Off balance sheet definition
/What is Off Balance Sheet?
Off balance sheet refers to those assets and liabilities not appearing on an entity's balance sheet, but which nonetheless effectively belong to the enterprise. These items are usually associated with the sharing of risk or they are financing transactions. Off balance sheet liabilities are a particular concern, since they might eventually result in substantial liabilities for and payments by the reporting entity.
A business tries to keep certain assets and liabilities off its balance sheet in order to present to the investment community a cleaner balance sheet than would otherwise be the case. It does so by engaging in transactions that are designed to shift the legal ownership of certain transactions to other entities. Or, the transactions are designed to sidestep the reporting requirements of the applicable accounting framework, such as GAAP or IFRS.
Though off balance sheet assets and liabilities do not appear on the balance sheet, they may still be noted within the accompanying financial statement footnotes. This method of presentation is less favorable to the reader of a set of financial statements, since the issuer could bury the applicable information deep in the footnotes or use obscure wording to mask the nature of the underlying transactions.
There has been a general trend in the formulation of accounting standards to allow fewer and fewer off balance sheet transactions. For example, a recent revision to the leasing standards now requires the recordation of an asset in use for certain types of lease obligations that previously would not have appeared in the balance sheet.