Department of Defense Agency Financial Report 2007
Section 2: Financial Information
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materiel management activities. Operational cycles are irregular and the military risks associated with stock-out positions
have no commercial parallel. The Department holds materiel based on military need and support for contingencies. The
Department does not attempt to account separately for “inventory held for sale” and “inventory held in reserve for future
sale” based on SFFAS No. 3 definitions, unless otherwise noted.
Related property includes OM&S and stockpile materiels. The OM&S, including munitions not held for sale, are valued
at standard purchase price. The Department uses both the consumption method and the purchase method of accounting
for OM&S. Items that are centrally managed and stored, such as ammunition and engines, are generally recorded using
the consumption method and are reported on the Balance Sheet as OM&S. When current systems cannot fully support the
consumption method, the Department uses the purchase method. Under this method, materiels and supplies are expensed
when purchased. During FY 2007, the Department expensed significant amounts using the purchase method because the
systems could not support the consumption method or management deemed that the item was in the hands of the end user.
This is a material weakness for the Department and long-term system corrections are in process. Once the proper systems are
in place, these items will be accounted for under the consumption method of accounting.
The Department determined that the recurring high dollar value of OM&S in need of repair is material to the financial
statements and requires a separate reporting category. Many high-dollar items, such as aircraft engines, are categorized as
OM&S rather than military equipment.
The Department recognizes condemned materiel as “excess, obsolete, and unserviceable.” The cost of disposal is greater
than the potential scrap value; therefore, the net value of condemned materiel is zero. Potentially redistributed materiel,
classified in previous years as “excess, obsolete, and unserviceable,” is included in the “held for use” or “held for repair”
categories according to its condition.
Inventory available and purchased for resale includes consumable spare and repair parts and repairable items owned and
managed by the Department. This inventory is retained to support military or national contingencies. Inventory held for
repair is damaged inventory that requires repair to make suitable for sale. Often, it is more economical to repair these items
rather than to procure them. The Department often relies on weapon systems and machinery no longer in production. As
a result, the Department supports a process that encourages the repair and rebuilding of certain items. This repair cycle is
essential to maintaining a ready, mobile, and armed military force. Work in process balances include costs related to the
production or servicing of items, including direct material, direct labor, applied overhead, and other direct costs. Work in
process also includes the value of finished products or completed services that are yet to be placed in service and transferred
to an asset account. Work in process includes munitions in production and depot maintenance work with its associated
labor, applied overhead, and supplies used in the delivery of maintenance services.
1.N. Investments
The Department reports investments in U.S. Treasury securities at cost, net of amortized premiums or discounts. Premiums or
discounts are amortized over the term of the investment using the effective interest rate method or another method obtaining
similar results. The Department’s intent is to hold investments to maturity, unless they are needed to finance claims or
otherwise sustain operations. Consequently, a provision is not made for unrealized gains or losses on these securities.
The Department invests in nonmarketable securities. The two types of nonmarketable securities are par value and market-
based intragovernmental securities. The Bureau of the Public Debt issues nonmarketable par value intragovernmental
securities. Nonmarketable, market-based intragovernmental securities emulate marketable securities, but are not publicly
traded.
The Department’s net investments are held by various trust and special funds. These funds include the Military Retirement
Trust Fund; Medicare-Eligible Retiree Health Care Fund; Other Defense Organizations General Fund trust and special
funds; donations (Gift Funds); and the USACE South Dakota Terrestrial Habitat Restoration, Inland Waterways, and Harbor
Maintenance Trust Fund accounts.
Other investments represent limited partnerships entered into on behalf of the U.S. Government in support of the MHPI
authorized by P.L. 104-106, Section 2801. These investments do not require market value disclosure.