off-balance-sheet financing

Off-Balance-Sheet Financing

A way of raising money that does not appear on the balance sheet.

Notes:

This is unlike loans, debt and equity, which do appear on the balance sheet. Examples of off balance sheet financing include joint ventures, research and development partnerships, and leases (rather than purchases of capital equipment).

This term came into household use during the Enron bankruptcy. Many of the energy traders' problems stemmed from setting up inappropriate off-balance sheet entities.

See also: Balance Sheet, Project Finance, SPV

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Off-balance-sheet financing

Financing that is not shown as a liability on a company's balance sheet.

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off-balance-sheet financing

An accounting technique in which a debt for which a company is obligated does not appear on the company's balance sheet as a liability. Keeping debt off the balance sheet allows a company to appear more creditworthy but misrepresents the firm's financial structure to creditors, shareholders, and the public. The sudden collapse of energy-trading giant Enron Corporation is attributed in large part to the firm's off-balance-sheet financing through multiple partnerships.

Case Study The sudden collapse of energy-trading giant Enron Corporation caught regulators, politicians, lenders, analysts, and the public by surprise. In large part the surprise resulted from the billions of dollars of debt the company had been able to hide by using off-balance-sheet financing through hundreds of partnerships. The hidden liabilities allowed Enron to maintain the appearance of a rapidly growing but financially stable company until near the very end, when bankruptcy was imminent. Enron's financial arrangements were complicated and sometimes entailed transferring overvalued assets to partnerships which it had a controlling interest in but was not required to include on its own balance sheet. The partnerships, with minimal equity capital from outside investors, raised most of their capital from loans using Enron stock, transferred assets, or pledges from Enron as collateral. Although Enron used aggressive accounting methods, many of the accounting techniques it employed were not illegal. For this the accounting profession was called to task.