What type of lease requires the government to report real property as if it were purchased with long-term debt?

The correct answer is the capital lease. A capital lease is treated like a purchase of property rather than a rental agreement. In accounting for a capital lease, the lessee recognizes an asset and a corresponding liability on their balance sheet, similar to how they would if they had financed the purchase of the property with long-term debt. This accounting treatment reflects the economic reality of the lease, where the lessee effectively has control and benefits of ownership of the asset for a significant portion of its useful life.

In practice, this means that the asset is capitalized on the balance sheet, allowing for depreciation to be calculated, and the lease liability is recorded to show the obligation to make lease payments over time. This approach provides a more transparent view of the government’s financial position and commitments, aligning with the principle that the financial statements should reflect the actual economic events and arrangements undertaken by the government entity.

Other types of leases, such as operating leases, do not require this kind of reporting. In operating leases, the lessee does not capitalize the asset; instead, lease payments are expensed as incurred, which does not provide the same comprehensive view of long-term obligations.