What Is Off Balance Sheet Financing?

Off-Balance-Sheet Financing: Referred to as off-balance sheet financing, it refers to the financing method that does not need to be included in the balance sheet, that is, the financing is not on the balance sheet's asset side as a certain asset The increase does not appear as an increase in liabilities on the liabilities and owners' equity side.

Off-balance sheet financing

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Off-Balance-Sheet Financing: Referred to as off-balance sheet financing, refers to those that do not need to be included in the balance sheet

Traditional financing methods such as borrowings appear as assets on the balance sheet

Current accounting standards (including international accounting standards, domestic accounting standards, and accounting systems) provide the possibility of off-balance sheet financing. For example, the current accounting standards do not define the liability very well enough to cope with the increasingly ingenious

Since the 1980s, off-balance sheet financing agreements have grown rapidly in Britain and the United States. This type of agreement has important characteristics of a balance sheet item, but it does not recognize a liability and avoids the recognition of an asset. Off-balance sheet financing can be attributed to many reasons, the main reason may be tax concessions, or it may be that companies are unwilling to reflect the true level of debt. If a company has a high debt ratio, it will attract the attention of creditors. If the company offsets the same amount of assets and liabilities from the balance sheet at the same time, it can reduce the debt ratio. Another offset from the balance sheet can reduce the debt ratio. Another possible reason is that companies have agreements with existing creditors that must limit the level of debt, and off-balance sheet financing can be used as a means to bypass this restriction.

Off-balance sheet financing behaviors mask important financial information of the enterprise and are likely to mislead the users of the information, which has drawn the attention of accounting standards setting organizations in various countries. They have formulated accounting standards to reduce off-balance sheet financing items and include them as much as possible in assets table. The accounting standard-setting agency stipulates that the financial statements should help the players understand the overall situation of the enterprise by presenting concentrated and orderly information about assets, liabilities and operating performance. To achieve this, the classification and recognition of items in the financial statements must be based on the principle that economic substance is more important than legal form.