time supply directives are issued for the amounts estimated to cover end items to be provided from service stocks."

Such allocation letters appear to have been transmitted without clarification to the military departments and the various operating agencies for implementation and various interpretations of such statement have been made. Consequently, obligations have been recorded in many cases for items to be furnished from stocks without regard to when the items would become available or be shipped, location of the items, or whether allocation action by the Joint Munitions Allocations Committee or its subordinate committee had been taken where required. In fact, it appears that mutual-security funds in excess of $1 billion were erroneously treated as obligations as of June 30, 1952, for items to be furnished from military stocks.

In order to determine the status of appropriations, both from the viewpoint of management and the Congress, it is essential that obligations be recorded in the accounting records on a factual and consistent basis throughout the Government. Only by the following of sound practices in this regard can data on existing obligations serve to indicate program accomplishments and be related to the amount of additional appropriations required. The practices which should be followed have been the subject of several discussions between representatives of your Department, the Bureau of the Budget, and the General Accounting Office. Based upon these discussions and our own studies there are set forth below the criteria for application in the treatment of procurement orders or requisitions as obligations when deliveries are to be made from stock of the agency to whom the orders or requisitions are issued.

1. Such orders shall comply with the general rule that the materials, supplies, or equipment ordered are intended to meet a bona fide need of the fiscal year in which the need arises or to replace stock used in that fiscal year. This will require attention to the reasonableness of the quantities ordered in the light of the needs of the requisitioning agency during the fiscal year.

2. The order must be firm and complete. This means that the order must request prompt delivery of specific available stock items for a stated consideration and be accepted by the supplying agency with formal notification to the requisitioning agency. However, where common-use standard stock items are carried on hand for sale at published prices to requisitioning agencies, such as under stock or supply funds, and the order will be promptly filed from stocks, no formal evidence of the acceptance of the order by the supplying agency is required.

3. Orders or requisitions for material to be delivered from stock shall be treated as obligations by the requisitioning agency when the conditions specified in paragraphs 1 and 2 are met.

4. As used herein "available" shall mean that the stock items are on hand or on order and will be released for prompt delivery and that all repair, rehabilitation, or renovation required to be done by the supplying agency has been completed. However, common-use standard stock items on order may be considered available if they will be delivered within a reasonable period of time acceptable to the requisitioning agency.

5. As used herein, "delivery" shall mean shipment as directed by the requisitioning agency, except when formal arrangements exist between the requisitioning and supplying agency whereby the later acts as a storage and distribution agent for the requisitioning agency. In the case of this exception, delivery includes the transfer for the account of the requisitioning agency without physical transfer of the material, provided there are no reservations concerning the transfer and there is an adequate system of accounting for the specific items of property preventing issuance or use of the material except as may be directed or authorized by the requisitioning agency for its use or reimbursement. I strongly urge that this matter be given immediate attention and request that unliquidated recorded obligations under all funds administered by the Department of Defense be analyzed and all such obligations for material to be furnished from stock which do not meet the above criteria be adjusted accordingly.

Sincerely yours,

LINDSAY C. WARREN, Comptroller General of the United States.

DEPARTMENT OF DEFENSE DIRECTIVE

Subject: Obligations for materiel to be delivered from stock.

I. PURPOSE

APRIL 29, 1953.

This directive provides the basis of obligation of appropriations or funds of any agency within the Department of Defense in connection with orders or requisitions for materiel upon another agency when deliveries are to be made from stock of the agency to whom the orders or requisitions are issued.

II. DEFINITION

The term "agency," as used herein, means any activity issuing or receiving orders for delivery of materiel from stock whether within or without the Department of Defense. In some cases an activity will receive orders from itself as agent for another program; in such cases the activity will be considered as the ordering agency and the receiving agency with separate responsibilities as though it were two separate agencies.

III. RULES ESTABLISHED BY THE COMPTROLLER GENERAL

A decision of the Comptroller General (B-114578) requires that the following rules shall be uniformly observed by all agencies throughout the Government in the recording and reporting of orders or requisitions for materiel as obligations when deliveries are to be made from stock of the agency to whom the orders or requisitions are issued.

A. Such orders shall comply with the general rule that the materials, supplies, or equipment ordered are intended to meet a bona fide need of the fiscal year in which the need arises or to replace stock used in that fiscal year. This will require attention to the reasonableness of the quantities ordered in the light of the needs of the requisitioning agency during the fiscal year.

B. The order must be firm and complete. This means that the order must request prompt delivery of specific available stock items for a stated consideration and be accepted by the supplying agency with formal notification to the requisitioning agency. However, where common-use standard stock items are carried on hand for sale at published prices to requisitioning agencies, such as under stock or supply funds, and the order will be promptly filled from stocks, no formal evidence of the acceptance of the order by the supplying agency is required.

C. Orders or requisitions for material to be delivered from stock shall be treated as obligations by the requisitioning agency when the conditions specified in paragraphs A and B are met.

D. As used herein, "available" shall mean that the stock items are on hand or on order and will be released for prompt delivery and that all repair, rehabilitation, or renovation required to be done by the supplying agency has been completed. However, common-use standard stock items on order may be considered available if they will be delivered within a reasonable period of time acceptable to the requisitioning agency.

E. As used herein, "delivery" shall mean shipment as directed by the requisitioning agency, except when formal arrangements exist between the requisitioning and supplying agency whereby the latter acts as a storage and distribu tion agent for the requisitioning agency. In the case of this exception, delivery includes the transfer for the account of the requisitioning agency without physical transfer of the material, provided there are no reservations concerning the transfer and there is an adequate system of accounting for the specific items of property preventing issuance or use of the material except as may be directed or authorized by the requisitioning agency for its use or reimbursement.

IV. APPLICATION OF RULES IN THE DEPARTMENT OF DEFENSE

A. The foregoing rules governing obligations for deliveries from stock shall be uniformly followed in accounting for obligations of all appropriations and funds administered by the Department of Defense.

B. In the application of these rules, the following instructions shall be observed:

1. The agency receiving an order or requisition for materiel which may be delivered from stock shall be responsible immediately upon receiving the order

for (a) determining availability of stock as on hand or on order pursuant to III-D above, and (b) formally notifying the ordering agency of acceptance of the order for prompt delivery of items other than common-use standard stock items, as required pursuant to III-B, above, or establishing a delayed delivery date within a reasonable period agreeable to the ordering agency in the case of common-use standard stock items on order.

2. The ordering agency shall be solely responsible for determining its bona fide need for materiel ordered to be delivered from stock. However, when an order is placed for procurement of materiel of substantial value having a relatively long lead time, and the supplying agency determines, as an alternative, that such materiel may be delivered promptly from its available stocks, it will first communicate with the ordering agency in order to enable the latter to determine the justification of its needs and authorize the alternative fulfillment of the order in the light thereof. (The order and acceptance will be amended to reflect any such changes.)

3. Explanations of the meaning of terms used herein are as follows:

(a) "Bona fide need” for a given item of materiel, expressed in quantity, to be ordered at any given time will be based upon consideration of the following factors: the authorized or normal stock level for the item (including mobilization reserves); stock on hand: estimated consumption or withdrawals for use; the goods already on order at the time; and the procurement or delivery lead time for goods on order as well as the subject order.

(b) "Prompt delivery" normally means within 30 days from date of receipt of order by the agency which will authorize shipment in the case of common-use standard stock items or from date of acceptance of order for all other items.

(c) "A reasonable period for delayed delivery of common-use standard stock items on order" normally means within 60 days from date of agreement with the ordering agency for such delayed delivery.

(d) "On order" for purposes of stock availability means in process of procurement under existing contracts or project orders with receipts scheduled to meet deliveries for subject orders within period specified in (b) and (c) above.

(e) "Common-use standard stock items" include items similar in character used by two or more departments or subdivisions thereof for the same or closely related purpose, such as those eligible for financing under stock funds. Examples are: subsistence, medical and dental supplies, lumber, hardware, fuels and lubricants, household and office-type furniture and material, “general housekeeping" material, individual clothing and equipment, and vehicular spare parts. Excluded are major items such as tanks, aircraft, automotive vehicles, and machine tools.

(f) "Stock available" excludes items subject to repair, rehabilitation, or renovation, to place it in condition to deliver pursuant to the terms of the order. However, such stock is available to deliver it as in "as is" condiiton if there is an appropriate agreement, in which case repair, rehabilitation, or renovation will be at the expense of the ordering agency. If repair, rehabilitation, or renovation is to be performed by the supplying agency, it may anticipate reimbursements for sales during the year, on an overall estimated basis. in requesting apportionments of the appropriation designated to be chargeable for the expense of such repair, rehabilitation, or renovation.

4. Acceptance of an order by the receiving agency, pursuant to the rules set forth by the Comptroller General, constitutes a valid obligation of the funds of the ordering agency and shall be recorded as such.

5. The agency accepting an order or requisition shall be responsible for making delivery in accordance with the period established in the acceptance.

6. Whenever stocks are transferred in the future by one agency to another under formal arrangements whereby it acts as a storage and distribution agent for the ordering agency, the following requirements of III-E, above, shall be observed, as follows:

(a) The storage and distribution agent shall maintain an adequate system of accounting for the specific items of property transferred to the account of the requisitioning agency. In other words, overall monetary stock withdrawal credits in the future will not be permitted.

(b) There shall be no reservations concerning transfer of ownership for the specific items.

(c) Such property so transferred in the future may not be issued or used except as directed or authorized by the requisitioning agency, and then reimbursement to the requisitioning agency will be required if it is issued to or used by any other agency whose operations are financed under a different appropriation

or fund. This requirement for reimbursement will not be construed to prevent the waiver of reimbursements for minor charges that may otherwise be authorized. C. Upon receipt of this directive or departmental implementing instructions, each agency within the Department of Defense holding orders or requisitions for deliveries of materiel from stock of 30 April 1953 shall review such transactions for the purpose of notification of acceptance to the ordering agencies or undertaking to establish an agreeable delayed delivery date under each order or requisition, where required by the rules.

D. Upon receipt of this directive or departmental implementing instructions, each agency within the Department of Defense shall review its obligations as of 30 April 1953 and make such adjustments in its records as may be required in accordance with the foregoing rules.

E. Following adjustments of recorded obligations as of 30 April 1953, each agency within the Department of Defense shall review collateral or related transactions and make such adjustments thereof as may be appropriate in the light of these rules and other rules governing accounting for financial transactions.

F. Following adjustments of recorded obligations as of 30 April 1953, each military department shall furnish a special report to the Office of Assistant Secretary of Defense (Comptroller) summarizing the amounts of reductions in obligations at that date by individual appropriations and funds or allocations of funds from other agencies.

V. IMPLEMENTATION

Each of the military departments shall promptly issue regulations or instructions implementing this directive and furnish a copy thereof to the Assistant Secretary of Defense (Comptroller).

VI. EFFECTIVE DATE

This directive is effective immediately.

W. J. MCNEIL,

Assistant Secretary of Defense (Comptroller).

In the Defense Department Comptroller's interpretation he defines "prompt delivery" as normally 30 to 60 days. In the example I cited you, those trucks would not be ready for delivery within 30 to 60 days. Those trucks are still out in a camp somewhere in the Middle West. They have to be replaced by the new trucks, sent in to an automotive rehabilitation center, be torn down, built back up with new parts, and readied for shipment.

Under the new rules that would not become an obligation until the supplying agency-in this case the Rossford Supply Depot-said, "We can deliver within 60 days."

This does not have any effect whatsoever on the requirements. The Danes still want those 50 trucks. It does not have any effect on the expenditures, because expenditures do not become expenditures until the work has been finished and the trucks are ready to ship. It does not change the program, but it definitely changes the bookkeeping. We are in the throes of putting these new rules into effect, and they will have a very significant impact on our obligations picture.

What we have tried in the chart shown here is to give you a rough idea of what the new rules would do. In the Army case, it looks as though this will have an effect of somewhere over $1 billion. In other words, instead of having unobligated on June 30, 1953, the amount that the colonel gave you a few moments ago-I think it was $258 million-if we can fully determine accurately the effect of these new rules on several thousand supply operations, we think the unobligated on June 30 will go up to $1.6 billion or more. The Air Force effect is nowhere near as great. In fact, Colonel Boylan told you he estimated

his unobligated balance at about $265.8 million. He tells me that the effect of the new rules on the Air Force will only be to increase that about $7 million, the reason being that very little of the Air Force program is coming out of the service stocks.

(The chart referred to follows:)

CONCEPT OF OBLIGATIONS

BASIC CONCEPT

1. Where the order is to be filled from the supplying agency's stocks, the order will be recorded as an obligation by the ordering agency.

2. Each military department acts as both ordering agency and supplying agency.

OLD RULES, ARMY

1. Funds are obligated at time supply directives are issued for end items to be provided from service stocks.

2. "Supply directive" is interpreted to mean the approved program document showing the items to be furnished from service stocks.

3. "Service stocks" include equipment in use, if plans for its replacement are established, in addition to items in storage.

OLD RULES, NAVY

1. Similar to new rules except for determination as to prompt delivery.

OLD RULES, AIR FORCE

1. Funds obligated at time order is issued, without determination as to prompt delivery.

NEW RULES

1. The order must be firm and complete, i. e. :

a. Must request prompt delivery of specific available stock items.
b. Must be accepted by supplying agency.

2. "Available" means items on hand or on order that will be released for prompt delivery.

a. Excludes items subject to repair, rehabilitation or renovation at expense of the services unless subject to sale on an "as is, where is" basis on which repair rehabilitation or renovation will be at customers' expense.

b. Includes items on which repair, rehabilitation or renovation has been completed.

3. "Prompt delivery" normally means with 30 to 60 days from date of acceptance of the order.

The Navy case is in between. The Navy picture, as I recall it, showed unobligated balance on June 30 estimated to be $158 million. Under the new rule it is estimated it would be 302 or 303 million dollars.

The problem, then, is when is an obligation an obligation, and how can we present the case to you honestly and fairly in this very turbulent fourth quarter of this game?

On the old rules, which we think represent a pretty fair picture, it is the figure we have given you of about $581 million unobligated balance, exclusive of savings. Under the new rules the thing skyrockets up to something more than 1.6 billion unobligated.

Chairman CHIPERFIELD. Mr. Bentley.

Mr. BENTLEY. Mr. Halaby, can I ask you to turn back to chart 2 for a minute? The amount of $151 million held by OSD is a little confusing. You have got that under distribution of unobligated balance, making a total of 959.5. To get your net unobligated balance you sub