Department Of Defense Agency Financial Report 2007 - Section 2: Financial Information Page 25
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82Section 2: Financial Information
Department of Defense Agency Financial Report 2007
7
Note 1. Significant Accounting Policies
1.A. Basis of Presentation
These financial statements have been prepared to report the financial position and results of operations of the Department of
Defense (DoD), as required by the Chief Financial Officers Act of 1990, expanded by the Government Management Reform
Act of 1994, and other appropriate legislation. The financial statements have been prepared from the books and records of
the Department in accordance with the “DoD Financial Management Regulation,” the Office of Management and Budget
(OMB) Circular No. A-136, “Financial Reporting Requirements,” and to the extent possible, generally accepted accounting
principles (GAAP). Effective 4th Quarter, fiscal year (FY) 2006, the Department no longer publishes consolidating/combining
financial statements. The accompanying financial statements account for all resources for which the Department is
responsible unless otherwise noted. Information relative to classified assets, programs, and operations is excluded from the
statements or otherwise aggregated and reported in such a manner that it is not discernable.
The Department is unable to fully implement all elements of GAAP and OMB Circular No. A-136 due to limitations of
its financial and nonfinancial management processes and systems that support the financial statements. The Department
derives its reported values and information for major asset and liability categories largely from nonfinancial systems,
such as inventory and logistics systems. These systems were designed to support reporting requirements for maintaining
accountability over assets and reporting the status of federal appropriations rather than preparing financial statements in
accordance with GAAP. The Department continues to implement process and system improvements addressing these
limitations.
Auditors are required to audit the financial statements of the following Department reporting activities: Army General Fund,
Army Working Capital Fund, Navy General Fund, Navy Working Capital Fund, Air Force General Fund, Air Force Working
Capital Fund, Military Retirement Fund, Medicare-Eligible Retiree Health Care Fund, and U.S. Army Corps of Engineers (Civil
Works).
In addition, the Department requires the Marine Corps General and Working Capital Funds and the following Defense
Agencies to prepare internal stand-alone auditable financial statements: Defense Logistics Agency, Defense Finance and
Accounting Service, Defense Information Systems Agency, Defense Contract Audit Agency, Defense Commissary Agency,
Defense Security Service, Defense Threat Reduction Agency, Defense Advanced Research Projects Agency, Chemical and
Biological Defense Program, Missile Defense Agency, Services Medical Activity, TRICARE Management Activity, U.S. Special
Operations Command, and Defense Security Cooperative Agency.
The Department currently has 13 auditor-identified material weaknesses: (1) Accounts Payable, (2) Accounting Entries,
(3) Environmental Liabilities, (4) Government Property and Materiel in Possession of Contractors, (5) Intragovernmental
Eliminations, (6) Operating Materiels and Supplies, (7) Reconciliation of Net Cost of Operations to Budget (formerly
Statement of Financing), (8) Statement of Net Cost, (9) Financial Management Systems, (10) Fund Balance with Treasury,
(11) General Property, Plant and Equipment, (12) Inventory, and (13) Accounts Receivable.
1.B. Mission of the Reporting Entity
The Department of Defense was established by the National Security Act of 1947. The Department provides the military
forces needed to deter war and protect the security of our country. Since the creation of America’s first army in 1775, the
Department and its predecessor organizations have evolved into a global presence with a worldwide infrastructure dedicated
to defending the United States by deterring and defeating aggression and coercion in critical regions.
The Department of Defense includes the Military Departments, the Defense Agencies and the Department Field Activities.
The Military Departments consist of the Army, Navy (of which the Marine Corps is a component), and the Air Force. The
Defense Agencies and the Department Field Activities provide support services commonly used throughout the Department.
1.C. Appropriations of Funds
The Department receives its appropriations and funds as general, working capital (revolving), trust, special, and deposit
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