How the trust fund keeps its books

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1. One account, apportioned before it is spent

Chapter 3 of Volume 15 of the Financial Management Regulation sets the accounting rules for the Foreign Military Sales Trust Fund. The fund is a single account authorized to be credited with receipts that may be obligated and spent under the Arms Export Control Act (AECA) (FMR Vol. 15, Ch. 3, para. 4.1). Its receipts must be apportioned before they are obligated or spent. An official designated under the apportionment statutes may exempt trust funds from that step.

All financial data for the program is recorded in accounts consistent with the United States Standard General Ledger (FMR Vol. 15, Ch. 3, para. 4.2). Other general ledger trust fund accounts may be used only with the written approval of the Deputy Chief Financial Officer in the Comptroller’s office. Every entry must be supported by objective evidence such as invoices, vouchers, receipts or statements. The evidence may be paper or computer data, "but in either case, the evidence must be verifiable" (FMR Vol. 15, Ch. 3, para. 4.2).

2. When a receivable appears

Cash in advance of performance is required from purchasers unless a written determination is made under legal authority (FMR Vol. 15, Ch. 3, para. 4.3.1.1). For purchasers legally exempt from advances, an account receivable is recorded for each country program in the trust fund. Where the exact amount is unknown, a reasonable estimate is made.

An accepted case is treated as a binding requirement that calls for an advance of funds (FMR Vol. 15, Ch. 3, para. 4.3.1.2). So when a payment due date is missed, a non-entity account receivable is established, and the debt is followed up and aged under the Department’s debt rules. Interest is assessed on country-level arrearages under the terms of that country’s active cases (FMR Vol. 15, Ch. 3, para. 4.3.2). The Defense Finance and Accounting Service (DFAS) reports receivables to the Treasury each quarter (FMR Vol. 15, Ch. 3, para. 4.3.3). How late payment works from the buyer’s side is covered in payment schedules, billing and late payment.

3. No cost to the government

The regulation states the founding principle plainly. "The AECA and provisions of the Letter of Offer and Acceptance (LOA) require that the FMS program operate at no cost to the U.S. Government" (FMR Vol. 15, Ch. 3, para. 4.5.1). For that reason the fund recognizes equity only for the balance kept in the attrition account.

Surcharges are recorded in a way that follows from the same principle. Collections of surcharges set under sections 21 and 43 of the Act are recorded as unearned revenue, to ensure full recovery of the costs of running the program (FMR Vol. 15, Ch. 3, para. 4.5.2.1). Revenue and expenses are recognized when disbursements are made from the surcharge account concerned (FMR Vol. 15, Ch. 3, para. 4.5.2.2). A subsidiary ledger is kept for each category of surcharge. The contract administration services surcharge applies to new procurements, though it may not apply under certain conditions set out in section 21 (FMR Vol. 15, Ch. 3, para. 4.5.2.4).

4. The surcharge accounts

The administrative surcharge is credited to its account as accrued expenditures are calculated (FMR Vol. 15, Ch. 3, para. 4.8.1.1). Where the computed surcharge on a case is $30,000 or less, the whole amount is included in the initial deposit (FMR Vol. 15, Ch. 3, para. 4.8.1.1.1). Where it is greater, 35 percent is collected when the case is implemented (FMR Vol. 15, Ch. 3, para. 4.8.1.1.2). The rest accrues over the life of the case and is finalized at closure.

The other surcharges are earned at different moments. Transportation surcharges are earned when Defense Department components report items as physically delivered, and actual carrier bills are charged against the same account (FMR Vol. 15, Ch. 3, para. 4.8.2). Contract administration surcharges are earned when payments are made to contractors, whether progress payments or bills for incurred costs (FMR Vol. 15, Ch. 3, para. 4.8.3).

An attrition surcharge may be applied on training cases that use training or operational equipment (FMR Vol. 15, Ch. 3, para. 4.5.3). The account replaces equipment damaged or destroyed during training through student negligence. Its balance is recorded at year end as equity in the trust fund. A withdrawal requires prior written approval from the Comptroller of the Defense Security Cooperation Agency (DSCA), and the full cost of replacement is reimbursed from the account (FMR Vol. 15, Ch. 3, para. 4.8.4).

5. Bad debts

Resolution of foreign debts arising from sales is staffed with the Department of State by DSCA, through the Under Secretary of Defense for Policy (FMR Vol. 15, Ch. 3, para. 4.5.4). Within 30 calendar days after the State Department determines a debt uncollectible, DSCA directs DFAS to record the amount owed, with accrued interest, in the general ledger.

Three consequences follow when a country is in arrears and the debt is confirmed uncollectible. All available funds for that country are used to meet its outstanding liabilities, in a priority recommended by DFAS and approved by DSCA (FMR Vol. 15, Ch. 3, para. 4.5.4.1). Case managers are directed to request cancellation of outstanding commitments and adjustment of obligations, including an amount for termination cost (FMR Vol. 15, Ch. 3, para. 4.5.4.2). Aging of the recorded amounts continues, and interest accrues monthly on the balance (FMR Vol. 15, Ch. 3, para. 4.5.4.3).

6. Watching each case

DFAS uses the Defense Integrated Financial System (DIFS) and the implementing agencies’ own source systems to account for the fund (FMR Vol. 15, Ch. 3, para. 4.6). Transactions are posted at trust fund, country and case level. DFAS must continuously analyze case-level data to find developing financial problems, and to alert case managers, DSCA country finance directors and other officials that corrective action is needed (FMR Vol. 15, Ch. 3, para. 4.7.1).

Two checks are named (FMR Vol. 15, Ch. 3, para. 4.7.2). The first compares the net unreserved cash balance on a case with its accounts payable. If payables are greater, DFAS asks the implementing agency to review the payment schedules and works to keep enough country funds available to pay vendors on time. The second applies when expenditures approach the authorized value, and asks whether the case should be closed.

Key terms

United States Standard General Ledger	The chart of accounts in which all trust fund accounting data is recorded.
Non-entity account receivable	The receivable set up when a purchaser misses a payment due date on an accepted case.
Unearned revenue	How surcharge collections are recorded until disbursements are made from the surcharge account.
Attrition surcharge	A charge on certain training cases that pays to replace equipment damaged through student negligence.
Defense Integrated Financial System (DIFS)	The trust fund level system that links agency records to the bills sent to purchasers.

Every statement above links to the document behind it. The full source list for this piece is on the sources page.

This page describes public United States government programs for general information. It is not legal, regulatory or procurement advice, and it does not address the facts of any particular case.

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