Financial Management: Improvements Needed in the Navy's Reporting of General Fund Inventory

On June 23, 2016, the Department of the Navy issued a memorandum requiring that all Department of the Navy Budget Submitting Offices produce and retain an asset listing of its Operating Material and Supplies--to include sponsor owned material--on a quarterly basis. The asset listing will provide details of the assets being reported and diminish the use of estimated values reported on the Department of the Navy's financial statements. The memorandum states that the asset's cost basis, such as moving average cost or latest acquisition cost, should be included in the listing as well. Further, the June 2016 memorandum requires that the Budget Submitting Offices maintain and archive all original documents in a readily available location to support managerial as well as auditor review.

Navy's ammunition, or ordnance, is primarily procured by two Navy Budget Submitting Offices--Naval Air Systems Command and Naval Sea Systems Command--through the Navy's Enterprise Resource Planning (ERP). Upon delivery of the ordnance to the intended recipient, the ordnance is then removed from Navy's ERP system and entered in the Navy's ordnance Accountable Property System of Record (APSR), the Ordnance Information System (OIS). Upon entry in OIS, Navy personnel perform a front-end review of key supporting documentation; including, but not limited to, a review of contractor data, item description, and quantities, and cost documentation to validate the information being input into OIS is accurate and complete. Ordnance financial statement information is then manually transferred from OIS into the Navy's financial statements utilizing the Navy's Defense Departmental Reporting System-Data Collection Module (DDRS-DCM) process.

The Navy has revised its procedures for classifying and reporting operating material and supplies deemed excess, obsolete, and unserviceable, to include ordnance (i.e. - ammunition), since the issuance of our report. The Statement of Federal Financial Accounting Standards Number 3 (SFFAS 3) states that the operating material and supplies category deemed excess, obsolete, and unserviceable shall be either (1) included in the operating materials and supplies line item on the face of the financial statements with separate disclosure in footnotes or (2) shown as a separate line item on the face of the financial statements. Based on review of the Navy's fiscal year 2016 annual financial report, the department is now reporting operating materials and supplies deemed excess, obsolete, and unserviceable in the operating materials and supplies line item on the face of the financial statements with separate disclosure in footnotes in accordance with federal accounting standards.

The Navy revised its financial reporting procedures to properly account for operating material and supplies (OM&S) held by contractors. OM&S material held by contractors for use in the performance of maintenance is expensed while material held for a construction contract is capitalized to a construction in progress account upon issue by the Navy to the contractor. Additionally, the Navy reports operating material and supplies on its financial statements in one of three categories--held for use; held for repair; or excess, obsolete, or unserviceable. If the OM&S is not expensed or capitalized upon issue by the Navy to the contractor, then it is reported in one of the three financial statement line items, depending upon the materials intended use at time of issue.

Regarding the first part of this recommendation, Navy revised its policies for ammunition items needing repair to account for either (1) capturing the costs required to bring the repair allowance to the current estimated cost of repairs as period operating expenses or (2) capitalizing the cost of repair once completed by capturing the difference between estimated repair cost and the actual repair cost. Additionally, Navy revised its policies regarding ammunition items deemed excess, obsolete, or unserviceable, to be valued at their expected net realizable value upon final disposition. Regarding the second part of this recommendation, accounting for shipboard inventories aboard smaller combatant vessels, Navy revised its accounting policy to account for the repair-type material as pre-operational readiness procedures as these spare parts are needed to bring the vessel to the form, fit, and function for its intended use. As such, these costs will now be capitalized in accordance with federal accounting standards. Navy's actions addressed this recommendation.

Navy has developed and implemented new systems to track and report operating materials and supplies (OM&S), such as ordnance and uninstalled aircraft engines, since the issuance of our report. These new logistical systems--the Ordnance Information System and the Decision Knowledge Programming for Logistics Analysis and Technical Evaluation system, responsible for tracking ordnance and uninstalled aircraft engines, respectively--give Navy improved visibility over its OM&S and feed directly into its financial reporting systems. While the Navy acknowledges that work remains with respect to tracking and reporting all of its OM&S, the Navy has developed planned corrective actions that consider the issues discussed in our report. In Navy's bi-annual status updates to DOD's Financial Improvement and Audit Readiness (FIAR) Report, it discusses long-term system solutions to issues related to accounting and visibility over its OM&S. Furthermore, in internal status meetings, Navy reported planned long-term improvements to existing OM&S logistical systems. For example, interfacing Navy's electronic invoicing, receipt and acceptance, and property transfer system to OIS; thereby supporting future valuation efforts that are compliant with federal accounting standards. This effort is planned to be completed by fiscal year 2019.