Could someone help me understand this Audit in simpler terms? I came across a review of a charter school that mentions a massive amount of lease money—hundreds of millions of dollars—being shifted around. What does this actually mean?
Here’s the link to the Audit: Audit Link
I’m particularly interested in the section about leases.
Leases Explanation:
“The School has adopted new rules for Accounting for leases, specifically under FASB Topic 842, starting on July 1, 2022. They chose to simplify their reporting by treating their existing operating leases as operating leases, without checking if these leases fit the new standards or if they should be classified differently (like capital leases now called finance leases). Because of this change in lease Accounting, the school recognized liabilities for both finance and operating leases totaling approximately $210 million. This amount reflects the current value of the remaining lease payments, which add up to about $311 million, calculated using low-risk interest rates. They also recorded ‘right-of-use’ assets (which represent the value of these leases) of about $205 million. This adjustment significantly affected the school’s financial position but did not majorly impact their activities or cash flows. The main change was the recognition of these lease liabilities and right-of-use assets.”
Is this the right place to ask my question?
One response
Sure, I can help break this down into simpler terms.
The Audit you’re asking about is discussing how the charter school is handling its leases (like renting buildings), especially after new Accounting rules came into play. Here’s a breakdown of the key points:
New Rules for Leases: The school adopted new Accounting standards known as FASB Topic 842 on July 1, 2022. This is just a fancy way of saying there are new rules about how organizations should account for leases.
Operating vs. finance Leases: Leases are generally categorized into two types: operating leases (like renting) and finance leases (like owning with a loan). The school decided to treat its existing leases as operating leases without going through a detailed review of each one to see if they needed to be classified differently under the new rules.
Financial Impact: Because of these new lease rules, the school now has to recognize significant amounts of money on its financial statements:
Right of Use (ROU) Assets: At the same time, they also recognized assets worth about $206 million. These represent the school’s right to use the leased properties.
Overall Effect: While the new lease Accounting rules had a big effect on how the school’s financial position looked (the balance sheet), they didn’t drastically change how much money the school reports coming in and going out (the statements of activities and cash flows).
In simple terms, the Audit is saying that the school is now showing a large amount of money related to its leases on its financial statements due to new accounting rules, but this didn’t change how much money it actually earned or spent.
If you’re asking if this is a good place to post your question, it’s definitely okay! Engaging with others about such documents is a great way to gain understanding.