DoD Standards and Guidance on Valuation

Strategy and Implementation Guidance for General Equipment Valuation Memo

The Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics (AT&L), the Office of the Under Secretary of Defense (Comptroller), and the General Equipment Working Group collaboratively worked together to provide Strategy and Implementation Guidance for General Equipment Valuation. The sections below describe the main topics found in the Memo.

Risk Based Approach

DoD Components will prioritize their efforts in establishing and validating their opening balances based on the assets’ impact on the financial statements. The highest priority should be given to those assets with the highest Deemed Cost-derived net book value. However, assets with little or no net book value must not be ignored. Equipment for which the historical cost has already been validated audit ready (including adequate supporting documentation sufficient for audit purposes) does not need to be revalued.

When prioritizing the opening balance valuation effort, DoD Components must also determine if the asset has undergone any modifications, modernizations, upgrades, and/or improvements that have impacted the asset’s value or extended its useful life.

Establishing Opening Balances

Opening balances are account balances that exist at the beginning of the reporting period. They are based upon the closing balances of the prior reporting period and reflect the effects of transactions, events and policies of prior periods. DoD Components must have their opening balances and go-forward processes ready and auditable for the Fiscal Year 2018 annual financial statement audit.

DoD will use Deemed Cost to value the opening balances for General Equipment. Deemed Cost is defined by FASAB as “an amount used as a surrogate for initial amounts that otherwise would be required to establish opening balances.” The FASAB Exposure Draft allows for the use of Deemed Cost for establishing opening balances based on alternative valuation methodologies. See the “Valuation Approaches” tab for DoD Approved Deemed Cost Methodologies for General Equipment.

When establishing opening balances using Deemed Cost, DoD Components will calculate a gross value and an accumulated depreciation value for General Equipment assets. Both the gross value Deemed Cost and accumulated depreciation Deemed Cost will be recorded in the accounting records. Recording both the gross value and accumulated depreciation will facilitate consistent reporting for financial statement footnote disclosure with General Equipment recorded after establishment of the opening balances.

Establishing Opening Balances – Construction In Progress

Capital expenditures or progress payments paid to contractors, coinciding with the portion of the work completed for General Equipment being manufactured or constructed, is to be recorded in a Construction in Progress (CIP) account. The CIP balance is included in the footnotes to the financial statements and is included in the General Property, Plant, and Equipment line of the Balance Sheet, and must therefore be included in the General Equipment Opening Balance. As a result, each Component’s Financial Management Community, working with their Acquisition Community, must establish a CIP balance for each existing/ongoing acquisition program with outstanding General Equipment deliverables. To create the CIP balances, DoD Components must determine capital versus non-capital costs (if the expected value of the completed General Equipment asset will be equal to or greater than the applicable capitalization threshold and it will have a useful life of 2 years or more the then it is a capital cost and should be accumulated in CIP). Where possible, transaction detail should be evaluated to identify costs that need to be capitalized. The opening balance for CIP will represent the amount disbursed to contractors (capital costs only) from program inception less the acquisition cost of General Equipment delivered and capitalized. The difference between the two amounts will be the CIP opening balance. The CIP opening balance formula is:


For some contract types that include contract finance payments, the Component must reconcile the payments to actual progress completed by the Contractor. If the CIP balance based on the above formula surpasses progress on the contract and is material, the Component must move the appropriate amount from CIP into the Advances account.

Sustain and Go-Forward

Processes, systems, and controls should be in place to record transactions at historical cost in compliance with GAAP prior to the establishment of opening balances. Some of these processes may involve manual work arounds until the end-state target environment is achieved.

The end state DoD target environment for recording General Equipment transactions in accordance with GAAP will leverage Enterprise Resource Planning systems and improved processes to capture and report historical costs (including both direct and indirect costs). It may be several years before the DoD has systems in place for the end state target environment that are capable of valuing equipment using cost accounting to produce actual historical costs based on transactions. Prior to reaching the end state target environment, DoD Components can use reasonable estimates for the purpose of cost assignment/allocation. However, the estimates must be bound by actual program and contract expenditures. The estimates provide a means to allocate the expenditures. Using estimates in this capacity provides two key benefits:

Sustain and Go-Forward - Construction In Progress

DoD Components must be able to capture capital costs paid to contractors and accumulate them (where they meet the criteria for capitalization) in CIP. DoD Components must maintain reasonable estimates of per unit costs which will be used to relieve CIP and capitalize the resulting General Equipment asset. An internal DoD study found that other direct and indirect costs such as program management costs are significant to the General Equipment reported balances. Therefore, these costs need to be captured as incurred, recorded in CIP, and allocated to the end item value. DoD Components need to determine how they will capture actual program management costs as well as other costs and the method for how they will allocate these costs.

The CIP balance must reflect actual progress made on the contract. Certain contract finance payments, which includes advance amounts, are to be recorded in the Advance account until the end items are delivered or the contract progress catches up to payments. Conversely, if contract payments lag behind actual construction progress, an accrual may be necessary to increase the CIP balance to an appropriate value. To ensure that CIP amounts reflect actual progress on the contract, DoD Components will perform a periodic reconciliation (at least quarterly) between amounts recorded in CIP and the actual progress on the contract. This may require working with the contractor to perform the reconciliation.

Capital costs will be relieved from CIP as the assets are delivered. The value of an asset constructed after the opening balance can be based upon a reasonable estimate of the per unit cost in accordance with SFFAS 6, Accounting for Property Plant and Equipment, and SFFAS 4 Managerial Cost Accounting Concepts and Standards for the Federal Government. Reasonable estimates may be based on established methods that will approximate historical cost such as contracts, budget documents, engineering and acquisition documents, or reports reflecting amounts to be expended.

Some assets will be under construction at the time the opening balance is established. The value assigned to these assets will consist of two parts. One part will be the portion of the asset under construction as of the opening balance. The value of this portion will be based on how it was estimated when initially calculated and recorded as a Deemed Cost. The second part of the value will be the portion of the asset constructed after the opening balance. The value of this portion of the asset will be recorded in accordance with SFFAS 4 and SFFAS 6 as described in the above paragraph. The resulting value of the asset that will be debited to the general equipment account and credited to the CIP account will be the sum of both parts.

Useful Life

The Strategy and Implementation Guidance for General Equipment Valuation provides a table that sets out the useful lives to be applied to general purpose equipment and weapon systems. If the GE asset’s useful life is not identified in the table, please contact the Property & Equipment Policy Office for specific guidance. If the DoD Components report a useful life other than what is stated in the table, they must document the justification.

Modifications, Improvements, and Upgrades

Costs that either extend the useful life of existing General Equipment, or enlarge or improve its capacity must be capitalized and depreciated/amortized over the lessor of the remaining useful life of the improvement or associated asset. For equipment, these improvements are often referred to as modifications, modernizations, and upgrades. Modifications, modernizations, upgrades, and improvements exceeding the capitalization threshold must be factored into the individual General Equipment end item value. Current DoD guidance requires that:

New Contracts and New Acquisitions

Significant business process improvements and additional guidance have been developed recently regarding new acquisition programs and contracts. Implementing these and other requirements will greatly assist DoD Components in assigning auditable values to General Equipment and are critical to the sustainment of equipment balances and achievement of the end state target environment.

New acquisition contracts must be written to reflect the end items being manufactured and constructed. In order to trace commitments, obligations, and expenditures to the General Equipment recorded in the DoD Component’s accounting records, it is essential that the level of detail in the obligating document be aligned to the level at which items will be delivered, recorded in the accounting records, and managed. The Defense Financial Acquisition Regulation Supplement (DFARS) provides specific instructions for the composition of the Contract Line Item Numbers (CLINs) and Accounting Classification Reference Numbers (ACRNs), which ensures funding citations are appropriately designated for items and services being acquired. Where applicable, the CLINs will be determined to be either capital or noncapital.

DoD Components are required to submit an Acquisition Strategy to the Milestone Decision Authority prior to acquiring new weapon systems (General Equipment). The Acquisition Strategy must be updated throughout the acquisition process, specifically before the completion of a milestone. Successful programs will have an Acquisition Strategy that contains sufficient information to determine the financial accounting treatment of costs, a breakdown of the deliverable end items, and a proposed contract structure that will allow appropriate accounting information to be associated with each deliverable item or task.

DoD Financial Management Regulation (FMR DoD 7000.14-R)

OUSD(C) has also issued guidance that directs statutory and regulatory financial management requirements, systems, and functions for all appropriated and non-appropriated, working capital, revolving, and trust fund activities. Information with regards to General Property, Plant and Equipment may be found in Volume 4, Chapter 6. Guidance is currently being updated to include additional information for General Equipment and Internal Use Software (IUS).

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