Please help me understand this Audit in simpler terms.
I’m looking at a review of a charter school, and it mentions that there are hundreds of millions of dollars related to leases moving around. Can someone break this down for me?
Here’s the link to the Audit: Audit Link.
I’m particularly interested in this section about leases:
“The School adopted FASB Topic 842, Leases, starting July 1, 2022, using certain practical expedients.
The School chose to account for its existing operating leases as operating leases, following the new guidelines. It didn’t reassess if the contracts still qualify as leases under the new rules or if the classification of the leases should change.
Because of this, when the new lease Accounting rules were put into effect, the School recognized lease liabilities of about $210 million. This amount reflects the present value of future lease payments, calculated using safe interest rates. The School also reported lease assets totaling around $206 million, which show the value of those leases.”
This change had a significant effect on the school’s financial statements but didn’t greatly impact their income and cash flow statements. The biggest change was recognizing the lease assets and liabilities.
Is this a good place to ask this question?
I’ve included the full paragraphs for more context. Thank you!
One response
Sure! Let’s break this down into simpler terms.
What’s Happening with the Leases?
New Rules for Leases:
The school is following a new set of Accounting rules called FASB Topic 842 that started on July 1, 2022. These new rules change how schools and organizations account for leases (agreements to use property or equipment).
What Are Operating and finance Leases?:
finance Leases (previously called capital leases) are more like buying an asset with payments over time, where at the end, the asset is owned by the school.
No Reassessment of Contracts:
The school chose not to go back and review all of their existing leases under the new rules. This means they didn’t look deeply into whether any leases should be categorized differently under the new standard.
Lease Liabilities and Assets:
When the school adopted these new rules, they recognized sizeable financial figures:
Right of Use (ROU) Assets: They recorded approximately $206 million as the value of the right to use the leased properties.
Impact of New Rules:
This new Accounting method had a big impact on the school’s financial statements, particularly showing these asset and liability figures, but it didn’t significantly change their income or cash flow. This means while their balance sheet looks different because of these lease values now being recognized, it doesn’t mean they’re necessarily making more or less money day-to-day.
In Summary
The Audit reveals that the school is using new rules to account for lease agreements, showing that they have significant amounts of future lease payments to make (over $210 million) and corresponding rights to use these assets (about $206 million). This shift makes the financial picture of the school look different but doesn’t impact the day-to-day cash flow or overall financial health in a way that’s noticeable in their activities.
Lastly, yes, this is a fine place to ask your question if you want to understand it better!