Can someone help me understand this Audit in simpler terms? I’m reading a review of a charter school, and the Audit shows that they have hundreds of millions of dollars in lease payments moving around. It’s quite confusing!
Here’s the Audit link: Audit Link
The section about leases states the following:
“The School decided to follow new Accounting guidelines for leases from the Financial Accounting Standards Board (FASB) starting July 1, 2022. They used certain shortcuts allowed under the guidelines, which meant they didn’t go back to check if their existing contracts qualified as leases under the new rules. They also didn’t reassess how to classify leases or whether their initial costs met the new definition.
Due to these new leasing rules, the School reported lease liabilities of $210,306,971. This is the present value of the remaining lease payments they owe, which totals $311,459,097. This amount was calculated using low-risk interest rates based on treasury bonds, ranging from 2.79% to 3.35%. Additionally, they reported $205,824,291 in assets representing the rights to those leases, adjusted for some deferred rent costs.
Overall, implementing these new lease rules greatly affected the School’s financial position, but it didn’t significantly impact their revenue and expenses. The main effect was the acknowledgment of asset rights and lease liabilities.”
Is this a good place to ask for help? I’d appreciate feedback on this complex topic!
One response
Sure, let’s break this down into simpler terms.
Background on the Audit: The Audit is reviewing how a charter school manages its leases, which are contracts allowing the school to use various facilities or equipment that it doesn’t own.
FASB Topic 842: This is a new Accounting rule that changes how leases are reported in financial statements. Under this rule, schools must record their lease obligations (what they owe for the leases) and assets (the rights to use those leased items) on their balance sheets.
Practical Expedients: The school chose to simplify the process by using “practical expedients.” This means they didn’t have to re-evaluate every single lease contract under the new rules. Instead, they continued treating many existing leases the same way they had before the new rules were implemented.
Lease Liabilities and Assets Recognized: As a result of adopting the new lease Accounting rules, the school now officially recognizes:
Right of Use (ROU) Assets: They have recognized about $206 million of assets, which represent their rights to use the leased properties or equipment. This amount includes adjustments for any rents that were deferred.
Impact of the Changes: Adopting this new lease Accounting method significantly changed what the school shows on its balance sheet (the statement of financial position) because they now have to list the lease liabilities and assets. However, it didn’t drastically change their overall income or cash flow (revenue and expenses reported in the statements of activities and cash flows).
In summary, the Audit reveals that the school has a lot of money tied up in lease obligations, which they are now required to report differently than before, providing a clearer picture of their financial commitments. If you have more questions or need further clarification on specific information, feel free to ask!