Off-Balance Sheet Financing

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What is Off-Balance Sheet Financing? Meaning.

Off-Balance Sheet Financing refers to an accounting technique in which a liability or capital expenditure is not recognized on a company's balance sheet as a liability.

Off-Balance Sheet Financing can be used by a company  to pursue new business opportunities without disrupting the  current businesses. Also companies may use it in order to keep their Debt to Equity Ratio low and thereby appearing to be in a better financial position. Keeping debt off the balance sheet allows a company to appear more creditworthy, but may misrepresent the firm's financial structure to creditors, shareholders, and the public.

Forms of Off-Balance Sheet Financing. Types

The most common form of off-balance sheet financing is Operating Lease, in which a company rents, rather than buys, a Capital Asset. In operating lease the  cumulative liability for all future lease payments is not reflected on the lessee's balance sheet. Instead, only a portion of the obligation gets accrued as partial performance takes place under the lease.

Less frequently used types of off-balance sheet financing include Strategic Alliances, Joint Ventures, Special Purpose Vehicles and R&D Partnerships.

Off-Balance Sheet Accounting

Although both IAS/IFRS and U.S. GAAP require footnote disclosure of the lessee's future cash outflows arising from operating leases, there are many circumstances in which lessees are made better off by using the operating lease method.

One example are lending agreements which include Financial Covenants. Since most covenants are based on financial statement numbers, operating leases do not affect the conditions mentioned in them, such as maintaining a certain debt-to-equity ratio.

Furthermore, the operating lease accounting method keeps the leased asset off the balance sheet, and therefore produces a favorable impact on the lessee's Return on Net Assets Ratio that is just as substantial as the benefit that arises from omitting lease liabilities.

Forum Forum about Off-Balance Sheet Financing. Below you can ask a question about this topic, share your experiences, report a new development, or explain something. Start a new topic about Off-Balance Sheet Financing Share your knowledge here (or ask a question)   🔥 NEW Equity Method Facilitates Off-Balance Sheet Financing The Equity Method is a technique for recording the financial aspects of investments of one company in other companies. Any investments made by holding 20%-50% shares provide significant control over t... 3   Off-Balance Sheet Financing Cases and Examples Hi, do you have a case or do you have a good example in which Off-Balance Sheet Financing is used?Please enter a reaction to share it for other people to enjoy! Thanks for contributing...!... 2   1 comments

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