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GA1·13:

AIMD -98-9

GAO

Background

United States

General Accounting Office
Washington, D.C. 20548

Accounting and Information

Management Division

B-273004

November 20, 1997

The Honorable William S. Cohen
The Secretary of Defense

Dear Mr. Secretary:

Recent laws have enhanced the legislative requirements to provide policymakers and agency program managers with more reliable financial information to formulate budgets, manage government programs, and make difficult policy choices.1 Recognizing the extent of incomplete and unreliable information on the cost and consequences of government programs and activities, these laws have made implementation of new accounting standards and audited financial statements a priority. New federal accounting standards have been adopted to enhance financial statements by requiring that government agencies show the financial results of their entire operations and provide relevant information on agencies' true financial status. This report discusses one such requirement for valuable information related to the disposal costs of federal agencies' property, plant, and equipment (PP&E). The second in a planned series of reports on the Department of Defense's (DOD) implementation of this requirement, this report focuses on aircraft.2 The disposal process for aircraft includes removal from active service, demilitarization, removal and disposal of hazardous materials, storage, reclamation of parts, and final disposal/salvage.

In October 1990, the Federal Accounting Standards Advisory Board
(FASAB) was established by the Secretary of the Treasury, the Director of
the Office of Management and Budget (OMB), and the Comptroller General
of the United States to consider and recommend accounting standards to
address the financial and budgetary information needs of the Congress,
executives agencies, and other users of federal financial information.
Using a due process and consensus building approach, the nine-member
Board, which has since its formation included a member from DOD,
recommends accounting standards for the federal government. Once FASAB
recommends accounting standards, the Secretary of the Treasury, the
Director of OMB, and the Comptroller General decide whether to adopt the

1The Chief Financial Officers Act (CFO) of 1990, the Government Management Reform Act (GMRA) of 1994, and the Federal Financial Management Improvement Act of 1996.

2See our first report, Financial Management: Factors to Consider in Estimating Environmental Liabilities for Removing Hazardous Materials in Nuclear Submarines and Ships (GAO/AIMD-97-135R, August 7, 1997).

recommended standards. If they are adopted, the standards are published as Statements of Federal Financial Accounting Standards (SFFAS) by OMB and by GAO. In addition, the Federal Financial Management Improvement Act of 1996, as well as the Federal Managers' Financial Integrity Act, requires federal agencies to implement and maintain financial management systems that will permit the preparation of financial statements that substantially comply with applicable federal accounting standards.

Issued in December 1995 and effective beginning with fiscal year 1997, SFFAS No. 5, Accounting for Liabilities of the Federal Government, requires the recognition of a liability for any probable and measurable future outflow of resources arising from past transactions.3 The statement defines probable as that which is likely to occur based on current facts and circumstances. It also states that a future outflow is measurable if it can be reasonably estimated. The statement recognizes that this estimate may not be precise and in such cases, it provides for recording the lowest estimate and disclosing in the financial statements the full range of estimated outflows that are likely to occur.

SFFAS No. 6, Accounting for Property, Plant, and Equipment, which is effective beginning in fiscal year 1998, deals with various accounting issues pertaining to PP&E. This statement establishes several new accounting categories of PP&E, collectively called stewardship PP&E. Other PP&E is referred to as general PP&E. One of the new stewardship categories-federal mission PP&E-is defined as tangible items owned by a federal government entity, principally DOD, that have no expected nongovernmental use, are held for use in the event of emergency, war, or natural disaster, and have an unpredictable useful life. Federal mission PP&E, which includes ships, submarines, aircraft, and combat vehicles, is a major part of DOD's total PP&E.

SFFAS No. 6 also provides information on how SFFAS No. 5's standard on liabilities should be applied to PP&E. Specifically, SFFAS No. 6 discusses how to recognize the liability for the clean up1 of hazardous waste in PP&E. While this statement modifies SFFAS No. 5 with respect to the timing of

3These requirements generally mirror those of the Statement of Financial Accounting Standard No. 5, Accounting for Contingencies (FASB No. 5), which was effective prior to the development of SFFAS No. 5.

4SFFAS No. 6 defines cleanup as the removal, containment, and/or disposal of (1) hazardous waste from property or (2) material and/or property that consists of hazardous waste at permanent or temporary closure or shutdown of associated property, plant, and equipment.