Off-Balance Sheet Financing

Off-balance-sheet financing is financing from sources other than debt or equity offerings, such as joint ventures, R&D partnerships, and operating leases.  Usually used by companies in order to keep their debt to equity-ratio low.  The most common form is operating leases. With operating leases, the institution that owns the asset and leases it out keeps the asset on its balance sheet. The company that leases the asset only records the expense for the use of the asset on its balance sheet.

There are many different rules and regulations provided by the GAAP(Generally Accepted Accounting Principles) to determine whether or not companies should list actual assets on their balance sheets or simply the expense of using the asset. It is very important to know exactly how and when to record off-balance sheet financing. A company can get into a lot of trouble if accounting principles are abused to make the company look like it is doing better than it actually is. Just look at Enron.

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