AGENCY FINANCIAL

REPORT

 FISCAL YEAR 2015
 FOREWORD 

Agency Financial Report (AFR)

This report, the U.S. Department of Defense Agency Financial Report (AFR) for 

Fiscal Year (FY) 2015, provides an executive-level overview of the Department, including 

our mission, organization, performance, highlights from the financial statements, internal 

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

contains the agency-wide financial statements and notes, along with the Independent 

Auditor’s Report. Additional and/or detailed information is available in the Other Information 

Section and Appendices to this report. 

The Department has produced the Agency Financial Report as an alternative to the 

Performance and Accountability Report (PAR). The AFR is intended to simplify and 

summarize information while providing transparent financial and performance reporting.

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

on financial and performance information: 

Annual Performance Report (APR)

Published with the Department’s annual budget submission in February 2016, the APR 

will provide a detailed description of performance measures and FY 2015 results.

Summary of Performance and Financial Information (SPFI)

The SPFI, published in February 2016 and available for viewing on the Under Secretary 

of Defense (Comptroller) public website, is a succinct summary of the FY 2015 financial and 

performance information previously reported in the AFR and APR, making the information 

more transparent and accessible to Congress, the public, and other key constituents.

AH-64 Apache helicopters demonstrate their weapon systems during a live-fire exercise as part 

of Operation Dragon Spear on Fort Irwin, Calif. The demonstration included a forcible entry 

operation with Army and Air Force units showcasing the U.S. global response force's ability to

deploy, fight and win.

U.S. Army photo by Staff Sgt. Jason Hull
i

ABOUT THE DEPARTMENT OF DEFENSE 

AGENCY FINANCIAL REPORT

The Department of Defense Agency Financial Report is required by law, including the 

Government Management and Reform Act of 1994 (GMRA) and the Chief Financial Officers 

Act of 1990. This report includes five main sections.

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

introduces the Agency Financial Report. 

The Management’s Discussion and Analysis (MD&A) Section provides an 

executive-level overview of the Department of Defense (DoD) and our use of taxpayer 

resources in fiscal year (FY) 2015. The MD&A describes the Department’s organization and 

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

measurable objectives through the third quarter of FY 2015. The MD&A also includes a 

Financial Overview section, introduced by the Chief Financial Officer, that reports on 

FY 2015 financial highlights from the agency-wide consolidated financial statements, and 

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

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

business and financial management systems improvement strategy, and improper payments 

and recoveries program. 

The Agency-Wide Financial Statements Section includes the FY 2015 Department of 

Defense financial statements and explanatory footnote disclosures, required supplementary 

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

Department’s internal controls.

The Other Information Section reports detailed information on material weaknesses in 

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

the Schedule of Spending, and DoD Inspector General-identified significant performance and 

management challenges facing the Department, along with DoD management responses.

The Appendices Section includes the Defense Security Cooperation Agency – Security

Assistance Accounts financial statements and explanatory notes, accounts the Department 

executes on behalf of the Executive Office of the President. The Appendices section also 

includes a list of acronyms and abbreviations, useful websites, and an index of figures and 

tables included throughout this report.

The estimated cost of this report or 

study for the Department of Defense is 

approximately $180,000 in Fiscal Years 

2015 - 2016. This includes $73,000 in 

expenses and $107,000 in DoD labor.

Generated on 2015Nov13 RefID: 2-579A3B4
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U.S. Department of Defense Agency Financial Report for FY 2015

Table of Contents

iii

Table of Contents

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

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

Management’s Discussion and Analysis

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

Resources ............................................................................................................4

Looking Forward ...................................................................................................6

Organization.........................................................................................................7

Performance Overview .............................................................................................. 13

Message from the Chief Financial Officer ..................................................................... 19

Financial Overview ................................................................................................... 20

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

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

 Financial Improvement and Audit Readiness Initiative.......................................... 28

 Financial Management Certification Program....................................................... 30

 More Disciplined Use of Resources ..................................................................... 31

Internal Controls Overview ........................................................................................ 32

Managers’ Internal Control Program ...................................................................... 32

Statement of Assurance ....................................................................................... 33

Business and Financial Management Systems ......................................................... 36

Improper Payment Reporting................................................................................ 40

Financial Section

Agency-Wide Financial Statements and Notes .............................................................. 41

Required Supplementary Stewardship Information ..................................................... 110

Required Supplementary Information ....................................................................... 112

Independent Auditor’s Report ................................................................................. 121

Other Information

Managers’ Internal Control Program Detailed Report................................................... 133

Improper Payment and Payment Recapture Programs Detailed Report.......................... 155

Freeze the Footprint ............................................................................................... 179

Civil Monetary Penalty Adjustment for Inflation.......................................................... 180

Schedule of Spending ............................................................................................. 181

Inspector General’s Summary of Management and Performance Challenges .................. 183

Appendices

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

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

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

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

Appendix D: Index of Figures and Tables .................................................................. D-1
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U.S. Department of Defense Agency Financial Report for FY 2015

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 AGENCY FINANCIAL REPORT

 FISCAL YEAR 2015

 MANAGEMENT’S

DISCUSSION AND

ANALYSIS
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U.S. Department of Defense Agency Financial Report for FY 2015

Management’s Discussion and Analysis

1

MANAGEMENT’S DISCUSSION AND ANALYSIS

DEPARTMENT OF DEFENSE OVERVIEW

The Department of Defense is charged with the mission to ensure the security of the 

United States and its citizens, or as phrased in the Constitution, to “provide for the common 

defense.” The Department of Defense is committed to protecting the people of the 

United States, defending our national interests, and providing America’s military with the 

resources to accomplish its mission. 

Today, the context in which we provide 

this security is extremely challenging. Global 

disorder has increased, while some of the 

military advantages we have traditionally

enjoyed have started to erode, for example 

through the rapid technological change 

enjoyed by both state and non-state 

adversaries. Violent extremist organizations 

continue to deny vulnerable populations 

their right to live in security and at peace, 

and some states provide support to such 

organizations or otherwise seek to challenge 

international norms. 

The Department maintains a force that is 

second-to-none in the world and serves as a 

bulwark to keep the nation secure in the 

face of these challenges. This force exists 

because of the men and women who choose 

to serve in order to guarantee the security 

and the freedoms of their fellow citizens. The

Department has an obligation to ensure they 

are properly trained and equipped. 

The Department sets its strategic direction through the Quadrennial Defense 

Review (QDR), which was provided to Congress in March 2014. The QDR is a 

legislatively-mandated report, issued every four years, that evaluates the threats and 

challenges to our enduring national interests that the nation will likely confront over the 

next 20 years. It is the key strategic document against which the Department’s priorities 

and requests for resources are aligned. The QDR, consistent with the President’s National 

Security Strategy, affirms the global leadership role of the United States and sets a course

that will help bring the military into balance over the next decade. The QDR outlines the 

Department’s strategic priorities which include: rebalancing our focus and our forces to the 

Asia-Pacific region to preserve peace and stability; maintaining a strong commitment to 

security and stability in Europe and the Middle East; and sustaining a global approach to 

countering violent extremists and terrorist threats, with an emphasis on the Middle East and 

Africa. It highlights the importance of strengthening our alliances and partnerships globally.

Ash Carter

Secretary of Defense
U.S. Department of Defense Agency Financial Report for FY 2015

Management’s Discussion and Analysis

2

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

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

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

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

and economic progress, we increasingly look to build their capacities.

The Rebalance to the Asia-Pacific remains a key component of the Department’s 

strategy. While a peaceful rise of China is welcome, its actions in the South China Sea are 

increasingly at odds with international norms. Faced with North Korea’s acts of cross-border 

provocation, and its pursuit of long-range missiles and weapons of mass destruction, we are 

committed to maintaining peace and stability on the Korean Peninsula. The Department will 

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

Southeast Asia.

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

President Putin’s continued aggression towards Ukraine and illegal annexation of Crimea is 

an unwelcome strategic development. The Department is working with U.S. allies and 

partners to promote regional security as part of a strong and balanced approach to Russia. 

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

non-lethal material and assistance.

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

security. The last year has been a significant one in the history of the alliance given 

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

deterring an increasingly aggressive Russia as well as addressing insecurity on NATO’s 

southern flank after a long period of focus on Afghanistan. In light of these significant 

challenges, NATO leaders have agreed to powerful steps: doubling the number of military 

exercises in the past year, setting up new command centers, and establishing the Very High 

Readiness Joint Task Force. The United States has continued to participate in military 

exercises throughout the Baltic Republics, Poland, and other front-line states. In doing so, 

the United States and our allies have upheld our commitment to collective self-defense. 

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

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

the region. Afghanistan’s government of national unity is now fully responsible for the 

security of its people and is moving ahead on a reform agenda. Approximately 9,800 U.S. 

forces are focused on training, advising, and assisting the Afghan National Defense and 

Security Forces (ANDSF) as part of the NATO-led Resolute Support Mission, as well as 

conducting a counterterrorism mission. The Department will continue to finance the 

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

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

United States, with a coalition of allies and partners, is engaging in a long-term campaign to 

degrade and deal a lasting defeat to the Islamic State of Iraq and the Levant (ISIL). To 

achieve a lasting defeat of ISIL requires a “whole of government” effort, and of the nine 

lines of efforts that underpin the campaign, the Department leads just two: Denying ISIL 

Safe Haven and Building Partner Capacity. The Department’s personnel remain committed 

to building the capacity of the Iraqi Security Forces to defend their homeland and deny ISIL 

safe haven. This is challenging to achieve, but ISIL’s lasting defeat requires local forces to 
U.S. Department of Defense Agency Financial Report for FY 2015

Management’s Discussion and Analysis

3

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

region in an effort to bolster their defenses and enable their activities and operations aimed 

at countering ISIL. We are doing all this in the context of a 60-plus nation coalition.

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

agreed to with the international community represents a detailed arrangement to

permanently prohibit Iran from obtaining a nuclear weapon. While welcoming the positive 

conclusion of diplomatic negotiations, we will continue to ensure Israel’s qualitative military 

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

against external aggression. 

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

is resetting and reconstituting the Joint Force after 13 years of war. The Department 

continues to make key investments in the future force, with an emphasis on restoring 

readiness, balancing the force, and achieving institutional reform. We are placing a greater 

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

also prioritizing investments in key strategic capabilities, namely nuclear deterrence; space

systems; power projection; missile defense; cyber capabilities; and intelligence, 

surveillance, and reconnaissance.

We will also draw from the brightest innovators within the commercial sector to find 

technologies that will give troops an edge on the battlefield of the future, and the pace at 

which we have established a presence in Silicon Valley exemplifies our determination to 

infuse Defense with non-traditional talent and leading edge technology. 

Finally we must show that we are taking effective action to make the best possible use 

of every taxpayer dollar. That means we must strive to manage the Defense enterprise 

efficiently and effectively, and to reform our business and acquisition practices. These 

efforts are imperative to maintain readiness on all fronts for both the geopolitical challenges 

we know about today, and those to come.

A soldier assigned to the California Army National Guard’s 

Company B, 1st Battalion, 126th Aviation Regiment, observes 

a bambi bucket dropping water onto the Rocky Fire near Clear 

Lake, Calif. During the crew’s 2.5-hour firefighting mission, they 

conducted 18 water drops. 

Photo by Sgt. Jason Beal

The USS Chung-Hoon, USS Mobile Bay and USS Russell 

follow the USS John C. Stennis during a show of force as they 

transit in the Pacific Ocean. Sailors conduct composite training 

and joint task force exercises as the final step in certifying to 

deploy.

Photo by Mass Communication Specialist 3rd Class Andre T. 

Richard
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Management’s Discussion and Analysis

4

RESOURCES

The FY 2015 Department of Defense budget balanced capacity, capability, and readiness

to protect the security interests of the United States within the funding constraints of the 

Bipartisan Budget Agreement. The key themes in the FY 2015 budget were:

 Seek a balanced force within available resources;

 Prepare for prolonged readiness challenges;

 Continue to focus on institutional reform;

 Pursue compensation changes; and

 Pursue investments in military capabilities.

The DoD FY 2015 enacted discretionary budget authority totaled $560.5 billion, 

composed of $496.3 billion in the base budget, $64.2 billion in support of Overseas 

Contingency Operations (OCO), and $0.1 billion for other emergency funding. Figure 1 

displays the DoD FY 2015 budget authority by Title.

Despite decreasing resources, the Department must continue to maintain its decisive 

technological edge. In FY 2015, the Department invested in emerging military capabilities, 

such as new and expanded cyber capabilities, nuclear deterrence, space, precision strike, 

and operationally responsive and persistent intelligence, surveillance, and reconnaissance 

assets. 

The Department also continued 

investments in modernization efforts to 

ensure that U.S. military forces are equipped 

with the most technologically innovative 

weapons available. For ground forces, this 

includes the development of the Armored 

Multi-Purpose Vehicle and the Joint Light 

Tactical Vehicle. For maritime forces, the 

FY 2015 request included funding for two 

Virginia-class fast attack submarines and two 

DDG-51 AEGIS destroyers, in addition to 

funding to continue construction of the 

U.S.S. John F. Kennedy and procurement of 

three Littoral Combat Ships. For air 

dominance, the budget included development 

and production of three different variants of

the F-35 Joint Strike Fighter; the next 

generation aerial refueling tanker, the 

KC-46A; the Navy’s advanced E-2D Hawkeye 

fleet defense aircraft; and the multi-mission 

P-8A Poseidon patrol aircraft. To protect the 

homeland and regional forces, the budget included continued development and fielding of 

ballistic missile defense systems. The budget also put emphasis on innovation by providing 

$12 billion for science and technology efforts.

Figure 1. DoD FY 2015 Budget 

Authority

Totals may not agree due to rounding.
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Management’s Discussion and Analysis

5

We continue to pursue institutional reforms to reduce the cost of doing business. By 

controlling support costs and generating efficiencies, we have prioritized spending on 

combat power. These efficiency initiatives include reductions in Headquarters budgets 

across the Department, beginning with the Office of the Secretary of Defense. We also have 

implemented acquisition reform efforts, most notably through the Better Buying Power

initiatives that seek to achieve affordable programs by controlling costs, incentivizing 

productivity and innovation in industry and government, eliminating unproductive 

bureaucracy, promoting effective competition, and improving the professionalization of the 

acquisition workforce.

The force structure reductions that began with the FY 2013 budget continue. In 

accordance with the revisions to the January 2012 Defense Strategic Guidance, the FY 2015

budget reflected the choices made to achieve a modern, ready, and balanced force to meet 

the full range of potential military requirements. The Army and Marine Corps, in particular,

made progress toward achieving their targeted active end states of 450,000 and 182,000,

respectively.

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

is focused on optimizing the active/reserve force mix and sustaining their readiness at 

appropriate levels. The reserves are trained, ready, and cost-effective forces that can be 

employed on a periodic operational basis while ensuring strategic surge capabilities for 

large-scale contingencies or other unanticipated national crises.

We recognize the demands that continue to be placed on the all-volunteer force and 

members’ families who give so much to defend the ideals and free institutions we often take 

Two E-2D Hawkeye aircraft conduct a test flight near St. Augustine, Fla.

Photo courtesy of Northrop-Grumman
U.S. Department of Defense Agency Financial Report for FY 2015

Management’s Discussion and Analysis

6

for granted. Their dedication reminds us that preserving America’s liberties often comes 

with a heavy cost. We keep faith by supporting a variety of Military Family Assistance 

programs designed to improve military life, such as child care, non-medical counseling, and 

Morale, Welfare and Recreation programs. The military healthcare system provides services 

to 9.5 million beneficiaries, including military retirees and their families, dependent 

survivors, and certain eligible Reserve Component members and their families. We seek to 

control healthcare costs and reasonable health care benefit reform as part of a balanced 

approach to cost containment, which is essential to fund the warfighting capabilities needed

to maintain the Joint Force and to send our personnel into combat with the best possible 

training and equipment.

LOOKING FORWARD

Against the unexpected geopolitical developments of Russian aggression, ISIL activism, 

North Korean provocation, and broader geopolitical turmoil across the Middle East region, 

the strategic priorities identified in the Quadrennial Defense Review 2014 remain our 

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

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

counterterrorism campaign, strengthening key alliances and partnerships, and prioritizing 

key modernization efforts. 

We are at a pivotal moment in the post-Cold War world. Russia is modernizing both its 

nuclear and its conventional military capabilities, and updating its warfighting doctrine.

While China’s rise is welcomed, its increasing assertiveness in the South China Sea is out of 

step with international norms and increasing demand for our engagement in the Asia-Pacific 

region. Meanwhile, the military’s technological edge, which we have relied upon for so long, 

is eroding. This is a major strategic challenge facing not only the Department, but also, 

America’s leadership in the world.

To maintain our warfighting dominance, the Department has launched the Defense 

Innovation Initiative and Third Offset Strategy, an ambitious Department-wide effort 

overseen by Deputy Secretary Work to identify and invest in innovative ways to sustain and 

advance America’s military dominance for the 21st century.

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

think creatively about how we can restore the readiness of the force, while we remain 

globally engaged. The Department seeks to achieve full spectrum combat readiness by 

FY 2023 for the Army and the Air Force, the Navy’s fleet response plan by 2020, and the 

Marine Corps’ Force Posture Plan by 2020.

Finally, we will be looking to preserve our most enduring and competitive advantage –

our people. Under the Force of the Future Initiative, the Department intends to improve the

recruitment and retention of the brightest and most committed young men and women and 

make Defense the most rewarding environment it can be, for those who choose to serve.
U.S. Department of Defense Agency Financial Report for FY 2015

Management’s Discussion and Analysis

7

ORGANIZATION

The Department of Defense maintains and uses armed forces to support and defend the 

Constitution and ensure the security of the United States, its possessions, and areas vital to its 

interest. This mission depends on our military and civilian personnel and equipment being in the 

right place, at the right time, with the right capabilities, and in the right quantities to protect our 

national interests. This has never been more important as America fights terrorists who plan 

and carry out attacks outside the traditional boundaries of the battlefield. 

The Department is one of the nation’s 

largest employers, with civilians, 

personnel on active duty, and the 

Selected Reserve of National Guard and 

Reserve forces. Our military service 

members and civilians operate in every 

time zone and in every climate. There 

also are more than 2 million military 

retirees and family members receiving 

benefits.

The Department’s real property 

infrastructure includes over 562,000 

facilities (buildings and structures) 

located on 4,800 sites worldwide covering 

over 24.9 million acres. To protect the 

security of the United States, the

Department operates 14,597 aircraft and 

284 Battle Force ships.

The Secretary of Defense is the 

principal assistant and advisor to the President in all matters relating to the Department, 

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

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

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

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

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

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

A sailor operates a tractor to carry supplies from the well deck of 

the amphibious dock landing ship USS Ashland onto a landing 

craft utility at Apra Harbor, Guam. The supplies were bound for 

Saipan as part of the disaster relief effort following Typhoon 

Soudelor.

Photo by Mass Communication Specialist 3rd Class David A. Cox 
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Management’s Discussion and Analysis

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Figure 2. Department of Defense Organizational Structure

The Office of the Secretary of Defense

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

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

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

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

(DCMO); the General Counsel of the Department of Defense; the Assistant Secretaries of 

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

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

Secretary. 

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

formulation of defense strategy and policy (Figure 3).

Secretary

of the Air Force

The

Air

Staff

The

Joint Chiefs

Secretary

of the Navy

Office

of the

Secretary

of the

Navy

Secretary

of the Army

Office

of the

Secretary

of the

Army

Secretary of Defense

Department of Defense

Office of the Inspector General

of the Department of Defense

Department of

the Air Force

Chairman of the

Joint Chiefs of 

Staff

The

Joint Staff

Department of

the Navy

Office

of the

Chief

of Naval 

Operations

Headquarters 

Marine

Corps

Department of 

the Army

The

Army

Staff

The

Navy

The

Marine

Corps

The

Army

Defense 

Agencies

DoD Field 

Activities 

Office

of the

Secretary

of the

Air Force

The

Air Force

Office of the

Secretary of 

Defense

Joint Chiefs

of Staff

Deputy 

Secretary, 

Under 

Secretaries, and 

Assistant 

Secretaries of 

Defense; and 

other specified 

officials

Combatant 

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

The Joint Chiefs of Staff and the Joint Staff

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

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

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

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

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

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

the Secretary of Defense.

Office of the Inspector General

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

Department that conducts and supervises audits and investigations relating to the 

Department’s programs and operations. The DoD IG serves as the principal advisor to the 

Secretary of Defense on all audit and criminal investigative matters relating to the 

prevention and detection of fraud, waste, and abuse in the programs and operations of the 

Department.

DoD Chief 

Information 

Officer

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

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

USD

(Acquisition, 

Technology, & 

Logistics)

USD

(Policy)

USD

(Comptroller)/

Chief Financial 

Officer

USD

(Personnel & 

Readiness)

USD

(Intelligence)

Inspector

General,

DoD*

Deputy Chief 

Management 

Officer

Director, Cost

Assessment & 

Program 

Evaluation

Director, 

Operational

Test &

Evaluation

General

Counsel,

DoD

ASD

(Legislative 

Affairs)

ATSD

(Public

Affairs)

Director,

Net

Assessment 

Deputy Secretary of Defense

Chief Management Officer/

Chief Operating Officer

Secretary of Defense
U.S. Department of Defense Agency Financial Report for FY 2015

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Military Departments

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

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

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

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

Department of Homeland Security. The three Military Departments organize, staff, train, 

equip, and sustain America’s military forces and are composed of the four Military Services 

(or five when including the U.S. Coast Guard, when directed). When the President 

determines military action is required, these trained and ready forces are assigned or 

allocated to a Combatant Command responsible for conducting military operations.

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

composed of units under the authority of the Secretary of Defense manned by active duty 

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

Service and the National Guard, which has a unique dual mission with both federal and State 

responsibilities (Figure 4). When commanded by the Governor of each state or territory, the

National Guard can be called into action during local, statewide, or other emergencies such as 

storms, drought, or civil disturbances, and in some cases supporting federal purposes for 

training or other duty (non-federalized service). 

When ordered to active duty (called into federal service) for national emergencies, units of 

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

Guard and Reserve forces are recognized as indispensable and integral parts of the Nation’s 

defense and fully part of the applicable Military Department.

Defense Agencies and DoD Field Activities

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

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

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

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

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

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

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

Field Activities operate under the authority, direction, and control of the Secretary of 

Defense through an OSD Principal Staff Assistant.

Figure 4. Reserve Components: Reserves and National Guard

Federal Missions

United States 

Army Reserve

United States 

Marine Corps

Reserve

United States 

Navy Reserve

United States 

Coast Guard

Reserve

United States 

Air Force

Reserve

United States 

Air National

Guard

United States

Army National

Guard

Federal and State Missions
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Combatant Commands

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

accomplishing the military missions assigned to them. Combatant Commanders exercise 

command authority over assigned and/or allocated forces, as directed by the Secretary of 

Figure 5. Defense Agencies and DoD Field Activities

Joint ImprovisedThreat Defeat

Agency *

* Nine Defense Agencies are designated as 

Combat Support Agencies with joint oversight by 

the Chairman of the Joint Chiefs of Staff

Secretary of Defense

USD(AT&L) USD(P) USD(C) USD(P&R) USD(I)

GC DoD ATSD(PA) DoD CIO DCMO

Defense Advanced

Research Projects

Agency

Defense Contract

Management

Agency *

Defense Logistics

Agency *

Missile Defense

Agency

Defense Technical

Information

Center

DoD Test 

Resource

Management

Center

Defense 

Information

Systems

Agency *

Defense Security

Cooperation

Agency

Defense 

Technology

Security

Administration

Defense

Contract Audit

Agency

Defense Finance

& Accounting

Service

Defense

Commissary

Agency

Defense Health

Agency *

DoD Education

Activity

Defense

Intelligence

Agency *

DoD Human

Resources

Activity

National

GeospatialIntelligence

Agency *

National

Reconnaissance

Office

National Security 

Agency/

Central Security 

Service *

Pentagon Force

Protection

Agency

Washington

Headquarters

Services

Defense

Media

Activity

Defense Legal

Services

Agency

Defense POW/MIA

Accounting

Agency

Defense Security

Service

Defense Threat

Reduction

Agency *

Office of 

Economic

Adjustment

Key

DoD Field Activity

Defense Agency
U.S. Department of Defense Agency Financial Report for FY 2015

Management’s Discussion and Analysis

12

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

Defense to the Commanders of the Combatant Commands. The Chairman of the Joint Chiefs 

of Staff functions within the chain of command by transmitting the orders of the President 

or the Secretary of Defense to the Commanders of the Combatant Commands.

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

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

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

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

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

Departments and Defense Agencies, including programming, budgeting, acquisition, 

training, organizing, equipping, and providing Special Operations Forces, and developing 

Special Operations Forces strategy, doctrine, tactics, and procedures. The USSOCOM is 

reliant upon the Military Services for common support and base operating support. 

In addition to supplying assigned and allocated forces and capabilities to the Combatant 

Commands, the Military Departments provide administrative and logistics support by

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

only Combatant Command directly receiving Congressional appropriations.

Figure 6. Combatant Commands

B10-04

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

Three commanders 

have worldwide mission 

responsibilities, each 

focused on a particular 

function:

United States

Strategic Command

United States

Transportation Command

United States

Special Operations

Command

United States

Northern Command

United States

Pacific Command

United States

European Command

United States

Southern Command

United States

Africa Command

United States

Central Command

USNORTHCOM

USEUCOM

USPACOM

USSOUTHCOM

USCENTCOM

USAFRICOM
U.S. Department of Defense Agency Financial Report for FY 2015

Management’s Discussion and Analysis

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PERFORMANCE OVERVIEW

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

Chief Operating Officer, is responsible for performance improvement in the Defense 

Department. Each year, in accordance with public law and OMB regulations1, the 

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

The Government Performance and Results Modernization Act (GPRAMA) of 2010 requires

the development of the Agency Strategic Plan (ASP). The Department’s 2015-2018 ASP 

strategic goals are:

 Defeat our Adversaries, Deter War, and Defend the Nation;

 Sustain a Ready Force to Meet Mission Needs;

 Strengthen and Enhance the Health and Effectiveness of the Total Workforce;

 Achieve Dominant Capabilities through Innovation and Technical Excellence; and

 Reform and Reshape the Defense Institution.

The Department Agency Strategic Plan presents the strategic goals and objectives the 

Department aims to accomplish over Fiscal Years (FY) 2015-2018, describing near and 

long-term defense performance and priority goals, and the federal cross-agency priority 

(CAP) goals the Department contributes toward achieving. The Department will continue to 

mature the ASP to better inform internal and external stakeholders, enhance substance for 

improved decision-making, planning, alignment of actions, and resources to realize goals 

and deal with challenges or risks –

while also addressing requirements 

of GPRAMA and the National 

Defense Authorization Act of 2008. 

The Department’s ASP builds from 

the strategic authorities and 

direction to align national defense 

efforts and resources ultimately 

enabling warfighter mission 

execution.

This report provides an 

executive-level overview of DoD’s 

performance through the third 

quarter, ending June 30, 2015, with 

fiscal year-end results published in 

the Annual Performance Report in 

the Department’s budget 

submission in February 2016.

 

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

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

Execution of the Budget

Marines with the 31st Marine Expeditionary Unit depart the amphibious 

assault ship USS Peleliu (LHA 5) to participate in the ground phase of 

Amphibious Landing Exercise (PHIBLEX) 15 in Subic Bay, Philippines. 

PHIBLEX is a bilateral training exercise designed to improve the 

interoperability, readiness, and professional relationships between the U.S. 

Marine Corps and partner nations.

Photo by Mass Communication Specialist 3rd Class Dustin Knight
U.S. Department of Defense Agency Financial Report for FY 2015

Management’s Discussion and Analysis

14

SUMMARY OF PERFORMANCE RESULTS

At the end of the third quarter, 67 percent of the Department’s quarterly performance 

measures were on track to meet the annual goals, while 33 percent did not meet third 

quarter targets and are considered “at risk” of not achieving their annual targets. 

Successes

The Department has been successful in meeting most of the priority measures for third 

quarter, FY 2015, including those related to acquisition reform and providing high quality 

care to wounded, ill, or injured service members. The Department has maintained its 

commitment to taking care of its people and has made considerable improvements in 

processing wounded warriors in a timely and effective manner.

Processing Wounded Warriors through the Integrated Disability Evaluation 

System (IDES)

Our Nation continues to be 

committed to the care and support of 

those who keep our country free and 

strong. Providing top-quality physical 

and psychological care to wounded 

warriors and assisting with the 

transition to veteran status is a 

Department priority. In FY 2015, the 

Department continued its work with the 

U.S. Department of Veterans Affairs

(VA) to accelerate the transition of 

Wounded, Ill, and Injured Service 

members into Veteran status by

reducing the disability evaluation 

processing time.

IDES is used to determine if Service 

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

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

Department that includes a single set of medical examinations and disability ratings. The goal is 

to reduce the gap between separation from active duty and receipt of VA benefits and 

compensation.

In the area of information technology enhancements, the Department is acquiring a DoD 

Disability Evaluation System Information Technology (IT) solution, with a targeted Initial 

Operating Capability in FY 2017. This will leverage existing IT capabilities where appropriate, 

and include new capabilities to support end-to-end case management, tracking, and reporting, 

and to enhance electronic IDES case file transferability within the Military Departments and 

interoperability between the Department and VA.

Despite numerous cross-agency challenges, the Department exceeded its IDES 

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

U.S. and British athletes compete in the 100-meter sprint at the 2015 

Department of Defense Warrior Games on Marine Corps Base 

Quantico, Va., June 23, 2015. 

Photo by Lance Cpl. Terry W. Miller Jr. 
U.S. Department of Defense Agency Financial Report for FY 2015

Management’s Discussion and Analysis

15

(85 percent), third (87 percent) and fourth (87 percent) quarters of FY 2015. The 

performance measure combines the outcomes of timeliness for completing Department core 

IDES phases, Service member satisfaction with the process, the accuracy and consistency of 

Military Department disability determinations, and compliance with administrative 

processing requirements.

Reform the DoD Acquisition Process

In the Better Buying Power (BBP) initiative announced in September 2010, and 

re-emphasized in the November 2012 memorandum introducing BBP 2.0, the Under Secretary 

of Defense for Acquisition, Technology and Logistics (USD(AT&L)) directed the acquisition 

professionals in the Department to deliver better value to the taxpayer and warfighter by 

improving the way the Department does business. Next to supporting the Armed Forces at war, 

this was the President’s and Secretary of Defense’s highest priority for the Department’s

acquisition professionals. USD(AT&L) pointed out its continuing responsibility to procure the 

critical goods and services U.S. Armed Forces need in the years ahead without having 

ever-increasing budgets to pay for them. DoD Components have incorporated Better Buying 

Power concepts into their policies and practices for the acquisition of weapon systems, goods 

and services, instilling a cost-conscious culture and improving the workforce’s ability to adapt 

and apply the best approach for each situation. These efforts are informed by ongoing analysis 

of numerous aspects of defense acquisition in the annual reports on the Performance of the 

Defense Acquisition System. These reports add insight and gauge progress that result in 

improvements in APG measures, showing positive trends and areas for further work. On 

April 9, 2015, USD(AT&L) announced the next step in the BBP continuum, BBP 3.0, Achieving 

Dominant Capabilities through Technical Excellence and Innovation. BBP 3.0 places an

additional emphasis on innovation, technical excellence, and quality of products.

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

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

technical data packages; extended Continuing Resolutions necessitating sole-source 

“bridge” contracts to avoid program disruptions; more programs past the stage where 

competition is economically viable; and lack of technical data packages and data rights on 

prior mature and aging aircraft programs.

DoD Components have incorporated BBP concepts into their acquisition programs, 

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

initiation. 

Areas for Improvement 

The Department did not meet 33 percent of its third quarter targets for the APG measures, 

indicating these are at risk for not achieving annual performance goals. There are improvement 

opportunities related to achieving audit-ready financial statements, improving energy

performance, and competitive contracting.

Achieving Audit-Ready Financial Statements

The National Defense Authorization Act of 2010 mandated that the Department have 

audit-ready financial statements by 2017; accordingly, the Department made this requirement 

a priority goal. Achieving audit readiness means that the Department has strengthened internal 
U.S. Department of Defense Agency Financial Report for FY 2015

Management’s Discussion and Analysis

16

controls and improved financial practices, processes, and systems so there is reasonable 

confidence the information can withstand review by an independent auditor. 

Fiscal Year 2015 was a pivotal year for the Department. Each Military Department began an 

Independent Public Accountant (IPA) audit of its General Fund Schedule of Budgetary Activity 

(SBA) FY 2015 appropriations. Additionally, most of the material other Defense organizations 

(ODO) went under SBA examination or completed mock audits of their current year budgetary 

activities. Going under IPA audit or examination is an essential part of the DoD strategy to 

achieve full audit readiness and is consistent with the feedback received from the Government 

Accountability Office, the DoD Office of the Inspector General, and some members of Congress. 

While the Department is in the process of prioritizing the corrective action plans to address the 

audit findings, it will continue to focus on preparing the remaining financial statements for audit.

The Department is currently focused on four principal financial statements: Statement of 

Budgetary Resources (SBR), Balance Sheet, Statement of Net Cost, and Statement of Changes 

in Net Position. To support auditability of the Balance Sheet, the Department established audit 

readiness of Mission Critical Assets as a priority. The Mission Critical Assets audit readiness 

strategy focuses on financial statement assertions for Existence and Completeness, Valuation, 

Presentation and Disclosure, and Rights and Obligations. Resolving existence and completeness 

issues is an essential first step to valuing assets and reporting them on the Balance Sheet. The 

Department did not meet the Mission Critical Assets target goal due to outstanding policy issues

in establishing an appropriate valuation baseline. The Department is working with the Federal 

Accounting Standards Advisory Board to establish a valuation baseline. Fund Balance with 

Treasury (FBWT), a material line item on the Balance Sheet, is another indicator as to whether

the Department’s full financial statements will be audit ready by FY 2017. The Department did 

not meet the FBWT target due to audit findings related to one Military Service. The SBR is also 

an indicator of whether the Department’s full financial statements will be audit ready by 

FY 2017. The Department did not meet 

the SBR target due to audit findings 

related to supporting balances for open 

obligations from prior year funds.

For the purposes of the above 

indicators, audit readiness is defined as 

an individual reporting entity’s 

management audit readiness assertions

for FBWT, Existence and Completeness 

of Mission Critical Assets, Valuation of 

Mission Critical Assets, and SBR to 

enable more meaningful and achievable 

goals when establishing FY 2016 goals.

The Department is committed to 

resolving the audit findings and 

achieving and sustaining audit-ready 

financial statements.

U.S. sailors and Marines man the rails as they pull into their first port 

call of their summer deployment on the amphibious dock landing ship 

USS Ashland in Bunbury, Australia, June 29, 2015. The Ashland is 

patrolling in the U.S. 7th Fleet area of operations. 

Photo by U.S. Navy Petty Officer 2nd Class David Co

. 

Photo by Lance Cpl. Terry W. Miller Jr.
U.S. Department of Defense Agency Financial Report for FY 2015

Management’s Discussion and Analysis

17

Energy 

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

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

Efficiencies will be achieved by reducing the demand for traditional energy. Legislation 

mandates a 3 percent annual reduction in facilities energy intensity as measured in British 

Thermal Units per gross square foot. The Department has pursued a facility energy 

investment strategy designed to 

reduce the energy costs and improve 

the energy security of our bases.

Despite falling short of the FY 2014

intensity reduction goal of 27 percent, 

the Department reduced its energy 

intensity by 17.6 percent from the 

FY 2003 baseline and improved by 

0.4 percent from FY 2013. While the 

Department continues to invest in 

cost-effective energy efficiency and 

conservation measures to improve 

goal progress, there will be challenges 

in future reductions. Facility energy 

metrics are reported on an annual 

basis.

Contract Obligations That Are 

Competitively Awarded

The Better Buying Power initiatives 

advanced by the Under Secretary of Defense for Acquisition, Technology and Logistics are 

aimed at achieving greater efficiencies through affordability and cost control. A principal 

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

quarter FY 2015, the Department achieved a competition rate of 52.4 percent against the 

third quarter target of 56 percent. Based on current projections, the Department does not 

anticipate achieving the FY 2015 goal of 59 percent.

However, USD(AT&L) continues to emphasize the importance of maximizing 

opportunities for competitive contracting on a quarterly basis at the Business Senior 

Integration Group meetings. In this forum, the Service Acquisition Executives have shared 

best practices by describing the approach employed by program executive officers to 

identify targets of opportunity. 

Looking ahead to next fiscal year, USD(AT&L) will emphasize a transition from targeted 

goals based primarily on the percentage increase over prior year actuals, to a forecast 

model that projects competition opportunities a year in advance to account for anomalies, 

such as the purchase of a nuclear powered aircraft carrier. The Director of Defense 

Procurement and Acquisition Policy, with Component input, will examine differing 

circumstances and projected competitive opportunities to enable more meaningful and 

achievable goals when establishing FY 2016 goals.

A Navy F/A-18E Super Hornet launches at sunset from the flight deck 

of the aircraft carrier USS Ronald Reagan in the Pacific Ocean off the 

coast of Southern California, July 10, 2015. The aircraft is assigned to

Strike Fighter Squadron 137. 

Photo by Petty Officer 2nd Class Chase C. Lacombe
U.S. Department of Defense Agency Financial Report for FY 2015

Management’s Discussion and Analysis

18

Summary

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

committed to managing towards specific, measurable goals derived from a defined mission, 

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

its commitment to veterans transitioning into the civilian workforce, and commitment to 

pursuing improvement opportunities related to acquisition reform and financial audit 

readiness.

A soldier assigned to the 982nd Combat Camera Company, rappels down a cliff during Fleet Combat Camera Pacific's Quick Shot 

2015 combined joint field training exercise in the Angeles National Forest near Azusa, Calif., Aug. 6, 2015. Quick Shot is a 

semiannual field exercise designed to train combat camera personnel to operate in a combat environment. 

Photo by Mass Communication Specialist 2nd Class Anthony R. Martinez

U.S. Department of Defense Agency Financial Report for FY 2015

Management’s Discussion and Analysis

20

FINANCIAL OVERVIEW

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

in FY 2015 and a high-level overview of how the Department met its performance goals and 

objectives as of the third quarter of FY 2015. The FY 2015 final results for all Department 

performance measures will be reported in the Department’s Annual Performance Report, 

which will be available in February 2016.

As noted, the Department’s issues in producing auditable financial statements persist, 

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

internal controls over financial reporting, operations, and financial management systems. 

Part of the challenge in successfully passing a financial statement audit lies with the 

Department’s unique size and mission. For example, Figure 7 shows the magnitude of 

financial activities processed only by the Defense Finance and Accounting Service (DFAS) in 

FY 2015, and does not include transactions processed by other DoD entities, such as the 

U.S. Army Corps of Engineers or the Defense 

Health Agency. 

Despite our complexities, we continue to 

make strides in our efforts towards producing 

auditable financial statements. Notably, the

Army, Navy, Air Force, and multiple Defense 

Agencies underwent audit in FY 2015 of their

Schedules of Budgetary Activity (SBA), a 

precursor to audits of their Statements of 

Budgetary Resources (SBR). Also, several DoD 

Components have continued to maintain audit 

opinions on their full financial statements.

The Department’s Financial Improvement 

and Audit Readiness (FIAR) Initiative guides 

the Department’s efforts to improve our 

financial management and ability to 

demonstrate reliable and well-controlled business processes and provide supporting 

documentation to auditors in a timely and consistent manner. Through the Managers’ 

Internal Controls Program, we continue to identify and fix gaps in business practices, 

policies, and procedures that could leave room for errors or weaknesses. Additionally, we 

continue to replace, update, and consolidate outdated and redundant information 

technology systems. New data standards are in place to improve data quality and systems 

interoperability. These initiatives are detailed further in this report.

With continued improvements in systems and business processes, the Department can

more readily achieve and sustain the reliability of reported financial information to meet the 

timeliness, reliability, and accuracy standards of an independent auditor. Although the 

Department has yet to achieve full auditability, we are confident that we know how taxpayer 

funds are spent, that employees and vendors are paid timely and appropriately, and that 

our overall financial operations are managed soundly in our efforts to protect and defend 

the nation. 

Figure 7. DFAS Statistics FY 2015

Description FY 2015

Number of Pay Transactions 135.7 million

Number of Commercial Invoices 

Paid 11.8 million

Number of Travel Payments 5.7 million

Number of General Ledger 

Accounts managed 190.6 million

Amount Disbursed $477 billion

Amount of Military Retirement 

and Health Benefits Funds 

Managed

$834 billion

Foreign Military Sales Cases 

Reimbursed by Foreign 

Governments 

$455 billion
U.S. Department of Defense Agency Financial Report for FY 2015

Management’s Discussion and Analysis

21

FINANCIAL HIGHLIGHTS AND ANALYSIS

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

and results of operations of the Department, pursuant to the requirements of 

31 U.S.C. 3515 (b). The statements have been prepared from the accounting records of the 

Department in accordance with OMB Circular No. A-136, Financial Reporting Requirements, 

and to the extent possible, U.S. Generally Accepted Accounting Principles (USGAAP) for 

Federal entities, and the DoD Financial Management Regulation. The statements, in addition 

to supporting financial reports, are used to monitor and control budgetary resources. The 

statements should be read with the realization that they are for a component of the 

U.S. Government, a sovereign entity. 

The Defense Finance and Accounting Service (DFAS) prepared the consolidated financial 

statements and explanatory notes, located in the Financial Information section of this 

report. The principal financial statements include the:

 Statement of Budgetary Resources;

 Balance Sheet;

 Statement of Net Cost; and

 Statement of Changes in Net Position. 

Statement of Budgetary 

Resources

One of the most critical financial 

improvement and audit readiness 

priorities in the Department involves 

the processes, controls, and systems 

that support information most often 

used to manage the Department, 

namely, budgetary resources. The 

Statement of Budgetary Resources 

(SBR) presents the Department’s total 

budgetary resources, their status at 

the end of the year, and the 

relationship between the budgetary 

resources and the outlays made 

against them. In accordance with 

Federal statutes and implementing 

regulations, obligations may be incurred and payments made only to the extent that 

budgetary resources are available to cover such items. 

As discussed in the DoD Overview Section of this report and as depicted in Figure 8, the 

Department’s FY 2015 budget authority total is $560.5 billion. The change in FY 2015 

budget authority from FY 2014 is mostly attributable to sequestration actions required by 

the Budget Control Act of 2011 and the Bipartisan Budget Agreement of 2013. 

Figure 8. Trend in DoD Budget Authority
U.S. Department of Defense Agency Financial Report for FY 2015

Management’s Discussion and Analysis

22

As shown in Figure 9, the 

Department reported $1.1 trillion in 

FY 2015 total budgetary resources. The 

total appropriations amount of 

$720.5 billion, reported on the 

Statement of Budgetary Resources, 

consists of DoD budget authority and 

appropriations provided by the U.S. 

Treasury for DoD military retirement and 

health benefits. The Department also 

receives appropriations to finance civil 

work projects managed by the 

U.S. Army Corps of Engineers (USACE). 

Current year Trust Fund receipts, 

including the Military Retirement Fund 

and the Medicare Eligible Retiree Health 

Care Fund, also are included in the SBR 

“Total Appropriations” line. Trust fund 

receipts, labeled “Temporarily not 

available,” represent budget authority 

the Department will execute in future years to pay the current unfunded liabilities carried in 

these large funds. 

Additional budgetary resources include $176.0 billion of unobligated balances stemming 

from prior year budget authority, $102.4 billion in spending authority from offsetting 

collections, and $68.3 billion of contract authority.

Of the $1.1 trillion in total budgetary resources, $917.8 billion was obligated and 

$887.8 billion of obligations were disbursed. The remaining unobligated budgetary resources 

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

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

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

for new obligations.

Figure 9. Composition of DoD Total 

Budgetary Resources

FY 2015

($ in billions)

DoD Budget Authority $ 560.5 

U.S. Treasury contribution for Military 

Retirement and Health Benefits 86.4 

Civil Works Projects executed by the 

USACE 4.1 

Trust Fund Receipts 123.7 

Trust Fund Resources Temporarily not 

Available (54.2)

Total Appropriations Reported on SBR $ 720.5 

Unobligated Budget Authority Brought 

Forward from Prior Year 176.0 

Spending Authority from Offsetting 

Collections 102.4 

Contract Authority 68.3 

Total Budgetary Resources $ 1,067.2 

Description
U.S. Department of Defense Agency Financial Report for FY 2015

Management’s Discussion and Analysis

23

Balance Sheet

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

September 30, 2015, reports probable future economic benefits obtained or controlled by 

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

between them (Net Position). 

The $2.3 trillion in assets shown in Figure 10 represent amounts the Department owns 

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

Treasury (FBWT) represent 85 percent of the Department’s assets. General Property, Plant, 

and Equipment is largely comprised of military equipment and buildings, structures, and 

facilities used to support the Department’s mission requirements. 

Total Assets increased $57.4 billion (2.6 percent) from FY 2014, largely due to a 

$60.9 billion increase in Investments in U.S. Treasury securities. Investments increased

primarily due to normal growth in the Military Retirement Fund. As displayed in Figure 13, 

the Department has realized growth in investments over the last several years. The growth 

results from investment of contributions from the U.S. Treasury and the Uniformed 

Services, net of benefits paid. Under the Department’s current strategy, invested balances 

will continue to grow to cover unfunded portions of future benefits. Funds not needed to 

cover current benefits were invested in U.S. Treasury Securities. 

As seen in Figure 11, the Department’s total liabilities decreased $32 billion during 

FY 2015, due to downward adjustments in the estimated actuarial liability associated with 

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

underlying benefit plan, actuarial assumptions, experience, and expectations used to 

calculate the unfunded liability. The Department’s $2.4 trillion of liabilities reported in 

FY 2015 are backed by the full faith and credit of the United States Government. 

Figure 10. Summary of Total Assets
U.S. Department of Defense Agency Financial Report for FY 2015

Management’s Discussion and Analysis

24

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

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

inception of the military retirement and health care programs. This $1.3 trillion actuarial 

liability accounts for approximately 82 percent of the total $1.6 trillion in liabilities not 

covered by budgetary resources. The Department has resources available to cover 

approximately $724.6 billion of the remaining liabilities, primarily invested in U.S. Treasury 

securities. In addition, there are Military Pre-Medicare eligible retiree health benefits 

actuarial liabilities of $235.3 million.

Figure 11. Summary of Total Liabilities

Figure 12. Unfunded Liabilities
U.S. Department of Defense Agency Financial Report for FY 2015

Management’s Discussion and Analysis

25

Statement of Net Cost

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

including military retirement benefits. The statement reports total expenses incurred less 

revenues earned from external sources to finance those expenses. Generally, the resulting 

balance of net cost is equivalent to the outlays reported on the Statement of Budgetary 

Resources (SBR), plus accrued liabilities, less the amount of assets purchased and 

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

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

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

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

programs. These costs were offset with investment earnings and contributions to support 

retirement and health benefit requirements, as well as earnings from reimbursed activities. 

This activity resulted in $560.6 billion in net cost of operations during the fiscal year. 

As depicted in Figure 13, the $560.6 billion in net cost of operations represents a 

$79.4 billion decrease (12 percent) from FY 2014 reported net cost. Approximately 

$74.5 billion of the decrease is related to the cost for future military retirement and health 

care benefits, largely driven by plan amendments, changes in actuarial assumptions, and 

other actuarial gains and losses.

Figure 13. Summary of Net Cost of Operations
U.S. Department of Defense Agency Financial Report for FY 2015

Management’s Discussion and Analysis

26

Statement of Changes in Net Position

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

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

The SCNP displays the components of net position separately to enable the user to better 

understand the nature of changes to net position as a whole. The statement focuses on how 

the net cost of operations as presented on the Statement of Net Cost is financed, as well as 

displaying the other items financing the Department’s operations. The Department’s ending 

net position increased $89.5 billion during FY 2015. The increase reflects primarily the effect 

of the change in projected military retirement and health care benefits.

Financial Performance Summary

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

represents the Department’s condensed financial position, results of operations, and 

budgetary resources, and includes comparisons of financial balances from the current year 

to the prior year. 

Management also relies on information that describes the economic conditions of the 

Department that cannot be expressed in the basic financial statements. Required 

supplementary stewardship information includes the Department’s investments in 

nonfederal physical property and investments in research and development.

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. Examples include expenditures supporting the 

design, build, and construction services/management for the missions of commercial 

navigation, flood/storm damage reduction, hydropower, regulatory, environmental, 

recreation, and water supply. Investments in transferred and funded assets for FY 2015 

totaled over $1.3 billion.

The Department also invests in research and development to maintain its technological 

advantage over potential adversaries, improve the health and welfare of military personal 

and their families, and make operational improvements to increase the Department’s overall 

efficiency and effectiveness. During FY 2015 the Department made investments in research 

and development of over $61 billion, which included investments in basic research, applied 

research, and development. Examples of research and development programs included 

lightweight energy efficient materials, night vision, global weather patterns, experimental 

and operational ships, planes, vehicles, and medical advances for the care and treatment of 

wounded warriors and their families. 

As noted, the lack of auditable financial data is a limiting factor in the ability of the 

Department to explain all material variances presented in the comparative statements. 

Nevertheless, the data underlying the amounts is used to manage the Department’s 

operations successfully.
U.S. Department of Defense Agency Financial Report for FY 2015

Management’s Discussion and Analysis

27

Figure 14. Financial Performance Summary

Dollars in Billions

FY 2015 Restated

FY 2014 Change % Change

ASSETS

Fund Balance with Treasury $ 467.4 $ 480.4 $ (13.0) -2.7%

Investments 848.0 787.1 60.9 7.7%

Accounts Receivable 7.7 8.0 (0.3) -3.8%

Other Assets 77.3 78.9 (1.6) -2.0%

Inventory and Related Property, Net 261.7 261.5 0.2 0.1%

General Property, Plant and Equipment, Net 630.0 618.8 11.2 1.8%

Total Assets $ 2,292.1 $ 2,234.7 $ 57.4 2.6%

LIABILITIES

Accounts Payable $ 20.3 19.9 $ 0.4 2.0%

Other Liabilities 44.3 46.2 (1.9) -4.1%

Military Retirement and Other Federal Employment 

Benefits 2,302.0 2,334.0 (32.0) -1.4%

Environmental and Disposal Liabilities 60.0 58.6 1.4 2.4%

Total Liabilities $ 2,426.6 $ 2,458.7 $ (32.1) -1.3%

Total Net Position (Assets Minus Liabilities) $ (134.5) $ (224.0) $ 89.5 40.0%

Total Financing Sources 677.0 646.5 30.5 4.7%

Less Net Cost of Operations (560.6) (640.0) 79.4 -12.4%

Net Change of Cumulative Results of Operations 116.4 6.5 109.9 1,690.8%

Total Budgetary Resources $ 1,067.2 $ 1,084.4 $ (17.2) -1.6%

An F-16 Fighting Falcon aircraft sits on the flightline before morning sorties on Tyndall Air 

Force Base, Fla., Sept. 18, 2015. The aircraft is assigned to the Ohio Air National Guard's 

180th Fighter Wing. 

Ohio National Guard photo by Air Force Senior Master Sgt. Beth Holliker
U.S. Department of Defense Agency Financial Report for FY 2015

Management’s Discussion and Analysis

28

FINANCIAL MANAGEMENT IMPROVEMENT INITIATIVES

Financial Improvement and Audit Readiness Initiative

The Financial Improvement and Audit Readiness (FIAR) initiative is the Department’s 

strategy for achieving and validating audit readiness of all financial statements by 

September 30, 2017. Audit readiness means the Department has strengthened internal 

controls and improved financial practices, processes, and systems so there is reasonable 

confidence the information can withstand an audit by an independent auditor. 

Fiscal year (FY) 2015 was a pivotal year for the Department. Each Military Department 

began an Independent Public Accountant (IPA) limited-scope audit of its General Fund 

Schedule of Budgetary Activity (SBA) for its FY 2015 appropriations. Additionally, most of 

the material other Defense organizations (ODO) went under SBA examination or completed 

mock audits of their current year budgetary activities. Going under IPA audit or examination 

is an essential part of the DoD FIAR strategy and is consistent with the feedback received 

from Government Accountability Office (GAO), the DoD Office of the Inspector General 

(DoD IG), and some members of Congress. Audits highlight dependencies between 

organizations and remaining deficiencies so corrective actions can be implemented and full 

audit readiness can be achieved. Going under audit also means an important culture change 

is underway, requiring both military and civilian personnel across the Department to learn 

and understand the business of being audited.

During FY 2015, about 90 percent of the total DoD General Fund appropriations were 

under audit. The remaining General Fund appropriations not currently under audit are 

undergoing examinations or audit readiness activities. 

U.S Marines and sailors clear a fallen tree during a community 

service project at an elementary school in Saipan in the 

aftermath of Typhoon Soudelor in Garapan, Saipan, Aug. 14, 

2015. The Marines are assigned to 31st Marine Expeditionary 

Unit, and the sailors are assigned to the USS Ashland. 

Photo by Petty Officer 3rd Class David A. Cox

Soldiers help extinguish a small fire while battling the Rocky 

Fire near Clear Lake, Calif., Aug. 12, 2015. The soldiers are 

California National Guardsmen assigned to the 578th Brigade 

Engineer Battalion and the 1st Battalion, 18th Cavalry, 79th 

Infantry Brigade Combat Team.

California Army National Guard photo
U.S. Department of Defense Agency Financial Report for FY 2015

Management’s Discussion and Analysis

29

Over the next two years, the Department will continue to expand the scope of audits, 

while sustaining a stronger, more disciplined environment, until full audit readiness is 

achieved. Lessons learned from other federal agencies suggest that the first years of

auditing the full financial statements will not result in a positive opinion, but the Department 

is committed to resolving all issues until a positive opinion can be achieved and sustained.

Figure 15 identifies the Components that were under audit in FY 2015 and their 

percentage of the total DoD General Funds (based on FY 2014 total).

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

Status Reports, is available on the Under Secretary of Defense (Comptroller) website.

Figure 15. General Funds Under Audit in FY 2015

Based on FY 2014 Total Budgetary Resources. 
U.S. Department of Defense Agency Financial Report for FY 2015

Management’s Discussion and Analysis

30

Financial Management Certification Program

The DoD Financial Management (FM) Certification Program, 

sponsored by the Office of the Under Secretary of Defense 

(Comptroller), hit full stride in FY 2014. As of September 2015, 

over 8,000 members achieved their required certification. The 

FM personnel in the Reserve Components transitioned in FY 2015, 

and we expect the wave of certifications awarded will increase 

steadily throughout the upcoming fiscal year.

The Certification Program is course-based rather than 

test-based, with course hour requirements aligned to FM and 

leadership competencies and other specific courses, namely, 

audit readiness, ethics, and fiscal law. There are three levels of FM Certification, and each 

level includes FM experience requirements. The FM workforce members must achieve 

certification within two years of assignment to an FM position. After meeting initial 

certification requirements, FM personnel must meet continuing education and training 

requirements every two years.

When we recognized that the inventory of FM 

courses would not be adequate to support a 

course-based certification program, the 

Comptroller team began to develop FM web-based 

training courses in 2012. Currently, 68 of these 

courses are available to the workforce, resulting in 

improved, cost-free access to training in key, 

substantive subject areas. 

To date, over 181,000 FM web-based course completions have been recorded and over 

29,000 of these course completions are in the Financial Improvement and Audit 

Readiness (FIAR) area. This metric’s results indicate that the program is achieving one of its 

goals, which is to improve employee knowledge and skills in audit readiness.

As the FM Certification Program matures, the culture of continual professional 

development and training for all FM workforce members will become ingrained, proficiency 

in technical and leadership subject areas will increase, and support to the warfighters will 

keep pace with their needs.
U.S. Department of Defense Agency Financial Report for FY 2015

Management’s Discussion and Analysis

31

More Disciplined Use of Resources

Continuing the reform agenda advanced in previous budgets, the Department reviewed 

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

campaign. Strategies to realize savings included restructuring the civilian workforce to meet 

key needs with fewer personnel; better leveraging of the reserve components; restructuring 

military treatment facilities; controlling health care costs by taking advantage of lower 

prices for private care; consolidating unintentionally duplicative efforts; reducing 

management headquarters staffs; and restructuring or terminating weapons programs and 

military construction projects to focus on the most critical capabilities.

As a result of these efforts, the Department proposed approximately $93 billion in cost 

reductions from fiscal year (FY) 2015 through FY 2019 in the Department’s Future Year’s 

Defense Program (FYDP) supporting the FY 2015 President’s Budget request compared to 

the FYDP supporting the FY 2014 President’s Budget. The savings include:

 Streamlining Business Practices and Support Services. The Department reduced

$38 billion from the FYDP by streamlining business practices and support services 

such as installation and administrative functions, contracting, staffing, and by 

implementing initiatives to reduce costs in the health care sector.

 Contracting Efficiencies. The Department eliminated $30 billion from the FYDP by 

reducing contract support levels commensurate with reductions in force structure, 

and by implementing better buying power initiatives in procurement activities.

 Terminating or Restructuring Weapons Programs. The Department reduced $9 billion

from the FYDP by identifying and terminating programs in which the most important 

capabilities could be met by other means, and restructuring or protracting of 

timelines that will still permit the Department to meet the most important strategic 

needs.

 Manpower or Force Restructuring. The Department eliminated $8 billion across the 

FYDP by reducing the civilian workforce commensurate with reduced force structure 

levels and reduced workload at depot maintenance activities.

 20 Percent Headquarters Reductions. The Department reduced the FYDP by $5 billion

by implementing the Department’s institutional reform efforts to prioritize and 

consolidate duplicative efforts and thereby reduce management headquarters staffs.

 Restructuring and Delaying Military Construction Projects. The Department

eliminated $4 billion across the FYDP by funding only the most critical facility 

requirements and ensuring construction projects are sized to support requirements 

needed for the reduced force structure. 

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

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

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

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

structure.
U.S. Department of Defense Agency Financial Report for FY 2015

Management’s Discussion and Analysis

32

INTERNAL CONTROLS OVERVIEW

MANAGERS’ INTERNAL CONTROL PROGRAM

The Office of the Under Secretary of Defense (Comptroller) leads the Department’s 

Federal Managers’ Financial Integrity Act (FMFIA) program, known as the Managers’ Internal 

Control Program (MICP). The Department is committed to ensuring effective internal 

management controls for all mission-essential processes. The MICP holds both operational 

and financial DoD managers accountable to ensure effective internal management controls 

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

programmatic approach to establish and assess internal management controls for all 

financial and non-financial mission-essential operations. Components that produce 

standalone financial statements are also required to provide financial reporting assurance.

The Department advocates a “tone at the top” approach, with emphasis on the 

importance of the internal control program, which permeates the entire DoD culture. The 

purpose of the MICP is to identify, prioritize, and mitigate high operational and financial risk 

before it impedes the mission. Per DoD Instruction 5010.40, each Component uses its

leadership’s mission requirements as a baseline for executing assessments of key functional 

operational and financial areas. Instead of relying on external auditors to identify material 

control weaknesses, Components rely upon appointed assessable unit managers for each 

key operational and financial area to identify and self-report internal control deficiencies for 

review and comment by leadership. This process complements the Government 

Accountability Office’s (GAO) Standards for Internal Control in the Federal Government

(“Green Book”) through the Department’s reliance upon the Risk Enterprise Framework 

approach to ensure we prioritize systemic operational and financial risk for corrective action.

Types of Material Weaknesses 

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

material weaknesses:

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

Congressional oversight committees;

 Hinders management’s ability to prevent or detect a material misstatement of the 

financial statements;

 Impairs fulfillment of essential operations or mission;

 Identified as a “high risk” by GAO or the DoD Inspector General (DoD IG);

 High impact of occurrence in terms of loss of dollars and loss of life;

 Significantly weakens established safeguards against waste, loss, unauthorized use 

or appropriation of funds, property, other assets, or conflicts of interest;

 Constitutes substantial noncompliance with laws and regulations;

 Nonconformance with government-wide, financial management system 

requirements; and

 Identified by independent public accountants as material weaknesses.
U.S. Department of Defense Agency Financial Report for FY 2015

Management’s Discussion and Analysis

33

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

Defense has signed the following Statement of Assurance.
U.S. Department of Defense Agency Financial Report for FY 2015

Management’s Discussion and Analysis

34

FY 2015 Improvements in Internal Controls

Strong internal controls are essential to achieving and sustaining a cost-effective audit 

regimen. Despite the many challenges, the Department is steadily improving internal 

controls. Some challenges and accomplishments are highlighted below.

1. Intragovernmental Transactions: Intragovernmental transactions result when 

business is conducted between two federal entities. Both entities must accurately 

record the event so that the buying and selling documentation can be matched. 

Imbalances occur when the federal entities are unable to account for and reconcile 

differences. These differences often lack proper documentation. To address this 

issue, the Department is aligning how it records intragovernmental transactions by 

mandating the use of the Department of the Treasury’s Invoice Processing 

Platform (IPP). The Department developed standard intragovernmental data 

exchange maps to be used by DoD financial systems, creating a common 

intragovernmental financial transaction set. Additionally, the Department worked 

with the Department of the Treasury and other federal agencies to create a 

government-wide data standard for intragovernmental transactions.

2. Charge Card Programs: Stronger controls help the Department identify, correct, and 

minimize fraud, waste, and abuse of charge cards. Additionally, limiting the number 

of cards in use reduces the number of cards that can be stolen or compromised. The 

total number of purchase cards issued in the Department of Defense was reduced by 

20,505 this year. Much of this reduction was a direct result of the Army’s 

implementation of the Purchase Card Online System (PCOLS), which assisted in the 

identification of underutilized cards to remove from operational use. The Department 

also aggressively provided oversight of the Purchase Card program, and as a result 

recorded 3,325 personnel actions for potential misuse or abuse of purchase cards.

3. Service Provider Integration: A service provider is a DoD Component that performs a 

business function or process on behalf of another Component. In order for service 

provider customers to become audit ready, a service provider’s audit readiness 

activities must be fully integrated with its customers’ audit readiness activities. 

Statement on Standards for Attestation Engagements (SSAE) No. 16 examinations 

are being used to validate the effectiveness of service provider internal controls. 

Results of the SSAE No. 16 examinations can then be used by Component customer 

financial statement auditors, improving Department-wide efficiency, and saving time 

and money. Because successful service providers’ SSAE No. 16 examinations are 

essential to their Component customers’ success, the Office of the Under Secretary 

of Defense (Comptroller) is expanding service provider integration. DFAS has begun 

an SSAE No. 16 for Fund Balance with Treasury (FBWT) and will continue 

sustainment of clean opinions on its service provider SSAE No. 16 examinations to 

include Civilian Pay, Contract Pay, and Disbursements. In addition, the Defense 

Logistics Agency (DLA) received a clean opinion on its Defense Agency Initiative 

(DAI) SSAE No. 16 examination. 

4. Standard Line of Accounting (SLOA): The Department has lacked a common financial 

business language that standardizes data elements, business rules, and the 

transaction posting logic used in DoD financial systems. To facilitate reconciliations 
U.S. Department of Defense Agency Financial Report for FY 2015

Management’s Discussion and Analysis

35

between systems, the Joint Interoperability Test Command (JITC) began 

independent verifications of the Department’s ERPs and key financial systems to 

determine system compliance with Standard Financial Information 

Structure/Standard Line of Accounting (SFIS/SLOA) data element configuration, 

United States Standard General Ledger (USSGL) posting logic, tie-points, and trading

partner interface interoperability standards. Aligned with Federal Information System 

Controls Audit Manual (FISCAM) general application and interface controls, the 

results of JITC verification provides further insight into the audit readiness status of 

DoD systems and findings to remediate as part of audit preparations.

5. Fund Balance with Treasury and Cash Accountability: Unsupported journal vouchers 

and unresolved FBWT differences between the Department and the Department of 

the Treasury (Treasury) are material and jeopardize achieving audit ready financial 

statements. The Department has endorsed a single, auditable enterprise-wide FBWT 

solution that aligns with Treasury’s modernization initiatives. The standardized 

process was tested with select DoD accounts in the last half of FY 2015. Results of 

those tests are being evaluated, and the process is being refined. 

A Marine fires a Javelin at a simulated enemy tank during Operation Lava Viper at Pohakuloa Training Area, Hawaii, May 29, 2015. 

The Marines are assigned to Weapons Company, 1st Battalion, 3rd Marine Regiment. 

Photo by Cpl. Ricky S. Gomez
U.S. Department of Defense Agency Financial Report for FY 2015

Management’s Discussion and Analysis

36

BUSINESS AND FINANCIAL MANAGEMENT SYSTEMS 

To successfully achieve and sustain improvements in our internal controls, financial 

management, and auditable financial reports, the Department is improving its business 

systems. Modernization and improved interoperability of DoD business systems is critical to 

efficiently respond to Warfighter needs and sustain public confidence in our stewardship of 

taxpayer funds. 

Following passage of section 901 of the National Defense Authorization Act2for FY 2012, 

the Department significantly changed the requirements for investment reviews and the 

certification of defense business systems, which now must occur before funds (appropriated 

or non-appropriated) are obligated. The Department’s investment review process ensures

that decisions on investments in business systems align with the Defense-wide integrated 

business strategy (Figure 16). These decisions also include retirement plans for legacy and 

non-target financial systems and ensure that systems eliminate redundant activity and 

maximize operating efficiency through streamlining business processes and the availability 

of timely, accurate, and useful business information.

Figure 16. The Department’s Integrated Business Framework

The Department’s Financial Management (FM) Functional Strategy provides the 

Department’s vision, initiatives, goals, target environment, and expected outcomes over the 

next five years. The strategy is designed to ensure the Department achieves and sustains 

 

2 Section 901 of the National Defense Authorization Act for FY 2012, codified at 10 U.S.C. 2222, “Defense business 

systems: architecture, accountability, and modernization”
U.S. Department of Defense Agency Financial Report for FY 2015

Management’s Discussion and Analysis

37

auditability and financial management improvement objectives.

The key components of the FM Functional Strategy include establishing data and data 

exchange standards, standard business processes, and system controls and enhancements 

that support improved processes, and leveraging technology across the Department’s 

end-to-end processes. The primary objectives of the FM Functional Strategy are to achieve a 

fully integrated environment linked by standard processes, standard data, with the fewest 

number of systems and interfaces. Ultimately, this strategy will lead to stronger internal 

controls impacting financial reporting and auditability, and improve end-to-end funds 

traceability and linkage between budget and expenditures. Current enterprise-level 

initiatives include the Standard Financial Information Structure, the Department’s first-ever 

Standard Line of Accounting to improve funds traceability and financial reporting. The 

Department also participates in Federal-wide process improvement initiatives, such as 

compliance with the President’s transparency and open government initiatives, the 

Department of the Treasury’s Government-wide accounting and Direct-to-Treasury 

disbursing initiatives, as well as promoting the use of business analytics and maximizing

existing Enterprise Resource Planning (ERP) systems.

The FM functional strategy also provides the plans to retire and replace legacy financial 

systems to simplify the FM systems environment and infrastructure. Under the legacy 

systems reduction plan, financial management core and feeder systems should be reduced 

from 327 systems at the beginning of FY 2014 to 120 systems by the end of FY 2019.

Figure 17. DoD Financial Management Improvement Initiatives

FM Standards 

& Compliance 

Standard Processes

& Systems

Leverage 

Technology

Business 

Outcomes*

Direct Treasury 

Disbursing

Cost 

Management

Funds 

Distribution

Daily Cash 

Reporting

Standard Planning, 

Programming, 

Budget Execution

Delinquent Debt 

Management

Treasury’s Central 

Acct. Reporting 

System Roll-Out

Sub-Allotment 

Execution

Intra/Inter-Govt. 

Trans-Invoice 

Payment Platform 

(IGT / IPP)

Business Results

Maximize and 

Leverage ERPs

Shared Services

Standard 

Transaction 

Broker & 

Business Analytics

• Better financial 

information for 

business decisions

• Auditable financial 

statements

• Transparency of 

financial data

Interoperability among 

business systems

End-to-end funds 

traceability and linkage 

between budget and 

expenditures

Stronger Internal 

Controls impacting 

financial reporting and 

auditability

Compliance with Govtwide Accounting 

(GWA) Initiatives

Enterprise Planning, 

Program Budget & 

Exec. (PPBE)

OSD FIAR

Plan 

Guidance

Federal Internal 

Control Stds. 

(SSAE-16)

GAO- Stdsfor 

Internal Control 

(FISCAM)

Treasury’s Std. 

general ledger

DoD Standard 

Fin. Information 

Structure

* Aligns with the DoD Strategic Management Plan (SMP)
U.S. Department of Defense Agency Financial Report for FY 2015

Management’s Discussion and Analysis

38

The ERP systems are integral to implementing the strategic FM business process 

improvements, achieving the planned target environment and reductions in the number of 

legacy systems, and better enabling a sustainable audit environment. The ERPs provide a 

broad range of functionality to support DoD business operations in financial management, 

supply chain management, logistics, and human resource management. Some ERPs are 

fully fielded while others are in a state of development and deployment.

Army ERPs

General Fund Enterprise Business System (GFEBS) is the General Fund accounting, asset 

management, and financial system used to standardize, streamline, and share critical data 

across the active Army, Army National Guard, and Army Reserve. The GFEBS is a webbased ERP solution that uses commercial off-the-shelf (COTS) business enterprise software 

to compile and share accurate, up-to-date financial and accounting data. 

Logistics Modernization Program (LMP) is one of the world’s largest, fully-integrated 

supply chain, maintenance, repair and overhaul, planning, execution, and financial 

management systems. The LMP mission is to sustain, monitor, measure, and improve the 

modernized, national-level logistics support solution. By modernizing both the systems and 

the processes associated with managing the Army’s supply chain at the national and 

installation levels, LMP will permit planning, forecasting, and rapid order fulfillment to supply 

lines, improved distribution, a reduced theater footprint, and a warfighter who is equipped 

and ready to respond to present and future threats.

Global Combat Support System – Army (GCSS-A) provides enterprise-wide visibility into 

various logistics areas and is a key enabler for the Army in achieving auditability. The

GCSS-A provides the tactical Warfighter with supply, maintenance, property accountability, 

integrated materiel management center, management functionality, and support to tactical 

financial processes.

Integrated Personnel Pay System – Army (IPPS-A) is a hybrid solution using ERP 

software to deliver an integrated personnel and pay capability. The IPPS-A will provide the 

Army with an integrated, multi-Component personnel and pay system which streamlines 

Army Human Resources processes, enhances the efficiency and accuracy of Army personnel 

and pay procedures, and supports soldiers and their families. The IPPS-A will improve 

internal controls to prevent erroneous military payments and loss of funds.

Navy ERPs

Navy Enterprise Resource Planning (Navy ERP) is an integrated business system that 

provides streamlined financial, acquisition, and supply chain management to the Navy’s 

major systems commands. 

Global Combat Support System – Marine Corps (GCSS-MC) is the core web-enabled, 

centrally-managed ERP for the Marine Corps. The GCSS-MC is focused on the acquisition 

and implementation of the initial set of logistics capabilities to deliver improved supply and 

maintenance management services. As the technology centerpiece of the Marine Corps’ 

overall logistics modernization effort, GCSS-MC will provide advanced expeditionary logistics 

capabilities to ensure future combat efficiency.
U.S. Department of Defense Agency Financial Report for FY 2015

Management’s Discussion and Analysis

39

Air Force ERPs

The Defense Enterprise Accounting and Management System (DEAMS) is an automated 

accounting and financial management execution system for the Air Force and 

U.S. Transportation Command. DEAMS creates an Air Force enterprise financial data view by 

providing an integrated accounting and finance solution to manage appropriated and

working capital funds.

The Air Force Integrated Personnel and Pay System (AF-IPPS) is a comprehensive,

self-service, web-based solution currently in development that integrates personnel and pay 

processes into one system and maintains an official member record throughout the airman’s 

career. A Federal Financial Management Improvement Act (FFMIA)-compliant system, 

AF-IPPS functionality will support audit readiness general and application controls. Full 

deployment is not projected until the fourth quarter of FY 2018.

Other Defense Organization ERPs

Defense Agency Initiative (DAI) is a system dedicated to address financial management 

improvements through standard end-to-end business processes delivered by commercial

off-the-shelf (COTS) software. The DAI provides accounting, procure to payment, and time 

and attendance capability today, and will provide grants financial management and budget 

formulation capability in the future. By the end of FY 2017, 22 of 26 Defense Agencies will 

have deployed DAI.

Enterprise Business System (EBS) uses a commercial off-the-shelf product to manage 

Defense Logistics Agency’s (DLA) supply chain management business. The EBS also includes

Electronic Procurement, Real Property, Inventory Materiel Management and Stock 

Positioning, and Energy Convergence modules, providing DLA leadership with the tools to 

respond to new challenges and trends.

Soldiers conduct a raid at an urban terrain training site on Fort Pickett, Va., Aug. 20, 2015. 

The Virginia National Guard ran the 14-day long exercise aimed at teaching infantry skills to 

non-combat military occupational specialties. 

Photo by Sgt. Sean Brady
U.S. Department of Defense Agency Financial Report for FY 2015

Management’s Discussion and Analysis

40

IMPROPER PAYMENT REPORTING 

Department of Defense Financial Management Regulation (DoD FMR) 7000-14-R, 

Volume 4, Chapter 14, defines improper payments as “any payment that should not have 

been made or was made in an incorrect amount under statutory, contractual, 

administrative, or other legally applicable requirements.”

In accordance with the Improper Payments Information Act of 2002 (IPIA) 

(P.L. 107-300); Improper Payments Elimination and Recovery Act of 2010 (IPERA)

(P.L. 111-204); Improper Payment Elimination and Recovery Improvement Act of 

2012 (IPERIA) (P.L.112-248); Executive Order 13520, Reducing Improper Payments, issued 

November 20, 2009; and Appendix C of Office of Management and Budget (OMB) 

Circular No. A-123, Defense components are required to report the status of improper 

payments and recovery of these improper payments to the President and Congress in the 

following categories:

• Commercial Pay

• Civilian Pay

• Military Pay

• Travel Pay

• Military Health Benefits

• Military Retirements

Each Department of Defense disbursing activity is committed to identifying the root 

causes of improper payments, establishing an appropriate sampling methodology, 

developing and implementing corrective action plans, and monitoring to ensure future 

improper payments are reduced and/or eliminated. One recent success:

 Defense Finance and Accounting Service revised the statistical sampling methodology 

for Commercial Pay improper payments. The revised sampling methodology is more 

complex and produces statistically valid improper payment estimates. The population 

is separated into quarters and samples are selected from each quarter for review. 

The sampling methodology is stratified by dollar amounts consistent with both 

Government Accountability Office and DoD IG recommendations. 

As the Department moves towards the Congressional 2017 mandate to have fully 

auditable financial statements, the reduction and elimination of improper payments will 

ensure the Department achieves Congress’ established goal.
 AGENCY FINANCIAL REPORT

 FISCAL YEAR 2015

 FINANCIAL SECTION
U.S. Department of Defense Agency Financial Report for FY 2015

ESCHER, short for Electric Series Compliant Humanoid for Emergency Response, makes its way down the track 

during day two of the Defense Advanced Research Projects Agency Robotics Challenge (DRC). ESCHER was 

designed, fabricated, and assembled by engineering students at Virginia Tech.

Photo by John F. Williams

A hospital corpsman interacts with a young patient at a medical site during Continuing Promise 2015 in Santo 

Domingo, Dominican Republic. The exercise focused on humanitarian-civil assistance, subject matter expert 

exchanges, medical, dental, veterinary and engineering support, and disaster response to partner nations, 

showing U.S. support to Central and South America and the Caribbean. 

Photo by Petty Officer 1st Class Maddelin Angebrand
Department of Defense Agency Financial Report for FY 2015

Financial Information

41

PRINCIPAL FINANCIAL STATEMENTS AND NOTES

LIMITATIONS OF THE FINANCIAL STATEMENTS

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

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

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

Office of Management and Budget (OMB) Circular No. A-136 and, to the extent possible, 

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

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

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

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

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

table below. 

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

include both the proprietary (Federal accounting standards) and budgetary resources of the 

Department. The Department is large and complex with an asset base of $2.3 trillion, and 

approximately 3 million military and civilian employees on installations in every state and 

around the world.

Four Principal Financial Statements

Statement What Information It Provides

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

(September 30, 2015). The assets are the amount of future economic benefits owned or 

managed by the Department. The liabilities are amounts owed by the Department. The 

net position is the difference between the assets and liabilities.

Statement of Net 

Cost

Shows separately the components of the net cost of the Department’s operations for the 

period. Net cost is equal to the gross cost incurred by the Department less any exchange 

revenue earned from its activities.

Statement of 

Changes in Net 

Position

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

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

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

financial position represents the difference between assets and liabilities as shown on the 

consolidated balance sheet.

Statement of 

Budgetary Resources

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

status at the end of the period. It is the only financial statement exclusively derived from 

the Department’s budgetary general ledger in accordance with budgetary accounting 

rules. The Statement of Budgetary Resources is the only principal financial statement 

prepared on a combined versus consolidated basis. As such, all intra-entity transactions 

are included in the balances reported in the statement. 
Department of Defense Agency Financial Report for FY 2015

Financial Information

42

Department of Defense Consolidated Balance Sheet

Agency Wide Dollars in Millions

As of September 30, 2015 and 2014

2015

Consolidated

Restated 2014

Consolidated 

ASSETS (Note 2)

Intragovernmental:

Fund Balance with Treasury (Note 3) $ 467,374.4 $ 480,352.3

Investments (Note 4) 844,664.9 783,736.3

Accounts Receivable (Note 5) 1,467.5 1,466.5

Other Assets (Note 6) 1,064.2 1,440.6

Total Intragovernmental Assets $ 1,314,571.0 $ 1,266,995.7

Cash and Other Monetary Assets (Note 7) 1,142.2 1,286.5

Accounts Receivable, Net (Note 5) 6,190.9 6,519.9

Loans Receivable (Note 8) 1,526.4 1,452.2

Inventory and Related Property, Net (Note 9) 261,717.1 261,496.8

General Property, Plant and Equipment, Net (Note 10) 629,997.1 618,848.2

Investments (Note 4) 3,371.9 3,371.9

Other Assets (Note 6) 73,620.9 74,716.5

TOTAL ASSETS $ 2,292,137.5 $ 2,234,687.7

Stewardship Property, Plant & Equipment (Note 10)

LIABILITIES (Note 11)

Intragovernmental:

Accounts Payable (Note 12) $ 1,432.7 $ 1,911.2

Debt (Note 13) 1,508.6 1,392.3

Other Liabilities (Note 15) 7,699.5 8,746.8

Total Intragovernmental Liabilities $ 10,640.8 $ 12,050.3

Accounts Payable (Note 12) 18,907.8 18,023.9

Military Retirement and Other Federal Employment Benefits 

(Note 17) 2,302,018.4 2,334,015.6

Environmental and Disposal Liabilities (Note 14) 60,030.1 58,581.4

Loan Guarantee Liability (Note 8) 66.5 56.8

Other Liabilities (Note 15) 34,927.1 35,945.4

TOTAL LIABILITIES $ 2,426,590.7 $ 2,458,673.4

Commitments & Contingencies (Note 16)

NET POSITION

Unexpended Appropriations – Other Funds $ 474,792.9 $ 501,692.9

Cumulative Results of Operations – Funds From Dedicated 

Collections (Note 23) 14,674.7 13,899.9

Cumulative Results of Operations – Other Funds (623,920.8) (739,578.5)

TOTAL NET POSITION $ (134,453.2) $ (223,985.7)

TOTAL LIABILITIES AND NET POSITION $ 2,292,137.5 $ 2,234,687.7

The accompanying notes are an integral part of these financial statements.
Department of Defense Agency Financial Report for FY 2015

Financial Information

43

Department of Defense Consolidated Statement of Net Cost

Agency Wide Dollars in Millions

For the Years Ended September 30, 2015 and 2014

2015

Consolidated

2014

Consolidated 

Program Costs

Gross Costs $ 656,541.2 $ 727,082.4

Military Retirement Benefits 66,863.5 101,877.6

Civil Works 9,186.5 8,842.2

Military Personnel 139,311.4 143,294.9

Operations, Readiness & Support 242,952.0 272,780.6

Procurement 107,776.6 98,488.2

Research, Development, Test & Evaluation 70,461.4 68,741.5

Family Housing & Military Construction 19,989.8 33,057.4

(Less: Earned Revenue) (68,509.8) (93,915.1)

Net Cost before Losses/(Gains) from Actuarial Assumption 

Changes for Military Retirement Benefits $ 588,031.4 $ 633,167.3

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits (27,449.5) 6,875.8

Net Cost of Operations (Note 18) $ 560,581.9 $ 640,043.1

The accompanying notes are an integral part of these financial statements.
Department of Defense Agency Financial Report for FY 2015

Financial Information

44

Department of Defense Consolidated Statement of Changes in Net Position 

Agency Wide Dollars in Millions

For the Years Ended September 30, 2015 and 2014

2015

Consolidated

Restated 2014

Consolidated

Cumulative Results Of Operations

Beginning Balances (Includes Funds from Dedicated Collections –

See Note 23) $ (725,468.3) $ (731,997.7)

Prior Period Adjustments:

Corrections of errors (+/-) (210.3) (227.1)

Beginning balances, as adjusted (Includes Funds from Dedicated 

Collections – See Note 23) (725,678.6) (732,224.8)

Budgetary Financing Sources:

Other adjustments (rescissions, etc.) (0.1) (7.6)

Appropriations used 661,169.5 657,113.2

Nonexchange revenue 1,427.9 2,886.4

Donations and forfeitures of cash and cash equivalents 238.0 414.1

Transfers in/out without reimbursement 1,259.8 (220.6)

Other (2,110.5) (145.8)

Other Financing Sources

Donations and forfeitures of property 12.4 10.6

Transfers in/out without reimbursement 84.2 56.6

Imputed financing 4,899.3 5,569.8

Other 10,033.9 (19,087.4)

Total Financing Sources $ 677,014.4 $ 646,589.3

Net Cost of Operations (+/-) (560,581.9) (640,043.1)

Net Change $ 116,432.5 $ 6,546.2

Cumulative Results of Operations (Includes Funds from Dedicated 

Collections – See Note 23) $ (609,246.1) $ (725,678.6)

Unexpended Appropriations

Beginning Balances (Includes Funds from Dedicated Collections –

See Note 23) $ 501,765.6 $ 499,735.3

Prior Period Adjustments:

Corrections of errors (72.7) (72.7)

Beginning Balances, as adjusted 501,692.9 499,662.6

Budgetary Financing Sources:

Appropriations received 654,288.5 675,748.6

Appropriations transferred in/out (164.7) (310.4)

Other adjustments (19,854.3) (16,294.7)

Appropriations used (661,169.5) (657,113.2)

Total Budgetary Financing Sources (Includes Funds from 

Dedicated Collections – See Note 23) $ (26,900.0) $ 2,030.3

Unexpended Appropriations (Includes Funds from Dedicated 

Collections – See Note 23) $ 474,792.9 $ 501,692.9

Net Position $ (134,453.2) $ (223,985.7)

The accompanying notes are an integral part of these financial statements.
Department of Defense Agency Financial Report for FY 2015

Financial Information

45

Department of Defense Combined 

Statement of Budgetary Resources 

Agency Wide

For the Years Ended September 30, 2015

and 2014

Page 1 of 2

Dollars in Millions

Budgetary 

Financing Accounts

Non-Budgetary 

Financing Accounts

2015

Combined

2014

Combined

2015

Combined

2014

Combined

Budgetary Resources

Unobligated balance, brought forward, October 1 $ 150,715.4 $ 143,813.4 $ 47.1 $ 46.8

Recoveries of prior year unpaid obligations 53,417.1 49,442.5 0.0 0.0

Other changes in unobligated balance (28,155.9) (17,411.2) 0.0 0.0

Unobligated balance from prior year budget 

authority, net 175,976.6 175,844.7 47.1 46.8

Appropriations (discretionary and mandatory) 720,483.1 737,644.3 0.0 0.0

Borrowing authority (discretionary and mandatory) 0.0 0.0 81.4 368.0

Contract authority (discretionary and mandatory) 68,357.3 70,599.4 0.0 0.0

Spending authority from offsetting collections 

(discretionary and mandatory) 102,414.9 100,315.6 73.6 120.4

Total Budgetary Resources $ 1,067,231.9 $ 1,084,404.0 $ 202.1 $ 535.2

Status of Budgetary Resources

Obligations incurred $ 917,797.6 $ 933,688.6 $ 135.5 $ 488.1

Unobligated balance, end of year:

Apportioned 105,090.8 113,158.7 0.0 0.0

Exempt from Apportionment 4,412.1 2,603.4 0.0 0.0

Unapportioned 39,931.4 34,953.3 66.6 47.1

Total unobligated balance, end of year $ 149,434.3 $ 150,715.4 $ 66.6 $ 47.1

Total Budgetary Resources $ 1,067,231.9 $ 1,084,404.0 $ 202.1 $ 535.2

Change in Obligated Balance

 Unpaid obligations:

Unpaid obligations, brought forward, October 1 $ 430,506.3 $ 437,365.2 $ 484.9 $ 300.7

Obligations incurred 917,797.6 933,688.6 135.5 488.1

Outlays (Gross) (887,768.7) (891,105.0) (209.9) (303.9)

Recoveries of prior year unpaid obligations (53,417.1) (49,442.5) 0.0 0.0

Unpaid obligations, end of year 407,118.1 430,506.3 410.5 484.9

 Uncollected payments:

Uncollected payments, Federal sources, brought 

forward, October 1 (77,322.6) (77,203.9) (75.2) (52.4)

Change in uncollected payments, Federal sources 4,500.4 (118.7) 2.8 (22.8)

Uncollected payments, Federal sources, end of 

year (72,822.2) (77,322.6) (72.4) (75.2)

 Memorandum Entries:

Obligated balance, start of year $ 353,183.7 $ 360,161.3 $ 409.7 $ 248.3

Obligated balance, end of year $ 334,295.9 $ 353,183.7 $ 338.1 $ 409.7

The accompanying notes are an integral part of these financial statements.
Department of Defense Agency Financial Report for FY 2015

Financial Information

46

Department of Defense Combined 

Statement of Budgetary Resources 

Agency Wide

For the Years Ended September 30, 2015

and 2014

Page 2 of 2

Dollars in Millions

Budgetary 

Financing Accounts

Non-Budgetary 

Financing Accounts

2015

Combined

2014

Combined

2015

Combined

2014

Combined

Budgetary Authority and Outlays, Net:

Budget authority, gross (discretionary and 

mandatory) $ 891,255.3 $ 908,559.3 $ 155.0 $ 488.4

Actual offsetting collections (discretionary and 

mandatory) (168,617.1) (161,764.4) (101.7) (97.5)

Change in uncollected customer payments from 

Federal sources (discretionary and mandatory) 4,500.4 (118.7) 2.8 (22.8)

Budget Authority, net (discretionary and 

mandatory) $ 727,138.6 $ 746,676.2 $ 56.1 $ 368.1

Outlays, gross (discretionary and mandatory) $ 887,768.7 $ 891,105.0 $ 209.9 $ 303.9

Actual offsetting collections (discretionary and 

mandatory) (168,617.1) (161,764.4) (101.7) (97.5)

Outlays, net (discretionary and mandatory) 719,151.6 729,340.6 108.2 206.4

Distributed offsetting receipts (86,772.6) (87,713.9) 0.0 0.0

Agency Outlays, net (discretionary and 

mandatory) $ 632,379.0 $ 641,626.7 $ 108.2 $ 206.4

The accompanying notes are an integral part of these financial statements.
Department of Defense Agency Financial Report for FY 2015

Financial Information

47

LIST OF NOTES TO THE FINANCIAL STATEMENTS

Note 1 Significant Accounting Policies .................................................................... 48

Note Disclosures Related to the Balance Sheets

Note 2 Non-Entity Assets ..................................................................................... 60

Note 3 Fund Balance with Treasury ....................................................................... 61

Note 4 Investments and Related Interest ............................................................... 62

Note 5 Accounts Receivable.................................................................................. 64

Note 6 Other Assets ............................................................................................ 64

Note 7 Cash and Other Monetary Assets ................................................................ 65

Note 8 Direct Loans and Loan Guarantees .............................................................. 65

Note 9 Inventory and Related Property .................................................................. 70

Note 10 General Property, Plant and Equipment, Net................................................. 74

Note 11 Liabilities Not Covered by Budgetary Resources ............................................ 77

Note 12 Accounts Payable...................................................................................... 78

Note 13 Debt ....................................................................................................... 79

Note 14 Environmental and Disposal Liabilities ......................................................... 80

Note 15 Other Liabilities ........................................................................................ 83

Note 16 Commitments and Contingencies ................................................................ 86

Note 17 Military Retirement and Other Federal Employment Benefits........................... 87

Note 18 General Disclosures Related to the Statement of Net Cost..................... 93

Note 19 Disclosures Related to the Statement of Changes in Net Position .......... 96

Note 20 Disclosures Related to the Statement of Budgetary Resources .............. 97

Note Disclosures Not Pertaining to a Specific Statement

Note 21 Reconciliation of Net Cost of Operations to Budget...................................... 101

Note 22 Incidental Custodial Collections ................................................................ 103

Note 23 Funds from Dedicated Collections ............................................................. 104

Note 24 Fiduciary Activities .................................................................................. 108

Note 25 Other Disclosures.................................................................................... 108

Note 26 Restatements ......................................................................................... 109

Required Supplementary Stewardship Information............................................. 110

Required Supplementary Information ................................................................. 112
Department of Defense Agency Financial Report for FY 2015

Financial Information

48

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES

1.A. Basis of Presentation

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

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

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

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

records of the Department in accordance with, and to the extent possible, U.S. generally 

accepted accounting principles (USGAAP) promulgated by the Federal Accounting Standards 

Advisory Board; the Office of Management and Budget (OMB) Circular No. A-136, “Financial

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

accompanying financial statements account for all resources for which the Department is 

responsible unless otherwise noted. Information relative to classified assets, programs, and 

operations is excluded from the statements or otherwise aggregated and reported in such a 

manner that it is not discernible.

The Department is unable to fully implement all elements of USGAAP and

OMB Circular No. A-136, due to limitations of financial and nonfinancial management 

processes and systems supporting the financial statements. The Department derives 

reported values and information for major asset and liability categories largely from 

nonfinancial systems, such as inventory and logistics systems. These systems were 

designed to support reporting requirements for maintaining accountability over assets and 

reporting the status of federal appropriations rather than preparing financial statements in 

accordance with USGAAP. The Department continues to implement process and system 

improvements addressing these limitations.

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

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

(5) Operating Materials and Supplies; (6) General Property, Plant, and Equipment; 

(7) Government Property in Possession of Contractors; (8) Accounts Payable; 

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

Eliminations; (12) Accounting Entries; and (13) Reconciliation of Net Cost of Operations to 

Budget.

1.B. Mission of the Reporting Entity 

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

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

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

organizations have evolved into a global presence with a worldwide infrastructure dedicated 

to defending the United States by deterring and defeating aggression and coercion in critical 

regions. 

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

Departments consist of the Army, the Navy (of which the Marine Corps is a component), 

and the Air Force. The Defense Agencies provide support services commonly used 

throughout the Department.
Department of Defense Agency Financial Report for FY 2015

Financial Information

49

1.C. Appropriations and Funds 

The Department receives appropriations and funds as general, working capital (revolving), 

trust, and special funds. The Department uses these appropriations and funds to execute 

its missions and subsequently report on resource usage.

General funds are used for financial transactions funded by congressional appropriations, 

including personnel, operation and maintenance, research and development, procurement, 

and military construction. 

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 flowing through the fund. Each WCF obtains the goods 

and services sold to customers on a reimbursable basis and maintains the corpus. 

Reimbursable receipts fund future operations and generally are available in their entirety for 

use without further congressional action. At various times, Congress provides additional 

appropriations to supplement the WCF as an infusion of cash when revenues are inadequate 

to cover costs within the corpus.

Trust funds contain receipts and expenditures of funds held in trust by the government for 

use in carrying out specific purposes or programs in accordance with the terms of the donor, 

trust agreement, or statute. Special fund accounts are used to record government receipts 

reserved for a specific purpose. Certain trust and special funds may be designated funds 

from dedicated collections. Funds from dedicated collections are financed by specifically 

identified revenues, required by statute to be used for designated activities, benefits or 

purposes, and remain available over time. The Department is required to separately 

account for and report on the receipt, use and retention of revenues and other financing 

sources for funds from dedicated collections.

Deposit funds are used to record amounts held temporarily until paid to the appropriate 

government or public entity. They are not Department funds, and as such, are not available 

for the Department’s operations. The Department is acting as an agent or custodian for 

funds awaiting distribution.

The Department is a party to allocation transfers with other federal agencies as a 

transferring (parent) entity or receiving (child) entity. An allocation transfer is an entity’s 

legal delegation of authority to obligate budget authority and outlay funds on its behalf. 

Generally, all financial activity related to allocation transfers (e.g., budget authority, 

obligations, outlays) is reported in the financial statements of the parent entity. Exceptions 

to this general rule apply to specific funds for which OMB has directed that all activity be 

reported in the financial statements of the child entity. These exceptions include U.S. 

Treasury-Managed Trust Funds, Executive Office of the President (EOP), and all other funds 

specifically designated by OMB. 

The Department receives allocation transfers from the following agencies: Departments of 

Agriculture, Interior, Energy, and Transportation; the Appalachian Regional Commission; 

and the Federal Highway Administration.

Additionally, the Department also receives allocation transfers from certain funds meeting 

the OMB exception and all related activity is included in the Department’s financial 
Department of Defense Agency Financial Report for FY 2015

Financial Information

50

statements. These funds include South Dakota Terrestrial Wildlife Habitat Restoration, 

Inland Waterways and Harbor Maintenance. The Department receives allocation transfers 

for the Security Assistance programs meeting the OMB exceptions for EOP funds. These 

funds are reported separately from the DoD financial statements based on an agreement 

with OMB.

As a parent, the Department reports in these financial statements funds allocated to the 

Departments of Transportation and Agriculture.

1.D. Basis of Accounting 

The Department is unable to meet all full accrual accounting requirements. This is primarily 

because many of the Department’s financial and nonfinancial systems and processes were 

designed prior to the legislative mandate to produce financial statements in accordance with 

USGAAP. These systems were not designed to collect and record financial information on 

the full accrual accounting basis but were designed to record information on a budgetary 

basis.

The Department’s financial statements and supporting trial balances are compiled from the 

underlying financial data and trial balances of the Military Services and Defense Agencies 

and their sub-entities. The underlying data is largely derived from budgetary transactions 

(obligations, disbursements, and collections), from nonfinancial feeder systems, and 

accruals made for major items such as payroll expenses, accounts payable, and 

environmental liabilities. Some of the sub-entity level trial balances may reflect known 

abnormal balances resulting largely from business and system processes. At the 

consolidated level these abnormal balances may not be evident. Disclosures of abnormal 

balances are made in the applicable footnotes, but only to the extent that the abnormal 

balances are evident at the consolidated level. 

The Department is continuing the actions required to bring financial and nonfinancial feeder 

systems and processes into compliance with 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, there 

will be instances when the Department’s financial data is derived from budgetary 

transactions or data from nonfinancial feeder systems.

1.E. Revenues and Other Financing Sources 

The Department receives congressional appropriations as financing sources for general 

funds, and on occasion, will also receive congressional appropriations for WCFs. These 

funds either expire annually, some on a multi-year basis, or do not expire. When 

authorized by legislation, these appropriations are supplemented by revenues generated by 

sales of goods or services. The Department recognizes revenue as a result of costs incurred 

for goods and services provided to other federal agencies and the public. Full-cost pricing is 

the Department’s standard policy for 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. 
Department of Defense Agency Financial Report for FY 2015

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51

Depot Maintenance and Ordnance WCF activities recognize revenue according to the 

percentage of completion method. Supply Management WCF activities recognize revenue 

from the sale of inventory items.

The Department does not include nonmonetary support provided by U.S. allies for common 

defense and mutual security in amounts reported in the Statement of Net Cost and Note 21, 

Reconciliation of Net Cost of Operations to Budget. The U.S. has cost sharing agreements 

with countries having a mutual or reciprocal defense agreement, where U.S. troops are 

stationed, or where the U.S. Fleet is in a port.

In accordance with Statement of Federal Financial Accounting Standards (SFFAS) No. 7,

“Accounting for Revenue and Other Financing Sources and Concepts for Reconciling 

Budgetary and Financial Accounting,” the Department recognizes nonexchange revenue 

when there is a specifically identifiable, legally enforceable claim to the cash or other assets 

of another party that will not directly receive value in return.

1.F. Recognition of Expenses

For financial reporting purposes, the Department’s policy requires the recognition of 

operating expenses in the period incurred. Current financial and nonfinancial feeder 

systems were not designed to collect and record financial information on the full accrual 

accounting basis. Estimates are made for major items such as payroll expenses, accounts 

payable, environmental liabilities, and unbilled revenue. In the case of Operating Materiel 

and Supplies (OM&S), operating expenses are generally recognized when the items are 

purchased. 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 an entity to eliminate intra-entity activity and balances from 

consolidated financial statements to prevent overstatement for business with itself. 

However, the Department cannot accurately identify intragovernmental transactions by 

customer because the Department’s systems do not track buyer and seller data at the 

transaction level. Generally, seller entities within the Department provide summary 

seller-side balances for revenue, accounts receivable, and unearned revenue to the 

buyer-side internal accounting offices. In most cases, the buyer side records are adjusted 

to agree with the Department seller-side balances and are then eliminated. The 

Department is implementing replacement systems and a standard financial information 

structure incorporating the necessary elements to enable the Department to correctly 

report, reconcile, and eliminate intragovernmental balances.

The Treasury Financial Manual Part 2 – Chapter 4700, Agency Reporting Requirements for 

the Financial Report of the United States Government, provides guidance for reporting and 

reconciling intragovernmental balances. While the Department is unable to fully reconcile 

intragovernmental transactions with all federal agencies, the Department is able to reconcile 

balances pertaining to investments in federal securities, borrowings from the U.S. Treasury 
Department of Defense Agency Financial Report for FY 2015

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52

and the Federal Financing Bank, Federal Employees’ Compensation Act transactions with the 

Department of Labor, and benefit program transactions with the Office of Personnel 

Management. 

Imputed financing represents the cost paid on behalf of the Department by another Federal 

entity. The Department recognizes imputed costs for (1) employee pension, 

post-retirement health, and life insurance benefits; (2) post-employment benefits for 

terminated and inactive employees to include unemployment and workers compensation 

under the Federal Employees’ Compensation Act; and (3) losses in litigation proceedings.

The Department’s proportionate share of public debt and related expenses of the 

Federal Government is not included. The Federal Government does not apportion debt and 

related costs to federal agencies. The Department’s financial statements do not report 

public debt, interest, or source of public financing, whether from issuance of debt or tax 

revenues. 

Generally, financing for the construction of the Department facilities is obtained through 

appropriations. To the extent this financing ultimately may have been obtained through the 

issuance of public debt, interest costs have not been capitalized since the Department of the

Treasury (Treasury) does not allocate such costs to the Department.

1.H. Transactions with Foreign Governments and International 

Organizations 

Each year, the Department sells defense articles and services to foreign governments and 

international organizations under the provisions of the Arms Export Control Act of 1976. 

Under the provisions of the Act, the Department has authority to sell defense articles and 

service to foreign countries and international organizations generally at no profit or loss to 

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

1.I. Funds with the U.S. Treasury 

The Department’s monetary resources are maintained in U.S. Treasury accounts. The 

disbursing offices of Defense Finance and Accounting Service (DFAS), the Military 

Departments, the U.S. Army Corps of Engineers (USACE), and the Department of State’s 

financial service centers process the majority of the Department’s cash collections, 

disbursements, and adjustments worldwide. Each disbursing station prepares monthly 

reports to the U.S. Treasury on checks issued, electronic fund transfers, interagency 

transfers, and deposits.

In addition, DFAS and the USACE Finance Center submit reports to Treasury by 

appropriation on interagency transfers, collections received, and disbursements issued. 

Treasury records these transactions to the applicable Fund Balance with Treasury (FBWT) 

account. On a monthly basis, the Department’s FBWT is reviewed and adjusted, as 

required, to agree with the Treasury accounts.

1.J. Cash and Other Monetary Assets

Cash is the total of cash resources under the control of the Department including coins, 

paper currency, negotiable instruments, and amounts held for deposit in banks and other 
Department of Defense Agency Financial Report for FY 2015

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53

financial institutions. Foreign currency consists of the total U.S. dollar equivalent of both 

purchased and nonpurchased foreign currencies held in foreign currency fund accounts. 

Foreign currency is valued using the U.S. Treasury prevailing rate of exchange.

The majority of cash and all foreign currency is classified as “nonentity” and is restricted. 

Amounts reported consist primarily of cash and foreign currency held by disbursing officers 

to carry out their paying, collecting, and foreign currency accommodation exchange 

missions.

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

a special account to handle the gains and losses from foreign currency transactions for five 

general fund appropriations: (1) operations and maintenance; (2) military personnel; 

(3) military construction; (4) family housing operation and maintenance; and (5) family 

housing construction. The gains and losses are calculated as the variance between the 

exchange rate current at the date of payment and a budget rate established at the 

beginning of each fiscal year. Foreign currency fluctuations related to other appropriations 

require adjustments to the original obligation amount at the time of payment. The 

Department does not separately identify foreign currency fluctuation transactions.

1.K. Accounts Receivable

Accounts receivable from other federal entities or the public include: accounts receivable, 

claims receivable, and refunds receivable. Allowances for uncollectible accounts due from 

the public are based upon an analysis of collection experience. The Department does not 

recognize an allowance for estimated uncollectible amounts from other federal agencies, as 

receivables from other federal agencies are considered to be inherently collectible. Claims 

for accounts receivable from other federal agencies are to be resolved between the agencies 

in accordance with the Intragovernmental Business Rules published in the Treasury 

Financial Manual.

1.L. Direct Loans and Loan Guarantees

The Department operates a direct loan and loan guarantee program authorized by the 

National Defense Authorization Act for FY 1996 (Public Law (PL) 104-106, Section 2801). 

The Act includes a series of authorities allowing the Department to work with the private 

sector to renovate military housing. The Department’s goals are to obtain private capital to 

leverage government dollars, make efficient use of limited resources, and use a variety of 

private sector approaches to build and renovate military housing faster and at a lower cost 

to the American taxpayers.

The Act also provides the Department with a variety of authorities to obtain private sector 

financing and expertise to improve military housing. The Department uses these authorities 

individually or in combination. They include guarantees (both loan and rental), 

conveyance/leasing of existing property and facilities, differential lease payments, 

investments (both limited partnerships and stock/bond ownership), and direct loans.

National Defense Authorization Act for FY 2005 (PL 108-375, Section 2805) provided 

permanent authorities to the Military Housing Privatization Initiative (MHPI).
Department of Defense Agency Financial Report for FY 2015

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54

The Department administers the Foreign Military Financing program on behalf of the EOP. 

This program is authorized by sections 23 and 24 of the Arms Export Control Act of 1976, as 

amended, and provides loans to help countries purchase U.S. produced weapons, defense 

equipment, services, or military training. The direct loans and loan guarantees related to 

Foreign Military Sales are not included in these financial statements, per Department’s 

agreement with OMB; this information is provided separately as other information.

1.M. Inventories and Related Property

The Department values approximately 97 percent of resale inventory using the moving 

average cost method. Additionally, the Department reports the remaining 3 percent of 

resale inventories at an approximation of historical cost using latest acquisition cost 

adjusted for holding gains and losses. The latest acquisition cost method is used because 

legacy inventory systems were designed for materiel management rather than accounting. 

Although these systems provide visibility and accountability over inventory items, they do 

not maintain historical cost data necessary to comply with SFFAS No. 3, “Accounting for 

Inventory and Related Property.” Additionally, these systems cannot produce financial 

transactions using the USSGL, as required by the Federal Financial Management 

Improvement Act of 1996 (PL 104-208). The Department is continuing to transition the 

balance of the inventories to the moving average cost method through the use of new 

inventory systems. Most transitioned balances, however, were not baselined to auditable 

historical cost and remain noncompliant with SFFAS No. 3.

The Department manages only military or government-specific materiel under normal 

conditions. Materiel is a unique term that relates to military force management, and 

includes items such as ships, tanks, self propelled weapons, aircraft, etc., and related 

spares, repair parts, and support equipment. Items commonly used in and available from 

the commercial sector are not managed in the Department’s materiel management 

activities. Operational cycles are irregular and the military risks associated with stock-out 

positions have no commercial parallel. The Department holds materiel based on military 

need and support for contingencies. The Department is currently developing a methodology 

to be used to account for “inventory held for sale” and “inventory held in reserve for future 

sale.”

Related property includes OM&S and stockpile materiel. The OM&S, including munitions not 

held for sale, are valued at standard purchase price. The Department uses both the 

consumption method and the purchase method of accounting for OM&S. Centrally managed 

and stored items, such as ammunition and engines, are generally recorded using the 

consumption method and are reported on the Balance Sheet as OM&S. When current 

systems cannot fully support the consumption method, the Department uses the purchase 

method. Under this method, materiel and supplies are expensed when purchased. During 

FY 2015 and FY 2014, the Department expensed significant amounts using the purchase 

method because the systems could not support the consumption method or management 

deemed that the item was in the hands of the end user. This is a material weakness for the 

Department and long term system corrections are in process. Once the proper systems are 

in place, these items will be accounted for under the consumption method of accounting.
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Many high-dollar items, such as aircraft engines, are categorized as OM&S rather than 

general equipment. The Department determined the recurring high dollar-value of OM&S in 

need of repair is material to the financial statements and requires a separate reporting 

category. 

The Military Services recognize excess, obsolete, and unserviceable inventory and OM&S at 

a net realizable value of zero, pending development of an effective means of valuing such 

materiel. Items transferred from the Military Services and awaiting sale, disposal, or reuse 

are valued at $451.9 million.

Inventory available and purchased for resale includes consumable spare and repair parts, 

and repairable items owned and managed by the Department. This inventory is retained to 

support military or national contingencies. Inventory held for repair is damaged inventory 

requiring repair to make it suitable for sale. Often, it is more economical to repair these 

items rather than to procure them. The Department often relies on weapon systems and 

machinery no longer in production. As a result, the Department supports a process 

encouraging the repair and rebuilding of certain items. This repair cycle is essential to 

maintaining a ready, mobile, and armed military force. Work in process balances include: 

(1) costs related to the production or servicing of items, including direct material, labor, and 

applied overhead; (2) the value of finished products or completed services yet to be placed 

in service; and (3) munitions in production and depot maintenance work with associated 

costs incurred in the delivery of maintenance services.

1.N. Investments in U.S. Treasury Securities

The Department reports investments in U.S. Treasury securities at cost, net of amortized 

premiums or discounts. Premiums or discounts are amortized over the term of the 

investments using the effective interest rate method or another method yielding similar 

results. The Department’s intent is to hold investments to maturity unless they are needed 

to finance claims or otherwise sustain operations. Consequently, a provision is not made for 

unrealized gains or losses on these securities.

The Department invests in nonmarketable market-based U.S. Treasury securities issued to 

federal agencies by Treasury’s Bureau of the Fiscal Service. These securities are not traded 

on any financial exchange but are priced consistently with publically traded U.S. Treasury 

securities.

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

include the Military Retirement Fund; Medicare-Eligible Retiree Health Care Fund; trust and 

special funds executed by other defense organizations; donations (gift funds); and 

Treasury-managed trust funds reported by USACE including the South Dakota Terrestrial 

Habitat Restoration, Inland Waterways, and Harbor Maintenance Trust Fund accounts.

Other investments represent joint ventures with private developers constructing or 

improving military housing on behalf of the Department under the authority of MHPI, 

authorized by PL 104-106, Section 2801. These investments do not require market value 

disclosure. The Department’s potential losses on these ventures are limited to the amounts 

invested.
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1.O. General Property, Plant and Equipment

In some instances, the Department uses the estimated historical cost for valuing 

equipment. To establish a baseline, the Department accumulated information relating to 

program funding and associated equipment, equipment useful life, program acquisitions, 

and disposals. The equipment baseline was updated using expenditure, acquisition, and 

disposal information.

The USACE Civil Works General Property, Plant, and Equipment (PP&E) is capitalized at 

acquisition cost plus capitalized improvements when an asset has a useful life of two or 

more years and the acquisition cost exceeds $25 thousand. The exception is buildings and 

structures related to hydropower projects, which are capitalized regardless of cost.

In addition, the Departments of the Air Force and Navy General Funds capitalize General 

PP&E acquisitions that are $1 million and greater. The remainder of the Department’s 

General PP&E capitalization threshold is $250 thousand. These capitalization thresholds 

apply to asset acquisitions and modifications/improvements placed into service after 

September 30, 2013. General PP&E assets acquired prior to October 1, 2013, were 

capitalized at prior thresholds ($100 thousand for equipment and $20 thousand for real 

property).

With the exception of USACE Civil Works and WCF, General PP&E assets are capitalized at 

historical acquisition cost when an asset has a useful life of two or more years and when the 

acquisition cost equals or exceeds the Department’s capitalization threshold. The 

Department capitalizes improvements to existing General PP&E assets if the improvements 

equal or exceed the capitalization threshold and extend the useful life or increase the size, 

efficiency, or capacity of the asset. The Department depreciates all General PP&E, other 

than land, on a straight-line basis.

The WCFs capitalize all PP&E used in the performance of their mission. These assets are 

capitalized as General PP&E, whether or not they meet the definition of any other PP&E 

category.

When it is in the best interest of the government, the Department provides government 

property to contractors to complete contract work. The Department either owns or leases 

such property, or it is purchased directly by the contractor for the government based on 

contract terms. When the value of contractor-procured General PP&E meets or exceeds the 

Department’s capitalization threshold, federal accounting standards require it be reported 

on the Department’s Balance Sheet.

The Department developed policy and a reporting process for contractors with government 

furnished equipment providing appropriate General PP&E information for financial statement 

reporting. The Department requires entities maintain, in their property systems, 

information on all property furnished to contractors. These actions are structured to 

capture and report the information necessary for compliance with federal accounting 

standards. The Department has not fully implemented this policy primarily due to system 

limitations.
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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 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 to 

contractors from long-term contracts, the Department may provide financing payments. 

Contract financing payments are defined in the Federal Acquisition Regulation, Part 32, as 

authorized disbursements to a contractor prior to acceptance of supplies or services by the 

Government. Contract financing payment clauses are incorporated in the contract terms 

and conditions and may include advance payments, performance-based payments, 

commercial advances and interim payments, progress payments based on cost, and interim 

payments under certain cost-reimbursement contracts. It is the Department’s policy to 

record certain contract financing payments as other assets. The Department has not fully 

implemented this policy primarily due to system limitations.
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Contract financing payments do not include invoice payments, payments for partial 

deliveries, lease and rental payments, or progress payments based on a percentage or 

stage of completion. The Defense Federal Acquisition Regulation Supplement authorizes 

progress payments based on a percentage or stage of completion only for construction of 

real property, shipbuilding and ship conversion, alteration, or repair. Progress payments 

based on percentage or stage of completion are reported as Construction in Progress.

1.S. Contingencies and Other Liabilities

The SFFAS No. 5, “Accounting for Liabilities of the Federal Government,” as amended by

SFFAS No. 12, “Recognition of Contingent Liabilities Arising from Litigation,” defines a 

contingency as an existing condition, situation, or set of circumstances involving an 

uncertainty as to possible gain or loss. The uncertainty will be resolved when one or more 

future events occur or fail to occur. The Department recognizes contingent liabilities when 

past events or exchange transactions occur, a future loss is probable, and the loss amount 

can be reasonably estimated.

Financial statement reporting is limited to disclosure when conditions for liability recognition 

do not exist, but there is at least a reasonable possibility of incurring a loss or additional 

losses. The Department’s risk of loss and resultant contingent liabilities arise from pending 

or threatened litigation or claims and assessments due to events such as aircraft, ship and 

vehicle accidents; medical malpractice; property or environmental damages; and contract 

disputes.

Other liabilities also arise as a result of anticipated disposal costs for the Department’s 

assets. Consistent with SFFAS 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, consistent with SFFAS No. 5, 

nonenvironmental disposal liabilities are recognized when management decides to dispose 

of an asset. In addition, the Department recognizes nonenvironmental disposal liabilities for 

nuclear-powered military equipment when placed into service. These amounts are not 

easily distinguishable and are developed in conjunction with environmental disposal costs.

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 
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cumulative results of operations also include donations and transfers in and out of assets 

that were not reimbursed.

1.V. Treaties for Use of Foreign Bases 

The Department has the use of land, buildings, and other overseas facilities obtained 

through various international treaties and agreements negotiated by the Department of 

State. The Department purchases capital assets overseas with appropriated funds; 

however, the host country retains title to the land and capital improvements. Treaty terms 

generally allow the Department continued use of these properties until the treaties expire. 

In the event treaties or other agreements are terminated, use of the foreign bases is 

prohibited and losses are recorded for the value of any nonretrievable capital assets. The 

settlement due to the United States or host nation is negotiated and takes into account the 

value of capital investments and may be offset by the environmental cleanup cost.

1.W. Undistributed Disbursements and Collections 

Undistributed disbursements and collections represent the difference between 

disbursements and collections matched at the transaction level to specific obligations, 

payables, or receivables in the source systems and those reported by Treasury. 

Supported disbursements and collections have corroborating documentation for the 

summary level adjustments made to accounts payable and receivable. Unsupported 

disbursements and collections do not have supporting documentation for the transaction 

and most likely would not meet audit scrutiny. However, both supported and unsupported 

adjustments may have been made to the Department’s accounts payable and receivable 

trial balances prior to validating underlying transactions. 

Due to noted material weaknesses in current accounting and financial feeder systems, the 

Department generally cannot determine whether undistributed disbursements and 

collections should be applied to federal or nonfederal accounts payable/receivable at the 

time accounting reports are prepared. Accordingly, the Department’s policy is to allocate 

supported undistributed disbursements and collections between federal and nonfederal 

categories based on the percentage of distributed federal and nonfederal accounts payable 

and accounts receivable. Unsupported undistributed disbursements and collections are also 

applied to reduce accounts payable and receivable accordingly.

1.X. Fiduciary Activities

Fiduciary cash and other assets are not assets of the Department and are not recognized on 

the Balance Sheet. Fiduciary activities are reported on the financial statement note 

schedules.

1.Y. Military Retirement and Other Federal Employment Benefits

The Department applies SFFAS No. 33, Pensions, “Other Retirement Benefits, and Other 

Postemployment Benefits: Reporting the Gains and Losses from Changes in Assumptions 

and Selecting Discount Rates and Valuation Dates,” in selecting the discount rate and 

valuation date used in estimating actuarial liabilities. In addition, gains and losses from 

changes in long-term assumptions used to estimate the actuarial liability are presented 
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separately on the Statement of Net Cost. Refer to Note 17, Military Retirement and Other 

Federal Employment Benefits and Note 18, General Disclosures Related to the Statement of 

Net Cost, for additional information.

NOTE 2. NONENTITY ASSETS

Nonentity Assets Dollars in Millions

As of September 30

2015 Restated 

2014

Intragovernmental Assets

Fund Balance with Treasury $ 1,461.1 $ 1,130.4

Total Intragovernmental Assets $ 1,461.1 $ 1,130.4

Non-Federal Assets

Cash and Other Monetary Assets $ 1,017.1 $ 1,197.7

Accounts Receivable 2,741.2 2,958.2

Other Assets 3.0 171.5

Total Non-Federal Assets $ 3,761.3 $ 4,327.4

Total Nonentity Assets $ 5,222.4 $ 5,457.8

Total Entity Assets $ 2,286,915.1 $ 2,229,229.9

Total Assets $ 2,292,137.5 $ 2,234,687.7

Nonentity assets are not available for use in the Department’s normal operations. The 

Department has stewardship accountability and reporting responsibility for nonentity assets.

Abnormal Balance

Total Entity Assets includes a $2.1 million abnormal balance in USSGL 159100, Other 

Related Property, due to a reporting error. The Department is researching the cause and 

anticipates correcting the error in FY 2016.

Restatements

The Department corrected a $149.0 million overstatement in Total Entity Assets. See 

Note 26, Restatements, for further information.

Other Disclosures

Intragovernmental Fund Balance with Treasury (FBWT) consists primarily of deposit funds 

and receipt accounts. Deposit funds represent amounts held temporarily until paid to the 

appropriate party. Receipt accounts represent amounts collected on behalf of the U.S. 

Treasury General Fund.

Non-Federal Cash and Other Monetary Assets consist primarily of cash held by Disbursing 

Officers to carry out payment, collection, and foreign currency exchanges. 

Non-Federal Accounts Receivable consists of amounts associated with canceled year 

appropriations, and interest, fines and penalties due on debt. Generally, the Department 

cannot use the collections and must remit them to the U.S. Treasury.

Non-Federal Other Assets consists of advances made by select activities and research and 

development projects.
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NOTE 3. FUND BALANCE WITH TREASURY

Fund Balance with Treasury Dollars in Millions

As of September 30 2015 2014

Fund Balance

Appropriated Funds $ 449,220.6 $ 466,263.1

Revolving Funds 12,199.8 9,606.1

Trust Funds 3,255.5 2,262.3

Special Funds 1,135.8 902.6

Other Fund Types 1,562.7 1,318.2

Total Fund Balance $ 467,374.4 $ 480,352.3

Fund Balance Per Treasury Versus Agency

Fund Balance per Treasury $ 467,439.7 $ 480,346.1

Less: Fund Balance per Agency (467,374.4) (480,352.3)

Reconciling Amount $ 65.3 $ (6.2)

Other Fund Types primarily consist of deposit funds and receipt accounts. These funds 

represent receipts held temporarily for distribution to another fund or entity or held as an 

agent for others.

The Department shows a reconciling net difference of $65.3 million with the U.S. 

Department of the Treasury (Treasury) between the Department’s financial statement 

records and Treasury. This includes fiduciary activities of $80.9 million offset by allocation 

transfers of $15.6 million. The Department received allocation transfers as the “child.” As 

“parent,” the Department issued allocation transfers to other Federal Government agencies 

for execution on behalf of the Department. For additional information, refer to Note 1, 

Significant Accounting Policies, Section 1C. Additionally, Fiduciary Activities are not reported 

in FBWT in accordance with SFFAS No. 31, “Accounting for Fiduciary Activities.”

Status of Fund Balance with Treasury Dollars in Millions

As of September 30 2015 2014

Unobligated Balances

Available $ 109,497.3 $ 115,757.0

Unavailable 775,736.4 717,096.9

Total Unobligated Balance 885,233.7 832,853.9

Obligated Balance not yet Disbursed 407,528.8 430,993.0

Non-Budgetary FBWT 2,348.6 1,530.5

Non-FBWT Budgetary Accounts (827,736.7) (785,025.1)

Total Fund Balance $ 467,374.4 $ 480,352.3

Abnormal Balance

Unobligated Balance, Available includes abnormal balances of $58.5 million in 

USSGL 461000, Allotments - Realized Resources, and $2.3 million in USSGL 451000,

Apportionments. Both abnormal balances are due to a posting error during funds 

distribution and did not result in over execution of funds. The Department is researching 

both abnormal balances and anticipates correcting the error in FY 2016.
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Other Disclosures

The Status of FBWT reflects the budgetary resources to support FBWT and is a reconciliation 

between budgetary and proprietary accounts. It primarily consists of unobligated and 

obligated balances. The balances reflect the budgetary authority remaining for 

disbursements against current or future obligations.

Unobligated Balance is classified as available or unavailable and represents the cumulative 

amount of budgetary authority set aside to cover future obligations. The unavailable balance 

consists primarily of funds invested in U.S. Treasury securities and are temporarily 

precluded from obligation by law. Certain unobligated balances are restricted for future use 

and are not apportioned for current use. Unobligated balances for trust fund accounts are 

restricted for use by public laws establishing the funds.

Obligated Balance not yet Disbursed represents funds obligated for goods and services but 

not paid.

Non-Budgetary FBWT includes accounts without budgetary authority, such as deposit funds, 

unavailable receipt accounts, clearing accounts, and nonentity FBWT.

Non-FBWT Budgetary Accounts reduce the Status of FBWT and consist of investments in 

U.S. Treasury securities, unfilled customer orders without advance, contract and borrowing 

authority, and receivables.

NOTE 4. INVESTMENTS AND RELATED INTEREST

Investments and Related Interest Dollars in Millions

2015

As of September 30

Cost Amortization 

Method

Amortized 

(Premium)/ 

Discount

Investments, 

Net

Market Value 

Disclosure

Intragovernmental Securities

Nonmarketable, Market-Based

Military Retirement Fund $ 620,997.2 See Below $ (25,237.9) $ 595,759.3 $ 640,927.1

Medicare-Eligible Retiree 

Health Care Fund 242,153.1 See Below (10,916.4) 231,236.7 258,944.2

US Army Corps of Engineers 8,904.4 See Below (105.7) 8,798.7 8,843.0

Other Funds 2,114.0 See Below (141.2) 1,972.8 2,047.3

Total Nonmarketable, MarketBased $ 874,168.7 $ (36,401.2) $ 837,767.5 $ 910,761.6

Accrued Interest 6,897.4 0.0 6,897.4 6,897.4

Total Intragovernmental 

Securities $ 881,066.1 $ (36,401.2) $ 844,664.9 $ 917,659.0

Other Investments

Total Other Investments $ 3,371.9 See Below $ 0.0 $ 3,371.9 N/A

Amortization Method Used: Effective Interest
Department of Defense Agency Financial Report for FY 2015

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Investments and Related Interest Dollars in Millions

2014

As of September 30

Cost Amortization 

Method

Amortized 

(Premium)/ 

Discount

Investments, 

Net

Market 

Value 

Disclosure

Intragovernmental Securities

Nonmarketable, Market-Based

Military Retirement Fund $ 560,971.3 See Below $ (20,188.8) $ 540,782.5 $ 588,892.3

Medicare-Eligible Retiree Health 

Care Fund 235,537.5 See Below (10,190.3) 225,347.2 254,136.4

US Army Corps of Engineers 8,610.7 See Below (104.6) 8,506.1 8,564.7

Other Funds 2,915.0 See Below (130.8) 2,784.2 2,873.8

Total Nonmarketable, MarketBased $ 808,034.5 $ (30,614.5) $ 777,420.0 $ 854,467.2

Accrued Interest 6,316.3 0.0 6,316.3 6,316.3

Total Intragovernmental Securities $ 814,350.8 $ (30,614.5) $ 783,736.3 $ 860,783.5

Other Investments

Total Other Investments $ 3,371.9 See Below $ 0.0 $ 3,371.9 N/A

Amortization Method Used: Effective Interest

The Department invests primarily in non-marketable, market-based Treasury securities. The 

value of these securities fluctuates in tandem with the selling price of the equivalent 

marketable security. Securities are purchased with the intent to hold until maturity; thus, 

balances are not adjusted to market value.

The U.S. Treasury securities are issued to authorized funds and are an asset to the 

Department and a liability to the U.S. Treasury. The Federal Government does not set aside 

assets to pay future benefits or other expenditures associated with these funds. Cash 

generated is deposited in the U.S. Treasury and used for general Government purposes. 

Since the Department and the U.S. Treasury are both part of the Federal Government, 

these assets and liabilities offset each other from the standpoint of the Federal Government 

as a whole. For this reason, they do not represent an asset or a liability in the 

U.S. Governmentwide financial statements.

The U.S. Treasury securities provide the Department with authority to access funds to make 

future benefit payments or other expenditures. When the Department requires redemption 

of securities to make expenditures, the Federal Government will meet the requirement by 

using accumulated cash balances, raising taxes or other receipts, borrowing from the public 

or repaying less debt, or curtailing other expenditures. The Federal Government uses the 

same method to finance all other expenditures.

Other Funds primarily consists of $1.5 billion in investments of the DoD Education Benefits 

Trust Fund, $273.8 million in investments of the Support for U.S. Relocation to Guam 

Activities Trust Fund, and $188.0 million in investments of the Voluntary Separation 

Incentive Trust Fund.

Other Investments consists of Military Housing Privatization Initiative limited partnerships. 

The Department invests in nongovernmental entities involved in the acquisition or 

construction of family housing and supporting facilities at Army, Air Force, Navy, and Marine 

Corps installations. The Department provides cash, land, or facilities as equity, but has no 
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management role. A limited partnership arrangement operates purely as a private business 

and does not require Market Value Disclosure. 

NOTE 5. ACCOUNTS RECEIVABLE

Accounts Receivable Dollars in Millions

2015

As of September 30

Gross Amount Due

Allowance for 

Estimated 

Uncollectibles

Accounts 

Receivable, Net

Intragovernmental Receivables $ 1,467.5 N/A $ 1,467.5

Non-Federal Receivables 

(From the Public) 6,667.3 (476.4) 6,190.9

Total Accounts Receivable $ 8,134.8 $ (476.4) $ 7,658.4

Accounts Receivable Dollars in Millions

2014

As of September 30

Gross Amount Due

Allowance for 

Estimated 

Uncollectibles

Accounts 

Receivable, Net

Intragovernmental Receivables $ 1,466.5 N/A $ 1,466.5

Non-Federal Receivables 

(From the Public) 7,099.2 (579.3) 6,519.9

Total Accounts Receivable $ 8,565.7 $ (579.3) $ 7,986.4

Accounts receivable represent the Department’s claim for payment from other entities. The 

Department only recognizes an allowance for uncollectible amounts from the public. 

Allowances for uncollectible accounts due from the public are based on an analysis of 

collection experience. Claims with other Federal agencies are resolved in accordance with 

the Intragovernmental Business Rules.

NOTE 6. OTHER ASSETS

Other Assets Dollars in Millions

As of September 30 2015 2014

Intragovernmental Other Assets

Advances and Prepayments $ 905.5 $ 1,290.9

Other Assets 158.7 149.7

Total Intragovernmental Other Assets $ 1,064.2 $ 1,440.6

Non-Federal Other Assets

Outstanding Contract Financing Payments $ 68,913.8 $ 70,104.9

Advances and Prepayments 4,693.3 4,431.5

Other Assets (With the Public) 13.8 180.1

Total Non-Federal Other Assets $ 73,620.9 $ 74,716.5

Total Other Assets $ 74,685.1 $ 76,157.1

Intragovernmental Other Assets are largely related to the Department’s right to 

approximately 6.4 million barrels of crude oil, net book value of $124.9 million, held by the 
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Department of Energy. Also, included are anticipated credits valued at $31.8 million from 

General Service Administration for returned inventory. 

The Other Assets (With the Public) balance includes advances with select activities, 

advances for research and development projects, and unassigned labor costs. 

Contract terms and conditions for certain types of contract financing payments convey

rights to the Department, protecting the contract work from state or local taxation, liens or 

attachment by contractors’ creditors, transfer of property, or disposition in bankruptcy. 

However, these rights should not be misconstrued to mean that ownership of contractors’ 

work has transferred to the Department. The Department does not have the right to take 

the work, except as provided for in contract clauses related to termination or acceptance. 

The Department is not obligated to make payment to contractors until delivery and 

acceptance.

Outstanding Contract Financing Payments includes $64.8 billion in contract financing 

payments and an additional $4.1 billion in estimated future payments to contractors upon 

delivery and government acceptance. Refer to Note 15, Other Liabilities, for further 

information.

NOTE 7. CASH AND OTHER MONETARY ASSETS

Cash and Other Monetary Assets Dollars in Millions

As of September 30 2015 2014

Cash $ 392.0 $ 328.3

Foreign Currency 750.2 958.2

Total Cash, Foreign Currency, and Other Monetary Assets $ 1,142.2 $ 1,286.5

The majority of Cash and Foreign Currency represent nonentity assets and are restricted 

and unavailable to fund the Department's mission. Cash also includes unrestricted entity 

assets of $125.1 million comprised of undeposited collections, imprest funds and other cash.

NOTE 8. DIRECT LOAN AND LOAN GUARANTEES

Direct Loan and Loan Guarantee Programs 

The Department operates loan guarantee programs for the Military Housing Privatization 

Initiative (MHPI). 

The Federal Credit Reform Act of 1990 governs all new and amended direct loan obligations 

and loan guarantee commitments made after FY 1991. 

Direct loans are reported at the net present value (NPV) of the following projected cash 

flows:

• Loan disbursements;

• Repayments of principal; and

• Payments of interest and other payments over the life of the loan after adjusting for 

estimated defaults, prepayments, fees, penalties, and other recoveries.
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Loan guarantee liabilities are reported at the NPV. The cost of the loan guarantee is the 

NPV of the following estimated projected cash flows:

• Payments by the Department to cover defaults and delinquencies, interest subsidies, or 

other payments; offset by payments to the Department including origination and other 

fees, penalties, and recoveries.

Military Housing Privatization Initiative

The MHPI includes both direct loan and loan guarantee programs. The programs are 

authorized by the National Defense Authorization Act for FY 1996 (PL 104-106, 

Section 2801) and includes a series of authorities allowing the Department to work with the 

private sector to renovate and build military family housing. The MHPI accelerates the 

construction of new housing built to market standards and obtains private sector capital to 

leverage government funds. The Department provides protection to private sector partners 

against specific risks, such as base closure or member deployment.

Summary of Direct Loans and Loan Guarantees Dollars in Millions

2015 2014

Loans Receivable

Direct Loans:

Military Housing Privatization Initiative $ 1,526.4 $ 1,452.2

Total Direct Loans $ 1,526.4 $ 1,452.2

Total Loans Receivable $ 1,526.4 $ 1,452.2

Loan Guarantee Liability

Military Housing Privatization Initiative $ 66.5 $ 56.8

Total Loan Guarantee Liability $ 66.5 $ 56.8

Direct Loans Obligated Dollars in Millions

2015 2014

Direct Loans Obligated After FY 1991

(Present Value Method):

Military Housing Privatization Initiative

Loans Receivable Gross $ 1,557.6 $ 1,493.4

Allowance for Subsidy Cost (Present Value) (31.2) (41.2)

Value of Assets Related to Direct Loans, Net 1,526.4 1,452.2

Total Direct Loans Receivable $ 1,526.4 $ 1,452.2

Direct Loans Receivable does not represent proceeds the Department would expect to 

receive from selling the loans. 

Interest receivable is calculated using the interest earned method.

Total Amount of Direct Loans Disbursed Dollars in Millions

2015 2014

Direct Loan Programs

Military Housing Privatization Initiative $ 74.4 $ 146.5

Total $ 74.4 $ 146.5
Department of Defense Agency Financial Report for FY 2015

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Subsidy Expense for Direct Loan by Program Dollars in Millions

2015 Interest 

Differential Defaults Fees Other Total

New Direct Loans Disbursed

Military Housing Privatization Initiative $ 4.6 $ 10.6 $ 0.0 $ 0.0 $ 15.2

Total $ 4.6 $ 10.6 $ 0.0 $ 0.0 $ 15.2

2014 Interest 

Differential Defaults Fees Other Total

New Direct Loans Disbursed

Military Housing Privatization Initiative $ 5.8 $ 18.1 $ 0.0 $ 0.0 $ 23.9

Total $ 5.8 $ 18.1 $ 0.0 $ 0.0 $ 23.9

2015 Modifications Interest Rate 

Reestimates

Technical 

Reestimates Total

Direct Loan Modifications and Reestimates

Military Housing Privatization Initiative $ 0.0 $ (6.4) $ (12.9) $ (19.3)

Total $ 0.0 $ (6.4) $ (12.9) $ (19.3)

2014 Modifications Interest Rate 

Reestimates

Technical 

Reestimates Total

Direct Loan Modifications and Reestimates

Military Housing Privatization Initiative $ 0.0 $ (8.3) $ (53.0) $ (61.3)

Total $ 0.0 $ (8.3) $ (53.0) $ (61.3)

2015 2014

Total Direct Loan Subsidy Expense:

Military Housing Privatization Initiative $ (4.1) $ (37.4)

Total $ (4.1) $ (37.4)

Subsidy Expense for Direct Loan by Program

As of September 30, 2015

Interest 

Differential Defaults Fees Other Total

Budget Subsidy Rates for Direct Loans

Military Housing Privatization Initiative 0.0% 0.0% 0.0% 0.0% 0.0%

Subsidy rates pertain to loan agreements contracted during the current fiscal year. There 

were no new loan agreements. 

These rates cannot be applied to direct loans disbursed during the current reporting year to 

yield the subsidy expense. Subsidy expense for new loans disbursed in the current year 

results from disbursements of loans from current and prior year loan agreements. Subsidy 

expense reported in the current year also includes reestimates.
Department of Defense Agency Financial Report for FY 2015

Financial Information

68

Schedule for Reconciling Subsidy Cost Allowance Balances

for Post-FY 1991 Direct Loans Dollars in Millions

2015 2014

Beginning Balance, Changes, and Ending Balance:

Beginning Balance of the Subsidy Cost Allowance $ 41.2 $ 88.1

Add: Subsidy Expense for Direct Loans Disbursed during the 

Reporting Years by Component

Interest Rate Differential Costs 4.6 5.8

Default Costs (Net of Recoveries) 10.6 18.1

Total of the above Subsidy Expense Components $ 15.2 $ 23.9

Adjustments

Subsidy Allowance Amortization (5.9) (9.5)

Total of the above Adjustment Components $ (5.9) $ (9.5)

Ending Balance of the Subsidy Cost Allowance before Reestimates $ 50.5 $ 102.5

Add or Subtract Subsidy Reestimates by Component

Interest Rate Reestimates $ (6.4) $ (8.3)

Technical/Default Reestimate (12.9) (53.0)

Total of the above Reestimate Components (19.3) (61.3)

Ending Balance of the Subsidy Cost Allowance $ 31.2 $ 41.2

Guaranteed Loans Outstanding Dollars in Millions

As of September 30

Outstanding 

Principal of 

Guaranteed Loans, 

Face Value

Amount of 

Outstanding 

Principal 

Guaranteed

2015

Guaranteed Loans Outstanding

Military Housing Privatization Initiative $ 874.7 $ 874.7

Total $ 874.7 $ 874.7

2014

Guaranteed Loans Outstanding

Military Housing Privatization Initiative $ 854.4 $ 854.4

Total $ 854.4 $ 854.4

2015

New Guaranteed Loans Disbursed

Military Housing Privatization Initiative $ 20.3 $ 20.3

Total $ 20.3 $ 20.3

2014

New Guaranteed Loans Disbursed

Military Housing Privatization Initiative $ 183.5 $ 183.5

Total $ 183.5 $ 183.5
Department of Defense Agency Financial Report for FY 2015

Financial Information

69

Liabilities for Loan Guarantees Dollars in Millions

As of September 30 2015 2014

Liabilities for Loan Guarantee from Post 1991

(Present Value)

Military Housing Privatization Initiative $ 66.5 $ 56.8

Total Loan Guarantee Liability (Post FY 1991) $ 66.5 $ 56.8

Total Loan Guarantee Liability $ 66.5 $ 56.8

Subsidy Expense for Direct Loan by Program

As of September 30 Dollars in Millions

2015 Interest 

Differential Defaults Fees Other Total

New Loan Guarantees Disbursed

Military Housing Privatization Initiative $ 0.0 $ 8.0 $ 0.0 $ 0.0 $ 8.0

Total $ 0.0 $ 8.0 $ 0.0 $ 0.0 $ 8.0

2014 Interest 

Differential Defaults Fees Other Total

New Loan Guarantees Disbursed

Military Housing Privatization Initiative $ 0.0 $ 11.3 $ 0.0 $ 0.0 $ 11.3

Total $ 0.0 $ 11.3 $ 0.0 $ 0.0 $ 11.3

2015 Modifications

Interest Rate 

Reestimates

Technical 

Reestimates

Total 

Reestimates Total

Modifications and Reestimates

Military Housing Privatization Initiative $ 0.0 $ (0.5) $ 0.5 $ 0.0 $ 0.0

Total $ 0.0 $ (0.5) $ 0.5 $ 0.0 $ 0.0

2014 Modifications

Interest Rate 

Reestimates

Technical 

Reestimates

Total 

Reestimates Total

Modifications and Reestimates

Military Housing Privatization Initiative $ 0.0 $ 1.2 $ (3.0) $ (1.8) $ (1.8)

Total $ 0.0 $ 1.2 $ (3.0) $ (1.8) $ (1.8)

2015 2014

Total Loan Guarantee

Military Housing Privatization Initiative $ 8.0 $ 9.5

Total $ 8.0 $ 9.5

Subsidy Expense for Direct Loan by Program

As of September 30, 2015

Interest 

Supplements Defaults

Fees and 

other 

Collections

Other Total

Budget Subsidy Rates for Loan 

Guarantees

Military Housing Privatization Initiative 0.0% 0.0% 0.0% 0.0% 0.0%
Department of Defense Agency Financial Report for FY 2015

Financial Information

70

Subsidy rates pertain to loan agreements contracted during the current fiscal year. There 

were no new loan agreements.

These rates cannot be applied to loan guarantees agreed to during the current reporting 

year to yield the subsidy expense. Subsidy expense reported in the current year also 

includes reestimates.

Schedule for Reconciling Loan Guarantee Liability Balances

for Post-FY 1991 Loan Guarantees Dollars in Millions

As of September 30 2015 2014

Beginning Balance, Changes, and Ending Balance

Beginning Balance of the Loan Guarantee Liability $ 56.8 $ 45.8

Add: Subsidy Expense for Guaranteed Loans Disbursed during the 

Reporting Years by Component

Default Costs (Net of Recoveries) 8.0 11.3

Total of the above Subsidy Expense Components $ 8.0 $ 11.3

Adjustments

Interest Accumulation on the Liability Balance 1.7 1.5

Total of the above Adjustments $ 1.7 $ 1.5

Ending Balance of the Loan Guarantee Liability before Reestimates $ 66.5 $ 58.6

Add or Subtract Subsidy Reestimates by Component

Interest Rate Reestimate $ (0.5) $ 1.2

Technical/Default Reestimate 0.5 (3.0)

Total of the above Reestimate Components $ 0.0 (1.8)

Ending Balance of the Loan Guarantee Liability $ 66.5 $ 56.8

Administrative Expenses

Administrative Expenses are limited to separately identified expenses for administering preFY 1992 and post-FY 1991 Direct Loans and Loan Guarantee Programs. 

NOTE 9. INVENTORY AND RELATED PROPERTY

Inventory and Related Property Dollars in Millions

As of September 30 2015 2014

Inventory, Net $ 92,555.8 $ 95,250.2

Operating Materiel & Supplies, Net 168,712.0 165,741.9

Stockpile Materiel, Net 449.3 504.7

Total Inventory and Related Property $ 261,717.1 $ 261,496.8
Department of Defense Agency Financial Report for FY 2015

Financial Information

71

Abnormal Balance

Inventory, Available and Purchased for Resale, Revaluation Allowance, includes a 

$2.1 million abnormal balance in USSGL 159100, Other Related Property, due to a reporting 

error. The Department is researching the cause and anticipates correcting the error in 

FY 2016.

Inventory Restrictions

The following are restrictions on the use, sale, or disposition of inventory: 

• War reserve materiel valued at $2.3 billion;

• Commissary items valued at $402.9 million held for purchase by authorized patrons; 

and 

• Dispositions pending litigation or negotiation valued at $82.8 million.

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

liabilities.

Inventory, Net Dollars in Millions

2015 Valuation 

Method

As of September 30

Inventory, 

Gross Value

Revaluation 

Allowance Inventory, Net

Inventory Categories

Available and Purchased for Resale $ 61,299.6 $ (14.1) $ 61,285.5 MAC, LAC

Held for Repair 32,784.2 (3,445.3) 29,338.9 MAC, LAC

Excess, Obsolete, and Unserviceable 1,426.7 (974.8) 451.9 NRV

Raw Materiel 1,449.9 0.0 1,449.9 MAC, LAC

Work in Process 29.6 0.0 29.6 AC

Total Inventory, Net $ 96,990.0 $ (4,434.2) $ 92,555.8

Legend for Valuation Methods:

LAC = Latest Acquisition Cost, adjusted for holding gains and losses

AC = Actual Cost

NRV = Net Realizable Value

MAC = Moving Average Cost

Inventory, Net Dollars in Millions

2014 Valuation 

Method

As of September 30

Inventory, 

Gross Value

Revaluation 

Allowance Inventory, Net

Inventory Categories

Available and Purchased for Resale $ 63,216.9 $ 21.3 $ 63,238.2 MAC,FIFO, 

LAC

Held for Repair 33,607.1 (3,345.1) 30,262.0 MAC, LAC

Excess, Obsolete, and Unserviceable 468.0 (235.8) 232.2 NRV

Raw Materiel 1,484.5 0.0 1,484.5 MAC, SP, LAC

Work in Process 33.3 0.0 33.3 AC

Total Inventory, Net $ 98,809.8 $ (3,559.6) $ 95,250.2

Legend for Valuation Methods:

LAC = Latest Acquisition Cost, adjusted for holding gains and losses

AC = Actual Cost

NRV = Net Realizable Value

MAC = Moving Average Cost

SP = Standard Price

FIFO = First In, First Out
Department of Defense Agency Financial Report for FY 2015

Financial Information

72

General Composition of Inventory

Inventory includes spare and repair parts, clothing and textiles, and fuels held for sale. 

Inventory is tangible personal property:

• Held for sale, or held for repair and eventual sale; 

• In the process of production for sale; or 

• To be consumed in the production of goods for sale or in the provision of service for a 

fee.

The Department assigns inventory items to a category based on asset type and condition.

Items transferred from the Military Services and awaiting sale, disposal, or reuse are valued 

at $451.9 million.

OM&S 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 when no other suitable munitions are immediately 

available.

Operating Materiel and Supplies, Net Dollars in Millions

2015 Valuation 

Method

As of September 30

OM&S, Gross 

Value

Revaluation 

Allowance OM&S, Net

OM&S Categories

Held for Use $ 121,858.5 $ 0.0 $ 121,858.5 LAC, MAC

Held for Repair 46,853.6 (0.1) 46,853.5 LAC, MAC

Excess, Obsolete, and Unserviceable 2,043.2 (2,043.2) 0.0 NRV

Total OM&S $ 170,755.3 $ (2,043.3) $ 168,712.0

Legend for Valuation Methods:

LAC = Latest Acquisition Cost, adjusted for holding gains and losses

MAC = Moving Average Cost

NRV = Net Realizable Value

Operating Materiel and Supplies, Net Dollars in Millions

2014 Valuation 

Method

As of September 30

OM&S, Gross 

Value

Revaluation 

Allowance OM&S, Net

OM&S Categories

Held for Use $ 138,507.5 $ 0.0 $ 138,507.5 SP, LAC, MAC

Held for Repair 27,235.5 (1.1) 27,234.4 SP, LAC, MAC

Excess, Obsolete, and Unserviceable 2,373.4 (2,373.4) 0.0 NRV

Total OM&S $ 168,116.4 $ (2,374.5) $ 165,741.9

Legend for Valuation Methods:

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 2015

Financial Information

73

General Composition of OM&S

OM&S include spare and repair parts, ammunition, tactical missiles, aircraft configuration 

pods, and centrally managed aircraft engines held for consumption. The Department 

assigns OM&S items to a category based on asset type and condition.

Stockpile Materiel Restrictions

Materiel held by the National Defense Stockpile (NDS) is restricted unless released by 

congressional action and made available for sale on the open market. Stockpile materiel 

may not be disposed except for: (1) necessary upgrading, refining, or processing; 

(2) necessary rotation to prevent deterioration; (3) determination as excess with potential 

financial loss if retained; or (4) authorization by law. 

Before selling any materiel, Congress must enact specific enabling legislation (e.g., the 

National Defense Authorization Act). When authorized to offer materiel for sale, NDS 

reclassifies from Materiel Held in Reserve to Materiel Held for Sale. 

General Composition of Stockpile Materiel

Due to statutory requirements, the Department holds strategic and critical stockpile 

materiel for use in national defense, conservation, or national emergencies. The estimated 

market price of stockpile materiel as of September 30, 2015, is $1.4 billion.

Stockpile Materiel, Net Dollars in Millions

2015

Valuation 

Method

As of September 30

Stockpile, 

Materiel

Amount

Allowance for 

Gains 

(Losses)

Stockpile, 

Materiel,

Net

Stockpile Materiel Categories

Held for Sale $ 6.8 $ 0.0 $ 6.8 AC, LCM

Held for Reserve for Future Sale 442.5 0.0 442.5 AC, LCM

Total Stockpile Materiel $ 449.3 $ 0.0 $ 449.3

Legend for Valuation Methods:

AC = Actual Cost LCM = Lower of Cost or Market

Stockpile Materiel, Net Dollars in Millions

2014

Valuation 

Method

As of September 30

Stockpile, 

Materiel

Amount

Allowance for 

Gains 

(Losses)

Stockpile, 

Materiel,

Net

Stockpile Materiel Categories

Held for Sale $ 156.4 $ 0.0 $ 156.4 AC, LCM

Held for Reserve for Future Sale 348.3 0.0 348.3 AC, LCM

Total Stockpile Materiel $ 504.7 $ 0.0 $ 504.7

Legend for Valuation Methods:

AC = Actual Cost LCM = Lower of Cost or Market
Department of Defense Agency Financial Report for FY 2015

Financial Information

74

NOTE 10. GENERAL PP&E, NET

General PP&E, Net Dollars in Millions

2015

As of September 30

Depreciation/

Amortization 

Method

Service 

Life

Acquisition 

Value

(Accumulated 

Depreciation/

Amortization)

Net Book Value

Major Asset Classes

Land N/A N/A $ 10,904.5 N/A $ 10,904.5

Buildings, Structures, and Facilities S/L 20 or 40 283,181.3 (136,918.4) 146,262.9

Leasehold Improvements S/L Lease 

term 515.2 (237.5) 277.7

Software S/L 2 – 5 or 

10 12,021.6 (8,426.0) 3,595.6

General Equipment S/L 5 or 10 1,010,573.5 (584,040.0) 426,533.5

Assets Under Capital Lease1 S/L Lease 

term 353.1 (208.7) 144.4

Construction-in-Progress N/A N/A 41,833.8 N/A 41,833.8

Other N/A N/A 446.4 (1.7) 444.7

Total General PP&E $ 1,359,829.4 $ (729,832.3) $ 629,997.1

1 Note 15 for additional information on Capital Leases

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

General PP&E, Net Dollars in Millions

Restated 2014

As of September 30

Depreciation/

Amortization 

Method

Service 

Life

Acquisition 

Value

(Accumulated 

Depreciation/

Amortization)

Net Book Value

Major Asset Classes

Land N/A N/A $ 10,839.7 N/A $ 10,839.7

Buildings, Structures, and Facilities S/L 20 or 40 272,509.0 (130,764.3) 141,744.7

Leasehold Improvements S/L Lease 

term 508.6 (196.5) 312.1

Software S/L 2 – 5 or 

10 11,700.5 (8,279.8) 3,420.7

General Equipment S/L 5 or 10 991,109.3 (570,731.0) 420,378.3

Assets Under Capital Lease1 S/L Lease 

term 632.6 (461.8) 170.8

Construction-in-Progress N/A N/A 41,092.0 N/A 41,092.0

Other N/A N/A 891.8 (1.9) 889.9

Total General PP&E $ 1,329,283.5 $ (710,435.3) $ 618,848.2

1 Note 15 for additional information on Capital Leases

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

Restatements

The Department corrected a $149.0 million overstatement of General Property, Plant and 

Equipment. See Note 26, Restatements, for further information.
Department of Defense Agency Financial Report for FY 2015

Financial Information

75

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. Extensive efforts are in progress to achieve audit readiness. The ongoing 

discovery and validation phases identify adjustments to values resulting in current year 

gains/losses. 

Other General Property, Plant, and Equipment includes assets awaiting disposition.

Heritage Assets and Stewardship Land 

The Department’s policy is to preserve its heritage assets including items of historical, 

cultural, educational, or artistic importance. The Department, with minor exceptions, uses 

the buildings and stewardship land in its daily activities and includes the buildings on the 

Balance Sheet as multi-use heritage assets. 

Heritage assets within the Department consist of buildings and structures, archeological 

sites, and museum collections. The Department defines these as follows:

• Buildings and Structures are listed, or eligible for listing, on the National Register of 

Historic Places, including multi-use heritage assets. 

• Archeological Sites are listed, or eligible for listing, on the National Register of Historic 

Places in accordance with Section 110 of the National Historic Preservation Act.

• Museum Collection Items are considered unique due to historical, natural, cultural, 

educational, artistic, technical, or architectural significance.

The Department is unable to identify quantities of heritage assets and stewardship land 

added through donation or devise due to limitations of the Department’s financial and 

nonfinancial management processes and systems.

Heritage Assets 

Categories Measure 

Quantity

Beginning 

Balance Additions Deletions Ending Balance

Buildings and Structures Each 55,165 2,484 (46) 57,603

Archeological Sites Each 29,327 1,913 (96) 31,144

Museum Collection Items 

(Objects, not including fine art) Each 1,242,321 6,211 (239) 1,248,293

Museum Collection Items (Objects, 

fine art) Each 58,910 333 (52) 59,191

Differences in heritage assets quantities from the FY 2014 ending to the FY 2015 beginning 

unit counts resulted from periodic reviews.

Stewardship land includes both land and land rights owned by the Department, but not 

acquired for, or in connection with, items of General Property, Plant, and Equipment. All 
Department of Defense Agency Financial Report for FY 2015

Financial Information

76

land provided to the Department from the public domain at no cost, regardless of its use, is 

classified as Stewardship Land.

Stewardship land is categorized and reported in acres based on the predominant use of the 

land. The three categories of Stewardship land held in public trust are: State Owned Land, 

Withdrawn Public Land, and Public Land.

The Department’s stewardship land consists mainly of mission essential land.

Stewardship Land Acres in Thousands

Facility 

Code

Predominant Land Use 

Categories

Beginning 

Balance Additions Deletions Ending Balance 

9110 Government Owned Land 6,551 0 0 6,551

9111 State Owned Land 5 13 0 18

9120 Withdrawn Public Land 15,356 149 (57) 15,448

9130 Licensed and Permitted Land 948 0 (1) 947

9140 Public Land 11 0 0 11

9210 Land Easement 379 0 (1) 378

9220 In-leased Land 125 0 (1) 124

9230 Foreign Land 297 0 0 297

Grand Total 23,774

Total – All Other Lands 8,297

Total – Stewardship Lands 15,477

Differences in the stewardship land quantities from the FY 2014 ending to the FY 2015 

beginning unit counts resulted from periodic reviews.

Assets Under Capital Lease Dollars in Millions

As of September 30 2015 2014

Entity as Lessee, Assets Under Capital Lease

Land and Buildings $ 0.0 $ 260.0

Equipment 353.1 372.6

Accumulated Amortization (208.7) (461.8)

Total Capital Leases $ 144.4 $ 170.8
Department of Defense Agency Financial Report for FY 2015

Financial Information

77

NOTE 11. LIABILITIES NOT COVERED BY BUDGETARY RESOURCES

Liabilities Not Covered by Budgetary Resources Dollars in Millions

As of September 30 2015 Restated 2014

Intragovernmental Liabilities

Debt 1.3 1.5

Other Liabilities 2,064.3 2,139.4

Total Intragovernmental Liabilities $ 2,065.6 $ 2,140.9

Non-Federal Liabilities

Accounts Payable $ 540.1 $ 139.9

Military Retirement and Other Federal Employment Benefits 1,570,899.0 1,656,417.2

Environmental and Disposal Liabilities 56,534.2 54,855.7

Other Liabilities 13,061.0 14,700.0

Total Non-Federal Liabilities $ 1,641,034.3 $ 1,726,112.8

Total Liabilities Not Covered by Budgetary Resources $ 1,643,099.9 $ 1,728,253.7

Total Liabilities Covered by Budgetary Resources $ 783,490.8 $ 730,419.7

Total Liabilities $ 2,426,590.7 $ 2,458,673.4

Restatements

The Department corrected a $134.0 million understatement in Total Liabilities Covered by 

Budgetary Resources. See Note 26, Restatements, for further information.

Other Disclosures

Liabilities Not Covered by Budgetary Resources includes liabilities requiring congressional 

action before budgetary resources can be provided.

Non-Federal Accounts Payable primarily represents liabilities in canceled appropriations, if 

paid, will be disbursed using current year funds.

Debt consists primarily of borrowing from the U.S. Treasury for capital improvements to the 

Washington Aqueduct Project expected to be completed by 2023. The related 

reimbursement to the Department from Arlington County and Falls Church, Virginia, is 

recorded as non-Federal accounts receivable. 

Environmental and Disposal Liabilities represents the Department’s liability for existing and 

anticipated environmental clean-up and disposal. Refer to Note 14, Environmental and 

Disposal Liabilities, for additional details. 

Intragovernmental Other Liabilities consists primarily of unfunded liabilities for Federal 

Employees Compensation Act, Unemployment Insurance, and Judgment Fund. 

Non-Federal Other Liabilities consists primarily of unfunded annual leave, contingent 

liabilities, and expected expenditures for disposal of conventional munitions.

Military Retirement and Other Federal Employment Benefits consists of various employee 

actuarial liabilities not due and payable during the current fiscal year. These liabilities 

primarily consist of $1.0 trillion in pension liabilities and $524.8 billion in health benefit 

liabilities. Refer to Note 17, Military Retirement and Other Federal Employment Benefits, for 

additional details.
Department of Defense Agency Financial Report for FY 2015

Financial Information

78

NOTE 12. ACCOUNTS PAYABLE

Accounts Payable Dollars in Millions

2015

As of September 30

Accounts Payable

Interest, Penalties, 

and Administrative 

Fees

Total

Intragovernmental Payables $ 1,432.7 N/A $ 1,432.7

Non-Federal Payables

(To the Public) 18,886.2 21.6 18,907.8

Total Accounts Payable $ 20,318.9 $ 21.6 $ 20,340.5

Accounts Payable Dollars in Millions

Restated 2014

As of September 30

Accounts Payable

Interest, Penalties, 

and Administrative 

Fees

Total

Intragovernmental Payables $ 1,911.2 N/A $ 1,911.2

Non-Federal Payables

(To the Public) 18,005.5 18.4 18,023.9

Total Accounts Payable $ 19,916.7 $ 18.4 $ 19,935.1

Restatements

The Department corrected a $134.0 million understatement in Nonfederal Payables (to the 

Public). See Note 26, Restatements, for further information.

Other Disclosures

Accounts Payable include amounts owed to Federal and non-Federal entities for goods and 

services received by the Department. The Department’s systems do not track 

intragovernmental accounts payable transactions by customer. Buyer-side accounts 

payable are adjusted to agree with interagency seller-side accounts receivable by: 

(1) reclassifying amounts between Federal and non-Federal accounts payable, (2) accruing 

additional accounts payable and expenses, and (3) applying both supported and 

unsupported undistributed disbursements at the reporting entity level.
Department of Defense Agency Financial Report for FY 2015

Financial Information

79

NOTE 13. DEBT

Debt Dollars in Millions

2015

As of September 30 Beginning Balance Net Borrowing Ending Balance

Agency Debt (Intragovernmental)

Debt to the Treasury $ 1,392.3 $ 116.3 $ 1,508.6

Total Agency Debt $ 1,392.3 $ 116.3 $ 1,508.6

Debt Dollars in Millions

2014

As of September 30 Beginning Balance Net Borrowing Ending Balance

Agency Debt (Intragovernmental)

Debt to the Treasury $ 1,174.7 $ 217.6 $ 1,392.3

Total Agency Debt $ 1,174.7 $ 217.6 $ 1,392.3

The Department’s debt consists of interest and principal payments due to the U.S. Treasury. 

The Department borrows funds for the Military Housing Privatization Initiative and the 

Washington Aqueduct Capital Improvements Project.

The Department must pay the debt on direct loans if borrowers (e.g., local governments or 

housing builders) default. For loan guarantees, the Department must pay the amount of 

outstanding principal guaranteed.
Department of Defense Agency Financial Report for FY 2015

Financial Information

80

NOTE 14. ENVIRONMENTAL AND DISPOSAL LIABILITIES

Environmental and Disposal Liabilities Dollars in Millions

As of September 30 2015 2014

Environmental Liabilities–Non-Federal

Accrued Environmental Restoration Liabilities

Active Installations – Installation Restoration Program (IRP) and 

Building Demolition and Debris Removal (BD/DR) $ 9,728.3 $ 10,125.1

Active Installations – Military Munitions Response Program (MMRP) 3,645.9 3,548.0

Formerly Used Defense Sites – IRP & BD/DR 3,055.0 2,896.5

Formerly Used Defense Sites – MMRP 10,767.9 10,427.1

Other Accrued Environmental Liabilities – Non-BRAC

Environmental Corrective Action $ 883.8 $ 1,673.4

Environmental Closure Requirements 2,943.3 1,830.8

Environmental Response at Operational – Ranges 88.7 123.2

Asbestos 1,493.5 1,030.2

Non-Military Equipment 288.1 571.9

Other 1,011.9 998.0

Base Realignment and Closure Installations (BRAC)

Installation Restoration Program $ 3,188.8 $ 3,121.3

Military Munitions Response Program 495.3 796.1

Environmental Corrective Action/Closure Requirements 213.8 285.5

Asbestos 9.9 7.1

Environmental Disposal for Military Equipment/Weapons Programs

Nuclear Powered Military Equipment/Spent Nuclear Fuel $ 13,814.6 $ 14,325.4

Non-Nuclear Powered Military Equipment 36.4 36.4

Other Weapons Systems 202.2 131.9

Chemical Weapons Disposal Program

Chemical Demilitarization – Chemical Materials Agency (CMA) $ 3,046.4 $ 882.6

CAMD Demilitarization – Assembled Chemical Weapons Alternatives 

(ACWA) 5,116.3 5,770.9

Total Environmental Liabilities $ 60,030.1 $ 58,581.4

Other Accrued Environmental Liabilities, Non-Base Realignment and Closure (Non-BRAC), 

Other consists primarily of Formerly Utilized Sites Remedial Action Program (FUSRAP) 

remediation of radiological contamination. The FUSRAP is a shared program between the 

Department and the Department of Energy’s U.S. Atomic Energy and Weapons Program.

The unrecognized portion of the estimated total cleanup costs associated with General 

Property, Plant, and Equipment (PP&E) is currently $3.1 billion. This estimate is incomplete 

and does not accurately reflect the Department’s total unrecognized costs associated with 

General PP&E. The Department is implementing procedures to address deficiencies.

Types of Environmental Liabilities and Disposal Liabilities Identified

The Department has cleanup requirements for the Defense Environmental Restoration 

Program (DERP) for active installations, BRAC installations, and Formerly Used Defense 

Sites. The Department has additional cleanup requirements for active installations not 

covered by DERP, weapon systems programs, and chemical weapons disposal programs. 

The weapons systems program consists of chemical weapons disposal, nuclear powered 
Department of Defense Agency Financial Report for FY 2015

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aircraft carriers, nuclear powered submarines, and other nuclear ships. All cleanup efforts 

are performed in coordination with regulatory agencies, other responsible parties, and 

current property owners.

Applicable Laws and Regulations for Cleanup Requirements

The Department is required to clean up contamination from past waste disposal practices, 

leaks, spills, and other activity resulting in public health or environmental risk. The 

Department accomplishes this effort in coordination with regulatory agencies and, if 

applicable, other responsible parties and current property owners. The Department is also 

required to recognize closure and post-closure costs for its General PP&E and environmental 

corrective action costs for current operations. Each of the Department's major reporting 

entities is responsible for tracking and reporting all required environmental information 

related to environmental restoration costs, other accrued environmental costs, disposal 

costs of weapon systems, and environmental costs related to BRAC actions.

The Department follows the Comprehensive Environmental Response, Compensation, and 

Liability Act (CERCLA, Public Law 96-510), Superfund Amendments and Reauthorization Act 

of 1986 (SARA, Public Law 99-499), Resource Conservation and Recovery Act (RCRA, Public 

Law 94-580) or other applicable federal or state laws to clean up contamination. The 

CERCLA and RCRA require the Department to clean up contamination in coordination with 

regulatory agencies, current owners of property damaged by the Department, and third 

parties with partial responsibility for environmental restoration. Failure to comply with 

agreements and legal mandates puts the Department at risk of incurring fines and 

penalties.

Laws concerning cleanup requirements for nuclear-powered naval vessels govern the 

Department’s environmental policy and regulations. The Atomic Energy Act of 1954, as 

amended, assures the proper management of source, special nuclear, and byproduct 

materiel. The Department coordinates nuclear power actions with the Department of 

Energy. The Nuclear Waste Policy Act of 1982 (Public Law 97-425) requires owners and 

generators of high-level nuclear waste and spent nuclear fuel to pay their share of the cost 

of the program. The Low-Level Radioactive Waste Policy Amendments Act of 1985 (Public 

Law 99-240) provides for the safe and efficient management of low-level radioactive waste.

The Chemical Weapons Disposal Program is based on FY 1986 National Defense 

Authorization Act (Public Law 99-145, as amended) directing the Department to destroy the 

unitary chemical stockpile per the requirements of the Chemical Weapons Convention 

Treaty.

Methods for Assigning Total Cleanup Costs to Current Operating 

Periods

The Department uses engineering estimates and independently validated models to project 

environmental costs. The models include the Remedial Action Cost Engineering 

Requirements application and the Normalization of Data System. The Department validates 

the models in accordance with DoD Instruction 5000.61, DoD Modeling and Simulation 

Verification, Validation, and Accreditation, and estimates liabilities based on data received 

during preliminary assessment and site investigation. The Department primarily uses 
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engineering estimates after obtaining extensive data during the remedial 

investigation/feasibility phase of the environmental project.

Once the environmental cost estimates are complete, the Department complies with 

accounting standards to charge costs to current operating periods. The Department 

expensed cleanup costs for General PP&E placed into service prior to October 1, 1997, 

unless costs are to be recovered through user charges. As costs are recovered, the 

Department expenses cleanup costs associated with the asset life that has passed since the 

General PP&E was placed into service. The Department systematically recognizes the 

remaining cost over the life of the assets.

For General PP&E placed into service after September 30, 1997, the Department expenses 

associated environmental costs using two methods: physical capacity for operating landfills 

and life expectancy in years for all other assets. The Department expenses the full cost to 

clean up contamination for Stewardship PP&E when the asset is placed into service.

In accordance with reporting requirements for asbestos, the Department reports liabilities 

for buildings and facilities containing both friable and non-friable asbestos. At this time the 

Department is unable to reasonably estimate an amount of the total cleanup costs related to 

friable and nonfriable asbestos. Of the Other Accrued Environmental Liabilities – Non-BRAC 

for Asbestos reported above, $8.5 million is related to the recognized cleanup costs for 

nonfriable asbestos.

Nature of Estimates and the Disclosure of Information Regarding 

Possible Changes Due to Inflation, Deflation, Technology, or 

Applicable Laws and Regulations

The Department revised estimates resulting from overlooked or previously unknown 

contaminants, re-estimation based on different assumptions, and other changes in project 

scope. Although the Department is unaware of pending changes, environmental liabilities 

are subject to changes in laws and regulations, agreements with regulatory agencies, and 

advances in technology.

Uncertainty Regarding the Accounting Estimates Used to Calculate 

the Reported Environmental Liabilities

Accounting estimates for environmental liabilities use reasonable judgments and 

assumptions based on available information. Actual results may materially vary if 

agreements with regulatory agencies require remediation to a different degree than 

anticipated when calculating the estimates. Liabilities can be further affected if investigation 

of the environmental sites reveals contamination levels differing from estimate parameters.

The Department is responsible for environmental restoration and corrective action for buried 

chemical munitions and agents; however, it is unable to provide a reasonable estimate 

because the extent of the buried chemical munitions and agents is unknown. The 

Department also cannot provide a complete estimate for FUSRAP. The Department has 

ongoing studies and will update its estimate as additional liabilities are identified. In 

addition, not all components of the Department recognize environmental liabilities 

associated with General PP&E due to process and system limitations.
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The Department may incur costs for restoration initiatives in conjunction with returning 

overseas Defense facilities to host nations. The Department is unable to provide a 

reasonable estimate because the extent of required restoration is unknown.

NOTE 15. OTHER LIABILITIES

Other Liabilities Dollars in Millions

2015

As of September 30 Current Liability Noncurrent 

Liability Total

Intragovernmental

Advances from Others $ 651.8 $ 0.0 $ 651.8

Deposit Funds and Suspense 

Account Liabilities 674.3 0.0 674.3

Disbursing Officer Cash 1,047.8 0.0 1,047.8

Judgment Fund Liabilities 590.2 0.0 590.2

FECA Reimbursement to the 

Department of Labor 550.8 687.1 1,237.9

Custodial Liabilities 529.7 2,188.4 2,718.1

Employer Contribution and 

Payroll Taxes Payable 528.9 0.0 528.9

Other Liabilities 250.5 0.0 250.5

Total Intragovernmental Other $ 4,824.0 $ 2,875.5 $ 7,699.5

Non-Federal

Accrued Funded Payroll and 

Benefits $ 9,335.1 $ 0.0 $ 9,335.1

Advances from Others 4,875.0 1.5 4,876.5

Deposit Funds and Suspense 

Accounts 1,602.0 0.0 1,602.0

Nonenvironmental Disposal 

Liabilities

Military Equipment 

(Nonnuclear) 173.5 49.2 222.7

Excess/Obsolete Structures 18.0 278.8 296.8

Conventional Munitions 

Disposal 0.0 6.0 6.0

Accrued Unfunded Annual Leave 9,931.7 0.0 9,931.7

Capital Lease Liability 149.0 0.0 149.0

Contract Holdbacks 923.0 1.4 924.4

Employer Contribution and 

Payroll Taxes Payable 418.3 0.0 418.3

Contingent Liabilities 253.3 6,633.0 6,886.3

Other Liabilities 278.3 0.0 278.3

Total Non-Federal Other 

Liabilities $ 27,957.2 $ 6,969.9 $ 34,927.1

Total Other Liabilities $ 32,781.2 $ 9,845.4 $ 42,626.6
Department of Defense Agency Financial Report for FY 2015

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Other Liabilities Dollars in Millions

2014

As of September 30 Current Liability Noncurrent 

Liability Total

Intragovernmental

Advances from Others $ 527.5 $ 0.0 $ 527.5

Deposit Funds and Suspense 

Account Liabilities 1,216.8 0.0 1,216.8

Disbursing Officer Cash 1,378.9 0.0 1,378.9

Judgment Fund Liabilities 600.4 0.0 600.4

FECA Reimbursement to the 

Department of Labor 591.0 698.0 1,289.0

Custodial Liabilities 767.3 2,170.0 2,937.3

Employer Contribution and 

Payroll Taxes Payable 430.0 0.0 430.0

Other Liabilities 366.9 0.0 366.9

Total Intragovernmental Other $ 5,878.8 $ 2,868.0 $ 8,746.8

Non-Federal

Accrued Funded Payroll and 

Benefits $ 9,814.9 $ 0.0 $ 9,814.9

Advances from Others 4,725.6 0.0 4,725.6

Deposit Funds and Suspense 

Accounts 240.7 0.0 240.7

Nonenvironmental Disposal 

Liabilities

Military Equipment 

(Nonnuclear) 151.8 73.9 225.7

Excess/Obsolete Structures 63.8 277.4 341.2

Conventional Munitions 

Disposal 0.0 2,078.3 2,078.3

Accrued Unfunded Annual Leave 10,410.6 0.0 10,410.6

Capital Lease Liability 161.1 6.5 167.6

Contract Holdbacks 963.2 25.0 988.2

Employer Contribution and 

Payroll Taxes Payable 599.9 0.0 599.9

Contingent Liabilities 194.3 5,969.3 6,163.6

Other Liabilities 189.1 0.0 189.1

Total Non-Federal Other 

Liabilities $ 27,515.0 $ 8,430.4 $ 35,945.4

Total Other Liabilities $ 33,393.8 $ 11,298.4 $ 44,692.2
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Advances from Others represent liabilities for collections received to cover future expenses 

or acquisition of assets.

Deposit funds and Suspense Accounts represent liabilities for receipts held in suspense 

temporarily for distribution to another fund or entity or held as an agent for others and paid 

at the direction of the owner.

Disbursing Officers Cash represents liabilities for currency on hand, cash on deposit at 

designated depositories, cash in the hands of deputy disbursing officers, cashiers and 

agents, negotiable instruments on hand, etc.

Custodial Liabilities represents liabilities for collections reported as non-exchange revenues 

where the Department is acting on behalf of another Federal entity.

Intragovernmental Other Liabilities primarily consists of unemployment compensation 

liabilities.

Capital Lease Liability Dollars in Millions

2015 – Asset Category

As of September 30

Land and 

Buildings Equipment Other Total

Future Payments Due

2016 $ 21.4 $ 0.0 $ 0.0 $ 21.4

2017 21.9 0.0 0.0 21.9

2018 22.5 0.0 0.0 22.5

2019 21.6 0.0 0.0 21.6

2020 21.9 0.0 0.0 21.9

After 5 Years 103.0 0.0 0.0 103.0

Total Future Lease Payments Due $ 212.3 $ 0.0 $ 0.0 $ 212.3

Less: Imputed Interest Executory Costs (63.3) (0.0) (0.0) (63.3)

Net Capital Lease Liability $ 149.0 $ 0.0 $ 0.0 $ 149.0

Capital Lease Liabilities Covered by Budgetary Resources $ 149.0

Capital Lease Liabilities Not Covered by Budgetary Resources $ 0.0

Capital Lease Liability Dollars in Millions

2014 – Asset Category

As of September 30

Land and 

Buildings Equipment Other Total

Future Payments Due

2015 $ 30.7 $ 0.0 $ 0.0 $ 30.7

2016 21.4 0.0 0.0 21.4

2017 21.9 0.0 0.0 21.9

2018 22.5 0.0 0.0 22.5

2019 21.6 0.0 0.0 21.6

After 5 Years 124.9 0.0 0.0 124.9

Total Future Lease Payments Due $ 243.0 $ 0.0 $ 0.0 $ 243.0

Less: Imputed Interest Executory Costs (75.4) (0.0) (0.0) (75.4)

Net Capital Lease Liability $ 167.6 $ 0.0 $ 0.0 $ 167.6

Capital Lease Liabilities Covered by Budgetary Resources $ 167.6

Capital Lease Liabilities Not Covered by Budgetary Resources $ 0.0
Department of Defense Agency Financial Report for FY 2015

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Nonfederal Other Liabilities primarily consist of estimated costs for services provided; 

accrued liabilities for inventory owned and managed on behalf of foreign governments; and 

undistributed international tariff receipts.

Contingent Liabilities include $4.1 billion related to contracts authorizing progress payments 

based on cost as defined in the Federal Acquisition Regulation (FAR). In accordance with 

contract terms, specific rights to contractors’ work vests with the Federal Government when 

a specific type of contract financing payment is made. This action protects taxpayer funds 

in the event of contract nonperformance. These rights should not be misconstrued as rights 

of ownership. The Department is under no obligation to pay contractors amounts in excess 

of progress payments until delivery and government acceptance. Due to the probability the 

contractors will complete their efforts and deliver satisfactory products, and because the 

amount of contractor costs incurred but yet unpaid are estimable, the Department has 

recognized a contingent liability for the estimated unpaid costs that are considered 

conditional for payment pending delivery and government acceptance.

Total contingent liabilities for progress payments based on cost represent the difference 

between the estimated costs incurred to date by contractors and amounts authorized to be 

paid under progress payments based on cost provisions within the FAR. Estimated 

contractor-incurred costs are calculated by dividing the cumulative unliquidated progress 

payments based on cost by the contract-authorized progress payment rate. The balance of 

unliquidated progress payments based on cost is deducted from the estimated total 

contractor-incurred costs to determine the contingency amount.

There is one agency with a delinquent Department of Labor Federal Employee 

Compensation Act bill.

• Defense Health Agency: $1,322,750.

NOTE 16. COMMITMENTS AND CONTINGENCIES

Legal Contingencies

The Department is a party in various administrative proceedings and legal actions related to 

claims for environmental damage, equal opportunity matters, and contractual bid protests. 

The Department has accrued contingent liabilities for legal actions where the Office of 

General Counsel (OGC) considers an adverse decision probable and the amount of loss is 

measurable. In the event of an adverse judgment against the Government, some of the 

liabilities may be payable from the U.S. Treasury Judgment Fund. The Department records 

contingent liabilities in Note 15, Other Liabilities.

The Department reports 40 legal actions with individual claims greater than the 

Department’s FY 2015 materiality threshold of $145.2 million. These actions total 

approximately $3.0 trillion. Of this amount, the OGC classified claims totaling approximately 

$73.0 million as “probable,” $5.2 billion as “reasonably possible,” $961.0 billion as 

“remote,” and $2.0 trillion as “unable to determine the probability of loss.” The Department 

also has 118 actions at approximately $6.4 billion above the individual Components’ 

thresholds, but below the Department’s materiality threshold.
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Other Commitments and Contingencies

The Department is a party in numerous individual contracts containing clauses, such as 

price escalation, award fee payments, or dispute resolution, potentially resulting in a future 

outflow of budgetary resources. Currently, the Department’s automated system processes 

have limited capability to capture these potential liabilities; therefore, the amounts reported 

may not fairly present the Department’s commitments and contingencies. Contingencies 

considered both measurable and probable have been recognized as liabilities. Refer to 

Note 15, Other Liabilities, for further information.

NOTE 17. MILITARY RETIREMENT AND OTHER FEDERAL EMPLOYMENT 

BENEFITS

Military Retirement and Other Federal Employment Benefits Dollars in Millions

2015

As of September 30

Liabilities

(Less: Assets 

Available to Pay 

Benefits)

Unfunded 

Liabilities

Pension and Health Actuarial 

Benefits

Military Retirement Pensions $ 1,558,518.6 $ (521,296.7) $ 1,037,221.9

Military Pre Medicare-Eligible 

Retiree Health Benefits 220,876.2 0.0 220,876.2

Military Medicare-Eligible Retiree 

Health Benefits 508,194.0 (203,254.5) 304,939.5

Total Pension and Health 

Actuarial Benefits $ 2,287,588.8 $ (724,551.2) $ 1,563,037.6

Other Benefits

FECA $ 6,056.0 $ 0.0 $ 6,056.0

Voluntary Separation Incentive 

Programs 453.1 (180.1) 273.0

DoD Education Benefits Fund 1,137.3 (1,137.3) 0.0

Other 6,783.2 (5,250.8) 1,532.4

Total Other Benefits $ 14,429.6 $ (6,568.2) $ 7,861.4

Total Military Retirement and 

Other Federal Employment 

Benefits

$ 2,302,018.4 $ (731,119.4) $ 1,570,899.0

Actuarial Cost Method Used: Aggregate Entry-Age Method 

Assumptions: Effective Interest 

Market Value of Investments in Market-based and Marketable Securities: $908.4 billion
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Military Retirement and Other Federal Employment Benefits Dollars in Millions

2014

As of September 30

Liabilities

(Less: Assets 

Available to Pay 

Benefits)

Unfunded 

Liabilities

Pension and Health Actuarial 

Benefits

Military Retirement Pensions $ 1,560,498.4 $ (473,541.3) $ 1,086,957.1

Military Pre Medicare-Eligible 

Retiree Health Benefits 235,711.1 0.0 235,711.1

Military Medicare-Eligible Retiree 

Health Benefits 522,533.6 (197,347.5) 325,186.1

Total Pension and Health 

Actuarial Benefits $ 2,318,743.1 $ (670,888.8) $ 1,647,854.3

Other Actuarial Benefits

FECA $ 6,530.3 $ 0.0 $ 6,530.3

Voluntary Separation Incentive 

Programs 525.5 (219.9) 305.6

DoD Education Benefits Fund 1,367.5 (1,367.5) 0.0

Other 6,849.2 (5,122.2) 1,727.0

Total Other Actuarial Benefits $ 15,272.5 $ (6,709.6) $ 8,562.9

Total Military Retirement and 

Other Federal Employment 

Benefits

$ 2,334,015.6 $ (677,598.4) $ 1,656,417.2

Actuarial Cost Method Used: Aggregate Entry-Age Method 

Assumptions: Effective Interest 

Market Value of Investments in Market-based and Marketable Securities: $851.3 billion
Department of Defense Agency Financial Report for FY 2015

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Military Retirement and Other Federal Employment Benefits Dollars in Millions

2015

As of September 30

Military 

Retirement 

Pensions

Military PreMedicare 

Eligible 

Retiree 

Health 

Benefits

Military 

MedicareEligible 

Retiree Health 

Benefits

Voluntary 

Separation 

Incentive 

Programs

DoD 

Education 

Benefits Fund

Beginning Actuarial Liability $ 1,560,498.4 $ 235,711.1 $ 522,533.6 $ 525.5 $ 1,367.5

Normal Cost 31,175.0 8,495.5 11,199.4 0.0 111.9

Interest Cost 66,560.6 10,279.6 22,744.6 14.9 45.6

Plan Amendments 22.7 (11,055.7) (10,151.6) 0.0 0.0

Experience Losses (Gains) (33,771.8) (5,265.6) (17,250.6) (1.1) 57.0

Other Factors 0.0 0.0 0.0 0.0 (167.5)

Subtotal: Expenses before 

Losses (Gains) from Actuarial 

Assumption Changes

63,986.5 2,453.8 6,541.8 13.8 47.0

Actuarial (Gain)/Loss due to:

Changes in Trend Assumptions 0.0 (10,141.0) (52,103.7) 0.0 0.0

Changes in Assumptions Other 

than Trend (9,368.1) 3,254.2 40,903.7 5.3 0.0

Subtotal: Losses (Gains) from 

Actuarial Assumption Changes (9,368.1) (6,886.8) (11,200.0) 5.3 0.0

Total Expenses 54,618.4 (4,433.0) (4,658.2) 19.1 47.0

Less Benefit Outlays (56,598.2) (10,401.9) (9,681.4) (91.5) (277.2)

Total Changes in Actuarial 

Liability $ (1,979.8) $ (14,834.9) $ (14,339.6) $ (72.4) $ (230.2)

Ending Actuarial Liability $ 1,558,518.6 $ 220,876.2 $ 508,194.0 $ 453.1 $ 1,137.3

The Department complies with SFFAS No. 33, “Pensions, Other Retirement Benefits, and 

Other Postemployment Benefits: Reporting the Gains and Losses from Changes in 

Assumptions and Selecting Discount Rates and Valuation Dates.” The standard requires the 

separate presentation of gains and losses from changes in long-term assumptions used to 

estimate liabilities associated with pensions, other retirement and postemployment benefits.

The SFFAS No. 33 also provides a standard for selecting the discount rate and valuation 

date used in estimating these liabilities.
Department of Defense Agency Financial Report for FY 2015

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Military Retirement Pensions

The Military Retirement Fund is a defined benefit plan authorized by Public Law (PL) 98-94

to provide funds used to pay annuities and pensions to retired military personnel and their 

survivors. The Department of Defense (DoD) Board of Actuaries approves the long-term 

economic assumptions for inflation, salary, and interest. The actuaries calculate the 

actuarial liabilities annually using economic assumptions and actual experience (e.g., 

mortality and retirement rates). The actuaries used the following assumptions to calculate 

the FY 2015 roll-forward amount:

Military Retirement Pensions Inflation Salary Interest

Fiscal Year 2015 1.7% (actual) 1.0% (actual) 4.3%

Fiscal Year 2016 0.0% (estimated) 1.3% (estimated) 4.1%

Long Term 2.1% 2.3% 4.1%

Actuarial Cost Method Used: Aggregate Entry-Age Normal Method

Market Value of Investments in Market-Based and Marketable Securities: $645.6 billion

Assumed Interest Rate: 4.1%

Historically, the initial unfunded liability of the program was amortized over a 50-year 

period. Effective FY 2008, the initial unfunded liability is amortized over a 42-year period to 

ensure annual payments cover interest on the unfunded actuarial liability, with the last 

payment expected October 1, 2025. All subsequent gains and losses experienced by the 

system are amortized over a 30 year period.

MILITARY RETIREMENT HEALTH BENEFITS (MRHB)

The MRHB are post-retirement benefits the Department provides to non-Medicare-eligible 

military retirees and other eligible beneficiaries through private sector health care providers 

and the Department’s medical treatment facilities. The actuaries calculate actuarial liabilities 

annually using assumptions and actual experience. For the FY 2015 actuarial liability 

calculation, actuaries used the following assumptions:

MRHB Medical Trend FY 2014 –

FY 2015

Ultimate Rate 

FY 2039

Non-Medicare Inpatient (Direct Care) 5.70% 4.85%

Non-Medicare Outpatient (Direct Care) 5.75% 4.85%

Non-Medicare Prescriptions (Direct Care) 2.75% 4.85%

Non-Medicare Inpatient (Purchased Care) 0.50% 4.85%

Non-Medicare Outpatient (Purchased Care) 2.05% 4.85%

Non-Medicare Prescriptions (Purchased Care) 5.90% 4.85%

U.S. Family Health Plan (USFHP) (Purchased Care) 3.58% 4.85%

Actuarial Cost Method Used: Aggregate Entry-Age Normal Method

Assumed Interest Rate: 4.1%
Department of Defense Agency Financial Report for FY 2015

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Medicare-Eligible Retiree Health Care Fund (MERHCF) Benefits 

In accordance with PL 106-398, MERHCF accumulates funds to finance the health care 

program liabilities of Medicare-eligible retirees for all the Uniformed Services and specific 

Medicare-eligible beneficiaries. The DoD Board of Actuaries approves the long-term 

assumptions for medical trends and interest. The actuaries calculate the actuarial liabilities 

annually using actual experience (e.g., mortality and retirement rates, direct care costs, 

purchased care). The actuaries used the following assumptions to calculate the FY 2015 

roll-forward amount:

MERHCF Benefits – Medical Trend FY 2014 –

FY 2015

Ultimate Rate 

FY 2039

Medicare Inpatient (Direct Care) 1.68% 4.85%

Medicare Inpatient (Purchased Care) 1.68% 4.85%

Medicare Outpatient (Direct Care) 2.09% 4.85%

Medicare Outpatient (Purchased Care) 2.09% 4.85%

Medicare Prescriptions (Direct Care) 2.75% 4.85%

Medicare Prescriptions (Purchased Care) 4.91% 4.85%

Medicare USFHP (Purchased Care) 2.60% 4.85%

Actuarial Cost Method Used: Aggregate Entry-Age Normal Method

Market Value of Investments in Market-Based and Marketable Securities: $261.1 billion

Assumed Interest Rate: 4.1%

The MERHCF liability includes Medicare liabilities for all Uniformed Services. The 

$508.2 billion liability includes $496.3 billion for the Department, $10.6 billion for the Coast 

Guard, $1.2 billion for the Public Health Service, and $78.6 million for National Oceanic and 

Atmospheric Administration (NOAA). The FY 2015 contributions from each of the Uniformed 

Services were $7.0 billion from the Department, $177.0 million from the Coast Guard, 

$28.0 million from the Public Health Service, and $1.3 million from NOAA.

Federal Employees Compensation Act (FECA) 

The Department of Labor (DOL) annually determines the liability for future workers’ 

compensation benefits including the expected liability for death, disability, medical, and 

miscellaneous costs for approved compensation cases, plus a component for 

incurred-but-not-reported claims. The liability is determined using historical benefit 

payment patterns related to a specific incurred period to predict the final payment related to 

that period. Consistent with past practice, these projected annual benefit payments have 

been discounted to present value based on interest rate assumptions on the U.S. 

Department of the Treasury’s Yield Curve for Treasury Nominal Coupon Issues (the TNC 

Yield Curve) to reflect the average duration of income payments and medical payments. An 

interest rate for wage benefits of 3.1 percent was assumed for year one and 3.1 percent for 

year two and thereafter. An interest rate for medical benefits of 2.5 percent was assumed 

for year one and 2.5 percent for year two and thereafter. 

The DOL calculates this liability using wage inflation factors (cost of living adjustments or 

COLAs) and medical inflation factors (consumer price index medical or CPIM). The actual 

rates for these factors for charge back year (CBY) 2015 were also used to adjust the 

methodology’s historical payments to current year constant dollars. 
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The compensation COLAs and CPIMs used in the projections for various charge back years 

were as follows:

Federal Employees Compensation Act (FECA)

CBY COLA CPIM

2016 1.64% 2.94%

2017 1.47% 2.98%

2018 1.33% 3.09%

2019 1.43% 3.39%

 2020+ 1.65% 3.69%

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 2015 to the average 

pattern observed during the prior three charge back years, and (4) a comparison of the 

estimated liability per case in the 2015 projection to the average pattern for the projections 

for the most recent three years.

DoD Education Benefits Fund (EBF)

The EBF was established by PL 98-525 to recruit and retain military members and aid in the 

readjustment of military members to civilian life. The actuaries calculate the actuarial 

liability annually based on the assumed interest rate of 3.5 percent as approved by the DoD 

Board of Actuaries. 

The Market Value of Investments in Market-based and Marketable Securities: $1.5 billion.

Voluntary Separation Incentive (VSI) Program 

The VSI Program was established by PL 102-190 to reduce the number of military personnel 

on active duty. The DoD Board of Actuaries approved the assumed annual interest rate of 

2.8 percent used to calculate the actuarial liability. Since VSI is no longer offered, the 

actuarial liability calculated annually is expected to continue to decrease with benefit outlays 

and increase with interest cost. 

The Market Value of Investments in Market-based and Marketable Securities: 

$193.6 million.

Other Federal Employment Benefits

Other Federal Employment Benefits primarily consists of accrued pensions and annuities and 

an estimated liability for incurred-but-not-reported medical claims not processed prior to 

fiscal year-end.
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NOTE 18. GENERAL DISCLOSURES RELATED TO THE STATEMENT OF NET 

COST

Costs and Exchange Revenue Dollars in Millions

As of September 30 2015 2014

Military Retirement Benefits 

Gross Cost

Intragovernmental Cost $ 4.8 $ 5.4

Non-Federal Cost $ 66,858.7 $ 101,872.2

Total Cost $ 66,863.5 $ 101,877.6

Earned Revenue

Intragovernmental Revenue $ (15,731.5) $ (25,061.3)

Non-Federal Revenue $ 0.0 $ 0.0

Total Revenue $ (15,731.5) $ (25,061.3)

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ (20,568.0) $ 20,527.1

Total Net Cost $ 30,564.0 $ 97,343.4

Civil Works

Gross Cost

Intragovernmental Cost $ 1,387.8 $ 1,647.1

Non-Federal Cost $ 7,798.7 $ 7,195.1

Total Cost $ 9,186.5 $ 8,842.2

Earned Revenue

Intragovernmental Revenue $ (641.8) $ (709.3)

Non-Federal Revenue $ (752.7) $ (690.6)

Total Revenue $ (1,394.5) $ (1,399.9)

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ 0.0 $ 0.0

Total Net Cost $ 7,792.0 $ 7,442.3

Military Personnel

Gross Cost

Intragovernmental Cost $ 48,493.9 $ 33,926.5

Non-Federal Cost $ 90,817.5 $ 109,368.4

Total Cost $ 139,311.4 $ 143,294.9

Earned Revenue

Intragovernmental Revenue $ (1,205.5) $ (1,160.7)

Non-Federal Revenue $ (39.1) $ (94.3)

Total Revenue $ (1,244.6) $ (1,255.0)

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ 0.0 $ 0.0

Total Net Cost $ 138,066.8 $ 142,039.9

Operations, Readiness & Support

Gross Cost

Intragovernmental Cost $ (60,576.3) $ (49,742.3)

Non-Federal Cost $ 303,528.3 $ 322,522.9

Total Cost $ 242,952.0 $ 272,780.6

Earned Revenue

Intragovernmental Revenue $ 10,480.5 $ 6,191.7

Non-Federal Revenue $ (42,632.3) $ (54,104.7)
Department of Defense Agency Financial Report for FY 2015

Financial Information

94

Costs and Exchange Revenue Dollars in Millions

As of September 30 2015 2014

Total Revenue $ (32,151.8) $ (47,913.0)

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ (6,881.5) $ (13,651.3)

Total Net Cost $ 203,918.7 $ 211,216.3

Procurement

Gross Cost

Intragovernmental Cost $ 23,400.9 $ 28,235.8

Non-Federal Cost $ 84,375.7 $ 70,252.4

Total Cost $ 107,776.6 $ 98,488.2

Earned Revenue

Intragovernmental Revenue $ (2,580.5) $ (1,725.4)

Non-Federal Revenue $ (1,323.5) $ (2,859.1)

Total Revenue $ (3,904.0) $ (4,584.5)

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ 0.0 $ 0.0

Total Net Cost $ 103,872.6 $ 93,903.7

Research, Development, Test & Evaluation

Gross Cost

Intragovernmental Cost $ 20,159.6 $ 19,879.5

Non-Federal Cost $ 50,301.8 $ 48,862.0

Total Cost $ 70,461.4 $ 68,741.5

Earned Revenue

Intragovernmental Revenue $ (7,571.4) $ (4,408.4)

Non-Federal Revenue $ (385.1) $ (2,949.2)

Total Revenue $ (7,956.5) $ (7,357.6)

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ 0.0 $ 0.0

Total Net Cost $ 62,504.9 $ 61,383.9

Family Housing & Military Construction

Gross Cost

Intragovernmental Cost $ 1,067.9 $ 1,066.7

Non-Federal Cost $ 18,921.9 $ 31,990.7

Total Cost $ 19,989.8 $ 33,057.4

Earned Revenue

Intragovernmental Revenue $ (5,753.3) $ (5,521.8)

Non-Federal Revenue $ (373.6) $ (822.0)

Total Revenue $ (6,126.9) $ (6,343.8)

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ 0.0 $ 0.0

Total Net Cost $ 13,862.9 $ 26,713.6
Department of Defense Agency Financial Report for FY 2015

Financial Information

95

Consolidated

Gross Cost

Intragovernmental Cost $ 33,938.6 $ 35,018.7

Non-Federal Cost $ 622,602.6 $ 692,063.7

Total Cost $ 656,541.2 $ 727,082.4

Earned Revenue

Intragovernmental Revenue $ (23,003.5) $ (32,395.2)

Non-Federal Revenue $ (45,506.3) $ (61,519.9)

Total Revenue $ (68,509.8) $ (93,915.1)

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ (27,449.5) $ 6,875.8

Costs Not Assigned to Programs $ 0.0 $ 0.0

(Less: Earned Revenues) Not Attributed to Programs $ 0.0 $ 0.0

Total Net Cost $ 560,581.9 $ 640,043.1

The Statement of Net Cost (SNC) represents the net cost of programs and organizations of 

the Department supported by appropriations or other means. The intent of the SNC is to 

provide gross and net cost information related to the amount of output or outcome for a 

given program or organization administered by a responsible reporting entity. The 

Department’s current processes and systems capture costs based on appropriation groups 

as presented in the schedule above. The lower level costs for major programs are not 

presented as required by the Government Performance and Results Act. The Department is 

in the process of reviewing available data and developing a cost reporting methodology 

required by SFFAS No. 4, “Managerial Cost Accounting Concepts and Standards for the 

Federal Government,” amended by SFFAS No. 30, “Inter-Entity Cost Implementation.”

Intragovernmental costs and revenues represent transactions between two reporting 

entities within the Federal Government. Public costs and revenues are exchange 

transactions between the reporting entity and a non-Federal entity. 

The Department’s systems do not track intragovernmental transactions by customer. Buyer 

side expenses are adjusted to agree with internal seller side revenues. Expenses are 

generally adjusted by reclassifying amounts between Federal and non-Federal expenses. 

Intradepartmental revenues and expenses are then eliminated.

The information presented on the SNC is compiled from many financial systems and 

sources. Newer financial systems record costs based on business events (e.g., receipt of 

goods or services), while many older financial systems record costs based upon financial 

transactions (e.g., invoices). In addition, some costs (e.g., actuarial) are derived from 

non-financial systems.

Abnormal Balances

Operations, Readiness & Support Intragovernmental Gross Cost and Earned Revenue on the 

SNC have abnormal balances of $60.6 billion and $4.8 billion, respectively in FY 2015, and 

abnormal balances of $49.7 billion and $6.2 billion, respectively in FY 2014. The current 

business practice is to report most eliminations in this program group resulting in the 

abnormal balance presentation. 
Department of Defense Agency Financial Report for FY 2015

Financial Information

96

Other Disclosures

The Department’s military retirement and postemployment costs are reported in accordance 

with SFFAS No. 33, “Pensions, Other Retirement Benefits, and Other Postemployment 

Benefits: Reporting the Gains and Losses from Changes in Assumptions and Selecting 

Discount Rates and Valuation Dates.” The standard requires the separate presentation of 

gains and losses from changes in long term assumptions used to estimate liabilities 

associated with pensions, other retirement benefits, and other postemployment benefits on 

the SNC.

NOTE 19. DISCLOSURES RELATED TO THE STATEMENT OF CHANGES IN NET 

POSITION

Restatements

The Department corrected a $149.0 million overstatement of General Property, Plant and 

Equipment and a $134.0 million understatement of Nonfederal Payables (to the Public). See 

Note 26, Restatements, for further information.

Other Disclosures

Other Financing Sources, Other consists primarily of nonexchange gains and losses 

necessary to reconcile the proprietary and budgetary amounts. 

Reconciliation Differences

In accordance with OMB and U.S. Treasury guidance, Appropriations reported on the 

Statement of Budgetary Resources exceeds Appropriations Received on the Statement of 

Changes in Net Position by $66.2 billion.

Year Ended September 30, 2015

Reconciliation of Appropriations on the Statement of Budgetary Resources to Appropriations 

Received on the Statement of Changes in Net Position

Dollars in Billions

Total

Appropriations, Statement of Budgetary Resources $ 720.5

Less: Appropriations Received, Statement of Changes in Net Position (654.3)

Total Reconciling Amount $ 66.2

Items Reported as Reductions to Appropriations, Statement of Budgetary Resources

 Permanent and Temporary Reductions $ (57.8)

 Miscellaneous items 0.3

Items Reported in Net Cost of Operations, Statement of Changes in Net Position

 Trust and Special Fund Receipts $ 123.7

Total Reconciling Items $ 66.2
Department of Defense Agency Financial Report for FY 2015

Financial Information

97

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 2015 2014

Net Amount of Budgetary Resources Obligated for Undelivered Orders at 

the End of the Period $ 429,619.1 $ 458,568.2

Abnormal Balances

Spending Authority from Offsetting Collections and Actual Offsetting Collections reported on 

the Statement of Budgetary Resources (SBR) includes an abnormal balance of 

$336.5 million in USSGL 497200, Downward Adjustments of Prior-Year Paid Delivered 

Orders – Obligations, Recoveries, due to offsetting entries in preparation for Enterprise 

Resource Planning system implementation. Overall, these offsetting entries have no effect 

on the amounts presented on the SBR. 

Unobligated balance, Apportioned reported on the SBR includes abnormal balances of 

$58.5 million in USSGL 461000, Allotments - Realized Resources, and $2.3 million in 

USSGL 451000, Apportionments. Both abnormal balances are due to a posting error during 

funds distribution and did not result in over-execution of funds. The Department is 

researching both abnormal balances for correction in FY 2016.

Reconciliation Differences

In accordance with OMB and U.S. Treasury guidance, Appropriations reported on the 

Statement of Budgetary Resources exceeds Appropriations Received on the Statement of 

Changes in Net Position by $66.2 billion. Reference Note 19, Disclosures Related to the 

Statement of Changes in Net Position, for additional details.

Differences exist between the amounts reported on the SBR and on the Budget of the U.S. 

Government (the Budget). The FY 2017 Budget will display the FY 2015 actual values and 

is expected to be published in February 2016. The FY 2016 Budget contains the actual 

values for FY 2014 reporting.

Reconciliation of Combined SBR to President’s Budget Dollars in Billions

Fiscal Year 2014 Actual

As of September 30

Budgetary 

Resources

Obligations 

Incurred

Distributed 

Offsetting 

Receipts

Agency 

Outlays, Net

Combined SBR $ 1,084.9 $ 934.2 $ 87.7 $ 641.8

Differences:

Other (0.7) 1 0.2 0.0 0.0

Budget of the U.S. Government $ 1,084.2 2 $ 934.4 $ 87.7 $ 641.8

1. The $(0.7) billion difference reported above for Budgetary Resources is primarily due to pending adjustments to the SBR, 

different reporting requirements on the SBR versus the Budget, and other differences requiring research.

2. The source of the Budgetary Resources figure was the DoD SBR to SF133 Reconciliation Summary on the Office of 

Management and Budget MAX website.
Department of Defense Agency Financial Report for FY 2015

Financial Information

98

Permanent Indefinite Appropriations

The Department of Defense received the following permanent indefinite appropriations:

Department of the Army General Gift Fund (10 USC 2601(C)(1))

Department of the Navy General Gift Fund (10 USC 2601(C)(2))

Department of the Air Force General Gift Fund (10 USC 2601(C)(3))

Department of Defense General Gift Fund (10 USC 2601)

Disposal of Department of Defense Real Property (40 USC 485(h)(2)(A)(B))

Lease of Department of Defense Real Property (40 USC 485(h)(2)(A)(B))

Foreign National Employees Separation Pay Account, Defense (10 USC 1581)

United States Naval Academy Gift and Museum Fund (10 USC 6973-4)

Ship Stores Profits, Navy (10 USC 7220, 31 USC 1321)

Burdensharing Contributions (10 USC 2350j) 

Forest Program (10 USC 2665) 

Medicare-Eligible Retiree Health Care Fund (10 USC 1111)

Military Retirement Fund (10 USC 1461)

Education Benefits Fund (10 USC 2006)

Host Nation Support for U.S. Relocation Activities (10 USC 2350k)

Hydraulic Mining Debris Reservoir (33 USC 683)

Maintenance and Operation of Dams and Other Improvements of Navigable Waters (16 USC 

810(a))

Payments to States (33 USC 701c-3)

Wildlife Conservation (16 USC 670-670(f))

Ainsworth Bequest (31 USC 1321)

DoD Family Housing Improvement Fund (10 USC 2883 (a))

DoD Military Unaccompanied Housing Improvement Fund (10 USC 2883 (a))

Voluntary Separation Incentive Fund (10 USC 1175(h))

Rivers & Harbors Contributed Funds (33 USC 560, 701h)

Concurrent Receipt Accrual Payments to the Military Retirement Fund (10 USC 1466(b)(1))

Rocky Mountain Arsenal, Restoration (100 Statute, 4003 SEC 1367)

DoD Family Housing Improvement Fund, Direct Loan, Financing Account (2 USC 661d)

DoD Family Housing Improvement Fund, Guaranteed Loan, Financing Account (2 USC 661d)

Homeowners Assistance Fund (10 USC 4551-4555; 42 USC 3374(d), Title United States 

Code; Public Law 111-5)
Department of Defense Agency Financial Report for FY 2015

Financial Information

99

Payments to Military Retirement Fund, Defense (10 USC, 1466)

Payment to Department of Defense Medicare-Eligible Retiree Health Care Fund (10 USC 

1116(a))

Arms Initiative, Guaranteed Loan Financing Account, Army (10 USC 2501, 10 USC 4551-

4555)

Medicare-Eligible Retiree Health Fund Contribution, Navy (10 USC 1116)

Medicare-Eligible Retiree Health Fund Contribution, Marine Corps (10 USC 1116)

Medicare-Eligible Retiree Health Fund Contribution, Reserve Personnel, Navy (10 USC 1116)

Medicare-Eligible Retiree Health Fund Contribution, Reserve Personnel, Marine Corps (10 

USC 1116)

Medicare-Eligible Retiree Health Fund Contribution, Army (10 USC 1116)

Medicare-Eligible Retiree Health Fund Contribution, Reserve Personnel, Army (10 USC 1116)

Medicare-Eligible Retiree Health Fund Contribution, National Guard Personnel, Army (10 

USC 1116)

Medicare-Eligible Retiree Health Fund Contribution, Air Force (10 USC 1116)

Medicare-Eligible Retiree Health Fund Contribution, Reserve Personnel, Air Force (10 USC 

1116)

Medicare-Eligible Retiree Health Fund Contribution, National Guard Personnel, Air Force (10 

USC 1116)

Department of Defense Vietnam War Commemoration Fund, Defense (PL 110-181, 122 

Stat. 141 (Sec. 598))

The above permanent indefinite appropriations cover a wide variety of purposes to help the 

Department accomplish its missions. These purposes primarily include: (1) military retirees’ 

health care benefits, retirement and survivor pay, and education benefits for veterans; 

(2) wildlife habitat restoration and water resources maintenance; (3) relocation of armed 

forces within a host nation; (4) separation payments for foreign nationals; and (5) upkeep 

of libraries and museums.
Department of Defense Agency Financial Report for FY 2015

Financial Information

100

Apportionment Categories for Obligations Incurred

Apportionment categories are determined in accordance with the guidance provided in OMB 

Circular No. A-11, “Preparation, Submission and Execution of the Budget.” Category A 

relates to appropriations for a specific period of time (e.g., Military Personnel appropriation), 

and category B relates to appropriations for a specific project (e.g., Military Construction 

appropriation). The Department reported the following amounts of obligations incurred:

Year Ended September 30, 2015 Dollars in Billions

Apportionment 

Category A

Apportionment 

Category B

Exempt From 

Apportionment

Total

Obligations Incurred – Direct $ 398.0 $ 204.8 $ 144.5 $ 747.3

Obligations Incurred – Reimbursable 15.1 147.7 7.8 170.6

Total Obligations Incurred: $ 413.1 $ 352.5 $ 152.3 $ 917.9

Legal Arrangements Affecting the Use of Unobligated Balances

A portion of the Department’s unobligated balances represent trust fund receipts collected in 

the current fiscal year exceeding the amount needed to pay benefits or other valid 

obligations. These receipts are temporarily precluded from obligation by law due to a 

benefit formula or other limitation. The receipts, however, are assets of the funds and are 

available for obligation in the future. The Department operates within the constraints of 

fiscal law and has no additional legal arrangements affecting the use of unobligated 

balances.

Other Disclosures

In accordance with OMB guidance, $112.6 billion of General Fund appropriations received by 

the Department are also recognized on the SBR as appropriations received for trust and 

special funds. The primary difference is due to this OMB guidance requiring duplicate 

reporting on the SBR of the Military Services’ contributions and U.S. Treasury’s payments to 

the Military Retirement Trust Fund and Medicare-Eligible Retiree Health Care Fund.

The SBR includes intra-entity transactions because the statements are presented as 

combined.

The Department utilizes borrowing authority for the Military Housing Privatization Initiative. 

Borrowing authority is used in accordance with OMB Circular No. A-129, Policies for Federal 

Credit Programs and Non-Tax Receivables. 

The Department received additional funding of $64.2 billion to cover obligations incurred 

above baseline operations in support of contingency operations.
Department of Defense Agency Financial Report for FY 2015

Financial Information

101

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 2015 Restated 2014

Resources Used to Finance Activities

Budgetary Resources Obligated:

Obligations incurred $ 917,933.1 $ 934,176.7

Less: Spending authority from offsetting collections and recoveries (-) (217,308.3) (211,124.0)

Obligations net of offsetting collections and recoveries $ 700,624.8 $ 723,052.7

Less: Offsetting receipts (-) (86,772.6) (87,713.9)

Net obligations $ 613,852.2 $ 635,338.8

Other Resources:

Donations and forfeitures of property $ 12.4 $ 10.6

Transfers in/out without reimbursement (+/-) 84.2 56.6

Imputed financing from costs absorbed by others 4,899.3 5,569.8

Other (+/-) 10,033.9 (19,087.4)

Net other resources used to finance activities $ 15,029.8 $ (13,450.4)

Total resources used to finance activities $ 628,882.0 $ 621,888.4

Resources Used to Finance Items not Part of the Net Cost of 

Operations

Change in budgetary resources obligated for goods, services and 

benefits ordered but not yet provided:

Undelivered Orders (-) $ 28,943.9 $ (9,879.6)

Unfilled Customer Orders (2,449.9) 234.8

Resources that fund expenses recognized in prior Periods (-) (41,865.4) (16,077.7)

Budgetary offsetting collections and receipts that do not affect Net Cost of 

Operations 1,560.8 2,272.0

Resources that finance the acquisition of assets (-) (83,090.3) (90,108.0)

Other resources or adjustments to net obligated resources that do not 

affect Net Cost of Operations:

Less: Trust or Special Fund Receipts Related to exchange in the 

Entity’s Budget (-) (334.3) (359.2)

Other (+/-) (9,575.5) 18,652.7

Total resources used to finance items not part of the Net Cost of 

Operations $ (106,810.7) $ (95,265.0)

Total resources used to finance the Net Cost of Operations $ 522,071.3 $ 526,623.4

Components of the Net Cost of Operations that will not Require or 

Generate Resources in the Current Period

Components Requiring or Generating Resources in Future Period:

Increase in annual leave liability $ 94.9 $ 151.2

Increase in environmental and disposal liability 64.0 713.6

Upward/Downward reestimates of credit subsidy expense (+/-) (15.1) (94.5)

Increase in exchange revenue receivable from the public (-) (3,380.2) 2,644.5

Other (+/-) 9,008.1 68,002.0

Total components of Net Cost of Operations that will Require or 

Generate Resources in future periods $ 5,771.7 $ 71,416.8

Components not Requiring or Generating Resources:

Depreciation and amortization $ 33,113.8 $ 46,734.8

Revaluation of assets or liabilities (+/-) (3,474.3) (12,046.6)

Other (+/-)
Department of Defense Agency Financial Report for FY 2015

Financial Information

102

Reconciliation of Net Cost of Operations to Budget Dollars in Millions

As of September 30 2015 Restated 2014

Trust Fund Exchange Revenue (44,444.1) (51,601.4)

Cost of Goods Sold 63,318.3 58,445.5

Operating Materiel and Supplies Used 39,594.1 29,960.0

Other (55,368.9) (29,489.4)

Total Components of Net Cost of Operations that will not Require or 

Generate Resources $ 32,738.9 $ 42,002.9

Total components of Net Cost of Operations that will not Require or 

Generate Resources in the current period $ 38,510.6 $ 113,419.7

Net Cost of Operations $ 560,581.9 $ 640,043.1

The Reconciliation of Net Cost of Operation to Budget reconciles the cost reflected on the 

Statement of Net Cost to the budgetary information on the Statement of Budgetary 

Resources. This is accomplished by aligning budgetary obligations and non-budgetary 

resources available with the cost of the Department’s operations.

Abnormal Balances

Spending authority from offsetting collections includes an abnormal balance of

$336.5 million in USSGL 497200, Downward Adjustments of Prior-Year Paid Delivered 

Orders – Obligations, Recoveries, due to offsetting entries in preparation for Enterprise 

Resource Planning system implementation. 

Restatements

The Department corrected a $149.0 million overstatement of General Property, Plant and 

Equipment and $134.0 million understatement of Accounts Payable. See Note 26, 

Restatements, for further details.

Other Disclosures

Due to the Department’s financial systems limitations, budgetary data does not agree with 

proprietary expenses and capitalized assets. This difference is a previously identified 

deficiency. 

The following adjustments (absolute value) were made to balance the Reconciliation of Net 

Cost of Operations to Budget:

Adjustments to Reconcile Net Cost of Operations to Budget Dollars in Millions

Resources that Finance the Acquisition of Assets $ 5,936.5

Revaluation of Assets or Liabilities $ 3,178.2

Other Components not Requiring or Generating Resources $ 4,900.5

Total Amount $ 14,015.2
Department of Defense Agency Financial Report for FY 2015

Financial Information

103

The following Reconciliation of Net Cost of Operations to Budget lines are presented as 

combined instead of consolidated as intra-agency budgetary transactions are not being 

eliminated:

• Obligations Incurred

• Less: Spending Authority from Offsetting Collections and Recoveries

• Obligations Net of Offsetting Collections and Recoveries

• Less: Offsetting Receipts

• Net Obligations

• Undelivered Orders

• Unfilled Customer Orders

Other Resources, Other primarily consists of non-exchange gains and losses to revalue 

assets, as well as reconcile the proprietary and budgetary amounts. 

Other Resources or Adjustments to Net Obligated Resources that Do Not Affect Net Cost of 

Operations, Other primarily consists of non-exchange gains and losses to revalue assets, as 

well as reconcile the proprietary and budgetary amounts. 

Components Requiring or Generating Resources in Future Period, Other consists primarily of 

future funded expenses.

Components not Requiring or Generating Resources, Other primarily consists of cost 

capitalization offsets, applied overhead, and other expenses not requiring budgetary 

resources.

NOTE 22. DISCLOSURES RELATED TO INCIDENTAL CUSTODIAL 

COLLECTIONS

The Department collected $2.3 million of incidental custodial revenues generated primarily 

from forfeitures of unclaimed money and property. These funds are not available for use by 

the Department. At the end of each fiscal year, the accounts are closed and the balances 

are relinquished to the U.S. Treasury.

The Department also distributed $2.4 million of incidental custodial collections received and 

reported in a prior year from the U.S. Treasury for premium refunds under the Defense 

Base Act Insurance Program.
Department of Defense Agency Financial Report for FY 2015

Financial Information

104

NOTE 23. FUNDS FROM DEDICATED COLLECTIONS

Funds from Dedicated Collections Dollars in Millions

2015

As of September 30

Harbor 

Maintenance 

Trust Fund

Rivers and 

Harbors 

Contributed 

and Advance 

Fund

Other Funds Eliminations

Total Funds 

from 

Dedicated 

Collections

Balance Sheet

Assets

Fund Balance with Treasury $ 107.6 $ 1,251.4 $ 2,299.4 $ 0.0 $ 3,658.4

Investments 8,702.1 0.0 326.0 0.0 9,028.1

Accounts and Interest Receivable 492.8 2.4 7.2 (5.2) 497.2

Other Assets 602.7 27.9 787.2 0.0 1,417.8

Total Assets $ 9,905.2 $ 1,281.7 $ 3,419.8 $ (5.2) $ 14,601.5

Liabilities and Net Position

Accounts Payable and Other 

Liabilities 7.3 1,295.9 80.3 (4.9) 1,378.6

Total Liabilities $ 7.3 $ 1,295.9 $ 80.3 $ (4.9) $ 1,378.6

Cumulative Results of Operations $ 9,897.9 $ (14.2) $ 3,339.5 $ 1,451.5 $ 14,674.7

Total Liabilities and Net Position $ 9,905.2 $ 1,281.7 $ 3,419.8 $ 1,446.6 $ 16,053.3

Statement of Net Cost

Program Costs $ 68.6 $ 444.1 $ 1,192.3 $ (123.6) $ 1,581.4

Less Earned Revenue 0.0 (447.5) (332.0) 0.2 (779.3)

Net Program Costs 68.6 (3.4) 860.3 (123.4) 802.1

Net Cost of Operations $ 68.6 $ (3.4) $ 860.3 $ (123.4) $ 802.1

Statement of Changes in Net Position

Net Position Beginning of the Period $ 9,612.3 $ (1.3) $ 2,990.3 $ 0.0 $ 12,601.3

Net Cost of Operations (68.6) 3.4 (860.3) 123.4 (802.1)

Budgetary Financing Sources 360.1 0.0 1,139.2 1,314.0 2,813.3

Other Financing Sources (5.9) (16.3) 70.3 14.1 62.2

Change in Net Position $ 285.6 $ (12.9) $ 349.2 $ 1,451.5 $ 2,073.4

Net Position End of Period $ 9,897.9 $ (14.2) $ 3,339.5 $ 1,451.5 $ 14,674.7
Department of Defense Agency Financial Report for FY 2015

Financial Information

105

Funds from Dedicated Collections Dollars in Millions

2014

As of September 30

Harbor 

Maintenance 

Trust Fund

Rivers and 

Harbors 

Contributed 

and Advance 

Fund

Other Funds Eliminations

Total Funds 

from 

Dedicated 

Collections

Balance Sheet

Assets

Fund Balance with Treasury $ 117.0 $ 1,084.7 $ 1,367.9 $ 0.0 $ 2,569.6

Investments 8,407.5 0.0 879.4 0.0 9,286.9

Accounts and Interest Receivable 476.4 4.9 6.9 (0.2) 488.0

Other Assets 618.1 30.5 807.9 0.0 1,456.5

Total Assets $ 9,619.0 $ 1,120.1 $ 3,062.1 $ (0.2) $ 13,801.0

Liabilities and Net Position

Accounts Payable and Other 

Liabilities 6.7 1,121.4 71.8 (7.2) 1,192.7

Total Liabilities $ 6.7 $ 1,121.4 $ 71.8 $ (7.2) $ 1,192.7

Cumulative Results of Operations $ 9,612.3 $ (1.3) $ 2,990.3 $ 1,298.6 $ 13,899.9

Total Liabilities and Net Position $ 9,619.0 $ 1,120.1 $ 3,062.1 $ 1,291.4 $ 15,092.6

Statement of Net Cost

Program Costs $ 45.4 $ 342.1 $ 1,241.5 $ (102.3) $ 1,526.7

Less Earned Revenue 0.0 (379.4) (339.0) 0.1 (718.3)

Net Program Costs 45.4 (37.3) 902.5 (102.2) 808.4

Net Cost of Operations $ 45.4 $ (37.3) $ 902.5 $ (102.2) $ 808.4

Statement of Changes in Net Position

Net Position Beginning of the Period $ 9,080.4 $ 2.0 $ 2,596.6 $ 0.0 $ 11,679.0

Net Cost of Operations (45.4) 37.3 (902.5) 102.2 (808.4)

Budgetary Financing Sources 618.2 0.0 1,251.6 1,123.8 2,993.6

Other Financing Sources (40.9) (40.6) 44.6 72.6 35.7

Change in Net Position $ 531.9 $ (3.3) $ 393.7 $ 1,298.6 $ 2,220.9

Net Position End of Period $ 9,612.3 $ (1.3) $ 2,990.3 $ 1,298.6 $ 13,899.9

The SFFAS No. 43, “Funds from Dedicated Collections: Amending SFFAS 27, Identifying and 

Reporting Earmarked Funds,” requires disclosure of Funds from Dedicated Collections 

separate from All Other Funds on the Balance Sheet. Funds must meet three criteria to be 

classified as funds from dedicated collections: (1) a statute committing the use of 

specifically-identified revenues provided by non-Federal sources for designated purposes; 

(2) explicit authority to retain the revenues; and (3) a requirement to separately account 

and report on the revenues. The Department’s funds from dedicated collections are either 

special or trust funds and use both receipt and expenditure accounts to report activity to 

Treasury. There has been no legislation significantly altering the purposes of the funds.

The Total column is shown as consolidated and relates only to Funds from Dedicated 

Collections. The Eliminations column includes eliminations associated with Funds from 

Dedicated Collections and excludes the offsetting eliminations from All Other Funds. This 

exclusion causes assets to not equal liabilities and net position in the note. However, the 
Department of Defense Agency Financial Report for FY 2015

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106

amounts in the Total column equal the amounts reported as Funds from Dedicated 

Collections on the Balance Sheet.

The Department has the following Funds from Dedicated Collections:

Harbor Maintenance Trust Fund, 26 USC 9505. The United States Army Corps of Engineers 

(USACE) Civil Works mission is funded by the Energy and Water Development 

Appropriations Act. The Water Resources Development Act of 1986 covers a portion of 

USACE operations and maintenance costs for deep draft navigation. The Harbor 

Maintenance Trust Fund is available for making expenditures to carry out the functions 

specified in the Act and for the payment of all administrative expenses incurred by Treasury, 

USACE, and the Department of Commerce. Taxes collected from imports, domestics, 

passengers, and foreign trade are deposited into the Trust Fund. The Bureau of the Fiscal 

Service (BFS) manages and invests for the Trust Fund.

Rivers and Harbors Contributed and Advance Funds, 33 USC 701h, 702f, and 703. 

Whenever any state or political subdivision offers to advance funds for a flood control 

project authorized by law, the Secretary of the Army may accept such funds and expend 

them in the immediate performance of such work. The funding is used to construct, 

improve, and maintain levees, water outlets, flood control, debris removal, rectification and 

enlargement of river channels, etc. in the course of flood control and river and harbor 

maintenance. 

Other Funds from Dedicated Collections

Special Recreation Use Fees, 16 USC 460l-6a note. The USACE charges and collects Special 

Recreation Use Fees at campgrounds located at lakes and reservoirs under their jurisdiction. 

Allowable fees include daily use fees, admission fees, recreational fees, annual pass fees, 

and other permit type fees. Receipts cover operation and maintenance of recreational sites.

Hydraulic Mining in California, Debris, 33 USC 683. Operators of hydraulic mines allowing 

debris to flow to a body restrained by a dam or other work erected by the California Debris 

Commission are required to pay an annual tax as determined by the Commission. The 

USACE collects taxes and expends funds under the direction of the Department of the Army. 

Funds repay advances by the Federal Government or other agencies for construction, 

restraining works, settling reservoirs, and maintenance.

Payments to States, Flood Control Act of 1954, 33 USC 701c-3. The USACE collects receipts 

for the leasing of lands acquired by the U.S. for flood control, navigation, and allied 

purposes (including the development of hydroelectric power). Funds received are 

appropriated and made available for use in the following fiscal year with 75 percent of funds 

provided to the state where the property is located. States may expend the funds for the 

benefit of public schools and public roads of the counties where the property is located, or 

for defraying county government expenses.

Maintenance and Operation of Dams and Other Improvements of Navigable Waters, 

16 USC 803(f) and 810. The Federal Energy Regulatory Commission (FERC) assesses 

charges against licensees when a reservoir or other improvement is constructed by the U.S. 

All proceeds from Indian reservations are credited to the Indians of the reservations. All 

other proceeds arising from licenses, except those established by the FERC for 
Department of Defense Agency Financial Report for FY 2015

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administrative reimbursement, are paid to the U.S. Treasury and allocated for specific uses. 

The Department of 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 owned by the U.S., or in construction, maintenance, or 

operation of headwater, or other improvements to navigable waters of the U.S.

Fund for Non-Federal Use of Disposal Facilities (for dredged material), 33 USC 2326. 

Non-Federal interests may use dredged material disposal facilities under the jurisdiction of, 

or managed by, the Secretary of the Army if the Secretary determines use will not reduce 

the availability of the facility for project purposes. Fees may be imposed to recover capital, 

operation, and maintenance costs of the disposal facility from which the fees were collected.

Coastal Wetlands Restoration Trust Fund and Coastal Wetlands Planning, Protection, and 

Restoration Act, 16 USC 3951-3956. The USACE, Environmental Protection Agency, and Fish 

and Wildlife Service are authorized to work with the State of Louisiana to achieve a goal of 

"no net loss of wetlands" in coastal Louisiana. The USACE is also responsible for allocating 

funds. Federal contributions are 75 percent of project costs or 85 percent if the state has 

an approved Coastal Wetlands Conservation Plan. This Trust Fund receives funding from 

the Sport Fish Restoration and Boating Trust Fund. 

Inland Waterways Trust Fund, 26 USC 9506. Excise taxes from the public are used by 

USACE for navigation, construction, and rehabilitation projects on inland waterways. The 

BFS manages and invests for the Trust Fund.

Defense Commissary Agency Surcharge Trust Fund, 10 USC 2685. Surcharge on sales of 

commissary goods finance the Commissary System operating expenses and capital 

purchases, precluded by law from being paid with appropriated funds. Revenue is 

generated through a five percent surcharge applied to each sale. These funds finance 

commissary-related information technology investments, equipment, advance design 

modifications to prior year construction projects, and maintenance and repair of facilities 

and equipment.
Department of Defense Agency Financial Report for FY 2015

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NOTE 24. FIDUCIARY ACTIVITIES

Schedule of Fiduciary Activity Dollars in Millions

As of September 30 2015 2014

Fiduciary net assets, beginning of year $ 88.0 $ 141.9

Contributions 93.6 59.7

Investment earnings 0.3 0.6

Distributions to and on behalf of beneficiaries (101.0) (114.2)

Increase/(Decrease) in fiduciary net assets (7.1) (53.9)

Fiduciary net assets, end of period $ 80.9 $ 88.0

Schedule of Fiduciary Net Assets Dollars in Millions

As of September 30 2015 2014

Fiduciary Assets

Cash and cash equivalents $ 80.9 $ 88.0

Total Fiduciary Net Assets $ 80.9 $ 88.0

Fiduciary activities exist when the Department has collected, received, held, or made 

disposition of assets on behalf of an individual or non-Federal entity. Fiduciary assets are 

not recognized on the Balance Sheet.

Public Law 89-538 authorized the Department, through the Savings Deposit Program, to 

collect voluntary contributions from members of the Armed Forces serving in designated 

areas. These contributions and earned interest are deposited in the U.S. Treasury on behalf 

of the members.

NOTE 25. OTHER DISCLOSURES

Operating leases do not transfer the benefits and risks of ownership as compared to capital 

leases. Payments are expensed over the life of the lease. Future year cost projections use 

the Consumer Price Index. Office space is the largest component of land and building 

leases. Other leases are primarily commercial leases with the general public and include 

automobile leases. 

Other Disclosures Dollars in Millions

2015 – Asset Category

As of September 30

Land and 

Buildings Equipment Other Total

Entity as Lessee – Operating Leases

Future Payments Due

Fiscal Year 2016 $ 579.8 $ 2.6 $ 15.0 $ 597.4

Fiscal Year 2017 568.8 2.4 15.1 586.3

Fiscal Year 2018 546.2 1.5 15.2 562.9

Fiscal Year 2019 613.5 1.6 15.3 630.4

Fiscal Year 2020 515.3 1.4 15.5 532.2

After 5 Years 1,057.7 1.3 15.5 1,074.5

Total Future Lease Payments Due $ 3,881.3 $ 10.8 $ 91.6 $ 3,983.7
Department of Defense Agency Financial Report for FY 2015

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NOTE 26. RESTATEMENTS

The Department restated its financial statements as of September 30, 2014, to correct 

errors in assets, liabilities, and net position identified during ongoing audit readiness efforts.

This restatement was recorded in the 4th quarter of 2015. 

The following notes were restated: Note 2, Nonentity Assets; Note 10, General Property, 

Plant and Equipment, Net; Note 11, Liabilities Not Covered by Budgetary Resources; Note 

12, Accounts Payable; Note 19, Disclosures Related to the Statement of Changes in Net 

Position; and Note 21, Reconciliation of Net Cost of Operations to Budget.

Effect on FY 2015 Beginning Cumulative Results of Operations and Unexpended 

Appropriations:

FY 2015 Statement of Changes in Net Position Amounts in Millions

CUMULATIVE RESULTS OF OPERATIONS

Correction of Errors (+/-) $ (210.3)

Beginning balance adjustments $ (210.3)

UNEXPENDED APPROPRIATIONS

Correction of Errors $ (72.7)

Beginning balance adjustments $ (72.7)

Effect on Comparative Balances:

FY 2014 Balance Sheet Amounts in Millions

General Property, Plant and Equipment, Net $ (149.0)

Total Assets $ (149.0)

Accounts Payable, Non-Federal $ 134.0

Total Liabilities $ 134.0

Unexpended Appropriations – Other $ (72.7)

Cumulative Results of Operations – Other (210.3)

Net Position (283.0)

Total Liabilities and Net Position $ (149.0)

FY 2014 Statement of Changes in Net Position Amounts in Millions

CUMULATIVE RESULTS OF OPERATIONS

Correction of Errors (+/-) $ (227.1)

Beginning balance adjustments (227.1)

Other Financing Sources:

Other Financing Sources: Other (+/-) 16.8

Cumulative Results of Operations $ (210.3)

UNEXPENDED APPROPRIATIONS

Correction of Errors $ (72.7)

Beginning balance adjustments (72.7)

Unexpended Appropriations $ (72.7)

Net Position $ (283.0)
Department of Defense Agency Financial Report for FY 2015

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REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION

Federal financial reporting requires the Department to report on its stewardship over certain 

resources that cannot be measured in traditional financial reports. These resources do not 

meet the criteria for assets and liabilities required to be reported in the financial statements, 

but are important to understand the operations and financial condition of the Department at 

the date of the financial statements and in subsequent periods.

The Department’s stewardship investments are comprised of, and are measured in terms of, 

expenditures for: (1) Nonfederal Physical Property (federally-financed, but not federally 

owned) and (2) federally-financed Research and Development (R&D). Information on 

additional reporting requirements for Nonfederal Physical Property and R&D follows.

NON-FEDERAL PHYSICAL PROPERTY

The Nonfederal Physical Property investments support the purchase, construction, or major 

renovation of physical property owned by state and local governments. In addition, 

Nonfederal Physical Property investments include federally-owned physical property 

transferred to state and local governments. The Department participates in cost-sharing 

agreements with nonfederal sponsors which are governed under numerous Water Resources 

Development Acts. The Department’s transferred assets include expenditures supporting the 

design, build, and construction services/management for the missions of commercial 

navigation, flood/storm damage reduction, hydropower, regulatory, environmental, 

recreation, and water supply.

Non-Federal Physical Property

Department of Defense Consolidated – Non-Federal Physical Property

Yearly Investments in State and Local Governments

For Fiscal Years 2011 through 2015 Dollars in Millions

Categories 2015 2014 2013 2012 2011

Transferred Assets:

National Defense Mission Related $ 1,307.2 $ 1,113.2 $ 1,376.8 $ 1,445.4 $ 2,304.5

Funded Assets:

National Defense Mission Related $ 12.7 $ 12.4 $ 11.8 $ 7.7 $ 12.0

Total $ 1,319.9 $ 1,125.6 $ 1,388.6 $ 1,453.1 $ 2,316.5

INVESTMENTS IN RESEARCH AND DEVELOPMENT

Investment values included in this report are based on R&D expenditures. The R&D 

programs are classified in the following categories: Basic Research, Applied Research, and 

Development. The amounts reported in the Investments in R&D table show outlays from 

FY 2011 – FY 2015 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.
Department of Defense Agency Financial Report for FY 2015

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Applied Research is the systematic study to gain knowledge or understanding necessary for 

determining the means by which a recognized and specific need may be met. It is the 

practical application of such knowledge or understanding for the purpose of meeting a 

recognized need. This research points toward specific military needs with a view toward 

developing and evaluating the feasibility and practicability of proposed solutions and 

determining their parameters. Major outputs are scientific studies, investigations, research 

papers, hardware components, software codes, or limited construction of a weapon system 

component, to include non-system-specific development efforts. Development takes what 

has been discovered or learned from basic and applied research and uses it to establish 

technological feasibility, assessment of operability, and production capability. Development 

consists of the five stages defined in the Investments in R&D table.

Advanced Technology Development is the systematic use of the knowledge or 

understanding gained from research and directed toward proof of concept and feasibility 

rather than directed toward the development of hardware for service use. It employs 

demonstration activities intended to test a technology or method.

Advanced Component Development and Prototypes evaluates integrated technologies in an 

operating environment as realistic as possible to assess the performance or cost reduction 

potential of advanced technology. Programs in this phase are generally system specific. 

Major outputs of Advanced Component Development and Prototypes are hardware and 

software components and complete weapon systems ready for operational and 

developmental testing and field use.

System Development and Demonstration concludes the program or project and prepares it 

for production. It consists primarily of preproduction efforts, such as logistics and repair 

studies. Major outputs are weapons systems finalized for complete operational and 

developmental testing.

Research, Development, Test, and Evaluation Management Support bolsters installations 

and operations for general research and development use. This category includes costs 

associated with test ranges, military construction maintenance support for laboratories, 

operation and maintenance of test aircraft and ships, and studies and analyses furthering 

the Research and Development program.

Operational Systems Development finances projects, programs, or upgrades in engineering 

and manufacturing development stages which have received approval for production, 

including production funds that have been budgeted in subsequent fiscal years.
Department of Defense Agency Financial Report for FY 2015

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Investments in Research and Development (R&D)

Department of Defense Consolidated

Yearly Investments in Research and Development

For the Current and Four Preceding Fiscal Years Dollars in Millions

Categories 2015 2014 2013 2012 2011

Basic Research $ 1,958.0 $ 1,948.2 $ 1,841.5 $ 1,645.3 $ 1,816.6

Applied Research 5,744.7 5,500.6 5,477.4 5,819.3 6,848.3

Development

Advanced Technology 

Development 5,007.6 5,253.3 4,898.3 5,868.0 6,024.3

Advanced Component 

Development and Prototypes 11,954.9 10,947.0 12,464.8 13,005.0 13,964.2

System Development and 

Demonstration 10,733.8 11,459.7 12,524.6 11,926.3 13,882.0

Research, Development, Test 

and Evaluation Management 

Support

5,163.3 5,262.5 4,906.5 5,640.5 5,659.2

Operational Systems 

Development 20,441.9 20,334.3 21,180.9 23,274.6 23,861.3

Totals: $ 61,004.2 $ 60,705.6 $ 63,294.0 $ 67,179.0 $ 72,055.9

REQUIRED SUPPLEMENTARY INFORMATION

This section includes the deferred maintenance and repairs information and Statement of 

Disaggregated Budgetary Resources. Beginning this fiscal year, the Department 

implemented the Statement of Federal Financial Accounting Standards (SFFAS) 42: 

“Deferred Maintenance and Repairs: Amending Statements of Federal Financial Accounting 

Standards 6, 14, 29 and 32.” The standard expands the reporting requirements to include 

prior year deferred maintenance amounts and provides additional details regarding the 

methodologies used to assess maintenance requirements.

REAL PROPERTY DEFERRED MAINTENANCE AND REPAIRS

Real Property Deferred Maintenance and Repairs

As of September 30, 2015 Dollars in Millions

Property Type

FY 2015

1. Plant Replacement Value 2. Required Work (Deferred 

Maintenance & Repair) 3. Percentage

1. Category 1 $ 1,017,329.0 $ 126,070.4 12%

2. Category 2 $ 28,085.3 $ 6,791.7 24%

3. Category 3 $ 41,661.5 $ 8,081.4 19%

Total $ 1,087,075.8 $ 140,943.5 13%

Property Type

FY 2014

1. Plant Replacement Value 2. Required Work (Deferred 

Maintenance & Repair) 3. Percentage

1. Category 1 $ 971,365.3 $ 101,531.0 10%

2. Category 2 $ 22,549.3 $ 3,689.7 16%

3. Category 3 $ 40,407.2 $ 4,899.3 12%

Total $ 1,034,321.8 $ 110,120.0 11%
Department of Defense Agency Financial Report for FY 2015

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The deferred maintenance and repairs amount is based on Facility Condition Index (FCI) 

ratings found in the Department’s real property inventory. FCI ratings represent work 

needed to bring a facility to a fully serviceable condition. The reported deferred 

maintenance is the difference between the FCI and the target condition rating representing

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 Linear Structures that are enduring and required 

to support an ongoing mission, including multi-use Heritage Assets.

• Category 2: Buildings, Structures, and Linear Structures that are excess to requirements 

or planned for replacement or disposal, including multi-use Heritage Assets.

• Category 3: Buildings, Structures, and Linear Structures that are Heritage Assets. 

As of the end of the fiscal year, the Department estimates facility maintenance cost of more 

than $140.9 billion for facilities with replacement cost of almost $1.1 trillion. The totals 

include $2.8 billion in civil works related maintenance needs under the U.S. Army Corps of 

Engineers with replacement cost of more than $259.0 billion. 

Maintenance and Repair Policies 

The Department is migrating to the Sustainment Management System (SMS), to perform a 

cyclical assessment of real property facilities and assign a facility condition index, which 

considers an asset’s key life-cycle attributes such as age and material. 

Maintenance and Repair Prioritization and Acceptable Condition 

Standards

The Department considers mission, health and safety, and quality of life when assigning 

priority to maintenance needs and assessing whether a facility is in acceptable condition. 

Generally, an asset is considered acceptable when it is in good condition with an assigned 

FCI of 90 percent or above.

Deferred Maintenance and Repair Exclusions

The deferred maintenance and repair information presented relates to all DoD facilities and 

is not restricted to capitalized assets.

Significant Changes in Deferred Maintenance and Repair 

The Department’s deferred maintenance and repair increased by more than $24.6 billion 

since FY 2014. This is largely attributable to the Department’s ongoing efforts to validate 

existence and completeness and improve valuation of the Department’s assets, and ensure 

consistency in accounting and reporting maintenance costs across the Military Services and 

other Defense organizations. 
Department of Defense Agency Financial Report for FY 2015

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EQUIPMENT DEFERRED MAINTENANCE AND REPAIRS

Equipment Deferred Maintenance and Repairs

For Fiscal Year Ended September 30 

Dollars in Millions

Major Categories 2015 2014

1. Aircraft $ 199.5 $ 186.3

2. Automotive Equipment 354.1 212.2

3. Combat Vehicles 10.7 184.6

4. Construction Equipment 5.8 25.3

5. Electronics and Communications Systems 15.2 190.1

6. Missiles 80.2 52.8

7. Ships - 419.0

8. Ordnance Weapons and Munitions 65.0 33.4

9. All Other Items Not Identified to above Categories 472.5 374.6

Total $ 1,203.0 $ 1,678.3

Maintenance and Repair Policies 

Depot maintenance requirements for equipment are developed during the annual budget 

process and updated based on work completion, shifts in priorities, work stoppages, or 

additional requirements. 

Maintenance and Repair Prioritization and Acceptable Condition 

Standards

The Department prioritizes maintenance and repair requirements based on mission and 

health and safety. In addition emerging requirements and real world events drive review 

and reprioritization of maintenance and repair requirements. The Department employs riskbased methodologies in determining acceptable levels of equipment operational risk.

Deferred Maintenance and Repair Exclusions

The deferred maintenance and repair information presented relates to all DoD equipment

and is not restricted to capitalized assets.

Significant Changes in Deferred Maintenance and Repair 

The Department’s deferred maintenance and repair work for equipment, platforms, and 

weapon systems decreased by $474.8 million during FY 2015. This decrease was largely 

related to more consistent and predictable funding levels for base program depot 

maintenance requirements under the Bipartisan Budget Act, funding increases for ship 

maintenance, and the receipt of overseas contingency operations funding at levels which 

allowed for coverage of the Department’s maintenance cost.
Department of Defense Agency Financial Report for FY 2015

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Statement of 

Disaggregated Budgetary 

Resources

2015

For the Years Ended 

September 30

Dollars in Millions

Military

Personnel Procurement

Research, 

Development, 

Test and 

Evaluation

Family Housing/ 

Military 

Construction

Military 

Retirement 

Benefits

Civil Works

Operations, 

Readiness & 

Support

2015 Combined

Budgetary Resources

Unobligated balance, brought 

forward, October 1 $ 4,355.7 $ 52,146.6 $ 14,363.5 $ 15,643.1 $ 0.0 $ 10,987.4 $ 53,219.1 $ 150,715.4

Recoveries of prior year unpaid 

obligations 5,784.1 9,163.5 2,755.3 1,367.6 0.0 337.1 34,009.5 53.417.1

Other changes in unobligated 

balance (1,667.8) (2,273.3) (1,093.9) (441.8) 0.0 (17.6) (22,661.5) (28,155.9)

Unobligated balance from prior 

year budget authority, net 8,472.0 59,036.8 16,024.9 16,568.9 0.0 11,306.9 64,567.1 175,976.6

Appropriations (discretionary and 

mandatory) 139,661.9 101,441.1 65,242.5 5,218.8 66,336.8 6,151.7 336,430.3 720,483.1

Contract Authority (discretionary 

and mandatory) 0.0 0.0 0.0 0.0 0.0 0.0 68,357.3 68,357.3

Spending Authority from offsetting 

collections (discretionary and 

mandatory)

1,348.2 2,742.2 8,398.0 5,016.8 0.0 10,273.0 74,636.7 102,414.9

Total Budgetary Resources $ 149,482.1 $ 163,220.1 $ 89,665.4 $ 26,804.5 $ 66,336.8 $ 27,731.6 $ 543,991.4 $ 1,067,231.9

Status of Budgetary Resources:

Obligations Incurred 145,000.4 107,430.9 74,289.8 12,851.8 66,336.8 17,696.9 494,191.0 917,797.6

Unobligated balance, end of year:

Apportioned 641.0 50,692.5 11,650.2 11,466.0 0.0 8,554.8 22,086.3 105,090.8

Exempt from Apportionment 0.0 0.0 0.0 0.0 0.0 1,484.8 2,927.3 4,412.1

Unapportioned 3,840.7 5,096.7 3,725.4 2,486.7 0.0 (4.9) 24,786.8 39,931.4

Unobligated balance brought 

forward, end of year $ 4,481.7 $ 55,789.2 $ 15,375.6 $ 13,952.7 $ 0.0 $ 10,034.7 $ 49,800.4 $ 149,434.3

Total Budgetary Resources $ 149,482.1 $ 163,220.1 $ 89,665.4 $ 26,804.5 $ 66,336.8 $ 27,731.6 $ 543,991.4 $ 1,067,231.9
Department of Defense Agency Financial Report for FY 2015

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116

Statement of Disaggregated 

Budgetary Resources 2015

For the Years Ended 

September 30

Dollars in Millions

Military

Personnel Procurement

Research, 

Development, 

Test and 

Evaluation

Family Housing/ 

Military 

Construction

Military 

Retirement 

Benefits

Civil Works

Operations, 

Readiness & 

Support

2015 Combined

Change in Obligated Balance

Unpaid obligations

Unpaid obligations, brought forward, 

October 1 (Gross) $ 13,156.8 $ 136,099.6 $ 45,995.7 $ 21,835.8 $ 5,481.9 $ 8,041.9 $ 199,894.6 $ 430,506.3

Obligations incurred 145,000.4 107,430.9 74,289.8 12,851.8 66,336.8 17,696.9 494,191.0 917,797.6

Outlays (gross) (140,323.2) (103,578.2) (74,294.4) (13,886.7) (66,691.9) (17,807.9) (471,186.4) (887,768.7)

Recoveries of prior year unpaid 

obligations (5,784.2) (9,163.6) (2,755.3) (1,367.6) 0.0 (337.2) (34,009.2) (53,417.1)

Unpaid Obligations, end of year 12,049.8 130,788.7 43,235.8 19,433.3 5,126.8 7,593.7 188,890.0 407,118.1

Uncollected Payments

Uncollected customer payments from 

Federal Sources, end of year (137.6) (4,213.4) (6,583.1) (10,184.7) 0.0 (1,803.0) (54,400.8) (77,322.6)

Change in uncollected payments, 

Federal sources (34.8) 474.2 822.5 1,336.1 0.0 155.2 1,747.2 4,500.4

Uncollected payments, Federal 

sources, end of year (172.4) (3,739.2) (5,760.6) (8,848.6) 0.0 (1,647.8) (52,653.6) (72,822.2)

Obligated balance, start of year $ 13,019.2 $ 131,886.2 39,412.6 $ 11,651.1 $ 5,481.9 $ 6,238.9 $ 145,493.8 $ 353,183.7

Obligated balance, end of year $ 11,877.4 $ 127,049.5 $ 37,475.2 $ 10,584.7 $ 5,126.8 $ 5,948.9 $ 136,236.4 $ 334,295.9

Budget Authority and Outlays, Net:

Budget Authority, gross (discretionary 

and mandatory) $ 141,010.1 $ 104,183.3 $ 73,640.5 $ 10,235.6 $ 66,336.8 $ 16,434.7 $ 479,424.3 $ 891,255.3

Actual offsetting collections 

(discretionary and mandatory ) (1,313.4) (3,214.8) (9,220.5) (6,352.9) 0.0 (10,320.4) (138,195.1) (168,617.1)

Change in uncollected customer 

payments from Federal Sources 

(discretionary and mandatory)

(34.8) 474.2 822.5 1,336.1 0.0 155.2 1,747.2 4,500.4

Budget authority, net 

(discretionary and mandatory) $ 139,661.9 $ 101,442.7 $ 65,242.5 $ 5,218.8 $ 66,336.8 $ 6,259.5 $ 342,976.4 $ 727,138.6

Outlays, gross (discretionary and 

mandatory) $ 140,323.2 $ 103,578.2 $ 74,294.4 $ 13,886.7 $ 66,691.9 $ 17,807.9 $ 471,186.4 $ 887,768.7

Actual offsetting collections 

(discretionary and mandatory) (1,313.4) (3,214.8) (9,220.5) (6,352.9) 0.0 (10,320.4) (138,195.1) (168,617.1)

Outlays, net (discretionary and 

mandatory) 139,009.8 100,363.4 65,073.9 7,533.8 66,691.9 7,487.5 332,991.3 719,151.6

Distributed offsetting receipts 0.0 (0.7) (2.0) 0.0 (83,777.3) (797.6) (2,195.0) (86,772.6)

Agency outlays, net (discretionary 

and mandatory) $ 139,009.8 $ 100,362.7 $ 65,071.9 $ 7,533.8 $ (17,085.4) $ 6,689.9 $ 330,796.3 $ 632,379.0
Department of Defense Agency Financial Report for FY 2015

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117

Statement of Disaggregated 

Budgetary Resources 2014

For the Years Ended 

September 30

Dollars in Millions

Military

Personnel Procurement

Research, 

Development, 

Test and 

Evaluation

Family Housing/ 

Military 

Construction

Military 

Retirement 

Benefits

Civil Works

Operations, 

Readiness & 

Support

2014 Combined

Budgetary Resources

Unobligated balance, brought 

forward, October 1 $ 3,064.6 $ 51,855.3 $ 14,683.8 $ 14,956.2 $ 0.0 $ 12,361.7 $ 46,891.8 $ 143,813.4

Recoveries of prior year unpaid 

obligations 6,235.9 8,417.4 2,873.6 1,666.5 0.0 362.0 29,887.1 49,442.5

Other changes in unobligated 

balance (501.0) (2,193.8) (812.8) (250.2) 0.0 0.0 (13,653.4) (17,411.2)

Unobligated balance from prior 

year budget authority, net 8,799.5 58,078.9 16,744.6 16,372.5 0.0 12,723.7 63,125.5 175,844.7

Appropriations (discretionary and 

mandatory) 143,848.9 99,490.1 64,860.0 7,270.7 64,745.7 5,910.3 351,518.6 737,644.3

Contract Authority (discretionary and 

mandatory) 0.0 0.0 0.0 0.0 0.0 0.0 70,599.4 70,599.4

Spending Authority from offsetting 

collections (discretionary and 

mandatory)

1,313.6 2,965.8 9,240.9 6,556.6 0.0 10,094.8 70,143.9 100,315.6

Total Budgetary Resources $ 153,962.0 $ 160,534.8 $ 90,845.5 $ 30,199.8 $ 64,745.7 $ 28,728.8 $ 555,387.4 $ 1,084,404.0

Status of Budgetary Resources:

Obligations Incurred 149,606.3 108,388.0 76,482.2 14,736.6 64,745.7 17,741.5 501,988.3 933,688.6

Unobligated balance, end of year:

Apportioned 496.1 47,647.1 11,360.2 13,128.6 0.0 9,565.9 30,960.8 113,158.7

Exempt from Apportionment 0.0 0.0 0.0 0.0 0.0 1,413.9 1,189.5 2,603.4

Unapportioned 3,859.6 4,499.7 3,003.1 2,334.6 0.0 7.5 21,248.8 34,953.3

Unobligated balance brought 

forward, end of year $ 4,355.7 $ 52,146.8 $ 14,363.3 $ 15,463.2 $ 0.0 $ 10,987.3 $ 53,399.1 $ 150,715.4

Total Budgetary Resources $ 153,962.0 $ 160,534.8 $ 90,845.5 $ 30,199.8 $ 64,745.7 $ 28,728.8 $ 555,387.4 $ 1,084,404.0
Department of Defense Agency Financial Report for FY 2015

Financial Information

118

Statement of Budgetary 

Resources 2014

For the Years Ended September 30

Dollars in Millions

Military

Personnel Procurement

Research, 

Development, Test 

and Evaluation

Family Housing/ 

Military 

Construction

Military Retirement 

Benefits Civil Works

Operations, 

Readiness & 

Support

2014

Combined

Change in Obligated Balance

Unpaid obligations

Unpaid obligations, brought forward, 

October 1 (Gross) $ 13,736.0 $ 144,145.0 $ 43,493.3 $ 23,167.5 $ 5,345.2 $ 7,814.0 $ 199,664.2 $ 437,365.2

Obligations incurred 149,606.3 108,388.0 76,482.2 14,736.6 64,745.7 17,741.5 501,988.3 933,688.6

Outlays (gross) (143,949.6) (108,017.4) (71,108.1) (15,025.0) (64,609.0) (17,151.6) (471,244.3) (891,105.0)

Recoveries of prior year unpaid obligations (6,235.9) (8,417.1) (2,873.6) (1,666.5) 0.0 (362.0) (29,887.4) (49,442.5)

Unpaid Obligations, end of year 13,156.8 136,098.5 45,993.8 21,212.6 5,481.9 8,041.9 200,520.8 430,506.3

Uncollected Payments

Uncollected customer payments from 

Federal Sources, end of year (187.7) (4,167.0) (5,622.0) (9,975.7) 0.0 (1,941.3) (55,310.2) (77,203.9)

Change in uncollected payments, Federal 

sources 50.1 (46.4) (961.1) (208.7) 0.0 138.3 909.1 (118.7)

Uncollected payments, Federal sources, 

end of year (137.6) (4,213.4) (6,583.1) (10,184.4) 0.0 (1,803.0) (54,401.1) (77,322.6)

Obligated balance, start of year $ 13,548.3 $ 139,978.0 $ 37,871.3 $ 13,191.8 $ 5,345.2 $ 5,872.7 $ 144,354.0 $ 360,161.3

Obligated balance, end of year $ 13,019.2 $ 131,885.1 $ 39,410.7 $ 11,028.8 $ 5,481.9 $ 6,238.9 $ 146,119.7 $ 353,183.7

Budget Authority and Outlays, Net:

Budget Authority, gross (discretionary and 

mandatory) $ 145,162.5 $ 102,455.9 $ 74,100.9 $ 13,827.3 $ 64,745.7 $ 16,005.1 $ 492,261.9 $ 908,559.3

Actual offsetting collections (discretionary 

and mandatory ) (1,363.6) (2,915.0) (8,279.8) (6,347.8) 0.0 (10,132.9) (132,725.3) (161,764.4)

Change in uncollected customer payments 

from Federal Sources (discretionary and 

mandatory)

50.1 (46.4) (961.1) (208.7) 0.0 138.3 909.1 (118.7)

Budget authority, net (discretionary and 

mandatory) $ 143,849.0 $ 99,494.5 $ 64,860.8 $ 7,270.8 $ 64,745.7 $ 6,010.5 $ 360,445.7 $ 746,676.2

Outlays, gross (discretionary and 

mandatory) $ 143,949.6 $ 108,017.4 $ 71,108.1 $ 15,025.0 $ 64,609.0 $ 17,151.6 $ 471,244.3 $ 891,105.0

Actual offsetting collections (discretionary 

and mandatory) (1,363.6) (2,915.0) (8,279.8) (6,347.8) 0.0 (10,132.9) (132,725.3) (161,764.4)

Outlays, net (discretionary and 

mandatory) 142,586.0 105,102.4 62,828.3 8,677.2 64,609.0 7,018.7 338,519.0 729,340.6

Distributed offsetting receipts 0.0 (18.2) 0.0 0.0 (84,867.8) (496.3) (2,331.6) (87,713.9)

Agency outlays, net (discretionary and 

mandatory) $ 142,586.0 $ 105,084.2 $ 62,828.3 $ 8,677.2 $ (20,258.8) $ 6,522.4 $ 336,187.4 $ 641,626.7
Department of Defense Agency Financial Report for FY 2015

Financial Information

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Statement of Disaggregated 

Budgetary Resources Non-Budgetary

For the Years ended September 30

Dollars in Millions Other 2015 Combined 2014 Combined

Budgetary Resources

Unobligated balance, brought 

forward, October 1 $ 47.1 $ 47.1 $ 46.8

Borrowing Authority (discretionary 

and mandatory) 81.4 81.4 368.0

Spending Authority from offsetting 

collections (discretionary and 

mandatory)

73.6 73.6 120.4

Total Budgetary Resources $ 202.1 $ 202.1 $ 535.2

Status of Budgetary Resources:

Obligations Incurred $ 135.5 $ 135.5 $ 488.1

Unobligated balance, end of year:

Unapportioned 66.6 66.6 47.1

Unobligated balance brought 

forward, end of year $ 66.6 $ 66.6 $ 47.1

Total Budgetary Resources $ 202.1 $ 202.1 $ 535.2
Department of Defense Agency Financial Report for FY 2015

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Statement of Disaggregated 

Budgetary Resources Non Budgetary

For the Years ended September 30

Dollars in Millions

Other 2015 Combined 2014 Combined

Change in Obligated Balance

Unpaid obligations:

Unpaid obligations, brought 

forward, October 1 (gross) $ 484.9 $ 484.9 $ 300.7

Obligations incurred 135.5 135.5 488.1

Outlays (gross) (209.9) (209.9) (303.9)

Unpaid obligations, end of year 410.5 410.5 484.9

Uncollected payments:

Uncollected payments, Federal 

sources, brought forward, October 

1

(75.2) (75.2) (52.4)

Change in uncollected customer 

payments, Federal sources

2.8 2.8 (22.8)

Uncollected payments, Federal 

sources, end of year (72.4) (72.4) (75.2)

Obligated balances, start of year 409.7 409.7 248.3

Obligated balance, end of year 

(net) $ 338.1 $ 338.1 $ 409.7

Budget Authority and Outlays, Net:

Budget Authority, gross 

(discretionary and mandatory) 155.0 155.0 488.4

Actual offsetting collections 

(discretionary and mandatory) (101.7) (101.7) (97.5)

Change in uncollected customer 

payments from Federal Sources 

(discretionary and mandatory)

2.8 2.8 (22.8)

Budget authority, net 

(discretionary and mandatory) $ 56.1 $ 56.1 $ 368.1

Outlays, gross (discretionary and 

mandatory) 209.9 209.9 303.9

Actual offsetting collections 

(discretionary and mandatory) (101.7) (101.7) (97.5)

Outlays, net (discretionary and 

mandatory) 108.2 108.2 206.4

Agency outlays, net 

(discretionary and mandatory) $ 108.2 $ 108.2 $ 206.4
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 AGENCY FINANCIAL REPORT

 FISCAL YEAR 2015

 OTHER INFORMATION
U.S. Department of Defense Agency Financial Report for FY 2015

Air traffic controllers with the 379th Expeditionary Operations Support Squadron review base-specific airspace 

operating instructions Sept. 2, 2015, at Al Udeid Air Base, Qatar. 

Photo by Staff Sgt. Alexandre Montes

A soldier, middle, with the 1st Platoon, Lightning Troop, 3rd Squadron, 2nd Cavalry Regiment, demonstrates 

walk-and-shoot procedures to Lithuanian soldiers assigned to the 3rd Company, Algirdas Mechanized Infantry 

Battalion during Operation Atlantic Resolve 2015. The U.S. and partner nations conducted land, sea, and air 

exercises and maintained a rotational presence in order to reinforce NATO security commitments in Europe. 

Photo by Staff Sgt. Megan Leuck
U.S. Department of Defense Agency Financial Report for FY 2015

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OTHER INFORMATION

MANAGERS’ INTERNAL CONTROL PROGRAM

The Department’s management has a fundamental responsibility to develop and 

maintain effective internal controls to ensure Federal programs operate and Federal 

resources are used efficiently and effectively to achieve desired objectives. As discussed in 

the Internal Controls section of this report, managers throughout the Department are 

accountable for ensuring effective internal controls in their areas of responsibility. All DoD 

Components are required to establish and assess internal controls for financial reporting,

mission-essential operations, and financial management systems.

Management-identified weaknesses are determined by assessing internal controls, as 

required by the Federal Managers’ Financial Integrity Act of 1982 (FMFIA), the Federal 

Financial Management Improvement Act of 1996 (FFMIA), and OMB Circular No. A-123, and 

fall into one of the following categories: 

1. FMFIA Section 2, Financial Reporting Material Weaknesses (see Table 2a).

2. FMFIA Section 2, Non-Financial Operations Material Weaknesses (see Table 2b). 

3. FMFIA Section 4, Financial System Nonconformance Weaknesses (see Table 2c).

4. FFMIA, Compliance with Section 803(a), FFMIA (see Table 3).

Army paratroopers assault an enemy-held urban environment at a live-fire range at the National Training 

Center on Fort Irwin, Calif., Aug. 1, 2015. The paratroopers completed several blank and live-fire iterations 

during the day and at night, sharpening their proficiency at battle drills in the austere environment of the 

Mojave Desert.
U.S. Department of Defense Agency Financial Report for FY 2015

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SUMMARY OF DOD IG-IDENTIFIED MATERIAL WEAKNESSES IN INTERNAL 

CONTROLS OVER FINANCIAL REPORTING

Table 1 lists the DoD IG-identified 13 areas of material weakness in the Department’s 

financial statement reporting.

Table 1. Summary of Financial Statement Audit

Audit Opinion: Disclaimer

Restatement: Yes

Areas of Material Weakness Beginning

Balance New Resolved Consolidated EndingBalance

1 Accounts Payable 1 1

2 Accounting Entries 1 1

3 Environmental Liabilities 1 1

4 Government Property in Possession of 

Contractors 1 1

5 Intragovernmental Eliminations 1 1

6 Operating Materials and Supplies 1 1

7 Reconciliation of Net Cost of 

Operations to Budget 1 1

8 Statement of Net Cost 1 1

9 Financial Management Systems 1 1

10 Fund Balance with Treasury 1 1

11 General Property, Plant & Equipment 1 1

12 Inventory 1 1

13 Accounts Receivable 1 1

Total Material Weaknesses 13 13

SUMMARY OF MANAGEMENT ASSURANCES

1. FMFIA SECTION 2, FINANCIAL REPORTING MATERIAL WEAKNESSES. Under the oversight of 

the DoD Financial Improvement Audit Readiness (FIAR) Governance Board, discussed in the 

FIAR Plan Status Report, the Department’s assessment of the effectiveness of its internal 

controls over financial reporting identified 16 areas of material weakness in FY 2015.

Table 2 lists the material weaknesses in internal controls over financial reporting, 

captured by end-to-end process and the assessable unit for the material weakness, and 

incorporates changes from the weaknesses reported in the FY 2014 Agency Financial 

Report.
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Table 2. Effectiveness of Internal Controls over Financial Reporting (FMFIA Section 2)

Statement of Assurance: No Assurance

End-to-End 

Process

Areas of Material 

Weakness

FY 2015

Beginning

Balance

New Resolved Consolidated Reassessed

FY 2015

Ending

Balance

Budget-toReport

Fund Balance with 

Treasury (FBWT) 1 1

Financial Reporting 

Compilation 1 1

Intragovernmental 

Eliminations 1 (1) 0

Hire-to-Retire

Health Care Liabilities 1 1

Civilian Pay 1 1

Military Pay 1 1

Order-to-Cash Accounts Receivable 1 1

Procure-to-Pay

Contract/Vendor Pay 1 1

Reimbursable Work

Orders (Budgetary) 1 * 1

Transportation of 

Things 1 1

Transportation of 

People 1 1

Acquire-toRetire

Equipment Assets 1 1

Real Property Assets 1 1

Environmental

Liabilities 1 1

Plan-to-Stock

Inventory 1 1

Operating Materials & 

Supplies (OM&S) 1 1

Military Standard 

Requisitioning and 

Issue Procedures 

(Requisitioning 

Procedures)

1 1

Total Financial Reporting Material 

Weaknesses 17 (1) 16

* The FY 2014 material weakness reported for Intragovernmental Eliminations has been consolidated and reported 

in the Reimbursable Work Orders material weakness for FY 2015.
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Table 2a provides a brief description of each of the material weaknesses in financial 

reporting, with corrective actions and the target correction year.

Table 2a. FY 2015 Material Weaknesses in Internal Controls over Financial Reporting 

Areas of Material 

Weakness

Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

1 Fund Balance with 

Treasury (FBWT)

• Ineffective processes and 

controls to reconcile 

transactions posted to 

the Department’s FBWT 

accounts with the 

Department of Treasury’s 

(Treasury) records.

• Collections and 

Disbursements are 

reported to Treasury but 

are not recorded in the 

Department’s general 

ledger.

• Ineffective processes to 

provide sufficient and 

accurate documentation 

to support FBWT 

transactions and 

reconciling items. 

FY 2005 Departmentwide

• Track and reconcile 

collection/disbursement activity 

from the core financial systems

and associated feeder systems 

to the Department’s general 

ledgers and to Treasury 

accounts.

• Develop an auditable FBWT 

reconciliation process, to 

include implementation of 

internal controls that ensure 

reconciling differences are 

resolved in a timely and 

accurate manner.

• Analyze and resolve 

transactions posted to budget 

clearing accounts (“suspense” 

accounts).

• Analyze and resolve 

transactions reported on 

Treasury’s Statement of 

Differences (e.g., deposits, 

electronic funds transfer (EFT), 

and check issue).

• Perform aging analysis and 

apply reconciliations 

backwards to any years 

possible.

• Implement Treasury SubAccount Codes (point 

accounts) strategy.

• Issue FBWT DoD Financial 

Manual Regulation policy 

update.

• Implement daily Treasury 

reporting capabilities.

• Perform Statement on 

Standards for Attestation 

Engagements (SSAE) 16, 

Reporting on Controls at a 

Service Organization, for both 

Defense Contract 

Administration Services 

(DCAS) and FBWT.

FY 2017
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2 Financial Reporting 

Compilation

• Ineffective processes and 

controls to prepare 

accurate financial 

statements supported by 

general ledger balances 

that align with 

Department strategic and 

performance plans, to 

include incorrect 

crosswalk and mapping 

of transactions to ensure 

completeness and 

accuracy of the financial 

reporting.

• Inability to reconcile 

detail-level transactions 

with the general ledgers 

and to provide adequate 

supporting 

documentation for 

adjustment entries.

• Accounting balances are 

unsupported due to 

inadequate financial 

management systems 

and related processes 

and procedures.

• Inconsistency in 

documented processes 

and procedures for 

performing reconciliations 

and resolving differences 

and the actual processes 

in practice.

• Lack of developed 

approach for performing 

and retaining reconciled 

date for sensitive 

activities.

• Inconsistent procedures 

for recording Journal 

Vouchers and Standard 

Business Transactions 

(SBT) and retention 

procedures to ensure 

maintaining of proper 

supporting 

documentation poses a 

significant risk to 

producing accurate and 

complete financial 

statements and reports.

FY 2007 Departmentwide

• Implement a Standard 

Financial Information Structure 

(SFIS) to standardize financial 

reporting that aligns with the 

Department’s mission. 

• Implement controls that 

ensure adequate 

documentation exists to 

validate and support journal 

entries. 

• Obtain population of feeder 

system data transactions and 

perform reconciliations from 

feeder systems to the financial 

statements.

• Implement Reconciliations for

Defense Agencies. 

• Implement strategy for 

obtaining, reconciling and 

securely storing sensitive data.

• Implement Integrated Pay and 

Personnel system (IPP), to 

include system change 

request requirements, 

implement the SFIS Standard 

Line of Accounting (SLOA) 

tools to validate financial data 

quality and build and 

implement accounting system 

interfaces.

FY 2017
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3 Health Care Liabilities

• Insufficient financial 

reporting and accounting 

for all health care costs 

and the lack of processes 

to reconcile Medical 

Expense and 

Performance Reporting 

System data.

• Inability to obtain 

sufficient documentation 

from compliant 

transaction-based 

accounting systems to 

support the costs of direct 

care provided by DoDmanaged military 

treatment facilities.

FY 2003 Departmentwide

• Complete the implementation 

of new Enterprise Resource 

Planning (ERP) core financial 

systems for each Service in 

order to record accrual-based, 

patient-level cost accounting 

data.

• Develop and implement 

methodology for per capita 

rate to address the auditor 

identified weakness related to 

direct care.

FY 2017

4 Civilian Pay

• Ineffective processes and 

controls to record civilian 

pay transactions and 

personnel actions in a 

timely, complete, and 

accurate manner.

• This includes unreliable 

supporting 

documentation for 

personnel actions and 

timekeeping, and 

inadequate 

reconciliations between 

Defense Civilian Pay 

System (DCPS) and the 

general ledger.

• No assessment of 

internal controls for 

Reporting Entity Time & 

Attendance processes.

FY 2011 Departmentwide

• Develop and implement 

controls to record personnel 

actions and timekeeping 

accurately and implement 

document retention policies 

and procedures to ensure that 

sufficient supporting 

documentation is available. 

• Develop and implement 

Complementary User Entity 

Controls (CUECs) identified in 

the DCPS SSAE16.

• Develop and implement a 

methodology to reconcile 

DCPS to the general ledger. 

• Implement controls for general 

ledger posting procedures and 

ensure supporting 

documentation is reviewed, 

approved, validated, retained, 

and readily available.

FY 2017
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5 Military Pay

• Ineffective processes and 

controls to record military 

pay transactions and 

personnel actions in a 

timely, complete, and 

accurate manner.

• Lack of reconciliations 

between Defense Joint 

Military Pay System 

(DJMS) and the general 

ledger (GL).

• Unreliable and/or lack of 

supporting 

documentation for 

personnel actions. 

• Outdated military pay and 

financial management 

information technology 

systems lack modern 

capabilities to support 

required auditability 

framework. Current 

deficiencies require 

unsustainable manual 

activities to support 

auditability.

FY 2011 Departmentwide

• Develop and implement a five 

year plan starting in FY 2018 

for an integrated pay and 

personnel system (IPPS), 

which will be designed to 

determine pay and 

entitlements, report ad hoc 

financial management data, 

and capture and store key 

supporting documents.

• Implement reconciliations to 

address the completeness of 

data entered into DJMS. 

FY 2023

6 Accounts Receivable

• Ineffective processes and 

controls to ensure 

complete and accurate 

recording and sufficient 

documentation to support 

accounts receivable and 

related accruals.

• Lack of proper 

accounting and reporting 

for accounts receivable 

collections.

Lack of controls to ensure 

that accounts receivable 

balances are supportable 

at the transaction level.

FY 2003 Departmentwide

• Implement ERP systems to 

improve collections of public 

accounts receivables, aging of 

receivables, and minimize 

manual processes.

• Implement process 

improvements, such as 

training, guidance, and policy 

changes. 

• Develop documentation in 

sufficient detail to address the 

edit checks and validations 

performed.

• Utilize the Tri-Annual Review

process to monitor the status 

of dormant reimbursable 

agreement receivables and 

unfilled orders. Reviews will 

evaluate timeliness, accuracy, 

and completeness for closeout 

when applicable.

FY 2017
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7 Contract/Vendor Pay

• No standard process or 

format governing 

purchase request 

development, linkage 

with contract data, and 

payment.

• Lack of standard 

processes for recording 

obligations electronically 

in accounting systems.

• Lack of timely contract 

closeout and deobligation of funds limits 

Department’s access to 

capital.

• Insufficient policies 

governing the recording 

of accruals.

FY 2003 Departmentwide

• Develop DoD Instruction 

setting policies, procedures, 

and data standards for 

purchase requests.

• Revise Financial Management 

Regulation to require use of 

standard data feeds for 

recording contract obligations 

in accordance with DFARS 

204.201 and implement 

corresponding accounting 

system changes.

• Publish and implement 

procedures for pre-award 

validation of contract data to 

ensure proper recording of the 

subsequent obligation.

• Establish traceability rules for 

identifying commitments in 

contracts.

• Implement distribution of 

electronic closeout 

notifications.

• Expand use of accrual 

recording based on Wide Area 

WorkFlow acceptance data to 

additional accounting systems.

FY 2019

A U.S. Sailor stands watch on the fantail aboard the aircraft carrier USS Theodore Roosevelt 

(CVN 71) in the Red Sea April 8, 2015. The Theodore Roosevelt deployed to the U.S. 5th 

Fleet area of responsibility in support of Combined Joint Task Force-Operation Inherent 

Resolve, a multinational effort to weaken and destroy Islamic State in the Levant (ISIL) 

operations in Iraq, Syria, the Middle East region and around the world. 

Photo by Mass Communication Specialist 2nd Class Chris Liaghat
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8 Reimbursable Work Orders

• Lack of evidence of 

performance, 

acknowledgement of 

receipt of 

intragovernmental goods 

and services, and validity 

of open obligations.

• Inability to verify the 

timely and accurate 

collection of 

disbursements and 

validate recorded 

reimbursable agreements 

meet the time, purpose, 

and amount criteria.

• Components are unable 

to collect, exchange, and 

reconcile buyer and 

seller intragovernmental 

transactions, resulting in 

adjustments that cannot 

be verified or 

substantiated. In 

addition, Department 

procedures required that 

buyer-side transaction 

data be forced to agree 

with seller-side 

transaction data without 

substantiating 

documentation or 

performing proper 

reconciliations.

FY 2011 Departmentwide

• Reporting entities to 

implement Invoice Processing 

Platform (IPP), leveraging 

systems controls for the entire 

intragovernmental business 

process across DoD.

• Reporting entities and DFAS 

to implement training, 

guidance, and management 

oversight related to 

Tri-Annual Reviews.

• Developing an 

intragovernmental data 

standard to allow seamless, 

systems controlled interfaces

for all intragovernmental 

business events between 

buyer and seller’s financial 

reporting systems and the 

Department’s consolidated 

financial reporting system, 

DDRS-B and DDRS-AFS.

• Implementing a validation 

service to validate standard 

line of accounting data for all 

intragovernmental 

transactions.

• Reporting entities and DFAS 

to identify and implement 

standard enterprise 

reconciliations that provide for 

validation of the seller/buyerside balances and input of 

supported journal vouchers for 

timing differences.

FY 2017

9 Transportation of Things

• No effective controls are 

in place to prevent 

unauthorized use of 

Transportation Account 

Codes (TAC) or 

unauthorized shipments 

from occurring.

• Lack of standardized 

processes and 

procedures for 

Transportation of Things 

(ToT) to support 

management evaluations, 

examinations, and audits.

FY 2014 Navy • Develop controls, processes, 

and policy and procedures for 

ToT. DoD Cargo Movement 

Operations System (CMOS) is 

a long term solution to 

standardize systems and 

processes across the 

transportation community,

scheduled for implementation 

by October 1, 2016.

• Implement control processes 

that ensure supporting 

documentation exists and is 

adequately reviewed, 

approved, and retained.

FY 2016
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10 Transportation of People

• Inadequate controls over 

transportation of people 

processes. This includes 

inadequate segregation 

of duties, lack of 

reconciliations between 

Defense Travel System 

(DTS) and the 

Component general 

ledgers, and untimely 

voucher filing.

• Material weaknesses 

were identified related to 

information technology 

access and computing 

processes within DTS 

(identified through 

SSAE16).

FY 2011 Departmentwide

• Develop plans to address 

segregation of duties internal 

control issues within the 

transaction system due to 

overlapping permission-level 

assignments, as well as 

demonstrating effective 

information technology general 

and application controls.

• Monitor open travel obligations 

and enforce supervisory 

review to ensure timely 

submission of travelers’ 

vouchers. 

• Develop procedures to 

reconcile DTS to general 

ledgers.

• Develop and implement 

Complementary User Entity 

Controls (CUECs) as identified 

within the DTS SSAE16.

FY 2017

11 Equipment Assets

• Processes and controls 

to account for the 

quantity and value of 

military and general 

equipment are not 

effective. 

FY 2003 Departmentwide

• The Navy and Air Force have

asserted to the existence and 

completeness (E&C) of all 

major military equipment. The 

Army has asserted to general 

equipment E&C.

• Established the Government 

Furnished Property (GFP) 

Working Group in 

collaboration with 

OUSD(FIAR) which requires 

the Components to report 

quarterly on progress in 

establishing accountable 

records for all GFP assets, 

correcting policy deficiencies, 

and ensuring controls are in 

place when property is 

furnished on contracts. In 

addition, developed Contractor 

Acquired Property guidance 

for establishing accountability 

and valuation. 

• The Department has brought 

over 611,000 GFP assets 

valued at $18.1 billion to 

record and continues to move 

forward to establish the 

universe and apply the 

appropriate controls and 

procedures in managing GFP 

accountability.

• Established a General 

Equipment Working Group to 

define or clarify accounting 

policy and guidance and assist 

with the Components’ audit 

readiness obstacles. As a 

result, developed a 

FY 2017
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streamlined risk based 

General Equipment Valuation 

approach. Developed 

supplemental guidance for 

establishing beginning 

balances for Construction in 

Progress accounting as part of 

full financial statement audit 

readiness.

• Implement changes to policy 

and procedures to comply with 

Federal Standards Advisory 

Board Standards. 

• Continue efforts to ensure that 

assets are recorded in the 

appropriate Accountable 

Property System of Record 

and can be reconciled to the 

General Ledger (GL) to ensure 

assets exist and records are 

complete.

• Apply controls and procedures 

to manage property 

accountability, including 

adequate documentation to 

support acquisition and 

disposal processes throughout 

the year.

• Report quarterly on progress 

in establishing accountable 

records for all capitalized 

equipment, correcting policy 

deficiencies, and ensuring 

controls are in place when 

property is furnished or 

purchased through contracts.

Members of the U.S. Marine Drum and Bugle Corps perform during a 

sunset parade at the Marine Corps War Memorial in Arlington, Va. Since 

September 1956, marching and musical units from Marine Barracks 

Washington, D.C., have presented sunset parades in the shadow of the 

32-foot high figures of the memorial.

Photo by Lance Cpl. Christopher J. Nunn
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12 Real Property Assets

• Real property processes, 

controls and supporting 

documentation do not 

substantiate that (1) all 

existing assets are 

recorded in an 

accountable system of 

record (APSR) (2) all 

assets recorded in the 

APSR properly reflect 

DoD’s legal interest in 

the asset, (3) all assets 

are properly valued and 

(4) all assets are 

appropriately presented 

and consistently reported 

in the financial 

statements.

• DoD has insufficient 

internal controls and 

supporting 

documentation 

requirements to ensure 

timely recording, relief 

and accuracy of 

Construction in Progress 

(CIP) and real property. 

FY 2003 Departmentwide

• Validate asset listings, 

document processes and 

control environment and 

perform materiality analysis to 

establish an auditable baseline 

for real property, to include 

CIP.

• Establish and implement DoD 

policy related to the 

accounting for imputed cost, 

contingency and enduring 

locations, deferred 

maintenance and stewardship 

land/heritage assets.

• Implement business 

processes and management 

controls to reconcile real 

property records and financial 

records (to include CIP) to 

ensure existing asset 

inventory and financial records 

are accurate and complete. 

• Implement periodic 

evaluations over the quality of 

real property data by making 

comparisons with physical 

assets and annual 

reconciliations.

FY 2017

13 Environmental Liabilities

• Inability to provide 

assurance that clean-up 

costs for all of its 

ongoing, closed, and 

disposal operations are 

identified, consistently 

estimated, and 

appropriately reported.

• Unable to consistently 

report environmental 

liability disclosures and 

supporting 

documentation is not 

properly maintained and 

readily available for all 

environmental sites.

FY 2001 Departmentwide

• Implement systems, 

processes, and controls to 

ensure the accuracy of 

environmental liabilities

identification, valuation, 

documentation and reporting.

• Implement new DoD strategy 

for achieving E&DL Audit 

Readiness, providing guidance 

on capturing the 

environmental liability 

universe, estimation and 

modeling practices for 

developing the cost estimates, 

documenting and supporting 

those estimates, and rollforward procedures for 

ensuring that estimates are up 

to date. 

• Implement new DoD policies 

for accounting treatment and 

recording of environmental 

liabilities.

• Implement business 

processes and controls to 

ensure transactions are 

recorded timely and 

accurately, and supporting 

documentation is retained and 

available.

FY 2017
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14 Inventory

• Insufficient policies and 

procedures to support 

inventory transactions, 

journal vouchers, and 

inventory valuation.

• Lack of clear audit trails 

to trace transactions from 

source documentation to 

the reported total dollar 

values on the Inventory 

line item on the financial 

statements.

• Lack of controls to 

provide assurance that 

inventory recorded in the 

financial statements

exists and is complete.

• Material-in-transit (MIT) is 

reported at the summary 

level instead of detail 

level.

FY 2005 Departmentwide

• Develop methodology and 

inventory condition code 

reports to support monthly 

journal vouchers (JV) related 

to inventory.

• Review all pre- and post-trial 

balance adjustments, 

determine reason for the 

adjustments, and trace to 

supporting documentation.

• Implement methodology to 

value inventory in the absence 

of historical costs (for baseline 

of asset inventory). 

• Develop and implement 

processes and controls to 

support the valuation of 

inventory on a “go-forward” 

basis.

• Modify systems to account for 

material in transit at the 

detailed level.

FY 2017

15 Operating Materials &

Supplies (OM&S)

• Historical cost data is not 

maintained as required 

by Generally Accepted 

Accounting Principles 

(GAAP).

• Inability to perform and 

document annual 

physical inventories of 

OM&S and maintain 

clear audit trails to permit 

the tracing of 

transactions from source 

documentation.

• Government-owned /

Contractor managed 

inventory is not 

accounted for in DoD 

accountable property 

system.

FY 2005 Departmentwide

• Document business and 

financial processes and 

controls to include tracking 

inventory values for newly 

acquired OM&S.

• Develop interim auditable 

solution for Government 

owned/Contractor managed 

inventory.

• Identify and document the 

current inventory reconciliation 

processes, including key 

controls and financial 

transactions.

• Modify systems/processes to 

account for Government 

Furnished Material (GFM).

FY 2017
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16 Military Standard 

Requisitioning and Issue 

Procedures (Requisitioning 

Procedures)

• Insufficient 

documentation of 

business and financial 

processes and controls 

to include transactions 

not accurately reconciled 

to the financial 

management systems of 

record and ineffective 

reconciliation process for 

unliquidated obligations 

(ULO).

FY 2013 Navy • Develop, document and 

implement business and 

financial processes to identify 

root causes, review and 

prioritize Federal Information 

System Controls Audit Manual 

(FISCAM) control testing, and 

ensure a comprehensive ULO 

reconciliation process. 

• Assess requirements and 

develop a strategy to integrate 

ULO requirements with the TriAnnual Review.

FY 2017

A newly acquired military working dog with the 95th Military Police Detachment bites into a specially designed 

protection sleeve worn by a soldier during training at Joint Base Lewis-McChord, Wash., July 29, 2015. 

Photo by Staff Sgt. Patricia McMurphy
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2. FMFIA SECTION 2, NON-FINANCIAL OPERATIONS MATERIAL WEAKNESSES. The DoD 

Components use an entity-wide, risk-based, self-assessment approach to establish and 

assess internal controls for mission-essential operations. The material weaknesses in nonfinancial operational areas are categorized in separate reporting categories.

Table 2b lists the FY 2015 material weaknesses in the internal controls over nonfinancial operations.

Table 2b. Effectiveness of Internal Controls over Non-Financial Operations (FMFIA Section 2)

Statement of Assurance: Qualified

Area of Material 

Weakness

Beginning 

Balance New Resolved Re-assessed Ending Balance

1 Acquisition 1 1

2 Security 1 1

3 Information Technology 1 1

4 Comptroller and/or 

Resource Management 1 1

5 Contract Administration 1 1

6 Force Readiness 1 1

7

Personnel and/or 

Organizational 

Management

1 1

Property Management

• Government 

Furnished Property

• Internal Use Software

1 1* 0

8 1* 1

9 1* 1

10 Supply Operations 1 1

Total Non-Financial 

Operations Material 

Weaknesses

9 1* 10

* The Department re-categorized the material weaknesses for property management into the government 

furnished property and internal use software categories in FY 2015.
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Table 2b-1 provides a brief description of each of the 10 area of material weaknesses in 

internal controls over non-financial operations, the associated corrective action, and the 

target correction year.

Table 2b-1. FY 2015 Material Weaknesses in Internal Controls over Non-Financial Operations

Areas of Material Weakness Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

1 Acquisition

• The Department continues to 

experience program cost and 

schedule increases in its Major 

Defense Acquisition Program 

Portfolio.

• Knowledge-based acquisition 

practices have not been 

consistently implemented 

across the acquisition portfolio.

FY 2011 Departmentwide

• Continue development and 

implementation of Better

Buying Power (BBP) initiatives 

designed to improve the 

operation of the defense 

acquisition system and 

enhance the skill of the 

acquisition workforce. 

• Issue revised acquisition 

policy that implements key 

BBP initiatives and improves 

system performance.

• On 7 January 2015, the 

Department issued a major 

revision to DOD I 5000.02, 

which describes the operation 

of the defense acquisition 

system. This revision 

incorporates and 

institutionalizes the acquisition 

process changes, resulting 

from the BBP initiatives. 

Reassessed 

annually 

based on 

incremental 

improvements

2 Security

• There are weaknesses in the 

Department’s management and 

assurance of the reliability and 

security of information.

FY 2006 Departmentwide

• Develop and implement a 

uniform equipment request 

and loan tracking system for 

managing and tracking 

information technology 

equipment.

• Create baseline metrics and 

define security administration 

compliance for information, 

personnel, and industrial 

security programs.

• Develop enhanced Ethics and 

Security Awareness training at 

all levels to ensure that 

personnel are trained to 

prevent the compromise of 

classified information.

• Implement actions to protect 

classified information and PII.

• Establish oversight controls to 

validate identified 

vulnerabilities are remediated.

Reassessed 

annually 

based on 

incremental 

improvements
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3 Information Technology

• 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, and accurate.

• There is lack of accountability 

for systems implementation, 

review, and oversight.

• Lack of system security safe 

guards integrated into the 

design, lack of user training,

and policies are not consistently 

validated and updated.

• There is a lack of Records 

Management procedures 

included during the systems 

development process. This 

weakness results in time and 

money lost as the procedures 

are added as an afterthought.

FY 2010 Departmentwide

• Complete relevant FISCAM 

testing, implement process 

standardization, and ensure 

compliance with information 

systems requirements in order 

to achieve FISCAM control 

objectives.

• Hold system stakeholders 

accountable for follow through 

and validation of final 

products.

• Develop central tracking 

databases for user accounts to 

maintain system 

security/safeguards as well as 

identifying, recording, and 

training proper individuals.

FY 2020

4 Comptroller and Resource 

Management

• The Department’s current 

business processes, policies 

and internal controls do not 

provide reliable, accurate and 

verifiable financial statements.

• The financial management 

workforce lacks adequate 

training in all financial 

management-related functions 

and the implementation of 

effective financial management 

processes, and procedures.

• Funds control process 

weaknesses resulted in the 

inability to adequately track 

funds consistent with existing 

laws and regulations. The lack 

of adequate funds control led to 

several Anti-Deficiency Act 

violations.

FY 2011 Departmentwide

• Implement established 

guidance to enable 

Components to improve their 

processes, systems, and 

controls.

• Conduct competency gap 

analyses of current and 

expected future financial 

management workforce and 

develop training programs and 

guidance for strategic 

workforce planning.

• Enhance systems for tracking 

funds, publishing guidance,

and scheduling training for 

personnel who perform 

funding-related functions.

FY 2017
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5 Contract Administration

• The Department must 

strategically manage Services 

Acquisition (SA), define 

outcomes, and capture data to 

do so.

• The Department continues to 

face challenges meeting FY 

competition goals and needs to 

address ill-suited contract 

arrangements as well as utilize 

incentives.

• The Acquisition workforce 

needs to be appropriately sized, 

trained, and equipped to meet 

the Department’s needs.

FY 2009 Departmentwide

• Establish Functional Domain 

Experts baseline data, specific 

goals for improvement and 

associated metrics and 

monitor progress against 

goals.

• Better Buying Power (BBP) 

2.0 and 3.0 initiatives to boost 

competition include the 

Service Acquisition Executives 

briefing progress and 

highlighting best practices 

quarterly at the Business 

Senior Integration Group 

meetings. DoD achieved a 

FY15 competition rate of 

55.1% against the goal of 

59%. 

• Chaired quarterly Contracting 

FIPT meetings (CONFIPT); 

coordinated on Defense 

Acquisition Workforce 

Improvement Act (DAWIA)-

related certification and 

workforce issues and 

participated in a number of 

AT&L-led workgroups to 

implement BBP initiatives.

Reassessed 

annually 

based on 

incremental 

improvements

6 Force Readiness

• There is a lack of diversity 

within the Sea, Air, and Land 

(SEAL) Special Operations 

Forces which indicates a 

potential operational weakness.

The Global War on Terrorism 

identified the need for an 

operational need for SEALs 

with diverse backgrounds. 

FY 2011 USSOCOM • Implement diversity outreach 

initiatives that will review 

outreach and awareness 

activities to ensure that the 

Special Operations Forces is 

recruiting candidates with 

diverse backgrounds and 

skills.

FY 2018
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7 Personnel and/or Organizational 

Management

• The Department did not 

adequately manage its human 

capital resources and maintain 

the critical skills and 

competencies of its civilian 

workforce and also does not 

have a comprehensive 

Personnel Accountability 

System. As a result, 

components’ ability to 

accomplish their mission is 

impacted by shortages in 

personnel with the right skills 

and competencies.

FY 2009 EUCOM

AFRICOM

• Leverage information obtained 

from skill and competency gap 

assessments to ensure that 

personnel actions are affecting 

current and future civilian 

workforce, restructuring or 

resizing initiatives are done in

a manner that preserves skills 

and knowledge, minimizes 

competency gaps, and avoids 

shortfalls in critical skills.

• Implement new hire 

procedures on USAJobs, and 

streamline position validation 

and request for personnel 

action pre-hiring processes to 

eliminate redundant functions 

and reduce processing time.

• Implement a Joint Personnel 

Accountability Reconciliation 

and Reporting (JPARR) 

system.

FY 2017

8 Government Furnished Property 

(GFP)

• In FY 2011, the Department did 

not have clear guidance and 

had not properly trained 

Program Office staff, contract 

specialists, and accountable 

property officers regarding 

policies and procedures for 

appropriately managing 

property provided to a 

contractor (this includes both 

contractor acquired property 

(CAP) and GFP. As a result, 

DoD’s accountability records 

are incomplete. Audit reports 

have consistently identified a 

lack of accountability 

concerning GFP and CAP for 

which the DoD has title but not 

immediate physical control.

FY 2011 Departmentwide

• Establish and implement 

procedures and training on 

property management policies, 

which will be embedded within 

contracts. 

• Develop measures to ensure 

that components follow 

property management policies, 

including the proper 

accountability for property 

provided to contractors.

• Validate accountable property 

records and supporting 

documentation through 

existence and completeness 

testing.

• Establish accountable records 

that will identify property, to 

include Government Furnished 

Property.

FY 2016
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9 Internal Use Software (IUS)

• The Department has not 

properly addressed the 

management and financial 

reporting of IUS which is 

required by the Financial 

Management Regulation. IUS 

is part of the DoD financial 

statement and is subject to 

audit. DoD will not be able to 

pass audit without sufficient 

guidance and time for 

implementing said guidance.

FY 2015 Departmentwide

• Finalized and issued a policy 

that establishes a 

Department-wide strategy for 

IUS audit readiness, 

streamlines the schedule 

and workload for establishing

opening balances, and 

provides guidance on 

multiple IUS issues for which 

the Department needed 

clarity such as accounting for 

software enhancements, 

licenses, cloud computing, 

and bulk purchases. 

• Drafted a Directive Type 

Memorandum (DTM) to 

address IUS accountability 

and accountable property 

system of record 

requirements.

• Components to begin 

managing and reporting IUS 

as required in the DTM. This 

includes the identification of 

accountable officers, the 

universe of IUS, and annual 

IUS inventory requirements.

FY 2020

10 Supply Operations

GAO identified 

Department-wide weaknesses in 

the areas of asset visibility, 

inventory management, and 

materiel distribution.

FY 2011 Departmentwide

• Improve Supply Chain 

Management operations 

through better demand 

forecasting, asset visibility, 

and distribution processes.

Reassessed 

annually 

based on 

incremental 

improvements

3. FMFIA SECTION 4, FINANCIAL SYSTEM NONCONFORMANCE WEAKNESSES. The Department 

requires financial system conformance with federal requirements and reports. The 

Department reported one weakness that includes a wide range of pervasive problems 

related to financial systems. 

Table 2c. Conformance with Financial Management System Requirements (FMFIA Section 4)

Statement of Assurance: Systems do not conform to financial management system requirements

Non-Conformances Beginning

Balance New Resolved Reassessed EndingBalance

1. Financial Management 

Systems 1 1

Total System Conformance 

Material Weaknesses 1 1
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Table 2c-1, below, provides the description and corrective action plan for the material 

weakness related to internal control over financial systems.

Table 2c-1. FY 2015 Internal Control over Financial Systems Material Weakness

Area of Material Weakness Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

1 • Financial Management Systems:

The Department’s financial 

systems currently do not provide 

the capability to record financial 

transactions in compliance with 

Federal Financial Management

Improvement Act (FFMIA), 

current federal financial 

management requirements, 

applicable federal accounting 

standards, and the Treasury 

USSGL at the transaction level.

• The Department’s IT systems 

environment includes numerous 

legacy systems, core enterprise

systems that support the major 

end-to-end processes, and nine 

Enterprise Resource Planning 

(ERP) systems. Most of the 

business legacy systems were 

designed to support functional 

purposes, such as human 

resource management, property 

management, and logistics 

management, and not originally 

for auditable financial statement 

reporting. The current systems 

environment is made up of many 

mixed (feeder and general 

ledger) systems that lack 

integration and are not in line 

with the Federal Information 

System Controls Audit Manual

(FISCAM) requirements with 

regards to entity-level 

technology general controls, 

application-level general controls 

and automated application 

controls.

• Inadequate configuration and 

user management of newly 

implemented systems with lack 

of proper design and 

effectiveness of internal controls 

for access, segregation of 

duties, configuration 

management, system interfaces 

and audit trails. 

• The Department has not fully 

defined and consistently 

implemented the full range of 

business systems modernization 

management controls. As a 

FY 2001 Departmentwide

• Develop effective financial 

management systems 

processes throughout the 

Department, including 

Enterprise Resource Planning 

systems (ERPs) and other core 

financial systems, and prepare a 

plan to correct or replace many 

of the mixed (feeder and general 

ledger) systems.

• Continue pre-deployment testing 

of end-to-end financial 

management systems in order 

to make necessary system 

improvements towards FFMIA 

compliance.

• Continue to evaluate and track 

CAPs to include completion of 

assessments of legacy financial 

management and critical feeder 

systems and required system 

change requests to 

accommodate related control 

deficiency remediation activities.

• Identify systems that affect 

internal controls over financial 

reporting and financial statement 

audit readiness, develop 

systems documentation, test 

controls and supporting 

documentation transactions, and 

remediate deficiencies and 

weaknesses (which may require 

modifications to the systems) in 

preparation for audit or SSAE16.

FY 2017
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Table 2c-1. FY 2015 Internal Control over Financial Systems Material Weakness

Area of Material Weakness Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

result, it may not be able to 

adequately ensure that its 

business system investments 

are the right solutions for 

addressing its business needs, 

as indicated by GAO 2015 High 

Risk report.

FEDERAL FINANCIAL MANAGEMENT IMPROVEMENT ACT (FFMIA)

The DoD IG and the audit agencies within the Military Services have reported on the 

Department’s noncompliance with FFMIA. The Department’s noncompliance is due to its 

reliance upon legacy financial management systems by the various Components. These 

legacy financial systems, for the most part, do not comply with the wide range of 

requirements for systems compliance, in accordance with FFMIA and therefore do not 

provide the necessary level of assurance that the core financial system data or the mixed 

systems information can be traced to source transactional documentation. Table 3 reflects 

the Department’s compliance with FFMIA. 

Table 3. Compliance with Federal Financial Management Improvement Act

Agency Auditor

1. System Requirements Lack of substantial 

compliance noted

Lack of substantial 

compliance noted

2. Accounting Standards Lack of substantial 

compliance noted

Lack of substantial 

compliance noted

3. U.S. Standard General Ledger at Transaction Level Lack of substantial 

compliance noted

Lack of substantial 

compliance noted

Members of a joint color guard present the colors during the U.S. 

Transportation Command assumption-of-command ceremony on Scott 

Air Force Base, Ill. 

Photo by U.S. Air Force Master Sgt. Adrian Cadiz 
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IMPROPER PAYMENT AND PAYMENT RECAPTURE PROGRAMS

Newly enacted Congressional legislation has amended the Improper Payments 

Elimination and Recovery Improvement Act of 2012 (IPERIA) and earlier legislation affecting 

improper payments1

. Congressional legislation ensures both federal and state entities 

maintain strong financial management controls to better detect and prevent improper 

payments, and to report on these programs to the President and Congress in the annual 

Agency Financial Report. Newly revised guidance has changed the way in which the 

Department’s improper payments and payment recapture programs are reported. The 

following subcategories are included in this section:

I. Risk Assessment

II. Statistical Sampling Process

III. Program Improper Payment Reporting

IV. Root Causes of Errors 

V. Corrective Actions 

VI. Internal Control over Payments 

VII. Accountability

VIII. Agency Information Systems and Other Infrastructure

IX. Statutory and Regulatory Barriers

X. Payment Recapture Audit Reporting 

XI. Additional Information

XII. Agency Reduction of Improper Payments with the Do Not Pay Initiative

The Department reports improper payments in the following six categories:

1. Military Health Benefits – Disbursed by Treasury for the Defense Health Agency 

(DHA) 

2. Military Pay – Disbursed by Defense Finance and Accounting Service (DFAS) 

3. Civilian Pay – Disbursed by DFAS 

4. Commercial Pay (vendor and contract payments) – Disbursed by DFAS, Navy, and 

U.S. Army Corps of Engineers (USACE) 

5. Military Retiree and Annuitant Benefit Payments – Disbursed by DFAS 

6. Travel Pay – Disbursed by DFAS, Army, Navy, Air Force, and USACE

The DFAS, USACE, and DHA are the primary disbursing components within the 

Department. The Army, Navy, and Air Force report on travel improper payments that are 

not disbursed by DFAS.

 1 Improper Payments Information Act of 2002 (IPIA), as amended by The Improper Payments Elimination and 

Recovery Act of 2010 (IPERA) and The Improper Payments Elimination and Recovery Improvement Act of 2012

(IPERIA)
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I. Risk Assessment

DFAS. The DFAS risk assessments for disbursements uses established criteria contained 

in the Office of Management and Budget (OMB) Circular No. A-123, Appendix C. DFAS 

monitors changes in programs associated with OMB-mandated criteria (for example, a large 

increase in annual outlays, regulatory changes, or newly-established programs) to track 

unfavorable trends to allow early implementation of corrective actions. 

USACE. The USACE risk assessments for travel and commercial payments address the 

effectiveness of internal controls, such as prepayment reviews, to prevent improper 

payments as well as system weaknesses identified internally or externally by external audit 

activities. The U.S. Corps of Engineers Financial Management System (CEFMS) provides 

internal system standards that adhere to U.S. generally accepted accounting principles, as 

well as process controls that provide the safeguards to monitor and ensure that prepayment 

examination requirements are met. The USACE also monitors changes in programs to track 

trends and implement corrective actions, as necessary. 

DHA. The DHA risk assessment process is managed through contracts with an external 

independent contractor (EIC) to provide independent, impartial review of reimbursements 

and claims processing procedures used by DHA’s purchased-care contractors. The EIC 

identifies improper payments resulting from the contractors’ noncompliance with The 

Military Health Care System (collectively referred to as TRICARE in this report) benefit 

and/or reimbursement policies, regulations, and contract requirements. The risk level of 

programs is evaluated based on results of these compliance reviews.

Navy. Navy’s Office of Financial Operations (FMO) tested the commercial payment 

sampling process at one Navy ERP command to evaluate internal controls. The Navy risk 

assessment for commercial payments included an established sampling process, addresses 

the effectiveness of key internal controls of the commercial payment business processes 

such as document review of paid vouchers versus individual purchase card transactions, 

inadequate signature approval and sampling, record retention, and validation of approving 

authority signatures on key supporting documentation. The risk level of programs is 

evaluated based on results of compliance review results.

II. Statistical Sampling Process2

The primary disbursing Components use statistically valid sampling methods designed to 

meet or exceed OMB’s requirements of 90 percent confidence level, ±2.5 percent, to 

estimate and project the Department’s annual improper payments for each payment type. 

The smaller disbursing Components normally perform 100 percent postpayment reviews or 

a full review of payments above a precise dollar threshold, with random sampling for 

lower-dollar payments. All Department sampling plans were approved by OMB in FY 2013, 

and updated plans for DFAS Commercial Pay, DHA Military Health Benefits, and USACE 

Travel Pay were submitted to OMB for FY 2014. The DFAS sampling plans were unchanged 

for FY 2015.

 2 Refer to detail at Under Secretary of Defense (Comptroller) > Financial Management > Reports for Reporting 

Components Statistical Sampling Plans.
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Military Health Benefits. The EIC compliance reviews include three sample types: a 

payment sample, to ensure payment accuracy by identifying underpayment and 

overpayments; a denied payment sample, to ensure proper claim denial; and an occurrence

sample, to ensure the accuracy in reporting healthcare data, regardless of payment 

accuracy. Payment samples are conducted as a stratified random sample based on paid 

amounts; denied samples are conducted as a stratified random sample based on billed 

amounts; and occurrence samples are conducted as a simple random sample with no 

stratification. 

• Payment Samples: Payment Samples for paid claims include between 4 and 12 

strata, depending on the composition of the claims in the universe. Mathematical 

formulas are used to identify optimal strata boundary points, and sample sizes are 

calculated to yield an estimate with a minimum of 90 percent confidence 

±2.5 percentage points. All claims with a paid amount above a $200,000 high-dollar 

threshold are reviewed, and claims with a paid amount below a $100 low-dollar 

threshold are excluded. These thresholds may vary from contract to contract. 

• Denied Payment Sample: Denied payment samples are limited to claims with 

$0 government payment. The denied payment sample is similar in design to the 

payment sample, but the denied sample is stratified based on billed amount because 

the paid amount for a denied claim is equal to $0. All claims with a billed amount 

above a $500,000 high-dollar threshold are reviewed, and claims with a billed 

amount below a $100 low-dollar threshold are excluded. These thresholds may vary 

from contract to contract.

• Occurrence Samples: Occurrence samples are intended to monitor and evaluate the 

accuracy of TRICARE Encounter Data (TED) record coding, versus the accuracy of the 

payment, by the Third Party Payment Contractors (TPPCs). These records are 

selected using a simple random sample. A sample of up to 350 records is selected for 

each occurrence sample, and each record in the sample has approximately 90 data 

fields that are evaluated for accuracy. The results from occurrence samples are used 

to monitor data accuracy only and do not affect the improper payment error rates; 

however, TPPCs are required to correct any improper payments identified during 

occurrence reviews. 

In addition, DHA conducts an internal statistically valid review of low-dollar claims 

excluded from the payment samples. Results from this internal review are combined with 

results from the EIC compliance reviews to arrive at an overall payment accuracy 

measurement for all DHA claims.

The DHA continually evaluates the accuracy and design of its sampling methodologies 

for all contracts and implements revisions, if warranted by the distribution of audit universes 

or the outcome of compliance reviews. 

Military Pay. On a monthly basis, the Department statistically samples Military Pay 

accounts stratified by Active Duty (Army, Navy, Air Force, and Marine Corps) and Reserve 

Components (Army Reserve, Army National Guard, Navy Reserve, Air Force Reserve, Air 

National Guard, and Marine Corps Reserve). The DFAS selects the accounts for each 

Component to review, and DFAS produces annual estimates of improper payments.
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Civilian Pay. On a monthly basis, DFAS statistically samples Civilian Pay accounts 

stratified by Army, Air Force, Navy/Marine Corps, and Defense Agencies. DFAS selects the 

accounts for each Component to review, and as a result produces the annual estimates of 

improper payments.

Commercial Pay

DFAS. In FY 2014, DFAS refined its statistical sampling methodology for the Commercial 

Pay program to incorporate Government Accountability Office (GAO) and DoD IG 

recommendations. DFAS assessed the risk of improper payments computed within the 

entitlement systems. Seven contract and vendor pay systems3 were identified as “at risk” of 

making improper payments based on historical postpayment, self-identified reviews and the 

volume of outlays. These seven systems cover over 90 percent of the Commercial Pay 

program outlays. 

DFAS designed its samples using the Neyman Allocation method, a sample allocation 

method to stratify random samples by dollar amount using financial data contained within 

each of the seven systems. The overall variable sample size was calculated for the 

combined systems to produce a point estimate with a 95 percent confidence interval and a 

margin of error of ±2.5 percent. Samples were then randomly selected using the Statistical 

Package for the Social Sciences (SPSS) statistical software from the seven systems as a 

whole. Each invoice within the stratum had an equal probability of selection. 

The sampling framework, designed by DFAS statisticians and reviewed by its Internal 

Review office, addressed the GAO and DoD OIG audit recommendation. The sampling 

framework also was submitted to OMB, and no issues were noted. 

Navy. The Navy compliance review includes contract and vendor payments computed in 

the Navy Enterprise Resource Planning (ERP). The standardized sampling framework was 

developed by the Office of Financial Operations (FMO) and approved by statisticians in the 

Navy’s Center for Cost Analysis and OMB. FMO staff extracts data from the Navy ERP and 

provides payment samples to the Commands. The Commands then review these payments 

to ensure they are legal and proper. 

USACE. The USACE compliance postpayment reviews were conducted using a 

statistically valid, 95 percent confidence level, ±2.5 percent, sample taken from the entire 

USACE Commercial Pay universe. In addition, the USACE Finance Center (UFC) used 

prepayment controls, postpayment contract audits, and data mining to prevent and identify 

improper payments in Commercial Pay. 

Military Retiree and Annuitant Benefit Payments. On a monthly basis, DFAS 

statistically samples military retirement payments stratified by the retired and annuitant pay 

accounts. The review contains samples of: drilling reserve units, retiree offsets, survivor 

benefit plans, transfers to/from the Temporary Disability Retired List to the Permanent List, 

and Veterans Affairs offsets. Continuous random reviews are done for: Combat Related 

Special Compensation, Concurrent Receipt of Disability Payment, daily payroll accounts, 

 3 Computerized Accounts Payable System for Windows (CAPS-W), Defense Agencies Initiative (DAI), Enterprise 

Business System (EBS), General Funds Enterprise Business System (GFEBS), Integrated Accounts Payable System 

(IAPS), Mechanization of Contract Administrative Services (MOCAS), and One Pay (ONEPAY).
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newly established accounts, and other targeted areas.

Travel Pay

The Department. The Department’s travel payments are computed, paid, and 

independently reported by the military services and other Defense agencies. The results 

incorporate the review of DFAS-disbursed travel payments as well as non-DFAS-disbursed 

travel payments for Army, Air Force, and Navy (see Table 4). 

DFAS reports the largest portion of DoD’s travel payments processed in the Defense 

Travel System (DTS), and Windows Integrated Automated Travel System (WinIATS) for the 

Department of the Army and select Defense Agencies. On a monthly basis, DFAS 

statistically samples DTS travel vouchers stratified by Military Service and the aggregate of 

the Defense Agency vouchers. In addition, DFAS also statistically samples monthly WinIATS 

travel vouchers, stratified by Army activity and type of payment, for both Temporary Duty 

Travel (TDY) and Permanent Change of Station (PCS). 

DTS Root Causes. The primary reasons for DTS improper payments are voucher input 

errors by the traveler and/or the approving official’s failure to catch the error(s) before 

reimbursement occurs. The errors identified in the sample include:

• Per Diem, 51 percent: Incorrectly reimbursed the traveler for lodging expenses without 

validating the claim with receipts, and/or reimbursed for meals at an incorrect rate.

• Reimbursable Expense, 24 percent: Incorrectly reimbursed airfare, non-travel related 

expenses, and/or rental car expenses due to traveler errors.

• Missing Documentation, 25 percent: Incorrectly reimbursed unsupported traveler 

claimed lodging, airfare or rental car expenses.

WinIATS Root Causes. The primary reasons for WinIATS improper payments are voucher 

input errors by the traveler and/or the approving official’s failure to identify the error(s) 

before reimbursement occurs. The error types include:

• Per Diem (91 percent): Per diem/meals and incidental expenses and lodging paid at 

the incorrect rate, not at all, or when unauthorized.

• Reimbursable Expense, 2 percent: Airfare, household goods storage, and lodging tax 

paid incorrectly or not at all.

• Other miscellaneous, 7 percent.

USACE. The UFC processes USACE travel payments using the CEFMS and WinIATS. The 

payment population includes both TDY and PCS travel voucher reimbursements. All PCS and 

TDY vouchers over $2,500 are 100 percent reviewed for accuracy. The remaining vouchers 

are statistically sampled at 95 percent confidence level, ±2.5 percentage.
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III. Program Improper Payment Reporting 

Table 4 summarizes the Department’s improper payment reduction outlook and total program outlays (prospective 

payments) from FY 2014 through FY 2018.

Table 4. Improper Payment Reduction Outlook ($ in millions)

Program or 

Activity

FY 2014 

Outlays 

FY 2014 IP %

FY 2014 IP 

FY 2015 

Outlays 

FY 2015 IP %

FY 2015 IP 

FY 2015 Overpayment 

FY 2015 

Underpayment 

FY 2016 Est. 

Outlays 

FY 2016 Est. 

IP %

FY 2016 Est. 

IP 

FY 2017 Est. 

Outlays 

FY 2017 Est. 

IP %

FY 2017 Est. 

IP 

FY 2018 Est. 

Outlays 

FY 2018 Est. 

IP

%

FY 2018 Est. 

IP 

Military Health 

Benefits 1, 2 $21,200.0 0.87 $184.4 $19,700.0 0.80 $157.67 $138.59 $19.08 $20,100.0 1.75 $352.35 $20,200.0 1.75 $353.73 $20,400.0 1.75 $356.82

Military Pay3 $110,600.0 0.23 $249.8 $107,400.0 0.23 $242.90 $227.60 $15.30 $93,500.0 0.29 $271.20 $93,500.0 0.29 $271.20 $93,500.0 0.29 $271.20

Civilian Pay3 $55,600.0 0.14 $80.0 $56,600.0 0.10 $57.20 $57.20 $0.00 $56,500.0 0.17 $96.10 $56,500.0 0.17 $96.10 $56,500.0 0.17 $96.10

Military 

Retirement3 $56,500.0 0.03 $19.3 $59,300.0 0.04 $20.80 $20.60 $0.20 $44,100.0 0.04 $17.60 $44,100.0 0.04 $17.60 $44,100.0 0.04 $17.60

DoD Travel Pay 

4,5 $6,600.0 6.94 $458.2 $6,600.0 7.90 $521.47 $487.64 $33.83 $9,190.0 4.46 $410.27 $9,190.0 4.46 $406.07 $9,190.0 4.46 $406.07

DFAS 

Commercial Pay 

3 $305,000.0 0.00 $2.9 $287,800.0 0.09 $256.00 $256.00 $0.00 $384,700.0 0.03 $115.40 $384,700.0 0.03 $115.40 $384,700.0 0.03 $115.40

USACE 

Commercial $18,700.0 0.00 $0.0 $18,200.0 0.00 $0.00 $0.00 $0.00 $17,800.0 0.00 $0.00 $17,400.0 0.00 $0.00 $17,000.0 0.00 $0.00

USACE Travel 

Pay $150.0 0.40 $0.6 $170.0 0.02 $0.04 $0.04 $0.00 $170.0 0.01 $0.02 $170.0 0.01 $0.02 $160.0 0.01 $0.02

Navy ERP 

Commercial Pay 

6 $4,400.0 0.00 $0.0 $5,000.0 0.00 $0.00 $0.00 $0.00 $5,000.0 0.00 $0.00 $5,000.0 0.00 $0.00 $5,000.0 0.00 $0.00

Note 1: DHA reports 12 months in arrears; therefore its FY 2015 reporting represents FY 2014 data.

Note 2: DHA uses 1.75% as its out-year target because that is the contractual performance standard. The FY 2016-2018 outlays estimates were calculated using the OMB CPI-U Annual Averages and Percent 

Change Table. As DHA reports 12 months in arrears, the FY 2015 CPI-U medical percent change was used to calculate the FY 2016 outlay estimates, while the FY 2016 and 2017 medical percent changes 

were used to calculate the FY 2017 and 2018 outlay estimates, respectively.

Note 3: Out-year reduction targets for Mil Pay, Civ Pay, Mil Retirement, and DFAS Commercial Pay represent a continuation of the very low IP rates experienced in FY 2015. DFAS proposes flat line of FY 16-

18 improper payment rates related to Military and Civilian Pay.

Note 4: DoD Travel Pay includes travel data from DFAS and the Army, Navy, and Air Force for vouchers paid outside of DTS. 

Note 5: DoD Travel represents DFAS and Navy travel vouchers settled from July 2014 through June 2015; Army and Air Force follow the normal fiscal year.

Note 6: Since no improper payments were identified for FY 2015, out-year reduction targets are not applicable.
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IV. Root Causes of Errors 

Table 5 summarizes the Department’s improper payment root causes.

Table 5. Improper Payment Root Cause Category Matrix ($ in millions)

Reason for Improper 

Payment

Military Pay Civilian Pay Retired Pay Commercial Pay Travel Pay (a, b) USACE Commercial 

Pay (c, d)

DHA (Military Health 

Benefits) (e)

OverpaymentUnderpaymentOverpaymentUnderpaymentOverpaymentUnderpaymentOverpaymentUnderpaymentOverpaymentUnderpaymentOverpaymentUnderpaymentOverpaymentUnderpayment

Program Design or 

Structural Issue $0.00 $0.00 $0.00 $0.00 $20.20 $0.00 $0.00 $0.00 $16.20 $0.02 $0.00 $0.00 $0.00 $0.00

Inability to Authenticate 

Eligibility $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.01 $0.05 $0.00 $0.00 $1.06 $0.00

Failure to 

Verify:

Death 

Data $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Financial 

Data $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.04 $0.00 $0.00 $0.00 $0.00 $0.00

Excluded 

Party Data $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Prisoner 

Data $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Other 

Eligibility 

Data 

$0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Administrative or 

Process 

Errors 

Made by:

Federal 

Agency $227.60 $15.30 $57.20 $0.00 $0.40 $0.20 $109.20 $0.00 $212.41 $33.61 $0.00 $0.00 $0.00 $0.00

State or 

Local 

Agency 

$0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Other 

Party $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.11 $0.02 $0.00 $0.00 $0.00 $0.00

Medical Necessity $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Insufficient 

Documentation to 

Determine

$0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $146.80 $0.00 $257.41 $0.00 $0.00 $0.00 $0.00 $0.00

Other Reason (a) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $1.16 $0.00 $0.00 $0.00 $0.00 $0.00

Other Reason (b) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.30 $0.15 $0.00 $0.00 $0.00 $0.00

Other Reason (c) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.0355 $0.00 $0.00 $0.00

Other Reason (d) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.0016 $0.00 $0.00

Other Reason (e) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $137.53 $19.075 

TOTAL $227.60 $15.30 $57.20 $0.00 $20.60 $0.20 $256.00 $0.00 $487.64 $33.86 $0.04 $0.00 $138.59 $19.075 

(a) Navy overpayments are Debit Management Monitored to establish Due Process debts since the members failed to submit vouchers promptly. Once the members receive notification they submit their 

vouchers. In the interim, the command treats the voucher as unsubmitted vouchers and starts a collection process. 

(b) Reflects the total for FY-14-Q4 Improper Payments not required by OMB to be separated by Reason for Improper Payment. 

(c) USACE: Erroneous TAO Approval.

(d) USACE: Employee failure to claim.

(e) DHA Other reasons include: Incorrect pricing, government pay miscalculation, cost/share deductible, procedure code errors and payment omissions.
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Military Health Benefits 

The projected FY 2015 error rate for military health benefits (MHB) improper payment is 

0.80 percent. 

The DHA’s purchased-care contracts are designed to include payment accuracy 

performance standards for processing MHB claims. Specifically, if improper payments 

exceed the payment accuracy performance standard, as stipulated in Military Health Care 

System policy manuals, or exceed more stringent purchased-care performance standards, 

the contractors are subject to financial penalties. Conversely, and if identified as a contract 

requirement, if the purchased-care contractor’s improper payments fall below the DHA 

TRICARE policy requirement or unique contract performance standard(s), the purchasedcare contractor may receive a financial incentive award. 

Purchased-care contractor payment accuracy performance is analyzed during the EIC 

quarterly and semi-annual compliance reviews. In addition to these reviews, annual reviews 

are conducted on claims representing underwritten healthcare costs that are paid by the 

managed-care support contractors (MCSCs). Confirmed overpayments from annual audits 

are projected to the sample universe, and the MCSCs are liable for the total extrapolated 

error amount. 

For the past several years, purchased-care contractors were held to payment accuracy 

performance standards with either contract financial penalties or incentives, depending on 

the contract type and requirement(s). This contract design encourages contractors to keep 

payment error rates as low as possible to avoid financial penalties, or to obtain increased 

contract financial incentives. Actual error rates have been consistently less than one 

percent. This contract design, combined with numerous pre- and post-payment controls, 

effectively curtails improper payments by the DHA’s purchased-care contractors and 

ensures the Government’s risk for improper payments in the MHB program is low.

In FY 2014, the formula used to calculate the DoD improper payment rate for the MHB 

program was changed. Specifically, the error rate was changed to calculate the error as a 

percent of dollars paid versus dollars billed. The errors identified in random samples were 

extrapolated using a weighted formula. Consequently, the FY 2014 error rate cannot be 

compared with previous years due to this change.

Root Causes. The primary reasons for payment errors in the MHB program for this 

reporting cycle are: 

• Incorrect pricing of medical procedures and equipment, 31 percent. 

• Lack of authorization or pre-authorization, required prior to receiving medical care, 

20 percent.

• Unsupported benefit determination, 12 percent.

• All other causes combined, 37 percent.
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Military Pay

The Department projects a 0.23 

percent error rate in FY 2015 Military Pay 

for improper payment based on reviews of 

trend in data from October 2014 to 

September 2015. Overpayments, which 

comprise 94 percent of the Military Pay 

improper payments, were not found in 

statistical sampling, but in debts 

established after a member has left the 

Military Service and through Active Duty 

debt collections reported by the Military 

Services. 

Root Causes. The primary reason for 

recurring Military Pay errors is the high 

turnover in military payroll clerks. This also 

causes a large amount of untimely or 

inaccurate information entered into pay 

systems, and administrative errors that 

occur during and between monthly pay 

periods, as many Service Members are paid multiple times per month. Entitlement changes, 

especially for deployed Service Members, can greatly change the amount due. Changes 

must be corrected in the following month’s pay. Nearly 100 percent of the improper 

payments identified during this reporting period were recovered, or in the process of being 

recovered.

Military Pay improper payments typically result in incorrect entitlement allocation as 

described above. These entitlements are: 

• Basic allowance for housing, 47 percent;

• Base pay for Active Duty and incorrect Active Duty pay for Reservists, 12 percent;

• Overseas housing allowance, 7 percent;

• Hostile fire/imminent danger pay, 5 percent;

• Family separation allowance, Active and Reserve, 5 percent; and

• Miscellaneous categories, including results from underpayments, account for 24 

percent of all improper payments. Miscellaneous categories include over 25 different 

entitlements.

Figure 18. Improper Payment Rate –

Military Pay
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Civilian Pay 

The Department projects a 

0.10 percent error rate in FY 2015 for 

Civilian pay payments, primarily 

overpayments. 

Root Causes. The Civilian Pay improper 

payments primarily were overpayments 

due to administrative errors caused by 

untimely or inaccurate entry of information 

into the pay systems. Improper payments 

identified include:

• Time and attendance, 49 percent; 

• Overseas and other allowances, 

31 percent; and

• Late personnel actions, 20 percent.

The Defense civilian payroll systems, 

like most government payroll systems, 

base time and attendance submissions on 

anticipated versus actual hours worked; 

therefore, the Department must correct overpayments and underpayments in a subsequent 

pay period. 

Errors in overseas Civilian Pay accounts often occur due to payment of an entitlement 

that erroneously continued after the employee has returned to the United States. These 

improper payments often result from inaccurate personnel actions generated by human 

resources offices. Corrections subsequently are generated by human resource offices and 

transmitted to the civilian payroll system. These corrections result in pay and allowance recomputations therefore creating a collection action to offset the overpayment. The initial 

improper payments are discovered through agency reviews, bi-weekly exception reports, 

and employee or supervisor notification. 

Figure 19. Improper Payment Rate –

Civilian Pay
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Commercial Pay

DFAS. DFAS continued the current sampling methodology, stratified by invoice dollar 

amount, to conduct statistically valid reviews of invoices computed in the Mechanization of 

Contract Administrative Services (MOCAS) contract payment system, the DFAS legacy 

commercial pay systems (IAPS, ONEPAY, CAPS), and the Army (GFEBS) and Defense 

Agency Component ERPs (DAI and EBS.) 4

The FY 2015 estimated improper payment amount is $256.0 million, with a 95 percent 

confidence interval between zero and $613.8 million, and an estimated 0.10 percent error 

rate. DFAS performs analysis on contractor identified improper payments data for 

preventive controls. 

Root Causes. The Commercial Pay improper payments were administrative and 

documentation errors caused by other system related errors. Improper payments identified 

from quarterly random sample reviews include: 

• Administrative errors, 57 percent, resulting from invalid invoice released, erroneous 

interest paid, special pay instructions not input, and/or other system related errors; 

and

• Missing Documentation, 43 percent.

Business Activity Monitoring (BAM) Tool. Using the BAM tool, DFAS identifies and 

prevents improper payments in the Department’s five largest commercial payment systems, 

which includes MOCAS, CAPS-W, IAPS, OnePay, and EBS accounting, for 87 percent of all 

DoD commercial payment dollars. 

Since the implementation of BAM in 

August 2008, prepayment reviews have 

prevented more than $11 billion in improper 

payments. Continuous payment error 

analyses allow for the recurrent enhancement 

of BAM logic and improved disbursement 

accuracy. 

This year, DFAS developed new system 

edits, also called integrity checks, to improve 

BAM’s ability to identify improper payments 

prior to disbursement. One example of the 

success of these new edits and integrity 

checks in preventing improper payments in 

FY 2015 is an integrity check focused on risk 

management for MOCAS that will flag an 

invoice for review if it is being paid to a 

 4 Computerized Accounts Payable System for Windows (CAPS-W), Defense Agencies Initiative (DAI), Enterprise 

Business System (EBS), General Funds Enterprise Business system (GFEBS), Integrated Accounts Payable System 

(IAPS), Mechanization of Contract Administration Services (MOCAS) and One Pay (ONEPAY).

Figure 20. Improper Payment Rate –

USACE Commercial Pay
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vendor that has historically had high dollar improper payments. This new integrity check 

has helped to prevent over $50 million in improper payments since its implementation in 

January 2015.

DFAS identifies and monitors the root cause for all improper payments by researching 

supporting documentation and assigning an assessment (reason) code that identifies the 

type and cause of the improper payment. In addition, root causes of improper payments 

detected by BAM are reviewed and analyzed monthly. Root cause analysis is shared with the 

DFAS payment offices on a monthly basis and is used to identify areas for operational 

improvement. The information is also used to implement refinements to BAM and develop 

new integrity checks.

USACE. USACE projects a zero percent statistical sampling error rate for Commercial 

Pay for FY 2015. 

Navy. The Navy ERP reported no improper payments for Commercial Pay for FY 2015. 

Military Retirement

The Department projects a 0.04 percent error rate for the Military Retirement Program 

for FY 2015. Almost the entire amount is comprised of payments made prior to DFAS receipt 

of notification of a deceased retiree or annuitant. 

Root Causes. Eligibility for military 

retired pay ends on the retiree’s date of 

death. Prompt reporting of a deceased 

retiree's death can help avoid possible 

financial hardship to the Service member’s 

annuitant by expediting the correct 

calculation and processing of the monthly 

benefit. Family members or executors are 

required to return any overpayments of the 

deceased military retired pay. 

The delay in notifying the payroll activity 

of the death of a Military Retiree may result 

in an initial unavoidable overpayment to a 

deceased retiree. Our review of confirmed 

overpayments to deceased retirees in 

FY 2015 disclosed that the Department 

recovered approximately 91 percent of the 

overpayments within 60 days, 

demonstrating the effectiveness of controls 

within the retired pay system once the 

Department is notified of a retiree’s death. 

Travel Pay 

Department. The Department projected an 8.8 percent error rate for travel improper 

payments for FY 2015. This represents Military DTS trip records and WinIATS Temporary 

Duty (TDY) and Permanent Change of Station (PCS) vouchers for both civilians and military 

Figure 21. Improper Payment Rate –

Military Retirement
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members, which are computed and disbursed by DFAS. In addition, the 8.8 percent error 

rate includes travel payments disbursed outside of DFAS by the Army, Navy, and Air Force.

Root Causes. The primary reasons for travel improper payments were administrative, 

documentation and program design errors caused by traveler input errors and or approving 

official’s failure to identify the error(s) prior to payments. The errors identified in the sample 

include:

• Administrative errors, 48 percent, resulting from per diem expenses incorrectly 

reimbursed to the traveler for lodging expenses without validating the claim with 

receipts, and/or reimbursed for meals at an incorrect rate. Errors also result from 

incorrectly reimbursed airfare, non-travel related expenses, and/or rental car 

expenses due to traveler input errors when completing voucher in DTS.

• Missing documentation errors, 49 percent: resulting from unsupported reimbursable 

for claimed lodging, airfare or rental car expenses.

• Program design or structural errors, 3 percent, resulting from using the WinIATS 

system to process non-traditional travel vouchers for foreign students under the 

International Military Education and Training (IMET) program.

USACE. The Army Corps of Engineers continued to see a reduction in its Travel Pay 

error rate over the course of the past 12 months (refer to Table 4). The USACE continues to 

stress the need for refresher training for all approving officials and travelers, which 

dramatically impacted the error rate. Also, the USACE Finance Center (UFC) performs a 100 

percent audit of all airline credits issued against travelers’ individually billed travel card 

accounts. This ensures that all airline credits, issued as a result of flight changes, are 

properly recouped.

Root Causes (see also Table 5). The primary reasons travel pay errors occur are: 

• Errors generated by Travelers when completing their travel vouchers.

• Improper review of travel vouchers by Approving Officials (AO).
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V. Corrective Actions 

Military Health Benefits

Corrective Actions. The DHA purchased-care contractors are monetarily incentivized or 

dis-incentivized, through payment accuracy performance standards, to reduce and/or 

eliminate improper payments. The fewer improper payments the contractors make, the less 

money is deducted from their reimbursements. 

Additionally, details of the EIC compliance reviews are shared with the purchased-care 

contractors, DHA Program Offices, purchased-care contract Contracting Officers, and 

Contracting Officer Representatives to coordinate appropriate corrective action plans with 

the respective purchased-care contractor.

• Upon completion of an EIC compliance review, respective contractors review results, 

formulate an action plan to mitigate future findings and derive a process to avoid 

future improper payments.

• If warranted, contractor claims processing systems are modified to meet the 

Department’s healthcare policy, reimbursement, or benefit requirements.

• If there is the potential that additional healthcare claims were processed in error, 

special ad hoc reports are pulled and adjustment actions are taken as appropriate.

Each purchased-care contractor has its own business process for evaluating compliance 

review results and conducting root cause analyses to ensure the accuracy of future claims 

payment and developing internal corrective action plans. If required, DHA Contracting 

Officers and Contracting Officer Representatives issue contractor corrective action plans to 

remedy and track noncompliance with TRICARE healthcare policy/regulations and 

purchased-care contracts.

Military Pay

Corrective Actions. The Department institutes comprehensive training programs with 

standard desk procedures to ensure continuity of operation as new clerks onboard. In 

addition, the Department, primarily through DFAS, advises the Military Services of the 

results of payment reviews and the associated root causes of the errors. DFAS provides the 

Military Service with monthly reports on the results of statistical reviews, including the 

reasons for and dollar value of errors and year-to-date trends, to inform their training plans.

Civilian Pay

Corrective Actions 

DFAS continues to advise Components of the results of payment reviews and the 

associated reasons for errors that result in improper payments to civilian employees. DFAS

also advises Components on best business practices to prevent future improper payments 

and participates in various conferences to guide personnel on how to correctly submit 

information to prevent improper payments.

Commercial Pay

Corrective Actions. The Department’s continued to implement corrective action to 

prevent, identify, and reduce overpayments. Corrective actions include:
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• Ongoing training for pay technicians to increase their ability to compute and input 

claims accurately.

• Mandatory all-hands training and awareness for MOCAS Accounts Payable personnel 

when the system is down for month-end. Training and awareness are tailored to 

address risk areas and to improve quality.

• Continued work with Contracting Officers to simplify contract terms and eliminate the 

need for manual calculations.

• Implementation of a new control called “First Financing Review” that requires a 

review of the first financing payment for every new contract as well as an attestation 

by the supervisor that the review was performed. The accuracy of the first financing 

payment on a contract is critical to ensuring all subsequent payments are properly 

made.

• Continued electronic commerce improvement initiatives, such as the automation of 

third party payments, aimed at minimizing manual intervention and improving 

quality.

DFAS is working to add Procedures Guidance and Instruction (PGI) data to enhance 

detection capability within MOCAS. The PGI is an initiative that created special payment 

instruction codes and fields. These new data elements present an opportunity for new 

integrity checks to be created within the BAM tool for MOCAS.

Another initiative to reduce improper payments includes outreach to reduce vendor 

billing errors caused by duplicate manual and electronic submission of invoices. In addition, 

the Department conducts manual reviews to ensure it meets all Certifying Officer Legislation 

requirements prior to certifying payment, such as ensuring proper documentation and 

correct payment amounts before disbursement.

Military Retirement

Corrective Actions. The Department’s control processes to prevent, identify, and reduce 

overpayments to deceased retirees and annuitants include:

• Validating existence of retiree and/or annuitant, if living outside the United States.

• Annual certification of existence for all annuitants.

• Periodic, random certifications for retirees over a certain age.

• Validating military retiree’s existence if payments are returned and/or if benefit 

account was suspended for several months due to bad check/correspondence 

address.

Early detection and data mining efforts, along with partnerships with other Federal and 

state entities, are used to detect improper payments. The Department takes a proactive 

approach to ensure the accuracy of Military Retiree payments by routinely comparing retired 

and annuitant payroll master file databases with the Social Security Administration’s Death 

Master File, and periodically comparing records with the Office of Personnel Management’s 

deceased files, Department of Veterans Affairs’ database, and with individual states with 

sizable retiree and annuitant populations (e.g., Texas, California, and Florida). Payments for 
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military retirees identified as deceased are suspended pending validation of death or 

validation of continued eligibility. The Department's expanded definition of acceptable 

source documents for notice of death has allowed DFAS to initiate earlier reclamation 

actions, thereby enhancing faster recovery of overpaid funds. Refer to the Do Not Pay 

discussion, later in this section, for discussion on the Department’s use of the Social 

Security Death Master File. 

Travel Pay

DTS Corrective Actions. DFAS provides the Defense Travel Management Office (DTMO) 

and DoD Components with error trend reports. The DFAS postpayment review personnel 

give presentations at various DTS training sessions and brief Senior Service Executives on 

these postpayment review statistics, trends, and input errors. Any improper payments 

identified are forwarded to the appropriate Debt Management Monitor to establish a debt 

and recover the improper payment. Also, the Department has implemented a DTMO 

Compliance Tool, discussed in the Do No Pay discussion later in this section.

WinIATS Corrective Actions. DFAS implemented several steps to prevent improper 

payments, including:

• Monthly meetings with postpayment reviewers and Travel Pay operations personnel 

to discuss findings and preventative measures. Travel Pay examiner training 

programs, based on postpayment reviewers’ findings and recommendations, are 

ongoing.

• Implementation of prepayment validations and cross checks to prevent duplicate 

payments.

USACE

Corrective Actions. The USACE continues to educate travelers and travel AOs through 

required training, including refresher training for seasoned travelers and AOs. Additionally, 

all AOs are required to complete fiscal law training every year to maintain their certification. 

When improper payments are identified, the UFC notifies the parties involved to 

determine the circumstances surrounding the error and to assist them in identifying 

business process improvements to prevent future recurrences. These areas are also covered 

thoroughly in refresher training.

Navy

Corrective Actions. Navy is coordinating with DFAS to review the root causes of DTS 

improper payments in an effort to achieve compliance with the Department reduction and 

recovery goals.
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VI. Internal Controls over Payments 

Table 6 summarizes DoD risk assessments (1-4) within each internal control standard.

Table 6. Status of Internal Controls

Internal Control Standards DHA 

* 

Navy 

ERP Com 

Pay

WINIATS

USACE 

Com 

Payments

USACE 

Travel 

Payments

Control Environment 3 3 3 4 4

Risk Assessment 3 2 2 4 4

Control Activities 3 2 2 4 4

Information and Communication 3 3 2 4 4

Monitoring 3 3 3 4 4

NOTE: * DHA consists of North, South, West, TDEFIC, TOP, TPharm and ADDP.

Definitions:

1=Controls are not in place to prevent improper payments.

2=Minimal controls are in place to prevent improper payments.

3=Controls are in place to prevent improper payments, but there is room for improvement.

4=Sufficient controls are in place to prevent improper payments.

DFAS. The Managers’ Internal Control Program (MICP) and the DFAS FY 2015 

Statement of Assurance (SOA) provided Management’s assurance for DFAS’ internal 

controls over operations, internal controls over financial reporting and internal controls over 

financial systems. The low improper payment rates reflected for DoD services and agencies 

are indicative of the success of the internal controls to prevent improper payments.

DHA. DHA has payment accuracy performance standards requiring contractors to meet 

TRICARE policy or contract performance standards or be subject to financial penalty.

The current baseline for contractor performance standard is 1.75 percent. However, DHA 

Program Offices have developed more stringent contract performance requirements 

lowering the requirement to less than 1 percent. DHA monitors contractor performance by 

conducting EIC compliance reviews. In addition, DHA has numerous prepayment (i.e., 

claims auditing software, TRICARE documentation policies, duplicate claim check) and 

postpayment controls (i.e., EIC audits, DCAA contract audits, recovery activities, Medicare 

cost report and internal contractor postpayment audits) built into the military health 

benefits contract requirements and contractor’s claims processing systems to minimize 

improper payments.

Navy. Navy internal controls performance standards are centralized for commercial pay 

(ERP) and travel pay (WinIATS). Internal controls are developed based on: adequate 

policies and procedures, training, program maturity, regulatory compliance and assessment 

of known deficiencies of Internal Controls Over Financial Systems (ICOFS).

USACE. USACE internal process controls are built into the system and are an integral 

part of the overall business processes. Process controls include but are not limited to: 

decentralization of support activities, Finance Center certification and disbursement of funds 

to ensure separation of duties; invoices not processed without adequate support (i.e., 

receiving reports) and limited disbursements prior to increase in obligation.
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VII. Accountability

The Under Secretary of Defense (Comptroller)/Chief Financial Officer is the Accountable 

Official for the Department and is responsible for ensuring that, to the greatest extent 

possible, all DoD disbursements are accurate.

Certifying Officer Legislation, 10 U.S.C. 2773a, holds Certifying and Disbursing Officers 

accountable for government funds. In accordance with this law, pecuniary liability attaches 

automatically when there is a fiscal irregularity, i.e., (1) a physical loss of cash, vouchers, 

negotiable instruments, or supporting documents, or (2) an improper payment. This is further 

captured in the DoD Financial Management Regulation (DoD FMR), Volume 5, Chapter 3, 

entitled “Certifying Officers, Accountable Officials, and Review Officials.” The Department’s 

efforts to recover overpayments from a recipient must be undertaken in accordance with the 

debt collection procedures outlined in the DoD FMR, Volume 5, Chapter 28, “Management and 

Collection of Individual Debt,” and DoD FMR, Volume 10, Chapter 18, “Contractor Debt.”

The DoD FMR contains other policies that specifically address Improper Payments 

(DoD FMR Volume 4, Chapter 14) and Recovery Auditing (DoD FMR Volume 10, 

Chapter 22). Beginning in Quarter 3, FY 2013, all reporting DoD Components were required 

to begin downloading their improper payment reports to the DFAS ePortal, as the Office of 

the Deputy Chief Financial Officer’s Accounting & Finance Policy Directorate was designated 

as the Executive Agent to manage this information and its associated reporting 

requirements. This centralized electronic system allows the reporting Components to access 

improper payment information without regard to the time zone in which they are located. 

More importantly, it allows management to ensure all Components’ submissions are timely 

and accurate. 

Because DoD Travel currently has the highest error rate among all DoD-reported 

programs, initial focus will be placed here to achieve measurable progress more quickly. The 

Department is focused on reducing overall Travel spending; reducing improper payments 

and increasing recoveries is another way to reach that goal.
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VIII. Agency Information Systems and Other Infrastructure

The Department has much of the information and infrastructure needed to reduce 

improper payments. The Department uses the BAM tool and the Do Not Pay portal to 

identify potential improper payments prior to disbursement. 

The Department’s ongoing migration from a legacy system environment to new ERP 

systems presents a number of challenges and opportunities to prevent and detect improper 

payments. This migration also can enhance the Department’s ability to improve its debt 

collection and recovery auditing abilities. The Department is addressing these areas both 

from a payment integrity as well as audit readiness perspective.

DHA. The DHA has much of the information and infrastructure needed to reduce 

improper payments. The Department uses the TRICARE Encounter Data Set (TEDS), a 

financial feeder system, through which all claims are processed to the Oracle Federal 

Financials (OFF). The TEDS contains various edits to verify patient and provider eligibility, 

benefit calculations, and reimbursement methodologies determined by DHA. The claims 

processing systems are able to determine the appropriate reimbursement methodology 

based on information included in the claims such as type of service, provider record, and 

claim form type).

In addition, the DHA has developed a TRICARE Duplicate Claims System (DCS) to 

automate the resolution of duplicate claims payments. The system facilitates the 

identification of actual duplicate claim payments, the initiation and tracking of recoupments, 

and the removal of duplicate records from the TEDS database. DHA purchased care 

contractors are contractually required to use the DCS and resolve duplicate payments. 

A CH-47 Chinook helicopter suspends a large bucket of water to douse a wildfire in Shasta 

County near Redding, Calif. The helicopter, part of an effort to battle more than a dozen wildfires 

in California, is assigned to the California National Guard's 1st Battalion, 126th Aviation 

Regiment.

California Army National Guard photo by Staff Sgt. Eddie Siguenza
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IX. Statutory and Regulatory Barriers

The primary barriers in preventing improper payments in Military Pay are the statutory 

entitlements and regulatory monthly pay schedule. For DHA collections, there are 

contractual requirements that allow up to 270 days, instead of the standard delinquency 

deadline of 180 days, to be transferred to the Treasury under the Debt Collection 

Improvement Act of 1996. 

X. Payment Recapture Audit Reporting

Table 7 shows improper payment recaptures.

Table 7. Improper Payment Recaptures with and without Audit Programs

Overpayments Recaptured outside of Payment Recapture Audits ($ in millions)

Program or Activity Amount 

Identified 

Total Amount 

Extrapolated

(estimated throughout 

Total Outlays) 

Amount Recaptured (Refunds 

throughout FY 2014) 4

Military Pay1 $227.60 $182.50

Civilian Pay1 $57.20 $57.20

Military Retirement2 $20.60 $18.80

DoD Travel Pay3 $3.70 $0.10

DFAS Commercial Pay $144.1 $131.30

USACE $2.00 $2.00

DHA 4 $2.74 $ 138.58 $560.93 

Note 1: Military Pay and Civilian Pay include In-Service Collections for recovery amounts. Military Pay also 

includes Out-of-Service Debts. Both In-Service Collections and Out-of-Service Debts continue to be collected 

beyond the AFR period.

Note 2: The amounts identified and recovered are based on 100% review of Deceased Retired and Deceased 

Annuitant accounts.

Note 3: The amounts identified and recaptured are based on the amounts identified in the statistical reviews.

Note 4: DHA “Amount Recaptured” represents recoveries from specific overpayments identified via samples as 

well as dollars paid back to DHA in the course of other routine claim adjustments.

DTS Compliance Tool. In December 2012, the Department established the Travel 

Policy Compliance Program, mandated by the National Defense Authorization Act for Fiscal 

Year 2012. Managed by the Defense Travel Management Office (DTMO), the program was 

established to ensure travel claims do not exceed reasonable or actual expenses as well as 

to minimize inaccurate, unauthorized, overstated, inflated, or duplicate travel claims. The 

DTS Travel Policy Compliance Tool, an automated application, reviews DTS travel vouchers 

in near real time and identifies potential improper payments. If a potential improper 

payment is identified, travelers and their Approving Official are notified via e-mail to either 

submit a corrected claim or explain why the claim is correct. Service administrators can run 

reports to review all identified errors and track corrections. 

The DTMO Compliance Program not only ensures travel claims are paid in accordance 

with regulations and assists in recouping funds, but it also mitigates budget cuts for travel, 

improves postpayment audits, educates travelers and administrators on travel policy, and 
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identifies travel trends, training needs, and opportunities for greater controls in the future. 

As of September 30, 2014, all DoD Components using DTS are actively using the 

Compliance Tool, and all DTS vouchers are being examined using 12 areas of inquiry. 

As of October 19, 2015: 

• $13,418,869 in errors was identified.

• $3,294,409 in payment errors were corrected without any funds due back to the 

Government. 

• $2,718,047 in errors were corrected and are awaiting collection. 

• $1,947,449 in errors were corrected and the funds have been recovered. 

The DTMO has identified over 50 additional queries and currently is working to add these 

queries based on availability of funds. In addition to examining DTS vouchers, the 

Compliance Tool Program has expanded to include additional data sources, such as 

Government Travel Charge Card (GTCC) data, and is now comparing amounts claimed on 

vouchers with amounts charged on the GTCC to identify potential overpayments. As new 

data sources become available, they may be used to identify additional errors.

Use of the Compliance Tool provides a mechanism to greatly facilitate DoD’s collections 

and improve recovery rate for Travel Pay overpayments. In addition, funds recovered from 

prior years can be re-allocated for use in current year appropriations, in accordance with 

Public Law 111-204, The Improper Payments Elimination and Recovery Act of 2010.

DFAS. The Department continues to use its internal staff and procedures to identify and 

recover overpayments. The DFAS recovery percentages remain close to the 85th percentile, 

as required by OMB; therefore, it would not be cost-effective to contract with a private 

sector firm to perform this function, which although not paid with appropriated funds, would 

still cost the Department time and money in technical and other forms of contractor 

assistance. The DFAS has not used an external recovery audit firm, as it historically had not 

proven cost-effective. The use of the BAM tool on the front-end of commercial payment 

transactions continues to provide a successful means of both preventing improper payments 

and thereby reducing the need to pursue overpayment recoveries. 

In compliance with IPERIA, as well as the Debt Collection Improvement Act of 1996, the 

Department uses a number of other methods to prevent, identify, and collect improper 

payments. For example, DFAS has implemented a Centralized Offset Program to look across 

the Defense components for opportunities to offset debts within the first 90 days of 

delinquency. Once this deadline passes, DFAS transfers the debts to the Treasury 

Department, no longer waiting until day 180 as allowed by statute, to utilize all debt 

collection tools available earlier in the debt lifecycle to increase the likelihood of collecting 

the debt. During FY 2015, the Centralized Offset Program requested and confirmed 

784 offsets totaling approximately $11 million.

USACE. The UFC uses a data mining tool as part of its postpayment/payment recapture 

program. This tool searches for potential errors, such as duplicate, missing, or suspicious 

invoices, as well as specific types of recurring payments. There are ten scenarios built into 

the data mining tool, which searches 100 percent of all USACE commercial payments. The 
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use of a data-mining tool complements the prepayment system edits built into CEFMS. 

Payment safeguards include a requirement to match a receiving report with an invoice and 

thereby prevent use of duplicate invoice numbers for the same obligation. 

DHA. The DHA uses a number of different mechanisms to prevent, identify, and collect 

improper payments, to include claims auditing by an EIC and internal DoD agencies for all 

private-sector payments. This process utilizes postpayment review techniques, performed 

internally and by external contractors, paid from the proceeds of recovered funds.

Contract payments comprise a large volume of transactions with high-dollar values; 

therefore, DHA is vigilant to ensure payment accuracy. In addition to the postpayment 

reviews, the DHA also utilizes various internal manual and automated prepayment initiatives 

to prevent overpayments and underpayments. 

The DHA conducted a pilot study to evaluate its ability to identify and recover funds that 

are owed from private health care providers, resulting from overpayments that occurred as 

a result of secondary insurance payment errors. The pilot results indicated that this type of 

account review would be cost-effective, and a Request for Proposal initially planned to be 

released in FY 2015 has since been delayed and may be issued in FY 2016 or FY 2017. 

The Department has no reportable data for Disposition of Funds Recaptured through 

Payment Recapture Audits or for Aging of Outstanding Overpayments in the Payment 

Recapture Audits.

XI. Additional Information

The Department is positioning itself to be fully compliant with additional elements required 

by the Improper Payments Elimination and Recovery Improvement Act (IPERIA) for FY 2014 

reporting. As part of the effort toward auditability, each of the Defense disbursing 

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

and ensuring the processes used are compliant with laws and regulations. 

The Department continually looks for opportunities to improve its methodologies, and the 

postpayment review teams are far from complacent. The Department is implementing 

recommendations from both the DoD Inspector General’s IPERIA Compliance Review for 

FY 2013 (DoDIG Report No. D-2014-059), and from GAO Report No. GAO-13-227 on 

improper payments, to guide our progress in our future improper payment efforts. In 

addition, we continue to implement cross-utilization of best business practices related to 

improved system edits, procedures, guidance and instructions.
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XII. Agency Reduction of Improper Payments with the Do Not Pay 

Initiative

Table 8 summarizes the Department’s successes attributed to the Do Not Pay Initiative. 

Table 8. Results of the Do Not Pay Initiative in Preventing Improper Payments 

Number (#) of 

payments 

reviewed for 

possible 

improper 

payments

Dollars ($) of 

payments reviewed 

for possible 

improper payments 

(in millions)

Number (#) 

of payments 

stopped

Dollars ($) 

of 

payments 

stopped

Number (#) of 

potential 

improper 

payments 

reviewed and 

determined 

accurate

Dollars ($) of 

potential improper 

payments reviewed 

and determined 

accurate (in 

millions)

DFAS NTDO 

reviews with 

the IPERIA 

specified 

databases *

6,835,540 $590,997.00 0 $0.00 83,862 $7,640.0

DFAS TDO 

reviews with 

the IPERIA 

specified 

databases **

113,341 $9,679.00 0 $0.00 45 $1.5 

DHA Reviews 

with the 

IPERIA 

specified 

databases

795 $2,902.24 0 $0.00 795 $2,902.24

USACE 

Reviews with 

the IPERIA 

specified 

databases

571,000 $18,158.00 0 $0.00 2 $0.00 

* Non Treasury Disbursing Office (NTDO) Data is based on invoice and invoice amount vs. payment. 

** Treasury Disbursing Office (TDO) Data is FY 2015 through August.

The Do Not Pay (DNP) Initiative (detailed reporting in Table 8), as currently 

implemented, is programmed to look at the vendor, the invoice amount, and the dollar 

amount of the payment. Improper payments may still occur at some later point due to 

reasons that DNP does not detect. For example DNP cannot detect a duplicate payment, 

because the vendor name, invoice amount, and payment amount would still be correct; the 

duplicate invoices would not appear on the match list.

DFAS. DFAS sends a weekly batch file to the DNP database and receives results the 

next day. DFAS then researches these results to determine if the proposed payment is 

proper based on established business rules. To date, DFAS has not identified any potential 

improper payments using the DNP list. 

DFAS continues to conduct comparisons against all the DNP databases with the 

exception of the debt check, which is a duplication of the Treasury Offset Program, and the 

Credit Alert System, which does not apply to Commercial Payments. In addition to the 

weekly non-Treasury disbursed prepayment review, a group of Treasury-disbursed 

payments are checked: prepayments on a weekly basis, and prepayment each time a file is 

sent to Treasury for disbursement. For the Treasury-disbursing process to date there were 

45 potential improper payments for DFAS to review which were all deemed proper. The 

Death Master probable results along with all the possible results from each database, which 
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are name matches, make up 95 percent of the false positives received. The other 5 percent 

are deemed not to be improper payments due to established business rules.

USACE. The USACE matches its payment files daily in the DNP Portal to prevent any 

improper payments.

DHA. 

Individual Payments. The DHA processes relatively few, 5 - 20, case recoupment refunds 

each month for small dollar amounts, $5 – $20,000. The Single Online Search service is 

used 100 percent of all case recoupment refunds to verify (1) a business or individual has 

not been placed on the List of Excluded Individuals/Entities (LEIE), and (2) an individual has 

not died. Any matches will be referred to the DHA Office of General Counsel.

Vendor and Contract Payments. The DHA processes approximately 200 routine 

payments per month for 23 unique contractor payees. The Single Online Search service is 

used once a month to verify a DHA contractor payee has not been placed on the Excluded 

Parties List System (EPLS) or the List of Excluded Individuals/Entities (LEIE). Any matches 

are referred to the assigned Contracting Officer. The risk, however, lies outside of DHA 

because DHA contractors are not required to use the Do-Not-Pay database, and there is no 

current mechanism in place to require the contractors to use the Do-Not-Pay databases at 

the prepayment phase to comply with IPERIA.

Navy ERP. Navy ERP transactions are included in the DFAS Do Not Pay Figures.

Military Retiree and Annuitant Pay – File Matching with the DMF outside DNP.

Prior to implementation of the Do Not Pay initiative, the Defense Manpower Data 

Center (DMDC) had a computer matching agreement with the Social Security 

Administration (SSA) to use its Death Master File to identify potential accounts that need to 

be suspended or cancelled as a result of a retiree’s or annuitant’s passing. As part of the 

end-of-month processing, DFAS produces two files (one for retirees, one for annuitants) 

that are sent to DMDC to match or conduct comparisons against the monthly DMF file. The 

results are compiled and forwarded to DFAS.

DFAS then runs its match process to suspend pay accounts (but not cancel) and to 

notify next of kin that this action was based on information received from SSA. This 

correspondence contains instructions on how to close out the account or reactivate if the 

death was mistakenly reported by SSA; however, this is rare.

The vast majority of these monthly benefits are paid via Electronic Funds Transfer (EFT). 

The disbursement system suspends payment to prevent additional benefits from being 

improperly paid. Any EFT payment that was mistakenly disbursed is automatically reclaimed 

from the bank account after the official notification of death is processed. The normal 

recovery rate hovers around 95 percent within 60 days of the official death confirmation.
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FREEZE AND REDUCE THE FOOTPRINT

Since the inception of the Freeze the Footprint (FtF) initiative in FY 2012, the 

Department has been a leader among Federal agencies in not only freezing the amount of 

facility square feet of building space, but in fact reducing its overall real property footprint. 

The Department contributed nearly 75 percent of the total Federal government’s 

infrastructure reduction in FY 2015. The DoD FY 2012 square footage baseline identified in 

the Freeze the Footprint plan was 313.5 million square feet in office and warehouse assets. 

As of September 30, 2014, the Department had reduced the office and warehouse 

footprint to 288.4 million square feet for an overall 8 percent reduction. With the release in 

FY 2015 of OMB’s National Strategy for the Efficient Use of Real Property (2015-2020), 

Reducing the Federal Portfolio through Improved Space Utilization, Consolidation, and 

Disposal; Federal agencies are encouraged to develop plans to reduce footprint rather than 

just freeze to the FY 2012 baseline. Based on this Reduce the Footprint (RtF) guidance, the 

Department is developing plans to look for even more opportunities to consolidate activities 

and dispose of underutilized space. Through DoD’s Real Property Efficiency Plan, the 

Department plans to add another 5.9 million square foot reduction in office and warehouse 

building space to the previously mentioned FtF baseline reductions. The table below 

establishes the RtF reduction goals for the five year period covered by the efficiency plan. 

Table 9. DoD Goals for Reduce the Footprint for the FY 2016-2020 Period

DoD Goal FY 2016 FY 2017 FY 2018 FY 2019 FY 2020

Net SF Reduction

(Million SF)

0.13 1.61 1.06 1.63 1.44

Demolition of the Navy Annex in Arlington, Virginia, began in November 2012. 

The above picture shows sections of Wing 6 and 7. 

Photo by WHS Corporate Communications Division
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CIVIL MONETARY PENALTY ADJUSTMENT FOR INFLATION 

Name of Penalty Authority 

(Statute)

Date of 

Previous 

Adjustment

Date of Current 

Adjustment

Current 

Penalty Level

($ Amount)

Unlawful 

Provision of 

Healthcare

10 U.S.C 

1094(c)(1) October 23, 1996 December 1996 $5,500.00

Wrongful DisclosureMedical Records

First Offense

Subsequent Offense

10 U.S.C 

1102(k)

October 23, 1996 December 1996 $3,300.00

$22,000.00

Use of Appropriated 

Funds to Influence 

Contract

Minimum

Maximum

10 U.S.C 

1352

October 23, 1996 December 1996 $11,000.00

$110,000.00

Personal Property 

Loss Claims from the 

Government

31 U.S.C 

3721(i)

October 23, 1996 December 1996 $1,100.00

Program Fraud Civil 

Remedies 

Act/Violation 

Involving False 

Statement

31 U.S.C. 

3802(a)(2)

October 23, 1996 December 1996 $5,500.00

Permit Condition 

Violation, Class I (per 

violation amount)

31 U.S.C 

1319(g)(2)

October 23, 1996 December 1996 $11,000.00

Permit Condition 

Violation Class I 

(maximum amount)

31 U.S.C 

1319(g)(2)

October 23, 1996 December 1996 $27,500.00

Permit Condition 

Violation Class II (per 

day amount)

31 U.S.C 

1319(g)(2)

October 23, 1996 December 1996 $11,000.00

Permit Condition 

Violation Class II 

(maximum amount)

31 U.S.C 

1319(g)(2)

October 23, 1996 December 1996 $137,500.00
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SCHEDULE OF SPENDING

Department of Defense Combined Schedule of Spending

Agency Wide Dollars in Millions

For the Years Ended September 30, 2015 and 2014 2015 2014 

What Money is Available to Spend?

Total Resources $ 1,067,434.0 $ 1,084,939.2

Less: Amount Available but Not Agreed to be Spent (109,502.9) (115,762.1)

Less: Amount Not Available to be Spent (39,998.0) (35,000.4)

Total Amounts Agreed to be Spent $ 917,933.1 $ 934,176.7

How was the Money Spent/Issued?

Civil Work

Personnel Compensation and Benefits $ 2,364.6 $ 7,213.8

Contractual Services and Supplies 9,977.1 5,268.2

Acquisitions of Assets 4,074.3 4,175.7

Grants and Fixed Charges 7.8 8.4

Other 1,273.1 1,075.4

Total Civil Works $ 17,696.9 $ 17,741.5

Military Retirement

Personnel Compensation and Benefits $ 9,507.8 $ 9,294.2

Contractual Services and Supplies

Acquisitions of Assets

Grants and Fixed Charges 56,829.0 55,451.5

Other

Total Military Retirement $ 66,336.8 $ 64,745.7

Military Personnel

Personnel Compensation and Benefits $ 120,770.4 $ 123,769.3

Contractual Services and Supplies 7,241.5 7,280.7

Acquisitions of Assets 0.6 2,326.9

Grants and Fixed Charges 288.1 559.7

Other 16,699.8 15,669.7

Total Military Personnel $ 145,000.4 $ 149,606.3

Operation, Readiness & Support

Personnel Compensation and Benefits $ 147,748.2 $ 142,119.5

Contractual Services and Supplies 313,317.6 294,418.7

Acquisitions of Assets 18,499.7 20,998.9

Grants and Fixed Charges 2,055.2 2,754.8

Other 12,705.8 42,184.5

Total Operations, Readiness & Support $ 494,326.5 $ 502,476.4

Procurement

Personnel Compensation and Benefits $ (3.9) $ (525.8)

Contractual Services and Supplies 23,696.3 26,531.8

Acquisitions of Assets 80,330.0 85,057.6

Grants and Fixed Charges 142.9 85.3

Other 3,265.5 (2,760.9)

Total Procurement $ 107,430.8 $ 108,388.0
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Research, Development, Test & Evaluation

Personnel Compensation and Benefits $ 4,555.4 $ 976.1

Contractual Services and Supplies 57,995.4 69,003.6

Acquisitions of Assets 5,616.8 6,846.0

Grants and Fixed Charges 1,687.4 2,161.8

Other 4,434.8 (2,505.3)

Total Research, Development, Test & Evaluation $ 74,289.8 $ 76,482.2

Family Housing and Military Construction

Personnel Compensation and Benefits $ 848.4 $ 731.8

Contractual Services and Supplies 2,015.9 3,409.9

Acquisitions of Assets 7,228.4 8,268.7

Grants and Fixed Charges 24.6 60.5

Other 2,734.6 2,265.7

Total Family Housing and Military Construction $ 12,851.9 $ 14,736.6

Total Amounts Agreed to be Spent $ 917,933.1 $ 934,176.7

The Combined Schedule of Spending (SoS) presents an overview of the funding received 

by the Department and how it was spent (i.e., obligated) during the reporting period. The 

SoS presents total budgetary resources and fiscal year-to-date total obligations for the 

reporting entity. The budgetary information in the SoS is presented on a combined basis 

and not a consolidated basis in order to remain consistent with the information reported on 

the Report on Budget Execution and Budgetary Resources (SF-133) and SBR. Obligations 

categorized as “Other” consists of obligations that could not be identified to a specific 

category of spending due to accounting process and systems limitations. Obligations 

categorized as “Other” obligations decreased $14.8 billion, or 26 percent, from the fourth 

quarter of FY 2014 primarily due to continued improvements in the reporting process for the 

majority of the Defense Agencies’ general fund activities during FY 2015. These 

improvements provided access to a greater level of detail in obligation classification than 

was available in FY 2014. The Department is in the process of implementing the Digital 

Accountability and Transparency Act of 2014 (DATA Act) to enhance the accuracy and 

completeness of the SoS.
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INSPECTOR GENERAL’S SUMMARY OF MANAGEMENT AND 

PERFORMANCE CHALLENGES FOR FISCAL YEAR (FY) 2015

Each year, the Department of Defense Inspector General (DoD IG) prepares a statement 

summarizing the most serious management and performance challenges facing the Department and 

provides a brief assessment of the Department’s progress in addressing these challenges. 

For FY 2015, the DoD IG identified challenges in the following eight categories:

• Financial Management 

• Acquisition Processes and Contract Management 

• Joint Warfighting and Readiness 

• Cyber Security 

• Health Care 

• Training and Equipping Afghan, Iraqi, and New Syrian Security Forces

• The Nuclear Enterprise 

• Insider Threat 

 Detailed discussion of the DoD IG’s statement and the Department management’s response 

follows.

U.S and South Korean marines simulate an assault on Incheon during the 65th annual Incheon Amphibious 

Landing Operations Commemoration Ceremony in South Korea. The event commemorated the Sept. 15, 1950, 

surprise amphibious landing of more than 40,000 troops led by Gen. Douglas MacArthur during the Korean War.

Photo by Petty Officer 1st Class Abraham Essenmacher
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SUMMARY OF IDENTIFIED CHALLENGES

1. Financial Management

1-1A. Achieving Financial Statement 

Audit Readiness IG Summary of Challenge

The Department’s continuing financial management challenges impair its ability to provide 

reliable, timely, and useful financial and managerial data to support operating, budgeting, and 

policy decisions. Gaps in the financial framework harm the accuracy, reliability, and timeliness 

of the data used by the Department’s leadership. Improving and sustaining good financial 

management processes is critical to achieving auditable financial statements and receiving 

unmodified opinions.

Achieving auditable financial statements is an ongoing, difficult task. The success of the 

DoD Financial Improvement and Audit Readiness (FIAR) effort depends on:

1. Resolving material internal control weaknesses to ensure internal controls are 

designed and implemented properly, and are working effectively;

2. Evaluating and remediating controls for information technology (IT) systems that 

materially affect the financial statements, including Enterprise Resource Planning 

(ERP) systems, custom-built legacy systems, financial systems, and non-financial 

feeder systems;

3. Sustaining improvement in internal controls and systems to provide consistent and 

repeatable financial data used in decision making and reporting; and

4. Monitoring progress in achieving milestones, developing comprehensive improvement 

initiatives across DoD functional areas, and holding managers accountable for the 

timely implementation of those efforts.

Congress required the Department to validate the DoD Statement of Budgetary Resources 

(SBR) and the other DoD financial statements as audit ready by September 30, 2014, and 

September 30, 2017, respectively. However, the Department continues to struggle to 

implement business transformation efforts. Additional relevant mandates include:

5. Public Law 111-383, Section 881, which requires the Department to establish interim 

milestones to achieve audit readiness of its financial statements earlier than 

September 30, 2017. These interim milestones for Military Departments and Defense 

Components call for each major element of the SBR, such as “civilian pay, military 

pay, supply orders, contracts, and the funds balance with the Treasury,” to achieve 

audit readiness;

6. Public Law 112-81, Section 1003, which requires the Department have a plan to 

validate the SBR as audit ready by September 30, 2014. The plan must include interim 

objectives and a schedule of milestones for each Military Department and for the 

Defense agencies. The Department must develop and implement comprehensive 

improvement initiatives and monitor progress according to interim milestones. The 

Department may need to revise these initiatives and milestones as it identifies 

additional deficiencies and corrective actions as a result of the iterative FIAR process;

7. Public Law 112-239, Section 1005(b)(1), which requires that plans to achieve audit 

readiness of the SBR “by September 30, 2014, include steps to minimize one-time 

fixes and manual work-arounds, be sustainable and affordable, and not delay the full 

auditability of financial statements”; and

8. Public Law 113-66, Section 1003(a), which requires the Secretary of Defense to 

ensure a full audit of the DoD financial statements is performed for FY 2018 and the 
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results of the audit are submitted to Congress not later than March 31, 2019. 

Although the Department did not meet the 2014 deadline for full SBR audit readiness, the 

Department continues to make progress. Because the Department recognized it could not 

achieve SBR audit readiness by 2014, it implemented an incremental approach to achieving 

SBR audit readiness. The Department chose to address SBR audit readiness by focusing on the 

current year information contained in the SBRs of the General Funds. Specifically, the FY 2015 

SBR audits focus on current-year appropriation activity and transactions, which the 

Department calls the schedule of budgetary activity (SBA). 

In December 2014, the Department awarded contracts to three independent public 

accounting (IPA) firms. The IPAs began audits of the Military Departments’ General Fund SBAs 

reporting FY 2015 appropriations with the DoD IG providing oversight. Additionally, the 

budgetary activities of several other Defense organizations are under SBA examinations or 

completing mock audits. The Department seeks to achieve audit readiness for the SBR by the 

2017 deadline originally planned for all financial statements. 

Meeting the 2017 deadline for audit ready financial statements remains a significant 

challenge, as the Department must also focus on the audit readiness of the remaining portions 

of the SBR, implementation of the ERP system, and achieving audit readiness for the full 

financial statements. Additionally, results of the FY 2015 SBA audits may identify additional 

internal control weaknesses that require corrective action, which may further delay the 

Department’s plans for achieving audit readiness.

The Department must continue to develop and implement a comprehensive plan, including 

interim objectives and a schedule of milestones, to achieve audit readiness of the full SBR for 

both the General and Working Capital funds. In addition, the interim objectives and milestones 

must address each major category of DoD assets, which includes general equipment, real 

property, inventory, and operating material and supplies, to achieve audit readiness of the full 

financial statements.

1-1B. Achieving Financial Statement 

Audit Readiness IG Assessment of Progress

Although the Department is far from reaching an unmodified opinion on its financial 

statements, it has made progress. The DoD senior leadership has emphasized the importance 

of this goal and provided resources to achieve it. The DoD IG believes this increased senior 

leadership emphasis drives the Department’s ability to accomplish its internal milestones and 

progress toward full SBR audit readiness to meet the 2017 audit readiness mandates. 

According to the May 2015 FIAR Plan Status Report (FPSR), unmodified SBA audit opinions 

are not expected in the initial years. However, proceeding with audits helps the Department

uncover remaining challenges and exercises its audit support infrastructure. In FY 2015, the 

Department plans on spending approximately $619 million on audit readiness, validations, and 

audits for activities such as:

• Completing evaluation, discovery, and corrective actions of the Components and their 

service providers (e.g., Defense Finance and Accounting Service);

• Testing or verifying audit readiness after completing corrective actions and preparing 

management assertions;

• Supporting independent public accounting audit readiness validations and financial 

statement audits; and

• Additional financial and ERP systems.

Despite pervasive and longstanding DoD financial management challenges, the Army 

Corps of Engineers – Civil Works, and five other defense organizations received unmodified 

opinions on their FY 2014 financial statements, including the Defense Commissary Agency, 
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Defense Contract Audit Agency, the Military Retirement Fund, Defense Financial Accounting 

Service, and Defense Health Agency Contract Resource Management. The Medicare-Eligible 

Retiree Health Care Fund received a modified opinion. The Department must sustain its 

achievements and advance in the remaining significant areas.

The Department continues to make progress toward meeting the audit readiness goals, as 

the Military Services have now asserted audit readiness on the General Fund SBA. The 

Department modified its strategy based on the U.S. Marine Corps (USMC) audit experience. 

The USMC encountered many challenges during this first type of audit, which resulted in 

disclaimers of opinion in FY 2010 and FY 2011, and an unmodified opinion in FY 2012 that was 

withdrawn in FY 2015 due to information discovered during the audit of the FY 2014 SBA. A 

disclaimer was issued for FY 2014. The USMC, the Navy, and the Department are using 

USMC’s experience to correct weaknesses, as well as prepare the other Military Services for 

their eventual SBR audits. The Marine Corps is planning for another SBA audit in FY 2015 and 

a full SBR audit in FY 2016. The Department remains committed to the Marine Corps’ 

incremental approach to achieving audit readiness on the SBR. 

In January 2015, with the DoD IG providing oversight, the independent public accounting 

firms began audits of the Military Departments’ General Fund SBAs for their FY 2015 

appropriations. The General Fund SBAs include financial transactions directly related to 

appropriations received in FY 2015 and do not include financial transactions for appropriations 

received in prior fiscal years. Additionally, the budgetary activities of most of the other 

Defense organizations are under SBA examinations or completing mock audits. 

The May 2015 FPSR reported the Department has nearly 90 percent of its General Fund 

FY 2015 budgetary resources under audit and the remaining budgetary resources are being 

readied for audit. The Department has expanded its focus to include the Working Capital 

Funds and remaining financial statements. Additionally, the May 2015 FPSR reported the 

Department has expanded its audit readiness priorities from budgetary data reported on the 

SBR to all financial transactions reported on the balance sheet, statement of net cost, and 

statement of changes in net position. The Department also reported that achieving future 

audit readiness milestones will be a challenge for all components because of remaining 

financial management issues that cut across the Department.

The May 2015 FPSR recognized that the Department faces many difficult challenges to 

audit readiness. Some of the challenges are more easily resolved than others, but several will 

be difficult to address and are critical to success, including: 

• Integration of service providers;

• Systems audit readiness, such as dependency on legacy and service provider systems;

• Attracting and retaining qualified personnel; and

• Audit-related impediments caused by the unique challenges of some business 

processes, sub-allotments, and sensitive activities which require a standard framework 

and process for the appropriate handling of classified and unclassified documents and 

data during audit.

1-1C. Achieving Financial Statement 

Audit Readiness Department Response

The Department generally agrees with the DoD IG’s assessment of the Department’s 

status and progress in achieving financial statement audit readiness. The Department has 

made significant progress toward the full audit readiness and the September 30, 2017, 

deadline. Increased focus from senior leadership has been essential, and the Department is on 

track to meet its goals.

In FY 2015, the Department achieved a critical interim milestone when the Military 
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Departments began audits of their General Fund Schedules of Budgetary Activity (SBAs). 

Additionally, most of the material, other Defense organizations went under SBA examination 

or completed mock audits of their budgetary activities. Going under audit is an essential part 

of the DoD audit strategy and is consistent with the feedback received from GAO, the DoD IG, 

and some members of Congress. 

The FY 2015 audits are proving invaluable to the Department. The process allows the 

Department to test its audit infrastructure and highlights dependencies between organizations. 

Auditor-identified deficiencies are prioritized and carefully tracked. Audits also facilitate the 

workforce’s transition into an environment of being under annual audit. 

Although limited in scope, the audits of current year budgetary funding are still huge 

undertakings, requiring considerable resources and triggering thousands of auditor requests. 

Other resources continue to be dedicated to audit readiness activities, such testing internal 

controls, migrating to an audit ready systems environment, and remediating remaining 

deficiencies. Working groups are forming to address critical path items. The Department is 

also working closely with standards setters, such as the Federal Accounting Standards 

Advisory Board (FASAB), to resolve long-standing policy issues and find a cost-effective way to 

prepare for an audit of DoD’s full financial statements. 

Over the next two years, the Department will continue to expand the scope of audits while 

sustaining a stronger, more disciplined environment until all full audit readiness is achieved. 

Lessons learned from other federal agencies suggest that the first years auditing the full 

financial statements will not result in a positive opinion. However, the Department is 

committed to resolving all issues until a positive opinion is achieved and sustained.

A Marine, left, and a sailor, right, both with Joint Task Force 505, help an earthquake victim to an ambulance 

at a medical triage area at Tribhuvan International Airport in Kathmandu, Nepal, May 13, 2015, after a 7.3-

magnitude earthquake struck the country. The U.S. Pacific Command’s Joint Task Force 505 dispatched 

aircraft, emergency supplies, and personnel to Nepal after a 7.8-magnitude earthquake on April 25, 2015, 

and subsequent aftershocks caused thousands of deaths and widespread destruction. 

U.S. Marine Corps photo by Staff Sgt. Jeffrey D. Anderson
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1-2A. Modernizing Financial Systems 

(Enterprise Resource Planning) IG Summary of Challenge

To develop effective financial management processes throughout the Department, the 

Department continues to implement new financial management systems and business 

processes. The DoD IG believes properly planned and integrated systems with strong internal 

controls are critical to providing useful, timely, and complete financial management data and 

achieving auditability. Timely and effective implementation of the ERP systems will enable the 

Department to achieve its financial improvement and audit readiness goals. 

The Department noted in the 2015 FPSR that the ERP systems are essential to its audit 

readiness efforts. However, not all ERP systems will be fully deployed for the FY 2015 SBA 

audits or the 2017 readiness deadlines. This will require the Department to continue to rely on 

legacy systems. Specifically, the May 2015 FPSR reported that the “Department is moving 

toward a target systems environment that significantly reduces the number of legacy systems. 

However, many of the legacy systems scheduled to be replaced will not be replaced by the 

audit readiness deadline of September 30, 2017. The Department will undergo audit in 

FY 2018 using both legacy systems and systems that will be part of the Department’s target 

systems environment, including ERPs.”

1-2B. Modernizing Financial Systems 

(Enterprise Resource Planning) IG Assessment of Progress

The Department plans to spend about $15 billion to develop and implement ERP systems. 

These systems have incurred cost increases and schedule delays. The Department noted some 

ERP systems will not be fully deployed by the 2014 and 2017 audit readiness dates; therefore, 

it must continue to rely on legacy systems. Additionally, the Department plans to spend about 

$60 million in FY 2015, and more than $250 million over the next five years, on financial 

systems for activities such as designing, developing, and deploying audit-ready compliant 

systems as well as implementing cost-effective changes to legacy systems that will be part of 

the systems environment. Relying on legacy systems increases the risk that the audits of the 

FY 2015 SBAs may result in modified opinions and the Department will not meet the goal of 

full financial statement audit readiness by September 30, 2017. Reliance on legacy systems, 

compounded by schedule delays and poorly developed and implemented ERP systems, will 

diminish the savings expected from transforming operations through business system 

modernization. Additionally, reliance on legacy systems and the number of unique instances of 

each system increases the cost of audits.

Furthermore, without fully deployed ERP systems, the Department will be challenged to 

produce reliable financial data and auditable financial statements without resorting to 

additional data calls and manual workarounds to provide financial data on a recurring basis. As 

a result, the Department may need to rely on a combination of ERP systems and legacy 

business and financial systems to conduct the SBA and SBR audits.

The Department has not reengineered its business processes to the extent necessary. 

Instead, it has often customized commercial ERP systems to accommodate existing processes. 

This creates a need for system interfaces and weakens controls built into each ERP system. 

The ERP systems were designed to replace numerous subsidiary systems, reduce the number 

of interfaces, standardize data, eliminate redundant data entry, and facilitate end-to-end 

business processes while providing a foundation for sustainable audit readiness. However, the 

numerous interfaces between the ERP systems and existing systems may be overwhelming 

and inadequately defined. Each interface presents a risk that the system might not function as 

designed, and prevents the linking of all transactions in an end-to-end process. The 

Department needs to ensure ERP system development addresses the required business 
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processes and functions.

Without the effective and timely development and implementation of ERP systems and 

needed senior level governance, the Department will continue to struggle to improve its 

financial management processes; achieve long-term sustainability of those improvements; and 

provide accurate, timely, and meaningful financial management information for internal and 

external users. 

Recent audits continue to find that system program managers have not configured 

systems to report U.S. Government Standard General Ledger financial data using the 

DoD Standard Financial Information Structure. Additional audits have found the Department 

has not sufficiently reengineered its business enterprise architecture processes nor 

incorporated the functionality in ERP systems. The Department has established certification 

requirements, and the Deputy Chief Management Officer and Deputy Chief Financial Officer 

have established validation and certification procedures for implementing Standard Financial 

Information Structure requirements and ensuring business process reengineering has taken 

place. However, these procedures were not stringent enough to ensure compliance. 

In FY 2014, the Joint Interoperability Test Command began to verify financial 

management systems compliance. Specifically, Joint Interoperability Test Command began to 

perform compliance verifications across several areas, including DoD Chart of Accounts, 

U.S. Government Standard General Ledger transaction posting logic, Standard Financial 

Information Structure business rules, Defense Departmental Reporting System trial balance 

interface specifications, and Standard Line of Accounting and Standard Financial Information 

Structure 10.0 interfaces. Five systems were to undergo pilot testing before a more extensive 

program was implemented. Initial testing results indicate more needs to be done to ensure 

financial management systems comply with Treasury and DoD standards and policy.

1-2C. Modernizing Financial Systems 

(Enterprise Resource Planning) Department Response

The Department is committed to supporting improvements to financial processes through 

the implementation of ERP systems. In support of these efforts, the Department has been 

working diligently to improve business processes, oversight of the development of the ERP 

systems, and implementation of formal business process reviews in support of auditability.

While it is true that legacy systems will continue to be employed during the development 

and full deployment of the ERP systems, the implementations that have already occurred 

throughout the Department have resulted in the ability to phase out dozens of legacy systems. 

Several of the Department’s ERP systems have been or will be implemented to support the 

2017 auditability goal. However, where we are dependent on legacy systems, the 

Components’ Financial Improvement Plans incorporate actions necessary to ensure that 

accurate, reliable financial information is reported.

Modernizing DoD business systems is a key aspect of our overall effort to achieve and 

sustain auditability. The Department plans to achieve the audit goals with a combination of 

both target and legacy systems. While taking pro-active steps to align individual ERP system 

programs with auditability outcomes, we also are focused on delivering audit-ready processes 

and controls that will remain outside the ERP systems. This will allow us to develop a 

sustainable business environment that can be cost-effectively audited. 

The ERP system programs, by their very nature, are designed to:

9. Handle detail transactions in a defined end-to-end process; 

10. Enforce process and execution standardization among implementing organizations;

11. Manage consolidated business data in a single repository that allows centralized access 
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control; and

12. Facilitate the flow of information both within an organization and with external 

stakeholders. 

These design principles within the ERP system directly enable capabilities essential to 

auditability, such as the ability to trace all transactions from source to statement; the ability to 

recreate a transaction; documented, repeatable processes and procedures; demonstrable 

compliance with laws, regulations and standards; and a control environment that is sufficient 

to reduce risk to an acceptable level. 

Essentially, ERP system are acquired with industry best practices/“to-be” processes 

embedded within them. Each of the Department’s ERP system programs went through 

significant, up-front blueprinting and gap analysis to determine which configuration or 

customization was necessary for the system to work within its particular business 

environment. The Department has focused on properly enforcing compliance with the target 

financial management environment, built on a backbone of the core ERP systems and aligned 

with the Business Enterprise Architecture’s end-to-end processes. The Joint Interoperability 

Test Command testing of systems for compliance with standards is expanding to review over a 

dozen systems in both FY 2016 and FY 2017. This testing process also includes establishment 

of corrective action plans to resolve identified issues and for follow-up testing by the Joint 

Interoperability Test Command to validate corrective actions where needed.

The Department’s investment management process ensures:

13. Investments are aligned to functional strategies;

14. Allow the Department to make more informed investment decisions;

15. Eliminate legacy systems that are no longer required;

16. Enhance interoperability; and

17. Help the Department transform to an environment where business applications can be 

rapidly deployed on a common computing infrastructure. 

The investment review process also ensures each investment is an appropriate use of 

taxpayer dollars and aligns to the Department’s business architecture and our shared goal of 

delivering agile, effective and efficient business solutions that support and enable 

our warfighters.

To implement this investment management process, the Deputy Chief Management Officer 

issued guidance to ensure that the Department continues to treat its business system 

investments with the firmness of purpose and discipline that will enable cost savings to be

redirected to critical operational needs of the warfighter. The guidance, updated annually, 

includes an integrated business framework to align broad Departmental strategy with 

functional and organizational strategy, to guide system implementations. The integrated 

business framework utilizes Functional Strategies and Organizational Execution Plans (OEP), to 

help achieve the Department’s target business environment.

 The Financial Management (FM) Functional Strategy describes the Department’s financial 

management business mission area’s strategic vision, goals, target environment, and 

expected outcomes over the next five years. Key components of the FM functional strategy 

include: FM data standards, process/system improvements, leveraging technology to assist 

the Department to improve efficiency and effectiveness of FM processes.

In response to Principal Staff Assistant’s (PSA) functional strategies, the Military 

Departments and Defense Agencies develop OEPs that describe how their business system 

portfolios will achieve the strategic directions and initiatives articulated in the strategy. The 

OEPs also provide more detailed information on how information technology investments align 

to the functional strategy initiatives.
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1-3A. Improper Payments IG Summary of Challenge

The Department’s inadequate financial systems and controls hamper its ability to minimize 

improper payments. Improper payments, a longstanding problem in the Department, are often 

the result of unreliable data, a lack of adequate internal controls, or both. In addition, the 

pace of operations and volume of DoD spending creates additional risk for improper payments 

and hinders its ability to detect and recover those improper payments. These payments 

increase the likelihood of fraud. As a result, the Department lacks assurance that billions of 

dollars of annual payments are disbursed correctly. The Department faces difficulties in the 

completeness and accuracy of its improper payment reviews and the information reported. 

Additionally, the lack of an auditable SBR leaves the Department unable to reconcile outlays to 

the gross outlays reported in the SBR to ensure all required payments for reporting purposes 

have been captured. These areas require improvement before the Department will be able to 

provide complete and accurate information on its estimated amount of improper payments.

1-3B. Improper Payments IG Assessment of Progress

Although the Department made strides to improve the identification and reporting of 

improper payments, and took many corrective actions to implement recommendations made 

by the DoD IG, more work is needed to improve controls over payments processed throughout 

the Department. 

In May 2015, the DoD IG reported the Department complied with five of the six improper 

payment reporting requirements for FY 2014. Although improper payment rates for the 

reported payment programs were below the Office of Management and Budget established 

threshold, the Department did not achieve its improper payment reduction targets for one of 

eight payment programs with established targets. For the third consecutive year, the 

DoD Travel Pay Program did not meet its target rate. Failure to attain reduction targets 

indicates that additional corrective actions are needed to reduce improper payments. The 

DoD IG will perform oversight on the DoD Travel Pay Program to determine whether DoD 

actions to reduce improper payments in the DoD Travel Pay Program were effective.

In addition, the Department had deficiencies in the methodologies for two of the 

nine payment program areas that could affect the reliability of DoD’s improper payments 

estimates. The DoD IG also recommended that the Department improve the statistical 

precision of improper payments estimates in seven of the DoD payment programs through the 

use of stratified sample designs.

DoD IG commends the Department for aggressively pursuing recovery of identified 

improper payments, but unless the Department continues to improve its methodology for 

reviewing its disbursements, it likely will not identify and accurately estimate the amount of 

improper payments. As a result, the Department will miss opportunities to identify causes of 

and implement effective corrective actions to prevent future improper payments.
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1-3C. Improper Payments Department Response

The Department appreciates DoD IG’s recognition of our efforts to minimize improper 

payments and our aggressive pursuit to recover identified improper payments. The 

Department revised its sampling methodology to ensure it meets or exceeds the minimum 

requirements in accordance with the Financial Management Regulation to ensure compliance 

with Improper Payments Elimination and Recovery Act (IPERA), as amended. The Department 

has taken actions to develop corrective actions plans at the component level to improve the 

integrity of the post-payment review results, and we continue to take ownership to address 

the recommendations in the latest DoD IG and Government Accountability Office (GAO) 

reports. 

While the Department continually strives to reduce improper payments, it should be noted 

that the payment error rates experienced in most of the Department’s programs are already 

low. The Department is taking steps to implement and enforce existing internal controls and 

working with the military services and components to implement effective front-end controls 

to prevent improper payments. Additionally, the Department plans to pilot a modernized travel 

system that will address many improper payment causes. 

All of these actions, coupled with the Department’s progress toward achieving audit 

readiness, will increase public confidence in the Department’s stewardship of taxpayer dollars 

as well as strengthen the fundamentally sound DoD improper payments program.

A sailor helps a distressed mariner get to the medical staff aboard the USS Rushmore in the Makassar 

Strait, June 10, 2015. The Rushmore offered assistance to distressed mariners in the waters between the 

Indonesian islands of Kalimantan and Sulawesi. Once on board, the mariners received food and medical 

attention by Marines and sailors assigned to the 15th Marine Expeditionary Unit and Essex Amphibious 

Ready Group. 

Photo by Sgt. Emmanuel Ramos
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2. Acquisition Processes and Contract Management

2-1A. Enhancing the Acquisition 

Workforce IG Summary of Challenge

Ensuring that the acquisition workforce is adequately sized, trained, and equipped to meet 

the Department’s needs is an ongoing leadership challenge. The Department’s leadership 

acknowledges the importance of employing and managing its acquisition workforce to ensure 

the right personnel are in the right positions at the right time. 

Since 2010, the Better Buying Power (BBP) initiatives have focused on improving 

acquisition performance. Specifically, BBP 2.0 focused on enhancing professionalism and 

equipping the Department’s acquisition professionals with the best tools to facilitate making 

solid acquisition decisions. In an effort to strengthen innovation and technical excellence, the 

Implementation Directive for BBP 3.0, Achieving Dominant Capabilities through Technical 

Excellence and Innovation, was released on April 9, 2015. BBP 3.0 strengthens the technical 

capability of and encourages innovation by the Department’s acquisition workforce to achieve 

greater efficiency and productivity. Considering the fiscal pressures on the Department, it 

continues to invest in expanding the capacity of the acquisition workforce. The Department 

must improve procurement outcomes by providing essential education and training.

2-1B. Enhancing the Acquisition 

Workforce IG Assessment of Progress

The Department continues to recognize the importance of the acquisition mission and the 

need for workforce planning and development strategies. The Department slightly increased 

the total number of acquisition personnel to 152,651 civilian and military personnel as of the 

second quarter of FY 2015, up from 150,465 personnel in FY 2014. As in the previous years, 

the Department’s concerns are not only with sustaining a sufficient workforce size, but also 

with the training and development of those with acquisition responsibilities.

In FY 2016 budget estimates, the Department requested $84.1 million for the Defense 

Acquisition Workforce Development Fund. The Department intends to use the fund to improve 

the defense acquisition workforce through targeted hiring and initiatives to improve training, 

development, qualifications, and professionalism. It is critical for the Department to advance 

the skills of the acquisition workforce throughout their careers so the Department can achieve 

increased buying power and improve acquisition outcomes. 

2-1C. Enhancing the Acquisition 

Workforce Department Response

The Department concurs with the DoD IG’s statements on the challenge and progress 

made in enhancing the acquisition workforce. DoD senior acquisition leadership is continuing 

its emphasis on responsibly sustaining and strengthening the capability and professionalism of 

the acquisition workforce. Sufficient workforce capacity and capability is critical to improving 

acquisition productivity, increasing buying power, and equipping the warfighter for 

technological dominance.
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2-2A. Weapon System Acquisition IG Summary of Challenge

The Department remains challenged in its management of Major Defense Acquisition 

Programs. Over the past year, the Department’s Major Defense Acquisition Programs portfolio 

reduced from 80 programs to 78. More programs are started than can be funded and many 

programs must compete for funding. The Department should continue to look for a better 

balance between its limited resources and the capabilities needed to succeed in current and 

future conflicts. Failure to do so can jeopardize other acquisition programs and limit the 

Department’s ability to execute warfighting operations effectively. Acquisition experts of 

various backgrounds (government and industry) continue to emphasize the need for strong 

accountability and leadership throughout the lifecycle of a weapon system.

2-2B. Weapon System Acquisition IG Assessment of Progress

The BBP initiatives encompass a set of fundamental acquisition principles to achieve 

greater efficiencies through affordability, cost control, elimination of unproductive processes 

and bureaucracy, and promotion of competition. BBP 3.0 initiatives are designed to:

• Create affordable programs;

• Establish dominant capabilities while controlling lifecycle costs;

• Incentivize productivity in industry and government;

• Incentivize innovation in industry and government;

• Eliminate unproductive processes and bureaucracy;

• Promote effective competition; 

• Improve tradecraft in acquisition of services; and

• Improve the professionalism of the total acquisition workforce.

The Department’s revision of Instruction 5000.02 in January 2015 incorporated its BBP 

initiative memorandum, representing an effort to improve the acquisition process. Congress 

and the Department also proposed legislative and policy changes to address the inefficiencies 

of the current acquisition process and improve weapon systems procurements. The enactment 

of the Weapon Systems Acquisition Reform Act of 2009 and the Department’s revision of 

Instruction 5000.02 represent efforts to improve this process. The Department has made 

progress, but still struggles with programmatic problems such as cost overruns and schedule 

delays of acquisition programs. The DoD IG continues to identify challenges in acquisition such 

as:

• Requesting waivers and deferrals from operational test requirements; 

• Certifying program readiness for initial operational test and evaluation; 

• Documenting the acquisition process for defining, validating, funding, and executing 

requirements; 

• Meeting system performance requirements; 

• Determining fair and reasonable prices for spare parts;

• Acquiring excess spare parts inventory; and

• Managing performance-based logistics contracts. 

DoD IG has made recommendations to address these challenges and the Services have 

made progress in implementing them. Given the prospect of shrinking or static defense 
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budgets, it is important that the Department remains vigilant in its oversight role and 

minimize risk during the acquisition process.

2-2C. Weapon System Acquisition Department Response

As the Inspector General notes, the Department recently issued BBP 3.0 and a revised 

DoD Instruction 5000.02 reflecting our commitment to continuous improvement of the defense 

acquisition process. Among the many initiatives captured in those policies are actions designed 

to: improve the accountability and quality of DoD acquisition leadership; continue our 

emphasis on reducing cost and establishing thoughtful business arrangements; ensure that 

requirements are fully supported and carefully reviewed prior to program initiation; and, 

address program affordability as a systematic element of acquisition decision making. All of 

these are critical to ensuring we make the best use of available resources so our warfighters 

have the capabilities they need. The revised policies also rearticulate and clarify the principles 

of effective acquisition decision making to ensure that we make thoughtful and well informed 

acquisition decisions. In addition, the Department is conducting annual acquisition system 

assessments to determine whether our policies are achieving stated objectives and to focus 

management attention on process elements that need to be improved.

Sailors perform maintenance on a rocket-build aboard the aircraft carrier Harry S. Truman (CVN 75) in the Atlantic 

Ocean. The Harry S. Truman Carrier Strike Group was underway participating in a Composite Training Exercise in 

preparation for a future deployment. 

Photo by Mass Communication Specialist 2nd Class Emily M. M. Blair
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2-3A. Contract Management IG Summary of Challenge

The Department struggles to provide consistent effective oversight of its contracting 

efforts. The Department continues to face contracting deficiencies in these areas: 

• Obtaining adequate competition in contracts; 

• Defining contract requirements; 

• Overseeing contract performance; 

• Obtaining fair and reasonable prices; and 

• Maintaining contract documentation for contract payments.

Service contracts represent more than 50 percent of the Department’s contract spending. 

The Department faces several challenges in contract oversight and administration of service 

contracts. DoD IG audits continue to identify insufficient contract oversight by the 

Department. Insufficient oversight subjects the Department to risk overpaying for increases in 

contract costs and contractor performance that does not satisfy contract requirements. This 

leaves the Department vulnerable to increased fraud, waste, and abuse.

The Department continues to face challenges in obtaining fair and reasonable prices for 

parts. DoD IG audits first started identifying problems with price-based acquisition and 

commercial pricing in the late 1990s. However, legislative changes allowing contracting 

officers to request information on labor costs, material costs, and overhead rates for 

commercial items did not begin until 2008. More recently, the Department uses a new 

performance-based logistics (PBL) arrangement, which creates a new challenge in obtaining 

fair and reasonable prices for parts. The Services are procuring parts from the weapons 

systems contractors instead of other sources, such as the Defense Logistics Agency. DoD IG 

found that these parts often were purchased unnecessarily and at higher prices than if the 

Department used existing Defense Logistics Agency inventory.

2-3B. Contract Management IG Assessment of Progress

The Department continues to strengthen contracting and has issued policy, procedures, 

and guidance to address current contracting challenges. The Department began the BBP effort 

in 2010 and continued the second phase of the initiative, BBP 2.0, in April 2013. It started the 

third phase of the initiative, BBP 3.0, in April 2015. BBP 3.0 has eight areas of focus, and 

three of those areas address the following contract management challenges: 

• Promote effective competition; 

• Improve tradecraft in acquisition of services; and 

• Incentivize productivity in industry and Government.

When competition is applied effectively, it results in lower costs to the Government, 

greater innovation from industry, and added savings to the taxpayer. To promote effective 

competition, BBP 3.0 emphasizes competition strategies with initiatives to create and maintain 

competitive environments and increase small business roles and opportunities. 

Because service contracts make up the majority of the Department’s purchases, the 

BBP 3.0 initiative to improve tradecraft in the acquisition of services is critical. For the 

acquisition of services, the Department is focusing on improving requirements definitions for 

services, strengthening contract management outside the normal acquisition chain, and 

developing enterprise approaches for improving the effectiveness and productivity of 
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contracted engineering and technical services, among other initiatives.

To further its goal of incentivizing productivity in industry and government, BBP 3.0 will 

increase the use of incentive-type contracts, implement Service-specific superior supplier 

incentive programs to drive healthy competition among industry, and increase effective use of 

PBL arrangements. When PBL arrangements are properly structured and executed, this effort 

achieves improved readiness at significant savings. However, PBL success depends on the 

workforce having the expertise and support to properly develop and implement the 

PBL concept.

Implementing BBP 3.0 continues the efforts to pursue programs that are affordable by 

mandating that managers identify and pursue “should cost” savings opportunities, providing 

effective incentives to industry, emphasizing competition, reducing bureaucracy, improving 

acquisition of contracted services, and building professionalism.

Even with the implementation of BBP 2.0 and the initiation of BBP 3.0, the Department 

continues to struggle with implementing Federal Acquisition Regulation revisions on the use of 

cost-reimbursement contracts. Contracting activities are still challenged in:

• Obtaining approval for cost-reimbursement contracts at least one level above the 

contracting officer;

• Justifying cost-reimbursement contracts;

• Defining requirements for service contracts adequately; 

• Conducting sufficient price analysis for commercial spare parts;

• Determining how requirements under contracts could transition to firm-fixed price in 

the future; and

• Providing Government resources to be available to monitor cost-reimbursement 

contracts.

2-3C. Contract Management Department Response

Contract Management continues to be a high priority for DoD leadership. In the 

February 2015 GAO report, “High-Risk Series: An Update,” GAO acknowledged the 

Department’s sustained leadership commitment to addressing these challenges. As a result of 

that leadership commitment and the progress made, the GAO removed the appropriate use of 

contracting techniques and approaches from the contract management high risk area. Three 

segments remain in this GAO High Risk area: 1) the acquisition workforce, 2) service 

acquisitions, and 3) operational contract support. 

The Department continues to work aggressively to resolve the issues in the DoD IG’s 

summary of challenges and assessment by taking a number of steps to improve those 

identified. Key actions include:

Efforts to Improve Competition 

On October 29, 2014, the Director, Defense Procurement and Acquisition Policy (DPAP) 

issued a memorandum entitled, “Publication of DoD Competition Reporting – 4th Quarter 

FY 2014,” announcing the Under Secretary of Defense for Acquisition, Technology and 

Logistics (USD (AT&L)) plan to address competition as a recurring Business Senior Integration 

Group (B-SIG) agenda item. To support preparation and increase visibility and accountability, 

DPAP initiated publication of quarterly competition data. Subsequently, DPAP issued 

memoranda with competition achievement data for the first, second, and third quarters of 

FY 2015. 

Through 2015, quarterly B-SIG meetings continued with senior leader focus and attention 

on competition measures to increase visibility and accountability, and also focused on 
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emerging tools, trends and guidance useful for the Military Departments and Defense Agencies 

to increase competition and overcome barriers to competition. During the June 2015 B-SIG 

meeting, the USD (AT&L) expressed an interest in transitioning from an annual targeted goal 

based on actuals to an approach that sets goals relative to a plan that can be actively 

managed for more meaningful and achievable results. For the FY 2016 Competition measure, 

the Director, DPAP is soliciting input from the Military Departments and Defense Agencies on 

this forward looking approach. Competition will continue to be tracked at quarterly 

B-SIG meetings. 

On April 13, 2015, the Acting Director, DPAP signed a memorandum to the Components 

entitled, “Noncompetitive Contracts Awarded Based on Urgency.” This addressed three 

recommendations in GAO Report GAO-14-304, "Federal Contracting: Noncompetitive contracts 

Based on Urgency Need Additional Oversight," dated March 25, 2014.

On April 20, 2015, the Defense Federal Acquisition Regulation Supplement (DFARS), 

Procedures, Guidance, and Information (PGI) (Case 2014-P021) incorporated the guidance 

and requirements of the USD (AT&L) August 2014 memorandum, “Actions to Improve 

Department of Defense Competition.”

Improve Tradecraft in Acquisition of Services

On June 1, 2015, the Deputy Director, Services Acquisition in DPAP, as the newly 

designated Functional Lead (FL) for services acquisition (SA), signed an updated Acquisition of 

Services Functional Integrated Product Team (FIPT) Charter which includes focused goals for 

the next two years. These goals include improving requirements workforce tracking, defining a 

services acquisition qualification program, improving marketing for the SA training website, 

supporting training products and practical tools, and developing tracking metrics. Several of 

these efforts are underway. The FIPT team established criteria for identifying the non-Defense 

Acquisition Workforce Improvement Act (DAWIA) workforce with acquisition-related 

responsibilities, defined the competencies needed, and identified several training sources for 

the variety of skills required and present within this workforce. The FIPT is identifying gaps in 

training coverage to continue improvement and/or development of additional training 

curricula. Special training sessions are being supported with Defense Acquisition 

Workforce Development Fund (DAWDF) funds, including special sessions of Defense 

Acquisition University’s ACQ 265 and COR 222 classes solely for non-DAWIA services 

community stakeholders. 

In 2015, the Functional Domain Experts (FDEs) continued to analyze their portfolios and 

identify areas for active management. Their analysis includes identifying/understanding what 

services are contained within their portfolios; characteristics of contract spend in their 

portfolios, such as amount, competition rates, and contract types; vendor base characteristics; 

and what services may be common across Military Departments and Defense Agencies. The 

analysis informed the FDE development of metrics and goals for effectively managing 

their domains.

The PDUSD (AT&L), as the Department’s Senior Services Manager directing each FDE to 

develop their metrics and FY 2016 goals, has met regularly with the FDEs to ensure 

appropriateness of these metrics and goals. Despite FDE domains containing different sets of 

capabilities and mission support, there are some common acquisition metrics that will be 

collected across the domains to include competition rates, small business rates, fragmentation 

(number of vendors), and types of contracts. Goals are being set in these areas against 

portfolio execution. Additional metrics regarding general training curriculum and student 

throughput are being implemented as well.

Acquisition Workforce (Contracting) 

The DoD Contracting Workforce successfully completed a Contracting Competency 

Assessment in 2008-2009, with 86 percent participation. A reassessment of 55 percent of the 

contracting workforce was completed in September 2014. DPAP and the Military Components 

are in the early stages of analyzing the data from the assessment to determine gap areas 
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across the contracting workforce and at the Component and field office levels. The results will 

inform human capital actions/workforce planning; update/initiate training, increase/improve 

leadership developmental opportunities, and allow the Department to make informed and 

sustained investments in the workforce, to include quality-focused initiatives to strengthen the 

capability and readiness of the total acquisition workforce.

As the AT&L Functional Leader for the Contracting, Purchasing, and Industrial/Contract 

Property Management career fields, the Director, DPAP, chaired quarterly Contracting FIPT 

meetings (CONFIPT). In 2015, the CONFIPT coordinated on Defense Acquisition Workforce 

Improvement Act (DAWIA)-related certification and workforce issues and participated in a 

number of AT&L-led workgroups to implement BBP initiatives. The most significant is the 

participation and active support to the AT&L Key Leadership Position (KLP) Qualification Board 

working group that developed the documentation and process to implement the USD (AT&L) 

KLP guidance. The FIPT completed a comprehensive review of the Component KLP data and 

existing warrant boards or Head of Contracting Activity (HCA) equivalent processes to 

determine if a Joint Qualification Board was needed for the Program Lead Contracting Officer 

KLPs. The FIPT supported the ongoing efforts to develop and implement the Acquisition 

Workforce Qualification Initiative (AWQI) at the direction of the Assistant Secretary of Defense 

(Acquisition) (ASD (A)), and reviewed the extensive work completed by the AWQI project 

teams for the Contracting, Purchasing, and Property career fields. The CONFIPT effort resulted 

in the validation of the qualification standards for each competency element. The FIPT 

contributed to information briefed at the quarterly AT&L Workforce Management Workgroup 

meetings and Senior Steering Boards, and coordinated updates to the training assets with the 

Defense Acquisition University (DAU). The FIPT completed a review of the DAWIA training 

standards, competency models, and position category descriptions for the Contracting, 

Purchasing, and Property Career Fields for the annual Functional Leader certification.

DPAP continues to collaborate with DAU on the curriculum for the Contracting, Purchasing, 

and Industrial/Contract Property Management career fields. Efforts to improve acquisition 

workforce training continued in FY 2014 and 2015 with these Continuous Learning Courses 

(CLC) being updated as reflected in the DAU iCatalog: CLC 018, Contractual Incentives, in 

January 2015; CLC 023, Commercial Item Determination Executive Overview, also in January 

2015; CLC 058, Introduction to Contract Pricing, in March 2015; CLC 025, Small Business 

Program for Contracting Officers, in April 2015; CLG 006, Certifying Officer Legislation Training 

for Purchase Card Payments, in May 2015; and CLC 048, Export Controls, in September 2015. 

Important updates in 2014 to DAU continuous learning modules include: CLC 028, Past 

Performance Information; CLC 055, Competition Requirements; and CLC 051, Managing 

Government Property in the Possession of Contractors, all completed in March 2014. CLC 065, 

Suspension and Debarment, was updated in June 2014.

Additionally, among the top ten DAU continuous learning modules taken as of the fourth 

quarter in FY 2015 are: CLG 004, DoD Government Purchase Card Refresher Training, with 

36,866 student graduates; CLG 001, DoD Government Purchase Card, with 29,342 graduates; 

CLG 005, Purchase Card Online System, with 25,105 graduates; CLC 106, COR with a Mission 

Focus, at 21,877 graduates; CLC 222, Contracting Officer’s Representative Online Training, 

with 20,568 graduates; and CLC 206, COR in a Contingency Environment, with 6,658 students 

completing the course. DAU, as approved by the respective Functional Leader, has also 

incorporated Performance-Based Logistics Training assets LOG 235 and CLL 011 into the 

Core Plus Guides of the Program Management, Contracting, and Engineering career fields. 

Other important learning assets approved by the Functional Leader for addition to the 

Core Plus Development Guide for Contracting are: EVM 101, Fundamentals of Earned Value 

Management; HBS 304, Coaching for Results; and HBS 406, Coaching. All of these learning 

assets contribute to the improved capability and professionalism of the acquisition workforce.

Better Buying Power Initiatives

BBP, BBP 2.0 and BBP 3.0 are part of the Department’s overall commitment to reduce 

costs and increase value to the taxpayer and warfighter. DPAP is working hard to improve all 

aspects of the costing, pricing, and financing of its contracts. Many of the BBP initiatives are 
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currently in process and are not meant to be one-time events, but a set of continuous learning 

and improvement approaches. Specific DPAP contributions to support BBP initiatives and 

contract management include:

On March 4, 2015, the Under Secretary of Defense for Acquisition, Technology, and 

Logistics (USD(AT&L)) issued a memorandum entitled, “Appropriate Use of Lowest Priced 

Technically Acceptable Source Selection Process and Associated Contract Type.” The 

memorandum outlines the acquisition circumstances when it is appropriate to use the Lowest 

Priced Technically Acceptable (LPTA) Source Selection Process. LPTA is appropriate when 

requirements are well-defined, the risk of unsuccessful performance is minimal, price is a 

significant factor in the selection and there is neither value, nor need to pay for higher 

performance. Alternatively, inappropriate usage of LPTA can lead to the Department missing 

out on an innovative, cost-effective solution needed to maintain our technological advantage. 

The memo goes on to discuss the importance of selecting the right contract type to fit the

requirements, especially when buying services and specifically, professional or management 

support services, to enhance our mission.

On March 30, 2015, the acting Director of DPAP announced the release of DoD Instruction 

5000.72, “DoD Standard for Contracting Officer’s Representative Certification,” which 

established uniform guidance for identification, development, certification and management of 

Contracting Officer’s Representatives (CORs) within the Department. 

The Department developed the Contracting Officer Representative Tracking (CORT) tool to 

track and maintain COR assignments. The web-based tool, hosted on the Wide Area Workflow 

portal, enables Military Departments and Defense Agencies to manage nomination, training, 

and tracking of their respective cadres of CORs and the contract(s) assigned to each COR. As 

of September 2015, there are 59,988 registered CORs. Of the number registered, the Army 

has 36,048. 

On July 27-30, 2015, the Director of Defense Pricing hosted the second Pricing 

Collaboration event in Southbridge, Massachusetts. Attendees included contracting pricing 

professionals and Procurement Contracting Officers (PCO’s) from the Military Departments and 

Defense Agencies. Agenda items included: 1) Sessions led by Army, Air Force, and Navy 

providing FFP-FPIF Component Program Pricing Examples plus Q&A; 2) Incentive Contracting 

with sessions on FPIF/CPIF/Multiple Incentives, Demonstration of the FPIF Model, and 

Incentive Contracting Group Exercises concluding with a presentation on Exercise JSF LRIP; 3) 

Case Study/Critical Thinking Exercise (JSF LRIP); 4) Commercial Item Pricing; 5) DCAA Audit 

of Contractor Compliance; 6) DCMA Cost and Pricing Center and ICATs; and 7) Senior 

Procurement Executives Panel. 

On July 6, 2015, the Principal Deputy, DPAP signed a memo to the Components 

announcing the release of the Defense Contingency Contracting Handbook, 5th Edition. The 

handbook is posted on DPAP’s website.

On July 31, 2015, the Director, DPAP signed a memo to the Components entitled “Proper 

Use of GSA Federal Schedule Contracts – A Reminder.” The memorandum highlights two 

specific aspects of GSA Federal Schedule use that the Department can improve upon: 

1) seeking discounts and 2) determining and documenting that the prices obtained are fair 

and reasonable for all items purchased through the Federal Supply Schedules program, 

including “open market items.”

In addition, the Defense Contract Management Agency (DCMA) continues to establish new 

and refined capabilities to support BBP initiatives and assist the acquisition workforce in 

making better business decisions:

Commercial Item Group:

As part of the Under Secretary of Defense’s Better Buying Power initiative, DCMA 

established an initial cadre of commercial pricing experts in early 2015 to assist PCOs in 

making commercial item determinations and to ensure the price reasonableness of commercial 

items. Select major program commercial pricing assistance was offered during 2015 with 
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commercial item determination and pricing support provided to: USAF Cryptologic Support 

Center, USAF Space and Missile Center, Robins Air Force Base (AFB), Tinker AFB, Hill AFB; 

Redstone Arsenal (Army); NAVAIR and NAVSUP (Navy); and DLA. With a limited staff, the 

Commercial Item Group identified savings of $47 million as of September 2015 and demand 

from PCOs for this specialized support is rapidly increasing. The capability of the Commercial 

Item Group will continue to grow and mature in 2016 and, when fully staffed, will consist of 

fifty analysts and engineers dispersed in six strategic geographic locations. 

Integrated Cost Analysis Teams (ICATs):

DCMA has ten fully-staffed Integrated Cost Analysis Teams (ICATs) with dedicated 

business and technical pricing personnel at twelve major contractor divisions. In 2015, the 

ICATs proactively engaged PCOs during Request for Proposal (RFP) development on major 

proposals to strategize pricing requirements in partnership with program offices and DCAA. 

Additionally, the ICATs continue to aggressively pursue opportunities to reduce costs in the 

supply chain through targeted proposal analysis of second and third tier suppliers, and 

through coordinated assistance with the DCMA Cost and Pricing Center’s mobile/surge pricing 

capability, commercial pricing cell capability, and augmentation from the Navy Price Fighters. 

Overhead Should Cost Reviews and Forward Pricing:

As part of the Department’s Affordability Initiative under BBP 3.0, the Department 

continued its formalized process of coordinating with Military Department Service Acquisition 

Executives (SAEs) on the identification of contractor locations for the conduct of overhead 

should cost reviews. Input is received from each SAE on beneficial contractor segments and 

expected price proposals of significance for the upcoming fiscal year. Based on this input, the 

Director of Defense Pricing selects the locations for review, notifies the affected services, and 

planning is initiated for the joint conduct of the reviews.

FY 2015 was the first year in which DCMA conducted targeted reviews focused on the 

contractor’s business base and select indirect cost items – areas with the highest potential 

savings. The business base is a significant factor in predicting overhead rates and thereby 

establishing a sound “should cost” position. This streamlined approach allowed DCMA to 

increase the number of scheduled reviews over the prior year. 

The results of the reviews are shared with SAEs, affected program/buying offices, 

and DCMA Administrative Contracting Officers, who utilize the results to establish Forward 

Pricing Rate Agreements and Recommendations (FPRA/FPRR). These agreements and 

recommendations support BBP goals to reduce the acquisition cycle time by providing 

contracting officers with negotiated rates that incorporate affordability initiatives used in 

pricing contract actions. DCMA is also progressing with its plan to increase the number of 

locations with FPRAs – working with Defense Contract Audit Agency (DCAA) and industry 

partners to establish processes and information requirements. This effort has resulted in an 

increase in the number of FPRAs at some of the largest defense contractors. The DoD 

Enterprise Contractor Business Analysis Repository (CBAR) includes comprehensive contractor 

pricing information – to include FPRAs/FPRRs to assist PCOs with contract negotiations. 

CBAR supports the Department’s BBP goals of controlling costs and achieving affordability 

by providing PCOs with real-time information that enables them to negotiate a “better deal” 

for the Government.
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3. IG-Identified Challenge: Joint Warfighting and Readiness

3-1A. Joint Warfighting and Readiness IG Summary of Challenge

Maintaining the Department’s Joint Warfighting and Readiness abilities is challenged by 

the fluid, multi-theater environment in which it operates. The Department’s missions include:

• Drawing down DoD presence in Afghanistan while continuing to support the Afghan 

National Defense Security Forces (ANDSF) and counterterror operations;

• Returning to Iraq to support the battle against the Islamic State with advisors and 

trainers;

• Strengthening our alliances in the Pacific, as well as in other parts of the world; and 

• Addressing emerging terrorism and instability within the U.S. Africa Command areas of 

operations.

Each of these efforts presents its own challenges that the Department must address. The 

existing external challenges are compounded by internal challenges relating to the budgetary 

environment and efforts to optimize the joint warfighting structure.

As the ANDSF formally assumed security responsibilities for all of Afghanistan on 

January 1, 2015, the U.S. and the Department simultaneously transitioned to Operation 

Freedom Sentinel (OFS), primarily focused on advising and assisting the ANDSF to further 

develop its ability to provide security and stability in Afghanistan. The subsequent reduction of 

U.S. and Coalition Forces in Afghanistan has created significant challenges in the ANDSF 

advise and assist mission, to include development of the Planning, Programming, Budgeting 

and Execution (PPBE) and anti-corruption capabilities in the Ministry of Defense (MoD) and 

Ministry of Interior (MoI). 

Furthermore, the U.S. and Coalition advise and assist mission is challenged by the 

ANDSF’s ongoing issues with:

• Excess officers at senior levels, complicating development of an effective planning and 

command and control capability;

• Maintenance and logistics planning capabilities;

• Development of counter-improvised explosive device exploitation capabilities;

• Consistent and effective leadership;

• Unity of command; and

• Lack of tactical air support. 

 The Afghan National Police (ANP) continues to perform traditional policing as well as 

counterinsurgency operations, but it suffered significant casualties, as has the Afghan National 

Army (ANA). The ANP still has significant issues concerning force protection, command 

and control, training, maintenance, medical support, force management, personnel attrition, 

and corruption.

The drawdown of forces from Afghanistan continues to challenge the Services as they deal 

with retrograde and reset of equipment. The majority of the returning equipment is in poor 

condition and has reached the end of its planned service life. Equipment is a critical 

component of readiness, and returning equipment will require repair or replacement. The

retrograde/reset will be complicated by numerous ongoing and developing situations around 

the world.

Global conflict and crises will continue to affect the Department’s rebalancing and 

resetting efforts:
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• The limited return of forces to Iraq in constrained roles as advisors and trainers for 

Operation Inherent Resolve (OIR) to assist in the battle against the Islamic State 

creates additional challenges for the Department. This effort confirms that U.S. forces 

need to train for unconventional and asymmetric warfare, as well as for more 

conventional force-on-force training. Ongoing training and deployment requirements 

will continue to test both personnel and material readiness. 

• The Services are rebalancing to the Asia-Pacific region while maintaining the global 

presence needed to protect national interests. While undergoing this strategic 

rebalance, the Department will need to address a wide spectrum of challenges, 

ranging from increased reliance on uncertain host nation infrastructure to vast areas of 

operational responsibility. This will require pre-positioning of personnel and equipment 

and the need for strengthened security partnering with select countries. This effort 

requires enhanced knowledge of various languages and cultural, ethnic, and 

religious sensitivities. 

• The Department continues to coordinate with the Republic of Korea regarding our 

strategic alliance. The transfer of the overall combined command from U.S. forces has 

been scheduled several times, but continues to be delayed. 

• The Department also continues to address emerging terrorism and instability 

challenges in U.S. Africa Command’s area of operation, as demonstrated by the 

Department’s involvement in Operation United Assistance. Growth in U.S. Africa 

Command’s operational partnering mission raises the issue of sufficiency of its 

resources to address the terrorist threat, given that the Department returned some 

facilities in Europe.

The effects of the reduced Department budget are being felt in areas such as maintenance 

of existing equipment and systems, fielding and implementation of new systems, and the 

frequency and extent of training and exercises. The Services and the Combatant Commands 

must plan for future budget realities in order to minimize the effect on their ability to respond 

to future threats. The Services must review their existing force structures and make necessary 

changes or adjustments, especially when those changes or adjustments involve shifts in how 

the Department views future military missions. 

Sequestration and possible future budget constraints continue to challenge the readiness 

of the Services. For example, the effect of sequestration was felt almost immediately as the 

Navy adjusted repair and overhaul schedules for ships and the Air Force began restricting 

flying hours for squadrons. The Services and the Combatant Commands will need to ensure 

that any current and future budget reductions do not limit our force’s capability to respond to 

future threats. 

During these times of fiscal austerity, particularly the potential to return to Budget Control 

Act funding levels, finding the proper balance between maintaining readiness, force structure 

sizing, modernization, and preparing for potential future threats will continue to challenge the 

Department’s leadership.

In addition to external events affecting the Department’s joint warfighting and readiness 

construct, internal factors affect readiness. The proposed drawdown of the Services, with the 

accompanying potential to close installations and facilities, will again require enhanced 

attention from the Department’s senior leadership. For example, the proposed restructuring of 

Army aviation forces, a critical combat force multiplier, will be particularly challenging. The 

Department must continue to assess the capabilities and readiness of the force across the full 

spectrum of operations. This assessment includes significant issues, such as whether the joint 

force is capable of achieving the strategic objectives set forth in the National Security 

Strategy, as well as tactical issues, such as the focus on unit and individual service member 

readiness. A key objective of maintaining joint warfighting capability and readiness is caring 

for the all-volunteer force and their families. Difficulty in recruiting sufficient volunteers to 

meet Service targets and the lifting of gender restrictions within the force will continue to 

require attention.
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Turmoil around the world continues, ranging from Russian aggression in Europe, Chinese 

maritime actions in the South China Sea, North Korean nuclear threats, externally-initiated 

cyber-attacks on our government, and the potential health issues that could occur on 

pandemic levels, among others. It is critical that the Department address these challenges to 

ensure our military is agile, flexible, and ready for the full range of contingencies. 

3-1B. Joint Warfighting and Readiness IG Assessment of Progress

The Afghan National Army (ANA) made significant leadership changes during this reporting 

period. In February 2015, to make room for the next generation of Army officers, President 

Ashraf Ghani directed the retirement of 47 general officers who had exceeded the mandatory 

retirement age. In addition, he suspended multiple general officers involved in a fuel scandal. 

The uncertainty over an extended period associated with these leadership changes hampered 

the Department’s advise and assist mission, especially in the area of MoD and MoI 

development of PPBE capability and accountability. While the U.S. and Coalition generally 

viewed these actions as a positive step, the ANDSF remains burdened by an excess of officers 

at senior levels and needs further reduction. 

In advance of the 2015 fighting season, the ANDSF continued its high operational tempo 

and conducted the first major offensive operation of 2015 in northern Helmand Province. This 

large-scale operation highlighted the ANDSF’s ability to organize and execute an operation of 

this scope, as well as the continuing challenges the ANA faces with maintenance and logistics 

planning, counter-improvised explosive device (IED) exploitation capabilities, effective 

leadership, and unity of command. The Coalition intervened to provide tactical air support to 

compensate for ANDSF’s limited capability. The capabilities of the ANP, while improving, face 

challenges in the same areas as the ANA.

Although the Department is making progress in addressing the drawdown of U.S. forces 

and equipment in Afghanistan, fiscal challenges will become even more important as current 

weapon systems reach the end of their serviceable lives and their replacements become more 

costly. The Department must ensure adequate oversight and management of equipment being 

returned or reset so that only unusable equipment is disposed, and new equipment is fielded 

to the intended users.

Across the globe, the Department continues to develop and enhance partnerships with 

countries and regions whose interests align with ours.

• The U.S. and Coalition forces conducting OIR’s Build Partner Capacity/Advise and 

Assist mission in Iraq are progressing, within given limits and constraints. The Iraqi 

Army today is not the Iraqi Army that the U.S. left in 2011. Issues with 

assigned/present for duty strength, weak personnel recruiting, poor leadership, 

bureaucratic inertia, and corruption continue to affect the viability of the Iraqi forces, 

and the effectiveness of the U.S. and Coalition effort. 

• In the Pacific, the Department continues to strengthen alliances and build partner 

capacity in countries across the region, including the Republic of Korea, the 

Philippines, Japan, Australia, Malaysia, and Indonesia.

• The Department works to strengthen security institutions across Africa to foster 

stability, build peacekeeping capacity, and counter transregional extremism. The 

U.S. military also supports interagency efforts with Latin American and Caribbean 

states to promote regional stability and counter transnational criminal organizations. 

Ongoing efforts to redeploy military units around the globe with the consent and support 

of partner nations has enabled the Services to better shape and focus their force structure to 

provide greater flexibility in responding to evolving threats; however, worldwide commitments 

continue to build. All of these commitments add to an ever increasing challenge for 

U.S. forces’ ability to deploy to multiple global threat scenarios simultaneously. 
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Despite the continued high operations tempo, the Department remains committed to 

ensuring deployed forces around the globe are trained, equipped, and ready to perform their 

assigned missions. However, deploying capable and ready forces for current operations 

continues to affect the non-deployed forces’ ability to prepare for full spectrum operations. 

3-1C. Joint Warfighting and Readiness Department Response

The Department acknowledges the DoD IG’s assessment.

An airman carries the U.S. flag during the POW/MIA run at Bagram Air Field, Afghanistan, Sept. 3, 2015. During the 24-hour event, 

Service members kept the POW/MIA flag in constant motion in honor of American prisoners of war and those classified as missing 

in action. U.S. Service members were deployed to Bagram in support of Operation Freedom’s Sentinel, the follow-on to Enduring 

Freedom and the continuing U.S. effort to train, advise, and assist Afghan security forces as well as conduct counterterrorism 

operations in Afghanistan.

Photo by Tech. Sgt. Joseph Swafford
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4. Cyber Security

4-1A. Executing Cyber Security 

Initiatives IG Summary of Challenge

In February 2013, then Secretary of Defense Panetta stated, “Cyber is now at a point 

where the technology is there to cripple a country, to take down our power grid systems, to 

take down our government systems, take down our financial systems and literally paralyze the 

country.” Current cyber events occurring both within the Federal government and in the 

private domain emphasize the reality of the Secretary’s statement. As a result, a conclusion 

from the 2010 Quadrennial Defense Review (QDR) takes on special meaning. The 2010 QDR 

concluded, “We must therefore be constantly vigilant and prepared to react nearly 

instantaneously if we are to effectively limit the damage that the most sophisticated types of 

[cyber] attacks can inflict.” 

While the Department has made strides in developing strategies for opposing cyber 

threats and adopting new technologies to make its information technology programs more 

effective and efficient, executing those strategies and implementing those programs remains a 

significant challenge. For example, several recent DoD cyber initiatives that lag behind 

implementation milestones include: 

• Transitioning to Internet Protocol version 6 (IPv6);

• Requiring the Defense Federal Acquisition Regulation Supplement (DFARS) clause on 

safeguarding unclassified DoD information on all relevant contracts;

• Adopting cloud computing; and

• Reducing the number of DoD data centers.

In June 2003, the DoD Chief Information Officer (CIO) issued a memorandum stating the 

Department’s implementation of IPv6 was necessary because the previous internet protocol 

version had limitations that made it unable to meet long-term commercial and DoD 

requirements. Over the next five years, the Department issued transition plans, guidance, and 

requirements outlining the Department’s transition to IPv6. In addition, the Office of 

Management and Budget issued Federal requirements for implementation. However, as of 

December 2014, the Department had not completed the Federal and DoD requirements and 

deliverables to effectively migrate the DoD enterprise network to IPv6. As a result, the 

Department is not realizing potential IPv6 benefits and the longer the Department waits, the 

higher the cost and the more complex the transition will become.

In June 2011, the Department proposed to amend the DFARS to add a new subpart and 

associated contract clauses to address requirements for safeguarding unclassified DoD 

information. The purpose of the DFARS rule was to implement adequate security measures to 

safeguard unclassified DoD information within contractor information systems from 

unauthorized access and disclosure. In November 2013, the Department issued the final 

DFARS rule and established a new DFARS clause. The new clause is mandatory for all DoD 

prime contracts and subcontracts. The clause imposes two obligations for contractors: 

safeguarding information systems and reporting the investigation of cyber incidents. However, 

in February 2015, the Department reported only 65 percent of new contracts included the 

required DFARS clause.

There are several other DoD cyber initiatives that have similar circumstances as the IPv6 

and DFARS initiatives, such as cloud computing and consolidation of data centers. The 

Department issued cloud computing requirements in 2010 and the strategy in 2012, but has 

not fully implemented it in 2015. The Department issued requirements for consolidation of 

data centers in 2012 and still is in the process of completing consolidation.

While it is unrealistic to think the Department can be “prepared to react nearly 

instantaneously” as the 2010 QDR required, it is not unreasonable to expect that when 
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milestone requirements and guidance are issued for cybersecurity initiatives, they receive high 

priority for execution and implementation.

4-1B. Executing Cyber Security 

Initiatives IG Assessment of Progress

Both the Federal Government and the Department appear to be moving forward to make 

cybersecurity a higher priority and provide the necessary resources to implement and execute 

cybersecurity initiatives. In December 2014, the Federal Information Technology Acquisition 

Reform Act (FITARA) was enacted. FITARA has been described as the most comprehensive 

overhaul of government IT in 18 years. According to the Federal CIO, one of the most 

important dimensions of the law is the added authority and responsibility for department-level 

CIOs. However, he also stated that, “FITARA’s success also depends on an agency’s ability to 

overcome cultural challenges that could hinder process improvement and reform efforts.” 

Although not all measures contained in FITARA apply to the Department, it begins to raise the 

authority of CIOs.

In March 2015, the Department announced its CIO, who had been acting since May 2014, 

had officially assumed the duties of the CIO position. Along with an extensive background in 

DoD information technology and the provisions of FITARA, the Department’s new CIO brings 

an added sense of urgency in implementing cybersecurity initiatives within DoD components. 

The Department must continue challenging all military, civilian, and contractor employees 

to execute cybersecurity initiatives successfully and quickly implement cyber programs as 

instructed to counter all threats in the Cyber domain.

4-1C. Executing Cyber Security 

Initiatives Department Response

The Department acknowledges the DoD IG’s assessment.

4-2A. Cyber Mission Force IG Summary of Challenge

Cyberspace is an inherently global domain that affects nearly every function of the 

DoD Joint Force. The Department is increasingly dependent upon a skilled cyber force with 

appropriate cyber capabilities to conduct modern military operations. In 2012, the

Commander, U.S. Cyber Command recommended, and the Secretary of Defense approved, 

the Cyber Force model. The Cyber Force model includes developing a Service Component-built 

Cyber Mission Force to support U.S. Cyber Command mission. Today, the pace of threats 

continues to grow in scope, intensity, and sophistication. Every conflict in the world today has 

a cyber dimension. Actors with modest conventional military capabilities have shown 

considerable capacity to harass, disrupt, and distract their adversaries using cyberspace. 

Recent attacks, such as the breach of Office of Personnel Management systems and the 

hacking of Sony Pictures Entertainment, demonstrate that no industry or sector is immune to 

this growing threat. 

According to the National Initiative for Cyber Security Education, a highly skilled 

cybersecurity force is required to secure, protect, and defend our nation’s information 

systems, networks, and infrastructure. However, the Center for Strategic and International 

Studies report, “A Human Capital Crisis in Cybersecurity,” April 2010, identified a national 

shortage of skilled cyberspace personnel. The 2015 Government Accountability Office 

High Risk Series identifies continuing concerns regarding mission-critical gaps in cybersecurity 

professionals and safeguarding federal computer systems and the systems that support 

critical infrastructure. These gaps pose a threat to the nation and to the Department’s 
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operational readiness. 

In the current environment of economic uncertainty and fiscal constraint, the Department 

faces significant challenges in staffing and training the cyber personnel it needs for the 

Cyber Mission Force. Additionally, the Department faces further challenges related to building, 

commanding and controlling, and equipping the Cyber Mission Force.

4-2B. Cyber Mission Force IG Assessment of Progress

The Commander, U.S. Cyber Command noted the Department’s progress during his March 

4, 2015 testimony before the House Armed Services, Subcommittee on Emerging Threats and 

Capabilities, but also acknowledged the Department had a long road ahead in implementing 

the Cyber Mission Force. Two years into the Cyber Mission Force build, the Service 

Components field approximately 71 of the 133 teams planned. Some fielded teams are fully 

operational and performing offensive and defensive missions, while other teams are still filling 

out manning rosters and completing training and certifications 

One of the DoD IG’s top priorities is cybersecurity and cyberspace operations. DoD IG will 

continue to assess issues affecting the Cyber Mission Force and U.S. Cyber Command’s ability 

to meet mission requirements. In 2015, the DoD IG issued a classified report concluding that 

the Service Components have been unable to effectively staff qualified Cyber Mission Force 

teams based on U.S. Cyber Command aggressive fielding schedules. Additionally, the DoD IG 

issued another classified report concluding, among other issues, that select Combatant 

Commands did not and other Combatant Commands may not have sufficient resources to staff 

their joint cyber centers, and U.S. Cyber Command was not providing sufficient 

forward-deployed support to the combatant commands. These elements are a critical 

component affecting DoD command and control decisions. The DoD IG is in the process of 

determining the adequacy of Cyber Mission Force teams’ facilities, equipment, tools, 

and capabilities.

Although U.S. Cyber Command, Service Components, the Defense Information Systems 

Agency, and Combatant Commands were making progress in building and operationalizing the 

Cyber Mission Force, recent audits show further time-sensitive actions are still needed to staff 

and train the Cyber Mission Force to effectively meet mission requirements. The Deputy 

Secretary of Defense directed actions in the Resource Management Decisions for the FY 2016 

Budget Request to better influence how the Department continues to build the Cyber Mission 

Force and meet other cyberspace-related tasks affecting the Joint Force. These actions 

demonstrate the Department’s commitment to building a fully staffed and qualified Cyber 

Mission Force.

4-2C. Cyber Mission Force Department Response

The Department acknowledges the DoD IG’s assessment.
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5. Health Care

5-1A. Health Care Cost IG Summary of Challenge

The Military Health System (MHS) must provide quality care for 9.6 million beneficiaries 

within fiscal constraints while facing increased user demand, legislative imperatives, and 

inflation. These factors make cost control difficult in the public and private sectors. Over the 

last decade, health care costs have grown substantially, and MHS costs have been no 

exception. The DoD FY 2014 appropriations for health care were $32.7 billion, which is an 

increase of about 80 percent since FY 2005. Appropriations have almost tripled since the FY 

2001 appropriation of $12.1 billion. However, the Department’s appropriations have decreased 

slightly by $16 million from FY 2013. Health care fraud is another challenge in containing 

health care costs. Health care fraud is among the top five categories of criminal investigations 

of the DoD IG’s Defense Criminal Investigative Service (DCIS). Specifically, as of March 31, 

2015, DCIS had 297 health care cases, representing 18 percent of the 1,637 open cases. 

As the MHS continues to adapt to budgetary and force transformation constraints, the 

Department must continue to provide timely access to quality medical care per established 

policies and timelines and maintain the medical readiness of the force. The Department 

reports that growing health care costs will limit its ability to fund medical readiness 

requirements. These challenges include public health, suicide prevention, mental health 

screening and treatment, access to care, pre- and post-deployment health care, medication 

management, and Reserve Component health care. The Department continues to enable the 

recovery and transition of wounded, ill, and injured service members by using Wounded 

Warriors programs and the Integrated Disability Evaluation System. Due to the drawdown in 

Afghanistan and the introduction of Operation Inherent Resolve, the Military Services will be 

challenged with “rightsizing" their medical transition programs.

5-1B. Health Care Cost IG Assessment of Progress

Ensuring Military Service members, their families, and all other eligible beneficiaries 

receive the care they need and deserve while controlling costs continues to be a challenge. 

The MHS is focusing on multiple areas to manage health care costs per capita, including 

contracting for managed-care support that provide incentives for customer satisfaction and 

fosters contractors as partners in support of medical readiness. The Department continues to 

examine how the MHS purchases health care from the private sector.

The Department identified areas that assist in managing costs, including the use of the 

TRICARE Mail Order Pharmacy program. The DoD IG reported in July 2013 that the TRICARE 

Mail Order Pharmacy Program was more cost efficient than the retail program due to the 

difference in the cost of the pharmaceuticals. The Defense Health Agency Pharmacy 

Operations Directorate implemented an aggressive communication plan to encourage the 

increased use of receiving prescription drugs through the mail to reduce costs.

The Defense Health Agency, Office of Program Integrity, conducts anti-fraud activities to 

protect benefit dollars and safeguard beneficiaries. To encourage the early identification of 

fraud, the Office of Program Integrity is proactive in detecting areas that may be vulnerable to 

fraudulent and abusive billings. In addition, the Office of Program Integrity renewed its 

Memorandum of Understanding with DCIS to provide investigative support. The Defense 

Health Agency (DHA) reported that during calendar year 2014, the Office of Program Integrity 

managed 354 active investigations, opened 229 new cases, responded to 430 Qui Tams from 

the Department of Justice, and responded to 951 leads or requests for assistance. DHA also 

reported that the Office of Program Integrity also coordinated investigative activities with 

Military Criminal Investigative Offices, as well as other federal, state, and local agencies.
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The Department continues to struggle to contain costs in TRICARE programs. The 

Pharmacy Program has seen a dramatic rise in the receipt and payment of compound drug 

prescriptions. From October 2014 to March 2015, payments for compound drugs have 

increased from $84 million to $330 million, or 300 percent over the six-month period. In 

May 2015, DHA implemented new controls to attempt to curb the costs of these drugs; 

however, these controls are not as aggressive as other federal agency and insurance company 

controls. DHA officials believe that more aggressive controls are necessary. The DoD IG 

initiated an audit in FY 2015 to review controls over compound drugs.

The DoD IG reported in November 2014 that DHA did not have adequate controls to detect 

improper payments for TRICARE claims submitted by skilled nursing facilities in the North 

region. The audit determined that 67.4 percent of FY 2013 skilled nursing facilities claims in 

the TRICARE North region (valued at $13.2 million) had insufficient documentation to support 

the claims submitted by the skilled nursing facilities. In response to the report, a DHA official 

stated that the agency would increase reviews of skilled nursing claims.

DoD IG also reported in April 2014 that DHA and its overseas contractor officials did not 

negotiate rates in any of the 163 overseas locations, which represented $238 million in health 

care payments in FY 2012. In six high-dollar locations without negotiated rates or other cost 

containment measures, TRICARE payments increased from $21.1 million in FY 2009 to $63.8 

million in FY 2012, or about 203 percent. The Department did not agree to implement cost 

containment measures for these locations, but did agree to implement cost containment 

measures, similar to rates established by the Centers for Medicare and Medicaid Services, in 

the U.S. territories. 

In addition to controlling health care costs, the Department could improve collections for 

services provided at military treatment facilities. The DoD IG issued three reports from August 

2014 through June 2015, which concluded that military treatment facilities did not actively 

pursue collections from non-DoD beneficiaries for 59 accounts valued at $9.6 million of the 75 

accounts the DoD IG reviewed. Also, the military treatment facilities did not appropriately 

transfer funds to the U.S. Treasury for 71 delinquent accounts valued at $11.3 million of the 

75 accounts the DoD IG reviewed for collection.

The MHS Quadruple Aim Concept focuses on four factors in providing quality health care to 

DoD beneficiaries: readiness, better health, better care, and lower cost. In March 2015, the 

MHS approved the following strategic focus areas for improvement: increase direct care 

primary care capacity, improve access, improve quality outcomes for condition-based care, 

and reduce patient harm. Continuing to implement the MHS Quadruple Aim Concept and 

concentrating on these focus areas should improve quality and reduce costs by focusing on 

improved care coordination and delivering care in the appropriate setting. 

5-1C. Health Care Cost Department Response

In 2009, the Department projected that by FY 2016 the Defense Health Program (DHP) 

funding requirement would be around $70 billion. The Department’s actual FY 2016 DHP 

budget request was just under $48 billion, over $22 billion less than previously projected. This 

reduction was due to a combination of factors, including historically low inflation, a declining 

beneficiary population, and specific initiatives taken in the Military Health System (MHS) to 

target rising costs. Despite our recent successes in containing costs, FY 2015 has been a 

challenge for the MHS. Exploitation of the pharmacy benefit for compound pharmaceuticals 

contributed to an estimated $1.5 billion shortfall in DHP funding, and we are seeing a gradual 

rise in medical inflation. The MHS continues to take aggressive action to increase efficiency, 

combat fraud, and reduce costs. Following are examples:

Compound Pharmacy – In May 2015, the MHS implemented aggressive screening 

processes for compound pharmaceuticals. This reduced the monthly (including Medicare 

Eligible Health Care Retirement Fund, MERHCF) compound costs from a high of $545 million in 

April to a current average of about $10 million per month. Average claim cost was also 
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reduced from a high of over $6,000 to around $300. MHS is also aggressively pursuing 

compound pharmacies and compound prescribers that appear to be have engaged in 

fraudulent and abusive activities. The Defense Health Agency (DHA) Program Integrity (PI) 

office, along with Defense Criminal Investigative Service (DCIS) and Department of Justice 

(DOJ), has opened 140 compounding fraud investigations. 

Enhanced Mail/MTF Pharmacy Initiative – Starting October 1, 2015, most 

beneficiaries in the United States will be required to refill brand name maintenance drugs 

through TRICARE Pharmacy Home Delivery or at a military pharmacy or pay full price. This is 

an expansion of the TRICARE for Life Pilot. The Department estimates this will save $88 million 

per year. 

Improper Payments to Skilled Nursing Facilities – On June 1, 2010, we began 

preauthorizing skilled nursing facility care for TRICARE dual eligible beneficiaries when we 

became primary payer on day 101 when Medicare benefits exhausted. 

TRICARE Overseas Cost Containment – In the TRICARE Overseas follow-on contract, 

we require the contractor to evaluate the feasibility of implementing fee schedules in Bahrain, 

South Korea, Turkey, Japan, and the United Kingdom. The contract deliverable is due in 

December 1, 2016. 

Improvements to Third Party Collections – The Military Health System is in the 

process of deploying a commercial-grade business system to improve our capabilities in billing 

third party payers. The Armed Forced Billing and Collection Utilization Solution (ABACUS) is 

expected to be fully deployed and operational by the first quarter of FY 2016, if not sooner. 

We have also contracted with a commercial firm to assist us in better identifying beneficiaries 

who have additional health insurance. 

Airmen secure a room during medical evacuation drills during a biannual tactical combat casualty care 

course on Ramstein Air Base, Germany. Over 20 Airmen from the 435th Contingency Response Support 

Squadron, 435th Security Forces Squadron, and 86th Medical Group participated in the training.

Photo by Senior Airman Nicole Sikorski
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6. Training and Equipping Afghan, Iraqi, and New Syrian Security Forces

6-1A. Afghan National Defense and 

Security Forces IG Summary of Challenge

The Department continues to develop the Afghan National Defense Security Force’s 

(ANDSF) capability to take ultimate responsibility for Afghanistan’s security. Challenges 

include:

• Developing ministerial capability to plan and manage resources and human capital;

• Ensuring enabling-force capabilities (combat readiness and sustainment support 

elements) are fielded prior to withdrawal of Coalition capabilities;

• Measuring and reporting ANDSF operational readiness and effectiveness;

• Professionalizing the ANDSF;

• Ensuring the ANDSF logistical system can support an independent and sustainable 

security force; and 

• Preparing for post-2016 operations.

Coalition force drawdown and retrograde have added significant challenges as ANDSF 

completes the transition to full Afghan government responsibility for security. The protracted 

2014 Afghan election caused setbacks for the U.S. and Coalition Train, Advise, and 

Assist (TAA) mission. Last year’s political impasse delayed the finalization of the Bilateral 

Support Agreement (BSA) and Status of Forces Agreement (SOFA), causing many Allies and 

operational partners to delay fulfilling their Resolute Support (RS) force commitments until a 

newly-elected government was in place, the bilateral and international agreements were 

signed, and the United States announced its own force commitments. The international 

community’s uncertainty, coupled with setbacks in forming a new government cabinet, created 

a period of comparative stagnation in ANDSF development, with some Afghan leaders hesitant 

to make necessary decisions. This political uncertainty threatened to undermine the progress 

made by the ANDSF in the security domain. Economic growth was similarly stymied by a lack 

of investor confidence in the Afghan government and its prospects for the future. 

At the same time, President Ghani and Chief Executive Abdullah committed to putting their 

country’s interests above all else when they formed the national unity government. 

Encouragingly, both leaders have proven to be amenable to cooperation with the international 

community, presenting an opportunity for the United States to deepen its partnership with 

Afghanistan. Both leaders are supportive of women’s rights and their empowerment in Afghan 

society, and both are committed to addressing the challenge of corruption, as demonstrated 

by their strong reaction to the discovery of irregularities regarding the proper award and 

execution of fuel contracts within the Ministry of Defense (MoD). However, after almost a year 

in power, the Afghan government remains in a state of flux as President Ghani and Chief 

Executive Abdullah determine how to distribute power and responsibilities, while key reform 

initiatives have been slow to be implemented. 

The unity government faces many challenges both internally and externally. The forward 

momentum of the RS campaign was stymied by delays in forming the full new 25-member 

Afghan cabinet. After months of delays, the first round of negotiated candidates was finally 

announced on January 12, 2015, and Parliament rejected more than half of those originally 

proposed, including the nominee for MoD. By April 18, 2015, Parliament had approved 24 

members of the cabinet; however, President Ghani and Chief Executive Abdullah continued to 

negotiate a new candidate for MoD as the 2015 fighting season began. On May 21, 2015, 

President Ghani nominated Mohammad Masoom Stanekzai to be the MoD, but the Afghan 

Parliament has yet to confirm the appointment. The delayed appointment has had a negative 
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effect on the ability of the Afghan security ministries to effectively support the ANDSF. 

Security Ministries. At the security ministries, RS advisors are focusing on assisting the 

Afghans in building systems and processes critical to enabling the ministries to support the 

ANDSF. These efforts have been ongoing for several years but were a secondary focus when 

the International Security Assistance Force (ISAF) was conducting combat operations; now it 

is the main effort. Moreover, the delay in confirming a new Minister of Defense, and the 

suspension of a number of senior officials over MoD fuel contract irregularities, have slowed 

capacity building efforts over the last year within the MoD. 

Although some progress was made during this reporting period, gaps in the Afghan 

security ministries’ ability to perform key functions such as fiscal planning, programming, 

budgeting and procurement, and human resource management will likely persist for some 

time, and could impede sustainment of its forces. The most critical gaps in Afghan security 

institution capacity are the lack of effective systems and repeatable processes to develop 

defense requirements properly, procure goods and services, and manage budget execution. 

The Department must continue its focus on advising and assisting the development of the 

resource management capabilities of the Ministry of Interior (MoI) and MoD. Budget planning 

and execution, training and development of human resources, increasing the ranks of civilian 

professionals, and leader emphasis on command and control of logistics are key areas for 

continued emphasis. Ensuring the capacity of the ANDSF and U.S./NATO command to 

maintain accountability and control over direct funding and equipment provided via the U.S. 

Afghan Security Forces Fund remains a key challenge. Additionally, coordination between the 

Afghan National Army (ANA), Afghan National Police (ANP), Afghan Air Force (AAF), and 

Special Operations Forces will be important to ensuring a multi-layered, long-term defense 

against insurgents and criminal syndicates. 

Enabling Force Capabilities. The 2015 fighting season is the first in which the ANDSF have 

battled insurgents without the full support of U.S. and coalition combat forces, and with very 

limited coalition air and Intelligence, Surveillance and Reconnaissance (ISR) enablers. 

Completing the fielding of “enablers,” or military capabilities essential to building ANDSF’s 

capacity to accomplish its missions, is increasingly important. Fielding and integration of 

combat and support capabilities in the ANA and ANP will remain a priority. 

Overall, the ANDSF’s most critical gaps remain in aviation, intelligence, and special 

operations, all linked to the ANDSF’s targeting capability. These gaps will endure for some 

time, even with the addition of key enablers. RS advisors are also working to address 

developmental shortfalls in the areas of logistics, medical support, and counter-IED 

exploitation. In general, the ANDSF are better trained and equipped than insurgent forces, and 

continue to demonstrate tactical proficiency as they work together across security pillars. 

When the ANA and ANP collaborate, they have proven that they can defeat the insurgents 

when challenged.

Maximizing the ability to employ, sustain, and maintain critical equipment, coupled with 

the identification and promotion of capable leaders, is a near-term focus for Afghan and 

coalition leadership to maximize ANDSF effectiveness in the 2016 fighting season and 

beyond. Higher operational rates and challenges, including the likelihood of high ANDSF 

casualties and attrition, logistics sustainment and maintenance issues, and the ANP’s inability 

to “hold” cleared areas after the ANA offensives will continue to detract from ANDSF 

operational effectiveness. 

Logistics remains a challenge for the ANDSF that has been exacerbated by a diminished 

Coalition presence in the field. Since U.S. and Coalition forces historically have ordered 

supplies for the ANDSF, Afghan personnel have little experience doing it themselves. Efforts 

are focusing on improving the Afghan MOD and MOI’s ability to identify requirements. One of 

these efforts involves development of an upgrade to CORE IMS - the Afghan’s primary logistics 

automation system – that will assist in projecting requirements based on actual usage. Other 

efforts have focused on cataloging, parts manuals, and logistics training. It is important that, 

with advisor support, logistics responsibilities and decision making be transitioned to the 
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Afghans. In many cases, reported shortages in operational units typically result from the 

ANDSF’s underdeveloped logistics system rather than actual system-wide supply shortages. 

Coalition officials are working Afghan security leaders to address essential logistics functions, 

but progress is incremental.

Additionally, the Afghan ministries’ procurement systems have not yet matured in terms of 

efficiency and internal controls. The fuel scandal in January 2015 brought almost all ANDSF 

procurement to a temporary halt. This does not, however, affect the buying of military 

equipment and parts, which DoD procures through the Foreign Military Sales System, using 

money from the Afghan National Security Forces Fund. The Afghans’ procurement system has 

been limited to fuel, fuel, firewood, facility maintenance, and other locally produced supplies. 

The Afghans are being taught to effectively use the US Foreign Military Sales System to obtain 

needed equipment and supplies. The primary means of supporting the ANDSF has always 

been through the US Foreign Military Sales system. As we transition to a normalized security 

cooperation relationship with Afghanistan, expectation is that the Afghans will continue to use 

the US Foreign Military Sales system as one of the primary means of obtaining needed 

equipment and supplies. It is particularly critical that we expedite the development of the 

Afghan capability to take ownership of the development of requirements needed to support 

executable Foreign Military Sales cases. 

Assessment of ANDSF Progress. Assessing capabilities and identifying capability gaps 

will become more difficult during Coalition force withdrawal. The Department’s ability to 

determine the operational readiness and effectiveness of ANSF units is diminishing as the 

number of partner units and advisors continue to decrease. The challenge is to ensure 

sufficient skilled and qualified advisors are in key positions to continue assessing and 

developing ANSF leadership, command and control, logistics, and accountability capabilities, 

and critical units. 

Professionalization. The Department must continue to support ANDSF’s current efforts 

to professionalize the force. Command reports show recruitment and management of initial 

training at the enlisted and officer levels are becoming ANDSF strengths. Developing quality 

leadership, managing effective training at all army and police levels, providing career 

development opportunities, and maintaining accurate personnel and pay records have all been 

identified as areas requiring a sustained effort necessary to build a professional army and 

police force.

Post-2016 Operations. The President recently announced plans to maintain the current 

force of 9,800 uniformed personnel, plus civilian and contract staff, in Afghanistan through 

2016 and into 2017, drawing down to 5,500 uniformed personnel, plus civilian and 

contractors, in 2017. Subsequently, a new Defense Security Cooperation Management 

Office (DSCMO) office is expected to be established using DoD funding authority versus more 

traditional funding authority from the Department of State. Its function will be to plan, 

develop, and execute a mission to replace Operation Freedom’s Sentinel to oversee Afghan 

Security Forces Fund expenditures, and continue to build long-term Afghan capacity through 

2024. Organizing the DSCMO will require careful advance planning within the Department, 

other agencies, and especially with the Department of State and U.S. Mission Kabul to 

accomplish this new mission with substantially fewer military forces. The Department will need 

to ensure the DCSMO is staffed appropriately with the advisory skill sets necessary to assist 

the ANDSF further develop its still lagging operational and institutional capabilities. 

6-1B. Afghan National Defense and 

Security Forces IG Assessment of Progress

The Coalition is monitoring the performance of ANDSF in the first fighting season against 

stiff Taliban resistance without the support of a Coalition combat presence in Afghanistan. The 

Coalition emphasis on ANDSF development has shifted from building its forces to assisting the 
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Afghans in professionalizing and ensuring systems are developed and in place to manage 

fiscal, personnel, and equipment resources accountably and sustainably. 

Ministerial development is a primary emphasis, and the Coalition is increasing resource 

management training for MoD and MoI personnel. Ministerial advisors are delivering 

assessments of the security ministry departments, reporting departmental setbacks as well as 

successes, and planning and revising training milestones and objectives as necessary. 

Additional advisors are arriving to complement the ministerial and general staff advisory 

capacity and to accelerate progress. 

The shortage of qualified army and police volunteers with sufficient education remains a 

challenge for ANDSF, especially as its casualty rate has increased over the past year. 

Nevertheless, ANDSF continues to support human capital development and training, including 

for literacy. 

The ANDSF has taken more responsibility for its own training. Coalition reports confirm 

that the number of Afghan trainers has increased steadily over time, easing the burden on the 

Coalition Forces to provide military and civilian trainers. Reportedly, ANDSF is also managing 

its non-commissioned officer (NCO) and officer ranks more aggressively, for example, by 

taking action to meet ANP and ANA non-commissioned officer shortages by training and 

promoting qualified and experienced enlisted soldiers and junior NCOs. 

Importantly, operational readiness and effectiveness, and self-reliance, of the ANA and 

ANP continue to show overall improvement. However, with the decrease in advisor teams and 

advisor resources at the Corps and Police Headquarters levels and below, Coalition forces have 

had to shift to using Afghan reporting to understand ANDSF capabilities. Challenges remain in 

getting reliable data from the ANDSF self-assessment tool.

Continued financial support from the international community depends upon a transparent 

and accountable Afghan resource management process that enables oversight by third party 

organizations. Resolute Support priorities include developing an advisor network to encourage 

leaders of the Afghan security ministries to embrace transparent and accountable processes 

while providing effective oversight. The absence of effective internal control processes 

increases the risk of poor management and the existence of corrupt practices, depriving the 

ANDSF of vital resources and could lead to reduction in international contributions over time. 

DoD has deployed a team to Afghanistan to assist the Afghans in improving the current MOD 

and MOI payroll systems and improve funds accountability. 

In April 2015, the acting Minister of Defense signed the Ministerial Internal Controls 

Program (MICP), as well as an anti-corruption policy, to address this shortfall, and it is being 

implemented within the MoD. RS advisors assisted with developing MICP guidelines, which is 

leading to introduction of process maps, auditing plans, and the development of effective and 

sustainable control processes for items such as fuel, ammunition, salaries, and food. The new 

MoD Inspector General (IG), as well as the ANA General Staff IG, accepted responsibility and 

leadership for the implementation of MICP and adopted a leadership role in the transparency, 

accountability, and oversight forums, such as the Counter Corruption Working Group and the 

Senior High Commission Anti-Corruption Council. In addition, the Combined Security Transition 

Command is pressing forward on finding savings in Afghan Security Force Funds that could be 

used to bolster fiscal resources needed for now to sustain the ANDSF at its current level of 

352,000 army and police personnel. 

6-1C. Afghan National Defense and 

Security Forces Department Response

The Department acknowledges the DoD IG’s assessment.
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6-2A. Iraqi and New Syrian 

Security Forces IG Summary of Challenge

At the direction of the President, the United States is pursuing a strategy to degrade and 

ultimately defeat the Islamic State of Iraq and the Levant (ISIL). In September 2014, the 

President articulated an approach to accomplish this strategy that involves nine separate lines 

of effort: supporting effective governance in Iraq, denying ISIL safe haven, building partner 

capacity, enhancing intelligence collection against ISIL, disrupting ISIL’s finances, exposing 

ISIL’s true nature, disrupting the flow of foreign fighters, protecting the Homeland, and 

providing humanitarian support. The Department has responsibility for two lines of effort: 

denying safe haven and building partner capacity. 

To support these two lines of effort, the Department has committed to the development of 

the Iraqi Army and the New Syrian Forces to fight ISIL. However, the onslaught of the ISIL 

advance reduced the Iraqi Army to 10 of its former 14 Divisions. While the Government of 

Iraq (GoI) is recruiting and training new personnel, it lacks the rapid ability to professionally 

train and equip the forces required to conduct counter-offensive operations, and it needs U.S. 

and Coalition assistance. While the trend on the battlefield has been promising in stemming 

ISIL gains, ISIL remains a potent force. The GoI currently lacks the military capacity to field 

sufficient and effective forces needed to regain much of the lost territory, protect the 

population and threatened critical infrastructure, and drive ISIL out of the country. 

To successfully conduct counter-offensive operations with Coalition support, the GoI has 

initially committed to training, equipping, and fielding three Iraqi Army Divisions (nine 

Brigades), three Kurdish Brigades, and Tribal Forces, which could comprise eventual Iraqi 

National Guard brigades. The focus of DoD efforts is to work with, by, and through the GoI to 

build the necessary military capability to counter ISIL. The Department requested and 

received approximately $1.6 billion to provide assistance to military and other security forces 

of, or associated with, the GoI, including Kurdish and tribal security forces. 

While initial plans called for spending $500 million to train Moderate Syrian Opposition 

fighters to become part of the New Syrian Force, the program has recently been suspended 

pending further evaluation and consideration of options. 

6-2B. Iraqi and New Syrian 

Security Forces IG Assessment of Progress

While U.S./Coalition Forces are pursuing this train, advise, and assist mission with selected 

Iraqi Army and Tribal Forces, the overall condition of the Iraqi Army, coupled with weak 

personnel recruiting, poor leadership, bureaucratic inertia, and corruption, presents challenges 

to building an effective GoI security force capable of carrying out the mission to defeat ISIL in 

Iraq.

The Department recently suspended the New Syrian Forces training program, after having 

trained a very small number of personnel. One particular challenge was the rigorous vetting 

process required by various aspects of U.S. law, which limited the number of eligible recruits. 

6-2C. Iraqi and New Syrian 

Security Forces Department Response

The Department acknowledges the DoD IG’s assessment.
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7. The Nuclear Enterprise

7-1A. Managing the Risks between 

Sustainment, Modernization, and 

Strategic Force Reduction

IG Summary of Challenge

The President is committed to maintaining safe, secure, and effective nuclear forces while 

reducing the strategic nuclear forces in accordance with the New Strategic Arms Reduction 

(START) Treaty. The Department must balance the sustainment of legacy systems and the 

reduction of strategic forces while continuing investments to modernize essential nuclear 

delivery systems; warning, command, and control; and in collaboration with the Department 

of Energy, nuclear weapons and supporting infrastructure. Survivability, reliability, 

accountability, and production infrastructures become critically important with the reduction of 

overall numbers of nuclear weapons and delivery platforms.

7-1B. Managing the Risks between 

Sustainment, Modernization, and 

Strategic Force Reduction

IG Assessment of Progress

The Department’s efforts in managing the risks between sustainment, modernization, and 

strategic force reduction will continue to be a challenge. Sustainment of legacy systems is one 

of the most pervasive problems in the nuclear enterprise. The Department must focus on 

sustainment challenges. If not addressed, sustainment challenges will overtake any 

improvements or enhancements the Department intends to make in the near term.

Significant uncertainties exist in today’s threat environment. U.S. deterrence and 

assurance strategies must be adaptable to counter unpredictable strategic and regional 

threats. New platforms must be adaptable to deter emerging threats well into the future. For 

example, Ohio-class replacement ballistic missile submarines are scheduled to be deployed 

until the 2080s. However, fragmented leadership and advocacy has hindered the Department’s 

ability to synthesize efforts to ensure the arrival at an adaptable force after strategic 

reductions. 

Aging infrastructure and the constraints of the Budget Control Act put both the legacy 

system and the replacement program at risk. Additionally, senior Air Force leaders accepted 

the risk of not meeting national security requirements without the knowledge of Combatant 

Commands or the Joint Chiefs of Staff. 

The lack of Service focus on aging infrastructure and risk management without the 

knowledge of DoD senior leadership is a trend throughout most of the DoD IG’s recent nuclear 

enterprise reports. 

7-1C. Managing the Risks between 

Sustainment, Modernization, and 

Strategic Force Reduction

Department Response

Ensuring a safe, secure, and effective nuclear enterprise is the top priority of the 

Department, and the Department is committed to aggressively managing the risks between 

sustainment and modernization of the nation’s nuclear forces.

The constraints of the Budget Control Act place many DoD programs at risk, not just 
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nuclear force programs such as Minuteman III. The Air Force has defined Ground Based 

Strategic Deterrent (GBSD) as the replacement to MM III and is proceeding towards Milestone 

A in FY 2016. The President’s FY 2016 budget request includes a new GBSD Program Element 

with resources to continue work on guidance, propulsion, and weapon system integration. The 

Air Force is also preparing for launch system, command and control, and flight systems 

Technology Maturation and Risk Reduction activities (after Milestone A) with resources 

identified in FY 2017-2020, to include continuing funding beyond the Future Years Defense 

Program (FYDP). For the legacy Minuteman III system, the FY 2016 budget request includes 

investments to sustain the weapon system, with additional funding projected to ensure 

Minuteman III remains effective through GBSD fielding.

As part of DoD’s Program and Budget Review process, senior leadership throughout the 

Department, to include the Air Force, jointly assesses risks for national defense requirements. 

The DoD oversight process remains keenly focused on nuclear enterprise risks at the Service, 

Combatant Command, Joint Chiefs of Staff, and Secretary of Defense levels. In addition, the 

President’s FY 2016 budget request includes an additional $8 billion across the FYDP, 

compared to the FY 2015 budget, for sustainment and modernization of all nuclear forces. 

The Secretary of Defense, as specified in Section 1043 of the National Defense 

Authorization Act for Fiscal Year 2012, annually reports to Congress sustainment issues and 

modernization plans for the nuclear weapons stockpile, nuclear weapons complex, nuclear 

weapons delivery systems, and nuclear weapons command and control systems.

7-2A. Modernizing Our Nuclear Forces 

to Meet Future National Security 

Needs

IG Summary of Challenge

The United States’ nuclear deterrent is an amalgamation of terrestrial, aerial, and 

space-based sensors; assured command and control, the triad of delivery systems, nuclear 

weapons and supporting infrastructure; and most importantly, trained and dedicated people. 

The triad of delivery systems was modernized twice -- once in the early 1960s and once in the 

1980s. The average warhead today is over 27 years old. Every one of the systems, including 

the various elements of the Nuclear Command, Control, and Communications (NC3) system, 

will require significant modernization or replacement in the next two decades.

7-2B. Modernizing Our Nuclear Forces 

to Meet Future National Security 

Needs

IG Assessment of Progress

Although the Department is far from attaining an acceptable level of risk in the nuclear 

enterprise, it has made progress. The DoD senior leadership has increased the emphasis on 

achieving this goal. 

The President’s FY 2016 budget begins to reduce the accumulated risk because of deferred 

maintenance and sustainment, but there is little to no margin for error. The 

Department must balance the sustainment of legacy systems with modernization to ensure 

national security capabilities are met. Even though the President’s budget requests 

$142 billion to recapitalize, sustain, and modernize the nuclear enterprise over the next five 

years, the Department must ensure consistent focus to align acquisition schedules for new 

platforms and their associated weapons. 

Long Range Strike Bomber (LRS-B): The LRS-B is funded and in the acquisition cycle. 

However, the Senate Armed Service Committee recently removed $460 million from the 

program. The Air Force still has not committed to ensuring the first bomber variant will be
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nuclear capable, which could lead to additional investment to sustain the aging dual-capable 

B-52 and B-2 bombers. 

Ohio Class Submarine Replacement: The current Ohio class of ballistic missile submarines 

(SSBN) were commissioned between 1984 and 1997, and their lifetime has been extended 

from 30 to 42 years -- unprecedented for a nuclear submarine. No further extension is 

possible and maintaining operational availability is a concern. Even though the first Ohio 

replacement will begin its first strategic patrol in 2031, the current SSBNs must be sustained 

until the last hull is decommissioned in 2040. 

National Airborne Operations Center (NAOC) E-4B: Aircraft availability has not met mission 

needs over the last three and a half years. The cost to sustain the airframe will continually 

increase as commercial airlines continue to retire the 747-200 fleet and spare parts are 

depleted. Age-related maintenance issues have led to extended depot periods and a 

replacement program has yet to be identified.

Integrated Tactical Warning and Attack Assessment (ITW/AA): The ITW/AA enterprise’s 

mission is to provide timely, accurate, and unambiguous warning of air, missile, and space 

attacks against North America to the U.S. President, the Prime Minister of Canada, and the 

Chairman of the Joint Chiefs of Staff, Combatant Commands, and other forward users. The 

ITW/AA is composed of Air and Space Missile Warning Missions, with sensors and forward 

users located worldwide, and at correlation centers at Peterson AFB, Cheyenne Mountain AFS, 

Offutt AFB, and Vandenberg AFB. Portions of this legacy system are unsustainable, and plans 

for replacement systems have been delayed. 

Minuteman III/Ground Based Strategic Deterrent: The National Defense Authorization Act 

of 2007 directed the Air Force to sustain the Minuteman III (MMIII) ICBM until 2030. Even 

though the MMIII has received several generations of sustainment and modernization, the 

supporting infrastructure is aging to the point of becoming unsustainable. The Air Force must 

balance investment between the legacy system and the new GBSD, follow-on to the MMIII. 

Air Launched Cruise Missile/Long Range Stand-Off (ALCM/LRSO): The LRSO effort will 

develop a weapon system to replace the Air Force's ALCM, operational since 1986. However, 

an independent cost estimate depicted higher LRSO development and integration costs than 

the original Resource Management Decision funding. The FY 2015 Presidential Budget Request 

included a decision to defer the program three years, resulting in a four-year delay due to 

unexecutable funds and programmatics. 

Nuclear Command, Control, and Communications (NC3): The NC3 system is a large and 

complex system-of-systems comprised of numerous land, airborne, and space-based 

components used to assure connectivity between the President and nuclear forces. The NC3 

system remains a primary concern for Congress. The National Defense Authorization Act of 

2014 directed the establishment of the Council on Oversight of the National Leadership 

Command, Control, and Communications System. The Council is responsible for oversight of 

the command, control, and communications system for the national leadership of the United 

States. Specific responsibilities include oversight of performance assessments (including 

interoperability), vulnerability identification and mitigation, architecture development, and 

resource prioritization. However, most systems are controlled by separate entities to include 

different program offices, program element offices, and even different Major Commands. 

7-2C. Modernizing Our Nuclear Forces 

to Meet Future National Security 

Needs

Department Response

Ensuring a safe, secure, and effective nuclear enterprise remains the top priority of the 

Department, and the Department remains firmly committed to modernization. The President’s 

FY 2016 budget request includes an additional $8 billion across the FYDP, compared to the 
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FY 2015 budget, for sustainment and modernization of all nuclear forces. 

 The Air Force has defined Ground Based Strategic Deterrent (GBSD) as the replacement 

to MM III and is proceeding towards Milestone A in FY 2016. The President’s FY 2016 budget 

request includes a new GBSD Program Element with resources to continue work on guidance, 

propulsion, and weapon system integration. The Air Force is also preparing for launch system, 

command and control, and flight systems Technology Maturation and Risk Reduction activities 

(after Milestone A) with resources identified in FY 2017-2020, to include continuing funding 

beyond the FYDP. For the legacy Minuteman III system, the FY 2016 budget request includes 

investments to sustain the weapon system, with additional funding projected to ensure 

Minuteman III remains effective through GBSD fielding.

The FY 2016 budget request recovers two years of the three-year Long Range Standoff 

(LRSO) cruise missile deferment from the 2015 budget. In addition, the Air Force is planning 

for Milestone-A acquisition decisions for both GBSD and LRSO in FY 2016, which will include 

development of Independent Cost Estimates.

Due to delays in awarding the LRS-B contract, the Senate Armed Services Committee 

removed $460 million from the program in FY 2016 in order to properly phase funding with 

program execution. The LRS-B is being built with features and components necessary for the 

nuclear mission to ensure the nuclear certification effort completes within two years after 

conventional initial operational capability in accordance with the FY 2013 National Defense 

Authorization Act. The LRS-B requirements for the nuclear mission have been validated by the 

Joint Requirements Oversight Council.

In early 2015, the Deputy Secretary directed an end-to-end review of the National 

Leadership Command Capability (NLCC) and Nuclear Command, Control, and Communications 

(NC3) enterprise. This review was led by DoD Chief Information Officer, Joint Staff, and United 

States Strategic Command (USSSTRATCOM) experts and provided findings and 

recommendations that drove near-term improvements and supported priority investment 

decisions. 

Through the NLCC and NC3 Capability Planning Guidance (CPG), Services and Agencies 

are directed to fund continuing sustainment and modernization efforts, including E-4B and 

Integrated Tactical Warning/Attack Assessment (ITW/AA) systems.

The Council on Oversight of the National Leadership C3 System (NLC3S) 2014 annual 

report to Congress identified critical NLC3S sustainment and modernization programs 

endorsed by DoD senior leadership. The Council has ensured proper oversight and sufficient 

resources for Nuclear Command, Control, and Communications (NC3) modernization, and the 

Council is working to better integrate the activities of DoD entities to improve NC3 system 

capabilities.

7-3A. Lack of an Integrated 

End-to-End Governance Process IG Summary of Challenge

Collaborative decision structures do not exist to provide strategic direction or manage 

cross-cutting risks across the Department’s nuclear weapon enterprise. Existing forums remain 

isolated from one another, leading to unclear and ambiguous lines of reporting, accountability, 

and responsibility. 

7-3B. Lack of an Integrated 

End-to-End Governance Process IG Assessment of Progress

Despite the current challenges in the DoD nuclear enterprise, the Department is focusing 
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on progress and bringing senior leader focus to nuclear issues that need attention. In 2014, 

Secretary Hagel directed two reviews of the DoD nuclear enterprise. The reviews concluded 

that there is no coherent, integrated structure and synchronized set of activities characterized 

as a DOD nuclear enterprise. Instead, the Review found a loose federation of separate nuclear 

activities often embedded in and indistinguishable from support for and execution of a wide 

range of non-nuclear activities. The reviews also found that the forces are meeting the 

demands of the mission with dedication and determination. However, the Sailors, Airmen, and 

Marines are paying an unsustainable price with the increasing difficulty. In response to the 

findings, Secretary Hagel created the Nuclear Deterrent Enterprise Review Group to help 

maintain senior-level focus on the nuclear mission, and to integrate all the elements of the 

nuclear force into a coherent enterprise. The Secretary also directed the Office of the 

Secretary of Defense, Cost Analysis and Program Evaluation, to monitor the implementation of 

the review’s recommendations. This notable change and sustained efforts will reduce the risk 

to the DoD nuclear enterprise. 

Section 171 of the National Defense Authorization Act for Fiscal Year 2014 directed the 

Department to establish the Council on Oversight of the National Leadership Command, 

Control, and Communications System (the Council). Section 171 directs the Council to be 

responsible for oversight of the command, control, and, communications system for the 

national leadership of the United States, including nuclear command, control, and 

communications. Assessing the effect of the Council is premature, but the commitment of 

resources by senior leadership to identify and correct deficiencies will likely have a very 

positive long-term effect.

The 2010 Nuclear Posture Review and the 2013 Report on Nuclear Employment Strategy 

of the United States state the key objectives of U.S. nuclear weapons policy. The 2010 

Strategic Concept and the 2012 Deterrence and Defense Posture Review outline U.S. and 

NATO nuclear capabilities for deterrence and defense. Finally, the New START Treaty verifiably 

reduces and limits the strategic arsenals of both the U.S. and Russia, and is consistent with 

the U.S. objective of maintaining strategic stability at reduced force levels. With isolated 

exceptions, these policies lack coordinated, implementing guidance. Further, no governance 

structure exists to analyze the aggregate risk and to monitor implementation for unforeseen 

consequences.

Collaboration among U.S. nuclear weapon stakeholders is paramount to ensure a unified 

effort to meet national security requirements. Although the Nuclear Weapons Council—, which 

serves as the focal point of DoD and National Nuclear Security Administration (NNSA) 

interagency activities to maintain the U.S. nuclear weapons stockpile—carries out its statutory 

and regulatory responsibilities in a number of ways, the Council faces challenges in doing so. 

The Council does not have an up-to-date agreement that reflects the processes it uses to 

carry out its responsibilities. The 1997 memorandum of agreement between the Department 

and the Department of Energy that guides the Council’s efforts has not been updated, 

although the Council’s responsibilities were expanded in 2013, and the 1997 memorandum 

does not define the roles, responsibilities, structure, and functions of the two support 

committees that conduct the Council’s day-to-day operations. 

Without an updated memorandum of agreement that describes Council processes, it may 

be difficult for the Council to provide greater clarity to support committee members on how 

their work is to be conducted. Second, a key consideration when implementing collaborative 

mechanisms is whether all relevant participants have been included in the effort. For example, 

DoD and NNSA budget and program evaluation officials are not required to attend Council 

support committee meetings. DoD budget and program evaluation officials are invited and 

generally attend, but NNSA budget and program evaluation officials generally do not attend 

because they are invited at the discretion of NNSA support committee members. Without a 

requirement that all relevant participants consistently attend all support committee meetings, 

the Council may be limited in its ability to manage and respond to unanticipated budget 

questions as they arise at meetings.
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7-3C. Lack of an Integrated 

End-to-End Governance Process Department Response

Modernization and sustainment of safe, credible, and effective nuclear forces involves 

disciplined, complex, and inter-agency processes. The Department concurs with the IG’s 

assessment, and the Department continues to explore and implement improvements to the 

governance process. 

The Council on Oversight of the National Leadership Command, Control, and 

Communications (C3) System is informed by numerous cross-community subordinate working 

groups and integrated process teams, including groups working on crypto modernization, 

cyber risk assessment, low frequency/very low frequency communications, Presidential and 

National Voice Conferencing, and Senior Leader C3 System. These subordinate groups, 

working through the National Leadership Command Capability (NLCC) Senior Steering Group 

and the NLCC Executive Management Board, review, validate, prioritize and recommend 

capabilities for NLCC resourcing, architecture roadmaps, assessments, and vulnerability 

mitigation. The process also includes a working group that reviews Service and Agency budget 

submissions and, as necessary, recommends high-priority additions to their Program Objective 

Memorandums. This robust oversight and governance process resulted in significant NLCC and 

Nuclear Command, Control, and Communications (NC3) resourcing gains in the 2016 

Presidential Budget Submission, as well as successfully appealing to Congressional defense 

committees against 2016 marks to NLCC/NC3 programs.

Based on input from the Council on Oversight of the National Leadership C3 System, as 

well as a recommendation from the National Leadership Command Capability (NLCC)/NC3 

Enterprise Review, the Air Force is in the process of assigning a single Major Command as the 

overall lead for the NC3 System. Additionally, the Air Force plans to designate the NC3 

System as a weapon system to consolidate program elements. The Council receives briefings 

and progress towards this goal is being tracked and briefed to the Council.

Lastly, the Nuclear Weapons Council (NWC) is in the process of updating its memorandum 

of agreement between the Department of Defense and the Department of Energy.

The coastal patrol ship USS 

Firebolt (PC 10) fires a Griffin 

missile during a test and 

proficiency fire in the Persian 

Gulf. Commander, Task Force 

55 supported maritime security 

operations and theater security 

cooperation efforts in the U.S. 

5th Fleet area of responsibility. 

Photo by Mass Communication 

Specialist 1st Class Joshua 

Bryce Bruns
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8. IG-Identified Challenge: Insider Threat

8-1A. Security (information, physical, 

personnel) and Counterintelligence. 

Access, clearances, continuous 

evaluation, continuous monitoring, 

unauthorized disclosure, espionage.

IG Summary of Challenge

The past several years have seen significant damage done to the Department – and 

indeed, the wider US Intelligence Community and Homeland Security – by trusted DoD 

“insiders.” Recent incidents such as Chelsea Manning’s unauthorized disclosures via WikiLeaks, 

Edward Snowden’s revelation of highly classified NSA and military information to the media, 

and the Fort Hood and Washington Navy Yard shootings are only the most visible, high impact 

instances of the destruction brought about by current or former DoD employees or 

contractors. 

As defined in DOD Directive 5205.16, an Insider Threat is, “[t]he threat an insider will use 

her or his authorized access, wittingly or unwittingly, to do harm to the security of the United 

States. This can include damage to the United States through espionage, terrorism, 

unauthorized disclosure of national security information, or through the loss or degradation of 

departmental resources or capabilities.” The threat posed by DoD insiders has been recognized 

at the highest levels of both the Department and the Executive Branch. In October 2011, 

Executive Order 13587 established the National Insider Threat Task Force, requiring Insider 

Threat detection and prevention programs at every federal agency that handles sensitive or 

classified information; specific policy guidance and minimum programmatic standards were 

released in November 2012 via Presidential Memorandum. Congress has acknowledged the 

gravity of the Insider Threat at the Department and has mandated that the Department 

improve information sharing protections and Insider Threat mitigation for DoD information 

systems (Section 922, FY 2012 NDAA). 

To address the widely varied and remaining vulnerabilities, multiple DoD directives and 

instructions were codified since 2013, including naming the Under Secretary of Defense for 

Intelligence (USD(I)) as the Senior Official responsible for insider threat matters and releasing 

the highly anticipated DoD Insider Threat Program policy directive (DoD Directive 5205.16, 

September 30, 2014). As a result, even before the Snowden disclosures and Washington Navy 

Yard shootings, the DoD Chief Information Officer submitted a Report to Congress on Insider 

Threat Detection (March 29, 2013), detailing the results of extensive DoD reviews of the 

Department’s posture, policy, and measures taken to identify and mitigate the Insider Threat. 

Despite the significant personnel and financial resources directed at Insider Threat across the 

federal government, the Executive Office of the President continues to stress the need for 

reform, releasing a memo via the Office of Management and Budget in July 2014 which stated 

that “agencies should focus on efforts to improve infrastructure permitting, and on 

implementing insider threat and security clearance reform.”

Over the past two years, the Department has invested significant resources into evaluating 

and resolving Insider Threat issues. For instance, USD(I) released a memo in May 2014, 

directing DoD agencies to update and cross-reference personnel data in the Joint Personnel 

Adjudication System (JPAS)/Defense Central Index of Investigations (DCII)/Scattered Castles 

as recommended in DOD IG Report 2014-060. In December 2014, the USD(I) mandated that 

the Defense Security Service (DSS) would establish, staff, and operate the Defense Insider 

Threat Management and Analysis Center (DITMAC). The Center is scheduled to begin 

operating in FY 2016. 

Despite the distribution of multiple Presidential, Congressional, and Departmental 

guidance and requirements – and the actions the Department has taken over the past two to 

three years – the Department still lags behind many other federal and IC agencies in 
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identifying and mitigating the Insider Threat, which leaves DoD personnel, information, and 

mission attainment vulnerable to insider threats. To complicate matters, the nature of an 

Insider Threat continues to evolve. It is unrealistic to believe that the Department can plan for 

every possible contingency; however, it is crucial that the Department prioritize, aggressively 

pursue, and monitor initiatives to improve prevention, detection, and mitigation policies and 

processes. 

8-1B. Security (information, physical, 

personnel) and Counterintelligence. 

Access, clearances, continuous 

evaluation, continuous monitoring, 

unauthorized disclosure, espionage.

IG Assessment of Progress

The Department is poised to manage Insider Threat risks at the enterprise-level via 

establishment of the Defense Insider Threat Management and Analysis Center (DITMAC). The 

USD(I), as the DoD Senior Official for Insider Threat, formally assigned responsibility for 

establishing, manning, and operation of the DITMAC to the Defense Security Service (DSS) in 

mid-December 2014. The DITMAC, composed of a cross-functional team of security, 

counterintelligence, cybersecurity, law enforcement, human resources, adjudicative, legal, and 

privacy personnel will gather, integrate, analyze, and respond to hard copy or electronic 

information that is indicative of a potential insider threat. DoD IG will review mandatory 

quarterly updates from DSS to USD(I).

In mid-2014, the USD(I) also mandated that the four Defense intelligence agencies –

National Reconnaissance Office, National Security Agency, National Geospatial-Intelligence 

Agency and Defense Intelligence Agency – initiate personnel security clearance reform. 

Specifically, information should be entered, indexed, and shared timely to allow for 

identification of potential insider threats as well as material changes for an employee or 

contractor’s access to classified information. DOD IG will follow up with USD(I) to determine if 

the four agencies responded. We will also identify successes, lessons learned, and remaining 

obstacles to cross-referencing and indexing of insider threat information. 

8-1C. Security (information, physical, 

personnel) and Counterintelligence. 

Access, clearances, continuous 

evaluation, continuous monitoring, 

unauthorized disclosure, espionage.

Department Response

The Department recognizes that its implementation of an enterprise-level insider threat

program has not matched the pace of implementation observed in some other departments 

and agencies in the Executive Branch. However, the disparity noted is likely dictated by the 

overall scope of effort the Department must undertake. The Department has been extremely 

active, implementing several measures to establish a comprehensive insider threat program.

These actions include: The Deputy Secretary of Defense designating the Under Secretary of 

Defense for Intelligence (USD(I)) as the DoD Senior Official for Insider Threat; the publication 

of a DoD Directive on insider threat; the publication of a DoD Instruction addressing the 

counterintelligence aspects of insider threat; forming a dedicated staff within the Office of the 

USD(I) to manage the DoD insider threat program at the enterprise level; including resource 

recommendations for the insider threat program into current and future program budget 

review cycles; creating a DoD-wide Insider Threat Working Group to address issues, find 

solutions, and share information; and developing a detailed implementation plan which 

provides program managers definitive guidance as they establish insider threat programs in 43 
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separate DoD Components. That plan will be signed during the first quarter of CY 2016.

Furthermore, the Department continues to make progress on the challenging task of 

identifying insiders on our information networks. This is accomplished through the 

implementation of tools and policies to detect and mitigate insider actions before they can 

negatively affect DoD resources. The Department is employing a risk-based approach to user 

activity monitoring by focusing on our most critical classified networks first. Many of the DoD 

Intelligence Community Components have fully implemented network monitoring and the 

Department is pursing commercial solutions to provide this monitoring to all Geographic 

Component Commands. Additionally, the Department has made insider threat a separate line 

of effort in the latest DoD Cyber Strategy emphasizing its importance in how we defend our 

information. The Department has also assigned a senior executive as the DoD Liaison Officer 

to the National Insider Threat Task Force to further enhance the partnership between the two 

organizations. 

The Department has also integrated insider threat as a key focus area in multiple working 

groups, lessons-learned forums, training initiatives, and a variety of web-based information 

portals. This emphasis and exposure will generate interest in the inherent threat and promote 

discussion on future solutions. In a related effort, the DoD Mission Assurance Coordination 

Board will enhance its oversight of steps taken by Components to improve the monitoring of 

recommendations implemented from the 2009 Fort Hood and the 2013 Washington 

Navy Yard shootings.

On December 12, 2014, the USD(I) directed the Director, Defense Security Service (DSS), 

to incubate the DITMAC. The DITMAC’s specified responsibilities include an enterprise-level 

management capability enabling OSD-level oversight of DoD Components’ insider threat 

responsibilities while ensuring Department-wide awareness for specific threshold-level insider 

threat events. DITMAC operations, metrics, and case studies will inform, support, and enable 

the (USD (I))’s management and oversight of the Department’s insider threat program. The 

DITMAC is projected to reach initial operational capability in October 2015 and full operational 

capability in the first quarter of FY 2019. In accordance with DoD Directive 5205.16, “The DoD 

Insider Threat Program,” DoD Component insider threat programs will also establish and 

maintain a multi-disciplinary threat management capability to conduct and integrate the 

monitoring, analysis, reporting, and response to insider threats. The Component threat 

management elements will implement reporting channels with the DITMAC to facilitate the 

prompt exchange of information arising from the analysis process. These linkages will further 

ensure that the Department quickly reviews critical data regarding an adjudicative matter or 

security incident and takes swift action if warranted. The DITMAC role and responsibilities 

have been codified in a DoD Instruction that is undergoing coordination within the 

Department.

Separately, the Department has taken steps to implement a system of continuous 

evaluation for DoD personnel who have access to classified information. This effort will use 

automated records checks of authoritative commercial and government data sources to note 

issues of personnel security concern and supplement existing security processes to more 

quickly identify and prioritize information of adjudicative relevance and adverse events that 

occur between periodic reinvestigations. Currently, the Department is conducting pilots to 

validate the evaluation process and refine it to enhance performance. When fully endorsed by 

the Office of Personnel Management (OPM) and the Office of the Director of National 

Intelligence, our continuous evaluation system will relieve DoD and OPM of conducting 

personnel security investigations for individuals seeking Secret-level security clearances and 

generate immense savings for the Department.

The success of these efforts is dependent on having a general workforce that is trained to 

recognize behaviors of concern and a highly trained team of insider threat personnel who can 

quickly analyze data and respond appropriately. To meet this demand, the Department has 

developed insider threat training for both audiences. The DSS has developed course offerings 

that address insider threat awareness, reporting responsibilities, and procedures unique to 

staff working in analysis centers. In fact, the National Insider Threat Task Force has certified 
U.S. Department of Defense Agency Financial Report for FY 2015

Other Information

226

the DSS curriculum and directed all departments and agencies of the Executive Branch to use 

the DSS insider threat courses to train their personnel.

Although the pace and scope of future actions are affected by available resources, the 

Department’s resolve to institutionalize an effective insider threat program has not wavered. 

The goals stated in National and Departmental policies remain the impetus for the measures 

stated here and the Department is committed to their achievement.

U.S. Navy officers attending the Information Professional Basic Course listen to the commander of Information Dominance Corps

Reserve Command and reserve deputy commander of Navy Information Dominance Forces talk about career opportunities in the 

Information Dominance Corps at Center for Information Dominance Unit Corry Station in Pensacola, Fla. 

Photo by Carla M. McCarthy
 AGENCY FINANCIAL REPORT

 FISCAL YEAR 2015

 APPENDICES
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U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-1

APPENDIX A: DEFENSE SECURITY COOPERATION AGENCY –

SECURITY ASSISTANCE ACCOUNTS

The Defense Security Cooperation Agency (DSCA) is the Department of Defense (DoD) lead 

agency for the execution of security assistance functions, under Executive Order 11958. 

The financial statements and explanatory notes in this appendix pertain to the following 

accounts, generally referred to as “security assistance” provided by the Department of 

State: Foreign Military Sales (FMS) Trust Fund; the International Military Education and 

Training Account; Foreign Military Financing Program Account; Foreign Military Loan 

Liquidating Account; Foreign Military Financing Direct Loan Financing Account; Military Debt 

Reduction Financing Account; and the Special Defense Acquisition Fund, granted to the 

Executive Office of the President (EOP) pursuant to the Arms Export Control Act (AECA), as 

amended. The DSCA receives separate funding for the administration of the DoD Regional 

Centers for Security Studies reported in the DoD consolidated financial statements and 

separate from the security assistance functions, not reported in these financial statements. 

Balance Sheet

Defense Security Cooperation Agency – Security Assistance Accounts Dollars in Thousands

As of September 30, 2015 and 2014

2015

Consolidated

2014

Consolidated 

ASSETS (Note 2)

Intragovernmental

Fund Balance with Treasury (Note 3) $ 30,334,836 $ 27,250,677

Total Intragovernmental Assets $ 30,334,836 $ 27,250,677

Cash and Other Monetary Assets (Note 6) $ 23,881,227 $ 20,539,802

Accounts Receivable, Net (Note 4) 1,788 31,014

Loans Receivable (Note 7) 646,632 639,533

Other Assets (Note 5) 33,811,386 30,217,081

TOTAL ASSETS $ 88,675,869 $ 78,678,107

LIABILITIES (Note 8)

Intragovernmental

Accounts Payable (Note 9) $ 405,228 $ 329,951

Debt (Note 10) 39,354 37,469

Other Liabilities (Note 11 and 12) 641,292 647,550

Total Intragovernmental Liabilities $ 1,085,874 $ 1,014,970

Accounts Payable (Note 9) $ 300,379 $ 355,870

Federal Employment Benefits (Note 13) 634 648

Other Liabilities (Note 11 and 12) 78,600,258 68,078,173

TOTAL LIABILITIES $ 79,987,145 $ 69,449,661

Commitments & Contingencies (Note 12)

NET POSITION

Unexpended Appropriations – Other Funds $ 4,374,115 $ 5,325,422

Cumulative Results of Operations – Other Funds 4,314,609 3,903,024

TOTAL NET POSITION $ 8,688,724 $ 9,228,446

TOTAL LIABILITIES AND NET POSITION $ 88,675,869 $ 78,678,107
U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-2

Statement of Net Cost

Defense Security Cooperation Agency – Security Assistance Accounts Dollars in Thousands

For the Years Ended September 30, 2015 and 2014

2015

Consolidated 2014 Consolidated 

Program Costs

Gross Costs $ 38,858,023 $ 34,886,326

(Less: Earned Revenue) (35,913) (5,890)

Net Cost of Operations $ 38,822,110 $ 34,880,436

Statement of Changes in Net Position

Defense Security Cooperation Agency – Security Assistance

Accounts Dollars in Thousands

For the Years Ended September 30, 2015 and 2014

2015

Consolidated

2014

Consolidated

Cumulative Results Of Operations

Beginning balances $ 3,903,024 $ 3,889,869

Budgetary Financing Sources

Appropriations used $ 6,809,314 $ 5,625,649

Nonexchange revenue 32,424,381 29,267,942

Total Financing Sources $ 39,233,695 $ 34,893,591

Net Cost of Operations (+/-) (38,822,110) (34,880,436)

Net Change $ 411,585 $ 13,155

Cumulative Results of Operations $ 4,314,609 $ 3,903,024

Unexpended Appropriations

Beginning Balances $ 5,325,422 $ 5,130,896

Budgetary Financing Sources

Appropriations received $ 5,986,603 $ 6,024,853

Appropriations transferred (in/out) (120,686) (194,062)

Other adjustments (rescissions, etc.) (7,910) (10,616)

Appropriations used (6,809,314) (5,625,649)

Total Budgetary Financing Sources $ (951,307) $ 194,526

Unexpended Appropriations $ 4,374,115 $ 5,325,422

Net Position $ 8,688,724 $ 9,228,446

The accompanying notes are an integral part of these financial statements.
U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-3

Statement of Budgetary Resources

Defense Security Cooperation Agency – Security 

Assistance Accounts

For the Years Ended September 30, 2015 and 2014

Budgetary 

Financing Accounts

Non-Budgetary 

Financing Accounts

Dollars in Thousands

2015

Combined

2014

Combined

2015

Combined

2014

Combined

Budgetary Resources

Unobligated balance, brought forward, October 1 $ 144,457 $ 141,901 $ 27,139 $ 27,139

Recoveries of prior year unpaid obligations 1,403,726 938,532 0 0

Other changes in unobligated balance (111,981) (915,438) 0 0

Unobligated balance from prior year budget 

authority, net 1,436,202 164,995 27,139 27,139

Appropriation (discretionary and mandatory) 2,371,714 6,735,612 0 0

Borrowing Authority (discretionary and mandatory) 0 0 1,885 1,793

Contract authority (discretionary and mandatory) 43,541,802 35,145,412 0 0

Spending authority from offsetting collections

(discretionary and mandatory) 117,076 57,196 11,351 0

Total Budgetary Resources $ 47,466,794 $ 42,103,215 $ 40,375 $ 28,932

Status of Budgetary Resources

Obligations incurred $ 46,685,597 $ 41,958,758 $ 24,716 $ 1,793

Unobligated balance, end of year:

Apportioned 159,359 29,767 (22,749) 0

Unapportioned 621,838 114,690 38,408 27,139

Total unobligated balance, end of year $ 781,197 $ 144,457 $ 15,659 $ 27,139

Total Budgetary Resources $ 47,466,794 $ 42,103,215 $ 40,375 $ 28,932

Change in Obligated Balance

Unpaid obligations, brought forward, October 1 $ 137,707,793 $ 129,002,355 $ 2,462,224 $ 2,462,224

Obligations incurred 46,685,597 41,958,758 24,716 1,793

Outlays (Gross) (35,303,836) (32,314,788) (453,864) (1,793)

Recoveries of prior year unpaid obligations (1,403,726) (938,532) 0 0

Unpaid Obligations, end of year 147,685,828 137,707,793 2,033,076 2,462,224

Uncollected payments

Change in uncollected payments, Federal sources $ 12 $ 0 $ 0 $ 0

Uncollected payments, Federal sources, end of year 12 0 0 0

Obligated balance, start of year $ 137,707,793 $ 129,002,355 $ 2,462,224 $ 2,462,224

Obligated balance, end of year $ 147,685,840 $ 137,707,793 $ 2,033,076 $ 2,462,224

Budgetary Authority and Outlays, Net

Budget Authority, gross (discretionary and 

mandatory) $ 46,030,592 $ 41,938,220 $ 13,236 $ 1,793

Actual offsetting collections (discretionary and 

mandatory) (117,087) (57,197) (471,042) (112,509)

Change in uncollected customer payments from 

Federal sources (discretionary and mandatory) 12 0 0 0

Budget Authority, net (discretionary and 

mandatory) $ 45,913,517 $ 41,881,023 $ (457,806) $ (110,716)

Outlays, gross (discretionary and mandatory) 35,303,836 32,314,788 453,864 1,793

Actual offsetting collections (discretionary and 

mandatory) (117,087) (57,197) (471,042) (112,509)

Outlays, net (discretionary and mandatory) 35,186,749 32,257,591 (17,178) (110,716)

Distributed offsetting receipts (32,424,380) (29,267,942) 0 0

Agency Outlays, net (discretionary and 

mandatory) $ 2,762,369 $ 2,989,649 $ (17,178) $ (110,716)

The accompanying notes are an integral part of these financial statements.
U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-4

Table of Contents for Notes to the Financial Statements

DSCA-Security Assistance Accounts (SAA) Financial Statements

Page

Note 1 Significant Accounting Policies ...................................................................A-5

Note Disclosures Related to the DSCA-SAA Balance Sheets

Note 2 Nonentity Assets....................................................................................A-13

Note 3 Fund Balance with Treasury ....................................................................A-14

Note 4 Accounts Receivable...............................................................................A-15

Note 5 Other Assets .........................................................................................A-15

Note 6 Cash and Other Monetary Assets .............................................................A-16

Note 7 Direct Loan and Loan Guarantee Programs................................................A-16

Note 8 Liabilities Not Covered by Budgetary Resources .........................................A-19

Note 9 Accounts Payable...................................................................................A-20

Note 10 Debt ....................................................................................................A-21

Note 11 Other Liabilities .....................................................................................A-22

Note 12 Commitments and Contingencies .............................................................A-23

Note 13 Federal Employment Benefits ..................................................................A-23

Note 14 General Disclosures Related to the Statement of Net Cost ..................A-25

Note 15 Disclosures Related to the Statement of Changes in Net Position .......A-26

Note 16 Disclosures Related to the Statement of Budgetary Resources ...........A-26

Note Disclosures Not Pertaining to a Specific Statement

Note 17 Reconciliation of Net Cost of Operations to Budget.....................................A-27
U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-5

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 Defense Security Cooperation Agency (DSCA), consisting of the Foreign 

Military Sales (FMS) Trust Fund and several other accounts, identified in the President’s 

Budget Request, as the Foreign Operations (International Affairs) appropriated accounts. 

This includes accounts for U.S. government funds appropriated for security assistance and 

funds deposited by foreign countries and international organizations, or by others for their 

use. See paragraph 1.C, Appropriations and Funds, for a list of these accounts.

The FMS Trust Fund and other accounts for funds appropriated for security assistance are 

managed by DSCA on behalf of the Department of Defense (DoD), in accordance with the 

authority of the Executive Office of the President (EOP), the requirements of the Chief 

Financial Officers Act of 1990 (CFO Act), as expanded by the Government Management 

Reform Act of 1994, and other applicable laws and regulations. The FMS Trust Fund and the 

accounts for funds appropriated for security assistance hereafter will be referred to as the 

DSCA Security Assistance Accounts.

The financial statements were prepared from accounting records that are maintained by the 

Military Departments (MILDEPs), Other Defense Organizations (ODO), and the Defense 

Finance and Accounting Service (DFAS) in accordance with, and to the extent possible, 

U.S. generally accepted accounting principles (USGAAP) promulgated by the Federal 

Accounting Standards Advisory Board; the Office of Management and Budget (OMB)

Circular No. A-136, Financial Reporting Requirements; and the DoD Financial Management 

Regulation (FMR).

The accompanying financial statement information accounts for all DSCA Security Assistance 

Accounts unless otherwise noted. Information relative to classified assets, programs, and 

operations is excluded from the statements or otherwise aggregated and reported in such a 

manner to not be discernible.

The accounting systems used by DSCA Security Assistance Accounts are unable to fully 

implement all elements of USGAAP and OMB Circular No. A-136, due to limitations of 

financial management processes, financial systems, and nonfinancial systems and processes 

supporting the financial statements. Many of the accounts derive their reported values and 

other information for major asset and liability categories largely from nonfinancial systems, 

such as the MILDEPs’ inventory and logistic systems. Such legacy systems were designed 

to support reporting requirements for maintaining asset accountability and reporting the 

status of federal appropriations rather than preparing financial statements consistent with 

USGAAP. There are ongoing efforts to implement process and system improvements 

addressing these limitations.

The DSCA Security Assistance Accounts contribute to several of the Department’s 13 

auditor-identified material weaknesses: (1) Financial Management Systems, 

(2) Intergovernmental Eliminations, (3) Fund Balance with Treasury, (4) Statement of Net 

Cost, (5) Other Accounting Entries, (6) Reconciliation of Net Cost of Operations to Budget,

(7) Accounts Payable, and (8) Accounts Receivable.
U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-6

1.B. Mission of the Reporting Entity

The DSCA mission is to lead, direct, and manage security cooperation programs and

resources to support the U.S. national security objectives. Such programs build relationships 

with foreign countries and international organizations promoting the U.S. interests, develop 

allied and partner capacities for self-defense and coalition participation in overseas 

contingency operations, and promote peacetime and contingency access for U.S. forces. The 

DSCA accomplishes its responsibilities for security cooperation in concert with the 

Department of State (DOS), MILDEPs, other U.S. Government organizations, U.S. industry, 

and non-governmental organizations. Together we provide financial and technical 

assistance, 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) 

containing deposits from FMS foreign country and international organization customers, as 

well as funds transferred into the account from U.S. Government appropriations, for use in 

carrying out specific purposes or programs in accordance with the Arms Export and Control 

Act, as amended (AECA) (22 U.S.C. § 2751 et seq.), the Foreign Assistance Act of 1961, as 

amended (FAA), (22 U.S.C. § 2151 et seq.), and other legal authorities. The monies in the 

FMS Trust Fund are subject to U.S. Treasury account system controls from the date of 

receipt to the date of expenditure or refund. At the country or customer level there are 

separate subsidiary accounts used by the Department through DSCA and DFAS to 

separately and individually account for each FMS customer’s deposits, other collections or 

deposits, payments of bills, refunds, and adjustments. At the U.S. Treasury level, the 

corpus of the FMS Trust Fund represents the total aggregations of balances (receipts minus 

disbursements) for all activities and programs.

The Department uses separate U.S. Treasury Accounts for the general fund Foreign 

Operations (International Affairs) appropriations. These accounts are:

 International Military Education and Training (TAS 1081)

 Foreign Military Financing Program Account (TAS 1082)

 Foreign Military Loan Liquidating Account (TAS 4121)

 Foreign Military Financing Direct Loan Financing Account (TAS 4122)

 Military Debt Reduction Financing Account (TAS 4174)

 Special Defense Acquisition Fund (TAS 4116)

The DSCA receives funds for the FMS Trust Fund and the accounts for funds appropriated 

for security assistance as general, special, and trust funds. The DSCA uses these 

appropriations and funds to execute its missions and subsequently reports on resource 

usage.

General and special appropriations transferred into the FMS Trust Fund are used for financial 

transactions, including personnel, operations and maintenance of security assistance 
U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-7

functions, and financing of FMS, which may include sales of defense articles and services 

from stock or through procurement, and the sale of foreign military construction.

The FMS Trust Fund accounts for receipts and expenditures of funds held in trust by the 

U.S. government for use in carrying out specific purposes or programs in accordance with 

applicable laws, regulations, and agreements.

The DSCA is a party to allocation transfers with other federal agencies as a receiving (child) 

entity. An allocation transfer is an entity’s legal delegation of authority to obligate budget 

authority and outlay funds on its behalf. Generally, all financial activity related to allocation 

transfers are reported in the financial statements of the parent entity. Exceptions to this 

general rule will apply to specific funds for which OMB has directed that all activity will be 

reported in the financial statements of the child entity. Exceptions include all U.S. TreasuryManaged Trust Funds, EOP, and all other funds specifically designated by OMB. The DSCA’s 

appropriations related to security assistance are allocation transfers from the EOP meeting

the OMB exception and all related activity is reported separately from the consolidated DoD 

financial statements.

1.D. Basis of Accounting 

The legacy financial management systems used by DSCA Security Assistance Accounts are 

unable to meet full accrual accounting requirements. Many of the DSCA, MILDEP, and ODO 

financial and nonfinancial feeder systems and processes were designed and implemented 

prior to the issuance of 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 Security Assistance Accounts financial statements and supporting trial balances 

are compiled from the underlying financial data and trial balances of the MILDEPs, ODOs, 

and their sub-entities. The underlying data is largely derived from budgetary transactions 

(obligations, disbursements, and collections), from nonfinancial feeder systems, and 

accruals made for major items such as payroll expenses, and accounts payable. Some of the 

sub-entity level trial balances may reflect known abnormal balances resulting largely from 

business and system processes. At the consolidated DSCA level these abnormal balances 

may not be evident. Disclosures of abnormal balances are made in the applicable footnotes, 

but only to the extent the abnormal balances are evident at the consolidated level. 

The DSCA, with MILDEPs and ODOs, is determining the actions required to bring its financial 

and nonfinancial feeder systems and processes into compliance with USGAAP. One such 

action is the current revision of accounting systems to record transactions based on the 

U.S. Standard General Ledger (USSGL). Until all DSCA, MILDEP, and ODO systems and 

related processes have been updated to collect and report financial information as required 

by USGAAP, reported financial data is based on budgetary transactions, data from 

nonfinancial feeder systems, and accruals.

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 
U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-8

for security assistance are a financing source and are transferred into the FMS Trust Fund, 

or deposited into the accounts for funds appropriated for security assistance. Pricing for 

defense articles and services, including training, is established to recover costs as required 

by the AECA, the FAA, and OMB Circular A-25, User Charges. The DSCA Security Assistance 

Accounts recognize revenue when earned within the constraints of current system 

capabilities.

The DSCA does not include nonmonetary support provided by friendly foreign countries and 

international organizations in amounts reported in the Statement of Net Cost and Note 17, 

Reconciliation of Net Cost of Operations to Budget.

The DSCA participates in assistance-in-kind agreements in its overseas presence. The 

assistance-in-kind provided in support of security cooperation programs includes the use of 

facilities and personnel (guards and drivers) at a small number of Security Cooperation 

Offices worldwide.

The DSCA collects payments from foreign customers in advance of delivery of goods or 

services and records unearned revenue accordingly. All FMS Trust Fund revenue is 

reclassified as nonexchange once customers confirm the receipt of goods and services, since

the FMS Trust Fund does not provide any of the goods or services directly, but serves as an 

intermediary for the U.S. military services and contractors.

1.F. Recognition of Expenses

Department policy requires the recognition of operating expenses in the period incurred. 

Current financial and nonfinancial feeder systems used by DSCA Security Assistance 

Accounts were not designed to collect and record transactions on an accrual accounting 

basis. Estimates are made for major items such as payroll expenses, accounts payable, and 

unbilled revenue. The DSCA continues to implement process and system improvements to 

address these limitations.

1.G. Accounting for Intragovernmental Activities 

Accounting standards require an entity eliminates intra-entity activity and balances from 

consolidated financial statements in order to prevent overstatement for business with itself. 

However, DSCA cannot accurately identify most of its intragovernmental transactions 

because the Department’s systems do not track buyer and seller data needed to match 

related transactions. In most cases, the buyer-side records are adjusted to agree with DoD 

seller-side balances and are then eliminated. The Department is implementing replacement 

systems and a standard financial information structure incorporating the necessary 

elements to enable the Department to correctly report, reconcile, and eliminate 

intragovernmental balances.

The Treasury Financial Manual Part 2 – Chapter 4700, Agency Reporting Requirements for 

the Financial Report of the United States Government, provides guidance for reporting and 

reconciling intragovernmental balances. 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, 
U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-9

Federal Employees’ Compensation Act (FECA) transactions with the Department of Labor, 

and benefit program transactions with the Office of Personnel Management.

Imputed Financing represents the costs paid on behalf of the FMS Trust Fund by the Office 

of Personnel Management for employee pension, post-retirement health, and life insurance 

benefits; and the Department of Labor post-employment benefits for terminated and 

inactive employees to include unemployment and workers compensation under the Federal 

Employees’ Compensation Act.

The Department’s proportionate share of public debt and related expenses to the Federal 

Government is not included. The Federal Government does not apportion debt and its 

related costs to federal agencies. The Department’s financial statements do not report any 

public debt, interest, or source of public financing whether from issuance of debt or tax 

revenues.

1.H. Transactions with Foreign Governments and International 

Organizations 

Each year, DSCA Security Assistance Accounts administers the sale of defense articles and 

services to foreign governments and international organizations under the provisions of the 

AECA. Under the provisions of the Act, the Department has authority to sell defense articles 

and services to foreign countries and international organizations generally at no profit or 

loss to the Federal Government. Payment in U.S. dollars is required in advance.

1.I. Funds with the U.S. Treasury 

The FMS Trust Fund monies are held in U.S. Treasury accounts and the Federal Reserve 

Bank in individual accounts established by the U.S. for foreign countries. Funds held in the 

Federal Reserve Bank are transferred to the FMS Trust Fund account to be disbursed for 

FMS purposes.

For monetary financial resources maintained in U.S. Treasury accounts, the disbursing 

offices of DFAS, the Military Departments, the U.S. Army Corps of Engineers (USACE), and 

the DOS’s financial service centers process the majority of DSCA Security Assistance 

Accounts cash collections, disbursements, and adjustments worldwide. Each disbursing 

station prepares monthly reports providing information to the U.S. Treasury on checks 

issued, electronic fund transfers, interagency transfers, and deposits.

In addition, DFAS sites and USACE Finance Center submit reports to the U.S. Treasury, by 

appropriation, on interagency transfers, collections received, and disbursements issued. The 

U.S. Treasury records this information to the applicable Fund Balance with Treasury (FBWT) 

account. On a monthly basis, the FBWT for the DSCA Security Assistance Accounts is 

adjusted to agree with the U.S. Treasury accounts.

1.J. Cash and Other Monetary Assets 

Cash is the total of cash resources under the control of the Department including coin, 

paper currency, negotiable instruments held for deposit in banks or other financial 

institutions and is classified as “nonentity” and is restricted. 

The FMS Trust Fund only accepts U.S. dollars for payment of defense articles and services 
U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

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per DSCA Manual 5105.38-M, Security Assistance Management Manual, Chapter 5; Foreign 

Military Sales Case Development. All payments and collections are in U.S. dollars. 

1.K. Accounts Receivable 

The DSCA Security Assistance Accounts’ accounts receivable from other federal entities or 

the public include: accounts receivable, claims receivable, and refunds receivable. 

Allowances for uncollectible accounts due from the public are based upon analysis of 

collection experience by fund type. The Department does not recognize an allowance for 

estimated uncollectible amounts from other federal agencies. Claims against other federal 

agencies are to be resolved between the agencies in accordance with dispute resolution 

procedures defined in the Intragovernmental Business Rules published in the Treasury 

Financial Manual.

1.L. Direct Loans and Loan Guarantees 

The DSCA administers the FMF program on behalf of the EOP. Direct loans and loan 

guarantees are authorized by sections 23 and 24 of the AECA of 1976, as amended, 

P.L. 90-269, as amended, and section 503(a) and other specific legislation. These loans and 

guarantees assist friendly foreign countries and international organizations in purchasing 

U.S. defense articles and services.

1.M. Inventories and Related Property 

The DSCA Security Assistance Accounts do not maintain inventory. The defense articles are 

provided to FMS customers from the U.S. Government or the contractor pursuant to a 

contract with the U.S. Government. Defense articles sold from the Department or the 

U.S. Coast Guard are assets of the providing component until title is transferred to the 

foreign customer.

1.N. Advances and Prepayments 

When advances are permitted by law, legislative action, or presidential authorization, the 

Department’s policy is to record advances and prepayments in accordance with USGAAP. As 

such, payments made in advance of the receipt of goods and services are reported as an 

asset on the Balance Sheet. The Department’s policy is to expense and/or properly classify 

assets when the related goods and services are received. Not all military services executing

on behalf of DSCA have implemented this policy primarily due to system limitations.

1.O. Leases 

The FMS Trust Fund and the accounts for funds appropriated for security assistance do not 

have capital leases and currently are not able to reliably estimate the value of operating 

leases.

1.P. Other Assets 

Other assets include civil service employee pay advances, travel advances, and certain 

contract financing payments not reported elsewhere on the DSCA Security Assistance 

Accounts Balance Sheet.
U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

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The DSCA Security Assistance Accounts conduct business with commercial contractors using 

two primary types of contracts: fixed price and cost reimbursable. Contract financing 

payments are defined in the Federal Acquisition Regulations, Part 32, as authorized 

disbursements to a contractor prior to acceptance of supplies or services by the 

Government. These payments are designed to alleviate the potential financial burden on 

contractors performing on certain long-term contracts and facilitate competition for defense 

contracts. Contract financing payment clauses are incorporated in the contract terms and 

conditions and may include advance payments, performance-based payments, commercial 

advance and interim payments, progress payments based on cost, and interim payments 

under certain cost-reimbursement contracts. It is DoD policy to record certain contract 

financing payments as other assets.

Contract financing payments do not include invoice payments, payments for partial 

deliveries, lease and rental payments, or progress payments based on a percentage or 

stage of completion. The Defense Federal Acquisitions Regulation Supplement authorizes 

progress payments based on a percentage or stage of completion only for construction of 

real property, shipbuilding, and ship conversion, alteration, or repair. Progress payments 

based on percentage or stage of completion are reported as Construction in Progress.

1.Q. Contingencies and Other Liabilities 

Statement of Federal Financial Accounting Standard (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 involving an uncertainty as to possible gain or loss. The uncertainty 

will be resolved when one or more future events occur or fail to occur. The DSCA Security 

Assistance Accounts recognize contingent liabilities when past events or exchange 

transactions occur, a future loss is probable, and the loss amount can be reasonably 

estimated.

Financial statement reporting is limited to disclosure when conditions for liability recognition 

do not exist but there is at least a reasonable possibility of incurring a loss or additional 

losses. The DSCA Security Assistance Accounts’ risk of loss due to contingencies arise as a 

result of pending or threatened litigation or claims and assessments due to events such as 

aircraft, ship, and vehicle accidents; medical malpractice; property or environmental 

damages; and contract disputes.

1.R. Accrued Leave 

The FMS Trust Fund reports liabilities for accrued compensatory and annual leave for 

civilians. Sick leave for civilians is expensed as taken. The liabilities are based on current 

pay rates.

1.S. Net Position 

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

Unexpended appropriations represent the amounts of budget authority that are unobligated 

and have not been rescinded or withdrawn. Unexpended appropriations also represent 

amounts obligated for which legal liabilities for payments have not been incurred. 

Cumulative results of operations represent the net difference between expenses and losses 
U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-12

and financing sources (including appropriations, revenue, and gains) since inception. The 

cumulative results of operations also include donations and transfer in and out of assets 

that were not reimbursed.

1.T. Undistributed Disbursements and Collections

Undistributed disbursements and collections represent the difference between 

disbursements and collections matched at the transaction level to specific obligations, 

payables, or receivables in the source systems and those reported by the U.S. Treasury. 

Supported disbursements and collections may be evidenced by the availability of 

corroborating documentation generally support the summary level adjustments made to 

accounts payable and receivable. Unsupported disbursements and collections do not have 

supporting documentation for the transactions and most likely would not meet audit 

scrutiny. However, both supported and unsupported adjustments may have been made to 

the DSCA Accounts Payable and Receivable trial balances prior to validating underlying 

transactions. As a result, misstatements of reported Accounts Payable and Receivables are 

likely included in the DSCA financial statements.

Due to noted material weaknesses in current accounting and financial feeder systems, the 

Department is generally unable to determine whether undistributed disbursements and 

collections should be applied to federal or nonfederal accounts payables/receivable at the 

time accounting reports are prepared. Accordingly, the FMS Trust Fund and accounts for 

funds appropriated for security assistance follow the DoD policy to allocate supported 

undistributed disbursements and collections between federal and nonfederal categories 

based on the percentage of distributed federal and nonfederal accounts payable and 

accounts receivable. Unsupported undistributed disbursements and collections are also 

applied to reduce accounts payable and receivable accordingly.
U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-13

NOTE 2. NONENTITY ASSETS

Nonentity Assets Dollars in Thousands

As of September 30 2015 2014

Intragovernmental Assets

Fund Balance with Treasury $ 9,974,511 $ 11,010,018

Total Intragovernmental Assets $ 9,974,511 $ 11,010,018

Nonfederal Assets

Cash and Other Monetary Assets $ 23,881,227 $ 20,539,802

Accounts Receivable 642,939 678,418

Other Assets 33,808,506 30,212,208

Total Nonfederal Assets $ 58,332,672 $ 51,430,428

Total Nonentity Assets $ 68,307,183 $ 62,440,446

Total Entity Assets $ 20,368,686 $ 16,237,661

Total Assets $ 88,675,869 $ 78,678,107

Nonentity Assets are assets for which the DSCA Security Assistance Accounts maintain 

stewardship accountability and reporting responsibility, but are not available for the 

agency’s operations. 

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 in litigation at 

Department of Justice or collection status at Defense Finance and Accounting Service. Some 

portion of these uncollected funds may be payable to the FMS Administrative Surcharge 

account, but are not discernible prior to collection.

Nonfederal Other Assets consist primarily of advances paid for undelivered defense articles 

and services intended for future delivery to the FMS customer.
U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-14

NOTE 3. FUND BALANCE WITH TREASURY 

Fund Balance with Treasury Dollars in Thousands

As of September 30 2015 2014

Fund Balance

Appropriated Funds $ 4,599,767 $ 5,522,643

Trust Funds 25,735,069 21,728,034

Total Fund Balance $ 30,334,836 $ 27,250,677

Fund Balance Per Treasury Versus Agency

Fund Balance per Treasury $ 30,344,836 $ 27,250,677

Fund Balance per Agency 30,334,836 27,250,677

Reconciling Amount $ 0 $ 0

Status of Fund Balance with Treasury Dollars in Thousands

As of September 30 2015 2014

Unobligated Balances

Available $ 136,610 $ 29,767

Unavailable 4,258,521 141,829

Total Unobligated Balance 4,395,131 171,596

Obligated Balance not yet Disbursed 149,718,904 140,170,016

Non-FBWT Budgetary Accounts (123,779,199) (113,090,935)

Total Fund Balance $ 30,334,836 $ 27,250,677

The Status of FBWT reflects the budgetary resources to support FBWT and is a reconciliation 

between budgetary and proprietary accounts. It primarily consists of unobligated and 

obligated balances. The balances reflect the budgetary authority remaining for disbursement 

against current or future obligations.

Unobligated Balance is classified as available or unavailable and represents the cumulative 

amount of budgetary authority not set aside to cover outstanding obligations. The 

unavailable balance consists primarily of funds invested in U.S. Treasury securities 

temporarily precluded from obligations by law. Certain unobligated balances are restricted 

for future use and are not apportioned for current use. Unobligated balances for trust fund 

accounts are restricted for use by the public law established the funds.

Obligated Balance not yet Disbursed represents funds that have been obligated for goods 

and services not received and those received but not paid.

Non-FBWT Budgetary Accounts reduces the Status of FBWT. The Non-FBWT Budgetary 

Accounts primarily consists of nonentity cash deposited in the Federal Reserve Bank and 

contract authority.
U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-15

NOTE 4. ACCOUNTS RECEIVABLE

Accounts Receivable Dollars in Thousands

2015

As of September 30

Gross Amount Due

Allowance for 

Estimated 

Uncollectibles

Accounts 

Receivable, Net

Nonfederal Receivables 

(From the Public) $ 1,793 (5) $ 1,788

Total Accounts Receivable $ 1,793 $ (5) $ 1,788

Accounts Receivable Dollars in Thousands

2014

As of September 30

Gross Amount Due

Allowance for 

Estimated 

Uncollectibles

Accounts 

Receivable, Net

Nonfederal Receivables 

(From the Public) $ 31,082 (68) $ 31,014

Total Accounts Receivable $ 31,082 $ (68) $ 31,014

The accounts receivable represent the FMS Trust Fund claim for payment from contractors 

and individuals for refunds and overpayments. The FMS Trust Fund only recognizes an 

allowance for uncollectible amounts from the public. 

Note 5. Other Assets

Other Assets Dollars in Thousands

As of September 30 2015 2014

Nonfederal Other Assets

Outstanding Contract Financing Payments $ 4,318,500 $ 3,595,335

Advances and Prepayments 29,492,886 26,621,746

Total Nonfederal Other Assets $ 33,811,386 $ 30,217,081

Total Other Assets $ 33,811,386 $ 30,217,081

Contract terms and conditions for certain types of contract financing payments convey 

certain rights to the FMS Trust Fund protecting the contract work from state or local 

taxation, liens or attachment by the contractor's creditors, transfer of property, or 

disposition in bankruptcy. However, these rights should not be misconstrued to mean 

ownership of the contractor’s work has transferred to the Government. The Government 

does not have the right to take the work, except as provided in contract clauses related to 

termination or acceptance, and the FMS Trust Fund is not obligated to make payment to the 

contractor until delivery and acceptance of a satisfactory product. 

The balance of Outstanding Contract Financing Payments includes $2.4 billion in contract 

financing payments and an additional $1.9 billion in estimated future payments to 

contractors upon delivery and government acceptance of a satisfactory product. See 

additional discussion in Note 11, Other Liabilities.
U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-16

NOTE 6. CASH AND OTHER MONETARY ASSETS

Cash and Other Monetary Assets Dollars in Thousands

As of September 30 2015 2014

Cash $ 23,881,227 $ 20,539,802

Total Cash, Foreign Currency, and Other Monetary Assets $ 23,881,227 $ 20,539,802

Restricted cash of $23.9 billion includes advance deposits from foreign nations in the 

Federal Reserve Bank which have not been transferred to the FMS Trust Fund and are not 

available for agency use (nonentity cash).

NOTE 7. DIRECT LOAN AND LOAN GUARANTEE PROGRAMS

Direct Loan and Loan Guarantee Programs

The Defense Security Cooperation Agency (DSCA) operates the following direct loans and/or 

loan guarantee programs:

The Arms Export Control Act, as amended, authorizes funds to be appropriated to the 

President for financing the sales of defense articles and defense services to eligible foreign 

countries. Each loan is reviewed in the light of the purchasing country’s financial condition, 

its need for credit, U.S. economic or military assistance programs in the country and region, 

and other proposed arms purchases by the country. The President delegates to the 

Secretary of Defense the authority to issue and guaranty loans through the designated 

administering agency, DSCA. The loans are issued to friendly, less economically developed 

countries. Pursuant to the authority contained in the Act, DSCA operates the four funds, 

known as: 

 Foreign Military Loan Liquidating Account (FMLLA)), for pre-1992 loans

 Foreign Military Financing Direct Loan Program Account (FMFDLPA), for post-1991 

loans

 Foreign Military Financing Direct Loan Financing Accounts (FMFDLFA), for post-1991 

loans

 Military Debt Reduction Financing Account (MDRFA) for reducing loan receivables for 

eligible countries. 

The FMLLA is a liquidating account including all assets, liabilities, and equities for loan 

balances recorded prior to FY 1992. No new loan disbursements are made from this 

account. Certain collections made into this account are made available for default claim 

payments. The Federal Credit Reform Act (FCRA) provides permanent indefinite authority to 

cover obligations for default payments in the event the funds in the liquidating account are 

otherwise insufficient.

The FMFDLPA is a program account established pursuant to the FCRA to provide the funds 

necessary for the subsidy element of loans. Expenditures from this account finance the 

subsidy element of direct loan disbursements and are transferred into the FMFDLFA to make 

required loan disbursements for approved Foreign Military Sales or commercial sales. 
U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-17

The FMFDLPA is still active with one outstanding loan. The loan works as a line of credit 

where the country can borrow from it at any time. The country initiated a loan during the 

fourth quarter for the first time since FY 2010. The country normally borrows one day and 

immediately repays it the next day, which occurred in FY 2015.

The FMFDLFA is a financing account used to make disbursements of Foreign Military Loan 

funds for approved procurements and for subsequent collections for the loans after 

September 30, 1991. The account uses permanent borrowing authority from the 

U.S. Treasury combined with transfers of appropriated funds from FMFDLPA to make the 

required disbursements to loan recipient country borrowers for approved procurements. 

Receipts of debt service collections from borrowers are used to repay borrowings from 

U.S. Treasury.

The MDRFA is a financing account established for the debt relief of certain countries as 

established by Public Law 103-87. The MDRFA buys the portfolio of loans from the FMLLA, 

thus transferring the loans from the FMLLA account to the MDRFA account. The Paris Club 

negotiates the debt forgiveness with Highly Indebted Poor Countries (HIPC). 

The Paris Club has nineteen member countries that negotiate rescheduling or refinancing of 

debt for HIPC. The Paris Club provides debt reduction initially on payments coming due over 

a specific period corresponding to the length of an International Monetary Fund (IMF) 

supported economic reform program. Reduction then is staged, with each successive stage 

contingent upon debtor country compliance with its IMF-support program. Under Naples 

Terms, stock of debt reduction is provided after three years of good performance with 

respect to IMF reform programs and payments to Paris Club creditors. The United States 

incurs the budget cost of the eventual stock of debt reduction when it agrees to the initial 

“maturities” reduction of payments coming due, since bilateral agreements commit us to 

stock reduction once the Paris Club agrees to provide them. 

The FCRA governs all amended direct loan obligations and loan guarantee commitments 

made after FY 1991 resulting in direct loans or loan guarantees.

Direct loans are reported at the net present value of the following projected cash flows: 

(1) loan disbursements, (2) repayments of principal, and (3) payments of interest and other 

payments over the life of the loan after adjusting for estimated defaults, prepayments, fees, 

penalties, and other recoveries.

Summary of Direct Loans and Loan Guarantees Dollars in Thousands

As of September 30 2015 2014

Loans Receivable

Direct Loans

Foreign Military Loan Liquidating Account $ 641,139 $ 647,404

Foreign Military Financing Account (15,631) 0

Military Debt Reduction Financing Account 21,124 (7,871)

Total Loans Receivable $ 646,632 $ 639,533
U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-18

Abnormal Balances

The abnormal balance of $15.6 million for the Foreign Military Financing Account is due to a 

one day loan initiated by one country. To cover this loan, the DSCA borrowed the funds for 

the loan from the Treasury. The interest calculations provided by Treasury required DSCA to 

record an allowance for the loan even though the loan had been repaid. 

Direct Loans Obligated Dollars in Thousands

As of September 30 2015 2014

Direct Loans Obligated After FY 1992 

(Allowance for Loss Method)

Foreign Military Loan Liquidating Account

Loans Receivable Gross $ 354,529 $ 377,627

Interest Receivable 1,921,079 1,835,074

Allowance for Loan Losses (1,634,469) (1,565,297)

Value of Assets Related to Direct Loans, Net $ 641,139 $ 647,404

Direct Loans Obligated After FY 1991 

(Present Value Method)

Foreign Military Financing Account

Allowance for Subsidy Cost (Present Value) $ (15,631) $ 0

Value of Assets Related to Direct Loans $ (15,631) $ 0

Military Debt Reduction Financing Account

Allowance for Subsidy Cost (Present Value) 21,124 (7,871)

Value of Assets Related to Direct Loans, Net $ 21,124 $ (7,871)

Total Direct Loans Receivable $ 646,632 $ 639,533

The DSCA bills the countries every six months for loan repayments. Applying terms of the 

loans with the countries, accrued interest receivable is calculated using the simple interest 

method. Interest accrued on unpaid balances use the same interest rate plus 4 percent for 

loans owed to the Federal Financing Bank.

The allowance for credit subsidy account for the FMFDLFA account is calculated taking into 

consideration three transactions: (1) transfers of subsidy from the program account to the 

financing account; (the subsidy is the difference between the expected cash outlays from 

the U.S. Government and the present value of the expected collections); (2) interest 

payments from the U.S. Treasury to the financing fund; and (3) upward adjustments due to 

reestimates as U.S. Treasury borrowing rates change over time from the loan repayment 

rate and an increase in estimated defaults on the loan. 

Total Amount of Direct Loans Disbursed Dollars in Thousands

As of September 30 2015 2014

Direct Loan Program

Foreign Military Financing Account $ 429,147 $ 0

Total $ 429,147 $ 0
U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-19

Schedule for Reconciling Subsidy Cost Allowance Balances

For Post-FY 1991 Direct Loans Dollars in Thousands

As of September 30 2015 2014

Beginning Balance, Changes, and Ending Balance

Beginning Balance of the Subsidy Cost Allowance $ 7,871 $ 9,666

Adjustments

Subsidy Allowance Amortization (13,364) (1,795)

Total of the above Adjustment Components $ (13,364) $ (1,795)

Ending Balance of the Subsidy Cost Allowance before Reestimate $ (5,493) $ 7,871

Ending Balance of the Subsidy Cost Allowance $ (5,493) $ 7,871

Administrative Expenses

Administrative expenses for loans are not funded in the loan program account. The Office of 

Management and Budget directed the administration of loans be funded by the Foreign 

Military Financing Program (11*1082).

Note 8. Liabilities Not Covered by Budgetary Resources

Liabilities Not Covered by Budgetary Resources Dollars in Thousands

As of September 30 2015 2014

Intragovernmental Liabilities

Other $ 154 $ 145

Total Intragovernmental Liabilities $ 154 $ 145

Nonfederal Liabilities

Accounts Payable 1,598 0

Federal Employment Benefits 634 648

Total Nonfederal Liabilities 2,232 648

Total Liabilities Not Covered by Budgetary Resources 2,386 793

Total Liabilities Covered by Budgetary Resources $ 79,984,759 $ 69,448,868

Total Liabilities $ 79,987,145 $ 69,449,661

The Liabilities Not Covered by Budgetary Resources includes liabilities for which 

congressional action is needed before budgetary resources can be provided. These liabilities 

are categorized as not covered because there is no current or immediate appropriation 

available to pay them. 

Military Retirement and Other Federal Employment Benefits consists of Federal Employee 

Compensation Act (FECA) actuarial liabilities of $633.6 thousand not due and payable during 

the current fiscal year. Refer to Note 13, Federal Employment Benefits, for additional details 

and disclosures.

Intragovernmental Liabilities Other represents the amount payable to Department of Labor 

for FECA liabilities.
U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-20

NOTE 9. ACCOUNTS PAYABLE

Accounts Payable Dollars in Thousands

2015

As of September 30

Accounts Payable

Interest, Penalties, 

and Administrative 

Fees

Total

Intragovernmental Payables $ 405,228 N/A $ 405,228

Nonfederal Payables

(To the Public) 300,379 0 300,379

Total Accounts Payable $ 705,607 $ 0 $ 705,607

Accounts Payable Dollars in Thousands

2014

As of September 30

Accounts Payable

Interest, Penalties, 

and Administrative 

Fees

Total

Intragovernmental Payables $ 329,951 N/A $ 329,951

Nonfederal Payables

(To the Public) 355,870 0 355,870

Total Accounts Payable $ 685,821 $ 0 $ 685,821

Accounts Payable includes amounts owed to federal and nonfederal entities for goods and 

services received by DSCA Security Assistance Accounts.

The systems used by the DSCA Security Assistance Accounts do not track intragovernmental 

transactions by customer at the transaction level. The DSCA therefore cannot reconcile 

accounts payable with other federal entities. Buyer-side accounts payable are adjusted to 

agree with interagency seller-side accounts receivable.
U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-21

NOTE 10. DEBT

Debt Dollars in Thousands

2015

As of September 30 Beginning Balance Net Borrowing Ending Balance

Agency Debt 

(Intragovernmental)

Debt to the Treasury $ 37,469 $ 1,885 $ 39,354

Debt to the Federal Financing 

Bank 0 0 0

Total Debt $ 37,469 $ 1,885 $ 39,354

Debt Dollars in Thousands

2014

As of September 30 Beginning Balance Net Borrowing Ending Balance

Agency Debt 

(Intragovernmental)

Debt to the Treasury $ 35,674 $ 1,795 $ 37,469

Debt to the Federal Financing

Bank 80,930 (80,930) 0

Total Debt $ 116,604 $ (79,135) $ 37,469

The Federal Credit Reform Act (FCRA) of 1990 provides financing accounts with indefinite 

authority to borrow from the U.S. Treasury to fund disbursements of loans made to 

sovereign nations for security assistance. This debt to the U.S. Treasury is reflected in the 

Foreign Military Financing Direct Loan Financing Account and the Military Debt Reduction 

Account.

Beginning in January 1975, the DSCA and the Federal Financing Bank (FFB), acting under 

section 24 of the Arms Export Control Act, as amended, entered into an agreement whereby 

the FFB would make loan agreements with friendly nations and acquire promissory notes 

guaranteed by DSCA. The promissory notes with FFB were liquidated during 2014.

The majority of the debt represents direct and guaranteed loans to foreign countries for 

pre-1992 and post-1991 loans. The FCRA governs all direct loan obligations and loan 

guarantee commitments made after FY 1991. Before 1992, funds were borrowed from the 

FFB to either directly loan the funds to foreign countries or to reimburse guaranteed loans 

defaulted. Beginning in 1992, based on the FCRA, the security assistance program began 

borrowing the funds from the U.S. Treasury.

The DSCA must pay the debt if the foreign country borrower defaults. For loan defaults 

DSCA must pay the outstanding principal amounts guaranteed.
U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-22

NOTE 11. OTHER LIABILITIES

Other Liabilities Dollars in Thousands

2015

As of September 30

Current Liability Noncurrent 

Liability Total

Intragovernmental

FECA Reimbursement to the 

Department of Labor $ 66 $ 88 $ 154

Custodial Liabilities 0 641,138 641,138

Total Intragovernmental Other 

Liabilities $ 66 $ 641,226 $ 641,292

Nonfederal

Accrued Funded Payroll and 

Benefits $ 35 $ 0 $ 35

Advances from Others 73,749,884 4,318,161 78,068,045

Contract Holdbacks 532,156 0 532,156

Employer Contribution and 

Payroll Taxes Payable 22 0 22

Total Nonfederal Other 

Liabilities $ 74,282,097 $ 4,318,161 $ 78,600,258

Total Other Liabilities $ 74,282,163 $ 4,959,387 $ 79,241,550

Other Liabilities Dollars in Thousands

2014

As of September 30

Current Liability Noncurrent 

Liability Total

Intragovernmental

FECA Reimbursement to the 

Department of Labor $ 68 $ 78 $ 146

Custodial Liabilities 0 647,404 647,404

Total Intragovernmental Other 

Liabilities $ 68 $ 647,482 $ 647,550

Nonfederal

Accrued Funded Payroll and 

Benefits $ 7 $ 0 $ 7

Advances from Others 64,151,890 3,594,897 67,746,787

Contract Holdbacks 331,379 0 331,379

Employer Contribution and 

Payroll Taxes Payable 0 0 0

Total Nonfederal Other 

Liabilities $ 64,483,276 $ 3,594,897 $ 68,078,173

Total Other Liabilities $ 64,483,344 $ 4,242,379 $ 68,725,723

Advances from Others represent liabilities for collections received to cover future expenses 

or acquisition of assets.

Custodial Liabilities represents liabilities for collections reported as non-exchange revenues 

where the Department is acting on behalf of another Federal entity.
U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-23

Contract Holdbacks are amounts earned by contractors or suppliers during the production 

period but not yet paid to the contractor/supplier to ensure future performance.

Other Liabilities

Nonfederal Advances from Others, Noncurrent includes $4.0 billion related to contracts 

authorizing progress payments based on cost as defined in the Federal Acquisition 

Regulation (FAR). In accordance with contract terms, specific rights to the contractors’ work 

vest with the Federal Government when a specific type of contract financing payment is 

made. This action protects taxpayer funds in the event of contract nonperformance. These 

rights should not be misconstrued as rights of ownership. The Department is under no 

obligation to pay contractors for amounts greater than the amounts authorized in contracts 

until delivery and government acceptance. Due to the probability the contractors will 

complete their efforts and deliver satisfactory products, and because the amount of 

potential future payments are estimable, the Department has recognized a contingent 

liability for estimated future payments which are conditional pending delivery and 

government acceptance.

Total Contingent Liabilities for progress payments based on cost represent the difference 

between the estimated costs incurred to date by contractors and amounts authorized to be 

paid under progress payments based on cost provisions within the FAR. Estimated 

contractor-incurred costs are calculated by dividing the cumulative unliquidated progress 

payments based on cost by the contract-authorized progress payment rate. The balance of 

unliquidated progress payments based on cost is deducted from the estimated total 

contractor-incurred costs to determine the contingency amount.

NOTE 12. COMMITMENTS AND CONTINGENCIES

The U.S. Government may be a party in various administrative proceedings or court 

litigations, but it is highly unlikely any will implicate the FMS Trust Fund. The U.S. funds 

appropriated for security assistance generally are not legally available for paying claims.

NOTE 13. FEDERAL EMPLOYMENT BENEFITS

Federal Employment Benefits Dollars in Thousands

2015

As of September 30

Liabilities

(Less: Assets 

Available to Pay 

Benefits)

Unfunded 

Liabilities

Pension and Health Actuarial Benefits

FECA $ 634 $ 0 $ 634

Total Federal Employment Benefits $ 634 $ 0 $ 634
U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-24

FEDERAL EMPLOYEES’ COMPENSATION ACT (FECA)

Actuarial Cost Method Used and Assumptions

The Defense Security Cooperation Agency FMS Trust Fund actuarial liability for workers’ 

compensation benefits is developed by the Department of Labor and provided to the FMS 

Trust Fund at the end of each fiscal year. The liability for future workers’ compensation 

benefits includes the expected liability for death, disability, medical, and miscellaneous costs 

for approved compensation cases, plus a component for incurred but not reported claims. 

The liability is determined using a method utilizing historical benefit payment patterns 

related to a specific incurred period to predict the ultimate payments related to that period. 

Consistent with past practice, these projected annual benefit payments have been 

discounted to present value based on interest rate assumptions on the U.S. Department of 

the Treasury’s Yield Curve for Treasury Nominal Coupon Issues (the TNC Yield Curve) to 

reflect the average duration of income payments and medical payments. An interest rate 

for wage benefits of 3.1 percent was assumed for year one and 3.1 percent for year two and 

thereafter. An interest rate for medical benefits of 2.5 percent was assumed for year one 

and 2.5 percent for year two and thereafter. 

The DOL calculates this liability using wage inflation factors (cost of living adjustments or 

COLAs) and medical inflation factors (consumer price index medical or CPIM). The actual 

rates for these factors for charge back year (CBY) 2015 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

2016 1.64% 2.94%

2017 1.47% 2.98%

2018 1.33% 3.09%

2019 1.43% 3.39%

2020+ 1.65% 3.69%

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 

Federal Employment Benefits Dollars in Thousands

2014

As of September 30

Liabilities

(Less: Assets 

Available to Pay 

Benefits)

Unfunded 

Liabilities

Pension and Health Actuarial Benefits

FECA $ 648 $ 0 $ 648

Total Federal Employment Benefits $ 648 $ 0 $ 648
U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-25

paid losses per case (a measure of case-severity) in CBY 2015 to the average pattern 

observed during the most current three CBYs, and (4) a comparison of the estimated 

liability per case in the CBY 2015 projection to the average pattern for the projections of the 

most recent three years.

NOTE 14. GENERAL DISCLOSURES RELATED TO THE STATEMENT OF NET 

COST

Costs and Exchange Revenue Dollars in Thousands

As of September 30 2015 2014

Operations, Readiness & Support

Gross Cost

Intragovernmental Cost $ 3,458,594 $ 8,555,546

Nonfederal Cost $ 35,399,429 $ 26,330,780

Total Cost $ 38,858,023 $ 34,886,326

Earned Revenue

Intragovernmental Revenue $ (11,270) $ (32)

Nonfederal Revenue $ (24,643) $ (5,858)

Total Revenue $ (35,913) $ (5,890)

Total Net Cost $ 38,822,110 $ 34,880,436

The Statement of Net Cost (SNC) represents the net cost of programs and organizations of 

the Department as supported by appropriations or other means. The intent of the SNC is to 

provide gross and net cost information related to the amount of output or outcome for a 

given program or organization administered by a responsible reporting entity. 

Intragovernmental costs and revenue represent transactions between two reporting entities 

within the Federal Government. Public costs and exchange revenues are transactions made 

between the reporting entity and a nonfederal entity.

The systems utilized by Defense Security Cooperation Agency for the FMS Trust Fund and 

the accounts for funds appropriated for security assistance do not fully meet accounting 

standards. Information presented is based on budgetary obligations, disbursements, and 

collection transactions, as well as nonfinancial feeder systems adjusted to record known 

accruals for major items, such as payroll expenses and accounts payable. The Department’s 

current processes and systems do not capture and report accumulated costs for major 

programs based upon the performance measures as required by the Government 

Performance and Results Act. The Department is in the process of reviewing available data 

and developing a cost reporting methodology as required by the 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.

Additionally, these systems do not track intragovernmental transactions by a customer at 

the transaction level. The FMS Trust Fund adjusts expenses by reclassifying amounts 

between federal and nonfederal expenses and accruing additional payables and expenses. 

Intradepartmental revenues and expenses are then eliminated. 
U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-26

NOTE 15. DISCLOSURES RELATED TO THE STATEMENT OF CHANGES IN NET 

POSITION

The Appropriations on the Statement of Budgetary Resources (SBR) does not agree with the 

Appropriations Received on the Statement of Changes in Net Position. The difference of 

$3.6 billion is primarily attributable to mandatory adjustments required by the Office of 

Management and Budget.

Year Ended September 30, 2015

Reconciliation of Appropriations on the Statement of Budgetary Resources to 

Appropriations Received on the Statement of Changes in Net Position

Dollars in 

Thousands

Total

Appropriations, Statement of Budgetary Resources $ 2,371,714

Less: Appropriations Received, Statement of Changes in Net Position 5,986,603

Total Reconciling Amount $ 3,614,889

Items Reported as Decreases to Appropriations, Statement of Budgetary Resources

Temporary Reductions $ 3,598,275

Transfers 16,614

Total Reconciling Items $ 3,614,889

NOTE 16. DISCLOSURES RELATED TO THE STATEMENT OF BUDGETARY 

RESOURCES

Disclosures Related to the Statement of Budgetary Resources Dollars in Thousands

As of September 30 2015 2014

Net Amount of Budgetary Resources Obligated for Undelivered Orders at 

the End of the Period $ 165,850,074 $ 159,932,064

Abnormal Balances

The abnormal balance of $11.7 thousand on the Budgetary, Uncollected Payments, Federal 

sources, end of year line is due to a timing difference.

The abnormal balance of $22.7 million on the NonBudgetary, Appropriation line is due to a 

one day loan initiated by one country. The DSCA borrowed the funds for the loan from the 

Treasury. The short duration of the loan caused the interest received on the loan to be less 

than the minimum interest due to Treasury. The DSCA will pay the additional interest due 

on the loan to Treasury.

Other Disclosures

Obligations incurred of $46.7 billion are direct and exempt from apportionment.

The SBR includes intra-entity transactions because the statements are presented on a 

combined basis.

Borrowings from the U.S. Treasury are required to be repaid once a year at the end of the 

fiscal year. The financing sources for the repayments on borrowings are loan repayments 

from the countries or permanent indefinite appropriations through subsidy reestimates.
U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-27

The portions of the FMS Trust Fund receipts collected in the current fiscal year that exceed 

current outlays are temporarily precluded from obligation by law. These receipts, however, 

are available for obligation as needed in the future.

The Federal Credit Reform Act of 1990 (FCRA) provides permanent indefinite appropriations 

to fund upward subsidy reestimates that fund repayments of principal and interest of 

U.S. Treasury borrowings with the Foreign Military Financing Direct Loan Program and the 

Military Debt Reduction Financing Account. The FCRA also provides permanent indefinite 

appropriations to fund loan defaults with the Federal Financing Bank in the Foreign Military 

Loan Liquidating Account.

The Appropriations line item on the SBR does not agree with Appropriations Received on the 

Statement of Changes in Net Position. Refer to Note 15, Disclosures Related to the 

Statement of Changes in Net Position, for additional details.

Legal limitations and time restriction on the use of unobligated appropriation balances are 

provided under Public Law.

NOTE 17. RECONCILIATION OF NET COST OF OPERATIONS TO BUDGET

Reconciliation of Net Cost of Operations to Budget Dollars in Thousands

As of September 30 2015 2014

Resources Used to Finance Activities

Budgetary Resources Obligated

Obligations incurred $ 46,710,313 $ 41,960,551

Less: Spending authority from offsetting collections and recoveries (1,991,844) (1,108,237)

Obligations net of offsetting collections and recoveries $ 44,718,469 $ 40,852,314

Less: Offsetting receipts (32,424,380) (29,267,942)

Net Budgetary Resources Obligated $ 12,294,089 $ 11,584,372

Total resources used to finance activities $ 12,294,089 $ 11,584,372

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 $ (5,918,010) $ (6,082,652)

Resources that fund expenses recognized in prior periods (14) 0

Budgetary offsetting collections and receipts that do not affect Net 

Cost of Operations 32,895,422 29,380,451

Resources that finance the acquisition of assets (453,863) (1,794)

Total resources used to finance items not part of the Net Cost of 

Operations $ 26,523,535 $ 23,296,005

Total resources used to finance the Net Cost of Operations $ 38,817,624 $ 34,880,377

Components of the Net Cost of Operations that will not Require or 

Generate Resources in the Current Period

Components Requiring or Generating Resources in Future Period

Other $ 1,607 $ 59

Total components of Net Cost of Operations that will Require or 

Generate Resources in future periods $ 1,607 $ 59

Components not Requiring or Generating Resources

Other $ 2,879 $ 0

Total Components of Net Cost of Operations that will not Require 

or Generate Resources $ 2,879 $ 0
U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-28

Reconciliation of Net Cost of Operations to Budget Dollars in Thousands

As of September 30 2015 2014

Total components of Net Cost of Operations that 

will not Require or Generate Resources in the current period $ 4,486 $ 59

Net Cost of Operations $ 38,822,110 $ 34,880,436

The Reconciliation of Net Cost of Operations to Budget reconciles the cost reflected on the 

Statement of Net Cost to the budgetary information reflected on the Statement of 

Budgetary Resources. This is accomplished by means of a reconciliation of budgetary 

obligations and non-budgetary resources available to the reporting entity with its net cost of 

operations.

The following Reconciliation of Net Cost of Operations to Budget lines are presented as 

combined instead of consolidated as intraagency budgetary transactions are not eliminated:

Obligations Incurred

Less: Spending Authority from Offsetting Collections and Recoveries

Obligations Net of Offsetting Collections and Recoveries

Less: Offsetting Receipts

Net Obligations

Undelivered Orders

Unfilled Customer Orders

Due to system limitations, budgetary data is not in agreement with proprietary expenses 

and assets capitalized. The difference between budgetary and proprietary data is a 

previously identified deficiency.

Components Requiring or Generating Resources in Future Period, Other, is attributable to 

Federal Employee Compensation Act actuarial expense.
U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX B List of Acronyms and Abbreviations

B-1

APPENDIX B: LIST OF ACRONYMS AND ABBREVIATIONS

Acronym Definition

AF-IPPS Air Force Integrated Personnel and Pay System ERP

AFR Agency Financial Report

AFRICOM Africa Combatant Command

ANSF Afghan National Security Force

APP Annual Performance Plan

APR Annual Performance Report

ASD Assistant Secretary of Defense

BAM Business Activity Monitoring tool

BBP Better Buying Power

BCA Budget Control Act 2011

CEFMS Corps of Engineers Financial Management System

CFO Chief Financial Officer

CIO Chief Information Officer

CMO Chief Management Officer

COCOM Combatant Command

COLA Cost of Living Adjustment

COR Contracting Officer Representative

COTS Commercial off-the-shelf

CPIM Consumer Price Index, Medical

CRS Career Readiness Standards

DAI Defense Agency Initiative ERP

DAU Defense Acquisition University

DAWIA Defense Acquisition Workforce Improvement Act

DBC Defense Business Council

DCAA Defense Contract Audit Agency

DCMA Defense Contract Management Agency

DCMO Deputy Chief Management Officer

DCPS Defense Civilian Pay System

DEAMS Defense Enterprise Accounting and Management System

DFAS Defense Finance and Accounting Service

DHA Defense Health Agency

DHP Defense Health Program

DJMS Defense Joint Military Pay System

DLA Defense Logistics Agency

DMDC Defense Manpower Data Center

DoD Department of Defense

DoDI Department of Defense Instruction

DSCA Defense Security Cooperation Agency

DTMO Defense Travel Management Office
U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX B List of Acronyms and Abbreviations

B-2

Acronym Definition

DTS Defense Travel System 

EBS Enterprise Business System ERP

EIC External Independent Contractor

ERP Enterprise Resource Planning

FBWT Fund Balance With Treasury

FFMIA Federal Financial Management Improvement Act of 1996

FIAR Financial Improvement and Audit Readiness

FM Financial Management

FMFIA Federal Managers’ Financial Integrity Act of 1982

FMR Financial Management Regulation

FMS Foreign Military Sales

FPSR FIAR Plan Status Report

FY Fiscal Year

GAO Government Accountability Office

GCSS-A Global Combat Support System - Army

GCSS-MC Global Combat Support System - MC

GFEBS General Fund Enterprise Business System

GPF General Purpose Force

HUMINT Human intelligence

ICBM Intercontinental Ballistic Missile

IDES Integrated Disability Evaluation System 

IG Inspector General

IPERA Improper Payments Elimination and Recovery Act of 2010

IPERIA Improper Payments Elimination and Recovery Improvement 

Act of 2012

IPIA Improper Payment Information Act of 2002

IPPS-A Integrated Personnel Pay System - Army

IRB Investment Review Board

ISAF International Security Assistance Force

ISR Intelligence, Surveillance and Reconnaissance

ISIL Islamic State of Iraq and the Levant

IT Information Technology

LMP Logistics Modernization Program

MDA Missile Defense Agency

MDAP Major Defense Acquisition Programs

MERHCF Medicare-Eligible Retiree Health Care Fund

MHS Military Health System

MICP Managers’ Internal Control Program

MILDEP Military Department

MOCAS Mechanization of Contract Administrative Services

MRF Military Retirement Fund
U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX B List of Acronyms and Abbreviations

B-3

Acronym Definition

MRHB Military Retirement Health Benefits

NATO North Atlantic Treaty Organization

NDAA National Defense Authorization Act

NDS National Defense Stockpile

O&M Operations and Maintenance

OCO Overseas Contingency Operations

ODO Other Defense organizations

OEF Operation Enduring Freedom

OIF Operation Iraqi Freedom

OIG Office of the Inspector General

OM&S Operating Material and Supplies

OMB Office of Management and Budget

OPSEC Operations Security

OSD Office of the Secretary of Defense

OUSD Office of the Under Secretary of Defense

OUSD(C) Office of the Under Secretary of Defense (Comptroller)

PBL Performance Based Logistics

PCS Permanent Change of Station 

PFPA Pentagon Force Protection Agency

PP&E Property, Plant, and Equipment

PSA Principal Staff Assistants

QDR Quadrennial Defense Review

R&D Research and Development

RAA Rapid Acquisition Authority

RDT&E Research, Development, Test, and Evaluation

SBA Schedule of Budgetary Activity

SBR Statement of Budgetary Resources

SCMR Strategic Choices and Management Review

SCNP Statement of Changes in Net Position

SFA Security force assistance

SFFAS Statement of Federal Financial Accounting Standards

SFIS Standard Financial Information Structure

SIG Senior Integration Group

SLOA Standard Line of Accounting

SNC Statement of Net Cost

SSAE Statement on Standards for Attestation Engagement

TAP Transition Assistance Program

TDY Temporary Duty 

UFC USACE Finance Center

U.S. United States

USACE United States Army Corps of Engineers
U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX B List of Acronyms and Abbreviations

B-4

Acronym Definition

USD Under Secretary of Defense

USD(AT&L) Under Secretary of Defense for Acquisition, Technology and 

Logistics

USGAAP United States Generally Accepted Accounting Principles

USMC United States Marine Corps

USSGL United States Standard General Ledger

USSOCOM United States Special Operations Command

USSTRATCOM United States Strategic Command

USTRANSCOM United States Transportation Command

VA Department of Veterans Affairs

WCF Working Capital Fund

WII Wounded, Ill, or Injured 
U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX C Useful Web Sites

C-1

APPENDIX C: USEFUL WEBSITES

Link URL

Budget Control Act of 2011 http://www.gpo.gov/fdsys/pkg/PLAW112publ25/pdf/PLAW-112publ25.pdf

Defense Advanced Research Projects 

Agency

http://www.darpa.mil

Defense Business Council http://dcmo.defense.gov/Governance/DefenseBusinessCou

ncil.aspx

Defense Commissary Agency http://www.commissaries.com

Defense Contract Audit Agency http://www.dcaa.mil

Defense Contract Management 

Agency

http://www.dcma.mil

Defense Finance and Accounting 

Service

http://www.dfas.mil

Defense Health Agency http://www.health.mil/dha

Defense Intelligence Agency http://www.dia.mil

Defense Information Systems Agency http://www.disa.mil

Defense Logistics Agency http://www.dla.mil

Defense Media Activity http://www.dma.mil

Defense POW/Missing Personnel 

Office

http://www.dpaa.mil/

Defense Security Cooperation Agency http://www.dsca.mil

Defense Security Service http://www.dss.mil

Defense Strategic Guidance 2012 http://www.defense.gov/news/Defense_Strategic_Guidanc

e.pdf

Defense Technical Information Center http://www.dtic.mil

Defense Technology Security 

Administration

http://www.dtsa.mil

Defense Threat Reduction Agency http://www.dtra.mil

Department of the Air Force http://www.af.mil

Department of the Army http://www.army.mil

Department of Defense (DoD) http://www.defense.gov/

Department of the Navy http://www.navy.mil

DoD Education Activity http://www.dodea.edu/

DoD Enterprise Transition Plan http://dcmo.defense.gov/Publications/EnterpriseTransition

Plan.aspx

DoD Financial Improvement and Audit 

Readiness

http://comptroller.defense.gov/fiar

DoD Financial Management 

Certification Program

http://comptroller.defense.gov/externalLinks/FMCert.aspx

DoD Financial Management 

Regulation

http://comptroller.defense.gov/fmr

DoD Human Resources Activity http://www.dhra.mil

DoD Joint Chiefs of Staff http://www.jcs.mil/
U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX C Useful Web Sites

C-2

Link URL

DoD Managers’ Internal Control 

Program

http://comptroller.defense.gov/fiar/micp.aspx

DoD, Office of the Inspector General http://www.dodig.mil/

DoD Strategic Management Plan http://dcmo.defense.gov/Publications/StrategicManagemen

tPlan.aspx

Federal Accounting Standards 

Advisory Board

http://fasab.gov/

Federal Financial Management 

Improvement Act

http://www.gpo.gov/fdsys/pkg/PLAW104publ208/pdf/PLAW-104publ208.pdf

Federal Managers’ Financial Integrity 

Act

http://www.gpo.gov/fdsys/pkg/STATUTE-96/pdf/STATUTE96-Pg814.pdf

Missile Defense Agency http://www.mda.mil

National Geospatial-Intelligence

Agency

https://www.nga.mil/Pages/default.aspx

National Guard http://www.nationalguard.mil

National Reconnaissance Office http://www.nro.gov

National Security Agency/Central 

Security Service

https://www.nsa.gov/

Office of Economic Adjustment http://www.oea.gov

Office of Management and Budget 

Circulars 

http://www.whitehouse.gov/omb/circulars_default/

Pentagon Force Protection Agency http://www.pfpa.mil

Quadrennial Defense Review 2014 http://www.defense.gov/qdr

U.S. Africa Command http://www.africom.mil

U.S. Central Command http://www.centcom.mil

U.S. European Command http://www.eucom.mil

U.S. Marine Corps http://www.marines.mil

U.S. Northern Command http://www.northcom.mil

U.S. Pacific Command http://www.pacom.mil

U.S. Southern Command http://www.southcom.mil

U.S. Special Operations Command http://www.socom.mil

U.S. Strategic Command http://www.stratcom.mil

U.S. Transportation Command http://www.transcom.mil

Washington Headquarters Services http://www.whs.mil
U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX D Index of Figures and Tables

D-1

APPENDIX D: INDEX OF FIGURES AND TABLES

FIGURES

Figure 1. DoD FY 2015 Budget Authority .......................................................................4

Figure 2. Department of Defense Organizational Structure ..............................................8

Figure 3. Office of the Secretary of Defense Principal Staff Assistants ...............................9

Figure 4. Reserve Components: Reserves and National Guard........................................ 10

Figure 5. Defense Agencies and DoD Field Activities ..................................................... 11

Figure 6. Combatant Commands ................................................................................ 12

Figure 7. DFAS Statistics FY 2015............................................................................... 20

Figure 8. Trend in DoD Budget Authority ..................................................................... 21

Figure 9. Composition of DoD Total Budgetary Resources .............................................. 22

Figure 10. Summary of Total Assets ........................................................................... 23

Figure 11. Summary of Total Liabilities ....................................................................... 24

Figure 12. Unfunded Liabilities ................................................................................... 24

Figure 13. Summary of Net Cost of Operations ............................................................ 25

Figure 14. Financial Performance Summary ................................................................. 27

Figure 15. General Funds Under Audit in FY 2015......................................................... 29

Figure 16. The Department’s Integrated Business Framework ........................................ 36

Figure 17. DoD Financial Management Improvement Initiatives ..................................... 37

Figure 18. Improper Payment Rate – Military Pay....................................................... 163

Figure 19. Improper Payment Rate – Civilian Pay ....................................................... 164

Figure 20. Improper Payment Rate – USACE Commercial Pay ...................................... 165

Figure 21. Improper Payment Rate – Military Retirement ............................................ 166

TABLES

Table 1. Summary of Financial Statement Audit ......................................................... 134

Table 2. Effectiveness of Internal Controls over Financial Reporting .............................. 135

Table 2a. FY 2015 Material Weaknesses in Internal Controls over Financial Reporting ..... 136

Table 2b. Effectiveness of Internal Controls over Non-Financial Operations.................... 147

Table 2b-1. Material Weaknesses in Internal Controls over Non-Financial Operations ...... 148

Table 2c. Conformance with Financial Management System Requirements..................... 152

Table 2c-1. FY 2015 Internal Control over Financial Systems Material Weakness ............ 153

Table 3. Compliance with Federal Financial Management Improvement Act.................... 154

Table 4. Improper Payment Reduction Outlook .......................................................... 160

Table 5. Improper Payment Root Cause Category Matrix ............................................. 161

Table 6. Status of Internal Controls .......................................................................... 171

Table 7. Improper Payment Recaptures with and without Audit Programs...................... 174

Table 8. Results of the Do Not Pay Initiative in Preventing Improper Payments .............. 177

Table 9. DoD Goals for Reduce the Footprint for the FY 2016-2020 Period..................... 179
U.S. Department of Defense Agency Financial Report for FY 2015

APPENDIX D Index of Figures and Tables

D-2

The Marine Corps Silent Drill Team performs during the evening parade at Marine Barracks Washington, D.C.

Photo by D. Myles Cullen

Two U.S. Air Force F-16C Fighting Falcons lead a mixed formation including a Bulgarian air force MiG-29 Fulcrum 

and MiG-21 Fishbed during Thracian Star 2015 over Bulgaria, July 20, 2015. 
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