MAKING BETTER USE OF FINANCIAL STATEMENTS FOR MILITARY: WHAT’S WRONG AND WHAT CAN BE DONE?

Abstract

This research focuses on how to make better use of military financial statements, especially for internal decision makers, by introducing a new approach to weapon systems’ valuation and its appearance on balance sheets. This new approach aims to improve decision-making in the resource allocation of weapon systems. The author compares military balance sheets of several countries and identifies major flaws in two current primary valuation approaches: historical cost and fair value. These two approaches are difficult to use in decision-making because of their inability to reflect military reality on the book value of weapon systems. The author also verifies the effectiveness of the existing depreciation method of weapon systems and proposes a new decelerated depreciation method. The new valuing approach based on the military value of weapon systems is created and compared with existing approaches. To measure the usefulness of the new approach and the new depreciation method in the decision-making, a simplified scenario is made up, and changes in the value of weapon systems are compared between the new approach and two status quo approaches. The result shows that the new approach provides military leadership decision usefulness, which could accelerate transformation in the portfolio of weapon systems that must constantly respond to rapidly changing strategic circumstances.