oversight

Financial Management: DOD's Liability for the Disposal of Conventional Ammunition Can Be Estimated

Published by the Government Accountability Office on 1997-12-19.

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

                 United States General Accounting Office

GAO              Report to the Secretary of Defense




December 1997
                 FINANCIAL
                 MANAGEMENT
                 DOD’s Liability for the
                 Disposal of
                 Conventional
                 Ammunition Can Be
                 Estimated




GAO/AIMD-98-32
             United States
GAO          General Accounting Office
             Washington, D.C. 20548

             Accounting and Information
             Management Division

             B-273004

             December 19, 1997

             The Honorable William S. Cohen
             The Secretary of Defense

             Dear Mr. Secretary:

             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
             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 implementation of new
             accounting standards and audited financial statements a priority. New
             federal accounting standards have been adopted to enhance financial
             statements by requiring that government agencies show the financial
             results of their entire operations and provide relevant information on
             agencies’ true financial status. The third in a planned series of reports,2
             this report discusses the Department of Defense’s (DOD) implementation of
             the requirement to disclose the liability associated with the disposal of
             various types of assets, specifically conventional ammunition,3 hereafter
             referred to as ammunition.


             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,


             1
              The Chief Financial Officers (CFO) Act of 1990, the Government Management Reform Act of 1994,
             and the Federal Financial Management Improvement Act of 1996.
             2
              Financial Management: Factors to Consider in Estimating Environmental Liabilities for Removing
             Hazardous Materials in Nuclear Submarines and Ships (GAO/AIMD-97-135R, August 7, 1997) and
             Financial Management: DOD’s Liability for Aircraft Disposal Can Be Estimated (GAO/AIMD-98-9,
             November 20, 1997).
             3
              DOD Directive 5160.65, “Single Manager for Ammunition” defines ammunition to include small arms,
             mortars, automatic cannons, artillery, ship gun ammunition, bombs, unguided rockets, land mines,
             grenades, flares and pyrotechnics, incendiaries, projectiles, high explosives, and fuzes. The directive’s
             definition includes chemical ammunition, which is excluded from this report because estimated costs
             for disposal of chemical weapons are discussed in Chemical Weapons and Materiels: Key Factors
             Affecting Disposal Costs and Schedule (GAO/NSIAD-97-18, February 10, 1997). Both the directive and
             this report exclude nuclear weapons and guided rockets (missiles).



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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 by GAO. In
addition, the Federal Financial Management Improvement Act of 1996, as
well as the Federal Managers’ Financial Integrity Act, 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.

Issued in December 1995 and effective beginning with fiscal year 1997,
SFFAS No. 5, Accounting for Liabilities of the Federal Government, requires
the recognition of a liability for any probable and measurable future
outflow of resources arising from past transactions.4 The statement
defines probable as that which is likely to occur based on current facts
and circumstances. It also states that a future outflow is measurable if it
can be reasonably estimated. The statement recognizes that this estimate
may not be precise and, in such cases, it provides for recording the lowest
estimate and disclosing in the financial statements the full range of
estimated outflows that are likely to occur.

The liability disclosure requirements stated in SFFAS No. 5 apply to several
types of assets, including property, plant, and equipment (PP&E) and
operating materials and supplies. SFFAS No. 3, Accounting for Inventory
and Related Property, defines operating materials and supplies as
consisting of tangible personal property to be consumed in normal
operations. SFFAS No. 6, Accounting for Property, Plant, and Equipment,
which is effective beginning in fiscal year 1998, deals with various
accounting issues pertaining to PP&E. This statement establishes several
new accounting categories of PP&E, collectively called stewardship PP&E.
Other PP&E is referred to as general PP&E. One of the new stewardship
categories—federal mission PP&E—is defined as tangible items owned by a
federal government entity, principally DOD, that have no expected
nongovernmental use, are held for use in the event of emergency, war, or
natural disaster, and have an unpredictable useful life. Federal mission
PP&E, which includes ships, submarines, aircraft, and combat vehicles, is a
major part of DOD’s total PP&E.


4
These requirements generally mirror those of the Statement of Financial Accounting Standard No. 5,
Accounting for Contingencies (FASB No. 5), which was effective prior to the development of SFFAS
No. 5.



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                     Recently, FASAB reviewed the asset category for ammunition and reiterated
                     its position that ammunition should be classified as operating materials
                     and supplies rather than federal mission PP&E. Although the asset
                     categories for financial reporting may be different, the SFFAS No. 5
                     requirements for recording the disposal liability are the same for operating
                     materials and supplies and mission assets.


                     DOD has not yet implemented the federal accounting standard that requires
Results in Brief     recognizing and reporting liabilities such as those associated with
                     ammunition disposal, nor has it provided guidance to the military services.
                     In commenting on our recent report on the aircraft disposal liability, DOD
                     agreed with our recommendation to incorporate SFFAS No. 5 in its
                     Financial Management Regulation. Ammunition disposal is an ongoing
                     process that results from materials with a limited shelf-life or that
                     otherwise will not be used in operations, and the cost can be reasonably
                     estimated. Accordingly, these activities meet the criteria for a reportable
                     liability. The cost information that DOD developed in response to requests
                     from congressional committees can be used as a starting point to estimate
                     the ammunition disposal liability. A number of additional factors will have
                     to be addressed, including data reliability, data completeness, and the
                     need for periodic updates.


                     We undertook this review to assist DOD in its efforts to meet the new
Objectives, Scope,   federal accounting standard, SFFAS No. 5, and because of our responsibility
and Methodology      to audit the federal government’s consolidated financial statements
                     beginning with fiscal year 1997. Our objectives were to determine (1) the
                     status of DOD’s efforts to implement the new federal accounting standard
                     for disclosure of liabilities, such as ammunition disposal costs, and
                     (2) whether the ammunition disposal liability was probable and whether a
                     reasonable estimate of the minimum disposal liability for ammunition
                     could be made.

                     To determine if the liability is probable, we reviewed financial accounting
                     standards, environmental laws and regulations, and DOD manuals that
                     address the handling and disposal of hazardous material. We also reviewed
                     congressional committee reports that requested ammunition disposal cost
                     information. We also interviewed DOD officials responsible for financial
                     reporting and those at the service level responsible for program
                     management, ammunition demilitarization, and disposal.




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                    To determine if a disposal liability was reasonably estimable, we obtained
                    information on ammunition inventories, as of September 30, 1996, the
                    most recent data available at the time of our review, and what it costs to
                    demilitarize and dispose of ammunition. To determine the availability of
                    ammunition inventory information, we interviewed service officials
                    responsible for inventory management and obtained information on the
                    services’ ammunition inventory systems as well as their ammunition
                    inventories as of September 30, 1996.

                    To determine the availability of ammunition demilitarization and disposal
                    cost information, we obtained information on the volume, nature, and cost
                    of the Army Industrial Operation Command’s (DOD’s single manager for
                    ammunition) disposal activities, as well as information on the Joint
                    Ordnance Commanders Group’s munitions demilitarization studies. We
                    also obtained information on the Navy’s ammunition disposal activities
                    because the Navy disposes of certain Navy-specific items, such as
                    underwater torpedoes and depth charges. In addition, we interviewed
                    service officials responsible for the accounting and reporting of
                    demilitarization and disposal costs.

                    We analyzed the DOD Joint Ordnance Commanders Group, Munitions
                    Demil/Disposal Subgroup’s 1995 and 1996 reports on demilitarization and
                    disposal cost information. The Subgroup’s 1996 Munitions Demilitarization
                    Study identified disposal costs for 23 munition5 categories, referred to as
                    Munition Items Disposition Action System (MIDAS) families. We did not
                    independently verify the inventory and cost data furnished to us.

                    We conducted our review between November 1996 and November 1997 in
                    accordance with generally accepted government auditing standards.
                    Appendix I lists the primary locations where we performed our review. We
                    provided a draft of this report to the Secretary of Defense for review and
                    comment. We received oral comments which are discussed in the “Agency
                    Comments and Our Evaluation” section.


                    As we recently stated in our report on DOD’s aircraft disposal liability, as of
DOD Has Not         the end of the fiscal year on September 30, 1997, DOD had not established a
Implemented SFFAS   policy to implement SFFAS No. 5. On September 30, 1997, the DOD
No. 5               Comptroller’s office posted revisions to the electronic version of DOD’s
                    Financial Management Regulation (FMR) to include SFFAS No. 1 through 4,
                    but SFFAS No. 5 was not included. In commenting on a draft of our aircraft

                    5
                     Munitions includes ammunition as well as tactical missiles.



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                      disposal liability report, DOD agreed with our recommendation that SFFAS
                      No. 5 be incorporated in the FMR.6 In addition, the DOD Comptroller, who is
                      responsible for developing and issuing guidance on accounting standards,
                      and the Under Secretary of Defense (Acquisition and Technology), who is
                      responsible for the operational activities associated with ammunition
                      disposal, have not provided implementation guidance to the services to
                      assist them in estimating the disposal costs for ammunition. Service
                      officials stated that they are reluctant to estimate a liability for their
                      ammunition disposal until they receive DOD-wide guidance. Unless prompt
                      action to implement this standard is taken, it is unlikely that DOD’s or the
                      military services’ fiscal year 1997 financial statements will include an
                      estimate of ammunition disposal costs as required.


                      One of the key criteria cited in SFFAS No. 5 for a liability to be reported is
Ammunition Disposal   that a future payment is probable—that is, the future outflow of resources
Liability Has Been    is likely to occur. Although, in some cases, the likelihood of a future
Incurred              outflow may be difficult to determine and an entity may have difficulty
                      deciding whether to record a liability for certain events, this is not the case
                      for DOD. DOD continually disposes of ammunition and has an amount for
                      disposal costs in its annual budget. According to the Industrial Operations
                      Command’s Associate Director for Demilitarization, during the last 5
                      years, DOD has spent over $370 million to dispose of ammunition. Thus,
                      because it is known at the time of acquisition that costs will be incurred
                      for ammunition disposal, the probability criterion for recording a liability
                      is met.

                      The Congress has also recognized that disposal will occur and has
                      emphasized the importance of accumulating these costs and considering
                      this information. In the past 3 years, congressional committees have
                      specifically asked for information related to ammunition disposal costs.
                      The Senate Committee on Appropriations, in its report on the fiscal year
                      1995 Defense Appropriations bill, directed DOD to develop a plan for the
                      disposal of rocket motors, ammunition, and other explosives, including
                      information on alternative ammunition disposal methods and related
                      costs. The next year, the House Committee on Appropriations, in its report
                      on the fiscal year 1996 Defense Appropriations bill, expressed concern
                      about the Army’s continuing practice of demilitarizing ammunition by
                      open-air burning and detonation. The committee requested an analysis
                      that included the costs and savings of recycle and reuse technologies, the


                      6
                      See Financial Management: DOD’s Liability for Aircraft Disposal Can Be Estimated (GAO/AIMD-98-9,
                      November 20, 1997).



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                       revenue that could be derived from the sale of recycled and reusable
                       products, and the ultimate clean-up costs for open-air burning and
                       detonation sites. Most recently, the Fiscal Year 1997 National Defense
                       Authorization Act required the establishment of a 5-year program for the
                       development and demonstration of environmentally compliant
                       technologies for the disposal of ammunition, explosives, and rockets.


Ammunition Disposal    The Army Industrial Operations Command (IOC), DOD’s single manager for
Process                ammunition, has an ongoing program to dispose of ammunition from all
                       services. While each service maintains its own ammunition inventory
                       management systems and technically owns the ammunition, IOC manages
                       procurement and disposal of ammunition items for all services. IOC
                       supplies or ships ammunition from production and storage sites to field
                       installations and units; manages ammunition disposal programs; oversees
                       efforts to upgrade ammunition already in service; and manages the Army’s
                       worldwide ammunition stockpile.

                       IOC is responsible for the disposal of about 96 percent of all ammunition.
                       The exceptions are generally service-unique ammunition items, like Navy
                       torpedoes, or items that are more practical to dispose of at their current
                       installation or depot or by a contractor. The reasons for disposal of
                       ammunition are obsolescence, deterioration, and excess supply.
                       Obsolescence occurs when the weapons systems that use the ammunition
                       are phased out, thus eliminating the need for the ammunition. Ammunition
                       becomes excess when the quantities on hand exceed what is needed due
                       to factors such as downsizing of the military forces. Deterioration can
                       result from age and long-term storage conditions that render the
                       ammunition unusable.

                       The two overall types of ammunition disposal methods are (1) destructive
                       processes that either explode or incinerate the ammunition and
                       (2) resource recovery and recycling processes that remove the explosive
                       components through a variety of methods and allow their reuse.


Ammunition Inventory   Ammunition under IOC’s control is tracked by the Commodity Command
                       Standard System. This system accounts for ammunition in depots, but
                       does not include ammunition issued to military field units. Army field
                       ammunition stocks are accounted for by the World-wide Ammunition
                       Reporting System. Systems used by the other services are the Air Force’s
                       Combat Ammunition System, the Navy’s Conventional Ammunition



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                                      Information Management System, and the Marine Corps Ammunition and
                                      Accounting Reporting System.7 We requested a detailed listing of the
                                      year-end ammunition inventory from each of the services and obtained the
                                      inventory balance from the information they provided to us. The
                                      September 30, 1996, ammunition inventory balance is shown in table 1,
                                      which contains the most recent data available.

Table 1: Service Inventory of
Ammunition as of September 30, 1996   Service                                                                    Inventory balance (tons)
                                      Army                                                                                          2,159,667
                                      Air Force                                                                                     2,102,988
                                      Navy                                                                                            644,424
                                      Marine Corps                                                                                    107,797
                                      Total                                                                                         5,014,876

                                      The ammunition inventory serves as the basis for estimating the disposal
                                      liability because ammunition used in training and operations is generally
                                      replaced to maintain the inventory at certain levels. As a result, training
                                      and operational usage may not reduce the total liability for ammunition
                                      disposal.


                                      The second key criterion in SFFAS No. 5 for reporting of a liability is that an
Ammunition Disposal                   amount be reasonably estimable. In the past, DOD has reported its
Liability Could Be                    estimated ammunition disposal costs using several methodologies that
Estimated                             range from a “rule of thumb” figure to more detailed cost analyses based
                                      on specific types of ammunition. Achieving a reasonable estimate is
                                      possible using the existing detailed analyses as a starting point. A number
                                      of key factors would have to be considered to ensure that the development
                                      of the ammunition disposal cost estimate is as accurate as possible.


DOD’s Estimates Based on              DOD has used $1,000 per ton as a “rule of thumb” for ammunition disposal
Analysis by Ammunition                costs. For example, in May 1995 congressional testimony, the Deputy for
Type                                  Ammunition, U.S. Army, stated that “rule of thumb is that it costs about
                                      $1,000 a ton, hopefully a little less, to get rid of unserviceable




                                      7
                                       We as well as the DOD Inspector General and service auditors have reported problems with the
                                      reliability of information in DOD’s accounting and logistical systems. While there are limitations in the
                                      data, DOD is working to improve the systems that should, over time, increase the accuracy of the
                                      information and improve the disposal liability estimates. See our report Defense Financial
                                      Management (GAO/HR-97-3, February 1997).



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ammunition.”8 According to officials in the Army’s Office of the Deputy for
Ammunition, the $1,000 estimate was calculated for the Army’s
Conventional Ammunition Demilitarization Master Plan issued in
May 1993. They stated that the $1,000 estimate was an average cost based
on actual disposals during the 2 years preceding the master plan’s
issuance.

As part of its response to Senate and House requests for more detailed
disposal cost information in 1995 and 1996, DOD compiled historical cost
information that could be used as a starting point for developing a
reasonable estimate of the ammunition disposal cost liability. In response
to the fiscal year 1995 Senate Committee on Appropriations report
requesting information on alternative disposal procedures and costs for
ammunition and other explosives, the Joint Ordnance Commanders Group
(JOCG),9 Munitions Demil/Disposal Subgroup, analyzed the ammunition
stockpile in 1995 using “families” of items for disposal. The MIDAS families
are based on the materials contained in the ammunition, methods of
assembly/disassembly, preferred demilitarization methods, and any unique
features. In its September 1995 report, JOCG provided an estimate of the
tonnage requiring disposal for each MIDAS family of ammunition.

In response to the 1996 House Committee on Appropriations report that
requested additional information, the JOCG subgroup formed an ad hoc
working group10 to study the comparative benefits and costs of different
disposal methods using the MIDAS families as the basis for collecting and
summarizing the cost per ton for the various alternative disposal
procedures. The cost information was collected for both government
installations and contractor facilities that had performed ammunition
disposal during fiscal years 1994 to 1996. For the 1996 study, the JOCG
working group collected historical cost information on the ammunition
disposed of during fiscal years 1994 through 1996. It grouped11 the disposal
actions by MIDAS family and calculated an average disposal cost per ton
based on the facility type—government-owned and operated facilities,
government-owned facilities operated by a contractor, and

8
Testimony of the Deputy for Ammunition, U.S. Army, before the Subcommittee on National Security,
House Committee on Appropriations, May 2, 1995.
9
 JOCG consists of representatives from each of the four military services. It was established to
coordinate and consolidate programs for the development, production, and support of military
ammunition systems within DOD.
10
  Participants included the Army Defense Ammunition Center and School, Industrial Operations
Command, Argonne National Laboratory, Army Corps of Engineers, as well as subject matter experts
from the military services, industry, and academia.
11
    Other groupings showing average costs were included in the working group’s analysis.



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                            contractor-owned and contractor-operated facilities. For 14 of the MIDAS
                            families for which costs were available, the demilitarization was
                            performed by a single category of facility and thus yielded a single average
                            cost. The other eight MIDAS families involved demilitarization at more than
                            one type of facility, thus yielding a range of average costs. See appendix II
                            for a listing of the MIDAS families and the average disposal costs that were
                            developed based on the working group’s report.

                            Although a number of critical factors would have to be considered,
                            including the reliability of the historical data as discussed in the following
                            section, the cost estimates developed for the MIDAS families can be used as
                            a starting point to estimate the ammunition disposal liability. The national
                            stock numbers (NSNs) of ammunition items throughout DOD have been
                            associated with the MIDAS families. For example, for the Army, the U.S.
                            Army Defense Ammunition Center and School staff provided us with a
                            data file that translated the specific Army ammunition NSN line items into
                            their respective MIDAS families. Using Army’s fiscal year 1996 inventory
                            amount of 2,144,995 tons (which excludes 14,672 tons of ammunition for
                            which MIDAS cost information was not available) and the average disposal
                            cost data developed by the JOCG working group for the MIDAS families, we
                            estimated that the Army’s ammunition disposal liability could range from
                            about $1.3 billion to $2.1 billion.

                            Marine Corps, Navy, and Air Force officials verified that information was
                            available to perform a similar analysis of their respective ammunition
                            inventories using NSNs and the MIDAS cost families.


Key Estimation Factors to   In using the MIDAS analysis to estimate the disposal liability, several
Be Considered               additional factors would have to be considered to refine the estimate.
                            Although SFFAS No. 5 is clear that the disposal liability is to be a reasonable
                            estimate and that the disclosure may be presented as a range, the accuracy
                            and precision of the range will affect its usefulness to decisionmakers. Key
                            estimation factors to be considered include the following.

                            Data reliability - Although we did not verify the underlying data supporting
                            the historical cost data developed for the MIDAS families, a limited review
                            yielded a number of discrepancies. For example, one schedule indicated
                            that a contractor had destroyed 1,512 tons of small caliber ammunition in
                            fiscal year 1996 for $1,512, or $1 per ton. The same schedule showed that
                            the same contractor had destroyed the same type of ammunition in fiscal
                            year 1995 for $728 per ton. In addition, the schedule showed that two



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government-owned, government-operated facilities had destroyed small
caliber ammunition with costs of $0.10 per ton at one facility and $3,327
per ton at the other facility. Such anomalies would have to be addressed
before relying on these data as a basis for estimating the total disposal
liability.

In addition, the appropriateness of averaging the actual disposal costs by
type of facility would have to be considered. For example, the study
concluded that the disposal cost for white phosphorus was $1,231 per ton.
The underlying data show that white phosphorus was destroyed by one
government-owned, government-operated facility in six separate batches
in fiscal years 1994 through 1996. The reported costs per ton for each
batch ranged from $646 to $14,208 and were averaged to arrive at the
$1,231 figure. If it is determined that averaging does not appropriately
reflect the true range of these costs, alternatives may include calculating a
disposal liability range for each MIDAS family based on factors such as type
of facility or disposal method.

Data completeness - As stated in appendix II, data were not available for
six of the MIDAS families because (1) the types of ammunition were not
disposed of during the period studied or (2) the ammunition was disposed
of by a specific service and the cost data were not available to the working
group. DOD would have to consider the significance of these costs and
determine whether cost data were collected by individual services. In
addition, the MIDAS costs did not include an amount for packaging, crating,
handling, and transportation, nor do they reflect the value of any scrap
recovered from the demilitarization process. JOCG determined that
packaging, crating, handling, and transportation costs ranged from $66 per
ton to $228 per ton. Also, although the working group’s 1996 report
indicated that storage costs were part of the disposal costs, the group did
not develop any storage cost estimates.

Updated information - Finally, estimates using the MIDAS costs would have
to be updated periodically to take into account the use of different
disposal methods and locations, current costs, and other factors that
would affect costs. Such factors would have to be considered by DOD as it
develops its policy for determining its ammunition disposal liability.




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                                              DOD has pointed out that the total disposal liability estimate for
Reporting Total                               ammunition will result in a significant liability—much of which would not
Disposal Liability by                         require budget authority in the current year. Thus, one way to provide a
Future Time Periods                           proper context for this reported liability and make it more meaningful to
                                              decisionmakers would be to provide a breakdown of the liability in a
Would Be Useful                               footnote to the financial statements showing the liability based on the
                                              services’ estimates of the ammunition scheduled to be taken out of
                                              service.

                                              Table 2 is a simplified illustration of how the ammunition disposal liability
                                              for ammunition managed by the single manager could be related to the
                                              time period in which it is taken out of service. For the purposes of this
                                              illustration, we used $1,000 per ton as the basis for estimating the disposal
                                              liability. As discussed previously, in actual practice, the services should
                                              refine this figure to reflect the expected cost experience within the time
                                              period. We applied the $1,000 per ton disposal liability to (1) tonnage
                                              estimates reported in the JOCG September 1995 study that projected the
                                              quantity of ammunition that would be turned over to the single manager
                                              for disposal in fiscal years 1995 through 2001 and (2) the remaining
                                              inventory after subtracting these quantities.


Table 2: Example of How the Liability Could Be Related to the Disposal Schedule
Dollars in millions
                               Liability
                      associated with
Total ammunition           ammunition      Liability associated with ammunition expected to be transferred for
disposal liability   awaiting disposal                          disposal during fiscal year
as of 9/30/96             as of 9/30/96           1997          1998          1999          2000          2001          Thereafter
$5,015                            $393            $107           $93           $85           $74           $72              $4,191

                                              Such information could provide important context for congressional and
                                              other budget decisionmakers on the total liability by showing the annual
                                              impact of potentially needed budget authority for ammunition expected to
                                              be transferred for disposal. Furthermore, using time periods to present
                                              data consistent with budget justification documents, such as DOD’s Future
                                              Years Defense Program, provides a link between budgetary and
                                              accounting information, one of the key objectives of the CFO Act.


                                              Ammunition disposal costs are both probable and estimable and,
Conclusions                                   therefore, meet the criteria stated in SFFAS No. 5 for reportable liabilities.
                                              In commenting on our recent report on the aircraft disposal liability, DOD



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                         agreed to implement SFFAS No. 5 and to record the disposal liability related
                         to aircraft, which are categorized as federal mission assets. DOD also
                         agreed that the DOD Comptroller and Under Secretary of Defense
                         (Acquisition and Technology) should promptly issue implementing
                         guidance to assist the services in estimating the aircraft disposal liability.
                         Because the same requirements apply to ammunition, which is considered
                         part of the operating material and supply asset category, similar action is
                         necessary to ensure that the ammunition disposal liability is properly
                         recorded. Development of a reasonable estimate of the ammunition
                         disposal liability, which addresses the key factors identified in this report,
                         will help ensure not only that the financial statement disclosure
                         requirements are met, but will also provide important information to the
                         Congress and other decisionmakers as they continue to assess
                         ammunition disposal methods and related costs.


                         We recommend that you ensure that
Recommendations
                     •   the DOD Comptroller and the Under Secretary of Defense (Acquisition and
                         Technology) promptly issue joint implementing guidance for the services
                         on the SFFAS No. 5 requirements for recognition of a liability for
                         ammunition disposal costs. This guidance should address the key liability
                         estimation factors identified in this report, including data reliability, data
                         completeness, and the need for updated information.
                     •   the DOD and military service comptrollers include the estimated
                         ammunition disposal liability in DOD’s fiscal year 1997 financial statements.


                         In commenting on a draft of this report, Department of Defense officials
Agency Comments          concurred with our recommendations that joint implementing guidance be
and Our Evaluation       issued promptly on the SFFAS No. 5 requirements for recognition of a
                         liability for ammunition disposal costs. In addition, DOD officials stated
                         that current disposal cost estimates can be reasonably determined for
                         ammunition types that have been in the active inventory for some period
                         of time. However, DOD officials stated that the development of disposal
                         cost estimates for all types in the inventory and the development and
                         coordination of standard application procedures and reporting guidance
                         would take time to complete. For this reason, Defense officials stated that
                         it will not be feasible to report the estimated ammunition disposal liability
                         in the DOD’s financial statements prior to fiscal year 1998.




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SFFAS No. 5 was issued almost 2 years ago to allow agencies ample time to
develop implementing policies and procedures prior to its fiscal year 1997
effective date. As stated in this report, information is available on all types
of ammunition disposal processes to develop a reasonable estimate of
these costs. Such cost information can be applied to all types of
ammunition, regardless of the length of time the ammunition has been in
the active inventory. Such an estimate need not be precise—SFFAS No. 5
permits the reporting of a range. Accordingly, DOD, with a concentrated
effort, can develop an estimate of ammunition disposal costs for its fiscal
year 1997 financial statements.


This report contains recommendations to you. The head of a federal
agency is required by 31 U.S.C. 720 to submit a written statement on
actions taken on these recommendations to the Senate Committee on
Governmental Affairs and the House Committee on Government Reform
and Oversight not later than 60 days after the date of this report. A written
statement also must be sent to the House and Senate Committees on
Appropriations with the agency’s first request for appropriations made
more than 60 days after the date of this report.

We are sending copies of this report to the Chairmen and Ranking
Minority Members of the Senate Committee on Armed Services, the House
Committee on National Security, the Senate Committee on Governmental
Affairs, the House Committee on Government Reform and Oversight, and
the Subcommittee on Management, Information and Technology, and to
the Director of the Office of Management and Budget. We are also sending
copies to the Under Secretary of Defense (Comptroller), the Air Force
Assistant Secretary for Financial Management and Comptroller, the Army
Assistant Secretary for Financial Management and Comptroller, the Navy
Assistant Secretary for Financial Management and Comptroller, the Under
Secretary of Defense (Acquisition and Technology), the Deputy Under
Secretary of Defense for Environmental Security, and the Acting Director,
Defense Finance and Accounting Service. Copies will be made available to
others upon request.




Page 13                      GAO/AIMD-98-32 DOD’s Liability for Ammunition Disposal
B-273004




Please contact me at (202) 512-9095 if you have any questions concerning
this letter. Major contributors to this letter are listed in appendix III.

Sincerely yours,




Lisa G. Jacobson
Director, Defense Audits




Page 14                     GAO/AIMD-98-32 DOD’s Liability for Ammunition Disposal
Page 15   GAO/AIMD-98-32 DOD’s Liability for Ammunition Disposal
Contents



Letter                                                                                                 1


Appendix I                                                                                            18

Activities/Locations
Contacted or Visited
Appendix II                                                                                           19

Reported Average
Ammunition Disposal
Costs by MIDAS
Family
Appendix III                                                                                          20

Major Contributors to
This Report
Tables                  Table 1: Service Inventory of Ammunition as of September 30,                   7
                          1996
                        Table 2: Example of How the Liability Could Be Related to the                 11
                          Disposal Schedule




                        Abbreviations

                        CFO        Chief Financial Officer
                        DOD        Department of Defense
                        FASAB      Federal Accounting Standards Advisory Board
                        FMR        Financial Management Regulation
                        IOC        Industrial Operations Command
                        JOCG       Joint Ordnance Commanders Group
                        MIDAS      Munition Items Disposition Action System
                        NSN        national stock number
                        OMB        Office of Management and Budget
                        PP&E       property, plant, and equipment
                        SFFAS      Statement of Federal Financial Accounting Standards


                        Page 16                    GAO/AIMD-98-32 DOD’s Liability for Ammunition Disposal
Page 17   GAO/AIMD-98-32 DOD’s Liability for Ammunition Disposal
Appendix I

Activities/Locations Contacted or Visited


                      We contacted personnel and conducted work at the following locations.


                      DOD   Headquarters, Pentagon, Washington, D.C.
Department of
Defense
                      Defense Finance and Accounting Service, Denver, Colorado
Defense Finance and
Accounting Service
                      Air Force Combat Support Division, Air Force Headquarters, Pentagon,
Air Force             Washington, D.C.

                      Ogden Air Force Logistics Center, Commodities Directorate, Hill Air Force
                      Base, Ogden, Utah


                      Army Industrial Operations Command, Rock Island Arsenal, Rock Island,
Army                  Illinois

                      Army Materiel Command, Alexandria, Virginia

                      Army Missile Command, Redstone Arsenal, Huntsville, Alabama

                      U.S. Army Defense Ammunition Center and School, Savanna, Illinois


                      Marine Corps Systems Command, Arlington, Virginia
Marine Corps
                      Navy Ordnance Center, Inventory Management Systems Division,
Navy                  Mechanicsburg, Pennsylvania

                      Naval Ordnance Center, Indianhead, Maryland

                      Naval Surface Warfare Center, Crane Division, Crane, Indiana




                      Page 18                     GAO/AIMD-98-32 DOD’s Liability for Ammunition Disposal
Appendix II

Reported Average Ammunition Disposal
Costs by MIDAS Family


              Dollars in millions
                                                                                     Reported average costs
              Type of ammunition (MIDAS family)                                       per ton of ammunition
              White phosphorus                                                                            $1,231
              Riot control                                                                                 1,601
              Smokes, HC/colored/RP                                                                        1,010
              Depleted uranium                                                                             1,895
              High explosive components/devices                                                            1,557
              High explosive bombs                                                                           298
              High explosive cartridges                                                               430 to 776
              High explosive “D” (ammunition that contains ammonium                                   648 to 906
              picrate)
              High explosives for improved ammunition/cluster bomb                                  221 to 1,264
              units (ICM/CBUs) and submunitions
              High explosive grenades                                                                      3,735
              High explosive projectiles and warheads                                                 578 to 626
              High explosive rockets                                                                         844
              Demolition material                                                                            976
              High explosive land mines                                                                    1,578
              Bulk propellants and black powder                                                              878
              Propellant charges and increments                                                              873
              Propellant munitions/components                                                         745 to 765
              Small caliber ammunition                                                                104 to 542
              Fuzes                                                                                 243 to 1,065
              Pyrotechnics                                                                                 1,696
              Inert (training material)                                                                      463
              No family                                                                                      748
              Note: The study included missiles as a MIDAS family, but missiles were excluded from our
              analysis because they are not included in DOD’s definition of ammunition. In addition, the study
              did not identify costs for six MIDAS families of ammunition: dyes, incendiary/themite, bulk high
              explosives, high explosive depth charges and underwater mines, torpedoes, and incinerable
              munitions and components. Data were not available for these families because (1) these types of
              ammunition were not disposed of during the period studied or (2) the ammunition was disposed
              of by a specific service and the cost data were not available to the working group.

              Source: JOCG Munitions Demilitarization Study (June 1996). We did not verify these data.




              Page 19                              GAO/AIMD-98-32 DOD’s Liability for Ammunition Disposal
Appendix III

Major Contributors to This Report


                       Jacob W. Sprouse, Jr., Audit Manager
Accounting and         Linda J. Brigham, Auditor
Information
Management Division,
Washington, D.C.
                       Dieter M. Kiefer, Assistant Director
Kansas City Office
                       John R. Richter, Auditor-in-charge
Chicago Office         Stewart O. Seman, Evaluator
                       Lynn M. Filla-Clark, Auditor
                       Frederick P. Schmidt, Evaluator




(918867)               Page 20                     GAO/AIMD-98-32 DOD’s Liability for Ammunition Disposal
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