Department Of Defense Agency Financial Report 2007 - Section 2: Financial Information Page 32
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82Department of Defense Agency Financial Report 2007
Section 2: Financial Information
1.Q. Leases
Lease payments for the rental of equipment and operating facilities are classified as either capital or operating leases. When
a lease is essentially equivalent to an installment purchase of property (a capital lease), and the value equals or exceeds
the current capitalization threshold, the Department records the applicable asset and liability. The Department records
the amounts as the lesser of the present value of the rental and other lease payments during the lease term (excluding
portions representing executory costs paid to the lessor) or the asset’s fair market value. The discount rate for the present
value calculation is either the lessor’s implicit interest rate or the Government’s incremental borrowing rate at the inception
of the lease. The Department as the lessee receives the use and possession of leased property, for example real estate or
equipment, from a lessor in exchange for a payment of funds. An operating lease does not substantially transfer all the
benefits and risk of ownership. Payments for operating leases are charged to expense over the lease term as they become
payable.
Office space and leases entered into by the Department are the largest component of operating leases. These costs were
gathered from existing leases, General Services Administration (GSA) bills, and interservice support agreements. Future year
projections use the consumer price index (CPI) rather than the Department’s inflation factor.
1.R. Other Assets
Other assets include those assets, such as military and civil service employee pay advances, travel advances, and certain
contract financing payments that are not reported elsewhere on the Department’s Balance Sheet.
The Department conducts business with commercial contractors under two primary types of contracts: fixed price and
cost reimbursable. To alleviate the potential financial burden on the contractor that long-term contracts can cause,
the Department may provide financing payments. Contract financing payments are defined in the Federal Acquisition
Regulation, Part 32, as authorized disbursements of monies to a contractor prior to acceptance of supplies or services by the
Government. Contract financing payment clauses are incorporated in the contract terms and conditions and may include
advance payments, performance-based payments, commercial advances and interim payments, progress payments based on
cost, and interim payments under certain cost-reimbursement contracts.
Contract financing payments do not include invoice payments, payments for partial deliveries, lease and rental payments, or
progress payments based on a percentage or stage of completion. The Defense Federal Acquisition Regulation Supplement
authorizes progress payments based on a percentage or stage of completion only for construction of real property,
shipbuilding and ship conversion, alteration, or repair. Progress payments for real property and ships are reported as
construction in progress. It is the Department’s policy to record certain contract financing payments as other asset.
1.S. Contingencies and Other Liabilities
The SFFAS No. 5, “Accounting for Liabilities of the Federal Government,” as amended by SFFAS No. 12, “Recognition
of Contingent Liabilities Arising from Litigation,” defines a contingency as an existing condition, situation, or set of
circumstances that involves an uncertainty as to possible gain or loss. The uncertainty will be resolved when one or
more future events occur or fail to occur. The Department recognizes contingent liabilities when past events or exchange
transactions occur, a future loss is probable, and the loss amount can be reasonably estimated.
Financial statement reporting is limited to disclosure when conditions for liability recognition do not exist but there is at
least a reasonable possibility of incurring a loss or additional losses. Examples of loss contingencies include the collectibility
of receivables, pending or threatened litigation, and possible claims and assessments. The Department’s risk of loss and
resultant contingent liabilities arise from pending or threatened litigation or claims and assessments due to events such as
aircraft, ship and vehicle accidents; medical malpractice; property or environmental damages; and contract disputes.
Other liabilities arise as a result of anticipated disposal costs for the Department’s assets. This type of liability has two
components: nonenvironmental and environmental. Consistent with SFFAS No. 6, “Accounting for Property, Plant and
Equipment,” recognition of an anticipated environmental disposal liability begins when the asset is placed into service.
Based on the Department’s policy, which is consistent with SFFAS No. 5 “Accounting for Liabilities of the Federal
Government,” nonenvironmental disposal liabilities are recognized for assets when management decides to dispose of an
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