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What is meant by off-balance sheet financing?
Off-balance sheet (OBS) financing is an accounting practice whereby a company does not include a liability on its balance sheet. It is used to impact a company’s level of debt and liability. The practice has been denigrated by some since it was exposed as a key strategy of the ill-fated energy giant Enron.
Why off-balance sheet financing is bad?
Also, of concern is some off-balance sheet items have the potential to become hidden liabilities. For example, collateralized debt obligations (CDO) can become toxic assets, assets that can suddenly become almost completely illiquid, before investors are aware of the company’s financial exposure.
What are examples of off-balance sheet items?
Most commonly known examples of off-balance-sheet items include research and development partnerships, joint ventures, and operating leases. Among the above examples, operating leases are the most common examples of off-balance-sheet financing.
How many types of off-balance sheet financing are there?
This article discusses the two types of Off-Balance Sheet (OBS) Financing: operating and synthetic leases. More companies, particularly small companies, acquire new productive equipment through leases than through loans.
What is off-balance debt?
Off-balance sheet financing is an accounting method whereby companies record certain assets or liabilities in a way that prevents them from appearing on their balance sheet. It is used to keep debt-to-equity and leverage ratios low, especially if the inclusion of a large expenditure would break negative debt covenants.
What is the meaning of off-balance?
1 : not well proportioned : out of balance the plans are off-balance their military is off-balance. 2 : not standing, sitting, or resting in normal physical equilibrium caught off-balance and knocked down— Jack Dempsey.
How did Enron use off-balance-sheet financing?
The Enron scandal was one of the first developments to bring the use of off-balance-sheet entities to public attention. In Enron’s case, the company would build an asset such as a power plant and immediately claim the projected profit on its books even though it hadn’t made one dime from it.
Why do companies use off-balance-sheet financing?
Goal. The goal of off-balance sheet financing is to reduce or maintain a company’s debt at at or below a prescribed level so that its debt-to-equity ratio is low. When a company has a favorable ratio, that company appears to be a good credit risk.
What is the difference between on and off-balance sheet?
Put simply, on-balance sheet items are items that are recorded on a company’s balance sheet. Off-balance sheet items are not recorded on a company’s balance sheet. (On) Balance sheet items are considered assets or liabilities of a company, and can affect the financial overview of the business.
What is off-balance-sheet risk?
Off-Balance-Sheet Risk — the risk posed by factors not appearing on an insurer’s or reinsurer’s balance sheet. Excessive (imprudent) growth and legal precedents affecting defense cost coverage are examples of off-balance-sheet risk.
What’s another word for off balance?
In this page you can discover 9 synonyms, antonyms, idiomatic expressions, and related words for off-balance, like: lopsided, uneven, out-of-shape, unsteady, off-track, on-balance, beta-pleated, Formerton and off-course.