Financial Management: DOD's Liability for the Disposal of Conventional
Ammunition Can Be Estimated (Letter Report, 12/19/97, GAO/AIMD-98-32).

Pursuant to a legislative requirement, GAO reviewed the Department of
Defense's (DOD) implementation of the requirement to disclose the
liability associated with the disposal of various types of assets,
specifically conventional ammunition.

GAO noted that: (1) DOD has not yet implemented the federal accounting
standard that requires recognizing and reporting liabilities such as
those associated with ammunition disposal, nor has it provided guidance
to the military services; (2) in commenting on GAO's recent report on
the aircraft disposal liability, DOD agreed with GAO's recommendation to
incorporate statements of federal financial accounting standards (SFFAS)
No. 5 in its "Financial Management Regulation"; (3) ammunition disposal
is an ongoing process that results from materials with a limited
shelf-life or that otherwise will not be used in operations, and the
cost can be reasonably estimated; (4) accordingly, these activities meet
the criteria for a reportable liability; (5) the cost information that
DOD developed in response to requests from congressional committees can
be used as a starting point to estimate the ammunition disposal
liability; and (6) a number of additional factors will have to be
addressed, including data reliability, data completeness, and the need
for periodic updates.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-98-32
     TITLE:  Financial Management: DOD's Liability for the Disposal of 
             Conventional Ammunition Can Be Estimated
      DATE:  12/19/97
   SUBJECT:  Property disposal
             Federal agency accounting systems
             Data integrity
             Accounting procedures
             Government liability (legal)
             Cost analysis
             Inventory control systems
             Financial statements
             Ammunition
IDENTIFIER:  Munition Items Disposition Action System
             Air Force Combat Ammunition System
             World-wide Ammunition Reporting System
             Navy Conventional Ammunition Information Management System
             Marine Ammunition and Accounting Reporting System
             
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Cover
================================================================ COVER


Report to the Secretary of Defense

December 1997

FINANCIAL MANAGEMENT - DOD'S
LIABILITY FOR THE DISPOSAL OF
CONVENTIONAL AMMUNITION CAN BE
ESTIMATED

GAO/AIMD-98-32

DOD's Liability for Ammunition Disposal

(918867)


Abbreviations
=============================================================== ABBREV

  CFO - Chief Financial Officer
  DOD - Department of Defense
  FASAB - Federal Accounting Standards Advisory Board
  FMR - Financial Management Regulation
  IOC - Industrial Operations Command
  JOCG - Joint Ordnance Commanders Group
  MIDAS - Munition Items Disposition Action System
  NSN - national stock number
  OMB - Office of Management and Budget
  PP&E - property, plant, and equipment
  SFFAS - Statement of Federal Financial Accounting Standards

Letter
=============================================================== LETTER


B-273004

December 19, 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.  The third in a
planned series of reports,\2 this report discusses the Department of
Defense's (DOD) implementation of the requirement to disclose the
liability associated with the disposal of various types of assets,
specifically conventional ammunition,\3 hereafter referred to as
ammunition. 


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

\2 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) and Financial
Management:  DOD's Liability for Aircraft Disposal Can Be Estimated
(GAO/AIMD-98-9, November 20, 1997). 

\3 DOD Directive 5160.65, "Single Manager for Ammunition" defines
ammunition to include small arms, mortars, automatic cannons,
artillery, ship gun ammunition, bombs, unguided rockets, land mines,
grenades, flares and pyrotechnics, incendiaries, projectiles, high
explosives, and fuzes.  The directive's definition includes chemical
ammunition, which is excluded from this report because estimated
costs for disposal of chemical weapons are discussed in Chemical
Weapons and Materiels:  Key Factors Affecting Disposal Costs and
Schedule (GAO/NSIAD-97-18, February 10, 1997).  Both the directive
and this report exclude nuclear weapons and guided rockets
(missiles). 


   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 by GAO.  In addition, the Federal Financial
Management Improvement Act of 1996, as well as the Federal Managers'
Financial Integrity Act, 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. 

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.\4 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. 

The liability disclosure requirements stated in SFFAS No.  5 apply to
several types of assets, including property, plant, and equipment
(PP&E) and operating materials and supplies.  SFFAS No.  3,
Accounting for Inventory and Related Property, defines operating
materials and supplies as consisting of tangible personal property to
be consumed in normal operations.  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. 

Recently, FASAB reviewed the asset category for ammunition and
reiterated its position that ammunition should be classified as
operating materials and supplies rather than federal mission PP&E. 
Although the asset categories for financial reporting may be
different, the SFFAS No.  5 requirements for recording the disposal
liability are the same for operating materials and supplies and
mission assets. 


--------------------
\4 These 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. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

DOD has not yet implemented the federal accounting standard that
requires recognizing and reporting liabilities such as those
associated with ammunition disposal, nor has it provided guidance to
the military services.  In commenting on our recent report on the
aircraft disposal liability, DOD agreed with our recommendation to
incorporate SFFAS No.  5 in its Financial Management Regulation. 
Ammunition disposal is an ongoing process that results from materials
with a limited shelf-life or that otherwise will not be used in
operations, and the cost can be reasonably estimated.  Accordingly,
these activities meet the criteria for a reportable liability.  The
cost information that DOD developed in response to requests from
congressional committees can be used as a starting point to estimate
the ammunition disposal liability.  A number of additional factors
will have to be addressed, including data reliability, data
completeness, and the need for periodic updates. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
------------------------------------------------------------ Letter :3

We undertook this review to assist DOD in its efforts to meet the new
federal accounting standard, SFFAS No.  5, and because of our
responsibility to audit the federal government's consolidated
financial statements beginning with fiscal year 1997.  Our objectives
were to determine (1) the status of DOD's efforts to implement the
new federal accounting standard for disclosure of liabilities, such
as ammunition disposal costs, and (2) whether the ammunition disposal
liability was probable and whether a reasonable estimate of the
minimum disposal liability for ammunition could be made. 

To determine if the liability is probable, we reviewed financial
accounting standards, environmental laws and regulations, and DOD
manuals that address the handling and disposal of hazardous material. 
We also reviewed congressional committee reports that requested
ammunition disposal cost information.  We also interviewed DOD
officials responsible for financial reporting and those at the
service level responsible for program management, ammunition
demilitarization, and disposal. 

To determine if a disposal liability was reasonably estimable, we
obtained information on ammunition inventories, as of September 30,
1996, the most recent data available at the time of our review, and
what it costs to demilitarize and dispose of ammunition.  To
determine the availability of ammunition inventory information, we
interviewed service officials responsible for inventory management
and obtained information on the services' ammunition inventory
systems as well as their ammunition inventories as of September 30,
1996. 

To determine the availability of ammunition demilitarization and
disposal cost information, we obtained information on the volume,
nature, and cost of the Army Industrial Operation Command's (DOD's
single manager for ammunition) disposal activities, as well as
information on the Joint Ordnance Commanders Group's munitions
demilitarization studies.  We also obtained information on the Navy's
ammunition disposal activities because the Navy disposes of certain
Navy-specific items, such as underwater torpedoes and depth charges. 
In addition, we interviewed service officials responsible for the
accounting and reporting of demilitarization and disposal costs. 

We analyzed the DOD Joint Ordnance Commanders Group, Munitions
Demil/Disposal Subgroup's 1995 and 1996 reports on demilitarization
and disposal cost information.  The Subgroup's 1996 Munitions
Demilitarization Study identified disposal costs for 23 munition\5
categories, referred to as Munition Items Disposition Action System
(MIDAS) families.  We did not independently verify the inventory and
cost data furnished to us. 

We conducted our review between November 1996 and November 1997 in
accordance with generally accepted government auditing standards. 
Appendix I lists the primary locations where we performed our review. 
We provided a draft of this report to the Secretary of Defense for
review and comment.  We received oral comments which are discussed in
the "Agency Comments and Our Evaluation" section. 


--------------------
\5 Munitions includes ammunition as well as tactical missiles. 


   DOD HAS NOT IMPLEMENTED SFFAS
   NO.  5
------------------------------------------------------------ Letter :4

As we recently stated in our report on DOD's aircraft disposal
liability, as of the end of the fiscal year on September 30, 1997,
DOD had not established a policy to implement SFFAS No.  5.  On
September 30, 1997, the DOD Comptroller's office posted revisions to
the electronic version of DOD's Financial Management Regulation (FMR)
to include SFFAS No.  1 through 4, but SFFAS No.  5 was not included. 
In commenting on a draft of our aircraft disposal liability report,
DOD agreed with our recommendation that SFFAS No.  5 be incorporated
in the FMR.\6

In addition, the DOD Comptroller, who is responsible for developing
and issuing guidance on accounting standards, and the Under Secretary
of Defense (Acquisition and Technology), who is responsible for the
operational activities associated with ammunition disposal, have not
provided implementation guidance to the services to assist them in
estimating the disposal costs for ammunition.  Service officials
stated that they are reluctant to estimate a liability for their
ammunition disposal until they receive DOD-wide guidance.  Unless
prompt action to implement this standard is taken, it is unlikely
that DOD's or the military services' fiscal year 1997 financial
statements will include an estimate of ammunition disposal costs as
required. 


--------------------
\6 See Financial Management:  DOD's Liability for Aircraft Disposal
Can Be Estimated (GAO/AIMD-98-9, November 20, 1997). 


   AMMUNITION DISPOSAL LIABILITY
   HAS BEEN INCURRED
------------------------------------------------------------ Letter :5

One of the key criteria cited in SFFAS No.  5 for a liability to be
reported is that a future payment is probable--that is, the future
outflow of resources is likely to occur.  Although, in some cases,
the likelihood of a future outflow may be difficult to determine and
an entity may have difficulty deciding whether to record a liability
for certain events, this is not the case for DOD.  DOD continually
disposes of ammunition and has an amount for disposal costs in its
annual budget.  According to the Industrial Operations Command's
Associate Director for Demilitarization, during the last 5 years, DOD
has spent over $370 million to dispose of ammunition.  Thus, because
it is known at the time of acquisition that costs will be incurred
for ammunition disposal, the probability criterion for recording a
liability is met. 

The Congress has also recognized that disposal will occur and has
emphasized the importance of accumulating these costs and considering
this information.  In the past 3 years, congressional committees have
specifically asked for information related to ammunition disposal
costs.  The Senate Committee on Appropriations, in its report on the
fiscal year 1995 Defense Appropriations bill, directed DOD to develop
a plan for the disposal of rocket motors, ammunition, and other
explosives, including information on alternative ammunition disposal
methods and related costs.  The next year, the House Committee on
Appropriations, in its report on the fiscal year 1996 Defense
Appropriations bill, expressed concern about the Army's continuing
practice of demilitarizing ammunition by open-air burning and
detonation.  The committee requested an analysis that included the
costs and savings of recycle and reuse technologies, the revenue that
could be derived from the sale of recycled and reusable products, and
the ultimate clean-up costs for open-air burning and detonation
sites.  Most recently, the Fiscal Year 1997 National Defense
Authorization Act required the establishment of a 5-year program for
the development and demonstration of environmentally compliant
technologies for the disposal of ammunition, explosives, and rockets. 


      AMMUNITION DISPOSAL PROCESS
---------------------------------------------------------- Letter :5.1

The Army Industrial Operations Command (IOC), DOD's single manager
for ammunition, has an ongoing program to dispose of ammunition from
all services.  While each service maintains its own ammunition
inventory management systems and technically owns the ammunition, IOC
manages procurement and disposal of ammunition items for all
services.  IOC supplies or ships ammunition from production and
storage sites to field installations and units; manages ammunition
disposal programs; oversees efforts to upgrade ammunition already in
service; and manages the Army's worldwide ammunition stockpile. 

IOC is responsible for the disposal of about 96 percent of all
ammunition.  The exceptions are generally service-unique ammunition
items, like Navy torpedoes, or items that are more practical to
dispose of at their current installation or depot or by a contractor. 
The reasons for disposal of ammunition are obsolescence,
deterioration, and excess supply.  Obsolescence occurs when the
weapons systems that use the ammunition are phased out, thus
eliminating the need for the ammunition.  Ammunition becomes excess
when the quantities on hand exceed what is needed due to factors such
as downsizing of the military forces.  Deterioration can result from
age and long-term storage conditions that render the ammunition
unusable. 

The two overall types of ammunition disposal methods are (1)
destructive processes that either explode or incinerate the
ammunition and (2) resource recovery and recycling processes that
remove the explosive components through a variety of methods and
allow their reuse. 


      AMMUNITION INVENTORY
---------------------------------------------------------- Letter :5.2

Ammunition under IOC's control is tracked by the Commodity Command
Standard System.  This system accounts for ammunition in depots, but
does not include ammunition issued to military field units.  Army
field ammunition stocks are accounted for by the World-wide
Ammunition Reporting System.  Systems used by the other services are
the Air Force's Combat Ammunition System, the Navy's Conventional
Ammunition Information Management System, and the Marine Corps
Ammunition and Accounting Reporting System.\7 We requested a detailed
listing of the year-end ammunition inventory from each of the
services and obtained the inventory balance from the information they
provided to us.  The September 30, 1996, ammunition inventory balance
is shown in table 1, which contains the most recent data available. 



                                Table 1
                
                 Service Inventory of Ammunition as of
                           September 30, 1996

Service                                       Inventory balance (tons)
----------------------------------------  ----------------------------
Army                                                         2,159,667
Air Force                                                    2,102,988
Navy                                                           644,424
Marine Corps                                                   107,797
======================================================================
Total                                                        5,014,876
----------------------------------------------------------------------
The ammunition inventory serves as the basis for estimating the
disposal liability because ammunition used in training and operations
is generally replaced to maintain the inventory at certain levels. 
As a result, training and operational usage may not reduce the total
liability for ammunition disposal. 


--------------------
\7 We as well as the DOD Inspector General and service auditors have
reported problems with the reliability of information in DOD's
accounting and logistical systems.  While there are limitations in
the data, DOD is working to improve the systems that should, over
time, increase the accuracy of the information and improve the
disposal liability estimates.  See our report Defense Financial
Management (GAO/HR-97-3, February 1997). 


   AMMUNITION DISPOSAL LIABILITY
   COULD BE ESTIMATED
------------------------------------------------------------ Letter :6

The second key criterion in SFFAS No.  5 for reporting of a liability
is that an amount be reasonably estimable.  In the past, DOD has
reported its estimated ammunition disposal costs using several
methodologies that range from a "rule of thumb" figure to more
detailed cost analyses based on specific types of ammunition. 
Achieving a reasonable estimate is possible using the existing
detailed analyses as a starting point.  A number of key factors would
have to be considered to ensure that the development of the
ammunition disposal cost estimate is as accurate as possible. 


      DOD'S ESTIMATES BASED ON
      ANALYSIS BY AMMUNITION TYPE
---------------------------------------------------------- Letter :6.1

DOD has used $1,000 per ton as a "rule of thumb" for ammunition
disposal costs.  For example, in May 1995 congressional testimony,
the Deputy for Ammunition, U.S.  Army, stated that "rule of thumb is
that it costs about $1,000 a ton, hopefully a little less, to get rid
of unserviceable ammunition."\8 According to officials in the Army's
Office of the Deputy for Ammunition, the $1,000 estimate was
calculated for the Army's Conventional Ammunition Demilitarization
Master Plan issued in May 1993.  They stated that the $1,000 estimate
was an average cost based on actual disposals during the 2 years
preceding the master plan's issuance. 

As part of its response to Senate and House requests for more
detailed disposal cost information in 1995 and 1996, DOD compiled
historical cost information that could be used as a starting point
for developing a reasonable estimate of the ammunition disposal cost
liability.  In response to the fiscal year 1995 Senate Committee on
Appropriations report requesting information on alternative disposal
procedures and costs for ammunition and other explosives, the Joint
Ordnance Commanders Group (JOCG),\9 Munitions Demil/Disposal
Subgroup, analyzed the ammunition stockpile in 1995 using "families"
of items for disposal.  The MIDAS families are based on the materials
contained in the ammunition, methods of assembly/disassembly,
preferred demilitarization methods, and any unique features.  In its
September 1995 report, JOCG provided an estimate of the tonnage
requiring disposal for each MIDAS family of ammunition. 

In response to the 1996 House Committee on Appropriations report that
requested additional information, the JOCG subgroup formed an ad hoc
working group\10 to study the comparative benefits and costs of
different disposal methods using the MIDAS families as the basis for
collecting and summarizing the cost per ton for the various
alternative disposal procedures.  The cost information was collected
for both government installations and contractor facilities that had
performed ammunition disposal during fiscal years 1994 to 1996.  For
the 1996 study, the JOCG working group collected historical cost
information on the ammunition disposed of during fiscal years 1994
through 1996.  It grouped\11 the disposal actions by MIDAS family and
calculated an average disposal cost per ton based on the facility
type--government-owned and operated facilities, government-owned
facilities operated by a contractor, and contractor-owned and
contractor-operated facilities.  For 14 of the MIDAS families for
which costs were available, the demilitarization was performed by a
single category of facility and thus yielded a single average cost. 
The other eight MIDAS families involved demilitarization at more than
one type of facility, thus yielding a range of average costs.  See
appendix II for a listing of the MIDAS families and the average
disposal costs that were developed based on the working group's
report. 

Although a number of critical factors would have to be considered,
including the reliability of the historical data as discussed in the
following section, the cost estimates developed for the MIDAS
families can be used as a starting point to estimate the ammunition
disposal liability.  The national stock numbers (NSNs) of ammunition
items throughout DOD have been associated with the MIDAS families. 
For example, for the Army, the U.S.  Army Defense Ammunition Center
and School staff provided us with a data file that translated the
specific Army ammunition NSN line items into their respective MIDAS
families.  Using Army's fiscal year 1996 inventory amount of
2,144,995 tons (which excludes 14,672 tons of ammunition for which
MIDAS cost information was not available) and the average disposal
cost data developed by the JOCG working group for the MIDAS families,
we estimated that the Army's ammunition disposal liability could
range from about $1.3 billion to $2.1 billion. 

Marine Corps, Navy, and Air Force officials verified that information
was available to perform a similar analysis of their respective
ammunition inventories using NSNs and the MIDAS cost families. 


--------------------
\8 Testimony of the Deputy for Ammunition, U.S.  Army, before the
Subcommittee on National Security, House Committee on Appropriations,
May 2, 1995. 

\9 JOCG consists of representatives from each of the four military
services.  It was established to coordinate and consolidate programs
for the development, production, and support of military ammunition
systems within DOD. 

\10 Participants included the Army Defense Ammunition Center and
School, Industrial Operations Command, Argonne National Laboratory,
Army Corps of Engineers, as well as subject matter experts from the
military services, industry, and academia. 

\11 Other groupings showing average costs were included in the
working group's analysis. 


      KEY ESTIMATION FACTORS TO BE
      CONSIDERED
---------------------------------------------------------- Letter :6.2

In using the MIDAS analysis to estimate the disposal liability,
several additional factors would have to be considered to refine the
estimate.  Although SFFAS No.  5 is clear that the disposal liability
is to be a reasonable estimate and that the disclosure may be
presented as a range, the accuracy and precision of the range will
affect its usefulness to decisionmakers.  Key estimation factors to
be considered include the following. 

Data reliability - Although we did not verify the underlying data
supporting the historical cost data developed for the MIDAS families,
a limited review yielded a number of discrepancies.  For example, one
schedule indicated that a contractor had destroyed 1,512 tons of
small caliber ammunition in fiscal year 1996 for $1,512, or $1 per
ton.  The same schedule showed that the same contractor had destroyed
the same type of ammunition in fiscal year 1995 for $728 per ton.  In
addition, the schedule showed that two government-owned,
government-operated facilities had destroyed small caliber ammunition
with costs of $0.10 per ton at one facility and $3,327 per ton at the
other facility.  Such anomalies would have to be addressed before
relying on these data as a basis for estimating the total disposal
liability. 

In addition, the appropriateness of averaging the actual disposal
costs by type of facility would have to be considered.  For example,
the study concluded that the disposal cost for white phosphorus was
$1,231 per ton.  The underlying data show that white phosphorus was
destroyed by one government-owned, government-operated facility in
six separate batches in fiscal years 1994 through 1996.  The reported
costs per ton for each batch ranged from $646 to $14,208 and were
averaged to arrive at the $1,231 figure.  If it is determined that
averaging does not appropriately reflect the true range of these
costs, alternatives may include calculating a disposal liability
range for each MIDAS family based on factors such as type of facility
or disposal method. 

Data completeness - As stated in appendix II, data were not available
for six of the MIDAS families because (1) the types of ammunition
were not disposed of during the period studied or (2) the ammunition
was disposed of by a specific service and the cost data were not
available to the working group.  DOD would have to consider the
significance of these costs and determine whether cost data were
collected by individual services.  In addition, the MIDAS costs did
not include an amount for packaging, crating, handling, and
transportation, nor do they reflect the value of any scrap recovered
from the demilitarization process.  JOCG determined that packaging,
crating, handling, and transportation costs ranged from $66 per ton
to $228 per ton.  Also, although the working group's 1996 report
indicated that storage costs were part of the disposal costs, the
group did not develop any storage cost estimates. 

Updated information - Finally, estimates using the MIDAS costs would
have to be updated periodically to take into account the use of
different disposal methods and locations, current costs, and other
factors that would affect costs.  Such factors would have to be
considered by DOD as it develops its policy for determining its
ammunition disposal liability. 


   REPORTING TOTAL DISPOSAL
   LIABILITY BY FUTURE TIME
   PERIODS WOULD BE USEFUL
------------------------------------------------------------ Letter :7

DOD has pointed out that the total disposal liability estimate for
ammunition will result in a significant liability--much of which
would not require budget authority in the current year.  Thus, one
way to provide a proper context for this reported liability and make
it more meaningful to decisionmakers would be to provide a breakdown
of the liability in a footnote to the financial statements showing
the liability based on the services' estimates of the ammunition
scheduled to be taken out of service. 

Table 2 is a simplified illustration of how the ammunition disposal
liability for ammunition managed by the single manager could be
related to the time period in which it is taken out of service.  For
the purposes of this illustration, we used $1,000 per ton as the
basis for estimating the disposal liability.  As discussed
previously, in actual practice, the services should refine this
figure to reflect the expected cost experience within the time
period.  We applied the $1,000 per ton disposal liability to (1)
tonnage estimates reported in the JOCG September 1995 study that
projected the quantity of ammunition that would be turned over to the
single manager for disposal in fiscal years 1995 through 2001 and (2)
the remaining inventory after subtracting these quantities. 



                                     Table 2
                     
                      Example of How the Liability Could Be
                         Related to the Disposal Schedule

                              (Dollars in millions)

                  Liability associated with ammunition expected to
                   be transferred for disposal during fiscal year
                  ------------------------------------------------
To
ta
l
am
mu
ni
ti
on
di
sp
os
al
li
ab
il
it
y      Liability
as    associated
of          with
9/    ammunition
30      awaiting
/    disposal as
96    of 9/30/96      1997      1998      1999      2000      2001    Thereafter
--  ------------  --------  --------  --------  --------  --------  ------------
$5          $393      $107       $93       $85       $74       $72        $4,191
 ,
 0
 1
 5
--------------------------------------------------------------------------------
Such information could provide important context for congressional
and other budget decisionmakers on the total liability by showing the
annual impact of potentially needed budget authority for ammunition
expected to be transferred for disposal.  Furthermore, using time
periods to present data consistent with budget justification
documents, such as DOD's Future Years Defense Program, provides a
link between budgetary and accounting information, one of the key
objectives of the CFO Act. 


   CONCLUSIONS
------------------------------------------------------------ Letter :8

Ammunition disposal costs are both probable and estimable and,
therefore, meet the criteria stated in SFFAS No.  5 for reportable
liabilities.  In commenting on our recent report on the aircraft
disposal liability, DOD agreed to implement SFFAS No.  5 and to
record the disposal liability related to aircraft, which are
categorized as federal mission assets.  DOD also agreed that the DOD
Comptroller and Under Secretary of Defense (Acquisition and
Technology) should promptly issue implementing guidance to assist the
services in estimating the aircraft disposal liability.  Because the
same requirements apply to ammunition, which is considered part of
the operating material and supply asset category, similar action is
necessary to ensure that the ammunition disposal liability is
properly recorded.  Development of a reasonable estimate of the
ammunition disposal liability, which addresses the key factors
identified in this report, will help ensure not only that the
financial statement disclosure requirements are met, but will also
provide important information to the Congress and other
decisionmakers as they continue to assess ammunition disposal methods
and related costs. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :9

We recommend that you ensure that

  -- the DOD Comptroller and the Under Secretary of Defense
     (Acquisition and Technology) promptly issue joint implementing
     guidance for the services on the SFFAS No.  5 requirements for
     recognition of a liability for ammunition disposal costs.  This
     guidance should address the key liability estimation factors
     identified in this report, including data reliability, data
     completeness, and the need for updated information. 

  -- the DOD and military service comptrollers include the estimated
     ammunition disposal liability in DOD's fiscal year 1997
     financial statements. 


   AGENCY COMMENTS AND OUR
   EVALUATION
----------------------------------------------------------- Letter :10

In commenting on a draft of this report, Department of Defense
officials concurred with our recommendations that joint implementing
guidance be issued promptly on the SFFAS No.  5 requirements for
recognition of a liability for ammunition disposal costs.  In
addition, DOD officials stated that current disposal cost estimates
can be reasonably determined for ammunition types that have been in
the active inventory for some period of time.  However, DOD officials
stated that the development of disposal cost estimates for all types
in the inventory and the development and coordination of standard
application procedures and reporting guidance would take time to
complete.  For this reason, Defense officials stated that it will not
be feasible to report the estimated ammunition disposal liability in
the DOD's financial statements prior to fiscal year 1998. 

SFFAS No.  5 was issued almost 2 years ago to allow agencies ample
time to develop implementing policies and procedures prior to its
fiscal year 1997 effective date.  As stated in this report,
information is available on all types of ammunition disposal
processes to develop a reasonable estimate of these costs.  Such cost
information can be applied to all types of ammunition, regardless of
the length of time the ammunition has been in the active inventory. 
Such an estimate need not be precise--SFFAS No.  5 permits the
reporting of a range.  Accordingly, DOD, with a concentrated effort,
can develop an estimate of ammunition disposal costs for its fiscal
year 1997 financial statements. 


--------------------------------------------------------- Letter :10.1

This report contains recommendations to you.  The head of a federal
agency is required by 31 U.S.C.  720 to submit a written statement on
actions taken on these recommendations to the Senate Committee on
Governmental Affairs and the House Committee on Government Reform and
Oversight not later than 60 days after the date of this report.  A
written statement also must be sent to the House and Senate
Committees on Appropriations with the agency's first request for
appropriations made more than 60 days after the date of this report. 

We are sending copies of this report to the Chairmen and Ranking
Minority Members of the Senate Committee on Armed Services, the House
Committee on National Security, the Senate Committee on Governmental
Affairs, the House Committee on Government Reform and Oversight, and
the Subcommittee on Management, Information and Technology, and to
the Director of the Office of Management and Budget.  We are also
sending copies to the Under Secretary of Defense (Comptroller), the
Air Force Assistant Secretary for Financial Management and
Comptroller, the Army Assistant Secretary for Financial Management
and Comptroller, the Navy Assistant Secretary for Financial
Management and Comptroller, the Under Secretary of Defense
(Acquisition and Technology), the Deputy Under Secretary of Defense
for Environmental Security, and the Acting Director, Defense Finance
and Accounting Service.  Copies will be made available to others upon
request. 


Please contact me at (202) 512-9095 if you have any questions
concerning this letter.  Major contributors to this letter are listed
in appendix III. 

Sincerely yours,

Lisa G.  Jacobson
Director, Defense Audits


ACTIVITIES/LOCATIONS CONTACTED OR
VISITED
=========================================================== Appendix I

We contacted personnel and conducted work at the following locations. 

DEPARTMENT OF DEFENSE

DOD Headquarters, Pentagon, Washington, D.C. 

DEFENSE FINANCE AND ACCOUNTING
SERVICE

Defense Finance and Accounting Service, Denver, Colorado

AIR FORCE

Air Force Combat Support Division, Air Force Headquarters, Pentagon,
Washington, D.C. 

Ogden Air Force Logistics Center, Commodities Directorate, Hill Air
Force Base, Ogden, Utah

ARMY

Army Industrial Operations Command, Rock Island Arsenal, Rock Island,
Illinois

Army Materiel Command, Alexandria, Virginia

Army Missile Command, Redstone Arsenal, Huntsville, Alabama

U.S.  Army Defense Ammunition Center and School, Savanna, Illinois

MARINE CORPS

Marine Corps Systems Command, Arlington, Virginia

NAVY

Navy Ordnance Center, Inventory Management Systems Division,
Mechanicsburg, Pennsylvania

Naval Ordnance Center, Indianhead, Maryland

Naval Surface Warfare Center, Crane Division, Crane, Indiana


REPORTED AVERAGE AMMUNITION
DISPOSAL COSTS BY MIDAS FAMILY
========================================================== Appendix II

                         (Dollars in millions)

                                                      Reported average
                                                      costs per ton of
Type of ammunition (MIDAS family)                           ammunition
--------------------------------------------------  ------------------
White phosphorus                                                $1,231
Riot control                                                     1,601
Smokes, HC/colored/RP                                            1,010
Depleted uranium                                                 1,895
High explosive components/devices                                1,557
High explosive bombs                                               298
High explosive cartridges                                   430 to 776
High explosive "D" (ammunition that contains                648 to 906
 ammonium picrate)
High explosives for improved ammunition/cluster           221 to 1,264
 bomb units (ICM/CBUs) and submunitions
High explosive grenades                                          3,735
High explosive projectiles and warheads                     578 to 626
High explosive rockets                                             844
Demolition material                                                976
High explosive land mines                                        1,578
Bulk propellants and black powder                                  878
Propellant charges and increments                                  873
Propellant munitions/components                             745 to 765
Small caliber ammunition                                    104 to 542
Fuzes                                                     243 to 1,065
Pyrotechnics                                                     1,696
Inert (training material)                                          463
No family                                                          748
----------------------------------------------------------------------
Note:  The study included missiles as a MIDAS family, but missiles
were excluded from our analysis because they are not included in
DOD's definition of ammunition.  In addition, the study did not
identify costs for six MIDAS families of ammunition:  dyes,
incendiary/themite, bulk high explosives, high explosive depth
charges and underwater mines, torpedoes, and incinerable munitions
and components.  Data were not available for these families because
(1) these types of ammunition were not disposed of during the period
studied or (2) the ammunition was disposed of by a specific service
and the cost data were not available to the working group. 

Source:  JOCG Munitions Demilitarization Study (June 1996).  We did
not verify these data. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

ACCOUNTING AND INFORMATION
MANAGEMENT DIVISION, WASHINGTON,
D.C. 

Jacob W.  Sprouse, Jr., Audit Manager
Linda J.  Brigham, Auditor

KANSAS CITY OFFICE

Dieter M.  Kiefer, Assistant Director

CHICAGO OFFICE

John R.  Richter, Auditor-in-charge
Stewart O.  Seman, Evaluator
Lynn M.  Filla-Clark, Auditor
Frederick P.  Schmidt, Evaluator

*** End of document. ***