When should the recognition of liabilities for operating leases occur in governmental funds?

The recognition of liabilities for operating leases in governmental funds occurs when payment becomes due and payable. This is because governmental accounting follows a modified accrual basis, which focuses on the flow of current financial resources. Under this framework, a liability should be recorded when the obligation to pay is incurred.

In the case of operating leases, governments account for lease payments as they are due instead of when the lease is signed or when the fiscal year begins. This aligns with the principle that liabilities are recognized when the related outflow of financial resources is expected to occur. Consequently, recording the liability at the time the payment is due ensures that the financial statements reflect obligations accurately based on current obligations rather than anticipated future costs.

Therefore, recognizing the liability when payment is due provides a more accurate picture of the government's financial condition and obligations at any given time.