Could someone help me understand this Audit? I’m currently looking at a review of a charter school, and it appears that there are hundreds of millions of dollars in lease transactions that are quite confusing. Here’s the Audit for reference: Audit Link.
I would like clarification specifically on the section about leases:
“The School adopted Financial Accounting Standards Board (FASB) Topic 842, Leases, starting on July 1, 2022. They chose to use certain practical shortcuts available to them. So, they treated their existing operating leases as operating leases under this new guidance. They didn’t reassess whether their contracts met the new criteria for leases, and they didn’t look into whether the classification of leases changed under the new rules. Because of this adoption, the School has reported lease liabilities of $210,306,971, which is the present value of what they still owe on their leases, discounted using Treasury bond rates. They also recognized $205,824,291 worth of right-of-use (ROU) assets, which is essentially the value of those leases. This change significantly affected the School’s financial position but didn’t notably impact its operating statements or cash flow.”
Is this a good place to ask this question? I’d love to get some plain-language insight into these points. Thank you!
One response
Sure! Let’s break down the audit’s section on leases into simpler terms:
What is a lease? A lease is an agreement where one party pays to use something (like a building or equipment) owned by another party for a specific period.
What changed with the new lease rules (Topic 842)? On July 1, 2022, a new Accounting rule called Topic 842 took effect. This rule changes how organizations report their leases in financial statements. Before this new rule, many leases were not shown on the balance sheet, which could make a school’s finances look better than they actually are.
The School’s choice: The school decided to adopt these new rules and used some available options (called “practical expedients”) to simplify the process. This means they didn’t have to go back and reassess every single lease they had to see if they had to categorize them differently under the new rules.
How much money is involved? Because of the new lease Accounting rules, the school reported a total of about $210 million in lease liabilities. This is the total amount they will have to pay in the future for their leases, discounted to account for the time value of money (which means money in the future is worth less than money today). The gross amount of future lease payments is even higher, at about $311 million.
What are right-of-use (ROU) assets? When they recognized these lease liabilities, they also recognized “right-of-use assets” of about $206 million. This represents the value of the leases themselves that the school has access to.
Impact on financial statements: The Audit notes that the changes had a significant effect on the school’s balance sheet (which shows what the school owns and owes) but did not significantly impact the income statement (which shows how much money the school made or spent) or cash flow statement. This means the school now shows more liabilities (what it owes) on its balance sheet because of these leases, but its overall financial performance didn’t change dramatically in terms of income or cash flow.
In summary, the Audit explains that due to new Accounting rules, the charter school has reported a large amount of lease liabilities and associated assets on its balance sheet, reflecting the financial commitments it has for its leases. This makes their financial position appear more comprehensive but doesn’t necessarily change the cash they have or their income.
Feel free to ask if you have more questions or need further clarification!