off-balance-sheet financing


Also found in: Acronyms.

Off-balance-sheet financing

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

Off-Balance-Sheet Financing

A type of company financing that does not appear as a liability on the company's balance sheet. A company may engage in off-balance-sheet financing if it wishes to keep its debt-equity ratio low and thereby appear as if it is carrying little debt. This, in turn, makes the company look more creditworthy than it would otherwise. A common form of off-balance-sheet financing is an operating lease, in which a company rents, rather than buys, a capital asset. In an operating lease, the company must record only the rental payments, and not the whole cost of the asset. While off-balance-sheet financing is permissible, it can become unsustainable and can hide a company's true financial state. The term came into common parlance when Enron collapsed in the wake of excessive off-balance-sheet financing. See also: Enron scandal.

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.
References in periodicals archive ?
Fortunately, the Boards' efforts over the years have culminated in Proposed Accounting Standards Update--Leases (Topic 842): A Revision of the 2010 Proposed FASB Accounting Standards Update, Leases (Topic 840), which would sharply curtail the potential for further misuse of lease agreements as a source of off-balance-sheet financing.
That said, we do not take into account possible allocation of off-balance-sheet financing by VEB, since the deal structure is not clear so far (yet we are almost sure the company will receive the bank's assent).
The ELA's Petta believes that the accounting framework for leasing will change, and there will be less off-balance-sheet financing, given the impetus of the accounting standard-setters and the Securities and Exchange Commission (SEC) to limit such arrangements, which triggered the collapse of Enron.
Also in 1999, a joint venture with Shurgard, one nation's largest self-storage REITs, extended Kalikow's ability to provide off-balance-sheet financing to the REIT market, where it can be especially helpful in furthering these public corporation's goal of maintaining a diversified capital base and the emphasis on growth through the development of high quality assets.
Messages such as that prompted the FASB in 1986 to add to its agenda a new major project on financial instruments and off-balance-sheet financing.
The approach should help the FASB resolve today's issues and help practicing accountants answer tomorrow's inevitable accounting questions about innovative financial instruments and off-balance-sheet financing.
But the June issue of CFO magazine reports that poorly understood asset-backed securitization, or ABS, has become the latest off-balance-sheet financing method to come under fire in the post-Enron age.
So far this year, however, the SEC has stressed disclosure issues -- off-balance-sheet financing, related-party transactions, cash, cash flows, and liquidity, risks and ratings.
46 (FIN 46)-and the nearly year-long process of deliberation leading up to it-the majority of securitization professionals worldwide report that they are overwhelmingly frustrated, skeptical, and confused by the new set of rules for off-balance-sheet financing, characterizing it as an unnecessary and costly burden on an otherwise healthy market, according to the results of Standard & Poor's Ratings Services second "SF Market Opinion" survey, which solicited views on the recently released FIN 46 (Consolidation of Variable Interest Entities) from structured finance professionals around the world.
Bullen, wrote an article about a 1987 exposure draft, "Disclosures about Financial Instruments" ("FASB Moves to Improve Financial Instruments Disclosure") The exposure draft was the first document published since the Board added to its agenda a major project on financial instruments and off-balance-sheet financing.
Aside from factors relating to investor demand, one potential reason for stagnant growth in the market may be tied to pending changes and further clarification to the regulatory and accounting environment for special purpose entities and off-balance-sheet financing.
The analysis covered five rated regional mall REITs and focused on five main areas of concern: market fundamentals, tenant-level credit fundamentals, issuer financial profiles, joint ventures and off-balance-sheet financing, and development activity.