If a government has a capital asset not reported on the statement of net assets, how should related debt be reflected?

In governmental accounting, capital assets are key resources that provide benefits over time, and accounting for them accurately is essential for understanding the financial position of the government. When a capital asset is not reported on the statement of net assets, but there is related debt—which represents a liability tied to that asset—it is appropriate to reflect this relationship in the net assets section of the financial statements.

The option stating that net assets should be presented as invested in capital assets net of related debt is accurate because it provides a clear picture of the government's financial standing concerning its investment in capital assets. It acknowledges both the value of the assets utilized for providing services and the corresponding debt that finances those assets. This net assets calculation gives users of the financial statement insight into how much of the governmental resources are freely available after accounting for the associated liabilities. This way, stakeholders can better assess the government's ability to fulfill its financial obligations and their net position regarding capital investments.

Contrasting options, such as restricted net assets or unrestricted net assets, do not adequately reflect the direct relationship between capital assets and the associated liabilities since they categorize assets based on their availability and usage rather than their specific connection to corresponding debt. Thus, the approach of reporting net assets invested in capital assets net of related debt fosters greater