Off-Balance-Sheet Financing

AAA

DEFINITION of 'Off-Balance-Sheet Financing'

A form of financing in which large capital expenditures are kept off of a company's balance sheet through various classification methods. Companies will often use off-balance-sheet financing to keep their debt to equity (D/E) and leverage ratios low, especially if the inclusion of a large expenditure would break negative debt covenants.

INVESTOPEDIA EXPLAINS 'Off-Balance-Sheet Financing'

Contrast to loans, debt and equity, which do appear on the balance sheet. Examples of off-balance-sheet financing include joint ventures, research and development partnerships, and operating leases (rather than purchases of capital equipment).

Operating leases are one of the most common forms of off-balance-sheet financing. In these cases, the asset itself is kept on the lessor's balance sheet, and the lessee reports only the required rental expense for use of the asset. Generally Accepted Accounting Principles in the U.S. have set numerous rules for companies to follow in determining whether a lease should be capitalized (included on the balance sheet) or expensed.

This term came into popular use during the Enron bankruptcy. Many of the energy traders' problems stemmed from setting up inappropriate off-balance-sheet entities.

RELATED TERMS
  1. Risk Participation

    A type of off-balance-sheet transaction in which a bank sells ...
  2. Debt/Equity Ratio

    A measure of a company's financial leverage calculated by dividing ...
  3. Balance Sheet

    A financial statement that summarizes a company's assets, liabilities ...
  4. Capital Lease

    A lease considered to have the economic characteristics of asset ...
  5. Capital Expenditure - CAPEX

    Funds used by a company to acquire or upgrade physical assets ...
  6. FASB 157

    A Financial Accounting Standards Board (FASB) Statement that ...
Related Articles
  1. Bonds & Fixed Income

    Evaluating A Company's Capital Structure

    Learn to use the composition of debt and equity to evaluate balance sheet strength.
  2. Investing Basics

    The Importance Of Corporate Transparency

    Clear and honest financial statements not only reflect value, they also help ensure it.
  3. Investing Basics

    Playing The Sleuth In A Scandal Stock

    Learn the legwork involved in finding out whether your investment can weather a storm.
  4. Investing

    Off-Balance-Sheet Entities: An Introduction

    The theory and practice of these entities varies greatly. Investors need to learn what they're getting into.
  5. Economics

    2000-2009: The Lost Decade

    A look back at a volatile decade for investors and what it can teach us going forward.
  6. Options & Futures

    5 Lessons From The World's Biggest Bankruptcies

    We can learn of investing strategies by studying previous financial disasters.
  7. Investing

    Does a company logo change require a material disclosable event?

    A company logo change usually constitutes a material disclosable event. Securities law requires that companies disclose all material information and corporate events to shareholders, and material ...
  8. Bonds & Fixed Income

    Uncovering Hidden Debt

    Understand how financing through operating leases, synthetic leases, and securitizations affects companies' image of performance.
  9. Taxes

    What is the best method of calculating depreciation for tax reporting purposes?

    Learn the best method for calculating depreciation for tax reporting purposes according to generally accepted accounting principles, or GAAP.
  10. Fundamental Analysis

    Are accounts receivable used when calculating a company's debt collateral?

    Learn how accounts receivables are recorded as assets on a balance sheet; they are used when calculating a company's total debt collateral.

You May Also Like

Hot Definitions
  1. Multiplier Effect

    The expansion of a country's money supply that results from banks being able to lend. The size of the multiplier effect depends ...
  2. Command Economy

    A system where the government, rather than the free market, determines what goods should be produced, how much should be ...
  3. Prospectus

    A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details ...
  4. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  5. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  6. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
Trading Center