CITY OF LAGUNA NIGUEL NOTES TO BASIC FINANCIAL STATEMENTS JUNE 30, 2024 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) G. Prepaid Items and Deposits Prepaid items are payments made to vendors for services that will benefit periods beyond the fiscal year ended using the purchase method. Deposits are payments made as security or in part payment. A nonspendable fund balance has been reported in the governmental funds to show that prepaid items and deposits do not constitute “available spendable resources”, even though they are a component of net current assets. H. Leases The City accounts for leases in accordance with GASB Statement No. 87 based on the principle that leases are financings of the right to use an underlying asset. The primary objective of this statement is to enhance the relevance and consistency of information about governments' leasing activities. This statement establishes a single model for lease accounting based on the principle that leases are financings of the right to use an underlying asset. Under this statement, a lessee is required to recognize a lease liability and an intangible right-to-use lease asset, and a lessor is required to recognize a lease receivable and a deferred inflow of resources. For additional information, refer to the disclosures in Note 4 Leases Receivable and Note 7 Long-Term Obligations. At the commencement of the lease, the City initially measures the lease receivable at the present value of payments expected to be received during the lease term. Subsequently, the lease receivable is reduced by the principal portion of lease payments received. The deferred inflow of resources are initially measured as the initial amount of the lease receivable, adjusted for lease payments received at or before the lease commencement date. Subsequently, the deferred inflows of resources are recognized as revenue over the life of the lease term. Key estimates and judgments include how the City determines the discount rate it uses to discount the expected lease receipts to present value, lease term and lease receipts. The City used the estimated incremental borrowing rate as the discount rate for leases. The lease term includes the noncancellable period of the lease. Lease receipts included in the measurement of the lease receivable is composed of fixed payments from the lessee. The City monitors changes in circumstances that would require a remeasurement of its leases, and will remeasure the lease receivable and deferred inflows of resources if certain changes occur that are expected to significantly affect the amount of the lease receivable. (42)