PP&E consists of tangible assets, including land, that: (1) have an estimated useful life of 2 or more years, (2) are not intended for sale in the ordinary course of operations, and (3) have been acquired to be used or available for use by the entity. The amount of PP&E reported by agencies can aid in identifying agencies that may have deferred maintenance. These amounts only include PP&E owned by the federal government—not assets financed by the federal government but owned by other entities such as state and local governments. Table 1 presents the amount of PP&E reported for fiscal year 1996 by the 11 agencies that account for almost 99 percent of total reported PP&E. DOD is the largest single holder of PP&E in the federal government, controlling about 80 percent of the reported total, while the next largest holders—TVA, NASA and DOT—hold about 3 percent each. The new accounting requirements for deferred maintenance contained in SFFAS No. 6 have the potential to improve information on maintenance needs. SFFAS No. 6 requires that a line item for “deferred maintenance amounts” be presented on the statement of net cost. The statement of net cost is one of several financial statements. It is designed to report the gross and net costs of providing goods, services and benefits. Although no dollar amounts for deferred maintenance are to be reported on the statement of net cost itself and thus are not included in the net costs of activities, the explanatory notes to the financial statements must include dollar estimates of deferred maintenance. When agencies begin to disclose deferred maintenance in their fiscal year 1998 financial statements in compliance with the standard, the annual audits of agency financial statements will help ensure that whatever is reported is subject to independent scrutiny. As the objective of the financial statement audit is to obtain reasonable assurance about the financial statements as a whole, individually reported deferred maintenance amounts will receive varying levels of audit coverage depending on their materiality to the financial statements. Because of the nature of these estimates, the auditor’s assessment will depend in part, on management’s judgement of the asset condition, maintenance needs, and the methodology chosen to estimate deferred maintenance. Deferred maintenance is defined in SFFAS No. 6 as “maintenance that was not performed when it should have been or was scheduled to be and which, therefore, is put off or delayed for a future period.” Maintenance—described as the act of keeping fixed assets in acceptable condition—includes preventive maintenance and normal repairs, including the replacement of parts and structural components and other activities needed to preserve the asset so that it continues to provide acceptable service and achieve its expected life. Modifications or upgrades that are intended to expand the capacity of an asset are specifically excluded from the definition. SFFAS No. 6 recognizes that determining maintenance needs is a management function and accordingly allows management flexibility and judgment within broadly defined requirements. For example, the standard acknowledges that determining the asset condition—condition rating—is a management function because what constitutes acceptable condition may differ both across entities and for different items of PP&E held by the same entity. Under the standard, it is management’s responsibility to (1) determine the level of service and condition of the asset that are acceptable, (2) disclose deferred maintenance by major classes of assets, and (3) establish methods to estimate and report any material amounts of deferred maintenance. In addition, the standard has an optional disclosure for stratification between critical and noncritical amounts of maintenance. Management must decide whether to distinguish between critical and noncritical deferred maintenance amounts and, if it chooses to do so, what constitutes critical. Of the 11 agencies included in our review, nine agencies are required specifically to implement the standard for fiscal year 1998. TVA and USPS follow private sector practices in their financial statement reporting. However, TVA and USPS are included in the governmentwide financial statements and will be subject to reporting deferred maintenance under SFFAS No. 6 if their amounts prove material to the governmentwide statements. Treasury officials are addressing whether there are any significant issues regarding how to include entities in the consolidated statements that are not required to follow federal accounting standards, such as TVA and USPS. The objectives of our work were to (1) look at the plans and progress of the 11 agencies to implement the deferred maintenance requirements of SFFAS No. 6 and (2) obtain the official position of agency CFOs and IGs with respect to its implementation. To achieve these objectives we first reviewed SFFAS No. 6, including the significant considerations made by the board in developing the standard. We then developed an interview guide covering (1) previous agency experience with maintenance reporting, (2) agency management plans for and commitment to implementing deferred maintenance reporting in compliance with SFFAS No. 6, and (3) the status of agency policies and procedures for implementing such reporting. Interviews using this guide were held with 11 agency CFOs and their related staff. In addition, because of their experience with agency financial reporting, we developed an interview guide which was used to obtain agency IGs’ views about their agency’s readiness and progress towards implementing the deferred maintenance requirements and about any previous relevant audit reports. Interviews were conducted only with the IG’s at the nine agencies specifically required to implement the deferred maintenance requirements of SFFAS No. 6. Agency responses were confirmed with each agency’s CFO and IG to ensure that they accurately reflected the agency’s official position. Our work focused on departmental level implementation efforts rather than the work of individual bureaus within an agency. We also reviewed agency financial statements, relevant policy documentation, and prior GAO and IG reports on deferred maintenance. We requested written comments on a draft of this report from agency officials. Several agencies provided comments of a technical nature which were incorporated into this report. The Deputy CFO for DOT and the Under Secretary of Defense provided us with formal written comments, which are reprinted in appendixes XII and XIII, respectively. We conducted our work from September through November 1997 in accordance with generally accepted auditing standards. Throughout the rest of the report, unless otherwise noted, agencies refers to the nine agencies specifically required to implement the deferred maintenance requirements of SFFAS No. 6 for fiscal year 1998. Historically, deferred maintenance reporting was not required, thus agencies have limited experience in developing agencywide estimates of deferred maintenance or maintenance backlogs. Although all agencies said that they have estimated maintenance needs for ad hoc and budgetary purposes, only two agencies—DOI and NASA—indicated that they have made agencywide deferred maintenance estimates. These estimates have not been audited to ensure their reliability or conformance with the new requirements included in SFFAS No. 6. Four other agencies—USDA, State, DOT, and DOD—have previously made at least partial estimates of deferred maintenance for other than financial statement reporting purposes. USDA noted that its deferred maintenance estimate included activities to expand and upgrade PP&E items—which are not considered deferred maintenance under SFFAS No. 6. State’s estimate of deferred maintenance is based upon an inventory of known facility maintenance requirements. However the CFO for State cautioned that not all of these known requirements may be deferred maintenance as defined by SFFAS No. 6. DOT noted that its estimates of deferred maintenance included the Maritime Administration and the Federal Aviation Administration, but did not include the Coast Guard. Similarly, DOD cited Air Force estimates for deferred maintenance for depot and real property but had no agencywide estimate. Three agencies—DOE, GSA, and VA—did not have deferred maintenance estimates. Although DOE was able to provide policies requiring field offices/sites to manage their maintenance backlogs, the Acting CFO told us the department has no requirement for reporting to headquarters. None of the deferred maintenance estimates, including the agencywide estimates, had been subject to an independent audit. GAO and IG reports have questioned the validity of agency estimates of deferred maintenance and maintenance backlogs. For example, GAO reports on the DOI’s National Park Service confirmed deteriorating conditions at the National Parks but questioned whether the Park Service had adequate financial and program data or controls to know the nature or extent of resource problems or the effectiveness of measures taken to address the problems. Similarly, a 1993 Department of State IG report found that while the department had progressed in identifying its maintenance and repair deficiencies, information on the maintenance backlog had not been summarized, quantified or monitored. Further, the size and scope of DOD PP&E creates special problems in its reporting of deferred maintenance, many of which have been previously reported by GAO. As noted in our May 1997 report, DOD’s changes in its definition of backlogs have led to large decreases in its “unfunded requirements” for maintenance. We also noted that the military services have expressed concern about the adequacy of funding to maintain and repair all of their facilities and have reported growing maintenance and repair backlogs. However, the services also have many excess buildings which could be demolished to avoid millions of dollars of recurring maintenance costs. Also, we recently reported that, while military service installation officials cited increases in backlogs of deferred maintenance and repair projects in recent years, reliable composite information was not available due to differences in how services develop and maintain these data. Further, recent efforts by the Office of the Secretary of Defense to develop a comprehensive system for performing facilities condition assessment have not been successful and systems maintained by the individual services vary in terms of their capabilities to identify funding requirements. Most recently, we reported on DOD’s plans to implement the deferred maintenance requirements for national defense assets, noting that DOD needs to expedite plans to implement this new disclosure.