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).
Although not specifically related to off-balance-sheet financing, this reaction is an illustration of how accounting regulation can affect financial markets.
Shrewd (and ethical) tactics in off-balance-sheet financing. Controller Magazine, 30-34.
* Off-Balance-Sheet Financing Congress limited the ability of the ESF to issue liabilities on its own and thus, perhaps intentionally, limited the ESF to financing new interventions through the sale of assets, a practice known as asset management.
Another creative off-balance-sheet financing mechanism that has fueled the acquisition appetite of owners is the "Black Box." The Black Box is a financing technique used ostensibly to improve a company's operating performance.
These strategic objectives can be achieved through comprehensive diagnostic reviews of real estate operations that identify opportunities to reduce costs and manage operations more efficiently, as well as through off-balance-sheet financing structures including sale-leasebacks and synthetic leases.
They also want more qualitative and quantitative information about the risks associated with financial instruments and off-balance-sheet financing arrangements.
Leasing is often viewed positively in lean times because it represents "off-balance-sheet financing." That is, you do not show the liability on your balance sheet.
But, many of our constituents urge us to bring more information into the statements themselves, such as off-balance-sheet financing. Would that further overload the financial statements?
You know the term "off-balance-sheet financing," and your executives have undoubtedly heard about it.
* Contingent liabilities including guarantees, warranties or other off-balance-sheet financing such as letters of credit.