Financial Statement Lease Disclosure

2 Pages 481 Words

SUBJECT: Disclosure of Lease in Wheeling Ironworks’ Financial Statements

As a shareholder of Wheeling Ironworks I am concerned about the disclosure of the non-cancelable warehouse lease that was signed at the end of 2001 to provide storage for excess inventory. In order for the financial statements to fulfill their purpose as the principal means of communicating accounting information they must disclose information such as this lease. The signing of such a lease is important in determining the approximate the value of the company because of the future expenses that will be incurred as a result of the lease and because the reason the lease was signed gives valuable information about the amount of inventory the company holds. The non-cancelable ten year lease is a material change and it is important that the shareholders are aware of it.

In order to appropriately disclose this information the lease should be disclosed in a footnote to the 2001 financial statements detailing both the term and cost of the lease. In 2002 and the following years the rent expense should be recorded as usual and a similar footnote should be included.

The lease will not be reflected on the December 31, 2001 balance sheet because no expense has been incurred at that point in time. The balance sheet accounts that will be affected by the lease are cash and prepaid rent. These accounts will reflect the lease on January 1, 2002 when the rent for the year will be paid. However, by disclosing the lease in the footnotes, decision makers are provided with important information about planned expenditures as well as the company’s increasing need for inventory storage. The lease of the warehouse for $10,000 a year for the next ten years is important because it is a significant set of future expenditures which could influence the company’s future success. Also, the fact that the warehouse was needed to store excess inventory gives shareholders usef...