Question

Understanding the Importance of Documentation   A company is evaluating a lease to determine whether it would receive capital or operating treatment and concludes that it should be capitalized. However, company accountants realize that a similar lease contract, executed just two years ago, has been receiving operating lease treatment. The company is unable to locate documentation explaining the rationale for the earlier lease’s operating classification. Think through this issue. What should the company do? What lessons can the company learn from this?

Answer 1

Documentations are very important part of business from smaller documents of purchase order to larger legal documents all are important for the functioning of business. The company should have proper system of filing the documentations and there should be internal controls for documenting the documents of the business. In this case the company can approach the lessor from whom the earlier lease was taken and understand the accounting treatment made earlier by the lessor and obtain the copy of document from the lessor. The lessons learn by the company is that all documents are important and with documents missing there could be errors in preparing the financials which will impact the company in the long run and hence the company needs to have proper controls placed in for documentation.