Financial Management: DOD Needs to Expedite Plans to Implement Deferred Maintenance Accounting Standard

Published by the Government Accountability Office on 1997-09-30.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

        United States
GA!!0   General Accounting Office
        Washington, D.C. 20548

        Accounting and Information
        Management Division


        September 30, 1997

        Ms. Alice C. Maroni
        Acting Under Secretary of Defense (Comptroller)

        The Honorable R. Noel Longuemare
        Acting Under Secretary of Defense (Acquisition and Technology)

        Subject:    Financial Management: DOD Needs to Expedite Plans to Implement
                    Deferred Maintenance Accounting Standard

        Recent laws’ have enhanced the legislative requirements to provide
        pohcymakers and agency program managers with more reliable financial
        information to formulate budgets, manage government programs, and help make
        difficult policy choices. Because informed decision-making is made more
        difficult by incomplete and unreliable information on the cost and consequences
        of government programs and activities, these laws have made implementation of
        new: accounting standards and audited federal financial statements a priority.
        New federal financial accounting standards have been adopted to enhance
        federal financial statements by showing the financial results of government
        agencies’entire operations and providing relevant information on agencies’
        financial status-information that has never before been required in this form.
        This letter discusses one such requirement for information related to deferred
        maintenance on mission assets2

        ‘The Chief Financial Officers Act (CFO) of 1990, the Government Management
        Reform Act (GMRA) of 1994, and the Federal Financial Management
        Improvement Act of 1996.

        “Statement of Federal Financial Accounting Standard (SFFAS) No. 6, Accounting
        for Pronertv. Plant. and Eauinment, dated November 30, 1995, defines federal
        mission property, plant, and equipment as possessing certain characteristics
        related to (1) its use, such as having no expected nongovernmental uses, and
        (2) its useful life, such as a very high risk of being destroyed in use or
        premature obsolescence.
                                        GAO/AIMD-97-159R DOD Deferred Maintenance
Beginning with fiscal year 1998, federal accounting standards require agencies
to disclose in their financial statements the amount of deferred maintenance
related to property, plant, and equipment, including mission assets. For the
Department of Defense (DOD), mission assets such as submarines, ships,
aircraft, and combat vehicles are a major category of property, plant, and
equipment. For fiscal year 1996, DOD reported over $590 billion in this asset
category. Accurate reporting of deferred maintenance is important for key
decisionmakers such as the Congress and DOD, including military service
managers. Further, deferred maintenance applicable to mission assets, if
reliably quantified and reported, can be an important performance indicator of
mission asset condition (a key readiness factor), as well as an indicator of the
proper functioning of maintenance and supply lines. While the existence of
deferred maintenance may also indicate a need for additional resources for
maintenance, such resources may already be available within the current
funding of the services.

The purpose of this letter is to report on the status of DOD’s efforts to develop
agencywide policies to address the deferred maintenance standard for mission
assets and to emphasize the importance of developing timely DOD-wide
guidance. This is the first in a series of reviews that will address DOD’s
implementation of the deferred maintenance standard, including separate
reports on issues related to Army and Navy.


The development of DOD policy and implementing guidance for deferred
maintenance is essential to ensure consistent reporting among the services and
to facilitate the preparation of accurate DOD-wide financial statements,
particularly since the new accounting standard provides extensive management
flexibility in implementing the disclosure requirement. During our ongoing
work on identifying and disclosing deferred maintenance on mission assets,
both Army and Navy officials stated that they were reluctant to develop
procedures to implement the required accounting standard until DOD issues
overall policy guidance.

Accotiting policy officials within the Office of the Under Secretary of Defense,
Comptroller (OUSD(C)), stated that they plan to issue DOD-wide policy
guidance in the DOD Financial Management Regulation after OUSD(C) and the
Under Secretary of Defense (Acquisition and Technology) review the results of
a study by a nonprofit organization. This study is expected to identify and
evaluate alternative reporting approaches. The officials then plan to provide
financial management and logistic policy guidance as appropriate for deferred
maintenance. OUSD (Acquisition and Technology) maintenance policy staff

                                  GAO/AJMD-97-159RDOD Deferred Maintenance
plan to award the task order for this study in October 1997 and expect the
results in 6 to 9 months. However, under this time frame, the military services
may not have the DOD-wide guidance in tie to develop service-specific
policies and procedures for collecting deferred maintenance data for the fiscal
year 1998 financial statements.


To assess progress made in implementing the requirements to disclose mission
assets and associated deferred maintenance, we reviewed regulations and
pertinent documentation at DOD headquarters and various organizational levels
within DOD and the Departments of the Army and Navy and interviewed
responsible officials. Our work focused on Army and Navy because they
account for most of the major classes of mission assets found throughout DOD.

We conducted our review from May 1997 through September 1997 in
accordance with generally accepted government auditing standards. This work
was part of our broader reviews of factors that DOD, Army, and Navy need to
address in developing deferred maintenance policy and guidance. We requested
comments on a draft of this report from the Secretary of Defense or his
designee. The Acting Under Secretary of Defense (Comptroller) provided us
with written comments, which are discussed in the “Agency Comments and Our
Evaluation” section and are reprinted in enclosure I.


Statement of Federal Financial Accounting Standards (SFFAS) No. 6,
Accounting for Proper-&. Plant. and Eauinment, issued on November 30, 1995,
requires the disclosure of deferred maintenance in agencies’financial
statements for the fiscal year beginning October 1, 1997. SFFAS No. 6 defines
deferred maintenance 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.” It includes preventive maintenance and normal repairs, but
excludes modifications or upgrades that are intended to expand the capacity of
an asset. The deferred maintenance standard applies to all property, plant, and
equipment, including mission assets that will be reported on the supplementary
stewtidship report3 Federal mission assets specifically include weapons

%atement of Federal Financial Accounting Standards No. 8, Sunolementarv
Stewardship Reporting, requires the reporting of federal mission property, plant,
and equipment on the supplementary stewardship report.

                                 GAO/AIMD-97-159R DOD Deferred Maintenance

systems, such as fighter/attack aircraft, submarines, and tracked combat

SFFAS No. 6 recognizes that there are many variables in estimating deferred
maintenance amounts. For example, the standard acknowledges that
determining the condition of the asset-condition rating-is a management
function because different conditions might be considered acceptable by
different entities or for different items of property, plant, and equipment held by
the same entity. Amounts disclosed for deferred maintenance may be measured
using condition assessment surveys4 or life-cycle cost forecasts5 Therefore,
SFFAS No. 6 provides flexibility for agencies’mauagement 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.

SFFAS No. 6 also has an optional disclosure for stratification between critical
and noncritical amounts of maintenance needed to return each major class of
asset to its acceptable operating condition. If management elects to disclose
critical and noncritical amounts, the disclosure must include management’s
definition of these categories.


As of September 30, 1997, DOD accounting policy and implementing guidance
for the disclosure of deferred maintenance had not been developed. Officials
from both Office of the Secretary of Defense (OSD) offices responsible for
developing implementation guidance for SFFAS No. 6-accounting policy and
mtitenance policy-acknowledged the need for DOD policy guidance to ensure
consistent disclosure of deferred maintenance by the military services. The

‘Condition assessment surveys are periodic inspections of property, plant, and
equipment to determine their current condition and the estimated cost to
correct any deficiencies.
5Life-cycle costing is an acquisition or procurement technique which considers
operating, maintenance, and other costs in addition to the acquisition cost of
assets. Since it results in a forecast of maintenance expense, these forecasts
may serve as a basis against which to compare actual maintenance expense and
estimate deferred maintenance.
                                   GAO/AlMD-97-159R DOD Deferred Maintenance

officials stated that about a year ago the two offices started discussing how the
deferred maintenance definition should be applied to DOD’s mission assets.

Issuance of implementing policy guidance is particularly important for
disclosing deferred maintenance because operational and financial Army, Navy,
and DOD officials have varied positions regarding what constitutes deferred
maintenance. Consistent application of criteria for identifying and reporting
deferred maintenance is especially important in the case of similar or even
identical classes of assets held by two or more services. For example, DOD-
wide policy and guidance would help ensure that all services use the same
methodology in developing estimates of deferred maintenance for aircraft, a
weapon system common to all three services.

During our review, OUSD(C) accountmg policy officials advised us that they
planned to publish policy guidance in electronic form by October 1, 1997. They
recognized that the military services must have guidance available at the
beginning of the fiscal year to establish their own policies, develop
implementation plans, and ensure that appropriate processes are in place to
collect the needed data to properly disclose deferred maintenance at yearend.
According to OUSD(C) officials, the planned DOD-wide policy would consist of
reiterating the federal financial accounting standards related to deferred
maintenance in DOD’s Financial Management Regulation without further
guidance at that time. However, after we received DOD’s official comments, the
Deputy CFO advised us on September 30, 1997, that DOD now plans to await
the results of the I&H study, as discussed below, before issuing DOD-wide

OUSD (Acquisition and Technology) maintenance policy officials recently
requested fiscal year 1998 funds to engage a nonprofit organization, the
Logistics Management Institute (LMI), to identify and evaluate alternative
reporting approaches for deferred maintenance, recommend the best solution
from the Chief Financial Officer (CFO) and maintenance community
perspective, and recommend the necessary policy and reporting protocols.
DOD maintenance policy personnel expect to award a task order to LMI in
October 1997, with an estimated 6-month to g-month completion date. An
OUSD(C) official stated that once the information is obtained from LMI, policy
updates can easily be communicated because DOD’s Financial Management
Regulation is available electronically to all DOD staff.

We are encouraged by the collaborative and concurrent efforts of the
accountig policy and maintenance policy officials to develop meaningful
financial data that will be useful to both financial and program managers-a goal
of the recent laws to improve government performance and accountability.

                                 GAO/AIMD-97-159RDOD Deferred Maintenance

However, the timing of OUSD(C)‘s planned guidance may be problematic since
the overall results of the contract on which the guidance is to be based will not
be available until April 1998 at the earliest-assuming the study begins on
October 1,1997, and is completed within 6 months. Additional time would then
be needed for OUSD(C) staff to review the study results and develop specific
policies and procedures. Without accelerating the planned study completion
date, the military services may not have the guidance in time to develop service-
specific policies and procedures for collecting deferred maintenance data for
the tkcal year 1998 financial statements. The military services have emphasized
that they need the OUSD(C) guidance as soon as possible to ensure that they
have enough time to meet the deferred maintenance reporting requirements for
fiscal year 1998. We believe that such guidance needs to be issued no later than
March 1998 in order to allow the services time to take appropriate action and
accumulate the necessary data to ensure consistent DOD-wide implementation
for fiscal year 1998.

For example, Army officials stated that they needed timely OUSD(C) guidance
to ensure that they have the necessary procedures in place to accumulate the
needed data. In particular, Army officials were concerned that although they
have previously reported deferred maintenance at the depot level for budgetary
purposes, they were not certain whether these reports would be consistent with
OUSD(C) deferred maintenance policy guidance. Further, they were also
concerned that they did not have procedures or systems in place to quantify
deferred maintenance at the unit level. Because of the lead time necessary to
support disclosure of unit-level deferred maintenance, Army officials preferred
to know at the start of the fiscal year whether this would be required.

Similarly, Navy officials stated that they would prefer to have specific OUSD(C)
guidance as close to the beginning of the fiscal year as possible so that fleet
comptrollers can determine how the needed information will be derived. Navy
officials told us that they intend to obtain the data needed to disclose deferred
maintenance by relying on “data calls” in which financial management personnel
send out a request to all appropriate locations for the information. Navy
officials stated that at the latest, OUSD(C) guidance must be received by July
1998 to give them enough time to issue the data calls.

DOD-wide policy on identifying and disclosing deferred maintenance is
necessary to ensure consistent application of the accounting standards across
the military services. This is especially important because of the flexibility
provided by the standards and the various opinions among service officials as to
what constitutes deferred maintenance. The recent coordination effort between

                                 GAO/AIMD-97-159R DOD Deferred Maintenance

OUSD (C) accounting policy and OUSD (Acquisition and Technology)
maintenance policy staffs to issue a task order for the Logistics Management
Institute to help develop deferred maintenance policy is a positive step.
However, as indicated by Army and Navy officials, OUSD(C) implementing
guidance is needed as close to the start of fiscal year 1998 as possible to ensure
that the services have enough i&ue to implement service-specific policies and
procedures and derive the needed data for the 1isca3year-end.


We recommend that you

-   ensure that DOD-wide policy is in place as soon as possible so that DOD
    can comply with the fiscal year 1998 effective date of the deferred
    maintenance standard

-   establish milestones for key actions in the policy development process to
    help ensure issuance of the policy no later than March 1998; and

-   modify the proposed study with the Logistics Management Institute to
    accelerate completion of the deliverables to help achieve the March time


In commenting on a draft of this report (see enclosure I), the Department of
Defense generally concurred with the report and the intent of our

We recommended that milestones be established for key actions in the policy
development process to help ensure issuance of the DOD-wide implementing
policy for the deferred maintenance standard no later than March 1998. In
response to our recommendation that DOD accelerate completion of the LMI
study results to achieve the March time frame for issuing implementing
guidance, DOD stated that the Office of the Assistant Under Secretary of
Defense (Maintenance Policy, Programs and Resources) will investigate the
feasibility of expediting the completion date of the LMI study to March 1998.

In order to be fully responsive to our recommendations, DOD will soon need to
establish several additional important interim milestone dates. While DOD
responded that it has established key milestones, the only milestone established
is the September 30, 1998, date for publishing DOD guidance on form and
content of financial statements for fiscal year 1998. DOD has not yet

                                 GAO/AIM&97-159R DOD Deferred Maintenance
established milestones for key actions (such as reviewing study results, drafting
implementing guidance, and coordinating with the military services), as
intended by our recommendation, to ensure that it has time to incorporate the
results of the LMI study into implementing policy and to publish that policy no
later than March 1998. As emphasized in our report, we believe it is important,
especially in light of the varied opinions of DOD officials on what constitutes
deferred.maintenance, that the policy guidance be expanded beyond a
reiteration of the standard to address its specific application in DOD to help
ensure consistent disclosure of deferred maintenance by the military services.
Clearly, for DOD to have sufficient time to use those results to develop its
policy, coordinate with the military services, and publish the policy within this
time frame, the results must be available before March.

This report contains recommendations to you. Within 60 days of the date of
this letter, we would appreciate receiving your written statement on actions
taken to address these recommendations.

We are sending copies of this letter to the Chairmen and Ranking Minority
Members of the Senate Committee on Appropriations, the Senate Committee on
Armed Services, the House Committee on National Security, the Senate
Committee on Governmental Affairs, and the House Committee on Government
Reform and Oversight. We are also sending copies to the Director of the Office
of Management and Budget and the Secretary of Defense; the Assistant
Secretaries for Financial Management for the Air Force, Army, and Navy; and
the Acting Director, Defense Finance and Accounting Service. Copies will be
made available to others upon request.

During our work on deferred maintenance at both the Army and Navy, we have
collected information that may be useful to you in developing policies and
procedures for identifying and disclosing deferred maintenance. We will be
issuing reports on these issues but are &o available to discuss this information
with you at your convenience. Please contact me at (202) 512-9095to arrange a
meeting or if you or your staffs have any questions concerning this letter.
Major contributors to this letter are listed in enclosure II.

Lis<G. Jacobso!
Director, Defense Audits


                                  GAO/AIMD-97-159R DOD Deferred Mtitenance
ENCLOSURE I                                                                                  ENCLOSURE I


                                         UNDER     SECRETARY       OF DEFENSE
                                                1100 DEFENSE   PENTAGON
                                              WASHINGTON.    DC 20301-I    100

                   Assistant Compuolkr General
                   Accounting and Information MauagcmentDivision
                   United StatesGeneralAccounting Office
                   Washington.DC 20548

                   Dear Mr. Dodaro:

                           ‘his is the Dqmment of Defensereqmsc to the GeneraiAccounting OBice (GAO)
                   draft report cmitlcd. “PlNAXIAL MANAGEMENT DoD Needsto Expedite Plans to
                   Implernext DeferredMainmancc AccountingStandard,”dated@ember 4,1997
                   (GAO Code 918876IOSDCase1458).

                         The Ilkp~ent gumlly concurswith Thedlaft teporL Enclosedis the Dqanment’s
                   rcsponscto the repon’s Ecommendation.

                          The Dcpattmentappreciatesthe oppomnity to commenton the subjectdraft report

                                                               Acting Under Sccretaq of Defense



                                                    GAO/AIMD-97-159R DOD Deferred Maintenance
       ENCLOSURE I                                                                                     ENCLOSURE I

                                     GAO DRAET REPORT - DATED SRPTEMRER 4,W7
                                           OSD CASE 1458, GAO CODE 918876

                               ‘~AWIAL   MANAGEMENT: DOD NEEDS TO EXPEDITE PLANS TO

                                         DEPARTMENT   OF DEFENSE COMMENTS ON
                                                THE GAO RECOMMENDATlON

                 Recommendationt    The GAO recommelldedthattheunder secraary of Defense(comptroller)
                 and the Under Secrctq of Defense(Acquisition and Technology),coliabo&vely,

                         - ensurethatOSDpolicyisinplaceassoonas~siblesothatDoDcancomplywith
                 the fiscal year 1998 effcctiYedateof the deferredmaintenanceslanda&

                           - establishmilestonesfor key actionsin the policy developmentprocessto help ensure
                     issuanmof the policy no later than March 1998;and

                               modify the proposedstudy with the Logistics Managcmcntinstitute to accelerate
                     completion of the deliverablesto help achievethe March time frame. ip. 1l/GAO Draft Report)

                     DOD Remonsec Concur with the intent of the rccommendatiorLThe ousD(c) ahcadyhas
                     establishedkey milestonesnot only for publishing DOD-widefinancial managmmt policy in the
                     “DOD Facial ManagementRegulation”(DoD 7ooO.14-R),including DOD’s form and content
                     guidancefor the preparationof financial statements,but also updatingthat policy guidance,if
See comment 1.       required,upon a joint review of the LMI study initiatal by the OADUSD@lPP&R). As correctly
                     statedin tbe draft audit repon the OUSD(C) plans to publish DoD-wide financial management
                     policy guidancefor defaxxi maintenancein the DOD 7000.14;R That policy guidance,as a
                     mioimum, is expectal to includethe fedaalwide accountingstandardon deferredmaintenance.
                     Additionally, “DoD Guidanceon Form and Contentfor CFO Fmial” is expectedto be
                     publishedin the DOD 7000.14-R The OADUSD(ME’P&R) will inves$gatethe feasibility of
                     expediting the completiondate of the LMI study to March 1998.

                                                                                     Enclosun to Letter - GAO
                                                                                   Draft Report- OSD Case 1458
                        ..-                                                                Page1 of 1

                                                              GAO/AIMD-97-159R DOD Deferred Maintenance
ENCLOSURE I                                                            ENCLOSURE I

The following is GAO’s comment on DOD’s letter dated September 23, 1997.


1. After we received DOD’s official comments, the Deputy CFO advised us on
   September 30, 1997, that DOD now plans to await the results of the LMI study before
   issuing the DOD-wide guidance. Accordingly, we have revised the appropriate
   sections of the report.

                                        GAO/AlMD-97-159R DOD Deferred Maintenance
ENCLOSURE II                                                   ENCLOSURE IT



Cleggett Funkhouser


Charnel Harlow
Seth Taylor


Rebecca Beale
Merle Courtney
Chris Rice
John Wren


(9 18876)

                                     GAO/AIMD-97-159R DOD Deferred Maintenance
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