Off Balance Sheet Financing Practices

Topics: Enron, Balance sheet, Financial statements Pages: 4 (1410 words) Published: May 27, 2013
Off Balance Sheet Financing Practices
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Off Balance Sheet Financing Practices
The traditional accounting methods have been replaced by a number of new accounting techniques. Some of which are observable while other remain hidden. Off Balance Sheet Financing or OBSF is one of these new accounting techniques. It is a mode of obtaining finance for a business without disclosing significant capital expenditures on the balance sheet of a company by means of using different ways of classifying such expenses. OBSF is most of the times used by business enterprises to maintain their leverage or gearing positions in such a way which would not have any negative implications on the company. In the business world of today, OBSF is recognized as an important means for raising finance by means of operating leases, joint venture and collaborations with respect to R&D. Following Off Balance Sheet Financing method results in significant variations in the overall financial reporting of an entity. Considering the changes in accounting and financial reporting requirements, it is generally expected that the companies using these technique will be more able to run their operations efficiently. However, keeping in view the case of off balance sheet financing and accounting in this respect, it is argued that while using OBSF companies are able to not disclose entirely the financing of their capital expenditures and thus the information required to be disclosed in this respect is not made available to the interested parties (Tyrrell 1986). This report discusses this area of accounting and explains how OBSF is actually promoted by the market economies and the expectations of increased profits from the companies. The usage of off balance sheet accounting and financing is not new. In the beginning of 20th century, this concept of managing a company’s balance sheet gained fame and the banking and other corporate sector applied...
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