit necessary MoD force capability improvements. 

The MoD/Iraqi Army continues to experience numerous challenges in acquisition processes, including the lack of a 

multi-year acquisition strategy, weak requirements determination, overly centralized decision-making, an 

inadequately trained and inexperienced acquisition staff, and inefficient use of technology to optimize processes. 

The Army continues to experience shortfalls in self-sustaining logistics. While the initiatives to develop the Iraqi 

Army logistics base have been significant, success may be hampered by shortages in the number of formally 

trained Iraqi logistics personnel, inadequate acquisition and distribution policies and procedures that prevent 

effective stock replenishment, inadequate maintenance and repair operations, and lack of information connectivity. 

6-2B. Iraqi National Army IG Assessment of Progress 

The Iraqi Army is taking several steps to mitigate leader shortages, such as actively recruiting prior service officers 

and NCOs, using mobile recruiting teams, and exploring accelerated promotions of personnel currently in the 

Army. However, it is unclear whether sufficient candidates can be recruited to offset the increased force 

requirements to field 14 Army divisions and support forces, a Navy of 2,700 personnel, and an Air Force of 6,000 

personnel. 

Multi-National Security Transition Command-Iraq and Multi-National Corps-Iraq are making significant strides in 

assisting the Iraqi Army to develop an Iraqi logistics sustainment base, but much work remains to be done. The 

MoD continues to develop its national supply and distribution network, including establishment of Location 

Commands in support of each IA division; however, the Location Commands are still lacking in equipment and 

manning and will not be fully operational for several more months. 
 

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Through the efforts of the U.S. Forces Iraqi Logistics Development Committee, specific logistics advisory, training, 

and partnering relationships have been established throughout the MoD, Joint Headquarters Staff, and Iraqi Army 

to build a logistics system using an Iraqi model that it will be able to sustain. 

U.S. Logistics Management Advisory Teams have been assigned to each regional Iraqi logistics Location 

Command. In addition, U.S. Logistics Training and Assistance Teams, formed from in-country U.S. logistics 

sustainment brigades, have refocused their efforts to provide more intense mentoring and partnering interaction 

with Iraqi Army units, including the regional Location Commands supporting line units, division, and below. With 

U.S. forces downsizing significantly over the next 12 months, there is still a continuing need to ensure the 

momentum of the training and partnering mission is sustained, and appropriate and sufficient forces will be 

specifically tasked with the logistics-mentoring mission. 

Nevertheless, newly organized and trained U.S. Advisory and Assistance Brigades (AABs) will be deployed to Iraq 

starting in Fall 2009. AABs are re-missioned brigade combat teams augmented with U.S. military field grade 

advisors that will focus on stability operations within a given region in Iraq. The mission requirements of the AABs 

are to conduct stability and civil capacity building operations; to partner with, enable, and advise the ISF; and if 

required, conduct full spectrum operations

6-3A. Iraqi Federal Police IG Summary of Challenge 

The capacity of the MoI to plan, coordinate, conduct, and sustain operations continues to improve, though 

planning efforts remain highly centralized and not thoroughly integrated with MoD plans. The MoI has made some 

notable improvements in its logistics capability, having executed a $48 million Foreign Military Sales (FMS) case to 

create a computer-based supply-chain management system and to enhance its vehicle maintenance training on 

non-tactical vehicles assigned to the MoI ground transport fleet. A Federal Police Sustainment Brigade is 

scheduled to be operational by September 2009, capable of line-haul transport, deployable maintenance, supply 

receipt, storage, and issue for NP divisions. 

Additional challenges for the MoI include ensuring ongoing and advanced training for the Iraqi Police Service 

(IPS), the Iraqi Federal Police (IFP), the Directorate of Border Enforcement (DBE), the Ports of Entry Directorate 

(PoED), and those security personnel assumed from the Oil Police (OP) and the Facilities Protection Services 

(FPS). 

6-3B. Iraqi Federal Police IG Assessment of Progress 

The MoI’s ability to address basic equipping shortfalls for each of its components – the IPS, the National Police 

(NP), the DBE, the PoED, the OP, and the FPS – remains a concern. For example, although progress has been 

made, some NP units lack personnel, individual equipment, and reliable vehicles to conduct operations without 

Coalition support. 

The ongoing professionalization of the basic community-based uniformed police, the IPS, is crucial to develop and 

maintain a credible police force. But, training challenges remain, particularly for the DBE, the PoED, the OP, and 

the FPS, which are crucial since these organizations have not previously had the benefit of focused security and 

ethics training. 

6-4A. ISF Health Care System IG Summary of Challenge 

The ISF continues to develop health systems that parallel the civilian sector, but depend on the supporting 

capability within the civilian sector for anything other than basic outpatient care. Challenges remain in recruiting 

medical personnel, particularly specialist physicians, and in building military hospital facilities. 

Cooperation and collaborative planning between the Iraqi Ministries of Defense, Interior, Health, and Higher 

Education are required to achieve comprehensive and sustainable health care delivery, independent of Coalition 

support. Medical logistics, training and education programs, and transportation of casualties will remain the highest 

priority challenges. 

6-4B. ISF Health Care System IG Assessment of Progress 

The initial enthusiasm in the Fall of 2008 about refugee physicians returning to Iraq to practice medicine has 

waned, and major shortages of health care personnel continue in all fields. MoD hospital construction remains an 
 

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unfinanced requirement in the Government of Iraq budget, but it does not appear that the Ministries have 

developed contingency plans to adjust for the loss of care to ISF members that will occur with the withdraw of U.S. 

military field hospitals. Logistics capabilities are inadequate, including the maintenance of procured medical 

equipment, and will likely result in loss of capability unless the problems are addressed. 

6-5A. Afghan Security Forces IG Summary of Challenge 

The Afghan National Security Forces (ANSF) are comprised of the military and police forces. Their effectiveness is 

being tested by increased Taliban attacks, including in previously safe areas of the country. 

Coalition efforts to build the capability of the Afghan Ministries of Defense (MoD) and Interior (MoI) and their 

respective forces continue to focus on four major areas: developing ministerial capacity; improving the proficiency 

of military and police forces through the assistance of mentors, embedded advisors, and partnership unit 

relationships; building the training, logistics, medical, and sustainment capability of the MoD and MoI; and 

supporting the expansion of the army and police, and their ability to operate on an independent basis. 

The Afghan government continues to pursue significant expansion of the ANSF, with the support of the 

international community. The Afghan National Army (ANA) has an approved authorized end-strength of 134,000 

and is expected to reach that level by the end of CY 2011. The authorized end-strength of the Afghan Federal 

Police (AFP) was increased to 96,800 as of June 2009, and it is planned to reach that level by September 2009. 

As of May 2009, ANA and AFP assigned strength was 86,558 and 81,509, respectively. Both ANA and AFP will 

likely require additional increases in end-strength beyond currently approved levels, partnered with international 

security forces, in order to win, the counter insurgency fight and, ultimately, to develop the capacity to conduct and 

sustain independent operations on their own. 

The Afghan MoI recently initiated a pilot program to augment its police through the development of the Afghan 

Public Protection Program. This program envisions enhancing security and stability, and strengthening community 

development by building local forces of community-vetted security personnel to assist the police. 

The DoD faces numerous challenges with respect to accomplishing the train and equip mission for ANSF. 

Foremost among these are a continuing lack of sufficient personnel dedicated to training and mentoring, as well as 

difficulties in coordinating and synchronizing the training effort with our international partners. To solve the problem 

of insufficient trainers, DoD decided to augment the one National Guard brigade in Afghanistan with an additional 

Army Brigade Combat Team with the primary mission of training and mentoring. The North Atlantic Treaty 

Organization (NATO) recently designated Combined Security Transition Command-Afghanistan (CSTC-A) with the 

dual-hatted mission as NATO Training Mission-Afghanistan. This shift in command and control will provide CSTCA with more authority in coordinating NATO International Security Assistance Forces (ISAF) with Coalitional and 

U.S. forces to accomplish integrated training and mentoring missions in support of the ANSF. 

6-5B. Afghan Security Forces IG Assessment of Progress 

The ANA as an institution is highly regarded by the populace. As of May 2009, approximately 41 percent of fielded 

ANA organizations have reached Capability Milestone 1 (the unit, agency, staff function, or installation is capable 

of conducting primary operational mission[s], with the support of Coalition enablers – air support, medical 

evacuation, logistics, and intelligence enablers). The ANA now takes the lead in approximately 54 percent of 

Coalition combat operations. However, there are still significant leadership shortcomings that must be addressed 

within the ANA, especially at the junior officer and NCO levels. 

Progress in building the capability of the AFP, which is often viewed with mistrust due to lack of professionalism 

and corruption issues, lags that of the ANA in development, as much as several years. The DoD has placed 

significant emphasis in reforming the Afghan Uniformed Police through the Focused District Development 

program, an intensified reform initiative that trained the police in 52 of Afghanistan’s 365 districts from November 

2007 through May 2009. CSTC-A estimates that it will take another 3 to 4 years to train all 365 districts. A similar 

training program has been initiated for the authorized Afghan Border Police, numbering 18,000. 

There are insufficient numbers of Embedded Training Teams (ETTs) to mentor the ANA and Police Mentoring 

Teams (PMTs) to mentor the AFP. As of April 2009, CSTC-A needed approximately 5,724 personnel for ETTs and 

PMTs when compared to personnel requirements stated in RFF 920 and 937. However, only about 2,175 had 

been assigned. Additionally, as of June 2009, ISAF and Coalition partners had provided 54 Operational Mentor 

and Liaison Teams (OMLTs), about 800 personnel, out of the current requirement of 65. Combining the 

ETT/PMT/OMLT assigned strength of approximately 2,975 against the 5,724 requirement gives about a 52 percent 

overall fill rate. 
 

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6-6A. Afghan National Army IG Summary of Challenge 

Developing an effective ANA force of sufficient size and effectiveness is a significant challenge in the midst of an 

ongoing war. A decision was made to increase the ANA to 134,000 by the end of CY 2011, and very conceivably 

to an even larger number thereafter. 

The ANA logistics system required to support its combat forces is progressing, but is still in its infancy, and 

continues to experience shortfalls in providing a self-sustaining logistics capability. While the Coalition and ISAF 

initiatives to develop the ANA logistics base are significant, success may be hampered by shortages in formally 

trained Afghan logistics personnel and lack of information connectivity. In addition, one of the problems in 

establishing logistics sustainment within the ANA has been the lack of an integrated systems approach. The 

Afghans have been accustomed to working in stovepipes with little cross coordination. The result is that important 

nodes in the logistics system were lacking visibility of the ANA logistics capability and challenges, and senior 

leaders were unable to make informed decisions about logistics requirements and necessary performance 

improvements. 

6-6B. Afghan National Army IG Assessment of Progress 

Progress has been made in developing a more capable ANA, but significant work still needs to be accomplished. 

A continually improving national logistics infrastructure exists and is already supporting ANA. A series of national 

and forward-support depots currently provide the bulk of ANA supply needs. Brigade-level logistics structures and 

systems continue to develop. However, there is a gap in the linkage from the brigade level to the national level. 

There are insufficient trained logistics personnel and the capacity to produce them, especially in specialist military 

occupations specialists. Moreover, some MoD, General Staff, and ANA field command senior officers appear to 

lack an appreciation for the essential importance of having a strong logistical support system and a commitment to 

building one. A gap has grown between the ANA operational and logistical capabilities that must be closed for the 

ANA to become a fully independent and sustainable fighting force. 

6-7A. Afghan Federal Police IG Summary of Challenge 

The AFP are the face of the government to most Afghan people. Unfortunately, in the past, this has often been the 

face of unprofessionalism and corruption. To be effective in the counter insurgency fight through protecting the 

population and thereby gaining its confidence, AFP and MoI must change their behavior to overcome the people’s 

negative perceptions. 

At present, there are insufficient police to provide both effective community policing and security for the populace 

in a counter insurgency environment. The most current Tashkil, an organizational document, authorized 82,000 

AFP spread throughout various units to include: Afghan Uniformed Police, Afghan Border Police, Afghan National 

Civil Order Police, Counternarcotics Police, Customs, and Special Police. Even with the recent increase in size to 

96,800, this number may be insufficient to provide the security needed in the Afghan counter insurgency 

environment. 

Most external studies would recommend increasing the size of the police to 130,000 to 140,000 to provide a more 

viable proportion of police to populace. The new Minister of Interior has recommended a police force of 160,000. A 

doubling of the AFP would more closely align the ratio of police to population in Afghanistan to that found in Iraq. 

The Afghan MoI and National Police logistics system continues to experience shortfalls in self-sustaining logistics 

capability. While the initiatives to develop the AFP logistics base have achieved progress, further advances have 

been hampered by shortages in formally trained Afghan logistics personnel and lack of experience and confidence 

in the system being put in place. Logistics sustainment for the MoI and AFP significantly lags that of the ANA. 

Supplying regional, district, and provincial police units, especially those in far-flung locations, is a vastly different 

problem than providing support for an army corps, brigade, or battalion. The MoI is behind in establishing needed 

logistics policies and procedures and in obtaining the requisite training for their logistics personnel. 

The U.S. Police Mentoring Teams have been under-resourced for personnel, requiring CSTC-A to fill the gap by 

using U.S. military personnel who had previously been assigned to train the Afghan Army. The shortage of 

qualified logistics trainers for PMTs also remains a continuing problem in advancing the logistics capability of the 

Afghan Police. The deficiency in the number of police trainers, unless addressed, will only be amplified as the 

authorized size of the AFP is increased. 
 

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Although the International Security Assistance Force has not previously been as engaged in the police mentoring 

mission as the Coalition, they have provided some Police Operational Mentor Liaison Teams. In addition, there are 

police trainers and mentors provided by the European Union, the Provincial Reconstruction Teams, and through 

several bi-lateral country agreements with the Government of Afghanistan. Most of these police training efforts 

have fallen outside the purview of CSTC-A, resulting sometimes in a lack of coordination, duplication of effort, and 

inefficiently used or wasted police training resources. However, the recent establishment of the North Atlantic 

Treaty Organization (NATO) Training Mission-Afghanistan under the Commander, CSTC-A, should address these 

problems. 

6-7B. Afghan Federal Police IG Assessment of Progress 

The Focused District Development program is an effective tool in addressing the problem of corruption and 

unprofessionalism at the district level, but it will take significant effort to run all districts through the Focused 

District Development process, and to incorporate the provincial police fully into the program. Furthermore, the 

impact of the Focused District Development program is limited by the lack of effective linkages between the police 

and the Afghan justice system at the district level. Consequently, there is a very tenuous connection between the 

important roles of the police and Rule of Law at the community level. Their ability to collectively promote security 

and stability is diminished. 

Anticorruption has become a primary focus of new Minister of Interior, Mohammad Hanif Atmar, but he will need a 

reinforced capability to accomplish this goal both within the ministry and down the police chain of command. To 

enhance accountability and transparency throughout the MoI, there should be an increase in the numbers and 

capability of DoD IG and internal affairs staff, and internal affairs investigators should have a presence in the 

provincial and district police headquarters. 

The international community has approved increasing the size of the AFP from the 82,000 authorized on its latest 

staffing documents to 96,800, but this increase has been in large part to accommodate security for the August 

2009 elections and to strengthen the police capability in the capital region in and around Kabul, which has been 

subjected to increasing insurgent attacks. The Afghan Public Protection Program is a new approach developed by 

the MoI and ISAF to supplement police security at the local level. Although in a nascent pilot stage of 

development, if effective, the Afghan Public Protection Program force could be expanded to significant effect in 

terms of providing enhanced local security against the Taliban insurgents. At present, there are notable shortfalls 

in staffing the authorized numbers of police. The Afghan National Civil Order Police is at approximately 50 percent 

of its authorized strength, and the Border Police are manned at approximately 75 percent. 

Regional, provincial, and district level gaps in effective Afghan Police logistics support stem in part from stilldeveloping MoI logistics policies and procedures and lack of logistics officer skills. The MoI is working to close 

these gaps through logistics officer training, and there has been a renewed emphasis in new MoI directives on the 

importance of equipment accountability and control. 

According to CSTC-A plans, PMTs will ultimately be assigned to every AFP unit (including Afghan Uniformed 

Police, Afghan National Civil Order Police, and Afghan Border Police). Given current personnel resources, PMTs 

can be provided to no more than one-fourth of all AFP organizations and units. CSTC-A previously determined that 

in order to deploy PMTs to one-third of all Afghan Uniformed Police districts they would need an additional 2,375 

personnel. As of January 2009, they only had 922. To address the mentor shortage, DoD has decided to assign an 

additional Brigade Combat Team to CSTC-A; it will be uniquely organized and trained to perform the sole mission 

of training and mentoring. This should address much of the ETT/PMT training and mentoring shortfall, but there 

still may be some mentoring gaps. 

6-8A. Afghan National Security Forces Health Care 

System IG Summary of Challenge 

The core U.S. strategy toward developing the capacity of the ANSF health care system is through providing 

medical mentoring teams at ANA and AFP medical facilities, primarily at definitive treatment centers (e.g., 

hospitals). Training and managing medical mentors remains the greatest challenge, although medical logistics 

system development is a major concern. The ANSF leadership has resisted U.S. recommendations to develop a 

single ANSF healthcare system, and continues to build independent ANA and AFP systems, despite limited fiscal 

and personnel resources and the remote locations of many AFP posts that preclude access to AFP clinics for 

many AFP members. The ANSF has not developed a plan to care for dependents of ANA and AFP members 

within the highly constrained resources available, yet it remains a stated objective of ANSF leadership. 
 

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6-8B. Afghan National Security Forces Health Care 

System IG Assessment of Progress 

CSTC-A has not developed an operational plan to provide leadership and oversight of medical mentoring teams, 

nor measurements of performance and effectiveness. There is no strategic plan for the role of the U.S. military and 

NATO forces in ANSF health system development, resulting in poorly defined command and control relationships 

among medical trainers, mentors, and advisers at all levels of command. Medical mentors have still not received 

adequate pre-deployment training before deployment to Afghanistan, and they do not arrive with a sufficient 

understanding of the knowledge and capabilities of ANSF medical personnel, equipment, and facilities. This has 

hindered the utility of U.S. mentoring mission and has created a sense of dissatisfaction among their medical 

mentor staff. 

6. Equipping and Training Iraqi and Afghan 

Security Forces Management’s Overall Assessment 

The U.S.’s four areas of focus to develop the ISF remain unchanged: support force generation and force 

replenishment; improve the proficiency and professionalism of Iraqi forces; build specific logistic, sustainment, and 

training capacities; and develop ministerial and institutional capacity. The four near-term areas of emphasis also 

remain unchanged: ensure Iraqi forces continue to improve in logistics, maintenance, and life support; ensure the 

size, capability, professionalism, and leadership of the ISF enable increasing assumption of additional security 

roles from U.S. forces; enhance the capabilities of Iraqi Special Operations Forces and Counter-Terrorism Forces; 

and ensure Iraqi Air Force and Navy growth stays on track. Following the withdrawal of U.S. combat forces from 

Iraqi cities on June 30, 2009, the ISF continue to mature in their leadership roles providing security and overall 

stability for the citizens of Iraq. The citizens of Iraq continue to develop their confidence in the ISF, and it is 

becoming clear that the growing professionalism of the ISF is a source of national pride. 

The ANP have made progress over the last year as a result of the implementation of the Focused District 

Development OFDD) program. We concur with the comments made on the issues being addressed with the MoI. 

The FDD program has attempted to improve the logistics capabilities of ANP districts by ensuring equipment is 

properly issued and accounted for. The FDD training program that the district police attend also teaches ANP 

Officers about logistics and equipment accountability. Logistics officers within police units are provided additional 

training in these areas. As noted, the creation of the NATO Training Mission – Afghanistan (NTM-A) as part of a 

combined command including CSTC-A will lead to increased coordination between U.S. and Allied training efforts. 

CSTC-A has a robust program that is focusing on ministerial level logistics development with the MoI. As 

previously mentioned, we are currently awaiting the President’s decision on additional resources for Afghanistan, 

which may make additional forces available for mentoring and training the ANSF. 

The Department agrees with DoD IG’s assessment of progress made by the ANSF. The ANA is one of the most 

trusted and respected institutions within Afghanistan. As of November 2009, the ANA has grown to a force size of 

approximately 95,500 and is growing towards an end strength of 134,000 in October 2010. The ANP currently 

lags behind the ANA in development, but much progress has been made. The ANP is at a force level of 93,300 

and growing towards 96,800. Sixty-four Districts have completed Focused District Development training as of 

September 2009. The establishment of the NTM-A/CSTC-A command will improve overall coordination of ANSF 

development. The total number of Coalition trainers available may increase pending the President’s decision on 

committing further troops. 

The ANA has made great progress over the past year. As the ANA grows to 134,000, it is increasingly improving 

in capability and in building logistics capacity. While the Department agrees with the need for a more robust ANA 

logistics processes, it should be noted that priority has been placed on the development of ANA combat forces 

first, supported by ISAF enablers. Logistic enablers will be developed by design after combat elements have been 

fielded. Afghanistan poses unique issues in terms of implementing an integrated nation-wide logistics system. 

Many areas within Afghanistan lack reliable power and communications capacity and do not allow for a networked 

logistics system. Additionally, the issue is made even more challenging because of low literacy rates among the 

populace and the lack of trained personnel with logistics background 

The DoD is focused on improving logistics within the ANA. One of the objectives of the CSTC-A Campaign Plan is 

to develop an efficient logistics system that is capable of acquiring and distributing resources to the ANA. The 

CSTC-A is developing a unified ANA logistics strategy which will ensure standardized logistics mentoring within 

the ANA. A robust Ministerial Development program is in place which focuses on building logistics capabilities 

within the MOD and the General Staff Headquarters. 
 

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The Department agrees that a coordinated ANSF Health Care system is desirable but DoD cannot accomplish this 

without support from the Afghan Government. The International Community and other areas of the U.S. 

Government outside of DoD will need to be involved in this effort as well. 

7. Nuclear Enterprise 

7-1A. Decline of Focus on the Nuclear Enterprise IG Summary of Challenge 

The Department faces complex and long-standing nuclear enterprise management challenges that affect the 

Department’s ability to provide public assurance that it can meet its nuclear operational and surety responsibilities. 

A 2008 Defense Science Board report stated that since the end of the Cold War, there has been a marked but 

gradual decline in the level and intensity of focus on the nuclear enterprise and the nuclear mission. When 

comparing the current level of focus to that of 1990, the aggregate change is dramatic. The decline is 

characterized by: 

• Embedding nuclear mission forces in nonnuclear organizations. 

• Markedly reducing levels of leadership whose daily focus is on nuclear enterprise. 

• Generally devaluing the nuclear mission and those who perform the mission. 

Numerous reports and studies issued over the past decade have documented the decline. From 1991 to 2009, the 

IG identified and reported on aspects of this decline in a series of classified audit reports related to the security of 

nuclear systems. Although specific report details are classified, the weaknesses identified in each of those reports 

are a direct result of the decline in emphasis of the nuclear enterprise and mission. 

7-1B. Decline of Focus on the Nuclear Enterprise IG Assessment of Progress 

The Department has begun to address and reverse the nuclear enterprise decline. By the end of June 2009, DoD 

issued ten reports related to the enterprise. Four additional reports were due during the summer of 2009. The DoD 

IG recently completed field work examining DoD actions in response to the recommendations contained in three of 

the 10 reports and found that DoD is taking actions to address those report recommendations. 

It is critical that DoD leadership recognize the consequences of failure to ensure the security of its nuclear forces 

and provide sustained commitment to continue to implement viable recommendations to stop and reverse the 

decline focus on the nuclear enterprise. 

7-1. Decline of Focus on the Nuclear Enterprise Management’s Overall Assessment 

The Department has made substantial progress in reversing the decline of the nuclear enterprise. DoD continues 

to aggressively implement enduring remedies to address recommendations from several DoD reports. For 

example, the Air Force made an effort to reverse the decline of focus on the nuclear enterprise by activating Air 

Force Global Strike Command in August 2009. This initiative will place all Intercontinental Ballistic Missile (ICBMs) 

and nuclear-capable bombers into a single command. 

The Air Force also developed a nuclear roadmap last fall which: 

• Unified nuclear sustainment into the Nuclear Weapons Center to consolidate authority and responsibility 

for nuclear weapons related material 

• Established an Air Staff directorate to ensure a clear and consistent voice for the nuclear mission 

• Established a Nuclear Deterrence Operations Panel to ensure resources advocacy for the nuclear 

enterprise 

• Enhanced our inspection process with improved inspector training, headquarters oversight of commandlevel Nuclear Surety Inspections, and a centrally managed core team of highly experienced inspectors 

Established a Nuclear Oversight Board chaired by the Secretary of the Air Force and the Chief of Staff of the Air 

Force to provide executive-level supervision of nuclear issues. 

7-2A. Incidents Indicate Systemic Problems IG Summary of Challenge 

During FY 2008, the Department experienced a series of incidents that indicated significant problems with nuclear 

enterprise management. Failure to follow prescribed verification procedures resulted in nuclear warheads being 

inadvertently transferred from Minot Air Force Base (AFB) to Barksdale AFB. Sensitive missile components were 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

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erroneously shipped to Taiwan. The 2nd Bomb Wing at Barksdale AFB failed a nuclear surety inspection and had 

to be re-inspected to a satisfactory rating. 

7-2B. Incidents Indicate Systemic Problems IG Assessment of Progress 

In response to the Minot incident, the Air Force conducted a Commander Directed Report of Investigation 

Concerning an Unauthorized Transfer of Nuclear Warheads Between Minot AFB, North Dakota and Barksdale 

AFB, Louisiana; August 30, 2007; and the Air Force Blue Ribbon Review of Nuclear Weapons Policies and 

Procedures, February 8, 2008. In response to a February 2008 request from the USD (AT&L) the Defense Science 

Board Permanent Task Force issued its “Report on the Unauthorized Movement of Nuclear Weapons.” These 

reports contain over 100 recommendations for improving the nuclear enterprise. The DoD IG is preparing a draft 

report of our recently completed work to examine DoD actions in response to the recommendations contained in 

these reports, reporting that DoD is taking actions to address those report recommendations. 

The Department has continued to analyze and study critical elements of the nuclear enterprise. In addition to the 

three reports noted above, DoD issued 7 additional reports related to the nuclear enterprise: 

• Nuclear Surety Staff Oversight of US Air Force Nuclear Surety Inspections, April 1, 2008 

• Investigation into the Shipment of Sensitive Missile Components to Taiwan, May 22, 2008 

• Air Force Inventory and Assessment: Nuclear Weapons and Nuclear Weapons-Related Materiel, May 25, 

2008 

• Air Force Comprehensive Assessment of Nuclear Sustainment, July 26, 2008 

• SECDEF Task Force on DoD Nuclear Weapons Management, September 12, 2008 

• Air Force Nuclear Task Force (Nuclear Roadmap), October 24, 2009 

• Nuclear Weapons Management, January 8, 2009. 

Four additional reports were expected to be published during the summer of 2009: 

• Nuclear Command and Control System 

• Comprehensive Assessment of Nuclear Sustainment - II 

• Commission on Strategic Posture 

• Defense Science Board Task Force; DoD Nuclear Surety Inspections. 

7-2. Incidents Indicate Systemic Problems Management’s Overall Assessment

The Department has taken action to further strengthen nuclear weapons enterprise governance and oversight 

processes to ensure the highest levels of accountability and control in the stewardship of nuclear weapons. For 

example, the Secretary of Defense directed nuclear inventories by the U.S. Navy, and Defense Logistics Agency 

(DLA). There were no discrepancies noted with nuclear weapons and the discrepancies noted with nuclear 

weapons-related materials were resolved. The Air Force consolidated nuclear weapons management and 

systems under the Air Force Nuclear Weapons Center and initiated an aggressive and comprehensive program to 

ensure positive control of nuclear weapons-related materials and components in the Air Force Supply system. 

Additionally, the Air Force Global Strike Command was charged with providing weapon system oversight and 

reinvigorating the service’s nuclear culture. 

The joint DoD/Department of Energy (DOE) Nuclear Weapons Council (NWC) chaired by the USD (AT&L) and 

the Interagency Nuclear Command and Control System (NCCS) Committee of Principals (CoP) chaired by the 

Deputy Secretary of Defense, continues to oversee implementation actions to address the findings and 

recommendations from various reports and studies. Departmental senior leaders are involved in the 

organizational structure, processes, and procedures to improve every aspect of the nuclear mission area and 

restore confidence in the safe handling and accountability of the nation’s strategic assets. 

7-3A. Keys to Improvement IG Summary of Challenge 

To reverse this trend, the Department needs to sustain its focus on the nuclear enterprise. The following elements 

are key to improvement: 

• Create an environment that emphasizes the nuclear mission and that a reliable, safe, secure, and 

credible nuclear deterrent is essential to national security and is a high DoD priority. 
 

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• Conduct detailed reviews and studies of all critical elements of the nuclear enterprise to identify key 

deficiencies and methods for improvement. 

• Develop corrective action plans that correct the deficiencies and provide adequate funding and leadership 

to ensure implementation. 

• Implement the corrective actions and conduct follow-up reviews to ensure that the action plans are 

correcting the deficiencies. 

As stated in the Defense Science Board report, the series of nuclear related incidents that occurred over the past 

year “can be a just-in-time rescue if lasting corrective actions are implemented now.” 

7-3B. Keys to Improvement IG Assessment of Progress 

The Department has taken significant action to conduct detailed reviews and studies of critical elements of the 

nuclear enterprise to identify key deficiencies and methods for improvement. Additionally, they are implementing 

report recommendations and developing corrective action plans that correct the deficiencies. 

We fully support these efforts. However, successfully addressing the deficiencies in the nuclear enterprise will 

require years of sustained effort. Fixing the problems will require commitment, effort, and resources. The IG will 

monitor the Department’s progress in implementing the various report and study recommendations. 

7-3. Keys to Improvement Management’s Overall Assessment 

The Department is fully committed to restoring confidence in the nuclear enterprise and in the safe handling and 

accountability of the nation’s strategic assets. The Department continues to engage in a robust effort implementing 

report recommendations and corrective action plans to address stockpile deficiencies. 

Processes are under development to address the root and systemic cause of the deficiencies with enduring 

methods to help ensure a lasting approach. Resources have been committed to high-priority nuclear enterprise 

items through reprogramming and realignment of funds. The Nuclear Command and Control System Oversight 

Committee (NOC), NWC and NCCS CoP will continue oversight of the reports, recommendations, and findings to 

ensure proper level of interagency and departmental oversight and to assure proper resources are allocated for 

and enduring restoration. 

8. American Recovery and Reinvestment Act 

8-1A. American Recovery and Reinvestment Act IG Summary of Challenge 

In passing the American Recovery and Reinvestment Act of 2009 (Recovery Act), (Public Law 111-5), the 

Congress provided supplemental appropriations to preserve and create jobs; promote economic recovery; assist 

those most affected by the recession; provide investments to increase economic efficiency through technological 

advances in science and health; and invest in transportation, environmental protection, and other infrastructure. 

Under the Recovery Act, Congress appropriated $7.4 billion to DoD for the following programs: 

• Energy Conservation Investment ($120 million) 

• Facilities Sustainment, Restoration, and Modernization ($4.26 billion) 

• Homeowners Assistance Program($555 million) 

• Military Construction ($2.18 billion) 

• Near Term Energy-Efficient Technologies ($300 million). 

The USACE received $4.6 billion in appropriation for its civil works program. The $4.6 billion provided for the civil 

works program includes $2 billion for construction and $2.075 billion for Operations & Maintenance. 

The Recovery Act also provided unprecedented efforts to ensure the responsible distribution of funds for the Act’s 

purposes and to provide transparency and accountability of expenditures so that the public would know how, 

when, and where tax dollars were being spent. Further, the Recovery Act stated that the President and the heads 

of Federal departments and agencies were to manage and expend the funds made available in the Act to achieve 

its purpose, which included commencing expenditures for activities as quickly as possible, consistent with prudent 

management. 

The DoD is pursuing three broad goals with Recovery Act Funding, preserve and create American jobs, care for 

U.S. Service members and their families, and improve DoD energy efficiency. The DoD intends to expend DoD 
 

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ADDENDUM B Other Accompanying Information

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funds as quickly as possible on facilities sustainment, restoration, and modernization, military construction, energy 

conservation, near-term energy efficiency technology demonstration and research, and homeowners assistance. 

Specific investments in military construction will further the goal of providing stimulus to the economy while helping 

to improve the quality of life for the troops and their families. 

By September 4, 2009, DoD planned to start 2,300 construction and facility repair projects (meaning contract 

award and construction/repair work had commenced) in 49 states, plus Guam and the District of Columbia, using 

$1.9 billion of the Recovery Act funds. DoD estimated that about 225 of these projects would be completed by 

Labor Day. DoD is planning on over 4000 repair projects, totaling $4.26 billion for installations in all 50 states, two 

territories and the District of Columbia. An additional $2.18 billion is available for new construction, including $1.33 

billion for replacement of aging hospitals, $115 million for family housing construction, $240 million for 21 Child 

Development Centers, $100 million for two Warrior in Transition facilities, and $555 million to reduce the impact of 

the down-turn in the housing market on the families of the Department’s military and civilian personnel. DoD is 

using $120 million in Recovery Act funds for 45 energy efficiency projects and an additional $300 million for 51 

energy programs researching ways to reduce the Department’s energy demand via increasing fuel efficiency or 

advancing new technologies related to alternative energy sources. 

The DoD continues to place an emphasis on meaningful and effective competition to get the best deal for the 

warfighters and the taxpayers. Given the importance of the Recovery Act dollars in stimulating the economy, the 

Department has taken extra steps, including frequent communications with Senior Procurement Executives 

(SPEs), regarding the expectations for contract implementation. SPEs in the Department are communicating more 

frequently with their respective acquisition workforce, including flash notices and reminders of Recovery Act 

regulations, specifically the importance of competition. 

8-1B. American Recovery and Reinvestment Act IG Assessment of Progress 

The OMB specified the initial step for each agency receiving Recovery Act funds to take was to develop formal 

documented plans identifying how the recovery funds will be applied and managed. OMB required that agencies 

discuss both Recovery Act goals and how different parts of the agency are coordinating efforts toward successful 

implementation and monitoring of these goals. Required agencies to submit separate plans for each program 

funded by the Recovery Act and stipulated 12 minimum requirements that each plan must address. The DoD 

Agency Plan and four program-specific plans (at the time of our review DoD had not issued the Homeowners 

Assistance Program plan) met the 12 minimum OMB requirements. 

We have noted that further execution of the Recovery Act is not moving as quickly as the Department had 

planned, and much of the spending and actual work on the projects will not occur until FY 2010. This delay will 

impact the Recovery Act’s goals of commencing expenditures and activities as quickly as possible, consistent with 

prudent management. Thus, added pressure is likely to be placed on the Department’s contracting professionals 

to award contracts in an expedited manner, potentially impacting the Recovery Act and Department’s goal to 

competitively award a large portion of the contracts. 

We believe, as was the case in Hurricane Katrina, Operation Iraqi Freedom, and Operation Enduring Freedom, 

that identifying, starting, meeting milestones, and accounting for the efforts will be a recurring challenge for DoD. 

Without adequate planning, contractor oversight, performance measures, and adequate documentary support, 

DoD may not be able to adequately meet the intent of the Recovery Act and maintain adequate transparency, 

accountability, and stewardship of taxpayer funds. 

8. American Recovery and Reinvestment Act Management’s Overall Assessment

The Department has obligated $3.3 billion in Recovery Act funds through Sept. 30, 2009, which is over 45 percent 

of the $7.4 billion allocated to the Department. This includes $2.5 billion, or 58 percent, of all Facilities 

Sustainment, Restoration, and Modernization projects, $0.1 billion, or 47 percent, of all Near Term Energy-Efficient 

Technologies projects, and $0.6 billion or 26 percent of all Military Construction or Energy Conservation 

Investment projects. Obligations and project completions will continue to increase throughout FY 2010. 

The President has established high standards of transparency and accountability for the use of Recovery Act 

funds. Each project is required to have policies and procedures in place to ensure that recipients and uses of all 

funds are transparent to the public, and the public benefits of these funds are reported clearly, accurately, and in a 

timely manner. 
 

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ADDENDUM B Other Accompanying Information

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Performance Measures: The Department has established performance measures consistent with the intent of 

the Recovery Act, such as: 

• Percent of family housing brought up to acceptable Department standards 

• Change in facility condition 

• Number of families aided by Homeowners Assistance funding 

• Estimated annual energy savings. 

Program performance measures are supported by standardized definitions, quantifiable outputs, and designated 

measurement frequencies. The results of the performance measurements will be updated based on the 

established frequency and will be readily accessible to the public on the website www.recovery.gov. 

Additional details on program performance measures are found in the DoD Agency Plan. 

Financial Tracking: The Department will track financial performance using established procedures and routines. 

Examples include: 

• Percent of total projects awarded, 

• Percent of the total dollar value of projects awarded, 

• Percent of projects completed on agreed-to contractor schedule, 

• Percent of fixed price contracts, 

• Percent of competitive contracts. 

These metrics that track program execution are secondary to the critical outputs of Recovery Act spending, such 

as job preservation and creation. 

Since the signing of the Recovery Act, the Department has worked very closely with OMB and other White House 

offices to effectively implement funding. The Secretary of Defense designated the Principal Deputy Under 

Secretary of Defense Comptroller (PDUSD(C)) as the Department’s primary point of contact to the White House. 

Within the Office of the USD(C) a senior steering committee oversees implementation, establishes polices and 

procedures, and reviews key metrics as the funds are obligated and executed. 

Within the Department, a working group – which includes OMB and DoD IG – has been meeting weekly to 

coordinate the implementation of Recovery Act funds. Also, the Military Services have established their own 

working groups to coordinate execution down to the installation level. 

In accordance with legal and executive directives, Department staff creates weekly reports for OMB, 

Recovery.gov, and the Office of the Vice President. Daily phone calls occur between OMB and Department staff. 

Reports with project-level plans, including projected costs and deadlines, are submitted on a scheduled basis. 

Review of the progress and performance of major programs, including risk-mitigation and corrective actions, is 

guided by the Risk Management Plan developed by the Department in accordance with OMB Circular No. A-123, 

Management’s Responsibility for Internal Control, Appendix A. The Department’s current Appendix A process has 

a Senior Assessment Team lead by PDUSD(C), who is also the Responsible Officer for the Department’s 

Recovery Act funding. As part of the Risk Management Plan, each program will be evaluated on a quarterly basis, 

with a Risk Profile being submitted to the Office of the USD(C) and CFO. This process is further elaborated in the 

detailed program plans. 

Due to the magnitude of normal budgeting for national defense within the Department, the OUSD(C) has 

established a centralized Business Enterprise Integration System (BEIS) for financial review and internal control. 

The Department will use BEIS to handle financial tracking, particularly obligation and execution data, at a projectlevel. This ensures compliance with general financial management policies pertaining to the Recovery Act. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

26 

MANAGEMENT ASSURANCES AND FINANCIAL STATEMENT MATERIAL WEAKNESSES 

DoD Managers’ Internal Control Program 

The Department’s management conducts self-assessments of internal management controls in 

accordance with the Federal Managers’ Financial Integrity Act (FMFIA), formally designated as 

the Department’s Managers’ Internal Control Program. Self-assessments are conducted 

throughout the Department, to include forward deployed units such as the Multi-National Forces 

- Iraq. These internal management controls are the checks and balances that assist program 

and financial managers in achieving results and safeguarding the integrity of the programs. As 

prescribed by OMB Circular No. A-123, the Department’s internal management control program 

assesses the functions and processes of nonfinancial operations, financial reporting, and 

financial systems. 

The Department’s leadership is committed to maintaining effective internal management 

controls for all mission-essential processes to support the reliability of financial statements and 

to obtain unqualified audit opinions. After more than 2 years of successfully promoting the 

concept that “what gets checked gets done,” the Defense Department’s award winning “Check 

It” campaign ended on December 18, 2008. 

In 2008, the Public Relations Society of America awarded the Check It campaign the prestigious 

Silver Anvil Award for the best internal communications campaign to raise awareness of the 

importance of effective internal management controls. An example of the effectiveness of the 

Check It campaign is illustrated by General David Petraeus’, Commander of the Multi-National 

Forces- Iraq, recognition of members of the Multi-National Security Transition Team. As a result 

of “checking” 950 contracts, the team members defoliated or recommitted $831 million, which 

was used for critical items for the ISF. Building on the campaign’s success, the Department is 

planning a new internal communications campaign that will continue to emphasize the 

importance of demonstrating good stewardship and accountability 

The Department continued an aggressive program of identifying, tracking, and resolving 

weaknesses in internal controls during FY 2009. Since FY 2001, DoD successfully reduced its 

management-identified internal control weaknesses by 85 percent, from 116 to 17, in FY 2009. 

To facilitate better oversight, management, and tracking of Component progress to achieve the 

USD(C) directed priorities, the Department recently made significant improvements to the FIAR 

plan framework, mandating its use by the 

Components for their FIPs. The revised FIAR 

framework better integrates OMB Circular No. 

A-123, Appendix A. The framework is designed 

to strengthen internal controls by requiring the 

Components to focus on key financial reporting 

control objectives and capabilities. The 

framework also requires the identification of 

accountable organizations, individuals, and 

resource requirements. 

DoD Managers’ Internal Control Program 

Training 

The Department’s managers and senior leaders 

understand that education and training are 

crucial to the successful execution of the internal 

management control program. During FY 2009, 

Left to right: Staff Sergeant Hudnall, Lieutenant Commander 

McAndrew, Major Sadiq, First Lieutenant Beck, Lieutenant 

Colonel Dunn, Master Sergeant Westerman, Captain Smith, 

Colonel Cruse, General Petraeus, Captain Nicot, Lieutenant 

General Dubik 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

27 

training was provided to 14 of the 35 DoD Components. Training was attended by over 1,000 DoD 

personnel at various locations throughout the Department, including the American Forces in 

Baghdad, Iraq. Additionally, a Departmentwide training conference presented by DoD senior 

leadership was attended by over 260 representatives. Training discussion topics included: 

• Requirements for an effective internal management control program; 

• Review of reporting requirements associated with FMFIA; 

• Overview of successful results attributed to the Department’s Check-It campaign; 

• Management of risk for effective internal controls; and 

• Highlights of the FY 2008 DoD Statement of Assurance. 

Revision of DoD Instruction 5010.40 

The Department is revising DoDI 5010.40, “Managers’ Internal Control Program Procedures.” 

This revision adds the requirement that Component heads must provide an explicit level of 

assurance over financial system conformance to federal requirements, in addition to assurances 

over nonfinancial operations and financial reporting. 

The American Recovery and Reinvestment Act of 2009 

Under the Recovery Act, Congress appropriated $7.4 billion to DoD and $4.6 billion to USACE 

for its civil works program. The DoD will use the funds for facilities sustainment, restoration, and 

modernization; military construction; energy conservation; near-term energy efficiency 

technology demonstration and research; and homeowners assistance. The DoD is pursuing 

three broad goals with Recovery Act Funding: preserve and create American jobs; care for U.S. 

Service members and their families; and, improve DoD energy efficiency. 

Agencies are required to manage risks that could hinder the ability to fulfill the accountability 

and transparency objectives of the Act. Review of the progress and performance of major 

programs is guided by the Risk Management Plan developed by the Department in accordance 

with OMB Circular No. A-123, Management’s Responsibility for Internal Control, Appendix A. 

The Department’s current Appendix A process has a Senior Assessment Team lead by the 

PDUSD(C), who is also the Responsible Officer for the Department’s Recovery Act funding. As 

part of the Risk Management Plan, each program will be evaluated on a quarterly basis, with a 

Risk Profile being submitted to the USD(C). 

Most Improved Processes 

The cornerstone of the Check It campaign was to raise individual and senior leadership 

awareness of the importance of effective internal controls throughout the Department. Phase 2 

of the campaign focused on process improvements and solicited examples of successful 

improvements. During the Check It Campaign, 40 improvements were received from 24 

Components with savings and cost avoidance totaling $3 billion. The spirit of the Check It 

campaign continues. Below are 16 examples of significant improvements.

Most Improved Processes 

Process Improvement By Whom Result 

Leveraged Space and Naval Warfare Systems 

Command’s Lean Six Sigma and continuous 

process improvements to identify six strategic 

and high impact core value streams with highest 

potential for readiness improvement and cost 

savings. 

Department of Navy Validated Lean Six Sigma savings of 

$17 million, with an additional $9 

million currently in the validation 

phase. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

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Most Improved Processes 

Process Improvement By Whom Result 

Reduced dormant accounts resulting in 

deactivations of 25,000 Department of Navy and 

25,000 U.S. Marine Corps’ unclassified 

accounts. 

Department of Navy Experienced a cost avoidance of 

$900 thousand (Navy) and $550 

thousand Marine Corps (USMC) by 

using a centrally-funded contract line 

item number for deactivations. 

Conducted a Lean Six Sigma project on better 

visibility and accountability of containers “A Proof 

of Principle” was conducted at Victory Base, Iraq 

in April 2009. 

Department of Army Focus of review was collection of 

data in critical fields to better manage 

containers. Identified and recovered 

$1.8 million worth of excess material. 

Conducted an extensive search throughout DoD 

for other programs to provide alert and protection 

systems and identified collective protection 

project. 

North American 

Aerospace Defense 

Command 

Realized savings of approximately $6 

million through the identification and 

request for inclusion of a previously 

funded Collective Protection 

Program. 

Conducted search and reutilization of 

disregarded assets to negate increases in labor 

hours due to impacts on mission on-time rates. 

U.S. Special 

Operations Command 

Saved approximately $1.0 million 

through the identification and repair 

of equipment categorized as 

“impaired capability awaiting parts” 

and avoided 18 additional, by 

repairing broken parts and returning 

to supply. 

Established a suspense file to track items 

temporarily signed out, and to follow-up on items 

not turned in by due date. 

U.S. Special 

Operations Command 

Obtained over 1,000 pieces of 

unserviceable, excess automated 

data processing equipment valued 

over $300 thousand. 

Implemented extension of the aircraft 

(F-15C/D/E) phase inspection interval from 200 

hours to 400 hours. 

Department of Air 

Force 

Reduced costs estimated at $7.29 

million for the first five months of 

implementation. 

Integrated the functions of the Weapon System 

Cost Retrieval System into the Air Force Total 

Ownership Cost System. 

Department of Air 

Force 

Reduced operating costs for FY 2008 

to FY 2012 from $2 million to $1.2 

million. 

Improved BRAC and Defense Environmental 

Restoration Account funding reconciliation for 

unliquidated obligations. 

DLA Reduced BRAC environmental 

cleanup funding unliquidated 

obligations by $267 thousand in the 

first half of FY 2009. 

Improvements in management of invoices for 

Command Invoices Not Scheduled to Pay 

Listings specifically for those invoices at 15 days 

aged. 

U.S. Strategic 

Command 

Decreased current interest penalties 

by 90 percent compared to last year. 

Conducted a Management Internal Control 

Review and identified significant delinquency 

problems and made related recommendations to 

the Defense Travel System centrally billed 

account. 

U.S. Joint Forces 

Command 

Identified unpaid invoices valued at 

$284 thousand and received a credit 

of $73 thousand. 
 

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ADDENDUM B Other Accompanying Information

29 

Most Improved Processes 

Process Improvement By Whom Result 

Improved Defense Finance Accounting ServiceIndianapolis Cash Management Report and 

Proprietary to Budget Adjustments through joint 

effort with the Defense Finance Accounting 

Service - Indianapolis to research and correct 

disbursements and collections from FY 2006 

through FY 2009. 

Defense Threat 

Reduction Agency 

Researched and corrected 

disbursements and collections from 

FY 2006 through FY 2009. As a 

result, 735 transactions were 

corrected in FY 2009 totaling $22.4 

million in absolute value with a $2.28 

million net effect on Fund Balance 

with Treasury and a reduction in the 

unsupported undistributed adjustment 

to the Fund Balance with Treasury. 

Also, reduced proprietary to budget 

adjustments by $38.4 million between 

the 2nd Quarter, FY 2008 and the 

2nd Quarter, FY 2009. 

Implemented a continuous process improvement 

capability, combining Six Sigma and Lean 

Transformation (Lean6) tools. 

DFAS Exceeded goal and trained 811 

Green Belts and 62 Black Belts and 

certified 398 Green Belts and 27 

Black Belts. One reported example is 

that the team analyzed the current “to 

be” processes and made changes 

that resulted in $88 thousand in 

savings in one of the major Divisions 

of the Financial Management Center 

of Excellence Directorates. 

Implemented quality control to identify 

discrepancies in the incinerator waste removal 

contract. 

Pentagon Force 

Protection Agency 

Identified a 50 percent direct savings 

per pick-up load, resulting in overall 

savings of $10 thousand annually. 

Increased recruitment efforts to prepare for 

future gaps in core acquisition new hires through 

FY 2015. In recent testimony, Secretary of 

Defense recognized need to increase DCMA’s 

acquisition workforce. 

DCMA Received authority to recruit and train 

2,737 acquisition new hires to assist 

in growing critical acquisition 

workforce skills and provide relief in 

short - and long-term capital 

requirements. . 

Re-engineered payment procedures to reduce 

aged accounts payable and undelivered orders 

using expected period of performance to affect 

final payment. 

DeCA Reduced aged accounts payable and 

undelivered orders by 50 percent 

from 10,027 September 2007 to 

5,010 records in FY 2009. 

Types of Material Weaknesses 

The management-identified weaknesses determined by assessments of internal management 

controls, required by the FMFIA and OMB Circular No. A-123, fall into three categories: 

1. FMFIA Section 2 Financial Reporting Material Weaknesses (See Table 1a). 

2. FMFIA Section 2 Non-Financial Operations Material Weaknesses (See Table 1b). 

3. FMFIA Section 4 Financial System Nonconformance Weaknesses (see Table 1c). 

In FY 2009, the Department began with 17 outstanding weaknesses, resolved one and added 

one new weakness for an ending total of 17. Tables 1a, b, and c below identify the resulting 
 

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ADDENDUM B Other Accompanying Information

30 

weaknesses. The column entitled "Ref Table 2" crosswalks the reported FMFIA manageridentified weaknesses to similar auditor-identified weaknesses in Table 2. 

1. FMFIA Section 2 Financial Reporting Material Weaknesses. Under the oversight of the 

DoD Senior Assessment Team, the Department’s assessment over financial reporting identified 

the following material weaknesses listed in Table 1a. 

Table 1a. Summary of Management Assurances 

Effectiveness of Internal Control Over Financial Reporting (FMFIA Section 2) 

Statement of Assurance No Assurance 

Material Weaknesses Ref 

Table 2 

Beginning

Balance New Resolved Consolidated Reassessed Ending 

Balance 

1) Valuation of Property Plant 

and Equipment - Military 

Equipment 

11 1 1 

2) Real Property Assets 11 1 1 

3) Environmental Liabilities 3 1 1 

4) Health Care 

(Medicare-Eligible Retiree Health Care 

Liability in military departments direct 

care operations) 

1 1 

5) Fund Balance with Treasury 10 1 1 

6) Accounts Receivable 13 1 1 

7) Inventory Valuation 12 1 1 

8) Operating Materials and 

Supplies 6 1 1 

9) Accounts Payable 1 1 1 

10) Personal Property – General 

Purpose Equipment 

(Includes reported problems with the cost 

of DoD property and material in the 

possession of contractors. Reassessed 

and moved from Overall Non-financial 

Operations #3 to DoD Financial 

Reporting Material Weakness #10) 

11 & 4 1 1 

11) Financial Reporting 

Compilation 

(Includes Statement of Net Cost, 

Statement of Budgetary Resources, 

Statement of Net Position, Accounting 

Adjustments, and Reconciliation of Net 

Cost of Operations to Budget)

2, 7, & 8 1 1 

12) Financial Reporting of 

Intergovernmental 

Eliminations 

(Includes Anti-Deficiency Act Violations)

5 1 1 

Total Financial Reporting 

Material Weaknesses 12 12 
 

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31 

2. FMFIA Section 2 Nonfinancial Operations Material Weaknesses. The Department’s 35 

Component Heads utilize a robust, programmatic approach to establish and assess internal 

management controls for their respective nonfinancial, mission-essential operations. Table 1b 

shows the resulting weaknesses for this assessment. 

Table 1b. Summary of Management Assurances 

Effectiveness of Internal Control Over Nonfinancial Operations (FMFIA Section 2) 

Statement of Assurance Qualified 

Nonfinancial Material 

Weaknesses 

Ref 

Table 2 

Beginning

Balance New Resolved Consolidated Reassessed Ending 

Balance 

1) Management of Information 

Technology and Assurance 1 1 

2) Personnel Security 

Investigations 1 1 

3) Contracting 1 1 

4) Certain Audits Do Not Meet 

Professional Standards 1 1 0 

5) Internal Controls Over 

Contingency Contracting 0 1 1 

Total Material Weaknesses 

Nonfinancial Operations 4 1 1 4 

3. FMFIA Section 4 Financial System Nonconformance Weaknesses: The Department 

requires financial system conformance with federal requirements and reports one weakness that 

covers the wide-range of pervasive problems identified during the assessment. Table 1c shows 

the resulting weakness. 

Table 1c. Summary of Management Assurances 

Conformance with Financial Management System Requirements (FMFIA Section 4) 

Statement of Assurance No Assurance 

System Nonconformance Ref 

Table 2 

Beginning

Balance New Resolved Consolidated Reassessed Ending

Balance 

1) Department of Defense 

Financial Management 

Systems and Processes 

9 1 1 

Total System Conformance 

Material Weaknesses 1 1 

Total FMFIA Weaknesses 17 1 1 17 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

32 

Financial Statement Material Weaknesses 

The DoD IG identified 13 material weaknesses in financial statement reporting. The 13 auditor 

identified material weaknesses are listed in Table 2. For further details, refer to the FY 2009 

audit reporting Addendum A. 

Table 2. Summary of Financial Statement Audit 

Audit Opinion Disclaimer 

Restatement Yes 

Material Weakness Beginning 

Balance New Resolved Consolidated Ending 

Balance 

1 Accounts Payable 1 1 

2 Accounting Entries 1 1 

3 Environmental Liabilities 1 1 

4 Government Property in Possession of 

Contractors 

1 1 

5 Intragovernmental Elimination 1 1 

6 Operating Materials and Supplies 1 1 

7 Reconciliation of Net Cost of 

Operations to Budget 

1 1 

8 Statement of Net Cost 1 1 

9 Financial Management Systems 1 1 

10 Fund Balance with Treasury 1 1 

11 General Property, Plant & Equipment 1 1 

12 Inventory 1 1 

13 Accounts Receivable 1 1 

Total Material Weaknesses 13 0 0 0 13 

Federal Financial Management Improvement Act (FFMIA) 

The DoD IG and the audit agencies within the Military Services have reported on the 

Department’s non-compliance. The Department’s noncompliance is largely due to the legacy 

financial management systems in use by the Department’s Components. These systems, for 

the most part, do not comply with the wide range of requirements for systems compliance and 

therefore, do not provide the necessary assurances to rely on information contained either in the 

core financial system or in the mixed systems that provide source transactional information. 

Table 3 reflects the Department’s compliance with FFMIA. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

33 

Statement of Assurance over Financial Reporting Process: 

The Department prepared the FY 2009 Annual Statement of Assurance using internal control 

assessments in accordance with OMB Circular No. A-123, “Management’s Responsibility for 

Internal Control.” The Statement of Assurance is presented in the Management’s Discussion 

and Analysis section of this report. 

Table 3. Compliance with Federal Financial Management Improvement Act 

Agency Auditor 

Overall Substantial Compliance No No 

1. System Requirements No No 

2. Accounting Standards No No 

3. U.S. Standard General Ledger at Transaction Level No No 

The Department’s 35 Component Heads are required to report their respective Statement of 

Assurance to the Secretary of Defense. The Component Heads are comprised of the 3 Military 

Departments, 11 Combatant Commands, Joint Staff, OSD, DoD IG, 17 DoD Agencies, and the 

DoD Financial Reporting Senior Assessment Team. All Component Heads are required to utilize 

a robust, programmatic approach to establish and assess internal management controls for all 

nonfinancial mission essential operations. Component Heads preparing stand-alone financial 

statements are required to include a financial reporting assurance. 

The Department uses the Component Heads’ Statements of Assurance as the foundation for 

the Department’s Statement of Assurance. More information concerning the Department’s 

process for developing the Statement of Assurance is available at http://www.defenselink.mil/ 

comptroller/micp.html. The Department asserts that all Components, as prescribed by the 

Department’s regulatory guidelines, have reported their individual statements of assurance over 

internal control to the Secretary of Defense. 

The Department is using an incremental approach in implementing Appendix A of OMB Circular 

No. A-123, and leveraging, to the extent possible, existing initiatives, such as DoD FIAR Plan 

management tools and audit documentation. 

At the beginning of FY 2006, the Deputy Secretary of Defense established a Senior Assessment 

Team comprised of senior leaders who serve as the governing body for DoD Appendix A 

implementation. The team issues guidance, defines the scope of the assessments used within 

the Department, determines DoD financial reporting weaknesses, and monitors the progress of 

corrective actions. 

The annual guidance issued by the Senior Assessment Team provides a framework for 

assuring proper planning and implementation of OMB Circular No. A-123, Appendix A, and 

prescribes procedures for conducting flow charts, risk assessments, internal control analyses 

and creating test plans to help promote consistency and comparability of data throughout the 

Department. The current guidance defines the materiality used by the Department and provides 

instructions on preparing corrective action plans. 

The Department is leveraging its FIAR Plan for the Appendix A implementation by using the 

resources and capabilities already established. The FIAR Plan is the Department’s path to audit 

readiness and an unqualified audit opinion. The plan describes major impediments identified by 

auditors and management and sets milestones for resolving problems affecting the accuracy, 

reliability, and timeliness of financial information. For process solutions, the plan addresses 

known major deficiencies and captures work done, or to be done, by large Defense components 

in assessing their weaknesses and developing necessary plans for overcoming those 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

34 

weaknesses. The Department will continue to align its focus areas of the Appendix A effort to be 

congruent with the FIAR Plan in an effort to maximize resources. 

Conclusion 

The Department has improved its financial management by focusing its efforts on fixing material 

weaknesses and strengthening internal controls. This approach has yielded positive results 

providing a more complete depiction of the Department’s financial health and improved 

operation processes. The Department remains committed to transformational efforts to 

continue reducing materiel weaknesses. 

Completed and Planned Milestones 

The Department’s internal control weaknesses over financial reporting are listed in Table 1a. 

The completed actions and planned milestones are listed below in Table 4 for each material 

weakness. The completed milestones continue to demonstrate measured progress and highlight 

the Department’s commitment to resolving the material weaknesses. The planned milestones 

are under review to ensure consistency with the Department’s new strategy for audit priorities. 

Table 4. Effectiveness of Internal Control Over Financial Reporting (FMFIA Section 2) 

1. Valuation of Property, Plant, and Equipment – Military Equipment 

Description of Issue: The DoD’s inability to accurately report the value of military equipment increases the 

probability of material misstatement in financial reporting. 

1a. Completed Milestones 

Department of Air Force: 

• Validated the accuracy of the military equipment valuations previously reported to OSD, in the Capital 

Asset Management System – Military Equipment. 

• Tested the asset data reconciled during the second quarter, to ensure the integrity of the information was 

consistent at the end of each quarter for the Capital Asset Management System – Military Equipment and 

the Reliability and Maintainability Information System. 

• Tested the implementation of the policy to support the reengineered process to collect information at the 

contract level. 

• Developed and issued Air Force policy on proper documentation to support the possession and title of 

assets defined as military equipment. 

• Ensured proper implementation of the Air Force policy on the documentation to support the possession 

and title of assets defined as military equipment. 

Department of Navy: 

• Initiated the discovery phase of audit readiness at Naval Air Systems Command Pilot Program Office. 

• Worked with the Deputy Assistant Secretary of Navy (Air) to select pilot team members including Program 

Executive Offices, financial management and logistic representatives. 

• Created a temporary data storage repository in order to capture aggregated military equipment asset data 

from the legacy item unique identification records at the Marine Corps. 

• Prepared activities for military equipment valuation, which includes briefing the Financial Management 

Office and the Assistant Secretary of the Navy for Research, Development and Acquisition on pilot 

approach; identified organization for gap analysis study support; finalized the “as-is” and “to-be” processes; 

and developed data collection templates. 

• Conducted the military equipment valuation gap analysis study, which included: having a kick-off event 

with a pilot leadership team and subject matter experts; executing preliminary reports in Navy Enterprise 

Resource Planning; performing data collection; developing metrics; and conducting measurement review 

with gap analysis of study results held by leadership. 

• Conducted a leadership review of the implementation strategy, conducted a control milestone review and 

developed final “pilot” briefing. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

35 

• Included in the military equipment valuation gap analysis study the analysis of the “as-is“ and ”to-be” model 

differences; conducted milestone review; and developed and conducted the final “pilot” briefing. 

• Defined the accountability systems of record by transitioning the Non-Aircraft Inventory Readiness and 

Reporting System and Naval Vessel Register to Defense Property Accounting System and defined the 

current Department of Navy policy and guidance. 

1b. Planned Milestones 

Revised Correction Target Date: 

2nd Quarter, FY 2016 

• (Although some component corrective 

actions extend to the 2nd Quarter, FY 2016, 

the DoD Senior Assessment Team 

considers these actions immaterial to the 

DoD Financial Statement line for military 

equipment). 

Department of Air Force will: 

• Test internal controls to ensure that corrective actions have been effectively implemented. 

United States Special Operations Command will: 

• Join OSD military equipment working group. 

• Identify problems and solutions related to military equipment. 

• Decide on a method to capture value from classified assets and implement it. 

• Determine the baseline amount for military equipment. 

• Establish, document, and implement processes to properly initiate, record, and report financial events. 

• Communicate new procedures related to military equipment. 

• Test to ensure new procedures are followed related to military equipment. 

• Ensure accurate presentation and disclosure of military equipment values reported on the U.S. Special 

Operations Command’s financial statements. 

• Prepare and submit audit readiness package to DoD IG, provide copy to Office of the Under Secretary of 

Defense (Comptroller); and conduct internal DoD IG assessment of audit readiness. 

• Review processes annually until audited. 

• Complete independent audit. 

Department of Navy will: 

• Complete Military Equipment Valuation pilot to include: preparation of activities for the Military Equipment 

Valuation pilot, implementation of Military Equipment Valuation pilot, analysis of impact on legacy 

information systems and finalize implementation strategy. 

• Evaluate pilot results and the Enterprise Resource Planning functionality for the remaining command 

functional requirements. 

• Develop future “to-be” system environment for procurement, accountability and accounting; confirm future 

system environment; confirm military equipment policy according to the Assistant Secretary of the Navy 

(Research, Development and Acquisition) and Assistant Secretary of the Navy (Financial Management and 

Comptroller) in coordination with Office of the Under Secretary of Defense (Acquisition, Technology and 

Logistics) and Office of the Under Secretary of Defense (Comptroller); and develop strategy and functional 

requirements for implementing the proper financial accounting treatment for military equipment. 

• Develop interface with item unique identification registry and Navy Enterprise Resource Planning; identify 

Accountable Property Offices; develop “to be” process documentation to include risks, controls, and test 

plans; and re-evaluate military equipment baseline strategy. 

• Ensure that the Marine Corps implements and sustains the Global Combat Support System – Marine 

Corps. 

• Implement “to-be” environment, deploy the new military equipment process and systems and implement 

the Navy Enterprise Resource Planning at the following commands: Naval Air, Naval Sea and Space and 

Naval Warfare Systems Command. 

• Complete military equipment accuracy at all locations by performing a complete assessment of all 

inventory for military equipment as well as identifying unusable, damaged, and excess or missing items. 

• Identify and implement a military equipment sampling methodology to sustain data quality. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

36 

• Complete testing the design and effectiveness using design tests in accordance with the Office of 

Management and Budget Circular No. A-123, Appendix A guidance; perform tests; analyze and summarize 

results; define and report weaknesses, if any identified. 

• Ensure that the Marine Corps reviews and revalidates waived programs and makes available the 

appropriate supporting documentation. 

• Verify, validate and provide management assertion. 

Department of Army will: 

• Reconcile military equipment data with Army logistical and accountability systems of record. 

• Report military equipment in accordance with an auditable process. 

• Ensure completion of an internal validation of military equipment conducted by Army Audit Agency. 

2. Real Property Assets 

Description of Issue: The DoD does not have adequate internal controls in place to provide assurance that real 

property assets are identified and properly reported in its financial reports. 

2a. Completed Milestones 

Department: 

• Published a revision to the DoD Financial Management Regulation (DoDFMR), Volume 4, Chapter 6, 

“General Property, Plant, and Equipment” that codifies the Statement of Federal Financial Accounting 

Standards. 

• Issued a revised capitalization threshold that capitalizes 99 percent of real property assets. 

• Standardized the core real property inventory data elements and issued DoD Instruction 4165.14, “Real 

Property Inventory and Forecasting.” 

• Received the Military Services’ plans for implementing the real property inventory requirements to 

streamline the business processes, standardize data elements, and implement the business rules as 

depicted in the Business Enterprise Architecture. 

• Conducted a business process reengineering of the construction-in-progress to identify sustainable 

business processes and internal management controls that will improve reliability for construction-inprogress cost information. 

• Validated the implementation of the Military Services’ standardized data reporting for real property assets. 

• Revised the guidance on standardized transactions for acceptance and transfer of real property assets. 

• Continued to monitor the Military Services’ progress toward implementing real property inventory 

requirements and its sustainable business processes against the Enterprise Transition Plan. 

• Achieved full operational capability for the real property unique identifier registry, which contains the 

information on the Department’s owned real property sites and assets. 

• Monitored Military Services’ progress toward implementing real property inventory requirements and its 

sustainable business processes. Validated that the Services have achieved real property inventory 

requirements implementation milestones as of 4th Quarter, FY 2008. 

• Published revisions to the Unified Facilities Criteria for Transfer and Acceptance of Military Real Property, 

to incorporate sustainable processes and consistent management controls for transfer and acceptance of 

real property accountability in a timely and consistent manner throughout DoD. 

• Developed standard process and management controls for reconciling the real property asset records 

between the Military Departments and Defense Agencies to enable validation of existence and 

completeness of asset records. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

37 

2b. Planned Milestones 

Correction Target Date: 2nd Quarter, FY 2013 

• (Although some component corrective actions 

extend to 4th Qtr 2015, these actions are 

immaterial to the DoD financial statement line for 

Real Property Assets) 

Department will: 

• Validate that the Military Services have implemented the real property inventory requirements for standard 

data elements, sustainable business processes and consistent management controls. 

• Achieve the prototype of the reconciliation capability that will be used to enhance the completeness and 

accuracy of the real property records. 

• Ensure that the Components complete the reconciliation of real property records between the Defense 

Agencies and Military Departments. 

• Develop the standard methodology for establishing the real property valuation baseline that can be 

sustained by the implementation of the real property inventory requirements processes. 

• Validate that the Components have adopted and sustained the standard methodology to establish the real 

property valuation baseline. 

• Validate that the Military Services have completed the implementation of real property construction-inprogress requirements for sustainable business processes, standard data elements, and consistent 

internal management controls. 

• Validate that the Military Services have monitored the real property inventory requirements and real 

property construction-in-progress requirement processes and the effectiveness of management controls 

and have examined and compared data periodically with physical assets. 

• Validate that the weakness is corrected. 

3. Environmental Liabilities 

Description of Issue: The DoD internal controls for reporting environmental liabilities do not provide assurance that 

cleanup costs for all of its ongoing, closed, and disposal operations are identified, consistently estimated, and 

appropriately reported. 

3a. Completed Milestones 

Department of Air Force: 

• Published policy that defines the terms “Regulation”, “Law” and “Technology” for the Defense 

Environmental Restoration Program, Installation Restoration Program, Building Demolition Debris Removal 

Program, and Environmental Compliance Assessment. 

• Published policy that covers the reporting and disclosure requirements for the Military Munitions Response 

Program environmental liabilities. 

• Published policy for reporting environmental liabilities for overseas locations. 

• Determined the other assets retirement obligations that exist (e.g. radon, lead-based paint, mercury, 

others) and whether an environmental liability should also be recognized. 

• Assured estimate changes are properly reported in the disclosure table for the Installation Restoration 

Program Building Demolition Debris Removal Program. Signed and distributed a memorandum, which 

covers all of the reporting requirements for Debris Removal Program and the Installation Restoration and 

Program Building Demolition Debris Removal Program. 

• Assured liability for overseas locations is correctly disclosed. DoD IG, issued a report reviewing the reporting 

requirements for overseas environmental liabilities. The Air Force complied with the requirements to correctly 

disclose overseas environmental liabilities as indicated in the report in the FY 2008 financial statement. 

• Assured liability for the Military Munitions Response is properly reported and disclosed. 

• Assured estimate changes are properly reported in the disclosure table for Environmental Compliance 

Assessment. 

• Assured that those estimate changes required for assertion, are properly reported in the disclosure table 

for BRAC. 

• Assured liability for environmental closures was completed and disclosed. 

• Assured asset retirement obligation is properly reported and disclosed. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

38 

Department of Army: 

• Identified the environmental liabilities universe for the environmental liability program. 

• Ensured quality of documentation meets audit standards for environmental liability program. 

• Implemented a sustainable business process to report environmental liability program. 

• Performed site level supervisory review on environmental liability program. 

• Implemented the internal control program to ensure accurate site level environmental liability data. 

3b. Planned Milestones Correction Target Date: 4th Quarter, FY 2012 

Department of Air Force will: 

• Test and validate internal controls for active Air Force environmental liabilities financial statement 

disclosures. 

Department of Army will: 

• Identify the environmental liabilities universe for environmental liabilities segment. 

• Ensure quality of documentation meets audit standards for environmental liabilities segment. 

• Implement a sustainable business process to report environmental liabilities segment. 

• Perform site level supervisory review on environmental liabilities segment. 

• Implement internal control program to ensure accurate site level liability data. 

• Provide audit readiness validation plan. 

4. Defense Health Care Liabilities 

Description of Issue: The current military health financial processes cannot collect accurate cost and performance 

information to produce reliable financial reports. 

4a. Completed Milestones 

Office of the Actuary, DoD: 

• Received requested data from Centers for Medicare and Medicaid Services during 3rd Quarter, FY 2009 

and conducted an initial review of the data. Additionally, required data scrubs were identified. 

4b. Planned Milestones Correction Target Date: 4th Quarter, FY 2015 

Office of the Actuary, DoD will: 

• Brief the Medicare-Eligible Retiree Health Care Fund Audit Committee regularly on the progress and status 

of development and application of per-capita rate methodology. 

Medicare-Eligible Retiree Health Care Fund, will: 

• Use the per-capita rate methodology to compute FY 2013 Medicare-Eligible Retiree Health Care Fund 

Health Care Liability and the FY 2014 Distribution Plan to the Military Services. 

• Validate, through annual independent audit process already in place, the Medicare-Eligible Retiree Health 

Care Fund with objective of achieving an unqualified opinion. 

Service Medical Activities will: 

• Map the Army Medical Command, the Navy Bureau of Medicine and Surgery, and the Air Force Medical 

Services medical systems requirements into the Line Services Information Technology Solutions. 

• Monitor the data from the Army Medical Command, the Navy Bureau of Medicine and Surgery, and the Air 

Force Medical Services for integrity and data conversion issues. 

• Implement information technology solutions for the core financial systems of line service for the Army 

Medical Command, the Navy Bureau of Medicine and Surgery, and the Air Force Medical Services; and 

reconcile the Medical Expense and Performance Reporting Systems Expense Assignment System IV data 

for the Army Medical Command, the Navy Bureau of Medicine and Surgery, and the Air Force Medical 

Services. 

• Sustain audit readiness and validate consistency with assertion schedule for Service Medical Activities 

consolidated balance sheet, per DoD Financial Improvement Business Rules. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

39 

5. Fund Balance with Treasury 

Description of Issue: DoD is unable to reconcile fund balance with treasury account balances to the Department of 

the Treasury account balances. Unsupported transactions are one of the Department’s most wide-spread auditorrecognized fund balance with treasury deficiencies. The DoD IG has identified seven weaknesses related to fund 

balance with treasury including: explanation of differences between Treasury and DoD, specific transactions making 

up differences, traceable lines of accounting and journal voucher numbers, recording reasonable time frames, and 

auditor access to journal vouchers and general ledgers.

5a. Completed Milestones 

Defense Logistics Agency: 

• DFAS provided the accounting alternative recommendations for $1.2 million of the working capital fund 

pre-Columbus Cash Accountability System’s unsupported, undistributed collection amounts. 

• DFAS provided DLA with accounting alternative recommendations to correct working capital fund preColumbus Cash Accountability System unsupported, undistributed disbursements totaling a net amount of 

$167 million. 

• DFAS increased the manpower resources dedicated to the resolution of Columbus Cash Accountability 

System Tier 3 variances per DLA authorization of the business plan. 

• DFAS provided DLA with accounting alternatives for $198 thousand of Columbus Cash Accountability 

System Tier 2 amounts to be written off, primarily the aged amounts for which there is insufficient detail to 

properly reconcile. 

• The pilot project with DFAS provided DLA – Accountability Office the population of fund balance with 

treasury transactions using Columbus Cash Accountability System. The DLA-Accountability Office 

requested a sample of the population and DFAS and DLA delivered the documents through DLA Central 

Information Repository. 

• DFAS increased resources dedicated to documenting all standard processes for the fund balance with 

treasury process per DLA authorization. 

• DFAS in Indianapolis documented the working capital fund treasury cash allocation process and integrated 

it into a DFAS and DLA monthly cash reconciliation package. 

Department of Air Force: 

• Compiled and validated a listing of systems that contain fund balance with treasury activity. 

• Identified and documented the source of transaction level files, data and timeframes in which the data can 

be accessed in those systems. 

• Identified and documented the type of data available at Treasury to compare against the data recorded in 

the Air Force accounting records. 

• Analyzed supporting documentation, validity and accuracy of journal voucher activity; and documented the 

underlying nature, cause and potential impacts on the fund balance with treasury reconciliation 

procedures. 

• Developed a plan to implement the proposed fund balance with treasury standard operating procedures 

and reconciliation template. 

• Assessed the capabilities of available systems to facilitate the reconciliation progress. 

Department of Navy: 

• Researched current problem disbursement efforts; collaborated with other DFAS Centers to discuss 

problem disbursements; determined if adequate resources are assigned to work problem disbursements; 

and determined the areas of focus for problem disbursements at DFAS Center in Cleveland. 

• Reviewed the policies and procedures by system; and identified the universe of DFAS and Navy personnel 

with the ability to approve accounting adjustments. 

• Designed testing for disbursements. 

• Performed Phase I testing of accounts receivables key controls and controls for collections. 

Department of Army: 

• Identified requirements to accurately report fund balance with treasury. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

40 

Defense Intelligence Agency: 

• Reconciled 3 fund balance with treasury appropriations for FY 2007. 

• In FY 2008, implemented the area review and documented the control weaknesses for the Office of the 

Under Secretary of Defense (Comptroller) internal controls over financial reporting. 

• Developed a detailed corrective action plan and submitted it to the Office of the Director of National 

Intelligence. 

• Researched and resolved abnormal and canceling account balances prior to data conversion. 

• Based on data cleansing and conversion, verified that fund balance with treasury balances were accurately 

converted to Department of Treasury, Financial Management Service Federal Agencies’ Centralized TrialBalance System. 

• Established a Defense Intelligence Agency team to coordinate with DFAS to research and resolve 

differences. 

• Reconciled the Data Element Management Accounting Report for FY 2007 and prior year non-payroll and 

payroll transactions. 

• Determined a strategy for the remaining unmatched DFAS “pile-up file” (automatic sequentially filed) 

transactions. 

National Security Agency: 

• Developed the concept of operations for fund balance with treasury audit. 

• Obtained approval for the concept of the operations from Office of the Under Secretary of Defense 

(Comptroller). 

• Completed the system requirements approved by Finance and Accounting Services. 

• Completed the system designs accomplished by the information technology group. 

Service Medical Activities: 

• Reconciled the disbursement and collection date in the pile file in the Cash Management Report at a limit 

level to the Treasury account for TI97 – 0130, Defense Health Program. 

• Reconciled disbursement and collection data by automatically filing sequentially in the Cash Management 

Report at a limit level to the Treasury account for TI97 – 0500, Military Construction. 

• Reconciled the disbursement and collections data in the Cash Management Report U-File to the fund 

balance with treasury amounts reported in the Defense Department Reporting System. 

• Identified suspense amounts reported in the other defense organization’s financial statements. 

5b. Planned Milestones Revised Correction Target Date: 

3rd Quarter, 2014 

Defense Logistics Agency will: 

• Implement required corrective actions resulting from DLA- Accountability Office pilot project. 

• Conduct recurring sample test. DFAS will provide DLA - Accountability Office the population of fund 

balance with treasury transactions using Columbus Cash Accountability System. DLA Accountability Office 

will request a sample of the population and DFAS will deliver the documents with competent evidential 

matter through DLA Central Information Repository. 

• Complete the development of process cycle memoranda and flowcharts for all identified processes. 

• Complete the development of the scoping worksheets that identify the fund balance with treasury process 

from the beginning of the process to the financial statements. 

• Rely upon DFAS to reconcile the Columbus Cash Accountability System Tier 3 variances. Tier 3 variances 

relate to unmatched vouchers. 

• Validate that the material weakness correction is complete. 

Department of Air Force will: 

• Test and evaluate the impact of the reconciliation standard operating procedures and template on 

auditability of larger fund symbols. 

• Assess and determine the required resources and skill sets. 

• Document a monthly process for a fund balance with treasury reconciliation for all Air Force account 

symbols. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

41 

• Implement an automated solution for Columbus Cash Accountability System – Air Force and create 

management reports. 

• Research and reconcile current and past unreconciled balances to the extent that detailed information is 

available. 

• Complete the testing of the fund balance with treasury reconciliation process to validate corrective actions 

and develop a management assertion package. 

• Pre-validate the testing to ensure Air Force is prepared to submit segment management assertion 

package. 

• Conduct testing of the fund balance with treasury through the Office of Management and Budget Circular 

No. A-123, Appendix A program year with internal control review, performing various testing procedures to 

ensure corrective actions have been implemented and are effective. 

Department of Navy will: 

• Identify corrective actions for unmatched disbursements roles and responsibilities by appropriation and 

customer. 

• Identify corrective actions for “interfund”, “no obligation” and “military construction” working groups by 

meeting to research the major issues associated with problem disbursements. Define controls and 

determine deficiencies in the “to-be” process. 

• Obtain definition of accounting adjustments by system. Update and/or revoke the user access through 

identification of roles and responsibilities for preparing accounting adjustments. 

• Draft guidance on accounting adjustments and approval process, and develop and implement web-based 

training. 

• Observe the Business Activity Monitoring demonstration and assess the impact of the outcome of initial 

and final operational capability on reconciliation. 

• Perform Phase II testing. 

• Verify and validate the audit substantive testing. 

• Complete the assertion package and the management assertion and submit the assertion package to DoD 

IG, & FIAR Directorate. 

National Security Agency will: 

• Conduct the initial operating capability for fund balance with treasury. 

• Complete preliminary design review and critical design review. 

Service Medical Activities will: 

• Reconcile the disbursement and collection data in the pile files in the Cash Management Report at a limit 

to the Treasury account for TI97, Operations and Maintenance and Military Construction Appropriations of 

the Recovery Act. 

• Investigate unposted disbursements and collections reported in the suspense limits and post amounts to 

proper limits. 

• Obtain the Statement of Transactions detail from the DFAS in Indianapolis, Fund Balance with Treasury 

Division from “for self” and “by others” transactions for Army, Navy, Air Force and State Department 

disbursing offices. 

• Reconcile the Statement of Transactions detail to summary Statement of Transaction data used to create 

the “pile file”. 

• Reconcile the Statement of Transactions detail to the Disbursement Offices’ Statement of Accountability. 

• Reconcile Statement of Transactions detail to the Other Defense Organization Detail Disbursement 

Database in DFAS Indianapolis. 

• Evaluate data quality for the Other Defense Organization Detail Disbursement Database in DFAS in 

Indianapolis. 

• Sustain audit readiness and validate consistency with the assertion schedule for Service Medical Activities 

consolidated balance sheet, per DoD Financial Improvement Business Rules. 

Defense Intelligence Agency will: 

• Reconcile cash with fund balance with treasury during 1st Quarter, FY 2010. 

• Consolidate evidential matter that supports the fund balance with treasury for management's assertion. 

• Perform internal review of fund balance with treasury assertion package. 

• Develop corrective action plans based on internal review. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

42 

• Focus efforts toward completing all corrective action plans. 

• Continue to verify fund balance with treasury transactions are recorded accurately and timely in 

Department of Treasury, Financial Management Service’s Federal Agencies’ Centralized Trial-Balance 

System: (a) Continue to develop formal policies and procedures for resolving undistributed balances; (b) 

Provide training to Defense Intelligence Agency and DFAS personnel on new policy and procedures; (c) 

Continue to resolve and record material DFAS differences for 41 appropriations, which consist of eight 

appropriations ranging from FY 2003 to 2007; (d) Continue to resolve and record Data Element 

Management Accounting Report differences; (e) Continue to research and resolve State Department 

discrepancies; (f) Continue to research and resolve all material unmatched Defense Finance and 

Accounting Agency Pile-up file transactions by document numbers; (g) Based on Office of the Director of 

National Intelligence guidance and coordination with Treasury and other DoD Intelligence Community 

agencies adopt and implement a deposit account with Treasury; (h) Research and document business 

processes to identify root causes of discrepancies and develop additional plans of action; (i) Develop policy 

and procedures for fund balance with treasury combatant commands reconciliation; (j) Continue with the 

migration of combatant commands into the Defense Intelligence Agency fund balance with treasury 

reconciliation; (k) Transition reliance from defense disbursement centers and move toward utilizing the 

National Security Agency as the Defense Intelligence Agency’s primary disbursement center; (l) For 

activities that are not feasible to move to National Security Agency, consolidate the multiple DFAS 

disbursing stations into one location for disbursements and collections of Defense Intelligence Agency 

funds; and (m) Obtain staff to analyze, identify, and reduce fund balance with treasury agency differences. 

Department of Army will: 

• Obtain full operational capability of General Fund Enterprise Business System. 

• Implement sustainable business process to report fund balance with treasury. 

• Report fund balance with treasury in accordance with a sustainable business process. 

• Internal validation of fund balance with treasury completed by Army Audit Agency. 

6. Accounts Receivable 

Description of Issue: The DoD is unable to accurately record, report, collect, and reconcile intragovernmental 

accounts receivable, as well as accounts receivable due from the public. 

6a. Completed Milestones 

Department of Air Force: 

• Evaluated existing pricing strategy for sales to the foreign military sales trust fund, ensuring compliance 

with DoDFMR Volume 15, Chapter 5. 

• Identified and documented Air Force foreign military sales “order to cash” “as-is” processes, controls, 

systems and policies during discovery site visits. 

• Developed the initial corrective actions for improving the Air Force foreign military sales “order to cash” “asis” processes. 

• Identified and documented major audit recommendations related to accounts receivable based on the last 

5 years of audit reports. 

• Created test plans for the major audit recommendations to determine whether the recommendations have 

been implemented as scheduled. 

• Reported that Air Force Audit Agency began an audit of Air Force Tri-Annual Review over accounts 

receivable. 

• Reviewed the Tri-Annual Review guidance to confirm compliance with DoDFMR Volume 3, Chapter 8. 

• Completed the FY 2008 testing of internal controls to include validating the establishment and support for 

accounts receivable. 

• Wrote off unsupported undistributed collections based upon Office of the Under Secretary of Defense 

(Comptroller) guidance. 

• Completed flow charting and narrating the accounts receivable process; performed risk assessments; and 

developed and executed test plans to test existing controls. 

• Analyzed results and developed corrective action plans for reporting in the FIAR Tool. 

• Reported that the Office of the Under Secretary of Defense (Comptroller) memorandum for the revised 

intragovernmental business rules regarding trading partners was incorporated into DoDFMR. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

43 

• Led a team, including DFAS and security assistance personnel, to review and analyze the foreign military 

sales accounts receivable process. 

• Began identifying and incorporating necessary changes to foreign military sales accounts receivable 

process to ensure compliance with DoDFMR, Volume 15, Chapter 5. 

• Analyzed feeder systems to determine where gaps exist against the Office of the Under Secretary of 

Defense (Comptroller) memorandum. 

• Modified the Air Force policy and procedures to reflect the transaction data associated with the acceptance 

and fulfillment of the reimbursable orders to comply with the Office of the Under Secretary of Defense 

(Comptroller) memorandum. 

• Ensured a dispute resolution was implemented with all trading partners as directed by Office of the Under 

Secretary of Defense (Comptroller). 

• Implemented the open document analysis component of the financial management suite to aid financial 

analysts in the review and reconciliation of open documented items during the Tri-Annual Review. 

• Compiled listings of all Air Force accounts receivable feeder systems. 

Defense Logistics Agency: 

• Developed standard operating procedures to review customer orders not posted and reconciled and/or 

posted missing receipts required by systems to record revenue. Implemented processes to ensure orders 

and receipts are posted in Business Systems Modernization – Energy. 

• Documented processes for recording end-of-month budgetary for Oracle Government Funds for Defense 

Energy Supply Center in the Business Systems Management – Energy. 

Service Medical Activities Executing Organizations: 

• Performed a decomposition of the Treasury report on receivables to determine what accounts receivables 

data are being reported in Defense Departmental Reporting System on a quarterly basis. 

• On May 2, 2008, the Office of the Assistant Secretary of Defense (Health Affairs) issued the Defense 

Health Program Accounts Receivable Policy. 

6b. Planned Milestones Correction Target Date: 3rd Quarter, FY 2015 

Department of Air Force will: 

• Develop and implement corrective actions recommended by Air Force Audit Agency. 

• Complete the Air Force Smart Operations 21 rewrite of the Air Force instructions for completing the TriAnnual Review to incorporate any necessary changes to existing Tri-Annual review processes to ensure 

compliance with DoDFMR Volume 3, Chapter 8. 

• Review the system requirements and perform gap analysis on accounts receivable process model 

documents for the Enterprise Resource Planning solutions. 

• Identify and test AFB-level controls over acceptance and recording of reimbursable orders in core financial 

systems. 

• Identify and test AFB-level controls over fulfillment of reimbursable orders in core financial systems. 

• Assess the accounts receivable systems to determine if the systems are capturing all the detailed 

transactions associated with an order for the life of an order. 

• Assess the Air Force accounts receivables feeder systems ability to capture data attributes necessary for 

the identification and reconciliation of intragovernmental balances. 

• Test and validate internal controls over the acceptance and fulfillment of reimbursable orders. 

• Implement corrective actions for pricing strategy for sales to the Foreign Military Sales Trust Fund after 

discovery is complete. 

• Complete the review and reconciliation of the Supply General Support Division account receivable 

balances. 

• Perform internal control reviews to determine effectiveness of corrective actions. 

• Test to validate foreign military sales accounts receivable. 

• Conduct testing of all closed corrective actions by DFAS that validate the Air Force accounts receivables 

processes through Office of Management and Budget Circular No. A-123, Appendix A. 

• Implement corrective actions and adjustments for the Supply General Support Division accounts receivable 

balances. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

44 

• Conduct testing of all closed corrective actions by DFAS which affect the Air Force accounts receivables 

processes. This will be accomplished through OMB Circular A-123, Appendix A, program year with internal 

control reviews, including various testing procedures, are performed to ensure corrective actions have 

been implemented and are effectively mitigating risk. 

• Complete review and reconciliation of the Supply Material Support Division accounts receivable balances. 

• Implement the Expeditionary Combat Support System Increment 1 Retail Material Management. 

• Implement corrective actions and adjustments for the Supply Material Support Division account receivable 

balances. 

• Implement the Expeditionary Combat Support System Increment 2 Air Logistics Center Supply. 

• Complete review and reconciliation of depot maintenance accounts receivable balances for each of the Air 

Logistics Centers. 

• Implement corrective actions and adjustments for the depot maintenance accounts receivable balances for 

each of the Air Logistics Centers. 

• Implement the Expeditionary Combat Support System Increment 3 for depot maintenance. 

• Test and validate internal controls for Air Force working capital fund accounts receivable financial 

disclosures. 

• Analyze the Air Force implementation of the DoD Tri-Annual review requirements. 

• Incorporate any necessary changes to existing Tri-Annual review processes to ensure compliance with the 

DoD Financial Management Regulation Volume 3, Chapter 8. 

• Test and validate the Tri-Annual review process to ensure compliance with the DoD Financial Management 

Regulation Volume 3, Chapter 8. 

Service Medical Activities will: 

• Sustain audit readiness and validate consistency with segment assertion schedule for Service Medical 

Activities consolidated balance sheet, per DoD Financial Improvement Business Rules. 

• Based on successfully implemented systems change requests in Third Party Outpatient Collection System 

and other systems, gather billing data from Medical Service Accounts, Third Party Outpatient Collection 

System and Medical Affirmative Claims to determine if the outstanding bills are either recorded in the core 

accounting systems and/or reported on the Monthly Report on Debt and Treasury Report on Receivables. 

• Implement subsidiary ledgers that are compliant with the generally accepted accounting principles and 

support the outstanding medical bills for Third Party Outpatient System, Medical Service Accounts and 

Medical Affirmative Claims at the Executing Organizations. 

• Report whether the TRICARE Management Activity provides a policy for Service Medical Activity Executing 

Organizations to estimate an allowance for doubtful accounts. 

Department of Army reported will: 

• DFAS will identify dollar amounts, number of line items, and types of receivables originating in system and 

identify corrective actions. 

Defense Logistics Agency will: 

• Evaluated procedures used to perform internal reconciliations of the Defense Energy Supply Center 

revenue and accounts receivable. Developed and implemented standard operating procedures in the 

Business Systems Modernization – Energy. 

• Develop test plans for the Fuels Automated System Enterprise Server and Defense Fuels Automated 

Management System reject/suspense corrections by Defense Fuel Support Points; conduct tests at 

Defense Fuel Support Point locations; and validate effective implementation of correction findings. 

• Update procedures for generating and correcting errors relating to customer requisitions, passing and 

redistributing orders, and implemented training, as required. Office of Accountability will perform validation 

of compliance with procedures for addressing input errors related to order fulfillment. 

• Ensure that the Defense Energy Support Center end of month fund balance is reconciled with the Treasury 

and that the balance is accurately entered in the Columbus Cash Accountability System. Implement 

standard operating procedures as required. 

• Evaluate reconciliations of the Columbus Cash Accountability System and Treasury collections against 

Defense Fuels Automated Management System and Oracle General Fund billings’ records and report of 

unmatched collections. Develop and implement standard operating procedures as required. 

• Document and evaluate transactional and related controls, as well as overall functionality, of the following 

information systems: Defense Automated Addressing System (specifically for subsistence total orders); 

Receipt Electronic System; Fresh Fruit and Vegetables Order Receipt System; and Defense Medical 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

45 

Logistics Support System. Test the functionality and update the standard operating procedures to include 

interfaces with related information systems during the evaluation of electronic mail and other processes 

related to order fulfillments 7096,74, 75, and 78. 

• Develop documentation in sufficient detail to address edit checks over signal codes and shipment 

confirmations for the Order Fulfillment 167 interface. Document the identifier code for the “post – post” 

transactions into the financial system, test functionality and implement. 

• Develop documentation to describe controls for customer setup and processes related to the Order 

Fulfillment 55 interface; implement controls as appropriate; and test functionality. 

• Develop documentation in sufficient detail to address customer funds availability included in partial 

payment and order processing. Test functionality and implement. 

• Conduct agency validation. 

• Verify that the transfer of interfund collections to DFAS-Indianapolis is reconciled with Defense Fuels 

Automated Management System and Oracle General Fund Interfund Collections Report. 

• Validate that the Intragovernmental Payment and Collection System is correctly identifying errors in 

collection data and are corrected by DFAS-Columbus. Develop and implement standard operating 

procedures as required. This corrective action requires support from DFAS 

• Evaluate procedures to verify that the DoD Activity Address Codes are valid. Update procedures as 

required. 

• Ensure journal vouchers are for the correct amounts and approved prior to entry into Oracle General Fund. 

Implement standard operating procedures as required. 

• Evaluate and develop Defense Energy Support Center Inventory Division standard operating procedures 

for the suspense report error research and customer review. 

• Document the Fuel Enterprise Server and the Defense Fuels Automated Management System data 

validation and format edit checks process on fuels sales and returns from the Fuels Control Center and the 

Fuels Manager Defense. Validate effective documentation of system data. 

• Validate accounts receivable process. 

7. Inventory Valuation 

Description of Issue: The DoD is unable to accurately account for, value, and report inventory on DoD’s financial 

statements in accordance with generally accepted accounting principles. 

7a. Completed Milestones 

Defense Logistics Agency: 

• Reconciled financial inventory barrels with supply inventory barrels on a monthly basis in the Business 

System Modernization – Energy. 

• Identified discrepancies and causes for imbalances between supply and financial inventory barrels on a 

monthly basis in the Business System Modernization – Energy. 

• Resolved imbalances noted as appropriate, i.e., system correction, journal voucher, or process change in 

the Business System Modernization – Energy. 

• Reconciled supply inventory quantity in the Oil Energy Downstream and Defense Fuels Automated 

Management System with the Fuels Automated System Enterprise Resource Planning Server as part of 

the Business System Modernization – Energy monthly. 

• Identified discrepancies and causes for any imbalance between quantities in the Oil Energy Downstream, 

Defense Fuels Automated Management Systems and Fuels Automated System Enterprise Server and in 

the Business System Modernization – Energy monthly. 

• Resolved imbalances noted as appropriate, i.e., system correction, journal voucher or process change in 

the Business System Modernization – Energy. 

• Demonstrated the audit trail which includes supporting sales to accounts receivable and receipt to 

accounts payable Business System Modernization – Energy. 

• Developed system reports and queries as required in the Business System Modernization – Energy. 

• Developed additional business rules, process papers, and job aids for correcting failed information 

documents. 

• Established a systemic prioritization process that included the dollar value of the failed information 

document. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

46 

• Worked with OSD Inventory Working Group to establish policy and a process for adequate internal controls 

to value excess inventory in accordance with accounting standards. 

• Reported that OSD wrote new Net Realizable Value policy and was coordinating it with the Services and 

DoD IG. 

• Updated policy changing process and DLA processes changed to value excess inventory at net realizable 

value. 

• Reviewed current reconciliation controls and procedures. 

• Reviewed and documented the in-transit process. 

• Reviewed the current reconciliation controls and procedures between subsidiary ledgers and general 

ledger balances provided by DFAS – Columbus for DNSC, DAPS, and DESC. Requested that a subsidiary 

ledger be created that will accomplish the reconciliation between the subsidiary ledgers and the general 

ledger to Enterprise Business System. 

• Using DLA Research and Resource Analysis quarterly data for all Non-Distribution Standard System 

inventory on hand balances, cost of goods sold and sales data for FY 2008, concluded that an accurate 

comparison could not be made due to differences in individual valuation methodologies, reporting 

frequencies, etc. 

• Obtained current individual balances from Enterprise Business System to identify the major vendor 

managed inventory and other Non-Distribution Standard System sites. Selected candidate sites for 

accomplishing walkthroughs to determine individual systems, processes and frequencies used to report 

transactions to Enterprise Business System and ascertain any existing reconciliation processes. 

• Finalized the inputs for an system change request for the required data elements for an in-transit report. 

• System change requests submitted for detail posting and aging of in-transits. 

Department of Air Force: 

• Completed the OMB, Circular No. A-123, Appendix A, implementation requirements. The process involved 

flowcharting and narrating the inventory process, performing risk assessments and developing and 

executing test plans to test existing controls. 

• Held an inventory in-transit workshop at Air Force Material Command headquarters. 

• Implemented system change requests which will record all issues and receipts to history. Used this history 

to help identify problems in the in-transits between the Standard Base Supply System and the Stock 

Control System. 

• Identified all systems that report inventory to the financial systems. 

• Established a joint inventory in-transit working group of functional experts to develop a roadmap for 

corrective actions. 

• Researched and mapped inventory in-transit process segments from “procurement to disposal” of an 

asset. 

• Identified which logistical and financial systems should be responsible for reporting in-transit quantities and 

values. 

Department of the Army: 

• Published implementation guidance. 

7b. Planned Milestones Revised Correction Target Date: 

3rd Quarter, FY 2016 

Defense Logistics Agency will: 

• Perform walkthroughs of selected Vendor-Managed Inventory and other non-Distribution Standard System 

sites. 

• Complete reconciliation steps for in-transit inventory. 

• Develop standard operating procedures to document reconciliation steps noted above. 

• Ensure cumulative trial balance inventory value is fully supported. 

• Provide necessary training to all resolution specialists. 

• Establish standard operating procedures that implement an auditable process to value excess material at 

Net Realizable Value in coordination with OSD. 

• Compile the universe of systems outside of Distribution Standard System that interface with Enterprise 

Business System at the Inventory Control points and reconcile results of walkthroughs at non-Defense 

Security Service sites to Enterprise Business System inventory. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

47 

• Establish standard operating procedures that implement an auditable and sustainable process to reconcile 

subsidiary ledgers for material Vendor-Managed Inventory and other Non-Distribution Standard System 

sites having material balances with the general ledger summary. 

• Completed the programming for system change requests. 

• Validate the internal controls in the Business System Modernization – Energy System. 

• Develop, implement and document the automated controls for interfaces. 

• Reinforce oversight procedures that currently exist or establish oversight procedures where a supervisor 

reviews the work of a resolution specialist to ensure failed information documents are corrected accurately 

and timely. 

• Commence generation of in-transit reports. 

• Validate procedures to ensure an auditable in-transit inventory process with adequate controls. 

• Validate reconciliation procedures to ensure that accurate and supportable values are reported on financial 

statements. 

• Test functionality of existing and newly developed automated controls, business rules, process papers and 

job aids. 

• Validate to ensure automated and manual controls are working as designed. 

Department of Air Force will: 

• Conduct joint inventory in-transit working group to research and analyze transactions for in-transits. 

• Analyze and test internal controls within the in-transit process segments in legacy systems. 

• Complete necessary corrective actions in legacy environment as determined by OMB Circular No. A-123 

testing and corrective action plans. 

• Conduct internal control reviews to ensure corrective actions taken to date are effective. 

• Develop internal controls and improve audit trails over in-transit inventory. 

• Implement the Expeditionary Combat Support System. 

• Test and validate internal controls for Air Force Working Capital Fund Accounts Payable financial 

disclosures. 

Department of Navy will: 

• Issue clarification guidance for definition of inventory, procedures for special operational situations, and 

Work-in-Progress; and identify inventory of built for service assets and the proper costing and accounting 

treatment. 

• Deploy Enterprise Resource Planning for Naval Expeditionary Combat Support System – Phases I and 2; 

and the Deployment of Navy Enterprise Resource Planning release 1.1. 

• Complete review, correction or modification and documentation of business and financial processes. 

• Cleanse and migrate data to Navy Enterprise Resource Planning, correct inventory accuracy at Aviation 

Materials, inventory existence at Sea Materials, and inventory valuation. 

• Implement the direct method of valuing Depot Level Repairable and proper U.S. Standard General Ledger 

(USSGL) accounting for inventory. 

• Require Naval Surface Warfare Center, Naval Undersea Warfare Center, and Commander of Fleet and 

Industrial Supply Center to maintain source documentation to permit the tracing of transactions in a 

manner that provides clear and precise audit trails to support the financial information reported on the 

financial statement. 

• Develop auditable opening balances with appropriate supporting documentation readily available for 

auditors. 

• Complete test of design and test of effectiveness; design tests using the OMB Circular No. A-123, 

Appendix A, guidance; perform tests; analyze and summarize results; and define and report weaknesses, 

if any were identified by tests. 

• Complete verification and validation and complete the Department of the Navy’s management assertion of 

audit readiness. 

Department of Army will: 

• Perform physical inventory counts in accordance with the Army Regulation 740-26 and other applicable 

guidance. 

• Ensure adherence to governance requirements for field level physical inventory process. 

• Achieve full operational capability of the Logistics Modernization Program. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

48 

• Achieve full operational capability of General Fund Enterprise Business System. 

• Report inventory and related property in accordance with a sustainable business process. 

• Achieve full operational capability of Global Combat Support System – Army for General Fund and 

Working Capital Fund. 

• Complete the internal validation of inventory and related property performed by Army Audit Agency. 

8. Operating Materials and Supplies 

Description of Issue: The DoD cannot accurately account for the value of operating material and supplies, which 

causes the potential for a misstatement in financial reporting. 

8a. Completed Milestones 

Department of Air Force: 

• Implemented the “Spares – The Moving Average Cost” unit cost correction process within the Stock 

Control System, Financial Inventory Accounting and Billing System and the Standard Base Supply System 

to retroactively correct unit cost values. 

• Established baseline values for uninstalled intercontinental ballistic missile motors tracked in the 

accountability system integrated missile database. 

• Researched the acquisition cost reporting policy for drones, cruise missiles, engines, and missile motors. 

• Developed new policy regarding drones, cruise missiles, engines, and missile motors acquisition cost 

reporting and implemented applicable Air Force instructions. This includes the tracking of cost information 

subsequent to the establishment of baseline values and capturing accurate cost data for assets in the 

systems that were acquired during the interim period. 

Department of Army: 

• Provided guidance for establishing the value of operating materials and supplies using a historical cost 

method. 

• Provided policy for valuation of operating expenses associated with consumption of operating materials 

and supplies in normal operations. 

• Provided guidance for reporting excess, obsolete and beyond repair of operating material and supplies. 

• Incorporated the revised historical cost valuation policy using the consumption method for operating 

material and supplies according to DoDFMR 7000.14-R. 

• Provided guidance for establishing the inventory baseline, i.e., an acceptable value for on-hand operating 

material and supplies at the time systems are converted to a historical cost method. 

Department of Navy: 

• Identified plans for the Ordnance Information System to fully comply with applicable laws and regulations. 

• Correctly reported and disclosed FY 2005 prior period adjustment of $106 million. 

• Maintained readily available audit trails and documentation to support all Navy submissions for the 

Department of Navy Financial Statements. 

• Established requirements for desktop procedures and documented supervisory reviews for all financial 

data. 

• Developed comprehensive memoranda of agreement in sufficient detail to ensure that mission-critical 

support functions are agreed to by activities providing those services. 

• Required that segregation of duties be implemented in the Ordnance Information Systems development 

effort. 

• Analyzed the deposition of legacy information system.

United States Special Operations Command: 

• Conducted site visits to Components and confirmed operating materials and supplies. 

• Developed procedures to request operating materials and supplies information to be included in financial 

statements.
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

49 

8b. Planned Milestones 

Revised Correction Target Date: 

2nd Quarter, FY 2015 

• (Although some components corrective 

actions extend to the 2nd Quarter, FY 2019, 

the Senior Assessment Team considers 

these actions immaterial to DoD Financial 

Statement line for operating materials and 

supplies). 

Department of Air Force will: 

• Test internal controls for District Contingency Engineering Manager to ensure that corrective actions have 

been effectively implemented. 

• Establish baseline values for spares within Standard Base Supply System and Supply Control System. 

• Test internal controls for spares to ensure that corrective actions have been effectively implemented. 

• Establish auditable baseline values for munitions assets. 

• Implement the Expeditionary Combat Support System for munitions. 

• Test internal controls to ensure that corrective actions have been effectively implemented within the 

Expeditionary Combat Support System for munitions. 

Department of Navy will: 

• Analyze and confirm which operating material and supply systems will be replaced by Enterprise Resource 

Planning and which will remain as legacy systems. 

• Complete deficiency correction actions identified in 2007 by Naval Audit Service in Department of Navy 

legacy operating material and supply systems. 

• Identify legacy information systems which are candidates for conversion and or migration into Navy 

Enterprise Resource Planning. 

• Perform data mapping from legacy environment to Navy Enterprise Resource Planning. 

• Deploy the Enterprise Resource Planning for Naval Supply Phases – 1 and 2. 

• Issue clarification guidance for the definition of inventory, procedures for special operations situations, 

work-in-progress, and identify inventory of built for service assets and the proper costing and accounting 

treatment. 

• Determine Enterprise Resource Planning strategy and solution to address appropriation purchase account 

material, property in the possession of contractors, and residual material; issue clarification guidance for 

definition of operating material and supplies; and deploy Navy Enterprise Resource Planning Release. 

• Complete the preparation activities for the Material Management Pilot. 

• Analyze the impact on legacy information systems and finalize implementation strategy of material 

management pilot. 

• Deploy of the Navy Enterprise Resource Planning Release 1.1. 

• Complete review, correction or modification, and documentation of the business and financial processes. 

• Implement the “to-be” process in accordance with implementation strategy. 

• Cleanse and migrate data to the Navy Enterprise Resource Planning to correct identified deficiencies 

related to inventory, such as accuracy for aviations materials, inventory existence of inventory at sea 

materials, and valuation. 

• Require Naval Surface Warfare Center, Naval Undersea Center, and Commander of Fleet and Industrial 

Supply Center to maintain source documentation to permit the tracing of transactions in a manner that 

provides clear and precise audit trails to support the financial information reported on the financial 

statement. 

• Implement the direct method of valuing depot level repairable and proper USSGL accounting for inventory. 

• Develop auditable opening balances with appropriate supporting documentation readily available for 

auditors. 

• Complete the test of design and test of effectiveness, design tests using OMB Circular No. A-123, 

Appendix A, guidance, perform tests, analyze and summarize results, define, and report weaknesses, if 

any identified by tests. 

• Complete management assertion for operating material and supplies. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

50 

• Interface legacy systems with Enterprise Resource Planning and design and implement interfaces between 

legacy systems and Enterprise Resource Planning; and confirm the “to-be” processes in Navy Enterprise 

Resource Planning. 

• Evaluate pilot results and Enterprise Resource Planning functionality to remaining command functional 

requirements. 

• Implement “to-be” environment and deploy operating material and supplies process for the following 

commands: Naval Air, Naval Sea, and Space and Naval Warfare Systems Command. 

• Complete test of design and test of effectiveness, design tests using OMB Circular No. A-123, Appendix A 

guidance, perform tests, analyze and summarize results to define and report weaknesses (if any were 

identified by tests). 

• Complete verification and validation for operating material and supplies 

• Complete management assertion for operating material and supplies of general fund. 

• Identify operating materials and supplies holders throughout Navy and implement sample methodology to 

sustain data quality. 

United States Special Forces Command will: 

• Study new Special Operations Tactical Asset Visibility System to see if it captures all values for operating 

material and supplies. 

• If Special Operations Tactical Asset Visibility System does not meet the need, ask Special Operations 

Command management to require a quarterly operating material and supplies data call from Components. 

• Discover the capabilities of the Enterprise Resource Planning that the services implemented and 

developed relating to the policies and processes in gathering and compiling required component 

information. 

• Implement procedures for components to report amounts for operating material and supplies. 

• Prepare and submit audit readiness package to DoD IG and OUSD(C). 

• Conduct internal DoD IG assessment of audit readiness. 

• Complete independent audit. 

Department of Army will: 

• Perform physical inventory counts in accordance with the Army Regulation 740-26 and other applicable 

guidance. 

• Ensure adherence to governance requirements for field-level physical inventory process. 

• Achieve full operational capability of Logistics Modernization Program. 

• Obtain full operational capability of General Fund Enterprise Business System, and Global Combat 

Support System. 

• Complete internal validation of inventory and related property conducted by Army Audit Agency. 

9. Accounts Payable 

Description of Issue: The DoD does not have adequate internal controls in place to provide assurance that 

accounts payable are identified and properly reported in its financial reports. 

9a. Completed Milestones 

Defense Intelligence Agency: 

• Documented the current “as-is” processes for training, travel, government purchase cards, civilian pay, 

acquisitions, and manual payables. 

• Documented the “to-be” processes for training, travel, government purchase cards, civilian pay, acquisition 

under the new National Security Agency’s Financial Accounting and Corporate Tracking System. 

• Developed a methodology to detect abnormal balances in the current environment. 

• Implemented the Financial Accounting and Corporate Tracking System. 

• Reviewed the documentation of the process for manual payables under Financial Accounting and 

Corporate Tracking System. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

51 

National Security Agency: 

• Evaluated service of accrual options. 

• Selected accrual methodology to document expense transactions. 

• Received senior management approval for accrual methodology. 

• Developed remediation plan related to goods and services. 

• Developed the “to-be” process and internal controls. 

Defense Security Service: 

• Improved current accounts payable process to include documentation and internal communication for the 

obligation of funds. 

• Documented the Defense Security Service accounts payable policies and procedures for the commitment 

and obligation process. 

• As part of Defense Security Service Tri-Annual Review process, reviewed outstanding intragovernmental 

obligations. 

• Identified accountability and oversight features in the Tri-Annual Review as related to intragovernmental 

accounts payable. 

• Assigned responsibility for daily review of the open document listing. 

• Decomposed the procure-to-pay process business cycle for the confirm receipt and acceptance process to 

the second level. 

• Determined types of obligations and contracting vehicles. 

• Determined types of services and goods. 

Department of Air Force: 

• Completed flow chats, narratives of the accounts payable process, risk assessments, and developed and 

executed test plans. 

• Analyzed results and developed corrective action plans for reporting in the FIAR Tool. 

• Requested DFAS initiate system change requests to the UNISYS Revalidation Module to prevent hanging 

and invalid accrued expenditures that are unpaid. 

• Reviewed Tri-Annual Review Guidance and confirmed compliance with DoDFMR, Volume 3, Chapter 8. 

• Coordinated with Defense Finance Accounting Service to ensure system change request to the UNISYS 

Revalidation Module was complete. Performed the validation testing by testing accounts payable 

transactions to ensure payable was liquidated during the recording of expenditures. 

• Performed testing of internal controls of accounts payables, including the validation of accruals and the 

existence of supporting documentation. 

• Tested to ensure that dormant buyer obligation and payable balances were monitored and follow-up action 

accomplished, as prescribed in the Office of Budget and Management Memorandum 07-03 

Intragovernmental Business Rules. 

• Tested the Mechanization of Contract Administration Service accounts payable accrual process, as 

implemented by DFAS to ensure accuracy and validity of Air Force financial reporting. 

• Implemented the open document analysis component of the financial management suite to aid financial 

analysts in the review and reconciliation of open document items during the Tri-Annual Review. 

• Reviewed and analyzed the results of Air Force Audit Agency audit on the overall health of the accounts 

payable process. 

• Analyzed feeder systems against the OUSD(C) memorandum to determine where gaps existed for the 

identification and use of required order data for the core accounting system. 

• Modified Air Force policy and procedures to reflect the transaction data in compliance with OUSD(C) 

memorandum of revised intragovernmental business rules regarding trading partners. 

• Ensured a dispute resolution process was implemented with trading partners as directed by OUSD (C). 

• Analyzed the Air Force implementation of DoD Tri-Annual Review requirements. Incorporated necessary 

changes to existing the Tri-Annual review processes to ensure compliance with DoDFMR Volume 3, 

Chapter 8. 

• Tested the Mechanization of Contract Administration Service accounts payable accrual process as 

implemented by DFAS to ensure accuracy and validity of Air Force financial reporting. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

52 

Department of Navy: 

• Documented and implemented revised guidance to clarify accrual policies and procedures. 

• Supporting documentation for allocated amounts not readily identifiable. 

• Corrected auditor reported deficiencies in problem disbursements, unmatched collections, lack of 

standardized processes, and lack of supporting documentation. 

• Designed tests using OMB Circular No. A-123, Appendix A guidance. 

9b. Planned Milestones 

Correction Target Date: 3rd Quarter, FY 2015 

• (Although some component corrective 

actions extend to 2nd Quarter, FY 2019, the 

DoD Senior Assessment Team considers 

these actions immaterial to DoD Financial 

Statement line for accounts payable). 

National Security Agency will: 

• Determine effectiveness of process testing. 

• Develop policies and procedures for accounts payable. 

• Implement revised business processes. 

Defense Intelligence Agency will: 

• Review documentation of the processes for training, travel, government purchase cards, civilian pay, and 

acquisitions under the Federal Agencies’ Centralized Trial-Balance System. 

• Resolve abnormal balances. 

• Implement business process improvements. 

Defense Logistics Agency will: 

• Identify existing control documentation and evaluate the extent of the controls that have been documented 

to ensure that: unauthorized users can not access Bulk Ports without proper authorization; a sufficient level 

of detail is embedded in the available documentation to address the Fuels Automated System Enterprise 

Server edit checks; a sufficient level of detail is in the available documentation to address the Defense 

Fuels Automated Management System edit checks, when Constellar receives the daily purchase order 

data from Bulk Ports; a sufficient level of detail is available in the documentation to address the Constellar 

edit checks, when Constellar receives electronically signed receipt data from Bulk Ports; and a sufficient 

level of detail is available in the documentation to address the Bulk Ports edit checks for the Business 

System Modernization – Energy. 

• Identify existing control documentation and evaluate the extent of the controls that have been documented 

to ensure unauthorized users cannot access bulk ports without proper authorization and that there is a 

sufficient level of detail in the available documentation to address the required management edit checks for 

the Business System Modernization – Non Energy. 

• Identify where control gaps exist in the control process; develop, implement and document the controls; 

and test the functionality of existing and newly developed controls for the Business System Modernization 

– Energy and Non Energy. 

• Identify existing control documentation and evaluate the extent of the controls that have been documented 

to ensure that: there is a sufficient level of detail in the available documentation to address the Defense 

Funds Automated System edit checks, when the daily purchase order file is received from Bulk Ports; there 

is a sufficient level of detail in the available documentation to address the Defense Funds Automated 

System edit checks, when Defense Funds Automated System receives electronically signed receipt data 

from Bulk Ports Business System Modernization – Energy. 

• Identify where control gaps exist in the control process; develop, implement and document the controls; 

and test the functionality of existing and newly developed controls for the Business System Modernization 

– Energy. 

• Identify existing control documentation and evaluate the extent of the controls that have been documented 

to ensure a sufficient level of detail in the available documentation for: the Vendor Maintenance File; the 

generation of document numbers; and the two and three way match for the Business System 

Modernization – Energy and Non Energy. 

• Identify existing control documentation and evaluate the extent of the controls that have been documented 

to ensure there is a sufficient level of detail in the available documentation in the Vendor Maintenance File 

and to address: electronic mail, substance total order and receipt electronic system, fresh fruit and 
 

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ADDENDUM B Other Accompanying Information

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vegetables ordering system, and Defense Medical Logistics Standard Support edit checks for the Business 

System Modernization – Non Energy. 

• Identify where controls are not documented and develop documentation that describes controls to 

appropriate levels. Where control gaps exist in the control process, develop, implement, and document the 

controls; test the functionality of existing and newly developed controls for the Business System 

Modernization – Energy and Non Energy. 

• Validate the Defense Agency Business System Modernization – Non Energy. 

• Evaluate and develop the Defense Energy Support Center - Financial standard operating procedures for 

suspense error research and customer review for the Business Systems Modernization – Energy. 

• Document the data validation of the Fuels Automated System Enterprise Server and Defense Fuels 

Automated Management System; conduct format edit checks on fuel purchases from Fuels Control Center 

– Fuels Manager Defense; and validate the effective documentation of the Fuels Automated System 

Enterprise Server and Defense Fuels Automated Management System data validation process. 

Department of Navy will: 

• Submit completed validation of packages to Financial Management Office. 

• Perform Phase I testing on key controls. 

• Complete corrective actions for process definition, system configuration and change management. 

• Complete data cleansing and correct any material deficiencies of the pre-Enterprise Resource Planning 

implementation. 

• Implement the Navy Enterprise Resource Planning at Navy inventory control point. 

• Test the design and effectiveness of internal controls. 

• Verify and validate through audit of substantive testing. 

• Discover and document the procure-to-pay process. 

• Correct material deficiencies of the Post-Enterprise Resource Planning implementation. 

• Complete the systems assessment. 

• Complete the internal validation of systems and validation of financial statements. 

• Submit completed validation of packages to Financial Management Office. 

• Assert audit readiness for accounts payable. 

Department of Air Force will: 

• Develop and implement corrective actions recommended by Air Force Audit Agency. 

• Rewrite the Air Force instructions on how to complete the Tri-Annual Review, incorporating any necessary 

changes to the existing Tri-Annual review processes that may occur when implementing the Open 

Document Analysis Tool and complying with DoDFMR Volume 3, Chapter 8. 

• Create a test plan for the Mechanization of Contract Administration Service accounts payable accrual 

process. The test will ensure the accuracy and validity of Air Force financial reporting. 

• Perform internal control reviews to determine the effectiveness of corrective actions. 

• Complete testing the validity of general funds, public accounts payable that support the documentation. 

• Test and validate the internal controls for intragovernmental trading partner eliminations and the 

reconciliation of the open document listing to ensure accuracy and completeness. 

• Complete the journal voucher review process and test for intragovernmental supporting documentation. 

• Complete the review and reconciliation of the Supply General Support Division accounts payable balances.

• Implement corrective actions and adjustments for the Supply General Support Division accounts payable 

balances. 

• Complete the review and reconciliation of the Supply Material Support Division accounts payable balances.

• Conduct testing of all closed corrective actions by DFAS which affect the Air Force accounts payable 

processes. 

• Implement the Expeditionary Combat Support System for retail material management. 

• Implement corrective actions and adjustments for the Supply Material Support Division accounts payable 

balances. 

• Implement the Expeditionary Combat Support System for Air Logistics Center Supply. 

• Complete review and reconciliation of depot maintenance accounts payable balances for each of the Air 

Logistics Centers. 
 

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• Implement corrective actions and adjustments for the depot maintenance accounts payable balances for 

each of the Air Logistics Centers. 

• Implement the Expeditionary Combat Support System Increment 3 Depot Maintenance. 

• Test and validate internal controls for Air Force Working Capital Fund accounts payable financial 

disclosures. 

Defense Security Service will: 

• Review and reconcile trading partner data to validate the elimination data for accounts payable, which is a 

joint effort with DFAS. 

• Establish a schedule for actions related to the review of trading partner balances that support the quarterly 

audited financial statements as of the cut-off date. 

• Add responsibility for capturing and maintaining intragovernmental transaction history. 

• Document the “procure-to-pay” business cycle. 

Defense Finance and Accounting Service will: 

• Perform data cleansing in the Mechanization of Contract Administration Service for periods 1 and 2. 

• Perform a complete Mechanization of Contract Administration Service clean-up at transaction level. 

• Maintain and modify standard procedures for reconciling accounts payable; perform a thorough data 

analysis; and evaluate Wide Area Work Flow process to ensure timely receipt and posting of the accrual in 

the accounting records for the Department of the Army. 

Department of Army will: 

• Achieve full operational capability of Logistics Modernization Program and General Fund Enterprise 

Resource Planning Business System. 

• Determine if the entitlement system has the ability to appropriately age accounts payable; and determine 

changes needed to bring non-aging systems into aging status for the Department of the Army. 

• Conduct internal validation of accounts payable. 

Service Medical Activities will: 

• Ensure that each Service Medical Activities Component gathers transactional data for their top five trading 

partners and seek reconciliation with trading partner records. 

• Sustain audit readiness and validate consistency with assertion schedule for Service Medical Activities 

Consolidated Balance Sheet, in accordance with DoD Financial Improvement Business Rules. 

National Security Agency will: 

• Evaluate the accounts payable process. 

United States Special Operations Command will: 

• Discover processes used to report accurate accounts payable information. 

• Implement procedures to identify component level accounts payable balances and test procedures used to 

identify accounts payable balances. 

• Correct deficiencies found in procedures for accounts payable balances. 

• Prepare and submit audit readiness package. 

• Conduct internal DoD IG assessment of audit readiness. 

• Review processes annually until audited. 

• Complete independent audit. 

Defense Intelligence Agency will: 

• Implement full accrual accounting. 

• Reconcile the documents, accounting system, and accounts payable database. 

• Establish and document processes for ensuring sufficient audit trails, and issue requirements for 

supporting documentation. 

• Conduct training for accounts payable staff on all written procedures and process flows. 

• Complete internal control self-assessment to validate adherence to written procedures. 

• Ensure continued monitoring and reconciliation of detailed transactions to corresponding general ledger 

account balances. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

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10. Valuation of General Personal Property - General Purpose Equipment 

Description of Issue: The Department does not currently meet Federal Accounting Standards for the financial 

reporting of general personal property, specifically general equipment. The Department is not able to accurately 

report the financial value of general equipment, which is a factor in the Department’s inability to obtain an 

unqualified audit opinion on its annual financial statements. 

10a. Completed Milestones 

Defense Intelligence Agency: 

• Developed a corrective action plan that includes required steps to attain accountability and auditability, 

target dates for actions, and performance metrics that address real property, personal property, software, 

systems and government furnished property. 

• Developed supporting documentation requirements. Trained property book officers to maintain complete 

personal property capital asset folders. 

• Developed real property baseline data as of September 30, 2006. Identified documentation support 

requirements and established real property capital assets folders that include construction-in-progress 

data. 

• Developed and tested a system and software checklist to ease identification of accountable items that 

should be replaced under record control. 

• Modified the Property Accountability Support System to accept data from the Systems Asset Property. 

• Developed and issued Defense Intelligence Agency Instruction 4000.001, “Property Accountability and 

Management”. 

• Developed an item unique identification implementation strategy. 

• Completed the standard operating procedure for reporting real property financial data in September 2007 

providing procedures for both real property financial reporting and property management. 

• Documented 95 percent of Defense Intelligence Agency’s baseline personal property assets. 

• Completed 66 percent of DoD IG findings and recommendations related to Chief Financial Office 

compliance for property plant and equipment. 

• Developed and coordinated an alternative valuation methodology for capital assets. 

• Completed all requirements for heritage asset reporting for Defense Intelligence Agency financial 

statements. 

• Completed a study and developed and implemented written standard operating procedures for reporting 

deferred maintenance on real and personal property. 

• Achieved approximately 90 percent preponderant use reconciliation with the military services. 

• Reported deferred maintenance on personal property in the FY 2008 financial statements. 

• Initiated implementation of item unique identification strategy for property in the possession of contractors, 

formally referred to as government furnished equipment. 

• Issued acquisition policy memorandum requiring the inclusion of item unique identification clauses in 

applicable Defense Intelligence Agency contracts. 

• Posted the real property subsidiary ledger to the general ledger. 

• Developed a revised training program for all employees for property accountability. 

• Drafted management instructions and procedures for capital personal property. 

• Initiated quarterly reviews of the property accountability support system to ensure a minimum of 75 percent 

accuracy of all capital assets associated inventory and cost date. 

• Documented and reported leasehold improvements to real property placed-in-service in FY 2008. 

• Drafted procedures to identify and report internal use software. 

National Security Agency: 

• Worked with personnel to audit property accountability; conducted a physical inventory; initiated the use of 

Defense Property Accountability System to manage property; and ensured compliance with all applicable 

regulations. 

• Obtained corporate funding support and hired contractors to work on remediation activities to ensure 

sustainment of auditable activities. 
 

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• Developed and implemented standard operating procedures covering all property plant and equipment 

activities with the exception of Government Furnished Equipment. 

• Developed and instituted a compressed schedule for property plant and equipment inventory activities. 

• Determined the scope of real property, which established the correct association of real property assets 

with agency elements. 

National Geospatial-Intelligence Agency: 

• Finalized business process narratives and corresponding flow charts. 

• Performed risk assessment and internal control testing for property, plant, and equipment and personal 

property, including funds execution and financial reporting. 

• Implemented an action plan to place reporting requirements on Military Interdepartmental Purchase 

Requests. 

• Revised existing property, plant and equipment policies. 

• Developed request for change for issuance to all National Geospatial-Intelligence Agency contractors to 

obtain estimated impact and cost to implement property, plant, and equipment financial reporting on 

existing contracts. 

Defense Logistics Agency: 

• Completed standard operating procedures for capital-funded contractor-developed Internal Use Software. 

Department of Navy: 

• Defined audit-ready financial environment for the Integrated Financial Management System by 

communicating and distributing “acquire to retire” audit readiness. 

• Identified known weaknesses. 

• Documented effective controls and prioritized control weaknesses. 

• Conduct a gap analysis for the following Commands: Bureau of Medicine and Surgery; Bureau of Naval 

Personnel; Commander, Navy Installations Command; U.S. Fleet Forces Command; U.S. Pacific Fleet; 

Navy Sea Systems Command; Office of Naval Research; Space and Naval Warfare Systems Command; 

and Special Warfare Command. 

Department of Army: 

• At USACE, provided training to all Chief Financial Office leaders and Finance and Accounting Officers for 

the implementation of corrective action plans. 

• Executive Senior Assessment Team met to oversee and provided guidance in implementation of corrective 

action plan.

10b. Planned Milestones 

Revised Correction Target Date: 

4th Quarter, FY 2013 

• (Although the Senior Assessment Team 

reports the projected correction date as 4th

Quarter, FY 2013, some Components have 

actions extending out to 2nd Quarter, FY 

2019, but the Senior Assessment Team 

considers these actions immaterial.) 

Defense Security Service will: 

• Align processes and standardize roles and responsibilities across Defense Security Service. 

• Perform a walkthrough of each property, plant and equipment cycle process. 

• Perform a risk analysis of the key control points identified. 

Department of Navy will: 

• Implement system changes for Wide Area Work Flow and Defense Property Accountability System 

interface, create DoD Activity Address Code table, and update receipt and acceptance policy and 

procedures. 

• Monitor and disseminate Navy Enterprise Resource Planning impact on general equipment process and 

controls. 

• Update physical inventory policy and procedures. 
 

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ADDENDUM B Other Accompanying Information

57 

• Train responsible parties for the receipt and acceptance process and controls, complete receipt and 

acceptance manual and systemic controls, implement the general equipment key controls; and complete 

the transfer of equipment using Wide Area Work Flow and Defense Property Accountability System 

interface. 

• Execute receipt and acceptance corrective actions and implement receipt and acceptance manual controls 

utilizing the Wide Area Work Flow and Defense Property Accountability System interface. 

• Execute proper financial accounting treatment for assets corrective actions. Measure proper financial 

accounting treatment for assets performance and monitor and disseminate performance metrics on period. 

• Train responsible parties for valuing equipment; complete valuation manual controls; implement general 

equipment key controls and financial reporting key controls. 

• Train responsible parties for the physical inventory process and control; identify baseline inventory 

performance; create Defense Property Accountability System service records for found equipment; and 

complete annual cyclical inventory performance. 

• Measure receipt and acceptance performance and monitor and disseminate performance metrics. 

• Execute valuation corrective actions by implementing valuation controls. 

• Measure the physical inventory performance and monitor and disseminate performance metrics. 

• Test the receipt and acceptance performance by developing methodology, testing samples, and control 

effectiveness. 

• Test proper financial accounting treatment for assets performance by developing methodology and testing 

samples and the effectiveness of controls. 

• Measure validation control effectiveness, monitor, and disseminate performance metrics on period. 

• Complete receipt and acceptance corrective action by identifying control test failures, determining cause of 

failure, retraining, and retesting. 

• Test ”valuation” performance by developing methodology and testing samples, and control effectiveness. 

• Complete proper financial accounting treatment for assets corrective action by identifying control test 

failures, determining cause of failure, retraining, and retesting. 

• Test a physical inventory performance by developing methodology, and testing samples and control 

effectiveness. 

• Complete valuation corrective action by identifying control test failures, determining cause of failure, 

retraining, and retesting. 

• Complete physical inventory corrective action by identifying control test failures, determining cause of 

failure, retraining, and retesting. 

• Execute physical inventory corrective actions, perform annual and cyclical inventories. 

• Complete mock audit and/or final testing for corrective actions to perform an end-to-end test process to 

include procurement and contracting. Perform a property accountability testing to include the following: 

receipt and acceptance, physical inventories, transfers, loans, disposals, and property accountability 

testing and correct and retest, as necessary. 

• Complete test of design and test of effectiveness. Design tests using OMB Circular No. A-123, Appendix A, 

guidance; perform tests; analyze and summarize results; and define and report weaknesses, if any were 

identified by tests. 

• Complete the verification and validation and management assertion. 

Department of Army will : 

• Identify requirements to accurately report general equipment. 

• Conduct follow-up audit of implemented corrective actions for Property Book Unit Supply Enhanced. 

• Obtain Army Audit Agency certification that Property Book Unit Supply Enhanced complies with all 

identified requirements based on the current versions of the DFAS Blue Book and the Federal Financial 

Systems Integration Office. 

• Implement sustainable business processes to report general equipment. 

• Report general equipment in accordance with a sustainable business processes. 

• Validate auditability of general equipment. 

• Formally request for Federal Financial Management Improvement Act compliance re-audit on Property 

Book Unit Supply Enhanced from Army Audit Agency. 

• Ensure the USACE Internal Review Office performs monthly testing. 

• Ensure that an independent public accountant performs year-end testing of the USACE. 
 

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• Continue monitoring and testing by Internal Review Office of the USACE. 

Defense Intelligence Agency will: 

• Issue management instructions and procedures for personal property. 

• Complete the item unique identification strategy for marking legacy items. 

• Implement revised training program for property accountability. 

• Identify, inventory, and record property in the possession of contractors. 

• Initiate implementation of asset management system. 

• Initiate implementation of Supply Chain Management System. 

• Initiate internal assessment and validation of real property. 

• Complete Real Property and Internal Use Software and Systems remediation. 

• Complete the full implementation of Asset Management and Supply Chain Management Systems. 

Complete personal property remediation. 

• Obtain clean audit opinion on property plant and equipment. 

National Security Agency will: 

• Research the acquisition and government furnished property and document a process to account for all 

agency-owned assets not currently collected in Defense Property Accountability System. 

• Will issue assertion that the property plant and equipment process is ready to be audited. 

• Coordinate with personnel at selected sites to audit property accountability; conduct a physical inventory, 

initiate use of the Defense Property Accountability System to manage property; and ensure compliance 

with all applicable regulations. 

• Develop and implement a comprehensive, automated, portable computing device solution designed to 

ensure 100 percent accountability of all Agency-owned portable computing devices. 

National Geospatial-Intelligence Agency will: 

• Develop new control activities to satisfy control objectives based on internal control objectives. 

• Create standard operating procedures and desk guide for general personal property. 

• Validate the general property plant and equipment internal controls. 

United States Special Operations Command will: 

• Determine a method to identify and record new purchases of general property plant and equipment assets; 

determine a method to discover and record disposals of general property plant and equipment assets; and 

correct past incorrect entries. 

• Discover the Enterprise Resource Planning the services are utilizing to track general property plant and 

equipment. 

• Implement procedures to accurately record property plant and equipment in the financial statements. 

• Test procedures to verify accurate recording of values in financial statements and correct, if necessary. 

• Correct any deficiencies found in the procedures to identify values recorded in the financial statements. 

• Prepare and submit audit readiness package. 

• Complete internal DoD IG, assessment of audit readiness. 

• Review processes annually until audited. 

• Complete independent audit. 

Defense Logistics Agency: 

• Initiate training of headquarters and field activity property management, information operations, and 

financial operations personnel responsible for capital funded contractor developed Internal Use Software 

on revised processes, procedures, and internal controls. 

• Complete development of additional standard operating procedures addressing the five remaining 

categories of Internal Use Software developed or purchased by DLA. Complete Internal Use Software 

internal control design memoranda. 

• Initiate training of headquarters and field activity property management, information operations, and 

financial operations personnel responsible for the five remaining categories of Internal Use Software 

developed or purchased by DLA on revised processes, procedures and internal controls. 

• Complete initial compliance reviews designed to monitor implementation of revised processes procedures 

and internal controls. 
 

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ADDENDUM B Other Accompanying Information

59 

11. Financial Reporting Compilation - Includes Statement of Net Costs, Statement of Budgetary 

Resources, Statement of Net Position, and Accounting Adjustments 

Description of Issue: Due to inadequate internal management controls, the Department is unable to produce 

accurate Statements of Net Cost, Budgetary Resources, and Net Position, or adequately document accounting 

adjustments as required by the Chief Financial Officers Act of 1990. 

11a. Completed Milestones 

Defense Security Service: 

• Determined proper classification of personnel security investigation costs based on DoD regulatory criteria.

• Worked with DFAS and the Office of Personnel Management to properly account for payments made to 

the Office of Personnel Management for personnel security investigation costs. 

• Incorporated into the Tri-Annual Review of classifications and the validity of line items on financial 

statements.

11b. Planned Milestones Correction Target Date: 1st Quarter, FY 2012 

Defense Security Service will: 

• Establish that the Office of Personnel Management advances are properly classified on prior period 

financial statements. 

Department of Army will: 

• Correct system issues causing abnormal accounts payable balances and reconciliation problems with 

delivered orders. 

• Achieve full operational capability of Logistics Modernization Program. 

• Report indirect costs included in the full cost of outputs. 

• Report general management and administrative support costs as a cost not assigned to programs if they 

cannot be identified by segment. 

• Report other post employment benefits as an expense for the period during which the future outflow or 

other sacrifice is probable and measurable on the basis of events occurring on or before the accounting 

date. 

• Achieve full operational capability of General Fund Enterprise Business System. 

• Report the full cost of outputs in the general fund financial statements. 

• Report, as an expense, the benefits paid during the reporting period, plus any increase or less any 

decrease, in liabilities from the end of the prior period to the end of the current period. 

• Report inter-entity costs for goods and services received without reimbursement. 

• Correct identified deficiencies resulting in abnormal account balances. 

12. Financial Reporting of Intragovernmental Eliminations – Includes Anti-Deficiency Act Violations 

Description of Issue: The Department is unable to collect, exchange, and reconcile buyer and seller 

intragovernmental transactions, resulting in adjustments that cannot be verified. 

12a. Completed Milestones 

Department: 

• Conducted a review of 30 DoD accounting and information systems to determine data capturing 

capabilities. 

• Identified payables and advances from others and eliminated with major level-one trading partner activities.

• Defined the end-to-end standard process, business rules and requirements for intragovernmental 

transactions. 

• Determined the feasibility of completing the intragovernmental transaction system and received permission 

to reevaluate completion of date and methodology. 

• Fully decomposed and defined the end-to-end standard process, business rules and requirements for 

reimbursable orders of intragovernmental transactions beginning with reimbursable orders. Reorganized 

efforts into three distinct working integrated product teams beginning with reimbursable orders as follows: 
 

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ADDENDUM B Other Accompanying Information

60 

order creation, performance and fulfillment and disbursements, and collections. 

• Conducted and completed the analysis of alternatives to determine the best way to provide an Enterprise 

Resource Planning-wide capability for processing reimbursable orders. 

• Determined milestones and the final implementation date based on the Office of the Under Secretary of 

Defense (Acquisition, Technology, and Logistics) alternative selected. 

• Developed the intragovernmental transactions pilot plan, which focuses on selected DoD service buyerseller customers that have the capability to produce and track intragovernmental orders through the order 

creation process. 

• Drafted a concept of the operations for the intragovernmental transactions pilot automated system as a 

concept demonstration system. 

• Requested the investment review board approval for the intragovernmental transactions pilot plan which is 

being sought in two phases: Phase 1 briefing and overview, and Phase 2 is for technical documentation 

and funding approval. 

• Conducted acquisition and vendor selection process for developing of the Intragovernmental Value Added 

Network, finalized pilot participants, and established metrics. 

• Assessed results of Intragovernmental Value Added Network proof of concept for Level 2 DoD to DoD 

transactions. 

• Established an intragovernmental transactions working group to develop an Intragovernmental Value 

Added Network implementation strategy and plan. 

• Completed Intragovernmental Value Added Network proof of concept for Level 1 DoD to Non-DoD 

transactions. 

• Obtained concurrence from Military Services financial managers that Intragovernmental Value Added 

Network is the enterprise solution for levels 1 and 2 of the intragovernmental orders. 

• Established limited production in a commercial hosting environment.

12b. Planned Milestones Correction Target Date: 4th Quarter, FY 2013 

Department will: 

• Establish full production capability in Defense Information Systems Agency hosting environment. 

• Deploy the Intragovernmental Value Added Network at the U.S. Marine Corps. 

• Deploy the Intragovernmental Value Added Network at Army Materiel Command. 

• Finalize Intragovernmental Value Added Network deployment plan and obtain funding. 

• Develop standard interface specification for financial Enterprise Resource Planning systems. 

• Complete the deployment and conduct final assessment and closure actions; evaluate result of operational 

effectiveness of the solution. 

The Department’s internal control weaknesses over nonfinancial operations are listed in Table 

1b. The completed actions and planned milestones are listed below in Table 5 for each material 

weakness. The completed milestones continue to demonstrate measured progress and highlight 

the Department’s commitment to resolving the material weaknesses. 

Table 5. Effectiveness of Internal Control Over Nonfinancial Operations (FMFIA Section 2) 

1. Management of Information Technology and Assurance 

Description of Issue: The DoD information systems are potentially vulnerable to an information warfare attack. In 

addition, the Department has reported this issue as a significant deficiency under the reporting requirements of the 

Federal Information Security Management Act. The Department has uncovered numerous attempts to breach 

systems and networks supporting finance, logistics, medical, procurement, personnel, and research and 

development activities. 

1a. Completed Milestones 

Department: 

• Revised the Department’s security certification and accreditation policy and instructions for the Defense 

Information Assurance Certification and Accreditation Process to improve compliance and provide an 
 

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enterprise management capability. Incorporated the Department’s policy guidance to manage and help 

correct identified security performance weaknesses and direct components to appropriately report all 

security weaknesses identified in annual reviews of the General Accountability Office and DoD IG, audits. 

• Began issuing public key infrastructure certificates to network domain Controllers in support of smart card 

login to DoD networks. 

• Initiated the second phase of the public key infrastructure operational implementation, which will enable 

digital signature for electronic-mail with attachments and encryption of sensitive data. 

• Completed the certification and accreditation of all 23 Department computer network Defense service 

providers. 

• Certified 10 percent of the Department’s information assurance workforce. 

• Aligned 52 components with a certified DoD network service provider, of which 15 require improvements 

to the computer network defense program. 

• Developed the initial phase of the Departments’ non-classified internet protocol router network demilitarized zone engineering plan. 

• Demonstrated the prototype capability of the security content automation protocol that provided 

enterprise-level situational awareness and mitigation of vulnerabilities, intrusions, and misconfigurations 

for DoD’s information technology assets. 

• Achieved 95 percent of certification and accreditation of the Department’s systems. 

• Initiated the second phase of non-classified internet protocol router network de-militarized zone 

engineering plan, established the de-militarized configuration control board, and developed the 

application control board. 

• Implemented the enterprise-wide passive vulnerability monitoring of information technology assets. 

Installed 85 passive monitoring sensors on secret internet protocol router network and 123 intrusion 

detection sensors acquired for non-classified internet protocol router network and secret internet protocol 

router network. 

• Developed the Department’s external application migration strategy and roadmap. 

• Certified 30 percent of DoD information assurance workforce. 

• Fielded the prototype capability of the Security Content Automation Protocol and Computer Network 

Defense Data Standards and provided a model for the enterprise level situational awareness. Mitigated 

vulnerabilities, intrusions, and misconfigurations across selected global information grid organization 

information technology assets. 

• Conducted the initial implementation of five non-classified internet protocol router network de-militarized 

zones at the Defense Information Systems Agency’s Defense Enterprise Computing Center with three 

located within and two located outside the Continental U.S.. 

1b. Planned Milestones 

Revised Correction Target Date: 

4th Quarter, FY 2010 

• (Although management reported the completion 

date as 4th Qtr, FY2010, actions to correct the 

weakness extend to 2nd Qtr, FY 2011.) 

Department will: 

• Begin deploying the public key infrastructure hardware credentials on a secret internet protocol router 

network. 

• Implement globally the initial phase of the de-militarized zone plans and implement the whitelisting of 

inbound file transfer protocol, electronic-mail, and web, in order to reduce the accessible attack surface of 

DoD by 90 percent. 

• Complete an extensive host-based security solution for the engineering design and implementation 

coordination requirements of the enterprise fielding. 

• Achieve greater than 90 percent certification and accreditation of DoD systems. 

• Report when the U.S. Cyber Command achieves initial operating capability. The Command is a subunified command established by the Secretary of Defense to focus on cyberspace operations and 

associated cyber threats and vulnerabilities. 

• Complete acquisition requirements for approximately 50 intrusion detection sensors that support the nonclassified internet protocol router network and secret internet protocol router network. 

• Certified 55 percent of the Department’s information assurance workforce. 
 

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• Begin operational deployment of the hardware token on the secret internet protocol router network. 

• Achieve greater than 90 percent certification and accreditation of DoD information technology systems for 

Financial Information Security Act reporting. 

• Complete garrison level host based security solution implementation at the component locations in 

accordance with the Joint Task Force Global Network Operations Requirements. 

• Validate the corrective action plan. 

2. Personnel Security Investigations 

Description of Issue: Security clearances and personal security investigations are key elements in protecting 

national security by determining whether an individual should be granted access to classified information, 

accessed or retained in the military, or employed in a sensitive position. In January 2005, GAO issued its high-risk 

series and listed the DoD Personnel Security Program as a high-risk program. The GAO indicated that problems 

such as timeliness and quality in the personal security clearance process directly affects the Department’s 

operations and is a matter of national security. Other factors contributed to the high-risk designation included: 

inadequate program oversight and monitoring and the lack of a comprehensive, integrated management plan to 

address various obstacles. 

2a. Completed Milestones 

Department: 

• Transferred the function of personnel security investigations to the Office of Personnel Management. 

Made improvements and progress in the timeliness of investigations as a result of the initiatives 

generated by the Office of the Management and Budget, the Office of Personnel Management, and DoD. 

• Implemented the December 2005 OMB policy on the reciprocal recognition of existing personnel security 

clearances. 

• Implemented the OMB’s additional guidelines to improve reciprocity within the Federal Government with 

respect to special access programs. 

• Implemented the new adjudication guidelines approved by the President to determine eligibility for access 

to classified information. 

• Increased the FY 2008 funding for industry investigations in the President’s Budget to cover all 

anticipated future requirements. 

• Increased by 72 percent the use of electronic questionnaires for investigations processing resulting in 

fewer requests for investigations because of incomplete or erroneous information. 

• Reiterated the guidance on the requirement for full submissions on the electronic questionnaires for 

processing investigations when used for National Security Investigations. 

• Reduced the total number of DoD’s pending investigations of all types from 444,000 to 293,650. 

• Completed the program of instruction for DoD Adjudicator Certification Program. 

• Mandated a study to review the Department’s Central Adjudication Facilities, which maximized 

efficiencies in the adjudication process and related information technology infrastructure. 

• Revised the Performance Assessment Rating Tool that identified measures to assess the cost, 

timeliness, and quality of the security clearance program for all three phases of the process. 

• Completed a virtual test of electronic adjudication for non-issue investigations in support of secret security 

clearances. 

• Increased to 89 percent the Department’s use of electronic questionnaire investigations. 

• Adjudicated 80 percent of all completed investigations received within 25 days and met the Intelligence 

Reform and Terrorism Production Act’s metrics goal for timeliness. 

• Maintained an average of 90 percent for adjudication timeliness of Intelligence Reform and Terrorism 

Production Act security clearance requests in 39 days. The end-to-end time for the entire process was 

completed in an average of 135 days, which include approximately 15 days of processing and mailing 

time. 

• Established business rules for the Adjudicator Certification Program. 

• Funded and published several successful demonstrations of the feasibility and effectiveness of greater 

reliance on automated records checks in lieu of field activities. 
 

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• Signed on June 30, 2008, Executive Order 13467, which established the Performance Accountability 

Council with oversight for security clearance processing and performance goals. 

• Conducted a successful pilot test of the investigation quality assessment tool called the rapid assessment 

of incomplete security evaluations and the adjudication quality assessment of the tool called the review of 

adjudication documentation and rationales. 

• Concluded and published findings that summarized the successful demonstration of the end-to-end 

investigative process as recommended by the joint reform team. 

• Began the electronic adjudication of non-issue investigations in support of secret security clearances. 

• Established program baseline measures in support of the Program Assessment Rating Tool, for cost and 

timeliness and established short and long-range performance goals. 

• Achieved 95 percent usage of electronic questionnaires for processing of national security investigations. 

• Began implementation of financial disclosure requirements. 

• Directed the implementation of electronic questionnaires for investigations processing for all investigative 

submissions by October 2009. 

• Instituted a weekly monitoring system at the Defense Security Service to track industry investigations 

against available funding to recognize the depletion of funds far enough in advance to avoid any stopwork actions. 

• Submitted a $25 million reprogramming request to the Congress to fund the Defense Security Service’s 

requirements. 

• Established working groups to address improving essential elements in the Personnel Security Program. 

• Developed initiatives to improve financial management and to meet the requirements of accurate budget 

estimates and budget execution for the Defense Security Service. 

• Maintained only a 2 percent variance of workload projections and actual submissions for the personnel 

security investigations. 

• Assessed sensitive activities of the mission in support of the stakeholders for the Defense Security 

Service mission areas. 

• Established a formal team jointly with the Office of the Director of National Intelligence to develop 

recommendations for a reformed clearance system to address current and future program needs. 

• At the Personnel Security Research Center, received the predictive model established by the Air Force 

for independent validation as a forecasting tool for all the Department’s requirements for personnel 

security investigations. 

• Provided an initial report to the Office of the Management and Budget for submission to the President 

designed to improve the cost, timeliness and quality of the Security Clearance Program. This report was 

provided by the Joint Security and Suitability Reform Team. 

• Began receiving investigations electronically from the Office of Personnel Management for the Army 

Central Adjudication Facilities. 

• Designated the Army Case Adjudication Tracking System as the DoD Case Management and 

Adjudication System for the non-intelligence community. 

• Completed a virtual test of the On-Line Rapid Assessment of Incomplete Security Evaluations to assess 

the quality of investigations completed by Office of Personnel Management. 

2b. Planned Milestones Revised Correction Target Date: 

4th Quarter, FY 2010

Department will: 

• Produce 90 percent of the requested files and information in 30 days or less. 

• Achieve initial operating capability for the use of automated record checks in initial investigations. 

• Implement the adjudicator certification program. 

• Implement the use of the Rapid Assessment of Incomplete Security Evaluations to assess investigative 

quality. 

• Ensure that the Defense Industrial Security Clearance Office is able to receive completed investigations 

electronically. 

• Meet or exceed the Intelligence Reform and Terrorism Protection Act goals that require 90 percent of all 

applications for a personnel security clearance to be adjudicated in an average of 20 days. 
 

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• Establish the Department’s program baseline measures for the quality of the security clearance process, 

and provide initial trend data for timeliness and cost in support of the Performance Assessment Rating 

Tool. 

• Implement the use of the Review of Adjudication Documentation and Accuracy Rationales to assess 

investigative and adjudicative quality. 

• Achieve initial operating capability for use of the automated record checks for continuous evaluation. 

• Ensure that the Navy, Air Force, and Washington Headquarters Service are able to receive completed 

investigations electronically. 

• Develop a strategic plan for the DoD Personnel Security Program. 

• Deploy DoD-wide the Case Adjudication Tracking System. 

• Begin electronic adjudication of non-issue investigations in support of clearance types other than the 

national agency check with local agency and credit check. 

• Complete assessment of Personnel Security Research Center’s predictive model to accurately project 

military and civilian investigative requirements for Department-wide implementation. 

• Validate that the weakness is corrected. 

• Ensure that processing electronic questionnaire investigative requests do not extend beyond 14 days 

from the date of request to the date Office of Personnel Management receives all required information. 

• Measure five areas for annual performance report to the OMB: (1) use of the electronic questionnaire 

investigations processing; (2) workload projections; (3) investigation and adjudication timeliness; (4) 

investigative quality; and (5) cost of the security clearance process. 

• Submission of less than 5 percent of all investigators to the Office of Personnel Management will be 

deficient or returned for corrections. 

3. Contracting for Services 

Description of Issue: The DoD IG and the GAO issued numerous reports which identify various deficiencies in 

DoD’s acquisition of services. 

3a. Completed Milestones 

Department: 

• Revised DoD October 2004 policy on proper use of other agency contracts to include guidance on 

conducting surveillance of services procured from other agency contracts. 

• Established working groups identified in the DoD improvement plan and initiated the implementation of 

the plan, conducted periodic status briefs on the DoD improvement plan for systemic weaknesses for 

senior OSD leadership. 

• Issued DoD policy memo on Performance Based Services Acquisition. The memo contained the 

requirement for progress reports on training for individuals participating in preparation of performancebased work statements. 

• Developed metrics goals and thresholds for the strategic sourcing program. 

• Developed a concept of operation for DoD strategic sourcing. 

• Reported that DoD updated the plan for improvements in GAO High Risk Area of contract management, 

and implemented Section 812, “Management Structure for the Procurement of Contract Services,” Public 

Law 109-163. 

• Published the guidance and procedures for the use of, waivers to competitive requirements. 

• Reviewed and updated the policy on quality assurance surveillance and written oversight plans. 

• Published policy implementing section 812, “Management Structure for the Procurement of Contract 

Services,” National Defense Authorization Act for FY 2006, Public Law 109-163. 

• Required designated senior officials to ensure that their service contract review processes and 

associated data collection requirements supported adequate contract surveillance. 

• Reviewed DoD Component data for the top 20 acquisitions of services. 

• Required personnel to have Performance Based Services Acquisition training that develop Performance 

Based Services Acquisition statements of work. 

• Completed self-assessments. Military Departments and Defense Agencies completed self-assessments 

on the use of pricing techniques, performance-based services acquisition, and quality assurance 

surveillance or written oversight plans. 
 

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• Required that the Contracting Functional Integrated Process Team address GAO High Risk Areas in 

training requirements and/or policy, based on results of working group self-assessments. 

• Reviewed OSD guidance for use of task orders, competition, price reasonableness determinations, and 

quality assurance surveillance or written oversight plans in response to related weaknesses identified in 

DoD improvement plan self-assessment results. 

• Implemented the new DoD Architecture for Acquisition of Services. Issued policy memorandum entitled, 

“Review Criteria for the Acquisition of Services” on February 18, 2009. The policy memorandum 

articulates the 12 tenets of the DoD architecture for the acquisition of services applicable in the PreAward phase, and the eight tenets applicable in the Post-Award phase. 

• Resolved overpayment issues identified in DoD IG Report No. 2004-057 at the Defense Contracting 

Command in Washington. 

• Published DoD updated policy for appointment and training of Contracting Officer Representatives. The 

Defense Acquisition University updated training with a mission focus on Contracting Officer 

Representatives. 

• At the Defense Acquisition University, published the Acquisition Technology & Logistics Workforce 

Human Capital Strategic Plan. 

• At the Army, reviewed all Logistics Civil Augmentation Plan orders for Army to ensure they were within 

scope and eliminated backlog of “undefinitized” orders. Developed new procedures to ensure timely 

“definitization.” 

3b. Planned Milestones Revised Correction Target Date: 

1st Quarter, FY 2010 

Department will: 

• Submit a total of 75 percent of DoD invoices electronically via an authorized electronic invoicing system. 

4. Certain Audits Do Not Meet Professional Standards 

Description of Issue: As a result of hotline complaints, GAO Report 08-857 was issued on July 22, 2008, and 

concluded that certain DCAA audits at three locations did not comply with Generally Accepted Government 

Auditing Standards and did not meet professional standards. 

4a. Completed Milestones 

Corrected 

• (Although some corrective actions are still 

necessary, DCAA has materially 

corrected this weakness.)

Defense Contract Audit Agency: 

• Prepared Western Region action plan for each of the reported issues. 

• Reported that the DCAA Director visited the Western Region to meet with the Regional Director and 

discuss the plan. 

• Assembled a team of individuals who were not involved with the GAO audit to assess whether the 

reported issues exist throughout the Agency. 

• Issued guidance on how to deal with disagreements over potential audit findings. 

• Issued an audit alert reiterating existing guidance on “workpaper” documentation. 

• Issued guidance discontinuing DCAA participation in Integrated Product Teams. This action represents a 

significant change in policy and addresses the issue of contractors controlling DCAA audits. 

• Reviewed a sample of assignments across the Agency to assess whether the issues as reported in the 

GAO report exist elsewhere and issued a report on the findings. 

• Received completed review from DoD IG of issues disclosed in the GAO report. 

• Developed an action plan for revising Agency policy as needed in light of the GAO findings. The plan 

included recommendations from the independent DCAA assessment team as well as DoD IG team. 

• Designated August 2008 as DCAA’s stand-down month dedicated to audit quality. Each Field Audit Office 

set aside 4-8 hours during the month to conduct a staff conference with its entire staff focusing on audit 

quality. Regional Directors or Deputy Regional Directors participated in these conferences, sharing the 

Agency’s and the region’s expectations on audit quality. 

• Performed an assessment of Agency staffing to ensure adequate staffing to perform quality audits. 
 

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• Performed an assessment of Agency metrics and benchmarks to ensure that metrics are not driving 

decisions and behavior that negatively impact audit quality. 

• Distributed a climate survey to the workforce. 

• Compiled and assessed results of the climate survey. 

• Continued to assess the need for revisions to Agency guidance using the results from the internal review. 

• Assessed improvements in DCAA Quality Assurance program and coordinated revisions with DoD IG. 

• Implemented improvements in DCAA Quality Assurance program. 

• Reassessed the Agency performance measures, metrics and benchmarks, to ensure measures are 

working as intended. 

• Validated that the weakness was corrected through a follow-up review performed by DoD IG. 

5. Internal Controls Over Contingency Contracting (Newly reported 2009) 

Description of Issue: Department needs to improve internal controls over contingency contracting. 

5a. Completed Milestones 

Department of the Army: 

• Formed the Army Contracting Task Force with participants from a wide range of Army staff elements and 

contracting operations. 

• Assigned new leadership and staff. 

• Established a reach-back capability to manage active contracts. 

• Developed internal controls for optimal contract management and surveillance. 

• Established increased engagement of DCMA to perform contract management and oversight support 

through the Kuwait Logistics Support Office. 

• Established and commenced contracting officer’s representative training program. 

• Disbanded the Army Contracting Task Force and formed the Army Contracting Campaign Plan Task 

Force to help resolve Army Contracting Task Force findings. 

• Implemented internal controls for optimal contract surveillance. 

• Conducted an independent verification of compliance with the internal control procedures and reported 

results. 

• Developed and distributed an internal control evaluation checklist in accordance with the Army Federal 

Acquisition Regulation Supplement, Appendix BB. 

Defense Contract Management Agency: 

• Received the Office of the Joint Chiefs of Staff validation of the contracting officer representatives’ 

shortfalls initially identified by the Military Services. 

• Received Office of the Joint Chiefs of Staff validation of subject matter expert shortfalls initially identified 

by the Military Services 

• Engaged with the Military Services to rectify the contracting officer representatives’ shortfall. 

5b. Planned Milestones Correction Target Date: 2nd Quarter, FY 2011 

Department of Army will: 

• Initiate discussions with the U.S. Army Audit Agency for the conduct of a validation audit. 

• Conduct a unit self-inspection utilizing the internal control evaluation checklist. 

• Conduct independent reviews by the procurement management reviews for compliance. 

• Review procurement management review team reports internal control review results. 

• Implement revised contracting operations. 

• Obtain review results of the U.S. Army Audit Agency’s validation of revised contracting operations. 

Defense Contract Management Agency will: 

• Continue monthly reporting and engagement with the Military Services to include risk analysis of contract 

oversight in theater. 

• Verify effectiveness of Military Service’s strategies to meet the requirements for subject matter experts 

and contracting officer representatives. When position requirements support the use of civilian resources 
 

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in lieu of military-only resources, expand the current joint manning document request to include the OSD 

Civilian Expeditionary Work Force, thus expanding the population of eligible candidates able to fill these 

critical billets. 

• Initially obtain 50 percent fill rate of the joint manning document’s subject matter expert requirements and 

Military Service-provided contract officer’s representatives. Subsequently, improve fill rate to 75 percent. 

• Certify that the validation factors have been met. 

The Department’s internal control weakness for conformance with financial management 

system requirements is listed in Table 1c. The completed actions and planned milestones are 

listed below in Table 6 for the material weakness. The completed milestones continue to 

demonstrate measured progress and highlight the Department’s commitment to resolving the 

material weakness. 

Table 6. Conformance with Financial Management System Requirements (FMFIA Section 4) 

1. DoD Financial Management Systems and Processes 

Description of Issue: DoD financial and business management systems and processes are costly to maintain and 

operate, are not fully integrated, and do not provide information that is reliable, timely, or accurate. In addition, the 

Department has reported this issue as noncompliant with the Federal Financial Management Improvement Act of 

1996 and as non-conforming to Section 4 of the FMFIA of 1982. 

1a. Completed Milestones 

Department: 

• Formally established the Core Business Mission Area Investment Review Boards to enhance DoD’s 

ability to meet the Ronald W. Reagan National Defense Authorization Act of FY 2005 for control and 

recommendations for investments in financial management and other business systems. 

• Refined the Defense Business System Acquisition Executive to make it the effective component 

acquisition executive and milestone decision authority for DoD enterprise financial management and 

other business systems. 

• Made a concerted effort to coordinate business enterprise initiatives with its warfighter customer through 

the establishment and operation of the Iraq Task Force. Focused on effective and efficient use and 

accountability of in-theater financial resources, deploying the Common Contingency Contracting System 

for Iraq at eleven regional contracting centers. 

• Published Version 4.1 of the Business Enterprise Architecture. The September 2005 release was 

designated the baseline version for guiding business transformation. 

• Published an updated version of the DoD Enterprise Transition Plan for congressional reporting in FY 

2007, including enterprise and Component system milestones and accomplishments. 

• Published an updated Financial Improvement Audit Readiness Plan to describe and report the progress 

of specific corrective actions for achieving more reliable, accurate, and complete financial data. 

• Refined and extended the scope and depth of standard financial information structure for integration into 

the Business Enterprise Information Services, other enterprise and component Enterprise Resource 

Planning Systems, and other business mission area systems to continue evolution of a shared business 

intelligence environment and common financial transaction structure. 

• Developed, coordinated, and published an updated version of the Enterprise Transition Plan in 

September 2007 to include system and program milestones and progress measures, final identification of 

Defense Business System Acquisition Executive enterprise financial and other business programs and 

initiatives, and responsibilities with implementation milestones. 

• Gathered, validated, and integrated the business mission area information for the March 2008 version of 

the Business Enterprise Architecture, focusing efforts on systems information exchanges, business 

capability improvement, and enhancement of quality and consistency of information throughout 

architecture artifacts and assessments. 

• Drafted, coordinated, and began implementing the Enterprise Risk Assessment Methodology and 

Business Capability Lifecycle for risk and program management associated with business mission area 

systems and initiatives. 
 

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• Developed and validated meaningful metrics to track progress, manage, and measure the results of the 

business mission area transformations. 

• Extended the capabilities of the Common Contingency Contracting Systems and extended the 

membership, coordination of actions, and economic results of Iraq In-Theater Business Transformation 

Conferences. 

• Tested the concepts of service-oriented and federated architectures in the DoD business mission area to 

enhance business agility and enterprise information definition and exchange. 

• Implemented a DoD “Center of Excellence” to provide lessons learned, provide feedback, and accelerate 

the assistance to component Enterprise Resource Planning Systems programs and initiatives. 

• Implemented the Enterprise Risk Assessment Methodology and Business Capability Lifecycle for risk and 

program management associated with business mission area systems and initiatives. 

• Published initial version of business mission area transformation metrics with which to report progress. 

• Updated the Business Enterprise Architecture, integrating it with an updated version of the Enterprise 

Transition Plan to include system and program milestones and progress measures. 

• Published update of the Financial Improvement Audit Readiness Plan to include progress metrics. 

• Published an update of the Business Mission Area Transformation Metrics with which to report progress. 

• Published the Business Mission Area Federation Strategy and Roadmap Version 2.4 which provides an 

updated vision for business transformation. 

• Published an update of the Enterprise Transition Plan to include component and enterprise systems, and 

program milestones and accomplishments. 

• Published an update of the Financial Improvement Audit Readiness Plan to include progress metrics. 

• Moved initial service-oriented and federated architecture concepts from test to operational capability with 

the DoD business mission area. 

1b. Planned Milestones Correction Target Date: 4th Quarter, FY 2015 

Department will: 

• Publish an additional update of the Enterprise Transition Plan to include component and enterprise 

systems, and program milestones and accomplishments. 

• Publish an update of the Financial Improvement Audit Readiness Plan to include progress metrics. 

• Publish an update of the business mission area transformation metrics with which to report progress. 

• Release of updated Business Enterprise Architecture to standardize financial and business processes, 

systems, and information. 

• Semiannually release the Enterprise Transition Plan system and program milestones and progress 

measures. 

• Semiannually update the FIAR Plan to include progress metrics. 

• Release the Business Transformation Progress Metrics to report progress quarterly. 

• Validate the completion of corrective action plans. 

 

 
 

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Improper Payments Information Act Reporting 

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

Circular No. A-123, Appendix C, “Requirements for Effective Measurement and Remediation of 

Improper Payments,” requires federal agencies to review all programs and activities annually 

and identify those that may be susceptible to significant erroneous payments. The Department’s 

FY 2009 review did not identify any programs or activities at risk of significant erroneous 

payments in accordance with OMB criteria (programs with erroneous payments exceeding both 

$10 million and 2.5 percent of program payments). However, based on the large volume of 

transactions and high dollar amounts, OMB required DoD to report on all its programs beginning 

in FY 2006. 

The five programs reportable under IPIA for FY 2009 are: (1) Military Health Benefits, (2) 

Military Pay, (3) Civilian Pay, (4) Military Retirement, and (5) Travel Pay. Improper payment 

estimates for these programs, as well as out-year reduction targets, are presented in the table 

contained in Section IV. Commercial Pay information is included in Section V, Recovery 

Auditing. 

I. RISK ASSESSMENT 

The Department’s risk assessments for each of the programs identified above addressed the 

effectiveness of internal controls in place to prevent improper payments (such as prepayment 

reviews), as well as system weaknesses identified internally or by outside audit activities. While 

the Department’s improper payment percentages are extremely low, numerous pre- and postpayment controls further minimize and eliminate improper payments. The Defense Finance and 

Accounting Service (DFAS) is developing a comprehensive Enterprise Risk Management 

Program (ERMP) to identify and assess risks and controls for each program that DFAS 

manages through a process known as Risk and Control, Identification and Assessment (RCIA). 

The RCIA is used to validate that controls are established and tested to mitigate risks. The 

RCIA will also provide DFAS with a better understanding of its risk profile and can assist in 

effectively targeting risk management resources. 

A software tool called Business Activity Monitoring (BAM) was deployed at DFAS in August 

2008. This tool uses logic and algorithms to identify potential improper payments before they 

are made. BAM is now used as an additional tool by DFAS to prevent overpayments for 89 

percent of all DoD commercial payments. 

II. STATISTICAL SAMPLING PROCESS 

The DoD uses random sampling methods designed to meet or exceed OMB’s requirement of 

annual estimates of improper payments with a 90 percent confidence interval, plus or minus 2.5 

percent. See below for detailed sampling plans. 

Sampling Plans 

Military Health Benefits. TRICARE is a triple option health benefit plan available for Active Duty 

family members, retirees and their family members, and family members of deceased service 

members. To determine an estimate of the annual amount of improper payments, DoD uses a 

statistically valid sampling method at 90 percent probability plus or minus one percentage point 

sampling precision for the managed care support services contracts and the Medicare dual 

eligibility contractor (TRICARE Dual Eligibility Fiscal Intermediary Contract). This process takes 

place quarterly. 

The Department samples data records for review for claims processed by the managed care 

support contractors and the Medicare dual eligible contractor. There are two kinds of payment 
 

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samples, one for non-denied claims and one for denied claims. For the managed care support 

services contracts, the non-denied payment sample will be drawn from all records with 

government payments of $100 to $100,000. In addition, all records with a government payment 

of $100,000 and over will be audited. The denied payment sample will be drawn from all records 

with a billed amount of $100 to $100,000. In addition, all records with billed amounts of 

$100,000 and over will be audited. The non-denied and denied payment samples will be 

stratified at multiple levels within the $100 to $100,000 range. 

For the Medicare dual eligible contract, the non-denied payment sample will be drawn from all 

records with government payments of $1 to $25,000. All records with a government payment of 

$25,000 and over will be audited. The denied payment sample will be drawn from all records 

with a billed amount of $1 to $500,000. In addition, all records with billed amounts of $500,000 

and over will be audited. The non-denied payment sample will be stratified at multiple levels 

within the $1 to $25,000 range and the denied payment sample will be stratified at multiple 

levels within the $1 to $500,000 range. 

Military Pay. The Department uses simple random sampling methods to select military pay 

accounts for each Component to review to produce annual estimates of improper payments. 

These methods provide a 95 percent probability, plus or minus 2.5 percent sampling precision. 

Monthly samples are reviewed for each of the Active Duty (Army, Navy, Air Force, and Marine 

Corps) and Reserve Components (Army Reserve, Army National Guard, Navy Reserve, 

Air Force Reserve, Air National Guard, and Marine Corps Reserve). 

Civilian Pay. The Department uses simple random sampling methods to review civilian pay 

accounts for each Component and the sum of Defense Agencies to produce annual estimates 

of improper payments. These methods provide a 95 percent probability, plus or minus 

2.5 percent sampling precision. Monthly samples are reviewed for each of the Components 

(Army, Air Force, Navy/Marine Corps, Overseas and Defense Agencies). 

DFAS processes the largest portion of the Department’s civilian payments. However, both the 

Navy and Army process civilian payments independently for civilian mariners and local national 

payrolls in foreign countries. 

Military Retirement. The Department conducts monthly random reviews of both the confirmed 

deceased retiree accounts and the overall population of retired and annuitant pay accounts. All 

sampling plans are designed to produce annual estimates of improper payments with 

95 percent probability, plus or minus 2.5 percent sampling precision.

Travel Pay. DFAS reports the largest portion of the Department’s travel payments made by 

Defense Travel System (DTS) and Windows Integrated Automated Travel System (WinIATS) is 

for the Department of the Army. The Department’s total travel payment population includes 

travel payments computed, paid, and reported independently by the Departments of the Military 

Services and other Defense agencies. The AFR Improper Payment Reduction Outlook table 

represents the combined results for Travel Pay.

The Department uses simple random sampling methods to review trip records settled and paid 

through DTS for each Service Component and the Defense Agencies and for WinIATS 

Temporary Duty (TDY) and Permanent Change of Station (PCS) vouchers computed and paid 

by DFAS for the Army. These sampling plans are designed to produce quarterly estimates of 

improper payments at the Component level with 95 percent probability, plus or minus 2.5 

percent sampling precision. 
 

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III. ROOT CAUSES OF ERRORS AND CORRECTIVE ACTION PLANS 

Military Health. The TRICARE Management Activity (TMA) has had contract performance 

standards in place for several years to ensure accurate health claims processing and payment. 

Overpayments identified during the annual audit process are projected to the audit universe, 

and subsequently, the managed care support contract becomes liable for the total amount. The 

contract performance accuracy is no more than 2 percent errors, but the actual error rate 

(reported 12 months in arrears) normally falls below 1 percent. This unique contractual design, 

coupled with numerous pre- and post-payment controls, effectively minimize the Government’s 

risk for improper payments in this program. 

The primary causes of errors: 

• Incorrect Pricing: 46.3 percent of improper payments. 

• Cost Share/Deductible Error: 17.9 percent of improper payments. 

• Incorrect Benefit Determination: 9.5 percent of improper payments. 

• Government Payment Amount Miscalculated: 9.3 percent of improper payments. 

• Other: 17 percent of improper payments. 

The corrective action for all categories is that TMA has made the contractor accept the risk for 

making any improper payments. Consequently, the historical error rates have been below 1%. 

Military Pay. Improper payments in military pay are projected at $406.5 million, or .48 percent, 

of total net pay based on review, estimates, and forecasts for October 2008 through September 

2009. Over 53 percent ($217million) of the total military pay improper payments occurred within 

the reserve/guard components. Army Reserve and Army National Guard accounted for 

84 percent ($181M) of the reserve/guard component total improper payments. 

Underpayments accounted for 57.2 percent ($232.6million) of the total improper payments. 

Most of these underpayments occurred within the Army Reserve and Army National Guard 

($135 million) and represent unpaid leave that did not occur before a member was discharged 

or de-activated back to reserve from active duty. Primary reasons for the under payments were: 

• Leave Accountability/Lump Sum Leave: Estimated $179 million, or 77 percent. 

Underpayments to reservists/guardsmen resulting from un-reconciled/unpaid leave balances. 

• Basic Pay: Estimated $16 million, or 7 percent. Entitlement not reported correctly resulting 

in an underpayment. 

• Basic Allowance for Housing: Estimated $4.7 million, or 2 percent. Entitlement not reported 

correctly resulting in an underpayment. 

• Other: 14 percent. 

In-service collections for overpayments, among select entitlement categories, accounted for 

36 percent ($145.6 million) of total military pay improper payments. Virtually all, 99.99 percent, 

of the total reported improper overpayments for military pay have been recovered or have an 

action in place to recover the initial overpayment. In addition, out of service debt collections 

account for the remaining $28.2 million, or 7 percent, of the total reported improper payments. 

Most improper payments identified from random reviews, as well as in-service collections, are 

attributed to untimely or inaccurate input to the pay systems by the service components. In 

order to rectify the causes of payment errors, the Department, primarily through DFAS, 

continues to work with the Military Services to advise them of these results and associated 

reasons for errors that result in improper payments to service members. Of specific interest, 

DFAS collaborates with each of the service components on best business practices for proper 

leave accountability and reporting to prevent improper payments. 
 

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Civilian Pay. Total improper payments in civilian pay are projected at $94.6 million, or 

0.32 percent, of total net pay. Overpayments were projected at $81.9 million and underpayments 

were projected at $12.8 million. Eighty-five percent, or $80.2 million, of the overpayments were 

collected through In-service civilian pay collections. Payment errors attributed to time and 

attendance accounted for $43.9 million of the total civilian pay in-service collections and overseasrelated civilian pay errors were projected at $20 million. The remaining 5 percent of overpayments 

and 100 percent of underpayments were detected through random post pay reviews and were 

primarily due to time and attendance and personnel action input errors. 

The primary causes of improper payments identified from random reviews as well as in-service 

collections are untimely or inaccurate input to the pay systems by the Components. Because 

most government payroll systems base time and attendance submissions on anticipated versus 

actual work hours, over and underpayments occur that must be corrected in a subsequent pay 

period. Collections among the overseas civilian accounts are often attributed to repayment of 

overseas pay allowances that erroneously continued after the individual returned to the 

contiguous United States (CONUS). DFAS works diligently on corrective actions with the 

components to advise them of results of monthly civilian pay random reviews and the 

associated reasons for errors that result in improper payments. 

DFAS has also developed a civilian pay improvement plan that highlights key areas where 

opportunities for improvement exist. This corrective action plan includes heightening the 

awareness of risk control and error prevention, training, and development and testing of system 

changes. 

In addition, new Pre-Pay Audit reports are in development and prototypes were delivered to 

DFAS Payroll Offices in late August 2009. These reports are for validating the accuracy of all 

selected pay accounts and to insert reasonable assurance that all pay categories and 

employees pay are accurate. The reports are being analyzed by the payroll offices and their 

feedback will be used to refine the data and place report generation into routine production. 

These new tools will help both components process fewer payment errors. 

Military Retirement. Payments to deceased retirees continue to be the highest risk for 

improper payments in this program. Based on FY 2009 reviews, the Department projected 

approximately $49.5 million in improper payments for this program, with almost the entire 

amount paid to deceased retirees. This represents an overpayment rate of .13 percent of the 

estimated $38.9 billion in annual military retirement payments. In many instances, payments to 

deceased retirees is unavoidable due to payment cycle dates and the fact that notifying a 

payroll activity is not likely to be the first action for next-of-kin at the time of a retiree’s passing. A 

review of payments to confirmed deceased retirees in FY 2009 indicated that the Department 

recovered 92 percent of the overpayment amounts within 60 days, demonstrating the 

effectiveness of controls within the retired pay system once a retiree’s death confirmation is 

received and processed for final disposition. 

The Department’s control processes to prevent, identify, and reduce overpayments to deceased 

retirees include a series of periodic eligibility notifications, early detection data mining efforts, 

and partnerships with other Federal and state entities. The Department takes a proactive 

approach, routinely comparing retired and annuity payroll master file databases to Social 

Security Administration "deceased" records and periodically comparing records with the Office 

of Personnel Management deceased files. The file comparisons are also conducted with the 

Department of Veterans Affairs’ cemetery database and with individual states with sizable 

retiree and annuitant populations (e.g., Texas, California, and Florida). Retirees identified as 

deceased in these comparisons must validate their continued eligibility, or the accounts are 

suspended. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

73 

Travel Pay The FY 2009 projected improper payment rates for both DTS (.92 percent) and 

WinIATS (5.35 percent) have decreased from FY 2008 estimates. The FY 2009 improper 

payment estimates include random reviews of DTS trip records for the service components ($32 

million, .92 percent) as well as monthly random reviews of WinIATS TDY and military PCS 

vouchers computed and disbursed by DFAS ($26.4 million, 5.35 percent). Results are based on 

random reviews of settled vouchers from October 2008 through June 2009. 

The primary Reasons for DTS improper payments include: 

• Lodging: 53 percent of total improper payments. Traveler is reimbursed the full lodging rate, 

when the daily rate should be reduced to reflect actual cost, including when there is no cost 

incurred for lodging. Also, traveler claims lodging under “lodging” and also as a reimbursable 

expense, causing a duplicate reimbursement. 

• Rental Car: 15 percent of total improper payments. Traveler did not revise the original cost 

estimate of the rental car to reflect the actual cost. Also, traveler claims rental car expense 

under both transportation and the reimbursable categories, causing a duplicate 

reimbursement. 

• Per Diem: 6 percent of total improper payments. Traveler fails to correct the meal 

breakdown when meals are provided at conferences/training. Also, traveler claims the per 

diem rate for the location of the hotel instead of the TDY location. 

• Other: 26 percent of total improper payments. 

DFAS provides monthly and quarterly error trend reports to the Defense Travel Management 

Office (DTMO) for review and dissemination to DoD Components, given that nearly all of the 

monetary errors detected during the random reviews are attributed to traveler input and 

Approving Official (AO) oversight. The DTMO uses these post pay review statistics and 

illustrations of input errors in their regular training sessions for Defense Travel Administrators. 

Primary Reasons for WinIATS improper payments: 

• Per Diem: 23 percent of total improper payments. Per Diem/Meals & Incidental Expenses 

(M&IE) paid at the wrong rate, while the traveler is in a leave status, and/or the traveler is 

paid advance per diem when not authorized. 

• Lodging: 14 percent of total improper payments. Traveler reimbursed without required 

lodging documentation, i.e., invalid lodging receipts, missing statement of non-availability, 

incorrect rates paid, and lodging taxes paid incorrectly. 

• Missing Signature: 14 percent of total improper payments. Claims are paid without required 

signatures, i.e., traveler, AO, reviewing official. 

• Missing/Invalid Orders: 10 percent of total improper payments. Traveler reimbursed without 

(or invalid) TDY and PCS orders attached to the claim. 

• Other: 39 percent of total improper payments. 

The majority of errors are attributed to processing inaccuracies at the time of settlement and 

travel technician input errors. DFAS established an extensive set of preventative and monitoring 

actions to include: 

• Post pay reviewers meet monthly with travel pay operations personnel to discuss findings 

and preventative measures 

• Pre payment accuracy rates are reported by travel pay operations and monitored daily 

• Implementation of travel pay examiner training programs based on post pay review findings 

and recommendation 

• Linked pre-payment to post-payment checklists to identify and prevent improper payments. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

74 

IV. PROGRAM IMPROPER PAYMENT REPORTING 

The following table summarizes the Department’s improper payment reduction outlook and total 

program outlays (payments) from FY 2008 through FY 2012. 

Improper Payment Reduction Outlook5 

FY 20084 FY 2009 FY 2010 Estimate FY 2011 Estimate FY 2012 Estimate 

Program Outlays

($ B) 

IP 

(%) 

IP 

($ M) 

Outlays 

($ B) 

IP 

(%) 

IP 

($ M) 

Outlays

($ B) 

IP 

(%) 

IP 

($ M) 

Outlays

($ B) 

IP 

(%) 

IP 

($ M) 

Outlays 

($ B) 

IP 

(%) 

IP 

($ M) 

Military 

Health 

Benefits 

(Note 1) 

$10.4 0.44 $45.8 $12.0 2.00 $240 $12.7 2.00 $254 $14.0 2.00 $280.0 $15.2 2.00 $304 

Military Pay $72.1 0.60 $434.6 $84.6 0.48 $406.5 $69.7 0.45 $313.7 $71 0.45 $319.5 $71.3 .0.44 313.7 

Civilian Pay $26.4 0.28 $73.8 $29.4 0.32 $94.6 $31.3 0.30 $93.9 $32.3 0.29 93.7 $32.3 0.28 90.4 

Military 

Retirement 

(Note 2) $35.6 0.12 $44.0 $38.9 0.13 $49.5 $42.9 0.12 $54.2 $44.5 0.12 $52.3 $44.5 0.12 $52.3 

Travel Pay 

(Notes 3 and 

4) $5.2 2.00 $103.0 6.6 0.95 59.9 6.8 0.90 61.2 $6.8 0.88 $59.8 $6.8 0.87 $59.2 

Note 1 Military Health Benefits. The actual payment error rate for FY 2008 was 0.44 percent, substantially less than the estimate error rate of 2.00 percent 

reported in the FY 2007 AFR. The current and out-year projections for this program are conservatively set at 2.00 percent which is the contract 

performance standard. 

Note2 Military Retirement. A review of payments to confirmed deceased retirees in FY 2009 showed that DoD recovered 92 percent of these amounts within 

60 days. 

Note 3 Travel Pay. FY 2009 figures include both DTS and Win IATS payments, and are based on reviews through June 2009. 

Note 4 Military Pay, Civilian Pay, and Military Retirement include data through August 2008. Travel Pay includes data through April 2008 for DTS and May 

2008 for WinIATS. 

Note 5 All improper payment amounts are absolute values; the figure represents the combined total of over- and under-payments for each program. 

V. RECOVERY AUDITING REPORTING 

The Department utilizes a number of different mechanisms to prevent, identify, and collect 

improper payments, to include recovery and contract auditing. 

Regulatory requirements for a recovery auditing program state the importance of maintaining 

internal controls to prevent, detect, and recover overpayments to contractors. Similar guidance 

regarding the prevention and reporting of improper payments in OMB Circular No. A-123, 

Appendix C, states that an internal control program may include policies and activities such as: 

• Prepayment reviews; 

• A requirement that all relevant documents be made available before making payment (e.g. 

invoice, packing list, receiving report, inspection report); 

• Payment of only original invoices (as opposed to photocopies); and 

• Performance of contract audits. 

The Department currently has all of these internal controls in place. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

75 

For prepayment reviews, the Department conducts manual reviews of payment documentation 

at various steps in the payment process. For example, DoD ensures all Certifying Officer 

Legislation requirements are met prior to payment certification to include receipt of proper 

documentation (invoice, receiving report and contract). In addition, the Department performs 

various pre-validation checks of vouchers certified for payment prior to payment based on 

payment amount, payment type, and so forth. BAM is currently being used to identify and 

prevent improper payments in DoD’s four largest commercial payment systems (MOCAS, CapsW, IAPS, and OnePay), accounting for 89 percent of all Defense commercial payments. As 

BAM matures and reviewers gain additional analytical expertise, more and more improper 

payments will be prevented before the “check goes out the door.” These types of preventative 

(vs. detective) program integrity activities consistently prove to be the most cost-effective. 

DFAS also identifies improper commercial payments based on overpayments made from 

previous invoices detected in the current pay cycle, overpayments discovered during the 

contract reconciliation process, and when payments are made to the incorrect vendor. Further, 

these improper payments are then captured in the Improper Payment On-line Database (IPOD) 

to identify and correct the cause(s) of the improper payment. This analysis allows management 

to determine if there is a systemic, training, or other type of challenge that needs to be resolved. 

To further ensure proper identification and recovery of improper commercial payments, the 

Department also uses various post payment initiatives including periodic duplicate payment 

reviews performed by DFAS Internal Review for the four major commercial payment systems. 

DFAS Internal Review (IR) auditors analyze monthly extracts of invoice and disbursing data 

from payments made through these systems. They perform various quality control checks to 

ensure the data is consistent and reasonable as to volume and frequency. The DFAS IR 

auditors identify groups they believe to be duplicates and refer them to DFAS Accounts Payable 

staff for final determination. DFAS Accounts Payable staff then update IPOD with the agreedupon determination and follow up to ensure all outstanding duplicate payments are recouped. 

The DLA has an external contractor conducting post-payment recovery audits that began in 

April 2009. No results are yet available from this effort. In addition, the U.S. Army Corps of 

Engineers is developing recovery auditing algorithms using its Oracle financial systems datamining tool. They are targeting implementation in early FY 2010. 

Recovery Audit Activity 

Amount Subject to Review for Current Year (CY) 2009 

Reporting $351,896,635,802 

Actual Amount Reviewed and Reported (CY 2009) $351,896,635,802 

Amounts Identified for Recovery (CY 2009) $94,172,157 

Amounts Recovered (CY 2009) $41,051,023 

Amounts Identified for Recovery (Prior Years) $119,293,207 

Amounts Recovered (Prior Years) $101,676,003 

Cumulative Amounts Identified for Recovery 

(CY 2009 and Prior) $213,465,364 

Cumulative Amounts Recovered (CY 2009 and Prior) $142,727,026 

Note: The DoD IG issued Report No. D-2009-072, “Monitoring Powertrack Payments on DoD Freight,” April 9, 2009. Because these payments are 

for transportation, the General Services Administration has legal purview over post-payment reviews and recoveries of improper payments. 

Therefore, the DCFO agreed with DoD IG recommendation to identify this payment area as high risk, and is working with the OUSD for 

Acquisitions, Technology, and Logistics to implement a stringent pre-payment system to prevent improper payments in the Powertrack system. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM B Other Accompanying Information

76 

VI. ACCOUNTABILITY 

Certifying officer legislation holds certifying and disbursing officers accountable for government 

funds. In accordance with section 2773a of title 10, United States Code, pecuniary liability 

attaches automatically when there is a fiscal irregularity, i.e., (1) a physical loss of cash, 

vouchers, negotiable instruments, or supporting documents, or (2) an improper payment. Efforts 

to recover from a recipient must be undertaken in accordance with the debt collection 

procedures in Volume V, Chapters 29 and 30, of DoDFMR. 

VII. INFRASTRUCTURE 

The Department has the information and infrastructure needed to reduce improper payments in 

each of the improper payment program areas. As stated in previous sections, DoD has 

implemented the BAM tool, which employs the latest technology to increase the efficiency and 

effectiveness of improper payment prevention efforts for commercial pay. 

VIII. BARRIERS 

Military retirement is the only program area facing statutory or regulatory barriers limiting 

corrective actions. The barriers include: (1) the Retired and Annuitant Pay service contract and 

(2) the Federal Acquisition Regulation. 

In January 2002, DFAS awarded the Retired and Annuitant Pay service operations to a 

contractor. Although most functions remained unchanged from when the Government 

performed these functions, there are now contractual limits to the Government’s involvement in 

the day-to-day operations of Retired and Annuitant Pay. The Continuing Government Activity 

Office was formed to oversee this contract; however, the Government can no longer direct how 

the work is accomplished. To bring about an operational change, both the Government and the 

contractor must agree on how to effect and fund the change. The Federal Acquisition 

Regulation requires a contract modification for any scope change to the current contract. 

In an effort to overcome many of these barriers, DFAS, under the authority of SEC 324, NDAA 

2008 is migrating the management and operation of Retired and Annuitant Pay back to the 

federal sector. This is expected to generate, more flexibility, equal or better customer service, 

and $20-23 million in savings over 10 years. Conversion is scheduled for February 1, 2010. 
WELCOME TO THE

DEPARTMENT OF DEFENSE

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regarding the content of this report.

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You may also view this document at:

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November 16, 2009

Department of Defense

AGENCY FINANCIAL 

REPORT FOR 

FISCAL YEAR 2009

ADDENDUM C

DEFENSE SECURITY

COOPERATION AGENCY

UNAUDITED FINANCIAL 

STATEMENTS 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM C Unaudited Financial Statements - DSCA

1 

The FY 2007 DoD financial statements included certain programs of the Executive Office of the 

President (EOP). Revised guidance from the Office of Management and Budget (OMB) 

declared that these programs should be reported separately from the DoD financial statements. 

The following Defense Security Cooperation Agency financial statements include these 

programs executed on behalf of EOP. The DoD continues to report activity resulting from EOP 

allocation transfers within the DoD financial statements. 

Consolidated Balance Sheet 

Security Assistance Dollars in Thousands 

2009 

Consolidated

2008 

Consolidated 

ASSETS (Note 2) 

 Intragovernmental: 

 Fund Balance with Treasury (Note 3) $ 20,764,468 $ 16,624,832 

 Accounts Receivable (Note 5) 0 0 

 Total Intragovernmental Assets $ 20,764,468 $ 16,624,832 

 Cash and Other Monetary Assets (Note 7) 17,208,614 13,299,859 

 Accounts Receivable, Net (Note 5) 40,578 21,406 

 Loans Receivable (Note 8) 1,164,410 1,410,888 

 Other Assets (Note 6) 14,833,562 11,095,636 

 TOTAL ASSETS $ 54,011,632 $ 42,452,621 

 

 LIABILITIES (Note 11) 

 Intragovernmental: 

 Accounts Payable (Note 12) 0 0 

 Debt (Note 13) 619,562 725,558 

 Other Liabilities (Note 15 and 16) 651,037 705,857 

Total Intragovernmental Liabilities $ 1,270,599 $ 1,431,415 

 Accounts Payable (Note 12) 405,251 826,108 

 Military Retirement and Other Federal Employment Benefits (Note 17) 429 339 

 Other Liabilities (Note 15 and 16) 47,303,711 36,425,837 

Commitments & Contingencies (Note 16) 

 TOTAL LIABILITIES $ 48,979,990 $ 38,683,699 

 

 NET POSITION 

 Unexpended Appropriations - Other Funds 3,530,529 2,385,718 

 Cumulative Results of Operations - Other Funds 1,501,113 1,383,204 

 TOTAL NET POSITION $ 5,031,642 $ 3,768,922 

 

 TOTAL LIABILITIES AND NET POSITION $54,011,632 $ 42,452,621 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM C Unaudited Financial Statements - DSCA

2 

Consolidated Statement of Net Cost 

Security Assistance Dollars in Thousands 

2009 

Consolidated

2008 

Consolidated

Program Costs 

 Gross Costs $23,838,982 $ 19,604,795 

 (Less: Earned Revenue) (58,392) (84,107) 

 Net Program Costs $23,780,590 $ 19,520,688 

 Net Cost of Operations $23,780,590 $ 19,520,688 
Department of Defense Agency Financial Report for FY 2009 

ADDENDUM C 

3 

Consolidated Statement of Changes in Net Position Security Assistance For Periods ended September 30, 2008 and 2007 2009 Earmarked Funds 2009 All Other Funds 2009 Eliminations 2009 Consolidated 2

Earmar

Cumulative Results Of Operations Beginning Balances $ 0 $ 1,383,204 $ 0 $ 1,383,204 $ Beginning balances, as adjusted $ 0 $ 1,383,204 $ 0 $ 1,383,204 $ Budgetary Financing Sources:  Appropriations used 0 5,182,337 0 5,182,337  Nonexchange revenue 0 18,716,162 0 18,716,162  Other budgetary financing sources 0 0 0 0 Other Financing Sources:  Transfers(in/out without reimbursement (+/-) 0 0 0 0  Other (+/-) 0 0 0 0 Total Financing Sources $ 0 $ 23,898,499 $ 0 $ 23,898,499 $ Net Cost of Operations (+/-) 0 23,780,590 0 23,780,590 Net Change $ 0 $ 117,909 $ 0 $ 117,909 $ Cumulative Results of Operations $ 0 $ 1,501,113 $ 0 $ 1,501,113 $ Unexpended Appropriations Beginning Balances 0 2,381,961 0 2,381,961 Beginning balances, as adjusted $ 0 $ 2,381,961 $ 0 $ 2,381,961 $ Budgetary Financing Sources:  Appropriations received 0 6,334,116 0 6,334,116  Appropriations transferred (in/out) 0 2,480 0 2,480  Other adjustments (rescissions, etc) 0 (5,691) 0 (5,691)  Appropriations used 0 (5,182,337) 0 (5,182,337) Total Budgetary Financing Sources $ 0 $ 1,148,568 $ 0 $ 1,148,568 $ Unexpended Appropriations $ 0 $ 3,530,529 $ 0 $ 3,530,529 $ Net Position $ 0 $ 5,031,642 $ 0 $ 5,031,642 $ 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM C Unaudited Financial Statements - DSCA 

4 

Budgetary 

Financing Accounts 

Nonbudgetary 

Financing Accounts Combined Statement Of Budgetary Resources

Security Assistance 

Dollars in Thousands

2009 

Combined

2008 

Combined

2009 

Combined 

2008 

Combined

Budgetary Resources 

Unobligated balance, brought forward, 

October 1 $ 186,394 $ 10,158 $ 12,043 $ 33,757 

Recoveries of prior year unpaid obligations 13,427 7,130 0 0 

Budget authority 

 Appropriation 31,247,463 26,681,236 0 0 

 Borrowing authority 0 0 3,747 2,402 

 Contract authority 35,987,005 28,797,056 0 0 

 Spending authority from offsetting collections 

 Earned 

 Collected 22 103 251,868 632,573 

 Subtotal $ 67,234,490 $ 55,478,395 $ 255,615 $ 634,975 

Nonexpenditure transfers, net, anticipated 

and actual 2,480 0 0 0 

Permanently not available (24,919,038) (21,870,868) $ (244,353) (428,418) 

Total Budgetary Resources $ 42,517,753 $ 33,624,815 $ 23,305 $ 240,314 

Obligations incurred: 

Direct 41,201,614 33,434,664 11,872 146,287 

 Subtotal $ 41,201,614 $ 33,434,664 $ 11,872 $ 146,287 

Unobligated balance: 

Apportioned 1,300,745 10,866 727 27,075 

 Subtotal $ 1,300,745 $ 10,866 $ 727 $ 27,075 

Unobligated balance not available 15,394 179,285 10,706 66,952 

Total status of budgetary resources $ 42,517,753 $ 33,624,815 $ 23,305 $ 240,314 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM C Unaudited Financial Statements - DSCA 

5 

Budgetary 

Financing Accounts 

Nonbudgetary Combined Statement Of Budgetary Resources Financing Accounts Security Assistance 

Dollars in Thousands

2009 

Combined

2008 

Combined

2009 

Combined 

2008 

Combined

Change in Obligated Balance: 

Obligated balance, net 

Unpaid obligations, brought forward, October 1 73,811,001 62,299,588 2,645,228 2,740,283 

Total unpaid obligated balance 73,811,001 62,299,588 2,645,228 2,740,283 

Obligations incurred net (+/-) 41,201,614 33,434,664 11,872 146,287 

Less: Gross outlays (27,100,272) (21,916,120) (69,822) (228,272)

Less: Recoveries of prior year unpaid obligations, actual (13,427) (7,131) 0 0 

Obligated balance, net, end of period 

Unpaid obligations 87,898,916 73,811,001 2,587,278 2,658,298 

Total, unpaid obligated balance, net, end of period $ 87,898,916 $ 73,811,001 $ 2,587,278 $ 2,658,298

Net Outlays 

Net Outlays: 

Gross outlays 27,100,272 21,916,120 69,822 228,272 

Less: Offsetting collections (22) (101) (251,868) (632,573)

Less: Distributed Offsetting receipts (18,716,162) (21,830,598) 0 0 

Net Outlays $ 8,384,088 $ 85,421 $ (182,046) $ (404,301)

Note 1. Significant Accounting Policies 

1.A. Basis of Presentation 

These financial statements have been prepared, in accordance with Chief Financial Officers Act 

of 1990 (CFO), to report the financial position and results of operations of the Foreign Military 

Sales (FMS) Trust Fund and its accounts and, as identified in the President’s Budget Request, 

the Foreign Operations (International Affairs) appropriated accounts. The FMS Trust Fund has 

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 (FASAB); the Office of Management and Budget (OMB) Circular No. 

A-136, Financial Reporting Requirements; and DoD Financial Management Regulation (FMR). 

The accompanying financial statement information accounts for all FMS Trust Fund resources 

and the accounts for funds appropriated for security assistance, unless otherwise noted. 

Information relative to classified assets, programs, and operations is excluded from the 

statements or otherwise aggregated and reported in such a manner that it is not discernable. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM C Unaudited Financial Statements - DSCA 

6 

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 OMB Circular No. A-136 due to limitations of financial management processes, 

financial systems, and nonfinancial systems and processes that support the financial 

statements. Many of the accounts derive their reported values and other information for major 

asset and liability categories largely from nonfinancial systems, such as 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 13 auditor identified material weaknesses. Of these, the FMS Trust 

Fund and the accounts for funds appropriated for security assistance may include: (1) Financial 

Management Systems, (2) Intergovernmental Eliminations, (3) Unsupported Accounting Entries, 

(4) Fund Balance with Treasury, (5) Statement of Net Cost, (5) Reconciliation of Net Cost of 

Operations to Budget, (6) Accounts Payable, and (7) Accounts Receivable. 

1.B. Mission of the Reporting Entity 

The DSCA mission is to lead, direct, and manage security cooperation programs and resources 

to support the U.S. national security objectives. Such programs build relationships with foreign 

countries and international organizations that promote the U.S. interests, develop allied and 

partner capacities for self-defense and coalition participation in overseas contingency 

operations, and promote peacetime and contingency access for U.S. forces. The DSCA 

accomplishes its responsibilities for security cooperation in concert with the Department of State 

(DOS), 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, (AECA) as 

amended (22 U.S.C. § 2751 et seq.), the Foreign Assistance Act of 1961 (FAA), as amended, 

(22 U.S.C. § 2151 et seq.), and other legal authorities. The monies in the FMS Trust Fund are 

subject to U.S. Treasury account system controls from the date of receipt to the date of 

expenditure or refund. At the country or customer level, there are separate 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) 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM C Unaudited Financial Statements - DSCA 

7 

• Military Debt Reduction Financing Account (TAS 4174) 

The DSCA receives funds for the FMS Trust Fund and the accounts for funds appropriated for 

security assistance as general, special, and trust funds. The DSCA uses these appropriations 

and funds to execute its missions and subsequently reports on resource usage. 

General and special appropriations transferred into the FMS Trust Fund are used for financial 

transactions, including personnel, operations and maintenance of security assistance functions, 

and financing of FMS, which may include sales of defense articles and services from stock or 

through procurement, and the sale of foreign military construction. 

The FMS Trust Fund accounts for receipts and expenditures of funds held in trust by the U.S. 

government for use in carrying out specific purposes or programs in accordance with applicable 

laws, regulations, and agreements. 

The DSCA receives allocation transfers from certain fund(s) that meet the OMB exception, and 

all related activity is included in DSCA financial statements, which are reported separately from 

the DoD financial statements, for: International Military Education and Training, Foreign Military 

Financing Program Account, Foreign Military Loan Liquidating Account, Foreign Military 

Financing Direct Loan Financing Account, Military Debt Reduction Financing Account, and the 

FMS Trust Fund. Allocation transfers are an entity’s legal delegation of authority to obligate 

budget authority and outlay funds to another entity. Generally, all financial activity related to 

allocation transfers are reported in the financial statements of the parent entity. Exceptions to 

this general rule will apply to specific funds for which OMB has directed that all activity will be 

reported in the financial statements of the child to the transfer. Exceptions include all U.S. 

Treasury-Managed Trust Funds, EOP, and all other funds specifically designated by OMB. 

1.D. Basis of Accounting 

The legacy financial 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 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 are 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. 

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 Military Services and Defense Agencies. The underlying data is largely derived 

from budgetary transactions (obligations, disbursements, and collections), from nonfinancial 

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

payable. Some of the lower level trial balances may reflect known abnormal balances resulting 

largely from business and system processes. At the consolidated 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. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM C Unaudited Financial Statements - DSCA 

8 

1.E. Revenues and Other Financing Sources 

As authorized by legislation, payments for the sales of defense articles and services are 

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 No. A-25, User Charges.” The FMS Trust Fund and the 

accounts for funds appropriated for security assistance recognize revenue when earned within 

the constraints of current system capabilities. 

The DSCA does not include nonmonetary support provided by friendly foreign countries and 

international organizations in amounts reported in the Statement of Net Cost and the Note 21, 

Reconciliation of Net Cost of Operations to Budget. 

The DSCA participates in assistance in kind agreements in its overseas presence. The 

assistance in kind provided in support of security cooperation programs includes the use of 

facilities and personnel (guards and drivers) at a small number of Security Cooperation Offices 

worldwide. 

1.F. Recognition of Expenses 

DoD policy 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. 

1.G. Accounting for Intragovernmental Activities 

Accounting standards require that an entity eliminates intraentity 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 seller-side balances and are 

then eliminated. The DoD is developing long-term system improvements that will include 

sufficient up front edits and controls to eliminate the need for reconciliations. The volume of 

intragovernmental transactions is so large that reconciliations cannot be accomplished 

effectively. 

The U.S. Treasury’s “Federal Intragovernmental Transactions Accounting Policy Guide” and 

U.S. 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. 

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. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM C Unaudited Financial Statements - DSCA 

9 

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 Services, the U.S. Army Corps of Engineers (USACE), and the DOS’s 

financial service centers process the majority of the FMS Trust Fund and the accounts for funds 

appropriated for security assistance cash collections, disbursements, and adjustments 

worldwide. Each disbursing station prepares monthly reports that provide information to the 

U.S. Treasury on checks issued, electronic fund transfers, interagency transfers, and deposits. 

In addition, DFAS sites and USACE Finance Center submit reports to the U.S. Treasury, by 

appropriation, on interagency transfers, collections received, and disbursements issued. The 

U.S. Treasury records this information to the applicable Fund Balance with Treasury (FBWT) 

account. On a monthly basis, FMS Trust Fund and the accounts for funds appropriated for 

security assistance FBWT is adjusted to agree with the U.S. Treasury accounts. 

1.J. Cash and Other Monetary Assets 

The FMS Trust Fund only accepts U.S. dollars for payment of defense articles and services. All 

payments and collections are in U.S. dollars. 

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 an 

allowance for estimated uncollectible amounts from other federal agencies. Claims against 

other federal agencies are to be resolved between the agencies in accordance with dispute 

resolution procedures defined in the Intragovernmental Business Rules published in the 

Treasury Financial Manual at http://www.fms.treas.gov/tfm/vol1/07-03.pdf. 

1.L. Direct Loans and Loan Guarantees 

The DSCA administers the Foreign Military Financing program on behalf of the EOP. Direct 

loans and loan guarantees are authorized by sections 23 and 24 of the AECA (P.L. 90-269, as 

amended) 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. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM C Unaudited Financial Statements - DSCA 

10 

1.N. Investments in U.S. Treasury Securities 

Not applicable. 

1.O. General Property, Plant and Equipment 

Not applicable. 

1.P. Advances and Prepayments 

When advances are permitted by law, legislative action, or presidential authorization, DoD’s 

policy is to record advances and prepayments in accordance with USGAAP. As such, 

payments made in advance of the receipt of goods and services are reported as an asset on the 

Balance Sheet. The DoD’s policy is to expense and/or properly classify assets when the related 

goods and services are received. Not all military services who execute on behalf DSCA have 

implemented this policy primarily due to system limitations. 

1.Q. Leases 

Lease payments for the rental of DSCA operating facilities are contracted for and classified as 

operating leases. The DSCA, as the lessee, receives the use and possession of leased 

property, for example real estate, from a lessor in exchange for payment of funds. An operating 

lease does not substantially transfer all the benefits and risk of ownership. Payments for 

operating leases are charged to expenses over the lease terms as it becomes payable. 

Office space and leases are funded by the FMS Trust Fund. These costs were gathered from 

existing operating leases and General Services Administration bills, and interservice support 

agreements. Future year projections use the Consumer Price Index. The FMS Trust Fund and 

the accounts for funds appropriated for security assistance do not have capital leases. 

1.R. Other Assets 

Other assets includes civil service employee pay advances, travel advances, and certain 

contract financing payments that are not reported elsewhere on the FMS Trust Fund and the 

accounts for funds appropriated for security assistance Balance Sheet. 

The FMS Trust Fund and the accounts for funds appropriated for security assistance conduct 

business with commercial contractors using two primary types of contracts: fixed price and cost 

reimbursable. Contract financing payments are defined in the Federal Acquisition Regulations, 

Part 32, as authorized disbursements to a contractor prior to acceptance of supplies or services 

by the Government. These payments are designed to alleviate the potential financial burden on 

contractors performing on certain long-term contracts and facilitate competition for defense 

contracts. Contract financing payments clauses are incorporated in the contract terms and 

conditions and may include advance payments, performance-based payments, commercial 

advance and interim payments, progress payments based on cost, and interim payments under 

certain cost-reimbursement contracts. It is DoD policy to record certain contract financing 

payments as other assets. 

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. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM C Unaudited Financial Statements - DSCA 

11 

1.S. Contingencies and Other Liabilities 

The SFFAS No. 5, “Accounting for Liabilities of the Federal Government,” as amended by SFFAS 

No. 12, “Recognition of Contingent Liabilities Arising from Litigation,” defines a contingency as an 

existing condition, situation, or set of circumstances that involves an uncertainty as to possible 

gain or loss. The uncertainty will be resolved when one or more future events occur or fail to 

occur. The FMS Trust Fund and the accounts for funds appropriated for security assistance 

recognize contingent liabilities when past events or exchange transactions occur, a future loss is 

probable, and the loss amount can be reasonably estimated. 

Financial statement reporting is limited to disclosure when conditions for liability recognition do 

not exist but there is at least a reasonable possibility of incurring a loss or additional losses. 

The FMS Trust Fund and the accounts for funds appropriated for security assistance risk of loss 

due to contingencies arise as a result of pending or threatened litigation or claims and 

assessments due to events such as aircraft, ship, and vehicle accidents; medical malpractice; 

property or environmental damages; and contract disputes. 

1.T. Accrued Leave 

The FMS Trust Fund reports liabilities for military leave and accrued compensatory and annual 

leave for civilians. Sick leave for civilians is expensed as taken. The liabilities are based on 

current pay rates. 

1.U. Net Position 

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

Unexpended Appropriations represent the amounts of budget authority that are unobligated and 

have not been rescinded or withdrawn. Unexpended Appropriations also represent amounts 

obligated for which legal liabilities for payments have not been incurred. Cumulative Results of 

Operations represent the net difference between expenses and losses and financing sources 

(including appropriations, revenue, and gains) since inception. 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. Unexpended Obligations 

The FMS Trust Fund and the accounts for funds appropriated for security assistance obligate 

funds to provide defense articles, services, and training for outstanding orders not yet delivered. 

Unless the title has passed to the FMS customer, the financial statements do not reflect a 

liability for payment for goods and services not yet delivered. Unexpended obligations includes 

both obligations for which goods and services have been delivered and a liability recognized, 

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

unexpended obligations appears immediately before net outlays in the Statement of Budgetary 

Resources, and is referred to as “Total, unpaid obligated balances, net, end of period.” 

1.X. Undistributed Disbursements and Collections 

Undistributed disbursements and collections represent the difference between disbursements 

and collections matched at the transaction level to a specific obligation, payable, or receivable in 

the source systems and those reported by the U.S. Treasury. Supported disbursements and 

collections are evidenced by collaborating documentation. Unsupported disbursements and 

collections do not have supporting documentation for the transaction and most likely would not 

meet audit scrutiny. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM C Unaudited Financial Statements - DSCA 

12 

The FMS Trust Fund and accounts for funds appropriated for security assistance follow DoD 

policy, which is to allocate supported undistributed disbursements and collections between 

federal and nonfederal categories based on the percentage of federal and nonfederal accounts 

payable and accounts receivable. Supported undistributed disbursements and collections are 

then applied to reduce accounts payable and receivable accordingly. Unsupported 

undistributed disbursements are recorded as disbursements in transit and reduce nonfederal 

accounts payable. Unsupported undistributed collections are recorded in nonfederal other 

liabilities. 

Note 2. Nonentity Assets 

Nonentity Assets Dollars in Thousands 

As of September 30 2009 2008 

Intragovernmental Assets 

 Fund Balance with Treasury $ 15,202,854 $ 12,744,738 

 Total Intragovernmental Assets $ 15,202,854 $ 12,744,738 

Nonfederal Assets 

Cash and Other Monetary Assets $ 17,208,614 $ 13,299,859 

Accounts Receivable 691,508 21,406 

Other Assets 14,456,802 10,727,113 

 Total Nonfederal Assets $ 32,356,924 $ 24,048,378 

Total Nonentity Assets $ 47,559,778 $ 36,793,116 

Total Entity Assets 6,451,854 5,659,505 

Total Assets $ 54,011,632 $ 42,452,621 

Nonentity Assets are assets for which the FMS Trust Fund and the accounts for funds 

appropriated for security assistance maintain 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 DFAS. Some portion of these uncollected funds 

may be payable to the FMS Administrative Surcharge account, but are not discernable prior to 

collection. 

Nonfederal Other Assets consist primarily of advances paid to contractors for undelivered 

defense articles and services intended for future delivery to the FMS customer. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM C Unaudited Financial Statements - DSCA

13 

Note 3. Fund Balance with Treasury 

Fund Balance with Treasury Dollars in Thousands 

As of September 30 2009 2008 

Fund Balance 

 Appropriated Funds $ 3,577,215 $ 2,456,544 

 Trust Funds 15,202,854 12,744,738 

 Other Fund Types 1,984,399 1,423,550 

Total Fund Balance $ 20,764,468 $ 16,624,832 

Fund Balance Per Treasury Versus Agency 

 Fund Balance per Treasury $ 20,764,468 $ 16,624,832 

 Fund Balance per Agency 20,764,468 16,624,832 

Reconciling Amount $ 0 $ 0 

The $2.0 billion reported as Fund Balances, Other Fund Types consists of funds on deposit for 

the management of FMS Administration, Contract Administrative Services, Transportation, 

Attrition and General Services Administration Packing, Crating and Handling. 

Status of Fund Balance with Treasury Dollars in Thousands 

As of September 30 2009 2008 

Unobligated Balances 

Available $ 1,301,473 $ 37,942 

Unavailable 26,100 246,236 

Obligated Balance not yet Disbursed 90,486,194 76,469,299 

Nonbudgetary FBWT 24,913,352 21,830,604 

NonFBWT Budgetary Accounts (95,962,651) (81,959,249) 

Total Fund Balance $ 20,764,468 $ 16,624,832 

The Status of Fund Balance with Treasury (FBWT) reflects the budgetary resources to support 

FBWT and is a reconciliation between budgetary and proprietary accounts. It primarily consists 

of unobligated and obligated balances. The balances reflect the budgetary authority remaining 

for disbursement against current or future obligations. 

Unobligated Balance is classified as available or unavailable and represents the cumulative 

amount of budgetary authority that has not been set aside to cover outstanding obligations. The 

unavailable balance consists primarily of funds invested in U. S. Treasury securities that are 

temporarily precluded from 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. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM C Unaudited Financial Statements - DSCA

14 

Nonbudgetary FBWT includes accounts that do not have budgetary authority, such as 

unavailable receipt accounts or clearing accounts. The Nonbudgetary FBWT consists of 

Contingency Operations provided to DoD in supplemental appropriations, and Contingency 

Operations funding transferred from DOS, which DOS received in supplemental appropriations. 

Obligations are incurred using contract authority and liquidated with these appropriations. 

NonFBWT Budgetary Accounts reduces the Status of FBWT. The NonFBWT Budgetary 

Accounts primarily consists of nonentity cash deposited in the Federal Reserve Bank and 

contract authority. 

Unobligated balances are segregated to show available and unavailable amounts in the note 

schedule. Certain unobligated balances are restricted to future use and are not apportioned for 

current use. The unobligated balance is restricted for use for specific purposes and time. 

Note 5. Accounts Receivable 

Accounts Receivable Dollars in Thousands 

2009 

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) 40,578 0 40,578 

Total Accounts Receivable $ 40,578 $ 0 $ 40,578 

Accounts Receivable Dollars in Thousands

2008 

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) 21,406 0 21,406 

Total Accounts Receivable $ 21,406 $ 0 $ 21,406 

The Allowances for Estimated Uncollectibles are based upon collection experience. Historically, 

these amounts have been collected at completion of ligation, thus an allowance for 

uncollectable has not been recognized. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM C Unaudited Financial Statements - DSCA

15 

Note 6. Other Assets 

Other Assets Dollars in Thousands 

As of September 30 2009 2008 

Nonfederal Other Assets 

Outstanding Contract Financing Payments $ 1,878,470 $ 1,126,044 

Advances and Prepayments 12,955,092 9,969,592 

Total Nonfederal Other Assets $ 14,833,562 $ 11,095,636 

Total Other Assets $ 14,833,562 $ 11,095,636 

Contract terms and conditions for certain types of contract financing payments convey certain 

rights to the FMS Trust Fund that protect the contract work from state or local taxation, liens or 

attachment by the contractor's creditors, transfer of property, or disposition in bankruptcy. 

However, these rights should not be misconstrued to mean that ownership of the contractor’s 

work has transferred to the Government. The Government does not have the right to take the 

work, except as provided in contract clauses related to termination or acceptance, and the FMS 

Trust Fund is not obligated to make payment to the contractor until delivery and acceptance of a 

satisfactory product. 

The Contract Financing Payment balance of $1.9 billion is comprised of $1.5 billion in contract 

financing payments and an additional $376.8 million in estimated future payments that will be 

paid to the contractor upon future 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 2009 2008 

Cash $ 17,208,614 $ 13,299,859 

Total Cash, Foreign Currency, and Other Monetary Assets $ 17,208,614 $ 13,299,859 

Restricted cash of $17.2 billion includes advance deposits from foreign nations in the Federal 

Reserve Bank which have not been transferred to the FMS Trust Fund and are not available for 

agency use (nonentity cash). 

Note 8. Direct Loan and Loan Guarantees 

Direct Loan and Loan Guarantee Programs 

The DSCA operates the following Direct Loans Programs: 

 The AECA, as amended, authorizes funds to be appropriated to the President for financing the 

sales of defense articles and defense services to eligible foreign countries. Each loan is 

reviewed in the light of the purchasing country’s financial condition, its need for credit, U.S. 

economic or military assistance programs in the country and region, and other proposed arms 

purchases by the country. The President delegates the Secretary of Defense the authority to 

issue and guaranty loans through the DSCA, the designated administering agency. The loans 

are issued to friendly and less economically developed countries. Pursuant to the authority 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM C Unaudited Financial Statements - DSCA

16 

contained in the Act, DSCA operates the four funds, known as: (1) Foreign Military Loan 

Liquidating Account (FMLLA) for pre-1992 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 for post-1991 

loans.” 

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 (FMFDLP) Account is a program account that 

was established pursuant to FCRA to provide the funds necessary for the subsidy element of 

loans. Expenditures from this account finance the subsidy element of direct loan disbursements 

and are transferred into the Foreign Military Financing Direct Loan Financing (FMFDLF) 

Account to make required loan disbursements for approved FMS or commercial sales. For the 

purpose of this report, FMFDLP accounting transactions, to the extent they are relevant to the 

FMFDLF account, are included in the data reported for the FMFDLF account. 

The FMFDLF account is a financing account that is used to make disbursements of Foreign 

Military Loan funds for approved procurements and for subsequent collections for the loans after 

September 30, 1991. The account uses permanent borrowing authority from the U.S. Treasury 

combined with transfers of appropriated funds from FMFDLP account to make the required 

disbursements to loan recipient country borrowers for approved procurements. Receipts of debt 

service collections from borrowers are used to repay borrowings from U.S. Treasury. 

Military Debt Reduction Financing Account (MDRFA) is a financing account authorized by Public 

Law 103-87. The MDRFA buys the portfolio of loans from the FMLLA, thus transferring the 

loans from the FMLLA to the MDRFA. The Paris Club negotiates the debt forgiveness with 

Highly Indebted Poor Countries (HIPC). 

The Paris Club has nineteen member countries that negotiate rescheduling or refinancing of 

debt for HIPC. The Paris Club provides debt reduction initially on payments outstanding over a 

specific period corresponding to the length of an International Monetary Fund (IMF) supported 

economic reform program. The debt reduction occurs in stages contingent upon debtor’s 

compliance with its IMF-support program. Additionally, the Naples Term repayment agreement 

offers debt reduction after three years of good performance with respect to IMF reform 

programs and payments to Paris Club creditors. The United States incurs the cost of the 

eventual debt reduction when it agrees to the initial “maturities” reduction of upcoming payments 

due, since bilateral agreements commit the U.S. once the Paris Club agrees to provide them. 

The FCRA governs all amended direct loan obligations and loan guarantee commitments made 

after FY 1991 resulting in direct loans or loan guarantees. 

Direct loans are reported at the net present value of the following projected cash flows: (1) loan 

disbursements, (2) repayments of principal, and (3) payments of interest and other payments 

over the life of the loan after adjusting for estimated defaults, prepayments, fees, penalties, and 

other recoveries. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM C Unaudited Financial Statements - DSCA

17 

Summary of Direct Loans and Loan Guarantees Dollars in Thousands 

As of September 30, 2009 and 2008 2009 2008 

Loans Receivable 

Direct Loans: 

Foreign Military Loan Liquidating Account $ 1,146,424 $ 1,393,736 

Foreign Military Financing Account 6,899 7,468 

Military Debt Reduction Financing Account 11,087 9,684 

Total Loans Receivable $ 1,164,410 $ 1,410,888 

Direct Loans Obligated Dollars in Thousands 

As of September 30, 2009 and 2008 2009 2008 

Direct Loans Obligated After FY 1992 

(Allowance for Loss Method): 

Foreign Military Loan Liquidating Account: 

Loans Receivable Gross $ 1,015,340 $ 1,183,766 

Interest Receivable 1,343,379 1,402,924 

Allowance for Loan Losses (1,212,295) (1,192,954) 

Value of Assets Related to Direct Loans $ 1,146,424 $ 1,393,736 

Direct Loans Obligated After FY 1991 

(Present Value Method): 

Foreign Military Financing Account: 

Allowance for Subsidy Cost (Present Value) $ 6,899 $ 7,468

Value of Assets Related to Direct Loans $ 6,899 $ 7,468 

Military Debt Reduction Financing Account: 

Loans Receivable Gross $ 190,905 $ 190,913

Interest Receivable 43,777 31,323 

Allowance for Subsidy Cost (Present Value) (223,595) (212,552) 

Value of Assets Related to Direct Loans 11,087 9,684 

Total Direct Loans Receivable $ 1,164,410 $ 1,410,888 

Other Disclosures: 

The DSCA bills the countries every six months for loan repayments. Accrued interest 

receivable is calculated as simple interest based on the terms of the loans with the countries, 

except for loans owed to the Federal Financing Bank where an extra 4% is added to the interest 

rate stated in the loan. 

The allowance for credit subsidy account for the FMFDLF account is calculated taking into 

consideration three transactions: (1) transfers of subsidy from the program account to the 

financing account (the subsidy is the difference between the expected cash outlays from the 

U.S. Government and the present value of the expected collections); (2) interest payments from 

the U.S. Treasury to the financing fund; and (3) upward adjustments due to reestimates as U.S. 

Treasury borrowing rates change over time from the loan repayment rate and an increase in 

estimated defaults on the loan. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM C Unaudited Financial Statements - DSCA

18 

The abnormal debit balance for allowance of $6.9 million in the FMFDLF is the unamortized 

portion of the subsidy reflecting the cost of the loan to the U.S. Government. A debit balance 

results from: (1) interest expense paid on U.S. Treasury borrowings and (2) downward 

adjustments due to reestimates when the loan repayment rate exceeds the U.S. Treasury 

borrowing rate, and a decrease in estimated defaults. The loans in the FMFDLF account are 

categorized as moderate to medium risk and were expected to have an increasing amount of 

defaults over the years. This was built into the subsidy amount. 

As the loan matured, none of the loans defaulted and the U.S. Treasury borrowing rates fell 

below some of the loan interest rates. This resulted in downward reestimates and a negative 

subsidy rate for the loans, which resulted in a debit balance in the allowance for subsidy. This 

unexpected debit balance has occurred for several years due to the downward reestimates due 

to zero defaults. 

Total Amount of Direct Loans Disbursed Dollars in Thousands 

As of September 30, 2009 and 2008 2009 2008 

Direct Loan Programs 

Foreign Military Financing Account $ 57,950 $ 95,055 

Total Direct Loans Disbursed $ 57,950 $ 95,055 

 Subsidy Expense for Direct Loan by Program 

 As of September 30, 2009 and 2008 Dollars in Thousands 

2009 Modifications 

Interest 

Rate 

Reestimates 

Technical 

Reestimates 

Total 

Reestimates Total 

Direct Loan Modifications and Reestimates:

Foreign Military Financing Account $ 0 $ 0 $ 0 $ 0 $ 0 

Military Debt Reduction Financing Account 0 0 0 0 0 

Total $ 0 $ 0 $ 0 $ 0 $ 0 

2008 Modifications 

Interest Rate 

Reestimates 

Technical 

Reestimates 

Total 

Reestimates Total 

Direct Loan Modifications and Reestimates:

Foreign Military Financing Account $ 0 $ 70,262 $ 0 $ 70,262 $ 70,262 

Military Debt Reduction Financing Account $ 0 $ (46,447) $ 0 $ (46,447) $ (46,447) 

Total $ 0 $ 23,815 $ 0 $ 23,815 $ 23,815 

2009 2008 

Total Direct Loan Subsidy Expense: 

Foreign Military Financing Account $ 0 $ 70,262 

Military Debt Reduction Financing Account $ 0 $ (46,447) 

Total $ 0 $ 23,815 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM C Unaudited Financial Statements - DSCA

19 

Schedule for Reconciling Subsidy Cost Allowance Balances 

for Post FY1991 Direct Loans Dollars in Thousands 

As of September 30, 2009 and 2008 2009 2008 

Beginning Balance, Changes, and Ending Balance: 

Beginning Balance of the Subsidy Cost Allowance $ 205,084 $ 225,658 

Adjustments

 Loans Written Off (8,156) (20) 

 Subsidy Allowance Amortization 19,768 (44,370) 

Total of the above Adjustment Components $ 11,612 $ (44,390) 

Ending Balance of the Subsidy Cost Allowance before 

Reestimate $ 216,696 $ 181,268 

Add or Subtract Subsidy Reestimate by Component

Interest Rate Reestimate 0 23,816 

 Total of the above Reestimate Components 0 23,816 

Ending Balance of the Subsidy Cost Allowance $ 216,696 $ 205,084 

Administrative Expenses 

Administrative expenses for loans are not funded in the loan program account. The OMB made 

the decision to fund administration of loans in the FMF 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 2009 2008 

Intragovernmental Liabilities 

 Debt $ 30,515 $ 0 

 Other 107 705,857 

Total Intragovernmental Liabilities $ 30,622 $ 705,857 

Nonfederal Liabilities 

 Military Retirement and Other Federal Employment Benefits 429 339 

Total Nonfederal Liabilities $ 429 $ 339 

Total Liabilities Not Covered by Budgetary Resources $ 31,051 $ 706,196 

Total Liabilities Covered by Budgetary Resources $ 48,948,939 $ 37,977,503 

Total Liabilities $ 48,979,990 $ 38,683,699 

The liabilities not covered by Budgetary Resources are liabilities for which congressional action 

is needed before budgetary resources can be provided. These liabilities are categorized as not 

covered because there is no current or immediate appropriation available for liquidation. 

Military Retirement and Other Federal Employment Benefits consists of Federal Employee 

Compensation Act actuarial liabilities of $429 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. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM C Unaudited Financial Statements - DSCA

20 

Note 12. Accounts Payable 

Dollars in Thousands

2009 

 Accounts Payable 

As of September 30

Accounts Payable 

Interest, Penalties, 

and Administrative 

Fees 

Total 

Intragovernmental Payables $ 0 N/A $ 0 

Nonfederal Payables 

(To the Public) 405,251 0 405,251 

Total Accounts Payable $ 405,251 $ 0 $ 405,251 

Dollars in Thousands

2008 

 Accounts Payable 

As of September 30

Accounts Payable 

Interest, Penalties, 

and Administrative 

Fees 

Total 

Intragovernmental Payables $ 0 N/A $ 0 

Nonfederal Payables 

(To the Public) 826,108 0 826,108 

Total Accounts Payable $ 826,108 $ 0 $ 826,108 

Note 13. Debt 

Debt Dollars in Thousands 

2009 

As of September 30 Beginning Balance Net 

Borrowing Ending Balance 

Agency Debt 

(Intragovernmental) 

Debt to the Treasury $ 37,595 $ 224 $ 37,819 

Debt to the Federal 

Financing Bank 687,963 (106,220) 581,743 

Total Debt $ 725,558 $ (105,996) $ 619,562
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM C Unaudited Financial Statements - DSCA

21 

Debt Dollars in Thousands 

2008 

As of September 30 Beginning Balance Net 

Borrowing Ending Balance 

Agency Debt 

(Intragovernmental) 

Debt to the Treasury $ 252,154 $ (214,559) $ 37,595 

Debt to the Federal 

Financing Bank 2,683,112 (1,995,149) 687,963 

Total Debt $ 2,935,266 $ (2,209,708) $ 725,558

The FCRA 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 FMFDLF account and the Military Debt 

Reduction account. 

Beginning in January 1975, the DSCA and the Federal Financing Bank (FFB), acting under 

section 24 of the AECA, 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 FMLLA. 

The majority of the debt represents direct and guaranteed loans to foreign countries for pre1992 and post-1991 loans. The FCRA governs all direct loan obligations and loan guarantee 

commitments made after FY 1991. Before 1992, funds were borrowed from the FFB to either 

directly loan the funds to foreign countries or to reimburse guaranteed loans defaulted. 

Beginning in 1992, based on the FCRA, the security assistance program began borrowing the 

funds from the U.S. Treasury. 

The DSCA must pay the debt if the foreign country borrower defaults on the loan. For loan 

defaults, DSCA must pay the outstanding principal amounts guaranteed. 

Note 15. Other Liabilities 

 Other Liabilities Dollars in Thousands

2009 

As of September 30 Current Liability Noncurrent 

Liability Total 

Intragovernmental 

FECA Reimbursement to the 

Department of Labor $ 37 $ 70 $ 107

Custodial Liabilities 0 650,930 650,930

Total Intragovernmental Other Liabilities $ 37 $ 651,000 $ 651,037

Nonfederal 

Accrued Funded Payroll and Benefits $ 330 $ 0 $ 330

Advances from Others 46,908,847 0 46,908,847

Contract Holdbacks 17,773 0 17,773

Contingent Liabilities 0 376,761 376,761

 Total Nonfederal Other Liabilities $ 46,926,950 $ 376,761 $ 47,303,711

Total Other Liabilities $ 46,926,987 $ 1,027,761 $ 47,954,748
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM C Unaudited Financial Statements - DSCA

22 

 Other Liabilities Dollars in Thousands

2008 

As of September 30 Current Liability Noncurrent 

Liability Total 

Intragovernmental 

FECA Reimbursement to the 

Department of Labor $ 83 $ 0 $ 83

Custodial Liabilities 0 705,774 705,774

Total Intragovernmental Other Liabilities $ 83 $ 705,774 $ 705,857

Nonfederal 

Accrued Funded Payroll and Benefits $ 0 $ 0 $ 0

Advances from Others 36,035,595 0 36,035,595

Contract Holdbacks 21,720 0 21,720

Contingent Liabilities 0 368,522 368,522

 Total Nonfederal Other Liabilities $ 36,057,315 $ 368,522 $ 36,425,837

Total Other Liabilities $ 36,057,398 $ 1,074,296 $ 37,131,694

Other Liabilities 

Contingent Liabilities includes $376.8 million related to contracts authorizing Progress 

Payments Based on Cost as defined in the Federal Acquisition Regulation (FAR). In 

accordance with contract terms, specific rights to the contractors’ work vest with the Federal 

Government when a specific type of contract financing payment is made. This action protects 

taxpayer funds in the event of contract nonperformance. These rights should not be 

misconstrued as rights of ownership. The Department is under no obligation to pay contractors 

for amounts greater than the amounts authorized in contracts until delivery and government 

acceptance. Due to the probability the contractors will complete their efforts and deliver 

satisfactory products, and because the amount of potential future payments are estimable, the 

Department has recognized a contingent liability for estimated future payments which are 

conditional pending delivery and government acceptance. 

Total Contingent Liabilities for Progress Payments Based on Cost represent the difference 

between the estimated costs incurred to date by contractors and amounts authorized to be paid 

under Progress Payments Based on Cost provisions within the FAR. Estimated contractorincurred costs are calculated by dividing the cumulative unliquidated Progress Payments Based 

on Cost by the contract-authorized progress payment rate. The balance of unliquidated 

Progress Payments Based on Cost is deducted from the estimated total contractor-incurred 

costs to determine the contingency amount. 

Note 16. Commitments and Contingencies 

Claims may be presented and/or the U.S. Government may be a party in various administrative 

proceedings or court litigations, but it is highly unlikely that any can implicate the FMS Trust 

Fund. The U.S. funds appropriated for security assistance generally are not legally available for 

paying claims. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM C Unaudited Financial Statements - DSCA

23 

Note 17. Military Retirement and Other Federal Employment Benefits 

Military Retirement and Other Federal Employment Benefits Dollars in Thousands 

2009 

As of September 30 

Liabilities 

Assumed 

Interest Rate 

(%) 

(Less: Assets 

Available to Pay 

Benefits) 

Unfunded 

Liabilities 

Pension and Health Actuarial 

Benefits 

FECA $ 429 0.0 $ 0.0 $ 429 

Total Military Retirement 

and Other Federal 

Employment Benefits 

$ 429 0.0 $ 0.0 $ 429 

Actuarial Cost Method Used: Aggregate Entry-Age Method 

Assumptions: See Below 

Market Value of Investments in Market-based and Marketable Securities: $374.5 billion 

Military Retirement and Other Federal Employment Benefits Dollars in Thousands 

2008 

As of September 30 

Liabilities 

Assumed 

Interest Rate 

(%) 

(Less: Assets 

Available to Pay 

Benefits) 

Unfunded 

Liabilities 

Pension and Health Actuarial 

Benefits 

FECA $ 339 0.0 $ 0.0 $ 339 

Total Military Retirement 

and Other Federal 

Employment Benefits 

$ 339 0.0 $ 0.0 $ 339 

Actuarial Cost Method Used: Aggregate Entry-Age Method 

Assumptions: See Below 

Market Value of Investments in Market-based and Marketable Securities: $374.5 billion 

Federal Employees’ Compensation Act 

Actuarial Cost Method Used and Assumptions: 

The DSCA FMS Trust Fund actuarial liability for workers’ compensation benefits is developed 

by the Department of Labor and provided to the FMS Trust Fund at the end of each fiscal year. 

The liability for future workers’ compensation benefits includes the expected liability for death, 

disability, medical, and miscellaneous costs for approved compensation cases, plus a 

component for incurred but not reported claims. The liability is determined using a method that 

utilizes historical benefit payment patterns related to a specific incurred period to predict the 

ultimate payments related to that period. Consistent with past practice, these projected annual 

benefit payments have been discounted to present value using OMB’S economic assumptions 

for 10-year Treasury notes and bonds. Interest rate assumptions utilized for discounting were 

as follows: 

 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM C Unaudited Financial Statements - DSCA

24 

Discount Rates

 4.223 % in Year 1 

 4.715 % 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) 

2009 were also used to adjust the methodology’s historical payments to current year constant 

dollars. 

The compensation COLAs and CPIMs used in the projections for various CBYs were as follows: 

Federal Employees — Compensation Act (FECA) 

CBY COLA CPIM 

2009 N/A N/A 

2010 0.47% 3.42% 

2011 1.40% 3.29% 

2012 1.50% 3.48% 

2013 1.80% 3.71% 

 2014+ 2.00% 3.71% 

The model’s resulting projections were analyzed to ensure that the estimates were reliable. The 

analysis was based on four tests: (1) a sensitive analysis of the model to economic 

assumptions; (2) a comparison of the percentage change in the liability amount to the 

percentage change in the actual incremental payments; (3) a comparison of the incremental 

paid losses per case (a measure of case-severity) in CBY 2009 to the average pattern observed 

during the most current three CBYs; (4) a comparison of the estimated liability per case in the 

CBY 2009 projection to the average pattern for the projections of the most recent three years. 

Note 18. General Disclosures Related to the Statement of Net Cost 

General Disclosures Related to the Statement of Net Cost Dollars in Thousands 

As of September 30 2009 2008 

Intragovernmental Costs $ 113,230 $ 156,393 

Public Costs 23,725,752 19,448,402 

Total Costs $ 23,838,982 $ 19,604,795 

Intragovernmental Earned Revenue (2,220) (4,914) 

Public Earned Revenue (56,172) (79,193) 

Total Earned Revenue $ (58,392) $ (84,107) 

Net Cost of Operations $ 23,780,590 $ 19,520,688 

Intragovernmental costs and revenue are related to transactions made between two reporting 

entities within the Federal Government. 

Public costs and revenues are exchange transactions made between the reporting entity and a 

nonfederal entity. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM C Unaudited Financial Statements - DSCA

25 

The systems utilized by DSCA for the 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 Statement of Net Cost (SNC) represents the net cost of programs and organizations of the 

Federal Government supported by appropriations or other means. The intent of the SNC is to 

provide gross and net cost information related to the amount of output or outcome for a given 

program or organization administered by a responsible reporting entity. The Department’s 

current processes and systems do not capture and report accumulated costs for major 

programs based upon the performance measures as required by the Government Performance 

and Results Act. The Department is in the process of reviewing available data and developing a 

cost reporting methodology as required by the Statement of Federal Financial Accounting 

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

Federal Government”, as amended by SFFAS No. 30, “Inter-entity Cost Implementation”. 

Until all of the FMS Trust Fund and the accounts for funds appropriated for security assistance 

financial and feeder systems and processes have been updated to collect and report financial 

information as required, the FMS Trust Fund and the accounts for funds appropriated for 

security assistance financial data is based on budgetary transactions (obligations, 

disbursements, and collections), transactions from feeder systems, and adjustments for known 

accruals of items such as payroll expenses and accounts payable.

Note 19. Disclosures Related to the Statement of Changes in Net Position 

The appropriations received on the Statement of Budgetary Resources (SBR) do not agree with 

appropriations received on the Statement of Changes in Net Position. The difference of $24.9 

billion is due to the FMS Trust Fund receipts from foreign governments that liquidate contract 

authority, but are not recorded as appropriations, on the Statement of Changes in Net Position. 

These receipts are transferred from the receipt account to cover disbursements as they occur, 

similar to the receipt of appropriations. 

Note 20. Disclosures Related to the Statement of Budgetary Resources 

Disclosures Related to the Statement of Budgetary Resources Dollars in Thousands 

As of September 30, 2009 2009 2008 

Net Amount of Budgetary Resources Obligated for Undelivered Orders at 

the End of the Period. $ 103,035,669 $ 85,612,754 

On the SBR, obligations incurred of $40.9 billion are direct and exempt from apportionment. 

Borrowings from the U.S. Treasury are required to be repaid once a year at the end of the fiscal 

year. The financing sources for the repayments on borrowings are loan repayments from the 

countries or permanent indefinite appropriations through subsidy reestimates. 

The portions of the FMS Trust Fund receipts collected in the current fiscal year that exceed 

current outlays are temporarily precluded from obligation by law. These receipts, however, are 

available for obligation as needed in the future. 

The FCRA provides permanent indefinite appropriations to fund upward subsidy reestimates 

that fund repayments of principal and interest of U.S. Treasury borrowings with the FMFDLF 

account and the MDRFA. The FCRA also provides permanent indefinite appropriations to fund 

loan defaults with the FFB in the FMLLA. 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM C Unaudited Financial Statements - DSCA

26 

The SBR includes intraentity transactions because the statements are presented combined. 

The appropriations received on the SBR do not agree with appropriations received on the 

Statement of Changes in Net Position. The difference of $24.9 billion is due to the FMS Trust 

Fund receipts from foreign governments that liquidate contract authority, but are not recorded as 

appropriations, on the Statement of Changes in Net Position. These receipts are transferred 

from the receipt account to cover disbursements as they occur, similar to the receipt of 

appropriations. 

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, 2009 and 2008 2009 2008 

Resources Used to Finance Activities: 

Budgetary Resources Obligated: 

Obligations incurred $ 41,213,486 $ 33,580,951 

Less: Spending authority from offsetting collections and recoveries (-) (265,317) (639,806) 

Obligations net of offsetting collections and recoveries $ 40,948,169 $ 32,941,145 

Less: Offsetting receipts (-) (18,716,162) (21,830,598) 

Net Budgetary Resources Obligated $ 22,232,007 $ 11,110,547 

Other Resources: 

Transfers in/out without reimbursement (+/-) $ 0 $ (14,863) 

Other (+/-) 0 28 

Net other resources used to finance activities $ 0 $ (14,835) 

Total resources used to finance activities $ 22,232,007 $ 11,095,712 

Resources Used to Finance Items not Part of the Net Cost of Operations 

Change in budgetary resources obligated for goods, services and 

benefits ordered but not yet provided: 

Undelivered Orders (-) (17,435,986) (13,809,945) 

Budgetary offsetting collections and receipts that do not affect Net Cost of 

Operations 18,968,030 22,463,172 

Resources that finance the acquisition of assets (-) (69,823) (228,271) 

Other resources or adjustments to net obligated resources that do not 

affect Net Cost of Operations: 

Other (+/-) 0 14,863 

Total resources used to finance items not part of the Net Cost of 

Operations $ 1,462,221 $ 8,439,819 

Total resources used to finance the Net Cost of Operations $ 23,694,228 $ 19,535,531 
 

Department of Defense Agency Financial Report for FY 2009 

ADDENDUM C Unaudited Financial Statements - DSCA

27 

Reconciliation of Net Cost of Operations to Budget Dollars in Thousands 

As of September 30, 2009 and 2008 2009 2008 

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:

Upward/Downward reestimates of credit subsidy expense (+/-) 0 (14,862) 

Other (+/-) 113 19 

Total components of Net Cost of Operations that will Require or 

Generate Resources in future periods $ 113 $ (14,843) 

Components not Requiring or Generating Resources: 

Revaluation of assets or liabilities $ 86,249 $ 0 

Total components of Net Cost of Operations that 

will not Require or Generate Resources in the current period $ 86,362 $ (14,843) 

Net Cost of Operations $ 23,780,590 $ 19,520,688 

The following note schedule lines are presented as combined instead of consolidated due to 

intraagency budgetary transactions not being eliminated: 

• Obligations Incurred 

• Less: Spending Authority from Offsetting Collections and Recoveries 

• Obligations Net of Offsetting Collections and Recoveries 

• Less: Offsetting Receipts 

• Net Obligations 

• Undelivered Orders 

• Unfilled Customer Orders 

The $112.9 thousand Components Requiring or Generating Resources in Future Period, Other 

represents the FECA liabilities and the related actuarial liabilities not requiring current year 

budget authority. 

The systems utilized by FMS Trust Fund and accounts for funds appropriated for security 

assistance have limitations; budgetary data is not in agreement with proprietary expenses. The 

difference between budgetary and proprietary data is a previously identified deficiency. 
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