Brief Definition
Off-balance sheet financing refers to a method companies use to keep certain assets or liabilities off their balance sheets. This means these items are not included in the company’s official financial statements, often to make the company appear less leveraged or to comply with debt covenants.
Further Explanation
Off-balance sheet financing refers to a method companies use to keep certain assets or liabilities off their balance sheets. This means these items are not included in the company’s official financial statements, often to make the company appear less leveraged or to comply with debt covenants. Common forms of off-balance sheet financing include operating leases, joint ventures, and special purpose vehicles (SPVs). This practice can sometimes lead to a lack of transparency, making it harder for investors and regulators to assess the true financial health of a company.
Example:
A company may use an operating lease to acquire office space. Instead of recording the office as an asset and the lease payments as a liability on its balance sheet, the company only records the lease payments as an expense on its income statement. This keeps both the asset and the liability off the balance sheet.