DoD policy requires cost definition criteria that can be used in determining the content of the programs and activities that comprise the Defense budget. Costs are categorized as either expenses or investments. Purchases (i.e., obligations) of non-centrally managed items with a unit cost of $250,000 or less, are considered expenses funded from appropriations available to DoD for operation and maintenance. Costs budgeted in the Operation and Maintenance (O&M) and Military Personnel appropriations are considered expenses. Purchases of non-centrally managed items with a unit cost greater than $250,000 are investments funded from appropriations available for investments. Costs budgeted in the Procurement and Military Construction appropriations are considered investments. Costs budgeted in the Research, Development, Test and Evaluation (RDT&E), Base Realignment and Closure (BRAC), and Family Housing appropriations include both expenses and investments. If an item is centrally managed, it is always considered an investment cost regardless of the unit cost.
There is a difference between the expense/investment threshold established by the Congress and the capitalization threshold established for accounting purposes. The expense/investment threshold determines whether a DoD activity purchases an asset using O&M or procurement appropriations.
For Defense Working Capital Fund (DWCF) activities this limit determines whether an asset is purchased using the operating budget or the capital budget. For accounting purposes, the capitalization threshold determines when an activity records and depreciates an asset on the financial statement. The two criteria are not the same. Activities will establish DWCF rates using the expense/investment threshold of $100,000 for Minor Construction projects and $250,000 for all other capital assets. DWCF activities will record all items purchased using Capital Budget Obligation Authority on the balance sheet and depreciate those assets over its useful life. For accounting purposes, the capitalization threshold is $20,000 for Minor Construction and $100,000 for all other Capital Investments. If an asset meets the accounting capitalization threshold, but is less than the budget investment threshold, the DWCF activity will record this asset on the financial statements as a capital asset and depreciate it over its useful life. However, at the end of each fiscal year, activities will make an accounting adjustment to treat the gain generated by this transaction as non-recoverable for rate setting purposes. The gain is the difference between the cost of the asset and the depreciation recorded.
- Multi-Year Appropriations: Often referred to as investment appropriations because they are available to fund investment costs (e.g., OPN, WPN, APN, PAN&MC, SCN, MILCON, RDT&EN, etc.). These funds are available for new obligations for multiple years.
- Annual “Expense” Appropriations: Often referred to as expense appropriations because they are available to fund expense costs. These are primarily O&M accounts (e.g., O&M,N, O&M,NR, MPN, RPN, etc.). These funds are available for new obligations only for the fiscal year authorized and appropriated.
- The question to ask is what are you buying, what is the unit cost, is the item centrally managed or non-centrally managed, is this an expense or an investment cost, and are you using the right funds that can legally finance that specific type of cost?
AcqLinks and References:
- Financial Management Compendium
- Website: 31 U.S.C. 1301 – Application
- Website: DoD Comptroller: DoD 7000.14R – (Most Updated Versions)