Off Balance Sheet Financing – What You Need To Know About Off Balance Sheet Financing

Believe it or not, there are certain things that companies can and do leave off of their balance sheets, or statements of financial position. These things are assets in which the company has control over or helps the owner to manage, but they do not have ownership of. Some companies do include these assets on their statement of financial position, but many of them utilize off balance sheet financing for these assets. Generally, this is a perfectly acceptable practice. However, during the whole Enron debacle, this practice became front and center. The problem during that whole thing was that they had set up faulty and improper off balance sheet units.

Needless to say, if a company is going to utilize off balance sheet financing for some of their assets, they had better be careful and very sure that they are reporting everything correctly. One wrong move and they can be part of a huge scandal like Enron turned out to be. So, it is best for the company to fully understand if they are just overseers of an asset for a client or if they actually own the asset themselves. Sometimes, difficult as it may seen, it can be hard to understand just who owns a certain asset based on the legal standards that are in place.

For most companies there are certain times when off balance sheet financing can be used:

  • Research and development – Multiple companies can share the expenses for research and development, thus allowing it to be considered as off the balance sheet.
  • Joint ventures – This is when two or more companies undertake a project together. Each one is usually financially responsible for certain aspects of the venture, so it is not considered to be an asset to one particular company.
  • Operating lease – This is a lease where the company is only required to disclose the expense in regards to using the property or the equipment furnished instead of everything involved in major projects that they undertake.

Companies who use off balance sheet financing really have to be careful how they use it. Since the Enron scandal, these things are looked at more closely and any little red flag will set someone off who is looking at your balance sheets. As long as the separate entity is on the up and up, however, the company who uses off balance sheet financing should be in the clear and will benefit from this type of financing.

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