April 10, 2023 1

OFFICE OF THE UNDER SECRETARY OF DEFENSE (ACQUISITION, TECHNOLOGY AND LOGISTICS)

American Society of Military Comptrollers29 March 2005

Military Equipment ValuationWhat is it and Why is it Important?

Joe WardKPMG LLPAcquisition Resources &

Analysis(Property & Equipment

Policy)

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The Problem

The Government Accountability Office (GAO) has identified the following major performance and accountability challenge

“DoD cannot properly account for and report on its weapon systems and support equipment.”

Results:

– Increased risk that inventory item managers may request funds to obtain unnecessary items

– Loss of accountability could affect supply responsiveness and purchase decisions

GAO report 01-244, “Major Management Challenges and Program Risks,” January 2001

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Current GAO View

“In their review, GAO auditors found that incomplete documentation and "weaknesses" in financial systems, record-keeping and financial reporting hurt the government's ability to provide reliable information on assets, liabilities and costs. The greatest challenges are continuing ‘serious financial management problems’ at the Defense Department, auditors reported. The government could not show that property and equipment inventory reports at Defense were correct [emphasis added], nor could it fully account for transactions between agencies. “

By Christopher Lee, Washington Post Staff Writer, Tuesday, December 21, 2004,

“GAO Again Finds Fault With the Federal Books: Auditors Say That Government's Records Are So Inadequate They Cannot Be Evaluated, but Bush Official Cites Progress”

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The Need for Change is Clear

Services and Agencies have individual processes and supporting systems that focus primarily on their own operations

Results are:– DoD resources are not managed as well as they could be– DoD decision-making is not supported as well as it could be– DoD costs are higher than they need to be

Combatant Commanders Services

Army Navy Air Force Marines

Agencies

NGA DISADLA

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A Leadership Priority

“Without accurate and timely financial information, it is not possible to accomplish the President’s agenda to secure the best performance and highest measure of accountability for the American people.”

-- President George W. Bush, President’s Management Agenda, 2002

“One of my highest priorities is to have reliable, accurate and timely financial management information upon which to make the most effective business decisions. ...[C]urrently, the Department’s financial and non-financial operations and systems do not work effectively together to produce the most desirable financial management information. Correcting this deficiency is everyone’s responsibility.”

-- Secretary of Defense Donald H. Rumsfeld, July 19, 2001

“[W]e are moving toward Knowledge-Based Warfare, or Knowledge-Enabled Warfare. In fact, the overriding objective of U.S. defense acquisition is acquiring materiel and systems that enable Knowledge-Based Warfare. This also underscores our approach to … our business processes, with Knowledge Enabled Business.”

-- Under Secretary of Defense Michael W. Wynne, June 2, 2004

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The Response

Knowledge-Enabled Business

Accountability Value

Organization Program Location Status

Property

Real Property Personal Property

People

Person Role

Military Equipment Valuation

Unique

Identification

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Military Equipment Valuation – What and Why

What is MEV?– A process to implement the 2003 federal accounting standard – ME (including modifications and upgrades) must be properly

Valued Capitalized and depreciated

Why is it important?-- To provide reliable and accurate information to decision makers

Total acquisition cost of assets will be consistently determined Decision makers will get comparable information over time and between programs It will allow better investment planning for replacements

-- To increase public confidence “We owe the taxpayers no less than a private company would to its investors in being able to account for

their money.” Linda M. Springer, OMB

– It’s the law – and policy! Chief Financial Officers Act of 1990 Federal Financial Management Improvement Act of 1996 OMB Circular A-127 President’s Management Agenda (2002) Secretary of Defense Memorandum (July 19, 2001)

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MEV – How?

New business rules

– Financial Management Regulation (what to value and how to value it)

– Federal Acquisition Regulation (what to do with government property in the hands of contractors)

Valuation of end items

– Current: Bureau of Economic Analysis estimates

– Near Term (FY06-07): Manually-derived baseline valuations (program level)– Mid Term (FY08-12): System -derived transaction-based valuations (contract level)– Long Term (FY12 +): System-derived transaction-based valuations (end item level)

Systems development

– Mid-Term: System of currently available systems – Long-Term: Business Management Modernization Program systems

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Policy

Goal: Publish 10 business rules to guide valuation process (Financial Mgt Regs) Publish property rule to guide property management (FAR)

Plan: Financial Business Rules –

– Develop rules and coordinate within DoD -- DONE– Come to agreement on rules with the auditors – on-going– Convert into FMR language (working through USD(C) Acctg Policy) – in USD(C) for coordination

Property Accountability Rules –

– Develop rule and coordinate within DoD, with other Federal Agencies, and with Industry -- DONE– Publish proposed rule – April 2005– Resolve comments – September 2005– Publish final rule – December 2005

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Financial Business Rules

Full Cost Research, Development, Test, and Evaluation Clean-up Costs Classification Modifications, Modernizations, Upgrades, and Improvements Contract Close Out Adjustments Work-in-Process Acquisition Date and Useful Life Reporting Entity Componentization

MUST BE CONVERTED INTO FMR LANGUAGE

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Baseline ValuationFY05/06 Goals

Data as of 3/31/05 Army Navy/USMC Air Force SOCOM Total

SummaryUniverse 413 384 251 39 1087

Complete thru FY04 127 114 138 1 380

FY 05 Targets(95% Cum)

FY05, Q1 Complete 43 60 29 0 132

FY05, Q2 Complete 47 52 40 10 149

FY05, Q3 Goal 73 98 27 18 216

FY05, Q4 Goal 98 43 17 10 168

Total FY05 Goal 260 253 113 38 665

FY06 Target(5%)

FY06 Goal 25 17 -- -- 42

Goals:– Complete 100% of known Air Force program valuations by 9/30/05

– Complete 95% of known Army, Navy/USMC, and ODAs program valuations by 9/30/05

– Report quarterly ME values and footnotes to DFAS for Financial Reporting

Metrics:

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Baseline Valuation Critical Challenges

Valuation of Classified Programs– Working with Special Programs to develop a unified approach for valuing classified programs and reporting

Component-level balances for financial reporting

Baseline Valuation Updates– OSD to update all baseline valuations as of 9/30/06 or later for financial reporting – will need Service staff

support for data collection

– Performing existence and completeness testing [on a sampling basis] to test the completeness of the ME universe and selected valuations

Assertions and Baseline Transition– Establishing an agreed upon process for management assertions on the ME balance during the update process

– Establishing an agreed upon process for transferring baseline responsibilities and providing training and support, as appropriate

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Military Equipment System Solution

Goal:

Develop a mid-term solution – End-to-end process– Data requirements– Use systems already in place– Develop a system to accumulate work-in-process and establish a military equipment value

Develop a long-term solution (that fits with the Business Enterprise Architecture)

Plan: Create concept of operations -- DONE

Establish funding– Given authority (Nov ’04) to obligate funds to complete pre Milestone B activities– Working towards Milestone B

Implement program – non-systems related activities on-going

Process View

ACQ

ACC

LOG

WIP System

ME Valuation System

Receiving System

Disbursement &A/P Systems

Fixed AssetAccounting System

Contract WritingSystem

Accountability System

Financial Reporting System

RequisitionSystem

UID Registry

GFP InventorySystem

1. Acquisition Planning & Contract Writing

2. Item Receipt & Acceptance/Work in

Process

3. ME Valuation

5. Asset Accountability

4. Fixed Asset

Accounting

6. Financial Reporting

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Change Management

Outreach and communication plan – who needs to get the message?

Website (www.acq.osd.mil/me) – reference materials and valuation results

Training (working with DAU) – awareness module, learning module, and guidebooks

Coordination – working with BMMP, Domains, Services, and UID program office

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Summary

To be accomplished in 2005:–Business rules in policy–New FAR guidance on property in the hands of contractors

published–A new reporting system for managing government property in

the hands of contractors–Baseline valuations sufficient to allow Military Departments to

assert their readiness for audit–A system to support the baseline valuations–Communication and training so that the rules, valuations, and

system will be understood and useful

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Contact Information

E-mail: Joe.Ward.ctr@osd.mil

Phone: 703-604-6350 x118

Web: www.acq.osd.mil/me