off-balance-sheet finance

Off-Balance Sheet Financing (Definition)| List of OBS Items

off-balance-sheet finance

Off-balance sheet financing is the company’s practice of excluding certain liabilities and in some cases assets from getting reported in the balance sheet in order to keep the ratios such as debt-equity ratios low to ease financing at a lower rate of interest and also to avoid the violation of covenants between the lender and the borrower.

It is a liability that is not directly recorded on the balance sheet of the company. Off-balance sheet items carry enough significance because even if they are not recorded on balance sheet finance, they are still the liability of the company and should be included in the overall analysis of the financial position of the company.

How Does It Work?

Suppose ABC Manufacturers Ltd is undergoing an expansion plan and wants to purchase machinery to establish the second unit in another state. However, it is not having a financing arrangement for the same as its balance sheet is already heavily financed. In such a case, it has two options.

It can set up a joint venture with other investors or companies to establish a new unit and obtain fresh financing in the name of the new entity. On the other hand, it can also chalk out the long-term lease agreement with the equipment manufacturer for the leasing of machinery, and in this case, it need not worry about obtaining fresh financing.

Both of the above cases are examples of Off-balance sheet financing.

What is the Purpose of Off-Balance Sheet Items?

  1. To maintain solvency ratio Debt to equity ratio below a certain level and obtain funding which company would not have been able to obtain otherwise.
  2. Better solvency ratios ensure maintaining a good credit rating, which in term allows the company to access cheaper finance.
  3. It makes balance sheet finance appear leaner, which prima facie may attract investors.

Key Features

  1. It results in the reduction in existing assets or exclusion of assets going to be created from the balance sheet.
  2. There is a change in the Capital structure of the company.
  3. Assets and liabilities are both understated, and it gives a leaner impression of the balance sheet finance.
  4. It involves the use of creative accounting and financial instruments to achieve off-balance sheet finance.

List of Off-Balance Sheet Financing Items

The following are some of the common instruments for off-balance-sheet Items.

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#1 – Leasing

It is the oldest form of off-balance-sheet financing. Leasing an asset, allows the company to avoid showing financing of the asset from its liabilities and lease or rent is directly shown as an expense in the Profit & Loss statement.

  1. For the lessee, it is the source of financing as lessor bears the financing of the asset.
  2. The conventional method to acquire assets that require significant capital outlay;
  3. It makes it easier to upgrade technology with changing times.
  4. Only Operating leases qualify as off-balance-sheet financing, and financial leases are required to be capitalized on the balance sheet as per the latest Indian Accounting Standards.

#2 – Special Purpose Vehicle (SPV)

Special purpose vehicles or subsidiary companies are one of the routine ways of creating off the balance sheet financing exposures. It was used by Enron, which is known for one of the high profile off-balance-sheet financing exposure controversies.

  1. The parent company creates SPV to enter into a new set of activities but wants to isolate itself from risks and liabilities from new activity.
  2. Parent company need not show the assets and liabilities of SPV on its balance sheet.
  3. The SPV acts as an independent entity and acquires its credit lines for the new business.
  4. If the parent company fully owns SPV, then under accounting standard for most countries, it needs to consolidate the SPV balance sheet into its own, which defeats the purpose of creating off-balance sheet finance. Therefore usually, companies create SPV by way of the new joint venture with some other entity.

#3 – Hire Purchase Agreements

If a company cannot afford to purchase assets outright or obtain finance for the same, it can enter into a hire purchase agreement for a certain period with financiers.

A financier will purchase the asset for the company, which in turn will pay a fixed amount monthly until all the terms in the contract are fulfilled.

The hirer has the option of owning the asset at the end of the hire purchase agreement.

  1. Under normal accounting, the asset reflects in the balance sheet of the purchaser, and the hirer need not show it in its balance sheet during the period of the hire purchase agreement.

#4 – Factoring

It is a type of credit service offered by Banks and other financial institutions to their existing clients. Under factoring, finance is obtained by selling account receivables to Banks. Banks offer immediate cash to the company after taking some cut from account receivables for offering the service.

  1. It is also termed as accelerating cash flows sometimes.
  2. There is no direct liability on the company due to factoring, but there is a sale of some of its assets.

Significance For Investors

Under accounting standards for almost all major countries, it is mandatory to make full disclosure of all the off-balance sheet financing items for the company for that particular year. Investors should take note of these disclosures to fully understand risks associated with such transactions.

This article has been a guide to what is Off-Balance Sheet Financing and its definition. Here we discuss how off-balance sheet Items works and the list of items used to create them. You may learn more about Advanced Accounting here –

Источник: https://www.wallstreetmojo.com/off-balance-sheet-financing/

Off Balance Sheet

off-balance-sheet finance

Off balance sheet: You are probably familiar with the standard ‘Big 3’ financial statements: balance sheet, income statement and cash flow statement. Used in conjunction, these three documents can tell a lot about a company’s financial position.

An accountant or financial analyst can easily calculate a bevy of financial ratios, monitoring leverage, liquidity, solvency, and efficiency.

With just these few metrics, analysts can assess a company’s ability to pay its bills on time, vet expansion plans and can even critique management’s handling of corporate assets.

Perhaps the analyst determined the company’s weighted average cost of capital is too high. By calculating the debt to equity ratio, a common measure of leverage, you determine there is an opportunity to lower the cost of capital by taking on more debt. This is because the interest expense on the debt ability can be written off.

Using Financial Analysis to Manage Risk

More importantly, an analyst or accountant may be able to detect risky behavior by the company by reviewing the financial statements. Shrewd analysts can see if the company needs to tighten up credit and collection policies with customers or raise cash to prevent a liquidity crunch through the use of a factoring company.

Reviewing financial statements can also assess the ‘quality’ of reported corporate earnings. For example, lesser-quality reports might show positive net earnings (on the income statement) but cash flows from operations that are decreasing (the cash flow statement).

As you can see, a trained analyst can ascertain a large amount of information from these basic financial statements. But what if these three statements don’t tell the whole story?

Off Balance Sheet Activity

Sometimes, companies execute transactions not recorded on any financial statement.

These ‘off balance sheet (OBS)” items are assets or liabilities that exist but are not required by IFRS to be included on financial statements (balance sheet). Off-Balance sheet financing can de-emphasize (hide) a particular activity.

Consistent use of off-balance sheet financing lowers the quality of earnings in many analyst’s eyes and can negatively affect both credit and equity ratings.

How Would a Company Use OBS Financing?

Here’s an example of how a company might utilize off balance sheet activity. Let’s say a company currently has a high level of debt outstanding. It wants to make a large capital expenditure (buying a building) but doing so would cause the company’s debt-to-equity ratio to increase above a pre-determined threshold.

Exceeding the threshold would breach a covenant in a lending agreement the company has with its creditor, a commercial bank.

A few things could happen following a breach, none of which are good-the bank could call in the loans, causing a potential bankruptcy if the company was stretched thin enough.

The bank could restructure the existing loans with a higher interest rate. At the very least, it would raise future borrowing costs.

Instead, the company uses an operating lease with an off balance sheet entity that it creates, known as a special Purpose Vehicle, SPV. The SPV actually owns the asset (the building) on behalf of the company and leases it back to the company.

So, instead of buying the building outright, which would cause a large, covenant triggering liability (the building’s purchase price) on the balance sheet, it enters into an ‘operating lease’ off balance sheet and records just the small operating expense (lease payments).

This method also maintains liquidity for the company. It seems as if this would be illegal, but it’s not.

Off Balance Sheet Financing

Off-balance sheet financing is discretionary and the activity is not required to be reported on the balance sheet. Typical items held off the balance sheet include operating leases, joint ventures, and partnerships.

Often, an analyst must locate these items which tend to be buried in the footnotes in the company’s financial statements.

But the footnotes may not actually list the financing arrangements directly; they may simply indicate the ability to pursue future financings.

Infamous Off Balance Sheet frauds

Even though off-balance sheet items are not required to be reported on the balance sheet, the vast majority of items are legitimate. The problem arises when off-balance sheet items involves dealings with questionable entities, such as offshore subsidiaries (i.e. ‘partnerships’).1

Even though off-balance sheet items are not required to be reported on the balance sheet, the vast majority of items are legitimate. The problem arises when off-balance sheet items involves dealings with questionable entities, such as offshore subsidiaries (i.e. ‘partnerships’).1

For example, liabilities of a subsidiary are not required to be listed in the financial statements of the parent company. As such, liabilities can be easily transferred from the balance sheet to a largely hidden subsidiary. This was at the heart of arguably the biggest off-balance sheet scandal of all time-Enron.

Enron

In Enron’s case, it created SPVs which were created for the purpose of hiding debt. Enron would also capitalize, fund, its SPVs with its own stock. Its death blow was that it guaranteed the value of the SPVs and when the stock turned south, so did the value of all SPVs.2

Further, these SPVs had clear conflicts of interest (Enron executives were principles in the vehicles) and therefore were not operated as arms-length transactions.3 Again, no one seemed to know the extent of the gimmickry because the SPVs were unconsolidated subsidiaries whose actions weren’t being fully reported.4

Lehman Brothers

Off-balance sheet financing also played a significant role in the Lehman Brothers bankruptcy. Through the use of off-balance sheet entity ‘Repo 105’, Lehman was able to move $50 billion of debt off of their balance sheet, making them appear more financially stable before a quarter’s end.

5 Since it was classified as a repurchase agreement, it was ‘bought back’ after the reporting period. To make matters worse, when the debt was originally moved off-balance sheet, the bank recorded the debt as a ‘sale’ and booked the $50 billion as revenue!6 This type of accounting shenanigans contributed to the largest bankruptcy in U.S.

history, wiping out the life savings of thousands of employees of the bank.

To make matters worse, when the debt was originally moved off-balance sheet, the bank recorded the debt as a ‘sale’ and booked the $50 billion as revenue!6

Today, accountants, auditors, and analysts are increasingly trained to check the footnotes on these accounts. Further, the implementation of Sarbanes-Oxley made corporate directors criminally liable for lying on financial reports. While an improvement, the regulations are unly to catch all fraud. And the training if often lacking.

These scandals inevitably cost financial firms money through fines and penalties. For example, JP Morgan was fined $135 million for its role in the Enron fraud.7 Today, compliance personnel are quite busy at financial firms, managing risk whenever possible. Risk managers are some of the most highly recruited careers in finance today.

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There are a dedicated group of financial professionals that are committed to detecting, preventing and catching accounting and financial fraud.

Forensic accountants and fraud investigators decipher off-balance sheet transactions when following a money trail, looking to catch an employee who has committed, and is hiding, a financial crime.

With the global nature of business today, following money trails through a web of subsidiaries and offshore entities is a daunting task.

But if you’re up for the challenge, consider furthering your career with an online Masters in Financial Crime and Compliance Management Degree. These programs are designed to teach the student many of the tools needed to detect and deter financial crimes, in other words, catch fraudsters!

References:

  • 7http://www.economist.com/node/2374354

Источник: https://financialcareeroptions.com/financial-statement-fraud-off-balance-sheet/

Off Balance Sheet | On Balance Sheet vs Off Balance Sheet

off-balance-sheet finance

Off Balance sheet refers to those activities of assets or debt or financing liabilities of the company that belongs to the company’s balance sheet but do not appear/present in the balance sheet i.e.

the activities that are not recorded in the balance sheet but company has the rights and obligations for those activities and has the impact on its financial health that taken into consideration by many investors during review of balance sheet as a whole.

As discussed above, off balance sheet are not recorded in the balance sheet of the company and hence are very difficult to identify and track by the investors .Many times, they are mentioned in the accompanying notes. They also form part of hidden liabilities which makes it a matter of concern.

How does it Work?

Off balance sheet are much useful for those companies that are highly leveraged. If the company is already having high debt-to-equity ratio, it will be a problem for a company to increase its debt. Also, it will be much expensive for the company to borrow more finances because of high interest rates charged by lender.

The measures of in debtness of the company such as debt to equity (D/E) and other leveraged ratios do not get affected due to off balance sheet activities. This helps the company in its borrowing. The liquidity position of the company is also not affected due to off balance sheet activities.

Example of Off Balance Sheet

Some of the examples are provided and discussed as below-

  • One of the most common examples of off balance sheet is operating leases, which are not recorded in lessee’s balance sheet. The asset continues to appear in lessor’s books of accounts.
  • One more example is that when assets are secured and are sold off, the selling of the assets as investment does not appear in the books of accounts.
  • Any disposal of inventory does not appear in the balance sheet but forms part of notes to accounts.
  • All the above are the example of off balance sheet. Various joint ventures, Research and development activities also form part of examples of off balance sheet activities

Off Balance Sheet Items

Similar to above, off balance sheet items are those items which forms part of asset and liabilities of the company but do not presented in the company’s balance sheet. wise, the presentation of off balance sheet activities, these items also shown in notes to accounts and are sometimes difficult to identify.

Depending upon the business of the company, there can be large portion of off balance sheet items in many books of accounts of the company. These items can be formally shown as “assets under management” as a presentation. The working of off balance sheet items is similar to those of off balance sheet activities.

Differentoff balance sheet items include

  1. Operating Leases: It is an off balance sheet item in which rentals expenses are shown in lessee’s books of account and asset is shown in lessor’s books of account.
  2. Cash in transit also forms part of notes to accounts but does not recorded in the balance sheetso, it is off balance sheet item
  3. Accounts Receivable: It may also be the off balance sheet item and default risk under this category is highest. Almost all of the company have the said asset category.
  4. Other items are inventory write off and its disposal etc.

Off Balance Sheet Disclosures

  • According to Securities and exchange Commission and generally accepted accounting principles (GAAP), every public company is required to disclose all its off balance sheet activities in the notes of its financial statements, the transactions, obligations (including contingent obligations), arrangements or any otherrelationships , with unconsolidated entities that have or may have in future any material effect on company’s financial conditions, revenues ,Changes in financial conditions, expenses, results of operations, liquidity , capital expenditures or capital resources.
  • The Securities and Exchange Commission (SEC) has recently proposed the rules to implement the above disclosure as per sec 401(a) of Sarbanes-Oxley Act 2002 in each quarterly and annual financial report of the company filed with SEC.
  • The above proposed disclosures are also required by Foreign Companies and Canadian companies in their annual returns.

On Balance Sheet vs Off Balance Sheet

  • On Balance sheet items are those that form part of balance sheet of company and at the same time presented in the balance sheet whereas off balance sheet items are not recorded or presented in the balance sheet of company but forms part of balance sheet.
  • On balance sheet items are very easy to analyze as they appear clearly on the face of balance sheet whereas off balance sheet items are very difficult to analyze by the investors and proves to be matter of concern.
  • Example of on balance sheet items is Cash, Banks balance, fixed assets, etc.and example of off balance sheets items are operating leases, sold off investments, etc.

Benefits of Off balance Sheet Items

Benefits are provided and discussed as below-

  • The Off balance sheet does not affect the liquidity position of the company.
  • As the items are not included in the balance sheet, the company is not liable to pay them on a priority basis. As these do not form part of liability, it poses little risk to the company.
  • As company’s debt to equity ratio does not get affected with off balance sheet, it gives the advantage of financing without affecting debt burden.
  • In normal debts, the management needs to go through the conversations and approvals of directors to get new debts. Due to off balance sheet, business does not involve in new debts and it does not affect relationship of business with suppliers, lenders or directors.
  • The ratios and reported numbers of the business do not get affected due to off balance sheet. On the other hands, presentation of large amount on loans on the face of balance sheet makes it less attractive and financially weaker to the investors.
  • With the help of Off Balance sheet, the liquidity of the business can be improved. Considering the example of operating lease, as only rental payment needs to be paid instead of paying full investment, in which case, funds can be used elsewhere.

Conclusion

Off Balance sheet can be proved to be much beneficial for the company considering its advantages. If the company wants to acquire more debts, it can go for the off balance sheet, as it does not affect the ratios of company. Also Company should use the off balance sheet for its better presentation of financial health to the investors.

Экономический словарь — значение слова Off-balance-sheet Finance (забалансовое Финансирование)

off-balance-sheet finance

Использование фондов компании для аренды или лизинга дорогостоящего оборудования вместо его покупки, что позволяет, не делая капиталовложений, использовать такое оборудование. Оно не фигурирует в балансе компании в качестве актива, что ведет к занижению объемов вложенного капитала; однако рентные платежи будут отражены в счете прибылей и убытков.

Смотреть значение Off-balance-sheet Finance (забалансовое Финансирование) в других словарях

Финансирование — финансирования, мн. нет, ср. Действие по глаг. финансировать.
Толковый словарь Ушакова

Финансирование Ср. — 1. Процесс действия по знач. несов. глаг.: финансировать.
Толковый словарь Ефремовой

Бюджетное Финансирование — — безвозвратное предоставление средств из государственного бюджета предприятиям, учреждениям, организациям для полного или частичного покрытия их расходов. В условиях……..
Юридический словарь

Венчурное Финансирование — — финансирование, сопряженное с повышенным риском. Венчурный финансовый капитал обычно вкладывается в новую технику, технологию, освоение новых видов производств.
Юридический словарь

Государственное Финансирование Политических Партий — — предусмотренные законом случаи целевого использования бюджетных средств для финансовой поддержки государством деятельности политических партий. Федеральный закон……..
Юридический словарь

Дефицитное Финансирование — — государственное финансирование экономики, превышающее бюджетные возможности, способ государственного регулирования экономики путем преднамеренного превышения……..
Юридический словарь

Кондуитное Финансирование — — выпуск государственным учреждением ценных бумаг для содействия финансированию проекта через третьих лиц. Выпуск обычно обеспечивается кредитами частной промышленной……..
Юридический словарь

Сметно-бюджетное Финансирование — — в финансовом праве безвозвратный и безвозмездный отпуск денежных средств бюджетным учреждениям. На С.-б. ф. находятся учреждения социальной сферы: образовательные;……..
Юридический словарь

Сметное Финансирование — — предоставление денежных средств из государственного бюджета для покрытия расходов согласно предоставленным сметам.
Юридический словарь

Совместное Финансирование — -1) кредитование развивающихся стран в форме объединения кредитов нескольких кредиторов из одной или разных стран, финансирующих один крупный проект; 2) участие нескольких……..
Юридический словарь

Финансирование — — обеспечение денежными ресурсами текущих затрат и капитальных вложений; осуществляется за счет собственных средств предприятия, государства, привлеченных, заемных……..
Юридический словарь

Финансирование Второго Этапа — взнос учредителями новой компании второй части уставного капитала, дополнительное финансирование новой компании, которая уже функционирует.
Юридический словарь

Финансирование Выборов — — совокупность избирательных действий, связанных с финансовым обеспечением подготовки и проведения выборов и финансированием предвыборной агитации. Ф.в. состоит из……..
Юридический словарь

Финансирование Избирательной Кампании, Подготовки И Проведения Референдума Помимо Избирательных Фонд — — административное правонарушение, ответственность за совершение которого установлена федеральными законами. Административная ответственность установлена не……..
Юридический словарь

Финансирование Под Уступку Денежного Требования — — см. Договор финансирования под уступку денежного требования.
Юридический словарь

Функциональное Финансирование — — использование государством фискальной политики для обеспечения производства неинфляционного ВНП в условиях полной занятости независимо от воздействия этой политики……..
Юридический словарь

Целевое Финансирование — — источник средств для проведения целевых мероприятий, решения социально-экономической проблемы, создания определенного объекта и т.п.
Юридический словарь

Ясельное Финансирование — — финансовые ресурсы, инвестиции, вкладываемые в частные компании в начальный, «ясельный» период их создания.
Юридический словарь

Баланс Азотистый (nitrogen Balance) — соотношение между количеством азота, которое потребляется организмом, и тем, которое выводится из него. Азотистый баланс может быть отрицательным, если экскретируемое……..
Медицинский словарь

Клеенка (draw-sheet) — непромокаемая ткань, подстилаемая в кровать больного; когда одна клеенка испачкается или сморщится, она легко может быть заменена другой. При этом не требуется повторного……..
Медицинский словарь

Равновесие Кислотнощелочное (acid-base Balance) — баланс между содержанием в крови угольной кислоты и бикарбоната НСОЗ. Соотношение между ними должно быть всегда постоянным и составлять 1:20, чтобы обеспечивать нормальное……..
Медицинский словарь

Блоковое Финансирование — (Block funding) — порядок финансирования социальных программ и услуг, при котором федеральное правительство предоставляет провинциям  на эти цели определенную сумму «в……..
Социологический словарь

Государственное Финансирование — Финансовые ресурсы, предоставленные государственным сектором/правительством для поддержки проектов.
Социологический словарь

Совместное Финансирование — (Cost-sharing) — порядок распределения расходов на социальные программы и услуги между федеральным правительством и правительствами провинций, при котором расходы, независимо……..
Социологический словарь

Частное Финансирование — Финансовые ресурсы или ресурсы натурой, предоставляемые частным сектором для поддержки проектов.
Социологический словарь

Account Balance Of A Prepaid Service Gsm Subscriber — остаток на счете абонента GSM, пользующегося предоплаченными услугами
Словарь терминов стандарта сотовой связи GSM

Deplete The Balance Of A Prepaid Card — снимать средства со счета карты предоплаты
Словарь терминов стандарта сотовой связи GSM

Посмотреть в Wikipedia статью для Off-balance-sheet Finance (забалансовое Финансирование)

Источник: http://slovariki.org/ekonomiceskij-slovar/50073

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