Are governmental funds required to report a payable for operating leases with scheduled rent increases?

Governmental funds follow the modified accrual basis of accounting, which typically focuses on the flow of current financial resources and records only financial events that result in current financial transactions. Under this framework, operating leases are generally not recognized as liabilities on the balance sheet. Instead, they are treated as expenditures when payments are made.

In the case of operating leases with scheduled rent increases, the payments are typically expensed as they come due rather than recorded as a payable. Lease payments must be recognized in the period they are due, regardless of whether the amount increases over time. This treatment aligns with the recognition principles set by the Governmental Accounting Standards Board (GASB), which governs how governmental entities should account for leases. Consequently, since these leases do not meet the criteria for being reported as a liability, government funds do not need to report a payable related to them.