AMERICA’S AWAY TEAM TABLE OF CONTENTS Message from the Secretary of the Navy 2 Message from the Assistant Secretary of the Navy (Financial Management & Comptroller) 3 Management’s Discussion and Analysis 5 Department of the Navy Audit Opinions 47 Department of the Navy Principal Statements 59 Department of the Navy Required Supplementary Stewardship Information 95 Department of the Navy Required Supplementary Information 101 Department of the Navy Other Information 109 Navy Working Capital Fund Audit Opinions 113 Navy Working Capital Fund Principal Statements 123 Navy Working Capital Fund Required Supplementary Information 147 Navy Working Capital Fund Other Information 149 Appendix 151 SECRETARY OF THE NAVY NOVEMBER 2016 The Department of the Navy fervently continues its mission to maintain, train, and equip combat-ready naval forces capable of winning wars, deterring aggression, and maintaining freedom of the seas. United States Sailors and Marines are "America’s Away Team," deploying around the world in times of peace and war to be at the right place all the time, ready and able to respond when called upon. This presence includes deploying forces, building global partnerships, and conducting routine deployments. Four fundamental principles have guided me as Secretary of the Navy in sustaining this global presence: People, Platforms, Power, and Partnerships. People – Sustaining the World’s Most Formidable Expeditionary Fighting Force: Our Sailors, Marines, and civilians all contribute to executing the mission of the DON. We must ensure we’re able to recruit and retain the best and most capable people. To do this, we have expanded meritorious advancements, improved the Career Intermission Program, increased maternity leave, and are opening all billets to every member of the Navy and Marine Corps. The opportunities we provide to the warfighter are investments in sustainment of the world’s most formidable expeditionary fighting force. Platforms – Growing Our Fleet Despite Shrinking Budgets: Platforms enable our people to perform their mission. Having the right number of ships, submarines, and aircraft is critical. Since 2009 we have reversed the decline in United States Sailors shipbuilding. We will have a 300 ship fleet by the end of the decade, despite budget constraints, while continuing to invest in next generation innovations. and Marines are Power – Alternative Energy Fueling the Fight: The Navy has a history of energy innovation, advancing from sail, to coal, to oil, and to nuclear power. "America’s Away This year we launched the Great Green Fleet 2016, steaming on a blend of conventional and alternative fuels. Additionally, during this fiscal year, the Team," deploying DON completed procurement of one gigawatt of alternative energy for shore bases. The use of alternative energies at sea and ashore improves security around the world and advances stability for our fighting forces. in times of peace Partnerships – Building Partnerships to Advance our Shared Values: Partnerships with the American people, our allies, foreign partners, and industry and war to be at allow us to carry out our mission. Joint exercises improve interoperability with foreign navies, building understanding and trust. Improved procurement of the right place all long-lead items such as ships provides stability to our nation’s industrial base. Most critically, we partner with the American people to provide for the future the time. of naval security. Despite ever-tightening fiscal constraints, the DON continues to provide the nation with a strong global presence. As stewards of resources entrusted to us by Congress on behalf of the American people, we are aggressively pursuing the Congressional mandate to improve the reliability of our financial data and achieve audit readiness. The DON’s Fiscal Year 2016 Annual Financial Report, "America’s Away Team," conveys this commitment to, and our partnership with, the American People. Detailed discussion of identified weaknesses and ongoing remediation efforts are disclosed in the DON Statement of Assurance and within the Management’s Discussion and Analysis section. 2 ASSISTANT SECRETARY OF THE NAVY, FINANCIAL MANAGEMENT & COMPTROLLER NOVEMBER 2016 I am pleased to present the Department of the Navy’s (DON) 2016 Annual Financial Report, America’s Away Team, reflecting the hard work performed by Sailors, Marines, and civil servants in executing the Department’s mission. Deploying in times of peace and in times of ensuring they are where it matters, when it matters, our people are the most critical component to success as an organization. Despite shrinking budgets, the DON financial community is working to ensure that resources are efficiently executed to support the needs of the Department today. We are focused on planning for the fiscal future to enable the DON to achieve its objectives: to protect the homeland, build global security, project power and win decisively when called upon. This requires making hard choices to focus investments while continuing to innovate. In an environment of budget constraints and instability, we must protect procurement of long lead items such as ships and aircraft while simultaneously maintaining a high operating tempo. We remain committed to ensuring budget requests balance mission readiness, sustaining the world’s most formidable expeditionary fighting force. We are focused on Financial improvement and audit readiness continue to be important elements of DON financial operations. After years of preparation, the Navy shifted from planning for the preparing for audit to being under audit in FY 2015 marking a significant milestone on our path to a full financial statement audit. I have observed fiscal future to enable the rapidly increasing pace of learning as Navy meets the demands of audit, including creation of an effective audit response network and aggressive the DON to achieve remediation of findings, eliminating root causes, not simply resolving the symptoms. While complex long-standing issues are being resolved through its objectives. diligence and hard work, much work remains. As we drive toward full financial statement audit, the DON’s civilian and military leadership demonstrate their enduring commitment to be accountable to Congress and the American people for sound stewardship of the funds entrusted to them and along with it, greater accountability, transparency, and efficiency. Leadership Messages 3 4 Department of the Navy Fiscal Year 2016 Annual Financial Report MANAGEMENT’S DISCUSSION AND ANALYSIS America’s Away Team Management’s Discussion and Analysis Management’s 5 (U S Navy photo by Petty Officer 3rd Class Nathan Burke/Released) AMERICA’S AWAY TEAM OVERVIEW The Department of Defense (DoD) includes three military departments (Department of the Army, Department of the Navy, and Department of the Air Force); however, there are four separate service branches (Army, Navy, Marine Corps, and Air Force). Since 1834, the Navy and Marine Corps have been housed together under the Department of the Navy (DON). The Department of the Navy was established on April 30, 1798. The DON has three principal components: the Navy Department, consisting of executive offices mostly in Washington, DC; the operating forces, including the Marine Corps, the reserve components, and, in time of war, the U.S. Coast Guard (in peace, a component of the Department of Homeland Security); and the shore establishment. The Department of the Navy consists of two uniformed Services: the United States Navy and the United States Marine Corps. The United States Navy was founded on October 13, 1775. The Navy’s core responsibilities are to deter aggression and, if deterrence fails, win the nation’s wars. The Navy employs the global reach and persistent presence of forward-stationed and rotational forces to secure the nation from direct attack, assure Joint operational access, and retain global freedom of action. Along with global partners, the Navy protects the maritime freedom that is the basis for global prosperity and fosters and sustains cooperative relationships with an expanding set of allies and international partners to enhance global security. The United States Marine Corps (USMC) was founded by an act of the Continental Congress on November 10, 1775. As the nation’s Expeditionary Force in Readiness, the Marine Corps provides power projected from the sea, utilizing the mobility of the Navy to rapidly deliver combined-arms task forces in coastal regions or emergent global crises. The Marine Corps has evolved into a balanced air-ground task force with significant logistical capabilities to forward deployed and forward engaged areas shaping, training, deterring, and responding to all manner of crises and contingencies. The Department of the Navy Annual Financial Report (AFR) includes two separate sets of financial statements, the DON General Fund (GF) and the Navy Working Capital Fund (NWCF). The DON GF accounts for appropriations and funds as general, working capital (revolving), trust, special, and deposit funds. The DON uses these funds (excluding deposit funds) to execute its mission. The National Defense Sealift Fund is the only 6 Department of the Navy Fiscal Year 2016 Annual Financial Report AMERICA’S AWAY TEAM revolving fund within DON GF and receives an annual appropriation. The DON GF is comprised of those federal account symbols beginning with agency number 17 within the United States Treasury’s Federal Account Symbols and Titles (FAST) Book. The NWCF is a revolving fund that provides