Kathy Sherrill Office of the Under Secretary of Defense Comptroller Accounting Finance Policy Analysis 703-614-7524

1. Kathy Sherrill Office of the Under Secretary of Defense (Comptroller) Accounting & Finance Policy & Analysis 703-614-7524 � kathy.sherrill@osd.mil Intragovernmental Eliminations

2. Overview Reporting Requirements Intragovernmental Transactions (IGT) Examples Treasury Requirements Levels of IGT DoD�s Material Weakness The Solution Your Role Resources

3. Reporting Requirements Generally Accepted Accounting Principles (GAAP) require the elimination of intragovernmental transactions from consolidated financial statements to prevent overstating accounts for intra/inter-entity activity IGT must be eliminated from the DoD and Government-wide financial statements The basic idea is that a reader of financial statements is interested in seeing how the business did � business with yourself distorts that picture Eliminating intra-entity balances has no impact on the bottom line, while eliminating the overstatement of assets, liabilities, revenues and expenses that occur when you carry intra-entity offsetting balances IGT must be eliminated from the DoD and Government-wide financial statements The basic idea is that a reader of financial statements is interested in seeing how the business did � business with yourself distorts that picture Eliminating intra-entity balances has no impact on the bottom line, while eliminating the overstatement of assets, liabilities, revenues and expenses that occur when you carry intra-entity offsetting balances

4. Intragovernmental (IGT) Transactions Any transactions involving sales, services or transfers within or between two entities of the federal government

5. Examples of Intragovernmental Transactions Intragovernmental buy/sell transactions Intragovernmental transfers Employee benefits transactions Intragov. Buy/sell examples: Interfund Purchases International Merchant Purchase Authorization Card (IMPAC) purchases from federal sources General Services Agency (GSA) supply card purchases GSA vehicle and space rental Transportation purchased from US Transportation Command (USTRANSCOM), including those billed directly from USTRANSCOM or via PowerTrack Supplies/services provided under Military Interdepartmental Purchase Request (MIPR) accepted category I (reimbursable) Services provided under Inter/Intra-service Support Agreements Transfer examples: Assets transferred between federal partners (with or without resources) Appropriation and Non-expenditure transfers Employee Benefits: Department of Labor Office of Personnel ManagementIntragov. Buy/sell examples: Interfund Purchases International Merchant Purchase Authorization Card (IMPAC) purchases from federal sources General Services Agency (GSA) supply card purchases GSA vehicle and space rental Transportation purchased from US Transportation Command (USTRANSCOM), including those billed directly from USTRANSCOM or via PowerTrack Supplies/services provided under Military Interdepartmental Purchase Request (MIPR) accepted category I (reimbursable) Services provided under Inter/Intra-service Support Agreements Transfer examples: Assets transferred between federal partners (with or without resources) Appropriation and Non-expenditure transfers Employee Benefits: Department of Labor Office of Personnel Management

6. Examples of Non-Federal Transactions Payments to individuals Payments to vendors/contractors Direct-cite MIPRs Transactions with state/local governments Transactions with Non-Appropriated Funds The key is: Is the entity funded with an appropriation from the Federal Government? Note that some vendors/contractors use US, Federal or Government in their titles � this does not mean they are Federal entities. USDA Grad School is an example � this entity is non-federal! Example of payments to individuals: Payroll, travel, awards, leave etc. Direct-cite MIPRs: (Category II) Note: Emphasize the difference between direct-cite and reimbursable MIPRs The key is: Is the entity funded with an appropriation from the Federal Government? Note that some vendors/contractors use US, Federal or Government in their titles � this does not mean they are Federal entities. USDA Grad School is an example � this entity is non-federal! Example of payments to individuals: Payroll, travel, awards, leave etc. Direct-cite MIPRs: (Category II) Note: Emphasize the difference between direct-cite and reimbursable MIPRs

7. Treasury Requirements US Standard General Ledger (USSGL) reporting with attributes �F� = intragovernmental �N� = non-federal Trading partner list for all �F� transactions Reciprocal Categories Reconciliation Detail documents must be established within source systems with proper federal/non-federal identifiers Trading partners must be discernable �F� Transactions: For all �F� transactions reported to Treasury a list of partners must be provided IGT is reported by reciprocal categories: Definition: Reciprocal categories = pairings of related USSGL accounts used to reconcile and eliminate like IGT (available on Treasury website � websites at end of briefing) Examples of reciprocal categories: Revenues/Expenses (and Capitalized Assets) Accounts Receivable/Accounts Payable Transfers In/Transfers Out For a complete list refer to Reconciliation: Mandatory reconciliation with fiduciary partners (DoL and OPM) DoD must prepare a report of level 1 differences Requires CFO to certify balances reported!Detail documents must be established within source systems with proper federal/non-federal identifiers Trading partners must be discernable �F� Transactions: For all �F� transactions reported to Treasury a list of partners must be provided IGT is reported by reciprocal categories: Definition: Reciprocal categories = pairings of related USSGL accounts used to reconcile and eliminate like IGT (available on Treasury website � websites at end of briefing) Examples of reciprocal categories: Revenues/Expenses (and Capitalized Assets) Accounts Receivable/Accounts Payable Transfers In/Transfers Out For a complete list refer to Reconciliation: Mandatory reconciliation with fiduciary partners (DoL and OPM) DoD must prepare a report of level 1 differences Requires CFO to certify balances reported!

8. Levels of Intragovernmental Transactions Treasury recognizes 2 levels Level 1 = Between DoD and Non-DoD Entities Level 2 = Between DoD Components DoD recognizes additional levels Level 3 = Within DoD Components Level 4 = Between DoD Agencies Level 5 = Between Entities of one Agency Level 6 = Within an Entity Examples: Level 1: DoD to GSA, or DoD to Dept. of Commerce, etc. Level 2 = Between DoD entities: Army to Navy, or Other Defense Agencies to Air Force Levels 4-6 are subdivisions of level 3 in DDRS: Level 4: Army GF to Army WCF, or DLA GF to DLA WCF Level 5 = Between business areas of the same fund: DLA Distribution Depots to DLA Supply management, or Army O&M to Army MILCON Level 6 = Within a business area: DLA Distribution Depots to DLA Distribution Depots, or Army O&M to Army O&M Note: All transactions below level 1 are eliminated from the DoD consolidated financial statements. The only IGT remaining in DoD consolidated statements are transactions between DoD and other Federal partners. Note: Talk to your service provider to help you drill down in DDRS.Examples: Level 1: DoD to GSA, or DoD to Dept. of Commerce, etc. Level 2 = Between DoD entities: Army to Navy, or Other Defense Agencies to Air Force Levels 4-6 are subdivisions of level 3 in DDRS: Level 4: Army GF to Army WCF, or DLA GF to DLA WCF Level 5 = Between business areas of the same fund: DLA Distribution Depots to DLA Supply management, or Army O&M to Army MILCON Level 6 = Within a business area: DLA Distribution Depots to DLA Distribution Depots, or Army O&M to Army O&M Note: All transactions below level 1 are eliminated from the DoD consolidated financial statements. The only IGT remaining in DoD consolidated statements are transactions between DoD and other Federal partners. Note: Talk to your service provider to help you drill down in DDRS.

9. Note: Credit goes to Dale Yeakel of DLA for creating the base chart � I�ve modified his chart. This is a pictorial to show you what happens to IGT when reports are consolidated at the various levels. Legend at bottom indicates the various levels of transactions in color and by number. The picture shows you in color at what point transactions are eliminated from the financial statements. Note that level 6 has no color and there is no level 6 line on the chart � that is because level 6 transactions are already eliminated from a business area financial statement: the only way to see them is by querying DDRS for level 6 eliminations: For example: Look at any WCF (or GF) consolidating financial statement in DDRS � there will be columns for each business area, an eliminations column, and a consolidated column. The business area columns will contain transactions between the business areas (level 5) and all levels above. The total of the transactions between the business areas of that entity reflect in the eliminations column and are deducted from the consolidated total. Level 6 transactions (within the same business area) are already eliminated from the business area column � you will never see them in a report � to see them you must query DDRS (trading partner reports) Note: There are several trading partner reports are available in DDRS � they are extremely helpful � I highly suggest you make use of them! They are also helpful for variance analysis, as changes in the level of intra-entity activity between periods can explain a portion of your variance!Note: Credit goes to Dale Yeakel of DLA for creating the base chart � I�ve modified his chart. This is a pictorial to show you what happens to IGT when reports are consolidated at the various levels. Legend at bottom indicates the various levels of transactions in color and by number. The picture shows you in color at what point transactions are eliminated from the financial statements. Note that level 6 has no color and there is no level 6 line on the chart � that is because level 6 transactions are already eliminated from a business area financial statement: the only way to see them is by querying DDRS for level 6 eliminations: For example: Look at any WCF (or GF) consolidating financial statement in DDRS � there will be columns for each business area, an eliminations column, and a consolidated column. The business area columns will contain transactions between the business areas (level 5) and all levels above. The total of the transactions between the business areas of that entity reflect in the eliminations column and are deducted from the consolidated total. Level 6 transactions (within the same business area) are already eliminated from the business area column � you will never see them in a report � to see them you must query DDRS (trading partner reports) Note: There are several trading partner reports are available in DDRS � they are extremely helpful � I highly suggest you make use of them! They are also helpful for variance analysis, as changes in the level of intra-entity activity between periods can explain a portion of your variance!

10. DoD�s Material Weakness DoD cannot support eliminations with the details required to pass an audit No transaction level support A large portion of IGT and partners estimated Unsupported transactions to �force� IGT To achieve an unqualified audit opinion DoD must overcome this obstacle IGT and partners are estimated: Sellers drive balances Accommodation for entities with waivers The impact when we don�t properly report IGT is: Unsupported Entries: Reclassifications between �F� and �N� Sometimes we must accrue if there appears not to be enough IGT to eliminate or reclass We may recognize invalid losses and gains I�m sure you all have read the articles about the billions of dollars of adjustments � we will never pass audit as long as we�re doing this to any material extent If the adjustments posted to force IGT are not �correct� we actually do misstate our bottom line: Example: We cannot reconcile transfers in/out, so most simply eliminate the two against one-another and recognize a gain or loss for the difference � this gain or loss misstates the consolidated entity financial statements (Hopefully, the other side of those missing tranfsers are on another DoD entity, and the gains/losses will be offset in the long run!) If you think about it, you can come up with many other examples of the often material impact these adjustments can have on the entity, DoD and even the governmentwide statements Emphasis: These are the entity�s financial statements, and therefore they are the entity�s IGT In many cases DFAS compiles much of the detail trading partner data for you - In some cases, DFAS makes the adjustments for you � you are responsible for these balances and for the resulting adjustments Make it a priority to know what your trading partner balances are and do a sanity check! If adjustments are required, think through possible causes of the imbalance and determine what entries to make based upon that analysis � don�t just mindlessly reclass! If you disagree with balances charged to you by another partner � CHALLENGE them! Open a dialogue with partners you consistently have material differences with - even without perfect systems we can get much closer if we all understand and work at itIGT and partners are estimated: Sellers drive balances Accommodation for entities with waivers The impact when we don�t properly report IGT is: Unsupported Entries: Reclassifications between �F� and �N� Sometimes we must accrue if there appears not to be enough IGT to eliminate or reclass We may recognize invalid losses and gains I�m sure you all have read the articles about the billions of dollars of adjustments � we will never pass audit as long as we�re doing this to any material extent If the adjustments posted to force IGT are not �correct� we actually do misstate our bottom line: Example: We cannot reconcile transfers in/out, so most simply eliminate the two against one-another and recognize a gain or loss for the difference � this gain or loss misstates the consolidated entity financial statements (Hopefully, the other side of those missing tranfsers are on another DoD entity, and the gains/losses will be offset in the long run!) If you think about it, you can come up with many other examples of the often material impact these adjustments can have on the entity, DoD and even the governmentwide statements Emphasis: These are the entity�s financial statements, and therefore they are the entity�s IGT In many cases DFAS compiles much of the detail trading partner data for you - In some cases, DFAS makes the adjustments for you � you are responsible for these balances and for the resulting adjustments Make it a priority to know what your trading partner balances are and do a sanity check! If adjustments are required, think through possible causes of the imbalance and determine what entries to make based upon that analysis � don�t just mindlessly reclass! If you disagree with balances charged to you by another partner � CHALLENGE them! Open a dialogue with partners you consistently have material differences with - even without perfect systems we can get much closer if we all understand and work at it

11. The Solution The Intragovernmental Transactions Exchange (IGTE) OMB Business rules IGTE addresses only level 1 transactions The DoD Intragovernmental Transactions System (IGTS) Summarize buyer/seller data for supported IGT Capture details where current systems cannot Repository of all IGT for reconciliation You will hear about our solution in another briefing shortly.You will hear about our solution in another briefing shortly.

12. Your Role in IGT Improvement Take ownership of the process Provide input Understand the impact of IGT Make informed decisions Challenge as appropriate Waived entities Ensure integrity of buyer data pushed to sellers Validate that sellers match your data in DDRS Waived entities do not �adjust�, they correct Strive to know your trading partners at all levels Provide/validate trading partner data for entry to DDRS Note that this includes outside DoD (Level 1) data! If necessary do a datacall to properly identify Review elimination details in DDRS After each quarter identify partners with large differences and work with them Note: While we allow sellers and waived entities to drive, you can and should challenge if you have support. Strive to know your trading partners at all levels Provide/validate trading partner data for entry to DDRS Note that this includes outside DoD (Level 1) data! If necessary do a datacall to properly identify Review elimination details in DDRS After each quarter identify partners with large differences and work with them Note: While we allow sellers and waived entities to drive, you can and should challenge if you have support.

13. Resources Treasury FMS FACTS I Regulations Website: http://www.fms.treas.gov/factsi/regulations.html Treasury FMS USSGL Website: http://www.fms.treas.gov/ussgl OMB Website: http://www.whitehouse.gov/omb GAO Website: http://www.gao.gov DoDFMR Volume 6b, Chapter 13: http://www.dod.mil/comptroller/fmr