Financial Management: Issues to Be Considered by DOD in Developing
Guidance for Disclosing Deferred Maintenance on Aircraft (Letter Report,
12/30/97, GAO/AIMD-98-25).
GAO reviewed the Department of Defense's (DOD) efforts to develop
guidance for disclosing deferred maintenance on aircraft, focusing on
deferred maintenance on mission assets of Navy aircraft.
GAO noted that: (1) the development of DOD and Navy policy and
implementing guidance for deferred maintenance is essential to ensure
consistent reporting among the military services and to facilitate the
preparation of accurate DOD-wide financial statements, particularly
since the new accounting standard provides extensive management
flexibility in implementing the disclosure requirement; (2) Navy
officials stated that they were reluctant to develop procedures to
implement the required accounting standard until DOD issues overall
policy guidance; (3) GAO's September 30, 1997, letter points out the
need for accelerating DOD plans to issue implementing guidance to the
military services; (4) DOD and Navy officials have expressed numerous
views as to how to apply the deferred maintenance standard to aircraft;
(5) since numerous views exist, GAO believes it is even more important
for clear guidance to be developed; (6) the opinions ranged from
including only maintenance needed on grounded aircraft to including all
maintenance needs identified during aircraft inspections; (7) in
formulating the DOD and Navy guidance, GAO believes key issues must be
resolved to allow for consistent reporting within the Navy, among the
military services, and from year to year, including: (a) what
constitutes acceptable operating condition in aircraft; and (b) when
unperformed maintenance on aircraft becomes deferred maintenance; (8) in
addition, DOD needs to address in its implementing guidance: (a) whether
the deferred maintenance standard should be applied to certain groups of
assets, such as equipment (for example, aircraft engines) for which
there is no current operational requirement; and (b) whether the
reported deferred maintenance should differentiate between critical and
noncritical and, if so, what constitutes critical.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: AIMD-98-25
TITLE: Financial Management: Issues to Be Considered by DOD in
Developing Guidance for Disclosing Deferred
Maintenance on Aircraft
DATE: 12/30/97
SUBJECT: Maintenance costs
Aircraft maintenance
Financial statements
Accounting procedures
Federal agency accounting systems
Reporting requirements
Naval aircraft
Financial management
Maintenance standards
IDENTIFIER: F-14 Aircraft
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Cover
================================================================ COVER
Report to Agency Officials
December 1997
FINANCIAL MANAGEMENT - ISSUES TO
BE
CONSIDERED
BY DOD IN DEVELOPING GUIDANCE FOR
DISCLOSING
DEFERRED MAINTENANCE ON AIRCRAFT
GAO/AIMD-98-25
Aircraft Deferred Maintenance Guidance
(918884)
Abbreviations
=============================================================== ABBREV
DOD - Department of Defense
FASAB - Federal Accounting Standards Advisory Board
OMB - Office of Management and Budget
SFFAS - Statement of Federal Financial Accounting
Letter
=============================================================== LETTER
B-274836
December 30, 1997
The Honorable William J. Lynn, III
The Under Secretary of Defense (Comptroller)
The Honorable Deborah P. Christie
The Assistant Secretary of the Navy
(Financial Management and Comptroller)
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
help 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 implementing
new accounting standards and audited federal financial statements a
priority. New federal financial accounting standards have been
adopted to enhance federal financial statements by requiring that
government agencies show the financial results of their entire
operations and provide relevant information on their financial
status. This report discusses one such requirement for valuable
information related to deferred maintenance on mission assets.\2 The
second in a series of reports on the Department of Defense's (DOD)
implementation of this requirement, this report focuses on Navy
aircraft.\3 We are not making recommendations in this report.
Rather, we are identifying specific issues that need to be considered
in carrying out the basic recommendation in our September 30, 1997,
letter to expedite plans to implement the deferred maintenance
standard.
Accurate reporting of deferred maintenance is important for key
decisionmakers, such as the Congress, DOD, and Navy managers.
Further, deferred maintenance applicable to mission assets, if
reliably quantified and reported, can be an important performance
indicator of mission asset condition (a key readiness factor), as
well as an indicator of the proper functioning of maintenance and
supply lines. While the existence of deferred maintenance may
indicate a need for additional resources for maintenance, such
resources may already be available within the current funding of the
military services.
--------------------
\1 The Chief Financial Officers Act of 1990, the Government
Performance and Results Act of 1993, the Government Management Reform
Act of 1994, and the Federal Financial Management Improvement Act of
1996.
\2 Statement of Federal Financial Accounting Standard No. 6,
Accounting for Property, Plant, and Equipment, dated November 30,
1995, defines federal mission property, plant, and equipment as
possessing certain characteristics related to (1) its use, such as
having no expected nongovernmental uses, and (2) its useful life,
such as a very high risk of being destroyed in use or premature
obsolescence.
\3 See Financial Management: DOD Needs to Expedite Plans to
Implement Deferred Maintenance Accounting Standard (GAO/AIMD-97-159R,
September 30, 1997).
BACKGROUND
------------------------------------------------------------ Letter :1
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, executive 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
recommended standards. If they are adopted, the standards are
published as Statements of Federal Financial Accounting Standards
(SFFAS) by OMB and GAO. In addition, the Federal Financial
Management Improvement Act of 1996 as well as the Federal Managers'
Financial Integrity Act of 1982, require 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.
SFFAS No. 6, Accounting for Property, Plant, and Equipment, issued
on November 30, 1995, requires the disclosure of deferred maintenance
in agencies' financial statements for the fiscal year beginning
October 1, 1997. SFFAS No. 6 defines deferred maintenance as
"maintenance that was not performed when it should have been or was
scheduled to be and which, therefore, is put off or delayed for a
future period." It includes preventive maintenance and normal
repairs, but excludes modifications or upgrades that are intended to
expand the capacity of an asset. The deferred maintenance standard
applies to all property, plant, and equipment, including mission
assets--which will be reported on the supplementary stewardship
report.\4 For DOD, mission assets, such as submarines, ships,
aircraft, and combat vehicles, is a major category of property,
plant, and equipment. In fiscal year 1996, DOD reported over $590
billion in this asset category, of which over $297 billion belonged
to the Navy.
SFFAS No. 6 recognizes that there are many variables in estimating
deferred maintenance amounts. For example, the standard acknowledges
that determining the condition of the asset--condition rating--is a
management function because different conditions might be considered
acceptable by different entities as well as for different items of
property, plant, and equipment held by the same entity. Amounts
disclosed for deferred maintenance may be measured using condition
assessment surveys\5 or life-cycle cost forecasts.\6 Therefore, SFFAS
No. 6 provides flexibility for agencies' management to (1) determine
the level of service and condition of the asset that are acceptable,
(2) disclose deferred maintenance by major classes of assets, and (3)
establish methods to estimate and report any material amounts of
deferred maintenance.
SFFAS No. 6 also has an optional disclosure for stratifying between
critical and noncritical amounts of maintenance needed to return each
major class of asset to its acceptable operating condition. If
management elects to disclose critical and noncritical amounts, the
disclosure must include management's definition of these categories.
--------------------
\4 SFFAS No. 8, Supplementary Stewardship Reporting, requires the
reporting of federal mission property, plant, and equipment on the
supplementary stewardship report for the fiscal years beginning
October 1, 1997. Prior to this standard, these assets were reported
on the Statement of Financial Position.
\5 Condition assessment surveys are periodic inspections of property,
plant, and equipment to determine their current condition and
estimated cost to correct any deficiencies.
\6 Life-cycle costing is an acquisition or procurement technique that
considers operating, maintenance, and other costs in addition to the
acquisition cost of assets. Since it results in a forecast of
maintenance expense, these forecasts may serve as a basis against
which to compare actual maintenance expense and estimate deferred
maintenance.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :2
The development of DOD and Navy policy and implementing guidance for
deferred maintenance is essential to ensure consistent reporting
among the military services and to facilitate the preparation of
accurate DOD-wide financial statements, particularly since the new
accounting standard provides extensive management flexibility in
implementing the disclosure requirement. Navy officials stated that
they were reluctant to develop procedures to implement the required
accounting standard until DOD issues overall policy guidance. Our
September 30, 1997, letter points out the need for accelerating DOD
plans to issue implementing guidance to the military services.
DOD and Navy officials have expressed numerous views as to how to
apply the deferred maintenance standard to aircraft. Since numerous
views exist, we believe it is even more important for clear guidance
to be developed. The opinions ranged from including only maintenance
needed on grounded aircraft to including all maintenance needs
identified during aircraft inspections. In formulating the DOD and
Navy guidance, we believe key issues must be resolved to allow for
consistent reporting within the Navy, among the military services,
and from year to year, including (1) what constitutes acceptable
operating condition in aircraft and (2) when unperformed maintenance
on aircraft becomes deferred maintenance. In addition, DOD needs to
address in its implementing guidance (1) whether the deferred
maintenance standard should be applied to certain groups of assets,
such as equipment (for example, aircraft engines) for which there is
no current operational requirement, and (2) whether the reported
deferred maintenance should differentiate between critical and
noncritical and, if so, what constitutes critical.
OBJECTIVE, SCOPE, AND
METHODOLOGY
------------------------------------------------------------ Letter :3
The objective of our work was to provide information on specific
issues to be considered in developing implementing guidance for
disclosing deferred maintenance on aircraft. We reviewed financial
and operational regulations and documentation related to managing and
reporting on the aircraft maintenance process. The documentation we
reviewed included fleet spreadsheets used to track depot maintenance
requirements and execution by specific aircraft. We also reviewed
Navy Comptroller budget documents as well as aircraft and engine
maintenance databases. We discussed this information with officials
of DOD and Navy headquarters and of various organizational levels
within the Department of the Navy. While the deferred maintenance
standard applies to all maintenance, this report addresses the
aircraft depot level because (1) depot maintenance is the most
complex and expensive and (2) all military services operate aircraft
and experience deferred maintenance related to those assets. (See
the following section for a discussion of the Navy aircraft
maintenance process, including the levels of maintenance.) Navy
officials provided the estimates of deferred depot-level maintenance
presented in this report. We did not verify the accuracy and
completeness of the data.
We conducted our review from August 1996 through August 1997 in
accordance with generally accepted government auditing standards. We
requested written comments on a draft of this report from the
Secretary of Defense or his designee. The Principal Deputy Under
Secretary of Defense provided us with written comments, which are
discussed in the "Agency Comments" section and are reprinted in
appendix I.
NAVY AIRCRAFT MAINTENANCE
PROCESS
------------------------------------------------------------ Letter :4
The Navy accomplishes maintenance at three levels: organizational,
intermediate, and depot. Organizational-level maintenance is
accomplished at the squadron level and consists of the removal and
replacement of failed components and the cleaning, prevention, and
correction of corrosion. For example, the squadron would remove and
paint minor areas of corrosion on the exterior of the aircraft.
Intermediate-level maintenance is accomplished by Navy personnel on
board ships or stationed ashore at facilities dedicated to repairing
components and assemblies on site. For example, the intermediate
level would repair moderate corrosion to removable assemblies of the
aircraft, such as the nose cone. Depot-level maintenance is
performed at maintenance depots that are equipped to perform complete
overhauls of the aircraft. The depots repair major corrosion
problems and structural weakness throughout the airframe, such as
repairing cracks in the fuselage.
Depot maintenance for aircraft is periodically done on airframes,
engines, and other aircraft components. Generally, the engines,
weapon systems, and other components of the aircraft are removed and
replaced with other components when they need repair. The component
needing repair is then sent to a depot or an intermediate repair
facility, depending on the nature of the problem. Generally, the
Navy identifies the airframes that will receive depot-level
maintenance based on an inspection. The length of time an aircraft
can operate between inspections--referred to as the operating
period--is determined by a combination of variables, such as age of
the aircraft and results of previous inspections. Usually, if an
aircraft passes the inspection, it is allowed to fly an additional
year.
Because it is very time-consuming and, therefore, expensive to
disassemble an aircraft to completely inspect for corrosion, stress,
or other problems requiring depot maintenance, inspection is done
only of items considered key indicators of the overall condition of
the aircraft. Points are awarded for defects observed. When an
aircraft accumulates enough points, it "fails" and is identified as
needing depot maintenance. Problems noted can range from minor, such
as surface corrosion on upper exterior skin, to critical concerns,
such as major corrosion on and around the right hand rudder cable
pulley support bracket, which, if it were to break, would result in
loss of aircraft control. When problems affecting flight safety are
identified, the aircraft is grounded until the maintenance is done.
An aircraft that has accumulated enough points to fail the
inspection, but whose individual problems do not affect flight
safety, can continue flying until it reaches the end of its
predetermined operating period. In addition, a grace period of 90
calendar days of flying beyond the predetermined operating period is
generally allowed for flexibility in scheduling and operational
commitments. Since inspections can be done up to 6 months before the
aircraft reaches the end of its operating period, a "failed" aircraft
could conceivably fly for 9 months before having the depot
maintenance work done. If depot maintenance has not begun on the
aircraft by the end of its grace period, Navy regulations require
that the aircraft be grounded.
Although problems may be identified with the aircraft during the
inspection, the total points awarded for the defects may not be high
enough to "fail" the aircraft and send it to the depot. These
aircraft continue flying until the next scheduled inspection, usually
another year.
IMPLEMENTING GUIDANCE NEEDED TO
ENSURE CONSISTENT AND TIMELY
REPORTING OF DEFERRED
MAINTENANCE
------------------------------------------------------------ Letter :5
Neither DOD nor the Navy have developed implementing guidance for
determining and disclosing deferred maintenance on financial
statements. Navy officials said that they are reluctant to develop
their procedures until DOD issues its guidance. As we reported in
our September 30, 1997, letter, the guidance is important to ensure
consistency among the military services and to facilitate the
preparation of DOD-wide financial statements. We also stated that
the guidance needs to be available as close to the beginning of the
fiscal year as possible so that the military services have time to
develop implementing procedures and accumulate the necessary data to
ensure consistent DOD-wide implementation for fiscal year 1998. DOD
guidance for applying the deferred maintenance definition to aircraft
is essential to consistent reporting by all of the military services
since each service operates aircraft.
We found that operations and comptroller officials from both DOD and
the Navy have varying opinions concerning the nature of unperformed
maintenance that should be reported as "deferred." Inspections, a
type of condition assessment, are a normal part of the management of
the aircraft and provide a reasonable basis for estimating deferred
maintenance; therefore, neither DOD nor Navy officials suggested
using life-cycle costing (an estimation tool allowed in lieu of
condition assessments in SFFAS No. 6 as previously described). The
differences in opinions arise from various interpretations of how to
apply the standard to the inspection and maintenance process.
The views on how to apply the deferred maintenance standard to the
aircraft maintenance process ranged from considering only the work
needed on grounded aircraft to estimating the cost of repairing all
maintenance problems identified on all aircraft during inspection,
whether the aircraft "failed" or not. At the end of fiscal year 1996
(the most recent year for which historical data are available), the
Navy data would have supported reporting $98 million for depot
maintenance needed for grounded aircraft. While the Navy has no
formal estimate for the cost of repairing all depot-level maintenance
problems identified with the airframes during inspection, Navy
officials believed that it would exceed $200 million. This amount
does not include depot-level maintenance for aircraft components.
Including only amounts for maintenance that needs to be done on
grounded aircraft may not meet the intent of SFFAS No. 6. FASAB
addressed the deferred maintenance issue because of widespread
concern over the deteriorating condition of government-owned
equipment. FASAB reported that the consequences of underfunding
maintenance (increased safety hazards, poor service to the public,
higher costs in the future, and inefficient operations) are often not
immediately reported, and that the cost of the deferred maintenance
is important to users of financial statements and key decisionmakers.
Reporting only grounded aircraft would not disclose all of the costs
that have been deferred until a future period.
Other views expressed by DOD and Navy officials of what should be
reported as deferred maintenance fell between the two described
previously. One view was to report only the maintenance needed on
"failed aircraft" that had reached the operating period end date
(estimated by Navy to be about $163 million in fiscal year 1996).
This would include grounded aircraft and aircraft still flying during
the 90-day grace period; this is the amount reported in budget
justification documents. Another view was to report the maintenance
needed on all "failed" aircraft, regardless of the aircraft's
operating period end date (estimated by Navy to be $196 million in
fiscal year 1996).
KEY ISSUES TO BE RESOLVED
------------------------------------------------------------ Letter :6
Implementing guidance is needed so that all military services
consistently apply the deferred maintenance standard. As a result of
the variations in the way the deferred maintenance standard can be
applied to aircraft, DOD and the Navy must address a number of
issues, including the following.
-- Acceptable asset condition - SFFAS No. 6 allows agencies to
decide what "acceptable condition" means and what maintenance
needs to be done to keep assets in that condition. Determining
acceptable operating condition could include whether (1) the
aircraft can perform all or only part of its mission, (2) the
most important components of the aircraft function as intended,
(3) the aircraft passes inspection using engineering
specifications, (4) the aircraft meets specified readiness
indicators, or (5) the aircraft meets some other relevant
criteria determined by management. The determination may also
be influenced by whether the aircraft is assigned to a deployed
unit. One example of the acceptable operating condition issue
is as follows. An F-14 aircraft's primary mission is long-range
intercept (air-to-air combat), but it also has strike capability
(air-to-ground combat). The radar/fire control system has nodes
that provide the capability for the aircraft to launch specific
types of missiles and bombs. If the node that controls the
aircraft's ability to launch Phoenix missiles is not functioning
properly, the aircraft does not have any air-to-ground
capability, but can still fulfill its air-to-air mission using
Sidewinder and/or Sparrow missiles. Therefore, the question is
whether maintenance required on the node for the air-to-ground
missiles should be reported as deferred maintenance since it
supports the secondary mission.
-- Timing of deferred maintenance recognition - Generally, although
the military services use different specific criteria to
identify the aircraft and engines that will require depot
maintenance, all three military services rely on the concept of
a standard operating period. Sometimes the period is determined
by flying hours and sometimes by elapsed time between
inspections. Grace periods are frequently allowed so that
operational or funding considerations can affect maintenance
schedules. To ensure that meaningful, consistent data are
provided, DOD and the military services need to decide which one
of the many possible alternatives will be used to determine when
maintenance needed but not performed is considered deferred.
For example, an F-14 whose operating period ends September 30
could be inspected as early as March 31, 6 months prior to the
end of the operating period. If it fails inspection but is not
grounded immediately for safety reasons, it can continue to fly
until December 29, the end of a 90-day grace period. The timing
issue involves when the needed maintenance should be recognized
as deferred--the date the operating period ends, the date the
grace period ends, the date the maintenance needs are
identified, the date the aircraft is grounded, or some other
point in time.
-- Applicability of the reporting requirements - DOD and the
military services need to determine whether deferred maintenance
should be reported for assets that are not needed for current
requirements. Further differences in opinion exist concerning
what should be recognized as deferred maintenance for aircraft
engines and other components. Since this aircraft equipment can
be removed from the aircraft and replaced, the question arises
as to whether the components waiting to be repaired at the depot
should be included in deferred maintenance if no aircraft are
currently in need of the component. For example, if a service
reduces the number of aircraft it is flying but does not reduce
the inventory of related engines, should it consider maintenance
not done on the engines in excess of current requirements as
deferred maintenance? Reporting the maintenance not performed
on the engines as deferred would more accurately reflect the
cost of restoring all reported assets to operating condition;
however, it would also be reporting maintenance that is not
currently needed.
-- Critical and noncritical deferred maintenance - If critical
versus noncritical deferred maintenance is to be disclosed, such
a disclosure must be consistent among the military services, and
critical must be defined. For example, different kinds of
maintenance needed--from preventive to urgent for continued
operation--may be used to differentiate between critical and
noncritical. Also, if DOD chooses to disclose deferred
maintenance for all reported assets, including maintenance on
assets exceeding current operating requirements, identifying the
types of assets included in the deferred maintenance disclosure
may be another way to differentiate between critical and
noncritical.
Although our work focused on the depot level, the deferred
maintenance standard applies to all maintenance that should have been
done, regardless of where the maintenance should have taken place.
Therefore, in addressing the issues in this report and others
regarding deferred maintenance, all levels of maintenance must be
considered.
AGENCY COMMENTS
------------------------------------------------------------ Letter :7
In comments on a draft of this report, the Department of Defense
agreed that it must consider the key issues identified in the report
as it develops implementing guidance and policy for reporting
deferred maintenance.
---------------------------------------------------------- Letter :7.1
We are sending copies of this report to the Chairmen and Ranking
Minority Members of the Senate Committee on Appropriations, the House
Committee on Appropriations, the Senate Committee on Armed Services,
the House Committee on National Security, the Senate Committee on
Governmental Affairs, and the House Committee on Government Reform
and Oversight. We are also sending copies to the Director of the
Office of Management and Budget, the Secretary of Defense, the
Assistant Secretaries for Financial Management for the Air Force and
Army, and the Acting Director of the Defense Finance and Accounting
Service. Copies will be made available to others upon request.
Please contact me at (202) 512-9095 if you or your staffs have any
questions concerning this report. Cleggett Funkhouser, Merle
Courtney, Chris Rice, Rebecca Beale, and John Wren were major
contributors to this report.
Lisa G. Jacobson
Director, Defense Audits
(See figure in printed edition.)Appendix I
*** End of document. ***