GFP Working Group Property and Equipment Policy Update OUSD(AT&L) P&EP Office Ms. Amber Propert 23 October 2013

Agenda Important Policy Changes for GPP&E Financial Reporting Overview of the Capitalization Threshold study Analysis Recommendation Policy moving forward Other P&EP Activities APSR Identification Project Status of APSR Checklist IUID Parent-Child Project Questions and Next steps

Memo – Elimination of Military Equipment Definition and Increase to Capitalization Threshold KEY TALKING POINTS Significant Accomplishment for the Department Collaborative Effort between OUSD(Comptroller) and P&EP, Jointly signed memo There’s been talk about raising the Capitalization Threshold for years, NOW its reality Changes implemented that are designed to simplify accounting for General Equipment DoD IG also involved in the process at a high level (aware of initiative, aware of key findings, aware of proposed recommendations)

Key Guidance Provided in Memo Combine ME with GE ME definition rescinded ME will be reported as “General Equipment” beginning Fiscal Year 2014 Increase Cap Threshold for GPP&E Raise from $100,000 to $1 million for Air Force and Navy General Fund assets Raise from $100,000 to $250,000 for remaining DoD for all IUS & other GE for General and Working Capital Funds Changes to be implemented prospectively starting 10/1/2013 Increase Cap Threshold for Real Property From $20,000 to $250,000 for all new Real Property assets and modifications Conduct Valuation for new GPP&E For assets placed into Service 10/1/2013 & after Follow FIAR guidance for adequate supporting documentation Value assets using expenditure data if processes and systems support OK to estimate asset costs if systems and processes can’t support accumulating expenditure data by asset Conduct Valuation for Legacy Assets First priority is assets with a Net Book Value remaining by September 30, 2017 Validate values and ensure adequate supporting documentation (as prescribe by FIAR guidance) Must be completed by 9/30/2017 Secondary priority is fully depreciated assets; validate value and supporting documentation for fully depreciated assets KEY TALKING POINTS Refer mainly to chart! Explain and emphasize implementation will be on a “prospective approach” Current assets remain on the books and continue to depreciate for remainder of useful life Policy change will apply for new acquisitions (acquired on 10/1/13 and beyond)

Capitalization Threshold Overview Objective Discuss high level analysis of Capitalization Threshold study Enable GFP Working Group to gain a basic understanding of how the new Capitalization Threshold was determined Identify areas where change in policy impacts general property accountability practices KEY TALKING POINTS This is primarily a transition slide into the Cap Threshold Study Indicate topic of capitalization threshold policy change is for informational purposes, “just FYI”

Background on Capitalization Threshold Study DoD capitalization threshold, $100k, established in 1999 excluded Military Equipment (ME) and may no longer be an appropriate threshold OUSD(AT&L) P&EP supported capitalization threshold study in 2009 Assumption was analyzing military equipment (ME) and general equipment (GE) together will significantly change the mix of assets being capitalized, warranting a study to assess the affects of a change in threshold (source: Mr. Easton’s “2013 Capitalization Threshold Study” memo issued 1 March 2013)

Initial Factors to Consider Individual Component thresholds were not ideal Bulk purchases were excluded as a possible threshold option, would result in losing ability to account for individual assets Desired threshold as high as possible, while creating a minimal impact on DoD and individual Component financial statements Army’s low dollar/high density asset mix creates challenges Initial target for acceptable capitalization rates were in low to mid 90 percent range (re: 2009 study)

Preliminary Recommendations Recommended options (as of 5 June 2013 – presented at meeting with Mr. Easton): Recommendations and impacts based on implementing new threshold on retroactive approach Intent was to capitalize, at least, 90% of assets at DoD and Component levels Analysis excluded WCF Army asset mix created challenges even at $250k threshold OUSD(C) and OIG supported direction of analysis; however, determined 90% capitalization rate is unacceptable Prospective implementation was discussed and agreed upon Further analysis was required to support recommendations and measure future impacts based on new implementation direction DoD-wide $1M Threshold DoD-wide $250k Navy and AF $1M DoD-wide $200k Component Specific KEY TALKING POINTS Explain analysis at high level Profiled data: identified Army, Navy, and Air Force account for 98.17% of total acquisition cost and 96.63% of total number of assets change (as expected) Assessed impact of threshold change at individual Component level in addition to DoD level Initially, assumed implementation would occur on a retroactive basis, analysis reflected that approach First bullet refers to first round of potential thresholds Address feedback received from stakeholders from coordination process Next steps include analysis estimating impact on balance sheet for 5 year outlook (prospective implementation approach) to determine whether or not the percentage capitalized negatively impacts the balance sheet, and assesses what would be acceptable to the audit community Preliminary analysis and recommendations focused on GF, expanded study to review impact on WCF as well

New Capitalization Threshold Change to capitalization threshold policy: $1M Navy (+USMC) and AF capitalization threshold (GF assets only); $250k DoD-wide capitalization threshold Recommendation and analysis coordinated with DoD stakeholders, and well received by OUSD(C), OIG, and FIAR communities Determine process and actions required to implement new capitalization threshold P&EP will provide support and guidance to Components for implementation of new capitalization threshold KEY TALKING POINTS Slide serves as a “wrap-up” of capitalization threshold Transition to two on going projects: IUID and APSR studies

APSR Validation Analysis – Project Charter Identify a population of systems capable of qualifying as an acceptable APSR Validate system capabilities compared to BEA PMO self-assessment, as well as compliance with required functionality; refine APSR population OBJECTIVE: Develop segmented listing by indicating whether systems are “most likely”, “likely”, or “unlikely” to qualify as an acceptable APSR Refine listing to identify only those systems that perform required functionalities based on BEA capabilities and research of available resources Create tool to help robustly define and assess the likelihood a system satisfies the requirements of an APSR DELIVERABLES: KEY TALKING POINTS: Objective #1: Discuss independent research of systems, methodology to try to quantify system capabilities (i.e., assigning weighted values to capabilities, working sessions to prioritize systems based on current knowledge) Data source: system capabilities based on PMO self-assessment provided by Enterprise Business Integration team Deliverable #1: i.e. “9-box” chart Deliverable #3 (“Moving forward”) refers to checklist  transition to next slide

“accountable versus managerial” APSR Checklist Checklist overview: Tool to identify capabilities essential for a system to operate as an acceptable and auditable APSR for equipment Reference guidance and directives that systems need to adhere to Checklist determines difference between core requirements and addition capabilities that add value but are not required “Bigger picture”: define parameters of an acceptable APSR Checklist currently being coordinated with DPAP Are Components required to designate one system as their “accountable” APSR? If not, should they? And will they? Prevents duplicating records and creating a disconnection between universe of systems Discussion Point: “accountable versus managerial”

Checklist Snapshot

Feasibility Study of IUID Registry Data for Valuation Project Charter Research and gain understanding of policy directing responsibility to manage and update parent-children relationships in IUID Registry Analyze new acquisition IUID records, to include end items associated with parent-child components, to assess the quality of data Pending results of Objective #1, determine practicality and viability of using values in IUID Registry as a resource to value military and general equipment OBJECTIVE: Interim Deliverable: periodic status updates to P&EP team Document understanding of roles and activities associated with IUID Registry record management, and address questions from research Report findings and determine opinion on quality of data and usability Report analysis and findings from reconciling IUID values with available validated sources DELIVERABLES:

Thank You! Questions? Comments? Contact: Amber Propert (Amber.L.Propert.civ@mail.mil) For general questions and information, visit our website: http://www.acq.osd.mil/pepolicy/ Thank You! 14

Back-up Slides

Summary & Component Breakdown Data Source: ME and GE asset listings which support the FY2012 Financial Statements from all Components and Agencies identified as Material for GE in latest FIAR Guidance KEY TALKING POINTS All components and DoD agencies identified as “material” for General Equipment in the latest FIAR Guidance Components asked to provide detailed asset listings for all ME & GE assets that make up the dollar values reporting in FY2012 Financial Report Asset Data received from both General Fund and Working Capital Funds Combined Data Set totaled over $1 trillion dollars Army, Navy (including USMC) and Air Force represented over 98% of the reported dollar values & approx. 97% of the number of items Working Capital Funds assets represented less than 1% of the total Navy (including USMC), Air Force, and Army account for 98.17% of total acquisition cost and 96.63% of total number of assets

DoD Consolidated Analysis DoD-wide Capitalization Thresholds by Capitalization Rates KEY TALKING POINTS Using individual asset acquisition cost data, determined exact dollar value that represented the desired Percent to be capitalized Slide shows DoD Wide results Key take-away from slide is that this helped established some beginning thresholds that should be further analyzed If we wanted to Capitalize 90% of the dollars on a DoD wide basis, the desired threshold would be $887,000. At 95%, threshold would be $266,000

Component Specific Analysis Component Capitalization Thresholds by Capitalization Rates KEY TALKING POINTS This slide shows the same data as the previous slide on a component level basis Since Army, Navy(& USMC) and Air Force represent 98+% of dollar values, they’re the only ones shown Note the huge disparity between the estimated capitalization threshold at 90% capitalization rate for the Army ($191,000) and Navy ($12.4 million) Army’s asset composition (High density of low dollar assets) will drive entire department down to the Lowest Common Demoninator

Recommendations for Consideration DoD Level Impact of Various Threshold Component Impact of Various Threshold KEY TALKING POINTS Using the prior slides, established a couple of capitalization thresholds to consider $200,000 $250,000 $500,000 $1 million A high capitalization threshold SIGNIFICANTLY impacts the Army’s financial reporting and its ability to obtain a clean audit opinion

Statement of Net Cost Analysis Scenario Percentage Impact of SNC: GF Assets DoD-wide Navy (+ USMC) Air Force Army $250,000 0.60% 0.35% 0.67% 1.50% $1,000,000 1.35% 0.84% 1.68% 3.09% $1 M Navy+AF & $200k DoD 0.85% 1.06% Percentage Impact of SNC: WCF Assets $200,000 0.56% 1.21% 0.31% 0.77% 1.82% 0.44% *Only analyzed Components with separate WCF statements in financial reporting Leveraging the 2009 study and further discussions on SNC impacts, 2% was determined to be the maximum acceptable change Impact on SNC is less than 2% for potential recommendations

Impacts of Prospective Implementation GF Assets: Projected Five Year Impact For $1M/$200k scenario, the impact on equipment (net) to DoD and its Components for Year 1 and Year 5 are less than 5%, resulting in a capitalization rate greater than 95% WCF Assets: Projected Five Year Impact For $200k scenario, the impact on equipment (net) to DoD and its Components for Year 1 and Year 5 are less than 6%, resulting in a capitalization rate greater than 94%