What is out of balance sheet financing?
Funding
There is a balance sheet financing when the company participates in a financial obligation that does not appear in its balance sheet. The purpose of maintaining such transactions outside the balance sheet is for the company to seem financially strong and attractive for potentially investors. There are many ways to achieve balance sheet financing, even through credit starting swaps, subsidiaries and operational leases. This practice may be controversial and was at the heart of several financial collapse, especially in the ENRON financial scandal in the United States. The balance sheet is a financial document that states all the assets and obligations of the company and is used to show how many of these assets are worth compared to the debt incurred. Any company that successfully eliminates any obligations Nebodluh from its financial reporting, while still accepting these negative numbers, practices the financing of the balance sheet.
It is important to understand that not all the balance of balance is dangerous or illegal. For example, a company that uses operating leasing actually practices its form. While the rented asset still technically appears in the balance sheet of a subject that actually holds ownership, a company that rents it still uses it. This company can also write off the money paid for lease of the asset as expenses for its tax report.
On the other hand, financing beyond balance can also be problematic when it is practiced by large financial institutions that are essential for the overall economic health of the economy. Banks often choose loans to customers and then sell loans to investors as securities. The bank boasts the profits of these so -called default swaps for loan, but it is still exposed to the risk of customer failure. This risk does not appear in the bank's balance sheet, but can become a real problem if there are multiple default values.
maybe thatin the United States there was a notorious example of the financing of the balance sheet outside the balance sheet with the financial scandal of Enron, which developed in 2001. Enron was a rapidly growing energy company based in Texas, the US and its leaders were able to use subsidiaries and partnership to hide either overvalued or simply imaginary. Through dubious accounting, the company maintained its own financial records looking spotless while actually falling towards bankruptcy. The resulting scandal led to a closer inspection of the balance sheet accounting of large companies.