Off-Balance Sheet Financing

Knowledge Center

12manage is looking for students. Info

Description of Off-Balance Sheet Financing. Explanation.


Off-Balance Sheet Financing

Definition Off-Balance Sheet Financing. Description

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.

Special Interest Group - Off-Balance Sheet Financing

Special Interest Group (3 members)

Forum - Off-Balance Sheet Financing  

In this forum you will find recent interesting discussions.

Hot Off-Balance Sheet Financing Cases and Examples
Hi, do you have a case or do you have a good example in whic...

Best Practices - Off-Balance Sheet Financing

Here you will find the most valuable discussions from the past.

Expert Tips - Off-Balance Sheet Financing

Here you will find high-quality advice from experts.

Resources - Off-Balance Sheet Financing

Here you will find powerpoint presentations, micro-learning videos and further information sources.


News about Off-balance Sheet Financing


Videos about Off-balance Sheet Financing


Presentations about Off-balance Sheet Financing


Books about Off-balance Sheet Financing


More about Off-balance Sheet Financing


Compare with: Contingent Liabilities

Special Interest Group Leader

You here? Sign up for free


Return to Management Hub: Finance & Investing

More on Management  |  Return to Management Dictionary  | 

This ends our Off-Balance Sheet Financing summary and forum.

About 12manage | Advertising | Link to us / Cite us | Privacy | Suggestions | Terms of Service
2019 12manage - The Executive Fast Track. V15.1 - Last updated: 19-10-2019. All names of their owners.