Financial Reporting:

DOD's Fiscal Year 1996 Financial Statements Inventory Reporting Does Not Meet Standards

AIMD-98-16: Published: Dec 24, 1997. Publicly Released: Dec 24, 1997.

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GAO reviewed the Department of Defense's (DOD) fiscal year (FY) 1996 financial statements, focusing on whether its approach to reporting inventory and operating materials and supplies complied with the Statement of Federal Financial Accounting Standards (SFFAS) No. 3 requirements, both in individual military service financial statements and those at the consolidated DOD-wide level.

GAO noted that: (1) DOD did not fully comply with SFFAS No. 3 in FY 1996; (2) its consolidated and component financial statements misclassified operating materials and supplies and some equipment as inventory and did not include all operating materials and supplies; (3) for FY 1996, the Army, Navy, and Air Force general fund financial statements collectively reported $115.6 billion of inventory; (4) the Army and Air Force did not report any amounts for operating materials and supplies and the Navy reported only $27,000; (5) one reason for these errors is that DOD's "Guidance on Form and Content of Financial Statements for FY 1996 Financial Activity" and its accounting policy misinterpreted and were not consistent with the accounting standard; (6) as a result, DOD's FY 1996 financial statements overstated inventory, understated operating materials and supplies, and overstated expenses; (7) about $113.7 billion out of the $115.6 billion reported as inventory by the general funds consisted of munitions and equipment that met the SFFAS No. 3 definition of inventory and should have been classified as operating materials and supplies or plant, property, and equipment; (8) at the same time, other items warehoused by service activities, such as repair parts and consumables, that met the SFFAS No. 3 definition of operating materials and supplies were not reported at all; (9) GAO, the DOD Inspector General, and the military service auditors have reported that the military services have warehoused billions of dollars of items at bases and on ships that meet the SFFAS No. 3 definition of operating materials and supplies; (10) however, these items were not considered as capitalized assets as required, but were instead expensed on the financial statements when purchased; (11) the $113.7 billion of misclassified assets represents 9 percent of total assets reported and therefore was material to DOD's FY 1996 financial statements; (12) continued material misclassification and underreporting will negatively affect the reliability and usefulness of the military services' and DOD's financial statements and also the auditors' opinions on those statements; and (13) DOD's guidance and accounting policies must comply with accounting standards so that inventory and operating materials and supplies are properly classified and reported in its future financial statements.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: DOD's final guidance for the fiscal year 1997 financial statements included only those items held for sale as inventory, as required by SFFAS No. 3.

    Recommendation: The Under Secretary of Defense (Comptroller) should revise DOD's "Guidance on Form and Content of Financial Statements" to include as inventory only those items that are held for sale, consistent with SFFAS No. 3.

    Agency Affected: Department of Defense: Under Secretary of Defense (Comptroller)

  2. Status: Closed - Implemented

    Comments: The October 1999 revision of DOD's Financial Management Regulation (DOD 7000.14-R), Volume 6B, on the form and content of financial statements, clarifies the reporting of inventory and operating materials and supplies. It requires tangible personal property held for sale to be reported as "inventory" and tangible personal property to be consumed in normal operations to be reported as "operating materials and supplies". Further, it specifies that operating materials and supplies include ammunition and other munitions and that the value of ammunition and other munitions be disclosed in the footnotes.

    Recommendation: The Under Secretary of Defense (Comptroller) should clarify DOD's Financial Management Regulation on the documentation and reporting requirements for operating materials and supplies.

    Agency Affected: Department of Defense: Under Secretary of Defense (Comptroller)

  3. Status: Closed - Implemented

    Comments: DOD will monitor the implementation of DOD-wide guidance as well as policies issued by the military services and DFAS on the reporting of operating materials and supplies. In response to the recommendation, DOD's fiscal years 1998 and 1999 financial reports report included for the first time (1) about $40 billion and over $37 billion, respectively, of ammunition and (2) over $20 billion and over $32 billion, respectively, of other materiel as operating material and supplies.

    Recommendation: The Under Secretary of Defense (Comptroller) should monitor the services' and the Defense Finance Accounting Service's implementation of the guidance and policy to ensure that: (1) amounts are properly classified between SFFAS No. 3 reporting categories; and (2) operating materials and supplies, which include munitions and other materiel held in storage at all organizational levels, are recognized and reported as assets in DOD's financial statements.

    Agency Affected: Department of Defense: Under Secretary of Defense (Comptroller)

 

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