To save costs, the Military Departments and agencies within the Department of Defense (DoD) share much of their equipment, information systems, and other assets that support the shared national defense mission. In preparation for DoD’s audit (as mandated by the CFO Act of 1990), a major issue when sharing resources between component organizations is determining on whose balance sheet each asset appears.
The Federal Accounting Standards Advisory Board’s (FASAB) Statement on Federal Financial Accounting Concepts 5 (SFFAC 5) provides guidance, stating that the organization with a “comprehensive relationship” to an asset should report that item on its balance sheet. SFFAC 5 further defines that organization as the “entity responsible and accountable for receiving, controlling, managing, and utilizing government assets.” While this seems straightforward, what if Special Operations Command (SOCOM) modifies UH-60 Blackhawks it borrows from the Army with .50 caliber guns, infrared cameras, and other equipment? Does the Army own those modifications? Who incurs the expense for maintenance on the helicopters and their modifications? What about depreciation?
The Statement on Federal Financial Accounting Standards 4 (SFFAS 4) requires SOCOM and the Army to calculate the “imputed cost,” or the cost associated with the use of the helicopters, for reporting. The process involves identifying all costs associated with the use of the helicopters to include depreciation, determining an allocation method for maintenance costs, and calculating the percentage of use between the two services. Aside from this, SOCOM and the Army must perform the same process for the bells and whistles SOCOM added and identify the modifications’ benefit to the Army after SOCOM returns the asset. The complexity of this information is unlikely to be readily available in the aging or deficient maintenance or asset management information systems currently used, and the time spent gathering that information increases the cost of accounting for sharing the helicopters. The costs to meet this standard eventually negate the benefit of sharing helicopters in the first place.
After review and consideration of comments from the public, FASAB released Technical Bulletin 2017-2 (TB 2017-2), which allows flexibility in applying ownership of assets. The TB states “that assets may be assigned to component reporting entities within a larger component reporting entity on a rational and consistent basis. For example, an asset may be assigned to the component reporting entity holding legal title, funding the asset, using the asset in its operations, or on another rational and consistent basis.”
Reporting entities should document a policy detailing the basis by which they assign assets and be consistent in adhering to it. The flexibility this TB allows greatly reduces time and costs associated with compiling reports and preparing for audits. In the above example, the helicopter now can be assigned based on which component owns the title or which is using the asset in its operations, so long as the policy is consistent and rational. The TB also gives management options to report shared assets in a manner that best suits both components’ objectives. A standardized policy for recognizing asset ownership leads to improved audit readiness. Specifically, it addresses the existence and completeness management assertions for physical assets. It also supports an accurate reporting in the valuation of assets and related information in financial statements and notes.
MorganFranklin analysts can help defense organizations identify opportunities where TB 2017-2 can be implemented. For example, an improved understanding of ownership naturally flows to an enhanced ability to prove Existence and Completeness of physical assets, prepare for supporting an accurate Valuation of the asset on the financial statements, and present and disclose accurate and insightful information in the statements and notes. MorganFranklin closely works with each of these audit objectives currently on Army and other DoD engagements. Our audit readiness subject matter experts can assist with an initial review of assets, perform an analysis to help choose the basis for asset ownership, and make it easier to answer the question, “Whose Blackhawk is this?”