AGENCY FINANCIAL

REPORT

UNITED STATES DEPARTMENT OF DEFENSE

 FISCAL YEAR 2014
 FOREWORD 

Agency Financial Report (AFR)

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

Fiscal Year (FY) 2014, 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 2015, the APR 

will provide a detailed description of performance measures and FY 2014 results.

Summary of Performance and Financial Information (SPFI)

The SPFI, published in February 2015 and available for viewing on the Under Secretary 

of Defense (Comptroller) public website, is a succinct summary of the FY 2014 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.

U.S. Sailors and Marines conduct visit, board, search and seizure training in a rigid-hull inflatable 

boat in the Gulf of Aden. 

Photo by Lance Cpl. Lonzo-Grei D. Thornton
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 2014. 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 2014. The MD&A also includes a 

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

2014 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 2014 Department of 

Defense financial statements and explanatory notes, 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 report or study for 

the Department of Defense is 

approximately $179,000 in 

Fiscal Years 2014 – 2015. 

This includes $68,000 in expenses and 

$111,000 in DoD labor. 

Generated on 2014Nov13 RefID: 2-73362DA
ii

This Page Left Blank Intentionally
U.S. Department of Defense Agency Financial Report for FY 2014

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 ............................................................................................................3

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

Organization.........................................................................................................6

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 ......................................................... 35

Improper Payment Reporting................................................................................ 39

Agency-Wide Financial Statements 

Principal Financial Statements and Notes .................................................................... 41

Required Supplementary Stewardship Information ..................................................... 108

Required Supplementary Information ....................................................................... 111

Independent Auditor’s Report ................................................................................. 118

Other Information

Managers’ Internal Control Program Detailed Report................................................... 131

Improper Payment and Payment Recapture Programs Detailed Report.......................... 145

Freeze the Footprint ............................................................................................... 170

Schedule of Spending ............................................................................................. 171

Inspector General’s Statement of Management and Performance Challenges ................. 172

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
U.S. Department of Defense Agency Financial Report for FY 2014

Table of Contents

iv

This Page Left Blank Intentionally

vi

This Page Left Blank Intentionally
FISCAL YEAR 2014

AGENCY FINANCIAL REPORT

MANAGEMENT’S

DISCUSSION AND

ANALYSIS

UNITED STATES DEPARTMENT OF DEFENSE
This Page Left Blank Intentionally
U.S. Department of Defense Agency Financial Report for FY 2014

Management’s Discussion and Analysis

1

MANAGEMENT’S DISCUSSION AND ANALYSIS

DEPARTMENT OF DEFENSE OVERVIEW

One of the core responsibilities of the United States government is to protect the life and 

liberty of the American people, or as phrased in the Constitution, to “provide for the 

common defense.” The Department of Defense (DoD) plays a critical role in defending and 

advancing the safety and security of American citizens and interests.

Today, the nation faces a rapidly 

changing security environment with dynamic 

and unpredictable threats around the world. 

Unrest and violence persist, creating a lack 

of stability and sectarian conflict, and 

threatening U.S. citizens. Following more 

than a decade of war, and with potential 

adversaries across the world continuing to 

develop significant capabilities, the 

Department of Defense is committed to 

protecting the American people, defending 

the national interest, and providing 

America’s military with the resources to 

accomplish its mission. 

Building on the Defense Strategic 

Guidance published in 2012, the Department 

delivered the Quadrennial Defense Review 

(QDR) 2014 to Congress in March 2014. The 

QDR is a legislatively-mandated report,

issued every four years, that evaluates the 

threats and challenges the nation will likely 

confront over the next 20 years. This QDR 

describes the tough choices the Department 

makes during this time of fiscal austerity to 

ensure our Armed Forces retain the 

capability to execute a wide range of missions to secure our nation’s interests, now and in 

the future.

The Department’s strategic priorities 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. We will invigorate efforts to build innovative partnerships and strengthen our 

alliances, all while pursuing lower-cost, resourceful approaches.

Chuck Hagel

Secretary of Defense
U.S. Department of Defense Agency Financial Report for FY 2014

Management’s Discussion and Analysis

2

Rebalancing to Asia-Pacific remains a key component of the defense strategy. The 

United States seeks to preserve peace and stability in a region that is increasingly central to 

U.S. political, economic, and security interests. Faced with North Korea’s 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 free and at 

peace, the Department works with 

U.S. allies and partners to promote

regional security. We are supporting

Ukraine’s Armed Forces in their current 

engagements in Eastern Ukraine, and 

have committed millions of dollars of 

non-lethal material and assistance.

More broadly, the Department is 

reinforcing our North Atlantic Treaty 

Organization (NATO) allies and

upholding our commitment to 

collective self-defense. The 

Department participates in military 

exercises throughout the Baltic republics and Poland, with American aircraft flying Baltic air 

policing missions and American ships increasing patrols in the Black Sea.

The Department continues its responsible drawdown of U.S. forces in Afghanistan. With 

the projected end of the International Security Assistance Force (ISAF) combat mission, 

there will be 9,800 U.S. troops serving in Afghanistan at the end of calendar year 2014. 

These troops will focus on training, advising, and assisting the Afghan forces as part of the 

NATO Resolute Support Mission, as well as conducting limited counterterrorism operations.

The Department also continues to finance the sustainment and professionalization of the 

Afghan National Security Forces (ANSF).

U.S. Army Stryker armored vehicles convoy during operations in 

support of Steadfast Javelin II, a NATO-led exercise.

Photo by Airman 1st Class Jordan Castelan

A U.S. Army National Guard Lieutenant guides vehicles in 

preparation for retrograde support mission at Camp Marmal, 

Afghanistan.

Photo by Staff Sgt. Peter Sinclair

A U.S. Special Forces Soldier watches after a clearing 

operation in which two suspected insurgents were detained and 

IED materials were destroyed.

Photo by Pfc. David Devich
U.S. Department of Defense Agency Financial Report for FY 2014

Management’s Discussion and Analysis

3

The U.S. and our allies and partners seek to degrade and ultimately destroy the threat 

posed by the Islamic State of Iraq and the Levant (ISIL). In the last few months, the world 

has seen ISIL's barbarity up close,

as its fighters advanced across 

western and northern Iraq and 

Syria and slaughtered thousands of 

innocent civilians. The DoD 

personnel in Iraq remain 

committed to building the capacity 

of the Iraqi Security Forces to 

defend their homeland. The DoD’s 

“Advise and Assist” role will help 

the Iraqis take back territory lost 

to ISIL.

The last 12 years have 

reinforced the importance of the 

Military Services operating as a 

Joint Force, specifically in terms of 

combined intelligence, surveillance 

and reconnaissance, cyber operations, and unmanned aerial vehicles. In FY 2014, the 

Military Services actively participated in the Combatant Command-sponsored large Joint 

Force exercises, as well as innovative, low-cost, and small-footprint engagements across the 

globe. The Department invested in exercises and engagements across all Combatant 

Commands as a cost-effective way to provide U.S. presence and reassure allies. 

The Department is focused on preparing for the future by rebalancing defense efforts in 

a period of increasing fiscal constraint. Our strategic priorities protect and advance 

U.S. interests and sustain America’s leadership; responsibly and realistically take steps to 

rebalance major elements of the Joint Force, given the changing fiscal environment; and 

continue our efforts to control costs and improve use of resources in a period of fiscal 

austerity. Our sustained attention and engagement will be important in shaping emerging 

global trends. 

RESOURCES

The FY 2014 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 2014 budget were to achieve a deeper 

alignment of our future force structure with resource availability, to maintain a 

mission-ready force, to emphasize institutional reforms by being even better stewards of 

taxpayer dollars, and to take care of our people and their families.

U.S. Air Force F-15E Strike Eagle aircraft flies over northern Iraq after 

conducting airstrikes in Syria. 

Photo by Senior Airman Matthew Bruch
U.S. Department of Defense Agency Financial Report for FY 2014

Management’s Discussion and Analysis

4

The DoD FY 2014 budget authority totaled 

$581.4 billion, composed of $496 billion in 

the base budget, and $85.4 billion in support 

of the Overseas Contingency Operations 

(OCO). Figure 1 displays the DoD FY 2014 

budgetary authority by appropriation.

Despite decreasing resources, the 

Department must maintain its decisive 

technological edge. In FY 2014, 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 its 

modernization efforts by funding three 

variants of the Joint Strike Fighter; a 

shipbuilding program that included two 

Virginia-class submarines, one Aegis

destroyer, and four littoral combat ships; 

various unmanned aerial systems, such as the Reaper; development of the KC-46A tanker

and procurement of P-8A aircraft; and a multi-faceted missile defense program.

Figure 1. DoD FY 2014 Budget

Authority

The littoral combat ship USS Independence at Joint Base Pearl Harbor-Hickam, Hawaii, during RIMPAC 2014 exercise. RIMPAC is 

a U.S. Pacific Fleet-hosted biennial multi-national maritime exercise to foster international cooperation and security on the world’s 

oceans.

Photo by Mass Communication Specialist 1st Class Shannon E. Renfroe

B14-17

OCO

$85.4B

(15%)

Base Budget

$496.0B

(85%)

Budget by Appropriation $ in Billions $ in Billions

Military Personnel $144.0 

Operation and Maintenance $262.5

Procurement* $99.7

RDT&E $62.9

Military Construction $8.4

Family Housing $1.4

Revolving Funds $2.5

Total $581.4

* Procurement includes $225M Iron Dome(P.L. 113-145)
U.S. Department of Defense Agency Financial Report for FY 2014

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. Recently, the Department announced a 20 percent reduction 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 2014 

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 440,000 – 450,000 and 

182,100 respectively.

Reserve Components are an important 

element of the Total Force, and the Department 

is focused on optimizing the active/reserve force 

mix, 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 their 

families who give so much to defend the ideals 

and free institutions we often take 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 9.6 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.

Paratroopers from the United States, France, Germany, 

the United Kingdom and the Netherlands participate in a 

mass parachute jump in Chef-du-Pont, France, to mark 

the 70th anniversary of D-Day. 

Photo by SPC Joshua E. Powell
U.S. Department of Defense Agency Financial Report for FY 2014

Management’s Discussion and Analysis

6

LOOKING FORWARD

Turmoil around the world continues, ranging from the threat presented by ISIL in Iraq 

and Syria to the potential of an Ebola pandemic. As reflected in the Quadrennial Defense 

Review 2014, the current strategic and budgetary environment compels us to think 

creatively and develop new ways to manage and employ the Joint Forces as we engage with 

the world. Force readiness decisions made today will continue to have an impact for years to 

come. 

The Department is continually developing and refining comprehensive plans for both 

resetting and rebalancing the total force, which includes all Reserve Component forces, in 

the most effective and efficient manner possible. During these times of fiscal austerity, 

particularly with the potential to return to the Budget Control Act of 2011 reduced funding 

levels, balancing between readiness, force structure sizing, and threats will remain a high 

priority. 

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 of the traditional boundaries of the battlefield. 

U.S. Marines and Sailors prepare to board a Marine Corps KC130J Super Hercules aircraft to deploy to West Africa in support of 

Operation United Assistance.

Photo by 1st Lt. Gerard R. Farao

U.S. Airmen board a C-17 Globemaster III aircraft to Monrovia, 

Liberia, carrying a modular medical treatment center and supplies in 

support of Operation United Assistance. 

Photo by Senior Airman Kayla Newman

Operation United Assistance, a USAFRICOM-led operation, provides command and control, logistics, training, and engineering 

support to the U.S. government's efforts to contain the Ebola virus outbreak.
U.S. Department of Defense Agency Financial Report for FY 2014

Management’s Discussion and Analysis

7

The Department is one of the nation’s largest employers, with approximately 1.3 million 

personnel on active duty, 756,000 civilians, and 824,000 men and women in the Selected 

Reserve of National Guard and Reserve forces. Our military service members and civilians 

operate in every time zone and in every climate, and more than 450,000 of our employees 

serve overseas. There also are more than 2 million military retirees and family members 

receiving benefits. 

The Department's real property infrastructure includes over 526,000 facilities (buildings

and structures) located on 4,800 sites worldwide. These sites represent over 24.7 million 

acres that individually range in size from training ranges of approximately 3 million acres, 

such as Range No.1 at Nellis Air Force Base, to single weather towers or navigational aids 

isolated on sites of less than one one-hundredth (0.01) of an acre. To protect the security of 

the United States, the Department operates approximately 17,580 aircraft and 630 ships. 

The Secretary of Defense is the principal assistant 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.

U.S. Sailors and civil service mariners on the joint high-speed vessel USNS Spearhead maneuver a rigid-hull inflatable boat into the 

water during Africa Partnership Station (APS) 2014 in the Gulf of Guinea. APS is an international security cooperation initiative 

facilitated by the Commander, U.S. Naval Forces Europe-Africa. 

Photo by Mass Communication Specialist Seaman Justin R. DiNiro
U.S. Department of Defense Agency Financial Report for FY 2014

Management’s Discussion and Analysis

8

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; 

their staff; 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

President Barack Obama, right, Defense Secretary Chuck Hagel, center, 

and Army Gen. Martin Dempsey, chairman of the Joint Chiefs of Staff, 

salute the American flag as the national anthem plays during the ceremony 

to commemorate 9/11 at the Pentagon, Sept. 11, 2014. 

Photo by Master Sgt. Adrian Cadiz
U.S. Department of Defense Agency Financial Report for FY 2014

Management’s Discussion and Analysis

9

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.

* 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

** Alternative organizational placements are being considered for the Director, Net Assessment

USD

(Acquisition, 

Technology, & 

Logistics)

USD

(Policy)

USD

(Comptroller)/

Chief Financial 

Officer

USD

(Personnel & 

Readiness)

USD

(Intelligence)

Inspector

General,

DoD*

Deputy Chief 

Management 

Officer

Director, Cost

Assessment & 

Program 

Evaluation

Director, 

Operational

Test &

Evaluation

General

Counsel,

DoD

ASD

(Legislative 

Affairs)

ATSD

(Public

Affairs)

DoD Chief 

Information 

Officer

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 2014

Management’s Discussion and Analysis

10

Office of the Inspector General

The Office of Inspector General, 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.

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 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 (non-federalized service). 

When ordered to active service or called into federal service for national emergencies, units 

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

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

defense and fully part of the applicable Military Department.

Figure 4. Reserve Forces and National Guard
U.S. Department of Defense Agency Financial Report for FY 2014

Management’s Discussion and Analysis

11

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 18 Defense Agencies and 9 DoD 

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

Defense through an OSD Principal Staff Assistant (PSA).

Combatant Commands

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

accomplishing the military missions assigned to them. Combatant Commanders exercise 

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

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

Figure 5. Defense Agencies and DoD Field Activities
U.S. Department of Defense Agency Financial Report for FY 2014

Management’s Discussion and Analysis

12

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 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 2014

Management’s Discussion and Analysis

13

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. 

For FY 2014, the Department continued to follow the Quadrennial Defense Review (QDR) 

Report 2010 priorities. The Quadrennial Defense Review 2014 was issued in March of 2014,

and new performance measures associated with the most recent QDR are under 

development. The current performance measures were shaped by the following strategic 

goals: 

1. Prevail in today’s wars.

2. Prevent and deter conflict.

3. Prepare to defeat adversaries and succeed in a wide range of contingencies.

4. Preserve and enhance the all-volunteer force.

5. Reform the business and support functions of the Defense enterprise.

 

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

U.S. Marines leave the well deck of the amphibious dock landing ship USS Germantown in a combat rubber raiding craft during 

Amphibious Landing Exercise (PHIBLEX) 15 in Manila Bay, Philippines. PHIBLEX is a bilateral training exercise designed to 

improve the interoperability, readiness, and professional relationships between the USMC and partner nations. 

Photo by Mass Communication Specialist Seaman Patrick Dionne
U.S. Department of Defense Agency Financial Report for FY 2014

Management’s Discussion and Analysis

14

The Department’s strategic priorities serve as the foundation for the strategic objectives, 

performance goals, and performance measures outlined in the Department’s Annual 

Performance Plan (APP). The OSD Principal Staff Assistants are responsible for creating the 

performance measures, which are published each year in the DoD Budget Request. These 

performance measures encompass activities related to both the Department’s warfighting 

mission and business (institutional) operations to create a holistic annual performance plan 

and budget submission.

This report provides an executive-level overview of DoD’s performance through the third 

quarter, ending June 30, 2014, with fiscal-year end results published in the Annual 

Performance Report (APR) in the Department’s budget submission in February 2015.

SUMMARY OF PERFORMANCE RESULTS

At the end of the third quarter, 89 percent of Warfighting measures were on track to 

meet the annual goals, while 11 percent did not meet third quarter targets and are 

considered “at risk” of not achieving their annual targets. Similarly, 75 percent of the 

Institutional measures are on track while 25 percent are at risk of not achieving their annual 

targets. However, the Department is currently re-evaluating those performance measures to 

conform to new strategic priorities identified in the Quadrennial Defense Review 2014, 

released in the Spring of 2014. 

Successes

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

quarter, FY 2014, including those related to mission readiness and providing high quality 

care to wounded warriors. 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. 

Figure 7. Performance Measure Results, Third Quarter FY 2014

1

11%

8

89%

Warfighter Measures

At Risk On Target

10

25%

30

75%

Institutional Measures

At Risk On Target B14-48
U.S. Department of Defense Agency Financial Report for FY 2014

Management’s Discussion and Analysis

15

Mission Readiness

Despite a challenging fiscal environment, the Department has remained committed to 

ensuring that our Nation’s military remains ready to train, advise, and assist foreign security 

forces and their sustaining institutions to operate with or in lieu of U.S. forces. To that end, 

the Department requires that annually, 95 percent of General Purpose Force (GPF) 

units/teams deployed to support Combatant Command (COCOM) security force 

assistance (SFA) requirements receive focused SFA training. As of the end of the third 

quarter, FY 2014, 100 percent of GPF deployed to support SFA requirements receive focused 

SFA training, ensuring that warfighters in Afghanistan and elsewhere around the globe were 

trained and prepared to build partnership capacity. 

In FY 2014, the Department took three priority actions with regard to the Defense 

Institutional Reform Initiative, a program that develops effective, accountable, professional 

and transparent partner defense establishments in partner countries that can manage 

sustain and employ national forces.

(1) Established a larger pool of 

advisors and technical experts, cohesively 

trained and employed, to meet growing 

engagement demand.

(2) Worked with DoD Components for 

exceptions to hiring freezes to improve 

program capacity.

(3) Worked more closely with 

Commands and Security Officers to 

improve defense institutions. 

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 controls and improved 

financial practices, processes, and systems so there is reasonable confidence the information 

can withstand review by an independent auditor. 

The Department is currently focused on two Statement of Budgetary Resources (SBR) 

line items, “Obligations Incurred” and “Outlays,” which closely relate to current year 

activity, or the “Schedule of Budgetary Activity” (SBA). For Quarter 3, the Department set a 

target of having 25 percent of the SBR “Obligations Incurred” line item validated as audit 

ready, and we achieved 51 percent.

U.S. Air Force, U.S. Navy, Japan Air Self-Defense Force, and 

Royal Australian Air Force aircraft fly in formation over the Pacific 

Ocean in support of Cope North 2014. Cope North is an annual air 

combat tactics, humanitarian assistance and disaster relief exercise 

designed to increase the readiness and interoperability of the 

U.S. Air Force, Japan Air Self-Defense Force, and Royal Australian 

Air Force. 

Photo by Tech. Sgt. Henry Hoegen
U.S. Department of Defense Agency Financial Report for FY 2014

Management’s Discussion and Analysis

16

Processing Wounded Warriors through 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 2014, the 

Department continued its work with the 

U.S. Department of Veterans Affairs

(VA) to accelerate the transition of 

Wounded, Ill, and Injured (WII) Service 

members into Veteran status by 

reducing the disability evaluation 

processing time.

The Integrated Disability Evaluation 

System (IDES) is used to determine if 

Service members coping with wounds 

that may prevent them from performing 

their duties are able to continue serving. 

IDES is a joint process established by the 

VA and DoD that includes a single set of 

medical examinations and disability 

ratings. The goal is to close the gap 

between separation from active duty and receipt of VA benefits and compensation.

Despite numerous cross-agency challenges, the Department was able to meet its IDES

goal. One indicator used to assess the efficiency and effectiveness of the IDES system is the 

percentage of Service members who meet DoD’s core IDES time and Service member 

satisfaction goals. In the third quarter of FY 2013, just 26 percent of Service members being 

processed through IDES met time and satisfaction goals; a year later, in the third quarter of

FY 2014, the percentage rose to 79 percent. The Department is on track to achieve the 

fourth quarter goal of 80 percent.

AREAS FOR IMPROVEMENT 

The Department successfully achieved 89 percent of its Warfighting measures, meeting 

or exceeding third quarter targets, indicating that they are on track to achieve their annual 

performance goals. However, the Department did not meet 25 percent of its third quarter

targets for Institutional measures, indicating they are at risk for not achieving annual 

performance goals. There are improvement opportunities related to human intelligence and 

veterans transitioning into the civilian workforce.

Athletes dive into a pool during the 2014 Warrior Games in Colorado 

Springs, Colo. The Warrior Games is an annual event allowing 

wounded, ill and injured Service members and veterans to compete in 

Paralympic sports including archery, cycling, shooting, sitting 

volleyball, track and field, swimming, and wheelchair basketball. 

Photo by Airman 1st Class Scott Jackson
U.S. Department of Defense Agency Financial Report for FY 2014

Management’s Discussion and Analysis

17

Human Intelligence (HUMINT) Training

The Department set a target that by the third quarter, 62 percent of funded training 

seats at the HUMINT Joint Center of Excellence for Military Source Operations, 

Interrogation, and HUMINT-enabling training activities would be filled through student 

enrollments. However, only 45 percent of funded training seats were filled. Several factors 

that have limited the desired performance in FY 2014 – lingering restrictions based on the 

Budget Control Act of 2011, to include sequestration, the government shutdown, and an 

overall overstated training requirement based on uncertainty with continued operations in

Afghanistan, Iraq, and Africa. 

To gain efficiencies, the Department began to transition courseware to a distributed 

learning environment online. The first transition, for the Joint Source Validation Course, was 

not completed in the third quarter due to technical difficulties, which negatively impacted 

course enrollments. Once the course is fully transitioned to an online platform, 100 percent

of the validated training requirement can be met. In addition to the online learning 

environment, the Department is establishing Mobile Training Teams to make training more 

accessible.

Career Readiness and Pre-Separation Training for Veterans

Our Nation can and should provide the best support possible to those who keep our 

country free and strong as they transition to civilian life. The Department is partnering with 

other federal agencies to ensure that all Service members participate in an effective 

program of pre-separation planning and education. 

To this end, Service Members 

must complete a set of clear, 

comprehensive career preparation 

activities prior to leaving Active 

Duty status to be considered 

“career ready.” These Career 

Readiness Standards (CRS), an 

integral component of the 

Transition Assistance Program

(TAP), help to ensure Service 

members have the training and 

skills needed to succeed in civilian 

life. Completion of CRS activities 

is mandatory for all Service 

members retiring, separating, or 

being released after 180 days or 

more of Active Duty. The 

Commanders verify CRS 

completion during a mandatory 

event called "Capstone," no later than 90 days prior to transition.

U.S. Soldiers and civilians participate in the Morale, Welfare and Recreation's 

9th Annual 5k Down and Dirty Mud Run, at Joint Base Lewis-McChord, Wash. 

The run consisted of 14 obstacles and is part of the Morale, Welfare and 

Recreation's efforts to promote healthy activities. 

Photo by Sgt. Cody Quinn
U.S. Department of Defense Agency Financial Report for FY 2014

Management’s Discussion and Analysis

18

For third quarter, the Department set a goal that 85 percent of eligible Service members 

would meet CRS prior to their separation. The Department did not meet this goal, verifying 

that only 26.4 percent of Service members had met CRS prior to separating. 

Data gathering processes for this measure are immature and continue to evolve. 

Capstone, the process used to verify CRS by Commanders or Commanders’ designees, was 

launched in October 2013 for some Military Services, but was not fully implemented until 

March 2014. The Department expects reported performance to improve as Capstone and 

improved data collection processes are implemented across installations to provide complete 

and timely data.

Another performance measure used to gauge how well the Department prepares Service 

members to transition to veteran status is the following: Verified percent of Service 

members who have separated and attended (a) pre-separation counseling, 

(b) a Department of Labor employment workshop, and (c) VA benefits briefings prior to 

their separation. This performance measure tracks the attendance rate to three specific 

classes/information briefings in accordance with the Vow to Hire Heroes Act of 2011 (known 

as the VOW Act), while the CRS measure takes into account a broader spectrum of activities 

to achieve career readiness prior to separation. To calculate the results for the VOW Act 

performance measure, the Defense Manpower Data Center (DMDC) queries a TAP database 

for each separation reported to determine whether or not course completion and counseling 

session records are present for the Service member. 

For third quarter, the Department set a goal of achieving 85 percent validation, but only

59.3 percent were validated. Data collection processes for these new measures are 

immature and continue to evolve. The Department is actively working with the Military 

Departments and DMDC to ensure that required TAP services are being delivered, identify 

the causes of data gaps, and enable Service TAP offices to more easily and accurately report 

completion of pre-separation counseling and course attendance. Progress is being made as 

a result of these efforts.

In summary, the Department’s focus on mission readiness over the past year has 

resulted in success on 89 percent of its “warfighting” measures, including that 100 percent 

of General Purpose Force units/teams deployed to support Combatant Command security 

force assistance (SFA) requirements had received focused SFA training. Most importantly, 

the Department has maintained its commitment to caring for Service Members and their 

families who have borne the burden of more than a decade of war. While the Department 

did not meet 25 percent of its third quarter targets for Institutional measures, we have 

identified improvement opportunities related to human intelligence and veterans 

transitioning into the civilian workforce. The Department plans on building on the 

momentum of the successes of the past year to improve performance related to those and 

other measures.

U.S. Department of Defense Agency Financial Report for FY 2014

Management’s Discussion and Analysis

20

FINANCIAL OVERVIEW

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

in FY 2014 and a high-level overview of how the Department’s met its performance goals 

and objectives as of the third quarter of FY 2014. The FY 2014 final results for all 

Department performance measures will be reported in the Department’s Annual 

Performance Report, which will be available in February 2015.

The Department continues to make strides in its efforts towards producing auditable 

financial statements, as evidenced by the upcoming audits of the Army, Navy, and Air Force 

Schedules of Budgetary Activity (SBA) and the planned audit readiness assertion on the SBA 

by some of the Other Defense Agencies. Also, several DoD Components have received and 

maintained audit opinions on their full financial statements, some for many years.

Department-wide, we continue to replace, update, and consolidate outdated and 

redundant information technology (IT) systems, with plans to reduce the number of 

financial management systems from 327 to 120 by FY 2019. New data standards have been 

put in place to improve data quality and systems interoperability. Additionally, through the 

Managers’ Internal Controls Program, the Department continues to identify and fix gaps in 

business practices, policies, and procedures that could leave room for errors or weaknesses. 

With fewer systems and improved business processes, the Department can more readily 

achieve and sustain the reliability of reported financial information that meets the 

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

A U.S. Soldier conducts fire phobia training as part of Steppe Eagle 2014, an annual exercise between 

the U.S. and several Central Asian partner nations designed to train participants in peace support 

operations. 

Photo by Pfc. Lloyd Villanueva
U.S. Department of Defense Agency Financial Report for FY 2014

Management’s Discussion and Analysis

21

At present, the Department cannot produce 

auditable financial statements and management 

cannot provide unqualified assurance as to the 

effectiveness of our internal controls over 

financial reporting. The Department currently 

lacks the ability to prove reliable and wellcontrolled business processes and consistently 

provide supporting documentation to auditors 

in a timely manner. The Department’s Financial 

Improvement and Audit Readiness (FIAR) 

Initiative, which is briefly discussed later in this 

report, guides the Department’s efforts to 

improve our financial management.

Part of the challenge in successfully passing 

a financial statement audit lies with DoD’s 

unique size and mission. For example, Figure 8

shows the magnitude of financial activities 

processed only by the Defense Finance and Accounting Service (DFAS) in FY 2014, and does 

not include transactions processed by other DoD entities, such as the U.S. Army Corps of 

Engineers or the Defense Health Agency. Although we have yet to achieve full auditability, 

the Department is 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. 

FINANCIAL HIGHLIGHTS AND ANALYSIS

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

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

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

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

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

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

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

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

Government, a sovereign entity. 

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

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

report. The principal financial statements include:

• Statement of Budgetary Resources

• Balance Sheet

• Statement of Net Cost

• Statement of Changes in Net Position 

Figure 8. DFAS Statistics FY 2014

Description FY 2014

Number of Pay Transactions 150.2 Million

Number of Commercial Invoices 

Paid 11.5 Million

Number of Travel Payments 5.8 Million

Number of General Ledger 

Accounts managed 228.6 Million

Amount Disbursed $572 Billion

Amount of Military Retirement 

and Health Benefits Funds 

Managed

$772 Billion

Foreign Military Sales Cases 

Reimbursed by Foreign 

Governments 

$424 Billion
U.S. Department of Defense Agency Financial Report for FY 2014

Management’s Discussion and Analysis

22

Statement of Budgetary Resources

One of the most critical financial improvement and audit readiness priorities in the 

Department involves the processes, controls, and systems that 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 9, the Department’s FY 2014

budget authority total is $581.4 billion. The change in FY 2014 budget authority from

FY 2013 is mostly attributable to sequestration actions required by the Budget Control Act of 

2011 and the Bipartisan Budget Agreement of 2013. 

As shown in Figure 10, the Department reported $1.1 trillion in FY 2014 total budgetary 

resources. The total appropriations amount of $737.6 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. 

Figure 9. Trend in DoD Budget Authority

Figure 10. Composition of DoD Total 

Budgetary Resources

Description FY 2014

($ in billions)

DoD Budget Authority $581.4

U.S. Treasury contribution for Military 

retirement and health benefits 84.3

Civil works projects executed by the 

USACE 4.3

Trust Fund Receipts 136.1

Trust Fund Resources Temporarily Not 

Available (68.5)

Total Appropriations Reported 

on SBR $737.6

Unobligated Balances from Prior Year 

Budget Authority 175.9

Spending Authority from Offsetting 

Collections 100.3

Contract and Borrowing Authority 70.6

Total Budgetary Resources $1,084.4

528.2 529.0 530.6 527.5 496.0

163.0 159.0 115.1 87.3 85.4

$0

$100

$200

$300

$400

$500

$600

$700

$800

FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

Base Budget OCO

$691.2 $688.0

$614.8 $645.7

$581.4

B14-35

$ in Billions
U.S. Department of Defense Agency Financial Report for FY 2014

Management’s Discussion and Analysis

23

Additional budgetary resources include $175.9 billion of unobligated balances stemming 

from prior year budget authority, $100.3 billion in spending authority from offsetting 

collections, and $70.6 billion of contract authority.

Of the $1.1 trillion in total budgetary resources, $933.7 billion was obligated and 

$891.1 billion of obligations was disbursed. The remaining unobligated budgetary resources 

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

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

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

for new obligations.

BALANCE SHEET

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

September 30, 2014, reports amounts available to provide future economic benefits 

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

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

The $2.2 trillion in assets shown in Figure 11 represent amounts the Department owns 

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

Treasury (FBWT) represent 84 percent of the Department’s assets. General Property, Plant, 

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

facilities used to support the Department’s mission requirements.

Figure 11. Summary of Total Assets

B14-31

$1,915.9 

$2,031.5 $2,085.7 

$2,179.8 $2,234.8 

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

$2,200

$2,400

FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

Trend in Assets $ in Billions

Breakout

Property, 

Plant, and 

Equipment

$619.0

28%

Fund 

Balance with 

Treasury

$480.4

21%

Investments

$787.1

35%

Accounts 

Receivable

$8.0

0% Other 

Assets*

$78.8

4%

Inventory

$261.5

12%

FY 2014 

Assets

* Includes Other Assets, Cash and Other 

Monetary Assets, and Loans Receivable
U.S. Department of Defense Agency Financial Report for FY 2014

Management’s Discussion and Analysis

24

Total Assets increased $55 billion (3 percent) from FY 2013, largely due to a 

$72.3 billion increase in Investments in U.S. Treasury securities offset by a $20.6 billion 

decrease in General Property, Plant, and Equipment. Investments increased by $72.2 billion 

due to the $83.5 billion deposit of additional funds from the U.S. Treasury and military 

services to cover the normal growth of future military retirement and health benefits. Funds 

not needed to cover current benefits were invested in U. S. Treasury Securities. The $20.6

billion decrease in the Department’s General Property, Plant, and Equipment is primarily the 

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

improve the valuation of its assets. 

As seen in Figure 12, the Department’s total liabilities increased $46.4 billion during 

FY 2014, almost exclusively due to upward adjustments in the estimated actuarial liability

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

Office of the Actuary revised the cost basis for the estimate by $46.6 billion. The 

Department’s $2.5 trillion of liabilities reported in FY 2014 are backed by the full faith and 

credit of the United States Government. 

Figure 13 shows the $1.7 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 $1.4 trillion actuarial 

liability accounts for approximately 82 percent of the total $1.7 trillion in liabilities not 

covered by budgetary resources. Additionally, the Department has resources available to 

cover approximately $670.9 billion of the remaining liabilities, primarily invested in 

U.S. Treasury securities. 

Figure 12. Summary of Total Liabilities

B14-32

$2,322.4 $2,351.5 

$2,458.0 $2,412.1 $2,458.5 

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

$2,200

$2,400

$2,600

FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

Trend in Liabilities $ in Billions

Breakout

Accounts 

Payable

$19.8

1%

Military Retirement 

and Employment 

Benefits

$2,334.0

95%

Environmental 

and Disposal 

Liabilities

$58.6

2%

Other Liabilities*

$46.1

2%

FY 2014 

Liabilities

* Includes Other Liabilities, Debt, 

and Loan Guarantee Liability
U.S. Department of Defense Agency Financial Report for FY 2014

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 $640 billion in net costs of operations during the fiscal year. 

As depicted in Figure 14, the $640 billion in net cost of operations represents an

$82 billion increase (15 percent) from FY 2013 reported net cost. A $69.7 billion change to 

the actuarial assumptions used to estimate and record accruals for future payments of 

military retirement and health care benefits increased the overall net cost of operations. The 

change resulted in a loss on the net cost of operations and also has the effect of increasing 

the liabilities on the Balance Sheet. 

Figure 13. Unfunded Liabilities

B14-33

$ in Billions

Liabilities 

covered by 

Budgetary 

Resources

$730.3

30%

Liabilities not 

covered by 

Budgetary 

Resources

$1,728.3

70%

All Other 

Unfunded 

Liabilities

$16.9

Unfunded 

Environmental 

Liabilities

$54.9

DoD Unfunded 

Military Retirement 

Benefits

$244.3

Unfunded Military 

Retirement and 

Benefits funded 

by Treasury

$1,412.2

Breakout

$1,728.3

$1.7T
U.S. Department of Defense Agency Financial Report for FY 2014

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 $8.6 billion during FY 2014. The increase reflects primarily the

impact of the change in actuarial liability estimates, offset by the impact of the decrease in 

the value of property, plant, and equipment during FY 2014.

Financial Performance Summary

The Department’s financial performance is summarized in Figure 15 on the following 

page. 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. 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 can be and is used 

to manage the Department’s operations successfully.

Figure 14. Summary of Net Cost of Operations

615.0 615.3 622.3 

558.0 556.3 

204.8 

68.9 

146.6 

$83.7 

$0

$100

$200

$300

$400

$500

$600

$700

$800

FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

DoD Costs Military Retirement Benefit Costs B14-34

$819.8

$684.2

$768.9

$640.0

Trend in Net Cost of Operations

Procurement

$94.0

15%

Operations, 

Readiness & 

Support

$224.8

35%

Research, 

Development, 

Test & 

Evaluation

$61.04

10%

Military 

Personnel

$142.0

22%

Civil Works

$7.4

1%

Military 

Retirement 

Benefits

$83.7

13%

Family Housing 

& Military 

Construction

$26.7

4%

Breakout

FY 2014 

Net Cost of 

Operations

$ in Billions

$558.0
U.S. Department of Defense Agency Financial Report for FY 2014

Management’s Discussion and Analysis

27

Figure 15. Financial Performance Summary

Dollars in Billions

FY 2014 FY 2013 Change % Change

ASSETS

Fund Balance with Treasury $ 480.4 $ 482.7 ($ 2.3) -0.5%

Investments 787.1 714.8 72.3 10.1%

Accounts Receivable 8.0 11.7 (3.7) -31.6%

Other Assets 78.8 77.0 1.8 2.3%

Inventory and Related Property, Net 261.5 254.0 7.5 3.0%

General Property, Plant and Equipment, Net 619.0 639.6 (20.6) -3.2%

Total Assets $ 2,234.8 $ 2,179.8 $ 55.0 2.5%

LIABILITIES

Accounts Payable $ 19.8 $ 21.7 ($ 1.9) -8.8%

Other Liabilities 46.1 51.5 (5.4) -10.5%

Military Retirement and Other Federal Employment 

Benefits 2,334.0 2,280.6 53.4 2.3%

Environmental and Disposal Liabilities 58.6 58.3 0.3 0.5%

Total Liabilities $ 2,458.5 $ 2,412.1 $ 46.4 1.9%

Total Net Position (Assets Minus Liabilities) ($ 223.7) ($ 232.3) $ 8.6 3.7%

Total Financing Sources 646.5 727.2 (80.7) -11.1%

Less Net Cost of Operations 640.0 558.0 82.0 14.7%

Net Change of Cumulative Results of Operations 6.5 169.2 (162.7) 96.2%

Total Budgetary Resources $ 1,084.4 $ 1,097.8 ($ 13.4) -1.2%
U.S. Department of Defense Agency Financial Report for FY 2014

Management’s Discussion and Analysis

28

FINANCIAL MANAGEMENT IMPROVEMENT INITIATIVES

Financial Improvement and Audit Readiness Initiative

As Secretary Hagel reported to Congress and told the men and women serving in the 

Department of Defense, getting our financial house in order is one of the Department’s top 

priorities. Deputy Secretary Work has echoed Secretary Hagel’s message and recently 

challenged leaders of the Defense Agencies and activities to be champions for Financial 

Improvement and Audit Readiness (FIAR) – to demand compliant processes and systems, to 

incorporate audit readiness in employee performance plans, and to be prepared to move out of 

audit readiness and into the business of being under continuous audit. The message is clear: 

The DoD leadership team is serious about improving financial management processes and 

controls over DoD resources.

Audit readiness is critically important for the Department of Defense. “Audit ready”

means the Department has reasonable assurance about the effectiveness of its internal 

controls and financial practices, processes, and systems and their ability to withstand audit 

by an independent auditor. Financial statement auditability is not only required by law2

, but 

will demonstrate that the Department properly manages and is a good steward of taxpayer 

dollars. 

This year, the Department made substantial progress. The U.S. Marine Corps became 

the first Military Service to achieve an unmodified (“clean”) opinion on its Schedule of 

Budgetary Activity (SBA) for FY 2012, which reported on the Marine Corps’ receipt and use 

of funds in FY 2012. Achieving an opinion on the SBA shows that the Marine Corps’ 

budgetary processes, controls, and systems, which are the same used in reporting both 

current and expired funds in the Statement of Budgetary Resources (SBR), can meet audit 

standards. 

Following the Marine Corps’ audit readiness approach, the Military Departments and 

many of the other Defense organizations (ODOs) asserted audit readiness on their FY 2015 

appropriations, to be reported on a Schedule of Budgetary Activity (SBA). Beginning in 

January 2015, over 90 percent of the Department’s current year appropriations will be 

under audit. Most of the other ODOs not under audit will begin SBA examinations or mock 

audits in FY 2015. All remaining ODOs will continue audit readiness activities and not be 

audited until the DoD Consolidated Financial Statements are audited in FY 2018.

 

2 Chief Financial Officers Act of 1990 (“CFO Act”) (Public Law 101-576), as amended by the Reports Consolidation 

Act of 2000; the Government Management Reform Act of 1994 (GMRA) (Public Law 103-356); National Defense 

Authorization Act of 2010 (Public Law 111-84)
U.S. Department of Defense Agency Financial Report for FY 2014

Management’s Discussion and Analysis

29

Figure 16 identifies the DoD Components that will be under audit in FY 2015 and their 

percent of the total DoD General Funds. The DoD Components have now expanded the audit 

readiness focus from budgetary data to all financial transactions to achieve the full goal of 

auditing full financial statements in FY 2018. Several DoD Components that have received 

and sustained audit opinions on their full financial statements, such as the U.S. Army Corps of 

Engineers Civil Works, will continue to prepare stand-alone financial statements. 

In terms of our strategic warfighting mission and the size of the Department’s annual 

budget and quantity of worldwide physical assets, no organization in the world can compare 

with the complexity of the U.S. Department of Defense. As the Department continues to 

emphasize improvements in its business processes and more and more of the DoD 

Components achieve audit readiness and complete audits successfully, the Department will 

demonstrate its effective stewardship of taxpayer dollars. Additional information on the 

Department’s Financial Improvement and Audit Readiness Initiative, as well as the latest FIAR 

Plan Status Report, is available on the Under Secretary of Defense (Comptroller)’s public 

website. 

Figure 16. General Funds Under Audit in FY 2015
U.S. Department of Defense Agency Financial Report for FY 2014

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. Ninety-eight percent of 

Active-Duty Military and Civilian FM personnel have transitioned 

into the program, and over 725 members have already achieved 

their required certification. The FM personnel in the Reserve 

Components will be 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, 38 of these courses are available to the workforce, 

resulting in improved, cost-free access to training in key, substantive subject areas. 

To date, over 38,000 FM web-based course completions have been recorded and over 

6,000 of these course completions are in the Financial Improvement and Audit 

Readiness (FIAR) area. This metric’s results indicate that the Program already 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 2014

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; 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 $37 billion in 

additional cost reductions over the period of FY 2014 through FY 2018 (Future Years 

Defense Program) from the amount of funds requested in the Department’s FY 2014 

President’s Budget. The savings include:

• Streamlining Business Practices and Support Services. The Department saved 

$19 billion by streamlining business practices and support services, such as 

installation and administrative functions, contracting, and staffing. 

• Terminating or Restructuring Weapons Programs. The Department saved $14 billion

by identifying and terminating programs where the most important capabilities could 

be met by other means.

• Restructuring and Delaying Military Construction Projects. The Department saved 

$4 billion by funding only the most critical facility requirements and ensuring 

construction projects only support requirements after force structure adjustments. 

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. Sailors assigned to Naval Mobile Construction Battalion 11 pour concrete for a 

project at Camp Lemonnier, Djibouti.

Photo by Mass Communication Specialist 1st Class Jonathan Carmichael
U.S. Department of Defense Agency Financial Report for FY 2014

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’s management has a fundamental responsibility 

to develop and maintain effective internal controls to provide reasonable assurance that 

obligations and cost are in compliance with applicable laws; funds, property, and other 

assets are safeguarded against waste, loss, and unauthorized use or misappropriation; 

revenues and expenditures are properly recorded and accounted for; and programs are 

efficiently and effectively executed in accordance with applicable laws and management 

policies. This is accomplished, in part, through leadership’s strong, clear, and consistent 

“tone-at-the-top” that includes the empowerment and regular interface with subject matter 

experts embedded in each of a Component’s key functional areas.

The MICP is dependent upon the shaping of an organizational culture that proactively 

implements continuous business process improvements to ensure timely, accurate, and 

complete financial and operational information. This continuous business process 

improvement methodology complements and relies upon stakeholders’ understanding, 

documentation and assessment of their assigned functional areas. A comprehensive MICP 

also provides leadership the latitude to address related operational and financial risk before 

the mission is adversely impacted. 

All Components are required to implement a robust program to establish and assess 

internal controls for all mission-essential operations. Components identified in the 

Department’s FIAR Guidance are required to include assurances over the internal controls 

related to financial reporting and financial systems. 

Types of Material Weaknesses 

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

material weaknesses:

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

Congressional oversight committees.

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

financial statements.

• Impairs fulfillment of essential operations or mission.

• Identified previously as a “high risk” area.

• 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.

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

has signed the following Statement of Assurance.
U.S. Department of Defense Agency Financial Report for FY 2014

Management’s Discussion and Analysis

33
U.S. Department of Defense Agency Financial Report for FY 2014

Management’s Discussion and Analysis

34

FY 2014 Improvements in Internal Controls

Despite significant challenges, the Department achieved important improvements in 

internal controls, which will better enable our ability to meet strategic priorities. A few of our 

accomplishments are highlighted below.

• Security. The United States Special Operations Command (USSOCOM) established a 

security professionals working group and created a single location to report, track, 

and archive all security incidents and violations. The single archive location will 

enable the working group to review previous incidents and violations and use the 

active archived reports to identify trends, patterns, and emerging threats to the 

Command’s security program. The working group will adjust the Command’s security 

education to address identified threats and vulnerabilities, from review of metrics of 

previous incidents. 

• Financial Reporting. Independent public auditors performed attestation engagements 

(Statement on Standards for Attestation Engagement No. 16) and issued unqualified 

opinions, with no material weaknesses identified, on the effectiveness of select DFAS 

internal controls for Military Pay and Disbursing Operations, Civilian Pay and 

Disbursing Operations, and Contract Pay and Disbursing Operations. 

• Charge Card Programs. The Department implemented new safeguards and controls 

to supplement oversight and legal compliance3 in use of the Government travel 

charge card. Cardholders are now required to formally document and acknowledge 

their understanding of the DoD government travel charge card policy. Commanders 

and Agency Heads are responsible for periodic reviews of the effectiveness of the 

internal controls in their travel card program. Also this year, the Department issued 

the "Government Charge Card Guidebook for Establishing and Managing Purchase, 

Travel and Fuel Card Programs,” which highlights important controls to identify, 

correct, and minimize fraud, waste, and abuse of charge cards. 

• Standard Line of Accounting. This year, the Department began to implement the 

standard line of accounting (SLOA) in accounting systems. The SLOA is comprised of 

standard data elements that will allow different financial management systems to

better interoperate. The SLOA is comprised of a subset of data elements in the DoD 

Standard Financial Information Systems language, and will be used to report 

financial information to OMB and the Department of the Treasury. The SLOA will 

improve the completeness and accuracy of financial information that is traded 

between different accounting systems and improve the reliability of financial 

reporting. 

 

3 Government Charge Card Abuse Prevention Act of 2012 (Public Law 112-194)
U.S. Department of Defense Agency Financial Report for FY 2014

Management’s Discussion and Analysis

35

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 Act4 for 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 17). These decisions also ensure that systems eliminate 

redundancy and maximize operating efficiency through streamlining business processes and 

the availability of timely, accurate and useful business information.

Figure 17. The Department’s Integrated Business Framework

 

4 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 2014

Management’s Discussion and Analysis

36

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 

auditability and financial management improvement objectives. 

The key components of the FM strategy include setting data standards, process and 

system improvements, and leveraging technology throughout the FM community. Current 

enterprise-level initiatives include the Standard Financial Information Structure, the 

Department’s first-ever Standard Line of Accounting to improve transaction quality. The 

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

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

U.S. Treasury Department’s Government-wide accounting initiative, and direct-to-Treasury 

disbursing, 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 and means 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 18. 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

 
U.S. Department of Defense Agency Financial Report for FY 2014

Management’s Discussion and Analysis

37

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 2014

Management’s Discussion and Analysis

38

Air Force ERPs

Defense Enterprise Accounting and Management System (DEAMS) is an automated 

accounting and financial management execution system for the Air Force and 

U.S. Transportation Command. The DEAMS creates an Air Force enterprise financial data 

view by providing an integrated accounting and finance solution to manage appropriated 

and working capital funds.

Air Force Integrated Personnel and Pay System (AF-IPPS) is a comprehensive,

self-service, web-based solution 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.

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.

Deputy Secretary of Defense Bob Work addresses DoD leadership 

during the ODO FIAR Conference. He discussed budgetary concerns 

and the Department’s way ahead. 

Photo by 

Mass Communication Specialist 2nd Class Sean Hurt
U.S. Department of Defense Agency Financial Report for FY 2014

Management’s Discussion and Analysis

39

IMPROPER PAYMENT REPORTING 

The Federal government disburses more than $2 trillion in payments to individuals and 

other entities each year. Beginning in 2002, Congress enacted legislation to help ensure 

Federal entities have strong financial management controls in place to pay the correct 

amount to the appropriate recipient and to better detect and prevent improper payments. 

In accordance with legislation5 (collectively referred to in this report as IPERA) and 

Office of Management and Budget (OMB) Circular No. A-123, the Department reports on its 

improper payments, and the recovery of these payments, to the President (via OMB) and 

Congress in the following categories:

• Military Health Benefits

• Military Pay

• Civilian Pay

• Commercial Pay

• Military Retirement

• Travel Pay

The Department continually looks for opportunities to improve our improper payment 

methodologies. The Department is implementing recommendations reflected in the DoD IG’s 

April 2014 review6 of our improper payment program, as well as the recommendations 

identified by the Government Accountability Office (GAO) in its May 2013 report7

. For 

example, based on GAO recommendations, DFAS enhanced the sampling methodology used 

in the Commercial Pay category to stratify the universe of payments by invoice dollar 

amount, in addition to stratifying by site and system. The Defense Health Agency (DHA) 

also modified its statistical sampling plan pursuant to the GAO’s recommendation related to 

calculating underpayments. The DHA may award a recovery auditing contract in FY 2015 to 

recapture outstanding credit balances from vendor and contractor accounts.

As part of the Department’s efforts to become fully auditable by FY 2017, each DoD 

disbursing activity is diligently reviewing and reporting on all payments that are subject to 

IPERA and ensuring the processes used are compliant with laws and regulations. Until all 

DoD disbursements can be reconciled with the amount reported on the Statement of 

Budgetary Resources, the Department cannot demonstrate that all payments subject to 

IPERA have been reviewed. The Department’s efforts to achieve an auditable SBR by 

FY 2017 will increase the public’s confidence in the Department’s stewardship of taxpayer 

dollars and the integrity of the DoD improper payments program. 

Refer to the Other Information section of this report for detailed reporting on improper 

payments and recoveries.

 

5 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); Recovery Auditing Act (Section 831, Defense Authorization Act, for FY 2002) 

(P.L. 107-107) 6 DoD Efforts to Meet the Requirements of the Improper Payments Elimination and Recovery Act in FY 2013 7 Significant Improvements Needed in Efforts to Address Improper Payment Requirements
U.S. Department of Defense Agency Financial Report for FY 2014

Management’s Discussion and Analysis

40

U.S. Sailors assigned to the amphibious assault ship USS Bataan rescue people in the Mediterranean Sea 

June 6, 2014. The Bataan and the guided missile frigate USS Elrod rendered assistance and provided food, 

water, medical attention and temporary shelter to 277 people after receiving a report that an Italian military 

marine patrol aircraft sighted six small vessels, one of which was sinking. 

Photo by Mass Communication Specialist Seaman Apprentice Michael J. Lieberknecht

A U.S. Army UH-60 Black Hawk helicopter assigned to the Oklahoma Army National Guard releases water from 

a helicopter bucket May 5, 2014, near Guthrie, Oklahoma. Black Hawk crews assisted firefighters in battling 

wildfires that burned more the 6,000 acres and numerous homes in less than 24 hours. 

Photo by Maj. Geoff Legler
FISCAL YEAR 2014

AGENCY FINANCIAL REPORT

FINANCIAL SECTION

UNITED STATES DEPARTMENT OF DEFENSE
This Page Left Blank Intentionally
Department of Defense Agency Financial Report for FY 2014

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 $2.2 trillion, and 

more than 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, 2014). 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 2014

Financial Information

42

Department of Defense Consolidated Balance Sheet

Agency Wide Dollars in Millions

As of September 30, 2014 and 2013

2014

Consolidated

2013

Consolidated 

ASSETS (Note 2)

Intragovernmental:

Fund Balance with Treasury (Note 3) $ 480,352.3 $ 482,661.7

Investments (Note 4) 783,736.3 711,497.5

Accounts Receivable (Note 5) 1,466.5 1,284.2

Other Assets (Note 6) 1,440.6 1,757.6

Total Intragovernmental Assets $ 1,266,995.7 $ 1,197,201.0

Cash and Other Monetary Assets (Note 7) 1,286.5 1,529.7

Accounts Receivable, Net (Note 5) 6,519.9 10,456.2

Loans Receivable (Note 8) 1,452.2 1,267.7

Inventory and Related Property, Net (Note 9) 261,496.8 253,997.5

General Property, Plant and Equipment, Net (Note 10) 618,997.2 639,611.9

Investments (Note 4) 3,371.9 3,333.9

Other Assets (Note 6) 74,716.5 72,466.9

TOTAL ASSETS $ 2,234,836.7 $ 2,179,864.8

Stewardship Property, Plant & Equipment (Note 10)

LIABILITIES (Note 11)

Intragovernmental:

Accounts Payable (Note 12) $ 1,911.2 $ 1,574.7

Debt (Note 13) 1,392.3 1,174.7

Other Liabilities (Note 15) 8,746.8 12,887.7

Total Intragovernmental Liabilities $ 12,050.3 $ 15,637.1

Accounts Payable (Note 12) 17,889.9 20,149.1

Military Retirement and Other Federal Employment Benefits 

(Note 17) 2,334,015.6 2,280,567.8

Environmental and Disposal Liabilities (Note 14) 58,581.4 58,333.9

Loan Guarantee Liability (Note 8) 56.8 45.8

Other Liabilities (Note 15) 35,945.4 37,393.5

TOTAL LIABILITIES $ 2,458,539.4 $ 2,412,127.2

Commitments & Contingencies (Note 16)

NET POSITION

Unexpended Appropriations – Other Funds $ 501,765.6 $ 499,735.3

Cumulative Results of Operations – Funds From Dedicated 

Collections (Note 23) 13,899.9 12,707.8

Cumulative Results of Operations – Other Funds (739,368.2) (744,705.5)

TOTAL NET POSITION $ (223,702.7) $ (232,262.4)

TOTAL LIABILITIES AND NET POSITION $ 2,234,836.7 $ 2,179,864.8

The accompanying notes are an integral part of these financial statements.
Department of Defense Agency Financial Report for FY 2014

Financial Information

43

Department of Defense Consolidated Statement of Net Cost

Agency Wide Dollars in Millions

For the Years Ended September 30, 2014 and 2013

2014

Consolidated

2013

Consolidated 

Program Costs

Gross Costs $ 727,082.4 $ 695,856.1

Military Retirement Benefits 101,877.6 64,422.3

Civil Works 8,842.2 9,756.7

Military Personnel 143,294.9 146,052.1

Operations, Readiness & Support 272,780.6 292,918.2

Procurement 98,488.2 76,216.1

Research, Development, Test & Evaluation 68,741.5 70,147.0

Family Housing & Military Construction 33,057.4 36,343.7

(Less: Earned Revenue) (93,915.1) (75,009.7)

Net Cost before Losses/(Gains) from Actuarial Assumption 

Changes for Military Retirement Benefits $ 633,167.3 $ 620,846.4

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits 6,875.8 (62,838.6)

Net Cost of Operations (Note 18) $ 640,043.1 $ 558,007.8

The accompanying notes are an integral part of these financial statements.
Department of Defense Agency Financial Report for FY 2014

Financial Information

44

Department of Defense Consolidated Statement of Changes in Net Position 

Agency Wide Dollars in Millions

For the Years Ended September 30, 2014 and 2013

2014

Consolidated

2013

Consolidated

Cumulative Results Of Operations

Beginning Balances (Includes Funds from Dedicated Collections –

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

Budgetary Financing Sources:

Other adjustments (rescissions, etc.) (7.6) 0.0

Appropriations used 657,113.2 687,146.0

Nonexchange revenue 2,886.4 2,890.5

Donations and forfeitures of cash and cash equivalents 414.1 75.1

Transfers in/out without reimbursement (220.6) 142.8

Other (145.8) (84.2)

Other Financing Sources

Donations and forfeitures of property 10.6 9.9

Transfers in/out without reimbursement 56.6 (14.6)

Imputed financing 5,569.8 4,896.8

Other (19,104.2) 32,173.5

Total Financing Sources $ 646,572.5 $ 727,235.8

Net Cost of Operations (+/-) (640,043.1) (558,007.8)

Net Change $ 6,529.4 $ 169,228.0

Cumulative Results of Operations (Includes Funds from Dedicated 

Collections – See Note 23) $ (725,468.3) $ (731,997.7)

Unexpended Appropriations

Beginning Balances (Includes Funds from Dedicated Collections –

See Note 23) 499,735.3 528,955.6

Budgetary Financing Sources:

Appropriations received 675,748.6 710,120.8

Appropriations transferred in/out (310.4) (208.9)

Other adjustments (16,294.7) (51,986.2)

Appropriations used (657,113.2) (687,146.0)

Total Budgetary Financing Sources (Includes Funds from 

Dedicated Collections – See Note 23) $ 2,030.3 $ (29,220.3)

Unexpended Appropriations (Includes Funds from Dedicated 

Collections – See Note 23) $ 501,765.6 $ 499,735.3

Net Position $ (223,702.7) $ (232,262.4)

The accompanying notes are an integral part of these financial statements.
Department of Defense Agency Financial Report for FY 2014

Financial Information

45

Department of Defense Combined 

Statement of Budgetary Resources 

Agency Wide

For the Years Ended September 30, 2014

and 2013

Page 1 of 2

Dollars in Millions

Budgetary 

Financing Accounts

Non-Budgetary 

Financing Accounts

2014

Combined

2013

Combined

2014

Combined

2013

Combined

Budgetary Resources

Unobligated balance, brought forward, October 1 $ 143,813.4 $ 145,692.5 $ 46.8 $ 15.5

Recoveries of prior year unpaid obligations 49,442.5 63,172.6 0.0 0.0

Other changes in unobligated balance (17,411.2) (13,817.9) 0.0 0.0

Unobligated balance from prior year budget 

authority, net 175,844.7 195,047.2 46.8 15.5

Appropriations (discretionary and mandatory) 737,644.3 733,535.9 0.0 0.0

Borrowing authority (discretionary and mandatory) 0.0 0.0 368.0 26.9

Contract authority (discretionary and mandatory) 70,599.4 65,506.0 0.0 0.0

Spending authority from offsetting collections 

(discretionary and mandatory) 100,315.6 103,712.7 120.4 83.2

Total Budgetary Resources $1,084,404.0 $ 1,097,801.8 $ 535.2 $ 125.6

Status of Budgetary Resources

Obligations incurred $ 933,688.6 $ 953,988.4 $ 488.1 $ 78.8

Unobligated balance, end of year:

Apportioned 113,158.7 109,896.8 0.0 0.0

Exempt from Apportionment 2,603.4 4,046.6 0.0 0.0

Unapportioned 34,953.3 29,870.0 47.1 46.8

Total unobligated balance, end of year $ 150,715.4 $ 143,813.4 $ 47.1 $ 46.8

Total Budgetary Resources $1,084,404.0 $ 1,097,801.8 $ 535.2 $ 125.6

Change in Obligated Balance

 Unpaid obligations:

Unpaid obligations, brought forward, October 1 $ 437,365.2 $ 468,570.2 $ 300.7 $ 541.8

Obligations incurred 933,688.6 953,988.4 488.1 78.8

Outlays (Gross) (891,105.0) (922,020.8) (303.9) (319.9)

Recoveries of prior year unpaid obligations (49,442.5) (63,172.6) 0.0 0.0

Unpaid obligations, end of year 430,506.3 437,365.2 484.9 300.7

 Uncollected payments:

Uncollected payments, Federal sources, brought 

forward, October 1 (77,203.9) (77,953.4) (52.4) (83.5)

Change in uncollected payments, Federal sources (118.7) 749.5 (22.8) 31.1

Uncollected payments, Federal sources, end of 

year (77,322.6) (77,203.9) (75.2) (52.4)

 Memorandum Entries:

Obligated balance, start of year $ 360,161.3 $ 390,616.8 $ 248.3 $ 458.3

Obligated balance, end of year $ 353,183.7 $ 360,161.3 $ 409.7 $ 248.3

The accompanying notes are an integral part of these financial statements.
Department of Defense Agency Financial Report for FY 2014

Financial Information

46

Department of Defense Combined 

Statement of Budgetary Resources 

Agency Wide

For the Years Ended September 30, 2014

and 2013

Page 2 of 2

Dollars in Millions

Budgetary 

Financing Accounts

Non-Budgetary 

Financing Accounts

2014

Combined

2013

Combined

2014

Combined

2013

Combined

Budgetary Authority and Outlays, Net:

Budget authority, gross (discretionary and 

mandatory) $ 908,559.3 $ 902,754.6 $ 488.4 $ 110.1

Actual offsetting collections (discretionary and 

mandatory) (161,764.4) (167,910.0) (97.5) (126.7)

Change in uncollected customer payments from 

Federal sources (discretionary and mandatory) (118.7) 749.5 (22.8) 31.1

Budget Authority, net (discretionary and 

mandatory) $ 746,676.2 $ 735,594.1 $ 368.1 $ 14.5

Outlays, gross (discretionary and mandatory) $ 891,105.0 $ 922,020.8 $ 303.9 $ 319.9

Actual offsetting collections (discretionary and 

mandatory) (161,764.4) (167,910.0) (97.5) (126.7)

Outlays, net (discretionary and mandatory) 729,340.6 754,110.8 206.4 193.2

Distributed offsetting receipts (87,713.9) (82,767.6) 0.0 0.0

Agency Outlays, net (discretionary and 

mandatory) $ 641,626.7 $ 671,343.2 $ 206.4 $ 193.2

The accompanying notes are an integral part of these financial statements.
Department of Defense Agency Financial Report for FY 2014

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 .................................................................. 71

Note 10 General Property, Plant and Equipment, Net................................................. 75

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..................... 92

Note 19 Disclosures Related to the Statement of Changes in Net Position .......... 96

Note 20 Disclosures Related to the Statement of Budgetary Resources .............. 96

Note Disclosures Not Pertaining to a Specific Statement

Note 21 Reconciliation of Net Cost of Operations to Budget...................................... 100

Note 22 Incidental Custodial Collections ................................................................ 102

Note 23 Funds from Dedicated Collections ............................................................. 103

Note 24 Fiduciary Activities .................................................................................. 106

Note 25 Other Disclosures.................................................................................... 107

Required Supplementary Stewardship Information............................................. 108

Required Supplementary Information ................................................................. 111
Department of Defense Agency Financial Report for FY 2014

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 that support the financial statements. The Department derives 

reported values and information for major asset and liability categories largely from 

nonfinancial systems, such as inventory and logistics systems. These systems were 

designed to support reporting requirements for maintaining accountability over assets and 

reporting the status of federal appropriations, rather than preparing financial statements in 

accordance with USGAAP. The Department continues to implement process and system 

improvements addressing these limitations.

The Department has 13 auditor-identified material weaknesses related to these limitations: 

(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 2014

Financial Information

49

1.C. Appropriations and Funds 

The Department receives appropriations and funds as general, working capital (revolving), 

trust, special, and deposit funds. The Department uses these appropriations and funds to 

execute its missions and subsequently report on resource usage.

General Funds are used for financial transactions funded by congressional appropriations, 

including personnel, operation and maintenance, research and development, procurement, 

and military construction. 

Working capital funds (WCF) received funding to establish an initial corpus through an 

appropriation or a transfer of resources from existing appropriations or funds. The corpus 

finances operations and transactions that flow through the fund. 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 as funds 

from dedicated collections. Funds from dedicated collections are financed by specifically 

identified revenues, required by statute to be used for designated activities, benefits or 

purposes, and remain available over time. The Department is required to separately account 

for and report on the receipt, use, and retention of revenues and other financing sources for 

funds from dedicated collections.

Deposit funds are used to record amounts held temporarily until paid to the appropriate 

government or public entity. They are not Department funds, and as such, are not available 

for the Department’s operations. The Department is acting as an agent or custodian for 

funds awaiting distribution.

The Department is a party to allocation transfers with other federal agencies as a 

transferring (parent) entity or receiving (child) entity. An allocation transfer is an entity’s 

legal delegation of authority to obligate budget authority and outlay funds on its behalf. 

Generally, all financial activity related to allocation transfers (e.g., budget authority, 

obligations, outlays) is reported in the financial statements of the parent entity. Exceptions 

to this general rule apply to specific funds for which OMB has directed that all activity be 

reported in the financial statements of the child entity. These exceptions include 

U.S. Treasury – Managed Trust Funds, Executive Office of the President (EOP), and all other 

funds specifically designated by OMB. 

The Department receives allocation transfers from the following agencies: Departments of

Agriculture, Interior, Energy, and Transportation; the Appalachian Regional Commission; 

and the Federal Highway Administration.

Additionally, the Department receives allocation transfers from certain funds meeting the 

OMB exception and all related activity is included in the Department’s financial statements. 
Department of Defense Agency Financial Report for FY 2014

Financial Information

50

These funds include South Dakota Terrestrial Wildlife Habitat Restoration, Inland 

Waterways, and Harbor Maintenance. The Department also 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 allocates funds to the Departments of Transportation and 

Agriculture, and reports all related activity in these financial statements.

1.D. Basis of Accounting 

The Department 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 determining the actions required to bring financial and nonfinancial 

feeder systems and processes into compliance with USGAAP. One such action is the current 

revision of accounting systems to record transactions based on the U.S. Standard General 

Ledger (USSGL). Until all of the Department’s financial and nonfinancial feeder systems and 

processes are able to collect and report financial information as required by USGAAP, there 

will be instances when the Department’s financial data is derived from budgetary 

transactions, data from nonfinancial feeder systems, and accruals.

1.E. Revenues and Other Financing Sources 

The Department receives congressional appropriations as financing sources for general 

funds, and on occasion, will also receive congressional appropriations for working capital 

funds. These funds either expire annually, some on a multi-year basis, or do not expire. 

When authorized by legislation, these appropriations are supplemented by revenues 

generated by sales of goods or services. The Department recognizes revenue as a result of 

costs incurred for goods and services provided to other federal agencies and the public. 

Full-cost pricing is the Department’s standard policy for services provided as required by 

OMB Circular 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 2014

Financial Information

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) Number 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’s 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 2014

Financial Information

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 costs 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’s facilities is obtained through 

appropriations. To the extent this financing ultimately may have been obtained through the 

issuance of public debt, interest costs have not been capitalized since the U.S. Treasury 

does not allocate such costs to the Department.

1.H. Transactions with Foreign Governments and International 

Organizations 

Each year, the Department sells defense articles and services to foreign governments and 

international organizations under the provisions of the Arms Export Control Act of 1976. 

Under the provisions of the Act, the Department has authority to sell defense articles and 

services to foreign countries and international organizations generally at no profit or loss to 

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

1.I. Funds with the U.S. Treasury 

The Department’s monetary resources are maintained in U.S. Treasury accounts. The 

disbursing offices of the 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 the U.S. Treasury by 

appropriation on interagency transfers, collections received, and disbursements issued. The 

U.S. Treasury records these transactions to the applicable Fund Balance with 

Treasury (FBWT) account. On a monthly basis, the Department's FBWT is reviewed and 

adjusted, as required, to agree with the U.S. Treasury accounts.

1.J. Cash and Other Monetary Assets

Cash is the total of cash resources under the control of the Department including coin, 

paper currency, negotiable instruments, and amounts held for deposit in banks and other 

financial institutions. Foreign currency consists of the total U.S. dollar equivalent of both 
Department of Defense Agency Financial Report for FY 2014

Financial Information

53

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 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).

The Department also operates the Armament Retooling and Manufacturing Support 

Initiative under Title 10 United States Code 4551-4555. This loan guarantee program was 
Department of Defense Agency Financial Report for FY 2014

Financial Information

54

designed to encourage commercial use of inactive government facilities. The revenue 

generated from property rental offsets the cost of maintaining these facilities.

The Department administers the Foreign Military Financing program on behalf of the EOP. 

This program is authorized by sections 23 and 24 of the Arms Export Control Act of 1976, as 

amended 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 the Department’s 

agreement with OMB; this information is provided separately as other information.

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

guarantee commitments made after FY 1991. The Act requires the Department to estimate 

the cost of direct loans and loan guarantees at present value. The present value of the 

subsidy costs (i.e., interest rate differentials, interest subsidies, delinquencies and defaults, 

fee offsets and other cash flows) associated with direct loans and loan guarantees are 

recognized as a cost in the year the loan or loan guarantee is disbursed and reevaluated 

annually. The net present value of loans or defaulted guaranteed loans receivable is the 

amount of the gross loan or defaulted guaranteed loans receivable less the present value of 

the subsidy.

1.M. Inventories and Related Property

The Department values approximately 87 percent of resale inventory using the moving 

average cost method. An additional 11 percent (fuel inventory) is reported using the 

first-in-first-out method. The Department reports the remaining 2 percent of resale 

inventories at an approximation of historical cost using latest acquisition cost adjusted for

holding gains and losses. The latest acquisition cost method is used because legacy 

inventory systems were designed for materiel management rather than accounting. 

Although these systems provide visibility and accountability over inventory items, they do 

not maintain historical cost data necessary to comply with Statement of Federal Financial 

Accounting Standards (SFFAS) No. 3, “Accounting for Inventory and Related Property.”

Additionally, these systems cannot produce financial transactions using the USSGL, as 

required by the Federal Financial Management Improvement Act of 1996 (PL 104-208). The 

Department is continuing to transition the balance of the inventories to the moving average 

cost method through the use of new inventory systems. Most transitioned balances, 

however, were not baselined to auditable historical cost and remain noncompliant with 

SFFAS No. 3.

The Department manages only military or government-specific materiel under normal 

conditions. Materiel is a unique term that relates to military force management, and 

includes items such as ships, tanks, self-propelled weapons, aircraft, etc., and related 

spares, repair parts, and support equipment. Items commonly used in and available from 

the commercial sector are not managed in the Department’s materiel management 

activities. Operational cycles are irregular, and the military risks associated with out of stock

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.”
Department of Defense Agency Financial Report for FY 2014

Financial Information

55

Related property includes OM&S and stockpile materiel. The OM&S, including munitions not 

held for sale, are valued at standard purchase price. The Department uses both the 

consumption method and the purchase method of accounting for OM&S. Items that are 

centrally managed and stored, such as ammunition and engines, are generally recorded 

using the consumption method and are reported on the Balance Sheet as OM&S. When 

current systems cannot fully support the consumption method, the Department uses the 

purchase method. Under this method, materiel and supplies are expensed when purchased. 

During FY 2014 and FY 2013, the Department expensed significant amounts using the 

purchase method because the systems could not support the consumption method or 

management deemed that the item was in the hands of the end user. This is a material 

weakness for the Department and long-term system corrections are in process. Once the 

proper systems are in place, these items will be accounted for under the consumption 

method of accounting.

Many high-dollar items, such as aircraft engines, are categorized as OM&S rather than 

general equipment. As a result the Department determined that the recurring high 

dollar-value of OM&S in need of repair is material to the financial statements and requires a 

separate reporting category. 

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 than to procure them. The Department often relies on weapon systems and 

machinery no longer in production. As a result, the Department supports a process that 

encourages the repair and rebuilding of certain items. This repair cycle is essential to 

maintaining a ready, mobile, and armed military force. Work in process balances include: 

(1) costs related to the production or servicing of items, including direct material, labor, and 

applied overhead; (2) the value of finished products or completed services that are yet to 

be placed in service; and (3) munitions in production and depot maintenance work with 

associated costs incurred in the delivery of maintenance services.

1.N. Investments in U.S. Treasury Securities

The Department reports investments in U.S. Treasury securities at cost, net of amortized 

premiums or discounts. Premiums or discounts are amortized over the term of the 

investments using the effective interest rate method or another method 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 non-marketable market-based U.S. Treasury securities issued to 

federal agencies by the U.S. Treasury’s Bureau of the Fiscal Service. These securities are 

not traded on any financial exchange but are priced consistently with publically traded 

U.S. Treasury securities.

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

include the Military Retirement Fund; Medicare-Eligible Retiree Health Care Fund; Other 

Defense Organizations General Fund trust and special funds; donations (gift funds); and the 
Department of Defense Agency Financial Report for FY 2014

Financial Information

56

U.S. Treasury managed trust funds reported by USACE including the South Dakota 

Terrestrial Habitat Restoration, Inland Waterways, and Harbor Maintenance Trust Funds.

Other investments represent joint ventures with private developers constructing or 

improving military housing on behalf of the Department under the authority of MHPI, 

authorized by PL 104-106, Section 2801. These investments do not require market value 

disclosure. The Department’s potential losses on these ventures are limited to the amounts 

invested.

1.O. General Property, Plant and Equipment

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 is 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 thresholds 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 working capital funds 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 that provides appropriate General PP&E information for financial 
Department of Defense Agency Financial Report for FY 2014

Financial Information

57

statement reporting. The Department requires that entities maintain, in their property 

systems, information on all property furnished to contractors. These actions are structured 

to capture and report the information necessary for compliance with federal accounting 

standards. The Department has not fully implemented this policy primarily due to system 

limitations.

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 on 

the contractor long-term contracts can cause, the Department may provide financing 

payments. Contract financing payments are defined in the Federal Acquisition Regulation, 

Part 32, as authorized disbursements to a contractor prior to acceptance of supplies or 

services by the Government. Contract financing payment clauses are incorporated in the 

contract terms and conditions and may include advance payments, performance-based 
Department of Defense Agency Financial Report for FY 2014

Financial Information

58

payments, commercial advances and interim payments, progress payments based on cost, 

and interim payments under certain cost reimbursement contracts. It is the Department’s 

policy to record certain contract financing payments as other assets. The Department has 

not fully implemented this policy primarily due to system limitations.

Contract financing payments do not include invoice payments, payments for partial 

deliveries, lease and rental payments, or progress payments based on a percentage or 

stage of completion. The Defense Federal Acquisition Regulation Supplement authorizes 

progress payments based on a percentage or stage of completion only for construction of 

real property, shipbuilding and ship conversion, alteration, or repair. Progress payments 

based on percentage or stage of completion are reported as Construction in Progress.

1.S. Contingencies and Other Liabilities

The SFFAS No. 5, “Accounting for Liabilities of the Federal Government,” as amended by

SFFAS No. 12, “Recognition of Contingent Liabilities Arising from Litigation,” defines a 

contingency as an existing condition, situation, or set of circumstances 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.
Department of Defense Agency Financial Report for FY 2014

Financial Information

59

Unexpended appropriations represent the amounts of budget authority that are unobligated 

and have not been rescinded or withdrawn. Unexpended appropriations also represent 

amounts obligated for which legal liabilities for payments have not been incurred.

Cumulative results of operations represent the net difference between expenses and losses, 

and financing sources (including appropriations, revenue, and gains), since inception. The 

cumulative results of operations also include donations and transfers in and out of assets 

that were not reimbursed.

1.V. Treaties for Use of Foreign Bases 

The Department has the use of land, buildings, and other overseas facilities obtained 

through various international treaties and agreements negotiated by the Department of 

State. The Department purchases capital assets overseas with appropriated funds; however, 

the host country retains title to the land and capital improvements. Treaty terms generally 

allow the Department continued use of these properties until the treaties expire. In the 

event treaties or other agreements are terminated, use of the foreign bases is prohibited 

and losses are recorded for the value of any nonretrievable capital assets. The settlement 

due to the U.S. or host nation is negotiated and takes into account the value of capital 

investments and may be offset by the cost of environmental cleanup.

1.W. 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 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. As a result, misstatements of 

reported Accounts Payable and Receivable are likely in the Department’s financial 

statements.

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.
Department of Defense Agency Financial Report for FY 2014

Financial Information

60

1.Y. Military Retirement and Other Federal Employment Benefits

The Department applies SFFAS No. 33, Pensions, “Other Retirement Benefits, and Other 

Postemployment Benefits: Reporting the Gains and Losses from Changes in Assumptions 

and Selecting Discount Rates and Valuation Dates,” in selecting the discount rate and 

valuation date used in estimating actuarial liabilities. In addition, gains and losses from 

changes in long-term assumptions used to estimate the actuarial liability are presented 

separately on the Statement of Net Cost. Refer to Note 17, Military Retirement and Other 

Federal Employment Benefits and Note 18, General Disclosures Related to the Statement of 

Net Cost, for additional information.

NOTE 2. NONENTITY ASSETS

Nonentity Assets Dollars in Millions

As of September 30 2014 2013

Intragovernmental Assets

Fund Balance with Treasury $ 1,130.4 $ 1,184.0

Total Intragovernmental Assets $ 1,130.4 $ 1,184.0

Non-Federal Assets

Cash and Other Monetary Assets $ 1,197.7 $ 1,393.6

Accounts Receivable 2,958.2 6,830.4

Other Assets 171.5 174.1

Total Non-Federal Assets $ 4,327.4 $ 8,398.1

Total Nonentity Assets $ 5,457.8 $ 9,582.1

Total Entity Assets $ 2,229,378.9 $ 2,170,282.7

Total Assets $ 2,234,836.7 $ 2,179,864.8

Nonentity assets are not available for use in the Department’s normal operations. The 

Department has stewardship accountability and reporting responsibility for nonentity assets. 

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 consists 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 Advance Payment Pool Agreements (APPA) for 

research and development projects. The Department utilizes APPAs when multiple contracts 

with a nonprofit educational institution require advance payments.
Department of Defense Agency Financial Report for FY 2014

Financial Information

61

NOTE 3. FUND BALANCE WITH TREASURY

Fund Balance with Treasury Dollars in Millions

As of September 30 2014 2013

Fund Balance

Appropriated Funds $ 466,263.1 $ 468,669.9

Revolving Funds 9,606.1 10,477.7

Trust Funds 2,262.3 1,666.0

Special Funds 902.6 686.2

Other Fund Types 1,318.2 1,161.9

Total Fund Balance $ 480,352.3 $ 482,661.7

Fund Balance Per Treasury Versus Agency

Fund Balance per Treasury $ 480,346.1 $ 492,296.4

Less: Fund Balance per Agency (480,352.3) (482,661.7)

Reconciling Amount $ (6.2) $ 9,634.7

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 $6.2 million with the U.S. Department 

of the Treasury (Treasury) between the Department’s financial statement records and 

Treasury. 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 31, “Accounting for Fiduciary Activities.”

The Department’s fund balance per Treasury (FBPT), in FY 2014 does not include 

$10.1 billion in canceling year authority while the FBPT in FY 2013 includes $9.1 billion in 

canceling year authority. During FY 2014, Treasury revised the Treasury Financial Manual to 

require a corresponding Treasury warrant returning canceling funds to Treasury in the year 

the funds cancel.

Status of Fund Balance with Treasury Dollars in Millions

As of September 30 2014 2013

Unobligated Balances

Available $ 115,757.0 $ 113,939.3

Unavailable 717,096.9 643,857.4

Total Unobligated Balance 832,853.9 757,796.7

Obligated Balance not yet Disbursed 430,993.0 437,665.8

Non-Budgetary FBWT 1,530.5 1,654.7

Non-FBWT Budgetary Accounts (785,025.1) (714,455.5)

Total Fund Balance $ 480,352.3 $ 482,661.7

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.
Department of Defense Agency Financial Report for FY 2014

Financial Information

62

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

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 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
Department of Defense Agency Financial Report for FY 2014

Financial Information

63

Investments and Related Interest Dollars in Millions

2013

As of September 30

Cost Amortization 

Method

Amortized 

(Premium)/ 

Discount

Investments, 

Net

Market 

Value 

Disclosure

Intragovernmental Securities

Nonmarketable, Market-Based

Military Retirement Fund $ 494,977.7 See Below $ (15,416.9) $ 479,560.8 $ 522,376.6

Medicare-Eligible Retiree Health 

Care Fund 223,228.7 See Below (8,291.7) 214,937.0 242,383.0

US Army Corps of Engineers 8,100.0 See Below (127.3) 7,972.7 8,078.3

Other Funds 3,213.4 See Below (114.9) 3,098.5 3,231.5

Total Nonmarketable, MarketBased $ 729,519.8 $ (23,950.8) $ 705,569.0 $ 776,069.4

Accrued Interest 5,928.5 5,928.5 5,928.5

Total Intragovernmental Securities $ 735,448.3 $ (23,950.8) $ 711,497.5 $ 781,997.9

Other Investments

Total Other Investments $ 3,333.9 See Below $ 0.0 $ 3,333.9 N/A

Amortization Method Used: Effective Interest

The Department invests primarily in non-marketable, market-based securities. The value of 

these securities fluctuates in tandem with the selling price of the equivalent marketable 

security. Securities are purchased with the intent to hold until maturity; thus, balances are 

not adjusted to market value.

The U.S. Treasury securities are issued to 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 $1.7 billion in investments of the DoD Education Benefits 

Trust Fund, $846.1 million in investments of the Support for U.S. Relocation to Guam 

Activities Trust Fund, and $228.2 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 
Department of Defense Agency Financial Report for FY 2014

Financial Information

64

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

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 Dollars in Millions

2013

As of September 30

Gross Amount Due

Allowance for 

Estimated 

Uncollectibles

Accounts 

Receivable, Net

Intragovernmental Receivables $ 1,284.2 N/A $ 1,284.2

Non-Federal Receivables 

(From the Public) 11,262.8 (806.6) 10,456.2

Total Accounts Receivable $ 12,547.0 $ (806.6) $ 11,740.4

Accounts receivable represent the Department’s claim for payment from other entities. The 

Department only recognizes an allowance for uncollectible amounts from the public. Claims 

with other Federal agencies are resolved in accordance with the Intragovernmental Business 

Rules.

NOTE 6. OTHER ASSETS

Other Assets Dollars in Millions

As of September 30 2014 2013

Intragovernmental Other Assets

Advances and Prepayments $ 1,290.9 $ 1,620.2

Other Assets 149.7 137.4

Total Intragovernmental Other Assets $ 1,440.6 $ 1,757.6

Non-Federal Other Assets

Outstanding Contract Financing Payments $ 70,104.9 $ 68,594.7

Advances and Prepayments 4,431.5 3,681.4

Other Assets (With the Public) 180.1 190.8

Total Non-Federal Other Assets $ 74,716.5 $ 72,466.9

Total Other Assets $ 76,157.1 $ 74,224.5

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 

Department of Energy. Also included are pending offsets valued at $24.8 million from 

General Service Administration for returned inventory. 
Department of Defense Agency Financial Report for FY 2014

Financial Information

65

The Other Assets (With the Public) balance is largely the result of Advance Payment Pool 

Agreements (APPAs) for research and development projects. APPAs are utilized when 

multiple contracts with a nonprofit educational institution require advance payments.

Contract terms and conditions for certain types of contract financing payments convey 

rights to the Department, protecting the contract work from state or local taxation, liens or 

attachment by contractors’ creditors, transfer of property, or disposition in bankruptcy. 

However, these rights should not be misconstrued to mean that ownership of contractors’ 

work has transferred to the Department. The Department does not have the right to take 

the work, except as provided for in contract clauses related to termination or acceptance. 

The Department is not obligated to make payment to contractors until delivery and 

acceptance.

Outstanding Contract Financing Payments includes $66.3 billion in contract financing 

payments and an additional $3.8 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 2014 2013

Cash $ 328.3 $ 430.7

Foreign Currency 958.2 1,099.0

Total Cash, Foreign Currency, and Other Monetary Assets $ 1,286.5 $ 1,529.7

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 $88.8 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 the following direct loan and/or loan guarantee programs:

• Military Housing Privatization Initiative (MHPI)

• Armament Retooling and Manufacturing Support Initiative (ARMS)

The Federal Credit Reform Act of 1990 governs all new and amended direct loan obligations 

and loan guarantee commitments made after FY 1991. 

Direct loans are reported at the net present value of the following projected cash flows:

• Loan disbursements

• Repayments of principal

• Payments of interest and other payments over the life of the loan after adjusting for 

estimated defaults, prepayments, fees, penalties, and other recoveries

Loan guarantee liabilities are reported at the net present value. The cost of the loan 

guarantee is the net present value of the following estimated projected cash flows:
Department of Defense Agency Financial Report for FY 2014

Financial Information

66

• 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.

Armament Retooling and Manufacturing Support Initiative

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

designed to encourage commercial use of Army's inactive ammunition plants through 

incentives for businesses willing to locate to a government ammunition production facility. 

The production capacity of these facilities is greater than current military requirements; 

however, this capacity may be needed by the military in the future. Revenue offsets 

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

The Army instituted an ARMS loan guarantee moratorium in FY 2004 and is in the process of 

closing this program.

Summary of Direct Loans and Loan Guarantees Dollars in Millions

2014 2013

Loans Receivable

Direct Loans:

Military Housing Privatization Initiative $ 1,452.2 $ 1,267.7

Total Direct Loans $ 1,452.2 $ 1,267.7

Total Loans Receivable $ 1,452.2 $ 1,267.7

Loan Guarantee Liability

Military Housing Privatization Initiative $ 56.8 $ 45.8

Armament Retooling & Manufacturing Support Initiative 0.0 0.0

Total Loan Guarantee Liability $ 56.8 $ 45.8

Direct Loans Obligated Dollars in Millions

2014 2013

Direct Loans Obligated After FY 1991

(Present Value Method):

Military Housing Privatization Initiative

Loans Receivable Gross $ 1,493.4 $ 1,355.8

Allowance for Subsidy Cost (Present Value) (41.2) (88.1)

Value of Assets Related to Direct Loans, Net 1,452.2 1,267.7

Total Direct Loans Receivable $ 1,452.2 $ 1,267.7
Department of Defense Agency Financial Report for FY 2014

Financial Information

67

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

2014 2013

Direct Loan Programs

Military Housing Privatization Initiative $ 146.5 $ 241.3

Total $ 146.5 $ 241.3

Subsidy Expense for Direct Loan by Program Dollars in Millions

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

2013 Interest 

Differential Defaults Fees Other Total

New Direct Loans Disbursed

Military Housing Privatization Initiative $ 5.9 $ 34.9 $ 0.0 $ 0.0 $ 40.8

Total $ 5.9 $ 34.9 $ 0.0 $ 0.0 $ 40.8

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)

2013 Modifications Interest Rate 

Reestimates

Technical 

Reestimates Total

Direct Loan Modifications and Reestimates

Military Housing Privatization Initiative $ 0.0 $ (10.7) $ (84.0) $ (94.7)

Total $ 0.0 $ (10.7) $ (84.0) $ (94.7)

2014 2013

Total Direct Loan Subsidy Expense:

Military Housing Privatization Initiative $ (37.4) $ (53.9)

Total $ (37.4) $ (53.9)

Subsidy Expense for Direct Loan by Program

As of September 30, 2014

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 
Department of Defense Agency Financial Report for FY 2014

Financial Information

68

results from disbursements of loans from current and prior year loan agreements. Subsidy 

expense reported in the current year also includes reestimates.

Schedule for Reconciling Subsidy Cost Allowance Balances

for Post-FY 1991 Direct Loans Dollars in Millions

2014 2013

Beginning Balance, Changes, and Ending Balance:

Beginning Balance of the Subsidy Cost Allowance $ 88.1 $ 162.1

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

Interest Rate Differential Costs 5.8 5.9

Default Costs (Net of Recoveries) 18.1 34.9

Total of the above Subsidy Expense Components $ 23.9 $ 40.8

Adjustments

Subsidy Allowance Amortization (9.5) (10.4)

Other 0.0 (9.7)

Total of the above Adjustment Components $ (9.5) $ (20.1)

Ending Balance of the Subsidy Cost Allowance before Reestimates $ 102.5 $ 182.8

Add or Subtract Subsidy Reestimates by Component

Interest Rate Reestimates $ (8.3) $ (10.7)

Technical/Default Reestimate (53.0) (84.0)

Total of the above Reestimate Components (61.3) (94.7)

Ending Balance of the Subsidy Cost Allowance $ 41.2 $ 88.1

Defaulted Guaranteed Loans Dollars in Millions

As of September 30 2014 2013

Defaulted Guaranteed Loans from Post-FY 1991 Guarantees (Present Value Method):

Armament Retooling & Manufacturing Support Initiative

Defaulted Guaranteed Loans Receivable, Gross $ 0.0 $ 0.7

Allowance for Subsidy Cost (Present Value) 0.0 (0.7)

Value of Assets Related to Defaulted Guaranteed Loans 

Receivable, Net $ 0.0 $ 0.0

Total Value of Assets Related to Defaulted $ 0.0 $ 0.0
Department of Defense Agency Financial Report for FY 2014

Financial Information

69

Guaranteed Loans Outstanding Dollars in Millions

As of September 30

Outstanding 

Principal of 

Guaranteed Loans, 

Face Value

Amount of 

Outstanding 

Principal 

Guaranteed

2014

Guaranteed Loans Outstanding

Military Housing Privatization Initiative $ 854.4 $ 854.4

Total $ 854.4 $ 854.4

2013

Guaranteed Loans Outstanding

Military Housing Privatization Initiative $ 670.8 $ 670.8

Total $ 670.8 $ 670.8

2014

New Guaranteed Loans Disbursed

Military Housing Privatization Initiative $ 183.5 $ 183.5

Total $ 183.5 $ 183.5

2013

New Guaranteed Loans Disbursed

Military Housing Privatization Initiative $ 222.5 $ 222.5

Total $ 222.5 $ 222.5

Liabilities for Loan Guarantees Dollars in Millions

As of September 30 2014 2013

Liabilities for Loan Guarantee from Post 1991

(Present Value)

Military Housing Privatization Initiative $ 56.8 $ 45.8

Armament Retooling & Manufacturing Support Initiative 0.0 0.0

Total Loan Guarantee Liability (Post FY 1991) $ 56.8 $ 45.8

Total Loan Guarantee Liability $ 56.8 $ 45.8
Department of Defense Agency Financial Report for FY 2014

Financial Information

70

Subsidy Expense for Direct Loan by Program

As of September 30 Dollars in Millions

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

Armament Retooling & 

Manufacturing Support Initiative 0.0 0.0 0.0 0.0 0.0

Total $ 0.0 $ 11.3 $ 0.0 $ 0.0 $ 11.3

2013 Interest 

Differential Defaults Fees Other Total

New Loan Guarantees Disbursed

Military Housing Privatization Initiative $ 0.0 $ 33.7 $ 0.0 $ 0.0 $ 33.7

Armament Retooling & 

Manufacturing Support Initiative 0.0 0.0 0.0 0.0 0.0

Total $ 0.0 $ 33.7 $ 0.0 $ 0.0 $ 33.7

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)

Armament Retooling & 

Manufacturing Support Initiative 0.0 0.0 0.0 0.0 0.0

Total $ 0.0 $ 1.2 $ (3.0) $ (1.8) $ (1.8)

2013 Modifications

Interest Rate 

Reestimates

Technical 

Reestimates

Total 

Reestimates Total

Modifications and Reestimates

Military Housing Privatization Initiative $ 0.0 $ (0.9) $ (0.3) $ (1.2) $ (1.2)

Armament Retooling & 

Manufacturing Support Initiative 0.0 0.0 (1.1) (1.1) (1.1)

Total $ 0.0 $ (0.9) $ (1.4) $ (2.3) $ (2.3)

2014 2013

Total Loan Guarantee

Military Housing Privatization Initiative $ 9.5 $ 32.5

Armament Retooling & 

Manufacturing Support Initiative 0.0 (1.1)

Total $ 9.5 $ 31.4

The Department incurred two new loan guarantees after determining the projects were 

more advantageous to administer these projects as loan guarantees rather than direct 

loans.

Subsidy Expense for Direct Loan by Program

As of September 30, 2014

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%

Armament Retooling & 

Manufacturing Support Initiative 0.0% 0.0% 0.0% 0.0% 0.0%
Department of Defense Agency Financial Report for FY 2014

Financial Information

71

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 2014 2013

Beginning Balance, Changes, and Ending Balance

Beginning Balance of the Loan Guarantee Liability $ 45.8 $ 12.7

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

Default Costs (Net of Recoveries) 11.3 33.7

Total of the above Subsidy Expense Components $ 11.3 $ 33.7

Adjustments

Interest Accumulation on the Liability Balance 1.5 1.7

Total of the above Adjustments $ 1.5 $ 1.7

Ending Balance of the Loan Guarantee Liability before Reestimates $ 58.6 $ 48.1

Add or Subtract Subsidy Reestimates by Component

Interest Rate Reestimate $ 1.2 $ (0.9)

Technical/Default Reestimate (3.0) (1.4)

Total of the above Reestimate Components $ (1.8) (2.3)

Ending Balance of the Loan Guarantee Liability $ 56.8 $ 45.8

Administrative Expenses

Administrative Expenses are limited to separately identified expenses for administering preFY 1992 and post-FY 1991 Direct Loans and Loan Guarantee Programs. The Department 

does not maintain a separate program to capture expenses related to direct loans and loan 

guarantees for MHPI. Administrative expenses for the ARMS Initiative represent a fee paid 

to the U.S. Department of Agriculture, Rural Business Cooperative Service for servicing the 

loan guarantee program.

NOTE 9. INVENTORY AND RELATED PROPERTY

Inventory and Related Property Dollars in Millions

As of September 30 2014 2013

Inventory, Net $ 95,250.2 $ 85,368.0

Operating Materiel & Supplies, Net 165,741.9 168,110.0

Stockpile Materiel, Net 504.7 519.5

Total Inventory and Related Property $ 261,496.8 $ 253,997.5
Department of Defense Agency Financial Report for FY 2014

Financial Information

72

Abnormal Balance

Inventory, Available and Purchased for Resale, Revaluation Allowance, includes an abnormal 

balance due to reduction in the cost of items during the Department’s transition to LAC 

valuation. The Department inventory evaluation transition efforts are ongoing.

Inventory Restrictions

The following are restrictions on the use, sale, or disposition of inventory: 

• War reserve materiel valued at $1.4 billion;

• Commissary items valued at $377.6 million held for purchase by authorized patrons; 

and 

• Dispositions pending litigation or negotiation valued at $73.7 million.

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

liabilities.

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 FIFO,LAC,

MAC

Held for Repair 33,607.1 (3,345.1) 30,262.0 LAC,MAC

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:

Adjusted LAC = Latest Acquisition Cost, adjusted for holding gains and losses

SP = Standard Price

AC = Actual Cost

NRV = Net Realizable Value

MAC = Moving Average Cost

FIFO = First In, First Out

Inventory, Net Dollars in Millions

2013 Valuation 

Method

As of September 30

Inventory, 

Gross Value

Revaluation 

Allowance Inventory, Net

Inventory Categories

Available and Purchased for Resale $ 57,101.0 $ (3,402.3) $ 53,698.7 FIFO,LAC, 

MAC

Held for Repair 34,312.3 (4,105.8) 30,206.5 LAC,MAC

Excess, Obsolete, and Unserviceable 6,967.1 (6,967.1) 0.0 NRV

Raw Materiel 1,412.4 0.0 1,412.4 MAC,SP,LAC

Work in Process 50.4 0.0 50.4 AC

Total Inventory, Net $ 99,843.2 $ (14,475.2) $ 85,368.0

Legend for Valuation Methods:

Adjusted LAC = Latest Acquisition Cost, adjusted for holding gains and losses

SP = Standard Price

AC = Actual Cost

NRV = Net Realizable Value

MAC = Moving Average Cost

FIFO = First In, First Out
Department of Defense Agency Financial Report for FY 2014

Financial Information

73

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 $232.2 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

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:

Adjusted LAC = Latest Acquisition Cost, adjusted for holding gains and losses

SP = Standard Price

NRV = Net Realizable Value

MAC = Moving Average Cost

Operating Materiel and Supplies, Net Dollars in Millions

2013 Valuation 

Method

As of September 30

OM&S, Gross 

Value

Revaluation 

Allowance OM&S, Net

OM&S Categories

Held for Use $ 142,845.3 $ (8.7) $ 142,836.6 SP, LAC, MAC

Held for Repair 25,285.3 (11.9) 25,273.4 SP, LAC, MAC

Excess, Obsolete, and Unserviceable 2,134.8 (2,134.8) 0.0 NRV

Total OM&S $ 170,265.4 $ (2,155.4) $ 168,110.0

Legend for Valuation Methods:

Adjusted LAC = Latest Acquisition Cost, adjusted for holding gains and losses

SP = Standard Price

NRV = Net Realizable Value

MAC = Moving Average Cost
Department of Defense Agency Financial Report for FY 2014

Financial Information

74

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. The estimated market 

price of stockpile materiel held for sale as of fourth quarter, FY 2014, is $1.5 billion.

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.

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

Stockpile Materiel, Net Dollars in Millions

2013

Valuation 

Method

As of September 30

Stockpile, 

Materiel

Amount

Allowance for 

Gains 

(Losses)

Stockpile, 

Materiel,

Net

Stockpile Materiel Categories

Held for Sale $ 424.5 $ 0.0 $ 424.5 AC, LCM

Held for Reserve for Future Sale 95.0 0.0 95.0 AC, LCM

Total Stockpile Materiel $ 519.5 $ 0.0 $ 519.5

Legend for Valuation Methods:

AC = Actual Cost LCM = Lower of Cost or Market
Department of Defense Agency Financial Report for FY 2014

Financial Information

75

NOTE 10. GENERAL PP&E, NET

General PP&E, Net Dollars in Millions

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 40 271,646.2 (130,690.4) 140,955.8

Leasehold Improvements S/L Lease 

term 508.6 (196.5) 312.1

Software S/L 2 – 5 or 

10 11,766.6 (8,363.4) 3,403.2

General Equipment S/L 5 or 10 991,917.6 (571,601.8) 420,315.8

Assets Under Capital Lease1 S/L Lease 

term 632.6 (461.8) 170.8

Construction-in-Progress N/A N/A 42,109.9 N/A 42,109.9

Other 891.8 (1.9) 889.9

Total General PP&E $ 1,330,313.0 $ (711,315.8) $ 618,997.2

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

2013

As of September 30

Depreciation/

Amortization 

Method

Service 

Life

Acquisition 

Value

(Accumulated 

Depreciation/

Amortization)

Net Book Value

Major Asset Classes

Land N/A N/A $ 10,781.2 N/A $ 10,781.2

Buildings, Structures, and Facilities S/L 20 or 40 269,766.1 (127,980.0) 141,786.1

Leasehold Improvements S/L Lease 

term 403.8 (167.9) 235.9

Software S/L 2 – 5 or 

10 11,024.7 (8,038.9) 2,985.8

General Equipment S/L 5 or 10 983,628.4 (547,669.3) 435,959.1

Assets Under Capital Lease1 S/L Lease 

term 632.8 (438.5) 194.3

Construction-in-Progress N/A N/A 46,635.7 N/A 46,635.7

Other 1,035.8 (2.0) 1,033.8

Total General PP&E $ 1,323,908.5 $ (684,296.6) $ 639,611.9

1 Note 15 for additional information on Capital Leases

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

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 
Department of Defense Agency Financial Report for FY 2014

Financial Information

76

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.

Differences in heritage asset quantities from the FY 2013 ending to the FY 2014 beginning 

unit counts resulted from periodic reviews.

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.

Categories Measure 

Quantity

As of 

9/30/13 Additions Deletions As of 9/30/14

Buildings and Structures Each 55,996 53 (884) 55,165

Archeological Sites Each 30,067 404 (28) 30,443

Museum Collection Items 

(Objects, not including fine art) Each 1,247,150 868 (5,508) 1,242,510

Museum Collection Items (Objects, 

fine art) Each 56,317 884 (247) 58,954

Differences in the heritage assets quantities from the FY 2013 ending to the FY 2014 

beginning unit counts resulted from periodic reviews of museum collections.

Stewardship land includes both land and land rights owned by the Department, but not 

acquired for, or in connection with, items of General Property, Plant, and Equipment. All 

land provided to the Department from the public domain 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.
Department of Defense Agency Financial Report for FY 2014

Financial Information

77

Facility 

Code

Predominant Land Use 

Categories

As of 

9/30/13

(Acres in 

Thousands)

Additions Deletions As of 

9/30/14

9110 Government Owned Land 6,552 0 0 6,552

9111 State Owned Land 5 0 0 5

9120 Withdrawn Public Land 15,396 0 (1) 15,395

9130 Licensed and Permitted Land 944 4 0 948

9140 Public Land 11 0 0 11

9210 Land Easement 379 0 0 379

9220 In-leased Land 124 0 0 124

9230 Foreign Land 297 0 0 297

Grand Total 23,711

Total – All Other Lands 8,300

Total – Stewardship Lands 15,411

Differences in the stewardship land quantities from the FY 2013 ending to the FY 2014 

beginning unit counts resulted from periodic reviews.

Assets Under Capital Lease Dollars in Millions

As of September 30 2014 2013

Entity as Lessee, Assets Under Capital Lease

Land and Buildings $ 260.0 $ 260.0

Equipment 372.6 372.9

Accumulated Amortization (461.8) (438.5)

Total Capital Leases $ 170.8 $ 194.4

NOTE 11. LIABILITIES NOT COVERED BY BUDGETARY RESOURCES

Liabilities Not Covered by Budgetary Resources Dollars in Millions

As of September 30 2014 2013

Intragovernmental Liabilities

Accounts Payable $ 0.0 $ 2.2

Debt 1.5 1.7

Other 2,139.4 1,936.8

Total Intragovernmental Liabilities $ 2,140.9 $ 1,940.7

Non-Federal Liabilities

Accounts Payable $ 139.9 $ 206.2

Military Retirement and Other Federal Employment Benefits 1,656,417.2 1,670,714.4

Environmental and Disposal Liabilities 54,855.7 54,593.4

Other Liabilities 14,700.0 15,726.6

Total Non-Federal Liabilities $ 1,726,112.8 $ 1,741,240.6

Total Liabilities Not Covered by Budgetary Resources $ 1,728,253.7 $ 1,743,181.3

Total Liabilities Covered by Budgetary Resources $ 730,285.7 $ 668,945.9

Total Liabilities $ 2,458,539.4 $ 2,412,127.2

Liabilities Not Covered by Budgetary Resources includes liabilities requiring congressional 

action before budgetary resources can be provided.
Department of Defense Agency Financial Report for FY 2014

Financial Information

78

Non-Federal Accounts Payable primarily represents liabilities in canceled appropriations, that 

if paid, will be disbursed using current year funds.

Debt consists primarily of borrowing from the U.S. Treasury for capital improvements to the 

Washington Aqueduct Project 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 cleanup 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 $1.1 trillion in pension liabilities and $560.9 billion in health benefit 

liabilities. Refer to Note 17, Military Retirement and Other Federal Employment Benefits, for 

additional details.

NOTE 12. ACCOUNTS PAYABLE

Accounts Payable Dollars in Millions

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) 17,871.5 18.4 17,889.9

Total Accounts Payable $ 19,782.7 $ 18.4 $ 19,801.1

Accounts Payable Dollars in Millions

2013

As of September 30

Accounts Payable

Interest, Penalties, 

and Administrative 

Fees

Total

Intragovernmental Payables $ 1,574.7 N/A $ 1,574.7

Non-Federal Payables

(To the Public) 20,138.9 10.2 20,149.1

Total Accounts Payable $ 21,713.6 $ 10.2 $ 21,723.8

Accounts Payable includes 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 
Department of Defense Agency Financial Report for FY 2014

Financial Information

79

accounts payable and expenses, and (3) applying both supported and unsupported 

undistributed disbursements at the reporting entity level.

NOTE 13. DEBT

Debt Dollars in Millions

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

Debt Dollars in Millions

2013

As of September 30 Beginning Balance Net Borrowing Ending Balance

Agency Debt (Intragovernmental)

Debt to the Treasury $ 952.6 $ 222.1 $ 1,174.7

Total Agency Debt $ 952.6 $ 222.1 $ 1,174.7

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 2014

Financial Information

80

NOTE 14. ENVIRONMENTAL AND DISPOSAL LIABILITIES

Environmental and Disposal Liabilities Dollars in Millions

As of September 30 2014 2013

Environmental Liabilities–Non-Federal

Accrued Environmental Restoration Liabilities

Active Installations – Installation Restoration Program (IRP) and 

Building Demolition and Debris Removal (BD/DR) $ 10,125.1 $ 10,026.3

Active Installations – Military Munitions Response Program (MMRP) 3,548.0 3,416.9

Formerly Used Defense Sites – IRP & BD/DR 2,896.5 3,018.8

Formerly Used Defense Sites – MMRP 10,427.1 10,096.8

Other Accrued Environmental Liabilities – Non-BRAC

Environmental Corrective Action $ 1,673.4 $ 1,005.9

Environmental Closure Requirements 1,830.8 1,824.6

Environmental Response at Operational – Ranges 123.2 128.7

Asbestos 1,030.2 1,030.7

Non-Military Equipment 571.9 575.7

Other 998.0 1,107.9

Base Realignment and Closure Installations (BRAC)

Installation Restoration Program $ 3,121.3 $ 3,394.9

Military Munitions Response Program 796.1 690.3

Environmental Corrective Action/Closure Requirements 285.5 197.6

Asbestos 7.1 0.3

Environmental Disposal for Military Equipment/Weapons Programs

Nuclear Powered Military Equipment/Spent Nuclear Fuel $ 14,325.4 $ 14,076.4

Non-Nuclear Powered Military Equipment 36.4 36.4

Other Weapons Systems 131.9 147.5

Chemical Weapons Disposal Program

Chemical Demilitarization – Chemical Materials Agency (CMA) $ 882.6 $ 1,503.8

CAMD Demilitarization – Assembled Chemical Weapons Alternatives 

(ACWA) 5,770.9 6,054.4

Total Environmental Liabilities $ 58,581.4 $ 58,333.9

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. The amount estimated is not 

complete 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. 
Department of Defense Agency Financial Report for FY 2014

Financial Information

81

The weapons systems program consists of chemical weapons disposal, nuclear powered 

aircraft carriers, nuclear powered submarines, and other nuclear ships. All cleanup efforts 

are performed in coordination with regulatory agencies, other responsible parties, and 

current property owners.

Applicable Laws and Regulations for Cleanup Requirements

The Department is required to clean up contamination from past waste disposal practices, 

leaks, spills, and other activity resulting in public health or environmental risk. The 

Department accomplishes this effort in coordination with regulatory agencies and, if 

applicable, other responsible parties and current property owners. The Department is also 

required to recognize closure and post-closure costs for its General PP&E and environmental 

corrective action costs for current operations. Each of the Department's major reporting 

entities is responsible for tracking and reporting all required environmental information 

related to environmental restoration costs, other accrued environmental costs, disposal 

costs of weapon systems, and environmental costs related to BRAC actions.

The Department follows the Comprehensive Environmental Response, Compensation, and 

Liability Act (CERCLA, Public Law 96-510), Superfund Amendments and Reauthorization Act 

of 1986 (SARA, Public Law 99-499), Resource Conservation and Recovery Act (RCRA, Public 

Law 94-580) or other applicable federal or state laws to clean up contamination. The 

CERCLA and RCRA require the Department to clean up contamination in coordination with 

regulatory agencies, current owners of property damaged by the Department, and third 

parties with partial responsibility for environmental restoration. Failure to comply with 

agreements and legal mandates puts the Department at risk of incurring fines and 

penalties.

Laws concerning cleanup requirements for nuclear-powered naval vessels govern the 

Department’s environmental policy and regulations. The Atomic Energy Act of 1954, as 

amended, assures the proper management of source, special nuclear, and byproduct 

materiel. The Department coordinates nuclear power actions with the Department of 

Energy. The Nuclear Waste Policy Act of 1982 (Public Law 97-425) requires owners and 

generators of high-level nuclear waste and spent nuclear fuel to pay their share of the cost 

of the program. The Low-Level Radioactive Waste Policy Amendments Act of 1985 (Public 

Law 99-240) provides for the safe and efficient management of low-level radioactive waste.

The Chemical Weapons Disposal Program is based on FY 1986 National Defense 

Authorization Act (Public Law 99-145, as amended) directing the Department to destroy the 

unitary chemical stockpile per the requirements of the Chemical Weapons Convention 

Treaty.

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 
Department of Defense Agency Financial Report for FY 2014

Financial Information

82

during preliminary assessment and site investigation. The Department primarily uses 

engineering estimates after obtaining extensive data during the remedial 

investigation/feasibility phase of the environmental project.

Once the environmental cost estimates are complete, the Department complies with 

accounting standards to charge costs to current operating periods. The Department 

expensed cleanup costs for General PP&E placed into service prior to October 1, 1997, 

unless costs are to be recovered through user charges. As costs are recovered, the 

Department expenses cleanup costs associated with the asset life that has passed since the 

General PP&E was placed into service. The Department systematically recognizes the 

remaining cost over the life of the assets.

For General PP&E placed into service after September 30, 1997, the Department expenses 

associated environmental costs using two methods: physical capacity for operating landfills 

and life expectancy in years for all other assets. The Department expenses the full cost to 

clean up contamination for Stewardship PP&E when the asset is placed into service.

In accordance with reporting requirements for asbestos, the Department reports liabilities 

for buildings and facilities containing both friable and non-friable asbestos. At this time the 

Department is unable to reasonably estimate an amount of the total cleanup costs related to 

friable and nonfriable asbestos. Of the Other Accrued Environmental Liabilities – Non-BRAC 

for Asbestos reported above, $8.7 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 
Department of Defense Agency Financial Report for FY 2014

Financial Information

83

addition, not all components of the Department recognize environmental liabilities 

associated with General PP&E due to process and system limitations.

The Department may incur costs for restoration initiatives in conjunction with returning 

overseas Defense facilities to host nations. The Department is unable to provide a 

reasonable estimate because the extent of required restoration is unknown.

NOTE 15. OTHER LIABILITIES

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
Department of Defense Agency Financial Report for FY 2014

Financial Information

84

Other Liabilities Dollars in Millions

2013

As of September 30 Current Liability Noncurrent 

Liability Total

Intragovernmental

Advances from Others $ 733.0 $ 0.0 $ 733.0

Deposit Funds and Suspense 

Account Liabilities 1,242.6 0.0 1,242.6

Disbursing Officer Cash 1,577.7 0.0 1,577.7

Judgment Fund Liabilities 234.3 0.0 234.3

FECA Reimbursement to the 

Department of Labor 621.3 707.7 1,329.0

Custodial Liabilities 4,498.7 2,383.7 6,882.4

Employer Contribution and 

Payroll Taxes Payable 397.3 0.0 397.3

Other Liabilities 491.4 0.0 491.4

Total Intragovernmental Other $ 9,796.3 $ 3,091.4 $ 12,887.7

Non-Federal

Accrued Funded Payroll and 

Benefits $ 9,857.5 $ 0.0 $ 9,857.5

Advances from Others 4,862.7 0.0 4,862.7

Deposit Funds and Suspense 

Accounts 377.7 0.0 377.7

Nonenvironmental Disposal 

Liabilities

Military Equipment 

(Nonnuclear) 161.5 63.1 224.6

Excess/Obsolete Structures 79.2 218.9 298.1

Conventional Munitions 

Disposal 0.0 2,136.6 2,136.6

Accrued Unfunded Annual Leave 10,504.7 0.0 10,504.7

Capital Lease Liability 171.7 14.3 186.0

Contract Holdbacks 1,569.9 0.2 1,570.1

Employer Contribution and 

Payroll Taxes Payable 398.9 0.0 398.9

Contingent Liabilities 523.7 6,296.1 6,819.8

Other Liabilities 156.8 0.0 156.8

Total Non-Federal Other 

Liabilities $ 28,664.3 $ 8,729.2 $ 37,393.5

Total Other Liabilities $ 38,460.6 $ 11,820.6 $ 50,281.2

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.
Department of Defense Agency Financial Report for FY 2014

Financial Information

85

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.

Non-Federal Other Liabilities primarily consist of accruals for services, accrued liabilities for 

inventory owned and managed on behalf of foreign governments, and undistributed 

international tariff receipts.

Contingent Liabilities include $3.8 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 are four agencies with delinquent Federal Employee Compensation Act (FECA) bills 

due to the Department of Labor (DOL):

• Army: $21,029,536

• Defense Media Activity: $9,569

• Defense Technology Security Administration: $625

• Defense Legal Services Agency: $2,090
Department of Defense Agency Financial Report for FY 2014

Financial Information

86

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 39 legal actions with individual claims greater than the 

Department's FY 2014 materiality threshold of $147.4 million. These actions total 

approximately $13.0 trillion. Of this amount, the OGC classified claims totaling 

approximately $7.6 billion as "reasonably possible," $3.0 trillion as "remote," and 

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

Capital Lease Liability Dollars in Millions

2013 – Asset Category

As of September 30

Land and 

Buildings Equipment Other Total

Future Payments Due

2014 $ 30.1 $ 0.0 $ 1.1 $ 31.2

2015 30.7 0.0 0.0 30.7

2016 21.4 0.0 0.0 21.4

2017 22.1 0.0 0.0 22.1

2018 22.5 0.0 0.0 22.5

After 5 Years 146.4 0.0 0.0 146.4

Total Future Lease Payments Due $ 273.2 $ 0.0 $ 1.1 $ 274.3

Less: Imputed Interest Executory Costs (88.3) (0.0) (0.0) (88.3)

Net Capital Lease Liability $ 184.9 $ 0.0 $ 1.1 $ 186.0

Capital Lease Liabilities Covered by Budgetary Resources $ 186.0

Capital Lease Liabilities Not Covered by Budgetary Resources $ 0.0
Department of Defense Agency Financial Report for FY 2014

Financial Information

87

$10.0 trillion as "unable to determine the probability of loss." The Department also has 

125 actions at approximately $6.5 billion above the individual Components' thresholds, but 

below the Department's materiality threshold.

Other Commitments and Contingencies

The Department is a party in numerous individual contracts that contain clauses, such as 

price escalation, award fee payments, or dispute resolution, that may result in a future 

outflow of budgetary resources. Currently, the Department has limited automated system 

processes by which it captures or assesses 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

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 Retirement Health 

Benefits 235,711.1 0.0 235,711.1

Military Medicare-Eligible Retiree 

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 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 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 2014

Financial Information

88

Military Retirement and Other Federal Employment Benefits Dollars in Millions

2013

As of September 30

Liabilities

(Less: Assets 

Available to Pay 

Benefits)

Unfunded 

Liabilities

Pension and Health Actuarial Benefits

Military Retirement Pensions $ 1,519,779.5 $ (416,190.0) $ 1,103,589.5

Military Retirement Health 

Benefits 243,049.7 0.0 243,049.7

Military Medicare-Eligible Retiree 

Benefits 502,399.5 (186,963.8) 315,435.7

Total Pension and Health 

Actuarial Benefits $ 2,265,228.7 $ (603,153.8) $ 1,662,074.9

Other Actuarial Benefits

FECA $ 6,749.8 $ 0.0 $ 6,749.8

Voluntary Separation Incentive 

Programs 587.9 (265.6) 322.3

DoD Education Benefits Fund 1,369.3 (1,369.3) 0.0

Other 6,632.1 (5,064.9) 1,567.2

Total Other Actuarial Benefits $ 15,339.1 $ (6,699.8) $ 8,639.3

Total Military Retirement and 

Other Federal Employment 

Benefits

$ 2,280,567.8 $ (609,853.6) $ 1,670,714.2

Actuarial Cost Method Used: Aggregate Entry-Age Method 

Assumptions: Effective Interest 

Market Value of Investments in Market-based and Marketable Securities: $773 billion
Department of Defense Agency Financial Report for FY 2014

Financial Information

89

Military Retirement and Other Federal Employment Benefits Dollars in Millions

2014

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 $ 1,519,779.5 $ 243,049.7 $ 502,399.5 $ 587.9 $ 1,369.3

Normal Cost Liability 32,462.4 9,934.4 11,807.3 0.0 142.6

Interest Cost 64,858.3 10,908.0 22,423.5 17.2 46.1

Plan Amendments (21.7) 0.0 0.0 0.0 0.0

Experience Losses (Gains) (22,572.8) (4,264.3) (3,769.0) 15.6 (59.8)

Other factors 0.0 0.0 0.0 0.0 152.0

Subtotal: Expenses before 

Losses (Gains) from Actuarial 

Assumption Changes

74,726.2 16,578.1 30,461.8 32.8 280.9

Actuarial (Gain)/Loss due to:

Changes in trend assumptions 0.0 (16,298.3) (19,416.7) 0.0 0.0

Changes in assumptions other 

than trend 21,591.7 2,644.8 18,352.0 2.3 0.0

Subtotal: Losses (Gains) from 

Actuarial Assumption Changes 21,591.7 (13,653.5) (1,064.7) 2.3 0.0

Total Expenses 96,317.9 2,924.6 29,397.1 35.1 280.9

Less Benefit Outlays (55,599.0) (10,263.2) (9,263.0) (97.5) (282.7)

Total Changes in Actuarial 

Liability $ 40,718.9 $ (7,338.6) $ 20,134.1 $ (62.4) $ (1.8)

Ending Actuarial Liability $ 1,560,498.4 $ 235,711.1 $ 522,533.6 $ 525.5 $ 1,367.5

The Department complies with SFFAS No. 33, “Pensions, Other Retirement Benefits, and 

Other Postemployment Benefits: Reporting the Gains and Losses from Changes in 

Assumptions and Selecting Discount Rates and Valuation Dates.” The standard requires the 

separate presentation of gains and losses from changes in long-term assumptions used to 

estimate liabilities associated with pensions, other retirement and postemployment benefits. 

The SFFAS No. 33 also provides a standard for selecting the discount rate and valuation 

date used in estimating these liabilities.

Military Retirement Pensions

The Military Retirement Fund is a defined benefit plan authorized by Public Law (PL) 98-94

to provide funds used to pay annuities and pensions to retired military personnel and their 

survivors. The Department of Defense (DoD) Board of Actuaries approves the long-term 

economic assumptions for inflation, salary, and interest. The actuaries calculate the 

actuarial liabilities annually using economic assumptions and actual experience 

(e.g., mortality and retirement rates). Due to reporting deadlines, the current year actuarial 

present value of projected plan benefits rolls forward from the prior year’s valuation results. 

The actuaries used the following assumptions to calculate the FY 2014 roll-forward amount:
Department of Defense Agency Financial Report for FY 2014

Financial Information

90

Military Retirement Pensions Inflation Salary Interest

Fiscal Year 2014 1.5% (actual) 1.0% (actual) 4.3%

Fiscal Year 2015 1.7% (estimated) 1.0% (estimated) 4.3%

Long Term 2.4% 2.5% 4.3%

Actuarial Cost Method Used: Aggregate Entry-Age Normal Method

Market Value of Investments in Market-Based and Marketable Securities: $593.0 billion

Assumed Interest Rate: 4.3%

Historically, the initial unfunded liability of the program was amortized over a 50-year 

period. Effective FY 2008, the initial unfunded liability is amortized over a 42-year period to 

ensure annual payments cover interest on the unfunded actuarial liability, with the last 

payment expected October 1, 2025. All subsequent gains and losses experienced are 

amortized over a 30-year period. 

MILITARY RETIREMENT HEALTH BENEFITS (MRHB)

The MRHB are post-retirement benefits the Department provides to non-Medicare-eligible 

military retirees and other eligible beneficiaries through private sector health care providers 

and the Department’s medical treatment facilities. The actuaries calculate actuarial liabilities 

annually using assumptions and actual experience. For the FY 2014 actuarial liability 

calculation, actuaries used the following assumptions:

MHRB Medical Trend FY 2013 –

FY 2014

Ultimate Rate 

FY 2038

Medicare Inpatient (Direct Care) 1.98% 5.15%

Medicare Outpatient (Direct Care) 4.25% 5.15%

Medicare Prescriptions (Direct Care) 2.50% 5.15%

Non-Medicare Inpatient (Direct Care) 5.90% 5.15%

Non-Medicare Outpatient (Direct Care) 6.00% 5.15%

Non-Medicare Prescriptions (Direct Care) 2.50% 5.15%

Non-Medicare Inpatient (Purchased Care) 1.45% 5.15%

Non-Medicare Outpatient (Purchased Care) 2.80% 5.15%

Non-Medicare Prescriptions (Purchased Care) 4.60% 5.15%

U.S. Family Health Plan (USFHP) (Purchased Care) 3.78% 5.15%

Actuarial Cost Method Used: Aggregate Entry-Age Normal Method

Assumed Interest Rate: 4.3%

Medicare-Eligible Retiree Health Care Fund (MERHCF) Benefits 

In accordance with PL 106-398, MERHCF accumulates funds to finance the health care 

program liabilities of Medicare-eligible retirees for all the Uniformed Services and specific 

Medicare-eligible beneficiaries. The DoD Board of Actuaries approves the long-term 

assumptions for medical trends and interest. The actuaries calculate the actuarial liabilities 

annually using actual experience (e.g., mortality and retirement rates, direct care costs, 

purchased care). Due to reporting deadlines, the current year actuarial present value of 

projected plan benefits rolls forward from the prior year’s results. The actuaries used the 

following assumptions to calculate the FY 2014 roll-forward amount:
Department of Defense Agency Financial Report for FY 2014

Financial Information

91

MERHCF Benefits – Medical Trend FY 2013 –

FY 2014

Ultimate Rate 

FY 2038

Medicare Inpatient (Direct Care) 1.98% 5.15%

Medicare Inpatient (Purchased Care) 2.48% 5.15%

Medicare Outpatient (Direct Care) 4.25% 5.15%

Medicare Outpatient (Purchased Care) 4.25% 5.15%

Medicare Prescriptions (Direct Care) 2.50% 5.15%

Medicare Prescriptions (Purchased Care) 4.24% 5.15%

Medicare USFHP (Purchased Care) 3.86% 5.15%

Actuarial Cost Method Used: Aggregate Entry-Age Normal Method

Market Value of Investments in Market-Based and Marketable Securities: $256.3 billion

Assumed Interest Rate: 4.3%

The MERHCF liability includes Medicare liabilities for all Uniformed Services. The 

$522.5 billion liability includes $510.4 billion for the Department, $10.8 billion for the Coast 

Guard, $1.3 billion for the Public Health Service and $80.4 million for National Oceanic and 

Atmospheric Administration (NOAA). The FY 2014 contributions from each of the Uniformed 

Services were $7.4 billion from the Department, $186.0 million from the Coast Guard, 

$27.4 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, which includes the expected liability for death, disability, medical, 

and miscellaneous costs for approved compensation cases, plus a component for 

incurred-but-not-reported claims. The liability is determined using historical benefit 

payment patterns related to a specific incurred period to predict the final payment related to 

that period. Consistent with past practice, these projected annual benefit payments have 

been discounted to present value using the Office of Management and Budget’s economic 

assumptions for 10-year U.S. Treasury notes and bonds. An interest rate for wage benefits 

of 3.5 percent was assumed for year one and 3.5 percent for year two and thereafter. An 

interest rate for medical benefits of 2.9 percent was assumed for year one and 2.9 percent

for year two and thereafter. 

The DOL calculates this liability using wage inflation factors (cost of living adjustments or 

COLAs) and medical inflation factors (consumer price index medical or CPIM). The actual 

rates for these factors for charge back year (CBY) 2014 were also used to adjust the 

methodology’s historical payments to current year constant dollars. The compensation 

COLAs and CPIMs used in the projections for various charge back years were as follows:

Federal Employees Compensation Act (FECA)

CBY COLA CPIM

2015 1.73% 2.93%

2016 2.17% 3.76%

2017 2.13% 3.86%

2018 2.23% 3.90%

2019+ 2.30% 3.90%
Department of Defense Agency Financial Report for FY 2014

Financial Information

92

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 2014 to the average 

pattern observed during the prior three charge back years, and (4) a comparison of the 

estimated liability per case in the 2014 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 that was approved by 

the DoD Board of Actuaries. 

The Market Value of Investments in Market-based and Marketable Securities: $1.8 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 

3.1 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:

$231.1 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.

NOTE 18. GENERAL DISCLOSURES RELATED TO THE STATEMENT OF NET 

COST

Costs and Exchange Revenue Dollars in Millions

As of September 30 2014 2013

Military Retirement Benefits 

Gross Cost

Intragovernmental Cost $ 5.4 $ 205.3

Non-Federal Cost $ 101,872.2 $ 64,217.0

Total Cost $ 101,877.6 $ 64,422.3

Earned Revenue

Intragovernmental Revenue $ (25,061.3) $ (22,387.6)

Non-Federal Revenue $ 0.0 $ 0.0

Total Revenue $ (25,061.3) $ (22,387.6)
Department of Defense Agency Financial Report for FY 2014

Financial Information

93

Costs and Exchange Revenue Dollars in Millions

As of September 30 2014 2013

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ 20,527.1 $ 8,018.2

Total Net Cost $ 97,343.4 $ 50,052.9

Civil Works

Gross Cost

Intragovernmental Cost $ 1,647.1 $ 1,465.1

Non-Federal Cost $ 7,195.1 $ 8,291.6

Total Cost $ 8,842.2 $ 9,756.7

Earned Revenue

Intragovernmental Revenue $ (709.3) $ (1,135.5)

Non-Federal Revenue $ (690.6) $ (700.4)

Total Revenue $ (1,399.9) $ (1,835.9)

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ 0.0 $ 0.0

Total Net Cost $ 7,442.3 $ 7,920.8

Military Personnel

Gross Cost

Intragovernmental Cost $ 33,926.5 $ 30,997.8

Non-Federal Cost $ 109,368.4 $ 115,054.3

Total Cost $ 143,294.9 $ 146,052.1

Earned Revenue

Intragovernmental Revenue $ (1,160.7) $ (1,155.6)

Non-Federal Revenue $ (94.3) $ (3.1)

Total Revenue $ (1,255.0) $ (1,158.7)

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ 0.0 $ 0.0

Total Net Cost $ 142,039.9 $ 144,893.4

Operations, Readiness & Support

Gross Cost

Intragovernmental Cost $ (49,742.3) $ (49,139.9)

Non-Federal Cost $ 322,522.9 $ 342,058.1

Total Cost $ 272,780.6 $ 292,918.2

Earned Revenue

Intragovernmental Revenue $ 6,191.7 $ 8,896.7

Non-Federal Revenue $ (54,104.7) $ (40,099.7)

Total Revenue $ (47,913.0) $ (31,203.0)

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ (13,651.3) $ (70,856.8)

Total Net Cost $ 211,216.3 $ 190,858.4

Procurement

Gross Cost

Intragovernmental Cost $ 28,235.8 $ 31,638.1

Non-Federal Cost $ 70,252.4 $ 44,578.0

Total Cost $ 98,488.2 $ 76,216.1

Earned Revenue

Intragovernmental Revenue $ (1,725.4) $ (2,104.6)

Non-Federal Revenue $ (2,859.1) $ (935.0)
Department of Defense Agency Financial Report for FY 2014

Financial Information

94

Costs and Exchange Revenue Dollars in Millions

As of September 30 2014 2013

Total Revenue $ (4,584.5) $ (3,039.6)

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ 0.0 $ 0.0

Total Net Cost $ 93,903.7 $ 73,176.5

Research, Development, Test & Evaluation

Gross Cost

Intragovernmental Cost $ 19,879.5 $ 20,817.3

Non-Federal Cost $ 48,862.0 $ 49,329.7

Total Cost $ 68,741.5 $ 70,147.0

Earned Revenue

Intragovernmental Revenue $ (4,408.4) $ (5,105.0)

Non-Federal Revenue $ (2,949.2) $ (2,687.8)

Total Revenue $ (7,357.6) $ (7,792.8)

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ 0.0 $ 0.0

Total Net Cost $ 61,383.9 $ 62,354.2

Family Housing & Military Construction

Gross Cost

Intragovernmental Cost $ 1,066.7 $ 1,494.7

Non-Federal Cost $ 31,990.7 $ 34,849.0

Total Cost $ 33,057.4 $ 36,343.7

Earned Revenue

Intragovernmental Revenue $ (5,521.8) $ (7,147.1)

Non-Federal Revenue $ (822.0) $ (445.0)

Total Revenue $ (6,343.8) $ (7,592.1)

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ 0.0 $ 0.0

Total Net Cost $ 26,713.6 $ 28,751.6

Consolidated

Gross Cost

Intragovernmental Cost $ 35,018.7 $ 37,478.4

Non-Federal Cost $ 692,063.7 $ 658,377.7

Total Cost $ 727,082.4 $ 695,856.1

Earned Revenue

Intragovernmental Revenue $ (32,395.2) $ (30,138.7)

Non-Federal Revenue $ (61,519.9) $ (44,871.0)

Total Revenue $ (93,915.1) $ (75,009.7)

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ 6,875.8 $ (62,838.6)

Costs Not Assigned to Programs $ 0.0 $ 0.0

(Less: Earned Revenues) Not Attributed to Programs $ 0.0 $ 0.0

Total Net Cost $ 640,043.1 $ 558,007.8

The SNC represents the net cost of programs and organizations of the Department 

supported by appropriations or other means. The intent of the SNC is to provide gross and 

net cost information related to the amount of output or outcome for a given program or 
Department of Defense Agency Financial Report for FY 2014

Financial Information

95

organization administered by a responsible reporting entity. The Department’s current 

processes and systems capture costs based on appropriation groups as presented in the 

schedule above. The lower level costs for major programs are not presented as required by 

the Government Performance and Results Act. The Department is in the process of 

reviewing available data and developing a cost reporting methodology required by 

SFFAS No. 4, “Managerial Cost Accounting Concepts and Standards for the Federal 

Government,” amended by SFFAS No. 30, “Inter-Entity Cost Implementation.”

Intragovernmental costs and revenue represent transactions between two reporting entities 

within the Federal Government. Public costs and revenues are exchange transactions 

between the reporting entity and a non-Federal entity. 

The Department’s systems do not track intragovernmental transactions by customer. Buyer 

side expenses are adjusted to agree with internal seller side revenues. Expenses are 

generally adjusted by reclassifying amounts between Federal and non-Federal expenses. 

Intradepartmental revenues and expenses are then eliminated.

The SNC presents information based on budgetary obligation, disbursement, and collection 

transactions, as well as data from nonfinancial feeder systems. General Fund data is 

primarily derived from budgetary transactions (obligations, disbursements, and collections), 

data from nonfinancial feeder systems, and accruals (payroll expenses, accounts payable,

and environmental liabilities). Working Capital Funds primarily record transactions on an 

accrual basis; however, the systems do not always capture actual costs timely. 

Abnormal Balances

Operations, Readiness & Support Intragovernmental Gross Cost and Earned Revenue on the 

SNC have abnormal balances of $49.7 billion and $6.2 billion, respectively. The current 

business practice is to report most eliminations in this program group, resulting in the 

abnormal balance presentation. 

Other Disclosures

The Department reclassified a portion of the elimination entry to Research, Development, 

Test & Evaluation from Operations, Readiness & Support to better align costs and revenues 

with program group. Comparative year amounts include offsetting differences of 

$174.0 million for Intragovernmental Gross Costs, Nonfederal Gross Costs, and 

Intragovernmental Earned Revenue with no change to the overall FY 2013 consolidated 

amounts. Net Costs increased for Operations, Readiness & Support and decreased for 

Research, Development, Test & Evaluation. 

The Department’s military retirement and postemployment costs are reported in accordance 

with SFFAS 33, “Pensions, Other Retirement Benefits, and Other Postemployment Benefits: 

Reporting the Gains and Losses from Changes in Assumptions and Selecting Discount Rates 

and Valuation Dates.”
Department of Defense Agency Financial Report for FY 2014

Financial Information

96

NOTE 19. DISCLOSURES RELATED TO THE STATEMENT OF CHANGES IN NET 

POSITION

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 $61.9 billion. 

Year Ended September 30, 2014

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 $ 737.6

Less: Appropriations Received, Statement of Changes in Net Position (675.7)

Total Reconciling Amount $ 61.9

Items Reported in Net Cost of Operations, Statement of Changes in Net Position

 Trust and Special Fund Receipts 136.1

Items Reported as Reductions to Appropriations, Statement of Budgetary Resources

 Permanent and Temporary Reductions $ (73.9)

 Miscellaneous items (0.3)

Total Reconciling Items $ 61.9

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 2014 2013

Net Amount of Budgetary Resources Obligated for Undelivered Orders at 

the End of the Period $ 458,568.2 $ 458,821.6

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 $61.9 billion. Reference Note 19, Disclosures Related to the 

Statement of Changes in Net Position, for additional details.

The SBR FY 2013 column includes $109.7 billion more in budget authority than reported in 

the 2013 actual column of the President’s FY 2015 Budget. The difference is primarily due to 

duplicate reporting in the SBR of the Military Services’ contributions and U.S. Treasury’s 

payments to the Military Retirement Trust Fund and Medicare-Eligible Retiree Health Care 

Fund.
Department of Defense Agency Financial Report for FY 2014

Financial Information

97

The SBR FY 2013 column includes $585.4 million less in obligations than reported in the 

2013 actual column of the President’s FY 2015 Budget. The difference is primarily due to the 

timing of the recognition of obligations in accordance with OMB guidance.

In accordance with OMB guidance, the SBR FY 2013 column includes $82.8 billion less in net 

outlays than reported in the 2013 actual column of the President’s FY 2015 Budget. The SBR 

reduces net outlays by the distributed offsetting receipts. The President’s Budget does not 

reduce the Department’s outlays by the distributed offsetting receipts.

Permanent Indefinite Appropriations

The Department of Defense received the following permanent indefinite appropriations:

Department of the Army General Gift Fund (10 USC 2601(C)(1))

Department of the Navy General Gift Fund (10 USC 2601(C)(2))

Department of the Air Force General Gift Fund (10 USC 2601(C)(3))

Department of Defense General Gift Fund (10 USC 2601)

Disposal of Department of Defense Real Property (40 USC 485(h)(2)(A)(B))

Lease of Department of Defense Real Property (40 USC 485(h)(2)(A)(B))

Foreign National Employees Separation Pay Account, Defense (10 USC 1581)

United States Naval Academy Gift and Museum Fund (10 USC 6973-4)

Ship Stores Profits, Navy (10 USC 7220, 31 USC 1321)

Burdensharing Contributions (10 USC 2350j) 

Forest Program (10 USC 2665) 

Medicare Eligible Retiree Health Care Fund (10 USC 1111)

Military Retirement Fund (10 USC 1461)

Education Benefits Fund (10 USC 2006)

Host Nation Support for U.S. Relocation Activities (10 USC 2350k)

Hydraulic Mining Debris Reservoir (33 USC 683)

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)
Department of Defense Agency Financial Report for FY 2014

Financial Information

98

Concurrent Receipt Accrual Payments to the Military Retirement Fund 10 USC 1466(b)(1)

Rocky Mountain Arsenal, Restoration (100 Statute, 4003 SEC 1367)

DoD Family Housing Improvement Fund, Direct Loan, Financing Account (2 USC 661d)

DoD Family Housing Improvement Fund, Guaranteed Loan, Financing Account (2 USC 661d)

Homeowners Assistance Fund (10 USC 4551-4555; 42 USC 3374(d), Title United States 

Code; Public Law 111-5)

Payments to Military Retirement Fund, Defense (10 USC, 1466)

Payment to Department of Defense Medicare-Eligible Retiree Health Care Fund 

(10 USC 1116(a))

Arms Initiative, Guaranteed Loan Financing Account, Army (10 USC 2501, 

10 USC 4551-4555)

Medicare-Eligible Retiree Health Fund Contribution, Navy (10 USC 1116)

Medicare-Eligible Retiree Health Fund Contribution, Marine Corps (10 USC 1116)

Medicare-Eligible Retiree Health Fund Contribution, Reserve Personnel, Navy (10 USC 1116)

Medicare-Eligible Retiree Health Fund Contribution, Reserve Personnel, Marine Corps 

(10 USC 1116)

Medicare-Eligible Retiree Health Fund Contribution, Army (10 USC 1116)

Medicare-Eligible Retiree Health Fund Contribution, Reserve Personnel, Army (10 USC 1116)

Medicare-Eligible Retiree Health Fund Contribution, National Guard Personnel, Army 

(10 USC 1116)

Medicare-Eligible Retiree Health Fund Contribution, Air Force (10 USC 1116)

Medicare-Eligible Retiree Health Fund Contribution, Reserve Personnel, Air Force 

(10 USC 1116)

Medicare-Eligible Retiree Health Fund Contribution, National Guard Personnel, Air Force 

(10 USC 1116)

Department of Defense Vietnam War Commemoration Fund, Defense (P.L. 110-181, 

122 Stat. 141 (Sec. 598))

The above permanent indefinite appropriations cover a wide variety of purposes to help the 

Department accomplish its missions. These purposes primarily include: (1) military retirees’ 

health care benefits, retirement and survivor pay, and education benefits for veterans; 

(2) wildlife habitat restoration and water resources maintenance; (3) relocation of armed 

forces within a host nation; (4) separation payments for foreign nationals; and (5) upkeep 

of libraries and museums.

Apportionment Categories for Obligations Incurred

Apportionment categories are determined in accordance with the guidance provided in OMB 

Circular No. A-11, “Preparation, Submission and Execution of the Budget.” Category A 

relates to appropriations for a specific period of time (e.g., Military Personnel appropriation), 
Department of Defense Agency Financial Report for FY 2014

Financial Information

99

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, 2014 Dollars in Billions

Apportionment 

Category A

Apportionment 

Category B

Exempt From 

Apportionment

Total

Obligations Incurred – Direct 406.9 216.3 140.8 764.0

Obligations Incurred – Reimbursable 15.3 147.1 7.8 170.2

Total Obligations Incurred: $ 422.2 $ 363.4 $ 148.6 $ 934.2

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, $111.6 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 $85.4 billion to cover obligations incurred 

above baseline operations in support of contingency operations.
Department of Defense Agency Financial Report for FY 2014

Financial Information

100

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 2014 2013

Resources Used to Finance Activities

Budgetary Resources Obligated:

Obligations incurred $ 934,176.7 $ 954,067.2

Less: Spending authority from offsetting collections and recoveries (-) (211,124.0) (230,340.8)

Obligations net of offsetting collections and recoveries $ 723,052.7 $ 723,726.4

Less: Offsetting receipts (-) (87,713.9) (82,767.6)

Net obligations $ 635,338.8 $ 640,958.8

Other Resources:

Donations and forfeitures of property $ 10.6 $ 9.9

Transfers in/out without reimbursement (+/-) 56.6 (14.6)

Imputed financing from costs absorbed by others 5,569.8 4,896.8

Other (+/-) (19,104.2) 32,173.5

Net other resources used to finance activities $ (13,467.2) $ 37,065.6

Total resources used to finance activities $ 621,871.6 $ 678,024.4

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 (-) $ (9,879.6) $ 28,064.4

Unfilled Customer Orders 234.8 (1,767.8)

Resources that fund expenses recognized in prior Periods (-) (16,077.7) (92,516.0)

Budgetary offsetting collections and receipts that do not affect Net Cost of 

Operations 2,272.0 2,122.8

Resources that finance the acquisition of assets (-) (90,108.0) (105,940.4)

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 (-) (359.2) 0.0

Other (+/-) 18,669.5 (32,309.2)

Total resources used to finance items not part of the Net Cost of 

Operations $ (95,248.2) $ (202,346.2)

Total resources used to finance the Net Cost of Operations $ 526,623.4 $ 475,678.2

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 $ 151.2 $ 189.5

Increase in environmental and disposal liability 713.6 624.1

Upward/Downward reestimates of credit subsidy expense (+/-) (94.5) (24.8)

Increase in exchange revenue receivable from the public (-) 2,644.5 194.0

Other (+/-) 68,002.0 42,826.9

Total components of Net Cost of Operations that will Require or 

Generate Resources in future periods $ 71,416.8 $ 43,809.7

Components not Requiring or Generating Resources:

Depreciation and amortization $ 46,734.8 $ 44,524.6

Revaluation of assets or liabilities (+/-) (12,046.6) 3,528.3

Other (+/-)

Trust Fund Exchange Revenue (51,601.4) (51,893.3)
Department of Defense Agency Financial Report for FY 2014

Financial Information

101

Reconciliation of Net Cost of Operations to Budget Dollars in Millions

As of September 30 2014 2013

Cost of Goods Sold 58,445.5 66,612.8

Operating Materiel and Supplies Used 29,960.0 12,936.2

Other (29,489.4) (37,188.7)

Total Components of Net Cost of Operations that will not Require or 

Generate Resources $ 42,002.9 $ 38,519.9

Total components of Net Cost of Operations that will not Require or 

Generate Resources in the current period $ 113,419.7 $ 82,329.6

Net Cost of Operations $ 640,043.1 $ 558,007.8

The Reconciliation of Net Cost of Operations 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.

Other Disclosures

Due to the Department’s financial systems limitations, budgetary data does not agree with 

proprietary expenses and capitalized assets. This difference is a previously identified 

deficiency. The following adjustments (absolute value) were made to balance the 

Reconciliation of Net Cost of Operations to Budget:

Dollars in Millions

Resources that Finance the Acquisition of Assets $ 19,061.5

Revaluation of Assets or Liabilities $ 675.3

Other Components not Requiring or Generating Resources $ 4,649.4

Total Amount $ 24,386.2

The following Reconciliation of Net Cost of Operations to Budget lines are presented as 

combined instead of consolidated due to intra-agency budgetary transactions not being 

eliminated:

• Obligations Incurred

• Less: Spending Authority from Offsetting Collections and Recoveries

• Obligations Net of Offsetting Collections and Recoveries

• Less: Offsetting Receipts

• Net Obligations

• Undelivered Orders

• Unfilled Customer Orders

Other Resources, Other primarily consists of non-exchange gains and losses 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. 
Department of Defense Agency Financial Report for FY 2014

Financial Information

102

Components Requiring or Generating Resources in Future Period, Other consists primarily of 

future funded expenses.

Components not Requiring or Generating Resources, Other primarily consist of cost 

capitalization offsets and other expenses not requiring budgetary resources. 

NOTE 22. DISCLOSURES RELATED TO INCIDENTAL CUSTODIAL 

COLLECTIONS

The Department collected $3.8 million of incidental custodial revenues generated primarily 

from forfeitures of unclaimed money and property. These funds are not available for use by 

the Department. At the end of each fiscal year, the accounts are closed and the balances 

are relinquished to the U.S. Treasury.

The Department also reversed $6.6 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 2014

Financial Information

103

NOTE 23. FUNDS FROM DEDICATED COLLECTIONS

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
Department of Defense Agency Financial Report for FY 2014

Financial Information

104

Funds from Dedicated Collections Dollars in Millions

2013

As of September 30

Harbor 

Maintenance 

Trust Fund

Rivers and

Harbors 

Contributed 

and Advance 

Fund

Other Funds Eliminations

Total Funds 

from 

Dedicated 

Collections

Balance Sheet

Assets

Fund Balance with Treasury $ 107.5 $ 1,093.5 $ 949.0 $ 0.0 $ 2,150.0

Investments 7,877.5 0.0 911.9 0.0 8,789.4

Accounts and Interest Receivable 448.8 3.9 5.0 (2.9) 454.8

Other Assets 659.6 30.0 804.9 0.0 1,494.5

Total Assets $ 9,093.4 $ 1,127.4 $ 2,670.8 $ (2.9) $ 12,888.7

Liabilities and Net Position

Accounts Payable and Other 

Liabilities 13.0 1,125.4 74.2 (10.6) 1,202.0

Total Liabilities $ 13.0 $ 1,125.4 $ 74.2 $ (10.6) $ 1,202.0

Cumulative Results of Operations $ 9,080.4 $ 2.0 $ 2,596.6 $ 1,028.8 $ 12,707.8

Total Liabilities and Net Position $ 9,093.4 $ 1,127.4 $ 2,670.8 $ 1,018.2 $ 13,909.8

Statement of Net Cost

Program Costs $ 145.3 $ 340.9 $ 1,296.1 $ (123.1) $ 1,659.2

Less Earned Revenue 0.0 (366.9) (305.0) 0.1 (671.8)

Net Cost of Operations $ 145.3 $ (26.0) $ 991.1 $ (123.0) $ 987.4

Statement of Changes in Net Position

Net Position Beginning of the Period $ 8,377.2 $ 4.8 $ 2,410.4 $ 0.0 $ 10,792.4

Net Cost of Operations (145.3) 26.0 (991.1) 123.0 (987.4)

Budgetary Financing Sources 848.6 0.0 1,129.2 938.8 2,916.6

Other Financing Sources (0.1) (28.8) 48.1 (33.0) (13.8)

Change in Net Position $ 703.2 $ (2.8) $ 186.2 $ 1,028.8 $ 1,915.4

Net Position End of Period $ 9,080.4 $ 2.0 $ 2,596.6 $ 1,028.8 $ 12,707.8

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 the 

U.S. Treasury. There has been no legislation significantly altering the purposes of the funds.

The Total column is shown as consolidated and relates only to Funds from Dedicated 

Collections. The Eliminations column includes eliminations associated with Funds from 

Dedicated Collections and excludes the offsetting eliminations from All Other Funds. This 

exclusion causes assets to not equal liabilities and net position in the note. However, the 
Department of Defense Agency Financial Report for FY 2014

Financial Information

105

amounts in the Total column equal the amounts reported as Funds from Dedicated 

Collections on the Balance Sheet.

The Department has the following Funds from Dedicated Collections:

Harbor Maintenance Trust Fund, 26 USC 9505. The United States Army Corps of Engineers 

(USACE) Civil Works mission is funded by the Energy and Water Development 

Appropriations Act. The Water Resources Development Act of 1986 covers a portion of 

USACE operations and maintenance costs for deep draft navigation. The Harbor 

Maintenance Trust Fund is available for making expenditures to carry out the functions 

specified in the Act and for the payment of all administrative expenses incurred by the 

U.S. Treasury, USACE, and the Department of Commerce. Taxes collected from imports, 

domestics, passengers, and foreign trade are deposited into the Trust Fund. The Bureau of 

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 2014

Financial Information

106

administrative reimbursement, are paid to the U.S. Treasury and allocated for specific uses. 

The Department of the Army is allocated fifty percent of charges from all licenses, except 

licenses for the occupancy and use of public lands and national forests. These funds are 

deposited in a special fund and used for maintenance, operation, and improvement of dams 

and other navigation structures owned by the U.S., or in construction, maintenance, or 

operation of headwater, or other improvements to navigable waters of the U.S. 

Fund for Non-Federal Use of Disposal Facilities (for dredged material), 33 USC 2326. 

Non-Federal interests may use dredged material disposal facilities under the jurisdiction of, 

or managed by, the Secretary of the Army if the Secretary determines use will not reduce 

the availability of the facility for project purposes. Fees may be imposed to recover capital, 

operation, and maintenance costs of the disposal facility from which the fees were collected.

Coastal Wetlands Restoration Trust Fund and Coastal Wetlands Planning, Protection, and 

Restoration Act, 16 USC 3951-3956. The USACE, Environmental Protection Agency, and Fish 

and Wildlife Service are authorized to work with the State of Louisiana to achieve a goal of 

"no net loss of wetlands" in coastal Louisiana. The USACE is also responsible for allocating 

funds. Federal contributions are 75 percent of project costs or 85 percent if the state has 

an approved Coastal Wetlands Conservation Plan. This Trust Fund receives funding from the 

Sport Fish Restoration and Boating Trust Fund. 

Inland Waterways Trust Fund, 26 USC 9506. Excise taxes from the public are used by 

USACE for navigation, construction, and rehabilitation projects on inland waterways. The 

BFS manages and invests for the Trust Fund.

Defense Commissary Agency Surcharge Trust Fund, 10 USC 2685. Surcharge on sales of 

commissary goods finance the Commissary System operating expenses and capital 

purchases, precluded by law from being paid with appropriated funds. Revenue is generated 

through a five percent surcharge applied to each sale. These funds finance 

commissary-related information technology investments, equipment, advance design 

modifications to prior year construction projects, and maintenance and repair of facilities 

and equipment.

NOTE 24. FIDUCIARY ACTIVITIES

Schedule of Fiduciary Activity Dollars in Millions

As of September 30 2014 2013

Fiduciary net assets, beginning of year $ 141.9 $ 158.7

Contributions 59.7 194.1

Investment earnings 0.6 12.4

Distributions to and on behalf of beneficiaries (114.2) (223.3)

Increase/(Decrease) in fiduciary net assets (53.9) (16.8)

Fiduciary net assets, end of period $ 88.0 $ 141.9
Department of Defense Agency Financial Report for FY 2014

Financial Information

107

Schedule of Fiduciary Net Assets Dollars in Millions

As of September 30 2014 2013

Fiduciary Assets

Cash and cash equivalents $ 88.0 $ 141.9

Total Fiduciary Net Assets $ 88.0 $ 141.9

Fiduciary activities exist when the Department has collected, received, held, or made 

disposition of assets on behalf of an individual or non-Federal entity. Fiduciary assets are 

not recognized on the Balance Sheet.

Public Law 89-538 authorized the Department, through the Savings Deposit Program, to 

collect voluntary contributions from members of the Armed Forces serving in designated 

areas. These contributions and earned interest are deposited in the U.S. Treasury on behalf 

of the members.

NOTE 25. OTHER DISCLOSURES

Operating leases do not transfer the benefits and risks of ownership of 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

2014 – Asset Category

As of September 30

Land and 

Buildings Equipment Other Total

Entity as Lessee – Operating Leases

Future Payments Due

Fiscal Year 2015 $ 644.6 $ 10.1 $ 14.7 $ 669.4

Fiscal Year 2016 647.3 10.0 14.8 672.1

Fiscal Year 2017 637.2 10.0 14.9 662.1

Fiscal Year 2018 609.0 10.0 15.1 634.1

Fiscal Year 2019 747.9 10.0 15.2 773.1

After 5 Years 1,105.5 0.7 15.4 1,121.6

Total Future Lease Payments Due $ 4,391.5 $ 50.8 $ 90.1 $ 4,532.4
Department of Defense Agency Financial Report for FY 2014

Financial Information

108

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 2014 through 2010 Dollars in Millions

Categories 2014 2013 2012 2011 2010

Transferred Assets:

National Defense Mission Related $ 1,113.2 $ 1,376.8 $ 1,445.4 $ 2,304.5 $ 2,126.2

Funded Assets:

National Defense Mission Related $ 12.4 $ 11.8 $ 7.7 $ 12.0 $ 0.0

Total $ 1,125.6 $ 1,388.6 $ 1,453.1 $ 2,316.5 $ 2,126.2

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 2010 – FY 2014 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 2014

Financial Information

109

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 2014

Financial Information

110

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 2014 2013 2012 2011 2010

Basic Research $ 1,948.2 $ 1,841.5 $ 1,645.3 $ 1,816.6 $ 1,805.5

Applied Research 5,500.6 5,477.4 5,819.3 6,848.3 5,758.4

Development

Advanced Technology 

Development 5,253.3 4,898.3 5,868.0 6,024.3 6,353.4

Advanced Component 

Development and Prototypes 10,947.0 12,464.8 13,005.0 13,964.2 14,304.6

System Development and 

Demonstration 11,459.7 12,524.6 11,926.3 13,882.0 15,156.7

Research, Development, Test 

and Evaluation Management 

Support

5,262.5 4,906.5 5,640.5 5,659.2 5,503.6

Operational Systems 

Development 20,334.3 21,180.9 23,274.6 23,861.3 23,986.2

Totals: $ 60,705.6 $ 63,294.0 $ 67,179.0 $ 72,055.9 $ 72,868.4
Department of Defense Agency Financial Report for FY 2014

Financial Information

111

REQUIRED SUPPLEMENTARY INFORMATION

This section includes the deferred maintenance and repairs information and Statement of 

Disaggregated Budgetary Resources.

REAL PROPERTY DEFERRED MAINTENANCE AND REPAIRS

The deferred maintenance and repairs amount is based on facility Q-ratings found in the 

Department’s real property inventory. Q-ratings represent work needed to bring a facility to 

a fully serviceable condition with no repair needs. The reported deferred maintenance is the 

difference between the facility Q-rating and the target Q-rating that represents the 

acceptable operating condition established by each Component within the Department. The 

percentage column reflects the percent of total plant replacement value for each category 

represented by deferred maintenance.

Facility Categories are as follows:

• Category 1: Buildings, Structures, and Utilities that are enduring and required to support 

an ongoing mission, including multi-use Heritage Assets.

• Category 2: Buildings, Structures, and Utilities that are excess to requirements or 

planned for replacement or disposal, including multi-use Heritage Assets.

• Category 3: Buildings, Structures, and Utilities that are Heritage Assets. 

Equipment Deferred Maintenance and Repairs

Depot maintenance requirements for equipment are developed during the annual budget 

process. The table below shows the deferred unfunded requirements for the depot 

maintenance program.

Equipment Deferred Maintenance and Repairs

For Fiscal Year Ended September 30, 2014

Major Categories Dollars in Millions

1. Aircraft $ 186.3

2. Automotive Equipment $ 212.2

3. Combat Vehicles $ 184.6

4. Construction Equipment $ 25.3

5. Electronics and Communications Systems $ 190.1

6. Missiles $ 52.8

7. Ships $ 419.0

8. Ordnance Weapons and Munitions $ 33.4

9. All Other Items Not Identified to above Categories $ 374.6

Total $ 1,678.3

Real Property Deferred Maintenance and Repairs

As of September 30, 2014 Dollars in Millions

Property Type

Current Fiscal Year (CFY)

1. Plant Replacement Value 2. Required Work (Deferred 

Maintenance & Repair) 3. Percentage

1. Category 1 $ 971,365 $ 101,531 10%

2. Category 2 $ 22,549 $ 3,690 16%

3. Category 3 $ 40,407 $ 4,899 12%
Department of Defense Agency Financial Report for FY 2014

Financial Information

112

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 $ 14956.2 $ 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 2014

Financial Information

113

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

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 $ 11,028.2 $ 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 $ 64,860.0 $ 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 2014

Financial Information

114

Statement of Disaggregated 

Budgetary Resources 2013

For the Years Ended 

September 30

Dollars in Millions

Military

Personnel Procurement

Research, 

Development, 

Test and 

Evaluation

Family Housing/ 

Military 

Construction

Military 

Retirement 

Benefits

Civil Works

Operations, 

Readiness & 

Support

2013 Combined

Budgetary Resources

Unobligated balance, brought 

forward, October 1 $ 2,463.8 $ 63,347.7 $ 15,203.9 $ 16,057.9 $ 0.0 $ 8,610.1 $ 40,009.1 $ 145,692.5

Recoveries of prior year unpaid 

obligations 14,394.5 12,838.5 2,665.7 2,431.7 0.0 415.3 30,426.9 63,172.6

Other changes in unobligated 

balance (406.3) (1,770.8) (825.5) (301.7) 0.0 0.0 (10,513.6) (13,817.9)

Unobligated balance from prior 

year budget authority, net 16,452.0 74,415.4 17,044.1 18,187.9 0.0 9,025.4 59,922.4 195,047.2

Appropriations (discretionary and 

mandatory) 146,740.1 95,634.8 60,131.7 6,995.5 63,194.3 10,431.7 350,407.8 733,535.9

Contract Authority (discretionary and 

mandatory) 0.0 0.0 0.0 0.0 0.0 0.0 65,506.0 65,506.0

Spending Authority from offsetting 

collections (discretionary and 

mandatory)

1,246.8 2,664.00 7,695.8 5,129.6 128.5 10,821.8 76,026.2 103,712.7

Total Budgetary Resources $ 164,438.9 $ 172,714.2 $ 84,871.6 $ 30,313.0 $ 63,322.8 $ 30,278.9 $ 551,862.4 $ 1,097,081.8

Status of Budgetary Resources:

Obligations Incurred 161,374.3 120,858.9 70,187.8 15,356.8 63,322.8 17,917.2 504,970.6 953,988.4

Unobligated balance, end of year:

Apportioned 692.7 47,045.0 12,943.3 13,300.0 0.0 11,038.0 24,877.8 109,896.8

Exempt from Apportionment 0.0 0.0 0.0 0.0 0.0 1,319.5 2,727.1 4,046.6

Unapportioned 2,371.9 4,810.3 1,740.5 1,656.2 0.0 4.2 19,286.9 29,870.0

Unobligated balance brought 

forward, end of year $ 3,064.6 $ 51,855.3 $ 14,683.8 $ 14,956.2 $ 0.0 $ 12,361.7 $ 46,891.8 $ 143,813.4

Total Budgetary Resources $ 164,438.9 $ 172,714.2 $ 84,871.6 $ 30,313.0 $ 63,322.8 $ 30,278.9 $ 551,862.4 $ 1,097,801.8
Department of Defense Agency Financial Report for FY 2014

Financial Information

115

Statement of Budgetary 

Resources 2013

For the Years Ended September 30

Dollars in Millions

Military

Personnel Procurement

Research, 

Development, Test 

and Evaluation

Family Housing/ 

Military 

Construction

Military Retirement 

Benefits Civil Works

Operations, 

Readiness & 

Support

2013

Combined

Change in Obligated Balance

Unpaid obligations

Unpaid obligations, brought forward, 

October 1 (Gross) $ 11,975.7 $ 151,469.5 $ 47,712.4 $ 28,530.9 $ 4,643.2 $ 8,374.7 $ 215,863.8 $ 468,570.2

Obligations incurred 161,374.3 120,858.9 70,187.8 15,356.8 63,322.8 17,917.2 504,970.6 953,988.4

Outlays (gross) (145,219.5) (115,344.9) (71,741.2) (18,288.5) (62,620.8) (18,062.6) (490,743.3) (922,020.8)

Recoveries of prior year unpaid obligations (14,394.5) (12,838.5) (2,665.7) (2,431.7) 0.0 (415.3) (30,426.9) (63,172.6)

Unpaid Obligations, end of year 13,736.0 144,145.0 43,493.3 23,167.5 5,345.2 7,814.0 199,664.2 437,365.2

Uncollected Payments

Uncollected customer payments from 

Federal Sources, end of year (126.9) (4,239.5) (5,720.5) (12,277.8) 0.0 (2,176.7) (53,412.0) (77,953.4)

Change in uncollected payments, Federal

sources (60.8) 72.5 98.5 2,302.1 0.0 235.4 (1,898.2) 749.5

Actual transfers, uncollected payments, 

Federal sources 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Uncollected payments, 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)

Obligated balance, start of year $ 11,848.8 $ 147,230.0 $ 41,991.9 $ 16,253.1 $ 4,643.2 $ 6,198.0 $ 162,451.8 $ 390,616.8

Obligated balance, end of year $ 13,548.3 $ 139,978.0 $ 37,871.3 $ 13,191.8 $ 5,345.2 $ 5,872.7 $ 144,354.0 $ 360,161.3

Budget Authority and Outlays, Net:

Budget Authority, gross (discretionary and 

mandatory) $ 147,986.9 $ 98,298.8 $ 67,827.5 $ 12,125.1 $ 63,322.8 $ 21,253.5 $ 491,940.0 $ 902,754.6

Actual offsetting collections (discretionary 

and mandatory ) (1,186.1) (2,741.0) (7,794.5) (7,431.7) (128.5) (10,963.5) (137,664.7) (167,910.0)

Change in uncollected customer payments 

from Federal Sources (discretionary and 

mandatory)

(60.8) 72.5 98.5 2,302.1 0.0 235.4 (1,898.2) 749.5

Budget authority, net (discretionary and 

mandatory) $ 146,740.0 $ 95,630.3 $ 60,131.5 $ 6,995.5 $ 63,194.3 $ 10,525.4 $ 352,377.1 $ 735,594.1

Outlays, gross (discretionary and 

mandatory) $ 145,219.5 $ 115,344.9 $ 71,741.2 $ 18,288.5 $ 62,620.8 $ 18,062.6 $ 490,743.3 $ 922,020.8

Actual offsetting collections (discretionary 

and mandatory) (1,186.1) (2741.0) (7,794.5) (7,431.7) (128.5) (10,963.5) (137,664.7) (167,910.0)

Outlays, net (discretionary and 

mandatory) 144,033.4 112,603.9 63,946.7 10,856.8 62,492.3 7,099.1 353,078.6 754,110.8

Distributed offsetting receipts 0.0 (0.8) 0.0 0.0 (79,998.2) (806.7) (1,961.9) (82,767.6)

Agency outlays, net (discretionary and 

mandatory) $ 144,033.4 $ 112,603.1 $ 63,946.7 $ 10,856.8 $ (17,505.9) $ 6,292.4 $ 351,116.7 $ 671,343.2
Department of Defense Agency Financial Report for FY 2014

Financial Information

116

Statement of Disaggregated 

Budgetary Resources Non-Budgetary

For the Years ended September 30

Dollars in Millions Other 2014 Combined 2013 Combined

Budgetary Resources

Unobligated balance, brought 

forward, October 1 $ 46.8 $ 46.8 $ 15.5

Borrowing Authority (discretionary 

and mandatory) 368.0 368.0 26.9

Spending Authority from offsetting 

collections (discretionary and 

mandatory)

120.4 120.4 83.2

Total Budgetary Resources $ 535.2 $ 535.2 $ 125.6

Status of Budgetary Resources:

Obligations Incurred $ 488.1 $ 488.1 $ 78.8

Unobligated balance, end of year:

Unapportioned 47.1 47.1 46.8

Unobligated balance brought 

forward, end of year $ 47.1 $ 47.1 $ 46.8

Total Budgetary Resources $ 535.2 $ 535.2 $ 125.6
Department of Defense Agency Financial Report for FY 2014

Financial Information

117

Statement of Disaggregated 

Budgetary Resources Non Budgetary

For the Years ended September 30

Dollars in Millions

Other 2014 Combined 2013 Combined

Change in Obligated Balance

Unpaid obligations:

Unpaid obligations, brought 

forward, October 1 (gross) $ 300.7 $ 300.7 $ 541.8

Obligations incurred 488.1 488.1 78.8

Outlays (gross) (303.9) (303.9) (319.9)

Unpaid obligations, end of year 484.9 484.9 300.7

Uncollected payments:

Uncollected payments, Federal 

sources, brought forward, October 

1

(52.4) (52.4) (83.5)

Change in uncollected customer 

payments, Federal sources (22.8) (22.8) 31.1

Uncollected payments, Federal 

sources, end of year (75.2) (75.2) (52.4)

Obligated balances, start of year 248.3 248.3 458.3

Obligated balance, end of year 

(net) $ 409.7 $ 409.7 $ 248.3

Budget Authority and Outlays, Net:

Budget Authority, gross 

(discretionary and mandatory) 488.4 488.4 110.1

Actual offsetting collections 

(discretionary and mandatory) (97.5) (97.5) (126.7)

Change in uncollected customer 

payments from Federal Sources 

(discretionary and mandatory)

(22.8) (22.8) 31.1

Budget authority, net 

(discretionary and mandatory) $ 368.1 $ 368.1 $ 14.5

Outlays, gross (discretionary and 

mandatory) 303.9 303.9 319.9

Actual offsetting collections 

(discretionary and mandatory) (97.5) (97.5) (126.7)

Outlays, net (discretionary and 

mandatory) 206.4 206.4 193.2

Agency outlays, net 

(discretionary and mandatory) $ 206.4 $ 206.4 $ 193.2
Department of Defense Agency Financial Report for FY 2014

Financial Information

118
Department of Defense Agency Financial Report for FY 2014

Financial Information

119
Department of Defense Agency Financial Report for FY 2014

Financial Information

120
Department of Defense Agency Financial Report for FY 2014

Financial Information

121
Department of Defense Agency Financial Report for FY 2014

Financial Information

122
Department of Defense Agency Financial Report for FY 2014

Financial Information

123
Department of Defense Agency Financial Report for FY 2014

Financial Information

124
Department of Defense Agency Financial Report for FY 2014

Financial Information

125
Department of Defense Agency Financial Report for FY 2014

Financial Information

126
Department of Defense Agency Financial Report for FY 2014

Financial Information

127
Department of Defense Agency Financial Report for FY 2014

Financial Information

128
Department of Defense Agency Financial Report for FY 2014

Financial Information

129
Department of Defense Agency Financial Report for FY 2014

Financial Information

130

This Page Left Blank Intentionally
FISCAL YEAR 2014

AGENCY FINANCIAL REPORT

OTHER INFORMATION

UNITED STATES DEPARTMENT OF DEFENSE
This Page Left Blank Intentionally
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

131

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 Management’s Discussion and Analysis, 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 FMFIA, the Federal Financial Management Improvement Act (FFMIA), and 

OMB Circular No. A-123, and fall into one of the following three categories: 

1. FMFIA Section 2, Financial Reporting Material Weaknesses (see Table 2a, with detail 

in Table 2a-1).

2. FMFIA Section 2, Non-Financial Operations Material Weaknesses (see Table 2b, with 

detail in Table 2b-1). 

3. FMFIA Section 4, Financial System Nonconformance Weaknesses (see Table 2c, with 

detail in Table 2c-1).

4. FFMIA, Compliance with Section 803(a), FFMIA.

Table 1. DoD IG-Identified Material Weaknesses in Internal Controls Over Financial Reporting

Audit Opinion: Disclaimer

Restatement: No

Areas of Material Weakness Beginning

Balance New Resolved Consolidated EndingBalance

Accounts Payable 1 1

Accounting Entries 1 1

Environmental Liabilities 1 1

Government Property in Possession of 

Contractors 1 1

Intragovernmental Eliminations 1 1

Operating Materials and Supplies 1 1

Reconciliation of Net Cost of Operations to 

Budget 1 1

Statement of Net Cost 1 1

Financial Management Systems 1 1

Fund Balance with Treasury 1 1

General Property, Plant & Equipment 1 1

Inventory 1 1

Accounts Receivable 1 1

Total Material Weaknesses 13 13
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

132

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 17 areas of material weakness in 

FY 2014. Table 2a 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 DoD Agency Financial Report for 

FY 2013.

Table 2a. Summary of DoD-Identified Material Weaknesses in Internal Controls over Financial Reporting 

(FMFIA Section 2)

Statement of Assurance: No assurance

End-to-End 

Process

Areas of Material 

Weakness

FY 2014 

Beginning

Balance

New Resolved Consolidated Reassessed

FY 2014 

Ending

Balance

Budget-to-Report

Fund Balance with 

Treasury (FBWT) 1 1

Financial Reporting 

Compilation 1 1

Intragovernmental

Eliminations 1 1

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 0 1 1

Transportation of People 1 1

Acquire-to-Retire

Financial Reporting of 

Valuation of Equipment 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 (MILSTRIP)

1 1

Total Financial Reporting Material 

Weaknesses 16 1 17
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

133

Table 2a-1 provides a brief description of each of the material weaknesses in financial 

reporting, with corrective actions and the target correction year.

Table 2a-1. Brief Description of Material Weaknesses in Internal Controls over Financial Reporting 

Material Weaknesses 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.

FY 2015

2 Financial Reporting 

Compilation

• Ineffective processes and 

controls to prepare 

accurate financial 

statements supported by 

general ledger balances 

that align with Department 

strategic and performance 

plans.

• Inability to reconcile detaillevel 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.

• Inconsistent procedures for 

recording Journal 

Vouchers and Standard 

Business Transactions 

(SBT) and retention 

procedures to ensure 

maintaining of proper 

supporting documentation.

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. 

• Develop controls, processes, 

and policy and procedures 

that include the reconciliation 

of the Defense Agency 

Initiative (DAI) Trial Balance 

to the financial statements.

• Identify root causes for 

abnormal balances on the 

Report on Budget Execution 

and Budgetary Resources 

(Standard Form-133s) and 

develop mitigating internal 

controls.

FY 2015
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

134

Table 2a-1. Brief Description of Material Weaknesses in Internal Controls over Financial Reporting 

Material Weaknesses Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

3 Intragovernmental 

Eliminations

• Ineffective processes and 

controls to collect, 

exchange, and reconcile 

intragovernmental buyer 

and seller transactions, 

resulting in unsupported 

adjustments.

• Inability to provide valid 

and complete supporting 

documentation in a timely 

manner.

FY 2008 Departmentwide

• Implement enterprise 

resource planning (ERP) 

systems and SFIS structure 

to correctly report, reconcile, 

and eliminate 

intragovernmental balances.

• Identify and implement 

reconciliations that provide 

for validation of the 

seller/buyer transactions.

• Implement controls to ensure 

adequate documentation 

exists to validate and support 

journal entries.

FY 2017

4 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.

FY 2003 Departmentwide

• Complete the implementation 

of new Enterprise Resource 

Planning (ERP) core financial 

systems for each Service in 

order to record accrualbased, 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

5 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.

FY 2011 Departmentwide

• Evaluate the sufficiency of 

the current SSAE 16 efforts. 

This includes determining 

whether the assessment 

includes all complete 

end-to-end processes.

• Develop and implement a 

methodology to reconcile 

DCPS to the general ledger.

• Implement controls to ensure 

supporting documentation 

exists, is reviewed, approved, 

validated, retained, and 

readily available. 

FY 2015
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

135

Table 2a-1. Brief Description of Material Weaknesses in Internal Controls over Financial Reporting 

Material Weaknesses Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

6 Military Pay

• Ineffective processes and 

controls to record military 

pay transactions and 

personnel actions in a 

timely, complete, and 

accurate manner. This 

includes unreliable 

supporting documentation 

for personnel actions, and 

lack of reconciliations 

between Defense Joint 

Military Pay System 

(DJMS) and the general 

ledger.

FY 2011 Departmentwide

• Implement control processes 

that ensure supporting 

documentation exists, is 

reviewed, approved, 

validated, retained, and 

readily available. 

• Implement reconciliations to 

address the completeness of 

data entered into the 

Defense Joint Military Pay 

System. 

FY 2015

7 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.

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 2015

8 Contract/Vendor Pay

• No standard process or 

format governing purchase 

request development, 

linkage with contract data, 

and payment.

• Untimely contract closeout 

and deobligation of funds.

• Insufficient policies 

governing the recording of 

obligations and accruals. 

FY 2003 Departmentwide

• Implement controls to 

validate receipt and 

acceptance.

• Implement training, guidance 

and management oversight.

• Develop interfaces between 

data standardization 

repositories.

FY 2017
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

136

Table 2a-1. Brief Description of Material Weaknesses in Internal Controls over Financial Reporting 

Material Weaknesses Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

9 Reimbursable Work Orders

• Inability to reconcile 

Reimbursable Work Order 

buyer and seller 

balances/transaction 

details to field activity 

systems in a complete and 

timely manner.

• Lack of evidence to 

support receipt and 

acceptance of goods and 

services, and the validity of 

open obligations. 

• Inability to verify the timely 

and accurate collection of 

disbursements, and 

validate that recorded 

reimbursable agreements 

meet the time, purpose, 

and amount criteria. 

FY 2011 Departmentwide

• Implement controls to 

validate receipt and 

acceptance of goods and 

services.

• Implement training, improved 

guidance, and management 

oversight related to 

Tri-Annual Reviews.

• Develop interfaces between 

data standardization 

repositories and accounting 

systems of record. 

FY 2017

10 Transportation of Things

• No effective controls are in 

place to prevent 

unauthorized use of 

Transportation Account 

Codes (TAC) or 

unauthorized shipments 

from occurring.

• The Department does not 

have standardized 

processes and procedures 

for Transportation of 

Things to support 

management evaluations, 

examinations, and audits.

FY 2014 Navy • Develop controls, processes, 

and policy and procedures 

for Transportation of Things.

• Implement control processes 

that ensure supporting 

documentation exists and is 

adequately reviewed, 

approved, and retained.

FY 2017

11 Transportation of People

• Inadequate controls over 

transportation of people 

processes. This includes 

inadequate segregation of 

duties, lack of 

reconciliations, and 

untimely voucher filing.

FY 2011 Departmentwide

• Develop plans to address 

segregation of duties internal 

control issues within the 

transaction system due to 

overlapping permission-level 

assignments, as well as 

demonstrating effective 

information technology 

general and application 

controls.

• Monitor open travel 

obligations and enforce 

supervisory review to ensure 

timely submission of 

travelers’ vouchers. 

FY 2017
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

137

Table 2a-1. Brief Description of Material Weaknesses in Internal Controls over Financial Reporting 

Material Weaknesses Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

12 Financial Reporting of 

Valuation of Equipment

• Ineffective processes and 

controls to account for 

quantity and value of 

military and general 

equipment.

FY 2003 Departmentwide

• Continue efforts to ensure 

that assets are recorded in 

the appropriate Accountable 

Property System of Record 

and can be reconciled to the 

general ledgers.

• Apply controls and 

procedures to manage 

equipment accountability, 

including adequate 

documentation to support 

ownership.

• Re-emphasized the 

importance of valuation by 

having the Services report 

progress and impediments 

quarterly.

• 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.

FY 2017

13 Real Property Assets

• Ineffective processes and 

controls to account for the 

quantity and value of real 

property. 

• Inaccurate and untimely 

recording of transactions 

when construction in 

progress is transferred to 

real property accounts.

• Inadequate real property 

documentation.

FY 2003 Departmentwide

• Implement business 

processes and management 

controls to reconcile real 

property records, and to 

ensure assets exist and 

records are complete.

• Implement periodic 

evaluations over the quality 

of real property data by 

making comparisons with 

physical assets and annual 

reconciliations. 

FY 2017

14 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 

site-level liability data to 

report environmental 

liabilities.

• Develop “cost to complete”

guidance and training 

procedures.

FY 2016
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

138

Table 2a-1. Brief Description of Material Weaknesses in Internal Controls over Financial Reporting 

Material Weaknesses Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

15 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.

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.

• Develop methodology to 

value inventory in the 

absence of historical costs.

FY 2017

16 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 to historical 

cost.

• Develop interim auditable 

solution for Government 

owned/Contractor managed 

inventory.

• Identify and document the 

current inventory 

reconciliation processes, 

including key controls and 

financial transactions.

FY 2017

17 Military Standard 

Requisitioning and Issue 

Procedures (MILSTRIP)

• 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 • Document 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. 

FY 2015
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

139

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 

non-financial operational areas are categorized in separate reporting categories.

Table 2b lists the FY 2014 material weaknesses in the internal controls over nonfinancial operations. The Department did not identify any new material weaknesses in 

operations in FY 2014; however, the Department consolidated the Areas of Material 

Weaknesses to comply with OMB Circular A-136, Financial Reporting Requirements. 

Table 2b. Summary of DoD-Identified Material Weaknesses in Internal Controls over Non-Financial 

Operations (FMFIA Section 2)

Statement of Assurance: Qualified

Area of Material 

Weakness

Beginning 

Balance New Resolved Consolidated8 Reassessed Ending Balance

Acquisition 1 1

Security 3 2 1

Information Technology 1 1

Comptroller and/or Resource 

Management 3 2 1

Contract Administration 2 1 1

Force Readiness 1 1

Personnel and/or 

Organizational Management 3 2 1

Property Management 1 1

Supply Operations 1 1

Total Non-Financial 

Operations Material 

Weaknesses

16 7 9

 8

 Per OMB’s revised Circular No. A-136, Financial Reporting Requirements, the column titled “Consolidation” has 

been added to Table 2b. This column represents the number of Department-wide material weaknesses from the 

beginning balance reported from preceding years and consolidated. 
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

140

Table 2b-1 provides a brief description of each of the nine material weaknesses in 

internal controls over non-financial operations, the associated corrective actions, and the 

target correction year provided by the reporting Components.

Table 2b-1. Brief Description, DoD-Identified Material Weaknesses in Internal Controls Over Non-Financial 

Operations 

Material Weaknesses Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

1 Acquisition 

• DoD 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 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.

Reassessed 

Annually 

based on 

Incremental 

Improvements

2 Security

• There are weaknesses in 

DoD’s management and 

assurance of the reliability 

and security of information 

technology infrastructures.

• Personally Identifiable 

Information (PII), which 

consisted of sensitive 

employee information, was 

improperly disposed of in 

recycle bins.

• Lack of effective oversight 

of Security Managers 

regarding Common Access 

Card (CAC) retrieval, which 

potentially lead to an 

inadvertent compromise of 

sensitive information.

FY 2006 Departmentwide

• Develop and implement a 

uniform equipment request 

and loan tracking system for 

managing and tracking 

information.

• 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.

FY 2015

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.

FY 2010 Departmentwide

• Complete relevant FISCAM 

testing, implement process 

standardization, and ensure 

compliance with information 

systems requirements in 

order to achieve FISCAM 

control objectives.

FY 2017
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

141

Table 2b-1. Brief Description, DoD-Identified Material Weaknesses in Internal Controls Over Non-Financial 

Operations 

Material Weaknesses Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

4 Comptroller and Resource 

Management

• DoD’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

5 Contract Administration

• DoD must strategically 

manage services 

acquisition (SA), define 

outcomes, and capture 

data to do so. 

• DoD continues to face 

challenges meeting FY 

competition goals and 

needs to address ill-suited 

contract arrangements as 

well as utilize incentives. 

• Acquisition workforce 

needs to be appropriately

sized, trained and 

equipped to meet the 

Department’s needs. 

FY 2009 Departmentwide • Adopted standard taxonomy 

for services, appointed

senior managers for 

acquisition of services in 

each Military Department, 

appointed Functional 

Domain Experts, goals 

established within 12 

Services Portfolio Groups 

and monitor progress. 

Established Functional

Integrated Product Team 

(SA FIPT). 

• Better Buying Power 2.0 

initiatives to boost 

competition are on-going

such as quarterly MilDep 

briefings at the Business 

Senior Integration Group 

meetings, sharing best 

practices, etc. DoD achieved 

FY 14 competition rate of 

58.7% against the goal of 

58.0%.

Reassessed 

Annually 

based on 

Incremental 

Improvements
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

142

Table 2b-1. Brief Description, DoD-Identified Material Weaknesses in Internal Controls Over Non-Financial 

Operations 

Material Weaknesses Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

Contract Administration 

(cont’d)

• Deployed Contracting 

Competency Assessment to 

assess proficiencies of 

workforce. Results will be 

used for workforce planning

and training forecasts. 

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. 

• USTRANSCOM did not 

conduct quarterly Joint 

Patient Movement 

Expeditionary System 

(JPMES), which potentially 

hinders USTRANSCOM 

personnel from deployment 

readiness during Defense 

Security Cooperation 

Agency (DSCA) and other 

contingency events. 

FY 2011 Departmentwide

• Implement diversity outreach 

initiatives that will review 

outreach and awareness 

activities to ensure that the 

Special Operations Forces is 

recruiting candidates with 

diverse backgrounds and 

skills.

• Finalize training plans for 

JPMES and conduct 

quarterly training exercises.

FY 2018

7 Personnel and/or 

Organizational Management

• DCMA did not prioritize and 

execute skills-based, 

on-the-job training that 

provided its employees 

with the competencies and 

practical skills needed to 

execute their job duties.

• The Department identified 

multiple inconsistencies in 

time keeping procedures.

FY 2009 Departmentwide

• Develop Defense Acquisition 

University (DAU) accredited 

courses and on-line learning 

assets to enhance the skills 

of the DCMA workforce.

• Implement a plan to address 

time and attendance issues, 

and conduct inspections of 

Command directorates to 

determine whether they are 

in compliance with time and 

attendance guidance.

FY 2016
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

143

Table 2b-1. Brief Description, DoD-Identified Material Weaknesses in Internal Controls Over Non-Financial 

Operations 

Material Weaknesses Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

8 Property Management

• The Department has not 

effectively trained staff or 

enabled sufficient tools to 

address accountability 

requirements in place to 

adequately oversee and 

execute personal property 

transactions, including 

government furnished 

property in the hands of 

contractors.

FY 2011 Departmentwide

• Establish procedures and 

training on property 

management policies. 

• 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

9 Supply Operations

• The Government 

Accountability Office

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 Consolidated Reassessed EndingBalance

1. Financial Management 

Systems 1 1

Total System 

Conformance Material 

Weaknesses

1 1
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

144

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. Brief Description, Internal Control over Financial Systems Material Weakness

Material Weaknesses Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

1 Financial Management 

Systems: The 

Department’s financial 

systems were originally 

developed to meet the 

requirements of 

budgetary accounting 

and do not provide the 

capability to record 

costs and assets in 

compliance with current 

accounting standards. 

Improvements to the 

current systems 

environment are 

complicated by the use 

of and reliance upon 

many mixed systems 

that are not well 

integrated.

FY 2001 DepartmentwideDoD Components have embarked 

on an effort to implement a 

compliant, end-to-end financial 

management system, anchored by 

ERPs that provide the core 

financial system as well as 

replacing many of the mixed 

(feeder) systems.

FY 2017

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 2d reflects 

the Department’s compliance with FFMIA. 

Table 2d. Compliance with Section 803(a) of FFMIA

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
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

145

IMPROPER PAYMENT AND PAYMENT RECAPTURE PROGRAMS

As previously discussed in the Management Discussion and Analysis section, beginning 

in 2002 Congress enacted legislation9 (collectively referred to as IPERA in this report) to 

help ensure Federal entities have 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. The Department’s improper payments and payment 

recapture programs are reported in this section in the following subcategories:

I. Risk Assessment

II. Statistical Sampling Process

III. Root Causes of Errors and Corrective Actions

IV. Program Improper Payment Reporting 

V. Recapture of Improper Payment Reporting 

VI. Accountability

VII. Agency Information Systems and Other Infrastructure

VIII. Statutory and Regulatory Barriers

IX. Additional Information

X. Agency reduction of improper payments with the Do Not Pay Initiative

The Department reports improper payments in the following six categories:

Military Health Benefits – Disbursed by Treasury for the Defense Health Agency (DHA) 

Military Pay – Disbursed by Defense Finance and Accounting Service (DFAS)

Civilian Pay – Disbursed by DFAS 

Commercial Pay (vendor and contract payments) – Disbursed by DFAS, the Navy, and 

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

Military Retiree and Annuitant Benefit Payments – Disbursed by DFAS 

Travel Pay – Disbursed by DFAS, the Army, the Navy, the Air Force, and USACE

The DFAS, USACE, and DHA are the primary disbursing components within the 

Department. The Army, Navy, and Air Force report on travel improper payments that are 

not disbursed by DFAS.

I. Risk Assessment10

DFAS. The DFAS performed a risk assessment of its disbursements using Office of 

Management and Budget (OMB) criteria contained in OMB Circular No. A-123, Appendix C, 

Management’s Responsibility for Internal Control. The DFAS also monitors changes in 

programs associated with OMB-mandated criteria (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.

 9 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)

10 Refer to detail at Under Secretary of Defense (Comptroller) > Financial Management > Reports > Governmentwide Improper Payment Reporting for Reporting Component Risk Assessments.
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

146

USACE. The USACE risk assessments for travel and commercial payments address the 

effectiveness of internal controls, such as pre-payment reviews, to prevent improper 

payments as well as system weaknesses identified internally or by outside audit activities. 

The U.S. Corps of Engineers Financial Management System (CEFMS) provides internal 

system standards that adhere to U.S. generally accepted accounting principles, as well as 

process controls that provide the safeguards to monitor and ensure that pre-payment 

examination requirements are met. The USACE also monitors changes in programs to track 

trends and implement corrective actions, as necessary. 

DHA. The DHA risk assessment process is managed through contracts with an external 

independent contractor (EIC) to provide an independent, impartial review of 

reimbursements and claims processing procedures used by DHA’s care contractors. The EIC 

identifies improper payments resulting from the contractors’ noncompliance with DHA 

payment/reimbursement policies, regulations, and contract requirements. The risk level of 

programs is evaluated based on results of these compliance reviews.

Navy. Because the Navy’s FY 2013 reporting included only six months of data, the Navy 

determined that its commercial payment disbursements would be high risk for FY 2014, 

when an entire year of transactions could be reviewed. 

II. Statistical Sampling Process11

The primary disbursing Components use statistically valid sampling methods designed to 

meet or exceed OMB’s requirements of 90 percent confidence level, plus or minus 

(±2.5) percentage points, to estimate and project the Department’s annual improper 

payments for each payment type. The smaller disbursing Components normally perform 

100 percent post-payment reviews or a full review of payments above a certain dollar 

threshold, with random sampling for lower-dollar payments. All Department sampling plans

were approved by OMB 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.

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. Paid 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: 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. 

 11 Refer to detail at Under Secretary of Defense (Comptroller) > Financial Management > Reports for Reporting 

Components Statistical Sampling Plans.
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

147

• 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. 

• 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 contains 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, TPCCs are required to correct any improper payments identified 

during occurrence reviews. 

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. Based on recent GAO recommendation, DHA is 

reevaluating its sampling methodology for FY 2015 AFR reporting.

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.

Civilian Pay. On a monthly basis, DFAS statistically samples Civilian Pay accounts 

stratified by Army, Air Force, Navy/Marine Corps, and Defense Agencies. 

Commercial Pay

DFAS. In FY 2014, DFAS refined its statistical sampling methodology for the Commercial 

Pay program to incorporate GAO and DoD OIG recommendations. The agency assessed the 

risk of improper payments computed within the entitlement systems. Seven systems12 were 

identified as “at risk” of making improper payments based on historical post-payment and 

self-identified reviews, and the volume of outlays. These seven systems cover 

approximately 94 percent of the Commercial Pay program outlays. 

The DFAS designed a stratified random sample by dollar amount to consider the widerange of amounts within each of the seven contract and vendor pay 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, and was 

allocated to each stratum with the Neyman Allocation method. Samples were randomly 

selected using the SPSS statistical software from the seven systems as a whole. Each 

invoice within the stratum had an equal probability of selection. 

 12 Computerized Accounts Payable System for Windows (CAPS), 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).
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

148

The sampling framework, designed by DFAS statisticians and reviewed by the DFAS 

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 samples the contract and vendor payment population for those 

payments computed in its Enterprise Resource Planning (ERP) system. The standardized 

sampling framework was developed by the Navy’s Financial Management Office and 

approved by statisticians in the Navy’s Center for Cost Analysis, as well as by OMB. Trained 

Navy financial management staff extract data from the ERP and provide payment samples 

to the Commands. The Commands then review these payments to ensure they are legal and 

proper. 

USACE. The post-payment reviews were conducted using a statistically valid (95 percent 

confidence level, ±2.5 percentage points) sample taken from the entire USACE Commercial 

Pay universe. In addition, the USACE Finance Center (UFC) used pre-payment controls, post 

payment contract audits, and data mining to prevent and identify improper payments in 

Commercial Pay. 

Military Retiree and Annuitant Benefit Payments. On a monthly basis, DFAS 

statistically samples military retirement payments stratified by the retired and annuitant pay 

accounts. The reviews for retired and annuitant pay include sampling drilling reserve units, 

retiree offsets, survivor benefit plans, transfers to/from the Temporary Disability Retired List 

to the Permanent List, and Veterans Affairs offsets. Special reviews continue for Combat 

Related Special Compensation, Concurrent Receipt of Disability Payment, daily payroll 

accounts, newly established accounts, and other targeted areas.

Travel Pay

The Department. The Department’s travel payments include those computed, paid, and

reported independently by the military services and other Defense agencies. Department 

travel, as depicted in Table 3 at the end of this section, represents the combined results of 

the review of DFAS-disbursed travel payments as well as non-DFAS-disbursed travel 

payments for Army, Air Force, and Navy. 

The DFAS reports the largest portion of DoD’s travel payments made by the Defense 

Travel System (DTS), and Windows Integrated Automated Travel System (WinIATS) for the 

Department of the Army and select Defense Agencies. On a monthly basis, DFAS 

statistically samples DTS travel vouchers stratified by Military Service and the aggregate of 

the Defense Agency vouchers. The 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). 

USACE. The UFC processes USACE travel payments using the CEFMS and WinIATS. The 

payment population includes both TDY and PCS travel voucher reimbursements. All PCS and 

TDY vouchers over $2,500 are 100 percent reviewed for accuracy. The remaining vouchers 

are statistically sampled at 95 percent confidence level, ±2.5 percentage points.
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

149

III. Root Causes of Errors and Corrective Actions

Military Health Benefits. The DHA projects a 0.87 percent error rate for Military 

Health Benefits improper payments for FY 2014. The DHA’s purchased-care contracts are 

designed to include payment accuracy performance standards for processing military health 

benefit claims. Specifically, if improper payments exceed the payment accuracy 

performance standard, as stipulated in TRICARE policy manuals, or exceed more stringent 

purchased-care performance standards, the contractors are subject to financial penalties. 

Conversely, and if 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 purchased-care contractor may receive a financial incentive award. 

Purchased-care contractor payment accuracy performance is analyzed during the EIC 

quarterly and semi-annual compliance reviews. In addition to these reviews, annual reviews 

are conducted on claims representing underwritten healthcare costs that are paid by the 

managed-care support contractors (MCSCs). Confirmed overpayments 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 have been held to payment 

accuracy performance standards with either contract financial penalties or incentives, 

depending on the contract type and requirement(s). This contract design encourages 

contractors to keep payment error rates as low as possible to avoid financial penalties, or to 

obtain increased contract financial awards. 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 Department’s purchased-care 

contractors and ensures the Government’s risk for improper payments in the military health 

benefits program is low.

The formula used to calculate the DoD improper payment rate for the military health 

benefits program was changed in FY 2014. Specifically, the error rate is calculated as a 

percent of dollars paid versus dollars billed, and the errors identified in random samples 

were extrapolated using a weighted formula. Accordingly, the FY 2013 error rate cannot be 

directly compared with prior years. 

Root Causes. The primary reasons for payment errors in the Military Health Benefits 

program for this reporting cycle are: 

• Incorrect pricing of medical procedures and equipment, 37 percent 

• Lack of authorization or pre-authorization, required prior to receiving medical care, 

16 percent

• Cost-share/deductible miscalculations, 10 percent

• All other causes combined, 37 percent

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. 
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

150

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 contract 

requirements.

Military Pay. As shown in 

Figure 19, the Department estimates a 

0.23 percent error rate in FY 2014

Military Pay, based on reviews and

estimates from October 2013 through 

September 2014. 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 

primary reason is often the underlying cause of the next most common causes of Military 

Pay errors – the large amount of untimely or inaccurate information entered into pay 

systems, and administrative and documentation errors that occur during and between 

monthly pay periods (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. Nonetheless, nearly 

100 percent of improper payments for Military Pay are recovered when identified, or a 

collection action has been established to recover the amount.

Figure 19. Improper Payment Rate –

Military Pay1

0.24%

0.29%

0.23%

0.29% 0.29% 0.29%

0.00%

0.10%

0.20%

0.30%

0.40%

FY 2012

Actual

FY 2013

Actual

FY 2014

Actual

FY 2015

Target

FY 2016

Target

FY 2017

Target

B14-38

FY 2014 Target 0.29%
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

151

The primary types of Military Pay improper payments result from administrative and 

documentation errors as described above. These entitlements are:

• Basic Allowance for Housing (50 percent) resulting from incorrect reporting of the 

entitlement.

• Base pay for Active Duty and incorrect Active Duty pay for Reservists (11 percent) 

resulting from incorrect reporting of the entitlement.

• Hostile fire/imminent danger pay (11 percent) resulting from incorrect reporting of 

the entitlement.

• Overseas Housing Allowance (6 percent) resulting from incorrect reporting of the 

entitlement.

• Family separation allowance, Active and Reserve, (6 percent) resulting from incorrect 

reporting of the entitlement.

• Miscellaneous categories, including results from underpayments, account for 

16 percent of all improper payments. Miscellaneous categories include over 

25 different entitlements.

Corrective Actions. Corrective actions taken include instituting more comprehensive 

training programs with standard desk procedures to provide a reference for new clerks. In 

addition, the Department, primarily through DFAS, advises the Military Services of the 

results of payment reviews and the associated root causes of the errors. The DFAS provides 

the Military Service financial managers with monthly reports on the results of statistical 

reviews, including the reasons for and dollar value of errors and year-to-date trends, to 

inform their training plans.

Independent public auditors performed a Statement on Standards for Attestation 

Engagement No. 16 (SSAE 16), completed June 2014, on the effectiveness of select internal 

controls for DFAS Military Pay and Disbursing Operations and issued an unqualified opinion 

with no material weaknesses identified.

Civilian Pay. As shown in 

Figure 20, the Department projects a 

0.14 percent error rate for Civilian gross 

pay payments, primarily overpayments, 

for FY 2014. 

Root Causes. The Civilian Pay 

improper payments primarily were 

caused by untimely or inaccurate entry 

of information into the pay systems. 

• Time and attendance, 36 percent 

• Overseas and other allowances, 

43 percent

• Late personnel actions, 

21 percent

Figure 20. Improper Payment Rate –

Civilian Pay

0.14%

0.17%

0.14%

0.17% 0.17% 0.17%

0.00%

0.05%

0.10%

0.15%

0.20%

FY 2012

Actual

FY 2013

Actual

FY 2014

Actual

FY 2015

Target

FY 2016

Target

FY 2017

Target B14-39

FY 2014 Target 0.17%
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

152

The Defense civilian payroll systems, like most government payroll systems, base their 

time and attendance submissions on anticipated versus actual hours worked; therefore, the 

Department must correct overpayments and underpayments in a subsequent pay period. 

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 re-computing pay and 

allowances and creating a collection (Accounts Receivable) action to offset the overpayment. 

The initial improper payments are discovered through various sources, such as agency 

reviews, bi-weekly exception reports, and employee or supervisor notification. 

Corrective Actions 

The DFAS continues to advise Components of the results of payment reviews and the 

associated reasons for errors that result in improper payments to civilian employees. The 

DFAS also advises Components on best business practices to prevent future improper 

payments and participates at various conferences to instruct personnel on how to correctly 

submit information to help prevent improper payments.

Independent public auditors performed a Statement on Standards for Attestation 

Engagement No. 16 (SSAE 16) on the effectiveness of select internal controls for DFAS 

Civilian Pay and Disbursing Operations, completed June 2014, and issued an unqualified 

opinion with no material weaknesses identified.

Commercial Pay

DFAS. The DFAS implemented an improved sampling methodology in FY 2014, 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.)

Based on the revised statistical sampling13 methods, the FY 2014 total estimated 

commercial improper payments is $2.9 million, with a 95 percent confidence interval 

between $2.8 million and $3.1 million, and an estimated 0.001 percent error rate. The DFAS 

also collects data on contractor-identified improper payments and regularly performs 

analyses to inform its preventative efforts. 

Root Causes. The majority of errors in Commercial Pay improper payments are caused 

by vendor billing errors. Improper payments identified from quarterly random sample 

reviews include: 

• Voucher Examiner Error – No deduction taken from the invoice to offset progress 

payments, 28 percent;

• Vendor Billing Errors, 28 percent;

• Interest penalties, 28 percent (underpayments);

 13 Refer to detail at Under Secretary of Defense (Comptroller) > Financial Management > Reports for Reporting 

Components Statistical Sampling Plans.
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

153

• Overpayment Entitlement Errors, 14 percent; and

• Miscellaneous errors, 2 percent.

Business Activity Monitoring (BAM) Tool. Using the BAM tool, DFAS identifies and 

prevents improper payments in DoD’s five largest commercial payment systems, which 

includes MOCAS, CAPS-Windows, IAPS, One-Pay, and EBS. These systems account for 

87 percent of all DoD commercial payment dollars. The DAI and GFEBS ERPs initially did not 

feel BAM would be cost-effective. Recently, the Army requested an overview to determine if 

BAM would prove helpful for GFEBS at a reasonable price.

Since the Department rolled out BAM in August 2008, pre-payment reviews have

prevented more than $8.4 billion in improper payments. Ongoing payment error analyses 

allow for the continual enhancement of BAM logic and improved disbursement accuracy.

This year, DFAS refined or developed new system edits (also called integrity checks) to 

improve BAM’s ability to identify improper payments before disbursement. Some examples 

of the success of these new edits and integrity checks in preventing improper payments in 

FY 2014 include: 

• A Wrong Vendor Paid enhancement that detected over $12 million in potential 

improper payments.

• A modification to the Invoice Outlier (unexpected result) edit broadened the ability to 

detect potential overpayments. Since July 2013, over $52 million in potential 

improper payments were identified that, without this modification, might not have 

been identified.

The 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 and through other formal 

reviews. 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.

Corrective Actions. Corrective actions include:

• Ongoing training for pay technicians to increase their ability to compute and input 

accurately.

• The MOCAS contract input team initiated a new report that identifies contracts with 

recoupment rates that will receive a 100 percent review from a lead to ensure 

accurate input.

• Continued work with Contracting Officers to simplify contract terms and eliminate the 

need for manual calculations.

• The MOCAS front-end analysis team, which reviews high dollar invoices for accuracy, 

changed their process from sampling the entire population in queue to sampling the 

population that is getting ready to disburse. This change facilitates more focused 

reviews on areas of risk.
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

154

• Continued electronic commerce improvement initiatives, such as the automation of 

third party payments, aimed at minimizing manual intervention and improving 

quality.

The DFAS currently is adding 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.

Independent public auditors performed a Statement on Standards for Attestation

Engagement No. 16 (SSAE 16) on the effectiveness of select internal controls for DFAS 

Contract Pay and Disbursing Operations and issued an unqualified opinion with no material 

weaknesses identified (completed 

April 2014).

USACE. As shown in Figure 21,

USACE projects a zero percent error 

rate in improper payments for 

Commercial Pay for FY 2014. The 

USACE functions as the real estate 

agency for the Department, with 

responsibility for leasing office space 

for all military recruiters. This 

responsibility applies to small offices in 

rural and semi-rural areas as well as 

larger spaces in more urban areas. 

Navy. The Navy projects a zero 

percent error rate in improper 

payments for Commercial Pay for 

FY 2014. Preventing, detecting, and 

correcting improper payments is a top 

priority for the Navy. The Navy’s 

commitment to compliance with IPERA and its amendments include activities such as: 

• Reconciling the payment universe to ensure all programs are captured for review.

• Reviewing programs to identify additional corrective actions to achieve reduction 

targets.

• Identifying and designating Senior Accounting Officials at the Military Service level 

for the Navy and the Marine Corps to oversee and report on their improper payment 

programs. 

Figure 21. Improper Payment Rate –

USACE Commercial Pay

0.03%

0.00% 0.00%

0.03% 0.03% 0.03%

0.00%

0.01%

0.02%

0.03%

0.04%

FY 2012

Actual

FY 2013

Actual

FY 2014

Actual

FY 2015

Target

FY 2016

Target

FY 2017

Target B14-44

FY 2014 Target 0.03%
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

155

The Navy’s continuing emphasis on accountability and integrity, at every level, 

underscores its commitment to achieve the goals set forth in IPERA. The Navy continues to 

report progress through monthly performance reviews with the Assistant Secretary of the 

Navy for Financial Management and Comptroller as well as through monthly financial 

operations metrics meetings with the OUSD(C) Deputy Chief Financial Officer. 

Management has taken several additional steps to ensure its ERP adheres to IPERA 

requirements. 

• Assigned responsibility for monitoring oversight of the Navy’s IPERA Program.

• Identified Oversight Officials, responsible for preparing and updating the Navy’s 

annual IPERA sampling plans, drawing monthly samples, and reviewing and 

monitoring IPERA test results.

• Issued desk procedures and provided training to staff that identifies step-by-step 

instructions on how to conduct IPERA reviews, and in the event that improper 

payments are identified, how to identify root causes and corrective actions to 

address them.

• Issued the Navy ERP Compliance Guide to the Commands in the Navy ERP in 

June 2013. The handbook defines and standardizes procedures associated with 

IPERA requirements.

Military Retirement. Based on 

FY 2014 reviews, DFAS projects a 

0.03 percent error rate for improper 

payments in the Military Retirement 

program (refer to Figure 22), with 

almost the entire amount related to

payments made to deceased retirees 

and annuitants. 

Root Causes. Eligibility for military 

retired pay ends on the retiree’s date of 

death. Prompt reporting of a deceased 

retiree's death can help avoid possible 

financial hardship to the Service 

Member’s annuitant by expediting the 

correct calculation and processing of the 

monthly benefit. Family members or 

executors are required to return any 

overpayments of the decedent's military 

retired pay. 

The delay in notifying the payroll activity of the death of a Military Retiree results in 

unavoidable overpayments to deceased retirees. Our review of confirmed overpayments to 

deceased retirees in FY 2014 disclosed that the Department recovered approximately 

96 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. 

Figure 22. Improper Payment Rate –

Military Retirement

0.02%

0.04%

0.03%

0.04% 0.04% 0.04%

0.00%

0.01%

0.02%

0.03%

0.04%

0.05%

FY 2012

Actual

FY 2013

Actual

FY 2014

Actual

FY 2015

Target

FY 2016

Target

FY 2017

Target B14-40

FY 2014 Target 0.04%
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

156

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 

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.

Department. The Department projected a 7.0 percent error rate for travel improper 

payments for FY 2014, representing Military DTS trip records and WinIATS Temporary Duty 

(TDY) and Permanent Change of Station (PCS) vouchers for both civilians and military 

members, which are computed and disbursed by DFAS. In addition, the 7.0 percent error 

rate includes travel reimbursements disbursed outside of DFAS by the Army, Navy, and Air 

Force.

DTS Root Causes. The primary reasons for DTS improper payments are voucher input 

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): The Department incorrectly reimbursed the traveler for 

lodging expenses without validating the claim with receipts, and/or reimbursed for 

meals at an incorrect rate.

• Reimbursable Expense (24 percent): Because of traveler mistakes when completing 

vouchers in DTS, the Department incorrectly reimbursed airfare, non-travel related 

expenses, and/or rental car expenses.

• Missing Documentation (25 percent): The Department reimbursed claimed lodging, 

airfare or rental car expenses that were not supported with a receipt.
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

157

DTS Corrective Actions. On a quarterly basis, 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 post-payment review statistics, trends, and input errors. Any 

improper payments identified are forwarded to the appropriate Debt Management Monitor to 

establish a debt and recover the improper payment. Also, the Department has implemented a 

DTMO Compliance Tool, discussed in the Do No Pay discussion later in this section. 

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 catch 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).

WinIATS Corrective Actions. The DFAS implemented several steps to prevent improper 

payments, including:

• Post-payment reviewers meet monthly with Travel Pay operations personnel to 

discuss findings and preventative measures. Travel Pay examiner training programs, 

based on post-payment review findings and recommendations, are ongoing.

• Pre-payment validations and cross checks have been implemented to ensure the 

traveler was not previously reimbursed for the same trip through WinIATS or another 

travel system, therefore avoiding a duplicate payment.

USACE. The Army Corps of 

Engineers reduced its Travel Pay error 

rate from 1.43 percent to 0.40 percent 

over the course of the past 12 months

(refer to Figure 23). The USACE 

implemented 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.

Figure 23. Improper Payment Rate –

USACE Travel Pay

0.40%

1.43%

0.40%

1.00% 1.00% 1.00%

0.00%

0.25%

0.50%

0.75%

1.00%

1.25%

1.50%

1.75%

FY 2012

Actual

FY 2013

Actual

FY 2014

Actual

FY 2015

Target

FY 2016

Target

FY 2017

Target B14-42

FY 2014 Target 1.00%
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

158

Root Causes. Travel Pay errors generally occur for two reasons:

• Travelers make mistakes when completing their travel vouchers.

• Approving Officials (AO) fail to properly review travel vouchers before approval.

Corrective Actions. The USACE continues to educate travelers and travel AOs through 

required training, including refresher training for seasoned travelers and AOs. Additionally, 

all AOs are required to complete fiscal law training every three years to maintain their 

certification eligibility. 

When improper payments are identified, the UFC notifies the parties involved to 

determine the circumstances surrounding the error and to assist them in identifying 

business process improvements to prevent future recurrences. These areas are also covered 

thoroughly in refresher training.

HURRICANE SANDY

In FY 2013, the Department received approximately $112.7 million for Hurricane Sandyrelated repairs and assistance, which was distributed among the three Military Departments. 

The funds provided to both the Department and the U.S. Army Corps of Engineers (USACE) 

were rolled into programs that already were reporting improper payment estimates; 

therefore, no new sampling or estimation methodologies were required under 

OMB Memorandum 13-07, Accountability for Funds Provided by the Disaster Relief 

Appropriations Act. 

The U.S. Army Corps of Engineers (USACE) – Civil Works received over $5 billion for 

Hurricane Sandy-related repairs and assistance, and used transactional identifiers for 

commercial and travel payments related to these disaster-related disbursements to review 

all for accuracy. No improper payments were found related to the Hurricane Sandy travel 

and Commercial Pay disbursements.

• The USACE uses multiple processes to mitigate the risk of improper payments for all 

programs, including those associated with Hurricane Sandy. The USACE Financial 

Management System (CEFMS) provides internal system standards that adhere to 

Generally Accepted Accounting Principles (GAAP) as well as system and process 

controls

The USACE also uses post-payment recovery audit processes via data-mining to mitigate 

and recover improper payments. The USACE data-mining uses ten different scenarios to 

identify possible improper payments. Any items identified as a potential improper payment 

are reviewed for a final determination and recovery action initiated if improper.

Post-payment audits/recoveries also are conducted via statistical sampling, 100 percent

review, other audits/review, as well as through voluntary refunds and analysis. 

IV. Program Improper Payment Reporting 

Table 3 summarizes DoD’s improper payment reduction outlook and total program 

outlays (payments) from FY 2013 through FY 2017.
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

159

Table 3. Improper Payment Reduction Outlook

FY 2013 FY 2014 FY 2015 Estimate FY 2016 Estimate FY 2017 Estimate

Program

Outlays 

($B)

IP 

(%)

IP Over 

($M)

IP 

Under 

($M)

IP Total 

($M)

Outlays 

($B)

IP 

(%)

IP 

Over 

($M)

IP 

Under 

($M)

IP 

Total 

($M)

Outlays 

($B) IP (%) IP ($M)

Outlays 

($B)

IP 

(%)

IP 

($M)

Outlays 

($B)

IP

(%)

IP 

($M)

Military 

Health 

Benefits 1,2

$ 20.5 0.32 $ 60.3 $ 7.3 $ 67.6 21.2 0.87 153.1 31.4 184.4 $ 21.8 1.75 $381.4 $ 22.6 1.75 $395.5 23.5 1.75 410.5

Military Pay3 $ 98.7 0.29 $258.5 $ 28.1 $286.6 110.6 0.23 234.4 15.3 249.8 $ 94.0 0.29 $272.6 $ 93.5 0.29 $271.2 93.5 0.29 271.2

Civilian Pay3 $ 57.0 0.17 $ 96.4 $ 0.0 $ 96.4 55.6 0.14 80.0 0.00 80.0 $ 57.0 0.17 $96.9 $ 56.5 0.17 $ 96.1 56.5 0.17 96.1

Military 

Retirement3 $ 56.6 0.04 $ 19.9 $ 0.01 $ 19.9 56.5 0.03 19.3 0.07 19.3 $ 43.5 0.04 $ 17.4 $ 44.1 0.04 $ 17.6 44.1 0.04 17.6

DoD Travel 

Pay4,5,7 $ 7.3 6.5 $421.1 $ 53.7 $474.8 6.6 7.0 424.7 33.5 458.2 $ 8.5 Note 7 Note 7 $ 8.5 Note 7 Note 7 8.5 Note 7 Note 7

DFAS 

Commercial 

Pay3

$ 352.6 0.03 $ 49.4 $ 67.9 $117.3 305.0 0.001 2.8 0.10 2.90 $ 392.5 0.03 $117.8 $ 384.7 0.03 $115.4 384.7 0.03 115.4

USACE 

Travel Pay $ 0.16 1.43 $ 2.1 $ 0.175 $ 2.28 0.15 0.4 0.6 0 0.6 $ .15 1.0 $1.5 $ 0.15 1.00 $1.5 $0.15 1.0 $1.5

USACE 

Commercial 

Pay

$ 21.7 0.0 $ 0.0 $ 0.0 $ 0.0 18.7 0 0 0 0 $ 20.0 0.03 $ 6.0 $ 20.0 0.03 $ 9.0 $20.0 .03 0

Navy ERP

Commercial 

Pay6

$1.2 0.0 $0.0 $ 0.0 $ 0.0 4.4 0 0 0 $ 4.5 N/A N/A $ 4.5 N/A N/A $4.5 N/A N/A

Note 1: DHA reports 12 months in arrears; therefore, FY 2014 reporting represents FY 2013 data. The error rate increase resulted from a small number of high-dollar claim errors 

assessed that significantly affected the annual error rate.

Note 2: DHA now uses 1.75% as its out-year target because that is the new contractual performance standard. The FY 2015-2017 outlays estimates were calculated using the OMB CPIU Annual Averages and Percent Change Table. As DHA reports 12 months in arrears the FY 2013 CPI-U medical percent change was used to calculate the FY 2014 outlay 

estimates, while the FY 2015 and 2016 medical percent changes were used to calculate the FY 2016 and 2017 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 2014.

Note 4: DoD Travel Pay includes travel data from DFAS and for the Army, Navy, and Air Force for vouchers paid outside of DTS. 

Note 5: DoD Travel Pay represents DFAS and Navy travel vouchers settled from July 2013 through June 2014; Army and Air Force follow the normal fiscal year.

Note 6: Since no improper payments were identified for FY 2014, out-year reduction targets are not applicable.

Note 7: Modified out-year reduction targets are under development for DoD Travel Pay and will be included in the FY 2015 AFR.
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

160

V. Recapture of Improper Payment Reporting

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 DTMO, the program was established to ensure travel claims do 

not exceed reasonable or actual expenses as well as to minimize inaccurate, unauthorized, 

overstated, inflated, or duplicate travel claims. The Travel Policy Compliance Tool, an 

automated application, reviews DTS travel vouchers in near real time and identifies 

potential improper payments. If a potential improper payment is identified, travelers and 

their 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 post-pay audits, educates travelers and administrators on travel policy, and 

identifies travel trends, training needs, and opportunities for greater controls in the future. 

Beginning in December 2012, a limited number of organizations from all four Military 

Services selectively used the Travel Policy Compliance Tool as part of a pilot that included 

three areas of inquiry. As of September 30, 2014, all DoD Components using DTS are 

actively using the Compliance Tool, and all DTS vouchers are being examined using the ten 

areas of inquiry. In FY 2014, as a result of all DoD Components using the tool, the pilot 

ended and the efforts transitioned to a full program. 

As of September 30, 2014: 

• $8,062,602 in errors were identified.

• $619,340 in payment errors were corrected without any funds due back to the 

Government.

• $912,076 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 40 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 our 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.
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

161

DFAS. For the most part, the Department continues to use its internal staff and 

procedures to identify and recovery 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 IPERA, as well as the Debt Collection Improvement Act of 1996, the 

Department uses a number of other methods to prevent, identify, and collect improper 

payments. For example, DFAS has implemented a Centralized Offset Program to look across 

the Defense agencies for opportunities to offset debts within the first 90 days of 

delinquency. Once this deadline passes, DFAS transfers the debts to the Treasury 

Department, no longer waiting until day 180 as allowed by statute, to utilize all debt 

collection tools available earlier in the debt lifecycle to increase the likelihood of collecting 

the debt. During FY 2014, the Centralized Offset Program requested and confirmed 

784 offsets totaling approximately $14 million.

USACE. The UFC utilizes a data mining tool as part of its post-payment/payment 

recapture program. This tool searches for potential errors, such as duplicate, missing, or 

suspicious invoices, as well as specific types of recurring payments. There are ten scenarios 

built into the data mining tool, which searches 100 percent of all USACE commercial 

payments. The use of a data-mining tool complements the pre-payment system edits built 

into CEFMS. Payment safeguards include a requirement to match a receiving report with an 

invoice and thereby prevent use of duplicate invoice numbers for the same obligation. 

DLA. The Defense Logistics Agency run a fuels tax recovery program that is not, strictly 

speaking, a recovery audit exercise; nonetheless, this program recovered about $13 million 

in each of the last two fiscal years and predicts that FY 2014’s recoveries will compare 

favorably with this figure. Tax recoveries fluctuate depending on changing tax laws and the 

amount of DLA’s energy business.

DHA. The DHA uses a number of different mechanisms to prevent, identify, and collect 

improper payments, to include claims auditing by an EIC and internal DoD agencies for all 

private-sector payments. This process utilizes post-payment review techniques, performed 

internally and by external contractors, paid from the proceeds of recovered funds.

Contract payments comprise a large volume of transactions with high-dollar values; 

therefore, DHA is vigilant to ensure payment accuracy. In addition to the post-payment 

reviews, the DHA also utilizes various internal manual and automated prepayment initiatives 

to prevent overpayments and underpayments. 
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

162

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 study will provide an accurate 

assessment of the potential recoveries and cost effectiveness if a full recovery audit is 

initiated, and will review ten of the largest-volume institutional providers. The pilot results 

indicated that this type of account review would be cost-effective, and a Request for 

Proposal may be issued in FY 2015.
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

163

Table 4 summarizes the recovery auditing identifications and collections for 2014.

Table 4. Payment Recapture Audit Reporting

Program

Type of 

Payment

Amount 

Subject to 

Review

(CY)

Actual 

Amount 

Reviewed 

and 

Reported 

(CY)

Amount

Identified 

for 

Recovery

(CY)

Amount

Recovered

(CY)

% of 

Amount

Recovered out of 

Amount 

Identified

(CY)

Amount 

Outstanding 

(CY)

% of 

Amount 

Outstanding out of 

Amount 

Identified 

(CY)

Amount 

Determined Not 

to be 

Collectable 

(CY)

% of 

Amount 

Determined Not 

to be 

Collectable out of 

Amount 

Identified 

(CY)

Amounts

Identified 

for 

Recovery

(PYs)

Amounts

Recovered

(PYs)

Cumulative 

Amounts

Identified 

for 

Recovery

(CY+PYs)

Cumulative 

Amounts

Recovered

(CY+PYs)

Cumulative

Amounts

Outstandi

ng

(CY+PYs)

Cumulative 

Amounts 

Determined Not 

to be

Collectable

(CY+PYs)

DTMO 

Compliance 

Tool 1

DTS 

Travel $ 8.0B $ 8.0B $ 6.5M $ 1.95M 27% $ 4.2 M2 60% $0.55M3 7.0% $1.2M $140K $8.2B $2.1M $5.5M4 $675K

USACE5 Contract 

Pay $ 18.7 $ 18.7 $ 0.0M $ 0.0M N/A $ N/A N/A $ 0.0M 0% $ 59.4M $ 59.4M $ 59.4M $ 59.4M $ 0.0M $ 0.0M

“K” represents thousands; “M” represents millions; “B” represents billions.

Note 1: The Defense Travel Management Office’s (DTMO) Compliance Tool began as a pilot in December 2012, and transitioned to full implementation, with all DTS

organizations participating as of fiscal year end.

Note 2: Action not taken to correct $3.5M as of September 30, 2014. Travelers were notified of $600K in August and $1.9M in September 2014.

Note 3: $545K in errors were eliminated through voucher correction; therefore, no collection is necessary. Additionally, the amount identified for recovery was reduced from 

$7.0M by the $545K.

Note 4: $1M of this amount is being collected through a repayment plan.

Note 5: USACE uses its Oracle data mining tool within CEFMS to perform recovery auditing on contract payments.
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

164

Table 5 summarizes DoD’s annual targets related to its payment recapture audit efforts 

for FY 2014 through FY 2017.

Table 6 presents an aging schedule of overpayments collected outside of efforts of 

payment recapture audits.

Table 6. Aging of Outstanding Overpayments

Program Type of

Payment

CY Amount

Outstanding

(0 – 6 Months)

($M)

CY Amount

Outstanding

(6 Months – 1 Year)

($M)

CY Amount

Outstanding

(Over 1 Year)

($M)

DFAS Commercial 

Pay Commercial1,2 4.40 1.60 -

Military Retirement Pension2 1.50 - -

Note 1: Figures based on overpayments identified and paid during FY 2013.

Note 2: After 120 days, most debts are transferred to Treasury for collection.

Table 7 presents a summary of how cumulative amounts recaptured have been used. 

Table 7. Disposition of Recaptured Funds

Program Type of

Payment

Agency

Expenses 

to 

Administer

the 

Program

Payment

Recapture

Auditor 

Fees

Financial

Management

Improvement

Activities

Original

Purpose

($M)

Office of

Inspector

General

Returned 

to

Treasury

USACE1 Commercial

$20,000

per 

annum

$ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0

DTMO 

(DTS)2 Travel Under 

Review $ N/A $ 0.0 $ 0.0 $ 0.0 $ 0.0

Note 1: No overpayments identified; therefore, no funds recovered in FY 2014 using recovery auditing.

Note 2: No recoveries have yet been re-allocated.

Table 5. Payment Recapture Audit Targets

Program Type of

Payment

CY

Amount

Identified

($M)

CY

Amount

Recovered

($M)

CY

Recovery

Rate

(Amount

Recovered/

Amount

Identified)

CY + 1

Recovery

Rate

Target

CY + 2

Recovery

Rate

Target

CY + 3

Recovery

Rate

Target

DTMO 

(DTS) Travel $ 6.5M1 $ 1.95M 27.0% 40% 55% 85%

USACE Commercial $ 0.0 $ 0.0 0.0% 100.0% 100.0% 100.0%

Note 1: This figure does not include the errors determined to not be overpayments ($545K).
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

165

Table 8 summarizes improper payments identified and recovered outside of payment 

recapture audits for the years 2004-2014. 

Table 8. Overpayments Recaptured Outside of Payment Recapture Audits

Source of 

Recovery

Amount

Identified

(CY)

Amount

Recovered

(CY)

Amount

Identified

(PY)

Amount

Recovered

(PY)

Cumulative 

Amount 

Identified 

(CY+PYs)

Cumulative 

Amount

Recovered

(CY+PYs)

DFAS 

Commercial 

Pay1

$ 162.30M $ 156.30M $ 141.60M $ 137.20M $ 1.9B $ 1.8B

Military 

Retirement2 $ 19.30M $ 17.80M $ 19.90M $ 18.30M $ 281.90M $ 263.40M

Military Pay3 4 $ 236.90M $ 198.50M $ 258.50M $ 219.30M $ 1.02M $ 867.30M

Civilian Pay3 $ 80.00M $ 80.00M $ 96.40M $ 96.40M $ 508.50M $ 508.50M

DoD Travel 

Pay $ 4.70M $ 0.03M $ 3.70M $ 0.10M $ 11.90M $ 0.33M

USACE 

Commercial 

Pay7

$ 5M $ 5M

USACE Travel 

Pay5 $ 0.6M $ 0.6M $ 0.7M $ 0.5M $ 2.1M $ 1.9M

Defense Health 

Agency (DHA) 

Health Benefits 

Contracts6

$ 4.4M $ 4.4M $ 136.1M $ 245.1M $ 140.5M $ 249.5M

“M” represents millions. “B” represents billions.

Note 1: Overpayments are based on the date payment was made or debt incurred. Prior year amounts shown in the OMB 

Max database do not reflect further collections or adjustments made in subsequent fiscal years.

Note 2: FY 2014 amounts identified and recovered are based on 100 percent review of deceased retiree and annuitant 

accounts. Recoveries normally run 90 days behind; therefore, FY 2014 recoveries will not be completed until 

December 31, 2014.

Note 3: In-service collection dollars are used as a proxy for recovery amounts because actual results from statistical reviews 

are negligible.

Note 4: Recoveries provided in CY for Military Pay include out-of-service debt collections. Because debt recoveries are 

tracked for 12 months for AFR purposes, collections may not be realized until the end of FY 2015. 

Note 5: The balance of USACE Travel Pay recoveries are in the process of collection through salary offset or have been 

appealed to the Civilian Board of Contract Appeals for final determination.

Note 6: DHA contract improper payments and recoveries are reported 12 months in arrears to accommodate its 100 percent 

post-payment review.

Note 7: These recoveries resulted from self-identified overpayments, not a recovery auditing program.
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

166

VI. Accountability

The Under Secretary of Defense (Comptroller)/Chief Financial Officer is the Accountable 

Official for the Department and is responsible for ensuring that, to the greatest extent 

possible, all DoD disbursements are accurate.

Certifying Officer Legislation, 10 U.S.C. 2773a, holds Certifying and Disbursing Officers 

accountable for government funds. In accordance with this law, pecuniary liability attaches 

automatically when there is a fiscal irregularity, i.e., (1) a physical loss of cash, vouchers, 

negotiable instruments, or supporting documents, or (2) an improper payment. This is further 

captured in the DoD Financial Management Regulation (DoDFMR), Volume 5, Chapter 33, 

entitled “Certifying Officers, Accountable Officials, and Review Officials.” The Department’s 

efforts to recover overpayments from a recipient must be undertaken in accordance with the 

debt collection procedures outlined in the DoDFMR, Volume 5,Chapter 28, “Management and 

Collection of Individual Debt,” and DoDFMR, Volume 10, Chapter 18, “Contractor Debt”.

The DoD FMR contains other policies that specifically address Improper Payments 

(DoDFMR Volume 4, Chapter 14) and Recovery Auditing (DoDFMR 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. 

Tracking Corrective Action Plan Progress. A new mechanism will be used beginning 

FY 2015 to track corrective action plan progress. The Financial Improvement and Audit 

Readiness (FIAR) Directorate uses a tool called the Notice of Findings and Recommendations 

Tracker, or NFR Tracker, to monitor audit readiness tasks and corrective actions. This tool 

provides a method to record corrective actions for each Improper Payment program, to set 

milestones and interim goals, and to monitor progress toward more long-term objectives. 

The tool will also be configured to notify officials, via e-mail, when milestone dates are 

approaching, and also will require a justification when a milestone or goal misses its 

deadline.

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 very focused on reducing overall Travel spending; reducing improper 

payments and increasing recoveries is another way to reach that goal.
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

167

VII. Agency Information Systems and Other Infrastructure

The Department has much of the information and infrastructure needed to reduce 

improper payments. The Department uses the BAM tool and the Do Not Pay portal to 

identify potential improper payments prior to disbursement. 

The Department’s ongoing migration from a legacy system environment to new ERP 

systems presents a number of challenges 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.

VIII. 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. 

IX. Additional Information

The Department is positioning itself to be fully compliant with additional elements required 

by the Improper Payments Elimination and Recovery Improvement Act (IPERA) for FY 2014 

reporting. As part of the effort toward auditability, each of the Defense disbursing 

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

and ensuring the processes used are compliant with laws and regulations. 

The Department continually looks for opportunities to improve its methodologies, and the 

post-payment review teams are far from complacent. The Department is implementing 

recommendations from both the DoD Inspector General’s IPERA Compliance Review for 

FY 2013 (DoDIG Report No. D-2014-059), and from the GAO Report No. GAO-13-227 on 

improper payments, to guide our progress in our future improper payment efforts.

X. Agency Reduction of Improper Payments with the Do Not Pay 

Initiative

The Do Not Pay (DNP) Initiative (detailed reporting in Table 9), 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. The DFAS sends a weekly batch file to the DNP database and receives results the 

next day. The 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. 
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

168

The DFAS bumps against all the DNP databases with the exception of the DEBT Check,

for which we already have a process in place called the Treasury Offset Program, and the 

Credit Alert System, which does not apply to Commercial Payments. In addition to the 

weekly non-Treasury disbursed pre-payment review, a small group of Treasury-disbursed 

payments are checked: pre-payments on a weekly basis, and post-payments on a monthly 

basis.

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 (1 – 5) case recoupment refunds 

each month for small dollar amounts ($5 – $5,000). The Single Online Search service is 

utilized pre-payment for 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, Contract Payments. The DHA processes approximately 200 routine payments 

per month for 23 unique contractor payees. The Single Online Search service is utilized 

pre-payment 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 utilize the Do-Not-Pay database, and 

there is no current mechanism in place to require the contractors to use the Do-Not-Pay 

databases at the prepayment phase to comply with IPERA.

Navy ERP. Navy ERP transactions are included in the DFAS Do Not Pay Figures.
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

169

Table 9. Implementation of the Do Not Pay Initiative to Prevent Improper Payments

Death Master File (DMF) Matching and Excluded Parties List (EPLS)

# of 

Payments 

Reviewed

$ of Payments 

Reviewed

# of 

Payments 

Stopped

$ of 

Payments 

Stopped

# of 

Improper 

Payments 

Reviewed 

and Not 

Stopped

$ of 

Improper 

Payments 

Reviewed 

and Not 

Stopped

DFAS NonTreasury 

Disbursing 

Office (NTDO)

$11,950,521* $733,384,581,004** 0 0 0* 0*

DFAS 

Reviewed 

Treasury 

Disbursing 

Office (TDO)

41,464 $ 5,103,958,963 0 0 0* 0*

USACE 

Reviews with 

the DMF

420,877 $ 16,207,916,851 0 0 0 0

DHA Reviews 

with DMF & 

EPLS

336 $ 297,806,052 0 0 0 0

* DNP specifically looks at the vendor. Improper payments identified at some later point are improper due to other reasons

that DNP does not have the capability to detect. For example: DNP cannot detect duplicate payments.

** Data is based on Invoice and invoice amount vs. payment. The data represents invoices in a non-pay status submitted on 

a weekly basis so the invoice can be submitted multiple times per month.

Navy ERP transactions included in DFAS DNP figures.

USACE transmits 100% of its pending commercial payments on a daily basis to match against the Death Master File 

(DMF) and the Excluded Parties List System (EPLS).

Military Retiree and Annuitant Pay – File Matching with the DMF outside of DNP

For the past ten years, before the Do Not Pay initiative, the Defense Manpower Data 

Center (DMDC) has 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 “bump” 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. The 

disbursement system suspends payment to prevent additional benefits from being improper 

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.
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

170

FREEZE THE FOOTPRINT

As part of the Federal initiative to promote efficiencies, the Department is committed to 

effectively managing its inventory of real property assets and disposing of excess 

properties. As reflected in the Future Years Defense Program, the Department proposed 

$4 billion in savings, when compared to the FY 2014 budget request, by funding only the 

most critical facilities and ensuring construction projects support only requirements 

remaining after force structure adjustments.

Through our partnership with General Services Administration (GSA) and Office of 

Management and Budget, the Department’s “Freeze the Footprint” plan ensures that our 

total square footage of domestic office and warehouse inventory does not exceed the square 

footage baseline that existed in FY 2012. 

As reflected in Table 10, in FY 2013 the Department reduced the total square footage in 

its owned offices and warehouses by nearly 10 million square feet (SF), or 3 percent. The 

10 million SF decrease is comprised of the reduction in DoD Military Departments’ and 

Washington Headquarters Services (WHS) office and warehouse space that offset a slight 

increase experienced by the United States Army Corps of Engineers civil works assets. This 

reduction in real property square footage was achieved through a variety of methods, 

though the current austere funding environment significantly constrained demolition as an 

option for eliminating real property assets that are structurally too old and worn out. 

Additionally for FY 2013, the Department’s GSA occupancy agreement square footage 

was reduced from the FY 2012 baseline, with over 319 thousand SF (2 percent) no longer 

leased by the Department. Though Annual Operating Costs (AOC) are required to be 

reported in the Federal Real Property Profile (FRPP), actual operating costs are not currently 

available at the constructed asset level for the Department’s real property inventory. For 

reporting purposes at this time, AOC is calculated using a mathematical formula to

reasonably break out consolidated data and increase the result by inflation to try to reflect 

individual asset costs. The use of the inflation factor explains the slight increase in operating 

costs reported in Table 11.

Table 10. Freeze the Footprint Baseline Comparison

Baseline Comparison – Total DoD Office and Warehouse Square Footage

(SF in Millions) FY 2012 

Baseline

FY 2013

Data

Change 

(FY 2012 – FY 2013)

Square Footage 313.52 303.55 -9.97

Note: As reported in the DoD Annual Freeze the Footprint Report for 2014.

Table 11. Reporting of O&M Costs – Owned and Direct Lease Buildings

Reporting of O&M Costs – Owned and Direct Lease Buildings

($ in millions) FY 2012 

Reported Costs

FY 2013

FRPP Data

Change 

(FY 2012 – FY 2013)

Operating and Maintenance Costs 1,396 1,398 1.73
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

171

SCHEDULE OF SPENDING

The Schedule of Spending (SoS) provides an overview of how and where the 

Department spends (obligates) its money during the year. Specifically, the SoS presents the 

Department’s total budgetary resources and total fiscal year-to-date obligations, on a 

combined basis. The SoS uses the same underlying data that is used to produce the 

combined Statement of Budgetary Resources (SBR), but reports the obligations by the 

items or services purchased (object class), such as personnel compensation, assets, grants, 

etc. 

The Department recognizes the importance of providing this spending summary and has 

been working diligently to capture and ensure accurate and complete object class data in 

the financial systems. As of the end of FY 2014, all Defense Agencies’ financial information 

was integrated in the Department’s financial reporting system, which will greatly reduce 

manual effort in producing the SoS, and will continue to work on improving the object class 

data; however, the Department was unable to produce the Schedule of Spending for this 

year’s reporting.

The Department is working with the Office of Management and Budget to produce a 

reliable Schedule of Spending and will publish this schedule in the Department’s FY 2015 

Agency Financial Report. 
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

172

INSPECTOR GENERAL’S STATEMENT OF MANAGEMENT AND 

PERFORMANCE CHALLENGES FOR FY 2014

Each year, the Inspector General, DoD (DoD IG) prepares a statement that summarizes 

what he considers to be the most serious management and performance challenges facing 

the Department and a brief assessment of the Department’s progress in addressing these 

challenges. The DoD IG cited challenges are in addition to those identified by the 

Government Accountability Office in its February 2013 biennial report, entitled High Risk 

Series, An Update.

For FY 2014, the DoD IG identified challenges in the following seven categories:

• Financial Management

• Acquisition Processes and Contract Management

• Joint Warfighting and Readiness

• Cyber Security 

• Health Care

• Equipping and Training Afghan National Security Forces

• The Nuclear Enterprise

Detailed discussion of the DoD IG’s statement and the Department management’s response 

follows.

U.S. and Colombian paratroopers track during a free fall as part of Fuerzas Comando 2014 at the Colombian National Training 

Center on Fort Tolemaida, Colombia. The U.S. Service Members are assigned to Special Operations Command South. The jump 

symbolizes the strong partnership between both nations. 

Photo by Maj. Edward Lauer
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

173

SUMMARY OF IDENTIFIED CHALLENGES

1. IG-Identified Challenge: Financial Management

1-1A. Achieving Financial Statement 

Audit Readiness IG Summary of Challenge

The Department’s financial management challenges impair its ability to provide reliable, 

timely, and useful financial and managerial data to support operating, budgeting, and policy 

decisions. Gaps in the financial framework harm the accuracy, reliability, and timeliness of 

budgetary and accounting data and financial reporting, reducing the effectiveness of decisions 

made by leaders at all levels. The key to solving the Department’s financial management 

problems is the production of auditable financial statements and receiving unmodified opinions 

on them. 

Achieving auditable financial statements is a long-standing and daunting task. The success 

of the DoD financial improvement and audit readiness (FIAR) effort depends on the 

Department’s ability to accomplish the following:

• Resolve material internal control weaknesses to ensure internal controls are properly 

designed, properly implemented, and working effectively.

• Sustain improvement in internal controls and systems to provide consistent and 

repeatable financial data used in decision making and reporting.

• Effectively develop and implement the financial improvement effort by monitoring DoD 

progress in achieving milestones, developing comprehensive improvement initiatives 

across DoD functional areas, and holding managers accountable for the timely 

implementation of these efforts.

Congress requires the Department to validate its 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 with 

effective and timely development and implementation of their business transformation efforts.

Furthermore:

• Public Law 111-383, Section 881 requires the Department to establish interim 

milestones to achieve audit readiness of its financial statements earlier than 

September 30, 2017. These interim milestones for Military Departments and Defense 

Components call for the achievement of audit readiness for each major element of the

SBR, such as “civilian pay, military pay, supply orders, contracts, and the funds 

balance with the Treasury.” 

• Public Law 112-81, Section 1003 requires the Department have a plan that includes 

interim objectives and a schedule of milestones for each Military Department and for 

the Defense agencies, to support the goal of validating the SBR as audit ready by 

September 30, 2014. The Department must aggressively pursue the development and 

implementation of comprehensive improvement initiatives and must monitor progress 

according to interim milestones. The Department may need to revise these initiatives 

and milestones as it identifies additional deficiencies and corrective actions as a result 

of DoD’s iterative FIAR process.

• Public Law 112-239, Section 1005(b)(1) requires that the plans to achieve audit 

readiness of the SBR “by September 30, 2014, include steps to minimize one-time 

fixes and manual work-arounds, be sustainable and affordable, and not delay the full 

auditability of financial statements.” 
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

174

• Public Law 113-66, Section 1003(a) requires that the Secretary of Defense ensure that 

a full audit of the DoD financial statements for FY 2018 is performed and the results of

the audit 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 that it could not 

achieve SBR audit readiness by 2014, an incremental approach to achieving SBR audit 

readiness was implemented. The Department has chosen to address SBR audit readiness 

incrementally by focusing on the current year information contained in the SBRs of the 

General Funds.

Specifically, the limited scope FY 2015 SBR audits will be on current-year appropriation 

activity and transactions, which the Department calls the “Schedule of Budgetary Activity” 

(SBA). As a result, the Department’s initial audit efforts will focus on the SBA. The Department 

plans on achieving audit readiness for the SBR by the 2017 due date that was originally 

planned for all financial statements. Since the 2014 deadline for SBR audit readiness has been 

a challenge for the Department, meeting the 2017 deadline for all DoD financial statements to 

be audit ready remains an even more significant challenge as the Department must also focus 

on the audit readiness of the remaining portions of the SBR, implementation of the enterprise 

resource planning systems (ERPs), and achieving audit readiness of 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 that 

identifies the interim objectives and schedule of milestones to achieve audit readiness of the 

full SBR for both the General and Working Capital Funds. In addition, the interim milestones 

must address the existence and completeness of 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 placed an increased 

emphasis on achieving this goal. The DoD IG believes this increased senior leadership 

emphasis is essential to the Department’s ability to meet its internal milestones as well as to 

make progress in achieving full SBR audit readiness and meet the 2017 audit readiness 

mandates. 

Despite pervasive and long-standing Department financial management problems, the 

U.S. Army Corps of Engineers – Civil Works, and various Defense agencies, such as the 

Defense Commissary Agency and Defense Contract Audit Agency, and the Military Retirement 

Fund, have received unmodified audit opinions. The Department must sustain its 

achievements as well as advance in the remaining significant areas.

The Department continues to make progress toward meeting the 2014 audit readiness 

goal of the SBR; however, the Department has modified its strategy based on the U.S. Marine

Corps (USMC) audit experience. The Military Services now plan to assert audit readiness on 

the SBA. The USMC encountered many challenges during this first type of audit, which 

resulted in disclaimers of opinion in FY 2010 and FY 2011. However, progress was seen in the 

Corps’ ability to produce supporting documentation on transactions within the SBA, and the 

USMC achieved an unqualified opinion on its FY 2012 SBA. As a result, the USMC is 

undergoing subsequent SBA audits. The USMC, the Navy, and the Department are using USMC 

experience to correct weaknesses, as well as prepare the other Military Services for their 

eventual SBR audits.
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

175

The May 2014 FIAR Plan Status Report (FPSR) only addressed audit readiness for certain 

aspects of the SBR and stated that the Department did not expect every Component to 

achieve a clean audit opinion on its SBA in FY 2015. The Department reported in the 

November 2011 FPSR, and continued to report in the May 2014 FPSR, that it had significantly 

changed its audit goals to include achieving audit readiness of the General Fund SBR by the 

end of FY 2014, in addition to achieving audit readiness of all DoD financial statements by the 

end of FY 2017. However, in the November 2012 FPSR, the Department reported it would limit 

first-year SBR audits in FY 2015 to audits of schedules containing only current-year 

appropriation activity, that is, a Schedule of Budgetary Activity (SBA). 

Additionally, in the May 2013 FPSR, the Department reported that the initial audits of the 

General Fund SBA would not include balances from prior year activity. The Department would 

also begin audits of the complete SBR only after achieving successful audits of current-year 

appropriation activity. Meaningful progress in FY 2014 for the SBR audit-readiness goal will be 

critical, and this will continue to be a high-visibility area.

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’s goal of 

achieving audit readiness on the SBR remains the same. However, the strategy for achieving 

that goal has been modified to limit the scope of initial audits.

The Department has focused consistently on achieving SBR audit readiness by 

September 30, 2014. Audit readiness means strengthening internal controls and improving 

financial practices, processes, and systems used to manage the Department’s budgetary 

resources so there is reasonable confidence the information can withstand an audit by an 

independent auditor. The Department modified the strategy to limit the scope of initial audits 

to focus on current year budgetary transactions reported on a Schedule of Budgetary Activity 

(SBA). The SBAs rely on the same internal controls and financial practices, processes, and 

systems as the SBR and contain a substantial subset of the financial information reported on 

the SBR.

The change in strategy was based on lessons learned from the U.S. Marine Corps SBR 

audit. The Marine Corps was unable to produce documentation supporting historical 

transactions associated with SBR beginning balances quickly enough to meet the audit 

timelines. Historical documentation (for example, requisitions, receiving reports, and invoices) 

exists primarily in paper form and is dispersed across various commands and activities. The 

Marine Corps was, however, able to produce documentation for current-year transactions, and 

in December 2013, the Marine Corps became the first DoD Military Service to receive an 

unmodified (clean) audit opinion on its FY 2012 SBA. 

The Department’s modified strategy implements a sensible and cost effective approach to 

validating SBR audit readiness by way of SBA audits in FY 2015 through FY 2017. Beginning 

balances will be addressed during the SBA audits and will be audit ready by 

September 30, 2017, prior to full financial statement audits in FY 2018. This sensible approach 

has been favorably received by the Government Accountability Office (GAO) and the DoD IG.
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

176

1-2A. Modernizing Financial Systems 

(Enterprise Resource Planning) IG Summary of Challenge

To develop effective financial-management processes throughout the Department, the 

Department has begun to implement new financial management systems and business 

processes. 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 

to achieving auditability. Timely and effective implementation of the enterprise resource 

planning systems (ERPs) is critical for the Department to achieve its financial improvement 

and audit readiness goals.

The Department noted in the May 2014 FIAR update that the ERPs continue to be essential 

to the Department’s audit readiness efforts. However, not all ERPs 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.

1-2B. Modernizing Financial Systems 

(Enterprise Resource Planning) IG Assessment of Progress

The Department plans to spend about $15 billion to develop and implement ERPs. These 

systems have experienced cost increases and schedule delays. The Department noted that 

some ERPs will not be fully deployed by the 2014 and 2017 audit readiness dates, and 

therefore, it must continue to rely on legacy systems. This will increase the risk that the audits 

of the FY 2015 SBR, or a schedule of current year budget activity, will not be successful and 

may not result in unmodified opinions, and that the Department will not meet the goal of full 

financial statement audit readiness by September 30, 2017. Reliance on legacy systems, along 

with schedule delays and poorly developed and implemented ERPs, will diminish the savings 

expected from transforming operations through business system modernization.

Furthermore, without fully deployed ERPs, the Department will be challenged to produce 

reliable financial data and auditable financial statements without resorting to extreme efforts, 

such as data calls or manual work-arounds, to provide financial data on a recurring basis. For 

example, the Department reported in the May 2014 FIAR Plan Status Report that the Air Force 

ERPs will not be fully deployed by 2014. As a result, the Department may need to rely on a 

combination of ERPs 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 ERPs to accommodate existing processes, which

creates a need for system interfaces and weakens controls built into each ERP system. The 

ERPs were designed to replace numerous subsidiary systems, reduce the number of interfaces, 

standardize data, eliminate redundant data entry, and provide an environment for end-to-end 

business processes while being a foundation for sustainable audit readiness. However, the 

numerous interfaces between the ERPs and existing systems may be overwhelming and 

inadequately defined. Each interface presents a risk that the system might not function as 

designed, and each prevents the linking of all transactions in an end-to-end process. The 

Department needs to ensure ERP system development addresses the required business 

processes and functions.

Without the effective and timely development and implementation of ERP systems, and 

without senior-level governance, the Department will continue to struggle to improve its 

financial management processes, achieve long-term sustainability of those improvements, and

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 
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

177

report U.S. Government Standard General Ledger financial data using the DoD Standard 

Financial Information Structure (SFIS).

Additionally, other audits have found that the Department has not sufficiently 

reengineered its business enterprise architecture processes nor incorporated the functionality 

in ERP systems. The Department has established certification requirements, and the Deputy 

Chief Management Officer and Deputy Chief Financial Officer have established validation and 

certification procedures for implementing SFIS requirements and ensuring business process 

reengineering has taken place; however, these procedures were not stringent enough to 

ensure compliance. The Department needs to continue to improve its validation and 

certification procedures.

1-2C. Modernizing Financial Systems 

(Enterprise Resource Planning) Department Response

The Department is committed to improving financial processes through the 

implementation of ERPs. In support of these efforts, the Department has been working 

diligently to improve business processes and oversee the development of the ERPs in support 

of auditability.

While it is true that legacy systems will continue to be used, the ERPs that have been 

implemented resulted in phasing out dozens of legacy systems. Several of the Department’s 

ERPs support the 2017 auditability goal. Where the Department is dependent on legacy 

systems, the Components’ Financial Improvement Plans incorporate those 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 proactive steps to align individual ERP programs 

with auditability outcomes, we also are focused on delivering audit-ready processes and 

controls that will remain outside the ERP systems. This will allow us to develop a sustainable 

business environment that can be cost-effectively audited. 

The ERP programs, by their very nature, are designed to:

• Handle detail transactions in a defined, end-to-end process;

• Enforce process and execution standardization among implementing organizations;

• Manage consolidated business data in a single repository that allows centralized access 

control, and

• Facilitate the flow of information both within an organization and with external 

stakeholders. 

These design principles within the ERPs directly enable the capabilities that are essential to 

auditability, such as the ability to trace all transactions from source to statement and to 

recreate a transaction; documented, repeatable processes and procedures; demonstrable 

compliance with laws, regulations and standards; and a control environment sufficient to 

reduce risk to an acceptable level. 

Essentially, ERPs are acquired with industry best practices/“to-be” processes embedded 

within them. Each of the ERPs’ programs went through significant, up-front blueprinting and 

gap analysis to determine which configuration or customization would be 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. 
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

178

The Department’s investment management process ensures:

• Investments are aligned to functional strategies;

• The Department makes more informed investment decisions;

• Legacy systems that are no longer required are eliminated;

• Enhanced interoperability, and

• The Department transforms 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 the Department continues to treat its business system investments 

with the 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, DoD strategy with functional and organizational strategy to 

guide system implementations. The integrated business framework uses 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, and how to leverage technology to 

assist the Department improve efficiency and effectiveness of FM processes.

In response to OSD Principal Staff Assistants’ (PSA) functional strategies, the Military 

Departments and Defense Agencies develop OEPs that describe how their business system 

portfolios will achieve the PSA’s directions and initiatives. The OEPs also provide more detailed 

information on how information technology investments align to the functional strategy 

initiatives.
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

179

1-3A. Improper Payments IG Summary of Challenge

Improper payments, a long-standing problem in the Department, are often the result of 

unreliable data, a lack of adequate internal controls, or both, which increases the likelihood of 

fraud. As a result, the Department lacks assurance that billions of dollars of annual payments 

are disbursed correctly. The Department’s inadequate financial systems and controls hamper 

its ability to minimize improper payments. In addition, the pace of operations and volume of 

Department spending create additional risk for improper payments, and both hinder the 

Department’s ability to detect and recover those improper payments.

The Department faces difficulties in the completeness and accuracy of its improper 

payment reviews and the information reported. Additionally, the lack of an auditable

Statement of Budgetary Resources (SBR) leaves the Department unable to reconcile outlays to 

the quarterly or annual gross outlays reported in the SBR to ensure all required payments for 

reporting purposes have been captured. These areas require improvement before the 

Department will be able to provide complete and accurate information on its estimated 

amount of improper payments.

1-3B. Improper Payments IG Assessment of Progress

Although the Department made strides to improve the identification and reporting of 

improper payments and took many corrective actions to implement recommendations made 

by the DoD IG, more work is needed to improve controls over payments processed throughout 

the Department. 

The Department complied with five of the six improper payment reporting requirements 

for FY 2013. 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 five of eight payment programs with established 

targets. Further, for the second consecutive year, one of the payment programs did not meet 

its target rate. Not attaining reduction targets indicates that additional corrective actions are 

needed to reduce improper payments. In addition, the Department had deficiencies in the 

methodologies for five of the nine payment program areas that could affect the reliability of 

DoD’s improper payments estimates.

We commend the Department on aggressively pursuing recovery of identified improper 

payments, but unless it continues to improve its methodology for reviewing all its 

disbursements, it likely will not identify and accurately estimate the amount of improper 

payments. As a result, the Department will likely miss opportunities to identify causes of 

improper payments and implement effective corrective actions to prevent future improper 

payments.

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 has addressed the sampling methodology deficiencies to improve the integrity of 

the post-payment review results, and we continue to take ownership and corrective actions to 

address the recommendations in the latest DoD IG and GAO reports. 

While the Department continually strives to reduce improper payments, it should be noted 

that the payment error rates experienced in most of DoD’s programs already are very low, 

many lower than half of one percentage point (detailed reporting on the DoD improper 

payment program is addressed in the found in the “Other Information” section of this report). 
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

180

The Department is collaborating with OMB to consider establishing more reasonable 

tolerance levels around the target reduction goals that consider the cost effectiveness of 

required remediation plans when the goals are not met or when actual payment error rates 

are very low. 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 Marine walks ahead of a legged support system at Marine Corps Training Area Bellows on Oahu, Hawaii. The legged system is 

designed to carry supplies, including water, food and ammunition, through rough terrain. 

Photo by Cpl. Matthew Callahan
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

181

2. IG-Identified Challenge: Acquisition Processes and Contract 

Management

2-1A. Enhancing the Acquisition 

Workforce IG Summary of Challenge

The Department’s senior leadership remains dedicated to continuously improving the size 

and the capabilities of its acquisition workforce. While the Department has made progress in 

growing its workforce to meet the demands placed on it by the volume and complexities of its 

programs and contracts, the Department needs to shift its focus to sustain the number of 

resources needed to execute the acquisition mission and increase opportunities for training 

and development.

In addition to improving the professionalism of the acquisition workforce, which is an 

initiative of Better Buying Power 2.0 (explained in Section 2-1B, below), Department leaders 

remain concerned over the effects of budget uncertainty and cuts. The budget instability 

decreases morale and negatively impacts the ability to recruit, train, and retain skilled 

acquisition professionals. The Department also faces significant challenges in the acquisition 

community resulting from an aging workforce. Over the next decade, over 50 percent of the 

acquisition workforce will be eligible for retirement. Accordingly, it will be critical that the 

Department plan for and invest in targeted training, education, and certification of the 

acquisition workforce left to succeed those leaving.

2-1B. Enhancing the Acquisition 

Workforce IG Assessment of Progress

Since reaching a maximum strength of 152,326 civilian and military personnel in 2012, 

the Department has since seen a decline of 1.3 percent in overall strength, to 

150,247 personnel, in the third quarter of FY 2014. The issues related to the DoD acquisition 

workforce, however, do not relate only to the number of resources, but to the quality and the 

capability of the personnel the Department employs. For FY 2015, the Department plans to 

invest approximately $500 million using the Defense Acquisition Workforce Development Fund, 

of which the President requested $212.9 million in direct appropriations from Congress to 

support strategic objectives and continuous improvement of the defense acquisition workforce.

Keeping in line with current initiatives, the funding will support both the remaining hiring of 

personnel to complete the rebuilding initiative and limited hiring for critical needs. It also will 

support training, development, and improvement of the acquisition workforce needed to 

increase buying power; modernize and reset our military force; improve acquisition outcomes; 

and ensure future technological superiority. As efforts in these areas continue, oversight and 

commitment remains imperative.

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. Consistent with the President’s FYs 2014 and 

2015 budget requests and the Quadrennial Defense Review 2014 (QDR) objectives, strong 

leadership emphasis and initiatives will continue to move us toward objectives to improve 

acquisition productivity, increase buying power, and increased efficiencies. A necessary 

element of achieving these objectives requires continuous improvement and resources to 

sustain and strengthen the capability and professionalism of the acquisition workforce.
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

182

2-2A. Weapon System Acquisition IG Summary of Challenge

The Department remains challenged in its management of Major Defense Acquisition 

Programs (MDAPs), which declined from 85 in 2012 to 80 in 2013. While the number of 

programs within DoD’s portfolio decreased between FY 2012 and FY 2013, the overall cost of 

the programs increased by $14.1 billion. Furthermore, DoD programs cannot stay within the 

confines of cost and schedule estimates, as demonstrated by cost growth of over $14.1 billion 

and average schedule delays of over two months. With the expectation that defense budgets 

will continue to decline in the future, it will be more important than ever for the Department to 

identify opportunities to reduce costs and achieve efficiencies in its processes throughout the 

lifecycle.

2-2B. Weapon System Acquisition IG Assessment of Progress

Four years ago, DoD implemented the first iteration of the Better Buying Power and two

years later, implemented the second set of initiatives known as Better Buying Power 2.0. 

While there is evidence that progress was made in areas such as program affordability, 

life-cycle costing and bottom-up estimating, competitive contracting, and program 

management, the cost and schedule growth attributable to the acquisition of major defense 

programs remained significant and demonstrated the need for additional work.

The DoD IG audits continue to identify significant programmatic issues, such as poorly

defined requirements, duplicate and redundant capabilities, incomplete system testing,

improper fielding, and procurement quantities in excess of what is needed to successfully 

execute its mission. The enormity of the investment in weapon systems acquisition and the 

role it plays in making U.S. forces capable warrants continued oversight and a long-term 

commitment to process improvement. The need to continue support for the warfighter and the 

potential for savings argue against complacency.

2-2C. Weapon System Acquisition Department Response

Weapons Systems Acquisition has been and continues to be a high priority for DoD 

leadership. This commitment is reflected in the Department’s Better Buying Power (BBP) 

Initiatives and more recently in the interim revision of DoD Instruction 5000.02, which 

describes the policies applicable to the defense acquisition system. The DoDI 5000.02 revision, 

issued in November 2013, institutionalizes many of the BBP initiatives. Key policy changes 

include affordability constraints for every program; a requirements decision point to ensure 

requirements are well understood, technically achievable, and affordable; enhanced emphasis 

on thoughtful business arrangements, to include better use of contract incentives and 

maintenance of a competitive environment; more effective developmental and operational 

testing – and much more.

Department acquisition leadership aggressively monitors implementation of these policies 

via the Under Secretary of Defense for Acquisition, Technology, and Logistics (USD AT&L) 

Business Senior Integration Group, program decision events, and careful review of periodic 

reports. Our objective is continuous, incremental improvement based on pragmatism and 

evidence.
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

183

2-3A. Contract Management IG Summary of Challenge

The Department continues to struggle 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 services 

contracts. Without proper oversight, which DoD IG audits continue to identify, the Department 

cannot be certain that contractors are performing in accordance with contract requirements, 

may have overpaid for increases in contract costs, and cannot ensure that services are 

performed. 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. Audits first started identifying problems with price-based acquisition and commercial 

pricing in the late 1990s, and it was not until 2008 that legislative changes allowed 

Contracting Officers to request information on labor costs, material costs, and overhead rates 

for commercial items.

More recently, the Department has moved to new performance-based logistics (PBL) 

arrangements, which have added a new challenge to obtaining fair and reasonable prices for 

parts since the Services now are procuring parts from the weapons systems contractors 

instead of other sources, such as the Defense Logistics Agency (DLA). These parts often are 

purchased unnecessarily and at higher prices rather than utilizing existing DLA inventory.

2-3B. Contract Management IG Assessment of Progress

The Department continues to strengthen contracting and has issued policy, procedures, 

and guidance addressing current contracting challenges. The Department began the Better 

Buying Power (BBP) effort in 2010 and continued with the second phase of the initiative, 

BBP 2.0, in April 2013. The BBP 2.0 has seven areas of focus, and three of those help the 

Department address the following contract management challenges: promote effective 

competition; improve tradecraft in acquisition of services; and incentivize productivity and 

innovation in industry and Government.

To promote effective competition, BBP 2.0 emphasizes competition strategies, with 

initiatives to create and maintain competitive environments and increase small business roles 

and opportunities. When competition is applied effectively, it results in lower costs to the 

Government, greater innovation from industry, and added savings to the taxpayer.

Because service contracts make up the majority of the Department’s purchases, the 

BBP 2.0 area of improving tradecraft in the acquisition of services is very important. For the 

acquisition of services, the Department is focusing on assigning senior managers, improving 

requirements definitions, preventing requirements creep, and strengthening contract 

management outside the normal acquisition chain, among other initiatives.

As part of its goal of incentivizing productivity and innovation in industry and government, 

BBP 2.0 will increase effective use of Performance Based Logistics (PBL) arrangements, by 

which the Department has achieved improved readiness at significant savings, when PBL 

arrangements are properly structured and executed. However, PBL success depends on the 

workforce having the expertise and support to properly develop and implement the PBL 

concept.
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

184

Even with the implementation of BBP 2.0, the Department continues to struggle with 

implementing Federal Acquisition Regulation revisions on the use of cost-reimbursement 

contracts. Contracting activities are still challenged in documenting:

1) The approval for a cost-reimbursement contract was at least one level above the 

Contracting Officer;

2) Cost-reimbursement contracts were justified; 

3) How the requirements under the contract could transition to firm-fixed price in the 

future; 

4) That Government resources were available to monitor the cost-reimbursement 

contract; and 

5) That contractors had an adequate accounting system in place at contract award.

2-3C. Contract Management Department Response

The Department agrees with the DoD IG’s summary of challenges and assessment of 

progress and continues to work aggressively to resolve the long-standing material weaknesses 

in contract management. Key initiatives include:

Efforts to Improve Competition 

The USD(AT&L) recently announced measures to boost competition in contracting at the 

field level for lower-dollar value services contracts, where there is more opportunity for 

improvement. The USD(AT&L) memorandum, entitled “Actions to Improve Department of 

Defense Competition,” dated August 21, 2014, identifies actions to improve competition 

consistent with BBP 2.0 Initiatives to Promote Effective Competition. The memorandum 

encourages collaboration and sharing of best practices that have been successfully employed 

to increase competition, improve quality and performance, and lower cost for supplies and 

services. Specific actions include:

• Address competition on a quarterly basis at the Business Senior Integration Group 

meetings to track and manage progress in competition using expanded competition 

metrics to identify opportunities for improvement.

• Employ business intelligence tools to identify opportunities for improvement.

• Require contracting officers to obtain feedback on competitive solicitations in which 

more than one offer was expected based on market research, yet only one offer was 

received, and

• Require active market research using mandatory Request for Information notices on 

non-competitive acquisitions.

The August 21, 2014 memo announced publication of "Guidelines for Creating and Maintaining 

a Competitive Environment for Supplies and Services in the Department of Defense." The 

guidelines are intended to provoke thought about the various approaches that may be 

employed to competitively fulfill the Department's requirements.

Improve Tradecraft in Acquisition of Services

Services acquisition continues to play a critical role as the Department begins reducing the 

size of the force and appropriately balancing the mission requirements against the unique 

capabilities provided by the three types of labor in the Department’s total workforce: 

uniformed military, DoD civilians, and contractors.
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

185

As stated in the DoD IG progress assessment, the USD(AT&L) recognized the need to 

develop more guidance, metrics, and oversight for services acquisition and focused these

efforts through the BBP Initiatives. The Principal Deputy USD(AT&L) has been appointed as the 

DoD Senior Services Manager leading the contracted services initiatives, with the Deputy 

Director, Defense Procurement and Acquisition Policy (DPAP), Services Acquisition (SA),

focused on day-to-day leadership and oversight of the Department’s efforts, as detailed below.

The USD(AT&L) appointed DoD Functional Domain Experts (FDEs) to serve as the 

DoD-level lead for his or her respective Portfolio Group or Portfolio Category. The FDEs will 

actively oversee the life-cycle process for the contracted services within their portfolio, 

including forecasting and budgeting, requirements definition and validation, procurement, 

active management, and oversight of contracted services.

The USD(AT&L) also directed the development of a new DoD Instruction on Defense 

Acquisition of Services, which will:

• Establish policy, assign responsibilities, and provide procedures for identifying, 

assessing, reviewing, and validating requirements for the acquisition of services;

• Establish a simplified and flexible management framework for translating approved 

services requirements into stable, affordable, and well-managed programs;

• Authorize decision authorities, consistent with statutory and regulatory requirements 

for the acquisitions of services, to tailor the procedures to best achieve cost, schedule, 

and performance objectives; and

• Provide additional capability and oversight of services contracts.

The Department also is engaged in developing data capabilities to help stakeholders 

(including resource sponsors, Military Departments, and FDEs) understand and actively 

manage the services we are buying. The DPAP developed a Business Intelligence tool to 

provide visibility into our spending and allow greater management and oversight.

The Services Acquisition Functional Integrated Product Team (SA FIPT) is leading new and 

leveraging ongoing initiatives, to include development/deployment of formal Service 

Acquisition training for SA stakeholders, both Defense Acquisition Workforce Improvement Act 

(DAWIA) and non-DAWIA populations, in the lifecycle management of services contracts. The 

SA FIPT has identified competencies for services stakeholders and identified/endorsed five online modules (CLCs 011, 222, 007, 004, & 017), two classroom classes (ACQ101 and 

ACQ265), and one mission-assistance capability (Services Acquisition Workshop) related to 

improving services acquisitions for use within and outside of the DAWIA workforce. Work 

continues on completing both competency and full curriculum development.

Better Buying Power 2.0 Initiatives

The Better Buying Power (BBP) 2.0 Implementation Guidance of April 24, 2013, included 

specific direction to “Increase effective use of Performance-Based Logistics.” The following 

recent policies and guidance address use of Performance Based Logistics (PBL) and assist the 

defense acquisition workforce in developing effective PBL product support arrangements.

• On November 23, 2013, Acting Assistant Secretary of Defense for Logistics & Materiel 

Readiness (ASD[L&MR]) issued a memorandum, entitled "Performance Based Logistics 

Comprehensive Guidance." 

• On May 27, 2014, the ASD (L&MR) (Acting) issued the DoD PBL Guidebook. The 

Guidebook is designed to serve as both a reference manual for experienced PBL 

practitioners as well as a practical "how-to" guide for “new-to-PBL” logisticians. The 

guidebook provides PBL best practices and practical examples (tenets, analytics, 

metrics, and draft RFP information) for developing performance-based arrangements.
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

186

• Additionally, the Defense Acquisition University (DAU) has incorporated PBL learning 

assets into the Life Cycle Logistics curriculum and is working to incorporate 

performance-based learning assets into Program Management, Contracting, Systems 

Engineering, and Business/Financial Management curriculum.

An initiative implemented in BBP 2.0 is “Continue to increase the cost consciousness of the 

Acquisition Workforce – change the culture” under the “Improve the Professionalism of the 

Total Acquisition Workforce” focus area. The Director, DPAP, continues to focus on improving 

the capability of the contracting workforce to include quality-focused initiatives to strengthen 

the capability and readiness. In FYs 2013 and 2014, DPAP prepared to reassess the 

proficiencies of the contracting workforce to determine if progress has been made to address 

competency gaps identified from the 2009 competency assessment and to determine if new 

training gaps exist. In the third quarter of FY 2014, the competency reassessment was 

deployed to the 30,000 member contracting workforce. The results of the competency 

assessment will be used for the basis of human capital actions/workforce planning; 

updated/initiating training, increasing/improving leadership developmental opportunities, and 

the results allow the Department to make informed and sustained investments in the 

workforce.

The DPAP continues to collaborate with DAU on the curriculum for the contracting, 

purchasing, and industrial property career fields. The new curriculum incorporates more 

pricing, competition, contract administration, services acquisition, small business, and the BBP 

initiatives. Efforts to improve acquisition workforce staffing and training continued in FYs 2013

and 2014. Courses CLC 106, COR With a Mission Focus, and CLC 222, Contracting Officer 

Representative, are ranked number one and number three amongst the “most taken” DAU 

online learning assets.

As recent as June 9-13, 2014, the Director of Defense Pricing and the Director of DPAP 

hosted a collaborative event for pricing subject matter experts from across the Department.

Representatives from the Air Force, Army, Navy, Defense Logistics Agency (DLA), Missile 

Defense Agency (MDA), Defense Contract Audit Agency (DCAA), and Defense Contract 

Management Agency (DCMA) participated. The event included advanced training on topics 

such as contract incentives, subcontractor pricing, the Truth in Negotiations Act, and 

commercial pricing, and also included time devoted to each Component sharing best practices, 

examples of overcoming pricing challenges, and pricing success stories. Sessions on 

subcontract analysis/subcontracting issues, commercial item pricing, and effective incentive 

contracting, as well as vigorous discussions on these topics, enabled the participants to share 

experiences with strategies which have proven successful, and to brainstorm about possible 

further evolutions of these strategies. The Senior Leader Question and Answer session on 

competition/source selection allowed the participants to not only get the DPAP perspective on 

the process, but to engage in dialogue about some of the issues currently being experienced 

across the Department. Going forward, it is expected that the participants will avail 

themselves of these connections with other pricing experts across the Department to develop 

robust approaches to address the most complex pricing issues facing the DoD Components. 

The Department developed the Contracting Officer Representative Tracking (CORT) tool to 

track and maintain COR assignment. 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 4, 2014, there were 50,288 registered CORs. Of the number registered, the 

Army has 31,578 users.

In addition to the BBP and BBP 2.0 initiatives, DCMA continued to both establish new and 

to refine existing capabilities to assist the Acquisition Workforce in making better business 

decisions. The DCMA stood up a commercial pricing cell to assist Procuring Contracting 

Officers in making commercial item determinations and to facilitate the cost reasonableness of 

commercial items. Calendar year 2014 marks the first full year DCMA had fully-staffed and 

operational Integrated Cost Analysis Teams (ICATs), comprised of dedicated business and 

technical pricing personnel located at 11 major contractor divisions. Expectations are for the 
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

187

ICATs to more aggressively pursue opportunities to reduce costs in the supply chain in their 

proposal pricing efforts, including targeted engagements at second and third tier suppliers.

The DCMA initiated a formalized process for coordinating and selecting locations for the 

conduct of overhead should-cost reviews to maximize benefit for the Department.

A Seaman signals to pilots in an MH-60S Seahawk helicopter as it picks up supplies from the flight deck during a vertical 

replenishment aboard the guided-missile destroyer USS Arleigh Burke in the Persian Gulf. The Arleigh Burke is deployed 

in the U.S. 5th Fleet area of responsibility supporting maritime security operations and theater security cooperation efforts. 

The Seahawk is assigned to Helicopter Sea Combat Squadron 26. 

Photo by Petty Officer 2nd Class Carlos M. Vazquez II
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

188

3. IG-Identified Challenge: Joint Warfighting and Readiness

3-1A. Joint Warfighting and Readiness IG Summary of Challenge

The United States removed its combat troops from Iraq and is drawing down its presence 

in Afghanistan. The lead for security responsibility in Afghanistan has transitioned to the 

Afghan government. The drawdown of forces from Afghanistan will continue to challenge the 

Services as they deal with retrograde and reset equipment, with much of the equipment being

returned after exceeding utilization rates in many of their design operating parameters. The 

Department will be challenged to maintain the readiness of the forces as equipment is repaired 

or replaced.

The Services are engaged in a strategic rebalance to the Asia-Pacific region while 

continuing to maintain the global presence needed to protect national interests. While 

undergoing this 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 responsibility – both requiring pre-positioning and the need for enhanced knowledge 

of various languages and cultural, ethnic, and religious sensitivities. The Department also 

continues to address emerging terrorism and instability challenges in AFRICOM’s area of 

operation. Growth in AFRICOM’s operational partnering mission raises the issue of sufficiency 

of its resources to address the terrorist threat. The Department returned some facilities in 

Europe and continues to move toward the completion of the Strategic Alliance in Korea. Global 

conflict and crises will continue to impact the Department’s rebalancing and resetting. It is 

critical that the Department address these challenges to ensure our military is agile, flexible, 

and ready for the full range of contingencies during this time.

Meanwhile, the new budget reality is being sensed across the Department, especially 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 impact 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 need to ensure that the impact of the current sequestration, as well as 

future budget reductions, has minimal impact on the ability to respond to future threats. The 

Services will be challenged to review their existing force structures and make necessary 

changes or adjustments, especially when those changes or adjustments involve paradigm 

shifts in how we view future scenarios.

3-1B. Joint Warfighting and Readiness IG Assessment of Progress

The Department must assess warfighter capabilities and readiness across the full range of 

strategic, operational, and tactical considerations. This assessment includes large questions, 

such as whether the joint force is capable of achieving the strategic objectives set forth in the 

National Security Strategy, to the tactical focus on individual unit readiness. The Department 

is making progress in addressing the many difficulties in the drawdown in Afghanistan, 

resetting equipment, and ensuring the long-term viability of the all-volunteer force. However, 

the Department must also be ready to address fiscal challenges; if not addressed, those fiscal 

challenges will overtake any improvements or enhancements the Department intends to make 

in the near term.

The National Security Strategy released in January 2012 placed increased emphasis on the 

Pacific theater. The realignment of forces from Okinawa, Japan, to Guam still faces formidable 

challenges, which have increased projected costs and schedules. 
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

189

The Services will have to train to fight in conventional and unconventional scenarios, and 

they will be challenged to do so with diminishing resources while maintaining their readiness.

The Department must also provide the necessary levels of oversight to ensure that forces 

returning from Afghanistan, and their families, continue to receive the medical and other 

support they need.

As the drawdown continues in Afghanistan, the Department must ensure that adequate 

oversight of equipment being returned and the equipment reset process is properly managed 

so that only unusable equipment is disposed and that which is new is fielded to intended 

users. The DoD IG recently reported on concerns with the security of equipment staged for 

retrograde in Afghanistan. We also identified concerns with the contract oversight of the 

multimodal contract used to facilitate the transporting of equipment to the United States for 

reset. 

Efforts to redeploy military units around the globe will enable the Services to better shape 

and focus their force structure to provide greater flexibility in responding to threats.

3-1C. Joint Warfighting and Readiness Department Response

Turmoil around the world continues, ranging from the threat presented by ISIL in Iraq to 

the potential of an Ebola pandemic. Despite our 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. Deploying capable and ready forces 

for current operations continues to impact the non-deployed forces’ ability to prepare for full 

spectrum operations. Non-deployed forces are focusing their available training time to prepare 

for their next mission in support of Operation Enduring Freedom, or training to full spectrum 

readiness hedging against the need to execute other potential contingencies. 

The ongoing reduction of forces from Afghanistan has reduced the stress on forces in the 

near term; however, fiscal constraints will result in tough decisions on materiel, manpower, 

and infrastructure that could negate the positive aspects expected from the reductions in 

operational stress. Additionally, even with the reduction of ground forces in the Central 

Command area of responsibility, it is anticipated the demand for Naval and Air Forces will 

continue unabated for the foreseeable future. 

The Department is continually developing and refining comprehensive plans for both 

resetting and rebalancing the total force, which includes all Reserve Component forces, in the 

most effective and efficient manner possible. We recognize the most important part of 

maintaining joint warfighting capability and readiness is caring for the all-volunteer force and 

their families. 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 future threats remains the highest priority of the 

Department’s leadership.
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

190

4. IG-Identified Challenge: Cyber Security

4-1A. Cyber Security IG Summary of Challenge

Although the Department has operated in the information and cyberspace environment for 

years, making “cyber” a new domain of warfare in the 2010 Quadrennial Defense 

Review (QDR) brought it into the forefront of warfighter planning. However, bringing the cyber 

domain into parity with the more easily distinguished and widely developed air, land, and sea 

domains will remain a challenging task for the near future. 

As described in the National Military Strategy for Cyberspace Operations, cyberspace 

threats generally fall within six categories: traditional, irregular, catastrophic, disruptive, 

natural, and accidental. Addressing the rapidly increasing threats in the cyber domain is a 

priority. As such, developing offensive as well as defensive operations within the domain takes 

specialized equipment along with uniquely trained personnel.

In the relatively short life of the newly described cyber domain, the Department has 

developed strategies for both offensive and defensive operations. In a June 12, 2013, 

statement before the Senate Committee on Appropriations, the Commander, United States 

Cyber Command stated, “We are improving our tactics, techniques, and procedures, as well as 

our policies and organizations. This means building cyber capabilities into doctrine, plans, and 

training – and building them in a way that senior leaders can plan and integrate such 

capabilities as they would capabilities in the air, land, and sea domains.” As stated by the 

Department’s past Chief Information Officer, “There will never be a time that we can assume a 

comfort posture.” As such, the Department must be ever vigilant to continuously invent and 

reinvent how it operates in the cyber domain.

4-1B. Cyber Security IG Assessment of Progress

The Department has made strides in developing strategies for operating in the cyber 

domain, developing frameworks for evaluating risks, and building its cyber workforce strategy 

for the future. The Department is establishing cyber support elements at several geographic 

combatant commands to provide both technical capability and expertise for the combatant 

commander. The Department continues to develop, refine, and implement programs and 

processes for the five initiatives identified in the Department of Defense Strategy for Operating

in Cyberspace. The Department continues to invest in cybersecurity capabilities by expanding 

the cyber forces that will defend the networks, degrade adversary cyber capabilities, and 

support defense of National infrastructure.

In March 2014, the Department issued instructions for the Risk Management 

Framework (RMF) for DoD Information Technology (IT). The instructions describe how 

cybersecurity requirements for DoD information technologies will be managed through RMF,

consistent with the principles established by the National Institute of Standards and 

Technology. Also in March 2014, a new instruction on cybersecurity was issued to establish a 

cybersecurity program to protect and defend DoD information and information technology. The 

Quadrennial Defense Review 2014 commits the Department to dedicate additional resources to 

cybersecurity. Lastly, the Department continues to increase the number of high-level positions 

with a cyber leadership role. However, unlike in the air, land, and sea domains, 

accomplishments can be quickly overcome by the stream of threats, and the Department must 

continue to challenge all military, civilian, and contractor employees to successfully implement 

cyber security while operating in the cyber domain.
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

191

4-1C. Cyber Security Department Response

The Department continues to make progress in ensuring the strategic goals of the cyber 

environment are met. To ensure cyber security for the nation, the Cyber Mission Force was 

created. The Cyber Mission Force continues to mature to respond to cyber security demands of 

the nation. Several programs have been put in place to ensure the Cyber Mission Force is 

properly manned, trained, and equipped.

The Assistant Secretary of Defense for Global Strategic Affairs has been assigned the role 

of Principal Cyber Advisor to inform the Secretary of Defense on policy related to the Cyber 

Mission Force. The Department is examining the role of the National Guard and Reserve 

Component for the Cyber Mission Force. The department is leveraging cyber National Guard 

forces to coordinate train, advise, and assist the Cyber Mission Force. Using the National 

Guard in this capacity allows the Department to take advantage of the knowledge and training 

of both the military and private sectors. In addition, the Department is ensuring a right sized, 

properly trained and equipped civilian cyber force by ensuring the proper hiring policy and 

authority is in place to recruit the talent needed. Lastly, the Department is taking action to 

create a persistent training environment is available to certify the Cyber Mission Force is 

properly trained.

Per the National Defense Authorization Act for FY 2014, the Department recently 

submitted a report to Congress which made recommendations across a range of issues in 

support of cyberspace, including the manpower, recruitment, retention, roles, mission 

requirements, training, infrastructure and structure for the Reserve Components (RC). This 

report also addressed how the Military Services supply personnel to the Cyber Mission Force.

4-2A. Cyber Workforce IG Summary of Challenge

According to the National Initiative for Cyber Security Education, as the world grows more 

connected through cyberspace, a highly skilled cyber security workforce is required to secure, 

protect, and defend our nation’s information systems. While the demand for cyber security 

professionals is high, the supply is relatively insufficient. For example, according to one 

leading research director, “Top-notch cyber-threat hunters and tool builders are in short 

supply. There are probably fewer than 800 of them in the entire country.”

In the current environment of economic uncertainty and fiscal constraints, the Department 

faces a significant challenge in filling the multitude of cyber positions it needs to operate, 

defend, and protect its networks. The Center for Strategic and International Studies issued a 

report, “A Human Capital Crisis in Cybersecurity,” April 2010, identifying a national shortage of 

skilled cyberspace personnel that could potentially impact DoD’s operational readiness and put 

national security at risk. Additionally, the most recent Government Accountability Office

report, High Risk Series, An Update, February 2013, includes strategic human capital 

management and identifies information technology management/cybersecurity as a 

Government-wide mission critical occupation. As of 2014, DoD is in the process of building its 

cyber mission force to provide effective defense of the nation, support combatant command 

military operations, and defense of DoD Information Networks. However, it is still imperative 

that the Department continue focused efforts to recruit, train, and retain a cyber workforce in 

the competitive national environment to meet the threat.

4-2B. Cyber Workforce IG Assessment of Progress

Training and retaining a skilled cyber force is one of the biggest gaps in the cyberspace 

domain. The Department has taken steps recently to build its cyber workforce. On 

November 21, 2013, the Deputy Secretary of Defense issued the “Department of Defense 
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

192

Cyberspace Workforce Strategy,” identifying six strategic focus areas for building and 

maintaining a competent and resilient cyber workforce. For example, the Army developed a 

new military occupational specialty and graduated its first class of cyber network defenders in 

November 2013 as a means to building a cyber workforce. Also, the Deputy Secretary of 

Defense included funding in FYs 2014 and 2015 to field the approximately 6,000 personnel 

cyber mission force. In addition, the Department will add additional military and civilians to 

perform other cyberspace functions for U.S. Cyber Command, the combatant commands, and 

the Services related to defending networks, degrading adversary cyber capabilities, and 

supporting defense of national infrastructure. In addition, the 2014 budget adds resources to 

increase the quality and throughput of DoD’s training pipeline. Although the Department has 

made progress in beginning to build a cyber workforce, it must maintain momentum through 

implementation to ensure the resourcing initiatives allow DoD to recruit, train, and retain a 

competent cyber workforce.

4-2C. Cyber Workforce Department Response

The Department has set a goal of 6,000 personnel trained, equipped, and working as the 

Cyber Mission Force by the end of fiscal year 2016. To facilitate success, the Department is 

ensuring the proper policy and authorities are in place to hire the right personnel to meet this 

goal. While personnel with cyber security skills remain in high demand, the Department has 

put incentives in place to attract world class talent. 

The Department also is conducting the Civilian Cyber Workforce Challenges study, which 

will examine the current human resources systems and practices in place at the National 

Security Agency and United States Cyber Command to ensure that human resources and 

funding systems are flexible for a dynamic community.

Lastly, the Services are creating occupational series specifically for cyber missions. These 

new career fields will replace the existing model of taking personnel from disparate career 

fields to become part of the Cyber Mission Force. Instead, the new career fields will be used to 

supply personnel to the Cyber Mission Force.

To ensure the Cyber Mission Force is properly trained, the Department continues to 

mature the United States Cyber Command Training and Readiness Manual. This document 

details individual training requirements for the Cyber Mission Force. It has seen wide 

distribution and coordination throughout the Department throughout the creation process.

The Department continues to prioritize cyber workforce and has developed a strategy for 

providing a phased cyber workforce development that is large enough and strategically 

structured to secure, protect, and defend Department networks. Budget constraints, including 

indiscriminate cuts, put that strategy at risk.
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

193

5. IG-Identified Challenge: Health Care

5-1A. Health Care 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 continued to grow 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, and which has almost tripled since FY 2001

appropriations of $12.1 billion. However, the Department’s appropriations slightly decreased 

by $16 million from FY 2013. The Department reported that growing health care costs will limit 

its ability to fund medical readiness requirements.

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, 2014, DCIS had 322 health care 

cases representing 19.8 percent of the 1,725 open cases. The Defense Health Agency reported 

that during calendar year 2013, its program integrity unit managed 388 active investigations, 

opened 212 new cases, and responded to 931 leads or requests for assistance.

As the Military Health System continues to adapt to budgetary and force transformation 

constraints, the Department must maintain the medical readiness of the force. Challenges will 

include public health, suicide prevention, 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 Iraq and Afghanistan, the Military Services will be challenged with

"right-sizing" their medical transition programs.

5-1B. Health Care IG Assessment of Progress

The Department’s efforts in controlling health care costs, while still ensuring our service 

men and women and their families receive the care they need and deserve, will continue to be 

a challenge. The MHS is focusing on many areas to manage health care costs per capita. Three 

managed-care support contracts are in effect; however, award protests resulted in staggered 

implementation of the new-generation TRICARE contracts. These contracts provide incentives 

for customer satisfaction and contractors for managed care support 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.

Also, through the authority provided in Section 703 of the FY 2008 National Defense 

Authorization Act, DoD obtains federal pricing discounts in the TRICARE retail network 

pharmacies in the form of refunds from pharmaceutical manufacturers. According to the 

Defense Health Agency, as of May 2014, DoD achieved savings to the Defense Health Plan of 

$493 million through the program. Finally, according to the Defense Health Agency, DoD 

achieved savings through DoD and VA joint pharmaceutical purchase contracts totaling 

$30 million in 2014, with further potential contracts pending totaling $129 million.
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

194

However, the Department continues to struggle with containing costs in the TRICARE 

Overseas Program. DoD IG reported in April 2014 that the Defense Health Agency 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. TRICARE payments 

increased from $21.1 million in FY 2009 to $63.8 million in FY 2012, or about 203 percent, in 

six, high-dollar volume locations without negotiated rates or other cost containment 

measures. 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.

Since 2011, the IG has extensively assessed the efficiency and effectiveness of medical 

care and transition programs for wounded, ill, and injured Service Members. The Services 

have refined and improved these transition programs and have implemented plans to 

continually assess ongoing requirements.

The MHS Quadruple Aim Concept focuses on four factors in providing quality health care to 

DoD beneficiaries: readiness, population health, experience of care, and cost. Continuing to 

implement the MHS Quadruple Aim Concept should improve quality and reduce costs by 

focusing on improved care coordination and delivering care in the appropriate setting. 

Additionally, the MHS identified optimization of the pharmacy practices and implementation of 

the patient-centered medical home as strategic initiatives, both of which aim to increase the 

quality of health care while reducing its cost.

5-1C. Health Care Department Response

The Department acknowledges the summary of the DoD IG’s challenges and assessment 

of the Department’s progress regarding health care.

An Airman positions a Service Member for a CT scan at the Craig Joint Theater Hospital on Bagram Airfield, 

Afghanistan.

Photo by Staff Sgt. Evelyn Chavez
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

195

6. IG-Identified Challenge: Equipping and Training Afghan Security 

Forces

6-1A. Afghan National Security Forces IG Summary of Challenge

Between now and the end of CY 2014, the Department will continue to develop the Afghan 

National Security Force’s (ANSF) capability to take ultimate responsibility for Afghanistan’s 

security. Challenges include:

• Developing ministerial capability to plan and manage resources and human capital;

• Ensuring enabling-force capabilities (combat support and combat service support 

elements) are fielded prior to withdrawal of Coalition capabilities;

• Measuring and reporting ANSF operational readiness and effectiveness;

• Professionalizing the ANSF;

• Ensuring the ANSF logistical system can support an independent and sustainable 

security force; and

• Preparing for post-2014 operations.

Coalition force drawdown and retrograde have added significant challenges as ANSF 

completes the transition to full Afghan government responsibility for security.

Security Ministries. The Department must continue its focus on advising and assisting the 

development of the resource management capabilities of the Ministry of Interior and Ministry 

of Defense. Budget planning and execution, training and development of human resources, 

increasing the ranks of civilian professionals, and leader emphasis on command and control of 

logistics are key areas for continued emphasis. Ensuring the capacity of the ANSF 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 criminals.

Enabling Force Capabilities. Completing the fielding of “enablers,” or military capabilities

essential to building ANSF’s capacity to accomplish its missions, is increasingly important.

Fielding and integration of combat and support capabilities in the ANA and ANP will remain

a priority. As Coalition advisors and trainers are withdrawn, the Department must take 

steps to mitigate the impact of the withdrawal of coalition provided enabler capability.

Additionally, the Department must continue to identify, assess, and address the training,

advice, and assistance requirements for fielding enabling capabilities beyond 2014.

Assessment of ANSF Progress. Assessing capabilities and identifying capability gaps will 

become more difficult during Coalition force withdrawal. The Department’s visibility of the 

operational readiness and effectiveness of ANSF units is diminishing as the 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, and critical units.

Professionalization. The Department must continue to support ANSF’s current efforts to 

professionalize the force. Command reports show recruitment and management of initial 

training at the enlisted and officer levels are becoming ANSF strengths. Developing quality 

leadership, managing effective training at all army and police levels, providing career 

development opportunities, and maintaining accurate personnel records have all been 

identified as areas requiring a sustained effort to build a professional army and police force.
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

196

Post-2014 Operations. Although no decision has been made on when the transition of DoD’s 

security cooperation and assistance activities to the Department of State will occur, the 

Department should begin planning for an eventual transition. With the recent announcement 

by the President of a ceiling of 9,800 U.S. troops in 2015 in Afghanistan, reducing that 

presence to a Kabul-based presence, with a strong security assistance component by the end 

of 2016, careful deliberate planning is required to ensure timely progress in the development 

of a future DoD Office of Security Cooperation to provide ongoing security cooperation and 

support for the ANSF.

6-1B. Afghan National Security Forces IG Assessment of Progress

Despite the current challenges in Afghanistan, much progress has been made. Most of the 

challenges above are recognized in Command reports as Coalition and ANSF priorities.

Since force levels are at over 95 percent of personnel end strength objective in both the 

ANA and ANP, and are approaching 90 percent of personnel end-strength objectives in the 

AAF, the emphasis on ANSF development has shifted from force quantity, or growing the 

force, to force quality – sustaining and professionalizing the force.

Ministerial development is a primary emphasis, and the Coalition is increasing resource 

management training for security ministry personnel. Ministerial advisors are delivering 

assessments of the security ministry departments, reporting departmental setbacks as well as 

successes, and planning and revising training milestones and objectives as necessary. 

However, lack of sufficient experienced and trained advisors remains a challenge that the

Command is trying to address.

With Coalition support, ANSF is committed to fielding a wide array of combat and combat 

support enablers that will provide ANSF the capability to operate independently and 

sustainably. Although ANSF logistics and force sustainment is still a primary concern as a force 

enabler, recent DoD IG assessments have noted some increased understanding and 

appreciation of the ANSF logistics system at the unit level. 

Additionally, the shortage of qualified volunteers with sufficient education remains a 

challenge for ANSF; nevertheless, ANSF continues to support human capital development and 

training, particularly literacy training. The literacy program is on course to fully transition to 

ANSF ownership in January 2015. Literacy training is now mandatory for all ANA and ANP 

recruits.

The ANSF has taken responsibility for its own training. Coalition reports confirm that the 

number of Afghan trainers has increased steadily over time, easing the burden on the 

Coalition Forces to provide military and civilian trainers between now and December 2014.

Reportedly, ANSF is also managing its non-commissioned officer (NCO) and officer ranks more 

aggressively, for example, taking action to meet ANP and ANA non-commissioned officer 

(NCO) shortages by training and promoting qualified and experienced enlisted soldiers and 

junior NCOs.

Importantly, operational readiness and effectiveness of the ANA and ANP continues to 

show improvement. The Regional Command (RC) ANSF Status Report (RASR) in March 2014 

assessed 62 of 85 key headquarters and units as either fully capable or capable, the two 

highest definition levels. With the decrease in advisor teams and advisor resources at the 

Corps and Police Headquarter level, Coalition forces are shifting to using Afghan reporting to 

understand ANSF capabilities. Challenges remain in getting reliable data with this newly 

developed ANSF self-assessment tool.

The ANSF assumed the lead for security nationwide on June 18, 2013 and remains on 

target to assume full responsibility for Afghanistan security by the end of 2014. Coalition 

forces have assumed a Train, Advise, and Assist role rather than a combat role, except for 
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

197

force protection and certain counter-terrorism operations conducted with ANSF. As a 

consequence, Coalition casualties have been significantly reduced, but ANSF casualties have 

commensurately increased. The Coalition is providing equipment to mitigate this trend to the 

extent possible, especially with respect to Improvised Explosive Device (IED) attacks, which

account for many of the ANSF wounded or killed.

The Coalition is monitoring the performance of ANSF in the current fighting season to 

determine its strengths and weaknesses. According to the “Report on Progress Toward 

Security and Stability in Afghanistan,” issued in April 2014 by the Secretary of Defense, the 

Ministry of Defense (MOD) and the Ministry of Interior (MOI) continued to make progress in 

both budget execution and accountability, and critical support functions, but still required 

coalition assistance and are expected to require support for the near future, particularly with 

logistics and facilities. There were ministerial developmental shortfalls in acquisition and 

financial management; strategic plans and policy; and human resource management. The 

ANSF capability development shortfalls were in command and control (C2), leadership, 

combined arms integration, training, and logistical sustainment. Developmental shortfalls 

consisted of counter-IED, medical, fire support coordination, special operations capabilities, 

including counterterrorism (CT), and air power. The Afghan Security Institutions and ANSF 

both continued to rely on support from ISAF to mitigate these shortfalls and gaps.

6-1C. Afghan National Security Forces Department Response

The Department concurs with the DoD IG's assessment.

A Soldier assigned to 16th Combat Aviation Brigade flies the American flag from the back of a CH-47 Chinook helicopter 

over southern Kandahar province, Afghanistan. The pilots and crew chiefs fly American flags to present--with certificates--

to Service Members as part of aviation tradition. 

Photo by Staff Sgt. Bryan Lewis
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

198

7. IG-Identified Challenge: The Nuclear Enterprise

7-1A. Redefining the Importance of the 

Nuclear Enterprise and Overcoming Past 

Neglect

IG Summary of Challenge

Following the Soviet Union’s collapse in 1991, the United States began to shift from a nuclear 

weapon-centric Cold War posture to a more dynamic and flexible force structure. Two Strategic 

Arms Reduction Treaties (START) and the 2010 Nuclear Posture Review (NPR) culminated in 

further steps to reduce the role of nuclear weapons in U.S. security strategy. Moreover, the NPR 

directs the Department to strengthen non-nuclear capabilities and reduce the role of nuclear 

weapons in deterring non-nuclear attacks. The shift in strategic priorities caused a cultural crisis 

throughout the nation’s nuclear forces, particularly in the Air Force. 

In June 2013, President Obama affirmed that the United States will maintain a credible 

deterrent, capable of convincing potential adversaries that the adverse consequences of attacking 

the United States, or its allies and partners, far outweigh any potential benefit they may seek to 

gain through an attack. The President reaffirmed that as long as nuclear weapons exist, the United 

States will maintain a safe, secure, and effective arsenal that guarantees the nation’s defense and 

that of U.S. allies and partners. 

The President has supported significant investments to modernize the nuclear enterprise and 

maintain a safe, secure, and effective arsenal. However, mishaps in the DoD nuclear enterprise, 

ranging from cheating scandals to fundamental errors in sustainment and acquisition, have 

tarnished the reputation of those providing the nation’s nuclear deterrent, while budgetary 

constraints have hampered modernization.

Just as both the inadvertent transfer of nuclear warheads and the discovery of Intercontinental 

Ballistic Missile (ICBM) fuses accidentally shipped to Taiwan eroded the confidence in the bomber 

and logistics communities, several other high-profile incidents struck at the core of trust and 

reliability of the ICBM community in 2013 and 2014. 

7-1B. Redefining the Importance of the 

Nuclear Enterprise and Overcoming Past 

Neglect

IG Assessment of Progress

This past year witnessed a setback in public perception of the integrity and professionalism of 

the nuclear force, primarily in the ICBM leg of the nuclear triad. A probe into cheating was 

launched in 2013 after a drug trafficking investigation involving missile launch officers revealed 

information on classified tests stored on cell phones. The investigation into the cheating resulted 

in the firing of nine commanders and the disciplining of 79 nuclear officers. This incident followed 

on the heels of failed inspections and disciplinary action for missile launch officers who had fallen 

asleep at their post. Finally, two Flag Officers were relieved of their nuclear duties due to off-duty 

incidents. The incidents throughout 2013 and 2014 resulted in both the Secretary of Defense and 

the Secretary of the Air Force acknowledging that systemic problems exist in the ICBM 

community.

In January 2014, Secretary of Defense Hagel initiated an internal DoD review and an 

independent review of the entire nuclear enterprise in response to the cheating scandal and other 

failures in the ICBM community. The charter for the internal review directed an examination of the 

nuclear mission of both the Air Force and the Navy, to include personnel, training, testing, 

command oversight, mission performance, and investment.

In addition, the Secretary of the Air Force, the Chief of Staff of the Air Force, and the Chief 

Master Sergeant of the Air Force visited all three ICBM wings in January 2014 to gather feedback 
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

199

from the Force and to reinforce Air Force standards and expectations. The Secretary of the Air 

Force developed a seven-point action plan to address systemic problems in the nuclear community 

and delivered the action plan to Secretary Hagel in March 2014.

Air Force Global Strike Command developed the Force Improvement Program, which pulled 

input directly from airmen at the organizational level on the most pressing issues. The command is 

pressing forward with a series of initiatives under the Force Improvement Program to change and 

improve the culture of the airmen who perform the nuclear mission. Building on the success of the 

Force Improvement Program’s results from the ICBM wings, Air Force Global Strike Command 

initiated a similar effort for the B-52 wings at Minot Air Force Base (AFB) and Barksdale AFB, as 

well as the B-2 wing at Whiteman AFB.

Assessing the impact of these initiatives is premature, but this massive commitment of 

resources by senior leadership likely will improve morale and reinforce standards and 

expectations. As part of our FY 2015 project planning process, we are looking at potential projects 

that would follow up on these issues and corresponding Air Force actions.

7-1C. Redefining the Importance of the 

Nuclear Enterprise and Overcoming Past 

Neglect

Department Response

The Department concurs with the DoD IG’s assessment.

An unarmed AGM-86B Air-Launched Cruise Missile is released from a B-52H Stratofortress over the Utah Test 

and Training Range during a Nuclear Weapons System Evaluation Program sortie. Conducted by Airmen from the 

2nd Bomb Wing, Barksdale Air Force Base, La., the launch was part of an end-to-end operational evaluation of 

8th Air Force and Task Force 204’s ability to pull an ALCM from storage, load it aboard an aircraft, execute a 

simulated combat mission tasking, and successfully deliver the weapon from the aircraft to its final target. 

Photo by Staff Sgt. Roidan Carlson
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

200

7-2A. Modernizing the Nuclear Force in the Face 

of Declining Resources IG Summary of Challenge

The U.S. nuclear triad of land-based Intercontinental Ballistic Missiles (ICBMs), submarinelaunched ballistic missiles (SLBMs), and heavy bombers has served for decades in providing a 

survivable and capable deterrent force. In essence, the triad has only been modernized 

twice – once in the early 1960s and once in the 1980s. Every one of the systems, to include the 

Nuclear Command, Control, and Communications (NC3) system, will require significant 

modernization or replacement in the next two decades. Both the Senate and House Armed Service 

Committees are concerned with sustainment and replacement efforts in the DoD nuclear 

enterprise. Similarly, the Defense Science Board Standing Task Force on Nuclear Weapons Surety 

states that failures continue in fundamental areas, negatively affecting the fielded forces and the 

replacing or upgrading of old equipment.

7-2B. Modernizing the Nuclear Force in 

the Face of Declining Resources IG Assessment of Progress

The Services have initiated several programs to transform the aging nuclear force into a 

modern, nuclear-deterrent arm capable of operating into the latter part of the 21st century. 

Renovating the nuclear enterprise entails sustaining nuclear assets and developing replacement 

systems that integrate the latest technologies. When completed in 2030, almost every component 

of the strategic nuclear force will be replaced or updated.

Air Force

Long Range Strike Bomber (LRS-B): The LRS-B is funded and in the acquisition cycle. The Air 

Force released a request for proposal and anticipates vendor selection in FY 2015. However, Air 

Force leaders have issued contradictory statements regarding whether the first bomber variant will 

be nuclear capable. This ambiguity raises questions about the Air Force’s strategic message that 

the nuclear mission is its number one priority, and is strikingly similar to the Air Force’s acquisition 

strategy to procure conventional F-35s first before producing a nuclear variant. Additionally, the 

Air Force has not announced a commitment to require the LRS-B to be hardened against ElectroMagnetic Pulse (EMP). Any plans for future nuclear weapon platforms must consider the existing 

threat environment. 

Sustaining current bombers: While the LRS-B is in development and production, the current fleet 

of bombers still needs sustainment, both for conventional and nuclear missions. Some of the 

systems and particular parts are showing aging issues that affect the fleet’s readiness and 

reliability. Similar to other nuclear platforms, as these systems age, more parts fail for the first 

time, many with old or obsolete technologies. The cost to create a manufacturing base for parts 

that are no longer available is prohibitively expensive 

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. The LRSO weapon system 

will be capable of penetrating and surviving advanced Integrated Air Defense Systems from 

significant stand-off ranges to prosecute strategic targets. The ALCM is well past its expected 

operational lifetime, but the LRSO missile will not begin development in fiscal year 2015, as was 

scheduled; instead, development will slip by three years, deferring almost $1 billion in spending 

beyond FY 2018.

B61-12: The B61 family of nuclear gravity bombs, which include components dating to the 1960s, 

is going through a life extension process to preserve capabilities while consolidating the variants 

currently fielded. This process is a joint venture with the Department of 

Energy (DOE), which requires that the Air Force synchronize its schedules with DOE to field life 

extension programs without further delay. The weapon’s planned modernization is required for 
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

201

integration with the anticipated nuclear variant of the F-35, when it is nuclear capable, 

and the LRS-B.

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. The MMIII 

has received several generations of sustainment and modernization, most recently focusing on 

propulsion replacement, guidance replacement, and Mk21 fuse refurbishment. At the same time, 

the Air Force must balance investment between the legacy system and the new Ground Based 

Strategic Deterrent (GBSD). The GBSD refers to the yet-to-be-determined follow-on to the MMIII. 

The requirement for the new GBSD was expressed in the April 2010 Nuclear Posture Review 

(NPR), which stated the “...U.S. Nuclear Triad of ICBMs, SLBMs, and nuclear capable heavy 

bombers will be maintained...” Thus, DoD began an initial study of alternatives in fiscal years 2011 

and 2012. The studies identified a range of possible deployment options, with the objective of 

defining a cost-effective approach that “supports continued reductions in U.S. nuclear weapons 

while promoting stable deterrence,” and “Exploring new modes of ICBM basing that enhance 

survivability and further reduce any incentives for prompt launch.” Federally-mandated budget 

cuts, coupled with parts obsolescence for the legacy MMIII, put both sustainment of the MMIII and 

acquisition of the new GBSD at risk.

Security Helicopter: Despite continued congressional urging and a decade of studies highlighting 

the inadequacy of the UH-1 helicopter as an ICBM missile field security platform, the Air Force is 

still using aircraft with combat time dating to the Vietnam war. The FY 2014 budget request did 

not include funds for replacing the previously terminated Common Vertical Lift Support Platform, 

raising concerns in the Senate Armed Services Committee that the Air Force's number one priority 

to sustain an effective nuclear deterrent is being insufficiently supported. 

National Airborne Operations Center (NAOC) E-4B: Aircraft availability has not met mission needs 

over the last two and a half years. In FY 2013, the lack of aircraft negatively manifested itself 

through significantly reduced training sorties jeopardizing aircrew proficiency. Additionally, the E4Bs existing Very Low Frequency/Low Frequency system is mechanically/electronically obsolete 

and unsustainable.

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, 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.

Navy

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. Additional Ohio life 

extensions are unrealistic, and these SSBNs will begin to be retired at a rate of one per year in 

2027. Ohio replacement construction must begin in 2021 to commence its first Strategic Patrol in 

2031. The FY 2013 budget delayed delivery of the first new SSBN by two years, which produced 

manageable risk for the future transition. Additional delays are not manageable and would create 

a gap in at-sea strategic requirements.

Fixed Submarine Broadcast System (FSBS): The existing Low Frequency/Very Low Frequency 

stations were designed and built in different periods from 1953 to 1983. Consequently, each 

station is unique, and all are suffering from varying degrees of component obsolescence. System 

efficiencies are relatively low, which results in excessive energy consumption and complicated 

logistics support. This past year, the DoD IG examined the FSBS and concluded that while the 

transmitter equipment was well maintained, the supporting infrastructure at the geographicallyisolated sites is on the verge of failing. 
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

202

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 2012 directed the then Assistant Secretary of Defense for Networks, 

Information and Infrastructure, in coordination with the service secretaries, to submit a report on 

the NC3 architecture and long-term strategy. More recently, the Senate Armed Services 

Committee report accompanying a bill for the National Defense Authorization Act for Fiscal Year 

2013 mandated GAO to assess DoD’s efforts to sustain and improve the NC3 system. These 

concerns for NC3 stem from the multitude of aging and obsolete legacy systems that require 

modernization and replacement.

7-2C. Modernizing the Nuclear Force in 

the Face of Declining Resources Department Response

The Department concurs with the DoD IG’s assessment.

A convoy follows a payload transporter (PT) through the weapons storage area at Malmstrom Air Force 

Base, Montana. The PT returned after maintenance crews removed the last multiple independently 

targetable reentry vehicle in the Air Force intercontinental ballistic missile inventory from a Minuteman III, 

helping bring the Air Force towards compliance with the New Strategic Arms Reduction Treaty and comply 

with direction from the 2010 Nuclear Posture Review. 

Photo by Senior Airman Katrina Heikkinen
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

203

7-3A. Lack of an Integrated End-to-End 

Governance Process IG Summary of Challenge

No integrated, end-to-end governance process exists for the DoD nuclear weapon enterprise.

Existing forums are generally effective, but are separate entities, either in substance or process,

that are not viewed as part of an integrated, whole-DoD effort.

7-3B. Lack of an Integrated End-to-End 

Governance Process IG Assessment of Progress

With isolated exception, coordinated senior-level leadership attention dedicated to nuclear 

issues in the Department is insufficient. The Congressional Budget Office estimates that the nation 

is faced with $296 billion of nuclear weapon-related decisions to be made over the next 10 years. 

Without centralized and integrated management, these decisions will be made with an eroded 

capability to properly analyze these issues. 

No governance structure exists that empowers a single DoD organization to ensure that 

capabilities are planned, resourced, modernized, and sustained as an integrated program of record 

in all DoD Services and organizations. Multiple committees, including the Nuclear Weapons 

Council, the Senior Nuclear Oversight Council, and the National Leadership Command, Control, 

and Communication Executive Management Board, have overlapping memberships to address 

various issues in the nuclear enterprise. Most committees, however, are not full-time bodies and 

cannot be expected to delve deeply into the details of every programmatic decision. Additionally, 

many of these committees are merely advisory or coordination bodies, unable to commit 

resources. The absence of a DoD-wide nuclear enterprise governance structure has resulted in 

gaps, seams, and overlap among these committees.

Not having clear delineations of responsibility is a trend throughout most of the DoD IG’s 

recent nuclear enterprise reports. This trend may be hard to overcome for NC3 systems with 

multiple organizations hosting portions of it, but in other instances we find examples where 

responsibility is shared or uncertain.

Notable exceptions have recently occurred. The Deputy’s Management Action Group effectively 

provided some specific programmatic direction for the Services, and the DoD Chief Information 

Officer established organizations to oversee Nuclear Command, Control, and Communications.

7-3C. Lack of an Integrated End-to-End 

Governance Process Department Response

The Department concurs with the DoD IG’s assessment, but notes that the Department is 

leading a congressionally mandated council for NC3. The Council on Oversight of the National 

Leadership C3 System, which was established in the FY 2014 National Defense Authorization Act, 

comprises DoD stakeholders to address declining resources for NC3 modernization. The Council 

members include the USD(AT&L), USD Policy, Vice Chairman of the Joint Chiefs of Staff, the 

Director of the National Security Agency, the DoD CIO, and the Commander of U.S. Strategic 

Command.
U.S. Department of Defense Agency Financial Report for FY 2014

Other Information

204

This Page Left Blank Intentionally
FISCAL YEAR 2014

AGENCY FINANCIAL REPORT

APPENDICES

UNITED STATES DEPARTMENT OF DEFENSE
This Page Left Blank Intentionally
U.S. Department of Defense Agency Financial Report for FY 2014

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, 2014 and 2013

2014

Consolidated

2013

Consolidated 

ASSETS (Note 2)

Intragovernmental

Fund Balance with Treasury (Note 3) $ 27,250,677 $ 24,420,154

Total Intragovernmental Assets $ 27,250,677 $ 24,420,154

Cash and Other Monetary Assets (Note 6) $ 20,539,802 $ 20,593,988

Accounts Receivable, Net (Note 4) 31,014 20,906

Loans Receivable (Note 7) 639,533 723,975

Other Assets (Note 5) 30,217,081 31,801,934

TOTAL ASSETS $ 78,678,107 $ 77,560,957

LIABILITIES (Note 8)

Intragovernmental

Accounts Payable (Note 9) $ 329,951 $ 266,922

Debt (Note 10) 37,469 116,604

Other Liabilities (Note 11 and 12) 647,550 652,851

Total Intragovernmental Liabilities $ 1,014,970 $ 1,036,377

Accounts Payable (Note 9) $ 355,870 $ 400,521

Federal Employment Benefits (Note 13) 648 595

Other Liabilities (Note 11 and 12) 68,078,173 67,102,699

TOTAL LIABILITIES $ 69,449,661 $ 68,540,192

Commitments & Contingencies (Note 12)

NET POSITION

Unexpended Appropriations – Other Funds $ 5,325,422 $ 5,130,896

Cumulative Results of Operations – Other Funds 3,903,024 3,889,869

TOTAL NET POSITION $ 9,228,446 $ 9,020,765

TOTAL LIABILITIES AND NET POSITION $ 78,678,107 $ 77,560,957
U.S. Department of Defense Agency Financial Report for FY 2014

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, 2014 and 2013

2014

Consolidated

2013

Consolidated 

Program Costs

Gross Costs $ 34,886,326 $ 30,906,145

(Less: Earned Revenue) (5,890) (14,556)

Net Cost before Losses (Gains) from Actuarial Assumption Changes 

for Military Retirement Benefits $ 34,880,436 $ 30,891,589

Net Cost of Operations $ 34,880,436 $ 30,891,589

Statement of Changes in Net Position

Defense Security Cooperation Agency – Security Assistance

Accounts Dollars in Thousands

For the Years Ended September 30, 2014 and 2013

2014 

Consolidated

2013

Consolidated

Cumulative Results Of Operations

Beginning balances $ 3,889,869 $ 3,528,023

Budgetary Financing Sources

Appropriations used $ 5,625,649 $ 4,602,076

Nonexchange revenue 29,267,942 26,651,359

Total Financing Sources $ 34,893,591 $ 31,253,435

Net Cost of Operations (+/-) (34,880,436) (30,891,589)

Net Change $ 13,155 $ 361,846

Cumulative Results of Operations $ 3,903,024 $ 3,889,869

Unexpended Appropriations

Beginning Balances $ 5,130,896 $ 3,800,488

Budgetary Financing Sources

Appropriations received $ 6,024,853 $ 6,418,005

Appropriations transferred (in/out) (194,062) (209,751)

Other adjustments (rescissions, etc.) (10,616) (275,770)

Appropriations used (5,625,649) (4,602,076)

Total Budgetary Financing Sources $ 194,526 $ 1,330,408

Unexpended Appropriations $ 5,325,422 $ 5,130,896

Net Position $ 9,228,446 $ 9,020,765

The accompanying notes are an integral part of these financial statements. The accompanying notes are an integral part of these financial statements.
U.S. Department of Defense Agency Financial Report for FY 2014

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, 2014 and 2013

Budgetary 

Financing Accounts

Non-Budgetary 

Financing Accounts

Dollars in Thousands

2014

Combined

2013

Combined

2014

Combined

2013

Combined

Budgetary Resources

Unobligated balance, brought forward, October 1 $ 141,901 $ 143,180 $ 27,139 $ 27,139

Recoveries of prior year unpaid obligations 938,532 339,303 0 0

Other changes in unobligated balance (915,438) (308,257) 0 0

Unobligated balance from prior year budget 

authority, net 164,995 174,226 27,139 27,139

Appropriation (discretionary and mandatory) 6,735,612 6,240,741 0 0

Borrowing Authority (discretionary and mandatory) 0 0 1,793 1,709

Contract authority (discretionary and mandatory) 35,145,412 15,313,617 0 0

Spending authority from offsetting collections

(discretionary and mandatory) 57,196 49,346 0 0

Total Budgetary Resources $ 42,103,215 $ 21,777,930 $ 28,932 $ 28,848

Status of Budgetary Resources

Obligations incurred $ 41,958,758 $ 21,636,029 $ 1,793 $ 1,709

Unobligated balance, end of year:

Apportioned 29,767 112,118 0 0

Unapportioned 114,690 29,783 27,139 27,139

Total unobligated balance, end of year $ 144,457 $ 141,901 $ 27,139 $ 27,139

Total Budgetary Resources $ 42,103,215 $ 21,777,930 $ 28,932 $ 28,848

Change in Obligated Balance

Unpaid obligations, brought forward, October 1 $ 129,002,355 $ 138,729,747 $ 2,462,224 $ 2,462,224

Obligations incurred 41,958,758 21,636,029 1,793 1,709

Outlays (Gross) (32,314,788) (31,024,118) (1,793) (1,709)

Recoveries of prior year unpaid obligations (938,532) (339,303) 0 0

Unpaid Obligations, end of year 137,707,793 129,002,355 2,462,224 2,462,224

Obligated balance, start of year $ 129,002,355 $ 138,729,747 $ 2,462,224 $ 2,462,224

Obligated balance, end of year $ 137,707,793 $ 129,002,355 $ 2,462,224 $ 2,462,224

Budgetary Authority and Outlays, Net

Budget Authority, gross (discretionary and 

mandatory) $ 41,938,220 $ 21,603,704 $ 1,793 $ 1,709

Actual offsetting collections (discretionary and 

mandatory) (57,197) (49,346) (112,509) (141,320)

Budget Authority, net (discretionary and 

mandatory) $ 41,881,023 $ 21,554,358 $ (110,716) $ (139,611)

Outlays, gross (discretionary and mandatory) 32,314,788 31,024,118 1,793 1,709

Actual offsetting collections (discretionary and 

mandatory) (57,197) (49,346) (112,509) (141,320)

Outlays, net (discretionary and mandatory) 32,257,591 30,974,772 (110,716) (139,611)

Distributed offsetting receipts (29,267,942) (26,651,359) 0 0

Agency Outlays, net (discretionary and 

mandatory) $ 2,989,649 $ 4,323,413 $ (110,716) $ (139,611)

The accompanying notes are an integral part of these financial statements.
U.S. Department of Defense Agency Financial Report for FY 2014

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-13

Note 4 Accounts Receivable...............................................................................A-14

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-19

Note 10 Debt ....................................................................................................A-20

Note 11 Other Liabilities .....................................................................................A-22

Note 12 Commitments and Contingencies .............................................................A-23

Note 13 Military Retirement and Other 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 2014

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. 

The FMS Trust Fund includes accounts for U.S. government funds appropriated for security 

assistance and funds deposited by foreign countries and international organizations, or by 

others for their use. Refer to paragraph 1.C, Appropriations and Funds, for a list of these 

accounts.

The FMS Trust Fund and other accounts for funds appropriated for security assistance are 

managed by DSCA on behalf of 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.
U.S. Department of Defense Agency Financial Report for FY 2014

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-6

The Department currently has 13 auditor-identified material weaknesses related to the above 

limitations. Of these, DSCA Security Assistance Accounts contributes to: (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.

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 
U.S. Department of Defense Agency Financial Report for FY 2014

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-7

for security assistance as general, special, and trust funds. The DSCA uses these 

appropriations and funds to execute its missions and subsequently reports on resource 

usage.

General and special appropriations transferred into the FMS Trust Fund are used for financial 

transactions, including personnel, operations and maintenance of security assistance 

functions, and financing of FMS, which may include sales of defense articles and services 

from stock or through procurement, and the sale of foreign military construction.

The FMS Trust Fund accounts for receipts and expenditures of funds held in trust by the 

U.S. government for use in carrying out specific purposes or programs in accordance with 

applicable laws, regulations, and agreements.

The DSCA is a party to allocation transfers with other federal agencies as a receiving (child) 

entity. An allocation transfer is an entity’s legal delegation of authority to obligate budget 

authority and outlay funds on its behalf. Generally, all financial activity related to allocation 

transfers are reported in the financial statements of the parent entity. Exceptions to this 

general rule will apply to specific funds for which OMB has directed that all activity will be 

reported in the financial statements of the child entity. Exceptions include all U.S. 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 
U.S. Department of Defense Agency Financial Report for FY 2014

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-8

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 

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 MILDEP systems do not track buyer and seller data needed to match related 

transactions. In most cases, the buyer-side records are adjusted to agree with DoD sellerside balances and are then eliminated. The 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.
U.S. Department of Defense Agency Financial Report for FY 2014

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-9

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, 

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.
U.S. Department of Defense Agency Financial Report for FY 2014

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-10

1.J. Cash and Other Monetary Assets 

Cash is the total of cash resources under the control of the Department including coin, 

paper currency, negotiable instruments held for deposit in banks or other financial 

institutions and is classified as “nonentity” and is restricted. 

The FMS Trust Fund only accepts U.S. dollars for payment of defense articles and services 

per DSCA Manual 5105.38-M, Security Assistance Management Manual, Chapter 5; Foreign 

Military Sales Case Development. All payments and collections are in U.S. dollars. 

1.K. Accounts Receivable 

The DSCA Security Assistance Accounts’ accounts receivable from other federal entities or 

the public include: accounts receivable, claims receivable, and refunds receivable. 

Allowances for uncollectible accounts due from the public are based upon analysis of 

collection experience by fund type. The Department does not recognize an allowance for 

estimated uncollectible amounts from other federal agencies. Claims against other federal 

agencies are to be resolved between the agencies in accordance with dispute resolution 

procedures defined in the Intragovernmental Business Rules published in the Treasury 

Financial Manual.

1.L. Direct Loans and Loan Guarantees 

The DSCA administers the FMF program on behalf of the EOP. Direct loans and loan 

guarantees are authorized by sections 23 and 24 of the AECA of 1976, as amended, 

P.L. 90-269, as amended, and section 503(a) and other specific legislation. These loans and 

guarantees assist friendly foreign countries and international organizations in purchasing 

U.S. defense articles and services.

1.M. Inventories and Related Property 

The DSCA Security Assistance Accounts do not maintain inventory. The defense articles are 

provided to FMS customers from the U.S. Government or the contractor pursuant to a 

contract with the U.S. Government. Defense articles sold from the Department or the 

U.S. Coast Guard are assets of the providing component until title is transferred to foreign 

customer.

1.P. 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.Q. Leases 

The FMS Trust Fund and the accounts for funds appropriated for security assistance do not 

have capital leases and currently is not able to reliably estimate the value of operating 

leases.
U.S. Department of Defense Agency Financial Report for FY 2014

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-11

1.R. Other Assets 

Other assets include civil service employee pay advances, travel advances, and certain 

contract financing payments not reported elsewhere on the DSCA Security Assistance 

Accounts Balance Sheet.

The DSCA Security Assistance Accounts conduct business with commercial contractors using 

two primary types of contracts: fixed price and cost reimbursable. Contract financing 

payments are defined in the Federal Acquisition Regulations, Part 32, as authorized 

disbursements to a contractor prior to acceptance of supplies or services by the 

Government. These payments are designed to alleviate the potential financial burden on 

contractors performing on certain long-term contracts and facilitate competition for defense 

contracts. Contract financing payment clauses are incorporated in the contract terms and 

conditions and may include advance payments, performance-based payments, commercial 

advance and interim payments, progress payments based on cost, and interim payments 

under certain cost-reimbursement contracts. It is DoD policy to record certain contract 

financing payments as other assets.

Contract financing payments do not include invoice payments, payments for partial 

deliveries, lease and rental payments, or progress payments based on a percentage or 

stage of completion. The Defense Federal Acquisitions Regulation Supplement authorizes 

progress payments based on a percentage or stage of completion only for construction of 

real property, shipbuilding, and ship conversion, alteration, or repair. Progress payments 

based on percentage or stage of completion are reported as Construction in Progress.

1.S. Contingencies and Other Liabilities 

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.T. Accrued Leave 

The FMS Trust Fund reports liabilities for military leave and accrued compensatory and 

annual leave for civilians. Sick leave for civilians is expensed as taken. The liabilities are 

based on current pay rates.
U.S. Department of Defense Agency Financial Report for FY 2014

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-12

1.U. Net Position 

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

Unexpended appropriations represent the amounts of budget authority that are unobligated 

and have not been rescinded or withdrawn. Unexpended appropriations also represent 

amounts obligated for which legal liabilities for payments have not been incurred. 

Cumulative results of operations represent the net difference between expenses and losses 

and financing sources (including appropriations, revenue, and gains) since inception. The 

cumulative results of operations also include donations and transfer in and out of assets 

that were not reimbursed.

1.W. Undistributed Disbursements and Collections

Undistributed disbursements and collections represent the difference between 

disbursements and collections matched at the transaction level to specific obligations, 

payables, or receivables in the source systems and those reported by the U.S. Treasury. 

Supported disbursements and collections may be evidenced by the availability of 

corroborating documentation generally support the summary level adjustments made to 

accounts payable and receivable. Unsupported disbursements and collections do not have 

supporting documentation for the transactions and most likely would not meet audit 

scrutiny. However, both supported and unsupported adjustments may have been made to 

the DSCA Accounts Payable and Receivable trial balances prior to validating underlying 

transactions. 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 2014

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-13

NOTE 2. NONENTITY ASSETS

Nonentity Assets Dollars in Thousands

As of September 30 2014 2013

Intragovernmental Assets

Fund Balance with Treasury $ 11,010,018 $ 7,799,844

Total Intragovernmental Assets $ 11,010,018 $ 7,799,844

Nonfederal Assets

Cash and Other Monetary Assets $ 20,539,802 $ 20,593,988

Accounts Receivable 678,418 673,617

Other Assets 30,212,208 31,777,541

Total Nonfederal Assets $ 51,430,428 $ 53,045,146

Total Nonentity Assets $ 62,440,446 $ 60,844,990

Total Entity Assets $ 16,237,661 $ 16,715,967

Total Assets $ 78,678,107 $ 77,560,957

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.

NOTE 3. FUND BALANCE WITH TREASURY 

Fund Balance with Treasury Dollars in Thousands

As of September 30 2014 2013

Fund Balance

Appropriated Funds $ 5,522,643 $ 5,318,823

Trust Funds 21,728,034 19,101,331

Total Fund Balance $ 27,250,677 $ 24,420,154

Fund Balance Per Treasury Versus Agency

Fund Balance per Treasury $ 27,250,677 $ 24,420,154

Fund Balance per Agency 27,250,677 24,420,154

Reconciling Amount $ 0 $ 0
U.S. Department of Defense Agency Financial Report for FY 2014

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-14

Status of Fund Balance with Treasury Dollars in Thousands

As of September 30 2014 2013

Unobligated Balances

Available $ 29,767 $ 112,117

Unavailable 141,829 56,921

Total Unobligated Balance 171,596 169,038

Obligated Balance not yet Disbursed 140,170,016 131,464,580

Non-Budgetary FBWT 0 26,651,365

Non-FBWT Budgetary Accounts (113,090,935) (133,864,829)

Total Fund Balance $ 27,250,677 $ 24,420,154

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-budgetary FBWT includes accounts without budgetary authority, such as deposit funds, 

unavailable receipt accounts, clearing accounts and nonentity FBWT. The 2013 balance in 

Non-budgetary FBWT consisted of Contingency Operations provided to Department of 

Defense in supplemental appropriations, and Contingency Operations funding transferred 

from Department of State (DOS), which DOS received in supplemental appropriations. 

Obligations are incurred using contract authority and liquidated with these appropriations. 

Non-FBWT Budgetary Accounts reduces the Status of FBWT. The Non-FBWT Budgetary 

Accounts primarily consists of nonentity cash deposited in the Federal Reserve Bank and 

contract authority.

NOTE 4. ACCOUNTS RECEIVABLE

Accounts Receivable Dollars in Thousands

2014

As of September 30

Gross Amount Due

Allowance for 

Estimated 

Uncollectibles

Accounts 

Receivable, Net

Intragovernmental Receivables $ 0 N/A $ 0

Nonfederal Receivables 

(From the Public) 31,082 (68) 31,014

Total Accounts Receivable $ 31,082 $ (68) $ 31,014
U.S. Department of Defense Agency Financial Report for FY 2014

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-15

Accounts Receivable Dollars in Thousands

2013

As of September 30

Gross Amount Due

Allowance for 

Estimated 

Uncollectibles

Accounts 

Receivable, Net

Intragovernmental Receivables $ 0 N/A $ 0

Nonfederal Receivables 

(From the Public) 20,913 (7) 20,906

Total Accounts Receivable $ 20,913 $ (7) $ 20,906

Other Disclosures

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. Claims with other federal agencies are 

resolved in accordance with the Intragovernmental Business Rules.

Note 5. Other Assets

Other Assets Dollars in Thousands

As of September 30 2014 2013

Nonfederal Other Assets

Outstanding Contract Financing Payments $ 3,595,335 $ 3,497,621

Advances and Prepayments 26,621,746 28,304,313

Total Nonfederal Other Assets $ 30,217,081 $ 31,801,934

Total Other Assets $ 30,217,081 $ 31,801,934

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 $2.1 billion in contract 

financing payments and an additional $1.5 billion in estimated future payments to 

contractors upon delivery and government acceptance of a satisfactory product. See 

additional discussion in Note 11, Other Liabilities.
U.S. Department of Defense Agency Financial Report for FY 2014

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 2014 2013

Cash $ 20,539,802 $ 20,593,988

Total Cash, Foreign Currency, and Other Monetary Assets $ 20,539,802 $ 20,593,988

Restricted cash of $20.5 billion includes advance deposits from foreign nations in the 

Federal Reserve Bank which have not been transferred to the Foreign Military Sales Trust 

Fund and are not available for agency use (nonentity cash).

NOTE 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 Direct Loan Program, for post-1991 loans

• Financing Accounts for post-1991 loans, 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.

Foreign Military Financing Direct Loan Program Account (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 Foreign Military Financing Direct Loan Financing 

Account (FMFDLFA) to make required loan disbursements for approved Foreign Military 

Sales or commercial sales. 

The Foreign Military Direct Loan Program is still active with one outstanding loan with 
U.S. Department of Defense Agency Financial Report for FY 2014

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-17

Poland. Poland's loan works as a line of credit but has not been used since 2010. 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.

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 2014 2013

Loans Receivable

Direct Loans

Foreign Military Loan Liquidating Account $ 647,404 $ 733,641

Foreign Military Financing Account 0 (27,111)

Military Debt Reduction Financing Account (7,871) 17,445

Total Loans Receivable $ 639,533 $ 723,975
U.S. Department of Defense Agency Financial Report for FY 2014

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-18

Direct Loans Obligated Dollars in Thousands

As of September 30 2014 2013

Direct Loans Obligated After FY 1992 

(Allowance for Loss Method)

Foreign Military Loan Liquidating Account

Loans Receivable Gross $ 377,627 $ 480,672

Interest Receivable 1,835,074 1,744,628

Allowance for Loan Losses (1,565,297) (1,491,659)

Value of Assets Related to Direct Loans, Net $ 647,404 $ 733,641

Direct Loans Obligated After FY 1991 

(Present Value Method)

Foreign Military Financing Account

Allowance for Subsidy Cost (Present Value) $ 0 $ (27,111)

Value of Assets Related to Direct Loans $ 0 $ (27,111)

Military Debt Reduction Financing Account

Allowance for Subsidy Cost (Present Value) $ (7,871) 17,445

Value of Assets Related to Direct Loans, Net $ (7,871) $ 17,445

Total Direct Loans Receivable $ 639,533 $ 723,975

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. 

Schedule for Reconciling Subsidy Cost Allowance Balances

For Post-FY 1991 Direct Loans Dollars in Thousands

As of September 30 2014 2013

Beginning Balance, Changes, and Ending Balance

Beginning Balance of the Subsidy Cost Allowance $ 9,666 $ 11,374

Adjustments

Subsidy Allowance Amortization (1,795) (1,708)

Total of the above Adjustment Components $ (1,795) $ (1,708)

Ending Balance of the Subsidy Cost Allowance before Reestimate $ 7,871 $ 9,666

Ending Balance of the Subsidy Cost Allowance $ 7,871 $ 9,666
U.S. Department of Defense Agency Financial Report for FY 2014

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-19

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 2014 2013

Intragovernmental Liabilities

Other $ 145 $ 139

Total Intragovernmental Liabilities $ 145 $ 139

Nonfederal Liabilities

Military Retirement and Other Federal Employment Benefits 648 595

Total Nonfederal Liabilities 648 595

Total Liabilities Not Covered by Budgetary Resources 793 734

Total Liabilities Covered by Budgetary Resources $ 69,448,868 $ 68,539,458

Total Liabilities $ 69,449,661 $ 68,540,192

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 $647.7 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.

NOTE 9. ACCOUNTS PAYABLE

Accounts Payable Dollars in Thousands

2014

As of September 30

Accounts Payable

Interest, Penalties, 

and Administrative 

Fees

Total

Intragovernmental Payables $ 329,951 N/A $ 329,950

Nonfederal Payables

(To the Public) 355,870 0 355,870

Total Accounts Payable $ 685,821 $ 0 $ 685,820
U.S. Department of Defense Agency Financial Report for FY 2014

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-20

Accounts Payable Dollars in Thousands

2013

As of September 30

Accounts Payable

Interest, Penalties, 

and Administrative 

Fees

Total

Intragovernmental Payables $ 266,922 N/A $ 266,922

Nonfederal Payables

(To the Public) 400,521 0 400,521

Total Accounts Payable $ 667,443 $ 0 $ 667,443

Accounts Payable 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.

NOTE 10. DEBT

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

Debt Dollars in Thousands

2013

As of September 30 Beginning Balance Net Borrowing Ending Balance

Agency Debt 

(Intragovernmental)

Debt to the Treasury $ 33,967 $ 1,708 $ 35,675

Debt to the Federal Financing 

Bank 190,191 (109,262) 80,929

Total Debt $ 224,158 $ (107,554) $ 116,604

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 
U.S. Department of Defense Agency Financial Report for FY 2014

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-21

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 2014

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-22

NOTE 11. OTHER LIABILITIES

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

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

Other Liabilities Dollars in Thousands

2013

As of September 30 Current Liability Noncurrent 

Liability Total

Intragovernmental

FECA Reimbursement to the 

Department of Labor $ 59 $ 81 $ 140

Custodial Liabilities 0 652,711 652,711

Total Intragovernmental Other 

Liabilities $ 59 $ 652,792 $ 652,851

Nonfederal

Accrued Funded Payroll and 

Benefits $ 44 $ 0 $ 44

Advances from Others 63,474,620 3,477,539 66,952,159

Contract Holdbacks 150,496 0 150,496

Total Nonfederal Other 

Liabilities $ 63,625,160 $ 3,477,539 $ 67,102,699

Total Other Liabilities $ 63,625,219 $ 4,130,331 $ 67,755,550

Advances from Others represent liabilities for collections received to cover future expenses 

or acquisition of assets.

Custodial Liabilities represents liabilities for collections reported as non-exchange revenues 

where the Department is acting on behalf of another Federal entity.

Contract Holdbacks are amounts earned by contractors or suppliers during the production 

period but not yet paid to the contractor/supplier to ensure future performance.
U.S. Department of Defense Agency Financial Report for FY 2014

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-23

Other Liabilities

Nonfederal Advances from Others, Noncurrent includes $3.6 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

2014

As of September 30

Liabilities

(Less: Assets 

Available to Pay 

Benefits)

Unfunded 

Liabilities

Pension and Health Actuarial Benefits

FECA $ 648 $ 0 $ 648

Total Military Retirement and Other Federal 

Employment Benefits $ 648 $ 0 $ 648
U.S. Department of Defense Agency Financial Report for FY 2014

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 using the Office of Management and Budget’s economic 

assumptions for 10-year Treasury notes and bonds. Interest rate assumptions utilized for 

discounting were as follows:

Discount Rates

3.455% in Year 1

3.455% in Year 2 and thereafter

To provide more specifically for the effects of inflation on the liability for future workers’ 

compensation benefits, wage inflation factors (cost of living adjustments or COLAs) and 

medical inflation factors (consumer price index medical or CPIMs) were applied to the 

calculation of projected future benefits. The actual rates for these factors for the charge 

back year (CBY) 2014 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

2015 1.73% 2.93%

2016 2.17% 3.76%

2017 2.13% 3.86%

2018 2.23% 3.90%

2019+ 2.30% 3.90%

Federal Employment Benefits Dollars in Thousands

2013

As of September 30

Liabilities

(Less: Assets 

Available to Pay 

Benefits)

Unfunded 

Liabilities

Pension and Health Actuarial Benefits

FECA $ 595 $ 0 $ 595

Total Military Retirement and Other Federal 

Employment Benefits $ 595 $ 0 $ 595
U.S. Department of Defense Agency Financial Report for FY 2014

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-25

The model’s resulting projections were analyzed to ensure that the estimates were reliable. 

The analysis was based on four tests: (1) a sensitive analysis of the model to economic 

assumptions, (2) a comparison of the percentage change in the liability amount by agency 

to the percentage change in the actual incremental payments, (3) a comparison of the 

incremental paid losses per case (a measure of case-severity) in CBY 2014 to the average 

pattern observed during the most current three CBYs, and (4) a comparison of the 

estimated liability per case in the CBY 2014 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 2014 2013

Operations, Readiness & Support

Gross Cost

Intragovernmental Cost $ 8,555,546 $ 7,424,481

Nonfederal Cost $ 26,330,780 $ 23,481,664

Total Cost $ 34,886,326 $ 30,906,145

Earned Revenue

Intragovernmental Revenue $ (32) $ 0

Nonfederal Revenue $ (5,858) $ (14,556)

Total Revenue $ (5,890) $ (14,556)

Total Net Cost $ 34,880,436 $ 30,891,589

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 
U.S. Department of Defense Agency Financial Report for FY 2014

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-26

between federal and nonfederal expenses and accruing additional payables and expenses. 

Intradepartmental revenues and expenses are then eliminated. 

NOTE 15. DISCLOSURES RELATED TO THE STATEMENT OF CHANGES IN NET 

POSITION

The Appropriations on the SBR does not agree with the Appropriations Received on the 

Statement of Changes in Net Position. The difference of $710.8 million is primarily 

attributable to the period of availability extension within the Foreign Military Financing 

Program account.

Year Ended September 30, 2014

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 $ 6,735,612

Less: Appropriations Received, Statement of Changes in Net Position (6,024,853)

Total Reconciling Amount $ 710,759

Items Reported as Increases to Appropriations, Statement of Budgetary Resources

Allocation Transfers $ 710,759

Items Reported in Net Cost of Operations, Statement of Changes in Net Position

Total Reconciling Items $ 710,759

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 2014 2013

Net Amount of Budgetary Resources Obligated for Undelivered Orders at 

the End of the Period. $ 159,932,064 $ 153,849,411

On the Statement of Budgetary Resources (SBR), obligations incurred of $41.9 billion are 

direct and exempt from apportionment.

The SBR includes intra-entity transactions because the statements are presented combined.

Borrowings from the U.S. Treasury are required to be repaid once a year at the end of the 

fiscal year. The financing sources for the repayments on borrowings are loan repayments 

from the countries or permanent indefinite appropriations through subsidy reestimates.

The portions of the 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 
U.S. Department of Defense Agency Financial Report for FY 2014

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-27

Loan Liquidating Account.

The Appropriations on the SBR does not agree with the 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 2014 2013

Resources Used to Finance Activities

Budgetary Resources Obligated

Obligations incurred $ 41,960,551 $ 21,637,738

Less: Spending authority from offsetting collections and recoveries (1,108,237) (529,970)

Obligations net of offsetting collections and recoveries $ 40,852,314 $ 21,107,768

Less: Offsetting receipts (29,267,942) (26,651,359)

Net Budgetary Resources Obligated $ 11,584,372 $ (5,543,591)

Total resources used to finance activities $ 11,584,372 $ (5,543,591)

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 $ (6,082,652) $ 9,644,116

Budgetary offsetting collections and receipts that do not affect Net Cost 

of Operations 29,380,451 26,792,680

Resources that finance the acquisition of assets (1,794) (1,709)

Total resources used to finance items not part of the Net Cost of 

Operations $ 23,296,005 $ 36,435,087

Total resources used to finance the Net Cost of Operations $ 34,880,377 $ 30,891,496

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 $ 59 $ 93

Total components of Net Cost of Operations that will Require or 

Generate Resources in future periods $ 59 $ 93

Components not Requiring or Generating Resources

Total components of Net Cost of Operations that 

will not Require or Generate Resources in the current period $ 59 $ 93

Net Cost of Operations $ 34,880,436 $ 30,891,589

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.
U.S. Department of Defense Agency Financial Report for FY 2014

APPENDIX A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-28

The following Reconciliation of Net Cost of Operations to Budget lines are presented as 

combined instead of consolidated due to intraagency budgetary transactions not being 

eliminated:

Obligations Incurred

Less: Spending Authority from Offsetting Collections and Recoveries

Obligations Net of Offsetting Collections and Recoveries

Less: Offsetting Receipts

Net Obligations

Undelivered Orders

Unfilled Customer Orders

Due to the Foreign Military Sales Trust Fund system limitations, budgetary data is not in 

agreement with proprietary expenses and assets capitalized. The difference between 

budgetary and proprietary data is a previously identified deficiency.

Components Requiring or Generating Resources in Future Period, Other is attributable to 

Federal Employee Compensation Act actuarial expense.
U.S. Department of Defense Agency Financial Report for FY 2014

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 2014

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 2014

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 2014

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 2014

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/dbc-irb.html

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 & Accounting Service http://www.dfas.mil

Defense Health Agency http://tricare.mil/tma/

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.dtic.mil/dpmo/

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.html

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/

DoD Managers’ Internal Control 

Program

http://comptroller.defense.gov/fiar/micp.aspx

DoD, Office of the Inspector General http://www.dodig.mil/
U.S. Department of Defense Agency Financial Report for FY 2014

APPENDIX C Useful Web Sites

C-2

Link URL

DoD Strategic Management Plan http://dcmo.defense.gov/publications/strategicmanagement-plan.html

Federal Accounting Standards 

Advisory Board

http://fasab.gov/accounting-standards/authoritativesource-of-gaap/

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 2014

APPENDIX D Index of Figures and Charts

D-1

APPENDIX D: INDEX OF FIGURES AND TABLES

FIGURES

Figure 1. Department of Defense FY 2014 Budget Authority ....................................................... 4

Figure 2. Department of Defense Organization Structure ........................................................... 8

Figure 3. Office of the Secretary of Defense Principal Staff Assistants.......................................... 9

Figure 4. Reserve Forces and National Guard ......................................................................... 10

Figure 5. Defense Agencies and DoD Field Activities................................................................ 11

Figure 6. Combatant Commands........................................................................................... 12

Figure 7. Summary of Performance Results, Third Quarter FY 2014........................................... 14

Figure 8. DFAS Statistics FY 2014 ......................................................................................... 21

Figure 9. Trend in DoD Budget Authority ............................................................................... 22

Figure 10. Composition of DoD Total Budgetary Resources ........................................................ 22

Figure 11. Summary of Total Assets........................................................................................ 23

Figure 12. Summary of Total Liabilities.................................................................................... 24

Figure 13. Unfunded Liabilities ............................................................................................... 25

Figure 14. Summary of Net Cost of Operations......................................................................... 26

Figure 15. Financial Performance Summary ............................................................................. 27

Figure 16. General Funds Under Audit in FY 2015 ..................................................................... 29

Figure 17. The Department’s Integrated Business Framework .................................................... 35

Figure 18. DoD Financial Management Improvement Initiatives.................................................. 36

Figure 19. Improper Payment Rate – Military Pay ....................................................................150

Figure 20. Improper Payment Rate – Civilian Pay ....................................................................151

Figure 21. Improper Payment Rate – USACE Commercial Pay ...................................................154

Figure 22. Improper Payment Rate – Military Retirement..........................................................155

Figure 23. Improper Payment Rate – USACE Travel Pay ...........................................................157

TABLES

Table 1. DoD IG-Identified Material Weaknesses in Internal Controls Over Financial Reporting......131

Table 2a. Summary of DoD-Identified Material Weaknesses in Internal Controls Over

Financial Reporting...............................................................................................132

Table 2a-1. Brief Description of Material Weaknesses in Internal Controls Over Financial Reporting.133

Table 2b. Summary of DoD-Identified Material Weaknesses in Internal Controls Over 

Non-Financial Operations.......................................................................................139

Table 2b-1. Brief Description of Material Weaknesses in Internal Controls Over Non-Financial 

Operations ..........................................................................................................140

Table 2c. Conformance with Financial Management System Requirements (FMFIA Section 4) ......143

Table 2c-1. Brief Description, Material Weaknesses in Internal Controls over Financial Systems ......144

Table 2d. Compliance with Section 803(a) of FFMIA................................................................144

Table 3. Improper Payment Reduction Outlook.....................................................................159

Table 4. Payment Recapture Audit Reporting........................................................................163

Table 5. Payment Recapture Audit Targets...........................................................................164

Table 6. Aging of Outstanding Overpayments.......................................................................164

Table 7. Disposition of Recaptured Funds.............................................................................164

Table 8. Overpayments Recaptured Outside of Payment Recapture Audits ...............................165

Table 9. Implementation of the Do Not Pay Initiative ............................................................169

Table 10. Freeze the Footprint Baseline Comparison ...............................................................170

Table 11. Reporting of O&M Costs – Owned and Direct Lease Buildings .....................................170
U.S. Department of Defense Agency Financial Report for FY 2014

APPENDIX D Index of Figures and Charts

D-2

This Page Left Blank Intentionally
WELCOME TO THE 

DEPARTMENT OF DEFENSE

We are interested in your feedback 

regarding the content of this report.

Comments can be e-mailed to

osd.pentagon.ousd-c.mbx.dod-agency-financial-report@mail.mil 

Comments can be mailed to

United States Department of Defense

Office of the Under Secretary of Defense (Comptroller)

1100 Defense Pentagon, Room 3D150

Washington, DC 20301‐1100

This document can be viewed at

http://comptroller.defense.gov/FinancialManagement/Reports/afr2014.aspx/

KNOW YOUR BUSINESS

CONTROL YOUR FUTURE

FINANCIAL IMPROVEMENT AND AUDIT READINESS