Winning Through Readiness, Modernization, and Reform

Fiscal Year 2018 United States Army Annual Financial Report

Winning Through Readiness, Modernization, and Reform

Winning Through Readiness, Modernization, and Reform

FY 2018 CONTENTS

Message from the Secretary of the Army . . . . . . . . . . . . . . 3

Message from the Assistant Secretary of the Army Financial Management and Comptroller . . . . . . . . . . . . . . . 5

SECTION 1: MANAGEMENT'S DISCUSSION AND

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ANALYSIS

Army General Fund (GF) Mission and Organizational Structure . . . . 7

Analysis of Performance Goals, Objectives, and Results . . . . 9

Analysis of Principal Financial Statements . . . . . . . . . . 37

Army Working Capital (WCF) Mission and Organizational Structure . 41

Analysis of Performance Goals, Objectives, and Results . . . 43

Analysis of Principal Financial Statements . . . . . . . . . . 53

GF & WCF Management Assurances . . . . . . . . . . . . . . . . 57

SECTION 2.A: ARMY GENERAL FUND FINANCIAL SECTION

61

Inspector General's Transmittal Letter . . . . . . . . . . . . . . . 63

Independent Auditors' Report . . . . . . . . . . . . . . . . . . . 65

Management's Response to Independent Auditors' Report . . . . .96

Principal Financial Statements . . . . . . . . . . . . . . . . . . . 97

Consolidated Balance Sheets . . . . . . . . . . . . . . . . . 97

Consolidated Statements of Net Cost . . . . . . . . . . . . .98

Consolidated Statements of Changes in Net Position . . . . . 99

Combined Statements of Budgetary Resources . . . . . . . 101

Notes to the Principal Financial Statements . . . . . . . . . . . . 102

Required Supplementary Stewardship Information . . . . . . . . . 136

Non-Federal Physical Property . . . . . . . . . . . . . . . 136

Research and Development . . . . . . . . . . . . . . . . . 136

Required Supplementary Information . . . . . . . . . . . . . . . 141

Deferred Maintenance . . . . . . . . . . . . . . . . . . . 141

Heritage Assets and Stewardship Land . . . . . . . . . . . 143

Disaggregated Statement of Budgetary Resources . . . . . 144

SECTION 2.B: ARMY WORKING CAPITAL FUND FINANCIAL SECTION

147

Inspector General's Transmittal Letter . . . . . . . . . . . . . . 149

Independent Auditors' Report . . . . . . . . . . . . . . . . . . 151

Management's Response to Independent Auditors' Report . . . . 180

Principal Financial Statements . . . . . . . . . . . . . . . . . . 181

Consolidated Balance Sheets . . . . . . . . . . . . . . . . 181

Consolidated Statements of Net Cost . . . . . . . . . . . . 182

Consolidated Statements of Changes in Net Position . . . . 183

Statements of Budgetary Resources . . . . . . . . . . . . 184

Notes to the Principal Financial Statements . . . . . . . . . . . . 185

Required Supplementary Information . . . . . . . . . . . . . . . 202

Disaggregated Statement of Budgetary Resources . . . . . 202

UNAUDITED

Fiscal Year 2018 United States Army Annual Financial Report

Winning Through Readiness, Modernization, and Reform

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FY 2018 United States Army Annual Financial Report

Today, our Army stands ready to deter, and if necessary, defeat any adversary that threatens our Nation's security or vital national interests.

The United States Army is the most lethal and capable ground combat force in history, defending the Nation and serving the American people for over 243 years. Today, our Army stands ready to deter, and if necessary, defeat any adversary that threatens our Nation's security or vital national interests. We are thankful to Congress for providing us the resources required to build this current state of readiness.

The Army's 2018 Annual Financial Report (AFR) reflects the outcome of the Army's inaugural comprehensive audit. For the first time in Army history, a full audit by an independent public accountant was conducted, which reflects our enduring commitment to fiscal responsibility and accountability.

Over the past seventeen years, the Army provided the majority of forces fighting in Iraq and Afghanistan. Over that time, strategic competitors modernized their armies in an attempt to reduce the overmatch of the U.S. military. Rapid rates of technological change and the proliferation of advanced technologies have added further complexity to the security environment. In response to these changing conditions, the 2018 National Defense Strategy (NDS) issued a mandate to build a more lethal force.

In support of the NDS, the Army published the Army Vision in June of 2018, which articulates the future end state needed to ensure our overmatch against all potential adversaries. As described in the Army Vision: "The Army of 2028 will be ready to deploy, fight and win decisively against any adversary, anytime and anywhere, in a joint, multi-domain, high-intensity conflict, while simultaneously deterring others and maintaining our ability to conduct irregular warfare." In pursuit of this Vision, Army resources are focused around three priorities: Readiness, Modernization, and Reform.

Readiness ensures the Army's ability to deploy, fight, and win our Nation's wars. The Army made great gains in readiness this year, increasing the number of fully-ready Brigade Combat Teams by over 30 percent. We also improved equipment readiness across the Army, increased munitions supplies, and expanded our pre-positioned stocks.

In addition to building readiness, we are taking needed measures to modernize the Army. The establishment of Army Futures Command (AFC) allows us to unify our entire modernization enterprise under one command. AFC will allow us to better partner with academia and the private sector in order to find innovative solutions to fulfill our six modernization priorities.

To enable continued advancements in readiness and modernization, the Army is implementing a series of reforms. Army reform efforts will free up time, money, and manpower to ensure they are going into the highest priority activities that produce the greatest benefit to the force. We will continue to reallocate resources towards our priorities to ensure that our budget remains aligned with the NDS and the Army Vision.

As has been the case throughout history, the U.S. Army stands prepared to answer the Nation's call. All throughout the Total Army ? Regular Army, National Guard, and Reserve ? our Soldiers and civilian professionals remain committed to stewarding the efficient use of our resources. With sustained, adequate, and timely budgetary support from Congress, we will continue to maintain the ready and lethal Army that America needs.

DR. MARK T. ESPER

Secretary of the Army

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UNAUDITED

Fiscal Year 2018 United States Army Annual Financial Report

Winning Through Readiness, Modernization, and Reform

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FY 2018 United States Army Annual Financial Report

Army leaders and financial managers are committed to ensuring compliance with Congressionally mandated auditability requirements to support achievement of Army priorities in readiness, modernization, and reform.

The Army began its first full financial statement audit in fiscal year (FY) 2018. Building on the momentum generated by partial audits in FY 2017 and earlier years, the Army was ready to take this major step forward in fiscal responsibility and accountability. As expected, the result of the FY 2018 audit was a disclaimer of opinion but the findings of our auditor have produced a clear benchmark to begin measuring our progress to a clean opinion. This Army Annual Financial Report (AFR) reflects our enduring commitment to achieving audit success in order to fully support the Army's missions through better management of our financial resources with timely, accurate, and reliable information.

To continue the Army's progress, we are aggressively developing and maintaining a culture that expects auditable records at every Army level. The Secretary of the Army has directed all Commanders, Directors, Leaders, Soldiers, and Civilians across the force to take an active role in improving transparency and accountability. We are investing in our people and continuing to improve processes, technology, and policies to sustain accountability and to achieve a clean audit opinion on the Army's financial statements.

To operationalize this vision across the Army, we have assigned functional managers responsibility for audit success in their respective areas with support from the financial management community. These include, for example, Army leaders in logistics, acquisitions, information technology, and facilities. To coordinate and support these leaders, the Army implemented the Business Mission Area Champion (BMAC) framework. In FY 2018, the Army focused on creating a Universe of Transactions to enhance the monitoring and reconciling of Fund Balance with Treasury, journal vouchers, and budget execution, as well as ensuring system posting logic and data categorization compliance with the United States Treasury Financial Manual.

Another important element of audit success is the continual improvement of our financial accounting systems. The General Fund Enterprise Business System (GFEBS), Logistics Modernization Program (LMP), and Global Combat Support System (GCSS)?Army are our primary systems of record providing financial visibility to achieve Army's operating goals at all levels. The LMP Program Office achieved a significant milestone in FY 2018 by remediating the LMP information technology general controls findings. This is the first Army system to achieve this milestone and provides an example of how to achieve measurable progress for other systems.

Improving and standardizing processes is another key step for audit success. One example where this is particularly important is in maintaining proper controls and accountability over ammunition. The Army is the Single Manager for Conventional Ammunition (SMCA), which means that the Army procures and maintains conventional ammunition for all of the Department of Defense. In FY 2017, the Army underwent its first audit of ammunition and its role as SMCA. The biggest challenges included that the Army did not have its controls over access to the ammunition fully documented and that business processes across Army locations were not standardized. Based on these findings, the Army implemented systematic Corrective Action Plans addressing key problems, including documenting control procedures and standardizing business processes. For example, the Army Joint Munitions Command implemented an automated task order system that limits individuals from signing out keys that are not required to complete a task. This reduced the issuance time from 90 minutes to 15 minutes, significantly reduced the risk of loss of ammunition, and allowed leaders to better plan their operations with the resources available. As a result of the actions the Army took, we closed out 30 of the 53 FY 2017 Notice of Findings and Recommendations (NFR).

Army leaders and financial managers are committed to ensuring compliance with Congressionally mandated auditability requirements to support achievement of Army priorities in readiness, modernization, and reform. The first full audit of the Army's financial statements is a major milestone for the Army and we are now firmly on our way to ultimately achieving a clean audit opinion.

JOHN E. WHITLEY

Assistant Secretary of the Army, Financial Management and Comptroller

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UNAUDITED

Guiding a vehicle during a live-fire exercise. (U.S. Army National Guard photo by Sgt. Jamar Marcel Pugh)

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FY 2018 United States Army Annual Financial Report

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