Financial Management: Issues to Be Considered by DOD in Developing Guidance for Disclosing Deferred Maintenance on Aircraft

Published by the Government Accountability Office on 1997-12-30.

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

                 United States General Accounting Office

GAO              Report to Agency Officials

December 1997
                 Issues to Be Considered
                 by DOD in Developing
                 Guidance for Disclosing
                 Deferred Maintenance
                 on Aircraft

      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Accounting and Information
      Management Division


      December 30, 1997

      The Honorable William J. Lynn, III
      The Under Secretary of Defense (Comptroller)

      The Honorable Deborah P. Christie
      The Assistant Secretary of the Navy
        (Financial Management and Comptroller)

      Recent laws have enhanced the legislative requirements to provide
      policymakers and agency program managers with more reliable financial
      information to formulate budgets, manage government programs, and help
      make difficult policy choices.1 Recognizing the extent of incomplete and
      unreliable information on the cost and consequences of government
      programs and activities, these laws have made implementing new
      accounting standards and audited federal financial statements a priority.
      New federal financial accounting standards have been adopted to enhance
      federal financial statements by requiring that government agencies show
      the financial results of their entire operations and provide relevant
      information on their financial status. This report discusses one such
      requirement for valuable information related to deferred maintenance on
      mission assets.2 The second in a series of reports on the Department of
      Defense’s (DOD) implementation of this requirement, this report focuses on
      Navy aircraft.3 We are not making recommendations in this report. Rather,
      we are identifying specific issues that need to be considered in carrying
      out the basic recommendation in our September 30, 1997, letter to
      expedite plans to implement the deferred maintenance standard.

      Accurate reporting of deferred maintenance is important for key
      decisionmakers, such as the Congress, DOD, and Navy 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

      The Chief Financial Officers Act of 1990, the Government Performance and Results Act of 1993, the
      Government Management Reform Act of 1994, and the Federal Financial Management Improvement
      Act of 1996.
       Statement of Federal Financial Accounting Standard No. 6, Accounting for Property, Plant, and
      Equipment, 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
      See Financial Management: DOD Needs to Expedite Plans to Implement Deferred Maintenance
      Accounting Standard (GAO/AIMD-97-159R, September 30, 1997).

      Page 1                                GAO/AIMD-98-25 Aircraft Deferred Maintenance Guidance

             deferred maintenance may indicate a need for additional resources for
             maintenance, such resources may already be available within the current
             funding of the military services.

             In October 1990, the Federal Accounting Standards Advisory Board
Background   (FASAB) was established by the Secretary of the Treasury, the Director of
             the Office of Management and Budget (OMB), and the Comptroller General
             of the United States to consider and recommend accounting standards to
             address the financial and budgetary information needs of the Congress,
             executive agencies, and other users of federal financial information. Using
             a due process and consensus building approach, the nine-member Board,
             which has since its formation included a member from DOD, recommends
             accounting standards for the federal government. Once FASAB recommends
             accounting standards, the Secretary of the Treasury, the Director of OMB,
             and the Comptroller General decide whether to adopt the recommended
             standards. If they are adopted, the standards are published as Statements
             of Federal Financial Accounting Standards (SFFAS) by OMB and GAO. In
             addition, the Federal Financial Management Improvement Act of 1996 as
             well as the Federal Managers’ Financial Integrity Act of 1982, require
             federal agencies to implement and maintain financial management systems
             that will permit the preparation of financial statements that substantially
             comply with applicable federal accounting standards.

             SFFAS No. 6, Accounting for Property, Plant, and Equipment, 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—which will be reported on the
             supplementary stewardship report.4 For DOD, mission assets, such as
             submarines, ships, aircraft, and combat vehicles, is a major category of
             property, plant, and equipment. In fiscal year 1996, DOD reported over
             $590 billion in this asset category, of which over $297 billion belonged to
             the Navy.

               SFFAS No. 8, Supplementary Stewardship Reporting, requires the reporting of federal mission
             property, plant, and equipment on the supplementary stewardship report for the fiscal years beginning
             October 1, 1997. Prior to this standard, these assets were reported on the Statement of Financial

             Page 2                               GAO/AIMD-98-25 Aircraft Deferred Maintenance Guidance

                   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 as well as for different items of property,
                   plant, and equipment held by the same entity. Amounts disclosed for
                   deferred maintenance may be measured using condition assessment
                   surveys5 or life-cycle cost forecasts.6 Therefore, SFFAS No. 6 provides
                   flexibility for agencies’ management 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 stratifying 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.

                   The development of DOD and Navy policy and implementing guidance for
Results in Brief   deferred maintenance is essential to ensure consistent reporting among
                   the military 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. Navy officials stated that they were reluctant to develop
                   procedures to implement the required accounting standard until DOD
                   issues overall policy guidance. Our September 30, 1997, letter points out
                   the need for accelerating DOD plans to issue implementing guidance to the
                   military services.

                   DOD and Navy officials have expressed numerous views as to how to apply
                   the deferred maintenance standard to aircraft. Since numerous views
                   exist, we believe it is even more important for clear guidance to be
                   developed. The opinions ranged from including only maintenance needed
                   on grounded aircraft to including all maintenance needs identified during
                   aircraft inspections. In formulating the DOD and Navy guidance, we believe

                    Condition assessment surveys are periodic inspections of property, plant, and equipment to determine
                   their current condition and estimated cost to correct any deficiencies.
                    Life-cycle costing is an acquisition or procurement technique that 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.

                   Page 3                                GAO/AIMD-98-25 Aircraft Deferred Maintenance Guidance

                        key issues must be resolved to allow for consistent reporting within the
                        Navy, among the military services, and from year to year, including
                        (1) what constitutes acceptable operating condition in aircraft and
                        (2) when unperformed maintenance on aircraft becomes deferred
                        maintenance. In addition, DOD needs to address in its implementing
                        guidance (1) whether the deferred maintenance standard should be
                        applied to certain groups of assets, such as equipment (for example,
                        aircraft engines) for which there is no current operational requirement,
                        and (2) whether the reported deferred maintenance should differentiate
                        between critical and noncritical and, if so, what constitutes critical.

                        The objective of our work was to provide information on specific issues to
Objective, Scope, and   be considered in developing implementing guidance for disclosing
Methodology             deferred maintenance on aircraft. We reviewed financial and operational
                        regulations and documentation related to managing and reporting on the
                        aircraft maintenance process. The documentation we reviewed included
                        fleet spreadsheets used to track depot maintenance requirements and
                        execution by specific aircraft. We also reviewed Navy Comptroller budget
                        documents as well as aircraft and engine maintenance databases. We
                        discussed this information with officials of DOD and Navy headquarters and
                        of various organizational levels within the Department of the Navy. While
                        the deferred maintenance standard applies to all maintenance, this report
                        addresses the aircraft depot level because (1) depot maintenance is the
                        most complex and expensive and (2) all military services operate aircraft
                        and experience deferred maintenance related to those assets. (See the
                        following section for a discussion of the Navy aircraft maintenance
                        process, including the levels of maintenance.) Navy officials provided the
                        estimates of deferred depot-level maintenance presented in this report. We
                        did not verify the accuracy and completeness of the data.

                        We conducted our review from August 1996 through August 1997 in
                        accordance with generally accepted government auditing standards. We
                        requested written comments on a draft of this report from the Secretary of
                        Defense or his designee. The Principal Deputy Under Secretary of Defense
                        provided us with written comments, which are discussed in the “Agency
                        Comments” section and are reprinted in appendix I.

                        The Navy accomplishes maintenance at three levels: organizational,
Navy Aircraft           intermediate, and depot. Organizational-level maintenance is
Maintenance Process     accomplished at the squadron level and consists of the removal and

                        Page 4                     GAO/AIMD-98-25 Aircraft Deferred Maintenance Guidance

replacement of failed components and the cleaning, prevention, and
correction of corrosion. For example, the squadron would remove and
paint minor areas of corrosion on the exterior of the aircraft.
Intermediate-level maintenance is accomplished by Navy personnel on
board ships or stationed ashore at facilities dedicated to repairing
components and assemblies on site. For example, the intermediate level
would repair moderate corrosion to removable assemblies of the aircraft,
such as the nose cone. Depot-level maintenance is performed at
maintenance depots that are equipped to perform complete overhauls of
the aircraft. The depots repair major corrosion problems and structural
weakness throughout the airframe, such as repairing cracks in the

Depot maintenance for aircraft is periodically done on airframes, engines,
and other aircraft components. Generally, the engines, weapon systems,
and other components of the aircraft are removed and replaced with other
components when they need repair. The component needing repair is then
sent to a depot or an intermediate repair facility, depending on the nature
of the problem. Generally, the Navy identifies the airframes that will
receive depot-level maintenance based on an inspection. The length of
time an aircraft can operate between inspections—referred to as the
operating period—is determined by a combination of variables, such as
age of the aircraft and results of previous inspections. Usually, if an
aircraft passes the inspection, it is allowed to fly an additional year.

Because it is very time-consuming and, therefore, expensive to
disassemble an aircraft to completely inspect for corrosion, stress, or
other problems requiring depot maintenance, inspection is done only of
items considered key indicators of the overall condition of the aircraft.
Points are awarded for defects observed. When an aircraft accumulates
enough points, it “fails” and is identified as needing depot maintenance.
Problems noted can range from minor, such as surface corrosion on upper
exterior skin, to critical concerns, such as major corrosion on and around
the right hand rudder cable pulley support bracket, which, if it were to
break, would result in loss of aircraft control. When problems affecting
flight safety are identified, the aircraft is grounded until the maintenance is

An aircraft that has accumulated enough points to fail the inspection, but
whose individual problems do not affect flight safety, can continue flying
until it reaches the end of its predetermined operating period. In addition,
a grace period of 90 calendar days of flying beyond the predetermined

Page 5                       GAO/AIMD-98-25 Aircraft Deferred Maintenance Guidance

                       operating period is generally allowed for flexibility in scheduling and
                       operational commitments. Since inspections can be done up to 6 months
                       before the aircraft reaches the end of its operating period, a “failed”
                       aircraft could conceivably fly for 9 months before having the depot
                       maintenance work done. If depot maintenance has not begun on the
                       aircraft by the end of its grace period, Navy regulations require that the
                       aircraft be grounded.

                       Although problems may be identified with the aircraft during the
                       inspection, the total points awarded for the defects may not be high
                       enough to “fail” the aircraft and send it to the depot. These aircraft
                       continue flying until the next scheduled inspection, usually another year.

                       Neither DOD nor the Navy have developed implementing guidance for
Implementing           determining and disclosing deferred maintenance on financial statements.
Guidance Needed to     Navy officials said that they are reluctant to develop their procedures until
Ensure Consistent      DOD issues its guidance. As we reported in our September 30, 1997, letter,
                       the guidance is important to ensure consistency among the military
and Timely Reporting   services and to facilitate the preparation of DOD-wide financial statements.
of Deferred            We also stated that the guidance needs to be available as close to the
                       beginning of the fiscal year as possible so that the military services have
Maintenance            time to develop implementing procedures and accumulate the necessary
                       data to ensure consistent DOD-wide implementation for fiscal year 1998.
                       DOD guidance for applying the deferred maintenance definition to aircraft
                       is essential to consistent reporting by all of the military services since each
                       service operates aircraft.

                       We found that operations and comptroller officials from both DOD and the
                       Navy have varying opinions concerning the nature of unperformed
                       maintenance that should be reported as “deferred.” Inspections, a type of
                       condition assessment, are a normal part of the management of the aircraft
                       and provide a reasonable basis for estimating deferred maintenance;
                       therefore, neither DOD nor Navy officials suggested using life-cycle costing
                       (an estimation tool allowed in lieu of condition assessments in SFFAS No. 6
                       as previously described). The differences in opinions arise from various
                       interpretations of how to apply the standard to the inspection and
                       maintenance process.

                       The views on how to apply the deferred maintenance standard to the
                       aircraft maintenance process ranged from considering only the work
                       needed on grounded aircraft to estimating the cost of repairing all

                       Page 6                       GAO/AIMD-98-25 Aircraft Deferred Maintenance Guidance

                   maintenance problems identified on all aircraft during inspection, whether
                   the aircraft “failed” or not. At the end of fiscal year 1996 (the most recent
                   year for which historical data are available), the Navy data would have
                   supported reporting $98 million for depot maintenance needed for
                   grounded aircraft. While the Navy has no formal estimate for the cost of
                   repairing all depot-level maintenance problems identified with the
                   airframes during inspection, Navy officials believed that it would exceed
                   $200 million. This amount does not include depot-level maintenance for
                   aircraft components.

                   Including only amounts for maintenance that needs to be done on
                   grounded aircraft may not meet the intent of SFFAS No. 6. FASAB addressed
                   the deferred maintenance issue because of widespread concern over the
                   deteriorating condition of government-owned equipment. FASAB reported
                   that the consequences of underfunding maintenance (increased safety
                   hazards, poor service to the public, higher costs in the future, and
                   inefficient operations) are often not immediately reported, and that the
                   cost of the deferred maintenance is important to users of financial
                   statements and key decisionmakers. Reporting only grounded aircraft
                   would not disclose all of the costs that have been deferred until a future

                   Other views expressed by DOD and Navy officials of what should be
                   reported as deferred maintenance fell between the two described
                   previously. One view was to report only the maintenance needed on
                   “failed aircraft” that had reached the operating period end date (estimated
                   by Navy to be about $163 million in fiscal year 1996). This would include
                   grounded aircraft and aircraft still flying during the 90-day grace period;
                   this is the amount reported in budget justification documents. Another
                   view was to report the maintenance needed on all “failed” aircraft,
                   regardless of the aircraft’s operating period end date (estimated by Navy
                   to be $196 million in fiscal year 1996).

                   Implementing guidance is needed so that all military services consistently
Key Issues to Be   apply the deferred maintenance standard. As a result of the variations in
Resolved           the way the deferred maintenance standard can be applied to aircraft, DOD
                   and the Navy must address a number of issues, including the following.

                   Page 7                      GAO/AIMD-98-25 Aircraft Deferred Maintenance Guidance

•   Acceptable asset condition - SFFAS No. 6 allows agencies to decide what
    “acceptable condition” means and what maintenance needs to be done to
    keep assets in that condition. Determining acceptable operating condition
    could include whether (1) the aircraft can perform all or only part of its
    mission, (2) the most important components of the aircraft function as
    intended, (3) the aircraft passes inspection using engineering
    specifications, (4) the aircraft meets specified readiness indicators, or
    (5) the aircraft meets some other relevant criteria determined by
    management. The determination may also be influenced by whether the
    aircraft is assigned to a deployed unit. One example of the acceptable
    operating condition issue is as follows. An F-14 aircraft’s primary mission
    is long-range intercept (air-to-air combat), but it also has strike capability
    (air-to-ground combat). The radar/fire control system has nodes that
    provide the capability for the aircraft to launch specific types of missiles
    and bombs. If the node that controls the aircraft’s ability to launch
    Phoenix missiles is not functioning properly, the aircraft does not have
    any air-to-ground capability, but can still fulfill its air-to-air mission using
    Sidewinder and/or Sparrow missiles. Therefore, the question is whether
    maintenance required on the node for the air-to-ground missiles should be
    reported as deferred maintenance since it supports the secondary mission.

•   Timing of deferred maintenance recognition - Generally, although the
    military services use different specific criteria to identify the aircraft and
    engines that will require depot maintenance, all three military services rely
    on the concept of a standard operating period. Sometimes the period is
    determined by flying hours and sometimes by elapsed time between
    inspections. Grace periods are frequently allowed so that operational or
    funding considerations can affect maintenance schedules. To ensure that
    meaningful, consistent data are provided, DOD and the military services
    need to decide which one of the many possible alternatives will be used to
    determine when maintenance needed but not performed is considered
    deferred. For example, an F-14 whose operating period ends September 30
    could be inspected as early as March 31, 6 months prior to the end of the
    operating period. If it fails inspection but is not grounded immediately for
    safety reasons, it can continue to fly until December 29, the end of a 90-day
    grace period. The timing issue involves when the needed maintenance
    should be recognized as deferred—the date the operating period ends, the
    date the grace period ends, the date the maintenance needs are identified,
    the date the aircraft is grounded, or some other point in time.

    Page 8                       GAO/AIMD-98-25 Aircraft Deferred Maintenance Guidance

                  •   Applicability of the reporting requirements - DOD and the military services
                      need to determine whether deferred maintenance should be reported for
                      assets that are not needed for current requirements. Further differences in
                      opinion exist concerning what should be recognized as deferred
                      maintenance for aircraft engines and other components. Since this aircraft
                      equipment can be removed from the aircraft and replaced, the question
                      arises as to whether the components waiting to be repaired at the depot
                      should be included in deferred maintenance if no aircraft are currently in
                      need of the component. For example, if a service reduces the number of
                      aircraft it is flying but does not reduce the inventory of related engines,
                      should it consider maintenance not done on the engines in excess of
                      current requirements as deferred maintenance? Reporting the
                      maintenance not performed on the engines as deferred would more
                      accurately reflect the cost of restoring all reported assets to operating
                      condition; however, it would also be reporting maintenance that is not
                      currently needed.

                  •   Critical and noncritical deferred maintenance - If critical versus noncritical
                      deferred maintenance is to be disclosed, such a disclosure must be
                      consistent among the military services, and critical must be defined. For
                      example, different kinds of maintenance needed—from preventive to
                      urgent for continued operation—may be used to differentiate between
                      critical and noncritical. Also, if DOD chooses to disclose deferred
                      maintenance for all reported assets, including maintenance on assets
                      exceeding current operating requirements, identifying the types of assets
                      included in the deferred maintenance disclosure may be another way to
                      differentiate between critical and noncritical.

                      Although our work focused on the depot level, the deferred maintenance
                      standard applies to all maintenance that should have been done,
                      regardless of where the maintenance should have taken place. Therefore,
                      in addressing the issues in this report and others regarding deferred
                      maintenance, all levels of maintenance must be considered.

                      In comments on a draft of this report, the Department of Defense agreed
Agency Comments       that it must consider the key issues identified in the report as it develops
                      implementing guidance and policy for reporting deferred maintenance.

                      We are sending copies of this report to the Chairmen and Ranking
                      Minority Members of the Senate Committee on Appropriations, the House
                      Committee on Appropriations, the Senate Committee on Armed Services,

                      Page 9                       GAO/AIMD-98-25 Aircraft Deferred Maintenance Guidance

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, the Secretary of Defense, the Assistant
Secretaries for Financial Management for the Air Force and Army, and the
Acting Director of the Defense Finance and Accounting Service. Copies
will be made available to others upon request.

Please contact me at (202) 512-9095 if you or your staffs have any
questions concerning this report. Cleggett Funkhouser, Merle Courtney,
Chris Rice, Rebecca Beale, and John Wren were major contributors to this

Lisa G. Jacobson
Director, Defense Audits

Page 10                    GAO/AIMD-98-25 Aircraft Deferred Maintenance Guidance
Page 11   GAO/AIMD-98-25 Aircraft Deferred Maintenance Guidance
Appendix I

Comments From the Department of Defense

(918884)     Page 12   GAO/AIMD-98-25 Aircraft Deferred Maintenance Guidance
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