Attachment 1 - Standby Letter of Credit (SBLC) Procedures Paper Excerpts

Section 1: Introduction and Framework

1.1 Purpose
This paper describes the procedures pursuant to which a Standby Letter of Credit (SBLC) instrument can apply to the Foreign Military Sales (FMS) program. The rights of the DSCA under an SBLC are independent of the underlying transaction between the financial institution and the FMS Purchaser.

1.2 Scope
This SBLC is in lieu of termination liability (T/L) prepayment requirements under the FMS program. Instead of T/L prepayments being deposited into the FMS Purchaser's Federal Reserve Bank (FRB) account or the FMS Trust Fund, an equivalent amount is guaranteed under the SBLC. Other financial requirements owed the USG (i.e., working capital) are not covered by this arrangement. This SBLC covers all basic FMS cases offered on or after 1 November 2001.

Section 2: Responsibilities

2.1 Defense Security Cooperation Agency (DSCA)
The DSCA is the Beneficiary stated on the SBLC. The DSCA is responsible for implementing all aspects of the U.S. Security Cooperation Program. In addition, DSCA is the Trust Fund manager of the FMS program and is ultimately responsible for sound and efficient fiduciary and financial management thereof.

2.1.1 Director
The DSCA Director has overall responsibility for ensuring the successful implementation, execution and management of the SBLC program. The Director must approve any waivers to the eligibility threshold criteria contained in Section 3.3 and 3.4 below as regards a particular SBLC application.

2.1.2 Comptroller
The DSCA Comptroller directs and oversees the financial management of Security Cooperation programs (particularly the Foreign Military Sales program) and DoD appropriated programs allocated to DSCA to optimize the use of fiscal resources and maximize benefit to the U.S. foreign policy and national security objectives. The Comptroller is the lead directorate within DSCA for performing the FMS Trust Fund manager functions/duties.
The DSCA Comptroller provides general leadership and policy guidance to the Deputy for Financial Management regarding administration of the SBLC program. The Comptroller signs all invitations for FMS Purchasers to consider joining the SBLC program. The Comptroller determines whether a SBLC application will be approved or rejected. Lastly, the Comptroller normally signs all SBLC documents on behalf of DSCA ("Beneficiary").

2.1.3 Deputy for Financial Management (FM)
The Deputy for FM is responsible for day-to-day financial management of the FMS program, to include country financial management, financial policy and information reporting.
FM will prepare all invitation letters; issue for release all SBLC documents; conduct negotiations and discussions with FMS Purchaser representatives and participating bank officials; recommend to the DSCA Comptroller whether a SBLC application should be approved or rejected; ensure adherence to SBLC policy; update SBLC policy as necessary (to include obtaining requisite coordinations thereon); notify DFAS and the Implementing Agencies when SBLCs are implemented (to include confirmation as to which FMS cases pertain); maintain a current tracking mechanism to reflect SBLC activity; resolve problems/issues that arise; keep the DSCA Director and Comptroller apprised of SBLC-related issues as appropriate; serve as USG contact for all SBLC-related inquiries; and serve as overall coordinator for the SBLC program.

2.1.4 General Counsel (GC)
The DSCA GC will serve as counsel to the Director, Comptroller and FM on SBLC issues. GC will coordinate on all SBLC documents prior to their issuance to designated parties for their review and acceptance. GC is responsible for reviewing any proposed revisions to SBLC documents. In addition, GC will articulate dispute resolution mechanisms. As necessary, DSCA GC will coordinate with DoD GC (Fiscal).

2.2 Office of the Under Secretary of Defense (Comptroller)
The OUSD(C) is responsible for issuing financial policy relating to the FMS program. Volume 15 of the DoD Financial Management Regulation (FMR, DoD 7000.14-R) pertains. OUSD(C) shall coordinate on the generic SBLC documents and issue formal changes to the FMR/Volume 15 to reflect the SBLC program.

2.3 Defense Financing and Accounting Service (DFAS) Denver
The Directorate for Security Assistance (DFAS-AY/DE) is responsible for the financial accounting of FMS Trust Fund transactions. As regards the SBLC, DFAS-AY/DE will record the deposit of funds from the issuing/confirming bank(s) to the FMS Purchaser's Trust Fund general ledger account (GLA) 1009. (This will have a corresponding impact on GLA 1001 as well.) DFAS-AY/DE will be provided copies of all sight drafts issued by DSCA, in order to be provided advance notification of the forthcoming deposit.

2.4 FMS Purchaser
The FMS Purchaser may initiate a request to participate in the SBLC for FMS program. All requests, either initiated unilaterally or in reply to a DSCA invitation, must be sent to the DSCA Comptroller in writing and signed by an official authorized to accept the SBLC documents on behalf of the Purchaser's government/organization. The FMS Purchaser is responsible for paying to the issuing bank any/all fees associated with the SBLC. No fees can be capitalized or subsumed into the dollar amount specified in the SBLC documents. The Purchaser must specify to DSCA the issuing and/or confirming bank(s) it wishes to participate in the SBLC for FMS program. The Purchaser is responsible for notifying DSCA in writing if and when it wishes to terminate its agreement with an issuing and/or confirming bank. Lastly, the Purchaser must sign the agreement specifying terms and conditions in order for the associated SBLC to be implemented.

2.5 Implementing Agencies (IAs)
Refer to Chapter 7 of the Security Assistance Management Manual (DoD 5105.38-M) for general IA responsibilities as regards the FMS program. For the SBLC program, the IAs will be notified by DSCA when the SBLC for a particular FMS Purchaser is implemented. That notification will include the list of cases (or cite all cases as a general statement) governed by the SBLC. Accordingly, the IA will ensure proper format of payment schedules that extract the T/L component as a financial requirement owed the USG. Likewise, should a given SBLC be terminated, the payment schedules may need to be revised to re-insert T/L as appropriate; the same time frames as noted in the preceding sentence apply.

Section 3: Implementation

3.1 Implementation Criteria
The SBLC is binding when issued. The Terms and Conditions Agreement is considered to be implemented when all parties signed all copies of the documents and the corresponding SBLC is issued. At this stage, the process to notify applicable USG agencies as to the implementation shall commence.

3.2 Notification to USG Entities
Upon SBLC implementation, DSCA will engage specific DoD components as follows:

• Implementing Agencies: A frontchannel cable will be sent from DSCA that provides the SBLC implementation date; confirms the extent of T/L coverage under the SBLC; and provides either a list of affected cases (or makes general reference to all cases to which T/L applies). The cable will also specify actions to be performed in terms of ensuring proper format of payment schedules on affected cases. See Section 2.5 above.
• DFAS: A frontchannel cable will be sent from DSCA that conveys the requirement to modify the means by which DFAS captures the payment schedule amounts into its DIFS system.
• FMS Purchaser: A letter will be sent from DSCA that confirms implementation details of the SBLC documents.

Section 4: Execution/Monitoring/Adjustments

4.1 Sight Draft Process/Requirements A sight draft is a demand for payment. This Section describes the associated actions and requirements.

4.1.1 Events Prompting a Sight Draft
A sight draft may be completed by FM and signed by the DSCA Comptroller after coordination and approval by the Director or Deputy Director. DSCA may issue a sight draft if any of the following situations occur:

• The FMS Purchaser notifies the USG in writing that it is terminating all or a portion of any FMS case.
• The USG notifies the FMS Purchaser in writing that it is terminating an FMS case(s) or contracts relating to an FMS case.
• The USG is aware the SBLC is being either terminated or not extended beyond its expiration date.
• A contractor presents a bill to the USG for termination charges associated with an FMS case(s).
• The issuing and/or confirming bank falls below DSCA's acceptable eligibility thresholds.

The sight drafts may demand payment for the entire secured amount (to include the automatic amendment of up to 10 percent over the original secured amount) or for a portion of the secured amount. Multiple drawings, on either the same date or on separate dates, can also occur, provided those drawings taken together do not exceed the original or amended secured amount.

4.1.2 Sight Draft Presentation
The sight draft must be completed and signed by the DSCA Comptroller. It will be presented to the issuing bank (with a copy to the FMS Purchaser and, if applicable, the confirming bank). DSCA will handcarry, express mail or telex the sight draft to the address specified in the SBLC and the Terms and Conditions Agreement. No documentation other than the sight draft is required for presentation to the bank in order for that presentation to be complete. The bank cannot dishonor payment by demanding that additional documents be furnished by the DSCA.

4.1.3 Sight Draft Honor
The sight draft, SBLC agreement (and, in the absence of specific terms, clauses or provisions in either of those documents, the ISP 98) govern the timeframes by which the payment demand is to be honored.

4.1.4 Application of Payment Received
The sight draft specifies the account into which the payment shall be remitted. Upon receipt, DFAS will ensure the payment is properly credited to the FMS case(s) as directed on the wire transfer. DFAS will notify DSCA (FM) via e-mail as to the date deposited and FMS case(s) credited within three (3) business days of demand payment receipt. DSCA (FM) will acknowledge to DFAS via e-mail within one (1) business day thereafter its receipt of the DFAS advice and confirm that it approves the demand payment application.

4.1.5 Impact of Sight Draft on SBLC Secured amount
To the extent a sight draft is presented and demand payment received, the corresponding amount is deducted from the SBLC Secured amount remaining for future payment. Understandably, a bank's amount under an SBLC for a given FMS Purchaser is ultimately finite in nature. For example, if the SBLC Secured amount is $100M and a payment of $42M is made to DSCA, only $58M is available for subsequent drawings. An exception to this is if the SBLC Secured amount is restored to $100M (or some other amount) via an amended or new SBLC.

4.2 Monitoring Requirements
DSCA (FM) will monitor the status of each SBLC for FMS on a basis not less than quarterly. This includes processes as noted in the following sections.

4.2.1 Validating T/L Requirements
Each quarter, DSCA (FM) Financial Policy will, in coordination with the DSCA (FM) CFD, determine whether the secured amount specified in the SBLC remains adequate to cover T/L requirements for the portion of the Purchaser's FMS program governed by the SBLC. This is in recognition of the dynamic nature of FMS programs. For example, during the period in which a given SBLC is active, many FMS cases may be implemented, many may close and many may continue to be executed - all of which may impact the corpus-level T/L requirement. Refer to Section 6.3 below for actions taken to amend the SBLC to reflect changes in the T/L.

4.2.2 Tracking Mechanism
Each quarter, DSCA (FM) Financial Policy will submit via the Deputy for FM to the Comptroller a report to identify SBLC activity/status. On an annual basis (by 31 October for the fiscal year-end), a consolidated report will be forwarded to the DSCA Director with an information copy to OUSD(C). The annual report will include overall assessments and a recommendation as to any changes in the overarching SBLC policy that may be required to more effectively execute this program.

4.3 Amendments
It is recognized that valid changes to any given SBLC while it is active can be necessary. These changes could be prompted by the DSCA assessment that the amount should be adjusted, the Purchaser's and/or issuing bank(s) request for the same, and changes in any terms and conditions acceptable to all parties. Regardless of the reason, all amendments must be approved by DSCA before they are accepted and implemented.

4.4 Impact on LOA Payment Schedules
T/L applies for purchases of defense articles and defense services made pursuant to Section 21 of the Arms Export Control Act. In the event no SBLC exists, T/L prepayments are made as part of the financial requirements owed the DSCA on each applicable FMS case. With an executed SBLC, T/L requirements are instead governed by the SBLC instrument. The SBLC therefore impacts the USG's financial requirements. Accordingly, the FMS case payment schedules must be adjusted to identify the revised amount owed the DSCA (which equals the advance collection of funds needed to cover anticipated disbursements).
Upon SBLC implementation, DSCA will notify the IAs in accordance with Section 3.2 above. For basic FMS cases offered on or after 1 November 2001, the IAs will ensure payment schedules reflect the exclusion of T/L from the financial requirements owed the USG. Initially, this will be accomplished by ensuring the payment schedules (using the current format) consider only the anticipated financial expenditures and omit the T/L requirement. The following format applies once the requisite reprogramming enhancements to DSAMS are completed:

Upon receiving the LOA documents, DFAS will load the "USG Financial Requirements" figures into DIFS. This will replace the "total requirements" figures currently shown in DIFS and, consequently, revise future financial forecasts and individual quarterly amounts due.

Section 5: Closeout

5.1 Closeout
Closeout of the SBLC can be prompted by its termination or expiration without extension. Within thirty days after either date (whichever occurs earlier), the bank(s) will be requested to submit to the DSCA Comptroller and to the authorized FMS Purchaser official a written notice that confirms the SBLC was closed and that the bank is no longer carrying this contingent liability on its books. Within fifteen days after receiving the bank's notice, DSCA will send written confirmation to the FMS Purchaser and the bank that it has also closed the SBLC. Written confirmation to the FMS Purchaser will also include information on how future T/L requirements will be billed until/unless a new SBLC is implemented. DSCA will notify DFAS and the IAs that the SBLC was closed and instruct (a) the IAs as to consequent payment schedule methodology and (b) DFAS as to the revised billing process.
If the FMS Purchaser requests that the SBLC not be renewed, not later than 30 days prior to the expiration date it may request that DSCA either draw the entire T/L amount from the SBLC or shall deposit the applicable T/L prepayment amount into its FMS Trust Fund account. If the secured amount available in the SBLC is not sufficient to cover all T/L funds required at the time of SBLC expiration, the Purchaser would be responsible for depositing that uncovered amount.

Section 6: Points of Contact

For more information, contact:

• DSCA Deputy for Financial Management
  Arthur Hotop, telephone (703) 604-6565, hotopa@osd.pentagon.mil
• SBLC Program Coordinator/Financial Policy
  David Rude, telephone (703) 604-6569, david.rude@osd.pentagon.mil
• DSCA General Counsel
  Dorothy "Kay" Cannon, telephone (703) 604-6587, kay.cannon@osd.pentagon.mil
• Prepared by: David A. Rude/Date of Last Revision: 21 September 2001

Attachment 2 - Payment Schedules Policy

Definitions

In order to ensure common understanding of the terms utilized throughout this policy guidance, the IPT developed a lexicon defining those terms. The lexicon is furnished at Attachment 2A.

Implementation Guidelines for DEPSECDEF 13 Dec 99 Memorandum

On 13 Dec 99, the DEPSECDEF issued a memorandum concerning FMS financial management. That memorandum mandated the periodic revision of payment schedules and described the reconciliation requirements for major cases. This policy memorandum provides implementation guidelines for effectively executing those requirements.

Case Reviews. All FMS cases must be reviewed. A review shall occur at least annually either (a) on the anniversary of basic case implementation; (b) in preparation for a formal review with the FMS customer; or (c) when the case value adjusts by ten percent or more. Attachment 2B provides the minimum review items that, taken together, constitute a review of an FMS case. The IAs should develop checklists that incorporate the Attachment 2B case review items, and issue detailed procedural guidance that provides supplementary information unique to each IA. Each checklist shall be signed and dated by the case manager conducting the review, and shall become an official document within the applicable case file.

Additional Major Case Requirement. In addition to the guidance specified above, a quarterly payment schedule variance report was developed to signify major cases for which discrepancies between the payment schedule and financial requirements appear to exist. A sample of this report, along with a lexicon defining each data element thereon, is furnished at Attachment 2C. The report will be comprised of two sections: (1) the universe of all open FMS cases; and (2) a filtered version. The filtered version identifies only those cases meeting the following criteria:

• Is a major case as defined in Attachment 2A and
• Type of Assistance code is not equal to '3' (i.e., Cash with Acceptance) or 'U' (FMSO I) and
• Expenditures do not exceed 80 percent of the total LOA value and
• The variance between the payment schedule and financial requirements exceeds 25 percent for the average of the past three quarters.

This filtered version should be considered as the actionable version. It will be generated and distributed by DSCA. The IAs will use this report to issue workflow tasks in DSAMS that will bring these variances to the attention of case managers for their analysis and, as appropriate, revision to the corresponding payment schedules via a modification or (if a scope adjustment is being done concurrently) an amendment.

Case Reconciliations. While all cases must be reviewed, not all cases need to be reconciled. A reconciliation is required only when errors or discrepancies are found during the review. The IPT identified those reconciliation actions, correlated them with the aforementioned case review actions, and combined them into a single matrix (see Attachment 2B). This matrix describes what needs to be done to correct situations found during the review. As with the case review checklist, the IAs should develop procedural guidance that provides a "how to" primer on fixing errors discovered during the review. Many of these tools are already being taught in the DISAM-CR (Case Reconciliation/Closure) course and should be promulgated throughout the FMS community. (To that end, DISAM should incorporate the Attachment 2B matrix into its CR course curriculum.)

Payment Schedule Format

Through the IPT's discussions and the simultaneous rewrite of Volume 15 to the DoD Financial Management Regulation (DoD 7000.14-R), revisions to the payment schedule format were made. Attachment 2D illustrates those revisions contained in Chapter 4 of the rewritten Volume 15. For example, use of the term "Initial Deposit" no longer applies to LOA amendments; instead, the new language is "Due with Amendment Acceptance." This change eliminates the confusion that "Initial Deposits" as related to amendments oftentimes caused. Another key formatting change regards cases subject to the Standby Letter of Credit (SBLC); refer to Attachment 1 for more information. Other fundamental revisions to the payment schedule methodology are articulated in ensuing sections of this document.

Factors/Variables

Life Cycle Matrix. The relevance of payment schedules spans from pre-LOR through active case reconciliation. Attachment 2E provides a matrix delineating the general actions relative to payment schedules during each stage of an FMS case.

Line Level. A basic shift in the culture of developing payment schedules concerns the baseline for how they will be developed. In the past, payment schedules were predominantly developed at the case level; while they considered line-level activity, there was no requirement to analyze the future requirements for each line. For the future, however, the general policy rule is that schedules will be built at least at the line level (and could be constructed at the sub-line or delivery set level). For multi-line LOAs, the individual line-level schedules will be rolled-up to reflect a consolidated case-level schedule. (For cases with only one line, construct at the case level is appropriate.) From a systems perspective, DSAMS already has the capability to use curves to compute projected line-level financial requirements that would, in turn, be combined to form a case-level payment schedule. Attachment 2F illustrates the concept of the line-level roll-up methodology using quarterly estimated expenditures for each line; this manual process will be incorporated into a future DSAMS release. On an exception basis, case managers will be allowed to construct payment schedules at the case level.

Collections. A primary principle of payment schedule logic is that it is intended to reflect the timeline and amounts to be paid from the FMS customer. While this statement seems fairly obvious, the absence of recording what the customer has already paid when adjusting those schedules can result in a misleading representation of future payment requirements. Thus, we have incorporated the requirement that, for payment schedule revisions reflected on LOA amendments and modifications, the amount paid from the FMS purchaser will be shown on those LOA documents. That said, the infusion of collections is the last sequential component in developing the future stream of payments. In other words, the case/program manager develops the payment schedule based on the forecasted expenditure requirements remaining on that LOA. Once those requirements are solidified in the form of a case-level schedule, the amount paid by the FMS purchaser is then factored into the equation. Whether the collections to date equal, exceed or are less than the financial requirements for the next payment due on the case has a corresponding influence on the future payment schedule. Revisions B through G on Attachment 2D illustrate the impact collections have on the payment schedule. Regardless of collections, revision B reflects the projected expenditure requirements. The collection status is then used to determine which payment schedule computation logic (i.e., revisions B through G) applies.

Parameters/Assumptions. In order to construct as accurate a payment schedule as possible, the proper assumptions must be used and loaded into DSAMS. This touches on lead times (both administrative and procurement); period of performance; progress payment schedules; delivery schedules; and when commitments, obligations and expenditures are anticipated to be incurred. The inadvertent use of inaccurate parameters will likely result in inaccurate payment schedules. The case manager should at all times be able to validate the assumptions used to create a payment schedule.

Information Exchange. In many organizations, personnel responsible for the development and preparation of LOA documents are different from those who negotiate contracts, schedule training, determine follow-on and concurrent spare parts requirements, etc. It is critical that the full package of information necessary to develop the payment schedule portion of LOA documents be provided to the case writers. Examples of information are: contractor progress payment schedules; contractor termination schedules (used in the termination liability worksheet); lead times/availability; periods of performance; delivery schedules; estimated contract award dates; customer requested payment schedules and organizational approvals; and disbursement histories for like-item cases or lines already implemented. As noted above, provision of this information needs to be at the line-level, not just the case-level. The more information furnished to the case writers, the more complete the analysis - which should correspond to a better representation of future payment needs.

Curve Validation. Payment schedule curves (most of which reside in DSAMS) exist as a means of profiling the expenditure patterns for types of cases/weapon systems. These curves can then be used as a means for computing expenditure patterns for similar types of cases/systems, without having to "re-create the wheel" each time. The IPT reviewed some curves currently used and conducted a limited sampling of cases that used each curve. In general, the findings were that the curves studied required relatively minor adjustments. However, it is important to note that the sampling was extremely small in scope and that time precluded a thorough review of all curves in existence. Also, it was discovered that there was no systemic procedure for validating the accuracy of curves. Accordingly, each payment schedule curve must be validated every two years by conducting a random sampling of cases that used each curve, comparing the actual performance of those cases with the curve, and adjusting the curve based on those findings. A statistically valid sample (e.g., a sufficient number of cases are analyzed when compared to the total population of cases using a given curve) is important to provide sufficient analytic data and to document whatever adjustments to the curve resulted during the validation process.

New curves proposed by the IAs should be sent to the Headquarters component for assessment. The IAs should validate the need for a new curve (to include affirming that it will be used frequently enough to merit its creation) and verify the basis for how the proposed curve was constructed. After the IA review is completed, it should be sent to DSCA (COMPT-FM) for approval.

Termination Liability (T/L). T/L applies to procurement-based FMS cases and, when added to the disbursements projected for a given quarter, constitute the total payment due for that quarter. The use of contractor termination schedules is the preferred baseline document for calculating the T/L that would apply at a given point in time for a specific FMS case. The next preferred method is using the T/L component of the payment schedule curve being used. The least preferred method, to be used only in the absence of any other documentation, is the "DoD Standard Curve" shown in Chapter 4, Volume 15, of the DoD FMR.

This policy memorandum deletes the requirement for the T/L Worksheets to be furnished with LOA documents sent to DSCA for electronic countersignature. However, T/L Worksheets must be prepared whenever a case contains a Pricing Element Code (PEC) of 'CC'. The T/L Worksheets must reside in DSAMS. On an ad hoc basis, DSCA will print the T/L Worksheets from DSAMS.

As noted above, T/L Worksheets are prepared for cases containing a PEC of 'CC'. Moreover, T/L does not apply to any PEC other than 'CC'. This business rule must be followed to help ensure accurate pricing of the item and to help reflect an accurate portrayal of financial requirements owed under the LOA. If a specific case, or line within a case, contains multiple PECs, to include 'CC', care must be taken to appropriately pro-rate the 'CC' component for the purpose of computing the T/L.

'BK' Transactions. The 'BK' transaction, aka "K" cards, represent committed unfilled requisitions. These requisitions apply to the Cooperative Logistics Supply Support Arrangement requisitioning cases (FMSO II) and some blanket order cases. Through the IPT's discussions, it was agreed that the 'BK' billing process was more convoluted than necessary. As such, the 'BK' transaction/'K' card feed from the IAs to DFAS will in all instances form the basis for what is billed to the FMS customer. In addition, payment schedules for the 'BK transaction-based cases shall include a note directly underneath the schedule that states the following: "This schedule represents the USG's best approximation only, and is ultimately determined by actual FMS customer requisitioning." Significant variances that arise on 'BK'-based cases will, if meeting the criteria for the payment schedule variance filtered report, require revisions to the approximate payments for the remainder of that case.

Customer Requests. On occasion, the FMS customer may submit its requested payment schedule for a given case. This schedule may be based on its internal budgetary allocation, reflect other constraints or may reflect a desire to pay on an accelerated basis. In all instances, the IA should analyze the customer's request in the context of whether the desired incoming cash flow ensures sufficient funds are available throughout the life of the case. This requires a comparison with the payment schedule the USG would have otherwise developed on its own. Every effort should be made to accommodate customer requests. If minor adjustments should be made to satisfy our requirements, a dialogue with the customer should commence; an outright rejection should not be initiated. Most obstacles will be overcome through clear and open communication in advance of an offered LOA.

To the extent customer-requested schedules that deviate from the USG's schedule are used, only the customer-requested schedule will appear on the LOA (except for certain Japan cases under its Planned Payment Schedule concept). The case manager must document, either through DSAMS or in the case file, the USG-developed payment schedule that would have otherwise been used had the customer not requested a unique schedule. A note underneath the schedule is required to confirm usage of the customer-requested schedule (provide a reference) and USG approval (provide name of organization and approval date). In addition, a second note to be placed underneath that schedule shall be worded as follows: "The USG reserves the right to bill for additional amounts if, during the execution phase, actual costs materialize at a rate that cannot be supported by the customer-based schedule." That said, it is understood that dialogue with the FMS customer will occur in advance of modifying the payment schedule to reflect a profile not based on our prior arrangement.

Lastly, customer-based schedules will impact the T/L Worksheet. The IA should first develop the T/L Worksheet based on the payment schedule the USG would have otherwise developed (to include contractor termination costs). Then, the customer-based schedule should be overlaid and used to re-calculate what the T/L profile will be based on that schedule. In other words, the T/L "curve" will change to accommodate and align with the customer-based schedule.

Updates. Updates to payment schedules are an integral part of keeping the FMS customer informed as to changes during the execution phase of an LOA. These changes may be necessary to reflect revisions to delivery schedules (for example) and also adjusted scopes. For major cases, this includes the payment schedule variance filtered report discussed above. For all cases, the payment schedule review occurs at least annually, and is one item found on the case review checklist (Attachment 2B).

Special Billing Arrangements (SBAs). Over 30 countries have SBAs that serve as alternate billing arrangements with DSCA and DFAS. These SBAs were created primarily as a result of customer dissatisfaction with the payment schedule process. We believe that the improved policies and methodologies will likely, over time, obviate the need for SBAs from a USG perspective. However, ultimate decision on whether to continue or terminate an individual SBA rests with the applicable FMS customer. No SBA will be terminated unilaterally.

DSAMS and DIFS. The policy revisions articulated in this guidance necessitated a number of revisions and corrections to the DSAMS (and to a lesser extent, DIFS) constructs. These issues were explored in detail with the DSAMS programmers earlier this year. The meeting with DIFS programmers has not yet been held. However, due to the relative complexity of some programming requirements, not all of the policy revisions can be implemented immediately. DSCA will send a formal memorandum announcing deployment of the release that incorporates these changes. Refer to the "Implementation" section below for additional information on when the policies announced herein will be effective.

Implementation

The following policies are effective immediately upon the USG FMS community being adequately trained on these requirements, and in any event not later than 31 December 2001:

• Case review and case reconciliation requirements (including the checklists).
• Use of, and taskings through DSAMS based on, the payment schedule variance report (filtered/actionable version).
• Reference to the life cycle matrix.
• Construct of payment schedules from the line-level using curves in DSAMS, rolled-up to the case-level.
• Use of valid/proper parameters and assumptions when building schedules.
• Information exchange requirements between case writers and information providers.
• Curve validation process.
• Elimination of requirement to provide T/L worksheet with LOA packages sent to DSCA for countersignature.
• Inclusion of notes underneath LOA payment schedules for 'BK' transaction-based cases and also for customer-requested schedules.
• Payment schedule update requirements.

The following policies are effective when DSAMS or DIFS are reprogrammed, the corresponding releases are deployed, and DSCA notifies the FMS community:

• Reformatted payment schedules (to include insertion of collection data) (DSAMS).
• Construct of payment schedules from the line-level using manually-entered quarterly financial expenditures, rolled-up to the case-level (DSAMS).
• Computing T/L amounts based only on PEC of 'CC' (DSAMS).
• Reformatted T/L worksheets (DSAMS).
• Recomputed billing methodology for 'BK' transaction-based cases (DIFS).

Attachment 2A - Finance IPT Lexicon

Attachment 2B - Case Review and Reconciliation Matrix

Attachment 2C - Lexicon for Payment Schedule Variance Report

DEFINITION/DATA OPTIONS

PAYMENT SCHEDULE THRESHOLD VARIANCE REPORT
(DEC 2000 DD645; PAYMENT DUE 15 MAR FOR REQUIREMENTS APR-JUN 2001)

Attachment 2D - Illustrations of Payment Schedule Revision Examples

A. Original Estimated Payment Schedule

Given Data for Revisions 1 through 5 Below:

1. Last Payment Due Date: 15 Dec 200X (most recent quarterly payment before month of LOA amendment preparation - refer to Section 040304B)
2. LOA Amendment Prepared: February 200Y
3. Offer Expiration Date: 25 May 200Y
4. Next Payment Due Date: 15 Sep 200Y (next quarterly payment due date after Offer Expiration Date - refer to Section 040304B)

B. Revision Example No.1 -- Upward Adjustment via Amendment (Note 1); Collections Equal Previous Payments Scheduled

Note: the "Due with Amendment Acceptance" reflected above includes amounts for payments earlier shown as due 15 Mar 200Y, 15 Jun 200Y and other requirements for the period through the payment due 15 Sep 200Y as shown above. Any payments made by the Purchaser that exceed the "Amount Received from Purchaser" as shown above are to be deducted from the "Due With Amendment Acceptance" amount shown above.

Revision Example No.2 - Upward Adjustment via Amendment (Note 2); Collections Exceed Previous Payments Scheduled

Note: any payments made by the Purchaser that exceed the "Amount Received from Purchaser" as shown above are to be deducted from the "Due With Amendment Acceptance" amount shown above.

D. Revision Example No.3 - Upward Adjustment via Amendment (Note 3); Collections Less Than Previous Payments Scheduled

Note: the "Due with Amendment Acceptance" reflected above includes amounts for payments earlier shown as due 15 Mar 200Y, 15 Jun 200Y and other requirements for the period through the payment due 15 Sep 200Y as shown above. Any payments made by the Purchaser that exceed the "Amount Received from Purchaser" as shown above are to be deducted from the "Due With Amendment Acceptance" amount.

E. Revision Example No.4 -- Downward Adjustment via Modification; Collections Equal Revised Payments Scheduled

F. Revision Example No.5 - Downward Adjustment via Modification (Note 4); Collections Exceed Revised Case Value

G. Revision Example No.6 - Upward Adjustment via Modification (Note 5); Collections Less Than Revised Case Value

Notes:

• In Revision No.1 (due at the DFAS-AY/DE not less than 10 Dec 200X), the Previous Payments Scheduled amount of $340,000 corresponds to the 15 Dec 200X cumulative amount on the original payment schedule. An amount due with amendment acceptance (reflected on the LOA amendment) is requested and is, therefore, shown.
• Uses the same expenditure forecast as Revision No.1, in order to identify how the overcollection status on a case influences the future payment requirements as reflected on the schedule. In this instance, the Purchaser does not need to resume payments until such time as the USG's financial requirements warrant.
• Uses the same expenditure forecast as Revision No.1, in order to identify how the undercollection status on a case influences the future payment requirements as reflected on the schedule. In this instance, the Purchaser must "catch up" on its payments with the amount due with amendment acceptance (or, in the event of an LOA Modification, with the next quarterly payment due).
• In Revision No.5 (due at the DFAS-AY/DE not later than 10 Sep 200X), the Previous Payments Scheduled amount of $460,000 corresponds to the 15 Sep 200X (previous) entry contained in Revision No.1. Since the implementing agency desires to reduce this amount by $60,000, a Revised Payments Scheduled entry ($400,000) is shown. Based on the revised case value equaling $400,000, this results in an overpayment status by $25,000. The Purchaser may elect to request from DFAS-AY/DE a transfer of these funds to another case or holding account.
• In Revision No.6, the case value is being increased from $460,000 to $500,000 via a Modification. Given the collections to date match the previous case value, the case requires additional funds. The Purchaser must remit those additional funds with the next appropriate quarterly payment due date. The "Revised Payments Scheduled" amount equals the "Previous Payments Scheduled" because there is no payment due upon processing of a Modification.

Attachment 2E - Payment Schedule Matrix

Attachment 2F - Line-Level Roll-Up Case Payment Schedule Illustration

Sample Case: Bandaria (BN)-Q-ABC/Offer Expiration Date: 30 November 2001

*** In this example, the initial Deposit covers the period from 30 November 2001 through 31 Mar 2002.

Attachment 3 - FMS Case Closure Reviews DSCA Proposal

BACKGROUND

As of 30 Jun 2001, approximately 940 FMS cases were open and supply complete (S/C) for more than two years. The current EACC methodology, in which cases are selected each quarter for closure by a targeted suspense date, is effective when a limited number of cases apply. However, the EACC approach can realistically address at most 150 or so cases each quarter. In the meantime, additional cases are becoming EACC-eligible. The net EACC backlog appears not to be diminishing to a level where the current process can realistically cover all eligible cases. A more radical approach must be considered to liquidate the backlog of several hundred cases that comprise the bulk of EACC-eligible cases. In the 27-29 March FMS Closure Conference, DSCA outlined a proposal that is described in greater detail here.

RECOMMENDATION

DSCA envisions the following timeline to apply to this EACC backlog liquidation proposal:

CLOSURE REVIEW PROCESS

Attendees

The meeting will be co-chaired between DSCA and the host MILDEP. DSCA/COMPT (Financial Policy) will be the DSCA rep. MILDEP reps should consist of those who routinely work closure/reconciliation issues, case/program managers from both the host MILDEP component and other commands/centers that have cases being discussed. Access to case files and/or system databases to verify values should be readily available.

Meeting Format

The attached document displays the decision-making process during these closure reviews. Essentially, this will be a comparison between the DSCA records and the MILDEP records. Each case will be reviewed in detail to determine:

• That it is supply complete and, if so, the month/year it became supply complete.
• Whether any of the following closure inhibitors exist: open SDRs; litigation; customer request to keep the case open; MILDEP desire to keep the case open (with justification); and/or excessive out-of-balance conditions (with supporting documentation).
• The estimated timeframe during which closure inhibitors are anticipated to be resolved.
• Any ULO value that applies.
• The estimated closure value.
• Confirmation as to whether it will be final closed (preferred) or interim closed.

TENTATIVE PLANNING SCHEDULE:

SECTION 1: What DSCA Sends to MILDEPs (10 August 2001)

SECTION 2: What DSCA Prepares for Closure Review (T-90 to T-30)

SECTION 3: What MILDEPs Prepare for Closure Review (T-90 to T)

SECTION 4: Closure Review Decisions (T)

Attachment 4 - Finance IPT Participants (USG Officials)

DSCA

• David Rude
• Vanessa Glascoe
• Patricia Higgins
• Brenda Hablutzel
• Pete Kambe
• Fred Beauchamp
• Sally Liberty

ARMY

• Sherry Ownby, DUSA-IA
• Bob Gilman, USASAC
• Diane Brown, AMCOM
• Chuck Tasin, TACOM
• Debbie Vogel, AMCOM
• Lemar Sheaffer, USASAC
• Rhode Chung, USASAC
• Reggie Graham, USASAC

NAVY

• Larry Baillie, IPO
• Chris Chaikowski, IPO
• David Molyneaux, NAVICP
• Kathy Truesdale, NAVSEA
• Saadiq Sadruddin, NAVAIR

AIR FORCE

• Colleen Henson, SAF-IAPX
• Shirley Lessey, SAF-FMBIS
• Betty Shearill, AFSAC
• SuEllen Gill, Eglin AFB
• Holly Taylor, AFSAT