What role does depreciation play in the financial reporting of governmental entities?

Depreciation serves the critical function of allocating the cost of tangible fixed assets over their useful lives. In the context of financial reporting for governmental entities, this systematic allocation reflects the consumption of the asset's economic benefits over time. By recognizing depreciation, governmental entities can accurately represent the true value of their assets on financial statements, showing how much of the asset has been used up and how much remains for future periods. This approach also assists in budgeting and financial planning, providing stakeholders with a clearer picture of asset management and resource allocation.

Understanding the role of depreciation is essential for ensuring that financial statements provide a fair representation of the entity's financial position and the long-term implications of asset usage. It enables better decision-making by illustrating the actual cost and value of resources used in public service delivery.