April 10, 2006
Depreciation standards for weapons established

By Gopal Ratnam
Special to the Times

In a move toward commercial accounting standards, the Pentagon has just completed assessing the useful life and estimated value of nearly 600 weapon systems acquired in recent decades, one defense official involved in the effort said.

The assessment, which estimated the value of the weapons at $600 billion, will help the Pentagon depreciate the value over the life of the equipment and allow senior defense officials to take “well informed decisions,” said Ric Sylvester, deputy director for property and equipment policy in the Office of the Undersecretary of Defense for Acquisitions.

Unlike globally accepted accounting standards, which require companies to spread the value of an asset throughout its useful life and charge depreciation for its use each year, the Pentagon, until now, has charged the entire cost of a weapon system as an expenditure in the year it is purchased.

All weapon systems with a unit cost greater than $100,000, and with a useful life of at least two years and continues to be used by the intended end users, were included in the assessment, he said.

The new system will bring the Pentagon in line with commercial standards, per Federal Accounting Standards Board norms, Sylvester said.

But there will be major differences between the defense and commercial worlds.

In the commercial world there are commonly accepted standards of useful life and depreciation rates for buildings and all kinds of plants and machinery, with some variations for different industries. Companies typically pick a standard and stick to it year after year. When an asset is fully depreciated, companies typically replace it with a new one.

The Pentagon does not foresee the new accounting system to lead to such automatic replacements.

Determining the useful life of a fighter aircraft or a naval destroyer has been, and will continue to be, a political-military decision, Sylvester said. Once the political debate is over and the life of a weapon system has been agreed upon, it will be documented and used for accounting purposes, he said.

But that could change too.

A weapon system’s lifespan agreed upon during peace time, based on normal wear and tear in military training, could drastically change in war times. In such cases, the users and senior defense officials would likely revise the useful life of equipment and, once again, the new estimate would be documented for accounting purposes, he said.

Sylvester’s office also intends to extend the concept of asset valuation and depreciation to other items such as software and information technology products, modifications to existing fleets of planes, ships and tanks, and spare parts.

Once those estimates are done the Pentagon could expect its accounts to pass the annual audit by the U.S. Government Accountability Office, Sylvester said. It’s been more than a decade since the Pentagon’s books have passed such audit.