Breakout Session # 402 Mark Hogenmiller, CPCM, Project Manager

2. Contract Based Valuation of Military Equipment Breakout Session #402 Mark Hogenmiller, CPCM, Project Manager Office of the Under Secretary of Defense Acquisition Resources and Analysis Property and Equipment Policy Office Date: 01:50 p.m. Time: April 14, 2008

3. Presentation Roadmap • Introduction • What is Military Equipment Valuation (MEV)? • Where is MEV Today? • How Do We Move Forward? • What is the Role of the Acquisition Community?

4. Military Equipment Definition Military Equipment is defined as Tangible Items that: • Have an estimated useful life of 2 or more years • Are not intended for sale • Does not ordinarily lose its identity or become a component part of another article, and • Are intended to be used or available for use in the performance of military missions Examples include: combat aircraft, pods, combat ships, satellites, combat vehicles Examples exclude: simulators, training aircraft Source: OUSD(AT&L)/ARA Memorandum, Subject: Military Equipment Definition, January 24, 2007

5. Capitalization of Military Equipment 1775 2002 2003-2006 2007 Expensed SFFAS 23 SFFAS 6 Established Military Equipment Baseline

6. Asset Taxonomy DoD Assets Real Property Equipment Internal Use Material $ 100 Billion $ 362 Billion Software $ 3 Billion $ 231 Billion Military Equipment Land Repairables Consumables $ 346 Billion General Equipment Facilities $ 17 Billion Buildings Structures Asset Taxonomy Operating Materials and Supplies Property, Plant and Equipment($ = Net Book Value) $ = Net Book Value

7. To provide more accurate and reliable information to decision makers To reinforce public trust and confidence in our ability to allocate mission funding To comply with the law To comply with more rigid accounting standards Why MEV is Necessary

8. Developed ten principle-based business rules implementing GAAP Standardized valuation methodology, reviewed over 1100 programs Developed a fixed asset accounting system – CAMS-ME Established an historical military equipment cost baseline Developed a management assertion and audit readiness process Where MEV is Today

9. Established policy on proper financial treatment for military equipment Improving asset identification and management information Moving toward contract-based valuation Establishing a more accurate basis to determine full cost of equipment Where MEV is Today (Cont.)

10. Long Term Goal Military Equipment Valuation & Accountability (MEVA) Full Cost Asset Identification & Management Expenditures SFFAS No. 6 Compliance Internal Controls Automation Assert to Audit Readiness Enterprise Wide

11. Moving Forward Full compliance with Standard No. 6 requires moving from program based valuations to obtain obligation based valuations. We accomplish this through: • Asset Identification and Management -- Accountable Property Officer (APO) • Confidence in Asset Physical Inventories • Asset Identification and Traceability • Clean Audit “Plus” • Fully Automated Integrate fiscal and physical accountability systems Achieve seamless end-to-end processing enterprise level visibility of assets • Full Cost -- Business Financial Manager (BFM) & • Contracting Officer (KO) • Operational Tempo • Acquisition Value • Modifications • Proper Financial Accounting Treatment for Military Equipment • Internal Controls Ensure effective internal controls are in place: People, Processes and Systems • Expenditures -- Finance & Accounting Officer • “Work-in-Progress” • Transactions tied to programs and assets

12. Moving Forward (Cont.) Full compliance with Standard No. 6 requires moving from program based valuations to obtain obligation based valuations. We accomplish this through: • Asset Identification and Management -- Accountable Property Officer (APO) • Confidence in Asset Physical Inventories • Asset Identification and Traceability • Clean Audit “Plus” • Full Cost -- Business Financial Manager (BFM) & • Contracting Officer (KO) • Operational Tempo • Acquisition Value • Modifications • Proper Financial Accounting Treatment for Military Equipment • Fully Automated Integrate fiscal and physical accountability systems Achieve seamless end-to-end processing enterprise level visibility of assets • Internal Controls Ensure effective internal controls are in place: People, Processes and Systems • Expenditures -- Finance & Accounting Officer • “Work-in-Progress” • Transactions tied to programs and assets

13. OpTempo– depreciation based on usage (e.g., flying hours, mileage, etc.) Acquisition Value– all embedded components are appropriately identified and value added to cost of end item (e.g., government furnished property (GFP), transportation, manuals, engineering services, new equipment training, etc.) Modifications– those that extend useful life or increase performance add value to end items Full Cost

14. Proper Financial Accounting Treatment of Equipment – USD(AT&L) Memo, June 30, 2006, Subj: Proper Financial Accounting Treatment for Military Equipment Based on the input the business financial management analysts (BFMA), contracting officers shall structure proposals, solicitations, contracts, and/or orders for, or related to, the acquisition of military equipment so that each type of item or service is properly segregated Contracting officer ensures that a separate contract line item (CLIN) or subline item (SLIN) structure created to reflect distinctions necessary to facilitate appropriate final accounting treatment Full Cost (Cont.)

15. Acquisition Community Role Current Role New Role Financial Management Visibility Program Budgeting & + Execution

16. Program Manager’s Role • Any Program Manager for any program, project, product, or system that has planned deliverables of military equipment meeting the capitalization threshold ($100,000 or $50,000 for self propelled or tracked vehicles) must prepare a program description as part of the acquisition strategy at Milestone C, or any other decision point that leads to production or procurement of end items to be used for operations.

17. Program Manager’s Role • The program description should identify items within the level 2 work breakdown structure groups (WBS) that meet the following criteria: • Each end item with a unit cost estimate that meets the capitalization thresholds • Government furnished property (GFP) to be included in the end item • Other deliverables to accompany the end item (e.g. manuals, technical data) and • Other types of deliverables to be bought with program funding (e.g. initial spares, peculiar support equipment, special tooling and test equipment), that cannot be directly attributed to a specific end item

18. Business/Financial Management Analyst's Role (BFMA) • Every military equipment end item in the program description must be uniquely identified. Military equipment line items must be itemized on the purchase request so that the Contracting Officer may identify them as a separate contract line item (CLIN) or sub-contract line item (SLIN) on the solicitations and contracts. • Upon receipt of a request for new procurement of military equipment, BFMA will: • Collaborate with the PM to ensure that for military equipment, the program description with the level 2 WBS facilitates the proper determination of the asset or expense type and financial accounting treatment

19. BFMA’s Role (Cont.) • Assign asset or expense type (e.g. military equipment, real property, IUS, OM&S, other General Plant, Property and Equipment (PP&E)) and financial accounting treatment (i.e. asset to be capitalized, asset held for inventory, or asset to be expensed) to each line item that is determined to be military equipment • Develop purchase requisitions separating requested military equipment deliverables, and • Collaborate as needed with the Contracting Officers to ensure the integrity of the line item structure of the purchase requisition is carried forth when solicitations are written, proposals are received, and contracts are awarded

20. CLM040 Proper Financial Accounting Treatment for Military Equipment – Online Training Course Provides over-arching procurement business process changes with examples (Includes PM and Procurement Contracting Office role in facilitating proper financial accounting treatment for military equipment) Describes definition of military equipment to help distinguish between capitalizable vs. non-capitalizable equipment Explains asset categories as defined in financial reporting (i.e., Capital, Expense, or Asset held for Inventory) and their applicable accounting treatment BFMA Training Support

21. BFMA Quick Reference Tools http://www.acq.osd.mil/me/bfma_instructions.html Provides guidance for proper treatments of new procurement as well as, modifications, service life extension plans (SLEPs), and upgrades Provides guidance to determine asset categories for each line item Provides guidance on how to categorize assets by line item on PRs Additional Guidance Proper Financial Accounting Treatment for Military Equipment Policy http://www.acq.osd.mil/me/pdfs/Proper_Financial.pdf BFMA Training Support (Cont.)

22. Based on the BFMA’s input, Contracting Officers must: Make certain that purchase requisition’s structure is maintained in proposals, solicitations, contracts, and orders for or related to, the acquisition of military equipment Collaborate as needed with the BFMA on any questions on the line item structure of the purchase requisition Create a separate CLIN or SLIN for each line item to facilitate appropriate financial accounting treatment of military equipment in solicitations and contracts Required CLIN / SLIN structure is in accordance with the Defense Federal Acquisition Regulations Supplement (DFARS) parts 204.7103 and 204.7104 Contracting Officer’s Role

23. Identifying the cost of GFP DFARS 211.274 requires a list of uniquely identified GFM included in end item at time of acceptance Wide Area Workflow (WAWF) being modified to allow GFP to be listed as a separate deliverable Item Unique Identification (IUID) Registry will contain acquisition costs for GFP Identify and capitalize modification costs Create additional CLIN/SLIN as requird for new line items DFARS 204.7103/.7104 Contracts shall identify the items or services to be acquired as separate contract line items unless it is not feasible to do so Procurement Guidance

24. Continuous Learning Courses CLC033 Contract Format and Structure for the DoD e-Business Environment CLM040 Proper Financial Accounting Treatment for Military Equipment https://learn.dau.mil/html/clc/Clc.jsp Contracting Officer Training Slide 24

25. Moving Forward (Cont.) Full compliance with Standard No. 6 requires moving from program based valuations to obtain obligation based valuations. We accomplish this through: • Asset Identification and Management -- Accountable Property Officer (APO) • Confidence in Asset Physical Inventories • Asset Identification and Traceability • Clean Audit “Plus” • Full Cost -- Business Financial Manager (BFM) & • Contracting Officer (KO) • Operational Tempo • Acquisition Value • Modifications • Proper Financial Accounting Treatment for Military Equipment • Fully Automated Integrate fiscal and physical accountability systems Achieve seamless end-to-end processing enterprise level visibility of assets • Internal Controls Ensure effective internal controls are in place: People, Processes and Systems • Expenditures -- Finance & Accounting Officer • “Work-in-Progress” • Transactions tied to programs and assets

26. Integrate fixed asset accounting (CAMS-ME) to core financial accounting systems and property accountability systems System Capabilities Business Enterprise Information Services (BEIS) DFAS data warehouse--automates program / end item expenditure updates UID Registries Provide asset data, values, type/model/series, asset type Wide Area Work Flow (WAWF) Automates receipt and acceptance Automates linking of GFP cost to an end item in the military equipment valuation process Fully Automated Slide 26

27. General questions and info: The MEVA website http://www.acq.osd.mil/me/ Or mark.hogenmiller.ctr@osd.mil Thank You