Some broad financial policies that should be noted early in the FMS process include the following:

C9.3.1. Recovery of Cost. The FMS program must be managed at no cost to the USG (with certain exceptions specifically identified in the AECA). The LOA mandates that the purchaser pay the full program cost regardless of terms of sale specified for the individual case or the estimated values provided. Modifications and Amendments are used to update case values as necessary when changes to the program occur. See Section C6.7. for more information on when these documents should be used.

C9.3.2. Payment in U.S. Dollars. Sales may be made under FMS only if the eligible purchaser agrees to pay in U.S. dollars (AECA, sections 21 (22 U.S.C. 2671) and 22 (22 U.S.C. 2762) ). AECA, section 21(h) (22 U.S.C. 2761(h)) authorizes reciprocal arrangements under limited circumstances.

C9.3.3. U.S. Guaranties. The USG may guarantee financing by any individual, corporation, partnership, or other judicial entity doing business in the United States (excluding USG agencies other than the Federal Financing Bank) if such financing is in connection with FMS or direct commercial sales of defense items. Fees will be charged for such guaranties (AECA, section 24 (22 U.S.C. 2764).

C9.3.4. Pre-LOR and Case Development Activities. Pre-LOR activities are those necessary to assist the purchaser in defining requirements in sufficient detail to produce a complete LOR. A complete LOR is one that contains all of the information necessary for the Implementing Agency (IA) to develop an LOA response. Pre-LOR activities include research and analysis, meetings, briefings, responses to requests for proposals and participation in international competitions, equipment demonstrations, and travel directly related to those efforts. Case development activities are those required to prepare LOAD quality data after an LOR is complete. Case development activities are complete when the LOA has been signed by the purchaser.

C9.3.4.1. Priority to Case Execution. IAs must make prudent choices when expending FMS Administrative Surcharge funds. In budgeting FMS Administrative Surcharge funds, priority should be placed upon providing support to IA case execution activities.

C9.3.4.2. Limits on Pre-LOR Expenditures. No more than 8% of the total FMS Administrative Surcharge funds allocated to an IA in a fiscal year may be expended on pre-LOR activities. Requests for an exception to policy to exceed the 8% limit on IA expenditure of FMS Administrative Surcharge funds on pre-LOR activities require DSCA Director approval. Requests for an exception to policy must include an accounting of expended and remaining funds and priorities for the remainder of the year.

C9.3.4.3. Pre-LOR and Case Development Notifications to DSCA. IAs will notify DSCA Business Operations and Strategy Directorates of planned pre-LOR and case development activities in the annual FMS administrative funds Program Objective Memoranda (POM) and budget process. Thereafter, IAs must notify DSCA Business Operations and Strategy Directorates when:

C9.3.4.3.1. There are any changes to information presented in the budget process and the change will result in a new or increased cost greater than 1% of the total IA pre-LOR budget approved by DSCA.

C9.3.4.3.2. Expenditure of FMS Administrative Surcharge funds for case development activities associated with a potential FMS case (to include groups of closely related cases) are expected to exceed $1,000,000.

C9.3.4.4. FMS Administrative Surcharge funding associated with these thresholds is all-inclusive (civilian pay, contracts, travel, etc.) and must be reported. Notifications should include an analysis of IA capability to fund other pre-LOR/case development efforts for the remainder of the current fiscal year. A notification memo template is provided at Figure C9.F1.

C9.3.4.5. DSCA will reply to IA notifications within ten (10) working days if additional information or clarification is required.

Figure C9.F1. Notification Memo Template

C9.3.4.6. Use of Appropriated Funds. Should IAs have additional pre-LOR and case development efforts that are not funded in the FMS administrative funds budget, on an exceptional basis and at the discretion of the IA, in accordance with AECA section 43(a) (22 U.S.C. 2792), these efforts may be funded with funds available to the IA for operations. AECA Section 43(a) provides: "Funds made available under other law for the operations of United States Government agencies carrying out functions under this Act shall be available for the administrative expenses incurred by such agencies under this Act." IA funds for operations may not be used to confer a subsidy on the foreign customer in violation of AECA sections 21 (22 U.S.C. 2761) and 22 (22 U.S.C. 2762). FMS administrative funds or case funds that subsequently become available may be used, as appropriate, to reimburse the IA funds.

C9.3.5. LOA Pricing. When pricing FMS case items, the price depends on the source of supply (e.g., available from stock, ordered from procurement, Working Capital Fund (WCF)), and whether the item is to be replaced with a similar or improved item, or involves manpower or training. DoD 7000.14-R, Volume 15, Chapter 7, provides detailed information on how prices are computed.

C9.3.6. Direct and/or Indirect Charges. All FMS program expenses are recovered from the purchaser through direct charges (included in the materiel and/or services cost) or indirect (accessorial) charges and/or surcharges (usually computed as a percentage of costs) on the FMS case. Charges included within the materiel and/or services line may be referred to as “above-the-line” charges. This term is a holdover from the rescinded LOA form (DD Form 1513) where a line divided the direct charges from the accessorial (surcharge) charges. Accessorials and/or surcharges that are not included within a line item value may be referred to as “below-the-line” charges (e.g., transportation surcharge and packing, crating, and handling (PC&H)).

C9.3.7. Single Selling Price. DoD policy is to provide a single unit estimated price for articles offered under FMS. If the purchaser desires, a detailed description of the major components of cost included in estimated prices may be provided with the LOA as supplemental information or via separate report, unless such information may be considered proprietary and not releasable to the purchaser.

C9.3.8. Use of Estimated Prices. To assure that all costs are covered, quotations for defense articles/services are cited as estimated prices, with final adjustments established during case execution or after delivery of articles and/or services. The LOA indicates that prices for articles and/or services are estimates. See DoD 7000.14-R, Volume 15, Chapter 7, for details on those instances when firm prices may be quoted on an LOA.

C9.3.9. FMS Trust Fund. The FMS Trust Fund is used for payments received from purchasers and disbursements made against implemented FMS cases. This fund is cited directly on contracts for the procurement of defense articles and/or services for the purchaser, or is used to reimburse DoD Component appropriations for deliveries from DoD stocks or services performed by DoD employees. The Defense Security Cooperation Agency (DSCA) manages the FMS Trust Fund and is responsible for the solvency of each purchaser's FMS Trust Fund account. See Section C9.11.1.

C9.3.10. Refund of FMS Administrative Surcharge Funds to the FMS Administrative Surcharge Account. There are specific circumstances when FMS Administrative Surcharge funds may be used to initially provide services (e.g., site survey) with subsequent reimbursement of the FMS Administrative Surcharge Account once the case is signed/implemented. The following outlines the process for an FMS case to refund FMS Administrative Surcharge funds to the FMS Administrative Surcharge Account for the specific instances where authorized. See Table C9.T2.

C9.3.10.1. The IA will establish a method of identifying all disbursement vouchers citing FMS Administrative Surcharge funds that will require subsequent refund to the FMS Administrative Surcharge Account by the FMS case when implemented.

C9.3.10.2. Upon case implementation, either a journal voucher (i.e., OF 1017-G, Journal Voucher, or other agency-approved form) or SF 1081, Voucher and Schedule of Withdrawals and Credits, may be used to transfer the prior disbursements from the FMS Administrative Surcharge fund cite to the FMS case fund cite. Refer to the DoD FMR, Volume 10, Chapter 10, paragraph 100201, Completion of Intra-governmental Reimbursement and Transfer Vouchers.

C9.3.10.3. The journal voucher or SF 1081 must be supported by and reference prior disbursement vouchers being refunded to the FMS Administrative Surcharge Account by the FMS case. This provides adequate documentation for the certification of transfer voucher (i.e., journal voucher or SF 1081 ) being processed and provides an adequate audit trail to the original obligation and disbursement transaction.

C9.3.10.4. If the refund is processed against current year FMS Administrative Surcharge fund budget authority, the funds would be available for obligation upon posting of the refund transaction. If the refund is processed against prior year FMS Administrative Surcharge fund budget authority, the excess budget authority made available as a result of posting the refund transaction, is to be returned to DSCA.