The Department Of Defense Can Improve Its Free-Asset Management

LCD-76-414: Published: Mar 3, 1976. Publicly Released: Mar 3, 1976.

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Pursuant to a congressional request, GAO provided information on the free-asset amounts available to the Department of Defense (DOD).

GAO noted that: (1) free assets accrue to DOD as receipts from sales of equipment not requiring in-kind inventory replacement; (2) the majority of free assets accrue from foreign military sales; (3) DOD gives to Congress estimates of free-asset funds which are used in the budget process to partially fund defense programs; (4) under this procedure: (a) free assets realized (as estimated) are used as directed in the budget; (b) failure of the military departments to realize the estimated free assets reduces the amounts available for procurement of equipment; and (c) the services can, with congressional oversight, apply amounts realized in excess of the estimates to other defense programs; (5) historically, the free-asset estimates given to Congress have been low; (6) if initial estimates were closer to the actual amounts of the free assets realized, funds initially appropriated for defense programs could be further reduced; (7) almost $1.1 billion in free assets were generated in DOD's procurement accounts during fiscal years 1972-1975; $66 million additional in free assets were generated in research and development appropriations during fiscal years 1974-1975; (8) because DOD has not provided the military departments with a standard definition of free assets, the services have developed their own definitions; (9) the Army has only limited control over its free-asset generations, because of problems concerning management of its customer-order program in general; and (10) some of these problems have impaired congressional oversight regarding the application of free assets.

Recommendation for Executive Action

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Secretary of Defense should establish and enforce a standard criterion to which the services should adhere in classifying the sales of defense items as free-asset sales. This criterion should specify the time period for replacing the items sold and what constitutes replacement in kind. The Secretary of Defense should instruct the Secretary of the Army to: (1) enforce the reporting requirements as set forth in Army Regulations 37-120; and (2) refrain from further reprogramming of free-asset amounts until the command records on which these funds are based have been established. In light of the problems discussed in this report in estimating the amount of free assets that accrue to DOD by selling defense articles as well as the lack of adequate system control over these proceeds, the House and Senate Committees on Armed Services and Appropriations should consider requiring DOD to: (1) credit proceeds from sales of inventory items which are not to be replaced to the Treasury as miscellaneous receipts; and (2) credit proceeds over and above replacement costs to the Treasury as miscellaneous receipts for sales of inventory items which are to be replaced. This would simplify accounting, provide better management control by matching replacement costs with revenues, and prevent DOD from using free assets for unintended purposes.

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